• Why Greece Must Leave

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  French Economy Minister Emmanuel Macron and German Vice-Chancellor Sigmar Gabriel published a piece in the Guardian last week that instantly revived our long nourished hope for the European Unholy Union to implode and be dissolved, sooner rather than later. The two gentlemen propose a ‘radical’ reform for the EU. Going a full-tard 180º against the tide of rising euroskeptism, the blindest bureaucrats in European capitals are talking about more centralization in the EU.

  Here’s hoping that they follow up with all the energy they can muster, and that we’ll hear a lot more about the ‘reforms’ being proposed. Because that will only serve to increase the resistance and skepticism. Let them try to ‘reform’ the EU. We’re all for it. If only because if they do it thorough enough, referendums will be required in all 28 member nations, which all need to agree, in a unanimous approval vote.

  The gents know of course that that is never ever going to happen. So sneaky ways will have to be found. Something Brussels is quite experienced at. They’ve shown many times they won’t let a little thing like 500 million citizens get in their way. We’re curious to see what they’ll come up with this time.

  Meanwhile, though, the rising skepticism threatens to rule the day in many countries, and Greece is by no means the leader in the field. Germany has a rising right wing party that wants out (just wait till Merkel leaves). Marine Le Pen has vowed to take France out as soon as she gets to power, and she leads many polls. Britain’s Ukip is merely the vanguard of a broad right wing UK ‘movement’ that either want out or have treaties thoroughly renegotiated.

  Portugal’s socialists are soaring in the polls on an EU-unfriendly agenda. Spain’s Podemos is no friend of Brussels. In Italy, M5S’s Beppe Grillo has gone from skeptic to outright adversary over the past few years. There are varying levels of antagonism in all other countries too.

  Now obviously, not all countries in the union carry the same weight, politically speaking (why do we so easily agree that’s obvious, though?). You have Germany, then a big nowhere, then France and Britain.

  Greece, equally obviously, has no say. They can elect a government that wants to change things even just at home, and be told no way. If Germany would elect such a party, all EU policy would change in the blink of an eye. A true union of sovereign nations it therefore is not. And that of course was never possible, it was just something people wished for who never contemplated the details or consequences.

  Still, given that the whole project has always been represented as a one-way street from which escape is not possible, the weight of the smaller nations should not be underestimated. Perhaps all it will take is one defector to make the entire edifice unstable. Statements to the contrary are made only by people who eat hubris for breakfast, lunch and dinner.

  If either France or Germany leave -the former looks far more likely right now-, it’s project over. The same would probably hold for Italy. Spain would be a grave blow. Britain might be quite a bit easier (no euro), though negotiations -let alone referendums- over treaties could cause a lot of havoc and unrest. While various bigwigs try to fool you into thinking that letting small nations leave can be ‘ringfenced’, that is utter nonsense, they have no way of knowing.

  David Cameron tries to convince himself that he can get away with establishing some sort of status aparte for Britain, but others may want such a status too, and they may have a list of points they want to discuss if and when treaty changes are put on the table. Multiple that by 28 and before you know it either nothing changes, or everything does.

  The Union was hastily and sloppily cross-stitched together when everyone was still exclusively dreaming more of mass lift-all-boats profits in the offing, than caring about the fineprint of compromise squared treaties or considering possible future consequences if and when the profits would turn out not to be unlimited. Ergo, everything that happens now is an improvised play performed by 28 at best mildly talented actors trying to convey an air of confidence. That’s all that is left.

  Throw all this in a pile, and renegotiating any EU treaty will to a high degree of probability be akin to opening Pandora’s cesspit. And besides, any changes would never pass if a referendum were held. Macron and Gabriel are all too aware of this pesky factoid:

  “What’s important is the project,” Macron said in an interview with Le Journal du Dimanche. “Treaty change is a method that would ensue and that we have to prepare in due time,” he said, warning that European people would probably reject a new treaty if asked in a referendum.

   

  Meanwhile, British demands to opt-out from “ever closer union” could be accommodated by a special “protocol” to the EU treaties, according to Manfred Weber, a Christian Social Union MEP who is a close ally of German Chancellor Angela Merkel. But in return, Britain would have to accept losing its veto in areas where others forge ahead with deeper integration, the German MEP warned.

  In 2005, both France and Holland rejected the EU constitution in respective national referenda. But Brussels just ‘forged’ ahead as if it didn’t matter. Today, however, let’s see them try that again.

  Ten years ago, the profits were still in vogue. But things have changed, and problems are everywhere. Problems that Brussels seeks to ‘solve’ by gifting itself with ever more centralized powers. But the undoubtedly biggest problem of all they have is that not 10% of Europeans would vote to give them these powers. So please, please, try.

  As for Greece, all the negotiations really are just a matter of fiddling while Rome burns. But that is not because Greece is in trouble; it’s because of what the EU has become. A club that depends on its ability to scare members into submission, the same vein the IMF operates in. The negotiations are about amounts of debt that were imposed upon Greece by the troika when it decided to bail out banks of Europe’s most powerful member nations and put the Greek people on the hook.

  Europe’s high and mighty will yet come to regret the decision not to restructure these banks, because this will be the catalyst that blows up the Union. The reason why will become apparent as debt rises further and asset markets start falling off so many cliffs.

  Greece should get out as fast as it can, all member countries should, especially the poorer ones. There is no benign or even economically viable future for any of them in the Union. A future inside the union is infinitely more frightening than one outside.

  What is evident by now is that the troika creditors don’t come to the table to negotiate, they come to impose their will. And those countries that carry the most debt are most vulnerable to the threats flung across the table. If you don’t get out, in time Germany will decide what you can eat, what your children learn in school, and how you are to behave. You will no longer live in sovereign nations.

  The eurozone must fail. And so must the EU. That is better for everyone who’s not inside the power circles, in the long term. What countries should do now is ‘ringfence’ themselves as best they can from the nuclear fallout the failure will lead to. Focus on resilience.

  While the leadership everywhere dreams of ever more centralized power, economic reality dictates decentralization. It can only be halted through propaganda and violence. But that will merely be temporary.

  Even if Brussels somehow ‘solves’ the Greece issue, others nations will follow, be targets of financial markets, and once it comes to Italy or Spain, who are both in very precarious places, the EU and the ECB are simply not strong enough to absorb the blow. And then where do you think that leaves you?

  I’ve said many times before that all governments, power structures and supra-national organizations are a magnet for the last people you would want to lead them: sociopaths. That’s not an opinion, it’s a description of the dynamics of human group psychology. Greece itself before Syriza is a prime example of this.

  The smaller the countries, states, regions that politicians are allowed to rule over, the less likely leadership posts are to attract sociopaths. Other considerations count too, remuneration, chances to forge ties with an elite and serve their purposes. Larger entities are certain to attract pathological minds. Exceptions to the rule are far and few between. Also: the more a society manages the field of propaganda, the likelier it is to get -and keep- a sociopath as its leader.

  The US is a good example. So is the EU. And obviously, the IMF, World Bank, NATO, FIFA. We always fail at ‘doing large scale’ for the benefit of the people. The large the scale, the less the people benefit.

  Just when its moment of glory seems to arrive, globalization will lead towards decentralization and protectionism. Just as stability leads to instability.

  The EU’s socio-pathological trait is evident in the way the organization’s leaders deal with Ukraine, with the refugees off its southern coasts, and, inside its very borders, with Greek society, unemployment, hunger and hospitals. There is no compassion, no conscience.

  In the EU, the idea(l)s have become the problems, argues Stratfor’s George Friedman:

  Is The European Union Already On The Brink Of Inevitable Disaster?

  The fact of the matter is that a free-trade zone in which the black hole at the centre, Germany, absolutely overwhelms all of its competition, and the competition can’t protect itself, is untenable.

   

  [..] many of the great ideas that the European Union began with have turned, as it frequently happens in history, into the problems.

   

  Q: [..] ..you said a group of squabbling nations, and you’ve alluded to the history, from the Franco-Prussian wars right up to 1945, the history is very, very unpleasant indeed. Is the corollary that Europe will eventually descend back into war?

   

  George Friedman: Well, the question is really has it ascended? From ’45 to ’92, Europe was occupied by the Soviets and the Americans. The fundamental questions of sovereignty were not in the hands of London or Berlin or Rome, it was in the hands of Washington and Moscow. In ’92, the Soviet Union collapsed, and for the first time since WWII, Europe became genuinely sovereign. And for 16 years, they made a go of it. For the last seven years, it’s been rather disastrous, and the question is, can they reverse it?

   

  And if they don’t reverse it, what prevents them from returning to the kind of history that is normal in Europe? And what I’m arguing is that basically, the period of ’92 to 2008 was an interesting aberration. We are now back to the old normal, and how bad it becomes really depends on a bunch of (inaudible) issues. But first we have to really recognise that the Europe that was envisioned in the European Union is not going to return.

  We had better not forget that. If Europe will never be what it was supposed to be, then why would anyone want to be part of it, apart from the few that profit most? If the corollary truly is that Europe will eventually descend back into war, isn’t it time to take care of your own? And isn’t that, really, what the Greeks are already trying to do today?

  Very timely for this article, Tyler Durden posted a piece by Jeff Thomas today that delves deeper:

  The New World Order – A Faustian Bargain

  [..] most people in any given country seem to believe that the political parties that rule them do not collude in their own collective interest and against the best interests of their respective constituents.

   

  Similarly, they are unlikely to accept that fascism exists in their country—that members of their favoured party collude with industries. Further, most people seem to disbelieve that the leaders of their own country collude with the leaders of their country’s enemies in such a way that might create loss or danger to their own people. This is naive. Such collusions are the norm rather than the exception.

   

  Those who tend to be more informed, readily acknowledge that collusion exists between all of the above, to one degree or another. If this group errs, it is often in the opposite assumption—that the collusion is all-encompassing.

   

  There can be no doubt that a New World Order is being sought by some—this has been made clear for at least a hundred years by many who regard themselves as an Elite. It is therefore an open secret.

   

  In my experience in dealing with political leaders (and political hopefuls) from several jurisdictions, I’ve found there to be a consistent sociopathology (by definition, the desire for dominance over others, undeserved self-confidence, lack of empathy, a sense of entitlement, lack of conscience, etc.).

   

  Sociopaths are drawn to political leadership for obvious reasons. First, they’re prone to collusion, as they recognise that it may further their interests [..] Trouble is, the same sociopathology would drive the same individuals to seek to dominate each other.

   

  It has been postulated by many that those who see themselves as an Elite are nearing the completion of what they perceive as world dominance. However, should they succeed, they will betray their partners the very next day, as it’s their nature to do so.

   

  First, there most assuredly are extremely domineering forces (regardless of how closely associated they might be), which, in the near future, will do immense damage to the cause of freedom in the world, particularly in those countries where they are most dominant, or will become most dominant. Second, the situation does appear to be reaching a head.

   

  The two greatest uncertainties will be how much damage will be done before the dust has settled, and how protracted the period of destruction and struggle for dominance might be. [..] The best that can be done is to work at placing ourselves as far outside of their sphere of influence as possible.

  That describes how the EU functions, and why Greece -first of all, and first thing in the morning- needs to leave. There is no future in the EU that anyone wants to live in. It’s not a tide that will lift all boats, it will sink them.

  

  

  
  
  

  

• Slave Or Rebel? Ten Principles For Escaping The Matrix And Standing Up to Tyranny

  Submitted by John Whitehead via The Rutherford Institute,

  “Until they become conscious, they will never rebel, and until after they have rebelled, they cannot become conscious.” – George Orwell

  The more things change, the more they stay the same.

  It’s a shell game intended to keep us focused on and distracted by all of the politically expedient things that are being said – about militarized police, surveillance, and government corruption – while the government continues to frogmarch us down the road toward outright tyranny.

  Unarmed citizens are still getting shot by militarized police trained to view them as the enemy and treated as if we have no rights. Despite President Obama’s warning that the nation needs to do some “soul searching” about issues such as race, poverty and the strained relationship between law enforcement and the minority communities they serve, police killings and racial tensions are at an all-time high. Just recently, in Texas, a white police officer was suspended after video footage showed him “manhandling, arresting and drawing his gun on a group of black children outside a pool party.”

  Americans’ private communications and data are still being sucked up by government spy agencies. The USA Freedom Act was just a placebo pill intended to make us feel better without bringing about any real change. As Bill Blunden, a cybersecurity researcher and surveillance critic, points out, “The theater we’ve just witnessed allows decision makers to boast to their constituents about reforming mass surveillance while spies understand that what’s actually transpired is hardly major change.”

  Taxpayer dollars are still being squandered on roads to nowhere, endless wars that do not make us safer, and bloated government agencies that should have been shut down long ago. A good example is the Transportation Security Administration, which, despite its $7 billion annual budget, has shown itself to be bumbling and ineffective.

  And military drills are still being carried out on American soil under the pretext of training soldiers for urban warfare overseas. Southeastern Michigan, the site of one of the many military training drills taking place across the country this summer, has had Black Hawk helicopters buzzing its skies and soldiers dressed for combat doing night combat drills in abandoned buildings around the state.

  In other words, freedom, or what’s left of it, is being threatened from every direction. The threats are of many kinds: political, cultural, educational, media, and psychological. However, as history shows us, freedom is not, on the whole, wrested from a citizenry. It is all too often given over voluntarily and for such a cheap price: safety, security, bread, and circuses.

  This is part and parcel of the propaganda churned out by the government machine. That said, what we face today—mind manipulation and systemic violence—is not new. What is different are the techniques used and the large-scale control of mass humanity, coercive police tactics and pervasive surveillance. As we have seen with the erection of the electronic concentration camp, there is virtually no escaping the invisible prison surrounding us. Once upon a time, one could run and hide or duck into a cave, but that is no longer feasible as caves are quite scarce, and those running the camp have their eyes watching everything.

  Moreover, we are presented with the illusion that we act of our own volition when most of the time we are being watched, prodded, and controlled. “The nature of psychological compulsion is such that those who act under constraint remain under the impression that they are acting on their own initiative,” Aldous Huxley stated. “The victim of mind-manipulation does not know that he is a victim. To him, the walls of his prison are invisible.”

  In fact, with the merger of the Internet and the corporate state, unless you are alert and aware, it will be increasingly difficult to discern the difference between freedom and enslavement. With the methods of mind manipulation available to the corporate state, the very nature of democratic government has been changed. Again, as Aldous Huxley writes:

  [T]he quaint old forms—elections, parliaments, Supreme Courts and all the rest will remain. The underlying substance will be a new kind of nonviolent totalitarianism. All the traditional names, all the hallowed slogans will remain exactly what they were in the good old days. Democracy and freedom will be the theme of every broadcast and editorial . . . Meanwhile the ruling oligarchy and its highly trained elite of soldiers, policemen, thought-manufacturers and mind-manipulators will quietly run the show as they see fit.

  To many, the situation seems hopeless. But is it?

  From the day you’re born until the day you die, the choices you exercise are very limited. You don’t choose to be born or choose what sex you are or who your parents are or where you live. When you are a child, you are told what to do, and when you enter school, you sit plastered to a desk and are taught what others demand you should know. Yes, the indoctrinating process begins on day one.

  Then there are the rules, the endless rules. If you say the wrong word, write the wrong story or wear the wrong clothes, you can get thrown out of school or even arrested. You live where you are told and eat what others think you should eat. As you grow older, this list expands into employment, marriage and so on. In other words, your so-called reality is socially constructed. It is predetermined for you, and if you step out of line and disagree with what the current society deems proper, you will be ostracized. If you speak your mind to the governing authorities, you might find yourself behind bars.

  The point is that in order to develop a compliant citizenry, people must be forced to live in a mental matrix of words, ideas, ideologies, and teachings that are designed to make us conform. “As the Matrix in the movie was used to facilitate the exploitation of humans,” writes author Henry H. Lindner, “so the current ideological Matrix was created for, and serves to exploit us, turning us into unthinking workers and consumers—slaves of the ruling elite who themselves are trapped in the Matrix.” In fact, “few of us are able to escape the Matrix. We do not even know it exists.”

  For there to be any hope of real change, you’ll have to change how you think about yourself, your fellow human beings, freedom, society, and the government. This means freeing your mind, realizing the truth, and unlearning all the myths you have been indoctrinated with since the day you were able to comprehend language.

  The following principles, taken from my new book Battlefield America: The War on the American People, may help any budding freedom fighters in the struggle to liberate themselves and our society.

  First, we must come to grips with the reality that the present system does not foster freedom. It denies freedom and must be altered. “Our authoritarian system is based on cruelty and control—it increasingly drives natural love and feelings from our society and produces violence and greed,” Lindner recognizes. “Our society is deteriorating morally and intellectually. This system cannot be reformed.”

  To start with, we must recognize that the government’s primary purpose is maintaining power and control. It’s an oligarchy composed of corporate giants wedded to government officials who benefit from the relationship. In other words, it is motivated by greed and exists to perpetuate itself. As George Orwell writes:

  We know that no one ever seizes power with the intention of relinquishing it. Power is not a means; it is an end. One does not establish a dictatorship in order to safeguard a revolution; one makes a revolution in order to establish a dictatorship. . . .. The object of power is power.

  Second, voting is practically worthless. “In principle, it is a great privilege,” Aldous Huxley recognized. “In practice, as recent history has repeatedly shown, the right to vote, by itself, is no guarantee of liberty.”

  We live in a secretive surveillance state that has virtually no accountability, transparency, or checks and balances of any kind. As Jordan Michael Smith, writing for the Boston Globe, concludes about the American government:

  There’s the one we elect, and then there’s the one behind it, steering huge swaths of policy almost unchecked. Elected officials end up serving as mere cover for the real decisions made by the bureaucracy.

  How many times have the various politicians, when running for office, lied about all they were going to do to bring hope and change to America? Once they get elected, what do they do? They do whatever the corporate powers want. Yes, the old boss is the same as the new boss. The maxim: power follows money.

  Moreover, voting is a way to keep the citizenry pacified. However, many Americans intuitively recognize that something is wrong with the way the electoral process works and have withdrawn from the process. That’s why the government places so much emphasis on the reassurance ritual of voting. It provides the illusion of participation.

  Third, question everything. Don’t assume anything government does is for the good of the citizenry. Again, that is not the purpose of modern government. It exists to perpetuate a regime. Remember the words of James Madison, considered the father of the U.S. Constitution: “All men having power ought to be distrusted to a certain degree.” Power corrupts. And as the maxim goes, absolute power corrupts absolutely.

  Fourth, materialism is a death knell to freedom. While it may be true that Americans are better off than citizens of other nations—we have jobs, food, entertainment, shopping malls, etc.—these are the trappings meant to anesthetize and distract us.

  Like the dodo, any “bird that has learned how to grub up a good living without being compelled to use its wings will soon renounce the privilege of flight and remain forever grounded,” Huxley warned. “Same thing is true of human beings. If bread is supplied regularly and capaciously three times a day, many of them will be perfectly content to live by bread alone—or at least by bread and circuses alone.” Free as a bird, some say, but only if you’re willing to free your mind and sacrifice all for a dangerous concept—freedom.

  In other words, the hope is that the cry of “‘give me television and hamburgers, but don’t bother me with the responsibilities of liberty,’ may give place, under altered circumstances, to the cry of ‘give me liberty or give me death.’” This is indeed dangerous freedom.

  Fifth, there is little hope for any true resistance if you are mindlessly connected to the electronic concentration camp. Remember, what you’re being electronically fed by those in power is meant to pacify, distract, and control you. You can avoid mind manipulations to a large degree by greatly limiting your reliance on electronic devices—cell phones, laptops, televisions, and so on.

  Sixth, an armed revolt will not work. Although we may have returned to a 1776 situation where we need to take drastic actions to restore freedom, this is not colonial America with its muskets and people’s armies. Local police departments have enough militarized firepower to do away with even a large-scale armed revolt. Even attempting to repel a SWAT team raid on your home is futile. You’ll get blown away.

  Seventh, be wise and realize that there is power in numbers. Networks, coalitions, and movements can accomplish much—especially if their objectives are focused and practical—and they are very much feared by government authorities. That’s why the government is armed to the teeth and prepared to put down even small nonviolent protests.

  Eighth, act locally but think nationally. The greatest impact can be had at local governing bodies such as city councils. Join together with friends and neighbors and start a Civil Liberties Oversight Committee. Regularly attend council meetings and demand that government corruption be brought under control and that police activities be brought under the scrutiny of local governing bodies and, thus, the citizenry.

  In Albuquerque, New Mexico, for example, police were involved in 39 shootings dating back to 2010. After a 2014 police shooting of an unarmed homeless man camped out in a public park, residents engaged in nonviolent acts of civil disobedience to disrupt the normal functioning of the city government and demand that the police department be brought under control. Community activists actually went so far as to storm a city council meeting and announce that they would be performing a citizens’ arrest of the police chief, charging him with “harboring fugitives from justice at the Albuquerque police department” and “crimes against humanity.”

  In Davis County, California, in August 2014, after a public uproar over the growing militarization of local police, council members ordered the police to find a way of getting rid of the department’s newly acquired MRAP tank. One man at the council meeting was quoted as saying: “I would like to say I do not suggest you take this vehicle and send it out of Davis, I demand it.”

  Ninth, local towns, cities and states can nullify or say “no” to federal laws that violate the rights and freedoms of the citizenry. In fact, several states have passed laws stating that they will not comply with the National Defense Authorization Act which allows for the military to indefinitely detain (imprison) American citizens. Again, when and if you see such federal laws passed, gather your coalition of citizens and demand that your local town council nullify such laws. If enough towns and cities across the country would speak truth to power in this way, we might see some positive movement from the federal governmental machine.

  Tenth, understand what freedom is all about. “Who were the first persons to get the unusual idea that being free was not only a value to be cherished but the most important thing that someone can possess?” asks Professor Orlando Patterson. “The answer in a word: slaves.”

  Freedom arose from the hearts and minds of those who realized that they were slaves. It became a primary passion of those who were victims of slavery.

  Some Americans are beginning to realize that they are slaves and that if they don’t act soon, they will find themselves imprisoned in the electronic concentration camp indefinitely. Mind you, there may not be any chains hanging from the dungeon walls, but it is a prison nonetheless, and we are, without a doubt, inmates serving life sentences.

  

  

  
  
  

  

• Aussie Central Bank Admits, Property Prices "Have Gone Crazy"

  With The Philly Fed admitting QE has been the driver of inequality in the USA and the Kiwis slashing rates unexpectedly, the fact that Reserve Bank of Australia Governor Glenn Stevens uttered the following is even more crucial. “I think it’s a social problem,” Stevens told the Economic Society of Australia, adding ominously, “I think some of what’s happening is crazy,” specifically pointing to Sydney property prices as an example. No matter where we look around the world, Central Bankers appear to be exercising their honesty glands about the impact of their policies. However Stevens can’t help himself at the end, noting “we remain open to the possibility of further policy easing.”

   

  As Business Spectator reports, Sydney property prices have gone “crazy”, but record low interest rates aren’t entirely to blame, Reserve Bank boss Glenn Stevens says.

  The RBA governor waded into the property debate on Wednesday, telling a business lunch that he finds Sydney’s soaring prices concerning.

   

  However the RBA remains open to cutting rates further and always took into account what was happening in property markets across the country – not just Sydney – when deciding whether to adjust the cash rate, he said.

   

  “What is happening in housing in Sydney I find acutely concerning for a host of reasons, many of which are not to do with monetary policy,” he told the Economic Society of Australia.

   

  “I think it’s a social problem.

   

  “I think some of what’s happening is crazy, but we have a national focus and so that just increases the complexity.”

  In other words – we know it’s crazy what we are creating but we have no choice…

  Treasury boss John Fraser last week said Sydney and wealthier parts of Melbourne were “unequivocally” in a housing bubble.

  While Treasurer Joe Hockey has downplayed fears of a bubble, he has sparked a wave of controversy by telling frustrated first-time buyers that all they need is “a good job that pays good money” if they want to buy a home in Sydney.

  In the meantime, the RBA remains open to cutting interest rates even further to help give the economy a boost.

  “We remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth,” Mr Stevens said.

  “I think it’s quite some time before we even think about interest rates going up.”

  *  *  *
  Or maybe not…

  

  

  

  
  
  

  

• Big Pharma Revealed As Puppetmaster Behind TPP Secrecy

  It is no secret that US healthcare corporations have been among, if not the biggest beneficiaries of Obamacare: by “socializing” costs and spreading the reimbursement pool over the entire population in the form of a tax, pharmaceutical companies have been able to boost medical product and service costs to unprecedented levels with the help of complicit insurance companies who have subsequently passed through these costs to the consumer, in the process sending the price of biotech and pharma stocks to levels not seen since the dot com bubble.

  But when it came to the highly confidential TPP, it was unclear just which corporations were dominant in pulling the strings.

  Now thanks to more documents published by Wikileaks, and analyzed by the NYT, it appears that “big pharma” is once again pulling the strings, this time of the Trans Pacific Partnership, which if passed will “empower big pharmaceutical firms to command higher reimbursement rates in the United States and abroad, at the expense of consumers” according to “public health professionals, generic-drug makers and activists opposed to the trade deal.”

  In other words, just like the narrowly-passed Obamacare was a gift for big Pharma, so America’s legal drug dealers are now trying to go for another price boosting catalyst, one which however will involve not just the US but some 12 countries in the Asia-Pacific region. Worst of all, the negotiations for the next price increase is taking place in utmost secrecy where “American negotiators are still pressing participating governments to open the process that sets reimbursement rates for drugs and medical devices.”

  As RT notes, the latest disclosure links the Healthcare Annex to the secret draft of the quite aptly-named “Transparency” Chapter of the TPP, along with each country’s negotiating position. The leaked “Annex on transparency and procedural fairness for pharmaceutical products and medical devices” is dated from December 2014, with the draft being restricted from release for four years after the passage of the TPP into law.
  

  RELEASE: TPP Transparency Chapter Healthcare Annex https://t.co/jc4hYqh06V #TPP #TTIP #TISA pic.twitter.com/xIlO4QCUu6

  — WikiLeaks (@wikileaks) June 10, 2015

   

  Worse, while in the US the rising healthcare costs are at least spread across a broader social safety net, the TPP is targeting countries where the potential jump in drug prices will have dramatic effects. As the NYT notes, “foreign governments and health care activists have accused pharmaceutical giants, mostly based in the United States, of protecting profits over public health, especially in poor countries where neither the government nor consumers can afford to pay rates anywhere close to those charged in wealthier nations.”

  That fight re-emerged in the Pacific trade negotiations, which involve countries with strong cost-containment policies, like New Zealand, as well as poor countries like Peru and Vietnam.

   

  The agreement “will increase the cost of medicines worldwide, starting with the 12 countries that are negotiating the Trans-Pacific Partnership,” said Judit Rius Sanjuan, a lawyer at Doctors Without Borders, a humanitarian organization that provides medical care in more than 60 countries.

  None other than the CEO of Mylan explained in the simplest possible way what is going on: a government mandated monopoly under the guise of a trade pact: “Heather Bresch, the chief executive of Mylan, one of the largest generic-drug makers, said the brand-name pharmaceutical industry was “establishing, through U.S. trade policy, an international system designed to maximize its monopolies.”

  But where the alarm bells truly go off is when someone, anyone, uses the word “fair” to justify policy, such as surging drug costs. To wit: “drug companies, however, say they need to be able to charge fair prices to compensate for the billions of dollars and decades of research that go into their medicines.”

  What is amusing is that the true motive behind the TPP’s secrecy have been quite clear to virtually everyone but the population of the TPP’s host nation:

  “It was very clear to everyone except the U.S. that the initial proposal wasn’t about transparency. It was about getting market access for the pharmaceutical industry by giving them greater access to and influence over decision-making processes around pricing and reimbursement,” said Deborah Gleeson, a lecturer at the School of Psychology and Public Health at La Trobe University in Australia. And even though the section, known as the transparency annex, has been toned down, she said, “I think it’s a shame that the annex is still being considered at all for the T.P.P.”

  RT adds that one country that should be in arms over the TPP is Australia:

  The secret negotiations now allegedly reveal that Australia’s Pharmaceutical Benefits Scheme might be undermined, pushing up the cost of medicines in the country.

   

  “United States trade negotiators have aggressively pushed for provisions favoring multinational pharmaceutical manufacturers at the expense of national governments and public healthcare systems,” the Sydney Morning Herald wrote.

  But the one place where the biggest price shock may be unleashed is, not surprisingly, the US itself :

  The leaked TPP document “shows that the pact could expose Medicare to pharmaceutical company attacks and constrain future policy reforms, including the ability of the US government to curb rising and unsustainable drug prices,” the US consumer rights advocacy group and think tank Public Citizen said in its Wednesday statement.

   

  The group says president Obama’s administration has been “acting at the behest of pharmaceutical companies,” and the secret negotiations it has been holding within the partnership might affect Medicare, limiting “Congress’ ability to enact policy reforms that would reduce prescription drug costs for Americans.”

  The same Congress, incidentally, which gladly washed its hands of any discussion of the TPP when the Senate “fast-tracked” its passage and as the NYT further notes, “a House vote on final passage of the bill, now expected on Friday, appears extremely close.”

  In other words, in exchange for a few million in lobby spending, aka bribes, by Big Pharma, the US Congress has once again sold out the US population, and this time it even voluntarily bypassed even the mock democratic process of debating the law it will pass.

  Why? Just so shareholders of pharmaceutical companies could reap even greater profits at the expense of not just the US population, but of the populations of some of the biggest US trading partners, all of whom are about to see the prices of medical care skyrocket.

  And since nothing is confirmed until it is officially denied, here is the punchline:

  “The transparency annex in T.P.P. is not subject to Investor-State Dispute Settlement, and nothing in its provisions will undermine our ability to pursue the best health care policy for Americans, including any future action on health care expenditures and cost containment,” a trade representative spokesman said.

  Those Americans who may wish to challenge the claim well, they are out of luck: Congress is about to make sure there is no way anyone can have a say into what big corporations have in store for the US population.

  The full Transparency Chapter Healthcare Annex below:

  

  

  
  
  

  

• Oops! Fed Admits QE Widens Inequality

  Via NotQuant.com,

  Once again, the Federal Reserve proves that it’s the last one to know everything that we knew already.   Today’s stunning announcement:  The Philadelphia Fed admits they (“may have”) made the wealthy wealthier and Main Street poorer.

  Oops.  Sorry America.

  

  The Philly Fed insists that “redistributing wealth” to the wealthy isn’t the main idea, but just a potential side effect of stimulus that they can’t do much about.

  “Monetary policy currently implemented by the Federal Reserve and other major central banks is not intended to benefit one segment of the population at the expense of another by redistributing income and wealth,” …

   

  “However, it is probably impossible to avoid the redistributive consequences of monetary policy”.

  We’re shocked.  Shocked, we tell you.  It turns out that handing out free money,  buying worthless assets at face value and allowing a small cabal of private banks the sole right to access your magic free-money window, “may” have given some financial advantages to “one segment of the population”.   But that’s just a side effect of saving the “economy”.

  Of course, it’s not just the bankers.  The 1% also happen to hold vastly more financial assets than the lower 99% — so they may directly benefit from financial asset-inflating monetary policy.

  

  And low income households which live paycheck-to-paycheck are far more exposed to “inflation-sensitive cash”.

  

  It’s great to see the Federal Reserve finally state this possibility publicly, unfortunately it doesn’t mean they’re about to change their minds.  In the eyes of the Fed, the ends justify the means.  If society as a whole is “better off” then it’s apparently “okay” that the poor are poorer and the rich are richer:

  It might be also true that the gain to society’s well-being from stabilizing the overall economy is greater than the loss coming from associated redistributive effects, in which case we could safely focus on the overall effects and ignore the redistributive effects.

  How convenient: Focus on the winners, not the losers.  Or something like that.

  But the rose-colored glasses have only just been donned:

  One could also argue that, in the long run, the redistributive consequences of monetary policy might average out. In other words, if the same type of households that tend to gain from monetary policy during economic expansions also tend to lose from monetary policy during recessions, then over time the average effect could be a wash.

  Got that?  The Fed is suggesting that while the rich “may” get richer during boom times,  recessions equalize wealth inequality.   So in a perfect world it might all even out.

  First, let’s take a moment to note that the Fed  just admitted that deflationary forces are wealth equalizers and inflationary forces benefit the rich.    That’s noteworthy.

  But let’s also note that the Fed’s money printing creates endless artificial booms, and limits recessions.  Ergo, the Fed reduces the possibility of equalization and creates a continuous money transfer mechanism from poor to rich – as they note:

   …There is a good chance that the redistributive effects do not average out because business cycles are known to be asymmetric —expansions tend to be long and moderate, while recessions tend to be short and sharp.

  Exactly.  And why are recessions so short?   Recessions “tend to be short and sharp” because the entire modus operandi of Federal Reserve policy is to shorten recessions and lengthen expansions.

  In other words, the Fed is admitting that it’s core policy thesis which is inherently inflationary makes the rich richer and the middle-class poorer.

  But as long as the “economy” is doing better, it’s all good.   Right?

  

  
  
  

  

• The Upside Of Soaring Obamacare Premiums?

  More costs…

   

  

   

  Source: Investors.com

  

  

  
  
  

  

• Rigging Markets? How To Determine If You Will Go To Jail In A Simple Flow Chart

  With a constant barage of revelations in the past three years that virtually every market is now rigged and manipulated to the core, the question is not “is [xxx] manipulated” (it is), but whether the manipulator will go to prison. For now, just one person has: a 36-year-old London suburb resident who was living in his parents’ house and… nobody else. So to make it easier for aspiring and existing manipulators, Virtu math PhDs, and various other “cartel” chat room members, here courtesy of Nanex is a flow chart that will answer the all important question: “will i go to prison if caught rigging.”

  

  Source: nanex

  

  

  
  
  

  

• Peter Schiff Warns This May Be The First Bubble To Burst Without A Pin

  Submitted by Peter Schiff via Euro-Pacific Capital,

  It is well known that I don’t think much of the ability of government officials to correctly forecast much of anything. Alan Greenspan and Ben Bernanke have made famously clueless predictions with respect to stock and housing bubbles, and rank and file Fed economists have consistently overestimated the strength of the economy ever since their forecasts became public in 2008 (see my previous article on the subject). But there is one former Fed and White House economist who has a slightly better track record…which is really not saying much. Over his public and private career, former Fed Governor and Bush-era White House Chief Economist Larry Lindsey actually got a few things right.

  Back in the late 1990s, Lindsey was one of the few Fed governors to warn about a pending stock bubble, and to suggest that forecasts for future growth in corporate earnings were wildly optimistic. He also famously predicted that the cost of the 2003 Iraq invasion would greatly exceed the $50 billion promised by then Secretary of Defense Donald Rumsfeld, a dissent that ultimately cost him his White House position. (But even Lindsey’s $100-$200 billion forecast proved way too conservative – the final price of the invasion and occupation is expected to exceed $2 trillion).

   

  Now Lindsey is speaking out again, and this time he is pointing to what he sees as a painfully obvious problem: That the Fed is creating new bubbles that no one seems willing to confront or even acknowledge.  Interviewed by CNBC on June 8th on Squawk Box, Lindsey offered an unusually blunt assessment of the current state of the markets and the economy. To paraphrase:

  “The public and the political class love to have everything going up. We had “Bubble #1” in the 1990s, “Bubble #2” in the 00s, and now we are in “Bubble #3.” It’s a lot of fun while it’s going up, but no one wants to be accused of ending the party early. But it’s the Fed’s job to take away the punch bowl before the party really gets going.”

  To his credit, however, Lindsey sees how this is sowing the seeds for future pain, saying:

  “The current Fed Funds rate is clearly too low, the only question is how we move it higher: Do we do it slowly, and start sooner, or do we wait until we are forced to, by the bond market or by events or statistics, in which case we would need to move more quickly. By far the lower risk approach would be to move slowly and gradually.”

  In other words, he is virtually pleading for his former Fed colleagues to begin raising rates immediately. I would take Lindsey’s assertion one step further; the party really got going years ago and has been raging since September 2011, the last time the Dow corrected more than 10%. (That correction occurred at a time when the Fed had briefly ceased stimulating markets with quantitative easing.) Since then, the Dow has rallied by almost 58% without ever taking a breather. With such confidence, the party has long since passed into the realm of late night delirium.

   

  As if to confirm that opinion, on June 8th the Associated Press published an extensive survey of 500 companies (using data supplied by S&P Capital IQ) that showed how corporate earnings have been inflated by gimmicky accounting. Public corporations, upon whose financial performance great sums may be gained or lost, are supposed to report earnings using standard GAAP (Generally Accepted Accounting Principles) methods. But much like government statisticians (see last month’s commentary on the dismissal of bad first quarter performance), corporate accountants may choose to focus instead on alternative versions of profits to make lemonade from lemons.

   

  Using creative accounting, bad performance can be explained away, moved forward, depreciated, offset, or otherwise erased. Given the enormity and complexity of corporate accounting, investors have deputized the analyst community to sniff out these shenanigans. Unfortunately, our deputies may have been napping on the job. 

   

  The AP found that 72% of the 500 companies had adjusted profits that were higher than net income in the first quarter of this year, and that the gap between those figures had widened to sixteen percent from nine percent five years ago. They also found that 21% of companies reported adjusted profits that were 50% more than net income, up from just 13% five years ago. 

   

  But with the fully spiked punch bowl still on the table, and the disco beat thumping on the speakers, investors have consistently looked past the smoke and mirrors and have accepted adjusted profits at face value. In a similar vein, they have looked past the distorting effect made by the huge wave of corporate share buybacks (financed on the back of six years of zero percent interest rates from the Fed). The buybacks have created the illusion of earnings per share growth even while revenues have stalled.   

   

  So kudos to Lindsey for pointing out the ugly truth. But I do not share his belief that the economy and the stock market can survive the slow, steady rate increases that he advocates. I believe that a very large portion of even our modest current growth is based on the “wealth effect” of rising stock, bond, and real estate prices that have only been made possible by zero percent rates in the first place. In my opinion, it is no coincidence that economic growth and stock market performance have stagnated since December 2014 when the Fed’s QE program came to an end (it has very little to do with either bad winter weather or the West Coast port closings).

   

  Prior to that, the $80+ billion dollars per month that the Fed had been pumping into the economy had helped push up asset prices across the board. With QE gone, the only thing helping to keep them from falling, and the economy from an outright recession (which is technically a possibility for the first half of 2015), is zero percent interest rates. Given this, even modest increases in interest rates could be devastating. Lindsey’s gradual approach may be equally as dangerous as the rapid variety. But the quick hit has the virtue of bringing the inevitable pain forward quickly and dealing with it all at once. Call it the band-aid removal approach; it may seem brutal, but at least it’s direct, decisive and makes us deal with our problems now, rather than pushing them endlessly into the future.

   

  The last attempt made by the Fed to raise rates gradually occurred after 2003-2004 when Alan Greenspan had attempted to withdraw the easy liquidity that he had supplied to the markets in the form of more than one years’ worth of 1% interest rates. But by raising rates in quarter point increments for the succeeding two years, Greenspan was unable to get in front of and contain the growing housing bubble, which burst a few years later and threatened to bring down the entire economy. In retrospect, Greenspan may have done us all a favor if he had moved more decisively.

   

  Today, we face a similar but far more dangerous prospect. Whereas Greenspan kept rates at 1% for only a year, Bernanke and Yellen have kept them at zero for almost seven. We have pumped in massively more liquidity this time around, and our economy has become that much more addicted and unbalanced as a result. Arguably, the bubbles we have created (in stocks, bonds, student debt, auto loans, and real estate) in the years since rates were cut to zero in 2008 have been far larger than the stock and housing bubbles of the Greenspan era. When they pop, look out below. Unfortunately, the gradual approach did not save us last time (worse, it backfired by making the ensuing crisis that much worse), and I believe it won’t work this time.   

   

  In fact, the current bubbles are so large and fragile that air is already coming out with rates still locked at zero. However, unlike prior bubbles that pricked in response to Fed rate hikes, the current bubble may be the first to burst without a pin. It appears the Fed fears this and will do everything it can to avoid any possible stress. That is why Fed officials will talk about raising rates, but keep coming up with excuses why they can’t.   

   

  Lindsey will be right that the markets will eventually force the Fed to raise rates even more abruptly if it waits too long to raise them on its own. But he grossly underestimates the magnitude of the rise and the severity of the crisis when that happens. It won’t just be the end of a raging party, but the beginning of the worst economic hangover this nation has yet experienced.

  

  

  
  
  

  

• China Officially Doubles Down On Multi-Trillion Yuan Debt Swap Program

  Last week, in “China May Double Down On Debt Swap As ABS Issuance Stumbles,” we discussed the likelihood that China’s local government debt swap pilot program would be expanded in the very near future. To recap, here’s what you need to know about the refi effort:

  China’s local governments are sitting on a pile of debt that amounts to around 35% of GDP. That’s a problem because some of this debt was accumulated off balance sheet through LGFVs (an effort to skirt official restrictions on borrowing via shadow banking conduits) meaning in some cases yields are far higher (at roughly 7%) than they would have been otherwise. The idea is to swap this debt for muni bonds and save 300 or so bps, in what amounts to a giant refi effort. The program officially got off the ground midway through last month with Jiangsu province sold paper with maturities ranging from 3 to 10 years at yields between 2.94% and 3.41%. 

   

  

  
  

  The program is a big deal for two reasons: 1) China’s local governments simply cannot afford 7% coupons on CNY20 trillion in debt, and 2) thanks to the fact that the PBoC will accept the muni bonds as collateral for cash loans, each new muni issue translates to new credit creation in the real economy — or at least that’s the idea. Shortly after launching the program, Beijing eased restrictions on LGFV financing, meaning that suddenly, local governments were once again able to borrow through the very same vehicles which got them into trouble in the first place. In the end, local governments are essentially able to roll their legacy high-yield LGFV debt via the issuance of muni bonds while re-leveraging via more LGVF financing. Meanwhile, the banks who purchase the newly issued munis pledge them for PBoC cash which is then used to make standard loans to individuals and businesses.

  If this sounds convoluted and self-defeating, that’s because it is. It’s a prime example of China attempting to deleverage and re-leverage at the same time. Local governments get to reduce their debt service burden (deleveraging) but the very mechanism which makes that possible also leads to further credit creation (re-leveraging). 

  Because the total debt burden for China’s local government stands at around 35% of GDP, the debt swap program can theoretically be expanded from the initial CNY1 trillion to as much as CNY20 trillion and indeed, we now have confirmation that the quota on the pilot program has been doubled. WSJ has more: 

  China will let its cities and provinces issue another 1 trillion yuan ($161 billion) of bonds as it continues an effort to rev up the economy and help local governments refinance their hefty debt burdens.

   

  The move, which doubles the amount Beijing initially authorized, will help local governments refinance 1.86 trillion yuan in debt due this year, according to the official Xinhua News Agency. It said swapping 1 trillion yuan will save local governments about 50 billion yuan in annual interest payments.

   

  The move, which was expected, underscores Beijing’s continued worries about slowing economic growth and mounting debt. China’s 7% first-quarter year-over-year growth rate was the slowest in six years, and recent trade and inflation data continue to point to soft domestic demand.

   

  China’s local governments had run up 17.9 trillion yuan of debt as of mid-2013, or $2.89 trillion at current exchange rates, according to the most recent official data. That was up sharply from negligible levels six years earlier.

   

  Much of the debt was from a massive stimulus push in the wake of the 2008 financial crisis. In recent years, China’s local governments circumvented rules that bar them from borrowing to fund the infrastructure and housing projects that have been essential in maintaining fast economic growth. The debt-fueled investment boom shielded China from the global financial crisis but left the country with greater financial vulnerabilities.

   

  Last month, China’s eastern province of Jiangsu became the first of several provinces to auction bonds. After a brief delay, it sold 52.2 billion yuan of debt at interest rates that ranged from 2.94% for three-year debt to 3.41% for 10-year bonds.

   

  Other local governments that have followed suit include the provinces of Hebei, Shandong, Hubei, Guangxi, and the municipalities of Chongqing and Tianjin.

  While the program is unequivocally positive for local governments as it effectively allows provincial authorities to kick the can a little further down the road while retaining access to LGFV financing in the mean time, it’s not clear whether the PBoC’s move to allow banks to pledge the new bonds for cash loans will be effective in terms of boosting credit creation and lowering real rates. 

  If three benchmark rate cuts in seven months and two RRR cuts since the beginning of the year haven’t done the trick, it’s unclear how pumping more liquidity into the system via LTROs is going to effect a meaningful change, especially considering the fact that rising defaults and NPLs are making banks think twice about taking on more credit risk. 

  

  

  
  
  

  

• CIA Humor – Mocking Transparency, "Conspiracy Theories"

  Earlier today, the CIA celebrated its first anniversary on Twitter. As part of its festivities it released five “reasons why you should follow the CIA” among which two stood out:

  5: The comments. Some of our followers have the most entertaining conspiracy theories on the internet.
  #aliensinthebasement
  #Twitterversary

  — CIA (@CIA) June 10, 2015

  and:

  4: In our second year we are going to ?????? #???
  #Twitterversary

  — CIA (@CIA) June 10, 2015

  And there you have it: in a nation in which a “conspiracy theory”, namely that the NSA was secretly spying on every single US citizen, and where the entire spy apparatus is undergoing a massive overhaul as a result of the “theory” becoming “fact” due to the impenetrable secrecy surrounding every decision of an administration whose biggest accomplishment will be passing a law that nobody has seen, the very subject of public transparency is now being ridiculed by the government itself.

  As expected, Edward Snowden’s lesson was lost on, well, everyone.

  

  
  
  

  

• Hospitals Are Blatantly Ripping Us Off

  Submitted by Michael Snyder via The Economic Collapse blog,

  Most Americans are deathly afraid to go to the hospital these days – and it is because of the immense pain that it will cause to their wallets.  If you want to get on a path that will lead you to bankruptcy, just start going to the hospital a lot.  In America today, hospitals and doctors are blatantly ripping us off and they aren’t making any apologies for it.  As you will read about below, some hospitals mark up treatments by 1,000 percent. 

  In other instances, basic medical supplies are being billed out at hundreds of times what they cost providers.  For example, it has been reported that some hospitals are charging up to 30 dollars for a single aspirin pill.  It would be difficult to argue that the extreme greed that we see in the medical system is even matched by the crooks on Wall Street.  These medical predators get their hands on us when we are at our most vulnerable.  They know that in our lowest moments we are willing to pay just about anything to get better or to make the pain go away.  And so they very quietly have us sign a bunch of forms without ever telling us how much everything is going to cost.  Eventually when the bills come in the mail, it is too late to do anything about it.

  How would you feel if someone sold you something for ten times the amount that it was worth?

  Would you feel ripped off?

  Well, that is what hospitals all over the country are doing every single day.  Just check out what one brand new study has discovered…

  Some hospitals are marking up treatments by as much as 1,000 percent, a new study finds, and the average U.S. hospital charges uninsured patients three times what Medicare allows.

   

  Twenty of the hospitals in the top 50 when it comes to marking up charges are in Florida, the researchers write in the journal Health Affairs. And three-quarters of them are operated by two Tennessee-based for-profit hospital systems: Community Health Systems and Hospital Corporation of America.

   

  “We just want to raise public awareness of the problem,” said Ge Bai of Washington & Lee University in Virginia, an accounting professor who wrote the study along with Gerard Anderson of Johns Hopkins University in Baltimore.

  Does reading that make you angry?

  It should.

  They are greedily taking advantage of all of us.

  Other studies have come up with similar results.  Here is one example…

  According to National Nurses United, U.S. hospital charges continue to soar with a handful of them, such as Meadowlands Hospital Medical Center in Secaucus, N.J., going as far as charging more than ten times the total cost — or almost $1,200 per $100 of the cost of care. Meanwhile, the hundred priciest hospitals in the nation were found to have this cost ratio begin at 765 percent, which is more than twice the national average of 331 percent.

  Much of the time, we are being overcharged for tests, services and procedures that we don’t even need.

  It has been estimated that the amount of truly wasteful spending in the U.S. medical system comes to a grand total of about $600 billion to $700 billion annually.  That means that wasteful medical spending in the U.S. each year is greater than the GDP of the entire country of Sweden.

