• Supply and Demand Report 26 Jul

  by Keith Weiner

   

  For those who are speculating on the dollar—i.e. most people—there was good news this week. The dollar rose almost a milligram, to 28.3mg gold. That’s a big gain, and welcome news for those who keep all of their eggs in the one dollar basket, perhaps because they don’t want to risk any of it on pet rocks.

  Yes, Jason Zweig at the Wall Street Journal actually said that. He couldn’t be more wrong—and yet he had a point. Wrong? Let me count the ways.

  One, per his title, he compares gold to a pet rock. A pet rock is either a useless knickknack, or else a fraud that preys on the irrational psychology of people in crowds. Gold is honest money, and the extinguisher of debt. Just because governments have banned it from the monetary system, does not make it either useless or a fraud.

  Two, he quotes a Barclays researcher saying that investors have become disillusioned with gold. Well, gold is not an investment. Even if one accepts the mainstream premise that gold is a commodity that you buy so you will make money—i.e. dollars—when it goes up, this is speculation. It is not investing. Our whole financial world is now stoned on the drug of zero interest rates. With no yield to be had, capital gain is all.

  Three, he says to own gold is an act of faith. Boy is this backwards! To go all-in on the debt of bankrupt governments is the real act of faith. And that is what one does, if one holds dollars or euros or pounds, etc.

  Fourth, he refers to inflation (by which he means rising prices) a few times. Gold purportedly has magical powers to fight inflation, but gold isn’t a “panacea” for it (straw man, much?) He later says gold is viewed as a hedge against inflation, but it does not go up as much as the alternatives (whatever those may be).

  I could go on, but I will stop here. Despite the cornucopia of errors, there is an excellent point buried in Zweig’s blog post.

  Suppose, as Zweig says, that everyone—or at least the current marginal gold trader—views gold as a speculative vehicle. In this view, it’s only useful to make bucks. Then, of course its price action is about as rational as the path of the planchette on a Ouija board. Everyone has the same price charts, and the same technical tools. Everyone can see the same trends. So when it is going up, it goes up. And when it is going down, it goes down.

  Of course, this may temporarily describe market conditions. But it in no way objectively describes gold.

  The price of gold dropped further this week, especially last Sunday night. We would guess that margin calls in China forced some liquidation. The price of silver did not drop as much, which is interesting in itself. Whomever was forced to liquidate either did not have a silver position, or else they have greater faith in that the price of the white metal will rise.

  The question is: did these hapless Chinese folks sell futures or metal? And we do not have to guess the answer to this question. We have the data to show it. Read on for the only accurate picture of the supply and demand conditions in the gold and silver markets, based on the basis and cobasis.

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

         The Prices of Gold and Silver
  

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

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

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

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

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

  The Ratio of the Gold Price to the Silver Price
  

   

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

  Here is the gold graph.

         The Gold Basis and Cobasis and the Dollar Price 

   Note that we transitioned to the October contract, as First Notice Day for the August future approaches.

  Look at the price of the dollar rising (i.e. the price of gold falling) and along with it the scarcity of gold rising. This answers the question we posed up top. The price action this week was driven by selling of futures.

  Our comment last week now seems well-timed:

  “Is this a good time to bet on gold? While other events could continue to dominate the fundamentals (temporarily), we can think of worse times for this trade.”

  Other events—we suspect credit conditions in China—did dominate. And the attractiveness of a gold position increased this week. The fundamental price is now more than $100 over the market price. This is no guarantee that the market couldn’t go lower. The basis is not a timing indicator. It is helping us measure value.

  The December contract, by the way, also entered backwardation this week.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  The silver price dropped about 20 cents (i.e. the price of the dollar, measured in silver rose to about 2.12g silver). However, the cobasis actually fell. The December cobasis is nowhere near backwardation.

  The bottom line is that the fundamental price of silver fell even more. It is now dead even with the market price.

  We think it’s best to continue approaching silver with extreme caution. While the time is long past for shorting it (we never recommend naked shorting a monetary metal!) it is not the time for betting on silver either. We want to see either one more price drop, or else a steady increase in the scarcity of this metal to the market.

   

  © 2015 Monetary Metals

  

  

  

  

• Meet The Kagans: Seeking War To The End Of The World

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

  
  

  If the neoconservatives have their way again, US ground troops will reoccupy Iraq, the US military will take out Syria’s secular government (likely helping Al Qaeda and the Islamic State take over), and the US Congress will not only kill the Iran nuclear deal but follow that with a massive increase in military spending.

  Like spraying lighter fluid on a roaring barbecue, the neocons also want a military escalation in Ukraine to burn the ethnic Russians out of the east, and the neocons dream of spreading the blaze to Moscow with the goal of forcing Russian President Vladimir Putin from the Kremlin. In other words, more and more fires of Imperial “regime change” abroad even as the last embers of the American Republic die at home.

  Much of this “strategy” is personified by a single Washington power couple: arch-neocon Robert Kagan, a co-founder of the Project for the New American Century and an early advocate of the Iraq War, and his wife, Assistant Secretary of State for European Affairs Victoria Nuland, who engineered last year’s coup in Ukraine that started a nasty civil war and created a confrontation between nuclear-armed United States and Russia.

  Kagan, who cut his teeth as a propaganda specialist in support of the Reagan administration’s brutal Central American policies in the 1980s, is now a senior fellow at the Brookings Institution and a contributing columnist to The Washington Post’s neocon-dominated opinion pages.

  On Friday, Kagan’s column baited the Republican Party to do more than just object to President Barack Obama’s Iranian nuclear deal. Kagan called for an all-out commitment to neoconservative goals, including military escalations in the Middle East, belligerence toward Russia and casting aside fiscal discipline in favor of funneling tens of billions of new dollars to the Pentagon.

  Kagan also showed how the neocons’ world view remains the conventional wisdom of Official Washington despite their disastrous Iraq War. The neocon narrative gets repeated over and over in the mainstream media no matter how delusional it is.

  For instance, a sane person might trace the origins of the bloodthirsty Islamic State back to President George W. Bush’s neocon-inspired Iraq War when this hyper-violent Sunni movement began as “Al Qaeda in Iraq” blowing up Shiite mosques and instigating sectarian bloodshed. It later expanded into Syria where Sunni militants were seeking the ouster of a secular regime led by Alawites, a Shiite offshoot. Though changing its name to the Islamic State, the movement continued with its trademark brutality.

  But Kagan doesn’t acknowledge that he and his fellow neocons bear any responsibility for this head-chopping phenomenon. In his neocon narrative, the Islamic State gets blamed on Iran and Syria, even though those governments are leading much of the resistance to the Islamic State and its former colleagues in Al Qaeda, which in Syria backs a separate terrorist organization, the Nusra Front.

  But here is how Kagan explains the situation to the Smart People of Official Washington:

  Critics of the recent nuclear deal struck between Iran and the United States are entirely right to point out the serious challenge that will now be posed by the Islamic republic. It is an aspiring hegemon in an important region of the world.

   

  It is deeply engaged in a region-wide war that encompasses Syria, Iraq, Lebanon, the Gulf States and the Palestinian territories. It subsidizes the murderous but collapsing regime of Bashar al-Assad in Syria, and therefore bears primary responsibility for the growing strength of the Islamic State and other radical jihadist forces in that country and in neighboring Iraq, where it is simultaneously expanding its influence and inflaming sectarian violence.

  The Real Hegemon

  While ranting about “Iranian hegemony,” Kagan called for direct military intervention by the world’s true hegemonic power, the United States. He wants the US military to weigh in against Iran on the side of two far more militarily advanced regional powers, Israel and Saudi Arabia, whose combined weapons spending dwarfs Iran’s and includes – with Israel – a sophisticated nuclear arsenal.

  Yet reality has never had much relationship to neocon ideology. Kagan continued:

  Any serious strategy aimed at resisting Iranian hegemony has also required confronting Iran on the several fronts of the Middle East battlefield. In Syria, it has required a determined policy to remove Assad by force, using US air power to provide cover for civilians and create a safe zone for Syrians willing to fight.

   

  In Iraq, it has required using American forces to push back and destroy the forces of the Islamic State so that we would not have to rely, de facto, on Iranian power to do the job. Overall, it has required a greater US military commitment to the region, a reversal of both the perceived and the real withdrawal of American power.

   

  And therefore it has required a reversal of the downward trend in US defense spending, especially the undoing of the sequestration of defense funds, which has made it harder for the military even to think about addressing these challenges, should it be called upon to do so. So the question for Republicans who are rightly warning of the danger posed by Iran is: What have they done to make it possible for the United States to begin to have any strategy for responding?

  In Kagan’s call for war and more war, we’re seeing, again, the consequence of failing to hold neocons accountable after they pushed the country into the illegal and catastrophic Iraq War by selling lies about weapons of mass destruction and telling tales about how easy it would be.

  Instead of facing a purge that should have followed the Iraq calamity, the neocons consolidated their power, holding onto key jobs in US foreign policy, ensconcing themselves in influential think tanks, and remaining the go-to experts for mainstream media coverage. Being wrong about Iraq has almost become a badge of honor in the upside-down world of Official Washington.

  But we need to unpack the truckload of sophistry that Kagan is peddling. First, it is simply crazy to talk about “Iranian hegemony.” That was part of Israeli Prime Minister Benjamin Netanyahu’s rhetoric before the US Congress on March 3 about Iran “gobbling up” nations – and it has now become a neocon-driven litany, but it is no more real just because it gets repeated endlessly.

  For instance, take the Iraq case. It has a Shiite-led government not because Iran invaded Iraq, but because the United States did. After the US military ousted Sunni dictator Saddam Hussein, the United States stood up a new government dominated by Shiites who, in turn, sought friendly relations with their co-religionists in Iran, which is entirely understandable and represents no aggression by Iran. Then, after the Islamic State’s dramatic military gains across Iraq last summer, the Iraqi government turned to Iran for military assistance, also no surprise.

  Back to Iraq

  However, leaving aside Kagan’s delusional hyperbole about Iran, look at what he’s proposing. He wants to return a sizable US occupation force to Iraq, apparently caring little about the US soldiers who were rotated multiple times into the war zone where almost 4,500 died (along with hundreds of thousands of Iraqis). Having promoted Iraq War I and having paid no price, Kagan now wants to give us Iraq War II.

  But that’s not enough. Kagan wants the US military to intervene to make sure the secular government of Syria is overthrown, even though the almost certain winners would be Sunni extremists from the Islamic State or Al Qaeda’s Nusra Front. Such a victory could lead to genocides against Syria’s Christians, Alawites, Shiites and other minorities. At that point, there would be tremendous pressure for a full-scale US invasion and occupation of Syria, too.

  That may be why Kagan wants to throw tens of billions of dollar more into the military-industrial complex, although the true price tag for Kagan’s new wars would likely run into the trillions of dollars. Yet, Kagan still isn’t satisfied. He wants even more military spending to confront “growing Chinese power, an aggressive Russia and an increasingly hegemonic Iran.”

  In his conclusion, Kagan mocks the Republicans for not backing up their tough talk: “So, yes, by all means, rail about the [Iran] deal. We all look forward to the hours of floor speeches and campaign speeches that lie ahead. But it will be hard to take Republican criticisms seriously unless they start doing the things that are in their power to do to begin to address the challenge.”

  While it’s true that Kagan is now “just” a neocon ideologue – albeit one with important platforms to present his views – his wife Assistant Secretary of State Nuland shares his foreign policy views and even edits many of his articles. As she told The New York Times last year, “nothing goes out of the house that I don’t think is worthy of his talents. Let’s put it that way.” [See “Obama’s True Foreign Policy ‘Weakness.’”]

  But Nuland is a foreign policy force of her own, considered by some in Washington to be the up-and-coming “star” at the State Department. By organizing the “regime change” in Ukraine – with the violent overthrow of democratically elected President Viktor Yanukovych in February 2014 – Nuland also earned her spurs as an accomplished neocon.

  Nuland has even outdone her husband, who may get “credit” for the Iraq War and the resulting chaos, but Nuland did him one better, instigating Cold War II and reviving hostilities between nuclear-armed Russia and the United States. After all, that’s where the really big money will go – toward modernizing nuclear arsenals and ordering top-of-the-line strategic weaponry.

  A Family Business

  There’s also a family-business aspect to these wars and confrontations, since the Kagans collectively serve not just to start conflicts but to profit from grateful military contractors who kick back a share of the money to the think tanks that employ the Kagans.

  For instance, Robert’s brother Frederick works at the American Enterprise Institute, which has long benefited from the largesse of the Military-Industrial Complex, and his wife Kimberly runs her own think tank called the Institute for the Study of War (ISW).

  According to ISW’s annual reports, its original supporters were mostly right-wing foundations, such as the Smith-Richardson Foundation and the Lynde and Harry Bradley Foundation, but it was later backed by a host of national security contractors, including major ones like General Dynamics, Northrop Grumman and CACI, as well as lesser-known firms such as DynCorp International, which provided training for Afghan police, and Palantir, a technology company founded with the backing of the CIA’s venture-capital arm, In-Q-Tel. Palantir supplied software to US military intelligence in Afghanistan.

  Since its founding in 2007, ISW has focused mostly on wars in the Middle East, especially Iraq and Afghanistan, including closely cooperating with Gen. David Petraeus when he commanded US forces in those countries. However, more recently, ISW has begun reporting extensively on the civil war in Ukraine. [See “Neocons Guided Petraeus on Afghan War.”]

  So, to understand the enduring influence of the neocons – and the Kagan clan, in particular – you have to appreciate the money connections between the business of war and the business of selling war. When the military contractors do well, the think tanks that advocate for heightened global tensions do well, too.

  And, it doesn’t hurt to have friends and family inside the government making sure that policymakers do their part to give war a chance — and to give peace the old heave-ho.

  

  

  

  

• Can You Hear the Fat Lady Singing? – Part III

  By Chris at www.CapitalistExploits.at

  I love what I do! A recent get together filled with blonde stick insects and cologne covered chinos found me subjected to talk about “work at the office”:

  “What did you do at work today?”

   

  “Oh, nothing much, tried to look down the new girl’s top for a bit then I made some phone calls, you?”

   

  “Oh, much the normal, searched the web for our next vacation and found I can get a Filipino bride for a grand.”

  After only 10 minutes I was ready to leave.

  I then received a call from a friend which snapped me back into my world and cemented my decision to leave. This friend has been extremely successful trading Asian credit and I was eager to get his perspective on emerging market debt and in particular China.

  This brings me to my thoughts on emerging market currencies and debt, which I’d like to share with you today.

  It all starts with the dollar bull market which we’ve discussed previously at length. As Brad mentioned earlier this year:

  So while the US current account deficit continues to narrow there is absolutely going to be a shortage of USDs. There is $9 trillion of dollar denominated debt outstanding, well considering that it took a number of years to build up this debt, it is going to take more than just a few months to unwind, more likely a couple of years at least. If the US Federal Reserve were to raise rates this year it sure wouldn’t help the cause, rather it would throw accelerant on the smouldering liquidity fire!

  After a brief breather, the dollar looks set to take out new highs:

  

  This time around the dollar looks set to take out 100 on the Dollar Index. My thoughts today lie in what this may mean for various emerging market asset classes.

  Take a look at the MSCI Emerging Markets ETF:

  

  Support sits at 36 and we’re getting close!

  This is a function of a stronger dollar. The larger question lies in where the leverage in emerging markets may lie, remembering that the unwinding of the carry trade will be particularly severely felt where leverage is highest.

  Taking a step back for a minute and thinking about the events in Europe recently and the events we’ve just witnessed in China, it’s clear to me that central banks are out of control.

  Risk lies in with the fact central banks believe themselves omnipotent. This is only half of the problem. The majority of investors believe the central banks are actually omnipotentand that is the other half of the problem. Central bank omnipotence is at an all time high… or is it?

  If we look back in history, it’s littered, not with successful central bank intervention, but with central bank failures. For every action there is a reaction. Everything is connected. You can’t throw a stone into a pond and not get ripples. Similarly you can’t have central banks buying assets, or slashing interest rates or any other such action, without consequences for those actions.

  Last week I looked back at how the Asian crisis unfolded. That particular crisis was only 18 years ago, yet market participants seem to have forgotten the lessons. We know that central bank intervention in the face of a levered market which is unwinding can often be the precursor to an outright rout.

  I then spoke about China earlier this week and how easily and quickly the Chinese central bank stepped in to attempt to stabilise the stock market. That they acted so aggressively is far more concerning to me than the actions themselves. The consequences of this are ultimately a weaker remnimbi, and a weaker remnimbi threatens to exacerbate losses for investors that have been participating in the USD carry trade.

  Furthermore, as Chinese growth slows the temptation to slash interest rates and devalue the remnimbi, should it happen, puts additional pressure on competitive emerging market currencies. Countries such as Korea, Malaysia, Thailand, even India. Once again, a stronger dollar vis-à-vis these respective currencies threatens any levered capital invested in the bond markets to seek first to reduce exposures. This means selling the respective currencies and buying back dollars. This self-reinforcing cycle can quickly force margin calls and the global carry trade unwind threatens to get particularly “exciting”.

  It’s not difficult to imagine a scenario where as the dollar bull run gathers steam we may well see more and more emerging markets looking like Greece.

  Right now a number of emerging market currencies are looking like they’re getting ready to roll over. The repercussions could well be an emerging market bond rout. As such, we’ve been dipping our toes into shorting the iShares JP Morgan Emerging market bond ETF (EMB) with some long dated options.

  If nothing else, it’s a heck more interesting than boring cocktail parties…

  – Chris

   

  “It amazed her how much people wanted to talk at parties. And about nothing in particular.”– J.D. Robb, Holiday in Death

  

  

  

  

• Donald Trump's Top 30 Insults

  Amid the 16 (yes sixteen!) candidates for Republican Presidential nominee, there is one, and only one, that stands above the rest in terms of sheer un-filtered, un-political, and some would say un-presidential outspoken-ness. In an oustanding aggregation of abuse, The Hill has documented Donald Trump's Top 30 insults (so far in the 2016 campaign alone).

  In no particular order…

  1. Former President George W. Bush: — “You mean George Bush sends our soldiers into combat, they are severely wounded, and then he wants $120,000 to make a boring speech to them?” asked Trump on July 9, after reports the former president charged a vets group for a speech. “Bush didn’t have the IQ [to be president],” he added on June 16.
  2. Former Gov. Jeb Bush (R-Fla.) — “I’m not a big fan. The last thing we need is another Bush,” Trump said on June 16. Trump's account also retweeted an insult to Bush’s wife on July 4th: “@RObHeilbron: @realDonaldTrump #JebBush has to like the Mexican Illegals because of his wife.” It was later deleted.
  3. Hillary Clinton — “Hillary Clinton was the worst secretary of State in the history of the United States," Trump told Business Insider. His account on April 16 also retweeted an attack on Clinton: “@mplefty67: If  Hillary Clinton can’t satisfy her husband what makes her think she can satisfy America?” Trump said a campaign staffer was responsible and deleted the tweet.
  4. Anderson Cooper — “What a waste of time being interviewed by@andersoncooper when he puts on really stupid talking heads like Tim O'Brien-dumb guy with no clue!” Trump tweeted on July 22 after his interview with the CNN anchor. During his interview, Trump told Cooper: "The people don’t trust you and the people don’t trust the media."
  5. Bill Cosby — Trump said he believed the sexual assault allegations against the comedian, calling him "guilty as hell." “I’ve known him, and I’ve never liked him,” Trump said in a July radio interview. “I think he is a highly overrated guy, both in talent and in many other ways,”
  6. Des Moines Register — After the paper called on Trump to drop out, he dismissed it as a "sophomoric editorial" and called their coverage "uneven and inconsistent, but far more importantly, very dishonest."
  7. Forbes Magazine — “Why does a failed magazine like @Forbes constantly seek out trivial nonsense? Their circulation way down. @Clare_OC,” Trump tweeted on July 9.
  8. Sen. Lindsey Graham (R-S.C.) —"What a stiff, what a stiff, Lindsey Graham. By the way he has registered zero in the polls,” Trump said, at a campaign speech in Bluffton, S.C. on July 21. “A total lightweight. In the private sector, he couldn’t get a job. Believe me. Couldn't get a job. He couldn't do what you people did. You're retired as hell and rich. He wouldn't be rich; he'd be poor.” Trump also shared Graham's personal cellphone number and said he had begged him to help get on Fox News's "Fox and Friends." "What's this guy, a beggar? He's like begging me to help him with [the show] 'Fox and Friends.’” Trump said of Graham on "CBS This Morning," on July 21.
  9. Jonah Goldberg — “Jonah Goldberg @JonahNRO of the once great @NRO#National Review is truly dumb as a rock. Why does @BretBaier put this dummy on his show?” Trump tweeted, criticizing the conservative columnist on April 20.
  10. Joaquin "El Chapo" Guzman — Trump said the Mexican drug lord would be no match for him. “Can you envision Jeb Bush or Hillary Clinton negotiating with 'El Chapo', the Mexican drug lord who escaped from prison? …Trump, however, would kick his ass!” he tweeted on July 12. Trump later called in the FBI after a death threat from a Twitter account associated with Guzman.
  11. Arianna Huffington — “The liberal clown @ariannahuff told her minions at the money losing @HuffingtonPost to cover me as entertainment. I am #1 in Huff Post Poll,” Trump tweeted on July 18.
  12. Penn Jillette — After the magician and comedian criticized Trump, he responded on July 16, tweeting: “I hear @pennjillette show on Broadway is terrible. Not surprised, boring guy (Penn). Without The Apprentice, show would have died long ago.” He then followed up with, “I loved firing goofball atheist Penn @pennjillette on The Apprentice. He never had a chance. Wrote letter to me begging for forgiveness.”
  13. Ohio Gov. John Kasich (R) — “What people don’t know about Kasich- he was a managing partner of the horrendous Lehman Brothers when it totally destroyed the economy!” Trump tweeted on May 20.
  14. Charles Krauthammer — “One of the worst and most boring political pundits on television is @krauthammer. A totally overrated clown who speaks without knowing facts,” Trump tweeted about the conservative writer and Fox News contributor on June 4. A tweet a day later called him a "dumpy political pundit" and took issue with Krauthammer's support for the Iraq war. Krauthammer brought on Trump's ire by mocking his then-low standing in the polls.
  15. Bill Kristol — When the Weekly Standard editor belittled Trump’s chances against Hillary, Trump responded on July 23, tweeting, “Bill, your small and slightly failing magazine will be a giant success when you finally back Trump. Country will soar!”
  16. Mitt Romney — “Why would anybody listen to @MittRomney? He lost an election that should have easily been won against Obama. By the way,so did John McCain!” Trump tweeted of the 2012 Republican nominee on July 18.
  17. Sen. John McCain (R-Ariz.) — “He’s not a war hero,” Trump said at a rally on July 18. “He was a war hero because he was captured. I like people who weren’t captured.” This followed a July 16 tweet saying, “@SenJohnMcCain should be defeated in the primaries. Graduated last in his class at Annapolis–dummy!” The insults came after McCain said Trump had "fired up the crazies" on immigration.
  18. Macy’s — Trump called for a boycott after the department store dropped his men’s clothing line. "I hope the boycott of @Macys continues forever. So many people are cutting up their cards. Macy's stores suck and they are bad for U.S.A.,” he tweeted on July 16. “Boycott @Macys, no guts, no glory. Besides, there are far better stores!” he tweeted later.
  19. Mexico  — Trump lambasted the southern neighbor. “The U.S. has become a dumping ground for everybody else’s problems,” he said on May 30 at his campaign launch. “When Mexico sends its people, they’re not sending their best. They’re not sending you. They’re sending people that have lots of problems, and they’re bringing those problems with us. They’re bringing drugs. They’re bringing crime. They’re rapists. And some, I assume, are good people.” The remarks led a number of businesses to cut their ties with him. He doubled down after the escape of a top drug kingpin. "It's a corrupt place," Trump said on July 17. "It's a terrible court system." "Let's put it this way," he added, "I'm not going to Mexico."
  20. President Obama — Trump has long said he is not sure Obama was born in the U.S. and slammed his policies, calling him the "worst ever president." Obama hit back at the 2011 White House Correspondents Dinner, mocking Trump who was in attendance. But Trump hasn't let up. During the Baltimore riots in April this year he tweeted: “Our great African American President hasn’t exactly had a positive impact on the thugs who are so happily and openly destroying Baltimore!” He also Obama to leave office early and golf on one of his many courses. “If he’d like to play, that’s fine. In fact, I’d love for him to leave early and play. That’d be a very good thing,” he said at his campaign launch in June. After the Chattanooga shooting, Trump pressed Obama to lower the flag for the victims. "We have a president who just can't say a few words: 'Put the flags at half-mast for the five Marines that were just killed.' Why? Why? Why?” Trump said at a South Carolina rally on July 21. “It's almost like, does he read the papers? Does he watch television?"
  21. Lawrence O’Donnell — “Dopey @Lawrence O’Donnell, whose unwatchable show is dying in the ratings, said that my Apprentice $ numbers were wrong. He is a fool!” Trump tweeted on July 16 of the MSNBC host.
  22. Former Gov. Rick Perry (R-Texas) — Perry has been a tough critic of Trump's rhetoric on immigration. “Rick Perry failed at the border. Now he is critical of me. He needs a new pair of glasses to see the crimes committed by illegal immigrants,” Trump tweeted on July 5th. On July 16, he added, “@GovernorPerry failed on the border. He should be forced to take an IQ test before being allowed to enter the GOP debate.” "He's doing very poorly in the polls. He put on glasses so people will think he's smart. And it just doesn't work! You know people can see through the glasses," Trump said at a rally on July 21.
  23. Former Gov. George Pataki (R-N.Y.) — Trump tweeted that Pataki "couldn’t be elected dog catcher if he ran again—so he didn’t!” Trump tweeted July 1. He followed up with: “.@GovernorPataki was a terrible governor of NY, one of the worst — would’ve been swamped if he ran again!”
  24. Karl Rove — Trump went off on the Republican strategist's record in 2012 record. “@KarlRove wasted $400 million + and didn’t win one race—a total loser.@FoxNews,” he tweeted on July 16, followed by “Irrelevant clown @KarlRove sweats and shakes nervously on @FoxNews as he talks ‘bull’ about me. Has zero cred. Made fool of himself in '12.” Trump even called out the network: “@FoxNewsYou shouldn’t have @KarlRove on the air—he’s a clown with zero credibility—a Bushy!”
  25. Sen. Bernie Sanders (I-Vt.) — “[Sanders] knows the country is ripped off. And I know the country is being ripped off,” Trump told The Hill on July 23. “The difference is that I can do something about it and he can’t. He’ll never be able to negotiate with China.”
  26. Republican National Committee — “The RNC has not been supportive. They were always supportive when I was a contributor. I was their fair-haired boy,” Trump toldThe Hill on July 23. “The RNC has been, I think, very foolish.”
  27. Chuck Todd —“I hear that sleepy eyes @chucktodd will be fired like a dog from ratings starved Meet The Press? I can't imagine what is taking so long!” Trump tweeted on July 12 about the "Meet the Press" host.
  28. Univision — “@Univision cares far more about Mexico than it does about the U.S. Are they controlled by the Mexican government?” Trump tweeted on June 26 after the network cut ties with him over his immigration remarks. “Has anyone seen the financials of @Univision. They are doing really badly. Too much debt and not enough viewers. Need money fast. Funny!” he followed up on July 11.
  29. The Wall Street Journal — Trump has had a long feud with owner Rupert Murdoch. After the paper questioned his candidacy, Trump tweeted on July 20: “The ever dwindling @WSJ which is worth about 1/10 of what it was purchased for, is always hitting me politically. Who cares!”
  30. Juan Williams — “@TheJuanWilliams you never speak well of me & yet when I saw you at Fox you ran over like a child and wanted a picture,” tweeted Trump on July 3 of the Fox personality.

  Perhaps just as troubling for The Republican Party:

  Donald Trump leads in New Hampshire with 21% support of potential Republican voters, according to NBC News/Marist latest polls. Jeb Bush has 14%, and Scott Walker 12% in New Hampshire

  It appears abusing McCain's war-record did nothing to dent Trump's popularity (except in the media).

  

  

  

  

  

  

• Clinton Favorability Plunges, Sanders Surges Amid Classified Emails Scandal

  Despite all her proclamations of new fairness doctrines, false promises of her truthfulness, and exclamations of 'everyday Americanism' Hillary Rodham Clinton is seeing her favorability ratings collapse. As populist as she dares to be, in the face of her donating captors, it appears the everyday American just isn't buying it as Gallup reports just 43% Americans view her favorably (down from 66% just a few years ago) while none other than Bernie Sanders is bounding up the popularity ladder, rising from 12% to 24% favorability in recent weeks.

  Via Gallup,

  Vermont Sen. Bernie Sanders' favorable rating among Americans has doubled since Gallup's initial reading in March, rising to 24% from 12% as he has become better known. Hillary Clinton's rating has slipped to 43% from 48% in April. At the same time, Clinton's unfavorable rating increased to 46%, tilting her image negative and producing her worst net favorable score since December 2007.

  Clinton, Clint-off…

  

   

  Clinton maintains a higher absolute favorable rating from Americans than any of her official rivals for the 2016 Democratic nomination. In contrast to the relative prominence of numerous candidates on the Republican side, she remains the only Democratic candidate known well enough by a majority of Americans for them to rate her, which helps Clinton maintain a higher overall favorable score.

  Sanders is still an unknown to a majority of Americans, with just 44% able to rate him compared with Clinton's 89%.

  Clinton's favorable rating has slipped slightly among Democrats and Democratic-leaning independents since April, falling to 74% from 79%. This partly accounts for her overall decline in favorability among the public. The other factor is a drop among non-leaning independents, from 44% to 36%, while her image among Republicans and Republican leaners is essentially unchanged at 14%.

  Among Democrats and Democratic leaners, Clinton is currently viewed more favorably by older than younger adults, by nonwhites than whites and by liberals than moderates or conservatives. However, she retains solid majority favorable scores from all of these groups. And she enjoys equally high ratings from men and women as well as in each of the four major regions of the country.

  However, as Gallup concludes,

  Clinton's national image has taken a slight turn for the worse, which is also evident in her image among Democrats. But she remains the only Democratic candidate for president with a national name, and Clinton continues to stand head and shoulders above her next closest competitor — Sanders — in popularity for the presidential nomination.

  * * *

  

   

  *  *  *

  And it is not surprising Hillary remains the front-runner as Liberty Blitzkrieg's Mike Krieger reports yet another group of lobbyists are raising funds for her campaign…

  Earlier this week, we learned that lobbyists for Monsanto, Exxon Mobil, Microsoft and the Telecom industry are actively raising funds for the pantsuit revolutionary, Hillary Clinton. Today, we can add private prison companies to the list. Because private prisons are sooooooo progressive.

  From the Intercept:

  As immigration and incarceration issues become central to the 2016 presidential campaign, lobbyists for two major prison companies are serving as top fundraisers for Hillary Clinton.

   

  Corrections Corporation of America and the Geo Group could both see their fortunes turning if there are fewer people to lock up in the future.

   

  Richard Sullivan, of the lobbying firm Capitol Counsel, is a bundler for the Clinton campaign, bringing in $44,859 in contributions in a few short months. Sullivan is also a registered lobbyist for the Geo Group, a company that operates a number of jails, including immigrant detention centers, for profit.

  You ready?

  

  

  

  

  

  

• Chinese Stocks Extend Friday's Losses Following Drop In Corporate Profits

  Following the weakness in Friday's afternoon (China) session, tonight's open is decidedly shaky as Shanghai Composite open down over 2% and CSI-300 (China's S&P 500) is now down over 5%. This follows a year-over-year drop in China Industrial profits (-0.3%), the first since March as the small bounce in April and May is now done. Commodities are lower and silver saw a minor flash-crash shortlty after China opened.

   

  • *SHANGHAI COMPOSITE FALLS 2.4% AT OPEN

  

   

  • *CHINA JUNE INDUSTRIAL COMPANIES' PROFIT FALLS 0.3% Y/Y

  

   

  Silver saw a mini flash crash…

  

   

  But PMs are bouncing back now…

  

   

   

  Charts: Bloomberg

  

  

  

  

  

• It's Really Very Simple…

  Submitted by Dmitry Orlov via Club Orlov blog,

  There are times when a loud cry of “The emperor has no clothes!” can be most copacetic. And so, let me point out something quite simple, yet very important.

  The old world order, to which we became accustomed over the course of the 1990s and the 2000s, its crises and its problems detailed in numerous authoritative publications on both sides of the Atlantic—it is no more. It is not out sick and it is not on vacation. It is deceased. It has passed on, gone to meet its maker, bought the farm, kicked the bucket and joined the crowd invisible. It is an ex-world order.

  If we rewind back to the early 1980s, we can easily remember how the USSR was still running half of Europe and exerting major influence on a sizable chunk of the world. World socialist revolution was still sputtering along, with pro-Soviet regimes coming in to power here and there in different parts of the globe, the chorus of their leaders' official pronouncements sounding more or less in unison. The leaders made their pilgrimages to Moscow as if it were Mecca, and they sent their promising young people there to learn how to do things the Soviet way. Soviet technology continued to make impressive advances: in the mid-1980s the Soviets launched into orbit a miracle of technology—the space station Mir, while Vega space probes were being dispatched to study Venus.

  But alongside all of this business-as-usual the rules and principles according which the “red” half of the globe operated were already in an advanced state of decay, and a completely different system was starting to emerge both at the center and along the periphery. Seven years later the USSR collapsed and the world order was transformed, but many people simply couldn't believe in the reality of this change. In the early 1990s many political scientists were self-assuredly claiming that what is happening is the realization of a clever Kremlin plan to modernize the Soviet system and that, after a quick rebranding, it will again start taking over the world. People like to talk about what they think they can understand, never mind whether it still exists.

  And what do we see today? The realm that self-identifies itself as “The West” is still claiming to be leading economically, technologically, and to be dominant militarily, but it has suffered a moral defeat, and, strictly as a consequence of this moral defeat, a profound ideological defeat as well.

  It's simple.

  How can they talk of the inviolability of private property while confiscating the savings of depositors in Cypriot banks?

   

  How can they talk of safeguarding the territorial integrity of countries while destroying, in turn, Yugoslavia, Iraq, Libya, Syria and Ukraine?

   

  How can they talk of free enterprise and then sign contracts to build ships but then refuse to deliver them because of pressure from Washington, as happened with Mistral ships which Russia ordered from France?

   

  How can they talk of democracy and then use naked threats against the premier of Greece—the birthplace of European democracy—forcing him to ignore the unprofitable results of the Greek national referendum?

   

  How can they talk about fighting racism while in the US they are constantly shooting mass quantities of unarmed Negros, all the while forbidding people to call them Negros.

   

  How can they accuse Serbs of genocide while refusing to acknowledge what they did to supposedly “independent” Kosovo, which has been turned into a European criminal enclave specializing in the production and distribution of narcotics?

   

  How can they talk about justice while the US maintains the largest prison population in the history of the world and has executed many people subsequently discovered to have been innocent?

   

  How can they accuse others of corruption after the colossal financial embarrassment of 2008, in the run-up to which obvious financial bubbles that were ready to bust were assigned the highest ratings?

   

  What has happened is the worst thing that could have possibly happened: in full view of the entire world, “Western values” have been demonstrated to be null and void.

   

  Are there any “Western values” left intact? Just one: the rights of sexual minorities. But it is not possible to maintain Western civilization on the strength of gay marriage alone.

  Is it any wonder then that the rest of the world is trying to put as much distance between itself and the morally bankrupt “West” as it possibly can, as quickly as it can? China is working on developing its own model, Russia is striving for self-sufficiency and independence from Western imports and finance, and even Latin America, once considered the backyard of the US, is increasingly going its own separate way.

  The ranks of the fools who are still buying the West's story are shrinking, while the ranks of the rebels are growing. There is the truth-teller Edward Snowden, who was forced to flee to Moscow to avoid persecution back home. There are European parliamentarians who recently broke ranks and visited Crimea. There are French and German military men who are volunteering to defend Eastern Ukraine against Western attack. There are the many European businessmen who came to the Economics Forum in St. Petersburg to sign trade deals with Russia, never mind what their politicians think of that.

  On the other side, the rapidly emerging new world order was recently on display in Ufa, capital of the majority-Moslem Republic of Bashkortostan in Southern Urals, Russian Federation. Leaders of more than half the world's population came there to sign deals, integrate their economies, and coordinate security arrangements. India and Pakistan set their differences aside and walked in through the door at the same time; Iran is next. “The West” was not represented there.

  Now that all Western values (other than the rights of sexual minorities) have been shown to be cynical exercises in hypocrisy, there is no path back. You see, it is a matter of reputation, and a reputation is something that one can lose exactly once. There is no path back. There is a path forward, but it is very frightening. There is the loss of control: Western institutions can no longer control the situation throughout much of the world, including, in due course, on their own territory. There is the abandonment of the Western narrative: Western pontificators, pundits and “thought leaders” will find that their talking points have been snatched away and will be reduced to either babbling apologetically or lapsing into embarrassed silence. Finally, there is the loss of identity: it is not possible, for the non-delusional, to identify with something (“The West”) that no longer exists.

  But the most frightening thing of all is this:

  behind a morally bankrupt civilization there are morally bankrupt people – lots and lots of them. Their own children, who will be forced to make their way in the world – whatever it turns out to be – will be as disrespectful of them as they were of their own vaunted civilizational values.

  

  

  

  

  

• Energy M&A Hits A Brick Wall: Ex Shell-BG Megadeal, Q2 Deal Value Was Lowest Since 2008

  One of the few catalyst that had helped maintain a consistent bid under energy names in the first half of 2015, despite the dramatic drop in the price of oil in late 2014 and then again in the last several weeks, was persistent fears of an “unexpected” M&A bid which would crush any new or incremental shorts who would otherwise have been delighted to accelerate the downward momentum in the beaten down energy sector.

  The result was an epic surge in forward energy P/E multiples: ones which even put the “glamour” multiples to shame, and threatened to overtake the all time fwd multiple high as recently as a few months ago.

  

   

  However, now that the latest crude dead cat bounce is over, it is time to reassess just how credible a surge in energy M&A activity truly is. The answer, as the EIA’s energy blog reveals, is not very credible at all (especially when considering the disappointing for the industry development when Whiting Petroleum pulled itself off the block when it found no buyer and was forced to massively dilute its shareholders instead).

  In fact, if one excludes the gargantuan April merger between Shell and the BG Group, Q2 M&A activity was the slowest in since 2008! If the price of oil continues to decline, one can be certain that Q3 M&A activity will be a dead zone.

  From the EIA:

  The second quarter of 2015 exhibited the largest amount of oil companies’ merger and acquisition (M&A) activity by value since fourth-quarter 2012. The announced merger between Royal Dutch Shell and BG Group in early April accounted for $84 billion of the $115 billion quarterly total.

   

  Without the Shell-BG merger, however, the value of deals in the second quarter of 2015 would have totaled $31 billion, $18 billion higher than first-quarter 2015, which was the lowest since at least 2008. The 137 deals announced in the second quarter was the lowest number of deals since fourth-quarter 2008 and 42% below the 235 median quarterly number of deals over the previous two years, indicating less breadth of activity.

   

  

   

  Companies often merge with or acquire other companies or their assets in an effort to achieve longer term growth, economies of scale, access to new technologies, diversity of market exposure, or a combination of factors. The buying or selling company may see a valuable opportunity that aligns with its own goals and expectations in deciding to purchase or sell assets. Also, a company may feel that it could benefit from adding new assets that complement its current strengths or by developing expertise in a market segment it currently does not participate in.

   

  M&A deals vary in size and can sometimes take months of negotiating to complete. M&A activity often reflects how market participants view future opportunities. The availability and cost of financing as well as legal factors also play a critical role in the value and amount of M&A activity.

  And since with the exception of just one mega-deal, the merger and acquisition landscape has hit a brick wall, one needs no explanation to understand just how “market participants view future opportunities.”

  

  

  

  

  

• Gold's Two Stories: Paper Markets Collapse… While The Retail Public Buys At A Record Pace

  Submitted by Mac Slavo via SHTFPlan.com,

  We’ve seen some significant swings in precious metals over the last several years and if we are to believe the paper spot prices and recent value of mining shares, one would think that gold and silver are on their last leg. Last weekend precious metals took a massive hit to the downside, sending shock waves throughout the industry. But was the move really representative of what’s happening in precious metals markets around the world? Or, is there an effort by large financial institutions to keep prices suppressed? In an open letter to the Commodity Futures Trading Commission First Mining Finance CEO Keith Neumeyer argues that real producers and consumers don’t appear to be represented by the purported billion dollar moves on paper trading exchanges.

  With China recently revealing that they have added some 600 tons of gold to their stockpiles and the U.S. mint having suspended sales of Silver Eagles due to extremely high demand in early July, how is it possible that prices are crashing?

  As noted in Mike Gleason’s Weekly Market Wrap at Money Metals Exchange, while it appears that gold is currently one of the world’s most hated assets, the retail public continues to buy at a record pace:

  The paper market is telling one story. But the actual physical bullion market is telling quite another.

   

  The U.S. Mint has sold over 100,000 ounces of American Eagle gold coins so far in July. That’s the highest monthly demand volume registered since April 2013. And that’s just as of this week. There’s still another week left to go before the final sales tally for Gold Eagles comes in for the month of July. It could be one for the record books with 109,000 1-ounce Gold Eagles sold — with bargain hunters purchasing 6% of the U.S. Mint’s production from Money Metals Exchange.

   

  As for Silver Eagles, the U.S. Mint has given up on trying to keep up with demand. After brisk sales during the first week of July, Mint officials suspended deliveries of Silver Eagles to dealers. Sales of the popular coins are set to resume next week. But we expect the Mint will be unable to get its act together and keep up with demand.

   

  Listen: Full Interview With Chris Powell Of The Gold Anti-Trust Committee (GATA)

  It’s not clear exactly who is suppressing precious metals or why, but it is quite apparent that prices on paper exchanges are completely disconnected from reality, as retail buyers are taking this opportunity to scoop up gold and silver at prices that are 50% or more off their highs.

  But what happens next? That, of course, is anybody’s guess, but considering current prices and movements within the context of a broader economic crisis, there is a precedent for what we have seen in recent years.

  We need only look back to the recession of the 1970’s.

  

  You’ll notice that gold saw some significant price movements, not dissimilar to what we’re experiencing today. There were several down swings of 25% or more within the broader gold bull market. Most notably, take a look at what happened from 1975 to 1976. Gold shot up to nearly $200 an ounce, only to be pounded just twelve months later by 50% to a price of just over $100 an ounce.

  As the crisis accelerated in severity into the late 1970’s, complete with gas shortages, job losses and geopolitical tensions, we saw gold explode in value to a high of $850 by January of 1980.

  We’re not necessarily suggesting that gold will follow the exact same pattern. But history does rhyme, and the world again finds itself in serious financial, economic, and monetary crisis.

  

  As we’ve noted before, gold is and always has been the historical asset of last resort for preserving wealth. Should the current crisis accelerate as we saw in the 1970’s, the value of gold will likely rise accordingly. We may not be looking at a 700% increase in price like we did from 1976 to 1980, but there is a distinct possibility that we will witness serious gains in real value as crisis and panic unfold.

  You can’t eat gold and silver, of course. If crisis is coming we have always urged our readers to prepare themselves for disruption to credit-dependent commerce systems with reserves of food, emergency cash and other supplies. But having a physical asset with real monetary and barterable value in your possession is certainly an important strategic consideration going forward.

  It’s been said that an ounce of gold could buy 350 loaves of bread in Biblical times. Today, an ounce of gold still buys about 350 loaves of bread. However you slice it, whether the system falls into a deflationary depression like the 1930’s or an inflationary recession like the 1970’s, gold will maintain its purchasing power.

  Though past performance is not necessarily an indicator of future results, we have over 6,000 years of history backing gold’s legitimacy as a true mechanism of exchange.

  

  

  

  

  

• In These 13 US Cities, Rents Are Skyrocketing

  Seven years ago, the American homeownership “dream” was shattered when a housing bubble built on a decisively shaky foundation burst in spectacular fashion, bringing Wall Street and Main Street to their knees. 

  In the blink of an eye, the seemingly inexorable rise in the American homeownership rate abruptly reversed course, and by 2014, two decades of gains had disappeared and the ashes of Bill Clinton’s National Homeownership Strategy lay smoldering in the aftermath of the greatest financial collapse since the Great Depression.

  

  In short, decades of speculative excess driven by imprudence, greed, and financial engineering and financed by the world’s demand for GSE debt had come crashing down and in relatively short order, a nation of homeowners was transformed into a nation of renters. 

  It wasn’t difficult to predict what would happen next.

  As demand for rentals increased and PE snapped up foreclosures, rents rose, just as a subpar jobs market, a meteoric rise in student debt, tougher lending standards, and critically important demographic shifts put further pressure on homeownership rates. Now, America faces a rather dire housing predicament: buying and renting are both unaffordable. Or, as WSJ put it last month, “households are stuck between homes they can’t qualify for and rents they can’t afford.”

  We’ve seen evidence of this across the country with perhaps the most telling statistic coming courtesy of The National Low Income Housing Coalition who recently noted that in no state can a minimum wage worker afford a one bedroom apartment. 

  In this context, Bloomberg is out with a list of 13 cities where single-family rents have risen by double-digits in just the last 12 months. Note that in Iowa, rents have risen more than 20% over the past year alone.

  

  More color from Bloomberg:

  Landlords have been preparing to raise rents on single-family homes this year, Bloomberg reported in April. It looks like those plans are already being put into action.

   

  The median rent for a three-bedroom single-family house increased 3.3 percent, to $1,320, during the second quarter, according to data compiled by RentRange and provided to Bloomberg by franchiser Real Property Management. Median rents are up 6.1 percent over the past 12 months. Even that kind of increase would have been welcome in 13 U.S. cities where single-family rents increased by double digits.

   

  It’s more evidence that rising rents have affected a broad scope of Americans. Sixty percent of low-income renters spend more than 50 percent of their income on rent, according to a report in May from New York University’s Furman Center. High rents have also stretched the budgets of middle-class workers and made it harder for young professionals to launch careers and start families.

   

  “You’re finding that people who wouldn’t have shared accommodations in the past are moving in with friends,”says Don Lawby, president of Real Property Management. “Kids are staying in their parents’ homes for longer and delaying the formation of families.”

  And for those with short memories, we thought this would be an opportune time to remind you of who became America’s landlord in the wake of the crisis…

  

  

  

  

  

• Raoul Pal: GroupThink Is Almost Ubiquitous (& The 1 Chart That Matters)

  Exceprted from Raoul Pal's exclusive Global Macro Investor letter,

  All together now

  From a very top-down perspective, I find it interesting that most macro funds tend to align themselves in groups that share ideas, however I find the uniformity of views amongst these groups somewhat troubling. That is not to say that everyone is wrong but that too many firms have the same views and same positions.

  The three groups tend to be:

  1. the newer New York macro and credit community,
  2. the older New York macro funds and,
  3. the London and Geneva crowd.

  All three tend to be somewhat distinct from each other but the views held within each group are similar.

  This is the groupthink effect.

  However, it is not totally ubiquitous as there are many who hold very different views. The very macro-orientated tend to be broader in their opinions than those who are crossing over into macro from credit, multi-strat or event driven.

  Summary of views

  The first group (and the majority with whom I met in NYC) have extremely similar views generally. These are as follows:

  • The US economy is fine and the lagged effect of lower oil prices on consumption is about to kick in along with real wage growth.
  • Inflation is going to rise with wage growth.
  • The European equity market is a better investment that the US market.
  • Chinese equities are a trade worth having on.
  • Japanese stocks are still an opportunity.
  • The Euro is going lower and the dollar higher.
  • Energy prices are going to rise.
  • Global growth is fine and EM is not much of a risk.

