• U.S. Government Has Long Used Propaganda Against the American People

  The United States Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities found in 1975 that the CIA submitted stories to the American press:

  Wikipedia adds details:

  After 1953, the network was overseen by Allen W. Dulles, director of the CIA. By this time, Operation Mockingbird had a major influence over 25 newspapers and wire agencies. The usual methodology was placing reports developed from intelligence provided by the CIA to witting or unwitting reporters. Those reports would then be repeated or cited by the preceding reporters which in turn would then be cited throughout the media wire services.

   

  The Office of Policy Coordination (OPC) was funded by siphoning off funds intended for the Marshall Plan [i.e. the rebuilding of Europe by the U.S. after WWII]. Some of this money was used to bribe journalists and publishers.

  In 2008, the New York Times wrote:

  During the early years of the cold war, [prominent writers and artists, from Arthur Schlesinger Jr. to Jackson Pollock] were supported, sometimes lavishly, always secretly, by the C.I.A. as part of its propaganda war against the Soviet Union. It was perhaps the most successful use of “soft power” in American history.

  A CIA operative told Washington Post editor Philip Graham … in a conversation about the willingness of journalists to peddle CIA propaganda and cover stories:

  You could get a journalist cheaper than a good call girl, for a couple hundred dollars a month.

  Famed Watergate reporter Carl Bernstein wrote in 1977:

  More than 400 American journalists … in the past twenty?five years have secretly carried out assignments for the Central Intelligence Agency, according to documents on file at CIA headquarters.

   

  ***

   

  In many instances, CIA documents show, journalists were engaged to perform tasks for the CIA with the consent of the managements of America’s leading news organizations.

   

  ***

   

  Among the executives who lent their cooperation to the Agency were [the heads of CBS, Time, the New York Times, the Louisville Courier?Journal, and Copley News Service. Other organizations which cooperated with the CIA include [ABC, NBC, AP, UPI, Reuters], Hearst Newspapers, Scripps?Howard, Newsweek magazine, the Mutual Broadcasting System, the Miami Herald and the old Saturday Evening Post and New York Herald?Tribune.

   

  ***

   

  There is ample evidence that America’s leading publishers and news executives allowed themselves and their organizations to become handmaidens to the intelligence services. “Let’s not pick on some poor reporters, for God’s sake,” William Colby exclaimed at one point to the Church committee’s investigators. “Let’s go to the managements.

   

  ***

   

  The CIA even ran a formal training program in the 1950s to teach its agents to be journalists. Intelligence officers were “taught to make noises like reporters,” explained a high CIA official, and were then placed in major news organizations with help from management.

   

  ***

   

  Once a year during the 1950s and early 1960s, CBS correspondents joined the CIA hierarchy for private dinners and briefings.

   

  ***

   

  Allen Dulles often interceded with his good friend, the late Henry Luce, founder of Time and Life magazines, who readily allowed certain members of his staff to work for the Agency and agreed to provide jobs and credentials for other CIA operatives who lacked journalistic experience.

   

  ***

   

  In the 1950s and early 1960s, Time magazine’s foreign correspondents attended CIA “briefing” dinners similar to those the CIA held for CBS.

   

  ***

   

  When Newsweek waspurchased by the Washington Post Company, publisher Philip L. Graham was informed by Agency officials that the CIA occasionally used the magazine for cover purposes, according to CIA sources. “It was widely known that Phil Graham was somebody you could get help from,” said a former deputy director of the Agency. “Frank Wisner dealt with him.” Wisner, deputy director of the CIA from 1950 until shortly before his suicide in 1965, was the Agency’s premier orchestrator of “black” operations, including many in which journalists were involved. Wisner liked to boast of his “mighty Wurlitzer,” a wondrous propaganda instrument he built, and played, with help from the press.)

   

  ***

   

  In November 1973, after [the CIA claimed to have ended the program], Colby told reporters and editors from the New York Times and the Washington Star that the Agency had “some three dozen” American newsmen “on the CIA payroll,” including five who worked for “general?circulation news organizations.” Yet even while the Senate Intelligence Committee was holding its hearings in 1976, according to high?level CIA sources, the CIA continued to maintain ties with seventy?five to ninety journalists of every description—executives, reporters, stringers, photographers, columnists, bureau clerks and members of broadcast technical crews. More than half of these had been moved off CIA contracts and payrolls but they were still bound by other secret agreements with the Agency. According to an unpublished report by the House Select Committee on Intelligence, chaired by Representative Otis Pike, at least fifteen news organizations were still providing cover for CIA operatives as of 1976.

   

  ***

   

  Those officials most knowledgeable about the subject say that a figure of 400 American journalists is on the low side ….

   

  “There were a lot of representations that if this stuff got out some of the biggest names in journalism would get smeared” ….

  Former Newsweek and Associated Press reporter Robert Parry notes that Ronald Reagan and the CIA unleashed a propaganda campaign in the 1980’s to sell the American public on supporting the Contra rebels, utilizing private players such as Rupert Murdoch to spread disinformation:

  President Ronald Reagan meeting with media magnate Rupert Murdoch in the Oval Office on Jan. 18, 1983, with Charles Wick, director of the U.S. Information Agency, in the background. (Photo credit: Reagan presidential library)

  In the 1980s, the Reagan administration was determined to “kick the Vietnam Syndrome,” the revulsion that many Americans felt for warfare after all those years in the blood-soaked jungles of Vietnam and all the lies that clumsily justified the war.

   

  So, the challenge for the U.S. government became: how to present the actions of “enemies” always in the darkest light while bathing the behavior of the U.S. “side” in a rosy glow. You also had to stage this propaganda theater in an ostensibly “free country” with a supposedly “independent press.”

   

  From documents declassified or leaked over the past several decades, including an unpublished draft chapter of the congressional Iran-Contra investigation, we now know a great deal about how this remarkable project was undertaken and who the key players were.

   

  Perhaps not surprisingly much of the initiative came from the Central Intelligence Agency, which housed the expertise for manipulating target populations through propaganda and disinformation. The only difference this time would be that the American people would be the target population.

   

  For this project, Ronald Reagan’s CIA Director William J. Casey sent his top propaganda specialist Walter Raymond Jr. to the National Security Council staff to manage the inter-agency task forces that would brainstorm and coordinate this “public diplomacy” strategy.

   

  Many of the old intelligence operatives, including Casey and Raymond, are now dead, but other influential Washington figures who were deeply involved by these strategies remain, such as neocon stalwart Robert Kagan, whose first major job in Washington was as chief of Reagan’s State Department Office of Public Diplomacy for Latin America.

   

  ***

   

  Declassified documents now reveal how extensive Reagan’s propaganda project became with inter-agency task forces assigned to develop “themes” that would push American “hot buttons.” Scores of documents came out during the Iran-Contra scandal in 1987 and hundreds more are now available at the Reagan presidential library in Simi Valley, California.

   

  What the documents reveal is that at the start of the Reagan administration, CIA Director Casey faced a daunting challenge in trying to rally public opinion behind aggressive U.S. interventions, especially in Central America. Bitter memories of the Vietnam War were still fresh and many Americans were horrified at the brutality of right-wing regimes in Guatemala and El Salvador, where Salvadoran soldiers raped and murdered four American churchwomen in December 1980.