  And of course almost everyone has a story about an absolutely ridiculous medical bill that they have received.  In fact, if you have one that you would like to share, please feel free to share it at the end of this article.  The following are just a few examples that were shared in an editorial in a local newspaper…

  Have you heard about the little girl who required three stitches over her right eye? The emergency room sent her parents a bill for $1,500 — $500 per stitch (NY Times, Dec. 3). My neighbor recently spent six hours in the emergency room with bleeding from the mouth. He was on a blood thinner, needed several blood tests, and his heart was monitored. His hospital bill came to $22,000. A California man diagnosed with lung cancer chose to fight his cancer aggressively. Eleven months later his widow received a bill exceeding $900,000.

  One of the most disturbing trends that we are witnessing all over the nation is something called “drive by doctoring”.  That is where an extra doctor that isn’t even necessary “pops in” to visit patients that are not his or “assists” with a surgery in order to stick the patient with a big, fat extra bill.  The following is from a New York Times article about this disgusting practice…

  Before his three-hour neck surgery for herniated disks in December, Peter Drier, 37, signed a pile of consent forms. A bank technology manager who had researched his insurance coverage, Mr. Drier was prepared when the bills started arriving: $56,000 from Lenox Hill Hospital in Manhattan, $4,300 from the anesthesiologist and even $133,000 from his orthopedist, who he knew would accept a fraction of that fee.

   

  He was blindsided, though, by a bill of about $117,000 from an “assistant surgeon,” a Queens-based neurosurgeon whom Mr. Drier did not recall meeting.

  How would you like to receive a bill for $117,000 from a doctor that you had never met and that you did not know would be at your surgery?

  This is how broken our medical system has become.

  And of course this type of abuse is not just happening in New York.  It is literally happening all over the nation…

  In operating rooms and on hospital wards across the country, physicians and other health providers typically help one another in patient care. But in an increasingly common practice that some medical experts call drive-by doctoring, assistants, consultants and other hospital employees are charging patients or their insurers hefty fees.

   

  They may be called in when the need for them is questionable. And patients usually do not realize they have been involved or are charging until the bill arrives.

  If you or a close family member has been to the hospital recently, you probably know how astronomical some of these bills can be.

  And if you have a chronic, life threatening disease, you can very rapidly end up hundreds of thousands of dollars in debt.

  If you doubt this, just check out the following excerpt from an article that appeared in Time Magazine.  One cancer patient out in California ran up nearly a million dollars in hospital bills before he finally died…

  By the time Steven D. died at his home in Northern California the following November, he had lived for an additional 11 months. And Alice had collected bills totaling $902,452. The family’s first bill — for $348,000 — which arrived when Steven got home from the Seton Medical Center in Daly City, Calif., was full of all the usual chargemaster profit grabs: $18 each for 88 diabetes-test strips that Amazon sells in boxes of 50 for $27.85; $24 each for 19 niacin pills that are sold in drugstores for about a nickel apiece. There were also four boxes of sterile gauze pads for $77 each. None of that was considered part of what was provided in return for Seton’s facility charge for the intensive-care unit for two days at $13,225 a day, 12 days in the critical unit at $7,315 a day and one day in a standard room (all of which totaled $120,116 over 15 days). There was also $20,886 for CT scans and $24,251 for lab work.

  The sad truth is that the U.S. health care system has become all about the money.

  A select few are becoming exceedingly wealthy while millions go broke.  One very disturbing study discovered that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt.  And collection agencies seek to collect unpaid medical bills from approximately 30 million Americans every single year.

  Once upon a time, going into the medical profession was a sacrifice and you did it because you wanted to help people.

  Today, it is considered to be a path to riches.

  If the U.S. health care system was a separate country, it would actually be the 6th largest economy on the entire planet.  Even though our system is deeply broken, nobody wants to rock the boat because trillions of dollars are at stake.  If it was up to me, I would tear the entire thing down and rebuild it from scratch.

  

  

  
  
  

  

• Biotech Bubble; China Crash; Rate Rumble: How Goldman Is Hedging The "What Ifs"

  It is no secret that in recent weeks Goldman has been particular bearish (if only to the outside world), with statements such as the following by chief equity strategist David Kostin:

  … by almost any measure, US equity valuations look expensive. The typical stock in the S&P 500 trades at 18.1x forward earnings, ranking at the 98th percentile of historical valuation since 1976. For the overall index, the aggregate forward P/E multiple equals 17.2x, a rise of 63% since September 2011, compared with the median expansion of 48% during 9 previous P/E expansion cycles. Financial metrics such as EV/EBITDA, EV/Sales, and P/B also suggest that US stocks have stretched valuations. With tightening on the horizon, the P/E expansion phase of the current bull market is behind us.”

  So with the firm not expecting much if any stock market upside at this point, all else equal, it is only logical that it must be expecting downside. Or so it would like its clients to believe.

  Which is perhaps why this afternoon, the 200 West firm with alumni manning every single central bank of relevance, released a note covering what are the three biggest market concerns, i.e., bubbles, and how Goldman is hedging them, or as Goldman puts it, the “what if” scenarios. To wit:

  In today’s report we examine several “what-if” scenarios on several key debates in the market with a focus on out of consensus ideas. Namely we ask 1.) How does one monetize a potential drawdown in Biotech. 2.) What stocks work better if the FED moves faster than expected? and 3.) What if China reforms don’t do the trick?

  Said otherwise, Goldman is hedging the biotech bubble, the China crash, and the rate rumble. Here’s how.

  First, Biotechs
  

  Many investors we speak to are concerned about a pullback in Biotech. It is easy to see the underlying sources of concern given strong sector outperformance, negative FCF for smid-caps, and increasingly early stage IPOs. While there are many reasons to be optimistic (strong new product cycles, advances in I/O and gene therapy, M&A), there are potential headwinds on the horizon. S&P Biotech (SPSIBITR) is up 85% in the past year and has outperformed the SPXTR by 250% over the past 5 years. In 2014, there were 71 IPOs, up 90% from 2013 as Venture Capital accelerated exits. Excitement has pushed the median stock to 11.6x EV/sales despite 90% of the NBI being unprofitable.

   

  Concerns that might have caused volatility in recent months:
   

  1. Availability of capital may quickly vanish with a broad market self-off or rate shock. Either could disproportionately pressure biotech.
      
  2. Pipeline setbacks have caused recent volatility in a few smid-cap biotechs including AERI (Oct 2013 IPO). CLDN (Jan 2014 IPO) and EBIO (Feb 2014 IPO).
  3. Lockup expirations have also been cited by investors as a source of weakness for some stocks such as FGEN and ATRA in recent months.

  How to Hedge: Buy XBI Dec 10% out-of-the-money puts for 5%. XBI puts (S&P biotech ETF) are attractive to hedge against a sell-off. XBI 3m implied volatility of 29% is near the lows vs. the past year, showing investors are complacent about risks. We prefer Dec XBI options as the XBI contains more smid-cap biotech and December options capture the critical fall conference season where data from recent trials is often made public. Put buyers risk losing their premium paid.

  Next: Interest Rates

  

  The timing and path of the Fed’s lift-off remains a key debate, with Fed Fund futures stall pricing in the first hike in 4Q despite recent improving economic indicators. Commentary from Fed governors continues to stress hike will be data dependent and Chair Janet Yellen noted in late May an increase could come this year if the US economy improves. Futures also imply a very gradual increase in rates with just three additional 25 bp hikes priced in for 2016. This compares to an average 200 bp increase in the 12m following the initial move in the last three rate cycles (2004: 200 bp, 1999: 175 bp. 1993: 250 bp).

   

  How to Hedge: Buy GSRHRATE. This basket includes 12 Financials

   

  across Discount Brokers, Regional Banks and Trust Banks that each have 20%+ EPS upside to normalized Fed Funds (300 bp) driven by higher net interest margins and money market fee waivers rolling off. While our Financial analysts estimate an initial hike is already priced in for most stocks in GSRHRATE, this baskel is still likely to be sensitive to any pull-forward in rate expectations as EPS estimates will likely be revised higher. The basket has been more correlated with treasury yields (2YR, 5YR, 10YR) than either the XLF (Financials) or SKX (Banks Index) over the last year.

  Finally, China.

  

   

  Market reform: A key pillar in the China re-railing story. The CSI 300 IChina A-shares) has irnere than doubled over the tam. year (+149%) and the HSCEI (China H-shares( is up 33%. A-shares have continued to outpace hi-shares in 2015 with the CS! 300 up 50% and the HSCEI up 16%. China bulls locus on the potential (Or the Shanghai and Sheranen stock connects io increase foreign inflows and enhance the liquidity profile required by key benchmark providers like MSC! and FTSE. Both index providers have cited that market accessibility concerns need to be resolved before including A-shares into benChrnaikS. Bears cite China’s debt buildup. NPLs and a slower China growth trajectory.

   

  Investors have been using options for access. Higher demand for upside calls (long with a hedge) rather than downside puts (fade the rally) has led to a rarity in the options Space. HSCEI and HSI are now the Only major global indices with negative skew, which all else equal. implies that put options are ‘fading inexpensive relative to calls. The term structure of implied volatility is also sharply downward sloping implying longer-dated options are trading at a discount to shorter-daled options.

   

  To position for upside with limited loss: Buy the HSCEI 105/125% call spread expiring December 30, 2015 for 4% (potential 5:1 payout). The December expiration benefits from the downward sloping term structure and potentially captures the Shenzhen-Hong Kong Connect expected to launch tater this year. The trade takes advantage of elevated call Skew by selling a deep otm call to cheapen the structure.

   

  To hedge the China rally: Take advantage of inverted skew. For investors who caught the rally or want to position for downside we like buying the HSCEI 90% put expiring December 30, 2015 for 3.9%.

  As for the real question: is Goldman truly hedging its positions or, as is almost always the case, merely looking for willing counterparties to its own prop exposure. Because if Goldman is happy to take the other side of these trades, then S&P 2400 may be just over the horizon.

  

  
  
  

  

• Deutsche Bank Head Of Asia-Pac Equities Loses Control Of His $580,000 Ferrari, Kills Innocent Bystander

  As recently as several months ago, the financial press was surprised when a wave of Deutsche Bank employees, particularly those in the bank’s legal department (such as here and here), decided to take their own lives. Now at least one Deutsche Banker, perhaps perturbed by the recent news involving the unexpected departure of his co-CEOs coupled with the even more unexpected raid of the bank’s global headquarters, has decided to show the jump from sui– to homicide is a simple one.

  Earlier today, Hong Kong police arrested a 48-year-old Deutsche Bank employee on “suspicion of dangerous driving and causing death.” The fatal accident happened early on Tuesday at a car park near Deutsche’s office at International Commerce Center, across the harbor from the city’s financial district.

  According to Reuters, the driver was Deutsche’s head of Asia-Pacific equities trading, Robert James Ebert, 48, who was behind the wheel of a Ferrari at the time of the accident.

  Below is his Linkedin profile:

  

  Police said the arrested driver, whom it identified only as James, had said he lost control of his car. The police said a 53-year-old man, who was next to the barriers, died after suffering serious head and shoulder injuries. He was pronounced dead in the hospital early in the afternoon.

  The Apple Daily newspaper also identified the driver as Ebert and said he was driving a black, HK$4.5 million ($580,502) Ferrari 458 Spider, which was in collision with a HK$2.4 million Maserati at the car park entrance before hitting a security guard.

  

  

   

  The police said the driver was not charged.  “We are investigating whether the car was driving beyond the speed limit of 30km/h at the time,” a police source said.

  It is safe to say the answer is yes, as a simple check of the security cameras would confirm.

  Ebert was released on bail in the early hours of Wednesday and has to report back in mid-July, the police said.

  Ejiinsight adds that Ebert’s car went on to sweep across three barricades and hit the guard, who was pinned to a post at the carpark entrance.

  Koo was rushed to the hospital but was pronounced dead by 2 p.m.

   

  Ebert and the Maserati driver were unhurt. Police said both drivers passed a breathalyser test.

   

  Skid marks stretching 10 meters were found at the entrance of the carpark.

   

  Ebert told police his car had a brake failure. He was arrested on suspicion of dangerous driving causing death.

  So guy drives a car which costs more than most Americans will make in a decade (pretax), crashes in what may have been an improvised drag race, kills an innocent bystander, and promptly posts bail and is allowed to roam, and drive, in freedom.

  Meanwhile Nav Sarao rots in the UK’s worst prison unable to pay his ridiculous $5 million bail, for the simple reason that he was a good trader and dared to expose the HFTs’ rigging to regulators. He faces a maximum sentence of 380 years in jail.

  It’s ok though: when Stan Fischer and Mark Carney said bankers have to go to prison for “at least” 10 years when caught rigging markets they said nothing about bankers who engage in homicide. It appears the legal system will need a central bank explainer on how to proceed in that specific case.

  

  

  
  
  

  

• China's Global Ambitions Take Shape As AIIB Structure Revealed, Germany Pledges Full Support

  China is working diligently to expand its global economic and political footprint. Two critical pieces of the puzzle for Beijing are the $40 billion Silk Road Fund and the $50 billion AIIB. 

  As a refresher, The Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. This failure has been exemplified of late by Washington’s steadfast refusal to reform the IMF in order to ensure the Fund reflects the economic clout of its members. Although the failure falls largely at the feet of Congress — US lawmakers’ utter inability to legislate has left reform measures stalled — it recently manifested itself at the Presidential level when President Obama had an opportunity to change the structure of the IMF (for the better) without congressional approval but chose not to do so. Importantly, Obama’s decision not to act was not made out of reverence for Congress. Rather, The White House believed that supporting the reform agenda would have jeopardized the US veto, which US officials at all levels view as sacrosanct. 

  As China builds its own multilateral institutions, Beijing has been keen to dispel the notion that it seeks to supplant the Bretton Woods order with its own brand of Eastern hegemony and although one can certainly question the degree to which China’s aims are rooted purely in an inclination to be benevolent towards nations in need of fixed asset investment, Beijing is making an effort to distance itself from the way the US governs the institutions under its control. WSJ has more on the structure of the AIIB:

  The bank’s voting structure means that China will retain the upper hand as the largest shareholder, according to its articles of incorporation and people close to the bank. China has offered to forgo outright veto power in day-to-day operations, which helped win over some key founding members.

   

  The articles, agreed to at a meeting of the bank’s 57 founding member countries last month, call for the Asian Infrastructure Investment Bank to be overseen by an unpaid, nonresident board of directors, unlike the World Bank and the Asian Development Bank. The new bank, which will be based in Beijing and use English as its operating language, will open bidding for projects to all, unlike the ADB, which restricts contracts to member countries, according to a copy of the articles reviewed by The Wall Street Journal.

   

  
  

   

  The new Asian bank also gives a bigger voice to developing nations—a turnaround from the International Monetary Fund and World Bank, which China lobbied for years for greater representation.

   

  “China benefited a lot from existing multilateral organizations, but it was also frustrated in a lot of ways that they didn’t increase the weight of China and other developing markets, that they are often slow and bureaucratic,” said David Dollar, a senior fellow at Brookings Institution and former World Bank and U.S. Treasury official in China who has done unpaid consulting for the new bank…

   

  Voting shares are apportioned according to a complex formula that factors in each member’s capital contribution, the size of its economy, basic votes each member receives equally plus another 600 votes allocated to each founding member.

   

  At least 75% of share votes are reserved for members located in the Asia-Pacific region, giving smaller Asian countries a greater say than they have in other global organizations.

   

  “They will try and increase the efficiency of investment compared to other development banks with long approval procedures,” said Cui Fan, a professor with Beijing’s University of International Business and Economics.

   

  The bank is expected to maintain a lean staff, according to analysts and those close to the bank, compared with the World Bank, which has over 12,000 staff and consultants. Doing without a resident board of directors should save the bank money and friction in decision-making.

   

  Mr. Dollar, of Brookings, said the resident board costs the World Bank some $70 million annually. When he worked at the bank, “There was often a certain tension between the management and the board members whose resident staff wanted to find out about projects at an early stage.”

  Germany, one of the European nations which signed on after the UK spurned Washington and opened the AIIB membership floodgates by pledging to join the bank, will become the fourth largest shareholder, demonstrating the degree to which Western powers believe the new institution will be far more influential than some US commentators have led the world to believe. 

  Via Reuters:

  Germany plans to take a 4.1 percent stake in the new China-led Asian Infrastructure Investment Bank (AIIB), making it the fourth-biggest member, according to a finance ministry draft document seen by Reuters on Tuesday.

   

  A total of 57 countries, including Britain, France and Iran, have joined the AIIB, which is seen as a rival to the Western-dominated World Bank and a major plank in spreading China’s “soft power”.

   

  It was launched in Beijing last year to support investment in Asia in transport, energy, telecommunications and other infrastructure. The articles of agreement are expected to be ready for signing at the end of June.

   

  Germany will be the fourth-biggest shareholder in the $100 billion lender after China, India and Russia. It plans to contribute around $900 million in the period 2016-2019 and take on $3.6 billion in guarantees from 2016, according to the document.

  In the AIIB, the US faces a far greater threat to its position in the global economic order than anyone in Washington dares to admit. The smear campaign (that’s really the only way to cast it) aimed at painting the new bank as relatively small and meaningful only to the degree that it symbolizes China’s global and regional ambitions is profoundly misleading.

  This is not a pet project for Beijing and the founding members are not pledging hundreds of millions so they can play a part in petty Chinese theatrics. The bank is real. The sooner Washington recognizes and accepts this, the better off it will be in terms of helping to repair the reputational damage the IMF and ADB have suffered as a result of American and Japanese belligerence. 

  

  

  
  
  

  

• Why EIA, IEA, And BP Oil Forecasts Are Too High

  Submitted by Gail Tverberg via Our Finite World blog,

  When forecasting how much oil will be available in future years, a standard approach seems to be the following:

  1. Figure out how much GDP growth the researcher hopes to have in the future.
  2. “Work backward” to see how much oil is needed, based on how much oil was used for a given level of GDP in the past. Adjust this amount for hoped-for efficiency gains and transfers to other fuel uses.
  3. Verify that there is actually enough oil available to support this level of growth in oil consumption.

  In fact, this seems to be the approach used by most forecasting agencies, including EIA, IEA and BP. It seems to me that this approach has a fundamental flaw. It doesn’t consider the possibility of continued low oil prices and the impact that these low oil prices are likely to have on future oil production. Hoped-for future GDP growth may not be possible if oil prices, as well as other commodity prices, remain low.

  Future Oil Resources Seem to Be More Than Adequate

  It is easy to get the idea that we have a great deal of oil resources in the ground. For example, if we start with BP Statistical Review of World Energy, we see that reported oil reserves at the end of 2013 were 1,687.9 billion barrels. This corresponds to 53.3 years of oil production at 2013 production levels.

  If we look at the United States Geological Services 2012 report for one big grouping–undiscovered conventional oil resources for the world excluding the United States–we get a “mean” estimate of 565 billion barrels. This corresponds to another 17.8 years of production at the 2013 level of oil production. Combining these two estimates gets us to a total of 71.1 years of future production. Furthermore, we haven’t even begun to consider oil that may be available by fracking that is not considered in current reserves. We also haven’t considered oil that might be available from very heavy oil deposits that is not in current reserves. These would theoretically add additional large amounts.

  Given these large amounts of theoretically available oil, it is not surprising that forecasters use the approach they do. There appears to be no need to cut back forecasts to reflect inadequate future oil supply, as long as we can really extract oil that seems to be available.

  Why We Can’t Count on Oil Prices Rising Indefinitely

  There is clearly a huge amount of oil available with current technology, if high cost is no problem. Without cost constraints, fracking can be used in many more areas of the world than it is used today. If more water is needed for fracking than is available, and price is no object, we can desalinate seawater, or pump water uphill for hundreds of miles.

  If high cost is no problem, we can extract very heavy oil in many deposits around the world using energy intensive heating approaches similar to those used in the Canadian oil sands. We can also create gasoline using a coal-to-liquids approach. Here again, we may need to work around water shortages using very high cost methods.

  The amount of available future oil is likely to be much lower if real-world price constraints are considered. There are at least two reasons why oil prices can’t rise indefinitely:

  1. Any time oil prices rise, economies that use a high proportion of oil in their energy mix experience financial problems. For example, countries that get a lot of their revenue from tourism seem to be vulnerable to high oil prices, because high oil prices raise the cost of airline travel. Also, if any oil is used for making electricity, its high cost makes it expensive to manufacture goods for export.
  2. When oil prices rise, workers find that the cost of food tends to rise, as does the cost of commuting. To offset these rising expenses, workers cut back on discretionary spending, such as going to restaurants, going on long-distance vacations, and buying more expensive homes. These spending cutbacks adversely affect the economy.

  The combination of these two effects tends to lead to recession, and recession tends to bring commodity prices in general down. The result is oil prices that cannot rise indefinitely. The oil extraction limit becomes a price limit related to recessionary impacts.

  The cost of oil is currently in the $60 per barrel range. It is not even clear that oil prices can rise back to the $100 per barrel level without causing recession in many counties. In fact, the demand for many things is low, including labor and capital. Why should the price of oil rise, if the overall economy is not generating enough demand for goods of all kinds, including oil?

  Oil Companies Can Report a Wide Range of Oil Prices Needed for Profitability

  The discussion of required oil prices is confusing because there are many different ways to compute oil prices needed for profitability. Companies make use of this fact in choosing information to report to the press. They want to make their situations look as favorable as possible, because they do not want to frighten bondholders and prospective stock buyers. This usually means reporting as low a needed price for profitability as possible.

  Oil prices can be computed on any of the following bases (arranged roughly from lowest to highest):

  • (a) The “going forward” cost of extracting oil from wells that are already in place, excluding fixed expenses that the company would incur anyhow. This cost is likely to be very low, likely less than $30 barrel.
  • (b) The cost of drilling new “infill” wells in existing fields, excluding the overhead expenses the company would incur anyhow.
  • (c) The cost of opening up a new oil field and drilling new wells, excluding the overhead expenses the company would incur anyhow.
  • (d) Add to (c), overhead expenses (but not including taxes paid to governments, dividends to policyholders, and interest on borrowed funds).
  • (e) Add to (d) amounts paid to government, dividends to policyholders, and interest on borrowed funds.
  • (f) The price required so that the oil company has sufficient cash flow so that it doesn’t need to keep taking on more debt. Instead, it can earn a reasonable profit (and from this pay dividends), and still have sufficient funds left for “Exploration & Development” of new fields to offset declines in production in existing fields. It can also pay governments the high taxes they require, and pay other ongoing expenses. Thus, the system can continue to operate, without assistance from other sources.

  I would argue that if we actually want to extract a large share of technically recoverable oil, we need oil prices up at this top level–a level at which companies are making a reasonable profit on a cash flow basis, so that they don’t have to go further and further into debt. If they are getting less than they really need, they will send drilling rigs home. They will use available funds to buy back their own shares, rather than spending as much money as is required to develop new fields to offset declines in existing fields.

  Required Oil Prices

  Many people believe that low prices started in late-2014, when oil prices dropped below the $100 barrel level. If we look back, we find that there was a problem as early as 2013, when oil prices were over $100 per barrel. Oil companies were then complaining about not making a profit on a cash flow basis–in other words, the highest price basis listed above.

  My February 2014 post called Beginning of the End? Oil Companies Cut Back on Spending (relating to a presentation by Steve Kopits) talks about oil companies already doing poorly on a cash flow basis. Many needed to borrow money in order to have sufficient funds to pay both dividends and “Exploration & Production” expenses related to potential new fields. Figure 1 is a slide by Kopits showing prices required for selected individual companies to be cash flow neutral:

  

  Figure 1.See this link for larger view of image.

  The problem back in 2013 was that $100 per barrel was not sufficient for most companies to be profitable on a cash flow basis. At that time, Figure 1 indicates that a price of over $130 per barrel was needed for many US companies to be profitable on that basis. Russian companies needed prices in the $100 to $125 range, while the Chinese companies PetroChina and Sinopec needed prices in the $115 to $130 per barrel range. The Brazilian company Petrobas needed a price over $150 per barrel to be cash flow neutral.

  Kopits doesn’t show required prices for OPEC countries to be cash flow neutral, but similar price estimates (required funding including budgeted tax amounts) are available from Arab Petroleum Investments Corporation (Figure 2, below).

  

  Figure 2. Estimate of OPEC break-even oil prices, including tax requirements by parent countries, from Arab Petroleum Investments Corporation.

  Based on this exhibit, OPEC costs are generally over $100 per barrel. In other words, OPEC costs are not too different from non-OPEC costs, when all types of expenses, including taxes, are included.

  As more oil is extracted, the tendency is for costs to rise. Figure 3, also from the Kopits’ presentation, shows a rapid escalation in some types of costs after 1999. This is what we would expect when we reach the end of readily available “cheap to extract” oil and move to more expensive-to-extract unconventional types of oil.

  

  Figure 3. Figure by Steve Kopits of Douglas Westwood showing trends in world oil exploration and production costs per barrel. CAGR is “Compound Annual Growth Rate”.

  What prices do we need on a going-forward basis, to keep the oil extraction system operating on a long-term basis? I would argue that we need a price of at least $130 now in 2015. In the future, this price needs to rise to higher and higher levels, perhaps moving up quite quickly as we move to more-expensive-to-extract resources.

  Is it really necessary to include tax revenues in these calculations? I would argue that the inclusion of taxes is especially important for oil exporting nations. Most of these countries depend heavily on oil taxes to provide funds to operate programs providing food and jobs. As the quantity of oil that they can extract depletes, and as the population of these countries rises, the per-barrel amount of revenue required to fund these government programs is likely to increase. If we want to have a reasonable chance of stability within these countries (so that exports can continue), then we need to expect that the tax loads of companies in oil exporting nations will increase in the future.

  Also, if there is any plan to subsidize “renewables,” funds to make this possible need to come from somewhere. Indirectly, these funds are available because of surpluses made possible by the fossil fuel industry. Thus taxes from the fossil fuel industry might be considered a way of subsidizing renewables.

  Why Production Doesn’t Quickly Reset to Match Prices

  Do we really have a problem with oil prices, if oil production hasn’t dropped quickly in response to low prices? I think we do still have a problem.

  One reason why oil production doesn’t quickly reset to match prices is related to many different ways of reporting oil extraction costs, mentioned above. A company may not be making money when all costs are included, but it is making money on a cash flow basis if “sunk costs” are ignored.

  Another reason why oil production doesn’t quickly reset to match prices is the fact that oil is the lifeblood of companies that produce it. “Cutting back” means laying off trained workers. If these workers are laid off, companies will find it nearly impossible to rehire the same workers later. The workers have families to support; they will need to find work, even if it is in other industries. Companies will need to train new workers from scratch. Thus, companies will do almost anything to keep employees, no matter how low prices drop on a temporary basis.

  A similar issue applies to equipment used in oil operations. Drilling equipment that is not used will deteriorate over time and may not be usable in the future. A USA Today article talks about auctions of equipment used in the oil industry. This equipment is likely to be permanently lost to the oil industry, making it hard to ramp back up again.

  If a company is a government owned company in an oil-exporting nation, there is an even greater interest in keeping the company operating. Very often, oil is the backbone of the entire country’s economy; most tax revenue comes from oil and gas companies. There is no real option of substantially cutting back operations, because tax funds and jobs are badly needed by the economy. Civil unrest could be a problem without tax revenue. In the short run, some countries, including Saudi Arabia, have reserve funds set aside to cover a rainy day. But these run out, so it is important to maintain market share.

  There are additional reasons why oil production stays high in the short term:

  • Some companies have contracts in the futures market that cushion price fluctuations, so they may not directly “feel” the impact of low prices. Because of this, they may not react quickly.
  • Oil companies will very often have debt obligations that they need to meet, and need cash flow to keep meet them. Any cash flow, even if the price covers only a bit more in the direct cost of extraction, is helpful.
  • Large amounts of equity funding have been available, even for companies issuing “junk bonds.” Companies that would otherwise be reaching debt limits have been able to issue large amounts of stock instead. Bloomberg reports that in the first quarter, $8 billion in stock was issued, which is a record.

  All of these considerations have allowed production to continue temporarily, but are unlikely to be long-term solutions. In the long run, we know that we are likely to see problems such as defaults on junk rated bonds of oil companies. Futures contracts guaranteeing high prices eventually run out. Also, if prices remain low, government programs of oil exporting countries may need to be cut back, leading to unrest by citizens.

  Regardless of what is happening in the short-term, it is clear that eventually production will drop, quite possibly permanently, unless oil prices rise substantially.

  Why are Oil Prices so Low?

  I see two reasons for low oil prices:

  1. Debt is now not rising fast enough, because debt levels are reaching limits. Increases in debt levels tend to hold up commodity prices because increasing amounts of debt allow consumers to buy additional cars, homes, factories and other goods, thus creating “demand” for oil and other commodities. At some point, debt limits are reached. This can happen because a growth spurt is slowing, as in China, or because governments are reaching limits on the ratio of debt to GDP that they can carry. When debt levels stop rising rapidly, the debt “pump” that has been holding up prices in the past disappears, and commodity prices tend to stay at a lower level.
  2. The wages of ordinary workers are lagging behind. If a young person cannot find a good paying job (or owes too much on college loans), he most likely will live with his parents longer, delaying the purchase of a house and car. If a family discovers that the cost of day care for children plus the cost of commuting is more than the wages of the lower-earning parent, the lower-earning parent may choose not to work. A household with only one employed worker is less likely to buy a house or a second car than a two-worker household. These kinds of responses to low wages tend to hold down “demand” for goods made with commodities. Thus, affordability issues (or low demand related to affordability) tends to hold down the prices of commodities.

  The problem of lagging wages of ordinary workers is a very old one. The problem occurs whenever there are issues with diminishing returns. For example, when population reaches a level where there are too many farmers for available land, the average size of plot for each farmer tends to decrease. Each farmer tends to produce less, because of the smaller size of plot available. If each farmer is paid for what he produces, his wages will drop.

  We are reaching the same problem today with oil. We continue to produce increasing amounts of oil, but doing so requires increasing numbers of workers and increasing amounts of resources of other types (including fresh water, steel, sand for fracking, and energy products). Workers are on average producing less oil per hour worked. In theory, they should be paid less, because the value of oil is determined by what the oil can do (how far it can move a vehicle), not how much labor was required to produce the oil.

  The same problem is occurring in other areas of the economy, including natural gas production, coal production, electricity production, medicine, and higher education. At some point, we find the economy as a whole becoming less efficient, rather than more efficient, because of diminishing returns.

  We know from Peter Turchin and Surgey Nefedov’s book, Secular Cycles, that low wages of common workers were frequently a major contributing factor to collapses in pre-fossil fuel days. With lower wages, workers were not able to buy adequate food, allowing epidemics to take hold. Also, governments could not collect adequate taxes from the large number of low-earning workers, leading to governmental financial problems. A person wonders whether today’s economy is reaching a similar situation. Will low wage growth of common workers hold down future GDP growth, or even lead to collapse?

  Are the Projections of EIA, IEA, BP, and all the Others Right?

  Perhaps these projections would be reasonable, if oil prices could immediately bounce to  $130 per barrel and could continue to inflate in the years ahead.

  If, on the other hand, low oil prices are really being caused by lagging wages of ordinary workers and the failure of debt levels to keep rising, then I don’t think we can expect oil prices to reach these lofty levels. Instead, we can expect oil production to fall because of low prices.

  The amount of oil available at $60 per barrel seems to be quite low. Perhaps a little low-priced oil would be available from Kuwait and Qatar at that price, but not much else. Some additional oil might be obtained, if governments of non-oil exporters (such as the USA and China) choose to cut back their tax levels on oil companies. Even with the additional oil made possible by lower taxes, total oil supply would still be far less than needed to run today’s world economy.

  The world economy would need to contract greatly in order to shrink down to the oil available. Such shrinkage might be accomplished by a cutback in trade and loss of jobs. Debt defaults would likely be another feature of the new smaller economy. Such a scenario would explain how future oil production may deviate significantly from the forecasts of EIA, IEA, and BP.

  

  

  
  
  

  

• Bush Brother Calls Putin "Bully", Warns Of "Consequences" For Russia If Elected

  On Monday we highlighted what looks to be the new campaign strategy for Republican presidential hopefuls: blame the “Putin boogeyman.” 

  Note that this goes beyond the usual Russophobic rhetoric that plays well with the hopelessly naive American public. In 2009, Hillary Clinton famously presented Russian foreign minister Sergei Lavrov with a big red “reset” button which the two pressed together in a priceless (for its sheer absurdity) photo op in Geneva. The media spectacle was meant to mark a new era for US-Russian relations.

  

  Like many other promises made in the early days of the Obama presidency, the Russian relations reset has not gone according to plan.

  In fact, one annexation, one bloody proxy war, innumerable thinly-veiled nuclear threats, and six years later, and the only thing that’s been “reset” in US-Russian relations is the Cold War. 

  Now, with tensions running high on the heels of escalating violence in Ukraine, calls for stepped up economic sanctions on Moscow, and a shifting US strategy that will reportedly involve measures to “contain” the Russian threat, the likely Republican frontrunner is trying his hand at casting Putin as the embodiment of Democrats’ failed foreign policy. Jeb Bush, who is traveling in Europe ahead of announcing his candidacy, notes that when it comes to Putin, the unassuming subtlety that typically characterizes Bush family foreign policy should be discarded. Reuters has more:

  Jeb Bush, who is traveling Europe ahead of announcing his candidacy, notes that when it comes to Putin, the unassuming subtlety that typically characterizes Bush family foreign policy should be discarded. Reuters has more:

   

  “Ultimately I think to deal with Putin you need to deal from strength – he’s a bully and … you enable bad behavior when you’re nuanced with a guy like that,” Bush, the former governor of Florida, told reporters in Berlin.

   

  “Just being clear – I’m not talking about being bellicose – but saying ‘there are the consequences of your actions’, that would deter the kind of bad outcome we don’t want to see.”

   

  

  (Bush speaks in Germany on Tuesday)

   

  Bush said signaling what further sanctions Russia could face, and reassuring Poland and the Baltic states that the United States would meet its NATO obligations to view an attack on one member state as an attack against the whole alliance could help halt Putin’s aggression.

   

  “If he thinks we’re resolute I think that that’s the greatest possibility of restricting any kind of further aggressions,” he said.

  Yes, no room for “nuance” when you’re talking about a “guy like that.” Bush goes on to say that given the size of the US military, there’s no reason why Eastern Europe should fear the “little green men” or the type of “organized Russian crime syndicates” that were recently blamed for an IRS data breach:

  “There are things that we could do given the scale of our military to send a strong signal that we’re on the side of Poland and the Baltics and the countries that truly feel threatened by the little green men and this new cyber warfare and these other tactics that Russia now is using.”

  Finally, Bush notes that although he doesn’t have the type of on-the-ground information and intelligence he would need to accurately appraise the situation and make fact-based decisions, if he had to act on no information at all, he would have preferred a “more robust” response:

  “If I was president of the United States, I’d clearly take the advice of the commanders on the ground but from the outside, without having any kind of classified information, it appears that we could have a more robust response.”

  We’re once again reminded of the hilariously accurate assessment of US foreign policy released by the Kremlin’s security council back in March:

  The Strategy emphasizes [that] the armed forces are considered as the basis of US national security and military superiority is considered a major factor in the American world leadership. 

  

  

  
  
  

  

• Guess How Many Nations In The World Do Not Have A Central Bank?

  Submitted by Michael Snyder via The Economic Collapse blog,

  

  Central banking has truly taken over the entire planet.  At this point, the only major nation on the globe that does not have a central bank is North Korea.  Yes, there are some small island countries such as the Federated States of Micronesia that do not have a central bank, but even if you count them, more than 99.9% of the population of the world still lives in a country that has a central bank. 

  So how has this happened?  How have we gotten the entire planet to agree that central banking is the best system?  Did the people of the world willingly choose this?  Of course not.  To my knowledge, there has never been a single vote where the people of a nation have willingly chosen to establish a central bank.  Instead, what has happened is that central banks have been imposed on all of us. 

  All over the world, people have been told that monetary issues are “too important” to be subject to politics, and that the only solution is to have a group of unelected, unaccountable bankers control those things for us.

  So precisely what does a central bank do?

  You would be surprised at how few people can actually answer that question accurately.  The following is how Wikipedia describes what a central bank does…

  A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency, which usually serves as the state’s legal tender. Examples include the European Central Bank (ECB), the Bank of England, the Federal Reserve of the United States and the People’s Bank of China.

  In the United States, we are told that we have a free market system.  But in a true free market system, market forces would determine what interest rates are.  We wouldn’t need anyone to “set interest rates” for us.

  And why have we given a private banking cartel (the Federal Reserve) the authority to create and manage our money supply?  The U.S. Constitution specifically delegates that authority to Congress.

  It is not as if we actually need the Federal Reserve.  In fact, the greatest period of economic growth in U.S. history happened during the decades before the Federal Reserve was created.

  Unfortunately, a little over 100 years ago our leaders decided that it would be best to turn over our financial future to a newly created private banking cartel that was designed by very powerful Wall Street interests.  Since that time, the value of our currency has diminished by more than 96 percent and our national debt has gotten more than 5000 times larger.

  But despite all of the problems, the vast majority of Democrats and the vast majority of Republicans are not even willing to consider slightly curtailing the immense power of the Federal Reserve.  And the idea of getting rid of the Fed altogether is tantamount to blasphemy to most of our politicians.

  Of course the same thing is true all over the planet.  Central banks are truly “the untouchables” of the modern world.  Even though everybody can see what they are doing, there has not been a single successful political movement anywhere on the globe (that I know about) to shut a central bank down.

  Instead, in recent years we have just seen the reach of central banking just continue to expand.

  For example, just look at what has happened to some of the countries that were not considered to be “integrated” into the “global community”…

  -In 2001, the United States invaded Afghanistan.  In 2003, Da Afghanistan Bank (who picked that name?) was established by presidential decree.  You can find the official website of the bank right here.  Now Afghanistan has a modern central bank just like the rest of us.

  -In 2003, the United States invaded Iraq.  In early 2004, the Central Bank of Iraq was established to manage the Iraqi currency and integrate Iraq into the global financial system.  The following comes from the official website of the Central Bank of Iraq…

  Following the deposition of Saddam Hussein in the 2003 invasion of Iraq, the Iraqi Governing Council and the Office for Reconstruction and Humanitarian Assistance began printing more Saddam dinar notes as a stopgap measure to maintain the money supply until new currency could be introduced.

   

  The Banking Law was issued September 19, 2003. The law brings Iraq’s legal framework for banking in line with international standards, and seeks to promote confidence in the banking system by establishing a safe, sound, competitive and accessible banking system.

   

  Between October 15, 2003 and January 15, 2004, the Coalition Provisional Authority issued new Iraqi dinar coins and notes, with the notes printed using modern anti-forgery techniques, to “create a single unified currency that is used throughout all of Iraq and will also make money more convenient to use in people’s everyday lives. Old banknotes were exchanged for new at a one-to-one rate, except for the Swiss dinars, which were exchanged at a rate of 150 new dinars for one Swiss dinar.

  The Central Bank of Iraq (Arabic: ????? ??????? ???????) was established as Iraq’s independent central bank by the Central Bank of Iraq Law of March 6, 2004

  -In 2011, the United States bombed the living daylights out of Libya.  Before Muammar Gaddafi was even overthrown, the U.S. helped the rebels establish a new Central Bank of Libya and form a new national oil company.

  Central banks are specifically designed to trap nations in debt spirals from which they can never possibly escape.  Today, the debt to GDP ratio for the entire planet is up to an all-time high record of 286 percent.  Humanity is being enslaved by a perpetual debt machine, but most people are not even aware that it is happening.

  It is time for an awakening.  We need to educate as many people as possible about why we need to get rid of the central banks.  For those living in the United States, my previous article entitled “On The 100th Anniversary Of The Federal Reserve Here Are 100 Reasons To Shut It Down Forever” is a good place to start.  In other countries, we need people to write similar articles about their own central banks in their own languages.

  The global elite dominate us because we allow them to dominate us.  Their debt-based system greatly enriches them while it enslaves the remainder of the planet.  We need to expose their evil system and the dark agenda behind it while we still have time.

  

  

  
  
  

  

• 20 Years Later, Bill Clinton's Home Ownership Dream For America Is Dead

  In “America’s Housing Problem: Buying And Renting Are Both Unaffordable,” we documented the rather disconcerting situation facing America’s renters.

  Despite the fact that Fannie Mae and Freddie Mac now back home loans with down payments as low as 3% (down from a previous floor of 5%) and despite the fact that the FHFA’s move to lower the down payment requirement effectively forced FHA to cut premiums in order to stay competitive, presumably making housing even more ‘affordable’, the homeownership dream is quickly slipping away for many Americans. 

  In short, non-existent wage growth (remember, wage growth in America is now almost solely concentrated in the hands of what the BLS describes as ‘supervisory’ workers who make up less than a fifth of the labor force) and crushing student debt (the Class of 2015 graduated with an average debt load of $35,000) are conspiring with the BEA’s fabricated, double-adjusted “recovery” to make saving enough for a down payment virtually impossible.

  

  Meanwhile, the very fact that many Americans are shut out of homeownership means more demand for rentals which in turn drives up rents, squeezing household balance sheets further and effectively leaving many stuck between homes they can’t buy and rents they can’t afford. The result: the homeownership rate in America is now back to where it was 20 years ago and some Americans face the very real possibility of not having a place to live at all. 

  Now, the question is whether the homeownership rates that persisted in the years leading up to the crisis were realistic in the first place or simply represented what happens when a political mandate (promote the “American Dream”) meets the Wall Street securitization machine. 

  Whatever the case, renewed scrutiny on the demise of the American homeowner comes at a rather inconvenient time because, as WSJ reports, this month marks the twenty year anniversary of Bill Clinton’s National Homeownership Strategy which was unveiled with the help of Jean Mikitz, an Allentown, Pennsylvania resident who, at the time, had just bought a home with her husband Jim with the help of an FHA guaranteed loan — Jim eventually went into foreclosure. Here’s more:

  This month marks 20 years since President Bill Clinton unveiled his “National Homeownership Strategy,” a 100-point action plan that put as its overarching goal achieving an “all-time high level of homeownership in America within the next six years.”

   

  That set in motion an effort by both parties in Washington to work with the private sector to loosen lending standards and make it easier for middle-class Americans with less savings or inherited wealth to purchase homes.

   

  Jean and Jim Mikitz of Allentown, Pa., had just bought a home using a loan backed by the Federal Housing Administration when the Clinton administration was rolling out its homeownership campaign. Their mortgage broker connected them with administration housing officials, which is how Ms. Mikitz ended up introducing Mr. Clinton at his June 1995 speech, a few weeks after they closed on the purchase.

   

  The homeownership rate, then at around 64%, steadily climbed to 69% in 2004, after President George W. Bush similarly embraced a goal of increasing homeownership. Today, the homeownership rate has fallen back to below where it was 20 years ago following the bursting of the housing bubble, which led to millions of foreclosures.

   

  Mr. and Ms. Mikitz’s story, it turns out, also ended in foreclosure. Mr. Mikitz, a 41-year-old mechanic, lost the house in 2004, according to public records. Mr. Mikitz said they stopped making payments on the home when he and his wife divorced. “It pretty much forced me into bankruptcy,” he said. His former wife couldn’t be reached for this article.

  There you have it.

  The American Dream in one cautionary tale.

  We’ll leave you with Clinton’s 1995 speeach introducing The National Home Ownership Strategy.

  

  

  
  
  

  

• No Steve Schwarzman, That's Not How "The Next Financial Crisis Will Happen"

  Overnight, in a lengthy op-ed, Blackstone CEO, Steve Schwarzman described, in his opinion, “How the Next Financial Crisis Will Happen.” In the article, the author, correctly, notes that bond market liquidity is collapsing – something that has been discussed here constantly for the past 3 years – yet incorrectly assigns the cause to “politicians and regulators” who “constructed an expansive and untested regulatory framework that will have unintended consequences for liquidity in our financial system.”

  The reason for the Blackstone CEO’s conflicted position is obvious: for a company whose lifeblood is abundant credit, the only gating factor preventing it from recreating the LBO spree of the mid-2000s, and thus a massive windfall to the partners, is somewhat more stringent regulations than the unregulated free-for-all in which Wall Street was expected to “police” itself. We all know how that ended.

  And while we can explain once again why Scwharzman is wrong (we will simply link back to the comprehensive explanation why liquidity has imploded at the end of this piece), we prefer to give the podium to Citi’s chief credit strategist Matt King to disabuse Schwarzman and his Wall Street peers of the assumption that the collapse of liquidity is due solely to regulation, when in reality the answer is the disastrous central bank policy of the past 7 years coupled with the relentless ascent of Hiigh Frequency Trading.

  Here are the choice excerpts from Matt King’s May 4, 2015 note:

  We take issue with the widespread notion that the problem is solely due to regulators having raised the cost of dealer balance sheet, and could be ameliorated if only there were greater investment in e-trading or a rise in non-dealer-to-non dealer activity. To be sure, we see the growth in regulation – leverage ratio and net stable funding ratio (NSFR) in particular – as one of the main reasons why rates markets are now starting to be afflicted, and indeed we expect further declines in repo volumes to add to such pressures. But illiquidity is a growing concern even in markets like equities and FX, which use barely any balance sheet at all, and where e-trading is the already the norm rather than the exception.

   

  Instead, we argue that in addition to bank regulations, there is a broad-based problem insofar as the investor base across markets has developed a greater tendency to crowd into the same trades, to be the same way round at the same time. This “herding” effect leads to markets which trend strongly, often with low day-to-day volatility, but are prone to air pockets, and ultimately to abrupt corrections. Etrading if anything reinforces this tendency, by creating the illusion of lliquidity which evaporates under stress…. Because the herding is not directly backed by leverage, it is unlikely to be reduced by macroprudential regulation.

   

  * * *

   

  One possibility is that regulation is once again the culprit. Greater constraints on dealers’ ability to act in a principal capacity, even for a few seconds, could be taking their toll. The Volcker Rule, for example, forbids dealers subject to US regulations from running positions except so as to facilitate client trades. It is possible that this has prompted dealers to become more cautious than previously, and that this increased caution is missed particularly on occasions when markets become volatile. While no numbers are available on even prop desk profits, never mind their balance sheet usage, some market participants do point to their importance as an uncorrelated source of risk-taking, in particular during moments of stress. Nor are dealers the only ones to have been subjected to increased regulation in recent years: others have pointed to the way in which accounting and capital requirements for insurance companies and pension funds may also cause them to move in an increasingly procyclical fashion.

   

  The trouble is, this still feels like an incomplete explanation as to why short-term illiquidity problems should be affecting quite so many markets, including those where pension companies, insurers and even dealers have not historically been considered particularly important drivers of pricing. And above all, it does nothing at all to explain why illiquidity pockets should be being encountered so suddenly and with so little obvious cause. At least in historically famous illiquidity episodes – such as the LTCM-related crisis in 1998 – there was a glaring cause of sufficiently large magnitude to help explain the incident. Many recent air pockets seem to have started almost from nothing. To complete the picture, we think you need to look beyond the regulations and in a different direction.

   

  * * * 

   

  To sum up, we are left with a paradox. Markets are liquid when they work both ways. Market participants, though, find themselves increasingly needing to move the same way. This is not only because of procyclical regulation; it is also because central banks have become a far larger driver of markets than was true in the past. The more liquidity the central banks add, the more they disrupt the natural heterogeneity of the market. On the way in, it has mostly proved possible to accommodate this, as investors have moved gradually, and their purchases have been offset by new issuance. The way out may not prove so easy; indeed, we are not sure there is any way out at all.

  And there it is: regulation is merely a small, procyclical part of the big “liquidity paradox” although now that Wall Street is screaming bloody murder and blaming it all on Volcker, Dodd Frank and other rules which nobody follows anyway, one can be certain that regulatory capital and leverage constraints will soon be quietly lifted. And since these are not the reason for the underlying illiquidty, the result will be an even more illiquid market, only one where the inherent leverage will be that much greater, leading to even more spectacular flash, and not so flash, crashes.

  But that doesn’t matter to people like Steve: all they care is to be able to push the LBO multiple from 10x to 15x or, heck, why not 20x. After all it is not like they won’t find bond buyers for any ludicrously levered transaction, allowing them to soak up the equity quickly and efficiently, leaving an insolvent husk behind.

  Which means the rich will get even richer, while leave even recorder debt behind, even greater defaults, and an even greater and more catastrophic collapse when everything crashes once again, which it will. After all even Citi admits “there may not be a way out at all.”

