• Historic Iran Nuke Deal Resets Eurasia's "Great Game"

  Originally authored by Pepe Escobar, via Asia Times,

  This is it. It is indeed historic. And diplomacy eventually wins. In terms of the New Great Game in Eurasia, and the ongoing tectonic shifts reorganizing Eurasia, this is huge: Iran — supported by Russia and China — has finally, successfully, called the long, winding 12-year-long Atlanticist bluff on its “nuclear weapons.”

  And this only happened because the Obama administration needed 1) a lone foreign policy success, and 2) a go at trying to influence at least laterally the onset of the new Eurasia-centered geopolitical order.

  So here it is – the 159-page, as detailed as possible, Joint Comprehensive Plan of Action (JCPOA); the actual P5+1/Iran nuclear deal. As Iranian diplomats have stressed, the JCPOA will be presented to the United Nations Security Council (UNSC), which will then adopt a resolution within 7 to 10 days making it an official international document.

  

   

  Iranian Foreign Minister Javad Zarif has described the deal — significantly — as a very Chinese “win-win” solution. But not perfect; “I believe this is a historic moment. We are reaching an agreement that is not perfect for anybody but is what we could accomplish. Today could have been the end of hope, but now we are starting a new chapter of hope.”

  Zarif also had to stress — correctly — this was a long-sought solution for an “unnecessary crisis”; the politicization — essentially by the US — of a scientific, technical dossier.

  Germany’s Foreign Minister Steinmeier, for his part, was euphoric; “A historic day! We leave 35 years of speechlessness + more than 12 years of a dangerous conflict behind us.”

  Looking ahead, Iranian President Hassan Rouhani tweeted now there can be “a focus on shared challenges” – referring to the real fight that NATO, and Iran, should pursue together; against the fake Caliphate of ISIS/ISIL/Daesh, whose ideological matrix is intolerant Wahhabism and whose attacks are directed against both Shi’ites and westerners.

  Right on cue, Russian President Vladimir Putin stressed the deal will contribute to fighting terrorism in the Middle East, not to mention “assisting in strengthening global and regional security, global nuclear non-proliferation” and — perhaps wishful thinking? — “the creation in the Middle East of a zone free from weapons of mass destruction.”

  Russian Foreign Minister Sergey Lavrov stressed the deal “fully corresponds” with Russia’s negotiating points. The fact is no deal would have been possible without extensive Russian involvement — and the Obama administration knows it (but cannot admit it publicly).

  The real problem started when Lavrov added that Moscow expects the cancellation of Washington’s missile defense plans, after the Iran deal proves that Tehran is not, and won’t be, a nuclear “threat.”

  There’s the rub. The Pentagon simply won’t cancel an essential part of its Full Spectrum Dominance military doctrine simply because of mere “diplomacy.” Every security analyst not blinded by ideology knows that missile defense was never about Iran, but about Russia. The Pentagon’s new military review still states — not by accident — major Eurasian players Iran, China and Russia as “threats” to U.S. national security.

  Now from the brighter side on Iran-Russia relations. Trade is bound to increase, especially in nanotechnology, machinery parts and agriculture. And on the all-pervasive energy front, Iran will indeed compete with Russia in major markets such as Turkey and soon Western Europe, but there’s plenty of leeway for Gazprom and the National Iranian Oil Company (NIOC) to coordinate their market share. NIOC executive Mohsen Qamsari advances that Iran will prioritize exporting to Asia, and will try to regain the at least 42% of the European market share that it had before sanctions.

  Compared to so many uplifting perspectives, Washington’s reaction was quite pedestrian. US President Barack Obama preferred to stress — correctly — that every pathway to an Iranian nuclear weapon has been cut off. And he vowed to veto any legislation in the US Congress that blocks the deal. When I was in Vienna last week I had surefire confirmation — from a European source — that the Obama administration feels confident it has the votes it needs in Capitol Hill.

  And what about all that oil?

  Tariq Rauf, former Head of Verification and Security Policy at the IAEA and currently Director of the Disarmament and Non-Proliferation Program at the Stockholm International Peace Research Institute (SIPRI), hailed the deal as “the most significant multilateral nuclear agreement in two decades – the last such agreement was the 1996 nuclear test ban treaty.” Rauf even advanced that the 2016 Nobel Peace Prize should go to US Secretary of State Jon Kerry and Iran’s Foreign Minister Zarif.

  Rebuilding trust between the US and Iran, though, will be a long and winding road.

  Tehran agreed to a 15-year moratorium on enriching uranium beyond 3.67 percent; this means it has agreed to reduce its enrichment capacity by two-thirds. Only Natanz will conduct enrichment; and Fordo, additionally, won’t store fissile material.

  Iran agreed to store no more than 300 kg of low-enriched uranium — a 96% reduction compared to current levels. The Arak reactor will be reconfigured, and won’t be used to produce plutonium. The spent fuel will be handled by an international team.

  The IAEA and Iran signed a roadmap in Tehran also this Tuesday; that was already decided last week in Vienna. By December 15, all past and present outstanding issues — that amount to 12 items — should be clarified, and the IAEA will deliver a final assessment. IAEA access to the Parchin military site — always a very contentious issue — is part of a separate arrangement.

  One of the major sticking points these last few days in Vienna was solved — with Tehran allowing UN inspectors to visit virtually any site. But it may object to a particular visit. A Joint Commission — the P5+1 + Iran — will be able to override any objections with a simple majority vote. After that Iran has three days to comply — in case it loses the vote. There won’t be American inspectors — shades of the run-up towards the war on Iraq; only from countries with diplomatic relations with Iran.

  So implementation of the deal will take at least the next five months. Sanctions will be lifted only by early 2016.

  What’s certain is that Iran will become a magnet for foreign investment. Major western and Asian multinationals are already positioned to start cracking this practically virgin market with over 70 million people, including a very well educated middle class. There will be a boom in sectors such as consumer electronics, the auto industry and hospitality and leisure.

  And then there’s, once again, oil. Iran has as much as a whopping 50 million barrels of oil stored at sea — and that’s about ready to hit the global market. The purchaser of choice will be, inevitably, China — as the West remains mired in recession. Iran’s first order of work is to regain lost market share to Persian Gulf producers. Yet the trend is for oil prices to go down – so Iran cannot count on much profit in the short to medium term.

  Now for a real war on terror?

  The conventional arms embargo on Iran essentially stays, for five years. That’s absurd, compared to Israel and the House of Saud arming themselves to their teeth.

  Last May the US Congress approved a $1.9 billion arms sale to Israel. That includes 50 BLU-113 bunker-buster bombs — to do what? Bomb Natanz? — and 3,000 Hellfire missiles. As for Saudi Arabia, according to SIPRI, the House of Saud spent a whopping $80 billion on weapons last year; more than nuclear powers France or Britain. The House of Saud is waging an — illegal — war on Yemen.

  Qatar is not far behind. It clinched an $11 billion deal to buy Apache helicopters and Javelin and Patriot air defense systems, and is bound to buy loads of F-15 fighters.

  Trita Parsi, president of the National American-Iranian Council, went straight to the point; “Saudi Arabia spends 13 times more money on its defense than Iran does. But somehow Iran, and not Saudi Arabia, is seen by the US as the potential aggressor.”

  So, whatever happens, expect tough days ahead. Two weeks ago, Foreign Minister Zarif told a small group of independent journalists in Vienna, including this correspondent, that the negotiations would be a success because the US and Iran had agreed on “no humiliation of one another.” He stressed he paid “a high domestic price for not blaming the Americans,” and he praised Kerry as “a reasonable man.” But he was wary of the US establishment, which to a great extent, according to his best information, was dead set against the lifting of sanctions.

  Zarif also praised the Russian idea that after a deal, it will be time to form a real counter-terrorism coalition, featuring Americans, Iranians, Russians, Chinese and Europeans — even as Putin and Obama had agreed to work together on “regional issues.” And Iranian diplomacy was giving signs that the Obama administration had finally understood that the alternative to Assad in Syria was ISIS/ISIL/Daesh, not the “Free” Syrian Army.

  That degree of collaboration, post-Wall of Mistrust, remains to be seen. Then it will be possible to clearly evaluate whether the Obama administration has made a major strategic decision, and whether “normalizing” its relation with Iran involves much more than meets the eye.

  

  

  

  

  

• China Stock Rout "Rocks" Property Market: "Massive" Cancellations Expected

  To be sure, we’ve had our fair share of laughs at the expense of China’s newly-minted day traders.

  Back in March, Bloomberg highlighted a study which suggested that some 31% of new investors in China’s equity markets had an elementary school education or less. Shortly thereafter, we began to look at data from the China Securities Depository and Clearing Co which showed that millions of new stock trading accounts were being created in China every single month. Once reports began to come in from the front lines of China’s inexorable equity rally, it became clear that (to say the least) not everyone pouring money into the SHCOMP and The Shenzhen was what you might call a “seasoned” investor. 

  From there, all it took was the suggestion from Bloomberg that in some cases, Chinese housewives had traded in the crochet kit for technical analysis and the race was on to see who could come up with the most entertaining characterization of China’s day trading hordes. Although the mainstream media has been careful not to be terribly explicit in their ridicule, the increasingly hilarious pictures of bemused Chinese grandmas staring at ticker tapes that have appeared atop WSJ and Reuters articles betray the fact that everyone, everywhere sees the humor in a multi-trillion dollar stock bubble driven by margin-trading hairdressers. 

  Admittedly, all of the above was even more amusing on days when Chinese stocks closed red, as it became quickly apparent that many Chinese investors might not have fully appreciated the fact that stocks can go down as well as up.

  

  In the good old days of the China stock rally (so, around two months ago), down days were few and far between and the outright confusion that reigned in the wake of a rare close lower served as a much needed comic interlude for the slow motion train wreck unfolding in the Aegean and, on the weekends, at various Euro summits.

  However, once the unwind began in China’s CNY1 trillion backdoor margin lending channels, we couldn’t help but feel slightly sorry for the millions of Chinese who quickly went from bewildered to dejected after watching their life savings evaporate over the course of a brutal three week sell-off that totaled more than 30% on some exchanges. 

  Due to significant retail participation and due to the fact that the equity mania had served as a distraction for a nation coping with decelerating economic growth and a bursting property bubble, some (and we were among the first) began to suggest that the broader economy, and indeed, social stability, may be at risk in China if stocks continued to fall.

  The extent to which this suggestion represented a real concern (as opposed to the ravings of a tin foil hat fringe blog) was underscored by the extraordinary measures China adopted in a desperate attempt to stop the bleeding and later by several sellside strategists who began to warn about possible spillovers into the real economy. 

  Now, with Beijing still struggling to restore the stock bubble, the first signs of knock-on effects are beginning to emerge. Here’s Nikkei with more:

  Turbulence on China’s equity market is starting to rock the country’s property market. Investors are quickly pulling their cash out of housing they purchased to cover losses incurred by stock investments. Some have begun offering discounts on property due to difficulties with finding buyers. Continued turmoil on the stock market looks as though it will have a heavy impact on the country’s real estate market.

   

  China’s stock market rally also helped drive up sales of domestic homes. The Shanghai Composite Index surged 60% from its low of around 3,200 in early March, rising to 5,166 logged on June 12. China Securities Depository and Clearing said that the number of accounts opened to trade yuan-denominated A-shares reached 980,000 in May in Shenzhen, where property prices are climbing faster than other areas. The figure accounted for roughly 80% of the total 1170,000 accounts in Guangdong Province, where large numbers of such account holders reside.

   

  Many newbie investors, who have just jumped into the stock market, likely gave a fresh impetus to the property market. China’s share price upswing prompted investors to reach out for new investments, including houses and other properties. A property analyst at major Chinese brokerage Guotai Junan Securities said that sales of luxury properties worth over 10 million yuan ($1.61 million) each for the first half of the year topped annual sales last year in Shanghai and Beijing.

   

  After this, Chinese stocks began to crumble. In early July, the Shanghai Composite Index dropped more than 30%, after hitting a seven-year high in mid-June. Investors who suffered big losses on the stock market were forced to sell property and cancel real estate purchase agreements. The Hong Kong Economic Times said that consumers are increasingly asking real estate firms for grace periods on down payments for mortgage loans, as they run out of cash because of weak stocks.

   

  Some canceled home purchase contracts, while others canceled mortgage loans, according to China’s largest property developer China Vanke, which has a strong foothold in Shenzhen. Local media reported that an official at China Vanke is concerned about massive numbers of cancellations in the future.

  So no, the damage isn’t “contained” and indeed it’s somewhat ironic that the first place the contagion is showing up is in China’s property market. What’s particularly interesting here is that one argment for why the collapse of China’s equity bubble would not spill over into the real economy revolved around the fact that the majority of Chinese household wealth is concentrated in real estate. “Ultimately, we think the impact of the sell-off in Chinese equities on the real economy will be relatively limited. This is because equities are only 10% of household wealth (at peak; just over 5% at the turn of the year),” Credit Suisse noted last week.

  If, however, what Nikkei says about the knock-on effect in property is true, it could put further pressure on an already fragile housing market. On that note, we’ll close with the following excerpt which is, ironically, from the same Credit Suisse note cited above.

  House prices are now falling at a record annual rate – the first time they have fallen without it being policy induced. With housing accounting for just over half of total household assets, the negative wealth impact could be significant.

  

  

  

  

  

• Paul Craig Roberts: Greece's Lesson For Russia

  Submitted by Paul Craig Roberts,

  “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.” — International Monetary Fund

  Greece’s lesson for Russia, and for China and Iran, is to avoid all financial relationships with the West. The West simply cannot be trusted. Washington is committed to economic and political hegemony over every other country and uses the Western financial system for asset freezes, confiscations, and sanctions. Countries that have independent foreign policies and also have assets in the West cannot expect Washington to respect their property rights or their ownership. Washington freezes or steals countries’ assets, or in the case of France imposes multi-billion dollar fines, in order to force compliance with Washington’s policies. Iran, for example, lost the use of $100 billion, approximately one-fourth of the Iranian GDP, for years simply because Iran insisted on its rights under the Non-Proliferation Treaty.

  Russian journalists are asking me if Obama’s willingness to reach a deal with Iran means there is hope a deal can be reached over Ukraine. The answer is No. Moreover, as I will later explain, the deal with Iran doesn’t mean much as far as Washington is concerned.

  Three days ago (July 14) a high ranking military officer, Gen. Paul Selva, the third in about as many days, told the US Senate that Russia is “an existential threat to this nation (the US).” Only a few days prior the Senate had heard the same thing from US Marine commander Joseph Dunford and from the Secretary of the Air Force. A few days before that, the Chairman of the US Joint Chiefs of Staff warned of a Russian “hybrid threat.”

  Washington is invested heavily in using Ukraine against Russia. All the conflict there originates with Washington’s puppet government in Kiev. Russia is blamed for everything, including the destruction of the Malaysian airliner. Washington has used false charges to coerce the EU into sanctions against Russia that are not in the EU’s interest. As Washington has succeeded in coercing all of Europe to harm Europe’s political and economic relationships with Russia and to enter into a state of conflict with Russia, certainly Washington is not going to agree to an Ukrainian settlement. Even if Washington wanted to do so, as Washington’s entire position rests on nothing but propaganda, Washington would have to disavow itself in order to come to an agreement.

  Despite everything, Russia’s president and foreign minister continue to speak of the US and Washington’s EU vassal states as “our partners.” Perhaps Putin and Lavrov are being sarcastic. The most certain thing of our time is that Washington and its vassals are not partners of Russia.

  The Wolfowitz doctrine, the basis of US foreign and military policy, declares that the rise of Russia or any other country cannot be permitted, because the US is the Uni-power and cannot tolerate any constraint on its unilateral actions.

  As long as this doctrine reigns in Washington, neither Russia, China, nor Iran, the nuclear agreement not withstanding, are safe. As long as Iran has an independent foreign policy, the nuclear agreement does not protect Iran, because any significant policy conflict with Washington can produce new justifications for sanctions.

  With the nuclear agreement with Iran comes the release of Iran’s $100 billion in frozen Western balances. I heard yesterday a member of the Council for Foreign Relations say that Iran should invest its released $100 billion in US and Europe companies. If Iran does this, the Iranian government is setting itself up for further blackmail. Investing anywhere in the West means that Iran’s assets can be frozen or confiscated at any time.

  If Obama were to dismiss Victoria Nuland, Susan Rice, and Samantha Power and replace these neoconservatives with sane diplomats, the outlook would improve. Then Russia, China, and Iran would have a better possibility of reaching accommodation with the US on terms other than vassalage.

  Russia and China, having emerged from a poorly functioning communist economic system, naturally regard the West as a model. It seems China has fallen for Western capitalism head over heels. Russia perhaps less so, but the economists in these two countries are the same as the West’s neoliberal economists, which means that they are unwitting servants of Western financial imperialism. Thinking mistakenly that they are being true to economics, they are being true to Washington’s hegemony.

  With the deregulation that began in the Clinton regime, Western capitalism has become socially dysfunctional. In the US and throughout the West capitalism no longer serves the people. Capitalism serves the owners and managers of capital and no one else.

  This is why US income inequality is now as bad or worse than during the “robber baron” era of the 1920s. The 1930s regulation that made capitalism a functioning economic system has been repealed. Today in the Western world capitalism is a looting mechanism. Capitalism not only loots labor, capitalism loots entire countries, such as Greece which is being forced by the EU to sell of Greece’s national assets to foreign purchasers.

  Before Putin and Lavrov again refer to their “American partners,” they should reflect on the EU’s lack of good will toward Greece. When a member of the EU itself is being looted and driven into the ground by its compatriots, how can Russia, China, and Iran expect better treatment? If the West has no good will toward Greece, where is the West’s good will toward Russia?

  The Greek government was forced to capitulate to the EU, despite the support it received from the referendum, because the Greeks relied on the good will of their European partners and underestimated the mendacity of the One Percent. The Greek government did not expect the merciless attitude of its fellow EU member governments. The Greek government actually thought that its expert analysis of the Greek debt situation and economy would carry weight in the negotiations. This expectation left the Greek government without a backup plan. The Greek government gave no thought to how to go about leaving the euro and putting in place a monetary and banking system independent of the euro. The lack of preparation for exit left the government with no alternative to the EU’s demands.

  The termination of Greece’s fiscal sovereignty is what is in store for Italy, Spain, and Portugal, and eventually for France and Germany. As Jean-Claude Trichet, the former head of the European Central Bank said, the sovereign debt crisis signaled that it is time to bring Europe beyond a “strict concept of nationhood.” The next step in the centralization of Europe is political centralization. The Greek debt crisis is being used to establish the principle that being a member of the EU means that the country has lost its sovereignty.

  The notion, prevalent in the Western financial media, that a solution has been imposed on the Greeks is nonsense. Nothing has been solved. The conditions to which the Greek government submitted make the debt even less payable. In a short time the issue will again be before us. As John Maynard Keynes made clear in 1936 and as every economist knows, driving down consumer incomes by cutting pensions, employment, wages, and social services, reduces consumer and investment demand, and thereby GDP, and results in large budget deficits that have to be covered by borrowing. Selling pubic assets to foreigners transfers the revenue flows out of the Greek economy into foreign hands.

  Unregulated naked capitalism, has proven in the 21st century to be unable to produce economic growth anywhere in the West. Consequently, median family incomes are declining. Governments cover up the decline by underestimating inflation and by not counting as unemployed discouraged workers who, unable to find jobs, have ceased looking. By not counting discouraged workers the US is able to report a 5.2 percent rate of unemployment. Including discouraged workers brings the unemployment rate to 23.1 percent. A 23 percent rate of unemployment has nothing in common with economic recovery.

  Even the language used in the West is deceptive. The Greek “bailout” does not bail out Greece. The bailout bails out the holders of Greek debt. Many of these holders are not Greece’s original creditors. What the “bailout” does is to make the New York hedge funds’ bet on the Greek debt pay off for the hedge funds. The bailout money goes not to Greece but to those who speculated on the debt being paid. According to news reports, Quantitative Easing by the ECB has been used to purchase Greek debt from the troubled banks that made the loans, so the debt issue is no longer a creditor issue.

  China seems unaware of the risk of investing in the US. China’s new rich are buying up residential communities in California, forgetting the experience of Japanese-Americans who were herded into detention camps during Washington’s war with Japan. Chinese companies are buying US companies and ore deposits in the US. These acquisitions make China susceptible to blackmail over foreign policy differences.

  The “globalism” that is hyped in the West is inconsistent with Washington’s unilateralism. No country with assets inside the Western system can afford to have policy differences with Washington. The French bank paid the $9 billion fine for disobeying Washington’s dictate of its lending practices, because the alternative was the close down of its operations in the United States. The French government was unable to protect the French bank from being looted by Washington.

  It is testimony to the insouciance of our time that the stark inconsistency of globalism with American unilateralism has passed unnoticed.

  

  

  

  

  

• Trumpism: The Ideology

  Submitted by Jeffrey Tucker via Liberty.me,

  It’s not too interesting to say that Donald Trump is a nationalist and aspiring despot who is manipulating bourgeois resentment, nativism, and ignorance to feed his power lust. It’s uninteresting because it is obviously true. It’s so true that stating it sounds more like an observation than a criticism.

  I just heard Trump speak live. It was an awesome experience, like an interwar séance of once-powerful dictators who inspired multitudes, drove countries into the ground, and died grim deaths.

  His speech at FreedomFest lasted a full hour, and I consider myself fortunate for having heard it. It was a magnificent exposure to an ideology that is very much present in American life, though hardly acknowledged. It lives mostly hidden in dark corners, and we don’t even have a name for it. You bump into it at neighborhood barbecues, at Thanksgiving dinner when Uncle Harry has the floor, at the hardware store when two old friends in line to checkout mutter about the state of the country.

  The ideology is a 21st century version of right fascism — one of the most politically successful ideological strains of 20th century politics. Though hardly anyone talks about it today, we really should. It is still real. It exists. It is distinct. It is not going away. Trump has tapped into it, absorbing unto his own political ambitions every conceivable bourgeois resentment: race, class, sex, religion, economic. You would have to be hopelessly ignorant of modern history not to see the outlines and where they end up.

  For now, Trump seems more like comedy than reality. I want to laugh about what he said, like reading a comic-book version of Franco, Mussolini, or Hitler. And truly I did laugh, as when he denounced the existence of tech support in India that serves American companies (“how can it be cheaper to call people there than here?” — as if he still thinks that long-distance charges apply).

  Let’s hope this laughter doesn’t turn to tears.

  As an aside, I mean no criticism of FreedomFest’s organizer Mark Skousen in allowing Trump to speak at this largely libertarian gathering. Mark invited every Republican candidate to address the 2,200-plus crowd. Only two accepted. Moreover, Mark is a very savvy businessman himself, and this conference operates on a for-profit basis. He does not have the luxury of giving the microphone to only people who pass the libertarian litmus test. His goal is to put on display the ideas that matter in our time and assess them by the standards of true liberty.

  In my view, it was a brilliant decision to let him speak. Lovers of freedom need to confront the views of a man with views like this. What’s more, of all the speeches I heard at FreedomFest, I learned more from this one than any other. I heard, for the first time in my life, what a modern iteration of a consistently statist but non-leftist outlook on politics sounds and feels like in our own time. And I watched as most of the audience undulated between delight and disgust — with perhaps only 10% actually cheering his descent into vituperative anti-intellectualism. That was gratifying.

  As of this writing, Trump is leading in the polls in the Republican field. He is hated by the media, which is a plus for the hoi polloi in the GOP. He says things he should not, which is also a plus for his supporters. He is brilliant at making belligerent noises rather than having worked out policy plans. He knows that real people don’t care about the details; they only want a strongman who shares their values. He makes fun of the intellectuals, of course, as all populists must do. Along with this penchant, Trump encourages a kind of nihilistic throwing out of rationality in favor of a trust in his own genius. And people respond, as we can see.

  So, what does Trump actually believe? He does have a philosophy, though it takes a bit of insight and historical understanding to discern it. Of course race baiting is essential to the ideology, and there was plenty of that. When a Hispanic man asked a question, Trump interrupted him and asked if he had been sent by the Mexican government. He took it a step further, dividing blacks from Hispanics by inviting a black man to the microphone to tell how his own son was killed by an illegal immigrant.

  Because Trump is the only one who speaks this way, he can count on support from the darkest elements of American life. He doesn’t need to actually advocate racial homogeneity, call for a whites-only sign to be hung at immigration control, or push for expulsion or extermination of undesirables. Because such views are verboten, he has the field alone, and he can count on the support of those who think that way by making the right noises.

  Trump also tosses little bones to the Christian Right, enough to allow them to believe that he represents their interests. Yes, it’s implausible and hilarious. But the crowd who looks for this is easily won with winks and nudges, and those he did give. At the speech I heard, he railed against ISIS and its war against Christians, pointing out further than he is a Presbyterian and thus personally affected every time ISIS beheads a Christian. This entire section of his speech was structured to rally the nationalist Christian strain that was the bulwark of support for the last four Republican presidents.

  But as much as racialist and religious resentment is part of his rhetorical apparatus, it is not his core. His core is about business, his own business and his acumen thereof. He is living proof that being a successful capitalist is no predictor of one’s appreciation for an actual free market (stealing not trading is more his style). It only implies a love of money and a longing for the power that comes with it. Trump has both.

  What do capitalists on his level do? They beat the competition. What does he believe he should do as president? Beat the competition, which means other countries, which means wage a trade war. If you listen to him, you would suppose that the U.S. is in some sort of massive, epochal struggle for supremacy with China, India, Malaysia, and, pretty much everyone else in the world.

  It takes a bit to figure out what the heck he could mean. He speaks of the United States as if it were one thing, one single firm. A business. “We” are in competition with “them,” as if the U.S. were IBM competing against Samsung, Apple, or Dell. “We” are not 300 million people pursuing unique dreams and ideas, with special tastes or interests, cooperating with people around the world to build prosperity. “We” are doing one thing, and that is being part of one business.

  In effect, he believes that he is running to be the CEO of the country — not just of the government (as Ross Perot once believed) but of the entire country. In this capacity, he believes that he will make deals with other countries that cause the U.S. to come out on top, whatever that could mean. He conjures up visions of himself or one of his associates sitting across the table from some Indian or Chinese leader and making wild demands that they will buy such and such amount of product else “we” won’t buy their product.

  Yes, it’s bizarre. As Nick Gillespie said, he has a tenuous grasp on reality. Trade theory from hundreds of years plays no role in his thinking at all. To him, America is a homogenous unit, no different from his own business enterprise. With his run for president, he is really making a takeover bid, not just for another company to own but for an entire country to manage from the top down, under his proven and brilliant record of business negotiation, acquisition, and management.

  You see why the whole speech came across as bizarre? It was. And yet, maybe it was not. In the 18th century, there is a trade theory called mercantilism that posited something similar: ship the goods out and keep the money in. It builds up industrial cartels that live at the expense of the consumer. In the 19th century, this penchant for industrial protectionism and mercantilism became guild socialism, which mutated later into fascism and then into Nazism. You can read Mises to find out more on how this works.

  What’s distinct about Trumpism, and the tradition of thought it represents, is that it is non-leftist in its cultural and political outlook and yet still totalitarian in the sense that it seeks total control of society and economy and places no limits on state power. The left has long waged war on bourgeois institutions like family, church, and property. In contrast, right fascism has made its peace with all three. It (very wisely) seeks political strategies that call on the organic matter of the social structure and inspire masses of people to rally around the nation as a personified ideal in history, under the leadership of a great and highly accomplished man.

  Trump believes himself to be that man.

  He sounds fresh, exciting, even thrilling, like a man with a plan and a complete disregard for the existing establishment and all its weakness and corruption. This is how strongmen take over countries. They say some true things, boldly, and conjure up visions of national greatness under their leadership. They’ve got the flags, the music, the hype, the hysteria, the resources, and they work to extract that thing in many people that seeks heroes and momentous struggles in which they can prove their greatness.

  Think of Commodus (161-192 AD) in his war against the corrupt Roman senate. His ascension to power came with the promise of renewed Rome. What he brought was inflation, stagnation, and suffering. Historians have usually dated the fall of Rome from his leadership. Or, if you prefer pop culture, think of Bane, the would-be dictator of Gotham in Batman, who promises an end to democratic corruption, weakness, and loss of civic pride. He sought a revolution against the prevailing elites in order to gain total power unto himself.

