• Greece Is Just The Beginning: The 21st Century 'Enclosures' Have Begun

  Submitted by Paul Craig Roberts,

  All of Europe, and insouciant Americans and Canadians as well, are put on notice by Syriza’s surrender to the agents of the One Percent. The message from the collapse of Syriza is that the social welfare system throughout the West will be dismantled.

  The Greek prime minister Alexis Tsipras has agreed to the One Percent’s looting of the Greek people of the advances in social welfare that the Greeks achieved in the post-World War II 20th century. Pensions and health care for the elderly are on the way out. The One Percent needs the money.

  The protected Greek islands, ports, water companies, airports, the entire panoply of national patrimony, is to be sold to the One Percent. At bargain prices, of course, but the subsequent water bills will not be bargains.

  This is the third round of austerity imposed on Greece, austerity that has required the complicity of the Greeks’ own governments. The austerity agreements serve as a cover for the looting of the Greek people literally of everything. The IMF is one member of the Troika that is imposing the austerity, despite the fact that the IMF’s economists have said that the austerity measures have proven to be a mistake. The Greek economy has been driven down by the austerity. Therefore, Greece’s indebtedness has increased as a burden. Each round of austerity makes the debt less payable.

  But when the One Percent is looting, facts are of no interest. The austerity, that is the looting, has gone forward despite the fact that the IMF’s economists cannot justify it.

  Greek democracy has proven itself to be impotent. The looting is going forward despite the vote one week ago by the Greek people rejecting it. So what we observe in Alexis Tsipras is an elected prime minister representing not the Greek people but the One Percent.

  The One Percent’s sigh of relief has been heard around the world. The last European leftist party, or what passes as leftist, has been brought to heel, just like Britain’s Labour Party, the French Socialist Party, and all the rest.

  Without an ideology to sustain it, the European left is dead, just as is the Democratic Party in the US. With the death of these political parties, the people no longer have any voice. A government in which the people have no voice is not a democracy. We can see this clearly in Greece. One week after the Greek people express themselves decisively in a referendum, their government ignores them and accommodates the One Percent.

  The American Democratic Party died with jobs offshoring, which destroyed the party’s financial base in the manufacturing unions. The European left died with the Soviet Union.

  The Soviet Union was a symbol that there existed a socialist alternative to capitalism. The Soviet collapse and “the end of history” deprived the left of an economic program and left the left-wing, at least in America, with “social issues” such as abortion, homosexual marriage, gender equality, and racism, which undermined the left-wing’s traditional support with the working class. Class warfare disappeared in the warfare between heterosexuals and homosexuals, blacks and whites, men and women.

  Today with the Western peoples facing re-enserfment and with the world facing nuclear war as a result of the American neoconservatives’ claim to be History’s chosen people entitled to world hegemony, the American left is busy hating the Confederate battle flag.

  The collapse of Europe’s last left-wing party, Syrzia, means that unless more determined parties arise in Portugal, Spain, and Italy, the baton passes to the right-wing parties – to Nigel Farage’s UK Independence Party, to Marine Le Pen’s National Front in France, and to other right-wing parties who stand for nationalism against national extermination in EU membership.

  Syriza could not succeed once it failed to nationalize the Greek banks in response to the EU’s determination to make them fail. The Greek One Percent have the banks and the media, and the Greek military shows no sign of standing with the people. What we see here is the impossibility of peaceful change, as Karl Marx and Lenin explained.

  Revolutions and fundamental reforms are frustrated or overturned by the One Percent who are left alive. Marx, frustrated by the defeat of the Revolutions of 1848 and instructed by his materialist conception of history, concluded, as did Lenin, Mao, and Pol Pot, that leaving the members of the old order alive meant counter-revolution and the return of the people to serfdom. In Latin America every reformist government is vulnerable to overthrow by US economic interests acting in conjunction with the Spanish elites. We see this process underway today in Venezuela and Ecuador.

  Duly instructed, Lenin and Mao eliminated the old order. The class holocaust was many times greater than anything the Jews experienced in the Nazi racial holocaust. But there is no memorial to it.

  To this day Westerners do not understand why Pol Pot emptied Cambodia’s urban areas. The West dismisses Pol Pot as a psychopath and mass murderer, a psychiatric case, but Pol Pot was simply acting on the supposition that if he permitted representatives of the old order to remain his revolution would be overthrown. To use a legal concept enshrined by the George W. Bush regime, Pol Pot pre-empted counter-revolution by striking in advance of the act and eliminating the class inclined to counter-revolution. The class genocide associated with Lenin, Mao, and Pol Pot are the collateral damage of revolution.

  The English conservative Edmund Burke said that the path of progress was reform, not revolution. The English elite, although they dragged their heels, accepted reform in place of revolution, thus vindicating Burke. But today with the left so totally defeated, the One Percent does not have to agree to reforms. Compliance with their power is the only alternative.

  Greece is only the beginning. Greeks driven out of their country by the collapsed economy, demise of the social welfare system, and extraordinary rate of unemployment will take their poverty to other EU countries. Members of the EU are not bound by national boundaries and can freely emigrate. Closing down the support system in Greece will drive Greeks into the support systems of other EU countries, which will be closed down in turn by the One Percent’s privatizations.

  The 21st century Enclosures have begun.

  

  

  

  

  

• Tennessee Woman Arrested For Printing Money: "All These Other Bitches Get To Print Money So I Can Too"

  In what is either the best example why one should never believe anything they read on the internet, or just blatant frontrunning of the last QE by a few years, earlier this week a woman from Kingsport, Tennessee was arrested for counterfeiting money. That in itself is not surprising – it was her justification why she did it: she told police that she thought she was doing nothing wrong because she had read online that President Barack Obama made a new law allowing her to print her own money.

  

  Pamela Downs, 45
  

  TimesNews reports that police were called to a local grocery store on Sunday night in regards to a complaint about counterfeit money. When the reporting officer arrived, he spoke with a gas station clerk who said that just prior to the officer’s arrival, a white female had handed him a $5 bill, which he suspected to be counterfeit.

  Since the bill had been printed on regular computer paper and each side had been glued together (but was falling apart), the officer immediately recognized the bill as a fake.

  The officer spoke with the female, identified as Pamela Downs, 45. After initially responding that she had gotten the fake bill from a gas station, Downs was asked by the officer if her purse could be searched, to which she agreed. Inside her purse, the officer found a $100 which was also counterfeit, according to the report. The bill was printed in black and white and the backside of the bill was upside down.

  A couple of receipts from Walmart were also found inside the purse, showing Downs had purchased copy paper and a printer.

  At that point she was arrested, and she gave the best money-counterfeiting “defense” we have heard in a long time:

  “I don’t give a ****, all these other bitches get to print money so I can too.“

  It was not immediately clear which “bitches” she was referring to.

  The police then searched the apartment and found several items consistent with being used to print counterfeit currency including paper, scissors, glue and a printer.  Several more counterfeit bills, both cut and uncut, were located at the apartment. Officers estimated the total to be around $30,000 to $50,000.

  While at the jail, Downs reportedly told the officer the receipts that were found were items she used to print money in her apartment.

  And back to the rationalization: “She then told officers she read online that President Obama had made a new law that permitted her to print her own money because she is on a fixed income, the report stated.“

  She was charged with criminal simulation and counterfeiting.

  While there are literally countless angles one can go with this story, maybe the best conclusion is that if only she had waited a few more years before printing her own money with the “president’s blessing”, all of this unpleasantness could have been avoided.

  

  

  

  

  

• Balance Of Superpowers: Comparing The US And Chinese Armed Forces

  Whether China is busy championing trade deals outside of the US dollar, buying up some of the world’s biggest companies, taking over foreign housing markets, or building massive networks of nuclear or wind power grids, it is clear that the country is a world power to be reckoned with. To be considered a true force, China also needs to be able to back up its economic and political might with a top notch military. Today’s infographic compares the armed forces of China with the United States.

  click image fir massive legible version

  

  Original graphic by: SCMP

   

  In terms of military spending per capita, China is the new kid on the block. Although it has increased in recent years, China is still behind Russia, Turkey, South Korea, Japan, Germany, the United Kingdom, France, and the United States. However, the country does make up for it with in absolute terms by its sheer population. In terms of total military expenditures, China spends the second most worldwide with a total of approximately $216 billion per year, which is about one-third of the US.

  In GDP terms, China spends about 2.1% of its annual GDP on military, and the United States spends 3.8%.

  Perhaps the biggest difference between the two superpowers is influence in other parts of the world. The United States has 133 military bases outside of its territory, and China has zero. More specifically, the United States has bases in multiple jurisdictions that surround China: South Korea, Kyrgyzstan, Japan, Singapore, Guam, Afghanistan, and Diego Garcia, a set of small islands in Indian Ocean.

  Courtesy of: Visual Capitalist

  

  

  

  

  

• Tennessee Mass Killer Linked To Islamic Terrorism

  While the rest of the world was paying attention to the sad conclusion of the Greek tragedy now in its third bailout season, the US was focused on a another tragedy playing out in the nation’s heartland when in the latest mass shooting on US soil, 4 marines were killed when a gunman, since identified at Mohammod Youssuf Abdulazeez, 24, a naturalized citizen born in Kuwait, opened fire first at a military recruiting center and then at a Naval Reserve Center in Chattanooga, Tennessee in what officials have called a “brazen, brutal act of domestic terrorism.”

  Incidentally, the shooting took place hours before a jury found James Holmes, who killed 12 people in a Colorado theater shooting in 2012, guilty of murder.

  As reported subsequently, the suspect’s mother is originally from Kuwait and his father from Palestine. It is unclear when Abdulazeez came to the United States but for many years he lived with his parents in a two-story home in Hixson, a suburb of Chattanooga. He worked as an intern at Mohawk Industries Inc, a carpet manufacturer, and the Tennessee Valley Authority, which provides power to the area. He most recently worked with Global Trade Express, according to the posted resume.

  

  According to Reuters, the suspect, seen driving an open-top Ford Mustang, is believed to have first gone to a joint military recruiting center in a strip mall and sprayed it with gunfire, riddling the glass facade with bullet holes.

  

  “Everybody was at a standstill and as soon as he pulled away everyone scrambled trying to make sure everyone was OK,” said Erica Wright, who works two doors down from the center.

  The gunman then drove off to a Naval Reserve Center about 6 miles away, when around 10:45 am local time, he shot four Marines before being shot and killed in a firefight with police about half an hour later. Three others were wounded in the attacks, including a police officer reported in stable condition and a Marine.

  

  At least three people were wounded in the attacks, including a Marine and a Navy sailor who is in critical condition, according to the hospital. One of those hurt was a police officer who was in stable condition.

  According to Bill Killian, the U.S. Attorney for the Eastern District of Tennessee, the rampage was being treated “as an act of domestic terrorism,” adding that no official determination of the nature of the crime had yet been made and the Federal Bureau of Investigation has not ruled anything out.

  “While it would be premature to speculate on the motives of the shooter at this time, we will conduct a thorough investigation of this tragedy and provide updates as they are available,” the agency said in a statement.

  According to a resume believed to have been posted online by Abdulazeez, he attended high school in a Chattanooga suburb and graduated from the University of Tennessee with an engineering degree.

  “I remember him being very creative. He was a very light minded kind of individual. All his videos were always very unique and entertaining,” said Greg Raymond, 28, who worked with Abdulazeez on a high school television program.

   

  “He was a really calm, smart and cool person who joked around. Like me he wasn’t very popular so we always kind of got along. He seemed like a really normal guy,” Raymond said.

  The FBI said it was too early to speculate on the motive for the rampage although in a follow up report we learned that the 24 year old had blogged as recently as Monday that “life is short and bitter” and Muslims should not miss an opportunity to “submit to Allah,” according to an organization that tracks extremist groups.

  The SITE Intelligence Group said a July 13 post written by suspected gunman Mohammod Youssuf Abdulazeez stressed the sacrifice of the Sahaba (companions of the Prophet) “fought Jihad for the sake of Allah.” Reuters could not independently verify the blog postings. Tangentially, Site Intelligence which has been most famous recently for being the first to track down and release most of ISIS’ barbaric if Hollywood-style produced YouTube clips, was founded by Rita Katz who prior to her intelligence career served in the Israeli Defense Forces.

  Further ties linking the shooting to terrorist Islamist elements emerged when the NYT reported that the father of a suspected gunman who killed four Marines in Chattanooga, Tennessee, on Thursday was investigated several years ago for “possible ties to a foreign terrorist organization.”

  Citing unnamed law enforcement officials, the paper said the gunman’s father was at one point on a terrorist watch list and was questioned while on a trip overseas.

  The paper quoted an official as cautioning that the investigation was several years old and had not generated any information on the son. The father was eventually removed from the watch list, the paper quoted the official as saying.

  According to another, unconfirmed report, an Islamic State affiliated Twitter account tweeted about the Chattanooga military reserve center shootings by Muhammad Youssef Abdulazeez just as they began.

  

  The account has since been suspended. The time stamp reads 10:34 a.m. in our screenshot of the tweet, which we took in New York, which is in the same time zone as Chattanooga. The shootings were reported between 10 and 11 a.m.

  In a statement following the shootings  Obama condemned the “heartbreaking” shooting deaths of four Marines Thursday in Tennessee, and said a full investigation is under way.

  “We don’t know yet all the details,” Obama said. “We know that what appears to be a lone gunman carried out these attacks.” The president said he wanted to extend “the deepest sympathies of the American people” to the four Marines and their families, and asked all Americans to pray for them.

  And while Obama did not rush to judgment, and had no comment about what the potential next steps could be, it was roughly around this time that America’s practically assured next president, Hillary Clinton, made it quite clear what the endgame of all these tragic events will likely be in the very near future:

  • CLINTON: U.S. NEEDS ANTI-PROPAGANDA POLICY TO COMBAT ISIS

  What better way to fight propaganda than with even greater propaganda even if it means the deaths of countless innocent people caught in the cross fire.

  

  

  

  

  

• How Socialism Destroyed Puerto Rico, And Why More Defaults Are Looming

  With Puerto Rico missing a payment on a bond overnight "due to non-appropriation of funds" but denying that this constitutes anything close to a default, the territory may be about to retake the limelight as Greece is now "fixed." As MarketWatch reports,

  The missed payment could have serious implications for holders of Puerto Rico bonds, “as the signal from breaking a seven-decade streak of bond payments may imply more defaults are looming,” Daniel Hanson, an analyst at Height Securities, said in a note.

   

  Not all Puerto Rican bonds are created equal, being backed by different types of revenues, such as tax revenues, road tolls, electricity bills etc.

   

  The first thing investors should do is “find out what revenue backs their bonds and whether their bonds are insured or not,” said Mary Talbutt, head of fixed income at Bryn Mawr Trust.

   

  Approximately 30% of muni mutual funds have holdings in Puerto Rico, more than half of which are insured, according to a Charles Schwab Investment Management report. As for the revenue that backs the bonds, most exposure is with the sales-tax backed bonds, known as COFINA bonds from their Spanish-language acronym, and the general-obligation bonds, known as G.O. bonds, according to the report.

   

  In that sense, investors that hold the PFC bonds are somewhat in a bind because “the language in PFC bonds makes payment dependent on appropriations from Puerto Rico’s legislature,” Hanson said.

   

  This is the main difference between the PFC bonds and the G.O. bonds. The former require appropriation, while the latter are backed by the full faith and credit of the territory and their repayment is guaranteed by the constitution.

   

  “The language… makes [the PFC bonds] a weaker credit relative to G.O. bonds. But a default is still a default,” said Andrew Gadlin, a research analyst at Odeon Capital Group.

   

  This has investors worried about other types of bonds that face a repayment deadline, most notably those issued by the island’s Government Development Bank (GDB).

   

  “The market is becoming more skeptical of the payments due August 1 on GDB debt, though the budget does set aside funds for paying these obligations,” Gadlin said.

  And as Euro Pacific Capital's Peter Schiff explains, this is far from over

  While Greece is now dominating the debt default stage, the real tragedy is playing out much closer to home, with the downward spiral of Puerto Rico. As in Greece, the Puerto Rican economy has been destroyed by its participation in an unrealistic monetary system that it does not control and the failure of domestic politicians to confront their own insolvency. But the damage done to the Puerto Rican economy by the United States has been far more debilitating than whatever damage the European Union has inflicted on Greece. In fact, the lessons we should be learning in Puerto Rico, most notably how socialistic labor and tax policies can devastate an economy, should serve as a wake up call to those advocating prescribing the same for the mainland.  

   

  The U.S. has bombed the territory of Puerto Rico with five supposedly well-meaning, but economically devastating policies. It has:

  1. Exempted the Island's government debt from all U.S. taxes in the Jones-Shaforth Act.
  2. Eliminated U.S. tax breaks for private sector investment with the expiration of section 936 of the U.S. Internal Revenue Code.
  3. Required the nation to abide by a restrictive trade arrangement.
  4. Made the Island subject to the U.S. minimum wage.
  5. Enabled Puerto Rico to offer generous welfare benefits relative to income.

  While passage of such politically popular laws seems benign on the surface (and have allowed politicians to claim that their efforts have helped the poorest Puerto Ricans), in reality they have deepened the poverty of the very people the laws were supposedly designed to help. The lessons here are so obvious that only the most ardent supporters of government economic control can fail to comprehend them.

   

  Tax-Free Debt

   

  By exempting U.S. citizens from taxes on interest paid on Puerto Rican sovereign debt, Washington sought to help the Puerto Rican economy by making it easier and cheaper for the Island's government to borrow from the mainland. As a result, Puerto Rican government bonds became a staple holding of many U.S. municipal bond funds. As with Fannie Mae and Freddie Mac bonds a decade ago, many investors believed that these Puerto Rican bonds had an implied U.S. government guarantee. This meant that the Puerto Rican government could borrow for far less than it could have without such a belief. However, this subsidy did not grow the Puerto Rican economy, but simply the size of the government, which had the perverse effect of stifling private sector growth.  

   

  In contrast to the tax-free income earned by Americans who buy Puerto Rican government bonds, those with the bad sense to lend to Puerto Rican businesses were taxed on the interest payments that they received. Businesses could have used the funds for actual capital investment (that could have increased the Island's productivity), but instead the money flowed to the Government which used it to buy votes with generous public sector benefits that did nothing to grow the Island's economy or put it in a better position to repay. That problem was left for future taxpayers who no politician seeking votes in the present cared about.

   

  This dynamic is almost identical to what happened in Greece, where low borrowing costs, made possible by the strong euro currency and the implied backstop of the European Central Bank and the more solvent northern European nations, permitted the Greek government to borrow at far lower rates than its strained finances would have otherwise allowed.

   

  Taxing Private Investment

   

  Perversely, as the U.S. government made it easier for the Puerto Rican government to borrow, it made it harder for the private sector to do so. In 2006 the government ended a tax break that exempted corporate profits earned on private sector investment in Puerto Rico from U.S. taxes. As a result, U.S. businesses that had been making investments and hiring workers on the Island pulled up stakes and moved to more tax-friendly jurisdictions. The result was an erosion of the Island's local tax base, just as more borrowing (made possible by triple tax-free government debt) obligated the remaining Puerto Rican taxpayers to greater future liabilities.

   

  The Jones Act

   

  The Jones Act, a 1920 law designed to protect the U.S. merchant marine from foreign competition, has had a devastating effect on Puerto Rico, and should be used as a cautionary tale to illustrate the dangers of trade barriers. Under the terms of this horrible law, foreign-flagged ships are prevented from carrying cargo between two U.S. ports. According to the law, Puerto Rico counts as a U.S. port. So a container ship bringing goods from China to the U.S. mainland is prevented from stopping in Puerto Rico on the way. Instead, the cargo must be dropped off at a mainland port, then reloaded onto an expensive U.S.-flagged ship, and transported back to Puerto Rico. As a result, shipping costs to and from Puerto Rico are the highest in the Caribbean. This reduces trade between Puerto Rico and the rest of the world. Since a large percentage of the finished goods used by Puerto Ricans are imported, the result is much higher consumer prices and fewer private sector jobs. Even though median incomes in Puerto Rico are just over half that of the poorest U.S. state, thanks to the Jones Act, the cost of living is actually higher than the average state.

   

  The Federal Minimum Wage

   

  In 1938 the Fair Labor Standards Act subjected Puerto Rico to a federal minimum wage, but it was not until 1983 that a 1974 act, which required that the Island match the mainland's minimum wage, was fully phased in. The current Federal minimum wage of $7.25 per hour is 77% of Puerto Rico's current median wage of $9.42. In contrast, the Federal minimum is only 43% of the U.S. median wage of almost $17 per hour (Bureau of Labor Statistics (BLS), May 2014). The U.S. minimum wage would have to be more than $13 per hour to match that Puerto Rico proportion. The disparity is greater when comparing minimum wage income to per capita income.

   

  The imposition of an insupportably high minimum wage has meant that entry level jobs simply don't exist in Puerto Rico. Unemployment is over 12% (BLS), and the labor force participation rate is about 43% (as opposed to 63% on the mainland) (The World Bank). A "success" by the Obama administration in raising the Federal minimum to $10 per hour would mean that the minimum wage in Puerto Rico would be higher than the current medium wage. Such a move would result in layoffs on the Island and another step down into the economic pit. I predict that it could bring on a crisis similar to the one created in the last decade in American Samoa when that Island’s economy was devastated by an unsustainable increase in the minimum wage.

   

  It will be interesting to see if our progressive politicians will have enough forethought and mercy to exempt Puerto Rico from minimum wage increases. But to do so would force them to acknowledge the destructive nature of the law, an admission that they would take great pains to avoid. 

   

  Welfare   

   

  In 2013 median income in Puerto Rico was just over half  that of the poorest state in the union (Mississippi) but welfare benefits are very similar. This means that the incentive to forgo public assistance in favor of a job is greatly reduced in Puerto Rico, as a larger percentage of those on public assistance would do better financially by turning down a low paying job. Because of these perverse incentives not to work, fewer than half of working age males are employed and 45% of the Island's population lived below the federal poverty line (U.S. Census Bureau, American Community Survey Briefs issued Sep. 2014). According to a 2012 report by the New York Federal Reserve Bank, 40% of Island income consists of transfer payments, and 35% of the Island's residents receive food stamps (Fox News Latino, 3/11/14).

   

  In other words, Puerto Rico's problems are strikingly similar to those of Greece. Its government spends chronically more than it raises in taxes, its economy is trapped in a regulatory morass, and its economic destiny is largely in the hands of others.

   

  *  *  *

  As The FT notes,

  Puerto Rico’s economy and population have been shrinking for almost a decade, and debts have ballooned to about 100 per cent of its gross national product as the government took advantage of the tax exemption enjoyed by US municipal debt.

   

  The Puerto Rico Electric Power Authority is already restructuring $9bn of bonds and loans.

   

  By September 1 Puerto Rico is expected to deliver a plan for turning round its finances. Officials have called for patience from creditors about how its various bondholders will be treated.

  Patience… indeed.

   

  *  *  *

   

  The solutions to Puerto Rico's problems are simple, but, Peter Schiff warns, politically toxic for mainland politicians to acknowledge.

  Puerto Rico must be allowed to declare bankruptcy, the Federal incentive for the Puerto Rican government to borrow money must be eliminated, Puerto Rico must be exempted from both the Jones Act and the Federal Minimum wage, and Federal welfare requirements must be reduced. Puerto Rico already has the huge advantages of being exempt from both the Federal Income Tax and Obamacare, so with a fresh start, free from oppressive debt and federal regulations, capitalism could quickly restore the prosperity socialism destroyed.

   

  With the current incentives provided by Acts 20 and 22 (which basically exempt Puerto Rico-sourced income for new arrivals from local as well as federal income tax – see my report on America's Tax Free Zone) and with some additional local free market labor reforms, in a generation it's possible that Puerto Ricans could enjoy higher per capita incomes than citizens of any U.S. state.

  If Washington really wanted to accelerate the process, it should exempt mainland residents from all income taxes, including the AMT, on Puerto Rico-sourced investment income, including dividends, capital gains, and interest related to capital investment.

  

  

  

  

  

• BofA Confused "Why People Would Wake Up One Morning And Decide To Panic"

  Over the past twelve months, the decades-old economic infrastructure that supports global dollar dominance suffered irreparable damage to two of its load-bearing walls. 

  First, the petrodollar system quietly began to die late last year. As crude prices plunged, the deluge of oil proceeds which had for years been recycled into USD-denominated assets dried up. Indeed, OPEC nations drained liquidity from financial markets for the first time in nearly two decades last year: 

  

  As we noted last month, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018, according to Goldman.The implications, BofAML observed in February, are far reaching: “…the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed’s exit strategy.”

  Second, the world’s most influential emerging economies have lost faith in the US-dominated multilateral institutions that have dominated the post-war world. This has manifested itself in the creation of two new supranational lenders (the AIIB and the BRICS bank) and one major new infrastructure development fund (China’s Silk Road fund). China plays an outsized role in the AIIB and the BRICS bank and both should serve to help Beijing embed the yuan further in global investment and trade. 

  Meanwhile, Russia and China have begun settling crude imports in yuan amid the extension of Western economic sanctions on Moscow and Russia recently overtook Saudi Arabia as China’s number one crude supplier. 

  All of this marks a departure from the economic and political norms that have served to underwrite decades of dollar dominance and it goes without saying that printing trillions of dollars over the course of multiple QE iterations doesn’t help king dollar’s cause.

  In addition to the above, there’s certainly an argument to be made that the US effectively surrendered its right to print the world’s reserve currency long ago.

  That is, once the new economics succeeded in burying sound money once and for all, and when fine-tuning macroeconomic outcomes and “smoothing” out business cycles finally became so entrenched in modern economic thought that talk of balanced budgets and a gold standard was largely relegated to the annals of history, the dollar became nothing more than another example of fiat money, unworthy of the reserve currency title. 

  Nevertheless, the status quo must be perpetuated, which is why Washington launched a Quixote-esque campaign against the AIIB complete with President Obama tilting against environmental and governance windmills and it is also why the likes of Bank of America must issue “research” with titles like “Econ 101: The reserve status of the dollar.”

  Fortunately, that particular piece of crisply-worded dollar cheerleader propaganda has one footnote that makes the five minutes we spent reading it all worth while. We present it below and leave it to readers to respond.

  From BofAML:

  Another mechanism could be a self-fulfilling feedback loop. If the general public watches the gloom and doom videos, loses faith in paper money and dumps it in favor of hard assets the dollar would collapse. On a similar note, if global investors believe QE is a signal of the central bank giving up on controlling inflation, they could dump the dollar, driving up the price of imported products. However, after seeing that QE has not caused inflation or triggered a dollar collapse in the last five years, it is not clear why people would wake up one morning and decide to panic. 

  

  

  

  

  

• "Safest Market In The World" China Opens Mixed As Margin Debt Drops To 4-Month Lows

  After a brief "don't fight the PBOC" three days of releveraging, China margin debt declined once again to 4-month lows. An opening pop – as is now ubiquitous has faded in FTSE China A50 futures but CSI-300 futures (which expire today and are this subject to some 'odd' behavior) are holding modest gains, despite a quarter of Chinese stocks remain halted. For those tempted back in to the deep end of global equity risk, we offer what must go down as the Baghdad Bob quote of the year, from the Chairman of HKEX, "China's stock market is the safest in the world."

  Some context on the decline and its massively manipulated bounce (which is now fading fast)…

  

   

  FTSE China A50 Futures opened a smidge higher but are leaking lower (while CSI-300 Futures are holding 1% gains pre-open)

  

   

  Deleveraging is happening… but has a long way to go…

  • *SHANGHAI MARGIN DEBT FALLS TO FOUR-MONTH LOW

  China margin debt is down 37% from its highs…

  

  And then there's this utter bollocks…

  • *CHINA STOCK MARKET IS "SAFEST" IN WORLD, HKEX CHAIR LI SAYS

  Yep, looks totally "safe"…

  

   

  Finally, on China, we leave you with Credit Suisse's Andrew garthwaite: "Our concern is that a triple bubble in housing, credit and investment comes with the significant risk of a hard landing."

  *  *  *

  In other news, Japan has its fair share of disasters…

  Sharp is the worst-performing stock on Japan's benchmark average this morning after the Nikkei newspaper said the electronics giant is likely to lose big in the April to June quarter.

   

  As the Nikkei 225 struggles to gain for a fifth day – up 0.1 per cent – Sharp shares are down 3 per cent in the first hour of trade.

  And Korea…

  And Samsung Heavy is down 17% to 7 year lows – this is the biggest drop since 1994

   

  

   Charts: Bloomberg

   

   

  

  

  

  

  

• Law Firm Stops Hiring Ivy League Grads, Demands "Gritty Street Lawyers"

  Having taken on hundreds of thousands of dollars worth of loans to achieve the ultimate goal of becoming an Ivy League law graduate, it appears, in at least one case, that your abilities are not required. As WSJ reports, Adam Leitman Bailey, a Manhattan attorney who runs a real estate firm, says he looks to hire law school graduates who have grit, ambition and a resolve to succeed in the legal profession. For that reason, he says, his firm has instituted a rule: If your resume lists your law school as Yale, Harvard, Columbia, Cornell or University of Pennsylvania, you need not apply because you won’t get the job.

  
  As The Wall Street Journal reports,

  Mr. Bailey, a graduate of Syracuse University Law School, says he admires the nation’s top law schools and doesn’t deny they attract some of the brightest minds. But says the best applicants hail from schools lower down the totem pole of prestige.

   

  In an article titled “Why We Do Not Hire Law School Graduates from the Ivy League Schools.” Mr. Bailey told Law Blog his ban applies to other elite schools outside the Ivy League, like Stanford and New York University.

   

  Explaining the policy, he writes that students who are accepted into top-ranked schools may have aced the LSAT, but, very broadly generalizing, they’ve climbed their way to a law degree without testing their mettle.

   

  [M]any of these law schools either fail to rank their students or do not even grade them at all. (1) Ergo, the students have no incentive to work hard and learn when they have guaranteed summer associate positions and guaranteed job offers. Their students typically have no incentive to get the best grades in their classes. They also have no incentive to squeeze as much learning as possible out of the law school experience. Most importantly, the real world simulation of dealing with the pressures of a case or deal may be removed when the students do not need to compete for a job in a difficult market…

   

  [T]hese students may become a United States Supreme Court Justice or a future President of the United States so political theory and international law and classes on capital punishment may be extremely important to them. However, we need our street lawyers ready for battle and taking trial practice, corporations, tax, civil procedure and any real estate and litigation course offered.

   

  In his piece he concedes that a few of the senior lawyers at Adam Leitman Bailey PC are indeed Ivy Leaguers, including the head of the firm’s real estate litigation practice group, a graduate of University of Pennsylvania Law School.

   

  “By the time these Ivy League attorneys come to our firm, we have seen them in the courtroom and observed their talents,” Mr. Bailey told Law Blog by email.

  *  *  *

  Ironically, Mr. Bailey, whose firm hires one to three law school graduates a year, also writes that the top students from the highest ranked schools “have no interest in applying for a job at our firm.”

  

  

  

  

  

• The World Explained (In 1 Cartoon)

  Presented with no comment…

   

  

   

  Source: @RoykoLePoyko

  

  

  

  

  

• How Likely Is Hyperinflation In The U.S?

  Authored by Seaborn Hall, originally posted at Advisor Perspectives,

  My previous article, “How likely is hyperinflation in the US? Part One,” covered hyperinflation's history, process, effects, definition, types and causes, as well as how to measure its emergence in nations using casual symptoms. Part Two answers the questions of how to gauge the likelihood of hyperinflation in the United States, what the emerging dangers are, how it might happen here and how to prepare if it does.

  As stated in Part One, because there are so many conflicting or just different views among analysts relative to hyperinflation, it is difficult for the average advisor or person investing for retirement – or just self-preservation – to know what to believe and how to act. Many of the warnings related to hyperinflation sound like Chicken Little's cry that the sky is falling.

  In the midst of the alarmism and confusion, these articles sift through the best resources available, including Bank for International Settlements (BIS), International Monetary Fund (IMF), Cato Institute and Fed papers to provide some clarity.

  Measuring hyperinflation in the U.S.A.

  The U.S. has come just short of hyperinflation twice before: once during the Revolutionary War and the second time, in March 1864, towards the end of the Civil War. The wars created high debt and supply disruptions within the continental states, congruent with fast acting hyperinflation, as explained in Part One.

  The U.S. has geographic advantages. It has natural supply routes made up of rivers, natural ports and inter-coastal waterways connected by a sophisticated rail and interstate system. It is protected by the natural boundaries of oceans, mountains and friendly bordering states. It is also not dependent on one export, like oil. These geographical and man-enhanced attributes temper any economic trend towards hyperinflation in the modern U.S.

  As previously noted, hyperinflation may be expected when there is persistent monetization and when the currency exchange premium – the premium the most-used foreign currency commands over the native currency – rises above 50%. This later sign typically occurs during a period of high inflation and up to three years before hyperinflation appears. This period may or may not include a currency crisis, which is distinct from, and can be an initial phase of, high inflation or hyperinflation. More broadly, the dangers of hyperinflation are measured by casual symptoms. These include fiscal, monetary and political causes and symptoms.

  As to fiscal symptoms in the U.S., according to a recent JP Morgan (JPM) presentation, net U.S. debt is presently around 75% of GDP, high, but non-critical. Foreign officials hold 35% of this debt; the Fed holds 16 percent. Both are significant, but not excessive. And, as Prasad and Ye note, debt cements the U.S. dollar role as global reserve; that is, as long as it is not unsustainable, and interest is a manageable piece of the total budget (chart, below).

  On this front, the U.S. does not have enough reserves to cover its short-term debt, but the Guidotti-Greenspan rule may not apply to Advanced Economies. And, as long as 10-year yields, currently about 2.35%, stay below 7% global bond investors tend not to panic, especially when the U.S. is the best of a bad lot.

  

  Deficits-to-expenditures is marginal at about 18%. According to the Wall Street Journal, the deficit has decreased to only 3% of GDP in 2014. The deficit was $1.4 trillion six years ago and the Congressional Budget Office (CBO) projects it to be just $486 billion this year. But, it is expected to increase in 2016 and according to The Heritage Foundation could be worrisome again by 2021.

  Also on the down side, according to Heritage, net U.S. debt, above, will reach 100% of GDP, a dangerous level, around 2028. At $18.2 trillion, total federal debt is already 102.5% of GDP. But most analysts feel that net debt (total minus intra-governmental debt) is the more critical measure. By 2024, mandatory expenditures, or entitlements plus interest on the debt, will be 75% of revenues. By 2030 they will consume revenues (chart, below).

  As to monetary symptoms, Federal Reserve liabilities are also high, about $4.4 trillion. According to Guggenheim, the Federal Reserve's debt/equity ratio was 51:1 in July 2012, more than double 2008, and almost double commercial institutions that failed. And Fed Assets as a percentage of GDP have more than doubled since 2007. But central banks are judged differently, as Japan's experience implies, thus far at least. John Cochrane, a professor of finance at the University of Chicago, points out more specifically that Fed reserves do not lead to hyperinflation. It is also important to understand that printing money or QE is not necessarily the same as monetizing the debt.

  

  In most cases, central banks control interest rates and reserves through government security and foreign currency purchases. To create money, a central bank purchases securities when it digitally credits the accounts of dealers with whom it does business. These dealer banks, like JP Morgan, are immediately richer. In some cases they park the money with the Fed, earning interest; in others, they invest it, some in riskier ways, like derivatives. For money velocity to increase they must actually loan it, which, according to Hanke, few currently do. This is partially due to increased federal regulations, like Dodd-Frank, instituted since the GFC, that place strict restrictions on lending activities.

  

  Monetizing is when the central bank buys government securities directly from the Treasury to fund existing or, unplanned debt, as in the case of Zimbabwe or Japan at present (see Part One). An independent central bank firmly resists such pressure from the political power. The danger, of course, is that this distinction becomes unclear.

  And, as a 2008 IMF report on the Fed stated, "Compared with its posture during the Great Depression, the Fed today is taking considerably more risk and the scope for possible profit and loss outcomes is much greater." The report also points out that the Fed's ability to make a profit during every year of the Great Depression era was largely due to its accumulation of gold. This is a far cry from the make-up of the Fed's burgeoning balance sheet today.

  Another emerging hyperinflation danger is in the area of political management relative to economic health. The Obama administration has less business experience than previous administrations (chart above). Surveys also show that the American people see themselves as more divided than at any time in history (below), and other studies show that the political center is shrinking. Political mismanagement that suddenly increases the debt and social tensions could lead to a crisis that results in high inflation.

  Years ago, R. E. McMaster, author of No Time for Slaves, proposed a simple formula to facilitate understanding of the interplay between government and economics: government + religion = economics. According to Hanke, the problem with Venezuela and its hyperinflation is Hugo Chavez's successor, Maduro; the problem in Yugoslavia was Milosevic; the problem in Zimbabwe was and is Mugabe. They all adhered to the ten-point playbook of the Communist Manifesto, which wrecked their economies and the social order. According to McMaster government does not operate in a vacuum, but those who lead administer by their philosophy or religion.

  

  This simple, but profound theorem plays out around the world today. It can lead to prosperity or economic crisis and hyperinflation. In America, this theorem has led to prosperity. The respect for individual rights and property rights are the pillars of the free market. The founders assured these rights through the founding documents, especially the U.S. Constitution.

  

  According to Coltart (see Part One), the primary reason for Zimbabwe's hyperinflation was that the deficiencies of their constitution allowed a vast disparity of power between the executive office and the legislative and judicial branches. Most worrisome relative to the U.S. Constitution are a list of Supreme Court reversed Executive Orders that even liberal law scholars say blatantly violate the Constitution. It is the quality, not the quantity (above ) of these orders that is the issue. If Americans continue to allow this executive tendency to span administrations, as they have in the past, the dilution of their constitutional rights may eventually lead to hyperinflation in the U.S.A.

  For the present, inflation and money velocity remain low. Though there are various reasons high inflation may appear, typically, there need to be two elements: economic capacity, including low unemployment, and high money velocity. With even core inflation (PCE) currently under 1.2% (as of June 15th headline PCE is 0.2%), economic capacity and lower unemployment just emerging, and money velocity still quite low, high inflation does not appear to be on the horizon.

  This is not to say that other factors could not instigate high inflation or hyperinflation. Some of these "black swans" are dealt with below. But, while Reinhart and Rogoff are no doubt right about the rampant denial afflicting advanced nations relative to future sub-par growth, QE, debt restructuring and coming high inflation, a crisis appears years away. Greece is symbolic of that looming crisis; but it is not Bear Stearns or Lehman.

  This time is not different; but global reserve status, the trust and confidence of investors and deep and wide financial markets make the U.S. unique. There are still enough questions not to be dogmatic, but until the U.S. experiences an increase in causal symptoms or a black swan that fractures global confidence in its economy, hyperinflation is not a worry.

  Black swans that could lead to high inflation or hyperinflation

  The above being noted, according to FT, the global system is in many ways more fragile today than before the GFC. And, considering its fragile nature, many incidents could come out of nowhere and lead to a crisis, or series of crises, that eventually results in a currency crisis and/or hyperinflation.

  One of the prominent possibilities is a successful cyber-attack on a major institution or the U.S. itself, especially the nation's power grids, its nuclear plants, its water supply or its major financial institutions. JPM's, NASDAQ's, and Sony's recent experience serve as examples, and with increasing tensions with Russia and China this area will continue to be a challenge. The director of the NSA recently warned that a cyber-attack will cause a major systems collapse within a decade unless the U.S. develops counter strategy immediately. According to Greg Medcraft, chairman of the board of the International Organization of Securities Commissions, the next black swan will be a cyber-attack.

  

  Though the U.S. has largely avoided catastrophe in the past, there is also the possibility that it might experience more natural disasters in the future. Remember Zimbabwe? About 19% of the U.S. is presently in severe or extreme drought, 29% in moderate to extreme conditions and approximately 40% in abnormal dryness or greater. 100% of California is in extreme, severe or exceptional drought. Also alarming is that according to the Wall Street Journal U.S. beekeepers have been losing 30% of their bees for the last decade, above the 19% sustainable rate. The above issues may place strains on agriculture, lead to supply disruptions and drive up food prices in future years.

  As I covered more extensively in “Evaluating the Arguments for the Dollar's Demise,” in the last decade, globally, at least, there has been an, apparent, increase in natural disasters. According to a 2013 article in The New England Journal of Medicine, there were three times as many natural disasters from 2000 to 2009 as there were from 1980 to 1989. And, according to one account, it was the 1906 San Francisco earthquake and fire that led directly to the Financial Panic of 1907.

  In another critical area, both George W. Bush and Barack Obama have identified nuclear terrorism as the greatest threat to national security. According to a 2008 FBI study, any terrorist nuclear weapon is likely to have a yield of about 1-kiloton (chart, below ), large enough to destroy a city center and with the potential to contaminate surrounding area for up to 4 miles, depending on wind direction (chart, 2nd below ). According to Nukemap, a 1-kiloton detonation in lower Manhattan would kill about 30,000 people and cause three times as many injuries, some fatal. A smaller possibility is a 10-kiloton event with fallout reaching 20 miles.

  

  Even before 911, the U.S. recognized that terrorist groups were attempting to acquire nuclear material. According to one recent joint report by Belfer Center at Harvard endorsed by military leaders, constructing a crude nuclear device is easier today than constructing a safe, reliable weapon. Tests indicate that intelligent operatives could defeat security systems holding weapons or materials and in the last five years several sites have been penetrated. As of 2014, at least four key core Al Qaeda nuclear operatives were still at large. And the difficulty of smuggling nuclear material into the U.S. is largely overstated. But the primary concern is that with one detonation terrorists could claim they had more bombs hidden, creating mass panic.

  

  The nuclear scenario would be a global catastrophe, claiming thousands of lives, shutting down trade and exporting dire consequences to other nations. The cost in response and retaliation would also add enormously to U.S. debt, potentially accelerating the nation towards economic crisis. According to the above Belfer report, the risk of a nuclear terrorist attack on U.S. soil is greater than 1 in 100 every single year.

  In addition to all of the above possibilities there are ongoing currency wars, the reemergence of the Eurozone crisis, the Ukraine and the potential destabilization of Russia, the China slowdown and real estate bubble, Japanese debt, the Sino-Japanese conflict and the craziness of mad regimes like North Korea and Iran to worry about. And we haven't even addressed nuclear sabotage, dirty bombs, an EMP device, ISIS and the Middle East as a whole, other U.S. terrorist events, central bank errors or another financial meltdown due to the approximately $70 trillion in global derivatives. In many ways, the world we currently live in is like dry kindling waiting for an inerrant spark to set it ablaze.

  Hyperinflation in the U.S.A.: How and when it might happen

  The risk of the economy collapsing and instigating hyperinflation is much like the theory of the avalanche: many of the items are in place, and all that is needed is the right trigger to set them off. Whether it comes in the next few years or twenty years from now is impossible to predict and depends on too many unknowns.

  Some, like Eswar S. Prasad, argue in The Dollar Trap that the intricate nature of global mechanisms will keep the dollar in play indefinitely – and the world largely in balance. Others, like James Rickards, in The Death of Money, insist that the complexity of global financial interactions and their tipping points will crash the U.S. economic system. Who is right?

  Based on the above analysis, unless the U.S. experiences a crisis greater than 911 or the GFC, hyperinflation is not a likely scenario for the next five years and probably more like twenty years. But, the greater and the more numerous crises are, the more likely that hyperinflation will come quickly. What if a black swan or a series of crises led to a perfect storm?

  A 1 kiloton nuclear terrorist attack strikes the U.S. in either New York City or Washington D.C. The stock markets crash, losing half their value. The EZ breaks apart and the resulting malaise spreads to the global economy. Instead of the confidence in crisis coming to the U.S., the U.S. bond market implodes and global money runs to gold, silver, foreign currencies and various ex-US bonds. In the U.S. prices rise and stocks rebound some with them – eventually. The U.S. military retaliates in foreign lands for the nuclear attack but walks into a trap.

  Disunity disintegrates into political civil war and panic incites unrest, resulting in martial law. The current drought increases and food supply is cut in half. Fed printing presses finally result in high inflation. Destruction from an earthquake and/or a volcanic eruption lays waste to much of a major city. All of these events combined destroy infrastructure, disrupt distribution, exacerbate the drought and kill leaders. Foreign governments take advantage of America's weakness and institute a cyber-attack. Power failures occur nation-wide.

  Hyperinflation ensues. The stock market falls as confidence wanes. Loss of control leads to a government coup, bank account freezes and despotism. The U.S. descends into an inflationary depression leading to fear of invasion, the dollar's fall and its replacement as the global reserve.

  It would probably take more than one isolated event – even a major one – to create the conditions for hyperinflation in the U.S. And, it took a decade for a similar process to unfold in other nations. But, it can occur faster in the midst of critical events.

  As I stated in “Evaluating the Arguments for the Dollar's Demise,” the U.S. has been protected by a hedge when it comes to disaster. But, events like Katrina, national drought, and the recent Supreme Court decisions relative to Constitutional interpretation hint at a new and more divisive era. Though for the present things seem fine, there is more than one route to an avalanche now than there may have been just a few years ago.

  Replacement of the dollar as global reserve as an isolated event might instigate hyperinflation more quickly. However, only one reserve currency nation has ever experienced a hyperinflation – France, from 1795-96, during the years of the French Revolution. And no nation has ever experienced a hyperinflation as a result of losing global reserve status. Other causal symptoms would likely be apparent, leaving some time to prepare.

  How to prepare for hyperinflation

  Here is some broad investment advice that takes into account the dichotomy of the above conclusions relative to hyperinflation. Portfolio allocations can start small and increase as events on the ground change:

  1. Protect what you have: Diversify your portfolio globally. Hold some real estate. Borrow at fixed rates while interest rates are low.

  2. Consider an international account. Set up expeditious portfolio transitions into foreign currency accounts and international funds with a flexible strategy for transference of at least some assets in the event of escalating volatility, major U.S. weakness or black swans.

  3. Allocate part of your portfolio to alternative funds and hedge-fund-like strategies. If qualified, consider hedge funds, especially those with a global macro and/or event-driven focus.

     

  4. Consider natural resources, agriculture and commodities based funds, especially now when commodities overall, including oil, have corrected and mining is near a historical low cost point versus gold. Remember that water is liquid gold and may be scarcer in the future.

  5. Accumulate tradable items: physical gold and silver (the chart above shows the rise of gold and silver during the Weimar Germany hyperinflation); jewelry; stored food and water; wine; and foreign currency.

  Hyperinflation in the U.S. is coming sometime in the next 20 years or so, and this isn't a cry from a Chicken Little, but a conclusion that the analysis strongly suggests. It is possible hyperinflation could happen during the next few years, but that seems unlikely since it would require a series of major crises and political blunders – events unprecedented in the history of the United States. If this led to a corruption of Constitutional rights in the midst of an exaltation of the Executive Branch that resulted in loss of the rule of law, hyperinflation might result. This is why the understanding and interpretation of the U.S. Constitution, especially in the context of executive orders, may be the most important issue before Congress, the judicial branch and the American people over the next few years – regardless of which party rules.

  It is much more probable that hyperinflation, when it comes to the U.S., will be preceded by a long slow decline that will include a protracted period of high inflation, and that the crash of the dollar and hyperinflation will be the final tumble off a looming, steep cliff. The indications from this analysis point to a convergence of events sometime in the mid-2020's to early 2030's – unless the American people can somehow unite and motivate their politicians to accomplish the hard, almost impossible task of cutting mountainous entitlements adding annually to U.S. debt. But, of course, if the perfect storm occurs, hyperinflation could arrive sooner.

