Aug 07

Today’s News August 7, 2015

  • GOP Debates Post-Mortem: Fiorina Wins Undercard; Trump Takes Title, Threatens Independent Run

    17 Entered… Despite the onslaught of attacks from the other 16 GOP Presidential nominee candidates, Donald Trump came out the 'winner' in his usual brash manner threatening to run as an independent and able to dominate the conversation, pitbull back at any jibes, and shrug off cozy Clintonite comments. Ted Cruz and Rand Paul appeared to have a strong showing but "had a tough night" in Trump's words. Rick Perry blew up again, calling the former President Ronald 'Raven' – which his team vehemently denied the entire FOX watching audience heard. Carly Fiorina easily won the undercard against a field of has-beens and wannabes and surely deserves some more top-billing in the next Republican death-match. In the immortal words of Kenny Rogers, we hope a few of the 17-strong gaggle now "know when to fold 'em," and can we suggest Rick Perry's corner "throws in the damn towel."

     

     

    The Main Event..

    Trump came out swinging hard…

    • *TRUMP ONLY CANDIDATE WHO DOESN'T PLEDGE TO BACK GOP NOMINEE
    • *TRUMP SAYS WON'T RULE OUT INDEPENDENT BID FOR PRESIDENT

    As AP reports,

    The first Republican primary debate got off to a contentious start Thursday, with billionaire businessman Donald Trump declaring he could not commit to supporting the party's eventual nominee — unless it's him — and would not rule out running as a third-party candidate.

     

    "I will not make the pledge at this time," Trump said. He also refused to apologize for making insulting comments about women, saying, "The big problem this country has is being political correct."

     

    Kentucky Sen. Rand Paul immediately jumped in to challenge Trump on his answer to the question about supporting the nominee.

     

    "He's already hedging his bets because he's used to buying politicians," Paul said.

    *  *  *

    Trump spoke the most…

     

     

    • *TRUMP, ASKED ON COMMENTS ON WOMEN, SAYS NOT POLITICALLY CORRECT
    • *TRUMP REITERATES NEED TO BUILD A WALL ON U.S.-MEXICO BORDER
    • *TRUMP: MEXICO SENDS `THE BAD ONES OVER' TO THE U.S.
    • *TRUMP SAYS HAS USED U.S. BANKRUPTCY LAWS TO HIS ADVANTAGE
    • *TRUMP: `I HAD THE GOOD SENSE TO LEAVE ATLANTIC CITY'
    • *TRUMP: `I'VE EVOLVED ON MANY ISSUES' OVER YEARS
    • *TRUMP: IF IRAN WAS A STOCK, YOU SHOULD GO OUT AND BUY IT
    • *TRUMP: IRAN IS A `DISGRACE'; SAYS WOULD BE STRONGER THAN OBAMA

     

    Headlines for rest of field… (based on Bloomberg Politics)

    • *CHRISTIE, ASKED ON NJ DOWNGRADES, SAYS WORSE BEFORE HIS TENURE
    • *KASICH DEFENDS MEDICAID EXPANSION IN OHIO AS COST-SAVING

     

    • *RUBIO: U.S. NEEDS E-VERIFY SYSTEM TO BOLSTER IMMIGRATION LAWS
    • *SCOTT WALKER SAYS IMMIGRATION SYSTEM SHOULD FAVOR U.S. WORKERS
    • *PAUL SAYS CHRISTIE FUNDAMENTALLY MISUNDERSTANDS BILL OF RIGHTS
    • *CHRISTIE SAYS RAND PAUL BLOWS `HOT AIR' ON PRIVACY, TERRORISM
    • *BUSH: KNOWING WHAT WE KNOW NOW, STARTING WAR IN IRAQ A MISTAKE
    • *WALKER: U.S. NEEDS TO STOP `LEADING FROM BEHIND' IN MIDDLE EAST
    • *HUCKABEE: COULD GET RID OF IRS WITH TAX ON CONSUMPTION
    • *CARSON: U.S. TAX CODE SHOULD BE MODELED ON 10% BIBLICAL TITHE
    • *HARPER SAYS OPPOSITION PLANS WILL LEAD TO PERMANENT DEFICITS
    • *JEB BUSH ON KEYSTONE PIPELINE: `OF COURSE WE'RE FOR IT'
    • *BUSH SAYS 2% U.S. GROWTH A DANGEROUS `NEW NORMAL'; HE SEEKS 4%
    • *CHRISTIE: RAISE U.S. RETIREMENT AGE 2 YRS PHASED OVER 25 YRS
    • *CHRISTIE SAYS SOCIAL SECURITY SHOULD BE MEANS-TESTED
    • *RUBIO: NEVER ADVOCATED FOR ABORTION IN VIOLENT CASES
    • *BUSH: NOT TRUE THAT HE CALLED TRUMP `BUFFOON'
    • *KASICH: IF MY KIDS WERE GAY, WOULD `LOVE AND ACCEPT' THEM
    • *WALKER SAYS PUT FORCES ON EASTERN BORDER OF UKRAINE, BALTICS
    • *WALKER SAYS WOULD SHOW `STEEL' TO RUSSIA, NOT `MUSH' SOFTNESS
    • *RAND PAUL SAYS HE'S ONLY CANDIDATE W/ 5-YR BALANCED BUDGET PLAN
    • *PAUL: U.S. MUST STOP BORROWING MONEY TO AID OTHER COUNTRIES
    • *PAUL: U.S. COULD AID ISRAEL FROM SURPLUS, NOT BORROWED FUNDS

     

     

     

     

    The attacks were varied…

     

    The result…

     

    Candidate Mentions (by minute)…

    *  *  *

     

    The Undercard….

    Carly Fiorina's coming out party but the pre-debate debate was summarized as an attack on Trump and Clinton…

     

    The 'biggest losers" debate was won by a landslide by Carly Fiorina…

    Though Santirum spoke the most…

     

    Artist's impression of Rick Perry's team…"Throw the damn towel!!"

     

    And The Other Not-So-Magnificent-Seven… (via Bloomberg)

    Here’s a look at how each candidate fared under circumstances like nothing they’ve ever faced before, and like nothing they hope to ever go through again.

    Carly Fiorina 

    Easily the most polished of anyone on the stage; you can see why she’s been impressing early audiences, and just how much of a difference she could make if she ever gets promoted to the adult’s table. She was assured and strong throughout, even when she connected Donald Trump to Bill Clinton. Moderator MacCallum mocked her for comparing herself to the “Iron Lady” Margaret Thatcher, but if you had no context for either woman and were just tuning in, you could almost see it. She also has the vital political skill of being able to deliver a shiv with a smile, even making an angry phone call to the Supreme Leader of Iran–“on Day One of the Oval Office!”–sound like a phone call you’d look forward to, even while you were shaking. Interestingly: She was the only candidate to consistently reference God. Though should be more careful about where she leaves her notes.

    Jim Gilmore 

    He hasn’t even been in the race a week, so, understandably, he spent his first question just rattling off his biography. He did it a little too fast, though; he actually ran out of factoids three-quarters of the way through his answer, which was a bit awkward. Every question directed toward him had an audible sigh before it, like a Little League coach who has to give an at-bat to every kid, even when they know the other kids are the only ones who can hit the ball. He didn’t embarrass himself, but he didn’t do anything to distinguish himself either, which adds up to a big net negative. Also, his suit looked too big for him.

    Lindsey Graham 

    You won’t find many Republican presidential candidates answering their first question at a Republican primary by going into extensive detail on fossil fuels, but hey, he’s been a Senator for a long time. Graham attempted to make up for by turning into the world’s most polite hawk the rest of the way: Graham turned every question after that into a diatribe against ISIS and Al Qaeda and our need to be aggressive in the Middle East. (No man has ever looked so genteel while vowing to secure the violent deaths of his enemies.) He even batted away a Planned Parenthood question, saying that the Middle East is the real “War on Women.” He remains a party attack dog to the end, particularly when it comes to Bill and Hillary, saying he’s “fluent in Clinton-speak; I’ve been dealing with it for 20 years.” Were you excited to hear the revival of the “definition of what ‘is” is” Clinton chestnut in the year 2015? If so, Lindsey Graham was here for you tonight. 

    Bobby Jindal 

    If anything, he succeeded in being a lot less Kenneth Parcell than in his infamous response to President Obama’s State of the Union, which is a start. It’s still disconcerting seeing such sharp rhetoric coming out of the mouth of such a friendly looking guy; he says he’s “taking the handcuffs off the military” to go after ISIS, but it feels more like the waterboy giving a big speech rather than the coach. (His “Obama and Hillary want to turn the American Dream into the European night” felt decidedly unapocalyptic.) He definitely scores points for being the only person in the debate to go after Jeb Bush, both a sign of the strength of Donald Trump and the weakness of Bush at this point; two months ago, this debate would have been seven people a race to call Bush the “establishment” the way Jindal, and Jindal alone, did this time. On the whole, though, he spoke the way a lot of voters in his party think, even if he doesn’t seem like the candidate they imagine speaking for them. Also, if elected, he is absolutely going to waste his first Executive Order, saying, he’d sign one “protecting religious liberty.” Who wants to tell him?

    George Pataki

    Well, George Pataki was here. He hasn’t really done anything, or even been in the public eye, since he was governor of New York, so he kept bringing that up like a middle-aged soft-in-the-middle jock who can’t stop telling you about the time he hit the game winner against Hickory South back in high school. Did you know Pataki was the governor on September 11? Pataki is happy to remind you several times. It was probably wise for him to focus on that, because his handling of the abortion question–he’s the only pro-choice candidate running for the Republican nomination–was muddled, defensive and weak, though, really, in this primary, and with those recent Planned Parenthood tapes, how could it not be? He was also the only candidate who consistently talked longer than the buzzer. It’s difficult to blame him.

    Rick Perry 

    No one knows the perils of a poor debate showing better than Perry, so he seemed determined, almost over-determined, to show off his debate bona fides here. He stiffened his jaw, he dialed back the Texas homespunisms, he even threw in a “I’d say HELL NO” for good measure. (To the Ayatollah of Iran, no less, a guy who knows, in conservative minds, from Hell.) He may have been a little too fired up for the room; it’s difficult to be too much of a tough guy when there are more people on stage than in the audience. It was particularly strange to see him go so aggressively after Donald Trump, considering Trump wasn’t in the room; it’s odd to stand up to a guy who doesn’t even need to bother to show up yet. He definitely wanted Trump’s mojo, though. His answers on immigration were as forceful as anyone said on stage all night, tripling down to the point that he actually claimed his primary purpose in office would be to enforce the fight against illegal immigration, getting into so much detail that he even mentioned specific helicopters. Also: Good to know someone still uses Wite-Out. 

    And then there's this…

    Rick Santorum 

    Santorum, who was as angry as anyone about these debate rules, went after them even further, pointing out (while inexplicably lapsing into the first person plural) that “we were even further behind four years ago than we are today.” (A salient point for a guy who won Iowa last time.) His answer on immigration—pointing to how his own father, an Italian immigrant, was separated from his father under Mussolini, said “America was worth the wait”—was personal but also underlined that he’s for separating families if it means following the letter of the law. Interestingly, Santorum, the supposed holy roller, didn’t say the word “God” once. He also brought up his “20-20 Perfect Vision of America” plan, which, when it comes to catchiness, isn’t quite 9-9-9.

    *  *  *

    So in summary.. Fiorina #winning… Perry #RonaldRaven… and this…

    Finally where the moneyis being bet… (via PaddyPower)

  • America's Biggest Lie – Dictatorship Or Democracy?

    Authored by Eric Zuesse,

    The Deceit About Being A 'Republic' Versus A 'Democracy'

    One of my recent articles at several sites, "Jimmy Carter Is Correct That the U.S. Is No Longer a Democracy” generated many reader-comments (such as here) saying things like, "The US has always been a republic. There are no true democracies in the modern world.” This will be my response to all who expressed that view:

    You miss the point that Carter made, and that I there documented to be true, which is no semantic issue (“democracy” versus “republic”), but which instead concerns the basic lie about what the United States of America really is now:

    Is this a representative democracy, such as its Founders intended and such as it was famous and honored throughout the world for being, until at least around 1980?

     

    Or, is it instead a nation that’s ruled by a tiny elite, an aristocracy, which in this country consists of its 500 or so billionaires, who buy the politicians whom ‘we’ ‘elect’?

    Is the U.S. now, basically, a fraud? Is it a dictatorship, instead of a democracy? Is it some kind of aristocracy, which controls the government here?

    That’s not a semantic issue, at all. America’s first political party was called the “Democratic Republican Party,” but could as well have been called the Democratic Party or the Republican Party, because those two terms are essentially synonymous in any nation that has a large population, in which the public elect representatives to represent them, instead of directly vote on the policies that the government is to pursue — to place into its law, and to enforce by its duly authorized police or otherwise, and to adjudicate by democratically appointed judges and/or juries.

    The only democracies that can exist, except for tiny ones, are representative democracies: they are republics. Republics are the only type of democratic nations that exist, practically speaking.

    Where, then, does the apparently common misconception that there is a difference between the two terms arise?

    I shall here present a theory about that: This widespread misconception arises because the rulers in a dictatorship — i.e., in an elite-controlled or “aristocratic” government, as opposed to in a government that authentically does  represent the public — can thereby fool many people into misconceiving what the real issue, the real problem, there is. 

    The real issue is whether the country is controlled by its aristocracy (a dictatorship), or instead by its public (its residents).

    Let’s be frank and honest: an aristocratically controlled government is a dictatorship, regardless of whether that “aristocracy” is in fascist Italy, or in Nazi Germany, or in Communist USSR, or in North Korea, or in the United States of America.

    That’s what Jimmy Carter was talking about, and it's what I was documenting to be true.

    To varying and rather extraordinary degrees throughout earlier U.S. history, this nation really was a democracy; that is to say, a republic. But we’re not actually like that any more (as I documented there).

    If this problem is not faced — and honestly, not by means of semantic games and misdirections — then surely there will be not even a possibility to restore the democracy, the republic, the democratic republic, or whatever one prefers to call it, which our Founders had intended, and which lasted for around two centuries on these shores, and was widely admired and even (by some) envied throughout the world.

    The aristocracy and its many fools might not want this enormous problem to be addressed, but Jimmy Carter clearly does. And so do I.

    One of the ways to misdirect about this problem is to obsess about “good residents” (“citizens”) versus “bad residents” (“aliens”), because that nationalistic way of viewing things enables the aristocracy to split the public against itself and thereby to maintain its own grip on power against, actually, that entire public. Nazi Germany did this.

    Another way they misdirect it is to buy control over all of the political parties that stand a chance of dominating the government, and so to create basically a ‘democratic’ or ‘republican’ controlled government which, in any case, is actually controlled by that aristocracy, even if, perhaps, by a different faction within it. Even if a different faction within the aristocracy takes control, it’s still the same dictatorship. Because the public is not  in control.

    There are many ways to deceive the public. There are many ways to rule the public. But all of them are aristocratic; all of them are elite — and typically monied-elite — dictatorships.

    In a democracy (or republic) the government does not rule, the government represents. It represents honestly, because it doesn’t need to do so by misdirection, by deceits.

     

    In an aristocracy (or dictatorship) the government does not represent — at least not honestly — because they don’t want the people to see how their sausages are made

    Will a violent revolution be required to overthrow it? If so, then won’t the likelihood be high that it will merely replace one group who rule by force, by a different group who rule by force? For example: isn’t that what happened in the Russian Revolution and its aftermath?

    Jimmy Carter challenged America to restore democracy. And he was right to do so. But can it be done? And, if so, then how?

    It’s the great issue in 2016. Because if it’s not dealt with then, the dictatorship, the aristocracy that controls it, will become so deeply lodged that it won’t be able to be dislodged without great violence. And the outcome of that would not solve the problem, at all. It would be hell. But avoiding that hell by means of accepting continuance of aristocratic control would also be hell, because aristocracy would then become even more deeply entrenched.

    America needs to deal with it, not postpone solving it.

    *  *  *

     

  • $60 Trillion Of World Debt In One Visualization

    Today’s visualization breaks down $59.7 trillion of world debt by country, as well as highlighting each country’s debt-to-GDP ratio using colour. The data comes from the IMF and only covers external government debt.  

    It excludes the debt of country’s citizens and businesses, as well as unfunded liabilities which are not yet technically incurred yet. All figures are based on USD.

     

     

    Courtesy of: Visual Capitalist

     

     

    The numbers that stand out the most, especially when comparing to the previous world economy graphic:

    • The United States constitutes 23.3% of the world economy but 29.1% of world debt. It’s debt-to-GDP ratio is 103.4% using IMF figures.
    • Japan makes up only 6.18% of total economic production, but has amounted 19.99% of global debt.
    • China, the world’s second largest economy (and largest by other measures), accounts for 13.9% of production. They only have 6.25% of world debt and a debt-to-GDP ratio of 39.4%.
    • 7 of the 15 countries with the most total debt are European. Together, excluding Russia, the European continent holds over 26% of total world debt.

    Combining the debt of the United States, Japan, and Europe together accounts for 75% of total global debt.

    Source: Visual Capitalist

  • What Kind Of Investor Are You? The Market Doesn't Care!

    Via ConvergEx's Nick Colas,

    Our monthly look at asset price correlations finds it’s getting just a little bit easier to beat the U.S. stock market with savvy sector bets. OK, not by a lot: average correlations for the 10 sectors of the S&P 500 to the index itself are down to 79.9% versus the year’s typical reading of 80.7%. The best hunting grounds have been in Technology (84.9% correlation, down from +90% the last three months) and, surprisingly, Utilities (32.9% correlation, down from 47-77% in the last three months).  Both have beaten the overall market over the last month as well. Looking forward, the quickest way to even lower correlations (which are good for active managers and passive investors alike) is for the Federal Reserve to move on rates sooner rather than later.  By our reckoning, the currently still-high correlations show that markets don’t quite think the Fed is moving in September.  If they did, correlations would be dropping more quickly.

    In my 25 years doing just about every job in finance I have had the chance to meet a wide array of money managers. This experience has taught me that there are only three kinds of people that can reliably “Beat” the market once you put aside obvious inputs like competent risk management and a stress-resistant personality. These are:

    The savant.  There is a certain type of person that can read price movements and consistently extrapolate signal from noise.  You could plop them on a desert island with little more than a Bloomberg machine, some dip, a Chinese takeout menu and some way to make trades and they would still make money.  A lot of it.  They tend to read to the New York Post, never miss a free meal, and will die between 4pm and 9:30am because during trading hours nothing will deter them from seeing the close.

     

    The information hound.  This breed makes it their business to know every single important source of knowledge about the companies in which they invest.  They don’t know everything, but they know where to find any piece of information necessary to price a security.  Twenty years ago this type of investor visited every single company they followed every quarter. Now, they do that AND they hire satellites to fly over production facilities AND use online tracking software to monitor company fundamentals in real time.  Effective activists fall into this camp, by the way.

     

    The big picture thinker. Some people are just better than the population as a whole at assimilating large quantities of information and synthesizing it into profitable action.  The advent of computerized trading over the last decade has pushed a lot of these individuals into routinizing their approach into systematic algorithms, of course.  But the best of the bunch see linkages through the capital markets the way spiders feel their webs – in analog waves, not digital bits and bytes. If the butterfly flaps its wings in Thailand, they know to get short insurers in Texas.

    All three types of investors/traders need the same thing to deliver the best results: asset prices that move at least somewhat independently of each other.  After all, their special set of skills is in separating the wheat from the chaff, the good from the bad, or the stars from the airplane lights. The more those differences cause divergent prices, the higher the potential profit.  For example, consider the S&P 500 – how many names in this index are up more than 20% on the year?  The answer is 70 by our count, or just over 1 in 7.  Only one name is a clean double in 2015: Netflix. Conversely, there are 60 names in the index that are down more than 20% but only three – Freeport-McMoRan, Consol Energy and Chesapeake Energy – are down by 50% or more. That leaves 372 names in the S&P 500 in a performance band of +20% to -20%.  Close down the range to +10/-10%, and we count 197 names in that range.  That’s 40% of the entire S&P 500 clinging to a pretty narrow band around the “Unchanged on the year” line.

    Another way to consider the question of how much opportunity there is in the S&P 500 and other asset classes is to look at stock price correlations – how much the individual sectors of the index move in tandem with the market as a whole.  We look at this data on a monthly basis, and there are several tables and charts at the end of this note.  Here’s our summary of this month’s numbers:

    The average price correlation of the 10 sectors of the S&P 500 to the index was 79.9% last month.  On the good news front, that’s less than the YTD average of 80.6% so asset prices have been moving a touch more independently over the last 30 days than the year as a whole.  As for the bad news, that’s still far higher than the textbook 50% correlation a sector “Should” have to the market as a whole.

     

    The two standout sectors last month were technology and utilities. Tech saw its correlation to the S&P 500 drop from 93.4% to 84.9% and the group also outperformed the broad market (+1.8% versus 1.1%).  The utilities group, left for dead on the thesis of ever-rising interest rates, also outperformed last month (+3.3% versus 1.1%) and managed to cut their correlation to the market to 32.9% from 47.6% at the same time.

     

    Emerging markets had a tough time over the last month, down 7.9%, but as any trader will tell you the moves between the U.S. market and far flung bourses were tied at the hip.  As a result, the correlation between the two was quite high – 71.7% – but no higher than the last few months combined. Developed markets, as represented by the MSCI EAFE (Europe, Asia, Far East) index also showed high correlations to the S&P 500 at 83.6%.

     

    Correlations between the high yield corporate bond market and equities have been tightening up over the last three months, an unwelcome development for those who worry about the structure of that market if general asset price volatility picks up.  Correlations between “Junk” bonds and U.S. stocks were 66.5% last month, up from 55.7% the month before and 49.7% the month before that.

     

     

    Gold has been a brutally tough investment over the last month, sinking to multi-year lows.  The best thing you can say about this trend is that at least the yellow metal still hews to its own path. Correlations to stocks here were -25.3% last month.

    Now, the #1 question we get after we review correlations every month is “Why are they so high relative to long term historical norms?”  Our answer is that Federal Reserve policy has been an unusually important factor in asset prices since 2009. The unusually easy monetary policy since that time (and its planning, implementation, and effect on the economy) has been a powerful unifying story in capital markets. Now, as the Federal Reserve moves to return the economy to a more “Normal” policy stance, correlations should drop. That they have not yet moved convincingly lower is a sign that equity markets may want to see the Fed actually pull the trigger. 
     

  • "Teflon Don" Holds Court – GOP Debates Begin

    (Click picture to watch live. Note that Fox requires a cable subscription log-in)

    Now that Carly Fiorina has thoroughly dominated the “B-team” GOP roster, all eyes will now turn to the prime time event where Donald Trump, the surprise frontrunner whose vitriolic campaign rhetoric has inexplicably translated into ever stronger poll numbers, will make his debate debut and attempt to dismiss critics who question how long the flamboyant billionaire’s popularity can last once the proverbial rubber meets the road. 

    And while some are expecting plenty of fireworks on Thursday evening, Trump himself is looking to play down the hype. “Maybe my whole life is a debate in a way, but the fact is I’m not a debater, and they are,” Trump told ABC News.

    And if you can’t make sense of that, here’s something less convoluted: “I don’t think I’m going to be throwing punches.”

    So it looks like we can scratch “fist fight” off the list of possible debate outcomes, but there’s still plenty of fun to be had, and for those wondering what to expect from each candidate, here’s a simple preview from NBC:

    • Donald Trump: With all eyes on him, he’s smartly downplayed expectations and has emphasized that he intends to play nice. But he also has to deliver the same toughness and channel the same anger fueling his rise in the GOP polls.
    • Jeb Bush: As we wrote yesterday, maybe no one has more on the line than Bush does. He’s had a rough last week — especially as Hillary Clinton has used him as a punching bag. And here’s the thing: He’s the most well-known unknown person (due to his last name) on that debate stage.
    • Scott Walker: He has the buzz and the record, but does he look the part? That will be his biggest challenge of the night.
    • Marco Rubio: Ditto. And he can’t afford to disappear at the debate — as he has disappeared from the 2016 scene these past few weeks.
    • Mike Huckabee: If you want to place an early bet on the best performer of the night, Huckabee would be a smart call. He is the only one of the 10 who has actually participated in a presidential debate before. And he was routinely the best performer in the 2007-2008 debates.
    • Ted Cruz: Can he handle the 60-second time limits and come across a bite more likeable than his perception, especially in DC?
    • Ben Carson: His low-key demeanor could be a weakness. Can he display some fire and passion that don’t come across in his interviews?
    • Chris Christie: He’s used to being the center of attention, but can he handle being on the outside looking in? How does he assert himself?
    • John Kasich: Ditto.
    • Rand Paul: Make no mistake: The Jesse Benton indictment has rocked the Ron/Rand Paul World, and the campaign needs a major pick-me-up from this debate.

    And here’s a Bingo card which should serve as a nice primer on the issues:

    Finally, here’s a bit of color from Bloomberg’s Joshua Green on Trump’s transformation from belicose billionaire to Republican frontrunner: 

    When Donald Trump takes center stage at Thursday’s Fox News debate in Cleveland, it will be a critical moment for the Republican Party. Until recently, Americans mentally categorized Trump as a celebrity entertainer and interpreted his madcap antics and controversial pronouncements accordingly. But on Thursday, voters will experience Trump in a much different context: as the standard-bearer of the Republican Party, who not only leads the presidential field by a wide margin but, as a new Bloomberg Politics poll shows, has a powerful appeal to every segment of the Republican electorate.

     

    Not every Republican worries about a “Trump effect” harming the GOP’s electoral fortunes. “Trump is a flash in the pan,” says Republican strategist John Feehery. “He’s not a serious candidate, no matter what the polls say. He will self-implode.”

     

    Others are hopeful that Trump will “grow into the role” and comport himself in a manner more befitting a presidential frontrunner. “The question is,” says Norquist, “is he capable of turning on a dime when the camera shines on him and saying, ‘Here are my standard, boring traditional Republican views’ with maybe a couple of colorful additions?”

     

    But Trump’s broad popularity and enduring strength among Republicans lend credence to a different interpretation: that his candidacy has become the preferred vehicle for Republican voters to express maximal outrage at their own party’s leaders for failing to carry out the agenda they keep promising. It’s one that many conservatives ardently desire: to deport undocumented immigrants, kill Obamacare, overturn Roe v. Wade, and return the GOP to a position of primacy in American politics.

     

    “If you look at the whole Republican Party, from libertarians to evangelicals to the Tea Party,” says Steele, “you have a group of people who’ve been lied to for 35 years. Republican [presidential candidates] have said, ‘Elect us and we’ll do these things.’ Well, they haven’t. And that frustration is manifesting itself in Trump.”

     

    Bonus: BBC’s “Fun Guide” to the debate

    Donald Trump

    Who is he? Billionaire, reality television star, golf and real estate mogul, rider of golden escalators. The Donald is the one man who really needs no introduction. He exists whether you acknowledge him or not. He’s at the top of the polls in the Republican Party, and the establishment’s attempts to strike him down have only made him more powerful than you can possibly imagine.

    Expected strategy: Trump will be Trump. If he’s attacked by one of the other candidates, expect him to hit back. Donald says he doesn’t start fights, he finishes them. Maybe he’ll say something crazy, and everyone will laugh. Maybe he’ll stay serious, and everyone will be impressed with his gravitas. Either way, he comes out ahead.

    Win a point if: He promises to “make America great again”. He believes he’s the man to do it, and he’s got the hat to show it.

    Win a million points if: He wears the hat on stage.

    Lose a point if: He says “you’re fired”. That Apprentice catchphrase is so 2004.

    Jeb Bush

    Who is he? Former governor of Florida, son of one president and brother to another, the man with 99 problems but having enough campaign money isn’t one. Bush started the year expected by many to emerge as the clear frontrunner, but that hasn’t happened. Jeb! – as his logo exclaims – is just one of several upper-tier candidates getting lapped in the polls by Trump.

    Expected strategy: Bush will likely try to be the grown-up in the room. If other candidates get mired in a slug-fest with Trump, he can try to stay above the fray and pitch himself as the mature, presidential alternative. It was a plan that worked (eventually) for Mitt Romney in 2012.

    Win a point if: He vows to boost US growth from 2% to 4% as president. Call it the “seven-minute abs” campaign promise. Who wants two when you can have four?

    Win a million points if: He says he agrees with his brother on anything. “George W Jeb” is getting hammered on his familial ties to the 43rd president, and proving he’s “his own man” has been one of his most daunting tasks.

    Lose a point if: He mentions his campaign “swag store”, as he did in New Hampshire Monday night. There are a lot of words that can sound presidential. “Swag” isn’t one of them.

    Scott Walker

    Who is he? Governor of Wisconsin, Kohl’s discount store shopper, bane of public employee unions everywhere. Walker made a big splash in an Iowa presidential forum back in January, and he’s become a popular pick as a candidate who can appeal to both conservative activists and the Republican establishment.

    Expected strategy: This will be a big test for Walker as a top-tier candidate. He’s been criticised in the past for lacking presidential timbre, so his goal will be to look and act like a serious, informed politician, while avoiding any major gaffes.

    Win a point if: He mentions Ronald Reagan. He got married on the late president’s birthday and every year throws a Reagan-themed anniversary party. He’s a big fan.

    Win a million points if: He talks about his fitness tracker. He wears one all the time and credits it with keeping him in shape. You may not see it under the sleeve of his debate-night suit jacket, but trust us, it’s there.

    Lose a point if: He cites heading the Wisconsin National Guard in a foreign policy answer. Every time governors trot this line out they sound only slightly less ridiculous than when Sarah Palin mentioned how close Alaska is to Russia.

    Mike Huckabee

    Who is he? Ordained minister, former Arkansas governor, former conservative radio and television talk host, model for awkward family photos. Huckabee was the surprise of the 2008 presidential race after winning the first-in-the-nation Iowa caucuses. Now he hopes to recapture that old campaign magic.

    Expected strategy: Eight years ago Huckabee ran as a conservative with a heart. After years as a Fox talking head, he now seems to be running as a conservative who eats hearts. Expect lots of blanket condemnations of liberal orthodoxy, particularly when it comes to Barack Obama’s foreign policy.

    Win a point if: He doesn’t make a reference to Nazi Germany. The candidate is a walking embodiment of Godwin’s law.

    Win a million points if: He bursts out into song. He and Democrat Martin O’Malley are the only presidential hopefuls who front rock bands.

    Lose a point if: He makes a joke that bombs. He styles himself as a good-natured cut-up, but as the old saying goes: “Dying is easy. Comedy is hard.”

    Marco Rubio

    Who is he? Florida senator, son of Cuban immigrants, former college football player, parched-mouth sufferer. Rubio is considered a rising star in Republican circles, but many were surprised that he decided to eschew a sure-thing second term in the US Senate for a presidential bid, particularly with Floridian Bush already in the race.

    Expected strategy: Rubio became a popular pick as a campaign dark horse, but after an early bounce in the polls he’s become mired in the crowded middle of the pack. He’s the youngest candidate on the stage, so he’ll have to project maturity and remind everyone of his potential.

    Win a point if: He mentions the American Dream. His child-of-immigrants story is compelling and he isn’t shy about recounting it, so you can probably go ahead and pencil this in the plus column.

    Win a million points if: He gets caught on camera drinking water. For a long time Rubio’s awkward attempt at hydration during a 2013 State of the Union response was all anyone knew about him.

    Lose a point if: He talks about immigration. He supported Senate immigration reform in 2013 before it became radioactive among much of the conservative base. Any time he spends on the subject will remind Republicans of this.

    Ben Carson

    Who is he? Paediatric neurosurgeon, best-selling author, child of urban poverty, separator of conjoined twins. Carson was in double digits in opinion polls for much of the year but has slipped of late. He has a loyal following that’s helped him nab several conservative straw poll victories.

    Expected strategy: This is the first time Carson has been in a political debate, so his goal is to prove he belongs there – which is a pretty low bar among this crowded field. He’s the “other” non-politician on the stage and could seek to offer himself as a less abrasive, more thoughtful choice for disaffected Trump supporters.

    Win a point if: He tells the story about the patient who mistook him for a hospital orderly.

    Win a million points if: He compares Obamacare to slavery. It wouldn’t be the first time, but he’s toned down his bombastic rhetoric recently.

    Lose a point if: He says progressive taxation is socialism. If it is, then the US has been a socialist state since 1913.

    Ted Cruz

    Who is he? Senator from Texas, former Supreme Court clerk, Canadian-American, aspiring Simpsons voice actor. Cruz beat a heavily favoured Republican in his 2012 Senate race and quickly made waves in Washington, spearheading multiple high-profile filibusters and government shut-downs

    Expected strategy: Cruz is a former college debate national champion, so he enters Thursday night with rhetorical knives sharpened and high expectations. He’s pitching his campaign to evangelical conservatives and grass-roots Tea Party true-believers, so expect him to spend plenty of time throwing them chunks of fresh red meat.

    Win a point if: He attacks “the Washington cartel”. Although it sounds like a minor-league soccer franchise, it’s his term for the insiders and establishment politicians he’s made life difficult for during his Senate tenure

    Win a million points if: He attacks Donald Trump. While other candidates have been going after the top dog, Cruz has showered him with praise, perhaps hoping to pick up the pieces if the billionaire flames out.

    Lose a point if: He talks about cooking bacon on the barrel of a machine gun. OK, he likes guns and he likes bacon. But his latest attempt at creating a viral video was just cringe-worthy.

    Rand Paul

    Who is he? Senator from Kentucky, opthalmologist, son of former presidential candidate Ron Paul, libertarian (sort of), enemy of hairbrushes everywhere. Paul launched his campaign as the candidate who could combine the grass-roots support of his father’s libertarian true believers with a more mainstream Republican appeal. So far, however, it seems he’s alienated both groups.

    Expected strategy: Paul will likely play up the anti-big government, surveillance-state positions that prompted Time magazine to once label him “the most interesting man in politics”. Given how his campaign has struggled in the past few months, he could come out swinging at the other candidates. At this point, he has little left to lose.

    Win a point if: He mentions the “Washington machine”. Like Cruz’s Washington cartel, Paul’s machine is the windmill he tilts at.

    Win a million points if: He’s wearing cowboy boots. The Texan has a penchant for fancy footwear, but such a debate fashion statement may be a bit too unorthodox even for Paul.

    Lose a point if: He has to talk about the Iran nuclear deal. It’s the kind of foreign policy topic that will only hurt him, no matter how he answers it.

    Chris Christie

    Who is he? Governor of New Jersey, former US attorney, bellicose YouTube star, Dallas Cowboys superfan. Christie could have presented a serious challenge to Romney in 2012, but he chose to sit out the race. He may have missed the presidential boat, as his popularity both in New Jersey and nationwide has precipitously dropped since then.

    Expected strategy: Donald Trump has stolen Christie’s “tell it like it is” mojo, so the debate may be his chance to win some of it back. Look for him to try to be blunt but not blustery, touting his ability to get things done in liberal-leaning New Jersey.

    Win a point if: He talks about his late Sicilian mother. He cites her as his “moral compass” – the way he tries to soften his brash image.

    Win a million points if: He mentions Bruce Springsteen. He used to be a huge follower, but the New Jersey musician very publicly skewered the governor in a January 2014 Tonight Show musical satire.

    Lose a point if: Hurricane Sandy comes up. The only thing Republicans remember from the natural disaster is Christie’s pre-2012 election embrace of Mr Obama – and they have never forgiven him for it.

    John Kasich

    Who is he? Ohio governor, former congressman, friend of U2’s Bono, 2000 presidential candidate who was beaten by a guy named Bush. Kasich is a late entry into the Republican field, but his post-announcement bounce was enough to sneak him into the final spot on the debate stage.

    Expected strategy: Kasich’s goal will be to appeal to the moderate, establishment Republican crowd, which puts another Bush squarely in his cross-hairs. If he contrasts favourably with the Floridian, and he could become the choice as the anti-Trump.

    Win a point if: He talks about finding God after his parents were killed by a drunk driver. It’s Kasich at his most heartfelt.

    Win a million points if: He leads the home-state Cleveland crowd in an O-H-I-O football chant.

    Lose a point if: Someone mispronounces his last name. The ch in Kasich is a hard k.

  • One Third Of All Chinese 'Gamblers' Have Shut Their Equity Trading Accounts

    It turns out making money trading stocks is not "easier than farmwork" and, as China Daily reports, a stunning 24 million Chinese 'investors' have shuttered their trading accounts since the end of June. Unlike in the U.S., where institutions dominate stock trading, retail investors are king in China, owning around 80% of listed stocks’ tradable shares, according to investment bank CICC. With the number of small investors holding stocks in their accounts sliding to 51 million at the end of July from 75 million at the end of June, it appears some grandmas and farmers have learned their lesson (for now).

     

    A-Share accounts with transactions have plunmged over 20% in the last few weeks…

     

    But, as The Wall Street Journal reports, China’s market selloff can safely be declared a rout.

    Nearly a third of the country’s individual investors—more than 20 million people—fled the plunging stock markets last month.

     

    The number of retail investors holding stocks in their accounts slid to 51 million at the end of July from 75 million at the end of June, according to China Securities Depository & Clearing Corp., the government agency that tracks accounts.

    But bank deposit is still the favorite investment tool for Chinese families. As China Daily notes,

    Up to 50 percent of disposable income will end up in families' saving account, according to data from World Bank. Due to recent volatility, it is unlikely that many families will move their money from saving account to stock market.

    As one newly minted stock trader explained…

    “Now I realize I can lose a lot of money very quickly,” he said, noting that threats to stocks include China’s slowing growth and the eventual end of government rescue efforts.

    But – there remains some who will never learn…

    “Where else can I put my money?” said Helen Lu. “Real estate is so expensive and beyond our reach, and there are no other good investment channels.”

    Sound familiar?

  • Participation Trophy Nation

    Submitted by Jim Quinn via The Burning Platform blog,

    What a pathetic nation of entitled whiners we’ve become. When did participation in a sport or any competition deserve a trophy?

    Trophies are for winners. Trophies are for the people who excelled. Trophies are for the people who worked harder than their competitors and won. The bullshit about every child being a special snowflake has permeated our society and created generations of momma’s boys and girls. They think they deserve a trophy for showing up at their jobs now. They think they deserve automatic B’s for showing up at college classes. They think they deserve pay raises because they came to work.

    You get ahead in life by hard work, using your brain, and refining your social skills. The free shit army mentality permeating our culture drives the participation trophy bullshit. Real free market capitalism (not the crony capitalism/socialism) has winners and losers. Losers need to work harder to become winners. Not in America today. The losers have a million excuses and think they deserve exactly what the winners have achieved. 

     

     

    Via The Daily Caller's Alex Pfeiffer,

    On HBO’s return of “Real Sports with Bryant Gumbel” Tuesday night, Bernard Goldberg looks into the current culture of handing out trophies to children just for showing up, and how this trend potentially leads to damaging psychological effects.

     

    “We want to make each child feel special,” says Brian Sanders, president of i9 Sports, the largest youth sports franchise in the nation.

     

    How does he make them feel special? By giving them all trophies.

     

    At an event outside Tampa, Fla. with 650 kids in attendance all will receive trophies, there is a division champion award and everyone else receives an “All-Star” trophy, both prizes are the same size.

     

    This isn’t just a phenomenon with his sports league. Janet Anderson is the regional commissioner in Los Angeles for AYSO Soccer and she told Goldberg for her 1,200 under-eight players, “If there name is on the roster, they get a trophy.”

     

    This means that players who don’t even show up can receive an award. On top of that, her league doesn’t keep score, no one is a loser.

     

    And what happened when Anderson decided to stop giving trophies to all participants for players over age eight? “Some parents went out and bought their own trophies for the whole team,” explained Anderson to Goldberg.

     

    It isn’t just children who are winners. The trophy industry now has sales around $2 billion at the retail level, says Scott Sletten of JDS Industries, one of the world’s largest trophy wholesalers. Sletten’s parents started the South Dakota business in 1972. Then, the mom-pop shop had sales of $20,000 to $40,000 a year. JDS now has sales of over $50 million a year.

     

    This culture arises out of a movement beginning in the late 20th Century to push the importance of self-esteem in education. “The state of California had a task force in the 1980s to study self-esteem, and we thought especially for kids in struggling communities if we just told them they were great, they would believe it, and then they could achieve more because they were certain they were great,” said researcher Ashley Merryman.

     

    This movement has apparently spiraled out of control. “Preschoolers sometimes now sing a song to the tune of ‘Frère Jacques’ that goes like this, ‘I am special I am special look at me look at me,’” according to San Diego State University professor Jean Twenge.

     

    This push to make every child feel special leads to problems in college. A study highlighted in Goldberg’s report shows that a third of college students say they deserve a B grade as long as they attend most classes in a course.

     

    Dr. Robert Cloninger, professor of psychiatry at Washington University in St. Louis School of Medicine has been studying the effects of rewards with rats in mazes. He found that rats that received food just for working their way through the maze were lazy. “They will not be fast runners to get to the trophy, and they will quit easily the moment they are no longer getting rewarded.”

     

    He concludes that children won’t be able to succeed if we pretend that they don’t fail. Cloninger says, “We have to get over the notion that everyone has to be a winner in the United States, it just isn’t true.”

    *  *  *

    Trophies for all. Do it for the chilrun. We must boost the self-esteem of losers so they think they are winners.

  • Payrolls Preview: Goldman Expects Seasonal Bounce In Jobs But Warns Wage Growth May Disappoint

    Via Goldman Sachs' Karen Heichgott,

     We forecast nonfarm payroll growth of 225k in July, in line with consensus expectations. Many labor market indicators were softer in July, but some important service sector indicators, such as ISM nonmanufacturing employment, were significantly stronger. On balance, we expect job growth roughly consistent with the 223k increase in June.

     

     

    We expect the unemployment rate to hold steady at 5.3%. Participation should at least partially rebound following an unexpected dip in June that likely reflected calendar effects. Finally, average hourly earnings are likely to rise 0.2% month-over-month in July.

    We forecast nonfarm payroll job growth of 225k in July, in line with consensus expectations. Reported job availability, the employment components of most manufacturing surveys, and ADP employment growth softened, but the employment components of most service sector surveys improved, particularly the ISM nonmanufacturing survey, which surged to its strongest level since 2005. Overall, the July data point to a gain roughly in line with the 223k increase in June.

    Arguing for a stronger report:

    •     Service sector surveys. The employment components of service sector surveys were broadly positive in July. The employment components of the ISM nonmanufacturing (+6.9pt to 59.6), Dallas Fed (+4.5pt to +10.1), Richmond Fed (+2.0pt to +12.0), and Markit PMI surveys rose, while the employment component of the New York Fed index (-2.9pt to +17.2) declined. Service-sector employment gains rose to 222k in June and averaged 195k over the last year.

    Arguing for a weaker report:

    •     Manufacturing employment indicators. The employment components of almost all of the major manufacturing surveys weakened in July. The employment components of the ISM manufacturing (-2.8pt to 52.7), New York Fed (-5.5pt to +3.2), Richmond Fed (-5.0pt to +1), Kansas City Fed (-10.0pt to -19), Dallas Fed (-2.1pt to -3.3), Philly Fed (-4.2pt to -0.4), and Markit PMI surveys declined, while the employment component of the Chicago PMI survey improved slightly. Payroll employment growth in the manufacturing sector picked up a bit to 4k in June, just below the average gain of 6k per month seen over the last year. Given that the manufacturing sector is more exposed to international trade than the services sector, the recent softness in manufacturing indicators could in part reflect the appreciation of the dollar.
    •     Job availability. The Conference Board's labor differential—the net percent of households reporting jobs are plentiful vs. hard to get—worsened by 1.2pt to -6.0 in July but remains near its post-recession high.
    •     ADP report. ADP employment rose 185k in July, below consensus expectations. In general, initial print ADP estimates have not been strong predictors of initial print totalpayroll gains reported by the Labor Department. However, we have found somewhat stronger correlations between ADP and nonfarm payrolls for some industries, in particular trade, transportation and utilities, which saw a relatively small gain of 25k in the July ADP report.

    Neutral factors:

    •     Jobless claims. The four-week moving average of initial jobless claims in the payrolls reference week remained roughly unchanged at 279k.
    •     Online job ads. According to the Conference Board's Help Wanted Online (HWOL) report, which we mainly see as a leading indicator, both new and total online job ads rebounded in July following large decreases in June. Although online job ads have risen over the past year, the trend over the past three months has slowed.

    We expect the unemployment rate to hold steady at 5.3% in July, from an unrounded 5.285% in June. The headline U3 unemployment rate declined by 0.2pp in June, while the broader U6 underemployment rate declined by 0.3pp to 10.5%. Looking further ahead, we expect U3 to reach 5% by early 2016 and U6 to reach our 9% estimate of its full employment rate by the end of 2016. The participation rate showed a surprising drop of 0.3pp in June to 62.6%. However, the decline likely resulted in large part from a calendar effect caused by the timing of the reference week relative to the end of the school year (Exhibit 1), and we therefore expect an at least partial rebound in July.

    Exhibit 1: Calendar Effects Probably Depressed Participation in June

    We expect a 0.2% increase in average hourly earnings for all workers. While the July print should reflect some bounce-back from the flat read in June, this will likely be offset by the late timing of the reference week within the month. Average hourly earnings for all workers rose 2.0% over the year ending in June, while average hourly earnings for production & nonsupervisory workers rose 1.9%. Our Wage Tracker also stands at 2.0% year-on-year as of 2015Q2. While we expect wage growth to pick up somewhat by year-end, it will likely remain well below our 3.5% estimate of the full employment rate.

    Recent data on wage growth have disappointed expectations. Our GS Wage Tracker stands at 2.0% year-on-year, showing no improvement from its average value over the past six years. Although some special factors in recent ECI and average hourly earnings data might have resulted in an unduly pessimistic view of wage growth in Q2, the broader trend remains quite subdued. We think the Fed would take comfort from a pickup in wages, as the level of wage growth provides a useful cross-check on the amount of slack remaining in the labor market. Fundamentals argue for at least a modest improvement in wage growth in coming quarters, in our view. Upcoming changes to state minimum wage laws will probably not move the needle on national aggregate wage metrics.

  • Let The Kool Aid Flow: Bank Of America "Predicts" No Recession In The Next Decade

    One year ago, as part of its always entertaining long-run forecasting exercise, Bank of America predicted that GDP growth in 2015 and 2016 would be 3.3% and 3.4% respectively.

    Fast forward one year, when in its updated “long-run” forecast, Bank of America’s crack economist Ethan Harris admits he was off by “only” 30% in his prediction of next year’s GDP, and instead of 3.3%, he now “forecasts” 2015 GDP to be… 2.3%.

    Not only that, but BofA has now also taken down all over its medium-term GDP forecasts lower by 0.4% and its terminal growth rate is now down 10% from 2.2% to 2.0%. Expect next year to see the first sub 2% potential growth rate of the US.

    This is how he justified his dramatic overestimation of US growth in just 12 months:

    1.We expect real GDP growth to converge to potential growth after 2016, which we expect to be around 2.0%.
    2. We expect that the long-run unemployment rate (the NAIRU) resides around 5.0%, due in part to demographic factors.
    3. We expect the Fed to hit its 2% target for the PCE deflator by 2018.
    4. We expect interest rates to converge to slightly lower long-run levels due to ongoing fiscal headwinds and lower potential growth.

    Compare these revised assumptions to what he penned just one year ago here.

    But the biggest laugh line, like last year, is the following:

    Obviously, there is considerable uncertainty in forecasting many years out, so these should be viewed as rough baseline numbers. For example, if history is our guide, at some point in the next decade the US will experience a recession, but predicting a recession far in advance is almost impossible. We plan to update this table on a regular basis.

    So to summarize, the chief economist of a TBTF bank was off in his one year forward “forecast” by 30%, but because prediction a recession “far in advance”, even if in reality one may very well already be taking place, he would rather just assume 2% or greater growth for the next decade, and just leave it at that.

    Because clearly Bank of America’s clients don’t pay with millions of soft dollars for someone to actually tell them the truth.

  • Mapping The Rising Poverty Of The U.S.

    Concentrated poverty in the neighborhoods of the nation's largest urban cores has exploded since the 1970s.

    The number of high poverty neighborhoods has tripled and the number of poor people in those neighborhoods has doubled according to a report released by City Observatory…

    As Gizmodo explains, the following maps created by Palmer use red and green arrows to indicate growth in wealth and poverty between 1970 and 2010. Green lines point down to indicate a decrease in poverty, while red lines slope up to represent a growth in poverty. Their length indicates the size of the change.

    Map source: LabratRevenge.com

    As City Observatory concludes,

     To be poor anywhere is difficult enough, but a growing body of evidence shows the negative effects of poverty are amplified for those who live in high-poverty neighborhoods – places where 30 percent or more of the population live below the poverty line. Quality of life is worse, crime is higher, public services are weaker, and economic opportunity more distant in concentrated poverty neighborhoods.

     

     

    Critically, concentrated poverty figures prominently in the inter-generational transmission of inequality: children growing up in neighborhoods of concentrated poverty have permanently impaired economic prospects.

    *  *  *

    Read the full dismal report here (and remember stocks are at record highs and initial jobless claims at 40 year lows)…PDF here

    *  *  *

    While there are obvious patterns of green and red in very city, the overall trend is telling: poverty is very much on the rise.
     

  • The Sweet, Sickly Stench Of QE 'Success'

    Submitted by Grent Williams via TTMYGH.com,

    Six years ago, hardly anybody outside financial circles had any idea what Quantitative Easing was – hell, many within financial circles had no idea what QE entailed.

    The Fed, and the BoE did the heavy lifting in explaining it to Western audiences (Japan had been doing it so long that its citizens were bored of it and paid little attention when iterations 16, 17 and 18 were rolled out in recent years) with then-Chairman of the Federal Reserve, Ben Bernanke, leading the way as only he could:

    (Jackson Hole Speech, 2010): The channels through which the Fed’s purchases affect longer-term interest rates and financial conditions more generally have been subject to debate. I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short- term interest rates have reached zero, the Federal Reserve’s purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public.

    Specifically, the Fed’s strategy relies on the presumption that different financial assets are not perfect substitutes in investors’ portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

    Yeah, I know.

    Others took a swing at explaining QE in terms more accessible to the layman (and woman):

    (The Economist): To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence “quantitative” easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment.

    But the general narrative that the general public was beaten over the head with by central bankers and politicians was, essentially this:

    We are going to pull a few levers and create money which is going to solve all the problems we face. Don’t worry, there will be no negative effects as a result of this policy. We will be able to maintain full control of everything and, when the time comes, we will gracefully exit the program and go back to the way things used to be just as soon as everything is fixed. In the meantime, carry on with your lives, go out, spend money, borrow more and leave the worrying to us.

    The campaign to take a complicated concept and dumb it down sufficiently for a public that really didn’t want to have to do the mental gymnastics required to understand its implications had one significant tailwind – complicity on the part of the public. They wanted to be told it was all going to be OK and they were positively inclined towards the idea of ‘free’ money being printed which would, in turn, lessen their own chances of being directly impacted by the economic downturn which had come so perilously close in 2008.

    Those in charge of designing and implementing QE programs knew that it was all too hard for the public to understand and they played that knowledge brilliantly.

    Unfortunately for them, they were wildly successful.

    The public neither knows nor cares what QE actually is. All they know is that, optically at least, it has worked because a) they are being told it has and b) the stock market is going up.

    That’s essentially been the extent of the burden of proof.

     

    They don’t understand this:

    Or this:

    But here’s where the success in creating the narrative that free money does no harm and has no unintended consequences turns into a potential disaster.

    In the UK, left-winger Jeremy Corbyn was a last-minute addition to the leadership ballot for the Labour Party (US readers can think in terms of the Democratic Party nomination) – thrown into the mix to supposedly ‘broaden the debate’.

    Well he’s broadened it alright:

    (UK Daily Telegraph): the joke has backfired. Mr Corbyn is now the clear front-runner, and on Thursday the bookies installed him as the favourite.

    Oops!

    Corbyn’s own understanding of economics is on par with that of the average British citizen – which is perfectly fine – however, it’s what he’s doing with that knowledge that makes him far more dangerous.

    Ladies and gentlemen, I give you; People’s QE:

    (UK Independent): Jeremy Corbyn said that future rounds of the monetary stimulus should be redirected from the financial sector to brick-and-mortar projects.

    “I am calling for a people’s quantitative easing – and asking my fellow candidates to join me in that call,” he wrote in an article for Huffington Post UK.

    “The Bank of England must be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects.

    Jeremy Corbyn, MP for Islington North“This would give our economy a huge boost: upgrading our outdated infrastructure and creating over a million skilled jobs and genuine apprenticeships.”

    Corbyn has been convinced that QE is a free ride, just like the majority of the electorate and so, of course, he will promise them more of what he knows appeals to them.

    And, if they get the chance, they will vote for him. Of course.

    (Jeremy Warner): …It sounds a bit like The X Factor – perhaps we could get Simon Cowell to chair the MPC live on TV and we could all text in to say how much cash we want the Bank of England to print this month. It turns out, however, that the idea is for the Bank to “be given a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects”. 

    Mark Carney might well feel he has enough to do already, what with controlling interest rates, inflation and regulating the City. But, heck, in a few spare hours on a Friday afternoon, he could just print a couple of hundred extra billion, and use the money to start building publicly-owned housing estates. Yet a few hundred years of history suggest that central banks financing governments directly creates inflation, and another few hundred suggest that state-owned companies don’t usually work well.

    Jeremy Warner’s warning was stark – its implications terrifying:

    (Jeremy Warner): Everything about “Corbyn-omics” is delusional. Unfortunately, that does not mean it does not have an audience. By September, Mr Corbyn might well be leading the Opposition – or at least be shadow chancellor under Mr Burnham.

    The success of the narrative created around QE; that it is the mythical ‘free lunch’ that we all intuitively know can’t exist but secretly hope does, has played perfectly to the public and now, having endured for two electoral cycles, the next wave of politicians also believe it will have no consequences and are actually using it when planning the message they feel will endear them to the electorate.

    What plays better than free money?

    The same phenomenon will be front and center again tonight when the first GOP debate takes place with billionaire reality TV star, Donald Trump front and centre.

    Nobody is better equipped to pander to a public who desire impressive promises of handouts which bear little or no scrutiny, as this remarkable excerpt from The Guardian demonstrates:

    (UK Guardian): “Asked recently what he would replace Obama’s signature healthcare law with, [Trump] replied: “Something terrific.”

    Who wouldn’t vote for something terrific?

  • Oil Trading "God" Loses $500 Million In July On Commodity Rout

    Back in December 2014, when crude oil first crashed into a bear market and traders were desperately looking under nook and cranny for the first casualty of the commodity collapse, they found it in the face of oil trading “god”, Andy Hall, best known for seeking $100 million in compensation in 2008 from Phibro’s then-owner Citigroup, who would leave his long-term employer Phibro by the end of 2014 for the simple reason that after 113 years of operation, Phibro would liquidate in the US, having been unable to find a buyer (with rumors circulating that Hall’s trading P&L did not exactly help the company’s long or short-term prospects).

    While Hall did sever his relationship with the liquidating Phibro (and may have accelerated its collapse with his bullish oil bets), he would keep running his own personal hedge fund, the $3 billion Astenbeck Capital, which may have been Hall’s Phibro bearish oil “hedge” and emerged largely unscathed from the 2014 commodity rout because “Hall curtailed bets and shifted to holding cash.”

    However, 8 months later, with oil crashing again, and without Phibro to serve as a natural hedge, suddenly Andy Hall is in trouble. Again.

    It appears that after the great collapse of 2014, the oil trading “god” refused to learn from his mistakes, and was convinced that oil would promptly rebound up to its historic levels. His bullishness was evident in his latest letter to investors (attached below) in which we found that both his long-term oil price outlook…

    The U.S. shale oil resources which are profitable at $65 WTI simply are not large enough to offset the declining production in these other areas that will result from oil being at that level. At $65 WTI, the economically recoverable oil resource of the lower 48 states in the U.S. is about 70 billion barrels of oil. This would support production of between 9 and 9.5 million bpd – about today’s level. To grow production meaningfully would require prices closer to $80. (Interestingly though, prices much higher than $80 do not significantly increase the economically recoverable resource.)

     

    In summary, global oil prices will not be capped by the average cost of producing U.S. shale oil. U.S. shale oil production costs lie along a spectrum and while the best producers can make adequate returns at $65 WTI many others cannot. Furthermore, in the longer term a significant proportion of non-U.S. shale oil production require prices higher than $65 WTI to sustain investment. Finally, U.S. shale oil producers cannot produce enough oil at $65 to offset the production decline that would occur elsewhere in the world over time at that price.

    … as well as short-term…

    The second half of the year will see a strong seasonal uptick in global oil demand. Oil demand in Q3 and Q4 of 2015 should be some 1.7 and 2.9 million bpd higher respectively than in Q2. Meanwhile year over year U.S. production growth has slowed and production is now starting to decline sequentially. It will continue to decline through the balance of the year (barring significantly higher prices). Non-OPEC production growth elsewhere in the world will also slow through the balance of 2015. By December of 2015 year over year non – OPEC production growth will be a negative 1.7 million bpd compared to a positive 2.7 million bpd in December of 2014.

     

    With global oil consumption rising through the second half of the year at the same time as non-OPEC supply growth is stalling and with OPEC essentially at full capacity, the call on OPEC production will exceed their ability to meet it. This will result in falling global oil inventories during the balance of 2015 and in 2016.

     

    Meanwhile, Saudi Arabia is fighting a proxy war with Iran in neighboring Yemen. It is also facing an existential threat from ISIS which is endeavoring to stir up sectarian unrest in the oil producing east of the country – home to most of Saudi Arabia’s large Shiite minority. Much of the rest of MENA is in turmoil. It’s not unreasonable to say that the geopolitical risks in the major oil exporting region have  seldom been higher. Yet oil prices currently have little or no risk premium and are – furthermore – below the longer run marginal cost of production. Because of this and given that the underlying fundamentals continue to improve, price risks are skewed to the upside in our view.

    … were quite bullish. They have also been, so far, dead wrong. And as Reuters reports, after two consecutive months of 3% losses in May and June at which point he was up just 2% for the year, July was by far the cruelest month in history for the oil trader, a month in which he suffered a whopping 17% loss. To wit:

    Oil trader Andy Hall’s hedge fund lost about 17 percent in July after failing to anticipate sliding crude prices as U.S. inventories piled up, a letter to its investors showed on Thursday.

     

    The monthly loss was the second largest in the history of his Connecticut-based Astenbeck Capital Management firm, performance data accompanying the letter showed. The decline cut total assets under management at Astenbeck to about $2.8 billion, down about $500 million from June.

    So after being up just barely up for the year in June and suddenly down 15% for 2015 a month later, having lost half a billion in just one month, it is a virtual certainty that the redemption requests are coming in. Worse, with Hall no longer having any hedges to cushion the ongoing oil crash (and in fact, it appears he is levered to the upside), his fund may be margin called to death soon enough even in the absence of major redemptions.

    Which begs the questiton: will Hall no longer be seen as an oil trading “god” if Astenbeck is promptly shut down, and the “god” blows up twice in less than a year? Perhaps instead of “god”, a more appropriate animalistic comparable is “pony” with an undiversified bag of tricks.

    His June letter to investors is below.

  • Is Trump The Democrat 'Wolf' In GOP Clothing?

    When we earlier noted the change of course for the GOP as RNC Chair Riebus showed Donald Trump much love, we wondered why the sudden shift of attitude and comment on being a Republican nominee? Well, perhaps, just perhaps, there is a reason why Republican leadership is vying for Trump's 'support'… As WaPo reports, former president Bill Clinton had a private telephone conversation in late spring with Donald Trump as he neared a decision to run for the White House, according to associates of both men. While there are no specifics about the call, we are reminded that Trump has also donated to Hillary Clinton’s Senate campaigns and to the Clinton Foundation.

    Trump, a longtime acquaintance of the Clintons, both of whom attended the businessman’s third wedding in 2005, reportedly had a private telephone conversation in late spring with former President Bill Clinton at the same time that the billionaire investor and reality-television star was nearing a decision to run for the White House, according to associates of both men. As The Washington Post reports,

    The talk with Clinton — the spouse of the Democratic presidential front-runner and one of his party’s preeminent political strategists — came just weeks before Trump jumped into the GOP race and surged to the front of the crowded Republican field.

     

    The revelation of the call comes as many Republicans have begun criticizing Trump for his ties to Democrats, including past financial donations to the Clintons and their charitable foundation.

     

    …

     

    “Mr. Trump reached out to President Clinton a few times. President Clinton returned his call in late May,” a Clinton employee said. “While we don’t make it a practice to discuss the president’s private conversations, we can tell you that the presidential race was not discussed.”

     

    One Trump adviser said Clinton called Trump, but the adviser did not provide specifics about how the call came about.

     

    People with knowledge of the call in both camps said it was one of many that Clinton and Trump have had over the years, whether about golf or donations to the Clinton Foundation. But the call in May was considered especially sensitive, coming soon after Hillary Rodham Clinton had declared her own presidential run the month before.

     

    …

     

    Clinton has reserved her sharpest attacks for former Florida governor Jeb Bush and other candidates she has called out by name for their policies on immigration, abortion and other issues.

     

    For his part, Trump said little about Clinton until recent weeks.

    *  *  *

    The Hill's Brent Budowsky also noted…

    What could Trump do in the campaign that would help the Clintons the most? First, he would personally attack leading GOP candidates in 2016, using derisive language that would almost surely find its way into Hillary Clinton campaign ads if she were to become the Democratic nominee. Check that box, right? Next, Trump could deeply offend Hispanic voters who widely respect Hillary Clinton already. Check that box, too!

     

    Similarly, if Trump tied the GOP in knots by prolonging the Republican nominating process, and prolonged the process of Republicans attacking Republicans, that would be a huge benefit for Hillary Clinton. Check that box. And to the degree that newer faces in the Republican Party who could become the strongest challengers to the Democratic nominee in November, such as Sen. Marco Rubio (R-Fla.) and Wisconsin Gov. Scott Walker (R), found their message drowned out by Trump, the big winner would be Hillary Clinton! Check that box, too.

     

    Of course the grand slam for Hillary Clinton would be if Donald Trump were to run as a third-party candidate in 2016. Remember how H. Ross Perot running in 1992 was vital to the election of Bill Clinton and set the stage for his highly successful and fondly remembered two-term presidency? It would be highly unlikely that this box will ultimately be checked by Team Clinton, but stranger things have happened.

     

    Does this suggest that Donald Trump is a Clinton plant in the current campaign? Of course not, but my tongue is only halfway planted in my cheek by raising this thought, which is delightful for Democrats and deep down must be scary for Republicans.

    *  *  *

    With Hillary facing plunging poll numbers and FBI probes, is The Donald the Democratic nominee in waiting?

  • Republican "Losers" Debate Pits Rick Perry Against Other "B List" GOP Hopefuls

    (Click picture to watch live. Note that Fox requires a cable subscription log-in)

    The “main event” GOP debate isn’t until 9 p.m. ET on Thursday, but for some, the anticipation surrounding Donald Trump’s debate debut will be too much to handle.

    For those folks, there’s the so-called “undercard”, which kicks of four hours earlier and should suffice as an appetizer until the Trump-sized entree is served up piping hot on Fox later this evening. The candidates below the blue cut-off point in the following chart will be participating.

    (Chart: National Journal)

    And while they’ll be no Donald in the “losers’ debate”, they’ll be plenty of Rick (actually there’s two of them), and for those who remember Governor Perry’s famous “oops” moment, that should be enough to guarantee that the consolation round of the first Republican debates of the 2016 election cycle still provides for plenty of entertainment. 

    Here’s a preview from Politico:

    How can you not feel a little bit sorry for Rick Perry? Arguably the most successful governor—certainly the longest serving—of a major state crucial to whatever presidential electoral prospects the GOP has left, and he’s relegated to the losers’ round of the 2016 debates, a forum undoubtedly sponsored by Tyrion Lannister and the Bad News Bears.

     

    But the former Texas governor is not alone.  An impressive array of talent will be alongside him, trying to pretend that they don’t feel like the kid picked last for the dodge ball team.  (Some people still haven’t gotten over it these days—but we try.) 

     

    There’s the only woman in the race, and one of the few with practical business experience that does not include firing Dennis Rodman on TV: Carly Fiorina. There’s Gov. Bobby Jindal, another accomplished governor and a onetime top-tier vice presidential contender whose staunch conservatism and moving son-of-immigrants story should stand out in a political party that’s knocked for being whiter than a Kenny Rogers concert in Vermont.  And next to him will be Sen. Lindsey Graham,  a seasoned legislator and John McCain clone, joined by his now famous cellphone and his bizarre Bill-Clinton-wishes-he’d-thought-of-that rotating first lady proposal. 

     

    Then there’s Rick Santorum, a finalist in 2012, who is about a point away from former Virginia Governor Jim Gilmore, whose poll numbers for the moment suggest he’d have a hard time beating Bill Cosby.  And let’s not forget New York’s George Pataki—one of the few if not the only Republican ever elected statewide in New York since the invention of the iPhone. No, there’s nothing to be embarrassed about by being in this crowd.

     


     

    Meanwhile in the “winners circle” are two guys who’ve never worked a single day in public office, a senator who wears baseball uniforms to display his qualifications for the White House and a former governor best known these days for writing about his yo-yo dieting and his love of gravy (I think there may be a connection there.)

     

    As you can see from the following graphic, the difference between making the prime time debate versus the “dinner time” version came down to the thinnest of margins for some participants:

    (Graphic: National Journal)

    *  *  *

    Bonus: “Oops“

  • 3 Warnings For Market Bulls

    Submitted by Lance Roberts via STA Wealth Management,

    Lowry Sees Bull Market Ending 

    There is a very interesting podcast at Financial Sense with Richard Dickson, who is the Senior Market Strategist at Lowry Research. The reason that this particular interview is so interesting is that Lowry Research has been one of the primary supports for Jeff Saut's uber bullish view on the markets over the last couple of years. To wit:

    "[May 2, 2014] In fact, the SPX has been in a flat-line pattern for almost two months, having only gained 0.03% since March 7th, causing many Wall Street wags to proclaim a major "top" is at hand. However, as Lowry's writes:

     

    'The 88-year history of the Lowry Analysis shows that such stalemates are relatively common developments during most bull markets. They simply reflect periods in which investor buying enthusiasm is temporarily fatigued, at the same time that sellers are reluctant to part with their stocks, in anticipation of eventually higher prices. Thus, there is not enough Demand to push prices up to new bull market highs, and there is not a strong enough desire to sell to drive prices sharply lower. Eventually, sideways trading patterns are usually resolved through the process of a short-term correction, in which investors become impatient and sell, pushing prices low enough to revitalize buying enthusiasm and launch the next leg of the bull market.'

     

    Obviously I agree with the astute Lowry's organization, and I will say it again, 'It is too early to know if this is the beginning of a 10%-12% correction.'"

    That was so last year. However, very similarly this year, markets have once again been locked in a stalemate with "buyers" fatigued and "sellers" unwilling to part with stocks from fear of missing the next leg higher. 

    So what is Mr. Dickson saying now? 

    Dickson says when the broader indexes are approaching a top, the advance is led by fewer and fewer stocks, which has been seen at every major market peak they've studied.

     

    This phenomenon registers in the market's widely followed advance-decline line, however, Dickson points out that relative under-performance by small-cap stocks often provides an earlier warning signal to potential trouble ahead. He notes that small-cap stocks began to deteriorate almost a year ago, and many have already entered bear market territory. This is not healthy action, he says.

     

    Based on research conducted at Lowry, this predicts a market top within 4 to 6 months. In the interim, Dickson will be watching a variety of other technical indicators for confirmation, such as buying power and selling pressure.

    Here is a chart of the advance-decline line and small-cap performance relative to the S&P 500. 

    SP500-Adv-Decline-080615

     

    McClellan: Market Lacking "Escape Velocity"

    Tom McClellan, a family famous for the "McClellan Oscillator" recently issued a note discussing the importance of the number of advancing and declining issues and "escape velocity." To wit:

    "To understand this important point, we need to explore and define a principle of rocketry known as 'escape velocity.' This term is variously (and sometimes confusingly) defined as the velocity which a projectile needs in order to escape the gravitational field of a planet or other body, and/or the velocity needed to achieve stable orbit as opposed to falling back down to Earth. My purpose here is not to defend either definition; for our purposes, the idea is the same, that there needs to be sufficient energy to keep from falling back down.

     

    The Summation Index can show us that. For this discussion I will be using the Ratio-Adjusted Summation Index (RASI), which factors out changes in the number of issues traded… the RASI gives comparable amplitude levels with which to evaluate available financial market liquidity."

    RASI July2015

    "The +500 level for the RASI is the important go/no-go threshold for this concept of 'escape velocity.'

     

    Since the 2009 bottom, the Federal Reserve has made sure that there was liquidity available to the financial markets, at least for the most part. The cutoffs of liquidity after both QE1 and QE2 led to vacuums in the banking system, and stock prices fell into those vacuums. The question for 2015 is whether Fed actions are going to take away the liquidity punch bowl, and create a problem for the next rally's ability to achieve escape velocity.

     

    We saw this principle of diminished liquidity back in 1998-2000, and again in 2007-08, as highlighted in this historical chart. When the RASI failed to climb back up above +500, it said that there were liquidity problems which ended up keeping the stock market from being able to continue itself higher."

    RASI 1998-2008bb

    "My leading indication from the eurodollar COT data says that we should expect a major top in August 2015, and so there is not all that much time left for the RASI to get back up above +500. An upturn from this oversold condition should be able to produce a marginally higher price high, but if it cannot produce a RASI reading above +500, then we will know that the end has arrived for the bull market."

    Effron: M&A Activity Looks A Lot Like 2007

    In a recent interview on CNBC, Blair Effron, co-founder of Centerview Partners and one of Wall Street's biggest dealmakers, highlighted the similarities between the current M&A environment to that of 2007. 

    Currently, M&A activity is at its highest level since 2007 with global volumes hitting $2.9 Trillion since the beginning of 2015. According to data from Dealogic, that is a surge of 38% as compared to the same period in 2014. 

    Importantly, Effron also notes that the high valuations paid for M&A deals are, in large part, being driven by the current low interest rate environment.

    Of course, with low interest rates, that means the majority of those deals are being funded by debt issuance. via WSJ:

    "According to Dealogic, the Americas accounts for 83% of global acquisition related bonds, with a record $241.7 billion issued so far this year, compared with just $62.6 billion this time last year. In Europe, 38% of all high-yield bond issuance in the first half of the year has been related to M&A activity, according to Credit Suisse."

    MA-DebtFinancing-080615

    That is an interesting point since that is the same argument for high stock valuations, stock buy backs and dividend issuance and the housing market. Given that the vast majority of analysts currently believe interest rates are on the verge of rising, logic would suggest that such will likely be a negative for the bullish mantra. 

    While we have seen this same game play out repeatedly before, this time is surely different…right?

  • Last Daily Show with Jon Stewart Airs Tonight

    Whether you love him or hate him, tonight marks Jon Stewart’s final taping of The Daily Show as he steps down as host – a position he’s held for 16 years. During that time, the show has won 20 Emmy Awards, two Peabody Awards, and Stewart even managed to win a Grammy for himself in 2005 for the recording of his audiobook, America, A Citizen’s Guide to Democracy Inaction.

    Despite the fact Stewart has always claimed The Daily Show is just a fake news show, the influence he’s had on politics and the media cannot be denied. 

    In October of 2004, Stewart appeared on CNN’s Crossfire where he heavily criticized the state of journalism and called the show’s hosts, Tucker Carlson and Paul Begala, “partisan hacks.” Stewart commented that the show failed to educate and inform its viewers by not taking politics seriously, stating that calling Crossfire a debate show is like “saying pro wrestling is a show about athletic competition.” In January of 2005, CNN announced the cancelation of Crossfire with CNN’s then-incoming president, Jonathan Klein stating, “I think he [Stewart] made a good point about the noise level of these types of shows, which does nothing to illuminate the issues of the day.”

    Stewart also announced a fake crowdfunding campaign to buy CNN back in July of 2014 after Rupert Murdoch offered $80 billion to buy its parent company, Time Warner. Stewart claimed that for a donation of $5 million, CNN would air a “24-hour, two-week hunt for your lost car keys.” 

    In March of 2009, The Daily Show lambasted CNBC for its shoddy reporting of the financial crisis of 2008. Stewart claimed the network dodged its journalistic duty by merely accepting information from corporations without bothering to investigate further into matters at hand. On March 12, Jim Cramer appeared on The Daily Show where Stewart told him, “I understand you want to make finance entertaining, but it’s not a fucking game. And when I watch that, I get, I can’t tell you how angry that makes me. Because what it says to me is: you all know. You all know what’s going on. You know, you can draw a straight line from those shenanigans to the stuff that was being pulled at Bear, and AIG, and all this derivative market stuff that is this weird Wall Street side bet.” That episode of The Daily Show garnered 2.3 million total viewers, and the next day The Daily Show website saw its highest day of traffic year-to-date.

    Stewart has also been an advocate for veterans and 9/11 first responders. He’s credited with breaking a Senate deadlock over a bill that would offer healthcare for 9/11 first responders, which passed three days after he featured a group of responders on the show. He also criticized a White House proposal to remove veterans with private insurance plans from the Department of Veterans Affairs rolls. The White House dropped the plan the next day.

    South African comedian, Trevor Noah, who has been a regular contributor to The Daily Show since December of 2014, will replace Stewart. He will begin his hosting duties on September 28. On Wednesday it was announced that Stewart’s Daily Show set will be put on display at the Newseum in Washington, D.C. 

    [original]

    EquityNet | The Leading Equity Crowdfunding Platform

  • Dow Dumps Almost 1000 Points From Highs To 6-Month Lows, Crude Carnage Continues

    Seemed appropriate…

    With 121 S&P 500 members now trading more than 20% off their highs…

    No real catalysts today – aside from Hilsenrath talking back Powell's dovishness, a terrible Challenger Jobs data point, moar crude carnage, and all the story stocks and media firms getting Baumgartner'd… Nasdaq was worst, Dow best but still a loser…

     

    The plunge was initially protected by a mysterious bid which failed and then anchored off JPY and WTI Crude…

     

    Desperate to get back to VWAP…

     

    Which left cash ugly on the day…Dow tested to 6mo lows – just short of 1000 points off the highs… Nasdaq worst on the day…

     

    And on the week… Small Caps are the biggest loser…

     

    Russell 2000 briefly went red for 2015

     

    Energy stock dip-buyers were out en masse….