  These people are all the same. They are populists. Oh how they love the people, and how they hate the establishment. They defy all civic conventions. Their ideology is somewhat organic to the nation, not a wacky import like socialism. They promise greatness. They have an obsession with the problem of trade and mercantilist belligerence as the only solution. They have zero conception of the social order as a complex and extended ordering of individual plans, one that functions through freedom and individual rights.

  This is a dark history and I seriously doubt that Trump himself is aware of it. Instead, he just makes it up as he goes along, speaking from his gut. This penchant has always served him well. It cannot serve a whole nation well. Indeed, the very prospect is terrifying, and not just for the immigrant groups and imports he has chosen to scapegoat for all the country’s problems. It’s a disaster in waiting for everyone.

  

  

  

  

  

• All Hail Our Banking Overlords!

  Submitted by Chris Martenson via PeakProseprity.com,

  You really have to be paying attention to see what’s truly going on these days. The keepers of the system, that is the banking elites, now openly control everything — though you'd never know that by listening to the media.

  Consider this:

  Eurozone backs €7bn bridging loan

  Jul 16, 2105

   

  Eurozone ministers have agreed to give Greece a €7bn (£5bn) bridging loan from an EU-wide fund to keep its finances afloat until a bailout is approved.

   

  The loan is expected to be confirmed on Friday by all EU member states.

   

  In another development, the European Central Bank (ECB) agreed to increase emergency funding to Greece for the first time since it was frozen in June.

   

  The decisions were made after Greek MPs passed tough reforms as part of a eurozone bailout deal.

  How generous of the finance ministers of all those EU member states to agree to a “bridge loan” that will help Greece "keep its finances afloat". This should provide the people of Greece with a bit of breathing room, right? Maybe access to their bank accounts (finally!), perhaps?

  No, not at all. Here’s what the entirety of the “”loan”” will go towards instead:

  The bridging loan means Greece will be able to repay debts to the ECB and IMF on Monday.

  Ummmm…that “money” will not ever go anywhere near Greece.

  This is all merely electronic window-dressing for entirely esoteric bookkeeping purposes. Servers will blink at one location in Europe as digital 1s and 0s are transmitted to another. The electronic balances at the ECB and the IMF will change, but not much else.

  The people of Greece will see none of it. Nor will they see their bank accounts unfrozen.

  This act of banker "largess" is, of course, of, by, and entirely for the bankers. It has nothing to do with Greece or its people, about whom the banker class cannot care less.   

  But, they hide this disdain under and increasingly thin and condescending veneer of graciousness. Take, for example, the recently-announced 'generosity' of the powers that be — that is, the banking powers that be — which will permit the long suffering depositors to…*cough*…deposit more money into the banks:

  Greece: Banks Can Reopen … for Deposits

  Jul 17, 2015

   

  Greek banks will reopen Monday after a three-week closure, the country's deputy finance minister says, though withdrawal restrictions will stay in place. Bank customers "can deposit cash, they can transfer money from one account to the other," but they can't withdraw money except at ATMs, the official says, and a withdrawal limit of 60 euros ($67) a day will stay in place, he said, though Greek authorities are working on a plan to allow people to roll over access to their funds so that if they don't make it to a bank machine one day, they can take out 120 euros the next day.

   

  Yeah, depositing more money into the Greek banking system is exactly what all 12 remaining Greek idiots are clamoring to do…everybody else just wants their money back, thank-you-very-much.

  Obviously, the only rational response of anybody in Europe watching this charade of theft continue would be to sell gold, right? (which has happened vigorously ever since the Greek crisis began) Because, you know, nothing says “confidence” quite like selling your gold so you can then park that money in a bank that may not let you withdraw it again.

  Of course, we here at Peak Prosperity hold to the view that everything, and we mean everything, in our ””markets”” is stage-managed. And that especially includes gold. The central banks are demanding and commanding complete fealty to their story line, no exceptions tolerated.  We are at that all-or-nothing moment in history when everything either works out perfectly or it all falls apart.

  Savers have to be punished so debtors can be saved.

  Why? Because if debtors are rescued, that makes it possible for more debts to be issued in the future..

  And why is that important? Because the banking system needs ever more loans in order to survive.

  Why do we slavishly feed a banking system that is rapacious, insatiable and always threatening calamity whenever it doesn’t get exactly everything it wants, when it wants it? That is a question nobody in power is willing to address.

  Why not? Because there's no good reason to do it — unless you're a bank, or one of the many proxy agents (like politicians) receiving kick-backs from the banks.

  We have a banking system that feeds on the blood, sweat and tears of the public. But the public's collective output is no longer ‘enough’ to subsidize everything that central planners have promised. So with a stagnating/shrinking pie – surprise! – the group that writes the rules, the banks, has decided that they should be the ones to get as much of it as possible.

  Naturally, this will not work for very long.  History is replete with examples why it can’t.  Just consider the root meaning of “bankrupt” which has an interesting history:

  The word actually comes from Italian banca rotta, a broken bench (not a rotten one, as the false friend of Italian rotta might suggest — it’s from Latin rumpere, to break). The bench was a literal one, however: it was the usual Italian word for a money dealer’s table.  In his dictionary, the great Dr Johnson retold the legend that when an Italian money trader became insolvent, his table was broken. 

  (Source)

  To “break the banker’s table” means to smash the money lender’s physical place of business after they have taken or lost all of your wealth.  It’s speaks of an act of anger by the betrayed. And that’s where the banking system finds itself again and again over time, for the exact same reasons all through history — today being no different in anything but scale and complexity.

  Conclusion

  You have to read past the headlines today because they quite often say exactly the opposite of what’s actually happening.  Like today’s description spinning GE’s 2Q, $1.38 billion earnings loss as a 5% rise in profits.

  The bankers and financiers are badly overplaying their hands, again, and people are starting to catch on to the scam.

  Real wealth is tangible things produced with tangible effort. Loans made out of thin-air 'money' require no effort and are entirely ephemeral.  But if those loans are used to acquire real ownership of real assets, then something has been exchanged for nothing and one party is getting screwed.

  That’s what has just happened in Greece. And expect it to happen increasingly elsewhere, as Charles Hughes Smith and I recently discussed in this week's excellent Off The Cuff podcast.

  If you had asked me ten years ago if there was any chance of Greece becoming a failed state within a decade, I would have said ‘No, no chance.’  But here we are. In ten years, I suspect, we’ll be marveling over all the other failed states as the rot proceeds from the outside in. Again, Charles does a wonderful job articulating why in his recent report More Sovereign Defaults Are Coming.

  There’s simply too much debt and too little cheap oil for there to be any other trajectory to this story. Boneheadedly, our leadership is so out-of-touch that their best response to this set of predicaments is to sacrifice the populace of an entire developed nation (for generations to come) just to keep the status quo stumbling along for a bit longer.

  We need to all prepare for the inevitability that, as the rot proceeds, the people of Greece will not be the only casualties of the banks' attempts at self-preservation. They'll try to throw all of us under the bus before taking any losses themselves.

  

  

  

  

  

• Peak "Reach For Yield"

  By removing liquidity via massive purchases of high quality (and in some cases) low quality collateral, the impact on investors of central bank repression of interest rates around the world can be summed up in three simple words: “reach for yield.” These three ever-so-simple words provide blanket excuse for ‘investors’ to pile head long into far riskier investments than they ever would before and considerably lower levels of compensation than they would ever have accepted before… but hey, as long as the central bankers have got their backs, there will always be a greater fool? However, as BofA notes, the mania for “yield reaching” is showing signs of fatigue with the biggest cumulative outflows since 2008…

   

  

  Note: the current outflows are considerably larger than those during the Taper Tantrum

  Does this mean investors have entirely given up on yield and have moved on to the more speculative non-earnings producing, negative free-cash flowing, “stocks always go up, just look at China”, stocks of the new bubble? Or is derisking beginning as The Fed desperately rearranges deckchairs on the “but hiking rates is not tightening” titanic of cheap-buyback-sponsored equity exuberance?

   

  Source: BofAML

  

  

  

  

  

• How Student Loans Create Demand For Useless Degrees

  Submitted by Josh Grossman via The Mises Institute,

  Last week, former Secretary of Education and US Senator Lamar Alexander wrote in the Wall Street Journal that a college degree is both affordable and an excellent investment. He repeated the usual talking point about how a college degree increases lifetime earnings by a million dollars, “on average.” That part about averages is perhaps the most important part, since all college degrees are certainly not created equal. In fact, once we start to look at the details, we find that a degree may not be the great deal many higher-education boosters seem to think it is.

  In my home state of Minnesota, for example, the cost of obtaining a four-year degree at the University of Minnesota for a resident of Minnesota, North Dakota, South Dakota, Manitoba, or Wisconsin is $100,720 (including room and board and miscellaneous fees). For private schools in Minnesota such as St. Olaf, however, the situation is even worse. A four-year degree at this institution will cost $210,920.

  This cost compares to an average starting salary for 2014 college graduates of $48,707. However, like GDP numbers this number is misleading because it is an average of all individuals who obtained a four-year degree in any academic field. Regarding the average student loan debt of an individual who graduated in 2013, about 70 percent of these graduates left college with an average student loan debt of $28,400. This entails the average student starting to pay back these loans six months after graduation or upon leaving school without a degree. The reality of this situation is that assuming a student loan interest rate of 6.8 percent and a ten-year repayment period, the average student will be paying $326.83 every month for 120 months or a cumulative total re-payment of $39,219.28. Depending upon a student’s job, this amount can be a substantial monthly financial burden for the average graduate.

  All Degrees Are Not of Equal Value

  Unfortunately, there is no price incentive for students to choose degrees that are most likely to enable them to pay back loans quickly or easily. In other words, these federal student loans are subsidizing a lack of discrimination in students’ major choice. A person majoring in communications can access the same loans as a student majoring in engineering. Both of these students would also pay the same interest rate, which would not occur in a free market.

  In an unhampered market, majors that have a higher probability of default should be required to pay a higher interest rate on money borrowed than majors with a lower probability of default. In summary, it is not just the federal government’s subsidization of student loans that is increasing the cost of college, but the fact that demand for low-paying and high-default majors is increasing, because loans for these majors are supplied at the same price as a major providing high salaries to its possessor with a low probability of default.

  And which programs are the most likely to pay off for the student? The top five highest paying bachelor’s degrees include: petroleum engineering, actuarial mathematics, nuclear engineering, chemical engineering and electronics and communications engineering, while the top five lowest paying bachelor’s degrees are: animal science, social work, child development and psychology, theological and ministerial studies, and human development, family studies, and related services. Petroleum engineering has an average starting salary of $93,500 while animal science has an average starting salary of $32,700. This breaks down for a monthly salary for the petroleum engineer of $7,761.67 versus a person working in animal science with a monthly salary of $2,725. Based on the average monthly payment mentioned above, this would equate to a burden of 4.2 percent of monthly income (petroleum engineer) versus a burden of 12 percent of monthly income (animal science). This debt burden is exacerbated by the fact that it is now nearly impossible to have student loan debts wiped away even if one declares bankruptcy.

  Ignoring Careers That Don’t Require a Degree

  Meanwhile, there are few government loan programs geared toward funding an education in the trades. And yet, for many prospective college students, the trades might be a much more lucrative option. Using the example of plumbing, the average plumber earns $53,820 per year with the employer paying the apprentice a wage and training.

  Acknowledging the fact that this average salary is for master plumbers, it still equates to a $20,000 salary difference between it and someone with a four-year degree in animal science while having no student loans as a bonus. Outside of earning a four-year degree in science, technology, engineering, math or, accounting with an average starting salary of $53,300, nursing with an average starting salary of $53,624, or as a family practice doctor on the lower end of physician pay of $161,000, society might be better served if parents and educators would stop using the canard that a four-year degree is always worth the cost outside of a few majors mentioned above. Encouraging students to consider the trades and parents to give their children the money they would spend on a four-year college degree to put a down payment on a house might be a better use of finite economic resources. The alternative of forcing the proverbial square peg into a round hole will condemn another generation to student debt slavery forcing them to put off buying a home or getting married.

  Loans Drive Overall Demand

  The root of the problem is intervention by the federal government in providing student loans. Since 1965 when President Johnson signed the Higher Education Act tuition, room, and board has increased from $1,105 per year to $18,943 in 2014–2015. This is an increase of 1,714 percent in 50 years. In addition, the Higher Education Act of 1965 created loans which are made by private institutions yet guaranteed by the federal government and capped at 6.8 percent. In case of default on the loans, the federal government — that is, the taxpayers — pick up the tab in order for these lenders to recover 95 cents on every dollar lent. Loaning these funds at below market interest rates and with the federal government backing up these risky loans has led to massive malinvestment as the percentage of high-school graduates enrolled in some form of higher education has increased from 10 percent before World War II to 70 percent by the 1990s. Getting a four-year degree in nearly any academic field seemed to be the way in which to enter or remain in the middle class.

  But just as with the housing bubble, keeping interest below market levels while increasing the money supply in terms of loans — while having the taxpayer on the hook for a majority of these same loans — leads to an avalanche of defaults and is a recipe for disaster.

  

  

  

  

  

• Putin Orders Formation Of New Military Reserve Force

  Fifteen years after Vladimir Putin first walked into the Kremlin, Russia’s army is bigger, stronger, and better equipped than at any time since the end of the Cold War. Able to call on three quarters of a million frontline troops, The Telegraph reports, with more tanks than any other country on the planet, and the world’s third largest air force, Russia retains much of the brute force associated with a former superpower. But it has also rapidly modernised, spending millions on rearmament and retraining programmes aimed at professionalising the lumbering, conscript-reliant force it inherited from the Soviet Union. The latest effort, as Reuters reports, Putin has ordered the creation of a new reserve armed force as part of steps to improve training and military readiness at a time of international tensions with the West over Ukraine.

  As The Telegraph details,

  With an estimated 766,000 troops under arms and another 2.5 million in reserve, Russia’s armed forces have shrunk under Mr Putin to the fourth largest in the world, behind China (2.3 million), India (1.4 million) and the United States (1.3 million).

   

  In the relatively low-tech, high fire-power weapons that have defined the Ukraine conflict, it remains unsurpassed, with more tanks, self propelled artillery, and multiple rocket launch systems than any other country on the planet.

   

   

  

   

   

  However, Russia still lags far behind the United States in total power and many other Western countries in terms of technology, with much of its vast arsenal still made up of ageing Soviet-designed equipment.

  And so, it appears "whatever it takes" is spreading to Russia…(as Reuters reports)

   The new reserve force has been discussed for several years and was first ordered by Putin in 2012 shortly after his re-election as President. The latest decree was published late on Friday.

   

  It will be distinct from Russia's existing military reserves because the part-time personnel will be paid a monthly sum and train regularly.

   

  Russia already has several million military reservists consisting of ex-servicemen, but they do little training as there are restrictions on how often they can be called up.

   

  Defence Ministry officials have previously said that the new reserve force was envisaged at around 5,000 men to begin with, a small figure in a country with around 750,000 frontline troops.

   

  The creation of the new reserve force had been delayed by a lack of financing, Russian media reported. Putin's decree ordered the government to find financing for the new force from the existing defense ministry budget.

  *  *  *

  Last year Russia spent an estimated 3.247 trillion rubles (£42.6 billion) – equivalent to 4.5 per cent of GDP – on defence, according to the SIPRI, a Swedish think tank. That’s up from 3.6 per cent of GDP since Mr Putin came to power in 2000.

  That SIPRI estimate is higher than Russia’s officially published 2014 defence budget of 2.49 trillion rubles – which still makes it the third largest spender in the world behind the United States and China.

  

  

  

  

  

• Was Greece Set Up To Fail?

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  An entire economy is being deliberately suffocated, and all in all it’s just total madness. Quiet madness, though (update: and then the riots broke out..).

  Two things I’ve been repeatedly asked to convey to you are that:

  1) you can’t trust any Greek poll or media, because the media are so skewed to one side of the political spectrum, and that side is not SYRIZA (can you imagine any other country where almost all the media are against the government, tell outright lies, use any trick in and outside the book, and the government still gets massive public support?!),

   

  and:

   

  2) Athens is the safest city on the planet. I can fully attest to that. Not one single moment of even a hint of a threat, and that in a city that feels very much under siege (don’t underestimate that). And people should come here, and thereby support the country’s economy. Don’t go to Spain or France this year, go to Greece. Europe is trying to blow this country up; don’t allow them to.

  *  *  *  *

  Then: I was reminded of something a few days ago that has me thinking -all over- ever since. That is, to what extent has Greece simply been a set-up, and a lab rat, for years now? I’m not sure I can get to the bottom of this all in one go, but maybe I don’t have to either. Maybe the details will fill themselves in as we go along.

  One Daniel Neun wrote on Twitter, in German, translation mine, that:

  Greece’s 2009 deficit was retroactively manipulated upward through a collaboration of the EU, IMF, PASOK, Eurostat (EU statistics bureau) and Elstat (Greek statistics bureau). That is the only reason why interest rates on Greek sovereign bonds skyrocketed in the markets, which in turn made Greek debt levels skyrocket.

  The political and media narrative has consistently been that Greece “unexpectedly” and “all of a sudden” in late 2009, when a new government came in, was “found out” to have much higher debt levels than “previously thought”. And then had to appeal for a massive bailout. Obviously, Neun’s version is quite different. His doesn’t look like just another wild assumption, since he names a few sources, among which this from Kathimerini dated January 22, 2013:

  Greece’s Statistics Chief Faces Charges Over Claims Of Inflated 2009 Deficit Figure

  The head of Greece’s statistics service, Andreas Georgiou, and two board members at the Hellenic Statistical Authority (ELSTAT) are to face felony charges regarding the alleged manipulation of the country’s deficit figure in 2009.

   

  Financial prosecutors Spyros Mouzakitis and Grigoris Peponis have asked a special magistrate who deals with corruption issues to investigate whether claims that Georgiou, the head of the national accounts department Constantinos Morfetas and the head of statistical research, Aspasia Xenaki, were responsible for massaging the figures so that Greece’s deficit appeared larger than it actually was, triggering Athens’s appeal for a bailout.

   

  The three face charges of dereliction of duty and making false statements. Ex-ELSTAT official Zoe Georganta caused a storm in 2011 when she accused Georgiou of pumping up Greece’s deficit to over 15% of GDP, which was more than three times higher than the government had forecast in 2009.

   

  However, she told a panel of MPs last March that she knew of no organized plan behind this alleged manipulation of statistics, instead blaming the politicians that handled Greece’s passage to the EU-IMF bailout of “inexperience, inability or maybe some of them profited.” The former ELSTAT official claimed that the deficit for 2009 should have been 12.5% of GDP and could have easily been brought to below 10% with immediate measures.

  As well as this from Greek Reporter dated June 18 2015:

  The 2009 Deficit Was Artificially Inflated, Former ELSTAT Official Tells Greek Parliament

  Greece’s deficit figures for 2009 and 2010 were deliberately and artificially inflated, and this was at least partly responsible for the imposition of bailouts and austerity programs on the country, a former vice president of the Hellenic Statistical Authority (ELSTAT), Nikos Logothetis, said.

   

  Testifying before a Parliamentary Investigation Committee on examining and clarifying the conditions under which Greece entered its bailout programs and the accompanying Memorandums, Logothetis called ELSTAT president Andreas Georgiou a “Eurostat pawn” that had converted the statistics service into a “one-man show.” He also accused Georgiou of bending the rules and “using tricks” to bump up the deficit’s size.

   

  “A lot of the criteria were violated in order to include public utilities in the deficits. The deficit was enlarged even more by the one-sided fiscal logic of ELSTAT president Andreas Georgiou. It should not have been above 10%. The ‘alchemy’ that was carried out demolished our credibility, drove spreads sky high and we were unable to borrow from the markets. The enlargement of the deficits legitimized the first Memorandum and justified the second for the implementation of odious measures,” Logothetis said.

   

  Noting that this was the third time he was testifying, Logothetis pointed out that Georgiou’s practices had been questioned by himself and other ELSTAT board members (most prominently by Zoe Georganta) but Georgiou had chosen to silence them so that the deficit figure was released only with his own approval and that of Eurostat.

   

  Logothetis claimed that Georgiou had avoided meeting with ELSTAT’s board, even after Logothetis resigned, because the board’s majority would have questioned his actions. He also insisted that “centers” outside of Greece had played a role and needed someone on the “inside,” while he suggested that “someone wanted to bring the IMF into Europe.”

   

  The former ELSTAT official said he was led to this conclusion by “seeing spreads rise as a result of the statistical figures until we reached a real enlargement of the deficits, violating the until-then not violated Eurostat criteria.”

  A view from the ground was provided earlier today by my friend Dimitri Galanis in Athens when I asked him about this:

  Let me help you a bit: September 2008 Wall Street crashes. For a whole year the whole planet is furious against TBTF banks and filthy rich bank CEOs. A year later – 2009 – the Deus ex machina – Georges Papandreou, then the newly elected Greek PM, “discovers” all of a sudden that Greek debt was bigger than everybody “imagined”.

  The EU is “surprised” – Oh nobody knew!!! [everybody knew] Et voila: The Wall Street crisis becomes the Greek and Eurozone crisis. IMF gets a footing in the eurozone. Wall Street, French and German banks get bailed out. Greece suffers – Eurozone on the brink of collapse.

  Greece is the tree – the rest is the forest .

  And then I saw a piece by former US Secretary of Labor Robert Reich yesterday:

  How Goldman Sachs Profited From the Greek Debt Crisis

  The Greek debt crisis offers another illustration of Wall Street’s powers of persuasion and predation, although the Street is missing from most accounts. The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman’s current CEO, Lloyd Blankfein. Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it.

   

  And just as with the American subprime crisis, and the current plight of many American cities, Wall Street’s predatory lending played an important although little-recognized role. In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction.

   

  Then Goldman Sachs came to the rescue, arranging a secret loan of €2.8 billion for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate. As a result, about 2% of Greece’s debt magically disappeared from its national accounts.

  For its services, Goldman received a whopping €600 million, according to Spyros Papanicolaou, who took over from Sardelis in 2005. That came to about 12% of Goldman’s revenue from its giant trading and principal-investments unit in 2001—which posted record sales that year. The unit was run by Blankfein.

   

  Then the deal turned sour. After the 9/11 attacks, bond yields plunged, resulting in a big loss for Greece because of the formula Goldman had used to compute the country’s debt repayments under the swap. By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from €2.8 billion to €5.1 billion.

   

  In 2005, the deal was restructured and that €5.1 billion in debt locked in. Perhaps not incidentally, Mario Draghi, now head of the ECB and a major player in the current Greek drama, was then managing director of Goldman’s international division. Greece wasn’t the only sinner. Until 2008, EU accounting rules allowed member nations to manage their debt with so-called off-market rates in swaps, pushed by Goldman and other Wall Street banks.

   

  In the late 1990s, JPMorgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn’t appear on its national accounts as future liabilities. But Greece was in the worst shape, and Goldman was the biggest enabler.

   

  Undoubtedly, Greece suffers from years of corruption and tax avoidance by its wealthy. But Goldman wasn’t an innocent bystander: It padded its profits by leveraging Greece to the hilt—along with much of the rest of the global economy. Other Wall Street banks did the same. When the bubble burst, all that leveraging pulled the world economy to its knees.

   

  Even with the global economy reeling from Wall Street’s excesses, Goldman offered Greece another gimmick. In early November 2009, three months before the country’s debt crisis became global news, a Goldman team proposed a financial instrument that would push the debt from Greece’s healthcare system far into the future.

  This time, though, Greece didn’t bite.

   

  As we know, Wall Street got bailed out by American taxpayers. And in subsequent years, the banks became profitable again and repaid their bailout loans. Bank shares have gone through the roof. Goldman’s were trading at $53 a share in November 2008; they’re now worth over $200. Executives at Goldman and other Wall Street banks have enjoyed huge pay packages and promotions. Blankfein, now Goldman’s CEO, raked in $24 million last year alone.

   

  Meanwhile, the people of Greece struggle to buy medicine and food.

  Note: when Reich says that “..Goldman wasn’t an innocent bystander: It padded its profits by leveraging Greece to the hilt..”, he describes a tried and true Wall Street model. This is how investment firms like for instance Mitt Romney’s Bain Capital operate: take over a company, load it up with (leveraged) debt, strip its assets and then throw the debt-laden remaining skeleton back unto the public sphere. In this sense, the Troika and its Wall Street connections function as a kind of venture/vulture fund with regards to Greece. Nothing new, other than it’s never been perpetrated on a European Union country before.

  So what do you think: was Greece set up to fail from at least 6 years ago, has it all been a coincidence, or did they maybe just get what they deserve?

  Here’s a short timeline.

  In October 2009, Papandreou becomes the new PM. Shortly thereafter, he “discovers” with the help of Elstat head Andreas Georgiou that the real Greek deficit is not the less than 5% the previous government had predicted, but more than 15%. Within months, salaries and pensions or cut or frozen and taxes are raised. That apparently doesn’t achieve the intended goals, so Papandreou asks for a bailout.

   

  Within 10(!) days, ECB, EU and IMF (aka Troika) fork over €110 billion. The conditions the bailout comes with, cause the Greek economy to fall ever further. Moreover, everyone today can agree that no more than 10% of the €110 billion ever reaches Greece; the remainder goes to the banks that had lent it too much money to begin with.

   

  The remaining investors -the big bailed out banks had fled by then- agree to a 50% haircut, with even more odious conditions for Greece. Papandreou wants a referendum over this and is unceremoniously removed. Technocrat Lucas Papademos is appointed his successor. As Athens literally burns in protest, a second bailout of €136 billion is pushed through. More and deeper austerity follows.

   

  By now, a large segment of the population is unemployed, and pensions are a fraction of what they once were. In an economy that depends to a large extent on domestic consumption, there could hardly be a bigger disaster. Papademos must be replaced because he has no support left, and Samaras comes in.

   

  He allegedly posts a budget surplus, but that is somewhat ironically only possible because the entire economy is no longer functioning. Greek debt-to-GDP rises fast. The Greek people this time revolt not by fighting in the streets, but by electing Syriza.

  And that brings us back to January 25 2015. And eventually to Thursday, July 16 2015.

  What have the bailouts achieved? Well, the Greek economy is doing worse than ever, and the people are poorer than ever. Both have a lot more bad ‘news’ to come. So says the latest bailout imposed on Tsipras at gunpoint.

  To go back to 2009, if the Elstat people who testified -multiple times- before the Greek Parliament were right, there would have been either no need for a bailout, or perhaps a much smaller one. Which, crucially, would not have required IMF involvement.

  It therefore doesn’t look at all unlikely that Greece was saddled with an artificially raised deficit, and that the intention behind that, all along, was to get the Troika ‘inside’ for the long run. So the country could be stripped of all its assets.

  The bailouts needed to be as big as they were to 1) successfully make the international banks ‘whole’ that had lent as much as they had into the Greek economy, 2) get the IMF involved, 3) and absolve the notorious -and cooperative- domestic oligarchy from any pain. And make all the usual suspects a lot more money in the process.

  The added benefit was that it was obvious from the start that the Greeks would never be able to pay the Troika back, and would be their debt slaves for as long as the latter wanted, giving up all their treasured possessions in the process.

  Or, alternatively, it could all have been a terribly unfortunate coincidence. It would be a curious coincidence, though.

  

  

  

  

  

• Pension Shocker: Plans Face $2 Trillion Shortfall, Moody's Says

  Last month, in “Cities, States Shun Moody’s For Blowing The Whistle On Pension Liabilities,” we highlighted a rift between Moody’s and some local governments over the return assumptions for public pension plans.

  To recap, when it comes to underfunded pension liabilities, one major concern is that in a world characterized by ZIRP and NIRP, it’s not entirely clear that public pension funds are using realistic investment return assumptions. The lower the return assumption, the larger the unfunded liability. After 2008, Moody’s stopped relying on the investment return assumptions of cities and states opting instead to use its own models. Unsurprisingly, this led the ratings agency to adopt a much less favorable view of state and local government finances and as WSJ reported, rather than admit that their return assumptions are indeed unrealistic, local governments have opted to drop Moody’s instead. 

  The debate underscores a larger problem in America. Almost half of the states in the union are facing budget deficits.