  For the chaos of change it brings, hyperinflation has been described as an economy without memory. It can also be viewed as a furtive civil war a nation's political leaders wage with its people over who will pay for the nation's sins. Its battlegrounds, victories and defeats answer the question of who will wave the white flag over the extravagance of the nation's mismanagement. Ultimately, the people – and the leaders – are both forced to surrender.

  The good news is that, with time, every nation returns from the devastation of hyperinflation to the degree that it embraces corrective measures and free market principles. Regardless of what else might occur, in this sense the U.S. has a sure foundation, a rich history and a hopeful future.

  

  

  

  

  

• Fearing Greek Fallout, ECB Extends "Secret" Credit Lines To Balkans

  As discussions between Greece and its creditors deteriorated and pressure on the country’s banking sector mounted, some analysts began to look nervously towards Bulgaria and Romania where Greek banks control a substantial percentage of total banking assets. 

  The Monday following Greek PM Alexis Tsipras’ referendum call, yields on Bulgarian, Romanian, and Serbian bonds jumped, reflecting souring investor sentiment and the countries’ central banks quickly released statements aimed at calming the nerves of investors and, more importantly, of depositors. 

  As Morgan Stanley noted in May, the real risk  “is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits.” The bank continued: “Although well capitalised and liquid, Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in.”

  Shortly thereafter the “no contagion risk” myth collapsed entirely when Bloomberg reported that the ECB had stepped in to shield Bulgaria from any potential fallout from capital controls in Greece. “The ECB is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation. The ECB would provide access to its refinancing operations, offering euros to the banking system against eligible collateral,” Bloomberg said, citing unnamed officials. 

  Now, FT is out reporting that the ECB has extended “secret credit lines” to Bulgaria and Romania in order to forestall asset seizures. Here’s more:

  The European Central Bank has introduced secret credit lines to Bulgaria and Romania as part of a broader effort to convince foreign regulators not to pull the plug on the local subsidiaries of Greek banks.

   

  News of the behind-the-scenes support for the subsidiaries comes as ECB governors decide on Thursday whether to extend a €89bn lifeline in emergency eurozone funding to Greece’s beleaguered financial sector.

   

  Greece’s Piraeus, National Bank of Greece, Eurobank and Alpha Bank all have substantial assets in central and eastern Europe. If those assets were seized by local regulators, the parent banks would take an immediate capital hit, dealing a potentially terminal blow to Greece’s domestic financial system, which is already hanging by a thread as the country battles to agree a new rescue package with international creditors.

   

  “The fear is that if someone goes first, and pulls the plug, everyone will follow,” said a person familiar with the situation.

   

  The person said the ECB had put in place special “swap” arrangements, or bilateral credit lines, with Romania and Bulgaria to reassure them that the Greek banks there would have funding support throughout the current crisis.

   

  Similar swap lines, which enable foreign central banks to borrow from the ECB and relend that money locally, were used during the eurozone financial crisis, but were typically publicly announced.

  So essentially, the ECB is now set to lend to Bulgaria and Romania in order to ensure that those countries’ regulators do not take any actions with regard to domestic subsidiaries of Greek banks that might serve to further destabilize the Greek banking sector as Europe scrambles to keep it afloat.

  As a reminder, Kathimerini reported in April that the central banks of Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia had “all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk (bonds, treasury bills, deposits to Greek banks, loans etc.) down to zero in order to shield themselves and minimize the danger of contagion in case the negotiations between the Greek government and the eurozone do not bear fruit.” The ECB’s fear seems to be that “quarantines” could turn to “asset seizures” which could in turn further impair the balance sheets of the parent companies and introduce yet another element of uncertainty into already indeterminate discussions around recapitalizing Greece’s ailing banks. 

  And as for the idea that depositors in the Balkans aren’t at risk, we’ll close with the following excerpt from the FT article cited above:

  The National Bank of Romania declined to comment specifically on the new funding line. It said its Greek banking offshoots are “sound”, adding that they could refuse to let shareholders withdraw deposits and could also raise liquidity from the local central bank if the situation worsened.

  

  

  

  

  

• Icahn Vs. Fink: Wall Street Legends Clash Over "Dangerous" ETFs

  In the interest of not burying the lead, so to speak, we’ll begin with a clip from this week’s Delivering Alpha conference.

  In it, Carl Icahn essentially rehashes everything we’ve said over the past several months about the systemic risk posed by phantom ETF liquidity. He then proceeds to explain to Larry Fink how BlackRock is a part of the problem, calling the firm “a dangerous company”, before opining that Fink and Janet Yellen are “pushing the damn thing off a cliff.” Needless to say, Fink did not agree with Icahn’s assessment. Here are the fireworks:

  For those interested to know more, below is the complete Zero Hegde guide to phantom ETF liquidity and a discussion of how it has set the stage for a bond market meltdown.

  *  *  *

  Two months ago, in “ETF Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity,” we outlined the rather disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity facilities that can be tapped in the event of a sudden retail exodus from bond funds. 

  “The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show,” Reuters reported at the time, in a story we suspect did not get the attention it deserved. 

  At a base level, these precautionary measures are the result of the interplay between central bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand there is for new corporate issuance (the rationale being that at least corporate credit offers some semblance of yield). More demand means rates on corporate credit are driven still lower, and once yields on high grade issues get close to the lower limit, yield-starved investors are then herded into HY.

  All of this supply in the primary market comes at a time when liquidity in the secondary market for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the government’s (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre with a tiny exit.

  This situation has been exacerbated by the proliferation of bond ETFs which have allowed retail investors to pile into corners of the fixed income world where they might not belong. 

  All of the above can be summarized as follows.

  “MF assets too large versus dealer inventories” (via Citi)…

  

  … clear evidence of “structural damage in corporate bond trading liquidity” (via JP Morgan)…

  

  … and the rapid growth of bond funds in the post-crisis world (via BIS)…

  

  So given the above, the question is this: if something were to spook the market – a rate hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical shock – causing an exodus from these funds, what would happen to prices if fund managers were suddenly forced to transact in size in an illiquid secondary market in order to meet redemptions?

  “Nothing good”, is the answer. 

  The solution is to avoid selling the underlying bonds – even when investors are selling their shares in the funds.

  But how is this possible? 

  To a certain extent, outflows in one fund can be offset by inflows to another. These “diversifiable flows” are one happy byproduct of the great ETF proliferation. Here’s a refresher on how this works courtesy of Barclays.

  *  *  *

  Portfolio Products Replace Dealer Inventory

  While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.

  

  The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.

  This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate bonds.

  

  *  *  *

  Ok great, so ETFs provide a kind of “phantom” liquidity if you will. There are two problems with this:

  • It only works when flows are diversifiable. Once flows become unidirectional, it all goes out the window.
  • It makes the underlying markets even more illiquid.

  Here’s how we put it last month in “How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown“:

  In other words, if I’m a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There’s a term for that kind of business. It’s called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses. 

   

  Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.

  So what is a fund manager to do? 

  This is where we come full circle to the emergency liquidity lines mentioned at the outset. In order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional, fund managers may instead pay out redemptions in borrowed cash. 

  This is, to quote Citi’s Matt King, “creative destruction destroyed.”

  Only worse.

  That is, this represents the willful delay of a long overdue episode of creative destruction layered atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy references, that can be translated as follows: this strategy is yet another example of delaying the inevitable. If fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they’re holding have done to stay in business. It’s a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course. 

  In closing, it’s important to note that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds. 

  In other words, when the exodus comes, the illiquidity that’s been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.

  

  

  

  

  

• So You Want To Be A Central Banker? Then Answer This Question

  Do you see a bubble?

   

  

   

  If your answer is “no”, proceed to job offer!

   

  h/t @NorthmanTrader

  

  

  

  

  

• Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

  Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

  In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

  In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

  Oh, and both CEOs resigned on June 7. 

  On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

  Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

  BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

   

  Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

   

  
  

  So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

  (From the report)

   

  Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

   

  Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

   

  In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

  Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

  An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

  Hmm. Well, maybe Jain didn’t read that article. 

  This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

   

  The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

   

  This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

  Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

  The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

   

  There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

   

  The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

  Christian, who is Christian?

  Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

  Wow. So how well did Jain know Bittar? 

  The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

  That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

  And on, and on, and on.

  The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

  Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

   

  Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

   

  Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

   

  Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

  And finally, the accusation that may prove most damaging of all: 

  There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

  There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

  So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

• Greece And The Worst Possible Way To Correct Trade/Productivity Imbalances

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  Piling on more debt is the worst possible way to correct structural trade and productivity imbalances.

  In Greece and the End of the Euroland Fantasy, I suggested the trade imbalances at the heart of Greece's debt crisis could only be resolved by Greece returning to its own national currency. Correspondent Michael Gorback observed that there are other mechanisms for correcting imbalances in trade and productivity:

  "There is not one but 4 ways to address international productivity imbalances: currency revaluation, fiscal transfers, labor migration, and changes in local wages.

   

  If you peg one of those the others must adjust. In the case of the Eurozone and Greece, the adjustment was largely through fiscal transfers with a bit of migration. Wages are not so much sticky as fossilized.

   

  I submit that the reason the US does well under monetary union (ED NOTE: that is, all 50 states use the same currency, the U.S. dollar) is not so much its fiscal union as it is the strength of compensatory mechanisms that are far less developed in Europe. American states and localities still engage in their own fiscal policies and productivity is by no means homogeneous.

   

  The US enjoys excellent labor mobility – about 10x that of Europe. It has seen numerous population shifts based on economics: the early western migration, the Gold Rush, migration of freed slaves to the north, Okies leaving the midwest during the Dust Bowl, the population shift from New England to the Sun Belt, and more recently the oil-boom-related migrations, to name a few.

   

  Employers are also mobile. Furniture manufacturers moved from Western NY state to the South decades ago. GE once had 14,000 employees in the town of Pittsfield, MA. Now it's gone. Boeing is moving ops to SC. Beretta moved to TN. If the wages don't adjust, the employers migrate to the lower wages.

   

  The US, having a large and relatively less regulated private sector that's also relatively unencumbered by unions, has greater wage flexibility than most developed countries.

   

  I think these compensation mechanisms in mobility and wages work better for the US and that's why the US handles monetary union better than the Eurozone. The US still has to engage in interstate fiscal transfers but they're mediated through the central government and few citizens give it a second thought. Is the State of NY frothing over the fact that it gets back less federal dollars than it pays, and that the difference is going to Kentucky?

   

  Why does Boeing open a plant in South Carolina and China open factories in Africa but BMW hasn't opened a plant in Greece? If I were negotiating a bailout, those would be the reforms I'd demand – reforms that make business thrive."

  Easing the process of labor migration within Europe was one goal of the Eurozone, and in terms of making it relatively easy for someone to take a job in another Eurozone member nation, it was a successful reform.

  But this doesn't really address imbalances in productivity due to differences in skills, education, cultural values and corruption. Low-skill labor is more easily recruited than high-skill labor, and in a global economy, the choice of where to site a new plant or call center depends on many factors, not just wage arbitrage, i.e. going to where the labor is currently cheaper.

  Many assume corporations have shifted production to China to take advantage of lower wages. But as wages rise in China, this is not necessarily the deciding factor: proximity to China's growing market is often the over-riding factor.

  A new book, Thieves of State: Why Corruption Threatens Global Security, highlights the many systemic costs of corruption. The corruption that is endemic to Greece and China (among many others) imposes profound systemic costs on those economies, costs that may well loom much larger in the next global downturn than they did in the last Global Financial Meltdown.

  I think it is safe to say that piling on more debt is the worst possible way to correct structural trade and productivity imbalances, yet that is the Eurozone's "solution" to Greece's debt/ trade/ productivity/ corruption crisis. The discussion should be (as Michael pointed out) about creating conditions for business and real wealth creation to thrive, not jamming more debt down the throats of everyone on either side of the structural imbalances.

  

  

  

  

  

• Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

  Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

  In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

  In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

  Oh, and both CEOs resigned on June 7. 

  On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

  Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

  BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

   

  Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

   

  
  

  So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

  (From the report)

   

  Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

   

  Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

   

  In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

  Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

  An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

  Hmm. Well, maybe Jain didn’t read that article. 

  This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

   

  The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

   

  This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

  Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

  The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

   

  There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

   

  The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

  Christian, who is Christian?

  Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

  Wow. So how well did Jain know Bittar? 

  The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

  That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

  And on, and on, and on.

  The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

  Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

   

  Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

   

  Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

   

  Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

  And finally, the accusation that may prove most damaging of all: 

  There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

  There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

  So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

• Stock Bubble And Its Buyback Genesis Suddenly Vulnerable

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  Having now passed the anniversary of the “rising dollar”, it is interesting to see the related and continued effects on the stock bubble(s). As should be obvious by now, stock buybacks, funded via corporate bonds and loosely categorized C&I loans, are responsible for the post-QE3 nearly uninterrupted rise. Repurchases are forming a separate “liquidity” conduit, indirect leverage if you will, which has already started to fray. Various broader “market” indices have diverged, starting with the Russell 2000 in early 2014 (with the economic slowdown that was supposed to be an anomaly of weather).

  

  Since then, other indices have also broken away, notably the broad NYSE Composite index which includes the greatest cluster of ETF’s. The deviation there coincides exactly with the “dollar” tightening in eurodollar liquidity and less-smoothened wholesale transactions.

  

  There really cannot be much doubt anymore that QE is the central focus of the stock bubble, especially the third and fourth applications. The timing is so obvious as to preclude any other interpretation – most especially a growing and sustainable recovery that never materialized despite all public and heavy exaltation.

  

  While there is undoubtedly some reinforcing inflation due to various views of “tail risks” and perceptions about volatility which become self-fulfilling, it really is repurchases that are driving price action. The most “effective” transmission is corporate debt funneled through shareholder returns, which are not very efficient in terms of economic circulation (especially by comparison to the opportunity cost of them).

  In that respect, along with recession fears, it is perhaps quite significant that the S&P Buyback Index has suffered its first extended reversal since the 2012 slowdown, coincidental then to European concerns and just prior to both Draghi’s promise and QE3. It is unclear at the moment what exactly has caused that dramatic shift but the more likely explanations point to fears about corporate ability to continue repurchasing with economic weakness bearing down against both internal cash flow and even corporate bond pricing and liquidity.

  Whatever the case may be ultimately, the stock bubble’s ties to central bank policy seem to suggest the quite waning influence; both in terms of active participation (on the Fed side) and, more importantly in my view, how blind faith in monetarism may be reversing because of that widespread economic fruitlessness. Stock momentum, for the first time since 2012, is decidedly waning on all fronts:

  

  I find it significant that the broader market index, the NYSE Composite, has shifted negative in its one-year comparison again tied to last year’s “dollar” disruption. At the very least it might imply that the central bank paradigm that lasted since the middle of 2012 has greatly eroded or even ended.

  

  

  

  

  

• If You Like Your Nuclear Bomb-Free Iran, You Can Keep It…

  “Read my lips…”

   

  

   

  Source: Investors.com

  

  

  

  

  

• Nasdaq Soars To Record High With Biggest Rally Since October's "Bullard" Bounce

  Artist's imprerssion of Nasdaq trader's reaction to the greek deal this week (forward to 45 seconds in…and feel the anticipation)

  Stock went up… some more than others… as Futures show gapped up on the Greek vote – kept squeezing into the US open and then diverged with Nasdaq melting up…

  

   

  Cash indices all gapped higher at the open but from that squeeze – there was major divergence (Dow Industrials and Trannies actually lower)

  

   

  On the week, the Nasdaq is now up over 3.25%…

  

   

  In summary…

  *  *  *

  The last few days saw the biggest short-squeeze in 5 months…

  

   

  Which is helping The Nasdaq to its biggest 6-day run since October's Bullard ramp…

  

   

  And then there's this massively free-cash-flow negative idiot-maker…

  

   

  One more good reason why stocks just keep surging… JPY carry is back on now that Grexit event risk has been 'removed' from carry traders risks… fun-durr-mentals

  

   

  VIXnado…back at an 11 handle!!

  

   

  as The backwardation unwinds to the steepest in 2 months…

  

   

  Bonds continued their rally with 30Y leading the way…

  

   

  As it appears the Moar QE trade is back in full swing…

  

   

  FX markets continued to be dominated by a plunge in EUR and JPY…

  

   

  And, digging into the details, your daily FX roundup (courtesy of ForexLive):

  We learned a few things from the ECB but nothing earth-shattering. The economic assessment gave a lift to the euro but it was quickly wiped out. The FX market reacted little to the Greek ELA but European stocks rallied.

   

  After the press conference a second wave of euro buying hit and pulled it from a session low of 1.0856 to 1.0927 at the options cut. From there, the sellers returned in a broad USD mini-rally and it slipped to 1.0875 at the end of the week (hold your horses there buddy … its Friday here in the world's greatest country but not the weekend yet – Eamonn) day.

   

  USD/JPY hit a session high of 124.18 very early in US trading but slipped into the options cut, falling to 123.89. Steady buying from there took it back to 124.13. Yellen had very little effect, if any.

   

  Cable hit a bump today, falling to 1.5560 from 1.5615 but the dip buyers were ready and it climbed all the way back. A second dip also found support and the pair finishes only modestly lower on the day at 1.5612.

   

  USD/CAD finishes at the highs of the day at 1.2966. Dips toward 1.2900 have found good support since the BOC cut. A touch off 1.2906 at the options cut set the stage for a steady rally to the highs.

   

  The Aussie was generally perky as it clawed back some of yesterday's losses. The high of 0.7437 peaked just above the 61.8% retracement of the slump on Wednesday but some sellers appeared late and drove it to 0.7401. There were some massive options running off in AUD and that was the buzz. The lows in USD right across the board today were at the cut.

  Commodities were mixed with copper limping higher as PMs leaked a little more and crude tumbled…

  

   

   

  Crude continues to tumble back to a $50 handle as Iran and default fears mount…

  

   

  Charts: Bloomberg

  Bonus Chart: VXX hits its 347th Record Low……

  This is pretty stunning 347 out of 1625 days that $VXX traded: new all time lows were set pic.twitter.com/KlFrtQPVHi

  — Eric Scott Hunsader (@nanexllc) July 16, 2015

  

  

  

  

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• Greece Is Just The Beginning: The 21st Century 'Enclosures' Have Begun

  Submitted by Paul Craig Roberts,

  All of Europe, and insouciant Americans and Canadians as well, are put on notice by Syriza’s surrender to the agents of the One Percent. The message from the collapse of Syriza is that the social welfare system throughout the West will be dismantled.

  The Greek prime minister Alexis Tsipras has agreed to the One Percent’s looting of the Greek people of the advances in social welfare that the Greeks achieved in the post-World War II 20th century. Pensions and health care for the elderly are on the way out. The One Percent needs the money.

  The protected Greek islands, ports, water companies, airports, the entire panoply of national patrimony, is to be sold to the One Percent. At bargain prices, of course, but the subsequent water bills will not be bargains.

  This is the third round of austerity imposed on Greece, austerity that has required the complicity of the Greeks’ own governments. The austerity agreements serve as a cover for the looting of the Greek people literally of everything. The IMF is one member of the Troika that is imposing the austerity, despite the fact that the IMF’s economists have said that the austerity measures have proven to be a mistake. The Greek economy has been driven down by the austerity. Therefore, Greece’s indebtedness has increased as a burden. Each round of austerity makes the debt less payable.

  But when the One Percent is looting, facts are of no interest. The austerity, that is the looting, has gone forward despite the fact that the IMF’s economists cannot justify it.

  Greek democracy has proven itself to be impotent. The looting is going forward despite the vote one week ago by the Greek people rejecting it. So what we observe in Alexis Tsipras is an elected prime minister representing not the Greek people but the One Percent.

  The One Percent’s sigh of relief has been heard around the world. The last European leftist party, or what passes as leftist, has been brought to heel, just like Britain’s Labour Party, the French Socialist Party, and all the rest.

  Without an ideology to sustain it, the European left is dead, just as is the Democratic Party in the US. With the death of these political parties, the people no longer have any voice. A government in which the people have no voice is not a democracy. We can see this clearly in Greece. One week after the Greek people express themselves decisively in a referendum, their government ignores them and accommodates the One Percent.

  The American Democratic Party died with jobs offshoring, which destroyed the party’s financial base in the manufacturing unions. The European left died with the Soviet Union.

  The Soviet Union was a symbol that there existed a socialist alternative to capitalism. The Soviet collapse and “the end of history” deprived the left of an economic program and left the left-wing, at least in America, with “social issues” such as abortion, homosexual marriage, gender equality, and racism, which undermined the left-wing’s traditional support with the working class. Class warfare disappeared in the warfare between heterosexuals and homosexuals, blacks and whites, men and women.

  Today with the Western peoples facing re-enserfment and with the world facing nuclear war as a result of the American neoconservatives’ claim to be History’s chosen people entitled to world hegemony, the American left is busy hating the Confederate battle flag.

  The collapse of Europe’s last left-wing party, Syrzia, means that unless more determined parties arise in Portugal, Spain, and Italy, the baton passes to the right-wing parties – to Nigel Farage’s UK Independence Party, to Marine Le Pen’s National Front in France, and to other right-wing parties who stand for nationalism against national extermination in EU membership.

  Syriza could not succeed once it failed to nationalize the Greek banks in response to the EU’s determination to make them fail. The Greek One Percent have the banks and the media, and the Greek military shows no sign of standing with the people. What we see here is the impossibility of peaceful change, as Karl Marx and Lenin explained.

  Revolutions and fundamental reforms are frustrated or overturned by the One Percent who are left alive. Marx, frustrated by the defeat of the Revolutions of 1848 and instructed by his materialist conception of history, concluded, as did Lenin, Mao, and Pol Pot, that leaving the members of the old order alive meant counter-revolution and the return of the people to serfdom. In Latin America every reformist government is vulnerable to overthrow by US economic interests acting in conjunction with the Spanish elites. We see this process underway today in Venezuela and Ecuador.

  Duly instructed, Lenin and Mao eliminated the old order. The class holocaust was many times greater than anything the Jews experienced in the Nazi racial holocaust. But there is no memorial to it.

  To this day Westerners do not understand why Pol Pot emptied Cambodia’s urban areas. The West dismisses Pol Pot as a psychopath and mass murderer, a psychiatric case, but Pol Pot was simply acting on the supposition that if he permitted representatives of the old order to remain his revolution would be overthrown. To use a legal concept enshrined by the George W. Bush regime, Pol Pot pre-empted counter-revolution by striking in advance of the act and eliminating the class inclined to counter-revolution. The class genocide associated with Lenin, Mao, and Pol Pot are the collateral damage of revolution.

  The English conservative Edmund Burke said that the path of progress was reform, not revolution. The English elite, although they dragged their heels, accepted reform in place of revolution, thus vindicating Burke. But today with the left so totally defeated, the One Percent does not have to agree to reforms. Compliance with their power is the only alternative.

  Greece is only the beginning. Greeks driven out of their country by the collapsed economy, demise of the social welfare system, and extraordinary rate of unemployment will take their poverty to other EU countries. Members of the EU are not bound by national boundaries and can freely emigrate. Closing down the support system in Greece will drive Greeks into the support systems of other EU countries, which will be closed down in turn by the One Percent’s privatizations.

  The 21st century Enclosures have begun.

  

  

  

  

  

• Tennessee Woman Arrested For Printing Money: "All These Other Bitches Get To Print Money So I Can Too"

  In what is either the best example why one should never believe anything they read on the internet, or just blatant frontrunning of the last QE by a few years, earlier this week a woman from Kingsport, Tennessee was arrested for counterfeiting money. That in itself is not surprising – it was her justification why she did it: she told police that she thought she was doing nothing wrong because she had read online that President Barack Obama made a new law allowing her to print her own money.

  

  Pamela Downs, 45
  

  TimesNews reports that police were called to a local grocery store on Sunday night in regards to a complaint about counterfeit money. When the reporting officer arrived, he spoke with a gas station clerk who said that just prior to the officer’s arrival, a white female had handed him a $5 bill, which he suspected to be counterfeit.

  Since the bill had been printed on regular computer paper and each side had been glued together (but was falling apart), the officer immediately recognized the bill as a fake.

  The officer spoke with the female, identified as Pamela Downs, 45. After initially responding that she had gotten the fake bill from a gas station, Downs was asked by the officer if her purse could be searched, to which she agreed. Inside her purse, the officer found a $100 which was also counterfeit, according to the report. The bill was printed in black and white and the backside of the bill was upside down.

  A couple of receipts from Walmart were also found inside the purse, showing Downs had purchased copy paper and a printer.

  At that point she was arrested, and she gave the best money-counterfeiting “defense” we have heard in a long time:

  “I don’t give a ****, all these other bitches get to print money so I can too.“

  It was not immediately clear which “bitches” she was referring to.

  The police then searched the apartment and found several items consistent with being used to print counterfeit currency including paper, scissors, glue and a printer.  Several more counterfeit bills, both cut and uncut, were located at the apartment. Officers estimated the total to be around $30,000 to $50,000.

  While at the jail, Downs reportedly told the officer the receipts that were found were items she used to print money in her apartment.

  And back to the rationalization: “She then told officers she read online that President Obama had made a new law that permitted her to print her own money because she is on a fixed income, the report stated.“

  She was charged with criminal simulation and counterfeiting.

  While there are literally countless angles one can go with this story, maybe the best conclusion is that if only she had waited a few more years before printing her own money with the “president’s blessing”, all of this unpleasantness could have been avoided.

  

  

  

  

  

• Balance Of Superpowers: Comparing The US And Chinese Armed Forces

  Whether China is busy championing trade deals outside of the US dollar, buying up some of the world’s biggest companies, taking over foreign housing markets, or building massive networks of nuclear or wind power grids, it is clear that the country is a world power to be reckoned with. To be considered a true force, China also needs to be able to back up its economic and political might with a top notch military. Today’s infographic compares the armed forces of China with the United States.

  click image fir massive legible version

  

  Original graphic by: SCMP

   

  In terms of military spending per capita, China is the new kid on the block. Although it has increased in recent years, China is still behind Russia, Turkey, South Korea, Japan, Germany, the United Kingdom, France, and the United States. However, the country does make up for it with in absolute terms by its sheer population. In terms of total military expenditures, China spends the second most worldwide with a total of approximately $216 billion per year, which is about one-third of the US.

  In GDP terms, China spends about 2.1% of its annual GDP on military, and the United States spends 3.8%.

  Perhaps the biggest difference between the two superpowers is influence in other parts of the world. The United States has 133 military bases outside of its territory, and China has zero. More specifically, the United States has bases in multiple jurisdictions that surround China: South Korea, Kyrgyzstan, Japan, Singapore, Guam, Afghanistan, and Diego Garcia, a set of small islands in Indian Ocean.

  Courtesy of: Visual Capitalist

  

  

  

  

  

• Tennessee Mass Killer Linked To Islamic Terrorism

  While the rest of the world was paying attention to the sad conclusion of the Greek tragedy now in its third bailout season, the US was focused on a another tragedy playing out in the nation’s heartland when in the latest mass shooting on US soil, 4 marines were killed when a gunman, since identified at Mohammod Youssuf Abdulazeez, 24, a naturalized citizen born in Kuwait, opened fire first at a military recruiting center and then at a Naval Reserve Center in Chattanooga, Tennessee in what officials have called a “brazen, brutal act of domestic terrorism.”

  Incidentally, the shooting took place hours before a jury found James Holmes, who killed 12 people in a Colorado theater shooting in 2012, guilty of murder.

  As reported subsequently, the suspect’s mother is originally from Kuwait and his father from Palestine. It is unclear when Abdulazeez came to the United States but for many years he lived with his parents in a two-story home in Hixson, a suburb of Chattanooga. He worked as an intern at Mohawk Industries Inc, a carpet manufacturer, and the Tennessee Valley Authority, which provides power to the area. He most recently worked with Global Trade Express, according to the posted resume.

  

  According to Reuters, the suspect, seen driving an open-top Ford Mustang, is believed to have first gone to a joint military recruiting center in a strip mall and sprayed it with gunfire, riddling the glass facade with bullet holes.

  

  “Everybody was at a standstill and as soon as he pulled away everyone scrambled trying to make sure everyone was OK,” said Erica Wright, who works two doors down from the center.

  The gunman then drove off to a Naval Reserve Center about 6 miles away, when around 10:45 am local time, he shot four Marines before being shot and killed in a firefight with police about half an hour later. Three others were wounded in the attacks, including a police officer reported in stable condition and a Marine.

  

  At least three people were wounded in the attacks, including a Marine and a Navy sailor who is in critical condition, according to the hospital. One of those hurt was a police officer who was in stable condition.

  According to Bill Killian, the U.S. Attorney for the Eastern District of Tennessee, the rampage was being treated “as an act of domestic terrorism,” adding that no official determination of the nature of the crime had yet been made and the Federal Bureau of Investigation has not ruled anything out.

  “While it would be premature to speculate on the motives of the shooter at this time, we will conduct a thorough investigation of this tragedy and provide updates as they are available,” the agency said in a statement.

  According to a resume believed to have been posted online by Abdulazeez, he attended high school in a Chattanooga suburb and graduated from the University of Tennessee with an engineering degree.

  “I remember him being very creative. He was a very light minded kind of individual. All his videos were always very unique and entertaining,” said Greg Raymond, 28, who worked with Abdulazeez on a high school television program.

   

  “He was a really calm, smart and cool person who joked around. Like me he wasn’t very popular so we always kind of got along. He seemed like a really normal guy,” Raymond said.

  The FBI said it was too early to speculate on the motive for the rampage although in a follow up report we learned that the 24 year old had blogged as recently as Monday that “life is short and bitter” and Muslims should not miss an opportunity to “submit to Allah,” according to an organization that tracks extremist groups.

  The SITE Intelligence Group said a July 13 post written by suspected gunman Mohammod Youssuf Abdulazeez stressed the sacrifice of the Sahaba (companions of the Prophet) “fought Jihad for the sake of Allah.” Reuters could not independently verify the blog postings. Tangentially, Site Intelligence which has been most famous recently for being the first to track down and release most of ISIS’ barbaric if Hollywood-style produced YouTube clips, was founded by Rita Katz who prior to her intelligence career served in the Israeli Defense Forces.

  Further ties linking the shooting to terrorist Islamist elements emerged when the NYT reported that the father of a suspected gunman who killed four Marines in Chattanooga, Tennessee, on Thursday was investigated several years ago for “possible ties to a foreign terrorist organization.”

  Citing unnamed law enforcement officials, the paper said the gunman’s father was at one point on a terrorist watch list and was questioned while on a trip overseas.

  The paper quoted an official as cautioning that the investigation was several years old and had not generated any information on the son. The father was eventually removed from the watch list, the paper quoted the official as saying.

  According to another, unconfirmed report, an Islamic State affiliated Twitter account tweeted about the Chattanooga military reserve center shootings by Muhammad Youssef Abdulazeez just as they began.

  

  The account has since been suspended. The time stamp reads 10:34 a.m. in our screenshot of the tweet, which we took in New York, which is in the same time zone as Chattanooga. The shootings were reported between 10 and 11 a.m.

  In a statement following the shootings  Obama condemned the “heartbreaking” shooting deaths of four Marines Thursday in Tennessee, and said a full investigation is under way.

  “We don’t know yet all the details,” Obama said. “We know that what appears to be a lone gunman carried out these attacks.” The president said he wanted to extend “the deepest sympathies of the American people” to the four Marines and their families, and asked all Americans to pray for them.

  And while Obama did not rush to judgment, and had no comment about what the potential next steps could be, it was roughly around this time that America’s practically assured next president, Hillary Clinton, made it quite clear what the endgame of all these tragic events will likely be in the very near future:

  • CLINTON: U.S. NEEDS ANTI-PROPAGANDA POLICY TO COMBAT ISIS

  What better way to fight propaganda than with even greater propaganda even if it means the deaths of countless innocent people caught in the cross fire.

  

  

  

  

  

• How Socialism Destroyed Puerto Rico, And Why More Defaults Are Looming

  With Puerto Rico missing a payment on a bond overnight "due to non-appropriation of funds" but denying that this constitutes anything close to a default, the territory may be about to retake the limelight as Greece is now "fixed." As MarketWatch reports,

  The missed payment could have serious implications for holders of Puerto Rico bonds, “as the signal from breaking a seven-decade streak of bond payments may imply more defaults are looming,” Daniel Hanson, an analyst at Height Securities, said in a note.

   

  Not all Puerto Rican bonds are created equal, being backed by different types of revenues, such as tax revenues, road tolls, electricity bills etc.

   

  The first thing investors should do is “find out what revenue backs their bonds and whether their bonds are insured or not,” said Mary Talbutt, head of fixed income at Bryn Mawr Trust.

   

  Approximately 30% of muni mutual funds have holdings in Puerto Rico, more than half of which are insured, according to a Charles Schwab Investment Management report. As for the revenue that backs the bonds, most exposure is with the sales-tax backed bonds, known as COFINA bonds from their Spanish-language acronym, and the general-obligation bonds, known as G.O. bonds, according to the report.

   

  In that sense, investors that hold the PFC bonds are somewhat in a bind because “the language in PFC bonds makes payment dependent on appropriations from Puerto Rico’s legislature,” Hanson said.

   

  This is the main difference between the PFC bonds and the G.O. bonds. The former require appropriation, while the latter are backed by the full faith and credit of the territory and their repayment is guaranteed by the constitution.

   

  “The language… makes [the PFC bonds] a weaker credit relative to G.O. bonds. But a default is still a default,” said Andrew Gadlin, a research analyst at Odeon Capital Group.

   

  This has investors worried about other types of bonds that face a repayment deadline, most notably those issued by the island’s Government Development Bank (GDB).

   

  “The market is becoming more skeptical of the payments due August 1 on GDB debt, though the budget does set aside funds for paying these obligations,” Gadlin said.

  And as Euro Pacific Capital's Peter Schiff explains, this is far from over

  While Greece is now dominating the debt default stage, the real tragedy is playing out much closer to home, with the downward spiral of Puerto Rico. As in Greece, the Puerto Rican economy has been destroyed by its participation in an unrealistic monetary system that it does not control and the failure of domestic politicians to confront their own insolvency. But the damage done to the Puerto Rican economy by the United States has been far more debilitating than whatever damage the European Union has inflicted on Greece. In fact, the lessons we should be learning in Puerto Rico, most notably how socialistic labor and tax policies can devastate an economy, should serve as a wake up call to those advocating prescribing the same for the mainland.  

   

  The U.S. has bombed the territory of Puerto Rico with five supposedly well-meaning, but economically devastating policies. It has:

  1. Exempted the Island's government debt from all U.S. taxes in the Jones-Shaforth Act.
  2. Eliminated U.S. tax breaks for private sector investment with the expiration of section 936 of the U.S. Internal Revenue Code.
  3. Required the nation to abide by a restrictive trade arrangement.
  4. Made the Island subject to the U.S. minimum wage.
  5. Enabled Puerto Rico to offer generous welfare benefits relative to income.

  While passage of such politically popular laws seems benign on the surface (and have allowed politicians to claim that their efforts have helped the poorest Puerto Ricans), in reality they have deepened the poverty of the very people the laws were supposedly designed to help. The lessons here are so obvious that only the most ardent supporters of government economic control can fail to comprehend them.

   

  Tax-Free Debt

   

  By exempting U.S. citizens from taxes on interest paid on Puerto Rican sovereign debt, Washington sought to help the Puerto Rican economy by making it easier and cheaper for the Island's government to borrow from the mainland. As a result, Puerto Rican government bonds became a staple holding of many U.S. municipal bond funds. As with Fannie Mae and Freddie Mac bonds a decade ago, many investors believed that these Puerto Rican bonds had an implied U.S. government guarantee. This meant that the Puerto Rican government could borrow for far less than it could have without such a belief. However, this subsidy did not grow the Puerto Rican economy, but simply the size of the government, which had the perverse effect of stifling private sector growth.  

   

  In contrast to the tax-free income earned by Americans who buy Puerto Rican government bonds, those with the bad sense to lend to Puerto Rican businesses were taxed on the interest payments that they received. Businesses could have used the funds for actual capital investment (that could have increased the Island's productivity), but instead the money flowed to the Government which used it to buy votes with generous public sector benefits that did nothing to grow the Island's economy or put it in a better position to repay. That problem was left for future taxpayers who no politician seeking votes in the present cared about.

   

  This dynamic is almost identical to what happened in Greece, where low borrowing costs, made possible by the strong euro currency and the implied backstop of the European Central Bank and the more solvent northern European nations, permitted the Greek government to borrow at far lower rates than its strained finances would have otherwise allowed.

   

  Taxing Private Investment

   

  Perversely, as the U.S. government made it easier for the Puerto Rican government to borrow, it made it harder for the private sector to do so. In 2006 the government ended a tax break that exempted corporate profits earned on private sector investment in Puerto Rico from U.S. taxes. As a result, U.S. businesses that had been making investments and hiring workers on the Island pulled up stakes and moved to more tax-friendly jurisdictions. The result was an erosion of the Island's local tax base, just as more borrowing (made possible by triple tax-free government debt) obligated the remaining Puerto Rican taxpayers to greater future liabilities.

   

  The Jones Act

   

  The Jones Act, a 1920 law designed to protect the U.S. merchant marine from foreign competition, has had a devastating effect on Puerto Rico, and should be used as a cautionary tale to illustrate the dangers of trade barriers. Under the terms of this horrible law, foreign-flagged ships are prevented from carrying cargo between two U.S. ports. According to the law, Puerto Rico counts as a U.S. port. So a container ship bringing goods from China to the U.S. mainland is prevented from stopping in Puerto Rico on the way. Instead, the cargo must be dropped off at a mainland port, then reloaded onto an expensive U.S.-flagged ship, and transported back to Puerto Rico. As a result, shipping costs to and from Puerto Rico are the highest in the Caribbean. This reduces trade between Puerto Rico and the rest of the world. Since a large percentage of the finished goods used by Puerto Ricans are imported, the result is much higher consumer prices and fewer private sector jobs. Even though median incomes in Puerto Rico are just over half that of the poorest U.S. state, thanks to the Jones Act, the cost of living is actually higher than the average state.

   

  The Federal Minimum Wage

   

  In 1938 the Fair Labor Standards Act subjected Puerto Rico to a federal minimum wage, but it was not until 1983 that a 1974 act, which required that the Island match the mainland's minimum wage, was fully phased in. The current Federal minimum wage of $7.25 per hour is 77% of Puerto Rico's current median wage of $9.42. In contrast, the Federal minimum is only 43% of the U.S. median wage of almost $17 per hour (Bureau of Labor Statistics (BLS), May 2014). The U.S. minimum wage would have to be more than $13 per hour to match that Puerto Rico proportion. The disparity is greater when comparing minimum wage income to per capita income.

   

  The imposition of an insupportably high minimum wage has meant that entry level jobs simply don't exist in Puerto Rico. Unemployment is over 12% (BLS), and the labor force participation rate is about 43% (as opposed to 63% on the mainland) (The World Bank). A "success" by the Obama administration in raising the Federal minimum to $10 per hour would mean that the minimum wage in Puerto Rico would be higher than the current medium wage. Such a move would result in layoffs on the Island and another step down into the economic pit. I predict that it could bring on a crisis similar to the one created in the last decade in American Samoa when that Island’s economy was devastated by an unsustainable increase in the minimum wage.

   

  It will be interesting to see if our progressive politicians will have enough forethought and mercy to exempt Puerto Rico from minimum wage increases. But to do so would force them to acknowledge the destructive nature of the law, an admission that they would take great pains to avoid. 

   

  Welfare   

   

  In 2013 median income in Puerto Rico was just over half  that of the poorest state in the union (Mississippi) but welfare benefits are very similar. This means that the incentive to forgo public assistance in favor of a job is greatly reduced in Puerto Rico, as a larger percentage of those on public assistance would do better financially by turning down a low paying job. Because of these perverse incentives not to work, fewer than half of working age males are employed and 45% of the Island's population lived below the federal poverty line (U.S. Census Bureau, American Community Survey Briefs issued Sep. 2014). According to a 2012 report by the New York Federal Reserve Bank, 40% of Island income consists of transfer payments, and 35% of the Island's residents receive food stamps (Fox News Latino, 3/11/14).

   

  In other words, Puerto Rico's problems are strikingly similar to those of Greece. Its government spends chronically more than it raises in taxes, its economy is trapped in a regulatory morass, and its economic destiny is largely in the hands of others.

   

  *  *  *

  As The FT notes,

  Puerto Rico’s economy and population have been shrinking for almost a decade, and debts have ballooned to about 100 per cent of its gross national product as the government took advantage of the tax exemption enjoyed by US municipal debt.

   

  The Puerto Rico Electric Power Authority is already restructuring $9bn of bonds and loans.

   

  By September 1 Puerto Rico is expected to deliver a plan for turning round its finances. Officials have called for patience from creditors about how its various bondholders will be treated.

  Patience… indeed.

   

  *  *  *

   

  The solutions to Puerto Rico's problems are simple, but, Peter Schiff warns, politically toxic for mainland politicians to acknowledge.

  Puerto Rico must be allowed to declare bankruptcy, the Federal incentive for the Puerto Rican government to borrow money must be eliminated, Puerto Rico must be exempted from both the Jones Act and the Federal Minimum wage, and Federal welfare requirements must be reduced. Puerto Rico already has the huge advantages of being exempt from both the Federal Income Tax and Obamacare, so with a fresh start, free from oppressive debt and federal regulations, capitalism could quickly restore the prosperity socialism destroyed.

   

  With the current incentives provided by Acts 20 and 22 (which basically exempt Puerto Rico-sourced income for new arrivals from local as well as federal income tax – see my report on America's Tax Free Zone) and with some additional local free market labor reforms, in a generation it's possible that Puerto Ricans could enjoy higher per capita incomes than citizens of any U.S. state.

  If Washington really wanted to accelerate the process, it should exempt mainland residents from all income taxes, including the AMT, on Puerto Rico-sourced investment income, including dividends, capital gains, and interest related to capital investment.

  

  

  

  

  

• BofA Confused "Why People Would Wake Up One Morning And Decide To Panic"

  Over the past twelve months, the decades-old economic infrastructure that supports global dollar dominance suffered irreparable damage to two of its load-bearing walls. 

  First, the petrodollar system quietly began to die late last year. As crude prices plunged, the deluge of oil proceeds which had for years been recycled into USD-denominated assets dried up. Indeed, OPEC nations drained liquidity from financial markets for the first time in nearly two decades last year: 

  

  As we noted last month, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018, according to Goldman.The implications, BofAML observed in February, are far reaching: “…the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed’s exit strategy.”

  Second, the world’s most influential emerging economies have lost faith in the US-dominated multilateral institutions that have dominated the post-war world. This has manifested itself in the creation of two new supranational lenders (the AIIB and the BRICS bank) and one major new infrastructure development fund (China’s Silk Road fund). China plays an outsized role in the AIIB and the BRICS bank and both should serve to help Beijing embed the yuan further in global investment and trade. 

  Meanwhile, Russia and China have begun settling crude imports in yuan amid the extension of Western economic sanctions on Moscow and Russia recently overtook Saudi Arabia as China’s number one crude supplier. 

  All of this marks a departure from the economic and political norms that have served to underwrite decades of dollar dominance and it goes without saying that printing trillions of dollars over the course of multiple QE iterations doesn’t help king dollar’s cause.

  In addition to the above, there’s certainly an argument to be made that the US effectively surrendered its right to print the world’s reserve currency long ago.

  That is, once the new economics succeeded in burying sound money once and for all, and when fine-tuning macroeconomic outcomes and “smoothing” out business cycles finally became so entrenched in modern economic thought that talk of balanced budgets and a gold standard was largely relegated to the annals of history, the dollar became nothing more than another example of fiat money, unworthy of the reserve currency title. 

  Nevertheless, the status quo must be perpetuated, which is why Washington launched a Quixote-esque campaign against the AIIB complete with President Obama tilting against environmental and governance windmills and it is also why the likes of Bank of America must issue “research” with titles like “Econ 101: The reserve status of the dollar.”

  Fortunately, that particular piece of crisply-worded dollar cheerleader propaganda has one footnote that makes the five minutes we spent reading it all worth while. We present it below and leave it to readers to respond.

  From BofAML:

  Another mechanism could be a self-fulfilling feedback loop. If the general public watches the gloom and doom videos, loses faith in paper money and dumps it in favor of hard assets the dollar would collapse. On a similar note, if global investors believe QE is a signal of the central bank giving up on controlling inflation, they could dump the dollar, driving up the price of imported products. However, after seeing that QE has not caused inflation or triggered a dollar collapse in the last five years, it is not clear why people would wake up one morning and decide to panic. 

  

  

  

  

  

• "Safest Market In The World" China Opens Mixed As Margin Debt Drops To 4-Month Lows

  After a brief "don't fight the PBOC" three days of releveraging, China margin debt declined once again to 4-month lows. An opening pop – as is now ubiquitous has faded in FTSE China A50 futures but CSI-300 futures (which expire today and are this subject to some 'odd' behavior) are holding modest gains, despite a quarter of Chinese stocks remain halted. For those tempted back in to the deep end of global equity risk, we offer what must go down as the Baghdad Bob quote of the year, from the Chairman of HKEX, "China's stock market is the safest in the world."

  Some context on the decline and its massively manipulated bounce (which is now fading fast)…

  

   

  FTSE China A50 Futures opened a smidge higher but are leaking lower (while CSI-300 Futures are holding 1% gains pre-open)

  

   

  Deleveraging is happening… but has a long way to go…

  • *SHANGHAI MARGIN DEBT FALLS TO FOUR-MONTH LOW

  China margin debt is down 37% from its highs…

  

  And then there's this utter bollocks…

  • *CHINA STOCK MARKET IS "SAFEST" IN WORLD, HKEX CHAIR LI SAYS

  Yep, looks totally "safe"…

  

   

  Finally, on China, we leave you with Credit Suisse's Andrew garthwaite: "Our concern is that a triple bubble in housing, credit and investment comes with the significant risk of a hard landing."

  *  *  *

  In other news, Japan has its fair share of disasters…

  Sharp is the worst-performing stock on Japan's benchmark average this morning after the Nikkei newspaper said the electronics giant is likely to lose big in the April to June quarter.

   

  As the Nikkei 225 struggles to gain for a fifth day – up 0.1 per cent – Sharp shares are down 3 per cent in the first hour of trade.

  And Korea…

  And Samsung Heavy is down 17% to 7 year lows – this is the biggest drop since 1994

   

  

   Charts: Bloomberg

   

   

  

  

  

  

  

• Law Firm Stops Hiring Ivy League Grads, Demands "Gritty Street Lawyers"

  Having taken on hundreds of thousands of dollars worth of loans to achieve the ultimate goal of becoming an Ivy League law graduate, it appears, in at least one case, that your abilities are not required. As WSJ reports, Adam Leitman Bailey, a Manhattan attorney who runs a real estate firm, says he looks to hire law school graduates who have grit, ambition and a resolve to succeed in the legal profession. For that reason, he says, his firm has instituted a rule: If your resume lists your law school as Yale, Harvard, Columbia, Cornell or University of Pennsylvania, you need not apply because you won’t get the job.

  
  As The Wall Street Journal reports,

  Mr. Bailey, a graduate of Syracuse University Law School, says he admires the nation’s top law schools and doesn’t deny they attract some of the brightest minds. But says the best applicants hail from schools lower down the totem pole of prestige.

   

  In an article titled “Why We Do Not Hire Law School Graduates from the Ivy League Schools.” Mr. Bailey told Law Blog his ban applies to other elite schools outside the Ivy League, like Stanford and New York University.

   

  Explaining the policy, he writes that students who are accepted into top-ranked schools may have aced the LSAT, but, very broadly generalizing, they’ve climbed their way to a law degree without testing their mettle.