   

  The new leftist Sandinista government in Nicaragua also was not viewed with much alarm. After all, Nicaragua was an impoverished country of only about three million people who had just cast off the brutal dictatorship of Anastasio Somoza.

   

  So, Reagan’s initial strategy of bolstering the Salvadoran and Guatemalan armies required defusing the negative publicity about them and somehow rallying the American people into supporting a covert CIA intervention inside Nicaragua via a counterrevolutionary force known as the Contras led by Somoza’s ex-National Guard officers.

   

  Reagan’s task was made tougher by the fact that the Cold War’s anti-communist arguments had so recently been discredited in Vietnam. As deputy assistant secretary to the Air Force, J. Michael Kelly, put it, “the most critical special operations mission we have … is to persuade the American people that the communists are out to get us.”

   

  ***

   

  According to the draft report, the CIA officer who was recruited for the NSC job had served as Director of the Covert Action Staff at the CIA from 1978 to 1982 and was a “specialist in propaganda and disinformation.”

   

  ***

   

  Federal law forbade taxpayers’ money from being spent on domestic propaganda or grassroots lobbying to pressure congressional representatives. Of course, every president and his team had vast resources to make their case in public, but by tradition and law, they were restricted to speeches, testimony and one-on-one persuasion of lawmakers.

   

  But things were about to change. In a Jan. 13, 1983, memo, NSC Advisor Clark foresaw the need for non-governmental money to advance this cause. “We will develop a scenario for obtaining private funding,” Clark wrote. (Just five days later, President Reagan personally welcomed media magnate Rupert Murdoch into the Oval Office for a private meeting, according to records on file at the Reagan library.)

   

  As administration officials reached out to wealthy supporters, lines against domestic propaganda soon were crossed as the operation took aim not only at foreign audiences but at U.S. public opinion, the press and congressional Democrats who opposed funding the Nicaraguan Contras.

   

  At the time, the Contras were earning a gruesome reputation as human rights violators and terrorists. To change this negative perception of the Contras as well as of the U.S.-backed regimes in El Salvador and Guatemala, the Reagan administration created a full-blown, clandestine propaganda network.

   

  In January 1983, President Reagan took the first formal step to create this unprecedented peacetime propaganda bureaucracy by signing National Security Decision Directive 77, entitled “Management of Public Diplomacy Relative to National Security.” Reagan deemed it “necessary to strengthen the organization, planning and coordination of the various aspects of public diplomacy of the United States Government.”

   

  Reagan ordered the creation of a special planning group within the National Security Council to direct these “public diplomacy” campaigns. The planning group would be headed by the CIA’s Walter Raymond Jr. and one of its principal arms would be a new Office of Public Diplomacy for Latin America, housed at the State Department but under the control of the NSC.

   

  ***

   

  In the memo to then-U.S. Information Agency director Charles Wick, Raymond also noted that “via Murdock [sic] may be able to draw down added funds” to support pro-Reagan initiatives. Raymond’s reference to Rupert Murdoch possibly drawing down “added funds” suggests that the right-wing media mogul had been recruited to be part of the covert propaganda operation. During this period, Wick arranged at least two face-to-face meetings between Murdoch and Reagan.

   

  ***

   

  Alarmed at a CIA director participating so brazenly in domestic propaganda, Raymond wrote that “I philosophized a bit with Bill Casey (in an effort to get him out of the loop)” but with little success.

   

  ***

   

  Another part of the office’s job was to plant “white propaganda” in the news media through op-eds secretly financed by the government. In one memo, Jonathan Miller, a senior public diplomacy official, informed White House aide Patrick Buchanan about success placing an anti-Sandinista piece in The Wall Street Journal’s friendly pages. “Officially, this office had no role in its preparation,” Miller wrote.

   

  Other times, the administration put out “black propaganda,” outright falsehoods. In 1983, one such theme was designed to anger American Jews by portraying the Sandinistas as anti-Semitic because much of Nicaragua’s small Jewish community fled after the revolution in 1979.

   

  However, the U.S. embassy in Managua investigated the charges and “found no verifiable ground on which to accuse the GRN [the Sandinista government] of anti-Semitism,” according to a July 28, 1983, cable. But the administration kept the cable secret and pushed the “hot button” anyway.

   

  ***

   

  As one NSC official told me, the campaign was modeled after CIA covert operations abroad where a political goal is more important than the truth. “They were trying to manipulate [U.S.] public opinion … using the tools of Walt Raymond’s trade craft which he learned from his career in the CIA covert operation shop,” the official admitted.

   

  Another administration official gave a similar description to The Miami Herald’s Alfonso Chardy. “If you look at it as a whole, the Office of Public Diplomacy was carrying out a huge psychological operation, the kind the military conduct to influence the population in denied or enemy territory,” that official explained. [For more details, see Parry’s Lost History.]

  Parry notes that many of the same people that led Reagan’s domestic propaganda effort in the 1980’s are in power today:

  While the older generation that pioneered these domestic propaganda techniques has passed from the scene, many of their protégés are still around along with some of the same organizations. The National Endowment for Democracy, which was formed in 1983 at the urging of CIA Director Casey and under the supervision of Walter Raymond’s NSC operation, is still run by the same neocon, Carl Gershman, and has an even bigger budget, now exceeding $100 million a year.

   

  Gershman and his NED played important behind-the-scenes roles in instigating the Ukraine crisis by financing activists, journalists and other operatives who supported the coup against elected President Yanukovych. The NED-backed Freedom House also beat the propaganda drums. [See Consortiumnews.com’s “A Shadow Foreign Policy.”]

   

  Two other Reagan-era veterans, Elliott Abrams and Robert Kagan, have both provided important intellectual support for continuing U.S. interventionism around the world. Earlier this year, Kagan’s article for The New Republic, entitled “Superpowers Don’t Get to Retire,” touched such a raw nerve with President Obama that he hosted Kagan at a White House lunch and crafted the presidential commencement speech at West Point to deflect some of Kagan’s criticism of Obama’s hesitancy to use military force.

   

  ***

   

  Rupert Murdoch’s media empire is bigger than ever ….

  An expert on propaganda testified under oath during trial that the CIA now employs THOUSANDS of reporters and OWNS its own media organizations. Whether or not his estimate is accurate, it is clear that many prominent reporters still report to the CIA.

  John Pilger is a highly-regarded journalist (the BBC’s world affairs editor John Simpson remarked, “A country that does not have a John Pilger in its journalism is a very feeble place indeed”). Pilger said in 2007:

  We now know that the BBC and other British media were used by the British secret intelligence service MI-6. In what they called Operation Mass Appeal, MI-6 agents planted stories about Saddam’s weapons of mass destruction, such as weapons hidden in his palaces and in secret underground bunkers. All of these stories were fake.

   

  ***

   

  One of my favorite stories about the Cold War concerns a group of Russian journalists who were touring the United States. On the final day of their visit, they were asked by the host for their impressions. “I have to tell you,” said the spokesman, “that we were astonished to find after reading all the newspapers and watching TV day after day that all the opinions on all the vital issues are the same. To get that result in our country we send journalists to the gulag. We even tear out their fingernails. Here you don’t have to do any of that. What is the secret?”