  Positioning

  In terms of positions, people were very light on dollar positioning, had zero bond exposure at best or were short, were long Chinese equities, long oil names, long German equities, long Japanese equities and generally long US equities. Many had on specific EM trades such as Argentina or Venezuela, Puerto Rico or Greece (yeah, it’s an EM now).

  I’m a tad different…

  Just to be clear, my views are startlingly out of consensus. My view is that shorting the Euro is the best risk reward trade in macro, US bonds are setting up to be a stunning opportunity on the long side, oil carries significant downside risk, the US and elsewhere are potentially heading into recession, equity volatility is highly likely, EM is a major risk and Germany is at the risk of leading Europe into a recession.

  Pure macro heaven (or hell)

  My overarching belief is that this is the most “pure macro” environment we have been in for over a decade, probably since the Asian Crisis in the late 1990s, and I just don’t think people understand what is going on.

  My entire thesis rests neatly on the US Dollar. Nothing else matters and if my view is wrong on that, then it is likely wrong on many things. What is really weird to me is that most people agree with my views on the dollar but don’t have the trade on, and were less versed on the macro knock-on effects of a strong dollar. Groupthink has tended to isolate particular parts of the US or global economy and ignore the bigger picture.

  …

  My views
  In New York I presented a very different spin on the world to almost anyone else. I am wildly and comfortably out of consensus.

  I think that the dollar is the only thing that matters. My view remains that we are in the early stages of what will prove to be one of the biggest dollar bull markets in history, and it is going to reap devastation on the global economy…

  The Chart Of Truth
  If you care about one chart and one chart only that sums up the entire risk to the world it is this: the DXY is forming a perfect wedge. It is going to break during the summer and the dollar is going to explode higher… 

   

  

   

  If this wedge breaks then I think the dollar will finish the year around 110 to 115, which would be consistent with the pattern of other dollar bull markets with an annual gain of over 20%.

  In a nutshell
  So, as you will see from all of the points below (and above), I fear that many people may well be backing the wrong horses.

  Clearly I can be wrong, and for me to be proven wrong is pretty simple: if the dollar does not rally further then the status quo can be maintained and we can continue with this lacklustre global expansion for a while longer.

  If the dollar rallies again from here then it is game over and the exit doors are small.

   *  *  *

  While mostly cost-prohibitive for the average investor, here is Raoul Pal's exclusive Global Macro Investor July letter…

  Raoul Pal GMI July2015 Monthly

  

  

  

  

  

• From Trump Tower To Clinton's Compound – The Homes Of The 2016 Presidential Candidates

  As dozens now vie for residence in the big white one of Pennsylvania Avenue, MarketWatch, courtesy of LoanDepot.com and CoreLogic, unveil the homes (since most own more than one) and mortgages of the 2016 presidential candidates. With homeownership rates at multi-decade lows, and the American Dream disappearing for most, it appears it pays to be in government – from Trump Tower and Clinton's Compounds to Bernie Sanders' underwater mortgages and Carly Fiorina's five fireplaces…

   

  Sen. Hillary Clinton (Democrat)

  

  Chappaqua, N.Y.

  Former President Bill Clinton and former Secretary of State and Sen. Hillary Clinton own a five-bedroom, four-bathroom Dutch colonial–style home in Westchester County built in 1889 that was assessed at $375,000 in 2014. The home at 15 Old House Lane has 5,232 square feet of living area. Public records show the home was purchased in 1999 for $1.7 million with an adjustable-rate first mortgage of $1.4 million, according to CoreLogic. Zillow estimates the market value today at $2.3 million. (The low tax assessment for the home compared with its market value is another example of New York state’s well-documented phenomenon of inconsistent tax assessment schedules.)

  

  Washington, D.C.

  The Clinton’s four-bedroom, six-bath (plus and two half-baths) home at 3067 Whitehaven St. in Washington, D.C., is two and a half stories with 5,152 square feet of living space and a brick exterior. Built in 1951 near Washington’s Embassy Row, the house was purchased by the Clintons in 2001 for $2.85 million, financing $2 million of that sum with a 30-year adjustable rate mortgage at 7.25% from Citibank with a down payment of $855,000. A Satisfaction of Mortgage filed in 2007 indicates it was paid off. The house was valued for the 2014 tax year at $5,049,180, and its projected assessment for 2016 is $5,225,900, according to CoreLogic. Zillow estimates the house to have a market value of $5.76 million.

  Gov. Martin O’Malley (Democrat)

  

  Baltimore

  Martin O’Malley and his wife, Katie, purchased a four-bedroom, four-bath, 2,726-square-foot Tudor house at 5304 Tilbury Way in the Homeland section of North Baltimore in December 2014 for their family, which includes four children. They paid $549,000 in 2014, with a 30-year first mortgage of $494,100, according to CoreLogic. The two-story house was built in 1928 and has a stone fireplace, nine-foot ceilings and a cherry-paneled family room.

  Sen. Bernie Sanders (Democrat)

  

  Burlington, Vt.

  A senator from Vermont and a former mayor of Burlington, Bernie Sanders and his wife, Jane O’Meara, have a four-bedroom, 2 ½-bath home in Chittenden County. The colonial-style home was built in 1981 and sold to Sanders in 2009 for $405,000, according to CoreLogic. The property has a 2013 assessed value of $321,900.

  Washington, D.C.

  Sanders and his wife also own a town house in the District. The 892-square-foot, one-bedroom, 1 ½-bath home with brick exterior was built in 1890. They bought it for $488,999 in 2007. The first mortgage was a 30-year conventional adjustable-rate mortgage for $391,200 at 5.88%. Records indicate there is also a $73,350 second mortgage on the property. The house has a taxable assessment of $480,970 for 2014 and a projected assessment in 2016 of $521,660.
  *  *  *

  Gov. Jeb Bush (Republican)

  

  Coral Gables, Fla.

  The former governor of Florida and his wife, Columba, live in the development of Almeria Row in Coral Gables, a suburb of Miami. They purchased their 3,485-square-foot, four-bedroom, four-bath town house in August 2011 for $1.3 million. Its assessed value in 2014 was $1.1 million. In July 2013, the Bushes refinanced their mortgage to a 30-year conventional loan for $754,000, according to CoreLogic.

  Sen. Marco Rubio (Republican)

  

  West Miami, Fla.

  The Florida senator, his wife, Jeanette, and their four children live in a four-bedroom, three-bath house in West Miami. The single-family home has 2,581 square feet of living area and was built in 2005. The Rubios paid $550,000. It has a porch, brick patio and swimming pool. After listing the house in 2013 for $675,000, the Rubios didn’t end up selling. In June 2015, they refinanced to a 30-year mortgage for $604,000. In 2014, the total value of the home was assessed at $430,936, according to CoreLogic and Zillow. Zillow estimates the house would sell today for $569,749.

  Gov. Chris Christie (Republican)

  

  Mendham, N.J.

  New Jersey Gov. Chris Christie has been in office since 2010, but he, his wife, Mary Pat, and their four children don’t live in the official New Jersey governor’s residence. The family lives in their 6,979-square-foot house in Mendham, N.J., which they bought in August 1998 for $775,000. Public records show the first mortgage was for $300,000 — a conventional, fixed-rate loan. They have since refinanced five times. The most recent loan was recorded in October 2008 for $400,000 — it is a 30-year adjustable-rate loan. The property assessed in 2014 for a total of $1.9 million and a market value of $2 million, according to CoreLogic.

  Gov. Bobby Jindal (Republican)

  

  Baton Rouge, La.

  The Louisiana governor and native of Baton Rouge still lives in his hometown — but not in a privately owned residence. Bobby Jindal and his wife, Supriya, and three children live in the state Governor’s Mansion, where they have resided since January 2008. The home was built in 1963 and has 12 bedrooms, 18 baths, two kitchens, a kitchenette, two dining rooms, a breakfast room and a receiving room for state affairs.

  Sen. Ted Cruz (Republican)

  

  Houston, Texas

  The junior senator, his wife, Heidi, and their two daughters live in a two-bedroom, 2 ½-bath luxury high-rise condominium unit with views of Houston, including the skyline. The Cruzes’ 19th-floor unit has 2,049 feet of living area and was built in 2003. Cruz and his wife bought it for $837,500 in September 2008 and financed $670,000 of it with a conventional, 30-year adjustable mortgage. In March 2011, public records show they refinanced $417,000 to a 15-year fixed-rate loan, according to CoreLogic data.

  Sen. Rand Paul (Republican)

  

  Bowling Green, Ky.

  The junior senator from Kentucky and his wife, Kelley, live in a four-bedroom, three-bath home with 4,206 square feet of living area. The white house with a gabled roof was built in 1994 and sits on a lush, tree-lined 1.99-acre lot. Its total value was assessed at $525,000 in 2014 with a land value of $257,500. In July 2014, the Pauls took a 10-year conventional mortgage out on the property for $172,500

  Rick Perry (Republican)

  

  Austin, Texas

  James Richard “Rick” Perry and his wife, Anita, spent the past 15 years living in the Texas Governor’s Mansion. When he left office this past January, the couple moved to a two-bedroom, two-bathroom town house in Austin while a new home is being built in Round Top, a community about 70 miles from the state capital in Fayette County.

   

  Sen. Lindsey Graham (Republican)

  Seneca, S.C.

  The South Carolina senator has been in office since January 2003 and has two residences: one in Washington and one in his home state. The latter is a 1,901-square-foot single-family ranch home in Seneca, S.C., built in 1989. He bought it for $164,000 in October 1993. In 2013, it was assessed at $213,230. A new, five-year conventional mortgage was recorded on March 2012 for $51,138.

  Washington, D.C.

  Graham also has a two-bedroom, two-bathroom 1,254-square-foot brick town house in Washington, D.C., that was purchased in 1997. Public records show the most recent mortgage is a 30-year conventional loan recorded June 21, 2012, for $207,000. The town house was assessed in 2015 at $560,910.

  Donald Trump (Republican)

  

  New York City, N.Y.

  Media personality and commercial property developer Donald Trump and his wife, Melania, live on Trump Tower’s top three floors, which are lavishly decorated in 24-karat gold and marble. The home was designed by Angelo Donghia in a style reminiscent of King Louis XIV with painted ceilings, ornate columns, opulent furnishings and crystal chandeliers. Trump took out a $100 million mortgage on the entire tower in 2012, New York City public records show.

  Palm Beach, Fla.

  The Mar-A-Lago Club in Palm Beach was initially a 126-room, 110,000-square-foot estate that Trump bought for $10 million in 1985. After a renovation, the home is said to have 58 bedrooms, 33 bathrooms, a 29-foot-long marble-top dining table, 12 fireplaces and three bomb shelters. Trump keeps private residential quarters at the club, which he calls his “home away from home.”

  He transferred the property to Mar-A-Lago Club Inc. in 1995 with a $10 million mortgage, according to CoreLogic.

  *  *  *
  It's good to be king… or even to try to be king.

  Source: MarketWatch

  

  

  

  

  

• It's Not Just Margin Debt: Presenting The Complete Chinese Stock Market Ponzi Schematic

  Late last month in “The Biggest Threat To Chinese Stocks: Shadow Lending Crackdown“, we suggested that the pressure on Chinese equities – which at that point had only begun to build – was at least partially attributable to an unwind in the country’s CNY1 trillion backdoor margin lending edifice. 

  As we explained, brokerages were only allowed to facilitate margin trading for investors whose account balances totaled at least CNY500K, and even then, traders could only lever up 2X. Brokerages naturally looked for ways to skirt the rules, leading to the development of multiple off-the-books vehicles and creating a situation wherein the official headline figure for margin lending (around CNY2.2 trillion at the time) woefully underrepresented the actual amount of leverage behind China’s world-beating equity rally.  

  Put simply, precisely measuring the amount of shadow financing that helped China’s legions of newly-minted retail day traders make leveraged bets on the SHCOMP and Shenzhen is virtually impossible, as is determining how much of that leverage has been unwound and how much remains or has been restored thanks to Beijing’s explicit efforts to reignite the margin madness by pumping PBoC cash into CSF.

  For our part, we’ve suggested that regardless of what the actual figure is, the important point is that the unwind has probably just begun. In short: it seems unlikely that all of the leverage has been squeezed out of China’s exceedingly intricate shadow financing system. 

  As it turns out, BofAML agrees and is out with a valiant attempt to not only identify each shadow lending channel, but to quantify just how much leverage is built into the Chinese market.

  *  *  *

  From BofAML

  We estimate that margin outstanding, only from the seven channels that we can estimate reasonably, easily exceeds Rmb3.7tr. Assuming an average 1x leverage, it means that at least Rmb7.5tr market positions are being carried on margin, equivalent to some 13% of A-share’s market cap and 34% of its free float. Meanwhile, A-shares ex. banks are still trading at 36.6x 12M trailing PER. We believe that the government will struggle to hold up the market beyond a few months, unless it is prepared to let go some of its other policy objectives including RMB credibility. When the market ultimately settles at a level that can be sustained on fundamental reasons, we expect that the balance sheet of most financial institutions (FIs) may get impaired and the financial system may wobble, due to high contagion risk. 

  Leverage means relentless selling pressure.

  The seven channels mentioned above are margin financing (MF), stock collateralized lending (SCL), umbrella trust (UT), stock benefits swap (SBS), structured mutual fund (SMF), P2P and offline private fund matching. There are a few other difficult–to-estimate channels, such as banks’ corporate/personal loans that ended up in stocks, brokers’ proprietary desk and funds’ subsidiaries. We suspect that the size of these may be Rmb1-2tr. In addition, China Securities Finance Corp. (CSFC) might have borrowed Rmb1.5tr from banks & PBoC to buy stocks. All the leveraged positions may want to unwind at certain point given the inflated collateral value, in our view. Additional selling pressure may come from hedge funds with compulsory winding-down clauses, when the market heads lower.

  

  *  *  * 

  So there you have it – an estimated CNY3.7 trillion in still-outstanding margin via official and unofficial channels. We’ll have much more soon on how each channel is structured, where the biggest risks lie, and the broader implications not only for China’s stock market and economy, but for the renminbi as well.

  For now, we’ll leave you with the following rather ominous quote from BofAML:

  The risk is that the unwinding of the leverage will be disorderly – due to implicit guarantees behind most shadow banking financial products, investors could easily panic if they suffer from meaningful capital losses, by our assessment. 

   

  

  

  

  

  

• Gold and Gibson's Paradox

  Submitted by Alasdair Macleod via GoldMoney.com,

  There is a myth prevalent today that the gold price always falls when interest rates rise.

  The logic is that when interest rates rise it is more expensive to hold gold, which just sits there not earning anything. And since markets discount future expectations, gold will even fall when a rise in interest rates is expected. With the Fed's Open Market Committee debating the timing of an interest rate rise to take place possibly in September, it is therefore no surprise to market commentators that the gold price continues its bear market. Only the myth is just that: a myth denied by empirical evidence.

  The chart below is of a time when the opposite was demonstrably true. From March 1971 to December 1979 the trends in both interest rates and the gold price rose and fell at the same time. It is worth noting that this occurred over more than one business cycle, so it is not a relationship which was cycle-dependant.

  

  The myth is therefore satisfactorily debunked.

  To understand why this relationship between interest rates and gold is not as simple as commonly believed, we must take the argument further to bring in commodities generally and visit the tricky subject of Gibson's Paradox. This paradox is based purely on long-run empirical evidence, when gold was transaction money, covering the two centuries between 1730 and 1930. It observes that the level of wholesale prices and interest rates are positively correlated. It is not the price relationship that is consistent with the quantity theory of money, which presupposes that interest rates correlate to the rate of price inflation instead of the price level itself. This maybe a reason why monetarists mistakenly argue, as we also discovered in the seventies, that central banks can manage the rate of inflation through interest rate policy. The common view in markets today about the relationship between interest rates and price inflation is wholly at odds with the longer-run evidence of Gibson's Paradox and accords with the more fashionable quantity theory instead.

  Gibson and his paradox are generally forgotten today, and those who centrally plan our money and markets appear unaware of the challenge it poses to their monetarist preconceptions. Keynes, no less, described Gibson's Paradox in 1930 as "one of the most completely established empirical facts in the whole field of quantitative economics", and Irving Fisher also wrote in 1930 that "no problem in economics has been more hotly debated". Even Milton Friedman agreed in 1976 that "The Gibson Paradox remains an empirical phenomenon without a theoretical explanation".*

  Resolving this paradox can be left to another time; instead we shall consider the implications by looking at price relationships between wholesale prices and interest rates in a post-gold world. The next chart is of producer prices measured in gold compared with one-year Treasury yields.

  

  I have taken the St Louis Fed's "Producer Price Index by Commodity for Crude Materials for Further Processing" to more closely reflect commodity price trends, and to reduce the additional considerations of changes in processing margins over time. The one-year interest rate is preferred to the original evidence of Gibson's Paradox, which used the yield on undated British Government Consols stock as being the only continual information on rates available, because we need to more firmly link the evidence to modern interest rate policies.

  Looking at the chart, it is hardly surprising that Gibson's Paradox was quashed from the time of the Nixon Shock in 1971, when the US unlocked a huge rise in the gold price by ending the Bretton Woods Agreement. Instead, the gold price took on a life of its own, driving down wholesale prices priced in gold for the next nine years. The rise in the index from 1980 to 2000 reflected gold's subsequent bear market when gold fell from $800 to $250, but the influence of Gibson's Paradox appears to have returned thereafter.

  This conclusion might be considered suspect; but the chart tells us that not only are producer prices at their lowest for thirty-five years when measured in sound money, the price level also coincides with zero interest rates. In theory, it accords precisely with Gibson's Paradox. So where do we go from here?

  There is only one way for interest rates to go from the zero bound, it being only a matter of time, time which according to the Fed is now running out. Commodity prices in their role as raw materials therefore seem set to rise with interest rates, if the Paradox is still valid. Furthermore, the evidence from this analysis suggests that wholesale prices are suppressed even more than the price of gold. This being the case, when the interest rate cycle turns the potential for higher raw material prices measured in dollars could be truly spectacular, even more so in the event the gold price rises at the same time, which seems likely in the event that financial markets become destabilised by higher interest rates.

  It is worth repeating at this point that the economic consensus, which adheres to the quantity theory of money and has been comforted by the apparent absence of consumer price inflation in the wake of the post-Lehman monetary expansion, takes a diametrically opposite view to that indicated by the Paradox. The prospect of a turn in the interest rate cycle is expected to drive the dollar's exchange rate higher still, weakening commodity prices and gold even further. In the language of the dealers, everyone is on the same side of the trade, meaning the dollar is technically over-bought and commodities over-sold.

  Gibson's Paradox says it will turn out otherwise, and it could be central to linking the cyclical relationship between interest rates, securities markets, and commodity prices. It becomes much easier to see how these relationships tie together. Rising interest rates would almost certainly be accompanied by a potentially large fall in overpriced bond and stock markets as speculative positions are unwound, the former even undermining bank solvency ratios.

  The flight of speculative capital from falling markets has to go somewhere, particularly if cash balances held in the banks are at a growing risk from systemic default. The Paradox tells us that these are the conditions for commodities to become the safe haven of choice for the highest levels of speculative money ever recorded since fiat currencies dispensed with their golden anchor. Ergo, Gibson's Paradox probably still holds.

  *All three quotes are taken from Barsky & Summers, National Bureau of Economic Research Working Paper No. 1680, (August 1985).

  

  

  

  

  

• How We Got Here – The 2008 Financial Crisis For Dummies

  It could never happen again, right?

   

  

   

  h/t 2020Crash.blogspot.com

  

  

  

  

  

• Europe's New Colonialism: ECB Rejects Greek Request To Reopen Stock Market

  It has been one month since Greek capital controls were imposed, and as we explained earlier, Greece is nowhere closer to having its deposit limits lifted. In fact, with several more months of capital controls at least, the Greek banks are likely to suffer ongoing balance sheet impairments which will ultimately result in depositor bail-ins, with Germany already pushing for haircuts on deposits over €100,000.

  However, when it comes to banks there is at least still the illusion that Greece has some residual sovereignty. The reality is that it does not, as Greece is no longer an independent nation, and as of July 15, the Greek “In Dependence” day, every Greek decision needs to get pre-approval from both the ECB, Brussels and, naturally, Berlin.

  This was made very clear earlier today when Reuters reported that the Greek stock exchange will remain closed on Monday but might reopen on Tuesday after a one-month shutdown which started on June 29. “It’s certain that it will not open on Monday, maybe on Tuesday,” a spokesperson for the Athens Stock Exchange told Reuters on condition of anonymity.

  A spokesman for the Athens Stock Exchange said on Friday a proposal to reopen the bourse had been submitted to the European Central Bank for an opinion before a decision on the matter is made by the Greek finance ministry.

   

  Another person with direct knowledge of the matter confirmed that Greek authorities aimed to reopen the bourse on Tuesday.

  However, to understand what really happened, one should read the Bloomberg explanation, according to which it was the ECB which rejected proposals by Greek authorities to reopen country’s financial markets with no restrictions in place for both Greek and foreign traders, citing an Athens Exchange spokeswoman.

  Ministerial decree is now expected, setting some restrictions in use of money from Greek bank accounts for trading.

  And just like that, we wave goodbye to the Hellenic Republic, and greet the Mediterranean Vassal Province of Mario and Merkel. Because as of this moment, no Greek decision can be taken without the direct or indirect express prior approval of either the ECB and/or Berlin.

  Oh, and incidentally, Greece may be better off leaving its markets closed indefinitely because since the day Greece was “fixed”, the GREK ETF, which has been the only equity way to trade Greece, has sunk 15%.

  

  It has also managed to drag down the S&P 500 with it despite the Greek can having supposedly been kicked for at least a few more months.

  And once the locals can finally cash out of the local banks which as we explained are an assured “doughnut” for existing equity investors pending either bankruptcy or massive dilution which will wipe out all existing stakeholders (the fate of depositors depends on whether a €25 billion source of liquidity can be found in very short notice) they will, which in turn will lead to another market closure for Greek stocks, only this time it will most likely be permanent.

  

  

  

  

  

• Reports Of Secret Drachma Plots Leave Tsipras Facing Fresh Crisis

  On Friday, we brought you the shocking story of the rebellion that never was in Greece. 

  According to FT, Former Greek Energy Minister and maverick among mavericks Panayotis Lafazanis convened a “secret” meeting at the Oscar Hotel in Athens on July 14 at which he attempted to convince Syriza hardliners (including, in FT’s words, “supporters of the late Venezuelan president Hugo Chávez [and some] old-fashioned communists”) to storm the Greek mint, seize the country’s currency reserves, and, if necessary, arrest central bank governor Yannis Stournaras. 

  

  (Lafazanis)

  Obviously, the plan was never implemented, but if the story is even partly true it betrays the degree to which Greece teetered on the edge of social upheaval and even civil war in the days that followed PM Alexis Tsipras’ decision to concede to creditors’ demands and abandon not only Syriza’s election mandate but the very referendum outcome he had himself campaigned for just days prior. 

  Now that Tsipras has succeeded in compelling Greek lawmakers to cede the country’s sovereignty to Brussels in exchange for the right to use the euro, tales of unrealized redenomination plots have come out of the woodwork so to speak, and now, in addition to the scheme described above and rumors that a return to the drachma was nearly financed by a loan from the Kremlin, we get a glimpse at yet another plan hatched behind the scenes, this time courtesy of a recorded conference call between Yanis Varoufakis and “members of international hedge funds.”

  Here’s the story from Kathimerini:

  Former Finance Minister Yanis Varoufakis has claimed that he was authorized by Alexis Tsipras last December to look into a parallel payment system that would operate using wiretapped tax registration numbers (AFMs) and could eventually work as a parallel banking system, Kathimerini has learned.

   

  In a teleconference call with members of international hedge funds that was allegedly coordinated by former British Chancellor of the Exchequer Norman Lamont, Varoufakis claimed to have been given the okay by Tsipras last December – a month before general elections that brought SYRIZA to power – to plan a payment system that could operate in euros but which could be changed into drachmas “overnight” if necessary, Kathimerini understands.

   

  Varoufakis worked with a small team to prepare the plan, which would have required a staff of 1,000 to implement but did not get the final go-ahead from Tsipras to proceed, he said.

   

  The call took place on July 16, more than a week after Varoufakis left his post as finance minister.

   

  The plan would involve hijacking the AFMs of taxpayers and corporations by hacking into General Secretariat of Public Revenues website, Varoufakis told his interlocutors. This would allow the creation of a parallel system that could operate if banks were forced to close and which would allow payments to be made between third parties and the state and could eventually lead to the creation of a parallel banking system, he said.

   

  As the general secretariat is a system that is monitored by Greece’s creditors and is therefore difficult to access, Varoufakis said he assigned a childhood friend of his, an information technology expert who became a professor at Columbia University, to hack into the system. A week after Varouakis took over the ministry, he said the friend telephoned him and said he had “control” of the hardware but not the software “which belongs to the troika.” 

   

  
  

  Apparently, Varoufakis planned to take control of the computers first, then hack into the ministry’s software, steal the code, and design the parallel payments system. Here are excerpts from the call, again from Kathimerini, quoting Varoufakis:

  “The prime minister before he became PM, before we won the election in January, had given me the green light to come up with a Plan B. And I assembled a very able team, a small team as it had to be because that had to be kept completely under wraps for obvious reasons. And we had been working since the end of December or beginning of January on creating one.

   

  “What we planned to do was the following. There is the website of the tax office like there is in Britain and everywhere else, where citizens, taxpayers go into the website they use their tax file number and they transfer through web banking monies from the bank account to their tax file number so as to make payments on VAT, income tax and so on and so forth.

   

  “We were planning to create, surreptitiously, reserve accounts attached to every tax file number, without telling anyone, just to have this system in a function under wraps. And, at the touch of a button, to allow us to give PIN numbers to tax file number holders, to taxpayers. 

   

  “That would have created a parallel banking system while the banks were shut as a result of the ECBs aggressive action to deny us some breathing space.

   

  “This was very well developed and I think it would have made a very big difference because very soon we could have extended it, using apps on smartphones and it could become a functioning parallel system and of course this would be euro denominated but at the drop of a hat it could be converted to a new drachma.

   

  “But let me tell you – and this is quite a fascinating story – what difficulties I faced. The General Secretary of Public Revenues within my ministry is controlled fully and directly by the troika. It was not under control of my ministry, of me as minister, it was controlled by Brussels. 

   

  Ok, so problem number one: The general secretary of information systems on the other hand was controlled by me, as minister. I appointed a good friend of mine, a childhood friend of mine who had become professor of IT at Columbia University in the States and so on.  I put him in because I trusted him to develop this.

   

  

   

  “At some point, a week or so after we moved into the ministry, he calls me up and says to me: ‘You know what? I control the machines, I control the hardware but I do not control the software. The software belongs to the troika controlled General Secretary of Public Revenues. What do I do?’

   

  “So we decided to hack into my ministry’s own software program in order to be able break it up to just copy just to copy the code of the tax systems website onto a large computer in his office so that he can work out how to design and implement this parallel payment system.

   

  “And we were ready to get the green light from the PM when the banks closed in order to move into the General Secretariat of Public Revenues, which is not controlled by us but is controlled by Brussels, and to plug this laptop in and to energize the system.

  In short, Varoufakis claims Tsipras had pre-approved the creation of secret accounts for every tax filer (which, knowing Greece, might have left Varoufakis short on accounts for quite a few citizens). Greeks would be made aware of the accounts’ existence in the event the banking system ceased to function altogether, and Athens would effectively facilitate payments through the new system in defiance of the EMU. Clearly, this would not have been well received by Brussels – especially the bit about hacking their software – but ultimately, because the new system would be entirely controlled by Varoufakis’ finance ministry, it could be converted to the drachma immediately. 

  Kathimerini goes on the quote Varoufakis as saying that German FinMin Wolfgang Schaeuble intended to use Grexit as leverage to force France into supporting a system that ceded fiscal decision making to Brussels (which would of course mean giving Berlin more say over EMU countries’ finances):

  “Schaeuble has a plan. The way he described it to me is very simple. He believes that the eurozone is not sustainable as it is. He believes there has to be some fiscal transfers, some degree of political union. He believes that for that political union to work without federation, without the legitimacy that a properly elected federal parliament can render, can bestow upon an executive, it will have to be done in a very disciplinary way. And he said explicitly to me that a Grexit is going to equip him with sufficient bargaining, sufficient terrorising power in order to impose upon the French that which Paris has been resisting. And what is that? A degree of transfer of budget making powers from Paris to Brussels.”

  The new revelations raise serious concerns for Alexis Tsipras. The deep divisions within Syriza are by now well publicized, but reports of covert plans to establish parallel banking systems using tax filers’ IDs and the idea that elements within the ruling party plotted to seize billions in currency reserves and take control of the central bank have left some lawmakers demanding answers. Here’s Reuters:

  The center-right New Democracy party and the centrist To Potami and the Socialist Pasok parties, which all backed Tsipras in parliamentary votes on the bailout this month, demanded a response to the reports.

   

  “The revelations that are coming out raise a major political, economic and moral issue for the government which needs in-depth examination,” it said in a statement.

   

  “Is it true that a designated team in the finance ministry had undertaken work on a backup plan? Is it true they had planned to raid the national Mint and that they prepared for a parallel currency by hacking the tax registration numbers of the taxpayers?”

   

  
  

  Tsipras thus finds himself in an extraordinarily difficult spot. Passing two sets of prior bailout actions through parliament cost him dearly on the political front as more than 30 Syriza MPs defected on both votes. This means he’ll be forced to rely on the support of opposition lawmakers to govern going forward or at least until he can call for elections and get a “clean start” after the third troika program is formally in place.

  If Syriza’s political opponents come to believe that their efforts to back Tsipras on the way to keeping Greece in the euro are being subverted in secret by members of Tsipras’ own party, their support could dry up quickly leaving the PM with no support from either side of the aisle. 

  Given all of this, it’s easy to see why many analysts and commentators still belive that Grexit – and everything that comes with it both for Greece and for the EMU – is still the most likely outcome.

  

  

  

  

  

• Forget Banks – GMOs Are The New "Too Big To Fail' System

  Authored by Mark Spitznagel and Nassim Nicholas Taleb, originally posted at The NY Times,

  Before the crisis that started in 2007, both of us believed that the financial system was fragile and unsustainable, contrary to the near ubiquitous analyses at the time.

  Now, there is something vastly riskier facing us, with risks that entail the survival of the global ecosystem — not the financial system. This time, the fight is against the current promotion of genetically modified organisms, or G.M.O.s.

  Our critics held that the financial system was improved thanks to the unwavering progress of science and technology, which had blessed finance with more sophisticated economic insight. But the “tail risks,” or the effect from rare but monstrously consequential events, we held, had been increasing, owing to increasing complexity and globalization. Given that almost nobody was paying attention to the risks, we set ourselves and our clients to be protected from an eventual collapse of the banking system, which subsequently happened to the benefit of those who were prepared.

  The fallacies used in the arguments against us at the time were as follows:

  First, we were said to be “against science.” Our adversaries invoked consensus among economists in favor of these methods, a serious fallacy. Had science operated solely by consensus, we would still be stuck in the Middle Ages. According to scientific practice, scientific consensus is used in telling us what theory is wrong; it cannot determine what is right. Nor can it apply to risk management, which requires much greater scrutiny.

   

  Second, we faced the argument that “more technology is invariably better,” a corruption of the notion of progress. In fact, only a small minority of technologies end up sticking; most fail because of some flaw identified over time.

   

  Third, we were told that had ideas such as ours prevailed in the past, they would have hindered risk-taking. Yet, the first rule of risk-taking is to not cross the street blindfolded.

   

  Fourth, toxic financial exposures were deemed to be “safe,” according to primitive risk models. But Fannie Mae went bust exactly because of overconfidence in its bad models (and, incidentally, after its bailout, appears to use the same risk models).

   

  Fifth, the system kept relying on “predictions,” not noticing that the past track record of predictions by central bankers and economists can be used to make astrologists look good. Yet the entire economic system rested on these flimsy predictions — while we were advocating a system that had isolated parts to withstand prediction errors.

  We were repeatedly told that there was evidence that the system was stable, that we were in “the Great Moderation,” a common practice that mistakes absence of evidence for evidence of absence. For the financial system to be viable, the solution is for it to resemble the restaurant business: decentralized, with mistakes that stay local and that cannot bring down the entire apparatus.

  As we said, the financial system nearly collapsed, but it was only money.

  We now find ourselves facing nearly the same five fallacies for our caution against the growth in popularity of G.M.O.s.

  First, there has been a tendency to label anyone who dislikes G.M.O.s as anti-science — and put them in the anti-antibiotics, antivaccine, even Luddite category. There is, of course, nothing scientific about the comparison. Nor is the scholastic invocation of a “consensus” a valid scientific argument.

   

  Interestingly, there are similarities between arguments that are pro-G.M.O. and snake oil, the latter having relied on a cosmetic definition of science. The charge of “therapeutic nihilism” was leveled at people who contested snake oil medicine at the turn of the 20th century. (At that time, anything with the appearance of sophistication was considered “progress.”)

   

  Second, we are told that a modified tomato is not different from a naturally occurring tomato. That is wrong: The statistical mechanism by which a tomato was built by nature is bottom-up, by tinkering in small steps (as with the restaurant business, distinct from contagion-prone banks). In nature, errors stay confined and, critically, isolated.

   

  Third, the technological salvation argument we faced in finance is also present with G.M.O.s, which are intended to “save children by providing them with vitamin-enriched rice.” The argument’s flaw is obvious: In a complex system, we do not know the causal chain, and it is better to solve a problem by the simplest method, and one that is unlikely to cause a bigger problem.

   

  Fourth, by leading to monoculture — which is the same in finance, where all risks became systemic — G.M.O.s threaten more than they can potentially help. Ireland’s population was decimated by the effect of monoculture during the potato famine. Just consider that the same can happen at a planetary scale.

   

  Fifth, and what is most worrisome, is that the risk of G.M.O.s are more severe than those of finance. They can lead to complex chains of unpredictable changes in the ecosystem, while the methods of risk management with G.M.O.s — unlike finance, where some effort was made — are not even primitive.

  The G.M.O. experiment, carried out in real time and with our entire food and ecological system as its laboratory, is perhaps the greatest case of human hubris ever. It creates yet another systemic, “too big too fail” enterprise – but one for which no bailouts will be possible when it fails.

  

  

  

  

  

• Revenue Recession: Investors Are Paying Too Much For Growth, Barclays Says

  The myopia displayed by corporate America in terms of inflating short-term earnings at the expense of balance sheet leverage and long-term growth is now so pervasive that it’s become a major campaign issue for Hillary Clinton who recently unveiled a plan to forcibly break what she’s calling the “tyranny of the next earnings report” (for more on possible ulterior motives for Clinton’s decision to effectively tax shortsightedness, see here). 

  Zero Hedge readers are well aware of how ZIRP has served as a convenient excuse for price insensitive corporate management teams to borrow and plow the proceeds into EPS-inflating, equity-linked compensation-boosting buybacks. 

  This comes at a price. Capex (i.e. future productivity) and wage growth suffer even as investors are rewarded and executives are enriched.

  Of course buying back shares can obscure negative earnings trends but it can’t do anything to hide the fact that revenue growth is non existent and indeed, as FactSet reports, “the blended revenue decline for Q2 2015 is -4.0%. If this is the final revenue decline for the quarter, it will mark the first time the index has seen two consecutive quarters of year-over-year revenue declines since Q2 2009 and Q3 2009. It will also mark the largest year over-year decline in revenue since Q3 2009 (-11.5%).”

  Here with more on what certainly looks like a ‘revenue recession’ and on the excessive price investors are willing to pay for top-line growth, is Barclays.

  *  *  *

  From Barclays

  Paying for revenue growth

  Growth is not easy to find.

  In the U.S., the economy has failed to accelerate, with GDP growth stubbornly below 2.5%. It is worse in Europe and even China has slowed. Stagnant global economic growth, a strong USD, and lower oil prices have combined to cause revenue growth for the S&P 500 to fall. The first quarter of 2015 was the first quarter of negative sales growth for the S&P 500 since the financial crisis. 2Q15 is expected to be worse (Figure 2).

  Few sectors have been immune to the slow growth macro environment. Only health care continues to experience sales growth of more than 5%. Over the last 15 years there have not been many others times when only one sector was able to achieve more than 5% sales growth (Figure 3). 

  

  Considering the scarcity of growth it is rational for investors to pay for it. But, has the outperformance of growth gone too far? Is it now too expensive and poised to underperform? We see evidence that it is.

  

  In Figure 11 we show the median price-to-sales ratio for each quintile of the S&P 500 based on revenue growth. As shown, there is a substantial premium being charged for the fastest growing companies. This once again indicates that the price of growth is now high, in our opinion. 

  

  

  

  

  

Digest powered by RSS Digest

• Pre-Crime Is Upon Us – "Schools Assess Students' Threat Level" From Kindergarten Up

  Submitted by Mac Slavo via SHTFPlan.com,

  Minority Report, eat your heart out. The real system is worse than anyone could have imagined.

  By now, everybody knows that the NSA and a host of other alphabet agencies are spying on Americans, collecting virtually every piece of communications data they exchange, regardless of whether or not they are “doing anything wrong.”

  But what are they doing with it?

  Apart from its value in consumer and marketing fields, the data is used to create “threat assessments” and put a black mark on the record of anyone who the authorities deem troublesome that will follow them throughout their career, and make it harder for individuals to get a job, qualify for a loan, travel, or enjoy the rights of a (now once) free society.

  MassPrivateI reports:

  Our government want us to believe that EVERY student is a potential threat and we need threat to stop them.

   

  […]

   

  Every student is given a “THREAT ASSESSMENT” by police and school administrators!

   

  Schools and police are using V-STAG to assess a ‘threat level:

   

  “The Virginia Student Threat Assessment Guidelines (V-STAG) is a school-based manualized process designed to help school administrators, mental health staff, and law enforcement officers assess and respond to threat incidents involving students in kindergarten through 12th grade and prevent student violence.”

   

  The war on terror is out of control! Watch out that kindergarten kid could be a threat!

  This program and others like it have been developed at the federal level, with FBI involvement, and coordinated across local, state and private organizations. The idea, unfortunately, is to implement this watch-and-flag surveillance grid across the system at every level, and with every institution that people must participate in.

  Hey, if it works for prisoners, it would be great for a once free society.

  The intent of schools to nurture children and help them to learn and grow into responsible adults has been subverted by an intrusive and paranoid surveillance system that considers every mistake to be a warning of crimes and misdeeds to come.

  And by treating everyone as a criminal before they even do anything, it probably creates a self-fulfilling prophecy.

  The Secret Service has the audacity to call threat assessing of kindergarten students a safety concern. “The Final Report And Findings Of The Safe School Initiative.”

   

  “The Safe School Initiative” was implemented through the Secret Service’s National Threat Assessment Center and the Department of Education’s Safe and Drug-Free Schools Program.

   

  Every student is being PROFILED and given a risk assessment rating, according to the Secret Services article titled “Evaluating Risk For Targeted Violence In Schools: Comparing Risk Assessment, Threat Assessment and Other Approaches.”

   

  What’s really being said is police and school administrators can put your kid(s) into mental health counseling which will follow them throughout their adult lives! Oddly there isn’t any mention of the school-to-prison pipeline!

  Meanwhile, this system is designed to expand throughout a student’s life and merge with other emerging “threat assessment” systems that follow adults in the general population as well.

  Colleges nationwide are using ‘Campus Teams’ to give their students sexual threat assessments, there is a “Legal Compliance and Sexual Violence Prevention Training” being held in Boston this July 27, 28th.

   

  “This training will address the critical intersection between compliance with federal laws to address sexual and intimate partner violence, and the role that threat assessment can play in effectively addressing these issues.”

  In adulthood, police departments and private employers are now also using threat assessment scores to profile and target against individuals who have raised red flags.

  Think it’s just those have committed crimes and demonstrated what bad people they can be? Think again. Dissidents, outspoken critics, competitors and opponents will all get flagged as the system is abused by its controllers and used to hammer down any nail that dares to stick up.

  This system will create a society of compliance and fearful people, not a free society free of crime and trouble.

  Whether or not this system can actually prevent crime remains unproven, but its ability to tarnish the record of individuals and place entire populations under preemptive suspicion is certain… and likely dangerous.

  

  

  

  

  

• SHINZORHEA

  

  

  

  

  

• The Meaning Of 'Trust'

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  

  

  

• Should You Buy A House?

  Submitted by Ramsey Su via Acting-Man.com,

  Why Buy a House?

  Examining the reasons to buy a house today may give us some idea where the housing market is heading in the future.

  There are three reasons to buy a house:

  Reason 1 – Utility

  A house (any dwelling) is a shelter.  It provides enjoyment, a home to raise one’s family, or just a place to watch that big screen TV.  Utility is not quantifiable and it differs from household to household.

   

  Reason 2 – Savings

  If financed, a mortgage is a way of saving something every month until the mortgage is paid in full.  If paid for, the savings come in the form of “owners’ equivalent rent”, which is what the census bureau uses to measure inflation in housing.

   

  Reason 3 – Asset appreciation

  At 5% appreciation per year, a $100k house today will be worth $412k in 30 years. Even a more modest 3% appreciation would result in better than a double.

  

   

  Why Not to Buy a House

  Based on the reasons above, it appears to be a slam dunk decision.  Why would anyone not want to buy a house?  There are three obstacles:

  Obstacle 1 – Affordability

  Housing, as a percentage of household income, is too expensive.  A decade of ill-conceived government intervention and Federal Reserve accommodations prevented natural economic forces from driving house prices to equilibrium.  As a result, not only is entry difficult, but many are struggling and are stuck in dire housing traps.  Corelogic estimated that as of the 1st quarter of 2015, 10.2% of mortgages are still under water while 9.7 million households have less than 20% equity.

   

  Obstacle 2 – High Risk

  Say you are young couple that purchased a home two years ago, using minimal down financing.  The wife is now pregnant and the husband has an excellent career opportunity in another city.  The couple has insufficient savings and the house has not appreciated enough to facilitate a sale, which results in negative equity after selling expenses.  The house can become a trap that diminishes a life time of income stream.

   

  Obstacle 3 – “Dead zones”

  Say you live in the middle of the country, in Kane County Illinois.  For the privilege of living there, you pay 3% in property taxes.  That is like adding 3% to a mortgage that never gets paid down.  Your property would have to appreciate 3% per year just to break even. By the way, “appreciation” is unheard of in Kane County, good times or bad.  There are many Kane Counties in the US.  Real estate in these counties should be named something else and should not be co-mingled with other housing statistics.  Employment is continuing to trend away from these areas.  What is going to happen to real estate in these markets?

   

  

  The Kane County court house: where real estate goes to vegetate

  The factors listed above are nothing new.  They provide some perspective as to where are are heading.  Looking at each of the reasons and obstacles, they are all trending negatively.

  The country is spending too much on housing, a luxury that is made possible by irresponsible Fed policies.  50% debt to income ratios are just insane and Ms. Yellen has the gall to call mortgage lending restrictive.  Can we not see what is happening to Greece?

   

  

  Mortgage backed securities held by the Federal Reserve System, a non-market central economic planning institution that is the chief instigator of house price inflation. Still growing, in spite of QE having officially ended – via Saint Louis Federal Reserve Research, click to enlarge.

   

  Real estate is an investment that matures over time.  The first few years are the toughest, until equity can be built up.  With appreciation slowing, not to mention the possibility of depreciation, it is taking much longer to reach financial safety.  The current base is weak, with too high a percentage of low equity and no equity ownership.  The stress of a recession, or just a few years of a flat market, can impact the economy beyond expectations.  The risks that might have been negligible once upon a time are much higher today.  Many who purchased ten years ago are still living with the consequences of that ill-timed decision today.

  By stepping back and looking at the big picture, we can see that real estate should be correcting and trending down.  The reasons why our grandparents bought their homes have changed.  Government intervention cannot last forever.  It will change from accommodation to devastation, when they finally run out of ideas.

   

  Conclusion

  In summary, my working life had its origins in real estate and I am not trying to bite the hand that fed me.  However, the reality is that the circumstances that prevailed when I entered the market are non-existent today.  I seriously doubt that I would chose real estate as a career, or as an investment avenue, if I were starting over.  As for buying a house, I would consider it more of a luxury as opposed to an investment, and one has to be prepared for the possibility of it being a depreciating asset, especially if one decides to move.

  

  

  

  

  

• Presenting The Most Ridiculous Things Ever Bought By Billionaires

  Despite the protestations of an indignant Ben Bernanke, seven years of global QE have not only failed to ignite the illusory “trickle down” wealth effect but have in fact served to widen the gap between the rich and the poor the world over.

  The explanation for this phenomenon is simple: when you deliberately inflate the value of the assets most likely to be concentrated in the hands of the wealthy, the class divide will grow in lockstep. 

  Perhaps the best evidence of the above can be found on Wall Street where Jamie Dimon and Lloyd Blankfein have now become billionaires. Because we wanted to do our part to help Jamie and Lloyd decide what to buy now that their wealth is virtually inexhaustible, we present the following video which counts down the 10 most absurd examples of conspicuous consumption in modern history.

  Enjoy. 

  

  

  

  

• Corporate Credit Crashing: Waiting On The Rest Of The Herd

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  With almost everything turning lower this week under “dollar” pressure, it is imperative to keep in mind the apex asset class. In 2007, it was the ABX indices and various mortgage related structures that signified the how far along everything was; in this cycle it is clearly corporate credit. The disarray starts in the riskiest pieces and then moves inward and eventually, if left unchecked, eroding too much underneath with which to support what was once believed perfectly safe. Once there is no place to hide, the turn really begins.

  Leveraged loan pricing, among the riskiest of the corporate bubble, had been somewhat tame, even unexpectedly so, as commodities ran aground under the weight of global “dollar” funding.

  

  In the past few days, however, leveraged loans (at least what is visible and represented by the index; it is very likely that less liquid issues are faring far more poorly) have been sold as have junk bonds. The market value portion of the S&P/LSTA US Leveraged Loan 100 fell 5 points just in the past two days, all the way to 965.

  

  Both junk bonds and leveraged loans are back down to prices far too close to the nadir of the last selloff in mid-December. That would seem to suggest, as UST’s (and the fast again flattening UST curve), that the broad credit and funding environment has turned far more toward that which prevailed in early December than the more benign mid-March to early May “pause.”

  Undoubtedly, there are economic concerns playing a significant part of the selloff but it may be liquidity that is the proximate catalyst (which is just another expression of those economic concerns combined with perceptions about the Fed’s proclivity to make it worse).

  

  The combined trend in liquidity and the apparently persistent impulse toward selling is a dangerous combination, as systemic capacity is extremely poor and the incongruence of corporate pricing to actual, non-QE delivered risk is as extreme. The divergence between this heightened form of “reach for yield” and what bearishness that beset the treasury market is beyond remarkable, as if there was open bifurcation in overall credit back in 2013. Dating to right around November 20 that year, all bonds were bid but for very different reasons.

  

  Corporate spreads, especially junk, compressed until the middle of last year – what a difference two years makes, as the corporate bubble is belatedly catching the warning of UST trading.

  

  The rising “dollar” has meant rising spreads, as the junk “curve” has actually retraced the entire taper euphoria. That is certainly a measure of the ongoing systemic reset for risk perceptions, but in the wider context there is perhaps a long way yet to go.

  In absolute terms, this move under the “dollar” is almost as severe as that in the middle of 2011…

  

  which triggered the renewed eurodollar decay and eventually two new QE’s: in 2011, this measure of risk spreads jumped 90 bps from February 2011 until the end of that September and the Fed’s renewed “dollar” swaps. The current decompression is already 74 bps dating back to July 2014.

  

  Again, it is the combination of liquidity (restrained and getting worse) and constant selling that ends up taking the next step.

  

  

  The real danger is if this continues past some unknown critical mass the entire herd will turn and there won’t be much at that point to offer support – the dealers are already out as are banks more generally.