   

  [M]any of these law schools either fail to rank their students or do not even grade them at all. (1) Ergo, the students have no incentive to work hard and learn when they have guaranteed summer associate positions and guaranteed job offers. Their students typically have no incentive to get the best grades in their classes. They also have no incentive to squeeze as much learning as possible out of the law school experience. Most importantly, the real world simulation of dealing with the pressures of a case or deal may be removed when the students do not need to compete for a job in a difficult market…

   

  [T]hese students may become a United States Supreme Court Justice or a future President of the United States so political theory and international law and classes on capital punishment may be extremely important to them. However, we need our street lawyers ready for battle and taking trial practice, corporations, tax, civil procedure and any real estate and litigation course offered.

   

  In his piece he concedes that a few of the senior lawyers at Adam Leitman Bailey PC are indeed Ivy Leaguers, including the head of the firm’s real estate litigation practice group, a graduate of University of Pennsylvania Law School.

   

  “By the time these Ivy League attorneys come to our firm, we have seen them in the courtroom and observed their talents,” Mr. Bailey told Law Blog by email.

  *  *  *

  Ironically, Mr. Bailey, whose firm hires one to three law school graduates a year, also writes that the top students from the highest ranked schools “have no interest in applying for a job at our firm.”

  

  

  

  

  

• The World Explained (In 1 Cartoon)

  Presented with no comment…

   

  

   

  Source: @RoykoLePoyko

  

  

  

  

  

• How Likely Is Hyperinflation In The U.S?

  Authored by Seaborn Hall, originally posted at Advisor Perspectives,

  My previous article, “How likely is hyperinflation in the US? Part One,” covered hyperinflation's history, process, effects, definition, types and causes, as well as how to measure its emergence in nations using casual symptoms. Part Two answers the questions of how to gauge the likelihood of hyperinflation in the United States, what the emerging dangers are, how it might happen here and how to prepare if it does.

  As stated in Part One, because there are so many conflicting or just different views among analysts relative to hyperinflation, it is difficult for the average advisor or person investing for retirement – or just self-preservation – to know what to believe and how to act. Many of the warnings related to hyperinflation sound like Chicken Little's cry that the sky is falling.

  In the midst of the alarmism and confusion, these articles sift through the best resources available, including Bank for International Settlements (BIS), International Monetary Fund (IMF), Cato Institute and Fed papers to provide some clarity.

  Measuring hyperinflation in the U.S.A.

  The U.S. has come just short of hyperinflation twice before: once during the Revolutionary War and the second time, in March 1864, towards the end of the Civil War. The wars created high debt and supply disruptions within the continental states, congruent with fast acting hyperinflation, as explained in Part One.

  The U.S. has geographic advantages. It has natural supply routes made up of rivers, natural ports and inter-coastal waterways connected by a sophisticated rail and interstate system. It is protected by the natural boundaries of oceans, mountains and friendly bordering states. It is also not dependent on one export, like oil. These geographical and man-enhanced attributes temper any economic trend towards hyperinflation in the modern U.S.

  As previously noted, hyperinflation may be expected when there is persistent monetization and when the currency exchange premium – the premium the most-used foreign currency commands over the native currency – rises above 50%. This later sign typically occurs during a period of high inflation and up to three years before hyperinflation appears. This period may or may not include a currency crisis, which is distinct from, and can be an initial phase of, high inflation or hyperinflation. More broadly, the dangers of hyperinflation are measured by casual symptoms. These include fiscal, monetary and political causes and symptoms.

  As to fiscal symptoms in the U.S., according to a recent JP Morgan (JPM) presentation, net U.S. debt is presently around 75% of GDP, high, but non-critical. Foreign officials hold 35% of this debt; the Fed holds 16 percent. Both are significant, but not excessive. And, as Prasad and Ye note, debt cements the U.S. dollar role as global reserve; that is, as long as it is not unsustainable, and interest is a manageable piece of the total budget (chart, below).

  On this front, the U.S. does not have enough reserves to cover its short-term debt, but the Guidotti-Greenspan rule may not apply to Advanced Economies. And, as long as 10-year yields, currently about 2.35%, stay below 7% global bond investors tend not to panic, especially when the U.S. is the best of a bad lot.

  

  Deficits-to-expenditures is marginal at about 18%. According to the Wall Street Journal, the deficit has decreased to only 3% of GDP in 2014. The deficit was $1.4 trillion six years ago and the Congressional Budget Office (CBO) projects it to be just $486 billion this year. But, it is expected to increase in 2016 and according to The Heritage Foundation could be worrisome again by 2021.

  Also on the down side, according to Heritage, net U.S. debt, above, will reach 100% of GDP, a dangerous level, around 2028. At $18.2 trillion, total federal debt is already 102.5% of GDP. But most analysts feel that net debt (total minus intra-governmental debt) is the more critical measure. By 2024, mandatory expenditures, or entitlements plus interest on the debt, will be 75% of revenues. By 2030 they will consume revenues (chart, below).

  As to monetary symptoms, Federal Reserve liabilities are also high, about $4.4 trillion. According to Guggenheim, the Federal Reserve's debt/equity ratio was 51:1 in July 2012, more than double 2008, and almost double commercial institutions that failed. And Fed Assets as a percentage of GDP have more than doubled since 2007. But central banks are judged differently, as Japan's experience implies, thus far at least. John Cochrane, a professor of finance at the University of Chicago, points out more specifically that Fed reserves do not lead to hyperinflation. It is also important to understand that printing money or QE is not necessarily the same as monetizing the debt.

  

  In most cases, central banks control interest rates and reserves through government security and foreign currency purchases. To create money, a central bank purchases securities when it digitally credits the accounts of dealers with whom it does business. These dealer banks, like JP Morgan, are immediately richer. In some cases they park the money with the Fed, earning interest; in others, they invest it, some in riskier ways, like derivatives. For money velocity to increase they must actually loan it, which, according to Hanke, few currently do. This is partially due to increased federal regulations, like Dodd-Frank, instituted since the GFC, that place strict restrictions on lending activities.

  

  Monetizing is when the central bank buys government securities directly from the Treasury to fund existing or, unplanned debt, as in the case of Zimbabwe or Japan at present (see Part One). An independent central bank firmly resists such pressure from the political power. The danger, of course, is that this distinction becomes unclear.

  And, as a 2008 IMF report on the Fed stated, "Compared with its posture during the Great Depression, the Fed today is taking considerably more risk and the scope for possible profit and loss outcomes is much greater." The report also points out that the Fed's ability to make a profit during every year of the Great Depression era was largely due to its accumulation of gold. This is a far cry from the make-up of the Fed's burgeoning balance sheet today.

  Another emerging hyperinflation danger is in the area of political management relative to economic health. The Obama administration has less business experience than previous administrations (chart above). Surveys also show that the American people see themselves as more divided than at any time in history (below), and other studies show that the political center is shrinking. Political mismanagement that suddenly increases the debt and social tensions could lead to a crisis that results in high inflation.

  Years ago, R. E. McMaster, author of No Time for Slaves, proposed a simple formula to facilitate understanding of the interplay between government and economics: government + religion = economics. According to Hanke, the problem with Venezuela and its hyperinflation is Hugo Chavez's successor, Maduro; the problem in Yugoslavia was Milosevic; the problem in Zimbabwe was and is Mugabe. They all adhered to the ten-point playbook of the Communist Manifesto, which wrecked their economies and the social order. According to McMaster government does not operate in a vacuum, but those who lead administer by their philosophy or religion.

  

  This simple, but profound theorem plays out around the world today. It can lead to prosperity or economic crisis and hyperinflation. In America, this theorem has led to prosperity. The respect for individual rights and property rights are the pillars of the free market. The founders assured these rights through the founding documents, especially the U.S. Constitution.

  

  According to Coltart (see Part One), the primary reason for Zimbabwe's hyperinflation was that the deficiencies of their constitution allowed a vast disparity of power between the executive office and the legislative and judicial branches. Most worrisome relative to the U.S. Constitution are a list of Supreme Court reversed Executive Orders that even liberal law scholars say blatantly violate the Constitution. It is the quality, not the quantity (above ) of these orders that is the issue. If Americans continue to allow this executive tendency to span administrations, as they have in the past, the dilution of their constitutional rights may eventually lead to hyperinflation in the U.S.A.

  For the present, inflation and money velocity remain low. Though there are various reasons high inflation may appear, typically, there need to be two elements: economic capacity, including low unemployment, and high money velocity. With even core inflation (PCE) currently under 1.2% (as of June 15th headline PCE is 0.2%), economic capacity and lower unemployment just emerging, and money velocity still quite low, high inflation does not appear to be on the horizon.

  This is not to say that other factors could not instigate high inflation or hyperinflation. Some of these "black swans" are dealt with below. But, while Reinhart and Rogoff are no doubt right about the rampant denial afflicting advanced nations relative to future sub-par growth, QE, debt restructuring and coming high inflation, a crisis appears years away. Greece is symbolic of that looming crisis; but it is not Bear Stearns or Lehman.

  This time is not different; but global reserve status, the trust and confidence of investors and deep and wide financial markets make the U.S. unique. There are still enough questions not to be dogmatic, but until the U.S. experiences an increase in causal symptoms or a black swan that fractures global confidence in its economy, hyperinflation is not a worry.

  Black swans that could lead to high inflation or hyperinflation

  The above being noted, according to FT, the global system is in many ways more fragile today than before the GFC. And, considering its fragile nature, many incidents could come out of nowhere and lead to a crisis, or series of crises, that eventually results in a currency crisis and/or hyperinflation.

  One of the prominent possibilities is a successful cyber-attack on a major institution or the U.S. itself, especially the nation's power grids, its nuclear plants, its water supply or its major financial institutions. JPM's, NASDAQ's, and Sony's recent experience serve as examples, and with increasing tensions with Russia and China this area will continue to be a challenge. The director of the NSA recently warned that a cyber-attack will cause a major systems collapse within a decade unless the U.S. develops counter strategy immediately. According to Greg Medcraft, chairman of the board of the International Organization of Securities Commissions, the next black swan will be a cyber-attack.

  

  Though the U.S. has largely avoided catastrophe in the past, there is also the possibility that it might experience more natural disasters in the future. Remember Zimbabwe? About 19% of the U.S. is presently in severe or extreme drought, 29% in moderate to extreme conditions and approximately 40% in abnormal dryness or greater. 100% of California is in extreme, severe or exceptional drought. Also alarming is that according to the Wall Street Journal U.S. beekeepers have been losing 30% of their bees for the last decade, above the 19% sustainable rate. The above issues may place strains on agriculture, lead to supply disruptions and drive up food prices in future years.

  As I covered more extensively in “Evaluating the Arguments for the Dollar's Demise,” in the last decade, globally, at least, there has been an, apparent, increase in natural disasters. According to a 2013 article in The New England Journal of Medicine, there were three times as many natural disasters from 2000 to 2009 as there were from 1980 to 1989. And, according to one account, it was the 1906 San Francisco earthquake and fire that led directly to the Financial Panic of 1907.

  In another critical area, both George W. Bush and Barack Obama have identified nuclear terrorism as the greatest threat to national security. According to a 2008 FBI study, any terrorist nuclear weapon is likely to have a yield of about 1-kiloton (chart, below ), large enough to destroy a city center and with the potential to contaminate surrounding area for up to 4 miles, depending on wind direction (chart, 2nd below ). According to Nukemap, a 1-kiloton detonation in lower Manhattan would kill about 30,000 people and cause three times as many injuries, some fatal. A smaller possibility is a 10-kiloton event with fallout reaching 20 miles.

  

  Even before 911, the U.S. recognized that terrorist groups were attempting to acquire nuclear material. According to one recent joint report by Belfer Center at Harvard endorsed by military leaders, constructing a crude nuclear device is easier today than constructing a safe, reliable weapon. Tests indicate that intelligent operatives could defeat security systems holding weapons or materials and in the last five years several sites have been penetrated. As of 2014, at least four key core Al Qaeda nuclear operatives were still at large. And the difficulty of smuggling nuclear material into the U.S. is largely overstated. But the primary concern is that with one detonation terrorists could claim they had more bombs hidden, creating mass panic.

  

  The nuclear scenario would be a global catastrophe, claiming thousands of lives, shutting down trade and exporting dire consequences to other nations. The cost in response and retaliation would also add enormously to U.S. debt, potentially accelerating the nation towards economic crisis. According to the above Belfer report, the risk of a nuclear terrorist attack on U.S. soil is greater than 1 in 100 every single year.

  In addition to all of the above possibilities there are ongoing currency wars, the reemergence of the Eurozone crisis, the Ukraine and the potential destabilization of Russia, the China slowdown and real estate bubble, Japanese debt, the Sino-Japanese conflict and the craziness of mad regimes like North Korea and Iran to worry about. And we haven't even addressed nuclear sabotage, dirty bombs, an EMP device, ISIS and the Middle East as a whole, other U.S. terrorist events, central bank errors or another financial meltdown due to the approximately $70 trillion in global derivatives. In many ways, the world we currently live in is like dry kindling waiting for an inerrant spark to set it ablaze.

  Hyperinflation in the U.S.A.: How and when it might happen

  The risk of the economy collapsing and instigating hyperinflation is much like the theory of the avalanche: many of the items are in place, and all that is needed is the right trigger to set them off. Whether it comes in the next few years or twenty years from now is impossible to predict and depends on too many unknowns.

  Some, like Eswar S. Prasad, argue in The Dollar Trap that the intricate nature of global mechanisms will keep the dollar in play indefinitely – and the world largely in balance. Others, like James Rickards, in The Death of Money, insist that the complexity of global financial interactions and their tipping points will crash the U.S. economic system. Who is right?

  Based on the above analysis, unless the U.S. experiences a crisis greater than 911 or the GFC, hyperinflation is not a likely scenario for the next five years and probably more like twenty years. But, the greater and the more numerous crises are, the more likely that hyperinflation will come quickly. What if a black swan or a series of crises led to a perfect storm?

  A 1 kiloton nuclear terrorist attack strikes the U.S. in either New York City or Washington D.C. The stock markets crash, losing half their value. The EZ breaks apart and the resulting malaise spreads to the global economy. Instead of the confidence in crisis coming to the U.S., the U.S. bond market implodes and global money runs to gold, silver, foreign currencies and various ex-US bonds. In the U.S. prices rise and stocks rebound some with them – eventually. The U.S. military retaliates in foreign lands for the nuclear attack but walks into a trap.

  Disunity disintegrates into political civil war and panic incites unrest, resulting in martial law. The current drought increases and food supply is cut in half. Fed printing presses finally result in high inflation. Destruction from an earthquake and/or a volcanic eruption lays waste to much of a major city. All of these events combined destroy infrastructure, disrupt distribution, exacerbate the drought and kill leaders. Foreign governments take advantage of America's weakness and institute a cyber-attack. Power failures occur nation-wide.

  Hyperinflation ensues. The stock market falls as confidence wanes. Loss of control leads to a government coup, bank account freezes and despotism. The U.S. descends into an inflationary depression leading to fear of invasion, the dollar's fall and its replacement as the global reserve.

  It would probably take more than one isolated event – even a major one – to create the conditions for hyperinflation in the U.S. And, it took a decade for a similar process to unfold in other nations. But, it can occur faster in the midst of critical events.

  As I stated in “Evaluating the Arguments for the Dollar's Demise,” the U.S. has been protected by a hedge when it comes to disaster. But, events like Katrina, national drought, and the recent Supreme Court decisions relative to Constitutional interpretation hint at a new and more divisive era. Though for the present things seem fine, there is more than one route to an avalanche now than there may have been just a few years ago.

  Replacement of the dollar as global reserve as an isolated event might instigate hyperinflation more quickly. However, only one reserve currency nation has ever experienced a hyperinflation – France, from 1795-96, during the years of the French Revolution. And no nation has ever experienced a hyperinflation as a result of losing global reserve status. Other causal symptoms would likely be apparent, leaving some time to prepare.

  How to prepare for hyperinflation

  Here is some broad investment advice that takes into account the dichotomy of the above conclusions relative to hyperinflation. Portfolio allocations can start small and increase as events on the ground change:

  1. Protect what you have: Diversify your portfolio globally. Hold some real estate. Borrow at fixed rates while interest rates are low.

  2. Consider an international account. Set up expeditious portfolio transitions into foreign currency accounts and international funds with a flexible strategy for transference of at least some assets in the event of escalating volatility, major U.S. weakness or black swans.

  3. Allocate part of your portfolio to alternative funds and hedge-fund-like strategies. If qualified, consider hedge funds, especially those with a global macro and/or event-driven focus.

     

  4. Consider natural resources, agriculture and commodities based funds, especially now when commodities overall, including oil, have corrected and mining is near a historical low cost point versus gold. Remember that water is liquid gold and may be scarcer in the future.

  5. Accumulate tradable items: physical gold and silver (the chart above shows the rise of gold and silver during the Weimar Germany hyperinflation); jewelry; stored food and water; wine; and foreign currency.

  Hyperinflation in the U.S. is coming sometime in the next 20 years or so, and this isn't a cry from a Chicken Little, but a conclusion that the analysis strongly suggests. It is possible hyperinflation could happen during the next few years, but that seems unlikely since it would require a series of major crises and political blunders – events unprecedented in the history of the United States. If this led to a corruption of Constitutional rights in the midst of an exaltation of the Executive Branch that resulted in loss of the rule of law, hyperinflation might result. This is why the understanding and interpretation of the U.S. Constitution, especially in the context of executive orders, may be the most important issue before Congress, the judicial branch and the American people over the next few years – regardless of which party rules.

  It is much more probable that hyperinflation, when it comes to the U.S., will be preceded by a long slow decline that will include a protracted period of high inflation, and that the crash of the dollar and hyperinflation will be the final tumble off a looming, steep cliff. The indications from this analysis point to a convergence of events sometime in the mid-2020's to early 2030's – unless the American people can somehow unite and motivate their politicians to accomplish the hard, almost impossible task of cutting mountainous entitlements adding annually to U.S. debt. But, of course, if the perfect storm occurs, hyperinflation could arrive sooner.

  For the chaos of change it brings, hyperinflation has been described as an economy without memory. It can also be viewed as a furtive civil war a nation's political leaders wage with its people over who will pay for the nation's sins. Its battlegrounds, victories and defeats answer the question of who will wave the white flag over the extravagance of the nation's mismanagement. Ultimately, the people – and the leaders – are both forced to surrender.

  The good news is that, with time, every nation returns from the devastation of hyperinflation to the degree that it embraces corrective measures and free market principles. Regardless of what else might occur, in this sense the U.S. has a sure foundation, a rich history and a hopeful future.

  

  

  

  

  

• Fearing Greek Fallout, ECB Extends "Secret" Credit Lines To Balkans

  As discussions between Greece and its creditors deteriorated and pressure on the country’s banking sector mounted, some analysts began to look nervously towards Bulgaria and Romania where Greek banks control a substantial percentage of total banking assets. 

  The Monday following Greek PM Alexis Tsipras’ referendum call, yields on Bulgarian, Romanian, and Serbian bonds jumped, reflecting souring investor sentiment and the countries’ central banks quickly released statements aimed at calming the nerves of investors and, more importantly, of depositors. 

  As Morgan Stanley noted in May, the real risk  “is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits.” The bank continued: “Although well capitalised and liquid, Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in.”

  Shortly thereafter the “no contagion risk” myth collapsed entirely when Bloomberg reported that the ECB had stepped in to shield Bulgaria from any potential fallout from capital controls in Greece. “The ECB is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation. The ECB would provide access to its refinancing operations, offering euros to the banking system against eligible collateral,” Bloomberg said, citing unnamed officials. 

  Now, FT is out reporting that the ECB has extended “secret credit lines” to Bulgaria and Romania in order to forestall asset seizures. Here’s more:

  The European Central Bank has introduced secret credit lines to Bulgaria and Romania as part of a broader effort to convince foreign regulators not to pull the plug on the local subsidiaries of Greek banks.

   

  News of the behind-the-scenes support for the subsidiaries comes as ECB governors decide on Thursday whether to extend a €89bn lifeline in emergency eurozone funding to Greece’s beleaguered financial sector.

   

  Greece’s Piraeus, National Bank of Greece, Eurobank and Alpha Bank all have substantial assets in central and eastern Europe. If those assets were seized by local regulators, the parent banks would take an immediate capital hit, dealing a potentially terminal blow to Greece’s domestic financial system, which is already hanging by a thread as the country battles to agree a new rescue package with international creditors.

   

  “The fear is that if someone goes first, and pulls the plug, everyone will follow,” said a person familiar with the situation.

   

  The person said the ECB had put in place special “swap” arrangements, or bilateral credit lines, with Romania and Bulgaria to reassure them that the Greek banks there would have funding support throughout the current crisis.

   

  Similar swap lines, which enable foreign central banks to borrow from the ECB and relend that money locally, were used during the eurozone financial crisis, but were typically publicly announced.

  So essentially, the ECB is now set to lend to Bulgaria and Romania in order to ensure that those countries’ regulators do not take any actions with regard to domestic subsidiaries of Greek banks that might serve to further destabilize the Greek banking sector as Europe scrambles to keep it afloat.

  As a reminder, Kathimerini reported in April that the central banks of Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia had “all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk (bonds, treasury bills, deposits to Greek banks, loans etc.) down to zero in order to shield themselves and minimize the danger of contagion in case the negotiations between the Greek government and the eurozone do not bear fruit.” The ECB’s fear seems to be that “quarantines” could turn to “asset seizures” which could in turn further impair the balance sheets of the parent companies and introduce yet another element of uncertainty into already indeterminate discussions around recapitalizing Greece’s ailing banks. 

  And as for the idea that depositors in the Balkans aren’t at risk, we’ll close with the following excerpt from the FT article cited above:

  The National Bank of Romania declined to comment specifically on the new funding line. It said its Greek banking offshoots are “sound”, adding that they could refuse to let shareholders withdraw deposits and could also raise liquidity from the local central bank if the situation worsened.

  

  

  

  

  

• Icahn Vs. Fink: Wall Street Legends Clash Over "Dangerous" ETFs

  In the interest of not burying the lead, so to speak, we’ll begin with a clip from this week’s Delivering Alpha conference.

  In it, Carl Icahn essentially rehashes everything we’ve said over the past several months about the systemic risk posed by phantom ETF liquidity. He then proceeds to explain to Larry Fink how BlackRock is a part of the problem, calling the firm “a dangerous company”, before opining that Fink and Janet Yellen are “pushing the damn thing off a cliff.” Needless to say, Fink did not agree with Icahn’s assessment. Here are the fireworks:

  For those interested to know more, below is the complete Zero Hegde guide to phantom ETF liquidity and a discussion of how it has set the stage for a bond market meltdown.

  *  *  *

  Two months ago, in “ETF Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity,” we outlined the rather disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity facilities that can be tapped in the event of a sudden retail exodus from bond funds. 

  “The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show,” Reuters reported at the time, in a story we suspect did not get the attention it deserved. 

  At a base level, these precautionary measures are the result of the interplay between central bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand there is for new corporate issuance (the rationale being that at least corporate credit offers some semblance of yield). More demand means rates on corporate credit are driven still lower, and once yields on high grade issues get close to the lower limit, yield-starved investors are then herded into HY.

  All of this supply in the primary market comes at a time when liquidity in the secondary market for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the government’s (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre with a tiny exit.

  This situation has been exacerbated by the proliferation of bond ETFs which have allowed retail investors to pile into corners of the fixed income world where they might not belong. 

  All of the above can be summarized as follows.

  “MF assets too large versus dealer inventories” (via Citi)…

  

  … clear evidence of “structural damage in corporate bond trading liquidity” (via JP Morgan)…

  

  … and the rapid growth of bond funds in the post-crisis world (via BIS)…

  

  So given the above, the question is this: if something were to spook the market – a rate hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical shock – causing an exodus from these funds, what would happen to prices if fund managers were suddenly forced to transact in size in an illiquid secondary market in order to meet redemptions?

  “Nothing good”, is the answer. 

  The solution is to avoid selling the underlying bonds – even when investors are selling their shares in the funds.

  But how is this possible? 

  To a certain extent, outflows in one fund can be offset by inflows to another. These “diversifiable flows” are one happy byproduct of the great ETF proliferation. Here’s a refresher on how this works courtesy of Barclays.

  *  *  *

  Portfolio Products Replace Dealer Inventory

  While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.

  

  The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.

  This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate bonds.

  

  *  *  *

  Ok great, so ETFs provide a kind of “phantom” liquidity if you will. There are two problems with this:

  • It only works when flows are diversifiable. Once flows become unidirectional, it all goes out the window.
  • It makes the underlying markets even more illiquid.

  Here’s how we put it last month in “How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown“:

  In other words, if I’m a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There’s a term for that kind of business. It’s called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses. 

   

  Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.

  So what is a fund manager to do? 

  This is where we come full circle to the emergency liquidity lines mentioned at the outset. In order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional, fund managers may instead pay out redemptions in borrowed cash. 

  This is, to quote Citi’s Matt King, “creative destruction destroyed.”

  Only worse.

  That is, this represents the willful delay of a long overdue episode of creative destruction layered atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy references, that can be translated as follows: this strategy is yet another example of delaying the inevitable. If fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they’re holding have done to stay in business. It’s a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course. 

  In closing, it’s important to note that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds. 

  In other words, when the exodus comes, the illiquidity that’s been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.

  

  

  

  

  

• So You Want To Be A Central Banker? Then Answer This Question

  Do you see a bubble?

   

  

   

  If your answer is “no”, proceed to job offer!

   

  h/t @NorthmanTrader

  

  

  

  

  

• Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

  Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

  In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

  In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

  Oh, and both CEOs resigned on June 7. 

  On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

  Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

  BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

   

  Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

   

  
  

  So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

  (From the report)

   

  Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

   

  Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

   

  In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

  Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

  An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

  Hmm. Well, maybe Jain didn’t read that article. 

  This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

   

  The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

   

  This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

  Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

  The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

   

  There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

   

  The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

  Christian, who is Christian?

  Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

  Wow. So how well did Jain know Bittar? 

  The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

  That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

  And on, and on, and on.

  The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

  Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

   

  Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

   

  Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

   

  Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

  And finally, the accusation that may prove most damaging of all: 

  There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

  There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

  So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

• Greece And The Worst Possible Way To Correct Trade/Productivity Imbalances

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  Piling on more debt is the worst possible way to correct structural trade and productivity imbalances.

  In Greece and the End of the Euroland Fantasy, I suggested the trade imbalances at the heart of Greece's debt crisis could only be resolved by Greece returning to its own national currency. Correspondent Michael Gorback observed that there are other mechanisms for correcting imbalances in trade and productivity:

  "There is not one but 4 ways to address international productivity imbalances: currency revaluation, fiscal transfers, labor migration, and changes in local wages.

   

  If you peg one of those the others must adjust. In the case of the Eurozone and Greece, the adjustment was largely through fiscal transfers with a bit of migration. Wages are not so much sticky as fossilized.

   

  I submit that the reason the US does well under monetary union (ED NOTE: that is, all 50 states use the same currency, the U.S. dollar) is not so much its fiscal union as it is the strength of compensatory mechanisms that are far less developed in Europe. American states and localities still engage in their own fiscal policies and productivity is by no means homogeneous.

   

  The US enjoys excellent labor mobility – about 10x that of Europe. It has seen numerous population shifts based on economics: the early western migration, the Gold Rush, migration of freed slaves to the north, Okies leaving the midwest during the Dust Bowl, the population shift from New England to the Sun Belt, and more recently the oil-boom-related migrations, to name a few.

   

  Employers are also mobile. Furniture manufacturers moved from Western NY state to the South decades ago. GE once had 14,000 employees in the town of Pittsfield, MA. Now it's gone. Boeing is moving ops to SC. Beretta moved to TN. If the wages don't adjust, the employers migrate to the lower wages.

   

  The US, having a large and relatively less regulated private sector that's also relatively unencumbered by unions, has greater wage flexibility than most developed countries.

   

  I think these compensation mechanisms in mobility and wages work better for the US and that's why the US handles monetary union better than the Eurozone. The US still has to engage in interstate fiscal transfers but they're mediated through the central government and few citizens give it a second thought. Is the State of NY frothing over the fact that it gets back less federal dollars than it pays, and that the difference is going to Kentucky?

   

  Why does Boeing open a plant in South Carolina and China open factories in Africa but BMW hasn't opened a plant in Greece? If I were negotiating a bailout, those would be the reforms I'd demand – reforms that make business thrive."

  Easing the process of labor migration within Europe was one goal of the Eurozone, and in terms of making it relatively easy for someone to take a job in another Eurozone member nation, it was a successful reform.

  But this doesn't really address imbalances in productivity due to differences in skills, education, cultural values and corruption. Low-skill labor is more easily recruited than high-skill labor, and in a global economy, the choice of where to site a new plant or call center depends on many factors, not just wage arbitrage, i.e. going to where the labor is currently cheaper.

  Many assume corporations have shifted production to China to take advantage of lower wages. But as wages rise in China, this is not necessarily the deciding factor: proximity to China's growing market is often the over-riding factor.

  A new book, Thieves of State: Why Corruption Threatens Global Security, highlights the many systemic costs of corruption. The corruption that is endemic to Greece and China (among many others) imposes profound systemic costs on those economies, costs that may well loom much larger in the next global downturn than they did in the last Global Financial Meltdown.

  I think it is safe to say that piling on more debt is the worst possible way to correct structural trade and productivity imbalances, yet that is the Eurozone's "solution" to Greece's debt/ trade/ productivity/ corruption crisis. The discussion should be (as Michael pointed out) about creating conditions for business and real wealth creation to thrive, not jamming more debt down the throats of everyone on either side of the structural imbalances.

  

  

  

  

  

• Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

  Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

  In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

  In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

  Oh, and both CEOs resigned on June 7. 

  On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

  Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

  BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

   

  Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

   

  
  

  So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

  (From the report)

   

  Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

   

  Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

   

  In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

  Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

  An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

  Hmm. Well, maybe Jain didn’t read that article. 

  This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

   

  The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

   

  This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

  Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

  The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

   

  There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

   

  The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

  Christian, who is Christian?

  Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

  Wow. So how well did Jain know Bittar? 

  The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

  That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

  And on, and on, and on.

  The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

  Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

   

  Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

   

  Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

   

  Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

  And finally, the accusation that may prove most damaging of all: 

  There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

  There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

  So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

• Stock Bubble And Its Buyback Genesis Suddenly Vulnerable

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  Having now passed the anniversary of the “rising dollar”, it is interesting to see the related and continued effects on the stock bubble(s). As should be obvious by now, stock buybacks, funded via corporate bonds and loosely categorized C&I loans, are responsible for the post-QE3 nearly uninterrupted rise. Repurchases are forming a separate “liquidity” conduit, indirect leverage if you will, which has already started to fray. Various broader “market” indices have diverged, starting with the Russell 2000 in early 2014 (with the economic slowdown that was supposed to be an anomaly of weather).

  

  Since then, other indices have also broken away, notably the broad NYSE Composite index which includes the greatest cluster of ETF’s. The deviation there coincides exactly with the “dollar” tightening in eurodollar liquidity and less-smoothened wholesale transactions.

  

  There really cannot be much doubt anymore that QE is the central focus of the stock bubble, especially the third and fourth applications. The timing is so obvious as to preclude any other interpretation – most especially a growing and sustainable recovery that never materialized despite all public and heavy exaltation.

  

  While there is undoubtedly some reinforcing inflation due to various views of “tail risks” and perceptions about volatility which become self-fulfilling, it really is repurchases that are driving price action. The most “effective” transmission is corporate debt funneled through shareholder returns, which are not very efficient in terms of economic circulation (especially by comparison to the opportunity cost of them).

  In that respect, along with recession fears, it is perhaps quite significant that the S&P Buyback Index has suffered its first extended reversal since the 2012 slowdown, coincidental then to European concerns and just prior to both Draghi’s promise and QE3. It is unclear at the moment what exactly has caused that dramatic shift but the more likely explanations point to fears about corporate ability to continue repurchasing with economic weakness bearing down against both internal cash flow and even corporate bond pricing and liquidity.

  Whatever the case may be ultimately, the stock bubble’s ties to central bank policy seem to suggest the quite waning influence; both in terms of active participation (on the Fed side) and, more importantly in my view, how blind faith in monetarism may be reversing because of that widespread economic fruitlessness. Stock momentum, for the first time since 2012, is decidedly waning on all fronts:

  

  I find it significant that the broader market index, the NYSE Composite, has shifted negative in its one-year comparison again tied to last year’s “dollar” disruption. At the very least it might imply that the central bank paradigm that lasted since the middle of 2012 has greatly eroded or even ended.

  

  

  

  

  

• If You Like Your Nuclear Bomb-Free Iran, You Can Keep It…

  “Read my lips…”

   

  

   

  Source: Investors.com

  

  

  

  

  

• Nasdaq Soars To Record High With Biggest Rally Since October's "Bullard" Bounce

  Artist's imprerssion of Nasdaq trader's reaction to the greek deal this week (forward to 45 seconds in…and feel the anticipation)

  Stock went up… some more than others… as Futures show gapped up on the Greek vote – kept squeezing into the US open and then diverged with Nasdaq melting up…

  

   

  Cash indices all gapped higher at the open but from that squeeze – there was major divergence (Dow Industrials and Trannies actually lower)

  

   

  On the week, the Nasdaq is now up over 3.25%…

  

   

  In summary…

  *  *  *

  The last few days saw the biggest short-squeeze in 5 months…

  

   

  Which is helping The Nasdaq to its biggest 6-day run since October's Bullard ramp…

  

   

  And then there's this massively free-cash-flow negative idiot-maker…

  

   

  One more good reason why stocks just keep surging… JPY carry is back on now that Grexit event risk has been 'removed' from carry traders risks… fun-durr-mentals

  

   

  VIXnado…back at an 11 handle!!

  

   

  as The backwardation unwinds to the steepest in 2 months…

  

   

  Bonds continued their rally with 30Y leading the way…

  

   

  As it appears the Moar QE trade is back in full swing…

  

   

  FX markets continued to be dominated by a plunge in EUR and JPY…

  

   

  And, digging into the details, your daily FX roundup (courtesy of ForexLive):

  We learned a few things from the ECB but nothing earth-shattering. The economic assessment gave a lift to the euro but it was quickly wiped out. The FX market reacted little to the Greek ELA but European stocks rallied.

   

  After the press conference a second wave of euro buying hit and pulled it from a session low of 1.0856 to 1.0927 at the options cut. From there, the sellers returned in a broad USD mini-rally and it slipped to 1.0875 at the end of the week (hold your horses there buddy … its Friday here in the world's greatest country but not the weekend yet – Eamonn) day.

   

  USD/JPY hit a session high of 124.18 very early in US trading but slipped into the options cut, falling to 123.89. Steady buying from there took it back to 124.13. Yellen had very little effect, if any.

   

  Cable hit a bump today, falling to 1.5560 from 1.5615 but the dip buyers were ready and it climbed all the way back. A second dip also found support and the pair finishes only modestly lower on the day at 1.5612.

   

  USD/CAD finishes at the highs of the day at 1.2966. Dips toward 1.2900 have found good support since the BOC cut. A touch off 1.2906 at the options cut set the stage for a steady rally to the highs.

   

  The Aussie was generally perky as it clawed back some of yesterday's losses. The high of 0.7437 peaked just above the 61.8% retracement of the slump on Wednesday but some sellers appeared late and drove it to 0.7401. There were some massive options running off in AUD and that was the buzz. The lows in USD right across the board today were at the cut.

  Commodities were mixed with copper limping higher as PMs leaked a little more and crude tumbled…

  

   

   

  Crude continues to tumble back to a $50 handle as Iran and default fears mount…

  

   

  Charts: Bloomberg

  Bonus Chart: VXX hits its 347th Record Low……

  This is pretty stunning 347 out of 1625 days that $VXX traded: new all time lows were set pic.twitter.com/KlFrtQPVHi

  — Eric Scott Hunsader (@nanexllc) July 16, 2015

  

  

  

  

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• The Future Costs Of Politically Correct Cultism

  Submitted by Brandon Smith via Alt-Market.com,

  

  I rarely touch on the subject of political correctness as a focus in my writings, partially because the entire issue is so awash in pundits on either side that the scrambling clatter of voices tends to drown out the liberty movement perspective. Also, I don’t really see PC cultism as separate from the problems I am always battling against: collectivism and the erasure of the individual in the name of pleasing society. Political correctness is nothing more than a tool that collectivists and statists exploit in order to better achieve their endgame, which is conning the masses into believing that the group mind is real and that the individual mind is fiction.

  Last year, I covered the PC issue in my article “The Twisted Motives Behind Political Correctness.” I believe I analyzed the bulk of the issue extensively. However, the times are changing at a pace that boggles the mind; and this is by design. So, it may be necessary to square off against this monstrosity once again.

  In order to better examine the true insanity of what many people now term “social justice warriors,” I must study a few aspects of that strange movement separately. First, let’s take a brief look at the mindset of your average social justice circus clown so that we might better understand what makes him/her/it tick.

  Rebel Without A Legitimate Cause

  I spent several years (up until 2004, when I woke up from the false paradigm madness) as a Democrat. And before anyone judges that particular decision, I would suggest they keep in mind the outright fascist brothel for the military-industrial complex the Republican Party had become at that point and remains to this day. Almost every stepping stone that Barack Obama is using today to eradicate the Constitution was set in place by the Bush dynasty, including the Authorization Of Military Force, which was the foundation for the National Defence Authorization Act and the legal precedence for indefinite detention without trial of ANY person (including an American citizen) accused of terrorism by the president of the U.S., as well as the use of assassination by executive order and the implementation of mass electronic surveillance without warrant.

  But, hell, these are real issues — issues that many of my fellow Democrats at the time claimed they actually cared about. Today, though, liberal concerns about unconstitutional actions by the federal government have all but vanished. Today, the left fights the good fight against flags on the hoods of cars from long-canceled television shows and battles tooth and nail for the “right” of boys wearing wigs and skirts to use the girl’s bathroom. Today, the left even fights to remove the words “boy” and “girl” from our vocabulary. Yes, such noble pursuits as these will surely be remembered as a pinnacle in the annals of societal reform.

  Maybe I realize the ideological goals of the social justice machine are meaningless on a surface level; and maybe you realize this, too. But these people live in their own little universe, which doesn’t extend far beyond the borders of their college campuses, the various Web forums they have hijacked and a trendy Marxist wine-and-swinger party here and there in New York or Hollywood. They actually think that they are on some great social crusade on par with the civil rights movements of the mid-1900s. They think they are the next Martin Luther King Jr. or the next Gandhi. The underlying banality and pointlessness of their cause completely escapes them. The PC cult is, in many respects, the antithesis of the liberty movement. We fight legitimate threats against legitimate freedoms; they fight mostly imaginary threats and seek to eradicate freedoms.

  Don’t get me wrong; sometimes our concerns do align. For instance, liberty proponents fight back against the militarization of police just as avidly as leftists do, if not more so. But our movements handle the problem in very different ways. Look at Ferguson, Missouri, where anyone with any sense should be able to admit that the government response to protests was absolutely a step toward tyranny, ignoring violent looters while attacking peaceful activists. Leftists and PC cultists decided to follow the Saul Alinsky/communist playbook, busing in provocateurs from Chicago to further loot and burn down businesses even if they belonged to ethnic minorities. In the meantime, the liberty movement and Oath Keepers sent armed and trained men to defend those businesses REGARDLESS of who owned them and defied police and federal agents who tried to stop them.

  The left gave the police and government a rationale for being draconian, while we removed the need for police and government entirely by providing security for the neighborhood (killing two birds with one stone). Either their methods are purely ignorant and do not work, or their methods are meant to achieve the opposite of their claims. In the end, the PC movement only serves establishment goals toward a fully collectivist and centralized society.  Their publicly stated intentions are otherwise pointless.

  Your average PC drone does not understand the grander plan at work, nor does he want to. All he cares about is that he has found a “purpose” — a fabricated purpose as a useful idiot for power brokers, but a purpose nonetheless.

  People Must Be Forced To Bake Gay Cakes

  I personally do not care if two people of the same gender want to be in a relationship, but I do find the issue of gay marriage (and marriage in general) a rather odd conflict that misses the whole point. Marriage has been and always will be a religious institution, not federal; and I find government involvement in this institution to be rather despicable. When the Supreme Court’s decision on gay marriage came down, I felt a little sorry for all the joyfully hopping homosexuals on the marbled steps of the hallowed building, primarily because they essentially were fighting for the state to provide recognition and legitimacy for their relationships. Frankly, who gives a rip what the state has to say in terms of your relationships or mine? The state is an arbitrary edifice, a facade wielding illusory power. If a relationship is based on true and enduring connection, then that is all that matters, whether the Supreme Court dignifies it or not.

  The only advantage to solidifying gay marriage in the eyes of the state is the advantage of being able to then use the state as an attack dog in order to force religious institutions to accept the status of gays in the same way the government does. And unfortunately, this is exactly what the PC cult is doing.  What they do not seem to understand is that recognition by the state does not necessarily translate to recognition by religious organizations, nor should it.

  Should an individual, organization or business be allowed to refuse service to anyone for any reason? Should the state be allowed to force people into servitude to one group or another even if it is against their core values?

  PC champions desperately try to make these questions a matter of “discrimination” alone. But they are more about personal rights and personal property and less about “hate speech.” Under natural law, as well as under the constitution, an individual has every right to refuse association with any other person for ANY reason. If I do not like you, the government does not have the authority to force me to be around you or to work for you. But this line has been consistently blurred over the years through legal chicanery. As I’m sure most readers are familiar, the issue of gay cakes seems to arise over and over, as in cases in Colorado and Oregon in which religiously oriented business owners were punished for refusing to provide service for gay customers.  Keep in mind, these businesses did not refuse outright service to gays.  What they did refuse, was to make gay wedding cakes.  To do so would have been in outright conflict with their religious principles.

  Punishments have included crippling fines designed to put store owners out of business and have even included gag orders restricting the freedom of businesses to continue speaking out against the orientation of customers they have refused to do business with.

  In order to validate such actions, leftists will invariably bring up segregation as a backdrop for the gay cake debate. “What if the customers were black,” they ask. “Is it OK for a business to be whites only?”

  My response?  Yes, according the dictates of individual liberty, yes it is okay.

  First, to be clear, I am talking specifically about private individuals and businesses, not public institutions as in the argument explored during Brown v. Board of Education. Private and public spaces are different issues with different nuances. I personally believe it is ignorant to judge someone solely on the color of his skin, and sexual orientation is not necessarily an issue to me. But it is equally ignorant for someone to think that the state exists to protect his feelings from being hurt. I’m sorry, but discrimination is a fact of life and always will be as long as individualism exists. The PC cultists don’t just want government recognition of their status; they want to homogenize individualism, erase it, and force the rest of us to vehemently approve of that status without question. This is unacceptable.

  Your feelings do not matter. They are not superior in importance to the fundamental freedom of each individual to choose his associations.

  If a business refuses to serve blacks, or gays, or Tibetans, then, hey, it probably just lost a lot of potential profit. But that should absolutely be the business’s choice and not up to the government to dictate. And in the case of “gay discrimination,” I think it is clear that the PC crowd is using the newfound legal victim group status of gays as a weapon to attack religiously based organizations. Make no mistake, this will not end with gay cakes. It is only a matter of time before pressure is brought to bear against churches as well for “discrimination.” And at the very least, I foresee many churches abandoning their 501(c)(3) tax exempt status.  Again, marriage has been and always will be a religious institution.  The PC crowd will not be happy with government recognition alone.  They want to force recognition from everyone.

  If a group wants fair treatment in this world, that is one thing. I believe a gay person has every right to open HIS OWN bakery and bake gay marriage cakes to his little heart’s content. I believe a black person has every right to dislike white people, as some do, and refuse to associate with them or or do business with them if that’s what he/she wants. I also believe that under natural and constitutional law, a religious business owner is an independent and free individual with the right to choose who he will work for or accept money from. If he finds a customer’s behavior to be against his principles, he should not be forced to serve that person, their feelings be damned.

  This is fair.

  What is not fair is the use of government by some groups to gain an advantage over others based on the legal illusion of victim group status. PC cultists want us to think that choice of association is immoral and damaging to the group. I have to say I find them to be far more intolerant and dangerous than the people they claim to be fighting against, and this attitude is quickly devolving into full bore tyranny under the guise of “humanitarianism.”

  Gender Bending Does Not Make You Special

  A man shaves his head and eyebrows, straps a plastic bottle to his face, and has his feet surgically modified to resemble flippers: Does this make him a dolphin, and should he be given victim group status as trans-species? I’m going to be brief here because I covered this issue in a previous article, but let’s lay everything on the table, as it were…

  PC cultists are clamoring to redefine the scientific FACT of gender as an “undefinable” and even discriminatory social perception. No one, no matter how dedicated, will EVER be able to redefine gender, unless they have the ability to change their very chromosomes. Nature defines gender, not man; and a man who undergoes numerous surgeries and body-changing steroid treatments will always have the genetics of a man even if he gives the appearance of a woman. Take away the drugs, and no amount of make-up will hide the chest hair growth and deepening voice.

  This might be deemed a “narrow” view of gender, and I don’t care. Nature’s view of gender is the only one that counts. Psychological orientations are irrelevant to biological definitions. Are you a man trapped in a woman’s body? Irrelevant. A woman trapped in a man’s body? Doesn’t matter. If we are talking about legal bearings, then biological definitions are the only scale that makes sense. I realize that gender bending is very trendy right now, and Hollywood sure seems to want everyone to jump on that freaky disco bandwagon, but there is no such thing as gender-neutral people. They are not a group, let alone a victim group, and do not necessitate special attention or government protection. There are men, and there are women; these are the only gender groups that count. Whether they would like to be the opposite does not change the inherent genetic definition. Period. To make such foolishness into an ideology or a legal battle is to attempt to bewilder man’s relationship to nature, and this will only lead to social distraction and disaster.

  There Is No Such Thing As ‘White Privilege’

  A person determines his success in life by his character and his choices. Color does not define success, as there are many people of every color who are indeed successful. Do you have to work harder to gain success because you are brown, or black, or neon green? I’ve seen no concrete evidence that this is the case. I know that people who identify as “white” are still around 70% of the American population, thus there are more white people in successful positions only due to sheer numbers.

  I know that I personally grew up in a low-wage household and had little to no financial help as I entered the working world. Everything I have accomplished in my life to this point was done alongside people of color, some of whom had far more advantages than I did. I cannot speak for other people’s experiences, but I can say that being white was never more important in my life than being stubborn and dedicated.

  I also find it a little absurd that most PC cultists who harp about so-called white privilege are often white themselves and haven’t the slightest experience or insight on what it is to be a person of color anyway.  All of their concepts of discrimination are based purely on assumption. White privilege seems to be the PC cult’s answer to the argument that racism is a universal construct. Only whites can be racist, they claim, because only whites benefit from racism. I defy these jokers to show any tangible proof that an individual white person has more of a chance at success than a person of color due to predominant racism. Or are we just supposed to have blind faith in the high priests of PC academia and their morally relative roots?

  The Cost Of Cultural Marxism

  Marxism (collectivism) uses many vehicles or Trojan horses to gain access to political and cultural spaces. Once present, it gestates like cancer, erasing previous models of heritage and history in order to destroy any competing models of society.  If you want to understand what is happening in America today, I suggest you research the Chinese Cultural Revolution of the 1960's.  We are experiencing the same Marxist program of historical and social destruction, only slightly slower and more strategic.