     

    But credit was being dumped…

     

    Even as Energy credit risk is soaring – back near 2015 highs…almost 1000bps!

     

    VIX Soared on the day back above 14… (after an 11 handle just 2 days ago)

     

    Treasury yields tumbled today…leaving 30Y yields lower on the day…

     

    The US Dollar drifted very modestly lower… Cable saw a quick dump on BoE comments this morning….

     

    Commodities were mixed with gold and silver drifting higher and copper lower…

     

    Crude was clubbed again…

     

    Charts: Bloomberg

    Bonus Chart: Explain this 'signalling'!!

    h/t Jim A

    Bonus Bonus Chart: You Are Here…

  • TBTF Banks Lowering Down-Payments & Credit Standards To Keep High-End Housing Market Alive

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    What do you do when even wealthy people begin to face an increasingly hard time purchasing a home in a vertical market completely disconnected from income trends? You reduce downpayments and lower credit standards, of course.

    Where have we seen this story before…

    From the Wall Street Journal:

    The nation’s largest bank by assets plans to announce Wednesday that it is lowering the minimum credit score and down payment it requires for mortgages as big as $3 million.

     

    The New York firm’s moves follow similar steps at Bank of AmericaCorp., Wells Fargo & Co. and other banks on requirements for “jumbo” mortgages—those that exceed $417,000 in most parts of the country or $625,500 in pricier markets. At the same time, some big banks are backing away from smaller loans where they see higher regulatory costs and litigation risks.

    Guess it’s gonna be shipping container apartments for everyone else.

     

    Since the financial crisis, a recovery in the mortgage market has faced several challenges, but the jumbo market—popular with well-heeled borrowers—has bounced back along with sales of higher-priced homes. In the second quarter, overall jumbo originations rose to an eight-year high of $93 billion, up 58% from a year ago, according to a preliminary estimate from industry newsletter Inside Mortgage Finance.

     

    By dollar volume, jumbo mortgages given out by lenders last year accounted for about 20% of all first-lien mortgages, used mostly to purchase or refinance a home, according to Inside Mortgage Finance. That is up from 5.5% in 2009. The last time jumbo mortgages accounted for a larger share was in 2005.

    2005…got it.

    For jumbo mortgages, J.P. Morgan plans to lower the minimum FICO credit scores it requires to 680 from 740 for loans on primary single-family purchases, second homes and certain refinances on those properties.

     

    The increase in jumbo lending underscores a housing recovery concentrated in higher-priced homes. Sales of existing single-family homes priced between $750,000 and $1 million, for example, increased 21% in June from a year prior, according to the National Association of Realtors.

     

    Sales of homes priced between $100,000 and $250,000, in contrast, increased 12.5%, while those priced lower fell 3%.

    I don’t call this the oligarch recovery for nothing.

    Rising home values have helped give lenders confidence that lower down payments won’t leave borrowers at risk of owing more on their homes than they will eventually be worth.

     

    J.P. Morgan’s changes, which go into effect Wednesday, will reduce minimum down payments for some borrowers to 15% of the purchase price for single-family homes serving as the borrower’s primary residence, down from 20% currently. That change applies to mortgages between $1.5 million and $3 million; the bank last year made the same change for jumbo mortgages up to $1.5 million.

     

    The bank also is lowering down-payment thresholds for jumbo mortgages used for second homes, such as vacation homes, and certain two- to four-unit properties. The bank says the changes simplify its offerings.

     

    Several large banks have recently lowered their jumbo-mortgage requirements. Wells Fargo last year cut the minimum down payment it requires to 10.1% from 15% for jumbo mortgages of up to $1 million.

     

    In June, Bank of America began allowing first-time home buyers, which it defines as people who haven’t owned a home for at least three years, to make 15% down payments for jumbo mortgages of up to $1 million. The bank previously excluded this group of buyers from its 15% down-payment option, which it rolled out in 2013.

    Gotta love these banks. They just make shit up. Somehow “not owning a home for three years” = first time homeowner. Aren’t you glad we bailed them out?

  • Analysts Give Up On "Man-Made" China Data: It's "A Fantasy" That "No One Believes"

    When China reported that its economy grew 7% in Q2 – spot-on Beijing’s target – virtually no one believed it.

    The veracity of the country’s economic data has long been the subject of debate and when FT called out the country’s National Bureau of Statistics for employing what we called “deficient deflator math” on the way to understating inflation and overstating output, China’s statistics bureau responded, saying that although there was “room for improvement,” the deflator wasn’t underestimated, GDP growth wasn’t overstated, and “both reflect the real situation.” 

    One could certainly be forgiven for insisting that the NBS is simply lying, because after all, the “real situation” looks like this:

    Charts: A. Gary Shilling’s Insight

    Given the above, it should come as no surprise that some analysts believe the actual rate of growth in China is closer to zero than it is to 7%. Here’s Reuters:

    China’s economy is growing only half as fast as official data shows, or maybe even slower, according to foreign investors and analysts who increasingly challenge how the world’s second largest economy can be measured so swiftly and precisely.

     

    But perhaps the biggest question is how a developing country of 1.4 billion people can publish its quarterly gross domestic product (GDP) statistics weeks before first drafts from developed economies like the United States, the euro zone or Britain, and then barely revise them later.

     

    “We think the numbers are fantasy,” said Erik Britton of Fathom Consulting, a London-based independent research firm and one of the more vocal critics of official Chinese data. “There is no way those numbers are even close to the truth.”

     

    The uncanny official calm in China GDP data may well be contributing to sceptics’ exit from Chinese assets just as the authorities struggle to manage a volatile stock market.

     

    Fathom, which decided last year to stop publishing forecasts of the official GDP release and instead publish what it thinks is really happening, reckons growth will be 2.8 percent this year, slowing to just 1.0 percent next year.

     

    Li Keqiang, now Chinese Premier, was cited in leaked U.S. diplomatic cables years ago from when he was Communist Party head in Liaoning province calling GDP figures “man-made” and unreliable. This remains a buttress for widespread scepticism.

     



    Fathom publishes a simple indicator based on three variables that Li said at the time he watched for a better view of how his local economy, and by extension the national one, was faring: electricity consumption, rail cargo volume, and bank lending.


    That implies a growth rate of 3.2 percent, and shows a significant decoupling from the official rate since late 2013 based on a plunge in rail freight volumes and below-trend growth in electricity production.


    “Clearly nobody believes the data,” said Sushil Wadhwani, a former Bank of England Monetary Policy Committee member and founder of Wadhwani Asset Management LLP.


    Wadhwani says he also looks at various proxies of China’s growth rate, which he deems are “pretty unreliable” as well and which suggest anywhere from 1.5 percent to about 5 percent growth.


     

    “I truly don’t know where we are in that range”, he said.

    Neither do we, but we suspect it’s closer to the low end and indeed, if the 35% rise in NPLs cited last week by Shang Fulin, chairman of China Banking Regulatory Commission, is any indication, things are getting a lot worse under the hood as the slumping economy causes loans to the manufacturing sector to sour at an unprecedented rate. 

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Aug 06

Today’s News August 6, 2015

  • Paul Craig Roberts: A Prescription For Peace & Prosperity

    Submitted by Paul Craig Roberts,

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

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

    The Road to Prosperity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    The Road to Peace is Difficult

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    This implies our own destruction.

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

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

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

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

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

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

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

    Submitted by Charles Hugh-Smith of OfTwoMinds blog,

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

    We are constantly bombarded with two messages about inflation:

    1. Inflation is near-zero

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

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

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

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

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

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

    Which also explains why she hired his lawyer.

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

     

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

     

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

     

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

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

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

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

    Submitted by Naji Dahl via Anti-Media,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

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

     

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

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

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

     

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

     

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

     

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

    As The Journal concludes,

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

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

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

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

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

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

    Each bounce yesterday saw immediate selling pressure..

     

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

     

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

     

    And it appears the 200DMA will be tested again…

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

     

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

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

     

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

     

    …

     

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

     

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

     

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

    What does it take for famers to learn?

    • *SHANGHAI EXCHANGE MARGIN DEBT RISES FOR SECOND DAY

    Another crash it would appear…

    *  *  *

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

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

    Originally posted at KesslerCompanies.com,

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

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

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

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

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

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

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

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

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

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

     

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

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

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    * * *

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

    * * *

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

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

    The Middlebrooks recording is below

  • China Responds To US Declaration Of Cyber War

    Authored Op-Ed via Government mouthpiece Xinhua,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Me So Einhorny!

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

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

    0805-givesup

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

    0805-gmcr

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

    A few other unrelated things on my mind……

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

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

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

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

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

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

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

    *  *  *

    From Goldman

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

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

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

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

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

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

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

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

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

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

    3. Short-term market implications

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

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

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

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

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

  • "Debt Is A Fickle Witch"

    Via The Liscio Report,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

  • Six Warning Signs That The Economy Is In Trouble

    Submitted by Tony Sagami via MauldinEconomics.com,

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

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

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

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

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

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

    Why so glum?

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

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

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

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

    The problem? Weak demand for its jet engines.

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

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

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

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

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

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

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

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

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

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

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

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

  • For Commodities, It's 2008 All Over Again

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

     

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

    Dear Commodity Investors – Welcome back to 2008!!

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    Charts: Bloomberg

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

    Submitted by Michael Snyder via The Economic Collapse blog,

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

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

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

     

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

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

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

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

     

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

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

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

     

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

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

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

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

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

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

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

     

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

     

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

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

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

     

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

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

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

     

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

    So are they right?

    We’ll know soon.

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

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

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

     

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

     

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

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

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

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

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

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

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

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

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

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

    (Charts: Chicago Tribune)

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

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

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

    *  *  *

    From Reuters

    “Multitude of local authorities soak Illinois homeowners in taxes“

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    *  *  *

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

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

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

    Via Scotiabank's Guy Haselmann,

    Part One, China

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Part Five, Notice the Warning Signs

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

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

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

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

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

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

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

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

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

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

     

    Increase portfolio liquidity, while reducing portfolio volatility.

     

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

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

    Own US Treasuries versus European debt.

     

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

     

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

     

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

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

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

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

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

  • Mapping The Global War On Terror

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

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

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

    Some “highlights” from 2013 include:

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

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Aug 05

Today’s News August 5, 2015

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

    by Keith Weiner

     

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

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

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

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

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

    Groceries

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

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

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

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

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

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

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

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

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

     

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

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

    Submitted by John Whitehead via The Rutherford Institute,

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

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

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

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

    All is not as it seems.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Fear makes people stupid.

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

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

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

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

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

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

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

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

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

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

    If we’re watching, we’re not doing.

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

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

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

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

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

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

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

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

    Chinese stocks see a modest lift at the open…

     

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

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

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

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

     

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

     

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

     

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

     

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

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

    But problems remain…

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

    As Bloomberg reports,

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

     

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

     

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

     

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

    which is neither unequivocally good for refiners or automakers.

  • Fed Lunacy Is To Blame For The Coming Crash

    Submitted by Jim Quinn via The Burning Platform blog,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Read Hussman’s Weekly Letter

  • Russia Ready To Send Paratroopers To Syria

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

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

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

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

     

    (USSR paratroopers ca. 1975)

     

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

     

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

     


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

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

  • Dramatic Footage Of Saudi Tanks Invading Yemen

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

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

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

     

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

     

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

     

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

     

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

     

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

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

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

    *  *  *

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

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

     

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

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

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

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

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

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

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

     

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

     

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

     

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

     

     

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

     

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

    How rising textbook prices mirrors rising drug costs…

  • Some Clear Thinking About The Price Of Gold

    Submitted by Simon Black via Sovereign Man blog,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    3) Remember why you own gold to begin with.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Submitted by Peter Schiff via Euro Pacific Capital,

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

    In recent years the contest has become a blowout, with the Dollar pummeling the Euro into apparent submission. Based on the turmoil created by the European Debt Crisis and the continuing problems in Greece and other overly indebted southern tier European economies, many investors may have come to assume that Euro boosters will be forced to ultimately throw in the towel and call off the entire experiment, thereby leaving the Dollar completely unchallenged as the champion currency, now and for the foreseeable future. This is a stunning turnaround for a currency that was seen just a few years ago as a credible threat to supplant the dollar as the world's reserve.
      
    Putting aside the fact that there are many important currency relationships besides the euro/dollar axis, economists, journalists, and investors have forgotten the 16-year history of the Euro and how the currency has survived and prospered after many had assumed it might be consigned to the dustbin of history.
      
    The Euro was created in 1992 by the Maastricht Treaty (which created the European Union) but did not come into being as an accounting unit (not a physical currency) until January of 1999. In the lead up to its launch, many had argued that the Euro would become the heir to the rock solid Deutsche Mark, the German currency that had risen to preeminence on the back of Germany's post war resurgence, high savings rate, enviable trade balance, and post-Soviet unification. With German bankers in a firm leadership position in the European Central Bank and the European Union, many had hoped that the new Euro would adopt the virtues of the Mark. As a result, the Euro debuted with a value of 1.18 dollars. But the honeymoon was short-lived.
      
    Almost immediately from the point it began freely trading the Euro began to encounter severe headwinds. The Russian debt default and the Asian currency crisis in the late 1990's caused investors to sell assets in the emerging markets and seek safe havens in the dominant economies. This provided a crucial early test for the Euro. But the new currency failed to attract much of this fast flowing transnational investment flow. On the other hand, the U.S. markets and the U.S. Dollar were beckoning as extremely attractive targets.
      
    In the second term of Bill Clinton's presidency, America, at least on paper, looked very strong. From 1998-2000, based on Bureau of Economic Analysis (BEA) figures, GDP growth averaged 4.4%, which is roughly four times the rate that we have seen since 2008. The expanding economy and the relative spending restraints that had been made by the Clinton Administration and the newly elected Republican Congress resulted in hundreds of billions of annual U.S. government surpluses, the first such black ink in generations. Many economists comically concluded that the surpluses would become permanent (in fact they lasted just a few years). At the same time, U.S. stock markets were notching some of the biggest gains in their history. From the beginning of 1997 to the end of 1999 the Dow Jones surged by approximately 69%. The tech heavy Nasdaq, the epicenter of the "dotcom" bubble, rallied by an eye popping 294%.
     
    As a result, international money began pouring into the Dollar, taking the wind out of the sails of the newly launched Euro. The stretched valuations that had pushed up U.S. stocks to nosebleed levels failed to dissuade investors from piling in well into the mid-point of 2000. Not only had Wall Street spread the gospel of the new economy, where negative earnings and high debt no longer mattered, but many were convinced that the interventionist tendencies of the Alan Greenspan-led Federal Reserve would protect investors against losses.

     

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

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

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

     

    The bursting of the dotcom bubble in mid-2000 finally caused a decisive break with the investment trends that had predominated in the previous number of years (see my recent article "The Big Picture"). Just as the dotcom wealth began disappearing, taking the U.S. federal budget surpluses with it, the emerging markets began to recover, and the much-maligned Euro started getting some attention.
      
    By January 5, 2001 the Euro had hit 95.4 cents, a stunning 15.3% rally in just over two months. And although the Euro zigzagged substantially over the next year and a half (with an early retreat in 2002, causing the Organization for Economic Cooperation and Development (OECD) to wonder whether the Euro was a "Doomed Currency"), by the second half of 2002 the uptrend was firmly in place, with the Euro reaching parity again with the Dollar by July 15, 2002, 30 months after it had fallen below that level. By April 22, 2008 the Euro traded at $1.60 to the Dollar, a price that represented a 36% increase over its debut level and a stunning 93% rally from its October 2000 low.
      

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

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

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

      
    But the straw that really broke the camel's back came at the end of 2014 when it became clear that the European Central Bank, under the new leadership of Mario Draghi, would finally succeed in short-circuiting the anti-bailout restrictions of the Maastricht Treaty and outflank the objections of the German financial and political establishment in order to bring full blown Quantitative Easing (QE) to the Eurozone. The QE program essentially involves creating Euros out of thin air in order to buy government debt and hold down long-term interest rates.
      
    Expectations about European QE came at a time when most observers concluded that the U.S. economy was finally on track for a strong recovery in 2015 and that the Federal Reserve (which has already showered the United States with almost six full years of QE) had finally done away with the program and would begin raising rates for the first time in almost 10 years. Despite a languishing economy, the U.S. markets had once again delivered stellar returns, with the S&P 500 rising 64% between 2011 and 2014, doing so without ever experiencing a correction of more than 10%.
      
    These movements provided a strong rationale for investors to sell Euros and buy Dollars. In the 12 months from May 2014 to May 2015 the Euro fell by about 20%. When it bottomed out at $1.05 on March 11, 2015, the Euro had fallen 34% from its peak seven years earlier. This revived the opinions that the Euro was dead and that the Dollar would be the only real reserve currency for the foreseeable future.
      
    But what if the assumptions about a U.S. economic recovery and Fed rate hikes were wrong? Could observers be mistaken now about the trajectory of the Dollar vs. the Euro as they were back in 2000? While some had warned that the dotcom bubble of 2000 could end badly, very few understood how deeply the mania was the root of the economic expansion and how severely the final flameout would threaten the entire economy. Similarly, very few had foreseen the dangers that the housing and mortgage bubble had presented to the wider economy in 2008. The economic and market contractions in 2000 and 2008 might have been much worse if the Fed had not been able to cut interest rates by almost 500 basis points in the face of the crises. (No such options are available if the economy contracts today). In other words, complacency can be very dangerous, especially if there is no ammunition to combat a crisis if it arrives unexpectedly .
     
    Confidence is the only thing that really undergirds modern fiat currencies. But confidence can be very ephemeral…disappearing as quickly as it arrives. The U.S. Dollar benefits from confidence that the Euro currency may just be unworkable, that the U.S. economy will continue to improve, and that the Fed will raise rates throughout the remainder of 2015 and into 2016. If these expectations are unfulfilled, there could be a Euro reversal.
      
    When a trend remains in place for a while, people tend to think it will continue forever. When it reverses, the shock can be widespread. Just as currency speculators over-estimated the strength of the U.S. economy in 2000, I believe they are making the same mistake again today. But the U.S. economy is actually much weaker and more vulnerable now than it was in 2000. If the spell of confidence surrounding the Dollar is broken, it may also reverse the fortunes of other beaten down currencies. This could present a sea change in the global investment landscape for which wise investors should be prepared.

     

  • We, The Sheeple

    Presented with no comment…

     

     

    Source: Investors.com

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

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

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

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

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

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

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

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

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

    * * *

    From The Liscio Report, by Danielle DiMartino

    You’re Gonna Need a Bigger Boat

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • TEPCO Officials To Be Tried for Role In Fukushima Meltdown

    Submitted by Andy Tully via OilPrice.com,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

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

     

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

    Here are some of the key findings:

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

  • Chart Of The Day – Americans Are Not Happy

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

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

    We learn that:

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

     

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

     

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

    Now, here’s that chart:

    Screen Shot 2015-08-04 at 2.00.55 PM

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

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

     

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

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

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

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

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

     

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

     

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

     

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

     

     

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

     

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

     

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

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

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

     

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

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

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

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

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

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

    Submitted by Gary Galles via The Mises Institute,

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

    Short-Termism, Share Prices, and Incentives

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

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

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

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

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

    The Role of the Fed and Government Intervention

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

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

    Government Is More Short-Term Oriented Than the Private Sector

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

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

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

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

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

     

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

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

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

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

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

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

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

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

     

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

     

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

     

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

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

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

     

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

     

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

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

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

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

    Well, that’s not entirely true.  

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

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

     


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

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

    They are not.

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

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

     

    This is how Goldman frames its confusion:

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

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

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

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

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

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

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

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

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

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

     

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

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

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

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

     

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

     

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

     

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

     

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

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

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

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

     

    Why is this a paradox?

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

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

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

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

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

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

     

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

     

    On the day…only Trannies closed green…

     

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

     

    And since Friday… Dow and Smal lCaps underperform

     

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

     

    With AAPL getting clubbed…

     

    VIX was as gappy as a hillbilly's teeth…

     

    Treasury yields all rose notably after Lockhart jawboned…

     

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

     

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

     

    Dollar strength sparked more commodity weakness…

     

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

     

    Charts: Bloomberg

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

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Aug 04

Today’s News August 4, 2015

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

    Submitted by Paul Craig Roberts,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

    Still ahead…

     

    As The Wall Street Journal reports,

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

     

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

     

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

     

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

     

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

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

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

     

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

    *  *  *

    Mr Trump did not seem too worried…

    It's going to be a busy week…

     

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

    Submitted by Christopher Westley via The Mises Institute,

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

    The Voluntary Marketplace Uses Greed as Motivation to Serve Others

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

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

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

    A New Death Tax in Connecticut

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

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

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

    Capital Arises from Thriftiness, Not Greed

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

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

     

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

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

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

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

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

     

    As Bloomberg details,

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

     

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

    As Reuters adds,

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

     

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

    *  *  *

    But for now it is having only modest impact…

     

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

     

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

     

    Charts: Bloomberg

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

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

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

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

    Screen Shot 2015-08-03 at 10.41.45 AM

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

     

    Screen Shot 2015-08-03 at 10.41.59 AM

    We learn more from Bloomberg:

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

     

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

     

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

     

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

     

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

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

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

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

     

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

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

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

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

    Coming to San Francisco…Tenement Sized Apartments!

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

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

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

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

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

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

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

    How many millions?

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

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

    And likewise for Bill Clinton:

    And a visual way of showing the above data.

    Hillary:

     

    Bill:

    Source: Hillaryclinton.con and Politco

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

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

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

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

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

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

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

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

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

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

     

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

     

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

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

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

     

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

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

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

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

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

    Which brings us to the usual concluding observations:

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

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

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

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

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

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

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

    Moments ago Melba Acosta, president of the Government Development Bank, confirmed as much, when he announced that only $628,000 of the $58 million payment, or just about 1%, had been paid.

    Below is the full statement from Acosta on the service of PFC Bonds:

    Today, Government Development Bank for Puerto Rico (“GDR”) President Melba Acosta Febo issued the following statement on the service of Public Finance Corporation (PFC) bonds:

     

    Due to the lack of appropriated funds for this fiscal year the entirety of the PFC payment was not made today. This was a decision that reflects the serious concerns about the Commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained.

     

    “PFC did make a partial payment of Interest in respect of its outstanding bonds. The partial payment was made from funds remaining from prior legislative appropriations in respect of the outstanding promissory notes securing the PFC bonds. In accordance with the terms of these bonds, which stipulate that these obligations are payable solely from funds specifically appropriated by the Legislature, PFC applied these funds—totaling approximately $628.000—to the August 1 payment.”

    WSJ adds that the payment to bondholders is the first skipped since Governor Alejandro Garcia Padilla in June said the island’s debts were unsustainable and urged negotiations with creditors in an effort to restructure about $72 billion. “Still, analysts said it isn’t likely to provoke an acute market wide reaction from investors, many of whom have been inching away for the commonwealth for years.”

    Except for those hedge funds who haven’t, and have been BTFD in hopes of another bailout of course.

    And confirming that making just 1% of the contractual payment is not the same as making 100% of it, moments ago Moody’s confirmed what most had already known:

    • MOODY’S VIEWS PUERTO RICO IN DEFAULT

    More via CNBC:

    “Moody’s views this event as a default,” Emily Raimes, vice president at Moody’s Investors Service, said in a statement, adding that payment of “debt service on these bonds is subject to appropriation, and the lack of appropriation means there is not a legal requirement to pay the debt, nor any legal recourse for bondholders.

     

    “This event is consistent with our belief that Puerto Rico does not have the resources to make all of its forthcoming debt payments. This is a first in what we believe will be broad defaults on commonwealth debt,” she added.

    In other words, small or not, PR has failed a mandatory principal repayment and is now in default under the PFC bonds. Up next, as per Bloomberg’s preview “the default promises to escalate the debt crisis racking the island, where officials are pushing for what may be the biggest restructuring ever in the municipal market.”

    “An event like this is significant enough that it could hurt prices for Puerto Rico bonds,” said Richard Larkin, director of credit analysis at Herbert J Sims & Co. in Boca Raton, Florida. “I can’t believe a default on debt with Puerto Rico’s name will go unnoticed.”

    It is unclear if creditors will now threaten the commonwealth with a “temporary” expulsion from the dollarzone as part of their hardball negotiating tactics. Nor is it clear if Schauble is still willing to trade Puerto Rico for Greece.

    What is clear is that the first default by a US commonwealth is now in the history books.

  • Pictures Worth A Thousand Words: Coafeidian, The Chinese Eco-City That Became A Ghost Town

    Authored by Gilles Sabrie, originally posted at The Guardian,

    "As precious as gold…" That was how then-president Hu Jintao described Caofeidian during his visit in 2006. It was pledged to be "the world’s first fully realised eco-city" – yet 10 years and almost $100bn later, only a few thousand inhabitants have moved to this land reclaimed from the sea.. as yet another 'centrally planed' idea is completely FUBAR.

    China’s ‘eco-cities’: empty of hospitals, shops and people

    The leftover gate from a road construction site. The road doesn't lead anywhere.

    The leftover gate from a construction site – for a road that doesn’t lead anywhere. Caofeidian eco-city, begun in 2003, is located 200km southeast of Beijing. All photographs: Gilles Sabrie

    Locals fish for crabs in the Bohai Sea as construction sites stand idle in the background.

    Locals fish for crabs in the Bohai Sea as construction sites stand idle in the background. Caofeidian, in Hebei province, was originally a small island that has expanded using land reclaimed from the sea.

    The ‘eco-city’ was made possible through huge bank loans. Once it was half-built, these loans were halted and many projects suspended due to the rising cost of raw materials and a lack of government support.

    The ‘eco-city’ was made possible through huge bank loans. Once it was half-built, these loans were halted and many projects suspended due to the rising cost of raw materials and a lack of government support.

    The knock-on effects are also to be seen in this abandoned tourist resort by the shore of Bohai Sea.

    The knock-on effects are also to be seen in this abandoned tourist resort by the shore of Bohai Sea.

    A lone worker inside Caofeidian city’s mostly abandoned industrial park. He works for a company producing solar panels – a heavily subsidised industry in China that is plagued by over capacity.

    A lone worker inside Caofeidian city’s mostly abandoned industrial park. He works for a company producing solar panels – a heavily subsidised industry in China that is plagued by over capacity.

    Caofeidian eco-city was planned to accommodate one million inhabitants, yet only a few thousand live there today.

    Caofeidian eco-city was planned to accommodate one million inhabitants, yet only a few thousand live there today. It has joined the growing ranks of China’s ghost cities.

    A torn poster showing the original plan for Caofeidian Environmental Industries Park. Government and state owned industrial enterprises are said to have invested 561 billion yuan (US $91bn) in the area over the past decade, but the park was never completed.

    A torn poster showing the original plan for Caofeidian Environmental Industries Park. Government and state owned industrial enterprises are said to have invested 561 billion yuan (US $91bn) in the area over the past decade, but the park was never completed.

    A shopping mall modelled on a traditional Italian city was finished, but businesses haven’t moved owing to the small number of city residents.

    A shopping mall modelled on a traditional Italian city was finished, but businesses haven’t moved owing to the small number of city residents.

    Behind the empty mall, a branch of Tangshan University is under construction. The provincial government is moving it to Caofeidian to make up for the lack of businesses in the new city.

    Behind the empty mall, a branch of Tangshan University is under construction. The provincial government is moving it to Caofeidian to make up for the lack of businesses in the new city.

    Security guards by Cafofeidian harbour, where coal and iron ore are unloaded to feed the Shougang steel mill – an operation that is mired in debt.

    Security guards by Cafofeidian harbour, where coal and iron ore are unloaded to feed the Shougang steel mill. The mill was moved from Beijing to Caofeidian in 2006, but is mired in debt.

    Bridge to nowhere: a six-lane road span was abandoned after 10 support pylons had been erected.

    Bridge to nowhere: a six-lane road span was abandoned after 10 support pylons had been erected.

    An Japanese factory stands idle in the Caofeidian Sino-Japanese eco-industry park. The factory moved from Tangshan city, attracted by government incentives, but never re-started operations.

    An Japanese factory stands idle in the Caofeidian Sino-Japanese eco-industry park. The factory moved from Tangshan city, attracted by government incentives, but never re-started operations.

    Empty residential buildings in Caofeidian eco-city. Once described as the world’s first fully realised eco-city, Caofeidian is now struggling to pay daily interest rates on the billions of yuan borrowed to build it.

    Empty residential buildings in Caofeidian eco-city. Once described as the world’s first fully realised eco-city, Caofeidian is now struggling to pay daily interest rates on the billions of yuan borrowed to build it.

  • Obama's Climate Fascism Is Another Nail In The Coffin For The U.S. Economy

    Submitted by Michael Snyder via The Economic Collapse blog,

    Is Barack Obama trying to kill the economy on purpose?  On Sunday, we learned that Obama is imposing a nationwide 32 percent carbon dioxide emission reduction from 2005 levels by the year 2030.  When it was first proposed last year, Obama’s plan called for a 30 percent reduction, but the final version is even more dramatic.  The Obama administration admits that this is going to cost the U.S. economy billions of dollars a year and that electricity rates for many Americans are going to rise substantially.  And what Obama is not telling us is that this plan is going to kill what is left of our coal industry and will destroy countless numbers of American jobs.  The Republicans in Congress hate this plan, state governments across the country hate this plan, and thousands of business owners hate this plan.  But since Barack Obama has decided that this is a good idea, he is imposing it on all of us anyway.

    So how can Obama get away with doing this without congressional approval?

    Well, he is using the “regulatory power” of the Environmental Protection Agency.  Congress is increasingly becoming irrelevant as federal agencies issue thousands of new rules and regulations each and every year.  The IRS, for example, issues countless numbers of new rules and regulations each year without every consulting Congress.  Government bureaucracy has spun wildly out of control, and most Americans don’t even realize what is happening.

    In the last 15 days of 2014 alone, 1,200 new government regulations were published.  We are literally being strangled with red tape, and it has gotten worse year after year no matter which political party has been in power.

    These new greenhouse gas regulations are terrible.  The following is a summary of what Obama is now imposing on the entire country…

    Last year, the Obama administration proposed the first greenhouse gas limits on existing power plants in U.S. history, triggering a yearlong review and 4 million public comments to the Environmental Protection Agency. In a video posted to Facebook, Obama said he would announce the final rule at a White House event on Monday, calling it the biggest step the U.S. has ever taken on climate change.

    The final version imposes stricter carbon dioxide limits on states than was previously expected: a 32 percent cut by 2030, compared to 2005 levels, senior administration officials said. Obama’s proposed version last year called only for a 30 percent cut.

    In America today, the burning of coal produces approximately 40 percent of the electrical power used by Americans each year.

    So what is this going to do to our electricity bills?

    You guessed it – at this point even the Obama administration is admitting that they are going to go up.  The following comes from Fox News…

    The Obama administration previously predicted emissions limits will cost up to $8.8 billion annually by 2030, though it says those costs will be far outweighed by health savings from fewer asthma attacks and other benefits. The actual price is unknown until states decide how they’ll reach their targets, but the administration has projected the rule would raise electricity prices about 4.9 percent by 2020 and prompt coal-fired power plants to close.

     

    In the works for years, the power plant rule forms the cornerstone of Obama’s plan to curb U.S. emissions and keep global temperatures from climbing, and its success is pivotal to the legacy Obama hopes to leave on climate change. Never before has the U.S. sought to restrict carbon dioxide from existing power plants.

    And we must keep in mind that government projections are always way too optimistic.  The real numbers would almost surely turn out to be far, far worse than this.

    In addition, these new regulations are going to complete Barack Obama’s goal of destroying our coal industry.  In a previous article, I included an excerpt from a recent news article about how some of the largest coal producers in America have just announced that they are declaring bankruptcy…

    On Thursday, Bloomberg reported that the biggest American producer of coking coal, Alpha Natural Resources, could file for bankruptcy as soon as Monday.

    Competitor Walter Energy filed for bankruptcy earlier this month, and several others have done the same this year.

    Barack Obama has actually done something that he promised to do.

    He promised to kill the coal industry, and he is well on the way to accomplishing that goal.

    Of course Hillary Clinton thinks that this is a splendid idea.  She called Obama’s plan “the floor, not the ceiling”, and she is pledging to do even more to reduce greenhouse gas emissions.  The following comes from the Washington Post…

    Democratic presidential front-runner Hillary Rodham Clinton pledged Sunday that if elected she will build on a new White House clean-energy program and defend it against those she called “Republican doubters and defeatists.”

     

    Clinton was the first 2016 candidate to respond to the ambitious plan that President Obama will debut on Monday. Details of the program, which aims to cut greenhouse-gas pollution, were released over the weekend. The new regulation will require every state to reduce emissions from coal-burning power plants.

    And you know what?

    The climate control freaks will never be satisfied.  Since just about all human activity affects the climate in some way, they will eventually demand control over virtually everything that we do in the name of “saving the planet”.  That is why I call it “climate fascism” – in the end it is all about control.

    During the month of September, the Pope is going to travel to the United Nations to give a major speech to kick off the conference at which the UN’s new sustainable development agenda will be launched.  As I have documented previously, this new agenda does not just cover greenhouse gas emissions and the environment.  It also addresses areas such as economics, agriculture, education and gender equality.  It has been called “Agenda 21 on steroids”, and it is basically a blueprint for governing the entire planet.

    Unfortunately, that is ultimately what the elite want.

    They want to micromanage the lives of every, man, woman and child on the globe.

    They will tell us that unless people everywhere are forced to reduce their “carbon footprints” that climate catastrophe is absolutely certain, but their “solutions” always mean more power and more control in their hands.

    Barack Obama promised to fundamentally transform America, and he is doing it in hundreds of different ways.  These new greenhouse gas regulations are just one example.  Our nation is being gutted like a fish, and most Americans don’t seem to care.

    What in the world will it take for this country to finally wake up?

  • Why The U.S. Is the Next Greece: Doug Casey On America's Economic Problems

    “With these stupid governments printing trillions and trillions of new currency units,” warns investor Doug Casey, “it’s building up to a catastrophe of historic proportions.” In an excellent brief interview with Reason magazine Editor-in-Chief Matt Welch, Casey expounds on the US noting that “as any institution gets larger and older it inevitably becomes corrupt and fails.” What to do? “I wouldn’t keep significant capital in banks,” he exclaimed, “most of the banks in the world are bankrupt. That didn’t stop the “brain dead” Greeks who left their money in banks as all the signs were on the wall, he notes as he addresses whether gold is a good investment in 2015, and offers back-handed bright side: Catastrophes create many opportunities to earn a profit.

     

  • Breaking Down China's $23 Trillion Debt Pile

    Back in April, we highlighted Beijing’s “massive debt problem“, noting that as of last year, total debt in China amounted to some $28 trillion when you include government debt, corporate debt, and household borrowing. 

    As Bloomberg noted at the time – and as we’ve discussed extensively – Beijing is facing the virtually impossible task of trying to de-leverage and releverage at the same time.

    “Various parts of the government don’t always seem to be working from the same playbook,” Bloomberg observed, before quoting Credit Agricole’s Dariusz Kowalczyk who pointed out the “obvious contradiction between attempts to deleverage the economy and attempts to boost growth.”

    Indeed, there are times when the scale seems to tip in favor of deleveraging. For instance, Beijing has recently shown a willingness to tolerate defaults and the case of Baoding Tianwei Group Co even suggested that in some instances, state-affiliated companies may not receive immediate government support. Nevertheless, the abrupt 180 on LGVF financing and the transformation of the local government debt restructuring initiative into the Chinese version of LTROs betrays the extent to which China is still reluctant to deleverage its economy in the face of flagging growth. 

    Against that backdrop we bring you the following graphic from Bloomberg which breaks down China’s massive debt pile and shows the degree to which it’s grown over the past decade.

  • Jimmy Carter Rages At What The U.S. Has Become: "Just An Oligarchy With Unlimited Political Bribery"

    Submitted by Eric Zeusse,

    On July 28th, Thom Hartmann interviewed former U.S. President Jimmy Carter, and, at the very end of his show (as if this massive question were merely an aftethought), asked him his opinion of the 2010 Citizens United decision and the 2014McCutcheon decision, both decisions by the five Republican judges on the U.S. Supreme Court. These two historic decisions enable unlimited secret money (including foreign money) now to pour into U.S. political and judicial campaigns. Carter answered:

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

     

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

    He was then cut off by the program, though that statement by Carter should have been the start of the program, not its end. (And the program didn’t end with an invitation for him to return to discuss this crucial matter in depth — something for which he’s qualified.)

    So: was this former President’s provocative allegation merely his opinion? Or was it actually lots more than that? It was lotsmore than that.

    Only a single empirical study has actually been done in the social sciences regarding whether the historical record shows that the United States has been, during the survey’s period, which in that case was between 1981 and 2002, a democracy (a nation whose leaders represent the public-at-large), or instead an aristocracy (or ‘oligarchy’) — a nation in which only the desires of the richest citizens end up being reflected in governmental actions. This study was titled “Testing Theories of American Politics,” and it was published by Martin Gilens and Benjamin I. Page in the journal Perspectives on Politics, issued by the American Political Science Association in September 2014. I had summarized it earlier, on 14 April 2014, while the article was still awaiting its publication.

    The headline of my summary-article was “U.S. Is an Oligarchy Not a Democracy Says Scientific Study.” I reported: "The clear finding is that the U.S. is an oligarchy, no democratic country, at all. American democracy is a sham, no matter how much it's pumped by the oligarchs who run the country (and who control the nation's 'news' media).” I then quoted the authors’ own summary: “The preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” 

    The scientific study closed by saying: “In the United States, our findings indicate, the majority does not rule—at least not in the causal sense of actually determining policy outcomes.” A few other tolerably clear sentences managed to make their ways into this well-researched, but, sadly, atrociously written, paper, such as: “The preferences of economic elites (as measured by our proxy, the preferences of ‘affluent’ citizens) have far more independent impact upon policy change than the preferences of average citizens do.” In other words, they found: The rich rule the U.S.

    Their study investigated specifically “1,779 instances between 1981 and 2002 in which a national survey of the general public asked a favor/oppose question about a proposed policy change,” and then the policy-follow-ups, of whether or not the polled public preferences had been turned into polices, or, alternatively, whether the relevant corporate-lobbied positions had instead become public policy on the given matter, irrespective of what the public had wanted concerning it.

    The study period, 1981-2002, covered the wake of the landmark 1976 U.S. Supreme Court decision, Buckley v. Valeo, which had started the aristocratic assault on American democracy, and which seminal (and bipartisan) pro-aristocratic court decision is described as follows by wikipedia: It “struck down on First Amendment grounds several provisions in the 1974 Amendments to the Federal Election Campaign Act. The most prominent portions of the case struck down limits on spending in campaigns, but upheld the provision limiting the size of individual contributions to campaigns. The Court also narrowed, and then upheld, the Act's disclosure provisions, and struck down (on separation of powers grounds) the make-up of the Federal Election Commission, which as written allowed Congress to directly appoint members of the Commission, an executive agency.”

    Basically, the Buckley decision, and subsequent (increasingly partisan Republican) Supreme Court decisions, have allowed aristocrats to buy and control politicians. 

    Already, the major ‘news’ media were owned and controlled by the aristocracy, and ‘freedom of the press’ was really just freedom of aristocrats to control the ‘news’ — to frame public issues in the ways the owners want. The media managers who are appointed by those owners select, in turn, the editors who, in their turn, hire only reporters who produce the propaganda that’s within the acceptable range for the owners, to be ‘the news’ as the public comes to know it.

    But, now, in the post-Buckley-v.-Valeo world, from Reagan on (and the resulting study-period of 1981-2002), aristocrats became almost totally free to buy also the political candidates they wanted. The ‘right’ candidates, plus the ‘right’ ‘news’-reporting about them, has thus bought the ‘right’ people to ‘represent’ the public, in the new American ‘democracy,’ which Jimmy Carter now aptly calls “subversion of our political system as a payoff to major contributors.”

    Carter — who had entered office in 1976, at the very start of that entire era of transition into an aristocratically controlled United States (and he left office in 1981, just as the study-period was starting) — expressed his opinion that, in the wake now of the two most extreme pro-aristocratic U.S. Supreme Court decisions ever (which are Citizens United in 2010, andMcCutcheon in 2014), American democracy is really only past tense, not present tense at all — no longer a reality.

    He is saying, in effect, that, no matter how much the U.S. was a dictatorship by the rich during 1981-2002 (the Gilens-Page study era), it’s far worse now.

    Apparently, Carter is correct: The New York Times front page on Sunday 2 August 2015 bannered, "Small Pool of Rich Donors Dominates Election Giving,” and reported that:

    "A New York Times analysis of Federal Election Commission reports and Internal Revenue Service records shows that the fund-raising arms race has made most of the presidential hopefuls deeply dependent on a small pool of the richest Americans. The concentration of donors is greatest on the Republican side, according to the Times analysis, where consultants and lawyers have pushed more aggressively to exploit the looser fund-raising rules that have fueled the rise of super PACs. Just 130 or so families and their businesses provided more than half the money raised through June by Republican candidates and their super PACs.”

    The Times study shows that the Republican Party is overwhelmingly advantaged by the recent unleashing of big-corporate money power. All of the evidence suggests that though different aristocrats compete against each other for the biggest chunks of whatever the given nation has to offer, they all compete on the same side against the public, in order to lower the wages of their workers, and to lower the standards for consumers’ safety and welfare so as to increase their own profits (transfer their costs and investment-losses onto others); and, so, now, the U.S. is soaring again toward Gilded Age economic inequality, perhaps to surpass the earlier era of unrestrained robber barons. And, the Times study shows: even in the Democratic Party, the mega-donations are going to only the most conservative (pro-corporate, anti-public) Democrats. Grass-roots politics could be vestigial, or even dead, in the new America.

    The question has become whether the unrestrained power of the aristocracy is locked in this time even more permanently than it was in that earlier era. Or: will there be yet another FDR (Franklin Delano Roosevelt) to restore a democracy that once was? Or: is a President like that any longer even possible in America?

    As for today’s political incumbents: they now have their careers for as long as they want and are willing to do the biddings of their masters. And, then, they retire to become, themselves, new members of the aristocracy, such as the Clintons have done, and such as the Obamas will do. (Of course, the Bushes have been aristocrats since early in the last century.)

    Furthermore, the new age of aristocratic control is not merely national but international in scope; so, the global aristocracy have probably found the formula that will keep them in control until they destroy the entire world. What’s especially interesting is that, with all of the many tax-exempt, ‘non-profit’ ‘charities,’ which aristocrats have established, none of them is warring to defeat the aristocracy itself — to defeat the aristocrats’ system of exploitation of the public. It’s the one thing they won’t create a ‘charity’ for; none of them will go to war against the expoitative interests of themselves and of their own exploitative peers. They’re all in this together, even though they do compete amongst themselves for dominance, as to which ones of them will lead against the public. And the public seem to accept this modern form of debt-bondage, perhaps because of the ‘news’ they see, and because of the news they don’t see (such as this).

     

  • What's The Difference Between Hillary, Snowden And Manning?

    As the race for The White House heats up, it’s looking increasingly likely that the biggest threat to Hillary Clinton’s bid for the US Presidency will in fact be Hillary Clinton. 

    On the GOP side, Donald Trump has thus far proven to be “gaffe proof”, as a series of vitriolic attacks against everyone from Mexicans to war heroes has only served to increase his lead over rivals, prompting some to brand the incorrigible billionaire the “Teflon Don”, after the late New York crime boss John Gotti. Fortunately for Hillary, Trump’s popularity has further splintered an already divided Republican party, and in the eyes of some commentators, this makes the road (back) to The White House that much easier for Clinton. 

    That is unless the controversy surrounding her handling of classified e-mails mushrooms into a bigger public relations nightmare than it already is and as we noted late last month, it now looks as though it won’t be easy for the presumed Democratic frontrunner to shake accusations that she violated protocol.

    “It’s not that Donald Trump needed help in his juggernaut campaign across the GOP presidential primary, but the flamboyant billionaire got an unexpected present from the WSJ which may have just crippled the chances of his biggest democrat competitor as well, Hillary Clinton,” we wrote, introducing a WSJ piece which cited an internal government review showing that the former Secretary of State, “sent at least four emails from her personal account containing classified information during her time heading the State Department.” Here’s more from McClatchy:

    The classified emails stored on former Secretary of State Hillary Clinton’s private server contained information from five U.S. intelligence agencies and included material related to the fatal 2012 Benghazi attacks, McClatchy has learned.

     

    Of the five classified emails, the one known to be connected to Benghazi was among 296 emails made public in May by the State Department. Intelligence community officials have determined it was improperly released.

     

    Revelations about the emails have put Clinton in the crosshairs of a broadening inquiry into whether she or her aides mishandled classified information when she used a private server set up at her New York home to conduct official State Department business.

     

    While campaigning for the 2016 Democratic presidential nomination, Clinton has repeatedly denied she ever sent or received classified information. Two inspectors general have indicated that five emails they have reviewed were not marked classified at the time they were stored on her private server but that the contents were in fact “secret.”

    That last passage is critical. Having a security clearance comes with a certain amount of responsibility and those who are privy to potentially sensitive information are expected to exercise good judgement. 

    In other words, whether or not the information carried a giant red “top secret” stamp isn’t the relevant question, nor is “no harm no foul” a legitimate after the fact defense. 

    And that, apparently, is the difference between a Clinton and say a Manning or a Snowden – that is, holding Hillary (or any other member of what Jimmy Carter would call America’s “political oligarchy”) to the same standards as everyone else turns out to be an uphill battle. 

    Here’s Peter Van Buren writing for Reuters with more on what’s wrong with Clinton’s defense.

    *  *  *

    What everyone with a Top Secret security clearance knows – or should know

    In the world of handling America’s secrets, words – classified, secure, retroactive – have special meanings. I held a Top Secret clearance at the State Department for 24 years and was regularly trained in protecting information as part of that privilege. Here is what some of those words mean in the context of former Secretary of State Hillary Clinton’s emails.

    The Inspectors General for the State Department and the intelligence community issued astatement saying Clinton’s personal email system contained classified information. This information, they said, “should never have been transmitted via an unclassified personal system.” The same statement voiced concern that a thumb drive held by Clinton’s lawyer also contains this same secret data. Another report claims the U.S. intelligence community is bracing for the possibility that Clinton’s private email account contains multiple instances of classified information, with some data originating at the CIA and NSA.

    A Clinton spokesperson responded that “Any released emails deemed classified by the administration have been done so after the fact, and not at the time they were transmitted.” Clinton claims unequivocally her email contained no classified information, and that no message carried any security marking, such as Confidential or Top Secret.

    Yet even if retroactive classification was applied only after Clinton hit “send” (and State’s own Inspector General says it wasn’t), she is not off the hook.

    What matters in the world of secrets is the information itself, which may or may not be marked “classified.” Employees at the highest levels of access are expected to apply the highest levels of judgment, based on the standards in Executive Order 13526. The government’s basic nondisclosure agreement makes clear the rule is “marked or unmarkedclassified information.”

    In addition, the use of retroactive classification has been tested and approved by the courts, and employees are regularly held accountable for releasing information that was unclassified when they released it, but classified retroactively.

    It is a way of doing business inside the government that may at first seem nonsensical, but in practice is essential for keeping secrets.

    For example, if an employee were to be handed information sourced from an NSA intercept of a foreign government leader, somehow not marked as classified, she would be expected to recognize the sensitivity of the material itself and treat it as classified.

    In other cases, an employee might hear something sensitive and be expected to treat the information as classified. The emphasis throughout the classification system is not on strict legalities and coded markings, but on judgment. In essence, employees are required to know right from wrong. It is a duty, however subjective in appearance, one takes on in return for a security clearance.

    “Not knowing” would be an unexpected defense from a person with years of government experience.

    In addition to information sourced from intelligence, Clinton’s email may contain some back-and-forth discussions among trusted advisors. Such emails are among the most sensitive information inside State, and are otherwise always considered highly classified.

    The problem for Clinton may be particularly damaging. Every email sent within the State Department’s own systems contains a classification; an employee technically cannot hit “send” without one being applied. Just because Clinton chose to use her own hardware does not relieve her or her staff of this requirement.

    Some may say even if Clinton committed security violations, there is no evidence the material got into the wrong hands – no blood, no foul. Legally that is irrelevant. Failing to safeguard information is the issue. It is not necessary to prove the information reached an adversary, or that an adversary did anything harmful with the information for a crime to have occurred. See the cases of Chelsea Manning, Edward Snowden, Jeff Sterling, Thomas Drake, John Kiriakou or even David Petraeus. The standard is “failure to protect” by itself.

  • Fed Finally Figures Out Soaring Student Debt Is Reason For Exploding College Costs

    Back in May 2014, in one of its patented utterly worthless “analyses” (that cost taxpayers several tens of thousands of dollars) the San Francisco Fed, home of such titans of central planning thought as Janet Yellen, asked “is it still worth going to college.” Not surprisingly, its answer was yes after some contrived mathematics that completely forgot to include just one thing: debt.

    At the time, we had the following comment:

    Oddly enough, having perused the paper several times, and having done
    a word search for both “loan” and “debt” (both of which return no
    hits), we find zero mention of one particular hockeystick. This one:

     

     

    Perhaps for the San Fran Fed to be taken seriously one of these
    years, it will actually do an analysis that covers all sides of a given
    problem, instead of just the one it was goalseeked to “conclude” before
    any “research” was even attempted.

    An analysis, even a painfully simple one, such as the one we put together less than a month later:

    It is common knowledge that in the hierarchy of bubbles, not even the stock market comes close to the student loan bubble. If it isn’t, one glance at the chart below which shows the exponential surge in Federal student debt starting just after the great financial crisis, should put the problem in its context.

     

     

    And while we have previously reported that a shocking amount of the loan proceeds are used to fund anything but tuition payments, a major portion of the funding does manage to find itself to its intended recipient: paying the college tuition bill.

     

    Which means that with student debt being so easily accessible anyone can use (and abuse), it gives colleges ample room to hike tuition as much as they see fit: after all students are merely a pass-through vehicle (even if one which for the most part represents non-dischargeable “collateral”) designed to get funding from point A, the Federal Government to point B, the college treasury account.

     

    It should thus come as no surprise that in a world in which colleges can hike tuition by any amount they choose, and promptly be paid courtesy of the federal government, and with endless amounts of propaganda whispering every day in the ears of impressionable potential students the only way they can get a well-paying job is to have a college diploma (see San Francisco Fed’s latest paper confirming just this) there is no shortage of applicants willing to take on any amount of debt to make sure this cycle continues, that soaring tuition costs are one of the few items not even the BLS can hedonically adjust to appear disinflationary.

     

    End result: tutitions have literally expoded across the country in both public and private colleges.

    None of this was rocket science, in fact that ultra cheap, widely available government-funded student debt is the cause for soaring prices, in this case college tuitions, is so obvious even tenured economists at the Federal Reserve should be able to get it.

    Well, we are delighted to report that about 7 years after it was glaringly obvious to everyone except the Fed of course, now – with the usual half decade delay – even the NY Fed has finally figured out what even 5 year olds get.

    As the WSJ helpfully reminds us, the federal government has boosted aid to families in recent decades to make college more affordable. However “a new study from the New York Federal Reserve faults these policies for enabling college institutions to aggressively raise tuitions.”

    The implication is the federal government is fueling a vicious cycle of higher prices and government aid that ultimately could cost taxpayers and price some Americans out of higher education, similar to what some economists contend happened with the housing bubble.

    But… but… the San Fran Fed said… 

    Could it be possible that the Fed itself, with its imbecilic monetary policies, and the Federal government with its resultant $1.2 trillion in cheap debt, is the cause for tuition prices which are soaring by 6% every year, some three times higher than the increase in broad wages?

    Not only is it possible, but it is precisely what has happened. And now, even the Fed has figured it out.

    The heresy continues:

    “There’s widespread concern among policy makers and college officials that it has become too easy for students to borrow large amounts of money without necessarily appreciating what they are getting into,” said Terry Hartle of the American Council on Education, a trade group representing college and university presidents.

     

    The government’s student-credit spigot burst open in recent decades as Americans sought a leg up in an increasingly sophisticated economy, and accelerated during the last recession. Annual student-loan disbursements—which include some private loans but come mostly from the federal government—more than doubled between 2001 and 2012 to $120 billion, according to the New York Fed’s David O. Lucca, Taylor Nadauld and Karen Shen.

    The math became so clear even economists, even Fed economists, finally figured it out:

    Federal student loans allow Americans to borrow at below-market rates with scant scrutiny of their credit and no assessment of their ability to repay. Meanwhile, federal Pell grants, which help low-income college students and don’t need to be repaid, more than tripled to more than $30 billion a year between 2001 and 2012. Education tax credits roughly quadrupled to about $20 billion a year.

     

    The cost of getting a degree similarly exploded. From 2000 to 2014, consumers’ out-of-pocket costs for college and graduate-school tuition rose 6% a year, on average, according to the Labor Department’s consumer-price index. By comparison, medical-care inflation looks meek at an average 3.8%. Overall consumer prices climbed 2.4% a year.

    And so on.

    What is most embarrassing about this above is not that what has been patently common sensical has finally been confirmed, but that the this was so confusing to the “smartest central planners in the room”, it took them years upon years, and not only faulty analysis (thank you San Fran Fed) to finally get it right.

    What will they figure out next: the buying E-Minis to prop up the S&P, after having monetized 30% of all 10Year equivalents, is a recipe for the greatest disaster ever? But at least also today the Fed (ironically the San Fran edition) finally admitted that the US economy can’t function without bubbles, so there…

    In fact, the only sensible thing out of this entire hodge-podge of Fed economist BS, was one of the comments to the WSJ piece, which stands on its own merit:

    Any first WEEK student of economics knows that more money begets higher prices – regardless of whether it is higher education or the housing market – and that throwing tax dollars at the problem only makes things worse.  This study was a waste of money, but what it really shows is that basic economics shouldn’t wait for “higher education” and should be taught in high school.

    The problem, dear commentator is that the Fed’s only purpose to exist, is to throw tax, or newly printed, dollars at problems.

  • Fed Admits Economy Can't Function Without Bubbles

    In short, the dot-com bust was the last chance for the Fed to pivot and liberate the American economy from the corrosive financialization it had fostered. A determined policy of higher interest rates and renunciation of the Greenspan Put would have paved the way for a return to current account balance, sharply increased domestic savings, the elevation of investment over consumption, and a restoration of financial discipline in both public and private life. Needless to say, the Fed never even considered this historic opportunity. Instead, it chose to double-down on the colossal failure it had already produced, driving interest rates into the sub-basement of historic experience. This inexorably triggered the next and most destructive bubble ever. – David Stockman, The Great Deformation

    Over the course of the roughly twelve and a half years from Black Monday to the beginning of the end for the dot-com bubble, the Fed effectively engineered a mania by facilitating the explosion of bank loans, GSE debt, and the shadow banking complex, which together grew from under $5 trillion in 1987 to $17 trillion by the beginning of 2000.

    For evidence that this expansion was indeed the work of monetary authorities and was not funded by an increase in America’s savings, look no further than the following chart which shows an accommodative Fed and an increasingly savings averse American public:

    When the Nasdaq collapsed, the Fed was given an opportunity to restore some semblance of order and discipline to a market that had learned to rely on the Greenspan put. Instead, it chose to inflate a still larger bubble and now, courtesy of Janet Yellen’s friends at the San Francisco Fed, we know precisely why. 

    *  *  *

    From the San Francisco Fed

    Interest Rates and House Prices: Pill or Poison? 

    Wild swings in asset prices over the past 20 years and the associated boom-bust cycles have sparked considerable debate about how monetary policy might play a stabilizing role. 

    We can now calculate how much interest rates would have had to increase relative to the historical record to keep housing prices in check. Figure 4 displays the historical U.S. post-World War II ratio of house prices to income, stated in log terms so that changes can be read approximately as percentage changes. That ratio had declined steadily until 2002. Using a linear approximation from 1950 to 2002, we extrapolate the trend rate through 2006. We then calculate the percent difference between actual observed house prices and this trend, which turns out to be about 40%. A similar number would result from comparing house prices to the consumer price index, so this difference is not particular to our choice of normalization. The United Kingdom suffered a similar 40% house price boom. Since a 1 percentage point increase in the short rate translates into about a 4.4% decline in house prices, keeping house prices on trend would have required about an 8 percentage point increase in the federal funds rate in 2002 according to our calculations.


    What actually happened? The federal funds rate, the Fed’s short-term policy rate, stayed between 1% and 1.25% from the end of 2002 until the middle of 2004. Starting in June 2004, the federal funds rate rose 4.25 percentage points, reaching 5.25% by June 2006. In our experiment, the rate would have been about 8 percentage points higher at the end of 2002, but would have ended at about the same level observed in June 2006. That is, preemptive interest rate policy would have been extraordinarily tight in 2002 then would have gradually abated to around the level eventually reached in June 2006. By our calculations, such a large increase in interest rates would have depressed output more than the Great Recession did, roughly speaking.

    What is the takeaway then? Slowing down a boom in house prices is likely to require a considerable increase in interest rates, probably by an amount that would be widely at odds with the dual mandate of full employment and price stability. Moreover, the Fed would need a crystal ball to foretell house price booms. In restraining asset prices, while the power of interest rate policy is uncontestable, its wisdom is debatable.

    *  *  *

    Got that? In other words, the Fed would have needed to hike rates by 800 bps in the wake of the dot-com collapse in order to prevent the housing bubble. That would have purged the system and gradually, the FOMC could have eased by around 300 bps over the next four years. That policy course would have prevented the speculative bubble that brought capital markets the world over to their knees in 2008. 

    And why didn’t the Fed do this? Because “such a large increase in interest rates would have depressed output more than the Great Recession did, roughly speaking.” In other words, thanks to Alan Greenspan, the US economy cannot function under a normalized monetary policy regime, “roughly speaking.”

    We suppose the only question now is this: if rates needed to be 9.25% in 2002 in order to completely disabuse markets of the idea that the Fed will everywhere and always move to support asset prices, how high should rates be today?

  • "The Worldwide Credit Boom Is Over, Now Comes The Tidal Wave Of Global Deflation"

    Submitted by David Stockman via Contra Corner blog,

    If you want a cogent metaphor for the central bank enabled crack-up boom now underway on a global basis, look no further than today’s scheduled chapter 11 filling of met coal supplier Alpha Natural Resources (ANRZ). After becoming a public company in 2005, its market cap soared from practically nothing to $11 billion exactly four years ago. Now it’s back at the zero bound.

    ANRZ Market Cap Chart

    ANRZ Market Cap data by YCharts

    Yes, bankruptcies happen, and this is most surely a case of horrendous mismanagement. But the mismanagement at issue is that of the world’s central bank cartel.

    The latter have insured that there will be thousands of such filings in the years ahead because since the mid-1990s the central banks has engulfed the global economy in an unsustainable credit based spending boom, while utterly disabling and falsifying the financial system that is supposed to price assets honestly, allocate capital efficiently and keep risk and greed in check.

    Accordingly, the ANRZ stock bubble depicted above does not merely show that the boys, girls and robo-traders in the casino got way too rambunctious chasing the “BRICs will grow to the sky” tommyrot fed to them by Goldman Sachs. What was actually happening is that the central banks were feeding the world economy with so much phony liquidity and dirt cheap capital that for a time the physical economy seemed to be doing a veritable jack-and-the-beanstalk number.

    In fact, the central banks generated a double-pumped boom——first in the form of a credit-fueled consumption spree in the DM economies that energized the great export machine of China and its satellite suppliers; and then after the DM consumption boom crashed in 2008-2009 and threatened to bring the export-mercantilism of China’s red capitalism crashing down on Beijing’s rulers, the PBOC unleashed an even more fantastic investment and infrastructure boom in China and the rest of the EM.

    During the interval between 1992 and 1994 the world’s monetary system—–which had grown increasingly unstable since the destruction of Bretton Woods in 1971——took a decided turn for the worst. This was fueled by the bailout of the Wall Street banks during the Mexican peso crisis; Mr. Deng’s ignition of export mercantilism in China and his discovery that communist party power could better by maintained from the end of the central bank’s printing presses, rather than Mao’s proverbial gun;  and Alan Greenspan’s 1994 panic when the bond vigilante’s dumped over-valued government bonds after the Fed finally let money market rates rise from the ridiculously low level where Greenspan had pegged them in the interest of re-electing George Bush Sr. in 1992.

    From that inflection point onward, the global central banks were off to the races and what can only be described as a credit supernova exploded throughout the warp and woof of the world’s economy. To wit, there was about $40 trillion of debt outstanding in the worldwide economy during 1994, but this figure reached $85 trillion by the year 2000, and then erupted to $200 trillion by 2014. That is, in hardly two decades the world debt increased by 5X.

    To be sure, in the interim a lot of phony GDP was created in the world economy. This came first in the credit-bloated housing and commercial real estate sectors of the DM economies through 2008; and then in the explosion of infrastructure and industrial asset investment in the EM world in the aftermath of the financial crisis and Great Recession. But even then, the growth of unsustainable debt fueled GDP was no match for the tsunami of debt itself.

    At the 1994 inflection point, world GDP was about $25 trillion and its nominal value today is in the range of $70 trillion—-including the last gasp of credit fueled spending (fixed asset investment) that continues to deliver iron ore mines, container ships, earthmovers, utility power plants, deep sea drilling platforms and Chinese airports, highways and high rises which have negligible economic value. Still, even counting all the capital assets which were artificially delivered to the spending (GDP) accounts, and which will eventually be written-down or liquidated on balance sheets, GDP grew by only $45 trillion in the last two decades or by just 28% of the $160 trillion debt supernova.

    Here is what sound money men have known for decades, if not centuries. Namely, that this kind of runaway credit growth feeds on itself by creating bloated, artificial demand for materials and industrial commodities that, in turn, generate shortages of capital assets like mines, ships, smelters, factories, ports and warehouses that require even more materials to construct. In a word, massive artificial credit sets the world digging, building, constructing, investing and gambling like there is no tomorrow.

    In the case of Alpha Natural Resources, for example, the bloated demand for material took the form of met coal. And the price trend shown below is not at all surprising in light of what happened to steel capacity in China alone. At the 1994 inflection point met coal sold for about $35/ton, but at that point the Chinese steel industry amounted to only 100 million tons. By the time of the met coal peak in 2011, the Chinese industry was 11X larger and met coal prices had soared ten-fold to $340 per ton.

    And here is where the self-feeding dynamic comes in. That is, how we get monumental waste and malinvestment from a credit boom. In a word, the initial explosion of demand for commodities generates capacity shortages and therefore soaring windfall profits on in-place capacity and resource reserves in the ground.

    These false profits, in turn, lead speculators to believe that what are actually destructive and temporary economic rents represents permanent value streams that can be capitalized by equity owners.

    But as shown below, eventually the credit bubble stops growing, materials demand flattens-out and begins to rollover, thereby causing windfall prices and profits to disappear. This happens slowly at first and then with a rush toward the drain.

    ANRZ is thus rushing toward the drain because it got capitalized as if the insanely uneconomic met coal prices of 2011 would be permanent.

    Needless to say, an honest equity market would never have mistaken the peak met coal price of $340/ton in early 2011 as indicative of the true economics of coking coal. After all, freshman engineering students know that the planet is blessed (cursed?) with virtually endless coal reserves including grades suitable for coking.

    Yet in markets completely broken and falsified by central bank manipulation and repression, the fast money traders know nothing accept the short-run “price action” and chart points. In the case of ANZR, this led its peak free cash flow of $380 million in early 2011 to be valued at 29X.
    ANRZ Free Cash Flow (TTM) Chart

    ANRZ Free Cash Flow (TTM) data by YCharts

    Self-evidently, a company that had averaged $50 to $75 million of free cash flow in the already booming met coal market of 2005-2008 was hardly worth $1 billion. The subsequent surge of free cash flow was nothing more than windfall rents on ANZR’s existing reserves, and, accordingly, merited no increase in its market capitalization or trading multiple at all.

    In fact, even superficial knowledge of the met coal supply curve and production economics at the time would have established that even prices of $100 per ton would be hard  to sustain after the long-term capacity expansion than underway came to fruition.

    This means that ANRZ’s sustainable free cash flow never exceeded about $80 million, and that at its peak 2011 capitalization of $11 billion it was being traded at 140X. In a word, that’s how falsified markets go completely haywire in a central bank driven credit boom.

    As it happened, the full ANZR story is far worse. During the last 10 years it generated $3.2 billion in cash flow from operations——including the peak cycle profit windfalls embedded in its reported results.   Yet it spent $5 billion on CapEx and acquisitions during the same period, while spending nearly another $750 million that it didn’t have on stock buybacks and dividends.

    Yes, it was the magic elixir of debt that made ends appear to meet in its financial statements. Needless to say, the climb of its debt from $635 million in 2005 to $3.3 billion presently was reported in plain sight and made no sense whatsoever for a company dependent upon the volatile margins and cash flows inherent in the global met coal trade.

    So when we insist that markets are broken and the equities have been consigned to the gambling casinos, look no farther than today’s filing by Alpha Natural Resources.

    Markets which were this wrong on a prominent name like ANRZ at the center of the global credit boom did not make a one-time mistake; they are the mistake.

    As it now happens, the global credit boom is over; DM consumers are stranded at peak debt; and the China/EM investment frenzy is winding down rapidly.

    Now comes the tidal wave of global deflation. The $11 billion of bottled air that disappeared from the Wall Street casino this morning is just the poster boy—–the foreshock of the thundering collapse of inflated asset values the lies ahead.

  • Despite VIX Flash-Crash, Stocks Slammed As Crude Crashes To 5-Month Lows

    "We got this…" Right up until around 55 seconds in the following clip…

    China was ugly…

     

    And Greece crashed 30% at the open…

     

    An early bounce and the ubiquitous pre-EU close ramp both failed to hold stocks which had an ugly day… notice the dump after Europ closed and the ramp after 330ET… as VIX was smashed

     

    Energy stocks led the downturn…

     

    As WTI led stocks broadly…

     

    Carnage in AAPL and TWTR…

     

    as stocks catch down to bond yields…

     

    VIX flash crashed in a desprate bid to get S&P back to VWAP… right as PR defaulted

     

    AND sure enough S&P Futs tagged VWAP and turned around…

     

    It appears hope is fading that Macro will help us…

     

    Treasury yields leaked higher overnight but plunged after weak data…

     

    The US Dollar pushed generally higher today with a retracement into the EU close that then recovered to the days highs…

     

    Commodities continueed to get clobbered…

     

    But crude was utterly carnaged today…

     

    Charts: Bloomberg

    Bonus Chart: Main Street Lost!!

  • The World Explained In One Chart

    We could not have put it better – Progress indeed…

     


    Source: @Not_Jim_Cramer

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Aug 03

Today’s News August 3, 2015

  • Chinese Economy Crashes To 2-Year Low; China Stocks Plunge, Asian Stocks Test 2015 Lows

    Yet again the endless reasurance from the talking heads of the world is proven fallacious as the crash in China's stock market has apparently crashed its economy. China's Manufacturing PMI final print for July collapsed to 47.8 – its lowest since July 2013. The reaction is not pretty. China is down 4-8% from Friday's highs (led by high beta high-flyers in ChiNext), most Asian markets are down 2-3%, and the broad MSCI Asia Ex-Japan index is once again testing the lowest levels of 2015. But apart from that, China is contained…

     

    Economy collapsed… but but but the clever people on TV said it wouldn't matter that stocks plunged?

     

    Chinese stocks tumble…

     

    As does most of Asia…

     

    Which has smashed Asian stocks to their lowest in 2015…

     

     

     

     

    Charts:Bloomberg

  • History's Future

    One of the assumptions about technical analysis’ efficacy is that history tends to repeat itself and, based on historical examples, the future can be anticipated with greater clarity than just hopeful guessing (a skill bulls exhibit with particular panache).

    I tripped across an interesting example of this far afield from the world of finances. It has more to do with geopolitics. Check out this quote from a historian made before the cold war ever started and see if, based on what happened, it rings true (I’ve boldfaced some parts):

    Today there are two great peoples on earth who, starting from different points, seem to advance toward the same goal: these are the Russians and the Anglo-Americans. Both grew up in obscurity; and while the attention of men was occupied elsewhere, they suddenly took their place in the first rank of nations, and the world learned of their birth and their greatness nearly at the same time. All other peoples seem to have almost reached the limits drawn by nature, and have nothing more to do except maintain themselves; but these two are growing. All the others have stopped or move ahead only with a thousand efforts; these two alone walk with an easy and rapid stride along a path whose limit cannot yet be seen. The American struggles against obstacles that nature opposes to him; the Russian is grappling with men. The one combats the wilderness and barbarism; the other, civilization clothed in all its arms. Consequently the conquests of the American are made with the farmer’s plow, those of the Russian with the soldier’s sword. To reach his goal the first relies on personal interest, and, without directing them, allows the strength and reason of individuals to operate. The second in a way concentrates all the power of society in one man. The one has as principal means of action liberty; the other, servitude. Their point of departure is different, their paths are varied; nonetheless, each one of them seems called by a secret design of Providence to hold in its hands one day the destinies of half the world.

    So when do you think this prediction was made? Perhaps during the mayhem of World War 2, as a scholar looked past the war to anticipate what was ahead?

    Nope. The above was written in the 1830s, over a hundred years before World War 2 even began, by Alexis de Tocqueville in “Democracy in America”. Pretty astonishing, isn’t it? Could you imagine making a sweeping prediction about the world’s construct in the year 2120 and being more or less correct? I, for one, am in awe of the foresight required to have speculated with such prescience. Nostradamus had nothing on this guy.

  • Monsters Of Ukraine: Made In The USA

    Submitted by Justin Raimondo via AntiWar.com,

    We’re in the summer doldrums of the news cycle, a perfect time for our government and the media – or do I repeat myself? – to drop certain inconvenient stories down the Memory Hole. My job, of course, is to retrieve them….

    Remember Ukraine? I seem to recall blaring headlines about a supposedly “imminent” and “massive” Russian invasion of that country: the Anglo-Saxon media was ablaze with a veritable countdown to D-Day and we were treated to ominous sightings of Russian troops and tanks gathering at the border, allegedly just awaiting the order from Putin to take Kiev. And it turns out there has been an invasion, of sorts – although it isn’t a Russian one. It’s the Kiev regime’s own foot-soldiers returning from the front and turning on their masters.

    The war is going badly for the government of oligarch Petro Poroshenko. The east Ukrainians, who rose in revolt after the US-sponsored coup threw out democratically elected President Viktor Yanukovych, show no signs of giving up: they’ve repulsed the “anti-terrorist” campaign launched by Kiev, withstanding relentless bombardment of their cities and enduring many thousands of casualties, not to mention widespread destruction. Indeed, the brutal protracted war waged by Kiev against its own “citizens” has arguably steeled the rebels’ resolve and made any thought of reconciliation unthinkable.

    As is usual with violent fanatics, the war aims of the Kiev coup leaders – to bring the eastern provinces back into the fold – have been rendered impossible by their methods and conduct. The de facto blockade imposed on the east has bound the separatists all the more tightly to Russia, and so economics as well as searing hatred of a government the easterners regard as “fascist” has sealed the country’s fate.

    Unable to crack the rebels’ resolve, the “revolutionaries” who once gathered in the Maidan have begun to turn on each other. Poroshenko, fearful of the rising power of the far-right militias who make up the backbone of his makeshift army, has ordered their dissolution – and the rightists are resisting.

    A standoff between the Right Sector militia and Ukrainian police the other day culminated in a pitched battle as the rightists attacked police positions in Mukachevo, in western Ukraine, and took a six-year-old boy hostage. A dispute over control of the local cigarette smuggling operation had ended with two Right Sector thugs killed and seven others – it’s not clear which side they belonged to – injured. The rightists used grenade launchers to pulverize two police cars. Oh well, no worries, Washington will send replacements…. for both the cars and the launchers.

    The big problem for the Kiev regime is that Right Sector and allied far-rightist militias are the core of their military operation against the east. Right Sector provided the muscle of the Maiden revolution, standing in the front lines against the widely feared Berkut special forces loyal to Yanukovych. If these thugs must be reined in, then the success of the “anti-terrorist” campaign is doubtful: yet Kiev is increasingly unwilling to pay the high price of appeasing their increasingly troublesome Praetorians.

    The aftermath of the Mukachevo stand off was a clear victory for the rightists, who saw their leader, Dmytro Yarosh, a member of parliament, negotiating with the Interior Ministry – and Right Sector militia blocking the road from Kiev to the scene of the fighting. The result was an announcement from the Interior Ministry that the police chief of Mukachevo has been suspended, pending an “investigation” of the charges of aiding and abetting smuggling.

    In short, Right Sector emerged victorious. Following up their victory, the group declared that a national referendum will be held – without gathering the required signatures, and under their sponsorship – on multiple questions, essentially demanding that their entire program for the nation be adopted. They call for a formal declaration of war against Russia, a complete blockade of the eastern provinces, martial law, and the legalization of their militias. Oh yes, and they also want the present government, up to and including Poroshenko, to be impeached.

    Mired in debt, and rapidly sinking into an economic abyss, Ukraine is literally coming apart at the seams – and the ugly underside of the Maiden “revolution” is being exposed to the light of day. The most recent atrocity is the uncovering of a torture chamber used by members of the “Tornado” Battalion, another far-right grouping, in which militia members kidnapped, tortured, raped, and robbed citizens in the eastern Luhansk region, where the government is fighting to retain some modicum of control. Eight members of the Tornado militia were recently arrested and are being held by military prosecutors in Kiev: the Tornado “volunteers,” who mostly consist of ex-convicts, defend their actions by claiming that this is just retaliation because they uncovered a smuggling operation run by local officials – who, they say, are collaborating with the rebels. They initially refused to lay down their arms and barricaded themselves into their camp.