  As a reminder, the size of the “herd” really escapes imagination:

  

  

  

  

  

  

• In Key Decision, Junk-Rated Chicago's Pension Reform Bid Ruled Unconstitutional

  On Thursday, we previewed a critical court ruling involving Chicago mayor Rahm Emanuel’s effort to cut pension expenses and plug a yawning budget gap. Here’s a brief recap of the story so far:

  Back in May, the Illinois Supreme Court set a de facto precedent for lawmakers across the country when a bid to cut pension benefits was struck down in a unanimous ruling. Anyone who might have been confused as to the significance of the decision got a wake up call from Moody’s when the ratings agency, citing the read-through for Chicago’s fiscal situation, downgraded the city to junk. This is part of a larger fiscal crisis in the country which has left almost half of US states facing funding gaps for the upcoming fiscal year. All told, the total pension shortfall across states and cities is anywhere between $1.5 trillion and $2.4 trillion depending on who you ask. 

  And here’s a recap of what was at stake in Friday’s ruling, courtesy of the Illinois Policy Institute: 

  A Cook County judge will rule on the legality of a 2014 pension law aimed at reforming two of Chicago’s underfunded city retirement systems. While the pension law included some much-needed reforms, such as an increase in the retirement age, if upheld the law ultimately would put Chicago residents on the hook for millions of dollars of tax increases.

  Well, those residents can relax for now, because as expected, Emanuel’s plan was determined to be unconstitutional by Rita M. Novak of the Cook County Circuit Court. The New York Times has more:

  A judge in Chicago ruled on Friday that a plan to change city workers’ pensions was unconstitutional. The case is being closely watched for its effect on the city’s uncertain finances.

   

  “This principle is particularly compelling where the Supreme Court’s decision is so recent, deals with such closely parallel issues and provides crystal-clear direction on the proper interpretation of the law,” Judge Novak wrote. The Constitution of Illinois provides that public pensions “shall not be diminished or impaired.”

   

  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 Friday’s ruling is seen as a setback to Mayor Rahm Emanuel’s efforts to close this gap and rescue Chicago’s credit rating.

   

  Officials in the mayor’s office said the city would appeal.

   

  “While we are disappointed by the trial court’s ruling, we have always recognized that this matter will ultimately be resolved by the Illinois Supreme Court,” said Chicago’s legal counsel, Stephen Patton, in a statement. “We now look forward to having our arguments heard there.”

  While we certainly understand the idea that cutting pension benefits amounts a breach of the so-called “implicit contract” between public sector employees and state and local governments, it seems as though the logic employed both by the workers and by the courts suffers from the same myopia and denial of economic realities that has helped saddle the world with a combined $19 trillion in debt. Put simply: if the pension system isn’t reformed, it will run out of money and no one will get anything. Here’s The Times again:

  “All city residents can be reassured that the Constitution — our state’s highest law — means what it says and will be respected, while city employees and retirees can be assured that their modest retirement income is protected,” said Ms. Lynch, the executive director of Afscme’s Council 31 in Chicago.

   

  Chicago said its pension overhaul would provide “massive net benefits” to workers if allowed to proceed. That was because the two pension funds at issue — one for laborers and one for general city workers — were heading toward certain insolvency. An insolvent system would be able to pay retirees only about 30 percent of their benefits.

  So for now, delay-and-pray wins and in all likelihood, Chicago will lose on appeal, meaning the city will sink further into insolvency while those that will be most affected when the pension ponzi finally collapses continue to object to the very reform measures that might save them. 

  Full decision below.

  Chicago Pension Ruling

  

  

  

  

  

• Iran's Supreme Leader Has A Message For President Obama

  Presented with no comment…

  US president has said he could knock out Iran’s military. We welcome no war, nor do we initiate any war, but.. pic.twitter.com/D4Co7fVuVg

  — Khamenei.ir (@khamenei_ir) July 25, 2015

  

  

  

  

• Abenomics End Game: Thousands Protest In Downtown Tokyo, Demand Abe's Resignation As PM Disapproval Soars

  Considering that Shinzo Abe’s first reign as prime minister of Japan lasted precisely one year from September 26, 2006 until September 26 of the following year, when he voluntarily resigned due to diarrhea, the fact that he has managed to stay in power for nearly 3 years since ascending to power for the second time in December 2012 and unleashing the currency-crushing and market-surging policy of unprecedented debt and deficit monetization known as “Abenomics” is quite impressive.

  It also confirms that as long as the stock market keeps going higher politicians have nothing to fear even if it means a total collapse in living standards for the rest of the population.

  

   

  Yet even with the Nikkei pushing on 18 years highs, it appears that Abe may have reached his rigged market rating benefit cap, because even as the Nikkei was soaring, Abe’s approval rating was plunging.

  As we reported a month ago, “Abe Cabinet’s approval rating plunged to 39%, matching a record low, as more than half of voters oppose the new US-sanctioned military/security legislation being debated in the Diet…. As his popularity has waned, Abe has become more and more desperate to keep support and has, for the first time in 70- years, lower the minimum voting age from 21 to 18.”

  The overall decline in support was apparently attributable to the fact that 53 percent of the respondents oppose the security bills being deliberated in the Lower House. Only 29 percent support the legislation, the survey showed.

   

  Three constitutional law scholars said in the Lower House Commission on the Constitution on June 4 that the security legislation is unconstitutional. The Abe Cabinet countered their stance by releasing an opinion paper that said the bills do not violate the Constitution.

  Since then things have gone from bad to worse for Abe, whose popularity rating last week plunged to a record low, while the number of Japanese citizens who disapprove of his policies has finally surpassed 50%, and rose to 52.6% in a Sankei poll, while the 47news.com poll shown below shows approval at just under 38% while dispparoval at 52%.

  

   

  It spilled over last night when after years of growing resentment to their premier who panders to the rich, to big exporters, to the Japanese military-industrial complex, and of course, to the US government and Goldman Sachs (whose idea Abenomics was from the very beginning) thousands of protestors rallied Friday night in downtown Tokyo in a campaign of “Say no to the Abe government,” targeting Japanese Prime Minister Shinzo Abe’s “runaway” policy. The protestors gathered at the Hibiya Park, Diet building and the prime minister’s official residence, shouting “Abe step down,” “definitely oppose war” and “protect constitution.”

  

  People hold up signs saying “No to the Abe administration” in a gathering at Hibiya Park in Tokyo on July 24, 2015. They expressed opposition to Prime Minister Shinzo Abe’s policies on a wide range of issues such as national security bills, the Trans-Pacific Partnership free trade initiative and the planned relocation of a U.S. military base within Okinawa Prefecture.

  

  

  [Photos: Imagine China]

  According to CRI, the anger of the Japanese population was sparked ever since the Abe administration started to push forward a series of controversial security-related bills in parliament debates.

  On Friday, the Japanese bicameral Diet decided to set up a special panel at the upper house to debate the security bills. The legislation package was rammed through the lower house last week.

   

  The bills, if enacted, will allow Japan’s Self-Defense Forces (SDF) to exercise the right to collective self-defense, but Japan’s war-renouncing constitution bans the SDF from doing so.

  Japan’s former prime minister Tomiichi Murayama, who delivered a speech Thursday evening during a rally near the Diet, again participated in Friday’s demonstration, criticizing Prime Minister Abe for carrying out an autocratic politics and defying Japan’s democratic system.

  The former prime minister, who is famous for his 1995 statement offering an apology to countries that suffered Japan’s wartime atrocities, stressed that it is very proud for Japan to renounce war under the pacifism constitution.

   

  The security bills will be discussed at the upper house special panel from Monday. Latest polls showed that majority of Japanese people opposed the bills and about 90 percent of Japanese constitutional experts said the bills are unconstitutional.

  In the immediate aftermath of the forced passage the controversial bills in the lower house Abe’s approval rate tumbled 10 percentage points immediately while the disapproval rate surged to over 50 percent. 

  So what happens next? Unless Abe relents and pockets his military expansion ambitions, it is very likely that another massive, and career ending, blast of diarrhea is in the prime minister’s immediate future.

  But first, as we said one month ago, and now as others admit, Abe will do everything in his power to, well, stay in power. Which is quite limited, i.e., print more.

  As Bloomberg reports, expectations for further BOJ easing may increase amid a falling approval rating of PM Abe’s Cabinet, says Daisaku Ueno, Tokyo-based chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities, in an interview. Uen adds that market participants are focusing on whether Cabinet’s approval rating can maintain key 30% level amid possible passage by upper house of security bills this summer and ahead of upper house elections in July 2016.

  His assessment: there is rising risk that BOJ will be pressured to ease policy further in autumn when govt is likely to struggle to find funding sources for its budgets.

  Which reveals one more important aspect of QE: in addition to being the only catalyst pushing stocks to record highs even as the global economy slides into recession if not outright depression, it has become the new normal politicians’ favorite and only means of holding on to power: if ratings plunge, print; if they continue plunging, print some more.

  By the time Abe is finally booted out of power, peacefully or otherwise, the Yen may well be at 200 which in turn will be the catalyst that finally destroys the already careening Japanese economy. But destroyed cataclysm and demographic disaster aside, at least the Nikkei will have hit all time record highs.

  

  

  

  

  

• Trump & The Political Risk Of A 3rd Party In 2016

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

  

   

  Historically, it has always been the Republican Party that splits. It has been a odd mixture of liberalism from the viewpoint of citizen rights before those of the government and the original constitutional goal of preserving the sovereignty of the states v the the Federalists. This liberal view has often taken the position of Libertarian whereas the so called “liberal” view of the Democrats is not liberal at all, it is liberal with other people’s money in the battle-cry of Marxism. This Republican “libertarian-ism” is what Trump is tapping into as is Bernie Sanders in the Democratic party. Both the traditional Republicans are owned by the NY banks as is Hillary Clinton, in who more people now distrust Hilary than trust her.

   

  

  This Republican “libertarian-ism” actually traces back to Thomas Jefferson – the ultimate anti-Federalist. Jefferson championed the Bill of Rights that both the Republicans and the Democrats no longer respect as demonstrated by Obama’s actions being indistinguishable from Bush regarding the NSA and both sides called Snowden a traitor.

  

   

  The humility of Jefferson further showing his Libertarian views can be demonstrated simply by reading his tombstone.  There is no mention of him being President of the United States. His accomplishments regarding liberty and for his home state are duly noted. He omitted any mention of being President since he was an anti-Federalist.

  The Party Republicans are  dreaming of chasing Donald Trump away since he is dominating the agenda and they want this to be politics as usual. What they fail to grasp is the rising resentment of politicians is the resurgence of Jeffersonian Libertarian-ism. Personally, I seriously doubt that mainstream Republicans will even allow Trump to take their ticket. I cannot imagine John Bohner not engaging in some covert action to try to prevent a Republican Trump ticket.

  The Republicans keep publicly rebuking the Trump for his inflammatory comments, yet he climbs in the polls. The very reason the majority of Democrats distrust Hillary Clinton is the foundation as to why Trump is so popular. They at least know he is not beholding to Goldman Sachs as both Bush and Hillary are most assuredly. There is no doubt that a Bush or Hillary victory in 2016 will be indistinguishable for both will represent business as usual.

  Where Rand Paul could have been a real contender, he seems to have lost his appeal for he too is trying to stay within the party and play politics as usual. The Republicans could chase Trump out and we could end up with a Trump third-party Libertarian surge. That would be the potential nightmare scenario for the GOP which our computer has been warning about for decades into 2016. NO, we are not advising Trump to answer the questions on this topic.

  A populist outsider with unlimited resources attacking the Republican and Democrat nominees in the general election will be perhaps the most interesting presidential election of all time. This will be really raising political hell and our computer has been projecting just that but at the same time a rise in the people voting for 2016 attracting votes from both Democrats fed up with Hillary and Republicans tired of politics as usual.

  The Republican Party mainstream establishment are out of touch and are not in tune with what is really happening. They cannot grasp they the emperor has no clothes. They are playing with disaster by trying to go after Donald Trump minimizing him and excluding him. They cannot see that times are changing – out with the old and in with the new.

  

  Trump has become a their favorite punching bag since launching his White House campaign. Questioning Sen. John McCain as a war hero was really spot on. He said:

  • Trump: “He’s not a war hero.”
  • Frank Luntz, interjecting: “He IS a war hero.”
  • Trump, chewing on his words, speaking quickly, with annoyance: “He is a war hero because he was captured. I like people that weren’t captured, OK?”

  A person who was a true War Hero did something magnanimous. McCain himself has acknowledged that he was a less-than-stellar Skyhawk pilot. He was a bit too reckless, and, had he made better decisions, might have avoided his shoot-down in 1967. Being captured does NOT make someone a war hero. If that is the standard, then it diminishes all those who received the Congressional Medal of Honor for being a real hero. So Trump was actually very correct and any Vet who respects those who went beyond the call of duty to save their fellow soldiers would agree calling McCain a war hero tarnishes the memory those who died saving their comrades by placing McCain in the same category. Sorry – Trump was right on that one.

  Trump has repeatedly declined to rule out a third-party White House run, saying in an interview with CNN’s Anderson Cooper earlier this month that he’s constantly being asked to run as an independent. He has said that his decision to run as an Independent will depend on “how I’m being treated by the Republicans.”

  If Trump took up a Third-Party, it might be the biggest shot we have at saving the country insofar as it would at least turn Capitol Hill into a new playing field. It really would not matter who the Third-Party candidate would be, Washington needs to be shaken and stirred vigorously to let these people know being a “representative” is supposed to be OF THE PEOPLE, not of yourself, the Party, and government. Whatever it takes to upset the apple-cart, at this point, we need rather desperately for we are headed in a direction that will destroy our future and these morons are demonstrating that they do not get it and are pissed off at Trump for not playing their game of never telling anything the way it is, sugar coat everything, promise the moon, and deliver nothing.

   

  

  

  

  

  

• Took 'Em Long Enough

  Barron’s just now, some 4+ years after Zero Hedge first called it out, presented with no further comment:

  

  ZH Note:  From “fringe bloggers” in August 2011

  

  

  

  

• How Janet Yellen Is Orchestrating Her Own 'Big Crisis' Moment

  

  Janet Yellen seems to be absolutely obsessed with increasing the benchmark interest rates in the USA as she desperately tries to put her stamp on her legislature as Chairwoman of the Federal Reserve. Even though the American economy definitely isn’t as strong as she thinks it is – the increases in employment are mainly due to part-time jobs which aren’t even sufficient to cover the costs of life – Yellen is determined to increase the interest rate which has been at a historical low since the Global Financial Crisis erupted (see next image).

  

  Source: Trading Economics

  This could have a devastating effect and in this article we will investigate the impact on a) the government finances and b) the stock market as a whole.

  But first, allow us to start with a general remark. The past few chairmen of the Federal Reserve have always created their own crises during their tenure, only to try to solve those crises themselves to go out with a bang. Ben Bernanke said there was no bubble in the housing prices and a few decades before Alan Greenspan had to ‘solve’ the 1987 crash, only to create his own technology bubble in the 2000’s.

  But, let’s go back to today’s situation. The Fed Funds Rate is at an all-time low and this results in lower borrowing costs for both the US government and the companies as the cost of debt is going down due to a lower risk-free interest rate. The interest expenses for the US government are now only marginally higher than 5 years ago, even though its total government debt has increased by 80% to $18T. The symbolic barrier of the government debt/GDP ratio of 100% has been reached a while ago, and now the risk of the snowball-effect is very realistic.

  

  Source: ibidem

  So, let’s keep it realistic and assume the total borrowing cost for the US government will increase by 1%. Nothing shocking, just one miserable percent. That’s absolutely not outrageous as the current interest on the 10 year government bond is 2.27%, but was more than twice as high in 2007, when it topped the 5%.

  

  If the interest rate increases by one measly percent, the US will have to pay $180B in additional interest expenses. $180B. That’s approximately $560 per American citizen but as not every American pays taxes (kids for instance have no income and can’t pay taxes), it might be a more useful exercise to see what the impact would be per American.

  According to the St Louis Fed, there are approximately 205 million Americans in the ‘working age population’ category. So if the US government would push the higher cost of debt on the taxpayers, a working American would have to pay almost $900 per year in additional taxes. And that’s just to cover the increased interest rate and doesn’t contribute a single dollar to reduce the government’s budget deficit.

  The $900 per working person will have to come from somewhere, so it means the consumption pattern will change resulting in a lower purchasing power per person, lower demand for products and this a higher unemployment rate. A higher unemployment rate would mean those who still are working would see their taxes increase once again, and yes, a vicious circle is born!

  And it’s not just the public debt that is worrying us, but the corporate debt is also on the rise. Due to the low interest rates, companies have issued a record amount of debt. Not to make smart and strategic acquisitions, no. The majority of the debt was used to reward their shareholders with special dividends and share repurchases.

  

  Source: FactSet

  Not only will that debt have to be repaid, it will very likely have to be refinanced as well. And yes, once the interest rates start to increase again, it will be much more expensive to refinance that existing debt. We tried to find out how much debt the S&P500 will have to repay before the end of this decade, and the results are shocking.

  

  Source: JP Morgan and Bloomberg

  As you can see on the previous image, S&P 500 members will have to refinance approximately $2.5 TRILLION in the 2016-2020 timeframe. So if the interest rate increases by 1%, it will cost them $25B in additional interest expenses. But as the interest rates on corporate bonds usually increases faster than on government bonds, the damage will be much higher. A 1.75% yield increase means the S&P 500 companies will have to cough up almost $45B in interest expenses. Per year.

  Let’s single out one company as an example. According to the most recent balance sheet, General Electric has $250B in debt on its balance sheet. If the company would see the cost of debt increase by just 100 base points, it would result in an $2.5B higher interest expense. If you’d use an 1.75% higher cost of debt, General Electric would lose an additional $4.4B per year in interest expenses, resulting in a 25% drop in the pre-tax profit! And how do you think the market will react if companies would start to report double-digit net profit drops?

  Our bet: Janet Yellen is so obsessed with increasing the interest rates she doesn’t look at the bigger picture. The profit increases at the stock markets will come to a screeching halt and once the increased interest rate trickles down to the corporate debt market, most companies will see their profits drop by a double digit percentage.

  Yellen will push the domestic economy over a cliff, will then do her best to save the world right before the end of her tenure to start a successful career in giving lectures, at $200,000 a pop.

  >>> FREE: Check Out Our Latest Gold Report!

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• "Jihadi John" Fears "Jealous" Terrorists Will Kill Him, Leaves ISIS

  When Top Gear front man Jeremy Clarkson left the show, the crowds of fanatical followers faded fast. When Zayn left One Direction, the band's insatiable devotees started to question their faith in the boy band's message. And so, as IB Times reports, the exodus of ISIS front-man "Jihadi John" from the terror group – citing irreconcilable differences with his "jealous" former terrorist colleagues – one wonders if the cracks of caliphate are starting to show…

  

   

  Britain's notorious, Kuwaiti-born, terrorist Mohammed Emwazi – known as Jihadi John – is on the run in Syria fearing the Islamist regime is going to kill him. As IB Times reports, Emwazi, from west London, is said to have been terrified by the publicity after he was identified as the murderer of British and American hostages.

  He may have joined a less well-known jihadist group somewhere in Syria, to try to keep a low profile.

   

  The Mirror reports that Emwazi is scared that "jealous" members of Islamic State may attack him, as well as being frightened of the British and US special forces hunting for him in the Middle East.

   

  The extremist is wanted for the gruesome killings of journalists and aid workers Stephen Sotloff, James Foley, David Haines, Alan Henning and Peter Kassig.

   

  Members of the SAS and US special forces have reportedly been given orders to capture Emwazi so he can be placed on trial, or to kill him if taking him prisoner is not practical.

  *  *  *
  It appears, perhaps, that Emwazi, who changed his name via deed poll, got too big for the ISIS 'band' and has not appeared in an Islamic State propaganda video, since Japanese journalist Kenji Goto was executed.

  

  

  

  

  

  

• It's Official: The Bar Can No Longer Be Lowered

  Via The New Yorker’s Andy Borowitz,

  A group of scholars who have been monitoring the descent of the bar over the past few decades have concluded that the bar can no longer be lowered, the scholars announced on Friday.

  The academics, led by Professor Davis Logsdon, of the University of Minnesota, published their conclusion after their research definitively found that the bar had finally dropped to its lowest possible position.

  “For those who thought the bar still had room to be lowered, our findings resoundingly contradict that assumption,” Logsdon said. “The bar is now essentially flush with the ground.”

  Logsdon acknowledged that he and his fellow scholars have come under fire in the past for claiming that the bar could not be further lowered, specifically when they issued a paper to that effect after the selection of the Republican Vice-Presidential nominee in 2008.

  “We got that one wrong,” he said. “Clearly, the bar still had a way to go.”

  Now that the issue of whether the bar can be further lowered has been settled, Logsdon and his colleagues plan to examine the question of whether there is anything left to scrape at the bottom of the barrel. “Our findings are preliminary, but it appears that the answer is no,” he said.

  *  *  *

  

  

  

  

  

• The Junk Bond Heatmap Has Not Been This Red In A Long Time

  It has been a tough year for equity investors: nearly seven months in and the S&P 500 has been caught in what may be its narrowest trading range in history, fluctuating between unchanged and up 4% for the year for the past 6 months (which is not unexpected for those who have said the only thing that matters for the US market is the growth, or lack thereof, of the Fed’s balance sheet).

  

   

  But while stock investors have nothing to write home about, and even less to expect in year-end bonuses (at least until Yellen inevitably launches QE4), for junk debt investors, especially those still holding energy bonds, the last 8 months has been a horrific roller coaster as can be seen on the chart below, which shows that energy credit spreads are once again on the verge of blowing out through 1000 bps.

  

   

  But for those equity investors caught in the artificial glare of the goalseeked stock market to appreciate how truly ugly it has gotten in the junk bond space, here is a heat map showing the YTD change in junk bond prices (relative box size indicates total outstanding debt amount) when seen in terms of either the 31 subsectors.

  

   

  … or the 805 issuer companies that make up Citi’s junk bond tracking universe.

  

   

  At some point, investors (using other people’s money) will tire of throwing good money after bad hoping to time the bottom tick in oil just right (and if oil tumbles in the $30, that may be just that moment) at which point the commodity capitulation which we noted previously, will spread away from just commodities and junk bonds, and spread to all sectors and products, including stocks. We can only hope this does not coincide with the Fed’s increasingly more amusing desire to rate hike imminently.

  

  

  

  

  

• BRICS Bank, AIIB Pledge Partnership, Loans To Be Issued In Yuan

  Over the first half of the year, we’ve built on several narratives that we believe are critical when it comes to understanding how the intersection of geopolitics and economics is set to shape the world going forward.

  One of these narratives revolves around the extent to which three China-led ventures are set to supplant traditionally dominant supranational lenders on the way to embedding the yuan in international trade and investment. 

  The new ventures are the BRICS bank, the Asian Infrastructure Investment Bank, and the Silk Road Fund. We’ve discussed each of these at length and we’ve also shown that in one way or another, they all represent a shift away from the multilateral institutions that have dominated the post-war economic order. 

  In short, they are a response not only to the IMF’s failure to provide the world’s most important emerging economies with representation that’s commensurate with their economic clout, but also to the perceived shortcomings of the IMF and ADB. In other words, they are far more than a new foreign policy tool for Beijing to deploy on the way to cementing its status as regional hegemon.

  The role of these new institutions in helping the yuan to replace the dollar as the world’s reserve currency (something which many still claim is an absurd proposition despite all evidence to the contrary) was made clear when, in April, we noted that although Beijing has sought to play down the degree to which the ventures will serve to help establish a new world economic order with China at the helm, the fact that Beijing “may encourage the $100b AIIB and $40b Silk Road Fund to issue loans directly in yuan” (via Bloomberg) and the fact that “the AIIB will establish a currency basket with China set to push for the yuan to take a prominent role” (via The South China Morning Post) suggested otherwise.

  Now that the AIIB and the BRICS bank have officially launched (see here and here) and are expected to begin operations soon, it appears that not only will the yuan play a key role for both lenders, but in fact, the two development banks may effectively merge. Here’s more via The BRICS Post:

  The BRICS New Development Bank will name its first investment in April next year and the first loan will be issued in yuan not dollar, top officials confirmed.

   

  The first president of the Bank, Kundapur Vaman Kamath said in Shanghai that the new lender will work closely with the China-led Asian Infrastructure Investment Bank.

   

  “We have partnerships that we will forge with the AIIB, the national loan banks and indeed, the existing market loan banks,” he said.

   

  The NDB with about $50 billion in capital to invest in public infrastructure will compete with institutions where the US has considerably more influence—organizations such as the World Bank and the International Monetary Fund.

   

  The paid-in reserves are planned to be denominated in each country’s currency. The Chinese renmimbi is also expected to replace the dollar at the BRICS Bank, especially for projects in Asia.

  And that is your de-dollarization du jour. While the IMF (and by extension, Washington) bickers with Berlin about just what went wrong with Greece’s first two bailouts and whether or not the third iteration is feasible without massive writedowns, the world’s new multilateral institutions are busy planning to make development loans in yuan. We’ll close with the following quote from Nomura’s Richard Koo:

  It is difficult to say at this point whether the AIIB will have a negative or a positive impact on the global economy. At the very least, however, the emergence of an international institution with a viewpoint different from that of western creditors will help enhance the quality of debate over emerging economies’ debt problems.

  

  

  

  

  

• Venezuela's Hyperinflation Crack-Up Boom On Its Way To Outer Space

  Submitted by Pater Tenebrarum via Acting-Man.com,

  Why Stock Markets Are Not an Indicator of the Economy

  In a free unhampered market economy based on a sound monetary system – this is to say a market-chosen monetary system with a free banking industry and no central planning institution that is manipulating interest rates and determining the size of the money supply – the gains and losses of shares prices in the stock market will simply be a reflection of entrepreneurial profits achieved in the past, plus embedded expectations of profits likely to be achieved in the future.

   

  

  Nicolas Maduro, the hapless president of socialist Venezuela, here seen hung with all sorts of bling supposed to testify to his achievements.

  Photo credit: Prensa Presidencial

  Under the assumption that such a free market money system would be largely non-inflationary, this mixture of “historical record” and expectations would primarily be expressed by the relative prices of shares. The bulk of the returns achieved by investors would come from dividend payments, as a general inflation of “the market” would be nigh impossible.

  And yet, although the stock market as a whole would barely appreciate in price in nominal terms, the gains achieved in real terms as well as real economic growth, would be far stronger than they are under our current, centrally planned system of constant inflation. Moreover, economic progress would be far more equitable as well, as the reverse redistribution of wealth caused by inflationary policy wouldn’t exist.

  This is why a rising stock market tells us absolutely nothing about the state of the underlying economy in the present inflationary system. In fact, we once again have a real life example providing ample empirical confirmation of this assertion. Venezuela’s economy is in free-fall. Its desperate socialist government, in an attempt to satisfy the masses of voters who have voted for it in order to receive handouts, is resorting to ever more repressive economic policy and money printing on a truly gargantuan scale to at least keep up the appearance that bread and circuses will continue. It has long lost the last shred of credibility, as shortages of basic goods have become the major hallmark of the country’s economy.

  However, amid capital controls and a collapse of Venezuela’s currency on the “black” market, the country’s stock market is soaring:

   

  

  The IBC General Index in Caracas, monthly, log scale – click to enlarge.

  Since the beginning of 2015, the Caracas stock market is up by more than 300% – note that this index was trading at a mere 6 points in 2002 and currently stands at nearly 15,000 points. This is what is indicative of a crack-up boom – as the currency system implodes, a flight into real assets is underway and titles to capital are soaring in value when measured in terms of the currency that is about to cease functioning as a medium of exchange. This is happening in spite of the fact that most of the businesses behind the stocks listed on the exchange are in fact consuming their capital and are no longer making any real profits.

  A linear chart of the index shows the size of recent advance even more starkly:

   

  

  IBC General Index monthly, linear chart – click to enlarge.

   

  Currency Collapse

  With oil prices under great pressure, the government of Venezuela can no longer finance its socialist program. Having nationalized countless companies and replaced their managers with cronies of the ruling party, while restricting the remaining private sector in every imaginable way – de facto creating a full command economy that is a mixture of the Marxist and fascist economic models, i.e. a mixture of Marxist state-ownership of the means of production with a fascist Zwangswirtschaft (literally: “coerced economy”) for what remains of the market economy – there is no way for the government to obtain the revenue it needs to keep its socialist system funded.

  Consequently, the only source of revenue for the government is the printing press of its central bank, which it is abusing quite liberally. There are several fixed exchange rates for the Venezuelan bolivar, which have long ceased to make even the faintest shred of sense. The reality is better reflected by black market exchange rates. Dolartoday.com keeps data on the black market in US dollars in the border town of Cucuta, which we are charting further below. In recent months, the bolivar has been in free-fall.

   

  

  Headquarters of the Central Bank of Venezuela in Caracas

  Photo credit: Caracasapie

  The plunge in the currency’s external value has become relentless:

   

  

  Black market rate of the Venezuelan bolivar against the US dollar in the border town of Cucuta. The collapse of the currency is accelerating – click to enlarge.

   

  Venezuela’s official inflation data lack credibility, but even so they are giving an idea of how quickly the currency is depreciating internally as well. Below we show a chart of the official consumer price index from late 2007 to the end of 2014, based to 100 in December of 2007:

   

  

  Venezuela’s official consumer price index between December 2007 (=100) to December 2014. More recent data are not available yet (it is probably no surprise that there is some foot-dragging with respect to these data releases). In December 2014, the official annualized inflation rate had accelerated to a new high of 68.5%. We imagine that even the official rate of change of CPI must by now be well over 100% – click to enlarge.

  We don’t know what the actual rate of price inflation is at this time, but it seems likely that is is a multiple of the official rate. The recent increase in stock prices is in fact providing us with a good hint.

   

  Conclusion

  Venezuela’s hyperinflation is reaching its final stages. It is probably already far too late for the government to stop the complete collapse of its currency. The bolivar is in the process of transforming from a medium of exchange to tinder for wood-stoves. Venezuelans who had the presence of mind to convert their savings into gold or foreign currency in good time are likely to survive the conflagration intact.

  Those who bought stocks on the Caracas stock exchange seem to have successfully side-stepped the effects of the devaluation as well, but they need a plan for the post-inflation adjustment crisis, which will bankrupt a great many companies very quickly. Also, the government can simply close the market down at any time if it doesn’t like what is happening there, so there is the ever-present danger of even more government interference as well.

  It is quite fascinating to see that in spite of numerous examples throughout history, governments never seem to learn. They all believe they can somehow overrule economic laws by diktat. This is not only true of Venezuela’s government, but of practically every government in today’s world. Central planning of money has been adopted everywhere. Venezuela merely shows us what the end game for every fiat money system looks like.

  At some point the State is overwhelmed by the promises it has made to its citizens. When it can no longer pay by means of confiscating private wealth, the printing press is always the last resort. Recently one actually gets the impression that it is often the first, rather than the last resort.

  In developed countries, people believe that the planners have everything in hand, and that their “price stabilization” rules will protect them from such outcomes. However, it should be clear that these rules will simply be abandoned in extremis. The independence of central banks exists only on paper – it will mean nothing in a perceived “emergency”. It is almost comical in this context that gold is being sold while most of the world’s major central banks are seemingly hell-bent on aping John Law’s Banque Générale Privée.

   

  

  Paper money endorsed by John Law – the grand-daddy of the hoary inflationism that has become the economic orthodoxy of modern times.

  

  

  

  

  

• Hillary Agrees To Testify Publicly Over Benghazi Deaths

  With the FBI and DoJ now involved in yet another Hillary Clinton scandal – that she sent confidential emails from her personal email server – it seems the 'presidential' former Secretary of State has felt pressured to come somewhat clean. While some might argue "what difference does it make?" The Washington Post reports that Hillary Rodham Clinton will testify on Oct. 22 before the House select committee investigating her role in connection with the deaths of four Americans in Benghazi, Libya. The testimony – before the committee formed last year – will be in a open setting (apparently against the wishes for privacy that committee chairman, Rep. Trey Gowdy initially requested).

  As The Washington Post details,

  Hillary Rodham Clinton will testify on Oct. 22 before the House select committee investigating her role in connection with the deaths of four Americans in Benghazi, Libya, Clinton campaign spokesman Nick Merrill said Saturday.

   

  The testimony will be public, Merrill said. It follows months of wrangling between the Republican-led committee and Clinton, whose allies accuse the panel of conducting a fishing expedition for damaging material that might be used against her as she runs for president in 2016.

   

  Clinton had long offered to testify in public, but the committee chairman, Rep. Trey Gowdy, had initially said he preferred a private interview. Although he said he was trying to keep the session from becoming a circus, Clinton's team objected on grounds that a closed session could allow Republicans to selectively leak unflattering details.

   

  Clinton's lawyer has also accused the committee of trying to drag out its investigation into 2016, the better to use it as a cudgel against the Democratic front-runner.

   

  U.S. Ambassador J. Christopher Stevens and three others were killed when militants overran two U.S. compounds in the restive Libyan city in September 2012, in the waning months of Clinton's term as secretary of state. She has long said she had no direct role in security decisions surrounding the U.S. facilities, but Republican critics claim that her State Department denied protections that might have prevented the attack.

  A spokesman for the committee said Clinton's lawyer sent a message last night to negotiate Clinton's appearance before the panel, requesting that the questioning be limited to the events surrounding the Benghazi attack.

  The committee says it disagrees, arguing that Clinton's email arrangement is relevant to the inquiry.

  Statement from Select Committee Communications Director Regarding Clinton Testimony

  Washington, DC— The Select Committee Communications Director Jamal Ware released this statement regarding reports about for Secretary Clinton’s testimony before the Committee:

   

  “Secretary Clinton's campaign may want to reach out to her lawyer, Mr. David Kendall, with whom the Committee has had ongoing conversations. As of last night, Mr. Kendall was still negotiating conditions for her appearance, writing: "The first is that, on the grounds of simple fairness and in order to make appropriate preparation possible, the scope of the questioning be consistent with the scope set forth in the resolution establishing the Select Committee on the Events Surrounding the 2012 Terrorist Attack in Benghazi (H.Res. 567 (113th Cong. 2013-14))." The second condition was that despite the fact that the Department of State has been woefully recalcitrant in producing relevant documents, the hearing date would not change.

   

  “Previously, Mr. Kendall had agreed, while insisting she would appear only a single time before the Committee, that Secretary Clinton would answer all questions the Committee had about Libya, Benghazi, and her unusual email arrangement with herself.

   

  “Her email arrangement clearly falls within the scope of the Select Committee's jurisdiction, which is charged by the House under the Resolution to look at Executive Branch efforts to comply with congressional oversight as well as the administration's response in the aftermath of the tragic attacks in Benghazi.

   

  “The Committee will not, now or ever, accept artificial limitations on its congressionally-directed jurisdiction or efforts to meet the responsibilities assigned to the Committee by the House of Representatives. Accordingly, once there is an agreement on the date and a better understanding of how, if at all, Secretary Clinton's lawyer's latest writing differs from previous ones, the Committee will announce said hearing date.”

  Of course, given that she already lied…

  “I did not email any classified material to anyone on my email. There is no classified material,” Mrs. Clinton told reporters in March. “I’m certainly aware of the classified requirements and did not send classified material.”

   

  Today's data confirms that the former first lady lied and has indeed used her email to send out confidential data on at least one occasion, or rather four:

   

  "In a letter to members of Congress on Thursday, the Inspector General of the Intelligence Community concluded that Mrs. Clinton’s email contains material from the intelligence community that should have been considered “secret” at the time it was sent, the second-highest level of classification. A copy of the letter to Congress was provided to The Wall Street Journal by a spokeswoman for the Inspector General."

   

  But the shocker is that the 4 emails were revealed when the Inspector General scoured through just 30 of Hillary's emails, suggeting that based on this random sample, Clinton was sending confidential data well over 10% of the time from her personal account!

   

  "The four emails in question “were classified when they were sent and are classified now,” said Andrea Williams, a spokeswoman for the inspector general. The inspector general reviewed just a small sample totaling about 40 emails in Mrs. Clinton’s inbox—meaning that many more in the trove of more than 30,000 may contain potentially secret or top-secret information."

  How can we trust that she will not simply lie once more…under oath.

  

  

  

  

  

• Bubble, Bubble, Toil, & Trouble: When Authorities Buy Assets To Prop Up Markets

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  The Central Planners who thought that buying shares to prop up the stock bubble was an excellent fix are about to find out the true meaning of toil and trouble.

  The actual line from Shakespeare's Macbeth is double, double, toil and trouble, fire burn, and cauldron bubble but for the purposes of analyzing what happens when authorities prop up market bubbles by directly buying assets, bubble, bubble, toil and trouble is also appropriate.

  China's authorities seem to have chanted Shakespeare's magical incantation nonstop this year, as the Shenzhen and other Chinese stock market indices have more than doubled. This chart illustrates what the Chinese authorities were aiming for: a bubble that just keeps expanding and never pops:

  

  But what actually happened was predictable: China's stock bubble burst. In response, Chinese authorities threw everything within reach into the market to stem the decline: criminalizing negative comments about stocks, loosening credit, enabling greater fools to post their homes as collateral for margin accounts, and the last and chillingly irreversible tool in the Central Planning Bubble Inflation Tool Kit, direct purchases of stocks: China Spends 10% Of GDP On "All Bark, No Bite" Stock Bailout:

  

  In gambling parlance, Chinese authorities doubled-down on their bet (there's your double, double) that they could save their bubble, bubble.

  The problem is that double, double leads to bubble, bubble which leads to double trouble, because once you start down the path of buying assets to prop up bubbly markets, there is no exit.

  As Sartre noted in No Exit, Hell is other people, which in the case of China's imploding stock bubble includes all the banana vendors who are now itching to sell Centrally Planned rallies to get their borrowed money off the table before the ball drops into a slot on the roulette wheel and they lose everything.

  Having accepted the poisoned chalice of buyer of last resort, Central Planners have no choice but to buy every share sold by every banana vendor who wants out.

  In other markets, the sellers might be hedge funds, private equity funds, pension funds or insurance companies. But the dynamic of private sellers realizing it's time to get out while the getting's good is the same in all post-bubble markets.

  That leaves Central Planners in a world of toil and trouble that is much like a financial Roach Motel–you can go in but you can't get out. The Central Planning fantasy is that after buying a huge chunk of the market to stabilize the bubble, private buyers will rush back in, allowing Central Planners to distribute (sell) their shares to the credulous banana vendors, pension funds, towns in Norway still sitting on the mortgage-backed securities they bought in the previous bubble, etc.

  This fantasy overlooks human psychology. A bubble is not just financial; it is a bubble of euphoria, confidence and greed. Once that bubble pops and is replaced by caution and fear, people want out–not just fickle banana vendors but professional asset managers.

  Central Planners have taken on an impossible task once they become the buyer of last resort: they have to keep buying to prop up valuations, but the pool of greater fools willing to take the inflated shares off the central planners is shrinking.

  The Central Planners can keep the market cauldron bubbling by buying assets hand over fist, but once they lower the fire of their buying, the bubbling stops and the market crashes.

  The Central Planners who thought that buying shares to prop up the stock bubble was an excellent fix are about to find out the true meaning of toil and trouble. Double, double, bubble, bubble, double trouble. The magical incantation isn't about saving markets, it's about destroying them.

  

  

  

  

  

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• Paul Craig Roberts: The Eroding Character Of The American People

  Submitted by Paul Craig Roberts,

  How can the life of such a man
  Be in the palm of some fool’s hand?
  To see him obviously framed
  Couldn’t help but make me feel ashamed to live in a land
  Where justice is a game.—Bob Dylan, “Hurricane”

  Attorney John W. Whitehead opens a recent posting on his Rutherford Institute website with these words from a song by Bob Dylan. Why don’t all of us feel ashamed? Why only Bob Dylan?

  I wonder how many of Bob Dylan’s fans understand what he is telling them. American justice has nothing to do with innocence or guilt. It only has to do with the prosecutor’s conviction rate, which builds his political career. Considering the gullibility of the American people, American jurors are the last people to whom an innocent defendant should trust his fate. The jury will betray the innocent almost every time.

  As Lawrence Stratton and I show in our book (2000, 2008) there is no justice in America. We titled our book, “How the Law Was Lost.” It is a description of how the protective features in law that made law a shield of the innocent was transformed over time into a weapon in the hands of the government, a weapon used against the people. The loss of law as a shield occurred prior to 9/11, which “our representative government” used to construct a police state.

  The marketing department of our publisher did not appreciate our title and instead came up with “The Tyranny of Good Intentions.” We asked what this title meant. The marketing department answered that we showed that the war on crime, which gave us the abuses of RICO, the war on child abusers, which gave us show trials of total innocents that bested Joseph Stalin’s show trials of the heroes of the Bolshevik Revolution, and the war on drugs, which gave “Freedom and Democracy America” broken families and by far the highest incarceration rate in the world all resulted from good intentions to combat crime, to combat drugs, and to combat child abuse. The publisher’s title apparently succeeded, because 15 years later the book is still in print. It has sold enough copies over these years that, had the sales occurred upon publication would have made the book a “best seller.” The book, had it been a best seller, would have gained more attention, and perhaps law schools and bar associations could have used it to hold the police state at bay.

  Whitehead documents how hard a not guilty verdict is to come by for an innocent defendant. Even if the falsely accused defendant and his attorney survive the prosecutor’s pressure to negotiate a plea bargain and arrive at a trial, they are confronted with jurors who are unable to doubt prosecutors, police, or witnesses paid to lie against the innocent defendant. Jurors even convicted the few survivors of the Clinton regime’s assault on the Branch Davidians of Waco, the few who were not gassed, shot, or burned to death by US federal forces. This religious sect was demonized by Washington and the presstitute media as child abusers who were manufacturing automatic weapons while they raped children. The charges proved to be false, like Saddam Hussein’s “weapons of mass destruction,” and so forth, but only after all of the innocents were dead or in prison.

  The question is: why do Americans not only sit silently while the lives of innocents are destroyed, but also actually support the destruction of the lives of innocents? Why do Americans believe “official sources” despite the proven fact that “official sources” lie repeatedly and never tell the truth?

  The only conclusion that one can come to is that the American people have failed. We have failed Justice. We have failed Mercy. We have failed the US Constitution. We have failed Truth. We have failed Democracy and representative government. We have failed ourselves and humanity. We have failed the confidence that our Founding Fathers put in us. We have failed God. If we ever had the character that we are told we had, we have obviously lost it. Little, if anything, remains of the “American character.”

  Was the American character present in the torture prisons of Abu Ghraib, Guantanamo Bay, and hidden CIA torture dungeons where US military and CIA personnel provided photographic evidence of their delight in torturing and abusing prisoners? Official reports have concluded that along with torture went rape, sodomy, and murder. All of this was presided over by American psychologists with Ph.D. degrees.

  We see the same inhumanity in the American police who respond to women children, the elderly, the physically and mentally handicapped, with gratuitous violence. For no reason whatsoever, police murder, taser, beat, and abuse US citizens. Every day there are more reports, and despite the reports the violence goes on and on and on. Clearly, the police enjoy inflicting pain and death on citizens whom the police are supposed to serve and protect. There have always been bullies in the police force, but the wanton police violence of our time indicates a complete collapse of the American character.

  The failure of the American character has had tremendous and disastrous consequences for ourselves and for the world. At home Americans have a police state in which all Constitutional protections have vanished. Abroad, Iraq and Libya, two formerly prosperous countries, have been destroyed. Libya no longer exists as a country. One million dead Iraqis, four million displaced abroad, hundreds of thousands of orphans and birth defects from the American ordnance, and continuing ongoing violence from factions fighting over the remains. These facts are incontestable. Yet the United States Government claims to have brought “freedom and democracy” to Iraq. “Mission accomplished,” declared one of the mass murderers of the 21st century, George W. Bush.

  The question is: how can the US government make such an obviously false outrageous claim without being shouted down by the rest of the world and by its own population? Is the answer that good character has disappeared from the world?

  Or is the rest of the world too afraid to protest? Washington can force supposedly sovereign countries to acquiesce to its will or be cut off from the international payments mechanism that Washington controls, and/or be sanctioned, and/or be bombed, droned, or invaded, and/or be assassinated or overthrown in a coup. On the entire planet Earth there are only two countries capable of standing up to Washington, Russia and China, and neither wants to stand up if they can avoid it.

  For whatever the reasons, not only Americans but most of the world as well accommodate Washington’s evil and are thereby complicit in the evil. Those humans with a moral conscience are gradually being positioned by Washington and London as “domestic extremists” who might have to be rounded up and placed in detention centers. Examine the recent statements by General Wesley Clark and British Prime Minister Cameron and remember Janet Napolitano’s statement that the Department of Homeland Security has shifted its focus from terrorists to domestic extremists, an undefined and open-ended term.

  Americans with good character are being maneuvered into a position of helplessness. As John Whitehead makes clear, the American people cannot even prevent “their police,” paid by their tax payments, from murdering 3 Americans each day, and this is only the officially reported murders. The actual account is likely higher.

  What Whitehead describes and what I have noticed for many years is that the American people have lost, in addition to their own sense of truth and falsity, any sense of mercy and justice for other peoples. Americans accept no sense of responsibility for the millions of peoples that Washington has exterminated over the past two decades dating back to the second term of Clinton. Every one of the millions of deaths is based on a Washington lie.

  When Clinton’s Secretary of State, Madeleine Albright, was asked if the Clinton’s regime’s sanctions, which had claimed the lives of 500,000 Iraqi children, were justified, she obviously expected no outrage from the American people when she replied in the affirmative.

  Americans need to face the facts. The loss of character means the loss of liberty and the transformation of government into a criminal enterprise.

  

  

  

  

  

• Aussie Dollar Tests Long-Term Trendline As China Contagion Spreads

  Last week, we asked "Is Australia the next Greece?" It appears, judging bu the collapse in the Aussie Dollar, that some – if not all – are starting to believe it's possible after last night's 15-month low in China Manufacturing PMI. As UBS previously noted, China's real GDP growth cycles have become an increasingly important driver of Australia's nominal GDP growth this last decade. With iron ore and coal prices plumbing new record lows, a Chinese (real) economy firing on perhaps 1 cyclinder, and equity investors reeling from China's collapse; perhaps the situation facing Australia is more like Greece than many want to admit.

  Australian consumers are more worried about the medium term outlook than at the peak of the financial crisis, and rightfully so…

  

   

  As China plumbs new depths in manufacturing, just piling on Aussie's woes…

   

  

   

  The Dollar is rising this morning but all eyes are on AUD as it tests a very long-term trendline…

  

  h/t @RaoulGMI

  *  *  *

  As The Telegraph previously concluded, rather ominously,

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

   

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

  Charts: Bloomberg

  

  

  

  

  

• The Eurasian Big Bang: How China & Russia Are Running Rings Around Washington

  Authored by Pepe Escobar, originally posted at TomDispatch.com,

  Let’s start with the geopolitical Big Bang you know nothing about, the one that occurred just two weeks ago. Here are its results: from now on, any possible future attack on Iran threatened by the Pentagon (in conjunction with NATO) would essentially be an assault on the planning of an interlocking set of organizations — the BRICS nations (Brazil, Russia, India, China, and South Africa), the SCO (Shanghai Cooperation Organization), the EEU (Eurasian Economic Union), the AIIB (the new Chinese-founded Asian Infrastructure Investment Bank), and the NDB (the BRICS' New Development Bank) — whose acronyms you’re unlikely to recognize either.  Still, they represent an emerging new order in Eurasia.

  Tehran, Beijing, Moscow, Islamabad, and New Delhi have been actively establishing interlocking security guarantees. They have been simultaneously calling the Atlanticist bluff when it comes to the endless drumbeat of attention given to the flimsy meme of Iran’s "nuclear weapons program."  And a few days before the Vienna nuclear negotiations finally culminated in an agreement, all of this came together at a twin BRICS/SCO summit in Ufa, Russia — a place you’ve undoubtedly never heard of and a meeting that got next to no attention in the U.S.  And yet sooner or later, these developments will ensure that the War Party in Washington and assorted neocons (as well as neoliberalcons) already breathing hard over the Iran deal will sweat bullets as their narratives about how the world works crumble.

