• China Is Crashing (Again)

  It appears – as opposed to what the world’s asset-gathering commission-takers would have one believe – that huge illiquid spikes in bond markets are not good for stocks. As the bond carnage continues to careen throughout Asia, Chinese stock investors appear to have decided enough is enough at doubling their money in a mere few months. After early weakness out of the gate, the ubiquitous dip-buyer-of-last-resort failed to appear as the afternoon session arrived and Chinese stock indices are down between 5% (Shanghai Comp – which never took out its previous highs) and 7% (CHINEXT which was up over 16% in the last 3 days) overnight. Everybody better be hoping for a disastrous jobs number on Friday or this drop may suddenly become the long lost ‘healthy’ correction in global stocks so many have called for.

   

  Today…

  

   

  And the last week… 10% correction… 16% face-ripper… 7% correction

  

   

  Every asset manager in the world is currently praying that MSCI does not include China in its indices or risk budgets everywhere will be blown and exposure to global equities will be forced lower.

   

  Charts: Bloomberg

  

  

  
  
  

  

• Free Speech, Facebook & The NSA: The Good, The Bad & The Ugly

  Submitted by John Whitehead via The Rutherford Institute,

  “A person under surveillance is no longer free; a society under surveillance is no longer a democracy.”—Writers Against Mass Surveillance

  THE GOOD NEWS: Americans have a right to freely express themselves on the Internet, including making threatening—even violent—statements on Facebook, provided that they don’t intend to actually inflict harm.

  The Supreme Court’s ruling in Elonis v. United States threw out the conviction of a Pennsylvania man who was charged with making unlawful threats (it was never proven that he intended to threaten anyone) and sentenced to 44 months in jail after he posted allusions to popular rap lyrics and comedy routines on his Facebook page. It’s a ruling that has First Amendment implications for where the government can draw the line when it comes to provocative and controversial speech that is protected and permissible versus speech that could be interpreted as connoting a criminal intent.

  That same day, Section 215 of the USA Patriot Act, the legal justification allowing the National Security Agency (NSA) to carry out warrantless surveillance on Americans, officially expired. Over the course of nearly a decade, if not more, the NSA had covertly spied on millions of Americans, many of whom were guilty of nothing more than using a telephone, and stored their records in government databases. For those who have been fighting the uphill battle against the NSA’s domestic spying program, it was a small but symbolic victory.

  THE BAD NEWS: Congress’ legislative “fix,” intended to mollify critics of the NSA, will ensure that the agency is not in any way hindered in its ability to keep spying on Americans’ communications.

  The USA FREEDOM Act could do more damage than good by creating a false impression that Congress has taken steps to prevent the government from spying on the telephone calls of citizens, while in fact ensuring the NSA’s ability to continue invading the privacy and security of Americans.

  For instance, the USA FREEDOM Act not only reauthorizes Section 215 of the Patriot Act for a period of time, but it also delegates to telecommunications companies the responsibility of carrying out phone surveillance on American citizens.

  AND NOW FOR THE DOWNRIGHT UGLY NEWS: Nothing is going to change.

  As journalist Conor Friedersdorf warns, “Americans concerned by mass surveillance and the national security state’s combination of power and secrecy should keep worrying.”

  In other words, telephone surveillance by the NSA is the least of our worries.

  Even with restrictions on its ability to collect mass quantities of telephone metadata, the government and its various spy agencies, from the NSA to the FBI, can still employ an endless number of methods for carrying out warrantless surveillance on Americans, all of which are far more invasive than the bulk collection program.

  As I point out in my new book Battlefield America: The War on the American People, just about every branch of the government—from the Postal Service to the Treasury Department and every agency in between—now has its own surveillance sector, authorized to spy on the American people. Just recently, for example, it was revealed that the FBI has been employing a small fleet of low-flying planes to carry out video and cell phone surveillance over American cities.

  Then there are the fusion and counterterrorism centers that gather all of the data from the smaller government spies—the police, public health officials, transportation, etc.—and make it accessible for all those in power.

  And of course that doesn’t even begin to touch on the complicity of the corporate sector, which buys and sells us from cradle to grave, until we have no more data left to mine. Indeed, Facebook, Amazon and Google are among the government’s closest competitors when it comes to carrying out surveillance on Americans, monitoring the content of your emails, tracking your purchases and exploiting your social media posts.

  “Few consumers understand what data are being shared, with whom, or how the information is being used,” reports the Los Angeles Times. “Most Americans emit a stream of personal digital exhaust — what they search for, what they buy, who they communicate with, where they are — that is captured and exploited in a largely unregulated fashion.”

  It’s not just what we say, where we go and what we buy that is being tracked. We’re being surveilled right down to our genes, thanks to a potent combination of hardware, software and data collection that scans our biometrics—our faces, irises, voices, genetics, even our gait—runs them through computer programs that can break the data down into unique “identifiers,” and then offers them up to the government and its corporate allies for their respective uses.

  All of those internet-connected gadgets we just have to have (Forbes refers to them as “(data) pipelines to our intimate bodily processes”)—the smart watches that can monitor our blood pressure and the smart phones that let us pay for purchases with our fingerprints and iris scans—are setting us up for a brave new world where there is nowhere to run and nowhere to hide.

  For instance, imagine what the NSA could do (and is likely already doing) with voiceprint technology, which has been likened to a fingerprint. Described as “the next frontline in the battle against overweening public surveillance,” the collection of voiceprints is a booming industry for governments and businesses alike. As The Guardian reports, “voice biometrics could be used to pinpoint the location of individuals. There is already discussion about placing voice sensors in public spaces, and [Lee Tien, senior staff attorney with the Electronic Frontier Foundation] said that multiple sensors could be triangulated to identify individuals and specify their location within very small areas.”

  Suddenly the NSA’s telephone metadata program seems like child’s play compared to what’s coming down the pike.

  That, of course, is the point.

  Whatever recent victories we’ve enjoyed—the Second Circuit ruling declaring the NSA’s metadata program to be illegal, Congress’ inability to reauthorize Section 215 of the Patriot Act, even the Supreme Court’s recognition that free speech on the internet may be protected—amount to little in the face of the government’s willful disregard of every constitutional safeguard put in place to protect us from abusive, intrusive government agencies out to control the populace.

  Already the American people are starting to lose interest in the spectacle of Congress wrangling, debating and negotiating over the NSA and the Patriot Act.

  Already the media outlets are being seduced by other, more titillating news: Caitlyn Jenner’s Vanity Fair cover, Kim Kardashian’s pregnancy announcement, and the new Fifty Shades of Grey book told from Christian’s perspective.

  What remains to be seen is whether, when all is said and done, the powers-that-be succeed in distracting us from the fact that the government’s unauthorized and unwarranted surveillance powers go far beyond anything thus far debated by Congress or the courts.

  

  

  
  
  

  

• Who Are Washington's Most Expensive Speakers?

  Recently, we’ve taken a look at some of the details surrounding speeches made by Bill and Hillary Clinton. As discussed in April, Goldman Sachs paid Bill Clinton nearly a quarter of a million dollars for a speaking engagement before lobbying Hillary’s State Department in an effort to secure $75 million in financing for a Chinese company that would later purchase aircraft from a Goldman-owned manufacturer.

  Seperately, we outlined Hillary Clinton’s keynote speech requirements which include the customary $225,000 plus a “chartered roundtrip private jet”, $1,000 for a stenographer, and a host of other “incidentals.”

  But the Clintons actually come cheap compared to a certain former Fed chair. Here’s a look at speaking engagement rates for some well-known former and current US officials (and one real estate magnate whose relevance to this list isn’t immediately discernable):

   

  

  *  *  *

  Two words: “everyday Americans”.

  

  

  
  
  

  

• THe BouNTiFuL GaMe…

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• It's Official: The USA Freedom Act Is Just As Destructive As The USA Patriot Act

  Submitted by Simon Black via Sovereign Man blog,

  My general rule of thumb when it comes to legislation is that the more high-sounding the name, the more insidious the law.

  Exhibit A: the just-passed USA FREEDOM Act.

  “Freedom”. It sounds great.

  So great, in fact, that they stuck it in the title and built an absurd acronym around it– the real name of the law is “Uniting and Strengthening America by Fulfilling Rights and Ensuring Effective Discipline Over Monitoring Act of 2015″.

  U-S-A-F-R-E-E-D-O-M. Hooray!

  And without fail, the media has bought in to the myth, praising the government for heralding in a new era of liberty with headlines like “Congress Reins In NSA’s Spying Powers” and “NSA phone program doomed as Senate passes USA Freedom Act”.

  Unfortunately this is simply not the case. And shame on the mainstream media for making such thinly-researched, fallacious assertions.

  If anyone had actually taken the time to read the legislation, they’d see that most of the ‘concessions’ made by the government are entirely hollow.

  Secret FISA courts still exist. Lone wolf surveillance authority and roving wiretaps still exist. They can still grab oodles of other data like medical and business records.

  And the US Attorney General has even been awarded new ’emergency powers’ to use in his/her sole discretion… just in case the secret courts might be uncooperative.

  The big victory being cheered by the media pertains to the collection of phone records. This one is actually hilarious.

  The USA FREEDOM Act prevents the government from seizing and storing ‘call detail records’, the so-called meta-data information like your phone number, the other caller’s phone number, the length of the call, etc.

  But section 107(k)(3)(B) of the new law specifically states that ‘call detail records’ do NOT include the *actual content* of the call itself. Or your name. Address. Financial data. Cell-site location. Etc.

  So basically they can’t archive your phone number. But everything else is fair game. Congratulations on your freedom.

  Lawmakers also managed to sprinkle all sorts of other worthless provisions into the USA FREEDOM Act.

  For example, the Inspector General (IG) of the United States is required to issue a report discussing what civil liberty violations may have occurred over the last few years.

  Great. Except that IG reports are just that– reports. They have no teeth. And Congress can do with this one precisely what they do with every other IG report that gets issued: nothing.

  (Seriously, when was the last time you heard any ruckus about an IG report? Probably never.)

  They also stated that a panel of ‘advocates’ (whoever they may be) would attend and observe any secret FISA court hearing in which profound legal issues might be at stake.

  Again, sounds great. Except that, like the IG report, a panel of advocates has no teeth… no power to stop the court or spy agencies.

  Bottom line, these concessions may look good on paper, but they don’t amount to any real concession.

  This is a classic negotiation tactic. When working out a contentious deal, the stronger side will invariably offer some irrelevant concession that has no material impact on what they want.

  We did this several months ago for our Chilean agriculture fund, pushing through a substantial price reduction on a 2,000 acre property by ‘conceding’ to let the seller stay in the farm house for a few months.

  He felt like he got something, but for us the concession was pointless and ceremonial.

  The same thing happened here. And the American people just got played.

  The government has spent the last 14 years turning up the heat on the boiling frog. They increased the temperature by 100 degrees over that time… and have now turned it down 1 degree.

  Yet people are treating this like it’s some sort of victory.

  It’s not. And this is a sad reflection of how low people’s expectations have become of their own government and liberty.

   

  It’s a mistake to rely on a government to solve the problems that they themselves created.

   

  It’s a mistake to expect bureaucrats to voluntarily give up the power that they have awarded themselves… and have spent years abusing.

   

  It’s a mistake to wait for politicians to give you back the freedom that they’ve taken away.

  They don’t give a damn about your freedom. And they’re certainly not going to give it to you.

  But it still exists. It’s out there for anyone who cares enough to do something about it.

  When I was in the military everyone used to say ‘freedom isn’t free’. And this is totally true.

  Freedom starts with the individual. No one is going to give it to you. Becoming free means you have to put forth just a little bit of effort to take some common sense baby steps.

  

  

  
  
  

  

• America's Discouraged, Underpaid Workforce Turns To Drugs

  It’s not a fantastic time to be a job hunter in America. The US economic “recovery” officially stalled in Q1 no matter what Steve Liesman, The San Francisco Fed, and/or the BEA say after double-adjusting the numbers, and as we’ve shown, those who are highly skilled at delivering beer and wings to restaurant patrons are far better off than highly skilled factory workers or, indeed, than those with freshly-minted master’s degrees in today’s marketplace. 

  Of course, even for those who are lucky enough to find work, the picture isn’t pretty, as wage growth for the 80% of laborers classified by the BLS as “non-supervisors” remains largely absent, while for those unfortunate enough to be stuck in minimum wage positions, affording even a one bedroom apartment is now officially out of the question in every state.  

  Given this rather depressing backdrop, it’s little wonder that workers are inclined to “alter their mood” a bit before punching the clock. Indeed, over the past 24 months, a decades-old trend towards falling workplace drug usage has reversed itself, with 4% of workers now testing positive for either legal or illegal drug use:

  

  More, via WSJ:

  The share of U.S. workers testing positive for drugs appears to be on the rise, according to data from millions of workplace drug tests administered by one of the nation’s largest medical-screening laboratories.

   

  Traces of drugs—from marijuana to methamphetamine to prescription opiates—were found in 3.9% of the 9.1 million urine tests conducted for employers by Quest Diagnostics Inc. in 2014, up from 3.7% in 2013.

   

  While the numbers might seem small, they reflect the reversal of a longtime trend of declining drug use among workers. Before 2013, positives had dropped nearly every year for 24 years, from 13.6% in 1988 to a low of 3.5% in 2012. Some of the positive results are later discarded if a worker produces a doctor’s prescription for a legal drug, but the majority reflect illicit use, driven by increases in marijuana, cocaine and methamphetamine positives, said Dr. Barry Sample, director of science and technology for Quest’s diagnostics employer solutions business.

   

  Experts are unsure why drug usage is rising. Researchers haven’t been able to conclusively link drug consumption to economic cycles. A 2013 paper from the Federal Reserve Bank of St. Louis, for example, concluded that “the Great Recession did not generate a clear temporary or permanent pattern in rates of substance abuse.”

  Maybe it’s the weather…

  

  

  

  
  
  

  

• Bond Crash Continues – Aussie & Japan Yields Burst Higher

  The carnage in Europe and US bonds is echoing on around the world as Aussie 10Y yields jump 15bps at the open (to 3.04% – the highest in 6 months) and the biggest 2-day spike in 2 years.  JGBs are also jumping, breaking to new 6-month highs above 50bps once again raising the spectre of VAR-Shock-driven vicious cycles…

   

  

  

   

  The spectre of a self-feeding dynamic is something we’ve discussed at length before, most notably in 2013 when volatility-induced selling — reminiscent of the 2003 JGB experience — hit the Japanese bond market again, prompting us to ask the following rhetorical question: 

  What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations? 

  The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan's banks.

  What we described is known as a VaR shock and 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.

  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. 

  Here’s more from JPM on the similarities between the Bund sell-off and the JGB rout that unfolded two years ago:

  The sharp rise in bond volatility over the past week or so is reminiscent of the VaR shocks of October 2014 in US rates and April 2013 in Japanese rates. The common feature of these rate volatility episodes was that there was no clear fundamental trigger. Instead, positions and flows experienced a sharp swing making these VaR episodes appearing more technical and unpredictable in nature. In October 2014, a violent capitulation on short positions at the front-end of the US curve had caused a collapse in UST yields. In April 2013, profittaking in long duration exposures post BoJ's QE announcement caused a sharp rise in JGB yields that started reversing two months after. 

  What is causing VaR shocks and why are they happening often? We argued before that one of the unintended consequences of QE is a higher frequency of volatility episodes or VaR shocks: investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This, we note, is how QE increases the likelihood of VaR shocks.  

   

  The proliferation of VaR sensitive investors, such as hedge funds, mutual fund managers, risk parity funds, dealers and banks raise the sensitivity of bond markets to self- reinforcing volatility-induced selling. These investors set limits against potential losses in their trading operations by calculating Value-at-Risk metrics. Value-at-Risk (VaR) is a statistical measure that investors use to quantify the expected loss, over a specified horizon and at a certain confidence level, in normal markets. Historical return distributions and historical market volatility measures are often used in VaR calculations given the difficulty in forecasting volatility. This in turn induces investors to raise the size of their trading positions in a low volatility environment, making them vulnerable to a subsequent volatility shock. When the volatility shock arrives, VaR sensitive investors cut their duration positions as the Value-at-Risk exceeded their limits and stop losses are triggered. This volatility induced position cutting becomes self- reinforcing until yields reach a level that induces the participation of VaR-insensitive investors, such as pension funds, insurance companies or households.  

   

  The VaR shock in the JGB market in April 2013 contained most of the above characteristics. By looking at quarterly Flow of Funds data from the BoJ, it was Japanese banks, Broker/Dealers and foreign investors who sold JGBs at the time. And it was VaR insensitive investors, such as Pension Funds and Insurance Companies and Households (via investment trusts) who absorbed that selling along with the BoJ.

  As we warned last time, it appears the fireworks are far from over.

  Charts: Bloomberg

  

  

  
  
  

  

• The Definition Of An Unfree Market

  Commentary by Guy Haselmann of Scotiabank

  Unfree

  A market economy is one based on supply and demand with little or no government control.   Dictionary site ‘Investopedia’ states that “a completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.” 

  Toto, I don’t think we are in Kansas anymore.

  After the 2008 financial crisis, regulatory banking rules (i.e. macroprudential policies) conspired with zero (or negative) interest rates and asset purchases to exterminate the markets’ ability to freely calibrate clearing market prices based on supply and demand factors.   It is impossible for central banks to sustain controlling influence on market sentiment, investor behavior, correlations, and valuations, simply because effectiveness wanes over time. 

  As time passes, central bank stimulus stretches financial asset valuations in a manner that outpaces fundamental economic improvements, thus skewing future risk-reward distributions to the downside.  Investors slowly begin to boycott over-priced securities, which in turn compromises market liquidity.  Eventually the slow drip morphs into a cascade where central banks lose control of the process.

  • The October flash crash in Treasuries might be an example. 
  • Zimbabwe was the greatest modern example of lost control when its money printing policy resulted in a worthless currency after achieving an estimated inflation rate of 79 billion percent (no, really).
  • In January, the Swiss National Bank broke its currency-cap-promise resulting in its (G-10) currency moving over 40% in 10 minutes.
  • The ECB began its overly-hyped asset purchase program after markets had re-priced trillions of debt securities into negative yields.  Could the 14 point (44 bps) collapse this week in the price of German 30-year bonds be an indication of the collateral damage resulting from the ECB’s market involvement?

  Central bank policies have encouraged financial risk-taking, but central bankers offer (spurious) assurances that while pockets of froth exist, equity valuations (in particular) are ‘in-line with historical multiples’.  This advice may prove just as fatuous as it did in 2006/2007, when Bernanke testified before congress that the housing sector was not in a bubble. 

  At least FOMC members admit that they expect ‘bumpy’ markets when rate ‘lift-off’ occurs. They are fully aware that their policies have provided cheap financing for carry trades and speculation which is evident in near-record low yields and credit spreads, and record amounts of NYSE margin debt.  By most measures, stocks, bonds, and various real estate regions are over-valued.   Unfortunately, ‘fair’ value is a futile concept during non-free markets and aggressive interventionist policies.

  The historical movement of Portuguese yields is a worthy example of the sway of central bank policy. The Portuguese 10 year traded above 17.25% in 2012.  This past March it traded 55 basis points below the US 10-year yield to a level of 1.56%. Portugal’s debt-to-GDP ratio was 83.7% in 2010, 111% in 2012, and has been greater than 125% since 2013. Clearly, the drop in yield has not been a function of improving debt levels or free market determinants. It has also not been due to debt restructuring or due to a balanced budget (its budget deficit is >3%). The significant improvement in yields was mainly a function of aggressive central bank action on the part of the ECB.

  Fed’s Timing and Path

  In order for the FOMC to hike no later than the July meeting as I expect, they need to obtain some undefined amount of further evidence that weak Q1 GDP was indeed a transitory aberration; something each member believes.  Since every FOMC member expects a decent bounce-back in Q2 (which they believe will accelerate into the second half of 2015), it is unlikely that they need a full quarter of strong growth under their belt before voting to hike. There have been some pockets of economic strength, including the May auto sales yesterday which tallied to an astounding 17.79 million rate.

  When looking through the smoke screen of ‘data dependency’ the fact is that the Fed is basically within a whisker of its dual mandates.  At this point, waiting for some improved economic data has as much to do with its perception of maintaining its credibility as it does with receiving insurance that it is correct about Q1 being transitory.  

  At a higher level, the Fed’s experiment with zero interest rates and asset purchases pre-supposes the correctness of many Keynesian assumptions; many of which make little sense.  Investors are also asked to accept with a great leap of faith that the FOMC can provide some ideal mix of difficult-to-measure variables that achieves what it considers to be the ‘appropriate’ amount of inflation and economic growth.  It doesn’t take much to see how arbitrary this all is.

  Does the Fed know for certain that its policy over the past few quarters hasn’t actually been counter-productive?  Does the Fed truly have any sense how markets will react when it finally raises rates for the first time in nine years?   If monetary policy works on an 18 to 24 month lag, and the Fed is confident that Q1 was an aberration and inflation will ‘move toward 2% in the medium term’, then shouldn’t the Fed just hike rates at its June 17th or July 29th meeting?  Isn’t it possible that the uncertainty hanging over markets about the timing for lift-off has become more harmful than beneficial?

  Only if the economy is powered by the marginal borrower who will no longer borrow after a 0.25% hike, does it make sense to believe a hike will derail the economy.  Comparisons to 1937, where a hike pushed the US into recession, are incomparable and groundless. 

  On the other hand, maybe the FOMC is worried that the ‘no free lunch’ concept makes them suspicious of the possibility of a meaningfully deleterious market reaction which could have a negative impact on the broader economy.  However, under this logic, delaying a hike would only exacerbate such a response.

  If the Fed were to hike, say, in July, then it could spend a few months allowing markets to settle down before hiking a second time prior to the end of the year. When choosing to further remove accommodation in 2016, the Fed will likely prefer shrinking the balance sheet rather than hiking IOER.  This hiking-path scenario would allow the Fed to be as gradual as they have promised; maximizing the time between actions, which could help prevent undue stress on markets inflated by years of moral hazard ‘puts’ and massive central bank liquidity.

  On April 30th, I urged caution on Treasuries and advised holding powder to purchase in front of 2.40% 10 year yields.  I recommend making opportunistic purchases in the backend today, as well as re-establishing flatteners. I also advise re-entering volatility and US dollar longs.  A good argument could be made for these exposures regardless of the outcome of Friday’s employment data.  In March, I recommended the position ‘long US Treasuries vs. short EU periphery’.  This position should be maintained.

  “A great deal of intelligence can be invested in ignorance when the need for illusion is deep” – Saul Bellow

  

  

  
  
  

  

• Six Political Issues to Watch This Summer

  Via Goldman Sachs’ Alec Phillips,

  • The next several weeks are likely to be relatively eventful in Washington. While the votes are close, we expect the House to pass Trade Promotion Authority (TPA) this month, which should increase the likelihood that negotiators conclude talks on the Trans-Pacific Partnership (TPP).
  • The Supreme Court looks more likely to rule in favor of the Obama Administration in its decision on the Affordable Care Act, expected later this month, but the issue is likely to dominate the political agenda if the court rules against the current subsidy program.
  • A debate on bank and mortgage regulation in the Senate also looks possible, though at this point we believe major changes face an uphill climb.
  • Congress looks likely to miss another opportunity to enact a long-term infrastructure program, and will probably enact a temporary extension instead. This may also close the window of opportunity for tax reform until after the 2016 presidential election, since using repatriation-related corporate tax revenue to pay for highway spending had bipartisan support and was seen as a potential driver of reform. While highway legislation may not carry tax reform this year, it does look increasingly likely to carry an extension of the Export-Import Bank charter, which expires June 30.

  1. Trade Promotion Authority looks likely to pass this month

  After a failed first attempt and some uncertainty about potential amendments, the Senate finally passed legislation to reinstate Trade Promotion Authority (TPA), also known as “fast track,” which is generally viewed as critical to implementing the Trans-Pacific Partnership (TPP) currently being negotiated. From here, the remaining obstacle is the vote in the House of Representatives, which has always appeared to be a higher hurdle than the Senate.

  The House looks likely to vote on TPA at some point in the next three weeks. In our view, it is more likely that the House will pass TPA than defeat it, though the outcome is harder than usual to predict because support and opposition do not fall cleanly along party lines. In particular, the Obama Administration is counting mainly on Republicans to pass TPA in the House, but at least a few dozen of the 245 House Republicans look likely to vote against it, leaving the bill short of the 217 votes needed to pass. To make this up, at least 10 Democrats and potentially as many as 20 would need to support the measure. This seems to be roughly where Democratic support is as the moment, but the situation could clearly still change. That said, TPA has an institutional advantage: Republican congressional leaders, who support TPA, can time the vote for when support appears to be sufficient and can make multiple attempts if necessary.

  Negotiations on the Trans-Pacific Partnership appear to be in the final stages. It seems likely that the most of the outstanding issues could be settled reasonably soon after TPA is enacted, since some trading partners may be waiting for TPA passage before presenting their final offers. Once negotiations are concluded, it could take another few months for the agreement to be released and formally signed. TPA imposes some deadlines to expedite congressional consideration, but also imposes some waiting periods that could prolong some of the earlier steps in the process. In all, it is likely to take at least four months, and potentially a few months longer, from the time negotiations conclude until Congress can begin considering the agreement, meaning Congress is unlikely to begin considering the TPP agreement, even if it is finalized soon, until late 2015 at earliest.

  2. The Supreme Court should rule on ACA subsidies in the next few weeks

  The court is expected to rule soon–probably between June 22 and June 29–on the challenge to the Obama Administration’s implementation of insurance subsidies under the ACA. The plaintiffs in the case contend that because the law states that only insurance purchased on an exchange “established by the state” is eligible for subsidies, enrollees in the 34 states with federally run exchanges should not be subsidized. The outcome is far from clear, though questioning during the oral arguments in March suggested that at least five of the justices were more inclined to rule in favor of the administration, albeit for different reasons. Those arguments seemed to boil the case down to two questions: whether the current law is ambiguous, and whether denying subsidies to states that have not established their own insurance exchanges amounts to unconstitutional coercion of states by the federal government. If the court finds the law ambiguous, it seems likely to rule in favor of the administration. If the court finds that denying subsidies as a means of forcing states into action is unconstitutional, this would also likely preserve the status quo. The administration’s implementation of the law would be overturned only, it seems, if the court found that the law was clear and that only insurance purchased on exchanges “established by the state” (rather than the federal government) is eligible for the subsidies.

  In the event of a ruling against the administration, subsidies would probably be eliminated by August unless the court explicitly granted a grace period for Congress and/or the states to respond (for example, Justice Alito raised the possibility of delaying the effect of the court’s decision until year end). This would put political pressure on Congress to act, with little time to do so. Congressional Republicans have floated a few proposals to replace the subsidies, but face two potential obstacles. First, the leading proposals would eliminate the individual and employer mandates, which the White House would be likely to reject. Second, some Republicans object to replacing the subsidies if they are struck down, raising the possibility that intra-party divisions could lead to a stalemate. Ultimately, if the court rejects the administration’s implementation of the subsidies, there is a high probability that Congress would reinstate some form of financial assistance, but the process would create significant uncertainty and would probably involve changes to the health law beyond simply reversing the effect of the court’s decision.

  3. Senate banking legislation faces a tough road ahead

  In May the Senate Banking Committee passed wide-ranging legislation that would make changes to mortgage and bank regulation and some organizational changes at the Fed. Specifically, among other changes, the bill would (1) loosen mortgage lending standards by providing banks with a “safe harbor” from qualified mortgage rules for loans that they originate and hold entirely in their own portfolio, along with other criteria; (2) increase the threshold for financial institutions to be automatically designated as “systemically important” by the Financial Stability Oversight Council (FSOC) from $50 billion to $500 billion in assets (FSOC would still retain the ability to designate institutions below that level); (3) require the president to nominate and the Senate to confirm the President of the New York Fed, and (4) prohibit the Treasury from disposing of the preferred stock it holds in Fannie Mae and Freddie Mac without congressional approval.

  However, the bill faces an uphill battle in getting through the Senate. Democrats on the Banking Committee unanimously opposed the legislation, and it is unlikely to have sufficient support to pass in its current form. There is a possibility that Senate Banking Committee Chairman Shelby will be able to negotiate a slimmer package of reforms that might win some Democratic support, but most of the important provisions noted above would be unlikely to make the cut, in our view. The upshot is that the Senate seems unlikely to pass the bill that came out of committee, and if the Senate does ultimately pass a bill it would probably necessitate dropping most of the provisions of greatest interest to market participants.

  4. Transportation infrastructure spending looks likely to be punted…

  Congress has failed to pass a long-term transportation infrastructure spending program for several years, and another temporary patch ahead of the July 31 expiration of spending authority looks likely. The highway program currently spends more than it takes in via the gasoline tax, so Congress will need to plug this hole (estimated at $11 billion through year end) by transferring funds from the Treasury and using a package of spending cuts and/or tax increases to cover cost of doing so. The duration of the next extension is uncertain, but given the funding constraints, we would expect the upcoming patch to last only through year-end.

  5. …closing the window of opportunity for tax reform…

  The next extension of the highway spending bill probably marks the end of the road for tax reform until after the 2016 election. Some lawmakers in both parties have held out hope for an agreement that combines a long-term (i.e., six-year) infrastructure plan with corporate tax reform, using revenues from taxing repatriated foreign earnings to fill the highway program’s funding gap and potentially to boost spending. However, tax reform has failed to get off the ground this year, and even Senate Finance Committee Chairman Orrin Hatch (R-UT) conceded recently that Congress is “not even near doing tax reform at this point.” While we expect to see some additional activity on the issue–House Ways and Means Committee member Charles Boustany (R-LA) is expected to introduce an international corporate tax reform bill in the next several weeks and working groups in the Senate are expected to report shortly on potential areas of agreement– the lack of progress thus far and the short time left before other political distractions take over suggest that the political opening that tax reform seemed to have early this year has just about closed.

  6. …but creating an opening for reauthorization of the Export-Import Bank

  While the transportation bill looks unlikely to become a vehicle for tax reform, it has emerged as a potential vehicle for renewing the charter of the Export-Import Bank. Senate Majority Leader McConnell has promised to allow a vote on Ex-Im renewal this month, as part of a political agreement that allowed Trade Promotion Authority to move forward. Ex-Im supporters are likely to seek to combine renewal of the bank’s charter with some other must-pass legislation; the most obvious is the highway bill. If this occurs, it would increase the probability that the Ex-Im charter will be extended, at least temporarily. That said, since the highway program’s authority does not expire until July 31, such a strategy would also raise the probability that authority for the Ex-Im Bank to make new export credit loans and guarantees would expire at least temporarily.

  

  

  
  
  

  

• Why Did These Former Fed Members Admit Mathematically, Logically, & In Reality: "It's Over"?

  In the ironically titled "Paying For The Past" presentation, none other than Dick Fisher, Al Greenspan, and Larry Lindsey appear to have crossed the Rubicon of denial, lies, and deception to the dark-side of accepting reality. As Bill Holter asks, why exactly would these former Federal Reservists hint that, mathematically, logically, intuitively and in real life, IT'S OVER! Do they now realize what the crazy gold bugs have been saying all along is true and the day of reckoning is very close at hand.  They must be trying to get "out in front" of what is coming so they're on the record for historical and "legacy" purposes.  Nothing else makes any sense.

  

   

  As Bill Holter details…I could only chuckle after watching the interview because my entire writing can now consist of "yeah, what they said!".  Rather than write an entire article on this, I believe it might be better to let you watch what I was going to write, and we can move on to the "motives" of these three telling "mostly" the truth.  If you watch this interview, please keep in mind this one question "…and the alternative is"?

   

   
  Why exactly would these former Federal Reservists hint that, mathematically, logically, intuitively and in real life, IT'S OVER!  They did back peddle a little bit as the interview went on but "why" or better yet why now?  I believe they know what the crazy gold bugs have been saying all along is true and the day of reckoning is very close at hand.  They must be trying to get "out in front" of what is coming so they're on the record for historical and "legacy" purposes.  Nothing else makes any sense.  Are they "trying" to torpedo the system or to break confidence?  I highly doubt it but after watching the interview, would any kid with a paper route invest their money into the current system?  Are they trying to bad mouth the Fed now they are no longer employed there?  No, in fact, they each one pointed the blame at Congress.  It's Congress' fault we are in this mess!  "They" (Congress) spent the money and made the promises which cannot be honored and will ultimately be broken.
   
  There is a punch line of course, one these three men don't want you to hear!  Actually, the joke AND the punch line are both one in the same, "the money itself is bad and is the core to ALL economic and financial problems!".  You see, Congress could never had authorized all of the spending if the Treasury did not have the "money" in its coffers.  Yes Treasury could have borrowed money but would have been restrained if "money" was gold or something "real".  The only way that Congress has been able to get away with bankrupting the country was with the aid of … yes, the FEDERAL RESERVE these guys used to work for!  The Fed has in fact underwritten the scheme, if there was no Fed …the leverage could never have been built into the system.  Greenspan, Fisher and Lindsey of course know this but they can never admit it.  Were they to admit it, it would be an admission that they knew all along they were driving the bus over a cliff …with a roadmap wide open!
   
  All three spoke about the current state of interest rates and the unsustainability of the situation.  They ask "why", for what good reason are interest rates at levels only justified by a crisis?  The answer of course is; we are still in a crisis, we never exited and if rates HAD been increased …their greatest fears would have already been realized!  Mathematically, rates cannot go higher because of the inability to service interest payments (not to mention blowing up the leveraged interest rate derivatives) would come front and center.  They are trying to say the inability to pay is guaranteed to come …but is a future event.  If rates were to rise now, it becomes a current event.  It's really this simple!          
   
  Lawrence Lindsey even said at the 45 minute mark, "this is how they all end …including Zimbabwe"!  All "what" Larry?  Fiat currencies?  Or central banks who issue them?  This brings me to another article which has come out and ties in perfectly.  Actually, it ties in so well we can bring this entire article full circle and back to one of the gold bugs most central theses.  Zerohedge posted an article regarding a systemic bet being made by billionaire hedge fund manager Paul Singer.  Mr. Singer's strategy is simple, he calls it the "bigger short".  He believes interest rates have only one way to go, up.  He also believes we will see far more staggering defaults than we did in 2008-09.  He believes shorting the debt of the world is a no brainer trade and one where you can win ALL the marbles.
   
  Zerohedge of course picked up on the "minor flaw" in this strategy.  The very same flaw I might add that Harry Dent, Martin Armstrong and others are missing.  You see, when you "win", you must be "paid", but paid in "what" is the question.  Assuming Mr. Singer is correct and the system does collapse on itself and he "wins".  His win of course will be HUGE …but, he will be paid in dollars or euros or whatever fiat currency his trade is done in.  What will his winnings be worth if the currency itself is worth nothing?  It reminds me of Mikhail Barishnikoff in the movie "White Nights", he had a stack full of worthless rubles and threw them handful after handful up in the air while saying "rubles, rubles, lots and lots of rubles".  He had money …but it wasn't worth anything.
   
  You see, the currencies themselves are supported by the very debt Mr. Singer is selling short and expects to collapse!  Which now brings us back full circle to the crazy gold bugs.  This is exactly what they have been saying all along, a debt default will also mean a collapse in confidence of the currencies themselves and direct "fear capital" back into real money.  This will create huge demand, force supply into hiding and additionally revalue gold higher because the currencies themselves are losing value and confidence.  Gold bugs are not so different from those who see the dangers in the system from overheated markets and overleveraged debtors.  The only difference is that these nut jobs want what hasn't been for nearly 50 years, they want TRUE and REAL "SETTLEMENT"!  They actually want to get paid in something real!  How crazy is that?

  

  

  
  
  

  

• Tspiras Says "Don't Worry" About IMF Payment After Latest Failure To Clinch Deal

  Following this evening’s “private” meeting with Jean-Claude Juncker and Jeroem Dijsselbloem, Greek PM Alexis Tsipras once again admits that there is no deal. Both sides issued statements – The EU’s was a 3 sentence boiler-plate; and Tsipras was a brief press conference on Greek TV. In the interests of clarity we provide the statements (and their actual translations from “we have nothing to say” to “this is what we are trying not to say.”)

   

  The European Commission:

  *EU COMMISSION SAYS TALKS WITH TSIPRAS WERE CONSTRUCTIVE [no plates were thrown]

   

  *EU COMMISSION: INTENSE WORK ON GREECE TO CONTINUE [we are no closer at all to a deal]

   

  *EU COMMISSION SAYS PROGRESS MADE IN UNDERSTANDING POSITIONS [it is our way or no-way]

   

  It was agreed they will meet again – [seriously!?]

  Tspiras then explained:

  *BRUSSELS TALKS WERE CORDIAL: TSIPRAS [we finished dinner before plates were thrown]

   

  “DON’T WORRY,” TSIPRAS SAYS ABOUT FRIDAY IMF PAYMENT [Please do not pull all your deposits from Greek banks, everything is fine]

   

  “We are very close on an agreement on primary surpluses; that means that all the sides agreed to go further without the tough austerity measures of the past.” [Rest assured fellow Greek politicians, we will magically achieve a primary surplus with lower tax receipts and no austerity]

   

  “I think the realistic proposals on the table are the proposals of the Greek government” [sadly it seems the EU disagrees]

   

  “Aid accord w/ euro area, IMF is “in sight”” [like a mirage in the desert?]

   

  GREECE TO NEAR AGREEMENT WITH CREDITORS IN `NEXT DAYS’: TSIPRAS [if only The EU would back down on VAT and Pensions provisions]

   

  Tsipras “optimistic” European Commission intends to continue with a “realistic point of view” [when did hope become the international negotiating strategy]

  And finally Jeroem added:

  *DIJSSELBLOEM EXITS BRUSSELS TALKS, SAYS `MEETING WAS GOOD‘ [Only the cheap plates were thrown]

  *  *  *

  So to sum it all up – No Deal… no closer to a deal… and the same sticking points remain.

  For those looking for any glimmer of hope – they claims to be close to an agreement on fiscal targets – Almost no progress over pension system – Small progress on VAT & taxes

  EURUSD is drifting slowly lower – entirely unimpressed by this news… (if news is what it can be called)

  

  

  

  
  
  

  

• Cartoons Mocking “Goldman Rats” And Hillary Clinton Appear All Over NYC

  Submitted by Mike Krieger via Liberty Blitzkrieg blog

  It appears mysterious cartoons mocking “Goldman Rats” and Hillary Clinton are appearing all over NYC. The best one I’ve seen, is the image which shows the two entities as the unified oligarch oppressors they are. See: below:

  

  Business Insider notes that:

  A street artist has set their sights Goldman Sachs and is putting up stickers around New York City attacking the investment giant. 

   

  I spotted the Clinton sticker in a Brooklyn subway station last week, but it seems to have appeared in multiple locations. A blog dedicated to Brooklyn street art posted a picture taken of one of the stickers last month. 

   

  The Clinton sticker is clearly relatively new. In the sticker, the “H” in “Hillary” is copied from her campaign logo, which was unveiled when she launched her campaign in April. It echoes a line of attack that has been used by one of Clinton’s Democratic rivals, former Maryland Gov. Martin O’Malley (D), who has suggested Goldman Sachs would like to see her in the White House.

  While we don’t know who made the stickers, we should all be grateful to the creator. While the oligarchy remains firmly in place, we don’t have to respect them, and mocking corrupt cronies is the first step in delegitimizing their undeserved claims to positions of extreme wealth and power.

  For related articles, see:

  Hillary Clinton’s Poll Numbers Plunge to the Worst Since 2001

  Charting the American Oligarchy – How 0.01% of the Population Contributes 42% of All Campaign Cash

  Portrait of the American Oligarchy – The Very Troubling Income and Wealth Trends Since 1989

  Just Another Tale from the Oligarch Recovery – $100 Million Homes Being Built on Spec

  The Face of the Oligarch Recovery – Luxury Skyscrapers Stay Empty as NYC Homeless Population Hits Record High

  

  

  
  
  

  

• Top 10 Military Spenders

  Follow ZeroHedge in Real-Time on FinancialJuice with Voice News

  Hey Big Spender! Well, that’s what Shirley Bassey warbled out in 1967 when apparently the ‘minute you walked into the joint’ it was possible to see you ‘were a man of distinction’. It would seem, therefore, that a man is judged neither on the clothes he wears, nor on his manners these days. Not for a long time. These days, what counts is the amount of money that you spend. You don’t have to have it, you just need to flaunt it and brashly show it off to the rest of the world. It’s only dirty books that gather no dust, isn’t it? It’s only a dirty man that is able to do what he pleases; dirty being here the way the rich arms dealers are playing their tiresome game of I produce, I sell, you wage war, we tell everyone it’s bad and the kids will believe it. A man of distinction in today’s world is a man that throws his money in military monkey business, the shenanigans that our wealthiest nations excel at.

  The Stockholm International Peace Research Institute (SIPRI) carries out research on military spending around the world and measures how it changes. Most of the world’s armed countries are included in the study. Although, what country exactly isn’t armed these days? Any guesses? A French statesman, Georges Clemenceau, once said that “war is too serious a matter to be entrusted to the military”. That’s why the government always looks after it. One thing that he forgot to say also was that it was far too lucrative a business to let it out of the hands of the politicians. So, there are very few countries in the world that have no military force. Where are they and have you heard of all of them? Here’s the list (in alphabetical order):

  Countries with NO Military Force

  1. Andorra

  The principality in the Pyrenees mountain range has no military and even declared war on Germany in 1914 despite this fact. There were 10 men in the army that went to war in World War I as representatives of this small state. After the Great War the 10-man army was replaced by a 240-strong police force. France and Spain provide protection of the principality.

  2. Costa Rica

  After the Costa Rican Civil War and on December 1^st 1948 President José Figueres Ferrer abolished the military. Today the only force in the country is the Fuerza Pública providing ground law enforcement and border controls. Only under the Inter-American Treaty of Reciprocal Assistance (1947) would Costa Rica be protected if attacked. 21 countries including the USA and Cuba, for example would come to its assistance.

  3. Grenada

  There has been no army in this country since the US-led invasion took place in 1983 under the name Operation Urgent Fury. There is only the Royal Grenada Police Force. It is the Regional Security System that ensures that countries such as Antigua, Barbados and the Grenadines provide assistance in the event of a threat on the country.

  4. Lichtenstein

  This country abolished its army in 1868 following the Austro-Prussian War. Apparently, the country did not have enough money at the time in order to be able to afford an army. The police force is known as the Principality of Lichtenstein National Police Force. In the event of war it would be the European Union that would ensure its protection.

  5. Marshall Islands

  The Marshall Islands have been granted the status of a sovereign nation since 1983 under the Compact of Free Association.  The US acts as a protectorate and as such the Marshall Islands has no military force. There is, however, the Marshall Islands Police force that carries out every day duties in the country in order to ensure security.

  6. Nauru

   This is the smallest country in the world and it measures just 8.1 square miles. It has no standing army or military force. There is a Nauru Police Force but oddly there is no capital in the country. The last time that Nauru was attacked was by Nazi Germany in 1940 and at the time, as today if it were to be attacked, it was Australia that stepped in to provide assistance.

  7. Palau

  There exists a Palau National Police force but there is no military as such. Palau would obtain assistance from the USA since under the Compact of Free Association Palau is to all intents and purposes a protectorate of the USA.

  8. Samoa

  There is no military force in this country and it would have to rely on other countries to ensure its own defense. It has a treaty for such a purpose with New Zealand which undertook its protection as from 1962.

  9. Solomon Islands

  The Solomon Islands was a British protectorate as from 1893 and there was very little military force on the thousands of islands that make up the country. When the Solomon Islands created a government in 1976, it remained in relative stability, but with no military force until 1998. At that date until 2006, the country was rife with crime and ethnic conflicts and peace was restored only when New Zealand and Australia stepped in. However, there is no military and only a Solomon Islands Police Force today.

  10. Vatican

  There is no legal military present in the Vatican City. In the past the Noble Guard and the Palatine Guard were created to protect the Pope. However, these were abolished in 1970 by Pope Paul VI. Today there are only the Pontifical Swiss Guards. They are there to protect the pope and the Vatican Palace, but they are not legally speaking considered to be an army or a military force. The Gendarmerie Corps deal with traffic and keeping order as well as criminal investigations. Rome is responsible for the protection of the Vatican City.

   Obviously if there are so few that have banished, outlawed and abolished their military force, then there must be some reason behind wanting to do. It can’t be that there is just some overriding need to have some means of protecting yourself from that nasty neighbor that so longingly wants to invade you and to take from you what you never had but just made him believe you were hiding under the mattress.

  The top ten countries that spend the most on military are as follows and these are in ascending order. Wonder who’s at the top of the roost? Any guesses?

  Top 10 Military Spenders in the World

  10. Brazil

  Military Expenditure stands at $36.2 billion per year and it represents 1.4% of Gross Domestic Product in the country. In one year it has reduced its military spending by 3.9%. It imports $254 million and exports $36 million. Military spending increased rapidly during the 2000s, mainly due oil revenues increasing. It decreased by 4% in 2013. It is the military force that maintains order within the country and not just the police force.

  9. India

  India’s military spending for the latest available figures (2014) stands at $49.1 billion per annum, meaning a 2.5% share of GDP. Spending only decreased by 0.7% by comparison with 2013 and total imports represent a value of $5.6 billion (which is the highest figure in the word). Exports stand at a value of $10 billion. India is one of the highest spenders in the world on its military force. This is more than likely for its need to show outwardly that it is wealthy enough and capable enough of providing protection against Pakistan.

  8. Germany

  Military expenditure in this country is worth 1.4% of GDP and works out to $49.3 billion per year. There was no change by comparison with 2013 and total exports stand at $972 million, making it the world’s 6^th largest arms exporter. It is 36^th highest importer only in the world of arms, worth a value of $129 million. Since World War II Germany has being passive in world conflicts and its main role today is arms seller. Whereas the majority of countries in the world dropped their military spending when the financial crisis hit, Germany increased it by 2% as from 2008, until 2013.

  7. United Kingdom

  The UK spends $56.2 billion, representing 2.3% of GDP. As a percentage of GDP this is the 34^th highest country in the world. Between 2013 and 2014 there was a 2.6% drop in military spending due to the consequences of the financial crisis still and austerity measures. It exports are to the value of $1.4 billion and it is the 5^th highest arms seller in the world. It imports $438 million in military equipment and that means it is the 15^th highest importer in the world.

  6. Japan

  Japan spends 1% of its GDP on military and it is worth $59.44 billion. It imports $145 million-worth of military equipment today. Territorial disputes have led the country to arm itself more in case of need for defense against China.

  5. France

  France spends $62.3 billion on military and it stands at 2.2% of GDP, making it the 39^th highest country in the world. Spending decreased from 2013 by 2.3%. It exports a total of $1.5 billion and is currently the 4^th largest exporter of military equipment in the world.

  4. Saudi Arabia

  Saudi Arabia spends $62.8 billion on arms and the military and it represents a total of 9.3% of GDP (the 2^nd highest figure in the world). Between 2013 and 2014 it increased military spending by 14.3%. There is the overriding worry in the country that political turmoil and terrorism will overflow into the country from neighboring Yemen and Iraq.

  3. Russia

  Military expenditure stands at $84.9 billion per year in this country and it represents 4.1% of GDP making it the 10^th highest in the world.  It exports $8.3 billion per year and this is the world’s number one arms seller. By comparison it is the 33^rd highest arms importer only.

  2. China

  Military expenditure here is worth $171.4 billion, and it is worth 2% of GDP. It increased spending by 7.4% between 2013 and 2014. Military spending is representative of economic growth usually. The better the economy, the higher the spending. Or is it the spending on the military that fuels the economy?

  1. United States

  The USA spends $618.7 billion on the military and that is the 14^th highest percentage of GDP (3.8%). It saw its military budget decrease between 2013 and 2014 by 7.8%. It is the 2^nd highest exporter in the world and its market is worth $6.2 billion. It is the 8^th highest importer in the world and imports to the tune of $759 million. Military spending was cut due to austerity measures as well as the withdrawing of troops from Afghanistan and Iraq.

   

  According to J. K. Galbraith: “All candid economists concede the role of military expenditures in sustaining the modern economy. Some have held that expenditures for civilian purposes would do as well. The transition would be rather easy … [But] there is the problem of magnitude. For the price of a smallish fleet of manned supersonic bombers, a modern mass transit system could be built in virtually every city large enough to have a serious bus line. What would be built then?” That’s certainly food for thought. The views of Chomsky are that the ‘Pentagon System’ means that the military spending keeps the economy ticking over sweetly. The demand for arms in the word is a myth, a created, fake demand that is driven by business and economics.

  Big Spender, the song immortalized by Bassey, ends with ‘How’s about a few laughs? Laughs?’. Who’s laughing at the race to military success these days? Only the top countries make, sell, arm others and then create wars between countries, while they teach their children that they are doing it all in the name of democracy. Since when did producing and selling arms prevent warfare? Since when did arms dealing become so lucrative that everybody would be willing to start a war to get in on the act? Is that laughable? Ask Shirley! She’s about the only one that might have the answer!

  What’s your opinion of arms dealing today in the world? 

  

  

  
  
  

  

• The Next Escalation: FBI Launches Probe Of Russia 2018 World Cup Award

  With The FBI now reportedly investigating the award of The Soccer World Cup to Qatar and Russia, it appears, as Mises' Lew Rockwell exclaimed, "FIFA has got to change its name, it’s going to have to take out the “I” and put in an “A” for American." This sudden act of imperialism by The US, putting itself in charge of world soccer, as Paul Craig Roberts notes, it "is another Washington-British scam against Russia," adding "law is a weapon that Washington uses to achieve its agenda."

  Which is as we predicted a week ago, has only one goal:

  And now Russia is stripped of the 2018 World Cup

  — zerohedge (@zerohedge) June 2, 2015

  Recall:

  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 now, let's see how FIFA strips Russia of its 2018 World Cup hosting, which also as noted previously, was the entire reason for the sudden and unexpected DOJ crackdown on FIFA, whose corruption has been well known for decades.

  Paul Craig Roberts previously noted,

  “This is another Washington-British scam against Russia. It reminds me of the orchestrated press attack on the Sochi Olympics. Washington is trying to turn professional sport into a propaganda weapon against Russia. They are going to use this to take the World Cup away from Russia.”

  “There is no rule of law in the US. Law is a weapon that Washington uses to achieve its agenda.”

  And as the following interview with Mises Institute's Lew Rockwell confirms, it proves there is nothing Washington will not interfere with…

  RT: This story has generated a huge amount of interest around the world. From an economic point of view, there is also a lot at stake, isn’t there?

   

  Lew Rockwell: Well, there certainly is, but I think the political angle is more important. We’ve had this act of imperialism. Who put the US in charge of international football? They’re able to because FIFA made a mistake of having an office in New York. Probably that is a warning to anybody else: Don’t have an office on US soil because then they can use that to take control.

   

  Maybe the corruption charges are true, I don’t know, but again: Why is it the business of the US? I think that’s entirely because FIFA gave the World Cup in 2018 to Russia. This is just another anti-Russian move, and the US wanting to run the entire world, be in charge of every crime or alleged crime every place on the globe.

   

  RT: But doesn’t it have a case there, because there are allegations of $150 million being misappropriated? A lot of this money apparently went through American banks, so part of it happened on American soil. So do they have the right to investigate it?

   

  LR: They can investigate what happens on American soil, but they don’t have the right to go and arrest people in Switzerland or elsewhere. Would you say that England or Switzerland can go and arrest people in New York without the US government’s permission?

   

  I have to tell you, there is corruption in the US too: there is corruption in US sports; there is corruption in the US government; there is corruption in every government. The problem the US has with this is not corruption, the problem it has got is with the results – Blatter wasn’t doing what he was told to do. And I guess now he has done what he was told to do. Obviously something happened to him. Maybe it was just the sponsors’ withdrawing; maybe it was the CIA. Who knows, maybe he was personally threatened or his family. This is the way governments operate there, sort of big-time mafias. We don’t know what happened. But as I said, this is not a good thing for football, not a good thing for the world. FIFA has got to change its name, it’s going to have to take out the “I” and put in an “A” for American.

   

  RT: Do you think that major corporations, such as McDonald’s, played an important role here, forcing Sepp Blatter to resign?

   

  LR: I guess, yes. Of course they are the ones that could be pressured by the US. Even aside the scandal thing, imagine that the US gave them their marching orders, and they took them. And I can understand why companies don’t want to be involved in something that’s potentially corrupt. Although they put on great football games. I don’t know whether they are corrupt or not. I think there is probably corruption in many different international sports associations, because there is so much money at stake. That is not a good thing – people shouldn’t be corrupt, people shouldn’t give bribes, people shouldn’t take bribes. But again, the US is using this to take control of international football; that’s what going on.

   

  Never again will the World Cup happen in a country that the US doesn’t like. The whole world is threatened by the US, which would like to be the world government; nothing is beyond its ken; nothing is outside of its control; nothing can stand against it in the view of the US.

  *  *  *

   

  

  

  
  
  

  

• FBI Uses Surveillance "Air Force" To Monitor US Citizens, AP Finds

  In the wake of the violent protests, looting, and riots that shook Baltimore to its core and left parts of the city smoldering in late April, Benjamin Shayne — who had just sat down in his backyard to enjoy a radio broadcast of an Orioles game — inadvertently uncovered a secret FBI aerial surveillance program when he noticed a small plane circling overhead and asked Twitter if anyone could explain the aircraft’s low, circular flight pattern. As it turned out, one of Shayne’s followers had some answers:

  @scanbaltimore It’s registered to NG Research: http://t.co/mCWpUzvndp
  For some other info: http://t.co/cbCehxiCS0 pic.twitter.com/eGXFIKXCgr

  — Pete Cimbolic (@pete_cimbolic) May 3, 2015

  That exchange would culminate in a Washington Post article which outlined the “aerial support” provided to the Baltimore Police Department by the FBI. 

  We went on to take a closer look and, in “Meet The FBI’s Secret Eye In The Sky Overseeing The Baltimore Riots”, we postulated that the Cessna’s monitoring the riots may have been equipped with night vision equipment provided by Persistent Surveillance Systems, a company which has worked with the Baltimore PD in the past. Here’s a schematic (via WaPo):

  

  On the heels of the revelations, AP followed up and has much more on the FBI’s aerial surveillance program.

  Via AP:

  The FBI is operating a small air force with scores of low-flying planes across the country carrying video and, at times, cellphone surveillance technology — all hidden behind fictitious companies that are fronts for the government, The Associated Press has learned.

   

  The planes’ surveillance equipment is generally used without a judge’s approval, and the FBI said the flights are used for specific, ongoing investigations. The FBI said it uses front companies to protect the safety of the pilots and aircraft. It also shields the identity of the aircraft so that suspects on the ground don’t know they’re being watched by the FBI.

   

  In a recent 30-day period, the agency flew above more than 30 cities in 11 states across the country, an AP review found.

  The FBI claims the program is “not secret” and does not aim to collect “mass surveillance”, but as we discussed in depth in the article linked above (and as you can see from the graphic), it’s difficult to believe that the equipment on the planes is powerful enough to be of use to the FBI but somehow not capable of the types of mass surveillance that the planes over Baltimore were capable of. More from AP:

  “The FBI’s aviation program is not secret,” spokesman Christopher Allen said in a statement. “Specific aircraft and their capabilities are protected for operational security purposes.” Allen added that the FBI’s planes “are not equipped, designed or used for bulk collection activities or mass surveillance.”

   

  
  

   

  But the planes can capture video of unrelated criminal activity on the ground that could be handed over for prosecutions.

   

  Some of the aircraft can also be equipped with technology that can identify thousands of people below through the cellphones they carry, even if they’re not making a call or in public. Officials said that practice, which mimics cell towers and gets phones to reveal basic subscriber information, is rare.

  AP discovered the names of many of the shell companies the FBI has used to conduct the operation and in an ironic twist, the government asked the news agency not to reveal the names because then the Bureau would simply have to create new companies, a process which would cost taxpayers money. In other words: “if you reveal this information to taxpayers, it will cost them.”

  U.S. law enforcement officials confirmed for the first time the wide-scale use of the aircraft, which the AP traced to at least 13 fake companies, such as FVX Research, KQM Aviation, NBR Aviation and PXW Services.

   

  During the past few weeks, the AP tracked planes from the FBI’s fleet on more than 100 flights over at least 11 states plus the District of Columbia, most with Cessna 182T Skylane aircraft. These included parts of Houston, Phoenix, Seattle, Chicago, Boston, Minneapolis and Southern California.

   

  The FBI asked the AP not to disclose the names of the fake companies it uncovered, saying that would saddle taxpayers with the expense of creating new cover companies to shield the government’s involvement, and could endanger the planes and integrity of the surveillance missions. The AP declined the FBI’s request because the companies’ names — as well as common addresses linked to the Justice Department — are listed on public documents and in government databases.

   

  At least 13 front companies that AP identified being actively used by the FBI are registered to post office boxes in Bristow, Virginia, which is near a regional airport used for private and charter flights. Only one of them appears in state business records.

   

  
  

   

   

  The moral of the story: if you’re ever in your backyard relaxing and listening to a baseball game and happen to notice a Cessna making concentric circles overhead remember, it’s not paranoia if they’re really watching you.

  

  

  
  
  

  

• A Much Bigger Threat Than Our National Debt

  Submitted by Bill Bonner via Bonner & Partners,

  The markets are acting as though it was already summer. They are wandering around with little ambition in either direction. Meanwhile, we’ve been wondering about… and trying to explain… what it is we are really doing at the Diary.

  We expect a violent monetary shock, in which the dollar – the physical, paper dollar – disappears. But why?

  Credit Bubble, the Sequel

  As you know, we tend to take the side of the underdogs… as well as half-wits, dipsomaniacs, and unrepentant romantics. But currently, we are standing up for the young, the poor, and all the others the credit bubble has hurt and handicapped. It’s not that we are saints or do-gooders. We are just trying to make a living, like everybody else.

  But we come at it from a different direction than most. Almost all the movers and shakers have the same bias: They want to see the credit extravaganza continue.

  The Federal Reserve has already “invested” (if that’s the right word for throwing phony money down the drain in a futile and jackass effort to hold off the future) $4.5 trillion to protect the balance sheets of the elite. This money has been amplified by zero-interest-rate policies to something like $17 trillion of stock market gains… and umpteen trillion in bond and real estate profits. Naturally, the people who own these things – and not coincidentally provide early stage funding for congressional and presidential candidates – do not want to see a new movie. They want to see the sequel, Credit Bubble 5. Then Credit Bubble 6. And so on…

  And the show goes on! They buy their candidates. They place their ads. The newspapers they support voice their opinions. Their corporations wheel and deal on Wall Street, spinning off bonuses, fees… and even higher stock prices. And the pet economists appointed to run central banks do their bidding.

  Eyes Wide Open

  We’re not complaining about it. We’re just calling attention to it. Because we believe there is a lot of money to be lost by not recognizing what is going on… and perhaps a little money to be made too by following the plotline carefully. Most people do not recognize what is going on because they are paid not to recognize it.

  As we’ve pointed out many times, no central bank is going to hire a guy who thinks it should mind its own business.

  Few investors are going to dispute the happy ending. And nobody is going to be appointed secretary of the Treasury who quotes Andrew Mellon’s famous advice to President Hoover following the 1929 Crash to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate.”

  The credit bubble causes an extreme bias to the upside. Almost no one wants to see it end. Except us.