  Underfunded pension liabilities are one factor, but the reasons for the pervasive shortfall vary from plunging oil revenues to plain old fiscal mismanagement. The pension issue gained national attention after an Illinois Supreme Court decision threw the future of pension reform into question and effectively set a precedent for other states, sending state and local officials back to the drawing board in terms of figuring out how to plug budget gaps. One option is what we have called the “pension ponzi” which involves the issuance of pension obligation bonds. Here is all you need to know about that option: 

  ‘Solving’ this problem by issuing bonds is an enticing option but at heart, it amounts to what one might call a “pension liability-bond arbitrage.” The idea is to borrow the money to plug the pension gap and invest it at a rate of return that’s higher than the coupon on the bonds, thus saving money over the long-haul. Of course, much like transferring a balance on a high interest credit card onto a new card with a teaser rate (or refinancing a high interest credit card via a P2P loan) this gimmick only works if you do not max out the original card again, because if you do, all you’ve done is doubled your debt burden. As it relates to pension liabilities, this means that what you absolutely cannot do is use the cash infusion as an excuse to get lax when it comes to pension funding because after all, that’s what caused the problem in the first place.

  And here’s a look at how pervasive the problem has become:

  

  Make no mistake, America’s pension problem isn’t likely to be resolved anytime soon and in fact, with risk-free rates likely to remain subdued even as equity returns face the possibility that the beginning of a Fed rate hike cycle could trigger a 1937-style equity meltdown (bad news for return assumptions), and with investors set to demand higher yields on muni issuance thanks to deteriorating fiscal circumstances, the financial screws may be set to tighten further on the country’s struggling state and local governments. Bloomberg has more:

  The cost to American cities for their cash-strapped pension funds is starting to look a lot worse, and it’s not because the stock-market rally may be losing steam.

   

  Houston was warned by Moody’s Investors Service this month that it may be downgraded because of mounting retirement bills, the latest municipality put on notice as the company ignores bookkeeping gimmicks that let cities mask the size of their debt for years. The approach foreshadows accounting rules for even top-rated issuers that are poised to cause pension shortfalls to swell as new financial reports are released.

   

  “If you’re AAA or AA rated and you’ve got significant and visible unfunded pension obligations, you’ve only got one direction to go in terms of rating, and that’s potentially down,” said Jeff Lipton, head of municipal research in New York at Oppenheimer & Co. “It’s the presentation on the balance sheet that is now going to drive urgency.”

   

  Cities that shortchanged pensions for years are under growing pressure to boost their contributions, even after windfalls from a stock market that’s tripled since early 2009. Janney Montgomery Scott has said growing retirement costs are “the largest cloud overhanging” the $3.6 trillion municipal-bond market, where investors are demanding higher yields from borrowers under the greatest strain.

   

  That was on display this week for Chicago, whose credit rating was cut to junk by Moody’s in May because of a $20 billion pension shortfall. The city was forced to pay yields of almost 8 percent on taxable bonds maturing in 2042, about twice what some homeowners can get on a 30-year mortgage.

   

  Estimates of the pension-fund deficits facing states and cities vary, depending on the assumptions used to calculate the cost of bills due over the next several decades. According to Federal Reserve figures, they have $1.4 trillion less than needed to cover promised benefits.

   

  Officials have been able to lower the size of the liability by counting on investment earnings of more than 7 percent a year, even after they expect to run out of cash. New rules from the Governmental Accounting Standards Board require a lower rate to be used after retirement plans go broke. Many reported shortfalls will grow as a result.

   

  Moody’s, which in 2013 began using a lower rate than governments do to calculate future liabilities, has estimated that the 25 largest U.S. public pensions alone have $2 trillion less than they need. Cincinnati and Minneapolis are among cities Moody’s has since downgraded.

   

  The California Public Employees’ Retirement System, the largest U.S. pension, this week said it earned just 2.4 percent last fiscal year, one-third of the annual return it projects. The California State Teachers’ Retirement System, the second-biggest fund,gained 4.5 percent, compared with its 7.5 percent goal.

  In short: America is facing a fiscal crisis at the state and local government level and it appears as though at least one ratings agency is no longer willing to suspend disbelief by allowing officials to utilize profoundly unrealistic return assumptions in the calculation of liabilities. This means downgrades and as for what comes next, we’ll leave you with a recap of Citi’s vicious “feedback loop”.

  From 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.

  

  

  

  

  

• The Greatest Collapse In The History Of The VIX Index

  Submitted by Christopher Cole via Artemis Capital Management,

  The extraordinary market intervention by China in response to their declining market, coupled with further ‘kick the can down the road’ policies by the EU regarding Greece, resulted in the greatest collapse in the history of the VIX index (which is still ongoing as I write). Over the past five days and counting the VIX has fallen -40% from 19.97 to 12.11. To gain perspective on moves in volatility Artemis ranks consecutive drawups and drawdowns (peak-to-trough or trough-to-peak %  moves by day) in the VIX index and models them as a power law distribution.  While the concept may be obscure to grasp at first the ramifications of the analysis are enlightening.

  What is a power-law distribution? The distributions of a wide variety of physical, biological, and human phenomena follow what is known as a power-law distribution. Examples include earthquakes, deaths in war and terrorism, populations of cities, solar flares, word frequencies in language, movie box office receipts… and financial asset price movements up and down over multiple days.

  Supernormal Power-Law Violations: When you rank events from the above natural and human phenomena the vast majority of observations follow the power-law distribution perfectly- however the violations of the function are the most interesting. Power-law violations are true  black swans or supernormal observations because their results contain a degree of reflexivity that outside the boundary of what would be expected from an exponential growth function. Examples of supernormal violations in power laws across other phenomena include death counts in WWII ranked among all wars, box office receipts of the movie Titanic, the 9.2 Magnitude 1960 Chilean Earthquake, the population of Tokyo, the 1987 Black Monday Crash, and the 9/11 terror attack in NYC.
   
  For volatility we define a Supernormal Volatility Collapse (Drawdown) as a multi-day decrease in spot-VIX index that violates power law distribution and is indicative of self-reflexivity in markets and unknown unknown events. These occur 1 out of every 920 drawdowns or 0.1087% of the time. Supernormal VIX collapses show returns below an expected power law distribution line since the extreme speed of collapse meets the fact that volatility is bounded by zero. 
   
  The graph below shows data points representing the rankings of VIX peak-to-trough declines (y-axis  = % drawdown in vol over consecutive days & x-axis = ranking ).

  

  As with most natural events – the vast majority of VIX drawdowns neatly follow the power law distribution function represented by the white line. The supernormal vol drawdowns to the lower left of the graph represent the most extreme violations of that power law (black swans) whereby the speed of collapse meets price constriction of implies due to the zero bound of volatility. They are the 9.2 earthquakes, 9/11s, and Titanics of VIX drawdowns.
   
  We would like to highlight:

  • The ongoing decline in the VIX starting last week (and still going) is the largest supernormal volatility collapse in VIX history
  • 3 of the largest  supernormal VIX collapses have occurred in the last year alone
  • The top 7 ranked power law violations have ALL occurred during the regime of monetary easing between 2010 and today

  In summary, over the past 2 years, we have been experiencing a quantifiable ‘outlier’ or ‘black swan’ decline in the VIX every 6 months as evaluated against history.
   
  I can only point to government intervention as the core reason. I firmly believe that this moral hazard produces a hidden leverage and “shadow market gamma” that at some point will result in a sustained volatility outlier event in the opposite direction.

  

  

  

  

  

• Trouble Ahead? KKK & African American Group Plan Opposing Protests At South Carolina Capitol

  We’ve written quite a bit about worsening race relations in America over the past several months. As Robert Putnam recently made clear with “Our Kids””, the real threat to the fabric of American society may be the growing class divide and indeed, the post-crisis monetary policies that have served to exacerbate the disparity between the rich and everyone else have a polarizing effect, as Main Street watches helplessly while the very same bankers who took taxpayer money in 2008 become billionaires on the back of the Fed’s printing press. 

  And while it might very well be that America’s future is defined more by class differences than by contentious race relations, there’s no question that multiple high profile cases of African American deaths at the hands of law enforcement have brought race relations back to the fore and the massacre at South Carolina’s Emanuel AME church didn’t help matters, nor did rumors about a subsequent string of “arsons” (some of the incidents were not proven to be related to hate crimes) at African American churches across the south. 

  The renewed debate about race in American society came to a head earlier this month when the Confederate flag was removed from the South Carolina State House.

  Now, trouble may be brewing in South Carolina because as Reuters reports, the KKK and the Black Educators for Justice are planning simultaneous rallies outside the State House on Saturday. Here’s more:

  A Ku Klux Klan chapter and an African-American group plan overlapping demonstrations on Saturday outside the South Carolina State House, where state officials removed the Confederate battle flag last week.

   

  Governor Nikki Haley, who called for the flag’s removal from the State House grounds after the killing of nine African-Americans in a Charleston church last month, urged South Carolinians to steer clear of the Klan rally.

   

  “Our family hopes the people of South Carolina will join us in staying away from the disruptive, hateful spectacle members of the Ku Klux Klan hope to create over the weekend and instead focus on what brings us together,” Haley said in a statement posted to her Facebook page.

   

  The Charleston shooting rekindled a controversy that has long surrounding the Confederate flag. A website linked to suspected gunman Dylann Roof, a 21-year-old white man, contained a racist manifesto and showed him in photos posing with the flag.

   

  Opponents see its display as a painful reminder of the South’s pro-slavery past, while supporters see it as an honorable emblem of Southern heritage.

   

  The Loyal White Knights of the Ku Klux Klan, a Pelham, North Carolina-based chapter that bills itself as “the largest Klan in America,” expects about 200 people to attend its demonstration, planned from 3 p.m. to 5 p.m.

   

  Calls to the chapter, one of numerous unconnected extremist groups in the United States that have adopted the Klan name, were not immediately returned.

   

  A Jacksonville, Florida, group called Black Educators for Justice expects a crowd of about 300 for its rally, planned for noon to 4 p.m. The group is run by James Evans Muhammad, a former director of the New Black Panther Party.

   

  The Black Educators group wants to highlight continuing racial inequality, which Muhammad says endures despite the Confederate flag’s removal.

   

  
  

  And while it seems the groups are in agreement as to not “interfering” with one another, we have to believe (and this is a phrase we don’t often get to use outside of financial markets but probably applies here) that “this may not end well.”

  

  

  

  

  

• The Bankruptcy Of The Planet Accelerates – 24 Nations Are Currently Facing A Debt Crisis

  Submitted by Michael Snyder via The Economic Collapse blog,

  There has been so much attention on Greece in recent weeks, but the truth is that Greece represents only a very tiny fraction of an unprecedented global debt bomb which threatens to explode at any moment.  As you are about to see, there are 24 nations that are currently facing a full-blown debt crisis, and there are 14 more that are rapidly heading toward one.  Right now, the debt to GDP ratio for the entire planet is up to an all-time record high of 286 percent, and globally there is approximately 200 TRILLION dollars of debt on the books.  That breaks down to about $28,000 of debt for every man, woman and child on the entire planet.  And since close to half of the population of the world lives on less than 10 dollars a day, there is no way that all of this debt can ever be repaid.  The only “solution” under our current system is to kick the can down the road for as long as we can until this colossal debt pyramid finally collapses in upon itself.

  As we are seeing in Greece, you can eventually accumulate so much debt that there is literally no way out.  The other European nations are attempting to find a way to give Greece a third bailout, but that is like paying one credit card with another credit card because virtually everyone in Europe is absolutely drowning in debt.

  Even if some “permanent solution” could be crafted for Greece, that would only solve a very small fraction of the overall problem that we are facing.  The nations of the world have never been in this much debt before, and it gets worse with each passing day.

  According to a new report from the Jubilee Debt Campaign, there are currently 24 countries in the world that are facing a full-blown debt crisis…

  • Armenia
  • Belize
  • Costa Rica
  • Croatia
  • Cyprus
  • Dominican Republic
  • El Salvador
  • The Gambia
  • Greece
  • Grenada
  • Ireland
  • Jamaica
  • Lebanon
  • Macedonia
  • Marshall Islands
  • Montenegro
  • Portugal
  • Spain
  • Sri Lanka
  • St Vincent and the Grenadines
  • Tunisia
  • Ukraine
  • Sudan
  • Zimbabwe

  And there are another 14 nations that are right on the verge of one…

  • Bhutan
  • Cape Verde
  • Dominica
  • Ethiopia
  • Ghana
  • Laos
  • Mauritania
  • Mongolia
  • Mozambique
  • Samoa
  • Sao Tome e Principe
  • Senegal
  • Tanzania
  • Uganda

  So what should be done about this?

  Should we have the “wealthy” countries bail all of them out?

  Well, the truth is that the “wealthy” countries are some of the biggest debt offenders of all.  Just consider the United States.  Our national debt has more than doubled since 2007, and at this point it has gotten so large that it is mathematically impossible to pay it off.

  Europe is in similar shape.  Members of the eurozone are trying to cobble together a “bailout package” for Greece, but the truth is that most of them will soon need bailouts too…

  All of those countries will come knocking asking for help at some point. The fact is that their Debt to GDP levels have soared since the EU nearly collapsed in 2012.

   

  Spain’s Debt to GDP has risen from 69% to 98%. Italy’s Debt to GDP has risen from 116% to 132%. France’s has risen from 85% to 95%.

  In addition to Spain, Italy and France, let us not forget Belgium (106 percent debt to GDP), Ireland (109 debt to GDP) and Portugal (130 debt to GDP).

  Once all of these dominoes start falling, the consequences for our massively overleveraged global financial system will be absolutely catastrophic…

  Spain has over $1.0 trillion in debt outstanding… and Italy has €2.6 trillion. These bonds are backstopping tens of trillions of Euros’ worth of derivatives trades. A haircut or debt forgiveness for them would trigger systemic failure in Europe.

   

  EU banks as a whole are leveraged at 26-to-1. At these leverage levels, even a 4% drop in asset prices wipes out ALL of your capital. And any haircut of Greek, Spanish, Italian and French debt would be a lot more than 4%.

  Things in Asia look quite ominous as well.

  According to Bloomberg, debt levels in China have risen to levels never recorded before…

  While China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace.

  Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.

  And remember, that doesn’t even include government debt.  When you throw all forms of debt into the mix, the overall debt to GDP number for China is rapidly approaching 300 percent.

  In Japan, things are even worse.  The government debt to GDP ratio in Japan is now up to an astounding 230 percent.  That number has gotten so high that it is hard to believe that it could possibly be true.  At some point an implosion is coming in Japan which is going to shock the world.

  Of course the same thing could be said about the entire planet.  Yes, national governments and central banks have been attempting to kick the can down the road for as long as possible, but everyone knows that this is not going to end well.

  And when things do really start falling apart, it will be unlike anything that we have ever seen before.  Just consider what Egon von Greyerz recently told King World News…

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

   

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

  So what do you think is coming, and how bad will things ultimately get once this global debt crisis finally spins totally out of control?

  

  

  

  

  

• Gold, Stocks, Oil… Choose One

  Via ConvergEx's Nick Colas,

  Would you rather have one “Share” of the S&P 500 at $2,124, or 41 barrels of crude oil, or 1.86 ounces of gold?  Yes, they are all worth the same amount at the moment, but the price relationship between the three has shifted over the decades. 

   

  

   

  For example, the current ratio of 41.4 barrels of crude to one S&P 500 is 45% higher than the 30 year average of 28.5x. That means oil really should be at $75/barrel with the S&P 500 where it is. The short term (10 year) average is even lower – 17.7x – pointing to a “Fair Value” for oil at $120. Perhaps equity markets do have more room to run if this historic relationship is on hold for the moment, as slack global growth and shifting geopolitics keeps oil prices down and (hopefully) helps U.S. consumer confidence. 

   

  As for the stock/gold relationship, the current ratio of 1.86 ounces to 1 S&P share is pretty spot-on the 30 year average of 1.89.  So why is gold breaking down even as stocks are melting up?  Stocks are a proxy for confidence in everything from the financial system to human ingenuity’s ability to create a better world; gold’s +5,000 year record of value is essentially a reminder that nothing ever changes.

  Warren Buffett hates gold as an investment, a fact that has perplexed me for years. Berkshire Hathaway’s own Borsheims jewelry store will sell you all the gold you want, provided you pay the premium over its intrinsic value to have it shaped into necklaces, bracelets, or rings.  Somehow, silver is ok – Berkshire once owned 129 million ounces of the stuff back in the 1990s. Charlie Munger, Buffett’s partner of many years, famously told CNBC in 2012 “I think gold is a great thing to sew in to your garments if you’re a Jewish family in Vienna in 1939 but I don’t think civilized people buy gold”.  Yep, that’s what he said…

  The problem Buffett and Munger seem to have with gold is that it just sits there and looks pretty.  Their model for investing is to buy businesses in whole or in part and essentially keep capital cycling through the global economic ecosystem.  That’s essentially their version of a social contract – if you have more money than you need then you hand it back for others to use, hopefully for productive purposes.  Fair enough – their balance sheets are much better than mine so it’s hard with their success using this paradigm.

  The other side of the coin is that every single piece of gold ever minted by any government or made by private hands – anywhere and at any time – still has value.  The modern financial system – banks, capital markets, the whole thing – have value in excess of gold when they do what they are supposed to do: channel human innovation and enable social progress.  And when they fail in those goals, gold is the default investment until the next time around.  Just consider that over the last 10 years – one very full cycle of economic expansion, severe contraction and then recovery – the performance of gold still far outstrips the S&P 500: 161% to 75%. Oh, and gold also beats the performance of Berkshire Hathaway (up 154% over the last 10 years), with a lot less volatility for most of that period.

  Yet on a day when gold broke to a five year low while U.S. equity markets seem destined to make new all-time highs in short order, we need some more historical context on the relative value of each asset class to make a thoughtful case for what’s happening now.  To do that, we have done a time series analysis back to 1970, dividing the value of the S&P 500 by the price of a troy ounce of gold. There are some handy graphs highlighting this calculus right after this note, but here are our key takeaways:

  • Gold and stocks are fairly valued relative to each other right where they are.  Over the last 30 years, the average ratio has been 1.89x, or that many troy ounces of gold for one S&P 500 “Share”.  The current ratio is 1.86 (2124 divided by $1,144). The math back to 1970, before the U.S. shed the last vestiges of a gold standard, is 1.53x meaning that prices up to $1,388/oz are also “Fair value”.
  • Gold goes through long waves of social favor/rejection, and it is better to view gold’s relationship to equity prices through that pendulum-mounted lens.  Consider that the all-time low ratio was 0.17, back in the early 1980s, when investors clearly felt that the U.S. central banking system was broken and the domestic economy was stuck in a cycle of “Stagflation”.  Yes, it took over 5 S&P 500’s to buy one ounce of gold. The relationship went through “Par” in the late 1980s – gold and S&P 500 at the same price – and hit a high of 5.5x during the dot com bubble of the late 1990s.  It would be hard to find a time in modern economic history when there was more enthusiasm for the wonders of man’s creativity than Internet 1.0. Gold was something for a Gucci bangle or Rolex Submariner case, but that was it.
  • You probably know the rest – gold and stocks revisited “Par” in January 2009 and stocks didn’t get the upper hand again until April 2013. Now the ratio is the aforementioned 1.86.  From 1996 to 2007, the ratio never dipped below 2.0x, so that’s a proxy for where the relationship tends to go during periods of capital markets enthusiasm.  And we clearly seem to be in such a phase.
  •  In the end, most investors own gold not strictly as an investment, but as a hedge.  The math we’ve highlighted shows why.  When humans get things wrong – central bankers, politicians, even overly enthusiastic equity investors – gold is a useful asset, uncorrelated to the rest.

  We can also do this analysis for oil, which in many ways is a more “Useful” commodity than gold and looks very undervalued versus U.S. stocks.  Again – graphs at the end of this note and summary below:

  • The current ratio of oil prices to the S&P 500 is 41.4 (2124 divided by spot WTI at $51.31) and the 30 year average (using a blend of Brent, Dubai and WTI) is 28.5x. That makes the current price of oil deeply undervalued to the S&P 500. Crude really should trade at $75 if the historical average relationship held any sway.  That is essentially 50% higher than current levels.
  •  Maybe the U.S. is less energy intensive now, so is the relationship is different?  Nope – just the opposite actually.  The 10 year average is 17.7x, so oil should be $120/barrel.
  •  The best thing you can say – and this is pretty good, actually – is that global geopolitics and oil supply fundamentals are conspiring to keep crude prices lower for longer than usual this late in an economic cycle. The math backs that up, and this should help U.S. stocks move higher from hopes that consumers will (one day) spend their savings at the pump.

   The upshot of these two case studies is pretty clear: oil is cheap relative to stocks and the savvy investor should look at the beaten up energy sector for value plays.  Oil doesn’t stay cheap forever – never has, any way.  Gold is likely in for some more rough treatment, only because the pendulum of human confidence is still moving towards “Hope” and away from “Fear”.  And that’s OK – history if full of such cycles.  And gold has seen them all.   

  

  

  

  

  

• Is This The Most Remote Object In The Solar System?

  Maybe not…

   

  

   

  Source: Investors.com

  

  

  

  

  

• Have Central Banks Brought Us Back to 2008… or 1929?

  In the early 2000s, Alan Greenspan was worried about deflation. So he hired Ben Bernanke, the self-proclaimed expert on the Great Depression from Princeton. The idea was that with Bernanke as his right hand man, Greenspan could put off deflation from hitting the US. Indeed, one of Bernanke’s first speeches was titled “Deflation: Making Sure It Doesn't Happen Here"

   

  The US did briefly experience a bout of deflation from late 2007 to early 2009. To combat this, Fed Chairman Ben Bernanke unleashed an unprecedented amount of Fed money. Remember, Bernanke claims to be an expert on the Great Depression, and his entire focus was to insure that the US didn’t repeat the era of the ‘30s again.

   

  Current Fed Chair Janet Yellen is cut of the same cloth as Bernanke. And her efforts (along with Bernanke’s) aided and abetted by the most fiscally irresponsible Congress in history, have recreated an environment almost identical to that of the 1920s.

   

  Let’s take a quick walk down history lane.

   

  In the 1920s, most of Europe was bankrupt due to after effects of WWI. Germany in particular was completely insolvent due to the war and due to the war reparations foisted upon it by the Treaty of Versailles. Remember, at this time Germany was the second largest economy in the world (the US was the largest, then Germany, then the UK).

   

  Germany attempted to deal with the economic implosion created by WWI by increasing social spending: social spending per resident grew from 20.5 Deutsche Marks in 1913 to 65 Deutsche Marks in 1929.

   

  Since the country was broke, incomes and taxes remained low, forcing Germany to run massive deficits. As its debt loads swelled, the county cut interest rates and began to print money, hoping to inflate away its debs.

   

  When the country lurched towards default, US and other banks loaned it money, doing anything they could to keep the country from defaulting on its debt. As a result of this and the US’s relative economic strength compared to most of Europe, capital flew from Europe to the US.

   

  This created a MASSIVE stock market bubble, arguably the second largest in history. From its bottom in 1921 to its peak in 1929, stocks rose over 400%. Things were so out of control that the Fed actually raised interest rates hoping to curb speculation.

   

  The bubble burst as all bubbles do and stocks lost 90% of their value in a mere two years.

   

  

   

  Today, the environment is almost identical but for different reasons. The ECB first cut interest rates to negative in June 2014. Since that time capital has fled Europe and moved into the US because 1) interest rates here are still positive, albeit marginally, and 2) the US continues to be perceived as a safe-haven due to its allegedly strong economy.

   

  This process has accelerated in 2015.

   

  ·      Globally, there have been 20 interest rate cuts since the years started a mere two months ago.

   

  ·      Interest rates are now at record lows in Australia, Canada, Switzerland, Russia and India.

   

  ·      Many of these rates cuts have resulted in actual negative interest rates, particularly in Europe (Denmark, Sweden, and Switzerland).

   

  ·      Both the ECB and the Bank of Japan are actively engaging in QE programs forcing rates even lower.

   

  ·      All told, SEVEN of the 10 largest economies in the world are currently easing.

   

  Because the US is neutral, money has been flowing into the country by the billions. A lot of it is moving into luxury real estate (particularly in LA and York), but a substantial amount has moved into stocks as well as the US Dollar.

   

  As a result of this, the US stock market is trading at 1929-bubblesque valuations, with a CAPE of 27.34 (the 1929 CAPE was only slightly higher at 30. And when that bubble burst, stocks lost over 90% of their value in the span of 24 months.

   

  Another Crash is coming… and smart investors would do well to prepare now before it hits.

   

  If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

   

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

   

  We are currently down to the last 25.

   

  To pick up yours, swing by…

   

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

   

  Best Regards

  Phoenix Capital Research

   

   

  

  

  

  

• The Fed Is Either Too Late Or Too Early; But Certainly Not Just Right

  Submitted by Roger Thomas via Valuewalk.com,

  If market economists have the Fed right, in about 60 days from now Janet Yellen, chairwoman of the Federal Reserve, will announce the first Federal Reserve rate hike in about 9 years.

  With the first rate hike pending, an obvious question is – Does the Fed have the timing right?

  If you're looking at year-over-year growth in Retail Sales, Industrial Production, and Capacity Utilization, the answer is a clear no.

  Here's a look.

  Retail Sales vs Fed tightening cycles

  The following graphic is a look at year-over-year growth in Retail Sales overlaid with the Federal Funds target interest rate.

  Fascinatingly, all four of the previous four Fed tightening cycles occurred when Retail Sales were either accelerating or about flat.

  This is interesting because Retail Sales in 2015 have been deteriorating all year.  Overall, Retail Sales growth peaked in August 2014, and since then have consistently experienced a decline in year-over-year growth.

  In the first tightening cycle shown, March 1988 to March 1989, Retail Sales floating about flat, neither decelerating or accelerating.

  In the mid-90s (January 1995 to February 1995), Retail Sales were clearly accelerating.

  In the late 1990s, Retail Sales were on a clear upward trend.

  Lastly, in the most recent tightening cycle, from April 2004 to August 2006, Retail Sales were also clearly on an accelerating trajectory.

  This goes to show that there's a first time for everything.  Raising rates when Retail has been weakening for around a year.

  

   

  Industrial Production

  Here's a look at the Industrial Production picture.

  Overall,the picture is pretty similar to the Retail Sales picture.

  In three out of the four instances, the Fed raised rates when Industrial Production was either accelerating or at least not decelerating.

  The sole exception to this observation was the 1988/1989 tightening cycle.

  During this period, the Fed decided to raise rates even though Industrial Production was decelerating.

   

  Unsurprisingly, Industrial Production continuously decelerated throughout the Fed's tightening cycle.

  This downward is similar to what we might see for the remainder of 2015 and first half of 2016 if the Fed first starts raising rates in September 2015.

  Interesting, Industrial Production growth is not far from going negative, so the Fed will more than likely impose a very short tightening cycle.

  

   

  Capacity Utilization

  Here's a look at the Capacity Utilization picture.

  As with Industrial Production, Capacity Utilization was, in most cases, accelerating or at least not decelerating when the Fed decided to start raising rates.

  The sole exception, as with Industrial Production, occurred in the late 1980s.

  The most interesting observation from this graphic is that year-over-year growth in Industrial Production is negative.

  It would be quite amazing for the Fed to raise rates when Capacity Utilization is lower than it was at this time last year.

  Perhaps there's a first time for everything (i.e. raise rates before the economy deteriorates too much, because the Fed certainly can't raise rates).

  

   

  Conclusion

  Overall, if one considers Retail Sales, Industrial Production, and Capacity Utilization as reliable indicators on the state of the U.S. economy, then the Fed is either way too late or way too early for a rate hike.  Ms. Yellen's Fed certainly does not have the time just right.

  If the Fed does raise the Fed's target interest rate in September, it would be coming at a time when year-over-year growth in Retail Sales, Industrial Production, and Capacity Utilization are all decelerating.

  Greenspan understood the first derivative, but apparently Ms. Yellen does not.

  

  

  

  

  

• UK Market Regulator Head Who Thought "All Bankers Were Evil" Let Go After "Making Too Many Enemies"

  On the surface it may appear that the head of the FCA, the UK’s financial regulator, Martin Wheatly resigned voluntarily yesterday. The truth is that here only “quit” after being told by George Osborne that he would not renew his contract when it expires in March.