    The Aidar Battalion, also operating in eastern Ukraine, has been accused by Amnesty International of committing war crimes: that was in 2014, but the charges were largely ignored until the local governor began to complain. Aidar’s leader, member of parliament Serhiy Melnychuk, of the ultra-nationalist Radical Party, has been stripped of immunity from prosecution and charged with kidnapping, issuing threats, and operating a criminal gang.  Melnychuk, while admitting there was “some looting,” attributed the dissolution of the Aidar Battalion by authorities to “Russian propaganda” and revealed that some members are still operating independently in Luhansk.

    Then there’s the openly neo-Nazi Azov Brigade, whose members sport fascist symbols from the World War II era, and whose leader, Andriy Biletsky, declares that the goal of his group is to “lead the White Races of the world in a struggle for their survival.” There was so much bad publicity surrounding the Azov Battalion that the US Congress unanimously passed legislation forbidding any aid to the group – a provision, as this piece by Joseph Epstein in the Daily Beast points out, that is essentially unenforceable:

    “In an interview with The Daily Beast, Sgt. Ivan Kharkiv of the Azov battalion talks about his battalion’s experience with U.S. trainers and US volunteers quite fondly, even mentioning US volunteers engineers and medics that are still currently assisting them. He also talks about the significant and active support from the Ukrainian diaspora in the US As for the training they have and continue to receive from numerous foreign armed forces. Kharkiv says ‘We must take knowledge from all armies… We pay for our mistakes with our lives.’

     

    “Those US officials involved in the vetting process obviously have instructions to say that US forces are not training the Azov Battalion as such. They also say that Azov members are screened out, yet no one seems to know precisely how that’s done. In fact, given the way the Ukrainian government operates, it’s almost impossible.”

    Yes, your tax dollars are going to arm, train, and feed neo-Nazis in Ukraine. That’s what we bought into when Washington decided to launch a regime change operation in that bedraggled corner of southeastern Europe. Your money is also going to prop up the country’s war-stricken economy – albeit not before corrupt government officials rake their cut off the top.

    Dmytro Korchynsky, who heads a group of several far-right “volunteers” gathered together in “St. Mary’s Battalion,” declares his goal of organizing a “Christian Taliban” that will put Ukraine in the forefront of an effort to “lead the crusades,” adding: “ Our mission is not only to kick out the occupiers, but also revenge. Moscow must burn.”

    That’s a goal American neocons and their liberal enablers can get behind, but Korchynsky’s invocation of the Taliban ought to make the rest of us step back from that precipice. For it was the US, in the throes of the last cold war, that coalesced, funded, trained, and armed what later became the Afghan Taliban – and we all know where that road led.

    Once again, in our endless search for foreign monsters to destroy, we’re creating yet more foreign monsters who will provide the next excuse for future crusades. It’s a perpetual motion machine of foreign policy madness – and the War Party likes it that way.

  • Something Just Snapped: Container Freight Rates From Asia To Europe Crash 23% In One Week

    One of the few silver linings surrounding the hard-landing Chinese economy in recent weeks has been the surprising resilience and strength of the Baltic Dry Index: even as Chinese commodity demand has cratered in 2015, this “index” has more than doubled in the past few months from all time lows, and at last check was hovering just over 1,100.

     

    Many were wondering how it was possible that with accelerating deterioration across all Chinese asset classes, not to mention the bursting of various asset bubbles, could global shippers demand increasingly higher freight rates, an indication of either a tight transportation market or a jump in commodity demand, neither of which seemed credible.

    We may have the answer.

    It appears that the recent spike in shipping rates was analogous to the dead cat bounce in crude oil prices: a speculator-driven anticipation for a sustainable rebound that never took place. And now, just like with crude prices, it is all crashing down…. again.

    According to Reuters, shipping freight rates for transporting containers from ports in Asia to Northern Europe dropped 22.8 per cent to $400 per 20-foot container (TEU) in the week ended last Friday, data from the Shanghai Containerized Freight Index showed.

    Freight rates on the world’s busiest shipping route have tanked this year due to overcapacity in available vessels and sluggish demand for transported goods. Rates generally deemed profitable for shipping companies on the route are at about US$800-US$1,000 per TEU. In other words, at current prices shippers are losing half a dollar on every booked contractual dollar at current rates.

    According to Shanghai data, it was the third consecutive week of falling freight rates on the world’s busiest route. Container freight rates have so far increased in 5 weeks this year but fallen in 23 weeks.

    In the week to Friday, container freight rates fell 24 percent from Asia to ports in the Mediterranean, fell 4.4 per cent to ports on the US West Coast and were down 3.7 per cent to ports on the US East Coast.

    Maersk Line, the global market leader with more than 600 vessels and part of Danish oil and shipping group AP Moller-Maersk, was one of the few container shipping companies to make a profit last year. The company controls around one fifth of all transported containers from Asia to Europe.

    Should the dead cat bounce in shipping rates indeed be over, and if the accelerate slide continues at the current pace, not only will shippers mothball key transit lanes, but the biggest concern for global economy, the unprecedented slowdown in world trade volumes, which we flagged a week ago, will be not only confirmed but is likely to unleash yet another global recession.

    Unless, of course, central planners learn how to print trade and quite soon at that…

  • The Population Bomb

    Submitted by Adam Taggart via PeakProsperity.com,

    In 1968, Paul Ehrlich released his ground-breaking book The Population Bomb, which awoke the national consciousness to the collision-course world population growth is on with our planet's finite resources. His work was reinforced several years later by the Limits To Growth report issued by the Club of Rome.

    Fast-forward almost 50 years later, and Ehrlich's book reads more like a 'how to' manual. Nearly all the predictions it made are coming to pass, if they haven't already. Ehrlich admits that things are even more dire than he originally forecasted; not just from the size of the predicament, but because of the lack of social willingness and political courage to address or even acknowledge the situation:

    The situation is much more grim because, of course, when the population bomb was written, there were 3.5 billion people on the planet. Now there are 7.3 billion people on the planet. And we are projected to have something on the order of 9.6 billion people 35 years from now. That means that we are scheduled to add to the population many more people than were alive when I was born in 1932. When I was born there were 2 billion people. The idea that, in 35 years when we already have billions of people hungry or micronutrient-malnourished, we are somehow going to have to take care of 2.5 billion more people is a daunting idea.

     

    I think it's going to get a lot worse for a lot more people. You've got to remember that each person we add disproportionately causes ecological damage. For example, human beings are smart. So human beings use the easiest to get to, the purest, the finest resources first.

     

    When thousands of years ago we started to fool around with copper, copper was lying on the surface of the earth. Now we have at least one mine that goes down at least two miles and is mining copper that is about 0.3% ore. And yet we go that deep and we refine that much. Same thing the first commercial oil well in the United States. We went down 69.5 feet in 1859 to hit oil. The one off in the Gulf of Mexico started a mile under water and went down a couple of more miles before it had the blow-out that ruined the Gulf of Mexico.

     

    Each person you add has to be fed from poorer land, drink water that has to be pumped from deeper wells or transported further or purified more, and have their materials sourced from other depleting resources. And so there is a disproportion there. When you figure that we are going to have to try and feed several billion more people and that the agricultural system itself, the food system supplies something like 30% of the greenhouse gases we put into the atmosphere. Those greenhouse gases are changing the climate rapidly, yet rapid climate change is the big enemy of agriculture — you can see that we are heading down a road that leads to a bridge that’s out. And we are not paying any attention to trying to apply the brakes

    Click the play button below to listen to Chris' interview with Paul Ehrlich (47m:06s)

  • Citadel Barred From Trading In China After Regulator Accuses "Automated Trading" Unit Of Manipulation

    Define irony: for the past 7 years, Wall Street’s worst kept secret is that Citadel, the world’s most levered hedge fund, has been the NY Fed’s just slightly more than arms-length enforcer of market stability, by which we mean spoofer, buyer and otherwise “plunge protector” in the equity and E-mini futures markets. The secret got even less “secret” when of all the possible hedge funds blogger Ben Bernanke could have gone to, he picked the Chicago HFT powerhouse, confirming the cozy and tight relationship between the Federal Reserve and the firm which has been increasingly linked to market manipulation not only in equities but bonds and virtually all other asset classes.

    Which is why Citadel must have been shocked to learn late last week that China had suspended trading at a brokerage account used by Citadel in China.

    When the news first broke last Friday, we asked, somewhat rhetorically, the following question:

    Today, the WSJ had more detail on the surprising snafu involving the Fed’s favorite market intervention vehicle, confirming that Citadel said trading in one of its China accounts has been suspended, as Chinese regulators battle a steep slide in stock prices.

    The reason: China’s securities regulator said Friday it has launched a probe into automated trading and has restricted 24 stock accounts suspected of influencing stock prices. The government didn’t name any of the companies behind the restricted stock accounts. Citadel said Sunday that one of its accounts was among them.

    Of course, China’s crackdown on foreign trading is not news, and had been reported about a week ago: in its endless list of scapegoatees, China had decided that blaming “evil”, if faceless, foreign sellers would be just as effective to boost confidence in a rigged market as accusing “malicious” sellers. That remains to be seen, but what is surprising is that while Citadel is best known for propping the US market higher, China is suggesting that the same NY Fed Plunge Protection Team extension was implicated in the recent downward move, using “automated trading” or otherwise. Surely, China’s regulator would not utter a peep if like in the US, Citadel had been used to support stock prices.

    In comments on its website, the China Securities Regulatory Commission said it is investigating more than 50 instances of suspected securities violations and broken promises not to sell down share holdings as the country’s stock markets plunged in June and July. It wasn’t immediately clear why Citadel’s account had been targeted.

    WSJ quotes a Citadel spokesman who notes that “We can confirm that while one account managed by Guosen Futures Ltd.—Citadel (Shanghai) Trading Ltd.—has had its trading on the Shenzhen Exchange suspended, we continue to otherwise operate normally from our offices, and we continue to comply with all local laws and regulations.”

    What a difference a year makes: recall that in May 2014, Citadel became only the first international hedge fund to complete yuan fundraising from Chinese wealthy individuals and companies through a local unit.

    Citadel (Shanghai) Foreign Investment won regulatory approval for currency exchange on March 26, marking the first qualified domestic limited partner, or QDLP, to have successfully completed fundraising in China, according to a statement from the Shanghai government’s information office.

    The irony:

    China’s leaders have pledged to promote freer movement of capital in and out of the country and make the exchange rate more market-based for investment purposes. Shanghai started the QDLP program last year to allow international hedge funds to raise capital in the local currency in China for overseas investments, aiding the government’s experiment with capital account convertibility and advancing its plan to build Shanghai into a financial center.

    Why irony? Because a little over a year later, we find out that China is only interested in “promoting freer movement of capital” as long as it involved its stock market going higher, and the capital flowing into China, not out of it at a record pace as we commented previously.

    But still the question remains – how did Citadel attract attention to itself. The answer: “The firm has recently expanded its quantitative hedge funds there, and its securities trading business traded options this year in a trial program on the China Financial Futures Exchange.”

    Chinese media reported over the weekend that one of the restricted accounts was co-owned by Citadel and major Chinese brokerage firm Citic Securities. Citic Securities said Sunday it invested in the account in 2010, but it sold off its stake in November 2014 and no longer owns stock in the account, according to China’s official Xinhua News Agency. Citic Securities didn’t immediately reply to a request for comment.

    And while a Citadel spokesman didn’t respond to a request for comment on which side of the firm’s business was affected by the suspension, it appears that Citadel’s infatuation with market rigging via algos and “automated trading” is what set China off. Or rather the “selling” via automated trading.

    Moments ago Bloomberg confirmed as much when it reported that an official Chinese regulator urges further algorithm trading regulation, adding that China should be prudent on developing algorithm trading, Shanghai Securities News cites an unidentified official with China Securities Regulatory Commission as saying.

    Market stability were “seriously damaged” by algorithm trading combined with some abnormal trading activities, the official was cited as saying. Algorithm trading may lead to systematic risks and result would be catastrophic when algorithm trading was used to manipulate market, the official was cited as saying.

    Why are none of these risks ever brought up vis-a-vis Citadel’s market manipulation in the US? The answer is glaringly simple: because in the US, unlike China, Citadel always manipulates the market higher.

    Which leads to an even more interesting, follow up question: if Citadel’s HFT algos were indeed caught red-handed selling in China, then someone in the US must have given the local Citadel brokerage the green light to spoof Chinese stocks lower. And since by definition Citadel does not do anything market-moving without the Fed’s preapproval, one wonders if China’s paranoia that foreigners are eager to crush its market is not at least partially grounded in reality?

  • Both Sales and Earnings Are Rolling Over With Stocks Near All-Time Highs

    Beyond multiple expansions driven by liquidity, sales and earnings drive stocks.

     

    Of the two, sales are most important for determining economic conditions. Earnings can be massaged any number of ways. However, sales cannot. Either the money came in the door or it did not.

     

    Unfortunately for the bulls, sales are falling.

     

    1Q15 sales came in 2.4% below 1Q14. And the trend has not improved since that time.

     

    General Electric (GE), JP Morgan (JPM), Microsoft (MSFT), IBM (IBM), Citigroup (C), Johnson & Johnson (JNJ), Intel (INTC), Coke (KO), Oracle (ORCL), Honeywell (HON), Goldman Sachs (GS), and American Express (AXP) have all reported a decline in Year Over Year sales for the second quarter of 2015.

     

    These companies are not unique. Across the board S&P 500 companies are posting a 4% drop in revenues.

     

    Sales are not the only metric that is tanking.

     

    Annual corporate earnings fell last year for the first time since we entered the so-called “recovery” in 2009. This is pretty incredible when you consider the sheer amount of buybacks and other accounting gimmicks used by corporations to boost their profits.

     

    Indeed, a study performed by Duke University found that roughly 20% of publicly traded firms manipulate their earnings to make them appear better than they really are. The folks who were surveyed for this study about this practice were the actual CFOs at the firms themselves.

     

    All of this gimmicky has resulted in corporate profits trading at an all time high relative to US GDP. Profits literally have nowhere to go but down as corporations have cut costs to the bone and juiced earnings through buybacks and leveraged buybacks (issuing debt to buy shares).

    Put simply, both sales and earnings are rolling over… at a time when the S&P 500 is close to all-time highs. This is a recipe for a correction if not a crash.

     

    If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

     

    We are making 1,000 copies available for FREE the general public.

     

    We are currently down to the last 15.

     

    To pick up yours, swing by….

     

    http://www.phoenixcapitalmarketing.com/roundtwo.html

     

    Best Regards

     

    Phoenix Capital Research

     

     

  • The Politicians’ War On Uber

    Submitted by John Stossel via Reason.com,

    Hillary Clinton gave a speech warning that the new “sharing economy” of businesses such as the ride-hailing company Uber is “raising hard questions about workplace protections.”

    Democrats hate what labor unions hate, and a taxi drivers’ union hates Uber, too. Its NYC website proclaims, “Uber has the money. But we are the PEOPLE!”

    The taxi cartels, which provide inferior service and are micromanaged by government, don’t like getting competition from efficient companies like Uber.

    Clinton didn’t mention Uber by name, but we don’t have to wonder which company she meant. The New York Times reports that Clinton contacted Uber and told them her speech would threaten to “crack down” on companies that don’t treat independent contractors as full employees. Apparently, Democrats think something’s wrong if people are independent contractors.

    But no driver is forced to work for Uber. People volunteer. They like the flexibility. They like getting more use out of their cars. It’s win-win-win. Drivers earn money, customers save money while gaining convenience, and Uber makes money. Why does Clinton insist on interfering with that?

    Clinton’s “social democrat” pal, New York’s Mayor Bill de Blasio, wants to crack down on Uber by limiting how many drivers they may hire. Uber cleverly responded with an app—a “de Blasio option”—that shows people how much longer they’d have to wait if de Blasio gets his way.

    Good for Uber for fighting back. I wish more companies did.

    Federal Express didn’t.

    FedEx Ground classified drivers as independent contractors. Again, drivers were willing to drive, FedEx Ground was willing to pay, and customers got packages faster and more reliably than they did from the U.S. Postal Service.

    But lawyers built a class action suit on behalf of FedEx drivers, saying they should be treated as employees, paying payroll tax, getting workman’s compensation, receiving benefits. FedEx settled the case for $228 million and began abandoning its independent contractor system.

    Uber’s use of independent drivers—who use their own cars—is now called analogous to FedEx’s use of delivery drivers.

    That means Uber may soon have to treat its drivers as employees. Business analysts at ZenPayroll estimate that the changes will cost $209 million. We customers will pay for that, and we’ll have fewer ride-share choices, too.

    Lawsuits and politicians’ attacks against one company have a chilling effect on others. The “independent contractor” assault will destroy all sorts of companies we’ll never even know about because now they won’t come into existence.

    Some of the entrepreneurs who dreamed of starting them will look at the additional costs, crunch the numbers and decide there’s not enough profit potential to risk investing their money.

    Who knows what odd but popular sharing-economy innovations aren’t happening even now—ones we’d use and love—because businesspeople with great ideas are frightened by the Clintons, deBlasios and lawyers?

    In France, the old-fashioned cabbies rioted against Uber, blocking Uber cars and dropping rocks on them from a bridge. Instead of arresting rioters, the French government threatened to arrest Uber executives for breaking taxi rules. Once again, without even a new law directed specifically at Uber, the enemies of free choice got their way. Paris police have been ordered to forbid use of the Uber app.

    I disagree with Jeb Bush about many things, but he was right to praise Uber for “disrupting the old order” of business.

    The New York Times responded with a sarcastic piece pointing out that when Bush used an Uber car, the driver, Munir Algazaly, didn’t recognize Bush. He said he plans to vote for Clinton, though Bush seemed like a “nice guy.” Another site mocked Bush because he talked about “hailing” an Uber, not “hiring” one. Another pointed out that the car Bush rode in had a license plate holder that said “Fresh as F—” on it. Ha, ha.

    But it’s the sneering media who miss the point. Bush is smart to see serious benefits from “reputation” businesses like Uber. Politicians and lawyers who threaten to destroy such companies threaten us all.

  • The Tide Has Turned And These Charts Predict The Next Stop

    Submitted by Thad Beversdorf via FirstRebuttal.com,

    What we saw with the latest GDP reports is something truly remarkable.  A market that was explicitly told the past 4 years of economic growth had been overstated simply shrugged off the news.  That is, absolutely no price recalibration took place.  This really evidences beyond any doubt that there is no relationship between the economy and the market.  It further evidences the Fed’s increased proficiency in directly guiding the market.

    Now I know this is not shocking to many of us.  But to watch the market’s blatant irreverence toward a report that, with the flip of a switch, removed 12% of the presumed economic growth from the past 4 years did strike me as remarkable.  It shows that the printing of economic indicators is nothing but theater.  There is absolutely no rational market explanation that the market traded flat to up on the day when current GDP missed estimates  and the past 4 years of growth was adjusted downward, all in the midst of one of the worst seasons for YoY deteriorating corporate revenues/earnings.

    But more realistically what it suggests is the only player left in the market is the ‘buyer of last resort’, i.e. the Fed and its minion entities.  Certainly nobody wants to aggressively short the market in the face of a clear long only strategy by the Fed, but just as certainly no major money managers are longing this market.  Volume has simply dried up.

    I’ve been writing for almost a year now about the economic cannibalism that has been feeding earnings growth.  I have discussed this concept with a dire warning that feeding earnings expansion through operational contraction is a short lived meal.  And well we are now seeing the indications that the growth through contraction has now hit its inevitable end.  Have a look at the following chart which is really the only chart one needs to study at this point.  The chart depicts S&P 500 adjusted earnings per share (blue line), S&P Price level (green line), S&P 500 Revs per share (red line) and US Productivity of Total Industry (olive line).

    Screen Shot 2015-07-27 at 2.03.09 PM

    I have normalized the parametres back to the early 1990’s so that we can better understand the absurdity of what’s been taking place.  Now there is a tremendous amount of information we can pull out of this chart so stay with me here.

    The initial observation is that the past 25 years has been a series of large bubbles and subsequent busts, at least in both the price level and adjusted eps of the S&P.  Focusing on the price level we see the normalized index having two similar peaks and now into a third peak quite substantially higher than the previous two.  The first two peaks top out around 400 on the index and each subsequent reset price was down around 220.  Now one might expect that the sources of these two very similar bubbles were thus the same.  But one would be wrong.

    Notice in the first bubble that adjusted EPS topped out around 275 whereas in the second bubble they reached 450.  We often hear that because of this phenomenon equities were far more overvalued in the tech bubble than in the credit bubble.  While the conclusion is correct it creates a strawman analogy for this third and current bubble.  Specifically, that because current price to earnings is similar to that of the credit bubble that equities are fairly priced or at least relative to the tech bubble.  But this argument is a strawman fallacy.

    The tech bubble was a bubble of massive direct capital allocation stupidity. The credit bubble was a bubble of massive indirect capital allocation stupidity.  What I mean by that is the tech bubble was created by absurd capital injections directly into the secondary market (bypassing earnings), driving stock valuations to the moon.  The credit bubble was done via flooding consumers with debt which was used to prop up personal consumption which led to growth in revenues, earnings and thus stock valuations.  You can see a large increase of revenues per share between 2001 and 2007.  Now revenue growth is supposed to lead earnings growth which in turn pushes up stock valuations.  However, when revenue growth is driven by debt consumption it is temporary.  And we all learned that cold, hard fact in 2008.

    But so the argument that EPS is the figure one needs to pay attention to really misses the actual driving force which is revenue based earnings growth.  The above chart depicts that while EPS has been rising significantly for the past 7 years, revenues have been absolutely flat.  And so what we have is earnings growth pushing stock valuations massively higher but without the consumer onboard.  Very different from the credit bubble.  How does this happen?

    Well again, stock valuations are being pushed  higher through another temporary effect.  EPS growth is coming by way of operational contraction and financial engineering – meaning dividend payouts and share buybacks. This is evident in the following chart of just this latest bubble that depicts growth in stock valuations relative to growth in revenue per share, which have (notably) declined since Aug 08 (the base period).

    Screen Shot 2015-07-20 at 3.58.53 PM

    Now EPS growth from anything other than earned consumption, meaning consumption from income rather than debt can only be temporary.  (One arguable exception would be if EPS growth came from productivity, however, we see in this first chart that productivity is flat and so not the driver of EPS growth.)  And if the EPS growth is temporary it follows that the stock valuations that have grown on the back of EPS growth too is temporary.  What we are about to find and already are seeing the signs of with major technical supports breaking down is that stock valuations will reset to match each firm’s operational propensity for earnings growth (i.e. each firm’s expected sustainable future free cash flow).  We saw this inevitable result in each of the last two major bubbles.

    Interestingly if we look at the macrocosm of the capital mix between earnings and incomes what we find since moving to a pure fiat based currency in 1971 is that while incomes are very steady as a percentage of gross domestic income (GDI), profits have been more volatile.  And since the large positive inflection point of money printing in 1993, corporate profits as a percentage of GDI have gone berserk.  For investors it is imperative to understand what happens to stock valuations when profits’ share of GDI collapses.  In the following chart I have normalized, back to 1971, income and profits’ respective shares of GDI.

    Screen Shot 2015-07-27 at 12.23.34 PM

    You can see income has steadily declined as a percentage of GDI while profits’ share has bounced around.  But we can see that starting in the mid 1990’s profits’ share of GDI has seen massively growing bubbles and busts.  This is a direct result of the temporary earnings growth scenarios discussed above.   That is, rather than implementing policies that create steady long term income and earnings growth the Fed and the government have been creating policies that act as bandages.  And so while we cover up the infection for short periods, eventually the infection not only reappears but spreads resulting in a continuously worsening problem for which ever more extreme bandages need to be used to cover up the problems.

    Today there is an even bigger problem in that the world has been riding China’s coat tails of growth so to speak. But looking at the following chart what we find is a huge dislocation between China’s growth machine (i.e. industrial production) and the valuation of world equity markets.  The dislocation really began around the time the Fed implemented Operation Twist at the end of 2011, which fed directly into QE3.

    Screen Shot 2015-07-27 at 8.02.53 AM

    We can see a similar indicator of industrial growth decelerating by looking at collapsing materials prices which began to deteriorate around the same time that the above dislocation started in late 2011.

    Screen Shot 2015-07-21 at 12.05.40 PM

    Screen Shot 2015-07-27 at 6.37.23 AM

    Despite now hearing fewer and fewer industry ‘pros’ shouting their euphoric calls for 20 year bulls we still get a constant barrage of delusional analyses.  We continue to hear about a strong job market when the opposite is true.  U6 (i.e. the truest official unemployment figure) remains well into the double digits.  As reported today by MarketWatch, labour cost index is at its lowest growth rate since 1982 and the U.S. has gained only an average of 208,000 jobs a month this year, down from 260,000 in 2014, a 20% decline YoY.  Those are the real facts and those are in the face of the lowest labour participation rate since the 1970’s and the highest number of people on government subsidy programs on record.

    In short, the last 20 years has been nothing but bad policies attempting to cover up the results of previous bad policies creating a need for more extreme policies to cover up more extreme resulting fundamental problems.  This is clearly depicted in the data.  The end result is that global growth has deteriorated steadily now for the past 6 years to its lowest long term trend line in modern history, now below 2%.

    Screen Shot 2015-07-11 at 8.21.32 AM

    Like the chicken and the egg, economic output and incomes are inherently intertwined.

    Screen Shot 2015-04-02 at 1.45.50 PM

    Be prepared for the now imminent equity valuation reset.  It is true the Fed now has the ability to manipulate the market well beyond anything we’ve ever seen before.  However, it is also still true that when the bursting bubble achieves full momentum the Fed will be helpless to stop it.   While the Fed feels increasingly omnipotent they will once again learn, that while natural laws can be bent, they cannot be broken.

  • Is This The Most Successful Trade Of The Last Decade?

    If the longs use VIX products as hedging instruments, then why would anyone take the other side? Especially in light of the fact that, as we discussed previously, only 1 in 20 "skilled" traders profit from VIX ETFs.

    Because, being short volatility can be very profitable, according to Goldman. Year-to-date this short vol index is up 56%, and selling the front-month VIX has earned a massive 114 vol points…

    The Short Story:  Short VIX futures index +56% ytd;  If the longs use VIX products as hedging instruments, then why would anyone take the other side? Because, being short volatility can be very profitable. The S&P 500 VIX Short-term Futures Daily Inverse Index (SPVXSPI) tracks the profitability of being short a constant maturity 1m VIX future and is the benchmark for ETPs such as the XIV and SVXY. Year-to-date this short vol index is up 56%.

     

     

    In low vol environments VIX futures tend to trade above VIX spot and futures typically roll down the curve to settle at VIX spot.

     

    Short VIX futures strategies profit from the contango in the VIX futures curve. The steeper the VIX term structure, the higher the (futures-spot VIX) basis, and short VIX strategies tend to be profitable as futures roll down the curve. There are many investors who try to profit from this well publicized phenomenon: sell a VIX future, capture roll down, do it again (wash, rinse, repeat).

     

    Prior to VIX Weeklys if you wanted to capture the roll-down you might have sold the front-month contract and hoped for the best. Short vol investors know that putting all of your eggs in one basket can be a risky strategy.

     

    VIX Weeklys may provide more flexibility with investors positioning for the roll-down a bit week each week by simply spreading out their monthly trades. Instead of selling $100 on the front month VIX future an investor might sell 1/4th of the notional per week which may help smooth the return profile. The VIX often mean reverts quickly so if one contract expires in the red, the other contracts may pick up the speedy mean reversion and end in the green.

     

    On the tactical side, we could see more investors positioning for a swift decline in volatility post an event (FOMC for example). 

    Shorter-dated VIX futures track VIX spot more closely

    A one-month VIX future has a beta of 0.44 to the VIX. For example, if the VIX moves up a vol point, a future with one-month left to expiration tends to move up a little less than half as much, or 0.44 vol points.

     

    Higher betas for shorter-dated tenors. The beta between a future with one week to expiry and the VIX has been 0.64 or 1.4x higher than a one-month future and 2.2x more sensitive to VIX moves than a future with three-months remaining to expiration.

     

    Many exchange traded VIX products are benchmarked to constant maturity VIX futures. As a cross check on our reaction function we create constant maturity one- to six-month VIX futures each trading day and estimate the betas back to VIX changes.  The results are very similar, with a constant maturity one-month VIX future having a beta of 0.45 to VIX changes and threemonth futures at 0.27, very close to what our reaction function would have predicted (1m: 0.44; 3m: 0.29).

     

     

     

    Shorter-dated VIX futures track (have more manipulative leverage) the market more closely…

    The beta between daily changes in the VIX and daily S&P 500 returns has been -1.2 using data back to 2004. A beta of -1.2 implies that for every -1% decline in the S&P 500 we would expect the VIX to go up by 1.2 vol points (say from 15 to 16.2).

     

    The beta of a one-month VIX future to S&P 500 returns is -0.60, roughly one-half the sensitivity between the VIX and market returns; about 1.5x that of a three-month future (-0.41) and 2.1x a six-month future (-0.28).  We make two important points here: (1) you cannot trade spot VIX and the betas between the tradable VIX futures and the market have historically been much lower; (2) the betas fall off dramatically as you move further out in the term structure.

     

     

    As a VIX future approaches settlement, its sensitivity to S&P 500 returns grows exponentially. The beta of a VIX future to S&P 500 returns moves from -0.6 on a one-month future to -0.74 on a two-week and -0.86 on a future with one-week left before VIX settlement and -1.15 with one-day left to maturity which approaches the beta of VIX spot (-1.2).

    *  *  *

    So – in summary – being short vol has been among the best performing trades of the last decade (never mind the risk-side) and, the introduction of weekly VIX futures (and the exponential decay implied by these volatility-inducing instruments) offers, according to Goldman Sachs, even more opportunity for active risk takers to sell vol, scrape premium, and face unlimited downside risk… playing the contango collapse game until there are no more musical chairs left.

  • If Price Insensitive Buyers Become Sellers, Will The Entire Market Collapse?

    One narrative we’ve been building on for quite some time is the idea that both stocks and bonds have been propped up by a perpetual bid from price insensitive buyers. Put simply, it really doesn’t matter how overvalued something is if your primary concern is something other than maximizing your return on investment. 

    Take corporate buybacks for instance. Both equity-linked compensation and the market’s tendency to focus on quarterly results at the expense of the bigger picture have compelled corporate management teams to develop a dangerously myopic strategy that revolves around tapping corporate credit markets for cheap cash and plowing the proceeds into EPS-inflating buybacks. Whether or not this is the best use of cash is certainly debatable but when the goal is to manage earnings and appease stockholders, that doesn’t matter, and indeed, companies have an abysmal record when it comes to buying back shares at levels that later prove to be quite expensive. 

    In America, the price insensitive corporate management bid simply replaced the monthly flow the market lost when the Fed – the most price insensitive of all buyers – began to taper its asset purchases. Of course QE in all its various iterations playing out across the globe, is price insensitive buying taken to its logical extreme. With the ECB’s PSPP for instance, limits on the percentage of an individual issue that NCBs are allowed to own apply to nominal amounts meaning that, to the extent NCBs can buy bonds at a premium to par, they can effectively buy fewer bonds than they otherwise would have and still hit their purchase targets. In other words, if you overpay, it’s easier to stay under the issue cap when supply is scarce in eligible paper. So in some respects, the more EMU central banks pay for the bonds they purchase, the better. 

    In Japan, the BoJ has amassed an elephantine balance sheet full of ETFs and because one cannot classify stocks as “held to maturity”, Haruhiko Kuroda’s equity plunge protection is effectively a self-feeding loop – that is, the more stocks the central bank owns, the more it must buy in order to protect its balance sheet from the damage it would suffer were equities to sell off. 

    And then there are banks, mutual funds, and pension plans which for various reasons (regulatory and otherwise) are forced to accumulate assets at otherwise unattractive prices. 

    The question in all of this – and this may indeed become one of the most important considerations for market participants once every DM central bank bumps up against the Sweden problem – is this: what happens when the price insensitive buyers behind the inexorable rise in financial asset prices become price insensitive sellers?

    Here with more on that question and more, is GMO’s Ben Inker:

    *  *  * 

    From GMO

    Price-insensitive sellers

    The last decade has seen an extraordinary rise in the importance of a unique class of investor. Generally referred to as “price-insensitive buyers,” these are asset owners for whom the expected returns of the assets they buy are not a primary consideration in their purchase decisions. Such buyers have been the explanation behind a whole series of market price movements that otherwise have not seemed to make sense in a historical context. In today’s world, where prices of all sorts of assets are trading far above historical norms, it is worth recognizing that investors prepared to buy assets without regard to the price of those assets may also find themselves in a position to sell those assets without regard to price as well. This potential is compounded by the reduction in liquidity in markets around the world, which has been driven by tighter regulation of financial institutions, and, paradoxically, a greater desire for liquidity on the part of market participants. Making matters worse, in order to see massive changes in the price of a security, you don’t need the price-insensitive buyer to become a seller. You merely need him to cease being the marginal buyer. If price-insensitive buyers actually become price-insensitive sellers, it becomes possible that price falls could take asset prices significantly below historical norms.

    Monetary authorities

    The first group of price-insensitive buyers to confound the markets were, arguably, the monetary authorities of emerging countries, who in the 2000s began to accumulate a vast hoard of foreign exchange reserves. These reserves, which served to both protect against a recurrence of the 1997-98 currency crises and to encourage export growth by holding down their exchange rates, needed to be invested. The lion’s share of the reserves went into U.S. treasuries and mortgage-backed securities, causing Alan Greenspan and Ben Bernanke to muse about the conundrum of bond yields failing to rise as the Federal Reserve lifted short-term interest rates in the middle of the decade. I have to admit that from a return standpoint, those purchases were ultimately vindicated by the even lower bond yields that have prevailed since the financial crisis. But just because the position turned out to be a surprisingly good one, return-wise, doesn’t mean that these central banks were acting like normal investors. Their accumulation of U.S. dollars had nothing to do with a desire to invest in the U.S., in treasuries or anything else, but was rather an attempt to hold down their own currencies. 

    Developed market central banks

    The financial crisis itself created the second group of price-insensitive buyers, developed market central banks. Quantitative easing policies by a wide array of central banks have had the explicit goal of pushing down interest rates and pushing up other asset prices. While one can argue that the central banks were anything but price-insensitive in that they cared quite deeply about the prices of the assets they were buying, they certainly were not buying assets for the returns they delivered to themselves as holders, and their buying has been driven by an attempt to help the real economy, not an attempt to earn a return on assets. Since 2008, the sum of the U.S., U.K., Eurozone, and Japanese central banks have expanded their balance sheets by over $4 trillion USD, as shown in Exhibit 2. 

    At the moment, the most active central banks in the developed world have been the European government bonds.

    Defined benefit pension plans

    Considerations of profit and loss on their portfolios are seldom at top of mind for central bankers, making them obvious candidates as price-insensitive buyers. But regulatory pressure can push otherwise profit-focused entities in similar directions. Successive tightening of the regulatory screws on defined benefit pension funds, particularly in Europe, have forced many of them into the role of price-insensitive buyers of certain assets as well. 

    Risk parity

    Another group of price-insensitive investors are managers of risk parity portfolios. These portfolios make allocations to asset classes not with regard to pricing of assets, but rather their volatility and correlation characteristics. Their price-insensitivity comes out in a couple of ways. First, as money flows into the strategies, they are levered buyers of bonds and inflation-linked bonds in particular. Like most strategies, if the money flows out, they are forced sellers of a slice of their portfolio. Second, unlike many other investors, they will also tend to buy and sell based on changes in volatility. As the volatility of an asset falls, these strategies will tend to lever it up further, and as the volatility rises they will sell. Given that low volatility tends to be associated with rising markets and high volatility with falling markets, this gives their buy and sell decisions a certain momentum flavor. If bond prices are moving up in a steady fashion, they will tend to buy more and more as volatility falls, and in a disorderly sell-off that sees yields and expected returns rise along with rising volatility, they will sell the assets due to their higher “risk.” In fact, rising volatility in bond markets could cause a general delevering of risk parity portfolios, causing them to sell assets unrelated to bonds in order to keep their estimated volatility stable. With hundreds of billions of dollars under management in risk parity strategies and large holdings in some of the less deeply liquid areas of the financial markets such as inflation-linked bonds and commodity futures, it is easy to imagine their selling in unsettling markets under certain circumstances, such as a repeat of 2013’s “Taper Tantrum.”

    Traditional mutual funds

    While the levered nature of risk parity portfolios may cause them to punch above their weight in potentially disrupting markets, in the end it isn’t clear that they are more likely to cause trouble than the managers of traditional mutual funds.

    The mutual funds are at the mercy of client flows. As money has flowed into areas such as high yield bonds and bank loans, they have had little choice but to put it to work, and given their mandates, prospectus restrictions, and career risk, they are largely forced to buy their asset classes whether or not they think the pricing makes sense. But to an even greater degree, when redemptions come, they have no choice but to sell. This is nothing new. But what has changed is the extent to which mutual funds have seen large flows into increasingly illiquid pieces of the markets, particularly in credit, where bank loan mutual funds are 20% of the total traded bank loan market and high yield funds make up another 5%. That may not sound particularly large, but almost half of that market is made up of CLOs, which are basically static holders of loans. This makes the “free float” of the bank loan market perhaps half of the total, and should the bank loan mutual funds sell, there are not a lot of investors for them to sell to.

    This is particularly true given the changes to the regulatory landscape for the dealer community. Banks are much less likely to take bonds and loans on their balance sheet for any length of time in the course of their market-making activities.

    Conclusion

    The size of the price-insensitive market participants is impressive. Monetary authorities and developed market central banks have each bought on the order of $5 trillion worth of assets for reasons that ultimately have nothing to do with earning an investment return on them. Regulatory pressures have caused pension funds, insurance companies, and banks to do likewise. While it is somewhat harder to put precise numbers to the size of these investments, it seems a safe bet that the total is in the trillions as well. Other investors are in analagous positions for different reasons, as strategies such as risk parity and the exigences of life as a mutual fund portfolio manager push such investors to also buy assets for reasons other than the expected returns those assets may deliver. To date, these investors have tended to be buyers, and given their lack of price-sensitivity, they have pushed up prices of assets beyond historically normal levels.

    At the same time, a natural buffer for many markets against a temporary imbalance between buyers and sellers, the dealer community has been forced to significantly curtail its activities due to the regulatory regime. So if circumstances cause these price-insensitive buyers to turn around and become price-insensitive sellers, there are not a lot of candidates to take the other side. 

    Be prepared for the possibility that some of the same assets that have again and again risen to prices that many investors said were impossible show more downside volatility than investors have bargained for. 

    Full letter (.pdf)

  • To Social Media's Horror – It 'Is' Different This Time

    Submitted by Mark St.Cyr,

    There has probably been no greater investing mantra placed upon an industry in recent memory than the now reflexive, as well as defensive response of “It’s different this time” when questioning anything Social. Trying to understand the business model along with its metrics, valuations and more is not only arduous, the response seems more akin to pulling teeth without anesthesia for those selling it, defending it, or both.

    Those that have been with me for a while know I have little use for the whole “social media” thing. Although, while I don’t use any of it myself, that doesn’t mean I don’t see value and innovation in many of them. Again, I don’t use them, nor have accounts. However, I do have share buttons on my own site for those that do. So let me be clear:

    It’s the valuations along with the metrics of their underlying business models and just how effective they are for those that are in business, along with the ROI for those businesses whether monetarily or in other ways for their time and money is what I take issue with. For as I’ve stated over and over again: “The only people making money in social media – are those selling you social media.”

    When it comes to everything social, today, recent memory is about the last 5 to 6 years. Or: post financial crisis. Basically, everything you know, or think you know about valuations, their coming into IPO existence, as well the metrics they stood on (and still use) as to “prove” those valuations has all been within the most adulterated markets in history fueled by the advent of “free money” made possible by The Fed. via QE. This is a quantitative, as well as a qualitative fact. Period.

    Never before has this (QE) been done in the history of the markets. So obscene has the valuation process become along with the metrics used to support it is why, “It’s different this time” was born. And precisely one might ask “why was that?” Well, just as a teenager who can no longer defend what they’re arguing and immediately cuts off further discussion with, “Because! Just because!” followed with “You just don’t get it!” When you’re wearing a $3K power-suit, “It’s different this time” sounds more grown up. Yet it serves the same purpose: It cuts off discussion leaving all the vagaries well intact. Nevertheless, there’s really no difference except for the wording.

    The world of everything Social has been the undisputed benefactor of all this “free money.” After all, wasn’t the term “Unicorn” applied and accepted with all its connotations as being a mythical creature that lived and breathed in the land of make-believe? Social has spun out more entities with BILLION dollar valuations that either never made, or, currently making – a single cent in net profit. Or worse; having no sales period! One can see why the “Unicorn” title was so applicable here, as well as the need for a catch phrase to deflect any nay-sayers.

    It is incontrovertible that if not for the “free money” provided by QE, many, if not most of what currently falls under the social media umbrella would not only never had come into existence (let alone with Billion dollar price tags) the perceived “hands off – unquestioning” attitude by Wall Street itself as many of the current top-tier entities spent Billions upon Billions of resource dollars making acquisitions – before they themselves have reached any true net profitability that could warrant such spending would be allowed. This in my opinion is an absolute wanton abandonment of business fundamentals and principles.

    However, it seems there is a change of mood (or realization the jig is truly up) on Wall Street.

    Back in September in my article “The Shot Heard Round The Valley World” I opined…

    “Let me go on the record here and point out what I believe will prove my point in the coming weeks and months.

     

    Currently Zuck and crew have been lauded over with the prowess in its acquisition choices. You will know everything has changed when the calls to rescind Mark Zuckerberg’s authority in having carte blanche via not needing board approval for acquisitions going forward is demanded by Wall Street.”

    What transpired during the most recent earnings call? At first what is shown to suggest as their still hitting on all cylinders they once again reiterated: they’re going to continue spending at just as impressive a rate. And the response this time? Suddenly far more concerned are those on Wall Street this time, than any time previous. The validation for it was near impossible to miss, as it was the singular point touted extensively, in unison, across all the financial media outlets. A prelude in my opinion for the coming demand I alluded to previously. An opinion I’ll contend was laughed at just months ago. Yet, suddenly – it’s no longer all that funny and is becoming a very serious probability.

    In my opinion the only reason for the stock not dropping in sympathy (i.e., like a rock) resembling its other brethren of late was only for its current liquidity for the HFT’s too feast upon in the quarter end, window dressing made ever so prevalent in today’s near non-existent participation rated “market.” However these “stick-saves” are becoming increasingly short-lived. Just look to any other recent all time high flyer this quarter. Is it a: lifetime high based on fundamental principles? Or: A speculative stop run, HFT fueled blow off top in a month end earnings period? You be the judge is all I’ll say. Yet, there are clues everywhere if – one wants to truly see.

    Remember: If the cohort of analysts or media venues that reached for every keyboard, camera, or microphone to justify why a company like Apple™ could suffer the fate of their stock gapping down some 4% or so after reporting a record-breaking 47.5 million iPhones®, an actual physical, quantifiable sale of a real product that generated Billions of actual net profits that were added to their existing coffers and the stock gets pummeled? What does that bode for the likes of many of today’s Wall Street darlings? Again, just for context: Apple delivered true net profits that produced surplus “cash” in the bank that the “Likes” of today can only dream of. Don’t let that point be lost. (Those coffers by the way are larger than the total market cap of many of today’s social darlings.)

    Whether one likes Apple, their products, or story is irrelevant. What can’t be denied is they generate net profits that result in surplus “cash” in the bank. And they were subsequently hammered. How do you think the social media space will fare going forward from here since there’s no longer any QE, but legitimate valuation fears are manifesting within all stocks in general world-wide?

    Maybe it’s just me, but I find it near laughable that these once social darlings just a few years since IPO-ing seem to be trying (or desperately seeking) ways as to find ways to expand, grow, justify, and more with anything but their raison d’être (i.e., their actual core business.) Along with every analyst as well as company figure-head contort their earlier views on why their valuations, metrics, and models are/were sound. For instance…

    Facebook™ needs to make sure everyone is still on-board with its spending (because as implied – they’re gonna!) The reasons I guess are they’re realizing “Likes” ain’t gonna cut it. Whether investors will like that or not, and by how much, we’ll know soon enough over the coming weeks, or months. However, as I expressed earlier, this earnings call was “different this time” with the near knee-jerk as well as residual hand wringing about Zuck and crew’s continued adamant stand on spending.

    And what should not be lost is how different it was as Wall Street awoke and became fully cognizant to the money they’ll be spending won’t be the “free money” afforded via QE. Rather, it will be today’s current share holders. In other words: Wall Street’s pockets.

    And what is always front and center in Wall Street’s mind is: Facebook can spend all the money it wants – just as long as it isn’t Wall Street’s. For one must remember, Facebook doesn’t make a net profit via true unadulterated GAAP earnings to warrant (in my view) the expense of it spending those BILLIONS of dollars. That was in the days of “Trust us – we know what we’re doing.” Well trust me: Those days are over. Period.

    Want another example? How about Twitter™? Let’s put them into perspective. I’ve been saying since their inception as well as IPO that this medium is truly revolutionary as to its application or niche. However, as a business model along with its valuation? I’ve railed about it for just as long. Below is an excerpt from an article I wrote in November of 2013 when Twitter was about to IPO.

    “Never mind what their stock valuations are currently. A stock is not a company. The stock today lives in a world of its own divorced from reality. What I’m talking about here is business. What and how are these enterprises going to generate income as in revenue to support these valuations? Remember, if the markets as I have been pounding my fist over the last few years is based purely by Federal Reserve interactions. Adulterating them beyond the resemblance of the financial markets everyone once understood and could agree on. Then these Wall Street darlings can not only crash to Earth without warning, more than likely the bird that should chirp the loudest will be sprawled out in the bottom of the mine shaft. Not only can it happen in the blink of an eye, that blink is now considered an eternity in today’s stock market.”

    People lined up in droves as to express how “I just didn’t get social” and a whole lot more. I was also impugned by nearly every social media “expert” as to why views from people like myself should not only be ignored – but laughed at. Many pointed at the near immediate surge in valuation as the stock ticked higher, and higher in the following months. Yet, that’s not the story today.

    The reality is that today – if you invested $1 dollar in their stock – ever. You are just about $1 away from losing money if you bought into at any time – ever. That’s because Twitter’s stock is dangerously close to falling beneath the lowest price paid/sold since it IPO’d. Again – ever! And if you were one of those whom just a mere 18 months cavalierly shouting “hashtag this!” as the stock price went higher and higher. How’s all that working for you today is all I’ll ask.

    Or maybe you’re one that couldn’t wait to sink your 401K teeth into LinkedIn™.  Once again, after years of pushing higher, and higher, it seems the new story is same as the “old story.” i.e., They seemingly needed to spend money as to gain potential “integration opportunities” by buying something (e.g. $1.5 BILLION for Lynda™) rather than investing directly and maximizing everything of what LinkedIn currently is involved in. i.e., A glorified resume writing and/or job seeker data base.

    In other words: They can’t make money via the old model as to warrant their current valuations. So, instead of doing what they do, and doing it better, enabling higher net profits, it seemed they had better buy something that can. Even if the price paid (again a reported $1.5 Billion) is money spent not from net profits – but from Wall Street’s pocket. Because for all intents and purposes, where else did it come from when using GAAP they actually lost $68 Million last quarter?

    All I can say, it appears someone made money. It just wasn’t LinkedIn, nor Wall Street, as they pounded its share price in one fell swoop some 10%. And so far, no one seems to be rushing in to buy at its now 25% plus or minus reduced “wonderful sale price” from where it stood only months ago.

    How about Yelp™? Or should I say ouch? Because as of today that’s what many whom “invested” in this once heralded “social reviewing hot bed” are currently dealing with. And to spare many from yelping or howling more like dogs than what these stocks of late have morphed into. I won’t reiterate just how “clueless” I was scorned to be when I railed about other previous “darling” valuations and business metrics such as Groupon™.

    This is the current, as well as ever-increasing pain of social reality coming to the entire social media space in my view. And I say “increasing” because I truly feel (and can argue the case) without QE – it’s over for this space as it currently stands today.

    What portends for the space is how large some of these entities remain going forward, or, actually remain. That’s all up for debate. What’s not debatable or tolerable are the previous objections as to seek clarity to reasoned questioning about the business models, and/or viability going forward.

    For the all too prevailing retort, laced with indignation, of the now well honed “well you don’t get it because – it’s different this time” will no longer suffice because – it’s different this time.

  • Dramatic Footage: How Venezuelans Get Milk Powder

    It’s been a sad week for Venezuela.

    First, on Wednesday we showed what happens to local supermarkets when formerly Latin American paradises run out of other people’s money.

    Then, the next day we showed what happens when in the aftermath of scenes such as the one above the social mood turns violent, and how what was once supposed to be a socialist utopia paradise ends uplooking like a warzone.

    Today we show how the local population is forced to act like stampeding animals when it comes to obtaining even the most basic of staples, in this case milk powder.

    The clip below speaks for itself.

  • The Fed's Circular Logic Exposed In 1 Simple Chart

    Submitted by Jeffrey Snider via Alhambra Investment Partners,

    I typically stay away from sentiment indicators and measures of “confidence” not just because they are of dubious construction but they often don’t mean what they are taken for. In the case of consumer confidence, you get both problems simultaneously particularly at the ends of each cycle. In other words, just as “confidence” is at its greatest point and economists, especially the FOMC, assert that as evidence for further economic gains the rug is pulled out, “unexpectedly”, and a precipitous decline just shows up.

    A few months ago I looked at the more recent break between confidence and spending. In past cycles, consumer confidence at least bore some coincident and even forward resemblance to economic activity, retail sales in particular. That broke down around 2011 as consumer “confidence” and spending have been unrelated ever since.

    ABOOK July 2015 Confidence v Spending

    The reason the FOMC relies so heavily on confidence measures and surveys is rational expectations. The theory asserts feelings and psychology as more important than real factors, therefore it is assumed that influencing emotions is as much economically useful as even the helicopter option. The same is true of orthodox belief in the opposite, recession, as monetary policy attempts to banish “undue” pessimism as an answer to contraction.

    With that in mind, the past year has offered what I think is a stunning rebuke to that theory. Starting in the spring of 2014, just after the nefarious cold winter, almost all the major indications jumped. The increases were questionable, and remain so, meaning that offers a useful control as far as attempting to measure the effects of pure numbers alone. Accounts like the unemployment rate, Establishment Survey and GDP surged without a matching increase in more “hard” data less subject to trend-cycle and non-seasonal seasonal adjustments. The response was striking in that the pure, number increases seemed to have worked upon at least consumer confidence (and, I would add, business confidence in the various business sentiment surveys).

    A year ago, the surge began which is also a compelling contrast since the “dollar” and global finance started at the same time to retreat. That didn’t matter, of course, as all that seems to have penetrated was the constant drumbeat of the “economy is awesome.”

    From July 2014:

    Its [Conference Board] Consumer Confidence Index reached 90.9 in July, up from 86.4 in June. It was the third straight monthly increase and the best reading since October 2007. Tuesday’s report solidly beat economists’ median forecast for a reading in the mid-80s.

     

    The report follows a five-month string of bright employment reports after a rocky start to the year that’s been mostly blamed on an economically-crippling hard winter. From February through June, the economy has added more than 1.2 million jobs and the unemployment rate has fallen to 6.1% from 6.7%.

     

    “Strong job growth helped boost consumers’ assessment of current conditions, while brighter short-term outlooks for the economy and jobs, and to a lesser extent personal income, drove the gain in expectations,” said Lynn Franco, the board’s director of economic indicators. “Recent improvements in consumer confidence, in particular expectations, suggest the recent strengthening in growth is likely to continue into the second half of this year.”

    That seemed to be the case as GDP grew nearly 4% in Q2 (since revised up) and then nearly 5% in Q3; with that “convincing” Q3 release published in December 2015. It wasn’t just the Conference Board’s estimates that surged, as everything from the University of Michigan Index to various Gallup economic tracking polls picked up the same robust “happiness.”

    ABOOK July 2015 Confidence UoM IndexABOOK July 2015 Confidence Gallup

    It is difficult in these various accounts not to notice the sudden and lasting downward bend now to July 2015. There is a hard reality that has shown up this year in sharp contrast to all those supposedly interpretive numbers from later last year. As an experiment in the two parts of rational expectations, it does appear as if the first part works. It wasn’t just the quickly falling unemployment rate that was intended to be convincing of the recovery arrival, however tardy by years. Alongside that was persistent reinforcement of the narrative by policy “noise” that was undoubtedly meant to foster those perceptions; by tapering QE, then ending it and further asserting an “exit” from even ZIRP, the FOMC was inarguably trying to harden those happy acuities into a coalesced economic reality.

    That part appears to be validated, again, by at least consumer confidence if not also business confidence and even some measures of business activity (especially inventory). The second part, the more important transition, however, has been shown quite lacking. For all the immense referral to confidence and emotion, the ubiquitous TV economists talking up that 5% GDP and “best jobs market in decades” at every opportunity, it appears to have mattered so very little. In fact, as noted in May, spending very much departed at the very same time as confidence was surging.

    The retrenchment in consumer spending started during the fall but really turned downward during the Christmas holiday period; right when confidence was at its inspired apex. It has only gotten worse since that point, with actual, nominal retail sales nearly contracting (and actually doing so ex autos). Retail sales in 2015 are worse now than they were during the whole of the dot-com recession. Regardless of how you interpret that in the context of the business cycle, it is at least a disqualifying contrast to what rational expectations asserts of emotion – happy and optimistic consumers did not lead to actual spending renaissance but rather yielded to its opposite.

    I think that rightly accounts for the round trip so far in the middle of 2015, as economic reality is more of a confirmed now slump that actually bodes much worse for the rest of the year. When consumer confidence was at its peak in January, the idea of a protracted decline or even recession seemed, in the orthodox-contained mainstream, laughable. Yet here it is, now entering the second half long past the “residual seasonality” and weather-drawn obfuscations (port strike still?).

    Even the unquestioned payroll expansion has fallen to such degeneracy. The Conference Board shocked yesterday with its July 2015 decline, as the “expectations” portion of the index just collapsed from 92.8 in June to just 79.9. The reason, questionable labor markets:

    “A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers’ confidence,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.

     

    'Americans’ assessments of current and future labor-market conditions deteriorated. The share of those who said jobs were plentiful dropped to 20.7 percent in July from 21.3 percent.

     

    The proportion of consumers expecting more jobs to become available in the next six months decreased to 13.1 percent, the lowest since November 2013, from 17.1 percent in June. [emphasis added]

    This is something that is unsurprising given 2015 in its more general sense so far. Even the vaunted Establishment Survey, still running at a high rate, has cooled somewhat. If you factor in trend-cycle, this disparity between feelings and activity becomes less surprising. In my view, especially in tandem with the break between confidence and spending, these are results of the “fake” recovery in total.

    In short, policy constructs the visible façade of recovery in the expectation that businesses and consumers will then fill it out beyond, a mechanical response to only noticeable changes. In that way, the fiscal view and the monetary view are supposed to be highly complimentary, as the government redistribution creates spending transactions financed by the monetary, central bank redistribution through asset prices and debt (modern “money”).

     

    Recovery is actually none of that, as what drives actual spending apart from forced redistribution is always opportunity; and that is not something that can be faked or reduced into mechanical, spreadsheet formality.

    I think that last part is being proven by “confidence” , as everything was supposedly going right last year, the appearance at least of the recovery arrival was as strong as perhaps it was ever going to be. In the end, again, it amounted to very little, likely even less than nothing as there is attrition to consider that these primarily monetary experiments are not neutral. There is really nothing left of last year’s “inarguable” sentiments except renewed questions of veracity all the way down to even the most basic constructions. GDP may be revised up for Q1 and Q2 may actually be 2% or more, but neither is even close to what was promised and derived from 2014’s unbridled rational expectations “experiment.”

    ABOOK July 2015 Payrolls Avgs

    Hope, quite simply, just isn’t close to enough for a real recovery. Spending grew only worse during this “sample” period, and the fact that consumer confidence round tripped to that point shows that perfectly well. Confidence is still important to the economic system, but unlike orthodox expectations it is only a part and maybe even a small part. More than sentiment, there has to be actual jobs and wages, which I think the cycling trajectory of confidence is but another marker that those supposed job gains last year were, in fact, figments of statistical imagination. In short, the presentation of estimated job gains created broad hope in Americans not that jobs had already arrived but rather in how they thought that might signal jobs that would come. I think that is why the labor force never expanded as it should have, signaling more strongly that this was all just imaginary.

    There is an undeniable element of troubling prevarication in the whole attempt to coax unearned optimism, as taken to the extreme it means that policymakers will never quite be honest about especially realistic downsides. That may even mean, in their zeal to “fool” consumers, they fool themselves on the circular logic.

    ABOOK Dec 2014 Fischer 2

  • US Police Kill 118 People In July, Highest Monthly Total Of 2015

    Early last month in “Crowdsourcing Police Brutality“, we highlighted an ongoing project at The Guardian which is attempting to tally the number of people killed by police in the US during 2015. Use of deadly force by authorities in America has become a hot button issue after several high profile cases involving the death of unarmed black suspects culminated in a night of violent protests in Baltimore. 

    In the wake of Baltimore’s “purge” (as April’s protests came to be known), two competing theories emerged about what effect the controversy has had on policing in America. We’ve outlined the two theories on a number of occasions, but for those unfamiliar, here’s a recap: 

    One theory — dubbed the “Ferguson Effect” — claims police are now reluctant to engage in “discretionary enforcement” for fear of prosecution. “Discretionary enforcement” of course refers to the use of lethal force in the line of duty and the implication seems to be that in light of recent events, law enforcement officers are afraid that their actions will be scrutinized by the public. In extreme cases, such scrutiny could culminate in social unrest, something no one individual wishes to be blamed for. 

     

    Casting doubt on the so-called Ferguson Effect is a report from The Washington Post which shows that US police are shooting and killing “suspects” at twice the rate seen in the past. More specifically, 385 people have been killed by police in 2015 alone. Unsurprisingly, minority groups are overrepresented in cases involving the fatal shooting of unarmed suspects. 

    Despite a notable spike in violence across Baltimore in the months since the riots and the persistence of violent crime in Chicago, the number of people killed by police across the country posted M/M declines in April, May, and June. In July, the trend was broken. Here’s The Guardian with more:

    July was the deadliest month of 2015 so far for killings by police after registering 118 fatalities, according to the Guardian’s ongoing investigation The Counted, which now projects that US law enforcement is on course to kill more than 1,150 people this year.

     

    The July figure brought an end to a steady decline in totals over the previous four months. After 113 people were killed in March, 101 died in April, 87 fatalities were recorded in May and 78 in June.

     

    At least 20 people killed in July – more than one in six – were unarmed, including Samuel DuBose, who was shot by University of Cincinnati officer Ray Tensing in a 19 July traffic stop that has become the latest flashpoint in protests over the police’s use of deadly force.

     

    Of the 118 people, 106 died from gunfire, making July also the first month of 2015 in which that number has exceeded 100. Two people died after officers shocked them with Tasers, two died being struck by police vehicles, and eight died after altercations in police custody.

     

    Tensing had claimed DuBose dragged him with his car, but footage recorded by Tensing’s body camera refuted his account. The officer was charged with murder on Wednesday, when at a press conference the Cincinnati prosecutor Joe Deters called the shooting “senseless” and said Tensing “should never have been a police officer”.

     

    Tensing, who turned himself in on Wednesday, was arraigned on Thursday and has been released on bail. On Friday it was announced by Deters’s office that two officers who appeared to reinforce Tensing’s false account will not be charged with any crimes.

    For those who haven’t seen the body cam footage referenced above, here is the incident:

    As a reminder, The Guardian’s effort stems from what it says is a generalized failure on the part of the US government to keep a “comprehensive record of the number of people killed by law enforcement” which it says is a “prerequisite for an informed public discussion about the use of force by police.”


    Again, we’ll leave it to readers to determine what it says about police accountability in America when other countries feel compelled to put a face and a name to hundreds of people whose deaths, if left in the hands of the US government, might have gone unnoticed or worse, undocumented. 

  • The 2016 "Dream" Ticket

    Who needs bread and circuses…

     

     

    Source: Townhall.com

  • Here's The Bad News That Nobody Is Telling You About The Record Lows In Initial Jobless Claims

    Submitted by Lee Adler via WallStreetExaminer.com,

    The headline, fictional, seasonally adjusted (SA) number of initial unemployment claims for last week came in at 267,000. The Wall Street economist crowd consensus guess close to the mark this week, at 272,000.

    We focus on the trend of the actual data, instead of the seasonally manipulated headline number expectations game. Facts tend to be more useful than the economic establishment’s favored fictitious numbers. Actual claims based on state by state filings were 230,430, which is another record low for this calendar week. It continues a nearly uninterrupted string of record lows that began in September 2013.

    The Department of Labor (DoL) reports the unmanipulated numbers that state unemployment offices actually count and report each week. This week it said, “The advance number of actual initial claims under state programs, unadjusted, totaled 230,430 in the week ending July 25, a decrease of 32,519 (or -12.4 percent) from the previous week. The seasonal factors had expected a decrease of 43,528 (or -16.6 percent) from the previous week. There were 257,625 initial claims in the comparable week in 2014. ”

    Initial Claims and Annual Rate of Change- Click to enlarge

    Initial Claims and Annual Rate of Change- Click to enlarge

    You can see for yourself from the chart just how extraordinarily low these numbers are.

    When using actual data we want to see if there’s any evidence of trend change. Thus we look at how the current week compares with this week in prior years, and whether there’s any sign of change. The actual change for the current week was a decrease of -32,500 (rounded). This week of July always has a large drop. Based on the data for this week from the last 10 years, the current decline was not very good, stronger than only last year (-29,500), and the same week in 2008 (also -29,500). In 2008 the economy was collapsing. The 10 year average decline for this week was -70,000.

    Is this weakness material? Week to week changes are noisy. The trend is what is important and it remains on track. Actual claims were 10.6% lower than the same week a year ago. Since 2010 the annual change rate has mostly fluctuated between -5% and -15%. This week’s data was right in the middle of that range. There’s no sign yet of a significant uptick in the trend of firings and layoffs.

    Population has been growing and the size of the workforce has as well, although not as fast as population. To get a better idea of how the claims data is performing over time, I normalize it based on the size of monthly nonfarm payrolls. Here’s where we can see just how extraordinary the current levels are. There were 1,613 claims per million of nonfarm payroll employees in the current week. This was a record low for that week of July, well below the 2007 previous record of 1,889. The 2007 extreme occurred just before the carnage of mass layoffs that was to begin a couple of months later. Employers were still clueless that the end of the housing bubble would have devastating effects. If they were clueless then, they are in an advanced state of delirium and delusion now.

    However, it is absolutely normal for employers to completely miss the signs of impending doom.

    Last week the media noted the fact that claims were lower than the record low of 1973. What they failed to mention was that that low came well after the Dow reached an all time high in January of that year. The devastating 1973-74 bear market, which cut the value of stocks by 50%, was in its early stages. This was an early example of employers being late to the funeral.

    Employers Late To The 1973 Funeral - Click to enlarge

    Employers Late To The 1973 Funeral

    Click here to view chart if viewing in email

    Similar employer hoarding of workers has been associated with bubbles in the more recent past and has led to massive retrenchment, usually within 18 months or so. In the housing bubble, employer hoarding behavior continued well beyond the peak of that bubble in 2005-06.

    It’s worth noting that there was an institutional stock market bubble in 1972-73. It was the Nifty Fifty bubble, where the biggest best known stocks kept soaring while everything else in the market went nowhere. A bubble does not require mass public participation. Institutional bubbles are just as insidious, even more so.

    The current string of record lows in claims is now 5 months beyond the point at which other major bubbles have begun to deflate. Based on the fact that previous records were attained at and for some time after the peaks of massive bubbles, by that standard, the current financial engineering, central bank bubble finance bubble, which is very much a big money, institutional bubble, may be the bubble to end all bubbles!

    As a result of the fact that employers apparently tend to take their cues from stock prices, we cannot depend on the next downturn in the claims data to give us advance warning of a decline in stock prices, although there should at least be concurrent confirmation. However, history shows that the fact that claims are at record lows is warning enough!

    Initial Claims and Annual Rate of Change- Click to enlarge

    Initial Claims and Annual Rate of Change- Click to enlarge

    I look at an analysis of individual state claims as a kind of advance decline line for confirmation of the trend in the total numbers. The impact of the oil price collapse started to show up in state claims data in the November-January period. While most states show the level of initial claims well below the levels of a year ago, in the oil producing states of Texas, North Dakota, Louisiana, and Oklahoma, since the beginning of 2015 claims have been consistently above year ago levels. North Dakota and Louisiana claims first increased above the year ago level in November of last year. Texas reversed in late January. Oklahoma joined the wake shortly after that.

    Data for the July 25 week:

    Claims increased year to year in North Dakota, Oklahoma, and Texas. The drop in Louisiana this week is suspicious. It may be a reporting issue. That state has consistently shown higher year to year claims. The numbers have varied widely week to week but the trend of claims being significantly higher than the same week last year has been persistent. Texas, with a huge and more diversified economy improved in the second quarter as the price of oil rebounded and stabilized, but that improvement was temporary and new claims in Texas have been climbing in July.

    In the July 25 week, in total only 7 states had more claims than in the same week in 2014. That was down from 11, last week. This number fluctuates widely week to week with many states near even. At the end of the third quarter of 2014 just 5 states showed an increase in claims year to year. At the end of 2014 that had increased to 8. In early April this year the number had risen to 22. The number this week is the lowest it has been all year. This is yet another example of the extreme which employer hoarding of workers has reached.

    The 22 states that were higher in early April gives us a benchmark to watch, similar to an advance decline line in the stock market. If the number of states showing a year to year increase in claims should exceed 22, it should be an indication that the national trend of decreasing claims has reversed.

    I track the daily real time Federal Withholding Tax data in the Wall Street Examiner Pro- Federal Cash Flows report. The year to year growth rate in withholding taxes in real time is now running +3.5% in nominal terms. That’s equivalent to around +1.5% to 2% adjusted for wage inflation. The growth rate has dropped sharply in July after being remarkably consistent around +5-6% in the second quarter.

    Withholding tax collections tend to rise and fall in a cycle lasting three to four months. It’s too soon to tell if the July drop is the beginning of weakening in the slow growing top line of the “Tale of Two Economies,” US economy, or just part of the normal cyclical swing pattern in this data. The behavior of the data over the next several weeks will tell.

    The following is reposted from prior reports for the benefit of new visitors.

    The July 12 week was the reference week for the July payrolls survey. The numbers for that week were weaker than the June numbers, suggesting that Wall Street economists are likely to find their estimates for July are too high. Whether the cockamamie seasonally adjusted headline number reflects that reality or not is a crapshoot. It takes the BLS 7 revisions of the SA data over 5 years to fit it to the actual trend. The first release is hit or miss. But even if the number comes in below expectations, it probably will not influence the Fed, which remains hellbent on trying to get rates up sooner rather than later.

    The Fed’s favored measure of inflation, PCE, suppresses the measurement of inflation even more than the just released CPI. If the Fed believed this data, it would be even further behind the curve in recognizing that inflation is running much hotter than the official measures show than it is. The Fed knows that, and has inserted weasel words into its various propaganda releases that it will raise rates as long as the Fed thinks that inflation is moving toward the 2% target. It does not actually need to be at the target. The Fed is prepared to ignore the official measures because the members realize that they’re bogus.

    The Fed will use or ignore whatever stats it wants depending on whether they fit its preconceived narrative, which is “We’re gonna try to raise rates at least once this year, and if that doesn’t work, we’ll think of an excuse not to do it again, because raising rates is really data dependant depending on which data dependably supports our narrative, and which data we will ignore, because it all depends on dependably dependant official data, none of which is dependable.”

    The actual claims data, and actual withholding data, show the financial engineering bubble economy is still at full boil. This will continue to encourage the Fed to engage in the charade of pretending to raise interest rates sooner rather than later, but only because they have conditioned the market to expect it, a conditioning that they now regret they had undertaken. They’re walking back expectations now because they know they will have problems getting rates to go up.

  • Russian Military Helicopter Crashes During Air Show Celebrating Airborne Forces Day, One Pilot Dead

    August 2 is the day when Russia celebrates its Airborne Forces, only this year something went very wrong, and it was all caught on tape.

    As Reuters report, one pilot died and another was injured when a helicopter crashed at an airshow in the Russian region of Ryazan on Sunday. During aerobatics at the event some 200 km (124 miles) south-east of Moscow, an Mi-28 helicopter went into a flat spin before crashing.

    RT adds that while performing a stunt at the Aviamix air show on Sunday, a helicopter belonging to the Berkuty (Golden Eagles) aerobatic team suddenly banked on one side and started to lose height.

    The moment the helicopter lost control and crashed was caught on video:

     

    Russia’s Air Force Commander-in-Chief Viktor Bondarev has ordered the grounding of all Mi-28 assault helicopters following the catastrophe in central Russia, the Defense Minister reported.

    “The crew fought to save the helicopter to the end. Unfortunately, the chief pilot died on impact – the co-pilot survived. According to the second pilot, the accident occurred due to technical failure. I have suspended all Mi-28 flights. The commission under my leadership is working to clarify the causes of the disaster,” Bondarev said.

    As of this moment, there has been no hint of industrial sabotage either through Stuxnet or Windows 10.

  • As China Admits It Lied About Its Local Debt Levels, Local Billionaires Are Quietly Liquidating Their Assets

    It was almost exactly two years ago, when during China’s long-forgotten attempt to actively deleverage its economy (remember that? good times…) we commented on the country’s s first attempt to estimate what its local government debt is since June 2011.

    This is what we said in July 2013:

    “China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleed-inducing $1 trillion, or roughly 15% of China’s goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is).”

    Not at all surprisingly, after conducting the goalseeked “exercise” of estimating its local government debt, the final number was well below the worst case or even average scenario, while the level of NPLs was at a very leisurely pace around 1% of total.

    We promptly accused China of doing what it does best: fabricate the data, but since the housing bubble was still raging (it has since burst), and the stock market bubble (which also popped a month ago) was yet to be unveiled, few cared. Furthermore, in early 2015 China unveiled an LTRO-type plan in which in would swap out maturing local government debt with long maturities, thus hoping to firmly shove the problem with unsustainable local government debt under the rug for the (un)forseeable future.

    Then overnight something unexpected happened: Sheng Songcheng, the director of the statistics division of the People’s Bank of China (PBOC), was quoted by the National Business Daily on Saturday whereby he essentially admitted China had been lying about not only its local debt exposure but the level of NPLs across the economy.

    Quoted by Reuters, Sheng said that “downward pressure on China’s economy will persist in the second half of the year as growth in infrastructure spending and exports is unlikely to pick up.” 

    He said that Chinese companies are not optimistic about business prospects according to the central bank’s second-quarter survey, and that :pressured by uneven domestic and export demand, cooling investment and factory overcapacity, China’s economic growth is expected to slow to around 7 percent this year, the lowest in a quarter of a century, from 7.4 percent in 2014.” The Chinese GDP reality, of course, as noted here before is somehere in the 1-3% range, and based on such more credible metrics as industrial production and electricity usage, it may even be negative.

    The punchline: Sheng warned about the risks of local government debt, saying that 2 trillion yuan ($322.08 billion) in bond swaps may not be able to fully cover maturing debt, according to the report.

    What he really said, as paraphrased by Bloomberg, is that “local governments tended to not report all their debts when audited in June 2013, thus the 2 trillion yuan debt swap plan arranged this year may not cover all debts due, Sheng cited as saying.”

    Oops.

    In other words, because the local governments lied (and Beijing had no idea, none at all this was happening) China will have no choice but to engage in an even more active bailouts.

    That’s not all: as a result of China’s various bubbles bursting, the biggest problem with the nearly $30 trillion financial system in the world’s most populous country is sttarting to be revealed: its non-performing loans, i.e, the level of bad debt. According to Sheng outstanding bad loans and NPL ratio at banks rose in 1H; banks’ profit growth slowed, Sheng cited as saying. NPL ratio reached 1.87% as of end-June, report cites Sheng as saying, without specifying which banks he refers to.

    And if China is admitting a NPLs ratio of 1.87%, then the real print is probably 4-5x greater. Which means that on a system with $26 trillion in deposits, approximately $3 trillion in loans is non-performing. Or about half the market cap of Chinese stocks, and a third of Chinese GDP.

    Is the problem starting to become clear? It is to some, particularly China’s wealthiest.

    WSJ reports that having glimpsed what is coming over the horizon, China’s wealthiest are quietly starting to dumb their holdings to the greatest fools: “A property developer backed by Hong Kong billionaire Li Ka-shing has put an office and retail property project in Shanghai up for sale, according to two people familiar with the matter. A sale would mark the latest China property divestment by the investor, one of Asia’s richest, who is closely watched for signs of how he sees markets shifting.”

    This is not the first time Ka-Shing has cashed out in recent months:

    In June, Mr. Li’s Cheung Kong Property Holdings Ltd. put up for sale Century Link and Century Link Tower, a shopping mall and twin office towers currently under construction in the Pudong Lujiazui area, said people briefed on details of the offer. A Cheung Kong spokeswoman didn’t respond to requests on Sunday for comment.

    Or just before the market crashed. And then more previously:

    Over the past two years, companies backed by Mr. Li and his family have sold five office and shopping mall projects in Shanghai, Beijing, Nanjing and Guangzhou. Many investors eye moves by his companies for hints on the tycoon’s view of the property market.

     

    His companies, including Hutchison Whampoa and ARA Asset Management Ltd., have been offloading their real-estate assets as China’s economy decelerates to its slowest growth in more than two decades.

    It remains to be seen who will buy what Ka-Shing is selling: if indeed the public mood is determined by his marginal trading activity, only the government will be bold enough to acquire his assets now that he has entered a liquidation phase, especially since the asking price of just one commercial project is about $2.6 billion.

    The asking price is around 60,000 yuan per square meter, the people said. According to Cheung Kong Property’s website, the shopping mall and office project occupies a total of about 269,000 square meters, which would bring the total asking price to more than 16 billion yuan ($2.6 billion).