  Nick Davies wrote in the Independent in 2008:

  For the first time in human history, there is a concerted strategy to manipulate global perception. And the mass media are operating as its compliant assistants, failing both to resist it and to expose it.

   

  The sheer ease with which this machinery has been able to do its work reflects a creeping structural weakness which now afflicts the production of our news. I’ve spent the last two years researching a book about falsehood, distortion and propaganda in the global media.

   

  The “Zarqawi letter” which made it on to the front page of The New York Times in February 2004 was one of a sequence of highly suspect documents which were said to have been written either by or to Zarqawi and which were fed into news media.

   

  This material is being generated, in part, by intelligence agencies who continue to work without effective oversight; and also by a new and essentially benign structure of “strategic communications” which was originally designed by doves in the Pentagon and Nato who wanted to use subtle and non-violent tactics to deal with Islamist terrorism but whose efforts are poorly regulated and badly supervised with the result that some of its practitioners are breaking loose and engaging in the black arts of propaganda.

   

  ***

   

  The Pentagon has now designated “information operations” as its fifth “core competency” alongside land, sea, air and special forces. Since October 2006, every brigade, division and corps in the US military has had its own “psyop” element producing output for local media. This military activity is linked to the State Department’s campaign of “public diplomacy” which includes funding radio stations and news websites. In Britain, the Directorate of Targeting and Information Operations in the Ministry of Defence works with specialists from 15 UK psyops, based at the Defence Intelligence and Security School at Chicksands in Bedfordshire.

   

  In the case of British intelligence, you can see this combination of reckless propaganda and failure of oversight at work in the case of Operation Mass Appeal. This was exposed by the former UN arms inspector Scott Ritter, who describes in his book, Iraq Confidential, how, in London in June 1998, he was introduced to two “black propaganda specialists” from MI6 who wanted him to give them material which they could spread through “editors and writers who work with us from time to time”.

  The government is still paying off reporters to spread disinformation. And the corporate media are acting like virtual “escort services” for the moneyed elites, selling access – for a price – to powerful government officials, instead of actually investigating and reporting on what those officials are doing.

  One of the ways that the U.S. government spreads propaganda is by making sure that it gets its version out first.   For example, the head of the U.S. Information Agency’s television and film division – Alvin A. Snyder – wrote in his book Warriors of Disinformation: How Lies, Videotape, and the USIA Won the Cold War:

  All governments, including our own, lie when it suits their purposes. The key is to lie first.

   

  ***

   

  Another casualty, always war’s first, was the truth. The story of [the accidental Russian shootdown of a Korean airliner] will be remembered pretty much the way we told it in 1983, not the way it really happened.

  In 2013, the American Congress repealed the formal ban against the deployment of propaganda against U.S. citizens living on American soil.  So there’s even less to constrain propaganda than before.

  Another key to American propaganda is the constant repetition of propaganda.    As Business Insider reported in 2013:

  Lt. Col. Daniel Davis, a highly-respected officer who released a critical report regarding the distortion of truth by senior military officials in Iraq and Afghanistan ….

   

  From Lt. Col. Davis:

   

  In context, Colonel Leap is implying we ought to change the law to enable Public Affairs officers to influence American public opinion when they deem it necessary to “protect a key friendly center of gravity, to wit US national will.”

   

  The Smith-Mundt Modernization Act of 2012 appears to serve this purpose by allowing for the American public to be a target audience of U.S. government-funded information campaigns.

   

  Davis also quotes Brigadier General Ralph O. Baker — the Pentagon officer responsible for the Department of Defense’s Joint Force Development — who defines Information Operations (IO) as activities undertaken to “shape the essential narrative of a conflict or situation and thus affect the attitudes and behaviors of the targeted audience.”

   

  Brig. Gen. Baker goes on to equate descriptions of combat operations with the standard marketing strategy of repeating something until it is accepted:

   

  For years, commercial advertisers have based their advertisement strategies on the premise that there is a positive correlation between the number of times a consumer is exposed to product advertisement and that consumer’s inclination to sample the new product. The very same principle applies to how we influence our target audiences when we conduct COIN.

   

  And those “thousands of hours per week of government-funded radio and TV programs” appear to serve Baker’s strategy, which states: “Repetition is a key tenet of IO execution, and the failure to constantly drive home a consistent message dilutes the impact on the target audiences.”

  Of course, the Web has become a huge media platform, and the Pentagon and other government agencies are influencing news on the web as well. Documents released by Snowden show that spies manipulate polls, website popularity and pageview counts, censor videos they don’t like and amplify messages they do.

  The CIA and other government agencies also put enormous energy into pushing propaganda through movies, television and video games.

  In 2012, the Pentagon launched a massive smear campaign against USA Today reporters investigating unlawful domestic propaganda by the Pentagon.

  End Notes:

  (1) One of the most common uses of propaganda is to sell unnecessary and counter-productive wars. Given that the American media is always pro-war, mainstream publishers, producers, editors, and reporters are willing participants.

  (2) A 4-part BBC documentary called the “Century of the Self” shows that an American – Freud’s nephew, Edward Bernays – created the modern field of manipulation of public perceptions, and the U.S. government has extensively used his techniques.

  (3) Sometimes, the government plants disinformation in American media in order to mislead foreigners. For example, an official government summary of America’s overthrow of the democratically-elected president of Iran in the 1950′s states, “In cooperation with the Department of State, CIA had several articles planted in major American newspapers and magazines which, when reproduced in Iran, had the desired psychological effect in Iran and contributed to the war of nerves against Mossadeq” (page x).

  

  

  

  

• The American Revolution – The Sequel

  Submitted by Jeff Thomas via InternationalMan.com,

  The US is the most observed country in the world. Since it’s the world’s current empire (and since it is beginning its death throes as an empire), it’s fascinating to watch.

  Those of us outside of the US watch it like Americans watch TV. It’s like a slow-motion car wreck that we observe almost daily, eager to see what’s going to happen next. We criticise the madness of it all, yet we can’t take our eyes off the unfolding drama. It has all the excitement of a blockbuster movie.

  • The national debt is, by far, the highest of any country in history.
  • The economic system is a house of cards, getting shakier every day.
  • The government has become mired in progress-numbing fascism and increasing collectivism.
  • The government is aggressively creating the world’s most organized police state.
  • The majority of the population have become wasteful, spendthrift consumers who apathetically hope that their government will somehow solve their problems.
  • The media consistently misrepresents international events, prodding the citizenry into accepting that the ongoing invasion of multiple other countries is essential.
  • The most popular candidates for president (both parties) are the candidates that are the most egotistical, out-of-control blowhards who preach provocative rhetoric rather than real solutions.

  Still, most Americans retain the hope that, somehow, it will all work out.

  Hope Is a Desire, Not a Plan

  There are growing numbers of Americans who have accepted that the US is unravelling rapidly and is headed for a social, economic, and political collapse of one form or another. Some talk of a new revolution (but hopefully a peaceful one, of the Tea Party sort). Some imagine that, if they can store enough guns and ammunition in their homes, they might be able to make a stand against government authorities. Others mull over the idea of organised secession by some of the states. A small, but growing, number are quietly leaving for more promising destinations.