  

  For those who are unfamiliar, Wheatley led the FCA from its inception in April 2013, and oversaw a regulator that extracted record penalties from the industry, teaming with US authorities in the Libor and foreign exchange benchmark-rigging scandals. He also targeted retail banks for mis-selling products to consumers and secured sweeping new powers, including oversight of payday lenders and antitrust tools. Granted, he was not able to send any prominent bankers to prison – the only person behind bars so far is the scapegoat for the HFT’s May 2010 flash crash, Nav Sarao – but his surprisingly dogged crackdown on manipulation was the main catalyst for the revelation of Liborgate (formerly known as a “conspiracy theory”) which then spread to FX, commodities (including gold) and Treasuries, and which most recently cost the jobs of Deutsche Bank’s co-CEO and led to several changes at the top of Barclays bank.

  It also cost Wheatley his job.

  According to the FT, citing government insiders, the message that his contract would expire was relayed to Mr Wheatley “relatively recently” and that the Financial Conduct Authority chief had decided that in such circumstances he did not want to serve out the remainder of his existing term. He will step down on September 12, with Tracey McDermott, the regulator’s head of supervision, taking over until a replacement is found.”

  The move comes a month after Mr Osborne, the chancellor, unveiled a “new settlement” with the City of London — suggesting a shift from an era of tough regulation of the financial services sector.

  The paradox: while Osborne’s official statement praised Mr Wheatley’s performance but talked about moving the FCA on to “the next stage. The government believes that a different leadership is required” to build on the FCA’s foundations, he said.

  In other words, the chancellor got “the tap on the shoulder” and was advised by UK’s banks that they would much rather if there is only token regulation and the pretense of supervision instead of someone like Wheatley who keeps making banks pay massive fines every quarter to the point where one-time, non-recurring legal charges are both non-one time and recurring (even if it means nobody actually goes to prison).

  Furthermore, the former head of Hong Kong’s Securities and Futures Commission did not always have the confidence of government officials, who have privately urged regulators to take a lighter approach as the economy improves and banker-bashing falls out of favour. Some industry executives, meanwhile, viewed him as remote and unhelpful and complained to senior Conservative politicians about his consumer-champion agenda.

  But his biggest transgression: “one senior UK bank director said: “The problem with Martin was that he made so many enemies, partly for good reason because banks did rightly need firm treatment after the crisis. But he seemed to have a mindset that all bankers were evil.“

  We wonder where he may have gotten that idea:

  

  But most importantly, “he made many enemies“, enemies which just happen to be in control of the decision-making process by their puppets in UK government.

  Which also means that the period of massive civil (if not criminal) penalty charges in the UK is now over and the time of banker prosecution, fake as it may have been, is officially over. It also means that it is once again open season for banks to manipulate and rig anything and everything that has a “market-set” price.

  Then again, there may be more to Wheatley’s departure than meets the eye.

  As one commentator notes, “Martin Wheatley achieved something unique: both bankers and victims of financial services misconduct hated him, and wanted him gone. The former grew tired of the procession of huge, seemingly random fines imposed on their blameless shareholders and the endless series of behavioural economics-based recommendations imposed by supervision teams. The latter berated him for refusing to hound the bad guys out of the industry and lock them up.

  Both are right. Wheatley’s era will be judged as one in which there was a lack of discrimination and precision. Much easier to fine a bank than prosecute a rogue banker. Especially if some of the rogues are in very senior positions, and also have the ability to dole out obscenely well-paid sinecures to failed ex-regulators…

   

  The need to track down and eliminate the bad apples while laying off the shareholders and let managers manage is the message that George Osborne and Mark Carney delivered, in no uncertain terms, at the Mansion House last month. Just days later, Wheatley made an ill-judged comment to a reporter about tracking down wrongdoers not being ‘in our charter’ (whatever that is). My guess is that this is what hammered the final nail into his professional coffin.

  This does appear accurate: after all if Wheatley really did want to ferret out all corruption he should have started with the Bank of England itself, which as we reported before, was one of the key participants in the FX rigging scandal, and where after a few key personnel were let go, things are back to normal. Because the last thing one is allowed to do nowadays, is to suggest that central banks themselves are participating in the rigging of market products, be they FX or gold (which lately are synonymous according to the US OCC) and hint that the gross market manipulation taking place in China is really quite endemic and is merely an example of what central banks do the world over.

  One can only hope that the assessment above is accurate and that Wheatley’s replacement will indeed crack down on actual banks instead of bank shareholders, who end up being the ones who pay the fines for banker transgression.

  And just to make sure all the t‘s are crossed, the obligatory diplomatic statements that the departure is amicable and Wheatley remains respected, were a key part of the charade. Sure enough.

  Mr Wheatley said: “I am incredibly proud of all we have achieved together in building the FCA over the past four years. I know that the organisation will build on that strong start and work so that the financial services industry continues to thrive.”

   

  John Griffith-Jones, chairman of the FCA, said: “Martin has done an outstanding job as chief executive setting up and leading the FCA over the past four years. We owe him a lot and I and my board would like to thank him for his great efforts in setting up the organisation and for the contribution he has made to putting conduct so firmly at the top of the financial services agenda.”

  Because no matter what the real reason behind Wheatley’s departure, whatever bankers want…

  And speaking of which, if only the US SEC had as its “leader” not a person whose entire legal career was spent defending Wall Street and is now forced to recuse herself from virtually every enforcement action, then just maybe the US retail investor would still be willing to participate in the rigged casino, and allow banks and hedge funds to offload their record risk holdings to the “dumb money” which is increasingly looking like the smartest money of all.

  

  

  

  

  

• Bonds Are Back: "There Is Too Much Complacency"

  Via Scotiabank's Guy Haselmann,

  FOMC

  For many, there is typically a large divide between what they believe the FOMC should do, and what it will actually do.  There are those who believe the Fed should not hike until next year or later: they include Charles Evans, Narayana Kocherlakota, Jeffrey Gundlach and the IMF.  Others believe the FOMC should have hiked already and should begin ASAP (even at the July meeting next week): those in this camp include, Esther George, Loretta Mester, Jeffrey Lacker and me.

  • Neither outcome will likely happen, despite reasonable and easily understandable arguments for either delaying or advancing lift-off.
  • Somehow the FOMC has veered back to its ‘hated’ calendar guidance, signifying the September meeting as most probable for lift-off. 

  It seems to me that the delay camp has too much faith in models.  Inflation and economic slack and few other aspects that constitute the basis of their position, may not be as fully understood as they claim. Globalization, technological advances, and the drift in the US economy from a goods-producing to a services economy, has weakened economic forecasting accuracy and understanding.  

  Nonetheless, this camp wants to wait for certainty (that the Fed’s full-employment and inflation mandates are achieved) before hiking.  They have little concern that official rates have been at the ‘emergency level’ of zero for six years; well past emergency conditions.  They believe that overshooting is preferable to undershooting targets, because of asymmetry, i.e., it has the ability to hike rates, but does not have the ability to ease from zero (further QE is likely a political non-starter).

  The delay camp also does not believe (rightly or wrongly) that there are any current (meaningful) risks to financial stability.   Rather, this camp seems excessively more worried about having to reverse course after hiking.

  I have outlined numerous reasons for over a year why the Fed should hike rates ASAP (including moral hazard, record levels of corporate issuance, impact on pensions and  insurance companies, investor herd-trading, inequality, renewed sub-prime lending, and low-quality securitization) so I will not get into detail here.

  Yellen said that the choice is hiking ‘sooner and slower’ or hiking ‘later and more aggressively’. Hiking sooner is more consistent with her preference and message of a gradual path toward ‘normalization’. She also said that a hike would indicate confidence in economic momentum; so wouldn’t an early hike rid markets of the uncertainty around the timing of the first hike as well as allow for a longer (i.e., more gradual) period before the second hike?

  Bottom line.

  The FOMC should stop dangling a rate hike over markets with its informationally-challenged term ‘data dependency’.  Currently, financial conditions are ideal and economic conditions are plodding along with progress.  Market interest rates are low.  Spreads are tight.  Equities are at, or near, all-time highs.  The dollar index (DXY), while higher than last year, is 4% lower than where it was during the March meeting.  China and Greece (and other geo-political flash points) are far from solved, but at the moment, there is relative calm.

  Financial Markets

  During the last week of April, I recommended being cautious on Treasuries (German Bunds were a catalyst).  However, in May, after a steep selloff, I recommended re-establishing tactical longs in the backend (10’s and longer) in front of 2.40% yield on the 10-year.  While chopping around ever since, the support levels of 2.40% 10’s and 3.25% 30’s, appears to have held well.  I now recommend adding to those backend positions.

  Investors are too myopically focused on expectations of a steep rise in bond yields and on using central bank stimulus to pile back into riskier assets. There is too much complacency.  I believe the upside potential for Treasuries prices for the balance of the year is once again being greatly underestimated.

  The long end should continue to perform well under various scenarios. If the Fed hikes in September or earlier, the back end should perform well.  If the Fed breaks its implicit promise to hike rates in September, its credibility would be damaged:  unless of course, it was due to a significant deterioration in the economic or political landscape.  Either outcome would likely benefit long Treasury security prices.

  I expect USD strength and commodity weakness to continue as well.  Weakness in the commodity complex is probably a sign of deep and on-going trouble in China. I expect: EUR to test parity, $/yen 130, $/Cad 1.35, AUD .6500, WTI oil $42.   I also expect the US 10yr and US 30yr yields to dip again this year below 2.00% and 2.75%, respectively.  Periphery EU spreads should continue to be sold versus Bunds and UST.

  “Easy money is not costless” – Anonymous

  

  

  

  

  

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• A Ratio Worth Respecting

  From the Slope of Hope: Two months ago, I did a piece called A Fascinating Ratio, which suggested that a major reversal was coming once the ratio reached about 2.0. At the time I did the post in mid-May, the ratio was a little under 1.8, but thanks to the unflagging strength of equities, as well as the unwavering suckiness of precious metals, this ratio is up to 1.95. We’re getting very, very close to what I think will be a major pivot point, and perhaps the pairs trade opportunity of the decade:

   
  What’s interesting is that the last major inflection point wasn’t precisely before the financial crisis took hold, as you might suspect. It was precisely a decade ago, in mid-2005. Back then, gold was dirt cheap, and as we know now, equities still had more than two years to go flying higher.

  Looking at the individual components, it’s obvious that gold has been a piece of trash for almost four solid years now, but we might be reaching an important support point, which is at about 107.50 defined by GLD, shown below:

   

  At the same time, the S&P 500 ETF, symbol SPY, has already fractured its long-term ascending trendline. This violation, which took place on June 29, is something I don’t take lightly. In my experience, once a financial instrument starts “chipping away” at a trendline, its days are numbered.

  

  In sum, the closer we get to a 2:1 relationship between SPY and GLD, the more powerful an opportunity is made available to go short the S&P and go long gold. Believe me, I realize what garbage gold looks like right now, and how powerful equities (think NFLX, GOOGL, AMZN, EBAY, etc.) appear to be. In spite of this, this contrarian play could be one of the most potent and profitable strategies in years.

  

  

  

  

  

• Does This Chart Look Bullish To You?

  As Nasdaq soars to record-er highs and CNBC just can’t hold themselves back when Google adds as much in one day as the market cap of 415 S&P 500 companies, we have one question… should breadth look like this when the index is hitting new highs?

   

  

   

  The troops aren’t following the generals…Now whwre have we seen this before?

  

   

  h/t @HumbleStudent

  Charts: Bloomberg
  

  

  

  

  

  

• The Bankruptcy Of The Planet Accelerates – 24 Nations Are Currently Facing A Debt Crisis

  Submitted by Michael Snyder via The Economic Collapse blog,

  There has been so much attention on Greece in recent weeks, but the truth is that Greece represents only a very tiny fraction of an unprecedented global debt bomb which threatens to explode at any moment.  As you are about to see, there are 24 nations that are currently facing a full-blown debt crisis, and there are 14 more that are rapidly heading toward one.  Right now, the debt to GDP ratio for the entire planet is up to an all-time record high of 286 percent, and globally there is approximately 200 TRILLION dollars of debt on the books.  That breaks down to about $28,000 of debt for every man, woman and child on the entire planet.  And since close to half of the population of the world lives on less than 10 dollars a day, there is no way that all of this debt can ever be repaid.  The only “solution” under our current system is to kick the can down the road for as long as we can until this colossal debt pyramid finally collapses in upon itself.

  As we are seeing in Greece, you can eventually accumulate so much debt that there is literally no way out.  The other European nations are attempting to find a way to give Greece a third bailout, but that is like paying one credit card with another credit card because virtually everyone in Europe is absolutely drowning in debt.

  Even if some “permanent solution” could be crafted for Greece, that would only solve a very small fraction of the overall problem that we are facing.  The nations of the world have never been in this much debt before, and it gets worse with each passing day.

  According to a new report from the Jubilee Debt Campaign, there are currently 24 countries in the world that are facing a full-blown debt crisis…

  • Armenia
  • Belize
  • Costa Rica
  • Croatia
  • Cyprus
  • Dominican Republic
  • El Salvador
  • The Gambia
  • Greece
  • Grenada
  • Ireland
  • Jamaica
  • Lebanon
  • Macedonia
  • Marshall Islands
  • Montenegro
  • Portugal
  • Spain
  • Sri Lanka
  • St Vincent and the Grenadines
  • Tunisia
  • Ukraine
  • Sudan
  • Zimbabwe

  And there are another 14 nations that are right on the verge of one…

  • Bhutan
  • Cape Verde
  • Dominica
  • Ethiopia
  • Ghana
  • Laos
  • Mauritania
  • Mongolia
  • Mozambique
  • Samoa
  • Sao Tome e Principe
  • Senegal
  • Tanzania
  • Uganda

  So what should be done about this?

  Should we have the “wealthy” countries bail all of them out?

  Well, the truth is that the “wealthy” countries are some of the biggest debt offenders of all.  Just consider the United States.  Our national debt has more than doubled since 2007, and at this point it has gotten so large that it is mathematically impossible to pay it off.

  Europe is in similar shape.  Members of the eurozone are trying to cobble together a “bailout package” for Greece, but the truth is that most of them will soon need bailouts too…

  All of those countries will come knocking asking for help at some point. The fact is that their Debt to GDP levels have soared since the EU nearly collapsed in 2012.

   

  Spain’s Debt to GDP has risen from 69% to 98%. Italy’s Debt to GDP has risen from 116% to 132%. France’s has risen from 85% to 95%.

  In addition to Spain, Italy and France, let us not forget Belgium (106 percent debt to GDP), Ireland (109 debt to GDP) and Portugal (130 debt to GDP).

  Once all of these dominoes start falling, the consequences for our massively overleveraged global financial system will be absolutely catastrophic…

  Spain has over $1.0 trillion in debt outstanding… and Italy has €2.6 trillion. These bonds are backstopping tens of trillions of Euros’ worth of derivatives trades. A haircut or debt forgiveness for them would trigger systemic failure in Europe.

   

  EU banks as a whole are leveraged at 26-to-1. At these leverage levels, even a 4% drop in asset prices wipes out ALL of your capital. And any haircut of Greek, Spanish, Italian and French debt would be a lot more than 4%.

  Things in Asia look quite ominous as well.

  According to Bloomberg, debt levels in China have risen to levels never recorded before…

  While China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace.

  Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.

  And remember, that doesn’t even include government debt.  When you throw all forms of debt into the mix, the overall debt to GDP number for China is rapidly approaching 300 percent.

  In Japan, things are even worse.  The government debt to GDP ratio in Japan is now up to an astounding 230 percent.  That number has gotten so high that it is hard to believe that it could possibly be true.  At some point an implosion is coming in Japan which is going to shock the world.

  Of course the same thing could be said about the entire planet.  Yes, national governments and central banks have been attempting to kick the can down the road for as long as possible, but everyone knows that this is not going to end well.

  And when things do really start falling apart, it will be unlike anything that we have ever seen before.  Just consider what Egon von Greyerz recently told King World News…

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

   

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

  So what do you think is coming, and how bad will things ultimately get once this global debt crisis finally spins totally out of control?

  

  

  

  

  

• An "Austrian" Economist's Advice For Greece & The EU

  Submitted by Dr. Richard Ebeling via The Cobden Centre,

  For months, now, the mass media and the financial markets have anxiously watched and waited to see the outcome of a war of words, accusations, and threats that have been fought between Greece and its Eurozone and European Union partners.

  Over several decades Greek governments accumulated a fiscally unmanageable debt and have been unwilling to introduce any meaningful, long-term economic and budgetary reforms to get the country’s political-economic house in order.

  Greece’s Euro and EU partners have warned that Greece may be formally or informally expelled from the common currency and, perhaps, from the economic union if the terms for a new series of loans based on domestic Greek reforms and some debt restructuring cannot be agreed upon.

  However, in the whirlwind of often sensational and uncertain daily new events, it is sometimes useful and even necessary to step back and try to take a look at the wider context of things in which those current events are occurring.

  Greek and European Union Crisis is the Result of Collectivism

  The fiscal and other economic policy problems that are plaguing Greece are simply the highly magnified and intensified problems that are affecting many of the other European nations

  Many of them have accumulated large national debts that press upon the fiscal capacities of their taxpayers. They all have highly regulated markets and restricted labor markets. They all have aging populations expecting generous government-funded pensions as the years go by. They all have costly welfare state “entitlement” programs that must be financed through taxes and deficit financing.

  They also share a generally anti-capitalistic mentality. Intellectuals, politicians, many in the electorates, and most certainly the national and EU bureaucrats neither understand nor advocate the classical liberal ideal of truly free markets or the wider political philosophy of individualism and individual rights to life, liberty, and honestly acquired property.

  The market-oriented entrepreneur is neither trusted nor valued. Rather than seen as an innovator and creator of new, better, and less expensive products serving the betterment of the general consuming public, the business enterpriser is considered an exploiter, a manipulator and “selfish” profit-seeker only doing damage to the society in which he operates.

  The free enterpriser must be either heavily controlled or regulated, or he must be put out of business. The only good businessman is the one who works hand-in-hand with politicians and bureaucrats to manipulate and restrict markets for their mutual advantages.

  The fact is that whether it is the EU political leadership and bureaucrats in Brussels or the local politicians and bureaucrats in the respective national capitals of the member countries, they all reflect one general political-economic set of policies: those of the interventionist-welfare state with its regulation of markets, its redistributive policies, and its use of state power to benefit some at the expensive of others through favors and privileges of one type or another.

  Greece’s version of these problems and policies are in its essentials no different from those in the other Eurozone and European Union member states. Only the degree to which they have all come together in the current crisis has magnified the seriousness and consequences for all to see when such policies are carried far enough.

  What, then, are the European Union and its member states such as Greece to do to start escaping from the current crisis and other similar crises in the future?

  

  Ludwig von Mises’ Analysis of Europe’s Dilemma – Seventy Years Ago

  Over seventy years ago, while Europe was being destroyed in the carnage of the Second World War, the famous Austrian economist, Ludwig von Mises, wrote a series of essays on how the European nations might recover from the ravages of totalitarianism and total war through which they were living.

  Ludwig von Mises (1881-1973) was one of the most well-known free market economists of the twentieth century. Internationally renowned for his demonstration of the unworkability of socialist central planning and the inherent contradictions of interventionist-welfare state, as well as his development of the “Austrian” theory of money and the business cycle, Mises worked in the years between the two World Wars as a senior economic policy analyst for the Vienna Chamber of Commerce in his native Austria. In this role he witnessed and analyzed the growth of government power and control across Europe, as well as in his own country, in the 1920s and 1930s.

  Mises explained how Europe’s financial and economic policy problems were the culmination of traveling down the collectivist road of government regulation, control and planning:

  “For two generations now the policy of the European nations has been based on nothing else than preventing and eliminating the function of the market as the regulator of production. By duties and trade-policy measures of other sorts, by legal requirements and prohibitions, by the subsidization of uncompetitive enterprises, by the suppression or throttling of business that offers unwelcomed competition to the spoiled children of the political regime through the regulation of prices, interest rates and wages, the attempt is made to force production into paths which it otherwise would not have taken . . .

  “The result of these policies is the severe economic crisis under which we suffer today. The crisis had its starting point in mistaken economic policy, and it will not end until it is recognized that the task of governments is to create the necessary preconditions for the prosperous operation of the economy, and not squandering more on foolish expenditures than the industry of the population is able to provide.”

  

  The Politicized Economy of Power, Privilege and Connections

  Mises also understood the political and economic corruption to which such a strangling system of government interventionism leads. He explained it with great cogency in the waning year of the Weimar Republic in Germany a few months before Adolf Hitler and his Nazi Party came to power in January of 1933.

  In an essay on “The Myth of the Failure of Capitalism” (1932), Mises described the essence of the politicized economy that replaces a free market-oriented economy in an increasingly interventionist system:

  “In the interventionist state it is no longer of crucial importance for the success of an enterprise that the business should be managed in a way that it satisfies the demands of consumers in the best and least costly manner.

  “It is far more important that one has ‘good relationships’ with the political authorities so that the interventions work to the advantage and not the disadvantage of the enterprise. A few marks’ more tariff protection for the products of the enterprise and a few marks’ less tariff for the raw materials used in the manufacturing process can be of far more benefit to the enterprise than the greatest care in managing the business.

  “No matter how well an enterprise may be managed, it will fail if it does not know how to protect its interests in the drawing up of the custom rates, in the negotiations before the arbitration boards, and with the cartel authorities. To have ‘connections’ becomes more important that to produce well and cheaply.

  “So the leadership positions within the enterprise are no longer achieved by men who understand how to organize companies and to direct production in the way the market situation demands, but by men who are well thought of ‘above’ and ‘below,’ men who understand how to get along well with the press and all the political parties, especially with the radicals, so that they and their company give no offense. It is that class of general directors that negotiate far more often with state functionaries and party leaders than with those from whom they buy or to whom they sell.

  “Since it is a question of obtaining political favors for these enterprises, their directors must repay the politicians with favors. In recent years, there have been relatively few large enterprises that have not had to spend very considerable sums for various undertakings in spite of it being clear from the start that they would yield no profit. But in spite of the expected loss it had to be done for political reasons. Let us not even mention contributions for purposes unrelated to business – for campaign funds, public welfare organizations, and the like.

  “Forces are becoming more and more generally accepted that aim at making the direction of large banks, industrial concerns, and stock corporations independent of the shareholders . . . The directors of large enterprises nowadays no longer think they need to give consideration to the interests of the shareholders, since they feel themselves thoroughly supported by the state and that they have interventionist public opinion behind them.

  “In those countries in which statism has most fully gained control . . . they manage the affairs of their corporations with about as little concern for the firm’s profitability as do the directors of public enterprises. The result is ruin.

  “The theory that has been cobbled together says that these enterprises are too big to allow them to be managed simply in terms of their profitability. This is an extraordinarily convenient idea, considering that renouncing profitability in the management of the company leads to the enterprises insolvency. It is fortunate for those involved that the same theory then demands state intervention and support for those enterprises that are viewed as being too big to be allowed to go under       . . .

  “The crisis from which the world is suffering today is the crisis of interventionism and of national and municipal socialism; in short, it is the crisis of anti-capitalist policies.”

  In Mises’ description, we find all the elements of what plagues the modern Western economies, including the United States. The politicizing of market decisions and outcomes with government support for those financial institutions and corporate enterprises defined as “good big to fail.” The pervasiveness of “crony capitalism,” with “connections” and government-business partnerships that serve the political class and anti-market business groups at the expense of consumers and those who wish to freely compete on a more open market. And the use of taxpayers’ dollars to feed the network of those receiving the favors, privileges, protections, and subsidies that government has the power to hand out in various and sundry ways.

  

  A New Politics and Economics of Freedom for Prosperity

  In 1940, Ludwig von Mises came to the United States as an exile from the tyrannies covering the map of Europe under the onslaught of the early Nazi conquests. From this new platform, Mises proceeded to write a series of papers and monographs during the war years outlining the changes that would have to be implemented to restore Europe’s freedom and prosperity.

  (Most of these essays and monographs are published in, Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises: Vol. 3: The Political Economy of International Reform and Reconstruction[Liberty Fund, 2000]).

  To reverse this trend towards and consequences from political and economic collectivism, Mises argued that it was necessary to bring about a reawakened understanding of the principles of free market capitalism and classical liberalism And what needed to be implemented were economic policies consistent with those principles to create the institutional foundation for free men to interact for mutual benefit and material improvement.

  The most fundamental changes to establish the foundations for the political and economic revival of Europe, Mises said, involved the mentality of the people. The first of these changes in thinking, he said, required no longer focusing primarily upon the short-run gains from various economic policies. Indeed, the economic calamities of the 1930s and the war through which Europe was then passing represented the fruits of a political economy of the short run. “Of course, there are pseudo-economists preaching the gospel of short-run policies,” Mises admitted. “‘In the long-run we are all dead,’ says Lord Keynes. But it all depends upon how long the short run will last.” And in Mises’ view, “Europe has now entered the stage in which it is experiencing the long-run consequences of its short-run policies.”

  Practical politics in the earlier decades of the twentieth century had been geared to providing immediate benefits to various groups that could be satisfied only by undermining the long-run prospects and prosperity of society. In the new postwar period, Mises said, taxes could no longer be confiscatory. International debts could no longer be repudiated or diluted through currency controls or manipulations of exchange rates. Foreign investors could no longer be viewed as victims to be violated or plundered through regulations or nationalization of their property.

  The countries of Europe needed to design economic policies with a long-run?perspective in mind. European recovery would require capital, and this would mean attracting foreign capital investment to assist in the process. Foreign private sector investors – especially American investors – would be reluctant unless they had the surety that there would be a protected and respected system of property rights, strict enforcement of market contracts for domestic and foreign businessmen, low and predictable taxes, reduced and limited government expenditures, balanced budgets, and a non-inflationary monetary environment.

  These were the institutional preconditions for the economic reconstruction of Europe, Mises argued. Once these general changes had been made, governments would have done all in their power to establish the general political environment that would be most conducive to fostering the incentives and opportunities for the people of Europe to start the recovery and rebirth of their own countries.

  The entrepreneurs, however, were the ones who were most despised and plundered by governments in that interwar epoch of interventionism and economic nationalism (many of whom ended up being killed by the Nazis during World War II due to the fact that in Central and especially Eastern Europe a large percentage of the entrepreneurs had been members of the Jewish community).

  The lifeblood for European recovery had been lost, particularly in Eastern Europe. There would have to be a new respect and regard for these creative men of the market in order to foster the emergence of a new generation of such individuals. “If there is any hope for a new upswing it rests with the initiative of individuals,”Mises said. “The entrepreneurs will have to rebuild what the governments and the politicians have destroyed.”

  

  The Need to End Special Interest Politics and Privileges

  The second change needed in the European mentality, Mises said, was an end to special interest group politics. Governments throughout the interwar period had followed a “producer policy,” in which individual manufacturers, farmers, and workers in various niches in the system of division of labor formed coalitions to gain favors for themselves at the expense of others in the society.

  At the behest of trade unions, governments intervened, supported, and subsidized policies that in the longer run resulted in restrictions in output, misdirections of capital, and restraints on labor markets. Such policies had to be abandoned because they work counter to the integrative role prices and competition were meant to play in assuring coordination of markets, and the incentives and ability for capital formation. Producer-oriented policies were better called “production-curtailing policies,” Mises said, since they serve to protect the less competent producers from the rivalry of the more competent. Europe could ill afford to indulge in favors for the less efficient and less productive if the ravages of war were to be overcome quickly.

  Third, Europe needed to give up the redistributive welfare state. Mises stated emphatically that, ?it is the duty of honest economists to repeat again and again that, after the destruction and the waste of a period of war, nothing else can lead society back to prosperity than the old recipe – produce more and consume less.

  Who would be left to be taxed in any “tax the rich and subsidize the poor” scheme in a setting in which war has made practically everyone a “have-not,” when the focus of economic policy should be to foster capital formation, not wealth redistribution? “There is no other recipe than this,” Mises declared. “Produce more and better, and save more and more.”