    To sum up: misrepresentations about local government debt, lies about bad debt levels, and now, the wealthiest locals are quietly, slowly getting out of Dodge, er, China. We can only hope that China’s desperate attempt to hold up its stock market, the final frontier before all confidence in China crumbles alongside, lasts a few months longer, or the great Chinese hard landing that has been discussed for years, and always delayed in the last moment, is now virttually inevitable.

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Aug 02

Today’s News August 2, 2015

  • Venezuela Increasingly Looks Like A War Zone

    Over the years, we have repeatedly poked fun at the transformation of Venezuela into a “socialist utopia” – an economy in a state of terminal collapse, where the destruction of the currency (one black market Bolivar is now worth 107 times less than the official currency’s exchange rate) and the resulting hyperinflation is only matched be barren wasteland that local stores have transformed into now that conventional supply chains are irreparably broken.

    Just this past Wednesday we showed a clip of what is currently taking place inside Venezuela supermarkets, noting that “the hyperinflationary collapse in Venezuela is reaching its terminal phase. With inflation soaring at least 65%, murder rates the 2nd highest in the world, and chronic food (and toilet paper shortages), the following disturbing clip shows what is rapidly becoming major social unrest in the Maduro’s socialist paradise… and perhaps more importantly, Venezuela shows us what the end game for every fiat money system looks like (and perhaps Janet and her colleagues should remember that).”

     

    Unfortunately, while mocking socialist paradises everywhere is a recurring theme especially once they have completely run out of other people’s money to burn through, what always follows next is far less amusing – completely social collapse, with riots, civil war and deaths not far behind.

    That is precisely what the video shown below has captured. In the clip, a demonstration against Venezuela’s poor transportation services quickly turned violent. End result: one person dead from a gunshot wound, more than 80 arrested and four shops looted on the Manuel Piar Avenue in San Felix.

    What is most distrubing is how comparable to an open war zone what was once a vibrant, rich and beautiful Latin American country has become.

    This is just the beginning: with the ongoing collapse of the economy, the resultant acts of social violence will only deteriorate and claim more innocent lives, until the “socialist utopia” ends as it always does: with the arrival of a military coup or a full blown civil war.

  • American (Predatory) Capitalism Explained In 130 Seconds

    Now, more than ever, with Greece and Ukraine front and center, understanding how corporations take control of countries, and how capitalism drives the expansion of the Military Industrial Complex is crucial: “we have created a mutant form of predatory capitalism which has created an extremely unstable, unsustainable, unjust and very very dangerous world.”

     

    Source: http://www.studiojoho.com/

  • Bubble Finance And A Tale Of Two Spheres

    Submitted by Doug Noland’s Credit Bubble Bulletin,

    In a tiny subsection of the analytical world, analysis is becoming more pointed and poignant. I appreciate Bill Gross’s August commentary, where he concluded: “Say a little prayer that the BIS, yours truly, and a growing cast of contrarians, such as Jim Bianco and CNBC’s Rick Santelli, can convince the establishment that their world has changed.”

    I’ll include the names Russell Napier, Albert Edwards and David Stockman as serious analysts whose views are especially pertinent. I presume each will exert minimal effect on “the establishment.”

    Back to Bill Gross: “The BIS emphatically avers that there are substantial medium term costs of ‘persistent ultra-low interest rates’. Such rates they claim, ‘sap banks’ interest margins…cause pervasive mispricing in financial markets…threaten the solvency of insurance companies and pension funds…and as a result test technical, economic, legal and even political boundaries.’ ‘…The reason [the Fed will commence rate increases] will be that the central bankers that are charged with leading the global financial markets – the Fed and the BOE for now – are wising up; that the Taylor rule and any other standard signal of monetary policy must now be discarded into the trash bin of history.”

    Count me skeptical that central bankers are on the brink of “wising up.” These days I have less confidence in the Fed than ever. For one, they are hopelessly trapped in Bubbles of their own making. Sure, crashing commodities and bubbling stock markets incite a little belated rethink. Yet I’ve seen not a hint of indication that policymakers are about to discard flawed doctrine. Devising inflationary measures – clever and otherwise – will remain their fixation. For a long time now, I’ve identified inflationism as the root cause of precarious financial and economic dynamics that will end in disaster. It’s been painful to witness the worst-case scenario unfold before our eyes.

    Ben Bernanke (and his cohorts and most of the economic community) believes much of the hardship from the Depression would have been averted had only the Fed aggressively printed money after the 1929 stock market crash. Modern-day inflationism rests on the premise that central banks (in a fiat world) can control a general price level. This view ensures that Credit and speculative Bubbles, while potentially problematic, are not to be overly feared. Discussion of mal-investment and economic imbalances is archaic and irrelevant. And somehow the view holds that Bubble risk pales in comparison to “The Scourge of Deflation.”

    After all, central bankers can always reflate system Credit and spur a generalized inflation. Stated differently, it is believed that central bankers and their electronic printing presses have the power to inflate out of deflationary Credit and economic busts. And repeated bouts of reflationary policies over recent decades have seemingly confirmed the merit of conventional doctrine. It has evolved to the point where the primary issue is whether policymakers have the determination to reflate sufficiently.

    The onus, I suppose, is on my analysis (and other “contrarians”) to convince readers that This Time Is Different. Especially over the past three years, unprecedented central bank “money” printing has corresponded with heightened disinflationary forces globally. As I note repeatedly, the upshot has been unprecedented divergence between inflating securities/asset market Bubbles and deflating fundamental economic prospects. This divergence was widened notably over recent weeks. The fact that egregious monetary inflation has been pulled to the heart of contemporary “money” and Credit – central bank Credit and sovereign debt – is as well fundamental to the “End is Nigh” Thesis.

    The work of the great Hyman Minsky plays prominently throughout my analytical framework. In particular, I appreciate his keen focus on “financial evolution.” Over time, it is inherent in finance (i.e. Credit and markets) to gravitate from the cautious and stable to the aggressive and increasingly unstable. It’s human, Credit and market nature. Minsky’s “Financial Instability Hypothesis” and the late-stage “Ponzi Finance” dynamic are more pertinent today than ever.

    Finance has evolved profoundly over the past thirty years. Evolution in central bank monetary management has been equally momentous. Over time, the increasingly unhinged global fiat financial “system” turned acutely unstable. The Fed, in particular, resorted to market intervention and nurturing non-bank Credit expansion in order to sustain booms, inflated asset markets and deep structural economic maladjustment. This required the Federal Reserve’s adoption of doctrine ensuring liquid and stable securities markets – a historic boon to leveraged speculation, the evolving (and highly leveraged) derivatives marketplace and securities prices generally.

    Fed and global central bank backstops buttressed the historic expansion in market-based finance. The proliferation of interlinked global market Bubbles drove outrageous policy experimentation. In time, the resulting globalized Bubble in market-based finance and speculation ensured that bolstering securities markets developed into the chief priority for the Fed and fellow global central bankers and officials. Just look at the Chinese over recent weeks.

    Long-time readers know I am particularly fond of the “Financial Sphere vs. Real Economic Sphere” framework. It is valuable to view these as two separate but interrelated “Spheres,” with contrasting supply/demand, price and behavioral dynamics. In simplest terms, throwing excess “money”/liquidity at these respective “Spheres” over an extended period will foster disparate dynamics and consequences. And, importantly, over recent decades the Fed and global central bank policies have gravitated toward increasingly desperate “Financial Sphere” intervention and manipulation. The crisis response to the 2008/2009 crisis and then again in 2012 were decisive.

    From Russell Napier “Most investors still believe that we live in a fiat currency world. They believe central bankers can create as much money as they believe to be necessary. Such truths are on the front page of every newspaper, but they may contain just as much truth as the headlines of their tabloid cousins. A belief in this ability to create money is the biggest mistake in analysis ever identified by this analyst. The first reality it ignores is that money, the stuff that buys things and assets, is created by an expansion of commercial bank, and not central bank, balance sheets. The massively expanded central bank balance sheets have not lifted the growth in broad money in the developed world above tepid levels. Until that happens, developed world monetary policy must be regarded as tight and not easy.”

    This is thoughtful and important analysis. I’ll approach it from my somewhat contrasting analytical framework. From CBB day one, I’ve tried to significantly broaden how we define and analyze “money” and so-called “money supply”. I draw from Mises’ “fiduciary media” and inclusion of financial instruments with the “functionality” of traditional narrow definitions of money supply (i.e. currency, central bank Credit and bank deposits). For me, the perception of a safe and liquid store of (nominal) value is critical.

    Moneyness is a market perception. The epicenter of danger lies in “money’s” virtual insatiable demand. It is prone to over-issuance. There is a powerful proclivity for government intervention, manipulation and inflation. The perception of moneyness is, in the end in a world of fiat, self-destructive.

    After the past almost seven years, I don’t question central banks’ capacity to create “money.” And my framework doesn’t ascribe special status and power to commercial bank “money” or balance sheets. Besides, U.S. M2 “money supply” has inflated about $2.5 TN in three years, or 20%. Over three years U.S. Commercial Bank Liabilities have inflated the same $2.5 TN, or almost 20%.

    The past three years have witnessed historic “money” and Credit expansion on a global basis. The fundamental problem is that global central bank (and governmental) policies over 30 years have profoundly distorted and undermined market incentive structures. This issue is not insufficient “money” – central bank, bank or otherwise. Finance has, however, been incentivized to flow in excess chiefly into the Financial Sphere, where it enjoys comforting policymaker control and support. As global maladjustment and imbalances (which engender disinflationary pressures) mount, why invest in the Real Economy Sphere when it appears so much safer and easier to chase returns in inflating central bank-supported securities market booms?

    Why would company managements not use abundant corporate cash flow to repurchase shares when waning returns make it increasingly difficult to justify Real Economy investment? Why proceed with major new investment plans when ultra-easy M&A finance favors acquisitions? Why not just join The Crowd throwing “money” at tech startups and biotech where real economic returns are irrelevant anyway? Why not just “invest” in ETFs shares that buy shares in companies that repurchase their shares? Better yet, why not invest in “safe” bond funds that invest in safe companies that safely borrow “money” to buy back their shares and make acquisitions? Above all, don’t just sit there in “money” that returns near zero when there’s been such a proliferation of “money-like” financial instruments and products with the promise decent yields and returns? You see, it’s just not a quantity of “money” issue.

    This vein of analysis offers layers of progressive complexity. Financial Sphere Bubbles over time engender major structural maladjustment. Throughout equities and debt markets, Bubble Dynamics ensure liquidity flows in progressive excess to the hot asset classes, sectors and products. If the Fed, central banks or the Chinese government seek to underpin such dynamics, momentum will eventually climax with precarious Terminal Phase “blow off” excess. This played prominently in techland in the late-nineties, housing/consumption during the mortgage finance Bubble period, in commodities and EM in the post-2008/09 crisis “global reflation trade,” and more recently (most conspicuously) in tech and biotech.

    I have argued that it is a perilous myth that central bankers these days control a general price level. They instead incentivize massive financial flows into securities markets and fashionable sectors. Over time, ramifications and consequences reach the profound. For one, excess liquidity promotes over/mal-investment. It’s only the scope and nature that remain in question.

    If major Bubble flows inundate new technology investment, the resulting surge in the supply of high-margin products engenders disinflationary pressures elsewhere. Policy responses to perceived heightened “deflation” risks then only work to exacerbate Bubbles, mounting imbalances and structural fragilities. This was a critical facet of “Roaring Twenties” analysis that was lost in time.

    Bubbles categorically redistribute and destroy wealth, and I will turn more optimistic when policymakers finally “wise up” to this harsh reality. On the one hand, progressively destabilizing Financial Sphere monetary disorder ensures deep economic maladjustment (i.e. excessive Bubble-related spending in tech, housing related, EM, commodities and China). On the other, serial securities and asset market booms and busts spur destabilizing wealth redistributions – a boon to some and economic hardship (boom and bust collateral damage) to many. Both work to foster economic stagnation – deep structural impairment impervious to central bank reflationary measures.

    Reflationary policies and attendant inflated market Bubbles can hold the consequences at bay for a while. Importantly, resulting monetary disorder works to exacerbate both Financial Sphere and Real Economy Sphere maladjustment with potentially catastrophic consequences. Economists have traditionally debated “money illusion” (notably Irvine Fisher and JM Keynes). “Wealth illusion” is today more appropriate. The U.S. economic structure remains viable – these days the “envy of the world” – only so long as perceived wealth from securities markets remains grossly inflated. The consumption-based U.S. economy requires record household sector perceived wealth (inflated Household Net Worth). And this requires ongoing loose financial conditions, strong Credit growth and buoyant financial flows.

    Because of the importance of the data, I wanted to circle back briefly to document key data released in last month’s Q1 2015 Z.1 “flow of funds” Credit report.

    As a proxy for the “U.S. debt securities market,” I combine Fed data for outstanding Treasury, Agency, Corporate and muni debt securities. I then combine this with Total Equities to come to my proxy of the “Total Securities” markets. During Q1, Total Securities jumped $759bn to a record $73.195 TN. Total Securities as a percentage of GDP jumped five percentage points to a record 414%. For perspective, this ratio began the nineties at 183%, concluded 1999 at 356% and then rose to 371% to end 2007.

    The value of U.S. Household (and non-profits) assets jumped $1.611 TN during Q1. By largest categories, Financial Assets jumped another $1.07 TN and Real Estate assets increased $500bn. And with Household Liabilities little changed for the quarter, Household Net Worth (assets minus liabilities) rose $1.6 TN to a record $84.925 TN. Over the past year, Household Net Worth inflated about $4.6 TN, with a two-year gain of $12.6 TN. Since the end of 2008, Household Net Worth has ballooned a stunning $28.4 TN, or 50%.

    One cannot overstate the integral role the inflation in Household Net Worth has played in the Fed’s reflationary policymaking. Household Net Worth ended Q1 at a record 481% of GDP. This compares to 447% to end Bubble Year 1999 and 476% in Bubble Year 2007.

    As was the case again during Q1, during the inflationary boom period, strong inflationary biases ensure that “wealth” increases a multiple of underlying Credit growth. This dynamic was on full display during both the tech and mortgage finance Bubble episodes. I recall being amazed at how $1 TN of mortgage Credit growth would fuel a $4.0 TN inflation in Household Net Worth. This “virtuous” dynamic turned vicious during the bust. The amount of new Credit required just to stabilize an inflated and maladjusted system becomes enormous.

    There is now chatter of the Chinese government intervening in the stock market to the tune of $100bn in a single session. We’ve seen how, despite repeated bailouts and debt reductions, the Greek black hole grows only bigger. Meanwhile, with commodities in freefall, it was another ominous week for EM. And these examples provide apt reminders of inflationism’s biggest flaw: once commenced, it’s about impossible to rein in. I would add that “money” printing will never resolve the issue of structural maladjustment. Monetary inflation will, however, ensure only greater quantities of “money” will be required come the inevitable bust. And those quantities will eventually bring to question confidence in “money.” Read monetary history.

  • Welcome To Planet Obama

    “Opposite”-land…

     


    Source: Townhall.com

  • This Coal Mine Valued At $630 Million In 2011 Just Sold For One Dollar

    The following photos are from Australia’s Isaac Plains coking-coal mine.

     

    Why is Isaac Plains relevant? Well, in 2011 at the height of the Australian mining boom, Japanese conglomerate Sumitomo thought it has spotted a bargain, and a SMH reports, it approached Tony Poli, the founder of mid-tier miner Aquila Resources with an offer: it would buy its 50% stake in Isaac Plains, at the time Aquila’s only producing mine, for $430 million.

    Market participants thought Aquila’s stake might fetch $300 million at best but Sumitomo was confident it would make a strong return, and offered almost 50% above fair value, especially since Brazil’s legendary mining company Vale owned the other 50% stake.

    Net, the total value of the Isaac Plains mine in 2011 just just about $630 million.

    It turns out Sumitomo was very, very wrong, and within a few years the writing was on the wall. In September 2014, Sumitomo and Vale shuttered the mine citing the downturn in the international coal market. Sumitomo said it would also take a writedown worth ¥30 billion ($11 million) on its Australian coal investments.

    And as SMH tongue in cheekly adds, Isaac Plains was added to the long list of coal mines up for sale – but at a price. That price was finally revealed on Thursday: the princely sum of $1.

    Why the complete collapse in price of the mine? Simple: blame China.

    As Bloomberg explains, “a slump in the price of coking coal, used to make steel, to a decade low is forcing mines to close across the world and bankrupting some producers. Alpha Natural Resources Inc., the biggest U.S. producer, plans to file for bankruptcy protection in Virginia as soon as Monday, said three people with direct knowledge of the matter. It was valued at $7.3 billion in 2008.”

    At the peak of the Chinese commodity bubble, which in turn resulted in a golden age for Australia’s mining companies, production from Isaac Plains hit a peak output was 2.8 million tons a year, with coal sold to steelmakers in Japan, South Korea and Taiwan.

    However, in the past year, with the bursting of the Chinese housing bubble, and the dramatic cooling off of China’s shadow banking system, the commodity demand of Chinese ghost cities has gone on hiatus, and so has the production of mines such as Isaac Plains:

    Coal’s demise is just part of a broader slump in commodity prices, which fell to the lowest in 13 years this month. The benchmark price for coking coal exported from Australia has slumped 24 percent this year to $85.40 a ton on Friday, according to prices from Steel Business Briefing. The quarterly benchmark price peaked at $330 a ton in 2011, according to Bloomberg Intelligence.

     

    The closing of Isaac Plains and a second mine in Australia shut last year, Integra Coal, led to a 7.2 percent reduction in Vale’s total coal output in the first half of 2015. It took a $343 million writedown on its Australian coal assets, part of total impairments of $1.15 billion last year, Vale said Feb. 26.

    Still, Vale’s and Sumitomo’s complete wipeout loss is someone else’s gain, in this case the new owner of Isaac Plain, which acquired the assets for a nominal tip, and merely had to fun ongoing spending and any debt obligations.

    The new owners of Isaac Plains, Stanmore Coal, hope to restart production in the first half of 2016 and estimate the mine could operate for another three years.

    The market took notice when the news of the dramatic purchase hit: Stanmore remains a minnow with a market capitalization of just $30 million. But with its shares up nearly 70 per cent on Thursday, investors have taken to the deal.

    Still, as SMH adds, sluggish coking and thermal coal prices will continue to weigh heavily however regardless of how quickly they can restart production. Metallurgical coal has fallen another 25 per cent since January to about $US82 a tonne, from more than $US300 in 2011, while thermal coal has lost 8 per cent since January to languish around $US59 a tonne, compared to about $US150 three years ago.

    Then again, with Stanmore’s cost basis virtually nil, it would be a fool not to take the discarded assets. As Kiril Sokoloff’s 13D wrote recently, “Buy when they give it away. What are they giving away now?” and recount how in 1977, “we were walking uptown in New York City with a friend who worked for a prominent trust company. He told us that the trustees of an estate had just sold a triplex on East End Avenue for $1. The reason? The $3,000 per month maintenance was “depleting the assets of the estate”.

    Last week, Glencore sold the Cosmos nickel mine for AU$24.5 million. In 2008, Xstrata Plc paid AU$3.1 billion for Jubilee Mines to gain control of Cosmos—the Perth-based company’s flagship operation.

     

    For what it’s worth, Javier Blas tweeted this week that, based on data from Citi Research, 90% of all M&A that miners did since 2007 has been written off. Makes you wonder about the current M&A boom…

    All of which makes the researcher wonder if investors are missing the big picture:

    There is a giant infrastructure investment boom just getting started in Asia and along the Silk Road. Wasn’t the whole commodity boom of the last decade based on infrastructure investment in China? Now, it will expand to all of Asia and beyond.

     

    It is interesting to note how little is being written in the West about One Belt, One Road (see related themes). China Development Bank notes that the number of cross-border projects underway in the Silk Road effort already amount to $980 billion. Reportedly, Asia’s infrastructure needs are close to $8 trillion by 2020.

    It remains to be seen if China can rebound, and if purchases such as Stanmore’s $1 acquisition of a site that has a resource of 30 million metric tons will be lucrative. At current prices, every incremental ton produced loses money. But maybe prices will rebound.

    For now, however, one thing is certain – the biggest winner is not Stanmore despite its suddenly soaring stock price, but Tony Poli, the person who sold Issac Plains at the absolute top to the naive Japanese conglomerate:

    [Poli] could barely believe his luck when Sumitomo came knocking. Then in 2014 Aquila was acquired by Baosteel and Aurizon for an eye watering $1.4 billion.  It gave the two companies access to Aquila’s West Pilbara iron ore project, but the timing could barely have been worse. Iron ore prices have slumped by more than half in the last 12 months leading to speculation Aurizon may be forced to eventually take a writedown on the value of the Aquila deal on its balance sheet.

    All of which is a very timely reminder: it is never an actual profit, until it has been booked. And as noted above, for 90% of all M&A deals in the past decade, the only thing booked is 100% losses.

  • Gold And The Grave Dancers

    Submitted by Pater Tenebrarum via Acting-Man.com,

    The Asset They Love to Hate …

    Back in the 1960s, Alan Greenspan wrote a well-known essay that to this day is an essential read for anyone who wants to understand the present-day monetary and economic system (which is a kind of “fascism lite” type of statism, masquerading as capitalism) and especially the almost visceral hate etatistes harbor toward gold. Greenspan’s essay is entitled “Gold and Economic Freedom”, and as the title already suggests, the two are intimately connected.

     

    Alan Greenspan

    Alan Greenspan in the mid 1970s – although he later turned out to be a sell-out, his understanding of economics undoubtedly dwarfed that of his successors at the Fed (and we are not just saying this based on the essay discussed here).

    Photo credit: Charles Kelly / AP Photo

    What makes Greenspan’s essay especially noteworthy is that it manages to present both theory and history in a concise, easy to understand manner. There isn’t a word in it we would change. At one point, Greenspan provides a brief history lesson. Yes, the (relatively) free banking era in the United States in the 19th century involved fractional reserve banking and as a result, there were frequent boom and bust cycles. However, since there was no “lender of last resort” with an unlimited money printing capacity, these business cycles were sharp and brief, and the market economy quickly righted itself every time:

    “A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.”

    (emphasis added)

    Alas, these relatively harmless business cycles provided interventionists with an opening to implement their central planning wet dreams, even though their ideas were based on what can charitably only be called appalling economic ignorance. This economic ignorance informs the monetary system to this day and we have nothing but contempt for these planners and their intellectual handmaidens.

    We cannot quantify it with any precision, but we believe it can be taken as a given that they have retarded economic progress by an order of magnitude, for reasons of compounding alone. Based on historical data, we would estimate that average real annual growth would have been at least twice as large since 1913 than it has actually been if the economy had remained free. Compounded over more than a century, this is basically the difference between what we have today and the universe of Star Trek.

     

    US-GNP-per-capita-1869-1918 (1)

    US GNP per capita in the decades before the establishment of the Federal Reserve: equitable and strong growth, unmatched before and ever since – in spite of fairly frequent boom-bust cycles click to enlarge.

    As Greenspan notes:

    “But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913.”

    (emphasis added)

    At the conclusion of his essay, Greenspan makes clear why the welfare/warfare statists just hate gold with a passion bordering on hysteria:

    “Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.”

     

    […]

     

    In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

     

    This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

    (emphasis added)

    This always was and remains true.

    Bought Off Intellectuals

    All the “justifications” for today’s system we hear from the supporters of the centrally planned fiat money dispensation are nothing but propaganda. This propaganda includes a number of historical lies (such as the old canard that “governments had no choice but to abandon the gold standard if they wanted to rescue the economy”), commingled with theoretical assertions that have been thoroughly refuted countless times.

    One of the latter is that an economy allegedly cannot grow unless the money supply grows as well (the truth is that any money supply is as good as any other, and in a free market prices would simply adjust). Another is that central banks need to be able to apply their “scientific monetary policy” to make up for the alleged deficiencies of the free market. In reality, central banking and fiat money have slowed real economic growth to a crawl and have produced boom-bust cycles of ever greater amplitude. Something like the “Great Depression” would never have been possible without a Federal Reserve and two heavily interventionist governments coming to power in a row (first Hoover’s and then FDR’s).

    The assertions listed above and similar ones are reiterated sotto voce by countless mainstream economists and the entire mainstream financial press at every opportunity. Hoever, this should be no surprise: The Federal Reserve has practically bought off the entire economics profession (incidentally, so have other central banks and assorted state-funded institutions).

    “The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession

     

    […]

     

    One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past

     

    […]

     

    A Fed spokeswoman says that exact figures for the number of economists contracted with weren’t available. But, she says, the Federal Reserve spent $389.2 million in 2008 on “monetary and economic policy,” money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009. That’s a lot of money for a relatively small number of economists.

    (emphasis added)

    In a free market, the market value of thousands of today’s hyper-specialized macroeconomists would be a tiny fraction of what they get paid by the State. In an unhampered free market economy, many of them would probably be forced to actually perform productive jobs. There would of course still be room for economists, but only the most committed and talented among them would could hope to receive funding. Absolutely no-one would bother paying for central planning advice or statist propaganda, that much is absolutely certain. Obviously these economists are highly unlikely to bite the hand that feeds them.

    As Hans-Hermann Hoppe has noted in this context:

    “There are almost no economists, philosophers, historians, or social theorists of rank employed privately by members of the natural elite. And those few of the old elite who remain and who might have purchased their services can no longer afford intellectuals financially. Instead, intellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand (“tenured”), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen.

     

    What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today’s intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”

    (emphasis added)

     

    HansHermannHoppe

    Economist Hans-Hermann Hoppe – a strongly committed enemy of the State, as the following quote illustrates: “[The State is] an institution run by gangs of murderers, plunderers, and thieves, surrounded by willing executioners, propagandists, sycophants, crooks, liars, clowns, charlatans, dupes and useful idiots – an institution that dirties and taints everything it touches”.

    Photo via libertarianin.org

    Given that intellectuals have great influence – the masses typically follow their lead, whether consciously or not – we shouldn’t be surprised that this “viciously statist propaganda” has become a hallmark of the mainstream press as well. This brings us back to the topic of gold.

    Premature Grave Dancing

    Readers may have noticed that there simply is no other asset that provokes more intense hatred in the mainstream press than gold. When the gold price declines as it has done since 2011, the press is literally brimming over with Schadenfreude, grave dancing exercises and anti-gold tirades. The lengthy preamble above is an attempt to explain why this is the case.

     

    dance-on-grave

    Intense grave dancing – the poor fellow at the bottom is Mr. Gold

    Engraving by Michael Wolgemut

    Simply put, gold is the one asset that provides the most reliable indictments of central economic planning and the abominable monetary and economic system that has been forced on us by the etatistes. In spite of its innumerable failures, socialism and its close cousin, modern-day corporatism (i.e., crony socialism), remains highly popular with the intellectual class, as it provides it with influence and money beyond its wildest dreams.

    Unfortunately, it is even more popular with big business. The handful of large corporations that are controlling the press these days are not exactly big fans of the free market and its unfettered competition either. Established big business organizations prefer to keep upstart competition suppressed by means of obtaining privileges from the State. One would think that business should be against the over-regulation that characterizes today’s bureaucratic Leviathan State. This is not the case: Since it harms small emerging competitors more than established businesses, they are actually in favor of it.

    Needless to say, the most powerful industry of modern times, the fractionally reserved banking cartel, is one of the biggest beneficiaries of the system and as such provides sheer unlimited funding to keep things right as they are.

    When gold’s fall accelerated recently, we have seen an outpouring of doom-saying and thinly disguised contempt in the mainstream press that actually puts everything seen before into the shade. In a way this is surprising; after all, gold is a completely unimportant asset, right? Just think about this for a moment. If another currency, such as e.g. the yen, suffers a big decline, is it subjected to even remotely comparable vitriol in the press? Here are a few examples from the last week or so (with a few comments by us interspersed):

    From Bloomberg (Bloomberg belongs to a limousine socialist, and is well-known for its pro-central banking/ pro-money printing and anti-gold editorial line. Some of the most ludicrous articles about gold ever published have appeared on Bloomberg):

    Gold Slump Not Over as Speculators Go Net-Short for First Time – apparently Bloomberg’s authors have yet to hear about contrarian signals.

     

    Gold Is Only Going to Get Worse (“Our survey shows a majority of traders and investors aren’t optimistic”) – indeed, Bloomberg seems to be blissfully unaware of contrarian sentiment analysis.

     

    Gold Could Fall to the $1,000 Mark (video)

     

    Good Luck Bargain Hunting for Gold Miners – naturally, gold miners are even more doomed than gold itself…

     

    From the Wall Street Journal:

    Let’s Get Real About Gold: It’s a Pet Rock – actually, as we have previously pointed out, it’s a door stop, not a pet rock. We should perhaps mention here what Jason Zweig, the author of this WSJ article, wrote in 2011 right at gold’s peak. From Mr. Zweig’s WSJ Article of September 17, 2011:

     

    “Growing numbers of investing experts have been declaring that gold is a bubble: an insanely overvalued asset whose price is bound to burst. There is no basis for that opinion.”

     

    With respect to gold miners (which since then are down by more than 80%) he opined:

     

    “But there is one aspect of gold investing where it is possible to make rational estimates of value: the stocks of gold-mining companies. And, by historical standards, they seem cheap—based not on subjective forecasts of continuing fiscal apocalypse, but on objective measures of stock-market valuation.”

     

    This is really a textbook example of how market sentiment works.

     

    From Marketwatch:

    The carnage isn’t over in gold, other metals-mining stocks

     

    Study predicts gold could plunge to $350 an ounce (i.e., here come the extreme predictions, the inverse of the vast bullish consensus and the extreme bullish predictions that were made at the peak by gold bulls)

     

    And all of this was finally crowned with the following pronouncement in the Washington Post:

    Gold is doomed

     

    Interestingly the author of this article, Matt O’Brian, actually gets one thing right, although his conclusion remains utterly wrong – he writes:

     

    “When you think about it, a bet on gold is really a bet that the people in charge don’t know what they’re doing.”

     

    That’s exactly what it is Mr. O’Brian. The wrong conclusion he comes to is this one:

     

    ”But economists do, for the most part, know what they’re doing.”

     

    Yes, in some parallel universe perhaps. That people can profess such beliefs after the twin debacles of the tech and housing bust and after yet another giant asset bubble has been blown by these “economists who know what they are doing” is truly stunning. How blind and naïve can one possibly be? This article is a good example of statist propaganda. Our wise leaders know what they are doing! How can anyone doubt it!

    Just to make this clear, we are not critical of people making bearish forecasts on gold. This is perfectly legitimate, especially as gold’s fundamental drivers have at best been stuck in “neutral” for much of the time over the past few years. Occasionally, gold’s fundamentals have switched to slightly more bullish, and then have quickly flipped back again to slightly more bearish, while its technical condition wasn’t much to write home about.

    Gold primarily has vast bullish potential. The factors that are currently slightly bearish could very easily and quickly flip to outright bullish. Gold bulls have the laws of economics on their side: the greatest post WW2 experiment in global money printing on a grand scale is apodictically certain to fail and will likely result in one of the greatest economic busts of modern times.

    Still A Contrarian’s Dream

    We find the reactions in the press interesting for the following reasons:

    Firstly, as mentioned above, we find it absolutely fascinating that gold is getting so much attention. The etatistes are apparently truly afraid of gold. If it were up to them, it would probably still be illegal (just a guess, mind).

    Secondly, we also find it fascinating (and a bit depressing) how woefully uninformed the commentary on gold generally is, and this does not only apply to gold bears, but to gold bulls as well. There is hardly any market about which more nonsense is written than the gold market.

    We have discussed this at length in previous articles on this blog, such as “Misconceptions about Gold”. Robert Blumen has contributed two excellent essays on the theoretical background that explain how exactly the gold price is formed (in “What Determines the Price of Gold” and “Misunderstanding Gold Demand”). In a somewhat dated “Update on Precious Metals” we provided a list of the most important fundamental drivers of the gold price (you’ll have to scroll down a bit to the section Fundamental Drivers of the Gold Market). We should also mention Keith Weiner’s frequent “Monetary Metals Supply and Demand” reports, which delve into the nitty-gritty of whether or not the metals are moved by developments on the physical side or the actions of futures speculators.

    In spite of all this information being available for free on the intertubes, we notice that even gold bulls are still wasting time talking about things like jewelry demand and mine supply. Others keep going on about central bank buying and gold buying in China, often asserting that “demand evidently exceeds supply”, even in the face of a declining price. Demand and supply are always in balance. Price informs us about the relative urgency displayed by demanders and suppliers, and when the price declines, it indicates that the former aren’t sufficiently enthusiastic. The fact that gold moves from warehouse A (in, say, New York) to warehouse B (in Shanghai) has nothing to do with it.

    Thirdly, we regard the excessive grave dancing, and the utter conviction with which gold is declared to be “doomed” as an outstanding contrary indicator. It means that a major trend change has to be very close. This is not to say that gold cannot fall further in the short term – technically it certainly continues to look weak, and the price attractor at $1,040-1,050 presumably still beckons. However, we believe that the long term outlook has greatly improved by the three waves of extreme bearish sentiment we have seen since 2013 (at the summer 2013 low, the late 2014 low and currently).

    Even in the short term, it seems that chances are very good that a substantial rally will develop. For instance, the Daily Sentiment Index (DSI) of futures traders has recently fallen back to a record low of just 5% bulls on two consecutive occasions. A recent report by EWI contained the following chart illustrating the situation:

     

    DSI

    From 98% bulls at the top to just 5% bulls back-to-back – how sentiment on gold moves from one extreme to another – click to enlarge.

     

    A similar message is conveyed by sentimentrader’s gold optimism index, an average of the most important gold sentiment surveys and positioning data, which we already shown in Bill Bonner’s recent article “Gold Miners, RIP”. Currently the “Gold Optix” is at its second-lowest level in history, undercutting even the low recorded in the year 2000, at the bottom of a 20 year bear market:

     

    Gold Optix

    Gold market participants haven’t even been this bearish back in the year 2000 – click to enlarge.

     

    As might be imagined, other market positioning and sentiment data all convey a similar message: small speculators hold a large net short position in gold futures, managed money is net short gold futures, Rydex precious metals assets are close to “wipe-out” territory, closed end bullion funds trade at vast discounts to their net asset value, GLD keeps losing gold, etc., etc.

    In short, everybody knows gold can only fall further and is positioned accordingly. If there is one truism about markets one needs to be aware of, it is this one: What “everybody knows” isn’t worth knowing. Naturally, all those who have maintained a somewhat positive view on gold in recent years (including yours truly) look like idiots right now – but there is considerable potential that assorted gold haters will be invested with this particular mantle over coming years. Don’t worry, we’ll needle them right back. 🙂

     

    Conclusion

    As we have already mentioned in our missive on the recent “Gold Panic”, when everybody in a market is looking in the same direction, it is time to pay close attention. Contrarians should really love the current juncture in the gold market. At the very least, a playable counter-trend move should be close at hand, and perhaps a long term turn is actually finally in the offing. After all, the market has by now finally more or less replicated the mid-cycle decline of 1974-1976.

    Lastly, we are actually gratified by the fact that assorted etatistes still seem so preoccupied with gold. This is a sign that gold remains an important monetary asset, one that continues to stand tall as an indictment of central economic planning, socialism and corporatism in all its forms. Even after having declined by roughly 45% from its 2011 high, gold is still up by more than 3,000% against the US dollar since the latter was cut loose from its tie to gold by Nixon’s default in 1971. This means that even with gold under pressure for four years running, the dollar has still crashed by 97% against it since 1971.

    There is little question which currency is more useful to preserving value and protecting savers and property rights, and which one is more useful for the depredations of a greedy and insatiable Leviathan State. Hence all the gold hate pouring forth in the mainstream press. It will be interesting to see what happens once the collapse of fiat money against gold resumes – especially as we think it will do so with a real bang.

     

    PIC FROM CATERS NEWS - (Pictured the Vault) We might be be in financial woes but dont worry theres still a few pence in the bank, inside the vault of the Bank of England which holds £156 BILLION in GOLD. As bankers are dis-honoured and Europe teeters on the brink of financial meltdown its still nice to see we have a little to fall back on. Deep underground the nations financial heart these piles upon piles of 28lb 24-carat gold bars make for reassuring viewing. Stacked on shelves like some scene from the end of an Indian Jones film the glittering nest egg is kept safe in a massive underground vault. In this image alone there are around around 15,000 bars around 210 tonnes of pure gold, with a value of around £3 billion. SEE CATERS COPY.

    What remains of the gold stash of the Bank of England

    Photo credit: Caters News

  • The Cyber Wars Begin: Obama Says US "Must Retaliate" Against China For Historic Data Breach

    On Friday, we highlighted a “secret” NSA map which purports to show every Chinese cyber attack on US targets over the past five years. “The prizes that China pilfered during its ‘intrusions’ included everything from specifications for hybrid cars to formulas for pharmaceutical products to details about U.S. military and civilian air traffic control systems,” intelligence sources told NBC, who broke the story. 

    The release of the map marked the culmination of a cyber attack propaganda campaign which began with accusations that North Korea had attempted to sabotage Sony, reached peak absurdity when Penn State claimed Chinese spies had taken control of the campus engineering department, and turned serious when Washington blamed China for what was deemed “the largest theft of US government data ever.” “Whether all of this is cause for the Pentagon to activate the ‘offensive’ component of its brand new cyber strategy remains to be seen,” we said yesterday.

    As it turns out, the Office of Personnel Management breach will indeed be used to justify a cyber “retaliation”against China, because as The New York Times notes, “the hacking attack was so vast in scope and ambition that the usual practices for dealing with traditional espionage cases [do] not apply.” Here’s more:

    The Obama administration has determined that it must retaliate against China for the theft of the personal information of more than 20 million Americans from the databases of the Office of Personnel Management, but it is still struggling to decide what it can do without prompting an escalating cyberconflict.

     

    The decision came after the administration concluded that the hacking attack was so vast in scope and ambition that the usual practices for dealing with traditional espionage cases did not apply.

     

    But in a series of classified meetings, officials have struggled to choose among options that range from largely symbolic responses — for example, diplomatic protests or the ouster of known Chinese agents in the United States — to more significant actions that some officials fear could lead to an escalation of the hacking conflict between the two countries.

     

    That does not mean a response will happen anytime soon — or be obvious when it does. 

    So the US will do something, it just doesn’t yet know what or when or even if anyone will notice, but one thing is clear: “this aggression will not stand, man.”

    The problem with “symbolic” responses is that they are merely, well, symbolic, and any real retaliation risks escalating the “cyberconflict.” Then again, not doing anything also risks prompting an escalation:

    But over recent days, both James Clapper Jr., the director of national intelligence, and Adm. Michael S. Rogers, director of the National Security Agency and commander of the military’s Cyber Command, have hinted at the internal debate by noting that unless the United States finds a way to respond to the attacks, they are bound to escalate.

     

    Mr. Clapper predicted that the number and sophistication of hacking aimed at the United States would worsen “until such time as we create both the substance and psychology of deterrence.”

     

    This echoes the rhetoric from the DoD’s “cyber strategy” released in April which says that “deterrence is partially a function of perception [and] works by convincing a potential adversary that it will suffer unacceptable costs if it conducts an attack on the United States.” 

    For now at least, it looks like criminal charges are off the table. 

    The Justice Department is exploring legal action against Chinese individuals and organizations believed responsible for the personnel office theft, much as it did last summer when five officers of the People’s Liberation Army, part of the Chinese military, were indicted on a charge of the theft of intellectual property from American companies. While Justice officials say that earlier action was a breakthrough, others characterize the punishment as only symbolic: Unless they visit the United States or a friendly nation, none of them are likely to ever see the inside of an American courtroom.

     

    “Criminal charges appear to be unlikely in the case of the O.P.M. breach,” a study of the Office of Personnel Management breach published by the Congressional Research Service two weeks ago concluded. “As a matter of policy, the United States has sought to distinguish between cyber intrusions to collect data for national security purposes — to which the United States deems counterintelligence to be an appropriate response — and cyber intrusions to steal data for commercial purposes, to which the United States deems a criminal justice response to be appropriate.“

    Instead, the US may look to remove the so called “great firewall” which Beijing uses to censor content it considers to be subversive or otherwise objectionable.

    One of the most innovative actions discussed inside the intelligence agencies, according to two officials familiar with the debate, involves finding a way to breach the so-called great firewall, the complex network of censorship and control that the Chinese government keeps in place to suppress dissent inside the country. The idea would be to demonstrate to the Chinese leadership that the one thing they value most — keeping absolute control over the country’s political dialogue — could be at risk if they do not moderate attacks on the United States.

    So perhaps there’s a silver lining in all of this: China’s 650 million internet users may, if only for a split second, be free to surf the web without the Politburo filter.

    Of course if the US really wanted to do some cyber damage, the Pentagon could hack into China’s National Bureau of Statistics and see what the country’s real GDP figure looks like, and if that doesn’t teach them a lesson, maybe the best option would be to breach China Securities Finance Corporation and hit the “sell” button. 

    Finally, for those interested to monitor the global cyber war in real time, you can do so via Norsecorp by clicking on the following map.

  • 11 Red Flags As We Enter The Pivotal Month Of August 2015

    Submitted by Michael Snyder via The Economic Collapse blog,

    Red Flags - Public Domain

    Are you ready for what is coming in August?  All over America, economic, political and social tensions are building, and the next 30 days could turn out to be pivotal.  In July, we saw things start to turn.  As you will read about below, a major six year trendline for the S&P 500 was finally broken this month, Chinese stocks crashed, commodities crashed, and debt problems started erupting all over the planet.  I fully expect that this next month (August) will be a month of transition as we enter an extremely chaotic time in the fall and winter. 

    Things are unfolding in textbook fashion for another major global financial crisis in the months ahead, and yet most people refuse to see what is happening.  In their blind optimism, they want to believe that things will somehow be different this time.  Well, the coming months will definitely reveal who was right and who was wrong.  The following are 11 red flag events that just happened as we enter the pivotal month of August 2015…

    #1 Puerto Rico is going to default on a 58 million dollar debt payment that is due on Saturday.  Even though this has serious implications for the U.S. financial system, Barack Obama has said that there will be no bailout for “America’s Greece”.

    #2 As James Bailey has pointed out, the most important trendline for the S&P 500 has finally been broken after holding up for six years.  This is a critical technical signal that will likely motivate a significant number of investors to sell off their holdings in the weeks ahead.

    #3 The IMF is indicating that it will not take part in the new Greek debt deal.  As a result, the whole thing may completely fall apart…

    Leaked minutes of the fund’s latest board meeting, which took place on Wednesday, showed staff “cannot reach agreement at this stage” on whether to take part in the new €86bn (£60bn) bailout for Greece. The document said there were doubts over the capacity of the Athens Government to implement economic reforms, as well as the over the sustainability of the country’s sovereign debt pile, which is now projected to hit 200 percent of GDP.

     

    The German Chancellor, Angela Merkel, only sanctioned a new Greek deal earlier this month on the condition that the IMF takes part.

    #4 Italy is going down the exact same path as Greece, but Italy is going to be a much larger problem for Europe because it has a far, far larger economy.  This week, we learned that youth unemployment in Italy has reached a 38-year high of 44 percent, and Italy’s debt to GDP ratio has now hit 135 percent.

    #5 The Canadian economy has officially entered a new recession.  This is something that was not supposed to happen.

    #6 The price of oil plummeted close to 20 percent during the month of July.  It was the worst month for the price of oil that we have seen since October 2008, which just happened to be during the height of the last financial crisis.

    #7 Commodities just had their worst month in almost four years.  As I have written about previously, we witnessed a collapse in commodity prices just before the stock market crash of 2008 too.

    #8 Thanks to Barack Obama, the U.S. coal industry is imploding, and some of the largest coal producers in the entire country have just announced that they are declaring bankruptcy…

    On Thursday, Bloomberg reported that the biggest American producer of coking coal, Alpha Natural Resources, could file for bankruptcy as soon as Monday.

     

    Competitor Walter Energy filed for bankruptcy earlier this month, and several others have done the same this year.

    #9 For the month of July, the Shanghai Composite Index was down 13.4 percent.  Despite unprecedented government intervention to prop up the market, it was the worst month for Chinese stocks since October 2009.

    #10 A major red flag that a recession in the United States is fast approaching is the fact that Exxon Mobile just announced their worst earnings for a single quarter since 2009.  Compared to the same time period one year ago, Exxon Mobile’s earnings were down 51 percent.

    #11 Chevron is another oil giant that has seen earnings plunge.  In the second quarter of this year, Chevron’s earnings were down an eye-popping 90 percent from a year ago.

    And in this list I didn’t even mention the economic chaos that is happening down in South America.  For full coverage of that, please see my previous article entitled “The South American Financial Crisis Of 2015“.

    To a certain extent, I can understand why most Americans are not alarmed about the months ahead.  The relative stability of the past several years has lulled most of us into a false sense of security, and the mainstream media is assuring everyone that everything is going to be just fine and that brighter days are ahead.  At this point, many believe that it is patently absurd to suggest that we could see an economic collapse in 2015.  But of course even though the signs were glaringly apparent, very few of us anticipated the financial crisis of 2008 either.

    A few weeks ago, I authored a piece entitled “The Last Days Of ‘Normal Life’ In America“, and I stand by every single word of that article.  I truly believe that the era of debt-fueled prosperity that we have been enjoying for so long is coming to an end, and our standard of living will never again get back to this level.

    Just yesterday, I had the chance to go over and stock up on some emergency supplies at a dollar store.  It always astounds me what you can still buy for a dollar.  The combined cost of raw materials, manufacturing, packaging, shipping and retailing most of these items shouldn’t be less than a dollar, but thanks to having the reserve currency of the world we are still able to go to these big box stores and fill up our carts with lots and lots of extremely inexpensive merchandise.

    Unfortunately, this massively inflated standard of living is going to come crashing to a halt.  This next financial crisis is going to destroy the system that is currently producing such comfortable lifestyles for the vast majority of us, and that will be an extremely painful experience.

    So enjoy this summer for as long as it lasts.  Even though August threatens to be pivotal, it is going to be nothing compared to what will follow.

    Fall and winter are coming.

    Prepare while there is still time to do so.

  • Furious Americans Demand Extradition Of Cecil-Killing Dentist As Poachers Kill Lion's Brother

    Update: The status of Cecil’s brother is now the subject of a “dispute” between conservationists.

    *  *  *

    There’s a lot going on in the world, but you wouldn’t know it if you tuned in to the nightly news because according to the mainstream media, the only thing that happened anywhere last week is that a dentist shot a lion. 

    (Cecil the lion is the one on the right)

    That’s right folks, Walter killed Cecil and some folks – scratch that – a lot of folks are unhappy about it.

    In fact, hundreds of protesters papered Dr. Palmer’s office with subtle messages like “rot in hell” and “there’s a deep cavity waiting for you.”

    As Reuters reports, Cecil’s untimely demise has the potential to put a dent in a lucrative industry by leaving a bad taste in the mouths of big game hunters, who may now hesitate before participating in this “archaic bloodsport”. Here’s more:

    Hunters longing to shoot big game in the African wild may choose a different target after public backlash against a Minnesota dentist who killed Zimbabwe’s Cecil the lion just outside a national wildlife preserve.

     

    African hunts are booked months in advance and pricey affairs, often costing $8,000 to $50,000, with approval needed from U.S. and U.N. agencies to bring back trophies such as the head of a lion to the United States.

     

    “It has left a bad taste in their mouths,” said James Jeffrey, a Houston-based international hunting agent with more than 12 years experience.

     

    “They read all those books and it is people’s dreams to go over there and do it. Some of these guys have worked their whole lives to do this one hunt,” he said.

     

    Eleven African countries issue lion hunting permits. Of them South Africa’s hunting industry is the biggest, worth $675 million, according to the Professional Hunters Association.

     

    Americans make up the bulk of non-African hunters, with 15,000 going to the continent on hunting safaris each year, according to John Jackson, president of Conservation Force, a lobby group that says regulated lion hunting helps protect the animal by giving reserve owners a financial incentive to deter poachers and cultivate stock.

     

    Supporters argue the money generated from hunts bolsters the coffers for conservation in emerging African countries that want to use their limited finances for social programs.

     

    Critics see the hunts as an archaic bloodsport, hurting species such as lions, which an academic study in 2012 said had seen a population fall of nearly 70 percent in the last 50 years.

    In response to the killing, Zimbabwe has now put a halt to big game hunts pending an investigation. From AP:

    Zimbabwean wildlife authorities say they have suspended the hunting of lions, leopards and elephants in an area favoured by hunters following the killing of a lion popular with tourists.

     

    The National Parks and Wildlife Authority said Saturday that bow and arrow hunts have also been suspended unless they are approved by the authority’s director.

     

    The authority says it is also investigating the killing of another lion in April that may have been illegal. It says it only received the information this week.

    And don’t expect the controversy to dissipate any time soon because in what is either a deliberate attempt on the part of an enterprising poacher to capitalize off the incident or else an incredibly ill-timed coincidence, Cecil’s brother Jericho was killed today by hunters. Here’s Sky News:

    The brother of Cecil the lion, Jericho, has been shot dead by poachers, the Zimbabwe Conservation Task Force has said.

     

    The organisation wrote on Facebook: “It is with huge disgust and sadness that we have just been informed that Jericho, Cecil’s brother, has been killed at 4pm today.

     

    “We are absolutely heart broken.”

     

    It is thought Jericho had been protecting Cecil’s cubs.

    And because the story obviously needed to get sadder still, those cubs will now likely die as well. 

    Via The Daily Mail:

    Before his death there had been concerns Jericho would not be able to hold the territory of Cecil’s cubs alone and could be chased away by rival lions. 

     

    Unprotected, the lionesses and cubs are now under threat and [must] move away or be killed.

     

    Last week Mr Rodrigues, told the Daily Mail Online Jericho was keeping the cubs safe from any rival males.

     

    (Jericho and Cecil in better times)

    As for Palmer, Zimbabwe is looking to have the dentist extradited from the US. “Environment minister Oppah Muchinguri said the dentist should be handed over to Zimbabwean officials to face justice, adding that she understood prosecutors had started the legal process to make that happen,” the Daily Mail notes. 

    And for anyone who thinks getting Palmer sent back to Zimbabwe will be like pulling teeth (so to speak), the public outcry may end up pressuing The White House into action, because as you can see from the screengrab below, a peitition to have Palmer extradicted has received the necessary number of signatures to warrant a response from The President:

     

     

    So in the end, we suppose the only question for Obama will be how to explain the fact that, as we reported on Thursday, the death of Cecil, as well as countless other lions, elephants, rhinos and other animals, is solely as a result of the Zimbabwe government’s corruption. A corruption, which the US government knew all about, and despite the fact that Washington knew US hunters were killing not only elephants but lions, the government’s only real concern was the “serious risks that Americans could be implicated in smuggling and poaching operations.”

  • Did We Just Hit The Threshold For Short Covering In Gold?

    Two weeks ago we noted something that has never happened before in gold – hedge funds, according to CFTC, had a net short position for the first in history. The past week saw a very surprising negligible shift of just 11 contracts as the short position shrank to 11,334 contracts. However, the aggregate net long position has dropped to a level that in the past has represented a threshold for signficant short-covering (21% and 17% rallies respectively). So with hedgies as short as they have ever been in history and aggregate positioning at a historically crucial level, one wonders if gold is due for a bounce…

     

    Hedgies remain the most short they have ever been in gold…

     

     

    This is what happened the last time gold saw a 'low' net long position…

     

    and now, the aggregate net position in gold futures appears to have hit a threshold that in the past has created a significant short-covering rally…

     

    The last 2 times aggregate net long positions were this low, gold rallied 21% and 17%…

    Did we just reach that short-covering threshold once again?

  • The Great Greek Fudge

    Submitted by Pieter Cleppe of Open Europe

    The Great Greek Fudge

    A third Greek bailout involving loans from the European Stability Mechanism (ESM), the eurozone’s bailout scheme, is now being negotiated. The start was quite rocky, with haggling over the precise location in Athens where negotiations need to take place and Greek officials once again withholding information to creditors. Therefore, few still believe that it will be possible to conclude a deal in time for Greece to repay 3.2 billion euro to the ECB on 20 August. Several national Parliaments in the Eurozone would need to approve a final deal, which would necessitate calling their members back from recess around two  weeks before the 20th, so it’s weird that French EU Commissioner Pierre Moscovici still seems so confident that the deadline can be met.

    If indeed there is no deal, Greece is likely to request a second so-called “bridge loan” to allow it to pay the ECB, firmly within the Eurozone tradition of the creditor providing the debtor cash in order to pay back the creditor. France, which is most eager to keep Greece inside the Eurozone, is afraid that bilateral bridge loans from Eurozone countries wouldn’t be approved by the more critical member states, as this would risk France having to foot this bill on its own, perhaps with Italy. Not exactly a rosy prospect for socialist French President Hollande, who’s already struggling to contain the far right anti-euro formation Front National.

    The only European fund practically available to provide a bridge loan is the European Financial Stabilisation Mechanism (EFSM), a fund created in May 2010, which has been raising 60 billion euro on the markets, with the EU’s €1 trillion Budget as collateral. The EFSM belongs not just to Eurozone member states, but to all EU member states. How on earth did the UK, which isn’t part of the Eurozone, agree to bail it out in 2010, one may wonder? The reason is that the decision to create the EFSM was taking precisely at the time of the power vacuum in the UK. Labour had just lost the election and the Conservatives were still busy negotiating a coalition with the Lib Dems. Outgoing Labour Chancellor Alistair Darling claimed to have “consulted” likely new Chancellor George Osborne, but it remains muddy who precisely gave the expensive OK. In order to correct this, PM Cameron secured a declaration from other EU leaders in December 2010 that the fund wasn’t going to be used any longer, until it was used after all, in July 2015, to provide Greece with a first bridge loan. Then not only the UK, but also the Czech Republic and Poland protested heavily, only backing down when they secured special guarantees against possible losses and a commitment that it would be illegal in the future to provide loans to Eurozone countries with the EFSM without also providing such guarantees to non-euro states.

    EU Finance Ministers are currently busy implementing the legal change, through a “written procedure”, which should be finalized before the middle of August. The Council declared in July that an “agreement” on this legal change was needed “in any case before” Greece can request a second bridge loan. Another “written procedure” is needed for that, but it’s unlikely that Finance Ministers will manage to decide this in smoke-filled rooms. With Polish elections coming up on 25 October, local opposition parties may once again rail against Polish PM Ewa Kopacz, who promised voters they wouldn’t be exposed to this. Also the UK may use this as an opportunity to extract concessions related to its own agenda for EU reform. Perhaps the French government’s sudden openness to this agenda and its welcome stance that “we need a fair treatment of the ‘out’ countries” may have been linked to the British approval for a first bridge loan.

    As always in the Eurozone, the safest bet is on another fudge, at least when it comes to the bridge loan.

    More questionable is how the IMF’s statement that it “cannot reach staff-level agreement [to participate to a third Greek bailout] at this stage” will play out, given that Greece no longer meets two of the four IMF criteria for a bailout: ability/willingness to implement reform and debt sustainability. It will only decide whether to take part in the bailout after Greece has “agreed on a comprehensive set of reforms” and after the Eurozone has “agreed on debt relief”, meaning it may even only join next year or not at all, of course. This is a problem, given that a number of Eurozone states, especially Germany and the Netherlands, have explicitly linked their willingness for a third Greek bailout to participation by the IMF. Former EU Commissioner for Monetary Affairs Olli Rehn has suggested that many countries demand IMF involvement in bailouts because they don’t trust the Commission.

    It’s not entirely clear what will be sufficient for the IMF: its President, Christine Lagarde, has discussed a write-down on the value of the country’s debt but ruled out a straight “haircut”, while mentioning an extension of debt maturities, an extension of grace periods and a maximum reduction of interest rates. The IMF carries the legacy of its former Director Dominique Strauss-Kahn, who managed to overcome opposition within the fund against taking part in the first Greek bailout in 2010. The IMF only issues loans to countries when there is prospect for debt sustainability, which clearly wasn’t the case for Greece in 2010, but the interests of supposedly “systemic” banks were considered to be more important. Now the IMF, which has never taken straight losses on loans it has issued, may be experiencing this in case of Grexit.

    As opposed to the IMF, which has completely ruled out the idea of taking losses on its lending to Greece, and contrary to the picture painted by some, Germany has made some noices suggesting it may be open to cutting its losses in Greece. German Chancellor Merkel has not only been open to extending debt maturities and lowering interest rates, but her Finance Minister Wolfgang Schäuble has said that “if you think the best way for Greece” is debt relief, then “the best way forward” is to leave the euro, adding that “a real debt haircut isn’t compatible with the membership of the currency union”. So Germany is willing to accept debt relief, if there is Grexit.

    Some have questioned Schäuble’s claim that debt relief wouldn’t be legally banned within the eurozone, as for example Financial Times columnist Wolfgang Munchau, who recently wrote: “In its landmark Pringle ruling — relating to an Irish case in 2012 — the European Court of Justice (ECJ) said bailouts are fine, even under Article 125, as long as the purpose of the bailout is to render the fiscal position of the recipient country sustainable in the long run.”

    This sounds a bit like a stretch. The ESM is very much conceived as a “European IMF”, hence the ECJ’s use of the term “sustainable”, reminiscent of the IMF’s condition to provide cash. Just like the IMF, the ESM has been set up to issue “loans”, not to provide “transfers”. Obviously, a loan with an artificially low interest rate partly counts as a “transfer”, but even for the rather politicized judges of the European Court of Justice there is an end to stretching the meaning of words.

    Therefore, apart from the case where the ECJ would completely remove the meaning of the words of its previous rulings and the ESM Treaty, EU law doesn’t allow the “loans” made to Greece to just be forgiven, as much as proponents of a Eurozone transfer union like Mr. Munchau may regret this.

    After PM Tsipras threatened with an internal referendum in his own left-wing populist Syriza party, it looks like he has secured the necessary domestic support for a third Greek bailout.

    Obstacles remain, but much of the protest in “creditor countries” seem to have been overcome. In Finland, where the coalition was at risk at some point, Foreign Minister Timo Soini has said that it “would make no sense” for his Eurosceptic Finns party to leave the Finnish coalition over this. In the Netherlands, the governing VVD party, which is skeptical to the Greek deal, has provided tacit consent for negotiations to start. In Germany, despite all the noice, Merkel enjoys a comfortable majority to get on with the third range of transfers.

    The third bailout is likely not to be sufficient to cover all Greek funding needs in the next few years, also given that expecting 50 billion euro from privatizing Greek state assets looks a little rosy. This is a problem which can be solved near the end of the bailout period, once Greece has made it through the difficult year 2015. In 2016 and 2017, the country needs to make debt repayments “only” amounting to around 6 billion euro each year.

    The IMF may in the end just back down and join in, given how it already bent its rules twice to agree to Greek bailouts. It would have been expected to provide between 10% and a third of the funding of the new bailout which may amount to 86 billion euro (and possibly more), so if the IMF wouldn’t back down, Germany and France would see their bill for the third bailout rise with another 1.7 billion and 1.3 billion euro respectively. A lot will depend on how the IMF will calculate “debt sustainaibility”. Speaking in the Dutch Parliament, Eurogroup chief Jeroen Dijsselbloem said on 16 July that the Eurozone already “agreed with the IMF to look at “debt service”, not merely at the debt to GDP levels”. In other words: because Greece’s interest burden as a percentage of GDP is even lower than the one carried by Portugal, Italy, Ireland and Spain, one can ignore the fact that its debt to GDP is at the horrendous level of 180% now. This of course overlooks the difficulty to boost that GDP, given the tax hikes and the capital controls which will be hard to remove as a result of the talk about “Grexit”. Still, a fudge looks on the cards.

    It isn’t a good idea to let the bill of Eurozone taxpayers grow even bigger, to burden an economy already crippled by debt with even more debt and to intervene deeply into domestic Greek policy choices. Opting for Grexit may have been the wisest choice for everyone. The opportunity was there, given that many Greeks had already taken their savings out of banks anyway. Also, many of the reasons to think Greece still may leave the Eurozone, like the difficulty to unwind capital controls, remain in place. We have come close, but Grexit seems to have been avoided for now. But it’s unlikely to have been referred “ad kalendas Graecas”- “until pigs can fly”.

  • "Asia Crisis, Tech Bubble Burst, Lehman"… And Today

    While over the past several months many have been focused – finally – on the bursting of China’s 3 bubbles (credit, housing and investment), in the context of its 4th burst bubble, the stock market which the politburo is desperately trying to patch up every single day, a far scarier picture has emerged within the entire Emerging Market space, where Brazil has rapidly become a “ground zero” case study for what has moved beyond mere recession and is an accelerated collapse into economic depression, as we discussed previously.

    Bank of America notes overnight that “capitulation is already visible in bond/bank/FX correlations and “forced selling” of crowded EM growth trades.” Here is what BofA’s Michael Hartnett has to say about the EM capitulation/collapse phase:

    Despite muted asset returns, 2015 has seen the emergence of two big trends: the risk of a bubble in US health care & technology; and the crash in EM/Resources/Commodities.

     

    The journey from hubris to humiliation in EM has taken roughly 5 years. Back in late 2010, when Sepp Blatter announced that Russia & Qatar would follow Brazil as hosts of the FIFA World Cup, both China & India were on course for >10% GDP growth, EM spreads were significantly lower, and the market cap of EM ($3.7 trillion on December 1st 2010) was twice the market cap of US banks, and exceeded the combined market cap of US tech & health care. Today, the market cap of EM equities is the same, while the combined market cap of US tech, health care and banks is over $10 trillion.

     

    Note that the classic sign of crisis and capital flight, higher interest rates, falling currency, and falling bank stocks are now visible in Brazil (and elsewhere). Indeed, the correlation between Brazilian bond yields and Brazilian financials/BRL turned sharply negative during each of the past 3 systemic crises (Asia ‘98, Tech ‘02 & Lehman ’08) and is doing so again today (Chart 3).

    In other words, while the S&P continues to exist in its own inert bubble, where stocks no longer are able to discount anything and merely float on the sea of $22 trillion in liquidity created by central banks, for Brazil, the correlation between key assets classes reveals that the local situation is on par with the three greatest crises of the past two decades: the Asia Crisis, the bursting of the Tech bubble, and of course, Lehman.

     

    While it is naive to blame much of this on the strength of the US dollar, one thing is obvious, as BofA notes: “Structural inflection points in both EM/DM (Chart 6 & Table 3) have tended to coincide with major geopolitical events and/or policy shifts that have started or ended a multi-year move in the US dollar, e.g. Bretton Woods ‘70s, LatAm debt crisis ‘80s, Asia crisis ‘90s, Lehman 200.8”

    So for those who are seeking the inflection point in deciding how and whether to invest in EM, “asset allocation to EM awaits an “event” (e.g. Fed hikes, China deval, bankruptcy/ default) to create narrative of US$ peak & unambiguous EM value).”

    For the time being, the dominant narrative is that the US has a ways to go and will go even higher if and when the Fed starts its hiking cycle (even if riots break out among the BRIC nations which, like Brazil, are facing economic devastation).

    Unless, of course, the first rate hike is precisely the catalyst that ends the past year’s dollar surge, as the market prices in the failure of the Fed’s hiking cycle and begins trading in anticipation of the admission of such failure which will lead to an end of rate hikes once the US economy slides into all out recession (the plunge in globla trade is the biggest flashing red light in that regard) and corporate profitability moves beyond GAAP recession into all out depression, ultimately culminating with the launch of QE4 and monetary policy reverting back to square one.

  • The Latest Government Trust Fund To Go Bankrupt

    Submitted by Sovereign Man

    The Latest Government Trust Fund To Go Bankrupt

    On June 6, 1932, President Herbert Hoover imposed the first ever national gasoline tax in the United States, initially set at 1 cent per gallon.

    It was a major success for the federal government; the tax on gasoline alone was responsible for over 15% of their 1933 tax revenue.

    What’s curious is that the Senate Finance Committee issued a report the following year stating that the federal gasoline tax should be repealed. But that never happened.

    Instead it went up.

    Under President Eisenhower, the tax increased to 3 cents per gallon. Under Reagan, 9 cents.

    It’s risen steadily through the years to a level of 18.4 cents for every gallon of unleaded fuel, and 24.4 cents per gallon of diesel.

    All of this tax revenue is –supposed– to go to the Federal Highway Trust Fund, something established back in the 1950s to finance the care and maintenance of the nation’s highways.

    And now it, too, is insolvent.

    Earlier this week I told you about Social Security’s Disability Insurance Trust Fund (DI), which will become insolvent in a matter of months.

    The DI problem (just like the rest of Social Security) has been a long time coming.

    But rather than form some meaningful solution, Congress has instead opted to commit financial fraud by commingling DI monies together with the other Social Security funds.

    Now comes the Highway Trust Fund.

    The difference between DI and the Highway Trust fund is that this one won’t be insolvent in a matter of years or months. Their own data shows that it may very well be toast… today.

    Once again- Congress to the rescue.

    Having waited until almost quite literally the last minute, their solution is to… wait for it… kick the can down the road.

    Congress has now passed a 90-day stay of execution for the Highway Trust Fund, which only delays the inevitable.

    Over the next three months they’ll sit down to the task of figuring out who to steal from.

    They’re either going to raise taxes on you.

    Or they’ll raise taxes on someone else, the costs of which will ultimately be passed on to you.

    Or they’ll simply default on their obligations to the residents of the United States to maintain the federal highway system.

    None of this should come as a surprise. This is what happens when nations go bankrupt: one by one, its major institutions fall into insolvency.

    Today it’s the Highway Fund. Tomorrow it’ll be the Pension Benefit Guarantee Corporation (we’ll talk about that one soon) and the United States Postal Service.

    Then it’ll be Social Security and Medicare. Then the Federal Reserve. And eventually it’ll be the United States government itself.

    The signs are everywhere– every single one of these hallowed institutions is flat broke.

    It’s no longer some wild assertion to say that. Their own financial statements show that they’re insolvent. And it’s not hard to figure out what happens down the road.

    Bankrupt governments invariably resort to plundering the wealth of their citizens. Inflation. Higher taxes. Confiscation of assets. Indebting unborn generations. And defaulting on the benefits promises they made to voters.

  • Head Of Collapsed Mt.Gox Exchange Arrested With Half A Billion In Bitcoin Still Unaccounted

    Back in its 2013 heyday, when bitcoin soared from below $100 to over $1000 in the span of a few months (in no small part thanks to the collapse of the Cyprus banking system) there was only one real Bitcoin exchange: Magic: The Gathering Online Exchange, or Mt. Gox as it was better known, which had become the world’s largest hub for trading the digital currency. And then, as mysteriously as it had appeared, Mt. Gox went dark, and filed for bankruptcy after nearly half a billion dollars worth of bitcoin “disappeared.”

    We wrote at the time:

    For a case study of a blistering rise and an absolutely epic fall of an exchange that i) was named after Magic: the Gathering and ii) transacted in a digital currency which many have speculated was conceived by the NSA nearly two decades ago and was used as a honeypot to trap the gullible, look no further than Mt.Gox which after halting withdrawals for the second (and final time) has finally done the honorable thing, and filed for bankruptcy. As the WSJ reports, “Bitcoin exchange Mt. Gox said Friday it was filing for bankruptcy protection after losing almost 750,000 of its customers’ bitcoins, marking the collapse of a marketplace that once dominated trading in the virtual currency. The company said it also lost around 100,000 of its own bitcoins. Together, the lost bitcoins would be worth approximately $473 million at market prices charted by the CoinDesk bitcoin index, although the price of Mt. Gox bitcoin had fallen well below that index after it stopped bitcoin withdrawals in early February.”

     

    The punchline: speaking to reporters at Tokyo District Court Friday after the bankruptcy filing, Mt. Gox owner Mark Karpelès said technical issues had opened the way for fraudulent withdrawals, and he apologized to customers.

     

    “There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble.”

    In other words, oops sorry, several hundred million in Bitcoin is unaccounted for but blame the “system weakness.” This promptly led to various artistic interpretations on the Mt. Gox logo, such as this one:

    Some were confused if Karpeles was going to get away with nothing more than an excuse, even if – as many speculated – he had personally fabricated exchange data entries and embezzled millions of dollars for his own account.

    As a reminder, when it filed for bankruptcy in February 2014, Mt. Gox said 750,000 customer bitcoins and another 100,000 belonging to the exchange were stolen due to a software security flaw. The lost funds represented the equivalent of $480 million at the time of the bankruptcy filing. Mt. Gox also said more than $27 million was missing from its Japanese bank accounts. Karpeles, who had blamed hackers for the loss, later said he had recovered 200,000 of the lost bitcoins.

    Earlier today we got the answer when nearly 18 months after his infamous apology, Mark Karpeles was arrested in Tokyo. FT reports that Japanese police have arrested Mark Karpelès, the head of the bankrupt Japan-based bitcoin exchange Mt Gox. The arrest charge is that he made an illegal entry to the system in February 2013 and increased the balance of his account by $1 million.

    And yet, a year and a half after the exchange insolvency, nobody truly knows what happened:

    The alleged crimes involved are hard to pin down, say police sources, because of the absence of a specific laws governing the virtual currency. Police have acknowledged privately that there technical elements of the alleged disappearance of nearly $500m that “are still not properly understood”.

     

    Asked by Mt Gox to look into the matter in March Last year, the Tokyo Metropolitan Police were not able to begin their investigation until three months later. Even then, say people close to the investigation, the two police departments in charge — the cyber crime unit and the white-collar crime unit — did not properly share information.

     

    The year long investigation, say legal experts, has culminated in an arrest that will allow police to hold Mr Karpelès without charge for 23 days. If he continues to deny any wrongdoing during that time, police may alter the charge, and hold him for another 23 days.

    While Karpeles may very well be guilty of embezzlement and massive fraud against his clients, could it be the still undetermined “crimes” relating to a virtual currency will become just the excuse to keep unsavory suspects detained and/or under arrest for an indefinite period of time? Because being held for up to 46 days without any charge seems a little Guantanamoish.

    As the FT adds, “the case has exposed both the complexities of crime relating to the bitcoin virtual currency, and the profound difficulties encountered by the Japanese police as they have attempted to investigate the Mt Gox.”

    Seemingly the complexity was not as big as that encountered by US regulators and police who 7 years after the greatest criminal systemic collapse, and after the statute of limitations has now expired, have yet to arrest anyone for a multi-trillion systemic crime far greater than Karpeles’ $500 million embezzlement.

    As for the former Mt. Gox head, today’s arrest will hardly come as a surprise as it was expected for over two weeks: Japanese journalists had been encamped outside his Tokyo home for several days. Footage of him being led from his home to a police car showed Mr Karpelès wearing a T-shirt and a baseball cap.

    Mr Karpelès could, if found guilty, face up to five years in prison or a fine of as much as Y500,000 which at today’s exchange rate is just over $4000.

    So let’s do the math: steal $500 million which only you know where it is, spend 5 years in prison, and be fined $5000. Sounds like a pretty good deal…

    Anyone curious for more, there was an AMA this morning with a person representing to be Ashley Barr, the first Mt. Gox employee which gives more insight into Karpeles various pathologies. It can be found here.

  • Greece May Miss ECB Payment As Germany Says Bailout Timeline Is Unrealistic

    Greek PM Alexis Tsipras won a hard fought victory over party rivals on Thursday when Syriza’s central committee voted to postpone an emergency congress until after formal discussions on the country’s third bailout program are complete. 

    Syriza has been grappling with bitter infighting since more than 30 MPs in Tsipras’ parliamentary coalition defected during a vote on the first set of bailout prior actions, forcing the PM to rely on opposition votes to clear the way for formal discussions with creditors. The party dispute was exacerbated by reports that ex-Energy Minister and incorrigible Grexit proponent Panayiotis Lafazanis (along with several Left Platform co-conspirators) planned to storm the Greek mint and seize the country’s currency reserves. 

    Fed up, Tsipras told 200 members of Syriza’s central committee on Thursday that essentially, they could either hold a party referendum on the bailout on Sunday or wait until September to sort things out, leading us to note that “were Syriza to vote on whether or not Greece should follow through on the agreement with creditors, the market could be in for an event that is far more dramatic and important than the original referendum.” 

    Lafazanis refused to go along with the idea. “How many referenda are we going to hold? We’ve already done one and we won with 62 per cent of the vote”, he said. Ultimately, the party approved a September congress. This gives Tsipras some “breathing space,” FT notes, “but Thursday’s highly charged debate signalled that the Left Platform, which supports an end to austerity and a ‘Grexit’ from the euro, would continue to oppose a fresh bailout.”

    And the party’s radical leftists aren’t alone in their opposition to the third program for Athens. On Thursday, FT reported that according to “strictly confidential” minutes from the IMF’s Wednesday board meeting, the Fund will not support the new bailout until the debt relief issue is decided and until it’s clear that Greece “has the institutional and political capacity to implement economic reforms.”

    Somehow, all of this must be worked out in the next three weeks. Greece must make a €3.2 billion payment to the ECB on August 20 and if the bailout isn’t in place by then, it’s either tap the remainder of the funds in the EFSM (which would require still more discussions with the UK and other decidedly unwilling non-euro states) or risk losing ELA which would trigger the complete collapse of not only the Greek economy but the banking sector and then, in short order, the government. The question is whether Germany can be reasonably expected to take it on faith that i) the Greek political situation will not eventually result in Athens walking back its austerity promises, and ii) that the IMF will eventually hold up its end of the deal once Berlin approves some manner of debt re-profiling for the Greeks. 

    Now, according to Focus magazine, there are questions as to whether the timetable for cementing the bailout agreement is realistic. German lawmakers may now have to postpone a Bundestag vote and Athens has already discussed the possibility of taking a second bridge loan from the EFSM, Focus says. Here’s more (Google translated):

    The timetable for the negotiations on a third aid package in favor of Greece is to look for an internal assessment of the federal government any more. According to the already contemplated for mid-August special session of the German Bundestag must be moved, according to government sources in Berlin.

     

    The objective pursued by the EU Commission scheduling is too closely knit, criticize experts.This was reported in its latest issue of FOCUS.

     

    Accordingly, the negotiations should be completed before August 10.On August 11, the euro zone finance ministers would approve the results before the agreement of other euro countries ratified and approved by the Parliament in Athens.Also, the Bundestag must still approve.