  *  *  *

  Is that because we are smarter or more virtuous? Not at all. It’s just that we are not paid to ignore things. And neither is any member of our team of worldwide analysts at Bonner & Partners – the small, independent publishing business behind the Diary. We are not beholden to the elite; we get no money from them. And our business model (and maybe our natural contrariness) tells us to open our eyes and try to see what others have missed. Yes, we own stocks. But capital gains take a back seat – far behind our desire to connect the dots.

  Beating Mr. Market

  Since we founded Agora Inc. – the parent company of Bonner & Partners – in 1980, we have published thousands of investment reports and recommendations. We now have analysts and economists in 10 different countries. Our advice and recommendations appear in French, German, Mandarin, Spanish, and Portuguese… as well as English.

  Is the advice good? Do the recommendations always go up? We recently commissioned an outside accountant to study them. The conclusion? Some good. Some not so good. Some do very well – with several of our paid-for advisories outpacing the S&P 500 over the last 10 years.

  …

  Our personal experience is similar: Sometimes we do well. Sometimes we don’t.

  This generally confirms what we know about the way the investment markets work: If you are lucky and work hard you can do a little better than the market.

  But Mr. Market is always hard to beat. The Efficient Market Hypothesis – which tells us that financial markets do not allow you to earn above-average returns without taking above-average risk – may overstate the case. But probably not by much.

  “Black Swan” Hunting

  On the other hand, when we look at the big macro events of the last 30 years, we find our team does very well.

  There were five major events that marked the period:

  1. The collapse of the Soviet Union
  2. The fall of the Japanese miracle economy in 1990
  3. The bursting of the dot-com bubble in 2000
  4. The attack on the World Trade Center in 2001 and the “War on Terror”
  5. The financial crisis of 2008 and the subsequent non-recovery

  These things are important because they were unanticipated. As our friend Nassim Taleb puts it, they were “black swans.” People weren’t ready for them. And most authorities said they wouldn’t happen.

  In the 1980s, for example, the CIA believed the Soviet Union was going from strength to strength. Until 1990, investors were betting heavily on a continuation of the Japanese boom. Same thing for the dot-com bubble. It was accompanied by the most delirious “this time it’s different” talk we’ve ever heard. And on the morning of September 11, 2001, nobody expected such a dramatic attack on Manhattan – especially not the people we paid billions of dollars to stay on top of it.

  And Fed chairmen Alan Greenspan and Ben Bernanke both admitted that the 2008 global financial crisis was unforeseeable. But the crash in real estate and finance of 2008 wasn’t unforeseeable at all.

  In 2003, my Agora colleague Addison Wiggin and I wrote a book called Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. The foreword to that book, penned by our friend Jim Rogers, summed up our thesis:

  As this book you hold in your hands demonstrates, artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks in the late 1990s.

   

  Now, policies being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble.

   

  And when those bubbles burst, it’s going to be worse than the stock market bubble, because there are many more people involved in consumption and housing. When all these people find out that house prices don’t go up forever, with very high credit card debt, there are going to be a lot of angry people.

  And our analysts were all over the story years before the crisis hit. (As one reader commented: We are often very early.) As for the other big events, our analysts were on top of three out of four of them. The only one we missed was the attack on the World Trade Center. In the interest of full disclosure, it is also true that we saw many other things coming – such as the Y2K computer glitch in 2000 – that never happened. Still, we were able to see many of these events coming when so many others – including those responsible for keeping an eye on them – failed.

  *  *  *

  How We Get to Hyperinflation from Here

  How did we do it? Our customers pay us to notice things that others are paid not to notice. Bear markets, crashes, credit contractions… governmental, technical, and social catastrophes – nobody wants to look carefully for these things. Nobody wants them to happen. They make people poor, not rich. And yet, they do happen.

  It seems part of nature’s system that mistakes are punished, errors are corrected, and “bad” things happen from time to time. But like forest fires, they have a useful purpose: They clear away the dead wood and allow future growth.

  Currently, we are predicting a credit crisis – much worse than the 2008 meltdown.

  No one wants it – especially not the deadwood. But we put a high probability factor on this forecast. It is unavoidable… even if we don’t know exactly what form it will take.

  And we believe it will be foreshadowed by something even rarer and more unexpected – the disappearance of cash dollars.

  Just to be clear, our prediction is that the “Ice Age” of low rates and low growth for a long time – as predicted by many analysts and economists – won’t happen.

  Instead, a crisis will cause a crash on Wall Street. The banks will go broke. The credit system will seize up. People will line up at ATMs to get cash and the cash will quickly run out. This will provoke the authorities to go full central bank retard. They will flood the system with “money” of all sorts.

  The ice will melt into a tidal wave of hyperinflation.

  

  

  
  
  

  

• Presenting The Next Great Source Of Middle Class Prosperity

  On the heels of yesterday’s news that auto sales blew away expectations in May, posting their largest MoM increase since November 2013 on the back of record numbers across-the-board for financing (including average new car loan terms of 67 months and record high average payments of $488/month), we present the reincarnation of the home equity loan.

  With PNC’s “cash out auto loan,” you can put your vehicle “to work” by pledging it as collateral for a cash loan.

  Welcome to the Great American auto bubble, now at PNC soon at every bank near you.

  

  

  
  
  

  

• Former US FIFA Official Admits Taking Bribes In Selection Of French And South African World Cups

  With the crackdown against FIFA corruption escalating with every passing day, just 24 hours after Sepp Blatter announced his unexpected resignation moments ago it was revealed that former US FIFA executive Chuck Blazer, who had been suspended in 2013 from CONCACAF amid corruption allegations and who became a confidential FBI informant, admitted to taking bribes when deciding the winners of the 1998 (France) and 2010 (South Africa) world cups.

  The revelation was made when a November 25, 2013 transcript between Loretta Lynch and the former FIFA official was unsealed hours ago. While the full transcript (attached below) makes for a fascinating read, the key section is the following:

  From 1997 through 2013, I served as a FIFA executive committee member. One of my responsibilities in that role was participating in the selection of the host countries for the World Cup. I also served as General Secretary of CONCACAF from 1990 through December of 2011 , and was responsible for, among other things, participating in the negotiations for sponsorship and media rights.

  During my association with FIFA and CONCACAF, among other things, I and others agreed that I or a co-conspirator would commit at least two acts of racketeering activity. Among other things, I agreed with other persons in or around 1992 to facilitate the acceptance of a bribe in conjunction with the selection of the host nation for the 1998 World Cup.

   

  Beginning in or about 1993 and continuing through the early 2000s, I and others agreed to accept bribes and kickbacks in conjunction with the broadcast and other rights to the 1996, ‘1998, 2000, 2002, and 2003 Go1d Cups. Beginning in or around 2004 and continuing through 2011, I and others on the FIFA executive committee agreed to accept bribes in conjunction with the selection of South Africa as the host nation for the 2010 World Cup.

  It is worth noting that earlier today, South Africa’s sports minister Fikile Mbalula said that the previously disclosed payment of $10 million made to the Caribbean Football Union in 2008, was not a bribe and was not made to assure his country hosted the 2010 world cup. The US indictment released by America’s department of justice last week alleged that: “a high-ranking Fifa official caused payments … totalling $10m – to be wired from a Fifa account in Switzerland to a Bank of America correspondent account in New York … controlled by Jack Warner”.

  Blazer’s sworn testimony clearly confirms that South Africa did pad some bank accounts to make sure it was awarded the 2010 world cup.

  It is unclear as of yet who may have been the source of funding for the 1992 bribe – some 23 years ago – to assure France was the recipient of the 1998 world cup.

  Blazer not only admits to taking bribes but to evading taxes while a resident of New York:

  Between 2005 and 2010, while a resident of New York, New York, I knowingly and willfully failed to file an income tax return and failed to pay income taxes. In this way, I intentionally concealed my true income from the IRS, thereby defrauding the IRS of income tax owed. I knew that my actions were wrong at the time.

  For those curious, the residence in question was in the Trump Tower, where in a $6,000/month apartment he kept his cats.

  And while it is only a matter of time before even more such transcripts are unsealed revealing the acceptance of bribes by FIFA officials to award the hosting of the 2018 and 2022 World Cups to Russia and Qatar, respectively, following promptly by the stripping of these countries hosting rights, one perhaps even more stunning revelation is that the abovementioned Chuck Blazer had, and still has a blog, titled Travels with Chuck Blazer and his Friends… (hosted by blogspot) which was launched in 2007 and whose most recent post was in February 2014, or after the above sworn deposition took place and Blazer already knew he was facing a indictment.

  Just who are these “friends” of Blazer’s? These are some examples:

  Here is the 450 pound Chuck with Miss Universe:

  

   

  Chuck with Vladimir Putin in 2010. This is what Blazer said of that meeting:

  On August 5th, I had the pleasure of visiting with the Prime Minister of Russia, Vladimir Putin, in his private office in the Russian Federation Office Building. It was a very busy day in the nation’s capital, with the Prime Minister’s itinerary changed, keeping him grounded to his office, due to the rash of forest fires sweeping the Moscow region. That morning I received a call inviting me to come to the House of the Russian Government and have a chat.

   

  Primed and ready for the opportunity, I arrived on time and was brought to a room where I met the very skilled translator who was specialized in simultaneous translation; not with headphones and equipment, but by softly speaking in the complimentary language while each speaker was saying their piece. We chatted informally for a while and then my Exco colleague Sports Minister Mutko joined us, giving us the opportunity to practice and establish a working cadence of translation.

   

  About an hour passed, while the PM had his cabinet in his office to consider how to put out the fires and to reduce the tension and the dense smoke that filled the city. Rain would have helped, but the weatherman brought no relief and the politicians needed to continue to do their best to fight the fires while battling mounting negative public sentiment. Minister Mutko left the room and went to check on when we would be received. While he was gone, I was ushered into a small receiving room with three large comfortable chairs. I calmly waited on the one with my name placed by protocol to make sure I was seated in the right place. All of a sudden, word came to the room that we were to move to another place to actually meet. So, with the translator in tow, we walked down a long corridor and through a room full of cabinet members and key officials. As the large doors to his private inner sanctum swung open, I was greeted by a smiling and very affable leader of the government, Mr. Putin himself.

   

  A firm handshake and a personable smile set the tone for what turned out to be a very special experience. He guided me to sit on a leather couch in the near right corner of the room. At right angles to that couch was another matching one where he took up his position so that we flanked the corner of a large wood bordered coffee table. On my couch, sitting near enough to be part of the conversation was the translator; while on Mr. Putin’s was Vitaly Mutko. The conversation began in a normal enough way, each of us thanking the other for making time for the visit. Genial welcomes continued until at one moment, he looked at me with a very serious gaze and said, without cracking a smile, “You know, you look like Karl Marx!”

   

  I guess I could have responded to his observation in any of a dozen unpredictable ways. Instead, I simply winked at him and said, “I know”. This brought an immediate response with him lifting his right arm up in the air and thrusting it forward to give me my first High-5 from a Prime Minister. I must admit that it was unique after all we have heard about this famous leader of the Russian Republic with a work history in the KGB. So, who knew what to expect? I can tell you that this began a half hour exchange of wit, charm and effective communications.

   

  Shortly after the High-5, he had some questions about my blog. Yes, this same one you are reading now. He asked how it began. I told him about the World Cup in Germany and the fact that I had many special experiences which I wanted to share with people who didn’t have the same opportunities. So, I began Inside the World Cup, which ran until the final whistle in Berlin.

   

  Shortly thereafter, Travels with Chuck Blazer was born. I still had many experiences to share, albeit not accompanied by as much writing as during the World Cup. Instead, more pictures, since recreational writing at times can be very demanding in the face of other obligations. Following discussion on other topics, Mr. Putin rose and walked to a wall behind the table where his cabinet had just met. He slid open two massive doors, revealing a beautiful wooden inlaid map of the whole of Russia, which filled the expanse of the largest wall in the room. As he did this, he talked about a vacation he was about to go on during the waning days of summer. He said that security normally doesn’t like him talking about his plans in advance, but he wanted to share with me some of the plans he had in mind. He walked from the western edge of the map where his St. Petersburg home and Moscow were located and walked to the right towards Siberia and great river deltas and continental roadways being connected. He talked of the things he planned to do, but I must admit I thought he was just trying to show me how very large an 11 time zone land mass of Russia is, when walking from the map’s western edge to the eastern perimeter.

   

  Before returning to the table, he posed the question, “If I send you pictures from my trip, will you post them in your blog and then what will you do?”. I told him yes, the pictures would definitely appear and I would change the name of the blog to “Travels with Chuck Blazer and his Friends”. Indeed, what he was telling me was the real preview of his trip. So, I now happily do what I committed to him and share with you the pictures he has been kind enough to send to me. You will note the new title of the blog has now reflected the pictures from my friend. I hope this opens up my forum to allow for other generous contributions of the people I have had the pleasure to meet in my very special role with FIFA.

  

   

  And here is Chuck with Bill Clinton and a random blonde:

  

   

  Here is Chuck with Hillary:

  

   

  Chuck with UEFA head Michel Platini

  

   

  Pirate Chuck with a nurse:

  

   

  Chuck with a stripper

  

  And so on: more here.

  * * *

  Full unsealed transcript below

  

  
  
  

  

• "Bernanke & Greenspan Have Destroyed America" Schiff & Maloney Warn "People Don't Realize What Is Coming"

  Ali and Frazier, Laurel and Hardy, Mayweather and Pacquiao, Liesman and Santelli, and now Schiff and Maloney. Peter and Mike join clash of the titan-like to discuss their investment strategies and expose the charts the government doesn't want you to seeas "people like Bernanke are taken seriously still and the people that did predict [the crisis] are dismissed as lunatics half the time." The wide-reaching conversation covers everything from gold and stocks to The Fed and The Dollar – Bernanke "took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning." The air is coming out of the bubble, they warn, "Bernanke and Greenspan have absolutely destroyed America. People don’t realize what is coming…"

   

  Full interview here:

   

  Full transcript below:

  Mike: I was in Puerto Rico a little while back and Peter Schiff invited me over to his house and we were just amazed at how we are exactly on the same page when it comes to everything economically. And so he just made a trip out to California near my offices and we decided we’d get together and discuss some of this stuff. So on your travels Peter lately you were just at a show you were speaking. Where were you at?

  Peter: I was in Las Vegas. It’s great to see you again Mike. I was speaking to a very main stream audience of hedge fund managers at an annual conference there. And what was very interesting is even though the audience was, as I said, very main stream, and I was on a panel with a lot of very high profile, main stream individuals, the only person that really got applause was me. I also got some laughs because I told a few jokes, but I think people really got what I was saying and I had maybe 50 to 100 people come up to me afterwards and shake my hand. And really appreciate the candor with which I spoke and I really agree with what you had to say and I was saying some things that the mainstream never really hears about the real problem in the US economy and I blamed it all on the Fed and everybody else was a cheerleader there for the Fed. In fact, Ben Bernanke spoke at the same event as me and he was introduced as being the savior of the US economy and I think he damned it.

  Mike: I absolutely agree. I saw you had your picture taken with him right?

  Peter: Yes, we were at a cocktail party following the event and I thought people would get the irony of the juxtaposition between the two of us kind of having a glass to drink.

  Mike: I think that he and Greenspan have absolutely destroyed America. People don’t realize what is coming from the stored up energy from the manipulations that they did.

  Peter: And speaking of him, this was really the first chance I had to have a conversation with Ben Bernanke. Speaking of him, I really got the sense that he has no idea of the Fed’s culpability in the housing bubble or the ensuing financial crisis, he really doesn’t know. And he denies that the Fed had anything to do with that, that maybe it was pure happenstance or coincidence that we had a housing bubble and these very low interest rates. And because Ben Bernanke still doesn’t get the connection between the Fed’s mistakes of the past and the last crisis he certainly doesn’t understand the coming crisis, which is going to be far worse because the mistakes the Federal Reserve made in the aftermath of that crisis are far worse than the ones and far bigger than the ones that caused it.

  Mike: Right. Ben Bernanke’s overreaction was far bigger than Greeenspan’s reaction to the NASDAQ crash.

  Peter: And as a result the crisis in our future unfortunately is going to be far larger than the one that we just experienced.

  Mike: I wanted to show you a couple of things because I have a feeling that you and I will be exactly on the same page here. You know how indicators…there’s all these different factors in the economy and they’ll be going up at different rates. Suddenly one or two indicators start to point down when you’re near a top and then more of them start to point down and then things roll over and then there’s a crash and everybody thinks that nobody saw it coming. But there’s a few people that are watching this stuff that do see it coming.

  Peter: That’s exactly what they said about the last crash that nobody could have possibly predicted this except there were people who did predict it.

  Mike: You predicted that we were in a real estate bubble. I predicted that we were in a real estate bubble.

  Peter: Ben Bernanke denied that there was a real estate bubble. Even after it burst, he still couldn’t figure it out.

  Mike: And what amazes me is people like Bernanke are taken seriously still and the people that did predict it are dismissed as lunatics half the time. It really burns me up. But this is manufacturing new orders for consumer goods and this is from the Fed’s website and you can see this big plunge that it took in 2008. And there’s a big plunge that’s happening right now. That suggests to me if people aren’t ordering new goods it feels like this could be this summer maybe..

  Peter: Remember, the air is coming out of the bubble because the Fed halted or paused it’s quantitative easing program. Most people think they ended it but I think it’s just a pause because now everybody expects the Fed to raise interest rates because they think the recovery finally has enough traction that it no longer needs the emergency life support of 0% yet your chart is showing and a lot of other economic indicators are showing that the economy is already rolled over and is rapidly headed back to recession even though the Fed hasn’t raised them yet. All they’ve done is talk about raising them in the future and we’re already rolling back into recession.

  So I believe that the Fed is going to have to do another round of quantitative easing, that they’re not going to raise rates and that’s going to be a shocker. It’s going to send shock waves throughout the currency markets and the bond markets because everybody expects the Fed to raise rates and when they don’t do it because the economy is too fragile because it’s just a bubble, not a legitimate recovery then people are now going to have to second guess their idea that what the Fed worked instead of calling Ben Bernanke a hero a lot more people are going to say, wait a minute he wasn’t a hero what he did wasn’t heroic. He took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.

  Mike: Yes the derivatives are bigger instead of smaller. Everything that was put in place to create that bubble that then popped. The two big [inaudible 00:05:36] banks are all bigger. Nothing has been addressed right?

  Peter: No. Those banks are now bigger than ever and if it was going to be a problem to let them fail in 2008 it’s going to be much bigger problem to let them fail in 2016. So the government has to do whatever it can unfortunately to keep the bubble from popping and I think the air is already coming out even without a rate hike but…

  Mike: So do I, yes.

  Peter: But more importantly, the reason that he’s been able to look like he’s succeeded is because of the illusion that it’s all temporary. Everybody believes that the Fed can normalize rates, shrink their balance sheet but when they realize that they can’t do that, that they’ve been lied to then this is going to be a major event for the currency markets or the financial markets when people come to terms with the predict that we’re in. That it’s QE infinity, that rates have to stay at zero in perpetuity. Because the debt is now so enormous that even the slightest increase in interest rates would collapse the system because there is just so much debt.

  Mike: I agree. I don’t think that they can raise interest rates. The next thing here is rejection of credit applications. And I wasn’t following this chart before. I just saw it in somebody’s newsletter. I think this is zero hedge maybe, but this is the crisis of ’08 and look at what happened in March for credit application rejections. So there’s something happening in the economy.

  Peter: One of it is the big transformation from full time employment to part time jobs. Everybody points to all the jobs that are being created and the low unemployment rate but the problem is that the unemployment rate dropped not because people found jobs but because a) they stopped looking or b) they settled for a part time job. So when people who used to have full time jobs now have part time jobs they don’t have the income to get the credit that they need.

  Mike: Right so they apply for a loan and it gets rejected.

  Peter: You know you have home ownership rates now at almost 30 year lows, yet rents are rising. I mean, now you have a record number of 50% or excuse me 25% of people who are renting now devote half their income to pay their housing costs. That’s never happened before. You have hardly anything left over for food or other expenditures that you have. And people are loaded up with student loans and unfortunately a lot of these college grads now have student loans and all they can get is minimum wage jobs and a lot of them are just part time. So people are trying to get by.

  In fact, a lot of people are actually enrolling in college now, not because they want the education but because they need the loans. They just want to get the money so they can pay their utility bills. They don’t even care and a lot of our college grads when they graduate with lots of debt, they can’t find jobs so they go to grad school to get a master’s degree so now they have even more debt but they still can’t get a job.

  Mike: Right, right. The big debt that has been plaguing us lately, the growth in debt. A lot of it is in student loans and auto loans. There are subprime auto loans now.

  Peter: As if the government didn’t learn their lesson from the housing bubble, they decided to create an auto bubble because when the governments.. when GM and Chrysler went bankrupt the government also acquired their financing divisions and they still own them. So the government after they bailed out these companies they certainly didn’t want them to fail again. They wanted to make it look like the ballot was a good idea. So they wanted to revive their profits by making it possible for just about anyone to buy a car. And so many people have been able to buy cars with zero down and they’ve been stretching out their payments so that now people are getting six and seven year auto loans.

  Mike: Right, the seven year auto loan. The car only lasts maybe that long. So you have no equity ever.

  Peter: Well the warranty only lasts for four years. Four or five years tops. And when these cars come out of warranty, try to have it repaired. We don’t have a lot of repair places anymore. It costs a fortune, and of course the value of the cars are plunging. People are going to have much less equity in their car than the remaining payments on their mortgage. And so they end up not making the payments. Now you’ve got to repossess the cars. But there is a huge bubble. But interestingly enough, the first four months of 2015, this was the worst start to a year in auto sales since 2009. So it looks to me like the air is coming out of the auto bubble already. We’ve already saturated the market and so this is just the beginning of the decline.

  Mike: Home mortgages, they’re going longer now than 30 years. There’s longer home mortgages being offered too, trying to keep that bubble inflated.

  Peter: Well, of course they’re offering 3.5% down payments now too with government guarantees which was part of the problem because 3.5% is not enough down to actually have skin in the game. It costs you more than that just to sell a house. So if you buy a house with 3.5% down, the minute your mortgage closes you’re already under water. But now the problem is you’re giving the homeowner a free gamble on the real estate market. Because if real estate prices go up, he can keep the profits, refinance. If prices go down, he could just walk away but better than that he can just stop making his payments altogether and live rent free for three years before they can kick you out.

  That’s really what they set up. I think a lot of the recent home buyers that did put 3.5% down are going to do just that. They’re just going to stop making their payments when they realize that they’re underwater especially when a lot of their repair bills come in. Because a lot of people were lulled into buying homes they couldn’t afford, once they see that it’s just not the mortgage but you also have maintenance and property taxes and some of these people might lose their jobs in this next recession so they no longer even have the income to service. And a lot of these people have adjustable mortgage. Imagine the people that are not even taking out 30 year fixed.

  Mike: With rates this low they are still buying an adjustable rate of mortgage.

  Peter: Because they couldn’t afford the fixed rate. That’s how stretched they are. You know the real solution to the housing market problem is to let real estate prices come down so that homes are affordable, but the government doesn’t want to do that because it will bankrupt all the banks that loaned on them so what their answer is to keep prices inflated and just make credit available by keeping interest rates low and keep throwing the lending standards out the window so that people can buy houses that they cant afford.

  Mike: Ben Bernanke recently commented on the savings glut. He doesn’t think people are spending enough and what is interesting is when you find out what constitutes savings paying down debt is not included in this calculation so any currency that goes to this that is considered savings for some reason. They consider paying down debt savings.

  Peter: Well it’s money you haven’t spent but I think when Bernanke is talking about a savings glut..

  Mike: That they’re paying for previous consumption basically..

  Peter: Right. But when they’re talking about the savings glut they’re referring in other countries, not the United States. We have a savings shortage. There’s maybe a glut of savings in Asia for example but people look at that.. I read an article recently about Chinese have this big savings problem. They have a bad habit of savings. Like smoking or something. Savings is a virtue, but we’re lecturing the Chinese, “You guys are saving too much. You need to spend more money.” One of the criticisms was that they don’t have social security. They expected the Chinese to save for their retirement. Imagine that. Allowing people the freedom to save for their own retirement. And we basically said “No.”

  China needs a gigantic Ponzi scheme run by the government. They should adopt social security so that the Chinese people won’t have to save anymore. As if savings are somehow undermining economic growth. But the only problem for China is that they’re squandering savings on US treasuries. They’re loaning the money to us and we’ll never pay it back. So that’s a waste of their savings they need to invest their savings productively in their own economy and I think that is going to happen and when it does the dollar is going to come crashing down.

  Mike: Yes, I agree and then the engineering of the entire economy and the illusion. This is interest rates from 1950 to today. And then we have base money as the red line here and then I plotted the Wilshire 5000 Total Market Cap Index so the value of the 5000 largest companies in America and what you see.. I’ll zoom in on this section here. You see that they took rates down to zero and at the same time created all this currency and the correlation between currency creation and the markets is just mind bogglinginly close. It’s a cannot possibly be an accident that the markets..

  Peter: Of course not and that’s why they can’t raise rates without bursting that bubble. To not understand how these things are connected the way that they are is one causes the other and I’ve heard people say, “Peter I’ve had 4%, 5% interest rates in the past so why can’t we go back there now?” It didn’t create a problem then because we didn’t have the enormity of the debt that we have now. It’s one thing to have higher interest rates when you don’t have a lot of debt. Sure you can afford it. But when you’re overwhelmed by debt you can’t afford it.

  The other thing is when you’ve been on 0% for 6 years you develop an addiction to that. We have built an entire economy around free money. You can’t take that away even if the interest rates are still low, even if they went to just 2% to 3%. Yes that’s still low. But not low enough for an economy addicted to 0%. If you’re a heroin addict and your body is used to a certain amount of heroin then your pusher says “I can only give you half of what I normally give you, but you still have some heroin.” That’s not gonna cut it. You’re already gonna start going through withdrawal.

  You know that’s why the Fed… supposedly we’ve been in a recovery for six years. Yet interest rates are still at zero. I mean if it was a real recovery they would have raised rates years ago. But they’re afraid to do it because they know it’s phony. But after a while they had to at least talk about raising interest rates. They have to pretend that there’s an exit strategy somewhere but you know just like someone who’s overweight and talks about going on a diet in the future they don’t go on one in the present. So the Fed wants to maintain the ruse that they can raise rates by talking about their intention to raise rates but they don’t actually do it and they play word games about “well we’re going to be patient” or “we’re going to wait a considerable period.” Now they take away the word patient but we’re not impatient. Now they’re saying “we can’t raise rates until unemployment improves.” Well it’s supposedly been improving. The unemployment rate is 5.5%. They initially said they would raise rates if it got to 6.5%. But the bottom line is that it doesn’t matter where the unemployment rate goes, doesn’t matter how high the inflation rate goes they can never raise rates without precipitating a worse financial crisis than the one we had in ’08.

  Mike: So you and I just absolutely agree that this entire recovery has been engineered through the creation of currency. Now if Keynesian economics was remotely plausible, if it worked would they have made it a QE2 or a QE3?

  Peter: Well no, it would have worked the first time.

  Mike: Right.

  Peter: The reason they’ve done it three times is because it fails every time which is why they’re going to do a fourth. Quantitative easing is like trying to put out a fire with gasoline. You can’t put the fire out, you just make the fire bigger. The problem is when all you have is gasoline that’s all you can do. The Keynesians don’t understand that their own remedy is the reason the patient is so sick and they just want to keep on administering it. But I don’t think we’ve had recovery. We haven’t recovered from anything. We’re sicker than ever. The average American knows that. The man on the street can feel his standard of living declining despite what the Federal Reserve. The cost of living is going up, the quality of jobs is going down, all the Fed is doing with its monetary policy is redirecting our resources from productive uses on main street to speculation on Wall Street. They’re propping up the stock market, they’re propping up housing, they’re diverting loans to things like education, they’re propping up health care but the real economy is disintegrating and Americans can feel that.

  If we actually had a real recovery we wouldn’t be talking about all the jobless recovery. The reason it’s jobless is because it’s not a recovery. If it was a recovery there would be good jobs and the jobs that are being created..you know I think the most interesting thing is who is getting them because they look at the labor force participation rate which is the lowest it’s been since the mid 1970s. And everybody wants to say it’s because the baby boom is retiring. So hey, there’s nothing we can do about it. We all know there’s a baby boom. They’re getting old, they must be retiring. That’s why the labor force is shrinking. A lot of people accept that on face value. Even Janet Yellen says that right?

  But the reality is the baby boomers, the older people, they are the ones working in record numbers. In fact, there are months when the only jobs that are created are for people 55 and older. It’s the younger people, people in their 20s and 30s that are leaving the labor force. And what’s happening is you have so many Americans who were retired who have to come out of retirement and take a part time job so they can pay their utility bills, so they can put food on the table. That’s where all the jobs are coming. So the labor force participation is not about people retiring. The people who should be retiring can’t afford to and the younger people who should be working can’t get jobs. That’s the truth behind the numbers.

  Mike: Yes. The markets are in a bubble. I think there’s a crash coming. This is Dr. Robert Shiller’s data. It’s a little bit of a confusing chart because it’s got two data plots in it and interest rates in red. But the valuation of the stock market, judge by PE ratios. You see bubbles in 1901 and then undervalued in 1921 and overvalued during the peak of the 1929 stock market bubble and without exception once it reaches a bubble it bounces on the way down but it has to go to undervaluation before a new bull market can start. There was a peak in 1966 of about 22 and the peak in 2000 where the PE ratio is over 45 which was absolute insanity and it started to bounce, it went down to fair value but then bounced back up into a bubble here at 27. We’re in an extreme bubble and so with these other indicators turning do you think we’re in for a stock market crash?

  Peter: I think first of all that it’s actually worse than that because the earnings have been manufactured by share buy backs because interest rates have been so low it’s been easy for companies to buy back their shares. So now their earnings per share number can be higher because there’s fewer shares. So they’re not really driving the profitability, they’re not driving the revenues, they’re just shrinking the share base but they’re subjecting their shareholders..

  Mike: So the earnings per share look better.

  Peter: Yes but now they all this debt but right now the interest rates are really low so it’s not hurting their earnings but what happens when interest rates rise and if they rise during a recession where they’re earnings are declining and they have no ability to pay the interest a lot of these companies that were buying back shares might have to come back to the market and resell the shares to raise money to service or repay debt that they can no longer afford.

  Mike: ..which will cause it to go way down to the greatest undervaluation in history I think.

  Peter: Right but the reason why I think there may not be a stock market crash even though one is warranted and in fact it would be a healthy development rather than to perpetuate the overvaluation and all the malinvestments that result from that. But I think this bubble is literally too big to pop. I think the Fed knows it. Again, that’s why they’ve been talking about raising rates..

  Mike: So you think they’ll do more of this, the quantitative easing for..

  Peter: The way you stop the value of the stock market from plunging is make the value of the dollar plunge and so rather than nominal prices declining real prices decline. So the real value of stocks let’s say measured in honest money like gold plunges because the Fed is trying to prop everything up. They’re trying to keep these bubbles from popping because they’re literally too big to pop. They think the mistake that they made in 2008 was turning off the spigots right, now they want to keep them wide open and so it’s the dollar that’s more likely to crash this time than the stock market.

  Mike: Yes. I do think though that if the problems first develop in other countries like if the Euro has a problem or if China has a problem we could see the dollar go higher. It might not but I think that we could see a very very short term deflation, that’s something that the Fed can’t control and then they will overreact and print into potentially a hyperinflation.

  Peter: I think we’ve already seen the dollar rally. In fact there is probably more agreement among traders, speculators in the dollar’s direction. Everybody believes that the dollar’s going to go up, everybody has longed to dollar, betting on it continuing to rise because everybody bought into this myth of legitimate U.S. recovery and they believed that the Fed was going to raise rates. So I doubt something that everybody expects to happen will in fact happen. What’s going to surprise everyone is dollar weakness. Everybody is positioned for dollar strength and I think that trade is already over. I think the dollar is fully valued or overvalued based on this belief and when everybody has ultimately has to come to the conclusion they were wrong, when the Fed is forced to admit the economy is much weaker than they thought and instead of a rate hike we get QE4 I think the dollar collapses. So I wouldn’t want to hold out waiting for another dollar rally. I think we’ve already had it. I think now the next thing for the dollar is a big drop.

  Mike: The move that the dollar made was..it’s less than a year right?

  Peter: Yes.

  Mike: Now imagine if you’re an importer or an exporter, what that’s doing to your business. This whole thing of national currencies is just a silly stupid game that countries play that hurts all of us, it hurts all of our prosperity. An importer or an exporter that sees the cost of their goods changed by 25% or the price that they’re able to get for goods going overseas by 25 % in six months this is something… if you chart it out, the exchange rates you can probably draw a line across it and say my business will be successful when this is under here and it’ll go broke when the exchange rate is above a certain amount. If we were using gold there wouldn’t be an exchange rates. Right? If they used honest money all over the world, if honest money was the money that we used in exchange.

  Peter: Yes, it would certainly be a lot easier to do business and we wouldn’t have all these imbalances. The United States couldn’t run these huge trade deficits if we had to pay for our imports with either exports or gold.

  Mike: Yes.

  Peter: But when we can pay for them just by printing money that costs nothing, we can make an unlimited quantity of it but this is going to end in disaster. This is something that’s never been tried on a global scale. We have had individual examples of fiat currencies being tried in one country or another and it always ends in disaster, it never works and countries always return to a gold standard but what’s unique about this time period since we went off the gold standard in 1971 since the world was on a dollar standard and when we went off the gold standard we took the entire world off of it and this has gone on for a while but I think we’re in the final stages of the world rejecting this monetary system where the dollar is at the center because it cannot work.

  Mike: Yes, I do too. When I was writing my book I loaded into a spreadsheet looking for cycles, every currency crisis, stock market crash, bank panics or whatever looking for some kind of cycle in there and what leapt out at me was that every 30 to 40 years the world has a new monetary system. And here we are like 43 years, going on 44 years after the end of the Bretton woods being on this global dollar standard. I think the days are numbered and that there is going to be a crisis and I think it is going to be soon. This is margin debt and the red line is just numerics, the total amount of dollars of margin debt but the blue is margin debt compared to the GDP of the country so the size of the economy. And this chart is already a year old but what you see is every time it got over a certain percentage of the economy here there was a stock market crash right after it got up to those levels and margin debt is back up to those levels.

  Peter: And more importantly though too the actual quality of our GDP has declined because so much of it is now just consumer spending finance by debt, the real wealth producing components manufacturing, mining, things like that those parts of our economy have been contracting. So the size of the GDP is very vulnerable to a collapse which would exacerbate those ratios especially if there was an increase in interest rates. So we’re certainly due for a stock market crash but the economy is so vulnerable that it really can’t withstand one anymore which is why I think again the Federal Reserve is going to do everything it can to prevent that from happening and there’s only one thing they can do is printing money but unfortunately the ultimate consequence there is even worse because a dollar crash is going to be much more damaging to the US economy and to the standard of living of the typical American than what a stock market crash or a real estate crash or banking crisis.

  But unfortunately the Fed doesn’t care abut that. It’s just trying to delay the inevitable. It doesn’t care how much worse it makes it during that time period because they’re hoping that there’ll be a different administration in charge at the time. They have no idea how much time we have so rather than face the music they want to keep on playing.

  Mike: Right just keep on blowing that balloon up bigger and bigger and every time it springs a leak they slap a band-aid on it and keep on blowing more air in. For some reason, people get used to living in a bubble. They like it and the politicians want to..

  Peter: Well, some people like it because there are some people that benefit from this process but there’s only a small sliver of the population. The overwhelming number is suffering don’t understand why. You know you talk about now we have this huge growing chasm between the very rich and everybody else. Call it 1% and the 99%. But this class warfare is being fueled by the very people who are creating it and they don’t even realize that it’s their policies that are doing it. It’s the monetary policies we have that are responsible for this widening divide. It’s not capitalism that’s doing it and just calling for higher taxes and more wealth distribution isn’t going to solve the problem. It’s only going to compound it. We have to get to the source of what is driving this and it’s the central bankers and their monetary policy and to the lesser extent the regulatory and taxing policy of the US government.

  Mike: Absolutely agreed. The gap between main street and Wall Street again, it’s engineered by all of this currency they created going into Wall Street and not to main street and that’s the reason wages haven’t grown. This chart that John Hussmann came up with where he took overvalued, overbought, overbullish indicators and internals weakening like earnings per share and added those factors together and what was interesting is every time there’s a major top this flashes up to very high levels. The 1987 stock market crash, it nailed that. And we’ve been getting these alarms going off over and over again lately. And it may not.. you may be right, the last time they started creating a lot of currency Wall Street partied but you did say that there’s going to come a time where they’re gonna start questioning the currency creation that it might be different this time. They might start partying on Wall Street first but do you think that even with massive currency creation though that people can say if they’ve got to do it again that means it really hasn’t worked?

  Peter: Well they have to come to that conclusion yet. Obviously they didn’t come to the conclusion with QE2 or 3 but I think there’s been so much anticipation and self congratulations by the Fed and the Keynesian economists and the Paul Krugmans of the world that when it doesn’t work, when we’re right back where we started with as far as back to recession and if we’ve gone through the entirety of a business cycle and rates have been at zero the entire time people might start to realize when can you ever raise rates? And if we’re doing a QE4 and instead of the Fed’s balance sheet shrinking from the current four and a half trillion we have to expand it to six to seven trillion, the idea that it’s ever going to go back down again people are going to see that for the ruse that it is and I do think there’s going to be a loss of confidence. Why anyone still has confidence in the Fed is beyond me. But I think that that confidence is going to go away and when it does you know you’ve destroyed the value of the currency.

  I think that as the world tries to shun the dollar denominated debt because the rates have to stay low, we can’t raise interest rates to make the dollar attractive because we can’t afford to pay those rates. So we have to keep the rates artificially low. We can only do that by creating more money but the more money we create the less it’s worth, the fewer people who actually want it. So then you have a situation where the Fed Reserve has to expand it’s QE program not just to mortgages and treasuries but to corporate bonds, to municipal bonds, they have to start buying everything. They become the buyer of only resort and then the dollar really has a crisis and now the Fed is in a position..

  Mike: How moral is that that there’s an entity that gets to create currency that is going to become the buyer of everything and they’re creating the currency to do it?

  Peter:It’s not moral at all, it’s theft is what it is. But eventually people are not going to want to be stolen from and they are going to rebel against that currency and they’re going to look for a safe haven. Something like gold where they can protect themselves from really this monetary looting.

  Mike: Most people don’t realize that when we’re in this grand experiment that the Keynesians that run things don’t actually know what they’re doing because this has never been done at this level before.

  Peter: Well the irons is it’s not an experiment because we know how it’s going to end. There’s no chance that this can work. Because history is replete with examples again on a smaller scale but if it doesn’t work on a small scale just putting it on a bigger scale doesn’t change the outcome. It maybe changes the dynamics.

  Mike: It makes the same outcome but much bigger to match the energy put into it.

  Peter: People that say this is some kind of experiment they’re wrong, they haven’t learned anything. We don’t have to experiment, we have history. We can learn from the mistakes of the past. The problem is that our central bankers and economists never learn from the mistakes of the past. They repeat them all.

  Mike: What I mean is from their point, they think they’ve got these little models that say if you do this this will happen but they don’t know that they actually can’t control it. They can influence stuff short term but..

  Peter: They think that this time it’s different or they can tweak it a little bit. It’s like somebody having another communist revolution saying, we’re gonna get it’s right. The Soviets didn’t get it right or the Chinese didn’t get it right, the Cubans or the North Koreans wherever it’s been tried, we’re gonna try it again. You don’t have to try communism again, it’s failed right.

  Mike: Right

  Peter: It doesn’t work. No matter how you want to repackage it, it’s never going to work but everybody thinks they’re smart enough they can make it work. And so you’ve got people now that think yes, we can make this work. Yes, it didn’t work in the past but we’re so smart that it’s gonna work now and it’s not going to work it’s going to fail even more spectacularly because it’s even bigger.

  Mike: Okay. We were talking about home ownership a little bit earlier. So this is a chart that goes back to 1980. It’s the levels of home ownership have dropped back down to 64% and it hit 69% during the peak of the real estate bubble.

  Peter: First of all, it’s going to go lower. But you’re really graphing the disintegration of the middle class who can no longer afford, thanks to the government to buy homes, and you had all these government programs designed to make home ownership more affordable and of course like everything the government does it backfires. And it’s now made home ownership less affordable and less desirable. So you have record numbers of people who are now renting their houses from hedge funds and private equity funds. And you know what’s been happening to rents for the past few years? They’ve been rising, 4% or 5% or 6% per year, more, 10% in some areas. Because people have no choice now but to rent and those rents don’t even make it into the CPI because they use something like owners equivalent rent and for some reason that never goes up.

  But the actual rent that people are paying is going up. That’s why I mentioned that right now you have 25% of renters have to spend half their income on their housing costs which is up considerably from where it was in 2007 right before the Great Recession started. The old rule of thumb used to be that housing costs should make up no more than a quarter of your income. And now people are devoting half their income. And of course everything else is getting more expensive. Food is getting more expensive, health care is getting more expensive, utility bills. The only life line that many Americans had is that gas prices came down. Gasoline got less expensive. That’s already changing. Oil prices are going back up. And people are wondering “Where was the benefit that we got because we didn’t see it in retail sales from the lower gas prices?” And there was a benefit, there were just so many other problems that you couldn’t see it because the consumer was drowning. Okay, now he’s got a lifeline here but you couldn’t see it. It wasn’t like they were spending the extra money, they needed the extra money for food. But now that lifeline is being yanked away because gas prices are going back up.

  Mike: And so this will go lower. Home ownership.

  Peter: Yes, because you need to eat, you need energy, there are certain things you have to buy.

  Mike: That figure of 50% to put a roof over your head.

  Peter: Yes.

  Mike: The percentage of your income going to home ownership or rent to put that roof over your head, that’s pretty much a constant that you can trace back to like ancient Roman times. You can only afford a certain percentage of your income and you can see when something’s in a bubble because it’s at or beyond a certain extreme.

  Peter: And think about this Mike because this is the cost of home ownership with interest rates at record lows. The Fed’s got rates at zero.

  Mike: Yes, so there’s nowhere to go.

  Peter: It’s never been cheaper to borrow money. Back in the day, in the 80’s, people were buying homes with 12% mortgages, 14% second mortgages, carried back by the seller. How could we have afforded that? Imagine how much wealthier Americans used to be in the past when they can buy a house? Put 20% down? And then pay 12% in mortgage on the remaining 80%? Now Americans are so broke they can barely scrape up 3.5% with a 2.5% adjustable rate mortgage. So you imagine where home prices will have to go, or where home ownership will have to go if we just had a return to low interest rates? Not zero, just historically low. Or if people were requiring a down payment again?

  Mike: Real estate would definitely crash.

  Peter: Of course, either the prices would crash or nobody would own any homes. It would all be owned by hedge funds.

  Mike: Yes. So levels of margin debt, we’ll skip that. These are different countries here and all of these countries are in Europe. The blue here is the different durations of their bonds that are in negative interest rate territory where you have to pay to loan the country your currency.

  Peter: It shows you how absurd this is. And right that old expression “Whom the God’s would destroy, they first made mad” Well, you can see we’re on the eve of destruction when the world is this crazy that you would actually pay somebody money to borrow from you. They have the use of your money and you get back less. I’m going to buy a bond for $1,000 knowing that I’m only going to get $999 back. I mean, what is the purpose of doing that? But you know, it’s actually worse than that because I do believe there are a lot of countries where their CPI is not accurately measuring what’s really going on with the cost of living. So there probably are a lot of other countries that have negative rates.

  Mike: So when you apply real rates to that you think much of the world is upside down.

  Peter: I think the United States has negative rates. We say “Oh we have 2% interest rates for a 10-year bond but our inflation is only a 0.5%.” I think our inflation rate is more than 2%. I don’t think the government’s statistics reflect how bad it really is.

  Mike: Right, I don’t believe so either. I call it the CP lie.

  Peter: Yes, we’ve got negative rates. The fact that there’s actually negative nominal rates where again you buy a bond for 1,000 Euros and you only get nine hundred and ninety something Euros when it matures. Or even the interest you make along the way when you add it to what you get back is still less than you originally loaned.

  Mike: Right. It’s crazy. This has never happened before in human history.

  Peter: It shows you we’re running out of rope here and now people are saying “Why should I buy that bond? I’m just going to hold on to cash.” “And the bank deposits have a negative rate, why even put my money in the bank? Why don’t I just put it in my mattress?” Now putting money under the mattress seems like it’s a more responsible thing to do than to loan it to a bank at a negative rate of interest. Because the bank could fail and you’ve lost your money. Why take a risk if you’re not going to be paid?

  Mike: Right. It’s illegal to put cash in a safe deposit box.

  Peter: Some of these countries want to make it illegal to even have cash. And they’re cracking down on people who are even conducting their business in cash which the way around that is own gold. Own real money. If they’re going to start punishing you for owning Euros or owning Yen or maybe owing dollars, okay, don’t own it. Own something real.

  Mike: Yes, that’s what I do. My total net worth is split up between cash and a vast majority is physical gold and silver.

  Now we’re going to talk about what you can do to protect yourself in this environment and Peter had some… we were talking about gold potentially basing here.

  Peter: Well, I think it’s been building this base now for a couple of years. You’ll notice every time we get down below 1200 people start saying “This is it! It’s going to collapse. Gold’s going below a 1000.”

   

  Source: SchiffGold.com

  

  

  
  
  

  

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• Chinese Stocks Stumble As Hanergy Debt Debacle Looms Over All The 500%-Club

  If one sentence sums up the farce that the hyper-speculative ponzifest that is the 500% club in China it is "Hanergy Group was basically using the listed company as a means to produce collateral in the form of shares that it could then pledge to secure financing." While the stock has been cut in half, lenders remain mired in opacity as they try to figure out, as Bloomberg reports, which of Chinese billionaire Li Hejun's many creditors risk losing every yuan they put into his company? Shenzhen and CHINEXT indices are lower out of the gate today after a 14% and 18% surge in the last 2 days as a group of 11 lenders (ranging from large banks to small asset managers) ask for a meeting to discuss various loans with various Hanergy entities… and whatever they find in Hanergy is bound to have been repeated manifold across China's manic markets.

   

  The surge is over… for now…

  

   

  As investors grow a little weary of "the opacity about parent finances and billings," in Hanergy and across numerous other names we are sure. As Bloomberg reports, a plethora of Chinese lenders are exposed to Hanergy Thin Film Power Group Ltd. and its parent company, including Industrial and Commercial Bank of China, which is owed tens of millions of dollars.

  "The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,” said Charles Yonts, an analyst with CLSA Asia-Pacific Markets in Hong Kong. “The opacity about parent finances and billings is extraordinary.”

  A Bloomberg examination of debt held by Hanergy Thin Film and its closely held parent, Hanergy Holding Group Ltd., show Li has tapped a variety of financing sources since the Hong Kong unit’s stock started surging last year. They include policy-bank lending, short-term loans from online lenders with interest rates of more than 10 percent and partnerships with local governments.

  Lenders also include China Everbright Bank, China Minsheng Bank, two of the companies set up to manage Chinese banks’ bad assets; and Harvest Fund Management Co., one of the country’s biggest fund managers with assets of more than $55 billion.

   

  Local governments have also provided money. Hanergy entered separate financing deals with governments in Sichuan, Shandong and Hebei.

   

  Hanergy pledged ownership stakes in a hydropower station in southern China to four trust companies, a guarantee company and a subsidiary of Harvest Fund Management in exchange for credit. It also guaranteed more than 100 million yuan in loans from online microfinancer Itouzi, and took 18.5 million yuan in loans from another microfinancer, Jimubox, according to the two lenders’ websites.

   

  …

   

  Hanergy Group has given no public accounting of all its debt or the debt scattered among its units. In its 2014 full-year results, Hanergy Thin Film reported debt of 4.4 billion yuan ($710 million).

   

  Li, who holds a 73 percent stake in Hanergy Thin Film, has also used shares as collateral to secure loans. In its 2013 annual report, Hanergy said it pledged 5.1 billion shares to four financial companies.

   

  “Hanergy Group was basically using the listed company as a means to produce collateral in the form of shares that it could then pledge to secure financing,” said Francis Lun, chief executive officer of Geo Securities Ltd. in Hong Kong.

  *  *  *
  Coming to the rest of the 500% club soon…

  

  (Note: These are all Year-to-date performance figures!!)

  

  

  
  
  

  

• Greece Faces Moment Of Truth: Troika To Present Final Offer On Wednesday

  Tuesday was an interesting day for negotiations between Athens and creditors. Recall that after venting his frustrations in a lengthy op-ed over the weekend, Greek PM Alexis Tsipras submitted what he called a “realistic plan for an agreement” ahead of an emergency meeting in Berlin between French President Francois Hollande, German Chancellor Angela Merkel, ECB chief Mario Draghi, and European Commission President Jean-Claude Juncker. 

  That meeting ended without any indication of concrete progress suggesting the group was either not impressed with what Tsipras had proposed or simply didn’t care and spent their time discussing a final, take it or leave it deal to send to Athens.

  By Tuesday morning it was clear that the troika was well on the way to drafting their own proposal. Fed up with Greece, the institutions had apparently decided to simply draft an agreement on their terms and place on X on the line where Tsipras needed to sign if he wanted to avert a default in three days. 

  The troika acknowledged that the deal they were crafting would be a tough sell to the radical members of Syriza and thus would be difficult for Tsipras to get through parliament, setting up what we have predicted all along: an imminent government reshuffle.

  The fact that the draft deal will contain language that forces Tsipras to concede at least a portion of Syriza’s campaign promises was later confirmed when Eurogroup President Jeroen Dijsselbloem was quoted as saying creditors would “not meet Greece halfway.” 

  Reuters is out with the latest, which serves as further confirmation that Tsipras will now be forced into concessions and the troika will have succeeded in using financial leverage to effect what will almost invariably be a government shakeup in Athens. 

  Via Reuters:

  Greece’s creditors on Tuesday drafted the broad lines of an agreement to put to the leftist government in Athens in a bid to conclude four months of acrimonious negotiations and release aid before the cash-strapped country runs out of money…

   

  “It covers all key policy areas and reflects the discussions of recent weeks. It will be discussed with (Greek Prime Minister Alexis) Tsipras tomorrow,” a senior EU official said.

   

  Another official said German Chancellor Angela Merkel and French President Francois Hollande would put the plan to Tsipras by telephone within hours to try to secure his acceptance…

   

  Tsipras, who has vowed not to surrender to more austerity, tried to pre-empt a take-it-or-leave-it offer by the creditors, sending what he called a comprehensive reform proposal to Brussels on Monday before they could complete their version.

   

  Euro zone officials branded the Greek text insufficient and said it was not formally on the table.

   

  The Greek leader faces a backlash from his own supporters if he has to accept cuts in pensions and job protection to avert a default and keep Greece in the euro zone.

   

  Despite defiant rhetoric and face-saving efforts, he seems likely to have to swallow painful pension and labor reforms, facing the choice between putting them to parliament at the risk of a revolt in his Syriza party, or calling a snap referendum.

  Reuters also suggests that Greece will likely not make a €300 million payment due to the IMF on Friday if Tsipras does not accept the proposal:

  A Greek government official said Athens would make a 300 million euro ($329.58 million) repayment to the IMF on Friday as due if there was an agreement with the creditors, hinting it might otherwise withhold the money without saying so explicitly.

   

  “If we judge that a deal has been sealed, then we will make the June 5 payment normally,” the official said, adding that the money would be transferred even if a preliminary agreement had not yet been approved by Eurogroup finance ministers.

  It appears we will know within the next 48 hours the extent to which Tsipras was forced by creditors to abandon Greek voters in order to save them from economic catastrophe. 

  

  

  
  
  

  

• Sounding The Alarm On The Country's Vulnerability To An EMP

  Last year, Elliott Management's Paul Singer highlighted "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). As Michael Snyder previously details, our entire way of life can be ended in a single day.  And it wouldn’t even take a nuclear war to do it.  All it would take for a rogue nation or terror organization to bring us to our knees is the explosion of a couple well-placed nuclear devices high up in our atmosphere.  The resulting electromagnetic pulses would fry electronics from coast to coast.

   

  

   

  As PeakProsperity.com's Chris Martenson explains, the country is extremely vulnerable to an EMP…

  In the past here at Peak Prosperity, we’ve written extensively on the threat posed by a sustained loss of electrical grid power. More specifically, we've warned that the most damaging threat to our grid would come from either a manmade or natural electromagnetic pulse (EMP). 

  A good friend of mine, Jen Bawden, is currently sitting on a committee of notable political, security and defense experts  — which includes past and present members of Congress, ambassadors, CIA directors, and others — who are equally concerned about this same threat and have recently sent a letter to Obama pleading for action to protect the US grid.

  Before we get to that letter, here’s a snippet from what we wrote on the matter roughly a year ago:

  We talk a lot about Peak Cheap Oil as the Achilles' heel of the exponential monetary model, but the real threat to the quality of our daily lives, if not our lives themselves, would be a sustained loss of electrical power. Anything over a week without power for any modern nation would be a serious problem.  A month would lead to chaos and many deaths.

   

  When the power goes out, everything just stops. For residential users, even a few hours begins to intrude heavily as melting freezers, dying cell phones, and the awkward realization that we don't remember how to play board games nudge us out of our comfort zone.

   

  However, those are just small inconveniences.

   

  For industrial and other heavy users, the impact of even a relatively short outage can be expensive or even ghastly. Hospitals and people on life-assisting machinery are especially vulnerable. Without power, aluminum smelters face the prospect of the molten ore solidifying in the channels from which it must be laboriously removed before operations can be restarted.

   

  Many types of nuclear power plants have to switch to back-up diesel generators to keep the cooling pumps running. And if those stop for any reason (like they run out of fuel), well, Fukushima gave us a sense of how bad things can get.

   

  And of course banking stops, ATMs are useless, and gas stations cannot pump gas. Just ask the people of New Jersey in the aftermath of Hurricane Sandy.

   

  A blackout of a few hours results in an inconvenience for everyone and something to talk about.

   

  But one more than a day or two long? Things begin to get a bit tense; especially in cities, and doubly so if it happens in the hot mid-summer months.

   

  Anything over a week and we start facing real, life-threatening issues. National Geographic ran a special presentation, American Blackout, in October 2013 — it presented a very good progression covering exactly what a timeline of serious grid disruption would look and feel like. I recommend the program for those interested.

   

  We're exploring this risk because there are a number of developments that could knock out the power grid for a week or more. They include a coronal mass ejection (CME), a nuclear electromagnetic pulse (EMP) device, a cascading grid failure, and malicious hacking or electronic attacks.

  Others Are Waking Up To The Danger

  Recently, we've been contacted by a well-connected group of powerful people who have formed a commission to study the matter, and have recently made a public and urgent appeal in an open letter to President Obama to take this threat seriously.

  This letter was sent to the President over the Memorial Day weekend.  It begins (emphasis mine):

  Dear Mr. President,

   

  We need your personal intervention to provide for the protection of the American people against an existential threat posed by natural and manmade electromagnetic pulse (EMP). The consequent failure of critical infrastructure that sustain our lives is a major national security threat and would be catastrophic to our people and our nation.

   

  The national Intelligence Council, which speaks for the entire U.S. Intelligence Community, published in its 2012 unclassified Global Trends 2030 report that an EMP is one of only eight Black Swan events that could change the course of global civilization by or before 2030. No official study denies the view that an EMP is a potentially catastrophic societal threat that needs to be addressed urgently. America is not prepared to be without water, electricity, telephones, computer networks, heating, air conditioning, transportation (cars, subways, buses, airplanes), and banking.

   

  All the benefits of our just-in-time economy would come to a deadly halt, including the production of petroleum products, clothing, groceries and medicine. Think about cities without electricity to pump water to their residents.

  (Source)

  Given the deadly drama that would accompany a such major and sustained grid-down event, you’d think that the US would be spending lots of money to safeguard against one happening. But you’d be wrong.

  A bit further in the letter they warn about the vulnerability of nuclear reactors, a risk that causes me a lot of personal concern:

  We urge you immediately to issue a Presidential Study Directive (PSD) directing your National Security Advisor to lead a focused interagency effort to provide, in connection with your current budget execution activities and future budget requests, a specific program to address this natural and manmade threat. In particular, this PSD should direct that hardening technology, well known in the Department of Defense, be exploited by all agencies with responsibility for maintaining the electric power grid. It is imperative that plans are immediately implemented to protect America’s at least 100 nuclear reactors and their co-located spent fuel storage facilities from an EMP. 

  As Fukushima taught the world, if nuclear plants lose grid power, they rely on diesel generators to keep the cooling water circulating.  Lacking grid power, they can keep everything working for as long as the diesel generators run. Of course, in a grid-down event nothing works, including refineries and the ability to pump and move refined fuel.  After the diesel runs out (assuming the generators themselves were not completely ruined by the EMP), the nuke plants will experience various forms of distress as cooling systems are compromised, up to and including complete meltdowns as a possibility.

  Nature Can Play This Game, Too

  As a reminder, an EMP can also come from a natural cause such as a coronal mass ejection from our sun — something we’ve covered in detail here in repeated interviews with NASA scientist Lika Guhathakurta (here and here) as well as in numerous reports centered on the electrical grid and/or warfare:

  A coronal mass ejection from the Sun can generate a natural EMP with catastrophic consequences. A geomagnetic super-storm in 1859 called the Carrington Event caused worldwide damage and fires in telegraph stations and other primitive electronics, which at the time were not necessary for societal survival. In contrast, today a Carrington-class geomagnetic super-storm-expected every century or so-could collapse electric grids and destroy critical infrastructure everywhere on Earth.

   

  We know it will happen; we just don’t know when, but we know humanity can’t risk being unprepared. In July 2012, we missed a repeat by only a few days when a major solar emission passed through the Earth’s orbit just after planet Earth passed. NASA recently warned that the likelihood of such a geomagnetic super-storm is 12 percent per decade; so it is virtually certain that a natural EMP catastrophe shall occur within our lifetime or that of our children.

  We covered the July 2012 event here at PeakProsperity.com because it was a very narrow miss for Earth. Had it instead hit, I seriously doubt I would be typing this or that you’d be reading it. Instead, more likely, we’d be writing letters by candlelight (assuming someone had a pony available to deliver them).

  Now, a 12% per decade chance of a natural EMP occuring per is a pretty high risk. Statistically, it translates into a pretty safe bet that sooner or later on is going to strike. Despite all our advanced technology, we’ll only have, at best, a couple of days advance warning. And that’s assuming that the government decides to tell us, risking a mass panic before the CME arrives.

  EMP As A Tool Of War

  But the bigger risk, in my mind, is that a military confrontation induces one (or several) players to use an EMP as a means of warfare. With the US poking the Russian bear, and now considering military options to confront China over the islands they are building in the South China Sea, it's not out-of-the-question that one of these world powers could consider using an EMP as a means of retaliation..

  The letter to Obama continues:

  As we have known for over a half-century from actual test data, even more damaging EMP effects would be produced by any nuclear weapon exploded a hundred miles or so above the United States, possibly disabling everything that depends on electronics for control or operations within a line of sight from the explosion.