  Younger generations are highly susceptible to social trends and are often easily manipulated by popular culture and academic authority, which is why we are seeing PC cultism explode with the millennials and post-millennials. In my brief participation on the left side of the false paradigm, political correctness was only beginning to take hold. A decade later, the speed of the propaganda has far accelerated, and we now have a bewildering manure storm on our hands. The result is a vast division within American society that cannot be mended. Those of us on the side of liberty are so different in our philosophies and solutions to social Marxists that there can be no compromise.  The whole carnival can end only one way: a fight. And perhaps this is exactly what the elites want: left against right, black against white, gay against religious and straight, etc. As long as the PC movement continues to unwittingly do the bidding of power brokers in their efforts toward the destruction of individual liberty, I see no other alternative but utter conflict.

  

  

  

  

  

• China-Led Bank Will "Keep America Honest," Provide Alternative To IMF, Nomura Says

  The membership drive and subsequent launch of the Asian Infrastructure Investment Bank has been a favorite topic of ours since the UK threw its support behind the China-led venture in March.

  London’s move to join the bank marked a diplomatic break with Washington, where fears about the potential for the new lender to supplant traditional US-dominated multilateral institutions prompted The White House to lead an absurdly transparent campaign aimed at deterring US allies from supporting Beijing by claiming that the AIIB would not adhere to international standards around governance and environmental protection. 

  In the weeks and months following the UK’s decision, dozens of countries (including many traditional US allies) expressed interest in the new lender and by the time the bank officially launched late last month, the US and Japan (who dominate the IMF and ADB, respectively) were the only notable holdouts. 

  

  As we never tire of discussing, the reason the AIIB matters is that it represents far more than a new foreign policy tool for Beijing to deploy on the way to cementing its status as regional hegemon.

  The lender’s real significance lies in the degree to which it represents a shift away from the multilateral institutions that have dominated the post-war world economic order. In short, it’s 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. The AIIB isn’t alone in this regard. Indeed, the BRICS bank can be viewed through a similar lens. 

  It’s against this backdrop that we bring you the following insight from Nomura’s Richard Koo, who suggests that the Greek experience with the IMF shows how the institution sometimes fails to deliver and by extension, how important it is for the countries in need to have more than one option when it comes to securing crucial aid.

  *  *  *

  AIIB a way around western opposition to IMF and World Bank reforms

  In light of US and European opposition to IMF and World Bank reforms, few should have been surprised that China decided it made more sense to create a new institution than to stand around waiting for the status quo to change. Eventually it announced the creation of the AIIB.

  Europe quickly declared that it would participate in the new institution. I see this as an attempt to smooth over relations with China after its earlier reluctance to allow the nation a more prominent role at the IMF.

  The US administration, while arguing China’s voting rights needed to be expanded to make the IMF a truly global institution, ultimately faced opposition from the legislative branch of government. The end result was a significant loss of US influence with both Europe and China.

  AIIB gives alternative to countries in need of help

  The US sought to expand China’s voting rights and thereby maintain the IMF and World Bank’s central positions in the global economy because allowing the creation of a similar institution would give cash-strapped countries more than one “lender of last resort” to turn to.

  Until now the IMF was the only choice for countries in need of financial assistance, which meant they had no choice but to accept the economic and fiscal reforms it demanded.

  But if the IMF has competition, countries in need of help will most likely shop around for the institution offering the easiest terms, which means necessary reforms may be delayed.

  China may also create an alternative to IMF

  In its current form, at least, the AIIB has a different role from the IMF; it is designed to provide development funds, much like the World Bank or Asian Development Bank (ADB). Given that the World Bank and the IMF were created as a pair under the postwar Bretton-Woods regime, US officials may be concerned that China will come up with a sister institution to the AIIB that has an intended role similar to that of the IMF.

  If the IMF’s rival is heavily under China’s influence, countries receiving its support will rebuild their economies under what is effectively Chinese guidance, increasing the likelihood they will fall directly or indirectly under that country’s influence.

  Lending of development funds to the countries of Asia by a Chinese-led AIIB will also bring about an increase in the nation’s influence throughout the region. That would be of concern to the US, which has succeeded in extending its own influence in the area via the World Bank and IMF.

  IMF and the US fundamentally misread Asian currency crisis

  There is something to be said for the US argument that there should be only one refuge for economically troubled nations which takes responsibility for ensuring they carry out necessary reforms. However, that view is based on the underlying assumption that the US and the IMF will correctly diagnose the problems it encounters.

  In reality, the US and the IMF completely misread the Asian currency crisis that began in 1997, and their errors caused tremendous damage to crisis-struck countries in the region.

  The decision of many Asian countries to participate in the AIIB is probably due in part to a distrust of the US born during the currency crisis.

  In that sense, I think the AIIB may come to play an important role in keeping America honest.

  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, I think 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. 

  

  

  

  

  

• China Stocks Slump Over 10% Post-Intervention: Derivatives Dealers Reveal $150 Billion In "Questionable" Exposure

  "Right now, dealers are going through their books trying to work out what their positions are worth," explains a major participant in the Asian derivatives market as Reuters reports the suspension of hundreds of mainland China stocks has created disputes between banks and their clients over the valuation of billions of dollars of equity derivatives. "In the end, someone is going to have to call the value of those deals, and someone else will lose out," and with over 1000 stocks still suspended, and Chinese stocks now 12% off post-intervention highs, ISDA – the body that represents the world's largest dealers – is worried that at least $150 billion of outstanding OTC equity derivatives on mainland-listed shares may not have the appropriate language to deal with these events. After 3 days of "you will never learn" rises, margin debt declined following China's great data last night and the continued good news is bad news sell off today.

  • *PBOC TO INJECT 20B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  Post-intervention, there is some "malicious selling" going on…

  • *FTSE CHINA A50 JULY FUTURES DECLINE 0.6%

  China's "Dow"…

  

   

  And CSI-300 (China's "S&P 500") is now down over 12% from the post-intervention highs…

  

   

  As after 3 days of "you will never learn" rises…

  • *SHANGHAI MARGIN DEBT DECLINES FIRST TIME IN FOUR DAYS

  And last night's data pushed China's debt-to-GDP to record highs…

  

   

  But a far bigger risk looms, as Reuters reports,

  The suspension of hundreds of mainland China stocks during a market plunge from mid-June could lead to disputes between banks and their clients over the valuation of billions of dollars of equity derivatives.

   

  Banks dealing in derivatives are concerned that valuation terms covering market disruptions in other Asian markets, such as trading halts when stocks move up or down by the exchange's daily range limits, might not apply to the wave of stock suspensions in China.

   

  …

   

  Dealers have written at least $150 billion of outstanding over-the-counter (OTC) equity derivatives on mainland-listed shares, according to estimates by Shanghai-based investment consultancy Z-Ben Advisors.

   

  "It's not yet clear if the existing disruption event language for other Asian jurisdictions can be applied to China or how the existing disruption definitions for limit-up, limit-down would apply to suspended stocks," said Keith Noyes, regional director, Asia Pacific, at the International Swaps and Derivatives Association (ISDA), which represents the world's largest derivatives dealers.

  And for those who proclaimed the surge in China stocks a victory, think again…

  "There could be wrangling over issues such as whether the Shanghai composite index closing price, which would generally be the easiest to use to value contracts, is a good price or a disrupted price, given that so many stocks are now suspended," said Noyes.

   

  "Right now, dealers are going through their books trying to work out what their positions are worth," said Adam Sussman, head of execution and quantitative services at international brokerage Liquidnet. "In the end, someone is going to have to call the value of those deals, and someone else will lose out."

  *  *  *

  We know who…

  

  

  

  

  

  

• Forget Stocks – China Is Trying To Centrally Plan Its Way Out Of Another Black Hole

  Submitted by Simon Black via SovereignMan.com,

  It’s here in southwestern China’s postcard-perfect Yunnan province that the mighty Mekong River rises.

  From its source in a nearby mountain range, the river proceeds south, cutting its way across Southeast Asia’s fertile lands through Burma, Laos, Thailand, Vietnam, and Cambodia.

  The Mekong is hugely important; its waters irrigate million of acres of land and provide untold quantities of fish, both of which support tens of millions of people in the region.

  So it’s a major concern that China appears to be unilaterally diverting the Mekong to support its own needs.

  We’ve discussed China’s worrisome drought several times in the past.

  It would not be the slightest overstatement to say that China’s water situation is rapidly approaching crisis levels.

  Even China’s Agriculture Ministry is sounding the alarm bells.

  The numbers they’re reporting show that China already has to import more water than the United States imports oil.

  And this is creating major problems for their food security– for without staggering food imports, China cannot feed itself.

  If you add up all the acres of farmland that it takes to grow the amount of food China must now import each year, the total area is larger than the entire state of California.

  And this problem is only getting bigger.

  Here in Yunnan, the scenic countryside stretches to the horizon with beautiful farms and vast walnut groves, benefiting from the province’s gentle climate.

  Yunnan is actually one of the biggest walnut producing regions in China, which itself is the largest walnut producer in the world.

  But this won’t last. It can’t. They simply don’t have enough water.

  That’s actually the reason I’m here– walnuts.

  One of the two major focuses of our Chilean agriculture business is walnuts– something we chose precisely because of the long-term water crisis in China (not to mention the water crisis in California, another major walnut producer).

  As Chinese production declines, the resulting shortage should boost prices and substantially benefit our firm.

  For now, China’s government is doing everything they can to stem their food security and water crises from getting worse. And that includes commandeering the Mekong.

  Over the last few years, the Chinese government has built several massive dams along the Mekong River in Yunnan province.

  The Nuozhadu and Xiaowan dams are so large, in fact, that their combined reservoirs have enough capacity to cover the entire state of Maryland in five feet of water.

  In addition to providing bountiful hydroelectricity for Chinese industry, these dams are also being used to hoard water.

  China has a long history of trying to tame rivers.

  It goes back to the days of Mao when legions of engineers did everything they could to alter and divert natural rivers for the betterment of farmers.

  (Even China’s former President Hu Jintao started off as an engineer for SinoHydro…)

  It didn’t work. And combined with the rest of Mao’s absurd central planning, millions of people starved to death.

  Trying to fight nature always ends badly. But governments never learn.

  This is exactly what the Chinese government is trying to do right now with its bubbly stock markets.

  Like their water crisis, this is a force of nature. When a market bubble gets too inflated, its natural course is to pop.

  No amount of clever engineering can prevent this. Delay, perhaps. But never prevent.

  China’s response to their financial emergency has been the same as their water emergency: deceit and desperation.

  They suspended trading, encouraged small investors to mortgage themselves to the hilt, pushed bank balance sheets onto even shakier ground, and published the most insane propaganda worthy of the Pulitzer Prize for fiction.

  They even took a suggestion from Shakespeare’s Henry VI: “The first thing we do, let’s [imprison] all the lawyers.” And yes, they actually did throw a bunch of lawyers in jail for ‘encouraging dissent.’

  But like their water crisis, this isn’t something they can out-engineer.

  It would be like expecting a bunch of bureaucrats to centrally plan their way out of a black hole.

  It’s just not going to happen– nature is too powerful a force, like an unstoppable train.

  And fundamentally in this world, there are two kinds of people: those who see it coming, and those who don’t.

  For those who see it coming, you have options. You have freedom.

  You can choose, at a minimum, to simply get out of the way, and ensure that the train doesn’t hit you or your family.

  Or you might even choose to find a way to profit from it, just as we are doing with China’s water crisis.

  Undoubtedly, whenever a nation as large and populous as China’s experiences such severe financial gyrations, there’s money to be made; if nothing else, potentially some great bargains for patient investors.

  The other type of person is the one who doesn’t see it coming and must suffer the consequences of ignorance and inaction.

  Being one or the other isn’t random. It’s a choice– a decision to be ignorant. Or a decision to be educated and prepared.

  Which one will you decide?

  

  

  

  

  

• "Subsidizing Scroungers" – The Germans Knew How 'Europe' Would End Back In 1997

  In 1997, Arnulf Baring (of the German-British family of Baring bankers) unleashed the following ‘Nostradamus’-like prediction of how the euro would end (from a German perspective)…

  “They will be subsidizing scroungers, lounging in cafes on the Mediterranean beaches.

   

  Monetary union, in the end, will result in a gigantic blackmailing operation.

   

  When we Germans demand monetray discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More they will perceive us as a kind of economic policeman.

   

  We risk once again becoming the most hated people in Europe.“

  It appears that Arnulf pretty much ‘nailed it’.

  h/t @DanHannanMP and @K_Niemietz

  

  

  

  

  

• Japan's Economic Disaster: Real Wages Lowest Since 1990, Record Numbers Describe "Hard" Living Conditions

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  With so much attention rightly focused on China at the moment (see: Chinese Authorities Arrest Over 100 Human Rights Activists and Lawyers in Desperate Crackdown on Dissent), people aren’t paying enough attention to the budding economic calamity unfolding in Japan.

  While “Abenomics” has succeeded in boosting the stock market and food prices, it has utterly failed to raise wages. In fact, wages adjusted for inflation have plunged to the lowest since 1990. As such, a record number of households now describe their living conditions as “somewhat hard” or “very hard.”

  From Bloomberg:

  Prime Minister Shinzo Abe came to power vowing to drag Japan out of deflation and stagnation. His logic was that rising prices would drive higher salaries and increased consumption. More than two years on, prices are rising, but wages adjusted for inflation have sunk to the lowest since at least 1990.

   

  

   

  A record 62 percent of Japanese households described their livelihoods as “hard” last year in a survey on incomes. A sales-tax increase in 2014 helped drive up living costs faster than wage gains.  At the same time, the Bank of Japan’s quantitative easing drove down the currency, boosting the cost of imported energy.

   

  
  

  Not that verifiable proof of failed economic policies will convince the central planners in Japan or anywhere else to change course. These people are simply dangerously insane and can’t help themselves.

  In case you missed it the first time, here’s my most recent important post on Japan:

  The Stock Market Myth and How the Japanese Middle Class is on the Precipice Thanks to Abenomics

  

  

  

  

  

• Banking "Explained" In 6 Minutes

  Banks are a riddle wrapped up in an enigma (as we just described what unsound banking is). Everyone kind of knows that they do stuff with money we don’t understand, while the last crisis left a feeling of deep mistrust and confusion. We try to shed a bit of light onto the banking system. Why were banks invented, why did they cause the last crisis and are there alternatives?

   

  

  

  

  

  

• "The Stock Market Is Too Important To Leave To The Vagaries Of An Actual Market"

  Submitted by Babar Rafique of Setter Capital,

  As equity markets have become increasingly critical to the global financial and economic system, we're actively subverting them into meaninglessness.

  Equity markets are efficient, rational, and accurately reflect the value of assets, we're told. Sure, there might be bouts of euphoria or panicked selling, but those are short-term anomalies in an otherwise rational system.

  The simplicity of this idea is undeniably appealing — if we can trust in markets to broadly be an efficient allocator of value and accurately representative of short-term economic potential, then we can use it for a range of economic decision-making. An investor who wants exposure to a particular country can buy ETFs linked to that country's stock market(s), for example, with the confidence that the investment outcome will bear a meaningful relationship with that of the economy invested in.

  This requires, of course, that the price numbers on global stock indices mean something. The trouble is, to an increasing degree, they mean nothing at all. And we are busy creating more meaningless stock markets precisely because we need the ticker numbers to be more and more meaningful.

  The equity market is a leading indicator for an economy, we're told, and from TV talking-heads to academics to wealth managers, we all conduct ourselves as if that's the case. A rising stock market thus means that confidence is improving and economic performance should shortly be rising as well. By that measure, the US economy should be doing fantastically well, matching or at least meaningfully correlated with the eye-popping performance of its major stock indices since 2008. Unfortunately, that's just not the case — labour force participation remains appallingly low, wages remain depressed with lackluster wage growth, more and more wealth has become concentrated at the very top of the income scale, etc. In reality, while US markets have galloped ahead, the actual economy has been sleepwalking since the 'Great Recession'.

  This begs the question then — if US markets don't meaningfully reflect the American economy, what do they reflect? To an increasing degree, they represent the fact and perception of central bank intervention into the markets. All major US indices share a meaningful correlation with the capital flows of the Fed's successive QE programs, and speculation on the Fed's future actions as communicated in various Fed meetings and press announcements move the markets in a big way. I'm certainly not saying that the Fed is all that matters for the US markets, but the market does listen to the Fed a lot more then it should and it sure seems like the Fed listens back. It's worth noting here that the Fed's dual mandate is to promote maximum employment and price stability, not manage market expectations — theoretically, they shouldn't directly impact stock markets in the short term at all.

  The story is much the same in the other major financial centres of the world, where the numbers on the big boards seem to be less and less meaningful as well. Broad European indices have been reaching for the heavens — after the ECB has reintroduced us to the pleasures of ZIRP and NIRP and launched a massive QE program of its own. Japanese intervention into their equity markets went even further, with the Bank of Japan directly buying ETFs to help keep the Nikkei going in the right direction.

  The Chinese take the cake here though, with their level of intervention into their equity markets made abundantly transparent after the recent popping of the Shanghai SSE Composite Index bubble. After more conventional tools failed to stem the tide of panicked selling, the authorities deemed selling to be unpatriotic, halted trading in about half of the market, ordered companies to buy their own shares and generally made it clear that there was a preferred direction for the stock market to be moving in. Going against that direction would have you risk a lot more then what any definition of a halfway efficient market would suggest.

  What has brought global equity markets to the point of becoming increasingly decoupled from their respective economies? I think it's our need to have stock and stock index prices be meaningful that ultimately has driven the shift towards meaninglessness. From a top-down perspective, an example here is that politicians point to the stock market as proof of what a good job they're doing in managing the economy and in some countries even derive their legitimacy from the continued performance of the local stock markets. Also, hundreds of millions of investors of all sizes have invested in stock markets through all sorts of financial instruments and stand to lose heavily in a market crash — that didn't go over too well the last time around and we're still struggling to recover.

  From a bottom-up perspective, an example is company boards that partially link executive compensation to the performance of the company's stock (which usually will have a positive correlation with the overall stock market). As a sidenote, Roger Martin, ex-Dean of Rotman School of Management (where I'm currently a student) has written extensively about this kind of executive compensation being problematic for the integrity of the markets as well — although he may not see it as a small symptom of a much larger threat to market integrity, as I do.

  The stock market is just too important to leave to the vagaries of an actual market now. Too much depends on good-looking numbers now. It must be guided and controlled, or else the stilts on which our global financial system balances become shakier and more visible. The market must be rendered increasingly meaningless simply because it's too meaningful to our current economic system.

  

  

  

  

  

• Paul Singer Blasts "Manipulated" Markets, Says China Collapse "Way Bigger Than Subprime"

  This week, dozens of billionaire fund managers, institutional investors, and financial market luminaries descended on that “iconic flagship of Taj Hotels on New York’s Fifth Avenue” The Pierre with a mission to “deliver alpha” for conference host CNBC, a network which, incidentally, very often has a difficult time “finding alpha.”

  On the guest list was Elliott Management’s Paul Singer, who was on hand Wednesday to discuss the perils of investing in a world dominated by Keynesian central planners, paper money, the “craziness” of China’s margin-fueled equity bubble, and “connecting the dots.” 

  Here are some notable bullets via Bloomberg:

  • ELLIOTT’S SINGER: CHINA CRASH ‘WAY BIGGER THAN SUBPRIME’
  • SINGER ISN’T OPTIMISTIC ABOUT GREEK SITUATION
  • SINGER SAYS GREECE SHOULD HAVE PULLED OUT OF EURO

  And here’s a recap, followed by a short video excerpt: 

  China’s government “encouraged” an equities boom, and the “craziness” of the country’s stock market echoes the late 1920s in the United States, hedge fund manager Paul Singer said Wednesday. 

   

  “It’s not just a bull market, it’s wild,” the founder and president of Elliott Management said at the Delivering Alpha conference presented by CNBC and Institutional Investor.

   

  Activity in China, which has included government efforts to ease policy and ramp up economic growth, reflects an “ever-growing” trend toward intervention, Singer said. He contended that bond-buying and easy interest rates in many corners of the world make it difficult to quantify how much markets are really worth.

   

  China’s Shanghai composite index, for instance, has climbed more than 80 percent in the last year. 

   

  “The prices are manipulated by governments,” he said, adding that investors “can’t trust” the value of some equities.

   

  Singer also criticized the central banks in the United States and Europe, as he decried the risks of continued near-zero interest rate policy from the Federal Reserve. A recession in the U.S. or Europe amid loose monetary policy would turn “truly ugly” for global markets, he said.

   

  A downturn in either area could lead to additional quantitative easing, bringing even more uncertainty into bonds.

  

  

  

  

  

• July 5: Greek Independence Day; July 15: Greek In Dependence Day

  The Greek parliament just voted, in a 229 for and 64 against landslide, to implement the austerity Europe demands to grant Greece the funds for Bailout #3 so that Greece can then repay European creditors (as opposed to facing up to the pain imminently and suffering through a Grexit) implicitly giving up their sovereignty and sending their 61% “Oxi” voting citizenry into what will inevitably be an even deeper economic depression.

  • *GREEK GOVERNMENT HAS VOTES TO APPROVE BAILOUT BILL, TALLY SHOWS

  

  As Bloomberg reports,

  A majority of 229 Greek lawmakers voted in favor of bill which includes prior actions demanded by creditors for a bailout agreement that the govt has applied for, Parliament Speaker says.

   

  64 lawmakers voted against bill, 6 abstained, in Greece’s 300-seat chamber

   

  Bill titled “urgent measures for the negotiation and signing of an agreement with the European Stability Mechanism”

   

  38 lawmakers of governing Syriza party, including former finance minister Yanis Varoufakis, former deputy Finance Minister Nadia Valavani, and Energy Minister Panagiotis Lafazanis didn’t support bill

   

  Out of 149 Syriza MPs, 32 voted against bill, 6 abstained, 1 didn’t show up

  More to the point, with 38 defections, Syriza has now officially lost its majority and a cabinet reshuffle is imminent as the drama goes on.

  #Greece significant ‘loss’ for SYRIZA NO 32 (Mainly Left Platform) + Present 6

  — Keep Talking Greece (@keeptalkingGR) July 15, 2015

  And as noted:

  #Greece Parliament votes YES but #Tsipras has lost his government majority.

  — Maxime Sbaihi (@MxSba) July 15, 2015

  But the biggest surprise of the night was that the former finance minister and Tsipras’ right-hand man, Yanis Varoufakis, voted against the bailout.

  And his Energy Minister (who also voted No)…

  • *GREECE’S ENERGY MINISTER LAFAZANIS SAYS HE SUPPORTS GOVERNMENT
  • *LAFAZANIS SAYS `WE ‘RE THE HEART AND SOUL OF SYRIZA’
  • *LAFAZANIS SAYS HE DOESN’T WANT SNAP ELECTIONS
    

  In summary – this just happened:

  

   

  @zerohedge New Greek Flag pic.twitter.com/RMgqpGRyQu

  — Ludwig W (@LudWitt) July 15, 2015

   

  And because all the algos know is to buy when the elites get their way, S&P futures are rallying

  

  

  

  

  

  

• Unholy Alliance: Blythe Masters Named Chairman Of Subprime Auto Lender

  Earlier today, on the way to presenting data from the NY Fed which shows that auto loan rejection rates hit an all-time low of just 3.3% in June, we said that if one wanted to understand the circumstances that led to the housing bubble in the US, a good place to start would be the modern day auto loan market where the “originate to sell” model that characterized pre-crisis mortgage lending is alive and well. We also recommended reading a bit about the history of the GSEs, and taking “a hard look at Blythe Masters and the wizards who created the credit default swap.”

  We’re not exaggerating when we say that just minutes after we penned those words – which drew an explicit link between the dynamics driving the auto loan market, the “originate to sell model” that fed Wall Street’s pre-crisis securitization machine, and the financial weapons of mass destruction that Blythe Masters helped to create – the following headline hit the wires: 

  • BLYTHE MASTERS NAMED CHAIRMAN OF SANTANDER CONSUMER USA HOLDING

  That’s right, dear readers. The mother of the credit default swap is now the chairman (err.. chairwoman) of Santander Consumer, the largest subprime auto lender in the country.

  You cannot make this stuff up. 

  For those unfamiliar with Santander Consumer, they are the lender who, as of Q4 2014, had $15 billion in oustanding subprime auto loans on the books. Here’s a peek into the company’s recent trials and travails:

  Santander Consumer — a unit of one of only two banks to receive the dubious honor of failing the Fed’s stress tests yesterday and the market leader in subprime auto lending — allegedly ignored a law that requires lenders to obtain a court order before repossessing cars from members of the military and will now pay $9.35 million to settle the issue with the government. Apparently, Santander illegally repoed nearly 800 vehicles from active service members over the course of 5 years and then attempted to extract fees from some 350 additional soldiers in connection with repossessions the bank didn’t even execute. 

   

  This is the same Santander Consumer that was subpoenaed last year by the Justice Department in connection with its packaging of subprime auto loans into ABS and whose lending practices also got the attention of the New York Dept. of Consumer Affairs. 

   

  Don’t think for a second that any of this is slowing down the Santander Consumer subprime auto securitization machine though. The company, which leads all other lenders when it comes to the total amount of subprime auto loan debt outstanding, has already done a deal this year worth $1.2 billion which accounts for nearly 25% of all subprime auto ABS issuance YTD.

   

  
  

  That’s from March. 

  And for those unfamiliar with Masters, we encourage you to simply Google her name along with “credit default swap” and “JP Morgan” (and throw in “Boca Raton“, “BISTRO“, and “Demchak” if you really want to take a trip down the “shit that sounded good in principle but almost destroyed the financial universe” rabbit hole), but that’s ancient history now, so here’s a useful summary of Masters’ more recent activities:

  About a year ago we wrote that the “farce is complete” when we learned that the former head of JPM’s commodities group – Blythe Masters – the person caught red-handed in trying to pull off Enron 2.0, and responsible for manipulating electricity prices in California, was about to join the CFTC: yes, the person who created perhaps the most important derivative product of the pre-crash period, the massively levered Credit Default Swaps, was about to become an advisor to the very agency tasked with regulating all derivatives. Just 24 hours later, following a furious public backlash against what is perhaps the most corrupt regulators in the US, the CFTC, Masters withdrew her candidacy from the CFTC. Not surprisingly, following the humiliating CFTC episode, Blythe disappeared completely from the public radar. Now, with a one year delay, she has finally reappeared. That’s not the surprising part. What is shocking is the capacity in which she has reappeared. According to the FT, the former JPM commodities head has re-emerged as chief executive of the Bitcoin startup, Digital Asset Holdings.

  That’s also from March. 

  Finally, here’s The NY Times on Santander Consumer’s “curious choice“: 

  Facing regulatory pressure related to its governance and lending practices, the subprime auto lender Santander Consumer USA has appointed Blythe Masters, a former longtime executive at JPMorgan Chase, its chairwoman.

   

  Ms. Masters, 46, who left JPMorgan last year and now heads a Bitcoin-related start-up, joins the board of Santander Consumer less than two weeks after it announced abruptly that its chief executive had resigned.

   

  Santander Consumer — a unit of the Spanish giant Banco Santander that is based in Dallas — has faced questions about its oversight after regulatory stumbles with the Federal Reserve and an investigation into its securitization of its auto loans.

   

  One of the company’s founders, Thomas Dundon, stepped down as chairman and chief executive at the start of the month, taking home more than $900 million as part of his exit.

   

  Masters is credited with helping to pioneer credit default swaps, financial instruments that contributed to the 2008 financial crisis. Most recently, Ms. Masters ran JPMorgan’s giant commodities unit. She left the bank in April 2014 among struggles in the commodities business broadly.

   

  While known for her stellar financial acumen and innovative thinking, in some ways Ms. Masters seems a curious choice for chairwoman of Santander Consumer USA, which, like Santander Holdings USA, its parent company, is seeking to improve its regulatory status. Santander Holdings has failed the Federal Reserve’s annual stress test for two consecutive years.

   

  While running the commodities business at JPMorgan, Ms. Masters came under regulatory scrutiny from the Federal Energy Regulatory Commission in 2013 for statements she made about some problematic trading activity. At the time, the bank disputed that Ms. Masters had acted inappropriately.

  For now, we’ll refrain from speculating on what it says about Masters’ career that she has gone from capo in the “Morgan Mafia” to bitcoin CEO and chairman of a subprime auto lender, but we would note that this unholy alliance between the king of a subprime prime auto market that’s driven by Wall Street’s ABS machine and the mother of the credit default swap may not be as “curious” as The NY Times believes.  

  

  
  

  

  

  

  

  

• Presenting The "Greek Terms Of Surrender" As Annotated By Yanis Varoufakis

  The Greek “deal” has already been dubbed “a new Versailles Treaty” for good reason: for Greece, the agreement which effectively abdicates sovereignty to Germany, is precisely that.

  And while few if any in Greece – and certainly its parliament – have carefully read the actual contents of the Summit statement, and instead rushed to pass the deal shortly after 1am Athens time, with hopes that just approving its contents may lead to the ECB blessing a prompt reopening of banks so Greeks can resume withdrawing their frozen deposits before the public realizes it was betrayed by its rulers once again, one person who has read it is the former finance minister Yanis Varoufakis.

  And not only that: just hours before what may be the most critical vote in Greek history, he has released an annotated version of what the Euro Summit statement really means for Greece.

  In his words: The Euro Summit statement (or Terms of Greece’s Surrender – as it will go down in history) follows, annotated by yours truly. The original text is untouched with my notes confined to square brackets (and in red). Read and weep… [For a pdf copy click here.]

  Full annotated statement:
  

  Euro Summit Statement Brussels, 12 July 2015

  The Euro Summit stresses the crucial need to rebuild trust with the Greek authorities [i.e. the Greek government must introduce new stringent austerity directed at the weakest Greeks that have already suffered grossly] as a pre- requisite for a possible future agreement on a new ESM programme [i.e. for a new extend-and-pretend loan].

  In this context, the ownership by the Greek authorities is key [i.e. the Syriza government must sign a declaration of having defected to the troika’s ‘logic’], and successful implementation should follow policy commitments.

  A euro area Member State requesting financial assistance from the ESM is expected to address, wherever possible, a similar request to the IMF This is a precondition for the Eurogroup to agree on a new ESM programme. Therefore Greece will request continued IMF support (monitoring and financing) from March 2016 [i.e. Berlin continues to believe that the Commission cannot be trusted to ‘police’ Europe’s own ‘bailout’ programs].

  Given the need to rebuild trust with Greece, the Euro Summit welcomes the commitments of the Greek authorities to legislate without delay a first set of measures [i.e. Greece must subject itself to fiscal waterboarding, even before any financing is offered]. These measures, taken in full prior agreement with the Institutions, will include:

  By 15 July

  • the streamlining of the VAT system [i.e. making it more regressive, through rate rises that encourage more VAT evasion]and the broadening of the tax base to increase revenue [i.e. dealing a major blow at the only Greek growth industry – tourism].

  • upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform programme [i.e. reducing the lowest of the low of pensions, while ignoring that the depletion of pension funds’ capital due to the 2012 troika-designed PSI and the ill effects of low employment & undeclared paid labour].

  • the safeguarding of the full legal independence of ELSTAT [i.e. the troika demands complete control of the way Greece’s budget balance is computed, with a view to controlling fully the magnitude of austerity it imposes on the government.]

  • full implementation of the relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, in particular by making the Fiscal Council operational before finalizing the MoU and introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions [i.e. the Greek government, which knows that the imposed fiscal targets will never be achieved under the imposed austerity, must commit to further, automated austerity as a result of the troika’s newest failures.]

  By 22 July

  • the adoption of the Code of Civil Procedure, which is a major overhaul of procedures and arrangements for the civil justice system and can significantly accelerate the judicial process and reduce costs [i.e. foreclosures, evictions and liquidation of thousands of homes and businesses who are not in a position to keep up with their mortgages/loans.]

  • the transposition of the BRRD with support from the European Commission.

  Immediately, and only subsequent to legal implementation of the first four above-mentioned measures as well as endorsement of all the commitments included in this document by the Greek Parliament, verified by the Institutions and the Eurogroup, may a decision to mandate the Institutions to negotiate a Memorandum of Understanding (MoU) be taken [i.e. The Syriza government must be humiliated to the extent that it is asked to impose harsh austerity upon itself as a first step towards requesting another toxic bailout loan, of the sort that Syriza became internationally famous for opposing.]

  This decision would be taken subject to national procedures having been completed and if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1. In order to form the basis for a successful conclusion of the MoU, the Greek offer of reform measures needs to be seriously strengthened to take into account the strongly deteriorated economic and fiscal position of the country during the last year [i.e. the Syriza government must accept the lie that it, and not the asphyxiation tactics of the creditors, caused the sharp economic deterioration of the past six months – the victim is being asked to take the blame by the on behalf of the villain.]

  The Greek government needs to formally commit to strengthening their proposals [i.e. to make them more regressive and more inhuman] in a number of areas identified by the Institutions, with a satisfactory clear timetable for legislation and implementation, including structural benchmarks, milestones and quantitative benchmarks, to have clarity on the direction of policies over the medium-run. They notably need, in agreement with the Institutions, to:

  • carry out ambitious pension reforms [i.e. cuts] and specify policies to fully compensate for the fiscal impact of the Constitutional Court ruling on the 2012 pension reform [i.e. cancel the Court’s decision in favour of pensioners] and to implement the zero deficit clause [i.e. cut by 85% the secondary pensions that the Syriza government fought tooth and nail to preserve over the past five months] or mutually agreeable alternative measures [i.e. find ‘equivalent’ victims] by October 2015;

  • adopt more ambitious product market reforms with a clear timetable for implementation of all OECD toolkit I recommendations [i.e. the recommendations that the OECD has now renounced after having re-designed these reforms in collaboration with the Syriza government], including Sunday trade, sales periods, pharmacy ownership, milk and bakeries, except over-the-counter pharmaceutical products, which will be implemented in a next step, as well as for the opening of macro-critical closed professions (e.g. ferry transportation). On the follow-up of the OECD toolkit-II, manufacturing needs to be included in the prior action;

  • on energy markets, proceed with the privatisation of the electricity transmission network operator (ADMIE), unless replacement measures can be found that have equivalent effect on competition, as agreed by the Institutions [i.e. ADMIE will be sold off to specific foreign vested interests at the behest of the Institutions.]

  • on labour markets, undertake rigorous reviews and modernisation of collective bargaining [i.e. to make sure that no collective bargaining is allowed], industrial action [i.e. that must be banned] and, in line with the relevant EU directive and best practice, collective dismissals [i.e. that should be allowed at the employers’ whim], along the timetable and the approach agreed with the Institutions [i.e. the Troika decides.]

  On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth [i.e. there should be no mechanisms that waged labour can use to extract better conditions from employers.]

  • adopt the necessary steps to strengthen the financial sector, including decisive action on non-performing loans [i.e. a tsunami of foreclosures is ante portas] and measures to strengthen governance of the HFSF and the banks [i.e. the Greek people who maintain the HFSF and the banks will have precisely zero control over the HFSF and the banks.], in particular by eliminating any possibility for political interference especially in appointment processes. [i.e. except the political interference of the Troika.] On top of that, the Greek authorities shall take the following actions:

  • to develop a significantly scaled up privatisation programme with improved governance; valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means [i.e. an East German-like Treuhand is envisaged to sell off all public property but without the equivalent large investments that W. Germany put into E. Germany in compensation for the Treuhand disaster.] The monetization of the assets will be one source to make the scheduled repayment of the new loan of ESM and generate over the life of the new loan a targeted total of EUR 50bn of which EUR 25bn will be used for the repayment of recapitalization of banks and other assets and 50 % of every remaining euro (i.e. 50% of EUR 25bn) will be used for decreasing the debt to GDP ratio and the remaining 50 % will be used for investments [i.e. public property will be sold off and the pitiful sums will go toward servicing an un-serviceable debt – with precisely nothing left over for public or private investments.] This fund would be established in Greece and be managed by the Greek authorities under the supervision of the relevant European Institutions [i.e. it will be nominally in Greece but, just like the HFSF or the Bank of Greece, it will be controlled fully by the creditors.] In agreement with Institutions and building on best international practices, a legislative framework should be adopted to ensure transparent procedures and adequate asset sale pricing, according to OECD principles and standards on the management of State Owned Enterprises (SOEs) [i.e. the Troika will do what it likes.]

  • in line with the Greek government ambitions, to modernise and significantly strengthen the Greek administration, and to put in place a programme, under the auspices of the European Commission, for capacity-building and de-politicizing the Greek administration [i.e. Turning Greece into a democracy-free zone modelled on Brussels, a form of supposedly technocratic government, which is politically toxic and macro-economically inept] A first proposal should be provided by 20 July after discussions with the Institutions. The Greek government commits to reduce further the costs of the Greek administration [i.e. to reduce the lowest wages while increasing a little the wages some of the Troika-friendly apparatchiks], in line with a schedule agreed with the Institutions.

  • to fully normalize working methods with the Institutions, including the necessary work on the ground in Athens, to improve programme implementation and monitoring [i.e. The Troika strikes back and demands that the Greek government invite it to return to Athens as Conqueror – the Carthaginian Peace in all its glory.] The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament [i.e. Greek Parliament must, again, after five months of short-lived independence, become an appendage of the Troika – passing translated legislation mechanistically.] The Euro Summit stresses again that implementation is key, and in that context welcomes the intention of the Greek authorities to request by 20 July support from the Institutions and Member States for technical assistance, and asks the European Commission to coordinate this support from Europe;

  • With the exception of the humanitarian crisis bill, the Greek government will reexamine with a view to amending legislations that were introduced counter to the February 20 agreement by backtracking on previous programme commitments or identify clear compensatory equivalents for the vested rights that were subsequently created [i.e. In addition to promising that it will no longer legislative autonomously, the Greek government will retrospectively annul all Bills it passed over the past five months.]

  The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities. However, the Euro Summit made it clear that the start of negotiations does not preclude any final possible agreement on a new ESM programme, which will have to be based on a decision on the whole package (including financing needs, debt sustainability and possible bridge financing) [i.e. self-flagellate, impose further austerity upon an economy crushed by austerity, and then we shall see whether the Eurogroup will grave you with another toxic, unsustainable loans.]

  The Euro Summit takes note of the possible programme financing needs of between EUR 82 and 86bn, as assessed by the Institutions [i.e. the Eurogroup conjured up a huge number, well above what is necessary, in order to signal the debt restructuring is out and that debt bondage ad infinitum is the name of the game.] It invites the Institutions to explore possibilities to reduce the financing envelope, through an alternative fiscal path or higher privatisation proceeds [i.e. And, yes, it may possible that pigs will fly.] Restoring market access, which is an objective of any financial assistance programme, lowers the need to draw on the total financing envelope [i.e. which is something the creditors will do their utmost to avoid, e.g. by ensuring that Greece will only enter the ECB’s quantitative easing program in 2018, once quantitative easing is… over.]

  The Euro Summit takes note of the urgent financing needs of Greece which underline the need for very swift progress in reaching a decision on a new MoU: these are estimated to amount to EUR 7bn by 20 July and an additional EUR 5bn by mid August [i.e. Extend and Pretend gets another spin.] The Euro Summit acknowledges the importance of ensuring that the Greek sovereign can clear its arrears to the IMF and to the Bank of Greece and honour its debt obligations in the coming weeks to create conditions which allow for an orderly conclusion of the negotiations. The risks of not concluding swiftly the negotiations remain fully with Greece [i.e. Once more, demanding that the victim takes all the blame in behalf of the villain.] The Euro Summit invites the Eurogroup to discuss these issues as a matter of urgency.

  Given the acute challenges of the Greek financial sector, the total envelope of a possible new ESM programme would have to include the establishment of a buffer of EUR 10 to 25bn for the banking sector in order to address potential bank recapitalisation needs and resolution costs, of which EUR 10bn would be made available immediately in a segregated account at the ESM [i.e. the Troika admits that the 2013-14 recapitalisation of the banks, which would only need a top up of at most 10 billion, was insufficient – but, of course, blames it on… the Syriza government.]

  The Euro Summit is aware that a rapid decision on a new programme is a condition to allow banks to reopen, thus avoiding an increase in the total financing envelope [i.e. The Troika closed Greece’s banks to force the Syriza government to capitulate and now cries out for their re-opening.] The ECB/SSM will conduct a comprehensive assessment after the summer. The overall buffer will cater for possible capital shortfalls following the comprehensive assessment after the legal framework is applied.

  There are serious concerns regarding the sustainability of Greek debt [N.b. Really? Gosh!] This is due to the easing of policies during the last twelve months, which resulted in the recent deterioration in the domestic macroeconomic and financial environment [i.e. It is not the Extend and Pretend ‘bailout’ loans of 2010 and 2012 that, in conjunction with GDP-sapping austerity, caused the debt to scale immense heights – it was the prospect, and reality, of a government that criticized the the Extend and Pretend ‘bailout’ loans that… caused Debt’s Unustainability!]

  The Euro Summit recalls that the euro area Member States have, throughout the last few years, adopted a remarkable set of measures supporting Greece’s debt sustainability, which have smoothed Greece’s debt servicing path and reduced costs significantly [i.e. The 1^st & 2^nd ‘bailout’ programs failed, the debt skyrocketing as it was always going to since the real purpose of the ‘bailout’ programs was to transfer banking losses to Europe’s taxpayers.] Against this background, in the context of a possible future ESM programme, and in line with the spirit of the Eurogroup statement of November 2012 [i.e. a promise of debt restructure to the previous Greek government was never kept by the creditors], the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme and will be considered after the first positive completion of a review [i.e. Yet again, the Troika shall let the Greek government labour under un-payable debt and when, as a result, the program fails, poverty rises further and incomes collapse much more, then we may haircut some of the debt – as the Troika did in 2012.]

  The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken [N.b. The Syriza government has been suggesting, since January, a moderate debt restructure, with no haircuts, maximizing the expected net present value of Greece’s repayments to creditors’ – which was rejected by the Troika because their aim was, simply, to humiliate Syriza.] Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and in a timely manner [N.b. Which can only happen after a substantial debt restrucuture.] Provided that all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM Board of Governors may, in accordance with Article 13.2 of the ESM Treaty, mandate the Institutions to negotiate a new ESM programme, if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1. To help support growth and job creation in Greece (in the next 3-5 years) [N.b. Having already destroyed growth and jobs for the past five years…] the Commission will work closely with the Greek authorities to mobilise up to EUR 35bn (under various EU programmes) to fund investment and economic activity, including in SMEs [i.e. Will use the same order of magnitude of structural funds, plus some fantasy money, as were available in 2010-2014.] As an exceptional measure and given the unique situation of Greece the Commission will propose to increase the level of pre-financing by EUR 1bn to give an immediate boost to investment to be dealt with by the EU co-legislators [i.e. Of the headline 35 billion, consider 1 billion as real money.] The Investment Plan for Europe will also provide funding opportunities for Greece [i.e. the same plan that most Eurozone ministers of finance refer to as a phantom program].

  

  

  

  

  

• The Oldest Trick In The Accounting Book: The Reason For Intel's Massive EPS Beat In One Chart

  Moments ago, INTC reported EPS of $0.55 which solidly beat expectations $0.50, with revenue of $13.2 billion printing just above consensus, if a substantial 5% drop compared to the $13.8 billion one year ago.

  This has sent the stock soaring in the after hours by about 6%. This is also despite the company lowering it full year revenue guidance from flat to -1%, with the bulls saying just look at that massive EPS beat.

  

   

  So for all those wondering just how INTC did it, here’s the reason for Intel’s beat in one simple chart:

  

   

  In other words, it is only thanks to the oldest trick in the accounting book, an artificially low tax rate, that INTC was able to make its plunging operating income, which was down 25% from a year ago, better than expected and make its EPS of $0.55 equal to the $0.55 reported one year ago.

  Crashing Operating Income:

  

   

  And yet, flat EPS:

  

   

  If INTC had used a 29% tax rate – the same as last year – EPS would have been $0.43, a 7 cent loss and that’s even using a more modern trick in the accounting book, some $700 million in stock buybacks!
  

  And that is how you use report unchanged EPS from a year ago despit sliding revenues and plunging earnings.

  

  

  

  

  

• Unsound Banking: Why Most Of The World’s Banks Are Headed For Collapse

  Submitted by Doug Casey via InternationalMan.com,

  You’re likely thinking that a discussion of “sound banking” will be a bit boring. Well, banking should be boring. And we’re sure officials at central banks all over the world today—many of whom have trouble sleeping—wish it were.

  This brief article will explain why the world’s banking system is unsound, and what differentiates a sound from an unsound bank. I suspect not one person in 1,000 actually understands the difference. As a result, the world’s economy is now based upon unsound banks dealing in unsound currencies. Both have degenerated considerably from their origins.

  Modern banking emerged from the goldsmithing trade of the Middle Ages. Being a goldsmith required a working inventory of precious metal, and managing that inventory profitably required expertise in buying and selling metal and storing it securely. Those capacities segued easily into the business of lending and borrowing gold, which is to say the business of lending and borrowing money.

  Most people today are only dimly aware that until the early 1930s, gold coins were used in everyday commerce by the general public. In addition, gold backed most national currencies at a fixed rate of convertibility. Banks were just another business—nothing special. They were distinguished from other enterprises only by the fact they stored, lent, and borrowed gold coins, not as a sideline but as a primary business. Bankers had become goldsmiths without the hammers.

  Bank deposits, until quite recently, fell strictly into two classes, depending on the preference of the depositor and the terms offered by banks: time deposits, and demand deposits. Although the distinction between them has been lost in recent years, respecting the difference is a critical element of sound banking practice.

  Time Deposits. With a time deposit—a savings account, in essence—a customer contracts to leave his money with the banker for a specified period. In return, he receives a specified fee (interest) for his risk, for his inconvenience, and as consideration for allowing the banker the use of the depositor’s money. The banker, secure in knowing he has a specific amount of gold for a specific amount of time, is able to lend it; he’ll do so at an interest rate high enough to cover expenses (including the interest promised to the depositor), fund a loan-loss reserve, and if all goes according to plan, make a profit.

  A time deposit entails a commitment by both parties. The depositor is locked in until the due date. How could a sound banker promise to give a time depositor his money back on demand and without penalty when he’s planning to lend it out?

  In the business of accepting time deposits, a banker is a dealer in credit, acting as an intermediary between lenders and borrowers. To avoid loss, bankers customarily preferred to lend on productive assets, whose earnings offered assurance that the borrower could cover the interest as it came due. And they were willing to lend only a fraction of the value of a pledged asset, to ensure a margin of safety for the principal. And only for a limited time—such as against the harvest of a crop or the sale of an inventory. And finally, only to people of known good character—the first line of defense against fraud. Long-term loans were the province of bond syndicators.

  That’s time deposits. Demand deposits were a completely different matter.

  Demand Deposits. Demand deposits were so called because, unlike time deposits, they were payable to the customer on demand. These are the basis of checking accounts. The banker doesn’t pay interest on the money, because he supposedly never has the use of it; to the contrary, he necessarily charged the depositor a fee for:

  1. Assuming the responsibility of keeping the money safe, available for immediate withdrawal, and

  1. Administering the transfer of the money if the depositor so chooses by either writing a check or passing along a warehouse receipt that represents the gold on deposit.

  An honest banker should no more lend out demand deposit money than Allied Van and Storage should lend out the furniture you’ve paid it to store. The warehouse receipts for gold were called banknotes. When a government issued them, they were called currency. Gold bullion, gold coinage, banknotes, and currency together constituted the society’s supply of transaction media. But its amount was strictly limited by the amount of gold actually available to people.

  Sound principles of banking are identical to sound principles of warehousing any kind of merchandise, whether it’s autos, potatoes, or books. Or money. There’s nothing mysterious about sound banking. But banking all over the world has been fundamentally unsound since government-sponsored central banks came to dominate the financial system.