     

    Due to delay Greece threatens a serious cash problem.The government in Athens must, at the latest on August 20, 3.2 billion euros, the European Central Bank to transfer (ECB), which should be possible without new loans from the third aid package barely.

     

    Therefore already searched in circles of the EU Commission for ways to temporarily raise money from another pot. Speaking here a renewed bailout from the European Financial Stabilisation Mechanism is (EFSM)

     

    This is difficult, however, because the EU states will again require an indemnity outside the euro-zone in this case. As early as September Greece must further loans operate: The International Monetary Fund (IMF) then expected repayments totaling € 1.56 billion in four tranches.In addition, running on 4 September from short-term government bonds in the amount of 1.4 billion euros, which Greece must also refinance.

    And here’s the summary from Bloomberg:

    German parliament meeting that was considered for mid-August might have to be postponed as European Commission’s schedule for aid talks is “much too tight,” Focus magazine reports, citing unidentified people in German govt.

     

    Greece has to pay EU3.2b to the ECB by Aug. 20, which it may not be able to do without third aid package.

    In other words, Greece will likely need yet another bridge loan from the EFSM and that will once again require the approval of non-euro countries that will, for the second time in a month, be asked to put their taxpayers at risk in order to keep the ill-fated EMU project alive and preserve the now thoroughly discredited notion that the currency union is “indissoluble.” 

    And make no mistake, Greece and its EMU “partners” had better hope things go smoothly after August because one more bridge loan and the EFSM is tapped out, which means Brussels will have to devise some other circular funding mechanism in the event the third program (which is itself nothing more than a dressed up ponzi scheme) isn’t in place by September. 

    Or, summarized in one picture:

  • German Government Launches Investigation of Journalists for Treason

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    If it were up to the Federal Attorney General and the President of the German Domestic Security Agency, two of our reporters would soon be in prison for at least two years. Today, we were officially informed about investigations against our Markus Beckedahl, Andre Meister and an unknown“ party. The accusation: Treason.

    – From Netzpolitik.org:  Suspicion of Treason“: Federal Attorney General Announces Investigation Against Us In Addition To Our Sources

    Widespread outrage across Germany is erupting following the revelation that the nation’s Attorney General has launched an investigation into treason charges for two journalists working for Netzpolitik.

    The charge is treason. The crime is journalism.

    We learn from The Guardian that:

    Germany has opened a treason investigation into a news website a broadcaster said had reported on plans to increase state surveillance of online communications.

     

    German media said it was the first time in more than 50 years journalists had faced treason charges, and some denounced the move as an attack on the freedom of the press.

     

    “The federal prosecutor has started an investigation on suspicion of treason into the articles … published on the internet blog Netzpolitik.org,” a spokeswoman for the prosecutor’s office said. 

     

    The public broadcaster ARD reported Netzpolitik.org had published an article on how the BfV was seeking extra funding to increase its online surveillance, and another about plans to set up a special unit to monitor social media, both based on leaked confidential documents.

     

    “This is an attack on the freedom of the press,” Netzpolitik.org journalist Andre Meister, targeted by the investigation along with editor-in-chief Markus Beckedahl, said in a statement. “We’re not going to be intimidated by this.”

    Cory Doctorow at Boing Boing accurately notes the shadiness and hypocrisy of it all:

    The German prosecutors who dropped all action against the US and UK spy-agencies who trampled German law and put the whole nation, up to and including Chancellor Angela Merkel, under surveillance, have decided instead to open an investigation into the bloggers at Netzpolitik, who revealed the wrongdoing.

     

    Netzpolitik are an important source of independent news, analysis and campaigning for privacy and freedom in Germany. This is a genuinely shameful moment for the nation. We stand with Netzpolitik and its supporters around the world.

    While this is horrible news, there is a silver lining. The main reason the German government feels a need to go overtly fascist, is because they are scared shitless. They are scared of the truth, of the light and of their own citizens. Such a corrupt and compromised government can’t last very long.

    Additionally, we should commend the bravery of the journalists involved. As reported by the Intercept:

    Asked if Netzpolitik would continue to report using materials gained from whistleblowers, Meister replied, “That’s our job, so of course we will continue to report about publicly relevant information, which obviously includes information from whistleblowers from state and private entities. As a matter of fact, just [yesterday] we have exposed the new ‘cyber strategy’ of the German Federal Military ‘Bundeswehr’ about offensive cyber attacks.”

     

    “If anything, all the support is showing that we must be doing the right thing, so we will continue what we do and maybe even step up the pace. … To paraphrase a Google engineer after yet another NSA leak: ‘Fuck those guys!'”

    Bravo. These guys deserve our complete and total support.

    *  *  *

    For related articles, see:

    Standard & Poor’s Warns on Germany as Anti-Euro Political Party Soars in Popularity

    Video of the Day – “End the Fed” Rallies are Exploding Throughout Germany

    Martin Luther King: “Everything Adolf Hitler did in Germany was Legal”

  • Chinese Company Replaces Humans With Robots, Production Skyrockets, Mistakes Disappear

    “I believe that anyone who has a job and works full time, they should be able to pay the things that sustain life: food, shelter and clothing. I can’t even do that.”

    That rather depressing quote is from 61-year old Rebecca Cornick. She’s a grandmother and a 9-year Wendy’s veteran who spoke to CBS News. Rebecca makes $9 an hour and her plight is representative of fast food workers across the country who are campaigning for higher pay. 

    The fast food worker pay debate is part of a larger discussion as “states and cities across the country [wrestle] with the idea of raising the minimum wage,” CBS notes, adding that “right now, 29 states have minimums above the federal $7.25 an hour [and] four cities, including Los Angeles, have doubled their minimum to $15.”

    Proponents of raising the pay floor argue that it’s simply not possible to live on minimum wage and indeed, there’s plenty of evidence to suggest that they’re right. Opponents say forcing employers to pay more will simply mean that companies will fire people or stop hiring and indeed, as we highlighted on Friday, it looks as though WalMart’s move to implement an across-the-board pay raise for its low-paid workers may have contributed to a decision to layoff around 1,000 people at its home office in Bentonville. 

    “The reality is that most business are not going to pay $15 dollars an hour and keep their doors open,” one Burger King franchisee told CBS. “It just won’t happen. The economics don’t work in this industry. There is a limit to what you’re going to pay for a hamburger.” 

    Yes, there’s only so much people will pay for a hamburger which is why Ronald McDonald has made an executive decision to hire more efficient employees at some locations:

    With all of that in mind, consider the following from TechRepublic who tells the story of Changying Precision Technology Company, which has replaced almost all of its human employees with robots to great success:

    In Dongguan City, located in the central Guangdong province of China, a technology company has set up a factory run almost exclusively by robots, and the results are fascinating.

     

    The Changying Precision Technology Company factory in Dongguan has automated production lines that use robotic arms to produce parts for cell phones. 

     

    The factory also has automated machining equipment, autonomous transport trucks, and other automated equipment in the warehouse.

     

    There are still people working at the factory, though. Three workers check and monitor each production line and there are other employees who monitor a computer control system. Previously, there were 650 employees at the factory. With the new robots, there’s now only 60. Luo Weiqiang, general manager of the company, told the People’s Daily that the number of employees could drop to 20 in the future.

     

    The robots have produced almost three times as many pieces as were produced before. According to the People’s Daily, production per person has increased from 8,000 pieces to 21,000 pieces. That’s a 162.5% increase.

     

    The increased production rate hasn’t come at the cost of quality either. In fact, quality has improved. Before the robots, the product defect rate was 25%, now it is below 5%.

    So to anyone planning on picketing the local McDonald’s in an attempt to secure a 70% wage hike, be careful, because this “guy” is ready to work, doesn’t need breaks, and never makes a mistake:

    Let’s just hope he doesn’t become self aware.

  • Don't Exaggerate Significance of SNB's Loss

     

    The Swiss National Bank reported a record CHF50.1 bln loss. It has got the chins wagging, but the real implications are minor.  The losses are not realized and are unlikely to be repeated.  In fact, if the SNB’s report had covered the month of July, the loss would likely have been smaller.  

     

    More of the SNB’s loss stemmed from the valuation of its foreign currency holdings in the face of franc appreciation, especially after the cap was abandoned in mid-January.  Here in July the franc fell nearly 3% against the US dollar and about 1.3% against the euro.  These two currencies account for nearly 3/4 of the SNB’s reserves.  The franc fell 2% against sterling and 1.5% against the yen.  These four currencies together account for nearly 90% of the reserves.  

     

    It addition to the currency valuation markdown, the SNB reported a CHF3.2 bln euro loss on its gold holdings.   Gold lost another 5% in July in franc terms.  These losses reduce the SNB’s equity to CHF3.425 bln, which amounts to just shy of 6% of its assets. 

     

    There are two implications, and they have nothing to do with the solvency of the Swiss National Bank.  The first implication, and one that central banks are sensitive to is reputational risk.  If the central bank losses money, doesn’t it undermine its credibility to manage the country’s economy?  While it is difficult to show that the SNB’s reputation has been harmed, its performance provides its critics with fodder. 

     

     Switzerland’s parliamentary election will be held in mid-October.  These losses allow for a politicalization of monetary policy that may not be particularly helpful.  A couple of parliamentarians are pressing the SNB to adopt a new cap for the franc (euro floor) at CHF1.15.   While this is highly unlikely to be implemented, it illustrates the frustration with the franc’s appreciation. 

     

    The SNB appears to have been given a free pass on its effort to stem the rise of the franc.  In 2013, Switzerland’s current account surplus was 10.7% of GDP.  Last  year, it fell back to 7%.  The OECD expects its to be 10.1% of GDP this year and 10.5% next year.   Countries with such substantial surpluses often come under international pressure to reduce the imbalance.  

     

    However, a closer inspection of the Swiss current account composition suggests that it is not particularly sensitive to currency appreciation.  There are three main drivers of the Swiss current account surplus and trade is not one of them.  

     

    First, the largest contributor is from investment income.  These are mostly coupon and dividends on foreign portfolio investment.  In this context we note Japan is evolving in the same direction.  Its investment income often overwhelms the trade balance on the current account.  

     

    Second, financial services are important but are not driven by currency fluctuations.  Third, officials point to what is called “merchanting.”  It is the sales of goods that do not cross Swiss borders.  This arises primarily from the commodity trading businesses that are located in Switzerland.  This activity can account for 1/4-1/3 of the Swiss current account surplus. 

     

    The other implication of the SNB’s loss is that it may be unable to make its customary payout to the federal government and cantons.  Some cantons depend on payment from the SNB to reach their fiscal targets.  The failure to make a payment in 2013 due to the fall in gold saw criticism heaped on the central bank. 

     

    The record loss of the SNB is embarrassing, and it gives its critics fresh ammunition ahead of the national election.  It could squeeze the finances of a few cantons, but it already has distributed CHF1 bln earlier this year based on last year’s profits.  Its losses, largely an accounting function and not realized, is of little economic or financial consequence. 

  • Near-Term Dollar Outlook

    The unexpectedly record low increase in Q2 US Employment Cost Index unwound the some of the dollar’s weekly gains and neutralized the near-term technical outlook.  Next week’s nonfarm payrolls are still critical, and the weakness may put even greater burden on the jobs data to demonstrate that slack is indeed being absorbed.  

     

    The Dollar Index was poised to challenge the three-month high set on July 21 near 98.15, but the sell-off following the ECI report reversed the gains scored on the back of the FOMC statement and Q2 GDP (and upward revision in Q1).   The five-day moving average barely crossed below the 20-day average for the first time since late-June.  It did not close below 96.40 (a retreacement objective and 100-day moving average), but instead finished the week and month near the middle of the 96.00-98.00 trading range.  

     

    The euro’s five-day moving crossed above the 20-day average a day before the FOMC statement.  After the Q2 GDP data and a threat that the Greek government would collapse saw the euro briefly trade below $1.09.  It rebounded with the help of month-end demand and signs that the Greek government will survive until at least September.  Before the weekend, nearly covered the entire week’s range.   Both the RSI and MACDs are consistent with a further push higher in the euro, but how fast it reversed the pre-weekend gains, and the relatively soft close suggests the bears are still in control.  Initial support is seen near $1.0950.  It may require greater confidence of a September rate hike before the $1.08 level can be breached.     

     

    The dollar was pushing above JPY124.50, the upper end of its range since mid-June and was stopped cold by the disappointing ECI.  The fact that Japan’s CPI excluding food and energy rose to 0.6% also discourage ideas that the BOJ the needs to provide additional stimulus. Support for the dollar is seen in the JPY123.00-JPY123.30 area.   A break that could signal a move into the JPY122.00-JPY122.50  band. 

     

    Since the middle of July, sterling has tried and failed to rise above $1.5700 a handful of times.  The technical indicators suggest the bulls may have been luck next week.  The BOE meeting is expected to see 2-3 hawkish dissents to what is anticipated to be a majority decision to keep policy on hold.  The minutes and the inflation report, with an update in macro-forecasts will be announced at the same time.   Before the weekend, sterling traded on both sides of Thursday’s range.  Even though it finished the week at its highest close in two week, it was still neutral.  A move above $1.57 would encourage a run toward $1.5800.   Support is seen in the $1.5540-$1.5560. 

     

    The Australian dollar nearly posted a potential key reversal before the weekend by making fresh multi-year lows (~$0.7235) before rallying to new highs for the week (almost $0.7370), but like sterling, the close was neutral.  The 20-day moving average is found near $0.7380, and the Aussie has not closed above this average since June 25.  It also roughly corresponds with the top end of a near-term down channel.   There is a bullish divergence in the RSI, and the MACDs are turning higher.  The market may be poised test the downtrend line drawn off May, June and July highs. It is found near comes in near $0.7420 by the end of next week.  If the RBA cuts rates next week, especially given that it would surprise participants, the modestly positive technical developments would likely be negated.  

     

    News that the Canadian economy unexpectedly contracted in May sent the Canadian dollar lower.  This was partly masked by US dollar weakness.  The greenback failed to take out the July 24 multi-year high just above CAD1.3100.  The US dollar closed on its highs, however, and additional near-term gains are likely.   The next important technical target is some distance away at CAD1.3450.  Support is seen near CAD1.2940.  

     

    The September light crude futures contract has fallen for seven consecutive weeks.  It has consistently recorded lower highs and lower lows.  The MACDs are trying to turn, but the RSI has drifted lower.  Initial support is seen near $46.70 and then $45.   Resistance is seen near $50. 

     

    The fact that the US 10-year yield was little changed on the week masks the 12 bp increase seen in the first four sessions last week.  Yields reversed lower on Thursday, and the weak ECI on Friday, pushed the 10-year yield below 2.20% for the first time since July 7-9, which itself was the first time since the beginning of June.   Although the 2.0% level is more significant, yields may find support near 2.08%-2.14%.   The 2.30% area likely represents the near-term cap. 

     

    The S&P 500 flirted with the 200-day moving average at the start of the week.  By the end of the week, it was about 2.5% above the lows set on Monday. Nevertheless, the close before the weekend was poor, on session lows.    Over the past three months, buying interest has dried up near 2130.  The S&P 500 has been in a broad 2040-2135 range since early February.  It is not clear what is going to drive it out of that range. 

     

    Observations based on the speculative positioning in the futures market:  

     

    1.  There were no significant (more than 10k contracts) adjustments to gross speculative currency positioning in the CFTC reporting week ending July 28.  The run-up to the FOMC meeting may have deterred activity.  

     

    2.  A clear pattern was speculators to reduce short euro, yen and sterling positions, and expand the short position in the other currencies.  Similarly, speculators cut gross long Australian and Canadian dollar futures.

     

    3.  The divergence of monetary policy, which we argue is the key driver, also benefits sterling, where the BOE is also expected to raise rates.  The net short sterling position is the smallest since last November.  We would not be surprised if it turned positive in the coming weeks.  The net position in the Swiss franc is moving in the opposite direction.  Speculators have been net long francs since mid-March.  It is on the verge of turning short.  

     

    4. The net short Canadian dollar position (56.1k contracts) is the largest since March 2014.  It is likely to grow further.  The net short Mexican peso position continues to grow, setting a new record each time it does.  

     

    5.  Speculators turned to a net long US 10-year Treasury futures position in the previous reporting week and grew it further over the past week to stand at 65.6k contracts.  The bulls added 31.9k contracts, lifting the gross long position to 491.5k contracts.  The bears covered 6.3k short contracts, leaving 425.9k.

     

    6. Bulls and bears added to gross positioning the light sweet crude oil futures.  The gross longs rose by 11.6k contracts to 476k.  The gross shorts increased 21.9k contracts to 232.6.  This resulted in a 10.3k contract reduction in the net long position, leaving 243.4k contracts.  

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Aug 01

Today’s News August 1, 2015

  • Paying In A Broken World

    Submitted by Tom Chatham via Project Chesapeake,

    It is a common reaction to ask, how much is that, when we see something we want or need. The question is answered with some monetary figure that people will recognize and use to determine if they can afford it. But what happens when the monetary system we know becomes so dysfunctional that common monetary values mean little.

    This could happen due to massive inflation, currency collapse or a frozen banking system that prevents you from accessing your funds. If you have no way to pay for something, it does not matter how much or little it costs. It will be out of your reach unless you have some means to pay.

    Some people keep cash on hand for just such a problem. They know they will be able to pay cash when everything else stops working. That will work for a time but eventually paper currency will be looked on as a diminishing asset as physical goods become more valuable to those that need them. Paper currency is not much different than a check you write on your account. If the account is empty your check is no good.

    The same can be said for those entities that issue paper money. If they are bankrupt or shut down, the value of their printed certificates will be worth the same as the bad check. Nobody will want to accept it after they realize it may not be honored for the value it supposedly holds. While a local store may accept it out of habit, eventually businesses will figure out the truth.

    In times like this alternative forms of money may become more viable to local individuals such as gold and silver. But, that may take some time and most people will not own any of these precious metals for trade. Some may resort to direct barter with some of the things they have amassed over the years to get the necessities they need and under these circumstances values will be variable and disconnected from reality at times.

    Some people have stored barter items for this eventuality rather than precious metals and there is nothing wrong with that if it gives them the feeling of safety they desire. One of the reasons they desire goods instead of metals is the fear that governments will call in precious metals as they did in 1933 and that is a legitimate fear but must be taken with some reflection on the facts.

    In 1933, gold and silver coinage was the circulating currency in the nation meaning most people had some in their possession. That is not the reality today as very few people have any knowledge of the value of metals and do not have them in their possession. The fact that the government can call in metals does not mean they will be able to relieve you of them.

    In 1933, on the river where I grew up, there was a store on the bank of the river that did a good business with all of the ships that came by. When the gold was called in in 1933, the store owner did not want to turn it in so he kept it hidden away. At the time he had a small chest full of gold coins. He kept that chest of coins until the 1970’s when gold was legal to own again and then he sold it for a good profit. This is a true story and just one example of how hard it would be for the government to call in all of the metals in private hands.

    It does not matter what you hold your savings in only that it will retain value when conventional paper currencies become a despised possession. When that happens you need the ability to buy the things you need with what you physically have on hand. The question you must answer is what will you have on hand when that day comes.

  • XOM

    XOM

  • The World Map Of Hubris & Humiliation

    The journey from hubris to humiliation in EM has taken roughly 5 years. As BofAML notes, despite muted asset returns, 2015 has seen the emergence of two big trends: the risk of a bubble in US health care & technology; and the crash in EM/Resources/Commodities. The two trends are best exemplified by the "Map of Hubris & Humiliation" which shows among other things that the market cap of MSCI Russia is currently equivalent to Intel’s, while the market cap of Netflix equals that of MSCI Chile.

     

     

    Back in late 2010, when Sepp Blatter announced that Russia & Qatar would follow Brazil as hosts of the FIFA World Cup, both China & India were on course for >10% GDP growth, EM spreads were significantly lower, and the market cap of EM ($3.7 trillion on December 1st 2010) was twice the market cap of US banks, and exceeded the combined market cap of US tech & health care.

    Today, the market cap of EM equities is the same, while the combined market cap of US tech, health care and banks is over $10 trillion.

     

    Source: BofAML

  • Ron Paul: "All Wars Are Paid For Through Debasing The Currency"

    Submitted by Mac Slavo via SHTFPlan.com,

    currency-collapse1

    And at some point, all empires crumble on their own excess, stretched to the breaking point by over-extending a military industrial complex with sophisticated equipment, hundreds of bases in as many countries, and never-ending wars that wrack up mind boggling levels of debt. This cost has been magnified by the relationship it shares with the money system, who have common owners and shareholders behind the scenes.

    As the hidden costs of war and the enormity of the black budget swell to record levels, the true total of its price comes in the form of the distortion it has caused in other dimensions of life; the numbers have been so thoroughly fudged for so long now, as Wall Street banks offset laundering activities and indulge in derivatives and quasi-official market rigging, the Federal Reserve policy holds the noble lie together.

    Ron Paul told RT:

     

    Seen from the proper angle, the dollar is revealed to be a paper thin instrument of warfare, a ripple effect on the people, a twisted illusion, a weaponized money now engaged in a covert economic warfare that threatens their very livelihood.

    The former Congressman and presidential candidate explained:

    Almost all wars have been paid for through inflation… the practice always ends badly as currency becomes debased leading to upward pressure on prices.

     

    “Almost all wars, in a hundred years or so, have been paid for through inflation, that is debasing the currency,” he said, adding that this has been going on “for hundreds, if not thousands of years.”

     

    “I don’t know if we ever had a war paid though tax payers. The only thing where they must have been literally paid for, was when they depended on the looting. They would go in and take over a country, and they would loot and take their gold, and they would pay for the war.”

     

    As inflation has debased the currency, other shady Wall Street tactics have driven Americans into a corner, overwhelmed with debt, and gamed by rigged markets in which Americans must make a living. The economic prosperity, adjusted for the kind of reality that doesn’t factor into government reports, can’t match the costs of a military industrial complex that has transformed society into a domestic police state, and slapped Americans with the bill for their own enslavement.

     

    Dr. Paul notes the mutual interest in keeping the lie going for as long as the public can stand it… and as long as the gravy keeps rolling in:

     

    They’re going to continue to finance all these warmongering, and letting the military industrial complex to make a lot of money, before it’s admitted that it doesn’t work, and the whole system comes down because of the debt burden, which would be unsustainable.”

    Unsustainable might be putting it lightly. The entire thing is in shambles from the second the coyote looks down and sees that he’s run out over a cliff.

     

  • Goldman Warns "The Global Economy Is Going Round In (Smaller & Smaller) Circles"

    Amid the collapse in commodities, crashing Chinese stocks, the weakest US wage growth in US history, and a data-dependent Fed; Goldman Sachs fears the new normal is 'shorter-and-faster' business cycles with no persistence primed by monetary policies. Most wprryingly, they conclude, will short business cycles beget shorter business cycles?

     

     

    As Goldman notes,

    Cycles: Shorter and faster

     

    Another factor keeping capex weak is poor visibility on global growth.

     

    The rate of change in our economists’ Global Leading Indicator, which tracks ten early indicators of global activity, suggests that cycles are becoming shorter over the last few years, i.e. neither positive nor negative data points persist for too long.

     

    This uncertainty provides a reason for companies to delay long-term capex and instead opt for as-a-service alternatives that provide greater flexibility. But, extending this argument on outsourcing capital intensity to its extreme would also imply shorter capex cycles for the users. If the advent of ERP software led to more efficient supply chains and shorter inventory cycles, we wonder if the rise in tech-driven services business models could do the same for capital investment cycles.

    In other words, will short business cycles beget shorter business cycles?

  • The IMF Experts Flunk, Again

    Submitted by Steve Hanke via The Cato Institute,

    My Globe Asia column in May was titled “Greece: Down and Probably Out.” Well, it’s out. Yes, Greece descended from drama to farce rapidly.

    If all goes according to plan, the left-wing Greek government will come to an agreement with the so-called troika — the European Commission (EC), the European Central Bank (ECB), and the International Monetary Fund (IMF) — over the details of a third bailout program by August 20th. This rescue package will probably be worth €86 billion (U.S. $94.5 billion). So, since 2010, Greece will have received three bailouts worth a whopping €430 billion (U.S. $472.2 billion). This amounts to a staggering €39,000 (U.S. $42,831) for every man, woman, and child in Greece.

    Like past bailouts, the third one will fail to stop Greece’s economic death spiral. The experts from the EC, ECB, and particularly those from the IMF have been wrong about the prospects for the Greek economy since day one. The experts have failed to embrace a coherent theory of national income determination. Indeed, they have often engaged in ad hoc theorizing that has, at times, appeared to be convoluted and politically motivated. The result has been a series of wildly optimistic forecasts about the course of the Greek economy followed by wrongheaded policies.

    What has been missing from the experts’ toolkit is the monetarist model of national income determination. The monetary approach posits that changes in the money supply, broadly determined, cause changes in nominal national income and the price level (as well as relative prices — like asset prices). Sure enough, the growth of broad money and nominal GDP are closely linked. The data in the following chart speak loudly to the linkage.

    image

    Greece’s monetary tune started to be played by the ECB in 2001, when Greece was allowed to adopt the euro on false pretenses. Yes, the experts at the Hellenic Statistical Authority had cooked the Greek books, and the experts at Eurostat knew the Greek data were phony. Still, Greece was allowed to enter the eurozone.

    Following the Northern Rock fiasco and bank run in September 2007 and the bankruptcy of Lehman Brothers in September 2008, the ECB allowed the supply of state money to grow. Then, in 2009, Jürgen Stark, the ECB chief economist, convinced the President of the ECB Jean-Claude Trichet that state money (the monetary base) was growing too rapidly and that excessive inflation was just around the corner. In consequence, the ECB withdrew its non-standard measures (read: credit facilities) to Greek banks in the spring of 2010. As the accompanying chart shows, that fateful ECB withdrawal marked a turning point in the growth of broad money in Greece. It, and the Greek economy, have been contracting ever since. This was in spite of a massive fiscal stimulus (a fiscal deficit of 12.7% of GDP) in 2009, prior to the October elections. Money dominates. The important thing to watch is the growth of broad money.

    image

    Shortly after the October 2009 victory of the Panhellenic Socialist Movement brought George Papandreou to power, his government passed a so-called austerity budget in which the fiscal deficit was supposed to be squeezed down to 9.4% of GDP.

    Greece was clearly in trouble and needed a helping hand. But, the EC and ECB were untrusting of the Greek government. So, in March 2010, the IMF was called in to negotiate loan conditions for new Greek financing. Dominique Strauss-Kahn (DSK) was the IMF’s managing director and was preparing to run for the French presidency as the Socialist candidate. DSK was more than willing to give his socialist brothers in Athens a helping hand. In 2010, Greece received a massive bailout.

    Just how massive? Normally, the IMF is limited to lending up to six times a country’s IMF quota subscription to that country. However, if the IMF judges a country’s debt to be sustainable, then that country can qualify for “exceptional access,” and the IMF credit extended to such a country can exceed the 600% limit. Thanks to DSK and the IMF experts, the debt sustainability reports were rosy, until recently. The IMF, as well as the other members of the troika, extended credit to Greece, and did so generously.

    The following table tells the tale. Greece holds the record for the highest IMF credit level relative to a country’s quota.

    image

    The first and second bailouts of May 2010 and February 2012 did boost the growth rate of state money. But, bank money, which accounts for the lion’s share (over 80%) of total money (M3) contracted at a very rapid rate. In consequence, the money supply (M3) has generally plunged since the bailouts, and so has nominal (and real) economic activity. And the worst is yet to come: note that the last dismal data for state and bank money in Greece are for June. Since then, things have deteriorated, with bank closures and the imposition of capital controls. This spells more trouble for Greek banks that produce over 80% of Greece’s money and for the economy.

    The four big Greek banks were already in trouble (as of Q1 2015). The accompanying table presents the Texas Ratios for the four banks that make up 87% of bank assets in Greece. Ratios over 100% mean that, if nonperforming loans must eventually be written off, a bank will become insolvent. If current data were available, I believe the nonperforming loans would be much higher than in the first quarter of 2015. In addition, with the collapse of the money supply and little chance of a recovery in the production of bank money, a high percentage of nonperforming loans will be written off. In consequence, the Greek banking system will be insolvent. This means that calls for a fourth Greek bailout are right around the corner.

    image

     

    The IMF failures in Greece bring back vivid memories of the Asian Financial Crisis of 1997-98. On August 14, 1997, shortly after the Thai baht collapsed on July 2nd, Indonesia floated the rupiah. This prompted the IMF to proclaim that “the floating of the rupiah, in combination with Indonesia’s strong fundamentals, supported by prudent fiscal and monetary policies, will allow its economy to continue its impressive economic performance of the last several years.”

    Contrary to the IMF’s expectations, the rupiah did not float on a sea of tranquility. It plunged from 2,700 rupiahs per U.S. dollar at the time of the float to lows of nearly 16,000 rupiahs per U.S. dollar in 1998. Indonesia was caught up in the maelstrom of the Asian crisis.

    By late January 1998, President Suharto realized that the IMF medicine was not working and sought a second opinion. In February, I was invited to offer that opinion and began to operate as Suharto’s Special Counselor. I proposed as an antidote an orthodox currency board in which the rupiah would be fully convertible into the U.S. dollar at a fixed exchange rate. On the day that news hit the street, the rupiah soared by 28% against the U.S. dollar. These developments infuriated the U.S. government and the IMF.

    Ruthless attacks on the currency board idea and the Special Counselor ensued. Suharto was told in no uncertain terms — by both the President of the United States, Bill Clinton, and the Managing Director of the IMF, Michel Camdessus — that he would have to drop the currency board idea or forego $43 billion in foreign assistance.

    Why all the fuss over a currency board for Indonesia? Politics. The U.S. and its allies wanted a regime change in Jakarta, not currency stability. Former U.S. Secretary of State Lawrence Eagleberger weighed in with a correct diagnosis: “We were fairly clever in that we supported the IMF as it overthrew [Suharto]. Whether that was a wise way to proceed is another question. I’m not saying Mr. Suharto should have stayed, but I kind of wish he had left on terms other than because the IMF pushed him out.” Even Michel Camdessus could not find fault with these assessments. On the occasion of his retirement, he proudly proclaimed: “We created the conditions that obliged President Suharto to leave his job.”

    As the Indonesian episode should teach us, the IMF’s management can be very political and often neither trustworthy nor competent. Greece offers yet another chapter.

  • Al-Qaeda Attacks CIA-Trained Syrian "Freedom Fighters"; Commander Captured

    Attempts to make sense of the prolonged, bloody conflict in Syria which threatens Turkey’s southern border and long ago spilled over into Iraq, are everywhere and always complicated by the constantly shifting alliances among the various groups fighting for control of the country. 

    For instance, commentators were taken off guard in April when al-Qaeda affiliate al-Nusra appeared to be working in tandem with rival ISIS in a push to control the Yarmouk refugee camp in Damascus. The siege – which transformed the camp into what Ban Ki-Moon called “the worst circle of hell” – also saw Palestinian militiamen forge awkward alliances with the Assad regime in the face of the militant assault. 

    Just this week, Turkey began bombing raids on ISIS targets, marking a departure from the country’s previous position and leading many to question why, given widespread suspicion that Turkey has been cooperating with ISIS for some time, Ankara would suddenly decide to go on the offensive (as we’ve shown, Erdogan’s motivation is purely political, but the official line is that a suicide bombing in Suruc forced the President’s reluctant hand). Turkey has also funnelled money to ISIS’ rivals in Syria in an effort to support any and all efforts (well, aside from those of the YPG) to overthrow Assad.

    As for the US, it’s virtually impossible to say which groups the CIA has or hasn’t supported over the course of the war and indeed, many suspect US intelligence of funding and training the very militants who eventually became ISIS (a suspicion that was recently confirmed in a leaked Pentagon document).

    Through it all, Syrian President Bashar al-Assad has desperately clung to power although a speech delivered last Sunday suggested that the strongman’s grip on the country had weakened materially in the face of a manpower shortage.

    Amid the chaos, the one thing that is abundantly clear is this: the US, Turkey, Saudi Arabia, and other parties with a vested interest in the trajectory of Syria’s political future all want Assad gone, and for Washington, openly supporting the various groups battling the regime is now virtually impossible given the now widespread acknowledgement that nearly everyone the US has trained or armed over the course of the civil war either already was or has since become an “extremist” (however one wishes to define that admittedly amorphous term). 

    The US effort to recruit and allign with “moderate freedom fighters” reached peak absurdity in May when the Pentagon announced that it would train “appropriately vetted” combatants who would help “meet the needs of Syrian opposition forces.”

    How has that program been going you ask?

    Not well.

    In fact, the US has only managed to recruit and train 54 people in three months- and that, believe it or not, is not the most embarrassing part. 

    Here’s The New York Times with more:

    A Pentagon program to train moderate Syrian insurgents to fight the Islamic State has been vexed by problems of recruitment, screening, dismissals and desertions that have left only a tiny band of fighters ready to do battle.

     

    Those fighters — 54 in all — suffered perhaps their most embarrassing setback yet on Thursday. One of their leaders, a Syrian Army defector who recruited them, was abducted in Syria near the Turkish border, along with his deputy who commands the trainees. They were seized not by the Islamic State but by its rival the Nusra Front, an affiliate of Al Qaeda that is another Islamist extremist byproduct of the four-year-old Syrian civil war.

     

    The abductions illustrate the challenges confronting the Obama administration as it seeks to marshal local insurgents to fight the Islamic State, which it views as the region’s biggest threat.

     


    So al-Nusra which, as The Times also notes, “dealt a more serious blow to the CIA program last year, attacking and dismantling its main groups, the Syrian Revolutionaries Front and Harakat Hazm, and seizing some of their American-supplied, sophisticated antitank missiles,” has now captured the commander and deputy commander of the new US “force”, marking a terribly humiliating blow to the latest ill-fated CIA -backed effort to locate and train the “good guys.” Reuters has more on the story:

    Al Qaeda’s Syria wing said on Friday it had detained members of a Syrian rebel group who had just returned from U.S. training, in a direct challenge to Washington’s plan to train and equip insurgents to combat the hard-line Islamic State group.

     

    In a statement that appeared to contradict comments from the Pentagon, Nusra Front said the men it was holding had entered Syria several days prior and had been trained under the supervision of the Central Intelligence Agency.

     

    It described them as agents of America and warned others they should abandon the programme. It also said a U.S.-led coalition had mounted air strikes against Nusra Front positions during fighting between the group and the rebels.

     

    Syrian opposition sources and a monitoring group said earlier this week that Nusra Front had detained the leader of the U.S-trained rebel “Division 30” and a number of its members. The Pentagon cast doubt on the reports on Thursday, saying no members of the “New Syrian Force” had been captured or detained.

     


     

    “We warn soldiers of (Division 30) against proceeding in the American project,” Nusra Front said in a statement distributed online. “We, and the Sunni people in Syria, will not allow their sacrifices to be offered on a golden platter to the American side.” 

    So ultimately, the CIA’s newest band of “freedom fighters” who are supposed to be fighting ISIS, are now fighting al-Nusra which is receiving funding from Turkey which as of last week, is now allied with the US in a fight against ISIS, only Turkey isn’t really fighting ISIS, it’s fighting the PKK which backs YPG which is really fighting ISIS and everyone involved is fighting Assad who would probably find the whole thing comically absurd were it not for the fact that it is ultimately his head that everyone is after.

    It goes without saying that all of this serves to make Washington look absolutely ridiculous and indeed, this may mark a new record low for US foreign policy gone horribly awry. 

  • Bernie, The Koch Brothers, & Open Borders

    Submitted by Jeff Deist via The Mises Institute,

    Presidential hopeful Bernie Sanders recently raised the ire of both progressives and libertarians with his remarks concerning immigration:

    “Open borders? No, that’s a Koch brothers proposal,” Sanders said. “That’s a right-wing proposal, which says essentially there is no United States.”

     

    “It would make everybody in America poorer — you’re doing away with the concept of a nation state, and I don’t think there’s any country in the world that believes in that,” Sanders said. “If you believe in a nation state or in a country called the United States or (the United Kingdom) or Denmark or any other country, you have an obligation in my view to do everything we can to help poor people.”

    In just a few sentences, Sanders manages to demonstrate a hodgepodge of nativist, nationalist, protectionist, and socialist sentiments. But for anyone wondering why he wandered off the progressive narrative on immigration, it’s because protectionist labor unions pay him better than, say, La Raza.

    If Bernie Sanders sounds like Donald Trump when it comes to “taking our jobs,” consider that both are statists who reflect the widely and deeply held belief that nations are defined by states. This may be an uncomfortable reality for libertarians, but it is reality nonetheless.

    National borders by definition are political boundaries. They mark the edge of a particular territory over which a political entity — a state — claims exclusive jurisdiction.

    Since political borders require states, “open borders” is an oxymoron. Nothing controlled by government is “open,” whether we’re talking about the New York City taxi market or federal ethanol subsidies or the Brownsville, Texas border bridge.

    Open borders can exist only if states do not exist. States require borders because they are defined by borders.

    So from the statist perspective, Sanders is right: you can’t have large centralized states and unregulated borders, because those borders are at the heart of the state’s identity and its raison d’etre: control. The political technocrats who run modern nation-states have zero incentive to cede control over the flow of humans entering (or in some cases leaving) their territories. If anything, the political impulse is ever and always to expand the state’s zone of control by pushing borders outward.

    Immigration is a tricky issue for libertarians precisely because the very concepts of states, borders, and “public” land (the commons) are wholly inconsistent with a political and legal philosophy based on self-ownership and property rights. It’s hard to speak rationally about immigration under the present circumstances, because we’re so far from a free society that we risk piling one kind of illibertarian “solution” upon another.

    While the understandable libertarian impulse is to comport our principles with the innately human desire for free migration, we too often forget that the Noble Immigrant archetype is rooted in a statist view of immigration: one controlled by the state, in which public space trumps private property and free association. The benefits and detriments of immigration are weighed only in terms of their impact on the state.

    In a libertarian society, there is no commons or public space. There are property lines, not borders. When it comes to real property and physical movement across such real property, there are owners, guests, licensees, business invitees, and trespassers — not legal and illegal immigrants.

    Admittedly, it might be quite difficult to establish rightful (lawful) property owners under some sort of Lockean homesteading analysis — even in a nation as young as the US. While libertarians generally are absolutist regarding unfettered immigration, they will entertain “halfway” arguments about the most libertarian path available in a statist world on other topics (for example, see Sheldon Richman’s cogent argument analogizing access to public roads with access to publicly-issued marriage licenses). But if Hans-Hermann Hoppe offers an interim argument for dealing with the societal costs imposed by immigrants given our current system of “public goods” and entitlements, he is considered a wrongheaded statist. The same progressives and left-libertarians who champion tort liability for corporations when it comes to environmental damage fall strangely silent on the externalities caused by human migration.

    Let’s be clear: the tendencies of a society based on property rights may well make progressives and left-libertarians quite unhappy. Such a society necessarily entails freedom of association and its corollary, the right to exclude. Free association might well result in regions that develop naturally based on (gasp) shared familial, economic, linguistic, social, and cultural interests. Contra the DNC, government is not “the only thing we all belong to.”

    This is not to say that a libertarian concept of naturally arising “nations” entails a clannish retreat into suspicious enclaves. Surely a free society would have regions where market demand for the cosmopolitan benefits of life in a multicultural society prevails (imagine a stateless Singapore). But multicultural social democracies with vast welfare states, like Western Europe and the US, did not arise through the “market.” They are big-government constructs, and they are quickly becoming unsustainable. Multicultural welfare states are a recipe for disaster.  

    Unfortunately, it appears for now we are stuck with the likes of Mr. Sanders and his faulty concept of nation-states. But if we want to advocate for a freer society, we need to apply first principles rather than sentimentality. There is a deep-rooted and natural human preference for the familiar face over the stranger, and human migration in a free society is likely to reflect this reality.

     

  • Should It Be A Crime To Shoot Down A Drone Over Your Property?

    A Hillview man has been arrested after he shot down a drone flying over his property – but he's not making any apologies for it. "I just think you should have privacy in your own backyard," said William Merideth, 47, "I went and got my shotgun and I said, "I'm not going to do anything unless it's directly over my property."" That moment soon arrived, "within a minute or so, here it came… it was hovering over top of my property, and I shot it out of the sky." Merideth was arrested and charged with first degree criminal mischief and first degree wanton endangerment…

    WDRB 41 Louisville News

    As WDRB reports, Hillview Police say they were called to the home of 47-year-old William H. Merideth after someone complained about a firearm, Sunday night at a home on Earlywood Way, just south of the intersection between Smith Lane and Mud Lane in Bullitt County, according to an arrest report.

    When they arrived, police say Merideth told them he had shot down a drone that was flying over his house. The drone was hit in mid-air and crashed in a field near Merideth’s home.

     

    Police say the owner of the drone claimed he was flying it to get pictures of a friend’s house — and that the cost of the drone was over $1,800.

     

    Merideth was arrested and charged with first degree criminal mischief and first degree wanton endangerment. He was booked into the Bullitt County Detention Center, and released on Monday.

     

    WDRB News spoke with Merideth Tuesday afternoon, and he gave his side of the story.

     

    “Sunday afternoon, the kids – my girls – were out on the back deck, and the neighbors were out in their yard,” Merideth said. “And they come in and said, ‘Dad, there’s a drone out here, flying over everybody’s yard.'”

     

    Merideth’s neighbors saw it too.

     

    “It was just hovering above our house and it stayed for a few moments and then she finally waved and it took off,” said neighbor Kim VanMeter.

     

    VanMeter has a 16-year-old daughter who lays out at their pool. She says a drone hovering with a camera is creepy and weird.

     

    “I just think you should have privacy in your own backyard,” she said.

     

    Merideth agrees and said he had to go see for himself.

     

    “Well, I came out and it was down by the neighbor’s house, about 10 feet off the ground, looking under their canopy that they’ve got under their back yard,” Merideth said. “I went and got my shotgun and I said, ‘I’m not going to do anything unless it’s directly over my property.’”

    That moment soon arrived, he said.

    “Within a minute or so, here it came,” he said. “It was hovering over top of my property, and I shot it out of the sky.”

     

    “I didn’t shoot across the road, I didn’t shoot across my neighbor’s fences, I shot directly into the air,” he added.

    It wasn’t long before the drone’s owners appeared.

    “Four guys came over to confront me about it, and I happened to be armed, so that changed their minds,” Merideth said.

     

    “They asked me, ‘Are you the S-O-B that shot my drone?’ and I said, ‘Yes I am,'” he said. “I had my 40 mm Glock on me and they started toward me and I told them, ‘If you cross my sidewalk, there’s gonna be another shooting.'”

    A short time later, Merideth said the police arrived.

    “There were some words exchanged there about my weapon, and I was open carry – it was completely legal,” he said. “Long story short, after that, they took me to jail for wanton endangerment first degree and criminal mischief…because I fired the shotgun into the air.”

    Merideth said he was disappointed with the police response.

    “They didn’t confiscate the drone. They gave the drone back to the individuals,” he said. “They didn’t take the SIM card out of it…but we’ve got…five houses here that everyone saw it – they saw what happened, including the neighbors that were sitting in their patio when he flew down low enough to see under the patio.”

     

    Hillview Police detective Charles McWhirter says you can’t fire your gun in the city.

     

    “Well, we do have a city ordinance against discharging firearms in the city, but the officer made an arrest for a Kentucky Revised Statute violation,” he said.

     

    According to the Academy of Model Aeronautics safety code, unmanned aircraft like drones may not be flown in a careless or reckless manner and has to be launched at least 100 feet downwind of spectators.

     

    The FAA says drones cannot fly over buildings — and that shooting them poses a significant safety hazard.

     

    “An unmanned aircraft hit by gunfire could crash, causing damage to persons or property on the ground, or it could collide with other objects in the air,” said FAA spokesman Les Dorr.

    Merideth said he’s offering no apologies for what he did.

    “He didn’t just fly over,” he said. “If he had been moving and just kept moving, that would have been one thing — but when he come directly over our heads, and just hovered there, I felt like I had the right.”

     

    “You know, when you’re in your own property, within a six-foot privacy fence, you have the expectation of privacy,” he said. “We don’t know if he was looking at the girls. We don’t know if he was looking for something to steal. To me, it was the same as trespassing.”

    For now, Merideth says he’s planning on pursuing legal action against the owners of the drone.

    “We’re not going to let it go,” he said. “I believe there are rules that need to be put into place and the situation needs to be addressed because everyone I’ve spoke to, including police, have said they would have done the same thing.”

     

    “Because our rights are being trampled daily,” he said. “Not on a local level only – but on a state and federal level. We need to have some laws in place to handle these kind of things.”

    So, should it be a crime to shoot down drones over your private property?

    *  *  *

    Finally, as an addenda, we note, as The BBC reports, the law isn't always in favour of drone pilots.

    Over the weekend, Californian officials agreed to offer a total of $75,000 (£48,000) in rewards for information that would help catch drone operators who flew their vehicles over recent wildfires in San Bernardino County.

     

    The flight of hobbyists' drones near to wildfires caused firefighting aircraft to be grounded for safety reasons, leading to the faster spread of the fires.

     

    District attorney Mike Ramos said in a statement: "We want to know who was flying drones, and we want them punished.

     

    "Someone knows who they are, and there is $75,000 waiting for them."

    *  *  *

  • NATO Member Busted Supporting ISIS … Now Declares War Against ISIS, But Instead Bombs Its Political Rival (the Main Force …

    Turkey Enabling ISIS

    NATO member Turkey has been busted supporting ISIS.

    The Guardian reported this week:

    US special forces raided the compound of an Islamic State leader in eastern Syria in May, they made sure not to tell the neighbours.

     

    The target of that raid, the first of its kind since US jets returned to the skies over Iraq last August, was an Isis official responsible for oil smuggling, named Abu Sayyaf. He was almost unheard of outside the upper echelons of the terror group, but he was well known to Turkey. From mid-2013, the Tunisian fighter had been responsible for smuggling oil from Syria’s eastern fields, which the group had by then commandeered. Black market oil quickly became the main driver of Isis revenues – and Turkish buyers were its main clients.

     

    As a result, the oil trade between the jihadis and the Turks was held up as evidence of an alliance between the two.

     

    ***

     

    In the wake of the raid that killed Abu Sayyaf, suspicions of an undeclared alliance have hardened. One senior western official familiar with the intelligence gathered at the slain leader’s compound said that direct dealings between Turkish officials and ranking Isis members was now “undeniable”.

     

    “There are hundreds of flash drives and documents that were seized there,” the official told the Observer. “They are being analysed at the moment, but the links are already so clear that they could end up having profound policy implications for the relationship between us and Ankara.”

     

    ***

     

    However, Turkey has openly supported other jihadi groups, such as Ahrar al-Sham, which espouses much of al-Qaida’s ideology, and Jabhat al-Nusra, which is proscribed as a terror organisation by much of the US and Europe. “The distinctions they draw [with other opposition groups] are thin indeed,” said the western official. “There is no doubt at all that they militarily cooperate with both.”

     

    ***

     

    One Isis member says the organisation remains a long way from establishing a self-sustaining economy across the area of Syria and Iraq it controls. “They need the Turks. I know of a lot of cooperation and it scares me,” he said. “I don’t see how Turkey can attack the organisation too hard. There are shared interests.”

    While the Guardian is one of Britain’s leading newspapers, many in the alternative press have long pointed out Turkey’s support for ISIS.

    And experts, Kurds, and Joe Biden have accuses Turkey of enabling ISIS.

    Has Turkey Changed Its Ways?

    On Tuesday, Turkey proclaimed that it will now help to fight ISIS.

    Don’t buy it …

    Colonel Lawrence Wilkerson – former chief of staff to Colin Powell, and now distinguished adjunct professor of Government and Public Policy at William & Mary – asked yesterday:

    What is [Turkish president] Erdogan’s ultimate purpose? He hates Assad. He’d love to bring him down. Is that why he’s doing this?

    There’s also the Kurds …

    As Time Magazine pointed out in June:

    Ethnic Kurds—who on Tuesday scored their second and third significant victories over ISIS in the space of eight days—are by far the most effective force fighting ISIS in both Iraq and Syria.

    And yet Turkey is trying to destroy the Kurds. Time writes:

    Since [Turkey announced that it was joining the war against ISIS] it has arrested more than 1,000 people in Turkey and carried out waves of air raids in neighboring Syria and Iraq. But most of those arrests and air strikes, say Kurdish leaders, have hit Kurdish and left wing groups, not ISIS.

     

    ***

     

    Kurds are an ethnic minority that live in parts of Syria, Iraq, Turkey and Iran. They have been persecuted for decades — from Turkey’s suppression of Kurdish identity and banning of Kurdish language to Saddam Hussein’s use of chemical weapons on Kurdish communities. Their leaders, from the numerous different parties and rebel groups that represent them, have long sought an independent Kurdish state encompassing that territory and have fought against their respective governments to try to achieve that.

     

    ***

     

    Hoshang Waziri, a political analyst based in Erbil, says the Kurds’ recent territorial gains in Syria along Turkey’s border and their increasing political legitimacy in the eyes of the West, have made the Kurds a bigger threat to Turkey than ISIS. “The fear of the Turkish state started with the Kurdish defeat of ISIS in Tel Abyad,” says Waziri.

     

    ***

     

    “The image in the West of the Kurds as a reliable ally on the ground is terrifying for Turkey,” says Waziri. “So before it’s too late, Turkey waged its war — not against ISIS, but against the PKK.”

     

    ***

     

    Some see the war against ISIS simply as a cover for an attack on Kurdish groups. Of the more than 1,000 people Turkey has arrested in security sweeps in recent days, 80% are Kurdish, associated either with the PKK or the non-violent Kurdish Peoples’ Democratic Party (HDP), says ?brahim Ayhan, a member of parliament for the HDP.

     

    ***

     

    Ayhan says the AKP needs a state of “chaos” to perusade voters that it is the only bulwark against chaos. As of yet no new government has been formed in Turkey and if that doesn’t happen in the next few weeks, new elections will be called. By that time Ayhad fears many of the leaders of his HDP party will be in jail and some even worry the HDP will be outlawed. At the same time, Erdo?an and his AKP hope they will have shown only they can defend Turkey from internal and external threats.

    The Wall Street Journal reports:

    Turkey’s military activity against Islamic State does not stem from sudden realizations about threats from ISIS but appears designed to elicit international support for its fight against the Kurds.

     

    The Kurdish Workers’ Party, known as the PKK, was locked in a bloody war with the Turkish state from the mid-1980s until 2013. The cease-fire has, for all intents and purposes, been destroyed. Turkey is battling both ISIS and the PKK under the guise of fighting terrorism. Yet Turkish attempts to conflate ISIS and the PKK–even in the wake of the suicide bombing in a Kurdish border town that killed 32 young people–effectively ask people to overlook some salient facts:

     

    The Kurds are Islamic State’s ideological opposites. The Kurds have been fighting ISIS in Syria and Iraq for some time; in particular, the Kurdish People’s Protection Unit (YPG) in northern Syria has been among the most effective forces at repelling ISIS efforts to take control of the Syrian-Turkish border. Kurdish military resistance in Syria and, to a lesser extent, the Kurdish autonomous government in Iraq have shouldered the lion’s share of the ground conflict against Islamic State, standing their ground at high cost and with limited support from the Western coalition.

     

    ***

     

    A declaration of a state of emergency in Turkey would give the Justice and Development Party (or AKP), which lost its parliamentary majority in June elections, more flexibility to crack down on political opponents such as the Kurdish majority People’s Democratic Party. More than 1,300 people have been detained recently under the guise of cracking down on domestic PKK and ISIS elements in Turkey.

     

    The AKP has declared the peace process with the Kurdish separatists dead and is trying to discredit the only recognized political representatives of the Turkish left and the Kurdish population; the Kurdish People’s Democratic Party won a 13% share of the Turkish parliament in the June elections–a sign of its rising popularity not only among Kurds but also with increasingly disgruntled Turkish liberals.

     

    ***

     

    If a governing coalition isn’t formed, early elections will be held. The AKP appears to be hoping for that–under the thinking that a majority of voters would seek to maintain the status quo in a time of uncertainty and potential civil war, and that AKP’s standing in parliament would, in turn, be strengthened.

    So Turkey isn’t really going after ISIS … instead, the ruling party is going after its main political threat – the Kurds – and continuing its long-term effort to overthrow Syria’s Assad.

  • Congress Passes Bill In 15 Minutes To Revoke Americans' Passports Without Due Process

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    The “war on terror” is a status quo fraud perpetuated by the oligarch-controlled mainstream media and authoritarian members of Congress as a way to systematically strip the American public of its freedom and civil rights in the name of fighting an outside enemy. This tried and true tactic has been used by statists throughout history, and history is indeed repeating itself here in the “land of the free.”

    Of course, I’ve spent innumerable hours writing on this topic for many years, even before I started this website. Here are a few recent examples:

    The “War on Terror” Turns Inward – DHS Report Warns of Right Wing Terror Threat

    More “War on Terror” Abuses – Spying Powers Are Used for Terrorism Only 0.5% of the Time

    How the Department of Homeland Security Monitored and Tracked Peaceful “Black Lives Matter” Protests

    Moving along, today’s story is so incredible it’s almost hard to believe. It appears our so-called “representatives” recently took fifteen minutes to pass a bill that allows the Secretary of State to revoke Americans’ passports with no due process. Did you know about this? Well neither did I, and what’s worse, these members of Congress are so cowardly they passed the bill with a voice vote to avoid going on record. Talk about anti-American.

    First, from Reason:

    On Tuesday, without much notice, and after a whopping 15-minute debate, the U.S. House of Representatives passed via voice vote the Foreign Terrorist Organization Passport Revocation Act of 2015. Its intent: “To authorize the revocation or denial of passports and passport cards to individuals affiliated with foreign terrorist organizations, and for other purposes.” Some of the bill’s sparse details:

     

    The Secretary of State may refuse to issue a passport [or revoke a previously issued one] to any individual whom the Secretary has determined has aided, assisted, abetted, or otherwise helped an organization the Secretary has designated as a foreign terrorist organization

     

    How does today’s John Kerry or tomorrow’s John Bolton make such a determination? The bill doesn’t say.

    Don’t we have laws, courts and due process in this country? Guess not.

    It was also covered by Police State USA:

    A bill passed by the U.S. House of Representatives would allow the government to restrict Americans’ travel through the revocation of passports based upon mere suspicions of unscrupulous activity.  This bill represents another dangerous step forward in the war on terror and the disintegration of American due process.

     

    H.R. 237, the “FTO (Foreign Terrorist Organization) Passport Revocation Act of 2015,” will allow the U.S. Secretary of State the unchecked authority to prohibit individuals from traveling internationally.  According to the bill, the Secretary may unilaterally revoke (or refuse to issue) a passport from “any individual whom the Secretary has determined has aided, assisted, abetted, or otherwise helped an organization the Secretary has designated as a foreign terrorist organization pursuant to section 219 of the Immigration and Nationality Act (8 U.S.C. 1189).”

     

    The bill did not bother to define what the terms “aided, assisted, abetted, or otherwise helped” actually mean, in legal terms.  The power has been left open-ended so that it can mean whatever the secretary wants it to mean.  Needless to say, a bill like this would be easily abused.

     

    The travel restriction requires no presumption of innocence for the targeted individual; no explanation; no public presentation of evidence; no opportunity for a defense; no checks and balances on the power.  The bill does not outline any appeals process for the targeted individual.  The only stipulation is that the Secretary of State must issue a report to the Senate Committee on Foreign Relations and the House Committee on Foreign Affairs — “classified or unclassified.”  The bill does not state that either committee can reverse the secretary’s decisions.

    What’s really disturbing though, is that as I was researching this bill, I came across the fact that Congress is also sneaking in a provision to the highway-bill that would allow the IRS to revoke Americans’ passports if they owe the agency $50,000. Here’s some excellent coverage on the matter from the Ron Paul Institute:

    Just the other day we wrote about a US House “suspension” bill that would give the Secretary of State the authority to cancel your passport if he decided that you had “aided” an organization that he rules is terrorist. There is no definition of what “aided” means, no chance to dispute the Secretary’s decision, no trial or presentation of evidence, and in fact any evidence the government has can be classified as secret so that you may not see it. In effect the Secretary of State can unilaterally consign you to internal exile and there is nothing you can do about it.

     

    Because Members of the US House were too cowardly to go on record voting for such an anti-American piece of legislation, the bill passed by a voice vote.

     

    Today the US Senate plans to one-up its counterparts on the lowlier side of Capitol Hill. Buried inside the US highways funding bill is a provision to revoke or deny issuance of a US passport to anyone who has a large outstanding tax debt to the US Internal Revenue Service. According to a Senate Finance Committee summary (PDF) acquired today, the measure provides for:

     

    Revocation or denial of passport in case of certain unpaid taxes. This provision would authorize the Federal government to deny the application for a passport when an individual has more than $50,000 (indexed for inflation) of unpaid federal taxes which the IRS is collecting through enforcement action. It would also permit the Federal government to revoke a passport for such individuals. Before revocation, however, the Federal government would be allowed to limit a previously issued passport only for return travel to the United States or to issue a limited passport that only permits return travel to the United States. The provision would be effective on January 1, 2016, and is estimated to raise $0.398 billion over 10 years.As can be seen from the summary, this measure threatening to imprison Americans within (or outside) US borders is simply viewed as a means by which to raise revenue. The hoped-for increase in revenue coming from this threat is considered an “offset” to the money being spent on the highway bill — in other words the threat to imprison US citizens within their own country or freeze them out is considered appropriate incentive to force them to pay what the government claims it is owed.

     

    Unconvinced that the US government would do such a thing? Check the bill coming to the Senate Floor. Section 52102 of the Highway Funding bill, to be taken up by the Senate today,  states:

     

    If the Secretary receives certification by the Commissioner of Internal Revenue that any individual has a seriously delinquent tax debt in an amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 52102(d) of the Transportation Funding Act of 2015.

     

    The use of citizenship rights as a weapon against Americans is becoming increasingly common as Washington is ever more desperate for control of its passport holders.

    Indeed, Congress does seem rather obsessed in creating various loopholes by which the government can snatch American citizens’ passports and restrict travel without due process. It makes you wonder if Ron Paul was right in 2011 when he stated: “Border Fence Will Be Used To ‘Keep Us In'”

  • July Jangles Markets' Nerves: Treasury Yields Tumble, Stocks Fumble, & Commodities Crumble

    No excuse needed…

    This seemed to sum the talking heads up today…

     

    Everything was awsome today after the worst wage growth in US history sent stocks soaring.. and then they unleashed The Bullard:

    • 1408ET *FED'S BULLARD SAYS "IN GOOD SHAPE" FOR SEPT HIKE: DJ VIA CNBC

    Complete chaos today…

     

    With cash indices ending mixed (Nasdaq desparately clinging to green and Small caps ripped on biotech reach for safety lol!!!)

     

    A complete disconnect between yields and stocks until Bullard spoiled the party…

     

    Today across bonds, stocks, and gold…

     

    Stocks were rolling over hard and then…

    • The Market Broke – 1532ET *NYSE HAVING BINARY GATEWAY LATENCY ISSUE ON IP 159.125.64.138

    And so VIX was slammed…to ensure S&P holds the all-important 2100 level…

     

    *  *  *

    Year-to-Date… Dow's down, Bonds down-er, Crude down-est… as The US Dollar is up 7.5%…

     

    Trannies are still the big laggards with Nasdaq leading…

     

    Led by Healthcare (Biotechs) as Energy remains the biggest loser…

     

    *  *  *

    It was quite a month!!

    Bonds hot, commodities cold, stocks meh…

     

    Bonds had their best month since January… (TLT +4.3%) – 2s30s biggest flattening (-23bps) since January

     

    Stocks managed – after this week's epic surge – to get into the green for July…Trannies best month since Feb (up 4.1%) but Small Caps (Russell 2000) fell for the first time since April…

     

    Commodities worst month since Sept 2011… to the lowest since April 2002

     

    • WTI Crude's worst month since Oct 2008 (down 20.5%) – lowest close since March 2015
    • Copper's worst month since Jan 2015 (down 10%) – lowest close since June 2009
    • Gold's worst month since June 2013 (down 6.5%) – lowest monthly close since Jan 2010
    • Silver's worst month since Sept 2014 (down 6%) – lowest monthly close since July 2009

    *  *  *

    On the week, Stocks soared…

     

    As VIX "Matterhorn"-ed…

     

    Bonds soared…

     

    The dollar ended the week unchanged…

     

    and all but silver slipped in commodities…

     

    Did we just reach the threshold for gold short-covering?

     

    And crude was crushed back to a $46 handle…

     

    Finally – despite all the huffing and puffing over how China saved the world again with their intervention, Chinese stocks suffered their worst week in the last 5, crashing 9-12%…

    The Shanghai Composite closed July down 14.4% – the worst month since August 2009.

     

    Charts: Bloomberg

    Bonus Chart: "Smart" Money Flow Continues To Signal Rotation To Weak Hands…

     

  • "We Want The Names Of Anyone Who Sold" – China's Market Witch Hunt Enters Twilight Zone

    Having claimed 'foreign interests' were "waging an economic war" against China, it was ironic that the most outspoken of Chinese SOEs is now under investigation for 'selling' shares when it was told not to. As Reuters reports, China is extending its dragnet for "malicious sellers" to Hong Kong and Singapore as the witchhunt blame-mongery continues, Rather ominously, the China Securities Regulatory Commission (CSRC) has demanded trading records to try to identify those with net short positions who would profit in case of further falls in China-listed shares, three sources at Chinese brokerages and two at foreign financial institutions said. Even more incredibly, as Bloomberg reports, despite total ignorance by US regulators, China is 'daring' to crackdown on market manipulation via 'spoofing'.

    China is pressing foreign and Chinese-owned brokerages in Hong Kong and Singapore to hand over stock trading records, sources told Reuters, extending its pursuit of "malicious" short sellers of Chinese stocks to overseas jurisdictions.

    The markets regulator, the China Securities Regulatory Commission (CSRC), wants the trading records to try to identify those with net short positions who would profit in case of further falls in China-listed shares, three sources at Chinese brokerages and two at foreign financial institutions said.

     

    At its regular press conference on Friday, the CSRC said it had not directly contacted top executives at Hong Kong brokerages. It also noted that it was normal, in the course of an investigation, to reach out to "relevant parties".

     

    The regulator has declared war on "malicious short sellers" or those it deems are trying to profit from a fall in share prices, rather than adopt a short position as a financial hedge.

     

    "The implied threat by the CSRC is that anything that is not a hedge is a no-no," said a source in Hong Kong with knowledge of the requests. This person added that foreign brokers were likely to comply as best they could with the requests.

     

    "When the CSRC makes an offer, you cannot refuse it."

     

    …

     

    The CSRC has no regulatory power in Hong Kong or other jurisdictions, such as Singapore and the United States, where investment products tracking mainland shares are listed, and can be legally shorted.

     

    But market sources worry that Chinese regulators are intent on suppressing any attempt to profit from China's sliding markets, including trying to suppress even legal investment behavior by referring to it as "malicious" or otherwise irregular.

     

    At the same time, the government is trying to rally retail investors who dominate trading in China to put money back into the market, a task made more difficult if investors offshore are making bets on falling prices.

    As we have detailed in depth previously, spoofers make money by feigning interest in buying or selling at a certain price, creating the illusion of demand in an attempt to make other traders move the market. The spoofer cancels the original order and buys or sells at the new price to make a profit. And so as Bloomberg reports, spoofing has become the latest target in China’s campaign against stock-market manipulation after a $3.5 trillion selloff.

    “It certainly looks like spoofing is at play here,” said Bernard Aw, a strategist at IG Asia Pte Ltd. in Singapore. “Given that this practice is seen as market manipulation, it is not surprising to see CSRC stepping in.”

     

    The practice, which involves placing then canceling orders to move prices, is suspected in 24 accounts on the Shanghai and Shenzhen stock exchanges, the China Securities Regulatory Commission said on its microblog. The bourses have restricted the accounts and regulators are investigating program traders, who have recently had an “obvious” impact on the stock market, the CSRC said.

     

    China’s focus on spoofing follows a probe of “malicious” short selling, part of the government’s unprecedented effort to shore up investor confidence.

     

    “The public isn’t happy about the market plunge so the regulator needs to take some actions as a response, and that’s part of the government’s plan to prop up the market,” said Zhang Haidong, the chief strategist at Jinkuang Investment Management in Shanghai. “Whether it’ll be effective remains to be seen.”

    *  *  *

    As one trader noted,

    Spoofing "works on the way up and the way down, so it’s interesting it’s only a problem when it causes equity prices to fall."

    And so, just as we have remarked previously, this kind of manipulation will be tolerated in the US markets until such time as stocks begin to tumble then it will be scapegoated as the sole reason why equity confidence collapsed.

  • 5 Things To Ponder: Mentally Conflicted

    Submitted by Lance Roberts via STA Wealth Management,

    I had a very interesting conversation with one my colleAgues yesterday about the markets and the economy. Essentially the discussion centered around the markets remaining near their all-time highs as economic data remained soft. Much like the "300" that defended Greece against the massive invading force of Persia, it is only a question of time before the battle is lost.

    As I discussed on Monday in "When Will We Ever Learn…"

    "The capacity for optimism is seemingly limitless, but the "sting" of failure is quite transient.

     

    While it is in those failures that valuable lessons are taught, studies have shown that humans tend to suppress or substitute new memories over time.

     

    George Santayana once said:

     

    "Those who cannot remember the past are condemned to repeat it."

     

    The phrasing itself certainly is catchy, and is often used in the financial media due to its underlying truth. If history is a guide to the results of previous actions, and those results were painful, then history should guide not only policy making (public and private) but our own behaviors as well.

     

    It's hard to disagree with. Over the history of the financial markets (all the way back to the 1600's) speculative investing has repeatedly led to booms and busts.

     

    Importantly, each of these "bubbles" involved an excessive level of speculation around some specific asset.

     

    Of course, it is all rather obvious in hindsight. Valuations were high, the Fed was hiking interest rates and the love affair with stocks and leverage had reached historically high levels.

     

    Today, there are many signs that the markets are once again approaching a "danger zone." Margin debt is once again at historically high levels; valuations are the second highest in history and the "love affair" with equities has pushed stocks to record highs. But these areas are really just a reflection of the excesses that are building elsewhere in the financial system."

    The disconnect between economic underpinnings, market internals and "bullish" investor optimism leaves many investors/advisors "mentally conflicted." If they "sell" too soon, they might miss a further advance in the market. But if they wait too long, well, they have lived through that scenario previously.

    This week's reading list is a smattering of conflicting views about the markets and the economy. As always, it is extremely valuable to analyze both sides of every argument. This reduces confirmation bias and leads to a better assessment of potential flaws that may exist in your investment thesis.

    1) The US Stock Market And A Major Recessionary Warning? by Pater Tenebrarum via Acting Man Blog

    "The deterioration in market internals is e.g. evident in new high/new low ratios that are inconsistent with a market making new highs, and a growing divergence between prices and advance/decline statistics. Also, an ever smaller percentage of stocks remains above important moving averages. Below is a chart depicting several of the most widely followed market internals (high/low percent, advance/decline line, S&P 500 stocks above 200 day and 50 day EMA).

     

    What this essentially tells us, is that capitalization-weighted indexes are held up by an ever smaller number of big cap stocks. A the time of writing, a strong short term rebound in the stock market is underway. However, the underlying problems with trend uniformity and internals depicted below remain in place."

    1-Internals

    Read Also: Several Reasons To Remain Bullish On Stocks by Chris Ciovacco via Ciovacco Capital

     

    2) "Extreme Fear" Is Back For The Stock Market by Heather Long via CNN Money

    "What's going on? Investors are spooked by the same factors that have been around for months: China's slowdown, Greece's possible exit from the euro, and the Federal Reserve's first interest rate hike expected in September.

     

    None of this is new, but it's getting real. On Monday, China's Shanghai Composite index fell a whopping 8.5% — its worst single day decline since February 2007. While America investors don't have a lot of exposure to China's stock market, they do have exposure to China's economy since so many U.S. businesses are now operating there.

     

    China's economic slowdown is the bigger concern. The stock market plunge is seen as more of a warning sign to the rest of the world."

     CNN-fear-greed-072015

    Read Also: The Secret For Beating The Market by Nouriel Roubini via Project Syndicate

     

    3) The S&P 500 And Stock Buybacks by Ironman via Political Calculations

    "How different would the value of the S&P 500 be if not for the amount of stock buybacks that have taken place in the U.S. stock market since the end of 2008?

     

    What we see from our highly simplified, back-of-the-envelope math is that through the end of the first quarter of 2015, the most recent for which S&P has reported data at this writing, the value of the S&P 500 would be about 324 points, or nearly 16%, lower if not for the progressive impact of share buybacks over the last seven years."

    Sp500-withandwithout-buybacks

    Read Also: Putting The "Buy Back" Craze Into Context by Eric Bush via GaveKal Capital

     

    4) When Will The Next Recession Start? by Ed Yardeni via Dr. Ed's Blog

    "I doubt that the business cycle is dead, though I suspect that inflation may be dead. As inflation remains subdued and central banks continue to provide ultra-easy monetary policies, the next recession may very well be a long ways off. If inflation makes a sudden comeback, a possibility I can't dismiss, then all bets are off. A meltdown in China's financial markets and economy might also trigger a global recession, which is why I am concerned about the renewed weakness in commodity prices, as I discussed last week."

    Read Also: Recession Ahead? Gross Output and B2B Data by Dr. Mark Skousen via MSkousen.com

    Read Also: Leaked Fed Staff Forecast Reflects Gloomier Outlook by Binyamin Appelbaum via New York Times

     

    5) Investors Should Raise Cash by Michael Kahn via Barron's

    "But what I find more interesting is that the last time the market suffered a significant correction, aside from last year's Ebola-inspired mini-panic, the industrials broke down first. That was in the summer of 2011 and the industrial sector broke down about a week before the broad market did (see Getting Technical, "Industrial Stocks Are Shutting Down," August 1, 2011). Although we cannot make a rule out of so few observations, it probably is a good idea to keep cash levels higher than normal."

    Industrails-073015

    Read Also: Its A Bounce For This Key Market Gauge, Or Else by Dana Lyons via Tumblr

    Other Interesting Reads

    Sometimes, Investors Win By Not Losing by Joe Calhoun via Alhambra Partners

    Am I Too Bearish, Or Are you Too Bullish by Jesse Felder via The Felder Report

    Jeremy Grantham's 10 Issues To Watch by Jeremy Grantham via ZeroHedge

    6 Great Investors Explain What Makes Stocks Rise by Lauren Rublin via Barron's

    "I have always found it valuable to study my mistakes" – Edwin Lefevre

    Have a great weekend.

  • "You've Got Jail"

    Forget The White House… Hillary is heading to The Big House…

     

     

    Source: Investors.com

  • Is This The Top? Private Equity "Exits" Surge To Record Highs

    After a slow first quarter of 2015, the private equity industry experienced a revitalization in Q2-2015. Investment dipped by less than 1 percent to $112 billion, holding strong at the second highest Q2 level since 2007, fundraising fell to $30 billion. . Meanwhile, as ValueWalk details, exit volume exploded last quarter to $125 billion – the highest level on record – raising the question: "if everything is so awesome, why the smartest people in the room selling to the public at the heaviest pace ever?"

    Via Valuewalk,

    Some key metrics of the private equity industry in the second quarter of 2015 are:

    U.S. Private Equity Investment Volume Decreases

    Quarterly U.S. private equity investment deal volume fell slightly from $113 billion in Q1-2015 to $112 billion in Q2-2015.

    Current Level – $112 B

    Quarterly Change % – -1%

    Equity Contributions Hold Steady

    Total equity financing for U.S. leveraged buyouts remained at 42% in Q2-2015.

    Current Level – 42%

    Quarterly Change % – 0%

    U.S. Fundraising Levels Fall

    Quarterly U.S. private equity fundraising volume declined from $38 billion in Q1-2015 to $30 billion in Q2-2015.

    Current Level – $30 B

    Quarterly Change % – -21%

    Dry Powder Increases

    Callable capital reserves (“dry powder”) of global buyout funds increased from $431 billion in December 2014 to $467 billion as of the end of June 2015.

    Current Level – $467 B

    Quarterly Change % – +8%

    Exit Volume Jumps

    U.S. private equity exit volume grew from $70 billion in Q1-2015 to $125 billion in Q2-2015.

    Current Level – $125 B

    Quarterly Change % – +80%

    Fig 1 The four-quarter average for exits took a sharp turn upwards in 2015-Q2, while the average for investments and fundraising decreased.

    Private Equity Activity

    Fig 2 U.S. private equity investment volume contracted by 1% from the previous quarter.

    PE Activity

     

    Fig 3 The proportion of equity financing for U.S. leveraged buyouts remained at 42%.

    PE Activity

    Fig 4 Capital raised by U.S. private equity funds declined from the previous quarter to $30 billion.

    PE Activity

    Fig 5 Global callable capital reserves (“dry powder”) of buyout funds increased to $467 billion as of June 2015.

    PE Activity

    Fig 6 U.S. private equity exit volume grew from previous quarter levels to $125 billion.

    PE Activity

     

    So – to summarize – funding levels are falling, dry powder is rising, and exit volume are at record highs… Still want to buy stocks with both hands and feet!!!!

  • Friday Humor: The Trump White House & Cabinet

    Having told Jimmy Kimmel that he "would love to" appoint Sarah Palin to his cabinet, The Washington Post asks (and answers), just what would a trump cabinet look like?

    Because Trump is busy poring over poll numbers and reviewing tape from focus groups, we went ahead and cobbled it together for him.

    Vice President: Oprah Winfrey, per Trump's past suggestion. Would she run with Trump? If Donald Trump can convince the Hispanic vote to come out for him, which he insists he can, he can certainly convince Winfrey to join his ticket. He has great negotiators.

     

    Secretary of the Interior: Sarah Palin. Granted, Palin would probably like something a little more substantive than this, but what other candidate can brag about having toured the country hunting various animals for a TV show? In case Palin declines, maybe reach out to that dentist.

     

    Attorney General: His go-to counsel, Michael Cohen.