   

  Electricity networks could be shut down indefinitely until major repairs could be made, and this could take months, even years. Cascading failures from even a lower altitude nuclear burst over the northeastern U.S. could indefinitely shut down the electric grid that produces three quarters of the U.S. electric power. Computers would be incapacitated. Supply chains would shut down. Imagine Hurricane Sandy affecting a much larger area without the immediate physical damage but also without any hope for relief supplies.

   

  Russia and China have already developed nuclear EMP weapons and many believe others possess EMP weapons including North Korea and soon Iran – and likely their terrorist surrogates. For example, they could launch nuclear-armed short or medium range missiles from near our coasts, possibly hiding the actual sponsor from retaliation. North Korea and Iran have tested their missiles in ways that can execute EMP attacks from ships or from satellites that approach the U.S. from the couth where our ballistic missile warning systems are minimal.

  A nuclear EMP device is thought to have the potential to completely ruin an unhardened electrical grid for as long as it takes to repair/replace all the ruined electrical items affected.  This is especially concerning in the case of large scale transformers, which are specially made in just a few places with very low manufacturing throughput capacity that could take a year or more (and that’s assuming the plants are still up and running after the attack).

  There is one quibble I have with the letter: I'm not at all concerned about Iran at this stage. Iran has never physically threatened the US nor funded any terrorists that have directly attacked the US like, say, Saudi Arabia.  Perhaps we should be more concerned about the Saudis:

  Saudis ‘to get nuclear weapons’

  May 17, 2015

   

  SAUDI ARABIA has taken the “strategic decision” to acquire “off-the-shelf” atomic weapons from Pakistan, risking a new arms race in the Middle East, according to senior American officials.

   

  The move by the Gulf kingdom, which has financed much of Islamabad’s nuclear programme over the past three decades, comes amid growing anger among Sunni Arab states over a deal backed by President Barack Obama, which they fear could allow their arch foe, Shi’ite Iran, to develop a nuclear bomb.

  (Source)

  So, yes, I’d personally be more concerned about a volatile and increasingly unstable Saudi Arabia having a few nukes in their hot little hands than I would Iran. But that's just me. And it's a small point relative to the main message of the letter.

  I do agree, though, that the US has plenty of enemies. And its relationships with major powers Russia and China are clearly deteriorating and becoming more hostile:

  China state paper warns of war over South China Sea unless U.S. backs down

  May 21, 2015

   

  A Chinese state-owned newspaper said on Monday that "war is inevitable" between China and the United States over the South China Sea unless Washington stops demanding Beijing halt the building of artificial islands in the disputed waterway.

   

  The Global Times, an influential nationalist tabloid owned by the ruling Communist Party's official newspaper the People's Daily, said in an editorial that China was determined to finish its construction work, calling it the country's "most important bottom line".

  (Source)

  It’s a far leap from a general risk of ‘war’ to panicking about a nuclear EMP device being detonated on our soil, but reasonable and prudent individuals cannot entirely discount the possibility. I agree that our government should have plans in place for such a shock, and a program to firm US national weaknesses in advance.

  As long as I'm making demands, it would also be my wish that the US practice more diplomacy and issued fewer blustery ‘my way or the highway’ ultimatums to major nuclear superpowers. Sadly the current State Department seems to be fully occupied by extremely hawkish Neocons who have a differnet point of view.

  China has a very strong interest in the South China Sea (where lots of oil is thought to be found, by the way) and they are very much unlikely to back down to US demands or even direct military confrontation. Both national pride and critical resources are at stake (things that the US should understand quite well).

  Protecting Yourself

  I'm glad that there is a group of concerned and well-connected individuals that are seeking both to raise awareness at the top of government and to encourage more direct action to insulate our electrical grid from the impact of an EMP. We applaud those efforts.

  But as with nearly every major societal risk we face, we don't recommend pinning your hopes on the government to ride to the rescue. Instead, we’ve been carefully and consistently raising awareness among our readers to the threat posed by a loss of grid power (especially due to an EMP event, because the duration of the outage in that case is likely to be long).

  It turns out there are plenty of steps you can take to insulate yourself from the worst effects of a loss of power.  We’ve covered everything from building your own Faraday cages, to installing solar and other electricity-generating systems that might themselves withstand an EMP or other acts of warfare and still function in providing essential power during dark times.

  In Part 2: Reducing Your Risk To A Grid-Down Event, we reveal the vulnerabilities mostly likely to cause prolonged outages of the national power grid: cyber attacks. The current system in the US has a disconcerting number of failure points that can — and are, the data shows — being targeted by malicious agents. 

  And more importantly, we lay out the specific steps concerned individuals should take at the home level to have backup support and protection should the grid go down. The cost of such preparation is very low compared to the huge magnitude of this low-probability, but highly disruptive, threat.

  Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

  

  

  
  
  

  

• Ron Paul Fears The CIA Is The Biggest Threat To Americans' Liberty

  As the Senate scrambled to pass the USA Freedom Act this evening, reinstating the agency’s ability to spy on Americans, Ron Paul points out that US intelligence organizations have always – and will continue – to operate outside the law; with Daniel McAdams noting the CIA “is sort of the President’s own Praetorian Guard.” As Sputnik News reports, before Americans applaud a minor step toward transparency, Paul warns that they should recognize the corrosive nature of the CIA, “They are a secret government,” operating way above the law, and are “way out of control.”

   

  “[The CIA] is sort of the President’s own Praetorian Guard,” Daniel McAdams, from the Institute of Peace and Prosperity, said on the Ron Paul Liberty Report.  “We know…that he sent assassination squads, he sent people to monitor Martin Luther King, and all sorts of things like this.”

  “This is like his own personal army which is accountable to no one,” McAdams adds.

  As Sputnik News reports, according to Paul, the CIA could be an even bigger threat to liberty than McAdams suggests. A covert army that doesn’t answer to Congress, the Supreme Court, or even the president.

  “That, to me, was the most frightening experience in Washington, is there were black budgets. We never knew exactly how much money was spent,” Paul says.

   

  Those secret budgets have allowed the CIA to carry out some pretty shady practices over the years. Chiefly, assassinations.

   

  …

   

  “There are certainly a lot of theories about the CIA being involved in even domestic assassinations, and they certainly are now involved in presidential directed assassinations,” Paul says.

   

  “The US has covertly and overtly influenced elections overseas a number of times,” McAdams says. “It’s a very open secret that the CIA infiltrates monitoring organizations like the OSCE with their personnel.”

  For some, the USA Freedom Act and similar legislation may be the best way to rein in renegade intelligence agencies. But as Paul notes, many laws already exist to implement limitations. These laws are routinely ignored.

  “They are a secret government,” Paul says of the CIA. “Way out of control.”

   

  Nevertheless, Paul ends on an optimistic note, pointing out that young Americans are tired of the status quo and fed up with broad government overreach.

   

  “In a true republic, there is no place for an organization like the CIA,” Dr. Paul says, quoting former FBI agent Dan Smoot. “I think he’s closer to the truth than a lot of what’s going on today.”

  *  *  *

  

  

  
  
  

  

• The Defaults Continue In China As Duck Producer Sinks

  On Monday, in “China May Double Down On Debt Swap As ABS Issuance Stumbles”, we reiterated the important point that China is effectively pursuing a number of competing policy goals in an attempt to deleverage and re-leverage simultaneously. 

  The effort to rein in shadow banking (deleveraging) has led to slowing credit creation just as economic growth decelerates, a decisively undesirable scenario that multiple policy rate cuts (re-leveraging) have so far proven ineffective at ameliorating. Meanwhile, a push to make it easier for banks to securitize loans and thus free up their balance sheets for more lending (re-leveraging) has been complicated by rising NPLs and Beijing’s apparent willingness to let the free market play more of a role in deciding which companies default (deleveraging). 

  Over the past several months we’ve seen at least three examples of Chinese defaults including Baoding Tianwei Group, a subsidiary of state-owned parent China South Industries, and while creditors have asked China South to guarantee the notes, the mere possibility that Beijing will begin to take a more hands-off approach when it comes to propping up borrowers (especially state-owned borrowers) has some lenders nervous. This was on full display on Monday when duck processing company Zhongao defaulted citing banks’ unwillingness to roll its debt. 

  FT has the story:

  A profitable Chinese duck processing company has defaulted on its debts after banks refused to roll over its loans — in a sign of lenders’ wariness over refinancings as China’s economy slows.

   

  Until recently, Chinese banks have been reluctant to write off big debts, preferring to keep businesses alive by rolling over their loans. But privately owned Zhongao has cited banks’ tighter lending policies as a reason why it lacked the funds to repay Rmb282m ($45m) in principal and interest despite turning a profit last year.

   

  It has now defaulted on debt from 13 banks, and warned it may not be able to repay Rmb200m in bonds maturing on June 12.

   

  If it fails to pay its bondholders, it will add to a series of recent defaults in China’s bond market where — until recently — many investors had assumed the government would not allow them to take losses.

   

  Underscoring how much things have changed, Zhongao was actually a profitable company, unlike Baoding Tianwei, for instance, which incurred large losses in 2014.

   

  Unlike other defaulters, however, Zhongao remains profitable, according to its latest financial statements. It made a net profit of Rmb388m in the first nine months of 2014, up 42 per cent over a year earlier. In late April, though, the company said the release of its fourth-quarter 2014 and first-quarter 2015 results would be delayed.

  In the past, Beijing would pressure banks to roll over bad debt in an effort to paper over problems and keep NPLs artificially suppressed at the country’s large lenders and indeed, that practice looks likely to continue especially for local governments who will enjoy lenient treatment should they run into trouble on any new debt incurred through the use of LGFV financing for ongoing projects.

  It’s now a different story for private companies however. Here’s FT again:

  But analysts point out that non-state entities such as Zhongao have less clout than state-owned enterprises and local governments to demand that banks roll over their loans. Last month, Chinese authorities ordered banks to roll over loans to local government financing vehicles, even if borrowers were unable to repay principal or interest.

   

  Non-performing loans at Chinese banks reached their highest level in more than five years by the end of March, official data show, and bankers say they are under pressure to curtail risks. Local media has reported that many branch managers’ pay is now directly linked to their NPL ratio.

  One would certainly expect this trend to continue because as noted last month, some 40% of credit risk in China is carried outside of traditional loans, but even if you take the figures at face value (which, again, one absolutely should not, especially as it relates to NPLs in China), the picture is not pretty.

  

  

  

  
  
  

  

• "If It Looks Like A Duck" – The Man In The Moon: Part 2

  Submitted by Paul Brodsky of Macro Allocation, Inc.

  In part 2 of the “Man in the Moon” series we look at Paul Volcker’s roundtrip – monetary policies and their impacts from 1971 through the Great Leveraging to today. Part 1 can be found here.

  If it Looks Like a Duck…

  Prior to 1971, all global currencies were valued based on a fixed exchange rate system, commonly referred to as “Bretton Woods”. Each currency was directly linked to the US dollar’s fixed exchange rate to gold.

  Bretton Woods effectively died in August 1971 (officially 1973) when the U.S. Treasury ceased exchanging dollars for gold in what became known as “The Nixon Shock”. Overnight, global money and credit became un-tethered to anything scarce. (The Man in the Moon is concerned only with understanding the value of money, not gold’s status as an economic, financial and political lightning rod.)

  What followed from 1973 to 1982 in the West was a period of significant inflation coincident with economic stagnation (i.e., “stagflation”), a state of dis-equilibrium with which most global economists were unfamiliar. 1970s stagflation is now commonly blamed on two Middle East wars, in 1973 and 1979, which led the Organization of Oil Producing Exporters (OPEC) to embargo crude oil and drive its price higher. It is thought the embargo created higher prices coincident with an economic slowdown because consumption dropped without a commensurate and offsetting downward adjustment in oil prices.

  Such macroeconomic analysis begins with the vagaries of geopolitics – the wars. Less blame is placed on what was then the new threat of a dramatically increasing stock of global currency – currency the OPEC cartel would have to accept in exchange for their relatively finite oil.

  Since 1971, the cost of creating money dropped to near zero and there was suddenly no limit to potential currency dilution. The Man in the Moon might wonder whether the new anchor-less, post-Bretton Woods monetary system that began in 1971/1973 contributed to OPEC’s decision to reduce oil exports? Perhaps the cartel simply wanted more hard-to-value currency in exchange for its precious resource?

  Paul Volcker, who, as Under-Secretary of the Treasury for internal monetary affairs under President Nixon in 1971, and as one of three primary decision makers that advised Nixon to abandon the fixed gold-exchange system, was appointed Fed Chairman in 1979 by President Carter. He was given the mandate of reversing debilitating inflation.

  Over the course of eighteen months, Volcker raised overnight rates from 11% to 20%. This created greater demand for U.S. Dollars, reduced the propensity to spend them, and stabilized the currency as a global store of value. As a result, foreign USD reserve holders, like OPEC, were given reasonable assurance that for the first time in a decade that they would receive fair terms of trade. Volcker may have successfully whipped inflation, but his actions effectively saved the USD as a reserve currency (which he helped jeopardize a decade before).

  The Great Leveraging

  As the purveyor of the world’s reserve currency and its monetary hegemon, The Man in the Moon would likely notice that it has become easy to disparage the United States, the country that first came to visit him.

  Since the demise of hyperinflation in 1981, central banks, led by the Fed, have generally maintained an easy credit posture, either through stimulative overnight funding rates or other policies meant to encourage credit growth. As a result, mountains of debt were piled onto bank, household, government and corporate balance sheets in the U.S. and around the world. The naturally-occurring production model for economic growth and stability was effectively replaced with a more managed financial model.

  There was an upside to this. It could be reasonably argued that this new financialism doomed communism in Russia and altered it in China, greased the wheels of great technological innovations, and improved coordination and unity among economies willing to play along with the leverage game.

  Nevertheless, it seems that years of financial return-seeking mal-investment arising from unnaturally easy credit conditions also forced economic imbalances, market distortions, and, as is becoming more obvious today, the potential for unsanctioned currency-based trade wars. (TMITM might even suspect The Great Leveraging re-defined global cultural relations to the point where it made it easier for less secular, un-levered members of the global community to revolt.)

  As a matter of course, central banks forever defend their political impartiality; which is to say, they deny being influenced by the whims of the political dimension to whom they ostensibly answer.

  While this may be true, the record seems to show clearly that monetary authorities have become loathe to making long-term economic sustainability their top priority. Whether they cave to political influences or the best interests of private banks, for whom central banks are directly responsible to provide constant liquidity and solvency, is a subject for gossipers. The net result is the same.

  Over the last generation, global monetary authorities have been able to help accommodate (or generate) global nominal output growth and inflation through policies that engendered credit growth and debt assumption. This can be seen clearly in the U.S., home to the world’s largest debt markets, where the total credit market debt-to-GDP ratio peaked in 2008 at 3.7. (It is about 3.2 today after holding constant from 1950 to 1980 at 1.5.)

  A broader measure of economic leverage would be the total credit-to-GDP ratio, implied in the following graph. Similar leverage implications can also be seen in Europe and China, where Fitch recently reported: “the interest-cost burden of servicing the debt has risen to an equivalent of around 15% of GDP, exceeding nominal GDP growth.”

  Incentives

  As a result of this leverage-based economic model, the global supply of credit (and now base money) has grown based not only on real economic incentives driven by production and capital formation, but also based purely on shorter-term financial incentives. As time passed and balance sheets became more leveraged, financial return ultimately overwhelmed production and capital formation as the primary investment driver.

  The more economies with established financial asset markets leveraged themselves, the less incentive the factors of production have had to produce. Production competes with financial returns for capital, and it has become unable to keep up. Corporate capital allocators are rationally choosing to operate their businesses in search of financial return rather than investing in new plant and equipment. (Tax incentives for debt assumption and “central bank puts” against rising funding rates also help.)

  Capital formation could still occur (and has, judging by the great innovations discussed in TMITM Part 1), but such innovations produce deflationary efficiencies and are accompanied by ever more debt and the need for inflation to service it. Indeed, the widening gap in the accompanying graph also implies how a dollar of debt has produced a decreasing amount of output.

  

  Consequences

  “Economic dis-equilibrium”, formally acknowledged via the onset of QE in Japan in 2001, China in 2008, the U.S. in 2009, and Europe in 2015, has been little more than necessary (and predictable) bank system de-leveraging.

  Put in context, QE’s impact today is as extreme as the events from 1971 to 1981. By raising rates in 1979 and 1980, the Fed saved the purchasing power of the US dollar and, by extension, all global currencies. By creating bank reserves today (excess reserves as they are commonly referred to, which implies any reserves are unnecessary), global central banks are planting the seeds for a new bank multiplier effect – a financial re-leveraging. This promises to further devalue currencies vis-à-vis the global production they will be exchanged for tomorrow.

  The impact of this would be felt most in the non-bank public and private sector. Under the right circumstances, re-liquefying the bank credit channel could benefit domestic commerce, international trade, and asset market valuations. Another impact of QE is that it temporarily offsets the burden of government debt repayment. QE, however, does not literally reduce federal debt or de-leverage household, corporate, or provincial government balance sheets. Today, total aggregate debt is higher than ever.

  During “normal times” – an economic growth phase accompanied or generated by rising systemic leverage – central banks have incentive to promote nominal growth and inflation, which make banking systems profitable and their free-spending political overseers happy. In such times, commercial banks have fiduciary responsibilities to shareholders to constantly increase their market values, which they do by expanding their balance sheets.

  Now that economies are highly leveraged, extinguishing debt would require banks to reduce the sizes of their loan books, which would shrink their market values. Thus, it seems economic policy makers never have incentive to promote debt extinguishment in the banking system, regardless of economic conditions or prospects.

  So, by all indicators it seems monetary policy makers intend to inflate away the purchasing power value of their currencies, and with it the PPV of savings.

  In Part 3, The Man in the Moon takes an analytical dive into monetary identities and the current states of the global economy and capital markets, and concludes there will be “A Great Reconciliation”.

  Paul Brodsky

  Macro Allocation Inc.

  

  

  
  
  

  

• DoNT WaiT UNTiL IT'S Too LaTe…

  

  
  
  

  

• The Future Of India's Monetary Policy Is Now "Monsoon Dependent"

  In a world priced to perfection and beyond, thanks to 7 years of central bank micromanagement of not only the capital markets but the economy, any and every scapegoat will be used when even the smallest deviations from the scripted economic path occur.

  Enter “harsh winter weather.” However, when said “harsh winter weather” entered two years in a row and highly-paid US economists turned out to be far more clueless about the future than the worst-paid weatherman, things promptly got funny when the BEA announced last week that it will seasonally adjust seasonally-adjusted data, thus officially jumping the econometric shark, and revealing how big a farce all underlying economic measurements of the economy truly are.

  As it turns out it is not just a US “thing” to blame the weather.

  Enter the Bank of India, which overnight cut its benchmark rate from 7.5% to 7.25%, as had been largely expected, taking India’s interest rate to the lowest since September 2013.

  The punchline, however, was when RBI’s governor Raghuram Rajan gave his outlook for the possibility of future rate cuts, saying he would have to wait to assess monsoon rains before acting again, an outlook that according to Bloomberg  disappointed investors looking for more cuts to spur weak economic growth.

  While “a conservative strategy would be to wait” for more certainty on how monsoon rains will affect inflation, weak investment means “a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty,” Rajan said. He also lowered the RBI’s growth forecast and said inflation risks are tilted on the upside.

   

  Consumer prices rose 4.87 percent in April from a year earlier, holding below Rajan’s 6 percent target for an eighth straight month. While price pressures have so far proved immune to crop damage from unseasonal rains, the weather department predicts monsoon rainfall — which waters more than half of India’s farmland — will be below average this year.

  Well, we already have a Dow data dependent Fed, it is only fitting that we also have a Monsoon-dependent central bank: Rajan said three risks are clouding, no pun intended, the inflation outlook: the possibility of a weak monsoon, rising oil prices and a volatile external environment. Of these, however, the weather got top billing as the biggest swing factor.

  Slowly a pattern is emerging: the Fed will never hike rates just before, or during, winter; India will never cut rates just before, or during, a weak monsoon; the ECB will never accelerate QE during summer when everyone goes on vacation (only in the late spring), and so on.

  We used to joke that John’s Weather Forecasting Stone is a tool no sell-side economist and strategist should live without. But it has now become abundantly clear that when it comes to monetary policy, there is just one tool that every central planner needs more than anything.

  The following.

  

  

  

  
  
  

  

• Caught On Tape: Hillary Puts "Everyday American" In Her Proper Place

  Presented with little comment aside to note that every now again the truth bubbles out from behind the mask…

   

   

  Source: The Daily Caller

  

  

  
  
  

  

• This Is What Market Mania Looks Like

  Following the Chinese stock market’s worst drop in recent history, a record-smashing 4.4 million new ‘investors’ opened stock-trading accounts last week, confirming that – despite the words (but no actions) of the regulators – China’s BTFD market mania (after all the PBOC will just bail them out, right?) is in absolute full swing.

   

  

   

  Charts: Bloomberg

  

  

  
  
  

  

• From Whence Cometh Our Wealth – The People's Labor Or The Fed’s Printing Press?

  Submitted by David Stockman via Contra Corner blog,

  It is hard to believe that in these allegedly enlightened times this question even needs to be asked. Are there really educated adults who believe that by dropping helicopter money conjured from thin air, the central bank can actually make society wealthier?

  Well, yes there are. They spread this lunacy from the most respectable MSM platforms. And, no, I’m not talking about professor Krugman and his New York Times column. At least, he pontificates from a Keynesian framework that has a respectable, if erroneous, intellectual heritage.

  What I am talking about here is the mindless bunkum issued by so-called financial journalists who swish around Wall Street and Washington exchanging knowing tidbits with policy-makers, deal-makers and each other. Call it the bubble finance “narrative”, and recognize that its gets more uncoupled from economic facts, logic and plausibility with each passing day in the casino.

  The estimable folks at The Automatic Earth put a bright spotlight on this crucial matter this morning, even if not by design. Their trademark daily vintage photo was a 1911 picture of a family including all the kids picking berries in the field; they were making GDP the old fashioned way.

  In its usual manner, the site’s “debt rattle” list of links to timely reads followed, and the first was a Bloomberg View opinion piece called “QE For The People: Monetary Policy For The Next Recession” by one Clive Crook. It was actually a case for literally dropping central bank money from the skies to enable policy-makers to better “support demand and keep their economies running”.

  In thoughtfully supplying a photo of a helicopter in full flight to accompany Crook’s discourse, the Bloomberg graphics department crystalized the essential economic issue of our times. Namely, whether wealth is made by the Berrie Pickers or the Money Printers.

  Needless to say, The Automatic Earth’s vintage photo reminds us how GDP is actually made. And, no, its not about child labor. I grew up in a family farm labor force of five kids and ended up no worse for the wear. But we did produce something—lots of strawberries, raspberries, tomatoes, peaches, grapes and apples.

  

  Lewis Wickes Hine Whole family works, Browns Mills, New Jersey 1910

  Not surprisingly, the house organ of the Bloomberg empire—the very offspring of bubble finance—- says wealth can be made by dropping trillions of dollars of unearned money from helicopters. Back in the day, even berry-picking kids wouldn’t have believed that.

  

  It used to be that “helicopter money” was a sort of metaphor—-certainly the great libertarian, Milton Friedman, did not literally mean that the state should engage in airborne redistribution through the aegis of the central bank when he famously coined the term. No longer. Here is what Bloomberg’s apparently lapsed Onion contributor said this morning:

  Sooner rather than later, attention therefore needs to turn to a new kind of unconventional monetary policy: helicopter money…. (or) how about “QE for the people” instead? It has a nice populist ring to it — suggesting a convergence of financial excess and the Communist Manifesto…… “Overt monetary financing” is closer to what’s required, but something even duller would be better.

   

  Whatever you call it, the idea is far from crazy. Lately, more economists have been advocating it, and they’re right.

   

  The logic is simple. If central banks need to expand demand — and interest rates can’t be cut any further — let them send a check to every citizen. Much of this money would be spent, boosting demand just as Friedman said.

  Uncle Milton must be rolling in his grave. Yet, in a way, he asked for it. He erroneously taught the world that capitalism can catastrophically fail if the central bank allows money and credit to be liquidated too intensively and extensively.

  To be sure, he did not believe this was an everyday risk on the free market; he was talking about the Great Depression of 1930-1933, but he had his causative factors upside down. During the period in question, excess bank reserves—–the stuff the Fed creates—-soared by 13X, while money market interest rates fell close to zero. So the banking system was actually awash with liquidity, meaning that a Bernanke-style bond-buying spree would have amounted to pushing on a string, exactly as has been the case since the Lehman meltdown.

  Instead, the problem in October 1929 was 15 years of massive, Fed-fueled credit creation—first to finance the Great War and then the Wall Street boom in foreign bonds and domestic stocks during the Roaring Twenties. The result of that era’s financial bubble was a massive, unsustainable expansion of US export capacity in agriculture and industry alike——along with bloated levels of industrial inventories, capital goods production and big ticket durable goods (autos, radios and refrigerators).

  When the music stopped, the washout in these sectors resulted in a $35 billion drop over the next three years—or 75% of the total plunge in nominal GDP during the 1929-1933 period. Not surprisingly, therefore, this contraction of bubble-fueled economic activity triggered massive insolvencies in the export-oriented agricultural and industrial districts and in the speculative precincts of Wall Street and their wire house affiliates all across the country.

  In short, the Great Depression did not represent a catastrophic failure of capitalism nor was it the result of a giant error by the central bank. And most assuredly, it was not owing to a deficiency of some mystical economic ether that the Keynesians were subsequently pleased to call “aggregate demand”.

  Plain and simple, the Great Depression was caused by massive insolvencies of banks, businesses and households in the agricultural hinterlands and the new auto, steel and industrial export belt of the upper Midwest and mid-Atlantic. The four-year decline of nominal GDP from $100 billion to $57 billion did not represent the disappearance of “aggregate demand” that could be reincarnated by the state and its central banking branch. As I detailed in the Great Deformation, it represented the liquidation of malinvestment and phony GDP, jobs, production and residual war-time inflation that had never represented real wealth in the first place.

  

  Nevertheless, statists have lived off the false proposition that capitalism is catastrophe prone and is chronically lapsing into recessionary slumps and under-performance ever since. But at least until the Greenspan era, the primary tool of state intervention to purportedly keep the macro economy off the shoals and on the path toward “full employment” was fiscal—–that is, deficit spending and tax cuts.

  And that kind of state action to improve upon the alleged inferior performance of producers, consumers, investors, entrepreneurs and speculators on the free market entailed at least some outer boundaries. To wit, hereditary fear of too much national debt kept the politicians from outright free lunch economics—even after the Reagan era destroyed the will of the old guard GOP budget balancers.

  As it happened, it was Greenspan who confected the bridge from fiscal stimulus by the unruly and inconstant processes of political democracy to central bank based monetary stimulus based on the purported wisdom of an unelected monetary elite. Slowly at first, and then with a rush during his post dotcom interest rate slashing campaign, Greenspan converted the old  counter-cyclical doctrines of the first generation Keynesians, who made a stagflationary hash out of the US economy during the late 1960s and 1970s, into the bubble finance economy which prevails today.

  Clive Crook is simply the archetype of today’s swarm of financial journalists who were house-trained on Dr.Greenspan’s doctrine of statist economics. Always and everywhere, both the old-style fiscal Keynesians and the new style Greenspan/Bernanke/Yellen money printers, postulate that the macro-economy suffers from a deficiency of “aggregate demand”.

  And why wouldn’t they argue just so?  If the family in the figurative berry patch pictured above is not spending enough to meet the policy-makers’ arbitrary growth targets—whether because it does not produce enough income or chooses to save a purportedly “excessive” portion—-then what economic agency can pour more spending into the nation’s economic bathtub until it is full up to the very brim? Why the state, of course.

  But here’s the insidious thing.  There is no such thing as “aggregate demand” which is separate and apart from production and income. The only way an economy can spend more than it produces is to finance excess consumption from artificially conjured credit.

  Now, admittedly, that works——but only so long as balance sheets have available runway and the servicing cost of higher leverage does not overtax the carrying capacity of current incomes. In other words, credit expansion has temporal and economic limits; its not a feature of some mythical, timeless,  dynamic stochastic general equilibrium!

  Well, those limits have been reached and we are therefore in a new, post-Keynesian ball game. The US economy hit “peak household debt” at the time of the crisis. Accordingly, central bank fueled credit expansion has been exposed as the one-time parlor trick it actually was.

  During the decades leading up to the great financial crisis, household leverage levels were ratcheted higher and higher during each stimulus cycle, causing income based household spending to be topped-up with incremental outlays from higher borrowings. But now the process has been reversed: household leverage ratios are falling, even as they remain far above their healthy and sustainable pre-1970 norms.

  So household consumption is once again tethered to current income and savings preferences, as it must be on a long-run basis. You couldn’t have an economy based on the inevitable normalization of interest rates and, say, 400% debt to wage and salary income ratios, too. So the credit fueled boom of 1970-2008 wasn’t the normal capitalist condition; it was a trick of the state.

  

  Household Leverage Ratio – Click to enlarge

  To be sure, that monetary financing trick did generate the illusion of growth. But it wasn’t sustainable. Accordingly, the tepid growth rate since the pre-crisis peak——that is, just a 1.0% annualized gain in real final sales for the last eight years—-simply represents the limits of a production and supply-side constrained economy.

  During the 40 years leading up to the year 2000, nominal wages in the private economy grew by 7.5% annually, while CPI inflation averaged 4.5% per annum. So real wages grew by 3.0% and with some help from the ratchet in household leverage and total credit relative to GDP, real GDP growth averaged 3.6%.

  By contrast, from December 2007 and up to and including this morning’s personal income and spending report for April, private sector wage and salary growth have decelerated sharply—-to just 2.5% at an annual rate for the last eight years. Even if you credit the BLS’ undercount of actual inflation, which has posted at 1.5% per annum during the same period, real wages have grown at just 1.0% per annum or by one-third of their historic trend. And with a discount for actual real world inflation, real aggregate wages have grown hardly at all.

  In short, we now have a 1% growth economy, not the 3.6% economy of the Keynesian yesteryear. Households are spending at levels constrained by the tepid growth of their production and incomes, not because some magic ether called “aggregate demand” has gone missing.

  It goes without saying, of course, that if you want to expand a supply constrained economy at a higher rate, the answer is to reduce the state’s barriers to enterprise and labor input, not to expand the central bank’s balance sheet and further falsify money market prices and inducements for rent-seeking speculation. For instance, abolish the 15% payroll tax barrier to low-skill labor and abolish the FOMC interest rate peg which subsidizes carry trade gamblers.

  None of this will happen, of course. So the bubble finance narrative will roll on awhile longer. Indeed, having been house-trained on the Greenspan wealth effects doctrine, financial journalists like Crook are now taking the intellectual dead-end of state sponsored “demand” stimulus to an absurd and dangerous extreme. Namely, to an out-and-out case for anti-democratic governance by a Wall Street-beholden posse of central bankers.

  The real objection is political not economic. Sending out checks is a hybrid of monetary and fiscal policy — public spending financed by pure money creation. That’s why it would work. Politically, this is awkward…….The real case for central-bank independence isn’t that monetary policy is non-political; it’s that central banks are better than politicians at economic policy.

  There you have it. Start with the sheer Keynesian myth that there is deficient aggregate demand; spend a lifetime in the Wall Street/ Washington corridor drinking the Kool-Aid; and you end up not knowing the difference between Berry Pickers and Money Printers.

  

  

  
  
  

  

• Six Nigerian Central Bankers Arrested In Currency Rigging "Mega Scam"

  Those following the ongoing currency market rigging scandal may be surprised to learn it isn’t just a “developed” world phenomenon in which virtually all TBTF commercial and central banks, such as the Bank of England, take part and engage in criminal manipulation of everything that trades. Apparently even plain-vanilla “developing” countries, elsewhere also known as ‘banana republics’, do it too such as that ground zero of 419 scams, Nigeria, only there FX manipulation takes place at such a modest degree most “cartel” chat room members wouldn’t even bother to waste their time.

  According to Bloomberg, six Nigerian central bankers were charged with fraud in an 8 billion naira ($40.2 million with an m, not a b, not a tr) currency “scam.” No chat rooms here, just a plain old “mega scam involving the theft and recirculation of defaced and mutilated currencies,” the Abuja-based Economic and Financial Crimes Commission said in a statement dated Sunday on its website.  In addition to the central bankers, among those charged are also sixteen commercial bankers who conspired with Central Bank of Nigeria regional executives. The suspects will appear at the Federal High Court in the southwest city of Ibadan from Tuesday to June 4.

  

  This is where it gets amusing: “instead of destroying defaced local currency, the officials substituted it with newspaper cut into the size of naira notes, the EFCC said. The fraud was partly to blame for the failure of monetary policy to check inflationary pressure for years, according to the agency.”

  In other words, Nigerian authorities blame financial executives for using currency-like newspaper clippings in lieu of notes for propagating inflation. Let that sink in for a second.

  The “systematic scheme” had been running for several years and “middle-level officers” were either dismissed or placed on indefinite suspension in October and handed over to the EFCC, the central bank said in a separate statement on its website on Monday. A national audit at the regulator’s 37 branches found it was an “isolated scheme” in the southwestern city of Ibadan.

   

  The EFCC said the scam was exposed on Nov. 3 through a petition alleging more than 6.6 billion naira was diverted and recycled by “light-fingered top executives of the CBN at the Ibadan branch.”

   

  The suspects, who were responsible for taking mutilated notes in exchange for fresh cash equivalent to the amount deposited, abused their positions, the EFCC said. Investigations found boxes that should have contained bundles of naira notes filled with newspaper instead.

   

  “This practice, known as interleafing, basically labels a box with a higher value than its true content,” the central bank said. “The bank will continue to collaborate with the EFCC to ensure that affected CBN staff, as well as their accomplices in some commercial banks, are brought to justice.”

  And unlike in the US, where the criminal bankers control the regulators and enforcers through the “rotating” (and in Goldman’s case, double-rotating) door phenomenon, in Nigeria President Muhammadu Buhari, a 72-year-old former military ruler, has made battling endemic corruption one of his administration’s top priorities.

  It is therefore likely that if convicted, the accused will likely see many years of prison time or worse, instead of just suffer a monetary penalty paid for by shareholders and a deferred prosecution.

  Which may explain why rumors are already rife the currency manipulation crew has begged the Southern District of New York to extradite them to the United States where they can face the proper “justice” for  financial criminals which guarantees immunity from any actual hard time.

  Joking aside, after several central bankers are sentenced to spend years to contemplate their criminal decisions in Nigerian prison, one may ask “who truly is the banana republic”, especially since the most difficult decision facing those who colluded, defrauded and manipulated tens of billions, will be in which of their numerous East Hampton mansions they will spend the upcoming weekend.

  

  

  
  
  

  

• John Nash Hated Keynesians

  Submitted by Jeff Berwick via The Dollar Vigilante blog,

  John Forbes Nash Jr., the Princeton University mathematician who inspired the film  “A Beautiful Mind,” died on May 23rd in a New Jersey car crash.

  While we always look at things critically, and are aware that he had said he was just days away from releasing his discovery of a replacement for Einstein’s relativity theory, we’ll leave that private detective work for the millions of truth researchers on the internet.

  While researching John Nash, however, we came across numerous anti-Keynesian comments by Nash that caught our eye here at the always anti-Keynesian Dollar Vigilante.  Of course, as with most things, his anti-Keynesian stance wasn’t talked about very much and certainly not featured in the movie based on his life.

  “Good money,” Nash once argued, is money that is expected to maintain its value over time. “Bad money” is expected to lose value over time, as under conditions of inflation.

  This seems to be a consistent economic statement by the late, great mathematician. His economic understanding, and disdain of “Keynesians”, goes deeper.  As he stated in this lecture:

  The special commodity or medium that we call money has a long and interesting history. And since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have we may become irrational in thinking about it and fail to be able to reason about it like about a technology, such as radio, to be used more or less efficiently.

  He goes on to analyze one school of thought’s views on money; namely, Keynesians:

  So I wish to present the argument that various interests and groups, notably including “Keynesian” economists, have sold to the public a “quasi-doctrine” which teaches, in effect, that “less is more” or that (in other words) “bad money is better than good money”. Here we can remember the classic ancient economics saying called “Gresham’s law” which was “The bad money drives out the good”. The saying of Gresham’s is mostly of interest here because it illustrates the “old” or “classical” concept of “bad money” and this can be contrasted with more recent attitudes which have been very much influenced by the Keynesians and by the results of their influence on government policies since the 30s

  He sees  Keynesians as “manipulative.”

  So let us define “Keynesian” to be descriptive of a “school of thought” that originated at the time of the devaluations of the pound and the dollar in the early 30’s of the 20th century. Then, more specifically, a “Keynesian” would favor the existence of a “manipulative” state establishment of central bank and treasury which would continuously seek to achieve “economic welfare” objectives with comparatively little regard for the long term reputation of the national currency and the associated effects of that on the reputation of financial enterprises domestic to the state.

  He recognizes Keynesians need an ignorant citizenry or “customers of the currency supplied by the state”:

  The Keynesians implicitly always have the argument that some good managers can do things of beneficial value, operating with the treasury and the central bank, and that it is not needed or appropriate for the citizenry or the “customers” of the currency supplied by the state to actually understand, while the managers are managing, what exactly they are doing and how it will affect the “pocketbook” circumstances of these customers.

  Essentially, as we’ve concluded many times here at TDV Blog, the Keynesians are Communists:

  I see this as analogous to how the “Bolshevik communists” were claiming to provide something much better than the “bourgeois democracy” that they could not deny existed in some other countries. But in the end the “dictatorship of the proletariat” seemed to become rather exposed as simply the dictatorship of the regime. So there may be an analogy to this as regards those called “the Keynesians” in that while they have claimed to be operating for high and noble objectives of general welfare what is clearly true is that they have made it easier for governments to “print money”.

  Nash was in particularly distrustful of a world currency administered by the current global structures.

  He foresaw in the future a sort of world currency being developed, and he had some worries about how one might evolve.

  “In practice, I’m a little distrustful of the politicians at the level of the United Nations and elsewhere,” who would be in charge of administering a world currency.

  So, Nash, one of the most influential mathematicians of our time, is not fooled by the money manipulators.

  Further critiquing the ideology:

  …while they have claimed to be operating for high and noble objective of general welfare what is clearly true is that they have made it easier for government to print money.

  In conclusion:

  And this parallel makes it seem not implausible that a process of political evolution might lead to the expectation on the part of the citizens in the great democracies that they should be better situated to be able to understand whatever will be the monetary polices which, indeed, are typically of great importance to citizens who may have alternative options for where to place their savings.

  Some people believe Nash’s contributions to math, economics, and other disciplines helped pave the way for Bitcoin.  Some think he is Satoshi Nakamoto, the creator of Bitcoin… which makes his death all the more suspicious.

  While bad guys like Dick Cheney, Henry Kissinger, Zbigniew Brzezinski and David Rockefeller seem to never die it seems that more and more of the good guys, like John Nash tend to pass before their work was done or end up in prison for life, like Ross Ulbricht of the Silk Road.

  R.I.P. John and Alicia Nash.

  

  

  
  
  

  

• Auto Sales Reach 10 Year Highs On Record Credit, Record Loan Terms, & Record Ignorance

  There’s no question about it, Experian’s senior director of automotive finance Melinda Zabritski is an optimist.

  Back in March, Zabritski chided the subprime Chicken Littles of the world, noting that “whenever there is an uptick in the number of loans to subprime and deep subprime customers, there is the potential for a ‘sky is falling’ type of reaction, [but] the reality is we are looking at a remarkably stable automotive-loan market, in part because consumers are continuing to stay on top of their payments.”

  Fast forward to Monday and Zabritski was back at it, this time defending the proliferation of longer average terms for auto loans in the US. “While longer-term loans are growing, they do not necessarily represent an ominous sign for the market,” Zabritski said, before explaining that extending the loan term is simply the most logical way for borrowers to buy cars they can’t really afford: “Most longer-term loans help consumers keep monthly payments manageable while allowing them to purchase the vehicles they need without having to break the bank.” 

  In other words, either car buyers are overreaching as homebuyers did in the McMansion era, or the American consumer is in bad shape courtesy of a sputtering economy and barely existent wage growth. To be clear, neither of those alternatives is a good thing.

  Consider the following out Monday from Experian:

  The average loan term for new and used vehicles increased by one month, reaching new all-time highs of 67 and 62 months, respectively.

   

  Findings from the report also showed that longer loans, those with terms lasting 73 to 84 months, accounted for a record-setting 29.5 percent of all new vehicles financed, an 18.6 percent rise over Q1 2014 and the highest percentage on record since Experian began publically tracking this data in 2006.

   

  Long-term used-vehicle loans also broke records, with loan terms of 73 to 84 months, reaching 16 percent in Q1 2015, rising from 12.94 percent the previous year — also the highest on record…

   

  The average amount financed and the average monthly payment for a new vehicle also increased to record heights. The average new vehicle loan was $28,711 in Q1 2015, compared to $27,612 in Q1 2014. The average monthly payment for new vehicles also rose, moving from $474 in Q1 2014 to $488 in Q1 2015.

   

  Additionally, leasing continued to increase in popularity during the quarter, jumping from 30.22 percent of all new vehicles financed in Q1 2014 to a record high of 31.46 percent in Q1 2015.

  So let’s break that Q1 data down:

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

  You get the idea.

  Given the above, it certainly comes as no surprise that auto sales for May came in quite strong. In fact, May saw the largest MoM increase since November 2013:

   

  Put simply, people are buying more cars because they’re allowed to take out long-term loans at extremely low rates, and the fact that monthly payments are still hitting all-time highs suggests that borrowers are not taking advantage of these conditions to make prudenct decisions in terms of what they’re buying (or leasing). While all of the above might seem like a recipe for disaster, Zabritski thinks otherwise:

  “Increases in vehicle financing are signs of a strong automotive market. By gaining a deeper understanding of current financing trends, lenders are able to stay competitive and better meet the needs of the marketplace, while consumers can use the data to become more educated on the different vehicle financing options and make a more informed purchasing decision.“

  Yes, “more informed purchasing decisions”, like taking out an 84-month loan to buy a used car. 

  All of the above notwithstanding, Experian would likely point to the fact that the averge FICO score for borrowers financing new cars fell only slight from 714 to 713 Y/Y while the same Y/Y scores for those financing used vehicles actually rose from 641 in Q1 2014 to 643 in Q1 2015. While that’s all well and good, there’s every indication that those figures are likely to deteriorate significantly going forward. Why? Because Wall Street’s securitization machine is involved. Let’s look at some numbers for consumer ABS issuance via Deutsche Bank:

  The consumer ABS sector saw $16.6 billion of new issue supply in April. This reflects a modest slowdown from Q1, when the average monthly issuance amount reached $18.9 billion. Nonetheless, year-to-date issuance, at $73.4 billion, remains flat year-over-year. Auto ABS saw $7.9 billion of new paper in April, bringing year-to-date new issue supply to $38 billion; nonprime auto ABS issuance totals $10 billion year-to-date. 

  So, in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit), auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers. Put simply, those subprime borrowers are getting subprimey-er. Here’s FT with the latest example of the deep subprime deal from Santander Consumer (which we have profiled on a number occasions, most notably here): 

  When Santander Consumer USA sold a $1bn pool of subprime auto-loans this week, it made no pretence that the loans would be paid back in full. So confident was SCUSA that a big chunk of the money would not be coming back that it said it would shield investors in the lowest-rated tranche of the deal from the first 19 per cent of losses.

   

  That is a lower level of protection than the Spanish bank’s US securitisation vehicle provided in its first trip to the lower reaches of subprime auto lending in March, when it offered “credit enhancement” of 25 per cent on the worst-ranked bonds.

   

  

  (details of the above mentioned March deep subprime deal)

  And Santander Consumer is hardly the worst. Recall Skopos Financial, to which we introduced readers in April. Skopos is run by a team of Santander veterans and the stats on their latest ABS offering look even worse. Note that a fifth of all loans in the collateral pool are made to borrowers with a FICO of between 350 and 500:

  

  The implication here is clear. The auto ABS market is alive and well with total issuance expected to reach around $100 billion this year and as the competition for borrowers heats up, lenders are reducing their underwriting standards in order to make the loans needed to feed the securitization machine. 

  *  *  *

  But perhaps the best bubble indicator of all is the rise of the “cash out auto loan”:

  

   

  “Use your car as collateral — our equity loans can help put your car to work for you.”

  Ladies and gentlemen, the “cash out auto loan” is the new home equity loan. Welcome to the great American car bubble.

  

  

  
  
  

  

• The Difference Between Republicans & Democrats

  What do “everyday Americans” do for a living compared to “average Joes”?

   

  

   

  Source: VerdantLabs.com

  

  

  
  
  

  

• The War on Cash is Now a Global Phenomenon

  More and more institutions are trying to make it harder for you to move your money into cash.

   

  Globally, over $5 trillion in debt currently have negative yields in nominal terms, meaning the bond literally has a negative yield when it trades. In the simplest of terms this means that investors are PAYING to own these bonds.

   

  Bonds are not unique in this regard. Switzerland, Denmark and other countries are now charging deposits at their banks. In France and Italy, you are not allowed to make cash transactions above €1,000. Spain, Uraguay,

   

  This is also at work in the US. Louisiana has made it illegal to purchase second hand goods using cash. This is just the beginning. The War on Cash will be spreading in the coming weeks.

  The reasoning is simple. Most large financial entities are insolvent. As a result, if a significant amount of digital money is converted into actual physical cash, the firm would very quickly implode.

   

  This is true for banks around the world. European banks as a whole are leveraged at 26 to 1. In simple terms, this means they have just €1 in capital for every €26 in assets (bought via borrowed money).

   

  The US financial system isn’t any better. Indeed, the vast majority of it is in digital money. Actual currency is just a little over $1.36 trillion. Bank accounts are $10 trillion. Stocks are $20 trillion and Bonds are $38 trillion.

   

  And at the top of the heap are the derivatives markets, which are over $220 TRILLION.

   

  If you think the banks aren’t terrified of what this market could do to them, consider that JP Morgan managed to get Congress to put the US taxpayer on the hook for it derivatives trades. Mind you, this is the same bank that is now refusing to let clients store cash in safe deposit boxes.

   

  This is just the beginning. As anyone can tell you, it’s all but impossible to move large amounts of money into cash in the US. Even the large banks will routinely ask you for 24 hours notice if you need $10,000 or more in cash. These are banks will TRLLLIONS of dollars worth of assets on their books.

   

  This is just the beginning.

   

  Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

  We are making 1,000 copies available for FREE the general public.

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/cash.html

   

  Best Regards

  Phoenix Capital Research

   

   

  

  
  
  

  

• ISIS, Assad Regime Now Fighting Together In Syria, US Alleges

  When last we checked in on the situation in Syria, ISIS (who a secret Pentagon document recently revealed was, and probably still is, considered a US “strategic asset”) was supposedly on the move, emboldened by recent successes in the ancient city of Palmyra and the conquest of Ramadi in Iraq, where, you’re reminded, Iraqi forces showed “no will” to fight according the Pentagon. 

  Recent reports also indicated that the militants may have commandeered 2,300 humvees worth more than $1 billion when the group sacked Mosul last summer, a convenient “loss” for the US which can now justify four times that amount in arms sales to allies who will now need to counter a ‘better-equipped’ ISIS. 

  On the heels of Palmyra, Ramadi, and a suicide bombing at a Saudi mosque, the US military  and Congressional war hawks have ratcheted up the calls for American boots on the ground in Iraq. More specifically, what’s needed is so-called forward “spotters” who will aid in making airstrikes more precise and thus avoid the type of collateral damage and failed bombing runs that have allegedly plagued the air campaign thus far. Or, as we put it last week: Carefully worded trial balloons don’t get much better than that. You see, the problem is that we are accidentally killing innocent children on our bombing runs and that’s if we’re lucky enough to be able to drop any bombs at all which apparently we only do a quarter of the time, and the whole “problem” could be “fixed” by deploying a couple of “spotters” with laser pointers. 

  But no good narrative is complete without a series of multi-colored maps which usually depict the enemy’s advance using various shades of red or orange or purple much like one might use to depict the spread of a deadly virus. That way, the public begins to equate the enemy advance with a rapidly proliferating biological threat.

  

  

   

  Alas, none of this has yet created enough public support for a ground incursion in Iraq and Syria, which needs to come sooner rather than later because after all, Qatari natural gas isn’t going to pipe itself into Europe. 

  So we suppose that if the original plan was to wait on ISIS to make the final push into Damascus before claiming that the US “must take action” to expel the murderous black flag-waving hordes on the way to installing a more ‘agreeable’ regime, it might make sense to just skip a step and claim Assad and ISIS have now teamed up, that way, we can equate the two and kill two birds with one stone (or, more accurately, serve one CIA asset a burn notice and oust an ‘unfriendly’ regime with 10,000 marines). 

  Cue Reuters:

  The United States has accused the Syrian military of carrying out air strikes to help Islamic State fighters advance around the northern city of Aleppo, messages posted on the U.S. Embassy Syria official Twitter feed said.

   

  Islamic State fighters pushed back rival insurgents north of Aleppo on Sunday near the Turkish border, threatening their supply route to the city, fighters and a group monitoring the war said.

   

  
  

   

  Fighters from Levant Front, a northern alliance which includes Western-backed rebels and Islamist fighters, said they were worried Islamic State was heading for the Bab al-Salam crossing between Aleppo and the Turkish province of Kilis.

   

  “Reports indicate that the regime is making air strikes in support of ISIL’s advance on Aleppo, aiding extremists against Syrian population,” a post on the U.S. Embassy Syria Twitter account said late on Monday, using an acronym for Islamic State.

   

  But the U.S. Twitter feed said Damascus had a hand in promoting Islamic State, an al Qaeda offshoot which has seized land in Syria and Iraq.

   

  “With these latest reports, (the military) is not only avoiding ISIL lines, but, actively seeking to bolster their position,” it said. Syria has accused its regional enemies of backing hardline insurgent groups.

  If that sounds strange to you, that’s because it is. Recall from the Pentagon document mentioned above that a spokesperson for The Islamic State of Iraq called on “the Sunnis in Iraq to wage war against the Syrian regime regarding Syria as an infidel regime for its support of the infidel army Hezbollah and other regimes he considers dissenters like Iran and Iraq.”

  Now, apparently, ISIS and the Assad regime have inexplicably decided to ban together.

  With these latest reports, #Asad is not only avoiding #ISIL lines, but, actively seeking to bolster their positon. #Syria

  — U.S. Embassy Syria (@USEmbassySyria) June 1, 2015

  Here’s more from Reuters:

  Syrian officials have previously dismissed as nonsense allegations by Washington and Syrian opposition activists that the Syrian military has helped Islamic State’s fight against rival Syrian insurgent forces.

   

  “The Syrian army is fighting Islamic State in all areas where it is present in Syria,” a military source said.

  And the US again:

  Reports indicate that the regime is making air-strikes in support of #ISIL‘s advance on #Aleppo, aiding extremists against Syrian population

  — U.S. Embassy Syria (@USEmbassySyria) June 1, 2015

  For their part, the ‘moderate’ Syrian opposition claims “it is fact” that Assad is now aiding ISIS and in fact has been doing so for the better part of two years. From Islam Alloush, a spokesman for the Islamic Front, via The Guardian:

  “Yesterday, the regime bombed Mare’a (which was held by the opposition) exactly at the same time when Isis was attacking us, and this helped them greatly.”

   

  “It has become a matter of fact since 2013 that the Syrian regime has bombed us to stop us fighting Isis properly. Isis have never attacked Syrian planes. They owe their success to the regime.”

  Draw your own conclusions, but if one wanted to speed up the process of bringing about regime change in Syria, one way to do so would be to claim that Assad and ISIS are now working together in an attempt to crush the opposition.

  That way, increased US military “support” could be justified by claiming that the barbarous ISIS hordes are now teaming with a regime that allegedly uses chemical weapons on its own people, thus creating a murderous Frankenstein monster by sewing together the ISIS bogeyman and the ‘maniacal’ Assad regime and trotting it out to the public as justification for yet another US ground war.

  

  
  
  

  

• Perception Is The Putrescence Of Politics And The Plague Of The People

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  In the following piece I want to lay to rest any notion that the accepted state of the economy has anything to do with any other than perception.  My hope is that by the end there will be very few that can continue to believe there is anything left to the idea that the underlying economy is either strong or improving; a perception substantiated by current market valuations rather than a reality substantiating current market valuations.

  But remember the idea that perception is reality is a force to be reckoned with in that perception not only deceives but can create a temporary self fulfilling prophecy.  This is the very basis of the danger of perception.   For it is perception of thick ice that leads us to the middle the of lake but reality that takes us to the bottom.  And so it is in the perception that the true danger of reality can hide.  I will limit the discussion today to economics but make no mistake, the putrescence via the dislocation between perception and reality extends to every nook and cranny of modern American and the Western world.

  I recently listened to a fairly impressive speech on television but unfortunately tuned in after the introduction.  It was a representative of the indigenous nations of North America.  The speaker discussed many issues and wrapped in the well being of all people so it was very inclusive and, as I said, very impressive.  However, toward the end of the speech the lecturer made a point to place blame, for much of his subject matter, on capitalism.  Such a disappointing and trite end in an otherwise interesting and persuasive set of arguments.

  While this speaker was just some obscure orator, there are much more prominent ‘authorities’ of public policy constantly making similar disappointing claims on perceptions for the public to digest.  Guys like Paul Krugman are incessantly twisting and mutating Keynesian economics to mean full on, full time government control of the economy while decrying capitalism as some evil force meant to destroy all but the top of the food chain.  But at the same time we have those profiting from the current system too twisting perception that indeed our system is capitalism at its finest.

  Capitalism is, in its most honest and basic form (i.e. its true and only form), simply the trade off of something for something else, with the value of trade being determined by supply and demand dynamics on both sides of the transaction.  That’s it.  And so then it becomes a very difficult task to understand how that can be the evil force so many around the world attribute to capitalism.  It is also a very trying task then to see how the current system has anything to do with capitalism.  But as does Krugman with Keynesian economics the definition of things that most don’t understand very well can be easily mutated for public consumption to make a particular stance seem much stronger than truth would merit.  And there is that other evil term that goes hand in hand with capitalism, merit.

  Again, merit is something just about all of us understand innately.  I don’t care how compassionate one wants to see them self, everyone gets annoyed when people take something that seems to have been earned by someone else.  For example, standing in line at the “I love trees”, T-shirt booth, if socialist A were to, for no reason, bud ahead of socialist B who has been patiently standing there for 3 hours, this would be a problem for all but the very best of us.  And this really explains merit.

  There is an inherent understanding by all, that socialist A didn’t deserve to be ahead of socialist B.   In other words, socialist B earned their place in line ahead of socialist A and so has every natural right to expect socialist A not to jump the line.  I say natural right because this concept is so woven into the reality of existence that it is a natural right.  It doesn’t preclude socialist B from kindly given up his right to be ahead of socialist A in line but the right is his prerogative to give up or keep.  If you understand and agree with that proposition then you understand and agree with capitalism and acknowledge it is a natural system. But I would argue capitalism has been replaced by economic cannibalism.

  Capitalism has an inherent way of avoiding dead weight losses via efficient resource allocation, while Cannibalism feeds on dead weight losses.  To be clear these dead weight losses are losses to labour (i.e. the consumer) in the current system (but can be otherwise, for instance with regulated pricing).  Similar to monopolistic pricing, in a cannibalistic economy profits to the producer increase despite a reduction in output.  While monopolies are difficult in the current regulatory world, the Fed has created a similar earnings scenario for corporations by allowing a reallocation of funds away from operations and into a guaranteed secondary stock market that provides no benefit to the economy (or to labour).

  Yet there is an active perception campaign that is taking us out to the middle of the lake.  Specifically, we are being led to perceive an expanding and thus improving economy despite the reality of contraction.  In fact, this focus on creating an ideal perception has become the main strategy of American policymakers.  The historic alternative being a focus on building an ideal reality.  This focus on perception is the putrescence of politics and it is an incredibly dangerous game for we the people.

  The very question of how is it that our ‘capitalistic’ society has become so seemingly unbalanced highlights the dislocation between perception and reality.  Very simply, our society is no more capitalistic than it is democratic.  This is where the effort to understand and be aware is an obligation of citizens.  To be a wantonly foolish citizen is to be an immoral citizen.  If we hope and expect to have a fair and just society, which does include the economy, we must work for it, that is, we must earn it.

  Society, with it’s rules and regulations is man made, and so by definition comes without natural rights.  And that is good because nature can be cruel to the weak.  However, we can design the rules and regulations to mimic our natural rights where ideal and can curve them where compassion is perhaps lacking in nature.  But again, such a design requires a moral citizenry, meaning, in part, an aware citizenry.

  By simply accepting the story as told without regard to integrity of truth we allow ourselves to become feed for those controlling the story and thus the system.  That is, our sweat equity becomes their wealth, our might becomes their weapon and our efforts become their strength.  In effect those controlling the story eat the just rewards of all those around them.  And that is exactly the system currently in place.  You will find it impossible to reconcile the description of the existing system against the nature of capitalism.  The two systems couldn’t be further apart, in fact, each is the antithesis of the other.

  Capitalism inherently optimizes the allocation of available capital between profits and labour.  But by creating policies that reward operational contraction (whether it be the ability for monopolies or for risk free returns in a secondary market) and by incentivizing investors and management in the short term, capital allocators will always divert capital to profits and away from labour.  This is a pure example of economic cannibalism in that investors and C-suite managers are filling their bellies from the meat of not only labour but also future investors and managers; an incredibly short sighted strategy.

  Warren Buffet, often perceived as America’s most beloved capitalist, is perhaps that grandest example of a economic cannibalist.  Let me give you give you a couple examples of how Mr. Buffet has zero respect for or interest in capitalism but practices economic cannibalism as a normal course of business.

  With his BNSF rail company generating significant profits transporting oil across the Midwest, Buffet lobbied hard and fierce against a pipeline being built that would create a more efficient method of delivery.  He lobbied all the way up to the president of the United States.  Not only did he lobby to get his way but he aligned himself with the Environmentalists no less.  Touting trains are safer and more efficient than a pipeline for transportation of oil is mythical at best.  But truth is irrelevant when it comes to cannibalism.  The truth is simply that Warren is willing to eat any competitive benefits to the end consumer to fill his own belly.  He does so not by being more competitive (capitalistic) but by purchasing ideal legislation for himself (cannibalistic) with all lost gains to the consumer from denying a capitalistic process being digested directly by him.

  Step forward to today and we find Buffet this time fighting against the Environmentalists and casinos to protect his bets on energy profits (MidAmerica’s purchase of NV Energy) in Nevada by lobbying to eliminate credits to folks that are net suppliers of renewable solar energy back into the grid.  Clearly, if people are adding to the existing power supplies using renewable sources of energy generation they should receive credit for those supplies.  However, that would eat away at the non-renewable energy profits being generated by Buffet’s energy plays.

  What it means is that nonrenewable energy companies like Buffet’s holdings need to quash the more competitive (albeit smaller) renewable sources and do it via purchasing favourable legislation rather than by being more competitive (hard to compete with the efficiency of the sun once the cells are in place and paid for).  This is quite obviously anti-competitive and thus anti-capitalistic.  The truth is that Warren is wealthy and unethical enough to eat the meat of all those competitive benefits of renewable energy supplies into the grid simply to keep his own belly filled.