  The Eurasian Silk Road

  With the Vienna deal, whose interminable build-up I had the dubious pleasure of following closely, Iranian Foreign Minister Javad Zarif and his diplomatic team have pulled the near-impossible out of an extremely crumpled magician’s hat: an agreement that might actually end sanctions against their country from an asymmetric, largely manufactured conflict.

  Think of that meeting in Ufa, the capital of Russia’s Bashkortostan, as a preamble to the long-delayed agreement in Vienna. It caught the new dynamics of the Eurasian continent and signaled the future geopolitical Big Bangness of it all. At Ufa, from July 8th to 10th, the 7th BRICS summit and the 15th Shanghai Cooperation Organization summit overlapped just as a possible Vienna deal was devouring one deadline after another.

  Consider it a diplomatic masterstroke of Vladmir Putin’s Russia to have merged those two summits with an informal meeting of the Eurasian Economic Union (EEU). Call it a soft power declaration of war against Washington’s imperial logic, one that would highlight the breadth and depth of an evolving Sino-Russian strategic partnership. Putting all those heads of state attending each of the meetings under one roof, Moscow offered a vision of an emerging, coordinated geopolitical structure anchored in Eurasian integration. Thus, the importance of Iran: no matter what happens post-Vienna, Iran will be a vital hub/node/crossroads in Eurasia for this new structure.

  If you read the declaration that came out of the BRICS summit, one detail should strike you: the austerity-ridden European Union (EU) is barely mentioned. And that’s not an oversight. From the point of view of the leaders of key BRICS nations, they are offering a new approach to Eurasia, the very opposite of the language of sanctions.

  Here are just a few examples of the dizzying activity that took place at Ufa, all of it ignored by the American mainstream media. In their meetings, President Putin, China's President Xi Jinping, and Indian Prime Minister Narendra Modi worked in a practical way to advance what is essentially a Chinese vision of a future Eurasia knit together by a series of interlocking “new Silk Roads.” Modi approved more Chinese investment in his country, while Xi and Modi together pledged to work to solve the joint border issues that have dogged their countries and, in at least one case, led to war.

  The NDB, the BRICS’ response to the World Bank, was officially launched with $50 billion in start-up capital. Focused on funding major infrastructure projects in the BRICS nations, it is capable of accumulating as much as $400 billion in capital, according to its president, Kundapur Vaman Kamath. Later, it plans to focus on funding such ventures in other developing nations across the Global South — all in their own currencies, which means bypassing the U.S. dollar.  Given its membership, the NDB’s money will clearly be closely linked to the new Silk Roads. As Brazilian Development Bank President Luciano Coutinho stressed, in the near future it may also assist European non-EU member states like Serbia and Macedonia. Think of this as the NDB’s attempt to break a Brussels monopoly on Greater Europe. Kamath even advanced the possibility of someday aiding in the reconstruction of Syria.

  You won’t be surprised to learn that both the new Asian Infrastructure Investment Bank and the NDB are headquartered in China and will work to complement each other’s efforts. At the same time, Russia’s foreign investment arm, the Direct Investment Fund (RDIF), signed a memorandum of understanding with funds from other BRICS countries and so launched an informal investment consortium in which China’s Silk Road Fund and India’s Infrastructure Development Finance Company will be key partners.

  Full Spectrum Transportation Dominance

  On the ground level, this should be thought of as part of the New Great Game in Eurasia. Its flip side is the Trans-Pacific Partnership in the Pacific and the Atlantic version of the same, the Transatlantic Trade and Investment Partnership, both of which Washington is trying to advance to maintain U.S. global economic dominance. The question these conflicting plans raise is how to integrate trade and commerce across that vast region. From the Chinese and Russian perspectives, Eurasia is to be integrated via a complex network of superhighways, high-speed rail lines, ports, airports, pipelines, and fiber optic cables. By land, sea, and air, the resulting New Silk Roads are meant to create an economic version of the Pentagon’s doctrine of “Full Spectrum Dominance” — a vision that already has Chinese corporate executives crisscrossing Eurasia sealing infrastructure deals.

  For Beijing — back to a 7% growth rate in the second quarter of 2015 despite a recent near-panic on the country’s stock markets — it makes perfect economic sense: as labor costs rise, production will be relocated from the country’s Eastern seaboard to its cheaper Western reaches, while the natural outlets for the production of just about everything will be those parallel and interlocking “belts” of the new Silk Roads.

  Meanwhile, Russia is pushing to modernize and diversify its energy-exploitation-dependent economy. Among other things, its leaders hope that the mix of those developing Silk Roads and the tying together of the Eurasian Economic Union — Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan — will translate into myriad transportation and construction projects for which the country’s industrial and engineering know-how will prove crucial.

  As the EEU has begun establishing free trade zones with India, Iran, Vietnam, Egypt, and Latin America’s Mercosur bloc (Argentina, Brazil, Paraguay, Uruguay, and Venezuela), the initial stages of this integration process already reach beyond Eurasia. Meanwhile, the SCO, which began as little more than a security forum, is expanding and moving into the field of economic cooperation.  Its countries, especially four Central Asian “stans” (Kazakhstan, Kyrgyzstan, Uzbekistan, and Tajikistan) will rely ever more on the Chinese-driven Asia Infrastructure Investment Bank (AIIB) and the NDB. At Ufa, India and Pakistan finalized an upgrading process in which they have moved from observers to members of the SCO. This makes it an alternative G8.

  In the meantime, when it comes to embattled Afghanistan, the BRICS nations and the SCO have now called upon “the armed opposition to disarm, accept the Constitution of Afghanistan, and cut ties with Al-Qaeda, ISIS, and other terrorist organizations.” Translation: within the framework of Afghan national unity, the organization would accept the Taliban as part of a future government. Their hopes, with the integration of the region in mind, would be for a future stable Afghanistan able to absorb more Chinese, Russian, Indian, and Iranian investment, and the construction — finally! — of a long-planned, $10 billion, 1,420-kilometer-long Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline that would benefit those energy-hungry new SCO members, Pakistan and India. (They would each receive 42% of the gas, the remaining 16% going to Afghanistan.)

  Central Asia is, at the moment, geographic ground zero for the convergence of the economic urges of China, Russia, and India. It was no happenstance that, on his way to Ufa, Prime Minister Modi stopped off in Central Asia.  Like the Chinese leadership in Beijing, Moscow looks forward (as a recent document puts it) to the “interpenetration and integration of the EEU and the Silk Road Economic Belt” into a “Greater Eurasia” and a “steady, developing, safe common neighborhood” for both Russia and China.

  And don’t forget Iran. In early 2016, once economic sanctions are fully lifted, it is expected to join the SCO, turning it into a G9. As its foreign minister, Javad Zarif, made clear recently to Russia's Channel 1 television, Tehran considers the two countries strategic partners. "Russia,” he said, “has been the most important participant in Iran's nuclear program and it will continue under the current agreement to be Iran's major nuclear partner." The same will, he added, be true when it comes to “oil and gas cooperation,” given the shared interest of those two energy-rich nations in “maintaining stability in global market prices."

  Got Corridor, Will Travel

  Across Eurasia, BRICS nations are moving on integration projects. A developing Bangladesh-China-India-Myanmar economic corridor is a typical example. It is now being reconfigured as a multilane highway between India and China. Meanwhile, Iran and Russia are developing a transportation corridor from the Persian Gulf and the Gulf of Oman to the Caspian Sea and the Volga River. Azerbaijan will be connected to the Caspian part of this corridor, while India is planning to use Iran’s southern ports to improve its access to Russia and Central Asia. Now, add in a maritime corridor that will stretch from the Indian city of Mumbai to the Iranian port of Bandar Abbas and then on to the southern Russian city of Astrakhan. And this just scratches the surface of the planning underway.

  Years ago, Vladimir Putin suggested that there could be a “Greater Europe” stretching from Lisbon, Portugal, on the Atlantic to the Russian city of Vladivostok on the Pacific. The EU, under Washington’s thumb, ignored him. Then the Chinese started dreaming about and planning new Silk Roads that would, in reverse Marco Polo fashion, extend from Shanghai to Venice (and then on to Berlin).

  Thanks to a set of cross-pollinating political institutions, investment funds, development banks, financial systems, and infrastructure projects that, to date, remain largely under Washington’s radar, a free-trade Eurasian heartland is being born. It will someday link China and Russia to Europe, Southwest Asia, and even Africa. It promises to be an astounding development. Keep your eyes, if you can, on the accumulating facts on the ground, even if they are rarely covered in the American media. They represent the New Great — emphasis on that word — Game in Eurasia.

  Location, Location, Location

  Tehran is now deeply invested in strengthening its connections to this new Eurasia and the man to watch on this score is Ali Akbar Velayati. He is the head of Iran's Center for Strategic Research and senior foreign policy adviser to Supreme Leader Ayatollah Khamenei. Velayati stresses that security in Asia, the Middle East, North Africa, Central Asia, and the Caucasus hinges on the further enhancement of a Beijing-Moscow-Tehran triple entente.

  As he knows, geo-strategically Iran is all about location, location, location. That country offers the best access to open seas in the region apart from Russia and is the only obvious east-west/north-south crossroads for trade from the Central Asian “stans.” Little wonder then that Iran will soon be an SCO member, even as its “partnership” with Russia is certain to evolve. Its energy resources are already crucial to and considered a matter of national security for China and, in the thinking of that country’s leadership, Iran also fulfills a key role as a hub in those Silk Roads they are planning.

  That growing web of literal roads, rail lines, and energy pipelines, as TomDispatch has previously reported, represents Beijing’s response to the Obama administration’s announced “pivot to Asia” and the U.S. Navy’s urge to meddle in the South China Sea. Beijing is choosing to project power via a vast set of infrastructure projects, especially high-speed rail lines that will reach from its eastern seaboard deep into Eurasia. In this fashion, the Chinese-built railway from Urumqi in Xinjiang Province to Almaty in Kazakhstan will undoubtedly someday be extended to Iran and traverse that country on its way to the Persian Gulf.

  A New World for Pentagon Planners

  At the St. Petersburg International Economic Forum last month, Vladimir Putin told PBS's Charlie Rose that Moscow and Beijing had always wanted a genuine partnership with the United States, but were spurned by Washington. Hats off, then, to the “leadership” of the Obama administration. Somehow, it has managed to bring together two former geopolitical rivals, while solidifying their pan-Eurasian grand strategy.

  Even the recent deal with Iran in Vienna is unlikely — especially given the war hawks in Congress — to truly end Washington’s 36-year-long Great Wall of Mistrust with Iran. Instead, the odds are that Iran, freed from sanctions, will indeed be absorbed into the Sino-Russian project to integrate Eurasia, which leads us to the spectacle of Washington’s warriors, unable to act effectively, yet screaming like banshees.

  NATO's supreme commander Dr. Strangelove, sorry, American General Philip Breedlove, insists that the West must create a rapid-reaction force — online — to counteract Russia's "false narratives.” Secretary of Defense Ashton Carter claims to be seriously considering unilaterally redeploying nuclear-capable missiles in Europe. The nominee to head the Joint Chiefs of Staff, Marine Commandant Joseph Dunford, recently directly labeled Russia America’s true “existential threat”; Air Force General Paul Selva, nominated to be the new vice chairman of the Joint Chiefs, seconded that assessment, using the same phrase and putting Russia, China and Iran, in that order, as more threatening than the Islamic State (ISIS). In the meantime, Republican presidential candidates and a bevy of congressional war hawks simply shout and fume when it comes to both the Iranian deal and the Russians.

  In response to the Ukrainian situation and the “threat” of a resurgent Russia (behind which stands a resurgent China), a Washington-centric militarization of Europe is proceeding apace. NATO is now reportedly obsessed with what’s being called “strategy rethink” — as in drawing up detailed futuristic war scenarios on European soil. As economist Michael Hudson has pointed out, even financial politics are becoming militarized and linked to NATO’s new Cold War 2.0.

  In its latest National Military Strategy, the Pentagon suggests that the risk of an American war with another nation (as opposed to terror outfits), while low, is “growing” and identifies four nations as “threats”: North Korea, a case apart, and predictably the three nations that form the new Eurasian core: Russia, China, and Iran. They are depicted in the document as “revisionist states,” openly defying what the Pentagon identifies as “international security and stability”; that is, the distinctly un-level playing field created by globalized, exclusionary, turbo-charged casino capitalism and Washington's brand of militarism.

  The Pentagon, of course, does not do diplomacy. Seemingly unaware of the Vienna negotiations, it continued to accuse Iran of pursuing nuclear weapons. And that “military option” against Iran is never off the table.

  So consider it the Mother of All Blockbusters to watch how the Pentagon and the war hawks in Congress will react to the post-Vienna and — though it was barely noticed in Washington — the post-Ufa environment, especially under a new White House tenant in 2017.

  It will be a spectacle.  Count on it.  Will the next version of Washington try to make it up to “lost” Russia or send in the troops? Will it contain China or the “caliphate” of ISIS? Will it work with Iran to fight ISIS or spurn it? Will it truly pivot to Asia for good and ditch the Middle East or vice-versa? Or might it try to contain Russia, China, and Iran simultaneously or find some way to play them against each other?

  In the end, whatever Washington may do, it will certainly reflect a fear of the increasing strategic depth Russia and China are developing economically, a reality now becoming visible across Eurasia. At Ufa, Putin told Xi on the record: "Combining efforts, no doubt we [Russia and China] will overcome all the problems before us."

  Read “efforts” as new Silk Roads, that Eurasian Economic Union, the growing BRICS block, the expanding Shanghai Cooperation Organization, those China-based banks, and all the rest of what adds up to the beginning of a new integration of significant parts of the Eurasian land mass. As for Washington, fly like an eagle? Try instead: scream like a banshee.

  

  

  

  

  

• US Mint Sells Most Physical Gold In Two Years On Same Day Gold Price Hits Five Year Low

  Three weeks ago, we reported that the US Mint had run out of physical silver on the same day silver plunged to its lowest price in 2015. This happened just days after the UK Royal mint announced that “during June, we experienced twice the expected demand for Sovereign bullion coins from our customers based in Greece.”

  While the surge in physical demand clearly did not explain the liquidation in the price of “paper” silver, we are still hoping that the OCC writes us back with an explanation why this happened, and maybe it can clarify also just how much more silver the mint will sell before it runs out of silver in inventory again as it did 20 days ago.

  We bring all of this up because just like 20 days ago when unstoppable demand for physical silver met an immovable paper silver selling object (with the “object” for now winning), so earlier today the price of gold tumbled to the lowest level in 5 years, some $1,072 per ounce, before it staged a dramatic comeback closing just under $1,100…

  

   

  … thanks in no small part to the illegal spoofing we noted earlier.

  

   

  And lo and behold, just like in the case of silver three weeks ago, today’s gold liquidation was not due to selling of physical metal. In fact, quite the contrary: according to the US mint, so far in July the mint has sold a whopping 143,000 ounces of physical gold – the most in over two years, or since April of 2013 – even as the price of gold briefly slid to the lowest level in 5 years.

  

  In other words, retail investors, who have bought over 7 million ounces of gold since January 2008 or the one third the total “held” currently by the GLD ETF, were eagerly buying up all the physical they could get their hands on, or said otherwise, “taking delivery” at the prevailing price, a process which practically assures that the US Mint will be out of gold in the next few days.

  We wonder when some central banks, the bulk of whose gold remains in “deliverable” format, decide to do the same? A few more down days in the stock market, coupled with a record high hedge fund short interest, and we just may get our answer.

  

  

  

  

  

• The End Of The Supercycle? Commodity "Capitulation" Arrives

  In a note by BofA’s Michael Hartnett titled “When Supercycles end”, the bank looks at the latest EPFR fund flows and concludes that the wave of commodity “capitulation” revulsion selling has finally arrived.

  Specifically, looking at fund flows, the most recent week saw the biggest outflow from precious metals in four months and emerging market fund outflows reaching $10 billion over the last two weeks leading Hartnett to conclude that “capitulation is beginning in EM/resources/ commodities.”

  This is what the most recent flows looked like:

  

  The fund flow details indicate a “Great Rotation” out of commodities, Emerging Markets and, curiously, the US, and into bonds and continued flows into Europe, which has now seen 10 straight weeks of inflows with the latest one of $6.0 billion also the largest in the past 4 months.

  Inflows into fixed income have been across the board:

  • $1.9bn inflows to IG bond funds (first inflows in 3 weeks)
  • $0.5bn inflows to HY bond funds (2 straight weeks)
  • $0.3bn inflows to EM debt funds (modest inflows but largest in 11 weeks)
  • $2.1bn inflows to govt/tsy funds (3 straight weeks)
  • $0.2bn inflows to muni bond funds (first in 7 weeks)

  While in equities it has been a tale of two flow directions: out of the US and into Europe (and to a lesser extent Japan):

  • Japan: first outflows in 8 weeks ($0.5bn)
  • Europe: $6.0bn inflows (10 straight weeks & largest in 4 months)
  • EM: $3.3bn outflows (2 straight weeks)
  • US: $3.7bn outflows (outflows from both mutual funds & ETFs)

  By sector, inflows to secular growth areas of healthcare ($1.3bn) & technology ($0.4bn)

  To be sure, the best example of the paper flow capitulation is where else but gold, where in the past week algo, 1% of total gold/silver AUM has been wihdrawn!

  

  But while gold has seen its share of pounding in the past 5 years, it is modest compared to the revulsion experienced by companies that have economic exposure to Emerging Markets. As BofA notes “US companies with high economic exposure to Emerging Markets at close to 13-year lows vs broad US equities.“

  

  The last chart may also explains why Ray Dalio, after largely ignoring the bursting of China’s three bubbles (as shown here previously) finally threw in the towel, became bearish on China and admitted that “There Are No Safe Places Left To Invest.” It also explains why increasingly fewer are “buying the dip” across markets despite one-off superstars like GOOG and AMZN.

  

  

  

  

  

• Jim Grant On Gold's Liquidation Sale: A "Vexing But Wonderful Opportunity"

  Via Valuewalk,

  Don’t tell Jim Grant, the publisher of Grant’s Interest Rate Observer, that gold is a hedge.

  The author and publisher said the metal is much more dynamic; providing a trifecta of price, value and sentiment, and investors should have exposure to it.

  “[G]old is an investment in monetary and financial disorder – not a hedge. You look around the world and you see exchange rates are properly disorderly, when you look around the world of lending and borrowing — we are in a regime of price control by another name, so-called zero percent rates and quantitative easing by the world central banks – we are in one of the most radical periods of monetary experimentation in the annals of money,” Grant told Kitco News Thursday.

  Grant added that it could be that it all works out, albeit a very “low probability.”

  “You want to have exposure to the reciprocal asset of the paper assets that are the most popular – so gold, to me, is now the conjunction of price, value and sentiment, and I am very bullish indeed.”

  Gold prices are on track for its longest run of losses since 1996. After reaching five-year lows this week, the metal was relatively quieter on Thursday with prices slightly rebounding on some bargain hunting in the spot market. Kitco’s spot gold was last up $0.60 at $1094.60 an ounce.

  Grant summed up the gold selloff as “Mr. Market having a sale,” and added that the downward spiral is “terrifically vexing but a wonderful opportunity.”

  He explained that no one knows the bottom for the metal and that should not be the sole focus.

  “The important thing to recall is why those of us who own it, bought it. What is it about gold that ought to make it appealing – when it seems to be absolutely the thing you don’t want to have.” He added that gold thrives in the face of monetary turmoil, disorder and uncertainty, noting, “I think we have all three of these things.”

  On the topic of U.S. Federal Reserve rate hikes, Grant said the central bank is in a hurry to raise rates.

  “The Fed feels it must act just for institutional pride; but, money supply growth is dwindling, the turnover rate of money likewise, the only thing that is dynamic in the world of money and credit is the issuance of more and more dubiously sourced debt, and more and more lenient terms,” Grant said. “What debt does is two things: it pushes forward consumption and pushes back evidence of business failure,” he added.

  Grant said he likes owning physical gold particularly South African Kruggerands. He added he is also the owner of “too many gold mining shares” for which he has, “a great deal of worry for the present but a great deal of conviction for the future.” Mining stocks have suffered even more since lower gold prices means less revenue per ounce of the metal for producers. The Market Vectors Gold Miners exchange-traded fund (GDX), which consists of stocks of gold-mining companies, was down $1.70, or 11%, to $13.72 on Thursday.

  

  

  

  

  

• The FBI And DOJ Get Involved: Hillary Clinton Sent Confidential Emails From Her Personal Email Account

  It’s not that Donald Trump needed help in his juggernaut campaign across the GOP presidential primary with his lead in the double digits at last check, but moments ago 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.

  WSJ reports that according to an internal government review Hillary Clinton, as former Secretary of State, “sent at least four emails from her personal account containing classified information during her time heading the State Department.”

  This is in reference to the long-standing investigation surrounding whether Clinton i) used bad judgment in opting for a personal, and far less protected, email device as Secretary of State and ii) whether she had – in direct contravention of State Department policies – sent out confidential data on her personal Blackberry.

  As a reminder, the Democratic presidential candidate has repeatedly denied sending out confidential emails from her own device, and instead used it purely in a permitted context. She has also repeatedly denied that the emails, which she has since “purged” despite receiving a Congressional subpoena to preserve, contained any sensitive materials, while deleting at least 30,000 emails which she specified were of a personal nature.

  “I did not email any classified material to anyone on my email. There is no classified material,” Mrs. Clinton told reporters in March. “I’m certainly aware of the classified requirements and did not send classified material.”

  Today’s data confirms that the former first lady lied and has indeed used her email to send out confidential data on at least one occasion, or rather four:

  In a letter to members of Congress on Thursday, the Inspector General of the Intelligence Community concluded that Mrs. Clinton’s email contains material from the intelligence community that should have been considered “secret” at the time it was sent, the second-highest level of classification. A copy of the letter to Congress was provided to The Wall Street Journal by a spokeswoman for the Inspector General.

  But the shocker is that the 4 emails were revealed when the Inspector General scoured through just 30 of Hillary’s emails, suggeting that based on this random sample, Clinton was sending confidential data well over 10% of the time from her personal account!

  The four emails in question “were classified when they were sent and are classified now,” said Andrea Williams, a spokeswoman for the inspector general. The inspector general reviewed just a small sample totaling about 40 emails in Mrs. Clinton’s inbox—meaning that many more in the trove of more than 30,000 may contain potentially secret or top-secret information.

  But the worst news for Hillary is that not only the FBI but the DOJ are now getting involved:

  As a result of the findings, the inspector general referred the matter to the counterintelligence division of Federal Bureau of Investigation. An official with the Department of Justice said Friday that it had received a referral to open a investigation into the potential mishandling of classified information.

  It remains to be seen if anyone in the DOJ will take this case seriously even after these most seriously charges are brought forward, although if so, then the full banana republic farce of a nation where laws are meant only for some, will be exposed to the entire world to marvel at.

  As for the final twist, the person who was taked with “identifying and preserving all emails that could potentially be federal records on Benghazi” was none other than Cheryl Mills:

  If Congress really wants to get to the bottom of Hillary Clinton’s missing Benghazi and pay-to-play emails, it should call her consigliere Cheryl D. Mills to testify — under oath, and under the klieg lights.

   

  A hearing featuring Clinton will be a wasted show trial with a lot of political grandstanding.

   

  But Mills, who served as the former secretary of state’s chief of staff and counselor, knows where the bodies are  buried. After all, Hillary tasked her with “identifying and preserving all emails that could potentially be federal records.”

   

  In short, Mills “is in the middle of it,” Judicial Watch President Tom Fitton said.
  

  The same Cheryl Mills who, as we reported moments ago, is now dictating Clinton’s (and possibly US if Hillary is elected) tax policy and pushing it to be precisely what Blackrock, which is urging Clinton to revamp short-term capital gains taxes to benefit firms like Blackrock at the expense of activist investors, demands for one simple reason: she just happens to be on the Blackrock board of directors!

  

  To summarize: the person who was in charge of combing through all of Clinton’s emails, and who is now on Blackrock’s Board and is telling Hillary what us tax policy should be, either was incompetent or simply lied to her boss, a boss who lied to reporters if not under oath.

  

  

  

  

  

• The Casino-fication Of Markets Is Pervasive & Permanent

  Submitted by Ben Hunt via Salient Partners Epsilon Theory blog,

  My favorite scene from Mad Men is the picnic scene from Season 2. The Draper family enjoys a lovely picnic at some park, and at the conclusion of the meal Don tosses his beer cans into the bushes and Betty just flicks the blanket and leaves all the trash right there on the grass. Shocking, right? I know this is impossible for anyone under the age of 30 to believe, but this is EXACTLY what picnics were like in the 1960’s, even if a bit over the top in typical Draper fashion. There was no widespread concept of littering, much less recycling and all the other green concepts that are second nature to my kids. I mean … if I even thought about Draper-level littering at a Hunt picnic today my children would consider it to be an act of rank betrayal and sheer evil. I’d be disowned before they called the police and had me arrested.
   

  
   

  Like many of us who were children in a Mad Men world, I can remember the moment when littering became a “thing”, with the 1971 public service commercial of an American Indian (actually an Italian actor) shedding a tear at the sight of all the trash blighting his native land.  Powerful stuff, and a wonderful example of the way in which Narrative construction can change the fundamental ways our society sees the world, setting in motion behaviors that are as second nature to our children as they were unthinkable to our parents. It’s barely noticeable as it’s happening, but one day you wake up and it’s hard to remember that there was a time when you didn’t believe that littering was a crime against humanity.
   

  
   

  This dynamic of change in meaning is rare, but it takes place more often than you might think. Dueling and smoking are easy examples. Slavery is, too. Myths and legends turned into nursery rhymes and fairy tales is one of my favorite examples, as is compulsory public education … a concept that didn’t exist until the Prussian government invented it to generate politically indoctrinated soldiers who could read a training manual. Occasionally – and only when political systems undergo the existential stress of potential collapse – this dynamic of change impacts the meaning of the Market itself, and I think that’s exactly what’s taking place today. Through the magic of Narrative construction, capital markets are being transformed into political utilities.

  It’s not a unique occurrence. The last time investors lived through this sort of change in what the market means was the 1930s, and it’s useful to examine that decade’s events more closely, in a history-rhyming sort of way. What’s less useful, I think, is to spend our time arguing about whether this transformation in market meaning is a good thing or a bad thing. It is what it is, and the last thing I want to be is a modern day version of one of those grumpy old men who railed about how Roosevelt was really the Anti-Christ. What I will say, though (and I promise this will be my last indication of moral tsk-tsking, for this note anyway), is that I have a newfound appreciation for why they were grumpy old men, and I feel keenly a sense of loss for the experience of markets that I suspect my children will never enjoy as I have. I suspect they will never suffer in their experience of markets as I have, either, but there’s a loss in that, as well. 

  It’s totally understandable why status quo political interests would seek to transform hurly-burly capital markets into a stable inflation-generation utility, as summed up in the following two McKinsey charts.

  

  

  Both of these charts can be found in the February 2015 McKinsey paper, “Debt and (not much) deleveraging”, well worth your time to peruse. Keep in mind that the data used here is from Q2 2014, back when Greece was still “fixed”, the Fed had not proclaimed its tightening bias, and China was still slowing gracefully. All of these numbers are worse today, not better.

  So what do the numbers tell us? Two things.

  First, there’s more debt in the world today than before the Great Recession kicked off in 2008. All the deleveraging that was supposed to happen … didn’t. Sure, it’s distributed slightly differently, both by sector and by geography – and that’s critically important for the political utility thesis here – but whatever overwhelming debt levels you thought triggered a super-cyclical, structural recession then … well, you’ve got more of it now.

   

  Second, it’s impossible to grow our way out of these debt levels. Japan, France and Italy would have to more than double their current GDP growth rates (and again, these are last year’s more optimistic projections) to even start to grow their way out of debt. Right. Good luck with that. Spain needs a triple. Even the US, the best house in a bad neighborhood, needs >3% growth from here to eternity to start making a dent in its debt. Moreover, every day you don’t achieve these growth levels is a day that the debt load gets even larger. These growth targets are a receding target, soon to be well out of reach for every country on Earth.

  The intractable problem with these inconvenient facts is that there are only three ways to get out from under a massive debt. You can grow your way out, you can inflate your way out, or you can shrink your way out through austerity and/or assignment of losses. Door #1 is now effectively impossible for most developed economies. Door #3 is unacceptable to any status quo regime. So that leaves Door #2. The ONLY way forward is inflation, so that’s what it’s going to be. There is no Plan B. What sort of inflation is most amenable to modern political influence? Financial asset inflation, by a wide margin. Inflation in the real economy depends on real investment decisions by real businesses, and just as in the 1930s most business decision makers are sitting this one out, thank you very much. Or just as in the 1930s they’re “investing” in stock buy-backs and earnings margin improvement, which doesn’t help real world inflation at all. What political institutions are most capable of promoting inflation? Central banks, again by a wide margin. Just as in the 1930s, almost every developed economy in the world has a highly polarized electorate and an equally polarized legislature. The executive may be willing, but the government is weak. Far better to wage the inflation wars from within the non-elected walls of the Eccles Building rather than the White House.

  Now … how to wage that inflation war with the proper Narrative armament? No one wants inflation in the sense of “runaway inflation”, to use the phrasing of doomsayers everywhere. In fact, unless you’re speaking apparatchik to apparatchik, you don’t want to use the word “inflation” at all. It’s just like Roosevelt essentially banning the word “regulation” from his Cabinet’s vocabulary. Don’t call it “regulation”. Call it “cooperation”, Roosevelt said, and even the grumpy old men will applaud. So today China calls it a “market malfunction” when their stock market deflates sharply (of course, inflating sharply is just fine). Better fix that malfunctioning machine! How can you argue with that language? But at least the political mandarins in the East are more authentic with their words than the political mandarins in the West. Here we now call market deflation by the sobriquet “volatility”, as in “major market indices suffered from volatility today, down almost one-half of one percent”, where a down day is treated as something akin to the common cold, a temporary illness with symptoms that we can shrug off with an aspirin or two. You can’t be in favor of volatility, surely. It’s a bad thing, almost on a par with littering. No, we want good things and good words, like “wealth effect” and “accommodation” and “stability” and “price appreciation”. As President Snow says in reference to The Hunger Games version of a political utility, “may the odds be always in your favor”. Who doesn’t want that?

  There are two problems with the odds being always in your favor.

  First, the casino-fication of markets ratchets up to an entirely new level of pervasiveness and permanence. By casino-fication I mean the transformation of the meaning of market securities from a partial ownership interest in the real-life cash flows of real-life companies to a disembodied symbol of participation in a disembodied game. Securities become chips, pure and simple. Now there’s nothing new in this gaming-centric vision of what markets mean; it’s been around since the dawn of time. My point is that with the “innovation” of ETF’s and the regulatory and technological shifts that allow HFTs and other liquidity game-players to dominate the day-to-day price action in markets, this vision is now dominant. There’s so little investing today. It’s all positioning.  And in a capital-markets-as-political-utility world, the State is now actively cementing that view. After World War I, French Prime Minister Georges Clemenceau famously said that war was too important to be left to the generals, meaning that politicians would now take charge. Today, the pervasive belief in every capital in the world is that markets are too important to be left to the investors. These things don’t change back. Sorry.

   

  Second, if you’re raising the floor on what you might suffer in the way of asset price deflation, you are also lowering the ceiling on what you might enjoy in the way of asset price inflation. That’s what investing in a utility means – you’re probably not going to lose money, but you’re not going to make a lot of money, either. So to all of those public pension funds who are wringing their hands at this fiscal year’s meager returns, well below what they need to stay afloat without raising contributions, I say get used to it. All of your capital market assumptions are now at risk, subject to the tsunami force of status quo politicians with their backs up against the debt wall. Their market-as-utility solution isn’t likely to go bust in a paroxysm of global chaos, any more than it’s likely to spark a glorious age of reinvigorated global growth. Neither the doomsday scenario nor the happy ending is likely here, I think. Instead, it’s what I’ve called the Entropic Ending, a long gray slog where a recession is as unthinkable as a 4% growth rate. It’s a very stable political equilibrium. Sorry.

  We’ve been down this road before in the 1930s. But the historical rhyming I see is not so much in the New Deal policies that directly impacted the stock market as it is in the policies that established a real-life utility, the Tennessee Valley Authority (TVA).  That’s because the nature of the existential threat posed by overwhelming debt to the US political system was different in the 1930s than it is today. When FDR took office, the flash point of that systemic threat was the labor market, not the capital market. Sure, the stock market took its hits in the Great Depression, but the relevance of the stock market to either the overall economic health of the country or – more importantly to FDR – his ability to remain in office was dwarfed by the relevance of the labor market. It’s another one of those changes in meaning that seems bizarre to the modern eye or ear. What, you mean there wasn’t 24/7 coverage of financial markets in 1932? You mean that most Americans didn’t really know what a stock certificate was, much less own one?  To succeed politically, Roosevelt had to change the meaning of the labor market, not the capital market, and that’s exactly what he did with the creation of the TVA.

  The TVA was only one effort in an alphabet soup of New Deal policies that FDR rammed through in his first Administration to change the popular conception of what the labor market meant to Americans. Other famous initiatives included the National Recovery administration (NRA) and the Civilian Conservation Corps (CCC), and the common thread in all of these efforts was a VERY active Narrative management embedded in their process from the outset, with photographers and journalists hired by the White House to document the “success” of the programs. Everything I write in Epsilon Theory about today’s pervasive Narrative construction also took place in the 1930s, in amazingly similar venues and formats, down to the specific words used.

  The Narrative effort worked. Not necessarily in the permanence of the institutions FDR established (the Supreme Court declared the NRA unconstitutional in 1935, and the CCC faded into obscurity with the outbreak of World War II), but in the complete reshaping of what the labor market meant to Americans and what government’s proper role within the labor market should be. Yes, there were important things lost in FDR’s political achievements (and plenty of grumpy old men to complain about that), but let’s not forget that he was re-elected THREE times on the back of these labor market policies. If that’s not winning, I don’t know what is. And if you don’t think that lesson from history hasn’t been absorbed by both Clinton™ and Bush™, you’re living in a different world than I am.

  One last point on the TVA. It’s still around today as a very powerful and oddly beloved institution, and I think its lasting political success is due in large part to the fact that it – unlike the other alphabet soup institutions – was explicitly a utility. Who doesn’t like the stability of a utility in the midst of vast inequality? Who doesn’t like the odds being ever in their favor? The more that I see today’s policy impact on markets described in utility-like terms – words like “stability” and notions like “volatility is bad and a thing to be fixed” – the more confident I am that the TVA political experience of the 1930s is coming soon to the capital markets of today. Scratch that. It’s already here.

  So, Ben, let’s assume you’re right and that current events are rhyming with the historical events of the last time the world wrestled with an overwhelming debt load. Let’s assume that a politically popular shift in the meaning of markets to cement its public utility function is taking shape and won’t reverse itself without a political shock of enormous proportions. What’s an investor or allocator to do, other than become a grumpy old man? Look, the hardest thing in the world is to recognize structural change when you’re embedded in the structure. If reading Epsilon Theory has given you a new set of lenses to see the relationship between State and Market, then you’ve already done the heavy lifting. From here, it’s a matter of applying that open-eyed perspective to your portfolio, not of buying this or selling that! Everyone will be different in their particular application, but I think everyone should have three basic goals:

  1. shake out the category errors in your investment assumptions, understanding that we humans are terrible judges of causality, particularly when something has worked recently;
  2. re-evaluate your capital market assumptions for a further transformation of those markets into state-run casinos and political utilities, understanding that whatever crystal ball you’ve used in the past is almost certainly broken today;
  3. adopt an investment process or find investment strategies that can adapt to the structural changes that are already underway in capital markets, understanding that the patterns of belief and meaning we think are “natural” today can change in the blink of a central banker’s eye.

  Put simply, it’s time for some good new thinking on some good old ideas like diversification. It’s time to recognize the world as it is rather than lose ourselves in nostalgia for the world that was. Most of all, it’s time to call things by their proper names and stop demonizing words like “leverage” and “volatility”. These are tools, for god’s sake, neither good nor bad in and of themselves, and they’re tools we are all going to need to learn how to use if we want to be survivors in the Golden Age of the Central Banker. It’s time to get to work.

  

  

  

  

  

• Did The Canary In The Credit Coalmine Just Croak: Capital One Credit Loss Provisions Soar By 60%

  Everyone knows Capital One’s trite soundbite: “What’s in your wallet?”

  Overnight, the market found out what’s in Capital One’s balance sheet, and it didn’t like it one bit.

  Yesterday, Capital One Financial reported earnings that fell well short of consensus: the $311 billion-company’s Q2 profit was $863 million, down 28% Y/Y. EPS was an ugly $1.50, $0.47 cents below the consensus estimate.  Surprisingly this earnings plunge took place even as overall revenue rose 4% to $5.7 billion.

  So what gives: a closer read through the numbers reveals that while average wages across the US are barely rising enough to cover inflation, Capital One felt the need to really incentivize its workfore with an increase in salaries and benefits 10 times higher than the national average, up 21%, to $1.4 billion, while marketing costs increased 16%, and professional-services fees grew 13%.

  At the same time headcount increased 7%, to 47,500 even though COF concurrently took a $147 million charge for the restructuring its benefits plan “as a result of the realignment of our workforce.” COF did not provide details on the workforce changes that led to the charge.

  End result: in moments, the stock wiped out all of its hard-earned gains for the year, and then some:

  

   

  But the biggest shocker was something else found between COF’s top and bottom line: a surge in provisions for credit losses: at $1.1 billion this was a jump of 21% from Q1 and up a whopping 60% from the year prior. It was also the biggest credit loss provision the credit card company has taken since Q2 2012.

  

  So the question: is this dramatic deterioration in COF’s loan book specific to the financial company which is nowhere near having a balance sheet big enough to mask its deteriorating loan book (or quality it for Too Big To Prosecute and/or Fail status), or is this a very loud, and very dead, canary in the credit coalmine, suggesting US consumers are suddenly unable to repay even their most basic purchases on credit?

  As for Capital One, we wonder: “Is that a blowing up loan book in your wallet”? We hope to have the answer over the next several quarters, especially if as the Fed’s leak today suggested, a rate hike, which will lead to even greater credit losses, is imminent.

  

  

  

  

  

• It Cost The Koch Brothers Only $299,000 To Block Labeling Of Genetically Modified Foods

  In what may have been the most underreported event overnight, the House quietly passed legislation that would keep states from issuing mandatory labeling laws for foods that contain genetically modified organisms, often called GMOs. The Safe and Accurate Food Labeling Act of 2015, as the law is formally known, passed 275-150, creating a federal standard for the voluntary labeling of foods with GMO ingredients. And since clearly nobody wants to advertise they are using GMOs in their food, the number of “volunteers” will be precisely zero.

  As the Hill reports, Rep. Mike Pompeo (R-Kan.), who authored the bill, called mandatory labeling laws — which have already passed in Vermont, Connecticut and Maine — unnecessarily costly given that GMOs have been deemed safe by the Food and Drug Administration (FDA).

  “Precisely zero pieces of credible evidence have been presented that foods produced with biotechnology pose any risk to our health and safety,” Pompeo said. “We should not raise prices on consumers based on the wishes of a handful of activists.”

  Well, sure. Then there is the curious case of a lobbyist who back in March proclaimed that Monstanto’s weedkiller “won’t hurt you”, only to promptly refuse drinking it on live it adding “I’m not stupid.”

  Somehow we doubt Mike Pompeo is stupid either, which is why he will use all his hard-earned lobby dollars to only purchase organic foods which do not have GMO ingredients, and which happen to be a premium food category, precisely for that reason. Which makes Pompeo’s statement even odder, considering the prices of non-GMO foods are already substantially higher.

  And while a minority was not willing to trade off healthy food for higher food prices, the victorious majority claimed a patchwork of labeling laws at the state level would drive up food costs.

  Citing a study from a Cornell University professor, the Grocery Manufacturers Association said state-level GMO labeling mandates would increase grocery prices for a family of four by as much as $500 per year and cost food and beverage manufacturers millions of dollars to change food labels and supply chain systems.

  Actually, where it would hurt manufacturers would be in the public’s revulsion to eating foods clearly labelled as being genetically modified, leading to a collapse in sales in this high margin food category, and forcing even higher non-GMO prices. Outcomes that would lead to a dramatic erosion in shareholder value for the owners of those companies who stood to lose the most should the Labeling act not pass in its current form.

  Owners such as the Koch Brothers and Monsanto.

  Last night’s passage of the anti-labeling law was the culmination of a very long and tedious process, one which started well over a year ago. In fact, as Andrea Germanos recalls, it all started last April, when in a move slammed as sealing “an unholy alliance between Monsanto and Koch Industries,” a Kansas congressman submitted legislation that would ban state-level GMO labeling laws.

  Called the Safe and Accurate Food Labeling Act of 2014, the industry-supported legislation sponsored by Republican Rep. Mike Pompeo would “amend the Federal Food, Drug, and Cosmetic Act with respect to food produced from, containing, or consisting of a bioengineered organism, the labeling of natural foods, and for other purposes.”

  At least between its 2014 name and the final 2015 version Pompeo and his backers added “Safe” to the front just in case the irony was lost on someone.

  Which brings us to the biggest winners from this law, and how Rep. Pompeo made a few very rich people even richer.

  Starting with the Grocery Manufacturers Association (GMA).

  According to The Center for Food Safety: “Koch Industries’ subsidiary, Georgia-Pacific, is a member of the Grocery Manufacturers Association, which donated more than $7 million against the recent Washington State ballot initiative to label GE foods. Monsanto, another GMA member, was the single largest contributor to that campaign. Between Washington State and California, Monsanto, GMA (including Georgia-Pacific), and others, have contributed over $67 million to keep consumers in the dark about GE foods.”

  Others quickly jumped onboard, especially those who would reap the biggest incremental profits such as biotech companies, and now the GMA and other industry groups like the Biotechnology Industry Organization are cheering Pompeo’s legislation.

  At the time, many were livid that a full-court press by a few corporations and even fewer billionaires would keep Americans in the dark as to the genetic content of the food they eat:

  “GMA’s selection of Congressman Pompeo as their champion shows how extreme the proposal really is,” stated Colin O’Neil, director of government affairs for Center for Food Safety. “Selecting Pompeo creates an unholy alliance between Monsanto and Koch Industries…”

  Well, today the unholy alliance won, and the GMA was delighted:

  “Today’s bipartisan passage of the Safe and Accurate Food Labeling Act (HR 1599) clearly demonstrates the growing support for this critically important legislation,” said Pamela G. Bailey, president and CEO of the Grocery Manufacturers Association.  “We thank the sponsors of this bill, Congressmen Mike Pompeo (R-KS) and G.K. Butterfield (D-NC), along with Congressmen Mike Conaway (R-TX), Collin Peterson (D-MN), Fred Upton (R-MI) and the other members who supported it for standing on the side of consumer choice, science and fact-based labeling. We now call on the U.S. Senate to move quickly on a companion bill and pass it this year.”

  Finally, the question everyone is dying to get the answer to: how much did it cost the Koch Brothers to purchase Mike Pompeo and his bipartisan congressional peers, both republicans and democrats, and pass a law that would save the company billions in profits?

  The answer: $299,000

  

  Which is why the stock market with its annual return of 7% is for chumps. If you want to make the kinds of quadruple digit returns on investment, you better buy yourself a congressman.

  As for the general American population, well: your food may be every so slightly more mutated, but the good news is that it will remain as cheap and unhealthy as always.

  

  

  

  

  

• Attention America's Suburbs: You Have Just Been Annexed

  Submitted by Stanley Kurtz via NationalReview.com,

  It’s difficult to say what’s more striking about President Obama’s Affirmatively Furthering Fair Housing (AFFH) regulation: its breathtaking radicalism, the refusal of the press to cover it, or its potential political ramifications. The danger AFFH poses to Democrats explains why the press barely mentions it. This lack of curiosity, in turn, explains why the revolutionary nature of the rule has not been properly understood. Ultimately, the regulation amounts to back-door annexation, a way of turning America’s suburbs into tributaries of nearby cities.

  This has been Obama’s purpose from the start. In Spreading the Wealth: How Obama Is Robbing the Suburbs to Pay for the Cities, I explain how a young Barack Obama turned against the suburbs and threw in his lot with a group of Alinsky-style community organizers who blamed suburban tax-flight for urban decay. Their bible was Cities Without Suburbs, by former Albuquerque mayor David Rusk. Rusk, who works closely with Obama’s Alinskyite mentors and now advises the Obama administration, initially called on cities to annex their surrounding suburbs. When it became clear that outright annexation was a political non-starter, Rusk and his followers settled on a series of measures designed to achieve de facto annexation over time.

  The plan has three elements: 1) Inhibit suburban growth, and when possible encourage suburban re-migration to cities. This can be achieved, for example, through regional growth boundaries (as in Portland), or by relative neglect of highway-building and repair in favor of public transportation. 2) Force the urban poor into the suburbs through the imposition of low-income housing quotas. 3) Institute “regional tax-base sharing,” where a state forces upper-middle-class suburbs to transfer tax revenue to nearby cities and less-well-off inner-ring suburbs (as in Minneapolis/St. Paul).

  If you press suburbanites into cities, transfer urbanites to the suburbs, and redistribute suburban tax money to cities, you have effectively abolished the suburbs. For all practical purposes, the suburbs would then be co-opted into a single metropolitan region. Advocates of these policy prescriptions call themselves “regionalists.”

  AFFH goes a long way toward achieving the regionalist program of Obama and his organizing mentors. In significant measure, the rule amounts to a de facto regional annexation of America’s suburbs. To see why, let’s have a look at the rule.

  AFFH obligates any local jurisdiction that receives HUD funding to conduct a detailed analysis of its housing occupancy by race, ethnicity, national origin, English proficiency, and class (among other categories). Grantees must identify factors (such as zoning laws, public-housing admissions criteria, and “lack of regional collaboration”) that account for any imbalance in living patterns. Localities must also list “community assets” (such as quality schools, transportation hubs, parks, and jobs) and explain any disparities in access to such assets by race, ethnicity, national origin, English proficiency, class, and more. Localities must then develop a plan to remedy these imbalances, subject to approval by HUD.

  By itself, this amounts to an extraordinary takeover of America’s cities and towns by the federal government. There is more, however.

  AFFH obligates grantees to conduct all of these analyses at both the local and regional levels. In other words, it’s not enough for, say, Philadelphia’s “Mainline” Montgomery County suburbs to analyze their own populations by race, ethnicity, and class to determine whether there are any imbalances in where groups live, or in access to schools, parks, transportation, and jobs. Those suburbs are also obligated to compare their own housing situations to the Greater Philadelphia region as a whole.

  So if some Montgomery County’s suburbs are predominantly upper-middle-class, white, and zoned for single-family housing, while the Philadelphia region as a whole is dotted with concentrations of less-well-off African Americans, Hispanics, or Asians, those suburbs could be obligated to nullify their zoning ordinances and build high-density, low-income housing at their own expense. At that point, those suburbs would have to direct advertising to potential minority occupants in the Greater Philadelphia region. Essentially, this is what HUD has imposed on Westchester County, New York, the most famous dry-run for AFFH.

  In other words, by obligating all localities receiving HUD funding to compare their demographics to the region as a whole, AFFH effectively nullifies municipal boundaries. Even with no allegation or evidence of intentional discrimination, the mere existence of a demographic imbalance in the region as a whole must be remedied by a given suburb. Suburbs will literally be forced to import population from elsewhere, at their own expense and in violation of their own laws. In effect, suburbs will have been annexed by a city-dominated region, their laws suspended and their tax money transferred to erstwhile non-residents. And to make sure the new high-density housing developments are close to “community assets” such as schools, transportation, parks, and jobs, bedroom suburbs will be forced to develop mini-downtowns. In effect, they will become more like the cities their residents chose to leave in the first place.