     

    Secretary of Homeland Security: Joe Arpaio. Trump's campaign shot into the stratosphere after his appearance with Arpaio at an immigration event in Arizona. This has the added benefit of helping to keep the Department of Justice off Arpaio's back.

     

    Secretary of State: We know that Trump thinks that Hillary Clinton was the worst secretary of state in American history. He clearly wants the opposite of that. So how about Vladimir Putin, whom Trump has repeatedly praised? He's pretty opposite.

     

    Secretary of Housing and Urban Development: Ivanka Trump. Public housing is basically just a no-frills hotel, right?

     

    Secretary of Health and Human Services: Dr. Oz.

     

    Secretary of Transportation: Christophe Georges, president of Bentley Motors.

     

    Secretary of Energy: Manoj Bhargava.

     

    Secretary of Education: Michael Sexton, former president of Trump University, which was a thing.

     

    Secretary of Agriculture: Secretary of Agriculture: Tom Fazio, Trump's golf course architect. Who knows more about proper watering and vegetation maintenance than this guy? Also, the imminent desertification of swaths of California sounds much better if you think about the process as "the creation of challenging new sand bunkers."

     

    Secretary of the Treasury: Donald Trump. Sure, it's more common for the president to appoint someone else to this position, but who's better at managing money than Donald Trump? No one. He's the best.

     

    Secretary of Veterans Affairs: Donald Trump. Sure, it's more common to etc., etc. But who cares more about the veterans than Donald Trump? No one.

     

    Secretary of Defense: Donald Trump. Sure, etc., etc., etc., ISIS, etc. No one.

     

    Secretary of Labor: Position will be left unfilled.

    Interest in Trump is rising notably…

     

    And finally…

    Artist's impression of The Trump White House…

    h/t ZH Member 38BWD22

  • Will FTC Probe Of Largest For-Profit College Lead To Another Billion Dollar Taxpayer Bailout?

    In late April we predicted that for-profit college closures would trigger the next multibillion dollar taxpayer-sponsored bailout in America. 

    At the time, Corinthian Colleges had abruptly shuttered what remained of its campuses, marking an unceremonious end to a slow motion wind down that had been in the works for quite some time. 

    As we noted then, delinquencies and defaults on student loans are far worse for borrowers that attend for-profit colleges. This, along with poor graduation rates and allegations of deceptive marketing practices, has led to increased government scrutiny of the for-profit sector, scrutiny which ultimately caused Corinthian to wind down operations last year amid allegations it falsified job placement rates.

    The company received nearly $1.5 billion per year in financial aid funding from the government, meaning the US taxpayer was subsidizing federal loans to students who very well may have been getting a subpar education and were thus even more likely to get behind on their loans and eventually default. Corinthian was able to sell off many of its campuses in November and although the writing had been on the wall for quite sometime, the sudden closure of its remaining physical campus still came as a surprise to students and faculty.

    The reason this matters is that the law allows students to apply for debt relief from the Department of Education when the school they attend is closed and found to have defrauded attendees. Here’s an excerpt from a Reuters piece that ran shortly after the closures:

    More than 50 consumer and labor organizations sent a joint petition on Tuesday to U.S. Secretary of Education Arne Duncan, urging him to cancel federal student loans owed by 78,000 who attended Corinthian schools.

     

    The groups, including the National Consumer Law Center, said the Department of Education had the authority because Corinthian misrepresented its job placement rates and defrauded students by enrolling them in high-cost, low-quality classes.

    What’s critical to understand here is that, as noted last month, “these institutions rely heavily on federal student loans for their very existence [and] tuition rates at for-profit colleges are, on average, double the rates charged by large public universities, a fact which explains why nearly 90% of students at for-profit schools have taken out loans to pay for their education.”

    So these students are i) almost certain to have borrowed from the government, and ii) their loan balances are almost certain to be higher, on average, than loan balances for students at public universities.

    When you combine this with the government’s ongoing crackdown on the for-profit sector and the fact that if the government closes a for-profit school, the students are eligible for debt relief, you have the perfect recipe for massive taxpayer-funded bailouts of heavily indebted students. 

    Anyone who thought we were exaggerating when we predicted a multibillion dollar hit for taxpayers got a rude awakening when, early last month, the government announced plans to write off nearly $4 billion in loans for students that attended Corinthian.

    The takeaway, as we wrote way back in April, is this: The real question now is whether continued pressure on for-profit colleges will result in further closures and more petitions from hundreds of thousands of students with hundreds of billions of loans they now know can be legally discharged. 

    Well, sure enough, the government is now looking into University of Phoenix parent Apollo Education. Here’s Bloomberg: 

    Apollo Education Group Inc., owner of the University of Phoenix for-profit college chain, fell as much as 9.4 percent after U.S. regulators began investigating possible unfair advertising and marketing.

     

    The Federal Trade Commission demanded information on enrollment, recruiting, financial aid, tuition and other business practices from 2011 to the present, Phoenix-based Apollo said in a filing with the Securities and Exchange Commission. Apollo said it will cooperate fully.

     

    The FTC and other government agencies are examining the practices of for-profit colleges amid concerns they are recruiting students with misleading pitches about the value of their education. Downers Grove, Illinois-based DeVry Education Group Inc., another for-profit college chain, received a similar notice from the FTC last year and said it is cooperating.

    From the filing:

    Apollo Education Group, Inc. announced that it received yesterday a Civil Investigative Demand from the U.S. Federal Trade Commission. The Demand indicates that it relates to an investigation to determine if certain unnamed persons, partnerships, corporations, or others have engaged or are engaging in deceptive or unfair acts or practices in or affecting commerce in the advertising, marketing, or sale of secondary or postsecondary educational products or services or educational accreditation products or services. The Demand requires Apollo to produce documents and information regarding a broad spectrum of the business and practices of its wholly-owned subsidiary, University of Phoenix, Inc., including in respect of marketing, recruiting, enrollment, financial aid, tuition and fees, academic programs, academic advising, student retention, billing and debt collection, complaints, accreditation, training, military recruitment, and other compliance matters, for the time period of January 1, 2011 to the present.

    We’re quite sure we’ll be discussing this extensively sooner rather than later, but for now we’ll close with an excerpt from US News & World Report on Corinthian’s bankruptcy and a screenshot from Apollo’s latest 10-Q. Bearing in mind that the Corinthian closure may cost taxpayers $3.6 billion, see if you can determine why a government mandated shutdown of Apollo could present a problem.

    In court documents, Corinthian listed total assets of $19.2 million and total debts of more than $143 million. At its peak during 2013, the company operated more than 100 campuses in states such as Arizona, California, Hawaii and Oregon, and enrolled more than 81,000 students, according to court documents.

  • Spot The Greek Referendum

    When fiat fragility shows its fecklessness, it appears people turn to the alternatives…

     

     

    As Grexit fears loomed, Bitcoin transactions surged, as we noted here, amid efforts to avoid capital controls. As Reuters reported,

    Using bitcoin could allow Greeks to do one of the things that capital controls were put in place this week to prevent: transfer money out of their bank accounts and, if they wish, out of the country.

     

    "When people are trying to move money out of the country and the state is stopping that from taking place, bitcoin is the only way to move any value," said Adam Vaziri, a board member of the UK Digital Currency Association.

     

    "There aren't any other options unless you buy diamonds, and that's very difficult to move."

     

    But Marinos said the bitcoin buyers' main aim was to shield their money against the prospect that Greece might leave the euro zone and convert all the deposits in Greek banks into a greatly devalued national currency. If voters reject the demands of international creditors in a referendum on Sunday, this becomes much more likely.

     

    "A lot of people are keeping all the bitcoins they buy on our platform, until they understand what to do with them," Marinos said. "In their eyes, now they have bitcoins, they're safe."

    *  *   *

    Source: Goldman Sachs

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Jul 31

Today’s News July 31, 2015

  • Liar Loans Pop up in Canada’s Magnificent Housing Bubble

    Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

    For a long time, the conservative mortgage lending standards in Canada, including a slew of new ones since 2008, have been touted as one of the reasons why Canada’s magnificent housing bubble, when it implodes, will not take down the financial system, unlike the US housing bubble, which terminated in the Financial Crisis.

    Canada is different. Regulators are on top of it. There are strict down payment requirements. Mortgages are full-recourse, so strung-out borrowers couldn’t just mail in their keys and walk away, as they did in the US. And yada-yada-yada.

    But Wednesday afterhours, Home Capital Group, Canada’s largest non-bank mortgage lender, threw a monkey wrench into this theory.

    Through its subsidiary, Home Trust, the company focuses on “alternative” mortgages: high-profit mortgages to risky borrowers with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime borrowers.

    So it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September: “falsification of income information.” Liar loans.

    Liar loans had been the scourge of the US housing bust. Lenders were either actively involved or blissfully closed their eyes. And everyone made a ton of money.

    So Home Capital revealed that it has suspended “during the period of September 2014 to March 2015, its relationship with 18 independent mortgage brokers and 2 brokerages, for a total of approximately 45 individual mortgage brokers,” who’d together originated nearly C$1 billion in single-family residential mortgages in 2014. That’s 5.3% of the company’s total outstanding loan assets, and 12.5% of its total single-family mortgage originations in 2014.

    That’s a big chunk. The company, however, didn’t disclose why it took so long to disclose this.

    It said an “external source” had warned it about income falsification on mortgage applications submitted by a number of brokers. Its investigation did not find any evidence of falsified credit scores or property values, it said.

    It’s not hard for a lender to require income verification. Not requiring it is precisely what US lenders had done before the Financial Crisis. Add a little encouragement from a broker, and that’s how you get perfect liar loans.

    Home Capital had already announced on July 10 (Friday afterhours!) that in Q2, originations of high-margin uninsured mortgages had plunged 16% and originations of lower-margin insured single-family mortgages had plummeted 55% because it had axed some brokers. Its shares plunged 20% the following Monday and another 4% the next day [read… Largest “Alternative” Mortgage Lender in Canada Plunges, Denies “Systemic Problem” in Housing Market].

    At the time, HCG was the fourth most shorted stock in Canada. By July 29, the day before the current announcement, HCG had risen to the second most shorted stock. Today, massive short-covering set in, and shares soared 13%, but remain 42% below where they’d been during the halcyon days last November.

    “Everyone had their ideas about what transpired in the past six months; this corroborates some suspicions but dispels some others,” Shubha Khan, an analyst at National Bank Financial told the Financial Post, adding – with Canadian understatement – that there were “still some questions.”

    Among them, whether these insured liar loans would continue to be insured; and whether this was an isolated problem, rather than an industry issue in the Canadian housing market. In other words, is it just the tip of the iceberg?

    Housing bubbles are money generators. Temptations are huge. Falsifying mortgage applications is easy if no one checks them. It’s a mad scramble to extract as much money as possible for as long as possible – but with a devastating aftermath.

    Now liar loans are coming out of the Canadian woodwork. The much touted down-payment requirements in Canada have already fallen apart. Don’t have the money for even 5% down? Solutions are openly promoted, for example:

    It is not a problem anymore!!! Canada Mortgage & Financial Group (CMFG) has a new product that now allows you to borrow your down payment from any source…. The only amount you need to show on your own is 1.5% of the purchase price….

    With regulators breathing softly down their necks, banks might have become more careful in lending to people to buy homes that are among the most overpriced in the world. What has that accomplished? The rise of alternative lenders in the shadow banking system. They’re not subject to the same regulations as banks.

    “There’s a lot more that can be hidden from the public, things that are not right could not be noticed early on,” Michael Dolega, a senior economist at TD Economics, told the Huffington Post of Canada. “The quality is slipping, and it’s far more questionable for some of these smaller lenders, but at the same time I think it’s still better than it was in the U.S., when it went south pretty quickly.”

    Yes, this time it’s different.

    But the patterns are crystallizing: Home Capital Group with liar loans on its books, CMFG with ultra-low down-payment loans on its books…. In banking, bad deals are made in good times.

    Even the Bank of Canada, in its most recent Financial System Review in June, fretted over the risks in the shadow banking system due to its “less regulated nature” and outright “opacity,” and considered it a “particularly important vulnerability” to financial stability. While the sector is still relatively small, it would impact the overall economy, it said.

    But it’s not so small anymore – estimated at 10% of Canada’s mortgage market and growing rapidly: A report by CIBC (Canadian Imperial Bank of Commerce), cited by the Huffington Post, found that lending by alternative lenders had doubled since 2012, and as of the Q3 last year, was still growing 20% year-over-year.

    This comes at the worst possible time for Canada. The economy likely shrank in the first half. Hence, the Conference Board of Canada just downgraded growth to 1.6% in 2015, worst since 2009. It sees some deep problems, after a 15.5% plunge in business investment in Q1:

    Oil and gas firms are expected to chop their investment by almost one-third…. Outside the energy sector, firms remain hesitant to invest. Purchases of machinery and equipment suffered a substantial decline in the first quarter of the year, and a decline in building permits suggests a downturn in commercial construction in 2015. Overall, business investment will drop by close to 7% this year.

    Household spending is also expected to weaken, despite savings for consumers at the gas pump and federal tax cuts. Soft employment growth, weak wage gains, high level of household debt and job losses in oil producing provinces will combine to limit growth in consumer spending to 2.1% in 2015.

    That would be the optimistic scenario. It assumes that the magnificent housing bubble can be maintained; but all bets are off if it takes liar loans, among other underwriting schemes, to maintain it. And when the housing bubble deflates, all these schemes that are forgiven as long as prices rise will turn into an unappetizing mess.

    The problems are already spreading in the Canadian real estate sector. Read… Epic Glut of Office Space Crushes Hope in Canadian Oil Patch

  • Debt Slaves: 7 Out Of 10 Americans Believe That Debt "Is A Necessity In Their Lives"

    Submitted by Michael Snyder via The End of The American Dream blog,

    Could you live without debt?  Most Americans say that they cannot.  According to a brand new Pew survey, approximately 7 out of every 10 Americans believe that “debt is a necessity in their lives”, and approximately 8 out of every 10 Americans actually have debt right now.  Most of us like to think that “someday” we will get out of the hole and quit being debt slaves, but very few of us ever actually accomplish this.  That is because the entire system is designed to trap us in debt before we even get out into the “real world” and keep us in debt until we die.  Sadly, most Americans don’t even realize what is being done to them.

    In America today, debt is considered to be just part of normal life.  We go into debt to go to college, we go into debt to buy a vehicle, we go into debt to buy a home, and we are constantly using our credit cards to buy the things that we think we need.

    As a result, this generation of Americans is absolutely swimming in debt.  The following are some of the findings of the Pew survey that I mentioned above…

    *”8 in 10 Americans have debt, with mortgages the most common liability.”

     

    *”Although younger generations of Americans are the most likely to have debt (89 percent of Gen Xers and 86 percent of millennials do), older generations are increasingly carrying debt into retirement.”

     

    *”7 in 10 Americans said debt is a necessity in their lives, even though they prefer not to have it.”

    Most of us wish that we didn’t have any debt, but we have bought into the lie that it is a necessary part of life in America in the 21st century.

    It has been estimated that 43 percent of all American households spend more money than they make each month, and U.S. households are more than 11 trillion dollars in debt at this point.

    When it comes to government debt, that is easy for us to blame on someone else, but all of this household debt is undoubtedly something that we have done to ourselves.

    It all starts at a very early age for most of us.  When we are still in high school, we are endlessly told about how important a college education is.  All of the authority figures in our lives insist that we should just try to get into the best school that we possibly can and to not even worry about how much it will cost.

    So many of us go into staggering amounts of debt before we even get out into the working world.  We had faith that the “good jobs” that were being promised to us would be there when we graduated.

    Unfortunately, in this day and age those “good jobs” end up being a mirage more often than not.

    But whether or not we can find a good job, we still have to pay off all that debt.

    According to new data that was recently released, the total amount of student loan debt in the United States has risen to a grand total 1.2 trillion dollars.  If you can believe it, that total has more than doubled over the past decade.

    Right now, there are approximately 40 million Americans that are paying off student loan debt.  For many of them, they will keep making payments on this debt until they are senior citizens.

    Another way that they get you while you are still in school is with credit card debt.

    I got my first credit card while I was in college, and nobody ever taught me about the potential dangers.

    Today, the average U.S. household that has at least one credit card has approximately $15,950 in credit card debt.

    So let’s say that you have that much credit card debt and you are paying an annual interest rate of 17 percent.  If you only pay the minimum payment each month, it will take you 229 months to pay your credit card off, and during that time you will have paid $13,505.82 in interest charges.

    In other words, you will almost have paid twice as much for everything that you originally bought with your credit card by the time it is all said and done.

    This is why banks love to give you credit cards.  If they can get back nearly twice as much money as they originally give you, they get rich and you get poor.

    Most of us get loaded down with even more debt when we go to buy a vehicle.  Instead of saving up and getting what we can afford, many of us end up getting the largest loans that we can qualify for.

    In a previous article, I discussed the fact that the average auto loan at signing in America today is approximately $27,000.  In order to get the monthly payments down to a level where we can afford them, many of these auto loans are now being stretched out for six or seven years.  In fact, the number of auto loans that exceed 72 months has hit at an all-time high of 29.5 percent.

    It is the same thing with home loans.

    In the old days, it was extremely rare for a mortgage to be stretched over 30 years, but today that is pretty much the standard.

    Sadly, most people don’t understand how much money this is costing them.

    If you take out a $300,000 mortgage at 3.92 percent and stretch it over 30 years, you will end up paying back a grand total of $510,640.

    In other words, you will pay for two houses by the time you are done.

    Yes, we all need somewhere to live, and there are definitely negatives to renting as well.  But it is very important that we all understand what is being done to us.

    And I haven’t even discussed one of the most insidious forms of debt yet.

    Have you noticed that most doctors and most hospitals will never tell you how much something is going to cost in advance?

    They get us when we are at our most vulnerable.  When there is something wrong with us physically, we are often desperate to get help.  So we don’t ask too many questions and we just go along with whatever they say.

    But then later we get the bill and we are often completely shocked by what they have charged us.

    If you are completely unethical, it is a great business model.  People that are extremely desperate and needy come to you and you don’t even have to tell them how much your services are going to cost.  And then once they leave, you send them an absolutely outrageous bill for whatever you feel like charging.

    Frankly, I don’t know how a lot of people working in the medical field live with themselves.  In their extreme greed, they are ruining the lives of millions of ordinary American families.

    One very disturbing study found that approximately 41 percent of all working age Americans either currently have medical bill problems or are paying off medical debt.  And collection agencies seek to collect unpaid medical bills from about 30 million of us each and every year.

    Most of us will spend our entire lives paying off debt.

    That is why we are called debt slaves – our hard work makes others extremely wealthy.

  • Secret Memo Reveals US Was Aware Of Americans Killing Zimbabwe Lions; Only Concern Was Getting Caught

    Over the past 3 days, it appears that the only thing Americans can talk about, whether around the watercooler, in the office or during prime time TV, is the tragic death of Cecil the Zimbabwe lion, and his “monster” killer, Minnesota dentist Walter Palmer. The reality, of course, is that despite engaging in the rather anachronistic pursuit of self-gratification through shooting at animal prey, in this case a bow and arrow, in a day and age of online apps and cyberspace, Palmer, a self-professed avid big-game hunter, did nothing illegal in his opinion having relied on local guides and was said to believe the hunt was legal.

    “I have not been contacted by authorities in Zimbabwe or in the U.S. about this situation, but will assist them in any inquiries they may have,” Palmer said but by then the witch hunt was on: not only were crowds of people stalking out his office but investigators have knocked on the front door of Palmer’s house, stopped by his dental office, called his telephone numbers and filled his inbox with e-mails. There is even a petition, with over 155,000 signatures, demanding Palmer be extradited to Zimbabwe where he would “face justice” alongside his two guides who are already said to be in custody.

    Not surprisingly, Palmer has prudently disappeared until tempers cool off and/or an arrest warrant is issued for his arrest.

    In the grand scheme of things, this is yet another grand, and convenient distraction du jour for the US public to rally around with a cry of fake (or in some TV talk show hosts, almost real) indignation while preaching moral superiority (killing one lion is apocryphal but killing millions of hamburgers and pork burritos every year is, well, meh) while the US economy continues to disintegrate under everyone’s feet.

    However, where this particular episode rapidly crossed the surreal threshold, is when news hit overnight that Obama administration officials are offering to help the Zimbabwean government investigate the high-profile killing.

    Yes, the president would show the American people just what a humanitarian he is, and do what he does best: dispense “fairness” and “justice.”

    Only… this being the US government, what really happened is another grotesque instance of unparalleled hypocrisy promptly backfiring.

    Presenting “QUIET DIPLOMACY” SUSPENDS ELEPHANT HUNTING IN NATIONAL PARKS – FOR NOW” – a Confidential memo sent on October 23, 2008 by the current US ambassador to Zimbabwe, James D. Mcgee, to the CIA, and released by Wikileaks.

    In it we read that, as usual, there is none more culpable of the recent event in Zimbabwe, which incidentally is and has been quite permitted by the local authorities as long as everyone’s palms are appropriately greased, than the US government, which years ago was fully aware that Americans were killing lions in Hwange National Park, but that its concern was not with the dead animals – no matter how hard the administration tries to feign empathy for the beheaded lion here and now – but with Americans getting caught in the act. As has just happened.

    But first, here is some background on how legal local poaching, whether it is for lions or elephants is. From the formerly classified memo:

    Meeting with poloff and conoff on October 10, Bown said that it was unclear “how legal” these hunting operations were, since it appeared the hunters had permits issued by Parks to kill the animals, despite the provision in the National Parks Act that prohibits commercial hunting.  The photographic safari operators indicated Parks had given several local and South African hunting companies concessions to kill elephants in Hwange if they met specific criteria: (1) total ivory weight less than 30 pounds, (2) young/adolescent males, (3) isolated areas (i.e. away from watering holes and main roads), and (4) controlled by Parks staff.  Parks has never publicly stated these criteria or explained the operation.  Frustrated photographic safari operators weighed and photographed many of the tusks at the Park’s ivory store in Hwange and found that many were over 30 pounds each.  In one case, an operator claimed an American hunter killed an elephant with tusks weighing over 120 pounds.  Photos also show some elephants were killed very near main roads and close to watering holes.  In at least one reported case, a vehicle drove around the animal before the hunter killed it at close range.  In emails to Mtsambiwa and Nhema, safari operators decried the unethical hunting both in terms of the detrimental ecological impact and the negative impact it would have on their own businesses.

     

    … the safari operators also  reported that some of the hunting guides had been issued hundreds of hunting permits for elephants in Hwange and other national parks in mid-to-late August.  Normally, hunting permits are offered in an auction to all professional hunting guides.  In contrast, Bown said these recent permits were issued through a non-transparent process to professional hunters of ill-repute, including some South African operators.

    So both the Zimbabwe ambassador and the CIA knew Zimbabwe was permitting and flaunting its own “regulations” when it comes to poaching if the fee is good enough. And, since American citizens were involved, the fee most certainly was:

    Despite Mtsambiwa’s assurances at our August meeting that Parks was only planning a management/training exercise for Parks staff, in early September poloff received an email  from an American citizen in California, asking about an advertisement for an elephant hunt in Zimbabwe to hunt five elephants over ten days for USD 6,000 as part of a culling exercise.  The meat from the animals would go to local villagers and hunters were expected to help with on-site butchering of the animals.  This price is significantly less than most elephant hunting packages.  Normally, elephant hunting excursions in Zimbabwe cost about USD 1,000 per day, plus a fee for each animal killed.  The hunting operation was to be led by Zimbabwean Headman Sibanda and was arranged by Thomas Powers Internationale, based in Colorado.

    Where was the disgust then? Oh yes, elephants are not cute animals about which Broadway musicals are written.

    However, there is a problem, because reading on we find that not only did the government know about everything that was going on involving US poachers, quite legal and paying very well, involving the hunting of elephants, but also, drumroll, lions.

    Bown, Save Valley Conservancy Director Clive Stockil and other conservationists opined in conversations with us that hunting permits were issued by Parks under intense pressure from its politicized board and ZANU-PF.  Bown believed this frantic last grab at hunting revenue was one more aspect of ZANU-PF insiders’ efforts to strip assets and fill their pockets before losing power to the MDC.  She said that the same small group of hunters involved in this operation had been consistently involved in unethical and marginally legal hunting.  Bown had no evidence that they were involved specifically with sanctioned individuals within the Mugabe regime, but believed such connections were likely.  According to Bown, the Zimbabwean professional hunters involved include Guy Whitall, Tim Schultz of African Dream Safaris, Headman Sibanda and Wayne Grant of Nyala Safaris, Evans Makanza, Alan Shearing, Buzz Charlton and James Macullam of Charlton Macullum Safaris, A.J. Van Heerden of Shashe Safaris, Barry Van Heerden of Big Game Safaris, and Lawrence Boha.  (COMMENT: Numerous conservationists have suggested the Van Heerden brothers are involved in suspicious hunting and land deals with the Director of the Central Intelligence Organization, Happyton Bonyongwe, although none have provided proof of the relationship.  END COMMENT.)  

     

    Additionally, one safari operator accused an American, by name, of killing a lion illegally and then smuggling its hide out through South Africa.  Given the rampant smuggling of other animal products across Zimbabwe’s southern border (reftel), this is not unlikely.  As reported in reftel, American hunting dollars are vital to Zimbabwe’s conservation efforts, but there are also serious risks that Americans could be implicated in smuggling and poaching operations.

    And there you have it: while blaming Walter Palmer is easy, the truth is that at its core, the death of Cecil, as well as countless other lions, elephants, rhinos and other animals, is solely as a result of the Zimbabwe government’s corruption. A corruption, which the US government knew all about, and which also knew that US hunters were killing not only elephants but lions.

    The government’s only real concern: the “serious risks that Americans could be implicated in smuggling and poaching operations.”

    And now that an American has been implicated in poaching, what does the government do? It generously offers to “help the Zimbabwe government investigate the killing” of Cecil. Even though both Zimbabwe and the US government have tacitly approval of just this kind of behavior for years. Until something went wrong.

    Come to think of it, that’s precisely what happens in the US capital markets too: as long as stocks go up, nobody cares about criminal behavior and bubble blowing (just don’t get caught spoofing an ES sell orders). But once the real selling begins…

  • Chinese Stocks Extend Yesterday's Plunge Despite Regulators "Asking" Insurers To Stop "Net Sales"

    Following last night's afternoon session plungefest (with ChiNext's biggest drop in a month), as it appeared the government experimented with 'free' markets briefly, regulators have "asked" insurance companies to be "net sellers" of stocks going forward. With margin debt dropping for the 4th day in a row (to fresh 4-month lows), Markit noted that accusations of foreigners short selling shares is “overblown” by Chinese market regulators and not the cause of a recent rout in the stock market, according to the SCMP. The requests and threats appear to not be working as CSI-300 futures open down 0.7%.

    As a reminder, this is how things ended last night…

     

    *  *  *

    And tonight we are seeing losses extend…

    • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1% TO 3,777.15
    • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.4% TO 3,655.67

     

    *  *  *

    More measures…

    China Insurance Regulatory Commission asked insurers to try their best to avoid net sales of equities in near future, Shanghai Securities News reports, citing an unidentified person from an insurer.

    And refutations to China's claims that foreign sellers were "waging economic war"

    Accusations of foreigners short selling shares is “overblown” by Chinese market regulators and not the cause of a recent rout in the stock market, South China Morning Post cites financial data co. Markit analyst Relte Stephen Schutte as saying.

    • Official data shows minimal short selling of individual shares with shorting of domestic ETFs at only 1.2% of total domestic ETFs under management, Schutte is cited as saying

    *  *  *

    On a more sombre note, the first major casualty of the Chinese stock market disaster has happened as Caixin reports well-known fund manager, Liu Qiang, a 36-year-old fund manager at Ruilin Jiachi,  jumped to his death from a high-rise in downtown Beijing, angry the government intervened in the stock market rout, people who knew him say…

    Several people close to Liu said he suffered from depression and returned to work in April after spending three years in the southwestern province of Yunnan where he was seeking treatment for depression. "He has had a very tough time in recent years," one of Liu's friends said.

     

     

    Some of Liu's friends said he had been very frustrated by the government's efforts to support the bourse amid recent turmoil because he believed this upset market order. He thought that "the rules and order of the market had been broken … and was desperate, feeling that he was at his wit's end," one of his friends said.

     

    Publicly available data show that the fund he managed, which invests in stocks and futures, had lost about 18 percent of its value this year and would be liquidated if losses exceeded 20 percent. But a person close to Liu said most of the fund's investors were his friends who agreed with his belief in long-term investment. They were not eager to liquidate the fund, he said.

     

    In a blog dated July 7, Liu wrote: "The stock market disaster has turned many of my investment principles upside down … and made me doubt many times whether I'm still suitable for the market."

    *  *  *

     

     

  • "Greed Is King" – What We Learned Talking To Chinese Stock Investors

    Authored by J.J. Zhang, originally posted at MarketWatch.com,

    Though Greece has dominated the news recently, its overall market impact has been surprisingly muted. Instead, the real market mover and shaker for the last couple of months has been China.

    By now, many are familiar with the facts and numbers of the Shanghai market situation. But recent events have also shed a light on a less well known dynamic — the individual behavioral habits and viewpoints of Chinese market participants.

    During a short stay in Shanghai a few weeks ago on unrelated business, I had an opportunity to witness the ground zero of the China market frenzy at its peak and its nascent plunge. Chinese retail investors make up 85% of the market, a far cry from the U.S. where retail investors own less than 30% of equities and make up less than 2% of NYSE trading volume for listed firms in 2009.

    Combined with the highest trading frequencies in the world and one of the lowest educational levels, describing China’s market as immature is an understatement. As many readers know, mental irrationality is often cited as the No. 1 cause of poor returns.

    Using the opportunity to interview some China market participants, both in Shanghai and elsewhere, here are a few observations of how they think and act — and the potential lessons that await.

    Bubbles can be surprisingly predictable

    During the housing bubble run-up and subsequent recriminations, a common excuse was the impossibility of predicting and diagnosing bubbles. However, bubbles can often be characterized by several irrational behaviors and metrics and the recent China bubble is no exception. Almost everyone in the financial industry knew the Shanghai market was in a bubble. Interestingly, from my interviews with everyday participants, they knew it as well, many agreed that the market was crazy and was likely in a bubble. It was not a question of if, but when, the bubble would pop.

    Chasing bubbles in China isn’t new

    An interesting counterpoint to the bubble awareness is that, frankly, Chinese participants are used to chasing bubbles. Whether a cultural phenomenon or something else, over the last decade there’s been a continual hopping of investment from one big money-making scheme to the next. Whether it was real estate a decade ago, gold half a decade ago or wealth-management products a few years ago, there’s a continual cycle of money rotation into the “hot” investment, with each failing eventually in some way. It’s simply stock’s turn. As one interviewee said: “The Chinese market is not for investing, it’s for gambling.”

    Early birds get the worms

    This goes completely against most prudent and established norms. While the standard advice is to avoid “hot” bubbly assets, in China the experience has actually been to jump in early and fully instead. Many of the bubbles or “hot” investments mentioned earlier have in truth made many of the people I’ve talked to a lot of money. China real estate today is a poor investment but those who got in early doubled or tripled their investments. Similarly with wealth-management products, more people have benefited from their high-interest-rate payouts than have suffered. While the Shanghai market has dropped 20%-30% from its peak a few weeks ago, it still represents a 100% gain from a year ago and a 30% gain over the last 6 months. Those participants who jumped in early are still more than happy.

    Greed is king

    Despite recognizing it’s a bubble, almost everyone was still all-in on stocks. Why? Quite simply — greed with a dash of jealously. Seeing constant market gains in the news along with daily sharing and boasting from friends and family getting rich is simply too tempting and thus caution was thrown to the winds. Subsequently, this fueled a massive amount of equity exposure followed by leveraging and margin borrowing to go even more all-in.

    But fear is the emperor

    The only emotion more powerful than greed is fear. Almost everyone I talked to was still all-in on stocks but everyone had a foot halfway out the door, ready to bolt at the first sign of trouble. While not uniquely a China problem — market drops are almost always more violent than the initial rise — in China, it’s several times more volatile. Look no further than solar-panel firm Hanergy’s Hong Kong listed stock, which lost 47% in one hour, or the numerous days the Shanghai market rose or dropped by 5% or more.

    Moral hazard in government rescues is real

    During the most chaotic moments of the financial crisis, bailout discussions always raised the specter of moral hazard. While it didn’t play a major role in the subsequent U.S. recovery, moral hazard in China is fast becoming a deep problem. Many market participants I talked to said they were confident in the Chinese government to step in eventually to maintain order and prevent mass panic. They know the government’s legitimacy relies heavily on economic progress and fear any contraction. So far, they’ve been right — the government has announced a never-ending stream of interventions over the last few weeks to stem the selloff and panic, with the latest being the implementation of a half-trillion-yuan fund to purchase stock and shore up the market. Of course, the question is: When does a problem become too big for the government to control?

    Maturity takes time

    Perhaps the last lesson I took away from my Shanghai experience: Maturity takes time. Just as kids grow from naïve adolescence to rowdy teenage years to eventual maturity, so will China and its market participants. While stocks have been a part of U.S. culture and wealth creation for several generations now, in China this is really the first generation where participants both have the money and the ability to invest in stocks.

    Perhaps in another generation, after several years of painful lessons and surprising opportunities, it’ll look completely different.

    *  *  *

    [ZH: Just like US investors have learned…

    ]

  • Donald Trump's Soaring Popularity "Is The Country's Collective Middle Finger To Washington"

    Submitted by Paul Brodsky, via Macro-Allocation.com,

    Donald Trump’s ascendance as the early GOP front-runner is symbolic of a greater global trend: growing pushback against institutional political and economic power.

    To many centrist politicians and mainstream political observers, Donald Trump is a boastful, insensitive egomaniac spouting populist rhetoric. Whether such a characterization is true is not worthy of debate, which may explain why the rantings of enraged career political pundits have no impact on Mr. Trump’s popularity among Republican voters in Iowa, New Hampshire, and across America. It seems no amount of ink or air time spent tarring and feathering Trump’s reputation sticks; in fact it seems to help Teflon Don in the polls, where he leads a crowded field of career politicians.

    Donald Trump is a threat not only to the nattering nabobs in the press corps and the Republican Party. His day in the sun may be symbolic of a broader dynamic: the declining power held by historically powerful institutions. Ask yourself if Trump’s campaign is making a mockery of the political process or exposing the mockery that the political process has become. A not-insignificant percentage of Americans away from the coasts, are looking past his utter lack of decorum and political savvy to hitch their wagons to his outrage.

    Let’s forget, for a moment, about our personal politics, preferred policies, and individual candidates we may be excited to elect. Are we supposed to forget that the Supreme Court, through its 2010 decision that corporate donors should be treated legally as individual donors under the First Amendment, effectively subordinated individual voters into mere supporting targets to which political aspirants have to appeal? Most importantly, are we supposed to nod our bobble heads in agreement with the heads of the national parties to choose a candidate they find acceptable based on which will appeal to the best funded special interests?

    Is anyone really polling in favor of Donald Trump or is he conveniently filling the role of the not-so-quiet counterfactual?

    I recently texted one of the premier Sunday morning political pundits with these thoughts and he texted back:

    “That’s what I am arguing internally. This is the country’s collective middle finger to Washington.”

    As an investment strategist and consultant observing our current global economy and markets, it is difficult not to extrapolate this sense of helplessness against powerful institutions. Tell us again why six years of central bank financial repression is serving the interests of the greater factors-of-production? As investors, should we care about widening wealth and income gaps that are clearly part-and-parcel with central bank policies devoted to maintaining asset values (see here and here)?

    Should we expect free, democratic markets that create, form and price capital efficiently – not that treat financial assets as balance sheet collateral for credit?

    Who can voters elect to again have an economy that puts producers over rentiers, or to have markets that price value? I’m sure it’s not Donald Trump (a rentier’s rentier!), but I’m also sure it’s not the heads of the Democrat and Republican Parties. Who can investors elect to keep the rentier thing going? Is that really what investors should want? It’s complicated.

    Read more here…

  • Why Do So Many Working Age Americans Choose Not To Enter The Workforce?

    Via ConvergEx's Nick Colas,

    Today we look at a unique dataset – Gallup’s annual poll of job satisfaction – to see what it can tell us about secular trends in employment, consumer confidence and spending.  This annual survey of +1,000 people active in the U.S. workforce goes back to the late 1980s, so it is a useful lens with which to consider issues like labor force participation rates that have shifted unexpectedly over the period.

     

    Most surprising news first: Americans express a broad satisfaction with their jobs, regardless of economic conditions. The very worst reading since 1989 was in 2011 when “Only” 83% of respondents said they were either “Somewhat” or “completely” satisfied with their jobs.  The peak was in 2007 at 94%, and last year (August 2014) it was 89%.

     

    The key takeaway is that declining labor force participation rates since the year 2000 (67% then, 62.6% now) aren’t because of any systemic disaffection with the American workplace. 

     

    The other notable takeaway: workers are (strangely, we must say) satisfied with what they earn. Those expressing “Complete” satisfaction with their paystub hit a high last year (31%) not seen since 2010 and 2006…  Wage inflation?  What for?

    You could call it the “Mystery of the Missing Worker” – why do so many people of working age chose not to enter the workforce?  Here are the numbers, as of the most recent Employment Situation report:

    • 250 million: the total number of people of working age in the United States. 
    • 149 million: the total number of people in that population that have a job.
    • 8 million: the number of people who want a job but do not have one.
    • 93 million: the number of people who don’t work, and don’t want work.

    To put some context around that last number, it is 30% of the entire U.S. population.  This is the same as the current population of the entire West Coast (CA, OR, and WA) AND New York State AND Florida.  Plus another 10 million people.  Economists measure this with the Labor Force Participation rate, and it has been in decline since February 2000, when it peaked at 67.3%.  It is now 62.6% and last month was a new low back to the 1970s. People of working age increasingly do not consider themselves part of the labor force.  Most economists chalk this up to the demographics of an aging workforce even though virtually all the literature on the topic in the early 2000 predicted participation would continue to increase. 

    We recently took a long look at a dataset that doesn’t often see the light of day but does provide some useful takes on how workers view their jobs.  It comes from the Gallup organization and is an annual survey of +1,000 employees since 1989 on their perceptions of job satisfaction in all its forms, from health and safety concerns to compensation to job security.  The complete data set can be found here, and the charts below highight the trends…

    But here are the important takeaways.

    #1: Americans are consistently satisfied with their jobs, although the readings vary slightly through a given economic cycle. The highest ever combined responses of “Completely Satisfied” and “Satisfied” was in 2007 at 94%. The worst since the start of the survey in the late 1980s was 2011, at 82%.  Last year – the results come out every August – the combined reading was 58% “Completely” and 31% “Somewhat” Satisfied, for a total of 89%.

     

    #2: They also feel relatively secure in their positions.  Last year some 88% reported being “Completely” (58%) or “Somewhat” (31%) satisfied by the security offered by their jobs and, implicitly, their employers.  The worst readings were in 2009 at 80% total and in the early 1990s at 79%.

     

    #3: Workers also report high levels of satisfaction with what they receive in terms of compensation.  Back in 1991 – the worst year in terms of general reported satisfaction for this question – “only” 66% of respondents were completely or somewhat satisfied with their pay stubs.  Even during the Financial Crisis and its aftermath that number troughed at 70% in 2011. Last year a total of 75% of respondents were satisfied with what they received for compensation.

     

    #4: Workers who respond to the Gallup survey last year have the biggest gripes about health insurance benefits (only 61% satisfied), retirement planning (only 63% satisfied) and chances for promotion (68%).

     

    #5: Conversely, workers reported exceptionally high levels of satisfaction in their relations with co-workers (95% completely or somewhat satisfied), physical safety (93%) and the flexibility of their hours (90%).

    Frankly, when we started to look at these numbers we expected to see a mirror of the volatility common in consumer confidence surveys.  A few points here:

    • Consumer confidence as measured by the Conference Board peaked in 1966/67 and again in the late 1990s at readings of +140. 
    • Troughs occurred in the early 1970s, late 1970s/early 1980s and post September 11 at readings of 50 or so. 
    • The Financial Crisis took us down to below 30 in 2008 and readings struggled to get past 70 until 2013. 

    We therefore thought that Americans would feel broadly the same about their work situations as they did the economy as a whole – that things are still pretty bad and the past was much better than the present.  This turned out not to be the case.  Yes, they express some marginal disaffection when times are hard, but the trough reading during and after the Financial Crisis was 83% satisfied with their jobs.  Hardly a pitchforks and barricades kind of number.  

    In short, we can’t blame lower participation rates on the nature of work – broadly speaking – offered in the American economy.  In Internet parlance, the American workplace gets 4 ½ stars and a lot of recommendations.  Perhaps, in the words of Yogi Berra: “No one goes to that restaurant any more.  It’s too crowded”.

    *  *  *

    Of course, when work is punished in the Entitlement State Americans live in… what else should we expect but 30% of the employable to sit at home? As we previously explained,

    This isthe painful reality in America: for increasingly more it is now more lucrative – in the form of actual disposable income – to sit, do nothing, and collect various welfare entitlements, than to work.

     

    This is graphically, and very painfully confirmed, in the below chart from Gary Alexander, Secretary of Public Welfare, Commonwealth of Pennsylvania (a state best known for its broke capital Harrisburg). As quantitied, and explained by Alexander, "the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

     

     

    We realize that this is a painful topic in a country in which the issue of welfare benefits, and cutting (or not) the spending side of the fiscal cliff, have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for most Americans who find themselves in a comparable situation: either being on the left side of minimum US wage, and relying on benefits, or move to the right side at far greater personal investment of work, and energy, and… have the same disposable income at the end of the day.

  • China Says US "Militarization" Of South China Sea Shows Washington "Wants Nothing Better Than Chaos"

    If you follow geopolitics you’re well aware that China has become a magnet for maritime conflict and controversy over the past six or so months. 

    It all started earlier this year when satellite images showing the construction of what appeared to be a 10,000 foot runway (long enough to accommodate military aircraft) atop a newly constructed island in the contested waters of the South China Sea touched off an international firestorm as the US and its allies accused Beijing of seeking to redraw maritime boundaries and expand its naval capabilities at the expense of regional security.

    China vigorously denied the accusations, pointing to the fact that other nations had undertaken similar land reclamation efforts in the Spratlys. 

    The situation escalated meaningfully when the PLA threatened a US spy plane, prompting Washington to remind Beijing that artillery stationed on “sand castles” would certainly not be enough to deter the US Navy from navigating wherever it chooses whenever it chooses to do so.

    The “conflict” subsided briefly after a propaganda campaign by Beijing put a humorous spin on the entire ordeal, but China found itself right back in the spotlight last week after Japan essentially accused it of stealing natural gas by positioning rigs too close to a demarcation line that separates the two countries’ exclusive economic zones. 

    For the latest on China’s seaborne exploits we go to Reuters, who notes that Washington and Beijing are back at each other’s throats over the Spratly issue, only this time it’s China which is accusing the US of militarizing the region. Here’s more:

    China’s Defence Ministry on Thursday accused the United States of “militarizing” the South China Sea by staging patrols and joint military drills there, ramping up the rhetoric ahead of a key regional security meeting in Malaysia next week.

     

    China has been angered by U.S. navy and air force forays through waters it claims as its own, especially this month, when U.S. Navy Admiral Scott Swift said he joined a routine surveillance flight.

     

    The United States has also stepped up military contacts, including drills, with regional allies such as the Philippines, which also has claims in the South China Sea.

     

    The United States was hyping up the “China threat” and attempting to sow discord between China and other claimant countries, Defence Ministry spokesman Yang Yujun told a news briefing.

     

    “China is extremely concerned at the United States’ pushing of the militarization of the South China Sea region,” he said.

     

    “What they are doing can’t help but make people wonder whether they want nothing better than chaos.”

    Well yes, one “can’t help but wonder” that about a lot of what Washington does foreign policy wise (especially in the Middle East), although we suspect that this particular issue can be chalked up to a combination of curiosity and the irresistible temptation on the part of the Pentagon to prove to China that no matter what Beijing says, the US will continue to fly, sail, and conduct war games in the region if for no other reason than to spite Xi Jinping. 

    But the atmosphere isn’t completely hostile because as Reuters also notes, China is fine with “certain U.S. officials taking civilian flights over the South China Sea to enjoy its beauty.”

  • Least Transparent Ever: IRS Used "Wholly Separate" Message System To Hide Communications

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    Barack Obama promised to have the “most transparent administration ever,” but as with pretty much every other promise he’s made over the years, the exact opposite is what has occurred.

    From Hillary Clinton using her own private email server while Secretary of State, to the latest revelations that the IRS (which intentionally targeted American citizens based on their political views), used a “wholly separate” instant messaging system in order to conceal their internal communications. Of course, not only is there no transparency, but as is the case with all shady and undemocratic “elite” behavior, there is no accountability.

    In the latest bit of information to emerge, we learn from Americans for Tax Reform that:

    The IRS used a “wholly separate” instant messaging system that automatically deleted office communications, according to documentation released by the House Oversight Committee on Monday. The system appears to have been purposefully used by agency officials responsible for the targeting of conservative non-profits, in order to evade public scrutiny.

     

    The system, known as “Office Communication Server” or OCS was used by IRS officials, including many in the Exempt Organizations (EO) Unit, which was headed by Lois Lerner.

     

    As the Oversight Committee report states, the instant messaging system did not archive any communications, so it is not possible to know what employees of the EO unit discussed on it.

    However, in an email uncovered by the Committee Lerner warns her colleagues about evading Congressional oversight:

    “I was cautioning folks about email and how we have had several occasions where Congress has asked for emails and there has been an electronic search for responsive emails – so we need to be cautious about what we say in emails.”

     

    Lerner then asks whether OCS is automatically archived. When informed it was not, Lerner responded “Perfect.”

     

    While it is possible to set the instant messaging system to automatically archive messages, the IRS chose not to do so, according to one employee interviewed by the Committee.

    This is not what freedom looks like.

  • This Is The 714 Sq. Foot Hovel In LA That Can Be Yours For Just $1.1 Million

    Submittted by Dr. Housing Bubble

    Venice is an interesting place.  I’ve always enjoyed the unique atmosphere and it can be argued that Venice was one of the leading hipster enclaves in Southern California.  It was cool before it was cool to be cool.  Similar to San Francisco, old homes are being sold for ridiculous amounts of money.  We recently featured a home in Venice that had 0 beds going for over $1 million.  That is how crazy things are getting in SoCal.  But there is definitely more of a feeling of “get out at the top” versus “I’m buying to ride some more appreciation” sentiment.  Venice has gotten wildly expensive.  Even just a few years ago visiting friends in Venice you were entering questionable neighborhoods where it didn’t seem safe.  But hey, who needs safety when you can live the life of luxury in a crap shack?  Is it any wonder why there is a steady migration out of California by the middle class?  Let us take a look at a home in Venice and get your thoughts on it.

    Venice in California

    Perception is everything when it comes to real estate.  Beverly Hills was able to garner fame and notoriety because at least the homes looked nice.  At least you were getting a home that looked like a million dollars.  Right now the big marketing push is “up and coming” neighborhoods.  Get in before you are priced out forever and are destined to a life of eating out of food trucks.

    The home we are going to look at today was built back in 1904.  You read that correctly.  1904, as in 111 years ago.  Let us take a look at this place:

     

    1130 Electric Ave, Venice, CA 90291

    1 bed 1.5 baths 714 sqft

    I love places that have more restrooms/bathrooms than actual bedrooms.  This place has 1 bedroom and is listed at 714 square feet.  I love the first few lines in the ad:

    “Old School Venice living at its finest! Don”t miss the opportunity to own one of the most unique properties off Abbot Kinney! This bright happy bungalow is loaded with charm and character in one of the most desirable locations around.”

    This is definitely old school.  Take a look inside:

     

    This place screams dual income hipster household.  I love that the place is pitched as old school but the price is definitely new school:

    The last recorded sales price was $450,000 back in 2010.  It was then listed for $799,000 back in 2011 but was removed shortly after.  What justified a $349,000 increase in one year?  Apparently nothing.  But then in 2014 it was listed for $1,500,000!  Bwahahaha!  They bought for $450,000 in 2010 and were asking for $1 million more just because.  Of course that didn’t work.  They had to drop it down to $1,250,000 back in November of 2014.  Then down to $1,165,000.  And now it is listed at $1,100,000.  This is still $650,000 more than what they paid for in 2010.  So what justifies a 144% increase in five years?

    This is full on mania and with inventory building up, people are starting to crunch the numbers more carefully.  I’m curious, how does someone justify a 144% increase on this place?  As we all know, real estate is essentially a game of musical chairs, especially in boom and bust California.  Someone is trying to cash in on a lottery ticket here for Venice.

    No mania here folks.  This is all reasonable and makes complete sense.

  • Does This Look Like An Accidental Relationship To You?

    Submitted by Ben Hunt via Salient Partners Epsilon Theory blog,

    I figure not one Epsilon Theory reader in a thousand has seen “Suddenly, Last Summer”, but let me tell you … it’s got everything. Katherine Hepburn in a phenomenal performance as bizarro Aunt Vi. Elizabeth Taylor cavorting in the surf. Montgomery Clift. Lobotomies. Pedophilia. Cannibalism. Honestly, it’s kind of what you would expect if Gore Vidal took a Tennessee Williams script and just went gonzo with it. Which, in fact, is exactly what happened.
     
    The subtext, as with so much of Southern Gothic in general and Tennessee Williams in particular, is mendacity and its crushing psychological damage.
    I found this quote, where Katherine Hepburn is trying to convince Montgomery Clift to lobotomize Elizabeth Taylor so that she’d forget her former life and be less fearful and anxious … less volatile, in other words … to be an eerily apt description of what Central Bankers have tried to do with markets.
     
    We endured an event last summer that, just as in the movie, ultimately brings all the mendacity out of the shadows and into the open. When Yellen declared last summer that the Fed had now firmly embraced a tightening bias, followed by the rest of the world declaring that they were doubling down on extraordinary monetary policy easing, the entire world was set on a path where all of the political fragmentation – all of the deep fissures within and between countries – would be inexorably revealed. Suddenly last summer, the mask of global monetary policy cooperation was ripped away, and the investment world will never be the same.
     
    Here are two Bloomberg charts that show what I mean. On the top is a 5-year chart of DXY – the trade-weighted dollar index. On the bottom is a 5-year chart of WTI crude oil spot prices. Does this look like an accidental relationship to you? Can we just stop with all the hand-wringing about how there’s suddenly too much oil in the world, or how the Saudis are trying to crush US shale production, or any of the other spurious supply-and-demand “explanations” for why oil prices have collapsed? Seriously. Can we just stop?
     
    Monetary policy divergence manifests itself first in currencies, because currencies aren’t an asset class at all, but a political construction that represents and symbolizes monetary policy. Then the divergence manifests itself in those asset classes, like commodities, that have no internal dynamics or cash flows and are thus only slightly removed in their construction and meaning from however they’re priced in this currency or that. From there the divergence spreads like a cancer (or like a cure for cancer, depending on your perspective) into commodity-sensitive real-world companies and national economies. Eventually – and this is the Big Point – the divergence spreads into everything, everywhere. Some things will go up, and some things will go down. But the days of ALL financial assets inflating in lock-step … the days of everything, everywhere going up together … that’s over.
     
    For a lot of active investment managers, this is great news.
     
    For a lot of politicians and central bankers – particularly the weaker ones, either in resources or in willpower (yes, I’m looking at you, Alexis Tsipras) – this is terrible news.
     
    For investors? Well, it’s a mixed bag. Certainly it’s a more difficult bag, where so many of the learned behaviors of the past five years that worked so well in an environment of monetary policy coordination will fail miserably in an environment of monetary policy competition. But it beats getting a lobotomy. I think. We’ll see.

  • Now It's Personal: Koch Brothers "Freeze Out" Donald Trump

    "He's not going away," warns one Republican committee member, adding "there are people who think his candidacy is a flash in the pan or a flash in the moment, but I think that underestimates his appeal." As Reuters reports, Trump has surged since suffering a slight downtick in the wake of the McCain furor, rocketing to 24.9% on Tuesday (compared to his closest rival, former Florida governor Jeb Bush, who trails at 12%). With everyone asking 'what can derail this?', perhaps, there is something. As Politico reports, the massively influential Koch brothers are freezing out Donald Trump from their influential political operation – denying him access to their state-of-the-art data and refusing to let him speak to their gatherings of grass-roots activists or major donors.

     

    As Reuters reports,

     Predictions of his demise were apparently premature. Instead, Trump is gaining momentum ahead of next week's first Republican debate, a new Reuters/Ipsos opinion poll shows.

     

    The poll shows Trump with his greatest support yet nationally, as nearly a quarter of Republicans surveyed said he would be their choice as the party's presidential nominee in 2016. He has opened up a double-digit lead over his closest rival, former Florida governor Jeb Bush, who trails at 12 percent.

     

    "I’m proud to be in first place by such a wide margin in another national poll," Trump said in a statement to Reuters.

     

    Trump has surged since suffering a slight downtick in the wake of the McCain furor. The five-day rolling online poll had the real-estate mogul and reality TV star at 15 percent among Republicans on Friday before rocketing to 24.9 percent on Tuesday.

     

    …

     

    But perhaps of greater concern to establishment Republicans, Reuters/Ipsos polling also shows that in a three-way race with Trump running as an independent in the general election, Trump would drain support from the Republican nominee and allow the Democrat, likely Hillary Clinton, to skate to victory.

     

    Trump has refused to rule out a possible independent run. In a matchup with Clinton and Bush, he would essentially tie Bush at about 23 percent among likely voters, with Clinton winning the White House with 37 percent of the vote. (About 15 percent of those polled said they were undecided or would not vote.)

     

    It is that scenario that should keep party strategists up at night.

    Which prehaps explains, as Politico reports, The Koch brothers decision to freeze-out The Donald from their operations…

    Despite a long and cordial relationship between the real estate showman and David Koch, as well as a raft of former Koch operatives who are now running Trump’s presidential campaign, the Koch political operation appears to have concluded that Trump is the wrong standard-bearer for the GOP. And the network of Koch-backed policy and political outfits is using behind-the-scenes influence to challenge Trump more forcefully than the Republican Party establishment — by limiting his access to the support and data that would help him translate his lead in the polls into a sustainable White House campaign.

     

    The Koch operation has spurned entreaties from the Trump campaign to purchase state-of-the-art data and analytics services from a Koch-backed political tech firm called i360, and also turned down a request to allow Trump to speak at an annual grass-roots summit next month in Columbus, Ohio, sponsored by the Koch-backed group Americans for Prosperity, POLITICO has learned.

     

    …

     

    Continued stiff-arming by the powerful Koch network could limit Trump’s ability to build a professional campaign operation to mobilize supporters ahead of primaries and caucuses.

     

    “The good news is that Donald Trump doesn’t need the Koch brothers, and he can do this perfectly without their assistance,” said Josh Youssef, who’s chairing Trump’s campaign in Belknap County, New Hampshire. Of the Kochs, Youssef said: “Their motivations are clearly not to break the mold of political insider-ship. Their goal is to keep the wheel spinning. Trump’s bad for business for them.”

     

    Still, the Koch network’s rejections of Trump are telling because of the relationships between Trump and his aides, and the Kochs and their operation.

    *  *  *

    We conclude with the two opposing views from within the Republican party…

    "The activists are doubly angry," Geer said. "He's capturing that anger. They're looking for a voice, and he happens to be here at the right time.”

    and

    "The curtain has not been pulled back yet," Feehery said. "In time, people will see Trump is not who they want to have as a nominee. But that’s going to take awhile."

  • "Why Commodities Defaults Could Spread", UBS Explains

    UBS has been keen to warn investors about just how perilous the situation in high yield has become – which works out nicely, because we’ve been saying precisely the same thing ever since it became readily apparent that between investors’ hunt for yield and energy producers’ desire to take advantage of low rates and forgiving capital markets in order to stay solvent, the market was setting up for a spectacular implosion. 

    Lots of supply (hooray for record issuance!), a gullible retail crowd (bring on the secondaries and find me a junk bond ETF!), and a lack of liquidity in the secondary market (down with the prop traders!) have conspired to create a veritable nightmare scenario and with commodity prices (especially crude) set to remain in the doldrums for the foreseeable future, the question is not whether there will be defaults in HY energy, but rather what the fallout will be for the broader market. 

    Or, as we put it in “The Junk Bond Heat Map Has Not Been This Red In A Long Time,” at some point, investors (using other people’s money) will tire of throwing good money after bad hoping to time the bottom tick in oil just right (and if oil tumbles in the $30, that may be just that moment) at which point the commodity capitulation which we noted previously, will spread away from just commodities and junk bonds, and spread to all sectors and products, including stocks. 

    Here with more on the contagion risk from commodities defaults is UBS.

    *  *  *

    From UBS

    Credit contagion: why commodity defaults could spread

    In the wake of the commodity price swoon one of the recurring questions is will the stress in commodity markets spillover to other sectors? 

    First, regular readers will recall our HY energy default forecast of 10-15% through mid- 2016. Simply framed, the commodity related industries total 22.8% of the overall HY market index on a par-weighted basis. In our view, sectors most at-risk for defaults (defined as failure to pay, bankruptcy and distressed restructurings) total 18.2% of the index and include the oil/gas producer (10.6%), metals/mining (4.7%), and oil service/equipment (2.9%) industries. 

    How large are contagion risks to the broader HY market? And what are the transmission channels? Historically, investors in the limited contagion camp would probably point to the early 1980s. In this cycle commodity price defaults spiked with the drop in oil prices yet average default rates (IG & HY) increased only moderately amidst a favorable economic environment. In our view, however, the parallels in terms of the credit and asset price cycles are a stretch versus the current context. In the last three cycles, commodity price defaults have either led or coincided with a broader rise in corporate default rates (Figure 2). 

    But why should there be contagion from commodity sectors to other segments?

    There is a clear pattern of default correlation dependent on fluctuations in national or international economic trends. Commodity price weakness is symptomatic of weak economic growth in China and emerging markets – with possible spillover risks for commodity related sovereigns (oil exporters) and corporates.

    In addition, distress in one sector affects the perceived creditworthiness as well as profits and investment of related firms in the production process. For example, exploration and production firm defaults could negatively affect suppliers and customers which would include oil equipment and service, metals, pipeline, infrastructure, and engineering firms. Furthermore, related literature points to the significance of the supply/demand balance for distressed debt; our theory is that there is a relatively finite pool of capital for distressed assets, implying greater supply of distressed paper pushes down valuations of like assets. Unfortunately, a rise in the supply of stressed bonds typically coincides with a decline in demand for such assets. This self-reinforcing dynamic historically leads to a re-pricing in lower quality segments. 

  • Twist Those Dirty Bags!

    From the Slope of Hope: Greetings from Whole Foods Market in Palo Alto. There are times when I simply have to get away from my home office, since even I have limits as to how many hours I want to stay in the same place. I come to Whole Foods often enough to notice that a fair number of insane people come here. I divide them into (a) insane people without money and (b) insane people with money.

    The insane ones without money are the more obvious ones. They are the ones yammering to themselves, or dressed in really peculiar outfits, or otherwise looking semi-homeless. The ones with money require a more discerning eye (or, in my case, a good memory). FLASH update: at this very moment, one of group (b) sat next to me and is having a business meeting on speakerphone. Astonishing. (It’s a very typical conversation: “I’m just trying to keep my day job while trying to raise money for my pet project.”)

    Today was really annoying from a trading perspective. It started off profitable, got really profitable, and then withered into a small loss. A market that isn’t “allowed’ to go its natural direction gets to be irksome. We’ve been trapped in a fairly tight range for the entire year.

    I’m still pretty comfortable shorting this market, and on Thursday I increased my positions from 62 to 80. I’ve still got 64 other prospects, but their price isn’t where I’d want them to be to short them. There are five charts that I think speak to the good prospects for bearishness. My favorite of them I shared this morning with my (beloved) Slope Plus members, but here are the others:

    The Dow Jones Composite has painted out a beautiful series of lower highs. My fervent wish, of course, is that the recent surge we have been dealing with is just another opportunity to disappoint our bullish friends.

    0730-comp

    The S&P 100 has quite clear broken its wedge pattern:

    0730-oex

    Similarity, the Russell 2000 broke its own wedge and has a pretty decently-formed head and shoulders top in place:

    0730-rut

    And my intent is to remain stalwart in the face of bullish bluster and nonsense until we get a VIX spike to the mid-20s. I know that seems impossible, but…..that’s my benchmark.

    0730-vix

    Another guy just sat down to replace the one earlier, and he’s talking to someone about his startup. My God, this place has lost its mind. But it’s doing so with money, so people forgive the insanity.

  • Shorting The Buyback Contradiction

    Submitted by Michael Lebowitz via 720Global.com,

    “To arrive at a contradiction is to confess an error in one’s thinking; to maintain a contradiction is to abdicate one’s mind and to evict oneself from the realm of reality”  ?  Ayn Rand

    The positive short?term price action of buybacks lures unsuspecting investors on the promise that such a shell game is sustainable. Many on Wall Street support such activities as it promotes rising stock prices, ultimately bolstering their wallets. However, clear?headed reason would argue that unless one is an executive whose compensation is tied to metrics influenced by the effects of share buybacks, there are few instances that support this use of corporate resources. 

    Those who promote buybacks base their support on the fact that fewer shares outstanding, a by?product of the share repurchases, produces more earnings per share (EPS) as the numerator in the EPS equation is unchanged while the denominator is smaller. In “Corporate Buybacks; Connecting Dots to the F?word” we point out that most investors fail to consider the use of assets required to execute the buyback and the current valuation of those companies. Even more worrisome they fail to fully understand the implications of spending corporate capital to repurchase (often expensive) shares instead of investing it in the future growth of companies. The obscured shortcomings of share repurchases actually highlight a blatant contradiction. Share repurchases boost EPS, making valuations appear cheaper, however at the same time they reduce the ability of companies conducting such buybacks to grow future earnings. Recognition of this circumstance presents significant opportunities for those willing to embrace the “realm of reality”. This article uses logic and mathematical analysis to demonstrate the serious price distortions share buybacks are creating and offers specific trade recommendations to capitalize on those distortions.

    Distortion

    Buybacks distort financial ratios that many investors rely upon to evaluate stock prices. This is most evident in the widely used price to earnings ratio (P/E). This straightforward ratio simply divides the price per share of a company by its earnings per share. The resulting multiple tells an investor the price one must pay for each dollar of earnings. Investors calculating P/E can use a wide variety of historic, current or estimated future data for the denominator, earnings per share. On the other hand the numerator, price, is a known number – the current equity price of the company in question. Therefore, when using P/E as a valuation technique, the validity of the earnings per share input should be given careful consideration. 

    The reality is that stock buybacks distort EPS data and produce lower P/E ratios, thus making the shares optically cheaper. As an example, consider a company with a $20 price per share, $1 EPS and plans to buyback half of their outstanding shares. Upon completion of the buyback, the company’s P/E will drop from 20 to 10 as the price remains at $20 but EPS will double to $2, due to the reduced share count.  This P/E distortion (an investor now only needs $10 to claim $1 of earnings instead of $20 prior to the buyback) will likely lead investors to conclude that the equity is cheap. However, investors have failed to consider the use of cash to purchase the stock and the now impaired ability of the company to fund and produce future growth. 

    Analysis

    For this analysis, we considered publicly traded companies listed on U.S. stock exchanges with a market capitalization greater than $5 billion. To quantify the distortions to P/E created by share repurchases, a buyback “adjusted” P/E is calculated. This adjusted P/E ratio normalizes EPS, the denominator, by assuming NO shares were repurchased since 2011. Normalizing EPS in this way reduces the denominator and therefore increases the P/E ratio. Comparing the current P/E to the adjusted P/E gives one some sense for just how much buybacks may be distorting values. To illustrate, the adjusted P/E of the company used in the example above would be 20, instead of the post buyback P/E of 10.  The distortion of P/E highlights how buybacks may lead investors to misinterpret value and then misallocate investment capital.

    Of the over 600 companies analyzed, including 99 which did not conduct buybacks, the average adjusted P/E was 3.99 higher than the average non?adjusted P/E. Based on the trailing 12 month S&P 500 P/E of 18.25 currently present in the market, investors are unknowingly invested in an adjusted market P/E which is over 20% higher than they assumed. Buyback distortions are larger than ever and not limited to any one industry grouping. The table below shows the average distortion to P/E by industry.  

    The following tables expand the analysis by detailing the P/E distortion for individual companies. Company specific analysis was limited to the S&P 100 to ensure we highlight widely held companies that can be easily traded from the short side and have liquid option offerings.

    Within the S&P 100 six companies were selected based upon a combination of large P/E distortions and the magnitude of recent share buybacks versus total outstanding shares. 

    The Contradiction

    When investors pay an above?market P/E for shares they are frequently betting that the company will deliver higher future earnings growth than the market. The table below uses the adjusted P/E of the six companies to calculate the annualized required EPS growth. The required EPS growth is the pace at which earnings must rise in order to align the adjusted P/E with the current market price to earnings ratio without requiring a discounting of current share prices. In other words, how much does EPS have to grow to reduce the company’s P/E to equate it with a market average P/E? Revenue growth is a sound proxy for earnings growth as a company cannot grow earnings more than sales in the long run. In the table below, annualized revenue growth is also included for the last 3 and 5 years. 

    Consider the large gap between the required EPS growth rates and historical revenue growth rates. The transparency of the adjusted P/E reveals that the required EPS growth hurdle has risen to seemingly unachievable levels. Given these large differences, investors should be alarmed that these companies have limited and continue to constrain their ability to grow by using cash for buybacks. Using these resources for the purposes of buybacks makes them unavailable for projects that might generate those earnings! Those that believe buybacks are a vote of confidence by management in the company should carefully reconsider that opinion and the inherent conflicts buybacks create. 

    Trade Recommendation and Conclusion

    Aggressive investors can take advantage of this analysis by shorting the six highlighted companies on a market neutral basis and countering the short positions with long positions in companies offering fair valuations.  Conservative investors may want to sell holdings in these firms or shy away from future purchases in them. 

    P/E ratios calculated with past, present and future EPS along with many other valuation techniques currently register in the extreme upper tiers of historical readings (click here to reference “Courage” in which we illustrate the currently rich valuations). Investors in companies or indices containing a significant number of companies conducting buybacks should carefully consider the effects, distortions and long term ramifications of share buybacks.  

    The contradiction of buybacks is apparent; a company should not have a higher P/E multiple resulting from buyback actions when those actions at the same time reduce the company’s ability to achieve the additional growth required to justify the higher P/E multiple. 

    The best way to avoid the permanent impairment of capital is to never overpay for an asset.

  • "Moscow Must Burn": Ukraine's "Christian Taliban" Pledges Anti-Russian "Crusade"

    “Like the majority of Ukrainian people, I think (the new leadership) is bad … They steal a lot. When Yanukovich was stealing, that was bad. But these people are clearing up when the country is at war, so they are guilty on two counts. This is marauding.”

    Those are the words of Dmytro Korchynsky, the commander of “Saint Mary”, a volunteer battalion that, like Ukraine’s official forces, is fighting to subdue the Russian- backed separatists who control the eastern part of the country. 

    Korchynsky – who spoke to Reuters – shares his generalized disaffection for the Poroshenko government with other Ukrainians who feel that little has changed since the ouster of Viktor Yanukovich. 

    “The (Maidan) revolution was interrupted by the aggression (in the east) and the patriots left Maidan and went to the east to protect Ukraine. Only 10 percent of people in positions of power are new; the rest are all the same, pursuing the same schemes they always did”, says Serhiy Melnychuk, an MP and volunteer battalion founder who also sat down with Reuters. 

    Over the course of the last year, Ukraine has become the battleground for a proxy war between Russia and the West. It’s one of several pieces currently in play on the geopolitical chessboard, and its citizens, like those of Yemen and Syria (fellow pawn nations), have been forced to endure a humanitarian crisis while more “consequential” countries sort out how the spoils will be divided and how borders will be redrawn.

    Some Ukrainian nationalists however, have chosen to take matters into their own hands, taking up arms against the separatists and likening themselves to a “Christian Taliban” bent on ensuring that “Moscow burns.”

    Here’s more from a Reuters special report on Ukraine’s “maverick battalions”:

    From a basement billiard club in central Kiev, Dmytro Korchynsky commands a volunteer battalion helping Ukraine’s government fight rebels in the east. 

     

    A burly man with a long, Cossack-style moustache, Korchynsky has several hundred armed men at his disposal. The exact number, he said, is “classified.”

     

    In the eyes of many Ukrainians, he and other volunteer fighters are heroes for helping the weak regular army resist pro-Russian separatists. In the view of the government, however, some of the volunteers have become a problem, even a law unto themselves.

     

    Dressed in a colorful peasant-style shirt, Korchynsky told Reuters that he follows orders from the Interior Ministry, and that his battalion would stop fighting if commanded to do so. Yet he added: “We would proceed with our own methods of action independently from state structures.”

     

    Korchynsky, a former leader of an ultra-nationalist party and a devout Orthodox Christian, wants to create a Christian “Taliban” to reclaim eastern Ukraine as well as Crimea, which was annexed by Russia in 2014. He isn’t going to give up his quest lightly.

     

    “I would like Ukraine to lead the crusades,” said Korchynsky, whose battalion’s name is Saint Mary. “Our mission is not only to kick out the occupiers, but also revenge. Moscow must burn.”

     

    Most of Ukraine’s almost 40 volunteer battalions grew out of squads of protesters who battled the Berkut riot police during the protests on Kiev’s Independence Square, or Maidan Nezalezhnosti, which began in November 2013. 

     


     

    After the protests toppled President Viktor Yanukovich, pro-Russian separatists rose up in the east of Ukraine in April, 2014, demanding independence from the new government in Kiev, which they called a “fascist regime.” In response, several leaders of the Maidan protests raced east with fellow protesters to try to stop the rebel advance.

     

    Numerous brigades and battalions formed haphazardly, with most leaders accepting anyone willing to fight. Serhiy Melnychuk, who founded the Aidar battalion in eastern Ukraine and is now a member of parliament, said he signed up people between the ages of 18 and 62 and “from the homeless to pensioners.”

     

    Irregular though theses forces were, some acquired weapons from the Defense Ministry, officials and battalion leaders said. Others received money and equipment from wealthy oligarchs. They became powerful forces in the struggle against pro-Russian separatists. 

     

    In his billiard club headquarters, commander Korchynsky of the Saint Mary battalion made his disdain for the government plain. “Like the majority of 

    Ukrainian people, I think (the new leadership) is bad … They steal a lot. When Yanukovich was stealing, that was bad. But these people are clearing up when the country is at war, so they are guilty on two counts. This is marauding.”

     

    He said the revolution that began with the Maidan had been interrupted, but would one day be completed. He did not say when.

     

    If so, he will have to confront Poroshenko. On July 16, the president, decried the problems posed by unspecified “internal enemies” of the country.  He told parliament: “I will not allow anarchy in Ukraine.”

    So in the end, we suppose the question is whether US weapons shipments to Kiev will be handed out to Ukraine’s “Christian Taliban” and whether they, like their namesake, will one day turn those weapons back on the US once the Russians have been expelled. 

    Scratch that. The real question is this: what does George Soros think?

  • LinkedIn Pumps'n'Dumps As Revenue Growth Rate Continues To Slow

    Despite early exuberance at beating top and bottom lines (and users), it appears those looking for hyper-growth opportunities are selling into the machines. An initial 12% spike in the stock after hours has been completely destroyed into the red as investors realize growth rates continue to tumble, capex is rising, and organic growth is slow.

    Pump… and Dump!

     

    as Revenue growth rates continue to tumble…

     

    Charts: Bloomberg

  • Another Day, Another V-Shaped Manic-Melt-Up Recovery In Stocks (To Unchanged)

    After 3 days of magical buying on no volume after heavy volume dumps, this seemed appropriate… "if you don't buy the dip, then you are a f##king idiot"

     

    First things first… Fed Funds Futures prices tumbled (implying a big shift higher in rates expectations)…

     

    Chinese stocks plunged overnight as no late-day rescue arrived…

     

    But more importantly in the US, another day, another opening dip, and another melt-up V-Shaped Recovery…

     

    Stocks and bonds decoupled again today…once again triggered as Europe closed…

     

    Credit markets notably decoupled also…

     

    But despite the best efforts of JPY and VIX, stocks were mixed by the close…

     

    With cash indices ending with Trannies & Dow red, S&P unch, and Nasdaq the winner (even with AAPL lower)

     

    On the week, Trannies remain the biggest gainer and Small Caps the least…

     

    Faceplant…machines did their best to anchor FB around VWAP all day…

     

    It's all about the MOMO…

    h/t JC O'Hara at FBN Securities

     

    Away from stocks, Bonds rallied notably with yields tumbling into the red for the week… (notice the considerable flattening post-GDP)

     

    The US Dollar surged higher – enabling JPY carry to save the day in stocks and driving EUR back down to a 1.08 handle (following The IMF's "non" to Greece)

     

    Dollar strength took the shine off commodities with crude and copper fading…

     

    As Gold was clubbed overnight once again…and ramped when The IMF said "Non" to Greece…

     

    And Crude lost some of yesterday's squeeze higher…

     

    Charts: Bloomberg

  • Brazil's Economy Slides Into Depression, And Now Olympians Will Be Swimming In Feces

    Back on December 29 of last year, we explained how under the burden of its soaring current account deficit, and its its first primary fiscal deficit since 1998, not to mention numerous corruption scandals and a dysfunctional monetary policy, the Brazilian economy “just imploded.” We also noted the main reason for the Latin American collapse: Brazil had for the past decade become China’s favorite source of commodities, and now that China suddenly no longer needed commodities, the Brazilian economy went into freefall.

    We followed this up a month later with “Brazil’s Economy Is On The Verge Of Total Collapse” which repeated more of the same, only this time the situation was even worse.

    It took the rating agencies 7 months to figure out what our readers had known since 2014, when two days ago S&P downgraded Brazil’s credit rating from Stable to Negative citing, what else, the “sharp deterioration of the growth and fiscal consolidation outlook and heightened political/institutional friction” adding that “the negative outlook reflects the agency’s view of a “greater than one–in–three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected.”