  But at least we now know why calls for regulatory repeal will intensify until, grudgingly, Wall Street’s bought politicians concede and all the lunatics to once again take over the asylum. Which, incidentally, is at this junction the best possible outcome: with the biggest bubble in developed markets history unfolding before everyone eyes, and with most rational people able to willing to admit what is happening, yet powerless to stop it, the only way this insanity ever ends is by hitting its inevitable peak sooner rather then later… and allowing humanity to proceed with the reset as soon as possible.

  One can only hope there are enough people left alive and who remember the stupidity and mistakes of the New Normal time of idiocy.

  * * *

  Finally, for the real and complete answer why there is no bond market liquidity, read our post on the Liquidity Paradox, or why “The more liquidity central banks add, the less there is in markets.“

  

  

  
  
  

  

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• How Could the Fed Protect Us from Economic Waves?

  by Keith Weiner

  Mainstream economists tell us that the Federal Reserve protects us from economic waves, indeed from the business cycle itself. In their view, people naturally tend to go overboard and cause wild swings in both directions. Thus, we need an economic central planner to alternatively stimulate us and then take away the punch bowl.

  Prior to the global financial crisis of 2008, a popular term described the supposed benefits created by the Fed. The Great Moderation referred to the reduced volatility of the business cycle. For example, I have written before about economist Marvin Goodfriend, who asserted that the Fed does better than the gold standard.

  
  (Credit: Greg Ziegerson and Keith Weiner)

  This belief is inherent in the Fed’s very mandate from Congress. The Fed states its three statutory objectives as, “maximum employment, stable prices, and moderate long-term interest rates.” These terms are Orwellian. Maximum employment means five percent of able-bodied adults can’t find work. Stable prices are actually rising relentlessly, at two percent per year. The
  meaning of moderate long-term interest rates must be changing, because rates have been falling for a third of a century.

  That aside, the basic idea is that the Fed has both the power and the knowledge to somehow deliver an economic miracle. However, we know that central planning never works, even for simple things such as wheat production. Communist states have invariably failed to produce the food to keep their people alive. Stalin, Mao, and other communist dictators have deliberately starved off segments of their populations that they couldn’t feed.

  The business cycle is vastly more complicated than the crop cycle. It plays out over decades. It involves every participant in the economy. It affects every price, including, especially, the price of money. It causes changes in how people coordinate in the present and how they plan for the future. And, there are feedback loops. Changes in one variable cause changes in others, which come back to affect the first variable. The very idea of centrally planning money and credit boggles the mind.

  This should not be controversial. Yet, even those who know why government food planners fail, somehow retain their faith in central planning of the economy as a whole. Marvin Goodfriend—who spoke in favor of free markets, by the way—called his faith in central banking, “optimism.”

  Is it true that the Fed is actually somehow providing stability, or even improving on a free market? Let’s look to the interest rate on the 10-year Treasury bond. The rate of interest is a key economic indicator.

  
  (sources: National Bureau of Economic Research 1800-2001, US Treasury 2002-2014)

  With that giant peak on the right side of the graph, we can immediately reject all claims to Fed-imposed stability. Now let’s label a few key dates.

   

  

  The pre-Fed period is pretty stable. Two spikes occur due to wars that we know disrupted the economy—and they’re pretty small, considering. Interest declines to a lower level when the government was paying down its war debt. Things remain stable until the creation of the Fed.

  After that, we get a rise, a protracted fall, an incredible and truly massive rise, and an endless freefall. Both rising and falling interest make it more difficult to run a business that depends on credit, such as manufacturing, banking, or insurance. The post-Fed period is a lot less stable than the pre-Fed.

  A feature of the free market and its gold standard is interest rate stability. The rate can vary between the marginal time preference and marginal productivity. This tends to be a stable and narrow range.

  Fed apologists argue that the economy would be even more unstable, if we had no monetary central planner. However, the fact is that it became a lot less stable after the Fed was created.

   

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

  

  
  
  

  

• "Ukrainians Have Been Dispossessed" Paul Craig Roberts Warns "Americans Are Next"

  Submitted by Paul Craig Roberts,

  Over the last 15 months Ukrainians have paid for Washington’s overthrow of their elected government in deaths, dismemberment of their country, and broken economic and political relationships with Russia that cost Ukraine its subsidized energy. Now Ukrainians are losing their pensions and traditional support payments. The Ukrainian population is headed for the graveyard.

  On June 1 the TASS news agency reported that Ukraine has stopped payments to pensioners, World War II veterans, people with disabilities, and victims of Chernobyl. According to the report, Kiev has also “eliminated transport, healthcare, utilities and financial benefits for former prisoners of Nazi concentration camps and recipients of some Soviet-era orders and titles. Compensations to families with children living in the areas contaminated by radiation from the Chernobyl accident will be no longer paid either. Ukraine’s parliamentary opposition believes that the Prosecutor General’s Office should launch an investigation against Prime Minister Arseniy Yatsenyuk who actively promoted the law on the abolition of privileges.”

  Notice that this is a yank of the blanket from under the elderly in Ukraine. “Useless eaters,” they are assigned to the trash can. How do the deceived Maiden student protesters feel now that they are culpable in the destruction of their grandparents’ support systems? Do these gullible fools still believe in the Washington-orchestrated Maiden Revolution? The crimes in which these stupid students are complicit are horrific.

  Yatsenyuk, or Yats as Victoria Nuland calls him, is the Washington stooge that the US State Department selected to run the puppet government established by Washington. Yats sounds like a right-wing Republican when he refers to pensions, compensations, and social services as “privileges.” This is the Republican view of Social Security and Medicare, programs paid for by the payroll tax over the working lives of Americans. The Republicans stole the payroll revenues and spent them on their wars that enrich Wall Street and the military/security complex, and now blame “welfare handouts” for America’s fiscal plight.

  Is Monsanto’s right to turn Ukraine into GMO food production a privilege? ls VP Biden’s son’s right to destroy Ukraine’s surface and underground water in fracking operations a privilege? Are the external costs imposed on Ukrainians by these looting activities a privilege? Of course not! These are not privileges. This is the operation of free market economics creating the greatest good for the greatest number. (As many Americans will not realize that I am engaging in satire, I would like to affirm that I am.)

  The news report does not say whether the abolished “privileges” are one part of a reform that will replace the terminated “privileges” with a new social support system. Possibly this is the case, but as the termination of pensions and payments was triggered by the coming into effect of Yat’s law to “stabilize the financial condition of Ukraine,” the purpose of the termination of Ukraine’s social welfare system might be to free up money to hand over to the IMF and Western banks. In Ukraine, as in Greece, the gullible and naive population that saw salvation in unity with the West will be driven into the ground.

  Russia, of course, will be blamed. I can already write the New York Times and Washington Post editorials and the words that will come from Obama, CNN, and Fox “News.” In fact, so can my intelligent readers.

  The same looting is underway in Great Britain, Italy, Spain, Portugal, and the United States. In Great Britain everything achieved by the Labour Party over many decades has been taken away, and not only by the Conservatives but by Labour leader Tony Blair himself.

  Tony Blair sold out his constituents for money and is now among the One Percent. Bill Clinton did the same thing. Bill and Hillary were able to spend $3 million on their daughter’s wedding, almost a world record, dwarfing many Hollywood weddings. Obama is not even out of office and is already rich. America’s faithful vassals–Merkel, Hollande, and Cameron–can look forward to equal riches.

  Karl Marx was correct when he said that money corrupts all. Everything becomes a commodity that is bought and sold for money.

  When money becomes the measure of a person, people have become corrupted. And that is the plight of the Western world.

  Where in the West is your wealth, small or large, safe? Nowhere. Washington has destroyed financial privacy everywhere in the West. Washington even forced Switzerland to violate its own laws in order to comply with Washington’s insistence on the absence of any financial privacy.

  For decades Americans with foreign bank accounts have been required to report them on their income tax returns. Now if an American owns a gold coin in a vault overseas, this must be reported to Washington.

  Once Washington knows the location of your assets, the assets can be confiscated at will. Washington only has to make some declaration or accusation or the other, and your wealth is gone.

  As Washington has run the printing presses hard in order to serve a handful of banks that control the US Treasury and the Federal Reserve, unless China and Russia acquiesce to becoming Washington’s vassals, at some point the dollar’s value is going to slide downward. When that happens, the Federal Reserve cannot continue to create new money to meet Washington’s needs.

  Where will the money come from? It will come from Americans’ pensions.

  Pensions accumulate tax free, and this accumulation will be confiscated in whole or part to make up for the failure to tax, another “privilege.”

  That confiscation works that year. But what happens the next year when the dollar is reeling on foreign exchange markets from over-supply?

  The answer is that another chunk of American pensions, and I am speaking of private pensions, will be confiscated “in order to stabilize the financial system.” Social Security will be long gone by this time.

  Alicia Munnel, who was my replacement as Assistant Secretary of the Treasury for Economic Policy in the Clinton regime, advocated many years ago a confiscation of private pensions, including your IRAs and 401Ks, in order to compensate the US government for their non-taxed status.

  Alicia has a sinecure at an Eastern university where she continues to advocate against your pension. The joint attack by Clinton Democrats on private pensions and by Conservative Republicans on public pensions means that no American can look forward to having a pension. Americans are only one presidential election away from the loss of their pensions, and it doesn’t matter who they vote for.

  Economic security is a thing of the past. Security was a product of the US being the only extant economy following World War II. In those days corporations believed, as did Washington, that companies had obligations not only to shareholders but to employees, customers, and the communities in which they were located.

  This meant prosperity for all, not merely, as is the case today, for corporate management and shareholders.

  Apologists for exploitation claim that the rich are richer because they are smarter. But the stupidity of the rich is everywhere visible. The greedy fools have destroyed their domestic US market. Really, how stupid can you be? How do Americans buy when they are forced by offshoring out of well paid manufacturing and software engineering jobs into being waitresses, bartenders, retail clerks and part-time Walmart workers in order that corporate bottom lines improve? Who buys the stuff that sustains the profits? Not Americans who no longer have the incomes to do so.

  The belief spread by Wall Street and “shareholder advocates” that corporations only have responsibility to their owners and managers has destroyed the American economy.
  By locating production offshore, corporations have destroyed the incomes that supported the American consumer market. For example, the incomes associated with the production of Apple computers, I-Pads, and I-Phones are in China. Apple’s American customers do not have the incomes associated with the production of the products that Apple markets to them.

  Americans are already dispossessed of their livelihoods and careers and their pensions are next. Wherever we look, the fate of populations under Western influence are the same. The Ukrainians are exploited, the Greeks, the British, the Americans.

  Wherever the West has an imprint, the populations are exploited. Exploitation of the many for the few is the Hallmark of the West, a decrepit, corrupt, and collapsing entity.

  

  

  
  
  

  

• Japanese "Over-Confidence & Complacency" Proved Deadly In Fukushima, IAEA Chief Blasts

  In a stunning report by The International Atomic Energy Agency (IAEA), Director General Yukiya Amano fingers Japanese over-confidence and complacency among the main reasons why the country was unprepared to the Fukushima Daiichi disaster of 2011. As Sputnik News reports, Amano exclaimed “there was a widespread belief in Japan that Japanese nuclear power plants are very safe and there would never be a severe accident. This belief was one of the reasons why Japan was not well prepared for severe accident.” Four years later, he hopes many have learned the painful lesson that “there can be no grounds for complacency about nuclear safety in any country.”

   

   

  The 240-page report assesses the causes and consequences of the accident triggered by a huge tsunami that followed a massive earthquake on 11 March 2011. It was the worst emergency at a nuclear plant since the Chernobyl disaster a quarter of a century earlier.

  The preparation of the report on the Fukushima Daiichi accident, which is scheduled to be made public at the IAEA General Conference this September, involved some 180 experts from 42 IAEA Member States and several other organizations.

   

  “The report represents an authoritative, factual and balanced assessment of what happened at Fukushima Daiichi that should also be accessible for a non-technical audience,” Mr Amano said.

   

  “There can be no grounds for complacency about nuclear safety in any country. Some of the factors that contributed to the Fukushima Daiichi accident were not unique to Japan,” the Director General added.

   

  “Continuous questioning and openness to learning from experience are key to safety culture and are essential for everyone involved in nuclear power. Safety must always come first.”

  As Sputnik News adds,

  “Before the Fukushima Daiichi accident there was a widespread belief in Japan that Japanese nuclear power plants are very safe and there would never be a severe accident. This belief was one of the reasons why Japan was not well prepared for severe accident,” Yukiya Amano said at a press conference on the sidelines of the meeting of the Agency’s board of governors that kicked off Monday.

   

  During the meeting, the IAEA governors are due to hear the final report on the Fukushima accident which is scheduled to be made public at the IAEA General Conference in September 2015.

   

  Amano added that prior to the Fukushima disaster, the zones of responsibility of Japan’s nuclear regulative body and various relevant government offices were vague and often duplicated one another.

   

  “After the Fukushima Daiichi accident there was a reform of the regulative body and the responsibility is more clearly defined. And the regulative authority is making the Japanese safety standards better meet the international standard,” Amano said.

   

  He expressed hope that the governments of all the IAEA member states will draw lessons from the report on Japan’s nuclear disaster.

  *  *  *

  Perhaps most stunningly, especially for those heading to the Tokyo Olympics in just a few years, according to Japanese authorities, cleanup efforts around Fukushima could take up to 40 years.

  

  
  
  

  

• If Your BS Detector Is Not Screaming, It's Broken

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  Wishing it was true doesn't make it true–it makes you a chump who fell for the con.

  Once upon a time in America, no adult could survive without possessing a finely tuned BS detector. Herman Melville masterfully captured America's fascination with cons and con artists in his 1857 classic The Confidence-Man, which I discussed in The Con in Confidence (October 4, 2006).
   

  An essential component of the American ethos is: don't be a chump. Don't fall for the con. And if you do, it's your own fault. The Wild West wasn't just thieves shooting people in the back (your classic "gunfight" in the real West)–it was a simmering stew of con artists, flim-flammers and grifters exploiting the naive, the trusting and the credulous.
   

  We now inhabit a world where virtually everything is a con. That "organic" produce from some other country–did anyone test the soil the produce grew in? It could be loaded with heavy metals and be certified "organic" because no pesticides were used during production. But what about last year? And the year before? What's in the water used to irrigate the crops?
   

  The employment/unemployment statistics are obviously BS. 93 million people aren't even counted any more–they're statistical zombies, no longer among the living workforce. If the unemployment rate were calculated on the number of full-time jobs and the true workforce (everyone ages 18 – 70 that isn't institutionalized or in prison), the unemployment rate would not be the absurdly delusional 5.6% claimed by the bureaucratic con artists.
   

  The corrupts-everything-it-touches bribe vacuum known as Hillary Clinton is still disgracing the national stage, 24 years after she first displayed her con-artist colors. Hillary's most enduring accomplishment is the Clinton Foundation–a glorification of bribery, chicanery, flim-flam and cons so outrageously perfected that it serves up examples of every con known to humanity in one form or another.
   

  And as she learned from hubby Bill–if the smarmy charm-con fails, quickly revert to veiled threats. "You'll never work in this town again!"
   

  Hillary would fit right into Melville's river boat teeming with con-artists. The accent she uses on the marks–oops, I mean audience–changes as readily as the camouflage on a chameleon. Upper Midwest, Noo Yawk, Fake-Southern–what you hear depends on the credulity of her marks.
   

  The entire American political system is a con, a sleazy mix of legalized bribes, auctioning off of favors, revolving doors between government agencies and the corporations they enrich and the blatant hypocrisy of snake-oil salespeople who know the marks (voters) face a false choice between two parties that are the same poison sold under different labels.
   

  Which brings us to China, one of the greatest credit bubble and financial cons ever. Please examine this chart of the Shanghai Stock Exchange (SSEC). Clearly, there is no upper limit to the Chinese stock market: 5,000 today, 10,000 next week, 50,000 the following month and 100,000 shortly thereafter. The sky's the limit, Baby!
   

  

  That China's credit machine is now dependent on a stock market bubble for its very survival speaks volumes about the true health of China's economy. This dependence was recently explained in Why China Is So Desperate To Blow The Most Epic Stock Bubble.
   

  Everybody who thinks China's economy is healthy because its stock market is soaring has been suckered. Every good con-man/ con-woman knows that the con only works if the chump/mark wants to believe the impossible is true–that the snake-oil remedy will actually cure their ailments, that the "hope" candidate will actually change the corrupt system from the inside (ha-ha, they fell for it), and that China's economy is on its way to becoming the world leader in everything.
   

  Many people want to believe this fantasy because it suits their agenda: For American pundits, China isn’t a country. It’s a fantasyland.
   

  But wishing it was true doesn't make it true–it makes you a chump who fell for the con. We want to believe our political system isn't an unreformable cesspool, that our economy is a vibrant creator of new middle class jobs and that China will manage the greatest credit bubble in history without a hitch. But these are all cons put over to protect the wealth and power of those benefiting from the con.
   

  If your BS detector isn't shrieking, it's broken. You've been conned. Wake up.

  

  

  
  
  

  

• Former CIA Director: We're Not Doing Nearly Enough To Protect Against The EMP Threat

  Last week we were reminded of what Elliott Management's Paul Singer highlighted as the "one risk that stands way above the rest in terms of the scope of potential damage adjusted for the likelihood of occurrence" – an electromagnetic pulse (EMP). Specifically, we covered the release of an open letter written to President Obama on the country's concerning level of vulnerability to a natural or man-made EMP. What is stunning about the former CIA Director's comments below is not just the carnage an EMP could wreak, but the apparent rabid intransigence with which the electrical power lobby is fighting any responsibility for defending against one.

  Submitted by Adam Taggart via PeakProsperity.com,

  On Monday we covered the release of an open letter written to President Obama, issued by a committee of notable political, security and defense experts  — which includes past and present members of Congress, ambassadors, CIA directors, and others — on the country's concerning level of vulnerability to a natural or man-made Electro-Magnetic Pulse (EMP).

  An EMP has very real potential for crippling much of our electrical grid instantaneously. Not only would that immediately throw the social order into chaos, but the timeline to repair and restart the grid in most estimated scenarios would take months to a year or more. Those curious on learning exactly how devastating an EMP can be can read our report on the topic from last summer.

  This week, we've been fortunate enough to get several of the authors of that open letter to join us and explain in depth what they conclude needs to be done to protect against the EMP risk: former CIA Director and current Ambassador James Woolsey, Executive Director of the EMP Task Force Dr Peter Pry, and security industry entrepreneur Jen Bawden.

  What's frightening in this story is not just the carnage an EMP could wreak, but the apparent rabid intransigence with which the electrical power lobby is fighting any responsibility for defending against one:

  Chris Martenson:   Now, we’ve had a commission to assess the threat to the United States from an EMP attack, which delivered a report back in 2008. In fact, I found no less than two congressional commissions, a National Academy of Science report, other U.S. government sponsored studies, including your own. All have raised heightened concerns about this issue. All have found, all of them, that the EMP threat poses a significant and existential threat to the United States, and yet here we are still talking about this. Why is that?

   

  Dr. Pry:   Well, the short answer to that is it’s called the North American Electric Reliability Corporation. They used to be a trade association or a lobby for the 3,000 electric utilities that exist in this country. And, their relationship with the federal government, with the U.S. Federal Energy Regulatory Commission, is a 19^th century-type relationship. There is no part of the U.S. government that has the legal powers to order them to protect the grid. This is unusual, because in the case of every other critical infrastructure, there’s an agency in the U.S. government that can require them to take actions for public safety. For example, the Food & Drug Administration can order certain medicines kept off shelves to protect the public safety. The Federal Aviation Administration can ground aircraft and require protective devices, put locks on aircraft doors, for example, to protect people from having the aircrafts hijacked by terrorists.The U.S. Federal Energy Regulatory Commission doesn’t have those legal powers or authorities.

   

  And, the NERC, which owns half of K Street and has got very deep pockets, has been successful in lobbying against legislation like the Grid Act and the SHIELD Act, both bipartisan bills supported almost unanimously by Democrats and Republicans. They’ve been able to stall for years and keep these bills held up. One time when we got a bill passed: the Grid Act actually, in 2010, unanimously passed the House. Everybody supported it. But Washington is so broken, one senator put a hold on a bill—if they know which senator to buy, they can buy that one senator and the person can put a hold on the bill so it can’t come to the floor for a vote and they can do it anonymously. The senator doesn’t have to identify themselves. So, you never know who stopped the bill.

   

  And, that’s been the problem in Washington. We’ve been trying to overcome resistance by the electric power lobby to try to protect the grid.

   

  They’ve basically been successful in stymying efforts at the federal level. Now, we’ve got another bill, Critical Infrastructure Protection Act, that we’re hoping will pass this year. Again, we’ve got a lot of support, but it’s already under attack by the utilities. And, they’re trying to change the language of the bill to basically gut the bill.

   

  Ambassador Woolsey:  And, when NERC is studying a problem, it doesn’t exactly operate at breakneck speed. After the ’03 outage in Cleveland that started with a tree branch touching a power line and took out the electricity for several days of Eastern Canada and much of the northeastern United States, NERC was finally prevailed upon to do a study. And, they did one and focused entirely on how to cut tree branches so that they won’t interfere with electric power lines. And, that tree branch study took them three years and eight months. What’s interesting about that lapse of time is three years and eight months is exactly the amount of time the United States was engaged in World War II, from beginning to end. So, one wonders how many wars worth of time it would take NERC to deal with a more complicated problem such as say, squirrels.

   

  Chris Martenson:  I understand that NERC is against this and they think this is overbearing regulation and they don’t want to be more highly regulated. I think possibly understandable concerns from any industry, but in this case, what kind of money are we talking about here? How much would it take to really begin to remedy this issue and how much time would it take? What is NERC fighting here?

   

  Dr. Pry:  Sure. Interesting question, because there are different numbers, depending upon how much security you want to buy. One of my colleagues on the, who served on the EMP Commission, had a plan that would cost $200 million. That’s not billions, but millions with an ‘m’. Now, that would be a very minimalist plan, and it would just protect the extra high voltage transformers that service the major metropolitan areas. It would by no means—we would still be at a very high level of risk, but it would at least give us something like a fighting chance to save all those people in the big cities, in the hundred largest big cities from starving to death, if you just invested $200 million.

   

  At this point, as I recently testified to Congress, I think the U.S. FERC is so broken and untrustworthy that we probably need to scrap the regulatory system we’ve got now and go to something completely different. I think what you’ve got is a situation of what’s called regulatory capture. You’ve got a rotating door between FERC and NERC and these guys are basically in cahoots with the electric power industry .

  Click the play button below to listen to Chris' interview with Dr. Peter Pry, Jen Bawden, and Ambassador James Woolsey (48m:35s)

   

  

  
  
  

  

• This Time Is Different: Miami Condo Prices Flatline For First Time In Six Years

  Back in March we suggested that slower price appreciation in 2014 might be the proverbial canary in the coal mine for a Miami condo market that has, in recent years, benefited from an influx of foreign buyers. Here’s a look at the trend: 

  

  While it’s still “up and to the right” so to speak, the growth rate fell to 16% in 2014 from 20%+ in the two previous years. Cooling prices are in large part attributable to dollar strength, which has hit demand from wealthy South American buyers especially hard. 

  As Miami’s Downtown Development Authority noted:

  “The primary driver for the Downtown Miami Condominium market is foreign investment. At the early stages of this cycle, South American capital was extremely strong versus the dollar and represented significant purchasing power for South American buyers using foreign currency to purchase pre-sale units that were being sold in U.S. Dollars. In addition to the favorable currency exchange rates, South American buyers are typically hedging against their own economies, which experience significant fluctuations due to political turbulence.

   

  Due to the recent advance of the U.S. Dollar vs. most South American and European currencies, the advantageous buying power of foreign investors has been diminished significantly since 2011 (with the exception of China). While the Euro has not diminished as much as the South American currencies, its slide vs. the U.S. Dollar has only recently started and is expected to continue to decrease over the next 6-12 months.”

  The trend has continued in recent months and as Bloomberg reports, many developers are now having a difficult time locating buyers as “whole countries” are priced out of the market. 

  Via Bloomberg:

  Downtown Miami’s luxury-condo boom — fueled by buyers from Latin America and Europe willing to pay half the purchase price up front — is becoming a casualty of the year-long climb in the U.S. dollar.

   

  Diminished purchasing power and rising prices are holding back the overseas investors that make up the bulk of sales at new towers, cooling a frenzied market.

   

  
  

   

  In response, developers are delaying projects, lowering down-payment requirements and turning their focus to Americans.

   

  “We’ve seen a very strong shift in the last year in the dollar — it has literally pushed whole countries out of the marketplace,” said Kevin Maloney, founder and principal of Property Markets Group, which is developing Echo Brickell, a 57-story luxury tower that will have a shark tank in the lobby.

   

  “We look around as real estate guys and say, ‘Jeez, who is our buyer?’” he said. 

  When last we discussed prevailing market conditions, we also mentioned that even as demand abates, construction and land costs are rising, pinching developer margins. According to the Miami DDA’s most recent quarterly report, this dynamic has continued to conspire with slumping foreign demand to create a drag on the market:

  As land pricing and construction costs continue to increase, either increased end-unit pricing and/or a decrease in required developer/investor returns will be required to achieve financial feasibility of future condo projects. IRR-Miami projects that a number of recent and pending land sales are being made by long-term investors with plans to sell or develop the site in 5-10 years after the current pipeline has been absorbed.

   

  As was noted in the February 2015 report by IRR-Miami, the Miami economy and the growth of the real estate market are not driven solely by local job and wage growth. The continued growth in the Downtown Miami real estate market remains largely-dependent on foreign capital participation. 

   

  The decline in foreign currencies compared to the U.S. Dollar over the past 18 months has narrowed the buyer pool. Several brokers have expressed concern regarding the closing ability of mid-level buyers that may not be fully denominated in U.S. currency. There have been early reports of buyers seeking approval for the assignment of their contract to a 3rd party. 

  But perhaps most telling, is the following updated version of the chart shown above.

  

  As you can see, price appreciation has leveled off for the first time in at least six years. 

  And here’s a table which clearly shows that average lease prices are increasing at a far slower rate than they have in the past. Indeed it certainly looks as though overall price appreciation is likely to flatline in the not-so- distant future, having fallen to just 2% from 5% in the previous two years.

  

  From the report:

  According to leasing statistics from the MLS, approximately 350 to 400 units are leased every month, a contraction of the rental market since Q2 2014. This number could be skewed by the significant number of units that are leased every month outside of the MLS, either as renewals or between parties in off-market transactions. Lease rates in the greater Downtown Miami continue to increase with annual lease pricing increasing over 5% per year on average (2012-2013), and 5% per year (2013-2014). Since the beginning of 2015, rental price appreciation has slowed to about 2% annualized.

  Despite all of the evidence above, and despite the strong dollar’s effect on demand from South America and Russia, some developers say there’s nothing to worry about, because after all, “corrections” are always portrayed as “healthy” in the beginning and this time is always different…

  Anthony Graziano, senior managing director at Integra Realty Resources Inc. (which prepared the above cited report for the DDA): 

  “We’re basically going to be in a period of slower growth for the next year, year-and-a-half while the market stabilizes. I characterize it as a healthy correction.“

  Carlos Rosso, president of Related Group of Florida:

  “Everybody is looking at Miami and saying when is something bad going to happen? I say this is a different market. You’re not going to have a bubble burst.”

  

  

  
  
  

  

• The Sick Man Of Asia – China's Looming Health Disaster

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  That the China Story is going to implode is already baked into the public health catastrophe that will unfold with a vengeance in the coming decade. 

  The financial pundits gushing over "The China Story" – that the Middle Kingdom's industrialization is a permanent boon to the global economy and China's poor – never calculate the human cost of that runaway industrialization and the vast inequalities it has unleashed.
   

  The human cost is staggering: at least half the population is suffering from chronic lifestyle/environmental-related illnesses and 225 million suffer from mental disorders. For context, the population of China is estimated to be 1.39 billion, roughly 4.4 times the U.S. population of 317 million, and about 20% of the total global population.
   

   

  Here are some estimates of China's public health problems: (source links below)
   

  — Half the population is estimated to be prediabetic (suffering from metabolic syndrome/diabesity).
   

  — 12% of the populace now has diabetes, roughly 115 million people.
   

  — An estimated 70% of China's diabetics are undiagnosed; only 25% are receiving any treatment and of the 25%, the disease is only being controlled in 40% of those getting treatment.
   

  — Noncommunicable diseases–cardiovascular disease, chronic respiratory diseases and cancer, account for 85% of total deaths in China today — much higher than the global average of 60%.
   

  — Mental disorders rose by more than 50 percent between 2003 and 2008. An estimated 17.5% of the population (225 million) suffers from some form of mental problem, one of the highest rates in the world.
   

  — More than 300 million people in China — roughly equivalent to the entire U.S. population of 317 million — smoke tobacco.
   

  — 200 million workers are directly exposed to occupational hazards.
   

  — Informal estimates suggest a large percentage of the urban population suffers from lung/pulmonary diseases. Over the last 30 years, deaths ascribed to lung cancer have risen by a factor of five in China.
   

  — 160 million Chinese adults have hypertension (high blood pressure).
   

  — In 2006, 80 percent of China’s health budget was spent on just 8.5 million government officials.
   

  — Tthe rate of health-care coverage is high, but the level of benefits is still very low. 836 million rural residents who were officially covered by the government's plan still had to pay the lion’s share of their medical bills. The government coverage paid a mere 8.6% of rural residents' total healthcare expenditures.
   

  

  Sources:
   

  China’s Worrying Diabetes Epidemic
   

  The Sick Man of Asia: China's Health Crisis
   

  Toxic smog threatens millions of Chinese lives
   

  Reliable statistics are hard to come by for a number of reasons. Authorities in China avoid quantifying China's public health realities because it detracts from the glowing "China Story" they promote.
   

  The rural population (still 55% of the total populace) often has little access to health care and statistics are sketchy.

  Preconditions that lead to disease (for example, prediabetes and early-stage COPD (chronic obstructive pulmonary disease) are not accurately monitored.
   

  The standard Western proponent of the China Story spends a few days in a fancy Shanghai hotel and then repeats glowing (and dodgy) economic statistics, as if that's the whole story. Western pundits don't visit rural village stripped of working-age adults, where grandparents are struggling to raise the children who resent their factory-worker parents' absence.
   

  Proponents don't spend time with those on the bottom of the urban "growth story," the millions living in makeshift hovels who receive no state aid due to their status as "illegal residents" in urban zones.
   

  The mental health issues arising from dislocated families, uprooted workers and grinding poverty in the midst of a society dominated by an Elite that drives super-sports cars and owns lavish homes in the West are ignored by the mainstream Western media.
   

  The rapid ageing of the Chinese populace is exacerbating an already immense public health crisis. It's estimated that by 2040 there will be more people with Alzheimer’s disease in China than in all the developed countries combined.
   

  Ill health and chronic disease are undercutting the economic growth everyone is focusing on. Whatever the metric used–hours of labor lost to illness, years of labor lost to early retirement due to ill-health, etc.–the costs of China's environmental damage, disrupted social order and low investment in public health are weighing heavily on output.
   

  The rise in health-related costs going forward will not be linear but geometric.Linear increases in pollution, diabesity, etc. can yield a ten-fold increase in diseases that require costly treatments.
   

  Every nation, developed and developing alike, has public health challenges. What's different about China (and India) is the scale is just so enormous: 740 million Chinese are regularly exposed to second-hand smoke, for example, and ten of millions of urban dwellers are exposed to air pollution that is said to rival smoking three packs of cigarettes a day in its negative impact on pulmonary health.
   

  It's all well and good to toss around grandiose plans for new Silk Roads, aircraft carriers and islands constructed in disputed seas, but where is the money and labor going to come from when the health problems of hundreds of millions of workers and retirees come due and payable? How many more trillions of yuan can local governments borrow once the credit bubble in China deflates, as all financial bubbles eventually do?
   

  Apologists and cheerleaders will naturally claim these estimates are exaggerated, and that China is aggressively tackling its immense environmental and public-health problems. The Chinese excel at the Soviet model of showcase trials and projects staged for propaganda, and officials regularly present Potemkin-Village pollution clean-ups. But if you try to come back a year later and check on the progress, you will find it isn't possible–and insisting might get you arrested.
   

  What's being exaggerated is China's response to the unfolding environmental and public health catastrophe. The Chinese government's priorities are tightening control of its domestic society and extending hegemony in the South China Sea. Public health receives lip service and a marginal slice of state funding and focus. The money flows to care for the elites, and the peasantry gets next to nothing.
   

  That the China Story is going to implode is already baked into the public health catastrophe that will unfold with a vengeance in the coming decade.

  

  

  
  
  

  

• What Can Possibly Go Wrong: The "Flash Boys" Arrive In China

  In a market where the Virtus of the world have, through outright manipulation, achieved trading perfection, it’s rare than a carbon-based lifeform bests a vacuum tube. Despite the odds, humans have scored two decisive victories YTD over the machines.

  One came in mid April when Colorado Springs resident Lucas Hinch took his Dell in the back alley and executed it with a handgun.

  The second came later that month when China’s millions of newly-minted ‘investors’ traded so much that they literally overwhelmed the software that tracks volume on the SHCOMP. Here’s what Reuters said at the time: 

  The exchange’s trading turnover exceeded 1 trillion yuan ($161.28 billion) for the first time on Monday, but the data could not be properly displayed because its software was not designed to report numbers that high.

   

  
  

  Now, China’s legions of day-trading retail investors with be forced to contend with ‘slightly’ more advanced software because as Reuters reports, The Flash Boys are coming:

  The rapid liberalisation of Chinese derivatives markets has attracted a new breed of creative traders employing complex trading strategies that can generate quick profits – and an extra dollop of risk – in China’s runaway stock boom.

   

  Brokerages and fund managers are investing in mathematics whizzes and hardware, and moving servers onto trading floors to gain precious microseconds dealing in new options and futures contracts, helping China’s CSI300 index become the world’s most traded equity futures contract in May.

   

  The introduction of new derivative products is intended to help investors hedge risk, but it also gives rise to the kind of sophisticated trading strategies that have made quick-trading “flash boys” notorious in the United States and Europe.

   

  For the most part the strategies and the traders employing them are untested in China, where the derivatives market barely existed five years ago, and slick automated trading strategies can produce horrific crashes when they go wrong.

  As we’ve been at pains to explain for years — and as the rest of the world is slowly realizing on the heels of last October’s Treasury flash crash — stop-hunting, hair trigger HFT algos help create the conditions for harrowing bouts of volatility and considering the number of inexperienced (and possibly illiterate) traders that have entered the Chinese equity markets over the past several months, combined with the amount of leverage these traders have employed on the way to driving the SHCOMP to historic highs and pushing valuations on the Shenzhen to a median of 108X, it would seem that adding automated trading to the mix is just about the worst thing that could possibly happen in terms of stability. Here’s more from Reuters:

  The risk is amplified by a triple-digit percentage leap in the SCI. Chinese bourses have already seen three panics that have driven major indexes down about 6 percent in short order. On Thursday afternoon benchmark indexes suddenly plunged over 5 percent, wiping out 3.4 trillion yuan ($548 billion) of market value, only to turn positive again by the close.

   

  

  (Thursday’s turbulece visualized)

   

  Analysts blame the new volatility on the preponderance of retail investors in the Chinese market – unlike in the West, where institutions dominate – and to the fact that many Chinese traders are highly leveraged, which tends to amplify movements.

   

  

  
  

  (“That aint no margin debt, THIS is margin debt”)

  As for the traders themselves, the opportunity to test can’t-lose strategies in the hottest market on the planet is too enticing to resist:

  That has already attracted overseas returnees like Wang Feng, a physics graduate from University of Michigan and former Wall Street trader, who finally sees an opportunity to apply scientific methods in China’s stock and futures markets.

   

  “Theoretically, we hope to achieve the same speed as in U.S. markets, transactions occurring in microseconds,” Wang said.

  And for all of China’s rabid, day-trading housewives, security guards, and banana vendors, prepare yourself because the challenge has been issued: 

  “China’s market is highly inefficient, which means it’s relatively easy to produce absolute returns,” said Ken Zhu, Chairman and CEO of hedge fund firm Scientific Investment. “Chinese retail investors don’t have any advantage over us.”

  

  

  
  
  

  

• Student Debt Cancellations Begin: Government To "Forgive" $3.6 Billion After Corinthian Closure

  In late April, we asked if for-profit college closures would represent the next multi-billion dollar taxpayer-funded bailout. While the country’s $1.3 trillion student debt bubble represents a very real risk to taxpayers over time, for-profit institutions pose a more immediate threat. 

  From a ‘big picture perspective, the push for student loan forgiveness and “debt-free” higher education is certainly kicking into high gear, with the likes of Elizabeth Warren and Bernie Sanders pushing ideas such as a tax on stock transactions to fund college education in America. Meanwhile, The White House is exploring more “efficient” ways for students to discharge debt in bankruptcy and the “cancel all student debt” calls have begun in earnest. That said, any kind of sweeping overhaul will likely take years to implement, but in the mean time, IBR repayment programs allow students whose post-graduation disposable income isn’t deemed sufficient, to simply pay nothing on the way to total debt forgiveness in 25 years. Clearly, many borrowers will, at some point in their lives, make enough to pay something each month, but the point is that the government is now actively promoting the fact that the full principal needn’t be repaid and this, in turn, has led to the proliferation of IBR plans and rising default risk for student loan-backed ABS. 

  So that’s the long-term outlook, and as we’ve said repeatedly, this likely won’t end well for taxpayers. But there’s a more immediate threat and it comes from for-profit college closures.

  To recap, the for-profit sector has been under intense government scrutiny for years due to, among other things, deceptive recruiting strategies and fabricated data on post-graduation job placement rates. These institutions rely heavily on federal student loans for their very existence, even as many are publicly traded and pay their CEOs millions. In addition, 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.

  

   

  As we discussed a few months back, the delinquency and default problem that hangs over the student debt bubble is far worse for loans extended to students that attend for-profit colleges than for those who attend or have attended public institutions (note the discrepancy in share of enrollment versus share of defualts):

  

  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 Colleges to wind down operations last year amid allegations it falsified job placement rates.

  The company — which is publicly traded — 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 has been on the wall for quite sometime, the company closed its remaining physical campus in late April without notice to students or faculty.

  As we noted when the doors were shut, for-profit students won’t have a particularly easy time transferring their credits (meaning they would have to start over at another school if they wanted to complete their degrees), and so will likely seek to take advantage of their ‘right’ to have their debt discharged. Fast forward to late May and sure enough, the government was scrambling to figure out what to do after Secretary of Education Arne Duncan received a group request from 78,000 students requesting loan forgiveness. 

  At the time, Reuters said that because the government had never used its authority to cancel student debt on a large scale, the Department of Education was “unsure how it would work,” to which we responded as follows: 

  Well Department of Education, allow us to tell you how the debt “relief” will work. You will end up being forced to write it off because you closed down the school.

   

  And while your decision to shutter the college was likely the right move given the for-profit industry’s reputation for absurdly predatory recruiting practices, you have no one to blame but yourself for allowing these institutions to live off of billions in federal loans for years (while their CEOs pulled in millions in compensation), when you likely knew that in the end, they would have to be closed down once Congress got wind of how they went about luring students. 

  Sure enough, The Department of Education now says it will forgive federal student loans made to Corinthian students who can prove they were victims of fraud. The potential cost to taxpayers: nearly $4 billion. And that is for just one for-profit school. AP has more:

  The federal government will erase much of the debt of students who attended the now-defunct Corinthian Colleges, officials announced Monday, as part of a new plan that could cost taxpayers as much as $3.6 billion.

   

  Corinthian Colleges was one of the largest for-profit schools when it nearly collapsed last year and became a symbol of fraud in the world of higher education and student loans. According to investigators, Corinthian schools charged exorbitant fees, lied about job prospects for its graduates and, in some cases, encouraged students to lie about their circumstances to get more federal aid.

   

  In a plan orchestrated by the Department of Education, some of the Corinthian schools closed while others were sold before the chain filed for bankruptcy this spring. The biggest question has been what should happen to the debt incurred by students whose schools were sold. The law already provides for debt relief for students of schools that close, so long as they apply within 120 days.

   

  The latest plan expands debt relief to students who attended a now-closed school as far back as a year ago. And it streamlines the process for students whose schools were sold but believe they were victims of fraud.

   

  “We will make this process as easy as possible for them, including by considering claims in groups wherever possible, and hold institutions accountable,” Education Secretary Arne Duncan said in a statement.

   

  As an example, the department said it has already found that many programs at a California subsidiary of Corinthian Colleges, known as Heald College, were “misrepresented” to students. So any student enrolled in that school between 2010 and 2015 would likely qualify for relief.

   

  The amount of debt relief could be staggering. Officials estimate that some 40,000 borrowers at the Heald College alone took on more than $540 million in loans that potentially qualify for debt relief.

   

  But the final amount could climb significantly when looking across all Corinthian Schools, which include Everest and WyoTech. In all, the department estimates that about $3.6 billion in federal loans was given to Corinthian students.

  This precedent set by this decision is precisely what we warned about nearly two months ago. In essence, this means that if the government continues to crack down on for-profit schools, the ensuing debt cancellations will run into the tens, if not hundreds of billions.

  

  WSJ has more on the fallout:

  Officials said that under the emerging plan, the government will consider forgiving any loans made directly by the government—those held by the majority of the 43 million Americans with student debt—so long as the borrower can document a school persuaded him or her to take out the loan under conditions that would violate state laws.

   

  The Education Department plans to use a provision of a decades-old federal law that allows borrowers to have loans discharged if they can prove their schools broke a state law—such as by using false advertising or other deception—to lure them to apply and borrow funds.

   

  Federal officials acknowledged the potentially high cost of the policy. In the case of Corinthian alone, the Education Department said 350,000 Americans who owe roughly $3.5 billion in loans could be eligible for forgiveness. In all, Americans owe more than $1.2 trillion in outstanding student debt.

   

  Federal officials declined to disclose the potential total amount of loans that could be eligible for forgiveness.

   

  Under Secretary of Education Ted Mitchell said the agency realized the move could invite applications from across higher education, whether from community college students or law-school graduates. The agency said it would hire a “special master” to figure out many of the details, including what standards the department should use to determine whether a school had violated state law. The department also would likely hire additional personnel to handle the applications.

   

  Mr. Duncan, the education secretary, said Corinthian won’t be the last company to come under close government scrutiny. “There may be more,” he said.

   

  Various arms of the federal government have become more aggressive in pursuing for-profit schools for misrepresentations. Ashworth College, an online college based in Norcross, Ga., agreed late last month to settle Federal Trade Commission allegations that the school misrepresented how well it prepared students for certain vocational licenses and whether students could transfer credits from Ashworth to other schools.

   

  Meanwhile, the Securities and Exchange Commission announced in May that it had brought fraud charges against ITT Educational Services Inc. and two of its top executives, alleging they misled investors about the financial prospects of some internal student-loan programs.

  We’ll close with what we said last month when we last discussed the idea of debt discharge for Corinthian students because, frankly, our assessment proved extremely prescient.

  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. Note that we have not used the term “canceled”, because as we like to remind readers, liabilities are never “canceled”, they are simply written off by the person for whom they are an asset.

  

  

  
  
  

  

• How To "Measure" Risk

  Excerpted from Oaktree Capital Management's Howard Marks letter to investors,

  Risk Revisited Again…

  What Risk Really Means

  In [my] book, I argued against the purported identity between volatility and risk. Volatility is the academic’s choice for defining and measuring risk. I think this is the case largely because volatility is quantifiable and thus usable in the calculations and models of modern finance theory. In the book I called it “machinable,” and there is no substitute for the purposes of the calculations.

  However, while volatility is quantifiable and machinable – and can be an indicator or symptom of riskiness and even a specific form of risk – I think it falls far short as “the” definition of investment risk. In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility. In fact, I’ve never heard anyone say, “The prospective return isn’t high enough to warrant bearing all that volatility.” What they fear is the possibility of permanent loss.

  Permanent loss is very different from volatility or fluctuation. A downward fluctuation – which by definition is temporary – doesn’t present a big problem if the investor is able to hold on and come out the other side. A permanent loss – from which there won’t be a rebound – can occur for either of two reasons: (a) an otherwise-temporary dip is locked in when the investor sells during a downswing – whether because of a loss of conviction; requirements stemming from his timeframe; financial exigency; or emotional pressures, or (b) the investment itself is unable to recover for fundamental reasons. We can ride out volatility, but we never get a chance to undo a permanent loss.

  Of course, the problem with defining risk as the possibility of permanent loss is that it lacks the very thing volatility offers: quantifiability. The probability of loss is no more measurable than the probability of rain. It can be modeled, and it can be estimated (and by experts pretty well), but it cannot be known.

  …

  If you accept that the underlying processes affecting economics, business and market psychology are less than 100% dependable, as seems obvious, then it follows that the future isn’t knowable. In that case, risk can be nothing more than the subject of estimation – Keynes’s “intuition or direct judgment” – and certainly not reliably quantified.

  *  *  *

  The Unknowable Future

  It seems most people in the prediction business think the future is knowable, and all they have to do is be among the ones who know it. Alternatively, they may understand (consciously or unconsciously) that it’s not knowable but believe they have to act as if it is in order to make a living as an economist or investment manager.
  On the other hand, I’m solidly convinced the future isn’t knowable. I side with John Kenneth Galbraith who said, “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.”

  …

  Given the near-infinite number of factors that influence developments, the great deal of randomness present, and the weakness of the linkages, it’s my solid belief that future events cannot be predicted with any consistency. In particular, predictions of important divergences from trends and norms can’t be made with anything approaching the accuracy required for them to be helpful.

  *  *  *

  Coping with the Unknowable Future

  Here’s the essential conundrum: investing requires us to decide how to position a portfolio for future developments, but the future isn’t knowable.

  Taken to slightly greater detail:

  • Investing requires the taking of positions that will be affected by future developments.
  • The existence of negative possibilities surrounding those future developments presents risk.
  • Intelligent investors pursue prospective returns that they think compensate them for bearing the risk of negative future developments.
  • But future developments are unpredictable.

  How can investors deal with the limitations on their ability to know the future? The answer lies in the fact that not being able to know the future doesn’t mean we can’t deal with it. It’s one thing to know what’s going to happen and something very different to have a feeling for the range of possible outcomes and the likelihood of each one happening. Saying we can’t do the former doesn’t mean we can’t do the latter.

  The information we’re able to estimate – the list of events that might happen and how likely each one is – can be used to construct a probability distribution. Key point number one in this memo is that the future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution.

  There’s little I believe in more than Albert Einstein’s observation: “Not everything that counts can be counted, and not everything that can be counted counts.” I’d rather have an order-of-magnitude approximation of risk from an expert than a precise figure from a highly educated statistician who knows less about the underlying investments. British philosopher and logician Carveth Read put it this way: “It is better to be vaguely right than exactly wrong.”

  We can’t know what will happen. We can know something about the possible outcomes (and how likely they are). People who have more insight into these things than others are likely to make superior investors. As I said in the last paragraph of The Most Important Thing:

  Only investors with unusual insight can regularly divine the probability distribution that governs future events and sense when the potential returns compensate for the risks that lurk in the distribution’s negative left-hand tail.

  In other words, in order to achieve superior results, an investor must be able – with some regularity – to find asymmetries: instances when the upside potential exceeds the downside risk. That’s what successful investing is all about.

  *  *  *
  Thinking in Terms of Diverse Outcomes

  It’s the indeterminate nature of future events that creates investment risk. It goes without saying that if we knew everything that was going to happen, there wouldn’t be any risk.

  …

  To oversimplify, investors in a given company may have an expectation that if A happens, that’ll make B happen, and if C and D also happen, then the result will be E. Factor A may be the pace at which a new product finds an audience. That will determine factor B, the growth of sales. If A is positive, B should be positive. Then if C (the cost of raw materials) is on target, earnings should grow as expected, and if D (investors’ valuation of the earnings) also meets expectations, the result should be a rising share price, giving us the return we seek (E).

  We may have a sense for the probability distributions governing future developments, and thus a feeling for the likely outcome regarding each of developments A through E. The problem is that for each of these, there can be lots of outcomes other than the ones we consider most likely. The possibility of less-good outcomes is the source of risk. That leads me to key point number two, as expressed by Elroy Dimson, a professor at the London Business School: “Risk means more things can happen than will happen.” This brief, pithy sentence contains a great deal of wisdom.