  Central banks are a linchpin of today’s world financial system. By purchasing government debt, banks can allow the state—for a while—to finance its activities without taxation. On the surface, this appears to be a “free lunch.” But it’s actually quite pernicious and is the engine of currency debasement.

  Central banks may seem like a permanent part of the cosmic landscape, but in fact they are a recent invention. The US Federal Reserve, for instance, didn’t exist before 1913.

  Unsound Banking

  Fraud can creep into any business. A banker, seeing other people’s gold sitting idle in his vault, might think, “What is the point of taking gold out of the ground from a mine, only to put it back into the ground in a vault?” People are writing checks against it and using his banknotes. But the gold itself seldom moves. A restless banker might conclude that, even though it might be a fraud on depositors (depending on exactly what the bank has promised them), he could easily create lots more banknotes and lend them out, and keep 100% of the interest for himself.

  Left solely to their own devices, some bankers would try that. But most would be careful not to go too far, since the game would end abruptly if any doubt emerged about the bank’s ability to hand over gold on demand. The arrival of central banks eased that fear by introducing a lender of last resort. Because the central bank is always standing by with credit, bankers are free to make promises they know they might not be able to keep on their own.

  How Banking Works Today

  In the past, when a bank created too much currency out of nothing, people eventually would notice, and a “bank run” would materialize. But when a central bank authorizes all banks to do the same thing, that’s less likely—unless it becomes known that an individual bank has made some really foolish loans.

  Central banks were originally justified—especially the creation of the Federal Reserve in the US—as a device for economic stability. The occasional chastisement of imprudent bankers and their foolish customers was an excuse to get government into the banking business. As has happened in so many cases, an occasional and local problem was “solved” by making it systemic and housing it in a national institution. It’s loosely analogous to the way the government handles the problem of forest fires: extinguishing them quickly provides an immediate and visible benefit. But the delayed and forgotten consequence of doing so is that it allows decades of deadwood to accumulate. Now when a fire starts, it can be a once-in-a-century conflagration.

  Banking all over the world now operates on a “fractional reserve” system. In our earlier example, our sound banker kept a 100% reserve against demand deposits: he held one ounce of gold in his vault for every one-ounce banknote he issued. And he could only lend the proceeds of time deposits, not demand deposits. A “fractional reserve” system can’t work in a free market; it has to be legislated. And it can’t work where banknotes are redeemable in a commodity, such as gold; the banknotes have to be “legal tender” or strictly paper money that can be created by fiat.

  The fractional reserve system is why banking is more profitable than normal businesses. In any industry, rich average returns attract competition, which reduces returns. A banker can lend out a dollar, which a businessman might use to buy a widget. When that seller of the widget re-deposits the dollar, a banker can lend it out at interest again. The good news for the banker is that his earnings are compounded several times over. The bad news is that, because of the pyramided leverage, a default can cascade. In each country, the central bank periodically changes the percentage reserve (theoretically, from 100% down to 0% of deposits) that banks must keep with it, according to how the bureaucrats in charge perceive the state of the economy.

  In any event, in the US (and actually most everywhere in the world), protection against runs on banks isn’t provided by sound practices, but by laws. In 1934, to restore confidence in commercial banks, the US government instituted the Federal Deposit Insurance Corporation (FDIC) deposit insurance in the amount of $2,500 per depositor per bank, eventually raising coverage to today’s $250,000. In Europe, €100,000 is the amount guaranteed by the state.

  FDIC insurance covers about $9.3 trillion of deposits, but the institution has assets of only $25 billion. That’s less than one cent on the dollar. I’ll be surprised if the FDIC doesn’t go bust and need to be recapitalized by the government. That money—many billions—will likely be created out of thin air by selling Treasury debt to the Fed.

  The fractional reserve banking system, with all of its unfortunate attributes, is critical to the world’s financial system as it is currently structured. You can plan your life around the fact the world’s governments and central banks will do everything they can to maintain confidence in the financial system. To do so, they must prevent a deflation at all costs. And to do that, they will continue printing up more dollars, pounds, euros, yen, and what-have-you.

  

  

  

  

  

• White House Cuts 2015 GDP Outlook By 33%

  Despite President Obama’s hubris over the ‘recovery’, his crowing about the jobs record, and his insistence that while “there’s more to be done,” everything is awesome, The White House just took the meat-cleaver to its US economic growth forecasts…cutting 2015 growth from 3% to 2%. That was not all though as their forecasts see no recession until at least 2025, unemployment under 5.0% for at least the next decade, stable inflation for 10 years, and last but not least – a 3-month T-Bill rate of over 3% within the next few years.

   

  So growth is going to drop… but there’ll be no rise in unemployment, rates will surge but there will be no inflation outbreak, and trend growth now appears to be just 2.3%…

  

   

  As The Wall Street Journal reports,

  The White House said it sees U.S. growth rising by just 2% this year before rebounding to 2.9% in 2016 – down from its earlier forecast of 3% growth for both 2015 and 2016 released in February – after the economy stalled during the first quarter.

   

  The new estimate came Tuesday in the White House budget office’s “Mid-Session Review,” which updates the economic and budget projections it made at the beginning of the year. The new growth forecast largely reflects the current thinking among private economists.

   

  The economy contracted at a 0.2% seasonally adjusted annual rate in the first quarter.

  *  *  *

  Full report here (link)

  This should make things a little awkward for Janet…

  

  

  

  

  

• Live Webcast: Greek Parliament Votes On Bailout

  Update: And Tsipras is speaking now.

  It is almost 1:00am Athens time, and as of this moment the speaker of the Parliament, Zoi Konstantopoulou is at the podium, blasting the terms of the Third Greek bailout. She may or may not be the last speaker, although there is some speculation that PM Tsipras, who has been absent from the entire session so far, may follow her. Whether he does or not, the parliamentarians will vote shortly in a paradoxical vote in which the Opposition will support a law brought on by a European proxy government whose majority will vote against its own proposal, a proposal it swore to fight as its primary electoral campaign.

  So, in a nutshell, confusion reigns. But then again, this is Greece or as it will soon be known: the Greek vassal state of Europe.

  Watch the live, and translated, webcast below as the moment when Greece votes to hand over its sovereignty to Brussels will surely be a historic moment if only for some 11 million Greeks and a few European oligarchs who plot the expansion of “Empire Europe.”

  

  

  

  

  

• Hillary Clinton Blasts High Frequency Trading Ahead Of Fundraiser With High Frequency Trader

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  One of the most entertaining angles of the imperial spectacle known as the 2016 U.S. Presidential campaign, has been watching Hillary Clinton, the consummate insider, pretend to be an outsider. The fact that anyone eats this up is a testament to the epic stupidity and ignorance of the American public.

  In her latest attempt at faux populism, Her Highness was found criticizing high frequency traders, as well as other Wall Street “fat cats,” with whom she is extremely cozy, during a speech at the New School. Her next stop? A fundraiser thrown by a high frequency trader.

  From the Weekly Standard:

  Today, in an economic speech at the New School in Manhattan, Hillary Clinton spoke out against short-term traders.

   

  “The problems are not limited to the big banks that get all the headlines. Serious risks are emerging from institutions in the so-called shadow banking system, including hedge funds, high-frequency traders, non-bank finance companies,” said the Democratic presidential candidate. 

  That’s Hillary the pantsuit rebel singing to the gullible plebs. Now here’s the real Hillary.

  Raj Fernando, the CEO of high-frequency trading firm Chopper Trading, is hosting a fundraiser for Clinton next week.

   

  “Hillary Clinton is coming to Chicago for a private fundraiser July 21 hosted at the home of Raj Fernando, CEO of Chopper Trading, a high-frequency trading firm that recently was purchased by Chicago-based DRW,” Chicago Business reports.

  Are you ready?

  

  

  

  

  

  

• Auto Loan Rejection Rate Falls To Lowest Level On Record

  If you were interested in learning about the conditions that conspired to create the great American housing bubble which burst in spectacular fashion in 2008 and brought the entire global financial system to its knees, you might start by reading the history of Fannie and Freddie, or you might take a hard look at Blythe Masters and the wizards who created the credit default swap, or, if you wanted to save yourself quite a bit of time and effort, you could just look at the current market for subprime auto loans. 

  You see, the much maligned “originate to sell” model – which was instrumental in making the American homeownership dream a reality for underqualified borrowers in the lead up to the crisis – is alive and well and is ‘in the driver’s seat’ so to speak when it comes to auto sales in America. 

  As we noted last month, in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit) auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers.

  The push to feed the securitization machine begets more competition among lenders for a shrinking pool of creditworthy borrowers and when that pool dries up, well, the definition of “creditworthy” must necessarily be relaxed, otherwise the securitization machine stalls for lack of fuel. For those who missed it, here are three charts which tell you everything you need to know about the market for auto loan-backed ABS:

  First, note that auto ABS issuance is set to hit record highs in 2015.

  

  Next, consider that the percentage of prime loans backing new supply is now at an all-time low. 

  

  Finally, here’s a look at the percentage of new financing extended to non-prime borrowers. As BofAML observes, the prime segements are losing share.

  

  Now, the NY Fed is out with what is perhaps the most shocking statistic yet (with the possible exception of the 137% average LTV ratio we highlighted earlier this month) on auto loans in America.

  As the following graphic shows, the rejection rate for auto loans was just 3.3% in June – the lowest on record:

  

  And here’s Bloomberg’s take on why virtually anyone who wants a car, gets a car:

  One reason for the looser credit has been the renewed appetite for securities backed by automobile debt, including to the riskiest borrowers, with subprime loans feeding about $13.2 billion of bond sales on Wall Street this year, according to data compiled by Bloomberg.

  Finally, to drive the point home, we’ll leave you with a set of statistics which speaks volumes about why this will certainly not end well.

  Q1 data from Experian:

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

  

  

  

  

  

• A Complete Farce: Ex-Obamacare Head To Lead Health Insurance Lobby

  If there was any doubt just who Obamacare was created to serve from day one (spoiler alert: it was never America’s population), we now have the answer and it is so simple, even a 5-year-old can get it. Moments ago Politico reported that former Medicare chief Marilyn Tavenner, and the infamous former administrator of the Centers for Medicare and Medicaid Services who was responsible for writing many of Obamacare’s rules and regulations for the insurance industry, only to be fired following the disastrous rollout of the HealthCare.gov enrollment website, has been hired as the new CEO of America’s Health Insurance Plans, the “powerful K Street lobbying group.“

  Cited by Politico, AHIP board chairman Mark Ganz in a statement that”There is no better individual than Marilyn to lead our industry through the increasingly complex health care transformation that is underway. She has the respect and trust of policymakers and stakeholders from all sides, and a personal commitment to advance meaningful solutions for improving access to quality, affordable care for all Americans.”

  Well, maybe for some Americans: those who are shareholder or employees of US health insurance companies, which as it now emerges, are the biggest benefactors of Obamacare because from the very beginning, they had their own operative setting up the rules and regulations of the biggest US healthcare overhaul in history to benefit, drum roll, them.

  And now the same insurance companies, just to benefit some more, are poised or already in process of hiking insurance premiums across America and crush the spending power of ordinary Americans, those who were supposed to benefit from Obama’s socialized healthcare dream.

  The Affordable Care Act has been a mixed bag financially for insurers, said Robert Laszewski, an industry consultant. The expansion of Medicaid and the continued growth of private Medicare plans have been a boon for insurers, he noted. But the law’s new health insurance exchanges have been more troublesome for health plans, many of which are seeking greater rate hikes in 2016.

   

  “They’re getting creamed,” Laszewski said of plans in the exchange business. “Any time you see a rate increase above 7, 8, 9 percent, they’re losing money.”

  Actually, that’s bullshit: any time you see a 9% increase (or much more), it means there is cartel pricing in action, and thanks to the Supreme Court’s ruling supporting Obamacare, healthcare is now a tax on Americans and one has no choice but to pay whatever premium incueases are imposed on them.

  It gets even more comical:

  Tavenner can push the group’s agenda in Congress, but she will face a ban on direct communications with the agency that she oversaw. That restriction shouldn’t present too much of a hurdle to being an effective advocate for the industry, said Meredith McGehee, policy director for the Campaign Legal Center.

  It won’t be a hurdle, but in the meantime, Tavenner will be paid about 20 to 30 times more than when we was a mere government lackey (and quite incompetent considering the billions spent to rollout a broken healthcare.gov) available for hire to the highest bidder, unprecedented conflicts of interest notwithstanding.

  And just to show how extensive the revolving door is, Tavenner is replacing AHIP’s longtime head Karen Ignagni, who left the group to run EmblemHealth, a big New York insurer. Her departure was soon followed the announcement that UnitedHealth Group, the country’s largest insurer, would leave AHIP.

  So for any 5 year old who are still confused: the insurance industry wrote the rules of Obamacare, and is now set to profit from it, which incidentally was obvious to anyone who has been following the stock prices of publicly traded insurance companies, which if the recent merger mania is any indication will shortly roll up into one monopoly enterprise, thus concluding Obama’s dream of a single-payer health system.

  And just like that, the corporations win again.

  

  

  

  

  

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• Freedom Or The Slaughterhouse? The American Police State From A To Z

  Submitted by John Whitehead via The Rutherford Institute,

  “Who needs direct repression when one can convince the chicken to walk freely into the slaughterhouse?”—Philosopher Slavoj Žižek

  Despite the best efforts of some to sound the alarm, the nation is being locked down into a militarized, mechanized, hypersensitive, legalistic, self-righteous, goose-stepping antithesis of every principle upon which this nation was founded.

  All the while, the nation’s citizens seem content to buy into a carefully constructed, benevolent vision of life in America that bears little resemblance to the gritty, pain-etched reality that plagues those unfortunate enough to not belong to the rarefied elite.

  For those whose minds have been short-circuited into believing the candy-coated propaganda peddled by the politicians, here is an A-to-Z, back-to-the-basics primer of what life in the United States of America is really all about.

  A is for the AMERICAN POLICE STATE. As I point out in my book Battlefield America: The War on the American People, a police state “is characterized by bureaucracy, secrecy, perpetual wars, a nation of suspects, militarization, surveillance, widespread police presence, and a citizenry with little recourse against police actions.”

  B is for our battered BILL OF RIGHTS. In the cop culture that is America today, where you can be kicked, punched, tasered, shot, intimidated, harassed, stripped, searched, brutalized, terrorized, wrongfully arrested, and even killed by a police officer, and that officer is rarely held accountable for violating your rights, the Bill of Rights doesn’t amount to much.

  C is for CIVIL ASSET FORFEITURE. The latest governmental scheme to deprive Americans of their liberties—namely, the right to property—is being carried out under the guise of civil asset forfeiture, a government practice wherein government agents (usually the police) seize private property they “suspect” may be connected to criminal activity. Then, whether or not any crime is actually proven to have taken place, the government keeps the citizen’s property.

  D is for DRONES. It is estimated that at least 30,000 drones will be airborne in American airspace by 2020, part of an $80 billion industry. Although some drones will be used for benevolent purposes, many will also be equipped with lasers, tasers and scanning devices, among other weapons.

  E is for ELECTRONIC CONCENTRATION CAMP. In the electronic concentration camp, as I have dubbed the surveillance state, all aspects of a person’s life are policed by government agents and all citizens are suspects, their activities monitored and regulated, their movements tracked, their communications spied upon, and their lives, liberties and pursuit of happiness dependent on the government’s say-so.

  F is for FUSION CENTERS. Fusion centers, data collecting agencies spread throughout the country and aided by the National Security Agency, serve as a clearinghouse for information shared between state, local and federal agencies. These fusion centers constantly monitor our communications, everything from our internet activity and web searches to text messages, phone calls and emails. This data is then fed to government agencies, which are now interconnected: the CIA to the FBI, the FBI to local police.

  G is for GRENADE LAUNCHERS. The federal government has distributed more than $18 billion worth of battlefield-appropriate military weapons, vehicles and equipment such as drones, tanks, and grenade launchers to domestic police departments across the country. As a result, most small-town police forces now have enough firepower to render any citizen resistance futile.

  H is for HOLLOW-POINT BULLETS. The government’s efforts to militarize and weaponize its agencies and employees is reaching epic proportions, with federal agencies as varied as the Department of Homeland Security and the Social Security Administration stockpiling millions of lethal hollow-point bullets, which violate international law. Ironically, while the government continues to push for stricter gun laws for the general populace, the U.S. military’s arsenal of weapons makes the average American’s handgun look like a Tinker Toy.

  I is for the INTERNET OF THINGS, in which internet-connected “things” will monitor your home, your health and your habits in order to keep your pantry stocked, your utilities regulated and your life under control and relatively worry-free. The key word here, however, is control. This “connected” industry propels us closer to a future where police agencies apprehend virtually anyone if the government “thinks” they may commit a crime, driverless cars populate the highways, and a person’s biometrics are constantly scanned and used to track their movements, target them for advertising, and keep them under perpetual surveillance.

  J is for JAILING FOR PROFIT. Having outsourced their inmate population to private prisons run by private corporations, this profit-driven form of mass punishment has given rise to a $70 billion private prison industry that relies on the complicity of state governments to keep their privately run prisons full by jailing large numbers of Americans for inane crimes.

  K is for KENTUCKY V. KING. In an 8-1 ruling, the Supreme Court ruled that police officers can break into homes, without a warrant, even if it’s the wrong home as long as they think they have a reason to do so. Despite the fact that the police in question ended up pursuing the wrong suspect, invaded the wrong apartment and violated just about every tenet that stands between us and a police state, the Court sanctioned the warrantless raid, leaving Americans with little real protection in the face of all manner of abuses by law enforcement officials.

  L is for LICENSE PLATE READERS, which enable law enforcement and private agencies to track the whereabouts of vehicles, and their occupants, all across the country. This data collected on tens of thousands of innocent people is also being shared between police agencies, as well as with fusion centers and private companies.

  M is for MAIN CORE. Since the 1980s, the U.S. government has acquired and maintained, without warrant or court order, a database of names and information on Americans considered to be threats to the nation. As Salon reports, this database, reportedly dubbed “Main Core,” is to be used by the Army and FEMA in times of national emergency or under martial law to locate and round up Americans seen as threats to national security. As of 2008, there were some 8 million Americans in the Main Core database.

  N is for NO-KNOCK RAIDS. Owing to the militarization of the nation’s police forces, SWAT teams are now increasingly being deployed for routine police matters. In fact, more than 80,000 of these paramilitary raids are carried out every year. That translates to more than 200 SWAT team raids every day in which police crash through doors, damage private property, terrorize adults and children alike, kill family pets, assault or shoot anyone that is perceived as threatening—and all in the pursuit of someone merely suspected of a crime, usually some small amount of drugs.

  O is for OVERCRIMINALIZATION. Thanks to an overabundance of 4500-plus federal crimes and 400,000 plus rules and regulations, it’s estimated that the average American actually commits three felonies a day without knowing it. As a result of this overcriminalization, we’re seeing an uptick in Americans being arrested and jailed for such absurd “violations” as letting their kids play at a park unsupervised, collecting rainwater and snow runoff on their own property, growing vegetables in their yard, and holding Bible studies in their living room.

  P is for PATHOCRACY. When our own government treats us as things to be manipulated, maneuvered, mined for data, manhandled by police, mistreated, and then jailed in profit-driven private prisons if we dare step out of line, we are no longer operating under a constitutional republic. Instead, what we are experiencing is a pathocracy: tyranny at the hands of a psychopathic government, which “operates against the interests of its own people except for favoring certain groups.”

  Q is for QUALIFIED IMMUNITY. Qualified immunity allows officers to walk away without paying a dime for their wrongdoing. Conveniently, those deciding whether a police officer should be immune from having to personally pay for misbehavior on the job all belong to the same system, all cronies with a vested interest in protecting the police and their infamous code of silence: city and county attorneys, police commissioners, city councils and judges.

  R is for ROADSIDE STRIP SEARCHES and BLOOD DRAWS. The courts have increasingly erred on the side of giving government officials—especially the police—vast discretion in carrying out strip searches, blood draws and even anal probes for a broad range of violations, no matter how minor the offense. In the past, strip searches were resorted to only in exceptional circumstances where police were confident that a serious crime was in progress. In recent years, however, strip searches have become routine operating procedures in which everyone is rendered a suspect and, as such, is subjected to treatment once reserved for only the most serious of criminals.

  S is for the SURVEILLANCE STATE. On any given day, the average American going about his daily business will be monitored, surveilled, spied on and tracked in more than 20 different ways, by both government and corporate eyes and ears. A byproduct of this new age in which we live, whether you’re walking through a store, driving your car, checking email, or talking to friends and family on the phone, you can be sure that some government agency, whether the NSA or some other entity, is listening in and tracking your behavior. This doesn’t even begin to touch on the corporate trackers that monitor your purchases, web browsing, Facebook posts and other activities taking place in the cyber sphere.

  T is for TASERS. Nonlethal weapons such as tasers, stun guns, rubber pellets and the like, have resulted in police using them as weapons of compliance more often and with less restraint—even against women and children—and in some instances, even causing death. These “nonlethal” weapons also enable police to aggress with the push of a button, making the potential for overblown confrontations over minor incidents that much more likely. A Taser Shockwave, for instance, can electrocute a crowd of people at the touch of a button.

  U is for UNARMED CITIZENS SHOT BY POLICE. No longer is it unusual to hear about incidents in which police shoot unarmed individuals first and ask questions later, often attributed to a fear for their safety. Yet the fatality rate of on-duty patrol officers is reportedly far lower than many other professions, including construction, logging, fishing, truck driving, and even trash collection.

  V is for VIPR SQUADS. So-called “soft target” security inspections, carried out by roving VIPR task forces, comprised of federal air marshals, surface transportation security inspectors, transportation security officers, behavior detection officers and explosive detection canine teams, are taking place whenever and wherever the government deems appropriate, at random times and places, and without needing the justification of a particular threat.

  W is for WHOLE-BODY SCANNERS. Using either x-ray radiation or radio waves, scanning devices are being used not only to “see” through your clothes but government mobile units can drive by your home and spy on you within the privacy of your home. While these mobile scanners are being sold to the American public as necessary security and safety measures, we can ill afford to forget that such systems are rife with the potential for abuse, not only by government bureaucrats but by the technicians employed to operate them.

  X is for X-KEYSCORE. One of the many spying programs carried out by the National Security Agency (NSA) that targets every person in the United States who uses a computer or phone. This top-secret program “allows analysts to search with no prior authorization through vast databases containing emails, online chats and the browsing histories of millions of individuals.”

  Y is for YOU-NESS. Using your face, mannerisms, social media and “you-ness” against you, you can now be tracked based on what you buy, where you go, what you do in public, and how you do what you do. Facial recognition software promises to create a society in which every individual who steps out into public is tracked and recorded as they go about their daily business. The goal is for government agents to be able to scan a crowd of people and instantaneously identify all of the individuals present. Facial recognition programs are being rolled out in states all across the country.

  Z is for ZERO TOLERANCE. We have moved into a new paradigm in which young people are increasingly viewed as suspects and treated as criminals by school officials and law enforcement alike, often for engaging in little more than childish behavior. In some jurisdictions, students have also been penalized under school zero tolerance policies for such inane "crimes" as carrying cough drops, wearing black lipstick, bringing nail clippers to school, using Listerine or Scope, and carrying fold-out combs that resemble switchblades.

  As you can see, the warning signs are all around us. The question is whether you will organize, take a stand and fight for freedom, or will you, like so many clueless Americans, freely walk into the slaughterhouse?

  

  

  

  

  

• "Everything Is Awesome" In China – Retail Sales, Industrial Production, & GDP All Mysteriously Crush Expectations

  Retail Sales increased 10.6% YoY (smashing expectations of a 10.2% YoY Gain); Industrial Production rose 6.8% (crushing expectations of a 6.0% YoY gain); and the big daddy of goalseeked data, China GDP managed to rise 7.0% (comfortably beating expectations of just 6.8% but still the lowest since Q1 2009). Now it is up to the markets to decide if good data is bad news because it gives the government less excuses to throw more "measures" at the market; or is good data, good news as it "proves" the economic fundamentals underlying massively exponential gains in Chinese stocks (and excessive valuations compared to the rest of the world) are justified. When the data hit Chinese stocks were at the lows of the day, and for now, it appears good data is bad news as stocks are not bouncing at all.

   

  SHANGHAI COMPOSITE FALLS 1.6% AT OPEN BEFORE GDP DATA. GDP better be a hugely goalseeked miss

  — zerohedge (@zerohedge) July 15, 2015

   

  Why would we ever think that?

  Everything Is Awesome!!!

  

   

  One quick question… What exactly are the Chinese suddenly producing so much of? Because its not steel, its not houses, and its not being exported overseas…

  

   

  Do not question this!!

  • *CHINA'S GDP 'NOT OVERESTIMATED', NBS SHENG SAYS

  China – we are going to need some worse data than that…

  

   

  *  *  *

  Finally here is Cornerstone Macro with a less 'optimistic' look ahead…

  • PBOC easing hasn’t worked b/c investment and credit are bubbles, lowering demand for credit and slowing investment, Cornerstone Macro economists led by Nancy Lazar write in note.
  • Expect China official real GDP by 4Q to have 5% handle
  • Inventory destocking likely to be drag on 2H growth; industrial production will probably slow further
  • Implications of Chinese hard landing incl. slower global growth; risk of disappointing multinational earnings; inflation and rates, both lower for longer; continued decline in commodity prices; rising USD trend
  • Potential ramifications for China incl. PBOC continues to ease, cutting base lending rate to zero from 4.85%, loweringRRR to 6% from 18.5%; weaker outbound investment, which presents problem for other EMs; weaker FDI into China; downturn in employment, retail sales; social unrest and geopolitical turmoil

  One last thing – we're going to need a lot more betterer data…

  

   

  Charts: Bloomberg

  

  

  

  

  

• De-Dollarization – Mapping The Ruin Of A Reserve Currency

  The dollar has been a stalwart of international trade over the majority of the last century. Around the time of the formation of the Eurozone, it reached its recent peak at 71.0% of official foreign exchange reserves. Since then, its composition of global reserves has more recently dropped to a more modest 62.9% in 2014.

  However, the dollar is slowly losing its status as the world’s undisputed reserve currency.

   

  

   

  This is not an unusual event as far as history goes. In fact, about every century or so since the Renaissance, the global reserve currency has shifted. Portugal, Spain, The Netherlands, France, and Britain have had dominant currencies at different times.

  Today’s infographic shows that the wind is shifting in international trade. With less countries and organizations using the dollar to settle international transactions, it slowly chips away at its hegemony of the dollar. China is at the epicenter and the country is making continued progress in cutting deals outside of the U.S. dollar framework. Deals shown in the graphic are currency flows between countries that have abandoned the dollar in bilateral trade, as well as countries that are considering such measures.

  The most recent culmination of these trends is the creation of the Asian Infrastructure Investment Bank (AIIB), a China-led rival to the World Bank and IMF that includes 57 founding countries and $100 billion of capital. The United States is not a member and has actively lobbied its allies to avoid joining due to perceived governance issues.

  Other recent deals by China include: a 30-year $400 billion energy alliance with Russia, a second energy deal focusing on natural gas worth $284 billion with Russia, and a deal removing tariffs on 85% of Australian commodity exports to China. Further, China and Russia have agreed to pay each other in domestic currencies in order to bypass the U.S. dollar.

  It is not only the Chinese that are starting to question the viability of the dollar. A report in 2010 by the United Nations called for the abandonment of the U.S. dollar as the single reserve currency. The Gulf Cooperation Council has also expressed desires for an independent reserve currency.

  In the short term, especially with a crashing Chinese stock market and fledgling Eurozone, the dollar will likely reign supreme. It’s still a stretch for the yuan to make its way into foreign reserve coffers so long as capital controls remain in place and the country’s bond market is not open or transparent to offshore investors. However, Beijing is currently mulling ways to internationalize the yuan, and each step it takes will take China closer to challenging dollar hegemony.

  With more bilateral trade transactions bypassing the dollar, and the increasing internationalization of the Chinese financial system, the yuan is eventually going to give the dollar a run for its money.

   

  Source: Visual Capitalist

  

  

  

  

  

• How The US Government Blew $1 Billion In Taxpayer Funds On "Ghost Schools" In Afghanistan

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  BuzzFeed News obtained internal Ministry of Education data for 2011 that has never before been made public. For Afghanistan overall, the data showed 1,174 schools — almost 1 in every 12 — was a ghost school, an educational facility that the Afghan government publicly claimed was open but that was, in fact, not operating. In the provinces that are the most dangerous to monitor — and into which the U.S. poured the most aid money — that proportion soared. In Kandahar province, where DeNenno served, a full third of the 423 schools the Ministry of Education publicly reported as open in 2011 were not functioning, and in Helmand, it was more than half.

   

  But teacher salaries continued to go to these ghost schools — and still do, according to numerous Afghan and U.S. sources. While the Afghan government puts in some of its own money to pay teachers, more than two-thirds of teacher salaries are provided through a World Bank fund, to which the United States is the biggest donor. The World Bank fund did not respond to requests for comment, but USAID said that World Bank financial controls guard against salaries going to ghost teachers.

   

  And just as with ghost students, the U.S. government has known about ghost teachers for years. Back in 2005 and 2006, an internal education ministry task force calculated that at least $12 million in salaries were going to so-called ghost teachers annually, according to several former employees of the USAID contractors embedded in the ministry. A scathing, confidential 2013 USAID audit of the Afghan education ministry obtained by BuzzFeed News reveals that the United States had been injecting hundreds of millions of dollars for more than a decade into a ministry marred by an “inadequate payroll system” and lacking even the most basic auditing practices.

   

  In some areas, the belief that ghost schools have enriched fat cats at the expense of Afghan children has stoked such widespread ire that American education aid is actually doing the opposite of what the U.S. intended: It’s turning locals against the government.

   

  – From the Buzzfeed article: Ghost Students, Ghost Teachers, Ghost Schools

  In the wake of so many wasteful, inhumane and disastrous foreign policy failures, the U.S. government has been desperate to highlight some significant successes in order to justify all of these tragic foreign imperial blunders.

  One such supposed success relates to education in Afghanistan, an area into which some $1 billion in taxpayer money has been spent to build schools and pay teachers according to Buzzfeed. U.S. Government officials have consistently trumpeted all of the good work that has been done in this regard, but there’s one slight problem. Not only are most of the statistics complete bogus, but in many cases, a lot of this U.S. wealth that was meant to be targeted for education, has gone straight to the coffers of some of the most ruthless warlords in the county. How could this happen you ask? Here’s how.

  From Buzzfeed:

  Nearly four years later, water seeps through the leaky roof and drips onto students in this more than $250,000 construction. Doors are cut in half; some are missing altogether. There is no running water for the approximately 200 boys — and zero girls — who attend. But the school did enrich a notorious local warlord. In exchange for donating the land on which the school sits, he extracted a contract from the U.S. military worth hundreds of thousands of dollars.

   

  Over and over, the United States has touted education — for which it has spent more than $1 billion — as one of its premier successes in Afghanistan, a signature achievement that helped win over ordinary Afghans and dissuade a future generation of Taliban recruits. As the American mission faltered, U.S. officials repeatedly trumpeted impressive statistics — the number of schools built, girls enrolled, textbooks distributed, teachers trained, and dollars spent — to help justify the 13 years and more than 2,000 Americans killed since the United States invaded.

   

  But a BuzzFeed News investigation — the first comprehensive journalistic reckoning, based on visits to schools across the country, internal U.S. and Afghan databases and documents, and more than 150 interviews — has found those claims to be massively exaggerated, riddled with ghost schools, teachers, and students that exist only on paper. The American effort to educate Afghanistan’s children was hollowed out by corruption and by short-term political and military goals that, time and again, took precedence over building a viable school system. And the U.S. government has known for years that it has been peddling hype.

   

  BuzzFeed News exclusively acquired the GPS coordinates and contractor information for every school that the U.S. Agency for International Development (USAID) claims to have refurbished or built since 2002, as well as Department of Defense records of school constructions funded by the U.S. military.

   

  At least a tenth of the schools BuzzFeed News visited no longer exist, are not operating, or were never built in the first place. “While regrettable,” USAID said in response, “it is hardly surprising to find the occasional shuttered schools in war zones.”

   

  USAID program reports obtained by BuzzFeed News indicate the agency knew as far back as 2006 that enrollment figures were inflated, but American officials continued to cite them to Congress and the American public.

  All they do is lie. Constantly, and about pretty much everything.

  As for the schools America truly did build, U.S. officials repeatedly emphasized to Congress that they were constructed to high-quality standards. But in 2010, USAID’s inspector general published a review based on site visits to 30 schools. More than three-quarters suffered from physical problems, poor hardware, or other deficiencies that might expose students to “unhealthy and even dangerous conditions.” Also, the review found that “the International Building Code was not adhered to” in USAID’s school-building program.

   

  This year, BuzzFeed News found that the overwhelming majority of the more than 50 U.S.-funded schools it visited resemble abandoned buildings — marred by collapsing roofs, shattered glass, boarded-up windows, protruding electrical wires, decaying doors, or other structural defects. At least a quarter of the schools BuzzFeed News visited do not have running water.

   

  By obtaining internal records from the Afghan Ministry of Education, never before made public, BuzzFeed News also learned that more than 1,100 schools that the ministry publicly reported as active in 2011 were in fact not operating at all. Provincial documents show that teacher salaries — largely paid for with U.S. funds — continued to pour into ghost schools.

   

  Some local officials even allege that those salaries sometimes end up in the hands of the Taliban. Certainly, U.S.-funded school projects have often lined the pockets of brutal warlords and reviled strongmen, which sometimes soured the local population on the U.S. and the Afghan government.

   

  One place where it’s a lot less than it’s cracked up to be is the province where America poured more aid money than almost any other: Kandahar, home to Zhari district, where DeNenno’s school sits.

   

  Habibullah Jan had fled the country, but when the Americans overthrew the Taliban in 2001, he returned and reimposed his checkpoints. With more than 2,000 men under his command and, soon, a seat in parliament, he became the most powerful man in Zhari. When his old foe the Taliban began to surge in 2005, the Americans turned to him for help.

   

  To put it plainly: The U.S. allied itself with a warlord so oppressive and kleptocratic that he helped create the Taliban in the first place.

  You really can’t make this stuff up.

  Few American soldiers knew that Haji Lala and Habibullah Jan were brothers, let alone of Habibullah Jan’s role in fomenting the Taliban. “I liked Haji Lala,” a soldier in DeNenno’s unit said. “I’m pretty sure he did some bad stuff, but for us he was helpful.” He added, “I knew he was a warlord, but he was our warlord.”

  America: Apple pie, democracy and Afghan warlords.

  One of the most common payments the military made was compensation. If U.S. soldiers killed an innocent bystander, or blew up a civilian’s house, or killed someone’s sheep, commanders would pay compensation. The amounts were often modest — from less than $100 to more than $25,000 — but in total they added up to more than $2.5 million, from which strongmen could take a cut. DeNenno said that Haji Lala would sometimes tell the Taliban, “Go blow up this area because we wanna get the Americans to pay for it.”

  The American taxpayer, the biggest patsy on earth, as usual.

  But the goal was never just to educate children. Education was also a means to advance America’s short-term military and political objectives. In 2003, a National Security Council–led “Accelerating Success” program demanded that USAID hasten its work and complete 314 schools by June 2004. The reason: The U.S. wanted achievements — statistics — to extol ahead of the Afghan presidential election.

  As a result of the NSC directive, USAID Director Patrick Fine wrote in an October 2004 internal memo, first obtained by the Washington Post, “awards were made without having design specifications, without agreed sites selected or surveyed or a process to do this, and without adequate consultation with either the [Ministry of Education or Ministry of Health] or the beneficiary communities.” The target numbers, he continued, “had gained a life of their own and were driving USAID to continue to rush the process.”

   

  Profiteers exploited that rush. A full reckoning of the waste and outright fraud has never happened, in part because cases of corruption have often been hidden for years.

   

  When an accountant went to federal investigators in 2006 with evidence that one of USAID’s largest contractors, Louis Berger Group, had been defrauding the agency of millions for years, the investigation was kept under federal seal until late 2010. Only then did the Justice Department reveal that two executives had pleaded guilty to fraud and announce the deal it had reached behind closed doors: The company as a whole would avoid criminal charges and be allowed to continue winning government contracts in exchange for implementing new financial controls and paying nearly $70 million in fines. Since the whistleblower came forward, USAID has awarded the company contracts worth more than 10 times what it was fined.

  Looks like Louis Berger was handed out some banker justice. Must be nice.

  From 2008 to at least August 2013, USAID claimed it had built or refurbished more than 680 schools in the country since the U.S. invaded — a figure the agency sometimes used to counter bad press and that it repeated on Twitter and in blog posts, press releases, and a report from USAID’s Office of the Inspector General, not to mention in Secretary Clinton’s submission to Congress.

   

  But over the last two years, USAID has quietly whittled away at that number without explaining what happened to the more than 115 schools it no longer says it built or refurbished. After BuzzFeed News pressed for an answer, Larry Sampler, the head of USAID’s Office of Afghanistan and Pakistan Affairs, said the agency had “revised its operational definition of school construction” to a “stricter definition.”

   

  Less than 20 miles southeast of DeNenno’s school, Deh-e-Bagh Primary School was recorded in U.S. military records as completed in 2012, at cost and up to standard. The nine-room building, along with latrines and a security wall, would allow children to go to school regularly and provide a “tangible source of community pride and legitimacy” for local elders and the Afghan government, the records say.

   

  But Deh-e-Bagh Primary School has never seen a single student. Only partially completed in 2012, its doors have never opened. There are no latrines, no running water. Without a security wall surrounding it, the building has deteriorated. Windows are smashed. Rooms are littered with construction materials.

   

  That same year, 2012, a military unit distributed supplies to the Sher Mohammad Hotak Primary School, located just a few miles down Highway 1 from DeNenno’s base. Fifty girls attended the school, according to the unit’s records. In photos the unit posted to Facebook, both girls and boys are seen smiling and collecting new backpacks. Together, USAID and the Pentagon have pumped more than $200,000 into the school.

   

  But in an unannounced visit to the school this March, not a single girl was in attendance. Instead, the seven tents that made up the school were filled with boys, some of whom had no chairs or desks. They sat on rocky ground, fading backpacks emblazoned with the Afghan flag next to them.

   

  It was that way across Afghanistan, with school after school visited by BuzzFeed News showing fewer students than were on the books. In 2011 and 2012, USAID sent monitors to many of the schools it had funded to check the number of students and other key information. Since then it has relied almost exclusively on data provided by the Afghan Ministry of Education to determine how many students and teachers are in schools. But no matter who came up with the official count, it often exaggerated the reality on the ground.

   

  At the USAID-funded Mujahed Sameullah Middle School in Kunar province, for example, there were fewer than 50 boys, sometimes sitting two per classroom. That’s only about a fifth of the 274 boys USAID’s quality assurance monitors recorded in 2011 or the 264 the Afghan government told BuzzFeed News are currently enrolled. Overall, in the schools BuzzFeed News visited for which comparison data was available, official figures overcounted students by an average of nearly a fifth — and girls by about two-fifths.

   

  In response to questions, USAID said that it takes seriously any allegations of falsified data and “will continue to work with the ministry to improve reliability.” It also said that beginning in 2012, the agency and other donors recommended that the ministry tighten that standard from three years to one. To date, the ministry has not done so. Still, USAID told BuzzFeed News that while it could not “be absolutely sure of all attendance numbers in all Afghan schools at all times,” in general it “is confident in overall attendance numbers provided by the MoE.”

   

  But Elizabeth Royall, a U.S. liaison to the ministry in 2011 and 2012, said, “There was a lack of scrutiny. I would just report MOE numbers, and that’s what we went with.”

   

  The U.S. just went with the ministry’s numbers for teachers, too. And those numbers were used to pay salaries — even when the teachers weren’t teaching.

   

  BuzzFeed News obtained internal Ministry of Education data for 2011 that has never before been made public. For Afghanistan overall, the data showed 1,174 schools — almost 1 in every 12 — was a ghost school, an educational facility that the Afghan government publicly claimed was open but that was, in fact, not operating. In the provinces that are the most dangerous to monitor — and into which the U.S. poured the most aid money — that proportion soared. In Kandahar province, where DeNenno served, a full third of the 423 schools the Ministry of Education publicly reported as open in 2011 were not functioning, and in Helmand, it was more than half.

   

  But teacher salaries continued to go to these ghost schools — and still do, according to numerous Afghan and U.S. sources. While the Afghan government puts in some of its own money to pay teachers, more than two-thirds of teacher salaries are provided through a World Bank fund, to which the United States is the biggest donor. The World Bank fund did not respond to requests for comment, but USAID said that World Bank financial controls guard against salaries going to ghost teachers.

   

  And just as with ghost students, the U.S. government has known about ghost teachers for years. Back in 2005 and 2006, an internal education ministry task force calculated that at least $12 million in salaries were going to so-called ghost teachers annually, according to several former employees of the USAID contractors embedded in the ministry. A scathing, confidential 2013 USAID audit of the Afghan education ministry obtained by BuzzFeed News reveals that the United States had been injecting hundreds of millions of dollars for more than a decade into a ministry marred by an “inadequate payroll system” and lacking even the most basic auditing practices.

   

  In some areas, the belief that ghost schools have enriched fat cats at the expense of Afghan children has stoked such widespread ire that American education aid is actually doing the opposite of what the U.S. intended: It’s turning locals against the government.

   

  At one point, the provincial police chief shouts out who he thinks are commandeering the payments: “Everyone knows the salaries of teachers come to the province, and then they go to the Taliban.”

   

  Military spending under the CERP program required very little paperwork for most projects. The point was to help win a war. But that flexibility means, quite literally, that the military does not know what it spent on education in Afghanistan, or what it got for its money. The military conceded that many CERP projects were not entered into “procurement database systems” but said it “does maintain extensive project records.” Last year, however, the Defense Department told the special inspector general for Afghanistan Reconstruction just how little it knew: For more than 40% of CERP projects, the Pentagon could not say who ultimately received its money.

   

  Pressed by BuzzFeed News, the Pentagon said it could not provide an exact number of schools it actually built. It also could not say how the more than $250 million in CERP funding earmarked for education was actually spent. To try to drill down on those figures, BuzzFeed News filed a Freedom of Information request and obtained CERP funding records — but found that entire projects were missing, including Joe DeNenno’s permanent school.

   

  “The CERP database was an absolute mess, literally a disaster,” one government official familiar with the records said. “Saying disaster doesn’t even do it justice.”

   

  Since 2002, the United States has invested more than $1 billion to provide education to Afghan children. But the American government does not know how many schools it has built, how many Afghan students are actually attending school, or how many teachers are actually teaching. What’s certain is the numbers for all of those are far less than what it has been peddling.

  While it’s bad enough U.S. taxpayer’s were sent a bill for $1 billion to fund education in Afghanistan when we have so many enormous domestic problems of our own, it’s downright criminal that so much of this money was irresponsibly wasted in political schemes, not to mention some of it going to directly to murderous warlords. Then again, none of this should surprise you. We are all familiar with the seemingly endless list of humanitarian disasters created by inept U.S. foreign policy since 9/11, such as:

  “Stop Thanking Me for My Service” – Former U.S. Army Ranger Blasts American Foreign Policy and The Corporate State

  More Foreign Policy Incompetence – U.S. Humanitarian Aid is Going Directly to ISIS

  Afghan President Hamid Karzai Slams U.S. Foreign Policy in Farewell Speech

  America’s Disastrous Foreign Policy – My Thoughts on Iraq

  The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya

  

  

  

  

  

• Chinese Big Cap Stocks Continue To Slide; Bridgewater Warns, "Typical Of Market Dominated by Unsophisticated Investors"

  As $170 billion hedge fund Bridgewater noted, "new participants are now discovering that making money in the markets is difficult," and sure enough, as WSJ reports, Asian hedge funds have suffered steep losses in June. Several hedge funds were hit with losses on longs (unable to square positions due to suspensions) as well as a dearth of effective tools to short, or bet against, Chinese stocks as they dropped, highlighting the downside of investing in an environment where managing risks is difficult and government actions are unpredictable.As the world anxiously awaits tonight's Retail Sales, Industrial Production, and crucially #goalseeked GDP, Chinese big cap stocks are continuing losses from the last 2 days. The CSI-300 – China's S&P 500 – is now down over 7% from post-intervention highs on Monday.

  Rather stunningly, as Bloomberg reports, more than 52 percent of the past six months' buy transactions by major shareholders and management in China companies happened in the past week. So it seems that after selling to the farmers on the way up they are no forced to buy the shares back from them…BUT these 4 were selling (off with their heads!!!!)

  

   

  It looks like China is going to need a bigger boatload of intervention (though we note that ChiNext and Shenzhen continue to rise). After opening modestly in the green, CSI-300 is fading…

  

  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.3% TO 3,874.97
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.1% TO 4,068.88

  or we are going to see a lot more of this…

  

  As WSJ reports,

  Only a third of Asian hedge funds tracked by Credit Suisse Group AG posted gains in June, and the group saw an average loss of 1.6%.

   

  “Up until the end of last month, most people thought it was a healthy correction,” said Richard Johnston, Asia head for alternative-investments consultancy Albourne Partners Ltd. “I think it went a lot further than many people thought.”

   

  …

   

  Highflying hedge-fund managers aren’t big players in China, which has only recently allowed foreign investors to freely buy mainland stocks through the Shanghai-Hong Kong trading link opened in November. Mom-and-pop investors in the country drive the market and have taken the brunt of the recent rout.

   

  “The Chinese market’s price action is typical for a newly developing equity market that is dominated by unsophisticated speculators,” said Bridgewater Associates LP, the world’s largest hedge-fund manager with about $170 billion under management, in a July note to clients. “New participants are now discovering that making money in the markets is difficult.”

  *  *  *

  But all eyes will be pinned to China at 2200ET when the data drops…

  

   

  in all it's "manipulated" wonder.

  *  *  *

   

  In other news: Golden Throat, the company with the best comb-over in town, starts trading today in Hong Kong pic.twitter.com/tq8kTW3b2N

  — Richard Frost (@frostyhk) July 15, 2015

  

  

  

  

  

• Gold And The Silver Stand-Off: Is The Selling Of Paper Gold And Silver Finally Ending?

  Submitted by Paul Mylchreest of ADM Investor Services Intl. (pdf version)
  

  Gold and the Silver stand-off: Demarketing and Deep Value

  The demarketing (in the 1971 Harvard Business Review, Kotler and Levy defined demarketing as “discouraging customers in general or a certain class of customers in particular on either a temporary or a permanent basis.” This is normally done when there is a shortage of supply or desire to promote other products) of gold may be close to running its course as it seems that sellers of paper gold instruments are attempting to induce one more sell-off to fully cover their diminishing short positions. Indeed, signs are emerging that the long Nikkei/short gold trade, which has done so much damage to gold’s price, is becoming problematic.

  This could be due to one or more of: less desire to run large paper short positions by some banks/funds; rising cost of repo funding; larger bids emerging for physical bullion below $1,200/oz; and/or a view that the BoJ is reluctant to engage in ever greater stimulus. The gold basis and four major identifiable sources of gold demand (Shanghai Gold Exchange withdrawals, Indian imports, net ETF changes and net central bank changes) are indicating strong physical demand right now.

  Anomalies in the silver market, such as large positive divergences in open interest and ETF holdings versus gold, suggest that entities which have been shorting gold may have been hedging (at least partly) in silver. What appears to be a stand-off in this much smaller market means that enormous volatility in the silver price is probably inevitable, especially with physical supply drying up.