  And look I’m not trying to have a go at Buffet in particular he just is an easy target to make the point.  In reality there are a million examples at all levels and in all facets of the economy but the point is that capitalism has very little to do with America today.  Let me say that again.  Capitalism has very little to do with America today and so we need to get this idea of evil capitalism out of the public discourse.

  Our system could be considered an immoral system in the sense that it is materially unethical and inefficient, based on massive resource misallocation but it cannot be considered capitalism.  Now I’m certain you are asking yourself if this is going anywhere or is this just some theoretical moral point being made??  Ok, let me bring this back to the here and now tangibility of the average American.

  Part of being an American profiteer today is getting ahead by any means available for which one will not go to prison nor pay 100% of their ill gotten gains in fines to the Treasury’s General Fund.  Just refer to the libor, FX, MBS or gold market manipulations that have so far found guilt but no one of any relevance prosecuted or broke.  The facts speak loud and clear to a system designed on economic cannibalism.  But because a picture is worth a 1000 words allow me to provide a few charts to make the point slightly more succinctly how this impacts we the people.

  The following is a visual of economic cannibalism in its most obvious form, understanding the idea that capital must go to either profit or labour.  It is apparent that while labour once sat at the table with profiteers, today, labour has become the meal.

  

  What we find in the above chart (source: Bloomberg/ Allocated Bullion Exchange) is that while corporate profits (dark blue line) and S&P valuations (light blue line) have historically correlated positively to real incomes, in the new Fed manipulated and highly cannibalistic economy, corporate profits and market valuations are actually feeding on incomes i.e. labour and thus on their own source of subsistence as labour is also the consumer.  Purely cannibalistic activity.  But due to the short term nature of today’s investor and managers, long term health has no place in strategy discussions.

  The next chart I’ve presented previously but it is perhaps the best representation of how earnings growth is simply an illusion/perception created by operational contraction.  You see while historically stock valuations grew with increased sales meaning operational expansion (i.e. non-temporary increased expected future cash flow), in the new cannibalistic economy, markets are thriving on lower sales i.e. contracted operations i.e. contracted labour i.e. temporary earnings growth.

  

  I simply cannot disseminate the above chart enough.  It is at the heart of the giant con I’ve been discussing for the past year.  Consumers are not spending more (i.e. real sales are down) because they have less income.  When one reads between the lines of the above chart one understands that the growth in market valuation has come via earnings growth, which has come by eating corporate operations (cannibalism not capitalism).   In effect, reducing economic activity by reallocating capital away from operations (capex and labour) and into profits via dividends and buybacks, corporations have created the perception of growth (expansion) leading to increased stock valuations when in fact the opposite it true.

  The next chart dispells the perception that because the defined unemployment statistic is falling more people are working.  This is truly unbelievable to me that people still talk as though we have had any sort of an improvement in labour over the past 6 years.

  

  What we actually find is that declining unemployment historically resulted in increasing labour participation rate meaning as unemployed fell out of the statistic they actually were moving into jobs as one would expect.  However, subsequent to 08 in the new perception economy, while the rate of unemployed persons (U6- red line) is falling those persons are not moving into employment as we are led to perceive but are simply no longer part of the defined labour force (blue line).  In short, they simply no longer exist according to the unemployment statistic.

  There is an abundance of evidence indicating the same reality.  For example, the Fed still cannot raise rates despite a historically low unemployment statistic (U3 at 5.8%).  Additionally, the instance of declining real wages and income is not a typical economic phenomenon during a tightening job market.  Yet the perception is of a highly improved job market via a deceptive unemployment statistic which continues to be pressed and pressed very hard despite all of the evidence to the contrary.

  Now let’s look at perhaps the strongest argument which I expect should alleviate any remaining doubt as to a choreographed perception based strategy.  The fact of the matter is that markets have now completely lost any logical tangibility to real economic growth vs contraction.  Allow me to crystallize the point with a chart that leaves no room for argument.  In fact, I would love to have one of you permabulls reach out to me and explain this next chart.

  

  I’m not sure there is a better depiction of long term market manipulation than the above chart.  Note that we’ve experienced an economic collapse (white line) matching that of 2008, yet while 2008 S&P (orange line) sold off +45% the market today has traded slightly higher in the face of the equivalent economic collapse.  I’ve added a vertical red line showing just where the pure market manipulation begins.  Notice the market price pops at each unexpected economic downturn (post 2011) with absolute absurdity and blatant market manipulation.

  But without this manipulation we are back to the chaos of late 2008.  The reason is that a market sell off triggers a systemic failure of assets collateralising the banking system which in turn paralyzes credit.  From an economic standpoint this manipulation holding market valuations constant is the only thing separating our experience today from our experience during the last collapse.  Think about that for a moment.

  The above chart clearly depicts two parallel worlds of perception and reality.  The media picking up only on the perception and avoiding discussion of the reality.  The market manipulation carries the perception which takes us further out onto the lake, each step adding to the depth of the lake bottom from which we will ultimately be forced to rebound or drown.  Some may argue prolonging the inevitable is better but it is a weak argument in that the lake bottom is only getting deeper and thus increasingly more difficult to survive when reality finally bites.

  Recently a friend clued me in on a great discussion by James Montier (h/t Ryan Bailey), who highlights an idea by 19th century economist, Michal Kalecki.  Kalecki predicted back in 1943 that if the Fed were to attempt to maintain full employment by stimulating private investment (via some equilibrium interest rate), interest rates would end up negative and income would end up being subsidized.  Well this is exactly what the Fed has attempted.  Kalecki’s prediction is brilliant (albeit more complex than I have laid out here) and we have now seen both aspects of his prediction come true over the past 15 years.  Negative interest rates are here and consumer debt has unquestionably become a necessary income subsidy if we are to maintain the perception output growth.

  The perception is that GDP has continued to expand which implies that the American consumer (to include the government) has continued to grow.  However, when one adjusts GDP for consumption by way of debt rather than income we see a very different story.

  

  Now debt is neither a positive nor negative economic influence naturally but its influence will be determined by its effectiveness.  Taking on debt for a good investment can create expansion of wealth and income.  Taking on debt for a poor investment or consumption can create loss of wealth and income.  The following chart shows how (inefficiently) debt is being used today to maintain the perception of a robust economy.  The cost of doing so being an incredible loss of wealth and income.

  

  You can see that for each dollar of debt we are taking on as a nation we are returning less than a dollar of output (red line).  The result is a net contraction not just a slowing of output.  And that is exactly what we saw in the previous GDP chart that adjusted out consumption debt i.e. a true contraction of output.

  Perhaps an easier way to see this is the following chart.  Very simply, below we are subtracting the periodic increase in GDP (output) by the increase in total public debt.

  

  Notice that historically, only periods of economic recession (shaded periods) showed results materially less than zero.  However, since 2008 almost all periods have less output than debt and to greater extents than ever before.  This is the epitome of the perception state.  Debt consumption is not growth.  Debt consumption is at very best a zero sum transaction assuming 0% interest.  However, debt consumption for 99.9% of the economy is a net negative (that is, borrowing costs are above 0% interest).

  What that means is that for each period above with a negative result, real GDP is actually contracting.  This is basic mathematics I’m afraid and so to all naysayers it is simply not an arguable point but cold, hard fact.  And again the reality is depicted in the adjusted GDP figure in the earlier chart above.  GDP has, in real – real terms, contracted significantly below where it was in 2007 when we account for the negative impact of debt consumption on long term output.  The only way to offset that negative impact is to continue to print and distribute ever increasing amounts of debt for consumption i.e. income subsidies as Kalecki had predicted.

  In summary, by accepting the story as told without regard to integrity of truth we have allowed ourselves to become feed for those controlling the story and thus the system.  As the charts above clearly depict we have two distinct economic states.  One is perceived and the other is real.  The perceived state gets sole attention allowing the economic cannibalism to continue and draws us further out to the middle of the lake.  And as the ice disappeared so quickly not yet 7 years ago it will again reveal itself only a perception created by policymakers for sycophants so willing to feast and profit on the rest of us and, perhaps more startling, on their own future well being.

  

  

  
  
  

  

• Blood On The Street In The Big Boys' Markets: Bonds & Dollar "Blatter"-ed

  We suspect more than a few professional traders can find some analagous context with this clip after today's turmoil… (forward to 1:30 if it does not automatically jump)

  Quite a day…

  • 0400ET Early drop on hotter-than-expected EU inflation
  • 0500ET Ramp on Greek deal rumors once again
  • 0815ET Airline Bomb Threats send stocks lower
  • 0830ET BTFDers ignore those headlines – stocks jump
  • 0915ET Dijsselbloem dismisses deal – stocks drop
  • 0945ET S&P touches 50DMA and bounces
  • 1000ET Terrible Factory Orders data – stocks surge
  • 1130ET Rip to new highs as algos latched on to Crude's spike – run stops
  • 1200ET VIX monkey-hammered lower surges stocks
  • 1400ET Stocks start to rollover on no news
  • 1430ET NYMEX Closes, oil-stock link fades and stocks drop into red
  • 1445ET RTRS headline bullshit on EU agreement on terms for Greece
  • 1500ET Great Auto Sales data bumped stocks briefly but faded

  *  *  *

  While stocks traded like an EKG today, the big story is in FX and Bond markets where turmoil was an understatement…

  The USDollar was crushed today… down a stunning 1.8% as EUR spiked over 2% ahead of tomorrow's ECB conference

  

   

  This is the 2nd biggest down day for the Dollar since March 2009…

  

   

  All driven by a huge roundtrip in EURUSD…

  

   

  Bond yields were smashed higher – in Bunds…

  

   

  And Treasuries… 30Y Yields broke above 3.00% once again

  

   

  Stocks and bonds recoupled yesterday but once EU inflation hit and spanked Bunds, TSYs and US equities decoupled once again…

  

   

  Stocks and USDJPY carry decoupled as they plunged this morning and algos flipped to EURJPY as the driver…

  

   

  *  *  *

  Ok so how did stocks do on the day…

  

   

  In cash – exactly the same pattern as yesterday!

  

   

  12:00 pm is the new 3:30 pm https://t.co/hXb3Dy4rd6

  — zerohedge (@zerohedge) June 2, 2015

   

  And since Friday's close…The Dow is clinging to Green, Trannies outperforming (despite oil's rally)

  

   

  S&P bounced off its 50DMA…

  

   

  VIX was once again gappy and noisy…

  

   

  Despite all the carnage in the dollar, commodities were kinda blah… positive but modest…

  

   

  Although stocks and Oil recoupled after Europe closed…then decoupled after NYMEX close (note the 2 pumps in Crude early on that led stocks)

  

   

  Charts: Bloomberg

  Bonus Chart: Deja vu all over again…

  Groundhog Day (??????? ?????) pic.twitter.com/YWQaOrQAMz

  — Rudolf E. Havenstein (@RudyHavenstein) June 2, 2015

  

  
  
  

  

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• Kyle Bass Was Right: Texas To Create Own Bullion Depository, Repatriate $1 Billion Of Gold

  Most investors have heard Kyle Bass' rather eloquent phrase, "buying gold is just buying a put against the idiocy of the political cycle. It's that simple." However, what few may remember was his warnings in 2011, suggesting the University of Texas Investment Management Co. take delivery of its gold – as opposed to trusting it in the 'safe' hands of COMEX massively levered paper warehouse. Now, as The Star Telegram reports, Texas is going one step further with State Rep. Giovanni Capriglione asking the Legislature to create a Texas Bullion Depository, where Texas could store its gold. The goal is to create a secure facility that would allow the state to bring home more than $1 billion in gold bars that are owned by UTIMCO and are now housed at HSBC in New York.

   

  From 2011:

  "The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault, according to the fund’s board."

   

  The decision to turn the fund’s investment into gold bars was influenced by Kyle Bass, a Dallas hedge fund manager and member of the endowment’s board, Zimmerman said at its annual meeting on April 14. Bass made $500 million on the U.S. subprime-mortgage collapse.

   

  “Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” Bass said yesterday in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

  And now, as The Star Telegram reports, UTMICO would prefer a Texas depository than a New York one…

  “We are not talking Fort Knox,” Capriglione said. “But when I first announced this, I got so many emails and phone calls from people literally all over the world who said they want to store their gold … in a Texas depository.

   

  “People have this image of Texas as big and powerful … so for a lot of people, this is exactly where they would want to go with their gold.” And other precious metals.

   

  House Bill 483 would let the Texas comptroller’s office establish the state’s first bullion depository at a location yet to be determined.

   

  Capriglione’s changes to the bill must be approved by Monday, the last day of the 84th legislative session.

   

  The goal is to create a secure facility that would allow the state to bring home more than $1 billion in gold bars that are owned by the University of Texas Investment Management Co. and are now housed at the Hong Kong and Shanghai Bank in New York.

   

  “The depository would be an agency of the state located in the Office of the Comptroller, directed by an administrator appointed by the Comptroller with the advice and consent of the Governor, Lieutenant Governor and Senate,” according to a fiscal analysis of the bill.

   

  The depository could also hold deposits of gold and other precious metals from financial institutions, cities, school districts, businesses, individuals and countries.

   

  “This will allow for bullion to be deposited here, as well as any other investments that … any state agencies, businesses or individuals have,” Capriglione said.

   

  Storage fees will be charged, perhaps generating revenue for the state. For instance, Texas pays about $1 million a year to store its gold in New York, Capriglione said.

   

  A fiscal note attached to the bill states that the depository will have “an indeterminate fiscal impact” on the state, depending on the number of transactions and fees, but says it’s too early to determine the extent.

   

  “It’s unusual,” said Cal Jillson, a political science professor at Southern Methodist University. “So far as I know, there are no states with bullion depositories.”

  *  *  *

  Perhasps the fact that Texas doesn't trust New York suggests the unitedness of the states is starting to quake and surely "the idiocy of the political cycle" has only got worse…

  "buying gold is just buying a put against the idiocy of the political cycle. It's that simple."

  This is Capriglione’s second attempt to create the depository.

  Two years ago, then-Gov. Rick Perry was on board, saying work was moving forward on “bringing gold that belongs to the state of Texas back into the state.”

   

  “If we own it,” Perry has said, “I will suggest to you that that’s not someone else’s determination whether we can take possession of it back or not.”

   

  In 2013, the Legislature ended before Capriglione could win approval of the bill.

   

  Jillson said the bill’s sentiment is consistent with the anti-federal approach that conservative lawmakers have taken this year. “It’s in line with the idea that Texas is exceptional and needs to keep a distance from the federal government that respects individual states’ depositories,” he said.

  Sounds like Texas – just like Austria, Germany, Russia, and China to name just four – no longer trusts the status quo.

  

  

  
  
  

  

• The Delusional World Of Imperial Washington

  Submitted by Michael Klare via TomDispatch.com,

  Think of this as a little imperial folly update — and here's the backstory. 

   

  In the years after invading Iraq and disbanding Saddam Hussein’s military, the U.S. sunk about $25 billion into “standing up” a new Iraqi army.  By June 2014, however, that army, filled with at least 50,000 “ghost soldiers,” was only standing in the imaginations of its generals and perhaps Washington.  When relatively small numbers of Islamic State (IS) militants swept into northern Iraq, it collapsed, abandoning four cities — including Mosul, the country’s second largest — and leaving behind enormous stores of U.S. weaponry, ranging from tanks and Humvees to artillery and rifles.  In essence, the U.S. was now standing up its future enemy in a style to which it was unaccustomed and, unlike the imploded Iraqi military, the forces of the Islamic State proved quite capable of using that weaponry without a foreign trainer or adviser in sight.

   

  In response, the Obama administration dispatched thousands of new advisers and trainers and began shipping in piles of new weaponry to re-equip the Iraqi army.  It also filled Iraqi skies with U.S. planes armed with their own munitions to destroy, among other things, some of that captured U.S. weaponry.  Then it set to work standing up a smaller version of the Iraqi army.  Now, skip nearly a year ahead and on a somewhat lesser scale the whole process has just happened again.  Less than two weeks ago, Islamic State militants took Ramadi, the capital of Anbar Province.  Iraqi army units, including the elite American-trained Golden Division, broke and fled, leaving behind — you’ll undoubtedly be shocked to hear — yet another huge cache of weaponry and equipment, including tanks, more than 100 Humvees and other vehicles, artillery, and so on.

   

  The Obama administration reacted in a thoroughly novel way: it immediately began shipping in new stocks of weaponry, starting with 1,000 antitank weapons, so that the reconstituted Iraqi military could take out future “massive suicide vehicle bombs” (some of which, assumedly, will be those captured vehicles from Ramadi).  Meanwhile, American planes began roaming the skies over that city, trying to destroy some of the equipment IS militants had captured.

   

  Notice anything repetitive in all this — other than another a bonanza for U.S. weapons makers?  Logically, it would prove less expensive for the Obama administration to simply arm the Islamic State directly before sending in the air strikes.  In any case, what a microcosm of U.S. imperial hubris and folly in the twenty-first century all this training and equipping of the Iraqi military has proved to be.  Start with the post-invasion decision of the Bush administration to totally disband Saddam’s army and instantly eject hundreds of thousands of unemployed Sunni military men and a full officer corps into the chaos of the “new” Iraq and you have an instant formula for creating a Sunni resistance movement.  Then, add in a little extra “training” at Camp Bucca, a U.S. military prison in Iraq, for key unemployed officers, and — Voilà! — you’ve helped set up the petri dish in which the leadership of the Islamic State movement will grow.  Multiply such stunning tactical finesse many times over globally and, as TomDispatch regular Michael Klare makes clear today, you have what might be called the folly of the “sole superpower” writ large.

   

  Delusionary Thinking in Washington

  The Desperate Plight of a Declining Superpower

  Take a look around the world and it’s hard not to conclude that the United States is a superpower in decline. Whether in Europe, Asia, or the Middle East, aspiring powers are flexing their muscles, ignoring Washington’s dictates, or actively combating them. Russia refuses to curtail its support for armed separatists in Ukraine; China refuses to abandon its base-building endeavors in the South China Sea; Saudi Arabia refuses to endorse the U.S.-brokered nuclear deal with Iran; the Islamic State movement (ISIS) refuses to capitulate in the face of U.S. airpower. What is a declining superpower supposed to do in the face of such defiance?

  This is no small matter. For decades, being a superpower has been the defining characteristic of American identity. The embrace of global supremacy began after World War II when the United States assumed responsibility for resisting Soviet expansionism around the world; it persisted through the Cold War era and only grew after the implosion of the Soviet Union, when the U.S. assumed sole responsibility for combating a whole new array of international threats. As General Colin Powell famously exclaimed in the final days of the Soviet era, “We have to put a shingle outside our door saying, ‘Superpower Lives Here,’ no matter what the Soviets do, even if they evacuate from Eastern Europe.”

  Imperial Overstretch Hits Washington

  Strategically, in the Cold War years, Washington’s power brokers assumed that there would always be two superpowers perpetually battling for world dominance.  In the wake of the utterly unexpected Soviet collapse, American strategists began to envision a world of just one, of a “sole superpower” (aka Rome on the Potomac). In line with this new outlook, the administration of George H.W. Bush soon adopted a long-range plan intended to preserve that status indefinitely. Known as the Defense Planning Guidance for Fiscal Years 1994-99, it declared: “Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union.”

  H.W.’s son, then the governor of Texas, articulated a similar vision of a globally encompassing Pax Americana when campaigning for president in 1999. If elected, he told military cadets at the Citadel in Charleston, his top goal would be “to take advantage of a tremendous opportunity — given few nations in history — to extend the current peace into the far realm of the future. A chance to project America’s peaceful influence not just across the world, but across the years.”

  For Bush, of course, “extending the peace” would turn out to mean invading Iraq and igniting a devastating regional conflagration that only continues to grow and spread to this day. Even after it began, he did not doubt — nor (despite the reputed wisdom offered by hindsight) does he today — that this was the price that had to be paid for the U.S. to retain its vaunted status as the world’s sole superpower.

  The problem, as many mainstream observers now acknowledge, is that such a strategy aimed at perpetuating U.S. global supremacy at all costs was always destined to result in what Yale historian Paul Kennedy, in his classic book The Rise and Fall of the Great Powers, unforgettably termed “imperial overstretch.” As he presciently wrote in that 1987 study, it would arise from a situation in which “the sum total of the United States’ global interests and obligations is… far larger than the country’s power to defend all of them simultaneously.”

  Indeed, Washington finds itself in exactly that dilemma today. What’s curious, however, is just how quickly such overstretch engulfed a country that, barely a decade ago, was being hailed as the planet’s first “hyperpower,” a status even more exalted than superpower. But that was before George W.’s miscalculation in Iraq and other missteps left the U.S. to face a war-ravaged Middle East with an exhausted military and a depleted treasury. At the same time, major and regional powers like China, India, Russia, Iran, Saudi Arabia, and Turkey have been building up their economic and military capabilities and, recognizing the weakness that accompanies imperial overstretch, are beginning to challenge U.S. dominance in many areas of the globe. The Obama administration has been trying, in one fashion or another, to respond in all of those areas — among them Ukraine, Syria, Iraq, Yemen, and the South China Sea — but without, it turns out, the capacity to prevail in any of them.

  Nonetheless, despite a range of setbacks, no one in Washington’s power elite — Senators Rand Paul and Bernie Sanders being the exceptions that prove the rule — seems to have the slightest urge to abandon the role of sole superpower or even to back off it in any significant way. President Obama, who is clearly all too aware of the country’s strategic limitations, has been typical in his unwillingness to retreat from such a supremacist vision. “The United States is and remains the one indispensable nation,” he told graduating cadets at West Point in May 2014. “That has been true for the century past and it will be true for the century to come.”

  How, then, to reconcile the reality of superpower overreach and decline with an unbending commitment to global supremacy?

  The first of two approaches to this conundrum in Washington might be thought of as a high-wire circus act.  It involves the constant juggling of America’s capabilities and commitments, with its limited resources (largely of a military nature) being rushed relatively fruitlessly from one place to another in response to unfolding crises, even as attempts are made to avoid yet more and deeper entanglements. This, in practice, has been the strategy pursued by the current administration.  Call it the Obama Doctrine.

  After concluding, for instance, that China had taken advantage of U.S. entanglement in Iraq and Afghanistan to advance its own strategic interests in Southeast Asia, Obama and his top advisers decided to downgrade the U.S. presence in the Middle East and free up resources for a more robust one in the western Pacific.  Announcing this shift in 2011 — it would first be called a “pivot to Asia” and then a “rebalancing” there — the president made no secret of the juggling act involved.

  “After a decade in which we fought two wars that cost us dearly, in blood and treasure, the United States is turning our attention to the vast potential of the Asia Pacific region,” he told members of the Australian Parliament that November.  “As we end today’s wars, I have directed my national security team to make our presence and mission in the Asia Pacific a top priority.  As a result, reductions in U.S. defense spending will not — I repeat, will not — come at the expense of the Asia Pacific.”

  Then, of course, the new Islamic State launched its offensive in Iraq in June 2014 and the American-trained army there collapsed with the loss of four northern cities. Videoed beheadings of American hostages followed, along with a looming threat to the U.S.-backed regime in Baghdad. Once again, President Obama found himself pivoting — this time sending thousands of U.S. military advisers back to that country, putting American air power into its skies, and laying the groundwork for another major conflict there.

  Meanwhile, Republican critics of the president, who claim he’s doing too little in a losing effort in Iraq (and Syria), have also taken him to task for not doing enough to implement the pivot to Asia. In reality, as his juggling act that satisfies no one continues in Iraq and the Pacific, he’s had a hard time finding the wherewithal to effectively confront Vladimir Putin in Ukraine, Bashar al-Assad in Syria, the Houthi rebels in Yemen, the various militias fighting for power in fragmenting Libya, and so on.

  The Party of Utter Denialism

  Clearly, in the face of multiplying threats, juggling has not proven to be a viable strategy.  Sooner or later, the “balls” will simply go flying and the whole system will threaten to fall apart. But however risky juggling may prove, it is not nearly as dangerous as the other strategic response to superpower decline in Washington: utter denial.

  For those who adhere to this outlook, it’s not America’s global stature that’s eroding, but its will — that is, its willingness to talk and act tough. If Washington were simply to speak more loudly, so this argument goes, and brandish bigger sticks, all these challenges would simply melt away. Of course, such an approach can only work if you’re prepared to back up your threats with actual force, or “hard power,” as some like to call it.

  Among the most vocal of those touting this line is Senator John McCain, the chair of the Senate Armed Services Committee and a persistent critic of President Obama. “For five years, Americans have been told that ‘the tide of war is receding,’ that we can pull back from the world at little cost to our interests and values,” he typically wrote in March 2014 in a New York Times op-ed. “This has fed a perception that the United States is weak, and to people like Mr. Putin, weakness is provocative.” The only way to prevent aggressive behavior by Russia and other adversaries, he stated, is “to restore the credibility of the United States as a world leader.” This means, among other things, arming the Ukrainians and anti-Assad Syrians, bolstering the NATO presence in Eastern Europe, combating “the larger strategic challenge that Iran poses,” and playing a “more robust” role (think: more “boots” on more ground) in the war against ISIS.

  Above all, of course, it means a willingness to employ military force. “When aggressive rulers or violent fanatics threaten our ideals, our interests, our allies, and us,” he declared last November, “what ultimately makes the difference… is the capability, credibility, and global reach of American hard power.”

  A similar approach — in some cases even more bellicose — is being articulated by the bevy of Republican candidates now in the race for president, Rand Paul again excepted. At a recent “Freedom Summit” in the early primary state of South Carolina, the various contenders sought to out-hard-power each other. Florida Senator Marco Rubio was loudly cheered for promising to make the U.S. “the strongest military power in the world.” Wisconsin Governor Scott Walker received a standing ovation for pledging to further escalate the war on international terrorists: “I want a leader who is willing to take the fight to them before they take the fight to us.” 

  In this overheated environment, the 2016 presidential campaign is certain to be dominated by calls for increased military spending, a tougher stance toward Moscow and Beijing, and an expanded military presence in the Middle East. Whatever her personal views, Hillary Clinton, the presumed Democratic candidate, will be forced to demonstrate her backbone by embracing similar positions. In other words, whoever enters the Oval Office in January 2017 will be expected to wield a far bigger stick on a significantly less stable planet. As a result, despite the last decade and a half of interventionary disasters, we’re likely to see an even more interventionist foreign policy with an even greater impulse to use military force.

  However initially gratifying such a stance is likely to prove for John McCain and the growing body of war hawks in Congress, it will undoubtedly prove disastrous in practice. Anyone who believes that the clock can now be turned back to 2002, when U.S. strength was at its zenith and the Iraq invasion had not yet depleted American wealth and vigor, is undoubtedly suffering from delusional thinking. China is far more powerful than it was 13 years ago, Russia has largely recovered from its post-Cold War slump, Iran has replaced the U.S. as the dominant foreign actor in Iraq, and other powers have acquired significantly greater freedom of action in an unsettled world. Under these circumstances, aggressive muscle-flexing in Washington is likely to result only in calamity or humiliation.

  Time to Stop Pretending

  Back, then, to our original question: What is a declining superpower supposed to do in the face of this predicament?

  Anywhere but in Washington, the obvious answer would for it to stop pretending to be what it’s not. The first step in any 12-step imperial-overstretch recovery program would involve accepting the fact that American power is limited and global rule an impossible fantasy. Accepted as well would have to be this obvious reality: like it or not, the U.S. shares the planet with a coterie of other major powers — none as strong as we are, but none so weak as to be intimidated by the threat of U.S. military intervention. Having absorbed a more realistic assessment of American power, Washington would then have to focus on how exactly to cohabit with such powers — Russia, China, and Iran among them — and manage its differences with them without igniting yet more disastrous regional firestorms. 

  If strategic juggling and massive denial were not so embedded in the political life of this country’s “war capital,” this would not be an impossibly difficult strategy to pursue, as others have suggested. In 2010, for example, Christopher Layne of the George H.W. Bush School at Texas A&M argued in the American Conservative that the U.S. could no longer sustain its global superpower status and, “rather than having this adjustment forced upon it suddenly by a major crisis… should get ahead of the curve by shifting its position in a gradual, orderly fashion.” Layne and others have spelled out what this might entail: fewer military entanglements abroad, a diminishing urge to garrison the planet, reduced military spending, greater reliance on allies, more funds to use at home in rebuilding the crumbling infrastructure of a divided society, and a diminished military footprint in the Middle East.

  But for any of this to happen, American policymakers would first have to abandon the pretense that the United States remains the sole global superpower — and that may be too bitter a pill for the present American psyche (and for the political aspirations of certain Republican candidates) to swallow. From such denialism, it’s already clear, will only come further ill-conceived military adventures abroad and, sooner or later, under far grimmer circumstances, an American reckoning with reality.

  

  

  
  
  

  

• China May Double Down On Debt Swap As ABS Issuance Stumbles

  Chinese stocks jumped nearly 5% on Monday on disappointing macro data which betrayed a third consecutive monthly contraction in the manufacturing sector (remember, bad news is good news in a world hooked on central bank-dispensed monetary heroin). But a poor macro print wasn’t the only hint that more stimulus may be just around the corner, as Beijing is now reportedly set to double the local debt swap quota to CNY2 trillion. 

  Via Bloomberg:

  China’s Ministry of Finance may set additional quota of 500b-1t yuan for local governments to swap debt into municipal bonds, according to people familiar with the matter.

   

  Plan needs State Council approval, according to the people, who asked not to be identified because deliberations are private.

  This should come as no surprise. As we’ve documented in excruciating detail, the country’s local governments are sitting on a pile of debt that amounts to around 35% of GDP. Visually, that looks like this…

  

  

  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 reason this program — and thus news of its expansion — serves as a catalyst for stock prices is that the PBoC allows the purchasing banks to pledge the muni bonds they buy as collateral for cash which can then be re-lent to the real economy. In other words, it amounts to a liquidity injection. China then went a step further and eased restrictions on local government funding via LGFVs (the same vehicles which got them into trouble in the first place), which effectively means that the pool of swappable debt is set to grow even larger than 35% of GDP and because any debt that’s swapped ends up creating an LTRO-eligible bond and thus a cash infusion to banks, what you end up with is a perpectual credit creation machine. This is on top of two RRR cuts YTD and three benchmark rate cuts in the last six months. In short: a lot of liquidity, which should be positive for China’s raucous equity mania. 

  However, something interesting is happening which harkens back to what we discussed in “China Has A Massive Debt Problem.” Recall that, in yet another effort to boost lending to the real economy, Beijing has eased restrictions on ABS issuance, the idea being that if banks can offload debt from their balance sheet, they will make still more loans. A ‘healthy’ (whatever that means in this context) securitization apparatus is essential to the entire idea of extend-and-pretend — just ask the 2006 US housing market. 

  What we’re seeing however, is a dramatic decline in ABS issuance YTD. Why? Well, because NPLs are on the rise and economic growth is declining swiftly, meaning bad loans are likely to increase going forward and as we outlined in “How China’s Banks Hide Trillions In Credit Risk,” the numbers are vastly understated. At the same time, the PBoC’s policy rate cuts combined with the local government debt swap effort (i.e. Chinese LTROs) mean banks don’t need to resort to ABS issuance to free up liquidity. Bloomberg has more:

  Chinese lenders have cut offerings of asset-backed securities 45 percent to 43.4 billion yuan ($7 billion) this year, after a 15-fold jump in 2014, Bloomberg-compiled data show. They have reduced loans for four straight months, even as policy makers expanded the securitization quota by 500 billion yuan to free up space on their balance sheets for fresh lending.

   

  The wariness contrasts with mounting support for asset-backed bonds among regulators, who reversed course in 2012 to allow sales they’d banned in 2009 after the products helped spark the global financial crisis. A jump in bad loans last quarter to the worst since 2008 amid the weakest economy in more than two decades has made banks hesitant to package their higher quality assets into debt securities.

   

  “With more signs showing an economic slowdown, Chinese banks don’t want to lend more, so they don’t need to sell ABS to free up more room for lending,” said Ji Weijie, senior associate at Beijing-based China Securities Co. “Plus with rising bad loans, banks are reluctant to move good assets off their balance sheets”…

   

  Another consequence of the combined 1.5 percentage point reduction in the reserve-requirement rate since November to 18.5 percent is that banks now have less need to sell ABS to free up space for lending.

  Once again we see policy decisions working at cross-purposes in China, a key theme as the country marks a difficult transition from an investment-led economy to a consumption driven model. Boiled down to its simplest form: China is attempting deleverage and re-leverage at the same time. 

  Beijing has signaled a willingness to allow defaults (even, in some cases, by state-backed entities and indeed FT reported Monday evening that China’s Zhongao defaulted after banks refused to roll its debt) which, in combination with the local government refi effort, suggests the government realizes the need to deleverage an economy laboring under $28 trillion in debt. 

  On the other hand, reining in shadow banking has led to a collapse in credit creation…

  

  Which means that when policy rates fail, the shadow banking machine must be reactivated, hence Beijing’s move to soften its stance on LGFVs. 

  Where all of this will end after the mutliple competing policy goals play out we don’t know, but as far as the local government refi effort is concerned, even if we assume that only the existing stock of local government debt is run through the program (i.e. that any extension of LGFV financing is not swapped for muni bonds), that leaves a total of CNY20 trillion that can be channeled towards new loans via LTROs. 

  

  

  
  
  

  

• Ron Paul: "Ex-Im Bank Is Welfare For The 1%"

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

  This month Congress will consider whether to renew the charter of the Export-Import Bank (Ex-Im Bank). Ex-Im Bank is a New Deal-era federal program that uses taxpayer funds to subsidize the exports of American businesses. Foreign businesses, including state-owned corporations, also benefit from Ex-Im Bank. One country that has benefited from $1.5 billion of Ex-Im Bank loans is Russia. Venezuela, Pakistan, and China have also benefited from Ex-Im Bank loans.

  With Ex-Im Bank’s track record of supporting countries that supposedly represent a threat to the US, one might expect neoconservatives, hawkish liberals, and other supporters of foreign intervention to be leading the effort to kill Ex-Im Bank. Yet, in an act of hypocrisy remarkable even by DC standards, many hawkish politicians, journalists, and foreign policy experts oppose ending Ex-Im Bank.

  This seeming contradiction may be explained by the fact that Ex-Im Bank’s primary beneficiaries include some of America’s biggest and most politically powerful corporations. Many of Ex-Im Bank’s beneficiaries are also part of the industrial half of the military-industrial complex. These corporations are also major funders of think tanks and publications promoting an interventionist foreign policy.

  Ex-Im Bank apologists claim that the bank primarily benefits small business. A look at the facts tells a different story. For example, in fiscal year 2014, 70 percent of the loans guaranteed by Ex-Im Bank’s largest program went to Caterpillar, which is hardly a small business.

  Boeing, which is also no one’s idea of a small business, is the leading recipient of Ex-Im Bank aid. In fiscal year 2014 alone, Ex-Im Bank devoted 40 percent of its budget — $8.1 billion — to projects aiding Boeing. No wonder Ex-Im Bank is often called “Boeing’s bank.”

  Taking money from working Americans, small businesses, and entrepreneurs to subsidize the exports of large corporations is the most indefensible form of redistribution. Yet many who criticize welfare for the poor on moral and constitutional grounds do not raise any objections to welfare for the rich.

  Ex-Im Bank’s supporters claim that ending Ex-Im Bank would deprive Americans of all the jobs and economic growth created by the recipients of Ex-Im Bank aid. This claim is a version of the economic fallacy of that which is not seen. The products exported and the people employed by businesses benefiting from Ex-Im Bank are visible to all. But what is not seen are the products that would have been manufactured, the businesses that would have been started, and the jobs that would have been created had the funds given to Ex-Im Bank been left in the hands of consumers.

  Another flawed justification for Ex-Im Bank is that it funds projects that could not attract private sector funding. This is true, but it is actually an argument for shutting down Ex-Im Bank. By funding projects that cannot obtain funding from private investors, Ex-Im Bank causes an inefficient allocation of scarce resources. These inefficiencies distort the market and reduce the average American's standard of living.

  Some Ex-Im Bank supporters claim that Ex-Im Bank promotes free trade. Like all other defenses of Ex-Im Bank, this claim is rooted in economic fallacy. True free trade involves the peaceful, voluntary exchange of goods across borders — not forcing taxpayers to subsidize the exports of politically powerful companies.

  Ex-Im Bank distorts the market and reduces the average American's standard of living in order to increase the power of government and enrich politically powerful corporations. Congress should resist pressure from the crony capitalist lobby and allow Ex-Im Bank's charter to expire at the end of the month. Shutting down Ex-Im Bank would improve our economy and benefit most Americans. It is time to kick Boeing and all other corporate welfare queens off the dole.

  *  *  *

  

  

  

  
  
  

  

• Hacked Emails Expose George Soros As Ukraine Puppet-Master

  Just days after George Soros warned that World War 3 was imminent unless Washington backed down to China on IMF currency basket inclusion, the hacker collective CyberBerkut has exposed the billionaire as the real puppet-master behind the scenes in Ukraine. In 3 stunning documents, allegedly hacked from email correspondence between the hedge fund manager and Ukraine President Poroshenko, Soros lays out “A short and medium term comprehensive strategy for the new Ukraine,” expresses his confidence that the US should provide Ukraine with lethal military assistance, “with same level of sophistication in defense weapons to match the level of opposing force,” and finally explained Poroshenko’s “first priority must be to regain control of financial markets,” which he assures the President could be helped by The Fed adding “I am ready to call Jack Lew of the US Treasury to sound him out about the swap agreement.”

  The hacking group CyberBerkut claims it has penetrated Ukraine’s presidential administration website and obtained correspondence between Soros and Ukraine’s President Petro Poroshenko. It has subsequently posted all the intercepted pdfs on line at the following location. More details as RT earlier reported:

  The hacktivists have published three files online, which include a draft of “A short and medium term comprehensive strategy for the new Ukraine” by Soros (dated March 12, 2015); an undated paper on military assistance to Kiev; and the billionaire’s letter to Poroshenko and Ukraine’s Prime Minister Arseny Yatsenyuk, dated December 23, 2014.

   

  According to the leaked documents, Soros supports Barack Obama’s stance on Ukraine, but believes that the US should do even more.

   

  He is confident that the US should provide Ukraine with lethal military assistance, “with same level of sophistication in defense weapons to match the level of opposing force.”

   

  “In poker terms, the US will ‘meet, but not raise,” the 84-year-old businessman explained, supposedly signing one of the letters as “a self-appointed advocate of the new Ukraine.”

   

  The Western backers want Kiev to “restore the fighting capacity of Ukraine without violating the Minsk agreement,” Soros wrote.

  Among other things, the leaked documents claim that the Ukrainian authorities were also asked to “restore some semblance of currency stability and functioning banking system” and “maintain unity among the various branches of government” in order to receive assistance from foreign allies.

  Soros believes that it’s up to the EU to support Kiev with financial aid, stressing that “Europe must reach a new framework agreement that will allow the European Commission to allocate up to $1 billion annually to Ukraine.”

   

  As for the current state of economy, the billionaire wrote that former Chilean finance minister, Andres Velasco, after visiting Ukraine on his request, returned with “a dire view of financial situation.”

   

  “The new Ukraine is literally on the verge of collapse” due to the national bank’s lack of hard currency reserves, Soros warned Poroshenko.

   

  The correspondence shows that the billionaire has been in constant touch with the authorities in Kiev and consulting them.

  Digging into the details of the documents, we find one intriguing snippet:

  As you know, I asked Andrés Velasco, a prominent economist who was Chile’s very successful minister of finance from 2006-2010 to visit Kyiv where he met the Prime Minister; the President was in Warsaw at the time. Velasco came back with a dire view of the financial situation. The National Bank of Ukraine has practically no hard currency reserves. That means that the hryvnia has no anchor. If a panic occurred and the currency collapsed as it did in Russia, the National Bank could not stabilize the exchange rate even if only temporarily as Russia did by injecting $90 billion.

   

  Your first priority must be to regain control over the financial markets—bank deposits and exchange rates. Unless you do, you will have no way to embark on deeper reforms. I believe the situation could be stabilized by getting the European Council to make a commitment in principle that they will pull together the new $15 billion package that the IMF requires in order to release the next tranche of its original package at the end of January 2015. Based on that commitment the Federal Reserve could be asked to extend a $15 billion three months swap arrangement with the National Bank of Ukraine. That would reassure the markets and avoid a panic.

   

  …

   

  I am ready to call Jack Lew of the US Treasury to sound him out about the swap agreement.

  One wonders what other matters of national importance involve George Soros getting on the line with the US Treasury Secretary to arrange virtually unlimited funds courtesy of the US Federal Reserve just to promote one person’s ulterior agenda?

  And just like that, conspiracy Theory becomes Conspiracy Fact once again.

  The full documents are below:

  Ironically, the first document laying out the “short and medium-term comprehensive strategy for new Ukraine” and signed by George Soros, “a self-appointed advocate of the New Ukraine”, was ironically created by Tamiko Bolton, the 40 year old who became Soros’ third wife several years ago.

  Soros Ukraine Strategy

   

  The next letter, one directly sent by Soros to Ukraine’s president Poroshenko and prime minister Yatseniuk, comes courtesy of a pdf created by Douglas York, Soros’ personal assistant.

  Priority To Fix Financial Markets

   

  Finally, a letter (authored by Yasin Yaqubie of the International Crisis Group based on its pdf metadata properties), which lobbies the US “to do more.”

  Ukraine Letter to Potus – Lethal Aid

   

  To sum up: Soros is basically lobbying on behalf of Ukraine, pushing for cash and guns, to oppose Putin in every way possible.

  If genuine, and based on their meta data, they appear to be just that, these lettes show how Soros is trying to weasel around the Minsk agreements (for instance, how to train Ukrainian soldiers without having a visible NATO presence in Ukraine). The documents link up Nuland with Soros, and clears up who is truly pulling the strings of the US State Department.

  Finally, while the documents don’t mention what Soros has in store for Ukraine, one can use their imagination.  

  

  

  
  
  

  

• Here's What Happens When Your City Is Cut To Junk

  We’ve spent quite a bit of time recently discussing the fiscal crises facing many state and local governments across the US. There are quite a few explanations for the deteriorating financial situation ranging from falling oil prices to outright fiscal mismanagement.

  One persistent theme is grossly underfunded pension liabilities. The most dramatic example of this problem is Chicago, whose debt was cut to junk by Moody’s after an Illinois State Supreme Court decision struck down a pension reform bid, complicating Mayor Rahm Emanuel’s efforts to push through similar legislation in Chicago where, as we’ve shown, the budget gap is set to triple over three years thanks to rising pension liabilities. 

  

  The Moody’s downgrade triggered some $2 billion in accelerated payment rights for creditors and also complicated Emanuel’s efforts to refinance $900 million in floating rate notes and pay down $200 million in related swaps. This underscores how a ratings agency downgrade can quickly cause a chain reaction that is self-feeding and can further imperil already beleaguered city finances. Citi has more on the “ratings agency feedback loop”:

  Via Citi:

  How does a downgrade create a feedback loop?

   

  Payment induced liquidity shock

  For many issuers’ credit contracts, a drop to a speculative grade rating acts as a payments trigger. For instance, the issuer may have commercial paper programs and line of credit agreements as a part of its short term borrowing program and a rating downgrade could qualify as an event of default for these borrowing arrangements. This enables the banks to declare all outstanding obligations as immediately due and payable.

   

  A rating downgrade could also force accelerated repayment schedules and penalty bank bond rates on swap contracts and variable-rate debt agreements.

   

  Thus, as a result of the rating action, an issuer could face increased liquidity risk at an unfortunate time when it is working to navigate its way out of a fiscal crisis.

   

  

  Knock-on rating downgrade risk

  In some instances, rating agencies may disagree on an issuer’s creditworthiness which could result in a split level rating for a prolonged period. But a drastic rating action by one main rating agency (either Moody’s or S&P) which knocks the issuer’s debt to below investment grade could force the other rating agencies to follow with a similar downgrade. While the other rating agencies might feel that underlying credit fundamentals of the issuer do not merit a sub-investment grade rating, their rating action could be dictated by negative implications due to the liquidity pressures posed by the first downgrade to junk status. Recently, S&P downgraded a credit as a result of Moody’s rating action that stated that its rating action reflected its view that the issuer’s efforts “are challenged by short-term interference” that prevents a solid and credible approach to resolving their fiscal problems.

   

  Shrinking buyer base

  Many investors have mandates to buy investment grade debt only and a fall to speculative grade status could cause existing investors to liquidate the holdings of the fallen credit and shrink the universe of buyers.

   

  Rising issuance costs

  In many cases the issuer may have been working diligently to reduce its exposure to bank credit risks in the event of a ratings deterioration (for e.g. shifting its variable-rate GOs and sales tax paper to a fixed rate by tapping its short-term paper program then converting it into long-term debt) but the unfortunate timing of the downgrade will make this task much more challenging as a shrunken buyer base for an entity’s debt, quite naturally, translates into a higher cost of debt.

  A higher cost of debt exacerbates liquidity problems and thus the feedback loop could continue to gain traction.

  To demonstrate just how pervasive the underfunded pension problem truly is, consider the following map:

  

  *  *  *

  We suppose it’s only a matter of time before a wave of officials go the extend-and-pretend ponzi route by issuing pension obligation bonds to paper over holes while doing nothing to solve the underlying problem ensuring that the cost to taxpayers will eventually be even larger than it would have been in the first place.  

  

  

  
  
  

  

• FaKe ReFoRM…

  

  
  
  

  

• It Cost US Taxpayers At Least $250,000 To Repatriate A Bicycle-Challenged John Kerry

  The somewhat farcical journey home from Europe for Secretary of State John Kerry continues. As we noted previously, after breaking his leg on an arbidged Tour de France'-esque accident in which he hit a curb, he was flown to Geneva in a helicopter where he was "stable and never lost consciousness," which makes sense (unless as many have suggested his brain lies considerably lower in his body than most humans).

  

   

  But then the escapade got beyond unreal as The White House sent a massive "specially-equipped" C-17 airplane (used to carrying over 100 combat troops and equipment into battle) to fly him to Boston for surgery.

  

  

   

  We assume he is covered by Obamacare, since the cost of this rescue mission – assuming roughly 10 hours flight-time – is at least $250,000… and all to avoid an Iran deadline no one expects to meet…

   

  As The Washington Post reports,

  Secretary of State John F. Kerry, who broke his leg in a bicycling accident near Geneva Sunday, left for home Monday aboard a specially outfitted U.S. military aircraft.

   

  The C-17 transport plane, dispatched from the U.S. base in Ramstein, Germany, was “staffed by additional military medical personnel in keeping with standard practice,” Kerry spokesman John Kirby said.

   

  Kerry, 71, is en route to Boston, where he will be admitted to Massachusetts General Hospital under the care of Dennis Burke, the surgeon who operated on him for a previous hip replacement on the same leg.

   

  He broke his right femur, near the site of the replaced hip joint, when he hit a curb with his bicycle wheel and fell at the beginning of a ride near the French town of Scionzier, about 30 miles from Geneva. He was flown by medical helicopter to a Geneva hospital, where he stayed until his medical evacuation.

  He is scheduled to arrive in Boston on Monday evening.

  Initial plans to fly Kerry aboard a commercial medical evacuation aircraft late Sunday were cancelled after physicians decided that he should remain in Geneva for further evaluation.

   

  There was no indication of whether further surgery will be required.

  So that's good then… though at a cost of at least $24,000 per hour, we have 2 quick questions:

  1) Given the cost-conscious White House could they not have found a more comfortable (or cheaper) option – Warren Buffett's private jet? and

   

  2) It's a broken femur!… not a brain aneurism, or heart malfunction, or any manner of considerably more complex health problems that might have required an arsenal of medical equipment to ensure survival

  And for those cynics who see this as a timely 'accident' to avoid the looming Iran deadline, The White House has this to say…

  While Kerry’s recovery period is unknown, State Department officials insisted that he will not be prevented from participating in the ongoing nuclear negotiations with Iran, which are closing in on a deadline at the end of the month.

  “The secretary is absolutely committed to moving with the negotiations, to proceeding with them on the exact same timetable as before his accident," State Department spokeswoman Mari Harf said today. "[It's] critical to stress that he is committed to doing so in the same time frame.”

  So rest assured – if there any missed deadlines, it is not because Iran is 'dealing' with Russia for new nuclaer facilities or trying to slow-play America, it's just Kerry's recovery

  

  

  
  
  

  

• Japan's Pension System Hacked; 1.25 Million Identification Numbers, Birth Dates, Addresses Compromised

  There’s been quite a bit of talk recently about “cyberthreats” to the US. Back in April, Defense Secretary Ash Carter unveiled a new US strategy designed to combat a list of supposed “cyberadversaries” which include (of course) China, Iran, Russia, and North Korea. The Pentagon suggested that Washington may use “offensive” cyberattacks if necessary to “disrupt an adversary’s military related networks or infrastructure so that the U.S. military can protect U.S. interests in an area of operations.” 

  As it turns out, the US did just that five years ago when Homeland Security tried to deploy a computer virus against North Korea’s nuclear program, an effort which ultimately failed due to, as Reuters puts it, “the extreme isolation of [Pyongyang’s] communications systems.”

  More recently, the US implicated Chinese hacker spies in a scheme purportedly designed to steal US military secrets from Penn State’s engineering department and “Russain crime syndicates” were blamed for an IRS breach.

  As far as Washington’s allies are concerned, Japan is onboard with PM Shinzo Abe and President Obama striking a cybersecurity alliance when Abe visited the capital in April. In a speech to Congress, Abe had the following to say about Chinese hacking: “[We cannot] simply allow free riders on intellectual property.” 

  In the latest cyber drama, we learned on Sunday that Japan Pension Service staff computers were hacked and 1.25 million cases of personal data were compromised in the process. Reuters has the story:

  Japan’s pension system has been hacked and more than a million cases of personal data leaked, authorities said on Monday, in an embarrassment that revived memories of a scandal that helped topple Prime Minister Shinzo Abe in his first term in office.

   

  Japan Pension Service staff computers were improperly accessed by an external email virus, leading to the leak of some 1.25 million cases of personal data, the system’s president, Toichiro Mizushima, told a hastily called news conference.

   

  He apologized for the leak, which he said involved combinations of names, identification numbers, birth dates and addresses.

  For some, the incident brings back bad memories:

  Public outrage over botched record-keeping that left millions of pension premium payments unaccounted for was a major factor in a devastating defeat suffered by Abe’s Liberal Democratic Party in a 2007 election for parliament’s upper house.

  And a bit more color from The Japan Times:

  The data were leaked when agency employees opened an attached file in their email containing a virus.
  

  Japan Pension Service President Toichiro Mizushima apologized for the leak and said affected people will be given new pension ID numbers.
  

   

  “We feel an extremely grave responsibility over this,” Mizushima told a hastily arranged news conference.
  

  “We will make the utmost efforts not to cause trouble to our customers”..
  

   

  Mizushima said the fund reported the attacks to the Metropolitan Police Department on May 19. He refused to elaborate on the type of computer virus or whether the attacks came from within Japan or abroad, citing the ongoing police investigation.
  

   

  Of the 1.25 million cases, some 52,000 involved the theft of pension IDs, names, birth dates and addresses, while another 1.17 million involved the leak of just pension IDs, names and birth dates. In the remaining 31,000 cases, just pension IDs and names were stolen.

  We will now await the official announcement wherein Japanese officials will say that their investigation suggests the attack originated in China. Stay tuned.

  

  

  
  
  

  

• NSA 'Reform' Explained (In 1 Cartoon)

  Presented with no comment…

   

  

   

  Source: Sputnink News

  

  

  
  
  

  

• May Consumer Spending Has Biggest Annual Drop Since Great Financial Crisis, Gallup Survey Finds

  It may not have the clout of the official monthly Dept of Commerce Retail Sales report not due out for two more weeks, but in retrospect considering how many credibility issues with seasonal adjustments government data has had in recent months, the Gallup Consumer Spending report may have become far more realistic than official government data.

  In which case all hope of a Q2 GDP rebound abandon, ye who read this: after a strong April, in which the average consumer reported a daily spend of $91, $3 higher than a year prior, and the highest spending month since before the great financial crisis…

  

  … in May things quickly deteriorated, with average daily spending in April and May unchanged at $91, despite a consistent jump the just concluded month of May in recent years, and despite the substantial jump in gas prices, which in May 2008 led to a $28 jump in average spending, and $10 in 2014.

  

  Worse, on an apples to apples, year-over-year basis, average spending in May of 2015 was $7 less than 2014, and nearly identical to 2013, when the US unemployment rate was nearly 3% higher, and the economy was supposedly sputtering badly enough for the Fed to launch QE3.

  Finally, as the chart below shows, this was the biggest month of May consumer spending drop in nominal dollar terms since the 2008 financial crisis.

  

   

  This is what Gallup does to calculate average spending:

  Gallup’s daily spending measure asks Americans to estimate
  the total amount they spent “yesterday” in restaurants, gas stations,
  stores or online — not counting home, vehicle or other major purchases,
  or normal monthly bills — to provide an indication of Americans’
  discretionary spending. The May 2015 average is based on Gallup Daily
  tracking interviews with more than 15,000 U.S. adults.

  What it found is that last May’s spending level has largely gone unmatched since, except in
  December 2014, when spending also averaged $98. However, Americans
  typically spend more in December because of holiday shopping. Still, the
  latest monthly figure is higher than what Americans spent each May from
  2009 through 2013. By contrast, Americans spent an average of $114 in
  May 2008 — prior to the global financial meltdown later that year that
  both deepened and prolonged the U.S. recession that started in late
  2007.

  But the punchline is that while the long awaited, and now long forgotten “gas savings” from the drop in crude, which in california is rapidly approaching an unchanged Y/Y print, never materialized in a jump in actual spending as today’s latest disappointing consumer spending data confirms, now that gas prices are rising consumer are retrenching even more!

  Quote Gallup:

  The stagnation in Americans’ spending may be related to gas prices, which continued to rise last month — though they are expected to plateau and eventually dip as the year progresses. Confidence in the economy also dipped, with lower weekly measures in May than in April. Gallup has found that Americans’ perceptions of the economy are related to gas prices, and what they pay at the pump certainly influences how much they spend overall and how much they have left for discretionary purchases after they take care of the basics. If gas prices do stabilize, this may enable Americans to spend more on other things.

   

  While Gallup’s historical spending averages have generally been higher in the spring and summer months than in the winter, spending usually dips or stays flat in June compared with May. With consumer spending the major driver of U.S. economic growth, healthier spending in June could help keep the economy on a strong track toward recovery after a disappointing first quarter that saw the economy shrink.

  Or, should May’s weaker than expected trend persist into June, then one can forget all about a second quarter GDP rebound. In fact, while Q1 GDP was saved to the tune of 2% from a surge of inventory accumulation, in Q2 this won’t repeat, and in the meantime, personal spending is starting off quite poorly and on the wrong foot. Should there be a comparable Y/Y decline in spending in June as well, it is virtually assured that Q2 GDP will also be negative.

  Which would mean that the US has officially entered recession just as the Fed is timing its first rate hike in one trading generation.

  

  

  
  
  

  

• GYPSY AuSTeRiTY…

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• China Responds: "Expiration Of The Patriot Act Is Not The End Of Washington's Intrusive Spying"

  Writing in the Politburo-owned mouthpiece The Global Times, China responds to the 'expiry' of The Patriot Act…

  Expiry of Patriot Act is not end of Washington’s intrusive spying

  Some provisions of the USA Patriot Act, the foundation of the massive US foreign and domestic wiretapping program and other controversial intelligence-collection operations, are set to expire on June 1, if they are not renewed. Although the House passed the renewed bill, the Senate failed to do so on May 23, leaving those controversial provisions with a pressing deadline for expiration. Without them, some intelligence operations currently carried out by the National Security Agency (NSA) and other intelligence agencies will be illegal. It seems to be a big deal for the US intelligence community and all those affected.

  After 9/11, the post-traumatic urge pushed forward the most profound intelligence reforms in decades, and as a result, intelligence budgets were raised, intelligence organizations and structures aligned, and laws enacted. The USA Patriot Act has generated a great deal of controversy since its enactment. Supporters defend it by saying that the act provides a legal basis for many effective intelligence operations against terrorists. Opponents argue that the act violates fundamental constitutional principles, for it allows investigators obtain "any tangible things (including books, records, papers, documents and other items)," as long as the records are sought "in connection" with a terror investigation, which may put citizens' privacy in jeopardy.

  The question is, it has been more than a decade after the first enactment of the Patriot Act, and it has undergone several extensions, why block it now?

  First, after the extensive expansion in the first several years post 9/11, people started to wonder about the real effectiveness of the US intelligence reform. The annual published intelligence budget of US was over $50 billion for many years and that amount was larger than most countries' total defense budgets.

  But the results were neither conclusive nor transparent, stirring public doubts. In as early as 2009, the National Intelligence Strategy of the US implied that the golden time for intelligence expansion may have passed, and they need to adjust to an era of austerity. Now it seems that legislators would like to move a step further, holding them more accountable, and putting a short leash on them.

  Second, in recent years, US intelligence operations have faced many accusations. With sources such as WikiLeaks, and especially Edward Snowden, the former NSA contractor, leaking a lot US wiretapping stories to the public, the fear of the US intelligence community becoming a "rogue elephant" is on the rise, and calls for stronger intelligence oversight have strengthened. Some of the US foreign partners or even allies are subject to US surveillance, which they expressed anger about, and the trust between them has been seriously undermined.

  US domestic public opinion was also affected. When phones are tapped, and personal information is no longer personal, people's nerves get stirred. US intelligence has often had a negative image at home, the most infamous incident being the Watergate scandal, in which then president Richard Nixon used multiple intelligence services to illegally spy on his political adversaries and was impeached as a result.

  US authorities need to take serious actions to show some sincerity, and to prove that they are not bad guys. Perhaps letting one of the most controversial intelligence-related acts expire is an acceptable solution.

  It is only one more year from the next US presidential election. Rand Paul, a presidential candidate playing a role in blocking the act from extension, may win the favor of the US public since the act is already a notorious one.

  Nevertheless, the Patriot Act is just the tip of the iceberg. There are many laws, regulations and policies that make sure the US intelligence community functions well enough to achieve its own purposes. Even if the act really expires after June 1, the US foreign intelligence operations will remain intact. Its assets are still out there, and its guiding principles remain the same. In that case, we may expect to hear more tales of US spying in the future.

  

  

  
  
  

  

• John Nash's Equilibrium Concept In Game Theory (Simplified)

  Submitted by Robert Murphy via Mises Canada,

  With the tragic deaths (in a taxi accident) of John Nash and his wife, people have been explaining Nash’s contributions to the general public.

  

  The single best piece I’ve seen so far is this one by John Cassidy. However, even Cassidy’s piece doesn’t really make clear exactly how Nash’s famous equilibrium concept works. I’ll give some simple examples in the present post so that the layperson can understand just what Nash accomplished in his celebrated 27-page doctoral dissertation. (Be sure to look at his bibliography on the last page.)

  I have seen many commentators tell their readers that John Nash developed the theory of non-cooperative games, in (alleged) contrast to the work on cooperative games by John von Neumann and Oskar Morgenstern. However, it’s a bit misleading to talk in this way. It’s certainly true that von Neumann and Morgenstern (henceforth vNM) did a lot of work on cooperative games (which involve coalitions of players where the players in a coalition can make “joint” moves). But vNM also did pioneering work on non-cooperative games–games where there are no coalitions and every player chooses his own strategy to serve his own payoff. However, vNM only studied the special case of 2-person, zero-sum games. (A zero-sum game is one in which one player’s gain is exactly counterbalanced by the other player’s loss.) This actually covers a lot of what people have in mind when they think of a “game,” including chess, checkers, and card games (if only two people are playing).