  People who rely heavily on forecasts seem to think there’s only one possibility, meaning risk can be eliminated if they just figure out which one it is. The rest of us know many possibilities exist today, and it’s not knowable which of them will occur. Further, things are subject to change, meaning there will be new possibilities tomorrow. This uncertainty as to which of the possibilities will occur is the source of risk in investing.

  *  *  *

  Even a Probability Distribution Isn’t Enough

  I’ve stressed the importance of viewing the future as a probability distribution rather than a single predetermined outcome. It’s still essential to bear in mind key point number three: Knowing the probabilities doesn’t mean you know what’s going to happen. For example, all good backgammon players know the probabilities governing throws of two dice. They know there are 36 possible outcomes, and that six of them add up to the number seven (1-6, 2-5, 3-4, 4-3, 5-2 and 6-1). Thus the chance of throwing a seven on any toss is 6 in 36, or 16.7%. There’s absolutely no doubt about that. But even though we know the probability of each number, we’re far from knowing what number will come up on a given roll.

  Backgammon players are usually quite happy to make a move that will enable them to win unless the opponent rolls twelve, since only one combination of the dice will produce it: 6-6. The probability of rolling twelve is thus only 1 in 36, or less than 3%. But twelve does come up from time to time, and the people it turns into losers end up complaining about having done the “right” thing but lost. As my friend Bruce Newberg says, “There’s a big difference between probability and outcome.” Unlikely things happen – and likely things fail to happen – all the time. Probabilities are likelihoods and very far from certainties.

  It’s true with dice, and it’s true in investing . . . and not a bad start toward conveying the essence of risk. Think again about the quote above from Elroy Dimson: “Risk means more things can happen than will happen.” I find it particularly helpful to invert Dimson’s observation for key point number four: Even though many things can happen, only one will.

  …

  I always say I have no interest in being a skydiver who’s successful 95% of the time.

  …

  Investment performance (like life in general) is a lot like choosing a lottery winner by pulling one ticket from a bowlful. The process through which the winning ticket is chosen can be influenced by physical processes, and also by randomness. But it never amounts to anything but one ticket picked from among many. Superior investors have a better sense for what’s in the bowl, and thus for whether it’s worth buying a ticket in a lottery. But even they don’t know for sure which one will be chosen. Lesser investors have less of a sense for the probability distribution and for whether the likelihood of winning the prize compensates for the risk that the cost of the ticket will be lost.

  *  *  *

  Risk and Return

  We hear it all the time: “Riskier investments produce higher returns” and “If you want to make more money, take more risk.”

  Both of these formulations are terrible. In brief, if riskier investments could be counted on to produce higher returns, they wouldn’t be riskier. Misplaced reliance on the benefits of risk bearing has led investors to some very unpleasant surprises.

  This is the essence of investment risk. Riskier investments are ones where the investor is less secure regarding the eventual outcome and faces the possibility of faring worse than those who stick to safer investments, and even of losing money.

  *  *  *
  The Many Forms of Risk

  The possibility of permanent loss may be the main risk in investing, but it’s not the only risk. I can think of lots of other risks, many of which contribute to – or are components of – that main risk.

  In the past, in addition to the risk of permanent loss, I’ve mentioned the risk of falling short. Some investors face return requirements in order to make necessary payouts, as in the case of pension funds, endowments and insurance companies. Others have more basic needs, like generating enough income to live on.

  Some investors with needs – particularly those who live on their income, and especially in today’s low-return environment – face a serious conundrum. If they put their money into safe investments, their returns may be inadequate. But if they take on incremental risk in pursuit of a higher return, they face the possibility of a still-lower return, and perhaps of permanent diminution of their capital, rendering their subsequent income lower still. There’s no easy way to resolve this conundrum.

  There are actually two possible causes of inadequate returns: (a) targeting a high return and being thwarted by negative events and (b) targeting a low return and achieving it. In other words, investors face not one but two major risks: the risk of losing money and the risk of missing opportunities. Either can be eliminated but not both. And leaning too far in order to avoid one can set you up to be victimized by the other.

  Potential opportunity costs – the result of missing opportunities – usually aren’t taken as seriously as real potential losses. But they do deserve attention. Put another way, we have to consider the risk of not taking enough risk.

  These days, the fear of losing money seems to have receded (since the crisis is all of six years in the past), and the fear of missing opportunities is riding high, given the paltry returns available on safe, mundane investments. Thus a new risk has arisen: FOMO risk, or the risk that comes from excessive fear of missing out. It’s important to worry about missing opportunities, since people who don’t can invest too conservatively. But when that worry becomes excessive, FOMO can drive an investor to do things he shouldn’t do and often doesn’t understand, just because others are doing them: if he doesn’t jump on the bandwagon, he may be left behind to live with envy.

  …

  There are many ways for an investment to be unsuccessful. The two main ones are fundamental risk (relating to how a company or asset performs in the real world) and valuation risk (relating to how the market prices that performance). For years investors, fiduciaries and rule-makers acted on the belief that it’s safe to buy high-quality assets and risky to buy low-quality assets. But between 1968 and 1973, many investors in the “Nifty Fifty” (the stocks of the fifty fastest-growing and best companies in America) lost 80-90% of their money. Attitudes have evolved since then, and today there’s less of an assumption that high quality prevents fundamental risk, and much less preoccupation with quality for its own sake.

  On the other hand, investors are more sensitive to the pivotal role played by price. At bottom, the riskiest thing is overpaying for an asset (regardless of its quality), and the best way to reduce risk is by paying a price that’s irrationally low (ditto). A low price provides a “margin of safety,” and that’s what risk-controlled investing is all about. Valuation risk should be easily combatted, since it’s largely within the investor’s control. All you have to do is refuse to buy if the price is too high given the fundamentals. “Who wouldn’t do that?” you might ask. Just think about the people who bought into the tech bubble.

  Fundamental risk and valuation risk bear on the risk of losing money in an individual security or asset, but that’s far from the whole story. Correlation is the essential additional piece of the puzzle. Correlation is the degree to which an asset’s price will move in sympathy with the movements of others. The higher the correlation among its components, all other things being equal, the less effective diversification a portfolio has, and the more exposed it is to untoward developments.

  An asset doesn’t have “a correlation.” Rather, it has a different correlation with every other asset. A bond has a certain correlation with a stock. One stock has a certain correlation with another stock (and a different correlation with a third). Stocks of one type (such as emerging market, high-tech or large-cap) are likely to be highly correlated with others within their category, but they may be either high or low in correlation with those in other categories. Bottom line: it’s hard to estimate the riskiness of a given asset, but many times harder to estimate its correlation with all the other assets in a portfolio, and thus the impact on performance of adding it to the portfolio. This is a real art.

  *  *  *

  To move to the biggest of big pictures, I want to make a few over-arching comments about risk.

  The first is that risk is counterintuitive.

  • The riskiest thing in the world is the widespread belief that there’s no risk.
  • Fear that the market is risky (and the prudent investor behavior that results) can render it quite safe.
  • As an asset declines in price, making people view it as riskier, it becomes less risky (all else being equal).
  • As an asset appreciates, causing people to think more highly of it, it becomes riskier.
  • Holding only “safe” assets of one type can render a portfolio under-diversified and make it vulnerable to a single shock.
  • Adding a few “risky” assets to a portfolio of safe assets can make it safer by increasing its diversification. Pointing this out was one of Professor William Sharpe’s great contributions.

  The second is that risk aversion is the thing that keeps markets safe and sane.

  • When investors are risk-conscious, they will demand generous risk premiums to compensate them for bearing risk. Thus the risk/return line will have a steep slope (the unit increase in prospective return per unit increase in perceived risk will be large) and the market should reward risk-bearing as theory asserts.
  • But when people forget to be risk-conscious and fail to require compensation for bearing risk, they’ll make risky investments even if risk premiums are skimpy. The slope of the line will be gradual, and risk taking is likely to eventually be penalized, not rewarded.
  • When risk aversion is running high, investors will perform extensive due diligence, make conservative assumptions, apply skepticism and deny capital to risky schemes.
  • But when risk tolerance is widespread instead, these things will fall by the wayside and deals will be done that set the scene for subsequent losses.

  Simply put, risk is low when risk aversion and risk consciousness are high, and high when they’re low.

  The third is that risk is often hidden and thus deceptive. Loss occurs when risk – the possibility of loss – collides with negative events. Thus the riskiness of an investment becomes apparent only when it is tested in a negative environment. It can be risky but not show losses as long as the environment remains salutary. The fact that an investment is susceptible to a serious negative development that will occur only infrequently – what I call “the improbable disaster” – can make it appear safer than it really is. Thus after several years of a benign environment, a risky investment can easily pass for safe. That’s why Warren Buffett famously said, “. . . you only find out who’s swimming naked when the tide goes out.”

  Assembling a portfolio that incorporates risk control as well as the potential for gains is a great accomplishment. But it’s a hidden accomplishment most of the time, since risk only turns into loss occasionally . . . when the tide goes out.

  The fourth is that risk is multi-faceted and hard to deal with. In this memo I’ve mentioned 24 different forms of risk: the risk of losing money, the risk of falling short, the risk of missing opportunities, FOMO risk, credit risk, illiquidity risk, concentration risk, leverage risk, funding risk, manager risk, over-diversification risk, risk associated with volatility, basis risk, model risk, black swan risk, career risk, headline risk, event risk, fundamental risk, valuation risk, correlation risk, interest rate risk, purchasing power risk, and upside risk. And I’m sure I’ve omitted some. Many times these risks are overlapping, contrasting and hard to manage simultaneously. For example:

  • Efforts to reduce the risk of losing money invariably increase the risk of missing out.
  • Efforts to reduce fundamental risk by buying higher-quality assets often increase valuation risk, given that higher-quality assets often sell at elevated valuation metrics.

  At bottom, it’s the inability to arrive at a single formula that simultaneously minimizes all the risks that makes investing the fascinating and challenging pursuit it is.

  The fifth is that the task of managing risk shouldn’t be left to designated risk managers. I’m convinced outsiders to the fundamental investment process can’t know enough about the subject assets to make appropriate decisions regarding each one. All they can do is apply statistical models and norms. But those models may be the wrong ones for the underlying assets – or just plain faulty – and there’s little evidence that they add value. In particular, risk managers can try to estimate correlation and tell you how things will behave when combined in a portfolio. But they can fail to adequately anticipate the “fault lines” that run through portfolios. And anyway, as the old saying goes, “in times of crisis all correlations go to one” and everything collapses in unison.

  “Value at Risk” was supposed to tell the banks how much they could lose on a very bad day. During the crisis, however, VaR was often shown to have understated the risk, since the assumptions hadn’t been harsh enough. Given the fact that risk managers are required at banks and de rigueur elsewhere, I think more money was spent on risk management in the early 2000s than in the rest of history combined . . . and yet we experienced the worst financial crisis in 80 years. Investors can calculate risk metrics like VaR and Sharpe ratios (we use them at Oaktree; they’re the best tools we have), but they shouldn’t put too much faith in them. The bottom line for me is that risk management should be the responsibility of every participant in the investment process, applying experience, judgment and knowledge of the underlying investments.

  The sixth is that while risk should be dealt with constantly, investors are often tempted to do so only sporadically. Since risk only turns into loss when bad things happen, this can cause investors to apply risk control only when the future seems ominous. At other times they may opt to pile on risk in the expectation that good things lie ahead. But since we can’t predict the future, we never really know when risk control will be needed. Risk control is unnecessary in times when losses don’t occur, but that doesn’t mean it’s wrong to have it. The best analogy is to fire insurance: do you consider it a mistake to have paid the premium in a year in which your house didn’t burn down?

  Taken together these six observations convince me that Charlie Munger’s trenchant comment on investing in general – “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – is profoundly applicable to risk management. Effective risk management requires deep insight and a deft touch. It has to be based on a superior understanding of the probability distributions that will govern future events. Those who would achieve it have to have a good sense for what the crucial moving parts are, what will influence them, what outcomes are possible, and how likely each one is. Following on with Charlie’s idea, thinking risk control is easy is perhaps the greatest trap in investing, since excessive confidence that they have risk under control can make investors do very risky things.

  Thus the key prerequisites for risk control also include humility, lack of hubris, and knowing what you don’t know. No one ever got into trouble for confessing a lack of prescience, being highly risk-conscious, and even investing scared. Risk control may restrain results during a rebound from crisis conditions or extreme under-valuations, when those who take the most risk generally make the most money. But it will also extend an investment career and increase the likelihood of long-term success. That’s why Oaktree was built on the belief that risk control is “the most important thing.”

  Lastly while dealing in generalities, I want to point out that whereas risk control is indispensable, risk avoidance isn’t an appropriate goal. The reason is simple: risk avoidance usually goes hand-in-hand with return avoidance. While you shouldn’t expect to make money just for bearing risk, you also shouldn’t expect to make money without bearing risk.

  *  *  *

  At present I consider risk control more important than usual. To put it briefly:

  • Today’s ultra-low interest rates have brought the prospective returns on money market instruments, Treasurys and high grade bonds to nearly zero.
  • This has caused money to flood into riskier assets in search of higher returns.
  • This, in turn, has caused some investors to drop their usual caution and engage in aggressive tactics.
  • And this, finally, has caused standards in the capital markets to deteriorate, making it easy for issuers to place risky securities and – consequently – hard for investors to buy safe ones.

  Warren Buffett put it best, and I regularly return to his statement on the subject:

  . . . the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.

  While investor behavior hasn’t sunk to the depths seen just before the crisis (and, in my opinion, that contributed greatly to it), in many ways it has entered the zone of imprudence. To borrow a metaphor from Chuck Prince, Citigroup’s CEO from 2003 to 2007, anyone who’s totally unwilling to dance to today’s fast-paced music can find it challenging to put money to work.

  It’s the job of investors to strike a proper balance between offense and defense, and between worrying about losing money and worrying about missing opportunity. Today I feel it’s important to pay more attention to loss prevention than to the pursuit of gain. For the last four years Oaktree’s mantra has been “move forward, but with caution.” At this time, in reiterating that mantra, I would increase the emphasis on those last three words: “but with caution.”

  Economic and company fundamentals in the U.S. are fine today, and asset prices – while full – don’t seem to be at bubble levels. But when undemanding capital markets and a low level of risk aversion combine to encourage investors to engage in risky practices, something usually goes wrong eventually. Although I have no idea what could make the day of reckoning come sooner rather than later, I don’t think it’s too early to take today’s carefree market conditions into consideration. What I do know is that those conditions are creating a degree of risk for which there is no commensurate risk premium. We have to behave accordingly.

  

  

  
  
  

  

• Obama Goes Full Stalin: Tells Secret Court To Ignore Law He Signed 4 Hours Earlier, Extend Illegal NSA Surveillance

  Just when we thought the absurdity that marks every single day of Obama’s reign could not possibly be surpassed, we learned that 4 hours (3 hours and 47 minutes to be precise) after the US president vowed to sign a new law banning bulk data collection by the NSA (named, for purely grotesque reasons, the “USA Freedom Act“), the Obama administration asked the secret Fisa surveillance court to ignore a federal court that found bulk surveillance illegal and to once again grant the National Security Agency the power to collect the phone records of millions of Americans for six months.

  Or, as the Guardian’s Spencer Ackerman, who spotted this glaring page out of Josef Stalin’s playbook, summarized it:

  June 2, 6:03pm: Obama says he’ll sign law banning bulk collection.
  June 2 9:50pm: DOJ asks secret court for 180 more days of bulk collection

  — Spencer Ackerman (@attackerman) June 8, 2015

  According to Ackerman, this latest travesty by the administration “suggests that the administration may not necessarily comply with any potential court order demanding that the collection stop.”

  Or, in other words, the administration “may” give orders that openly flaunt US laws. From the Guardian:

  US officials confirmed last week that they would ask the Foreign Intelligence Surveillance court – better known as the Fisa court, a panel that meets in secret as a step in the surveillance process and thus far has only ever had the government argue before it – to turn the domestic bulk collection spigot back on.

   

  This is a problem because Justice Department national security chief John A Carlin cited a six-month transition period provided in the USA Freedom Act – passed by the Senate last week to ban the bulk collection – as a reason to permit an “orderly transition” of the NSA’s domestic dragnet. However, Carlin “did not address whether the transition clause of the Freedom Act still applies now that a congressional deadlock meant the program shut down on 31 May.”

  So after the second circuit court of appeals already ruled NSA surveillance illegal, and after Congress officially shut down NSA’s bulk data collection in its current form, Obama’s DOJ decided to singlehandedly order that NSA spying on Americans be extended for at least another 6 months.

  Follow the details of how the US Department of “Justice” crushes every semblance thereof:

  Carlin asked the Fisa court to set aside a landmark declaration by the second circuit court of appeals. Decided on 7 May, the appeals court ruled that the government had erroneously interpreted the Patriot Act’s authorization of data collection as “relevant” to an ongoing investigation to permit bulk collection.

   

  Carlin, in his filing, wrote that the Patriot Act provision remained “in effect” during the transition period.

   

  “This court may certainly consider ACLU v Clapper as part of its evaluation of the government’s application, but second circuit rulings do not constitute controlling precedent for this court,” Carlin wrote in the 2 June application. Instead, the government asked the court to rely on its own body of once-secret precedent stretching back to 2006, which Carlin called “the better interpretation of the statute”.

  The punchline:

  The second circuit court of appeals is supposed to bind only the circuit’s lower courts. But the unique nature of the Fisa court – whose rulings practically never became public before whistleblower Edward Snowden’s revelations – has left ambiguous which public court precedents it is obliged to follow.

  Said otherwise, the NSA’s espionage activity is above the law, any law.

  Amusingly, some still harbor hope that “justice” is still a viable concept in the United States, such as the FreedomWorks conservative group, which is asking the Fisa court to essentially disband itself:

  On Friday, the conservative group FreedomWorks filed a rare motion before the Fisa court, asking it to reject the government’s surveillance request as a violation of the fourth amendment’s prohibition on unreasonable searches and seizures. Fisa court judge Michael Moseman gave the justice department until this coming Friday to respond – and explicitly barred the government from arguing that FreedomWorks lacks the standing to petition the secret court.

  Which, incidentally, is like asking Wall Street to police itself. A quick reminder of what happened there: after gross market manipulation was taking place for years involving trillions of interest-rate products, the person who witnessed it every single day called it, don’t laugh, a “conspiracy theory.”

  Incidentally, “conspiracy theorists” is precisely what all those who accused the NSA of engaging in mass illegal surveillance even before the Snowden revelations, were branded as. And, we are confident, before all is said and done, the “conspiracy theorists” who dare speak the truth against the surreal Orwellian state that the US finds itself in, will be crushed by the administration, both the current and the one that will replace it, whose every day modus operandi is taken straight out of the Stalin memoirs.

  

  

  
  
  

  

• Idaho School Arms Its Teachers As Defense Against Violent Criminals

  In the aftermath of the 2012 Shady Hook elementary school shooting, the Obama administration did everything in its power to impose even further Second Amendment limitations on general principles. It failed. Instead, what has happened over the past year is a documented series of lethal (and in many cases brutal) gun violence by those tasked to uphold and preserve the law, and who have been specifically instructed how to use weapons: the US police force.

  And in a world in which violence is constantly on the rise yet the police can not be relied on to “protect and to defend”, one Idaho school has decided to take matters into its own hands.

  According to the Guardian, the small Garden Valley School district in Idaho has purchased firearms and trained a handful of staff to use them should the same school shooting rampage that has occurred across the country take place.

  

  The stated reason for this decision, which will surely infuriate anti-gun activists, is that the school is far removed from law enforcement, that it takes the police at least 45 minutes to reach the school district. Furthermore, due to limited funds, the school is unable to afford hiring police officers to patrol the building during school hours.

  The solution: the school board approved this month purchasing guns to remain locked inside the school and trained six employees to use the weapons in an emergency. A school board member said that the school has spent roughly $3,500 to purchase ammunition and train six school employees to handle the weapons while the rest of the arsenal was donated by the community.

  Truly a novel concept: being prepared for violence instead of leaving your fate in the hands of some (potentially irresponsible) other person, and since the mere preparation will be a sufficient enough deterrent once it is public knowledge – the very same principle behind the concept of Mutual Assured Destruction – the probability of an armed assailant breaching the sanctity of the Garden Valley School district is virtually nil.

  “I hope we never have to use them,” said Alan Ward, a school board member who has been discussing this option with the school for two years. “But in the event something did happen, we wanted to be prepared.”

  The surprising move has been long coming: in 2013, an eastern Idaho school district approved installing gun safes in its high schools and middle schools in order for school resource officers to have easy access to rifles if needed – the same year the Idaho School Board Association rejected a plan to set up gun training for education staff and teachers. In 2014, state lawmakers approved allowing guns on college campuses.

  So far it has worked: according to the Idaho department of education, school districts statewide reported less than 10 weapon-related incidents over the past two years. This includes reports about guns, knives and explosives to schools.

  And yet, despite the Idaho’s track record of school violence, there are those who promptly brought up hypothetical strawman arguments against the school’s chosen path:

  Even with training, there is no guarantee teachers and staff will prevent fatalities in a high-stakes situation, said Allison Anderman, a staff attorney with Law Center to Prevent Gun Violence, a nonprofit opposed to arming teachers.

   

  She added that housing guns in schools could create a chilling effect for students who may be less inclined to speak out knowing that the teacher could be armed. “Just having people armed doesn’t make a school safer,” Anderman said.

  Judging by empirical evidence, it does, as does the whole concept of “defense” because knowing one may be potentially met with lethal force will make one far less willing to engage in lethal threats in the first place. It is called deterrence for a reason. 

  As for students not speaking up over fears of being shot, questions emerge about what traumatic events may have defined Ms. Anderman own personal upbringing.

  We conclude with a summary by John Vibes, whose recent takes on guns and school violence has been spot on:

  As many of you who follow my regular work are already aware, I am an advocate of unschooling and homeschooling. I feel that the kind of schooling that we have today is counterproductive and oppressive, so I don’t feel that children should be forced to go to public school to begin with.

   

  There may be a lot of great teachers out there, who care about what they do and have very good intentions, like the world famous educator John Taylor Gatto. But even he found the top down structure of the school system and the curriculum provided is very damaging to the minds of children.

   

  He left public schools by writing his resignation letter in the op-ed pages of the Wall Street Journal, starting the letter off by saying that he “refuses to continue hurting children.” He then went on to start an incredible career in writing, researching and speaking out about the dangers of compulsory schooling.

   

  This element is important because the public school system combined with other forms of child abuse has worked to create the kind of violent and angry culture that we see today. When you treat people like prisoners and second class citizens for the most vital developmental years of their lives, you are going to create confused, bitter and deranged people. There is still value in group learning settings, and there is still value in teachers, but what we have today is indoctrination, not education.

   

  With that being said, whether we are talking about a place of voluntary group learning in a free society or the compulsory public schools that we see today, the administrators should be armed. A convenience store clerk protects his store with a gun, and by the same logic a teacher or administrator should be able to protect the lives of children with a gun as well.

  Which makes sense, and which probably explains why the administration will fight too and nail to prevent the case study of the Garden Valley School district from going national.

  

  
  
  

  

• Corporate Buybacks: Connecting The Dots To The F-Word

  Submitted by Michael Lebowitz via 720Global.com,

  Over the course of history in the financial markets, Wall Street has continuously invented increasingly creative ways to peddle its wares under the guise of meeting investors’ “needs”. The modern era of financial alchemy began quietly enough with index investing in the early 1970’s, followed by portfolio insurance in the 1980’s (the cause of Black Monday 1987), progressed to the advent of the exchange-traded fund (ETF) and credit-default swaps (CDS) in the early to mid-1990’s, trailed by internet stocks in the late 1990’s (bubble #1). The 2000’s saw more than its fair share of ingenuity including toxic triple-A rated sub-prime mortgage-backed securities and CDO-Squared structures (bubble #2).

  The latest craze in financial engineering plays to the theme of “less is more”. Share buybacks, whereby a publicly-traded company repurchases its own stock in the open market, are driving the stock market to previously unimaginably rich valuations despite weak economic growth and a lack of supporting fundamentals. Share buybacks are being conducted in record amounts without regard for whether a company actually has the cash to spend on such a plan and worse, at prices well-above intrinsic value for those shares.

  

  The Federal Reserve (Fed) has been complicit creating this environment through not only their zero interest rate policy but indirectly via the euphoric markets which are partially the result of such policy. The instant gratification that share buybacks offer shareholders, including insiders, in combination with “free” money are so irresistible that companies are more than willing to borrow cash and exchange prudence for the gratuitous short-term pleasure of watching their stock climb on the news. Even if the Fed were to follow through with recently threatened interest rate hikes, markets are clearly not worried that the proverbial monetary stimulus punch bowl will be removed anytime soon. By maintaining crisis policy for nearly seven years and refusing to allow normal market discipline to reassert itself, the Fed has once again laid the groundwork for the third financial market bubble in only the last 15 years.

  With the Fed and other government authorities providing cover and Wall Street endorsing the approach, share buybacks are being driven by a desire to both manipulate stock prices in the short term and increase already egregious executive pay. Share buybacks are the mechanism by which value creation is being buried by corporate executives seeking value extraction.

  Finance and Accounting 101

  A share buyback is exactly what the name suggests. At some point in the past a company issued equity to capitalize the corporation. The repurchase, or buyback, is simply buying some of those shares back either as a tender offer to specific shareholders or in the open market, effectively returning capital and leaving remaining ownership in fewer hands. Most share repurchases today occur in the open market.

  From an accounting perspective a company’s true value or net worth before and after a buyback is identical. As the number of shares decrease, earnings per share (EPS) increase proportionately, seemingly making remaining ownership more valuable. However the benefits to remaining shareholders are perfectly offset by the loss of cash used to conduct the buyback. Accounting 101 teaches that assets minus liabilities equals owners’ equity. A cash buyback does nothing more than decrease the assets and the owners’ equity accounts equally, keeping the equation in the same state of equilibrium and leaving the remaining shareholders with the same amount of owners’ equity as prior to the exercise. This accounting identity is among the most basic in corporate finance and accounting.

  Because of historically low interest rates, debt-funded buybacks are especially popular today. Unlike cash buybacks which produce neither an accounting benefit nor impairment, buybacks supported by the issuance of new debt have an adverse effect on the bottom line. In a debt-funded buyback the asset side of the balance sheet is untouched, however the liability side increases while owners’ equity drops an equal amount. The end result is the company now owes the principal on the money borrowed as well as a series of future interest payments against which future earnings are reduced.

  Increased interest expenses with no change to cash flows or earnings negatively affects a company’s credit rating, which in turn increase future borrowing costs and limits future borrowing capacity. Rating agencies have warned that buybacks, especially those fueled with debt, increase the odds of credit downgrades.

  From a valuation perspective there is little doubt that buybacks, over the past few years, have led to increases in share prices in the equity market. However, analysts and investors who argue for buybacks on the premise that somehow those actions add real intrinsic value to a company are misguided. These advocates are correct that earnings per shares are increased, but they fail to factor in the negative effects on future earnings when cash is used to buy back stock instead of invested in the company’s future.

  When cash or debt is used to perform a buyback, then by definition those dollars cannot be used for other purposes. The question that must be answered is, “What gets sacrificed”?
  A company has two options to consider when deploying capital:

  1. It can reinvest that money by expanding employee skills, increasing pay and benefits, hiring more people, creating new products and services or making other capital investments that make the company more profitable and competitive.

   

  2. It can repurchase its own shares and/or pay cash dividends to shareholders – “capital return”.

  Deploying capital via share buybacks or dividends diminishes the ability of a company to invest in itself. The recent meteoric growth of returning capital to shareholders simply means far less capital is being deployed by corporations for reinvestment purposes. Prior to the 1980’s, major U.S. corporations employed a “retain and reinvest” approach to resource allocation in order to enhance both operational and human capital. This approach contributed to equitable, stable economic growth in the years to follow. Throughout the 1980s and 1990s however, the focus of corporate leadership shifted. In order to satisfy Wall Street’s demanding requirements for ever-higher quarterly earnings per share, executives lost sight of the long-term objectives and began using stock repurchases and other shortsighted ideas to manipulate EPS and ultimately their stock price.

  This behavior ensures the seeds of future earnings growth, re-investment, are being sacrificed for current benefits. While the economic costs of this strategy may not be well publicized, they are palpable. Productivity growth for instance slowed to a paltry .10% in 2014, continuing a slowing trend of the last 30 years. New highs in stock market indices may temporarily mask important economic factors such as the lack of productivity growth, sub-trend economic growth, income disparity and an ever growing debt burden, but the costs of misallocating corporate capital are significant and will be increasingly felt for years to come.

  Rational for buybacks

  Corporate executives offer three main reasons for share repurchases:

  1. Buybacks are investments in our undervalued shares signaling our confidence in the company’s future.

   

  2. Buybacks allow the company to offset the dilution of EPS when employee stock options are exercised or stock is granted to employees.

   

  3. The company is mature and has limited investment opportunities, therefore we are obligated to return unneeded cash to shareholders.

  The logic behind each of these explanations is in the vast majority of cases is flawed, to be kind, and deceptive to be blunt. In a letter to shareholders fifteen years ago, Warren Buffett explicitly addressed the topic of share repurchases through the following direct and critical explanations:

  • “Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price.”
  • “Usually, of course, chicanery is employed to drive stock prices up, not down.”
  • “The shareholder who chooses to sell today, of course, is benefitted by any buyer, whatever his origins or motives. But the continuing shareholder is penalized by repurchases above intrinsic value.”
  • “Buying dollar bills for $1.10 is not good business for those who stick around.”
  • “Sometimes too, companies say they are repurchasing shares to offset the shares issued when stock options granted at much lower prices are exercised. This “buy high, sell low” strategy is one many unfortunate investors have employed – but never intentionally! Managements, however, seem to follow this perverse activity very cheerfully.”

  Despite The Oracle’s sensible take, many “sophisticated” investors have opted to ignore the deception involved in buybacks and take part in the cheerleading. Rick Rieder, the Chief Investment Officer of BlackRock, the world’s largest asset management firm, recently stated “why risk cap-ex when the bar here is low and the results instantaneous?” The “low bar” and “instantaneous” results referring to the benefits of buybacks.

  On the other hand, across the hall in the executive suite, BlackRock’s CEO Laurence Fink had this to say: “More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”

  For the record, we concur with Mr. Fink.

  

  Two important facts bear emphasis:

  1. Stock buybacks do not increase the value of the company from an accounting perspective and when buybacks are done via borrowed money, there is a negative effect.

   

  2. Stock buybacks have an often overlooked cost of reducing corporate investment which is not being factored into earnings projections and valuations. By exchanging future earnings growth for hollow short-term stock price gains, CEO’s are having a deleterious effect on productivity and ultimately earnings potential.

  There is a reason for everything, for everything there is a reason

  So if share repurchases do not in any way enhance the intrinsic value of a company, the logic and rationale offered by executives is faulty and/or deceptive and the action itself is viewed as “chicanery”, then why are so many executives and board of directors authorizing them? What are the real reasons?

  The answer, as it so often does, lies in the incentives.

  Citing from his book The Practice of Management, Peter Drucker wrote “There is only one valid definition of a business purpose: to create a customer.”

  In the mid-1970’s Michael Jensen and William Meckling, Finance Professors at the University of Rochester, proposed in an article published in the Journal of Financial Economics that, contrary to Drucker’s philosophy, the singular goal of a company should be to maximize the return to shareholders. The professors argued that in efforts to re-prioritize the objective of maximizing shareholder value ahead of executives’ self-interest, executive incentives should be altered through stock-based compensation. Unfortunately, this concept ultimately became the conventional wisdom of the last 35 years.

  In a 2009 article in the Financial Times, Former GE CEO Jack Welch said “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal.”

  In a 2011 Forbes article The Dumbest Idea in the World: Maximizing Shareholder Value, author Steve Denning highlights that between “1960 and 1980, CEO compensation per dollar of net income earned for the 365 biggest publicly traded American companies fell by 33 percent. By contrast, in the decade from 1980 to 1990, CEO compensation per dollar of net earnings produced doubled. From 1990 to 2000 it quadrupled.”

  As an important side-bar the Securities Exchange Commission in 1982, allowed companies to buy back their own shares with virtually no regulatory oversight.

  Corporate executive compensation has become much more dependent on current EPS and ultimately stock prices as an incentive metric with stock option grants and outright stock awards increasing dramatically. In 2012, average CEO pay for S&P 500 companies was $30 million of which 83% was comprised of stock options and awards as shown below.

  

  As executive compensation has soared, the reasons for buybacks becomes more apparent. First, buybacks allow companies to manipulate their stock price in the short term to please investors and analysts. Second, they are a means of increasing pay for top executives resulting in their personal financial gain at the expense of innovation, employees and job creation.

  

  

  

  
  
  

  

• The PetroYuan Is Born: Gazprom Now Settling All Crude Sales To China In Renminbi

  Two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony. 

  Last November, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:

  Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

   

  
  

   

  The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.

  Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidity from financial markets for the first time in nearly two decades:

  

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

  Shifting to the idea of yuan hegemony, China is aggressively pushing its Silk Road Fund and Asian Infrastructure Investment Bank.

  The $40 billion Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the $50 billion AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. China will push for the yuan to play a prominent role in the settlement of AIIB transactions and may look to establish special reserves in both the AIIB and Silk Road fund to issue yuan-denominated loans.

  Back in early November, SWIFT data showed that 15 new countries had joined a list of nations settling more than 10% of their trade deals with China in yuan. “This is a good sign for [yuan] adoption rates and internationalisation. In particular, Canada’s [yuan] usage for payments, which has increased greatly over this period, is very interesting since we have not seen strong adoption of the [yuan] from North America to date,” Astrid Thorsen, Swift’s head of business intelligence said.

  Earlier that month, China and Russia indicated that going forward, more trade between the two countries would be settled in yuan. From Reuters, last November:

  Russia and China intend to increase the amount of trade settled in the yuan, President Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want the currency to be used more widely around the world.

   

  Spurred on by their often testy relations with the United States, Russia and China have long advocated reducing the role of the dollar in international trade.

   

  Curtailing the dollar’s influence fits well with China’s ambitions to increase the influence of the yuan and eventually turn it into a global reserve currency. With 32 percent of its $4 trillion foreign exchange reserves invested in U.S. government debt, China wants to curb investment risks in dollar.

   

  The quest to limit the dollar’s dominance became more urgent for Moscow this year when U.S. and European governments imposed sanctions on Russia over its support for separatist rebels in Ukraine.

  “As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions.The initial deals for rouble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade,” Putin said at the time, suggesting that going forward, Russia may look to settle sales of oil in yuan. 

  Sure enough, Gazprom has confirmed that since the beginning of the year, all oil sales to China have been settled in renminbi. From FT:

  Russia’s third-largest oil producer, is now settling all of its crude sales to China in renminbi, in the most clear sign yet that western sanctions have driven an increase in the use of the Chinese currency by Russian companies.

   

  Russian executives have talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a “pivot to Asia” foreign policy partly in response to the western sanctions against Moscow over its intervention in Ukraine, but until now there has been little clarity over how much trade is being settled in the Chinese currency.

   

  Gazprom Neft, the oil arm of state gas giant Gazprom, said on Friday that since the start of 2015 it had been selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to China.

   

  Russian companies’ crude exports were largely settled in dollars until the summer of last year, when the US and Europe imposed sanctions on the Russian energy sector over the Ukraine crisis…

   

  Gazprom Neft responded more rapidly than most, with Alexander Dyukov, chief executive, announcing in April last year that the company had secured agreement from 95 per cent of its customers to settle transactions in euros rather than dollars, should the need to do so arise.

   

  Mr Dyukov later said the company had started selling oil for export in roubles and renminbi, but he did not specify whether the sales were significant in scale.

   

  According to Gazprom Neft’s first-quarter results issued last month, the East Siberian Pacific Ocean pipeline accounted for 37.2 per cent of the company’s crude oil exports of 1.6m tonnes in the three months to March 31.

  With that, the “PetroYuan” has officially been born and while FT notes that “other Russian energy groups have been more reluctant to drop the dollar for settlement of oil sales,” the fact that Russian producers are now openly considering a shift at the same time that officials in the US and Europe are openly discussing stepped up economic sanctions suggests renminbi settlements may become more commonplace going forward.

  To understand why and to what extent this is significant in the current environment, consider the following from WSJ:

  Officials of the Organization of the Petroleum Exporting Countries, which declined to cut oil production last year, reasoned that maintaining high production levels would protect market share in crucial importing nations.;

   

  But Chinese customs data released Friday show that China’s crude imports from some big OPEC nations have plummeted, while imports from Russia surged 36% in 2014. Meanwhile, imports from Saudi Arabia fell 8% and those from Venezuela dropped 11%.

   

  

   

  To summarize: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman’s projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.

  Putting it all together, the PetroYuan represents the intersection of a dying petrodollar and an ascendant renminbi.

  

  

  
  
  

  

• MSCI "On Track" For China Inclusion But Warns Liquidity Remains An Issue

  MSCI has not decided to include China stocks in its index yet – as opposed to what mainstream media believes. MSCI instead says the inclusion is “on track” for inclusion but there remains three significant hurdles including liquiidty restrictions.

  Full MSCI Statement on China inclusion:

  MSCI, the premier provider of global equity indexes, announced today that it expects to include China A?shares in its global benchmarks after a few important remaining issues related to market accessibility have been resolved. MSCI and the China Securities Regulatory Commission (CSRC) will form a working group to contribute to the successful resolution of these issues.

  “Substantial progress has been made toward the opening of the Chinese equity market to institutional investors,” said Remy Briand, MSCI Managing Director and Global Head of Research. “In our 2015 consultation, we learned that major investors around the world are eager for further liberalization of the China A?shares market, especially with regard to the quota allocation process, capital mobility restrictions and beneficial ownership of investments.”

  Briand continued, “Because MSCI’s client base is so large and diverse, we have a strong interest in ensuring that remaining issues are addressed in an orderly and transparent way.  We are honored that the CSRC has recognized MSCI’s expertise regarding the requirements of international institutional investors. We look forward to a fruitful collaboration that will contribute to the further opening of the China A?shares markets to international investors and the inclusion in the MSCI Emerging Markets Index.”

  MSCI stated that it may announce the decision to include China A?shares in the MSCI Emerging Markets Index as soon as the issues it has outlined are resolved. This may happen outside the regular schedule of its annual Market Classification Review.

  China A?shares

  MSCI will collaborate with the CSRC over coming months to facilitate discussions designed to lead to the implementation of policies that effectively resolve the remaining accessibility issues in the China A?shares market.

  Since its 2014 Annual Market Classification Review, MSCI has continued to observe significant positive market?opening developments in the Chinese capital market. These developments include the successful launch of the Shanghai?Hong Kong Stock Connect program (“Stock Connect”), the expansion of RQFII program from four cities to 12 cities and the clarification of the capital gains tax. In addition, the imminent launch of the Shenzhen?Hong Kong Stock Connect program and potential further liberalization of the QFII program should further improve the accessibility of the China A?shares market.
   
  The working group aims to facilitate discussion and understanding of accessibility concerns and potential solutions that were highlighted by international institutional investors in MSCI’s 2015 consultation. The concerns include, but are not limited to, the quota allocation process, capital mobility restrictions and beneficial ownership of investments.  

  1. Quota allocation process.   Global investors told MSCI that having reliable access to quota is a critical requirement. They believe that large investors should be given access to quota commensurate with the size of their assets under management. This is especially important for passive investors, whose investment processes replicate benchmarks. In addition, all investors said that they need sufficient flexibility and assurance to secure additional quota should the need arise. Most international investors have indicated a preference for a more streamlined, transparent and predictable quota allocation process.  

   

  2. Capital mobility restrictions.  Liquidity is a critical component of the investment process. Regardless of the channel they use, investors say that they need access to daily liquidity. They believe that this access should apply to all investment vehicles, including open?ended funds, ETFs and separate accounts. Some investors have continued to express concerns about restrictions on capital lock?up and the limit on the amount of repatriation. Finally, in the context of Stock Connect, investors feel that the daily limit imposed on the “northbound access” (access to Shanghai?listed A?shares through the Hong Kong Stock Exchange) should be lifted because it is a great source of trading uncertainty for passive investors, who typically trade on market close. 

   

  3. Beneficial ownership. MSCI applauds CSRC’s recent clarification on the Stock Connect beneficial ownership issue. MSCI expects this clarification to make international investors more confident in using the Stock Connect scheme. Time and actual experience, however, are needed for investors to provide their final assessments. A large number of asset owners invest through separate accounts. Because they typically delegate investment and operational decisions to their fund managers, recognizing clear title to ownership for the ultimate beneficial owners is a crucial concern.

  Recognizing the significant progress to date and ongoing reform efforts, China A?shares will remain on the 2016 review list for potential inclusion into Emerging Markets. 

  MSCI has updated the consultation document that describes the proposed index inclusion roadmap for China A?shares in the MSCI Emerging Markets Index.  This roadmap, which was introduced in March 2014, proposes to partially include China A?shares in the pro forma MSCI China Index and its corresponding composite indexes, including the MSCI Emerging Markets Index, at 5% of its FIF?adjusted market capitalization.

  *  *  *

  For the cynics among you, we wonder (out loud) if the push for inclusion of Chinese stocks is preparation for a full-blown Chinese QE which, if unleashed, will send Chinese Stocks soaring and implicitly lift all MSCI boats on the back of it, thus enabling a far greater “wealth creation” channel effect to the world (multiplier) than if China was absent… but that would just be conspiracy theory wonkishness.

  

  

  
  
  

  

• Leaking Las Vegas

  What happens in Vegas, stays in Vegas… apart from the water. As the following interactive chart from ProPublica shows, water usage in the greater Las Vegas region has more than doubled in the last 40 years and with the drought conditions, every reservoir is near record lows. Welcome To Las Vegas (while water supplies last).

  Click here for large interactive version

  

   

  Via ProPublica,

  Vegas Water History

  1905    The Las Vegas Land and Water Company is formed to build and operate groundwater wells which the city then depended on for decades.

  1922    The seven basin states sign the Colorado River Compact, estimating the river’s annual supply at 18 million acre-feet of water and dividing 15 million acre-feet between the northern and southern states. The river would eventually prove to flow with just 14.8 million acre-feet a year.

  1928    The Boulder Canyon Project Act authorizes construction of the Hoover Dam and split the water shares up between states. Nevada only gets 97.8 billion gallons, while California is given 1.4 trillion gallons, an imbalance that complicates relations to this day.

  1941    A pipeline is constructed by Basic Management Inc., to take water from the Colorado River in Lake Mead and deliver it to Las Vegas for the first time.

  1956    Congress passes the Colorado River Storage Project, authorizing the construction of some of the largest dams on the river, including Glen Canyon, Flaming Gorge, New Mexico’s Navajo and Colorado’s Aspinall Unit.

  1963    Supreme Court settles Arizona vs. California, deciding a key aspect of Western water law and allowing Arizona, Nevada and California to withdraw unlimited water from their tributary rivers without counting it against their share of the Colorado River, further straining the system’s supply.

  1971    The first phase of construction on the Southern Nevada Water System is completed, enhancing Las Vegas’ reliance on the Colorado River for its water.

  1989    Seeking more water to support growth, Pat Mulroy and the Las Vegas Valley Water District quietly file 148 applications for water rights in rural counties north of Las Vegas.

  1990    Las Vegas’ daily water demand exceeds 300 million gallons per day.

  1991    The Las Vegas Valley Water District receives a report warning the area will run out of water within five years. Pat Mulroy temporarily puts a moratorium on new building projects. Later that year the Southern Nevada Water Authority is formed, combining seven water districts in the Las Vegas Valley.

  1992    The Water Authority gets permission from the U.S. Secretary of Interior to temporarily use extra water from the river, which for a few years flowed with more water than the states had divided up.

  1994    Nevada’s state engineer allows the Water Authority to take additional water from the Virgin River, water which would have otherwise flowed into Lake Mead.

  1998    The Southern Nevada Public Lands Management Act is passed, giving Nevada a say in how federal lands are sold and allowing Las Vegas to rapidly expand. The Water Authority gets a 10 percent stake in land sales, tying its revenues directly to growth.

  1999    Las Vegas’ maximum daily demand exceeds 400 million gallons.

  2001    A year into the start of the drought, California, Nevada and Arizona agree to divide up surplus water from the Colorado River.

  2002    The Water Authority completes a $2.1 billion tunnel to double the amount of water it can take from Lake Mead. That same year, drought ravages the basin. The Colorado flows at 25 percent of normal. Pat Mulroy throws out her 50-year water plan.

  2003    Mulroy’s water authority pays Las Vegas residents up to $2 per square foot to rip out front lawns.

  2005    SNWA decides to build a third, lower intake tunnel from Lake Mead to ensure it can, as Mulroy said recently, “take the last drop” when water levels fall.

  2007    As drought drags on, the Colorado River basin states reach an agreement to divide water shortfalls between them in case water levels in Lake Mead drop below 1,075 feet, a trigger that signals a water emergency.

  2012    The United States reaches an agreement with Mexico, which has long been entitled to nearly 489 billion gallons from the river, to allow Mexico to store some of its water for future use in Lake Mead. That same year the U.S. Bureau of Land Management comes out in support of the Water Authority’s proposal to build a water pipeline from rural Nevada to Las Vegas.

  2014    Pat Mulroy retires after 26 years as Las Vegas’ top water official and having added significantly more water to the city’s annual supply. But the city is in its 15th year of drought, and the Water Authority projects its water demand will continue to rise beyond what the city is currently capable of providing.

  Sources: USGS, NASA/USGS Landsat, Google, U.S. Census, Las Vegas Valley Water District, Southern Nevada Water Authority, U.S. Bureau of Reclamation, Department of Justice, State of Nevada Division of Water Resources, Wyoming State Water Plan, U.S. Department of the Interior Bureau of Land Management, Clark County Office of Public Communication.

  

  

  
  
  

  

• Stocks Slide To Weakest Consecutive Close Since October's Bullard Bounce

  Summing up today (and every day) on the AAPL infotainment channel, we thought the following brief clip would clarify our perspective…

   

  Before we start, something just does not add up here… Stocks (admittedly starting to catch down) have decoupled from relative volume pressures…

  

  h/t @Not_Jim_Cramer

  And Stocks have broken the uptrend heading back towards fundamentals…

  

   

  but still CNBC claims "you have nothing to worry about in the equity markets, credit is the bubble"

  

   

  *  *  *

  Having got that off our chests…

  Trannies were suffering more than the rest until late in the day panic buying lifted them up to Small Caps… S&P managed a tiny gain…

  

   

  Futures markets show the V-Shaped recovery from early Europe-driven losses… (this is post Payrolls)

  

   

  Since Friday's close, Trannies are ugly but notably the higher beta stock indices are not generasting the kind of momo oomph one would expect…

  

   

  Notably, the S&P rallied all the way back up to its 100DMA then sold off again – this is the first consecutive close below the 100DMA since October's Bullard bounce…

  

   

  AAPL's ramp was all about stop runs from yesterday's WWDC presentation...(AAPL bounced perfectly off its 100DMA at 125.37 and tested up to its 50DMA at 128.06 also)

  

   

  The Dollar had a modestly volatile day but ended unch…

  

   

  Treasury yields rose notably into the European close then rallied modestly into the US close…

  

   

  Gold and Copper rose gently, silver was flat, but crude just did its thing…

  

   

  Another day in the quiet world of crude oil… MidEast re-turmoiled – Saudi airstrikes in Yemen (and some claim that China will uptick its imports… because it just plunged them?)…

  

   

  Charts: Bloomberg

  Bonus Chart: Target was buyback spoofed…

  1. Issue press release about massive buyback
  2. Watch stock.
  3. If stock does not surge, retract press release

  

  

  
  
  

  

• Crude Oil Jumps After API Reports Significant Inventory Draw

  While API and DOE data has not exactly been consistent recently, the fact that API reported a huge 6.7 million barrel inventory draw for the last week is significant. Of course, all eyes will be focused on production data tomorrow but for now, WTI prices are up at the highs of the day.