  It’s easy to miss the de facto absorption of local governments into their surrounding regions by AFFH, because the rule disguises it. AFFH does contain a provision that allows individual jurisdictions to formally join a regional consortium. Yet the rule leaves it up to local authorities to decide whether to enter regional groupings — or at least the rule appears to make participation in regional decision-making voluntary. In truth, however, just by obligating grantees to compare their housing to the demographics of the greater metropolitan area, and remedy any disparities, HUD has effectively turned every suburban jurisdiction into a helpless satellite of its nearby city and region.

  We can see this, because the final version of AFFH includes much more than just the provisions of the rule itself. The final text of the regulation incorporates summaries of the many public comments on the preliminary rule, along with replies to those comments by HUD. This amounts to a running dialogue between leftist housing activists trying to make the rule more controlling, local bureaucrats overwhelmed by paperwork, a public outraged by federal overreach, and HUD itself.

  Read carefully, the section of the rule on “Regional Collaboration and Regional Analysis” (especially pages 188–203), reveals one of AFFH’s key secrets: It doesn’t really matter whether a local government decides to formally join a regional consortium or not. HUD can effectively draft any suburb into its surrounding region, just by forcing it to compare its demographics with the metropolitan area as a whole.

  At one point (pages 189–191), for example, commenters directly note that the obligation to compare local and regional data, and remedy any disparities, amounts to forcing a jurisdiction to ignore its own boundaries. Without contradicting this assertion, HUD then insists that all jurisdictions will have to engage in exactly such regional analysis.

  Comments from leftist housing activists repeatedly call on HUD to pressure local jurisdictions into regional planning consortia. At every point, however, HUD declines to demand that local governments formally join such regional collaborations. Yet each time the issue comes up, HUD assures the housing activists that just by compelling local jurisdictions to compare their demographics with the region as a whole, suburbs will effectively be forced to address demographic disparities at the total metropolitan level (e.g., page 196).

  When housing activists worry that a suburb with few poor or minority residents will argue that it has no need to develop low-income housing, HUD makes it clear that the regulation as written already effectively forces all suburbs to accommodate the needs of non-residents (pages 198–199). Again, HUD stresses that the mere obligation to analyze, compare, and remedy demographic disparities at the local and regional levels amounts to a kind of compulsory regionalism.

  HUD’s language is coy and careful. The Obama administration clearly wants to avoid alarming local governments, so it underplays the extent to which they have been effectively dissolved and regionalized by AFFH. At the same time, HUD wants to tip off its leftist allies that this is exactly what has happened.

  At one level, then, the apparatus of formal and voluntary collaboration in a regional consortium is a bit of a ruse. AFFH amounts to an annexation of suburbs by cities, whether the suburbs like it or not. Yet the formal, regional groupings enabled by the rule are far from harmless.

  Comments from housing advocates (pages 194–197), for example, chide HUD for failing to include a mention in AFFH of the hundreds of federally-funded regional plans already being developed by leftist activists across the country (the “Sustainable Communities Regional Planning Grant” program). These plans entail far more than imposing low-income housing quotas on the suburbs. They embody the regionalist program of densifying housing in suburb and city alike, and they structure transportation spending in such a way as to make suburban living far less convenient and workable. HUD replies that these plans can indeed be used by regional consortia to fulfill their obligations under AFFH.

  So a city could formally join with some less-well-off inner-ring suburbs and present one of these comprehensive regionalist dream-plans as the product of its consortium. At that point, HUD could pressure reluctant upper-middle-class suburbs to embrace the entire plan on pain of losing their federal funds. In this way, AFFH could force the full menu of regionalist policies—not just low-income housing quotas—onto the suburbs.

  There are plenty of ways in which HUD can pressure a suburb to bend to its will. The techniques go far beyond threats to withhold federal funds. The recent Supreme Court decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project has opened the door to “disparate impact” suits against suburbs by HUD and private groups alike. That is, any demographic imbalance, whether intentional or not, can be treated by the courts as de facto discrimination.

  Just by completing the obligatory demographic analysis demanded by AFFH—with HUD-provided data, and structured according to HUD requirements—a suburb could be handing the government evidence to be used in such a lawsuit. Worse, AFFH demands that suburbs account for their demographic disparities, and forces them to choose from a menu of HUD-provided explanations. So if a suburb follows HUD’s lead and formally attributes demographic “imbalances” to its zoning laws, the federal government has what amounts to a signed confession to present in a disparate-impact suit seeking to nullify local zoning regulations. With a (forced) paper “confession” from nearly every suburb in the country in hand, HUD can use the threat of lawsuits to press reluctant municipalities to buy into a regional consortium’s every plan.

  Regionalists consider the entire city-suburb system bigoted and illegitimate, so there are few local governments that HUD would not be able to slap with a disparate-impact suit on regionalist premises. It’s unlikely that any suburb has a perfect demographic and “asset” balance in every category. All HUD has to do is decide which suburban governments it wants to lean on. With every locality vulnerable to a suit, every locality can be made to play the regionalist game.

  Leftist housing activists worry that AFFH never specifies the penalties a suburb will face for imbalances in its housing patterns. These activists just don’t get it. A thoughtful reading of AFFH, including its extraordinary “dialogue” section, makes it clear that HUD can go after any suburb, any time it wants to. The controlling consideration will be politics. HUD has got to boil the frog slowly enough to prevent him from jumping.

  It will take time for the truth to emerge. Just by issuing AFFH, the Obama administration has effectively annexed America’s suburbs to its cities. The old American practice of local self-rule is gone. We’ve switched over to a federally controlled regionalist system. Now it’s strictly a question of how obvious Obama and the Democrats want to make this change — and when they intend to bring the hammer down. The only thing that can restore local control is joint action by a Republican president and a Republican congress to rescind AFFH and restrict the reach of disparate impact litigation. We’ll know after November 8, 2016.

  

  

  

  

  

• Howard Marks Interviewed: "There’s No Free Market Today"

  Earlier this year, Oaktree Capital Management’s Howard Marks asked what is perhaps the most important question for capital markets: “What would happen if a large number of holders decided to sell a high yield bond ETF all at once?”

  The answer, of course, is that fund managers would be left with a massive, non-diversifiable, unidirectional flow which would force them to either tap emergency liquidity lines with banks to meet redemptions or else risk selling the underlying bonds into an increasingly thin secondary market for corporate credit; the former option is a delay-and-pray scheme while the latter has the potential to trigger a sum-of-all-fears scenario wherein illiquidity quickly begets a fire sale.

  “The ETF can’t be more liquid than the underlying, and we know the underlying can become highly illiquid,” Marks warned.

  Recently, the “lonely contrarian” spoke to Goldman on topics ranging from manipulated markets to investor psychology. Here are some notable excerpts.

  *  *  *

  From Goldman’s “Fortnightly Thoughts”

  How can we understand investor psychology and use it to make investment decisions?

  It’s the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. It’s important to control fear and greed.  

  Why do behaviour patterns and mistakes recur despite the plethora of information available now? Are we doomed to repeat our mistakes?

  The bottom line is that even though knowing financial history is important, requiring people to study it won’t make a big difference, because they’ll ignore its lessons. There’s a very strong tendency for people to believe in things which, if true, would make them rich. Demosthenes said, “For that a man wishes, he generally believes to be true” Just like in the movies, where they show a person in a dilemma to have an angel on one side and a devil on the other, in the case of investing, investors have prudence and memory on one shoulder and greed on the other. Most of the time greed wins.  

  Is it volatility that’s made people scared of equity markets, particularly since 2000?

  Volatility goes in both directions but it’s declines that people dislike, not volatility. In 2000, people pursued growth but forgot to ask themselves ‘at what price?’ And in recent years they’ve been pursuing safety and income while ignoring the same question. Today the price being paid for the safety and income of bonds is among the highest in history. 

  How do you think about the current very low interest rate regime?

  Yes. The point is that today you can’t make a decent return safely. Six or seven years back, you could buy three to five-year Treasurys and get a return of 6% or so. So you could have both safety and income. But today, investors have to make a difficult choice: safety or income. If investors want complete safety, they can’t get much income, and if they aim for high income, they can’t completely avoid risk. It’s much more challenging today with rates being suppressed by governments. This is one of the negative consequences of centrally administered economic decisions. People talk about the wisdom of the free market – of the invisible hand – but there’s no free market in money today. Interest rates are not natural. They are where they are because the governments have set them at that level. Free markets optimise the allocation of resources in the long run, and administered markets distort the allocation of resources. This is not a good thing… although it was absolutely necessary four years ago in order to avoid a complete crash and restart the capital markets.

  Looking at the current scenario, is your level of caution and concern as high as it was during 2006-07?

  The worst things that occurred in 2006-07 are not happening as much today. But currently I’m just cautious, like I was in 2004-05. And some people might easily argue that I turned cautious too early. 

  If it’s human nature that causes the bubbles and crashes, do you think asset management should be done with more machines and fewer people?

  No, I disagree strenuously. People who doubt the existence of inefficient markets and the ability to profit from them may disagree with me. But if you think you’re operating in an inefficient market like I try to do, a lot can be accomplished by getting great people, developing an effective investment approach, hunting for misvaluations, keeping psychology under control, and understanding where you are in the cycle. I am not saying that everyone should try this. In fact, an algorithm or an index fund may work best for a lot of people. But at Oaktree, we don’t make heavy use of machines. We are fundamentalists and ours is a “non-quant shop.” As long as there are people on the other side making mistakes – failing to fully understand assets, acting emotionally, selling too low and buying too high – we’ll continue to find opportunities to produce superior risk-adjusted returns. This is something I’m very sure of. 

  

  

  

  

  

• Fed "Accidentally" Released Dovish Confidential Market-Moving Forecasts, Blames "Glitch"

  First The ‘unaudited’ Fed leaks its FOMC minutes. Then they leak ‘inside-information’ to Nikkei’s latest addition, Medley Global advisors (and remain “above the law” with regard consequences. And now, The Fed admits it leaked full blown confidential economic projections (due to a code glitch), whose summary assessment is shown below as per the leaked file.

  While superficially, and as expected, the Fed is assuming a 1.26% fed funds rate in one year, suggesting about 3-4 rate hikes until then, with the first one according to the leaked documents taking place in Q3:

  

  … the overall strength of the economy is well weaker, and thus more dovish, than many of the permabulls had expected.

  As Bloomberg notes,

  • *FED SAYS IT INADVERTENTLY RELEASED STAFF ECONOMIC PROJECTIONS
  • *FED SAYS PROJECTIONS POSTED TO PUBLIC WEBSITE ON JUNE 29

  The leaked projections were:

  • *FED STAFF PROECTIONS SHOW YEAR-END FED FUNDS OF 0.35% 2015
  • *FED STAFF PROJECTIONS SEE FED FUNDS AT 1.26% 4Q 2016
  • *FED STAFF PROJECTIONS SEE GDP 2.31% 2015, 2.38% 2016

  And these are the key projections as revealed in the leaked file (ZIP file can be found here). Note that the Fed expects a long-term 10Y rate of 4.25%, and potential GDP output to renormalize by 2020.

  

  

   

  

  Or in other words, quite more dovish than anyone expecting a strong, “escape velocity” surge in the economy had hoped for: certainly far weaker than what an imminent rate hike suggests.

  The impact of the “glitch” on the bond market can be seen the moment it hit by this dramatic move in the 2Year:

  

   

  As for the reason for the leak – simple – same as every other leak – a technical “glitch“:

  Economic projections prepared by Federal Reserve Board staff as background for the June 16-17, 2015, meeting of the Federal Open Market Committee (FOMC) were inadvertently included in a computer file posted to the Board’s public website on June 29. Because the information has already been released, the Federal Reserve is today providing general public notification and making those projections more easily accessible on our website within the FRB/US model package (ZIP) data folder.

   

  Approximately every three months, Federal Reserve Board staff update and publish on the Board’s website a package of computer code of the Board staff’s FRB/US model of the U.S. economy, including a set of illustrative economic projections based only on publicly available information.

   

  On June 29, an updated package of code was posted that inadvertently included three files containing staff economic forecasts that are confidential FOMC information. Two files contained charts of the staff’s projections for economic variables such as the unemployment rate, the core inflation rate, and gross domestic product growth as well as the staff’s assumption for the path of the federal funds rate target selected by the FOMC. Another file contained computer code used to generate a table displaying staff economic projections.

   

  The projections that were inadvertently released are staff projections that do not incorporate policymakers’ views, including their views on monetary policy. Policymaker views were set forth in the monetary policy statement and projection materials released on June 17 and in the minutes of the June FOMC meeting and the Summary of Economic Projections published on July 8.

   

  Consistent with the procedures in the FOMC’s Program for Security of FOMC Information, this matter has been referred to the Board’s Inspector General.

  But do not worry – despite the fact that they cannot upload a zip file in a timely manner, they are fully in charge of the world’s economic future.

  

  

  

  

  

• What's Really Killing Capitalism

  Submitted by Bill Bonner via Bonner & Partners,

  Stifling Growth

  Zombies and cronies stifle the process of growth and wealth creation.

  To add wealth, you have to add knowledge. That is, you have to learn to do things better.

  The trouble with zombies is that they don’t want to learn. Learning is hard. And costly. Zombies just want to take the fruits of someone else’s learning.

  Likewise, cronies try to freeze the process of accumulating knowledge.

  New knowledge – accumulated by others – is threatening. It is what causes disruption. And what economist Joseph Schumpeter called “creative destruction.”

  Cronies fear this new knowledge and try to block it from ever happening – with subsidies, licensing requirements, and other regulatory impediments.

  George Gilder, in his latest book, Knowledge and Power: The Information Theory of Capitalism and How It Is Revolutionizing Our World, is that an economy is fundamentally a learning system, not a way for distributing wealth, believes that this obstructionism is a bigger threat to prosperity than debt.

  When Capitalism Fails

  Information, says Gilder, is always surprising. It tells us things we didn’t know.

  In an economy, the person who is the source of most important new information is the entrepreneur. He is the fellow who takes risks, builds a new business, and then – surprise, surprise – it works!

  The cronies want to stop him, before he undermines the value of their old assets and old business models with new information.

  The zombies want to drag him down, leeching on him so greedily that he runs out of energy.

  But without the entrepreneur, capitalism fails.

  Capitalism also fails when the information the entrepreneur relies upon is distorted.

  When the feds fiddle with interest rates, for example, they turn the most important signal in capitalism into misleading noise. Gilder:

  [I]nterest rates are noise, rather than signal. Interest rates near zero cause finance to hypertrophy, as privileged borrowers reinvest government funds in government securities. Only a small portion of these funds goes to useful “infrastructure,” while the rest is burned off in consumption beyond our means.

  Gilder believes the signals must move through channels – secured, but not corrupted – by government!

  Yes, government exists. It is going to provide “channels” – laws, property protection, speed limits, and so forth – whether we like it or not. And it will be better for us all if it just keeps the channels open and free from twists and tolls.

  But that is very different from providing “guidance.” Politicians don’t have the information or experience to provide guidance. They are zombies. They don’t want to learn the nitty-gritty details of real wealth building. They should just make sure basic laws – against murder, theft, and fraud – are enforced.

  And otherwise butt out.

  

  

  

  

  

• Iran – Before & After The Nuclear 'Deal'

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  

  

  

• Another VA Scandal: GI Bill Funnels Taxpayer Money To Masturbation Classes, "Hate Churches" & More

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Iraq War veteran David Rodriguez steps into a softly lit classroom at the Institute for Advanced Study of Human Sexuality in San Francisco, crosses his legs and sits on a pillow in front of an altar decorated with a rope, a model of a penis and a statue of a Hindu god.

   

  Rodriguez, a retired Navy lieutenant commander who led an engineering battalion that dismantled roadside bombs, is here for a class on “sexual bodywork.” When instruction begins, he will join his classmates in practicing different forms of masturbation.

   

  “They do vulva massage and penis massage and anal massage,” said instructor Ariadne H. Luya, who holds a Ph.D. from the institute, an unaccredited graduate school founded in 1976 by an iconoclastic Methodist minister who amassed a large collection of erotic art and pornographic films, including child pornography, that is kept at the school.

   

  “We want to get people out of their ruts. Have you been masturbating the same way for 20 years?” she asked rhetorically. “How’s that going for you? Would you like to try something new?”

   

  Rodriguez is funding his studies with the GI Bill, which means taxpayers are covering his tuition to pursue a doctorate in human sexuality – more than $20,000 over the past two years.

   

  But in the absence of strong government oversight, Reveal has found a gold rush of 2,000 schools cashing in on the exemption. The list includes schools set up to make a profit by teaching blackjack, scuba diving, dog grooming, taxidermy and yoga. Many are owned by individuals who’ve gone bankrupt or failed to pay their taxes. A handful are owned by convicted felons…

   

  Back at the Institute for Advanced Study of Human Sexuality in San Francisco, the Rev. Ted McIlvenna, the school’s president, walks down a narrow hallway cluttered with erotic paintings and sculptures, pornographic magazines and reel after reel of pornographic films.

   

  “This is where we keep the kiddie porn,” he said, pointing at a 10-foot-long locked cabinet. “You have to have a doctorate to open it.”

   

  – From the Reveal article: GI Bill Pays for Unaccredited Sex, Bible and Massage Schools

  If you feel you’ve had enough Department of Veteran’s Affairs (VA) related scandals for one lifetime, you’ve come to the wrong place. I’m sure all Liberty Blitzkrieg readers will recall the huge outcry last year when it was revealed that some of those unfortunate Americans who sacrificed themselves in wars for imperial dominance and overseas profits, were left hung out to dry by the VA. So much so, that some vets even died while waiting for healthcare within the VA system.

  Not to worry though. Under the GI Bill, taxpayers are funding all sorts of “learning” at unaccredited schools, including masturbation classes at San Francisco’s Institute for Advanced Study of Human Sexuality, hate sermons at places such as the Oklahoma Baptist College and Institute, and all sorts of other scams run by convicted felons. I wish I was making this up.

  From the Center for Investigative Reporting’s Reveal:

  Iraq War veteran David Rodriguez steps into a softly lit classroom at the Institute for Advanced Study of Human Sexuality in San Francisco, crosses his legs and sits on a pillow in front of an altar decorated with a rope, a model of a penis and a statue of a Hindu god.

   

  Rodriguez, a retired Navy lieutenant commander who led an engineering battalion that dismantled roadside bombs, is here for a class on “sexual bodywork.” When instruction begins, he will join his classmates in practicing different forms of masturbation.

   

  “They do vulva massage and penis massage and anal massage,” said instructor Ariadne H. Luya, who holds a Ph.D. from the institute, an unaccredited graduate school founded in 1976 by an iconoclastic Methodist minister who amassed a large collection of erotic art and pornographic films, including child pornography, that is kept at the school.

   

  “We want to get people out of their ruts. Have you been masturbating the same way for 20 years?” she asked rhetorically. “How’s that going for you? Would you like to try something new?”

   

  Rodriguez is funding his studies with the GI Bill, which means taxpayers are covering his tuition to pursue a doctorate in human sexuality – more than $20,000 over the past two years. He says he wants to counsel veterans with sexual problems.

   

  Opinions may differ about whether Rodriguez’s degree is more or less valuable than other academic pursuits. But one thing is clear: His school does not meet the minimum standards that the U.S. Department of Education requires for receipt of other federal funds.

   

  The institute is eligible to receive money directly from the U.S. Treasury because the GI Bill does not require schools to be accredited – a formal process that typically includes extensive site visits and audits by an independent organization charged with upholding academic standards.

   

  But in the absence of strong government oversight, Reveal has found a gold rush of 2,000 schools cashing in on the exemption. The list includes schools set up to make a profit by teaching blackjack, scuba diving, dog grooming, taxidermy and yoga. Many are owned by individuals who’ve gone bankrupt or failed to pay their taxes. A handful are owned by convicted felons.

   

  The cost to taxpayers: more than $260 million from the time the new GI Bill took effect in 2009 until the end of 2014.

   

  Dozens of unaccredited Bible colleges benefit from the loophole, including one, the Oklahoma Baptist College and Institute, that is part of a church that was placed on the Southern Poverty Law Center’s list of hate groups. Its president, the Rev. Tom Vineyard, once declared that “50 to 60 percent of homosexuals are infected with intestinal parasites” and that “homosexuals account for half of the murders in large cities.” In December, Vineyard shot and killed a 14-year-old boy during what police said was an attempted burglary at his home. No charges were filed.

   

  “It boils down to this,” Van Buren said. “Your tax money paid me to fight a war and to sacrifice my family. For the rest of my life, I’ll be feeling the weight of that war. The education benefit I receive is part of that package, that I have the liberty to go where I want to go.”

   

  But some veterans advocates say such choices run counter to the purpose of the GI Bill, which is designed to help veterans succeed in civilian life.

   

  Reveal conducted extensive background checks on 100 unaccredited schools in 10 states that receive GI Bill money, including all of the top recipients and a sampling of others. More than a third were owned or run by individuals who had declared bankruptcy or failed to pay their taxes.

   

  In Georgia, GI Bill funds flowed to a construction academy whose president has declared bankruptcy twice and been arrested for assault. In New Jersey, they funded a for-profit nursing program whose president has faced five liens for unpaid taxes. In Pennsylvania, taxpayers paid for Iraq and Afghanistan veterans to attend a commercial trucking program whose president has lodged eight guilty pleas in traffic court, including driving an unregistered vehicle, driving a vehicle without proper inspection and speeding in a school zone.

   

  A handful of unaccredited schools are owned by convicted felons, including Royal Image Barber College, a Chicago-area beauty school whose founder, Corey Lewis, served four years in prison on charges of vehicular invasion and aggravated robbery. He also has declared bankruptcy twice in the past four years.

   

  The VA declined to discuss specific problems with any school, but in a statement, the agency argued that the “law sets no specific prohibitions against approving a program due to a school’s owner having declared bankruptcy, owed back taxes, or having been convicted of a crime in the past.”

   

  Back at the Institute for Advanced Study of Human Sexuality in San Francisco, the Rev. Ted McIlvenna, the school’s president, walks down a narrow hallway cluttered with erotic paintings and sculptures, pornographic magazines and reel after reel of pornographic films.

   

  “This is where we keep the kiddie porn,” he said, pointing at a 10-foot-long locked cabinet. “You have to have a doctorate to open it.”

   

  McIlvenna, who has been in business since 1976, says he will never seek accreditation from an organization approved by the Department of Education.

   

  “Accreditation is a bunch of crap,” he said. “They would never let me keep my library.”

   

  “We don’t take any federal money,” he said, “except for the veterans,” he quickly added – because it comes with no strings attached.

  Your taxpayer money at work. Speechless.

   

  

  

  

  

  

• Syriza "Rebels" Planned To Ransack Greek Mint, Seize Cash Reserves, Arrest Central Bank Governor

  Earlier this week, in an FT op-ed, Eurointelligence’s Wolfgang Münchau said that in his estimation, an EMU exit remains the most likely outcome for Greece. The reason, Münchau explained, is that “[Greek PM Alexis] Tsipras ended up with another very lousy bailout deal. And this one suffers from the same fundamental flaws as its predecessors.” Münchau went on to describe, in vivid detail, how he believes a Grexit would unfold: 

  My own most likely Grexit scenario is a different one yet again. Donald Tusk, the president of the European Council, hinted at this in his interview with the Financial Times last week when he said that he felt “something revolutionary” in the air. He is on to something. The most probable scenario for me is Grexit through insurrection.

  Whether he knew it when he penned those words or not, Münchau’s vision for Greece nearly unfolded just over a week ago when, according to FT, Syriza’s Left Platform (led by outspoken former Energy Minister Panayotis Lafazanis) met in at the Oscar hotel in a “shabby” downtown district of Athens and plotted to ransack the Greek mint, seize the country’s currency reserves, and arrest central bank chief Yannis Stournaras.

  It’s not entirely clear from the piece what the conspirators – who FT makes sure to mention included “supporters of the late Venezuelan president Hugo Chávez” and “old-fashioned communists” – planned to do next, but it certainly seems likely that if what you’re about to read is true, Greece came dangerously close to civil war last Wednesday. 

  Via FT:

  Arresting the central bank’s governor. Emptying its vaults. Appealing to Moscow for help.

   

  These were the elements of a covert plan to return Greece to the drachma hatched by members of the Left Platform faction of Greece’s governing Syriza party.

   

  They were discussed at a July 14 meeting at the Oscar Hotel in a shabby downtown district of Athens following an EU summit that saw Greece cave to its creditors, leaving many in the party feeling despondent and desperate.

   

  The plans have come to light through interviews with participants in the meeting as well as senior Greek officials and sympathetic journalists who were waiting outside the gathering and briefed on the talks.

   

  “Obviously it was a moment of high tension,” a Syriza activist said, describing the atmosphere as the meeting opened. “But you were also aware of a real revolutionary spirit in the room.”

   

  Yet even hardline communists were taken aback when Mr Lafazanis proposed that the Syriza government should seize control of the Nomismatokopeion, the Greek mint, where the bulk of the country’s cash reserves are kept.

   

  “Our plan is that we go for a national currency. This is what we should have done already. But we can do it now,” he said, according to people present at the meeting.

   

  Mr Lafazanis said the reserves, which he claimed amounted to €22bn, would pay for pensions and public sector wages and also keep Greece supplied with food and fuel while preparations were made for launching a new drachma.

   

  Meanwhile, the central bank would immediately lose its independence and be placed under government control. Its governor, Yannis Stournaras, would be arrested if, as expected, he opposed the move.

   

  As the details of the Left Platform meeting have leaked out, some political opponents are demanding an accounting.

   

  “Members of this government planned a trip to hell for Greeks,” said Stavros Theodorakis, leader of the pro-EU To Potami party. “They planned to raid the vaults of the people and invade the mint as if it were a Playmobil game. Alexis Tsipras must tell us the truth about what happened.”

  While the plan might have seemed straightforward enough on paper, and likely sounded like a good idea in the heat of the moment (assuming the meeting happened when FT says it did, Tsipras had betrayed the referendum outcome and agreed to hand over the country’s sovereignty to Berlin less than 48 hours earlier), it turns out that simply seizing the physical bank notes in the vault and firing up Greece’s euro printing presses wasn’t actually a viable option. “Anyone who tried to buy something with [those euros] would be at risk of being arrested for forgery,” one unnamed ECB official told FT, rather flatly. 

  Recall that just days before Tsipras arrived in Brussels for his “mental waterboarding”, Lafazanis had enthusiastically laid out the plans for Greece’s partnership with Russia on Gazprom’s Turkish Stream pipeline, exclaiming in the process that “Greece is no one’s hostage” and that “the Greek people’s No vote is not going to become a humiliating Yes.”

  

  (Follow me to the mint!)

  Lafazanis, FT notes, “visited Moscow three times as Mr Tsipras’s envoy after Syriza came to power in January. In return for signing up to a new gas pipeline project, he hoped for at least €5bn in prepayments of gas transit fees, according to people briefed on the initiative. But the Russians rejected the deal the week before the EU summit.” Some reports have also suggested that Moscow backed out of a deal to provide Athens with a loan to launch the new drachma.

  We’ll leave it to readers to digest the above and determine how close the Greek mint was to being commandeered by bloodthirsty (politically speaking that is) communists, but it’s worth noting that according to one bank official who spoke to FT, “it was all a fantasy.”

  

  

  

  

  

• 5 Things To Ponder: Shades Of Risk

  Submitted by Lance Roberts via STA Wealth Management,

  Is it just me? Last week while on vacation, the markets surged back to all-time highs as the Greek and China problems were solved. Unfortunately, as I left white, sandy beaches and clear ocean waters behind me to return to reality – so did the markets. Either it is purely coincidental or I should head back to Mexico. Personally, I am hoping for the latter.

  As I discussed earlier this week (chart updated through Thursday's close):

  "While the prices did manage to break out of the downtrend that has contained the market since mid-May, so far that rally has failed to attain new highs. Furthermore, the previous oversold condition that acted as the "fuel" for the recent rally has been exhausted with the markets are now back to an extreme overbought condition. This suggests that there is likely very little upside currently and that investors should consider using this opportunity to engage in prudent portfolio management practices such as taking profits, reducing laggards, and rebalancing allocations."

  

  That advice has played out well as the markets have continued to deteriorate, along with a vast majority of internal measures. The question is now, and is the subject of this weekend's reading list, is the correction over? Or, is this just the beginning of something bigger?

  ---

  1) The Thinnest New High In Stock Market History? by Dana Lyons via Dana Lyon's Tumbler

  "When we posted yesterday's piece on the stock market's weak internals (If Beauty's On The Inside, This Market Wins The Ugly Contest), we weren't sure if things could get any worse – and by how much – with the major averages still able to hold near 52-week highs. Well, the answers were 'yes' and 'a lot'."

  

  Read Also: What Do 1987, 2003, 2009 And 2015 Have In Common by Chris Ciovacco via Ciovacco Capital

   

  2) Doubling Down On A Summer Correction by Michael Gayed via MarketWatch

  "This is not about opinion, and this is not a call. The odds simply favor some kind of heightened volatility, and volatility tends to coincide with corrections in stocks. Much like in July 2011 when stocks rallied and all seemed well before the Summer Crash of 2011 took place, so too a similar pattern and complacency is under way.

   

  Perhaps this is precisely how it needs to happen — suck everyone in, and then refresh the fear when it seems like all is well, and when no one expects it."

  Read Also: What's The Biggest Risk To Investors by Ben Carlson via A Wealth Of Common Sense

   

  3) The Nasdaq Is Flashing A Dot-Com Era Signal by Anthony Mirhaydari via The Fiscal Times

  "But beneath the surface, the situation is more vulnerable than it seems: By one measure, the Nasdaq is getting ahead of itself in a way not seen since just days before the dot-com bubble burst.

  On the Nasdaq 100, this was only the second time that the index was up 1 percent or more to a new 52-week high amid net declining issues. The other day was March 23, 2000, just days after the dot-com bubble peaked."

  Read Also: The Market Doesn't Care About Your Opinions by Joe Calhoun via Alhambra Partners

  Read Also: The Most Boring Stock Market In Decades by Michael Driscoll via WSJ MoneyBeat

   

  4) Magical Thinking Divorces Markets From Reality by James Grant via Financial Times

  "The modern financial animal is wont to assume that he or she lives in an age of science. Just peruse the economic research that the great central banks produce. Even the titles of the papers are incomprehensible. Surely, the wit of man and woman has conquered the mysteries of money.

   

  So much for appearances. The truth is we live in an age of pseudoscience. The central banks' forecasting models have failed to predict the future. Quantitative easing and zero per cent interest rates — policy centrepieces of the post-2008 era — have failed to restore what we used to call prosperity."

  Read Also: Market Deterioration & Full Cycle Investing by Dr. John Hussman via Hussman Funds

   

  5) China's Record Dumping Of US Treasuries by Tyler Durden via ZeroHedge

  "The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.

   

  This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2)."

  

  Read Also: Investors Can't See Through Market Froth by John Plender via FT

  ---

  Other Interesting Reads

  Oil Warning: Crash Could Be Worst In 45 Years by Tom Randall via Bloomberg

  The Buffett Ratio Is Bearish by Ed Yardeni via Dr. Ed's Blog

  A Warning Signal For Growth Investors by Cam Hui via Humble Student Of The Market

  Are Stocks Overvalued? A Survey Of Equity Valuation Models by Chris Brightman via Research Affilliates

  ---

  "It wan't raining when Noah built the ark." – Howard Ruff

  Have a great weekend.

  

  

  

  

  

• Stocks Suffer Worst Week Of Year Amid Biotech Bloodbath, Commodity Carnage, & Bond Buying

  This seemed appropriate…

  But "everything was awesome"?

  • Russell 2000 -3.1% – worst week since Oct 2014 (Bullard)
  • Dow -2.8% – worst week since Dec 2014
  • S&P -2.1% – worst week since Jan 2015
  • Trannies -2.8% – worst week since Mar 2015
  • Nasdaq -2.2% – worst week since Mar 2015

  

   

  Who is to blame for all this?

  @InEgo_ I'm holding him accountable pic.twitter.com/KeNNDewp70

  — StockCats (@StockCats) July 24, 2015

  Leaving The Dow comfortably red year-to-date…

  

   

  This is notable.. VIX was pressed notably lower into the close and stocks went nowhere – either Kevin Henry just lost his mojo OR traders are unwinding hedges and underlying exposures at the same time.. in other words – derisking in size!

  

   

  The Nasdaq tumbled to its 50DMA, Small Caps broke below 50DMA & 100DMA, pressing 200DMA, S&P broke its 50DM And 100DMA, pushing towards its 200DMA, Dow smashed below its 200DMA, Trannies back near 9 month lows.

  Ugly day…

  

   

  AMZN retraced over half its overnight gains…

  

   

  Biotechs… worst week/day in 3 months

  

   

  Buggered… 50 Biotech names (1/3rd) dropped over 4%

  

   

  After Biogen was battered… down 22% (worst day since July 2008)

  

   

  Treasury yields plunged on the week (except 2Y which inched higher)… 30Y yield's biggest drop since March

  

   

  The massive flattening in the yield curve (2s30s -27bps) is the biggest 2-week flattening since Sept 2011 (and biggest weekly drop since The Taper Tantrum)…

  

   

  The Dollar has been relatively quiet for the last 3 days as AUD plunges and EUR strengthens…

  

   

  Commodities were whacked all week but Friday afternoon saw gold & silver bid as Crude tumbled to 4-month lows…

  

   

  Crude crashes for 4th week in a row… (down 20%)

  

   

  Commodity carnage… year-to-date…(except higher gas prices!!)

  

   

  On the week: Bonds good, Stocks bad, Gold ugly…

  

   

  Charts: Bloomberg

  

  

  

  

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• Liberty Movement Needs More Innovations To Counter Technological Tyranny

  Submitted by Brandon Smith via Alt-Market.com,

  The great lesson from history that each consecutive generations seems to forget is that the tools of tyranny used outward will inevitably be turned inward. That is to say, the laws and weapons governments devise for supposed enemies abroad will ALWAYS and eventually be used against the people they are mandated to protect. There is no centralized system so trustworthy, no political establishment so free of corruption that the blind faith of the citizenry is warranted. If free people do not remain vigilant they will be made slaves by their own leadership. This is the rule, not the exception, and it applies to America as much as any other society.

  The beauty of the con game that is the “war on terror” is that such a war is ultimately undefinable. An undefinable war has no set enemy; the establishment can change the definition of the “enemy” at will to any culture, country, or group it wishes. Thus, the war on terror can and will last forever. Or, at least, it will last as long as corrupt elitists remain in positions of power.

  As I have outlined in past articles, most terror groups are creations of our nation's own covert intelligence apparatus, or the covert agencies of allied governments.

  ISIS is perhaps the most openly engineered terror organization of all time (surpassing Operation Gladio), with U.S. elites and purported anti-Muslim terror champions like Sen. John McCain and Gen. Paul Vallely making deals with “moderate” Free Syrian Army rebels who immediately turn out to be full fledged ISIS fighters (I'm sure they were not “surprised” by this outcome) and the Obama Administration blatantly funding and arming more “moderates” which again in turn seem to be crossing over into the hands of ISIS. Frankly, the whole idea that there is a moderate front in places like Syria where alphabet agencies reign supreme is utterly absurd.

  The bottom line – our political leadership, Republican and Democrat alike, created ISIS out of thin air, and now the American people are being expected to relinquish more individual liberties in the name of stopping this fabricated threat. Apparently, the Orwellian police state structures built under the auspices of the Patriot Act, the AUMF, the NDAA, FISA, etc. have not been enough to stop events like the Chatanooga shooting from occurring. So, what is the answer? Well, certainly not a reexamination of our insane foreign policy or an investigation into government funded false flag terrorism; that would make too much sense.

  Instead, the establishment claims we need MORE mass surveillance without warrants, tighter restrictions on individual freedoms, and even, according to retired General Wesley Clark, internment camps designed to separate and confine “disloyal” Americans from the rest of the population.

   

  Remember, all of this is being suggested in the name of stopping ISIS, but the language being used by political elites does not restrict such actions to ISIS related “extremists”. Once again, the war on terror is an ambiguous war, so ambiguous that internment camps supposedly meant for those the government labels POTENTIAL Islamic extremists could also be used for potential extremists of any group. Once the fuse is lit on the process of rendition, black bagging, internment, and assassination of citizens, any citizens, without trial, there will be no stopping the powder keg explosion to follow.

  I believe that the power brokers that dictate legal and political developments within our country are preparing to turn the full force of the police state machine against the American people, all in the name of protecting us, of course. I do not need their brand of “protection”, and neither does anyone else.

  It comes down to this – in the face of an increasingly advanced technological control grid, either liberty movement activists and freedom fighters must develop our own countermeasures, or, we will lose everything, and every generation after us will blame us for our inaction, if they remember us at all.

  Keep in mind a countermeasure must be decentralized. Bitcoin, for instance, is NOT a practical countermeasure being that it relies on a centralized and monitored global internet in order to function. It also does not encourage any tangible production capabilities or skill sets. Therefore, it does not provide for the function of a true alternative economy. It is a false solution and a useless countermeasure to a fiat currency based economy.

  A real countermeasure to a controlled economy, for instance, would be a localized barter economy in which people must develop ways to produce, rather than play make believe with digital cryptocurrencies.

  Countermeasures do not always have to be high tech. In fact, I am a staunch believer in the advantages of low tech solutions to high tech tyranny. As many are already aware, with the aid of Oath Keepers I recently developed a long term wearable cloak system which defeats FLIR thermal imaging, including military grade thermal imaging. Something which has never been offered on the civilian market before.

  But this is only one countermeasure to one major threat. I will continue to work on defenses in other areas in which I feel I am best qualified, however, the movement needs more R&D, and we need it NOW before it is too late. I would like to suggest some possible dangers, and how people with far more knowledge than myself could create tools for defeating tyranny. I would also like to examine some simple organizational countermeasures which EVERYONE should be undertaking right now.

  Community Defense

  This is an amazing countermeasure for the liberty movement because it removes the monopoly of state control over individual security. Nothing pisses off the establishment more than people taking individual and community defense into their own hands. Fear is the greatest weapon of a corrupt government, and if they can't keep you afraid because you are your own security, then they have lost considerable leverage over you.

  This dynamic is represented perfectly in the Oath Keepers Community Preparedness Team model, which has been utilized successfully in places like Ferguson, MO. Today, in the wake of the Chatanooga shootings, Oath Keeper teams are volunteering across the nation to stand guard (discreetly) at military recruiting offices. The recruiters themselves, who are forced to remain disarmed by the DoD, appear to be thankful for the Oath Keeper presence. This kind of effort shows those in the military that the liberty movement is not the great homegrown monster that the government and the SPLC have made us out to be. It also throws a monkey wrench into the use of false flag terrorism or terrorism funded by covert agencies (as ISIS is) as a means to herd the masses into totalitarianism in the name of safety.

  You might not be an engineer, or a tactician, but anyone can and should be organizing security teams for the places they live. Nothing could be more important.

  Community Food Reserve

  Am I talking about feeding your entire neighborhood or your entire town during a crisis? No, not necessarily. But, if you found an innovative way to make that possible, the rest of the movement would surely be grateful. Preppers do what they can for themselves and their families, but the bottom line is, if you are isolated and unorganized, all your prepping will be for naught. You are nothing more than an easy target and no amount of “OPSEC” is going to hide the fact that you will look well fed and healthy while everyone else doesn't. The solution to this is to organize community defense, as stated above, but to also organize a community food reserve.

  I highly suggest approaching already existing groups, like your local churches if they are willing to listen, and discussing the idea of food stores, water filtration, and shelter scenarios. If you can convince at least one community group to make preparations, you have just potentially saved numerous lives and stopped the exploitation of food scarcity as a means to dominate your local population during disaster.

  WiFi Radar

  Active WiFi based radar systems have been developed over the past several years which can see through walls (to a point) and potentially detect persons hiding in an urban environment. The number of radio frequency based radar projects coming out of the dark recesses of DARPA have been numerous, and each project appears to revolve around the goal of complete surveillance ability, or total information awareness. Such measures are not as effective against a technologically advanced opponent, but they could be very effective in dominating a lower tech civilian population.

  WiFi radar in particular is a rather disturbing concept, and not a field that I am personally well versed. I have seen some examples of radio-wave based personnel tracking and have not been all that impressed with the visual results, but this is only what has been made available to the public. Sometimes, the DoD will present a technology that does not work as well as they claim in order to strike fear in the minds of their enemies. That said, sometimes they also use tech tools that work far better than they let on.

  Luckily, radar countermeasure information is widely available to the public, and WiFi blocking and absorbing materials exist also. Liberty champions would do well, though, to look into active countermeasures along with passive, and devise methods for jamming WiFi radar altogether.

  RFID Matrix

  RFID chips are a passive technology but rather dangerous under certain conditions. With a grid of RFID readers in place in an environment such as a city, or a highway, a person could be tracked in real time every second of every day. He might not even know he is carrying a chip or multiple chips, the trackers being so small they could be sewn behind the button of a shirt.

  This is one threat which would probably have to be solved with higher technology. I have seen RFID jamming and “spoofing” done by civilian computer engineers, mostly from foreign countries. But, this should not just be a hobby for computer experts in technical institutes. The Liberty Movement needs portable RFID jamming and spoofing capability to ensure that these chips, which are set to be ingrained in almost every existing product in the near future from clothing to cars to credit cards, can be rendered useless.

  Drones Vs. Drones

  The predator drone is not the biggest threat on the block anymore in terms of surveillance ability. DARPA has been working on other drone designs similar to the A160 Hummingbird and the MQ-8 Fire Scout; lightweight helicopter-style UAVs that can stay in the air for up to 24 hours and provide overwatch in a 30 mile area. And lets not forget about JLENS surveillance blimps (also ironically referred to as "ISIS" Integrated Sensor Is The Structure project) which can and are outfitted with high grade cameras and radar that can be used to track people from 10,000 feet up in the sky.

  This is the future of combat operations and the lockdown of populations. Standard military units will be reduced as much as possible while UAVs will be deployed en masse. Air power has always been the biggest weakness of civilians seeking to counter corrupt governments, but this is actually changing.

  While they may be lower tech in certain respects, civilian based drones are actually keeping pace with military projects, if only because military projects are restricted by bureaucracy and red tape while civilians are encouraged and emboldened by profit motive. Range and elevation limitations in the civilian market are purely legal right now, and such limitations will be of no concern once the SHTF. For the first time in history, common people now have the ability to field an aerial defense.

  The DoD is well aware of this, and is already working on measures to counter enemy drones through their Black Dart and Switchblade program. The Liberty Movement needs its own Black Dart program.

  Long Distance Radio And Codes

  Regardless of the region they live, liberty activists should be developing their own radio code methods for secure communications. There are a few existing frequency hopping and coded radio systems out there on the civilian market, but these are short range units usually with around 1 watt of power. This makes them ideal for quick operational comms and difficult to listen in on simply because their range is so limited. That said, longer range radio communication will likely be essential for the spread of information from one region to the next, and no one should assume that regular phone and internet will be available in the future. News must travel somehow.

  This means HAM radio, using mobile repeaters to avoid triangulation, and old school coded messages. The R&D portion of this issue I believe needs to be in the use of an Automatic Packet Reporting System (APRS) for the liberty movement regionally and nationwide. This is a kind of “texting” through HAM radio, and combining this with traditional low tech cipher coding may be our best bet for long range secure comms. It could also help defeat drones that intercept standard messages and use voice recognition software to identify targets.

  Decentralized Internet

  Information sharing makes or breaks a society. Without the web, the liberty movement would not have found the success it has today, and the alternative media would not exist, let alone be outmatching the readership ratings of mainstream media sources that have otherwise dominated news flow for decades. Unfortunately, the web is NOT a “creative commons” as many people believe. It is, as Edward Snowden's revelations on the NSA proved, a highly controlled and monitored network in which there is essentially no privacy, even with the existence of cryptography.

  The great threat to the establishment is the possibility that people will begin building an internet separate from the internet; a decentralized network. Recently, an inventor named Benjamin Caudill was slated to release a device called “Proxyham”, designed to reroute wifi signals and remove the possibility of government monitoring of digital communications. Strangely, just before the release of Proxyham, Caudill pulled all devices with the intent to destroy them, and will not be releasing the source code and blueprints to the public as planned.

  Clearly, something or someone scared the hell out of Caudill, and he is rushing to appease them. We don't know who for certain, but my vote is the NSA. And if this is the case, it means his project and others like it are a threat to the surveillance state, and must be released to the public ASAP. If Caudill doesn't have the guts to do it, then the liberty movement must.

  An alternative internet would be a holy grail in the fight against tyranny, if only to show the world that people can indeed decouple from the system and create advanced networks themselves, and do it better than the establishment.

  These are just a few of the areas that require immediate attention from those with ingenuity in the liberty movement. The time for talk is over. The time for tangible action has begun. Beyond the need for immediate local organization by those preparing for social and economic breakdown, there is a desperate need for out-of-the-box thinkers to develop countermeasures to technological fascism. It's time for the movement to go beyond mere intellectual analysis and provide concrete solutions. There is nothing left but this.

  

  

  

  

  

• Gold "Flash-Crashes" Again Amid Continued Commodity Liquidation As China Manufacturing Slumps To 15-Month Lows

  As Bridgewater talks back its now widely discussed bearish position on fallout from China's equity market collapse, Chinese stocks rose at the open (before fading after ugly manufacturing data). However, liquidations continue across the commodity complex in copper, gold, and silver. Though not on the scale to Sunday night's collapse, the China open brought another 'flash-crash' in precious metals. All signs point to CCFD unwinds, and forced liquidations as under the surface something smells rotten in China, which has just been confirmed by the lowest Manufacturing PMI print in 15 months.

   

  Gold flash crashed…

  

   

  As we noted previously, while the actual selling reason was irrelevant, the target was clear: to breach the $1080 gold price which also happens to be the multi-decade channel support level.

  

   

  As liquidations across the metals complex continue..

  

   

  Scotiabank's Guy Haselmann noted earlier…the plunging of the commodity complex is telling us that the China economy could be imploding. 

  Problems stemming from China are spreading further into more sectors and markets (various high yield sectors, emerging markets, EM and commodity currencies).

   

  As I wrote in my note Tuesday (Too Much of Everything), Zero interest rates have contributed to over-production, pressuring consumer prices lower.  Certainly, borrowing in the energy sector contributed to the over-supply of oil and look what has happened in that sector.   Now, weakening demand from China is accelerating the decent in most commodities.  Budgets of EM supplier-countries and commodity exporters are being materially impacted.  

   

  As commodities fall, the FOMC says that inflation targets are harder to obtain, leading to a self-perpetuating  belief that continued cheap money is needed. 

   

  Yet, claims fell to the lowest level since 1973, housing is strong, and auto sales are back to almost 17mm units (etc).  Clearly, the Fed has gotten itself into a difficult position.   By not lifting-off and taking their medicine in 2014 – market imbalances today are now bigger and the consequences greater.

   

  China is unfolding as the most important story of 2015 for markets. Stay alert.   Long-dated US Treasuries remain attractive and good place to hid.

  *  *  *

  It seems Guy may be on to something as Manufacturing just collapsed in China…

  

   

  All that stimulus, all those "measures" and Chinese manufacturing collapses at the fastest rate in 15 months; and it appears bad news is bad news still in China…

  

   

  Charts: Bloomberg

  

  

  

  

  

• The World Economy Visualized

  Via Jim Quinn's Burning Platform blog,

  If itsy bitsy pie slice – Greece (.33%) – can create this much worldwide economic havoc because of their unpayble level of debt, imagine what will happen when the truth is revealed about France (3.81%), Italy (2.88%), and Spain (1.88%). China’s (13.9%) entire economic model has been built upon debt and the world consuming their output.

  The world has run out of money to consume their shit. Japan (6.18%) is in the midst of a demographic and debt death spiral. The U.S. (23.32%) is living on borrowed time and the continued dominance of the USD. How long will it last? We are inhabiting in a world stacked with TNT run by monkeys with matches.