  The central result from the work of vNM was the minimax theorem. The full details are here, but the intuition is: In a finite two-person zero-sum game, there is a value V for the game such that one player can guarantee himself a payoff of at least V while the other player can limit his losses to V. The name comes from the fact that each player thinks, “Given what I do, what will the other guy do to maximize his payoff in response? Now, having computed my opponent’s best-response for every strategy I might pick, I want to pick my own strategy to minimize that value.” Since we are dealing with a zero-sum game, each player does best for himself by minimizing the other guy’s payoff.

  This was a pretty neat result. However, even though plenty of games–especially the ones we have in mind with the term “game”–are two-person zero-sum, there are many strategic interactions where this is not the case. This is where John Nash came in. He invented a solution concept that would work for the entire class of non-cooperative games–meaning those with n players and where the game could be negative-sum, zero-sum, or positive-sum. Then he showed the broad conditions under which his equilibrium would exist. (In other words, it would not have been as impressive or useful if Nash had defined an equilibrium concept for these games, if it rarely existed for a particular n-person positive-sum game.)

  For every game we analyze in this framework, we need to specify the set of players, the set of pure strategies available to each player, and finally the payoff function which takes a profile of actual strategies from each player as the input and spits out the payoffs to each player in that scenario. (One of the mathematical complexities is that players are allowed to choose mixed strategies, in which they assign probabilities to their set of pure strategies. So technically, the payoff function for the game as a whole maps from every possible combination of each player’s mixed strategies onto the list of payoffs for each player in that particular outcome.) Now that I’ve given the framework, we can illustrate it with some simple games.

  One popular game is the so-called Battle of the Sexes. The story is that a husband and wife have to go either to an event the husband prefers (let’s say it’s an action movie) or an event the wife prefers (let’s say it’s a romantic comedy). But, the catch is that each person would rather watch the movie with his or her spouse, than be alone, and this consideration trumps the choice of the movie. We can (start to) model this story in game theoretic form like this:

  • Set of players = {Husband, Wife}
  • Husband’s set of pure strategies = {Action, RomCom}
  • Wife’s set of pure strategies = {Action, RomCom}

  Rather than formally define a payoff function, it’s easier to construct a matrix showing the payoffs to our players from the four possible combinations of their pure strategies, like this (where the husband’s payoff is the first number in each cell and the wife’s payoff comes after the comma):

  

  Let’s make some observations about the above game. First, it’s isn’t a zero-sum game, so the minimax result doesn’t work. In other words, the husband wouldn’t want to approach this situation with the goal of harming the other person as much as possible.

  However, the situation is strategic, in the sense that the payoff to each person depends not just on the strategy that person chooses, but also on the strategy the other person chooses. This is what makes game theory different from more conventional settings in economic theory. For example, in mainstream textbook micro, the consumer has a “given” budget and takes market prices as “given,” and then maximizes utility according to those constraints. The consumer doesn’t have to “get into the head” of the producer and worry about whether the producer will change prices/output based on the consumer’s buying decision.

  Anyway, back to our “battle of the sexes” game above. Even though the game is positive-sum, there is still the “battle” element because the husband would prefer they both choose the action movie. That yields the best outcome possible for him (a payoff of 3) but only a 2 for the wife. The wife, in contrast, would prefer they both go to the romantic comedy, because she gets a 3 in that outcome (and 3 > 2). Yet to reiterate, they both prefer the other’s company, rather than seeing the preferred movie in isolation (i.e. 2 > 1). And of course, the worst possible outcome–where each gets a payoff of 0–occurs if for some crazy reason the husband watches the romantic comedy (by himself) while the wife watches the action movie (by herself).

  In this game, there are two Nash equilibria in pure strategies. In other words, if we (right now, for simplicity) are only allowing the husband and wife to pick either of their two available pure strategies, then there are only two combinations that form a Nash equilibrium. Specifically, the strategy profiles of (Action Movie, Action Movie) and (RomCom, RomCom) both constitute Nash equilibria.

  Formally, a Nash equilibrium is defined as a profile of strategies (possibly mixed) in which each player’s chosen strategy constitutes a best-response, given every other player’s chosen strategy in the particular profile.

  We can test our two stipulated profiles to see that they are indeed Nash equilibria. First let’s test (Action Movie, Action Movie). If the husband picks “Action Movie” as his strategy, then the wife’s available payoffs are either a 2 (if she also plays “Action Movie”) or a 1 (if she plays “RomCom”). Since 2>1, the wife would want to play “Action Movie” given that her husband is playing “Action Movie.” So that checks. Now for the husband: Given that his wife is playing “Action Movie,” he can get a payoff of either 3 or 0. Since 3>0, he also does better by playing “Action Movie” than “RomCom,” given that his wife is playing “Action Movie.” So that checks. We just proved that (Action Movie, Action Movie) is a Nash equilibrium.

  We’ll go quicker for the other stipulated Nash equilibrium of (RomCom, RomCom): If the husband picks “RomCom,” then the wife’s best response is “RomCom” because 3>0. So that checks. And if the wife picks “RomCom,” then the husband’s best response is “RomCom” because 2>1. So that checks, and since we’ve verified that each player is best responding to the other strategies in the profile of (RomCom, RomCom), the whole thing is a Nash equilibrium.

  Now for one last example, to show the robustness of Nash’s contribution. There are some games where there is no Nash equilibrium in pure strategies. For example, consider this classic game:

   

  

  Note that in this game, there is no Nash equilibrium in pure strategies. If Joe plays “Rock,” then Mary’s best response is “Paper.” But if Mary is playing “Paper,” Joe wouldn’t want to play “Rock.” (He would do better playing “Scissors.”) And so on, for the nine possible combinations of pure strategies.

  Although there’s no Nash equilibrium in pure strategies, there exists one in mixed strategies. In other words, if we allow Joe and Mary to assign probabilities to each of their pure strategies, then we can find a Nash equilibrium in that broader profile. To cut to the chase, if each player randomly picks each of his or her pure strategies one-third of the time, then we have a Nash equilibrium in those two mixed strategies.

  Let’s check our stipulated result. Given that Joe is equally mixing over “Rock,” “Paper,” and “Scissors,” Mary is actually indifferent between her three pure strategies. No matter which of the pure strategies she picks, the mathematical expectation of her payoff is 0. For example, if she picks “Paper” with 100% probability, then 1/3 of the time Joe plays “Rock” and Mary gets 1, 1/3 of the time Joe plays “Paper” and Mary gets 0, and 1/3 of the time Joe plays “Scissors” and Mary gets -1. So her expected payoff before she sees Joe’s actual play is (1/3 x 1) + (1/3 x 0) + (1/3 x [-1]) = (1/3) – (1/3) = 0. We could do a similar calculation for Mary playing “Rock” and “Scissors” against Joe’s stipulated mixed strategy of 1/3 weight on each of his pure strategies.

  Therefore, since Mary gets an expected payoff of 0 by playing any of her pure strategies against Joe’s even mixture, any of them constitutes a “best response,” and moreover any linear weighting of them is also a best response. In particular, Mary would be perfectly happy to mix 1/3 on each of her strategies against Joe’s stipulated strategy, because that too would give her an expected payoff of 0 and she can’t do any better than that. (I’m skipping the step of actually doing the math to show that mixing over pure strategies that have the same expected payoff, gives the same expected payoff. But I’m hoping it’s intuitive to the reader that if Mary gets 0 from playing any of her pure strategies, then if she assigns probabilities to two or three of them, she also gets an expected payoff of 0.)

  Thus far we’ve just done half of the work to check that our stipulated mixed strategy profile is indeed a Nash equilibrium. Specifically, we just verified that if Joe is mixing equally over his pure strategies, then Mary is content to mix equally over her pure strategies in response. It remains to do the opposite, namely, to verify that Joe is content to mix equally over his pure strategies, given that Mary is doing so. But since this game is perfectly symmetric, I hope the reader can see that we don’t have any more work; we would just be doing the mirror image of our above calculations.

  To bring things full circle, and to avoid confusion, I should mention that von Neumann and Morgenstern’s framework could handle our Rock, Paper, Scissors game, since it is a two-person zero-sum game. Specifically, the value V of the game is 0. If Joe mixes equally over his pure strategies, then he can minimize Mary’s expected payoff from her best response to 0, and Joe can limit his expected losses to 0. (The reason I chose a two-person zero-sum game to illustrate a mixed strategy Nash equilibrium is that I wanted to keep things as simple as possible.)

  Now that we’ve seen what a Nash equilibrium in mixed strategies looks like, I can relate Nash’s central result in his 27-page dissertation: Using a “fixed point theorem” from mathematics, Nash showed the general conditions under which we can prove that there exists at least one Nash equilibrium for a game. (Of course, Nash didn’t call his solution concept a “Nash equilibrium” in his dissertation, he called it an “equilibrium point.” The label “Nash equilibrium” came later from others.)

  Oh, one last thing. Now that we know what Nash did at Princeton, can you appreciate how absurd the relevant scenes from the Ron Howard movie were?

  

  When the movie’s Nash (played by Russell Crowe) tells his friends that they need to stop picking their approach to the ladies in terms of narrow self-interest, and instead figure out what the group as a whole needs to do in order to promote the interest of the group, that is arguably the exact opposite of the analysis in the real Nash’s doctoral dissertation. Indeed, if we analyzed the strategic environment of the bar in the way the movie Nash does so, the real Nash would say, “If all the guys could agree to ignore the pretty blonde woman and focus on her plainer friends, all the guys would be happier than if they each focused on the pretty blonde. But, that outcome doesn’t constitute a Nash equilibrium, so alas, we can’t expect it to work. If the rest of us focused on the plainer friends, we would each have an incentive to deviate and go after the pretty blonde. Ah, the limits of rational, self-interested behavior.”

  (I hope the reader will forgive the possibly sexist overtones of the preceding paragraph, but it’s how Ron Howard chose to convey Nash’s insights to the world. I am playing the hand I was dealt.)

  John Nash provided economists with a powerful framework for analyzing strategic interactions. If you want to see how economists took his neat result and applied it in settings where it leads to absurdity, read my articles here and here.

  

  

  
  
  

  

• From The Keynesian Archives: Who Said In 2010 That "Europe Is An Economic Success"

  Paul Krugman says a lot of funny things. 

  Indeed, if one is predisposed to being cynical about the 7-year bout of Keynesian madness that has infected DM central banks in the post crisis world, virtually everything Paul Krugman says is funny. 

  But some caution is warranted because while Krugman may be an endless source of entertainment for anyone who has even a shred of respect for sound money policies, he is also — as we pointed out when the Nobel prize winner took his economic insanity on a field trip to its natural habitat in Japan last year — there are two words that should strike fear in the hearts of any rational-thinking citizen of the world, and those two words are “Paul Krugman.” 

  At no time in history is the above more apparent than now, with seemingly the entire world on its way to becoming Japan because at the end of the day, everyone’s answer to why central planning hasn’t delivered on its lofty promises is simply this: not enough Keynes.

  Having thus set the stage, we bring you this classic Krugman throwback quote from 2010:

  “The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works.”

  
  

  
  

  Shortly thereafter, that “economic success” would turn into an unmitigated nightmare both from an economic and political perspective, with the entire periphery losing bond market access in mid-2012 due to the perception of fiscal irresponsibility, an event which was promptly followed up by a Keynesian rhetorical haymaker from Mario Draghi that temporarily stemmed the crisis but wasn’t enough to bring the EU economy back to life and so finally, the ECB went (nearly) full-Kuroda in March, all just to celebrate the fact that “hey, at least inflation isn’t negative anymore” and at least now, only Greece is on its way out because, ironically, it has “too much debt.” 

  Certainly doesn’t look like “success” to us, although, as Krugman reminds us, you have to look past math when you’re evaluating economic outcomes:

  “Actually, Europe’s economic success should be obvious even without statistics.”

  And because we couldn’t resist, here’s why things have gone from bad to worse in Greece over the past month:

  Tomorrow I will be meeting with the Nobel Prize-winning economist @NYTimeskrugman #Greece

  — Alexis Tsipras (@tsipras_eu) April 17, 2015

  

  

  
  
  

  

• Carl Icahn Is "Extremely Worried" About Stocks, Warns "It's Not If, But When It Will Happen"

  "This market has a lot to be concerned about," warns Carl Icahn in an interview with FOX Business Network's Trish Regan, slamming Fed policy, "by keeping interest rates this low you are creating bubbles that you don’t even know about." While mainstream media pundits are instantly feverish over every bullish AAPL word the aging activist has to say (or tweet), it seems that when it comes to facing facts and reality of the broad market, few, if any, are willing to share his thoughts as he concludes, "it’s not just a question of it could be the beginning… It’s not will it happen. It’s when it will happen."

   

  Interview via FOX Business Network…

  Watch the latest video at video.foxbusiness.com

   

  On the markets:

  “I say you have to look at things simplistically, if you’re really making a lot of money and you hold it and you’re a successful investor you try to reduce to simplicity. And if you look at it simply this market has a lot to be concerned about and people say well ’07 they said nobody was concerned. People knew that the housing bubble was there. They knew it was a great worry and everybody ignored it… I’m not telling you this market is going to crash, going to go down next week, next month, even next year, but you have to be extremely concerned with what’s going on. I mean consumers really aren’t spending – by keeping interest rates this low you are creating bubbles that you don’t even know about. And I do think that sooner or later the Fed can’t just keep this market up by itself.”

  On whether he thinks this is the beginning of something problematic in the markets:

  “I say it’s not just a question of it could be the beginning… It’s not will it happen. It’s when it will happen unless interest rate bubble is I think holding it up and I think the Fed has to be congratulated for what they did to save this economy in ’08. There is no question that the Fed did hold it up there, but I think now the time has come to stop the medicine and I think it will happen. It will stop.”

  

  

  
  
  

  

• From Money To Psychology, Japan Reveals The Basis Of Economic Policy Corruption

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  At some point in the middle of the last century, economics of money shifted to economics of psychology. When Milton Friedman wrote his 1963 book, A Monetary History, it was an effort that uncovered the role of money in the collapse of the Great Depression as he and his co-author, Anna Schwartz, saw it. Whether or not it was a full explanation, it wasn’t, it became widely adopted as the model for central bank behavior. At its heart, however, it was a treatise about the role of currency and liquidity.

  It was still largely faithful to the Bagehot paradigm of central banks as agents of elasticity, with some modification about the terms at which that would be available. It is, however, nothing like what central banks around the world do today, even though outwardly there is a rough resemblance.

  Almost as soon as A Monetary History was published there was a shift underway in more general economic theory about taking what was believed the next step – from monetary management to economic management. The impulse in that direction was not new, but the academy about its possibilities was. In 1958, AW Phillips in the UK put together an empirical analysis of a seeming durable correlation between inflation and employment. That was expanded in 1960 by Paul Samuelson and Robert Solow in the United States that posited the Phillips Curve, as it came to be known, as the means to exploit economic factors to introduce greater management and command.

  Samuelson, in particular, was immediately welcomed into the Kennedy and then Johnson administrations as an advisor on the subject of that “exploitable Phillips Curve.” What we got out of it was the Great Inflation, a 15-year period of nearly unrelenting disaster that wasn’t just limited to economic malaise, it destroyed the last vestiges of the dollar and introduced the world to credit-based money in the eurodollar standard – the “dollar.”

  Coming to terms with the Great Inflation was perfectly reasonable with a reasonable outlook free of determined bias for absolute control and command. Milton Friedman himself played a central role in discrediting the Phillips Curve, but that still left monetary theory short of the ancient Platonic ideal of the central banker as Philosopher King, if only in a limited capacity for creating and nurturing the “optimal” economic results. Despite the Great Inflation, economists did not turn away from trying to attain utopian command ideas, they only set about finding the “right” ones.

  Robert Lucas was heavily invested in exactly that, as the allure of “general equilibrium” was so tantalizing to potential economic theory. It meant, as we know all too well now, that, if correct, there was some range of regression equations that could be assembled and constituted such that perfect predictability was possible. That is the idea of general equilibrium in the first place, to be able to model the utterly complex and heretofore mystifying nature of the true economy.

  The world into which relatively primitive econometrics worked was centered around the idea of a “general equilibrium.” This was nothing new, as economists since the time of Malthus, Mill and Simon Newcomb believed that there was a method of quantifying any and all economic function. The equations would, as the name general equilibrium implies, have to balance. The central debate ranged around how price changes were set and modified especially owning to monetary and time variables.

   

  What Lucas did, in his famous 1972 paper Expectations and the Neutrality of Money, was to assume generalized equilibrium from the very start. Departing from a regime of “adaptive expectations” Lucas asserted “rational expectations.” What that meant was neutralizing the equations of price expectations so that the difference between actual and expected prices is thus set to zero. In that sense, price behavior could then be adapted under a general equilibrium format, and the whole set of Freidman/Phelps “natural unemployment rate” econometrics would balance (I am simplifying here intentionally).

  The generation of economists that undertook Lucas’ rational expectations assumptions saw its promise limited to the mathematical world of econometrics. The generation thereafter, including Ben Bernanke, sought to exploit it not unlike Samuelson and Solow’s attempt with Phillip’s scholarship. Rational expectations become the centerpoint of economic theory, and it has led the “discipline” in very strange directions.

  The problem, as with quantum physics, is that “rational expectations” is not a real world phenomenon and certainly not directly relatable or transferable. It sounds as if it may be consistent with our experience of economic reality, as setting the differential of actual and expected prices to zero represents something like total market efficiency. It means that “market” prices are always correct and therefore econometric models need not concern themselves about initial equilibriums – they are always just assumed to be in that state. Inside the math, market prices are thus presupposed to always be market-clearing, and thus not subject to stochastic tests.

   

  Even though the assumption of “rational expectations” is one in which there really appears to be no real-world counterpart, it dominates the centrality of all economic assumptions. Furthermore, like most economic and monetary paradigms, it is unfalsifiable. By adopting “rational expectations” at the start, any statistical tests are thus contained within the paradigm that all “market” prices are true and “correct.” That is a dangerous proposition when real world economic and financial parameters are supposed to flow solely from what is simply a means by which to find a solution within a system of stochastic equations describing only general equilibrium.

  Because of this one mathematical property designed only to “save” general equilibrium largely from its own very real limitations, rational expectations has been taken as a real phenomenon to be abused in monetary policy, and thus economic command. If prices are always rational, then the influence of prices will be the same. Monetary policy left money behind and become strictly a tool for influencing behavior – from money and currency to nothing but psychology and the equivalent of happy pills (placebos at that).

  We see the results of this shift all around us, especially where economists and “experts” are always so upbeat no matter how ludicrous and isolated such an attitude may be. And then there are the asset prices, going higher and higher to “stimulate” some “wealth effect” of not actual income but, again, happiness over not the direction of the true economy but of what its makers want of your perceptions of it all. It is taken as self-revealing now that even recessions are not much more than “irrational pessimism.”

  The lack of recovery everywhere QE is being tried is not actually surprising to anyone but those still believing that rational expectations is anything but a mathematical shortcut. That is true in the US but most especially Japan, where even the mighty QQE has failed to live up to its “unquestionable” power and has thus become to engender very dangerous doubts – unhappy feelings that are the dread of all central bankers under the rational expectations paradigm:

  While analysts expect consumption to pick up in coming months, lingering weakness will keep policymakers under pressure to underpin a fragile economic recovery.

   

  “It’s a pretty gloomy number … Consumption may take longer than expected to pick up,” said Taro Saito, director of economic research at NLI Research Institute.

   

  “The mood is good but wages haven’t risen much yet. It might take until around summer for consumption to clearly rebound.”

  Reading that economist’s summary would lead you to think that it really is nothing but psychology at work. It is, after all, fully consistent with the stated purpose of QQE to begin with.

  Households spent less on leisure and dining out even as the jobless rate fell to a 18-year low, underscoring the challenge of eradicating the sticky “deflationary mindset” that has beset Japan for nearly two decades.

  If you think that Japan, or the US for that matter, is suffering from an insufficiency of happiness, a quarter-century funk of nothing but a “deflationary mindset”, then QQE seems a consistent course (never mind the nine prior attempts). If, however, you look at Japan as suffering just madness emanating from monetary policy that is the equivalent of pop psychology, the malaise starts to make perfect sense. The Japanese must be the happiest recipients of impoverishment ever conceived, and the results show. The greatest trick about rational expectations is that it seems so plausible because confidence is a good part of the real economy, but hollow appeals to unrelated factors are not in any way the same as “animal spirits.”

  

  Last month was a difficult comparison because of the April 2014 tax change which pulled forward spending activity into March 2014, and thus the base of the year-over-year comparison was off. So it was expected that household spending would rise in April, with average expectations for +2.8%. Instead, spending declined yet once more, as economists missed their prediction by an enormous 4.1%. The problem with being reliant on illusions is that you can’t spend them; the Japanese, for all the ultra-low unemployment rate jubilee, have very little actual income. Even more recently, real DPI has ticked up but more as a matter of lower CPI and tax comparisons.

  

  Instead, in what matters most, real wages have shown absolutely no tendency toward everything that was expected. When starting QQE more than two years ago, it was fully intended that by now real wages would not just be rising but rising steadily and robustly. Japanese workers have suffered the opposite.

  

  The reason for that is the very way in which the unemployment rate is misleadingly “happy”, connecting wages to what really looks like a still-gathering recession. In the past few months, when this post-tax recovery was supposed to materialize, Japanese businesses have been degrading their labor force, shifting a huge proportion at the margins out of full-time and into part-time. The Japanese still don’t do mass layoffs, instead they just cut hours strenuously while maintaining the “happy” unemployment rate.

  

  I find it very revealing that this remaking of marginal labor utilization is largest in the wholesale and retail trade segments, further confirming the decimation of internal Japanese economics (in the truest sense, not the mathematical theories that dominate). The Japanese people are clearing buying less “stuff” meaning that those who sell stuff are requiring much less of workers in 2015. That is how recessions are made, in that they become self-feeding trends of reduced “demand” and then reduced labor utilization leading to further cuts in income and then demand again.

  

  The problem for econometrics and rational expectations is that any scientific endeavor, and economics very much fancies itself as that, is governed by observation rather than academic stylings even of the most elegant and sophisticated math. Clear observation, now two full years into the emotional bastardization, rejects all conclusions and intentions of the orthodox theories right down to their base foundation. Yet, as noted by the quoted economist above, it will never be falsified by anything other than counter-emotion; rational expectations is so irrational in its persistence because it is no longer even a scientific-like pursuit but a full-blown ideology of religious fervor. No matter how back Japan gets, orthodox economists still say that recovery is later in the year, or next year, or just around some unspecified corner. And it never is; maybe not all prices, especially those highly managed and cajoled, are market-clearing?

  The Japanese economy, to any clear mind, took a huge turn for the worst under Abenomics yet its practitioners are still, somehow, given the final word on judging its performance, meaning that the mainstream still, somehow, subscribes to the religion.

  Spending by Japanese households slumped unexpectedly in April and consumer inflation came in roughly flat, casting doubt on the central bank’s view that a steady economic recovery will help move inflation toward its ambitious 2 percent target. [emphasis added]

  By all scientific observation, there was nothing unexpected about the “gloom” in April.

  

  

  
  
  

  

• Greece Abandons "Red Lines" As Troika Meets In Berlin To Craft "Deal"

  We’ve been saying for months that the troika’s ultimate goal in negotiations with Greek PM Alexis Tsipras is to use financial leverage to force Syriza into abandoning its campaign mandate, thus sending a strong message to the EU periphery’s other ascendant socialists that threatening to disprove the idea of ‘euro indissolubility’ is not a viable bargaining strategy when it comes to extracting austerity concessions from creditors. 

  Over the past several days the political situation has come to a head with Tsipras expressing his extreme displeasure at the troika’s “coordinated leaks” and unwillingness to give even an inch on what the PM calls “absurd” demands.

  Meanwhile, Syriza has splintered with the far-left faction demanding a return to the drachma and a default to the IMF. We’ve contended that Tsipras will not be willing to go that route and risk an economic meltdown that would likely see him lose power altogether. The more likely scenario, we have argued, is that Tsipras caves to the troika, compromises on the government’s ‘red lines’ (pension reform being the most critical) and risks a government reshuffle on the way to a third program, thus averting a euro exit and keeping Greece from descending into a drachma death spiral, even as the “solution” effectively strips the Greek people of their right to choose how they want to be governed — a tragically absurd outcome in what is the birthplace of democracy.

  Sure enough, it appears as though this is precisely what will unfold over the coming weeks as Tsipras has now indicated he is willing to compromise on pension reform. Reuters has more:

  Greek Prime Minister Alexis Tsipras is ready to discuss pension reforms in negotiations with international creditors over a cash-for-reforms deal, German newspaper Die Welt reported on Monday.

   

  Labour and pension reforms are believed to be among the big sticking points with Athens.

   

  Die Welt cited participants in the negotiations as saying the prime minister had signalled he was ready to discuss pension cuts and a higher retirement age.

   

  The Greeks has not yet submitted a concrete proposal, the paper added in a preview of an article to run in its Tuesday print edition.

  And with that it will be missioned accomplished for the troika. The Greeks will remain debt serfs, Germany will have made its point and sent a strong message to the rest of the EU periphery, and the IMF… well, that’s still up in the air because Christine Lagarde has made it abundantly clear that the Fund does not wish to participate in perpetuating this ponzi any further unless Greece’s EU debtors agree to a writedown of their Greek bonds. Largarde and Draghi reportedly met with Merkel and Hollande in Berlin today, perhaps sensing that the charade is finally coming to an end. 

  Via Reuters again:

  The chiefs of the European Central Bank and the International Monetary Funded headed to Berlin for talks late on Monday with the leaders of France and Germany on how to proceed with Greek debt negotiations.

   

  EU officials said ECB chief Mario Draghi and Christine Lagarde of the IMF were joining the German and French leaders, and the president of the European Commission, with the aim of reaching a joint position on how to negotiate with Greece.

   

  The unexpected development came after Greek Prime Minister Alexis Tsipras fired a broadside at international creditors that officials said bore little resemblance to his private talks with EU leaders.

  Once again, here’s a flowchart which diagrams what comes next:

  

  *  *  *

  For those interested to know what these “absurd” demands from the troika are, we bring you the following from KeepTalkingGreece who has the story:

  Creditors command and demand, Greece is willing but … some red lines cannot be set aside. Apart from that, creditors’ commands are anything but logical as their demands could be only described as crazy. Furthermore the creditors seem divided as to what they demand from Greece with the logical consequence that the negotiations talks have ended into a deadlock.

  According to Greek media reports,

  While the European Commissions wants austerity measures worth 4-5 billion euro for the second half of 2015 and the 2016, the International Monetary Fund raises the lot to 7 billion euro for 2016. The all-inclusive austerity package should include among others €2.7 billion cuts in pensions.

  The Pensions Chapter is one of the thorns among the negotiation partners, and Greece would love to postpone it for after the provisional agreement with the creditors, call them: Institutions.

  While it is not clear whether it is the IMF or the EC or both, it comes down to the command that

  “Pensions should not be higher of 53% of the salary due to the financial situation of the social security funds.”

   

  Pension for a civil servant (director, 37 years of work) should come down to €900 from €1,386 today after the pension cuts during the austerity years.

   

  Pension for private sector – IKA insurer (37 years of work, 11,000 IKA stamps) and salary €2,300 should come down to €1,250 from €1,452 today after the austerity cuts. (examples* via here)

  Of course, with the PSI in March 2012, Greece’s social security funds suffered a huge slap in their deposits in Greek bonds.

  According to the Bank of Greece report of 2012, social security funds were holding Greek bonds with nominal value €18.7 billion euro. The PSI gave them a new look with a nice hair cut of 53.5%. Guess, how many billions euros were left behind.

  If one adds the loss of contributions due to high unemployment, part-time jobs, uninsured jobs and the disappearance of full time jobs in the last 3-4 years, the estimations concerning the money available at the Greek social insurance funds are … priceless!

  Another thorn in the negotiations is the Value Added Tax rates.

  Creditors reportedly want Value Added Tax hikes in the utility bills, electricity and water charged with 23% V.A.T. from 13% now.

  Do I hear you say that the austerity recipe imposed to Greece is wrong? You’re totally right.

  But creditors insist on it and then wonder why the soufflé dramatically sinks once it comes out of the oven in Brussels.

  *examples: the pensions issue is a huge labyrinth as full or reduced (early retirement) pension calculation depends on several criteria in addition to the 37 years +11,000 IKA-stamps scheme. There is no average and therefore there can be no average cuts.

  Before the crisis, pension was 80% of the salary of the last 5 work years. Now it has come down to 60% of either last salary after the salary & wages sharp cuts or of the best salary. And creditors want it down to 53%! Go figure…

  What is fact is that pensions in private sector sank at 26% in the last 3 years.

  

  

  
  
  

  

• The Commerce Department Will Throw You In Jail For Not Filling Out This Survey

  Submitted by Simon Black of Sovereign Man

  The Commerce Department will throw you in jail for not filling out this survey

  Chances are that you’ve never heard of the International Investment and Trade in Services Survey Act that was originally passed nearly 40 years ago.

  And chances are you didn’t catch the November 20, 2014 edition of the ‘Federal Register’, the US government’s daily opus of new rules and regulations that ran 331 pages that day.

  So, chances are, you have no idea that the Department of Commerce might just want to throw you in jail right now. I’ll explain.

  Back in 1976, Congress decided that they needed more information on US companies’ international trade activities.

  So they passed a law requiring the Department of Commerce to survey the biggest businesses in America to find out more about what they were doing abroad.

  These days, the survey is conducted every five years. And like most surveys it’s a bunch of useless bureaucratic drivel that only wastes the time of the poor souls who have to fill it out.

  Now it’s something that can get you thrown in jail.

  Late last year the Commerce Department quietly published a new ‘rule’ in the Federal Register requiring every American with certain investments abroad to fill out their survey, regardless of whether or not they were notified.

  In other words, you’re just supposed to know that you have to fill out this form.

  And if you don’t, the penalties are severe.

  For the first time ever the government is imposing both civil and CRIMINAL penalties for non-compliance.

  The fine for not filling out the survey (known as BE-10) ranges from $2,500 all the way to $25,000.

  And if they think you intentionally didn’t file, you “may be imprisoned for not more than one year.”

  Either way, even if you had no earthly idea and had never heard of this survey, they reserve the right to seek “injunctive relief commanding such person to comply.”

  So if you don’t fill out the form, they’ll get a judge to order you to comply.

  This really borders on insanity.

  The federal government of the United States of America… the Land of the Free… is willing to clog up the court system to either force people to fill out a survey, or to prosecute them for not doing so.

  Forget about rapists, murderers, and thieves. The government’s priority is to imprison people who don’t fill out surveys.

  What’s really amazing is that your elected representatives in Congress weren’t the ones to enact these absurd criminal penalties.

  The Department of Commerce’s Bureau of Economic Analysis (BEA) did this all on its own. They simply created a new ‘rule’, then buried it under hundreds of pages of other regulations.

  And even though Congress never even sees them, and no reasonable person has ever heard of them, these rules have the same weight and effect as the law.

  So much for representative democracy.

  Two important questions come to mind:

  1. How many other rules that carry criminal penalties might we be breaking at this very moment without even realizing it?
  2. Just who the hell do these people think they are?

  Regardless of whether or not the penalties are ever exacted is irrelevant.

  It’s disgusting to even be threatened with such atrocity, simply because some bureaucratic functionary needs to justify his/her position.

  It’s a clear sign that in today’s system, the government doesn’t exist to serve the people. They think the people exist to support the government.

  Abraham Lincoln once told a war-torn nation that a government of the people, by the people, for the people, shall not perish from this earth.

  Tragically, Lincoln was totally wrong. Because this is what freedom has become in America.

  Have you reached your breaking point yet?

  

  

  
  
  

  

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• Chinese Stocks Are Surging On Weak Macro Data BTFD-iness

  Having dropped over 10% in the previous 2 days, what better way to get the speculative frenzy of Chinese housewives levered up and buying stocks again than terrible macro data. With China HSBC Manufacturing PMI printing 49.2 (the 3rd monthly contraction in a row) and China's official Services PMI tumbling to its lowest since Dec 2008, the 'bad' news seems to have been greeted wondrously as Chinese stocks are up 2-4% on the news. CHINEXT back to fresh highs, Shenzhen is outperforming, and Shanghai and CSI-300 are all pushing higher. Add to this the news that the CSI-300 its rebalancing some positions and the 'correction' in China is now old news…

   

  Bade news is good news for dip-buying Chinese housewives…

  

   

  Not only is the bad news bad enough to be good, but the rumors of moar stimulus are also present…

  China’s Ministry of Finance may set additional quota of 500b-1t yuan for local governments to swap debt into municipal bonds,  according to people familiar with the matter.

   

  Plan needs State Council approval, according to the people, who asked not to be identified because deliberations are private

   

  Finance ministry said March 8 govt would permit as much as 1t yuan of high-yielding debt to be converted into municipal bonds

  However, while the market is juiced on the apparent weakness, Goldman sees pockets of strengths (for bulls to be worried about)…

  China’s official May manufacturing PMI headline inched up, although it was marginally below market expectations. The breakdowns of the sub-components were more positive than the headline with the two most important components (based on the past correlation with hard data such as IP)–new orders and production–showing more meaningful rebounds (up 0.4 and 0.3 points respectively). These rises were mainly offset by a move in the supplier delivery time sub-index (which we do not generally regard as a particularly useful indicator); the employment sub-index also inched up and the raw materials inventory index held up.

   

  Markit/HSBC manufacturing PMI May final reading was also released this morning. The May final reading was 49.2, up slightly from 49.1 in the flash reading, and also improved compared with April final reading of 48.9.

   

  

   

  Official non-manufacturing official PMI (which covers the construction and service sectors) moderated to 53.2 in May, from 53.4 in April, the weakest reading since the global financial crisis: Service sector PMI decreased to 52.0 from 52.4 in April, while construction PMI increased to 57.9 from 57.5.

   

  

   

  Today's data showed early signs of a recovery in the economy amid continued policy loosening. However, we do not believe these are enough to change the overall policy direction and believe the government will likely release further loosening initiatives in the coming months until there are consistent signs of a significant growth recovery. The recent repo operation by the PBOC (which drained liquidity) likely reflected a fine-turning in controlling the degree of looseness as opposed to a change in policy direction.

  *  *  *

  Meanwhile, in Yunnan Province…

  • CHINA TO HOLD LIVE-AMMUNITION DRILL IN YUNNAN PROVINCE: XINHUA

  During the exercise, all types of aircraft without approval shall not enter the airspace, into Gengma county, vehicle Zhenkang border exercise area, please obey traffic control personnel. Exercise does not affect normal production and life of the masses. To listen to local people and local governments participating troops command, exercise control without approval shall not enter the area. Exercise until further notice.

   

  

   

  In accordance with international practice and the relevant agreements between China and Myanmar armed forces, I informed the Myanmar authorities to matters I organized military exercises.

  *  *  *

  So… bad data, more stimulus, and warmongery… BTFD!

  

  

  
  
  

  

• A First-Hand Account Of The Greek Bank Run

  Submitted by Tom Winnifrith of Share Prophets

  Witnessing the great bank run first hand as I deposit money in Greece

  Jim Mellon says that the Greeks should build a statue in my honour as on Friday I opened a bank account in Greece and made a deposit. Okay it was only 10 Euro, I need to put in another 3,990 Euro to get my residency papers so I can buy a car, a bike and a gun, but it was a start. But the scenes at the National Bank in Kalamata were of chaos, you could smell the panic and they were being replicated at banks across Greece.

  For tomorrow is a Bank Holiday here and if you are going to default on your debts/ switch from Euros to New Drachmas a bank holiday weekend is the best time to do it. And with debt repayments that cannot be met due on June 5 (next Friday) Greece is clearly in the merde. If it defaults all its banks go bust.

  But I had to open an account and make a deposit. Outside the bank in the main street of Kalamata there are two ATMs. The lines at both were ten deep when I arrived and when I left an hour later. Inside I was directed to the two desks marked “Deposit”. You go there to put in money, to open an account or if you are so senile that you cannot do basic admin of your account without assistance. As such it was me depositing cash and four octogenerians who had not got a clue about anything. Actually I lie. These folks may have been gaga but they were not so gaga that they were actually going to deposit cash, I was the sole depositer.

  Friday was also the day when pensions are paid into bank accounts. On the Wednesday and Thursday it was reported that Greeks withdrew 800 million Euro from checking accounts. Friday’s number will dwarf that. Whe you go to a Greek bank you pull off a ticket and wait for your number to be called. The hall in my bank contains about 60 seats all of which were filled. There were folks standing behind the seats and in fact throughout the hall, all wanting to get their cash out before the bank closed at 2 PM.

  At the side of the room, shielded by a glass screen sat a man behind a big desk. He tapped away at his screen and made phone calls. Ocassionally folks wandered over, shook papers in his face and harangued him having got no joy elsewhere. So I guess he was the bank manager. I rather expected him to end one phone call and stand up to say “That was Athens – all the money has gone, its game over folks.” But he didn’t. He may well do so at some stage soon.

  Eventually I got the the front of my five person queue of the senile and opened my account. Passport, tax number, phone number all in order. I handed over a 10 Euro note and the polite – if somewhat stressed – young man gave me about ten pieces of paper to sign and stamped my passbook. I have done my bit for Greece and have given it 10 Euro which I will lose one way or another in due course. So Jim – time to lobby for that statue.

  The Government did not put up a default notice on Friday as I half expected. The can kicking goes on. The ATMs will be emptied this weekend and on Tuesday and in the run up to a potential default day next Friday the banks will be packed again with folks taking out whatever money they can.

  It is not just the bank coffers that are being emptied. To get to The Greek Hovel where I sit now from my local village of Kambos is a two mile drive. On my side of the valley there is some concrete track but it is mainly a mud road. On the other side of the valley there is a deserted monastery so to honour the Church – even if there are no actual monks there – a concrete road was built in the good times. By last summer it was more pothole than road.

  By law, since I have water and electricity, I can demand that the road be mended and so last summer I went to the Kambos town hall (4 full time staff serving a population of 536) and did just that. They said “the steam roller is broken and we have no money but will try to do it in the Autumn.” They did not.

  But last week a gang of men appeared and the road is now pothole free, indeed in some places we have a whole new concrete surface. And as I head towards Kalamta there are extensive road mending programmes. At Kitries, the village has found money to renovate its beach front. It is a hive of activity across the Mani.

  Quite simply each little municipality is spending every cent it has as fast as it can. The Greek State asked all the town halls to hand over spare cash a few weeks ago to help with the debt repayment. The town halls know that next time it will not be a request but an order. But by then all the money they had hoarded will have been spent. That is Greekeconomics for you.

  Everyone knows that something has to give and that it will probanly happen this summer. The signs are everywhere

  

  

  
  
  

  

• Abenomics Fail: Japanese Slack-Jawed At Oral Sex Price Deflation

  Despite proclamations by Kuroda, Abe, and various other elected (and unelected) officials that the 'deflation mindset' is gone from Japan, it appears one segment of the population is keenly aware of the ongoing deflationary market for one staple item. Just as we warned was occurring in America, it appears the cost of blow-jobs has gone from just-plain-cheap to "well, why not?" As one intrepid reporter ventured into the Otsuka red-light district of Toshima Ward discovered, the fee for an oral session at a “pink salon” starts as low as 2,000 yen ($16!).

   

  Japan (Tokyo to be specific) was already at the lower end of the spetrum for hourly rates for such services…

  

   

  But as The Tokyo Reporter blog explains, things have got considerably worse…

  On Friday, data released by the internal affairs ministry indicated that Japan’s annual inflation rate for April was zero. The report showed that Prime Minister Shinzo Abe’s economic revival plan is being hampered by falling prices, particularly for fuel and consumer electronics. The report did not mention blow-jobs, but, according to Takarajima (July), prices for such services in Tokyo remain low as the overall commercial sex industry continues to face hard times.

   

  A writer for the magazine travels to the Otsuka red-light district of Toshima Ward to discover that the fee for an oral session at a “pink salon” starts as low as 2,000 yen.

   

  He enters one particular establishment, which is not named, to find four other customers seated beneath a glitter ball hanging fr0m the ceiling and ’80s music filling the room.

   

  The shop operates on the hanabira kaiten principle. Meaning “flower petal rotation,” the system dictates that each customer is served by girls in shifts. At this shop, it is two rotations.

   

  Akira Ikoma, editor of a guide to the men’s entertainment called Ore no Tabi (My Journey), tells the magazine that the talent level of women employed in Otsuka is on the rise.

   

  “Years ago, Otsuka was known as the place for dirt-cheap pink salons,” says the editor. “But girls are using the Shonan Shinjuku Line” — which runs through nearby Ikebukuro in connecting Saitama and Kanagawa prefectures — “to commute to Otsuka from Utsunomiya and Gunma Prefecture, with the result being a distinct increase in their overall quality.”

   

  After a five-minute wait, Takarajima’s writer is joined by a highly rotund young lass with a pretty face, affectionate personality and — crucially — a supreme technique. After seven minutes, she is rotated out and a woman in her middle 30s takes her place for the final session.

   

  The magazine says that the quality of the ladies at even the low-end joints is maintained at an acceptable level.

   

  “With the impact of the rough economy ongoing, the value afforded (by pink salons) has become very popular,” says Ikoma. “At the high end, one might spend a total of 10,000 yen but he’s going to also be able to drink.”

   

  The industry has been in a tailspin for years, and this is not the first report of a parlor in Otsuka offering an exceptionally low entry fee. In 2011, Fashion Club Hi Hi also provided two rounds for 2,000 yen, which implies that the benefits of the recent economic initiatives behind “Abenomics” have not yet arrived in Otsuka.

   

  A street scout tells the magazine that the girls are attracted to the parlors due to the steady income.

   

  “At a pink salon, the girls are paid by the hour, but at an out-call establishment it is commission-based,” says the scout.

   

  He cites a jukujo “delivery health” business, which dispatches “mature” women to hotel rooms or residences, as an example.

   

  “In one day, a woman might make less than 10,000 yen,” he says. “But at a pink salon, an eight-hour shift at a rate of 3,000 yen per hour translates into more than 20,000 yen a day. So the pink salon is the winner.”

   

  The shop does well, too.

   

  “They may have small margins but the turnover is very, very high,” he says. (A.T.)

   

  Source: “Fuzoku-jo no reberu age no eikyo ha ‘2000en’ pinsaron ni mo atta!?” Takarajima (July, page 37)

  *  *  *

  No wonder household-spending is down 14 months in a row…

  

  

  
  
  

  

• American Police Are Shooting And Killing More Than 2 People Per Day In 2015

  On Saturday we introduced readers to the “Ferguson Effect”. The idea is that the recent spate of prosecutions and instances of social unrest that followed a series of events involving perceived police misconduct directed at African Americans have made police officers gun shy — literally. 

  Here’s what Thomas W. Smith fellow at the Manhattan Institute and author of “Are Cops Racist?” Heather Mac Donald wrote in a WSJ piece:

  This incessant drumbeat against the police has resulted in what St. Louis police chief Sam Dotson last November called the “Ferguson effect.” Cops are disengaging from discretionary enforcement activity and the “criminal element is feeling empowered,” Mr. Dotson reported. Arrests in St. Louis city and county by that point had dropped a third since the shooting of Michael Brown in August. Not surprisingly, homicides in the city surged 47% by early November and robberies in the county were up 82%.

   

  Similar “Ferguson effects” are happening across the country as officers scale back on proactive policing under the onslaught of anti-cop rhetoric. Arrests in Baltimore were down 56% in May compared with 2014.

  Note this passage: “Cops are disengaging from discretionary enforcement activity and the ‘criminal element is feeling empowered.’” That, according to Mac Donald, is why crime is up across many American cities.

  A second set of data casts considerable doubt on that thesis. According to The Washington Post, fatal police shootings have doubled with law enforcement now killing more than two people every day. 

  Via WaPo:

  [At least] 385 people [have been] shot and killed by police nationwide during the first five months of this year, more than two a day, according to a Washington Post analysis. That is more than twice the rate of fatal police shootings tallied by the federal government over the past decade, a count that officials concede is incomplete.

   

  “These shootings are grossly under­reported,” said Jim Bueermann, a former police chief and president of the Washington-based Police Foundation, a nonprofit organization dedicated to improving law enforcement. “We are never going to reduce the number of police shootings if we don’t begin to accurately track this information.”

  That doesn’t sound too much like a police force that is now “disengaging from discretionary enforcement.” Here are some of WaPo’s findings from an ongoing investigation:

  About half the victims were white, half minority. But the demographics shifted sharply among the unarmed victims, two-thirds of whom were black or Hispanic. Overall, blacks were killed at three times the rate of whites or other minorities when adjusting by the population of the census tracts where the shootings occurred.

   

  The vast majority of victims — more than 80 percent — were armed with potentially lethal objects, primarily guns, but also knives, machetes, revving vehicles and, in one case, a nail gun.

  Forty-nine people had no weapon, while the guns wielded by 13 others turned out to be toys. In all, 16 percent were either carrying a toy or were unarmed.

  So America’s “disengaged” police are shooting to kill at twice the rate they were in previous years and unsurprisingly, you are far more likely to be a victim if you are black or Hispanic. Further, the majority of cases involving the death of unarmed “suspects” involved minorities. 

  Here are the visuals…

  

  

  As for Mac Donald’s implicit contention that a looming increase in police prosecutions is likely discouraging officers from doing their jobs, it seems like the jury is out on that as well (no pun intended):

  Police are authorized to use deadly force only when they fear for their lives or the lives of others. So far, just three of the 385 fatal shootings have resulted in an officer being charged with a crime — less than 1 percent.

   

  The low rate mirrors the findings of a Post investigation in April that found that of thousands of fatal police shootings over the past decade, only 54 had produced criminal ­charges. Typically, those cases involved layers of damning evidence challenging the officer’s account. Of the cases resolved, most officers were cleared or acquitted.

  At the end of the day, the “Ferguson Effect” may indeed exist, but the above seems to indicate that it operates in exactly the opposite way as its proponents suggest.

  

  

  
  
  

  

• NSA Surveillance To Lapse At Midnight Although Extension Imminent With Obama's Signature

  “This is a debate over the Bill of Rights," exclaimed Rand Paul before this evening's rare Sunday Senate vote which secured NSA Reform (but leaves a brief window of NSA shutdown before Obama signs the bill), adding, now seemingly falling on the most-bribed and deafest ears, that "this is a debate over the Fourth Amendment. This is a debate over your right to be left alone.”

  In two speeches (one before the vote and one after), Paul implored reason among his colleagues.

  Following John McCain's jab that "the senator from Kentucky needs to learn the rules of the Senate,” Paul raged "are we going to so blithely give up our freedom? Are we going to so blindly go along and take it?" The short answer, yes! The longer answer may well be summed up his defiant comment that “I’m not going to take it anymore,” and with his voice rising to a shout, "I don’t think the American people are going to take it anymore."

  So rest easy America… you're safe again!

  

  *  *  *

  As The Hill reports, The Senate voted on Sunday to advance legislation reforming National Security Agency surveillance programs in a 77-17 vote…

  The bipartisan approval sets up a vote on final passage that will send the legislation to the White House, where President Obama has vowed to sign it. Sixty votes were needed to move forward.

   

  But the legislation will not reach Obama’s desk until after midnight, when Patriot Act provisions authorizing the NSA programs expire.

   

  That means there will be a lapse of the programs until the Senate can take a final vote on the legislation.

   

  Sen. Rand Paul (R-Ky.), who has made the spying programs unearthed by former government contractor Edward Snowden a central part of his presidential candidacy, has vowed to force the expiration of the Patriot Act.

   

  Paul argues the USA Freedom Act approved by the House does not go far enough to rein in spying programs that he and his allies argue are unconstitutional.

   

  “Are we going to so blithely give up our freedom? Are we going to so blindly go along and take it?” Paul said in heated remarks on the Senate floor before the vote. 

   

  “I’m not going to take it anymore,” he declared, as his voice rose to a shout. “I don’t think the American people are going to take it anymore.”

   

  Paul’s comments came during a rare Sunday session of the Senate that was scheduled because of the deadline.

   

  Tensions between Paul and other Senate Republicans were evident throughout Sunday’s proceedings — particularly when the Kentucky Republican sought to speak in opposition to the bill when Sens. Dan Coates (R-Ind.) and John McCain (R-Ariz.) were holding the floor.

   

  “The senator from Kentucky needs to learn the rules of the Senate,” McCain said. “Maybe the senator from Kentucky should know the rules of the Senate.”

  *  *  *

  Here is the "defense" for continued bulk surveillance…

  “He obviously has a higher priority for his fundraising and political ambitions than for the security of the nation,” Sen. John McCain (R., Ariz.) said of Mr. Paul on Sunday.

  Perhaps this will help explain McCain's anger…
   

  

  *  *  *

  Rand Speech 1 (before the vote)

   

  Speech 2 (post vote)

  "Some of the people here hope there is an attack on the United States so they can blame it on me"

  *  *  *

  This is already being spun as 'victory' for Obama by the mainstream media…

  The Senate on Sunday advanced legislation ending the National Security Agency’s collection of millions of Americans’ telephone records in a key test vote, setting up its passage later this week, in a reversal for Senate Majority Leader Mitch McConnell (R., Ky.) and a victory for the White House.  

   

  The National Security Agency began shutting down the bulk-data collection program Sunday afternoon, administration officials said. The program would be dormant at midnight and take a day to reboot after President Barack Obama signed legislation authorizing it, officials said. 

  But, as Rand Paul exclaimed

  "The Patriot Act will expire tonight but they will ultimately get their way… But if you go into the general public you will find that over 80% of people over ago 40 think that the government collecting your phone records is wrong and shouldn't occur"

  *  *  *

  So tonight for the first time in over a decade, iPhones will not be auto-backup'd to the NSA…

  @RT_America Stoppage irreversible from 8:00pm – even if the Senate votes to extend the program, it will take hours for the system to restart

  — RT America (@RT_America) June 1, 2015

  *  *  *

  We note that NBC News reports, thousands of sites are blocking Congress from viewing their webpages in an online demonstration against data-collection provisions of the Patriot Act.

   

  The websites — nearly 15,000 of them as of Saturday morning — are redirecting computers from Congress to BlackOutCongress.org, where users are greeted with a stark black and white warning that reads, "We are blocking your access until you end mass surveillance laws."

   

  "You have conducted mass surveillance of everyone illegally and are now on record for trying to enact those programs into law," the warning continues. "You have presented Americans with the false dichotomy of reauthorizing the PATRIOT Act or passing the USA Freedom Act. The real answer is to end all authorities used to conduct mass surveillance."

  *  *  *

  Edward Snowden perhaps summed it all up best for the nonchalant Americans watching Dance Moms…

  

  

  
  
  

  

• Five Reasons Why America Is Done

  Submitted by Karl Denninger via Market-Ticker.org,

  That's done.  As in baked, cooked, finis.

  Let's just look at the charges and specifications of late, shall we?

  • Big US and Global Banks have admitted (that is, have been convicted) of multiple criminal offenses over the last several years.  A partial list can be found here; let me remind everyone that an ordinary person who commits three felonies, even if some of them are very minor in comparison to any of the listed ones here in impact and they take place over a period of decades, goes away for life under long-existing three strikes laws.  All four of the banks listed in that dissent have three or more "convictions" and thus all of them should be dissolved as they are obviously incapable of modifying their behavior.  Nonetheless literally tens of millions of Americans and American corporations not only refuse to stand and demand that these charters be revoked they voluntarily do business with one or more of these firms!
     
  • We have a medical and insurance industry in this country that routinely, on a daily basis, engages in behavior that can easily be described as meeting the criteria for fraud, bid-rigging, racketeering and routinely uses the threat of both bankruptcy and violence by government goons to get what it wants.  This "industry" routinely, for example, bills for things they didn't actually do, sends people bills for hundreds or thousands of dollars for someone sticking their head in a door and saying "Hello", allows "off-plan" doctors to treat people without their consent exposing them to thousands (or tens of thousands!) in unauthorized charges and then enforces those "charges", takes drugs off the market that they produce so that the only remaining options are those made by the same company but are under patent and more.  The single most-common cause of bankruptcy in this country is medical debt incurred as a direct result of these practices and these practices are where the so-called "need" for Obamacare, that is now resulting in demands for 50% premium hikes in some markets for the next year, came from.  Yet we, as a nation and as a people, routinely consent to this crap and allow these corporations, institutions and individuals to continue their outrageous acts of pillage daily.
     
  • We have a former Secretary of State who now wants to be President but while Secretary of State her private family foundation took tens of millions of dollars in donations from foreign governments that were, at the same time, lobbying the very State Department she was in charge of for permission to buy over a hundred billion dollars worth of weapons.  How this fails to qualify as a federal crime is beyond me given that a foreign agent is unable to buy a Senator lunch.  Irrespective of whether this leads to indictments it is outrageous that such a person can be considered as fit to be President by anyone irrespective of party or other affiliation; that any material percentage of our voting population would cast a vote for such a person proves beyond any doubt that the majority of voters in this country are literally suicidal.
     
  • We have law enforcement agencies that actually claim in court through filed, sworn documents that when they throw a bomb into a baby's crib as they attempt to raid a house and the person they are seeking isn't there (because they didn't bother to confirm he was there), leading to the infant being critically injured, that it is the infant's fault that its face was blown off because it failed to move out of the way of said thrown bomb while it was sleeping in its crib.  In other words we, as a nation, sit silently while government agencies claim the right to blow the face off innocent infants because they are too lazy to bother with ordinary police work.  We could indict the government goons who refuse to wait for the person they want to arrest to depart wherever they are and thus make it possible for the police to arrest them without grievously injuring innocent children who had exactly nothing to do with the acts the accused is alleged of committing, but instead we allow innocent children to be grievously injured or killed due to the laziness and malfeasance of these so-called "boys in blue" and even allow to go unchallenged claims that said goons are there to "protect and serve" the public!
     
  • We have entire legislatures that engage with lobbyists to let them write and vote on laws they then rubber stamp. When caught by the press (good work, by the way) the members of the press who catch them are literally thrown out of a hotel they paid to stay at by men with firearms who are in fact off-duty cops — cops that, I remind you, draw their salaries directly and indirectly from that same legislature!

  I could go on, but why?

  Until and unless we at least resolve all five of the above, and everyone involved wears an orange jumpsuit and has their corporate and institutional edifices closed down with the ill-gotten gains disbursed back to their victims we are, as a nation, DONE.

  And more to the point we have all collectively consented as well.

  

  

  
  
  

  

• The 10 Most Important Themes To Watch This Summer

  As Deutsche Bank notes poetically, “April showers brought May flowers” but adds “Watch out for June thunder storms.” Why the caution?

  “Because S&P reached a new high of 2130 last Thursday on an 18 trailing PE, the highest since 2010 despite anemic EPS growth expected this year. Both EPS and GDP are struggling to expand in 1H, putting the burden for a decent year on 2H. A 2H rebound is likely, but trend growth is very uncertain. Given the growth outlook, it will take long-term Treasury yields staying very low when the Fed starts hiking to support an 18 or higher trailing S&P PE. This moment of truth for long-term yields upon Fed signals of a Sept hike is crucial for summer stock  performance, but we also see other important summer issues to watch.”

  Here are Deutsche Bank’s 10 themes and “summer issues” to keep an eye on as we leave May behind and enter June:

  1. Is Fed a “go” or “no-go” for Sept liftoff? We expect a Sept hike on falling unemployment even if US GDP growth stays slow. We think the Fed will issue more guidance that the FF rate is unlikely to exceed 2% over the next 2 years.
  2. What does this mean for the dollar? We expect further dollar appreciation, DXY ~100 and Euro down to near $1.00 by yearend, but not much stronger than that if Fed hikes appear likely to stay slow and plateau at 2% in 2017.
  3. How do long-term Treasury yields react to the start of Fed hikes? Long-term yields could spike up to about 2.8% this summer upon strong job reports, but should stabilize there if the dollar climbs and unit labor costs don’t accelerate.
  4. Will US GDP bounce back with ~3% growth for the rest of 2015 after 1Q’s contraction? What is a realistic est of trend US growth for the next few years? We see a moderate bounce and 2.0-2.25% trend assuming better productivity.
  5. Has the low in oil prices been set or need to be retested or new lows? We think WTI is capped at $70 through 2016 provided no geopolitical flare-ups. Oil prices are likely to drift down near-term as US and int’l producers vie for share.
  6. Greece? Is Europe prepared to pull the plug if no agreements by June end?
  7. US Supreme Court ruling on plan subsidies on federally set up exchanges? The law says subsidies can only be paid through state established exchanges. A decision is expected in June and if disallowed the Administration will need to turn to Congress to pass a law allowing such subsidies and this will open the door to other ACA modifications and maybe a foreign earnings repatriation holiday comes along with this legislation. There are risks to managed care stocks in this process and it is the only industry we are not OW within HC.
  8. Does the US put boots on the ground in Iraq again to deal with ISIS? This is becoming a problem for President Obama, but we doubt any ground action.
  9. China and other EM economies? US, Europe and Japan might be in a long lasting period of synchronized slow growth, but EM deceleration seems likely to continue and thus moderate global growth with vulnerability to shocks.
  10. US Presidential election. By late 2015 a republican favorite should emerge. This could be a very heated campaign even if Hillary leads. It will raise uncertainties on many US policies including corporate taxes, healthcare, banks and energy, and it might politicize issues related to the Fed and the dollar.

  

  

  
  
  

  

• There Is A Disturbing Anti-Freedom Trend Sweeping Across The West

  Submitted by Simon Black via Sovereign Man blog,

  I came across an interesting story from India recently. In a landmark animal rights case, the High Court there ruled that birds can no longer be kept in cages. The judges asserted that birds have a fundamental right to live with dignity and be free.

  Incredible. If only we humans had the same fundamental right.

  Many of us come from a country that claims to be free. We grow up singing songs about our freedom, and we are told by our governments that evil men in caves hate us because we are so free. This is powerful propaganda that starts practically from birth and stays with us for our entire lives. Even Hollywood does its part with heroic action movies portraying the homeland as strong and free, with evil villains who invariably have foreign accents.

  But it’s all a ruse.

  Most of us don’t even have the most basic freedom to choose what we can / cannot put in our own bodies, or decide how to educate our children.

  The volume of rules, regulations, and laws is so vast now that you can hardly breathe without committing a crime.

  And when they’re not busy confiscating private property through ‘civil asset forfeiture’ or shooting defenseless citizens, police now drive around shutting down children’s lemonade stands for failing to have the appropriate permit.

  Just this morning the US government’s publication of all the new rules, laws, and regulations totaled 313 pages.

  And that’s just for today. Tomorrow there will be more.

  Each of these new rules covers the most ridiculous topics – like regulating the way that dishwashers can be sold. I’m sure we can’t even begin to imagine how horrifying life would be with a rogue dishwasher salesman on the loose.

  And many of them come with severe penalties for non-compliance. You can’t even apply for a passport in the Land of the Free anymore without being threatened with fines and imprisonment.

  That’s not freedom. Not even close.

  Nowhere is this more clear than with the USA PATRIOT Act, the freedom-destroying law from 2001 that authorized all sorts of unconstitutional government powers.