  Except for the last of these, most of the “hopes” are understandable, but any attempt at a “Second American Revolution” is unlikely to succeed.

  Why? Well, just for a start,

  • The power of the US state is far greater than that of King George III in the late eighteenth century.
  • The present US state would be fighting on its own ground, not some continent thousands of miles across the ocean.
  • The US state is committed to the concept that it dealt definitively (and forever) with the concept of secession between 1861 and 1865.

  But, for the sake of argument, let’s say that a breakup of the union, or complete removal and replacement of the government were possible in the US. What then?

  Well, unfortunately, here comes the really bad news for those who hope that the US could start over as the free nation it was in its infancy:

  • In the late eighteenth century, America was a largely agrarian collection of colonies. Colonists had to work hard just to survive, so the work ethic and self-reliance were paramount in the colonists’ makeup. They were a brave people who were accustomed to providing for themselves and physically fighting off those who would challenge them.
  • Colonists received no significant largesse from the British or local governments. No welfare, no social security, no Medicare or Medicaid, no benefits of any kind.
  • Colonists made their own daily decisions. They had no government schools or media telling them what to think or what choices to make. They relied on common sense and self-determination to guide their decisions and actions.

  Today, of course, the opposite is true. Less than 2% of Americans are involved in agriculture. A mere 9% are actually employed in the production of goods. They are rarely directly involved in their own physical protection (Most, if not all, combat is overseas and fought by defence contractors or those who voluntarily serve the military).

  Most Americans receive benefits of one type or another from their government. Most recipients regard these benefits as “essential” and could not get by without them.

  Most Americans receive their opinions from the media. Although this is not apparent to many Americans, it’s glaringly clear to those outside the US who can only shake their heads at the misinformation proffered by the US media and the wholesale acceptance of this “alternate reality” by so many Americans.

  But what bearing does this have on what the future would be for Americans if they were to become determined enough to either remove their entire government or, alternatively, for some states to secede?

  There have been many revolutions in the history of the world, both peaceful and otherwise. In the case of the American Revolution of 1776, the colonists themselves were largely self-contained as a people and possessed the ideal ethos to succeed as a productive country. But this has rarely been true in history. Whenever a people have been heavily dependent on the State in one way or another, they had become accustomed to receiving largesse at the expense of others. This is a major, major factor. Such a group is unlikely in the extreme to either produce or elect a Washington or a Jefferson. They almost always choose, instead, to fall in behind someone who promises largesse from the State. In choosing such leaders, the people are more likely to receive a Robespierre or a Lenin. Out of the frying pan and into the fire.

  The pervasive difficulty here lies in the erroneous concept that there can be a return to freedom whilst maintaining the dependency upon largesse from the State. The two are mutually exclusive. Those who seek a return to greater freedom must also accept that “freedom for all” means an end to the State being empowered to steal from one person in order to give to another.

  Or, as stated by Frédéric Bastiat in the mid-nineteenth century, “Government is the great fiction, through which everybody endeavours to live at the expense of everybody else.”

  Whether the US continues on its present downward progression, or if it breaks free in a bid for greater freedom, the eventual outcome is likely to have more to do with the collectivist mindset of the majority than with the libertarian vision of a few.

  Unfortunately there’s little any individual can practically do to change the trajectory of this trend in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation.

  We think everyone should own some physical gold. Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

  But if you want to be truly “crisis-proof” there's more to do…

  Most people have no idea what really happens when an economy collapses, let alone how to prepare…

  How will you protect your savings and yourself in the event of an economic crisis? This just-released PDF guide Surviving and Thriving During an Economic Collapse will show you exactly how. Click here to download the PDF now.

   

  

  

  

  

  

• What Could Go Wrong? China Builds A Floating Nuclear Power Plant

  Back in August, a horrific explosion at a chemical storage facility in the Chinese port of Tianjin killed more than a hundred people and dispersed an unknown amount of toxic sodium cyanide into the air and water.

  Despite officials’ best efforts to play down the environmental impact, a series of “unexplained” events occurred in the days and weeks following the tragedy including a massive fish die-off and the appearance of an eerie white foam on the streets following a thunderstorm.

  Beijing promised a thorough investigation and unsurprisingly, there were questions as to the warehouse’s owners had ties to the Party and if so, whether those ties helped to explain why the amount of sodium cyanide in storage was orders of magnitude greater than what’s allowed by law.

  The blast itself was described by some as akin to a nuclear explosion and indeed, the footage backs up that assessment:

  Well don’t look now, but China is set to take it up a notch when it comes to creating the conditions for a “nuclear” disaster because as World Nuclear News reports, Beijing is now all set to build a portable, floating nuclear reactor. Here’s more:

  China General Nuclear (CGN) expects to complete construction of a demonstration small modular offshore multi-purpose reactor by 2020, the company announced.

   

  The 200 MWt (60 MWe) reactor has been developed for the supply of electricity, heat and desalination and could be used on islands or in coastal areas, or for offshore oil and gas exploration, according to CGN.

   

  CGN said the development of small-scale offshore and onshore nuclear power reactors will complement its large-scale plants and provide more diverse energy options.

  The only floating nuclear power plant today is the Akademik Lomonosov, under construction in Russia, where two 35 MWe reactors similar to those used to propel ships are being mounted on a barge to be moored at a harbour. The Baltiysky Zavod in St Petersburg is on schedule to deliver the first floating nuclear power plant to its customer, Russian nuclear power plant operator Rosenergoatom, in September 2016. It could start operating in Chukotka as early as in 2017.

  Here’s an artists’ impression of what this disaster-waiting-to-happen will look like once complete:

  

  Of course CGN is an SOE which means if and when something does go horribly wrong, there will be no transparency and no accountability whatsoever. 

  Check back in 2021 to find out what happens when a nuclear reactor melts down in the middle of the ocean.

  Until then, we’ll leave you with one final quote from CGN – make a mental note of the bolded passage:

  Floating plants offer various advantages: construction in a factory or shipyard should bring efficiencies; siting is simplified; environmental impact is extremely low; and decommissioning can take place at a specialised facility.

  

  

  

  

  

• Yuan Slides After Quadruple Whammy China Data Miss: GDP Both Matches And Misses

  Following China's growth slowing to 1999 levels in Q3 (but beating expectations with the mirage of a mysteriously large drop in the deflator), all eyes were on tonight's data, most notably the deflator (especially following the trade data debacle from last week). The quadriga struck at 2100ET with Industrial Production +5.9% (MISS vs +6.0% YoY expectations), Retail Sales +11.1% (MISS vs +11.3% YoY expectations), Fixed Asset Investment +10.0% (MISS vs +10.2% YoY expectations), and then the big kahuna Q4 GDP growth +6.8% (MISS vs +6.9% YoY expectations). China, US equities were higher going in but faded quickly on the miss only to be rescued higher again. Offshore Yuan is fading.