  

  Courtesy of: Visual Capitalist

   

  Today’s data visualization is the most simple breakdown of the world economy that we’ve seen. Not only is it split to show the GDP of dozens of countries in relation to one another based on size, but it also subtly divides each economy into its main sectors: agriculture, services, and industry.  

  The lightest shade in each country corresponds to the most primitive economic activity, which is agriculture. The medium shade is industry, and the darkest shade corresponds to services, which tends to make up a large portion of GDP of developed economies in the world economy.

  To take it one step further, the visualization also shades the countries by continental geography, to easily see the relative economic contributions of North America, Europe, South America, Asia, Oceania, and Africa.

  

  

  

  

  

• How Monsanto, Exxon Mobil, & Microsoft Lobbyists Are Bundling Funds For Hillary

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  The pantsuit revolutionary is at it again. Once again demonstrating her populist chops by employing the services of lobbyists to bundle millions in campaign funds. It’s no wonder opinion polls on her have been plunging as of late.

  We learn from Bloomberg that:

  When Barack Obama was running for the presidency in 2008—and later for reelection in 2012—he promised he wouldn’t take money from registered lobbyists, not even as bundlers. In the race to succeed him, Hillary Clinton is not following in his footsteps.

   

  The former secretary of state raised more than $2 million from 40 “bundlers”—fundraisers who get their contacts to give to campaigns—who were also lobbyists, according to financial forms released Wednesday by the Federal Election Commission. In all, the Clinton campaign raised $46.7 million between the beginning of April and the end of June.

   

  Clinton’s bundlers include some familiar names: Jerry Crawford, an outside lobbyist to Monsanto and Iowa kingmaker, put together another $35,000 or so. Tony Podesta, a mega-lobbyist who co-founded the Podesta Group and is the brother of Clinton’s campaign chair John, bundled almost $75,000.

   

  Other bundlers lobby for big companies including Microsoft (Fred Humphries) and Exxon Mobil (Theresa Fariello) or industry groups including the National Cable & Telecommunications Association (Daphna Peled). Another group includes former staffers for prominent Democratic politicians (including President Clinton) and politicians themselves, including former South Carolina Governor Jim Hodges. Lobbyist bundlers don’t have to disclose their employers, but the names appear on both Clinton’s disclosures and 2015 lobbyist registrations.

  She certainly knows how to diversify her portfolio when it comes to people who bribe U.S. Congress for a living.

  Clinton was the only Democrat running for president to have declared lobbyist bundlers as of Thursday. Two Republicans candidates, former Florida Governor Jeb Bush and Florida Senator Marco Rubio, also filed disclosures on lobbyist bundlers, with Bush raising more than $228,000 from eight lobbyist bundlers and Rubio raising more than $133,000 from three lobbyist bundlers.

   

  Lobbyist participation in a campaign can be hard to avoid: Despite President Obama’s promise, the New York Times found in 2011 that at least 15 of his bundlers had strong links to lobbyists, including “overseeing” them, even if they weren’t registered themselves.

  But hey,

  

  *  *  *

  For related articles, see:

  Hillary Clinton Blasts High Frequency Trading Ahead of Fundraiser with High Frequency Trader

  Where Does Hillary Stand on the TPP? 45 Public Statements Tell You Everything You Need to Know

  Cartoons Mocking “Goldman Rats” and Hillary Clinton Appear All Over NYC

  Conversations with Everyday Americans – Hillary Launches $2,700 per Person “Grassroots” Fundraiser in Boston

  How UCLA Tried to Negotiate a Lower Speaking Fee, but Hillary Clinton Refused and Demanded $300,000

  All Hail Hillary – Iowa Students Locked in Classrooms as Clinton Arrives at College to Visit “Everyday Iowans”

  More Clinton Foundation Cronyism – The Deal to Sell Uranium Interests to Russia While Hillary was Secretary of State

  More Hillary Cronyism Revealed – How Cisco Used Clinton Foundation Donations to Cover-up Human Rights Abuse in China

  

  

  

  

  

• The 'Fallout' From Fukushima Summed Up In 1 Disturbing Image

  If this is what is happening to a daisy now… good luck to the Olympic athletes in 5 years…

   

  Four years after the disastrous 2011 earthquake, subsequent tsunami, and Fukushima nuclear meltdown, this small patch of deformed daisies suggests all is not well no matter what Abe tells the world…

   

  ?????????(?????5/26)? ????????????????????????????????????????????????????????????????????????????????0.5?Sv??(???1m) pic.twitter.com/MinxdFgXBC

  — ??? (@san_kaido) May 27, 2015

   

   

  We are sure everything is fine.. apart from

  Fukushima's nuclear fuel "missing"

   

  A specially designed robot 'dying' after just 3 hours of exposure, or

   

  2000x Normal radiation found in a Tokyo playground

  So what is really going in Fukushima?

  

  

  

  

  

• Central Banks And Our Dysfunctional Gold Markets

  Submitted by Marcia Christoff-Kurapova via The Mises Institute,

  Many investors still view gold as a safe-haven investment, but there remains much confusion regarding the extent to which the gold market is vulnerable to manipulation through short-term rigged market trades, and long-arm central bank interventions. First, much of the gold that is being sold as shares, in certificates, or for physical hoarding in dubious "vaults" just isn't there. Second, paper gold can be printed into infinity just like regular currency. Third, new electronic gold pricing — replacing, as of this past February, the traditional five-bank phone-call of the London Gold Fix in place since 1919 — has not necessarily proved a more trustworthy model. Fourth, there looms the specter of the central bank, particularly in the form of volume trading discounts that commodity exchanges offer them.

  The Complex World of Gold Investments

  The question of rigging has been brought to media attention in the past few months when ten banks came under investigation by the US Commodity Futures Trading Commission (CFTC) and the US Department of Justice in price-manipulation probes. Also around that time, the Swiss regulator FINMA settled a currency manipulation case in which UBS was accused of trading ahead of silver-fix orders. Then, the UK Financial Conduct Authority, which regulates derivatives, ordered Barclays to pay close to $45 million in fines against a trader who artificially suppressed the price of gold in 2012 to avoid payouts to clients. Such manipulations are not limited to the precious-metals market: in November of last year, major banks had to pay several billion dollars in fines related to the rigging of foreign-exchange benchmarks, including LIBOR and other interest-rate benchmarks.

  These cases followed on the heels of a set of lawsuits in May 2014 filed in New York City in which twenty-five plaintiffs consisting of hedge funds, private citizens, and public investors (such as pension funds) sued HSBC, Barclays, Deutsche Bank, Bank Scotia, and Société Génerale (the five traditional banks of the former London Gold Fix) on charges of rigging the precious-metals and foreign-exchange markets. "A lot of conspiracy theories have turned out to be conspiracy fact," said Kevin Maher, a former gold trader in New York who filed one of the lawsuits that May, told The New York Times.

  Central Banks at the Center of Gold Markets

  The lawsuits were given more prominence with the introduction of the London Bullion Market Association (LBMA) on February 20, 2015. The new price-fixing body was established with seven banks: Goldman Sachs, J.P. Morgan, UBS, HSBC, Barclays, Bank Scotia and Société Génerale. (On June 16, the Bank of China announced, after months of speculation, that it would join.)

  While some economists have deemed the new electronic fix a good move in contrast to behind-closed-door, phoned-in price-fixing, others beg to differ. Last year, the commodities exchange CME Group came under scrutiny for allowing volume trading discounts to central banks, raising the question of how "open" electronic pricing really is. Then, too, the LBMA is itself not a commodities exchange but an Over-The-Counter (OTC) market, and does not publish — does not have to publish — comprehensive data as to the amount of metal that is traded in the London market.

  According to Ms. Ruth Crowell, the chairman of LBMA, writing in a report to that group: "Post-trade reporting is the material barrier preventing greater transparency on the bullion market." In the same report, Crowell states: "It is worth noting that the role of the central banks in the bullion market may preclude 'total' transparency, at least at the public level." To its credit, the secretive London Gold Fix (1919–2015) featured on its website tracking data of the daily net volume of bars traded and the history of gold trades, unlike current available information from the LBMA as one may see here (please scroll down for charts).

  The Problem with Paper Gold

  There is further the problem of what is being sold as "paper" gold. At first glance, that option seems a good one. Gold exchange-traded funds (ETFs), registered with The New York Stock Exchange, have done very well over the past decade and many cite this as proof that paper gold, rather than bars in hand, is just as sure an investment. The dollar price of gold rose more than 15.4 percent a year between 1999 and December 2012 and during that time, gold ETFs generated an annual return of 14 percent (while equities registered a loss).

  As paper claims on trusts that hold gold in bank vaults, ETFs are for many, preferable to physical gold. Gold coins, for instance, can be easily faked, will lose value when scratched, and dealers take high premiums on their sale. The assaying of gold bars, meanwhile, with transport and delivery costs, is easy for banking institutions to handle, but less so for individuals. Many see them as trustworthy: ETF Securities, for example, one of the largest operators of commodity ETFs with $21 billion in assets, stores their gold in Zurich, rather than in London or Toronto. These last two cities, according to one official from that company, "could not be trusted not to go along with a confiscation order like that by Roosevelt in 1933."

  Furthermore, shares in these entities represent only an indirect claim on a pile of gold. "Unless you are a big brokerage firm," writes economist William Baldwin, "you cannot take shares to a teller and get metal in exchange." ETF custodians usually consist of the likes of J.P. Morgan and UBS who are players on the wholesale market, says Baldwin, thus implying a possible conflict of interest.

  Government and Gold After 1944: A Love-Hate Relationship

  Still more complicated is the love-hate relationship between governments and gold. As independent gold analyst Christopher Powell put it in an address to a symposium on that metal in Sydney, October 2013: "It is because gold is a competitive national currency that, if allowed to function in a free market, will determine the value of other currencies, the level of interest rates and the value of government bonds." He continued: "Hence, central banks fight gold to defend their currencies and their bonds."

  It is a relationship that has had a turbulent history since the foundation of the Bretton Woods system in 1944 and up through August 1971, when President Nixon declared the convertibility of the dollar to gold suspended. During those intervening decades, gold lived a kind of strange dual existence as a half state-controlled, half free market-driven money-commodity, a situation that Nobel Prize economist Milton Friedman called a "real versus pseudo gold standard."

  The origin of this cumbersome duality was the post-war two-tiered system of gold pricing. On the one hand, there was a new monetary system that fixed gold at $35 an ounce. On the other, there was still a free market for gold. The $35 official price was ridiculously low compared to its free market variant, resulting in a situation in which IMF rules against dealing in gold at "free" prices were circumvented by banks that surreptitiously purchased gold from the London market.

  The artificial gold price held steady until the end of the sixties, when the metal's price started to "deny compliance" with the dollar. Still, monetary doctrine sought to keep the price fixed and, at the same time, to influence pricing on the free market. These attempts were failures. Finally, in March 1968, the US lost more than half its reserves, falling from 25,000 to 8,100 tons. The price of other precious metals was allowed to move freely.

  Gold Retreats Into the Shadows

  Meawhile, private hoarding of gold was underway. According to The Financial Times of May 21, 1966, gold production was rising, but it was not going to official gold stocks. This situation, in turn, fundamentally affected the gold clauses of the IMF concerning repayments in currency only in equal value to the gold value of such at the time of borrowing. This led to a rise in "paper gold planning" as a substitution for further increases in IMF quotas. (Please see "The Paper Gold Planners — Alchemists or Conjurers?" in The Financial Analysts Journal, Nov–Dec 1966.)

  By the late 1960s, Vietnam, poverty, the rise in crime and inflation were piling high atop one another. The Fed got to work doing what it does best: "Since April [1969]," wrote lawyer and economist C. Austin Barker in a January 1969 article, "The US Money Crisis," "the Fed has continually created new money at an unusually rapid rate." Economists implored the IMF to allow for a free market for gold but also to set the official price to at least $70 an ounce. What was the upshot of this silly system? That by 1969 Americans were paying for both higher taxes and inflation. The rest, as they might say, is the history of the present.

  Today, there is no “official” price for gold, nor any “gold-exchange standard” competing with a semi-underground free gold market. There is, however, a material legacy of “real versus pseudo” gold that remains a terrible menace. Buyer beware of the pivotal difference between the two.

   

  

  

  

  

  

• China Furious Over Rig Pictures: "What Japan Did Provokes Confrontation"

  On Wednesday, we detailed China’s latest maritime dispute with a US ally. Just as the back-and-forth banter and incessant sabre-rattling over Beijing’s land reclamation activities in the Spratlys had died down, Washington and Manila passed the baton to Tokyo in the race to see who can prod the PLA into a naval confrontation first. 

  To recap, Japan apparently believes that China is strategically positioning rigs as close to a geographical equidistance line as possible in order to siphon undersea gas from Japanese waters.

  Here’s a map showing the position of the rigs and the line which divides the countries’ economic zones:

  

  And here are the rigs themselves:

  

  Tokyo’s position is that Beijing’s exploration activities violate a 2008 joint development agreement between the two countries. Beijing, on the other hand, “erroneously” believes it has the right to development gas fields located in its territorial waters.

  As we noted yesterday, Chief Cabinet Secretary Yoshihide Suga’s assurance that the spat would not endanger the slow thaw of Sino-Japanese relations didn’t sound convincing under the circumstances:

  The dispute won’t do anything to help Sino-Japanese relations and although Suga claims the issue won’t derail diplomatic progress, one has to imagine that Beijing has had just about enough of being told what it can and can’t do in what it considers to be territorial waters. 

  Sure enough, China has taken the rhetoric up a notch. Reuters has more:

  Japan’s release of pictures of Chinese construction activity in the East China Sea will only provoke confrontation between the two countries and do nothing for efforts to promote dialogue, China’s Foreign Ministry said.

   

  In a statement late on Wednesday, China’s Foreign Ministry said it had every right to develop oil and gas resources in waters not in dispute that fall under its jurisdiction.

   

  “What Japan did provokes confrontation between the two countries, and is not constructive at all to the management of the East China Sea situation and the improvement of bilateral relations,” it said.

  According to some accounts, China’s O&G development efforts are tied to a long-running island dispute between the two countries. Here’s Reuters again: 

  In 2012, Japan’s government angered Beijing by purchasing a disputed, uninhabited island chain in the East China Sea.

   

  Until then, Beijing had curtailed activities under a pact with Japan to jointly develop undersea resources in disputed areas.

   

  

  So, spiteful retailiation or legitimate exploration and development? We’ll let readers decide with the help of the following color from BBC on the history behind the Senkaku islands row.

  * *  *

  From BBC

  At the heart of the dispute are eight uninhabited islands and rocks in the East China Sea. They have a total area of about 7 sq km and lie north-east of Taiwan, east of the Chinese mainland and south-west of Japan’s southern-most prefecture, Okinawa. The islands are controlled by Japan.

   

  They matter because they are close to important shipping lanes, offer rich fishing grounds and lie near potential oil and gas reserves. They are also in a strategically significant position, amid rising competition between the US and China for military primacy in the Asia-Pacific region.

   

  

   

  Japan says it surveyed the islands for 10 years in the 19th Century and determined that they were uninhabited. On 14 January 1895 Japan erected a sovereignty marker and formally incorporated the islands into Japanese territory.

   

  After World War Two, Japan renounced claims to a number of territories and islands including Taiwan in the 1951 Treaty of San Francisco. These islands, however, came under US trusteeship and were returned to Japan in 1971 under the Okinawa reversion deal.

   

  Japan says China raised no objections to the San Francisco deal. And it says that it is only since the 1970s, when the issue of oil resources in the area emerged, that Chinese and Taiwanese authorities began pressing their claims.

  
  

   

  China says that the islands have been part of its territory since ancient times, serving as important fishing grounds administered by the province of Taiwan.

  

  

  

  

  

• Hoisington On Bond Market Misperceptions: "Secular Low In Treasury Yields Still To Come"

  Submitted by Hoisington Investment Management's Lacy Hunt via MauldinEconomics.com,

  Misperceptions Create Significant Bond Market Value

  From the cyclical monthly high in interest rates in the 1990-91 recession through June of this year, the 30-year Treasury bond yield has dropped from 9% to 3%. This massive decline in long rates was hardly smooth with nine significant backups. In these nine cases yields rose an average of 127 basis points, with the range from about 200 basis points to 60 basis points (Chart 1). The recent move from the monthly low in February has been modest by comparison. Importantly, this powerful 6 percentage point downward move in long-term Treasury rates was nearly identical to the decline in the rate of inflation as measured by the monthly year-over-year change in the Consumer Price Index which moved from just over 6% in 1990 to 0% today. Therefore, it was the backdrop of shifting inflationary circumstances that once again determined the trend in long-term Treasury bond yields.

  

  In almost all cases, including the most recent rise, the intermittent change in psychology that drove interest rates higher in the short run, occurred despite weakening inflation. There was, however, always a strong sentiment that the rise marked the end of the bull market, and a major trend reversal was taking place. This is also the case today.

  Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. These are:

  1. The recent downturn in economic activity will give way to improving conditions and even higher bond yields.
  2. Intensifying cost pressures will lead to higher inflation/yields.
  3. The inevitable normalization of the Federal Funds rate will work its way up along the yield curve causing long rates to rise.
  4. The bond market is in a bubble, and like all manias, it will eventually burst.

  Rebounding Economy and Higher Yields

  The most widely held view of these four misperceptions is that the poor performance of the U.S. economy thus far in 2015 is due to transitory factors. As those conditions fade, the economy will strengthen, sparking inflation and causing bond yields to move even higher. The premise is not compelling, as there is solid evidence of a persistent shift towards lower growth. Industrial output is expected to decline more in the second quarter than the first. This will be the only back-to-back decrease in industrial production since the recession ended in 2009 (Chart 2). Any significant economic acceleration is doubtful without participation from the economy’s highest value-added sector. To be sure, the economy recorded higher growth in the second quarter, but that was an easy comparison after nominal and real GDP both contracted in the first quarter.

  

  Adding to a weak manufacturing sector, other fundamentals continue to indicate that top- line growth will not accelerate further this year, and inflation will be contained. M2 year-over-year growth has slipped below the growth rates that prevailed at year-end. The turnover of that stock of money, or velocity, is showing a sharp deceleration. Presently M2 velocity is declining at a 3.5% annual rate, and there are signs that it may decline even faster. If growth in M2 or velocity subsides much further, then nominal GDP growth is unlikely to reach the Fed’s recently revised forecast of 2.6% this year (M*V=Nominal GDP).

  At year-end 2014 the Fed was forecasting nominal GDP growth to accelerate to 4.1% this year, compared with 3.7% and 4.6% actual increases in 2014 and 2013, respectively. In six months the Fed has once again been forced to admit it's error and has massively lowered its forecast of nominal growth to 2.6%. Additionally, the Fed formerly expected a 2.8% increase in real GDP and now anticipates only a 1.9% increase in 2015, down from 2.4% and 3.1% in 2014 and 2013, respectively. The inflation rate forecast was also lowered by 60 basis points.

  Transitory increases in long Treasury bond yields are not likely to be sustained in an environment of a pronounced downward trend in growth in both real and nominal GDP. However the expectation of lower long rates is also bolstered by the well-vetted economic theory of “the Wicksell effect” (Knut Wicksell 1851-1926).

  Wicksell suggested that when the market rate of interest exceeds the natural rate of interest funds are drained from income and spending to pay the financial obligations of debtors. Contrarily, these same monetary conditions support economic growth when the market rate of interest is below the natural rate of interest as funds flow from financial obligations into spending and income. The market rate of interest and the natural rate of interest must be very broad in order to capture the activities of all market participants. The Baa corporate bond yield, which is a proxy for a middle range borrowing risk, serves the purpose of reflecting the overall market rate of interest. The natural rate of interest can be captured by the broadest of all economic indicators, the growth rate of nominal GDP.

  In comparing these key rates it is evident that the Wicksell effect has become more of a constraint on growth this year. For instance, the Baa corporate bond yield averaged about 4.9% in the second quarter. This is a full 230 basis points greater than the gain in nominal GDP expected by the Fed for 2015. By comparison, the Baa yield was only 70 basis points above the year-over-year percent increase in nominal GDP in the first quarter.

  To explain the adverse impact on the economy today of a 4.8% Baa rate verses a nominal GDP growth rate of 2.6% consider a $1 million investment financed by an equal amount of debt. The investment provides income of $26,000 a year (growth rate of nominal GDP), but the debt servicing (i.e. the interest on Baa credit) is $48,000. This amounts to a drain of $22,000 per million. Historically the $1 million investment would, on average, add $2,500 to the annual income spending stream. Over the past eight decades, the Wicksell spread averaged a negative 25 basis points (Chart 3).

  

  Since 2007 however, the market rate of interest has been persistently above the natural rate, and we have experienced an extended period of subpar economic performance. Also, during these eight years the economy has been overloaded with debt as a percent of GDP and, unfortunately, too much of the wrong type of debt. The ratio of public and private debt moved even higher over the past six months suggesting that the Wicksell effect is likely to continue enfeebling monetary policy and restraining economic growth and inflation.

  Cost Push Inflation Means Higher Yields

  The second misperception is more subtle. The suggestion is that higher health care and/or wage costs will force inflation higher. It follows, therefore, that Treasury bond yields will rise as they are heavily influenced by inflationary expectations and conditions. Further, this higher inflation will cause the Fed to boost the federal funds rate.

  Some argue that health care insurance costs are projected to rise very sharply, with some companies indicating that premiums will need to rise more than 50% due to the Affordable Care Act. Even excluding the extreme increases in medical insurance costs, many major carriers have announced increases of 20% or more. Others argue that the six-year low in the unemployment rate will cause wage rates to accelerate.

  Four considerations cast doubt on these cost- push arguments. First, increases in costs for medical care, which has inelastic demand, force consumers to cut expenditures on discretionary goods with price elastic demand. Goods with inelastic demand do not have many substitutes while those with elastic demand have many substitutes. When an economy is experiencing limited top-line growth, as it is currently, the need to make substitute-spending preferences is particularly acute. Thus, discretionary consumer prices are likely to be forced lower to accommodate higher non-discretionary costs, leaving overall inflation largely unchanged.

  Second, alternative labor market measures indicate substantial slack remains and evidence is unconvincing that wage rates are currently rising to any significant degree. The U.S. Government Accountability Office (GAO) released a report that looks at the “contingent workforce” (Wall Street Journal, May 28, 2015). These are workers who are not full-time permanent employees. In the broadest sense, the GAO found these workers accounted for 40.4% of the workforce in 2010, up from 35.3% in 2006. The GAO found that this growth mainly results from an increase in permanent part-timers, a category that grew as employers reduced hours and hired fewer full-time workers. The GAO also said that the actual pay earned was nearly 50% less for a contingent worker than a person with a steady full time job. The process portrayed in the study undermines the validity of the unemployment rate as an indicator because a person is counted as employed if they work as little as one hour a month. Additionally there is an upward bias on average hourly earnings due to the difference in hours worked between full-time and contingent workers.

  Third, corporate profits and closely aligned productivity measures are more consistent with declining, rather than strengthening, wage increases. After peaking in the third quarter of 2013, profits after tax and adjusted for inventory gains/losses and over/under depreciation have fallen by 16% (Chart 4). Over the past four years, nonfarm business productivity increased at a mere 0.6% annual rate, the slowest pace since the early 1980s. A significant wage increase would cut substantially into already thin profits as top-line growth is decelerating, and the dollar hovers close to a 12.5 year high. Together the profits and productivity suggest that firms need to streamline operations, which would entail reducing, rather than expanding, employment costs.

  

  Fourth, experience indicates inflationary cycles do not start with rising cost pressures. Historically, inflationary cycles are characterized by “a money, price and wage spiral” and in that order. In other words, money growth must accelerate without an offsetting decline in the velocity of money. When this happens, aggregate demand pulls prices higher, which, in turn, leads to faster wage gains. The upturn leads to a spiral when the higher prices and wages are reinforced by another even faster growth in money not thwarted by velocity. Current trends in money and velocity are not consistent with this pattern and neither are prices and wages.

  Normalizing the Federal Funds Rate

  A third argument is that the Fed needs to normalize rates, and as they do this, yields will also rise along the curve. It is argued the Fed has held the federal funds rate at the zero bound for a long time with results that are questionable, if not detrimental, to economic growth. Proponents for this argue that the zero bound may have resulted in excessive speculation in stocks and other assets. This excess liquidity undoubtedly boosted returns in the stock market, but the impact on economic activity was not meaningful. At the same time, the zero bound and the three rounds of quantitative easing reduced income to middle and lower range households who hold the bulk of their investments in the fixed income markets. Thus, to reverse the Fed’s inadvertent widening of the income and wealth divide, the economy will function better with the federal funds rate in a more normal range. Also, by raising short-term rates now, the Fed will have room to lower them later if t he economy worsens.

  Normalization of the federal funds rate is widely accepted as a worthwhile objective. However, achieving normalization is not without its costs. In order to increase the federal funds rate, the Fed will raise the interest rate on excess reserves of the depository institutions (IOER). Also, the Fed will have to shrink the $2.5 trillion of excess reserves owned by the depository institutions by conducting reverse repurchase agreements. This is in addition to operations needed to accommodate shifts in excess reserves caused by fluctuations in operating factors, such as currency needs of the non- bank public, U.S. Treasury deposits at the Fed and Federal Reserve float. If increases in the IOER do not work effectively, the Fed will then need to sell outright from its portfolio of government securities, causing an even more significant impact out the yield curve. The Fed’s portfolio has close to a seven-year average maturity.

  A higher federal funds rate and reduced monetary base would place additional downward pressure on both money growth and velocity, serving to slow economic activity. Productivity of debt has a far more important influence on money velocity than interest rates. Nevertheless, higher interest rates would cause households and businesses to save more and spend less, which, in turn, would work to lower money velocity. Such a policy consequence is highly unwelcome since velocity fell to a six decade low in the first quarter and another drop clearly appears to have occurred in the second quarter.

  These various aspects of the Fed’s actions would, all other things being equal, serve to reduce liquidity to the commodity, stock and foreign exchange markets while either placing upward pressure on interest rates or making them higher than otherwise would be the case. Stock prices and commodity prices would be lower than they otherwise. In addition the dollar would be higher than otherwise would be the case deepening the deficit between imports and exports of goods and services.

  Increases in the federal funds rate would be negative for economic activity. As the Fed’s restraining actions become apparent, however, the Fed could easily be forced to lower the federal funds rate, making increases in market interest rates temporary.

  The predicament the Fed is in is one that could be anticipated based on the work of the late Robert K. Merton (1910-2003). Considered by many to be the father of modern day sociology, he was awarded the National Medal of Science in 1994 and authored many outstanding books and articles. He is best known for popularizing, if not coining, the term “unanticipated consequences” in a 1936 article. He also developed the “theory of the middle range”, which says undertaking a completely new policy should proceed in small steps in case significant unintended problems arise. As the Fed’s grand scale experimental policies illustrate, anticipating unintended consequences of untested policies is an impossible task. For that reason policy should be limited to conventional methods with known outcomes or by untested operations only when taken in small and easily reversible increments.

  Bond Market Bubble

  The final argument contends that the Treasury bond market is in a bubble, and like all manias, it will burst at some point. In The New Palgrave, Charles Kindleberger defined a bubble up as …" a sharp rise in the price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers". The aforementioned new buyers are more interested in profits from “trading the asset than its use or earnings capacity”. For Kindleberger the high and growing price is unjustified by fundamental considerations. In addition Kindelberger felt that the price gains were fed by ‘momentum’ investors who buy, usually with borrowed funds, for the sole purpose of selling to others at a higher price. For Kindleberger, a large discrepancy between the fundamental price and the market price reflected excessive debt increases. This condition is referred to as “overtrading”. At some point, perhaps after a prolonged period of time, astute investors will begin to recognize the gap between market and fundamental value. They will begin to sell assets financed by debt, or their creditors may see this gap and deny the speculators credit. Charles Kindleberger called this process “discredit”. For Kindleberger, the word discredit was designed to capture the process of removing some of the excess debt creation. The phase leads into the popping of the bubble and is called “revulsion”.

  The issue in determining whether or not a bubble exists is to determine what constitutes fundamental value. For stocks this is generally considered to be after-tax earnings, cash flow or some combination of the two and the discount rate to put these flows in present value terms. Most experts who have addressed this issue of economic fundamentals have confined their analysis to assets like stocks or real estate. In the Palgrave article Kindelberger did not specifically cover the case of bonds. We could not find discussions by well- recognized scholars that explicitly defined a Treasury bond value or a market bubble. The reason is that there is no need.

  To be consistent with well-established and thoroughly vetted theory, the economic value of long-term Treasury bonds is determined by the relationship between the nominal yield and inflationary expectations, or the real yield. To assess the existence of a Treasury bond bubble one must evaluate the existing real yield in relation to the historic pattern of real yields. If the current real yield is well above the long-term historic mean then the Treasury bond market is not in a bubble. However, if the current real yield is significantly below this mean, then the market is in a bubble. By this standard, the thirty-year Treasury bond is far from a bubble. In the past 145 years, the real long bond yield averaged 2.1%. At a recent nominal yield of 3.1% with a year over year increase in inflation of 0.1%, the real yield stands at 3%, 50% greater value than investors have, on average, earned over the past 145 years. Indeed, the real yield is virtually the same as in 1990 when the nominal bond yield was 9%. Contrary to the Treasury bond market being in a bubble, errant concerns about inflation or other matters have created significant value for this asset class.

  Conclusion

  In summary, economic theory and history do not suggest the secular low in inflation, or that its alter ego, Treasury bond yields, is at hand. The excessive debt burden, slow money growth, declining money velocity, the Wicksell effect and the high real rate of interest indicate that the fundamental elements are exerting downward, rather than upward, pressure on inflation. Inflation will not trough as long as the US economy continues to become even more indebted. While Treasury bond yields have repeatedly shown the ability to rise in response to a multitude of short-run concerns that fade in and out of the bond market on a regular basis, the secular low in Treasury bond yields is not likely to occur until inflation troughs and real yields are well below long-run mean values. We therefore continue to comfortably hold our long-held position in long-term Treasury securities.

  

  

  

  

  

• 15 Years After Land-Grabs, Mugabe Invites White Farmers Back To Zimbabwe

  File this one away in the “when populism backfires” folder. 

  A little over a month after announcing that the Zimbabwean dollar – which, you’re reminded, was phased out in 2009 after inflation rose modestly to 500 billion percent – would be demonetized and exchanged at a generous rate of $5 for every 175 quadrillion, Zimbabwe will for the first time rethink the sweeping land grabs which began in 2000 and subsequently crippled the country’s economy.

  Many Zimbabwean farmers who have stopped growing food in favor of “green gold” (tobacco) fear they will starve this winter after a severe drought and a generalized “lack of knowledge” left them with a subpar crop that fetched little at auction. Here’s more from Rueters: 

  Thousands of small-scale farmers in Zimbabwe fear they will be going hungry this winter after abandoning traditional staples like maize, sorghum and groundnuts for tobacco, a cash crop known locally in this southern African nation as “green gold”.

   

  For 15 years after Zimbabwe’s agriculture sector collapsed in the face of President Robert Mugabe’s seizure of white-owned farms to resettle landless blacks, the tobacco industry has been booming, with farmers funded by private firms to grow tobacco.

   

  But this switch, coupled with the worst regional drought in nearly a decade, has left Zimbabwe in a precarious food situation. Many farmers have complained of low prices as the season ends while buyers argue the quality of the crop was poor.

   

  
  

   

  The tobacco industry has become the country’s biggest export earner with over 88,000 growers registered with the tobacco regulatory body, the Tobacco Industry and Marketing Board, in the 2014/15 season, up from 52,000 in 2012.

   

  But the returns are often uncertain and many farmers have been left disappointed.

   

  Industry figures showed that at the end of the selling season this month farmers sold 188.5 million kgs worth $555 million, down 8.5 percent from a year ago when the crop was worth $654 million.

   

  “It was a disaster,” said David Muyambo, 35, a father of four, who earned $74 from tobacco sales this season after investing $1,200 in his crop. “I need to buy food for my family and I have no money.”

   

  Muyambo blames his failure on erratic rains, which decimated his crop, as well as his lack of knowledge on how to apply fertilizer, remove suckers and cure the crop.

   

  Muyambo said he will never farm tobacco again.

   

  With more farmers focused on tobacco, Zimbabwe’s harvest of maize, a staple food, dropped by 49 percent in the 2014/15 season, the government said, which is set to exacerbate food shortages in Zimbabwe, once the bread-basket of the region.

  Against this rather dreary backdrop, the government is beginning to reconsider its stance towards white farmers and will, according to The Telegraph, “give official permission for some whites to stay on their land.”

  Via The Telegraph:

  Zimbabwe’s government has for the first time suggested it may give official permission for some white farmers to stay on their land, 15 years after it sanctioned widespread land grabs that plummeted the country into an economic crisis.

   

  Douglas Mombeshora, the Zanu-PF Lands Minister, said provincial leaders had been asked to draw up a list of white farmers they wanted to stay on their farms deemed to be “of strategic economic importance”.

   

  “We have asked provinces to give us the names of white farmers they want to remain on farms so that we can give them security of tenure documents to enable them to plan their operations properly,” Mr Mombeshora said. 

   

  More than 4,000 white farmers lost their land after Mr Mugabe lost a referendum to the new Movement for Democratic Change party and, in a bid to regain popularity, authorised land grabs by disaffected war veterans.

   

  Today, fewer than 300 white farmers remain on portions of their original land holdings in Zimbabwe and many of the seized farms lie fallow, meaning the former Breadbasket of Africa has to import food to feed its population.

   

  Among remaining farmers who have been recommended for a reprieve of Mr Mugabe’s edict that whites can no longer own land in Zimbabwe is Elizabeth Mitchell, a poultry farmer who produces 100,000 day-old chicks each week. 

   

  

   

  And so once again we see that necessity (a food shortage) breeds invention (rethinking populist land grabs), but lest anyone should believe that Mugabe has done a complete 180, we’ll close with the following advice given to supporters at a recent Patriotic Front rally:

  “Don’t be too kind to white farmers. They can own industries and companies, or stay in apartments in our towns but they cannot own land. They must leave the land to blacks.” 

  

  

  

  

  

• Commodity Carnage Contagion Crushes Stocks & Bond Yields

  Summing up Mainstream media today…

   

  Where to start…

  Bonds – Good!

  

   

  Stocks – Bad!

  

   

  Commodities – Ugly!

  

  *  *  *

  Everything was red in equity index land today… Trannies worst day since January

  

   

  Stocks are all red for the week… Dow is down over 400 points from Monday's highs back below its 200DMA; S&P 500 cash is back below its 50DMA; and Russell 2000 broke below its 50 & 100DMA

  

   

  Financials have given up their earlier week gains (as rates flatten) and only builders remain green on the week…

  

   

  Leaving The Dow red for 2015…

  

   

  52-Week Lows are at their highest since 2014…

  

   

  On the week, the Treasury complex is seeing major flattening as the long-end collapses while short-end lifts on rate hike expectations…

  

   

  With 30Y retracing all "Greece is fixed" weakness…

  

   

  With 2s30s near 3 month flats…

  

   

  Maybe all that NIM hope is overprices after all…

  

   

  The US Dollar leaked lower on the day as EUR strengthened and cable weakened…

  

   

  Summing up th edetails across the FX space (courtesy of ForexLive)

  The dollar was mixed in trading today. It rose against the GBP and AUD, fell against the EUR NZD. and JPY, and was little changed vs the CAD and CHF.

   

  The cable was the big loser on the day and is closing near low levels after weak retail sales took some of the jubilance from thoughts of a quicker tightening.  BOE McCafferty did comment, however, that the BOE must be careful not to keeps rates too low for too long. EURGBP surged higher in trading today.

   

  In Canada, stronger than expected retail sales sent the USDCAD sharply lower, but oil price continued to fall  with WTI crude down 1.14% on the day at the close.  What was gained in the London morning session for the loonie (and after the release of the data) was taken all back by the close.

   

  The EURUSD rallied to new week highs (highest level since July 15th). The pair did find sellers against technical levels defined by the 50% retracement and the 100 day MA at the 1.1011 and 1.1000 respectively.

   

  Twenty-four hours after the RBNZ cut their rate by 25 basis points, the NZDUSD is ending the day up from 5 pm close at 0.6560 but off the London session highs at 0.6694. The pair is ending the NY session testing the 200 hour MA at the 0.6606 level.  Disappointment from not cutting 50 basis points sent the pair higher but lower rates are still expected between now and the end of the year.

  But that did nothing to support commodities…

  

   

  Copper now at 6 year lows

  

   

  And front-month crude getting close to cycle lows…

  

   

  *  *  *

  Scotiabank's Guy Haselmann provides some more ominous color…

  I believe the plunging of the commodity complex is telling us that the China economy could be imploding.  Problems stemming from China are spreading further into more sectors and markets (various high yield sectors, emerging markets, EM and commodity currencies).

   

  As I wrote in my note Tuesday (Too Much of Everything), Zero interest rates have contributed to over-production, pressuring consumer prices lower.  Certainly, borrowing in the energy sector contributed to the over-supply of oil and look what has happened in that sector.   Now, weakening demand from China is accelerating the decent in most commodities.  Budgets of EM supplier-countries and commodity exporters are being materially impacted.  

   

  As commodities fall, the FOMC says that inflation targets are harder to obtain, leading to a self-perpetuating  belief that continued cheap money is needed. 

   

  Yet, claims fell to the lowest level since 1973, housing is strong, and auto sales are back to almost 17mm units (etc).  Clearly, the Fed has gotten itself into a difficult position.   By not lifting-off and taking their medicine in 2014 – market imbalances today are now bigger and the consequences greater.

   

  China is unfolding as the most important story of 2015 for markets. Stay alert.   Long-dated US Treasuries remain attractive and good place to hid.

  *  *  *

  Charts: Bloomberg

  Bonus Chart: Protection costs are dramatically diverging between credit and stocks…

  

  As Bloomberg notes, the last time the VIX diverged from high-yield CDS this much was in August 2013, when investors were anticipating the Federal Reserve would start reducing its quantitative easing program. The equity volatility gauge jumped more than 70 percent in the next two months as the S&P 500 lost as much as 4.6 percent.

   

  Bonus Bonus Chart: The real fear index is the most complacent since before Lehman… (details on Implied Correlation here)

  

  

  

  

  

• The Hard Truth: For Retail Investors, The NYSE Is Always Out Of Service

  Submitted by Nanex,

  1. Charts of the Event.

  On July 8, 2015 at 11:32:57, trades and quotes stopped updating from the NYSE. Trading eventually resumed at 3:10pm.

  Timeline up to the halt.

  

  Trades from NY-ARCA (red) and NYSE (blue) when NYSE halted (note the disappearance of the blue dots).

  

  NYSE trades when NYSE halted. (This is the chart Stephen Colbert used on the The Late Show)

  

  NYSE trades when NYSE resumed.

  

  ---

   

  2. Does the NYSE matter? The Importance of NYSE's Quote.

  On a typical trading day, quotes from the NYSE set the NBBO (National Best Bid/Offer) more than 60% of the time – beating out 10 other exchanges. You would think that losing NYSE's quote would severely impact the Retail Investor's trading experience.

  

  Below is the same chart as above but on the day of the NYSE halt. Right at the open we can see there's a problem. Then NYSE's quote disappears, mostly replaced by Nasdaq.

  

  There is also this excellent study of how trades fared among different exchanges, which is worth reading. What they found: the NYSE has great executions compared to other exchanges.

  ---

   

  3. The Halt's Impact on Retail Investors: Experts and Spin.

  "Even though the NYSE floor is down, the NYSE Arca exchange is still operating.
  A retail investor who wants to trade Exxon will see no impact from the outage."

  James Angel, Georgetown business school finance professor to Business Insider

  The Street.com article below is representative of how most main stream news media were spinning the NYSE halt story: Retail was having a rough day! It's hard to fault them, given how important NYSE's quote is for NYSE stocks.

  

  Later in the day, when no evidence surfaced of Retail Investors having trouble, a few began questioning the news spin.

  

  When it was clear that Retail Investors weren't impacted, the search was on for what was behind the miracle "success story".

  

  Without any evidence or a basic understand of retail order execution, some went so far as to claim stock market fragmentation saved the day. (We think Pisani got it dead wrong).

  

  Naturally, Modern Markets, the High Frequency Trading (HFT) Lobbyist, was quick to claim another benefit of HFT!
  They saved the day! Naturally. For a good look at how far lobbyists will go to spin a story (and probably more disturbing, how far a major network will let them), please watch this short video.

  

  ---

   

  4. The Hard Truth: To Retail Investors, the NYSE is Always Dark.

  A few of those who really understood where retail stock orders execute spoke the truth:

  

  But wait a minute, can Chris Nagy be right? After all, we know that the NYSE sets the best prices more than 60% of the time. Without NYSE's best prices, there had to be some harm, right?

  Retail orders execute on the NYSE, right?

  Well, in a word: NO.

  What the news media conveniently (or intentionally) forgot to ask and investigate:

  What really happens to the Retail Investor order?

  Answering part of that question is a simple matter of searching SEC required 606 reports from each retail broker.

  The following list is by no means complete. For brokers not listed, simply Google "BrokerName 606 Report".

  Here's what we found:

  1. Schwab Doesn't Route to NYSE

  

  2. Vanguard Brokerage Doesn't Route to NYSE

  

  3. E*Trade Doesn't Route to NYSE

  

  4. Fidelity Retail Brokerage Doesn't Route to NYSE

  

  5. Scottrade Doesn't Route to NYSE

  

  6. Credit Suisse (Private Client Services no less) Doesn't Route to NYSE (or anywhere else!)

  

  7. Morgan Stanley Wealth Management Doesn't Route to NYSE

  

  8. Edward Jones Doesn't Route to NYSE

  

  9. Northern Trust Doesn't Route to NYSE

  

  10. Wells Fargo Doesn't Route to NYSE

  

  11. Lightspeed Doesn't Route to NYSE

  

  12. TradeKing Doesn't Route to NYSE

  

  13. Citigroup Doesn't Route to NYSE (Note: Citi isn't retail, but as they own ATD we found this very interesting)

  

  Now you know why Retail Investors didn't have a problem with the NYSE being out of service – retail orders rarely route to the NYSE.

  For Retail Investors, the NYSE is ALWAYS OUT OF SERVICE.

  Which leads to the inevitable question..

  ---

   

  5. Where Do Retail Investor Orders Go?

  The simple answer: to the highest contracted bidder. Stock "wholesalers" or internalizers like Citadel or Knight pay retail brokers lots of cash to execute retail trades, essentially creating a "third market". Why? Because in a high frequency trading world, where stock prices have never been more fuzzy to the end user, but crystal clear to those that spend enormous sums on colocation and PhD employees, it's never been easier to print money (not unlike Bernie Madoff's scheme in the 90's). But that is the subject of a much, much longer story. Someone should write a book.

  In the meantime, we strongly encourage you to read this fabulous guide, written by an industry insider. This guide shines much needed light on how Wall Street treats (games) each type of Retail Investor order.

  

  

  

  

  

• US Recession Imminent – World Trade Slumps By Most Since Financial Crisis

  As goes the world, so goes America (according to 30 years of historical data), and so when world trade volumes drop over 2% (the biggest drop since 2009) in the last six months to the weakest since June 2014, the "US recession imminent" canary in the coalmine is drawing her last breath…

   

  

   

  As Wolf Street's Wolf Richter adds, this isn’t stagnation or sluggish growth. This is the steepest and longest decline in world trade since the Financial Crisis. Unless a miracle happened in June, and miracles are becoming exceedingly scarce in this sector, world trade will have experienced its first back-to-back quarterly contraction since 2009.

  Both of the measures above track import and export volumes. As volumes have been skidding, new shipping capacity has been bursting on the scene in what has become a brutal fight for market share [read… Container Carriers Wage Price War to Form Global Shipping Oligopoly].

  Hence pricing per unit, in US dollars, has plunged 14% since May 2014, and nearly 20% since the peak in March 2011. For the months of March, April, and May, the unit price index has hit levels not seen since mid-2009.

  

  World trade isn’t down for just one month, or just one region. It wasn’t bad weather or an election somewhere or whatever. The swoon has now lasted five months. In addition, the CPB decorated its report with sharp downward revisions of the prior months. And it isn’t limited to just one region. The report explains:

  The decline was widespread, import and export volumes decreasing in most regions and countries, both advanced and emerging. Import and export growth turned heavily negative in Japan. Among emerging economies, Central and Eastern Europe was one of the worst performers.

  Given these trends, the crummy performance of our heavily internationalized revenue-challenged corporate heroes is starting to make sense: it’s tough out there.

  But not just in the rest of the world. At first we thought it might have been a blip, a short-term thing. Read… Americans’ Economic Confidence Gets Whacked

  

  

  

  

  

• What's The Real Reason The Fed Is Raising Rates? (Hint: It's Not Employment)

  Submitted by Roger Thomas via ValueWalk.com,

  Sometime this fall, the Federal Reserve will begin a new tightening cycle.

  Publicly, Federal Reserve officials appear to be confident that the American labor market may be overheating or that inflation may be on the way in.

  Is this the case?

  In looking at Employment, Industrial Production, Consumer Prices, Capacity Utilization, Retail Sales, and the West Texas Intermediate price of oil, there's no evidence that the Fed should raise rates.

  What is the Fed worried about?

  Probably, and almost exclusively, it's financial asset price appreciation.

  Here's a review.

  Employment

  A picture of employment growth against the Federal Reserve's target interest rate follows.  Interestingly, in past tightening cycles, employment growth was either accelerating or flat.

  That's not the case this time around.  Employment growth is decelerating, and has been decelerating since February 2015.

  

  Industrial Production

  A very similar story to Employment is present in the Industrial Production picture.  Except for one instance, Industrial Production growth is either accelerating or flat when the Fed raises rates.

  That's not the case this time around.

  

  Consumer Prices

  Here's the Consumer Price picture.

  As with employment, the Fed almost always raises rates when inflation is accelerating.

  That's not the case this time.

  

  Capacity Utilization

  Capacity Utilization has a very similar story to Industrial Production.

  

  Price of Oil

  Here's the oil price picture.

  A less interesting story emerges here, probably because, of the indicators mentioned here, oil is of least policy value.

  

  Retail Sales

   

  As with the other economic indicators already mentioned, a tightening cycle this fall would be quite odd when looking at Retail Sales growth.

  

   

  Summing Up the Non-Causes

  As indicated, it's probably not the real economy behind the Fed's thinking.

  *  *  *

  Here's what's really concerning Fed officials.

  Equity Values

  It's equity values that has the Fed concerned.

  The Fed sees it's ultra-low monetary policy as having been incredibly stimulative to financial assets.  And, they don't want another technology bubble.

  So, to avoid a technology bubble, now's the time to start raising rates.

  Since the last time the Fed started a tightening cycle, the S&P 500 is up 62%, about where the mid-90s experience of 63% was.  It's well short of the +191% in the late90s/early 2000s equity markets produced.  It's also better than the -21% experienced in the mid-2000s.

  

  Interestingly, the P/E ratio confirms a similar story.

  In looking at the Shiller P/E ratio, perhaps a better rule than the Taylor rule to predict Fed tightening moves today is the P/E ratio rather than inflation and unemployment.  Just think about it.

  It's an interesting experiment for the Fed this time around, being concerned about the financial economy more than the real economy.

  

  Fed Conclusion

  Overall, although Federal Reserve officials publicly claim that the reason for impending rate hikes is that the American economy is doing well, there's not a lot of evidence, at least based upon prior tightening cycles, that it's the real economy the Fed is worried about.

  Rather, the pending beginning of the Fed's rate hiking season likely stems almost exclusively from concern about financial markets.

  Perhaps unsurprisingly, the Fed doesn't want another technology-type bubble (interesting that the Fed thinks it knows the intrinsic value of stocks better than the market).  At least, that's what the data appear to suggest.