  Some of the worst provisions from the USA PATRIOT Act are set to expire this weekend. But the Obama administration doesn’t want that. And they’ve channeled their inner-Cheney to roll out the same fear-mongering tactics that got this law passed 14 years ago.

  Without sweeping powers to spy on Americans, the administration claims that the country would be left utterly defenseless against terrorists.

  They have suggested that any dissent to the provisions is “playing national security Russian roulette”, and that the opposition will be blamed *when* there’s another terrorist attack in America.

  What’s incredible is how many people believe them… how many people are so afraid of the boogeyman that they support extending the most destructive legislation of their time.

  This was a huge litmus test for liberty in America. And I’m dismayed at how little people seem to care about privacy and freedom anymore.

  Across the Atlantic, things aren’t looking much better.

  In the UK, Prime Minister David Cameron recently stated:

  “For too long, we have been a passively tolerant society, saying to our citizens: as long as you obey the law, we will leave you alone.”

  Apparently leaving law-abiding citizens alone is being ‘too tolerant’.

  Cameron then unveiled a number of new measures to combat “extremism”, including putting people on a government watch list to have their Tweets approved by the police before being posted.

  We’re no longer talking about actual terrorist activity, but so-called extremist thought.

  It took 31 years, but it appears that the origins of 1984 are finally upon us. It’s happening all across the West at an alarming pace, and people are willing to allow it.

  That’s the funny thing about freedom.

  True freedom means that you are free to be an idiot. That people are free to make the greatest mistake of all and trade their liberty for security.

  And that’s their choice. But they’re not free to trade mine.

  What I do with my liberty is my choice. Not anyone else’s. And I have no desire to trade it away for excessive government power masquerading as fake security.

  Each of us has that choice.

  Unfortunately most people in the West are caged birds. It might be a nice cage with plenty of Starbucks and Bed, Bath, and Beyond megastores.

  But it’s a cage… filled with clueless birds chirping away about how free they are.

  The truth is that there’s still freedom to be found in the world. No one is going to give it to you. You have to break your own chains, seek it out, and plan for it.

  But it’s there. It’s still possible to deliberately live free.

  So if you’re one of the few people who still cares about personal liberty and living with dignity, never forget that the cage door is wide open for anyone paying attention.

  And that you can fly.

  

  

  
  
  

  

• The Other Mission Accomplished?

  “…leaving behind a sovereign, sustainable, and self-reliant Iraq,” or not…

   

  

   

  

   

  Source: Townhall

  

  
  
  

  

• Hysterical (Or Historical) Blindness

  Authored by Mark St.Cyr,

  Another week, another slew of disappointing (if not outright pathetic) macroeconomic data releases. From revisions of first quarter GDP now printing negative, to a weekly “jobs” report that was heralded as “fantastic” because once again – they dodged the bullet of printing anything at or above 300K. (albeit the miss was only by 15K, a rounding error in any of the calculus)

  Once again all this bad was spun throughout the financial media as to imply “good.” The reasoning for all this optimism being proclaimed was spouted as “Hey, it’s another print below 300K, this shows the economy is on track!” Even though this latest report is once again showing movement growing closer to 300K, rather than what would truly show improvement. Moving away from 300 and more towards 200K. However the hilarity didn’t stop there.

  When the pending home sales report was released showing an improvement in April of 3.4% vs consensus of 0.09? You could almost hear the champagne corks going off behind the eyes of every next in rotation economist, fund manager, analyst, or professorial academic as they took to the airwaves to shout “See, see!”

  I believe the real cause of their celebration was (just like the jobs report) they too dodged a bullet by once again having just enough specious data signals to shift perception away from a faltering and stagnating economy and “set the table” once again via their now well-worn version (or illusion) of: Three Card Monty economic reporting and analysis.

  So indoctrinated does this now seem to be within the so-called “smart crowd” I wouldn’t be surprised to soon read of an Ivy Leagued institute of “learning” offering it by name as an accredited study and degree costing 6 figures in the coming future. That’s how emblematic this charade now become.

  Today, anyone owning a business, or thinking about creating one outside of Unicorn Silicon Valley doesn’t need to hold some Ph.D in duh to understand there are still far more troubling issues within this economy.

  Currently there are more and more businesses not only struggling, they are also needing to spend ever more scarce and valuable resources competing with companies that should be – out of business. Unlike other businesses (i.e., Where a company needs to actually make a net profit, meaning, there’s something left over to reinvest once all the bills and salaries are paid.) these “companies” are being kept alive only by the financial engineering made possible since the outright adulteration of the capital markets via the Federal Reserve and its continuation of its insidious monetary policy. This unfair competitive advantage has to constantly be circumvented requiring allocation of scant resources. Or worse for far too many – completely unavailable.

  Today, a great many businesses that should, and want to compete are finding it harder, and harder to do just that. Innovation; along with market realignment can not only stagnate, but it can kill the next phase or wave of entrepreneurs or innovators that may hold the subsequent set of solutions an economy in entropy needs. All this is because of the markets (all markets) inability to clear.

  Please don’t tell me about all the innovation happening within “The Valley” as if that is your version of the “See, see!” argument.

  Yes, the innovation emanating there and around the country has been breathtaking. However: much of that innovation as of late I’ll contend is for the direct usage for, and application of businesses and entrepreneurs to utilize! e.g., You can now build an e-commerce website and begin selling, shipping, serving customers world-wide and more. That’s great, and yes it’s innovative – but there’s a problem nobody seems willing, or able to see. You now must have customers that have money to buy! Customers that can generate a net profit for what ever it is you are now selling to make the whole thing work.

  Let’s use an oversimplified yet illustrative scenario to put some perspective into this.

  If you’ve just innovated or “hacked” making a better “mousetrap” a few things according to the fundamentals of real, or true business have to take place. First, you need a customer that can afford to buy and use your product at a price you can make a net profit at. Second, the entity that purchased your product also needs to find customers they can do the same with. And Third: What ever company or provider previously supplying the now inefficient product or service – needs to be allowed to wither or cease freeing up the market place for potential customer acquisitions. And there lies the issue.

  If the last line it the above progression is not allowed, or, the process is adulterated (i.e., crony capitalism) all the preceding is for naught. And the resulting consequences are far greater to an economy than any pretend they’re avoiding.  i.e., “saving jobs” argument et al.

  The dirty little secret along with the blind eyes put to the above by all the academic and professorial “smart crowd” is this: The adherence to remain at the zero bound is doing nothing but providing the fuel for financial engineering for those that shouldn’t be able to compete to not only do just that, but at prices bastardizing the true price discovery level where honest profits can be made and utilized. But that’s not all. It also has another insidious effect not understood by those whom never had to run a business but just remained in school and now teach how they “think” the real business world operates.

  People want to point and shout, “Look at the funding and investing and entrepreneurship creation going on in the Valley! What do you mean innovation is being hurt? Are you blind?!” To which I’ll state again, “Yes, there’s funding and innovation. But (and it’s a very big but) the allocation of capital is now a numbers game as opposed to a more careful consideration to pure business fundamentals. Just as in times past. (does “sock puppet” ring any bells?)

  Let’s say a hypothetical fund may have $10MM to invest. What they’ll more than likely do today is to put $X amount across the next 100 pitches evenly. Regardless of business fundamentals. The rationale to this is a pure odds play. i.e., Maybe 1 or 2 will hit. Who cares what the business is or most other considerations. When the “free money” is flowing – it’s all a percentage game rather than taking the time needed for due diligence and investing in truly promising upstarts.

  In other words what doesn’t happen is: Invest in the 1, 2. or more out of the 100 adequately. The ones that shows real promise, innovation, and business fundamentals. Then use that partnership as to help ensure they have the best chance of becoming all they can. This model (the model where true business acumen is needed) is now shunned.

  Yes, it’s an over simplification. Sounds a little too altruistic? Again, yes. However, that’s because it’s up against the backdrop of what’s now taking place in response to “cheap money” via the current state of macro monetary policy.

  When money and investing is no longer rewarded by business acumen and prowess – rather it’s “Here’s a boatload of cheap money. Throw as much as you can, as fast as you can, at as many as you can, and see what, if any sticks” – that is when you should be looking for where the lifeboats are hanging. Rather, than hanging around on the poop-deck waiting to see if it’s all about to hit a fan.

  Today, far too many businesses are being created, and funded to do nothing more than survive longer cash burn periods to beat out your competitor (not business rival but next inline for funding competition) as to move it closer, and closer to the now coveted unicorn status. (e.g., $1 BILLION market cap potential) And profits, customers, or anything else fundamentally business related be damned. It’s all about getting to IPO and VC cash-out. Period. And the destruction left in the wake of this type of activity at one of the most important levels in the business food chain this time will be even more devastating than it was in the ’90s in my opinion.

  Just imagine the way this period of market mania will be looked back upon. When one of the reasons cited as a clue of a “bubble” will be how many businesses found themselves unable to compete not because of anything fundamental to business processes. Rather, it was due to the fact they had to use 1+1=2 math – as compared to their competition which was not only sanctioned – but encouraged, and rewarded via their stock price because of their ability to make 1+1=__________(what ever you want) via the non-GAAP methodology. Where unprofitable was turned into “We’re killing it!” with a keystroke in a spreadsheet.

  There’s this and a whole lot more being perpetuated within the corporate elite via the cheap money and funding made possible by the Federal Reserve’s reluctance to get off the zero bound. Small business that don’t have the luxury of this accounting methodology as to be rewarded by the capital markets for using it find themselves not only at an uncompetitive advantage – they find themselves out of business sooner – than later. All while the academics scratch their chins and wonder why the issue is getting perpetually worse, not better. It’s near maddening to the business sane. And the ramifications for staying this low for this long are going to be more than profound in my estimation.

  It also shouldn’t be lost on anyone that the financial media is once again in near hysterical jubilation as they’ve announced merger after merger of companies “Getting it done with M&A!” Those companies?

  Time Warner™ once again the focal point of a merger. AOL™ once again in the spotlight for its impending merger. Add to this SalesForce™ another company that without the benefit of non-GAAP reporting can’t make or show a profit is said to be acquired by none other than the “innovation” juggernaut of the last decade – Microsoft™. And last but not least: Housing just reported its best rebound print in over 3 years – as more and more perspective home-buyers without the ability to pay cash outright or make a substantial down-payment are unable to qualify. Not withstanding how fragile the complete structure of the markets in total has now become to just the sheer mention, let alone actual increase of just 1/4 or 1%. Talk about hysteria!

  I guess we’re just back to the old turn a blind eye to anything historical. Remember “It’s different this time.” Nothing to see here, move along, don’t fret, no need for concern. Just remember and repeat three times every time there’s reason for concern when the market drops 200 or 300 points out of the blue only to recover all if not more the next day…

  “The Fed’s got your back, the Fed’s got your back, The……”

  

  

  
  
  

  

• This Is How Little It Cost Goldman To Bribe America's Senators To Fast Track Obama's TPP Bill

  It took just a few days after the stunning defeat of Obama’s attempt to fast-track the Trans Pacific Partnership bill in the Senate at the hands of his own Democratic party, before everything returned back to normal and the TPP fast-track was promptly passed. Why? The simple answer: money. Or rather, even more money.

  Because while the actual contents of the TPP may be highly confidential, and their public dissemination may lead to prison time for the “perpetrator” of such illegal transparency, we now know just how much it cost corporations to bribe the Senate to do the bidding of the “people.” In the Supreme Court sense, of course, in which corporations are “people.”

  According to an analysis by the Guardian, fast-tracking the TPP, meaning its passage through Congress without having its contents available for debate or amendments, was only possible after lots of corporate money exchanged hands with senators. The US Senate passed Trade Promotion Authority (TPA) – the fast-tracking bill – by a 65-33 margin on 14 May. Last Thursday, the Senate voted 62-38 to bring the debate on TPA to a close.

  Those impressive majorities follow months of behind-the-scenes wheeling and dealing by the world’s most well-heeled multinational corporations with just a handful of holdouts.

  Using data from the Federal Election Commission, the chart below (based on data from the following spreadsheet) shows all donations that corporate members of the US Business Coalition for TPP made to US Senate campaigns between January and March 2015, when fast-tracking the TPP was being debated in the Senate.

  The result: it took a paltry $1.15 million in bribes to get everyone in the Senate on the same page. And the biggest shocker: with a total of $195,550 in “donations”, or more than double the second largest donor UPS, was none other than Goldman Sachs.

  

  The summary findings:

  • Out of the total $1,148,971 given, an average of $17,676.48 was donated to each of the 65 “yea” votes.
  • The average Republican member received $19,673.28 from corporate TPP supporters.
  • The average Democrat received $9,689.23 from those same donors.

  The amounts given rise dramatically when looking at how much each senator running for re-election received.

  Two days before the fast-track vote, Obama was a few votes shy of having the filibuster-proof majority he needed. Ron Wyden and seven other Senate Democrats announced they were on the fence on 12 May, distinguishing themselves from the Senate’s 54 Republicans and handful of Democrats as the votes to sway.

  • In just 24 hours, Wyden and five of those Democratic holdouts – Michael Bennet of Colorado, Dianne Feinstein of California, Claire McCaskill of Missouri, Patty Murray of Washington, and Bill Nelson of Florida – caved and voted for fast-track.
  • Bennet, Murray, and Wyden – all running for re-election in 2016 – received $105,900 between the three of them. Bennet, who comes from the more purple state of Colorado, got $53,700 in corporate campaign donations between January and March 2015, according to Channing’s research.
  • Almost 100% of the Republicans in the US Senate voted for fast-track – the only two non-votes on TPA were a Republican from Louisiana and a Republican from Alaska.
  • Senator Rob Portman of Ohio, who is the former US trade representative, has been one of the loudest proponents of the TPP. (In a comment to the Guardian Portman’s office said: “Senator Portman is not a vocal proponent of TPP – he has said it’s still being negotiated and if and when an agreement is reached he will review it carefully.”) He received $119,700 from 14 different corporations between January and March, most of which comes from donations from Goldman Sachs ($70,600), Pfizer ($15,700), and Procter & Gamble ($12,900). Portman is expected to run against former Ohio governor Ted Strickland in 2016 in one of the most politically competitive states in the country.
  • Seven Republicans who voted “yea” to fast-track and are also running for re-election next year cleaned up between January and March. Senator Johnny Isakson of Georgia received $102,500 in corporate contributions. Senator Roy Blunt of Missouri, best known for proposing a Monsanto-written bill in 2013 that became known as the Monsanto Protection Act, received $77,900 – $13,500 of which came from Monsanto.
  • Arizona senator and former presidential candidate John McCain received $51,700 in the first quarter of 2015. Senator Richard Burr of North Carolina received $60,000 in corporate donations. Eighty-one-year-old senator Chuck Grassley of Iowa, who is running for his seventh Senate term, received $35,000. Senator Tim Scott of South Carolina, who will be running for his first full six-year term in 2016, received $67,500 from pro-TPP corporations.

  “It’s a rare thing for members of Congress to go against the money these days,” said Mansur Gidfar, spokesman for the anti-corruption group Represent.Us. “They know exactly which special interests they need to keep happy if they want to fund their reelection campaigns or secure a future job as a lobbyist.

  “How can we expect politicians who routinely receive campaign money, lucrative job offers, and lavish gifts from special interests to make impartial decisions that directly affect those same special interests?” Gidfar said. “As long as this kind of transparently corrupt behavior remains legal, we won’t have a government that truly represents the people.”

  In other news, following last week’s DOJ crackdown on now openly criminal FX market manipulation and rigging by the big banks, in which precisely zero bankers have been arrested, we are happy to announce that “transparently corrupt behavior” in the Senate, and everywhere else, will remain not only legal, but very well funded.

  But what is truly scariest, is just how little it costs corporations to bribe America’s “elected” politicians, and make them serve the best interests of a few billionaire shareholders over the grave of what once used to be America’s middle class.

  

  

  
  
  

  

• How The US Indirectly Armed ISIS With Over 2,300 Humvees

  Curious how and why the US is “boosting” US GDP by selling over $4 billion worth of weapons to Israel, Iran and Saudi Arabia, ostensibly to provide these countries with protection against ISIS (the same ISIS, incidentally, which a leaked document last week admitted had been effectively created by the US)?  Simple: by first “losing” a billion dollars worth of Humvees so that, drumroll, ISIS can be the best-armed “terrorist” force in the middle east, a force whose mere presence will demand billions in subsequent military orders from the US military-industrial complex by all those who are threatened by ISIS.

  AFP reports that Iraqi security forces lost 2,300 Humvee armored vehicles when ISIS overran the northern city of Mosul, Prime Minister Haider al-Abadi said on Sunday.

  “In the collapse of Mosul, we lost a lot of weapons,” Abadi said in an interview with Iraqiya state TV. “We lost 2,300 Humvees in Mosul alone.”

  While the exact price of the vehicles varies depending on how they are armored and equipped, it is clearly a hugely expensive loss that has boosted ISIS’s capabilities.

  Last year, the State Department approved a possible sale to Iraq of 1,000 Humvees with increased armor, machineguns, grenade launchers, other gear and support that was estimated to cost $579 million.

  It is therefore safe to say that 2,300 Humvees would be worth a little over $1 billion: a great investment considering now the US can sell over $4 billion in weapons to countries “terrorized” by those same weapons!

  As AFP reminds us, clashes began in Mosul, Iraq’s second city, late on June 9, 2014, and Iraqi forces lost it the following day to ISIS, which spearheaded an offensive that overran much of the country’s Sunni Arab heartland.

  It was as if ISIS came out of nowhere, and nobody – certainly not the infamous NSA that knows everything that happens in the US but “nothing” of what goes on in the world – had a clue. Not one person.

  The militants gained ample arms, ammunition and other equipment when multiple Iraqi divisions fell apart in the country’s north, abandoning gear and shedding uniforms in their haste to flee.

   

  Iraqi security forces backed by Shiite militias have regained significant ground from ISIS in Diyala and Salaheddin provinces north of Baghdad.

   

  But that momentum was slashed in mid-May when ISIS overran Ramadi, the capital of Anbar province, west of Baghdad, where Iraqi forces had held out against militants for more than a year.

  Best of all, ISIS is literally the gift that will keep on giving: as the CIA director said earlier today “This is going to be a long fight.”

  And if the fight ever seems like it is about to end, well… the US will just “give” ISIS another 2,300 Humvess. 

  

  

  
  
  

  

• How Much More Extreme Can Markets Get?

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  These charts help us understand that a top is not just price, but a reversal in extremes of margin debt, valuation and sentiment.

  In blow-off tops, extremes of valuation, complacency and margin debt can always shoot beyond previous extremes to new extremes. This is why guessing when the blow-off top implodes is so hazardous: extreme can always get more extreme.
   

  Nonetheless, extremes eventually reverse, and generally in rough symmetry with their explosive rise. Exhibit 1 is margin debt: NYSE Margin Debt Hits a New Record High (Doug Short)

  Note the explosive rise in margin debt in the past few months:

  

  At tops, soaring margin debt no longer pushes stocks higher. I've marked up an excellent chart by Doug Short to highlight the diminishing returns of more margin debt at tops.
   

  

  It's clear this same dynamic of diminishing returns is in play now, as margin debt has skyrocketed while the S&P 500 has remained range-bound, with each new high being increasingly marginal.
   

  Exhibit 2 is China's Shenzhen stock exchange. The price-earnings ratio (PE) is a useful gauge of sentiment: when sentiment reaches extremes of euphoria, PEs go through the roof:
   

  

  It appears that the Shenzhen bubble has burst. Latecomers to the bubble party will continue to buy the dips, but the ADX (a measure of trend strength) has been diverging for quite some time, and the MACD is rolling over into a sell signal.
   

  

   

   

  These charts help us understand that a top is not just price, but a reversal in extremes of margin debt, valuation and sentiment. Many observers have an unyielding faith that central banks will never let markets decline ever again. There are four flaws in this blind faith:
   

  1. Central banks did not want bubble markets in 2000 and 2008 to burst, either, but the bubbles popped despite central bank interventions.
   

  2. Extremes can only get more extreme for a limited time. margin debt cannot rise from $507 billion to $5 trillion and then on to $50 trillion (three times the size of the U.S. GDP). The Shenzhen PE ratio cannot rise from 70 to 700.
   

  3. Complex systems cannot be beaten into submission by two simple sticks (central bank liquidity and zero interest rates) forever. Extremes give rise to dislocations that cannot be beaten into submission by central banks for this reason: it is the nature of complex systems to break at the very points that cannot be strengthened or defended by simplistic manipulation.
   

  4. When the speculative frenzy dissipates, central banks will be the only buyers left. Unless the Fed increases its balance sheet from $4.5 trillion to $14.5 trillion in a matter of months, even central bank manipulation will be swamped by sellers exiting bursting-bubble markets.

  

  

  
  
  

  

• "The Fed Has Been Horribly Wrong" Deutsche Bank Admits, Dares To Ask If Yellen Is Planning A Housing Market Crash

  The reason why Zero Hedge has been steadfast over the past 6 years in its accusation that the Fed is making a mockery of, and destroying not only the very fabric of capital markets (something which Citigroup now openly admits almost every week) but the US economy itself (as Goldman most recently hinted last week when it lowered its long-term “potential GDP” growth of the US by 0.5% to 1.75%), is simple: all along we knew we have been right, and all the career economists, Wall Street weathermen-cum-strategists, and “straight to CNBC” book-talking pundits were wrong. Not to mention the Fed.

  Indeed, the onus was not on us to prove how the Fed is wrong, but on the Fed – those smartest career academics in the room – to show it can grow the economy even as it has pushed global capital markets into a state of epic, bubble frenzy, with new all time highs a daily event across the globe, while the living standard of an ever increasing part of the world’s middle-class deteriorates with every passing year. We merely point out the truth that the propaganda media was too compromised, too ashamed or to clueless to comprehend.

  And now, 7 years after the start of the Fed’s grand – and doomed – experiment, the flood of other “serious people”, not finally admitting the “tinfoil, fringe blogs” were right all along, and the Fed was wrong, has finally been unleashed.

  Here is Deutsche Bank admitting that not only the Fed is lying to the American people:

  Truth be told, we think the Fed is obliged to talk up the economy because if they were brutally honest, the economy what vestiges of optimism remain in the domestic sectors could quickly evaporate.

  But has been “horribly wrong” all along:

  At issue is whether or not the Fed in particular but the market in general has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid that they do not. So aside from a data revision tsunami, we would suggest that the Fed has the outlook not just horribly wrong, but completely misunderstood.

   

  … the idea that the economy is “ready” for a removal of accommodation and that there is any sense in it from the perspective of rising inflation expectations and a stronger real growth outlook is nonsense

  And the kicker: it is no longer some “tinfoil, fringe blog“, but the bank with over €50 trillion in derivatives on its balance sheet itself which dares to hint that in order to make a housing-led recovery possible, the Fed itself is willing to crash the housing market!

  … if the single objective was to reduce inflation, regardless of where it came from, then crashing the housing market is certainly one way of going about it…. The dilemma for the Fed is of course that it is precisely the decision not to crash the housing market by doing extraordinary stimulus in the first place that has led to the current outcome of weak ex housing demand and strong housing inflation. The decision is akin to embracing financial repression as an alternative to the uncertainty of asset price deflation and a debt default cycle. If we could reset house prices 30 percent lower and fast forward a few years, the economy would probably be meaningfully more dynamic but it is those few years that might be hairy and no one let alone the Fed would likely stomach the risks.

  Here is the full note from Deutsche Bank which we expect every other primary dealer to copycat in the coming weeks and months now that the truth among the “very serious people” is finally out.

  * * *

  At issue is whether or not the Fed in particular but the market in general has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid that they do not. So aside from a data revision tsunami, we would suggest that the Fed has the outlook not just horribly wrong, but completely misunderstood. And here’s why.

  For many years we have focused on the poor supply side dynamics of US growth and more recently have recognized it as much a global phenomenon when it comes to productivity. And as we know supply always equals demand so invariably there is some “disappointment” in demand side metrics. What we haven’t dwelt on much is whether demand creates supply or, as in Say’s world, does supply create demand. It is very easy to see through the latter’s linkages. Companies have to meet a given demand say but choose to use cheap labor rather than invest for productivity. Productivity may be weaker for longer. Perhaps there is a lack of innovation so a lesser requirement to invest. Perhaps there’s greater depreciation so investment spend may be less impressive on a net basis. Since it takes a while for wages to pick up (need to be nearer full employment), demand doesn’t really strengthen much. Global issues may depress pricing, so this is an additional constraint for the investment outlook. But over time the hope is that under an accommodative monetary policy, full employment is reached, wages rise and companies are encouraged to substitute capital for labor thus boosting productivity and there is a virtuous cycle of rising demand, strengthening expected returns on investment so encouraging still stronger growth. It is not clear that pricing power returns but the profit cycle is supported nevertheless through higher productivity. Now it could be debated that this is just as much about demand driving supply in the sense of the investment cycle. At least though in the context of weak underlying demographics, initially sluggish associated demand plus the lack of innovation explaining weak investment and productivity, it can also be a supply led story.

  However there is also a whole different demand side angle to this that is less to do with the wage-productivity nexus but more to do structural weak consumer demand and the hangover from the housing crisis. This of course will tie out to weaker productivity and therefore weaker wages as well. It starts with the recognition that since the crisis or at least a few years after the initial rebound, consumer demand is decidedly weaker than it was pre crisis. As we highlighted last weak using log real retail sales we can observe a distinct weakening in the post crisis trend, especially in the past couple of years that’s worth almost up to 1 percent. Taking a broader look at consumption, the weakness however is even more protracted in housing services and especially in owner occupied housing. The latter is particularly important because it is the germ of demand for other consumption. Owners typically will furnish their home, buy more “stuff”, maintain the property through other services more aggressively etc. than say tenants. The “multiplier” effects of home ownership are almost certainly stronger than for tenant homes, controlling for age etc. It is therefore concerning that while household formation may be rising, homeownerships rates are still falling.

  What is then striking of course is that if housing consumption is unusually weak, why are housing components of inflation so strong? As the charts show it is quite striking that overall housing inflation in the PCE is almost 3 percent year over year (2.7 percent for owner occupied component) but for owner occupied housing consumption it is the most chronically divergent weaker than all other major consumption categories. Tenant home consumption is in line with trend despite also having a very strong deflator. Effectively we can think of housing as being in “stagflation”.

  Of course the obvious conclusion is that it is precisely because owner occupied housing is expensive in absolute terms that there is limited consumption in absolute terms that drives rental consumption relatively higher with also higher rents. The imputed rental for owner occupied housing comes from an adjusted rental series for tenancies so the results are consistent i.e. expensive rents and owner occupied, trend consumption for tenant housing consumption and below trend for owner occupied. In turn this then spills over into below trend for consumption ex housing. Note that weak consumption ex housing then also implies weak inflation in those sectors.

  

  The actual numbers are impressive. Owner occupied consumption in the PCE is almost half the trend since 2010 compared with the whole sample period 1990-2015q1. Annualized it is growing around 0.8 percent compared with over 2.5 percent for the whole period. It represents around 11 percent of total consumption, so alone shaves 0.1 to 0.15 percent off the trend realized real GDP growth. For the rest of consumption, including the other components of housing the trend is better but still disappointing since 2010. It drops from around 3 percent to 2.4 percent so in GDP terms effectively shaving 0.4 to 0.5 percent from trend GDP. Note that for tenant housing the trend is stronger, as we would expect but quite volatile. Currently running around 2.6 percent versus the whole sample trend of only 1.8 percent. However, interestingly recently the rental  trend seems to be a little weaker, suggesting high rents themselves are exerting a downward pressure on housing consumption.

  

  There are other interesting observations to note. For example, goods PCE alone isn’t too far off trend but is a little lower, around 3.2 percent versus 3.6 percent for the whole sample, while healthcare consumption is bang on an unchanged trend.

  

  The next charts show the housing and inflation ex housing deflators. Core CPI ex shelter is pretty much still at post crisis lows, less than 1 percent year over year. Consistent with the PCE analysis above, the PCE ex housing the deflator is zero. The deflator ex housing, ex energy is less than 1.2 percent year, but falling. The housing deflators, in line CPI housing and OER are close to 3 percent year over year.

  

  This brings us to the crux of the analysis. If the inflation “problem” or risk is in housing but the weakness in demand also stems from housing, what on earth is the Fed, or anyone for that matter, thinking in terms of the logic for removing accommodation? The inflation problem is not being created by excess demand for housing i.e. a housing boom because that would show up in terms of excess demand for consumption ex housing. Instead it is the quirky result of owner occupied housing being too “expensive” relative to rental housing which pushes up overall housing inflation via rents.

  Of course if the single objective was to reduce inflation, regardless of where it came from, then crashing the housing market is certainly one way of going about it; but it would only work if it forced homeowners to sell their homes and become renters, assuming house prices did actually fall in the process. Simply keeping house prices elevated and having new supply come onto the market even if it all goes into the rental sector won’t necessarily help if house prices are  lofty since rents may stay robust. This is effectively what has been going on anyway.

  

  The dilemma for the Fed is of course that it is precisely the decision not to crash the housing market by doing extraordinary stimulus in the first place that has led to the current outcome of weak ex housing demand and strong housing inflation. The decision is akin to embracing financial repression as an alternative to the uncertainty of asset price deflation and a debt default cycle. If we could reset house prices 30 percent lower and fast forward a few years, the economy would probably be meaningfully more dynamic but it is those few years that might be hairy and no one let alone the Fed would likely stomach the risks.

  

  The alternative is to accept elevated house prices as a byproduct of the stimulus and look to the supply side of housing to address high rents. If we consider housing completions as our supply of housing variable, it is clear that the only thing that really correlates with new supply is the change in the debt income ratio of the household sector. Balance sheet expansion is good for housing supply. Importantly, affordability doesn’t just have no relationship with, but if anything, is inversely correlated with supply. Housing affordability does not solicit new supply.

  Higher house prices do solicit some new supply, although there is a very large gap now in that supply has been very slow to respond to higher prices. The real issue is that housing supply is linked to household balance sheet expansion- proxied by the change in the debt income ratio. Since this has been growing slowly, so has supply been slow to come back on tap.  Households are still feeling balance sheet constrained.

  So that leaves two policy choices. One is to wait much longer for supply to catch up with elevated house prices but “hope” that prices don’t become further elevated. (We can give a nod to the financial stability camp; there is a case for no more QE and maybe at some point the odd rate hike). The second would be to wait longer for further improvements in the debt  income ratio i.e. the propensity for households to resume some re-leveraging. Now of course that can come from stronger incomes but there seems to be a little of a catch- 22 embedded in that. The other, is to give some regulatory relief to  encourage more mortgage lending, even rolling back on the 80 percent LTV formula for example. However that is about as likely as getting a GDP forecast correct.

  Either way, the idea that the economy is “ready” for a removal of accommodation and that there is any sense in it from the perspective of rising inflation expectations and a stronger real growth outlook is nonsense. There is some logic in giving up on expecting normalization to previous growth trends as a prelude to any rate rise (Yellen’s 2.5 percent threshold). This is reflected in what was then but not now a stronger supply side economy and a matching demand side, consistent with a greater share of consumption in owner occupied housing. But then rates are naturally very constrained in the normalization process and type 2 errors abound if the objectives of any lift off are not clearly understood. Note that Yellen’s 2.5 percent seems low in that all you need on a year over year basis is 2.5 percent quarterly growth for 2015h2 based on the Atlanta Fed’s current tracking for q2 GDP. However if the above analysis is right, this may still be too high. Moreover, note that for the past five years 2 ½ percent has been somewhat elusive anyway with the average through to 2015q2 being 2.2 percent and only above 2 ½ percent 9 out of 22 quarters, albeit 4 of them in the last 8 quarters. But please let’s not call this transitory! (Truth be told, we think the Fed is obliged to talk up the economy because if they were brutally honest, the economy what vestiges of optimism remain in the domestic sectors could quickly evaporate).

  Meanwhile in the medium term it is possible that if there is an exogenous positive productivity shock, consumption ex housing trend can bump higher, perhaps even bumping owner occupied consumption higher too via the improved debt income dynamic. Though, our indicators suggest that too is still not on the horizon.

  In general the Fed is necessarily bound to do very little, if anything. And if they insist on tying policy blindly to ill defined expectations on say inflation or full employment, the danger of a gross policy error builds. In the extreme imagine that core CPI was 2 ½ percent but it was all in housing inflation at 4 percent with full employment would they really think it a good idea to remove all “accommodation” with rates at 2 -3 percent. The scary thing is some people would say yes. The scarier thing would be the resulting economic crisis.

   

  ---

   

  Deutsche Bank continues, but this is the punchline. And all of this, of course, is or at least should be well known to Zero Hedge readers. As for the key message here is, it is simple: it is not just the “fringe blogs” who are telling the truth anymore, it is now the turn of the “very serious people”, and as everyone knows, once one dares to call the emperor naked, soon everyone else does. Which, incidentally, would be the final disaster for the Fed, which for the past several years has had just two things: a printer and “credibility”… if only among the “very serious people.”

  Now, the latter is about to evaporate. Which means all the Fed will soon have is a printer, which it will have no choice but to operate on turbo until such time as the residents of the Marriner Eccles building are driven out by angry, if armed, citizens.

   

  ---

   

  And perhaps just to confirm once again we were right all along, in yet another amusing incident involving a Federal Reserve economist, yesterday none other than St. Louis Fed’s David Andolfatto, in an oddly defensive moment, had this to tweet yesterday:

  

  David, of course, is the same St. Louis Fed career economist who in November accused Zero Hedge of being “dickheads“, something for which he promptly apologized thereafter.

  Our response to the St. Louis Fed economist is simple:

  No, just the collapse of the US economy https://t.co/lBochpOR5q

  — zerohedge (@zerohedge) May 30, 2015

  The problem for Andoflatto, and his equally clueless peers across the US central planning bureau also known as the Fed, is that what has been obvious to us from day one, is finally spreading among the very people whom the Fed decided to bail out while crushing the middle class it was supposed to protect.

  As for Andolfatto’s latest tweet faux pas, he promptly deleted it. Because that’s how the Fed rolls.

  

  

  
  
  

  

• The New Normal Graduate's Survival Guide

  The American Dream…

   

  

   

  Source: Townhall via Sunday Funnies

  

  

  
  
  

  

• And Now The Bull's Turn: Jeremy Siegel Explains "No Way There Is A Bubble, No Signs Of Recession"

  Having detailed the less status-quo-sustaining side of things, thanks to some frankness from Nobel Prize winner Robert Shiller, who warned "unlike 1929, this time everything – Stocks, Bonds and Housing – is overvalued," we thought it only fair-and-balanced to illustrate the alternative perspective and who better than Jeremy Siegel to deliver it. In his anti-thesis of Shiller's facts, Siegel unleashes textbook dogma to pronounce, "in no way do current levels quality as a bubble", that stock returns should remain supported by fundamentals, there is no sign of a recession in the next 18 months, The Dow's fair-value currently is 20,000, and "not much" could dissuade him from holding stocks.

  Below is an interview he gave to Goldman Sachs' Allison Nathan

  Allison Nathan: You have long argued the benefits of a buy-and¬hold strategy for stocks. But do stocks look overvalued today?

  Jeremy Siegel: Looking at current P/E ratios and interest rates, I find that stocks are only slightly above their historical valuations today. The average long-run P/E ratio of the S&P 500, going back to the 19th century, is about 15.0x earnings. Over the last 60 years, in the post-war period, the S&P 500 has averaged around 16.5x earnings. Today it is between 17.5 and 18x. So it is just a bit above its historical level. That level is completely justified; in fact, even perhaps a higher level is justified, given the low level of interest rates.

  Allison Nathan: What is your response to those who say the US equity market is in a bubble or on its way?

  Jeremy Siegel:   I completely disagree. A bubble implies a very significant overvaluation. The stock market was most certainly in a bubble in March of 2000, when the S&P 500 was selling at 30x earnings, and the technology sector of the S&P 500 was selling at nearly 100x earnings. In no way do current levels that are nowhere near those highs qualify as a bubble.
    
  Allison Nathan: The CAPE ratio created by your longtime friend and colleague—Robert Shiller—and often viewed as a useful valuation tool is showing material overvaluation. What are your thoughts?

  Jeremy Siegel: I have great respect for Bob Shiller and his CAPE ratio, which uses a 10-year average of earnings against price to assess the valuation of a company. The problem is that starting in the late 1990s, Standard & Poor's changed the way that it computed earnings; it went to a mark-to-market orientation, which sharply depressed earnings in recessions. Since the last ten years of earnings encompass the Great Recession, when earnings plunged close to zero, earnings appear far below what I think they should be, which inflates the CAPE ratio way above what I think is the true value. To adjust for this problem, I have done some work instead using a 10-year average of the National Income Product Accounts (NIPA) income estimates rather than the S&P's earnings estimates. Once you make that substitution you get far less overvaluation of the market now than you do under Shiller's valuation.

  {ZH: It's Different This Time… "the old metrics don't work…"]

  

  Allison Nathan: Is the real bubble in the bond market?

  Jeremy Siegel: With interest rates generally at all-time low levels and likely set to rise, I think it is fair to say that bonds are now overvalued and much more so than stocks. However, I do not see short or long-term interest rates returning to anywhere near their post-World War II average. In fact, it's my feeling that we will see rates remain around 2.0% on the short end, maybe even a little less; and 3.0 to 3.5% on the long end. Given that there are some very persuasive reasons why interest rates are low and will stay relatively low in the future, I wouldn't necessarily call the bond market a bubble.

  Allison Nathan: To what extent does valuation impact future equity returns?

  Jeremy Siegel: I find that the future real returns on stocks are linked to the earnings yield on the market. And the earnings yield on the market is nothing more than the reciprocal of the price/earnings ratio, E over P. So a P/E of 18 suggests a 5.5% earnings yield or real return; a P/E of 20 suggests a 5.0% real return. So as stocks sell for higher prices, it does mean their forward-looking returns will fall short of the long-term average, which I have found to be about 6.5% per year after inflation.

  Allison Nathan: How much more will multiples expand?

  Jeremy Siegel: That depends on what happens to interest rates. Although interest rates are going to rise, I think that rise will be moderate. And therefore I expect equities to continue to sell above their long-term average valuation ratios. I definitely think that a 20 P/E ratio is justified by the current level of interest rates. That does not mean these levels will be reached anytime soon; it may take a year or two to reach that level. But I do still see upside to the stock market from expanding P/E ratios over the next 12 months.

  Allison Nathan: Does the fact that US profit margins are at all-time highs concern you?

  Jeremy Siegel: It doesn't really worry me. There are several reasons for very high profit margins, which actually did decline a bit last quarter. One is the increased percent of foreign sales of US corporations. Because tax rates are lower outside of the United States, higher foreign sales raise profit margins. Also, the technology sector, which has a high profit margin because of the intellectual capital involved, is becoming a bigger part of the S&P 500. Very low interest rates and relatively low leverage at firms has also helped profitability. In most cases, these factors completely explain the record-high profit margins and are unlikely to reverse anytime soon. I think that we will see secularly higher margins because of the interest rate structure and the percent of foreign sales for many years to come.

  Allison Nathan: How much upside to stock index levels do you expect?

  Jeremy Siegel: I think that the fair market value of the Dow, given current circumstances, is about 20,000. We are at roughly 18,000 today, which implies more than a 10% increase in prices. Again, we may not get that in the next six or even 12 months. But I do think that given the likely persistence of relatively low interest rates over the next several years, a 20,000 level on the Dow can certainly be justified.

  Allison Nathan: If interest rates stayed where they are today, and the Dow reached 20,000 within a couple of months—crazier things have happened—would you advise investors to sell their stocks?

  Jeremy Siegel: I think that you would need an improvement in what have been some very disappointing earnings numbers over the last six months in order to see that kind of move. But even if we did, I would not recommend that people sell. At that point, you would have only reached fair market value, depending on your expectations for interest rates and earnings into the future. So I don't think we would be in a dangerous or bubbly situation. Of course, stocks can be tremendously volatile in the short run. So even though the fair value might be 20,000, the index may fall to 17,000, or may rise to 23,000 in the short run. There can be a lot of variation around the justified market value.

  Allison Nathan: How concerned are you about the prospect of a meaningful correction in the near term, perhaps triggered by the approach of US rate hikes?

  Jeremy Siegel: The market has pushed off its expectations for Fed liftoff to September. Any news that the Fed will hike earlier will be disturbing to the market. And we have not had a correction in the market—meaning 10% or more—for many, many years. I would not have been altogether surprised if one had happened in the first half of this year, but so far we have held in very well. Investors are looking forward to an earnings improvement, getting out of the relative slump that we saw in the first quarter. And so as long as the Fed's timetable does not seem to accelerate to a June increase, I would not expect a 10% correction in the near term. But if we did see a correction, I would view it as a buying opportunity.

  Allison Nathan: What else might trigger a correction beyond interest rate risk?

  Jeremy Siegel: Another significant leg of appreciation in the US dollar would be bearish for US equities, which are already contending with a 20% increase over the last year. OH prices have also started to rise again. If Brent crude oil stays in the $60 to $70 range, I think that would be healthy for the market in the long run. But there has been so much volatility in the oil price that that could also foster volatility in the equity market.

  Allison Nathan: What about a scenario of continued weak economic growth and rate hikes pushed off into 2016? How vulnerable would that leave the equity market?

  Jeremy Siegel: In that scenario, the risk would be on the profit side rather than on the interest rate side. The impact on the US equity market would depend on the source of the disappointment and whether it was just a US slowdown or a global slowdown. But if the Fed recognizes the slowdown and pushes off tightening, that would obviously moderate any correction in the equity market. Certainly a recession would drive down equity prices. But there are just no signs at all that I see of a recession in the next 12 to 18 months.

  *  *  *

  [ZH: nope none at all…]

  Retail Sales are weak – extremely weak. Retail Sales have not dropped this much YoY outside of a recession…

  

   

  And if Retail Sales are weak, then Wholesalers are seeing sales plunge at a pace not seen outside of recession…

  

   

  Which means Factory Orders are collapsing at a pace only seen in recession…

  

   

  And Durable Goods New Orders are negative YoY once again – strongly indicative of a recessionary environment…

  

   

  Which is not going to improve anytime soon since inventories have not been this high relative to sales outside of a recession

  

   

  In fact, the last time durable goods orders fell this much, The Fed launched QE3 – indicating clearly why they desperately want to raise rates imminently… in order to have some non-ZIRP/NIRP ammo when the next recession hits.

  And just in case you figured that if domestic prosperity won't goose the economy, Chinese and Japanese stimulus means the rest of the world will save us… nope!! Export growth is now negative… as seen in the last 2 recessions.

  

   

  And deflationary pressures (Import Prices ex-fuel) are washing upon America's shores at a pace not seen outside of a recession…

  

  *  *  *
  Allison Nathan: What do you make of the boost to equity prices from large share buyback programs? Does that concern you at all?

  Jeremy Siegel: I am very favorable towards buybacks. I think they tell you that firms are making good profits, which they want to return to shareholders. It also means that firms don't see a lot of very profitable opportunities to invest in right now, given slow global GDP growth. But that's not necessarily bad. Giving cash back to shareholders is a very effective way to generate value in the equity market. And with the substantial amount of slack in the global economy today, I would worry that expansion in plant equipment would be overinvesting, which would not be a good use of shareholder money. The reality is that there is not a lot of persuasive technology for firms to invest in today. But I view that as a temporary pause and not necessarily detrimental; if world demand expands or new technologies emerge that would be profitable for companies, I am confident that they would deploy cash effectively for shareholders.

  Allison Nathan: Do you find foreign equity markets even more compelling than the US market?

  Jeremy Siegel: I think that European equities are persuasive right now. I do believe that Euro depreciation is largely over; I expect the EUR/$ to trade in the 1-1.10 range in the future. And European equity valuations have increased dramatically. They were selling 10-12x earnings, and are now selling around 15¬17x. But that is still about 10% below US levels. Japan also looks relatively attractive. Although Japanese stock prices have increased tremendously, so have earnings. So Japanese P/E ratios remain around 15-17x earnings, which is a compelling range given current interest rates. And emerging markets in particular could be the best performing markets in the next three to five years given that their valuations have declined significantly in recent corrections and that their currencies are now selling at a very reasonable price relative to the dollar.

  Allison Nathan: So would you recommend investors overweight emerging markets and/or foreign equity markets in their portfolios today?

  Jeremy Siegel: It depends on risk preferences. But I would still generally recommend an allocation of roughly 50% US, 25% non-US developed market and 25% emerging markets.

  Allison Nathan: What—if anything—would dissuade you from holding equities over the medium term?

  Jeremy Siegel: Not much. There is always the potential for unexpected shocks such as terrorist attacks or natural disasters that could hit stocks dramatically. That is one of the reasons why many people shy away from them. But it is also the reason why investors who are brave enough to hold them through tough times end up with superior returns. And today I believe that prices are low enough that investors will likely be paid quite handsomely over time to hold risk in equities.

  [ZH: yep, everything looks good here…]

  

  

  

  
  
  

  

• John Kerry Goes Biking In France, Hits Curb, Breaks Leg; Will Fly Back To US In "Specially Outfitted Aircraft"

  Over the years, many have tried to prevent John Kerry from inserting his foot in his mouth and failed. Today, none other than Kerry himself achieved just that, both literally and metaphorically. America’s Secretary of State went biking in the French Alps when he hit a curb, and broke his femur. Not to worry: he is expected to make a full recovery and was in good spirits, according to John Kirby. And just to make sure of that, US taxpayers will be invoiced a little over a million so that a specially equipped airplane picks up the SecState “to ensure he remains comfortable and stable throughout the flight.”

  

  The accident took place in Scionzier, France, some 40km (25 miles) south-east of the Swiss border.

  The Dauphine Libere, a local newspaper, said Kerry fell near the beginning of his ride to the famed mountain pass called the Col de la Colombiere, which has been a route for the Tour de France more than a dozen times.

  

  It appeared Kerry is just as biking challenged as he is at negotiating international politics: according to the AP, he broke his leg after striking a curb, and scrapped the rest of a four-nation trip that included an international conference on combating the Islamic State group.

  “Paramedics and a physician were on the scene with the secretary’s motorcade at the time of the accident,” the state department said.

  “The secretary is stable and never lost consciousness, his injury is not life-threatening and he is expected to make a full recovery,” Kirby said in a statement.

  This is not the first time the 71 year old Kerry has seemingly risked his life by going on a bike ride: Kerry’s cycling rides have become a regular occurrence on his trips. He often takes his bike with him on the plane and was riding that bicycle Sunday.

  During discussions in late March and early April between world powers and Iran, Kerry took several bike trips during breaks. Those talks were in Lausanne, Switzerland, and led to a framework agreement.

  Even better: the “threat” of loose gravel had been telegraphed prior to Kerry’s big ride:

  Right around the time of his fall, a Twitter feed about local driving conditions warned of the danger due to gravel along the pass. But U.S. officials said there was no gravel on the road where the accident occurred. According to the newspaper, some Haute Savoie officials were with Kerry at the time, including the head of the region.

  The top diplomat, however, was above such petty warnings. And now, US taxpayers will have to shelve out a couple extra million because the banged up SecState is now has to fly back to the US aboard a specially eqipped plane “to ensure he remains comfortable and stable throughout the flight,” Kirby said. “Its use is nothing more than a prudent medical step on the advice of physicians.”

  Why the need to spend millions more? Because Kerry’s regular plane was returning to the United States carrying much of his staff and reporters who accompanied on the trip. And now, that plane too will have to fly back again. One way trip cost to US taxpayers: a little over $1 million.

  As a result of Kerry’s dramatic self-inflicted injury, the world just may be clueless how to defend itself against the persistent, ubiquotous threat of a US-created ISIS.

  The prospect of a lengthy rehabilitation could hamper the nuclear talks and other diplomatic endeavors. Even if Kerry does not need surgery, it was not immediately known when he could fly again after returning to the United States.

   

  Kerry has been the lead negotiator in several marathon sessions with Iran going back to 2013. The injury could affect other potential trips, such as one to the Cuban capital to raise the flag at a restored U.S. Embassy.

   

  As for the current trip, Kerry had planned to travel to Madrid on Sunday for meetings with Spain’s king and prime minister, before spending two days in Paris for an international gathering to combat IS.

   

  He will participate in the Paris conference remotely, Kirby said.

  At least the Iran “nuclear deal” which was going nowhere fast, and was certainly not going to have a conclusion by June 30, will have an official excuse to be extended indefinitely once again.

  As for the added expenditures from the cost of the Kerry emergency “airlift” which the US government could have used to actually benefit humanity in a myriad of other ways, just consider it a boost to double-seasonally adjusted GDP.

  

  

  
  
  

  

• Defiant Tsipras Warns European Leaders They Are "Making A Grave Mistake"

  We’ve said repeatedly that negotiations between Greece and the troika are just as much about politics as they are about economics although, in the final analysis the two are inextricably related especially as it relates to the anti-austerity contagion in the EU. In “Democracy Under Fire: Troika Looks To Force Greek Political ‘Reshuffle’” we said the following about the “institutions’” bargaining stance:

  It is becoming increasingly clear that the Syriza show will ultimately have to be canceled in Greece (or at least recast) if the country intends to find a long-term solution that allows for stable relations with European creditors, but as we’ve noted before, it may be time for Greeks to ask themselves if binding their fate to Europe is in their best interests given that some EU creditors seem to be perfectly fine with inflicting untold economic pain upon everyday Greeks if it means usurping the ‘radical leftists.’ 

  We also highlighted the following set of possible outcomes projected by Barclays:

  Political change could emerge through: 1) a government re-shuffle with more radical members exiting; 2) a referendum; or 3) snap elections. We think that the first scenario is the most likely, which would seem the least disruptive, allowing Greece to ‘return’ to a programme agreement before end-June. Importantly, we think that the Eurogroup could find ways to bridge temporary funding gaps (eg, by disbursing SMP profits or raising the T-bill ceiling), if it deemed the prospects for successfully finalising programme negotiations were good.

  With negotiations running into the eleventh hour ahead of a Friday IMF payment and with everyone’s patience running dangerously thin, it appears as though the situation described above is playing out almost to a tee. 

  On Sunday, PM Alexis Tsipras penned a lengthy statement expressing his frustration at creditors’ insistence on presenting what he calls “absurd proposals” even as the Greek delegation has gone most of the way towards meeting the troika’s demands. He also questions the utility of the “coordinated” leaks from certain EU and IMF officials regarding a lack of progress, hitting back against those who have in the past advised the Greek government against leaking statements to the press and tacitly suggesting that there is indeed a behind-the- scenes effort to spark a terminal bank run in order to force Syriza into conceding its entire mandate (something we’ve said time and again). Here are the highlights:

  On 25th of last January, the Greek people made a courageous decision. They dared to challenge the one-way street of the Memorandum’s tough austerity, and to seek a new agreement. A new agreement that will keep the country in the Euro, with a viable economic program, without the mistakes of the past…

   

  Doing so requires a mutually beneficial agreement that will set realistic goals regarding surpluses, while also reinstating an agenda of growth and investment. A final solution to the Greek problem is now more mature and more necessary than ever…

   

  Many, however, claim that the Greek side is not cooperating to reach an agreement because it comes to the negotiations intransigent and without proposals…

   

  Let’s be clear:

   

  The lack of an agreement so far is not due to the supposed intransigent, uncompromising and incomprehensible Greek stance.

   

  It is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people, despite the public admission of the three Institutions that necessary flexibility will be provided in order to respect the popular verdict.

   

  What is driving this insistence?

   

  My conclusion…  is that the issue of Greece does not only concern Greece; rather, it is the very epicenter of conflict between two diametrically opposing strategies concerning the future of European unification.

   

  The first strategy aims to deepen European unification in the context of equality and solidarity between its people and citizens.

   

  The second strategy seeks precisely this: The split and the division of the Eurozone, and consequently of the EU.

   

  The first step to accomplishing this is to create a two-speed Eurozone where the “core” will set tough rules regarding austerity and adaptation and will appoint a “super” Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism.

   

  For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency.

   

  Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim. To some, this represents a golden opportunity to make an example out of Greece for other countries that might be thinking of not following this new line of discipline.

  If you think that sounds like precisely what we have been saying in these pages for months you’d be right.

  Tsipras concludes as follows:

  Which strategy will prevail? The one that calls for a Europe of solidarity, equality and democracy, or the one that calls for rupture and division?

   

  If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”.

  Tsipras is thus acutely aware of the fact that the negotiations between his government and the troika are now considered by both creditors and by sympathetic political parties across the EU periphery as a testing ground for the notion that threatening the idea of euro indissolubility can be used as a bargaining chip on the way extracting austerity concessions from the IMF and Brussels. 

  So what happens next? As Barclays notes, a government reshuffle could be the most likely scenario with the more radical members of Syriza staging an open revolt and forcing Tsipras to form a new government, an outcome which would suit the troika just fine and which would prove that despite the PM’s extreme misgivings about the subversion of the democratic process, the country’s creditors will ultimately succeed in forcing Greeks to decide between an economic catastrophe that will likely be orders of magnitude greater than what they faced in the past and remaining free to decide for themselves how they want to be governed. 

  Or, visually…

  

  Indeed, this scenario has already begun to play out. The Telegraph has more:

  Greek prime minister Alexis Tsipras is facing open rebellion in his ruling Syriza party over Greece’s future in the eurozone, raising the spectre of snap elections being called as early as this month.

   

  The extreme “Left Platform” faction of Syriza, who make up a third of the party’s membership, have promised to defy creditor powers, and called for a reinstitution of the drachma, as the government enters its fifth month of arduous bail-out negotiations.

   

  Syriza member Stathis Kouvelakis, who has led the insurrection, has vowed to end his country’s ritual “humiliation” at the hands of the International Monetary Fund, European Commission, and European Central Bank.

   

  “It has become now clear that the ‘institutions’ are not striving for what some are calling an ‘honourable compromise’” said Mr Kouvelakis, in a statement…

   

  Latest polling shows that 58pc of Syriza supporters would prefer to return to the drachma rather than continue implementing Troika austerity measures…

   

  The insurrection poses a domestic headache for Mr Tsipras, who will have to pass any bail-out agreement though his country’s 300-member parliament.

   

  Holding only a 12-seat majority, failure to ratify an agreement would trigger a snap election and likely lead to an extreme Left breakaway, said Miranda Xafa, a Greek economist and senior scholar at the Center for International Governance Innovation.

   

  “There are indications that Mr Tsipras is ready to ditch his extremists should he lose a vote, but it will be very hard for him to come up with a face saving deal,” said Ms Xafa…

   

  “In any new election scenario, Syriza would be split and the Left wing would likely break off to form a separate party. Mr Tsipras would have to find new coalition partners,” added Ms Xafa.  

  As a reminder, it was just last week that the country came within 20 votes of backing a euro exit. 

  In a surprisingly close vote showing just how deeply the ruling Greek Syriza party has splintered, the hard line “Left Platform” a faction within Syriza, proposed that Greece stop paying its creditors if they continue with “blackmailing tactics” and instead seek “an alternative plan” for the debt-racked country. Its motion called for the government to default on the IMF loans rather than compromise to creditor demands. The proposal was narrowly rejected with 95 people voting against and 75 in favor. With a vote as close as that, the genie of the full-blown dissent within Syriza, which has a tiny majority of just 12 seats in Greece’s 300 seat partliament, is out of the bottle which could mean that the Troika’s long sought after goal of pushing Greece into a political crisis, may be just around the corner.

  What seems clear from the above is that this situation cannot be resolved without some manner of political (and possibly social) upheaval in Greece. While we do not yet know what Greek citizens will do in the event Tsipras strikes a deal that entails more austerity but averts a euro exit, what we do now know is that some members of Syriza are determined to stick to the campaign promises that got them elected in January and given that those promises have proven utterly incompatible with what the troika wants to hear on the way to bailing the country out (again), a political shakep seems virtually assured as it is unlikely Tsipras will risk an outright default and the economic consequences that will invariably accompany it. 

  Here’s a useful flow chart that maps the possibilities…

  

  …and here’s the latest opinion poll…

   

  Stay tuned — things just got a lot more interesting in Athens. 

  *  *  *

  Full statement from Tsipras:

  On 25th of last January, the Greek people made a courageous decision. They dared to challenge the one-way street of the Memorandum’s tough austerity, and to seek a new agreement. A new agreement that will keep the country in the Euro, with a viable economic program, without the mistakes of the past.

  The Greek people paid a high price for these mistakes; over the past five years the unemployment rate climbed to 28% (60% for young people), average income decreased by 40%, while according to Eurostat’s data, Greece became the EU country with the highest index of social inequality.

  And the worst result: Despite badly damaging the social fabric, this Program failed to invigorate the competitiveness of the Greek economy. Public debt soared from 124% to 180% of GDP, and despite the heavy sacrifices of the people, the Greek economy remains trapped in continuous uncertainty caused by unattainable fiscal balance targets that further the vicious cycle of austerity and recession.

  The new Greek government’s main goal during these last four months has been to put an end to this vicious cycle, an end to this uncertainty.

  Doing so requires a mutually beneficial agreement that will set realistic goals regarding surpluses, while also reinstating an agenda of growth and investment. A final solution to the Greek problem is now more mature and more necessary than ever.

  Such an agreement will also spell the end of the European economic crisis that began 7 years ago, by putting an end to the cycle of uncertainty in the Eurozone.

  Today, Europe has the opportunity to make decisions that will trigger a rapid recovery of the Greek and European economy by ending Grexit scenarios, scenarios that prevent the long-term stabilization of the European economy and may, at any given time, weaken the confidence of both citizens and investors in our common currency.

  Many, however, claim that the Greek side is not cooperating to reach an agreement because it comes to the negotiations intransigent and without proposals.

  Is this really the case?

  Because these times are critical, perhaps historic–not only for the future of Greece but also for the future of Europe–I would like to take this opportunity to present the truth, and to responsibly inform the world’s public opinion about the real intentions and positions of Greece.

  The Greek government, on the basis of the Eurogroup’s decision on February 20th, has submitted a broad package of reform proposals, with the intent to reach an agreement that will combine respect for the mandate of the Greek people with respect for the rules and decisions governing the Eurozone.

  One of the key aspects of our proposals is the commitment to lower – and hence make feasible – primary surpluses for 2015 and 2016, and to allow for higher primary surpluses for the following years, as we expect a proportional increase in the growth rates of the Greek economy.

  Another equally fundamental aspect of our proposals is the commitment to increase public revenues through a redistribution of the burden from lower and middle classes to the higher ones that have effectively avoided paying their fair share to help tackle the crisis, since they were for all accounts protected by both the political elite and the Troika who turned “a blind eye”.

  From the very start, our government has clearly demonstrated its intention and determination to address these matters by legislating a specific bill to deal with fraud caused by triangular transactions, and by intensifying customs and tax controls to reduce smuggling and tax evasion.

  While, for the first time in years, we charged media owners for their outstanding debts owed to the Greek public sector.

  These actions are changing things in Greece, as evidenced the speeding up of work in the courts to administer justice in cases of substantial tax evasion. In other words, the oligarchs who were used to being protected by the political system now have many reasons to lose sleep.

  In addition to these overarching goals that define our proposals, we have also offered highly detailed and specific plans during the course of our discussions with the institutions that have bridged the distance between our respective positions that separated us a few months ago.

  Specifically, the Greek side has accepted to implement a series of institutional reforms, such as strengthening the independence of the General Secretariat for Public Revenues and of the Hellenic Statistical Authority (ELSTAT), interventions to accelerate the administration of justice, as well as interventions in the product markets to eliminate distortions and privileges.