  WTI loves the news…

  

   

  For some context on the size of the draw…

  

   

  Charts: Bloomberg

  

  

  
  
  

  

• Why Adding China To The MSCI Indices Could Be A Disaster (In 1 Simple Chart)

  Chinese stocks are around 4 times more volatile than the current MSCI World index… in other words, if asset allocators maintain current equity weightings then portfolio risks will soar (if China is added). But given that most risk budgets are fixed, rising volatility in the equity portion of portfolios (from adding China) will require rotation out of equities and into bonds (or lower vol assets) in order to maintain VaR limits.

   

  

   

  Be careful what you wish for…

  In English – Adding China to MSCI is like adding a powder keg of volatility into an illiquid global correlation nest.

  Charts: Bloomberg

  

  

  
  
  

  

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• What Is the REAL Risk from Terrorism?

  Preface:   Bad government policy has increased the level of terrorism. And corruption in our security agencies has allowed attacks to succeed which should have been stopped. 

  Even so, the levels of terrorism are still much lower than many assume.  Government officials and counter-terror experts may hype the terror threat to promote their agendas. But – as shown below – your risk of being killed in a terror attack is actually much lower than being killed by virtually any other cause.

  Daniel Benjamin – the Coordinator for Counterterrorism at the United States Department of State from 2009 to 2012 – noted in January (at 10:22):

  The total number of deaths from terrorism in recent years has been extremely small in the West. And the threat itself has been considerably reduced. Given all the headlines people don’t have that perception; but if you look at the statistics that is the case.

  Time Magazine noted in 2013 that the chance of dying in a terrorist attack in the United States from 2007 to 2011, according to Richard Barrett – coordinator of the United Nations al Qaeda/Taliban Monitoring Team – was 1 in 20 million.

  Let's look at specific numbers …

  The U.S. Department of State reports that only 17 U.S. citizens were killed worldwide as a result of terrorism in 2011.* That figure includes deaths in Afghanistan, Iraq and all other theaters of war.

  In contrast, the American agency which tracks health-related issues – the U.S. Centers for Disease Control – rounds up the most prevalent causes of death in the United States:

  

  Comparing the CDC numbers to terrorism deaths means:

  – You are 35,079 times more likely to die from heart disease than from a terrorist attack

   

  – You are 33,842 times more likely to die from cancer than from a terrorist attack

   

  – You are 4,311 times more likely to die from diabetes than from a terrorist attack

   

  – You are 3,157 times more likely to die from flu or pneumonia than from a terrorist attack

   

  – You are 2,091 times more likely to die from blood poisoning than from a terrorist attack

   

  – You are 1,064 times more likely to die as your lungs swell up after your food or beverage goes down the wrong pipe

  (Keep in mind when reading this entire piece that we are consistently and substantially understating the risk of other causes of death as compared to terrorism, because we are comparing deaths from various causes within the United States against deaths from terrorism worldwide.)

  Wikipedia notes that obesity is a a contributing factor in 100,000–400,000 deaths in the United States per year. That makes obesity 5,882 to 23,528 times more likely to kill you than a terrorist.

  The annual number of deaths in the U.S. due to avoidable medical errors is as high as 100,000. Indeed, one of the world’s leading medical journals – Lancet – reported in 2011:

  A November, 2010, document from the Office of the Inspector General of the Department of Health and Human Services reported that, when in hospital, one in seven beneficiaries of Medicare (the government-sponsored health-care programme for those aged 65 years and older) have complications from medical errors, which contribute to about 180 000 deaths of patients per year.

  That’s just Medicare beneficiaries, not the entire American public. Scientific American noted in 2009:

  Preventable medical mistakes and infections are responsible for about 200,000 deaths in the U.S. each year, according to an investigation by the Hearst media corporation.

  And a new study in the Journal of Patient Safety says the numbers may be up to 440,000 each year.  But let’s use the lower – 100,000 – figure. That still means that you are 5,882 times more likely to die from medical error than terrorism.

  The CDC says that some 80,000 deaths each year are attributable to excessive alcohol use. So you’re 4,706 times more likely to drink yourself to death than die from terrorism.

  Approximately 38,329 Americans die each year from drug overdoses. That's 2,255 times more than from terrorists.

  Wikipedia notes that there were 32,367 automobile accidents in 2011, which means that you are 1,904 times more likely to die from a car accident than from a terrorist attack. As CNN reporter Fareed Zakaria wrote last year:

  “Since 9/11, foreign-inspired terrorism has claimed about two dozen lives in the United States. (Meanwhile, more than 100,000 have been killed in gun homicides and more than 400,000 in motor-vehicle accidents.) “

  President Obama agreed.

  According to a 2011 CDC report, poisoning from prescription drugs is even more likely to kill you than a car crash. Indeed, the CDC stated in 2011 that – in the majority of states – your prescription meds are more likely to kill you than any other source of injury. So your meds are thousands of times more likely to kill you than Al Qaeda.

  The financial crisis has also caused quite a few early deaths. The Guardian reported in 2008:

  High-income countries such as the UK and US could see a 6.4% surge in deaths from heart disease, while low-income countries could experience a 26% rise in mortality rates.

  Since there were 596,339 deaths from heart disease in the U.S. in 2011 (see CDC table above), that means that there are approximately 38, 165 additional deaths a year from the financial crisis … and Americans are 2,245 times more likely to die from a financial crisis that a terrorist attack.

  Financial crises cause deaths in other ways, as well. For example, the poverty rate has skyrocketed in the U.S. since the 2008 crash. For example, the poverty rate in 2010 was the highest in 17 years, and more Americans numerically were in poverty as of 2011 than for more than 50 years. Poverty causes increased deaths from hunger, inability to pay for heat and shelter, and other causes. (And – as mentioned below – suicides have skyrocketed recently; many connect the increase in suicides to the downturn in the economy.)

  The number of deaths by suicide has also surpassed car crashes. Around 35,000 Americans kill themselves each year (and more American soldiers die by suicide than combat; the number of veterans committing suicide is astronomical and under-reported). So you’re 2,059 times more likely to kill yourself than die at the hand of a terrorist.

  The CDC notes that there were 7,638 deaths from HIV and 45 from syphilis, so you’re 452 times more likely to die from risky sexual behavior than terrorism. (That doesn't include death by autoerotic asphyxiation … discussed below.)

  The National Safety Council reports that more than 6,000 Americans die a year from falls … most of them involve people falling off their roof or ladder trying to clean their gutters, put up Christmas lights and the like. That means that you’re 353 times more likely to fall to your death doing something idiotic than die in a terrorist attack.

  The same number – 6,000 – die annually from texting or talking on the cellphone while driving. So you're 353 times more likely to meet your maker while lol'ing than by terrorism.

  The agency in charge of workplace safety – the U.S. Occupational Safety and Health Administration – reports that 4,609 workers were killed on the job in 2011 within the U.S. homeland. In other words, you are 271 times more likely to die from a workplace accident than terrorism.

  Approximately 4,000 Americans drown each year … 235 times more than from terror attacks.

  The CDC notes that 3,177 people died of “nutritional deficiencies” in 2011, which means you are 187 times more likely to starve to death in American than be killed by terrorism.

  About 2,200 Americans die each year from acute alcohol poisoning (i.e. extreme binge drinking) … 129 times more than from terror attacks.

  Some 2,000 Americans die each year from heat or cold. That's 118 times more than from terrorism.

  Approximately 1,000 Americans die each year from autoerotic asphyxiation. So you're 59 times more likely to kill yourself doing weird, kinky things than at the hands of a terrorist.

  There were an average of 928 Americans killed by police officers in the United States each year in "justifiable homicides". That means that you were more than 55 times more likely to be killed by a law enforcement officer than by a terrorist. That number does not include unjustifiable homicides.

  Some 411 Americans are electrocuted each year … 24 times more than die from terrorism.

  Nearly 400 Americans die each year due to drug allergies from penicillin. More than 200 deaths occur each year due to food allergies. Nearly 100 Americans die due to insect allergies. And 10 deaths each year are due to severe reactions to latex. See this. There are many other types of allergies, but that totals 710 deaths each year from just those four types of allergies alone … making it 42 times more likely that you'll die from an allergic reaction than from a terror attack.

  Some 450 Americans die each year when they fall out of bed, 26 times more than are killed by terrorists.

  Scientific American notes:

  You might have toxoplasmosis, an infection caused by the microscopic parasite Toxoplasma gondii, which the CDC estimates has infected about 22.5 percent of Americans older than 12 years old

  Toxoplasmosis is a brain-parasite. The CDC reports that more than 375 Americans die annually due to toxoplasmosis. In addition, 3 Americans died in 2011 after being exposed to a brain-eating amoeba. So you’re about 22 times more likely to die from a brain-eating zombie parasite than a terrorist.

  Around 34 Americans a year are killed by dog bites … around twice as many as by terrorists.

  The 2011 Report on Terrorism from the National Counter Terrorism Center notes that Americans are just as likely to be “crushed to death by their televisions or furniture each year” as they are to be killed by terrorists.

  Statistics from the Centers for Disease Control show that Americans are 110 times more likely to die from contaminated food than terrorism. And see this.

  The Jewish Daily Forward noted in May that – even including the people killed in the Boston bombing – you are more likely to be killed by a toddler than a terrorist. And see these statistics from CNN.

  Reason notes:

  [The risk of being killed by terrorism] compares annual risk of dying in a car accident of 1 in 19,000; drowning in a bathtub at 1 in 800,000; dying in a building fire at 1 in 99,000; or being struck by lightning at 1 in 5,500,000. In other words, in the last five years you were four times more likely to be struck by lightning than killed by a terrorist.

   

  The National Consortium for the Study of Terrorism and Responses to Terrorism (START) has just published, Background Report: 9/11, Ten Years Later [PDF]. The report notes, excluding the 9/11 atrocities, that fewer than 500 people died in the U.S. from terrorist attacks between 1970 and 2010.

  Scientific American reported in 2011:

  John Mueller, a political scientist at Ohio State University, and Mark Stewart, a civil engineer and authority on risk assessment at University of Newcastle in Australia … contended, “a great deal of money appears to have been misspent and would have been far more productive—saved far more lives—if it had been expended in other ways.”

   

  Mueller and Stewart noted that, in general, government regulators around the world view fatality risks—say, from nuclear power, industrial toxins or commercial aviation—above one person per million per year as “acceptable.” Between 1970 and 2007 Mueller and Stewart asserted in a separate paper published last year in Foreign Affairs that a total of 3,292 Americans (not counting those in war zones) were killed by terrorists resulting in an annual risk of one in 3.5 million. Americans were more likely to die in an accident involving a bathtub (one in 950,000), a home appliance (one in 1.5 million), a deer (one in two million) or on a commercial airliner (one in 2.9 million). [Let's throw a couple more fun facts into the mix … The risk of choking to death on food is 1 in 4,404, and the risk of dying by falling out of furniture (including couches, chairs and beds) is 1 in 4,238. So you're almost a thousand times more likely to die from one of these rare causes of death than terrorism.]

   

  The global mortality rate of death by terrorism is even lower. Worldwide, terrorism killed 13,971 people between 1975 and 2003, an annual rate of one in 12.5 million. Since 9/11 acts of terrorism carried out by Muslim militants outside of war zones have killed about 300 people per year worldwide. This tally includes attacks not only by al Qaeda but also by “imitators, enthusiasts, look-alikes and wannabes,” according to Mueller and Stewart.

   

  Defenders of U.S. counterterrorism efforts might argue that they have kept casualties low by thwarting attacks. But investigations by the FBI and other law enforcement agencies suggest that 9/11 may have been an outlier—an aberration—rather than a harbinger of future attacks. Muslim terrorists are for the most part “short on know-how, prone to make mistakes, poor at planning” and small in number, Mueller and Stewart stated. Although still potentially dangerous, terrorists hardly represent an “existential” threat on a par with those posed by Nazi Germany or the Soviet Union.

   

  In fact, Mueller and Stewart suggested in Homeland Security Affairs, U.S. counterterrorism procedures may indirectly imperil more lives than they preserve: “Increased delays and added costs at U.S. airports due to new security procedures provide incentive for many short-haul passengers to drive to their destination rather than flying, and, since driving is far riskier than air travel, the extra automobile traffic generated has been estimated to result in 500 or more extra road fatalities per year.”

   

  The funds that the U.S. spends on counterterrorism should perhaps be diverted to other more significant perils, such as industrial accidents (one in 53,000), violent crime (one in 22,000), automobile accidents (one in 8,000) and cancer (one in 540). “Overall,” Mueller and Stewart wrote, “vastly more lives could have been saved if counterterrorism funds had instead been spent on combating hazards that present unacceptable risks.” In an e-mail to me, Mueller elaborated:

   

  “The key question, never asked of course, is what would the likelihood be if the added security measures had not been put in place? And, if the chances without the security measures might have been, say, one in 2.5 million per year, were the trillions of dollars in investment (including overseas policing which may have played a major role) worth that gain in security—to move from being unbelievably safe to being unbelievably unbelievably safe? Given that al Qaeda and al Qaeda types have managed to kill some 200 to 400 people throughout the entire world each year outside of war zones since 9/11—including in areas that are far less secure than the U.S.—there is no reason to anticipate that the measures have deterred, foiled or protected against massive casualties in the United States. If the domestic (we leave out overseas) enhanced security measures put into place after 9/11 have saved 100 lives per year in the United States, they would have done so at a cost of $1 billion per saved life. That same money, if invested in a measure that saves lives at a cost of $1 million each—like passive restraints for buses and trucks—would have saved 1,000 times more lives.”

   

  Mueller and Stewart’s analysis is conservative, because it excludes the most lethal and expensive U.S. responses to 9/11. Al Qaeda’s attacks also provoked the U.S. into invading and occupying two countries, at an estimated cost of several trillion dollars. The wars in Afghanistan and Iraq have resulted in the deaths of more than 6,000 Americans so far—more than twice as many as were killed on September 11, 2001—as well as tens of thousands of Iraqis and Afghans.

   

  ***

   

  In 2007 New York City Mayor Michael Bloomberg said that people are more likely to be killed by lightning than terrorism. “You can’t sit there and worry about everything,” Bloomberg exclaimed. "Get a life."

  Indeed, the Senior Research Scientist for the Space Science Institute (Alan W. Harris) estimates that the odds of being killed by a terrorist attack is about the same as being hit by an asteroid (and see this).

  Terrorism pushes our emotional buttons. And politicians and the media tend to blow the risk of terrorism out of proportion. But as the figures above show, terrorism is a very unlikely cause of death.

  Indeed, our spending on anti-terrorism measures is way out of whack … especially because most of the money has been wasted. And see this article, and this 3-minute video by professor Mueller:

  
  

  Indeed, mission creep in the name of countering terrorism actually makes us more vulnerable to actual terrorist attacks. And corrupt government policy is arguably more dangerous than terrorism.

  Indeed, the terrorism deaths Americans have suffered were  unnecessary … and were largely due to corruption in our security agencies. And see this.

  * Note: Subsequent official reports – published in 2012 and 2013 – show that even fewer Americans were killed by terrorists than in the previous year.

  

  
  
  

  

• Saudi Ambassador Warns West On Iran Deal: "All Options On Table…" Including Nukes

  We previously warned of the risks of escalation in The Middle East to something much more dangerous, but, as the Saudi ambassador to UK confirmed today, the risk of Wahhabis going nuclear is even higher than many expected, “…if [Iran will not offer assurances it will not pursue nuclear weapons], then all options will be on the table for Saudi Arabia… Iran’s nuclear program poses a direct threat to the entire region and constitutes a major source and incentive for nuclear proliferation across the Middle East, including Israel.”

   

  Saudi Arabia is ready to acquire nuclear weapons if diplomatic talks aimed at halting Iran’s nuclear ambitions break down, the Saudi ambassador to the UK has said. As RT reports,

  Prince Mohammed bin Nawwaf bin Abdulaziz al-Saud said the oil-rich Gulf kingdom hoped negotiations being led by US President Barack Obama would result in a “watertight” deal with Iran.

   

  However if does not happen, then “all options are on the table,” he said.

   

  …

   

  Prince Mohammad told The Telegraph: “We have always expressed our support for resolving the Iranian nuclear file in a diplomatic way and through negotiation.”

   

  “We commend the American president’s effort in this regard, provided that any deal reached is watertight and is not the kind of deal that offers Iran a license to continue its destabilizing foreign policies in the region. The proof is in the pudding.”

   

  The Saudi ambassador said the kingdom hopes Iran will offer assurances it will not pursue nuclear weapons.

   

  “But if this does not happen, then all options will be on the table for Saudi Arabia.”

   

  “Iran’s nuclear program poses a direct threat to the entire region and constitutes a major source and incentive for nuclear proliferation across the Middle East, including Israel,” he added.

   

  Saudi Arabia is believed to have funded up to 60 percent of Pakistan’s nuclear program, on the condition it could buy warheads at short notice.

  If the Gulf state were to activate the deal, it would see Saudi Arabia become the first nuclear power in the Arab world.

  Finally, if this ‘threat’ were to become true… what would be the Saudi catalyst of the hair-trigger big red button of doom? This perhaps?

  In Major Escalation, Yemen Rebels Fire Scud Missile Into Saudi Arabia

  This won’t end well…

  

  Source: Townhall via Sunday Funnies

  

  

  
  
  

  

• The New World Order – A Faustian Bargain

  Submitted by Jeff Thomas via Doug Casey's International Man blog,

  Faustian bargain: An agreement in which a person abandons his or her spiritual values or moral principles in order to obtain wealth or other benefits. A deal with the devil.

  The argument over the existence of an Elite, who plan to control the entire world under a New World Order like some great yo-yo, has been around for a long time. Not surprisingly, events created by world leaders of all stripes in recent years give rise to an increasing belief in the likelihood of the existence of such an effort.

  There are two great dangers in attempting to describe this perceived secret endeavour, and they are at opposite ends of the spectrum: a) being so naive as to assume that no collusion exists amongst various groups of leaders to further their respective ends, and b) over-simplifying such alliances to suggest that there is an Elite Master Plan that all members implicitly agree upon and follow in every respect.

  Assumption A

  In any country, the citizenry are accustomed to such acts of collusion as all the petrol suppliers raising the price by the same amount, overnight. Few individuals would doubt that the two companies get together well in advance to agree on the price hike.

  The same sort of collusion can be expected between banks and governments, etc. However, most people in any given country seem to believe that the political parties that rule them do not collude in their own collective interest and against the best interests of their respective constituents.

  Similarly, they are unlikely to accept that fascism exists in their country—that members of their favoured party collude with industries. Further, most people seem to disbelieve that the leaders of their own country collude with the leaders of their country’s enemies in such a way that might create loss or danger to their own people. This is naive. Such collusions are the norm rather than the exception.

  Assumption B

  Those who tend to be more informed, readily acknowledge that collusion exists between all of the above, to one degree or another. If this group errs, it is often in the opposite assumption—that the collusion is all-encompassing.

  There can be no doubt that a New World Order is being sought by some—this has been made clear for at least a hundred years by many who regard themselves as an Elite. It is therefore an open secret. As stated by David Rockefeller in his memoirs:

  Some even believe we are a part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure—one world, if you will. If that’s the charge, I stand guilty and I am proud of it.

  But the error that is most common amongst those who oppose a New World Order is the extent to which they believe the collusion exists. Many believe the collusion is total. That is, a Master Plan exists amongst the world’s leaders (the heads of the central banks, the Bilderberg Group, the leaders of the most powerful nations—or the whole gang of them—take your pick) that all members agree upon in detail and in full.

  Still, when any New World Order opponent rails against the latest perceived move by the Elite, if asked the question, “Do you really think that these people are so unified that several hundred of them get together every week around a conference table to decide who to victimise this week?,” most will say that, no, they may act in concert, but not in so total a fashion.

  Option C

  So, is there a third perception as regards those in high positions who collude on a large scale? In my opinion there is.

  In my experience in dealing with political leaders (and political hopefuls) from several jurisdictions, I’ve found there to be a consistent sociopathology (by definition, the desire for dominance over others, undeserved self-confidence, lack of empathy, a sense of entitlement, lack of conscience, etc.). Whether they are British members of Parliament or US members of Congress, they tend to display the same sociopathic traits.

  Sociopaths are drawn to political leadership for obvious reasons. First, they’re prone to collusion, as they recognise that it may further their interests (agreements with a small group of individuals that would allow for dominance over another, larger group of individuals). And this, of course, fits well into Assumption B.

  Trouble is, the same sociopathology would drive the same individuals to seek to dominate each other. Yes, they would enter into agreements with one another, but even as they are making them, they would be planning to deviate from them.

  Any agreement regarding increased power for all members, defining what seat each would have at the table, may be agreed, but immediately after, each would begin jockeying for a better seat. Further, whatever agenda is agreed upon, each would already have a secondary agenda for his own betterment even as the agreement is being forged.

  Any attempt at a New World Order, if it were to succeed in creating unified dominance, would never reach full fruition, as so many disparate individuals would be plotting for a bigger piece of the pie from the outset.

  As regards the desire to follow a Grand Plan, we are not describing the meek Kool-Aid drinkers of Jonestown, Guyana, whose willingness to follow a Master Plan was unquestioningly due to their extremely low self-esteem. We are describing those with the opposite mental makeup—those who are compulsive in their desire for dominance of others (first their minions, then their partners).

  Further, each would promote his own sphere of power. A banker would seek to have the group’s means of control be economically based; a general would seek to have the means of control be militarily based; etc.

  Dissent Among the Ranks

  The push-and-pull of sociopathic leaders is unending. Their very makeup dictates that each one individually will always be vying for more. In order to achieve that, they will form subversive subgroups that will agree on a separate direction from what has been agreed by the primary group, and along the way, each one, in his lack of conscience and loyalty, might betray both the primary group and the subgroup.

  In the end, there’s no question that there are those who consider themselves to be part of a New World Order, as so many have publicly stated so themselves, for generations. Also, there can be little doubt that each member expects to come out of the deal as a ruler, not as one of the ruled. Further, the effort is ongoing and growing, and will result in great damage for the average person who, in most cases, simply wishes to be left alone to run his own life.

  It has been postulated by many that those who see themselves as an Elite are nearing the completion of what they perceive as world dominance. However, should they succeed, they will betray their partners the very next day, as it’s their nature to do so. Their behaviour would likely be that of a group of cats with their tails tied together.

  So, what might we take away from this discussion? First, that there most assuredly are extremely domineering forces (regardless of how closely associated they might be), which, in the near future, will do immense damage to the cause of freedom in the world, particularly in those countries where they are most dominant, or will become most dominant. Second, the situation does appear to be reaching a head.

  The two greatest uncertainties will be how much damage will be done before the dust has settled, and how protracted the period of destruction and struggle for dominance might be.

  Ultimately, for the reasons stated above, I don’t believe the New World Order concept can fully prevail, but it can and will do damage of unprecedented proportions in the attempt to implement it. Those involved will not be swayed from their individual or collective objectives (consider Adolf Hitler or Josef Stalin).

  The best that can be done is to work at placing ourselves as far outside of their sphere of influence as possible.

  

  

  
  
  

  

• When It Rains It Pours: Shares Of Chinese Umbrella Manufacturer Rise 2,700%

  As mentioned previously, China’s world-beating equity rally is the gift that keeps on giving, and not just for those who are riding the inexorable, margin-fueled rally. The mania also provides quite a bit of comic relief for those of us who are, on a daily basis, inundated with hundreds of depressingly absurd Greek soundbites and hoplessly clueless central banker ruminations.

  Valuations have skyrocketed in China, with the median PE on the Shenzhen sitting at a cool 108X, which looks impressive until you consider that the ChiNext trades at 133X. The siren song is in fact so alluring that some US-listed Chinese tech firms are repatriating because they feel they aren’t getting the valuations they ‘deserve.’

  “American investors don’t understand the business model,” one Chinese tech executive recently told Reuters.

  One business model that’s easy to understand is that of Hong Kong-listed Jicheng Umbrella Holdings Limited. As you might have guessed from the name, the company designs, researches, manufactures and sells plastic umbrellas. That’s really all you need to know to appreciate the following chart which shows that shares have risen some 2,700% since February 13 (also note the annualized figure)… 

  

  *  *  *

  What bubble?  

  

  

  
  
  

  

• Major Medical Journal Retracts Numerous Scientific Papers After Fake Peer-Review Scandal

  A major publisher of scholarly medical and science articles has retracted 43 papers because of “fabricated” peer reviews amid signs of a broader fake peer review racket affecting many more publications. As The Washington Post reports, BioMed Central – a well-known publication of peer-reviewed journals – shows a partial list of the retracted articles suggests most of them were written by scholars at universities in China. The Committee on Publication Ethics stated, it "has become aware of systematic, inappropriate attempts to manipulate the peer review processes of several journals… that need to be retracted."

  Peer review is the vetting process designed to guarantee the integrity of scholarly articles by having experts read them and approve or disapprove them for publication. With researchers increasingly desperate for recognition, citations and professional advancement, the whole peer-review system has come under scrutiny in recent years for a host of flaws and irregularities, ranging from lackadaisical reviewing to cronyism to outright fraud.
  
  And as The Washington Post reports,  BioMed Central, based in the United Kingdom, which puts out 277 peer-reviewed journals of scholarly medical and science articles has retracted 43 papers because of “fabricated” peer reviews amid signs of a broader fake peer review racket affecting many more publications…

  A partial list of the retracted articles suggests most of them were written by scholars at universities in China. But Jigisha Patel, associate editorial director for research integrity at BioMed Central, said it’s not “a China problem. We get a lot of robust research of China. We see this as a broader problem of how scientists are judged.”

  Meanwhile, the Committee on Publication Ethics, a multidisciplinary group that includes more than 9,000 journal editors, issued a statement suggesting a much broader potential problem.

  The committee, it said, “has become aware of systematic, inappropriate attempts to manipulate the peer review processes of several journals across different publishers.” Those journals are now reviewing manuscripts to determine how many may need to be retracted, it said.

  Ivan Oransky and Adam Marcus, the co-editors of Retraction Watch, a blog that tracks research integrity and first reported the BioMed Central retractions, have counted a total of 170 retractions in the past few years across several journals because of fake peer reviews.

  “The problem of fake peer reviewers is affecting the whole of academic journal publishing and we are among the ranks of publishers hit by this type of fraud,” Patel of BioMed’s ethics group wrote in November.

   

  “The spectrum of ‘fakery’ has ranged from authors suggesting their friends who agree in advance to provide a positive review, to elaborate peer review circles where a group of authors agree to peer review each others’ manuscripts, to impersonating real people, and to generating completely fictitious characters. From what we have discovered amongst our journals, it appears to have reached a higher level of sophistication. The pattern we have found, where there is no apparent connection between the authors but similarities between the suggested reviewers, suggests that a third party could be behind this sophisticated fraud.”

   

  In a blog post yesterday, Elizabeth Moylan, BioMed Central’s senior editor for research integrity, said an investigation begun last year revealed a scheme to “deceive” journal editors by suggesting “fabricated” reviewers for submitted articles. She wrote that some of the “manipulations” appeared to have been conducted by agencies that offer language-editing and submission assistance to non-English speaking authors.

  Perhaps most astonishing was the fact that…

  Ultimately, when they tracked down some of the scientists in whose names reviews were written, they found that they hadn’t written them at all. Someone else had, using the scientists’ names.

  But that Chinese Micro-cap Biotech stock is definitely still worth buying… even after rising 3000% YTD.

  

  

  
  
  

  

• China's Deficient Deflator Math Is One More Reason To Distrust Data

  It’s no secret that Beijing’s ‘official’ GDP prints likely overstate the pace at which China’s economy is growing. In fact, the numbers may be grossly exaggerated, as some analysts say the real rate of expansion is somewhere on the order of 4% (as opposed to 7%). 

  We’ve noted on any number of occasions that multiple key indicators — such as rail freight volume, industrial production, electricity consumption, etc. — suggest the dreaded “hard landing” is in fact here, and if Beijing fails to figure out how to balance a sharp decrease in shadow financing with the need to boost credit creation (i.e., if China can’t navigate the impossible task of deleveraging and re-leveraging simultaneously), things could get materially worse before they get better for an economy that’s attempting to mark a very difficult transition from investment-led growth to a consumption-driven model. For more on transparency and why the real rate of growth in China’s economy is “anybody’s guess”, see “Guessing Game: China’s ‘Real’ GDP Growth Could Be As Low As 3.8%.”

  Beyond intentional misrepresentations however, China’s GDP data may suffer from a calculation error that at least one firm claims is endemic across emerging markets thanks to data collection limitations.

  FT has more:

  The issue centres on the so-called “GDP deflator”, the inflation measure used to convert estimates of nominal GDP into real, inflation-adjusted terms.

   

  The deflator is a broader measure than indicators such as consumer or producer price inflation and is therefore often considered a more useful gauge of overall price pressures in an economy. It is the preferred inflation measure of the US Federal Reserve.

   

  Since GDP is a measure of domestic output, arguably this deflator should only reflect the prices of domestically produced goods and services.

   

  In practice, this means netting out the price of imports in the calculation of the GDP deflator, a routine practice in countries with “robust statistical systems”, as Chang Liu, China economist at Capital Economics, puts it.

   

  For much of the time, a failure to do this might not matter too much. However, at times when import price inflation varies markedly from domestic inflation, such as when global commodity prices are rising or falling rapidly, it matters more..

   

  Because China does not net off shifts in import prices when calculating the deflator for most sectors of its economy, its deflator tracks producer price inflation much more closely.

   

  As a result, Mr Liu says: “China’s GDP deflator is not an accurate measure of changes in domestic output prices. It exaggerates inflation when import prices are rising, and understates it when import prices fall”.

   

  In the first quarter of the year, China’s deflator turned negative for the second time since 2000, coming in at -1.1 per cent. In comparison, consumer price inflation was +1.2 per cent. This means its inflation gap has jumped to 2.3 percentage points, even as it has fallen sharply in the likes of the US, as the chart shows.

   

  If the deflator is, as a result, understated, then real GDP growth is overstated by the same amount.

   

  “A reasonable guess might be that true inflation was 1-2 percentage points higher than the deflator shows. In that case, real GDP growth in Q1 would have been 5-6 per cent [rather than 7 per cent],” said Mr Liu, who added that the lower rate was closer to Capital Economics’ own estimate, based on activity data, of 4.9 per cent.

  In other words, when commodity prices are falling, China (and other EMs) may be routinely overstating GDP growth.  As a reminder, here are some estimates for ‘actual’ (i.e. not emanating from Beijing) Chinese economic output:

   

  While Capital Economics is careful to suggest that this statistical ‘error’ is baked into estimates like the ones shown above, one is certainly left to wonder whether the understated deflator should be simply one more factor to consider on the way to estimating what the real growth rate in China actually looks like.

  In other words, considering the above, it could well be that GDP growth in China is closer to flatlining than anyone cares to admit.

  

  

  
  
  

  

• Land Of The Debt Serf: How "Auto Title Loan" Companies Ruthlessly Prey On America's Growing Underclass

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Short-term lenders, seeking a detour around newly toughened restrictions on payday and other small loans, are pushing Americans to borrow more money than they often need by using their debt-free autos as collateral.

   

  Their hefty principal and high interest rates are creating another avenue that traps unwary consumers in a cycle of debt. For about 1 out of 9 borrowers, the loan ends with their vehicles being repossessed…

   

  But Jordan said it wouldn’t make a loan that small. Instead, it would lend her $2,600 at what she later would learn was the equivalent of 153% annual interest — as long as she put up her 2005 Buick Rendezvous sport utility vehicle as collateral.

   

  State law limits payday loans to $300, minus a maximum fee of $45. California also caps interest rates on consumer loans of less than $2,500 on a sliding scale that averages about 30%. Consumer loans above $2,500 have no interest rate limit.

   

  For that reason, essentially all auto title loans in the state are above that level, according to the state’s business oversight department.

   

  – From the excellent LA Times article: More Auto Title Lenders are Snagging Unwary Borrowers in Cycle of Debt

  Last week, I published an article highlighting how the use of “alternative financial services” has continued to increase despite the so-called economic “recovery.” These services include payday loans, refund-anticipation loans, pawnshops, rent-to-own services, and the little known, but recently surging, category called auto title loans. Here’s an excerpt from that post, titled Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery”:

  Families’ savings not where they should be: That’s one part of the problem. But Mills sees something else in the recovery that’s more disturbing. The number of households tapping alternative financial services are on the rise, meaning that Americans are turning to non-bank lenders for credit: payday loans, refund-anticipation loans, pawnshops, and rent-to-own services.

   

  According to the Urban Institute report, the number of households that used alternative credit products increased 7 percent between 2011 and 2013. And the kind of household seeking alternative financing is changing, too.

   

  It’s not the case that every one of these middle- and upper-class households turned to pawnshops and payday lenders because they got whomped by an unexpected bill from a mechanic or a dentist. “People who are in these [non-bank] situations are not using these forms of credit to simply overcome an emergency, but are using them for basic living experiences,” Mills says.

  In that article, the category of auto title loans was just a minor blip on the radar, but it seems poised to take a growing share of the legalized American loanshark market.

  

  Yesterday, the LA Times published an excellent article on the topic of auto title loans describing what they are, and how they are being used to prey on America’s growing underclass of debt serfs. We learn that:

  Cash-strapped consumers are being shown a new place to find money: their driveways.

   

  Short-term lenders, seeking a detour around newly toughened restrictions on payday and other small loans, are pushing Americans to borrow more money than they often need by using their debt-free autos as collateral.

   

  So-called auto title loans — the motor vehicle version of a home equity loan — are growing rapidly in California and 24 other states where lax regulations have allowed them to flourish in recent years.

  Think about how troubling this is for a second. In the run-up to the last crisis, Americans borrowed on their home equity and used the proceeds to remodel kitchens, etc. Now these same Americans are so completely broke, the only asset they can borrow against is their cars, and they are desperately using the money to purchase groceries, pay cable bills, etc. Thank you Ben.

  

  Even worse, more than 10% of these debt serfs end up losing their cars. What will they end up borrowing against after the next crisis, their organs?

  Their hefty principal and high interest rates are creating another avenue that traps unwary consumers in a cycle of debt. For about 1 out of 9 borrowers, the loan ends with their vehicles being repossessed.

   

  “I look at title lending as legalized car thievery,” said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento advocacy group. “What they want to do is get you into a loan where you just keep paying, paying, paying, and at the end of the day, they take your car.”

   

  Jordan, 58, said she needed about $400 to help her pay bills for cable TV and other expenses that had been piling up after her mother died.

   

  She turned to one of a proliferating number of storefront title lenders, Allied Cash Advance, which promises to help “get the cash you need now.”

   

  But Jordan said it wouldn’t make a loan that small. Instead, it would lend her $2,600 at what she later would learn was the equivalent of 153% annual interest — as long as she put up her 2005 Buick Rendezvous sport utility vehicle as collateral.

  Nice to see how the 0% interest rate Ben Bernanke and his fellow criminals at the Federal Reserve instituted is trickling down so generously to average Americans.

  Why would the company want to lend her much more money than she needed? The key reason is that California has no limit on interest rates for consumer loans of more than $2,500, and it otherwise doesn’t regulate auto title loans.

   

  Six months later, unable to keep up with the loan payments, Jordan said, she was awakened at 5 a.m.

   

  “My neighbor came pounding on my door and said, ‘They’re taking your car!'” she recalled.

   

  In California, the number of auto title loans jumped to 91,505 in 2013, the latest data available, from 64,585 in the previous year and 38,148 in the first year, 2011, that was tracked by the state Department of Business Oversight.

   

  The study, one of the first comprehensive looks at the issue, found that the average loan was for $1,000 and a typical borrower paid $1,200 in fees a year on top of the principal.

   

  Loan sizes and fees vary by state, but the most common annual percentage rate on a one-month loan was 300%, according to Pew, which surveyed borrowers and analyzed regulatory data and company filings.

   

  “Your auto is in many cases one of your only assets. Be careful signing away the ownership of that car for some short-term cash,” said Jan Lynn Owen, the state’s commissioner of business oversight.

   

  The terms of auto title loans vary widely by state. But they all center on using the vehicle’s title, also known as the pink slip, as collateral. The borrower usually must have full ownership of the vehicle, and its value must be well above the amount of the loan.

   

  Because the loan is secured by the vehicle, lenders often don’t consider a consumer’s income or ability to repay. If the borrower falls behind, the car will be repossessed and sold to pay off the loan.

   

  State law limits payday loans to $300, minus a maximum fee of $45. California also caps interest rates on consumer loans of less than $2,500 on a sliding scale that averages about 30%. Consumer loans above $2,500 have no interest rate limit.

   

  For that reason, essentially all auto title loans in the state are above that level, according to the state’s business oversight department. Most range from $2,500 to $5,000. Of those, about 45% carried annual percentage rates of at least 100%, according to state data for 2013.

  How can this practice be seen as anything other than predatory?

  Meanwhile, the Fed continues to holds interest rates for financial oligarchs at 0%, patting itself on the back as America’s underclass grows and the oligarchy consolidates all wealth and power. Bernanke and his colleagues at the Federal Reserve have committed ongoing crimes against humanity, and nobody with any ability to stop it seems to care.

  *  *  *

  For related articles, see:

  The Road to Serfdom

  Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery”

  Just Another Tale from the Oligarch Recovery – $100 Million Homes Being Built on Spec

  Pennsylvania Looks to Legalize Payday Loans by Calling Them “Mirco-Loans”

  TBTF Banks Enter Payday Loan Business with 500% Interest Rates

  Portrait of the American Oligarchy – The Very Troubling Income and Wealth Trends Since 1989

   

  

  

  
  
  

  

• "One Belt, One Road" May Be China's 'One Chance' To Save Collapsing Economy

  In April, Chinese President Xi Jinping marked a historic visit to neighboring Pakistan. China, via Beijing’s “One Belt, One Road” initiative, will invest some $50 billion in Pakistani infrastructure, including power plants, roads, railways, and, perhaps most importantly, the Iran-Pakistan natural gas pipeline. The vast sum represents 53% more than the US has given Islamabad over the past 13 years combined. China is also set to invest an equally large sum in Brazil and is even considering the construction a railroad over the Andes, which would connect Brazil to China via the Pacific and ports in Peru. 

  On Sunday, Hungary became the first European country to sign a Silk Road MOU. Reuters has more:

  Hungary has become the first European country to sign a cooperation agreement for China’s new “Silk Road” initiative to develop trade and transport infrastructure across Asia and beyond, China’s foreign ministry said late on Saturday.

   

  China welcomes more European countries to look East, and strengthen cooperation with China and other Asian countries, and participate in the “One Belt, One Road” in various ways, said Wang Yi, China’s foreign minister, according to a separate statement on the website.

   

  Hungary hopes to closely cooperate with China and push on with the Hungarian-Serbia railway and other major construction projects, Hungary’s President Janos Ader was quoted as saying by the Chinese foreign ministry.

   

  China is helping fund and build a railway connecting Hungary and Serbia.

   

  Projects under the plan include a network of railways, highways, oil and gas pipelines, power grids, Internet networks, maritime and other infrastructure links across Central, West and South Asia to as far as Greece, Russia and Oman, increasing China’s connections to Europe and Africa.

  Although highly publicized, “One Belt, One Road” isn’t well understood (which partly reflects the sheer size and scope of the initiative). The program has been cast, by some, as a Chinese Marshall Plan, an interesting characterization, given that we’ve cast the AIIB as an implicit attempt by Beijing to institute a kind of Sino-Monroe Doctrine.As an aside, this also demonstrates an overwhelming tendency (and we may be guilty here as well), to view the world through glasses tinted by the unipolarity that has dominated global politics for more than six decades. Or perhaps it’s a reflection of the fact that China is indeed a rising hegemon, and as such its policies and programs resemble those of the US at critical historical moments when Washington seized opportunities to expand American influence. 

  Here, to cast some light on “The Yi Dai Yi Lu”, is Barclays:

  *  *  *

  Not just a Marshall Plan – bigger, more comprehensive and more inclusive

  The Yi Dai Yi Lu (YDYL) initiative has been labelled a “Chinese Marshall plan” in some global commentary. There are some similarities between China’s new initiative and the post World War II US-driven European Recovery Program (popularly known as the Marshall Plan after US Secretary of State George Marshall).

  • The emphasis on infrastructure and heavy industry as a mode to kick-start growth or recovery.
  • The Marshall Plan amount of US$13bn (c.US$120bn in current dollar value) is in the same order of magnitude as the initial US$40bn envisaged for the New Silk Road Fund.
  • The establishment of the Asian Infrastructure Investment Bank (AIIB) could be perceived to be analogous to the formation of the IMF and the World Bank to aid the structural transformation of economies.
  • The perception (in some quarters) of potential for Chinese hegemony in the YDYL countries.

  However, there are some obvious differences as well.

  • The world is not recovering from the aftermath of a world war. In fact, most of the countries that are potential YDYL project recipients could do just fine without the project impetus (though growth rates arguably would be lower).
  • The YDYL initiative is open to all countries, regardless of their political or economic regime.

  We note that the Chinese government has expressed its displeasure at the Marshall Plan moniker. A government spokesman said in early March 2015 “It is inappropriate to simply describe the Belt and Road initiatives as another Marshall Plan. These initiatives seek common development of countries with different ethnicities, religions and cultures, focusing on wide consultation, joint contribution and shared benefits.”

  More than just a political slogan – this concept has potential, in our view

  
  

  We expect companies in China from SOEs to private enterprises to embrace the YDYL initiative, indentifying the value it could bring to their businesses, rather than simply paying lip service to the leadership’s latest pronouncements. We believe YDYL has captured the imagination of the market. During the FY14 results season, around 70% of the companies in our Chinese metals & mining coverage universe – including both SOEs (eg, Shenhua, Chalco, Jiangxi Copper) and private companies (eg, Hongqiao) – had YDYL formulated in their strategy and plans in some form or other.

  Not just about big projects – infrastructure building is just the start

  
  

  We believe it would not be overstating the case to say that China’s economic power to date has not been reflected in its influence on the world. China’s economic power has not translated into “soft power” being projected into the outside world.

  We see three phases of the YDYL initiative beginning to mould China’s influence overseas over the course of a few decades:

  • (Predominantly) China-funded infrastructure using plenty of Chinese-made materials and machinery, ‘adopted’ technology and Chinese construction companies (with a high contribution of Chinese workforce as well – at least in the initial stages).
  • Increasing awareness and demand for Chinese brands, consumer products and cultural products as a result of increased interaction between the countries that receive YDYL investment increases and China (in short, China becoming “cool”). Chinese consumer goods companies could capitalize on the international growth phase – very similar to Coca Cola and Disney as they became US exports in prior decades.
  • Full integration of China with the global economy as global influences (not just from the economically successful countries) seep back into China. Creation of international companies out of China that are truly transnational in character (eg, the likes of Unilever), rather than those that are just “China-plus”.

  Our China Economist, Jian Chang, also believes that development along the New Silk Road could contribute to sustainability of China’s growth at 5-7% in the coming years and have a positive impact on China’s industrial upgrading and economic transformation.

  *  *  *

  As you can see, One Belt, One Road has far-reaching implications for China. For Chinese state-owned companies, return on investment is falling (diminishing returns in the face of overcapacity) and now sits just above 4%. Investments in US Treasurys yield even less.

   

  

  On the other hand, Barclays estimates ROIC on YDYL projects to be between 10-15%, an obvious improvement over both domestic investment and money parked in US safe haven assets.

   

  Meanwhile, embarking on large infrastructure projects with YDYL recipients can also help alleviate one of China’s pressing problems. The transition away from investment-led growth to a consumer-driven economy and a dearth of global demand have combined to leave China’s industrial sector in a state of perpetual overcapacity.

  

  

   

  YDYL countries offer a potential outlet (a pressure valve, if you will) as there is a pressing need for FAI in the form of roads, railways, and power generation. While infrastructure development in these countries has the potential to provide a short-term economic boost for China, an expanded Chinese presence could also yield medium- and long-term benefits. Here’s how Barclays sums things up:

  China could benefit in the short, medium and long term from achieving various levels of the targets outlined in YDYL. Many sectors could benefit from increased revenue, while non- monetary benefits such as goodwill and political clout could arise if China successfully helps developing countries improve their economies.

  • Short term: Ease industrial overcapacity, create demand for Chinese capital and consumer goods. Help reduce the economic disparity between inland and coastal China as YDYL land-based projects are focused on central and western China.
  • In the medium term: Raise demand for Chinese capital goods and Chinese products in general, effectively helping China transition to a consumption-driven economy. Maintain export growth.
  • Medium to long term: Internationalization of China’s currency as some loans to YDYL countries will include RMB in the basket of currencies used to denominate and settle loans, versus using US dollars.
  • Long term: Promote travel, cultural exchange and long-term cooperation in geopolitical, military and trade areas. Improve general image of China on the world stage. Increase returns for the portion of China’s reserves contributed to the development funds and diversify risks. Potentially ease tension between countries over territorial disputes.

  In sum, China benefits economically from YDYL in three important ways. First, investing in countries where FAI is needed to improve infrastructure not only helps China’s SOE’s achieve a higher ROIC than they could get domestically, but also helps to alleviate China’s industrial overcapacity. Second, establishing a Chinese presence in emerging, rapidly-growing economies will boost demand for Chinese products, which will aid the country in its transition to a consumption-driven economic model. Third (and we’ve mentioned this on a number of occasions in the past), using the yuan to settle AIIB loans will help establish the renminbi and decrease dependence on the US dollar on the way to ushering in a new era characterized by yuan hegemony.

  *  *  *

  Bonus: More from Barclays on the extent to which YDYL will relieve China’s industrial overcapacity problem and a bit on the differences between the Silk Road Fund and the AIIB.

  YDYL demand should help China export overcapacity

  We estimate that YDYL projects would absorb some of the overcapacity in Chinese industries such as cement, steel and aluminium, even under conservative assumptions. If we envisage a scenario assuming that roads, railway, power generation and power distribution assets grow by 5% from their existing asset base among YDYL countries, this could create 137mt of steel demand based on the existing asset base. This represents around 14% of China’s total steel production capacity as of 2014. Such a boost to demand could effectively give back steel producers in China pricing power, as the industry would go from 22% oversupplied to 8%, based on our estimates.

  

  

  Asian Infrastructure Investment Bank (AIIB)

  The AIIB was proposed by President Xi in his speech at the Indonesian Parliament on 3 October 2013. It was proposed to finance infrastructure construction and promote regional interconnectivity and economic integration. Application to be a founding member of AIIB ended on 31 March 2015 and 57 countries have been approved to be founding members. China has stated that it will not seek to be the single majority shareholder and is aiming to dilute its 50% of capital as other countries join and contribute their own capital. The bank is expected to be set up at the end of 2015.

  Silk Road Infrastructure Fund

  The US$40bn Silk Road Infrastructure Fund is to provide funding to carry out infrastructure, resources, industrial cooperation, financial cooperation and other projects related to YDYL. The company that manages the fund, The Silk Road Fund Co. Ltd, is backed by China’s foreign exchange reserves, China Investment Corp, Export-Import Bank of China, and China Development Bank. The fund started operation in February 2015 with US$10bn in capital, which was 65% contributed by China’s SAFE, which manages China’s Foreign Reserve. The fund is chaired by Jin Qi, the assistant governor of PBOC.

  Jin Qi, the chief executive of the Silk Road Fund, said in March 2015 that the fund will invest in projects with reasonable mid- and long-term returns, and it is not an aid agency that does not consider returns. She added that the Silk Road Fund will not be the sole financer of projects; rather it will seek to cooperate with other financial institutions when investing in projects in the future.

  

  

  

  
  
  

  

• Ex-US Intelligence Officials Confirm: Secret Pentagon Report Proves US Complicity In Creation Of ISIS

  Two weeks ago, courtesy of the investigative work of Nafeez Ahmed whose deep dig through a recently declassified and formertly Pentagon documents released earlier by Judicial Watch FOIA, we learned that Western governments deliberately allied with al-Qaeda and other Islamist extremist groups to topple Syrian dictator Bashir al-Assad. In his words: “According to the newly declassified US document, the Pentagon foresaw the likely rise of the ‘Islamic State’ as a direct consequence of the strategy, but described this outcome as a strategic opportunity to “isolate the Syrian regime.”

  Now, in a follow up piece to his stunning original investigative report titled “Secret Pentagon report reveals West saw ISIS as strategic asset Anti-ISIS coalition knowingly sponsored violent extremists to ‘isolate’ Assad, rollback ‘Shia expansion“, Nafeez Ahmed reveals that according to leading American and British intelligence experts, the previously declassified Pentagon report confirms that the West accelerated support to extremist rebels in Syria, despite knowing full well the strategy would pave the way for the emergence of the ‘Islamic State’ (ISIS).