    In other words, Brazil is about to become the next BRIC to follow Russia into junk territory:

     

    Goldman followed up S&P with a report in which it said “There is nothing so bad it couldn’t get worse!” tongue in cheekly because it noted that “records show that over the last 11 years we cannot find a period with a strictly-worse growth-inflation outcome than that of 2Q2015 . That is, since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015 (i.e., there are no data points in the lower right quadrant in Exhibit 1). In fact, in 96% of the 46 quarters between 1Q2004 and 2Q2015 the economy was delivering simultaneously higher growth and lower inflation than during 2Q2015 (upper left quadrant of Exhibit 1). Finally, during the remaining 4% of the quarters, the economy was performing better in one component—recording lower growth (4Q2008 and 1Q2009) but also much lower inflation than currently (located in lower-left quadrant).

    Exhibit 1: 2Q2015 – A sour macroeconomic spot: Very High Inflation and declining growth

    In short, the Brazilian economy has never been worse and just to hammer that point home, Goldman added a chart which makes it quite clear that Brazil is not in a recession: it is almost certainly in a depression at this moment – note the recession bar on the chart below and where it is now.

    One can debate what is causing this until one is blue in the face, and Goldman does, repeating once again that it is the collapsing current and fiscal accounts that are the culprits for Brazil’s depression…

    The sizeable current account deficit and rapidly widening fiscal deficit are also a significant source of market concern. We repeated the same exercise above, this time with a two-dimensional vector that contains the fiscal and current account balances vs. growth and inflation. The two deficits together are now tracking at over 12% of GDP of GDP, by far the worst combined outcome in more than a decade. Exhibit 3 shows that over the last 11.5 years (since Jan-04) we cannot identify a month with a strictly-worse fiscal-CA deficit outcome than that of May-14 (lower left quadrant is empty). In fact, at 7.9% of GDP the fiscal deficit is now the widest it has ever been since Jan-04, and there were only a few months (5 out of 137 months in the sample) were the current account deficit was marginally wider than currently.

     

    … but it doesn’t really matter: whether it is China, whether it is runaway stagflation, whether it is simple politician greed and corruption, Brazil has passed the recession phase and its economy is in absolute free fall.

    The result is that the local central bank is about to lose control: despite soaring inflation, overnight the central bank Monetary Policy Committee hiked the Selic policy rate by another +50bp, to 14.25%. This was the sixth consecutive 50bp rate hike following the initial 25bp hike on October 29. What made this hike unique is that the policy statement was modified by adding a sentence that openly indicated that the tightening cycle ended yesterday, and that the policy rate will remain at the current level for a prolonged period of time.

    In other words, Brazil’s central bank has given up on fighting inflation and is instead hoping to stabilize what little is left of the economy.

    Unfortunately, it may be too little too late, and now both the market…

    … and the local population as the following Evercore ISI chart of consumer confidence shows…

    …have finally figured out what it means when your economy snaps shut as your biggest trading partner suddenly shuts its doors.

    Unfortunately, it is getting even worse, as a cursory scan of headlines in just the past 24 hours reveals:

    But the Brazilian economy hit its metaphorical, and literal, bottom earlier today when AP reported that, with the Brazil Olympics of 2016 just about 1 year away, “athletes in next year’s Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games.“

    An AP analysis of water quality revealed dangerously high levels of viruses and bacteria from human sewage in Olympic and Paralympic venues — results that alarmed international experts and dismayed competitors training in Rio, some of whom have already fallen ill with fevers, vomiting and diarrhea.

    In other words, competitors in Brazil’s olympic games will be swimming in shit.

    How is this possible? Simple: the government promised it would fix everything, and the IOC believed it. Now, the moment of truth arrives and it is literally covered in feces.

    Brazilian officials have assured that the water will be safe for the Olympic athletes and the medical director of the International Olympic Committee said all was on track for providing safe competing venues. But neither the government nor the IOC tests for viruses, relying on bacteria testing only.

     

    Extreme water pollution is common in Brazil, where the majority of sewage is not treated. Raw waste runs through open-air ditches to streams and rivers that feed the Olympic water sites.

     

    As a result, Olympic athletes are almost certain to come into contact with disease-causing viruses that in some tests measured up to 1.7 million times the level of what would be considered hazardous on a Southern California beach.

     

    Despite decades of official pledges to clean up the mess, the stench of raw sewage still greets travelers touching down at Rio’s international airport. Prime beaches are deserted because the surf is thick with putrid sludge, and periodic die-offs leave the Olympic lake, Rodrigo de Freitas, littered with rotting fish.

     

    “What you have there is basically raw sewage,” said John Griffith, a marine biologist at the Southern California Coastal Water Research Project. Griffith examined the protocols, methodology and results of the AP tests.

     

    “It’s all the water from the toilets and the showers and whatever people put down their sinks, all mixed up, and it’s going out into the beach waters. Those kinds of things would be shut down immediately if found here,” he said, referring to the U.S.

    As AP notes, more than 10,000 athletes from 205 nations are expected to compete in next year’s Olympics. Nearly 1,400 of them will be sailing in the waters near Marina da Gloria in Guanabara Bay, swimming off Copacabana beach, and canoeing and rowing on the brackish waters of the Rodrigo de Freitas Lake. They will all be delighted to learn about the “quality” of the water they will be swimming in: “Everybody runs the risk of infection in these polluted waters,” said Dr. Carlos Terra, a hepatologist and head of a Rio-based association of doctors specializing in the research and treatment of liver diseases.

    The AP commissioned four rounds of testing in each of those three Olympic water venues, and also in the surf off Ipanema Beach, which is popular with tourists but where no events will be held. Thirty-seven samples were checked for three types of human adenovirus, as well as rotavirus, enterovirus and fecal coliforms.

     

    The AP viral testing, which will continue in the coming year, found not one water venue safe for swimming or boating, according to global water experts.

    The irony is that most countries go broke after the Olympics, when the spending on infrastructure and facilities dries up. Brazil may be the first nation in recent history to have imploded before the Olympics.

    In the meantime, just like Greece, Brazil promised to stars and the moon…

    In its Olympic bid, Rio officials vowed the games would “regenerate Rio’s magnificent waterways” through a $4 billion government expansion of basic sanitation infrastructure. It was the latest in a long line of promises that have already cost Brazilian taxpayers more than $1 billion — with very little to show for it.

    Rio’s historic sewage problem spiraled over the past decades as the population exploded, with many of the metropolitan area’s 12 million residents settling in the vast hillside slums that ring the bay.

    … and delivered, well, 1.7 million times the normal amount of crap. And now reality comes crashing back with a bang:

    As the clock ticks down, local officials have dialed back their promises. Rio Gov. Luiz Fernando Pezao has acknowledged “there’s not going to be time” to finish the cleanup of the bay ahead of the games.

     

    Rio Mayor Eduardo Paes has said it’s a “shame” the Olympic promises wouldn’t be met, adding the games are proving “a wasted opportunity” as far as the waterways are concerned.

     

    But the Rio Olympic organizing committee’s website still states that a key legacy of the games will be “the rehabilitation and protection of the area’s environment, particularly its bays and canals” in areas where water sports will take place.

    Just don’t hold your breath. Or actually, if you want to avoid the smell, hold it.

    We end with a note of hope for our Greek readers: yes life is bad, and it won’t get better for a long time, but it could always be get worse: you, too, could be swimming in feces.

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Jul 30

Today’s News July 30, 2015

  • Affirmatively Destroying America's Neighborhoods In The War On Suburbia

    Submitted by Bob Livingston via PersonalLiberty.com,

    Few of us understand patient gradualism. We live and have our being within a few years and mostly in an unconscious automated state of mind.

    But people in power are long-term planners. They absolutely understand human nature and how to channel it to the evolution and refinement of the authoritarian state.

    Authoritarianism is based on long-term planning. Authoritarianism is a philosophy of collectivism. Some call it democracy. Some call it communism. Some call it fascism. Some call it National Socialism. But whatever you call it, it is all collectivism or authoritarianism; and in its ultimate form it is globalism.

    The goal is perfect docility and perfect harmony with authoritarianism (economic, social and spiritual). Until the people accept collectivism under some pretext, they are not docile and completely subdued. Once they do, rebellion and confrontation are impossible. This is the ultimate goal of the globalists, and the American system is nearing this state.

    As I told you last week in “Why is the war on the Confederacy still going on today?,” the dismantling of the middle class has become the appointed, full-time task of the largest government alphabet soup agencies and Wall Street on behalf of globalism. The purpose behind this is that if those big middle-class producers and consumers can be decimated once and for all, then they can join the ranks of low-wage workers and more readily accept government largess and, thereby, become “hooked” on collectivism.

    Collectivism is a certain means of social, economic and religious control. Politicians regularly espouse individualism, human liberty and democracy at the same time. Impossible! Individualism and human liberty are opposite to democracy and any other form of collectivism. The collectivist mentality or the mass collective mind is the spirit of the New World Order.

    But something is standing in the way. Despite the years of indoctrination through the public (non)education system and mass programming by the national propaganda media and public (i.e., government) policy, rural Middle and Southern middle-class Americans — the “Red States” of “flyover country” — continue to resist the globalists’ dreams of a socialist/Marxist “utopia” and egalitarianism. That’s because they are, by and large, more independent and more self-reliant and also demand equitable reward for their labor and product, placing them in competition for resources and goods with the global elite.

    Efforts to remove this obstacle are behind the current war on the middle class and individual liberty and the spirit of individualism through the attempts to whitewash Southern culture from existence and distort the true nature of the Confederate cause by casting it and Confederate symbols as racist and treasonous. The bigoted elites in the District of Criminals and pointy-headed “thinkers” in the prestigious institutes of learning continually promulgate the meme that whites — rural whites in particular and Southern whites specifically — are backward, racist buffoons riding in trucks looking for blacks to lynch while ridiculously clinging to their guns and religion.

    The purpose is to stir up racial animosity and manipulate the people against one another. Manipulating minorities who are naturally drawn to socialism is basic political strategy to cover government crime and justify government politics and plunder.

    The principle of government is that political power is maximized by forcibly leveling every individual to the same status of conformity, collectivism, egalitarianism and serfdom.

    The truth goes deeper. Because of perceived social, cultural, racial and psychic inferiority, minorities desire to parasite on government force and socialism to subvert those they envy and wish to imitate. (This includes all so-called minority groups, not just racial minorities.)

    Last summer, there was an invasion of illegals from Central and South America stemming from the immigration policies and statements of President Barack Obama. Over the ensuing months, the Obama regime shipped those illegals into communities and cities across the country and immediately began efforts to grant them some sort of legal status in order to ultimately provide them with voting rights in a back-door effort to change the local demographics and, therefore, the voting outcomes in these communities from a conservative bent to one more socialistic.

    Third World immigrants are attracted to cradle-to-grave nanny state socialism because it is what they know and all they have known. They are also more accepting of gun control and the police state. They have no understanding of or experience with individual liberty or the concept of natural rights.

    Gaining voting “rights” for non-citizens is the main driver of the federal opposition to voter ID laws.

    The Obama regime attempted but failed with a mass social re-engineering scheme in 2010. That effort, fueled by corruptocrat Sen. Chris Dodd (D-Conn.), sought to fulfill the United Nation’s Agenda 21 plan, adopted at the Earth Summit in Rio de Janeiro in 1992 and signed onto by “New World Order” President George H.W. Bush.

    Using a typical government “carrot-and-stick” policy, the bill sought to award or deny grants from the federal treasury to cities based on their compliance with amending or passing zoning laws to restrict housing in rural areas and force the residents into city centers.

    The stick, in addition to denial of the funds, would be bad publicity generated by “Green” organizations working on behalf of the federal government criticizing local government officials for turning down free money and neglecting so-called “Green” initiatives.

    Now comes Obama’s speciously titled Affirmatively Furthering Fair Housing edicts from the Department of Housing and Urban Development. This extra-constitutional rule change has been in the works for more than two years, but has been largely glossed over by the MSM. It seeks to do the reverse of the Dodd bill. That is, rather than drive the suburbanites into the cities, it seeks to move inner-city minorities into the suburbs.

    The AFFH will have the federal government imposing preferred racial and ethnic composition on neighborhoods in exchange for federal funds provided or denied. It will change zoning laws, require a certain amount of government-subsidized housing in rural areas in order to achieve “racial balance,” control transportation and business development and remove the authority of state and local governments in the areas of zoning, transportation and education.

    As National Review’s Stanley Kurtz writes:

    Fundamentally, AFFH is an attempt to achieve economic integration. Race and ethnicity are being used as proxies for class, since these are the only hooks for social engineering provided by the Fair Housing Act of 1968. Like AFFH itself, today’s Washington Post piece blurs the distinction between race and class, conflating the persistence of “concentrated poverty” with housing discrimination by race. Not being able to afford a freestanding house in a bedroom suburb is no proof of racial discrimination. Erstwhile urbanites have been moving to rustic and spacious suburbs since Cicero built his villa outside Rome. Even in a monoracial and mono-ethnic world, suburbanites would zone to set limits on dense development. Emily Badger’s piece in today’s Washington Post focuses on race, but the real story of AFFH is the attempt to force integration by class, to densify development in American suburbs and cities, and to undo America’s system of local government and replace it with a “regional” alternative that turns suburbs into helpless satellites of large cities. Once HUD gets its hooks into a municipality, no policy area is safe. Zoning, transportation, education, all of it risks slipping into the control of the federal government and the new, unelected regional bodies the feds will empower. Over time, AFFH could spell the end of the local democracy that Alexis de Tocqueville rightly saw as the foundation of America’s liberty and distinctiveness.

    To accomplish its goals, HUD will dig into the racial balance ZIP code by ZIP code looking for areas of segregation, with the segregation threshold being nonwhite populations of 50 percent or more. Federally funded cities deemed overly segregated will be pressured to change their zoning laws to allow construction of more subsidized housing in affluent areas in the suburbs and relocate inner-city minorities to those predominantly white areas. HUD’s maps, which use dots to show the racial distribution or density in residential areas, will be used to select affordable-housing sites, according to the New York Post.

    To employ this policy, the federal government has undertaken a massive Orwellian-style data collection initiative, prying into the medical records, credit card purchases, mortgage business records, IRS filings, employment records, educational records and local government policy initiatives searching for racial “inequalities” for the Justice Department to prosecute.

    The only way to resist this tyranny is for local governments to eschew all federal monies including Community Development Block Grants going forward. Of course, local residents always pressure their community leaders to accept government monies under the auspices that they have paid their “taxes” and want a return on their “investment.” But once the Feds get their hooks into the local community through the distribution of money from the federal treasury, they can exert total control over local government’s functions regarding housing, zoning and regulations far more than they do already.

    The globalist agenda is the most comprehensive program for world fascism and world collectivism ever conceived. Its basis is esoteric deception, as carried out pragmatically by mass politics, international mass banking and the mass media. It operates as a whole — as an organism. Today’s democratic globalists make the communists and the Nazis look like amateur totalitarians.

  • Hackers Claim John McCain Knew ISIS Execution Videos Were Staged

    In a rather stunning note, CyberBerkut, a Ukrainian group of hackers, claims to have hacked John McCain’s laptop while he was in the Ukraine, and as Techworm reports, what they have released from his June visit appears to be a fully staged production of an ISIS execution video…

     

    As Techworm reports, according to the hackers, they broke into the laptop of one of the American politicians, Senator McCain and after found a video with staged IS execution, which they decided to show to the world community.

    It so happened that Senator John McCain had visited Ukraine on a official visit somewhere in the first week of June 2015. The hacktivists belonging to CyberBerkut somehow managed to access his laptop.

    Here is what CyberBerkut said to John McCain…

    “We CyberBerkut received at the disposal of the file whose value can not be overstated!

     

    Dear Senator McCain! We recommend you next time in foreign travel, and especially on the territory of Ukraine, not to take confidential documents. In one of the devices of your colleagues, we found a lot of interesting things. Something we decided to put: this video should become the property of the international community!”

    According to the hackers, they broke into the laptop of one of the American politicians, Senator McCain and after found a video with staged IS execution, which they decided to show to the world community.

    The video they released is below..

    From the video it can be seen that the entire set including the hostage is stage managed.  An actor dressed as an executioner of IS is holding a knife to behead the prisoner, and the “victim” depicts to be suffering.

    It may be recalled that IS have been repeatedly publishing the videos of the executions of hostages and if this video is true, the victims may in fact be alive.

    The authenticity of this video has not been independently verified.

    *  *  *

    Metabunk.org has attempted to debunk the hacker's claims…

    The video shows a very brightly lit stage with simulated desert floor and a greenish backdrop. A film crew and multiple lights surround the stage, but they are strongly backlit. The video has no audio, and is very low resolution so no details can be made out. The kneeling man wears a head cover, to suggest that the head could be replaced by a computer generated image, or separately recorded video.

     

    The video appears to be an attempt to replicate one of the "Jihadi John" beheading videos of 2014. In particular it appears to be an attempt to replicate the video of James Foley. None of those videos show actual beheadings, and instead show Jihadi John sawing at the neck with no apparent blood, and then they cut to a shot of a decapitated head posed on top of a body. This led to speculation that the videos were faked.

     

    However we can tell it is not a video of the faking of any of the Jihadi John videos for a number of reasons.

     

    *  *  *

    While it is easy to point the finger at the pro-Russian hacker collective (and consider their motives in damaging US – especially McCain – influence) and deny the video's truth, one can't help but wonder – given just how well produced the final videos were in many cases, just who is behind the scenes of the widely known to be funded by US sources ISIS… just another conspiracy theory?

  • Chinese Stocks Open Lower As Margin Debt Tumbles To 4-Month Lows, Regulators Probe Officials' Sales

    Following last night's afternoon session melt-up at the hands of a $100bn injection into China's sovereign rescue fund, Chinese stocks opened higher but faded fast, with no follow-through from yesterday's farce. With Warren Buffett's favorite indicator flashing red for China (and US) stocks, and so many rural Chinese citizens "just hoping to get out at breakeven," any assistance in levitating the nation's stocks are simply being sold into as margined traders unwind their positions. One such leveraged 'citizen' is none other than State-Owned-Enterprise GM Yang Shengjun, whose firm was ironically among the most vocal in blaming the crash on "malicious foreign sellers trying tio start an economic war" and is now under investigation for dumping his own shares… do as I say Chinese people, not as I do.

    A reminder of last night's farce…

    The good news…

    • *SHANGHAI EXCHANGE MARGIN DEBT DECLINES TO FOUR-MONTH LOW

    So at least – whether through forced liquidation or common sense – the leverage is being unwound.

    *  *  *

    And tonight, for now…

    • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.4% TO 3,915.78
    • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.4% TO 3,773.79

    with no follow-through from yesterday's excitment…

     

    But, as Forbes notes, Chinese stocks are as bubblicious as US stocks (or vice versa) according to Warren Buffett's favorite indicator of equity market valuation…

     

    And do not forget the most important chart in China right now…. just as in The US – must keep stocks above 200DMA at all costs…

    There was at least one malicious seller… (as WSJ reports)

    A listed arm of China’s state-owned aerospace and defense company and its two largest shareholders are under investigation for potential violation of stock-selling rules, according to the securities regulator.

    AVIC Heibao Co., a manufacturing subsidiary of Aviation Industry Corp. of China, known as AVIC, said Wednesday that shareholders Jincheng Group and AVIC Investment Holdings had received notice of the investigation from the China Securities Regulatory Commission. The regulator didn’t disclose further details of the investigation.

    In addition, AVIC Capital Co., AVIC Heibao’s trading arm, dismissed General Manager Yang Shengjun on Wednesday, after AVIC Capital told the Shanghai Stock Exchange that AVIC Heibao is being probed by the regulator for selling shares on Tuesday.

    The massive irony is…

    The investigation comes after AVIC Chairman Lin Zuoming this month criticized foreign short sellers for deliberately instigating “an economic war against China” and pledged to prop up the market by buying shares. Short sellers bet that a stock’s price will fall. AVIC couldn’t immediately be reached for comment.

     

    AVIC Heibao said on June 30 that its top shareholder, Jincheng Group, had sold 3.39 million shares in the company for 78.8 million yuan ($12.7 million), while AVIC Investment Holdings, its second-largest shareholder, had shed all of its 16.8 million shares for 431.4 million yuan from June 5 to June 29. The two shareholders dumped a combined 5.86% of the company’s total issued shares.

    Do as your leaders say Chinese people… not as they do.

    And amid all this carnage… USDCNY has been deadstick…

    Charts: Bloomberg

  • If Spending Is Our Military Strategy, Our Strategy Is Bankrupt

    Submitted by Mark Mateski via The Mises Institute,

    Even today, few deny the long arm of US military might. After all, the US military exhausted the Soviet Union, crushed Saddam Hussein, and drove Osama bin Laden’s al Qaeda into hiding.

    To what should we attribute these triumphs? Some would say US planning and foresight. Others would mention the hard work and dedication of US soldiers, sailors, and airmen. Still others would point to the application of superior technology. All would be correct to some degree, but each of these explanations disregards the fact that for more than a lifetime, the United States has wildly outspent its military competitors.

    For many years, the United States spent more on defense than the next ten big spenders combined. It turns out that’s no longer true, according to Jane’s and PPGF. But whether the current count is seven or nine, we must acknowledge that US dominance was purchased at a high cost.

    The High Cost of Big Debts

    The first cost is the accumulation of debt. While many will admit to the numbers, few will publicly concede the long-term threat they pose to national and international security. Among the few, Admiral Mike Mullen, former chairman of the Joint Chiefs of Staff, has for several years consistently declared that “The single biggest threat to national security is the national debt.” While US defense spending is currently declining, these charts illustrate that the US share of global defense spending has remained strong (1) regardless of the irregular ups and downs of external events and (2) largely independent of the debt burden.

    The second cost is the accumulation of commitments and expectations. Despite the drawdown of troops from Iraq and Afghanistan, senior US policy makers remain staunchly determined to maintain a high level of global engagement. If you doubt it, read the recently published 2015 U.S. National Military Strategy. Among other things, it underscores the US commitment to countering agents of instability, whether “violent extremist organizations (VEOs)” or nation states, the standout examples being Russia and China. Not surprisingly, the strategy has prompted headlines such as “China Angered by New U.S. Military Strategy Report,” “Pentagon Concludes America Not Safe Unless It Conquers the World,” and “Pentagon’s New Military Strategy Calls for Preserving US Dominion of the World.”

    Yes, these criticisms arrive from predictable quarters, but in this case the perception is reality, and the reality is that US policy makers continue to pursue a strategy laden with unavoidably expensive commitments — commitments guaranteed to antagonize Russia and China. (All of which stimulates a risky reinforcing feedback loop.) As Patrick Tucker at Defense One quipped, “The United States is preparing for never-ending war abroad.” Despite this, don’t expect to find any references in the published strategy to “debt,” an oversight that ignores Mullen’s warning and validates David Stockman’s statement that “We’re blind to the debt bubble.”

    Our Military “Strategy” Amounts to Little More than Big Spending Plans

    The third cost — one we rarely discuss — is the dangerous yet unspoken conceit held by a generation of senior US officers and policy makers: the belief that they are innately superior strategists. Just ask the Soviet Union, Saddam Hussein, and Osama bin Laden! But what if in reality spending was the primary driver and arbiter of these outcomes?

    It is suggestive that in cases where the sheer weight of US firepower proved unable to secure a decisive victory (Korea and Vietnam are canonical examples), the United States’s cash-poor but tactically savvy opponents still managed to frustrate and confound front-line US forces. As H. John Poole, a retired Marine colonel, combat veteran, and prolific author, has remarked:

    For America’s wartime units, firepower has been and still is the name of the game. This game has some less-than-ideal ramifications. Since WWI, far too many units have not matched up well — tactically — with their Eastern counterparts. As unlikely as this may seem to today’s active-duty community, it is nevertheless well documented. (Global Warrior, 2011, p. xxii)

    On this count, “cyberwar” is a prime illustration of another domain in which spending doesn’t guarantee proportional dominance. The recent OPM hack is a painful example, and if practitioners like Richard Stiennon (There Will Be Cyberwar) are correct, more is coming.

    As a rule, US policy makers minimize these counterexamples. Commentators like John Poole who point out weaknesses and alternatives tend to be written off by Washington apparatchiks as well-meaning but misguided zealots. And to be fair, from the mainstream perspective Washington’s argument in support of the status quo is actually quite strong — as long as the money continues to flow. For those who discern the uncomfortable truth that the US debt addiction is unsustainable, the picture looks very different. Alternatives to spending-as-strategy exist, but they require policy makers and strategists to rethink their dearly held assumptions of economic and strategic superiority. It requires a unique mind and stout internal mettle to do this, and so far this decade, we have seen little evidence in Washington of this type of insight and character. Let’s hope that the anticipation of crises yet-to-be pushes hitherto overlooked reformers to the front of the national security debate.

    I’ll close by restating the problem via analogy: US global superiority in military affairs is actually the superiority of a rich kid who thinks he’s really smart but in reality is merely just rich. When the seemingly endless flow of money slows (as it inevitably will), the mask of cleverness will fall. Everyone who resented the kid will be waiting at the edge of the playground for this day of reckoning, and because no one else will have been so dependent on spending-as-strategy, the erstwhile rich kid will find it tough going.

  • Total Collapse: Greece Reverts To Barter Economy For First Time Since Nazi Occupation

    Months ago, when Alexis Tsipras, Yanis Varoufakis, and their Syriza compatriots had just swept to power behind an ambitious anti-austerity platform and bold promises about a brighter future for the beleaguered Greek state, we warned that Greece was one or two vacuous threats away from being “digitally bombed back to barter status.”

    Subsequently, the Greek economy began to deteriorate in the face of increasingly fraught negotiations between Athens and creditors, with Brussels blaming the economic slide on Syriza’s unwillingness to implement reforms, while analysts and commentators noted that relentless deposit flight and the weakened state of the Greek banking sector was contributing to a liquidity crisis and severe credit contraction. 

    As of May, 60 businesses were closed and 613 jobs were lost for each business day that the crisis persisted without a resolution. 

    On the heels of Tsipras’ referendum call and the imposition of capital controls, the bottom fell out completely as businesses found that supplier credit was increasingly difficult to come by, leaving Greeks to consider the possibility that the country would soon face a shortage of imported goods. 

    On Tuesday, we brought you the latest on the Greek economy when we noted that according to data presented at an extraordinary meeting of the Hellenic Confederation of Commerce and Entrepreneurship, retail sales have fallen 70%, while The Athens Medical Association recently warned that 7,500 doctors have left the country since 2010. 

    Now, the situation has gotten so bad that our prediction from February has come true. That is, Greece is reverting to a barter economy. Reuters has more:

    Wild boar and power cuts were Greek cotton farmer Mimis Tsakanikas’ biggest worries until a bank shutdown last month left him stranded without cash to pay suppliers, and his customers without money to pay him.

     

    Squeezed on all sides, the 41-year-old farmer began informal bartering to get around the cash crunch. He now pays some of his workers in kind with his clover crop and exchanges equipment with other farmers instead of buying or renting machinery.

     

    Tsakanikas is part of a growing barter economy that some Greeks deplore as a step backward from modernity, but others embrace as a practical means of short-term economic survival.

     

    When he rented a field this month, he agreed to pay with part of his clover production.

     

    “It’s a nightmare. I owe many people money now – gas stations and firms that service machinery. I have to go to the bank every single day, and the money I can take out is not enough,” said Tsakanikas, who also grows vegetables and corn on 148 acres (60 hectares) of farmland.

     

    “I’ve begun bartering in some forms – it existed in the past but now it is growing… Times have become really tough, and friends and relatives help each other out.”

    So Greece, the birthplace of Western civilization and democratic governance, is now literally sliding backwards in history.

    The nation – which has already suffered the humiliation of becoming the first developed country to default to the IMF and which was nearly reduced to accepting “humanitarian aid” from Brussels when a Grexit looked imminent a few weeks back – is now transacting in clover, hay, and cheese. Here’s Reuters again:

    Tradenow, a Website started three years ago to facilitate barter of everything from food to technology, says the number of users and the volume of transactions have doubled since capital controls came into effect on June 29.

     

    “Before capital controls, we were reaching out to companies to encourage them to register,” says Yiannis Deliyiannis, the company’s chief executive. 

     

    “Now companies themselves are getting in touch with us to get registered.”

     

    He rattles off a list of firms using the site to strike deals with suppliers: a car repairs shop that exchanged tyres with another firm for a new shower cubicle, a burglar alarm provider offering services in return for paper and advertising, an Athens butcher that trades daily meat supplies for services.

     

    In the lush yellow and green fields outside Lamia dotted with cotton, peanut and olive groves, barter is also flourishing on an informal basis outside the online platforms.

     

    Kostas Zavlagas, who produces cotton, wheat, and clover recounted how he gave bales of hay and machine parts to another farmer who did not have cash to pay him.

     

    “He is going to pay me back in some sort of product when he is able to, maybe in cheese.”

    Yes, “maybe in cheese”, but certainly not in euros, especially if the growing divisions within Syriza render Athens unable to pass a third set of prior actions through parliament next week.

    Should the vote not pass, it’s not clear if Greece will be able to obtain the funds it needs to pay €3.2 billion to the ECB on August 20 – a missed payment would endanger the liquidity lifeline that is the only thing keeping any euros at all circulating in the Greek economy.

    On the bright side, “barter has been a part of everyday life for Greeks for a long time” economist Haris Lambropoulos told Reuters. The only difference is that now, “it is a more structured and organised phenomenon.”

    Maybe so, but this is one “structured and ordered phenomenon” that many Greeks would likely just as soon do without and indeed, the new barter economy is drawing comparisons to a period in Greece’s history that has gotten quite a bit of attention over the course of the last few months, and on that note, we’ll give the last word to Christos Stamatis, who runs the barter website Mermix:

    “Of course, a barter economy is something that we shouldn’t aspire to and should be a thing of the past – the last time we had it on a large scale was when we were under [Nazi] occupation.”

  • In Latest Market-Rigging Scandal, ITG Busted For Frontrunning Clients In Its Dark Pool

    Last year, first in the aftermath of NYAG’s lawsuit against Barclays followed promptly by Michael Lewis’ “Flash Boys” (which over a year later is still a better seller than “GS Elevator’s” attempt to be this generation’s Tucker Max) exposing High Frequency Trading for being nothing more than a sophisticated gimmick enabling market rigging and bulk order frontrunning while pretending to “provide liquidity”, the revulsion against HFTs hit a fever pitch that forced Virtu to postpone its IPO.

    Several months later, because the market kept going higher, people quickly forgot why they were angry at a bunch of vacuum tubes, and Virtu not only re-IPOed (adding another year without a single trading day loss to its roster) but it was taken public by that “humanitarian” protagonist of Flash Boys, Goldman Sachs itself (which was so aghast at the scourge that is HFT it almost, almost, ended its own dark pool and HFT ambitions… before it decided to double down on HFT).

    However, since the market is once again on the verge of a terminal liquidity seizure with its associated side-effects (see China for details), the authorities needed to remind the “market” just who the scapegoat will be when the next crash finally does come. Which is why earlier today in an unexpected “preliminary second quarter guidance” release, ITG, owner of the Posit dark pool, was just busted with a $22.6 million potential SEC settlement for what appears to have been blatant frontrunning of company clients in its own prop trading pod.

    From the release:

    During the second quarter of 2015, ITG commenced settlement discussions with the Staff of the Division of Enforcement of the SEC (the “SEC Enforcement Division”) in connection with the SEC’s investigation into a proprietary trading pilot operated within ITG’s AlterNet Securities, Inc. (“AlterNet”) subsidiary for sixteen months in 2010 through mid-2011. The investigation is focused on customer disclosures, Form ATS regulatory filings and customer information controls relating to the pilot’s trading activity, which included (a) crossing against sell-side clients in POSIT and (b) violations of ITG policy and procedures by a former employee. These violations principally involved information breaches for a period of several months in 2010 regarding sell-side parent orders flowing into ITG’s algorithms and executions by all customers in non-POSIT markets that were not otherwise available to ITG clients.

    This would not be the first time a dark pool was busted for admitting it abused fragmented markets to frontrun clients. As Bloomberg reminds us, last year, the agency fined Liquidnet Holdings Inc. $2 million for not living up to client secrecy standards. In 2011, Pipeline Trading Systems LLC agreed to pay $1 million, in part because it had a proprietary trading unit that was secretly trading against client orders. Then there was of course NY AG Schneiderman’s lawsuit against Barclays alleging the UK bank which has been busted for manipulating pretty much everything under the sun at least once falsely claimed that it closely monitored and shut off certain types of traders.

    Still, the $22 million proposed settlement would be a record for a private Wall Street trading platform, surpassing the $14.4 million that UBS Group AG agreed to pay in January. More importantly, as Bloomberg also observes, the latest lawsuit “shows the steps authorities are taking against alternative trading systems such as dark pools.”

    In other words, everyone now knows HFTs are fair game for rigging and manipulation, and with the banks having already been bled dry by over a quarter trillion in litigation charges, it is now the HFTs’ turn to pay their kickbacks to the government for allowing them to frontrun sheep for 7 years since the advent of Reg NMS.

    What is particularly amusing in this case is that while everyone knows that when it comes to HFT’s, it is never called “rigging” – the proper nomenclature is “glitch”, so now we learn a new term to use instead of “criminal frontrunning” – drumroll… trading experiment, or as it is known in legal parlance “proprietary trading pilot.“

    From Bloomberg:

    ITG disclosed the discussions and potential fine in a statement Wednesday, saying the situation concerned an experimental market-making unit that a subsidiary ran in 2010 and 2011. The division traded using information not available to other customers of ITG’s private stock-trading system, which is against Securities and Exchange Commission rules.

     

    ITG Chief Executive Officer Bob Gasser said the firm shut the trading experiment and hasn’t run a similar one since.

    So let’s get this straight: ITG had an in house prop trading group, or “pilot”, which operated for nearly two years, whose only signal was client order flow, which it would frontrun, and make millions in profits. In other words, once again precisely what we have claimed since 2009. But oh yes, not everyone is guilty of such manipulation. Only Liquidnet… and Pipeline… and ITG… and countless other ATS and HFT firms for whom clients are better known as either “easy money” or muppets.

    And yes, we get the “trading experiment” narrative: calling it “criminal market manipulation and order frontrunning scheme” just does not sound like something the Modern Markets Initiative would spend millions of dollars to get Congressmen to agree on.

    But where the ITG client frontrunning case goes truly surreal and takes the cake, is that in addition to the fine, it also announced that one of its directors, Kevin O’Hara resigned effective immediately. This is what he said:

    Dear Maureen:

    This letter serves to inform you that, effective immediately, I resign from the Board of Directors (“Board”) of Investment Technology Group, Inc. (“ITG”), and the attendant Board committees of which I am a member: Compensation, Technology, and Capital.

     

    It has been my pleasure and an honor to serve the shareholders, clients, and employees of ITG, and to work alongside fellow directors over the last number of years. And, those years have witnessed ITG weather the slings and arrows of existential challenges: the 2008-09 financial crisis (and, subsequent, “Great Recession”), industry hyper-competition, and a highly dynamic regulatory environment.

     

    However, as you know, over the last several months, continuous fundamental, strategic and vital differences of opinion and direction have transpired at the Board level and, in particular, between me and the Board’s leadership. Although I believe in the importance of the governance concept of “loyal opposition,” alas, to everything there is a season. I do hope that my service in such role has, at the very least, furthered and continues to further the breadth of substantive deliberation and the process of decision-making by the Board.

     

    I wish the very best for ITG and its employees.

     

    Best Regards,

     

    Kevin J.P. O’Hara

    So some board member quit the day his company was busted by the SEC for more market rigging and frontrunning its clients. Is that the punchline?

    No. This is:

    Mr. O’Hara worked in the Division of Enforcement of the U.S. Securities and Exchange Commission and as Special Assistant United States Attorney at the U.S. Department of Justice

     

    And now proceed to laugh, or cry.

  • Meanwhile In Venezuela… The Socialist Paradise Has Arrived

    As we recently warned, the hyperinflationary collapse in Venezuala is reaching its terminal phase. With inflation soaring at least 65%, murder rates the 2nd highest in the world, and chronic food (and toilet paper shortages), the following disturbing clip shows what is rapidly becoming major social unrest in the Maduro's socialist paradise… and perhaps more importantly, Venezuela shows us what the end game for every fiat money system looks like (and perhaps Janet and her colleagues should remember that).

     

     

    As we previously concluded, and seemingly confirmed by the above video,

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

     

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

     

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

     

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

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

  • 4 Mainstream Media Articles Mocking Gold That Should Make You Think

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    For those of you who have been reading my stuff since all the way back to my Wall Street years at Sanford Bernstein, thanks for staying along for the ride. I appreciate your support immensely considering that I essentially no longer write about financial markets at all, and for many of you, that remains your profession and primary area of interest.

    There are many reasons why I stopped commenting on markets, but the main reason is that I started to recognize I wasn’t getting it right. In fact, in some cases I was getting it spectacularly wrong. Whenever this happens, I try to isolate the problem and fix it. In this case there was no fix, because much of why I was no longer getting it right was rooted in the fact that my heart, soul and passion had moved onto other things. My interests had expanded, and I started a blog to express myself on myriad other matters I deemed important. Providing relevant market information needs intense focus, and my focus had shifted elsewhere. I recognized that I wasn’t intellectually interested enough in centrally planned markets to provide insightful analysis, and so I stopped.

    This doesn’t mean I won’t start up again. When central planners do lose control, I may indeed become far more interested in opining on such matters. Time will tell. In the interim, financial markets do still play an important role in the bigger picture of social, political and economic trends I passionately care about. The stability and increase in financial assets (stocks and bonds) is of huge importance to the propaganda machine, in particular keeping the non-oligarchic, non-politically connected 1% in line and believing the hype (see: The Stock Market: Food Stamps for the 1%).

    So while I won’t claim to know when the paradigm shift will begin in earnest, I do rely on people who have gotten macro forecasts right, and there is no one better than Martin Armstrong. Years ago, he was saying that nothing goes up in a straight line and that gold would experience a severe correction before beginning its real bull market. We are seeing his prediction unfold before our very eyes. What he also said is that as gold approached the $1,000 per/oz mark or even below, everyone would proclaim that “gold is dead” and start making comically bearish statements. In a nutshell, negative sentiment would plunge to levels not seen in years, if not more than a decade. We are starting to see this now.

    Here are four mainstream media articles that provide some evidence we may be approaching a sentiment low. Some of them I’m sure you’ve seen, others perhaps not. What amazes me is how they’ve all come out within the last two weeks.

    1) From the Wall Street Journal: Let’s Be Honest About Gold: It’s a Pet Rock 

    Here are a few choice excerpts:

    Gold is supposed to be a haven amid hard times and soft money. So why, even as Greece has defaulted, the euro has sunk against the dollar, and the Chinese stock market has stumbled, has gold been sitting there like a pet rock?

     

    Many people may have bought gold for the wrong reasons: because of its glittering 18.7% average annual return between 2002 and 2011, because of its purportedly magical inflation-fighting properties, because it is supposed to shine in the darkest of days. But gold’s long-term returns are muted, it isn’t a panacea for inflation, and it does well in response to unexpected crises—but not long-simmering troubles like the Greek situation. And you will put lightning in a bottle before you figure out what gold is really worth.

     

    With greenhorns in gold starting to figure all this out, the price has gotten tarnished. It is time to call owning gold what it is: an act of faith. As the Epistle to the Hebrews defined it forevermore, “Faith is the substance of things hoped for, the evidence of things not seen.” Own gold if you feel you must, but admit honestly that you are relying on hope and imagination.

     

    Recognize, too, that gold bugs—the people who believe in owning the yellow metal no matter what—often resemble the subjects of a laboratory experiment on the psychology of cognitive dissonance.

     

    So, if buying gold is an act of faith, how much money should you put on the line?

     

    Anything much above that is more than an act of faith; it is a leap in the dark. Not even gold’s glitter can change that.

    Think about some of the words and phrases used in this WSJ article:

    “Pet rock.”

     

    “Greenhorns in gold (greenhorn means a person who lacks experience and knowledge).”

     

    “It is time to call owning gold what it is: an act of faith.”

     

    “Gold bugs often resemble the subjects of a laboratory experiment on the psychology of cognitive dissonance (this is actually true in many ways).”

    Condescending as the entire article is to gold owners, he even goes so far to quote the Hebrew Bible!

    Moving on.

    2) From the Washington Post: Gold is Doomed

    When you think about it, a bet on gold is really a bet that the people in charge don’t know what they’re doing. Policymakers missed yesterday’s financial crisis, so maybe they’re missing tomorrow’s inflation, too. That, at least, is what a cavalcade of charlatans, cranks, and armchair economists have been shouting for years now, from the penny ads that run on the bottom of websites — did you know that the $5 bill proves the stock market is on the cusp of crashing? — to Glenn Beck infomercials and even hedge fund conferences. Indeed, John Paulson, who made more fortunes than you can count betting against subprime, has been piling into gold for six years now, because he thinks “the consequences of printing money over time will be inflation.” They all do. Goldbugs act like the Federal Reserve’s public balance sheet is a secret only they have discovered, and that it’s only a matter of time until prices explode like they did in the 1970s United States, if not 1920s Germany.

     

    But economists do, for the most part, know what they’re doing. Sure, they missed the crash coming in 2008, but that wasn’t because they didn’t understand how bank runs work. It was because they didn’t understand that unregulated lenders had become vulnerable to runs. And the economists who haven’t forgotten their history knew that this inflation fear mongering was all wrong too. Specifically, there’s a difference between the central bank buying bonds, a.k.a. printing money, when interest rates are zero and when they’re not. In the first case, money and short-term bonds both pay the same amount of interest — none — so, as Paul Krugman has explained over and over again, printing one to buy the other won’t change anything. Banks won’t lend out any new money, and will just sit on it as a store of value instead. That’s what happened when interest rates fell to zero in 2000s Japan, and it’s what is happening now in the U.S., U.K., Japan, and Europe.

     

    It almost makes you feel bad for the goldbugs, until you remember that some substantial number of them are just trying to scare seniors out of their money. But the ones who aren’t really thought the 1970s showed that gold went up when inflation did, so the fact that gold was going up now meant inflation couldn’t be far behind. They didn’t understand that the price of gold doesn’t depend on how much inflation there is, but rather on how much inflation there is relative to interest rates. So now that rates are rising, gold, as you can see below, is falling. Wait a minute, rates are rising? Well, yes. The Federal Reserve hasn’t actually raised rates yet, but it has talked about it enough that markets have reacted as if it already did. That’s been enough to make real rates positive again.

    While I agree that many gold bugs do deserve the criticism they get, it’s interesting to see the way in which the Washington Post demonizes them as:

    “Just trying to scare seniors out of their money.” 

    But the purpose of the above article is less about demonizing gold bugs, and more about praising the existing system of crank central planners that no one other than starry eyed pundits and thieving oligarchs actually support (see: “Revolution is Coming” – The Top 20 Responses to Jon Hilsenrath’s Idiotic WSJ Article).

    Here are some examples:

    But economists do, for the most part, know what they’re doing.

     

    Paul Krugman has explained over and over again, printing one to buy the other won’t change anything. 

    This story is far from over, as the Fed has yet to raise interest rates. Talk to me about victory when rates normalize.

    Moving along to the next article:

    3) From Bloomberg: Gold Is Only Going to Get Worse

    The problem for gold isn’t just that prices are dropping. For many, the metal also has lost its charisma.

     

    Prices will drop to $984 an ounce before January, according to the average estimate in a Bloomberg News survey of 16 analysts and traders. That would be the lowest since 2009 and a 10 percent retreat from Tuesday’s settlement. Speculators are shorting the metal for the first time since U.S. government data began in 2006, and holders of exchange-traded products are selling at the fastest pace in two years.

     

    “Gold is out of fashion like flared trousers: no one wants it,” said Robin Bhar, an analyst at Societe Generale SA in London. “It’s not going to collapse, but we think it is going to be at a lower level in the not-too-distant future.”

     

    “Gold is a weird relic of antiquity,” said Brian Barish, who helps oversee about $12.5 billion at Denver-based Cambiar Investors LLC. “It’s not a commodity that has much fundamental demand. It’s pretty, so people use it for jewelry. But it’s unlike iron ore or oil, or copper, or corn. There’s not specific end-use for it. People just like it, so it becomes a discussion about fervor.”

    Let’s once again highlight some of the terminology used.

    The metal also has lost its charisma

    So now it’s magically turned into a human being as opposed to a pet rock.

    Speculators are shorting the metal for the first time since U.S. government data began in 2006

     

    “Gold is out of fashion like flared trousers: no one wants it.

     

    “Gold is a weird relic of antiquity.”

    Finally, for the last article. This one takes on more of the tone from the WSJ article, basically just calling gold buyers imbeciles.

    4) From Market Watch: Two Reasons Why Gold May Plunge to $350 an Ounce.

    CHAPEL HILL, N.C. (MarketWatch) — Gold bugs, who have just begun to digest bullion’s more than $100 drop over the past month, need to prepare for the possibility of an even bigger decline.

    That, at least, is the forecast of Claude Erb, a former commodities manager at fund manager TCW Group, and co-author (with Campbell Harvey, a Duke University finance professor) of a mid-2012 study that forecast a plunging gold price. They deserve to be listened to, therefore, since — unlike many latter-day converts to the bearish thesis — they forecast a long-term gold bear market when it was only just beginning.

     

    You might think that, with gold now trading more than $500 lower than when the study was released, Erb would declare victory and leave well enough alone. But Erb is doing nothing of the sort. Earlier this week, he told me that the gold community now needs to consider the distinct possibility that gold will trade for as low as $350 an ounce.

     

    Erb uses the five well-know stages of grief to characterize where the gold market currently stands. Those stages are denial, anger, bargaining, depression and acceptance, and he argues that the gold-bug community currently is in the “bargaining” stage.

     

    Erb imagines them saying the functional equivalent of: “So long as gold stays above $1,000 an ounce, I’ll go to church every Sunday.”

     

    Over shorter terms measured in years, according to their research, you must take seriously the possibility that gold won’t just drop below $1,000 an ounce but, eventually, to a far, far lower price as well.

    Some choice quotes to think about:

    The gold community now needs to consider the distinct possibility that gold will trade for as low as $350 an ounce.

     

    Erb uses the five well-know stages of grief to characterize where the gold market currently stands.

     

    “So long as gold stays above $1,000 an ounce, I’ll go to church every Sunday.”

    This is pretty much peak condescension, and once again, notice the religious imagery.

    Gold won’t just drop below $1,000 an ounce but, eventually, to a far, far lower price as well.

    I didn’t write this article to “call the bottom in gold” or anything like that. I merely want to flag these four articles due to the hyperbolic nature of some of the statements made (they are exhibiting pretty much exactly the same behavior as the gold bugs they mock do). I do think that something is happening on the sentiment front that warrants we are closer to the bottom that the mid-stages of a bear market.

    While I certainly accept that gold prices could fall further from here, I don’t think they will go anywhere near $350/oz, or $500/oz. If Claude Erb cares to make a public bet with me on that, he can find me here.

  • Presenting Jeremy Grantham's "10 Topics To Ruin Your Summer"

    When last we checked in with Jeremy Grantham, the GMO co-founder was still bubble watching, reiterating his outlook from November that although stocks can always go higher in the “strange, manipulated world” that we call the “new paranormal”, “bubble territory” probably isn’t far off given that the Yellen Fed is “bound and determined” to facilitate the inexorable rise of asset prices. 

    More specifically, bubble territory for Grantham is around S&P 2250, and because “the Greenspan/ Bernanke/Yellen .. Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006,” there’s no good reason to think we won’t reach a bubble-defining two sigma event before all is said and done, even if that means launching QE4 in the event liftoff’s first 25bps baby steps result in a 1937 redux.

    Grantham also bemoaned the lack of capex spending and the myopia exhibited by corporate management teams, noting the “current extreme reluctance to make new investments in plant and equipment (how old-fashioned that sounds these days) rather than [plowing money] into stock buybacks, which may be good for corporate officers and stockholders, but bad for GDP growth and employment.”

    In GMO’s latest quarterly missive, Grantham is back with another dose of inconvenient truthiness, this time in the form of “ten quick topics to ruin your summer.”

    In short, this is a list of what Grantham – who points out how fortunate he is to “have an ideal job [with] no routine day-to-day responsibilities [which leaves him] free to obsess about anything that seems both relevant and interesting” – thinks you should worry about going forward:

    1. A new era of lower trend GDP growth
    2. Resource scarcity
    3. Oil
    4. The environment
    5. Food shortages
    6. Income inequality
    7. The death of “majoritarian electoral democracy” 
    8. The Fed
    9. Asset bubbles
    10. The limits of humankind 

    Here are some excerpts from Grantham’s thoughts on each topic:

    *  *  * 

    From GMO

    1. Pressure on GDP growth in the U.S. and the balance of the developed world: count on 1.5% U.S. growth, not the old 3% 

    • Factors potentially slowing long-term growth:
    • Slowing growth rate of the working population
    • Aging of the working population
    • Resource constraints, especially the lack of cheap $20/barrel oil
    • Rising income inequality
    • Disappointing and sub-average capital spending, notably in the U.S.
    • Loss of low-hanging fruit: Facebook is not the new steam engine
    • Steadily increasing climate difficulties

    Partially dysfunctional government, particularly in economic matters that fail to maximize growth opportunities, especially in the E.U. and the U.S.

    Mainstream economists, with their emphasis on highly theoretical models, have been perplexed by the recent chain of disappointments in productivity and GDP growth and would disregard all or most of these factors as theoretically unsatisfactory. 

    2. The age of plentiful, cheap resources is gone forever

    After every historical major rally in commodity prices, there has been the predictable reaction whereby capacity is increased. Given the uncertainties of guessing other firms’ expansion plans, the usual result is a period of excess capacity and weaker prices as everyone expands simultaneously. 

    In agriculture, we also had a global sell-off following three consecutive years in which extremely hostile grain-growing weather had driven prices to panic levels of triple and quadruple their previous lows. 

    All in all I am still very confident, unfortunately, that the old regime of irregularly falling commodity prices is gone forever.

    3. Oil

    Among commodities, oil has been king and still is. For a while longer. Oil has driven our civilization to where it is today. It created the surplus in our economic system that allowed for scientific research and rapid growth. Now, as we are running out of oil that is cheap to recover, the economic system is becoming stressed and growth is slowing.

    4. Climate Problems

    Both the actual climate and the associated politics seem to be changing more rapidly these days, with the seriousness of the situation becoming better appreciated. Visible changes in the climate have also been accelerating, with many more records than normal of droughts, floods, and, most particularly, heat. Last year was the hottest year ever recorded, and this year, helped by an El Nin?o, has gotten off to a dreadful start. January was the second hottest January ever. February and March were outright records. April was in third place, but both May and June were back in first place. This consistency with volatile climate is unusual and ominous. If kept up, 2015 will be the hottest by a lot.

    5. Global food shortages

    The world’s population continues to grow, and the increasing middle class of the emerging countries, especially China, is rapidly increasing its meat consumption. Both trends put steady pressure on our grain and soy producing capabilities at a time when productivity gains have been irregularly slowing for several decades and show every sign of continuing to slow.7 Both overland and underground water supplies are stressed. Weather for farming becomes increasingly destabilized with increased droughts and radically increased flooding events. Flooding particularly increases soil erosion, which still continues at 1% a year, close to 100 times natural replacement rates. Insects and weeds are apparently becoming resistant to chemicals faster than chemists can respond. 

    6. Income inequality

    Over the last few years, we have been presented with data showing that the U.S. is the most unequal society (or one of the two or three worst) in both income and wealth in the developed world. It is also one of the less economically mobile ones, especially for mobility out of the poorest quintile. Neither situation applied or even nearly applied 40 years ago.

    7. Trying to understand deficiencies in democracy and capitalism

    Democracy

    “The central point that emerges from our research is that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.” This is the killer conclusion of a paper last fall by Gilens and Page.11 Based on the study of almost 1,800 policy issues for which income breakdowns were available, and defining the “Elite” generously as those above the 90th percentile, it finds that “majoritarian electoral democracy” is largely a thing of the past. 

    Capitalism: a failure to be inclusive (and feathering the corporate officers’ nests)

    I have previously gone on at length about the critical, perhaps even deadly, deficiency in capitalism in dealing with long-term issues of the commons – damages to our common air, water, and soil. I would now like to take a swipe at capitalism’s increasing failure to be inclusive. Capitalism has steadily dropped its baggage of stakeholders, with the exception of senior corporate officers in first place and stockholders in second. Interest in local communities, cities, states, and countries of origin has been largely put aside as has the previous jewel in the crown of responsibilities to workers, the defined benefit pension fund. At a time of provable abnormally high corporate profits as a percent of GDP, corporations have argued that defined benefit pensions are not affordable. That they are dropping them should come as no surprise, for defined contribution plans (in general less attractive to employees than defined benefit plans) are much cheaper and easier on accounting predictability. What is surprising is why they adopted defined benefit plans in the first place, when they did not have to. And why did they have, in the 1935 to 1985 window, a sense of a social contract, suggesting that other things mattered besides maximizing short-term profits? Good ethics but bad capitalism? Actually, my colleague, James Montier, argues that a single-minded emphasis on relatively short-term share value maximization is a bad business idea; and I agree. Loyalty from workers, community, and country and an image as a company with worthwhile values is very probably a better business proposition. A longer-term focus certainly is. The best strategy, as Montier argues, is probably to concentrate on the highest possible customer satisfaction at a reasonable profit.

    8. Deficiencies in the Fed

    A counter-productive job description, badly executed. 

    9. Investment bubbles in a world that is, this time, interestingly different

    Two significant items seem to be different this time. First, profit margins in the U.S. seem to have stopped mean reverting in the old, normal way, and second, some real estate markets have bubbled up and then stayed there at high prices. Both seem surprising events, even against what I would call “the laws of nature,” or at least the usual laws of capitalism. What is going on? 

    10. Limitations of homo sapiens 

    After reading all of this you may think that I am particularly pessimistic. It is not true: It is all of you who are optimistic! Not only does our species have a strong predisposition to be optimistic (or bullish) – it is probably a useful survival characteristic – but we are particularly good at listening to agreeable data and avoiding unpleasant data that does not jibe with our beliefs or philosophies. Facts, whether backed by 97% of scientists as is the case with man-made climate change, or 99.9% as is the case with evolution, do not count for nearly as much as we used to believe.

    For that matter, we do a terrible job of planning for the long term, particularly in postponing gratification, and we are wickedly bad at dealing with the implications of compound math. All of this makes it easy for us to forget about the previously painful market busts; facilitates our pushing stocks and markets on occasion to levels that make no mathematical sense; and allows us, regrettably, to ignore the logic of finite resources and a deteriorating climate until the consequences are pushed up our short-term noses. 

  • Bill Gross Explains (In 90 Seconds) How It's All A Big Shell Game

    “There is no doubt that the price of assets right now is a question mark… and ultimately when Central Banks stop manipulating markets where that price goes is up for grabs… and probably points down“

     

    As Gross tweeted…

    This clip carries a public wealth warning…

     

  • Hillary Saves Capitalism!

    Submitted by Bill Bonner via Bonner & Partners,

    The Fed’s EZ money is creating hard times. It led to overconsumption… then overproduction… and now to a big bust.

    Just what you’d expect.

    And what you’d expect next is more crashing, sliding, and busting up in the world’s markets… followed by more EZ money.

    Eventually, it will explode into consumer price inflation. But that could still be far in the future.

    *  *  *

    We keep our political coverage balanced at the Diary. On the Republican’s side, there is an unusually rich assortment of fools and knaves. And on the Democrat’s side, there is Ms. Clinton.

    We don’t know what we would do without her.

    How would we know, for example, how long we should hold an investment without her to tell us?

    She seems to believe that today’s average holding period is too short. It causes an obsession with short-term results that she calls “quarterly capitalism.”

    CNBC reports:

    Screen Shot 2015-07-28 at 12.17.04 PM

     

    How will “working to end short-termism” help working families?

    How many months of holding an investment is acceptable to the Democratic Party’s front-runner?

    A Crony Unmasked

    Why would anyone even think that Ms. Clinton – who has never held an honest job in the private sector – could possibly have any idea about how to save capitalism… or how long an investment should be held?

    These questions leave us panting, sweating… and in need of a drink.

    All Ms. Clinton knows about capitalism is what the cronies tell her when they are slipping her cash. Wall Street is a major financial contributor to her campaign. They know she can be bought. She won’t disappoint them.

    Hillary still has to grandstand for the benefit of the Democratic masses. But she’s clearly on the side of the cronies and the zombies. And they both hate capitalism.

    Why?

    Because capitalism is a zombie killer.

    Capitalism is not a wealth distribution system, as supply-side economist and techno-utopian guru George Gilder makes clear in his latest book, Knowledge and Power. It’s an information system… a knowledge system… in which entrepreneurs take risks and find out what works.

    They learn how to build better things… putting old zombie manufacturers out of business. They figure out how to cut costs and increase quality, too… squeezing out the cronies and forcing the zombies to get to work.

    They discover the knowledge that makes us wealthier.

    Naturally, the zombies and cronies try to put capitalism out of business. Typically, their candidates claim to be “improving” or “saving” capitalism from itself.

    What they are really doing is saving the crony lobbyists and zombie voters from real capitalism.

  • Hillary Does It Again: What "Everyday American" Would Pay $600 For This Haircut?

    There are plenty of 'everyday Americans' out there with perfectly good haircuts, styled by perfectly good hairdressers, in perfectly good Main Street salons… so why is self-proclaimed populist person-of-the-everyday-American Hillary Clinton getting a $600 haircut at Bergdorf Goodman's Fifth Avenue store in NYC?

     

    As PageSix reports,

    Hillary Clinton put part of Bergdorf Goodman on lockdown on Friday to get a $600 haircut at the swanky John Barrett Salon.

     

    Clinton, with a huge entourage in tow, was spotted being ushered through a side entrance of the Fifth Avenue store on Friday.

     

    A source said, “Staff closed off one side of Bergdorf’s so Hillary could come in privately to get her hair done. An elevator bank was shut down so she could ride up alone, and then she was styled in a private area of the salon. Other customers didn’t get a glimpse. Hillary was later seen with a new feathered hairdo.”

     

    Clinton regularly sees salon owner John Barrett, who charges regular mortals $600 for a cut and blow-dry. Hair color can cost an extra $600.

     

    And let’s not forget that her husband, Bill Clinton, was famously caught up in a 1993 controversy known as “Hairgate” when he got a $200 haircut on Air Force One as it was idling for an hour at LAX, shutting down two runways and diverting numerous flights.

     

    Read more here…

    *  *  *

    Maybe she should ask for her money back?

     

    The "Something About Mary" look?

     

    Still could be worse…

  • 1 In 5 US Stocks Now In Bear Market

    With the major US equity markets within 1-2% of their record highs, Gavekal Capital notes that underneath the headline indices, stock markets are extremely tumultuous. Rather stunningly 21% of MSCI USA stocks are at least 20% off their recent highs, and 68% of Canadian stocks are in bear markets, but the real carnage is taking place in Emerging Markets.

    This is only the third time since the summer of 2012 that this many stocks are in a bear market. The most interesting aspect of this internal correction is the fact that the headline index is a mere 1.8% off the 200-day high. On October 10, 2014 when 21% of MSCI USA stocks were in a bear market, the headline MSCI USA index was 5.4% off the 200-day high. And on November 8, 2012 when 21% of the MSCI USA stocks were in a bear market, the headline index was 6% off the 200-day high.

    image

    The pain felt in US stocks is nothing compared to many markets around the world. Just a reminder that this all based on USD performance.

    Canadian stocks have been getting pummeled. 68% of Canadian stocks are in a bear market. This is the greatest percentage of stocks in a bear market since 2011.

    30% of MSCI Hong Kong stocks are in a bear market and 29% of MSCI Singapore stocks are in a bear market as well.

    image

    image

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    The true carnage is taking place in the emerging markets, however, where nearly 2/3 of all EM stocks are at least 20% off its 200-day high.

    Some of the worst countries in EM are Brazil (82%), China (82%), Indonesia (77%), and Russia (81%).

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    Source: Gavekal Capital

  • The War On Cash: Why Now?

    Submitted by Charles Hugh-Smith via The Mises Institute,

    You’ve probably read that there is a “war on cash” being waged on various fronts around the world. What exactly does a “war on cash” mean?

    It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.

    These limits are broadly called “capital controls.”

    Why Now?

    Before we get to that, let’s distinguish between physical cash — currency and coins in your possession — and digital cash in the bank. The difference is self-evident: cash in hand cannot be confiscated by a “bail-in” (i.e., officially sanctioned theft) in which the government or bank expropriates a percentage of cash deposited in the bank. Cash in hand cannot be chipped away by negative interest rates or fees.

    Cash in the bank cannot be withdrawn in a financial emergency that shutters the banks (i.e., a bank holiday).

    When pundits suggest cash is “obsolete,” they mean physical paper money and coins, not cash in a bank. Cash in the bank is perfectly fine with the government and its well-paid yes-men (paging Mr. Rogoff and Mr. Buiter) because this cash can be expropriated by either “bail-ins” or by negative interest rates.

    Inflation and Negative Interest Rates

    Mr. Buiter, for example, recently opined that the spot of bother in 2008–09 (the Global Financial Meltdown) could have been avoided if banks had only charged a 6 percent negative interest rate on cash: in effect, taking 6 percent of the depositor’s cash to force everyone to spend what cash they might have.

    Both cash in hand and cash in the bank are subject to one favored method of expropriation, inflation. Inflation — the single most cherished goal of every central bank — steals purchasing power from physical cash and digital cash alike. Inflation punishes holders of cash and benefits those with debt, as debt becomes cheaper to service.

    The beneficial effect of inflation on debt has been in play for decades, so it can’t be the cause of governments’ recent interest in eliminating physical cash.

    So now we return to the question: Why are governments suddenly declaring war on physical cash, the oldest officially issued form of money?

    Why They Hate Cash in Hand

    The first reason: physical cash has the potential to evade both taxes as well as officially sanctioned theft via bail-ins and negative interest rates. In short, physical cash is extremely difficult for governments to steal.

    Some of you may find the word theft harsh or even offensive. But we must differentiate between taxes — which are levied to pay for the state’s programs that in principle benefit all citizens — and bail-ins, i.e., the taking of depositors’ cash to bail out banks that became insolvent through the actions of the banks’ management, not the actions of depositors.

    Bail-ins are theft, pure and simple. Since the government enforces the taking, it is officially sanctioned theft, but theft nonetheless.

    Negative interest rates are another form of officially sanctioned theft. In a world without the financial repression of zero-interest rates (ZIRP — central banks’ most beloved policy), lenders would charge borrowers enough interest to pay depositors for the use of their cash and earn the lender a profit.

    If borrowers are paying interest, negative interest rates are theft, pure and simple.

    Why are governments suddenly so keen to ban physical cash? The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.

    Forcing Those With Cash To Spend or Gamble Their Cash

    Negative interest rates (and fees on cash, which are equivalently punitive to savers) raise another question: why are governments suddenly obsessed with forcing owners of cash to either spend it or gamble it in the financial-market casinos?

    The conventional answer voiced by Mr. Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it. The solution to recession is thus to force all those stingy cash hoarders to spend their money.

    There are three enormous flaws in this thinking.

    One is that households and businesses have cash to hoard. The reality is the bottom 90 percent of households have less income now than they did fifteen years ago, which means their spending has declined not from hoarding but from declining income.

    Median Household Income in the 21st Century

    While corporate America has basked in the glory of sharply rising profits, small business has not prospered in the same fashion. Indeed, by some measures, small business has been in a six-year recession.

    The bottom 90 percent has less income and faces higher living expenses, so only the top slice of households has any substantial cash. This top slice may see few safe opportunities to invest their savings, so they choose to keep their savings in cash rather than gamble it in a rigged casino (i.e., the stock market).

    The second flaw is that hoarding cash is the only rational, prudent response in an era of financial repression and economic insecurity. What central banks are demanding — that we spend every penny of our earnings rather than save some for investments we control or emergencies — is counter to our best interests.

    A War on Cash Is a War on Capital

    This leads to the third flaw: capital — which begins its life as savings — is the foundation of capitalism. If you attack savings as a scourge, you are attacking capitalism and upward mobility, for only those who save capital can invest it to build wealth. By attacking cash, the central banks and governments are attacking capital and upward mobility.

    Those who already own the majority of productive assets are able to borrow essentially unlimited sums at near-zero interest rates, which they can use to buy more productive assets. Everyone else — the bottom 99.5 percent — is reduced to consumer-serfdom: you are not supposed to accumulate productive capital, you are supposed to spend every penny you earn on interest payments, goods, and services.

    This inversion of capitalism dooms an economy to all the ills we are experiencing in abundance: rising income inequality, reduced opportunities for entrepreneurship, rising debt burdens, and a short-term perspective that voids the longer-term planning required to build sustainable productivity and wealth.

    Physical Cash: Only $1.36 Trillion

    According to the Federal Reserve, total outstanding physical cash amounts to $1.36 trillion.

    Given that a substantial amount of this cash is held overseas, physical cash is a tiny part of the domestic economy and the nation’s total assets. For context: the US economy is $17.5 trillion, total financial assets of households and nonprofit organizations total $68 trillion, base money is around $4 trillion, and total money (currency in circulation and demand deposits) is over $10 trillion (source).

    Given the relatively modest quantity of physical cash, claims that eliminating it will boost the economy ring hollow.

    Following the principle of cui bono — to whose benefit? — let’s ask: What are the benefits of eliminating physical cash to banks and the government?

    Benefits To Banks and the Government of Eliminating Physical Cash

    The benefits to banks and governments by eliminating cash are self-evident:

    1.  Every financial transaction can be taxed.
    2.  Every financial transaction can be charged a fee.
    3.  Bank runs are eliminated.

    In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1 percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.

    The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.

    But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.

    So, when the dust has settled who ultimately benefits by this war on cash, government and the central banks, pure and simple.

  • What Is The Fair Value Of Gold?

    Having detailed yesterday the manipulation in the precious metals markets that implies the bear market in bullion is an artificial creation, we thought the following 'rational' chart effort at 'valuing' gold may provide some frame of reference for the level of riggedness occurring…

    Gold fair value, measured by a GDP-weighted average of global central bank's balance sheet expansion, as of Jul 2015

    Source: @CarpathiaCap

     

    As we concluded previously,

    Clearly the demand for physical metal is very high, and the ability to meet this demand is constrained. Yet, the prices of bullion in the futures market have consistently fallen during this entire period. The only possible explanation is manipulation.

     

    The manipulation of the gold price by injecting large quantities of freshly printed uncovered contracts into the Comex market is an empirical fact.

     

    The sudden debunking of gold in the financial press is circumstantial evidence that a full-scale attack on gold’s function as a systemic warning signal is underway.

    It is unlikely that regulatory authorities are unaware of the fraudulent manipulation of bullion prices. The fact that nothing is done about it is an indication of the lawlessness that prevails in US financial markets.

    Today, there is no “official” price for gold, nor any “gold-exchange standard” competing with a semi-underground free gold market.

    There is, however, a material legacy of “real versus pseudo” gold that remains a terrible menace. Buyer beware of the pivotal difference between the two.

  • Congress Proposes Fraudulent New Law To "Fix" Social Security

    Submitted by Simon Black via SovereignMan.com,

    On January 31, 1940, the very first Social Security check ever delivered went to Ms. Ida May Fuller, a former legal secretary who had recently retired.

     

    Ms. Fuller had spent just three years paying into the system, contributing a total of $24.75 to Social Security.

     

    Yet her first check was for nearly that entire amount. Quite a return on investment.

     

    She went on to live past 100, collecting a total of $22,888.92, over 900 times the amount she contributed to the program. Her story is quite the metaphor.

    If you’re not familiar, Social Security is comprised of two primary trust funds: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI).

    Essentially, all of the taxes paid in to Social Security end up in one of these two trust funds.

    The trust funds then ‘manage’ the money to generate a rate of return, and then pay out distributions to program recipients.

    Now, the funds are overseen by a Board of Trustees which is obliged to submit an annual report on the fiscal condition of the program. It ain’t pretty.

    The Disability Insurance (DI) fund is particularly ugly. In fact, the trustees themselves wrote in the 2015 annual report that

    “[T]he DI Trust Fund fails the Trustee’s short-range test of financial adequacy. . .”

     

    and,

     

    “The DI Trust Fund reserves are expected to deplete in the fourth quarter of 2016…”

    In other words, one of the two Social Security trust funds is just months away from insolvency.

    When people think about Social Security, they think that all the problems are decades away.

    Wrong. This is next year.

    The other trust fund, OAS, is projected to “become depleted and unable to pay scheduled benefits in full on a timely basis in 2034.”

    Which means that if you’re 47 or younger, you can kiss Social Security goodbye.

    Bear in mind, these aren’t my calculations. Nor are they any wild assertions. They’re direct quotes from the trustees themselves.

    And, just who are these trustees? The Secretary of the Treasury of the United States of America. The Labor Secretary. The Secretary of Health and Human Services.

    Some of the most senior officials in the US government sign their name to an official report stating that these funds are nearly insolvency– one of them even NEXT YEAR.

    Not to worry, though. Congress is on the case.

    Late last week, several dozen members of Congress introduced the “One Social Security Act”, HR 3150, to solve this problem.

    And let me tell you, their solution is bold. Fearless. And brilliant.

    HR 3150 attacks the looming insolvency of Disability Insurance by eliminating the fund altogether.

    So instead of having two separate funds for two distinct purposes of Social Security, the legislation aims to combine them into one unified fund.

    That way, with just one fund, there won’t be any separate reporting about DI’s insolvency.

    It’s genius! They make the problem go away by eliminating the requirement to report it.

    There’s just one small issue. Legally, they have a word for this. It’s called fraud.

    You and I would go to prison if we commingled funds like this. But in the hallowed halls of Congress, this is what passes as a solution.

    This is so typical– solving problems by pretending that they don’t exist and destroying any element of transparency and accountability.

    This pretty much tells you everything you need to know about government.

    Look, it’s a hard reality to swallow. But the government’s own data show that these programs are not going to be there for you.

    And the story smacking us in the face right now demonstrates precisely how politicians intend on ‘solving’ the problems.

    These people aren’t the solution. They’re the problem.

    And don’t think that ‘voting the bums out’ will affect anything. Elections merely change the players, not the game.

    The only way forward is to invest in yourself, particularly in your business and financial education. Make plans based on the assumption that Social Security doesn’t exist.

    And if, by some miracle, it’s still there by the time you retire, you won’t be worse off for having built a larger nest egg thanks to the financial acumen you developed.

  • If Varoufakis Is Charged With Treason, Then Dijsselbloem Should Be As Well

    In the aftermath of this weekend’s infamous leak of Yanis Varoufakis audio recording with members of OMFIF in which the former finmin admitted to asset managers that in his tenure as a finmin he had engaged in preparations for a return to the Drachma, Greece has been gripped by a media frenzy debating whether Varoufakis will be charged with treason for daring to even contemplate how an exit from the EMU would take place.

    To be sure, Varoufakis may have poured the initial gasoline on the fire when he admitted to Ambrose Evans-Pritchard shortly after the recording surfaced that “the context of all this is that they want to present me as a rogue finance minister, and have me indicted for treason. It is all part of an attempt to annul the first five months of this government and put it in the dustbin of history.”

    His concerns were certainly justified: yesterday Kathimerini reported that Greek Supreme Court prosecutor Efterpi Koutzamani on Tuesday took two initiatives in the wake of revelations by former Finance Minister Yanis Varoufakis that he had planned a parallel banking system: she forwarded to Parliament two suits filed against the former minister last week by private citizens and she appointed a colleague to determine whether any non-political figures should face criminal charges in connection with the affair.

    The legal suits were filed last week by Apostolos Gletsos, the mayor of Stylida in central Greece and head of the Teleia party, and Panayiotis Giannopoulos, a lawyer. Giannopoulos is suing Varoufakis for treason over his handling of talks with Greece’s creditors. Gletsos, for his part, accuses Varoufakis of exposing the Greek state to the risk of reprisals.

     

    As there is a law protecting ministers, the judiciary cannot move directly against Varoufakis. It is up to Parliament to decide whether his immunity should be lifted so he can stand trial. The first step would be to set up an investigative committee.

     

    A third suit was expected to go to Parliament after a group of five lawyers said they were seeking an investigation into whether any non-political figures should face criminal charges in connection with the Varoufakis affair. The charges would involve violation of privacy data, breach of duty, violation of currency laws and belonging to a criminal organization. It was the lawyers’ move that prompted Koutzamani to order an investigation.

    As a further reminder, during the telephone call Varoufakis detailed his plan for a parallel banking system, which would involve a childhood friend, a professor at Columbia University, to hack into the ministry’s online tax system.

    Varoufakis did not name the head of the General Secretariat for Information Systems, Michalis Hatzitheodorou, but the description of his role at the ministry and his background suggested he was referring to him.

     

    In a statement on Tuesday, Hatzitheodorou rebuffed as “absolutely false” reports regarding any type of intervention in the ministry’s information systems. The GSIS, and the current general secratary, have not planned much less attempted any type of intervention in its systems, the statement said. It added that the GSIS has enacted procedures with strict specifications which guarantee the security of personal data and make such interventions by anyone impossible.

    What makes matters confusing, is that the core allegation made by Varoufakis, namely that the Troika controls Greece tax revenues and had to be sabotaged, was strictly denied: European Commission spokeswoman Mina Andreeva on Tuesday described as “false and unfounded” Varoufakis’s claims that Greece’s General Secretariat for Public Revenues is controlled by the country’s creditors.

    In other words, if Andreeva is right, then Varoufakis’ transgression of threatening to hijack the Greek tax system was merely hot air, and the former finmin is guilty of nothing more than self-aggrandizement.

    On the other hand, if Greece does find it has a legal basis to criminally charge Varoufakis with treason merely for preparing for a Plan B, then it brings up an interesting question: if Varoufakis was a criminal merely for preparing for existing the Euro, then comparable treason charges should also be lobbed against none other than Varoufakis’ nemesis – Eurogroup president and Dutch finance minister Jeroen Dijsselbloem.