  Someone leaked it 5 minutes early:

  • CHINA 2015 REAL GDP +6.9% VS 2014 +7.3%; EXP. 6.9%

  And while the full year real GDP print was indeed inline with the 6.9% consensus – the weakest since 1990…

  

   

  …it was the Q4 number that was disappointing missing the 6.9% expectation by 0.1%

  • CHINA 4Q GDP GROWS 6.8% FROM YEAR EARLIER; EST. 6.9%

  As Bloomberg notes this was only the first time that China's quarterly GDP has missed the forecast since early 2013.

  

   

  Industrial Production

  • *CHINA DEC. INDUSTRIAL OUTPUT RISES 5.9% ON YEAR; EST. 6.0%

  

   

  Retail Sales

  • *CHINA DEC. RETAIL SALES RISE 11.1% ON YEAR; EST. 11.3%

  

   

  Fixed Asset Investment

  • *CHINA 2015 FIXED-ASSET INVESTMENT RISES 10% Y/Y; EST. 10.2%

  

   

  Dow futures were rallying confidently into the numbers (on the back suddeny JPY weakness following Kuroda's appearance in The Diet)… but started to fade on the quadruple whammy miss only to be rescued back higher again… and now fading…

  

   

  Offshore Yuan is extending losses but only marginally.

  

   

  Gold bid, crude slid…

  

   

  And just in case you question any of this:

  • *CHINA STATS BUREAU HEAD SAYS 6.9% GROWTH NOT LOW
  • *CHINA'S GDP CALCULATION IS BASED ON SOLID DATA: NBS WANG
  • CHINA NBS: OUR GDP NUMBER IS REAL AND CAN BE TRUSTED

     

  Think about that for a second – The world's 2nd largest economy has to come out publicly and say no seriously this was good data, you can trust it, seriously, we mean it!

  Anyone who doubts that China is growing at 6.9% is peddling fiction!!

   

  Charts: Bloomberg

   

  

  

  

  

  

• What Happens To A Dream Deferred? Ask Martin Luther King Jr.

  Submitted by John Whitehead via The Rutherford Institute,

  What happens to a dream deferred?
  Does it dry up
  like a raisin in the sun?
  Or fester like a sore—
  And then run?
  Does it stink like rotten meat?
  Or crust and sugar over—
  like a syrupy sweet?
  Maybe it just sags
  like a heavy load.
  Or does it explode?—Langston Hughes, “Harlem”

  Martin Luther King Jr. could tell you what happens to dreams deferred. They explode.

  As I point out in my book Battlefield America: The War on the American People, more than 50 years after King was assassinated, his dream of a world without racism, militarism and materialism remains a distant dream.

  Indeed, the reality we must contend with is far different from King’s dream for the future: America has become a ticking time bomb of racial unrest and injustice, police militarization, surveillance, government corruption and ineptitude, the blowblack from a battlefield mindset and endless wars abroad, and a growing economic inequality between the haves and have nots.

  King’s own legacy has suffered in the process.

  The image of the hard-talking, charismatic leader, voice of authority, and militant, nonviolent activist minister/peace warrior who staged sit-ins, boycotts and marches and lived through police attack dogs, water cannons and jail cells has been so watered down that younger generations recognize his face but know very little about his message.

  Rubbing salt in the wound, while those claiming to honor King’s legacy pay lip service to his life and the causes for which he died, they have done little to combat the evils about which King spoke and opposed so passionately: injustice, war, racism and economic inequality.

  For instance, President Obama speaks frequently of King, but what has he done to bring about peace or combat the racial injustices that continue to be meted out to young black Americans by the police state?

  Republican presidential candidate Donald Trump plans to “honor” Martin Luther King Jr.’s legacy by speaking at a convocation at Liberty University, but what has he done to combat economic injustice?

  Democratic presidential contender Hillary Clinton will pay tribute to King’s legacy by taking part in Columbia, South Carolina’s King Day at the Dome event, but has she done anything to dispel her track record’s impression that “machines and computers, profit motives and property rights are still considered more important than people”?

  Unlike the politicians of our present day, King was a clear moral voice that cut through the fog of distortion. He spoke like a prophet and commanded that you listen. King dared to speak truth to the establishment and called for an end to oppression and racism. He raised his voice against the Vietnam War and challenged the military-industrial complex. And King didn’t just threaten boycotts and sit-ins for the sake of photo ops and media headlines. Rather, he carefully planned and staged them to great effect.

  The following key principles formed the backbone of Rev. King’s life and work. King spoke of them incessantly, in every sermon he preached, every speech he delivered and every article he wrote. They are the lessons we failed to learn and, in failing to do so, we have set ourselves up for a future in which a militarized surveillance state is poised to eradicate freedom.

  Practice militant non-violence, resist militarism and put an end to war.

   

  “I could never again raise my voice against the violence of the oppressed in the ghettos without having first spoken clearly to the greatest purveyor of violence in the world today—my own government.”—Martin Luther King Jr., Sermon at New York’s Riverside Church (April 4, 1967)

   

  On April 4, 1967, exactly one year before his murder, King used the power of his pulpit to condemn the U.S. for “using massive doses of violence to solve its problems, to bring about the changes it wanted.” King called on the U.S. to end all bombing in Vietnam, declare a unilateral cease-fire, curtail its military buildup, and set a date for troop withdrawals. In that same sermon, King warned that “a nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death.”

   

  Fifty-some years later, America’s military empire has been expanded at great cost to the nation, with the White House leading the charge. Indeed, in his recent State of the Union address, President Obama bragged that the U.S. spends more on its military than the next eight nations combined. Mind you, the money spent on wars abroad, weapons and military personnel is money that is not being spent on education, poverty and disease.

   

  Stand against injustice.

   

  “Injustice anywhere is a threat to justice everywhere… there are two types of laws: just and unjust. I would be the first to advocate obeying just laws. One has not only a legal but a moral responsibility to obey just laws. Conversely, one has a moral responsibility to disobey unjust laws.”? Martin Luther King Jr., “Letter from a Birmingham Jail” (April 16, 1963)

   

  Arrested and jailed for taking part in a nonviolent protest against racial segregation in Birmingham, Ala., King used his time behind bars to respond to Alabama clergymen who criticized his methods of civil disobedience and suggested that the courts were the only legitimate means for enacting change. His “Letter from a Birmingham Jail,” makes the case for disobeying unjust laws when they are “out of harmony with the moral law.”

  Fifty-some years later, we are being bombarded with unjust laws at both the national and state levels, from laws authorizing the military to indefinitely detain American citizens and allowing the NSA to spy on American citizens to laws making it illegal to protest near an elected official or in front of the U.S. Supreme Court. As King warned, “Never forget that everything Hitler did in Germany was legal.”

   

  Work to end poverty. Prioritize people over corporations.

   

  “When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered.” —Martin Luther King Jr., Sermon at New York’s Riverside Church (April 4, 1967)

   

  Especially in the latter part of his life, King was unflinching in his determination to hold Americans accountable to alleviating the suffering of the poor, going so far as to call for a march on Washington, DC, to pressure Congress to pass an Economic Bill of Rights.