  Unless these changes occurred in people’s thinking, Europe’s path to reform and reconstruction would be more difficult and protracted than it needed to be. Neither the war nor its destruction stood in the way of Europe’s future. Ideas would determine what lie ahead.“What ranks above all else for economic and political reconstruction is a radical change of ideologies,” Mises said. “Economic prosperity is not so much a material problem; it is, first of all, an intellectual, spiritual and moral problem.”

  And this intellectual, spiritual and moral problem could only have its solution in a restoration of a political philosophy of individualism and the economic policies of free market, liberal capitalism, in the view of Ludwig von Mises.

  Today’s Europe Still in the Grip of Collectivist Ideals and Policies

  It is true that Europe, today, does not have to recover from a devastating war, with its costs in human lives and physical property, and its resulting dramatic consumption of capital.

  But today’s Europe suffers from its own destructive economic policies that hamper businesses and the spirit of entrepreneurship; siphon off the life-blood of enterprise and capital formation through the heavy burdens of taxes and straightjacketing anti-competitive regulations; rigid labor markets and generous welfare states that reduce the adaptability to change and lowers the incentives for people to want to be gainfully employed in profitable enterprises; and growing national debts to feed the costs of these unsustainable systems that threaten other European countries with the same fiscal abyss that has been facing Greece.

  Greece’s and the European Union’s economic and political crisis will not be resolved through a new debt deal between the government in Athens and the European authorities. It will be merely one more stop-gag “solution” to a problem whose nature is endemic to the current ideology and politics of State-Power and collectivism.

  Its real solution requires something deeper and more comprehensive: a revival of the classical liberal ideal of individualism and the economics of free market capitalism. This, unfortunately, is not likely to occur any time soon.

  

  

  

  

  

• Blankfein Joins The Billionaire Bankers' Club

  One thing that has become abundantly clear after seven years of global QE is that the trickle-down “wealth effect” is a myth.

  At the macro level, lackluster global demand betrays the failure of central bank policy to engineer a robust recovery. At the micro level, the growing wealth divide is proof of what should have been self evident even to a PhD economist: policies explicitly designed to inflate the assets most likely to be held by the wealthy will likely serve to exacerbate the disparity been the haves and the have nots. 

  Of course, post-crisis monetary policy has not only served to restore the fortunes of wealthy individuals – it’s also been tremendously helpful in nursing the world’s largest financial institutions back to health after they were nearly destroyed by their own greed and malfeasance. 

  These two happy (if you understand how important it is to have assets) byproducts of post-crisis money printing coalesce into what is perhaps the greatest betrayal of the public trust in modern history when one looks at how things have turned out for the very people whose decisions brought about the collapse of the system and effectively sowed the seeds for the very policies which have since served to make them even richer than they were before the meltdown. In short, Wall Street executives have done quite well since 2009 as was made abundantly clear last month when Bloomberg reported that Jamie Dimon had become a billionaire. 

  Well, just a little over a month later we learn that yet another TBTF CEO has joined the billionaire banker club and honestly, we’re surprised it took this long because after all, when you’re the CEO of the blood-sucking cephalopod that holds the political and financial fate of the world in its tentacles, it seems only right that you would have been a billionaire long before any other banker on the Street. Whatever the case, Lloyd Blankfein is now a billionaire. Bloomberg has more:

  Goldman Sachs Group Inc. made hundreds of partners rich when it went public in 1999. Its performance since then has turned Lloyd Blankfein into a billionaire.

   

  The chief executive officer of the Wall Street bank for the past nine years, Blankfein has seen his net worth surge to about $1.1 billion as the firm’s shares quadrupled since the initial public offering, according to the Bloomberg Billionaires Index. As the largest individual owner of Goldman Sachs stock, he has a stake in the company worth almost $500 million. Real estate and an investment portfolio seeded by cash bonuses and distributions from the bank’s private-equity funds add more than $600 million.

   

  Blankfein, 60, was co-head of fixed-income trading when Goldman Sachs had its IPO, an event that created enormous wealth for executives. Partners in the firm received stock valued at an average of $63.6 million at the time of the sale. Henry Paulson, the bank’s CEO before and after the IPO, had almost $600 million of stock and options when he left to become U.S. Treasury Secretary in 2006, a move that allowed him to sell his stake without paying taxes.

   

  Shares in the firm have climbed 298 percent since the IPO, compared with a 6 percent drop in the Standard & Poor’s 500 Financials Index. The stock has doubled in the past three years, reaching its highest level since 2007.

  And frankly, that’s pretty much all you need to know. The Bloomberg article has more on Blankfein’s homes, background, and charity work, but the bottom line is that it pays (literally) to have friends (and former colleagues) in high government and regulatory places and if you’re still having trouble understanding how it’s possible that the same people who Plaxico’d themselves in 2008 and plunged the world into the worst recession since 1930 could possibly be allowed to not only remain out of jail but accumulate obscene fortunes on the back of the humble taxpayer well, “that’s why [Lloyd Blankfein] is richer than you.”

  

  

  

  

  

  

• Donald Trump The Demagogue

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  It’s not too interesting to say that Donald Trump is a nationalist and aspiring despot who is manipulating bourgeois resentment, nativism, and ignorance to feed his power lust. It’s uninteresting because it is obviously true. It’s so true that stating it sounds more like an observation than a criticism.

   

  Lovers of freedom need to confront the views of a man with views like this. What’s more, of all the speeches I heard at FreedomFest, I learned more from this one than any other. I heard, for the first time in my life, what a modern iteration of a consistently statist but non-leftist outlook on politics sounds and feels like in our own time.

   

  What’s distinct about Trumpism, and the tradition of thought it represents, is that it is non-leftist in its cultural and political outlook and yet still totalitarian in the sense that it seeks total control of society and economy and places no limits on state power. The left has long waged war on bourgeois institutions like family, church, and property. In contrast, right fascism has made its peace with all three. It (very wisely) seeks political strategies that call on the organic matter of the social structure and inspire masses of people to rally around the nation as a personified ideal in history, under the leadership of a great and highly accomplished man.

   

  Trump believes himself to be that man.

   

  – From Jeffrey Tucker’s absolutely brilliant, must read, Trumpism: The Ideology

  The Huffington Post caused a bit of a media storm earlier today with its announcement that it would be covering Trump’s presidential campaign in the entertainment section. Here’s the announcement:

  After watching and listening to Donald Trump since he announced his candidacy for president, we have decided we won’t report on Trump’s campaign as part of The Huffington Post’s political coverage. Instead, we will cover his campaign as part of our Entertainment section. Our reason is simple: Trump’s campaign is a sideshow. We won’t take the bait. If you are interested in what The Donald has to say, you’ll find it next to our stories on the Kardashians and The Bachelorette.

  Unfortunately, I have to disagree with this assessment. Trump may be a “joke” to people who see right through what he’s doing, but he’s no joke to his growing number of supporters. The Huffington Post would do far more good covering him religiously, while discrediting him every step of the way. Mocking him will only reflexively boost his support amongst an increasingly desperate and confused citizenry. As much as I wish he were a joke, he’s not. In fact, he’s very real and very dangerous.

  Fortunately, Jeffrey Tucker at Liberty.me has penned a piece on Trump that is at the same time brilliant, incisive and necessary. He wrote the article on Trump I wish I had. If we are to ultimately choose liberty as opposed to Trump’s American brand of right-of-center statism, we much expose him for what he is in the context of history. Mocking him, ignoring him and hoping he just goes away silently into the night will not be enough.

  Now here are some excerpts from Mr. Tucker’s excellent article: Trumpism: The Ideology

  It’s not too interesting to say that Donald Trump is a nationalist and aspiring despot who is manipulating bourgeois resentment, nativism, and ignorance to feed his power lust. It’s uninteresting because it is obviously true. It’s so true that stating it sounds more like an observation than a criticism.

   

  I just heard Trump speak live. It was an awesome experience, like an interwar séance of once-powerful dictators who inspired multitudes, drove countries into the ground, and died grim deaths.

   

  The ideology is a 21st century version of right fascism — one of the most politically successful ideological strains of 20th century politics. Though hardly anyone talks about it today, we really should. It is still real. It exists. It is distinct. It is not going away. Trump has tapped into it, absorbing unto his own political ambitions every conceivable bourgeois resentment: race, class, sex, religion, economic. You would have to be hopelessly ignorant of modern history not to see the outlines and where they end up.

   

  For now, Trump seems more like comedy than reality. I want to laugh about what he said, like reading a comic-book version of Franco, Mussolini, or Hitler. And truly I did laugh, as when he denounced the existence of tech support in India that serves American companies (“how can it be cheaper to call people there than here?” — as if he still thinks that long-distance charges apply).

   

  Let’s hope this laughter doesn’t turn to tears.

   

  Lovers of freedom need to confront the views of a man with views like this. What’s more, of all the speeches I heard at FreedomFest, I learned more from this one than any other. I heard, for the first time in my life, what a modern iteration of a consistently statist but non-leftist outlook on politics sounds and feels like in our own time. And I watched as most of the audience undulated between delight and disgust — with perhaps only 10% actually cheering his descent into vituperative anti-intellectualism. That was gratifying.

   

  As of this writing, Trump is leading in the polls in the Republican field. He is hated by the media, which is a plus for the hoi polloi in the GOP. He says things he should not, which is also a plus for his supporters. He is brilliant at making belligerent noises rather than having worked out policy plans. He knows that real people don’t care about the details; they only want a strongman who shares their values. He makes fun of the intellectuals, of course, as all populists must do. Along with this penchant, Trump encourages a kind of nihilistic throwing out of rationality in favor of a trust in his own genius. And people respond, as we can see.

   

  So, what does Trump actually believe? He does have a philosophy, though it takes a bit of insight and historical understanding to discern it. Of course race baiting is essential to the ideology, and there was plenty of that. When a Hispanic man asked a question, Trump interrupted him and asked if he had been sent by the Mexican government. He took it a step further, dividing blacks from Hispanics by inviting a black man to the microphone to tell how his own son was killed by an illegal immigrant.

   

  Trump also tosses little bones to the Christian Right, enough to allow them to believe that he represents their interests. Yes, it’s implausible and hilarious. But the crowd who looks for this is easily won with winks and nudges, and those he did give. At the speech I heard, he railed against ISIS and its war against Christians, pointing out further than he is a Presbyterian and thus personally affected every time ISIS beheads a Christian. This entire section of his speech was structured to rally the nationalist Christian strain that was the bulwark of support for the last four Republican presidents.

   

  But as much as racialist and religious resentment is part of his rhetorical apparatus, it is not his core. His core is about business, his own business and his acumen thereof. He is living proof that being a successful capitalist is no predictor of one’s appreciation for an actual free market (stealing not trading is more his style). It only implies a love of money and a longing for the power that comes with it. Trump has both.

   

  In effect, he believes that he is running to be the CEO of the country — not just of the government (as Ross Perot once believed) but of the entire country. In this capacity, he believes that he will make deals with other countries that cause the U.S. to come out on top, whatever that could mean. He conjures up visions of himself or one of his associates sitting across the table from some Indian or Chinese leader and making wild demands that they will buy such and such amount of product else “we” won’t buy their product.

   

  Yes, it’s bizarre. As Nick Gillespie said, he has a tenuous grasp on reality. Trade theory from hundreds of years plays no role in his thinking at all. To him, America is a homogenous unit, no different from his own business enterprise. With his run for president, he is really making a takeover bid, not just for another company to own but for an entire country to manage from the top down, under his proven and brilliant record of business negotiation, acquisition, and management.

   

  What’s distinct about Trumpism, and the tradition of thought it represents, is that it is non-leftist in its cultural and political outlook and yet still totalitarian in the sense that it seeks total control of society and economy and places no limits on state power. The left has long waged war on bourgeois institutions like family, church, and property. In contrast, right fascism has made its peace with all three. It (very wisely) seeks political strategies that call on the organic matter of the social structure and inspire masses of people to rally around the nation as a personified ideal in history, under the leadership of a great and highly accomplished man.

   

  Trump believes himself to be that man.

   

  He sounds fresh, exciting, even thrilling, like a man with a plan and a complete disregard for the existing establishment and all its weakness and corruption. This is how strongmen take over countries. They say some true things, boldly, and conjure up visions of national greatness under their leadership. They’ve got the flags, the music, the hype, the hysteria, the resources, and they work to extract that thing in many people that seeks heroes and momentous struggles in which they can prove their greatness.

   

  This is a dark history and I seriously doubt that Trump himself is aware of it. Instead, he just makes it up as he goes along, speaking from his gut. This penchant has always served him well. It cannot serve a whole nation well. Indeed, the very prospect is terrifying, and not just for the immigrant groups and imports he has chosen to scapegoat for all the country’s problems. It’s a disaster in waiting for everyone.

  The main reason I chose to start this blog in the first place, was rooted in my deep fear of what might emerge after the current paradigm collapses. I have no doubt something very different is coming, I just desperately want that thing to be freedom, free markets and prosperity as opposed to the disaster that a $2 despot like Trump would bring. His ascension in the polls is very troubling, and makes me wonder whether the public will ultimately choose to rally behind some statist-demagogue wrapped in an American flag when things get bad enough, as opposed to something far more difficult: Liberty. I fear they may eventually choose someone like Donald Trump.

  

  

  

  

  

• Greece Is Now A Full-Blown Humanitarian Crisis – In 9 Charts

  The people of Greece are facing further years of economic hardship following a Eurozone agreement over the terms of a third bailout. The deal included more tax rises and spending cuts, despite the Syriza government coming to power promising to end what it described as the "humiliation and pain" of austerity. With the country having already endured years of economic contraction since the global downturn, The BBC asks, just how does Greece's ordeal compare with other recessions and how have the lives of the country's people been affected?

   

  

  The long recession

  It is now generally agreed that Greece has experienced an economic crisis on the scale of the US Great Depression of the 1930s.

  According to the Greek government's own figures, the economy first contracted in the final quarter of 2008 and – apart from some weak growth in 2014 – has been shrinking ever since. The recession has cut the size of the Greek economy by around a quarter, the largest contraction of an advanced economy since the 1950s.

  

  Although the Greek recession has not been quite as deep as the Great Depression from peak to trough, it has gone on longer and many observers now believe Greek GDP will drop further in 2015.

   

  Dwindling jobs

  Jobs are increasingly difficult to come by in Greece – especially for the young. While a quarter of the population are out of work, youth unemployment is running much higher.

  Half of those under 25 are out of work. In some regions of western Greece, the youth unemployment rate is well above 60%.

  

  To make matters worse, long-term unemployment is at particularly high levels in Greece.

  Being out of work for significant periods of time has severe consequences, according to a report by the European Parliament. The longer a person is unemployed, the less employable they become. Re-entering the workforce also becomes more difficult and more expensive.

  

  Young people have been particularly affected by long-term unemployment: one out of three has been jobless for more than a year.

  After two years out of work, the unemployed also lose their health insurance.

  This persistent unemployment also means pension funds receive fewer contributions from the working population. As more Greeks are without jobs, more pensioners are having to sustain families on a reduced income.

  According to the latest figures from the Greek government, 45% of pensioners receive monthly payments below the poverty line of €665.

   

  Plummeting income

  The Greek people are also facing dropping wages.

  In the five years from 2008 to 2013, Greeks became on average 40% poorer, according to data from the country's statistical agency analysed by Reuters. As well as job losses and wage cuts, the decline can also be explained by steep cuts in workers' compensation and social benefits.

  In 2014, disposable household income in Greece sunk to below 2003 levels.

  

   

  Rising poverty

  Like during all recessions, the poor and vulnerable have been hardest hit.

  One in five Greeks are experiencing severe material deprivation, a figure that has nearly doubled since 2008.

  Almost four million people living in Greece, more than a third of the country's total population, were classed as being 'at risk of poverty or social exclusion' in 2014.

  

  According to Dr Panos Tsakloglou, economist and professor at the Athens University of Economics and Business, the crisis has exposed Greece's lack of social safety nets.

  "The welfare state in Greece has historically been very weak, driven primarily by clientelistic calculations rather than an assessment of needs. In the past this was not really urgent because there were rarely any particularly explosive social conditions. The family was substituting the welfare state," he told the BBC.

  Typically, if a young person lost his or her job or could not find a job after graduating, they would receive support from the family until their situation improved.

  But as more and more people have become jobless and with pensions slashed as part of the austerity imposed on Greece from its creditors, ordinary Greeks are feeling the impact.

  "This has led to many more unemployed people falling into poverty much faster," Dr Tsakloglou said.

   

  Cuts to essential services

  Healthcare is one of the public services that has been hit hardest by the crisis. An estimated 800,000 Greeks are without medical access due to a lack of insurance or poverty.

  A 2014 report in the Lancet medical journal highlighted the devastating social and health consequences of the financial crisis and resulting austerity on the country's population.

  At a time of heightened demand, the report said, "the scale and speed of imposed change have constrained the capacity of the public health system to respond to the needs of the population".

  

  While a number of social initiatives and volunteer-led health clinics have emerged to ease the burden, many drug prevention and treatment centres and psychiatric clinics have been forced to close due to budget cuts.

  HIV infections among injecting drug users rose from 15 in 2009 to 484 people in 2012.

  

   

  Mental wellbeing

  The crisis also appears to have taken its toll on people's wellbeing.

  Figures suggest that the prevalence of major depression almost trebled from 3% to 8% of the population in the three years to 2011, during the onset of the crisis.

  While starting from a low initial figure, the suicide rate rose by 35% in Greece between 2010 and 2012, according to a study published in the British Medical Journal.

  

  Researchers concluded that suicides among those of working age coincided with austerity measures.

  Greece's public and non-profit mental health service providers have been forced to scale back operations, shut down, or reduce staff, while plans for development of child psychiatric services have been abandoned.

  Funding for mental health decreased by 20% between 2010 and 2011, and by a further 55% the following year.

   

  The brain drain

  Faced with the prospect of dwindling incomes or unemployment, many Greeks have been forced to look for work elsewhere. In the last five years, Greece's population has declined, falling by about 400,000.

  A 2013 study found that more than 120,000 professionals, including doctors, engineers and scientists, had left Greece since the start of the crisis in 2010.

  

   

  A more recent European University Institute survey found that of those who emigrated, nine in 10 hold a university degree and more than 60% of those have a master's degree, while 11% hold a PhD.

  Foteini Ploumbi was in her early thirties when she lost her job as a warehouse supervisor in Athens after the owner could no longer afford to pay his staff.

  After a year looking for a new job in Greece, she moved to the UK in 2013 and immediately found work as a business analyst in London.

  "I had no choice but leave if I wanted to work, I had no prospect of employment in Greece. I would love to go back, my whole life is back there. But logic stops me from returning at the moment," she said.

  "In the UK, I can get by – I can't even do that in Greece."

  

  

  

  

  

• When It Comes To Total Debt, Greece Is Not That Much Worse Than France (Or The USA)

  Now that even the IMF has admitted Greece has an unsustainable debt problem with a debt-to-GDP ratio which will soon cross 200% after its third bailout (even if it leaves open the question what the IMF thinks about Japan’s debt “sustainability”) we wonder what the IMF thinks when looking at Greece’s net government liabilities, which as SocGen’s Albert Edwards reminds us are rapidly approaching 1000%.

  Which incidentally means that Greece is only marginally better than the USA, whose comparable net liability is a little over 500%, while its other nearest comparable is none other than France, whose next president may will be “Madame Frexit” and whose biggest headache will be how to resolve government promises to creditors and retirees that are five times greater than the country’s GDP.

  

  Still, surely those “in control” are fully aware of all this, and are taking measures to contain it once the Greek debt fiasco spills over beyond Greek borders and returns to the European periphery or, worse, slips into the most unstable core nation of all: France.

  Here are Albert Edwards thoughts on how this particular crisis would play out, considering it was none other than France that did not push for a bigger debt haircut for Greece:

  I was not in any way surprised that Germany was able to gather a huge number of allies to its camp, with its traditional fiscally conservatively minded allies such as Finland, Holland and Austria, as well as many central European governments. I was not even surprised that other countries previously crushed by austerity, Spain, Ireland etc., were firmly in the Germany camp too. But I was really surprised that French authorities did not stand up to say what was happening was unacceptable, unsustainable, and indeed unfair, and that they would have no part of it.

   

  France instead facilitated a resolution of the impasse, acting as ‘good cop’ to Germany’s ‘bad cop’ routine and helping the Greeks to draft their proposals. The Wall Street Journal quotes one German official “The French smoothed the way so that the Greeks could walk, and then we pushed a bit.” Many critics of the deal would instead say the Greeks have indeed been walked to the edge – the edge of a cliff – and then pushed a bit.

   

  The reason why I am surprised that France went along with this extreme and humiliating austerity programme – and the effective removal of sovereignty forced on Greece – is simply its own self-interest, for France could itself end up in the firing line. The problem France will surely find further down the road is that its own debt dynamics and sustainability is also highly questionable. Estimates we have used before with calculations for the present value of unfunded liabilities (as a % of GDP) show that actually it is not Spain or Italy that have the worst long-term debt sustainability issues; it is the US and France, and  then next in line, surprisingly, Germany (see chart below). 

   

  Although on a much smaller scale to the problems faced by Greece, unfunded government liabilities elsewhere are still a genuine problem. We are not talking here about the on-balance sheet government debt to income ratios – although on that  basis Italy’s situation looks dire. But dire though Italy’s situation is, once you add in the off-balance sheet liabilities, which are only now coming onto the balance sheet as populations rapidly age, it is even worse for the US, France, Germany and the UK, in that order.

   

  A combination of inflation, defaulting on pension and medical promises, and severe fiscal retrenchment is the likely response. But, for the US and the UK, we have had a glimpse of where this will end – QE, devaluation and the printing press. Within the  eurozone, the vision of austerity as a remedy to fiscal excess, as shown in the Greek settlement, shows that austerity and ‘reform’ will be the likely route imposed from above. Germany has huge overseas assets accumulated via persistently large current account surpluses to call on to pay its unfunded bills. Germany had net overseas assets of around 50% of GDP last time I looked, whereas France does not have this huge well of assets, and indeed is a net debtor by around 20% of GDP. Hence it was France’s own perilous fiscal situation that left me most surprised that they did not make a strong stand that the Greek ‘agreement’ was wholly unacceptable.

  We disagree, and find it far less surprising: ultimately Hollande’s sole focus was to preserve near-term stability (and his job) at any cost, if only until the 2017 French elections, which he is guaranteed to lose. Even if the French fiscal and solvency situation deteriorates dramatically over the next two years (and it will because as we showed in June, France has now had 80 consecutive months of record unemployment as a result of yet another socialist economic failure), by the time the world wakes up it will be someone else’s problem, most likely that of Marine Le Pen, at which point the only way to resolve the French “problem” will by through the printing of French Francs (something Greece will likely have been doing for a while using its own currency the Drachma following its own inevitable exit from the European monetary prison).

  Because one look at the chart above and everything should be clear: there may be stability now, but once the current generation of workers retires and realizes its entitlements and retirement benefits were a big fat lie, it will have two choices: violence or printing. We tend to think it will choose the latter.

  

  

  

  

  

• Martin Armstrong: "Those In Power Will Risk War And Civil Unrest To Preserve It"

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

  Nigel Farage may be the only practical politician these days because he came from the trading sector. He explains the Euro-Project and its failures. He makes it clear that the Greek people never voted to enter the euro, and explains that it was forced upon them by Goldman Sachs and their politicians.

   

  Nigel also explains that the Euro project idea that a trade and economic union would then magically produce a political union – the United States of Europe and eliminate war.

  

   

  He has warned that the idea of a political union would end European wars has actually filled Europe with rising resentment in where there is now a new Berlin Wall emerging between Northern and Southern Europe.

   

  

   

  The Euro project was a delusional dream for it was never designed to succeed but to cut corners all in hope of creating the United States of Europe to challenge the USA and dethrone the dollar.

  That dream has turned into a nightmare and will never raise Europe to that lofty goal of the financial capitol of the world.

   

  

   

  The IMF acts as a member of the Troika, yet has no elected position whatsoever. The second unelected member is Mario Draghi of the ECB. Then the head of Europe is also unelected by the people.

  The entire government design is totally un-Democratic and therein lies the crisis. Not a single member of the Troika ever needs to worry about polls since they do not have to worry about elections.

  This is authoritarian government if we have ever seen one.

   

  

   

  The ECB attempts by sheer force to manipulate the economy with zero chance of success employing negative interest rates and defending banks as the (former?) Goldman Sachs man Mario Draghi dictates.

   

  

   

  Now, far too many political jobs have been created in Brussels.

  This is no longer about what is best for Europe, it is what is necessary to retain government jobs.

  The Invisible Hand of Adam Smith works even in this instance – those in power are only interested in their self-interest and will risk war and civil unrest to maintain their failed dreams of power.

   

  

  

  

  

  

• China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium

  When the latest Treasury International Capital data was released yesterday, many were quick to conclude that not only had China’s selling of US Treasury ceased, but that with the addition of $7 billion in US government paper, China’s latest total holdings of $1270.3 billion were the highest since May of 2014. And if one was merely looking at the “China” line item in the major foreign holders table, that would be correct.

  

   

  However, as we have shown before, when looking at China’s Treasury holdings, one also has to add the “Belgian” Treasuries, which is where China had been anonymously engaging in a record buying spree via the local Euroclear, starting in late 2013, which however concluded with a bang in early 2015.

  This is what we said last month:

  • “Belgium” is, or rather, was a front for China: either SAFE, CIC, or the PBOC itself.
  • That Belgium’s holdings, after soaring as high as $381 billion a
    year ago, have since tumbled as China has
    dumped the bulk of its Euroclear custody holdings, and that once this
    number is back to its historical level of around $170-$180 billion,
    “Belgium” will again be just Belgium.
  • China’s foreign reserves plunged concurrently and this was offset by a the
    biggest quarterly drop in Chinese pro-forma treasury holdings, which
    dropped by a record $72 billion in the month of March, and a record $113
    billion for the quarter.

  It wasn’t precisely clear just why China, which had historically used
  UK-based offshore banks to transact in US paper in addition to the
  mainland, would pick Belgium (and Euroclear) or why it chose to hide its transactions in
  such a crude way, however the recent acceleration in capital outflow from
  China manifesting in a plunge in Chinese forex reserves, coupled with a
  record monthly liquidation in total Chinese holdings, exposed just where China was trading.

  So with the benefit of the TIC data, we know that China’s Treasury liquidation has not only not stopped, but has continued. Enter, once again, Belgium, only this time it is not a “mystery” buyer behind the small central European country’s holdings, but a seller.

  As the chart below shows, after a record $92.5 billion drop in March, “Belgium” sold another $24 billion in April, and another $26 billion last month, bringing the total liquidation to a whopping $142.5 billion for the months of March, April and May.

  

   

  This means that after adding mainland China’s token increase of $7 billion in May after a $40 billion increase the two months prior, net of Belgium’s liquidation, China has sold a record $96 billion in Treasurys in the last three months.

  

   

  Just to confirm that one should add the dramatic changes in “Belgium” holdings to mainland China Treasury, here is a chart overlaying China’s Forex reserves, which as we learned today had dramatically increased by 600 tons of gold, but more importantly forex reserves declined to $3.693 trillion, a drop of $17 billion from $3.711 trillion the month before, and the lowest since September 2013!

  

  Putting all of this together, it reveals that China has already dumped a record total $107 billion in US Treasurys in 2015 to offset what is now quite clear capital flight from the mainland, and the most aggressive attempt to keep the Renminbi stable.

  

  

  

  

  

• Peru Sued By Illinois Firm For Unpaid Birdshit Bonds

  If you’ve followed the recent evolution of fixed income products, you’re well aware that when it comes to pooling assets and securitizing cash flows, pretty much anything goes. From subprime auto loans, to credit card receivables, to P2P debt, to PE home flipper loans, you name it and there’s a fixed income security for it. 

  Given the above, we were fairly certain that when it comes to bonds, nothing would surprise us in terms of debtors, creditors, and the underlying assets. 

  We were wrong. 

  As Bloomberg reports, Illinois-based MMA Consultants 1 Inc has filed suit in U.S. District Court in connection with money the firm says it is owed by The Republic of Peru for bonds issued in 1875. Here’s more:

  Fourteen bonds the country issued in 1875 .. are now held by an Illinois firm that says it’s having a hard time redeeming them.

   

  MMA said it sent three letters to Peru’s Minister of Economics and Finance requesting payment to no avail. The company is suing for breach of contract. It didn’t reveal in the lawsuit how it came by the bonds.