    Recall from the November 28 post that “Netherlands, Germany Have Euro Disaster Plan – Possible Return to Guilder and Mark“, to wit:

    The Dutch finance ministry prepared for a scenario in which the Netherlands could return to its former currency – the guilder. They hosted meetings with a team of legal, economic and foreign affairs experts to discuss the possibility of returning to the Dutch guilder in early 2012.

     

    At the time the Euro was in crisis, Greece was on the verge of leaving or being pushed out of the Euro and the debt crisis was hitting Spain and Italy hard. The Greek prime minister Georgios Papandreou and his Italian counterpart Silvio Berlusconi had resigned and there were concerns that the eurozone debt crisis was spinning out of control – leading to contagion and the risk of a systemic collapse.

     

    A TV documentary broke the story last Tuesday. The rumours were confirmed on Thursday by the current Dutch minister of finance, Jeroen Dijsselbloem, and the current President of the Eurogroup of finance ministers in a television interview which was covered by EU Observer and Bloomberg.

     

    “It is true that [the ministry of] finance and the then government had also prepared themselves for the worst scenario”, said Dijsselbloem.

    This is precisely what Varoufakis was doing too.

    “Government leaders, including the Dutch government, have always said: we want to keep that eurozone together. But [the Dutch government] also looked at: what if that fails. And it prepared for that.”

     

    While Dijsselbloem said there was no need to be “secretive” about the plans now, such discussions were shrouded in secrecy at the time to avoid spreading panic on the financial markets.

    Again, precisely like in the Greek scenario.

    In fact, if throwing people in jail, may round up Wolfi Schauble as well:

    Jan Kees de Jager, finance minister from February 2010 to November 2012, acknowledged that a team of legal experts, economists and foreign affairs specialists often met at his ministry on Fridays to discuss possible scenarios.

     

    “The fact that in Europe multiple scenarios were discussed was something some countries found rather scary. They did not do that at all, strikingly enough”, said De Jager in the TV documentary. “We were one of the few countries, together with Germany. We even had a team together that discussed scenarios, Germany-Netherlands.”

     

    When the EU Observer requested confirmation from Germany, the German ministry of finance did not officially deny that it had drawn up similar plans, stating simply: “We and our partners in the euro zone, including the Netherlands, were and still are determined to do everything possible to prevent a breakup of the eurozone.”

     

    * * *

     

    This is quite a revelation. At that time the German finance minister Wolfgang Schauble had said that the Euro could survive without Greece. Whether it could survive without the Dutch is another matter entirely.

    Fast forward 3 years when Greece, too, was making preparations for “preventing the breakup of the eurozone” in doing precisely what Schauble wanted as recently as three weeks ago: implementing a parallel currency which would enable Greece to take its “temporary” sabbatical from the Eurozone.

    So one wonders: where are the legal suits accusing Dijsselbloem and Schauble of the same “treason” that Varoufakis may have to vigorously defend himself in a kangaroo court designed to be nothing but a spectacle showing what happens to anyone in Europe who dares to give Germany the finger, either literally or metaphorically.

    The answer: nowhere, and they will never appear, because if Varoufakis is indeed sued it will not be because he did something that other much more “serious” Eurocrats haven’t considered or done before, but simply to crucify the Greek and make him into a dramatic example for any other “peripheral” (or even core, ahem “Madame Frexit“) European who would even consider taking a comparable action on their own and pushing Europe’s artificial, and now expiring, monetary union to the edge of collapse.

    Then again, considering just how badly Europe misjudged the third season of the Greek bailout tragicomedy, it may want to be careful: the last thing it wants is to create a martyr against what increasingly more are calling a fascist oligarchy operating, conveniently enough, out of Belgium, Frankfurt and Berlin, one whose next item on the agenda is taking advantage of the Greek crisis and finally doing away with European state sovereignty altogether handing over control of Europe to a “parliament”, one which if the ECB is any indication, will also be run by a few Goldman bankers.

  • China Rescue, VIX Crash, & Fed Pump Squeeze Shorts Most In 6 Months, Trannies Bounce Most Since 2011

    Summing up the talking heads opinions on China, Twitter, Yelp… and so on..

     

    Overnight exuberance in the afternoon session in China….

    Provided the first momo pump in US stocks (but that faded back to unch ahead of the open and dismal housing data), FOMC prep sent us spiking before investors realized that while dovish it basically suggests the economy is crap…

     

    Cash indices never looked back with a small pump'n'dump after the Fed statement…

     

    This is Trannies best 2-day ramp since 2011…

     

    Leaving everybody happy since Friday…

     

    All about avoiding a red print Year-To-Date…

     

    TWTR was clubbed like a baby seal…

     

    VIX crushed to 11 handle briefly…The Matterhorn Pattern completed…

     

    Which is no big surprise…

     

    Treasury yields ended the day higher, with the curve steepening modestly… initialk kneejerk was bonds rallied after FOMC…

     

    The US Dollar surged after FOMC – despite its dovish tone…

     

    Silver jumped but gold was flat as copper and crude popped…

     

    Saudi rumors on production cuts, US inventory draws, and the biggest US production drop since Oct 2013 sent crude soaring but The Fed pissed in the pool party arguing that things are not quite as awesome as they hoped…

     

     

    Charts: Bloomberg

    Bonus Chart: Data Dependent Fed misses window…

    Bonus Bonus Chart: Remember this…

  • This Is The Reason Why Facebook Is Sliding After Hours, Dragging Nasdaq Futures Lower

    Moments ago, Facebook reported Q2 earnings and just like Twitter, it beat across all key financial metrics:

    • Revenues of $4.04 billion beat consensus $3.99 billion
    • Non-GAAP EPS of $0.50 also beat consensus of $0.47 (GAAP EPS was a different story, at half the non-GAAP).
    • Monthly active users (MAUs) – MAUs were 1.49 billion as of June 30, 2015, an increase of 13% year-over-year, and above the 1.475billion expected.

    So all is well, and FB stock should be soaring. Alas for FB longs it isn’t and at last check the stock was down by $5 or about 5% after hours, because algos were focused on one particular user growth metric:

    • Daily active users (DAUs) – DAUs were 968 million on average for June 2015, an increase of 17% year-over-year.

    This number was a fraction less than the 970.5 million consensus estimate, and because it brought up nightmare visions of what happened to Twitter stock overnight, which since earnings has plunged to near all time lows, is forcing traders to sell or short, if only now, and ask questions later.

     

    Ironically, the one chart the algos should be looking at is the one showing the Y/Y decline in real operating income, masked by the endless fudging of non-GAAP adjustments…

     

    … an dthe collapse in GAAP operating margins:

     

    The reason for this massive divergence? Some 19% of Facebook revenues are stock-based compensation: magically everyone continues to pretend this is irrelevant.

    Whatever the reason, the stock is not happy…

     

    And since FB, with its $270 billion market cap, has become a huge component of the Nasdaq, the broader tech index is not too happy either.

     

    That said, we wouldn’t be at all surprised if there is a complete kneejerk reversal during the conference call: yesterday TWTR had spiked 10% on the initial results, only to crash today. Perhaps Facebook will pull a mirror image…

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Jul 29

Today’s News July 29, 2015

  • Supply And Demand In The Gold And Silver Futures Markets

    Authored by Paul Craig Roberts and Dave Kranzler,

    This article establishes that the price of gold and silver in the futures markets in which cash is the predominant means of settlement is inconsistent with the conditions of supply and demand in the actual physical or current market where physical bullion is bought and sold as opposed to transactions in uncovered paper claims to bullion in the futures markets. The supply of bullion in the futures markets is increased by printing uncovered contracts representing claims to gold. This artificial, indeed fraudulent, increase in the supply of paper bullion contracts drives down the price in the futures market despite high demand for bullion in the physical market and constrained supply. We will demonstrate with economic analysis and empirical evidence that the bear market in bullion is an artificial creation.

    The law of supply and demand is the basis of economics. Yet the price of gold and silver in the Comex futures market, where paper contracts representing 100 troy ounces of gold or 5,000 ounces of silver are traded, is inconsistent with the actual supply and demand conditions in the physical market for bullion. For four years the price of bullion has been falling in the futures market despite rising demand for possession of the physical metal and supply constraints.

    We begin with a review of basics. The vertical axis measures price. The horizontal axis measures quantity. Demand curves slope down to the right, the quantity demanded increasing as price falls. Supply curves slope upward to the right, the quantity supplied rising with price. The intersection of supply with demand determines price. (Graph 1)

    Supply and Demand Graph 1

    A change in quantity demanded or in the quantity supplied refers to a movement along a given curve. A change in demand or a change in supply refers to a shift in the curves. For example, an increase in demand (a shift to the right of the demand curve) causes a movement along the supply curve (an increase in the quantity supplied).

    Changes in income and changes in tastes or preferences toward an item can cause the demand curve to shift. For example, if people expect that their fiat currency is going to lose value, the demand for gold and silver would increase (a shift to the right).

    Changes in technology and resources can cause the supply curve to shift. New gold discoveries and improvements in gold mining technology would cause the supply curve to shift to the right. Exhaustion of existing mines would cause a reduction in supply (a shift to the left).

    What can cause the price of gold to fall? Two things: The demand for gold can fall, that is, the demand curve could shift to the left, intersecting the supply curve at a lower price. The fall in demand results in a reduction in the quantity supplied. A fall in demand means that people want less gold at every price. (Graph 2)

    Supply and Demand Graph 2

    Alternatively, supply could increase, that is, the supply curve could shift to the right, intersecting the demand curve at a lower price. The increase in supply results in an increase in the quantity demanded. An increase in supply means that more gold is available at every price. (Graph 3)

    Supply and Demand Graph 3

    To summarize: a decline in the price of gold can be caused by a decline in the demand for gold or by an increase in the supply of gold.

    A decline in demand or an increase in supply is not what we are observing in the gold and silver physical markets. The price of bullion in the futures market has been falling as demand for physical bullion increases and supply experiences constraints. What we are seeing in the physical market indicates a rising price. Yet in the futures market in which almost all contracts are settled in cash and not with bullion deliveries, the price is falling.

    For example, on July 7, 2015, the U.S. Mint said that due to a “significant” increase in demand, it had sold out of Silver Eagles (one ounce silver coin) and was suspending sales until some time in August. The premiums on the coins (the price of the coin above the price of the silver) rose, but the spot price of silver fell 7 percent to its lowest level of the year (as of July 7).

    This is the second time in 9 months that the U.S. Mint could not keep up with market demand and had to suspend sales. During the first 5 months of 2015, the U.S. Mint had to ration sales of Silver Eagles. According to Reuters, since 2013 the U.S. Mint has had to ration silver coin sales for 18 months. In 2013 the Royal Canadian Mint announced the rationing of its Silver Maple Leaf coins: “We are carefully managing supply in the face of very high demand. . . . Coming off strong sales volumes in December 2012, demand to date remains very strong for our Silver Maple Leaf and Gold Maple Leaf bullion coins.” During this entire period when mints could not keep up with demand for coins, the price of silver consistently fell on the Comex futures market. On July 24, 2015 the price of gold in the futures market fell to its lowest level in 5 years despite an increase in the demand for gold in the physical market. On that day U.S. Mint sales of Gold Eagles (one ounce gold coin) were the highest in more than two years, yet the price of gold fell in the futures market.

    How can this be explained? The financial press says that the drop in precious metals prices unleashed a surge in global demand for coins. This explanation is nonsensical to an economist. Price is not a determinant of demand but of quantity demanded. A lower price does not shift the demand curve. Moreover, if demand increases, price goes up, not down.

    Perhaps what the financial press means is that the lower price resulted in an increase in the quantity demanded. If so, what caused the lower price? In economic analysis, the answer would have to be an increase in supply, either new supplies from new discoveries and new mines or mining technology advances that lower the cost of producing bullion.

    There are no reports of any such supply increasing developments. To the contrary, the lower prices of bullion have been causing reductions in mining output as falling prices make existing operations unprofitable.

    There are abundant other signs of high demand for bullion, yet the prices continue their four-year decline on the Comex. Even as massive uncovered shorts (sales of gold contracts that are not covered by physical bullion) on the bullion futures market are driving down price, strong demand for physical bullion has been depleting the holdings of GLD, the largest exchange traded gold fund. Since February 27, 2015, the authorized bullion banks (principally JPMorganChase, HSBC, and Scotia) have removed 10 percent of GLD’s gold holdings. Similarly, strong demand in China and India has resulted in a 19% increase of purchases from the Shanghai Gold Exchange, a physical bullion market, during the first quarter of 2015. Through the week ending July 10, 2015, purchases from the Shanghai Gold Exchange alone are occurring at an annualized rate approximately equal to the annual supply of global mining output.

    India’s silver imports for the first four months of 2015 are 30% higher than 2014. In the first quarter of 2015 Canadian Silver Maple Leaf sales increased 8.5% compared to sales for the same period of 2014. Sales of Gold Eagles in June, 2015, were more than triple the sales for May. During the first 10 days of July, Gold Eagles sales were 2.5 times greater than during the first 10 days of June.

    Clearly the demand for physical metal is very high, and the ability to meet this demand is constrained. Yet, the prices of bullion in the futures market have consistently fallen during this entire period. The only possible explanation is manipulation.

    Precious metal prices are determined in the futures market, where paper contracts representing bullion are settled in cash, not in markets where the actual metals are bought and sold. As the Comex is predominantly a cash settlement market, there is little risk in uncovered contracts (an uncovered contract is a promise to deliver gold that the seller of the contract does not possess). This means that it is easy to increase the supply of gold in the futures market where price is established simply by printing uncovered (naked) contracts. Selling naked shorts is a way to artificially increase the supply of bullion in the futures market where price is determined. The supply of paper contracts representing gold increases, but not the supply of physical bullion.

    As we have documented on a number of occasions, the prices of bullion are being systematically driven down by the sudden appearance and sale during thinly traded times of day and night of uncovered future contracts representing massive amounts of bullion. In the space of a few minutes or less massive amounts of gold and silver shorts are dumped into the Comex market, dramatically increasing the supply of paper claims to bullion. If purchasers of these shorts stood for delivery, the Comex would fail. Comex bullion futures are used for speculation and by hedge funds to manage the risk/return characteristics of metrics like the Sharpe Ratio. The hedge funds are concerned with indexing the price of gold and silver and not with the rate of return performance of their bullion contracts.

    A rational speculator faced with strong demand for bullion and constrained supply would not short the market. Moreover, no rational actor who wished to unwind a large gold position would dump the entirety of his position on the market all at once. What then explains the massive naked shorts that are hurled into the market during thinly traded times?

    The bullion banks are the primary market-makers in bullion futures. They are also clearing members of the Comex, which gives them access to data such as the positions of the hedge funds and the prices at which stop-loss orders are triggered. They time their sales of uncovered shorts to trigger stop-loss sales and then cover their short sales by purchasing contracts at the price that they have forced down, pocketing the profits from the manipulation

    The manipulation is obvious. The question is why do the authorities tolerate it?

    Perhaps the answer is that a free gold market serves both to protect against the loss of a fiat currency’s purchasing power from exchange rate decline and inflation and as a warning that destabilizing systemic events are on the horizon. The current round of on-going massive short sales compressed into a few minutes during thinly traded periods began after gold hit $1,900 per ounce in response to the build-up of troubled debt and the Federal Reserve’s policy of Quantitative Easing. Washington’s power is heavily dependent on the role of the dollar as world reserve currency. The rising dollar price of gold indicated rising discomfort with the dollar. Whereas the dollar’s exchange value is carefully managed with help from the Japanese and European central banks, the supply of such help is not unlimited. If gold kept moving up, exchange rate weakness was likely to show up in the dollar, thus forcing the Fed off its policy of using QE to rescue the “banks too big to fail.”

    The bullion banks’ attack on gold is being augmented with a spate of stories in the financial media denying any usefulness of gold. On July 17 the Wall Street Journal declared that honesty about gold requires recognition that gold is nothing but a pet rock. Other commentators declare gold to be in a bear market despite the strong demand for physical metal and supply constraints, and some influential party is determined that gold not be regarded as money.

    Why a sudden spate of claims that gold is not money? Gold is considered a part of the United States’ official monetary reserves, which is also the case for central banks and the IMF. The IMF accepts gold as repayment for credit extended. The US Treasury’s Office of the Comptroller of the Currency classifies gold as a currency, as can be seen in the OCC’s latest quarterly report on bank derivatives activities in which the OCC places gold futures in the foreign exchange derivatives classification.

    The manipulation of the gold price by injecting large quantities of freshly printed uncovered contracts into the Comex market is an empirical fact. The sudden debunking of gold in the financial press is circumstantial evidence that a full-scale attack on gold’s function as a systemic warning signal is underway.

    It is unlikely that regulatory authorities are unaware of the fraudulent manipulation of bullion prices. The fact that nothing is done about it is an indication of the lawlessness that prevails in US financial markets.

  • The End Draws Near For Syria's Assad As Putin's Patience "Wears Thin"

    Early last month in, “The Noose Around Syria’s Assad Tightens” we outlined the latest developments in the country’s prolonged civil war. Here’s what we said then: 

    The US-led alliance realizes very well that as long as Assad has to fight three fronts: i.e., the Nusra Front in the northwestern province of Idlib and ever closer proximity to Syria’s main infrastructure hub of Latakia, ISIS in the central part of the nation where militants recently took over the historic town of Palmyra, and the official “rebel” force in close proximity to Damascus, Assad’s army will either eventually be obliterated or, more likely, mutiny and overthrow the president, putting the Ukraine scenario in play.

    In short, the US and its Middle Eastern allies are simply playing the waiting game; watching for the opportune time to charge in and “liberate” Syria from whatever army manages to take Damascus first, at which point a puppet government will be promptly installed. 

    And make no mistake, the new, U.S.-backed regime will present itself as fiercely anti-militant and will be trotted out as Washington’s newest “partner” in the global war on terror. Of course behind the scenes the situation will likely resemble what happened in Yemen (Obama’s “model of success”) where, according to one account, Abdullah Saleh and his lieutenants not only turned a blind eye to AQAP operations, but in fact played a direct role in facilitating al-Qaeda attacks even as the government accepted anti-terrorism financing from the US government. 

    Of course no one in Washington will care to know the details, as long as the new regime in Syria is receptive to things like piping Qatari natural gas to Europe via a long-stalled pipeline, a project which will do wonders for breaking Gazprom’s energy stranglehold and robbing Vladimir Putin of quite a bit of leverage in what is becoming an increasingly tense standoff with the EU over Ukraine.

    On Sunday, Assad gave a speech in which he attempted to address concerns about the recent setbacks his army has suffered at the hands of the various groups fighting for control of the country. Here’s more from the LA Times’ Special correspondent Nabih Bulos reporting from Beirut: 

    Syrian President Bashar Assad delivered a sober assessment of the state of his forces on Sunday, acknowledging a manpower shortage and conceding troop withdrawals from some areas, but asserting that the military was not facing collapse.

     

    “Are we giving up areas?” Assad asked as he posed a series of questions about the government’s strategy. “Why do we lose other areas? … And where is the army in some of the areas?”

     

    The Syrian president endeavored to provide answers. But it was an open question whether his responses would reassure loyalists worried that the government could be losing its hold on the embattled country.

     

    The president also thanked his allies — notably Iran — while taking the West to task for supporting “terrorists,” the Syrian government’s standard term for the armed opposition fighting to wrest control of the country.

     

    The core areas under government control include the capital, Damascus, and the strategic corridor north to the cities of Homs and Hama and west to the Mediterranean coast, a pro-government stronghold.

     

    Syrian authorities have been actively seeking to increase military recruitment in recent months, a sign of the shortage of fighters across a sprawling battlefield that stretches from the country’s northern fringes to its southern tip, and from its western borders to its eastern frontier.

     

    In Damascus and other cities, prominent recruiting billboards depict stern-looking young men and women in full military gear exhorting others to enlist.

     

    “Our army means all of us,” declares one billboard.

     

    Other signs posted prominently depict soldiers providing vital security for children and families.

     

    Another billboard takes a more confrontational approach, asking a man who is watching a computer screen: “Sitting there and looking? What are you waiting for?”

     

    The presidential speech comes as the thinly stretched Syrian army has suffered a string of setbacks in the last few months, squeezing government forces into defensive positions in Syria’s northwest and in the south.

     

    Assad blamed the retreats on a lack of manpower, asserting that steps would need to be taken “to raise the [capacity] of the armed forces… primarily through calling the reserves in addition to recruits and volunteers.”

     

    One such step, Assad said, was the granting of an amnesty on Saturday to soldiers who had defected, so long as they had not joined armed opposition groups. The amnesty was also extended to draft dodgers, many of whom have left Syria to escape military service.

     

    Despite conceding setbacks, Assad maintained a confident tone, insisting that Army recruitment numbers had increased in the last few months and that “there is no collapse… and we will be steadfast and will achieve the missions.”

     

    “Defeat … does not exist in the dictionaries of the Syrian Arab army,” he insisted.

    Maybe not yet, but that could change quickly, especially if Assad were to lose the support of his most important ally, Vladimir Putin.

    As we noted last month, the key outstanding question is this: what is the maximum pain level for Russia, which has the greatest vested interest in preserving the Assad regime?

    We could have an answer to that very soon, as slumping commodities prices, falling demand from China (which was recently cited as the reason for “indefinite” delays to the Altai pipeline joint venture which would have delivered 30 bcm/y of Siberian gas to China), and economic sanctions from the West are squeezing Moscow and may ultimately prompt Putin to “consider the acceptability of other candidates” for the Syrian Presidency. Here’s WSJ with more:

    And with Russia’s economy battered by a plunge in oil prices and Western sanctions, the government may be considering both the strategic and economic benefits of changing its stance on Mr. Assad.

     

    But Fyodor Lukyanov, chairman of a Kremlin foreign-policy advisory council, said Russian policy makers are likely considering possible alternatives to the Syrian president.

     

    “They are looking at the acceptability of other candidates at this point,” he said, adding that he had not heard any names.

     

    If Moscow does provide an opening to broker a negotiated exit for Mr. Assad, it would be a dramatic turn in the conflict.

     

    Mr. Assad’s other major international backer, Iran, shows no signs of wavering in its crucial military and financial support for the Syrian regime. But the long-sought nuclear deal between Iran and six world powers reached earlier this month has also opened up the possibility of broader political cooperation between Tehran and the West on other regional issues such as the war in Syria.

     

    Hadi al-Bahra, a senior member of the Turkey-based opposition umbrella group the Syrian National Coalition, said his alliance discussed Mr. Assad’s political fate with Russian officials for the first time in a meeting last month led by Russia’s Deputy Foreign Minister Mikhail Bogdanov. Ahmed Ramadan, another senior coalition member, also attended that meeting in the Turkish capital Ankara.

     

    “We have been speaking with the Russians from the very beginning and we have not heard one word of criticism of Assad,” Mr. Ramadan said. “But now, the Russians are discussing the alternatives with us.”

     

    In addition to the Syrian opposition, Mr. Assad’s regional adversaries such as Saudi Arabia and Turkey have argued his ouster is essential to resolve the Syrian conflict and halt the spread of Islamic State militants.

     

    The Obama administration recently has pursued Russian cooperation on its goal of ousting the Assad regime based on intelligence assessments that the Syrian president is weakening. President Barack Obama spoke with Russian President Vladimir Putin on June 25 and July 15 on an array of issues including Syria.

     

    An exchange in a meeting last month between Mr. Putin and Syrian Foreign MinisterWalid al-Moallem suggested Moscow’s patience with Damascus might be running thin.

     

    According to an official Russian transcript carried on the Kremlin’s website, Mr. Putin pointed out the regime’s recent military setbacks and suggested Mr. Assad join forces with regional rivals Saudi Arabia and Turkey. Mr. Moallem said the idea was farfetched.

     

    Russia has financial and political incentives to change course on backing Mr. Assad. The country has been politically isolated by Western sanctions. Lower oil prices and sanctions have taken a toll on the economy.

    So, as the Assad regime weakens in the face of dwindling manpower and is forced to resort to a military recrutiment drive complete with billboards designed to shame men into taking up arms against the various armies competing to conquer Damascus, Russia has not only seen the writing on the wall, but may be prepared to finally cut Assad loose. As for what happens next, see here. 

    *  *  *

    Full Assad speech from Sunday

  • Drivers, Beware: The Costly, Deadly Dangers Of Traffic Stops In The American Police State

    Submitted by John Whitehead via The Rutherford Institute,

    “The Fourth Amendment was designed to stand between us and arbitrary governmental authority. For all practical purposes, that shield has been shattered, leaving our liberty and personal integrity subject to the whim of every cop on the beat, trooper on the highway and jail official. The framers would be appalled.”—Herman Schwartz, The Nation

    Trying to predict the outcome of any encounter with the police is a bit like playing Russian roulette: most of the time you will emerge relatively unscathed, although decidedly poorer and less secure about your rights, but there’s always the chance that an encounter will turn deadly.

    The odds weren’t in Walter L. Scott’s favor. Reportedly pulled over for a broken taillight, Scott—unarmed—ran away from the police officer, who pursued and shot him from behind, first with a Taser, then with a gun. Scott was struck five times, “three times in the back, once in the upper buttocks and once in the ear — with at least one bullet entering his heart.”

    Samuel Dubose, also unarmed, was pulled over for a missing front license plate. He was reportedly shot in the head after a brief struggle in which his car began rolling forward.

    Levar Jones was stopped for a seatbelt offense, just as he was getting out of his car to enter a convenience store. Directed to show his license, Jones leaned into his car to get his wallet, only to be shot four times by the “fearful” officer. Jones was also unarmed.

    Bobby Canipe was pulled over for having an expired registration. When the 70-year-old reached into the back of his truck for his walking cane, the officer fired several shots at him, hitting him once in the abdomen.

    Dontrell Stevens was stopped “for not bicycling properly.” The officer pursuing him “thought the way Stephens rode his bike was suspicious. He thought the way Stephens got off his bike was suspicious.” Four seconds later, sheriff’s deputy Adams Lin shot Stephens four times as he pulled out a black object from his waistband. The object was his cell phone. Stephens was unarmed.

    If there is any lesson to be learned from these “routine” traffic stops, it is that drivers should beware.

    At a time when police can do no wrong—at least in the eyes of the courts, police unions and politicians dependent on their votes—and a “fear” for officer safety is used to justify all manner of police misconduct, “we the people” are at a severe disadvantage.

    According to the Justice Department, the most common reason for a citizen to come into contact with the police is being a driver in a traffic stop. On average, one in 10 Americans gets pulled over by police. Black drivers are 31 percent more likely to be pulled over than white drivers, or about 23 percent more likely than Hispanic drivers. As the Washington Post concludes, “‘Driving while black’ is, indeed, a measurable phenomenon.”

    As Sandra Bland learned the hard way, the reason for a traffic stop no longer matters. Bland, who was pulled over for allegedly failing to use her turn signal, was arrested after refusing to comply with the police officer’s order to extinguish her cigarette and exit her vehicle. The encounter escalated, with the officer threatening to “light” Bland up with his taser. Three days later, Bland was found dead in her jail cell.

    “You’re doing all of this for a failure to signal?” Bland asked as she got out of her car, after having been yelled at and threatened repeatedly. Had she only known, drivers have been pulled over for far less. Indeed, police officers have been given free range to pull anyone over for a variety of reasons.

    This approach to traffic stops (what I would call “blank check policing,” in which the police get to call all of the shots) has resulted in drivers being stopped for windows that are too heavily tinted, for driving too fast, driving too slow, failing to maintain speed, following too closely, improper lane changes, distracted driving, screeching a car’s tires, and leaving a parked car door open for too long.

    Motorists can also be stopped by police for driving near a bar or on a road that has large amounts of drunk driving, driving a certain make of car (Mercedes, Grand Prix and Hummers are among the most ticketed vehicles), having anything dangling from the rearview mirror (air fresheners, handicap parking permits, troll transponders or rosaries), and displaying pro-police bumper stickers.

    Incredibly, a federal appeals court actually ruled unanimously in 2014 that acne scars and driving with a stiff upright posture are reasonable grounds for being pulled over. More recently, the Fifth Circuit Court of Appeals ruled that driving a vehicle that has a couple air fresheners, rosaries and pro-police bumper stickers at 2 MPH over the speed limit is suspicious, meriting a traffic stop.

    Unfortunately for drivers, not only have traffic stops become potentially deadly encounters, they have also turned into a profitable form of highway robbery for the police departments involved.

    As The Washington Post reports, “traffic stops for minor infractions such as speeding or equipment violations are increasingly used as a pretext for officers to seize cash from drivers.” Relying on federal and state asset forfeiture laws, police set up “stings” on public roads that enable them to stop drivers for a variety of so-called “suspicious” behavior, search their vehicles and seize anything of value that could be suspected of being connected to criminal activity. Since 2001, police have seized $2.5 billion from people who were not charged with a crime and without a warrant being issued.

    “In case after case,” notes The Washington Post, “highway interdictors appeared to follow a similar script. Police set up what amounted to rolling checkpoints on busy highways and pulled over motorists for minor violations, such as following too closely or improper signaling. They quickly issued warnings or tickets. They studied drivers for signs of nervousness, including pulsing carotid arteries, clenched jaws and perspiration. They also looked for supposed ‘indicators’ of criminal activity, which can include such things as trash on the floor of a vehicle, abundant energy drinks or air fresheners hanging from rearview mirrors.”

    If you’re starting to feel somewhat overwhelmed, intimidated and fearful for your life and your property, you should be. Never before have “we the people” been so seemingly defenseless in the face of police misconduct, lacking advocates in the courts and in the legislatures.

    So how do you survive a police encounter with your life and wallet intact?

    The courts have already given police the green light to pull anyone over for a variety of reasons. In an 8-1 ruling in Heien v. North Carolina, the U.S. Supreme Court affirmed that police officers can pull someone over based on a “reasonable” but mistaken belief about the law.

    Of course, what’s reasonable to agents of the police state may be completely unreasonable to the populace. Nevertheless, the moment those lights start flashing and that siren goes off, we’re all in the same boat: we must pull over.

    However, it’s what happens after you’ve been pulled over that’s critical. Survival is the key.

    Technically, you have the right to remain silent (beyond the basic requirement to identify yourself and show your registration). You have the right to refuse to have your vehicle searched. You have the right to film your interaction with police. You have the right to ask to leave. You also have the right to resist an unlawful order such as a police officer directing you to extinguish your cigarette, put away your phone or stop recording them.

    However, as Bland learned the hard way, there is a price for asserting one’s rights. “Faced with an authority figure unwilling to de-escalate the situation, Bland refused to be bullied or intimidated,” writes Boston Globe contributor Renee Graham. “She understood her rights, but for African-Americans in encounters with police, the appalling price for asserting even the most basic rights can be their lives.”

    So if you don’t want to get probed, poked, pinched, tasered, tackled, searched, seized, stripped, manhandled, arrested, shot, or killed, don’t say, do or even suggest anything that even hints of noncompliance when it comes to interactions with police.

    One police officer advised that if you feel as if you’re being treated unfairly, comply anyhow and contest it in court later. Similarly, black parents, advising their kids on how to deal with police, tell them to just obey the officer’s orders. “The goal,” as one parent pointed out, “is to stay alive.”

    It seems that “comply or die” has become the new maxim for the American police state.

    Then again, not even compliance is a guarantee of safety anymore. “Police are specialists in violence,” warns Kristian Williams, who has written extensively on the phenomenon of police militarization and brutality. “They are armed, trained, and authorized to use force. With varying degrees of subtlety, this colors their every action. Like the possibility of arrest, the threat of violence is implicit in every police encounter. Violence, as well as the law, is what they represent.”

    In other words, in the American police state, “we the people” are at the mercy of law enforcement officers who have almost absolute discretion to decide who is a threat, what constitutes resistance, and how harshly they can deal with the citizens they were appointed to “serve and protect.”

    As I point out in my book Battlefield America: The War on the American People, this mindset that any challenge to police authority is a threat that needs to be “neutralized” is a dangerous one that is part of a greater nationwide trend that sets the police beyond the reach of the Fourth Amendment. Moreover, when police officers are allowed to operate under the assumption that their word is law and that there is no room for any form of disagreement or even question, that serves to chill the First Amendment’s assurances of free speech, free assembly and the right to petition the government for a redress of grievances.

    Frankly, it doesn’t matter whether it’s a casual “show your ID” request on a boardwalk, a stop-and-frisk search on a city street, or a traffic stop for speeding or just to check your insurance. If you feel like you can’t walk away from a police encounter of your own volition—and more often than not you can’t, especially when you’re being confronted by someone armed to the hilt with all manner of militarized weaponry and gear—then for all intents and purposes, you’re under arrest from the moment a cop stops you.

    Sad, isn’t it, how quickly we have gone from a nation of laws—where the least among us had just as much right to be treated with dignity and respect as the next person (in principle, at least)—to a nation of law enforcers (revenue collectors with weapons) who treat us all like suspects and criminals?

    Clearly, the language of freedom is no longer the common tongue spoken by the citizenry and their government. With the government having shifted into a language of force, “we the people” have been reduced to suspects in a surveillance state, criminals in a police state, and enemy combatants in a military empire.

  • Chinese Stocks Rise After Government Injects $100bn Into Sovereign (Rescue) Fund; Sell-off 'Blame' Shifts To Hong Kong

    Despite the reassurances from western media and talking heads that China is unimportant (both its stock market and economy), Asian economies continue to show signs of contagion from China's slowdown as Thai exports weaken and Hong Kong trade tumbles. But it is the blame game that is top of mind tonight as Chinese regulators switch attention to Hong Kong brokers in their "investigation into malicious sellers." As SCMP's George Chen notes, first they blame a "foreign force," and now they blame Hong Kong, always careful not to blame themselves. After 3 down days, Chinese stocks look are opening slightly higher as there is little follow-through from yesterday's PPT rescue or today's panic-buying in US markets especilaly in light of an additional $100bn injection into the sovereign (rescue) fund.

    Just throw another 100bn at it…

     

    As a reminder, China closed on the weaker side overnight…

    But it appears the PPT save overnight and extension through the US session is not helping China at the open…

    • *CHINA'S CSI 300 STOCK-INDEX FUTURES LITTLE CHANGED AT 3,683

     

    Update: Buying pressure arrived shortly after the open ..

    • *CHINA'S CSI 300 INDEX SET TO OPEN UP 0.8% TO 3,839.96
    • *CHINA SHANGHAI COMPOSITE SET TO OPEN UP 0.7% TO 3,689.82

    Not exactly the follow-through they would have hoped for…

    But here is the chart everyone is looking at…

    *  *  *

    As SCMP's George Chen explains, blame continues to project outward…

    Though as we saw yesterday,. any strength is being used by locals to sell (not short) into government strength as one farmer exclaimed – fighting back tears, "I have have ruined my entire family… I will nevere touch stocks again."

    *  *  *

    Furthermore, while Western media continues to stress how unimportant Chinese stocks (and the Chinese economy now apparently) is to US stocks and the US economy… it is, as Gavekal Capital explains, crucially important and more evidence  is building of a slowing Chinese economy permeating the rest of Asia…

    Today’s edition of our diary of weak Asian economic stats focuses on the recently released trade and industrial production numbers out of Thailand and the trade numbers from Hong Kong. The Thai economy is feeling the pain of the Chinese slowdown acutely even in the most high level economic statistics.

     

    picture 2

     

    picture 1

     

    Meanwhile the Hong Kong trade figures, which we view more as a proxy for Chinese trade given its intermediary port position connecting China with the rest of the world…

     

    picture 3

     

    …paint the picture of the weakest trade by volume since 2013.

    *  *  *

    But apart from that – everything is awesome judging by US equities.

  • Ron Paul Slams Gen. Wesley Clark: Is He Kidding, Internment Camps?

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

    Last week, Retired General Wesley Clark, who was NATO commander during the US bombing of Serbia, proposed that “disloyal Americans” be sent to internment camps for the “duration of the conflict.” Discussing the recent military base shootings in Chattanooga, TN, in which five US service members were killed, Clark recalled the internment of American citizens during World War II who were merely suspected of having Nazi sympathies. He said: “back then we didn’t say ‘that was freedom of speech,’ we put him in a camp.”

    He called for the government to identify people most likely to be radicalized so we can “cut this off at the beginning.” That sounds like “pre-crime”!

    Gen. Clark ran for president in 2004 and it’s probably a good thing he didn’t win considering what seems to be his disregard for the Constitution. Unfortunately in the current presidential race Donald Trump even one-upped Clark, stating recently that NSA whistleblower Edward Snowden is a traitor and should be treated like one, implying that the government should kill him.

    These statements and others like them most likely reflect the frustration felt in Washington over a 15 year war on terror where there has been no victory and where we actually seem worse off than when we started. The real problem is they will argue and bicker over changing tactics but their interventionist strategy remains the same.

    Retired Army Gen. Mike Flynn, who was head of the Defense Intelligence Agency during the US wars in Afghanistan and Iraq, told al-Jazeera this week that US drones create more terrorists than they kill. He said: “The more weapons we give, the more bombs we drop, that just … fuels the conflict.”

    Still Washington pursues the same strategy while expecting different results.

    It is probably almost inevitable that the warhawks will turn their anger inward, toward Americans who are sick of the endless and costly wars. The US loss of the Vietnam war is still blamed by many on the protesters at home rather than on the foolishness of the war based on a lie in the first place.

    Let’s hope these threats from Clark and Trump are not a trial balloon leading to a clampdown on our liberties. There are a few reasons we should be concerned. Last week the US House passed a bill that would allow the Secretary of State to unilaterally cancel an American citizen’s passport if he determines that person has “aided” or “abetted” a terrorist organization. And as of this writing, the Senate is debating a highway funding bill that would allow the Secretary of State to cancel the passport of any American who owes too much money to the IRS.

    Canceling a passport means removing the right to travel, which is a kind of virtual internment camp. The person would find his movements restricted, either being prevented from leaving or entering the United States. Neither of these measures involves any due process or possibility of appeal, and the government’s evidence supporting the action can be kept secret.

    We should demand an end to these foolish wars that even the experts admit are making matters worse. Of course we need a strong defense, but we should not provoke the hatred of others through drones, bombs, or pushing regime change overseas. And we must protect our civil liberties here at home from government elites who increasingly view us as the enemy.

  • Trump Is "The Best Thing To Happen To Politics In A Long Time," Mark Cuban Says

    Make no mistake, Donald Trump has made an enormous splash in the early days of the race for the GOP Presidential nomination.

    Need proof? You could check out the polls…

    ..or just have a look at the cover of the latest New Yorker…

    …or simply tune in to the nightly news where you’re sure to hear the latest sound bite from the incorrigible billionaire, whose main advantage may be that he is simply “gaffe proof“, which would explain why a series of statements which would have likely amounted to political suicide for anyone else, have only served to boost his popularity.

    In any event, it appears as though Trump can now count on the support of a fellow billionaire because as The Hill reports, Mark Cuban now says “The Donald” is “the best thing to happen to politics in a long time.” Here’s more from Cuban:

    Up until Trump announced his candidacy the conventional wisdom was that you had to be a professional politician in order to run. You had to have a background that was politically scrubbed. In other words, smart people who didn’t live perfect lives could never run. Smart people who didn’t want their families put under the media spotlight wouldn’t run. The Donald is changing all of that. He has changed the game and for that he deserves a lot of credit. 

    And here’s Trump’s response:

    And just to prove that this is truly a man for whom the traditional rules of politics absolutely do not apply, we’ll close with the following two tweets:

  • The True Minimum Wage Is $0 Per Hour

    Submitted by Jeffrey Snider via Alhambra Investment Partners,

    The minimum wage is not what is commonly referred, as is being proven again as parts of the US experiment directly with this boundary. In New York, fast food workers have been given a $15 per hour minimum wage which is being celebrated by the same fast food workers who will bear the brunt of the experimentation. Some of them will be happy with the results, but there will be clear losers – the full wrath of redistribution is usually unseen which is why it persists.

    Twitter had been having fun on the other side of the country with a similar minimum wage diktat, as the University of California system mandates also a $15 per hour rate. Professors, who overwhelmingly lean in a favorable direction, are being shown this mathematical reductionism up close. One physics professor who in one tweet reiterated his support took the next to realize the logic of it.

     

     

    He currently pays $9-$10 per hour for six undergrad assistants now, but in order to conform to the new “minimum wage” command he will only be able to afford four, maybe three. In other words, the true minimum wage is $0 per hour.

    To think it is any different for a fastfood restaurant is naïve. Business owners paying their workers more by arbitrary government setting will not bring in offsetting revenue (a very close microcosm of all that belies “aggregate demand”). The cost of the law will be felt by fewer hours being worked, leading to rationing of the business operations (checkouts and those cooking in the back, meaning longer wait times and worse service) and, where possible, rising prices. None of this is surprising or especially insightful.

    And yet in 2015, six years into recovery, there is still a huge and heavy undercurrent of discontent that breaks out into this kind of nonsensical “solution.” There has been a resurgent trend toward Marxism already (dating back to Occupy Wall Street that survived in sentiment beyond that pitiful outbreak) that flares up here and there with the next great Marx replica (Picketty being the last, global vestige). In a real recovery, none of this counterproductive meandering would stand a chance. If the labor market were growing as it should, in sharp contrast to how it has been presented over the past year, minimum wage laws would be the furthest from the mainstream.

    The same goes with the sudden outbreak of robot envy/fear. In the case of fastfood workers, they may find themselves actually staring into that reality as beyond the short-term automated technology may be more cost-effective, and productive, than unskilled at $15. But by and large, in the overall economy, this raging tinge of disgruntlement about technology and jobs is of the same deficient impulse. In a truly functioning economy robots are quite welcome. Instead, what we have now, and have had for a decade and a half or more, gives way to this:

    The bleakest news involves manufacturing and service jobs. He reports that Foxconn, the primary maker of Apple products, plans to deploy up to 1 million robots in its factories. A chief Nike executive, meanwhile, thinks the solution to rising wages in Indonesia is “engineering the labor out of the product.” This would not only be more affordable, it might also silence criticism about horrendous working conditions in international factories that make beloved American products. Self-checkout aisles at the grocery store, Redbox movie rental kiosks, and touchscreen ordering at restaurants are all examples of the same trend.

     

    For those who claim that these changes simply move jobs from one sector of the economy to another, Ford points to statistics. Blockbuster once employed roughly 60,000 employees nationally. Redbox, in the entire Chicago area, has a staff of seven. A comparison between Google and General Motors is another instructive example. After adjusting for inflation, General Motors earned a profit of around $11 billion in 1979, when it employed 840,000 workers. Google, in 2012, earned almost $14 billion and employed fewer than 38,000 people. He offers many other examples suggesting that not every job lost in one area is gained in another.

    The relevant comparison is not GM to Google but rather GM to first Japan and then China, with all of Google, Silicon Valley and the like added to Wall Street and its legions of mathematicians, accountants, lawyers and offshoot day traders and house flippers (along with the burger flippers, bartenders and hospitality workers “serving” asset inflation) to pick up the “slack.” Monetary redistribution is entirely the problem, not shipping off low wage jobs overseas (and getting lower price products in return) and having the government artificially price the entirety of the bottom rungs.

    Innovation is the spur to all of it, so long as it doesn’t become entangled in exactly these kinds of socialist misdirections. In other words, the fear of robots is somewhat justified right now but only because innovation has run aground in the decades since financialism re-charted the overall economic course. The last time machines were “taking jobs” in such huge numbers it worked out very well not just for Americans but the rest of the world. There was once background fear of tractors as farming industrialized and reconstituted the entire workforce.

    In 1820, out of the estimated 2.88 million American workers, 2.07 million (72%) were farm workers. By 1880, non-farm workers outnumbered those in agriculture; in 1910, the number of farm workers in the US peaked in absolute numbers, amounting to then just less than a third of all labor; today, very few are employed in agriculture. Innovation through industrialization absorbed labor into new and once “impossible” endeavors, industry and products that were prior scarcely believed realistic and certainly beyond the reach of all but the richest. True economic growth, labor specialization as its core, should be welcomed even though it is highly messy and dynamic. The general upheaval is, over time, unquestionably received in higher living standards for everyone.

    The fear today should not be ATM’s removing tellers from bank branches, just as there are no more elevator operators working in moving cages amongst the nation’s taller buildings. The anxiety now is instead really about the serious lack of innovation that suddenly appeared right around the time hard money, and thus financial restraint, was banished so that various control elements could endeavor upon their utopian ideals of redistribution.

    In other words, across now more than a century of monetary recalculations, the object remains the same – to become what Marx called that “third party”, to be the wielder of a mathematical code that will break the conventions of the past and lead to a more or even most perfect economic existence. The problem, universally, is that value is not just some convention to be deciphered, it is essential and immutable. Monetarists have believed that money was that object, pliable and a perfect substitute across ages, but money is just the expression of a much deeper ethos, a physical stand-in for the dimension of value. Political socialism is to transform individuals into a cohesive singular entity; monetary socialism is to do the same, centered always on redefining value. We live today not with free market capitalism, or even a functioning eurodollar standard anymore, but what looks very much like the inevitable end of the third age of socialist monetary experimentation. Value, beaten, battered and bastardized, so far survives.

    Each of these ages of socialist economic direction has pressed further and further into the economic foundation. Where once an entire system of economy was redistributed by market forces into global modernism, we now live in communal fear of every form of job being “taken” toward even the slightest difference (what would have been slight hyperbole just a few years ago isn’t so much now). Perhaps the greatest rebuttal of these socialist ages is that now workers cling to mostly stasis of every kind (fastfood jobs are now as careers?), as job and labor opportunities are almost ancient concepts applied only to past remembrances of what it all used to be like (especially among the millennials; how must the economy look to all those stuck in school, endeavoring as college-educated baristas and living at home with mom and dad until after 30). There is no economic confidence because there has been no reason for it; the more that this is planned out by these kinds of intrusions into economic inner-workings the farther away from the utopian agenda (but not the totalitarian offshoot) we “progress.”

    Three AGES

    The economy has shrunk and with it the means to be hopeful about what should be natural – opportunity. Robots are not the problem, per se, and the minimum wage will always be zero; it is this “secular stagnation” of serial asset bubbles that have robbed the economy of its organic and natural vitality and spreadable vigor. Fix the obvious incongruity, monetarism most especially, of redistribution by government directive and economic growth will engulf and subsume what is really unnatural economic angst expressed in all these various and quickening counterproductive “solutions.”

    ABOOK July 2015 Payrolls FT Participation

    Some disquiet about the uneven progress of market beneficence has always been present, but what is unique about especially the past six to eight years is its pervasiveness and persistence. In other words, there will always be some that fear dynamism because, again, the widespread benefits aren’t readily apparent right away; but when so many are convinced in the opposite something is very, very wrong. The first step is to stop making the economy shrink and let opportunity, real opportunity not linked to asset market gambling and the fake recovery efforts, again take hold.

  • Caught On Tape: The Moment Diver Discovers $1 Million In Gold From 300-Year-Old Spanish Shipwreck

    Following the latest mass media assault on gold, capped with such trollbait pearls as “Gold is doomed” or the classic “Let’s Be Honest About Gold: It’s a Pet Rock” by the inimitable Jason Zweig (imitable perhaps only by the September 2011 version of Jason Zweig when, days after gold hit its all time high just shy of $2000, he famously said “Is Gold Cheap? Who Knows? But Gold-Mining Stocks Are“… since then gold-mining stocks are down 80%) we were more shocked that someone would actually bother to look for the worthless pet rocks (of which China allegedly just bought 600 tons) than actually finding them during a random dive in the sea.

    Which is precisely what happened.

    For several weeks the Schmitt family had a million-dollar secret on their hands. Last month, it recovered $1 million worth of sunken Spanish coins and jewels off the Florida coast.

    The Schmitts are subcontractors to 1715 Fleet-Queens Jewels LLC which since 2010 has the salvaging rights to a fleet of Spanish ships, aka the “1715 Fleet“, that wrecked off the Florida coast some 300 years ago. While $50 million has been pulled in from the fleet’s resting place so far, this is so far the biggest single haul.

    “One of the most amazing recoveries in 1715 Fleet History. Congratulations to the entire Schmitt family and the crew of the Aarrr Booty,” said 1715 Fleet on its Facebook page Monday.

    Some more details from the Fleet Society’s website: “Gold and silver in great quantity was homeward bound to Philip V when a hurricane destroyed his fleet along Florida’s coast. Some recovery in the aftermath still left much to be recovered beginning in the 1960’s and ongoing to this day.”

    “The treasure was actually found a month ago,” said Brent Brisben of 1715 Fleet-Queens Jewels LLC. Keeping the news under wraps was “particularly hard for the family that found it. They’ve been beside themselves.”

    The timing of 1715 Fleet’s announcement coincides with the 300th anniversary of the Spanish treasure fleet’s shipwrecks off the coast of Florida.

    Among the precious items recovered:

    • 51 gold coins
    • 40 feet of ornate gold chain
    • A single coin called a Royal made for the king of Spain, Phillip V. Only a few are known to exist, and the coin — nicknamed “Tricentennial Royal” — is dated 1715. Brisben said the extremely rare silver-dollar-sized coin is worth “probably around half a million dollars itself.”

    Queens Jewels owner Brent Brisben told the Daily News this discovery is of the biggest single hauls taken from the ship.

    Or, as the WSJ would call it, a whole bunch of pet rocks.

    Brisben gives 20% of everything found to the state of Florida and then splits the remaining treasure equally with the contractor that finds it. Brisben said he and his family will keep everything they have and save it for a special collection for the public.

    It’s believed there is still $400 million worth of treasure located below, he said.

    As the WSJ’s sister publication, MarketWatch adds, “the discovery comes almost 300 years to the day that the fleet wrecked. As for the history, the ships were sent to America to fetch gold and silver and under pressure to get back quickly, as the Spanish crown needed to replenish its coffers to finance wars. Sailing from Havana, Cuba on July 24, 1715, the ships crashed during a hurricane a week later near present-day Vero Beach, Fla. The Spaniards returned a few times, salvaging a great chunk of that treasure.”

    Three hundreds years later wars are financed by long strings of 1s and 0s, backed by the full faith of a government whose total unfunded obligations amount to over 5x the total amount of goods and services produced by said government.

    Back to the discovery, whose key components are shown below.

    Fifty-one gold coins and 40 feet of gold chains were found from a Spanish ship of the 1715 Fleet

    The total value of the haul is more than $1 million.

    About $50 million worth of treasure has been discovered since the 1960s.

    * * *

    But the biggest drama was the actual moment when Schmitt discovered the gold, captured conveniently in the video below.

  • Today's Anti-Capitalists Ignore The Fundamental Problems Of Socialism

    Submitted by Jonathan Newman via The Mises Institute,

    Anti-market and pro-socialist rhetoric is surging in headlines (see also here, here, and here) and popping up more and more on social media feeds. Much of the time, these opponents of markets can’t tell the difference between state-sponsored organizations like the International Monetary Fund and actual markets. But, that doesn’t matter because the articles and memes are often populist and vaguely worded — intentionally framed in such a way to easily deflect uninformed attacks and honest descriptions of what they are actually saying. In the end, they can all be boiled down to one message: socialism works and is better than capitalism.

    While most of it comes from the Left, the Right is not innocent, since the Right appears to be primarily concerned with promoting its own version of populism, which apparently does not involve a defense of markets. “Build bigger walls at the border,” for example, is not a sufficient response to “All profits are evil!”

    Instead of stooping to this level or simply resorting to “Read Mises!” (a more fitting response), we must show, yet again, that socialism — even under well-meaning political leaders — is impossible and leads to disastrous consequences.

    The Necessity of Profits, Prices, and Entrepreneurs

    Socialism is the collective ownership (i.e., a state monopoly) of the means of production. It calls for the abolition of private ownership of factors of production. Wages and profits are two parts of the same pie, and socialism says the profit slice should be zero.

    The inherent theoretical problems of socialism all emanate from its definition, and not the particulars of its application. However, the supporters of socialism define “collective,” as no exchange of the factors of production. And without exchange, there can be no prices, and without prices there is no way to measure the costs of production.

    In an unhampered market economy, the prices of the factors of production are determined by their aid in producing things that consumers want. They tend to earn their marginal product, and because every laborer has some comparative advantage, there is a slice of pie for everybody.

    If technological changes make certain factors more productive, or if education and training makes a laborer more productive, their prices or wages may be bid up to their new, higher marginal product. An entrepreneur would not like to hire or buy any factor at a price that exceeds its marginal product because the entrepreneur would then incur losses.

    Entrepreneurial losses are more important than many realize. They aren’t just hits to the entrepreneur’s bottom line. Losses show that on the market, the resources used to produce something were more highly valued than what they were producing. Losses show that wealth has been destroyed.

    Profits give the opposite signal. They represent economic growth and wealth creation. A profitable line of production is one in which the stuff that goes into producing some consumer good costs less than what consumers are willing to pay for the consumer good.

    As such, profits and losses are more than just important incentives, or cover in a conspiratorial capitalist class system; they are the only way to know that wealth is being created instead of destroyed in any line of production.

    Under socialism, there is a single owner that does not bid factors away from some lines of production and toward others. Nobody is able to say, with any shred of certainty, that a particular tool or machine or factory could be used to produce something else in a more effective way. Nobody knows what to produce or how much to produce. It’s economic chaos.

    Without Markets, We Can’t Know What or How to Produce

    Profits and losses guide and correct entrepreneurs in the process of producing things they expect consumers will demand. Without this information, including the costs of production specifically, entrepreneurs cannot engage in economic calculation, the estimation of the difference between future revenues and the costs of production necessary to gain those future revenues.

    Laborers are put to work in areas where they don’t have a comparative advantage. Farmers are sent to factories, and tailors are sent to the mines. Workers are in the wrong lines of production and have the wrong tools. Every morning, the economy looks like Robert Murphy’s capital rearranging gnomes just ransacked it.

    The Polish film Brunet Will Call lampooned situations like this throughout the movie, with consumer and capital goods in the most unlikely places. A butcher pulls an automobile’s clutch cable out of his freezer, and gives it to the main character, who pays for it with information on the whereabouts of a double buggy for someone’s newborn twins (at the flower shop, obviously).

    So the failure of socialism is not conditional on the culture, time, or place of the victims. Socialism is flawed at its core: the “collective” ownership of the means of production. As such, there is no way to enact a functioning, growth-inducing version of socialism anywhere. In practice, however, the theoretical problems of socialism give way to civil unrest, which is met with state force and results in a death toll higher than any official war ever fought.

    Without profit motives to produce, quotas must be put in place. With quotas, even in the cases where workers don’t lie about their production, chaos still reigns. For example, if a nail production quota is based on the number of nails, workers produce a lot of tiny, unusable nails. A nail quota based on weight would encourage workers to produce massive, but still unusable nails — a situation lampooned by this cartoon in Krokodil during the 1960s.

    Endless queues stretched across the USSR, filled with people looking for shoes even though shoe production in the USSR exceeded that of the US. The problem was all the shoes were too small, because shoe production was measured by number, with no regard for the sizes or designs consumers demand.

    The Wake of Socialism

    Some cases are funny; others are not. About seven million people died of starvation in the USSR just in 1932–33 (middle-of-the-road estimate based on manipulated data). The authors of The Black Book of Communism (1999) estimate the deaths of close to 100 million people are attributable to communist and socialist regimes. That’s more than 200 times the number of US deaths in WWII (and a case could be made that their deaths are attributable to socialism, too).

    Even today, in Cuba, the average wage is about $20 a month. In North Korea civilians are routinely rounded up by the dozens for public execution for the crime of watching South Korean TV smuggled into the country.

    When people are hungry and unhappy, the state cannot survive if the people know others are better off. The state uses propaganda, misinformation, and censorship to make an already captive citizenry even more confused and submissive.

    So count me surprised to hear fresh calls for socialism in 2015 — if the strong economic calculation argument and astronomical death toll haven’t turned the Left off of socialism, I don’t know what will. The idea is both bankrupt and deadly in both theory and practice.

  • The Rise Of The Yuan Continues: LME To Accept Renminbi As Collateral

    As far-fetched as the notion may be to those who are wedded – by choice, by misguided beliefs, or by virtue of being completely beholden to the perpetuation of the status quo – to idea that the dollar will forever retain its status as the world’s reserve currency, the yuan is set to play a critical role in global finance, investment, and trade going forward. 

    We’ve long argued that the BRICS bank, the AIIB, and to an even greater extent, the Silk Road Fund, will help to usher in a new era of yuan hegemony in international investment and trade. A number of recent developments support this, including Beijing’s push for the renminbi to play an outsized role in loans doled out through the AIIB, the denomination of loans from the BRICS bank in yuan, and China’s aggressive investment in Pakistan and Brazil via the Silk Road initiative (here and here).

    As for financial markets, China recently confirmed the impending launch of a yuan denominated gold fix which conveniently dovetailed with the LBMA’s acceptance of the first Chinese banks to participate in the twice-daily auction that determines London gold prices.

    Now, in the latest sign of yuan proliferation and penetration, the renminbi will be accepted as collateral by the LME along with the dollar, the euro, the pound, and the yen.

    Here’s WSJ with more:

    China’s domestic stock market may be in turmoil but the country’s currency, known as the yuan or renminbi, is making a seemingly relentless push deeper into the global financial system.

     

    The latest step: the London Metal Exchange, the world’s largest venue for trading metals where $15 trillion of metals was traded last year, is set to accept yuan as collateral for banks and brokers that trade on its platform.

     

    The Chinese currency joins the U.S. dollar, the euro, the British pound and Japan’s yen, which are all currently permissible as collateral on the LME’s platform.

     

    “In the commodities area, it makes absolute sense to start providing renminbi-denominated services,” said Trevor Spanner, chief executive of the LME’s clearing house business. “The renminbi is on its way to becoming one of the world’s most widely used currencies” he said.

     

    While largely a technical change, the LME move marks another milestone for China’s currency.

     

    The yuan is now the fifth most used currency for international payments, ranking number seven a year ago, according to data from the Society for Worldwide Interbank Financial Telecommunication, a provider of payments services.

     

    A Bank of England survey on Monday showed that trading in yuan rose 25% in London in the six months to April this year, even as trading volumes in other currencies fell by 8% on average over the same period.

    The takeaway: irrespective of any damage China’s recent interventions into its domestic equity markets may have on the country’s SDR push, and regardless of whether the PBoC cash injection into CSF spooks the market and serves to accelerate short-term capital outflows, the internationalization of the yuan isn’t likely to be meaningfully derailed.

    We’ll leave you with the following quote from Dan Marcus, CEO of London-based currency trading platform ParFX who spoke to WSJ:

    “The rise of China’s currency on global markets is arguably the most significant development in currency trading since the introduction of the euro in 1999.”

     

  • There May Be Hope For The U.S. Yet: Caitlyn Jenner's Reality Show "No Ratings Bonanza"

    While (hopefully) not high on the agenda of readers more interested in what Janet Yellen will say tomorrow (and thus leak today) one of the more anticipated media events of recent days was Caitlyn Jenner’s new reality TV show “I am Cait” which premiered last night on E! and which supposedly chronicles former Bruce Jenner’s adjustment to life as a woman and transgender spokesperson.

    And while many were expecting blowout numbers from an America addicted to brain candy and passive-aggressive exhibitionism, the results were enough to inspire confidence that there may be some hope yet left for the United States.

    On one hand, TVline reports that “I Am Cait” topped Sunday cable rating with 2.7 million total viewers and a 1.2 demo rating – on par with Keeping Up With the Kardashians‘ most recent season premiere and leading the night in the demo (tying Adult Swim’s 11 pm Family Guy rerun).

    On the other, according to Reuters, despite its impressive Sunday-night cable topping viewership, the number of people who tuned in was a vast drop from the 17 million people who watched the former Olympic champion come out as a transgender woman in an April TV interview.

    It adds that “the first episode was no ratings bonanza. According to Nielsen data, almost three times as many Americans watched “Celebrity Family Feud” on ABC that night. The audience for “I am Cait” also suffered a marked drop from the almost 8 million people who watched the ESPY awards show on television two weeks ago on which Jenner, 65, was presented the Arthur Ashe courage award.”

    Not surprisingly, according to Nielsen Talent Analytics, which surveys about 1,000 Americans on a weekly basis, Jenner’s transition has not been universally welcomed, especially among older Americans. Then again using shock value to further a (well paid) personal agenda is nothing new: Donald Trump is currently using it with great effect and crushing the presidential primary field where nobody is quite sure how to respond to what some have said is the biggest trolling of the country by a presidential candidate in history. Which considering how broken the left-right political model is, may have come just on time to force America to re-evaluate just how applicable a “representative” political model that mainly panders to corporations and bankers actually is.

    And back to Bruce, pardon Cait, her “offensiveness” rating has gone from 16 percent to 26 percent since the initial coming-out interview in April, according to Nielsen, although those under 34 years old were more likely to consider Jenner successful (38 percent to 42 percent) and a role model (13 percent to 19 percent) now than a year ago.

    So maybe not hope for all, but some hope still.

    But don’t cry for Bruce: his show is sure to eventually become a monetary goldmine rivaling that other exercise in celebrity trolling, “Keeping Up With the Kardashians.” According to Business Insider, a 30 second ad spot in the premiere cost between $90,000 and $200,000, approaching the $344,000 which category killer “Big Bang Theory” charges for 30 seconds of its ad time.

    This means that Caitlyn’s take home from each episode is certainly in the hundreds of thousands of dollars, if not higher.

  • 3-Year-Old London Child Deemed "Extremist"; Placed In Government Reeducation Program

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    The United Kingdom has gone batshit crazy. There’s simply no other way to put it. I warned about Britain’s “war on toddler terrorists” earlier this year in the post: The War on Toddler Terrorists – Britain Wants to Force Nursery School Teachers to Identify “Extremist” Children. Here’s an excerpt:

    Nursery school staff and registered childminders must report toddlers at risk of becoming terrorists, under counter-terrorism measures proposed by the Government.

     

    The directive is contained in a 39-page consultation document issued by the Home Office in a bid to bolster its Prevent anti-terrorism plan.

     

    The document accompanies the Counter-Terrorism and Security Bill, currently before parliament. It identifies nurseries and early years childcare providers, along with schools and universities, as having a duty “to prevent people being drawn into terrorism”.

    Never fear good citizens of Great Britain. While your government actively does everything in its power to protect criminal financial oligarchs and powerful pedophiles, her majesty draws the line at toddler thought crime. We learn from the Independent:

    A three-year-old child from London is one of hundreds of young people in the capital who have been tipped as potential future radicals and extremists.

     

    As reported by the Evening Standard, 1,069 people have been put in the government’s anti-extremism ‘Channel’ process, the de-radicalization program at the heart of the Government’s ‘Prevent’ strategy.

     

    The three-year-old in the program is from the borough of Tower Hamlets, and was a member of a family group that had been showing suspect behavior.

     

    Since September 2014, 400 under 18s, including teenagers and children, have been referred to the scheme.

    The fact that this story broke on the same day that chairman of the UK’s Lords Privileges and Conduct Committee, Lord John Sewel, was caught on video snorting cocaine off the breast of a prostitute with a £5 note, is simply priceless. You just can’t make this stuff up.

    From the BBC:

    Lord Sewel is facing a police inquiry after quitting as House of Lords deputy speaker over a video allegedly showing him taking drugs with prostitutes.

    The footage showed him snorting powder from a woman’s breasts with a £5 note.

     

    In the footage, Lord Sewel, who is married, also discusses the Lords’ allowances system.

     

    As chairman of committees, the crossbench peer also chaired the privileges and conduct committee, and was responsible for enforcing standards in the Lords.

     

    Lord Sewel served as a minister in the Scotland office under Tony Blair’s Labour government.

    Tony Blair, why am I not surprised:

    Screen Shot 2015-07-27 at 11.48.13 AM

    He has been a member of the Lords since 1996, and is a former senior vice principal of the University of Aberdeen.

    Here’s a clip, in the event you’re interested:

     

    The UK government is so far gone that it insists on protecting the public from toddlers, rather than protecting toddlers from powerful sexual predators. In case you need a reminder:

    In Great Britain, Powerful Pedophiles are Seemingly Everywhere and Totally Above the Law

    In Great Britain, Protecting Pedophile Politicians is a Matter of “National Security”

    Former BBC Host “Sir” Jimmy Savile Exposed as Major Player in Massive Pedophile Ring

  • Could Trump Win?

    Submitted by Patrick Buchanan via Buchanan.org,

    The American political class has failed the country, and should be fired. That is the clearest message from the summer surge of Bernie Sanders and the remarkable rise of Donald Trump.

    Sanders’ candidacy can trace it roots back to the 19th-century populist party of Mary Elizabeth Lease who declaimed:

    “Wall Street owns the country. It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street. The great common people of this country are slaves, and monopoly is the master.”

     

    “Raise less corn and more hell!” Mary admonished the farmers of Kansas.

    William Jennings Bryan captured the Democratic nomination in 1896 by denouncing the gold standard beloved of the hard money men of his day: “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”

    Sanders is in that tradition, if not in that league as an orator. His followers, largely white, $50,000-a-year folks with college degrees, call to mind more the followers of George McGovern than Jennings Bryan.

    Yet the stagnation of workers’ wages as the billionaire boys club admits new members, and the hemorrhaging of U.S. jobs under trade deals done for the Davos-Doha crowd, has created a blazing issue of economic inequality that propels the Sanders campaign.

    Between his issues and Trump’s there is overlap. Both denounce the trade deals that deindustrialized America and shipped millions of jobs off to Mexico, Asia and China. But Trump has connected to an even more powerful current.

    That is the issue of uncontrolled and illegal immigration, the sense America’s borders are undefended, that untold millions of lawbreakers are in our country, and more are coming. While most come to work, they are taking American jobs and consuming tax dollars, and too many come to rob, rape, murder and make a living selling drugs.

    Moreover, the politicians who have talked about this for decades are a pack of phonies who have done little to secure the border.

    Trump boasts that he will get the job done, as he gets done all other jobs he has undertaken. And his poll ratings are one measure of how far out of touch the Republican establishment is with the Republican heartland.

    When Trump ridicules his rivals as Lilliputians and mocks the celebrity media, the Republican base cheers and laughs with him.

    He is boastful, brash, defiant, unapologetic, loves campaigning, and is putting on a great show with his Trump planes and 100-foot-long stretch limos. “Every man a king but no man wears a crown,” said Huey Long. “I’m gonna make America great again,” says Donald.

    Compared to Trump, all the other candidates, including Hillary Clinton and Jeb Bush, are boring. He makes politics entertaining, fun.

    Trump also benefits from the perception that his rivals and the press want him out of the race and are desperately seizing upon any gaffe to drive him out. The piling on, the abandonment of Trump by the corporate elite, may have cost him a lot of money. But it also brought him support he would not otherwise have had.

    For no group of Americans has been called more names than the base of the GOP. The attacks that caused the establishment to wash its hands of Trump as an embarrassment brought the base to his defense.

    But can Trump win?

    If his poll numbers hold, Trump will be there six months from now when the Sweet 16 is cut to the Final Four, and he will likely be in the finals. For if Trump is running at 18 or 20 percent nationally then, among Republicans, it is hard to see how two rivals beat him.

    For Trump not to be in the hunt as the New Hampshire primary opens, his campaign will have to implode, as Gary Hart’s did in 1987, and Bill Clinton’s almost did in 1992.

    Thus, in the next six months, Trump will have to commit some truly egregious blunder that costs him his present following. Or the dirt divers of the media and “oppo research” arms of the other campaigns will have to come up with some high-yield IEDs.

    Presidential primaries are minefields for the incautious, and Trump is not a cautious man. And it is difficult to see how, in a two-man race against the favorite of the Republican establishment, he could win enough primaries, caucuses and delegates to capture 50 percent of the convention votes.

    For almost all of the candidates who will have dropped out by then will have endorsed the last man standing against Trump. And should Trump be nominated, his candidacy would make Barry Goldwater look like the great uniter of the GOP.

    Still, who expected Donald Trump to be in the catbird seat in the GOP nomination run before the first presidential debate? And even his TV antagonists cannot deny he has been great for ratings.

  • Twitter Surges, Then Fades After Hours On User Growth Confusion: The Full Quarter In 6 Charts
    • *TWTR’S NOTO: THIS IS BOTH A PRODUCT ISSUE AND A MARKETING ISSUE
    • *TWTR: DOESNT SEE SUSTAINED GROWTH IN MAUS UNTIL REACH MASS MKT

     

    With many expecting Twitter to disappoint yet again after several quarters in which the company’s stock had a step-down reaction to earnings, moments ago TWTR beat virtually all-non-GAAP estimates, from revenue, to EPS, to EBITDA:

    • TWITTER 2Q REV. $502.4M, EST. $481.9M
    • TWITTER INC 2Q ADJ. EPS 7C, EST. 4C
    • TWITTER 2Q ADJ. EBITDA $120M, EST. $103.3M

    More importantly, everyone was focusing on user growth which on a headline basis was not bad…

    • TWITTER 2Q AVG. MAUS 316M INCL SMS FAST FOLLOWERS,VS 308M IN 1Q

    However, just like on previous quarters, TWTR decided to use a gimmick when counting users, to wit:

    “Average Monthly Active Users (MAUs) were 316 million for the second quarter, up 15% year-over-year, and compared to 308 million in the previous quarter. The vast majority of MAUs added in the quarter on a sequential basis came from SMS Fast Followers. Excluding SMS Fast Followers, MAUs were 304 million for the second quarter, up 12% year-over-year, and compared to 302 million in the previous quarter.”

     

    It took algos a few minutes to digest this fact, and as a result what was initially a solid 10% spike after hours, fizzled almost entirely, and as of this moment the stock had cut its after hours gains notably.

     

     

    Going back to the quarter, the non-GAAP numbers were generally not bad as follows.

     

     

    But are they good enough to justify a $25 billion market cap, especially when one remembers that virtually all the “profit” is in solidly in the non-GAAP arena.

  • American Enterprise in a Nutshell

  • 'Investors' Panic-Buy Stocks After Confidence Collapse Sparks Biggest Short-Squeeze In 6 Months

    China closes weak… Europe weak… US Consumer Confidence collapses… Energy credit risk increases dramatically… and stocks rip led by Energy in yet another epic short squeeze…

     

    We can't help but think this happens…

     

    It seems some think China was up last night… sure it was up off the lows… but is this really the backbone of a face-ripping rally in US Stocks…?

     

    And Japanese stocks hit a 2-week low…

     

    US Stocks traded weaker into the open… but once Consumer Confidence collapsed, Energy stocks went into full short squeeze mode and exploded everything higher…

     

    With cash indices all soaring…

     

    Getting everything back to green from Friday briefly… before Nasdaq and Small Caps faded back…and then a final ramp to get Nasdaq green on the week!

     

    As the big triple short squeeze hit…

     

    This was the biggest short squeeze in 6 months

     

    Much was made of the ramp in Energy stocks…  best day for Energy sector since Dec 2014…

     

    Well we've seen this before… BTFD once, shame on me… Energy Credit ain't buying it…

     

    And neither is WTI Crude!!!

     

    Yet another breadth indicator flashes red…

     

    Treasury yields rose on the day but rallied after the weak confidence data…

     

    The USDollar closed higher but once again flipped its regime at the EU close…

     

    Commodities all rose on the day with Copper and Crude popping most…

     

    WTI Crude tested a $46 handle overnight before its mini melt-up ahead of API tonight…

     

     

    Charts: Bloomberg

    Bonus Chart: No Corrections Allowed…

     

    Bonus Bonus Chart: The Collapse in Confidence Is Not Good News…

     

    Bonus Bonus Bonus Chart: You Are Here…

  • China and Greece Signal a New Round of Deflation

    Stocks rallied today because the Fed meets today and tomorrow and traders are conditioned to play for a rally into Fed meetings. Also, stocks had fallen for four days straight prior to this and so we were oversold in the near-term.

    The larger picture concerns the bursting of China’s stock bubble as well as the ongoing 3rd Greek bailout drama.

    Regarding China, anyone who actually bothered performing real analysis could have seen that the economic data coming out of that country was totally bogus. Indeed, back in 2007, current First Vice Premiere of China, Li Keqiang, admitted to the US ambassador to China that ALL Chinese data, outside of electricity consumption, railroad cargo, and bank lending is for “reference only.”

    With that in mind, China’s rail volumes had been collapsing at a pace not seen since the Asia Financial Crisis!

     

    Despite this, 99% of analysts believed China’s GDP was growing at 7%+. Those people piled into Chinese stocks and commodities… and they’ve since been eviscerated as the Chinese stock bubble burst and commodity prices plunged to 13-year lows.

     

    China has been the largest driver of global economic growth since 2009. With that country flirting with outright deflation, it's only a matter of time before global GDP tanks.

    As for Greece… the negotiations regarding a third bailout have officially begun. However, things have grown more complicated as former Greek Finance Minister Yanis Varoufakis revealed that Greece had a “Plan B” in place that would allow it to switch from the Euro to the Drachma “at the flip of a switch.”

    Germany was already fed up with Greece’s debt problems before this. Now that it’s clear Greece is ready to pull the nuclear option and leave the Euro, Germany’s economic council has backed a plan to kick out “uncooperative” Eurozone members.

    When both sides in a negotiation begin to believe that not agreeing is the best solution, it’s only a matter of time before things break down in a serious fashion. This is why for many investment banks, a Grexit remains the “base case” scenario for this situation.

    At the end of the day, both China and Greece are signaling that a new round of deflation has begun in the markets. Stocks are bouncing today, but a tectonic shift has begun.

    It is now clear that Central Banks have lost control of some markets… and this loss of control will be spreading in the coming months, culminating in a market Crash that will make 2008 look like a picnic.

    If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

    We are making 1,000 copies available for FREE the general public.

    We are currently down to the last 15.

    To pick up yours, swing by….

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    Best Regards

    Phoenix Capital Research

     

     

  • Why Your Portfolio Does Not Perform Like The Indices (In 1 Simple Chart)

    The average S&P 500 stock is no longer keeping pace with the market’s moves… as breadth becomes focused on a shrinking pool of FOMO stocks.

     

     

    Just add this to the list of charts that are flashing bright red “it’s over” signals…

     

    Chart: FBN Securities

  • Greece's Biggest Mistake Explained (In 1 Cartoon)

    Seriously…

     

     

    Source: Townhall.com

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