  The experts who have spoken out include renowned government whistleblowers such as the Pentagon’s Daniel Ellsberg, the NSA’s Thomas Drake, and the FBI’s Coleen Rowley, among others.

  Their remarks demonstrate the fraudulent nature of claims by two other former officials, the CIA’s Michael Morell and the NSA’s John Schindler, both of whom attempt to absolve the Obama administration of responsibility for the policy failures exposed by the DIA documents. 

  This is Nafeez Ahmed’s follow up story, originally posted in Medium

  Ex-intel officials: Pentagon report proves US complicity in ISIS

  Renowned government whistleblowers weigh in on debate over controversial declassified documen

  Foreseeing ISIS

  As I reported on May 22nd, the US Defense Intelligence Agency (DIA) document obtained by Judicial Watch under Freedom of Information confirms that the US intelligence community foresaw the rise of ISIS three years ago, as a direct consequence of the support to extremist rebels in Syria.

  The August 2012 ‘Information Intelligence Report’ (IIR) reveals that the overwhelming core of the Syrian insurgency at that time was dominated by a range of Islamist militant groups, including al-Qaeda in Iraq (AQI). It warned that the “supporting powers” to the insurgency?—?identified in the document as the West, Gulf states, and Turkey —?wanted to see the emergence of a “Salafist Principality” in eastern Syria to “isolate” the Assad regime.

  The document also provided an extraordinarily prescient prediction that such an Islamist quasi-statelet, backed by the region’s Sunni states, would amplify the risk of the declaration of an “Islamic State” across Iraq and Syria. The DIA report even anticipated the fall of Mosul and Ramadi.

  Divide and rule

  Last week, legendary whistleblower Daniel Ellsberg, the former career Pentagon officer and US military analyst who leaked Pentagon papers exposing White House lies about the Vietnam War, described my Insurge report on the DIA document as “a very important story.”

  

  In an extensive podcast interview, he said that the DIA document provided compelling evidence that the West’s Syria strategy created ISIS. The DIA, he said, “in 2012, was asserting that Western powers were supporting extremist Islamic groups in Syria that were opposing Assad…

  “They were not only as they claimed supporting moderate groups, who were losing members to the more extremist groups, but that they were directly supporting the extremist groups. And they were predicting that this support would result in an Islamic State organization, an ISIS or ISIL… They were encouraging it, regarding it as a positive development, because it was anti-Assad, Assad being supported by Russia, but also interestingly China… and Iran… So we have China, Russia and Iran backing Assad, and the US, starting out saying Assad must go… What he [Nafeez Ahmed] is talking about, the DIA report, is extremely significant. It fits into a general framework that I’m aware of, and sounds plausible to me.”

  Ellsberg also noted that “it’s pretty well known” in the intelligence community that Saudi Arabia sponsors Islamist terrorists to this day:

  “It’s kind of a deal that the Saudis will support various Islamic extremists, all around the world, and the deal is that they [extremists] will not try to overthrow the corrupt, alcohol-drinking clique in Saudi Arabia.”

  Ellsberg, who was a former senior analyst at RAND Corp, also agreed with the relevance of a 2008 US Army-commissioned RAND report, quoted in my Insurge story, and also examined in-depth for Middle East Eye.

  The US Army-funded RAND report advocated a range of policy scenarios for the Middle East, including a “divide and rule” strategy to play off Sunni and Shi’a factions against each other, which Ellsberg describes as “standard imperial policy” for the US.

  The RAND report even confirmed (p. 113) that its “divide and rule” strategy was already being executed in Iraq at the time:

  “Today in Iraq such a strategy is being used a tactical level, as the United States now forms temporary alliances with nationalist insurgent groups that it had been fighting for four years… providing carrots in the form of weapons and cash. In the past, these nationalists have cooperated with al-Qaeda against US forces.”

  The confirmed activation of this divide-and-rule strategy perhaps explains why the self-defeating US approach in Syria is fanning the flames of both sides: simultaneously allying with states like Turkey who have continued to covertly sponsor ISIS, while working with Assad through the Russians to fight ISIS. Ellsberg added:

  “As Assad is the main opponent of ISIS, we are covertly coordinating our airstrikes against ISIS with Assad. So are we against Assad, or not? It’s ambivalent… I think that Obama and everybody around him is clear that they do not any longer as they’ve been saying want Assad to leave power. I don’t believe that that is their intention anymore, as they believe anyone who succeeds Assad would be far worse.”

  If true, Ellsberg’s analysis exposes the deep-rooted hypocrisy of the previous campaign against Assad, the current campaign against ISIS, and why both appear destined for failure.

  Frankenstein script

  Coleen Rowley, retired FBI Special Agent described my report on the DIA document as “excellent.”

  

  Rowley, who was selected as TIME ‘Person of the Year’ in 2002 after revealing how pre-9/11 intelligence was ignored by superiors at the FBI, said of the document:

  “It’s like the mad power-hungry doctor who created Frankenstein, only to have his monster turn against him. It’s hard to feel sorry when the insane doctor gets his due. But in our case, that script is constantly repeating. The quest for ‘full spectrum dominance’ and blindness of exceptionalism seems to mean we are doomed to keep repeating the ‘Charlie Wilson’s Frankenstein War’ script… The various neocon warmongers and military industrial complex, most of them inept Peter Principles, just don’t care.”

  Also commenting on the declassified Pentagon report, former NSA senior executive Thomas Drake?—?the whistleblower who inspired Edward Snowden?—?condemned “the West’s role in ISIS and threat of ‘violent extremists’, justifying surveillance and libercide at home.”

  

  Wedge strategy

  Alastair Crooke, a former senior MI6 officer who spent three decades at the agency, said yesterday that the DIA document provides clear corroboration that the US was covertly pursuing a strategy to drive an extremist Salafi “wedge” between Iran and its Arab allies.

  

  The strategy was, Crooke confirms, standard thinking in the Western intelligence establishment for about a decade.

  “The idea of breaking up the large Arab states into ethnic or sectarian enclaves is an old Ben Gurion ‘canard,’ and splitting Iraq along sectarian lines has been Vice President Biden’s recipe since the Iraq war,” wrote Crooke, who had coordinated British assistance to the Afghan mujahideen in the 1980s. After his long MI6 stint, he became Middle East advisor to the European Union’s foreign policy chief (1997–2003).

  “But the idea of driving a Sunni ‘wedge’ into the landline linking Iran to Syria and to Hezbollah in Lebanon became established Western group think in the wake of the 2006 war, in which Israel failed to de-fang Hezbollah,” continued Crooke. “The response to 2006, it seemed to Western powers, was to cut off Hezbollah from its sources of weapons supply from Iran…

  “… In short, the DIA assessment indicates that the ‘wedge’ concept was being given new life by the desire to pressure Assad in the wake of the 2011 insurgency launched against the Syrian state. ‘Supporting powers’ effectively wanted to inject hydraulic fracturing fluid into eastern Syria (radical Salafists) in order to fracture the bridge between Iran and its Arab allies, even at the cost of this ‘fracking’ opening fissures right down inside Iraq to Ramadi. (Intelligence assessments purpose is to provide ‘a view’?—?not to describe or prescribe policy. But it is clear that the DIA reports’ ‘warnings’ were widely circulated and would have been meshed into the policy consideration.)

  “But this ‘view’ has exactly come about. It is fact. One might conclude then that in the policy debate, the notion of isolating Hezbollah from Iran, and of weakening and pressurizing President Assad, simply trumped the common sense judgment that when you pump highly toxic and dangerous fracturing substances into geological formations, you can never entirely know or control the consequences… So, when the GCC demanded a ‘price’ for any Iran deal (i.e. massing ‘fracking’ forces close to Aleppo), the pass had been already partially been sold by the US by 2012, when it did not object to what the ‘supporting powers’ wanted.”

   

  Intel shills

  Crooke’s analysis of the DIA report shows that it is irrelevant whether or not “the West” should be included in the “supporting powers” described by the report as specifically wanting a “Salafist Principality” in eastern Syria. Either way, the report groups “the West, Gulf countries and Turkey” as supporting the Syrian insurgency together?—?highlighting that the Gulf states and Turkey operated in alliance with the US, Britain, and other Western powers.

  The observations of intelligence experts Ellsberg, Rowley, and Drake add further weight to Crooke’s analysis. They come in addition to comments I had previously received on the DIA document from former MI5 counter-terrorism officer, Annie Machon, and former counter-terrorism intelligence officer, Charles Shoebridge.

  The comments undermine the recent claims of disgraced US national security commentator, John Schindler, a retired NSA intelligence officer, to the effect that the August 2012 DIA report is “almost incomprehensible,” “so heavily redacted that its difficult to say much meaningful about it,” “Nothing special here, not one bit,” “routine,” “a single data point,” and so on.

  Schindler cites the DIA’s use of ‘Curveball’?—?the Iraqi informant who fabricated claims about Saddam Hussein’s weapons of mass destruction (WMD)?—?as evidence of the agency’s “less than stellar reputation.” But this misrepresents the fact noted by the CIA’s Valerie Plame Wilson that “it was widely known [in the intelligence community] that CURVEBALL was not a credible source and that there were serious problems with his reporting.”

  As I’ve documented elsewhere, the WMD threat mythology was not the outcome of an ‘intelligence failure’, as Schindler and his ilk like to claim, but a consequence of the corruption and politicization of intelligence under the influence of dubious vested interests.

  Also contrary to Schindler’s misinformation, an IIR provides raw intelligence data from human sources (HUMINT), not simply rumour, gossip or opinion. Before wider distribution, the IIR is vetted to determine whether it is worthy of dissemination to the intelligence community. IIRs then provide a source basis for evaluation, interpretation, analysis and integration with other information.

  Far from justifying the dismissal of the relevance of the declassified DIA documents, this shows that urgent questions must be asked:

  What happened to this raw intelligence data, described by six US UK intelligence experts as providing damning confirmation of how Western strategy led to the rise of ISIS?

  And why did it not lead to a change in policy, despite DIA analysts’ clear warning of the outgrowth of an ISIS-entity from Western allies’ desire to see a ‘Salafist Principality’ in the region?—?a warning which was, in hindsight, quite accurate?

   

  Are intel critics traitors?

  Schindler previously characterized NSA whistleblower Edward Snowden as a traitor and “pawn… of America’s adversaries.”

  He now declares that those who cite the DIA report as proof the intelligence community “knew more about the rise of the Islamic State than they let on” are at best “fools; at worst, they’re deceivers who have lied to the American people.”

  On the contrary, six decorated former senior US and British intelligence officials, many with direct experience of IIRs and their function, agree that the DIA report provides significant insight into the kind of intelligence available to the US intelligence community at the time.

  Yet for Schindler, it seems, Ellsberg, Drake, Rowley, Crooke, Machon and Shoebridge are all, effectively, traitors simply for lending their expertise to public understanding of the newly declassified documents.

  As Marcy Wheeler points out in Salon, the large corpus of secret DIA documents obtained by Judicial Watch demonstrates, at the least, that:

  “The Intelligence Community (IC) knew that AQI had ties to the rebels in Syria; they knew our Gulf and Turkish allies were happy to strengthen Islamic extremists in a bid to oust Assad; and CIA officers in Benghazi (at a minimum) watched as our allies armed rebels using weapons from Libya. And the IC knew that a surging AQI might lead to the collapse of Iraq. That’s not the same thing as creating ISIS. But it does amount to doing little or nothing while our allies had a hand in creating ISIS. All of which ought to raise real questions about why we’re still allied with countries willfully empowering terrorist groups then, and how seriously they plan to fight those terrorist groups now. Because while the CIA may not have deliberately created ISIS, it sure seems to have watched impassively as our allies helped to do so.”

  However, Wheeler overlooks that the reliance on foreign allies is a standard proxy war strategy?—?as Ellsberg explained in his interview?—?used by the covert operations arm of the US government to guarantee ‘plausible deniability.’

  As I noted in my Middle East Eye analysis of the DIA document, there is extensive evidence against which to contextualize the DIA report’s assertions. This evidence shows that the CIA did not merely watch “impassively” as the Gulf states and Turkey supported violent extremists in Syria, but actively supervised, facilitated and accelerated this policy.

  The August 2012 DIA document further corroborates this by repeatedly pointing out that the support to the Syrian insurgency from its allies was itself backed by “the West”?—?despite awareness of their intent to establish an extremist Salafi political entity.

  While the DIA document was, indeed, just one data-point, analyzing it in context with the other DIA reports along with incontrovertible facts in the public record, establishes that the Pentagon was complicit in its allies’ support of Islamist terrorists, despite recognizing this could create an “Islamic State” in Iraq and Syria.

  These revelations show that the real traitors are not the courageous whistleblowers who sacrifice everything to speak out on behalf of the public interest, but shameless shills like Schindler and Morell who willfully sanitize a dysfunctional and dangerous ‘national security’ system from legitimate public scrutiny.

   

   

  ---

  Dr Nafeez Ahmed is an investigative journalist, bestselling author and international security scholar. A former Guardian writer, he writes the ‘System Shift’ column for VICE’s Motherboard, and is also a columnist for Middle East Eye. He is the winner of a 2015 Project Censored Award, known as the ‘Alternative Pulitzer Prize’, for Outstanding Investigative Journalism for his Guardian work, and was selected in the Evening Standard’s ‘Power 1,000’ most globally influential Londoners.

   

  Nafeez has also written for The Independent, Sydney Morning Herald, The Age, The Scotsman, Foreign Policy, The Atlantic, Quartz, Prospect, New Statesman, Le Monde diplomatique, New Internationalist, Counterpunch, Truthout, among others. He is the author of A User’s Guide to the Crisis of Civilization: And How to Save It (2010), and the scifi thriller novel ZERO POINT, among other books. His work on the root causes and covert operations linked to international terrorism officially contributed to the 9/11 Commission and the 7/7 Coroner’s Inquest.

  

  

  
  
  

  

• How Obama Spells 'Respect'

  No R.E.S.P.E.C.T. for the Truth…

   

  

   

  Source: Investors.com

  

  

  
  
  

  

• Markets, Not Janet Yellen, Should Set Interest Rates

  Submitted by Dr. Richartd Ebeling via EpicTimes.com,

  Financial markets in the United States and around the world are all waiting with “bated breath” for when the Federal Reserve modifies its “easy money” policy and starts to raise interest rates. No one, however, asks a simple question: Why is the American central bank in the interest rate setting business?

  

   

  In May 20^th, the minutes were released of the April 2015 meeting of the Open Market Committee (OMC) of the Federal Reserve. The Open Market Committee decides when and by how much America’s central bank should intervene into the financial markets to influence the amount of money and credit in the banking system and, therefore, over time, in the U.S. economy as a whole.

  The members, it seems, were still divided as to whether or not the OMC should start nudging interest rates up through monetary policy, or keep them at the low levels they have been at for years, with a majority leaning to not doing so until maybe September.

  In its usual ambiguous language, the published summary of the OMC meeting stated that, “Many participants . . . thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility.”

  The next day, Friday, May 21^st, Federal Reserve Chairwoman, Janet Yellen, spoke before the Greater Providence Chamber of Commerce in Rhode Island and said she, “Thinks it will be appropriate at some point this year to take the initial step to raise the federal-funds rate target and begin the process of normalizing monetary policy.”

  But she added that, “The Fed’s objectives of maximum employment and price stability would best be achieved by proceeding cautiously.”

  How the Fed Creates Money and Influences Interest Rates

  A key Federal Reserve policy instrument or “tool” is, as Yellen stated, the Federal Funds rate. This is the rate of interest that banks charge each other for overnight or short-term borrowing.

  Every bank is required under Federal Reserve rules to maintain a certain amount of cash reserves against its outstanding depositor liabilities. On a daily basis, sums of money deposits flow in and money withdrawals flow out of every bank and financial institution. Sometimes banks find that the withdrawals have exceeded deposits into their vaults, and they are threatened with temporarily falling below that required minimum of cash reserves. At other times, the reverse may be the case, and deposits have exceeded withdrawals resulting in “excess reserves,” that is, those above the minimum required.

  Banks borrow and lend funds between each other to cover and smooth out these temporary fluctuations in their deposit and withdrawal flows of cash, and a rate of interest emerges on the market reflecting the availability or “tightness” of such excess funds for some banks to lend to others running a bit short, short-term.

  The Federal Reserve can influence this Federal Funds interest rate by purchasing or selling U.S. government securities. The Federal Reserve is prohibited by law from directly lending to the U.S. Treasury. The Treasury first borrows money to cover the government’s budget deficit by issuing IOUs – short-term or longer-term securities – to financial institutions or larger private lenders.

  The Federal Reserve then goes into what is called the “secondary market” and offers to buy some of those securities being held by financial institutions or individuals, and pays for them by creating new money that then enters the banking system when those who have sold those government securities to the Federal Reserve deposit the check payments into their bank accounts.

  The banks receiving those additional deposits of this new money now have larger excess cash balances with which to extend loans (after setting aside a small fraction as a required cash reserve against the depositor’s newly deposited money).

  Finding themselves with larger available funds to lend, banks with try to attract interested and willing borrowers by lowering the rates of interest at which they offer to lend, given such things as the potential borrower’s creditworthiness and the type and term of the loan.

  This includes the short-term Federal Funds rate at which banks are lending to each other. Money is said to be “easy” when the Federal Funds rates is low or falling, since this means the banking system is awash with cash to facilitate the reserve requirements of those banks briefly short of required reserves.

  This process is reversed when (or if) the Federal Reserve sells government securities rather than buying them. The purchasers of those Treasury securities from the Federal Reserve’s portfolio pay for them out of their bank accounts. This “drains” reserves out of the banking system, tending to push up interest rates, as funds for lending purposes (all other things remaining the same) are reduced.

  

  $4 Trillion of New Money, But Low Price Inflation

  Since 2009, the Federal Reserve has been adding loanable funds into the banking system is such a large amount (around an extra $4 trillion) over the last five and a half years that the Federal Funds rate, when adjusted for the rate of price inflation has been “negative” virtually the entire time, as have one-year Treasury securities.

  And reflecting this, interest rates on various commercial and other loans have been “dirt cheap,” again, especially when adjusted for price inflation as measured, say, by the Consumer Price Index.

  It may be asked, why, if this is the case, price inflation has not been much higher with $4 trillion of extra loanable funds in the banking system? Sure, with that much additional money in the economy prices in general should have been rising much higher than the CPI measured rate of price inflation of far less than two percent a year.

  Fearful of the price inflation its own “easy” monetary policy might generate, the Federal Reserve has been paying banks not to lend a sizable portion of that $4 trillion by offering banking institutions a rate of interest slightly above what it could earn by lending to you and me. Thus, nearly $3 trillion of the $4 trillion have sat in the banks as unlent “excess reserves.”

  In viewing and treating interest rates as “policy tools” to influence the general levels of employment and prices in the economy, the Federal Reserve prevents interest rates from doing their “job” in a functioning market economy.

  Market-Based Interest Rates have Work to Do

  In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance.

  Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market. Market prices serve as an incentive for producers to supply more of a good when the price goes up and to supply less when the price goes down; similarly, a lower or higher price in?uences consumers to buy more or less of a good. Finally, the movement of a market price, by stimulating more or less demand and supply, tends to bring the two sides of the market into balance.

  Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods. This assures, on the one hand, that resources that are not being used to produce consumer goods are available for future-oriented investment, and, on the other, that investment doesn’t outrun the saved resources available to support it.

  Interest rates higher than those that would balance saving with investment stimulate more saving than investors are willing to borrow, and interest rates below that balancing point stimulate more borrowing than savers are willing to supply.

  There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage; that is, suppliers offer fewer hats than the number consumers are willing to buy at that price. Some consumers, therefore, will have to leave the market disappointed, without a hat in hand.

  

  Central Bank-Caused Imbalances and Distortions

  In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken.

  Investors who borrow the newly created money spend it to hire or purchase more resources, and their extra spending eventually starts putting upward pressure on prices. At the same time, more resources and workers are attracted to these new investment projects and away from other market activities.

  The twin result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price in?ation and an initial investment boom, both of which are unsustainable in the long run. Price in?ation is unsustainable because it inescapably reduces the value of the money in everyone’s pocket, and threatens over time to undermine trust in the monetary system.

  The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun with the newly created money for which real savings does not exist to complete or fully sustain them.

  

  Federal Reserve Policies Bring About the Boom and the Bust

  What is important to understand is that while price inflation carries it own negative effects on the economy by eroding the real value, or buying power, of the money in people’s pockets, the most serious consequences of monetary expansion and interest rate manipulation are those distortions and imbalances brought about in the underlying supply and demand relationships between savings and investment in the economy.

  That is why even if price inflation, as measured by such statistical methods as the Consumer Price Index, may seem moderate or even near zero, as in recent circumstances, the most serious effects brought about by Federal Reserve monetary policy are those beneath the surface of the macroeconomic aggregates of total employment, total output, or the “general price level” of goods and services.

  Janet Yellen and the other members of the Board of Governors may be waiting for price inflation to rise into the neighborhood of two percent a year (their desired “target” for inflation) before being seriously concerned about the impact of their own easy money policies. But by that time, beneath that macroeconomic surface of statistical aggregates and averages, the savings and investment patterns and the use and allocation of labor and other resources among different sectors and activities in the economy will have been given a “wrong twist.”

  As a consequence, Yellen’s monetary and interest rate policies meant to assure full employment and stable prices will have set the stage for another “bust” following another unsustainable “boom.”

  In her address in Rhode Island Janet Yellen recalled taking economics classes at Brown University and thinking, “Gee, I didn’t realize how much influence the Federal Reserve has on the health of the economy. If I ever have a chance at public service” working at the Federal Reserve “would be a worthwhile thing to do.”

  The only way to bring an end to these cycles of booms and busts is to end Federal Reserve power and authority to manipulate the money supply and interest rates. But that is unlikely to happen any time soon with “activist” policy addicts like Yellen running the central bank who think it is “a worthwhile thing to do.”

  

  

  
  
  

  

• America's Housing Problem: Buying And Renting Are Both Unaffordable

  In Q1, the average down payment on single family homes, condos, and townhomes fell to just 14.8% — the lowest level since Q1 2012. 

  As discussed here on Sunday, this is the inevitable result of a move by FHFA to lower the minimum down payment on loans backed by Fannie and Freddie to 3% from 5%. This had the knock-on effect of prompting FHA to cut premiums in order to retain market share. The idea, of course, is to make the homeownership dream a reality for as many Americans as possible irrespective of whether or not they can actually afford their mortgage payments. After all, “it’s only right.” 

  As it turns out, the FHFA’s best efforts at resurrecting the same type of underwriting standards which precipitated the housing bubble haven’t been enough to transform what has become a nation of renters back into a nation of owners. Leaving aside — for now anyway — the issue of whether the homeownership rates that persisted pre-crisis were realistic, the factors impeding new home buying in America will be familiar to those who frequent these pages: student debt and lackluster wage growth. Meanwhile, rising rents are squeezing renters, making it even more difficult to scrape together enough for a down payment. WSJ has more:

  Last decade’s housing crisis has given way to a new one in which many families lack the incomes or savings needed to buy homes, creating a surge of renters and a shortage of affordable housing.

   

  The U.S. homeownership rate is now below where it stood 20 years ago when President Bill Clinton launched a national campaign to encourage more Americans to buy homes. Conventional wisdom says the rate, now at 63.7%, is leveling off to where it was for decades before the housing-market peak.

   

  But this is probably wrong, according to research from the Urban Institute, which predicts homeownership will continue to slip for at least the next 15 years.

   

  Demographics tell the story. The Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average..

   

  Fewer than half of new households formed this decade and next will actually own homes. By contrast, almost three-quarters of new households in the 1990s became homeowners. The downtrend would push the homeownership rate below 62% in 2020, and it would hold the rate near 61% in 2030, below the lowest level since records began in 1965.

   

  The declines reflect a surge of new renter households, which is boosting rents. Together with tougher mortgage-qualification rules, this will leave households stuck between homes they can’t qualify to purchase and rentals they can’t afford, says Ron Terwilliger, who spent two decades running Trammell Crow Residential, one of the nation’s largest apartment developers..

   

  A related concern is that qualified households will be unable to move from renting to owning as housing-cost burdens, slow wage growth and student debt make it harder to cobble together even a modest down payment.

   

  “America is blissfully unaware of this,” says Lewis Ranieri, the financier who co-invented the mortgage-backed security, which allowed large numbers of baby boomers to become homeowners beginning in the 1980s. “We’re rapidly running to a crisis in less than 10 years.”

   

  

  In other words, between Fannie, Freddie, the Fed, and Wall Street’s securitization machine, the US created a bubble which drove the homeownership rate to levels not commensurate with economic realities (i.e. incomes, FICOs, etc). Invariably, the bubble burst, turning a nation of homeowners to a nation of renters and demand for rentals has naturally driven up rents.

  

  Meanwhile, Fed policy has failed to boost aggregate demand and in turn, wage growth remains in the doldrums for the vast majority of workers…

  

  …while new graduates are unable to buy homes because 1) the “strong” jobs market is a BLS fabrication, and 2) they are weighed down by record student debt…

  

  …and homes purchased by flippers are increasingly being sold not to new occupants, but to landlords…

  

  *  *  *

  What the above suggests is that for many Americans, buying is out of the question and renting is becoming increasingly unaffordable as the entire household formation “upside case” is now collapsing on itself, something we’ve discussed on a number of occasions. Recall the rise in “parental co-residence rates“:

  

  

  Note that this situation has the potential to become self-fullfilling. That is, as homeownership becomes increasingly unrealistic, demand for rentals will only increase, driving further increases in the cost of rental housing. The question then becomes this: what happens when a family that can’t afford a down payment can no longer afford to pay the rent?

  

  

  
  
  

  

• What Keeps A Billionaire Awake At Night: "Envy, Hatred, Social Warfare" And The "Destruction Of The Middle Class"

  There is something morbidly ironic when one of the world’s richest men, in this case South African Johann Rupert, who has made billions (his net worth is roughly $7.5 billion) peddling Cartier jewelry and Chloe fashion as founder and chairman of luxury conglomerate Richemont, whose 20 brands also include Vacheron Constantin and Montblanc, said tension between the rich and poor is set to escalate, that the “envy, hatred and the social warfare” may crush society, and that “we are destroying the middle classes at this stage and it will affect us.”

  According to Bloomberg, Rupert said that “we cannot have 0.1 percent of 0.1 percent taking all the spoils,” adding that “it’s unfair and it is not sustainable.” Being among the 0.1% of said “0.1% of 0.1%” he should know.

  “How is society going to cope with structural unemployment and the envy, hatred and the social warfare?” he said. “We are destroying the middle classes at this stage and it will affect us. It’s unfair. So that’s what keeps me awake at night.”

  One other person who has been quite a fan of such as “fairness doctrine”, at least as far as it does not directly affect his personal wealth, is none other than crony capitalist and railroad enthusiast #1, Obama’s personal tax advisor and the world’s third richest man: Warren Buffett, who for all his sage advice on income tax has had surprisingly little to say about taxation on financial assets/capital, esatate of carried interest tax. Or has, in any other way, provided any of his wealth for “fair” use among the destitute.

  Which is why we skeptical of Rupert’s preaching and motives, especially since he himself, unlike millions of other people, actually can do something about “unfair” social inequalty if he really feels the deep urge. 

  Furthermore, it is now much too late to do anything about the social issues which Rupert accurately lays out as the biggest problems facing the world. There was some hope in 2008 when resetting the “unfair” system was a distinct possibility, however it was if not Rupert, than his billionaire banker peers who hijacked the system once more, transferred some $50 trillion in wealth away from the global middle class to the “0.1% of 0.1%”, and have virtually assured a revolution or war.

  Which incidentally is precisely what another billionaire, Paul Tudor Jones, warned is coming.  Recall from his mid-March TED talk:

  “This gap between the 1 percent and the rest of America, and between the US and the rest of the world, cannot and will not persist…  Historically, these kinds of gaps get closed in one of three ways: by revolution, higher taxes or wars.”

  Still, we must admit we have a sweet spot for Rupert. As Bloomberg describes the university dropout whose father made a fortune setting up Rembrandt Tobacco Corp. and selling it off, has in the past made other social critiques. Nicknamed ‘Rupert the Bear’ for his pessimistic views on the economy, the 65-year-old refers to himself as a “reformed prostitute,” having spent a decade as an investment banker. He said in 2008 that the collateral damage from the financial crisis was yet to come.

  “We’re in for a huge change in society,” he said Monday. “Get used to it. And be prepared.”

  Yet what is surprising is that instead of laying the blame squarely where it belongs, at the feet of the Mandarins inhabiting the Marriner Eccles building, and their equally clueless central banker peers around the globe, Rupert mostly accuses technology and… robots?!

  [T]ension between the rich and poor is set to escalate as robots and artificial intelligence fuel mass unemployment.

   

  The founder and chairman of Richemont… said he expects advances in technology to lead to job losses after having read books on the subject recently. Conflicts between social classes will make selling luxury goods more tricky as the rich will want to conceal their wealth, Rupert said in a speech Monday at the Financial Times Business of Luxury Summit in Monaco.

  Don’t worry Johann: by the time there is a robot for every job, the entire market will have taken itself private thanks to the unseen “cost-savings” as the companies of the S&P500 fire everyone except the executive suite. And for that is just one automaton you have to thank: whichever banker puppet is currently in charge of the Federal Reserve, the ECB, the BOJ, the PBOC or the SNB.

  

  

  
  
  

  

• Rand Paul And The Bogus Terrorist Threat In America

  Excerpted from Bill Bonner's "We Salute You, Rand Paul" via Bonner & Partners,

  …

  You can divide Congress into two groups: the fools, who are just not clever enough to understand what is going on, and the knaves, who are too clever by half.

  Between them, the cronies have a field day… duping the former and conniving with the latter.

  Rand Paul’s father, Ron, never fit into either group. Maybe Rand doesn’t fit either…

  Ron Paul couldn’t be bought. And he was smart enough to see that the do-gooders weren’t doing any good – except for themselves.

  If we had a beef with Ron, it was that he lacked cynicism. We often wanted to ask: What’s a nice guy like you doing in a place like this?

  It was as though he didn’t see the sordid scenes going on around him… and wouldn’t stoop to notice the sleazy motives of his fellow representatives.

  He was always for liberty and the Constitution… and that was it. It was as though he thought he had been elected to defend the liberty of his constituent voters.

  What they really wanted was something else – power, status, and other people’s money. But Ron ignored it… like one ignores the character flaws of an old friend… and continued on his lonely mission.

  Surely, Rand must have learned from watching his father.

  But what?

  He grew up in a political world – full of stuffed shirts and empty heads.

  Did he learn how to work with this crumbly, second-rate clay and shape it into the world he and his father wanted? Or did he learn how to get along by going along… and maybe become more successful, at least in Washington’s terms, than his father?

  A Bogus Threat

  We had our doubts. It seemed as though the apple had fallen… and then rolled far from the tree. But then, this past weekend, despite howls of protest, Rand did his father’s work.

  The Patriot Act was an embarrassment from the get-go. How could a people who valued their liberty give it up so readily?

  The terrorist threat was gaudy and spectacular, but never serious.

  Statistically, we Americans are more likely to be killed by our own children than by terrorists. We are more likely to starve to death. Or die after tripping over furniture.

   

  

  Chart: Acting-Man.com

  And for every American killed by a terrorist, there are about 100 who are gunned down, run over, or Tasered to death by their own police.

  Still, eavesdropping was sold to the public as a way to head off terrorist attacks.

  How many attacks did it thwart?

  Zero.

  The Washington Times reports:

  FBI agents can’t point to any major terrorism cases they’ve cracked thanks to the key snooping powers in the Patriot Act, the Justice Department’s inspector general said in a report Thursday that could complicate efforts to keep key parts of the law operating.

   

  Inspector General Michael E. Horowitz said that between 2004 and 2009, the FBI tripled its use of bulk collection under Section 215 of the Patriot Act, which allows government agents to compel businesses to turn over records and documents, and increasingly scooped up records of Americans who had no ties to official terrorism investigations.

  So we salute Rand Paul. Good on you. In the long march to a police state, the feds were forced to take a small step back.

  This example made us think about other people doing good work. (Who says we are always negative!)

  There are millions and millions of people who do good work every day. Few of them get their names in the paper. They clean their homes. They drive trucks and analyze stocks. They weld steel and teach children.

  

  

  
  
  

  

• The 50 Most Illiquid Stocks

  Now that everyone is familiar with the idea of going long the most shorted stocks, a strategy which over the past several years was easily the best alpha generator available and has since become so commoditized there is even a short squeeze ETF, the SQZZ, the easy money has been made. As a result, hedge funds up and down Wall Street, or rather Park Avenue, are scratching their heads how to collude best (just don’t tell the SEC) and generate the highest returns while risking the smallest amount of capital.

  One of the strategies that has emerged in the post-squeeze normal is cornering the most illiquid stocks, and pushing them up, or down with relative ease due to the lack of liquidity and/or broad participation. Think of it as what the HFTs do each and every second with countless top hunts meant to ignite momentum once stops are hit, and to give HFT algos virtually risk-free returns with virtually no capital at risk.

  But how does one go about quantifying what are the most illiquid stocks: is it the ones that trade the least on any given day (a double edge sword, because exiting a position would be that much more problematic after pushing the prices to any desired level), or is it simply those where individual trades have the highest price impact?

  One suggested answer is to look at the equities whose current float is a small fraction of their total outstanding stock: these are names which have a big institutional concentration due to their recent corporate history, typically the result of Chapter 11 exits where the bondholders were equitized (Sears, Federal Mogul), or due to a recent IPO in which just a small amount of their total shares outstanding were sold to the public (incidentally, so the underwriters can control the price easier) or otherwise have the bulk of their shares locked up and unable to cushion (and take advantage of) big price swings.

  So to find those names which are most illiquid based on this definition, below we present a CapIQ screen of the top 50 Russell 3000 names that have the lowest float as a % of total outstanding shares.

  

   

  Naturally, the above list is not exhaustive and with a little searing one can surely find far more “illiquid” stocks based on any one particular definition of the word. However, the above list is likely a good place to start when analyzing the names which hedge funds would likely dabble in when trying to recreate HFT-type stop hunts at a major level as the preponderance of other illiquid names are simply too small for hedge funds to take a stake, as such they are at best PA trading vehicles.

  As a result one possible trade idea would be to put on a long-term straddle (preferably while VIX is still cheap) on some of the above names, and hope for a volatility shake out, either to the up, or downside.

  With the amount of liquidity packets in the broader market, and the sense that something big may be just over the horizon, which is now even starting to dent the broader market’s relentless buying spree for the past 3 years, finding a pool of potentially heightened volatility and trading in advance of implied vol becoming realized, is probably not the worst possible trade idea.

  

  

  
  
  

  

• Millennials Have No Hope Of Buying A Home In These 13 US Cities

  In “This Is What Happens When A Millennial Tries To Get A Job,” we highlighted 1) high youth unemployment (U-6 at nearly 14%) and 2) the failure of America’s university system to prepare new entrants for the job market, on the way to painting a rather grim picture for America’s newly-minted college graduates. 

  We’ve also been keen to emphasize the fact that the “strong” labor market is anything but, as wage growth is essentially non-existent and upside “surprises” benefit from the now ubiquitous “vanishing worker.” Given this, it’s no surprise that many of America’s best and brightest find themselves serving food and drinks after graduation even as they owe an average of $35,000 in student loans, debt which is curtailing homeownership — or at least delaying the process. 

  Given the above, it’s not surprising that in many large US cities, buying a home is simply out of the question for most millennials, even assuming they have saved up 20% for a down payment. Bloomberg has more:

  Millennials have been priced out of some of the biggest U.S. cities, with residential real estate prices rising even as wage growth remains elusive. 

   

  The good news is that out of 50 metropolitan areas, 37 are actually affordable for the typical 18-34 year-old.

   

  The bad news is that the areas that often most appeal to young adults are also the ones where homeownership is the most out of reach..

   

  Bloomberg’s calculations assume that millennials have already saved up the 20 percent they’d need for a down payment, which is a problem in itself. Families where the head of household was under 35 years old had a median net worth of $10,400 in 2013, according to the Federal Reserve’s Survey of Consumer Finances.

   

  Many millennials “don’t have the money for a down payment or can’t afford to buy where they want to buy,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “It’s tougher to buy a home in the city.”

   

  That means millennials living in unaffordable markets will be forced to shell out money for ever-increasing rents, instead of building equity.

   

   

  
  

   

   

  *  *  *

  We’ll leave you with the following quote from Dan Smart, a 28-year old with a graduate degree who spoke to Bloomberg about what it’s like for young professionals in New York:

  “I’m making a good salary and I’m doing all these things that I’m supposed to be doing. But you’re just not able to save enough to get to that number. Housing is so inflated.”

  

  

  
  
  

  

• Dow Red In 2015 As S&P Takes Out Key Support: Trannies Tank, Crude Clipped, Dollar Dumped

  It seems the hangover from Friday's "good" news continues, warranting only one possible clip today…

  First things first – The Dow dipped negative year-to-date, was briefly rescued by no-news Greece headlines…

  

   

  And the S&P 500 (cash) index closed back below its 100DMA (at 2084.57) for the first time in a month… closing at its lows… (and falling further after hours in futures)

  

   

  But while stocks were weak, the big moves were in The Dollar and Crude – both notably weaker…

  The dollar was monkey-hammered today driven by a surge above 1.1200 in EURUSD… (3rd worst day for USD in 3 months)

  

   

  As The Euro kept breaking significant levels…

  

   

  Crude did not care but gold, silver and copper eked out gains…

  

   

  In the only market The Fed cares about, stock indices were all weaker led by more turmoil in Trannies

  

   

  The Greek headline was perfectly timed to ramp S&P 500 futures to VWAP (even though it was actually bad news)…

  

   

  Notably, AAPL's weakness today weighed further on NASDAQ and leaves it the underperformer post Payrolls… Stocks closed "NOT" off the lows…

  

   

  AAPL's day explained…

  

   

  In case you missed it… Apple's Presentation was something like this… "am I right?"

   

  The Treasury Complex was generally bid with the long-end underperforming (late day weakness in bonds driven by the no-news Greece headlines)….

  

   

  With bond prices all lower post-payrolls…

  

   

  Charts:Bloomberg

  Bonus Chart: Whats wrong with this chart?

  

  

  
  
  

  

• The US Recovery Is Strong… In "Loan Shark" Terms

  It looks like this 'recovery' is going to need a triple-seasonal-adjustment to bring reality back to perception…

   

  

  h/t @RudyHavenstein

  As we concluded previously, we may as well go ahead and place that as the tombstone for the socio-economic entity previously known as the middle class.

  It’s not the case that every one of these middle- and upper-class households turned to pawnshops and payday lenders because they got whomped by an unexpected bill from a mechanic or a dentist. “People who are in these [non-bank] situations are not using these forms of credit to simply overcome an emergency, but are using them for basic living experiences,” Mills says.

  

   

  

  

  
  
  

  

• Why Stocks Are Not "Cheap Relative To Bonds"

  Authored by Jim Quinn's Burning Platform blog,

  For the lazy people who don’t like to slog through Hussman’s entire data laden weekly tome, I’ve picked out the most pertinent sections. For the really lazy, I’ve bolded the most important sentences.

  When everyone on Wall Street is using the same algorithms in their HFT supercomputers, and John Q. Public isn’t even in the market, who will these supercomputers sell to when they all get the sell signal at the same time?

  When that time comes, and it won’t be long, I’ll be munching popcorn and watching the festivities unfold. The talking heads, government apparatchiks, and Ivy League educated big swinging dicks on Wall Street will declare a national emergency and demand another bailout.

  Will we be stupid enough to fall for it again, or will we start hanging bankers? 

  

  Every valuation ratio used on Wall Street is simply an effort to approximate the Iron Law of Valuation by comparing price with some fundamental “X,” instead of explicitly modeling the long-term stream of deliverable cash flows for that investment. And here’s the central issue – if your fundamental “X” is not representative and proportional to the very, very long-term stream of cash flows that stocks are likely to deliver over time (think 50 years), valuing stocks as a ratio to X is meaningless. At the extreme, paying $100 for a one-year promise of $25 would represent a “cheap” P/E of just 4, but it would also be a ridiculous investment. Similarly, history has demonstrated cycle after cycle after cycle that paying elevated P/E multiples on record earnings is a time-tested way to lose 30-50% of your money by the time the cycle is complete.

  …

  The higher the price an investor pays for a given stream of expected cash flows today, the lower the return that an investor should expect over the long-term. As detailed below, investors have responded to zero interest rates by driving stock valuations up to the point where expected market returns over the coming decade are also zero. Given that outcome, one is quite free to say that stocks are reasonably valued “relative” to zero interest rates, but one should still expect zero 10-year returns on stocks.

  My impression is that’s not how investors are thinking. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected. The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history.

  Current valuations are above the 2007 peak, and are now within about 15% of the 2000 extreme.

  What we haven’t seen at any point in history is the combination of dismal projected returns for the S&P 500 coupled with a similarly dismal yield-to-maturity on bonds. The coming decade will be an underfunding disaster for corporate pension plans, endowments, and municipalities, most that still typically plan around an assumed rate of return closer to 8%. The most reliable measures we identify suggest that nominal total returns on a conventional asset mix are likely to be closer to 1% annually. Quantitative easing has already given investors, at least on paper, the gains that they would otherwise have waited years longer to achieve (again, at least on paper). Particularly in equities, investors who do not have a very long horizon and cannot actually tolerate a 50% loss should consider realizing those paper gains now and cutting exposure to a tolerable level. That’s not market timing – it’s sound financial planning that may be quite overdue. My impression is that the window of opportunity is closing quickly.

  Recall that the 2000-2002 and 2007-2009 collapses were accompanied by Fed easing, not tightening. “Following the Fed” would have been disastrous in each case, as the Fed cut rates persistently and aggressively as the market lost half its value. Indeed, the Fed began cutting rates several weeks before the 2007 peak. The Fed also did not tighten within a year of the 1929 peak.

  How many investors do you suspect will be available to absorb your shares at current price levels once they begin trying to exit simultaneously?

  Look around, and all you’ll see are other bulls who share virtually identical beliefs despite the fact that many of those beliefs are contradicted by historical evidence. As I’ve detailed in recent weeks, stocks have been in a clear price-volume distribution pattern for nearly a year. The NYSE Composite has gone nowhere since last July, while the Dow and S&P 500 are back to their late-December levels. Soon, the only ones who will be available to take the buy side against sell orders are, well, value investors like me, and we don’t see value anywhere near current levels. The rule is simple. Once market internals have deteriorated, the exit rule for bubbles is that you only get out if you panic before everyone else does.

  Frankly, history suggests that a rather ordinary completion to the present market cycle would involve the S&P 500 losing more than half of its value.

  Based on the combination of obscene valuations and increasing deterioration across a wide range of market internals, our outlook remains hard-defensive here.

  At present, market losses that may seem like “worst case” scenarios are actually quite run-of-the-mill expectations. As Santayana wrote, “Those who do not remember the past are condemned to repeat it.”

  Read Hussman’s Weekly Letter

  

  

  
  
  

  

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• FIFA Confirms Russia Will Be Stripped Of 2018 World Cup If "Evidence Of Bribery" Emerges

  Ten days ago, when the FIFA scandal broke out, it took just a few hours to figure out what the US DOJ’s motive was. The answer was simple: stripping the 2018 (and 2022) World Cup hosts, i.e., Russia (and to a lesser extent Qatar), of their respective hosting venues, and long before the Blatter’s resigned we said:

  What happens next? Sepp Blatter’s reelection this coming Friday, which until yesterday had been guaranteed, is now virtually assured to fail as Putin’s frontman at FIFA is shown the door.

   

  What else likely happens? Following some dramatic procedural changes, Russia loses the hosting of the 2018 World Cup.

  And moments after Blatter’s unexpected resignation we doubled down:

  And now Russia is stripped of the 2018 World Cup

  — zerohedge (@zerohedge) June 2, 2015

  One day later, we learned that as the FIFA corruption scandal kept growing, the jaws surrounding Russia started to close following a report thatthe FBI had launched a probe into the Russia 2018 World Cup award.

  There was just one thing missing: someone at FIFA admitting that the necessary and sufficient condition for Russia (if not so much Clinton Foundation donor Qatar) to be stripped of their hosting rights, would be evidence of bribery during the selection process. Which would be a low threshold indeed: if the past two weeks have confirmed it is that every single World Cup award stretching all the way back to France in 1998 and likely prior (such as the US in 1994) was as a result of illegal back-room dealings.

  Today, the last missing piece finally fell into place, after Domenico Scala, the independent chairman of FIFA’s audit and compliance committee, told a Swiss newspaper that Russia and Qatar could be stripped of their World Cup hosting rights if evidence emerges of bribery in the bidding process. From Reuters:

  “If evidence should emerge that the awards to Qatar and Russia only came about thanks to bought votes, then the awards could be invalidated,” Scala told SonntagsZeitung in an interview published on Sunday.

   

  “This evidence has not yet been brought forth.”

  It shortly will be, even as both countries – as expected – have denied wrongdoing in the conduct of their bids for the 2018 and 2022 tournaments, which were not the subject of charges announced by U.S. prosecutors last week against FIFA officials.

  Ironically, British Foreign Secretary Philip Hammond said he supported Qatar hosting the 2022 tournament but said Britain would work with another country if FIFA re-opened the bidding process.

  Perhaps the Clinton foundation will merely refund the Qatar “proceeds” if the Mid-east nation is stripped of its hosting rights. Or perhaps the US will simply make it up by “accidentally” blowing up Bashar al Assad’s home and ending once and for all the last hurdle to launching the Qatari natgas pipeline to Europe (in the process, the US also successfully isolating Gazprom as Europe’s sole outside energy provider).

  

  For Russia, the fate of Assad and Syria is a booby-trapped bridge it will have not choice but to cross eventually. But as for the fate of the Russian 2018 World Cup, the irony is that by forcibly stripping Putin of hosting rights, it will do Russia not one favor but two as we explained on Thursday:

  • first, Putin will save billions in funds for far better uses (the IRR on mass sport spectacles is terrible), and avoid the bottomless pit that is building if not bridges, then surely road, to nowhere and stadiums that will be used once only to become grazing grounds for sheep in the years to come.
  • more importantly, for a country fanned by nationalistic fervor, Putin will be able to wave the patriotic flag and slam the evil USA for not only meddling in other people’s affairs, but taking away what was rightfully Russia’s, thereby boosting his nationalism-inspired popularity to even greater heights.

  Or, to loosely paraphrase Hans Gruber, “You asked for miracles, Theo, I give you the DOJ.”

  

  

  
  
  

  

• A Professor Speaks Out: How Coddled, Hyper Sensitive Undergrads Are Ruining College Learning

  Submitted by Michael Krieger of Liberty Blitzkrieg

  A Professor Speaks Out: How Coddled, Hyper Sensitive Undergrads Are Ruining College Learning

  Things have changed since I started teaching. The vibe is different. I wish there were a less blunt way to put this, but my students sometimes scare me — particularly the liberal ones.

   

  I once saw an adjunct not get his contract renewed after students complained that he exposed them to “offensive” texts written by Edward Said and Mark Twain. His response, that the texts were meant to be a little upsetting, only fueled the students’ ire and sealed his fate.  That was enough to get me to comb through my syllabi and cut out anything I could see upsetting a coddled undergrad, texts ranging from Upton Sinclair to Maureen Tkacik — and I wasn’t the only one who made adjustments, either.

   

  The current student-teacher dynamic has been shaped by a large confluence of factors, and perhaps the most important of these is the manner in which cultural studies and social justice writers have comported themselves in popular media. I have a great deal of respect for both of these fields, but their manifestations online, their desire to democratize complex fields of study by making them as digestible as a TGIF sitcom, has led to adoption of a totalizing, simplistic, unworkable, and ultimately stifling conception of social justice. The simplicity and absolutism of this conception has combined with the precarity of academic jobs to create higher ed’s current climate of fear, a heavily policed discourse of semantic sensitivity in which safety and comfort have become the ends and the means of the college experience.