   

  

  If that were the whole story, it wouldn’t be all that interesting. Fortunately, there’s more: 

  [The] bonds were issued to pay off debt to a U.S. guano consignment company.

   

  Each bond promised a payoff of $1,000 “United States Gold coin” plus 7 percent interest a year, according to the complaint filed Thursday by MMA Consultants 1 Inc. in federal court in New York.

   

  The bonds bear the signature of Don Manuel Freyre, who is described as the “Envoy Extraordinaire and Minister Plenipotentiary of Peru,” according to the complaint.

  Because we cannot imagine what we could possibly add that would make this any more amusing than it already is, we’ll simply leave you with the following summary:

  MMA Consultants 1 is attempting to collect what, with interest, amounts to $182 million in gold coins from “Envoy Extraordinaire” Don Manuel Freyre, in connection with bonds Peru issued 140 years ago to pay off a debt to a seabird dung consignment company.

  

  (Don Manuel Freyre, Envoy Extraordinaire)  

  

  

  

  

  

• California Water Wars Escalate: State Changes Law, Orders Farmers To Stop Pumping

  "In the water world, the pre-1914 rights were considered to be gold," exclaimed one water attorney, but as AP reports, it appears that 'gold' is being tested as California water regulators flexed their muscles by ordering a group of farmers to stop pumping from a branch of the San Joaquin River amid an escalating battle over how much power the state has to protect waterways that are drying up in the drought. As usual, governments do what they want with one almond farmer raging "I've made investments as a farmer based on the rule of law…Now, somebody's changing the law that we depend on." This is not abiout toi get any better as NBCNews reports, this drought is of historic proportions – the worst in over 100 years.

   

  The current drought has averaged a reading of -3.67 over the last three years, nearly twice as bad as the second-driest stretch since 1900, which occurred in 1959.

  

   

  Other studies using PDSI data drawn from tree-ring observations reaching even further back in time reveal similar findings. One such study from University of Minnesota and Woods Hole Oceanographic Institute researchers showed the current drought is California's worst in at least 1,200 years.

  And as AP reports, regulatords are changing the laws to address the problems…

  The State Water Resources Control Board issued the cease and desist order Thursday against an irrigation district in California's agriculture-rich Central Valley that it said had failed to obey a previous warning to stop pumping. Hefty fines could follow.

   

  The action against the West Side Irrigation District in Tracy could be the first of many as farmers, cities and corporations dig in to protect water rights that were secured long before people began flooding the West and have remained all but immune from mandatory curtailments.

   

  "I've made investments as a farmer based on the rule of law," said David Phippen, an almond grower in the South San Joaquin Irrigation District. "Now, somebody's changing the law that we depend on."

   

  Phippen said his grandfather paid a premium price in the 1930s for hundreds of acres because it came with nearly ironclad senior water rights.

   

  Phippen said he takes those rights to the bank when he needs loans to replant almond orchards or install new irrigation lines. He fears that state officials are tampering with that time-tested system.

  Several irrigation districts have filed unresolved legal challenges to stop the curtailments demanded by the state.

  Among them is the West Side Irrigation District, which claimed a victory in a ruling last week by a Sacramento judge who said the state's initial order to stop pumping amounted to an unconstitutional violation of due process rights by not allowing hearings on the cuts.

   

  Superior Court Judge Shelleyanne Chang also indicated, however, that the water board can advise water rights holders to curtail use and fine them if the agency determines use exceeded the limit.

   

  West Side is a small district with junior water rights, but the ruling also has implications for larger districts with senior rights.

   

  West Side's attorney Steven Herum said the order issued Thursday was prompted after the judge sided with his client.

   

  "It is clear that the cease-and-desist order is retaliatory," Herum said. "It's intended to punish the district."

  Still the farmers face an uphill battle…

  Buzz Thompson, a water rights expert at Stanford Law School, expects California to prevail in the fight to pursue its unprecedented water cuts because courts have consistently expanded its authority.

   

  "It's only when you get into a really serious drought that you finally face the question," he said.

   

  California is an anomaly among Western states in the way it treats water rights. Thompson said other states use widespread meters and remote sensors to measure consumption or don't provide special status to those with property next to natural waterways.

   

  "In any other state, this wouldn't be a question," he said.

   

  California rights holders are going to have to abide by more strict measurement requirements starting next year after fighting several attempts to overhaul the rules for decades, said Andy Sawyer, a longtime attorney at the water board.

   

  "They long thought it's nobody else's business," said Lester Snow, executive director of the California Water Foundation, which advocates for better measurement of water consumption to improve management.

  *  *  *

  The Water Wars are just beginning and, it appears, with big oil still exempt, the small businessman and average joe face the costs…

  

  

  

  

  

• The Wall Of Worry

  Greece… just another brick in the wall…

   

  

   

  Nothing to see here, move along…

   

  

   

  Just promise to keep borrowing, keep leveraging, and keep spending and “they” promise to keep you “safe from domestic terrorism”, “safe from buyback-preferring CEOs’, and “safe from a drop in your wealth” forever…

   

  Source: @StockCats

  

  

  

  

  

• 5 Things To Ponder: Beach Reading

  Submitted by Lance Roberts via STA Wealth Management,

  Today, is my last day of vacation. Later this afternoon, my family and I board a flight that will leave this tropical paradise behind and return us back home to Houston, Texas. Since I have a few hours of flight time ahead of me, I have prepared a reading list to pass the time.

  The last week of being detached from my daily routine has given me a good opportunity to recenter my views on the economy, the markets and overall investor psychology. While the markets have improved since the "resolution" of the Greek crisis, in my opinion I would have expected substantially more given the overall "angst" that the situation was generating. Yet, as of Thursday's close, as shown in the chart below, the market remains in a bearish consolidation pattern. Furthermore, relative strength, momentum and volume remain a detraction from the "bullishness" of this week's "crisis resolution rally." 

  

  As I noted earlier this week:

  "To re-establish the longer-term bullish trend, the market will need to move to new highs. Any failure to do so will simply keep the markets trapped in the ongoing topping process that began earlier this year.

   

  While the rally on Monday certainly gave a relief to the "bull" camp, it has not been enough to completely shake the "bearish" grasp on the markets currently."

   

  "Also, notice the correlation between peaks in the Shanghai Index and the S&P 500. According to a recent Bloomberg article, margin debt in China reached $264 Billion in April of this year. After adjusting for the size of the two markets, is about double that of the roughly $500 billion in margin debt in the U.S.

   

  This difference in relative size was given as a prime example about how margin debt is not a problem for the U.S. However, the relative size of margin debt in the past has not been a "safety net" that investors should rely on. As shown, the level of real (inflation adjusted) margin debt as a percentage of real GDP has reached levels only witnessed at the peaks of the last two financial bubble peaks in the U.S."

  It is worth reminding readers that nothing has been resolved in Greece other than the passage of a bill that will impose harsh austerity measures for the country in exchange for a "loan to pay principal and interest payments" back to the people who loaned them money in the first place. This is the equivalent of "paying a credit card with another credit card." It keeps the bankers happy but keeps the individual broke. 

  We are not done with the Greek "crisis" as of yet and the country, and their inherent problems, will be back in the headlines soon. The problem with China's economy, real estate and markets have also not been resolved and the fallout there will likely be more significant than most currently attribute to it.

  In the meantime, here is my "beach reading" for the long plane ride back home to reality. 

  ---

  1) Is The NYSE Relevant Anymore? by Jonathon Trugman via NY Post

  "Today, the NYSE has morphed into a TV studio and a historical museum. Still, there are few places on Earth more patriotic than the exchange.

   

  The people on the floor — the few who remain — are a special breed of New Yorker, financier and American.

   

  But on Wednesday, the NYSE management embarrassed its floor traders and the country, weakened the already depleted public confidence in markets and cost itself millions in commissions — all supposedly because of a software update gone wrong.

   

  It also taught its customers that it has become largely irrelevant to market trading — the markets functioned just fine without it."

  Read Also: Why Investing Is Very Complicated by Sendhil Mullainathan via NY Times

   

  2) Is The Global Economy Headed For Another Crash? by Peter Spence via The Telegraph

  "The growth outlook for the rest of the year looks positively rosy. But economists aren't always the best bunch at spotting a coming crash.

   

  A sell-off in bonds – a place where you want to put your money when you're not confident about growth – suggests that investors are becoming more optimistic.

   

  But if history is a useful guide, then the US may already be due another recession. The average post-war growth streak has lasted less than five years.

   

  And the Bank for International Settlements, the so-called central bank of central banks, has warned that policymakers may not have room to fight the next financial crisis."

  Read Also:  Earth's Economy Continues Recessionary Cooling by IronMan via Political Calculations

   

  3) Cracks In The Markets Facade  by Joe Calhoun via Alhambra Partners

  "If the US economy doesn't start to improve measurably in short order the Fed might find itself in the same predicament as the PBOC. The S&P 500 appears to have peaked in any case. As I wrote a couple of months ago, the long term momentum indicator I use is putting out sell signals not seen since late 2007 (and in 2000 before that). All we're waiting on now is a catalyst to push the market into a full blown, honest to goodness correction. Would a loss of confidence in the abilities of the world's central bankers be sufficient to the task? I don't know but I'm certain the PBOC, the Fed and the ECB don't want to find out. I suspect in the end they'll have little say on the matter."

  Read Also: One Lesson To Learn Before A Correction by John Hussman via Hussman Funds

  Read Also: Can You Forecast Better Than A Dart Throwing Chimp by Timmar via Psy-Fi Blog

   

  4) If The Fed Hikes, It's One And Done by Paul Kasriel via Financial Sense

  "So, current inflationary pressures are quite mild here in the U.S. The current rate of growth in U.S. thin-air credit is below its "normal" rate, suggesting that credit creation is not fostering a future surge in U.S. inflation. And the global inflationary environment appears equally tranquil, if not more so. The Chinese economy, which already had experienced a growth slowdown, will now be negatively affected by its recent stock market swoon. And Europe is not exactly booming, Greece aside. Given all this, it is not clear what is motivating the Fed's desire to raise its policy interest rates sometime later this year. Whatever the motivation, if the Fed does pull the interest-rate tightening trigger in 2015, it will not likely do so again for many months thereafter. In other words, for Fed interest rate hikes in 2015, it's one and done."

  

  Read Also: The Mirage Of The Financial Singularity by Dr. Robert Shiller via Project Syndicate

   

  5) The Why Of Weak Wages by Michelle Lazette via Cleveland Federal Reserve

  "Technological advances. Lower productivity. Fewer full-time workers. Depending on whom one asks, the reasons vary for why we've experienced more than a decade of low wage growth. Observers agree, though: Stubbornly low wages impact society and the US economy."

  Read Also:  The Psychology Of Risk by Victor Ricciardi via Kentuck State University

  Psychology of Risk-Behavioral Finance Perspective

  Other Interesting Reads

  The Future Of Politically Correct Cultism by Brandon Smith via ZeroHedge

  The Real Risk Of The China Market Crash by Evan Osnos via The New Yorker

  Knowing When To Sell Real Estate Investments by Keith Jurow via Advisor Perspectives

  ---

  On Europe: "A clueless political personnel, in denial of the systemic nature of the crisis, is pursuing policies akin to carpet-bombing the economy of proud European nations in order to save them." – Yanis Varoufakis

  Have a great weekend.

  

  

  

  

  

• "Irrelevant" Greece 'Deal' Sparks Week-Long Stock And Bond Buying Frenzy

  This old clip seems very appropriate… Full Throttle until around 2:00… everyone smiling as the 'boat' surges ever faster… then hubris gets its revenge…

   

  Just as we said this morning…

  We expect the traditional no volume, USDJPY-levitation driven buying of ES will surely resume once US algos wake up and launch the self-trading spoof programs.

   

  

  And Volume just got worse and worse all week…

  

   

  Some context that Greece doesn't matter… On the week…

  • Nasdaq +4.1% to record highs – best week since Bullard bounce in October
  • S&P +2.3% – best week since March

  Trannies and Small Caps disappointed on the week…

  

   

  On the day – Nasdaq started off crazy right after the close as GOOG hit then just squeezed higher to fresh record highs… S&P unch, Dow down…

  

   

  But Small Caps were ugly today…

  

   

  But all the exuberance in Nasdaq is focused in an ever-shrinking number of names…

  

   

  Note that once the short squeeze had ended there was no follow through at all in the major indices… and in fact shorts started gathering pace again…

  

   

  Google had a day…

  

   

  And Netflix had a week…

  

   

  ETSY Soared because Goldman mentioned it in a Google call… and shorts got "Volkwagen'd"

  

   

  • VIX -28% – biggest drop since Jan 2013

  

  • Energy Stocks XLE -1.3% – down a record 11 straight weeks to Jan 2013 lows
  • Financial Stocks XLF +2.75% – best week since Feb
  • Greek Stocks (GREK) -8.2% – worst week since January

  It is pretty clear who won and who lost from the Greek bailout…

  

  • China ASHR +0.37% – not exactly the 'recovery' that all that intervention hoped for
  • China FXI +0.17% – first gain in 4 weeks

  

  • 30Y TSY -11bps – best week since May

  

  And where do rates go next? if the lagged correlation with crude holds up, considerably lower…

  

  • USD Index  +1.9% – best week since May
  • EURUSD -2.5% – worst week since May

  JPY flatlined today… and thus so did stocks. But it has been a one way street for USD strength, everything else weakness this week…

  

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

   

  • Silver -4.1% – down 8 of last 9 weeks
  • Gold -2.2% – down 7 of lats 9 weeks, worst week since March

  

   

  Ugly for precious metals leaves them still massively outperforming Nasdaq since the dotcom bubble…

  

   

  • WTI Crude -4.3% – 5th losing week in a row… worst 3-week loss in 2015)

  

   

  Charts: Bloomberg

  

  

  

  

• "Trust, But Vilify" – What A Difference 28 Years Makes

  Don’t ask. Period.

   

  

   

  Source: Cagle Post

  

  

  

  

  

• Attention Greek Bankers: Bridge In Brooklyn For Sale On The Cheap

  Submitted by George Kinits of Alcimos

  First of all, the facts. According to Ms. Danièle Nouy, head of the Single Supervisory Mechanism, Greek banks were proclaimed as recently as 7 June “to be solvent and liquid”. Ms. Nouy went on to say that “[t]he Greek supervisors have done good work over the past years in order to recapitalise and restructure the financial sector. That was also visible in the outcome of our stress test. The Greek institutions have experienced difficult phases in the past. But they have never before been so well prepared for them”. When pressed about the DTA/DTC issue facing Greek banks (DTA make up more than 40% of their capital), she seemed unperturbed: “That is not only a Greek issue but a general problem.[…] [W]e are now in a transitional phase, in which new capital rules are being introduced. When this has been completed, part of this problem will be fixed. But that requires a global approach”. Ms. Nouy’s view accords with the results of the ECB AQR back in October. 

  If you were a shareholder of a Greek bank, you wouldn’t lose sleep over your relationship with your regulator. In that context, the statement of the 12 July Euro Summit may have come as a shock—particularly the bit about the new program for Greece having to include “the establishment of a buffer of EUR 10 to 25bn for the banking sector in order to address potential bank recapitalisation needs and resolution costs, of which EUR 10bn would be made available immediately in a segregated account at the ESM”. And further down: “The ECB/SSM will conduct a comprehensive assessment after the summer. The overall buffer will cater for possible capital shortfalls following the comprehensive assessment after the legal framework is applied”.

  You could be forgiven for thinking—where did that come from? A keen observer might also notice that one of the six things that the Summit asked Greece to do by 22 July is to transpose the Bank Recovery and Resolution Directive (BRRD). Why all the haste, then? After all, when the European Commission requested on 28 May eleven countries to implement BRRD, Greece was not even among those countries. Could the tight deadline then have anything to do with the following mention in the Summit statement: “EUR 10bn [of the buffer for the banking sector] would be made available immediately in a segregated account at the ESM”? 

  Let us first look at what the IMF has to say about the issue. In the IMF’s initial debt sustainability analysis of 26 June, bank recap needs were estimated at only €5.9bn (p. 7, table 1). Not the case in its latest debt sustainability analysis (14 July):”The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated need for a larger banking sector backstop for Euro 25 billion [emphasis ours]”. 

  Now let’s see what the European Commission said in its assessment of Greece’s request for support from the ESM (dated 10 July): “[S]ince end-2014, the situation of the banking sector has deteriorated dramatically amid increased State financing risks, strong deposit outflows, a worsened macroeconomic development and more recently due to the implementation of administrative measures designed to stabilise the funding situation of banks and preserve financial stability. […] The estimated size of the required capital backstop amounts on a preliminary basis to EUR 25 bn”.

  Quite weird, no? Despite the fact that “since end-2014, the situation of the banking sector has deteriorated dramatically”, the three institutions thought till 7 June that Greek banks were solvent and as recently as 26 June (the date of the IMF’s initial deb sustainability analysis) that only €5.9bn would be needed for bank recap. On 10 July the European Commission already thought that €25bn were needed, but that probably did not get communicated to participants in the Euro Summit on 12 July who spoke of a buffer between €10bn and €25bn (quite a broad range, that one), of which €10bn was needed “immediately”. Finally, on 14 July the IMF confirmed needs to be €25bn. Quite a mess, frankly.

  Now, there are two ways in which one could interpret this. Someone leery of the European institutions might think that Eurocrats came up with yet another way of enriching large European banks at the expense of the Greek and European taxpayer (some people, like former Bundesbank head Karl Otto Pöhl, claim that even the first Greek bailout was “about protecting German banks, but especially the French banks, from debt write offs”). That the €25bn will be used to endow Greek banks, which will be bailed in and then sold off in a matter of months by the Single Resolution Mechanism (SRM) (to be launched on 1 January 2016). No prizes for guessing who will buy Greek banks. Some cynics might even say that, when €25bn of public money becomes available, a bureaucrat is sure to find a way to line his friends’ pockets. 

  Judging from press reports, Greek bankers remain unruffled. They seem to think that the bank recap will take the form of the 2013 exercise: back then, private investors put up just 10% of the funds needed, while the rest came from the European  taxpayers (via the Greek taxpayer). They seem to rely on an exception in to the general rule of the BRRD (“no public funds to be used without a bail-in”): according to point (e) of Article 59 (3) of the BRRD, “an injection of own funds or purchase of capital instruments at prices and on terms that do not confer an advantage upon the institution” does not necessitate a bail-in, as long as the supported institution was solvent (or words to that effect) at the time of the intervention.

  According to this narrative, none of the three institutions had an inkling as to what exactly was happening with Greek banks—their regulator, the SSM, even thought they were well capitalized. It apparently dawned on the three institutions right around the European Summit that there was a problem, but, although they knew before the Summit that the hole was €25bn, they apparently forgot to tell Europe’s leaders how big it was, and they mistakenly thought they could fix it with perhaps €10bn. But they knew that fixing the problem is something that should happen “immediately”. 

  That this presents a reversal of the longstanding sweep-under-the-carpet, kick-the-can-further approach of Eurocrats to all-things-Greek should not be a cause for concern.  Nor should the timing raise any eyebrows: slapping an additional almost 10% of GDP onto Greece’s funding needs at a time when the Europeans and the IMF are at odds over the sustainability of Greek debt may seem a bit odd, but one should not read anything into it. 

  Oh, and that paragraph in the latest IMF debt sustainability analysis: “[T]he proposed additional injection of large-scale support for the banking system would be the third such publicly funded rescue in the last 5 years. Further capital injections could be needed in the future, absent a radical solution to the governance issues that are at the root of the problems of the Greek banking system [emphasis ours]. There are at this stage no concrete plans in this regard”. Nothing to be concerned about, just some mandarin venting frustration.

  The SSM will simply run a stress test on Greek banks, and identify a €25bn capital shortfall (despite the words of Ms. Nouy just a bit over a month ago). Greek banks will be able to complete their capital raising exercises by 31 December 2015 (when, according to Article 32(4) of the BRRD the only exception to “no public funds without a bail-in” rule expires); if not, the always obliging European Commission will certainly provide an extension. Investors will certainly flock to subscribe for Greek bank rights issues, despite having thrown €8.3bn down the drain by doing the exact same thing just over a year ago. 

  Of course, there are some rather inconvenient facts, which one would need to ignore under this scenario: for example, if the SSM has to run stress tests on Greek banks, this will take some time. Why then the rush to implement BRRD and the need to set aside the €10bn for Greek bank recap “immediately”? Oh, and there is that Bruegel report on Greek bank recap which came out while the Euro Summit was still in progress, and puts things rather bluntly: “[T]he potential package for Greece would include 10 to 25bn for the banking sector in order to address potential recapitalisation needs. Rumours this morning suggest the banks would then become part of a new asset fund and sold off to pay down debt” (mind you that the piece was already published at 7am). Again, nothing to worry about, just some academic hokum.

  And if you believe all that, there’s a bridge in Brooklyn I want to sell you.

  

  

  

  

  

• The GOP's Biggest Nightmare: Trump Dominates Fox News Poll

  Demagogue or not, The Donald continues to gain support among Republicans for the GOP Presidential nomination, according to the latest FOX News poll, and among Republican primary voters, Trump now captures 18 percent: more than his closest competitor, Walker.

  He’s closely followed by Walker at 15 percent and former Florida Gov. Jeb Bush at 14 percent. No one else reaches double-digits.

  

   

  As FOX reports,

  Support for Trump is up seven percentage points since last month and up 14 points since May.  He’s also the candidate GOP primary voters say they are most interested in learning more about during the debates.

   

  Walker’s up six points since he officially kicked off his campaign. That bump gets him back to the support he was receiving earlier this year. In March, he was also at 15 percent.

   

  Kentucky Sen. Rand Paul gets eight percent, Florida Sen. Marco Rubio receives seven percent, former neurosurgeon Ben Carson comes in at six percent, and Texas Sen. Ted Cruz and former Arkansas Gov. Mike Huckabee get four percent a piece.

  *  *  * 

  

  *  *  *

  Here's Martin Armstrong on the matter…

  

  Trump is hitting very hard, clearly tapping into the emerging anti-establishment politician trend. He bluntly states, “Who do you want negotiating with China? Trump or Bush?” You could expand that to Hillary. Her negotiations amount to how much they are willing to donate to her questionable charity. People setup such charities because they have money to give back TO society, like Bill Gates. The Clintons started their charity when they were broke. Who is the charity really benefiting and why did Hillary shakedown countries as Secretary of State to pile in money to their questionable charity?

  MSNBC keeps trying to focus on Trump’s comments on Mexico. They give him tons of airtime in an attempt to discourage people from voting for him, but they may be creating the exact opposite. Despite what everyone says, he is tapping into the increasingly popular view that everyone is starting to feel, having had enough of politicians, or at least the ones with a brain.

  *  *  *

  

  

  

  

• Iran Is Hiding 51 Million Oil Barrels At Sea, Maritime Tracker Reports

  With yesterday's appearance what seems like the first Iran oil tanker to set sail post-nuke-deal, Haaretz reports that Iran has been hiding millions of barrels of oil it never reported to the United States or in the world oil market, according to a company that has developed sophisticated maritime tracking technology. With the world’s fourth-largest oil reserves, Iran denies it’s storing oil at sea, despite reports that surfaced in The New York Times as early as 2012; but Ami Daniel, Windward founder and cochairman, shows "the Iranians are taking huge, 280-meter-long ships and filling them with oil, to sit at sea and wait. Because the sanctions allow for production of only three million barrels a day, they began storing the remainder… oil tankers have been sitting in the Gulf for anywhere between three and six months, just waiting for orders."

  Searching for ships that do not want to be found…

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  As Bloomberg explains, based in Tel Aviv, Windward was founded four years ago by two Israeli naval officers…

  The algorithms Windward developed were initially intended to tackle illegal fishing by analyzing and profiling normative patterns in sea traffic. The entrepreneurs discovered that their technology could also be used to monitor unusual behavior near, say, oil-drilling ports in Libya.

   

  These anomalies of maritime behavior, which occur daily, would have probably gone undetected in the past. Today, advanced satellite imaging and communications technology, coupled with analytical software developed by an Israeli startup called Windward, identifies potential illegal activity in real time.

   

  "Everything affects everything else in the sea,” Daniel said in an interview. "We see when things are beginning to happen. We give you the insight first because we can see when patterns start changing.”

  As Haaretz reports, Windward claims that Iran is currently storing 50 million barrels of crude on tankers in the Gulf, a much larger amount than estimates from Western sources. Bank of America has estimated Iran is holding 30 million barrels, while the U.S. news broadcaster CNBC put the number at 40 million.

  According to Windward, the Iranian ships are purposely hiding their cargo.

   

  According to Windward, the amount of oil Iran is storing offshore has jumped more than 150% over the last year to over 51 million barrels as of Wednesday. The increase coincided with nuclear talks with world powers led by the U.S. while Iranian President Hassan Rohani publicly claimed Iran did not have enough oil to fulfill its own needs.

   

  The amount of oil Iran is holding is far larger than the daily quota of 30 million barrels imposed by the Organization of the Petroleum Exporting Countries on its members.

   

  …

   

  Iran currently produces 3.3 million barrels of oil daily, according to the U.S. Energy Agency, slightly more than the three-million-barrel ceiling stipulated by the sanctions, which allow Iran to export no more than one million barrels a day.

   

  Limitations were also placed on Iran’s oil-storage facilities, which Tehran apparently circumvented with the offshore storage scheme. The amount of oil involved is quite extensive: Annually, Iran pumps 1.204 billion barrels of oil, meaning the offshore oil stores reported by Windward account for 4.2% of Iran’s yearly production. In total, there are 28 Iranian tankers in the Gulf, each holding between one and two million barrels, according to Windward.

  *  *  *

  Follow in real-time the rise of floating storage in Iran's waters…

  

  

  

  

  

  

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

  Submitted by Paul Craig Roberts,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  The 21st century Enclosures have begun.

  

  

  

  

  

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

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

  

  Pamela Downs, 45
  

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

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

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

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

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

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

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

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

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

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

  She was charged with criminal simulation and counterfeiting.

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

  

  

  

  

  

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

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

  click image fir massive legible version

  

  Original graphic by: SCMP

   

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

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

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

  Courtesy of: Visual Capitalist

  

  

  

  

  

• Tennessee Mass Killer Linked To Islamic Terrorism

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

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

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

  

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

  

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

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

  

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

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

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

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

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

   

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

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

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

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

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

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

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

  

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

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

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

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

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

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

  

  

  

  

  

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

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

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

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

   

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

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

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

   

  Tax-Free Debt

   

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

   

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

   

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

   

  Taxing Private Investment

   

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

   

  The Jones Act

   

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

   

  The Federal Minimum Wage

   

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

   

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

   

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

   

  Welfare   

   

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

   

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

   

  *  *  *

  As The FT notes,

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

   

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

   

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

  Patience… indeed.

   

  *  *  *

   

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

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

   

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

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

  

  

  

  

  

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

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

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

  

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

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

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

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

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

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

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

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

  From BofAML:

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

  

  

  

  

  

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

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

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

  

   

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

  

   

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

  • *SHANGHAI MARGIN DEBT FALLS TO FOUR-MONTH LOW

  China margin debt is down 37% from its highs…

  

  And then there's this utter bollocks…

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

  Yep, looks totally "safe"…

  

   

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

  *  *  *

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

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

   

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

  And Korea…

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

   

  

   Charts: Bloomberg

   

   

  

  

  

  

  

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

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

  
  As The Wall Street Journal reports,

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

   

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

   

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

   

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

   

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

   

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

   

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

  *  *  *

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

  

  

  

  

  

• The World Explained (In 1 Cartoon)

  Presented with no comment…

   

  

   

  Source: @RoykoLePoyko

  

  

  

  

  

• How Likely Is Hyperinflation In The U.S?

  Authored by Seaborn Hall, originally posted at Advisor Perspectives,

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

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

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

  Measuring hyperinflation in the U.S.A.

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

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

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

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

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

  

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

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

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

  

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

  

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

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

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

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

  

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

  

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

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

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

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

  Black swans that could lead to high inflation or hyperinflation

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

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

  

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

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

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

  

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

  

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

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

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

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

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

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

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

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

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

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

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

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

  How to prepare for hyperinflation

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

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

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

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

     

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

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

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

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

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

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

  

  

  

  

  

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

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

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

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

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

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

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

   

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

   

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

   

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

   

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

   

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

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

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

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

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

  

  

  

  

  

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

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

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

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

  *  *  *

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

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

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

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

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

  All of the above can be summarized as follows.