   

  Fifty-some years later, a monied, oligarchic elite calls the shots in Washington, while militarized police and the surveillance sector keep the masses under control. With roughly 23 lobbyists per Congressman, corporate greed largely dictates what happens in the nation’s capital, enabling our so-called elected representatives to grow richer and the people poorer. One can only imagine what King would have said about a nation whose political processes, everything from elections to legislation, are driven by war chests and corporate benefactors rather than the needs and desires of the citizenry.

   

  Stand up for what is right, rather than what is politically expedient.

   

  “On some positions, cowardice asks the question, is it expedient? And then expedience comes along and asks the question, is it politic? Vanity asks the question, is it popular? Conscience asks the question, is it right? There comes a time when one must take the position that is neither safe nor politic nor popular, but he must do it because conscience tells him it is right.”—Martin Luther King Jr., Sermon at National Cathedral (March 31, 1968)

   

  Five days before his assassination, King delivered a sermon at National Cathedral in Washington, DC, in which he noted that “one of the great liabilities of life is that all too many people find themselves living amid a great period of social change, and yet they fail to develop the new attitudes, the new mental responses, that the new situation demands. They end up sleeping through a revolution.”

   

  Freedom, human dignity, brotherhood, spirituality, peace, justice, equality, putting an end to war and poverty: these are just a few of the big themes that shaped King’s life and his activism. As King recognized, there is much to be done if we are to make this world a better place, and we cannot afford to play politics when so much hangs in the balance.

  It’s time to wake up, America.

  To quote my hero: “[O]ur very survival depends on our ability to stay awake, to adjust to new ideas, to remain vigilant and to face the challenge of change. The large house in which we live demands that we transform this world-wide neighborhood into a world-wide brotherhood. Together we must learn to live as brothers or together we will be forced to perish as fools.”

  

  

  

  

  

• Offshore Yuan Weaker, Margin Debt Tumbles Ahead Of Key Chinese Data

  While all eyes will be glued to the data avalanche unleashed by China's 'official' data creators in an hour, offshore Yuan is fading modestly, giving back half of the regulatory shift gains. PBOC injects another CNY155 billion (clearly reflecting last night's spike in 1mth HIBOR) and holds the Yuan fix 'steady' for the 8th day. Finally on the somewhat bright side following the CSRC shief's resignation, Shanghai margin debt has dropped for the 12th day in a row – the longest streak in 4 months.

  PBOC fixed YUan "stable" for the 8th day in a row but injects Yuan 155 billion for good measure… The People’s Bank of China will inject 80b yuan into the banking system using 7-day reverse repurchase agreements, and 75b yuan via 28-day reverse repo today, according to traders at primary dealers required to bid at the auctions.

  

   

  Offshore Yuan just can't extend gains on the back of China's latest attempt to squeeze shorts…

  

   

  Meanwhile in what is relatively good news for the world's sanity:

  *SHANGHAI MARGIN DEBT POSTS LONGEST LOSING STREAK IN FOUR MONTHS

   

  

   

  The outstanding balance of Shanghai margin debt dropped for 12th consecutive day on Monday, matching longest losing streak ended on Sept. 2.

   

  Balance fell 0.3%, or 1.47b yuan, to 584b yuan for the lowest level since Oct. 9

  Which likely explains why the CSRC head quit – they lost the bubble! Luckily there is one still standing…

  

   

  Eyes down for +6.9% GDP growth…

  Charts: Bloomberg

  

  

  

  

  

• Demographic Doldrums: Visualizing 100 Years Of The Most Populous Countries

  Submityted by Jeff Desjardins vai The Visual Capitalist,

  “I think ageing demographics is a bigger issue in China than people think. And the problems it creates should be become evident as early as 2016.” – Stan Druckenmiller, a 2013 quote

  Over the last year, we’ve been very skeptical of the near-term potential for robust global economic growth.

  The media narrative throughout 2015 was that U.S. rates were on the rise, and that the American economy would finally normalize post-crisis. Stock and real estate prices reached record highs on this optimism, and many pundits expected growth and interest rates to return to more traditional levels.

  Over the last few months, we’ve noticed that this narrative has changed significantly. Even though the U.S. is doing “okay” for growth, the global economy is now more entwined than ever. It’s more challenging than ever before for one economy to prop up the rest during stagnation.

  Markets this year got off to their worst-ever start after jitters from China rippled through international markets. Oil has continued its plunge and is now trading near $30/bbl. Manufacturing is slowing in the United States. Europe and Japan are going nowhere, and the amount of global debt is starting to signal alarm bells.

  Finally, media and investors are accepting the idea that things may not normalize the way they “should”. Instead, the question has become more fundamental: are there even any bright spots in the first place?

  A major drive of this un-growth is demographics, or the changing composition of population over time.

  Today’s animation, which covers the change in populations over 100 years for the most populous countries, is a starting place for this.

   

  

  Courtesy of: Visual Capitalist

   

  The first point of interest is that by about the year 2000, all European countries dropped out of the rankings. At the beginning of the animation, the United Kingdom, Germany, France, and Italy were all there. Birth rates have declined to the lowest in the world, which establishes immigration as the only potential option for economic growth. With the recent events in Paris and the current backlash against Middle Eastern immigrants, this Catch-22 becomes even more interesting and important.

  Germany, in particular, faces a crucial demographic cliff. We aim to cover this in the very near future, since the country is an important engine for Europe.

  Another major point of interest, as we referenced in the opening quote, is the changing demographics of China. In the next decade or so, China’s population will stop growing altogether – and then it will start shrinking. This is the predictable aftermath of China’s one-child policy for many decades. The country still has a giant portion of the population that will continue to move up the ladder economically, but we will be looking at what these circumstances could mean as they loom closer.

  Lastly, the rise of India and Nigeria can’t be understated in importance. Both are home to the fastest growing cities in the world. Nigeria will pass the U.S. to become the third largest country in the world by population in the coming decades, and India could be the world’s next China.

  

  

  

  

• China's Housing Is Recovering, Just Ignore The 10 Billion Square Feet Of Vacant Housing

  While we await China’s fabricated and goalseeked Q4 GDP number (less than 3 weeks after the year end) which barring some even more humorous miracle will show China’s slowest growth in a quarter century, here is a quick recap of what the world’s second largest economy said about the most important part of its economy overnight.

  Why most important? Because as shown previously when remarking on the futility of China’s attempts to create a massive wealth effect by blowing an epic stock market bubble, in China the vast bulk of household wealth is allocated to real estate, unlike in the US, where three quarters of household net worth is in financial assets.

  

   

  According to China’s entertaining National Statistics Bureau, in December new home prices rose in 39 out of 70 cities, up from 33 cities in November, representing a 7.7% increase year-over-year in new home prices.

  On the surface this is great news for China, whose housing bubble had burst in early 2014 and which has been desperately doing everything in its power to reflate it once more. So was this the long-awaited light at the end of the tunnel? Not so fast. 

  As Reuters notes, the headline number masks China’s massive property problem – a vast amount of unsold apartments mainly in its smaller cities. “Property prices were rising fast in mega cities like southern Shenzhen, where prices rocketed by nearly 47%, Shanghai, up a healthy 15.5%, and Beijing, which posted a respectable 8% gain over a year ago.”