       – From the Vox article: I’m a Liberal Professor, and My Liberal Students Terrify Me

  The article at the center of today’s piece is truly excellent and demands much thought and introspection. One of the main themes here at Liberty Blitzkrieg since inception, has been the contention that the American population has turned into a nation of coddled, fearful serfs.

  It’s not quite clear to me when this transformation actually happened, but the first undeniable evidence within my lifetime was the public’s reaction to the terror attacks of September 11, 2001. I’ve written about this before, most specifically in the post, How I Remember September 11, 2001. Here’s an excerpt:

  In the days following the collapse, all I wanted was for the towers to be rebuilt just like before. I wanted the skyline back to what I had know since the day I came into this earth at a New York City hospital to be restored exactly as I had always known it. Career-wise, I felt I should leave Wall Street. I thought about going back to graduate school for political science, or maybe even join the newly created Department of Homeland Security (yes, the irony is not lost on me). I read a lengthy tome on Osama Bin Laden and al-Qaeda. I was an emotional and psychological mess, and it was when I was in this state of heightened distress that my own government and the military-industrial complex took advantage of me.

   

  It wasn’t just me of course. It was an entire nation that was callously manipulated in the aftermath of that tragedy. The courage and generosity exhibited by so many New Yorkers and others throughout the country and indeed the world was rapidly transformed into terrifying fear. Fear that was intentionally injected repeatedly into our daily lives. Fear that translated into pointless wars and countless deaths. Fear that was used to justify the destruction of our precious civil rights. Fear that was used to initiate a gigantic power grab and the source of tremendous profits for the corporate-statists and crony-capitalsits. Unfortunately, that is the greatest legacy of 9/11.

  It was the American public’s fearful and panicked emotional response to the attacks that allowed authoritarians and corrupt politicians to seamlessly and expeditiously steamroll over the civil rights of the citizenry. Unsurprisingly, this act of cowed submissiveness sent a signal to the less ethically inclined amongst us, and in the decade and a half since the attacks, the U.S. has rapidly deteriorated into something barely distinct from a Banana Republic.

  This infestation of cowardice, anti-intellectualism and fear has permeated almost every nook and crany of American life, including academics. So much so, that a college professor has just penned an article titled: I’m a Liberal Professor, and My Liberal Students Terrify Me. Even more worrisome, he felt the need to write it under a pseudonym due to the fear of backlash.

  This is not what makes a great nation. Here are some excerpts from Vox:

  I’m a professor at a midsize state school. I have been teaching college classes for nine years now. I have won (minor) teaching awards, studied pedagogy extensively, and almost always score highly on my student evaluations. I am not a world-class teacher by any means, but I am conscientious; I attempt to put teaching ahead of research, and I take a healthy emotional stake in the well-being and growth of my students.

   

  Things have changed since I started teaching. The vibe is different. I wish there were a less blunt way to put this, but my students sometimes scare me — particularly the liberal ones.

   

  Not, like, in a person-by-person sense, but students in general. The student-teacher dynamic has been reenvisioned along a line that’s simultaneously consumerist and hyper-protective, giving each and every student the ability to claim Grievous Harm in nearly any circumstance, after any affront, and a teacher’s formal ability to respond to these claims is limited at best.

   

  I once saw an adjunct not get his contract renewed after students complained that he exposed them to “offensive” texts written by Edward Said and Mark Twain. His response, that the texts were meant to be a little upsetting, only fueled the students’ ire and sealed his fate.  That was enough to get me to comb through my syllabi and cut out anything I could see upsetting a coddled undergrad, texts ranging from Upton Sinclair to Maureen Tkacik — and I wasn’t the only one who made adjustments, either.

  A bizarre form of censorship and anti-intellectualism, but a very dangerous one nonetheless.

  I am frightened sometimes by the thought that a student would complain again like he did in 2009. Only this time it would be a student accusing me not of saying something too ideologically extreme — be it communism or racism or whatever — but of not being sensitive enough toward his feelings, of some simple act of indelicacy that’s considered tantamount to physical assault. As Northwestern University professor Laura Kipnis writes, “Emotional discomfort is [now] regarded as equivalent to material injury, and all injuries have to be remediated.” Hurting a student’s feelings, even in the course of instruction that is absolutely appropriate and respectful, can now get a teacher into serious trouble.

   

  The academic job market is brutal. Teachers who are not tenured or tenure-track faculty members have no right to due process before being dismissed, and there’s a mile-long line of applicants eager to take their place. And as writer and academic Freddie DeBoer writes, they don’t even have to be formally fired — they can just not get rehired. In this type of environment, boat-rocking isn’t just dangerous, it’s suicidal, and so teachers limit their lessons to things they know won’t upset anybody.

   

  This shift in student-teacher dynamic placed many of the traditional goals of higher education — such as having students challenge their beliefs — off limits. While I used to pride myself on getting students to question themselves and engage with difficult concepts and texts, I now hesitate. What if this hurts my evaluations and I don’t get tenure? How many complaints will it take before chairs and administrators begin to worry that I’m not giving our customers — er, students, pardon me — the positive experience they’re paying for? Ten? Half a dozen? Two or three?

   

  The current student-teacher dynamic has been shaped by a large confluence of factors, and perhaps the most important of these is the manner in which cultural studies and social justice writers have comported themselves in popular media. I have a great deal of respect for both of these fields, but their manifestations online, their desire to democratize complex fields of study by making them as digestible as a TGIF sitcom, has led to adoption of a totalizing, simplistic, unworkable, and ultimately stifling conception of social justice. The simplicity and absolutism of this conception has combined with the precarity of academic jobs to create higher ed’s current climate of fear, a heavily policed discourse of semantic sensitivity in which safety and comfort have become the ends and the means of the college experience.

   

  This new understanding of social justice politics resembles what University of Pennsylvania political science professor Adolph Reed Jr. calls a politics of personal testimony, in which the feelings of individuals are the primary or even exclusive means through which social issues are understood and discussed. Reed derides this sort of political approach as essentially being a non-politics, a discourse that “is focused much more on taxonomy than politics [which] emphasizes the names by which we should call some strains of inequality [ … ] over specifying the mechanisms that produce them or even the steps that can be taken to combat them.” Under such a conception, people become more concerned with signaling goodness, usually through semantics and empty gestures, than with actually working to effect change.

  This is more or less how politics functions in the U.S. today. Fake and superficial narratives take position at center stage, while the really big existential issues are never addressed, or merely brushed under the rug.

  The press for actionability, or even for comprehensive analyses that go beyond personal testimony, is hereby considered redundant, since all we need to do to fix the world’s problems is adjust the feelings attached to them and open up the floor for various identity groups to have their say. All the old, enlightened means of discussion and analysis —from due process to scientific method — are dismissed as being blind to emotional concerns and therefore unfairly skewed toward the interest of straight white males. All that matters is that people are allowed to speak, that their narratives are accepted without question, and that the bad feelings go away.

   

  In a New York Magazine piece, Jonathan Chait described the chilling effect this type of discourse has upon classrooms. Chait’s piece generated seismic backlash, and while I disagree with much of his diagnosis, I have to admit he does a decent job of describing the symptoms. He cites an anonymous professor who says that “she and her fellow faculty members are terrified of facing accusations of triggering trauma.” Internet liberals pooh-poohed this comment, likening the professor to one of Tom Friedman’s imaginary cab drivers.  But I’ve seen what’s being described here. I’ve lived it. It’s real, and it affects liberal, socially conscious teachers much more than conservative ones.

  This is how civilizations die. Slowly, and by a thousand small cuts.

  

  

  
  
  

  

• The Central Banks Are Losing Control Of The Financial Markets

  Submitted by Michael Snyder of The Economic Collapse blog

  

  Every great con game eventually comes to an end. 

  For years, global central banks have been manipulating the financial marketplace with their monetary voodoo.  Somehow, they have convinced investors around the world to invest tens of trillions of dollars into bonds that provide a return that is way under the real rate of inflation.  For quite a long time I have been insisting that this is highly irrational.  Why would any rational investor want to put money into investments that will make them poorer on a purchasing power basis in the long run?  And when any central bank initiates a policy of “quantitative easing”, any rational investor should immediately start demanding a higher rate of return on the bonds of that nation.  Creating money out of thin air and pumping into the financial system devalues all existing money and creates inflation.  Therefore, rational investors should respond by driving interest rates up.  Instead, central banks told everyone that interest rates would be forced down, and that is precisely what happened.  But now things have shifted.  Investors are starting to behave more rationally and the central banks are starting to lose control of the financial markets, and that is a very bad sign for the rest of 2015.

  And of course it isn’t just bond yields that are out of control.  No matter how hard they try, financial authorities in Europe can’t seem to fix the problems in Greece, and the problems in Italy, Spain, Portugal and France just continue to escalate as well.  This week, Greece became the very first nation to miss a payment to the IMF since the 1980s.  We’ll discuss that some more in a moment.

  Over in Asia, stocks are fluctuating very wildly.  The Shanghai Composite Index plunged by 5.4 percent on Thursday before regaining all of those losses and actually closing with a gain of 0.8 percent.  When we see this kind of extreme volatility, it is a very bad sign.  It is during times of extreme volatility that markets crash.

  Remember, stocks generally tend to go up during calm markets, and they generally tend to go down during choppy markets.  So most investors do not want to see lots of volatility.  Unfortunately, that is precisely what we are witnessing all over the world right now.  The following comes from the Wall Street Journal…

  “Volatility over the last days has been breathtaking, especially in bond markets,” said Wouter Sturkenboom, senior investment strategist at Russell Investments. He said that it rippled through equity and currency markets, which overreacted.

   

  The yield on the benchmark German 10-year bond touched 0.99%, its highest level since September, before erasing the day’s rise and falling back to 0.84%. The 10-year U.S. Treasury yield, which hit a fresh 2015 high of 2.42% earlier Thursday, recently fell back to 2.33%. Yields rise as prices fall.

  Sometimes when bond yields go up, it is because investors are taking money out of bonds and putting it into stocks because they are feeling really good about where the stock market is heading.  This is not one of those times.  As Peter Tchir has noted, the huge moves in the bond market that we are now seeing are the result of “sheer panic in the market”…

  In a morning note before the open, Brean Capital’s Peter Tchir wrote: “It is time to reduce US equity holdings for the near term and look for a 3% to 5% move lower. The Treasury weakness is NOT a ‘risk on’ trade it is a ‘risk off’ trade, where low yields are viewed as a risk asset and not a safe haven.” And Tom di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets, told Bloomberg, “This is sheer panic in the market from the standpoint of what’s been happening in Europe … Most of Wall Street is guarded here as far as taking on new positions.”

  But this wasn’t supposed to happen.

  After watching the Federal Reserve be able to successfully use quantitative easing to drive down interest rates, the European Central Bank decided to try the same thing.  Unfortunately for them, investors are starting to behave more rationally.  The central banks are starting to lose control of the financial markets, and bond yields are soaring.  I think that Peter Boockvar summarized where we are currently at very well when he stated the following…

  I’ve said this before but I’m sorry, I need to say it again. What we are witnessing in global markets is the inherent contradiction writ large that is modern day monetary policy where dangerously ZIRP, NIRP and QE are considered conventional policies. The contradiction is simply this: the desire for higher inflation if fulfilled will result in higher interest rates that central banks are trying so hard and desperately to suppress.

   

  Outside of the short end of the curve, markets will always win for better or worse and that is clearly evident now. The ECB is getting their first taste of the market talking back and in quite the violent way. In the US, the bond market is watching the Fed drag its feet (its never-ending) with wanting to raise interest rates and finally said enough is enough. The US Treasury market is tightening for them. Since mid April, the 5 yr note yield is higher by 40 bps, the 10 yr is up by 55 bps and the 30 yr yield is up by 65 bps.

  And if global investors continue to move in a rational direction, this is just the beginning.  Bond yields all over the planet should be much, much higher than they are right now.  What that means is that bond prices potentially have a tremendous amount of room to go down.

  One thing that could accelerate the global bond crash is the crisis in Greece. Negotiations between the Greeks and their creditors have been dragging on for four months, and no agreement has been reached.  Now, Greece has missed the loan payment that was due to the IMF on June 5th, and it is asking the IMF to bundle all of the payments that are due this month into one giant payment at the end of June…

  Greece has asked to bundle its four debt payments to the International Monetary Fund that fall due in June so that it can pay them in one batch at the end of the month, Greek newspaper Kathimerini reported on Thursday.

   

  The request is expected to be approved by the IMF, the newspaper said. That would mean Greece does not have to pay the first tranche of 300 million euros that falls due on Friday.

   

  Greece faces a total bill of 1.5 billion euros owed to the IMF over four installments this month.

  Of course that payment will not be made either if a deal does not happen by then.  And with each passing day, a deal seems less and less likely.  At this point, the package of “economic reforms” that the creditors are demanding from Greece is completely unacceptable to Syriza.  The following comes from an article in the Guardian…

  Fresh from talks in Brussels, Tsipras faced outrage on Thursday from highly skeptical members of his own Syriza party. A five-page ultimatum from creditors, presented by the European commission president, Jean-Claude Juncker, was variously described as shocking, provocative, disgraceful and dishonourable.

   

  “It will never pass,” said Greece’s deputy social security minister, Dimitris Stratoulis. “If they don’t back down, the country won’t be lost … there are alternatives that would cost less than our signing a disgraceful and dishonourable agreement.”

  Ultimately, I don’t believe that we are going to see an agreement.

  Why?

  Well, I tend to agree with this bit of analysis from Andrew Lilico…

  The Eurozone does not want to make any compromise with the current Greek government because (a) they don’t believe they need to because Greek threats to leave the euro are empty both because internal polling suggests Greeks don’t want to leave and because if they did leave that doesn’t really constitute any threat to the euro; (b) because they (particularly perhaps Angela Merkel) believe that under enough pressure the Greek government might collapse and be replaced by a more cooperative government, as has happened repeatedly before in the Eurozone crisis including in Italy and Greece itself; and (c) because any deal with Greece that is seen to involve or be presentable as any victory for the Greek government would threaten the political positions of governments in several Eurozone states including Spain, Portugal, Italy, Finland and perhaps even the Netherlands and Germany.

   

  Furthermore, it’s not clear to me that the Eurozone creditors at this stage would have much interest in any deal based upon promises, regardless of how much the Greek had verbally surrendered.  Things have gone too far now for mere words to work.  They would need to see the Greeks deliver actions — tangible economic reforms and tangible, credible primary surplus targets and a sustainable change in the long-term political mood within Greece that meant other Eurozone states might eventually get their money back.  That is almost certainly not doable at all with the current Greek government.  The only deal possible would be with some replacement Greek government that had come in precisely on the basis that it did want to do a deal and did want to pay the creditors back.

   

  On the Syriza side, I see no more appetite for a deal.  They believe that austerity has been ruinous for the lives of Greeks and that decades more austerity would mean decades more Greek economic misery.  From their point of view, default or even exit from the euro, even if economically painful in the short term, would be better than continuing with austerity now.

  You can read the rest of his excellent article right here.

  Without a deal, the value of the euro is going to absolutely plummet and bond yields over in Europe will go through the roof.  I am fully convinced that this is the beginning of the end for the eurozone as it is currently constituted, and that we stand on the verge of a great European financial crisis.

  And of course the financial crisis that is coming won’t just be in Europe.  The global financial system is more interconnected than ever, and there are tens of trillions of dollars in derivatives that are tied to foreign exchange rates and 505 trillion dollars in derivatives that are tied to interest rates.  When this giant house of cards collapses, the central banks won’t be able to stop it.

  In the end, could we eventually see the entire central banking system itself totally collapse?

  That is what Phoenix Capital Research believes is about to happen…

  Last year (2014) will likely go down in history as the “beginning of the end” for the current global Central Banking system.

   

  What will follow will be a gradual unfolding of the next crisis and very likely the collapse of the Central Banking system as we know it.

   

  However, this process will not be fast by any means.

   

  Central Banks and the political elite will fight tooth and nail to maintain the status quo, even if this means breaking the law (freezing bank accounts or funds to stop withdrawals) or closing down the markets (the Dow was closed for four and a half months during World War 1).

   

  There will be Crashes and sharp drops in asset prices (20%-30%) here and there. However, history has shown us that when a financial system goes down, the overall process takes take several years, if not longer.

  We stand at the precipice of the greatest economic transition that any of us have ever seen.

  Even though things may seem very “normal” to most people right now, the truth is that the global financial system is fundamentally flawed, and cracks in the system are starting to appear all over the place.

  When this system does collapse, it will take most people entirely by surprise.

  But it shouldn’t.

  All con games eventually fall apart in the end, and we are about to learn that lesson the hard way.

  

  

  
  
  

  

• "Go East, Young Firm": Chinese Companies Drop New York Listings, Return Home

  China’s equity market bubble has become the stuff of legend recently, as millions of newly-minted day traders, record margin debt, liberalized cross-border flows, and the inclusion of China A shares in two transitional EM FTSE Russell benchmark indices have created a veritable frenzy on the SHCOMP and, more spectacularly, on the Shenzhen exchange.

  Valuations have soared, as has turnover and the bubble chorus is growing appreciably louder by the day. The following excerpt from a recent BNP note captures the situation nicely.

  Momentum buying reinforced by market-capitalisation benchmark weightings could further inflate the bubble. In particular, imminent decisions on the inclusion of A-shares in global equity indices might see strong institutional buying buttress the retail mania for a time. Still, the exponential trends in turnover, margin debt and increasingly valuations imply that a climax is now unlikely to be too far away. The Shenzhen Composite’s P/E ratio is now over 66x (with a median P/E of 108x), compared with the 75.8x P/E at the 2008 bubble peak. 

   

  

  Of course not everyone thinks the historic run is likely to end anytime soon and indeed, the momentum serves as a siren song to many Chinese companies which have listed on the NYSE. Reuters has more:

  Chinese tech firms have fallen out of love with America, and it shows – a growing number of them are looking to drop their listings in New York and head back home.

   

  Many Chinese tech executives are betting on higher share valuations in China where stock markets have recently caught fire. They also hope to evade any legal mess when Beijing formally outlaws foreign shareholder control of firms in protected tech sectors.

   

  The numbers are hard to resist. China’s tech-driven ChiNext composite index has gained nearly 180 percent this year, eclipsing the 30 percent rise in the Nasdaq OMX China Technology Index that tracks offshore listed mainland firms .

   

  Firms listed on the Nasdaq index get an average share price equal to 11 times their earnings. On ChiNext, they get 133 times. There’s a debate over which ratio is more accurate, but Chinese executives blame U.S. ignorance of China.

   

  “American investors don’t understand the business model of Chinese gaming companies,” said a senior executive of one such firm planning to eject from New York and move back to a Chinese listing, speaking on condition of anonymity.

  Perhaps. Or maybe American investors don’t understand the valuations. 133X is a lofty multiple even for America’s generally clueless BTFDers and indeed, the mainstream financial media is now awash with reports about China’s stock bubble. 

  Whatever the case, China is relaxing restrictions on tech listings in an apparent effort to encourage more startups to repatriate as Shanghai transitions to a more prominent role in the financial world.

  Chinese investors’ enthusiasm for startup listings is relatively recent, whereas U.S. investors have been rewarding internet startups with high share prices for decades.

   

  But more important was the fact that Chinese regulators wouldn’t let such firms list in the first place. The China Securities Regulatory Commission (CSRC) has required any company to be profitable for several years before listing – a rule which ruled out most Chinese internet companies.

   

  “The obstacle to coming back has been removed,” said China Renaissance in an email to Reuters. 

  Companies have also devised workarounds for China’s profitability restrictions, including convenient (if nonsensical) coporate tie-ups:

  Profitability requirements are being eased, and there’s also a shortcut: a merger with a Chinese company with a listed shell.

   

  Chinese display advertising giant Focus Media, which bailed out of New York in 2013, said this week it will relist in China via a $7 billion reverse merger with rubber manufacturer Jiangsu Hongda in what analysts say is a model for returnees to follow.

  Finally, China may look to close a legal loophole that allows companies in restricted sectors to take in money from foreign investors, a move which could further discourage tech companies from pursuing US listings:

  Chinese law bans foreign investment in domestic internet firms. Investors get around the restrictions by buying into variable interest entities (VIEs) set up by the internet companies, including Alibaba. U.S. courts recognise that as equivalent to ownership of the companies.

   

  But now Chinese regulators are revising the foreign investment law. A draft version of the document published by China’s cabinet explicitly forbids “effective control” by foreigners of a Chinese company in a prohibited sector.

  For Wall Street this means no more hundred million dollar paydays from underwriting highly anticipated Chinese offerings.

  For American exchanges, it means that as long as China’s self-feeding equity mania persists, US listings make little economic sense. Especially if China makes a concerted effort to bring more companies home. 

  

  

  
  
  

  

• Obama Sidelines Kerry On Ukraine Policy

  Submitted by investigative historian Eric Zuesse

  

  Obama Sidelines Kerry On Ukraine Policy

  On May 21st, I headlined “Secretary of State John Kerry v. His Subordinate Victoria Nuland, Regarding Ukraine,” and quoted John Kerry’s May 12th warning to Ukrainian President Petro Poroshenko to cease his repeated threats to invade Crimea and re-invade Donbass, two former regions of Ukraine, which had refused to accept the legitimacy of the new regime that was imposed on Ukraine in violent clashes during February 2014. (These were regions that had voted overwhelmingly for the Ukrainian President who had just been overthrown. They didn’t like him being violently tossed out and replaced by his enemies.)

  Kerry said then that, regarding Poroshenko, “we would strongly urge him to think twice not to engage in that kind of activity, that that would put Minsk in serious jeopardy. And we would be very, very concerned about what the consequences of that kind of action at this time may be.” Also quoted there was Kerry’s subordinate, Victoria Nuland, three days later, saying the exact opposite, that we “reiterate our deep commitment to a single Ukrainian nation, including Crimea, and all the other regions of Ukraine.” I noted, then that, “The only person with the power to fire Nuland is actually U.S. President Barack Obama.” However, Obama instead has sided with Nuland on this.

  Radio Free Europe, Radio Liberty, bannered, on June 5th, “Poroshenko: Ukraine Will ‘Do Everything’ To Retake Crimea‘,” and reported that, “President Petro Poroshenko has vowed to seek Crimea’s return to Ukrainian rule. … Speaking at a news conference on June 5, … Poroshenko said that ‘every day and every moment, we will do everything to return Crimea to Ukraine.’” Poroshenko was also quoted there as saying, “It is important not to give Russia a chance to break the world’s pro-Ukrainian coalition,” which indirectly insulted Kerry for his having criticized Poroshenko’s warnings that he intended to invade Crimea and Donbass.

  Right now, the Minsk II ceasefire has broken down and there are accusations on both sides that the other is to blame. What cannot be denied is that at least three times, on April 30th, then on May 11th, and then on June 5th, Poroshenko has repeatedly promised to invade Crimea, which wasn’t even mentioned in the Minsk II agreement; and that he was also promising to re-invade Donbass, something that is explicitly prohibited in this agreement. Furthermore, America’s President, Barack Obama, did not fire Kerry’s subordinate, Nuland, for her contradicting her boss on this important matter.

  How will that be taken in European capitals? Kerry was reaffirming the position of Merkel and Hollande, the key shapers of the Minsk II agreement; and Nuland was nullifying them. Obama now has sided with Nuland on this; it’s a slap in the face to the EU: Poroshenko can continue ignoring Kerry and can blatantly ignore the Minsk II agreement; and Obama tacitly sides with Poroshenko and Nuland, against Kerry.

  The personalities here are important: On 4 February 2014, in the very same phone-conversation with Geoffrey Pyatt, America’s Ambassador in Ukraine, in which Nuland had instructed Pyatt to get “Yats” Yatsenyuk appointed to lead Ukraine after the coup (which then occured 18 days later), she also famously said “F—k  the EU!” Obama is now seconding that statement of hers.

  In effect, Obama is telling the EU that they can get anything they want signed, but that he would still move forward with his own policy, regardless of whether or not they like it.

  Kerry, for his part, now faces the decision as to whether to quit — which would force the EU’s hand regarding whether to continue with U.S. policy there — or else for Kerry to stay in office and be disrespected in all capitals for his staying on after having been so blatantly contradicted by his subordinate on a key issue of U.S. foreign policy. If he stays on while Nuland also does, then, in effect, Kerry is being cut out of policymaking on Europe and Asia (Nuland’s territory), altogether, and the EU needs to communicate directly with Obama on everything, or else to communicate with Nuland as if she and not Kerry were the actual U.S. Secretary of State. But if Kerry instead quits, then the pressure would be placed on EU officials: whether to continue with the U.S., or to reject U.S. anti-Russia policy, and to move forward by leaving NATO, and all that that entails?

  If they then decide to stay with the U.S., after that “F—k the EU!” and then this; then, the European countries are clearly just U.S. colonies. This would be far more embarrassing to those leaders than John Kerry would be embarrassed by his simply resigning from the U.S. State Department. It might even turn the tide and force the Ukrainian Government to follow through with all of its commitments under the Minsk II accords.

  It would be the most effective thing for Kerry to do at this stage. But, it would lose him his position as a (now merely nominal) member of Obama’s Cabinet.

  The way this turns out will show a lot, about John Kerry. The nations of Europe already know everything they need to know about Barack Obama. If Kerry quits, he’ll have respect around the world. If he stays, he’ll be just another Colin Powell.

  The ball is in Kerry’s court, and everyone will see how he plays it — and what type of man he is (and isn’t).

  ———-
  Investigative historian Eric Zuesse is the author, most recently, of  They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity, and of  Feudalism, Fascism, Libertarianism and Economics.

  

  

  
  
  

  

• "Literally, Your ATM Won’t Work…"

  By Bill Bonner Of Bonner And Partners

  Literally, Your ATM Won’t Work…

  While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us.

  Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

  Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

  Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

  The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

  The same thing could happen to the money supply…

  There’s Not Enough Physical Money

  Here’s how… and why:

  It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $11.7 trillion as of last month.

  But there was just $1.3 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.)

  What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

  Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for.

  After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

  A monetary system like this has never before existed. And this one has existed only during a time when credit was undergoing an epic expansion.

  So our monetary system has never been thoroughly tested. How will it hold up in a deep or prolonged credit contraction? Can it survive an extended bear market in bonds or stocks? What would happen if consumer prices were out of control?

  Less Than Zero

  Our current money system began in 1971.

  It survived consumer price inflation of almost 14% a year in 1980. But Paul Volcker was already on the job, raising interest rates to bring inflation under control.

  And it survived the “credit crunch” of 2008-09. Ben Bernanke dropped the price of credit to almost zero, by slashing short-term interest rates and buying trillions of dollars of government bonds.

  But the next crisis could be very different…

  Short-term interest rates are already close to zero in the U.S. (and less than zero in Switzerland, Denmark, and Sweden). And according to a recent study by McKinsey, the world’s total debt (at least as officially recorded) now stands at $200 trillion – up $57 trillion since 2007. That’s 286% of global GDP… and far in excess of what the real economy can support.

  At some point, a debt correction is inevitable. Debt expansions are always – always – followed by debt contractions. There is no other way. Debt cannot increase forever.

  And when it happens, ZIRP and QE will not be enough to reverse the process, because they are already running at open throttle.

  What then?

  The value of debt drops sharply and fast. Creditors look to their borrowers… traders look at their counterparties… bankers look at each other…

  …and suddenly, no one wants to part with a penny, for fear he may never see it again. Credit stops.

  It’s not just that no one wants to lend; no one wants to borrow either – except for desperate people with no choice, usually those who have no hope of paying their debts.

  Just as we saw after the 2008 crisis, we can expect a quick response from the feds.

  The Fed will announce unlimited new borrowing facilities. But it won’t matter….

  House prices will be crashing. (Who will lend against the value of a house?) Stock prices will be crashing. (Who will be able to borrow against his stocks?) Art, collectibles, and resources – all we be in free fall.

  The NEXT Crisis

  In the last crisis, every major bank and investment firm on Wall Street would have gone broke had the feds not intervened. Next time it may not be so easy to save them.

  The next crisis is likely to be across ALL asset classes. And with $57 trillion more in global debt than in 2007, it is likely to be much harder to stop.

  Are you with us so far?

  Because here is where it gets interesting…

  In a gold-backed monetary system prices fall. But the money is still there. Money becomes more valuable. It doesn’t disappear. It is more valuable because you can use it to buy more stuff.

  Naturally, people hold on to it. Of course, the velocity of money – the frequency at which each unit of currency is used to buy something – falls. And this makes it appear that the supply of money is falling too.

  But imagine what happens to credit money. The money doesn’t just stop circulating. It vanishes. As collateral goes bad, credit is destroyed.

  A bank that had an “asset” (in the form of a loan to a customer) of $100,000 in June may have zilch by July. A corporation that splurged on share buybacks one week could find those shares cut in half two weeks later. A person with a $100,000 stock market portfolio one day could find his portfolio has no value at all a few days later.

  All of this is standard fare for a credit crisis. The new wrinkle – a devastating one – is that people now do what they always do, but they are forced to do it in a radically different way.

  They stop spending. They hoard cash. But what cash do you hoard when most transactions are done on credit? Do you hoard a line of credit? Do you put your credit card in your vault?

  No. People will hoard the kind of cash they understand… something they can put their hands on… something that is gaining value – rapidly. They’ll want dollar bills.

  Also, following a well-known pattern, these paper dollars will quickly disappear. People drain cash machines. They drain credit facilities. They ask for “cash back” when they use their credit cards. They want real money – old-fashioned money that they can put in their pockets and their home safes…

  Dollar Panic

  Let us stop here and remind readers that we’re talking about a short time frame – days… maybe weeks… a couple of months at most. That’s all. It’s the period after the credit crisis has sucked the cash out of the system… and before the government’s inflation tsunami has hit.

  As Ben Bernanke put it, “a determined central bank can always create positive consumer price inflation.” But it takes time!

  And during that interval, panic will set in. A dollar panic – with people desperate to put their hands on dollars… to pay for food… for fuel…and for everything else they need.

  Credit may still be available. But it will be useless. No one will want it. ATMs and banks will run out of cash. Credit facilities will be drained of real cash. Banks will put up signs, first: “Cash withdrawals limited to $500.” And then: “No Cash Withdrawals.”

  You will have a credit card with a $10,000 line of credit. You have $5,000 in your debit account. But all financial institutions are staggering. And in the news you will read that your bank has defaulted and been placed in receivership. What would you rather have? Your $10,000 line of credit or a stack of $50 bills?

  You will go to buy gasoline. You will take out your credit card to pay.

  “Cash Only,” the sign will say. Because the machinery of the credit economy will be breaking down. The gas station… its suppliers… and its financiers do not want to get stuck with a “credit” from your bankrupt lender!

  Whose credit cards are still good? Whose lines of credit are still valuable? Whose bank is ready to fail? Who can pay his mortgage? Who will honor his credit card debt? In a crisis, those questions will be as common as “Who will win an Oscar?” today.

  But no one will know the answers. Quickly, they will stop guessing… and turn to cash.

  Our advice: Keep some on hand. You may need it.

  

  

  
  
  

  

• Citi Clients "Complain How Difficult It Is To Make Money", "Everyone Is Worried About Liquidity Shocks"

  Back in early/mid 2007, just as the subprime bubble was bursting but Wall Street was desperate for the party to go on, when VIX was flirting with single digits (killing the swaption market due to lack of vol), when record, multi-billion LBOs were a daily thing, and when corporate bond spreads barely registered any risk on the horizon, there was one dominant trade for those credit traders who saw the writing on the wall (as they usually do 3-6 months ahead of their equity trading peers): going long cheap index puts while funding the cost of carry by selling a steep long end and pocketing the roll down.

  That trade is back.

  According to Citigroup’s Credit Index group led by Anindya Basu, “nearly every single investor conversation we have had recently has been about how difficult it is to make money in the current environment.”

  There are good reasons for investors to be concerned – the two big elephants in the room are showing no signs of leaving. The Greece saga continues to drag on with headlines driving markets, and mixed economic data out of the US is causing considerable uncertainty around the timing and pace of Fed rate hikes

  Citi adds that,”investors need to put money to work, but almost all investors lack conviction, bemoan the lack of opportunities given how tight spreads are, and continue to worry about market liquidity.” 

  Those investors must have read what Citi’s Matt King said two weeks ago, namely that the market as we know it no longer exists courtesy of central banks (something Zero Hedge has said since 2009).

  So what is the best way to position/trade in the current environment? Citi’s answer is putting the 2007 trade back on again: “Under these circumstances, we believe that option hedges funded by the substantial roll down of mezzanine tranches can be very attractive.”

  This is how those who just have to invest other people’s money are advised to do so via Citi:

  … the markets are awash in liquidity – recent fund flow data indicates continued inflows into corporate IG funds, and even HY funds have seen a reversal of some of the outflows (see Figure 1) – in fact, YTD, both IG and HY funds have experienced net positive inflows. So investors are now faced with the difficult choice of finding opportunities to generate alpha in markets that appear overpriced, while contending with the possibility of liquidity shocks when a sell off happens.

   

  

   

  Now, no one seems to disagree that put (payer) options could potentially provide the best hedges for such situations, if we could only find a way to pay for them. The problem is that in a tight spread environment such as now, investors have to be conscious about how much they can allocate to their hedging budget. One way to make this work is to move the put option strikes significantly out of the money, but that can often make the hedge less effective, especially if we need protection from the daily mark-to-market volatility.

   

  We believe that the steepness of current credit curves offers a way out (see Figure 2 (left)) – the carry from rolling down such steep curves, combined with some form of cheap leverage could potentially be enough to fund closer to ATM puts. From that perspective, we favor selling protection (going long) in index tranches which have steeper curves than the underlying indices (see Figure 2 (right)) – for example, IG 3-7% 3s5s are 63% of the 5y spread, compared to IG index 3s5s at 42% of the 5y. Similarly, HY 15-25% 3s5s are 55% of the 5y spread compared to HY index at 29% of the 5y.

   

  

   

  At the present time, it is our view that the mezzanine index tranches provide the most attractive vehicle for funding close-to-ATM option shorts. In addition to benefitting from the inherent (non-recourse) structural leverage, these tranches can also shield investors from actual default risks, which can be an important factor in an environment where idiosyncratic or sector specific (e.g. energy) risks are dominant.

   

  Combining the tranche and the option legs is advantageous in the following way. As spreads tighten, the trade benefits from the long tranche leg, while the option leg expires worthless. As spreads widen, the trade gains from the option leg and while mark-to-market losses on the tranche legs are partially compensated by the roll down. This can provide positive convexity.

  How to structure the trade:

  The details of our proposed trade are shown in Figure 3. We recommend buying December expiry 60 strike IG payers funded by selling protection in the 5y IG23 3- 7% tranche. We show the performance of the trade under different spread scenarios upon expiry in Figure 3 (red line). The trade is efficient in the sense it demonstrates positive convexity – upon option expiry, the P&L remains positive regardless of the direction of spread moves over a wide range of spreads. We chose a slightly in-the-money strike at 60bp since this exhibits better projected performance relative to strikes that are closer to the ATM 65bp strike.

   

  

   

  In effect, this trade can be thought of as a “payer spread” – selling protection on the IG23 3-7% tranche can be considered as selling an OTM payer option on defaults. In other words, we are long an ATM (technically in-the-money for this trade) payer option on IG in the conventional manner, but we are selling an OTM “default payer” option to fund this. The roll down characteristics of this “payer option” makes it anattractive way to fund the payer spread, rather than using a standard payer option.

  Whether Citi is merely looking for “clients” to take the opposite side of its own trade, or is legitimately pitching a funded, and deeply convex “fat tail” trade is unclear, but the fact that the very same trades that the entire hedge funds community (at least those who made money into the crash before both legs of the trade blew up) are starting to show up again is likely a cause for concern for those who are convinced the artificial, centrally-planned status quo of the past 7 years will continue indefinitely.

  As for Citi’s convictionless clients who “suffer” under the repressive, low vol regime: be happy you still have a job. Because just like Bill Gross, you may have identified both the trade and the timing of the “short (or long) of the century”, but if you execute it incorrectly and find yourself in a liquidity vacuum, your suffering will be the result of no longer having a job, artificial market conditions nowithstanding.

  

  

  
  
  

  

• Turkish Lira Plunges As Landmark Election Portends Political Uncertainty

  In an election that was, essentially, a litmus test for Recep Tayyip Erdogan’s plans to expand his powers, voters dealt the Turkish President and his Justice and Development Party (A.K.P.) a stinging blow at the ballot box on Sunday. 

  With 99% of the vote tallied, A.K.P appeared to have lost its parliamentary majority, winning only around 40% of the vote, a steep decline from 2011.

  The results likely mean the party will have around 260 seats in parliament, down from 327. A difficult coalition building effort will now ensue and Erdogan can call for new elections if a government isn’t formed within 45 days.

  What this means for political and social instability remains to be seen. 

  More color from The New York Times:

  Almost immediately, the results raised questions about the political future of Prime Minister Ahmet Davutoglu, who moved to that position from that of foreign minister last year and was seen as a loyal subordinate of Mr. Erdogan. Mr. Davutoglu, who during the campaign vowed to resign if the A.K.P. did not win a majority, told reporters on Sunday evening in brief comments, “whatever the people decide is for the best.” Mr. Davutoglu was due to speak later in the evening in Ankara.

   

  Mr. Erdogan, who as president was not on the ballot Sunday, will probably remain Turkey’s dominant political figure even if his powers have been rolled back, given his outsized personality and his still-deep well of support among Turkey’s religious conservatives, who form the backbone of his constituency. But even among those supporters, including ones in Kasimpasa, the Istanbul neighborhood where Mr. Erdogan spent part of his youth, there are signs that his popularity is flagging, partly because of his push for more powers over the judiciary and his crackdown on any form of criticism, including prosecutions of those who insult him on social media.

   

  “A lot of people in Kasimpasa have become disheartened by Erdogan’s aggressive approach in recent weeks,” said Aydin, 77, who gave only his first name because some of his family members are close to Mr. Erdogan. “I voted for the A.K.P. because it has become habit, but I think Erdogan lost votes this week.”

  And here’s Barclays on the implications going forward:

  So far, a single party government in Turkey has generally been perceived as a source of stability by the market and reaction to election results confirming such continuity has generally been positive. However, this perception seems to have somewhat evolved recently. Particularly, foreign investors sound less uncomfortable with a coalition government scenario on the basis of improvement in checks and balances, whereas local investor perception is more negative.

   

  In our view, local markets could trade poorly for an extended period should the election confirm a coalition government. First, it is still uncertain whether AKP would be able to attract support from MHP or HDP relatively swiftly and smoothly. While MHP stands as a natural coalition partner on the face of it, given the overlap in broader ideologies, the party’s disagreement with President Erdogan on many fronts and its reservations about the Kurdish peace process will likely make coalition process less straightforward. Indeed, MHP vice president Zuhal Topcu yesterday ruled out a coalition with AKP, accusing the party of making concessions to “terrorists” in an interview with Bloomberg. On the HDP front, external support for an AKP government seemed more likely than a coalition, given the sensitivities of both parties’ voter base.

   

  However, HDP officials recently ruled out external support to an AKP government.

   

  We think coalition negotiations could add another layer of uncertainty to the structure and focus of economic management, with which foreign investors already have concerns.

  Underscoring Barclays commentary, the lira just hit a record low against the dollar:

  • TURKISH LIRA PLUNGES 3.3% TO RECORD LOW 2.7523 AGAINST DOLLAR

  

  

  
  
  

  

• Another Bubble Alert: Home Down Payments Hit Three-Year Low

  Fannie Mae and Freddie Mac — the perpetually insolvent, bailed-out GSEs that a whole host of BTFDers and a few disgruntled billionaires swear can become cash cows again if they are just allowed to escape the evil clutches of government — are now allowed to back home loans with down payments as low as 3%. The decision to lower the minimum from 5% to 3% came from the GSEs’ regulator FHFA and its Director, Melvin Watt. Rather than retrace the entire story of how this came about, we’ll give you the Cliff’s Notes version as it appeared in Bloomberg last October: 

  Fannie Mae, Freddie Mac and their regulator are nearing agreement with mortgage issuers on efforts to boost lending and ease banks’ concerns that they will get stuck with bad loans when borrowers default.

   

  Melvin L. Watt, the director of the Federal Housing Finance Agency, will clarify in a Oct. 20 speech at the Mortgage Bankers Association conference in Las Vegas how some loans can be permanently exempted from the threat of buybacks, said the people, who asked not to be identified because the plans aren’t public. Watt will also discuss an effort that would allow borrowers to put down as little as three percent of the purchase price on loans backed by Fannie Mae and Freddie Mac, enabling borrowers with lower incomes to access the mortgage market, the people said. The two companies currently require a five percent down payment on most loans (ZH: this led FHA — which offers a 3.5% down payment product — to lower premiums in order to avoid losing market share.) 

  Needless to say, some GOP lawmakers were not pleased with this initiative, noting (correctly) that this simply encourages banks to return to pre-crisis underwriting standards and once again imperils taxpayers by putting Fannie and Freddie on the hook for loans made to borrowers who cannot afford their homes. Of course this kind of argument falls on deaf ears in a society where the answer to debt is still more debt and in a world where even the IMF now recommends “living with” debt rather than repaying it. 

  Given the above we weren’t surprised to learn that during Q1, the average down payment on single family homes, condos, and townhomes fell to just 14.8% — the lowest level since Q1 2012. RealtyTrac has more:

  The Q1 2015 U.S. Home Purchase Down Payment Report shows the average down payment for single family homes, condos and townhomes purchased in the first quarter was 14.8 percent of the purchase price, down from 15.2 percent in the previous quarter and down from 15.5 percent a year ago to the lowest level since Q1 2012..

   

  The report also shows that the average down payment for FHA purchase loans originated in the first quarter was 2.9 percent of the purchase price while the average down payment for conventional loans was 18.4 percent of the purchase price..

   

  FHA loans as a share of loan originations increased throughout the quarter, from 21 percent in January to 22 percent in February to 25 percent in March.

   

  “Down payment trends in the first quarter indicate that first time homebuyers are finally starting to come out of the woodwork, albeit it gradually,” said Daren Blomquist, vice president at RealtyTrac. “New low down payment loan programs recently introduced by Fannie Mae and Freddie Mac, along with the lower insurance premiums for FHA loans that took effect at the end of January are helping, given that first time homebuyers typically aren’t able to pony up large down payments..

   

  The share of low down payment loans — defined in the report as purchase loans with a loan-to-value ratio of 97 percent or higher, which would mean a down payment of 3 percent or lower — was 27 percent of all purchase loans in the first quarter, up from 26 percent in the fourth quarter and also 26 percent a year ago to the highest share since Q2 2013. Low down payment loans accounted for 83 percent of FHA purchase loans originated in the first quarter, while 11 percent of conventional loans were low down payment loans.

   

  “I see the rise in low down payments as a positive for our market. In Seattle, it’s primarily a function of the price growth in our region combined with buyers looking to take advantage of the new Fannie/Freddie 97 loan to value programs,” said OB Jacobi, president of Windermere Real Estate.

  And why not?

  After all, the average term on new car loans now sits at a record high 64 months, you can now refinance your credit cards with an online P2P loan from someone you’ve never met, and the government is actively promoting a ‘repayment’ plan for heavily-indebted college students that allows borrowers to make ‘payments’ of $0 on their way to complete loan forgiveness in just 300 short months.

  In other words, it’s no longer about credit risk. The only thing that matters is coming up with ways to re-leverage the economy. Someone else can deal with the fallout when the entire house of cards collapses on itself again down the road.

  

  

  
  
  

  

• The European "Template" For Dealing With Crises: Freezing Accounts, Bank Holidays, and Capital Controls…

  More and more analysts are beginning to take note of the “War on Cash.” However, they’re missing the fact that the actual template for what’s coming to the US first appeared in Europe back in 2012.

   

  Back in March of 2012, when the EU Crisis first began to spin out of control, then Prime Minister of France Nicolas Sarkozy openly called for the renegotiation of the Schengen Treaty: the treaty that established the 26-nation EU as a “borderless” entity in which individuals could move from one country to another with little difficulty and which also made trade among EU members easier.

   

  France was not alone either. A few months later, both France and Germany proposed imposing border controls in June of that same year.

   

              A Vote of No Confidence in Europe

   

  Germany and France's joint proposal to allow Schengen-zone countries to temporarily reintroduce border controls as a means of last resort might sound harmless. But doing so would damage one of the strongest symbols of European unity and perhaps even contribute to the EU's demise.

   

  Germany and France are serious this time. During next week's meeting of European Union interior ministers, the two countries plan to start a discussion about reintroducing national border controls within the Schengen zone. According to the German daily Süddeutsche Zeitung, German Interior Minister Hans-Peter Friedrich and his French counterpart, Claude Guéant, have formulated a letter to their colleagues in which they call for governments to once again be allowed to control their borders as "an ultima ratio" — that is, measure of last resort — "and for a limited period of time." They reportedly go on to recommend 30-days for the period.

   

  http://www.spiegel.de/international/europe/german-and-french-proposal-for-border-controls-endangers-european-unity-a-828815.html

   

  Why border controls? Well in truth, it was all about the money… specifically, physical cash. As we’ve noted before… with the vast majority of the global financial system based on digital money… the minute a significant number of depositors try to move their money OUT of a bank and INTO physical cash, the whole system can collapse.

   

  Again, Europe was ahead of the US in terms of proposing these terms. The below article dated from 2012 outlines the plan to limit cash withdrawals, shut down ATMs, and impose border controls to stop people from fleeing with their capital.

   

              Exclusive: EU floats worst-case plans for Greek euro exit: sources

   

  European finance officials have discussed as a worst-case scenario limiting the size of withdrawals from ATM machines, imposing border checks and introducing capital controls in at least Greece should Athens decide to leave the euro…

   

  As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.

   

  http://money.msn.com/business-news/article.aspx?feed=OBR&date=20120611&id=15208663

   

  What are the key takeaways from this?

   

  1)   When the next crisis hits, the Powers That Be are only too happy to let the rule of law will go out the window.

   

  2)   The biggest problem they face is STOPPING people from moving their money into physical cash.

   

  3)   To stop #2, capital controls, border controls, and even a CARRY taxes (read here for more on this) will be imposed.

   

  Moreover, and I want to stress this, Europe has also shown us the template for how this mess will play out. Indeed, the 2013 banking crisis in Cyprus showed us EXACTLY how it will be in terms of speed and timing.

   

  The quick timeline for Cyprus is as follows:

   

  ·      June 25, 2012: Cyprus formally requests a bailout from the EU.

  ·      November 24, 2012: Cyprus announces it has reached an agreement with the EU the bailout process once Cyprus banks are examined by EU officials (ballpark estimate of capital needed is €17.5 billion).

  ·      February 25, 2013: Democratic Rally candidate Nicos Anastasiades wins Cypriot election defeating his opponent, an anti-austerity Communist.

  ·      March 16 2013: Cyprus announces the terms of its bail-in: a 6.75% confiscation of accounts under €100,000 and 9.9% for accounts larger than €100,000… a bank holiday is announced.

  ·      March 17 2013: emergency session of Parliament to vote on bailout/bail-in is postponed.

  ·      March 18 2013: Bank holiday extended until March 21 2013.

  ·      March 19 2013: Cyprus parliament rejects bail-in bill.

  ·      March 20 2013: Bank holiday extended until March 26 2013.

  ·      March 24 2013: Cash limits of €100 in withdrawals begin for largest banks in Cyprus.

  ·      March 25 2013: Bail-in deal agreed upon. Those depositors with over €100,000 either lose 40% of their money (Bank of Cyprus) or lose 60% (Laiki).

   

  The most important thing I want you to focus on is the speed of these events.

   

  Cypriot banks formally requested a bailout back in June 2012. The bailout talks took months to perform. And then the entire system came unhinged in one weekend.

   

  One weekend. The process was not gradual. It was sudden and it was total: once it began in earnest, the banks were closed and you couldn’t get your money out. ATMs were closed, capital controls were in place, full stop.

   

  There were no warnings that this was coming because everyone at the top of the financial food chain are highly incentivized to keep quiet about this. Central Banks, Bank CEOs, politicians… all of these people are focused primarily on maintaining CONFIDENCE in the system.

   

  How far will they go to maintain this trust?

   

  The Bank of Cyprus, the bank that imploded in 2013 and STOLE clients’ funds was voted Best Bank for Private Banking in Cyprus by EUROMONEY magazine in 2012!!!