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

  

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

  

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

  

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

  “Nothing good”, is the answer. 

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

  But how is this possible? 

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

  *  *  *

  Portfolio Products Replace Dealer Inventory

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

  

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

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

  

  *  *  *

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

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

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

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

   

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

  So what is a fund manager to do? 

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

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

  Only worse.

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

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

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

  

  

  

  

  

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

  Do you see a bubble?

   

  

   

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

   

  h/t @NorthmanTrader

  

  

  

  

  

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

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

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

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

  Oh, and both CEOs resigned on June 7. 

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

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

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

   

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

   

  
  

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

  (From the report)

   

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

   

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

   

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

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

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

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

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

   

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

   

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

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

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

   

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

   

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

  Christian, who is Christian?

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

  Wow. So how well did Jain know Bittar? 

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

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

  And on, and on, and on.

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

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

   

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

   

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

   

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

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

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

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

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

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

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

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

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

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

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

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

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

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

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

  

  

  

  

  

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

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

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

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

  Oh, and both CEOs resigned on June 7. 

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

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

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

   

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

   

  
  

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

  (From the report)

   

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

   

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

   

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

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

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

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

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

   

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

   

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

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

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

   

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

   

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

  Christian, who is Christian?

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

  Wow. So how well did Jain know Bittar? 

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

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

  And on, and on, and on.

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

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

   

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

   

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

   

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

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

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

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

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

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

• Stock Bubble And Its Buyback Genesis Suddenly Vulnerable

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

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

  

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

  

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

  

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

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

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

  

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

  

  

  

  

  

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

  “Read my lips…”

   

  

   

  Source: Investors.com

  

  

  

  

  

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

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

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

  

   

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

  

   

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

  

   

  In summary…

  *  *  *

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

  

   

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

  

   

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

  

   

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

  

   

  VIXnado…back at an 11 handle!!

  

   

  as The backwardation unwinds to the steepest in 2 months…

  

   

  Bonds continued their rally with 30Y leading the way…

  

   

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

  

   

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

  

   

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

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

   

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

   

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

   

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

   

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

   

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

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

  

   

   

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

  

   

  Charts: Bloomberg

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

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

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

  

  

  

  

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

  Submitted by Paul Craig Roberts,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  The 21st century Enclosures have begun.

  

  

  

  

  

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

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

  

  Pamela Downs, 45
  

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

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

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

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

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

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

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

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

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

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

  She was charged with criminal simulation and counterfeiting.

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

  

  

  

  

  

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

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

  click image fir massive legible version

  

  Original graphic by: SCMP

   

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

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

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

  Courtesy of: Visual Capitalist

  

  

  

  

  

• Tennessee Mass Killer Linked To Islamic Terrorism

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

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

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

  

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

  

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

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

  

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

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

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

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

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

   

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

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

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

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

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

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

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

  

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

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

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

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

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

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

  

  

  

  

  

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

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

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

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

   

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

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

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

   

  Tax-Free Debt

   

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

   

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

   

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

   

  Taxing Private Investment

   

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

   

  The Jones Act

   

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

   

  The Federal Minimum Wage

   

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

   

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

   

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

   

  Welfare   

   

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

   

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

   

  *  *  *

  As The FT notes,

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

   

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

   

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

  Patience… indeed.

   

  *  *  *

   

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

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

   

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

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

  

  

  

  

  

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

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

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

  

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

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

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

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

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

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

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

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

  From BofAML:

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

  

  

  

  

  

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

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

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

  

   

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

  

   

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

  • *SHANGHAI MARGIN DEBT FALLS TO FOUR-MONTH LOW

  China margin debt is down 37% from its highs…

  

  And then there's this utter bollocks…

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

  Yep, looks totally "safe"…

  

   

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

  *  *  *

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

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

   

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

  And Korea…

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

   

  

   Charts: Bloomberg

   

   

  

  

  

  

  

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

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

  
  As The Wall Street Journal reports,

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

   

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

   

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

   

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

   

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

   

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

   

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

  *  *  *

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

  

  

  

  

  

• The World Explained (In 1 Cartoon)

  Presented with no comment…

   

  

   

  Source: @RoykoLePoyko

  

  

  

  

  

• How Likely Is Hyperinflation In The U.S?

  Authored by Seaborn Hall, originally posted at Advisor Perspectives,

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

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

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

  Measuring hyperinflation in the U.S.A.

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

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

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

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

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

  

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

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

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

  

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

  

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

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

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

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

  

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

  

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

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

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

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

  Black swans that could lead to high inflation or hyperinflation

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

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

  

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

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

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

  

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

  

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

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

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

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

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

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

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

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

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

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

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

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

  How to prepare for hyperinflation

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

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

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

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

     

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

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

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

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

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

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

  

  

  

  

  

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

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

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

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

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

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

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

   

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

   

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

   

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

   

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

   

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

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

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

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

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

  

  

  

  

  

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

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

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

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

  *  *  *

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

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

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

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

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

  All of the above can be summarized as follows.

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

  

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

  

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

  

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

  “Nothing good”, is the answer. 

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

  But how is this possible? 

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

  *  *  *

  Portfolio Products Replace Dealer Inventory

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

  

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

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

  

  *  *  *

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

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

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

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

   

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

  So what is a fund manager to do? 

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

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

  Only worse.

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

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

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

  

  

  

  

  

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

  Do you see a bubble?

   

  

   

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

   

  h/t @NorthmanTrader

  

  

  

  

  

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

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

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

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

  Oh, and both CEOs resigned on June 7. 

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

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

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

   

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

   

  
  

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

  (From the report)

   

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

   

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

   

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

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

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

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

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

   

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

   

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

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

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

   

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

   

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

  Christian, who is Christian?

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

  Wow. So how well did Jain know Bittar? 

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

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

  And on, and on, and on.

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

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

   

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

   

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

   

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

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

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

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

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

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

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

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

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

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

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

   

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

   

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

   

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

   

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

   

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

   

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

   

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

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

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

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

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

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

  

  

  

  

  

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

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

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

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

  Oh, and both CEOs resigned on June 7. 

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

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

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

   

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

   

  
  

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

  (From the report)

   

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

   

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

   

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

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

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

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

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

   

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

   

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

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

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

   

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

   

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

  Christian, who is Christian?

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

  Wow. So how well did Jain know Bittar? 

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

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

  And on, and on, and on.

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

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

   

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

   

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

   

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

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

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

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

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

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

• Stock Bubble And Its Buyback Genesis Suddenly Vulnerable

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

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

  

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

  

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

  

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

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

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

  

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

  

  

  

  

  

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

  “Read my lips…”

   

  

   

  Source: Investors.com

  

  

  

  

  

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

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

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

  

   

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

  

   

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

  

   

  In summary…

  *  *  *

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

  

   

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

  

   

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

  

   

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

  

   

  VIXnado…back at an 11 handle!!

  

   

  as The backwardation unwinds to the steepest in 2 months…

  

   

  Bonds continued their rally with 30Y leading the way…

  

   

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

  

   

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

  

   

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

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

   

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

   

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

   

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

   

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

   

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

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

  

   

   

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

  

   

  Charts: Bloomberg

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

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

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

  

  

  

  

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• The Future Costs Of Politically Correct Cultism

  Submitted by Brandon Smith via Alt-Market.com,

  

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

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

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

  Rebel Without A Legitimate Cause

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

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

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

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

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

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

  People Must Be Forced To Bake Gay Cakes

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

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

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

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

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

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

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

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

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

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

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

  This is fair.

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

  Gender Bending Does Not Make You Special

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

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

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

  There Is No Such Thing As ‘White Privilege’

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

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

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

  The Cost Of Cultural Marxism

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

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

  

  

  

  

  

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

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

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

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

  

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

  The lender’s real significance lies in the degree to which it represents a shift away from the multilateral institutions that have dominated the post-war world economic order. In short, it’s a response not only to the IMF’s failure to provide the world’s most important emerging economies with representation that’s commensurate with their economic clout, but also to the perceived shortcomings of the IMF and ADB. The AIIB isn’t alone in this regard. Indeed, the BRICS bank can be viewed through a similar lens. 

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

  *  *  *

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

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

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

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

  AIIB gives alternative to countries in need of help

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

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

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

  China may also create an alternative to IMF

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

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

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

  IMF and the US fundamentally misread Asian currency crisis

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

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

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

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

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

  

  

  

  

  

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

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

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

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

  • *FTSE CHINA A50 JULY FUTURES DECLINE 0.6%

  China's "Dow"…

  

   

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

  

   

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

  • *SHANGHAI MARGIN DEBT DECLINES FIRST TIME IN FOUR DAYS

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

  

   

  But a far bigger risk looms, as Reuters reports,

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

   

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

   

  …

   

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

   

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

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

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

   

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

  *  *  *

  We know who…

  

  

  

  

  

  

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

  Submitted by Simon Black via SovereignMan.com,

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

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

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

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

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

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

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

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

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

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

  And this problem is only getting bigger.

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

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

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

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

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

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

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

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

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

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

  China has a long history of trying to tame rivers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  Which one will you decide?

  

  

  

  

  

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

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

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

   

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

   

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

   

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

  It appears that Arnulf pretty much ‘nailed it’.

  h/t @DanHannanMP and @K_Niemietz

  

  

  

  

  

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

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

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

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

  From Bloomberg:

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

   

  

   

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

   

  
  

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

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

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

  

  

  

  

  

• Banking "Explained" In 6 Minutes

  Banks are a riddle wrapped up in an enigma (as we just described what unsound banking is). Everyone kind of knows that they do stuff with money we don’t understand, while the last crisis left a feeling of deep mistrust and confusion. We try to shed a bit of light onto the banking system. Why were banks invented, why did they cause the last crisis and are there alternatives?

   

  

  

  

  

  

• "The Stock Market Is Too Important To Leave To The Vagaries Of An Actual Market"

  Submitted by Babar Rafique of Setter Capital,

  As equity markets have become increasingly critical to the global financial and economic system, we're actively subverting them into meaninglessness.

  Equity markets are efficient, rational, and accurately reflect the value of assets, we're told. Sure, there might be bouts of euphoria or panicked selling, but those are short-term anomalies in an otherwise rational system.

  The simplicity of this idea is undeniably appealing — if we can trust in markets to broadly be an efficient allocator of value and accurately representative of short-term economic potential, then we can use it for a range of economic decision-making. An investor who wants exposure to a particular country can buy ETFs linked to that country's stock market(s), for example, with the confidence that the investment outcome will bear a meaningful relationship with that of the economy invested in.

  This requires, of course, that the price numbers on global stock indices mean something. The trouble is, to an increasing degree, they mean nothing at all. And we are busy creating more meaningless stock markets precisely because we need the ticker numbers to be more and more meaningful.

  The equity market is a leading indicator for an economy, we're told, and from TV talking-heads to academics to wealth managers, we all conduct ourselves as if that's the case. A rising stock market thus means that confidence is improving and economic performance should shortly be rising as well. By that measure, the US economy should be doing fantastically well, matching or at least meaningfully correlated with the eye-popping performance of its major stock indices since 2008. Unfortunately, that's just not the case — labour force participation remains appallingly low, wages remain depressed with lackluster wage growth, more and more wealth has become concentrated at the very top of the income scale, etc. In reality, while US markets have galloped ahead, the actual economy has been sleepwalking since the 'Great Recession'.

  This begs the question then — if US markets don't meaningfully reflect the American economy, what do they reflect? To an increasing degree, they represent the fact and perception of central bank intervention into the markets. All major US indices share a meaningful correlation with the capital flows of the Fed's successive QE programs, and speculation on the Fed's future actions as communicated in various Fed meetings and press announcements move the markets in a big way. I'm certainly not saying that the Fed is all that matters for the US markets, but the market does listen to the Fed a lot more then it should and it sure seems like the Fed listens back. It's worth noting here that the Fed's dual mandate is to promote maximum employment and price stability, not manage market expectations — theoretically, they shouldn't directly impact stock markets in the short term at all.

  The story is much the same in the other major financial centres of the world, where the numbers on the big boards seem to be less and less meaningful as well. Broad European indices have been reaching for the heavens — after the ECB has reintroduced us to the pleasures of ZIRP and NIRP and launched a massive QE program of its own. Japanese intervention into their equity markets went even further, with the Bank of Japan directly buying ETFs to help keep the Nikkei going in the right direction.

  The Chinese take the cake here though, with their level of intervention into their equity markets made abundantly transparent after the recent popping of the Shanghai SSE Composite Index bubble. After more conventional tools failed to stem the tide of panicked selling, the authorities deemed selling to be unpatriotic, halted trading in about half of the market, ordered companies to buy their own shares and generally made it clear that there was a preferred direction for the stock market to be moving in. Going against that direction would have you risk a lot more then what any definition of a halfway efficient market would suggest.

  What has brought global equity markets to the point of becoming increasingly decoupled from their respective economies? I think it's our need to have stock and stock index prices be meaningful that ultimately has driven the shift towards meaninglessness. From a top-down perspective, an example here is that politicians point to the stock market as proof of what a good job they're doing in managing the economy and in some countries even derive their legitimacy from the continued performance of the local stock markets. Also, hundreds of millions of investors of all sizes have invested in stock markets through all sorts of financial instruments and stand to lose heavily in a market crash — that didn't go over too well the last time around and we're still struggling to recover.

  From a bottom-up perspective, an example is company boards that partially link executive compensation to the performance of the company's stock (which usually will have a positive correlation with the overall stock market). As a sidenote, Roger Martin, ex-Dean of Rotman School of Management (where I'm currently a student) has written extensively about this kind of executive compensation being problematic for the integrity of the markets as well — although he may not see it as a small symptom of a much larger threat to market integrity, as I do.

  The stock market is just too important to leave to the vagaries of an actual market now. Too much depends on good-looking numbers now. It must be guided and controlled, or else the stilts on which our global financial system balances become shakier and more visible. The market must be rendered increasingly meaningless simply because it's too meaningful to our current economic system.

  

  

  

  

  

• Paul Singer Blasts "Manipulated" Markets, Says China Collapse "Way Bigger Than Subprime"

  This week, dozens of billionaire fund managers, institutional investors, and financial market luminaries descended on that “iconic flagship of Taj Hotels on New York’s Fifth Avenue” The Pierre with a mission to “deliver alpha” for conference host CNBC, a network which, incidentally, very often has a difficult time “finding alpha.”

  On the guest list was Elliott Management’s Paul Singer, who was on hand Wednesday to discuss the perils of investing in a world dominated by Keynesian central planners, paper money, the “craziness” of China’s margin-fueled equity bubble, and “connecting the dots.” 

  Here are some notable bullets via Bloomberg:

  • ELLIOTT’S SINGER: CHINA CRASH ‘WAY BIGGER THAN SUBPRIME’
  • SINGER ISN’T OPTIMISTIC ABOUT GREEK SITUATION
  • SINGER SAYS GREECE SHOULD HAVE PULLED OUT OF EURO

  And here’s a recap, followed by a short video excerpt: 

  China’s government “encouraged” an equities boom, and the “craziness” of the country’s stock market echoes the late 1920s in the United States, hedge fund manager Paul Singer said Wednesday. 

   

  “It’s not just a bull market, it’s wild,” the founder and president of Elliott Management said at the Delivering Alpha conference presented by CNBC and Institutional Investor.

   

  Activity in China, which has included government efforts to ease policy and ramp up economic growth, reflects an “ever-growing” trend toward intervention, Singer said. He contended that bond-buying and easy interest rates in many corners of the world make it difficult to quantify how much markets are really worth.

   

  China’s Shanghai composite index, for instance, has climbed more than 80 percent in the last year. 

   

  “The prices are manipulated by governments,” he said, adding that investors “can’t trust” the value of some equities.

   

  Singer also criticized the central banks in the United States and Europe, as he decried the risks of continued near-zero interest rate policy from the Federal Reserve. A recession in the U.S. or Europe amid loose monetary policy would turn “truly ugly” for global markets, he said.

   

  A downturn in either area could lead to additional quantitative easing, bringing even more uncertainty into bonds.

  

  

  

  

  

• July 5: Greek Independence Day; July 15: Greek In Dependence Day

  The Greek parliament just voted, in a 229 for and 64 against landslide, to implement the austerity Europe demands to grant Greece the funds for Bailout #3 so that Greece can then repay European creditors (as opposed to facing up to the pain imminently and suffering through a Grexit) implicitly giving up their sovereignty and sending their 61% “Oxi” voting citizenry into what will inevitably be an even deeper economic depression.

  • *GREEK GOVERNMENT HAS VOTES TO APPROVE BAILOUT BILL, TALLY SHOWS

  

  As Bloomberg reports,

  A majority of 229 Greek lawmakers voted in favor of bill which includes prior actions demanded by creditors for a bailout agreement that the govt has applied for, Parliament Speaker says.

   

  64 lawmakers voted against bill, 6 abstained, in Greece’s 300-seat chamber

   

  Bill titled “urgent measures for the negotiation and signing of an agreement with the European Stability Mechanism”

   

  38 lawmakers of governing Syriza party, including former finance minister Yanis Varoufakis, former deputy Finance Minister Nadia Valavani, and Energy Minister Panagiotis Lafazanis didn’t support bill

   

  Out of 149 Syriza MPs, 32 voted against bill, 6 abstained, 1 didn’t show up

  More to the point, with 38 defections, Syriza has now officially lost its majority and a cabinet reshuffle is imminent as the drama goes on.

  #Greece significant ‘loss’ for SYRIZA NO 32 (Mainly Left Platform) + Present 6

  — Keep Talking Greece (@keeptalkingGR) July 15, 2015

  And as noted:

  #Greece Parliament votes YES but #Tsipras has lost his government majority.

  — Maxime Sbaihi (@MxSba) July 15, 2015

  But the biggest surprise of the night was that the former finance minister and Tsipras’ right-hand man, Yanis Varoufakis, voted against the bailout.

  And his Energy Minister (who also voted No)…

  • *GREECE’S ENERGY MINISTER LAFAZANIS SAYS HE SUPPORTS GOVERNMENT
  • *LAFAZANIS SAYS `WE ‘RE THE HEART AND SOUL OF SYRIZA’
  • *LAFAZANIS SAYS HE DOESN’T WANT SNAP ELECTIONS
    

  In summary – this just happened:

  

   

  @zerohedge New Greek Flag pic.twitter.com/RMgqpGRyQu

  — Ludwig W (@LudWitt) July 15, 2015

   

  And because all the algos know is to buy when the elites get their way, S&P futures are rallying

  

  

  

  

  

  

• Unholy Alliance: Blythe Masters Named Chairman Of Subprime Auto Lender

  Earlier today, on the way to presenting data from the NY Fed which shows that auto loan rejection rates hit an all-time low of just 3.3% in June, we said that if one wanted to understand the circumstances that led to the housing bubble in the US, a good place to start would be the modern day auto loan market where the “originate to sell” model that characterized pre-crisis mortgage lending is alive and well. We also recommended reading a bit about the history of the GSEs, and taking “a hard look at Blythe Masters and the wizards who created the credit default swap.”

  We’re not exaggerating when we say that just minutes after we penned those words – which drew an explicit link between the dynamics driving the auto loan market, the “originate to sell model” that fed Wall Street’s pre-crisis securitization machine, and the financial weapons of mass destruction that Blythe Masters helped to create – the following headline hit the wires: 

  • BLYTHE MASTERS NAMED CHAIRMAN OF SANTANDER CONSUMER USA HOLDING

  That’s right, dear readers. The mother of the credit default swap is now the chairman (err.. chairwoman) of Santander Consumer, the largest subprime auto lender in the country.

  You cannot make this stuff up. 

  For those unfamiliar with Santander Consumer, they are the lender who, as of Q4 2014, had $15 billion in oustanding subprime auto loans on the books. Here’s a peek into the company’s recent trials and travails:

  Santander Consumer — a unit of one of only two banks to receive the dubious honor of failing the Fed’s stress tests yesterday and the market leader in subprime auto lending — allegedly ignored a law that requires lenders to obtain a court order before repossessing cars from members of the military and will now pay $9.35 million to settle the issue with the government. Apparently, Santander illegally repoed nearly 800 vehicles from active service members over the course of 5 years and then attempted to extract fees from some 350 additional soldiers in connection with repossessions the bank didn’t even execute. 

   

  This is the same Santander Consumer that was subpoenaed last year by the Justice Department in connection with its packaging of subprime auto loans into ABS and whose lending practices also got the attention of the New York Dept. of Consumer Affairs. 

   

  Don’t think for a second that any of this is slowing down the Santander Consumer subprime auto securitization machine though. The company, which leads all other lenders when it comes to the total amount of subprime auto loan debt outstanding, has already done a deal this year worth $1.2 billion which accounts for nearly 25% of all subprime auto ABS issuance YTD.

   

  
  

  That’s from March. 

  And for those unfamiliar with Masters, we encourage you to simply Google her name along with “credit default swap” and “JP Morgan” (and throw in “Boca Raton“, “BISTRO“, and “Demchak” if you really want to take a trip down the “shit that sounded good in principle but almost destroyed the financial universe” rabbit hole), but that’s ancient history now, so here’s a useful summary of Masters’ more recent activities:

  About a year ago we wrote that the “farce is complete” when we learned that the former head of JPM’s commodities group – Blythe Masters – the person caught red-handed in trying to pull off Enron 2.0, and responsible for manipulating electricity prices in California, was about to join the CFTC: yes, the person who created perhaps the most important derivative product of the pre-crash period, the massively levered Credit Default Swaps, was about to become an advisor to the very agency tasked with regulating all derivatives. Just 24 hours later, following a furious public backlash against what is perhaps the most corrupt regulators in the US, the CFTC, Masters withdrew her candidacy from the CFTC. Not surprisingly, following the humiliating CFTC episode, Blythe disappeared completely from the public radar. Now, with a one year delay, she has finally reappeared. That’s not the surprising part. What is shocking is the capacity in which she has reappeared. According to the FT, the former JPM commodities head has re-emerged as chief executive of the Bitcoin startup, Digital Asset Holdings.

  That’s also from March. 

  Finally, here’s The NY Times on Santander Consumer’s “curious choice“: 

  Facing regulatory pressure related to its governance and lending practices, the subprime auto lender Santander Consumer USA has appointed Blythe Masters, a former longtime executive at JPMorgan Chase, its chairwoman.

   

  Ms. Masters, 46, who left JPMorgan last year and now heads a Bitcoin-related start-up, joins the board of Santander Consumer less than two weeks after it announced abruptly that its chief executive had resigned.

   

  Santander Consumer — a unit of the Spanish giant Banco Santander that is based in Dallas — has faced questions about its oversight after regulatory stumbles with the Federal Reserve and an investigation into its securitization of its auto loans.

   

  One of the company’s founders, Thomas Dundon, stepped down as chairman and chief executive at the start of the month, taking home more than $900 million as part of his exit.

   

  Masters is credited with helping to pioneer credit default swaps, financial instruments that contributed to the 2008 financial crisis. Most recently, Ms. Masters ran JPMorgan’s giant commodities unit. She left the bank in April 2014 among struggles in the commodities business broadly.

   

  While known for her stellar financial acumen and innovative thinking, in some ways Ms. Masters seems a curious choice for chairwoman of Santander Consumer USA, which, like Santander Holdings USA, its parent company, is seeking to improve its regulatory status. Santander Holdings has failed the Federal Reserve’s annual stress test for two consecutive years.

   

  While running the commodities business at JPMorgan, Ms. Masters came under regulatory scrutiny from the Federal Energy Regulatory Commission in 2013 for statements she made about some problematic trading activity. At the time, the bank disputed that Ms. Masters had acted inappropriately.

  For now, we’ll refrain from speculating on what it says about Masters’ career that she has gone from capo in the “Morgan Mafia” to bitcoin CEO and chairman of a subprime auto lender, but we would note that this unholy alliance between the king of a subprime prime auto market that’s driven by Wall Street’s ABS machine and the mother of the credit default swap may not be as “curious” as The NY Times believes.  

  

  
  

  

  

  

  

  

• Presenting The "Greek Terms Of Surrender" As Annotated By Yanis Varoufakis

  The Greek “deal” has already been dubbed “a new Versailles Treaty” for good reason: for Greece, the agreement which effectively abdicates sovereignty to Germany, is precisely that.

  And while few if any in Greece – and certainly its parliament – have carefully read the actual contents of the Summit statement, and instead rushed to pass the deal shortly after 1am Athens time, with hopes that just approving its contents may lead to the ECB blessing a prompt reopening of banks so Greeks can resume withdrawing their frozen deposits before the public realizes it was betrayed by its rulers once again, one person who has read it is the former finance minister Yanis Varoufakis.

  And not only that: just hours before what may be the most critical vote in Greek history, he has released an annotated version of what the Euro Summit statement really means for Greece.

  In his words: The Euro Summit statement (or Terms of Greece’s Surrender – as it will go down in history) follows, annotated by yours truly. The original text is untouched with my notes confined to square brackets (and in red). Read and weep… [For a pdf copy click here.]

  Full annotated statement:
  

  Euro Summit Statement Brussels, 12 July 2015

  The Euro Summit stresses the crucial need to rebuild trust with the Greek authorities [i.e. the Greek government must introduce new stringent austerity directed at the weakest Greeks that have already suffered grossly] as a pre- requisite for a possible future agreement on a new ESM programme [i.e. for a new extend-and-pretend loan].

  In this context, the ownership by the Greek authorities is key [i.e. the Syriza government must sign a declaration of having defected to the troika’s ‘logic’], and successful implementation should follow policy commitments.

  A euro area Member State requesting financial assistance from the ESM is expected to address, wherever possible, a similar request to the IMF This is a precondition for the Eurogroup to agree on a new ESM programme. Therefore Greece will request continued IMF support (monitoring and financing) from March 2016 [i.e. Berlin continues to believe that the Commission cannot be trusted to ‘police’ Europe’s own ‘bailout’ programs].

  Given the need to rebuild trust with Greece, the Euro Summit welcomes the commitments of the Greek authorities to legislate without delay a first set of measures [i.e. Greece must subject itself to fiscal waterboarding, even before any financing is offered]. These measures, taken in full prior agreement with the Institutions, will include:

  By 15 July

  • the streamlining of the VAT system [i.e. making it more regressive, through rate rises that encourage more VAT evasion]and the broadening of the tax base to increase revenue [i.e. dealing a major blow at the only Greek growth industry – tourism].

  • upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform programme [i.e. reducing the lowest of the low of pensions, while ignoring that the depletion of pension funds’ capital due to the 2012 troika-designed PSI and the ill effects of low employment & undeclared paid labour].

  • the safeguarding of the full legal independence of ELSTAT [i.e. the troika demands complete control of the way Greece’s budget balance is computed, with a view to controlling fully the magnitude of austerity it imposes on the government.]

  • full implementation of the relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, in particular by making the Fiscal Council operational before finalizing the MoU and introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions [i.e. the Greek government, which knows that the imposed fiscal targets will never be achieved under the imposed austerity, must commit to further, automated austerity as a result of the troika’s newest failures.]

  By 22 July

  • the adoption of the Code of Civil Procedure, which is a major overhaul of procedures and arrangements for the civil justice system and can significantly accelerate the judicial process and reduce costs [i.e. foreclosures, evictions and liquidation of thousands of homes and businesses who are not in a position to keep up with their mortgages/loans.]

  • the transposition of the BRRD with support from the European Commission.

  Immediately, and only subsequent to legal implementation of the first four above-mentioned measures as well as endorsement of all the commitments included in this document by the Greek Parliament, verified by the Institutions and the Eurogroup, may a decision to mandate the Institutions to negotiate a Memorandum of Understanding (MoU) be taken [i.e. The Syriza government must be humiliated to the extent that it is asked to impose harsh austerity upon itself as a first step towards requesting another toxic bailout loan, of the sort that Syriza became internationally famous for opposing.]

  This decision would be taken subject to national procedures having been completed and if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1. In order to form the basis for a successful conclusion of the MoU, the Greek offer of reform measures needs to be seriously strengthened to take into account the strongly deteriorated economic and fiscal position of the country during the last year [i.e. the Syriza government must accept the lie that it, and not the asphyxiation tactics of the creditors, caused the sharp economic deterioration of the past six months – the victim is being asked to take the blame by the on behalf of the villain.]