  But the recovery that began in October, after 13 months of straight decline, has only spread to just over half the 70 cities captured by official data, leaving others languishing far behind.

  The chart below shows the unprecedented divergence that has developed between prime Chinese cities and the rest of the nation.

  

  

   

  The last time Tier 1 home prices soared as much as they have relative to the rest of the nation in late 2013, China suffered its worst housing crash in recent history, leading to the bursting of the shadow banking bubble in late 2014 and the current hard landing predicament faced by most Chinese commodity producers.

  Why the surge in Tier 1? Simple: another round of massive government stimulus.

  Shanghai-based property consultancy Centaline noted new home sales hit a seven-year high in December thanks to a swathe of government measures to spur demand, and a series of interest rate cuts. Realtors are hopeful that buyers unable to afford the cities in the first two tiers will eventually go elsewhere.

  Unless, of course, like in the US, buyers only buy in specific locations because they hope to find a greater fool and flip it as a quick investment. Because last time we checked nobody is buying in North Dakota because New York was too expensive.

  This logic appears to have gained a foothold in China as well: Wang Jianlin, China’s richest man and chairman of property and entertainment conglomerate Dalian Wanda Group, said on Monday that it could take four to five years for the market to digest the inventory in tier three and four cities.

  “Sales are highly concentrated in first- and second-tier cities, where 36 top cities account for three-quarters of the total sales value. So the portion from third- and fourth-tier cities is very low. As long as they destock slowly, there is no problem,” he told the Asia Financial Forum in Hong Kong.

  Indeed, as the chart above quite clearly shows.

  So while prices in China’s Tier 1 cities are soaring, let’s put the country’s vacant housing problem in context: China has some 13 million homes vacant – enough to house the families of several small countries .

  Actually, it’s worse: Zhu Min, deputy managing director at the International Monetary Fund, recently admitted that China’s real estate bubble now manifests itself in 10. 7 billion square feet  (1 billion square meters) of unused housing! Min added that many housing stock go unused, and the market may see a significant price correction in the future, wiping out vast household wealth.
  

  According to the Epoch Times, “despite limited demand, many third- and fourth-tier cities are laden with huge housing inventories, forming a bubble which may burst, especially in view of the low transaction volume for new houses in these cities” said Zhang Dawei, superintendent of the market research department at Centaline Property, according to Mingtiandi, a website that reports on China’s property sector.

  According to Zhang Liqun, a researcher with a Chinese regime think tank, the bulk of China’s housing projects have shifted to smaller, so-called third- and fourth-tier cities. But market demand has not kept up, a fact that Zhang said could well lead to those cities becoming ghost towns.

  Because that is precisely what China needs: even more ghost towns.

  So with China’s GDP print, as fabricated as it may be, looming what does this mean for China’s economic growth?

  Even more bad news.

  “Property investment is expected to see a single-digit decline this year despite recovering home prices, so it will continue to weigh on GDP,” said Liao Qun, China chief economist at Citic Bank International in Hong Kong.

  For the first 11 months of 2015, property investment accounted for 13 percent of gross domestic product. But the sector’s multiplier effect on other industries, from building materials to white goods and furniture, means its impact on the economy is far greater.

  “Looking forward, the property market would continue to drag on the broad economy in 2016, with property investment probably showing weak growth momentum,” said Wang Jun, senior economist at the China Centre for International Economic Exchanges (CCIEE), a Beijing-based think-tank.

  And here is a spoiler alert: Premier Li Keqiang said this past Saturday that China’s economy grew by around 7% in 2015, which generated much laughter among the China-watchers, because if the currently global pre-recession environment is the result of China growing at 7%, one wonders just how acute the global depression will be when Chna grows at 5%, or 3%, or 1%, or stops growing altogether. 

  What does the Wall Street consensus expect? Just a fraction lower, or 6.9%.

  But analysts polled by Reuters have forecast fourth-quarter GDP data set to be released on Tuesday will show growth slipped to 6.9 percent last year, the slowest in a quarter century and down from 7.3 percent in 2014. China’s growth is expected to drop to 6.5% by the end of the year.

  The reality is that nobody has any clue what China’s real growth was in 2015, with estimate ranging as low as 1%. One thing is certain: whatever China’s National Bureau of Statistics reports GDP was in 2015, the real number will be far, far lower, and it will only drop from there once the commodity defaults begin in earnest.

  

  

  

  

  

• Mission Accomplished? The U.S. Spent Half A Billion On Mining In Afghanistan With "Limited Progress"

  Submitted by ProPubolica via TheAntiMedia.org,

  The United States has spent nearly half a billion dollars and five years developing Afghanistan’s oil, gas and minerals industries — and has little to show for it, a government watchdog reported today.

  The project’s failings are the result of poorly planned programs, inadequate infrastructure and a challenging partnership with the Afghan government, the Special Inspector General for Afghanistan Reconstruction wrote in its newest damning assessment of U.S. efforts in the war-torn country. The finding comes after some 200 SIGAR reports have detailed inefficient, unsuccessful or downright wasteful reconstruction projects. A recent ProPublica analysis of the reports found that there has been at least $17 billion in questionable spending.

  The United States Agency for International Development and a Pentagon task force were in charge of developing a so-called “extractive” industry in Afghanistan – basically a system for getting precious resources out of the ground and to the commercial market. SIGAR called out both USAID and the Defense Department last year for their failures to coordinate and to ascertain the ability of Afghans to sustain the project, which unsurprisingly is not promising. In fact, when international aid stopped supporting the Afghan office responsible for oversight of the petroleum and natural gas industries, two-thirds of the staff were fired.

  Exploiting these resources, which are estimated to be worth as much as $1 trillion, is pivotal to Afghanistan’s economic future. SIGAR noted that the Afghan government has shown progress under USAID’s tutelage in regulating and developing the commercial export of the resources. But the report said the project was still hampered by corruption, structural problems and a lack of infrastructure for the mining industry, such as reliable roads. Many of the mines operate illegally, with some profit going to the insurgency, SIGAR said.

  When it came to individual extractive projects, there was little progress made, the IG found.

  The controversial Pentagon task force in charge of much of the effort, the Task Force for Business Stability Operations, spent $215 million on 11 extractive programs, but “after operating in Afghanistan for 5 years, TFBSO left with nearly all of its extractive projects incomplete,” SIGAR found. Three of the programs technically met objectives, but one of those is of questionable value at best. The task force built a gas station for an outrageously inflated cost and in the end it didn’t have any customers. So while the objective to create the station was achieved, SIGAR doubted it was a worthwhile venture.

  The task force, made up of mostly civilian business experts and designed to develop the Afghan economy, has come under fire from SIGAR and Congress for demanding unusual and expensive accommodations in the country, allegedly punishing a whistleblower, and lacking overall accountability. The Senate is holding a hearing on the task force next week.

  In today’s report, SIGAR highlighted that the task force spent $46.5 million to try to convince companies to agree to develop the resources, but not one ended up signing a contract. About $122 million worth of task force programs had mixed results, SIGAR said.