   

  No joke…

   

  Bank of Cyprus has been named as the Best Bank for Private Banking in Cyprus, by the internationally acclaimed magazine EUROMONEY

   

  Bank of Cyprus Private Banking ranked first among Cypriot, Greek and other international financial institutions operating in Cyprus in the Private Banking sector…

   

  This recognition by EUROMONEY is ever more important in today’s macroeconomic environment as it reaffirms the Bank’s ability to safely and successfully respond to its clients’ financial needs and emphasizes its clients’ loyalty and trust.

   

  http://www.bankofcyprus.com.cy/en-GB/Cyprus/News-Archive/Best-Bank-for-Private-Banking/

   

  From best bank to totally broke and freezing clients’ accounts in less than one year.

   

  Europe has laid the template for what’s coming to the US.

   

  This is just the beginning. We've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

  We are making 1,000 copies available for FREE the general public.

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/cash.html

   

  Best Regards

  Phoenix Capital Research

   

   

  

  
  
  

  

• Overeducated Writer Explains Why He Defaulted On His Student Loans, Asks "If He Is A Deadbeat"

  There are some valid points raised in Lee Siegel’s 1100 word rant against college loans (if not so much against college education). There are some bad ones. But two things are clear: the words “personal” and/or “responsibility” were used precisely zero times, and the op-ed writer, who described himself as “the author of five books who is writing a memoir about money“, is hardly a glowing advertisement for an education attained (funded with either debt or equity) at one of the Ivy League’s “best”, Columbia University.

  That, or the return on money after spending nearly a decade in university and taking out tens of thousands in loans just to achieve a Master of Philosophy degree.

  To wit:

  • Bachelor of Arts: Columbia University
  • Master’s Degree: Columbia University
  • Master of Philosophy: Columbia University

  

   

  Why I Defaulted on My Student Loans, originally published as an opinion piece in the NYT Sunday Review

  One late summer afternoon when I was 17, I went with my mother to the local bank, a long-defunct institution whose name I cannot remember, to apply for my first student loan. My mother co-signed. When we finished, the banker, a balding man in his late 50s, congratulated us, as if I had just won some kind of award rather than signed away my young life.

  By the end of my sophomore year at a small private liberal arts college, my mother and I had taken out a second loan, my father had declared bankruptcy and my parents had divorced. My mother could no longer afford the tuition that the student loans weren’t covering. I transferred to a state college in New Jersey, closer to home.

  Years later, I found myself confronted with a choice that too many people have had to and will have to face. I could give up what had become my vocation (in my case, being a writer) and take a job that I didn’t want in order to repay the huge debt I had accumulated in college and graduate school. Or I could take what I had been led to believe was both the morally and legally reprehensible step of defaulting on my student loans, which was the only way I could survive without wasting my life in a job that had nothing to do with my particular usefulness to society.

  I chose life. That is to say, I defaulted on my student loans.

  As difficult as it has been, I’ve never looked back. The millions of young people today, who collectively owe over $1 trillion in loans, may want to consider my example.

  It struck me as absurd that one could amass crippling debt as a result, not of drug addiction or reckless borrowing and spending, but of going to college. Having opened a new life to me beyond my modest origins, the education system was now going to call in its chits and prevent me from pursuing that new life, simply because I had the misfortune of coming from modest origins.

  Am I a deadbeat?

  In the eyes of the law I am. Indifferent to the claim that repaying student loans is the road to character? Yes. Blind to the reality of countless numbers of people struggling to repay their debts, no matter their circumstances, many worse than mine? My heart goes out to them. To my mind, they have learned to live with a social arrangement that is legal, but not moral.

  Maybe the problem was that I had reached beyond my lower-middle-class origins and taken out loans to attend a small private college to begin with. Maybe I should have stayed at a store called The Wild Pair, where I once had a nice stable job selling shoes after dropping out of the state college because I thought I deserved better, and naïvely tried to turn myself into a professional reader and writer on my own, without a college degree. I’d probably be district manager by now.

  Or maybe, after going back to school, I should have gone into finance, or some other lucrative career. Self-disgust and lifelong unhappiness, destroying a precious young life — all this is a small price to pay for meeting your student loan obligations.

  Some people will maintain that a bankrupt father, an impecunious background and impractical dreams are just the luck of the draw. Someone with character would have paid off those loans and let the chips fall where they may. But I have found, after some decades on this earth, that the road to character is often paved with family money and family connections, not to mention 14 percent effective tax rates on seven-figure incomes.

  Moneyed stumbles never seem to have much consequence. Tax fraud, insider trading, almost criminal nepotism — these won’t knock you off the straight and narrow. But if you’re poor and miss a child-support payment, or if you’re middle class and default on your student loans, then God help you.

  Forty years after I took out my first student loan, and 30 years after getting my last, the Department of Education is still pursuing the unpaid balance. My mother, who co-signed some of the loans, is dead. The banks that made them have all gone under. I doubt that anyone can even find the promissory notes. The accrued interest, combined with the collection agencies’ opulent fees, is now several times the principal.

  Even the Internal Revenue Service understands the irrationality of pursuing someone with an unmanageable economic burden. It has a program called Offer in Compromise that allows struggling people who have fallen behind in their taxes to settle their tax debt.

  The Department of Education makes it hard for you, and ugly. But it is possible to survive the life of default. You might want to follow these steps: Get as many credit cards as you can before your credit is ruined. Find a stable housing situation. Pay your rent on time so that you have a good record in that area when you do have to move. Live with or marry someone with good credit (preferably someone who shares your desperate nihilism).

  When the fateful day comes, and your credit looks like a war zone, don’t be afraid. The reported consequences of having no credit are scare talk, to some extent. The reliably predatory nature of American life guarantees that there will always be somebody to help you, from credit card companies charging stratospheric interest rates to subprime loans for houses and cars. Our economic system ensures that so long as you are willing to sink deeper and deeper into debt, you will keep being enthusiastically invited to play the economic game.

  I am sharply aware of the strongest objection to my lapse into default. If everyone acted as I did, chaos would result. The entire structure of American higher education would change.

  The collection agencies retained by the Department of Education would be exposed as the greedy vultures that they are. The government would get out of the loan-making and the loan-enforcement business. Congress might even explore a special, universal education tax that would make higher education affordable.

  There would be a national shaming of colleges and universities for charging soaring tuition rates that are reaching lunatic levels. The rapacity of American colleges and universities is turning social mobility, the keystone of American freedom, into a commodified farce.

  If people groaning under the weight of student loans simply said, “Enough,” then all the pieties about debt that have become absorbed into all the pieties about higher education might be brought into alignment with reality. Instead of guaranteeing loans, the government would have to guarantee a college education. There are a lot of people who could learn to live with that, too.

  

  

  

  
  
  

  

• 103 Years Later, Wall Street Turned Out Just As One Man Predicted

  In 1910, three years before the US Federal Reserve was founded, Senator Nelson Aldrich, Frank Vanderlip of National City (Citibank), Henry Davison of Morgan Bank, and Paul Warburg of the Kuhn, Loeb Investment House met secretly at Jekyll Island in Georgia to formulate a plan for a US central bank just years ahead of World War I.

  The result of their work was the so-called Aldrich Plan which called for a system of fifteen regional central banks, i.e., National Reserve Associations, whose actions would be coordinated by a national board of commercial bankers. The Reserve Association would make emergency loans to member banks, and would create money to provide an elastic currency that could be exchanged equally for demand deposits, and would act as a fiscal agent for the federal government.

  In other words, the Aldrich Plan proposed a “central bank” that would be openly and directly controlled by Wall Street commercial banks on whose behalf it would solely operate, instead of doing so indirectly, behind closed doors and the need for criminal probe of Yellen’s Fed seeking to find who leaked what to whom.

  The Aldrich Plan was defeated in the House in 1912 but its outline became the model for the bill that eventually was adopted as the Federal Reserve Act of 1913 whose passage not only unleashed the Fed as we know it now, but the entire shape of modern finance.

  In 1912, one person who warned against the passage of the Aldrich Plan, was Alfred Owen Crozier: a man who saw how it would all play out, and even wrote a book titled “U.S. Money vs Corporation Currency” (costing 25 cents) explaining and predicting everything that would ultimately happen, even adding some 30 illustrations for those readers who were visual learners. 

  The book, which is attached at the end of this post, is a must read, but even those pressed for time are urged to skim the following illustrations all of which were created in 1912, and all of which predicted just what the current financial system would look like.

  Or, in the words of Overstock’s CEO Patrick Byrne, “that’s uncanny“

  @zerohedge that’s uncanny.

  — Patrick Byrne (@OverstockCEO) June 5, 2015

  From “U.S. Money vs Corporation Currency” (which can and should be read for free on Google), here are the selected illustrations:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

   

  None of this was rocket science: should the power to create money fall into the hands of a private few, or an entity working purely on their behalf (and lest there is any confusion, a multi-trillion bailout of the US financial system and the ongoing ZIRP/QE regime has benefited almost entirely that handful of people who stood to lose trillions in paper wealth should US banking as we know it end), it would “inaugurate a financial and industrial reign of terror.” It was clear as day 103 years ago.

  

   

  Fast forward 103 years when who should end up with that power? A group of central banking career academics, currently in the midst of a criminal probe what and how much information they leaked to a select group of private Wall Street interests and commercial bankers.

  Why? Simple.

  

   

  The country now knows: “Democracy” forgot.

  

  * * *

  Full book below (link for free ebook):

  

  
  
  

  

• Citi: Euro Bond Market Faces "Historic" Levels Of Risk

  A little less than a month ago in “Two Years Later, The VaR Shock Is Back,” we outlined the similarities between the recent bout of bund selling and similar instances of safe haven havoc that have unfolded in the past. 

  More specifically, we discussed two self-fulfilling feedback loops that likely contributed to the sell-off. One of those self-feeding dynamics is known as a “VaR shock” and the concept is really quite simple. Here’s how we described it:

  A VaR shock simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.

  We went on the outline how QE sets the stage for episodic credit carnage:

  Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly. 

  Last week, the bund battering was back. Here’s Goldman:

  German long-dated government bonds (Bunds) have sold off aggressively this week. Returns on 10-year and 10-to-30- year bonds are negative to the tune of 6% and 16%, respectively, from the April 20 highs. Long-dated yield levels are back to roughly where they were in the last quarter of 2014, but their volatility is much higher. The 10-year benchmark rate has approached our end-2015 forecast. 

   

  Our correlation analysis indicates that the back-up in 10-year Bund yields has been affecting other markets and was pushing US Treasury yields higher. Exhibit 1 depicts the cumulative bullish or bearish signals generated by each of the four major bond markets, once contemporaneous and lagged inter-relations between rates are accounted for. As can be seen, Bunds are still in ‘in the driver’s seat’ in G4 rate markets, only this time they are moving ‘in reverse gear’. After contributing to a decline in global long-end rates since the Spring of 2014, they are now pushing them higher. 

   

  QE distortions: As we have discussed elsewhere, the way in which the ECB is conducting QE is leading to a ‘see-saw’ effect in the price action, particularly in markets with scarce supply. Consider that German 10-year yields were trading at around 35-40bp at the time of the March 5 press conference when President Draghi stated that the Eurosystem would not buy bonds yielding below the deposit rate, setting in motion a self-reinforcing price action largely unconnected to macro information. Seen in this light, around half of the sell-off from the 5bp lows on April 20 can be seen as the unwind of a ‘rational bubble’.

   

  

   

  Picking up where Goldman leaves off, if half of the sell-off represents the unwind of a “rational bubble” (where we assume “rational bubble” means the rapid yield compression that occurred when investors “rationally” anticipated that the entire bund curve was destined, by the design of PSPP, to converge on the depo rate) then the other half may represent a forced unwind into an increasingly illiquid market after Mario Draghi essentially warned that hightened volatility is set to become a permanent fixture in EU credit markets.  

  For their part, Citi suggests that although the April/May bund rout may have forced hedge funds and banks to recalibrate, longer-term holders have not yet moved to adjust to the new reality and while the ECB seems ambivalent — content to bask in PSPP’s “success” — EGB bond risk has soared. 

  Via Citi:

  Coming back to concept of bond market risk, we would expect high frequency investors (banks & HFs) to have reduced their risk-processing ability already in the sell-off four weeks ago. Other, less frequently trading investors (for example foreign central banks, insurance and pension funds, but also benchmarked mutual funds) might take some more time before adapting their limits to the new volatility environment. At the same time, the ECB – a large absorber of risk – is not altering its activity and even the front-loading is marginal (so far).

   

  VaR-measures are a better measure than just volatility or dv01 in the current environment as the total market risk is a function of outstanding market value, duration and volatility (we’re simplifying a lot here). The question then is: Do investors want to own bonds at 1% or 1-2bp yield per bp of realized vol, if risk is exploding (Figure 14)? Standard theory tells us that investors want to be compensated for their portfolio risk. That is the link between risk, term premium and bond yields. Figure 15 shows that the EGB market is at historical highs in terms of total market risk!

   

  

   

  With hoplessly illiquid core markets set become hoplessly illiquid-er during the summer “lull” (EGB net supply, QE inclusive, was set to be deeply negative in July and August and it isn’t clear to what extent font-loading will serve to mitigate supply constraints), investors should probably take Mario Draghi’s advice and prepare for severe turbulence.

  

  

  
  
  

  

• World’s 2nd Biggest Stock Breaks 28-Year Trendline

  By Dana Lyons, partner at Lyons Fund Management and founder of 401kPro.com

   

  

  On March 24, we posted a rare piece on an individual stock. As we do not invest in individual stocks, they are typically not our focus. Therefore, it takes extraordinary circumstances to inspire a post on a single stock. That was the case with the March 24 post which noted the fact that Exxon Mobil (XOM), the world’s 2nd biggest stock, was testing a trendline that began back in 1987.

  The origin of the trendline, based on a logarithmic scale of XOM, is the low point of the October 1987 crash. It then precisely connects the 1994 and 2010 lows. Interestingly, the stock stopped on a dime in March once it hit the vicinity of the post-1987 trendline. I say interestingly because, at the time, the stock appeared to be in no-man’s land. There were no obvious support or resistance levels in the vicinity. And yet, the stock stopped right on the trendline. It then proceeded to “walk up” the trendline for the next 18 days.

  To those who dismiss the influence of technical analysis and charting techniques on the behavior of stocks as completely random, I can hardly think of a better example of counter-evidence than this. What are the odds that a stock “respecting”, or adhering to, a nearly 3 decade-old trendline is completely random – for 18 days? Furthermore, after bouncing off this trendline into May, XOM returned to it over the past few weeks. It spent 6 straight days sitting squarely (again) on the trendline…before breaking below it yesterday.

  This breakdown marks the first day that Exxon Mobil has ever closed below this trendline. Now, assuming the stock’s behavior around the trendline is not completely random, and considering its capacity as the 2nd biggest stock in the equity market, the effect of this breakdown may be profound. Absent an immediate reversal back above the trendline, this loss of 28-year support would appear to open the door to more downside in the stock.

  

  

  
  
  

  

• "Shawshank Redemption" Inspires Real World Prison Break

  On Saturday, convicted murderers David Sweat and Richard Matt escaped from the maximum security wing of the Clinton Correctional Facility in upstate New York near the Canadian border.

  Escaping from a maximum security prison is not — we imagine anyway — a particularly easy task, but even as improbable jailbreaks go, this particular effort was quite remarkable. 

  

  In a scene straight out of “The Shawshank Redemption”, Sweat and Matt apparently busted through a steel wall, maneuvered down catwalks, cut through a steel pipe, left a Post-it note with the message “Have A Nice Day”, and crawled their way to freedom, emerging from a manhole outside of prison walls. The New York Times has more:

  Duping guards with dummies fashioned out of sweatshirts and using power tools to drill out of their cells, the men made their getaway late Friday or early Saturday, emerging on the other side of the prison’s 30-foot-tall walls, officials said..

   

  The governor marveled at the particulars of escape, in which the two inmates had cut through a steel wall of their adjacent cells, shinnied down a series of internal catwalks, and burrowed their way more than a city block away before emerging from a manhole. Mr. Cuomo said that there had been a number of contractors working in the facility, and that the escapees’ work may have been safeguarded by the silence of other prisoners.

   

  “I chatted with a couple of the inmates myself and said, ‘You must be a very heavy sleeper,’ ” the governor said. “They were heard, they had to be heard”..

   

  “When you look at how the operation was done, it was extraordinary,” Mr. Cuomo said on Saturday after being given a tour of the escape route. This was the first time in the prison’s history that anyone escaped from the maximum-security section of the facility, he said.

   

  The State Police said that Mr. Matt, 48, and Mr. Sweat, 34, were discovered missing during a 5:30 a.m. bed check.

   

  The inmates left a parting message, according to a picture posted to Twitter by Gareth Rhodes, the governor’s deputy press secretary. It shows a yellow Post-it note next to a hole cut in a pipe. On the note, a caricature of a man wearing a conical hat appears above the words: “Have a nice day!”

   

  

  

  

  

  

   

  A massive manhunt is now underway involving hundreds of law enforcement officers, K-9s, bloodhounds, and helicopters. 

  Despite their apparent sense of humor, Sweat and Matt are considered extremely dangerous and although authorities would appreciate any help they can get, Governor Cuomo had the folowing warning for New York residents:

  “These are dangerous people, and they are nothing to be trifled with.”

   

  

  

  
  
  

  

• Should We Raise The Voting Age?

  Submitted by Mark St. Cyr

  Should We Raise The Voting Age?

  I know at first blush the above headline reeks of “click bait.” However, that’s far from my intention. The reason why I used it, is exactly for the stopping power, as well as attention grabber I needed during a recent conversation. (If it could be called that)

  During a discussion amongst people of varying ages the discourse became heated and focused more on “who was to blame” for the current economic malaise throughout the country. As well as “who the fingers should be pointed at” as to fix it. Neither side seemed willing to budge or relent any ground. Yet, the side that seemed the most adamant was the “younger” of the two sides (although younger was not by much).

  They were also the most vocal in professing why “they were correct” as well as the one’s that were listening the least – and talking the most. Countering, or getting a word in edgewise without seeming to (or in reality) yell was near impossible. So I interjected with what I felt was a question that needed to be addressed if the “finger-pointing” argument if either side was to have any validity.

  Although I’m not going to touch with a 10? pole the arguments of left vs right. Or, who vs who. Or who should pay more or less. What I am not afraid to state, as well as remind anyone of is this: When it comes to taxes – everybody pays them in one form or another – nothing is free. And just like death – taxes (regardless of age) will at sometime need to be settled with the “ferryman.” Pure and simple. And by taxes I mean all – everything. i.e., taxing in all its forms be it business, personal, wealth, education, speech, freedom, safety etc., etc.

  You might want to debate they’re too high, or too low as to influence what one decides in the privacy of the voting booth. There’s nothing wrong with that and ideas should be expressed. However – knowing the implications; where they come from; the potential burdens on the young, old, neighbors, themselves, their families, the country and more is what has to be contemplated. Otherwise the arguments are nothing more than an assemblage of moot points only for the sake of verbal jousting.

  It’s not my place to say one is right or wrong. Again, that’s not my gist here. Nevertheless, when the argument falls between two sides and one of those sides has no experience in the effects of their decisions; and can only speak as to why in reasoning’s of platitudes, sound bites, or less? (i.e., Just because they think so.) Someone has to be the adult in the room and stop the merry-go-round of nonsensical reasoning or accusations. Which is where I found myself, as the appointed “ring master.”

  So when I interjected with the supposition “Maybe it’s time we need to raise the voting age?” Both sides stopped and took notice. Suddenly there was an argument on the table (which is what I’m known to do as to get to the real issue) neither contemplated. I believed it was a central (as well as clarifying) question that should be addressed by both sides if they were to continue further. For it opened the discussion more towards a tangible cause and effect both sides could, and did, have equal standing. Along with opening (hopefully) more reasoned arguments to answer for.

  This question focused and demanded qualitative answers. There could be no “just because” type answers from either side without making it blatantly obvious that’s all one had. (i.e., No real defensible argument. For “just because” type answers are just that.)

  I also elaborated the following in a true questioning manner. While at other times some bordered (and some were purely) the rhetorical. Whether or not any side agreed with the premise I stressed was not the case. However: knowing and understanding the intents and consequences contained within couldn’t go unanswered if: they wanted to continue on and try to reach an amicable conclusion. Whether it would be in half agreement, full agreement, or the willingness to agree they completely disagreed till more evidence or facts could be contemplated. But whatever the case: the talking (or half yelling) at each other had to cease. For as I’ve said many times “The best way to stop a headache is not with a stronger aspirin. It’s to first stop pounding your head against the wall.” And I could see the only thing everyone was contributing to was the severity of this “migraine.”

  (I started with asking the following as a premise for further insight and discussion. I wasn’t taking one side or another. The premise was purely for pushing the discussion forward where thinking and true reasoning needed to stem from. Nothing more.)

  I began with: Currently you can vote at 18. However, some of you are currently still in school (college), while some of you have recently just graduated. Others have since graduated and have yet to enter the work force. And, there are some that have since entered the work force yet, they are working in fields other than their chosen degree. And many combined still live at home. As a matter of fact, statics imply the number of college graduates that go back and live at home (i.e., parents or other family members) and remain there for years for whatever the reasons is quite high.

  On average, it takes about 3 or 4 years after the day you leave high-school to obtain and get yourself adjusted to enter the labor force with an associate degree. Yes, it’s a two-year “in school” thing. However, when you total up all the incidental time you’ll spend i.e., the summers in between, then graduate and settle back home time, get your bearings and start applying to businesses. It runs around 3 to 4 years. For a graduate degree, it’s about 5 to 6 when all is said and done.

  The average age after high school is about 18. So in essence, after an associates program you’re about 21. After a graduate somewhere around 23-24. And if a post-graduate about 25 or so give or take. The vast majority might not ever had, or may never hold a job of any type during this period.

  Not only that, they will live in a sheltered environment where all the rules are known, visible, and the only competition they’ll face is to answer taught, and known variables that will be asked during testing assignments. Where a mediocre score, if not an outright 1 point above a fail allows one to be included, as well as on the same stage or platform, as one who receives above average scoring. (e.g., This can be shown in the old joke that really isn’t: “What do they call a med-student who graduates at the bottom, and is last in their class? Doctor!)

  Add too this many of this same group have fought to be classified today as “children” until the age of 26 as to remain on their parents health insurance for the explicit reasoning that they “can’t and shouldn’t be made to afford it otherwise.” Also while remembering one isn’t considered legally as an “adult” to even drink alcohol till they’re 21.

  Yet, at the same time many (and many is just that: a vast preponderance) have taken on suffocating amounts of student debt in the pursuit of degrees or studies that when looked through the prism of prudent financial analysis shows; repayment (if even possible) may cripple one’s ability to move forward in pursuit of the things so many take for granted. i.e., Qualifying for a house, raising kids of their own, and more in the not so distant future.

  Does it seem this side should have equitable standing at the ballot box when their decisions will have the weight of enforcement by both law, and force under penalties of imprisonment or monetary damage when they may have never experienced a day in the real world outside of school?

  Think hard about how you address these points. For they are not only valid arguments – they are also very real. And although one may not feel the ramifications of these decisions today. Rest assured, they will – once they too enter what is known as real life.

  From the point of one side vs the other answer this question to yourself: Who is in the midst of what I just outlined? And should they be granted the right without any true understanding of the consequences of their actions? i.e., To vote for candidates, and laws to be passed where the ramifications will be borne by others? Or, those consequences may in fact backfire resulting to be far more devastating to they themselves in the future for they willy-nilly, or haphazardly voted them in – never contemplating the true ramifications.

  Again: Should a person or group that has never experienced what is known by all as “real life” while simultaneously being seen by many legal standards as not having the full credentials to be recognized as an “adult” have the ability to vote directly for, or vote for candidates responsible in the setting of the nations wage laws, tax laws, business law, national debt, business tax structures, business mandates, international trade policies, monetary policy, or most importantly – whether to send their brethren off to war where people die for real – not in some video game or movie? All the while they’ve never been responsible for anything more than “school” and in many cases not subject to feel the direct consequences of their votes until some 8 years or even longer after the age of 18?

  Not withstanding showing an inadequate fiduciary responsibility to themselves, never mind others, to pursue degrees that may in fact have no value in society for gainful employment? All the while taking on ever more burdensome debt that may never be paid back in their lifetimes without needing their own form of bailouts or debt forgiveness in the future? All this as they rail about “Wall St.” bailouts. Again, both sides should take a real hard look at not only these questions, but also the mirror.

  At the end both sides were a little taken back and knocked of their own self-appointed pedestals (which is what I hoped for). For as I stated earlier, The “younger” side wasn’t all that younger than the other. Many fit into the above from both sides. And you could see the wheels turning in their heads as they contemplated what I had just proposed.

  So now, with all that said, do I think we should raise the voting age? No. Of course not. Again: That’s not what I’m trying to argue.

  What I am trying to bring to light is: Far too many today are acting like children when in fact they are older (I’ll contend much older) than the many that not all that long ago set out and made a life for both themselves, as well as others. If I may be so bold I’ll use an example in which I played my own part.

  At 18 not only had the majority left school, many left at 16 or 17 never finishing (which is where I fell) and were out working odd or whatever jobs they could find. And trust me they were scarce in the 70’s. Sometimes we worked as many as we could handle at once with little to no sleep in between because if you wanted to eat – that’s what it took. (Many times I slept in my car, in the parking-lot as to not miss or be late. For a miss could mean being fired.)

  There was no “going back home” to live with your parents. Many at 18 were confronted by very loving parents and asked point-blank “So you’re 18 now. Have you thought about where your going to live?” Why? Because you were considered an adult in just about every aspect of life. And you had better of understood that or else life was going to get a whole lot tougher – sooner.

  For many by the age of 19 to 21 they were married, and most had their first child. They had apartments they were responsible for paying rent, utilities, food, as well as upkeep in household chores. Whether they could barely afford it or not. Want to eat? You had better learn to cook and make a meal of whatever you had on hand. A lot of times what was “on hand” was more like a finger. But we all did just that. There was no complaining because – there was no alternative. And for every generation going back it was the same if not more harsh. Want an example? Compare today’s employment prospects for a 20 something today as compared to someone the same age in let’s say 1938?

  By 25 most were in jobs that would turn out to be careers in one form or another. By 30 you were contemplating school districts for your kids, neighborhoods to raise them through high school and more. Today, there are more just shy of 30 (if not over) still living in their parents home with nothing more intense as to compare against a real word “family life” than a relationship that maybe lasted a year or so since college. The same may be for a job if that. All while under the guise of “Unless they can get a corner office with a title along with a smokin’ hot spouse – there’s no rush because – they aren’t settling.” As they remain in their parents home unemployed – and single.

  Before: the case for voting at 18 could easily be argued. For at 18 you were directly at the receiving end of consequences for your votes. Today? At 18? Answer that honestly. Especially if you are one that fits into the above scenario that I outlined in the beginning.

  Never mind what many deem as “the older generation.” If you are right now 25-ish. Do you want any 18-year-old today that you know voting into law something that can directly impact you for what ever the reason? Especially if they seem directly indifferent to anything you may hold as dear? And there would be nothing you can do about it (whether you like it or not) because it would be enforced by all the power that comes from being law. Are you starting to understand why knowing the consequences and truly weighing them against alternative scenarios is important? Important as in say…voting?

  Again, don’t let this point be lost on you. It truly is the crux of my argument. Think about it because what one thinks today as unimaginable can turn into reality tomorrow. If you think I’m trying to fear monger, or use the ole “when I went to school it was uphill both ways” argument. Think this…

  The most influential group coming up the ranks that may contemplate whether or not the voting age should, or should not be raised out of respect for future generations may very well be the next batch of newly minted 18 year old’s. Where they may decide to form a movement pursuing, pushing, and mobilizing their own grass-roots and numbers for its passage. Many think the argument only resides or will be borne from some organizing “old geezers” constituent. But history shows us surprises can come from where one least expects it.

  It’s quite possible (and perfectly lawful) it may very well be borne by some active and vocal group of 18 year-old’s the nation has ever seen. Remember, no matter what one thinks, or how hard one tries to escape it. The newest crop of 18 year-old’s at any time may take the sanctity of voting and its repercussions on the future more to heart than any predecessor – and decide for themselves how and when the “ferryman” in both death or taxes will be paid. After all – they will have to live the longest in what ever world they’re in, and may look at today’s constituent of 20 or 30 somethings – in the same light they look at their elders. Changes the whole landscape of who has the moral authority argument when put that way does it not?

  At the same time let’s not forget the reason why you or I can even sit here and contemplate these current arguments was made possible in no small part this weekend in history by a group of individuals younger than today’s most recent graduates. Those that stormed into the teeth of a relentless and unrelenting foe with thousands upon thousands of lives lost and even more wounded, so that we can contemplate (as well as vote on) the issues of the day going forward.

  If you want to impress upon yourself why voting in this country is looked upon with such reverence. Remembering D-Day should help you in that quest. Don’t take it for granted. Young – or old. And if you want more proof the world at any time could belong to someone 18.

  Alexander The Great conquered the known world at about age 18.

  

  

  
  
  

  

• Drivers in the Week Ahead

  The most important driver of the dollar remains the de-synchronization of the monetary policy cycle.  The early and more aggressive action by the US, and the institutional flexibility, leaves the Federal Reserve in a position to begin normalizing monetary policy several quarters at least ahead of the eurozone, the UK and Japan. Other countries, including China, Australia, New Zealand, Sweden, and Norway are also in the process or are anticipated to be, of easing policy as well.  

   

  Improvement in the US labor market is key. The strength of the May employment report strengthens conviction that the March weakness was a bit of a fluke, and in any event, not reflective of the underlying trends.  The same can be said of the contraction in Q1 GDP.  We recognize that the trend growth in the US economy has slowed on this side of the Great Financial Crisis.  The two drivers of growth–labor force growth and productivity, have slowed.  This means that even at 2% growth, the US economy can absorb the slack.  

   

  The IMF opined that the Federal Reserve should wait until next year to hike rates.  The Federal Reserve is unlikely to be swayed by the IMF’s logic.  Fed officials, or at least the leadership, accept some version of the  Phillips Curve, which posits that a tighter labor market will boost inflation.   The underlying view is that headline inflation gravitates toward core inflation, and labor costs drive core inflation.  Labor, like other commodities, is seen driven by supply and demand though a bit stickier.   Yellen has argued that she does not need to see core inflation rise much as long as the labor market slack is being absorbed to be reasonably confident that Fed’s 2% inflation target (core PCE deflator) will be reached in the medium term.  

   

  The most important US economic data in the coming days will be the May retail sales data.  Recall that after the strongest report in a year in March (1.2%), US consumers rested in April and retail sales were flat.  They returned in May.  The headline rate will be flattered by the strong auto sales that have already been reported.   The components used for GDP calculations are expected to rise 0.5%. The monthly average in Q1 was 0.02%. 

   

  Assuming the a consensus report in May, and a flat June, the monthly average in Q2 would be 0.16%. What this means is that consumption is likely to be a bigger contributor to Q2 GDP than Q1, and we have already learned that trade is exerting a smaller drag.  The Atlanta Fed GDPNow model says the US economy is tracking 1.1% Q2 GDP, and this is likely be revised higher after the retail sales report.   

   

  Another driver for the US dollar has been the dramatic sell-off in European bonds that pushed yields sharply higher.  As the long positions are unwound, the short euro hedge are bought back. There are two issues here:  the direction of yields and pace of the move.  German bunds appear to be at the heart of the matter.  The rise in German yields had a knock-on effect throughout the capital markets.  The 10-year yield approached zero in the middle of April, which culminated a multi-year decline in yields.  The last leg down in yields was sparked by European inflation falling into deflation territory.  

   

  There were also supply and demand dynamics at work.  The grand coalition in German had agreed to a balanced budget and paying down debt this year.  This curbed supply at the same moment that demand was increasing.  The increase in demand is partly a function of its safe haven status given the ongoing Greek drama.  German bunds are also used as collateral, not just an investment. The launch of the ECB’s sovereign bond-buying program is another source of demand.

   

  The decline in the interest rates, the euro and oil prices fueled an economic recovery in the euro zone. At the same time that the economy gained traction and credit growth expanded, oil prices began recovering.  This reduced the deflationary pressures.  April’s CPI was flat, and the preliminary May report was the first positive reading (0.3%) since last November. 

   

  If economic fundamentals explain the direction, what about the pace of the move?  In mid-April, many had expected the 10-year German bund yield to go negative, but it stopped just below five bp.   Three weeks later it was near 80 bp and a half week later (last week) it approached 100 bp. There appear to be several factors at work.  First, as Draghi noted, the low yields themselves leave the market more subject to volatility.  Second, the micro-structure of the market, with levered players using some variant of value-at-risk models, exacerbates movement.  

   

  As yields and vol fall, such participants take larger positions only to have to scramble out when vol increase.  Thirdly, the a combination of technology, regulation, and central bank activity appears to have contributed to the fragmentation of the market which while often generating strong volumes, diminishes liquidity.   Draghi’s failure to express much concern (instead he advised investors to get used to it) may have helps spur new selling.  

   

  The unresolved Greek crisis also keeps the market on edge.  The official creditors made an offer to Greece, which was very much in line with the “pretend and extend” strategy.  The Greek government summarily reject it.   The Greek government gets little sympathy from the political elites and investor class.  Nevertheless, its demand for debt relief is more realistic than pretending that its debt is sustainable.  Even the IMF has called for debt relief though it wants to exclude itself from the process.  It is willing to be more generous with EU money than with its own.    

   

  The Greek government has consistently maintained that it comes down to a political decision.  It has been accused of trying to have an end run around the Eurogroup of finance minister.  To the extent that the creditors finally offered its own proposal after Greece has submitted no less than three plans, it came about only with the intervention of officials at the highest level.   

   

  As European officials did in 2010-2011, they want to make an example of Greece.  They want to send a message that there is no alternative to the diktat of austerity.   But there is.  It is called debt relief.  This can take the orderly form of restructuring that EMU officials have permitted for private sector investors in Greece and Cyprus.    It can take a less organized form of default.  The more onerous the demand for austerity and refusal of the official creditors to devise a plan for debt restructuring, the more likely is a default.  A default under current conditions would make the Argentinian crisis look like a tea party.  Greece may very well have been dysfunctional before the crisis, but the cost to Europe of turning it into a failed state would be much higher than debt relief. 

   

  The dollar has rallied nearly 6% against the yen from the low seen on May 14 (~JPY118.90) to the high seen before the weekend (~JPY125.85).   Absent among the drivers is jawboning by Japanese officials.  If anything, government officials have been cautioning against sharp moves. Japanese companies,  like Fuji Heavy, have indicated that an “overly weak yen is not welcome.”  The macroeconomic considerations include the rise in US yields and the strong rise in Japanese stocks. Of the major G7 equity markets, the Nikkei is the only one to have rallied (~5.6%) over the past month.   

   

  In terms of flows, Japanese investors had stepped up their purchases of foreign bonds after early May. Before turning to small sellers in late May, Japanese investors had bought nearly JPY2.5 trillion of foreign bonds in the preceding three weeks.  Japanese pension funds are diversifying away from the JGB market toward domestic equities and foreign bonds.  The yen has reached levels, though that some asset managers are reevaluating whether they want to continue buying foreign bonds on an unhedged basis.  

   

  Speculators also have been exceptionally aggressive sellers of the yen over the past three weeks. We cite this figures from the speculative positioning in the futures market assuming that they are representative of that market segment of short-term leveraged momentum players.  

   

  One needs to appreciate that dollar-yen was confined to a broad trading range since last December. During this period, the gross short yen speculative positions at in the futures market were cut from 153k contracts (each contract is for 12.5 mln yen) to about 52.3k contracts by late April. This was the smallest speculative short yen position since November 2012.  In the past three CFTC reporting weeks, speculators have more than doubled their gross short yen position.  As of June 5, it stood at 132.4k contracts.  This three-week selling spree is the largest since in four years. 

   

  Indicative pricing in the options market is interesting.  The upside breakout for the dollar has coincided with a decline in implied volatility.  The three-month implied volatility has fallen from 10% in late-May to about 8.75% before the weekend.  

   

  At the same time, the premium for dollar calls (3-month 25 delta) have fallen from 0.9% to 0.3%. This suggests that instead of buying dollar calls while it is a rally, participants are selling dollar calls.   These participants could be long dollars and using the options market to buy downside protection.  It could also be Japanese exporters, whose exports to the US have been running more than a fifth above year ago levels, sell calls against their dollar receivables.   Some Japanese investors in US bonds may also be hedging their currency risk.  

   

  Japan will offer a revision to its initial Q1 GDP estimate of 2.4% at an annualized pace.  The market is divided about the outlook for the revision.  The Bloomberg consensus anticipates an upward revision to 2.8%.  This would be largely based on the strong upward Q1 caps.  Instead of falling by 0.2% as anticipated, it jumped 7.3%.  However, there is some risk that inventory accumulation that accounted for over half of Japan quarterly growth are revised down.   Hence, it will be a surprise regardless of the outcome.  

   

  Europe will report industrial production data for April.  After a weak March (-0.3%), industrial production in the eurozone is expected to have bounced back with the consensus around 0.4%.  However, it is not non-eurozone industrial production reports that may be more interesting.  Industrial output jumped 0.5% in the UK in March but is likely to have slowed in April.  The consensus expects a 0.1% rise though the risks seem on the downside.  Sterling has built a small shelf in the $1.5180-95 area (there is other technical support in the area, see here) and a disappointing report, which would play on ideas that the UK economy has peaked, would likely send sterling lower. The next target is the early May lows a cent lower.  

   

  Sweden reports industrial output and CPI figures.  The consensus is for a 0.2% increase in industrial production, but we see risk on the upside.  We look for the Swedish krona to be particularly data sensitive as the market is not convinced that the Riksbank QE is over.  The CPI figures are expected to show that Sweden is still experiencing deflation, but it appears to be diminishing.  

   

  At the same time, poor Norwegian industrial output figures (-4.9% month-over-month in April and a 2.9% fall in manufacturing output) has heightened speculation of a Norges Bank rate cut at the June 18 meeting.  Softness in this week’s CPI report will only fan such expectations.  The Norwegian krona broke down last week against the Swedish krona.  Although it looks over-extended, Nokkie is still vulnerable.  

   

  The Swiss National Bank meets the same day as Norges Bank.  It will likely confront a strengthening of deflationary forces as the franc’s appreciation following the lifting of its cap continues to filter through the economy.  With the risk of disruptive developments from the eurozone, the Swiss franc appears poised to strengthen against the euro.  Although Swiss officials have indicated that they are near the lower limit of rates with a minus 75 bp 3-month LIBOR target, there may be scope for a lower target, within the existing -1.25% to -0.25% current range.  

   

  The Reserve Bank of New Zealand meets on June 10.  The cash rate currently stands at 3.5%.  The OIS market is discounting roughly a 50% chance of a cut.  We had been leaning more in favor of a cut, but the 7.25% decline in New Zealand dollar against the US dollar since mid-May may have removed some urgency.  It finished at new multi-year lows against the dollar.   We are concerned that the RBNZ either disappoints those looking for a cut or that there is a sell-the-rumor, buy the fact” type of activity.  

   

  China reports its slew of monthly data.  On balance, the real sector is expected to have stabilized. That includes industrial production, retail sales, and investment.  China’s imports and exports likely remained soft (declining on a year-over-year basis), but this may result in a wider surplus.  Yuan loans and aggregate financing likely remained robust.  Perhaps the most important report is the CPI. Disinflationary, if not deflationary pressures are still evident.  The pace of increase in consumer prices has been halved since the recent peak in October 2013 at 3.2%.   Food prices are masking the decline in consumer prices.  Non-food prices are increasing by less than 1%.   A sharp slowing in the CPI (consensus is for 1.3% after 1.5% in April) may signal higher real interest rates, to which PBOC officials have been particularly sensitive.  

   

   

  The Mexican mid-term, and Turkey’s national elections are being held today.  The results are not yet available.  In Mexico, since the President cannot stand for re-election, the significance is about the legislative agenda for the next three years.  The peso finished last week at record lows against the US dollar.  In Turkey, the issue is whether the ruling AKP wins a super-majority that would give Erdogan a mandate to lead the country even further away from its secular and pro-European path.  It does not appear that he will get such a mandate.  If these results are borne out, the lira and Turkish assets may perform well at the start of the week.  

  

  

  
  
  

  

• De-Dollarization Du Jour: Russia's Largest Bank Issues Yuan-Denominated Guarantees

  The unipolar, dollar-dominated post-war world is shifting under Washington’s feet. 

  Leading the push towards multipolarity and de-dollarization are a resurgent Russia and China, the rising superpower. The demise of the Bretton Woods world order is perhaps nowhere more apparent than in the launch of the BRICS bank and the establishment of the AIIB. These new structures represent a move away from US-dominated multilateral institutions and their very existence suggests that a failure to adapt to economic realities and an inability or unwillingness to meet the needs of the modern world may soon drive institutions like the IMF into irrelevancy. 

  If the demise of the existing supranational economic order seems improbable, or if calls for its downfall appear at the very least to be premature, consider recent events. 

  While the US obstructs efforts to reform the IMF and give member countries representation that’s commensurate with their economic clout, and as the Fund itself bickers with the EU over aid to Greece, the BRICS bank (which hasn’t even officially launched) has offered Greece a spot at the table with some reports suggesting Athens may be able to contribute its paid in capital in installments while receiving aid in the interim. 

  China has pledged to invest some $50 billion in Pakistani infrastructure via Beijing’s Silk Road initiative and the AIIB. The money will fund power plants, roads, railways, and, perhaps most importantly, the Iran-Pakistan natural gas pipeline. The vast sum represents 53% more than the US has given Islamabad over the past 13 years combined. China is also set to invest an equally large sum in Brazil and is even considering the construction a railroad over the Andes, which would connect Brazil to China via the Pacific and ports in Peru. Meanwhile, lawmakers in Washington fight over whether infrastructure spending could have prevented an Amtrak derailment. 

  When considering the above, it’s important to understand that the BRICS bank isn’t simply a channel by which rising EM powers can ban together to project their growing influence in the face of the multilateral institutions which they feel have left them underrepresented. Similarly, the AIIB is more than a foreign policy tool that will allow Beijing to establish regional dominance.

  Both institutions will serve to accelerate de-dollarization. Russia, for instance, has proposed the establishment of a BRICS alternative to SWIFT. China, meanwhile, is set to ensure that the yuan plays an outsized role in lending through the AIIB. 

  In yet another sign that Russia and China are set to work together to extricate themselves from a dependence on the dollar specifically and on Western financial institutions more generally, Russia’s largest bank has, for the first time, extended yuan-denominated letters of credit in concert with the Chinese Export-Import bank. 

  More, via Sberbank:

  Sberbank issued its maiden letters of credit with financing from The Export-Import Bank of China for Baikal Bank’s client JSC Pharmasyntez.

   

  JSC Pharmasyntez approached Sberbank about the possibility to finance letters of credit in yuan (CNY) for the import contract to supply pharmaceutical products worth more than 29 mln yuan.

   

  The first LCs with financing from The Export-Import Bank of China have allowed the client to meet its current working capital needs while continuing to actively cooperate with Chinese suppliers.

   

  The development of cooperation with The Export-Import Bank of China expands Sberbank’s possibilities to finance clients’ foreign trade with Chinese counterparties.

  *  *  *

  Recall that last October, Russia and China opened a $25 billion currency swap line, an effort which not only serves to bolster ties between Moscow and Beijing in terms of investment and trade, but which also helps to secure Russia against the financial strain imposed by Western sanctions. 

  

  

  

  
  
  

  

• Tales From The Bizarro World

  Submitted by Erico Matias Tavares

  Tales from the Bizarro World

  Back in the 1960s, DC Comics introduced a parallel Earth called Bizarro, where everything is inverted and everyone is insane. They even have their own wacky Superman, which ends up being a formidable foe of his sane counterpart in our world.

  Or not in our world perhaps. Some events make us question in which of the two we might actually be living in: what if it was some version of Bizarro?

  Over the last decades scientists have been researching certain quirks in our brain, or cognitive biases, that make us act in rather illogical and peculiar ways under certain circumstances. Since Amos Tversky and Daniel Kahneman first introduced this notion in 1972, a growing body of evidence suggests that we may not be as rational as we once thought. And this impacts many areas of our lives, including our beliefs, attitudes towards certain events, political affiliations and so forth.

  A less scientific explanation for our illogical behaviors is that they may simply be the result of our imperfect human condition. That, or something in our environments could be poisoning our reasoning (we would argue, quite acutely in the case of Keynesian economists) similar to what happened to the Romans after they started using led in everyday life artifacts.

  Whatever the reason, consider the examples presented below, drawn from the fields of economics, politics, health, society and even religion. Now, to be clear, we don’t mean to pick on any country or anyone in particular, much less on their beliefs (except for those Keynesians). Remember, in the Bizarro World everyone is mad so presumably we are all in this together.

  Let’s proceed…

  • If you want to market a new medicine, first you need to spend years in a very expensive approval process to make sure it is completely safe to the public. However, at the same time, any adult can buy a particular and ubiquitous consumer product where it is clearly written in the package that if you use it will eventually kill you and all those around you‎
  • Keynesian economists tell us that in order to get richer we must save less and get deeper into debt‎
  • Obesity is estimated to kill three times as many as malnutrition
  • World governments spend trillions on weapons every year when we already have the capacity to blow up the planet many times over. But they always come up short when it comes to cleaning water supplies, providing healthcare, upgrading infrastructure, restoring nature and feeding people
  • How does a desert-like region such as Southern California decide to become so dominant in food production? All the water exported in the form of fresh produce, dairy, fresh fruits, rice and so on will NEVER return to that ecosystem
  • Hemp consumption can become a destructive addiction; but so can alcohol consumption. Why is only one of them illegal, or, depending on your views on the matter, why aren’t both legal in the same places?
  • A google search of “Kim Kardashian” generates 197 MILLION results (we speculate, to figure out what she actually does), just a tad less than the current US President “Barack Obama”
  • Some 30-40% of global food production is wasted
  • Western leaders, once the biggest supporters of free markets, now spend trillions intervening in the economy. The US government has been the world’s biggest employer for many years. The (Keynesian-inspired) theme is “we had to destroy capitalism in order to save it”
  • Everyone talks about the need to reduce debt levels, and yet since 2007 total debt around the world has increased by almost US$60 trillion
  • Politicians in the US seem to have gotten into the habit of approving major legislation without reading it
  • Pursuant to the Eurozone financial crisis in 2010, the Portuguese government was advised by international lenders to implement an aggressive austerity program. But public sector debt as a percentage of GDP ended up exploding as a result, reaching 166% last March from 108% in December 2009 – the exact opposite of the program’s goal. Nevertheless, the Portuguese government was recently praised by the architects of the program for delivering outstanding results (while being told, perhaps unsurprisingly, that more austerity is needed)
  • A famous actor passionately demands in front of a UN assembly that world governments take drastic action to reduce carbon emissions and tackle global warming. Maybe they could start with him. Just a few months earlier he rented a mega yacht (complete with its own helipad) off Rio de Janeiro to watch the World Cup in style and supposedly flew his mother and himself multiple times on a private jet while shooting one movie in the US
  • A country known as the “Land of the Free” has one of the largest prison populations on the planet‎; another with “Order and Progress” written on its flag has 19 of the world’s 50 most dangerous cities
  • A UK scientist achieves worldwide fame through his widely publicized efforts to debunk the existence of God, while admitting at the same time that creation might in fact be the result of intelligent design
  • In China, provincial governments have spent billions building new cities when most of their citizens can’t afford living there. Many remain empty
  • The Japanese government is so desperate to create inflation that it is printing more trillions of new debt, when even a modest ‎increase in nominal yields will explode its fiscal position
  • The West’s financial system received trillions in financial support in 2008 to avoid an implosion of the global economy. However, it has since become even bigger and more concentrated, and as such the associated systemic risk might now be larger than ever. The people who designed this financial system are also doing better than ever
  • Countries with the most abundant natural resources often have the poorest people
  • Most parents unconditionally love their children and would do anything to secure their future. So why are we bequeathing a world with ballooning financial debts, less freedoms, lower education standards and increasingly broken ecosystems?

  In his book “1984” George Orwell created his own version of an inverted world, where “war is peace, freedom is slavery, ignorance is strength”. That was quite a frightening vision.

  If we indeed live in the Bizarro World, what does that look like to you?