  

  

  

  

  

• A Stunning Look At California's Historic Drought – From The Air

  "Ugly brown rings where waves used to lap at the shore. Dry docks lying on desiccated silt. Barren boat ramps. Trickles of water." Those are just some of the disturbing images California's Department of Water Resources team saw in an aerial tour of Northern California's Folsom Lake, Lake Oroville and Shasta reservoirs released this week…

  

   

  The dramatic aerial views timelapsed from just a year ago show the level of devastation already… and it's not about to get any better…

   

  Click image below for interactive gallery…

  

   

  Source: SFGate.com

  

  

  

  

  

• Amazon Just Became Bigger Than Walmart: Here's Why

  MThe moment everyone has been waiting for has finally arrived, by which of course, we mean the moment when the market cap of AMZN would finally surpass Wal-mart.

  Just after 4pm Jeff Bezos’ Amazon reported number that were quite impressive at first blush. And at second blush as well. Among these: a whopping blow out beat on the topline of $23.2 billion in revenue, an increase of 27% from a year ago, and far above the $22.4 billion expected, which in turn resulted in Net income of $92 million, or EPS of $0.19. The street was expecting a loss of $0.14 per share.

  In terms of where the bulk of the growth and profitability came from, one word, or rather three letters: AWS (Amazon Web Services), also known as the “cloud”, whose net sales soared by 81% Y/Y to $1.8 billion generating a 21.4% operating margin and net income of $391 million up from $77 million a year ago.

  And while the quarter was good especially for AMZN the “web services” company, it was AMZN’s forecast for the future that was even more impressive: 

  The company now expects net sales to be between $23.3 billion and $25.5 billion, or to grow between 13% and 24% compared with third quarter 2014.  It also expects operating income (loss) is expected to be between $(480) million and $70 million, compared to $(544) million in third quarter 2014, although if the current quarter is any indicatiton this is some rather serious sandbagging.

  But words aside: here, in three charts is what happened, with the company that now employs a record 183,000 people:

  Worldwide net sales vs total Employees:

  

   

  Q2 operating and net income in context. Clearly the quarter was an outlier – the only question is why and how?

  

   

  And finally LTM Free Cash Flow. It appears Bezos does indeed have quite a bit FCF leverage if and when he wants it.

  

   

  Again our question: why convert AMZN from a growth to a free cash flow model now: the last time the company tried this it ended up being quite disappointed.

  For now, however, the algos love it, the shorts hate it and are scrambling to cover, and the result is an AMZN whose market cap has just jumped by over $40 billion to a record $268 billion.

  And, yes, It is now far bigger than Walmart.

  

  

  

  

  

  

• The Ashley Madison Data Breach Explained

  Always a silver lining…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Is The Echo Housing Bubble About To Burst?

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  Echo bubbles aren't followed by a third bubble.

  Speculative bubbles that burst are often followed by an echo bubble, as many participants continue to believe that the crash was only a temporary setback.

  The U.S. housing market is experiencing a classic echo bubble. Exhibit A is the Case-Shiller Housing Index for the San Francisco region, which has surged back to levels reached at the top of the first bubble:

  

  Exhibit B is the Case-Shiller 20 City Housing Index, which has notched a classic Fibonacci 62% retrace of the first bubble's decline.

  

  Several things pop out of the Case-Shiller San Francisco chart. One is the symmetry of the two stages of the initial housing bubble: the first leg rose 80% from 1997 to 2001, and the second leg also rose about 80% from 2003 to 2007.

  There is also a time symmetry, as each leg took about five years.

  The echo bubble has now inflated for roughly the same time period, and has almost fully retraced the 45% decline from the 2007 peak. Though recent buyers may hope this bubble will be different from all previous bubbles (i.e. it will never pop), history suggests the echo bubble will be fully retraced in a sharp decline lasting about two to three years, in rough symmetry with the collapse of the first housing bubble 2008-2010.

  The broader 20-city Case-Shiller Index reflects the same time symmetry: the echo bubble and the initial housing bubble both took about the same length of time to reach their zenith. Once again, we can anticipate a symmetrical decline that roughly parallels the 33% drop from 2007 to 2009.

  There is one key difference between the first bubble and the echo bubble: echo bubbles aren't followed by a third bubble. Markets often give second-chances, but they rarely offer third-chances.

  

  

  

  

  

• Turkey Permits U.S. To Use Its Airbase For Air Strikes Against Syria

  Earlier we reported that in an apparent retaliation against Monday’s alleged suicide bombing and today’s follow up killing of a Turkish soldier on the border with Syria, the Turkish army launched what under normal conditions would be deemed a land invasion of Turkey when four of its tanks entered Syrian territory. Rhetorically, we asked in “one may wonder if NATO-member Turkey’s land invasion of Syria, which many have said was long overdue following months of rhetoric and belligerent posturing, under the pretext of ISIS “liberation”, has just begun.”

  A following report from the WSJ largely answers our question: citing unnamed defense officials, WSJ reports that after months of negotiations, “Turkey has agreed to let the U.S. military carry out airstrikes against Islamic State fighters from a U.S. air base near the Syrian border.”

  This is the same authoritarian president who has repeatedly cracked down against protesters using various less than media friendly means, and one whom Obama has lashed out at diplomatically. It appears that when pursuing grander visions, Obama is will to forgive anyone’s humanitarian record, or lack thereof, and do anything to achieve America’s real politik ambitions. 

  Like in this case: the deal, agreed to by President Barack Obama and Turkish President Recep Tayyip Erdogan, will allow the U.S. to use Incirlik Air Base in eastern Turkey to send manned and unmanned planes to attack Islamic State fighters, the officials said. The two leaders spoke on Wednesday, the White House said.

  Use of Incirlik is part of a broader deal between the U.S. and Turkey to deepen their cooperation in the fight against Islamic State that is growing increasingly perilous for Turkey.

   

  On Thursday, Islamic State forces in Syria and the Turkish military engaged in a deadly cross-border battle that left at least one Turkish officer dead.

   

  “They’re in a counter-ISIL fight right across the border,” said one defense official, using one of the acronyms for Islamic State, which is also known as ISIS.

  And with that the northern wing of the anti-Syria, pardon anti-ISIS campaign is complete, with the US covering air sorties while Turkey will use NATO tanks to secure the ground and slowly but surely, together with the eastern front where the US will soon deplay troops, close in on Damascus to eliminate the biggest Syrian ISIS threat of them all: president Assad and his (and the Kremlin’s) stern anti-Qatar pipeline position.

  

  

  

  

  

• The Hunt For The "Mystery" Gold "Bear Raid" Leader Begins

  In the immediate aftermath of Sunday night’s massive gold slam, which was oddly reminiscent of the great silver crash of 2011 when on May 1 just around 6:25pm, silver plunged by 15%, from $48 to $42 with no news or catalyst…

  

   

  … marking the all time high price of silver in the current precious metals cycle (that particular ‘malicious seller’ has never been identified) the promptly arranged narrative was that because the gold crash took place in the span of 30 seconds just before Chinese stocks opened and broke the gold futures market not once but twice, that it has to be a China-based seller with Reuters taking the lead and quickly pointing the finger with an article titled “Gold hits five-year low, under $1,100 on Chinese selling.”

  

  Ironically, the very same Reuters last night admitted that it had been wrong and that it was in fact: “New York sell orders in thin trade” that triggered the “Shanghai gold rout”:

  In early Asian trading hours on Monday, when typically only tens of contracts of gold are traded, investors dumped more than $500 million worth of bullion in New York in four seconds, triggering the market’s biggest rout in years.

   

  The sell-off began when one or more massive sell orders hit the price of gold on the CME Group’s Comex futures in New York a tenth of a second after 9:29 a.m. in Shanghai, triggering turnover of almost 5,000 lots of gold in a blink of an eye. That equates to 13 tonnes of gold, more than typically trades in hours during this time of day, and the selling knocked the price almost $20 to $1,100 per ounce during those four seconds. It marked the first leg of a dramatic 60-second sell-off that saw prices sink more than 4 percent to five-year lows.

  And just like that the narrative shifts again: instead of a Chinese seller, the real culprit appears to have been a US-based entity masking as a Chinese trader, around which the media then conveniently built a further goal-seeked “story” in which the Sunday night selling (by a US entity now) was the result of a PBOC announcement that its gold holdings had risen to “only” 1600 tons… however the problem is that all this had been known since Friday morning.

  So, fast forward to this morning when in yet another Reuters piece, we “find” that the narrative has shifted once more and that now, “traders from Hong Kong to New York are pointing the finger at others for being behind the move while struggling to unmask the mystery sellers.”

  In other words: the “hunt” for the great gold “bear raid leader” has begun.

  Singapore-based futures brokerage Phillip Futures declared “indiscriminate selling by Asian hedge funds at the stroke of the market’s open in Shanghai” as the chief cause of the price fall in a letter to clients.

   

  But the most well known Chinese funds denied involvement, and as futures trading is anonymous, dealers may never know who was buying and selling during those crucial seconds.

   

  Such details often only become available if regulators take action, and amid the regulatory scrutiny following China’s recent equity market tumbles, it’s unlikely any trader or fund will be eager to take credit for setting off another avalanche.

   

  The fact that the selloff occurred while Japan’s markets were closed for a holiday and U.S. and European traders remained on weekend leave served to implicate China-based dealers in the eyes of some market participants.

  At this point a Reuters source even dared to use the “M” word:

  “That move was aggressive manipulation. Somebody clearly wanted the market lower and timed it very well,” said a gold trader at a bank in Hong Kong, who saw parallels with the way funds have been linked to swings in copper.

  Of course it was, but instead of focusing on what truly matters let’s go chasing for red, literally, herrings…

  Chinese funds such as Shanghai Chaos Investment Co and Zhejiang Dunhe Investment Co were, according to traders, behind falls in copper, one in March last year when the metal fell more than 8 percent in three days, and again in January this year when copper slid almost 8 percent in two days.

  … herrings which however had nothing to do with the actual selling:

  Sources familiar with both Zhejiang Dunhe and Chaos, and at similar outfits, say that while China’s status as the dominant copper consumer left that market vulnerable to potential influence, China’s traders have no such sway over bullion.

   

  “Honestly, Chinese hedge funds are not as experienced as the overseas veterans and gold is more connected to U.S. dollar movement and well-dominated by Wall Street,” said a trader with a Shanghai hedge fund.

  Then, inexplicably, more truth:

  A London-based trader with an investment bank agreed the lead seller might not be from Asia. “The selling was on Comex and could also be a non-Chinese fund just executing in what they thought was an illiquid timezone to get the biggest move,” the trader said.

  Others got close to admitting what happened, but were stopped just short, instead falling back to what had already been set up as the false narrative:

  Vishnu Varathan, senior economist at Mizuho Bank, added “there’s a good real money presence in centres like Hong Kong and Singapore. But of course, the inside people who knew where the trades were executed probably have their reason for citing Chinese hedge funds, but I don’t think they were alone in this trade.”

   

  “I think one of the triggers was some disappointment with the amount of the buildup in China’s gold reserves so in terms of the proximity of that particular trigger and the markets that were open there was some involvement, I’m sure, but it may not be the full story,” Varathan said.

  For the record, here is what we said moments after the “bear raid” took place:

  Once again, as in February 2014 and on various prior cases, the fact that someone meant to take out the entire bid stack reveals that this was not a normal order and price discovery was the last thing on the seller’s mind, but an intentional HFT-induced slam with one purpose: force the sell stops.

   

  So what caused it?

   

  The answer is probably irrelevant: it could be another HFT-orchestrated smash a la February 2014, or it could be the BIS’ gold and FX trading desk under Benoit Gilson, or it could be just a massive Chinese commodity financing deal unwind as we schematically showed last March it could be simply Citigroup, which as we showed earlier this month has now captured the precious metals market via derivatives.

  We then added: “we won’t know for sure until the CME once again explains who violated exchange rules with last night’s massive orders.“

  This is the same CME which took 18 months to admit that the almost identical market halting gold flash crash from January 6, 2014 was the result of potentially premeditated “flawed” algo trading which “resulted in a disruptive and rapid price movement in the February 2014 Gold Futures market and prompted a Velocity Logic event.“

  And, anticipating precisely today’s latest development in the great gold crash story, namely the pursuit of the perpetrators we also added: “there are many who do want to know the reason for the gold crash, which just like in January 2014 had a clear algorithmic liquidation component to it. Which means that until the CME opines on precisely who and what caused the latest gold market break, we won’t know with any certainty. That doesn’t mean that some won’t try to “explain” it.'”

  Such as Reuters, on several occasions.

  But the real answer, which almost certainly once again points to the trading desk of one Benoit Gilson in Basel, will surely never be revealed. Even in the January 2014 case, the CME stopped short of actually identifying precisely who had oredered the gold collapse instead leaving it broad as follows: “this failure resulted in unusually large and atypical trading activity by several of the Firm’s customers.”

  Which ones? Or perhaps the $64,000 answer to that question is what the central banks and the BIS, and hence the CME, will guard at all costs.

  Finally, as we also noted previously, “while the actual selling reason was irrelevant, the target was clear: to breach the $1080 gold price which also happens to be the multi-decade channel support level.“

  So far this has almost succeeded, with gold repeatedly sliding just shy of $1080 but never actually breaching it. We expect this too support level to be taken out as what is now clear and accepted manipulation continues, which in retrospect, will merely afford those who buy gold for its true practical value, as insurance against a systemic collapse which is pretty close to where the Chinese central planners find themselves right now not to mention the imploding European monetary union, to buy more for the same paper price.

  As for the “great”, and greatly misdirecting, hunt for the “bear raid” leader, one which will never reveal the true culprit, bring it on – we can always do with some entertainment meant to distract the masses. In fact, we would not be at all surprised if some Indian trader out of his parent’s basement in a London suburb ends up going to prison for this while those guilty of chronic, constant manipulation continue to walk free…

  

  

  

  

  

  

  

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• 11 Signs That America Has Already Gone Down The Toilet

  Submitted by Michael Snyder via The End of The American Dream blog,

  Just when you think that the depravity of the United States cannot possibly get any worse, something else comes along to surprise us.  Many of the things that you are about to read about in this article are incredibly disturbing, but it is important that we face the truth about how far this nation has fallen.  There are times when I will be having a conversation with someone else about the state of our country, and the other person will say something like this: “Wow – America is really going down the toilet.”  At one time, I would have totally agreed with that.  But at this point I would have to say that we have already circled the bowl and have made it all the way through to the other end.  Our society is absolutely addicted to entertainment (most of which is utter trash), tens of millions of us are hooked on drugs (both legal and illegal), and we have murdered more than 56 million of our own babies.  Our financial system is consumed with greed, we treat our military veterans like human garbage, and most of our “leaders” in Washington D.C. are deeply corrupt.  In America today, 64 percent of all men view pornography at least once per month, it is estimated that one out of every four girls is sexually abused before they become adults, and we have the highest teenage pregnancy rate in the entire industrialized world.  We like to think that we are an “example” to the rest of the world, but the only example that we are setting is a bad one.  The following are 11 signs that America has already gone down the toilet…

  #1 All over the United States, the body parts of aborted babies are being bought and sold, and the U.S. government gives the organization at the heart of this sick “industry” hundreds of millions of dollars a year.  This week, another incredibly shocking undercover video has been released which has given us even more evidence of what Planned Parenthood is really up to…

  The most recent video shows a luncheon conversation with Dr. Mary Gatter, who currently serves as president of Planned Parenthood’s Medical Directors’ Council and Medical Director of Planned Parenthood’s Pasadena abortion clinic.

   

  In the video, Gatter is heard haggling over the price she will charge for intact fetal body parts and is concerned that she will be “low-balled.” She asks for at least $75 per specimen, but wants to see what other Planned Parenthood abortionists are getting to make sure she gets similar compensation so she can buy an expensive sports car.

   

  “It’s been years since I’ve talked about compensation, so let me just figure out what others are getting and if this is in the ballpark, that’s fine. If it’s still low, we can bump it up. I want a Lamborghini,” Gatter laughed.

  This is wickedness at a level that is almost unspeakable, and it is being bankrolled by the U.S. government.

  Let’s hope that “I want a Lamborghini” gets plastered all over the Internet hundreds of millions of times.  I encourage everyone to get on Facebook and Twitter and start blasting out messages like this one to everyone that they know…

  "I want a Lamborghini" — don't mind those aborted babies over there. #PPSellsBabyParts pic.twitter.com/eyxa2nMYym

  — Charmaine (@CharmaineYoest) July 21, 2015

   

  If we cannot even stop the U.S. government from funding this kind of evil, what possible hope is there for the future of this nation?

  According to WND, some members of this “industry” even receive monetary bonuses “based on the baby parts they harvest”…

  StemExpress, which is run by Planned Parenthood abortion doctor Ronald Berman, offers its procurement technicians bonuses based on the baby parts they harvest, according to the Center for Medical Progress. Larger bonuses are offered for more valuable body parts, classified as “Category A” parts, while smaller bonuses are given for “Category C” parts.

  This alone is enough to prove that America has gone all the way down the toilet.  But I will continue with the list…

  #2 Just a few days ago, we learned that hackers had stolen personal information from 37 million users on an adultery website known as Ashley Madison…

  A hacking insider has told Sky News he thinks the people threatening to release personal details of users of an adultery website are bluffing and using the publicity as advertising to sell the data to the highest bidder.

   

  Hackers calling themselves Impact Team have stolen and leaked data from some of the Ashley Madison website’s 37 million users and are threatening to publish more.

  For now the group has released just 40MB of data, including some credit card details and several documents about its parent company Avid Life Media (ALM), it is reported.

  The big story here is not the hacking.

  Rather, the big story is the fact that 37 million of us have signed up to participate on a website that facilitates adultery.

  #3 Rates of violent crime are increasing by double digit percentages in many major U.S. cities in 2015, and some of the crimes being committed are almost too horrible to talk about.  Just consider the following example which comes from the Daily Mail…

  A 22-year-old man and his 21-year-old girlfriend were walking along McNichols Road near Birwood Street on Thursday around 11:30pm when a group of three to six men approached them in the well-lit area, WWJ reported.

   

  The couple was allegedly forced behind a nearby business, where the six men robbed and stripped them of their clothes.

   

  Police say the violent men took turns sexually assaulting the woman and when the attack ended, the victims ran nude to a nearby liquor store for help.

   

  Another couple was attacked just a few hours later at 2:40am when a 21-year-old man and his 19-year-old girlfriend were walking in the area of McNichols Road and Pierson Street.

   

  Four men ordered them to the ground and then took took turns sexually assaulting the woman, forcing her boyfriend to watch, WWJ reported.

  Incredibly, these gang rapes barely made a blip on the news here in the United States.  There are so many similar crimes taking place all around us that there is nothing really “unusual” about these horrific rapes.

  #4 Under the Obama administration, our federal government has become absolutely obsessed with political correctness and is spending money in some of the most bizarre ways imaginable.  For instance, the feds recently spent $125,000 “to study adjectives that could be perceived as sexist or racist“.

  #5 Speaking of pouring money down the toilet, the Obamaphone program is a perfect example.  It turns out that all you have to do to get a free cellphone from the federal government is to show them someone else’s food stamp card…

  The 2014 CBS4 investigation showed repeated instances of fraudulent activity and waste in the Lifeline program in Denver. It’s an FCC administered program designed to provide free monthly cellphone service to the needy so they can have cellphone service allowing them to seek employment or call for emergency help if needed. Recipients are required to show official documentation like Medicaid, housing assistance or food stamp cards verifying their low income status in order to receive the free phone service.

   

  But last year a vendor in Denver working under the FCC program had employees who volunteered to use someone else’s food stamp card to secure a free phone and service for a CBS4 producer who was not eligible for the program.

   

  Vendors typically receive $3 for every phone they are able to give out. In other cases, vendors said a CBS4 producer could simply show someone else’s electronics benefit card in order to secure a free phone and service.

  #6 Meanwhile, the government doesn’t even want to talk to normal, hard working citizens that just need a few questions answered.  According to a report that was just released, the IRS hung up on 8.8 million taxpayers that called in looking for help during this most recent tax season.

  #7 The federal government has made it exceedingly difficult for law-abiding people to immigrate to this nation legally, but meanwhile they have left our borders completely wide open and have actively encouraged people to immigrate illegally.  As a result, large numbers of criminals, drug dealers, gang members and welfare parasites have come pouring in.  According to one recent report, 2.5 million illegal immigrants have entered this country while Barack Obama has been in the White House…

  A new report estimates that 2.5 million illegal immigrants have entered the United States since Barack Obama took office in 2009.

   

  The Center for Immigration Studies released a study Monday citing data from the Center for Migration Studies, Pew Research Center and the Census Bureau that indicates 400,000 illegal immigrants on average have entered the country annually since 2009.

   

  From the middle of 2013 to May 2015 alone, 790,000 illegals have come into the United States. These undocumented individuals entered the country after President Obama unveiled a controversial executive order in 2012 to stop deporting young illegal immigrants who entered the country as children.

  And honestly, that 2.5 million number is probably on the low side.  These illegal immigrants are committing some of the most horrible crimes imaginable, and if you doubt this, just read this article.

  #8 Our society is being transformed into what I like to call “a Big Brother police state control grid”.  Just a few days ago, we learned of another example of this phenomenon.  The following comes from the New York Post…

  A key part of President Obama’s legacy will be the fed’s unprecedented collection of sensitive data on Americans by race. The government is prying into our most personal information at the most local levels, all for the purpose of “racial and economic justice.”

   

  Unbeknown to most Americans, Obama’s racial bean counters are furiously mining data on their health, home loans, credit cards, places of work, neighborhoods, even how their kids are disciplined in school — all to document “inequalities” between minorities and whites.

  What is truly sad is that so few Americans are actually upset that virtually everything we do is being watched, tracked and monitored.  For much more on all of this, please see this article.

  #9 Just recently, I authored a piece which railed about the fact that the average American citizen spends more than 10 hours a day plugged in to some form of media.  Many of us become extremely anxious if something is not playing at least in the background.  We spend endless hours watching television, listening to the radio, going to the movies, playing video games, messing with our smartphones and surfing the Internet.  Sadly, what most people don’t realize is that more than 90 percent of the “programming” that is being continually pumped into our brains through these various media outlets is controlled by just six absolutely enormous media corporations.

  #10 At the same time that the elite are endlessly pumping their twisted messages into all of our minds, they are becoming increasingly obsessed with controlling what the rest of us say.  In one recent article, I explained how support for “hate speech laws” in America is rapidly growing.  Today, 51 percent of all Democrats support these kinds of laws, and it is only a matter of time before liberal politicians start pushing really hard for the same kind of hate speech laws that have already been implemented in Europe and Canada.

  #11 On top of everything else, we have been stealing more than 100 million dollars an hour from future generations of Americans since Barack Obama entered the White House.

  Let that sink in for a moment.

  If someone were to write a movie script about the theft of 100 million dollars from a major financial institution, nobody would ever actually want to make that movie because such an amount would be too hard to believe.

  But this has actually been happening every single hour of every single day while Obama has been in power.

  In a frenzy of insatiable greed, we have been taking trillions of dollars that belong to our children and our grandchildren and spending it ourselves.  When you break it down, it comes to more than 100 million dollars every single hour of every single day.  This is a crime of unimaginable proportions, and if we lived in a just society a whole bunch of our “top politicians” would be going to prison for this.

  I could keep going, but I will stop for today.

  

  

  

  

  

• Obama's Minimum Wage Utopia Just Hit A Brick Wall

  Who could have possibly seen this coming? Almost three years we first detailed how America has become an entitlement nation where "work is punished." It appears President Obama is about to discover this first hand as his populist 'raise the minimum wage' strategy is showing yet another major unintended consequence. On the same day as New York acts to mandate a $15 minimum wage for fast food workers, Seattle's $15 minimum wage law – which is supposed to lift workers out of poverty and off public assistance – has hit a snag. As Fox News reports, evidence is surfacing that some workers are asking their bosses for fewer hours as their wages rise – in a bid to keep overall income down so they don’t lose public subsidies for things like food, child care and rent. So not only is work 'punished' it is now 'disinentivized by mandate' as part-time America toils amid ever-rising costs of living.

   

  As we previously explained,

  This isthe painful reality in America: for increasingly more it is now more lucrative – in the form of actual disposable income – to sit, do nothing, and collect various welfare entitlements, than to work.

   

  This is graphically, and very painfully confirmed, in the below chart from Gary Alexander, Secretary of Public Welfare, Commonwealth of Pennsylvania (a state best known for its broke capital Harrisburg). As quantitied, and explained by Alexander, "the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

   

  

   

  We realize that this is a painful topic in a country in which the issue of welfare benefits, and cutting (or not) the spending side of the fiscal cliff, have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for most Americans who find themselves in a comparable situation: either being on the left side of minimum US wage, and relying on benefits, or move to the right side at far greater personal investment of work, and energy, and… have the same disposable income at the end of the day.

  And so, as Fox News reports, it is no surprise that the sudden gains in income from a government-mandated $15 minimum wage would tip some over the edge of their handouts entitlement… and thus dicincentize work altogether…

  Seattle’s $15 minimum wage law is supposed to lift workers out of poverty and move them off public assistance. But there may be a hitch in the plan.

   

  Evidence is surfacing that some workers are asking their bosses for fewer hours as their wages rise – in a bid to keep overall income down so they don’t lose public subsidies for things like food, child care and rent.

   

  Full Life Care, a home nursing nonprofit, told KIRO-TV in Seattle that several workers want to work less.

   

  “If they cut down their hours to stay on those subsidies because the $15 per hour minimum wage didn’t actually help get them out of poverty, all you’ve done is put a burden on the business and given false hope to a lot of people,” said Jason Rantz, host of the Jason Rantz show on 97.3 KIRO-FM.

   

  The twist is just one apparent side effect of the controversial — yet trendsetting — minimum wage law in Seattle, which is being copied in several other cities despite concerns over prices rising and businesses struggling to keep up.

   

  The notion that employees are intentionally working less to preserve their welfare has been a hot topic on talk radio. While the claims are difficult to track, state stats indeed suggest few are moving off welfare programs under the new wage.

   

  Despite a booming economy throughout western Washington, the state’s welfare caseload has dropped very little since the higher wage phase began in Seattle in April. In March 130,851 people were enrolled in the Basic Food program. In April, the caseload dropped to 130,376.

   

  At the same time, prices appear to be going up on just about everything.

   

  Some restaurants have tacked on a 15 percent surcharge to cover the higher wages. And some managers are no longer encouraging customers to tip, leading to a redistribution of income. Workers in the back of the kitchen, such as dishwashers and cooks, are getting paid more, but servers who rely on tips are seeing a pay cut.

   

  Some long-time Seattle restaurants have closed altogether, though none of the owners publicly blamed the minimum wage law.

   

  “It’s what happens when the government imposes a restriction on the labor market that normally wouldn’t be there, and marginal businesses get hit the hardest, and usually those are small, neighborhood businesses,” said Paul Guppy, of the Washington Policy Center.

  *  *  *

  As we previously concluded, with more than half of welfare spending going to working families…

  The irony here seems to be that because companies would rather spend their money on raises for "supervisors" and on stock buybacks which benefit the very same supervisory employees who are likey to own stocks (and which artificially inflate the bottom line), everyday taxpayers just like the ones who can't get a raise end up footing the bill via public assistance programs. The companies meanwhile, get to utilize nice little tricks like corporate tax inversions in order to avoid paying their share of the assistance handed out to the very same employees they underpay.

  

  

  

  

  

• Greek Lawmakers Clear The Way For Formal Bailout Discussions

  Update: 36 Syriza lawmakers did not support the bill.

  As expected, the Greek parliament has approved a second set of prior measures, clearing the way for formal discussions on a third bailout program for the debt-stricken country.

  As Bloomberg notes, “several lawmakers of governing Syriza party, including Parliament Speaker Zoi Konstantopoulou, former deputy Finance Minister Nadia Valavani didn’t support bill.”

  

  As a reminder, Wednesday’s vote was largely a formality as the measures – which included EU rules on bank resolutions and civil justice reform – weren’t expected to be as contentious as those presented to lawmakers last week. Alexis Tsipras is desperately trying to regain the support of Syriza MPs who have refused to support the conditions creditors have attached to the €86 billion ESM aid package.

  Although negotiations will now likely begin within the next few days, another vote (on pensions and taxes for farmers) is expected during the first week of August.

  Earlier today, MNI – citing unnamed sources – reported that Tsipras will look to hold elections as soon as the third bailout is in place. Greek government officials promptly denied the report. 

  As a reminder, here’s what’s next for Greek politics, courtesy of Deutsche Bank.

  *  *  *

  From Deutsche Bank

  Potential political paths ahead

  We see the situation as potentially leading to three different political outcomes over the next few weeks.

  The first is near-term political instability that would put ESM negotiations on hold and return pressure on the Greek banking system ahead of the August 20th ECB bond redemption. This would be provoked by the PM tendering his government’s resignation either by losing additional government MPs in coming parliamentary votes or by losing support in the party’s Central Committee. Either would not necessarily cause a general election, with a government of national unity under very limited SYRIZA MP support possible until ESM talks are concluded (only 48 out of 149 MPs would be needed). Irrespectively, talks would be delayed, and the possibility of a more substantial shift in the SYRIZA position against the agreement could not be ruled out, whether before or after a new general election.

  The second potential outcome is a Greek PM decision to more aggressively position himself against internal party dissent and in favour of program implementation. This would likely involve a request from dissenting MPs to resign their parliamentary seats or, in case of refusal, exclusion from the SYRIZA parliamentary group. Such a decision would aim to consolidate the PM’s influence, with the ultimate aim of moving the party towards a more moderate direction in a future general election. Current electoral law stipulates that a general election within 12 months of the last one takes place under a “list” system, providing the Greek PM with the political cover to steer SYRIZA’s candidate list towards a more moderate direction.

  Still, any such decisions need to be approved by the party’s Central Committee. The latter is similarly responsible for excluding members from the party, even if the PM excludes MPs from the parliamentary group. Any such decision therefore requires the PM to take the risk of more formally splintering the party, with potential unpredictable results given his more uncertain influence over the party’s Central Committee

  The third – and what we believe the most likely outcome in coming weeks – is a continuation of the last few days’ status quo: persistent attempts by the PM to work through internal party dissent as well as the ESM negotiations, but without actively precipitating political change. In this instance the Greek PM would continue to preside over a de facto minority government, even if this is not explicitly acknowledged. A confidence vote may be called but dissenting MPs would still vote in favour and/or opposition parties would abstain. Any eventual ESM agreement would be ratified by a broad parliamentary majority, but with very strong SYRIZA dissents. Early elections could be called after. The benefit to this outcome is that near-term political uncertainty would be avoided, with dissenting and non-dissenting SYRIZA MPs as well as the opposition likely wanting to avoid near-term political instability. The cost would be that government commitment to the agreement would remain weak, maintaining the risk of a breakdown in negotiations as ESM negotiations get under way.

  Whatever the outcome above, events over the next few weeks are most likely to continue to be driven by the PM’s personal decisions as well as internal developments within SYRIZA. This will in turn depend on the ongoing economic and political cost of program implementation, with large upfront fiscal tightening already being legislated but additional fiscal and structural reform commitments needed to conclude the 3rd ESM program negotiations. The PMs own approval ratings will also matter, with opinion polls released after the negotiations continuing to show higher popularity ratings than other political leaders as well as a strong SYRIZA lead over other opposition parties. It remains to be seen how long this persists given the economic costs of the agreement, but the longer support is maintained, the greater the PM’s influence over internal party politics is likely to be.

  The endgame

  Irrespective of the near-term outcomes above, the inherent contradiction of program implementation by a government from within which the bulk of opposition originates will have to be resolved. It is unlikely that uncertainty around the stability of the Greek economy and banking system recedes until this is the case.

  Resolution could be led by Greek PM and current party president Tsipras moving SYRIZA in a more moderate direction followed by an early general election later this year after ESM negotiations have concluded. This would increase the odds of a government with greater commitment to implementation, irrespective of the electoral outcome. It would however risk a major splintering of the party or Tsipras’ own loss of authority in the process. An alternative is that the party retains its own internal contradictions, but that a government of national unity with broader-based participation is formed irrespectively. However, it remains unclear if this could materialize without an early general election, which the opposition may eventually request.

  Either way, implementation risks are likely to remain strong until greater political change materializes, likely driven by the strong internal contradictions within the current ruling party, but ultimately settled by the Greek PMs own political initiatives.

  

  

  

  

  

• A Middle-East Game Of Thrones

  Submitted by Patrick J Buchanan,

  As President Obama’s nuclear deal with Iran is compared to Richard Nixon’s opening to China, Bibi Netanyahu must know how Chiang Kai-shek felt as he watched his old friend Nixon toasting Mao in Peking.

  The Iran nuclear deal is not on the same geostrategic level. Yet both moves, seen as betrayals by old U.S. allies, were born of a cold assessment in Washington of a need to shift policy to reflect new threats and new opportunities.

  Several events contributed to the U.S. move toward Tehran.

  First was the stunning victory in June 2013 of President Hassan Rouhani, who rode to power on the votes of the Green Revolution that had sought unsuccessfully to oust Mahmoud Ahmadinejad in 2009.

  Rouhani then won the Ayatollah’s authorization to negotiate a cutting and curtailing of Iran’s nuclear program, in return for a U.S.-U.N. lifting of sanctions. As preventing an Iranian bomb had long been a U.S. objective, the Americans could not spurn such an offer.

  Came then the Islamic State’s seizure of Raqqa in Syria, and Mosul and Anbar in Iraq. Viciously anti-Shiite as well as anti-American, ISIS made the U.S. and Iran de facto allies in preventing the fall of Baghdad.

  But as U.S. and Iranian interests converged, those of the U.S. and its old allies — Saudi Arabia, Israel and Turkey — were diverging.

  Turkey, as it sees Bashar Assad’s alliance with Iran as the greater threat, and fears anti-ISIS Kurds in Syria will carve out a second Kurdistan, has been abetting ISIS.

  Saudi Arabia sees Shiite Iran as a geostrategic rival in the Gulf, allied with Hezbollah in Lebanon, Assad in Damascus, the Shiite regime in Iraq and the Houthis in Yemen. It also sees Iran as a subversive threat in Bahrain and the heavily Shiite oil fields of Saudi Arabia itself.

  Indeed, Riyadh, with the Sunni challenge of ISIS rising, and the Shiite challenge of Iran growing, and its border states already on fire, does indeed face an existential threat. And, so, too, do the Gulf Arabs.

  Uneasy lies the head that wears a crown in the Middle East today.

  The Israelis, too, see Iran as their great enemy and indispensable pillar of Hezbollah. For Bibi, any U.S.-Iran rapprochement is a diplomatic disaster.

  Which brings us to a fundamental question of the Middle East.

  Is the U.S.-Iran nuclear deal and our de facto alliance against ISIS a temporary collaboration? Or is it the beginning of a detente between these ideological enemies of 35 years?

  Is an historic “reversal of alliances” in the Mideast at hand?

  Clearly the United States and Iran have overlapping interests.

  Neither wants all-out war with the other.

  For the Americans, such a war would set the Gulf ablaze, halt the flow of oil, and cause a recession in the West. For Iran, war with the USA could see their country smashed and splintered like Saddam’s Iraq, and the loss of an historic opportunity to achieve hegemony in the Gulf.

  Also, both Iran and the United States would like to see ISIS not only degraded and defeated, but annihilated. Both thus have a vested interest in preventing a collapse of either the Shiite regime in Baghdad or Assad’s regime in Syria.

  And, thus, Syria is probably where the next collision is going to come between the United States and its old allies.

  For Turkey, Saudi Arabia and Israel all want the Assad regime brought down to break up Iran’s Shiite Crescent and inflict a strategic defeat on Tehran. But the United States believes the fall of Assad means the rise of ISIS and al-Qaida, a massacre of Christians, and the coming to power of a Sunni terrorist state implacably hostile to us.

  Look for the Saudis and Israelis, their agents and lobbies, their think tanks and op-ed writers, to begin beating the drums for the United States to bring down Assad, who has been “killing his own people.”

  The case will be made that this is the way for America to rejoin its old allies, removing the principal obstacle to our getting together and going after ISIS. Once Assad is gone, the line is already being moved, then we can all go after ISIS. But, first, Assad.

  What is wrong with this scenario?

  A U.S. no-fly zone, for example, to stop Assad’s barrel bombs, would entail attacks on Syrian airfields and antiaircraft missiles and guns. These would be acts of war, which would put us into a de facto alliance with the al-Qaida Nusra Front and ISIS, and invite retaliations against Americans by Hezbollah in Beirut, and the Shiite militia in Baghdad.

  Any U.S.-Iran rapprochement would be dead, and we will have been sucked into a war to achieve the strategic goals of allies that are in conflict with the national interests of the United States. And our interests come first.

  

  

  

  

  

• First China Arrests "Sellers", Now Bans "Defaulters" From Traveling

  In consequence-less America, the stigma of defaulting on one's personal responsibilities is a badge of honor for a risk-seeking public. No matter what, the government has your back if you want to buy a fridge, boat, or car – serial defaulter or not. However, hot on the heels of their proclamation that "malicious selling" of stocks is illegal, the Chinese government has extended its punitive measures against defaulting citizens, who are now banned from traveling on high-speed trains.

  • *CHINA BARS DEFAULTERS FROM TAKING HIGH-SPEED TRAINS: XINHUA

  This extends the already significant restrictions on 'defaulters' in place since last year (via Xinhua)…

  People who fail to fulfill court orders will face travel, financial and employment restrictions, said the Supreme People's Court (SPC) here Thursday.

   

  The SPC has signed a memorandum with six central government departments and China Railway Corporation to impose harsher restrictions on defaulters, said Jiang Bixin, vice president of the SPC, at a press conference here.

   

  They will be banned from flying and traveling in upper-class sleeper train compartments, as well as taking positions as legal representative, member of the board, member of the board of supervisors and senior executive of a company, Jiang said.

   

  Besides restrictions on traveling and employment, the defaulters will face constraints when applying for a loan or opening a credit card.

   

  When a corporation becomes a defaulter, its legal representatives, chief executives and those directly responsible for fulfilling the obligation will be subject to the same restrictions as individual defaulters, according to Jiang.

   

  Refusing to implement court judgements has become quite rampant in China, he said.

   

  "About 70 percent of debtors do not willingly fulfill court judgements. This not only harms legal interests of obligees but also social morals and mutual trust among people," he said.

   

  By Wednesday noon, there were 55,920 on the SPC's blacklist of defaulters, about 46,500 individuals and 9,400 corporations.

   

  The SPC will work with police and regulators of banks, state-owned enterprises, civil aviation, and business, Jiang said.

  *  *  *

  So while the Chinese government embraces the painful downside of capitalism in its personal defaults (and recognizes the moral hazrd), it entirely ignores it when it comes to stock market downside… perhaps they are learning from America what really matters after all.

  

  

  

  

  

• US Government Reinstates Arm Sales To Bahrain Despite Rampant Human Rights Abuses

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  One of the many destructive myths Americans like to tell themselves is that the U.S. government is a staunch defender of human rights and democracy around the world. In reality, nothing could be further from the truth.

  Yes its true, there are plenty of well intentioned individuals and organizations across America that do care very deeply about such things; the U.S. government just isn’t one of them. The facts on the ground clearly prove this to be the case. The only thing those in charge care about is raw imperial power and money. Of course, they know this. They also know that keeping the myth alive is extremely important in order to maintain the moral high ground and some degree of legitimacy in the eyes of the public.

  The most recent example of what a sham the government’s purported commitment to human rights is, was last week’s revelation that the State Department may be prepared to upgrade Malaysia’s trafficking in persons ranking just to move the TPP forward. Here’s an excerpt from the post, To Pass TPP, U.S. State Dept. Upgrades Malaysia’s Human Trafficking Ranking Despite Discovery of Mass Graves:

  Earlier this week, we wrote about a troubling move by the US State Department to “upgrade” Malaysia from a “tier 3″ country to a “tier 2″ country regarding human trafficking. This move came despite a near total lack of evidence of any improvement by Malaysia. In fact, just two months ago 139 mass graves were discovered for migrant workers who had been trafficked and/or held for ransom. And the US ambassador to Malaysia had publicly criticized the country for failing to tackle its massive human trafficking problem.

  Today, we learn about how the U.S. government has reinstated arm sales to Bahrain despite horrific human rights abuses. From International Business Times:

  “The government of Bahrain has made some meaningful progress on human rights reform and reconciliation.”

   

  With this flexible formulation, the US justified the decision to lift the hold on arms transfers to the Bahrain Defence Force and National Guard, which had been in a place in an effort to pressure the Bahraini regime to reform its violent tactics towards protesters.

   

  But even as State Department employees were drafting and editing the arms-release statement, the government of Bahrain was disabusing the Obama Administration of the notion that it had the slightest interest in human rights protections and political reconciliation.

   

  Two weeks before the decision, a court sentenced Sheikh Ali Salman, head of the opposition society al-Wefaq, to four years in prison for “inciting hatred” and “insulting public institutions” charges which Amnesty International dismissed outright. The day before the U.S. dropped its hold, the government sentenced another opposition leader, Fadhel Abbas, to five years in prison for tweeting his condemnation of the war in Yemen.

   

  Not three days after the statement, authorities arrested Majeed Milad, another participant in the erstwhile National Dialogue, on charges of “instigating hatred of the regime.” Lest a casual observer think this to be all party politics, Nabeel Rajab, the prominent nonviolent and nonpartisan human rights defender, was only just released for unspecified “health reasons” after languishing in prison since 2 April. Authorities also targeted him for unwelcome criticism of the Yemeni conflict.

   

  This, even as the State Department declared that Bahraini officials were “contribut[ing] to an environment more conducive to reconciliation and progress.”

   

  The unkindest cut of all for the State Department, however, came on June 11, when the Bahrain Interior Ministry arrested Ebrahim Sharif. On that day, authorities arrested the former leader of the secular opposition society Wa’ad (“Promise”), for “incitement to overthrow the government”.

   

  As evidence, officials cited a twenty-minute speech Sharif had delivered on 10 July. An examination of Sharif’s words reveals nothing in the way of incitement or coup-plotting, but rather the nonviolent dissidence to which the members of Bahrain’s democratic movement have held for years.

  Well at least they aren’t abusing American citizens or anything. Oh, wait.

  Nevermind that “prisoners,” plural, was a misnomer, that human rights activists like Abdulhadi al-Khawaja and Naji Fateel are still imprisoned. Nevermind that American citizen Taqi al-Maidan remains behind bars, suffering torture and maltreatment on unsubstantiated charges.

  

  

  

  

  

• China's Record Dumping Of US Treasuries Leaves Goldman Speechless

  On Friday, alongside China’s announcement that it had bought over 600 tons of gold in “one month”, the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.

  

   

  We then put China’s change in FX reserves alongside the total Treasury holdings of China and its “anonymous” offshore Treasury dealer Euroclear (aka “Belgium”) as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted – namely virtually the entire delta in Chinese FX reserves come via China’s US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.

  

   

  We explained all of his on Friday in “China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium“, and frankly we have been surprised that this extremely important topic has not gotten broader attention.

  Then, to our relief, first JPM noticed. This is what Nikolaos Panigirtzoglou, author of Flows and Liquidity had to say on the topic of China’s dramatic reserve liquidation

  Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.

  JPM conclusion is actually quite stunning:

  This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2).

  

  Incidentally, $520 billion is roughly triple what implied Treasury sales would suggest as China’s capital outflow, meaning that China is also liquidating some other USD-denominated asset(s) at a feverish pace. So far we do not know which, but the chart above and the magnitude of the Chinese capital outflow is certainly the biggest story surrounding the world’s most populous nation: what is happening in its stock market is just a diversion.

  At this point JPM goes into a tangent explaining what the practical implications of a massive capital outflow from China are for the global economy. Regular readers, especially those who have read our previous piece on the collapse in the Petrodollar, the plunge in EM capital inflows, and their impact on capital markets and global economies can skip this part. Those for whom the interplay of capital flows and the global economy are new, are urged to read the following:

  One way that slower EM capital flows and credit creation affect the rest of the world is via trade and trade finance. Trade finance datasets are unfortunately not homogeneous and different measures capture different aspects of trade finance activity. Reuters data on trade finance only aggregates loan syndication deals, which have mandated lead arrangers and thus capture the trends in the large-scale trade lending business, rather than providing an all-inclusive loans database. Perhaps the largest source of regularly collected and methodologically consistent data on trade finance is credit insurers (see “Testing the Trade Credit and Trade Link: Evidence from Data on Export Credit Insurance”, Auboin and Engemann, 2013). The Berne Union, the international trade association for credit and investment insurers with 79 members, includes the world’s largest private credit insurers and public export credit agencies. The volume of trade credit insured by members of the Berne Union covered more than 10% of international trade in 2012. The Berne Union provides data on insured trade credit, for both short-term (ST) and medium- and long-term transactions (MLT). Short-term trade credit insurance accounts for the vast majority at around 90% of new business in line with IMF estimates that the vast majority 80%-90% of trade credit is short term.

   

  

   

  Figure 4 shows both the Reuters (quarterly) and the Berne Union (annual) data on trade finance loan syndication and trade credit insurance volumes, respectively. The quarterly Reuters data showed a clear deceleration this year from the very high levels seen at the end of last year. Looking at the first two quarters of the year, Reuters volumes were down by 25% vs. the 2014 average (Figure 4). The more comprehensive Berne Union annual volumes are only available annually and the last observation is for 2014. These data showed a very benign trade finance picture up until the end of 2014. Trade finance volumes had been trending up since 2010 at an annual pace of 8.8% per annum (between 2010 and 2014) which is faster than global nominal GDP growth of 6% per annum, i.e. the trend in trade finance had been rather healthy up until 2014, but there are indications of material slowing this year. This is also reflected in world trade volumes which have also decelerated this year vs. strong growth in previous years (Figure 5).

  Summarizing the above as simply as possible: for all those confounded by why not only the US, but the global economy, hit another brick wall in Q1 the answer was neither snow, nor the West Coast strike, nor some other, arbitrary, goal-seeked excuse, but China, and specifically over half a trillion in still largely unexplained Chinese capital outflows.

  * * *

  But wait, because it wasn’t just JPM whose attention perked up over the weekend. This morning Goldman Sachs itself had a note titled “the Curious Case of China’s Capital Outflows“:

  China’s balance of payments has been undergoing important changes in recent quarters. The trade surplus has grown far above previous norms, running around $260bn in the first half of this year, compared with about $100bn during the same period last year and roughly $75bn on average during the previous seven years. Ordinarily, these kinds of numbers would see very rapid reserve accumulation, but this is not the case. Partly that is because China’s services balance has swung into meaningful deficit, so that the current account is quite a bit lower than the headline numbers from trade in goods would suggest. But the more important reason is that capital outflows have become very sizeable and now eclipse anything seen in the recent past.

   

  Headline FX reserves in the second quarter fell $36bn, from $3,730bn at end-March to $3,694bn at end-June. While we estimate that there was a large negative valuation effect in Q1 (due to the drop in EUR/$ on the ECB’s QE announcement), there was likely a positive valuation effect in Q2, which we put around $48bn. That means that our proxy for reserve accumulation in the second quarter is around -$85bn, i.e. the actual “flow” drop in reserves was bigger than the headline numbers suggest because of a flattering valuation effect. If we put that number together with the trade surplus in Q2 of $140bn, net capital outflows could be around -$224bn in the quarter, meaningfully up from the first quarter. There are caveats to this calculation, of course. There is obviously the services deficit that we mention above, which will tend to make this estimate less dramatic. It is also possible that our estimate for valuation effects is wrong. Indeed, there is some indication that valuation-related losses in Q1 were not nearly as large as implied by our calculations. But even if we adjust for these factors, net capital outflows might conceivably have run around -$200bn, an acceleration from Q1 and beyond anything seen historically.

  Granted, this is smaller than JPM’s $520 billion number but this also captures a far shorter time period. Annualizing a $224 billion outflow in one quarter would lead to a unprecedented $1 trillion capital outflow out of China for the year. Needless to say, a capital exodus of that pace and magnitude would suggest that something is very, very wrong with not only China’s economy, but its capital markets, and last but not least, its capital controls, which prohibit any substantial outbound capital flight (at least for ordinary people, the Politburo is clearly exempt from the regulations for the “common folk”).