  Also, despite our clear opposition to the privatization model promoted by the institutions that neither creates growth perspectives nor transfers funds to the real economy and the unsustainable debt, we accepted to move forward, with some minor modifications, on privatizations to prove our intention of taking steps towards approaching the other side.

  We also agreed to implement a major VAT reform by simplifying the system and reinforcing the redistributive dimension of the tax in order to achieve an increase in both collection and revenues.

  We have submitted specific proposals concerning measures that will result in a further increase in revenues. These include a special contribution tax on very high profits, a tax on e-betting, the intensification of checks of bank account holders with large sums – tax evaders, measures for the collection of public sector arrears, a special luxury tax, and a tendering process for broadcasting and other licenses, which the Troika coincidentally forgot about for the past five years.

  These measures will increase revenues, and will do so without having recessionary effects since they do not further reduce active demand or place more burdens on the low and middle social strata.

  Furthermore, we agreed to implement a major reform of the social security system that entails integrating pension funds and repealing provisions that wrongly allow for early retirement, which increases the real retirement age.

  These reforms will be put into place despite the fact that the losses endured by the pension funds, which have created the medium-term problem of their sustainability, are mainly due to political choices of both the previous Greek governments and especially the Troika, who share the responsibility for these losses: the pension funds’ reserves have been reduced by 25 billion through the PSI and from very high unemployment, which is almost exclusively due to the extreme austerity program that has been implemented in Greece since 2010.

  Finally–and despite our commitment to the workforce to immediately restore European legitimacy to the labor market that has been fully dismantled during the last five years under the pretext of competitiveness–we have accepted to implement labor reforms after our consultation with the ILO, which has already expressed a positive opinion about the Greek government’s proposals.

  Given the above, it is only reasonable to wonder why there is such insistence by Institutional officials that Greece is not submitting proposals.

  What end is served by this prolonged liquidity moratorium towards the Greek economy? Especially in light of the fact that Greece has shown that it wants to meet its external obligations, having paid more than 17 billion in interest and amortizations (about 10% of its GDP) since August 2014 without any external funding.

  And finally, what is the purpose of the coordinated leaks that claim that we are not close to an agreement that will put an end to the European and global economic and political uncertainty fueled by the Greek issue?

  The informal response that some are making is that we are not close to an agreement because the Greek side insists on its positions to restore collective bargaining and refuses to implement a further reduction of pensions.

  Here, too, I must make some clarifications:

  Regarding the issue of collective bargaining, the position of the Greek side is that it is impossible for the legislation protecting employees in Greece to not meet European standards or, even worse, to flagrantly violate European labor legislation. What we are asking for is nothing more than what is common practice in all Eurozone countries. This is the reason why I recently made a joint declaration on the issue with President Juncker.

  Concerning the issue on pensions, the position of the Greek government is completely substantiated and reasonable. In Greece, pensions have cumulatively declined from 20% to 48% during the Memorandum years; currently 44.5% of pensioners receive a pension under the fixed threshold of relative poverty while approximately 23.1% of pensioners, according to data from Eurostat, live in danger of poverty and social exclusion.

  It is therefore obvious that these numbers, which are the result of Memorandum policy, cannot be tolerated–not simply in Greece but in any civilized country.

  So, let’s be clear:

  The lack of an agreement so far is not due to the supposed intransigent, uncompromising and incomprehensible Greek stance.

  It is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people, despite the public admission of the three Institutions that necessary flexibility will be provided in order to respect the popular verdict.

  What is driving this insistence?

  An initial thought would be that this insistence is due to the desire of some to not admit their mistakes and instead, to reaffirm their choices by ignoring their failures.

  Moreover, we must not forget the public admission made a few years ago by the IMF that they erred in calculating the depth of the recession that would be caused by the Memorandum.

  I consider this, however, to be a shallow approach. I simply cannot believe that the future of Europe depends on the stubbornness or the insistence of some individuals.

  My conclusion, therefore, is that the issue of Greece does not only concern Greece; rather, it is the very epicenter of conflict between two diametrically opposing strategies concerning the future of European unification.

  The first strategy aims to deepen European unification in the context of equality and solidarity between its people and citizens.

  The proponents of this strategy begin with the assumption that it is not possible to demand that the new Greek government follows the course of the previous one – which, we must not forget, failed miserably. This assumption is the starting point, because otherwise, elections would need to be abolished in those countries that are in a Program. Namely, we would have to accept that the institutions should appoint the Ministers and Prime Ministers, and that citizens should be deprived of the right to vote until the completion of the Program.

  In other words, this means the complete abolition of democracy in Europe, the end of every pretext of democracy, and the beginning of disintegration and of an unacceptable division of United Europe.

  This means the beginning of the creation of a technocratic monstrosity that will lead to a Europe entirely alien to its founding principles.

  The second strategy seeks precisely this: The split and the division of the Eurozone, and consequently of the EU.

  The first step to accomplishing this is to create a two-speed Eurozone where the “core” will set tough rules regarding austerity and adaptation and will appoint a “super” Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism.

  For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency.

  Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim. To some, this represents a golden opportunity to make an example out of Greece for other countries that might be thinking of not following this new line of discipline.

  What is not being taken into account is the high amount of risk and the enormous dangers involved in this second strategy. This strategy not only risks the beginning of the end for the European unification project by shifting the Eurozone from a monetary union to an exchange rate zone, but it also triggers economic and political uncertainty, which is likely to entirely transform the economic and political balances throughout the West.

  Europe, therefore, is at a crossroads. Following the serious concessions made by the Greek government, the decision is now not in the hands of the institutions, which in any case – with the exception of the European Commission- are not elected and are not accountable to the people, but rather in the hands of Europe’s leaders.

  Which strategy will prevail? The one that calls for a Europe of solidarity, equality and democracy, or the one that calls for rupture and division?

  If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”.

  

  

  
  
  

  

• What's Currently For Sale On The "Amazon For The Super Rich"

  There’s Amazon, and then there’s the aptly named “Posh” – Bloomberg’s own internal Craigs List-type marketplace, open only to terminal subscribers. From a “spectacular” new construction French manor in Greenwich, CT, to a $4.3 million “Inside deal, won’t last”) 3 bedroom loft in Greenwich Village, to countless Aston Martins, Ferraris, Porsches, if the rich (and Libor, equity, gold and FX-manipulating) are selling it, you will find it on Posh.

  Here are the most expensive items currently for sale by and for Bloomberg terminal users.

  

   

  Want a new build mansion? It’s for sale:

  

   

  Or maybe just a 2500 square foot Village loft:

  

   

  Over $4 million for an apartment too much? Then how about just $2.8 million for a 2 bedrom condo in Chelsea.

  

   

  Concerned about a lack of real estate supply in NYC? Don’t be: for a price, everything can be bought.

  

   

  And on the off chance you can’t find what you’re looking for, contact Bloomberg@tengroup.com as the selected concierge for Bloomberg POSH. Because no price is too big when one “trades” rigged markets.

  

  

  

  
  
  

  

Digest powered by RSS Digest

• DoPe

  

  
  
  

  

• This Is How Little It Cost Goldman To Bribe America's Senators To Fast Track Obama's TPP Bill

  It took just a few days after the stunning defeat of Obama’s attempt to fast-track the Trans Pacific Partnership bill in the Senate at the hands of his own Democratic party, before everything returned back to normal and the TPP fast-track was promptly passed. Why? The simple answer: money. Or rather, even more money.

  Because while the actual contents of the TPP may be highly confidential, and their public dissemination may lead to prison time for the “perpetrator” of such illegal transparency, we now know just how much it cost corporations to bribe the Senate to do the bidding of the “people.” In the Supreme Court sense, of course, in which corporations are “people.”

  According to an analysis by the Guardian, fast-tracking the TPP, meaning its passage through Congress without having its contents available for debate or amendments, was only possible after lots of corporate money exchanged hands with senators. The US Senate passed Trade Promotion Authority (TPA) – the fast-tracking bill – by a 65-33 margin on 14 May. Last Thursday, the Senate voted 62-38 to bring the debate on TPA to a close.

  Those impressive majorities follow months of behind-the-scenes wheeling and dealing by the world’s most well-heeled multinational corporations with just a handful of holdouts.

  Using data from the Federal Election Commission, the chart below (based on data from the following spreadsheet) shows all donations that corporate members of the US Business Coalition for TPP made to US Senate campaigns between January and March 2015, when fast-tracking the TPP was being debated in the Senate.

  The result: it took a paltry $1.15 million in bribes to get everyone in the Senate on the same page. And the biggest shocker: with a total of $195,550 in “donations”, or more than double the second largest donor UPS, was none other than Goldman Sachs.

  

  The summary findings:

  • Out of the total $1,148,971 given, an average of $17,676.48 was donated to each of the 65 “yea” votes.
  • The average Republican member received $19,673.28 from corporate TPP supporters.
  • The average Democrat received $9,689.23 from those same donors.

  The amounts given rise dramatically when looking at how much each senator running for re-election received.

  Two days before the fast-track vote, Obama was a few votes shy of having the filibuster-proof majority he needed. Ron Wyden and seven other Senate Democrats announced they were on the fence on 12 May, distinguishing themselves from the Senate’s 54 Republicans and handful of Democrats as the votes to sway.

  • In just 24 hours, Wyden and five of those Democratic holdouts – Michael Bennet of Colorado, Dianne Feinstein of California, Claire McCaskill of Missouri, Patty Murray of Washington, and Bill Nelson of Florida – caved and voted for fast-track.
  • Bennet, Murray, and Wyden – all running for re-election in 2016 – received $105,900 between the three of them. Bennet, who comes from the more purple state of Colorado, got $53,700 in corporate campaign donations between January and March 2015, according to Channing’s research.
  • Almost 100% of the Republicans in the US Senate voted for fast-track – the only two non-votes on TPA were a Republican from Louisiana and a Republican from Alaska.
  • Senator Rob Portman of Ohio, who is the former US trade representative, has been one of the loudest proponents of the TPP. (In a comment to the Guardian Portman’s office said: “Senator Portman is not a vocal proponent of TPP – he has said it’s still being negotiated and if and when an agreement is reached he will review it carefully.”) He received $119,700 from 14 different corporations between January and March, most of which comes from donations from Goldman Sachs ($70,600), Pfizer ($15,700), and Procter & Gamble ($12,900). Portman is expected to run against former Ohio governor Ted Strickland in 2016 in one of the most politically competitive states in the country.
  • Seven Republicans who voted “yea” to fast-track and are also running for re-election next year cleaned up between January and March. Senator Johnny Isakson of Georgia received $102,500 in corporate contributions. Senator Roy Blunt of Missouri, best known for proposing a Monsanto-written bill in 2013 that became known as the Monsanto Protection Act, received $77,900 – $13,500 of which came from Monsanto.
  • Arizona senator and former presidential candidate John McCain received $51,700 in the first quarter of 2015. Senator Richard Burr of North Carolina received $60,000 in corporate donations. Eighty-one-year-old senator Chuck Grassley of Iowa, who is running for his seventh Senate term, received $35,000. Senator Tim Scott of South Carolina, who will be running for his first full six-year term in 2016, received $67,500 from pro-TPP corporations.

  “It’s a rare thing for members of Congress to go against the money these days,” said Mansur Gidfar, spokesman for the anti-corruption group Represent.Us. “They know exactly which special interests they need to keep happy if they want to fund their reelection campaigns or secure a future job as a lobbyist.

  “How can we expect politicians who routinely receive campaign money, lucrative job offers, and lavish gifts from special interests to make impartial decisions that directly affect those same special interests?” Gidfar said. “As long as this kind of transparently corrupt behavior remains legal, we won’t have a government that truly represents the people.”

  In other news, following last week’s DOJ crackdown on now openly criminal FX market manipulation and rigging by the big banks, in which precisely zero bankers have been arrested, we are happy to announce that “transparently corrupt behavior” in the Senate, and everywhere else, will remain not only legal, but very well funded.

  But what is truly scariest, is just how little it costs corporations to bribe America’s “elected” politicians, and make them serve the best interests of a few billionaire shareholders over the grave of what once used to be America’s middle class.

  

  

  
  
  

  

• Russia Wards Off "Provocative And Aggresive" US Warship In Black Sea

  While we are used to hearing of the 100s of “close encounters” between NATO and Russian planes,but, as reported by state news agency RIA – citing an anonymous source in Russia’s armed forces, Russian military aircraft were scrambled to head off a U.S. warship that was acting “aggressively” in the Black Sea.

  We are used to plane-on-plane “close encounters”…

   

  

   

  And now, as The Daily News reports, Russian attack jets were sent to warn off the American warship USS Ross from near the country’s territorial waters in the Black Sea, 

  The source was quoted as saying that the U.S. destroyer Ross was moving along the edge of Russia’s territorial waters and heading in their direction.

   

  

   

  “The crew of the ship acted provocatively and aggressively, which concerned the operators of monitoring stations and ships of the Black Sea Fleet,” RIA quoted the source as saying.

   

  “Su-24 attack aircraft demonstrated to the American crew readiness to harshly prevent a violation of the frontier and to defend the interests of the country.”

   

  “Apparently, the Americans have not forgotten the April 2014 incident when one Su-24 practically ‘blacked out’ all of the electronics on board the newest American destroyer Donald Cook,” the source said.

   

  Russia’s Defence Ministry was not immediately available to comment on the report.

  As RT notes,

  Saturday’s incident is the latest in a series of border surveillance confrontations between Russia and the West. Europeans, especially the Baltic states, have repeatedly sounded the alarm over Russian jets coming close to their borders.

   

  The US is rotating several warships in and out of the Black Sea, where Russia’s naval bases are located. The USS Vella Gulf, USS Ross, USS Truxton, and the USS Taylor – as well as warships from other NATO member states – were spotted in the area over the past few months.

  *  *  *

  This appears to be the first reported ship-to-plane ‘encounter’ and,
  just as US and China tensions are escalating in the South China Sea, it
  appears US and Russian military ‘discussions’ are shifting from words
  and proxy-fighting.

  

  

  
  
  

  

• For Greece, This Is What Hell Looks Like

  As previously reported by both IMF and Greek sources, Greece now has less than a week before it defaults on its June 5 payment to the IMF, a payment which it can’t make simply because it run out of money even before its last “payment” to the IMF on May 12.

  To be sure, Greece does have two options to kick the can yet again: one, of course, is to get a deal done in the coming 5 days although that is virtually impossible; the other is to bundle all June payments into the last one for the month, thus buying three additional weeks of time. This outcome now looks almost certain especially since two days ago the Greek government spokesman Sakellaridis said the Greek government denied planning to bundle the IMF payment, which essentially assures it.

  However, even if Greece manages to kick the can for the n^th time for the past five years, it has a lot of cans left to kick for the remainder of 2015.

  

   

  So let’s say that somehow Greece kicks every can left until the end of 2015. Surely Greece will be out of the woods then, right.

  Wrong. Because for Europe’s most devastated country, it is only then that the debt nightmare officially begins.

  Below are all upcoming Greek debt payments until 2057, also known as the first, ninth and all circles of Greek hell inbetween:

  

  But at least it will have the Euro.

  

  

  
  
  

  

• When The "Sharing" Economy Goes Too Far: Syphillis Cases Soar 79% In A Year

  “What’s mine is yours, for a fee,” is the mantra of the new normal “sharing economy,” as various segments of our heretofore under-utilized assets are variously ‘rented’ out for the enjoyment of others. However, as a report by the Rhode Island Department of Health suggests, perhaps we are sharing just a little too much. Sexually transmitted diseases are on the rise in the US, with health officials pointing the finger at casual sex arranged through social media as “the perfect storm.” With gonorrhea up 30%, HIV infections up by 33%, and syphilis soaring a shocking 79% in the last year alone, perhaps they have a point.

  The report notes that “new cases of HIV and syphilis continued to increase among gay, bisexual, and other men who have sex with men at a faster rate than in other populations,” adding that “infection rates of all STDs continued to have a greater impact on the African-American, Hispanic, and young adult populations.” As RT reports,

  While better testing partly explains the increase, health officials also highlighted “high-risk behaviors that have become more common in recent years,” such as “using social media to arrange casual and often anonymous sexual encounters.”

   

  Other risky behavior factors were: “Having sex without a condom, having multiple sex partners, and sex while under the influence of drugs or alcohol.”

   

  Rhode Island officials say their alarming STD rates are part of a trend throughout the US. Although the latest statistics from the Centers for Disease Control and Prevention (CDC) are from 2013, there have been reports of spikes in HIV and syphilis from New York and Texas to Utah.

  An STD clinic in Salt Lake County, Utah, has started asking patients about specific contact apps. Lynn Beltran, an epidemiologist at the clinic, told ABC she was not surprised to see a rise in STDs.

  “It’s been the perfect storm,” said Beltran. “Our attitude kind of shifted, where it became more acceptable to engage in casual sex.”

   

  Beltran said she had seen an uptick in syphilis and gonorrhea rates, and that many of the newly diagnosed patients said they were sexually active through dating apps.

  Finally, and rather interestingly, RT adds,

  Between 2003 and 2009, when prostitution wasn’t illegal in Rhode Island due to a clerical error, the state registered a 39-percent decrease in gonorrhea infections among women. A 2014 study by the National Bureau of Economic Research also found a 31-percent decrease in the number of rapes reported to the police.

  *  *  *

  So too much of a good thing is bad for you…which reminds us…

  What’s dangerous and eats nuts?

  …

  …

  Syphillis.

  

  

  
  
  

  

• Russian Pivot: Greece Will "Probably" Join BRICS Bank, Official Says

  Greece has very little in the way of bargaining power with European creditors.

  Outside of gimmicks like tapping its SDR reserves, Athens has no cash to make payments to the IMF in June and, perhaps more importantly, there’s very little in the way of wiggle room when one looks at revenues versus spending (see below), meaning Greece will also struggle to pay public sector employees which, in combination with Greeks’ consternation about the safety of their deposits, could contribute to social unrest and put unwelcome political pressure on PM Alexis Tsipras and his Syriza party that swept to power just five months ago on a defiant (and apparently naive) anti-austerity platform. 

  

  The troika (and Germany) knows this of course and they are also acutely aware that Spain’s Podemos and Portugal’s Socialists are watching the Greek drama closely for the slightest indication of concessions from the IMF or from the EU. In other words, the standoff is now just as much about politics as it is about economics, and the ‘institutions’ do not want any Syriza sympathizers to be able to say that Greece made anyone blink by threatening an exit from the currency bloc. 

  What all of the above means is that for better or worse, Greece has essentially no leverage because for many European officials, trading austerity concessions for the right to maintain the idea of euro indissolubility is no longer a desirable outcome as it could embolden anti-austerity governments in larger, more influential countries. 

  All of that said, Greece still has one card to play: the so-called ‘Russian pivot’. Over the course of negotiations between Syriza and the troika Moscow has, at various times, sought to take advantage of the hostilities between Athens and Brussels by making a series of overtures including the possibility of a €5 billion advance on Greece’s portion of the Turkish Stream natural gas pipeline and an invitation for the country to join the BRICS bank, a possibility Goldman’s Jim O’Neill wrote off as a politically-motivated “joke.”

  But Vladimir Putin isn’t fond of joking (unless he’s participating in his yearly town hall meeting with the Russian people) and sure enough, less than two months ahead of this year’s BRICS Summit in Ulfa, it appears Greece may accept Moscow’s invite. 

  Enikos has more:

  Greece is preparing and will probably submit a request to participate in the new development bank for BRICS countries and has secured Russia’s support on the issue, Productive Reconstruction, Environment and Energy Minister Panagiotis Lafazanis told ANA-MPA news agency on Friday evening.

   

  “During my meeting with Russian Deputy Finance Minister Sergey Storchak, we secured the decisive Russian support to Greece’s request for participation in the new development bank of BRICS countries. The relevant request for Greece’s participation…will be symbolic and will be paid in installments, while right after operations begin, it will be able to accept financial support,” the minister said.

   

  Lafazanis added that technical details were also discussed on how to submit the request so that it will be accepted after discussions within the Greek government conclude.

   

  He also noted that he also discussed the credit facility that will be provided by Russian banks to the Greek company which will undertake the construction of the new gas pipeline which will cross Greece.

   

  “Repayment of the Russian loan will be achieved by the profits made through the operation of the pipeline and this facility is not related to loans or economic assistance between states,” he said.

  As mentioned above, this comes as Russia, Brazil, India, China, and South Africa are set to officially launch the BRICS bank and a related reserve pool when the group of emerging powers convenes on July 8-9 in Russia. It also comes as Moscow looks set to put plans for a Eurasian currency bloc into motion and as the Central Bank of Russia explores the possibility of establishing a BRICS-associated alternative to SWIFT.

  Additionally, China’s recent $50 billion commitment to Brazil underscores the degree to which BRICS nations are expanding their economic and political cooperation in the face of declining Western hegemony. The BRICS bank speaks to the idea that the world’s most influential emerging markets now feel it necessary to support each other in the face of what they view as a half-hearted attempt on the part of the world’s existing multilateral institutions to serve EM interests or even to give them representation that’s comparable to their place in the world economy. Here’s what we said on Friday:

  Much like the China-led AIIB, the BRICS bank is in many ways a response to the failure of US-dominated multilateral institutions to meet the needs of modernity and offer representation that’s commensurate with the economic clout of its members.

  Why would Russia want Greece to join the bank? The motivation is clearly geopolitical consdering that Greece is broke, and what’s interesting about the statement from Lafazanis is that it appears to suggest that Greece’s paid in capital would come in installments while Athens would immediately be eligible for a loan from the bank. 

  In short, Putin would like nothing better than to establish a symbolic relationship with the first country to break from the supposedly indissoluble currency bloc, especially given the situation in Ukraine. Meanwhile, Greece is out of leverage, especially now that recent regional and municipal elections in Spain have proven to Athens’ EU creditors that the austerity (or, ‘fauxterity‘ as we’re fond of calling it) revolt is very real. We’ll see what, if any, impact this latest Russian pivot trial balloon has on Greek debt deal negotiations.

  

  

  
  
  

  

• When, Not If

  It's just a matter of time…

  Risk wil only remain repressed for so long…

  

  Source: @Not_Jim_Cramer

   

  Especially as valuations surge…

  

   

  But it's not just equities – everything is expensive…

  

   

  "rich" and getting richer…

  

   

  and when it mean-reverts, it will be painful for the massed crowds on one side of the ship… after all they don't call it "nice"-reversion do they?

  

  

  
  
  

  

• "Ferguson Effect" Triggers Nationwide "Crime Wave"

  Two weeks ago, we took a look at Baltimore in the aftermath of violent protests that left the city in ashes late last month. The astonishing statistic: from April 27 to May 14, there were 23 homicides in the city, for an average of 1.3 each day. 

  

  We summed up the situation as follows: “But out of sight, out of mind for the rest of the country and we imagine that just as high crime rates and a generalized sense of despair were ignored before the riots, so too will they be ignored now that the media spectacle has died down … at least until the next “purge.”

  In fact, May was the city’s bloodiest month since 1999 with more than 30 people shot on Memorial Day weekend alone. Here, courtesy of The Baltimore Sun, is a recap of those who were murdered in Baltimore from May 17 through May 25 alone:

  Shaquil Hinton, 21, was killed at 12:29 a.m. Monday in the 800 block of W. Fayette St. in Poppleton, police said. He lived in the same block according to police.

   

  Charles K. Jackson Jr., 32, was killed at 12:51 a.m. Sunday in the 900 block of Ducatel St. in Reservoir Hill, police said. Jackson lived nearby, in the 2300 block of Callow Ave., police said.

   

  Hassan Fields, 20, was killed at 9:06 a.m. Saturday in the 100 block of S. Augusta Ave. in Irvington, police said. Fields lived in the 3700 block of W. Franklin St. in Allendale. When reached by phone, Fields’ father declined to comment.

   

  Umika Smith, 24, was killed at 1:28 p.m. Saturday in the 2000 block of Hollins St. in Boyd-Booth. No phone number was listed for her address in the same block. A double shooting happened nearby the following day, injuring a man and a woman, police said.

   

  Bruce Fleming Jr., 23, was killed at 2 p.m. Saturday in the 2800 block of St. Lo Drive in Clifton Park, near Heritage High School, police said. Police said he lived in the 4800 block of Harford Road in Lauraville.

   

  Tyrin Diggs, 19, was killed at 11:06 p.m. Friday in the first block of Benkert Ave. in Saint Josephs, police said. Diggs lived on the 700 block of E. Pontiac Ave. in Brooklyn, police said.

   

  James Mckoy, 21, was killed at 11:51 p.m. Friday in the 1900 block of Wilhelm St., in Carrollton Ridge, police said. He lived in the 300 block S. Monroe St. in the same neighborhood, police said.

   

  Kelvin Warfield, 25, was killed at 4:50 p.m. on Sunday, May 17, in the 100 block of S. Arlington Ave. in Hollins Market, police said. Warfield lived in the 2500 block of W. Fayette St., police said.

   

  Additionally, a 9-year-old shot in the leg was among the victims in the shootings that took place over Memorial Day weekend, Baltimore police said.

  Baltimore is not alone. 

  The racially charged protests and demonstrations that have swept the country as a result of perceived police misconduct involving African American “suspects” has created what St. Louis police chief Sam Dotson calls “The Ferguson Effect”, whereby law enforcement are now more reluctant to use force to counter illegal activity for fear of prosecution or, more poignantly, for fear of finding themselves cast as the villain that catalyzes widespread civil unrest. This effect, some say, has led to a dramatic increase in violent crime throughout the country. 

  Via WSJ:

  In Milwaukee, homicides were up 180% by May 17 over the same period the previous year. Through April, shootings in St. Louis were up 39%, robberies 43%, and homicides 25%. “Crime is the worst I’ve ever seen it,” said St. Louis Alderman Joe Vacarro at a May 7 City Hall hearing.

   

  Murders in Atlanta were up 32% as of mid-May. Shootings in Chicago had increased 24% and homicides 17%. Shootings and other violent felonies in Los Angeles had spiked by 25%; in New York, murder was up nearly 13%, and gun violence 7%.

   

  Those citywide statistics from law-enforcement officials mask even more startling neighborhood-level increases. Shooting incidents are up 500% in an East Harlem precinct compared with last year; in a South Central Los Angeles police division, shooting victims are up 100%.

   

  By contrast, the first six months of 2014 continued a 20-year pattern of growing public safety. Violent crime in the first half of last year dropped 4.6% nationally and property crime was down 7.5%. Though comparable national figures for the first half of 2015 won’t be available for another year, the January through June 2014 crime decline is unlikely to be repeated…

   

  Almost any police shooting of a black person, no matter how threatening the behavior that provoked the shooting, now provokes angry protests..

   

  Acquittals of police officers for the use of deadly force against black suspects are now automatically presented as a miscarriage of justice…

   

  This incessant drumbeat against the police has resulted in what St. Louis police chief Sam Dotson last November called the “Ferguson effect.” Cops are disengaging from discretionary enforcement activity and the “criminal element is feeling empowered,” Mr. Dotson reported. Arrests in St. Louis city and county by that point had dropped a third since the shooting of Michael Brown in August. Not surprisingly, homicides in the city surged 47% by early November and robberies in the county were up 82%.

   

  Similar “Ferguson effects” are happening across the country as officers scale back on proactive policing under the onslaught of anti-cop rhetoric. Arrests in Baltimore were down 56% in May compared with 2014.

   

  “Any cop who uses his gun now has to worry about being indicted and losing his job and family,” a New York City officer tells me. “Everything has the potential to be recorded. A lot of cops feel that the climate for the next couple of years is going to be nonstop protests.”

  And while Heather Mac Donald — the author of the WSJ piece, Thomas W. Smith fellow at the Manhattan Institute, and the author of “Are Cops Racist?” — may be correct to say that “contrary to the claims of the ‘black lives matter’ movement, no government policy in the past quarter century has done more for urban reclamation than proactive policing. Data-driven enforcement, in conjunction with stricter penalties for criminals and “broken windows” policing, has saved thousands of black lives, brought lawful commerce and jobs to once drug-infested neighborhoods and allowed millions to go about their daily lives without fear,” it certainly seems reasonable to suggest that the logic behind the following statement from an NYPD officer Mac Donald interviewed for her piece seems questionable at best:

  “Does an officer need to be unconscious before he can use force? If someone is willing to fight you, he’s also willing to take your gun and shoot you. You can’t lose a fight with a guy who has already put his hands on you because if you do, you will likely end up dead.”

  Whatever position you care to take on the above, what’s clear is that race relations in America are deteriorating, as are class relations with policy decisions at the highest levels serving only to exacerbate the divide between the rich and the poor (as discussed in “America’s Class Segregation Problem In Four Charts“), thus creating still more tension in poor communities that have already sufferred from a lack of real opportunities for decades.

  Does the recent wave of protests and demonstrations mark an epochal shift in American society or will this all be quietly swept under the rug in order to maintain the appearance of social stability?

  

  

  
  
  

  

• 1812: The Inconsequential War That Changed America Forever

  Submitted by Jim Quinn via The Burning Platform blog,

  WHY SHOULD I CARE?

  Most adult Americans today are unaware of what caused the War of 1812, who started it, what the outcome was, or even who the belligerents were. If I recall correctly, my grade school / high school History Class covered The War Of 1812 — aka America’s Second War Of Independence, or America’s Forgotten War — for a total of maybe one week. And what a worthless week it was. Like most history teachers I’ve ever had, they turned an exciting story into a dry bundle of boring crap … focusing on memorizing dates and random events without getting to the real story behind the story; i.e. why did it happen, how does the war affect us today, and what can we learn from it?  This is a crying shame because the war had a tremendous impact on American political development, territorial expansion, and national identity.

  A 19^th century French historian said, “History studies not just facts and institutions, its real subject is the human spirit.” The word ‘history’ comes from the Greek, and literally means “knowledge acquired by investigation”. So, let us investigate the War Of 1812, and the spirit of humanity which caused it … and changed America forever.

  OVERALL SUMMARY

  There were two major reasons given for the war.

  First, Britain was at war with France since 1793. For twenty years the British claimed they had the right – as a legitimate and necessary wartime measure — to intercept American ships on the high seas, seize and keep their cargoes, and search the crews for British navy deserters. The British between 1807 and 1812 seized some 400 American ships and cargoes worth millions of dollars.

  

  Second, was the British practice of ‘impressment’. A chronic manpower shortage in the Royal Navy led the Brits to stop American merchant vessels on the high seas and remove seamen. Between 1803 and 1812 the Brits captured an estimated six to nine THOUSAND Americans in its dragnet. These men were subjected to all the horrors of British naval discipline—enforced with the cat-o’-nine-tails—and made to fight a war that was not their own.

  America felt this violated its rights as a neutral and sovereign nation. So, we declared war against the Brits in 1812.

  THE END OF THE REVOLUTIONARY WAR SEEDED THE WAR OF 1812

  Isn’t that often the case … that the end of one war, and the demands of the victor, eventually leads to yet another war? The war for American Independence lasted until 1783 when the peace treaty with the British was signed. Imagine the giddy feeling you would have had at that time. Freedom! Independence! But the rational exuberance was met with irrational naivete.

  The American populace, including its politicians, assumed that the British would continue to allow access to British ports …. as if nothing at all happened! America assumed that the Brits needed our wheat, the British Navy needed our timber, hemp, and tar, and British colonies in the West Indies needed our fish, wheat, and salt to feed their slaves. This was a big miscalculation.

  Canada and Ireland delivered most of the same goods. In fact, America needed the Brits more than they needed us as we depended on British manufacturing goods. America had zero leverage, and it was Britain that dictated foreign policy. They admitted American raw materials on a case-by-case basis, excluded manufactured goods altogether from entering England, and closed West Indian ports to American goods. Bullocks to America! What could America do? Nothing. We had no navy to back up our demands.

   

  1801 – A PIVOTAL YEAR

  George Washington negotiated the Jay Treaty in 1795. The Brits negotiated from a position of strength, and conversely, America from weakness. In a nutshell, the treaty granted the Brits virtually unlimited access to American markets in exchange for limited access to British markets in the West Indies. It also allowed British creditors to recover debts owed by Americans.

  In 1801, Thomas Jefferson was elected president and James Madison was named his secretary of state. They quickly abrogated the treaty.

  Madison took a hard-line approach towards the Brits. Even back in 1790, as a Congressman from Virginia, he championed the idea of countering British trade restrictions with a series of discriminatory tariffs via import taxes. George Washington and John Adams rejected the idea. Now, however, as Secretary of State, Madison hoped to implement what he believed was a long overdue aggressive trade policy against Britain. But, he shot himself in the foot big time …. by reversing the naval-building policies of John Adams

  John Adams succeeded in his priority of strengthening the United States Navy. When he was elected in 1796, the navy had only three battleships. Five years later, in 1801, the navy had fifty … more than enough to defend America’s coastline and maintain a viable presence in the Caribbean.

  Jefferson, and Madison, undid all this for several reasons. They felt maintaining a navy was too expensive. As Republicans they believed in frugal, tax-cutting government. And they believed that a large military posed a domestic threat in that the officer corps could harbor aristocratic ambitions and become a tool for would-be tyrants. Lastly, they felt navies led countries into unnecessary foreign entanglements. As such, Jefferson invested only in small gunboats for coastal patrols. The battleships atrophied. By 1812, the United States had only a dozen seaworthy battleships of any size.

  Jefferson and Madison certainly were not stupid men. Yet, one must wonder “What were they thinking??” With no leverage (military power) to bring to the negotiating table, did they expect the Brits to just quietly and unquestioningly bend to American demands? Hardly! As should have been expected, Britain continued to apply both its commercial and naval power to dictate — by force as necessary —  trade and maritime policy to the United States.

  MORE HALF-ASSED DECISIONS AND ERRONEOUS BELIEFS

  All governments do dumb-shit things, even that of our Founding Fathers.

  So, in 1807 Jefferson tried to pressure the Brits and French by convincing Congress to secure a radical embargo against all foreign trade. (Embargo!!! Our government still loves them to this very day. When will we ever learn?) American ships were forbidden from trading overseas. The embargo only hurt America. It was quickly scrapped.

  It was replaced with the Non-Intercourse Act. This act had nothing to do with the cessation of attacking the pink fortress. It allowed trade with all countries except Britain and France. It also allowed the President to restore trade with either country IF either belligerent ended its maritime harassment. That only intercoursed the American people, and didn’t work out either.

  So, in 1810 Madison signed the ridicules Macon’s Bill No.2. Even he didn’t like it, but he could not yet get Congress to pass a war resolution. The bill authorized Madison to impose trade restrictions against one offending country if the other lifted its trade restrictions against the United States. In other words, the United States would commercially punish country A if country B agreed to allow America to trade freely. Pitting two countries against each other didn’t work either.

  What was the result of all these half-assed measures to intimidate the British? They shopped elsewhere! For example, between 1808-1812 the Canadian timber industry exploded with its exports to England, increasing by 500%. Canadian agricultural production also increased greatly. The Brits were eating beef, Americans were eating crow.

  Madison was getting desperate. He was conjuring up even more rigorous measures against the British fearing that the window of opportunity for gaining concessions through commercial pressure would soon close forever. His conjuring included plans for war.

  He figured it would be a little war, and a quick one. (How many times have our Dear Leaders told us that? Especially since 1960?)  Most of the British army and navy were bogged down in Europe, fighting a brutal war with Napoleon. The French controlled most of Europe, and the little Frenchie dictator assembled a 700,000-man army for an invasion of Russia. All Madison wanted was the right to trade freely and, gain the respect owed to the United States as an independent nation. He calculated that since he wasn’t seeking territory or conquest, that Britain would surely be willing to negotiate rather than have to deploy valuable ships and troops thousands of miles away from the war in Europe. Madison miscalculated. Madison was wrong to believe that the British would rush to negotiate with him. The British even refused Tsar Alexander I’s invitation to mediate in 1813.

  Britain’s commitment to battle only strengthened over the first two years of the war. Madison was even wrong about the impact of the European war on America. He felt that when the European war ended, that the British would send the bulk of their armies to battle the United States. When you need popular support for a quick and easy war, you still need a little fear-mongering. “The British will come!!”  One reason the Brits didn’t redeploy their troops was that American military incompetence at the beginning of the war made it unnecessary. More fortuitously, after more than two decades of continual war, the Brits had had enough, and by 1814 were more than happy to soften their demands. (The British Invasion finally took place about 150 years later. But with guitars and drums.)

  THE FRENCH CONNECTION — TAKING ADVANTAGE OF MACON’S BILL

  The Brits had the world’s strongest navy, and couldn’t be coerced into lifting its restrictions. France, on the other hand, had everything to gain. Their Berlin (1806) and Milan (1807) decrees imposed severe trade restrictions against any country trading with Britain. But France’s navy was not sufficiently powerful enough to enforce these decrees. So, in compliance with Macon’s Bill, France could force the United States to restrict itself. In other words, France repealed its restrictions against the United States, thus forcing the United States to suspend its trade with Great Britain. Thus, on August 5, 1810 the French lifted the Berlin and Milan decrees. Madison, in turn, ended all trade with Britain on Feb. 2, 1811.

  The New England Federalists — who were dependent upon trade with Britain for their economic sustenance — immediately attacked the announcement. The claimed Napoleon could not be trusted, and that it would lead America into war. They were correct. Napoleon refused to release American ships already held in French ports, and continued to harass American shipping. America would declare war on June 18, 1812.

  MADISON FINALLY GETS HIS WAR

  It’s not entirely fair to say, as some do, that this was strictly Madison’s war. He had help. The Speaker of the House of Representatives, Henry Clay of Kentucky, his principal assistant, John C. Calhoun of South Carolina, and other southern and western representatives were collectively known as “Warhawks” and pressured Madison into asking Congress to declare war against Great Britain.

  

  The United States in 1812

   

  MILITARY COMPARISONS

  When the war started, the American army consisted of 7,000 regulars. (Theoretically, there were also thousands of citizen soldiers in the militia. While the Constitution granted the president the authority to call them into service to suppress insurrections and repel invasions … the legal consensus was that state militia could only be ordered to meet these duties in their own states). Anyway, the military was poorly trained. The army’s officer corps was a ragtag outfit …most had never seen combat … and the ones that did were old, having last seen service in the Revolution, thirty years earlier. West Point, established ten years earlier, had fewer than one hundred graduates ready to assume command. The navy, as mentioned above, was a puny force. By 1812, the US Navy counted only twelve ships of any size, and only three fully dressed battleships.

  The Brits had 250,000 battle-hardened men in uniform. True, the bulk of those were in Europe. Nevertheless, 6,000 were stationed in Canada … augmented by 2,000 Canadians, and roughly 3,000 Indians. The British Navy consisted of 500 ships …. 80 of them permanently stationed in the West Atlantic between Canada and the Caribbean. It should have been a rout.

  THE CANADIAN DEBACLE

  In the long run, the American navy could not possibly defeat their British counterparts. American politicians concluded the most realistic path to pressuring Britain was by targeting Canada …. which seemed like an easy target with a population of only 500,000 compared to 7.7 million in the United States in 1812. Virginia Congressman John Randolph even stated the conquest of Canada would be “a holiday campaign … with no expense of blood or treasure on our part”.  (You know … just like that quick war in Iraq and Afghanistan which we were promised.)

  Madison grossly miscalculated support from the Canadian populace. He believed the Canadians wished to be liberated from Britain … that they wanted their own 1776 moment. Why not? About two-thirds of the Canadian population had migrated there from the United States. So, the grand plan was to invade Canada when war broke out. The US Army would capture British territory, quickly, and force Britain to the negotiating table. After all, Britain certainly would not want to lose this colony, and they certainly would not divert troops from the European war, and therefore they would be delighted to negotiate favorable maritime rights America had been pursuing. In exchange, America would give Canada back (although there were some who wanted to make Canada part of America). Sounds logical. But, the devil is in the details, and this plan was SNAFU right from the get go.

  The correct military strategy was to attack the British at Montreal. A concentrated force sailing up the Hudson River and over Lake Champlain probably could have captured the city. However, recall that the New England Federalists strongly opposed the war. Madison greatly feared that New England’s militias, most necessary to a concentrated attack on Montreal, would simply refuse to turn out for battle! On to to crappy Plan B!

  Madison decided to launch a three-pronged northern invasion; 1) attack Montreal, 2) attack Fort Detroit in the far west, and 3) a third army would leave from Fort Niagara and into Canada at the western end of Lake Ontario. America lost the battle of Detroit without firing a shot. The Fort Niagara campaign was divided amongst two generals, neither had military experience, both were appointed political dogs who argued with each other and refused support at critical times, and out of 1,300 men, 900 were captured. The battle for Canada ended about as soon as it started.

  Yes, folks, one can make the case that Canada — with a little help from their friends — defeated the United States in the War Of 1812. The immediate impact of the war was to strengthen Canada’s loyalty to England. The United States still had interest in conquering Canada – more half-assed ideas, really – but, by the 1890’s the two nations formed a permanent bond. For all practical purposes, the War Of 1812 was Canada’s war of independence, and they won.

  A BRIEF REPRIEVE – US NAVAL VICTORIES

  

  Old Ironsides defeats HMS Guerriere

   

  Out-gunned and out-manned the US Navy did achieve some clear victories, even early in the war.  In 1812, the USS Constitution —aka, “Old Ironsides” — defeated HMS Guerriere in a ferocious battle off the coast of Nova Scotia. In the same year, the USS United States captured HMS Macedonian, a fully dressed 38-gun battleship. In September 1813, the United States achieved further naval success on Lake Erie. Also in 1813, Commander Perry’s fleet of ten ships outmaneuvered a squadron of six British ships despite being outgunned by the much larger enemy vessels. The same Perry who left Americans with a memorable line: “We have met the enemy and they are ours.” A month later, William Henry Harrison – yes, the future president – crossed Lake Erie and defeated the British and their Indian allies in the Battle of the Thames. Tecumseh — leader of the pan-Indian confederation – was killed in that battle. Many of Britain’s Indian allies subsequently abandoned the alliance, and America’s northwest frontier was secured.

  MORE BAD NEWS ON THE POLITICAL FRONT

  On the political front there was much bad news. Commander Perry – the navy’s best field officer – was “promoted” to a desk job. William Harrison was accused by Secretary Of War, John Armstrong, of financial impropriety, and Harrison, another excellent field commander, was forced to resign.

  The cost of the war broke the Treasury. By 1814, $34 million dollars (a hefty sum in its day) was borrowed to finance the war.

  Madison sent a delegation (including John Quincy Adams) to meet with Czar Alexander in St. Petersburg, but the British left before the delegation arrived and the whole thing was an embarrassment.

  Madison probably suffered a severe anxiety attack on May 30, 1814 — the day the French signed a peace treaty with Britain and its allies. Madison strongly believed that a good portion of Britain’s 250,000 troops would make their way to Canada.

  THE HOUSE, THE HOUSE, THE HOUSE IS ON FIRE!!!

  Madison didn’t have wait long for some of his fears to come to fruition. Two months after the French-British peace treaty Royal Navy ships carrying about 6,000 British regulars sailed into Chesapeake Bay. Secretary of War, John Armstrong, did not believe the Brits would attack the swampy and forest-shrouded city of Washington … that the British had more interest in the coastal cities. Bad call, muchacho! American forces actually outnumbered the Brits. However, poor intelligence – such as Americans being badly deployed – and a multitude of errors, and many American deserters, led to the British marching virtually unchallenged into the city. Then the Brits burned all public buildings except the Patent Office …. and the White House.

  

  BASTARDS !!!!!!!!!!!!

   

  [Worthy Of Further Study: Dolley Madison, the greatest First Lady of them all. Thomas Jefferson spent few resources on the presidential mansion, believing it would detract from the emphasis of a simple and frugal government. He also avoided elaborate social gatherings at the White House, as he believed they “stank” of the aristocratic courts of Europe. As such, when the Madisons moved into the White House in 1809, the building itself was in disrepair. Dolly established a new philosophy … that the White House should be decorated in a manner appropriate to the dignity of the office it represented. So, she completely refurnished the White House and transformed it into a compelling symbol for the new nation — not nearly as ostentatious as found in European palaces, but rather a quiet dignity within the framework of American political ideology. But, it was more than just a symbol. Dolly also turned it into an arena of governance. The many social events she planned were done with the intention of placing the White House at the center of Washington society … with her husband at the center of policy decisions and deal making. And as her beloved White House burned to the ground, she risked her life gathering up critical White House documents … as well as the great Gilbert Stuart portrait of President George Washington, and carried them away to safety.] 

  SIZE MATTERS!!

  To his credit (I suppose) Madison never wavered that the United States would eventually achieve victory. Where did that confidence come from? Let’s recap:

  —— the Treasury is depleted, the Canada campaign was a disaster, the Navy which actually won battles has its best commanders sitting behind a desk, military desertions are significant, military ineptness abounds, New England not only won’t help the cause but it threatening to secede while at the same time trying to negotiate a separate peace deal with the Brits, even as 7,500 British soldiers were headed towards New Orleans, and now his capital is burned! Hooahhh!!

  To understand the source of his confidence one must look thirty years earlier. During debates over the suitability of a republican form of government to a country as large as America, Madison argued that America’s size would prevent any faction or narrow interest group from dominating the government. Now he believed that the United States could absorb battles lost at Detroit, Niagara, and even Washington, and that it could prevail despite the disloyalty of the Federalists in New England. The United States was simply too large, and consequently, too resilient, to be defeated. In other words, America was too big to fail!

  HOW DID THE SUPERIOR BRITS MANAGE TO F*** THIS UP?

  It seems, at least in this instance, that Madison was right about America’s size. British fortunes suddenly turned for the worse.

  After burning (and looting) the capital, the Brits marched to Baltimore … and met a different fate at the hands of a more skillfully deployed American force of both militia and army regulars. American sharpshooters picked off one-by-one the British division approaching the city from the south. Meanwhile, the big guns at Fort McHenry prevented the British fleet from entering the city’s harbor. By September, the British were forced to withdraw and abandon their campaign in the Chesapeake. Simultaneously, American forces stationed on Lake Champlain turned back a British invading army and 11,000 British troops were forced to retreat back into Canada. Mid-1814 ended relatively well for the Americans.

  More importantly, back in England, British leaders lost the hearts & minds of their subjects. After 20 years of fighting France, and before that, fighting in the American Revolution … well, the people were simply fed up with war. The British became much more preoccupied in rebuilding Europe after the final defeat of Napoleon. A London newspaper even harshly criticized the burning of Washington. On top of all that, even military leaders were questioning whether victory was possible. The Duke of Wellington, the hero of Waterloo, was offered command of the British force in North America … and, he declined, saying the American continent could never be subdued. The loud drums of war fell deadly quiet.

  WE WON! WE WON!!! Ummmmmm …. WHAT DID WE WIN?

  This combination, military defeats in America and the loss of will to fight back in England, led to a peace treaty being signed in Ghent, Belgium on Dec. 24, 1814. The war would officially end in February 1815 after ratification by both governments.

  However, the Ghent talks actually started earlier in the year in August 1814. Madison sent five delegates – including John Quincy Adams and John Clay – and amongst American demands were the end of impressment ….  and turning over Canada to the United States. Madison had balls! The Brits made even more ridicules demands; a new Canadian border located farther to the south, the creation of an independent Indian state in the northwest, British navigation rights on the Mississippi River, the exclusion of American fishing boats from the Grand Banks and the the exclusion of the American Navy from the Great Lakes. The Brits had no brains!

  But, in Ghent by December 1814 all parties dropped their aggressive demands. A simple ceasefire was proposed, prisoners of war would be exchanged, and captured territories from both sides would be returned.

  STUNNINGLY, impressment – one of the two major reasons for going to war in the first place — was not even mentioned. Maritime issues and trade policies – the other major reason for going to war – was mentioned, but only that it would be addressed at some future conference¹.

  Strangely, the American diplomats were ecstatic. Why??? After all that bloodshed and destruction, the Ghent Treaty insured that both sides gained absolutely nothing … as if the war never happened. A Canadian historian wrote;

  “It was as if no war had been fought, or to put it more bluntly, as if the war that was fought was fought for no good reason. For nothing has changed; everything is as it was in the beginning save for the graves of those who, it now appears, have fought for a trifle.”

  [¹NOTE: By Dec 1814 the British practice of impressment had all but ended. And, since France was no longer an enemy of Britain, the Royal Navy no longer needed to stop American shipments to France. Nevertheless, the United States and Britain would argue about trade restrictions and access to markets for the next fifteen years after Ghent!  By 1830, the West Indies were far less important to American exporters than new markets in Latin America. Also by 1830, Britain’s commitment to mercantilism had been replaced internally by support for free trade. In other words, the issues that so bothered Madison would have been resolved of their own accord in due time … WITHOUT A WAR. The War of 1812 wasn’t concluded at Ghent …. it died of old age.]

  INJUN INTERLUDE #1: UP A CREEK

  Worthy of much further study than I have room for here, is the significant victory by Jackson over the Creek Nation. At one time or another the Brits, French, Spanish, and even other Indian Nations (Tecumseh and his Shawnee) aligned with various factions within the Creeks to make war against the United States. The war against the Creeks officially ended in the Treaty of Fort Jackson just five months before the war’s final battle at New Orleans.

  A couple staggering statistics; 1) about 15% of the Creek population was decimated and, 2) the treaty resulted in an enormous land grab as the Creeks lost 36,000 square miles of their territory (half of Alabama, and southern Georgia).

  The Creeks, and to a lesser extent other Indian tribes, were to play a significant role in the British alliance to attack New Orleans. Had the Creeks won their war, the combined forces might very well have overcome Jackson’s army, and New Orleans might have been lost.

  INJUN INTERLUDE #2: TECUMSEH, THE GREAT SHAWNEE WARRIOR

  

  Tecumseh was sick and tired of seeing the social and cultural deterioration, inter-tribal conflict, and white encroachment on Indian lands. So, he developed a plan. Indians needed to restore control over their lives. The only way to do this, he said, was to be unified, to overcome tribal differences, rebuild their integrity, and create a Pan-Indian alliance strong enough to defeat the military forces supporting white expansion. Starting in 1807, he and his brother (Tenskwatawa – “The Prophet”) traveled throughout the interior of America building this alliance of Indian tribes. The obstacles were huge, especially overcoming the decades of inter-tribal prejudices, fears, and wars. But, Tecumseh was a powerful and compelling orator.

  In village after village he preached unity to a dispirited people. He urged them to reject the pollutants of the white man; alcohol, European dress, Christianity. He also preached great patience. He said they must avoid all confrontations with the whites until the confederation was large and strong enough to effectively resist the power of white armies. Isolated skirmishes would only weaken them. They must wait until the time was right,

  Legend has it that Tecumseh said he would send a message when the time was right. He would stamp his foot—and when he did, the earth would shake, the buffalo would stampede, the skies would become dark with birds taking flight, huge cracks would open in the earth’s surface, and the great river would flow backwards.

  But, his brother, the Prophet, couldn’t wait. He launched into a fiery oratory and convinced his followers of his own bullshit – that the white man’s bullets could not harm them. So, in Nov. 1811 the Prophet battled an American force led by William Henry Harrison at Tippecanoe Creek. The Prophet lost, and the dream of a Pan-Indian alliance died with it. Tecumseh would go on to align his small remnant of the Indian confederation with the British, fought in the battle of Detroit, and was killed at the Battle of the Thames in 1813, disbanding the alliance forever.

  Most interestingly though, on Dec. 16, 1811, just over a month after the disaster at Tippecanoe, a great earthquake shook Arkansas and was felt throughout the Mississippi Valley, from Canada to the Gulf of Mexico – the New Madrid earthquake. According to eyewitnesses, buffalo stampeded, the skies became dark with birds taking flight, huge cracks opened in the earth’s surface, and the great Mississippi River flowed backward.

  Tecumseh’s prophecy had come to pass …. just not the way he expected.

  WHAT THE HELL …. LET”S HAVE ONE MORE BATTLE IN NEW ORLEANS

  The popular opinion amongst historians is that there simply wasn’t enough time to cross the oceans to stop the British attack on New Orleans. I don’t buy it.

  The Ghent Peace Treaty was signed on Dec.24, 1814. On Dec. 13th, a British fleet had landed about forty miles east of New Orleans. It must have taken at least a month to get there. The Brits commenced fire on January 8, 1815. The British Commanders and Generals surely must have known that peace talks were in process. So, a prudent thing to do would have been to at least wait to see the results.

  And don’t forget that the Ghent talks were initiated way back in August. Even during those negotiations the dastardly Brits had four invasions planned or underway; 1) the destruction of Washington, 2) the destruction of Baltimore, 3) the Battle of Plattsburgh – where 10,000 British troops tried to cut off New England, and 4) and the Battle Of New Orleans. The treacherous British had an Olive Branch in one hand, and a Murderous Dagger in the other.

  Two things made this battle so important. First, a victory in New Orleans would have been a major boon for the British giving them access to the interior of the U.S. via the Mississippi River. Secongly, it would have given the Brits greater ability for their desire to seal off the United States from the Gulf of Mexico, further isolating the nation. (Furthermore — and this is my pure conjecture — it could have led to a reversal of the Louisiana Purchase, cutting the size of the United States in half.) But, this much is absolutely certain; it would have given the Brits a major trump card in negotiating the Ghent Treaty.

  A popular opinion is that the British would have honored the Ghent Treaty even if they won the battle. Of course, we’ll never know but, I find that opinion enormously preposterous. The Brits, still butt-sore about the beating they took in the Revolutionary War – a war they still would not admit they lost in 1814 – hated America and wanted revenge and destruction. And what history is there of Britain – or any country – winning a huge major battle and then just walking away from it? None. A major victory such as New Orleans would absolutely have resulted in the United States being forced into major concessions. If fact, I wouldn’t be surprised if it would have led to an outright abrogation of the treaty. The Brits were ruthless bastards when it suited them, and never forget, they really hated America.

  What should be crystal clear is that far from being a senseless battle, a British victory at New Orleans would have drastically changed the future of America. But, they didn’t win. They were annihilated. Let’s look at some interesting details.

  THE BATTLE OF NEW ORLEANS …. ONE OF AMERICA’S MOST IMPORTANT VICTORIES EVER

  On the other hand, if you want to skip this section, just watch this 3 minute song by Johnny Horton — he does a fine job ‘splaining it! Nice pics too!

  The British force consisted of roughly 8,000 troops — including Royal Fusiliers, Highlanders, Light Infantry, and Light Dragoons — disciplined troops with plenty of battle experience, having just defeated the French.

  Why capture New Orleans? Lord Castlereagh, the British foreign secretary, said that once the large seaport towns of America were “laid in ashes” and New Orleans captured, that the British would have command of “all the rivers of the Mississippi valley and the Lakes … the Americans would be little better than prisoners in their own country.” The Brits also intended to prevent America from having any access to all of the Gulf Of Mexico.

  General Andrew Jackson first had to prepare the city’s defenses … not an easy task. New Orleans had a very diverse population and resisted organization. So, Jackson threatened to blow up the provincial legislature if it did not comply with his demands, one of which was to suspend habeas corpus. So, he declared martial law, turned the city into a military camp, and took over complete control of the city’s resources. This got their attention.

  He organized all available manpower—frontiersmen, militiamen, regular soldiers, Indians, slaves, townspeople including the city’s unusually large population of free blacks and even the famous river pirate, Jean Lafitte — about 4,000 in total. And then he built the “Jackson Line” –a defensive line between the city and the approaching British forces. Rodriguez Canal was a ten-foot-wide millrace located just off the Mississippi River. Using local slave labor, Madison widened the canal into a defensive trench. He then built an eight foot tall earthen rampart, twenty feet wide in parts, buttressed with timber, and protected by eight artillery batteries When completed, it stretched nearly a mile from the east bank of the Mississippi to a nearly impassable marsh. Jackson told his men “Here we shall plant our stakes and not abandon them until we drive these red-coat rascals into the river, or the swamp.”

  

  The British commander, Cochrane, felt the area could be taken with minimal forces with the help of the Spanish, Indians, and even the people of New Orleans who he felt would welcome the British as liberators. In retrospect, fairly idiotic assumptions.

  The bottom line; it was a hopeless tactical situation for the British with a swamp to the east of the American lines, and the Mississippi River to west. This left the British with only one route of attack—straight into the guns of the American forces tucked inside a dry canal.

  Tennessee and Kentucky riflemen laid withering fire against the advancing British lines, killing or wounding more than 2,000 British soldiers, including three generals and seven colonels, in less than an hour. One British veteran of the Napoleonic Wars claimed it was “the most murderous fire I ever beheld before or since.” American casualties were about 13 killed, and 39 wounded.

  [NOTE: Considerably more Americans were killed in the skirmishes leading up to the final battle. For example, 6,000 British troops snuck into the British headquarters at Villeré’s plantation. Jackson resolved to attack immediately before the British advance was reinforced and organized. He assembled 1,800 men in a battle called “Night Attack”, and repelled the British, but not before suffering 215 casualties.)

  New Orleans was a tremendous victory—one which made Andrew Jackson a national hero, and propelled him into the office of President. And, regardless of the reason for the battle, whether or not it was necessary, Madison certainly knew the fine art of Presidential spinning; — necessary war, reluctantly entered, rights, patriotism, and heroes – all in one brief sentence. (He might as well have been talking about Iraq.)

  “the late war, although reluctantly declared by Congress, had become a necessary resort to assert the rights and independence of the nation. It has been waged with a success which is the natural result of the wisdom of the legislative councils, of the patriotism of the people, of the public spirit of the militia, and of the valor of the military and naval forces of the country Peace.”

  A good detailed account of the battle can be found here: http://www.the-american-interest.com/2014/10/10/the-battle-for-the-big-easy/

  *  *  *

  THE AFTERMATH AND LEGACIES: 10 LESSONS

  1)- First and foremost, let’s be brutally frank about the REAL reason for this war; PRIDE and PATRIOTISM! The Brits didn’t respect our independence. The French didn’t. Spain didn’t. Most of the world thought it was just a fluke. Madison was convinced the country had to prove to the rest of the world, as well as to itself, that this new experiment in republican government was a permanent fixture in the family of nations. And the way to go about that was to confront Britain – the world’s most powerful nation – that violating American rights would not go unchallenged or unpunished. Unbridled Patriotism …so sweet in the Revolutionary War, souring in the War Of 1812, and look where it got us today.

  2)- The war reinforced the Executive branch’s de facto monopoly over foreign policy. When all’s said and done, this was Madison’s war. Another example: John Quincy Adams would defend Gen. Andrew Jackson’s invasion of Spanish Florida in the undeclared war on the Seminoles. Dissenting members of Congress could do nothing but gripe.

  3) A NEW way of looking at the Constitution emerged. Henry Clay said (emphasis mine); —

  “A new world has come into being since the Constitution was adopted. Are the narrow, limited necessities of the old thirteen states … as they existed at the formation of the present Constitution, forever to remain a rule of its interpretation? Are we to forget the wants of our country? I trust not, sir. I hope for better and nobler things.” Evidently, the concept of a Living Constitution took root a long, long time ago.

  4)- The war changed how Americans viewed the military. The Army and Navy became professional. The State Militia took a back seat. Now the nation embraced military spending as a necessity … even during times of peace.

  “The most painful, perhaps the most profitable, lesson of the war was the primary duty of the nation to place itself in a state of permanent preparation for self-defense” —— future President John Quincy Adams

  Many learned that connection with the military is great for one’s political career. Of the eleven presidents between Madison and Lincoln, seven of them got their start in public life or boosted their public careers during the War of 1812.