  The Greek government needs to formally commit to strengthening their proposals [i.e. to make them more regressive and more inhuman] in a number of areas identified by the Institutions, with a satisfactory clear timetable for legislation and implementation, including structural benchmarks, milestones and quantitative benchmarks, to have clarity on the direction of policies over the medium-run. They notably need, in agreement with the Institutions, to:

  • carry out ambitious pension reforms [i.e. cuts] and specify policies to fully compensate for the fiscal impact of the Constitutional Court ruling on the 2012 pension reform [i.e. cancel the Court’s decision in favour of pensioners] and to implement the zero deficit clause [i.e. cut by 85% the secondary pensions that the Syriza government fought tooth and nail to preserve over the past five months] or mutually agreeable alternative measures [i.e. find ‘equivalent’ victims] by October 2015;

  • adopt more ambitious product market reforms with a clear timetable for implementation of all OECD toolkit I recommendations [i.e. the recommendations that the OECD has now renounced after having re-designed these reforms in collaboration with the Syriza government], including Sunday trade, sales periods, pharmacy ownership, milk and bakeries, except over-the-counter pharmaceutical products, which will be implemented in a next step, as well as for the opening of macro-critical closed professions (e.g. ferry transportation). On the follow-up of the OECD toolkit-II, manufacturing needs to be included in the prior action;

  • on energy markets, proceed with the privatisation of the electricity transmission network operator (ADMIE), unless replacement measures can be found that have equivalent effect on competition, as agreed by the Institutions [i.e. ADMIE will be sold off to specific foreign vested interests at the behest of the Institutions.]

  • on labour markets, undertake rigorous reviews and modernisation of collective bargaining [i.e. to make sure that no collective bargaining is allowed], industrial action [i.e. that must be banned] and, in line with the relevant EU directive and best practice, collective dismissals [i.e. that should be allowed at the employers’ whim], along the timetable and the approach agreed with the Institutions [i.e. the Troika decides.]

  On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth [i.e. there should be no mechanisms that waged labour can use to extract better conditions from employers.]

  • adopt the necessary steps to strengthen the financial sector, including decisive action on non-performing loans [i.e. a tsunami of foreclosures is ante portas] and measures to strengthen governance of the HFSF and the banks [i.e. the Greek people who maintain the HFSF and the banks will have precisely zero control over the HFSF and the banks.], in particular by eliminating any possibility for political interference especially in appointment processes. [i.e. except the political interference of the Troika.] On top of that, the Greek authorities shall take the following actions:

  • to develop a significantly scaled up privatisation programme with improved governance; valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means [i.e. an East German-like Treuhand is envisaged to sell off all public property but without the equivalent large investments that W. Germany put into E. Germany in compensation for the Treuhand disaster.] The monetization of the assets will be one source to make the scheduled repayment of the new loan of ESM and generate over the life of the new loan a targeted total of EUR 50bn of which EUR 25bn will be used for the repayment of recapitalization of banks and other assets and 50 % of every remaining euro (i.e. 50% of EUR 25bn) will be used for decreasing the debt to GDP ratio and the remaining 50 % will be used for investments [i.e. public property will be sold off and the pitiful sums will go toward servicing an un-serviceable debt – with precisely nothing left over for public or private investments.] This fund would be established in Greece and be managed by the Greek authorities under the supervision of the relevant European Institutions [i.e. it will be nominally in Greece but, just like the HFSF or the Bank of Greece, it will be controlled fully by the creditors.] In agreement with Institutions and building on best international practices, a legislative framework should be adopted to ensure transparent procedures and adequate asset sale pricing, according to OECD principles and standards on the management of State Owned Enterprises (SOEs) [i.e. the Troika will do what it likes.]

  • in line with the Greek government ambitions, to modernise and significantly strengthen the Greek administration, and to put in place a programme, under the auspices of the European Commission, for capacity-building and de-politicizing the Greek administration [i.e. Turning Greece into a democracy-free zone modelled on Brussels, a form of supposedly technocratic government, which is politically toxic and macro-economically inept] A first proposal should be provided by 20 July after discussions with the Institutions. The Greek government commits to reduce further the costs of the Greek administration [i.e. to reduce the lowest wages while increasing a little the wages some of the Troika-friendly apparatchiks], in line with a schedule agreed with the Institutions.

  • to fully normalize working methods with the Institutions, including the necessary work on the ground in Athens, to improve programme implementation and monitoring [i.e. The Troika strikes back and demands that the Greek government invite it to return to Athens as Conqueror – the Carthaginian Peace in all its glory.] The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament [i.e. Greek Parliament must, again, after five months of short-lived independence, become an appendage of the Troika – passing translated legislation mechanistically.] The Euro Summit stresses again that implementation is key, and in that context welcomes the intention of the Greek authorities to request by 20 July support from the Institutions and Member States for technical assistance, and asks the European Commission to coordinate this support from Europe;

  • With the exception of the humanitarian crisis bill, the Greek government will reexamine with a view to amending legislations that were introduced counter to the February 20 agreement by backtracking on previous programme commitments or identify clear compensatory equivalents for the vested rights that were subsequently created [i.e. In addition to promising that it will no longer legislative autonomously, the Greek government will retrospectively annul all Bills it passed over the past five months.]

  The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities. However, the Euro Summit made it clear that the start of negotiations does not preclude any final possible agreement on a new ESM programme, which will have to be based on a decision on the whole package (including financing needs, debt sustainability and possible bridge financing) [i.e. self-flagellate, impose further austerity upon an economy crushed by austerity, and then we shall see whether the Eurogroup will grave you with another toxic, unsustainable loans.]

  The Euro Summit takes note of the possible programme financing needs of between EUR 82 and 86bn, as assessed by the Institutions [i.e. the Eurogroup conjured up a huge number, well above what is necessary, in order to signal the debt restructuring is out and that debt bondage ad infinitum is the name of the game.] It invites the Institutions to explore possibilities to reduce the financing envelope, through an alternative fiscal path or higher privatisation proceeds [i.e. And, yes, it may possible that pigs will fly.] Restoring market access, which is an objective of any financial assistance programme, lowers the need to draw on the total financing envelope [i.e. which is something the creditors will do their utmost to avoid, e.g. by ensuring that Greece will only enter the ECB’s quantitative easing program in 2018, once quantitative easing is… over.]

  The Euro Summit takes note of the urgent financing needs of Greece which underline the need for very swift progress in reaching a decision on a new MoU: these are estimated to amount to EUR 7bn by 20 July and an additional EUR 5bn by mid August [i.e. Extend and Pretend gets another spin.] The Euro Summit acknowledges the importance of ensuring that the Greek sovereign can clear its arrears to the IMF and to the Bank of Greece and honour its debt obligations in the coming weeks to create conditions which allow for an orderly conclusion of the negotiations. The risks of not concluding swiftly the negotiations remain fully with Greece [i.e. Once more, demanding that the victim takes all the blame in behalf of the villain.] The Euro Summit invites the Eurogroup to discuss these issues as a matter of urgency.

  Given the acute challenges of the Greek financial sector, the total envelope of a possible new ESM programme would have to include the establishment of a buffer of EUR 10 to 25bn for the banking sector in order to address potential bank recapitalisation needs and resolution costs, of which EUR 10bn would be made available immediately in a segregated account at the ESM [i.e. the Troika admits that the 2013-14 recapitalisation of the banks, which would only need a top up of at most 10 billion, was insufficient – but, of course, blames it on… the Syriza government.]

  The Euro Summit is aware that a rapid decision on a new programme is a condition to allow banks to reopen, thus avoiding an increase in the total financing envelope [i.e. The Troika closed Greece’s banks to force the Syriza government to capitulate and now cries out for their re-opening.] The ECB/SSM will conduct a comprehensive assessment after the summer. The overall buffer will cater for possible capital shortfalls following the comprehensive assessment after the legal framework is applied.

  There are serious concerns regarding the sustainability of Greek debt [N.b. Really? Gosh!] This is due to the easing of policies during the last twelve months, which resulted in the recent deterioration in the domestic macroeconomic and financial environment [i.e. It is not the Extend and Pretend ‘bailout’ loans of 2010 and 2012 that, in conjunction with GDP-sapping austerity, caused the debt to scale immense heights – it was the prospect, and reality, of a government that criticized the the Extend and Pretend ‘bailout’ loans that… caused Debt’s Unustainability!]

  The Euro Summit recalls that the euro area Member States have, throughout the last few years, adopted a remarkable set of measures supporting Greece’s debt sustainability, which have smoothed Greece’s debt servicing path and reduced costs significantly [i.e. The 1^st & 2^nd ‘bailout’ programs failed, the debt skyrocketing as it was always going to since the real purpose of the ‘bailout’ programs was to transfer banking losses to Europe’s taxpayers.] Against this background, in the context of a possible future ESM programme, and in line with the spirit of the Eurogroup statement of November 2012 [i.e. a promise of debt restructure to the previous Greek government was never kept by the creditors], the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme and will be considered after the first positive completion of a review [i.e. Yet again, the Troika shall let the Greek government labour under un-payable debt and when, as a result, the program fails, poverty rises further and incomes collapse much more, then we may haircut some of the debt – as the Troika did in 2012.]

  The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken [N.b. The Syriza government has been suggesting, since January, a moderate debt restructure, with no haircuts, maximizing the expected net present value of Greece’s repayments to creditors’ – which was rejected by the Troika because their aim was, simply, to humiliate Syriza.] Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and in a timely manner [N.b. Which can only happen after a substantial debt restrucuture.] Provided that all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM Board of Governors may, in accordance with Article 13.2 of the ESM Treaty, mandate the Institutions to negotiate a new ESM programme, if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1. To help support growth and job creation in Greece (in the next 3-5 years) [N.b. Having already destroyed growth and jobs for the past five years…] the Commission will work closely with the Greek authorities to mobilise up to EUR 35bn (under various EU programmes) to fund investment and economic activity, including in SMEs [i.e. Will use the same order of magnitude of structural funds, plus some fantasy money, as were available in 2010-2014.] As an exceptional measure and given the unique situation of Greece the Commission will propose to increase the level of pre-financing by EUR 1bn to give an immediate boost to investment to be dealt with by the EU co-legislators [i.e. Of the headline 35 billion, consider 1 billion as real money.] The Investment Plan for Europe will also provide funding opportunities for Greece [i.e. the same plan that most Eurozone ministers of finance refer to as a phantom program].

  

  

  

  

  

• The Oldest Trick In The Accounting Book: The Reason For Intel's Massive EPS Beat In One Chart

  Moments ago, INTC reported EPS of $0.55 which solidly beat expectations $0.50, with revenue of $13.2 billion printing just above consensus, if a substantial 5% drop compared to the $13.8 billion one year ago.

  This has sent the stock soaring in the after hours by about 6%. This is also despite the company lowering it full year revenue guidance from flat to -1%, with the bulls saying just look at that massive EPS beat.

  

   

  So for all those wondering just how INTC did it, here’s the reason for Intel’s beat in one simple chart:

  

   

  In other words, it is only thanks to the oldest trick in the accounting book, an artificially low tax rate, that INTC was able to make its plunging operating income, which was down 25% from a year ago, better than expected and make its EPS of $0.55 equal to the $0.55 reported one year ago.

  Crashing Operating Income:

  

   

  And yet, flat EPS:

  

   

  If INTC had used a 29% tax rate – the same as last year – EPS would have been $0.43, a 7 cent loss and that’s even using a more modern trick in the accounting book, some $700 million in stock buybacks!
  

  And that is how you use report unchanged EPS from a year ago despit sliding revenues and plunging earnings.

  

  

  

  

  

• Unsound Banking: Why Most Of The World’s Banks Are Headed For Collapse

  Submitted by Doug Casey via InternationalMan.com,

  You’re likely thinking that a discussion of “sound banking” will be a bit boring. Well, banking should be boring. And we’re sure officials at central banks all over the world today—many of whom have trouble sleeping—wish it were.

  This brief article will explain why the world’s banking system is unsound, and what differentiates a sound from an unsound bank. I suspect not one person in 1,000 actually understands the difference. As a result, the world’s economy is now based upon unsound banks dealing in unsound currencies. Both have degenerated considerably from their origins.

  Modern banking emerged from the goldsmithing trade of the Middle Ages. Being a goldsmith required a working inventory of precious metal, and managing that inventory profitably required expertise in buying and selling metal and storing it securely. Those capacities segued easily into the business of lending and borrowing gold, which is to say the business of lending and borrowing money.

  Most people today are only dimly aware that until the early 1930s, gold coins were used in everyday commerce by the general public. In addition, gold backed most national currencies at a fixed rate of convertibility. Banks were just another business—nothing special. They were distinguished from other enterprises only by the fact they stored, lent, and borrowed gold coins, not as a sideline but as a primary business. Bankers had become goldsmiths without the hammers.

  Bank deposits, until quite recently, fell strictly into two classes, depending on the preference of the depositor and the terms offered by banks: time deposits, and demand deposits. Although the distinction between them has been lost in recent years, respecting the difference is a critical element of sound banking practice.

  Time Deposits. With a time deposit—a savings account, in essence—a customer contracts to leave his money with the banker for a specified period. In return, he receives a specified fee (interest) for his risk, for his inconvenience, and as consideration for allowing the banker the use of the depositor’s money. The banker, secure in knowing he has a specific amount of gold for a specific amount of time, is able to lend it; he’ll do so at an interest rate high enough to cover expenses (including the interest promised to the depositor), fund a loan-loss reserve, and if all goes according to plan, make a profit.

  A time deposit entails a commitment by both parties. The depositor is locked in until the due date. How could a sound banker promise to give a time depositor his money back on demand and without penalty when he’s planning to lend it out?

  In the business of accepting time deposits, a banker is a dealer in credit, acting as an intermediary between lenders and borrowers. To avoid loss, bankers customarily preferred to lend on productive assets, whose earnings offered assurance that the borrower could cover the interest as it came due. And they were willing to lend only a fraction of the value of a pledged asset, to ensure a margin of safety for the principal. And only for a limited time—such as against the harvest of a crop or the sale of an inventory. And finally, only to people of known good character—the first line of defense against fraud. Long-term loans were the province of bond syndicators.

  That’s time deposits. Demand deposits were a completely different matter.

  Demand Deposits. Demand deposits were so called because, unlike time deposits, they were payable to the customer on demand. These are the basis of checking accounts. The banker doesn’t pay interest on the money, because he supposedly never has the use of it; to the contrary, he necessarily charged the depositor a fee for:

  1. Assuming the responsibility of keeping the money safe, available for immediate withdrawal, and

  1. Administering the transfer of the money if the depositor so chooses by either writing a check or passing along a warehouse receipt that represents the gold on deposit.

  An honest banker should no more lend out demand deposit money than Allied Van and Storage should lend out the furniture you’ve paid it to store. The warehouse receipts for gold were called banknotes. When a government issued them, they were called currency. Gold bullion, gold coinage, banknotes, and currency together constituted the society’s supply of transaction media. But its amount was strictly limited by the amount of gold actually available to people.

  Sound principles of banking are identical to sound principles of warehousing any kind of merchandise, whether it’s autos, potatoes, or books. Or money. There’s nothing mysterious about sound banking. But banking all over the world has been fundamentally unsound since government-sponsored central banks came to dominate the financial system.

  Central banks are a linchpin of today’s world financial system. By purchasing government debt, banks can allow the state—for a while—to finance its activities without taxation. On the surface, this appears to be a “free lunch.” But it’s actually quite pernicious and is the engine of currency debasement.

  Central banks may seem like a permanent part of the cosmic landscape, but in fact they are a recent invention. The US Federal Reserve, for instance, didn’t exist before 1913.

  Unsound Banking

  Fraud can creep into any business. A banker, seeing other people’s gold sitting idle in his vault, might think, “What is the point of taking gold out of the ground from a mine, only to put it back into the ground in a vault?” People are writing checks against it and using his banknotes. But the gold itself seldom moves. A restless banker might conclude that, even though it might be a fraud on depositors (depending on exactly what the bank has promised them), he could easily create lots more banknotes and lend them out, and keep 100% of the interest for himself.

  Left solely to their own devices, some bankers would try that. But most would be careful not to go too far, since the game would end abruptly if any doubt emerged about the bank’s ability to hand over gold on demand. The arrival of central banks eased that fear by introducing a lender of last resort. Because the central bank is always standing by with credit, bankers are free to make promises they know they might not be able to keep on their own.

  How Banking Works Today

  In the past, when a bank created too much currency out of nothing, people eventually would notice, and a “bank run” would materialize. But when a central bank authorizes all banks to do the same thing, that’s less likely—unless it becomes known that an individual bank has made some really foolish loans.

  Central banks were originally justified—especially the creation of the Federal Reserve in the US—as a device for economic stability. The occasional chastisement of imprudent bankers and their foolish customers was an excuse to get government into the banking business. As has happened in so many cases, an occasional and local problem was “solved” by making it systemic and housing it in a national institution. It’s loosely analogous to the way the government handles the problem of forest fires: extinguishing them quickly provides an immediate and visible benefit. But the delayed and forgotten consequence of doing so is that it allows decades of deadwood to accumulate. Now when a fire starts, it can be a once-in-a-century conflagration.

  Banking all over the world now operates on a “fractional reserve” system. In our earlier example, our sound banker kept a 100% reserve against demand deposits: he held one ounce of gold in his vault for every one-ounce banknote he issued. And he could only lend the proceeds of time deposits, not demand deposits. A “fractional reserve” system can’t work in a free market; it has to be legislated. And it can’t work where banknotes are redeemable in a commodity, such as gold; the banknotes have to be “legal tender” or strictly paper money that can be created by fiat.

  The fractional reserve system is why banking is more profitable than normal businesses. In any industry, rich average returns attract competition, which reduces returns. A banker can lend out a dollar, which a businessman might use to buy a widget. When that seller of the widget re-deposits the dollar, a banker can lend it out at interest again. The good news for the banker is that his earnings are compounded several times over. The bad news is that, because of the pyramided leverage, a default can cascade. In each country, the central bank periodically changes the percentage reserve (theoretically, from 100% down to 0% of deposits) that banks must keep with it, according to how the bureaucrats in charge perceive the state of the economy.

  In any event, in the US (and actually most everywhere in the world), protection against runs on banks isn’t provided by sound practices, but by laws. In 1934, to restore confidence in commercial banks, the US government instituted the Federal Deposit Insurance Corporation (FDIC) deposit insurance in the amount of $2,500 per depositor per bank, eventually raising coverage to today’s $250,000. In Europe, €100,000 is the amount guaranteed by the state.

  FDIC insurance covers about $9.3 trillion of deposits, but the institution has assets of only $25 billion. That’s less than one cent on the dollar. I’ll be surprised if the FDIC doesn’t go bust and need to be recapitalized by the government. That money—many billions—will likely be created out of thin air by selling Treasury debt to the Fed.

  The fractional reserve banking system, with all of its unfortunate attributes, is critical to the world’s financial system as it is currently structured. You can plan your life around the fact the world’s governments and central banks will do everything they can to maintain confidence in the financial system. To do so, they must prevent a deflation at all costs. And to do that, they will continue printing up more dollars, pounds, euros, yen, and what-have-you.

  

  

  

  

  

• White House Cuts 2015 GDP Outlook By 33%

  Despite President Obama’s hubris over the ‘recovery’, his crowing about the jobs record, and his insistence that while “there’s more to be done,” everything is awesome, The White House just took the meat-cleaver to its US economic growth forecasts…cutting 2015 growth from 3% to 2%. That was not all though as their forecasts see no recession until at least 2025, unemployment under 5.0% for at least the next decade, stable inflation for 10 years, and last but not least – a 3-month T-Bill rate of over 3% within the next few years.

   

  So growth is going to drop… but there’ll be no rise in unemployment, rates will surge but there will be no inflation outbreak, and trend growth now appears to be just 2.3%…

  

   

  As The Wall Street Journal reports,

  The White House said it sees U.S. growth rising by just 2% this year before rebounding to 2.9% in 2016 – down from its earlier forecast of 3% growth for both 2015 and 2016 released in February – after the economy stalled during the first quarter.

   

  The new estimate came Tuesday in the White House budget office’s “Mid-Session Review,” which updates the economic and budget projections it made at the beginning of the year. The new growth forecast largely reflects the current thinking among private economists.

   

  The economy contracted at a 0.2% seasonally adjusted annual rate in the first quarter.

  *  *  *

  Full report here (link)

  This should make things a little awkward for Janet…

  

  

  

  

  

• Live Webcast: Greek Parliament Votes On Bailout

  Update: And Tsipras is speaking now.

  It is almost 1:00am Athens time, and as of this moment the speaker of the Parliament, Zoi Konstantopoulou is at the podium, blasting the terms of the Third Greek bailout. She may or may not be the last speaker, although there is some speculation that PM Tsipras, who has been absent from the entire session so far, may follow her. Whether he does or not, the parliamentarians will vote shortly in a paradoxical vote in which the Opposition will support a law brought on by a European proxy government whose majority will vote against its own proposal, a proposal it swore to fight as its primary electoral campaign.

  So, in a nutshell, confusion reigns. But then again, this is Greece or as it will soon be known: the Greek vassal state of Europe.

  Watch the live, and translated, webcast below as the moment when Greece votes to hand over its sovereignty to Brussels will surely be a historic moment if only for some 11 million Greeks and a few European oligarchs who plot the expansion of “Empire Europe.”

  

  

  

  

  

• Hillary Clinton Blasts High Frequency Trading Ahead Of Fundraiser With High Frequency Trader

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  One of the most entertaining angles of the imperial spectacle known as the 2016 U.S. Presidential campaign, has been watching Hillary Clinton, the consummate insider, pretend to be an outsider. The fact that anyone eats this up is a testament to the epic stupidity and ignorance of the American public.

  In her latest attempt at faux populism, Her Highness was found criticizing high frequency traders, as well as other Wall Street “fat cats,” with whom she is extremely cozy, during a speech at the New School. Her next stop? A fundraiser thrown by a high frequency trader.

  From the Weekly Standard:

  Today, in an economic speech at the New School in Manhattan, Hillary Clinton spoke out against short-term traders.

   

  “The problems are not limited to the big banks that get all the headlines. Serious risks are emerging from institutions in the so-called shadow banking system, including hedge funds, high-frequency traders, non-bank finance companies,” said the Democratic presidential candidate. 

  That’s Hillary the pantsuit rebel singing to the gullible plebs. Now here’s the real Hillary.

  Raj Fernando, the CEO of high-frequency trading firm Chopper Trading, is hosting a fundraiser for Clinton next week.

   

  “Hillary Clinton is coming to Chicago for a private fundraiser July 21 hosted at the home of Raj Fernando, CEO of Chopper Trading, a high-frequency trading firm that recently was purchased by Chicago-based DRW,” Chicago Business reports.

  Are you ready?

  

  

  

  

  

  

• Auto Loan Rejection Rate Falls To Lowest Level On Record

  If you were interested in learning about the conditions that conspired to create the great American housing bubble which burst in spectacular fashion in 2008 and brought the entire global financial system to its knees, you might start by reading the history of Fannie and Freddie, or you might take a hard look at Blythe Masters and the wizards who created the credit default swap, or, if you wanted to save yourself quite a bit of time and effort, you could just look at the current market for subprime auto loans. 

  You see, the much maligned “originate to sell” model – which was instrumental in making the American homeownership dream a reality for underqualified borrowers in the lead up to the crisis – is alive and well and is ‘in the driver’s seat’ so to speak when it comes to auto sales in America. 

  As we noted last month, in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit) auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers.

  The push to feed the securitization machine begets more competition among lenders for a shrinking pool of creditworthy borrowers and when that pool dries up, well, the definition of “creditworthy” must necessarily be relaxed, otherwise the securitization machine stalls for lack of fuel. For those who missed it, here are three charts which tell you everything you need to know about the market for auto loan-backed ABS:

  First, note that auto ABS issuance is set to hit record highs in 2015.

  

  Next, consider that the percentage of prime loans backing new supply is now at an all-time low. 

  

  Finally, here’s a look at the percentage of new financing extended to non-prime borrowers. As BofAML observes, the prime segements are losing share.

  

  Now, the NY Fed is out with what is perhaps the most shocking statistic yet (with the possible exception of the 137% average LTV ratio we highlighted earlier this month) on auto loans in America.

  As the following graphic shows, the rejection rate for auto loans was just 3.3% in June – the lowest on record:

  

  And here’s Bloomberg’s take on why virtually anyone who wants a car, gets a car:

  One reason for the looser credit has been the renewed appetite for securities backed by automobile debt, including to the riskiest borrowers, with subprime loans feeding about $13.2 billion of bond sales on Wall Street this year, according to data compiled by Bloomberg.

  Finally, to drive the point home, we’ll leave you with a set of statistics which speaks volumes about why this will certainly not end well.

  Q1 data from Experian:

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

  

  

  

  

  

• A Complete Farce: Ex-Obamacare Head To Lead Health Insurance Lobby

  If there was any doubt just who Obamacare was created to serve from day one (spoiler alert: it was never America’s population), we now have the answer and it is so simple, even a 5-year-old can get it. Moments ago Politico reported that former Medicare chief Marilyn Tavenner, and the infamous former administrator of the Centers for Medicare and Medicaid Services who was responsible for writing many of Obamacare’s rules and regulations for the insurance industry, only to be fired following the disastrous rollout of the HealthCare.gov enrollment website, has been hired as the new CEO of America’s Health Insurance Plans, the “powerful K Street lobbying group.“

  Cited by Politico, AHIP board chairman Mark Ganz in a statement that”There is no better individual than Marilyn to lead our industry through the increasingly complex health care transformation that is underway. She has the respect and trust of policymakers and stakeholders from all sides, and a personal commitment to advance meaningful solutions for improving access to quality, affordable care for all Americans.”

  Well, maybe for some Americans: those who are shareholder or employees of US health insurance companies, which as it now emerges, are the biggest benefactors of Obamacare because from the very beginning, they had their own operative setting up the rules and regulations of the biggest US healthcare overhaul in history to benefit, drum roll, them.

  And now the same insurance companies, just to benefit some more, are poised or already in process of hiking insurance premiums across America and crush the spending power of ordinary Americans, those who were supposed to benefit from Obama’s socialized healthcare dream.

  The Affordable Care Act has been a mixed bag financially for insurers, said Robert Laszewski, an industry consultant. The expansion of Medicaid and the continued growth of private Medicare plans have been a boon for insurers, he noted. But the law’s new health insurance exchanges have been more troublesome for health plans, many of which are seeking greater rate hikes in 2016.

   

  “They’re getting creamed,” Laszewski said of plans in the exchange business. “Any time you see a rate increase above 7, 8, 9 percent, they’re losing money.”

  Actually, that’s bullshit: any time you see a 9% increase (or much more), it means there is cartel pricing in action, and thanks to the Supreme Court’s ruling supporting Obamacare, healthcare is now a tax on Americans and one has no choice but to pay whatever premium incueases are imposed on them.

  It gets even more comical:

  Tavenner can push the group’s agenda in Congress, but she will face a ban on direct communications with the agency that she oversaw. That restriction shouldn’t present too much of a hurdle to being an effective advocate for the industry, said Meredith McGehee, policy director for the Campaign Legal Center.

  It won’t be a hurdle, but in the meantime, Tavenner will be paid about 20 to 30 times more than when we was a mere government lackey (and quite incompetent considering the billions spent to rollout a broken healthcare.gov) available for hire to the highest bidder, unprecedented conflicts of interest notwithstanding.

  And just to show how extensive the revolving door is, Tavenner is replacing AHIP’s longtime head Karen Ignagni, who left the group to run EmblemHealth, a big New York insurer. Her departure was soon followed the announcement that UnitedHealth Group, the country’s largest insurer, would leave AHIP.

  So for any 5 year old who are still confused: the insurance industry wrote the rules of Obamacare, and is now set to profit from it, which incidentally was obvious to anyone who has been following the stock prices of publicly traded insurance companies, which if the recent merger mania is any indication will shortly roll up into one monopoly enterprise, thus concluding Obama’s dream of a single-payer health system.

  And just like that, the corporations win again.