  It could be argued that a deep value case for gold, silver and related equities is becoming more and more apparent. For example gold, the HUI (NYSE Gold Bugs Index) and the GDXJ (Junior Gold Miners ETF) have underperformed the S&P 500 by 66%, 87% and 91%, respectively, since their peaks.

  

  The gold price is still performing poorly in US dollars.

  

  That said, it is close to being in a bull market in Yen, now 18.2% above its 2013 low…

  

  …which says something about gold’s value (even in today’s seriously flawed gold market) in the face of a currency which has been deliberately and cynically debased by the BoJ (QQE running at 17% p.a. of GDP).

  Price discovery in the gold and silver markets remains misunderstood by an overwhelming majority of financial market participants. It was been hijacked by two factors.

  • The extreme domination of “paper gold” trading vis-à-vis a comparatively tiny amount of physical bullion; and
  • Gold has been on the “wrong” side of a long/short trade since about September 2012.

  In a January 2013 report “Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs”, the Reserve Bank of India estimated that the ratio of paper gold trading to physical gold trading is 92:1. That is a lot of unbacked paper gold instruments.

  This has almost entirely separated the “gold price”, such as it is (the clearing price for vast volumes of paper gold “representations” with a fractional backing) from the fundamental supply and demand dynamics for actual physical gold bullion.

  As Mr L. famously quipped.

  “Ever get the feeling you’ve been cheated?“

  Using the net short position of the Commercials (mainly banks) on the COMEX as a proxy for paper gold supply, the chart below shows how on the three occasions during 2006-11 that more paper gold was NOT supplied into a rising gold market, the gold price went parabolic.

  

  In terms of the long/short trade, we outlined a thesis in late-2014 which drew together a complex web of interactions between the gold price, Japan’s Nikkei index, repo financing, BoJ policy meetings and anomalies in the silver market.

  In brief, our thesis was as follows.

  The interactions began forming in late-2012, specifically around September, which was a pivotal period in recent financial history, when central banks (notably the Fed and BoJ) embarked on a new phase of aggressive credit creation.

  

  We believe that at the centre of these interactions is a large, leveraged long/short trade which we think is long the Nikkei index and short paper gold. The more the Nikkei rose, the more the gold price was pushed down and, in many cases, major price moves in both were closely tied to BoJ policy meetings, especially announcements of (even) more aggressive monetary policy under “Abenomics”.

  We began to suspect that gold might be the short in a long/short trade when we noticed a reasonably close correlation between gold and interest rates in the repo market. In particular, the gold price tended to decline with the cost of repo funding. The repo market is a major part of the “shadow banking” sector and is the nexus for investment strategies involving leverage and short selling.

  Controlling the short gold/long Nikkei trade may have become more problematic in recent months. For example, repo rates have been on the rise since late-2014. As funding costs increased, the downward pressure on gold has eased somewhat— they may be related.

  

  Suspecting that gold was the short in a long/short trade is one thing, finding the corresponding long was another. When we first looked at the charts of gold and the Nikkei, there was nothing to see…

  

  …until we inverted the Nikkei axis. Now can you see it?

  

  Then the almost perfect correlation between the two was visible from September 2012 until the beginning of 2015.

  And one that wasn’t there beforehand…either in the previous year (see chart below) or earlier.

  

  As we’ve said before, the long/short could be Yen/gold, rather than Nikkei/gold, although the correlation is not quite as good.

  

  Since late-2014, the gold price has traded sideways while the Nikkei continued to rise. We can only speculate on why this is, but four possible explanations come to mind.

  • The rising cost of repo funding; and/or
  • Solid bids emerging for physical bullion, around US$1,200/oz and below; and/or
  • A decreasing desire to maintain large short positions by some of the Commercials (banks); and/or
  • A view that the BoJ is reluctant to implement even more monetary stimulus with QQE already running at an annualised rate of 17% of GDP – although we wouldn’t rule it out given the lunacy demonstrated so far.

  Before the renewed gold sell-off in recent days, gold volatility had fallen to a level which was close to a 10-year low.

  

  Gold was/still is due for a significant price move, one way or another. In a free market, this would most likely be up since the Greek crisis led to reports of a strong pick-up in demand from bullion dealers. For example, Torgny Persson, CEO of BullionStar, noted.

  “Precious metals demand in the last week leading up to the Greek referendum has been about 150 % higher than normal both in terms of order quantity and order volume…Based on my conversations with the western world’s leading refineries and precious metals wholesalers, they have experienced similar increases in the last week.”

  In contrast, Bitcoin, a perceived “gold substitute”, safe haven (maybe) with finite supply (although lacking any kind of “tangible” value and track record down the millennia, has performed much better.

  

  However, a surging gold price is the last thing that anybody who’s concerned with maintaining the veneer of financial stability wants to see.

  We suspect that the Commercials are hoping that a renewed bout of weakness will attract additional shorting by the Non-Commercials. This would allow further reduction in the Commercials’ own net short position – which has been kept on a tighter leash since 2013 (and was facilitated by the price smash in April that year).

  

  Our guess is that this is the final shakeout in gold’s sell-off which has been in progress ever since the gold price peaked on 6 September 2011 – when the Swiss franc, i.e. one of the few safe havens, was pegged to the Euro (and common sense suggests should have been gold positive).

  Kotler and Levy, in “Demarketing, Yes, Demarketing” published in the Harvard Business Review in 1971, defined demarketing as.
  “discouraging customers in general or a certain class of customers in particular on either a temporary or a permanent basis.”

  The academic literature argues that this is normally done when (our emphasis).

  • There is a shortage of supply; and/or
  • There is a desire to promote other products; and/or
  • A product is unprofitable in a particular region.

  A demarketing campaign is usually undertaken via increasing prices, restricting availability or cutting back on advertising.
  But…how is this relevant to the gold and silver markets?

  What if gold and silver naturally (in free markets) act as Giffen Goods in the latter stages of a global debt bubble? To recap, a Giffen Good is one that violates the normal laws of supply and demand with people buying more of the good as its price increases.

  Intuitively, this makes sense. Rising gold and silver prices should naturally reflect increasing risk to the financial system— especially counterparty risk since gold and silver bullion are the only financial assets which have none (i.e. they are not somebody else’s liability).

  Following this argument, if gold has Giffen Good characteristics, the best way to reduce demand from western investors (eastern investors have a natural affinity for gold) would be to reduce the gold price. The point being that any sustained demand for physical bullion from the enormous pools of capital in the western world would hasten the inevitable onset of supply shortage.

  It’s reminiscent of what happened in the prelude to the end of gold’s bear market in the 1990s. This was from a famous (in gold market circles), but anonymous, source on western tactics at the time.

  “(They) needed to keep the price of gold down so it could flow where they needed it to flow. The key to free up gold was simple. The western public will not hold an asset that is going nowhere.”

  This discussion about demarketing in conditions of limited supply raise another point which seems to have gone unnoticed.

  It’s become alarmingly clear in recent months how liquidity on the downside is drying up in many markets, with Chinese equities being the most grotesque of many examples. In physical gold and silver, we believe the polar opposite is the case, i.e. there is very little liquidity to the upside.

  It is impossible to model supply and demand for gold due to the extreme stock-to-flow ratio which renders it entirely different from any commodity (although gold is money not a commodity).That doesn’t stop most gold analysts, however. Nevertheless, there are ways to gauge the strength of the physical gold demand.

  Firstly, by comparing the spot price with the near-month future, i.e. what’s known as the gold basis. Given its stock-to-flow ratio, the gold price should always trade in contango, i.e. with the near-month future at a premium to spot (positive basis). If gold is in backwardation (negative basis), there is a “free profit” for speculators from selling spot gold and buying the near-month future and taking delivery (SINCE SUPPLY SHOULD NEVER BE A CONSTRAINT).

  Backwardation in gold should be arbitraged away unless speculators are nervous about the availability of physical supply (IF OFFERS OF PHYSICAL GOLD ARE WITHHELD AT A PREVAILING PRICE WHICH IS DEEMED TOO LOW BY MARKET PARTICIPANTS). The chart below shows that gold has spent much of the time in backwardation since 2013.

  

  This was Professor Antal Fekete of Fekete Research writing in 2006.

  “We may grant that gold futures trading has materially added to the longevity of the regime of irredeemable currency. But while the central bankers are buying time, sand in the hour-glass of the gold basis keeps trickling down. When it runs out, the trickle of cash gold from warehouses will have become an avalanche that could no longer be stopped.”

  The run on gold has not reached avalanche scale yet, but it’s picking up. While physical gold demand can’t be measured in aggregate, we track four major identifiable indicators of physical gold demand to get a sense of demand conditions.

  These are.

  • Gold withdrawals on the Shanghai Gold Exchange;
  • Gross gold imports into India;
  • Net change in gold holdings of all-known ETFs; and
  • Net change in central bank gold holdings.

  The chart below shows that in aggregate these four sources of gold demand alone have exceeded the output of every gold mine in the world on a monthly basis during most of the last year.

  

  Suddenly, the negative gold basis starts to make sense. It’s also important to remember that the PBoC has not disclosed its purchases since 2009 (an update is due this year) and does not acquire gold on the SGE. So PBoC purchases would be additional.

  We should take a moment to explain the significance of withdrawals on the Shanghai Gold Exchange. Under Chinese law, all gold either mined domestically or imported has to be sold through the SGE, which allows the Chinese authorities to monitor non-government gold reserves. Once bars are withdrawn from the SGE, they are not allowed to be redeposited (Article 23 of the SGE rule book). Withdrawn SGE bars which are resold have to be recast and assayed as new bars. This gold is counted as scrap supply.

  Consequently, SGE withdrawals are a close proxy for incremental Chinese demand. The aggregate of SGE withdrawals was 2,197 tonnes in 2013 and 2,100 tonnes in 2014, which is equivalent to more than 70% of the world’s newly mined gold. We just want to emphasise that this is Chinese demand EXCLUDING the PBoC.

  When China’s purchases of copper and other metals were ramping up 50-60% of world supply in the “go-go” years of 2003-07, the investment world was transfixed by the potential of commodity investing in all its forms. This author was a Mining sector analyst at the time. Fast forward today and gold advocates like us are as rare as hen’s teeth in today’s financial markets.

  Chinese demand of c.2,000 tonnes was higher than the World Gold Council figure, but was confirmed by official Chinese sources. The China Gold Network reported a speech by the Chairman of the Shanghai Gold Exchange (SGE), Xu Luode, on 15 May 2014 in which he stated.

  “Xu pointed out that the current gold market, especially the physical gold market, is actually in the East, mainly in China. Last year China’s own gold-enterprises produced 428 tons; at the same time China imported 1,540 tons of gold, adding up to nearly 2,000 tons.”

  BullionStar’s Torgny Persson attended the LBMA forum in Singapore in July 2014. He reported on comments made by Xu Luode in another speech which Koos Jansen published on the “In Gold We Trust” website.

  “In the speech Mr Xu mentioned and I quote from the official translation in the headphones ‘as the Chinese consumption demand of gold hit 2,000 tonnes in 2013.”

  So, in summary, physical gold demand remains strong while the screen price of gold is being shorted into the ground…which brings us to anomalies in the silver market.

  We don’t mean price anomalies…yet.

  

  Instead…

  Look at how open interest in silver diverged from gold from late-2012 onwards – which is when we believe the short gold/long Nikkei trade was put on. Silver open interest is at an all-time high and note that the scales of the axes on the chart below are (almost) identical.

  

  The open interest of about 200,000 contracts is equivalent to 1.0 BILLION ounces of silver, which is approximately 114% of all silver mined worldwide in 2014. In contrast, the open interest in gold is equivalent to approximately 49% of all gold mined last year.

  Since almost all the gold ever mined remains as inventory (potential supply) while the majority of silver is consumed in industrial fabrication, there appears to be huge instability coming in the silver market.

  The second anomaly in the silver market relates to ETF holdings of silver versus gold. Gold peaked at the end of 2012 (!) while silver holdings have remained at high levels despite the sharp fall in the silver price, even more than gold in percentage terms.

  

  It’s not easy to reconcile these anomalies, but one explanation is that some entity/entities is/are building a long position in silver.

  If so, why? What if the “somebody” who is shorting the gold market is hedging themselves in silver, knowing that when these metals turn, the silver price moves like gold on steroids.

  Let’s speculate for a moment. If the silver market had to be “controlled” for as long as possible… a long hedge built up in silver would need an equally large and offsetting increase in short positions by another “controlling” entity. This might explain the “blow out” in silver open interest.

  Let’s look at the long and short positions of the Commercials since QE3 in September 2012. Until (very) recently, they had both increased by about 40,000 contracts, i.e. 200 million oz. or nearly a quarter of the world’s annual silver supply.

  

  It looked like a stand-off was developing. Now it looks like the shorts are using the price weakness to cover their positions.

  A third anomaly in the silver market was highlighted by Zero Hedge in its analysis of the latest report on the US derivatives report from the Office of the Comptroller of Currency. In the precious metals segment, gold derivatives were excluded and placed in the foreign exchange category instead (without explanation). The remaining precious metals derivatives are primarily silver. At the end of the first quarter of 2015, Citigroup’s precious metals derivatives exposure rose from US$3.9bn to US$53bn, a nearly fourteen fold increase.

  

  It’s far too opaque to discover what Citibank is actually doing but, if we assume that 90% of it is silver, the notional derivatives value is equivalent to 3.06bn oz, or three and a half years of world silver mine output, every single ounce of it. As a percentage of total precious metals derivatives outstanding, Citibank increased its market share from 17% to 70%.

  Calling the regulators…

  This was Zero Hedge’s comment.

  “there is just one word for what Citigroup has done to what the Precious Metals ex Gold (i.e., almost exclusively silver) derivatives market. Cornering.”

  Silver is volatile at the best of times, but enormous volatility in the silver price is probably inevitable.

  In our opinion, we are in the latter stages of gold and silver price discovery which is (almost) entirely dominated by related paper substitutes. The emergence and recognition of supply shortage will begin to alter the balance of price discovery, slowly at first, then rapidly.

  Having looked at trends in the gold market, what about indications of the strength of physical silver demand? Like gold, there is evidence that physical silver supply is getting increasingly tight.

  The silver basis has been in almost continuous decline in recent years and has recently moved into backwardation.

  

  Nobody knows the volume of above ground silver inventory although it is believed to be about 1.0 billion ounces (over 30,000 tonnes). Three points are worth considering in terms of the emerging tightness in physical silver supply:

  • There is considerably less above ground silver inventory compared with gold inventory (approx. 6.0bn oz.);
  • Central banks do not have silver reserves that can be leased into the market; and
  • Unlike gold, the majority of silver is consumed in industrial applications with silver being unique in terms of its dual nature of being both a monetary metal and an industrial metal.

  Finally…

  There is a deep value argument for gold and silver and the related equities. In a debt crisis, as we saw in 2007-08, counterparty risk becomes critical.

  Physical gold and silver are the only financial assets with no counterparty risk at all.

  Gold has underperformed the S&P 500 by 65.8% since the peak.

  

  Banks, in contrast, epitomise counterparty risk. Gold has underperformed the BKX banks index in the US by 70.6% since the peak in 2011.

  

  Silver has underperformed the BKX banks index in the US by 83.2% since the peak in 2011.

  

  Gold (and silver) equities have suffered far worse than the respective metals. The HUI Gold Bugs Index, for example, has fallen 80.3% versus the gold price since the peak more than a decade ago now.

  

  Relative to the S&P500, the HUI has underperformed by 87.1% since the peak.

  

  The GDXJ ETF of small cap. gold mining shares has underperformed the S&P 500 by 91.4%.

  

  The quote below is from (in our opinion) one of the best road movies of all time, but one that is masquerading as a war movie. It’s the story of American soldiers in World War Two who travel deep behind German lines to recover $16m of gold from a bank. When they get close to their goal, they find that the gold is guarded by three Tiger tanks while they only have one Sherman. It reminds us of how it’s felt to be a gold investor during the last few years.

  Kelly: Well Oddball, what do you think?

  Oddball: It’s a wasted trip baby. Nobody said nothing about locking horns with no Tigers.

  Big Joe: Hey look, you just keep them Tigers busy and we’ll take care of the rest.

  Oddball: The only way I got to keep them Tigers busy is to LET THEM SHOOT HOLES IN ME!

  Crapgame: Hey, Oddball, this is your hour of glory. And you’re chickening out!

  Oddball: To a New Yorker like you, a hero is some type of weird sandwich, not some nut who takes on three Tigers.

  Kelly: Nobody’s asking you to be a hero.

  Oddball: No? Then YOU sit up in that turret baby.

  Kelly: No, because you’re gonna be up there, baby, and I’ll be right outside showing you which way to go.

  Oddball: Yeah?

  Kelly: Yeah.

  Oddball: Crazy… I mean like, so many positive waves… maybe we can’t lose, you’re on!

  From Kelly’s Heroes (1970, MGM, Kelly = Clint Eastwood, Oddball = Donald Sutherland, Big Joe = Telly Savalas, Crapgame = Don Rickles)

  * * *

  Full report

  

  

  

  

  

• Varoufakis: Greek Deal Is "Coup", Turns Greece Into "Vassal" State, And Deals "Decisive Blow" To European Project

  Yanis Varoufakis, fresh off a few relaxing days at his island getaway, will be back in the Greek parliament this week to weigh in on the “compromise” deal his successor Euclid Tsakalotos and PM Alexis Tsipras struck in Brussels over the weekend.

  Considering the eyewitness accounts of the highly contentious Eurogroup meeting – out of which came the exceedingly punitive term sheet which would serve as the basis for Greece’s agreement with creditors – one can only imagine what might have unfolded if Varoufakis had been present for the “crazy kindergarten” finance minister free-for-all which reportedly took place on Saturday night. 

  For those curious to know what Yanis thinks about the deal, below are some “impressionistic thoughts” from the man himself. Highlights include the characterization of the Greek deal as a “decisive blow against the Euorpean project”, a “statement confirming that Greece acquiesces to becoming a vassal of the Eurogroup”, and the “culmination of a coup”.

  *  *  *

  On the Euro Summit’s Statement on Greece: First thoughts via Yanis Varoufakis

  In the next hours and days, I shall be sitting in Parliament to assess the legislation that is part of the recent Euro Summit agreement on Greece. I am also looking forward to hearing in person from my comrades, Alexis Tsipras and Euclid Tsakalotos, who have been through so much over the past few days. Till then, I shall reserve judgment regarding the legislation before us. Meanwhile, here are some first, impressionistic thoughts stirred up by the Euro Summit’s Statement.

  • A New Versailles Treaty is haunting Europe – I used that expression back in the Spring of 2010 to describe the first Greek ‘bailout’ that was being prepared at that time. If that allegory was pertinent then it is, sadly, all too germane now.
  • Never before has the European Union made a decision that undermines so fundamentally the project of European Integration. Europe’s leaders, in treating Alexis Tsipras and our government the way they did, dealt a decisive blow against the European project.
  • The project of European integration has, indeed, been fatally wounded over the past few days. And as Paul Krugman rightly says, whatever you think of Syriza, or Greece, it wasn’t the Greeks or Syriza who killed off the dream of a democratic, united Europe.
  • Back in 1971 Nick Kaldor, the noted Cambridge economist, had warned that forging monetary union before a political union was possible would lead not only to a failed monetary union but also to the deconstruction of the European political project. Later on, in 1999, German-British sociologist Ralf Dahrendorf also warned that economic and monetary union would split rather than unite Europe. All these years I hoped that they were wrong. Now, the powers that be in Brussels, in Berlin and in Frankfurt have conspired to prove them right.
  • The Euro Summit statement of yesterday morning reads like a document committing to paper Greece’s Terms of Surrender. It is meant as a statement confirming that Greece acquiesces to becoming a vassal of the Eurogroup.
  • The Euro Summit statement of yesterday morning has nothing to do with economics, nor with any concern for the type of reform agenda capable of lifting Greece out of its mire. It is purely and simply a manifestation of the politics of humiliation in action. Even if one loathes our government one must see that the Eurogroup’s list of demands represents a major departure from decency and reason.
  • The Euro Summit statement of yesterday morning signalled a complete annulment of national sovereignty, without putting in its place a supra-national, pan-European, sovereign body politic. Europeans, even those who give not a damn for Greece, ought to beware.
  • Much energy is expended by the media on whether the Terms of Surrender will pass through Greek Parliament, and in particular on whether MPs like myself will toe the line and vote in favour of the relevant legislation. I do not think this is the most interesting of questions. The crucial question is: Does the Greek economy stand any chance of recovery under these terms? This is the question that will preoccupy me during the Parliamentary sessions that follow in the next hours and days. The greatest worry is that even a complete surrender on our part would lead to a deepening of the never-ending crisis.
  • The recent Euro Summit is indeed nothing short of the culmination of a coup. In 1967 it was the tanks that foreign powers used to end Greek democracy. In my interview with Philip Adams, on ABC Radio National’s LNL, I claimed that in 2015 another coup was staged by foreign powers using, instead of tanks, Greece’s banks. Perhaps the main economic difference is that, whereas in 1967 Greece’s public property was not targeted, in 2015 the powers behind the coup demanded the handing over of all remaining public assets, so that they would be put into the servicing of our un-payble, unsustainable debt.

  

  

  

  

  

• 'Wanted' Obama "Hope" Artist Has None Left, Turns Himself In To Police

  World-renowned street artist Shepard Fairey – infamous for creating Obama's "Hope" image during the 2008 presidential campaign and more recently the "obey" street art – has apparently run out of it.

  

   

  He was arraigned today, after turning himself into Detroit police, on felony charges that he illegally tagged public and private property in the city. Detroit Police last month said Fairey set a bad example for other artists when he plastered his signature Andre the Giant posters on buildings in and near downtown.

   

  

   

  As Detroit Free Press reports,

   Fairey, 45, took a flight from Los Angeles — where he was initially detained last week — to Detroit on Monday evening.

   

  He is accused of causing about $9,000 in damage to nine illegally tagged properties while he was in Detroit in May. He was invited here for commissioned work that included an 18-story mural on One Campus Martius for Dan Gilbert's Bedrock Real Estate Services and others.

   

  Fairey faces two counts of malicious destruction of property, which carry a maximum penalty of five years in jail, plus fines that could exceed $10,000.

   

  Approached after the flight, Fairey declined to speak on the issue: "Can't talk about anything," he said.

   

  He didn't speak at his arraignment Wednesday morning, and his attorney Bradley Friedman declined to comment on the charges.

   

  Doug Baker, attorney for the city of Detroit and a retired Wayne County prosecutor, is taking graffiti cases through an arrangement with the Wayne County Prosecutor's Office. He said there are about eight to 10 other cases the city is working to "vigorously" enforce laws against defacing property.

   

  Asked what Baker thinks of people treating Detroit as a place they can get away with graffiti, he replied:

   

  "That is an attitude that we run into, because we get people coming into the city that view it as a free-fire zone, that view at as a place where no one cares," Baker said. "And that's what we'er changing. We're changing that culture of belief."

  *  *  *
  Just lucky he is not a young black "hope"-less "thug" or things could have got serious.

  

  

  

  

  

• (Not So) Elementary My Dear Watson: The Problem With Pension Plans

  Submitted by Keith Dicker of IceCap Asset Management

  Elementary my Dear Watson

  If you’re into mysteries, there’s certainly no shortage of them around the world. Enjoying them is one thing, solving them is quite another.

  In the mystery solving world, Sherlock Holmes was clearly heads, hands and feet above everyone else. His unorthodox thinking was the key to solving the mystery behind the Hounds of Baskerville, while shrewd decision making always proved valuable when up against the maniacal Moriarty.

  Lieutenant Columbo meanwhile, was also a sharp cookie. Whereas Sherlock dove straight into a mystery and aggressively confronted his foes, the affable Columbo excelled at bumbling around the problem which caused his foes to underestimate him. Which of course, always helped everyone’s favourite detective gather more clues and crack the case.

  Mysterious hounds and mysterious criminals certainly help keep our minds razor sharp as well as entertained. Yet, perhaps the biggest mystery in the world today involves – pension plans.

  Many people have them, and most people fully know what their eventual pension payout will be. Unfortunately, the average person doesn’t know how their pension plan is actually taped together, and fewer still, appreciate that the “promise” of their “eventual pension payout” is not as guaranteed as they may believe.

  Let’s leave no doubt – considering the mysterious complexity of these plans, to understand them one must certainly be a sharp cookie – that’s the easy part.

  However, to fully understand them, one must use unorthodox thinking and make shrewd analytical decisions. Last but not least, never underestimate how today’s financial environment is about to leave many pension plans scratching their heads with confusion and despair.

  * * *
  Pension Plan Assets

  Everyone knows their pension plan owns stocks and bonds. What few know is how they are actually valued.

  Because stock and bond markets can be very volatile in the short-term, and pension plans provide benefits over the long-term, many argue that it is unfair to determine the financial health of a pension plan based upon short-term, recent market performance.

  Unless of course, the short-term market performance is exceptionally good – then the above doesn’t apply.

  However, if markets whipsaw around like they did in 2012, 2009, 2008, 2002, 2001, 1998, 1994 (we could go on but…), then pension plan consultants prefer to smooth out these return fluctuations when reporting their financial check-up.

  The main tool used for smoothing returns is called the Expected Rate of Return. It isn’t the actual rate of return, but rather, it is an estimate of what the pension plan will earn over the long-term.

  Now, here’s the trick – the higher the expected rate of return, the higher the expected value of plan assets.

  The higher the expected plan assets, the lower the expected deficit.

  And, the lower the expected deficit, the lower the expected contributions that is required by the employer.

  Note: these expected returns are theoretical – not actual.

  In a nutshell – high expected rates of return are good. But only good if they retain a semblance of reality. And since most people live in reality, the expected rate of return used by pension plans should also resemble reality.

  And this brings us to the very big problem for pension plans today. Theoretical or expected returns used by pension funds today are no where close to what may be earned in reality.

  60% Stocks + 40% Bonds

  In order to better appreciate reality, one must first understand that most pension funds typically hold about 60% in stocks and 40% in bonds.

  The popularity of DBP pension funds really surged in the 1980s only to plateau in the 1990s. And during that time, a diversified portfolio with a roughly 60-40 split almost always produced a really nice return experience, which made everyone really happy.

  And since all of today’s consultants cut their teeth during this period, or learned from people who worked during this period – then a balanced 60-40 split will do just fine for everyone today. After all, the 80s and 90s happened over 25 years ago. For any investment strategy to endure over that amount of time, it must be good.

  Unfortunately, due to high expected rates of return, many pension funds are actually living in a fantasy world.

  Case in point, consider the Expected Rate of Returns for:

  • Ohio Police & Fire Pension Fund = +8.25%
  • California Public Employees Retirement System = +7.50%

  More conservative Expected Rates of Return can be found with:

  • Nova Scotia Public Service Superannuation Plan = +6.50%
  • Healthcare of Ontario Pension Plan = +6.34%

  To the naked eye, these return expectations may appear quite reasonable – after all, we’ve always been told that over 100 years, the stock market always averages 10% annual returns or higher.

  However, our regular readers know that it isn’t the stock market that worries us. Instead, it’s the bond market that should be keeping people awake at night.

  Yet, even long-term stock market returns have a major flaws. For starters, the 10% number comes from the well-known Ibbotson/Morningstar studies which show that since 1926, the US stock market returned 10% annually.

  With almost 90 years of history, this must be pretty darn accurate. However, if the Ibbotson study started 20 years earlier, the annual return declines to about 7% a year (source: Crestmont Research).

  Think about this; a 90 year study shows a 10% annual return, but a 110 year study shows a 7% annual return. That’s a pretty big difference, and certainly throws doubt on what exactly is the long-term average.

  Better still, Chart 1 (this page) shows the 10% average return is actually rarely achieved. Since 1900, 44% of the time the average 10-year return was < 8%.

  Think about that one – whether you exceed an 8% return has effectively become a flip of the coin.

  While that describes the challenges of using long-term returns from the stock market, our real concern is actually with the bond market. We’ve written, presented, interviewed and even web-casted many times before about the bubble in the bond market. It’s a very big deal, and when it bursts it will have cascading effects in every market, all over the world.

  And considering that the average pension plan has 40% of its investments in the bond market – this is a BIG deal.

  

  To fully appreciate how big of a deal this is, one needs to appreciate the complete picture of:

  • expected rates of return
  • stock market returns
  • bond market returns

  Since most pension plans hold about 60% in stocks and 40% in bonds, the pension plan’s total return is simply:

  60% * Stock Market Return + 40%*Bond Market Return

  As an example, if Stocks increased 10% and Bonds increased 5%, the pension plan’s total return = 60%*10% + 40%*5% = 8% Total Return.

  Simple enough and in theory, that’s how it works. However, it’s reality that has us concerned.

  To demonstrate exactly why pension funds are in trouble, note the above calculation. Due to the way the bond market works, it is fairly easy today to accurately predict the maximum return achievable – we’ll get to the minimum return in a moment.

  Today, the yield or interest received on a 10 year US Government Treasury Bond is about 2%. This means if you buy the bond today, the best return possible is 2% a year for the next 10 years.

  This is where our technical readers point out that bond investors also hold corporate bonds, junk bonds and emerging market bonds which will increase the yield further. As a result, even using the Barclay’s US Aggregate Bond Index as a different return proxy still only increases the yield to 2.2%. For this example, we’ll simply round down to 2%.

  

  Putting it all together: below we show using a 6.5% Expected Rate of Return and a 2% Bond Market return, the pension plan would need a 9.50% return from the stock market to meet it’s return objective.

  

  Most people would agree that over the long-run stocks will produce a 9.50% return.

  This is true for a 6.50% Expected Rate of Return. Watch happens to the poor folks at the Ohio Police & Fire Pension Fund who has elected to use a 8.25% Expected Rate of Return.

  

  Whoa – this pension plan needs a +12.45% return from the stock market to meet it’s return objective. And considering everyone swims in the same stock market, the probability of the Ohio Police & Fire Pension Fund meetings its return objectives are next to 0%.

  And that’s assuming a +2% return from the Bond Market.

  Next, and this is the most critical aspect of the pension mystery and why we are writing about it – what happens to pension funds when (not if), the bond bubble breaks? 

  * * *

  The full note can be read in the pdf below (link)

  
  

  

  

  

  

  

• IMF Rips Pandora's Box To Shreds, Demands Greek Debt Relief "Far Beyond What Europe Has Been Willing To Consider"

  Earlier today, Reuters first leaked that just two weeks after the IMF released its first revised Greek debt sustainability report, one which the Eurogroup desperately tried to squash as it urged for a 30% debt haircut and came hours before the Greek referendum vote giving the Oxi camp hope and crushing Tsipras’ carefully laid plan to lose the vote and capitulate with integrity instead of having to capitulate a week later after 17 hours of “mental waterboarding” and have his reputation torn to shreds, the IMF would release a follow up report updating its view on the Greek economy which in just two short weeks of capital controls has utterly imploded.

  Just like the first IMF report, which we correctly compared to the opening of a Pandora’s box, and with which the IMF also obliterated the careful plans of the Troika, so with this follow up the IMF effectively crushes the glideslope of the latest Greek bailout process barely scraped together on Monday morning and has torn Pandora’s box to shreds with the following summary assessment: “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

  Yes, debt relief… just the others’ debt: not the IMF’s, please.

  So what just happened?

  As of this moment the IMF is telling Greece that if nothing changes, it will die of cancer with 100% certainty; on the other hand the Eurogroup is telling Greece it will die of a heart attack also wih 100% certainty if anything changes.

  Good luck with the choice.

  Here are the report punchlines:

  • Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.
  • … significant shortfalls in program implementation during the last year led to a significant increase in the financing need—by more than Euro 60 billion—estimated only a few weeks ago. As a result, debt-to-GDP by 2022 was projected to increase from an estimate less than a year ago of about 105 percent to a revised estimate of 142 percent, significantly above the target of 110 percent of GDP. This would under the November 2012 agreement have implied significant additional measures to reduce the face-value of debt.
  • Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective.
  • The events of the past two weeks—the closure of banks and imposition of capital controls—are extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability relative to what was projected in our recently published DSA. A full and comprehensive revision of this debt sustainability analysis can only be done at a later stage, taking into account the deterioration in the economic situation as a result of the closing of the banking system and the details of policies yet to be agreed. However, it is already clear at this stage that there will be a significant increase in the financing need. The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated need for a larger banking sector backstop for Euro 25 billion. Adjusting our recent DSA mechanically for these changes, and taking into account the agreed weaker growth path for the next two years, gives rise to the following main revisions:
    • Debt would peak at close to 200 percent of GDP in the next two years. This contrasts with earlier projections that the peak in debt—at 177 percent of GDP in 2014—is already behind us.
    • By 2022, debt is now projected to be at 170 percent of GDP, compared to an estimate of 142 percent of GDP projected in our published DSA.
    • Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP  threshold deemed safe) and continue rising in the long term.

  In other words, for every week that the Greek capital controls remain , the total cost of the Greek bailout (the funding needs) increases by €10 billion.

  Another way of putting it: with every passing day, another 1% of Greece’s €210 billion in bank loans becomes “non-performing.”

  It gets worse: “these projections remain subject to considerable downside risk, suggesting that there could be a need for additional further exceptional financing from Member States with an attendant deterioration in the debt dynamics.”

  • Medium-term primary surplus target: Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so. The reversal of key public sector reforms already in place— notably pension and civil service reforms—without yet any specification of alternative reforms raises concerns about Greece’s ability to reach this target. Moreover, the failure to resist political pressures to ease the target that became evident as soon as the primary balance swung into surplus also raise doubts about the assumption that such targets can be sustained for prolonged periods. The Government and its European partners need to address these concerns in the coming months.
  • Growth: Greece is still assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area, which will require very ambitious and steadfast reforms. For this to happen, the Government— which has put on hold key structural reforms—would need to specify strong and credible alternatives in the context of the forthcoming program discussions.
  • Bank support: the proposed additional injection of large-scale support for the banking system would be the third such publicly funded rescue in the last 5 years. Further capital injections could be needed in the future, absent a radical solution to the  governance issues that are at the root of the problems of the Greek banking system. There are at this stage no concrete plans in this regard.

  The conclusion:

  The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM. There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance. This reflects the basic premise that debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates close to the current AAA rates before debt levels have been brought to much lower levels; borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades. Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide.

  Actually, it is no longer Greece’s: Greece is about to hand over its sovereignty to Brussels on a silver platter. The choice is now all up to the European “partners” to decide.

  Full report (pdf)

   

   

  

  

  

  

  

• "Everybody Benefits By Avoiding Defaults": Citi Explains How To Goalseek Student Loan ABS Ratings

  We last checked in on America’s $1.2 trillion student debt bubble a little over two weeks ago. 

  At the time, we noted that Moody’s had just placed 106 tranches in 57 securitizations backed by student loans on review for downgrade. It was the second such warning Moody’s had issued in the space of just 3 months. 

  Meanwhile, Fitch was getting worried as well and had also moved to place dozens of tranches in FFELP-backed paper on watch. Our takeaway: The fact that Moody’s and Fitch are beginning to reevaluate student loan ABS is indicative of an underlying shift in the market. Between the proliferation of IBR and the Department of Education’s recent move to open the door for debt forgiveness in the wake of the Corinthian collapse, financial markets are beginning to see the writing on the wall. Perhaps Bill Ackman said it best: “there’s no way students are going to pay it all back.” 

  Moody’s concerns revolve around the likelihood of rising defaults attributable to “low payment rates … persistently high volumes of loans in deferment and forbearance, and the growing popularity of the Income-Based Repayment and extended repayment programs.” We’ve discussed all of the above at length and have taken a particular interest in IBR, which we recently dubbed “the student loan bubble’s dirty little secret.”

  Facing shifting market dynamics, Moody’s last week called for comments on its methodology for rating FFELP-backed paper:

  Moody’s Investors Service has published a Request for Comment (RFC) proposing changes to the cash flow assumptions the agency uses in its approach to rating US Federal Family Education Loan Program (FFELP) securitizations.

   

  Low prepayment rates, persistently high rates of deferment and forbearance, and the growing use of IBR and other similar programs have increased the risk that some tranches will not pay off by their final maturity dates, which would trigger an event of default for the securitizations. 

   

  Since the recession, many student loan borrowers have struggled to make their monthly payments. This has resulted in historically low rates of voluntary prepayments, high volumes of loans in deferment and forbearance, and the growing popularity of IBR and other similar programs.

   

  “These trends have persisted despite the economic recovery and improving employment picture, and some levels of deferment, forbearance and IBR will be sustained through the life of the FFELP loan pools. Some repayment plans can extend loan repayment periods significantly, from the standard 10-year term for non-consolidation loans.”

  And here’s more from Bloomberg: 

  Top-rated securities backed by U.S. government-guaranteed student loans face cuts to as low as junk that may further roil the market for the debt, according to Citigroup Inc…

   

  In terms of ratings on the bonds, Moody’s said that any cuts could lower bonds to either low investment grades or speculative rankings. Fitch said in a June 26 statement that it could also lower top-rated debt to junk as a result of its review over the next three to six months.

   

  “Many triple-A investors would not be able to tolerate downgrades, and barring a cure of the possible maturity default, downgrades would present a significant market disruption,” Kane and Belostotsky wrote in the report.

   

  Rating analysts are likely to attach little-to-no value for future buybacks from a non-investment grade company” such as Navient, the Citigroup analysts wrote.

  Got that? No? That’s ok. Here’s a summary. Some of these student loan-backed deals are going to experience technical defaults in the collateral pool because people aren’t paying off the loans in time, which means Moody’s needs to downgrade some of the tranches, but downgrades would be bad, and Moody’s can’t use projected future servicer buybacks as an excuse not to downgrade because the servicers aren’t rated as highly as the securitizations themselves (which is of course absurd and suggests the paper never should have been investment grade in the first place). Therefore, someone needs to find another way to make this paper look less risky, and the best option may be to “cure” maturity default (i.e. extend the maturities). Here’s Citi with more on how Moody’s might go about goal seeking its FFELP-backed ABS ratings:

  Controversy endures in the FFELP ABS market amidst another rating agency voicing concern about breaching legal final maturities and some secondary selling activity. 

   

  The rating agencies assign ratings based on legal final maturity date. Without additional sponsor buybacks, certain SLMA classes are likely to extend beyond the legal final maturity if they continue paying at a slow rate. Rating agency analysts are likely to attach little value for future buybacks from the double-B rated Navient, thus the cash flow delays that are inherent in FFELP structures are problematic from a ratings perspective.

  Yes, “cash flow delays” in the collateral pool are definitely “problematic” and really, it’s not a problem that should be “solved” by tinkering with ratings methodology, because after all, if you just adjust the methodology instead of downgrading the securitizations… well, then what good is the rating? Citi continues:

  Ironically, it was the rating agencies that required the sponsor to initially assign presently defined legal final maturities. Yet the numerous moving parts endemic to FFELP student loans make setting prepayment assumptions and setting legal maturity dates a virtually impossible task. At cutoff, almost every deal had about 50% of the loans in-school. The pricing prepayment estimates had to incorporate numerous moving parts, including the borrower’s graduation date, payment type (conventional, graduated payment or income-based payment) loan maturity and proportions of loans in grace, deferment or forbearance. In our view, the legal final maturity is meaningless.

  See how that works? There are a lot of factors that make it “virtually impossible” to figure out when students might pay back their loans, so really, any estimate of when ABS investors might get their principal back is “meaningless,” and because one can’t really default on a loan with an indeterminate maturity date, “curing” the legal maturity problem, and thus eliminating the need for downgrades, is as simple as “amending” the bond indentures. “The sponsor could approach bondholders to formally extend the legal maturity date,” Citi happily notes. 

  What’s clear from the above is that billions in student loan-backed paper probably should be downgraded because as Citi correctly notes, there’s really no telling when or even if any of these loans are going to be paid off given the proliferation of IBR and the prevalence of deferement and forbearance.

  But rather than risk a “market disruption,” Citi thinks it might be better for Moody’s to consider doing away with definitive maturity dates because in the end (and this is the actual subheader for Citi’s concluding paragraph), “everyone benefits by avoiding default.” 

  *  *  *

  

  

  

  

  

  

• IMF May Walk Away From Greek Bailout

  Earlier today, a “secret” IMF paper surfaced in which the Fund reiterates the need for EU creditors to writedown their holdings of Greek debt.

  According to Reuters, who broke the story after reviewing the document, “the updated debt sustainability analysis was sent to euro zone governments late on Monday, and argues that ‘the dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM.'” The IMF goes on to say that Greece’s debt will likely hit 200% of GDP over the next two years and will sit at a still-elevated 170% of output in 2022.

  As a refresher, here’s a (very) brief recap of the IMFs position on haircuts for Greece: 

  A divide between the IMF and Europe (read: Germany), regarding writedowns on Greece’s debt to the EU has been brewing for quite some time and recently returned to the international spotlight when, a few months back, the Fund indicated debt relief was a precondition for its participation in any further aid for Athens. More recently, the IMF released a report on Greece’s debt sustainability just prior to the referendum. The timing appeared to be strategic and may have helped secure the “no” vote for Tsipras. Today, another “secret” IMF document on the sustainability of Greece’s debt burden has surfaced and not surprisingly, the Fund is once again pounding the table on a haircut.

  Although Tsipras had resisted IMF involvement in the country’s third program, Germany made it clear that the Fund’s participation was mandatory. Now, FT says Chrsitine Lagarge may consider pulling out of the deal in light of the fact that Athens’ debt is not seen as sustainable. Here’s more: 

  The International Monetary Fund has sent its strongest signal that it may walk away from Greece’s new bailout programme, arguing in a confidential analysis that the country’s debt is skyrocketing and budget surplus targets set by Athens cannot be achieved.

   

  “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the memo reads. Under its rules, the IMF is not allowed to participate in a bailout if a country’s debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the memo suggests it can no longer do so.

   

  IMF involvement in Greece’s rescue has been critical to a German-led group of eurozone hardliners who believe the European Commission, one of the other Greek bailout monitors, is not sufficiently rigorous in its evaluations.

   

  The issue became one of the major sticking points during all-night negotiations between Alexis Tsipras, the Greek prime minister, and Angela Merkel, his German counterpart, at the weekend, with Mr Tsipras repeatedly refusing to accept IMF participation in a new bailout.

   

  According to EU officials, Ms Merkel stood firm on the issue, telling the Greek premier there would be no bailout — and therefore “Grexit” from the eurozone — without a formal request made to the IMF for participation in a new programme. The final bailout deal states that “Greece will request continued IMF support” once its current IMF programme expires.

  What happens if the IMF walks away you ask? Well, the entire “deal” could fall apart, as the Fund is expected to put up a not insignificant portion of the bailout money, and in the absence of that funding, the gap would have to be filled with “privitization proceeds” which the IMF itself has projected will come to just €2 billion over the next three years. Furthermore, German lawmakers, already exasperated with the protracted negotiations, would likely pull their support altogether. Here’s FT again:

  If the IMF were to walk away from the Greek programme, it could cause significant political and financial problems for Berlin and other eurozone creditors. Without the IMF’s imprimatur, German officials have said they would struggle to win approval for any new bailout funding in the Bundestag. German MPs must approve both the reopening of new talks and the final terms of the third bailout.

   

  In addition, an EU official said that of the €86bn in Greek financing requirements, the European Stability Mechanism — the eurozone’s €500bn bailout fund — was expected to put up only €40bn-€50bn.

   

  The current IMF programme, which still has €16.4bn in undisbursed funds and runs through March 2016, is expected to make up some of the difference, and eurozone officials had been assuming a follow-on IMF programme would contribute as well.

   

  Any shortfall would have to be made up through Greek privatisation proceeds, which have repeatedly fallen short of expectations, or through Greek borrowing on the bond market, which has dried up since the Syriza-led government took power in Athens in January — and which the IMF memo said was highly unlikely to materialise.

   

  “Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective,” the IMF wrote.

  So in addition to a parliamentary revolt and uncertainty surround urgently needed bridge financing, Greece also faces the possibility that the IMF may walk away, throwing the entire “deal” into question. Here’s The Telegraph’s Ambrose Evans-Pritchard summing up the ramifications of the IMF’s analysis and reinforcing our contention that the US (and its IMF veto power) are pulling the strings behind the scenes and orchestrating “leaks” at opportune times.

  The findings are explosive. The document amounts to a warning that the IMF will not take part in any EMU-led rescue package for Greece unless Germany and the EMU creditor powers finally agree to sweeping debt relief.

   

  This vastly complicates the rescue deal agreed by eurozone leaders in marathon talks over the weekend since Germany insists that the bail-out cannot go ahead unless the IMF is involved. 

   

  It claimed that capital controls and the shutdown of the Greek banking system had entirely changed the picture for debt dynamics, an implicit criticism of both the Greek government and the eurozone authorities for letting the political dispute get out of hand. 

   

   Debt forgiveness alone would not be enough. There would also have to be “new assistance”, and perhaps “explicit annual transfers to the Greek budget”.

   

  This is the worst nightmare of the northern creditor states. The term “Transfer Union” has been dirty in the German political debate ever since the debt crisis erupted in 2010. 

   

  The backdrop to this sudden shift in position is almost certainly political. It follows an intense push for debt relief over recent days by the US Treasury, the dominant voice on the IMF Board in Washington. 

  Should the Fund threaten to pull its support, Germany would face a tough decision: remain belligerent in the face of pressure from IMF (and tacitly from the US), or concede to writedowns which could open the door for Italy, Spain, and Portugal to demand debt relief. 

  Imf Greece Sustainability Analysis

  

  

  

  

  

• Systemic Risks Surge As Correlation Among Stocks Shoots Higher

  Despite everyone saying "it's a stock-picking market" (notably one of Cliff Asness' pet peeves) recent co-movements in global equities suggests once again that there is just one factor driving returns as systemic codependence surges…

   

  Via Gavekal Capital blog,

  Over the past several weeks, correlations among stocks have been increasing which makes it increasingly difficult for stock pickers to outperform. The most dramatic example of this is happening in Europe. The 20-day moving average correlation of European equities stands at 82%, the highest level since July 2012, which not coincidently was another period when the European economic crisis was escalating. The 65-day moving average correlation has increased to 69%, which is the highest level since the end of 2012 and the 200-day moving average also increased over 60% to 62%. This is the highest level since June 2013.

  

  In North America, the 20-day moving average correlation has also shot above 60% for the first time since April and to the highest level since January. The 65-day moving average correlation has increased recently from 46% to 51%.

  

  Asia-Pacific remains the best environment for stock pickers. However, even there, we have seen the 20-day moving average correlation increase to 55% from a low of 34% in June.

  

  *  *  *

  And forward-looking market implied estimates of correlation suggest this will remain the case…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Trump Tramples Trends, Dominates National Poll For Second Week

  Despite losing marquee PGA and LPGA events, a bankruptcy at his Puerto Rico golf course, and the lowest ratings for Miss USA pageant ever, Donald Trump has topped the rest of the GOP presidential field in polls for the second time in as many weeks…

   

  Among voters who identify either as Republicans or independents and who plan to vote in their states’ Republican primaries or caucuses, 17 percent named Trump as their first choice for the GOP nomination in the 2016 presidential race.

  

   

  Trump was followed by former Florida Gov. Jeb Bush (14 percent), Wisconsin Gov. Scott Walker (8 percent), Texas Sen. Ted Cruz (6 percent), Florida Sen. Marco Rubio (5 percent), retired neurosurgeon Ben Carson (4 percent), Kentucky Sen. Rand Paul (4 percent), former Arkansas Gov. Mike Huckabee (4 percent) and New Jersey Gov. Chris Christie (3 percent).