  It only took 29 years after the end of the Revolutionary War for America to declare its first war. Strangely enough, this war was a complete and utter waste of human and capital resources. The precedent was set. It wouldn’t be the last such time America fought such a war.

  5)—Politicians learned that with proper spin and propagandizing the people can be rallied to LOVE A GOOD WAR. Precious few citizens were in strong favor of the war when it first started. But, at war’s end, the people were ecstatic. A common refrain throughout the country is depicted in this piece written in 1815 by a group known as “republican citizens of Baltimore” stating that the war;

  “ … has revived, with added luster the renown which brightened the morning of our independence: it has called forth and organized the dormant resources of the empire: it has tried and vindicated our republican institutions: it has given us that moral strength, which consists in the well earned respect of the world, and in a just respect for ourselves. It has raised up and consolidated a national character, dear to the hearts of the people, as an object of honest pride and a pledge of future union, tranquility, and greatness.”

  War is good for slogans and jingoes. “Don’t give up the ship” and “We have met the enemy and they are ours” and “Uncle Sam” and cute names for war equipment “Old Ironsides”, and populist songs abounded. Symbols, slogans, songs and sayings; that’s how you condition people’s minds as to what it means to be an American. Mold ‘em like clay into whatever form you want. At least there’s no record of Madison proclaiming “America is the greatest country in the world!!”.

  6)- The war permanently changed America’s economic model. Previous presidents, especially Jefferson, championed an agrarian economy. He hoped that commerce would not dominate America or its politics since that preoccupation would inevitably draw the country into perpetual international turmoil. Shortages caused by the various embargos, as well as the war itself, led to the fast growth of the manufacturing sector in the United States. Manufactures wanted protection from foreign competition once peace was restored, even forming the ‘American Society of the Encouragement of American Manufacturers’, a pro-tariff group. Active promotion of commerce required further expansion of American military strength. In other words, America would promote “free trade” with the government’s help in aggressively opening foreign markets ….. and threatening retaliation in the case of uncooperative regimes by displaying the military card. It wasn’t all that long before “free trade” gave way to mercantilism — a special-interest economic protectionism.

  7)- The devious and greedy amongst us started to notice that war is damn good racket. Shortly after the war, in 1817, the New York Stock Exchange was founded … born in a bubble created by the war. One year later the bubble burst in The Panic Of 1818. The war showed that hard money was for weenies. Paper money was the way to go, and reams of it was printed so the government could borrow it and finance the war. Note-issuing banks spread like wildfire. Once the war ended, imports swelled which led to falling commodity prices which led to big trouble for war-grown manufacturers. Businesses went bust while simultaneously some became filthy rich.    See book —- > https://mises.org/library/panic-1819-reactions-and-policies

  8)- Politicians learned that war makes government more powerful … and a great way to increase taxes.  Albert Gallatin, secretary of the Treasury from 1801 to 1814, said that because of the war, the “people are more American; they feel and act more as a nation ….. the war has laid the foundation of permanent taxes and military establishments, which the Republicans had deemed unfavorable to the happiness and free institutions of the country.”

  9)- The war ended a political party. The Federalist Party, the party of Washington and Adams, the party that had dominated national affairs during the 1790s, was all but dead after the war. They were staunchly against the war. They were even ready to introduce legislation requiring a two-thirds vote of approval for all future declarations of war, and that legislation restricting trade, such as the embargo, should also require a two-thirds vote. That is, until the stunning news of Jackson’s victory at New Orleans arrived in Washington. They picked the wrong cause. The country was in no mood for an anti-war party. And, within a few years of the war, they just faded into oblivion.

  10)- Expansionism. The victory over not only the Brits, but also over the Indians in the Northwest and Southwest, opened up the West as never before, and resulted in huge territorial gains. Westward expansion, in turn, indirectly led to the Civil War forty six years later because it was bitter disagreement about the expansion of slavery, rather than its existence in the Old South, which was a key reason for the War of Northern Aggression.

  GOOD, BAD, or UGLY?

  I originally titled this article “1812: The War That Changed America Forever For Worse”. I’m not sure whether or not that conclusion is 100% accurate. The “inconsequential” war certainly and drastically changed America, of that there is no doubt. Whether for the good, or bad, you’ll have to decide for yourself.

  On the positive side, the war did cement American independence. It proved that to defeat America on its home ground, a very, very large army, and a great commitment to prolonged and bloody war, was going to be needed. At the start of the war even Americans wondered whether the republic could survive a real crises. Many felt with Governor Morris did, that — ‘it was as vain to expect the permanency of democracy as to construct a palace on the surface of the sea.’ Now they had their answer.

  Americans would no longer be oriented towards Britain. We achieved freedom from Europe. We would turn to developing our own vast resources, and forget about Europe. Our National Government was here to stay.

  The end of the war led to a burst of patriotism in the USA as evidenced, in part, by the immediate and widespread popularity of “The Star Spangled Banner” The Nile Register wrote — “Who would not be an American? Long live the republic! All hail! Last asylum of oppressed humanity!”   Such a comment would have never been made before the war. A whole new national identity arose in “the dawn’s early light”.

  On the negative side; the war left the country with constitutional revisionism, centralized power, protectionism, mercantilism, expansionism, blind patriotism, and militarism. That decentralist small-government thingy conceived by the Founding Fathers didn’t last very long, did it? One must wonder “War, what is it good for? Was it all worth it?”

  *  *  *

  Most excellent resource — War Of 1812 Website

  

  

  
  
  

  

• Mapping An ISIS Advance: Syria On The Brink

  Recently, calls for US ‘boots on the ground’ in Syria have gotten louder after ISIS captured a UNESCO World Heritage site in Syria, overran Ramadi in Iraq, and took credit for a suicide bombing in a Saudi mosque. 

  The US is now reportedly looking at its options including sending so-called “spotters” to Iraq who will help to make US airstrikes more effective and meanwhile, uber hawks like Senator John McCain (who has himself had a bit of trouble shaking rumors that he was once photographed with the same ISIS forces he now wants to annihilate) saying that as many as 10,000 US troops are necessary to turn the tide. From Bloomberg:

  Arizona Republican Senator John McCain, chairman of the Senate Armed Services Committee, speaks during panel discussion at regional security summit in Singapore.

   

  Islamic State is winning in Iraq, Syria: McCain

   

  Air strikes without foreign troops on the ground providing real time targeting information aren’t effective: McCain.

   

  McCain says he blames President Barack Obama’s decision to withdraw troops from Iraq for emergence of Islamic State.

  Here’s a bit of color from Stratfor on the current situation on the ground:

  Last week, the Islamic State seized the ancient city of Palmyra from Syrian President Bashar al Assad’s forces. The city’s capture adds to the many defeats Damascus has suffered over the past six months, compounding its problems as it faces threats on multiple fronts.

   

  The Islamic State’s victory in Palmyra is notable for two reasons. First, it has completely isolated loyalist forces in Deir el-Zour province, including the 137th Mechanized Brigade and the elite 104th Republican Brigade. Second, Palmyra’s location — a critical crossroads in the center of Syria — gives the Islamic State a strategic base from which it can launch attacks on key locations in the surrounding area.

   

  The Islamic State’s maneuvers in Homs province, where Palmyra is located, denote a shift in its strategy in Syria. Previously, the Islamic State fought against the People’s Protection Units in Kobani and al-Hasaka while maintaining its positions in Aleppo province.

   

  Earlier in the conflict, Damascus removed its forces from Homs province and deployed them against the growing rebel threat of Jaish al-Fateh in Idlib province. The redeployment, which transferred the elite Tiger Forces and Desert Falcons away from the Islamic State’s area of operations, will now be seen as a mistake. The elite forces have been unable to halt rebel advances in Idlib, and their departure from Homs has left the government highly vulnerable on its eastern flank.

   

  The Islamic State now threatens the Syrian government’s core territory, which stretches from Damascus to Aleppo. It is likely that the government will try to take the fight to Islamic State forces stationed in Palmyra, if not to recapture the city then to pin the group down in a single location and keep it from spreading to other strongholds. Either way, any action al Assad takes in response to the Islamic State’s success in Homs will expose Damascus on other fronts.

  Here are the visuals…

  

  

  *  *  *

  Indeed it appears as though President Bashar al-Assad is well on his way to losing control. We’ll close with what we said last week:

  As you can see, there are now plenty of excuses to put boots on the ground first in Iraq, and then in Syria. Put simply: if there was ever an opportune time to play the ISIS card on the way to ousting Assad and securing a route for Qatari natural gas to flow to Europe thus breaking Gazprom (and Putin’s) stranglehold, this is surely it. 

  

  
  
  

  

• Was Charlie Hebdo A "Convenient" Incident For Policymakers?

  Submitted by Claudio Grass via Acting-Man.com,

  Many Questions

  On the 7th of January two gunmen attacked the office of Charlie Hebdo, a French weekly magazine. The shooters were two brothers who belonged to the Yemeni branch of the Islamist terrorist organization Al-Qaeda. The attack resulted in 11 casualties and many injured, while the shooters were shot a few days later in an exchange of fire with the police. Charlie Hebdo is a satire magazine, and its jokes and cartoons and its secular approach are widely considered anti-religious. Social media went into a frenzy with the hashtag “Je suis Charlie”. Four days later two million people including tens of world leaders participated in a rally for national unity in Paris, and over three million participated across France. A lot of questions were raised by this tragic event and its aftermath that we will look at in this article.

   

  

  The gunmen who attacked Charlie Hebdo and their get-away car

  Photo via Reuters TV

  How Free Should Free Speech be When it Comes to Religion?

  Let’s start with the obvious: What was the motive of the shooters? According to witness reports of the attack, one of the shooters said “You are going to pay for insulting the Prophet”. Charlie Hebdo’s cartoons and jokes are regarded as quite controversial, as they mock all religions, whether Islam, Christianity or Judaism. When respect to Islam, they repeatedly published cartoons of Mohammed, which infuriated Muslim communities worldwide as images of the Prophet are not allowed to be depicted according to Islamic teachings. Not only was the magazine sued for this, its editor-in-chief, who was killed in the attack, had been on the hit list of the Al-Qaeda branch in Yemen for some time.

  Certainly these attacks have added to a climate of tension and fear, and many would classify Charlie Hebdo’s satire as hate speech or a discriminatory form of expression. But the bottom line is that it is an opinion, which you can choose to agree or disagree with. To redress an opinion with a barrel of a gun is never the right answer. Freedom of speech has been widely established, but is constantly under attack. Even after having codified freedom of speech and expression into their constitutions, many Western countries have introduced contradictory defamation laws. The line has clearly not been drawn. However, why should there be a line in the first place?

  In my view, the right to speak freely should be absolute, and shouldn’t be restricted in any way. The essence of liberty lies in freedom from restrictions and control by an external entity. Ideas and thoughts are entitled to be expressed and circulated freely to whoever wishes to listen to them. This is what distinguishes democracies from authoritarian regimes. But what should govern controversial ideas, particularly when it comes to “sensitive” subjects like religion? Like the free market, free speech will govern itself and find its own equilibrium. In a society that upholds the right to free speech, there will be disagreements and these disagreements will lead to debate between the conflicting parties. The significance however lies in that these parties agree to disagree, and are willing to defend the right to free speech and expression at all costs.

   

  

  Cartoon by David Pope

  Renowned economist and strong advocate for libertarianism, Murray N. Rothbard, offers an interesting perspective, as he argues that free speech is connnected with where we can exercise this right. In other words, the right to speak is connected with the right to property. A man can exercise his right of free speech within the parameters of his own property, or within the property of someone who has willingly agreed to allow him to exercise this right on his premises. According to Rothbard:

  “A person does not have a “right to freedom of speech”; what he does have is the right to hire a hall and address the people who enter the premises. He does not have a “right to freedom of the press”; what he does have is the right to write or publish a pamphlet, and to sell that pamphlet to those who are willing to buy it (or to give it away to those who are willing to accept it).”

  Because it is a matter of property rights, you can exercise your right within your own property, but others can restrict you from exercising it on their property. At the end of the day, if you watch a show on TV that you disagree with, you can simply turn it off, and should you find an interesting article you can choose to read it or not. It is this freedom that should be and deserves to be defended!

  I recently read an interesting article by Hans-Hermann Hoppe, which contained the following paragraph:

  “The State in its long history has made some people richer and others poorer than they would have been otherwise. It killed some people and let others survive. It moved people around from one place to another. It promoted some professions, industries or regions and prevented or delayed and changed the development of others. It awarded some people with privileges and monopolies and legally discriminated against and disadvantaged others, and on and on. The list of past injustices, of winners and losers, perpetrators and victims, is endless.”

  Although he wasn’t discussing freedom of speech in his article, I think the above is applicable to our discussion here. Even if a case could be made for limiting freedom of speech in certain cases such as discrimination or inciting violence, do we really want to entrust the government, historically the biggest killer and discriminator, with the task of defining where these limitations should lie?

   

  

  Research into democide by R.J. Rummel suggests that governments killed altogether 262 million people in the last century.

   

  Is Charlie Hebdo a “Convenient” Incident for Policymakers?

  Since 9/11 the global war on terror was used to “justify” excessive legislation that restricted many basic and fundamental civil liberties and legitimized violation of privacy by the State. States have and will continue to misuse such incidents to further violate the civil liberties of citizens. By fueling hatred and anger against different religions and ethnic groups, states are very much applying the old political strategy of divide and conquer. The war on terror wouldn’t have gained this much support if it weren’t for fueling anger against Islam worldwide (let’s not forget that the US conveniently allied with Osama Bin Laden and his followers against the Soviets in Afghanistan in the 1980s).

  It is astonishing how states get their way when tying their policies to emotionally-driven topics linked to identity and human life. The American public suddenly gave away its right to privacy through the Patriot Act, which was introduced under the pretext of deterring terrorism and to better support the authorities in finding and hunting down criminals that are targeting the American public. This leads us to recall our recent interview with former Czech President Mr. Václav Klaus, who made a rather honest and realistic statement:

  “We experienced it in 2001 in America and it had very negative repercussions for us in Europe. I am afraid there will be a new wave of attempts to limit our personal freedom due to the so-called war against terrorism.”

  Looking back on the interview his fears were more than justified, as we are now seeing similar developments such as in the US after 9/11! The lower house of parliament in France just passed a bill that has already been dubbed the “French Patriot Act”. Due to the huge majority in the lower house we expect it to pass the upper house as well. This bill lays down the rules regarding surveillance of all forms of communication without prior approval by a judge.

   

  

   

  Furthermore, starting in September of this year, there will be massive new restrictions on the use of cash in France. Cash transactions over 1,000 Euro will no longer be allowed (down from 3,000 Euro). Foreign exchange transactions over 1,000 Euro will have to be recorded with an ID or passport of the person in question (down from 8,000 Euro). All cash deposits or withdrawals higher than 10,000 EUR per month will have to be reported to the anti fraud and money laundering agency. I think these developments only a few months after the Hebdo attack show clearly how this event is being misused to implement further restrictions on the civil liberties of the French population.

   

  How Selective is Media Coverage in Connection with Acts of Terrorism and Violence?

  Charlie Hebdo remained a focal topic in the media, the march in Paris was widely celebrated, and “Je suis Charlie” was everywhere on Facebook and Twitter. Other attacks did not receive this much attention, although they were equally gruesome and violent. Between the 3rd and 7th of January (the same day as the Charlie Hebdo attack) there were mass killings by Boko Haram in Nigeria. Boko Haram is a violent militia group that operates in northeastern Nigeria since 2009. In these four days it burned down 16 towns and villages, and overran the headquarters of the joint task force. The estimated number of casualties was ranging between hundreds and thousands.

   

  

  Boko Haram djihadists in Nigeria

  Photo credit: AP

  How can such a mass killing be ignored? Isn’t terrorism a violation of human rights everywhere? On February 11^th a gunman shot three citizens, a young Muslim couple and the woman’s sister, in the US town of Chapel Hill. The motive? Apparently it was a dispute over a parking issue. Meanwhile the families of the victims labeled it a hate crime. However, an article published in the British Independent newspaper put the real issue at the forefront:

  “Would the media have covered the tragedy if Twitter didn’t exist, and what would have happened if the murderer was Muslim?”

  What about hate crimes after Charlie Hebdo? France saw more attacks following the incident, which were not widely covered in the media, and certainly the list goes on around the world. An article in the UK’s Telegraph was entitled “’We’re leaving Britain – Jews aren’t safe here anymore’”. Yes, we knew racial and religious profiling was a problem, but how many of us knew that it has become so bad that people felt threatened and at constant risk? The article cited figures from the Community Security Trust (CST), which monitors anti-Semitism in Britain, which revealed a record 1168 incidents of anti?Semitism in 2014, which more than doubled from just a year earlier.

  Where are the media reports on all this? What is at issue here is the selectivity of media coverage. Why do some stories deserve more coverage than others? We’ve established our case that free speech should be free from restrictions, but we also argue that media outlets should not be exploited for pushing certain political agendas.

   

  Where Would we be if it Weren’t for Social Media and the Internet?

  It takes revolutionary means to promote revolutionary ideas. The invention of the first European movable printing type with the Gutenberg Press was a revolutionary discovery which played a significant role during the time of reformation, as it enabled the mass-exposure of the ideas and concepts of the protestant faith, and the case for religious decentralization and secularism that threatened the power of political and religious authorities.

   

  

  Johannes Gutenberg inspects the output from the movable type printing press he invented in the mid 15^th century. It would prove to be a truly revolutionary invention

  Image via Bettman-Corbis

  Then why shouldn’t we be able to make the best out of today’s mass media and social networks – to exercise our right to post our opinions online with no Big Brother watching over our shoulders controlling what or what we cannot say on the worldwide web? Whether Charlie Hebdo, or other cases of religious violence, all have certainly put media coverage in the spotlight. If it weren’t for social media, we may not have noticed the biased mainstream coverage or how states are manipulating racial profiling to satisfy their agendas. The media and the State are under great scrutiny nowadays. Ever since Western countries have signed up for the global war on terror, they have willingly and knowingly aggravated and encouraged more and more discrimination, while further infringing on the very civil liberties they claim to be protecting.

  For me, the most important takeaway from the tragic events in France is that we need to stay as vigilant as ever in defending our freedoms. As the aftermath of the Hebdo attack has shown, governments will misuse any opportunity they see to further restrict our freedom and arrogate more power to themselves. This is especially easy when people are faced with an understandably emotionally tense situation like 9/11 or other terrorist attacks. However, thanks to the Internet we are less prone to accept State propaganda and are able to get a more objective view of what is really happening in the world around us.

  

  

  
  
  

  

• Something Smells Fishy

  Submitted by Jim Quinn of The Burning Platform

  

  Something Smells Fishy

  It’s always interesting to see a long term chart that reflects your real life experiences. I bought my first home in 1990. It was a small townhouse and I paid $100k, put 10% down, and obtained a 9.875% mortgage. I was thrilled to get under 10%. Those were different times, when you bought a home as a place to live. We had our first kid in 1993 and started looking for a single family home. We stopped because our townhouse had declined in value to $85k, so I couldn’t afford to sell. In 1995 I convinced my employer to rent my townhouse, as they were already renting multiple townhouses for all the foreigners doing short term assignments in the U.S. We bought a single family home in 1995 with the sole purpose of having a decent place to raise a family that was within 20 minutes of my job.

  Considering home prices on an inflation adjusted basis were lower than they were in 1980, I was certainly not looking at it as some sort of investment vehicle. But, as you can see from the chart, nationally prices soared by about 55% between 1995 and 2005. My home supposedly doubled in value over 10 years. I was ecstatic when I was eventually able to sell my townhouse in 2004 for $134k. I felt so smart, until I saw a notice in the paper one year later showing my old townhouse had been sold again for $176k. Who knew there were so many greater fools.

  This was utterly ridiculous, as home prices over the last 100 years have gone up at the rate of inflation. Robert Shiller and a few other rational thinking people called it a bubble. They were scorned and ridiculed by the whores at the NAR and the bimbo cheerleaders on CNBC. Something smelled rotten in the state of housing. We now know who was responsible. Greenspan and Bernanke were at least 75% responsible for the housing bubble and its eventual implosion, which essentially destroyed our economic system. They purposely kept interest rates at obscenely low levels, encouraging every Tom, Dick and Julio to buy a home with a negative amortization, no doc, nothing down, adjustable rate mortgage, so they could live the American dream of being in debt up to their eyeballs.

  Greenspan and Bernanke were also responsible for regulating the Wall Street banks. They allowed them to leverage themselves 30 to 1. They allowed them to create fraudulent high risk mortgage products. They looked the other way as Wall Street sliced and diced these guaranteed to default mortgages into AAA rated derivatives that were then spread throughout the global financial system like ticking time bombs. As home prices rose three standard deviations above the long term average, these Ivy League educated geniuses cheered it all on. Bernanke saw no bubble, just as it was bursting. He saw no mal-investment or systematic risk from this orgy of greed and fraud. And then it all blew up in our faces, while the perpetrators walked away unscathed to pillage and rape once more.

  

  And now we come to present day and something really smells fishy again. Home prices crashed by 40% between 2005 and 2012, putting prices back to 1978 on an inflation adjusted basis. All of the bubble gains were wiped out in the blink of an eye. Bernanke and his Wall Street owners had a real problem with this development. Wall Street banks had/have billions in toxic mortgages on their books and only accounting fraud by not having to mark them to market has kept these banks from having to declare bankruptcy. Bernanke, Geithner, and the Wall Street banks hatched their master plan to save themselves at the expense of young people in 2011/2012.

  We know for a fact that real median household income is still 7% below 2007 levels and sits at the same level as 1989. We know for a fact that wages have been stagnant since 2007. We know for a fact GDP has barely broken 2% since 2009. We know for a fact the price of healthcare, food, energy, tuition, rent, and a myriad of other daily living expenses are dramatically higher since 2009. We know mortgage originations are at 1997 levels. We know housing starts are 60% below the 2005 highs and at levels seen during the 1991 and 1981 recessions. Existing home sales are 30% below the 2005 high, only up 10% from 2012 levels, and sitting at levels reached in 1999 before the boom.

  A critical thinking person might wonder how median single family home prices could possibly skyrocket by 37% in the last three years when household incomes are falling, living expenses rising, and the number of houses being sold are at recessionary levels. The stinking rotting fish again sits in the hallways of the Eccles Building in Washington D.C. Janet “Yellowfish” Yellen has inherited the bubble blowing machine from Ben “Blowfish” Bernanke and has continued to inflate a new housing bubble, because one housing bubble just isn’t enough.

  

  There is nothing free market about the 37% increase in home prices. It has absolutely nothing to do with supply and demand. It has nothing to do with normal families looking for a home. It has everything to do with the Federal Reserve’s 0% interest rates, the $3.5 trillion of QE injected into the economic gambling system, Wall Street banks withholding foreclosures from the market, hedge funds buying up tens of thousands of foreclosed homes and renting them out to the former middle class, Fannie and Freddie guaranteeing 70% of all sales, the government encouraging 3.5% subprime loans again, Chinese and Russian billionaires parking their ill gotten wealth in US real estate, and flippers reappearing in the same old places (Las Vegas, Phoenix, Florida, California).

  The Federal Reserve created the last housing bubble and they’ve created the new housing bubble, along with stock and bond bubbles, with their easy money policies designed to enrich their Wall Street owners and the parasites who feed off the financial industry. Their entire plan smells to high heaven. They have thrown young people and most of the middle class overboard, while the bankers, billionaires, politicians, and connected cronies party like it was 2005 on their $250 million yachts.

  

  Now what? The Fed says they are going to raise rates. The QE spigot has been turned off. The hedge funds are selling their buy and rent hovel investments, cash buyers are dwindling, the flippers who appeared in 2005 are back, Boomers are looking to sell and downsize, young people are already in debt up to their eyeballs thanks to the government doling out student loans like candy, the number of full-time good paying jobs continue to dwindle, and the rigged 37% price increase has priced millions of people out of the market.

  The good news is the Wall Street banks have inflated their balance sheets and celebrated by giving themselves $20 billion in bonuses for a job well done. If mortgage rates rise to 4% or God forbid 5%, the entire housing complex would implode faster than a blowfish out of water. If you’ve bought in the last two years you will be underwater sleeping with the fishes like Luca Brasi in the not too distant future.

  

  

  

  
  
  

  

• What's Holding Back America?

  Just a little more hope… and some change…

   

  

   

  Source: Investors.com

  

  

  
  
  

  

• Euro-sclerosis

  Submitted by Alasdair Macleod via GoldMoney.com,

  There appears to be little or nothing in the monetarists' handbook to enable them to assess the risk of a loss of confidence in the purchasing power of a paper currency. Furthermore, since today's macroeconomists have chosen to deny Say's Law, otherwise known as the laws of the markets, they have little hope of grasping the more subtle aspects of the role of money in price formation. It would appear that this potentially important issue is being ignored at a time when the Eurozone faces growing systemic risks that could ultimately challenge the euro's validity as money.

  The euro is primarily vulnerable because it has not existed for very long and its origin as money was simply decreed. It did not evolve out of marks, francs, lira or anything else; it just replaced the existing currencies of member states overnight by diktat. This contrasts with the dollar or sterling, whose origins were as gold substitutes and which evolved in steps over the last century to become standalone unbacked fiat. The reason this difference is important is summed up in the regression theorem.

  The theorem posits that money must have an origin in its value for a non-monetary purpose. That is why gold, which was originally ornamental and is still used as jewellery endures, while all government currencies throughout history have ultimately failed. It therefore follows that in the absence of this use-value, trust in money is fundamental to modern currencies.

  The theorem explains why we can automatically assume, for the purposes of transactions, that prices reflect the subjective values of the goods and services that we buy. This is in contrast with money that is not consumed but merely changes hands, and both parties in a transaction ascribe to money an objective value. And this is why the symptoms of monetary inflation are commonly referred to as rising prices instead of a fall in the purchasing power of money.

  The European Central Bank (ECB) is plainly assuming the euro is money on a par with any other major currency with a longer history. Despite caution occasionally expressed by sound-money advocates in Germany's Bundesbank, the ECB is aggressively pursuing monetary policies designed to weaken its currency. For example, it has reduced its deposit rate for Eurozone banks to minus 0.2%. This is wholly unnatural in a world where possession of money is always more valuable than an IOU. Furthermore banks are encouraged to limit their customers' cash withdrawals, often under the guise of fighting tax evasion or money laundering. But in Greece restrictions on cash withdrawals are clearly designed to protect the banks.

  So far, there is nothing identified in this article that actually points to a destabilisation of the euro, other than it's generally a bad idea to fool around with peoples' rights to it. But lets assume for a moment that Greece defaults. In that case the Greek banking system would certainly collapse (assuming the ECB suspends its emergency liquidity assistance (ELA) because bad debts already on their balance sheets exceed tangible equity by a substantial margin. If that assistance is withdrawn, some €80bn of ELA will be lost. Furthermore, TARGET2 2 settlement imbalances at the other Eurozone central banks, which have arisen through capital flight from Greece and which are guaranteed by the ECB, total a further €42bn. This leaves the ECB in the hole for €122bn. Unfortunately, the ECB's equity capital plus reserves total only €96bn, so a Greek default would expose the euro's issuing bank to be woefully under-capitalised.

  Therefore, if Greece defaults we would at least expect the validity of this relatively new euro to be challenged in the foreign exchange markets. Even if the ECB decided to rescue what it could from a Greek default by rearranging the order of bank creditors in its favour through a bail-in, it would still have to make substantial provisions from its own inadequate capital base. For this reason, rather than risk exposing the ECB as undercapitalised, it seems likely that Greece will be permitted to win its game of chicken against the Eurozone, forcing the other Eurozone states to come up with enough money to pay off maturing debt and cover public sector wages. So will that save the euro?

  Perhaps it will, but if so maybe not for long. If the Eurozone's finance ministers give in to Greece, it will be harder for other profligate nations to impose continuing austerity. Anti-austerity parties, such as Podemas in Spain, are increasingly likely to form tomorrow's governments, and Spain faces a general election later this year. Prime Minister Renzi and President Hollande in Italy and France respectively are keen to do away with austerity and increase government spending as their route to economic salvation. Unfortunately for both the undercapitalised ECB and its young currency, they are increasingly likely to be caught in the crossfire between the Northern creditors and the profligate borrowers in the South.

  Even if Greece is to be saved from default, the ECB will need to strengthen the Greek banks. This is likely to be done in two ways: firstly by forcing them to recapitalise with or without bail-ins, and secondly to restrict money outflows through capital controls and harsh limits on depositor withdrawals if need be. Essentially it is back to the Cyprus solution.

  Whichever way Greece is played, Eurozone residents will see themselves having a currency that is becoming increasingly questionable. The bail-in debacle that was Cyprus is still etched in depositors' minds. Cyprus certainly has not been forgotten in Greece, where ordinary people are now resorting to buying mobile capital goods that can be easily sold, such as German automobiles, with the bank balances that cannot be withdrawn in cash and are otherwise at risk from a Cyprus-style bail-in. Greek depositors have realised that euro balances held in the banks are not reliably money. Folding cash is still money, but that is all, and furthermore the folding stuff is rationed.

  The next blow for the euro could come from the exchange rate. If the euro continues to lose purchasing power on the foreign exchanges, it is likely to undermine confidence on the ground. And when that happens it will be increasingly difficult for the ECB to retrieve the situation and maintain the euro's credibility as money. It just doesn't seem sensible to take such enormous risks with a currency that has existed for only thirteen years.

  

  

  
  
  

  

• Seymour Hersh And The Dangers Of Corporate Muckraking

  By Mark Ames, originally posted on Pando Daily

  Seymour Hersh And The Dangers Of Corporate Muckraking

  

   

  “The Times wasn’t nearly as happy when we went after business wrongdoing as when we were kicking around some slob in government.” — Seymour Hersh

   

  In its original meaning, “muckraking journalism” was all about exposing the awful power that corporations, trusts, and monopolies exercised over people and the broader public interest. So why doesn’t Seymour Hersh, considered the premiere “muckraker” of the past few decades, turn his fearless muckraking guns on private corporate power?

  Ida Tarbell dug deep into Rockefeller’s Standard Oil empire and all the ways it exercised a kind of private government tyranny over huge swathes of public life; Tarbell’s work directly influenced the antitrust breakup of Standard Oil in 1911. Upton Sinclair exposed brutality in the meatpacking industry — on its workers, the slaughtered animals, and the diseased, rat-infested meats that eventually wound up in consumers’ homes — leading to the Meat Inspection Act and the Food and Drug Administration. Other muckraking exposés led to state-level child labor and workers’ comp laws, the progressive income tax amendment, and laws placing vast expanses of land and forests under federal protection from rapacious robber barons.

  But Hersh and others we today call “muckrakers” focus almost exclusively on taking on government power and the national security state power — not the power of private governments (corporations, oligopolies) that exert so much mundane existential power over our mundane little existences. To the extent that muckrakers today do delve into concentrated private power, it’s usually to expose the influence of corporate money in government, which reinforces the basic operating assumptions today that power is in the hands of public government, and that corporate power is only a problem when it co-opts government power.

  The nearly exclusive focus on fighting government power started with the baby boomers in the mid-late 1970s, as they retreated from politics and labor unions, and ditched the sort of university Marxist rhetoric that filled the pages of old Ramparts magazine issues.

  There are a lot of reasons for this trend in muckraking journalism over the past few decades, away from fighting private corporate power, in favor of fighting government power — but the most obvious reason of all is the one you won’t hear about much because it’s not very glamorous or heroic: It’s better for your journalism career — and easier — to take on the government leviathan, than it is to take on private corporate power.

  The best illustration of this is what happened when Seymour Hersh once tried his hand at corporate muckraking — and failed. The reasons he failed offer important lessons for anyone interested in understanding why investigative journalism chooses to emphasize and amplify some stories over others.

  Before getting into the story, it’s important to situate Hersh’s politics back in the 1970s, when he first rose to fame exposing the horrific My Lai massacre and the massive illegal CIA domestic spying programs. Back in the mid-70s, when they were muckraking rivals, Bob Woodward described Hersh as “an old line radical . . . interested more in the abuse of really big power, concentrated power, in the military and international capitalism.” In the New York Times newsroom, editor Abe Rosenthal used to affectionately refer to Hersh as “my little commie.”

  In 1975, Hersh was at the very top of his game. As I wrote about earlier this month, Hersh’s bombshell story in the New York Times exposing the massive CIA domestic spying program MH-CHAOS — which the Times dubbed “son of Watergate” — led to an entire year of Congressional committees and White House investigations into US intelligence abuses, followed by a rash of reforms, some serious, some half-baked.

  That same year, as Hersh’s colleagues jumped on the muckraking-government bandwagon exposing intel agency abuses (after initially attacking Hersh’s CIA reporting), Hersh himself decided that it was time for a shift — to focus on fighting private corporate power and abuses. As Hersh told NY Times editor Abe Rosenthal:

  “The biggest story in the next ten years is going to be corporations.”

  After years in Washington, Hersh had moved to New York in 1975 and spent three years there because that’s where his wife was going to medical school. Moving from the capital of government power to the capital of capitalism helped focus Hersh on this other source of huge and often unaccountable power: corporations.

  In principle, the New York Times agreed with Hersh’s idea — as managing editor Seymour Topping said in 1977,

  “There is no reason why we should not scrutinize the private sector as we have government in the Watergate affair.”

  But as the Times would find out when they tried this out, it’s a lot more dangerous and tricky to put a bug up private power’s ass than government power’s.

  It started in 1976, when Hersh did a groundbreaking series of articles on perhaps the most powerful (and scary) mob attorney of the 20th century: Sidney Korshak, who served everyone from Al Capone, Sam Giancana and Jimmy Hoffa, to Hollywood-Vegas moguls Lew Wasserman and Kirk Kerkorian. Hersh’s story included allegations that Korshak had planted a camera and a call girl in Senator Estes Kefauver’s hotel room to blackmail him into halting an investigation into the mob, which Kefauver suddenly and unexpectedly did halt; and that many years later, it was thanks to a phone call from Korshak that Al Pacino was released from his MGM contract so that he could play the role of Michael Corleone in Paramount Pictures’ The Godfather.

  But Korshak was not the type of guy people — journalists — felt comfortable writing about publicly. He once told a former New York Times journalist turned budding film producer,

  “Do you know what’s the best insurance policy in the world that absolutely guarantees continued breathing? Silence.”

  The ex-journalist, Peter Bart, immediately burned his notes, and went on to a successful career in Hollywood.

  So it’s a wonder that Hersh and his collaborator on the Korshak articles, Jeff Gerth (now at ProPublica), didn’t find themselves in the obit pages shortly afterwards, their careers tragically cut short in mysterious car crashes or suicide overdoses. . . .

  Instead, Hersh smelled blood: the Korshak articles opened his eyes to a company that was, in the 1970s, the symbol of aggressive, shady corporate power: Gulf & Western. Most people have probably forgotten Gulf & Western, once considered the most aggressively acquisitive conglomerate in the US, so aggressive that even Wall Street nicknamed the company “Engulf & Devour” (immortalized as the evil corporation in Mel Brooks’ “Silent Movie”). G&W’s best known subsidiary was Paramount Pictures, which Gulf & Western bought in the mid-1960s during its massive acquisition spree, underwritten by easy money from banking giants Chase Manhattan and Manufacturers Hanover.

  Under Gulf & Western, Paramount made some classic films including Chinatown, The Godfather, Airplane!, and Three Days of the Condor. G&W also made the career of future media tycoon Barry Diller, who was named Paramount’s CEO and chairman in 1974 and served there for a decade.

  Mob attorney Korshak was so integral to Gulf & Western’s Paramount subsidiary, he was known as the film company’s “consigliere,” and rumored to be the model for Robert Duvall’s consigliere character in Paramount’s “The Godfather.” Two years after acquiring Paramount in 1968, G&W pulled off a mind-boggling transaction with notorious Sicilian mafia financier Michele Sindona, who oversaw the mafia’s global heroin money laundering operations, managed the Vatican’s global portfolio (earning the nickname “God’s banker”), and helped the CIA move money around the globe. Somehow, Gulf & Western managed to exchange reams of worthless commercial paper in a broke subsidiary, Commonwealth United, at a vastly inflated price in exchange for a 10.5% stake in Sindona’s investment empire, Societa General Immobilaire — which was followed by another shady transaction giving half of Paramount Studio’s movie lot to Sindona’s mafia bank. Sindona explained the transaction thus:

  “I always sell a company for less than it is worth to someone I want to please.”

  In the mid-1970s, Sindona’s investment empire collapsed, triggering what was then the largest US bank failure in history — eventually leading to Sindona’s arrest and extradition to Italy, where was poisoned to death with cyanide.

  G&W acquired so many companies in its mad buying spree in the late 60s and early 70s that by the time Hersh took the company on, it was the 19th largest employer in the USA. One of its subsidiaries was the Dominican Republic’s sugar monopoly, whose assets included the largest sugar refinery in the world. That made Gulf & Western the largest employer and taxpayer in the Dominican Republic, home to all sorts of American interventions over the years, and led to a scandal in which G&W and the Dominican Republic’s central bank secretly helped cook each other’s books through illicit transfers.

  G&W’s chairman — and Hersh’s nemesis — was Charles Bluhdorn, the “Mad Austrian” and one of the most infamous names in the business world in his day. In the 1990s, years after Bluhdorn’s early demise by heart attack, he was described by the New Yorker as “the most ruthless conglomerateur of them all” and “the last of the great business eccentrics.”

  But Hersh saw Bluhdorn in less flattering terms, telling his Times editors:

  “If your local butcher pulled some of the acts these corporations pulled, he’d be in jail.”

  To his editor Abe Rosenthal, Hersh insisted that Gulf & Western would be the Big Business Story of the decade: “I’ve been trying to get into big business stories since coming to NY, and this one is the ultimate,” Hersh wrote in a memo. He believed an exposé on Gulf & Western would “help explain how things work in this nation,” describing G&W as “almost an archetype of what is wrong, or suspected to be wrong, about modern big-time conglomerates,” a company that “grows bigger not by building better products, but by playing the stock market.” Indeed in many ways, the opportunities for fraud and abuse of power that a conglomerate as huge and murky as Gulf & Western were many. And some of its schemes used to hide or transfer losses and inflate earnings by moving assets between subsidiaries, and the ways in which Bluhdorn was able to milk the conglomerate as his own personal ATM machine by commingling personal loans with the conglomerate’s banks and its assets foreshadowed some of the fraudulent accounting and bonus schemes used by the big banks in our times, with catastrophic results for the global economy.

  This backdrop to Hersh’s one foray into corporate muckraking is explained in Robert Miraldi’s 2012 biography on Hersh.

  Hersh’s massive Gulf & Western exposé was published in the Times in 1977 — 13,000 words long, in three parts, revealing a private labyrinth of corporate fraud, abuse, tax avoidance schemes, and mobbed-up malfeasance. And yet — in spite of all the pre-publication hype, the story landed with a whimper. Something Hersh wasn’t at all used to. For one thing, the article’s language was unusually cautious and dull for a Hersh scoop. As New York magazine quipped,

  [T]he general reaction has been a big yawn.

   

  “I expected a lot more explosive stuff,” commented a former G. & W. executive.

  The reason was pretty straightforward: unlike Hersh’s stories going after the CIA and the military, the Times was far more afraid, and careful, of the consequences of taking on a powerful private company (Gulf & Western) and getting sued out of existence. Unlike Hersh’s muckraking stories about illegal CIA spying and military massacres, the Times saddled Hersh with a team of editors and lawyers to vet his reporting, sucking the life out of the piece until it was almost unreadable. Among other things, the Times cut out all the colorful anonymous quotes that made his muckraking bombshells on the CIA (and more recently, on the Osama Bin Laden killing) such memorable reads.

  Why? Again, because legally, you can get away with saying much more about government, spy agency, and military abuses without worrying about the legal consequences than you can about private corporations. And the flipside: private corporations have much more legal leeway to go vicious and dirty at a journalist and a publication than the government, which is constrained by the Constitution. It’s one of the benefits of contracting government work out to private contractors and agencies — they can legally get away with doing some of the dirty work that the government is barred from doing.

  Again, from New York magazine’s postgame commentary:

  We hear that the Hersh series may have been toned down considerably by some very tough letters to Times management from Martin Davis, a G. & W. executive vice-president, hinting at legal action.

   

  …The overall impact of the series on the company’s stock was indeed minimal. The G. & W. stock dropped about 1-1/4 points—less than 10 percent in a very sharply declining market.

  So not only was taking on private sector power more difficult and dangerous — it had far less impact and almost zero payoff for the ego, making it doubly unappealing for a blood-hungry muckraker like Hersh.

  Afterwards, Hersh described G&W’s abusive efforts to kill or derail his story as unlike anything he’d ever experienced.

  “I’ve never felt such personal animosity in all of my career, and that includes all of the reporting I’ve done [on the CIA and FBI].”

  G&W vice president Charles Davis was assigned the role of company front man dealing with Hersh and the Times, and he was savage. He tried to go over Hersh’s head to the Times management and editors, complaining about what he described as Hersh’s “sick, twisted, malicious, hateful tactics.” G&W taped Hersh’s phone calls to them, recording Hersh calling Davis a “son of a bitch” and playing it back to his editors. They also claimed that Hersh had threatened to have them jailed if they didn’t answer his questions. The purpose was to drive a wedge between Hersh and his editors and management. They didn’t succeed in getting the story killed; but their relentless attacks did help influence the final flaccid outcome on paper and ensure that down the line, neither Hersh nor the Times had the will to repeat the miserable experience that comes with muckraking a corporate leviathan.

  Finally, Hersh and his collaborator Jeff Gerth managed to arrange a sit-down interview with Davis and Gulf & Western lawyers. Afterwards, Hersh told his managing editor that their three hour meeting was “the most distressing interview I’ve had in more than 17 years in the business. These two men repeatedly insulted us and directly threatened us with legal action.” G&W wasn’t afraid of going low and dirty, threatening their families. At a followup meeting a week later between Hersh and G&W’s Davis, Hersh was told that company investigators had dug up “damning evidence” about Gerth’s father. (Shades here of Uber executive Emil Michael’s threats against Pando editor Sarah Lacy’s family.)

  They could get away with this, again, because they’re a private company, not the government.

  What also made the story so problematic for Hersh was the intense editing and vetting, which he didn’t have to deal with when writing on the CIA or military. From Miraldi’s biography:

  [T]he accusations that Hersh made, based on the government probes that were under way, were dense, complicated, tedious, and difficult to follow. Probably the very tight editing by a wary band of editors and lawyers neutered some of the better material. Lee [the Times editor] made the reporters kill anonymous quotes, which Hersh always used to brighten up his stories (and irk Rosenthal).

  A Washington Post profile on Hersh in 2001 also describes the problems Hersh faced taking on private power versus government power, saying that the Gulf & Western series,

  caused them nothing but grief in the editing process. Part of the problem was that it was about the abuse of private power, a much dicier subject for many editors even than the CIA. “He had a story that were it about a public institution would have been in the paper the first time he wrote it, the first way he wrote it,” Kovach [Hersh’s former New York Times editor] says.

  A few weeks after the Gulf & Western series was published, Newsweek published a more serious analysis at the difficulties Hersh and the Times had in doing the story, and how the experience had already turned off both Hersh and the New York Times from repeating anything like it:

  The Hersh project provided a case-book study of the problems in investigating corporate affairs. First, the cost is high because of the time and expertise required; Hersh, 40, worked six months on the series with free-lance investigator Jeff Gerth, 32, a former business student. It may also be harder to find leaks in big corporations than in government, and Hersh fell back frequently on government sources.

   

  Actually writing the story can be as much of a hassle as getting it. Many private citizens and businesses are in a stronger position than public officials to sue for damages and apply pressure. A Gulf & Western director repeatedly protested to Times executives about Hersh’s investigation while it was going on (his requests for a meeting were turned down), and editing and legal clearance took more than a month. The Times felt obliged to add so much background and legal qualification as to render some readers numb; many newspapers that take the Times news service found the stories too long or dull to run.

   

  Even the appearance of impropriety can prompt a public official to resign, but businessman have rarely been held to that standard of public trust. And stories like Hersh’s may not involve such dramatic wrongdoings as payoffs to politicians.

  And Newsweek interviewed Hersh himself, getting his own despondent thoughts on corporate muckraking in the modern era:

  “It’s a gray area – what’s right, what’s wrong, what’s established practice,” Hersh himself conceded. “I don’t know if it was worth the effort, but these are issues people should be thinking about.”

   

  …As for the Times, it has started a weekly “enterprise meeting” to coordinate and possibly cut off future investigations, and thus avoid – in Topping’s words – “frittering away our resources.”

  The closest Hersh ever came to anything like corporate muckraking again was his 2001 New Yorker story on Mobil Oil’s role in the corrupt world of oil acquisitions in Kazakhstan and the Caspian Sea basin. It was a story about oil geopolitics and third world corruption, not about private corporate power; and yet even even this story, “owing to the complexity of the material, lacked the color and narrative momentum” (quoting the Columbia Journalism Review) of Hersh’s blockbuster a year earlier on Gen. Barry McCaffrey’s massacre of retreating Iraqi troops in the first Gulf War.

  Finally, there’s this depressing update from Hersh’s biographer, from an interview he gave last year, on the question of whether reporting on private sector power today is harder or easier than when Hersh tried and failed:

  Q: In discussing Hersh’s exposé of Gulf & Western in the 1970s, you talk about the complexity of reporting on business, noting that “disagreement begins…when it comes to [journalism’s] role vis-à-vis the private sector.” In today’s era of government bailouts of private enterprise, Occupy Wall Street, and reduced corporate regulation, do you think that views on business journalism have changed? If Hersh’s Gulf & Western piece were to be published today, do you think modern audiences would be more sympathetic and receptive than his readers were in the 1970s?

   

  A: I suspect the opposite — that the early 1970s was a time when people were more inclined to distrust business. Corporate might is more entrenched today than ever. I don’t know if a publication today would allow a reporter to take apart a modern corporation the way the Times allowed Hersh and Jeff Gerth to go after G&W. It was really quite remarkable. Hersh chose the topic and then went after the company like a prosecutor seeking indictments. He was a brazen foe of GW. No one went to jail after the stories, but the company quickly lost its way and was gobbled up.

  After that exhausting and brutalizing experience taking on private corporate power, Hersh threw in the towel on the private sector, and spent the next several years working on a scathing book taking down the most powerful “government slob” of the 1970s: Henry Kissinger. And Hersh has been making life hard on “government slobs” ever since — much to the slobs’ displeasure, and much to the relief of America’s all-powerful corporate tycoons.

  [Sources include: Robert Miraldi’s biography “Seymour Hersh: Scoop Artist”; Kathryn Olmsted’s “Challenging the Secret Government”; “Taking on Big Business,” Newsweek, Aug 8, 1977; “The Last Business Eccentric,” New Yorker, Dec 16, 1996.]

  

  

  
  
  

  

• What Do Falling Corporate Profits Mean With Stocks Near Their Highs?

  Via Dana Lyons' Tumblr,

  If you’ve followed our commentary for awhile, you may have noticed that we don’t cover fundamental or economic data too often. That is for a good reason: we don’t use it, at all. Occasionally, however, a data point will cross the radar that piques our interest for whatever reason. So it is with the current state of U.S. Corporate Profits. The U.S. Bureau of Economic Analysis released the latest data today revealing that Corporate Profits (after Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment) were down 9% for the 1st quarter and are now down 16% from their peak in the 3rd quarter of 2013.

  Perhaps we don’t run in the right circles but we haven’t heard much regarding the significance of this trend on the stock market, which continues to trade near its all-time highs. Perhaps that’s a good thing considering we’ve found scant profitable uses for fundamental data in our investment approach (which is why we don’t use it). So we decided to take a look at it ourselves to see what effect similar historical precedents, assuming there were any, may have had on the stock market. This is what we looked for:

  1. Quarters when Corporate Profits were down at least 12% from their 2-year high, and
  2. the S&P 500 made a 2-year high at some point within the same quarter.

  As it turns out, there have been 21 quarters meeting that criteria since 1960.

  

   

  Many of the occurrences came in clusters in 1980, 1986-1987 and 1998-2000. There were also single occurrences in 1961, 2007, 2011 and the 1st quarter of last year. Without going into great depth of analysis, one can tell by the inauspicious dates that these circumstances have not worked out well in the past. The stock market may not have rolled over immediately in every occasion (e.g., 1986, 1998, 2014), but it usually ended up paying the piper.

  Specifically, the average drawdown over the 2 years following these quarters was -18.6%. This compares with an average 2-year drawdown of -7.3% following all quarters since 1960.

  We don’t follow economic and fundamental data too often since we’ve never found it very helpful in our investment decision-making process. At times, however, a certain data series will garner our attention. Often times, as is the case with Corporate Profits presently, it grabs our attention because it is receiving very little attention elsewhere. From just a cursory look at the current trend of falling Corporate Profits, however, it would appear to be a potential negative influence on the stock market that is trading near its all-time highs – if not immediately, then eventually.

  

  

  
  
  

  

• Creator Of Infamous "Hope" Poster Lashes Out At Obama, Calls Americans "Ignorant And Lazy"

  Before the people realized that behind the “most transparent administration ever” there was nothing but double seasonal adjustments, drones and an impenetrable layer of propaganda and lies, there was…

  

  And change, of course.

  Sadly, at some point over the past six years the hope died, first for the people (if not the bankers), and then for the creator of the infamous “Hope” poster himself, Shepard Fairey who told Esquire magazine in an interview that Obama has not come even close to embodying the break with the past administration that Fairey and so many voters hoped he would.

  “I mean, drones and domestic spying are the last things I would have thought [he’d support].”

  But support them he did while crushing the much promised transparency and freedom for the masses, for one simple reason: money, the same reason why Fairey is almost willing to give Obama a pass, again. Money, and of course, power and control of the masses by the select few.

  Still, the confused artist still isn’t fully ready to throw away all his idealism just yet:

  I’ve met Obama a few times, and I think Obama’s a quality human being, but I think that he finds himself in a position where your actions are largely dictated by things out of your control.

  A “quality human being” he may be, but when it comes to personal motives, money always wins. Just ask the Clinton Foundation. Even Fairey, who says he “agrees with Hilary on most issues” finally grasps that now:

  … campaign finance structure makes me very angry, because it means that politicians are going to have to raise a huge amount of money, which narrows the field dramatically. There are only certain kinds of people that either have the preexisting resources or the willingness to work in way that will get them a lot of money from donors. That narrows the field right there. Then there’s the idea that the people who you are going to have to listen to are the people that are going to give you the biggest donation. That means lobbyists, special interest groups, and corporations are going to have politicians eager, disproportionally.

  He adds: “I’m not giving him a pass for not being more courageous, but I do think the entire system needs an overhaul and taking money out of politics would be a really good first step.“

  A systemic overhaul by whom? The same politicians who are nothing but “whores” to corporate lobby interests?

  Or maybe the infamous artist should just blame the American public for agreeing to be swindled and manipulated by one liar after another, all of whom promise change yet end up merely perpetuating the broken, corrupt system they inherit from their predecessor and make it even worse.

  Actually, that’s precisely what Fairey did. This is what he told Esquire:

  We also need a public that isn’t so uneducated and complacent. I hate to say Americans are ignorant and lazy, but a lot of them are ignorant and lazy.… When you live in a place that has a lot of good things that make life easier, it’s easier to take them for granted. But what frustrates me to no end are people who want to blame Obama or blame anything that is something that if they were actually doing anything as simple as voting, it might not be as bad as it is. There’s a lot of finger pointing and very little action and very little research into the dynamics that created the situation that they’re unhappy about.

  Actually, about that he’s quite accurate

  However his message will be diluted and ignored, and the media will do is what it always does when facing a threat to the status quo: crush the messenger.

  And conveniently, Fairey made it very easy for them: after all, and quite amusingly, his Hope poster itself was a fraud.

  The artist was recently sentenced to two years of probation and fined $250,000 in 2012 for destroying documents and concealing others in an attempt to hide that he had used an Associated Press photograph as the basis for his “Hope” poster. And even more ironic, as Gawker wrote in 2009, Fairey himself was  “lawsuit happy to artists who ape or parody his stuff.”

  Unfortunately, in retrospect Fairey’s story is one of “tidiest little package” summaries of the banana republic status the US, and its leadership, has devolved to.

  

  

  
  
  

  

• Why the Fed will change its exit strategy…again

  This blog entry was originally posted at Bawerk.net you may also follow us on Twitter

  In a press release
  dated September 17, 2014 the Federal Reserve updated their “policy normalization
  principles”  that was laid out in 2011 when our
  monetary masters first flirted with the idea of “green shoots”
  turning into “escape velocity.” As mission got closer to completion
  eternal bliss for all subjects lucky enough to be under the reign of
  enlightened central planners was clearly within reach. Without the steady
  guidance and micromanagement of the Politburo we would all be jumping off the
  nearest high-rise as approximately 37 per cent of the US population apparently
  did in the 1930s.

  Now,
  it did not quite work out that way and the normalization plan has been just as
  dormant as the economic promised land. Maybe, just maybe hope is not a
  viable long term plan after all. If household spending behaviour is really caused by perceptions about the future,
  neatly discounted into a surging Russell 2000, then, and only then, would our
  Ivory Tower economists be right. However, if that was the case there would be
  no need for scarcity in this world and we could essentially return to the
  Garden of Eden and live happily ever after.

  The
  real world is unfortunately more complex and as shown by Ludwig von Mises, in
  his article of 1920 called “Economic Calculation in the Socialist
  Commonwealth,” there cannot be a pricing mechanism in a centralised
  society without a free market and if there is no mechanism for honest
  pricing there cannot be rational economic calculation.

  In
  this light, isn’t the whole purpose of Federal Reserve, and their brethren’s,
  market interventions attempts, so far successfully, to impose upon free society
  a pricing structure that differs from the free market outcome?

  Prices
  are like traffic signals, guiding resource flows, but if for some reason
  resources starts to flow in a direction that does not fit with some grand
  master plan our self-proclaimed money masters have laid out, they find it
  fitting to change its direction at their own discretion.

  Who,
  in their right mind, would suggest  that in a free market the most
  insolvent government on the planet, Japan, can fund itself for mere basis
  points when they have an explicit strategy to debase their currency by two per
  cent annually?

  Have
  we not taken a giant step towards the society Mises suggest cannot perform
  rational economic calculation? And if we have, does this not mean vast amounts
  of resources are routinely being misallocated?

  If
  resource flows have become distorted from all the monetary shenanigans
  witnessed over the last years it is a safe bet to assume it will resume its
  original, or intended rather, flow as central bank excesses are reversed.

  And
  this brings us back to the press release which clearly states that the “…committee expects to cease
  or commence phasing out reinvestments” of securities
  holdings currently on the Federal Reserve balance sheet after it raises
  interest rates.

   

  Now,
  we assume that the first 25 basis points to the Federal Fund Target Rate will
  come in September, the Fed should stop their reinvestments shortly after. By
  looking through the Federal Reserve balance sheet by CUSIP we can calculate the
  current maturity profile of both TSYs, TIPS, Agencies and MBSs which is
  provided in the chart below.

  

  While there is no
  problem for 2015, by 2018 over 30 per cent of TSYs will have disappeared from
  the Federal Reserve’s balance sheet assuming no reinvestments. Since the US
  government is running a deficit, this means the reduction in Federal Reserve
  TSY holdings can be considered net supply of TSYs because the US Treasury
  will have to issue bonds to repay the Fed, and these bonds must be absorbed by
  the private sector.

  With
  good collateral being in short supply these days added bonds will probably get
  bid within a reasonable, but presumably lower, price than today, but
  funding for extra TSY flow will come by through reallocation of existing
  private portfolios.

  From
  the chart we see there will be a spike in H1 2016 and then the run-rate drops
  to around USD50bn per quarter until another spike in 2018.

  With
  expected return on risk being what it is, one should not be surprised to see
  increasing market volatility as the Fed withdraws and the private sector tries
  to take up the slack.

   

  Unless
  the economy tanks completely (more on this in a upcoming post) and added QE is
  felt necessary the Fed will be forced to continue to roll-over TSYs in
  perpetuity with the odd attempt to scale down the reinvestments to, say, 90 per
  cent of par, then 80 and so on.

  

  
  
  

  

• Are All Central Bankers Idiots?

  Submitted by Bill Bonner via Bonner & Partners,

  Yes, there’s no point in hiding it. We would like to see a depression. Short, swift, and decisive – a quick and sharp end to the biggest credit expansion in all of history.

  As secretary of the Treasury Andrew Mellon said after the 1929 stock market crash:

  Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

  Credit Cannot Increase Forever

  “It’s unbelievable,” said colleague Merryn Somerset Webb. Merryn is the editor of MoneyWeek magazine in London. “London property prices just keep going up and up. It’s so expensive our writers can’t afford to live here anymore. I’m thinking of moving the business to Edinburgh.”

  You can’t build a solid economy on the jelly of unaffordable housing, unpayable debts, and unsustainable asset prices. But that’s what we’ve got. The only way to get down to something more reliable… more real… and healthier… is to wash away the financial glop and goo that has accumulated during the last 30 years.

  One way or another, the credit expansion that began after War World II must come to an end. About that we have no doubt. Contrary to the evidence of the last half-century, credit cannot increase faster than income forever. It is mathematically, economically, and financially impossible.

  But when will it stop? “The trouble with you guys,” says a loyal reader (or words to this effect), “is that you are generally right… but you are always early.” Early? Certainly. In the case of the credit bubble, we were nearly 40 years ahead of the curve. We saw the handwriting on the wall back in the 1970s! We thought it said, “The End Is Nigh for the Paper Money System.” After all, no paper money ever lasted for very long.

  Not All Central Bankers Are Idiots…

  But we misread the graffiti… We don’t know where “nigh” is, but we’re pretty sure the end wasn’t close to it. Because, here we are four decades later, and the paper money system is still going strong.

  And guess what? We are still sure that it is headed for a debacle.

  But when? “It could take another two or three decades.” That was the answer we got from a top central banker. We had the rare treat of dining with one last night. We’ll keep his identity to ourselves, to protect his job and the reputation of the central bank. But he was a breath of fresh air. And a relief. Now, we can say with confidence: Not all central bankers are idiots.

  Here’s what he told us:

  It is doomed, of course. But not necessarily soon. As long as the major tendency of the economy is toward deflation, central banks can print money without causing consumer price inflation. They can buy bonds and keep buying them.

   

  When they buy bonds, they tend to lower interest rates. They also finance government deficits. And, from Japan’s example, it looks as though they can do it almost indefinitely.

  That’s right: They can keep this gig going… until they can’t. When it ends is anybody’s guess. It is in the future, where no man goeth with GPS or map in hand…

  Who Wants a Depression?

  And we goeth there only in hopes of discovering a depression. Everyone else hopes to discover many more years of asset price inflation, boom, bubble, and central bank management. This distinction is an important one. At least WE think so.

  Everyone in government, industry, commerce, and academia has an unspoken prejudice for the bubble. Wall Street wants to sell you stocks and bonds. Industry and commerce have products to unload… not to mention mergers and acquisitions to finance. And governments all over the planet are running deficits and counting on low interest rates to pay for their zombie wars and crony programs.

  Who speaks for the future? Who stands up for a healthy, sane, and real economy? Who champions the cause of the little guy… the small investor… the small businessman… the ordinary working stiff?

  Who wants a depression?