  Back to Goldman:

  The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.

  In other words, for once Goldman is speechless, however it is quick to point out that what traditionally has been a major source of reserve reflow, the Chinese current and capital accounts, is no longer there.

  It also means that what may have been one of the biggest drivers of DM FX strength in recent years, if only against the pegged Renminbi, is suddenly no longer present.

  While the implications of this on the global FX scene are profound, they tie in to what we said last November when explaining the death of the petrodollar. For the most part, the country most and first impacted from this capital outflow will be China, something its stock market has already noticed in recent weeks.

  But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China’s Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman… and this website of course.

  Finally, if China’s selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.

  Or let us paraphrase: how soon until QE 4?

  

  

  

  

  

• "It's Laughable Really": Why No One, Especially Not Jamie Dimon, Will Be Held Accountable For London Whale

  A few weeks back, Bruno Iksil, the man whose name shall live in CDX trading infamy and whose nicknames will forever haunt the desks at JP Morgan’s taxpayer-sponsored, London-based hedge fund (known in polite circles as “CIO”), got a break when the UK’s financial watchdog dropped its investigation saying it didn’t have a strong enough case. 

  Apparently, the fact that Iksil was the driving force (if not the most senior of the employees involved) behind a trade so large it noticeably displaced the market doesn’t count as a “strong case.” Indeed, the simple fact that Iksil was known across trading desks as “Voldemort“, “The London Whale“, and perhaps most telling, “He Who Must Not Be Named,” might fairly be said to constitute a compelling bit of anecdotal evidence. Alas, the whale is now scott-free, having secured immunity in the US in exchange for cooperating with the investigation and having been exonerated in the UK. 

  As we noted in “Free Willy: FCA Drops Case Against London Whale,” junior trader Julien Grout and Iksil’s boss Javier Martin-Artajo are still theoretically on the hook for the trade which, as a reminder, saw CIO sell massive amounts of protection on IG.9 back in Q1 of 2012 in what ultimately became a rather poignant example of the old adage “if you find yourself in a hole, stop digging.”

  We say “theoretically on the hook”, because in all likelihood, Grout and Martin-Artajo will never have to face the music either. Here’s NY Times with more on why “in all likelihood, no one will be held legally accountable”:

  The case of the London Whale has ended — with a whimper.

   

  Last week, Britain’s Financial Conduct Authority took the unusual step of announcing that it was dropping its investigation and would take no further action against Bruno Iksil, whose risky bets on complex derivative contracts ended up costing JPMorgan Chase $6.2 billion in losses.

   

  Today Mr. Iksil, 48, faces no charges. He does not even face civil claims, which have a much lower standard of proof. Preet Bharara, the United States attorney in Manhattan, disclosed in August 2013 that the government had entered into a nonprosecution agreement with Mr. Iksil, and that he would not be required to plead guilty to any crime. The Securities and Exchange Commission took no action against him. And now British regulators have dropped the case.

   

  The result has left many white-collar defense lawyers mystified, even as they profess admiration for Mr. Iksil’s lawyers. While Mr. Iksil has emerged scot-free, his immediate boss, Javier Martin-Artajo, a Spanish national, and Mr. Iksil’s lower-ranking assistant, Julien Grout, who is French, face criminal charges and civil claims. But Mr. Martin-Artajo is in Spain, where a court has refused to extradite him, and Mr. Grout is in France, which typically does not extradite its own citizens. Although the investigation in the United States officially remains open, it appears no one, in all likelihood, will be held legally accountable.

   

  

  (Martin-Artajo)

  And while it’s easy to write this off as yet another example of how no humans are ever held accountable for what happens when TBTF banks (with the implicit blessing of the US government via FDIC insurance) go all-in at the derivatives baccarat tables, the London Whale may also represent the tendency for regulators and prosecutors to place the blame on anyone but those who ultimately deserve it. Here’s the Times again:

  Far from being the rogue trader portrayed in early news coverage, Mr. Iksil emerges in government documents and interviews with people familiar with much of the evidence as a conflicted figure on the trading floor, troubled by conscience, even as he tried to please his bosses. They pushed him to undertake the risky derivatives trading that proved his undoing and caused the great losses. Then, as the losses mounted, he repeatedly warned his colleagues that they should be more forthcoming about their extent, to no avail.

   

  “It’s laughable, really, that so many banks have been prosecuted and it’s always the fault of a rogue trader, or an isolated trading desk,” said Brandon L. Garrett, a law professor at the University of Virginia and author of the book “Too Big to Jail.” “But when risky behavior is repeatedly tolerated or concealed, you have to wonder if higher-ranking people should have been targeted.”

  Yes, you do have to wonder about that.

  But as the ridiculous witch-hunt against flash crashing “mastermind” Nav Sarao proves, vested interests and well paid lobbyists will everywhere and always trump the truth, which is why, through it all, Jamie Dimon has not only managed to escape blame for the CIO fiasco, but has in fact become a billionaire in the interim. 

  

  

  

  

  

• Peter Schiff: Currencies Depend On Faith, Gold Doesn't

  Submitted by Peter Schiff via Euro Pacific Capital,

  In his July 17th Blog, Let's Get Real About Gold, author and Wall Street Journal columnist Jason Zweig likened investor interest in gold with the "Pet Rock" craze of the 1970's, when consumers became convinced that a rock in a box would provide continuous companionship, elevate their social standing, and give them something hip to talk about at parties. Zweig asserts that investor faith in gold, which he argues is just another inert mineral with good marketing, is similarly irrational, and has kept people from putting money in the much more lucrative stock market.

  First off, Zweig's comparison of gold to equities as an investment vehicle sets up a false dichotomy. Gold is not an investment. It is, as Zweig indicates, nothing but a rock. But it is a rock that is extremely scarce, with highly desirable physical properties that have resulted in its being used as money for all of recorded human history. As a result, it should not be compared to stocks or real estate, but to other forms of money, such as any one of a number of fiat currencies now in circulation. Ironically, in a world awash in fiat currencies that are created at an ever increasing pace, and whose value is solely derived from faith in the issuing state, gold is the only form of money whose value does not require a leap of faith.

  I have no emotional attachment to gold. I don't use it to cover my walls, I don't run my fingers through it and laugh, I don't ask my wife to paint herself with it. What I do know is that before the world moved to a fiat monetary system in the latter half of the 20th Century, gold had become the money of choice for nearly every major culture in every age. This supremacy was based on gold's scarcity, its versatility as a metal, its unique and useful properties, its beauty, and its wide cultural acceptance as a hallmark of love, permanence, wealth and success. There can be little doubt that people will always be willing to desire and accumulate gold…for any of a variety of reasons. The only question is how much they will be willing to pay. On that point, reasonable minds can differ. But to imply that gold has no more intrinsic value than a pet rock, is to recklessly ignore reality.

  Up until 1971, the U.S. dollar was backed by the faith that the government would redeem its notes in gold. But, since then, that faith has been replaced by a simpler faith that others will always accept U.S. dollars in exchange for goods and services of real value. The transformation put the U.S. dollar in the same basket as all the other fiat currencies in the world whose value stems from the faith in the issuing government. In his piece, Zweigseems to assume that holding currencies is not an act of faith. But clearly this too involves a question of degree.

  Most investors would certainly prefer gold to Argentine Pesos, Ghanaian Cedis, or Venezuelan Bolivars. In reality, what Zweig is saying is that good fiat currencies (the U.S. dollar being the gold standard of fiat currencies) require no faith to buy and hold. But why is that?

  But the dollar's strength is supposed to derive from faith that the U.S. government will remain fiscally sound. There is little evidence that this will be the case. All of the traditional factors that determine a currency's value, i.e. trade balances, interest rates, government debt levels, economic growth, etc. should be putting downward pressure on the dollar. The U.S. government has done nothing to solve the nation's long-term debt crisis. Even the Congressional Budget Office admits that the Federal deficit will increase by an average of $35 billion annually until the end of the decade. By 2025, Trillion dollar plus deficits become entrenched (and those projections are based on economic growth assumptions that currently have proven to be far too optimistic.)

  Despite all this, the dollar has surged close to a 10-year high, based on the Bloomberg Dollar Spot Index. Wall Street has explained the dominance by pointing to troubles in Europe and Asia, saying that the dollar has its problems, but it is the "cleanest dirty shirt in the hamper." Analysts pointed to the expected higher interest rates from the Fed that would under-gird demand for the dollar as other central banks around the world were lowering rates. But that outcome has yet to materialize.

  At the end of 2014 most investors had assumed that the Fed would begin raising rates in the First Quarter of 2015. But disappointing economic growth has led the Fed to continuously delay lift off. Nevertheless, investors still think that the hikes are just around the corner. In reaching this conclusion, they blindly accept that our economy can survive higher rates when all the objective evidence leads to the conclusion that it can't.

  In reality, faith in the dollar is based solely on the belief that the U.S. dominance of the global economy will continue indefinitely, no matter how deeply we go into debt, how low our interest rates remain, and how unbalanced our trade becomes.

  We have seen this movie before. When confidence in the infallibility of central bankers is high,mainstream voices tend to cast aside gold and put their faith in the judgment of man. In 1999, New York Times columnist Floyd Norris penned an article entitled, "Who Needs Gold When We Have Alan Greenspan?" Despite Norris' dismissal, the real answer to that question was "everyone". In the following 12 years, at its high, gold rallied 650%.

  From my perspective, the markets are now placing more misplaced faith in the wisdom of Janet Yellen than they had in Greenspan. As a result, gold is being shunned as it was back in 1999. Alan Greenspan's penchant for easing monetary policy to prop up financial markets led to the creation of two dangerous bubbles, the first in stocks in 2000, and then in real estate, which finally burst in 2007, leading to the Great Recession. Given that the easing of monetary policy made by Greenspan's successors has been much larger, one can only imagine what may be the enormity ofan economic disaster that looms on the horizon.

  So yes, in a way my investment decisions are based on faith, but not the same type of faith that the Wall Street Journal assumes. My faith is that governments and central banks will continue to run up debt and debase currencies until a crisis brings the whole experiment to a disastrous conclusion. There is simply no historical precedent to reach any other conclusion. I also have faith that human beings will always prefer a piece of gold to a stack of paper. Separate a paper currency from its perceived value and you just have a stack of paper and ink. However, if they would just print it on softer and absorbent stock and put it on rolls, it might have some intrinsic value if we run out of toilet paper.

  

  

  

  

  

• What Do Greece and Louisiana Have in Common? The War on Cash

  More and more institutions are trying to make it harder for you to move your money into cash.

   

  Globally, over $5 trillion in debt currently have negative yields in nominal terms, meaning the bond literally has a negative yield when it trades. In the simplest of terms this means that investors are PAYING to own these bonds.

   

  Bonds are not unique in this regard. Switzerland, Denmark and other countries are now charging deposits at their banks. In France and Italy, you are not allowed to make cash transactions above €1,000.

   

  This sounds laughable to most people, but it is a reality in Europe… and in the US, in some regions. Louisiana has made it illegal to purchase second hand goods using cash.

   

  This is just the beginning. The War on Cash will be spreading in the coming weeks.

  The reasoning is simple. Most large financial entities are insolvent. As a result, if a significant amount of digital money is converted into actual physical cash, the firm would very quickly implode.

   

  This is precisely what happened in 2008…

   

  When the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.

   

  A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).

   

  This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.

   

  To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.

   

  When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.

   

  None of these issues have been resolved. The big banks remain as leveraged as ever and at risk of implosion should a significant percentage of capital get pulled into physical cash.

   

  European banks as a whole are leveraged at 26 to 1. In simple terms, this means they have just €1 in capital for every €26 in assets (bought via borrowed money).

   

  This is why whenever things get messy in Europe, the ECB and EU begin implementing capital controls.

   

  Consider what recently happened in Greece. Depositors began to flee the banks in droves, so they declared a bank holiday. This holiday included safe deposit boxes… so all the bullion or physical cash Greeks had stashed there remained locked up… just like the “digital” money in their savings accounts.

   

  Again, it was impossible to get cash out of the banks… even cash that technically wasn’t “in the system” anymore but sitting in safe deposit banks.

   

  The US financial system isn’t any better. Indeed, the vast majority of it is in digital money. Actual currency is just a little over $1.36 trillion. Bank accounts are $10 trillion. Stocks are $20 trillion and Bonds are $38 trillion.

   

  And at the top of the heap are the derivatives markets, which are over $220 TRILLION.

   

  If you think the banks aren’t terrified of what this market could do to them, consider that JP Morgan managed to get Congress to put the US taxpayer on the hook for it derivatives trades.

   

  Mind you, this is the same bank that is now refusing to let clients store cash in safe deposit boxes.

   

  This is just the tip of the iceberg. As anyone can tell you, it’s all but impossible to move large amounts of money into cash in the US. Even the large banks will routinely ask you for 24 hours notice if you need $10,000 or more in cash. These are banks will TRLLLIONS of dollars worth of assets on their books.

   

  This is just the beginning.

   

  Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

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

   

  To pick up yours, swing by….

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

   

  Best Regards

  Phoenix Capital Research

   

   

   

  

  

  

  

• "Two-Faced" Japan Accuses China Of Stealing Gas With Sea Rigs

  Over the course of the last several months, China has found itself at the center of a rather spirited international “debate” over the country’s land reclamation efforts in the disputed waters of the South China Sea. 

  To recap, Beijing has created more than 1,500 acres of sovereign territory in the Spratly archipelago by using dredgers to construct man-made islands atop reefs. Although China isn’t the first country to embark on reclamation efforts in the region, its projects have been described by the US and its allies as far more ambitious than those of its neighbors.

  The situation escalated rapidly when the Chinese Navy threatened a US spy plane with a CNN crew aboard. Shortly thereafter, the US claimed to have spotted artillery on one of the islands and the entire situation culminated in a hilarious propaganda campaign by the Chinese apparently designed to show that life on its new islands was really all about girls, gardening, pigs, and puppies. 

  Now, China finds itself at the center of yet another maritime dispute, this time over the construction of oil and gas platforms in the East China Sea. Reuters has more:

  China reserves the right to a “necessary reaction” after Japan issued a defense review that called on Beijing to stop building oil and gas exploration platforms close to disputed waters in the East China Sea, the Defense Ministry has said.

   

  In the paper issued on Tuesday, Tokyo expressed concern that Chinese drills could tap reservoirs that extend into Japan’s waters.

   

  “This kind of action completely lays bare the two-faced nature of Japan’s foreign policy and has a detrimental impact on peace and stability in the Asia Pacific region,” China’s Defense Ministry said in a statement issued late on Tuesday.

   

  China would further evaluate Japan’s defense review, or white paper, when the full text is issued and would then make a “necessary reaction depending on the situation”, it said.

   

  In an escalation of the spat, Japan released aerial photos of China’s construction activities in the area, accusing Beijing of unilateral development and a halfhearted attitude toward a 2008 agreement to jointly develop resources there.

   

  “China’s development activities in the East China Sea have shown no signs of ceasing. Given rising concerns within and outside of Japan over China’s various attempts to change the status quo, we have decided to release what can be released in an appropriate manner,” Chief Cabinet Secretary Yoshihide Suga told a regular news conference.

  Apparently “what can be released” are the following images:

  

  And here is a map showing where the rigs are located in relation to a demarcation line that separates the two countries’ exclusive economic zones.

  

  So what’s the problem, you ask? It seems as though all of the structures are on China’s side of the line. Here’s Bloomberg with more:

  Japan’s foreign ministry unveiled a map and photographs of what it said were 16 Chinese marine platforms close to Japan’s side of the disputed East China Sea.

   

   

  The platforms are on the Chinese side of a geographical median line that Japan contends should mark the border between their exclusive economic zones. Japan has long expressed concern that such developments could siphon gas out of undersea structures that extend to its own side.

  So essentially, Japan believes that China may be attempting to steal from Japan by building rigs right next to the line and sucking undersea gas back to the Chinese side. Or, in other words:

  As for Beijing’s take on the matter, the foreign ministry says its exploration activities are “justified, reasonable and legitimate.”

  Whatever the case may be, the dispute won’t do anything to help Sino-Japanese relations and although Suga claims the issue won’t derail diplomatic progress, one has to imagine that Beijing has had just about enough of being told what it can and can’t do in what it considers to be territorial waters. 

  *  *  *

  Full statement from Japanese Ministry of Foreign Affairs (Google translated): 

  In recent years, China has to revitalize the resource development in the East China Sea, as a government, the Chinese side of the geographic middle line during the day, it has been confirmed a total of 16 groups structures so far. 2 East China Sea exclusive economic zone and continental shelf boundary is is not yet defined, Japan is in a position of that should be carried out the demarcation that is based on the median line during the day. In this way, in a situation that is not yet defined boundaries, although the middle and at the Chinese side of the median line the day, it is extremely regrettable that the Chinese side has promoted the unilateral development activities. The government, for the Chinese side, it is possible to stop the unilateral development activities, it was consistent for the cooperation between Japan and China on the resource development of the East China Sea “in June 2008 agreement,” As to respond to early resumption of negotiations on the implementation of, it is where you are asking once again strongly. 

  Japan’s legal position on resource development in (Reference) East China Sea both in one day, based on the relevant provisions of the United Nations Convention on the Law of the Sea, has the title of the exclusive economic zone and continental shelf from the territorial sea baseline to 200 sea miles . Since the distance between each of the territorial sea baseline during the day when you are face to face across the East China Sea is less than 400 sea miles, for the part of the exclusive economic zone and continental shelf up to 200 nautical miles both overlap, bounded by day intermediate agreement there is a need to define a. In light of the relevant provisions and international precedents UNCLOS, in order to define the boundary in such waters may define the boundaries based on the intermediate line is a the equitable solution. (Note: one sea mile = 1.852 km, 200 sea miles = 370.4 km) for two (1) this, the Chinese side, the demarcation in the East China Sea, a natural extension of the continental shelf, the East China Sea of characteristics such as mainland and the island of contrasts Based in and are going to should be carried out, after the demarcation is not recognized by the intermediate line, without the Chinese side shows the assumed specific boundary line, claim that the are naturally extended to the Okinawa Trough for the continental shelf doing. (2) On the other hand, it is a natural extension theory, in the 1960s, such as that used in the case law on the demarcation of the adjacent country continental shelf, is a concept that has been taken in the past of international law. Based on the relevant provisions and the subsequent international precedents of the United Nations Convention on the Law of the Sea, which was adopted in 1982, upon the distance between the opposing countries to define the boundaries in waters of less than 400 nautical miles, the room found a natural extension theory rather, also, there is no legal meaning in the seabed terrain, such as the Okinawa trough (groove of the seabed). Therefore, the idea that can claim a continental shelf up to the Okinawa Trough, lacks evidence In light of the current international law. 3 standing on such premise to this, our country is, the border has been taken the position of the course and that our country has the ability to exercise sovereign rights and jurisdiction in the Japanese side of the body of water from at least the middle line in the waters of non-defined . This thing is totally without that abandoned the title of intermediate line beyond, last until the boundary is defined is for the time being that the exercise of the sovereign rights and jurisdiction in the waters to the middle line. Therefore, day middle of demarcation has not been made ??in the East China Sea, and, in a situation where the Chinese side does not recognize any claims relating to the middle line of our country, and exclusive economic zone of our country up to 200 sea miles from Japan’s territorial waters baseline no different in fact that has the title of continental shelf.

  

  

  

  

• 'Trump'ing Political Success Through An Irate Silent Majority

  Submitted by Ben Tanosborn,

  Four years ago Tony Bennett and Lady Gaga rebirthed the musical-cicada of the 1937 song, “The Lady Is a Tramp”… which makes me think that maybe we could be facing in 2016 a reenactment of the 1968 presidential election, this time Donald Trump taking the role of George Wallace; a political musical that could appropriately be given the lyrical title, “The Politician Is a Trump.”

  Alabama’s Gov. Wallace, unable to represent the Democratic Party in the presidential election, created back then his own party: The American Independent Party; a party that by embracing Wallace’s views on segregation gave Richard Nixon ease-of-entry to the White House.  Donald Trump, with his equally verboten stand on immigration as Geo. Wallace was on segregation, is not likely to receive the seal of approval from the old guard in the Republican Party, which brings the possibility that Mr. Trump, in boastful arrogance, might decide to invest a few of his many millions in a third party candidacy which could add a new chapter to his book, “The Art of the Deal,” if elected; or create fresh material for his television pseudo-business repertoire, if turned down by the electorate.         

  Richard Nixon made hay of the term “Silent majority” back in November 1969 to defend his Vietnam War policy.  It has since been used by American politicians to legitimize and expand the nature of a non-descript huge following they claim as their own, quite often asserting the existence of magnified populism and an implied democracy.  Nixon’s baton seems to have been now passed to Donald Trump, as he submits his candidacy for the highest political office in the land, and grabs the microphone to broadcast his unfiltered stand on immigration.  A message that questionably-qualified experts in the media are quick to devour, then defecate, on a public more receptive to shallow issues dealing with celebrities than anything of social significance or depth.  

  In truth, there is no silent majority in the United States of America, and there has never existed one other than that represented by the number of converted-to-dust ancestors.  A collection of vocal minorities, yes; but most definitely not a political silent majority! [Oftentimes, however, low voter turnout may confuse us to the possible existence of a silent politically-indifferent majority; a topic worthy of study by our social scientists.]

  There are, nonetheless, silent substantial minorities bordering the majority rim on some specific critical issues that affect the body politic; their standing on those issues not adopted or represented by either of the two ruling parties openly because of political “incorrectness” or unsavory bigotry which politicians prefer to overlook or deny.  These days, the unwillingness, or incapacity, of the government to secure the nation’s borders from waves of economic invaders, negatively tagged as illegals by some, and positively by others as undocumented immigrants, is an issue not being properly, or directly, addressed politically by America’s Tweedledee and Tweedledum parties.

  It should come as no surprise when a politician, or would-be politician, unceremoniously breaks ranks with the party to claim leadership on a specific issue that overshadows the rest, and immigration seems to be one in our current political cycle, that such individual is going for broke, either because of his moral standing on such issue, or because he is powerful enough, usually through wealth, where personal risk is minimal or nonexistent.  Enter billionaire Donald Trump.  He may appear as a clown to the more sedate segment of the US population, but he’s nobody’s fool and can also break the straightjacket of an imposed political correctness simply because his wealth and power permit it.

  For all the polls taken on how Americans feel about almost any issue under the sun, a number of topics or issues seem out-of-bounds for pollsters; and how Americans in their diversity feel about immigration is one of them, remaining closeted so as not to create additional problems for an already fragmented society.  Trump, just like many others, senses that the majority of rank-and-file Republicans resent the do-nothing approach to resolve the ever-increasing number of illegal, or undocumented, residents, possibly exceeding 7 percent of the nation’s population.  And that the non-Latino rank-and-file Democrats probably hold a similar majority.

  Piling on by the dozen-and-a-half declared Republican candidates against outspoken Trump who’s now leading the pack might not be the best strategy for keeping the GOP whole.  And a rebuke by the Bobbsey Twins, war hawk senators Lindsey Graham and John McCain, will only fuel the existing party dissension.

  Much of Europe is facing the socio-economic-political reality of a Sub-Saharan economic invasion, just like the US is facing in its border with Mexico.  Politicians, whether in the EU or the US, must confront and resolve the problems created by such reality; and must do so at their career-peril… or a Trump-brand politician will replace them.

  

  

  

  

  

• Americans Are Fleeing These US Cities In Droves

  What do El Paso, New York, and Chicago have in common? They are among the top 20 cities from which Americans are fleeing in droves…

  The map below shows the 20 metropolitan areas that lost the greatest share of local people to other parts of the country between July 2013 and July 2014, according to a Bloomberg News analysis of U.S. Census Bureau data. The New York City area ranked 2nd, losing about a net 163,000 U.S. residents, closely followed by a couple surrounding suburbs in Connecticut. Honolulu ranked fourth and Los Angeles ranked 14th. The Bloomberg calculations looked at the 100 most populous U.S. metropolitan areas.

   

  

  So what's going on here? As Bloomberg notes, Michael Stoll, a professor of public policy and urban planning at the University of California Los Angeles, has an idea.

  Soaring home prices are pushing local residents out and scaring away potential new ones from other parts of the country, he said. (Everyone knows how unaffordable the Manhattan area has become.)

   

  And as Americans leave, people from abroad move in to these bustling cities to fill the vacant low-skilled jobs. They are able to do so by living in what Stoll calls "creative housing arrangements" in which they pack six to eight individuals, or two to four families, into one apartment or home. It's an arrangement that most Americans just aren't willing to pursue, and even many immigrants decide it's not for them as time goes by, he said.

   

  El Paso, Texas, the city that residents fled from at the fastest pace, also saw a surprisingly small number of foreigners settling in given how close it is to Mexico.

   

  "A lot of young, reasonably educated people are having a hard time finding work there," Stoll said. "They're not staying in town after they graduate," leaving for the faster-growing economies."

  Source: Bloomberg

  

  

  

  

  

• Kiwi Pops After RBNZ Cuts Rates, Citing Commodity Price Pressures

  While we know now that Greece is irrelevant, and China is irrelevant (fdrom what we are told by talking heads), it appears the commodity carnage of the last few months is relevant for at least one nation. Having already warned about Australia, it appears New Zealand has got nervous:

  • *NEW ZEALAND CUTS KEY INTEREST RATE TO 3.00% FROM 3.25%, FURTHER EASING LIKELY AT SOME POINT

  The Central bank blames softening economic outlook driven by commodity price pressures. Kiwi interestingly popped on the news to 0.66 before fading back a little, despite RBNZ noting a further NZD drop is necessary.

  *  *  *

  • *RBNZ SAYS SOME FURTHER EASING SEEMS LIKELY
  • *RBNZ SAYS FURTHER NZD DROP IS NECESSARY
  • *RBNZ: FURTHER NZ$ DEPRECIATION NECESSARY GIVEN COMMOD PRICES

  and finally…

  • *RBNZ SAYS FURTHER NZD DROP IS NECESSARY

  Disappointly, Kiwi is rallying…

  

   

  RBNZ Governor Graeme Wheeler Cuts Key Rate to 3.0%: Statement

  The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.0 percent.

   

  Global economic growth remains moderate, with only a gradual pickup in activity forecast. Recent developments in China and Europe led to heightened uncertainty and increased financial market volatility. Particular uncertainty remains around the impact of the expected tightening in US monetary policy.

   

  New Zealand’s economy is currently growing at an annual rate of around 2.5 percent, supported by low interest rates, construction activity, and high net immigration. However, the growth outlook is now softer than at the time of the June Statement. Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply.

   

  Headline inflation is currently below the Bank’s 1 to 3 percent target range, due largely to previous strength in the New Zealand dollar and a large decline in world oil prices. Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure. A key uncertainty is how quickly the exchange rate pass-through will occur.

   

  House prices in Auckland continue to increase rapidly, but, outside Auckland, house price inflation generally remains low. Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected.

   

  The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.

   

  A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely.

  *  *  *

  

  

  

  

  

• $900 Million Payday Is Billionaires' Reward For Crushing Twinkie-Maker's Labor Unions

  Two days ago we reported that according to the new Chief Restructuring Officer of America’s “first national supermarket chain”, Great Atlantic & Pacific, also known as A&P, Superfresh and Pathmark supermarkets, which just filed its second chapter 11 bankruptcy protection in 5 years, it did so for one main reason: unions, and specifically legacy Collective Bargaining Agreements which made profitability for the (heavily levered) company impossible.

  While that argument is debatable, and as we said “if it wasn’t for unions, it would be something else, like loading up on massive amounts of debt to repay Yucaipa’s equity investment, which would then be unsustainable once rates rose and once interest expense became so high it soaked up all the company’s cash flow” one thing that is absolutely certain is that what A&P just did is a flashback to what Twinkies’ maker Hostess itself did as part of its November 2012 Chapter 7 bankruptcy liquidation.

  Then, too, the company sought to crush labor unions who “refused to negotiate in good faith”, and as a result the company went bankrupt, thereby ending all of its legacy labor agreements once and for all.

  Sure enough, freed of its cash-draining labor obligations, Hostess suddenly became a very attractive target and not only did it survive but it fourished when in 2013 Private Equity titan Apollo Global Management and billionaire investor C. Dean Metropoulos acquired the maker of Twinkies from liquidation.

  Very shortly thereafter, the equity investors did everything they could to reward themselves for an investment in the newly labor union-free company, which was quite viable as a standalone entity because demand for its products was as high as ever (the US will never have a problem with lack of obesity) and tried first to sell the company and then to take it public. They were unable do achieve either, so they decided to take a third route, one which takes advantage of the unprecedented debt bubble.

  As Bloomberg reports, “Hostess is selling $1.23 billion of term loans. Of that, $905 million will be used to pay a dividend to its shareholders, according to Standard & Poor’s. That’s more than double what they paid for the business.“

  Translated: after investing $410 million in March 2013, two billionaires are about to make a $500 million return an investment they have held just over two years, with the blessing of a whole lot of debt investors. And all they had to do was pick up the carcass of a company which did nothing more than crush its unions.

  Somewhat snydely, we hope, Bloomberg adds that “the deal is just the latest example of how record-low borrowing costs from the Federal Reserve are encouraging risky companies to add cheap debt — sometimes to enrich private-equity firms — as investors clamor for yield.”

  Not sometimes: every time there is a bond bubble resulting from years of ruinous monetary policy and cheap rates, it is the equity backers who are left with all the profits. In this case, Apollo and Metropolous will make a more than 100% return over a holding period of less than two years.

  They are not alone: “So-called dividend deals reached almost $16 billion in the second quarter, the most in a year, according to Bloomberg data. The downside of the loans is they can increase a borrower’s risk of default by piling on debt, without any of the cash going to improving operations or boosting revenues.”

  “Dividends aren’t designed to create value for the company,” Moody’s Investors Service analyst Brian Weddington said by phone. “This is a return of capital and profits to the founding investors.”

  No, the value for the company, its equity sponsors will claim, came from their involvement, and indeed company operations did pick up modestly:

  Business at Hostess has improved since the buyout. Earnings have increased “substantially,” said S&P’s Chiem. Revenue has risen to more than $600 million, and earnings before interest, taxes, depreciation and amortization to nearly $200 million, according to S&P. The snack business was able to cut costs by storing its products in a warehouse rather than delivering them directly to stores from where they’re made, according to Chiem.

  Happy with their achievement, which was only made possible as a result of the unbundling of the underlying business from its labor union ties, barely one year after their involvement, the billionaire owners sought to capitalize on their investment and Hostess began considering a sale last year, with sources saying in November that the business could fetch as much as $1.6 billion.

  The sale process went nowhere, as did a subsequent attempt to take Hostess public.

  So, why not follow the path of least resistance, and present credit investors using “other people’s money” with the chance to repay them. This is precisely what they did about to happen courtesy of Credit Suisse which is the lead underwriter on the new debt financing.

  Credit Suisse is leading the financing, which consists of an $825 million first-lien loan and a $400 million second-lien offering, according to data compiled by Bloomberg. It has asked investors to commit by July 30.

  But don’t say the new creditors, secured by a whole lot of Twinkies and Ho-Hos in company inventory, did not put up a fight demanding fair terms: “At a July 16 meeting held at Credit Suisse Group AG’s New York offices, potential investors were offered treats including Hostess orange cupcakes, according to three people with knowledge of the meeting. They were also offered an interest rate of as high as 7.75 percentage points” above LIBOR.

  End result: a company that went from 2x EBITDA leverage to an eye-popping 6x!

  For Hostess, the deal will triple debt levels to about six times a measure of earnings, according to an S&P report this month. Regulators including the Federal Reserve and the Office of the Comptroller of the Currency said in their 2013 leveraged lending guidance that debt levels exceeding six times raise concern as they seek to curb risky underwriting.

  The irony is that Apollo would have pulled out even more cash if there wasn’t a leverage cap. Still, even with “only” 6 turns of EBITDA in debt, most know how this deal will end:

  The dividend demonstrates “a very aggressive financial policy,” S&P analyst Bea Chiem said in the report. The credit grader is keeping Hostess’s corporate rating at B, or five levels below investment-grade, on the view that the baker’s operating performance will continue improving. The junior-ranked loan being marketed is rated CCC+, or seven levels below investment grade.

  In short: we give Hostess about 1-2 years before it files Chapter 33: it third bankruptcy a first one in 2004 and the second one in 2012.

  Only this time there will be no unions left to blame: it will be all about the insurmountable leverage, and the rapacious greed of its PE sponsors to strip the company of all pledgeable assets and extract as much cash as possible in the shortest possible time, while layering what the IMF would clearly dub is insurmountable debt.

  But before you blame them, blame the creditors who made it possible: all those “investors” who were tempted with “Hostess orange cupcakes” to dump billions of other people’s money entrusted to then, just so they could generate a modest return.

  And before you blame these individuals who are merely looking after their year-end bonus which is contingent on beating some risk (or rather return)-free benchmark, blame the Fed whose 7 years of ZIRP has made this kind of asset strip-mining not only possible but an acceptable, daily occurrence.

  Because the end result is clear: after the unions were crushed, and Hostess emerged with a clean balance sheet, the fact that it already has 6x debt guarantees it will be bankrupt once again. The only question is when.

  The losers will be the thousands of non-unionized full and part-time workers at the company.

  The only winners: the billionaire investors who are about to get even richer thanks to none other than the Federal Reserve and an entire world filled with lunatic central bankers who have clearly taken over the asylum.

  

  

  

  

  

• 12 Ways The Economy Is In Worse Shape Now Than During The Depths Of The Last Recession

  Submitted by Michael Snyder via The Economic Collapse blog,

  Did you know that the percentage of children in the United States that are living in poverty is actually significantly higher than it was back in 2008?  When I write about an “economic collapse”, most people think of a collapse of the financial markets.  And without a doubt, one is coming very shortly, but let us not neglect the long-term economic collapse that is already happening all around us.  In this article, I am going to share with you a bunch of charts and statistics that show that economic conditions are already substantially worse than they were during the last financial crisis in a whole bunch of different ways.  Unfortunately, in our 48 hour news cycle world, a slow and steady decline does not produce many “sexy headlines”.  Those of us that are news junkies (myself included) are always looking for things that will shock us.  But if you stand back and take a broader view of things, what has been happening to the U.S. economy truly is quite shocking.  The following are 12 ways that the U.S. economy is already in worse shape than it was during the depths of the last recession…

  #1 Back in 2008, 18 percent of all Americans kids were living in poverty.  This week, we learned that number has now risen to 22 percent…

  There are nearly three million more children living in poverty today than during the recession, shocking new figures have revealed.

   

  Nearly a quarter of youngsters in the US (22 percent) or around 16.1 million individuals, were classed as living below the poverty line in 2013.

   

  This has soared from just 18 percent in 2008 – during the height of the economic crisis, the Casey Foundation’s 2015 Kids Count Data Book reported.

  #2 In early 2008, the homeownership rate in the U.S. was hovering around 68 percent.  Today, it has plunged below 64 percent.  Incredibly, it has not been this low in more than 20 years.  Just look at this chart – the homeownership rate has continued to plummet throughout Obama’s “economic recovery”…

  

  #3 While Barack Obama has been in the White House, government dependence has skyrocketed to levels that we have never seen before.  In 2008, the federal government was spending about 37 billion dollars a year on the federal food stamp program.  Today, that number is above 74 billion dollars.  If the economy truly is “recovering”, why is government dependence so much higher than it was during the last recession?

  #4 On the chart below, you can see that the U.S. national debt was sitting at about 9 trillion dollars when we entered the last recession.  Since that time, the debt of the federal government has doubled.  We are on the exact same path that Greece has gone down, and what you are looking at below is a recipe for national economic suicide…

  

  #5 During Obama’s “recovery”, real median household income has actually gone down quite a bit.  Just prior to the last recession, it was above $54,000 per year, but now it has dropped to about $52,000 per year…

  

  #6 Even though our incomes are stagnating, the cost of living just continues to rise steadily.  This is especially true of basic things that we all purchase such as food.  As I wrote about earlier this year, the price of ground beef in the United States has doubled since the last recession.

  #7 In a healthy economy, lots of new businesses are opening and not that many are being forced to shut down.  But for each of the past six years, more businesses have closed in the United States than have opened.  Prior to 2008, this had never happened before in all of U.S. history.

  #8 Barack Obama is constantly telling us about how unemployment is “going down”, but the truth is that the  percentage of working age Americans that are either working or considered to be looking for work has steadily declined since the end of the last recession…

  

  #9 Some have suggested that the decline in the labor force participation rate is due to large numbers of older people retiring.  But the reality of the matter is that we have seen a spike in the inactivity rate for Americans in their prime working years.  As you can see below, the percentage of males between the ages of 25 and 54 that aren’t working and that aren’t looking for work has surged to record highs since the end of the last recession…

  

  #10 A big reason why we don’t have enough jobs for everyone is the fact that millions upon millions of good paying jobs have been shipped overseas.  At the end of Barack Obama’s first year in office, our yearly trade deficit with China was 226 billion dollars.  Last year, it was more than 343 billion dollars.

  #11 Thanks to all of these factors, the middle class in America is dying.  In 2008, 53 percent of all Americans considered themselves to be “middle class”.  But by 2014, only 44 percent of all Americans still considered themselves to be “middle class”.

  When you take a look at our young people, the numbers become even more pronounced.  In 2008, 25 percent of all Americans in the 18 to 29-year-old age bracket considered themselves to be “lower class”.  But in 2014, an astounding 49 percent of all Americans in that age range considered themselves to be “lower class”.

  #12 This is something that I have covered before, but it bears repeating.  The velocity of money is a very important indicator of the health of an economy.  When an economy is functioning smoothly, people generally feel quite good about things and money flows freely through the system.  I buy something from you, then you take that money and buy something from someone else, etc.  But when an economy is in trouble, the velocity of money tends to go down.  As you can see on the chart below, a drop in the velocity of money has been associated with every single recession since 1960.  So why has the velocity of money continued to plummet since the end of the last recession?…

  

  If you are waiting for an “economic collapse” to happen, you can stop waiting.

  One is unfolding right now before our very eyes.

  But what most people really mean when they ask about these things is that they are wondering when the next great financial crisis will happen.  And as I discussed yesterday, things are lining up in textbook fashion for one to happen in our very near future.

  Once the next great financial crisis does strike, all of the numbers that I just discussed above are going to get a whole lot worse.

  So as bad as things are now, the truth is that this is just the beginning of the pain.

  

  

  

  

  

• Ottawans Outed – 1 In 5 Found To Be "Cheating Dirtbags Who Deserve No Discretion"

  Canada's capital city, Ottawa, is, as MSN reports, also it's most potentially adulterous. Around 1 in 5 of the population is registered on Ashley Madison – the recently hacked social network for married people looking for an affair. The hotbed of infidelity was also the seat of power: The top postal code for new members matched that of Parliament Hill, according to Avid Live chief executive Noel Biderman in a newspaper report published earlier this year.

  As Reuters reports,

  Canada's prim capital is suddenly focused more on the state of people's affairs than the affairs of the state.

   

  One in five Ottawa residents allegedly subscribed to adulterers' website Ashley Madison, making one of the world's coldest capitals among the hottest for extra-marital hookups – and the most vulnerable to a breach of privacy after hackers targeted the site.

   

  The hackers, who referred to customers as "cheating dirtbags who deserve no discretion," appear uninterested in blackmailing individual clients, unlike an organized crime outfit.

   

  The website's Canadian parent, Avid Life Media, said it had since secured the site and was working with law enforcement agencies to trace those behind the attack.

   

  "Everybody says Ottawa is a sleepy town and here we are with 200,000 people running around on each other," said municipal employee Jon Weaks, 27, as he took a break at an outdoor cafe near the nation's Parliament.

   

  "I think a lot of people will be questioned tonight at dinner," added colleague Ali Cross, 28.

   

  Some 189,810 Ashley Madison users were registered in Ottawa, a city with a population of about 883,000, making the capital No. 1 for philanderers in Canada and potentially the highest globally per capita, according to previously published figures from the Toronto-based company.

  However, Canada may have bigger problems…

  The hotbed of infidelity was also the seat of power: The top postal code for new members matched that of Parliament Hill, according to Avid Live chief executive Noel Biderman in a newspaper report published earlier this year.

   

  Biderman said capital cities around the world typically top subscription rates, a phenomenon he chalks up to "power, fame and opportunity," along with the risk-taking personalities that find themselves in political cities.

   

  The Ottawa mayor's office and city council either declined to comment or did not return emails.

  *  *  *

   

  

   

  We suspect 'overweighting' Canadian divorce lawyers and 'undereweighting' Canadian hotels would be the optimum pair to profit from this…

  

  

  

  

  

• "Far Worse Than 1986": The Oil Downturn Has No Parallel In Recorded History, Morgan Stanley Says

  On Tuesday the market got yet another reminder of just how painful the “current commodity price environment” has been for producers when Chesapeake eliminated its common dividend in order to conserve cash.

  After noting the plunge in Chesapeake’s shares (to a 12-year low) we subsequently outlined why the US shale “revolution” is now running out of lifelines as hedges roll off and as the next round of credit line assessments looms in October.

  A persistent theme here – as regular readers are no doubt aware – has been the extent to which an ultra-accommodative Fed has contributed to a deflationary supply glut by ensuring that beleaguered producers retain access to capital markets. In short, cash-strapped companies who would have otherwise gone out of business have been able to stay afloat thanks to the fact that Fed policy has herded investors into risk assets.

  In a ZIRP world, there’s plenty of demand for new HY issuance and ill-fated secondaries, which means the digging, drilling, and pumping gets to continue indefinitely in what may end up being one of the most dramatic instances of malinvestment the market has ever seen. 

  Those who contend that the downturn simply cannot last much longer – that the supply/demand imbalance will soon even out, that the market will clear sooner rather than later, and that even if the weaker hands are shaken out, the pain for the majors will be relatively short-lived – are perhaps ignoring the underlying narrative that helps to explain why the situation looks like it does. At heart, 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.

  Against that backdrop, and amid Wednesday’s crude carnage, we turn to Morgan Stanley for more on why the current downturn will be “worse than 1986.” 

  From Morgan Stanley

  Worse than 1986? Really?

  
  

  We have been expecting the current downturn to be as severe as the one in 1986 – the worst for at least 45 years – but not worse than that. Still, if oil prices follow the path suggested by the forward curve, our thesis may yet prove too optimistic.

  Our constructive stance on the majors is based on four factors: 1) supply – we expected production growth to moderate following large capex cuts and the sharp decline in the rig count; 2) demand – we anticipated that the fall in price would boost oil products demand; 3) cost and capex – we foresaw both falling sharply, similar to the industry’s response in 1986; and 4) valuation – relative DY and P/BV indicated 35-year lows.

   

  So far this year, we can put a tick against three of them [but] our expectation on supply has not materialised: US tight oil production growth has started to roll over, but this has been more than offset by OPEC, which has added ~1.5 mb/d since February. 

  
  

  On current trajectory, this downturn could become worse than 1986: An additional +1.5 mb/d is roughly one year of oil demand growth. If sustained, this could delay the rebalancing of oil markets by a year as well. The forward curve has started to price this in: as the chart shows, the forward curve currently points towards a recovery in prices that is far worse than in 1986. This means the industrial downturn could also be worse. In that case, there would be little in analysable history that could be a guide to this cycle. 

   

  

   

  [There are] strong similarities between the current oil price downturn and the one that occurred in 1985/86. The trajectory of oil prices is similar on both occasions. There were also common reasons for the collapse. 

   

  A high and stable oil price in the preceding four years stimulated technological innovation and led to a high level of investment. This resulted in strong production growth outside OPEC, exceeding the rate of global demand growth. When it became clear that OPEC would no longer rein in production to balance the market (as it did during both the Nov 1985 and Nov 2014 OPEC meetings) the price collapsed. 

  And although MS notes that similar to 1986, costs and capex are likely to come in sharply while demand growth should materialize, the supply side of the equation is not cooperating thanks to increased output from OPEC. 

  Due to the sharp slowdown in drilling activity and the high decline rate of tight oil wells, we expected production in the US to flatline and start declining in 2H. This seems to be happening: according to the US Department of Energy, tight oil production in June was 94 kb/d below the April level, and it forecasts further falls of 90 kb/d in both July and August.

   

  Now that capex is falling, we anticipated non-US production to be flat at best. Still, this has not yet been the case. At the time of our ‘Looking Beyond the Nadir’ report in February, OPEC production stood at ~30.2 mb/d. This increased substantially to 31.3 mb/d in May and 31.7 mb/d in June, i.e. OPEC has added 1.5 mb/d to global supply in the last four months alone.

   

  Our commodity analyst Adam Longson argues that the oil market is currently ~800,000 b/d oversupplied. This suggests that the current oversupply in the oil market is fully due to OPEC’s production increase since February alone. 

  
  

  We anticipated that OPEC would not cut, but we didn’t foresee such a sharp increase. In our view, this is the main reason why the rebalancing of oil markets had not yet gained momentum.

  
  

  

  
  

  If oil prices follow the path suggested by the forward curve, and essentially remain rangebound around levels seen in the last 2-3 months, this downturn would be more severe than that in 1986. As there was no sharp downturn in the ~15 years before that, the current downturn could be the worst of the last 45+ years.

   

  If this were to be the case, there would be nothing in our experience that would be a guide to the next phases of this cycle, especially over the relatively near term. In fact, there may be nothing in analysable history. 

  
  

  

   

  Needless to say, this does not bode well for everyone who has unwittingly thrown good money after bad on the assumption that the Saudis will cut production and trigger a rebound in crude.

  In addition to the immense pressure from persistently low prices, US producers also face a Fed rate hike cycle and thus the beginning of the end for easy money.

  Of course, the more expensive it is to fund money-losing producers, the less willing investors will be to perpetuate this delay-and-pray scheme, which brings us right back to what we’ve been saying for months: the expiration date for heavily indebted US drillers is fast approaching, and if Morgan Stanley thinks the oil downturn has no parallel in “analysable history,” wait until they see the carnage that will unfold in HY credit when a few high profile defaults in the oil patch send the retail crowd running for the junk bond ETF exits.

  

  

  

  

  

• Commodisaster

  "Peak" Apple?

  And a quick message for Caesar's shareholders… (and AAPL Call buyers)…

  Stocks legged lower overnight on AAPL and MSFT, USDJPY helped them stage a rampaplooza as cash markets opened managing to get the S&P unahcnged for a brief moment…

  

   

  Cash indices on the day saw Small Caps (who have been big losers recently) outperform but the rest ended red..

  

   

  On the week, Trannies crept back into the green but The Dow remains the biggest loser as CAT, IBM, UTX, MSFT and AAPL weight it down

  

   

  Leaving The Dow back in the red for 2015…

  

   

  But that was not acceptable and so VIX was whacked to ensuire The Dow closed green for 2015…

  

   

  52 Week Lows continue to rise…

  

   

  As AAPL bounced off the 200DMA again

  

   

  Stocks decoupled from bonds early on – thanks to JPY – but recoupled later in the day…

  

   

  Treasury yields were mixed with the long-end testing down to 3.02% and the short-end selling off…

  

   

  As The Dollar bounced back…

  

   

  Commodities all suffered…

  

   

  Though silver held its own…

  

   

   

  Gold continues to tumble – 10 down days in a row is now the longest losing streak since 1996…

  

   

  Crude was clubbed over 3% on the day – testing a $48 handle and back at its lowest in 3 months… down 16 of the last 20 days

  

   

  Copper clubbed like a baby seal – down 7 of lats 9 days , hovering at cycle lows…

  

   

  Charts: Bloomberg

  Bonus Chart: Even more ominously for Copper – physical demand for withdrawals from inventory have collapsed…

  

   

  Bonus Bonus Chart: Lumber smashed again today and as a leading indicator is flashing red for new home sales…

  

   

  Bonus Bonus Bonus Chart: Any day now – clicks will beat bricks…