  Receiving less than 2 percent each were former Texas Gov. Rick Perry, former Pennsylvania Sen. Rick Santorum, Louisiana Gov. Bobby Jindal, businesswoman Carly Fiorina, Ohio Gov. John Kasich, South Carolina Sen. Lindsey Graham, and former New York Gov. George Pataki.

   

  As the Suffolk University/USA Today poll also showed, among self-identified conservative or very conservative Republican likely voters, Trump led Bush 17 percent to 11 percent, with all other candidates in single digits.

  However, among voters of all parties, Trump’s negatives were the highest, at 61 percent.

  *  *  *
  

  Finally, Trump appears to be the most-searched Presidential candidates in the last six months in several regions…

  

   

  “United” States of America indeed.

  

  

  

  

  

• Exclusive: The Inside Story Of How Deutsche Bank "Deals With" Whistleblowers

  Back in May we brought you “The Real Story Behind Deutsche Bank’s Latest Book Cooking Settlement,” in which we detailed the circumstances that led the bank to settle claims it mismarked its crisis-era derivatives book to the tune of at least $5 billion. 

  Deutsche Bank settled the issue with the SEC for the laughable sum of $55 million a few months back.

  The SEC inquiry was prompted, in part, by Dr. Eric Ben-Artzi who was fired from Deutsche Bank in 2011 after expressing his concerns about the bank’s valuation methodology. 

  What follows is the real, play-by-play account of Ben-Artzi’s dismissal from Deutsche Bank, told in its entirety for the first time. 

  *  *  *

  Your Services Are No Longer Needed

  On November 7, 2011 Dr. Eric Ben-Artzi walked into a conference room at Deutsche Bank’s U.S. headquarters in lower Manhattan. Seated at a conference table was Sharon Wilson from the Human Resources department. Lars Popken, DB’s head of market risk methodology and Ben-Artzi’s manager, was videoconferenced in.

  Ben-Artzi had just returned from FMLA paternity leave and although things had gotten tense just prior to his time off, he certainly didn’t expect what came next. Ben-Artzi’s job, Popken said, was being moved to Germany.

  Ben-Artzi thought back to the summer when, in response to rumors that some U.S. positions were likely to be moved overseas, he had mentioned he’d be happy to relocate to Berlin. No such luck. Minutes later, he was terminated and Wilson hurriedly ushered him out of the building. Ben-Artzi wasn’t even allowed to collect his personal belongings. 

  
  

  The (Brief) Backstory

  The events that ultimately led Deutsche Bank to boot Ben-Artzi from 60 Wall without so much as a cardboard box for his pictures, pens, and legal pads date back to 1998 and for the sake of brevity, we won’t recount the whole story but encourage anyone interested in the entire narrative to review it here. 

  In short, Deutsche Bank was heavily involved in every single aspect of the market for third-party asset backed commercial paper in Canada prior to the financial crisis. They had an equity stake in the parent of at least two issuers, they served as a liquidity provider on over half of all Series A commercial paper issued by Canadian conduits, they sold the paper through their securities division, and perhaps most importantly, they structured the programs (e.g. LSS deals) that backed the paper. But in the simplest possible terms: Detusche Bank was deeply embedded in a market that collapsed in August of 2007.

  As mentioned above, the events that unfolded between June and October of that year are a story in and of themselves, but suffice to say that the market for commercial paper issued by the Canadian conduits imploded on August 13, 2007 (BNP’s move to freeze three ABS funds four days earlier sparked a panic) imperiling retail investors, small- to mid-size corporations, and pension funds and triggering a massive (and incredibly messy) restructuring effort.

  Most of this drama had ended by the time Eric Ben-Artzi arrived at Deutsche Bank in June of 2010 and the former Goldmanite likely had no idea what he was about to uncover when he began to look at how Deutsche went about accounting for their exposure to the Canadian conduits during the crisis. 

  Deutsche Bank played an outsized role in the market for LSS deals in the years leading up to the crisis. In fact, Deutsche Bank accounted for between $120 and $130 billion of the $200 billion (notional) in total LSS deals between 2005 and 2007.

  When Ben-Artzi, who has a PhD in applied mathematics from NYU Courant, began to look at how the bank was valuing the gap option on the LSS trades, he made a rather disconcerting discovery. 

  As a refresher, here’s a simple explanation of the gap option problem with LSS deals: 

  The laughable thing about LSS deals was that they were effectively non-recourse, meaning that the protection seller was allowed to sell protection on a notional amount that was multiples of the collateral posted, but in the event the market moved against the seller enough to chew through that collateral and a margin call was made, that seller could just say “to hell with it” and walk away from the deal. More simply, I, the seller, insure $100 million in debt, but only post $10 million up front. If there’s a credit market meltdown and my $10 million is no longer sufficient and you, the protection (insurance) buyer, call me looking for more money to compensate you for the elevated risk, I can politely tell you to piss off. The risk that I tell you to piss off is called “gap risk.”

  To be a bit more specific, the seller of protection (in this case the Canadian conduits) had the option to walk away from the deal without posting additional collateral (this is the “gap option”), and the value of that option changed depending on a number of factors including credit spreads and correlation. 

  As it turns out, Deutsche Bank began making these trades without even having a model to value the gap option — standard models (e.g. a copula model) cannot be used for LSS trades. Not only that, the bank’s credit correlation desk didn’t even bother to consult the market risk methodology department (where Ben-Artzi worked and which was responsible for verifying the appropriateness of valuation models) and instead decided to simply discount the value of the trades by 15%. Sensing that this was likely inadequate, Deutsche briefly attempted to determine the actual value of the gap option on the trades, but when the numbers came back looking rather nasty, the bank did what any pre-crisis sell side firm worth its salt would do: they scrapped that model and went with something that made the results look more favorable. In this case, Deutsche simply set up the equivalent of a loan loss reserve for the entire book and called it a day. At the time (i.e. between 2007 and 2009), other players in the industry valued the gap option at between 2% and 8% of notional. Taking the midpoint there, and taking the midpoint between Deutsche’s estimated $110 and $120 billion in notional exposure, the value of the gap option for the bank would have been nearly $6 billion.

  How Deutsche Bank Deals With ‘Problem’ Employees

  Sometime around October of 2010, Ben-Artzi began to ask questions, starting with the Director and Head of Risk Research and Development. Discussions with management continued into the new year until finally, fed up with what he perceived to be an attempt to sweep the issue under the rug, Ben-Artzi contacted the SEC on March 7, 2011 and called Deutsche Bank’s employee hotline four days later. 

  On March 17, Ben-Artzi met with Robert Rice, then Deutsche’s Head of Governance, Litigation & Regulation for the Americas who said there was an ongoing investigation into some of the issues Ben-Artzi had raised. Later that month, Ben-Artzi suffered through a lengthy meeting with Rice and William Johnson, Deutsche’s outside counsel. 

  What’s important to note here is that Bob and Bill (as Rice and Johnson are known to their friends) weren’t exactly strangers. As it turns out, they both worked in the  U.S. Attorney’s Office for the Southern District of New York with Mary Jo White and Robert Khuzami.

  After his first stint in public service, Khuzami went on to become General Counsel to  the Americas at Deutsche and by the time Ben-Artzi reported his concerns to the government in 2011, Khuzami had moved on to become Director of Enforcement for the SEC. Mary Jo White would of course become SEC Chair in 2013, and almost two years to the day after Ben-Artzi first met with Rice, Bob would be named Chief Counsel to White.

  As such, Ben-Artzi was (and still is) essentially squaring off against a tight-knit faction of former attorneys for the Southern District of New York who have managed to turn the SEC into an extension of Deutsche Bank, much as Goldman has turned the Fed into an extension of the Vampire Squid. As an aside, Deutsche’s General Counsel Richard Walker worked at the SEC for a decade and served as Director Of Enforcement from 1998 until his move to join the bank in 2001. 

  On May 12, 2011, Ben-Artzi sat down to discuss the issue further with Rice and Matt Spaulding (then global head of finance for Deutsche). Also in attendance were two employees from the corporate and investment bank, Stefan Schafer and Andreas Kodell, both of whom had come over from London.

  Maybe it was the jet lag, or maybe it was the fact that Ben-Artzi was essentially threatening to expose a multi-billion dollar “error” in the way the bank was valuing its LSS book, but whatever the case, Schafer and Kodell weren’t happy. The two proceeded to give Ben-Artzi a rather sharp tongue-lashing for questioning the bank’s valuation of the trades.

  In the process, Schafer and Kodell did shed some light on Deutsche’s previous attempts to evaluate their exposure to the gap option. Unfortunately, they were unable to explain why Ben-Artzi’s calculations were incorrect and Spaulding was similarly unable to justify the bank’s initial use of a 15% haircut or explain how the subsequent decision to adopt a reserve against the trades was in any way sufficient. Lars Popken, who was also in attendance, remained surprisingly quiet.

  On May 23, in a meeting that included Sharon Wilson from HR, Rice said Deutsche Bank would be providing no further information into how it valued the trades and suggested Ben-Artzi contact an SEC attorney.

  At the end of that month, Popken assured Ben-Artzi that despite the controversy, no retaliatory action would be taken by the bank.

  Ben-Artzi began his leave of absence on June 30 and returned to work on October 19.

  Less than three weeks later, he was fired. 

  

  *  *  *

  Epilogue

  If ever there was a story that exemplified virtually everything that is wrong on Wall Street surely this is it. Here we had one of the largest banks in the world by assets agreeing to facilitate leveraged bets in synthetic credit by Canadian special purpose entities which had virtually no equity whatsoever on their books. Deutsche knew the collateral for these bets came from the sale of commercial paper to clueless retail investors and pension funds, and not only did the bank not care, Deutsche actually encouraged the conduits to pile leverage on top of the posted collateral, creating an enormous amount of risk not only for the holders of the commercial paper, but for the bank itself. Deutsche then proceeded to guarantee the commercial paper in the event the market ceased to function only to refuse payment to noteholders when the market finally did collapse in August of 2007, leaving retail investors and pension funds out in the cold.

  Meanwhile, the bank intentionally underreported its exposure by systematically refusing to model the gap option built into the trades and when someone honest finally came along and called them on their obfuscation, they summarily dismissed him. 

  Of course the punchline here is that convincing the SEC to acknowledge the sheer absurdity of the entire ordeal has been, and will continue to be well nigh impossible for the following reasons: 1) Robert Khuzami, the agency’s head of enforcement when Ben-Artzi’s complaint was filed, was Deutsche’s General Counsel to the Americas the entire time the bank was mismarking its LSS book, 2) Bob Rice, the SEC’s current Chief Counsel, was Deutsche’s Head of Governance, Litigation & Regulation during Ben-Artzi’s tenure at the bank, 3) the current SEC Chair, Mary Jo White, goes way back with both Rice and Khuzami as well as with Bill Johnson, Deutsche’s outside counsel at time of Ben-Artzi’s complaint, and 4) Deutsche’s current General Counsel worked at the SEC for 10 years, including a stint as chief enforcement officer. 

  In the end, all the boxes are checked. This story truly has it all: risky derivatives, leverage, the destruction of retail investors’ savings, hidden risk, the termination of honest employees, and the revolving door between Wall Street and the U.S. government. 

  

  

  

  

  

• Beware: The "Made In China" Global Recession Is Coming, Morgan Stanley Warns

  The next global recession may come with a label that reads “made in China” Morgan Stanley’s Head of EM Ruchir Sharma, says. 

  As regular readers are no doubt aware, decelerating economic growth in China has been a major drag on worldwide demand and is one of the main reasons why global trade is in the doldrums.

  Flagging export growth (June’s “strong” 2.1% showing notwithstanding), a painful transition from an investment-led model to a consumption and services-driven economy, and an industrial production-sapping war on pollution have all conspired to bring the Chinese economic growth engine to a virtual halt, with some independent estimates putting output as low as 3.8% (which would constitute a blistering pace in the West but might as well be 0% if you’re China), far below the “official” headline figure which you can bet will remain at or above the Politburo-mandated 7%.

  Here’s Bloomberg with more from Sharma on the “Made In China” recession: 

  Forget about all the shoes, toys and other exports. China may soon have another thing to offer the world: a recession.

   

  That is the prediction from Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, who says a continuation of China’s slowdown in the next years may drag global economic growth below 2 percent, a threshold he views as equivalent to a world recession. It would be the first global slump over the past 50 years without the U.S. contracting.

   

  “The next global recession will be made by China,” Sharma, who manages more than $25 billion, said in an interview at Bloomberg’s headquarters in New York. “Over the next couple of years, China is likely to be the biggest source of vulnerability for the global economy.”

   

  While China’s growth is slowing, the country’s influence has increased as it became the world’s second-largest economy. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010, according to Morgan Stanley. It’s the world’s largest importer of copper, aluminum and cotton, and the biggest trading partner for countries from Brazil to South Africa.

  Yes it is, which explains why, as we noted on Monday evening, commodity producers which levered up in anticipation of a perpetual bid from China are now buried under hundreds of billions in debt amid slumping prices and a global deflationary supply glut. 

  And while the country’s shifting economic model undercuts global trade, the sharp decline in Chinese stocks poses a threat to the country’s presumed new engine for growth: the consumer.

  China’s $6.8 trillion equity market roiled global investors over the last few weeks after a yearlong rally accompanied by record borrowing and surging valuations ended in a bear market.

   

  “What happened in China last week was so significant in that for the first time, you’ve got this sign that something is out of control,” Sharma said. “Confidence damage is going to last for a while.”

  Indeed it will, and as we’ve argued on several occasions of late (here for instance), the equity market sell-off has caused irreparable damage to retail investors’ collective psyche, which could well have knock-on effects for consumer spending.

  This means that just as the world begins to come to terms with the new Chinese reality wherein shifting priorities and more importantly, shifting demographics (the fabled “Lewis Turning Point“), transfer the burden of economic growth from the industrial sector to the consumer, the propensity for everyday Chinese citizens to spend may be constrained by the psychological effects of watching trillions in margin-fueled paper gains vanish into thin air. 

  So yes, Mr. Sharma, we agree with your assessment – we only hope you realize how right you are and position your clients accordingly.

  //

  

  

  

  

  

• What's Wrong With Our Monetary System (And How To Fix It)

  Submitted by Adrian Kuzminski via Club Orlov blog,

  Something's profoundly wrong with our global financial system. Pope Francis is only the latest to raise the alarm:

  “Human beings and nature must not be at the service of money. Let us say no to an economy of exclusion and inequality, where money rules, rather than service. That economy kills. That economy excludes. That economy destroys Mother Earth.”

  What the Pope calls “an economy of exclusion and inequality, where money rules” is widely evident. What is not so clear is how we got into this situation, and what to do about it.

  Most people take our monetary system for granted, and are shocked to learn that the government doesn't issue our money. Almost all of it is created by loans made “out of thin air” as bookkeeping entries by private banks. For this sleight-of-hand, they charge interest, making a tidy profit for doing essentially nothing. The currency printed by the government – coins and bills – is a negligible amount by comparison.

  The idea of giving private banks a monopoly over money creation goes back to seventeenth century England. The British government, in a Faustian bargain, agreed to allow a group of private bankers to assume the national debt as collateral for the issuance of loans, confident that the state would be able to service the debt on the backs of taxpayers.

  And so it has been ever since. Alexander Hamilton much admired this scheme, which he called “the English system,” and he and his successors were finally able to establish it in the United States, and subsequently most of the world.

  But money is too important to be left to the bankers. There is no good reason to give any private group a lucrative monopoly over the creation of money; money creation should be the public service most people mistakenly believe it to be. Further, privatized money creation allows a few large banks and financial institutions not only to profit by simply making bookkeeping entries, but to direct overall investment in the economy to their corporate cronies, not the public at large.

  Ordinary people can get the financing they need only on burdensome if not ruinous terms, leaving them as debt peons weighed down by mortgages, student loans, auto loans, credit card balances, etc. The interest payments extracted from these loans feed the private investment machine of Wall Street finance, represented by the ultimate creditor class: the notorious “one percenters.”

  There are two main critics of our privatized financial system: goldbugs and public banking advocates. The goldbugs would return us to a gold standard, making gold our currency. The problem is that it would become almost impossible to borrow money since the amount of gold which could be put into circulation is relatively miniscule and inelastic. They is no way easily to expand the supply of gold in the world

  Credit—the ability to borrow money—is vital to any economy. If we cannot borrow against the future for capital investment—roads and infrastructure, housing, businesses, hospitals, education, etc.—then we cannot fund essential services. To that end, we need an elastic money supply.

  Public banking advocates—like Stephen Zarlenga and Ellen Brown–appreciate the need for credit. Their aim is to transfer the monopoly on the creation of credit from private to public hands. Unfortunately, there is no guarantee that this form of "progressive" state finance would be any better than private finance.

  If we had a truly democratic government actually accountable to the public, such a system might work. But in fact governments in the United States and most developed countries are oligarchies controlled by special interests. A centralized public bank—without a political revolution–would likely favor government contractors and continue to squeeze borrowers for interest payments, now supposedly directed to “the public good.”

  This is curiously reminiscent of the system in the old Soviet Union and today's China, where a political nomenklatura ends up calling the shots and enriching itself. Our current system of centralized private finance, as well as the "progressive" proposal of centralized public finance, are no more than twin versions of top-down financial control by an elite.

  Fortunately, there is another model available. There is a long tradition in America, beginning with colonial resistance to “the English system,” and continuing with anti-federalists, Jeffersonians, Jacksonians, and post-Civil war populists. This tradition opposed any kind of centralized banking in favor of some kind of decentralized issuance of money.

  The idea they developed is to prohibit any kind of central bank—public or private—and instead have money issued exclusively locally on the basis of good collateral to individuals and businesses. It's a grassroots, ground-up approach. Priority is given to local citizens and businesses, who can get interest-free loans from local public credit banks to finance what they need to do.

  Such a system would have to be publicly regulated to ensure fair and uniform standards of lending at the local level. It would, in that sense, be a public banking system. The absence of a centralized issuing authority, however, would prevent any concentration of financial power, public or private.

  Any top-down system of financial control – private or public – presupposes some kind of control by elites, that is, some kind of central planning, whether in corporate board rooms or in the offices of government agencies, or some combination of both. The historical record suggests that such top-down decision-making is inevitably self-serving, distorted, and socially counter-productive.

  Indeed, whether public or private, it is the love of money empowered by centralized finance which creates the “economy of exclusion and inequality” which Pope Francis decries.

  The decentralized system of populist finance would operate with no central planning. Instead, countless local decisions about lending and credit-worthiness would function as a genuine “hidden hand” of finance, one which would be self-regulating. Here the love of money would find no way to leverage its power. Instead it would be dispersed among the general population, as it should be, without burdensome interest charges, to the benefit of all.

  

  

  

  

  

• Crude Extends Gains After API Reports Large Drop In Inventories

  After a brief respite of 2 weeks of inventory builds, API just reported a major 7.3 million barrel inventory draw (far bigger than the 1.2mm barrel expected) and the biggest since July 2014…

   

  

   

  WTI Crude has jumped back above $53 on the news…

  

   

  Charts: Bloomberg

  

  

  

  

  

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• The Last Days Of 'Normal Life' In America

  Submitted by Michael Snyder via The End of The American Dream blog,

  If you have got family and friends that you would like to visit before things start getting really crazy, you should do so within the next couple of months, because these are the last days of “normal life” in America.  The website where I have posted this article is called “End of the American Dream“, but perhaps I should have entitled it “The End of America” because that is essentially what we are heading for.  The debt-fueled prosperity that so many of us take for granted is about to come to a screeching halt, and we are about to enter the hardest times that any of us have ever known.  And I am not just talking about economics either.  Based on all of the intel and information that I have gathered, we are about to enter a “perfect storm” that is going to shake this country in just about every possible way that it can be shaken.  So I hope that you will truly savor this summer – days like this will not come around again any time soon.

  Have you ever known someone that lived a seemingly charmed life even though that individual made foolish decision after foolish decision?

  In the end, reality almost always catches up with people like that.

  And in so many ways, we have been living a charmed life as a nation even though we have been making incredibly foolish decisions for decades.  We have cursed ourselves over and over again, and just about every form of evil that you can possibly imagine is exploding all around us.  As a nation, we now stand for just about everything that is foul, disgusting and wicked, and the rest of the world is absolutely horrified by what has happened to us.

  Once upon a time, we were one of the most loved nations on the entire planet.

  Now we are one of the most hated.

  The things that we have been doing to ourselves and to other countries are about to catch up with us in a major way.  We thought that we were getting away with everything that we were doing, but that was never the case.  When you do evil, there is always a price to pay.

  Over the past few weeks, some very strange things have begun to happen.  And in the months ahead, we are going to see some more unusual events.  But to be honest, this is just the tip of the iceberg.  For now, you are just going to have to trust me on this one.

  If my tone sounds ominous, that is good, because that is precisely the mood that I am trying to convey.  Right now, there are major things going on behind the scenes, and all of our comfortable little lives are about to get shaken up big time.

  I have often written about the global elite and about how they like to go about doing things.  Throughout history, they have always liked to create order out of chaos.  In other words, they will often purposely create a crisis in order to push through things that they would not be able to accomplish during “normal” times.

  I believe that we are about to enter one of those periods of time.  The problems that we are about to experience are going to be used to justify radical “solutions” that will further the overall agenda of the elite.  But because we will be in the middle of an “emergency”, a lot of people will choose to go along with those solutions.

  Sadly, most people don’t understand how the world works because they are so consumed with other things.  We live in a society that is absolutely addicted to entertainment.  Just recently, I wrote about how the average American spends more than 10 hours a day plugged in to some form of media.  If we are not watching television, we are listening to the radio, going to movies, playing video games, messing with our smartphones or spending endless hours on the Internet.  And more than 90 percent of the “programming” that we are fed through these devices is produced by just 6 absolutely gigantic media corporations.

  And who controls those gigantic media corporations?

  The elite do.

  And have you noticed how “the mainstream media” loves to divide us?

  Today, Americans are more divided than ever it seems.  Our news broadcasts endlessly fixate on “black vs. white”, “male vs. female”, “liberal vs. conservative”, “rich vs. poor”, etc, etc.

  Americans are extremely angry and frustrated at this point, but most of our anger and frustration is directed at one another.

  How can we ever hope to come up with any solutions for our nation if we spend so much time hating our fellow citizens?

  But this is just how the elite like it.

  They love to play divide and conquer.  If we were united, we would be far more difficult to manipulate.

  And even if we did find a way to come together, what values and principles would we use to rebuild this nation?

  The truth is that most Americans deeply reject the values and principles that the founders of this country once held so dear.

  Personally, I am very optimistic about the future.  My wife and I believe that the greatest chapters of our lives are still ahead of us.

  But am I optimistic about the future of the United States?

  No, I am not.

  Perhaps you are reading this and you have come to the conclusion that I am being irrationally negative.  If so, you are probably spending way too much time plugged in to the “propaganda matrix” that I described above.  The establishment wants you to believe that everything is going to be just fine and that the best days for this world are ahead.

  If you think that I am wrong, I challenge you to bookmark this page.  Then, after some time has passed, come back and revisit what I had to say today.

  I believe that you will be quite shocked by how your perspective has changed.

  The last half of this year (2015) is going to represent a major turning point, and we are moving into hard times unlike anything that America has ever seen before.

  Unfortunately, most of the “sheeple” are going to be completely blindsided by what is coming.  They just continue to follow their utterly clueless leaders down a path toward oblivion.

  But the good news is that once the “shaking” starts, many of these “sheeple” will begin to wake up.

  When that happens, who will those “sheeple” turn to for answers?

  

  

  

  

  

• What Assets Did Greece Just Hand Over To Europe: "Airports, Airplanes, Infrastructure And Most Certainly Banks"

  The Simpsons had it right all along:

  

   

  With the provocative and dramatic Greek “time out” language pulled from the final finmin and summit draft language, the two most humiliating aspects of the latest extend and pretend “deal” for the Greek people will be the return of the Troika’s (surely we can call it the Troika again as part of the Greek capitulation) IMF mission to Athens, and the escrowing of some €50 billion in  Greek assets in a liquidation fund.

  Granted said fund will not be domiciled in Luxembourg as was originally envisioned, but Europe will still have control and first refusal rights over what are technically Greek properties, in the process Athens handing over about 25% of Greek GDP (and sovereignty) over the Brussels.

  What are these assets? For the answer we go to the horse’s mouth, Jeroen Dijsselbloem, who laid out the holdings of the proposed Greek privatization that would be sold off as follows: “it still is going to be an independent fund, valued at €50 billion which can be airplanes, airports, infrastructure and most certainly banks.”

  Bloomberg quotes the Eurogroup finmin president:

  They will be brought in with the target to privatize those in the coming years, but we will take our time for that.

   

  We then hope for proceeds of EU50 billion, but that will be clear later.

   

  The banks first have to be refinanced from this aid program, but after that I take it that they’re worth money and then we can sell them.

   

  The proceedings are aimed at lowering Greece’s national debt.

  In other words, Greece will be liquidated piecemeal to repay creditors. In even other words, the proceeds from the Third Greek Bailout will not only not reach the Greek people, but Greece will have to sell itself in pieces to top off the creditors’ funding needs.

  Dijsselbloem concludes: “That is good for Greece, but also good for us. We are in the end the ones from whom the money is borrowed.”

  It was not exactly clear why this would be good for Greece.

  So for all those curious, here are some of the “assets” that already have, or soon will hit Ebay.

  

   

  The only caveat: when (not if) Greece defaults again, and it is time to collect on Europe’s secured DIP loan (which is what the Third bailout really is) collateral because not even the French socialists can push for a fourth bailout, good luck trying to repossess Aegean islands or the Santorini ferry terminal.

  Oh, and for those struck by a case of deja vu, the €50 billion privatization “plan” is nothing new: it was first proposed by the IMF in 2011. This is what happened next:

  

  What does the IMF say now about this latest privatization proposal? “Not realistic.”

  #EuroSummit has doubts over 50 bn€ privatization target. IMF don’t think it’s realistic. – EU source

  — Jarno Hartikainen (@JarnoHa) July 12, 2015

  Which may be a problem for Greek banks since as the summit deal envisions, half of the privatization “proceeds” will go to recapitalize Greece’s insolvent banks. Proceeds which the IMF projects will be about €2 billion until 2018!

   This is a problem because with this implicit admission that the Greek financial sector will effectively never receive the needed funds to remain stable, any ELA increase by the ECB will be promptly used by Greek depositors to yank as much money as they can, awaiting the next weekly dose of monetary generosity from Mario Draghi, as both capital controls and the Greek bank run remain a permanent fixture of Greek daily life.

  

  

  

  

  

• US Army May Use Hollow Points In New Pistols In Violation Of International Protocol

  A few months back, when “boots on the ground” trial balloons were floating around Washington, one argument made for sending so-called “forward spotters” to Iraq and possibly to Syria was that US airstrikes against ISIS needed to be made more efficient and more precise in order to minimize collateral damage.

  As a reminder here’s an excerpt from a Bloomberg piece published on May 22: 

  Conducting precision airstrikes that avoid civilian casualties is more difficult without spotters using laser designators and other tools to guide them, particularly in and around cities, said a State Department official who spoke under ground rules requiring anonymity.

   

  A U.S. airstrike in November against a different extremist group in Syria killed two children and wounded two adults, the Defense Department reported Thursday.

   

  On Capitol Hill Thursday, retired General Jack Keane, a former vice chief of staff of the Army, said deploying JTACs, also called forward air controllers, could quickly shift the balance against Islamic State by making its fighters more vulnerable to U.S. and coalition air attacks.

   

  “Seventy-five percent of the sorties we are currently running with our attack aircraft come back without dropping bombs, mostly because they cannot acquire the target or cannot properly identify the target,” he said. “Forward air controllers fix that problem.”

  As we noted at the time, carefully worded trial balloons don’t get much better than that. You see, the problem is that we are accidentally killing innocent children on our bombing runs and that’s if we’re lucky enough to be able to drop any bombs at all which apparently we only do a quarter of the time, and the whole “problem” could be “fixed” by deploying a couple of “spotters” with laser pointers. 

  Interestingly, officials seem to pay quite a bit more attention to collateral damage when citing civilian casualties can serve as a means to an end – an end like invading Syria, a state which is ripe for ‘regime change.’

  Conversely, when a drone strike vaporizes a ‘high value’ target from the stratosphere and a few innocents turn up in the smoldering wreckage, well, that’s just the cost of doing business if you’re the CIA. 

  In that context, we thought it was interesting that the US Army is considering using hollow point ammunition in their new standard issue handguns on the premise that doing so will reduce civilian casualties. Fragmenting ammunition does a lot more damage and thus has more “stopping power” than full metal jacket ammo, so one might reasonably suspect that the Army’s goal in giving every soldier a magazine full of hollow points is simply to increase the kill rate. Not so, says the Army – it’s all about preventing collateral damage. Here’s Army Times with more:

  The Army is considering the use of expanding and fragmenting ammunition, such as hollow point bullets, to increase its next-generation handgun’s ability to stop an enemy.

   

  After a recent legal review within the Pentagon, the Army can consider adopting “special purpose ammunition,” said Richard Jackson, special assistant to the Army Judge Advocate General for Law of War, according to an Army news release. This marks a departure from battlefield practices over a century old.

   

  Jackson told Army Times that while this isn’t the first approved use of such bullets in the military, the stance represented “a significant re-interpretation of the legal standard” for ammunition. He also said a lot has changed since the initial movements against the round, especially with the increased prevalence of asymmetric warfare.

   

  Most of the Army uses full metal jacket, or ball ammunition, in both handguns and rifles. These rounds are designed to hold together, increasing penetration and narrowing the tunnel of damaged tissue.

   

  Expanding and fragmenting bullets can flatten or break apart, and are more likely to remain in the body of a target and transfer all of their energy to it. A wider swath of tissue is typically destroyed.

   

  On the battlefield, the U.S. has generally observed the 1899 Hague Convention rule barring expanding and fragmenting rounds, despite the fact that it never has been signatory to that particular agreement, Russell said.

   

  The U.S. reserved the right to use different ammunition where it saw a need. For example, Criminal Investigations Command and military police use hollow points — as do law enforcement agencies around the country — in part to minimize collateral damage of bullets passing through the target. Special Forces also uses expanding/fragmenting rounds in counter-terrorism missions.

   

  “The use of this ammunition supports the international law principles of preventing excessive collateral effects and safeguarding civilian lives,” an Army statement said.

  So the US never signed up for this ban on special purpose ammo and always reserved the right to use it “where it saw the need”, which apparently is now everywhere.

  

  Note that the Hague Convention rule wasn’t something that was adopted for no reason. The ban on non standard rounds was put in place because, again quoting the Army Times, “the bullets caused unnecessary and therefore inhumane injury unrelated to stopping a combatant from continuing to fight.”

  After reading the above, you might be tempted to think that this is yet another example of the US simply ignoring international protocol – and you’d be right. But don’t worry (and here’s the punchline), the Pentagon thought about it and as it turns out, the fragmenting ammunition rule doesn’t “make much sense”, so much like territorial sovereignty in the Middle East, the US Army is free to ignore it: 

  “There’s a myth that [expanding/fragmenting bullets] are prohibited in international armed conflict, but that doesn’t make any sense now” – Richard Jackson, special assistant to the Army Judge Advocate General for Law of War

   

  

  

  

  

  

• Donald Trump: A False Flag Candidate?

  Submitted by Justin Raimondo via Antiwar.com,

  That we have to take Donald Trump seriously confirms my longstanding prognosis that we’ve entered another dimension in which up is down, black is white, and reason is dethroned: in short, we’re living in BizarroWorld, and the landscape is not very inviting. Yet explore it I must, since the reality TV star and professional self-promoter is rising in the polls, and garnering an inordinate amount of media attention – and whether the latter is responsible for the former is something I’ll get into later, but for now let us focus on what practically no one else is paying much attention to, the Trumpian foreign policy.

  Right off the bat, we run into trouble, however, since the signature sound-bites that characterize the Trump style don’t really qualify as anything close to a “policy.” Yet his various effusions on this topic do indeed translate into a mindset, which one might call blowhard-ism. And as much as it resembles the semi-coherent rantings of a drunk loudly pontificating in the dark recesses of some hotel bar at a Rotarians convention, it does reflect some “serious” trends to be found in the high-toned precincts of the foreign policy Establishment, not to mention among Trump’s fellow presidential aspirants in the GOP clown show.

  On Iraq, The Donald makes much of his alleged opposition to the Iraq war – a position no one has documented to my satisfaction – but now that we’re back there, what’s Trump’s plan? "We shouldn’t have been there,” he opines, and yet “once we were there, we probably should have stayed.” While this may sound bafflingly counterintuitive, not to mention flat out contradictory, you have to remember two things: 1) In Bizarro World, contradictions do exist, A is B, and the sensible is the impossible, and 2) Similar things were said about the Vietnam war by politicians less obviously nutso than The Donald. As Murray Rothbard put it in a 1968 newspaper column he wrote for the Freedom Newspapers chain:

  “A lot of people throughout the country are beginning to realize that getting into the Vietnam war was a disastrous mistake. In fact, hardly anyone makes so bold as to justify America’s entrance into, and generation of, that perpetual war. And so the last line of defense for the war’s proponents is: Well, maybe it was a mistake to get into the war, but now that we’re there, we’re committed, so we have to carry on.

   

  “A curious argument. Usually, in life, if we find out that a course of action has been a mistake, we abandon that course and try something else. This is supposed to be the time-honored principle of ‘trial and error.’ Or if a business project or investment turns out to be an unprofitable venture, we abandon it and try investing elsewhere. Only in the Vietnam war do we suddenly find that, having launched a disaster, we are stuck with it forevermore and must continue to pour in blood and treasure until eternity.”

  I’m editing a new collection of Rothbard’s work, entitled The Coming American Fascism and Other Essays, due out from the Ludwig von Mises Institute pretty soon, which is where I came upon this, and it got me to thinking: maybe it wasn’t the 9/11 terrorist attacks that tore a hole in the space-time continuum and blew us into Bizarro World – maybe it happened much earlier.

  At any rate, The Donald’s bloviations about staying in Iraq are nothing new: the man is a veritable volcano of well-worn bromides which he keeps stored under his toupee and emits when the occasion calls for it. Which wouldn’t distinguish him from most other politicians except for the fact that Trump’s words might as well be coming out of the mouth of a twelve-year-old. For example, in spite of his alleged opposition to the Iraq war, in 2011 he told a reporter:

  “I always heard that when we went into Iraq, we went in for the oil. I said, ‘Eh, that sounds smart.’"

  Which is precisely what a somewhat disturbed adolescent is wont to do: grab someone else’s lunch money if he thinks he can get away with it. Elaborating on his larcenous plan in 2011, Trump averred:

  “I very simply said that Iran is going to take over Iraq, and if that’s going to happen, we should just stay there and take the oil. They want the oil, and why should we? We de-neutered Iraq, Iran is going to walk in, take it over, take over the second largest oil fields in the world. That’s going to happen. That would mean that all of those soldiers that have died and been wounded and everything else would have died in vain – and I don’t want that to happen. I want their parents and their families to be proud.”

  Just like the criminally-inclined parents of a juvenile delinquent would be proud of their son’s very first bank heist. As Rothbard was fond of saying: “Are we to be spared nothing?”

  Trump’s foreign policy views belie his reputation as an unconventional politician who’s willing to say what others don’t dare even think to themselves. Indeed, he sounds like most of the other GOP presidential wannabes when it comes to the pending nuclear deal with Iran:

  “Take a look at the deal [Obama’s] making with Iran. [If] he makes that deal, Israel maybe won’t exist very long. It’s a disaster. We have to protect Israel. And we won’t be using a man like Secretary Kerry that has absolutely no concept of negotiation, who’s making a horrible and laughable deal.”

  Is Trump willing to go to war with Iran? He positively drools at the prospect:

  “America’s primary goal with Iran must be to destroy its nuclear ambitions. Let me put them as plainly as I know how: Iran’s nuclear program must be stopped – by any and all means necessary. Period. We cannot allow this radical regime to acquire a nuclear weapon that they will either use or hand off to terrorists. Better now than later!”

  And speaking of drooling, get this:

  “Who else in public life has called for a preemptive strike on North Korea?”

  I’m glad you asked. The answer is: Ashton Carter and William Perry, the former the current Secretary of Defense and the latter a former Secretary of Defense. In their jointly authored book, Carter and Perry claim then-President Bill Clinton was minutes away from authorizing just such a strike before Jimmy Carter called with the news that the North Koreans were willing to negotiate. And then there’s Rep. Peter King, another loudmouth New Yorker in the Trump mold, not to mention James Woolsey, Bill Clinton’s CIA Director, as well as this guy.

  So you think Trump is crazy? He may well be, but he’s just reflecting the general lunacy that afflicts large portions of the political class in this country. Far from opposing the elites, Trump is merely echoing – often caricaturing – their looniest effusions.

  Speaking of loony effusions, Bill Kristol has said that he’s sick of the “elite” media dissing Trump. Dan Quayle’s Brain got out his neocon playbook to declare he’s “anti-anti-Trump.” Which is interesting, since the last time a Republican anti-immigration, anti-free trade candidate arose, Kristol and his fellow neocons were in a lather of fear and loathing: that’s because Pat Buchanan was not only one of the dreaded “nativists,” he was also militantly anti-interventionist. Buchanan dared to call out Israel’s amen corner as the agitators for Gulf War I and its successor: for that, he was branded an “isolationist,” a label affixed to him also on account of his economic nostrums. Yet those same nostrums, when given a far cruder expression by Trump, evince a kind of admiration in the Grand Marshall of the laptop bombardiers. And the reason for this is Trump’s limning of the neocons’ penchant for unabashed militarism and grandiose imperialism: The Donald told a Phoenix audience over the weekend that “I’m the most militaristic person in this room.” And his prescription for what we ought to do to counter ISIS sounds like a Weekly Standard editorial:

  “I say that you can defeat ISIS by taking their wealth. Take back the oil. Once you go over and take back that oil, they have nothing. You bomb the hell out of them, and then you encircle it, and then you go in. And you let Mobil go in, and you let our great oil companies go in. Once you take that oil, they have nothing left. I would hit them so hard. I would find you a proper general, I would find the Patton or MacArthur. I would hit them so hard your head would spin.”

  Finally, one has to wonder about the provenance of the Trump phenomenon. Seemingly coming out of nowhere, it’s been attributed to a populist upsurge against the regnant elites, who are so out of touch with the people that they never saw what was coming. The media, we are told, are biased against Trump – this is one of The Donald’s chief complaints – and now The People are rising up against the Washington-New York know-it-alls with their “big words” and pretentious airs.

  Yet this analysis is lacking in one key ingredient: the facts. For the reality is that the media, far from ignoring Trump, have lavished so much attention on him that he’s eating up coverage that would otherwise go to the rest of the crowded Republican field. And that may be a clue as to what’s really going on here….

  The usual “mainstream” media tactics regarding a political outsider they hate is to ignore him or her: the example of Ron Paul should suffice to make this point. Indeed, Jon Stewart pointed this out in a memorable “Daily Show” segment, and it took Paul three runs for the White House to get their attention. Trump has suffered no such fate: quite the opposite, in fact. The Donald’s every demagogic pronouncement is faithfully recorded and broadcast far and wide. Over a hundred reporters crowded into his latest appearances in Las Vegas and Phoenix. Jeb Bush, for all the many millions stuffed into his campaign coffers, couldn’t buy that kind of exposure.

  This gift to the Trump campaign is being celebrated by Democratic politicos and consultants as if it were manna from heaven. The Republican “brand,” they aver, is being sullied beyond redemption, and they’re watching this unanticipated and providential miracle from the peanut gallery with unalloyed glee.

  And yet … just how unanticipated is it?

  As San Francisco Chronicle columnist Debra Saunders points out, Trump is not really any kind of Republican, and, what’s more, his links to the Clintons are well-documented and close:

  “In 1987, Trump registered as a Republican in New York. But in 1999, he registered with the Independence Party. In 2001, he registered as a Democrat. In 2009 he was back in with the GOP.

   

  “Hillary Rodham Clinton sat in the front row at Trump’s 2005 wedding with Melania Knauss.

   

  “According to Politico, Trump has donated more than $100,000 to the Clinton Foundation.

   

  “In the 2006 cycle, Trump donated $5,000 to the Democratic Senatorial Campaign Committee, $20,000 to the Democratic Congressional Campaign Committee, but only $1,000 to the National Republican Senatorial Committee.

   

  “When Trump flirted with running for president in 2012, CNN reported he had given $541,650 to federal Democratic candidates and committees since 1990 – more than the $429,450 he contributed to GOP candidates and committees.”

  National Review‘s Jonah Goldberg rips the veil off Trump’s alleged nativism in a by turns anguished-and-amused plea to his fellow conservatives not to be taken in by The Donald’s act:

  “You seem to think he’s an immigration hardliner, and he’s certainly pretending to be. But why can’t you see through it? He condemned Mitt Romney as an immigration hardliner in 2012 and favored comprehensive immigration reform. He told Bill O’Reilly he was in favor of a ‘path to citizenship’ for 30 million illegal immigrants:

   

  “Trump: ‘You have to give them a path. You have 20 million, 30 million, nobody knows what it is. It used to be 11 million. Now, today I hear it’s 11, but I don’t think it’s 11. I actually heard you probably have 30 million. You have to give them a path, and you have to make it possible for them to succeed. You have to do that.’

   

  “Question: Just how many rapists and drug dealers did Donald Trump want to give green cards to?”

  Trump has been playing the media with his supposed presidential ambitions for years, but it was clear then that it was just The Donald doing what he does best – promoting himself. So why now has he suddenly turned “serious”? I give that word scare quotes because 1) Serious is not a word one associates with a clown, and 2) It’s not at all clear that, for all his megalomania, he really thinks he can win the White House. He may be a lunatic but he’s far from stupid.

  And so the question jumps out at us: Why now?

  Although I have no concrete proof of my theory, there’s plenty of circumstantial evidence. His ties to the Clintons, his past pronouncements which are in such blatant contradiction to his current fulminations, and the cries of joy from the Clintonian gallery and the media (or do I repeat myself) all point to a single conclusion: the Trump campaign is a Democratic wrecking operation aimed straight at the GOP’s base.

  Donald Trump is a false-flag candidate. It’s all an act, one that benefits his good friend Hillary Clinton and the Democratic party that, until recently, counted the reality show star among its adherents. Indeed, Trump’s pronouncements – the open racism, the demagogic appeals, the faux-populist rhetoric – sound like something out of a Democratic political consultant’s imagination, a caricature of conservatism as performed by a master actor.

  Now I realize this is a “conspiracy theory,” and, as we all know, there are no conspiracies in politics. In that noble profession, everything is completely aboveboard and on the level – right?

  Like hell it is.

  

  

  

  

  

• Censored By Sanction? Barclays Freezes Accounts Of Russia's News Agency

  The UK has frozen the bank account of Russia's Rossiya Segodnya news agency without any explanation. "To close the account of one of the world’s leading news agencies is censorship, the direct obstruction of journalists’ work," Dmitry Kiselyov, head of the news agency, exclaimed, asking "what kind of press freedom and democracy can Britain claim to have if it prevents one of the world's largest news agencies from working in the country?" As RT reports, while no official justification for the move has been offered, a source in the banking sector told the agency the Exchequer has put Dmitry Kiselyov on an anti-Russian sanctions list. With David Cameron in full tyrannical 1984-mode, this latest move is perhaps not entirely surprising (though we await the boomerang from Putin).

  Last month, the EU drafted a plan to counter what it sees as “Russian disinformation activities” calling for “promotion of EU policies” in the post-Soviet space and the implementation of measures against Russian media.

   The nine-page paper drafted by the EU Foreign Service specifically mentions RT, which according to the report broadcasts “fabrications and hate speech from their bureaus in EU cities.”

   

  The Russian Foreign Ministry lashed out at the EU over the report, saying that the proposed plan is violating the right to freedom of expression and creating conditions of total discrimination against Russian media.

  

  As RT reports,

   Barclay's bank froze a Rossiya Segodnya news agency account without explaining its reasons. The agency’s head Dmitry Kiselyov has called it “censorship.”

   

  “To close the account of one of the world’s leading news agencies is censorship, the direct obstruction of journalists’ work,” Dmitry Kiselyov said. “What kind of press freedom and democracy can Britain claim to have if it prevents one of the world's largest news agencies from working in the country?”

   

  No formal notification of the move or justification for it was immediately provided. A source in the banking sector told the agency the Exchequer has put Dmitry Kiselyov on an anti-Russian sanctions list, which could have led to the news agency’s account being frozen.

   

  “This is illegal,” Rossiya Segodnya’s Editor-in-Chief Margarita Simonyan tweeted. “The sanctions imply that Kiselyov cannot travel to Europe and have personal bank accounts there. No sanctions were imposed on Rossiya Segodnya news agency.”

   

  The sanctions list, which includes the head of Rossiya Segodnya news agency, was published on March 21. It characterizes Kiselyov as “central figure of the government propaganda supporting the deployment of Russian forces in Ukraine.”

   

  Russia’s ambassador in the UK, Alexander Yakovenko, tweeted that the move is an example of using censorship against media that provides an alternative point of view.

  *  *  *

  Closure of @Rianru account by @Barclays without explanations an example of censorship against alternative media. pic.twitter.com/Ycyhmxgeue

  — Alexander Yakovenko (@Amb_Yakovenko) July 13, 2015

  One wonders when CNBC will have its account frozen for spewing constant propaganda?

  

  

  

  

  

• China Big Cap Stocks Continue Slide Despite Another Liquidity Injection; Margin Debt Rises For 2nd Day

  "This has caused me a lot of heartache. It will take some time to recover," exclaims one disgruntled (and self-admitted greedy) Chinese investor who lost it all in the recent equity market demise. "It is forever a planned market, a planned economy," which as one China policy professor noted, means "the massive state intervention, especially preventing major shareholders from selling shares and going after short sellers, has damaged financial sector reform in profound and permanent ways." Having fallen over 4.5% from its highs into the close yesterday, the CSI-300 index and FTSE China A50 are both opening weaker as nearly 30% of securities remain halted and margin debt rises for the 2nd day in a row.

  Following a major divergence in Chinese markets yesterday…

  

  It seems high beta muppetry (ChiNext and Shenzhen) is being focused on for the save and the big cap SHCOMP and CSI-300 left more alone… which makes sense as Shenzhen is where the majority of halted stocks remain.

  And the divergence continues today…

  

  Some more liquidity injected…

  • *PBOC TO INJECT 20B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  But it's not helping.

  And today it is following through weaker…

  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 1.2% TO 4,100
  • *CHINA'S SHANGHAI COMPOSITE INDEX FALLS 1% TO 3,929.32 AT OPEN

  

   

  And FTSE China A50 is reverting lower rapidly…

  • *FTSE CHINA A50 INDEX FALLS 2%

  

   

  And just as we warned earlier, they will never learn!!

  • *SHANGHAI MARGIN DEBT REBOUNDS FOR SECOND DAY AFTER STOCK ROUT

  And PBOC weakened the Yuan by the most in 2 weeks.

   

  Charts: Bloomberg

  

  

  

  

  

• Miners Buried In Billions Of Debt After "Colossal Misjudgment Of Demand"

  If one had to craft a narrative around the state of the global economic “recovery”, it might go something like this. Wildly optimistic assumptions about the sustainability of China’s torrid economic growth (and the voracious demand for raw materials which accompanied it), led to overbuilding and oversupply in the lead up to the crisis. In the aftermath of 2008, not only have multiple rounds of central bank money printing failed to provide a meaningful boost to aggregate demand, but global trade has also been hampered by China’s transition from an investment-led, smokestack economy to a model driven by consumption and services. 

  As Goldman put it in May, “there are no other markets large and/or dynamic enough to offset a slowdown in China in the foreseeable future, and we forecast trade volumes to stabilize in the period to 2018.”  This has been bad news for commodities as the following chart makes abundantly clear:

  

  It’s also bad news for the global mining industry which, as WSJ reports, borrowed “heavily” in anticipation of neverending Chinese demand. Here’s more:

  As forecasts predicting endless growth in China’s appetite for raw materials became a matter of industry faith, mining companies borrowed extensively to build networks of pits, railway lines and port terminals. Megadeals abounded as a merger-and-acquisition frenzy took hold. Cheap borrowing costs, thanks to low global interest rates, fueled the splurge.

   

  Now, as China’s hunger for resources ebbs and mining companies’ profits suffer amid falling commodity prices, those debts have become an albatross around the industry’s neck. 

   

  Amid a slump in Chinese share prices last week, metals such as copper and aluminum fell to near six-year lows. Iron ore at one point hit its weakest level for a decade.

   

  “There’s been a colossal misjudgment of future demand,” said Dali Yang, professor of political science at the University of Chicago. “That long boom made it especially difficult for people to expect anything otherwise. Many bought the big story about urbanization, instead of thinking how things could go bad.”

   

  The world’s largest mining companies by market value had accumulated nearly $200 billion in net debt by 2014, six times higher than a decade ago, according to consultancy EY, while their earnings only increased roughly two-and-a-half times. Large mining companies have written off roughly 90% of all the acquisitions they made since 2007, according to Citigroup Inc.

   

  Even if top mining companies devoted all their earnings less investment spending to paying down debt, it would take up to a decade to clear the decks, according to a Wall Street Journal analysis of EY data.

   

  Mining companies cut big project spending recently, but many still face the decision to reduce dividends to shareholders, or borrow more to keep funding high payouts, risking downgrades to their credit ratings that would drive up interest costs—even as they still need to spend to shore up aging mines. “Something has to give,” said EY’s global mining leader, Mike Elliott.

   

  An old-fashioned gold-rush mentality underpinned the mining sector’s debt binge. The logic was simple. As China’s economy grew, and more Chinese people moved from villages to cities, the country would need ever-increasing amounts of metals—particularly the steelmaking ingredient iron ore—to build homes, office buildings and other infrastructure.

   

  “Analysts are popularly criticized for ?thesis creep, the incremental mutation of a call’s drivers over time, such that it’s not really clear that the original call was just plain wrong,” said Morgan Stanley mining analyst Tom Price. “I suspect the same thing’s happened here with the Big Mining’s view on China’s iron ore.”

  This serves as still more evidence of how central bank policy, ostensibly designed to stoke inflation and save the world from a brush with the deflationary boogeyman, has ironically served to perpetuate the global deflationary supply glut, a dynamic we’ve outlined on a number of occasions this year, but which found perhaps its most unequivocal expression in “When QE Leads To Deflation: A Look At The Confounding Global Supply Glut.” Here’s what we said in April:

  Those who have access to easy money overproduce but unfortunately, they do not witness a comparable increase in demand from those to whom the direct benefits of ultra accommodative policies do not immediately accrue. Meanwhile, governments are reluctant to spend in the face of heavy debt burdens and increased scrutiny on fiscal policy in the wake of the European debt crisis while China, that all important source of voracious demand, is in the midst of executing the dreaded “hard landing.

  Rock-bottom borrowing costs and easy access to capital markets made possible by accommodative central bank policies tempt insolvent producers to keep producing, contributing to their own demise by driving prices even lower, a vicious circle which creates Matt King’s dreaded “zombie companies”:

  

  And finally, in an effort to connect all the dots, we’ll close with the following from Credit Suisse, who notes that another theme we’ve been keen to emphasize lately is in fact serving to exacerbate sluggish demand for the world’s commodities surplus:

  Three years on from commodity price peaks and we are still searching for the floor in bulks pricing, let alone any recovery. This is not the usual bust after a mining boom, but the down-half of the supercycle. Rather than a couple of excess mines, the entire iron ore and coal sectors are geared towards growth that has gone missing. For the rest of the metals, with China’s demand drive cooling, we have to return to looking at global growth. Unfortunately, money supply is contracting, with governments running austerity budgets and corporates returning cash to investors. Commodity consumption cannot grow when investment is spurned.

  

  

  

  

  

• How The Greek Deal Almost Collapsed At 6am In The Morning

  What began at Saturday’s Eurogroup meeting as a contentious exchange between EU finance ministers (who experessed their extreme consternation at the projected size of a Greek ESM package which was suddenly 43% larger than the figure from the Greek proposal thanks to a €25 billion provision for bank recapitalization) nearly ended in a Grexit, both figuratively and literally when, at 6am Monday morning Brussels time, Greek PM Alexis Tsipras headed for the door after discussions with Angela Merkel hit what both leaders deemed to be an intractable stalemate.

  Or so the story goes.

  For those who enjoy a good narrative, here are the details via FT: 

  The closest Greece has come to leaving the eurozone was at around 6am on Monday morning, just as dawn was breaking over Brussels.

   

  Alexis Tsipras of Greece and Angela Merkel, the German chancellor, decided after 14 hours of anguished talks that they had reached a dead end. With no room for compromise, neither saw any reason to carry on. Grexit was the only realistic option.

   

  As the two leaders made for the door it was Donald Tusk, the president of the European Council, who moved to prevent the fatigue and frustration from triggering a historic rupture for the eurozone.

   

  “Sorry, but there is no way you are leaving this room,” the former Polish prime minister said.

   

  The sticking point was the size and purpose of a privatisation fund to be backed by sequestered Greek assets. Ms Merkel wanted the €50bn of sales to be devoted to debt repayments; Mr Tsipras saw that as a national humiliation that would cede control of assets worth almost a third of Greek national income. His alternative was a smaller fund, whose proceeds would be reinvested in Greece.

   

  A compromise was ultimately found after more than an hour discussing nearly a dozen different structures. It was to be the coda to a weekend that featured one of the most exhausting and fraught negotiations in a seemingly interminable crisis that has provided the EU’s sternest test.

   

  
  

  Yes, a “compromise” was found, and one which has undoubtedly left the majority of Greeks wishing Tsipras had ignored Tusk and simply announced to the world that the drachma was about to make its not-so-triumphant return to the global FX markets because by sticking around, the PM who came to Brussels with a clear mandate to lead his country out of the euro “with his head held high” (to quote Nigel Farage) left without €50 billion in airports, planes, and infrastructure and more importantly, without the collective pride of the Greek people.

  Thanks Donald Tusk.

  

  

  

  

  

• "Someone Has To Be Held Accountable", House Committee Presses Fed On Leaks

  When last we checked in with Rep. Jeb Hensarling, the Chairman of the House Committee on Financial Services, he was in the process of learning a frustrating lesson about central bankers in the post-crisis world.

  What Jeb might not have realized when he subpoenaed the Fed for information on how the September 2012 FOMC minutes managed to get leaked to Medley Global Advisors (just four months after Janet Yellen met with the firm) is that whatever pretension of accountability the position of Fed chair retained in the lead up to the crisis disappeared entirely when Ben Bernanke ‘saved the world’ from financial armageddon in 2008. 

  Since then, central bankers have become celebrities and like celebrities, are generally above the law, a fact Yellen probably thought she had made clear to Hensarling when she simply refused to cooperate with the subpoena.

  As a reminder, here is the sequence of events (from the beginning): 

  On October 3, 2012, consulting firm Medley Global Advisors sent a newsletter to clients entitled “Fed: December Bound.”

   

  The “special report” essentially constituted an early leak of the minutes from the FOMC’s September meeting.

   

  

  Source: ProPublica

   

  An internal investigation by then-Chairman Bernanke revealed that some members of the committee had met with the firm that year but the names were not disclosed. On April 15, Congress sent Yellen a letter requesting that the Fed furnish a list of names no later than April 22.

   

  That deadline came and went with no response. 

   

  On May 4, the Fed acknowledged a DoJ and OIG criminal investigation into the leak, and in the same letter, Yellen admitted that indeed, she had met with the analyst who penned the newsletter at the center of the controversy.

   

  Subsequently, The Committee on Financial Services subpoenaed the Fed for records related to the central bank’s review.

   

  The Fed has declined to comply in full citing the ongoing criminal investigation. More specifically, Yellen says the OIG has advised the Fed that providing access to the information requested by congress would risk “jeopardizing the investigation.”

  
  

  

  Well, Hensarling – bless his heart – isn’t giving up and will now interview “a number” of Fed staffers in connection with the leak according to WSJ. Here’s more:

  A House panel has lined up “a number” of interviews with Federal Reserve staffers related to the possible leak of confidential information from a 2012 Fed policy meeting, the panel’s chairman said in an interview.

   

  House Financial Services Committee Chairman Jeb Hensarling (R., Texas) said the Fed has no legal basis for refusing to comply fully with a subpoena from the committeeon the leak probe. He also argued the Fed has no grounds to invoke “executive privilege,” the authority claimed by the president or other executive branch agencies to avoid releasing certain information.

   

  “They are violating the law at the moment,” Mr. Hensarling said.

   

  Fed Chairwoman Janet Yellen has said turning over the information at this time could interfere with an ongoing criminal probe of the matter. She said the Fed intends to cooperate as soon as its inspector general, which is conducting the criminal probe with theJustice Department, indicates that doing so won’t compromise their investigation.

   

  Ms. Yellen did, however, provide the names of Fed staffers who had contact with the policy information service firm that published the information.

   

  “We do have transcribed interviews with a number of witnesses that are lined up, but we haven’t quite seen eye-to-eye on the production of documents,” Mr. Hensarling said, adding that he is trying “to be respectful” and work with the central bank.

   

  Asked if the committee may move to hold the Fed chairwoman in contempt—the next step in the process—Mr. Hensarling declined to say.

   

  “We want the chair to tell the truth,” he said. “Somebody has to be held accountable.”

  We sincerely wish Hensarling the very best of luck in this endeavor but we can’t say we are particularly optimistic about his chances. 

  Yellen will give her semi-annual Humphrey-Hawkins testimony to Congress on Wednesday and Thursday this week. Perhaps some brave soul will interrupt the litany of liftoff dialogue with some tough questions about transparency and accountability.

  Then again, judging from the response WSJ’s Pedro da Costa got when he dared to question Yellen about the leaks, we doubt she’ll be very forthcoming if pressed.

  *  *  *

  Artist’s impression of the honorable Chairwoman if questioned about the leak:

  

  

  

  

  

• This Weekend's Greece Negotiations Explained In 60 Seconds (By Darth Vader)

  “Sources” say this is how it all went down…

   

   

  Because sometimes you just have to laugh… or you’ll cry yourself to sleep again.

   

  h/t @ShoutingBoy

  

  

  

  

  

• Will Chinese Farmers Never Learn?

  A 30-40% decline in indices and still it appears the average Chinese person thinks “making money trading stocks is easier than farmwork.” As the following chart shows, a thundering herd of margin calls, panicing policy makers, and media frenzy has done nothing to dampen renewed gambling fever in what is now the most speculative nation in the world as margin-financing as a percent of trading volumes has exploded once again in the last few days…

   

  Margin’s back baby!!! You can’t keep a bad market down…

  

  Source: @WeiDuCNA

  
  

  BTFCrash… or CTFFKnife?

  

  

  

  

  

• David Einhorn Says Varoufakis "Must Not Be Familiar With The Tyler Durden School Of Negotiation"

  Today everyone has chimed in to opine on what was, without doubt, the most historic weekend in European history: one in which we saw the Eurozone’s true face when, despite not have a legal right to do so, Germany almost unilaterally expelled “temporarily” one of its core members. Now, it’s David Einhorn’s turn.

  * * *

  Last year, it appeared that Greece had finally turned the corner after years of suffering through imposed austerity and the resultant 25% collapse in GDP. Much like the Seahawks’ ill-fated decision to pass the ball at the end of Superbowl XLIX, instead of giving it to monster running back Marshawn Lynch, Greece snatched defeat from the jaws of victory by electing the populist anti-austerity, pro-debt-writedown, Syriza coalition.

  Puerto Rico’s governor recently said of its own debt, “This is not about politics; it’s about math.” The math for Greece is easy: austerity hasn’t improved the economy and its debts are unsustainable. Knowing this, Syriza no longer wanted to play the “extend and pretend” game. Further, Greece’s recently resigned finance minister Yanis Varoufakis believed they wouldn’t have to. Mr. Varoufakis, who kept reminding everyone that he is a professor of game theory, believed that the European leaders would prefer to make concessions now rather than manage the disruption of a Greek default. He must not be familiar with the Tyler Durden school of negotiation: the first rule of using game theory is you do not talk about using game theory. What’s more obvious is that Syriza didn’t understand what the game is.

  This is not about math; it’s about politics. Consider that the main difference between Greece and France is that France is a big fan of extend and pretend. And as long as France says it will pay, its bonds might yield just a bit more than Germany’s. Though Greece has a superficially unmanageable ratio of debt to GDP, the debt had been restructured so that there is little debt service burden for the next several years. Politically, European leaders prefer to leave the future problems in the future. Syriza’s refusal to play along is a problem not just for bondholders but also for those holding seats of power. The European leaders fear that if Syriza can claim even a moral victory, it will inspire other European countries to oust their current leaders in favor of populist governments who campaign on the promise of debt repudiation.

  Though Mario Draghi promised he would do whatever it takes to save the euro, that doesn’t include lifting a finger to assist Greece financially or in any way signal that the ECB has Greece’s back. Just days prior to the January elections, Mr. Draghi announced that the ECB would exclude Greece from quantitative easing for at least six months. Doing whatever it takes is proving to be a conditional promise, as denying Greece access to the capital markets is a key tenet of the European strategy to pressure Syriza.

  For anyone still missing the joke, Bank of Japan Governor Haruhiko Kuroda summarized the view of the global central planners when he said, “ trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’ Yes, what we need is a positive attitude and conviction.” Perception supplants reality. The moment leaders (or markets) start making it about the math, gravity comes into play.

  The result is that Europe is unwilling to allow Syriza a face-saving compromise, even if that means Greece collapses and the rest of Europe suffers. At this writing, Syriza has capitulated by proposing a deal which leaves Greece with even more austerity than when negotiations began and no actual debt forgiveness. This might not be enough, as the grand goal of the European  negotiators appears to be to discourage other countries from electing populists.

  

  

  

  

  

• Germany Just Killed Its Golden Goose

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  Personally, like most of you, I always thought Germany, besides all its other talents, good or bad, was a nation of solid calculus and accounting. Gründlichkeit. And that they knew a thing or two about psychology. But I stand corrected.

  The Germans just made their biggest mistake in a long time (how about some 75 years) over the weekend. Now, when all you have to bring to a conversation slash negotiation is bullying and strong arming and brute force, that should perhaps not be overly surprising. But it’s a behemoth failure all by itself regardless.

  First though, I want to switch to what Yanis Varoufakis told the New Statesman in an interview published today, because it’s crucial to what happened this weekend. Varoufakis talks about how he was pushing for a plan to introduce an alternative currency in Greece rather than giving in to the Troika. But Tsipras refused. And Yanis understands why:

  “Varoufakis could not guarantee that a Grexit would work …

   

  …[he] knows Tsipras has an obligation to “not let this country become a failed state”.

  What this means is that Tsipras was told by the Troika behind closed doors, to put it crudely: “we’re going to kill your people”. He was made an offer he couldn’t refuse. And Tsipras could never take that upon himself, even though the deals now proposed will perhaps be worse in the medium to long term, even though it may cost him his career.

  Criticism of the man is easy, but it all comes from people never put in that position. Varoufakis understands, and sort of hints he might have had second thoughts too if he were ever put in that position.

  There’s not much that separates Schäuble and the EU from the five families that rule (used to rule?!) New York City. If you need proof of that, come to Athens and check out the devastated parts of the city. Germany and the Troika are as ruthless as the mob. Or, rather, they’re worse.

  My point is, their attitude and antics will backfire. You can’t run a political and/or monetary union that way. And only fools would try.

  The structure of the EU itself guarantees that Germany will always come out on top. But they can only stay on top by being lenient and above all fair, by letting the other countries share some of the loot.

  To know how this works, watch Marlon Brando, as Don Corleone, talk to the heads of the five families in the Godfather. You need to know what to do to, as he puts it, “keep the peace”. He’s accepted as the top leader precisely because the other capos understand he knows how.

  The Germans have shown that they don’t know this. And therefore, here comes a prediction, it’ll be all downhill from here for them. Germany’s period of -relative- economic strength effectively ended this weekend. The flaws in its economy will now be exposed, and the cracks will begin to show. If you want to be the godfather, the very first requirement is you need to be seen as fair. Or you will have no trust. And without trust you have nothing. It is not difficult.

  Germany will never get a deal like the EU has been for them, again. It was the best deal ever. And now they blew it, and they have no-one to blame but themselves. And really, the Godfather metaphor is a very apt one, in more ways than one. Schäuble could never be the capo di tutti capi, no-one would ever trust him in that role. Because he’s not a fair man. But he still tries to play the role. Big mistake.

  The people here in Greece are being forced to pay for years for something they were never a part of, and that they never profited from. The profits all went to a corrupt elite. And if there’s one thing Don Corleone could tell you, it’s that that’s a bad business model. Because it leads to war, to people being killed, to unrest, and all of that is bad for business.

  I must admit, I thought the Germans were smarter than this. They’re not. That much is overly obvious now. No matter what happens next, deal or no deal on Greece, and that’s by no means a given yet, don’t let the headlines fool you, no matter what happens, Germany loses.

  It’s not just about Greece, it’s about the whole EU. The Troika thinks that by scaring the living daylights out of the periphery, its power will increase. They even think it’ll work with France. Good luck with that. They’ll be facing Marine Le Pen soon, and Podemos, and M5S, and these antics will not work on them.

  I guess the main thing here is that Don Corleone was not a psychopath or sociopath, and that’s more than you can say for Schäuble and Dijsselbloem and Juncker and their ilk. These people simply lack the social skills to lead any organization, because all they understand is power and force, and that is simply not enough. While brute force may look attractive and decisive and all, in the end it will be their undoing.

  I’m sure the vast majority of them have seen the Godfather films, but they’ve just never understood what they depict; they don’t have the skillset for it.

  Germany just killed its golden goose. And boy, is that ever stupid. They could have had -again, relative, we’re in a recession- peace and prosperity, and they’re blowing it all away.

  Tsipras for obvious reasons cannot talk about the threats he’s been receiving, but he did give up some hints early this morning:

  • “We took the responsibility for the decision to avert the most extreme plans by conservative circles in Europe..”

  • “I promise you that as hard as we fought here, we will now fight at home, to finish the oligarchy which brought us to this state.”

  • “We resisted demands for the transfer of state assets abroad and averted a banking collapse which had been meticulously planned.”

  • “… decision to avert the most extreme plans by most extreme circles in Europe”

  The Italians and Spanish and French have noted every word of this, and more. Europe as it is, is already over. Everything from here on in is a mere death rattle.

  

  

  

  

  

• How High Frequency Traders Broke, And Manipulated, The Treasury Market On October 15, 2014

  We were amused to read some interpretations of today’s long-awaited joint-staff report (prepared by the Treasury, Fed, SEC and CFTC) attempting to “explain” the flash smash in Treasury prices on October 15, 2014 when as a reminder, Treasury prices exploded and yields plunged just around 9:34 am from a level of 2.20% to just over 1.95%…

  

  

   

  … which did everything in their power to deflect attention from High Frequency Trading.

  Case in point: the WSJ, which earlier today said that “U.S. officials concluded there was ““no single cause” of the unprecedented volatility that hit U.S. Treasury markets Oct. 15, 2014, citing instead broad changes in the structure of Treasury markets, including the growing role of high-speed trading.”

  To an extent the WSJ is right: the report does everything in its power to obfuscate and shift the blame away from the true culprit: “For such significant volatility and a large round-trip in prices to occur in so short a time, with no obvious catalyst, is unprecedented in the recent history of the Treasury market,” the report said of the events on October 15.

  To push the official position, the WSJ adds that “the staff examined nonpublic trading data before, during, and after a 12-minute window during the morning of October 15 in which the yield on a key U.S. Treasury note plummeted, then quickly rebounded. They concluded there was “no obvious catalyst” in the news that morning.”

  That is correct: the plunge came out of nowhere, with no catalyst at all – something market watchers see every day in equities, commodities and FX – and if it had all the telltale signs of an HFT momentum-ignition stop hunting spasm gone horribly wrong, it is because that was precisely what it was.

  Which is why the WSJ promptly trotted out some of the most washed out and discredited experts it could find: such as Irene Aldridge.

  Irene Aldridge, a markets expert at ABLE Alpha Trading Ltd., who sits on a subcommittee addressing high-frequency trading at the Commodity Futures Trading Commission, said her firm found “a spike in abnormal market activity” on October 15.

   

  She said she didn’t see much evidence that high frequency trading firms were chiefly to blame for the spike, and instead pointed to a wide array of macroeconomic forces and large cross-border trading activity that occurred that day and in the days prior.

  The fact that Irene Aldridge who once upon a time, long before HFT started strategically crashing every single market in which they were introduced courtesy of Getco, Virtu and Citadel, appeared with Jon Stewart’s “cash cow” to “explain” HFT… 

  The Daily Show
  Daily Show Full Episodes,  More Daily Show Videos,  Comedy Central Full Episodes

   

  … is less troubling than the fact that she actually sits on a CFTC HFT subcommittee because she is perceived to be an expert.

  In any event, while the WSJ did everything it could to defend HFT, Bloomberg apparently was unaware that it had to pick its words carefully and do all in its power to defend Citadel’s (the NY Fed’s preferred arms-length trading venue) market manipulation in every asset class, and ahead of the report’s release said that “U.S. officials have concluded that high-frequency trading contributed to the Treasury market’s wild ride last October, a finding that will probably add to regulatory scrutiny of the industry.”

  Further proof that Bloomberg’s Ian Katz did not get the memo that while the joint-staff report identified HFTs as the culprit behind the Oct. 15 “anomaly”, such an assessment was not to be made publicly was the next paragraph:

  While a soon-to-be-published government report won’t point to just one cause, it will cite speed traders as playing a key role, according to a person with direct knowledge of the study. Treasury yields plunged the most in five years on Oct. 15, 2014, before recovering, fueling a months-long debate over whether something has fundamentally changed in a $12.7 trillion market that most investors consider a safe haven.

   

  * * *

  While Fed officials concede Dodd-Frank has probably had some effect on price swings, they’ve joined Lew in flagging high-frequency trading as an important factor.

   

  The strategy typically involves using ultra-fast technology and placing computer servers close to exchanges to react to market data as quickly as possible. Such trading has drawn increased attention from regulators since the May 2010 flash crash, when $1 trillion of value was briefly erased from U.S. stocks.

   

  “Their trading patterns are different,” Fed Governor Lael Brainard said last week at an event in Washington. “As they take a preponderance of the trading activity in some markets, that no doubt also may change the patterns of liquidity resilience.”

  So back to the report which indeed tries to distance itself from HFT as the primary culprit of the yield crash at 9:34 am, by saying “While no single cause is apparent in the data, the analysis thus far does point to a number of findings which, in aggregate, help explain the conditions that likely contributed to the volatility.”

  And an amusing sideline: after back in 2009 Zero Hedge was one of the first to use the term High-Frequency Trader, or HFT, a monicker which since stuck and has become a popular pejorative to explain away all broken markets and microstructure manipulation, the report first and foremost does what every good report seeking to defend the object it is accusing, does: change the name. Sure enough, gone is “HFT“, and instead the report uses “PTF” or “Principal trading firms” instead, which is clear enough: since HFTs trade for their own account, we are happy with this new name, which unfortunately for the Modern Markets Initiative lobby which surely spent a lot of money to get HFT changed to PTF, will not stick.

  So any time readers encounter PTF, just think HFT.

  What are the report’s main findings:

  • An analysis of transactions shows that, on average, the types of firms participating in trading on October 15 did so in similar proportions to other days in the sample data. Principal trading firms (PTFs) represented more than half of traded volume, followed by bank-dealers. Both bank-dealers and PTFs continued to transact during the event window, and the share of PTF trading increased significantly.
  • The trading volume of PTFs and bank-dealers in the cash and futures markets is highly concentrated in the most active firms. In the cash market, for instance, the 10 most active PTFs conducted more than 90 percent of the trading activity of all PTFs on October 15, while the 10 most active bank-dealers accounted for nearly 80 percent of the trading activity of all banks. The concentration findings were generally similar for the futures market.
  • A review of position changes shows sizable changes in net positions by different types of participants following the retail sales data release. However, during the event window, only modest changes in net positions occurred, suggesting that changes in global risk sentiment and associated investor positions may help to explain a portion of the price movements during the day, but do not appear to explain the round-trip in prices during the event window itself.
  • During the event window, an imbalance between the volume of buyer-initiated trades and the volume of seller-initiated trades is observed, with more buyer-initiated trades as prices rise in the first part of the window, and more seller-initiated trades as prices fall in the second part of the event window. Such imbalances are common during periods of significant directional market moves. Both bank-dealers and PTFs initiate these liquidity-removing trades, though PTFs account for the largest share. At the same time, strong evidence suggests that PTFs, as a group, also remained engaged as liquidity providers throughout the event window, implying that more than one type of PTF strategy was at work.
  • Several large transactions—though not unusual in size relative to other sample days— occurred between the retail sales release and the start of the event window. Some coincided with a significant reduction in market bid and offer depth—both during this interval and at the start of the event window itself. But during the event window, the analysis does not suggest a direct causal relationship between the volatility and one or more large transactions, orders, or substantial position change.
  • The significant reduction in market depth following the retail sales data release appears to be the result of both the high volume of transactions and bank-dealers and PTFs changing their participation in the cash and futures order books. During the event window, bank-dealers tended to widen their bid-ask spreads, and for a period of time provided no, or very few, offers in the order book in the cash Treasury market. At the same time, PTFs tended to reduce the quantity of orders they supplied, and account for the largest share of the order book reduction, but maintained tight bid-ask spreads. Both sets of actions prompted the visible depth in the cash and futures order books to decline at the top price levels.
  • The time required by the futures exchange to process incoming orders, or “latency,” increased just prior to the start of the event window. This latency was associated with a significant increase in message traffic—in this case elevated due to order cancellations. Transaction data also show a higher incidence of “self-trading” during the event window. For the purpose of this report, self-trading is defined as a transaction in which the same entity takes both sides of the trade so that no change in beneficial ownership results. Although self-trading represented a non-trivial portion of volume, this activity also appears on days other than October 15 in the sample. Any causal connection between the unusually high level of cancellations or the self-trading and the event window at this time remains unknown.

  Which brings us to the report’s conclusion:

  In sum, record trade volumes, a decline in order book depth, changes in order flow and liquidity provision, and notable and unusual market activity together provide important insight into the factors that may have contributed to the heightened volatility, decreased liquidity, and round-trip in prices on October 15.

  In short: a lots of words to show just one chart which is the only one that mattered.

  

  What does this chart show? Recall from the top chart that the peak of the chaotic yield plunge (and price surge) took place at precisely 9:34 (and 3 second). Here is the official explanation of what the chart shows:

  Figure 3.29 shows the message rate and latency build-up within a single second around 9:34 ET at millisecond resolution, illustrating how a peak message rate of around 40 messages per millisecond results in a gradual slowing down of the response time of the matching engine. Once the messaging rate fell, trading platform latency quickly returned to previous low levels. While the message cancellations observed very near the beginning of the event window were not a direct cause of price movements at the time given their distance from the market price, the associated latency would have affected the trading speeds of other market participants by increasing the time lag between initial order entry and possible execution on the platform. As some market participants monitor latency and include it as a variable in their trading strategies, sudden changes in latency would cause them to adjust their behavior.

  Still unclear: here’s more. “Given the finite capacity of any matching engine to simultaneously process messages and execute matches between buyers and sellers, extremely high message rates appeared to cause trading platform latency to temporarily jump higher.”

  

  This is what happened: a massive burst of quote stuffing (seen with absolute clarity on Figure 3.29 above) in the form of a surge in message, resulted in a burst of accumulated order latency, which in turn was the catalyst to send the price soaring from 129 to over 130 in the span of 5 minutes, and then sliding back down again once the quote stuffing effect was eliminated.

  Seem familiar? This is precisely what we, in collaboration with Nanex, said was the reason for the Flash Crash of May 2010 – not some scapegoat Indian trading out of his parent’s basement in a London suburb, but either a malicious, premeditated rogue algo or else a freak algorithm whose programmers lost all control over. For those who have forgotten, we urge re-reading: “How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment.”

  Whichever case, it was quote stuffing that single-handedly destabilized the market, first in stocks in May 2010 and then in Treasurys in October 2014.

  Confirming that it was all PTFs, pardon HFTs, is a chart showing the burst in volume by firm/order type which not surprisingly was all HFT…

  

  … coupled with the collapse in market depth as HFT added tons of volume and eliminated all the market debt, also known as liquidity.

  

  As it turns out HFTs not only don’t add liquidity, they actively eliminate it! How ironic that this is precisely the opposite of what the HFT lobby claims it does. And this time it is not some tinfoil hat allegation: it is documented in a Fed, Treasury, SEC, CFTC paper.

  Furthermore, it wasn’t just quote-stuffing with order message blasts, it is also a surge in order cancelations and self-trading – all telltale signs of rogue HFT algos.

  Analysis of transaction and order book data during the event window revealed two notable patterns in activity on October 15, high levels of cancellations and self-trading, but whether this activity contributed to the rapid price movements is unknown.

   

  The cancellation activity witnessed in the invisible futures order book also resulted in a highly volatile total order book depth (including visible and invisible orders) in the futures market (Figure 3.30). In the futures market, the portion of the order book that is not visible to market participants (that portion that rests at levels outside the top 10 best bid and offer price levels) can represent anywhere from 50 to 90 percent of total market depth—witnessed both on October 15 and the control days.

  Ok cancellations we have covered extensively in the pastt but self-trading, as in the HFT firms “buys” and “sells” from itself? Why yes:

  A second notable aspect of trading on October 15 was the heightened level of self-trading during portions of the event window. Self-trading, for the purpose of this report, is defined as a transaction in which the same entity takes both sides of the trade so that no change in beneficial ownership results. Self-trades appeared in both cash and futures market data at varying levels across firms and time periods.28 In the cash market for 10-year Treasury securities, for example, self-trading represents 5.6 percent of the total activity on control days, and 4.2 percent on October 15 (Table 3.9).

  How is this possible, or better, legal? Simple: this is precisely what HFT is all about – creating the illusion of activity to force out real orders and frontrun them.

  The bulk of self-trading in cash and futures markets was observed among PTFs, perhaps due to the fact that such firms can run multiple separate trading algorithms simultaneously. For instance, one of these algorithms could specialize in placing buy or sell limit orders at the top of the order book while another could specialize in initiating trades given specific conditions in that market, potentially leading one algorithm to end up being matched with another algorithm from the same firm. In addition to PTFs, the cash data also showed a very small amount of selftrading by bank-dealers and hedge funds, some of which are also known to trade algorithmically.

  Sure enough, in addition to everything else noted previously, self-trading was a dominant feature during the flash smash period:

  During the event window, the data showed that the share of overall transactions resulting from self-trading was substantially higher than average. At the 10-year maturity, it reached 14.9 percent and 11.5 percent for cash and futures, respectively, during the move up in prices in the event window (Figure 3.31). During the retracement, when the price moved back down rapidly, the share of self-trading declined to 1.2 percent and 4.8 percent in cash and futures, respectively. Moreover, the concentration of self-trading volume among PTFs was very high in both markets during the event window. Another aspect of self-trading flows during the event window was its directional nature (Figures 3.32 and 3.33). For example, between 9:33 and 9:39 ET, the cumulative net aggressive buyer- minus seller-initiated self-trade volume increased by around $160 million in the cash 10-year note, accounting for close to one-fifth of the total imbalance between buyer and seller initiated trades observed over that time interval

  So… say you want to sent the price of a security, whether cash or derivative, soaring, what do you do? Why you just buy and sell from yourself at a furious pace, lifting the bid ask ever higher to draw out any organic, hidden order flow. And one you have achieved your goal, or fail to draw out momentum piggy backers, or halt self-trading and the price tumbles back to pre-manipulation levels.

  And there you have it: this is precisely how HFTs, pardon, PTFs, caused the bond market shock of October 15. But don’t worry, according to both the report, the WSJ, and Irene Aldridge, there was not “one single cause.”

  * * *

  All of this is known to our readers: we have covered virtually every aspect of fragmented, broken markets and price manipulation via HFT algorithms for over six years. We are delighted to see the biggest market regulators and supervisors admit, if tacitly, that our “conspiracy theories” have been right all along.

  But what is surpising is that unlike the SEC’s Flash Crash report which was a travesty and blamed the crash on Waddell and Reed, to be followed by another travesty of a report, one which has sent an innocent trader behind bars, this time HFT is explicitly, if not deliberately, singled out.

  Which in our opintion sets the stage. The stage for what? Why blaming the upcoming market crash on HFTs, of course.  As Bloomberg commented, these findings “will probably add to regulatory scrutiny of the industry.”

  The reality is that regulators know very well what is really going on in the markets, and now that HFTs have been exposed as the catalyst for the bond market crash, when the inevitable stock market crash – a crash that will be the result far more of the ruinous decisions of central planners around the globe – it will be the HFTs, pardon, PTFs that will be the first to blame, while the central bankers do their best to quietly slip out to a non-extradition country.

  Just look at China: the government is so terrified of losing control over its own stock market bubble and the potential for violent, social conflict that would result, that it will throw everything at the market to support it. In the US, the regulators are already one step ahead: they know a crash is inevitable, and the only thing they need is the scapegoat to blame it on when it all comes crashing down.

  Nameless, faceless algos would be just the perfect scapegoat.

  h/t Eric Hunsader

  Source: Joint Staff Report: The U.S. Treasury Market on October 15, 2014
  

  

  

  

  

  

• Is the Dollar Signaling Another 2008-Type Autumn is Coming?

  At this point the Greek crisis is beyond farcical; you couldn’t make up a more absurd plot if you tried.

   

  Greece’s Prime Minister Alexis Tsipras allowed Greece to default on a debt payment to the IMF in order to give the Greek people the opportunity to vote on whether or not to accept a particular EU offer.

   

  Last week, the Greek people overwhelmingly voted against the offer. Tsipras then went to the EU to seek a compromise… only to be told that EU leaders were fed up and wanted Greece out of the Euro. So Tsipras agreed to a deal that is much worse for Greece.

   

  The whole deal has blown up in his face. And it’s going to consolidate Germany’s control of the EU. Instead of shifting power away from Germany by introducing the threat of “default” to negotiations, this deal added a new weapon the Germany’s arsenal: the threat of Euro expulsion.

   

  The threat has worked. Greece must fork over €50 billion in assets in exchange for the deal. By assets, I mean “airports, infrastructure, and most certainly banks.”

   

  This represents an incredible 27% of Greek GDP. Greece, in essence, is handing over a quarter of its economy to Germany control. So much for any notion of borders, independence, or even sovereignty. Greece is now, for all extensive purposes, something of a German colony.

   

  Greece also has to submit to six months of capital controls.

   

  Interestingly, stocks are moving higher on the news… but so is the US Dollar. This is likely due to the fact that while Greece will remain in the Euro, Greek banks remains completely insolvent. Also, why anyone would want to move capital into an economy or currency in which confiscation of assets, capital controls, and the like are allowed is beyond me.

   

  Remember, stocks are the “dumb” money. The currency markets are ALWAYS ahead of them. So the US Dollar’s strength is indicative that “all is not fixed” in Euroland.

   

  Indeed, the Dollar has just broken out of a falling wedge pattern.  This is a BULLISH development.

  

   

  The whole thing feels a bit like the summer of 2008 all over. Once again, the global economy is weakening, a significant crisis has erupted, and temporary solutions to said crisis are being hailed as a success.

   

  And then, as now, the US Dollar’s strength was the first sign that all was NOT well, the crisis was nowhere near over, and that big trouble was stirring in the financial system.

   

  

   

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

   

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

   

  We are down to the last 25…

   

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

   

  Best Regards

  Phoenix Capital Research

   

   

   

  

  

  

  

• US Automakers Worst Nightmare: Chinese Auto Inventories Explode In May

  A week ago we exposed the massive number of cars piling up in GM's parking lots in China. A few days later, we note that Chinese auto sales have collapsed at the fastest rate in 3 years and an increasing number of new orders are being cancelled as the stock market crashes. But the triple whammy for US auto manufacturers – who have incessantly pitched China as their growth engine – is news from Huaxia Times that China's import car dealers saw inventory days reach a mind-blowing 143 days in May. For context, the normal average has been 24-36 days. Once again it appears the serial extrapolators at the automakers, excited by the serial extrapolators at the big banks have excitedly mal-invested right at the turn.

  Car Sales tumbling…as The Wall Street Journal reports,

  China sold 1.51 million passenger vehicles last month, down 3.4% from a year earlier, the China Association of Automobile Manufacturers said Friday. That compares with a 1.2% year-over-year rise recorded in May and a 3.7% increase in April.

   

  The performance was the worst since February 2013 when car sales fell 8.3% on-year during the weeklong Lunar New Year Holiday when car showrooms are closed. Stripping out the holiday factor, the last time China’s car market posted a decline was in September 2012, when a territorial dispute between Beijing and Tokyo over a group of uninhabited islands in the East China Sea hit demand for Japanese cars.

   

  … also cut its growth forecast for China’s automobile market in 2015 to 3% from the previous 7%.

   

  “2015 will be an off-year for the Chinese car market,” said Dong Yang, a vice president for the auto manufacturers’ association. He said the slowdown was caused by a confluence of factors including the cooling economy, increasing restrictions on car ownership to combat congestion and pollution and stock market volatility.

   

  “Neither a bull market nor bear market does good to car sales. Our surveys of dealers show that visiting volumes to car showrooms dropped sharply in the first-half,” said Mr. Dong.

   

  …

   

  “The painful market adjustment currently under way is far from over,” he said.

  *  *  *

  Auto Inventories exploding…

  Huaxia Times: China's import car dealers saw inventory days reach 143 days in May vs. normal average at 24-36 days.

  — Patrick Chovanec (@prchovanec) July 13, 2015

  But, as we previously noted, it appears there just is no more room to stuff inventories in its Shenyang, Lianing province parking lots  (as China has become the new car graveyard over the last 3 years)

  

  

  

  

  

  

  

  

  

   

  But it's not just China… inventories are surging in America too…

  

   

  Judging by the massive volume of cars 'parked' in GM's Shenyang Liaoning lots, it is clear that automakers learned nothing from the last "if we build it, they will come" channel-stuffing inventory surging dysphoria that, among other things, led to their last bankruptcy… if only Chinese buyers would take up the credit terms like Americans.

  

  

  

  

  

• Cashtration: As Goes Greece, So Goes The World

  Submitted by Jeff Thomas via Doug Casey's International Man blog,

  Recently, we’ve witnessed the bank holiday in Greece, the limitation as to how much the Greek people can withdraw from their accounts each day.

  Not surprisingly, the mainstream press have focused on images such as the one above – a queue at an ATM – and discussed the difficulty of the Greek people in trying to run their lives on the €50-€60 that they’re allowed to withdraw each day.

  The press then comment poignantly that “Something needs to be done.” The implication is that “someone”, either the banks or the government, need to find a way to deliver these people more money, so that they can continue to function economically.

  Of course, the problem, and the very reason for the bank holiday in the first place, is that the money simply doesn’t exist.

  For many years, governments have been attempting to expand the economy by encouraging debt. Governments (most notably the EU and US) have borrowed far more than they ever have in history, to the point that they’re now facing insolvency.

  Further, the average citizen has been programmed to think that he can get ahead through increased debt. As a result, personal debt has risen to an unprecedented level.

  But in order for someone to borrow, someone must offer to lend, and, of course, the banks have been the lenders. Banks typically make their profits by taking in deposits, then loaning out that money to others, making their profits on the interest.

  This is a system that began in Europe hundreds of years ago and, although it has repeatedly resulted in disaster, continues to be the standard by which banks operate.

  Theoretically, it’s a workable idea.

  The banks maintain, say, 10% of the deposits in order to service daily transactions by depositors, and they loan out the rest. As long as depositors do not lose faith in the system and arrive in droves to take out their deposits, the system continues to work.

  But today, when a bank provides a loan, it doesn’t hand over stacks of paper bills to the borrower. It simply processes a credit to his account. This allows the bank to offer far more loans and far larger loans.

  If a bank holds, say, $10 million in deposits, it could conceivably offer $100 million in loans. That money, of course, does not exist, except as an electronic credit, but it allows the bankers to increase their profits tenfold.

  Quite a temptation.

  And it’s a temptation that has, at this point, become the norm in much of the world. What we’re witnessing is the greatest credit bubble/debt bubble that mankind has ever seen. What we’re seeing in Greece is not merely a country of socialistically inclined people behaving very foolishly. We’re seeing a small pin pricking a very large balloon.

  (Editor's Note: Doug Casey recently wrote a very relevant article on this topic. Click here to read Unsound Banking: Why Most of the World’s Banks Are Headed for Collapse.)

  As Goes Greece, So Goes the World

  The tedious drama that we’ve been observing in Greece in recent years is far from over. Greek debt is tied to EU debt. EU debt is tied to world debt. The coming debacle may unfold in this manner:

  • Greeks try to adjust to subsistence living, on what little the banks allow them daily.
  • They make no payments on their own debt, as even mere subsistence is difficult.
  • Companies do the same, as they’re having a hard time just paying wages and other overheads and can’t afford to pay interest on their loans.
  • Greek banks continue to provide depositors with an “allowance”, whilst their income source (interest on loans) dries up.
  • Banks become insolvent and cease paying “allowances” altogether. (And remember, this is the depositors’ own money that will be denied them.)

  But, as stated above, Greece is not alone. Other EU countries that are on a similar precipice will be similarly affected. Each country, each “domino”, will fall more quickly than the one before it, as its people, having observed the pattern in other countries, lose faith in the system.

  Meanwhile, governments will side with the banks, giving them free rein to do whatever they wish to save themselves, at the expense of depositors. Cashtration has begun in Greece but will spread to every country where banks have overstepped the mark and gone on a loan-provision spree in recent decades.

  Further, a country such as Canada, which has not been so cavalier as the EU and US, is so inextricably linked with the US through banking and commerce, it will find itself equally impacted, even though they themselves tried to take a more responsible approach to loans.

  In the midst of this, the populations of all affected countries will cry out for their governments to “Do something!”

  Governments will respond by trying to cover their own responsibility in this debacle, as they have, for decades, been, not only the enablers of the bank debt spree, but have additionally run the governments themselves into debt beyond what can be repaid.

  There will be no “solution”, as such. There will be an economic collapse and a Greater Depression.

  At this point the reader may say to himself, “So, that’s it; we’re all toast. If this analysis is correct, there’s no hope for anybody.”

  Not so. For anyone who has ever been a guest at a really great party, where the food and wine were seemingly endless and the mood infectiously jubilant, the outside world seemed not to exist. At a great party, the world outside appears unimportant.

  Still, there are those who were either not invited, or chose not to go. They continued their lives soberly. In the aftermath of the party, they watch as the hung-over revellers leave. Although they may look upon the partygoers with disdain, they get on with their lives, relatively unaffected.

  It’s the same with an “economic party”. Not everyone attends. Which is to say that there are presently countries where it is, and has always been, difficult to get a loan, either to buy a car or house, or to start a business.

  Presently, these countries are looked upon as “backward”, as they are not charging ahead, as the more “prosperous” countries are. However, in the aftermath of The Great Economic Party, these countries will continue, relatively unaffected.

  It’s left to the reader to determine to what degree his own country is involved in the party and to what degree his country will be impacted as the balloon pops. His assessment will suggest to what degree he will personally be “cashtrated”: forced by emergency conditions to be placed on an “allowance” by his bank and, eventually, to have that allowance end altogether as funds run out.

  Sorry to say, it’s likely that the great majority who live in such jurisdictions will, as suggested above, be “toast”.

  But there will be some who observe Greece and realize that the condition will spread and that there will be no solution by governments. They will take advantage of the brief time available and internationalise themselves as much as they are able.

  It’s not the end, except for those who choose to remain at the party too long.

  

  

  

  

  

• The (Amended) Founding Principles Of The European Union

  Presented with no comment…

   

  

   

  Source: @g_mastropavlos

  

  

  

  

• Greece Just Lost Control Of Its Banks, And Why Deposit Haircuts Are Imminent

  Yes, Greek banks may have been insolvent – something that was clear since the first bailout of 2010 – but at least the Greek state had control over them: as such it could have mandated mergers, recapitalizations, liquidity injections, even depositor bail-ins (perhaps the harshest lesson for the ordinary Greek population as a result of this latest crisis is that deposits are not “cash in the bank” but liabilities of insolvent financial organizations).

  Starting on Wednesday that will no longer be the case.

  Because while Greek banks will maintain their capital controls for months and withdrawals will be limited to €60 or less for months (the ECB is well aware that any boost to the ELA will result in a promptly surge in deposit outflows until the new ELA ceiling is reached, and so on ad inf) the one key change on Wednesday when the Tsipras government, whose coalition no longer has a majority in parliament and will have to rely on opposition votes, votes through the humiliating Greek “pre-deal” to unlock negotiations for the promised €86 billion in bailouts (which will be used almost entirely to repay the Troika) is that it will hand over the keys of Greek banks to the ECB.

  Here is Reuters with this little known fact:

  One of the preconditions imposed on Greece for a deal is that it signs into law European rules that would put euro zone authorities at the ECB and in Brussels, rather than Athens, in charge of identifying and closing or breaking up sick banks.

   

  This in turn could lead to a shake-up of the sector that could see some banks close, with losses pushed onto bondholders and possibly even large depositors. In such circumstances, there would be little that Athens could do to prevent this.

   

  One European official had told Reuters that the number of big banks in the country could be reduced from four – National Bank, Piraeus, Eurobank and Alpha – to as little as two.

  Keep in mind the primary leverage the ECB had over the Greek government was the hint that if only Greece agrees to the terms, the European Central Bank just may be nice enough to ease ELA haircuts and eventually boost the ELA ceiling to allow the phasing out of capital controls and permit Greeks access to their savings.

  This will not happen.

  Unfortunatley, the moment the Greek government votes through the “deal” required by Summit document SN 4070/15, the Greek government will not only hand over sovereignty to €50 billion of Greece’s choicest assets to some escrowed fund controlled by Belgium and designed to liquidate Greek assets to repay the Troika, it will also give up all control of the nation’s €120 billion or so in leftover personal and corporate deposits, also known as unsecured liabilities.

  And since the banks are undercapitalized by at least €25 billion, and realistically over €60 billion, if one takes into account NPLs which at 50% are a very optimistic estimate for a country in depression for 6 consecutive years, the first decision the ECB will do once it realizes the sorry state of financial affairs in Greece is to do precisely what the government could have done but did not have the guts when it still had control: overnight it will out about 50% of Greek depositors.

  In other words, Greece is about to hand over the keys to the only thing that is forcing it to hand over the keys.

  Unfortunately for Greece, there will be absolutely nothing its government can do to avoid this because on Wednesday, the Greek government will vote to hand over its sovereignty to Europe for, sadly, absolutely nothing in return.

  Our only question, one we first asked in April, is whether as part of the deal, the 112.5 tons of official Greek gold will also be handed over to Frankfurt, Berlin or Brussels. Recall back in 2012:

  Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal.

  Since this bailout has the most draconian terms yet, we wonder just what the fate of Greek gold will be?