  The Defense Department declined SIGAR’s request to comment on its findings. In its response, USAID said it has helped Afghanistan “enact investor-friendly extractive legislation, improve the ability to market, negotiate and regulate contracts, and generate geological data to identify areas of interest to attract investors.” Any conclusions and criticisms, USAID told SIGAR, “need to be substantially tempered by the reality that mining is a long-term endeavor.”

  

  

  

  

  

• Art Cashin: This Is "What You Get Before You Slip Into A Crisis"

  Via Christoph Gisiger of Finanz Und Wirtschaft,

  Wall Street veteran Art Cashin warns that bankruptcies in the US oil industry could cause severe stress in the financial system. He believes the rate hike of the Federal Reserve was a mistake.

  Around the globe financial markets are in turmoil. Alarming news out of China and the crash in the oil market is causing angst among investors everywhere. In the United States, the S&P 500 is down more than 8% since the beginning of the year. Art Cashin, director of floor operations for UBS at the New York Stock Exchange, thinks that the rate hike of the Federal Reserve is one of the main reasons for the sell-off in the stock market. The highly respected Wall Street veteran fears that America will fall into a recession if the Fed doesn’t change its course and lowers interest rates back to zero.

  Mr. Cashin, the pressure on the financial markets is rising. How’s the mood on the trading floor of the New York Stock Exchange?

  The mood is both concerning and frustrated. On Friday, we traded temporarily lower than we got during the August spike down. That is never a good indication and it is troublesome. Here in the US, there was some concern that the markets will be closed for a holiday on Monday whereas the exchanges in Europe and in Asia are going to be open. So a lot of investors were worried about the exposure they will have for this extra day.

  You’re working on the floor of the stock exchange for almost six decades. During that time you have seen many difficult moments. How severe is the situation right now?

  It is very similar to what you get before you slip into a crisis. Also, it’s earnings season and because of that many corporate buybacks have to be paused during this period. That removes an important potential support for the market. Over the last year, companies buying back their own stock have put more money into the market than all of the public has. The cessation of those buybacks is probably a reason why we’re seeing the rather sharp selling that has occurred.

  A main source of concern is the sharp drop in oil prices. Both, WTI and Brent, closed below $30 on Friday. Why is this causing so much havoc on Wall Street?

  Investors are concerned that many of the small and domestic producers here in the United States have money owned in the high yield market. So if oil prices continue to go lower they’re afraid that up to two thirds of those fracking companies may go into bankruptcy. They fear that through financial contagion those bankruptcies would then begin to spread into other areas of the financial markets.

  Are there already signs of contagion?

  Several market participants have been asked to put up more collateral to prepare for bad loans. Also, on Wednesday there were both rumors and indications that there was a good deal of forced selling going on. There were rumors that it could have been either a hedge fund or a sovereign wealth fund, maybe investors who are exposed to the oil prices. It could have been Saudi  Arabia or Norway. Forced selling and margin calls are very hard to deal with because such an investor basically has no latitude. Positions must be sold at any price and that’s very difficult for the market.

  Also, there is  alarming news coming out of China. What’s the problem here?

  On Friday, before trading started in New York, Chinese equity markets were down another 3,5% already overnight –  and that is despite the best efforts of the Chinese government and the central bank to keep prices from destabilizing.

  Then again, the US economy seems hardly to be related to China.

  China is the second biggest economy in the world. The US may not sell much to China. But many of our economic partners like the countries in Europe do have big markets with China. There are other aspects to the China problem, too: The Chinese currency is relatively pegged to the US dollar.

  What’s the problem with that?

  When the Fed began raising interest rates and the dollar strengthened it made the Chinese currency go higher which put China at a disadvantage. So the Chinese began to try to find ways to slightly weaken their currency and that is disruptive throughout all the other currencies in the emerging markets and the small Asian economies. Back in 1997 when Thai baht broke everybody thought that won’t mean too much since the US doesn’t deal too much with Thailand. But in fact what happened was it rapidly spread through the financial industry and a great deal of money was lost. So investors are worried of seeing something like that happening again.

  So you think the rate hike of the Federal Reserve is one of the main sources for all the turmoil?

  The Chinese currency isn’t the only one that is under some stress. For instance, the Saudi Arabian currency is also partially pegged to the dollar. So you’re seeing many other nations beginning to suffer somewhat in reaction to the Fed move to begin raising rates.

  The appreciation of the dollar is also putting pressure on the export sector in the United States. Manufacturing has slowed down significantly over the last months.

  In its hundred year history the Fed had never before raised rates with the ISM index for the manufacturing sector below fifty which is showing that the manufacturing sector is in somewhat of a recession. I think the Fed basically painted itself into a corner. In September, because of the turmoil in the international markets, they were afraid to raise rates and they said:  »We didn’t want to move with the markets destabilized.» Because of that they found some critics here in the US who said: »Hey, you’re the central bank of the United States and not the central bank of the world. Therefore, do worry about us and do what you think our economy requires. Don’t pay attention to other economies.» So when the December meeting came the Fed talked itself into a corner with no chance to change.

  On the other hand, many economists are seeing encouraging signs in the US labor market. In December payroll employment rose by over 290’000 and beat expectations handily.

  When you look closer into the numbers you see that 280’000 of those jobs were seasonal adjustments. In other words it wasn’t physical people standing there, it was an assumption by the Bureau of Labor Statistics. They said it was December and the weather normally is cold so they had to add on some people. And If you went over to the household survey you saw that 35% of the new jobs were people under the age of nineteen. In fact, only 3% of the jobs went to people in the prime category between the ages of 25 and 55. So the vast majority of the new jobs went to people under 24 and over 55. To me, that looked liked holiday hiring: people who make deliveries, wrap packages etc. These are not long lasting jobs. That’s why I think the next couple of payroll numbers will not show that kind of strength.

  So was it a policy mistake to raise rates?

  Yes, I thinks so. I believe we may be back at zero percent interest rates before we see one percent interest rates. I think the Fed will wind up having to do that to try to avoid a recession. Before they moved Christine Lagarde, the head of the IMF, told them they shouldn’t move. Larry Summers, the former secretary of the Treasury, told them they shouldn’t move. The Bank of International Settlements told them they shouldn’t move. But they insisted upon it and I think part of the turmoil that we are seeing now is indirectly connected with the Fed’s decision to go ahead.

  But on the day the Fed raised rates for the first time since the financial crisis many investors applauded and stock prices rallied. Why has the mood soured?

  The rate hike had to work its way through the system. Investors had to see what would happen to the Chinese currency and how the Chinese central bank and the Chinese government respond to what happened to their currency. Not a lot of people guessed that immediately when they saw that the Fed raised the rate. It’s now working through the system and it’s contributing to the turmoil that we’re experiencing.

  Looking ahead, what’s going to happen next?

  The bumpy ride is probably not over yet. I would remain very careful. I think efforts have to be made to stabilize the oil price. Investors have to review their risk exposure. So make sure you’re on guard.

   

  

  

  

  

  

• Regrets

  We’ve got a few…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Negative Oil Prices Arrive: Koch Brothers' Refinery "Pays" -$0.50 For North Dakota Crude

  Do you have some extra space in your garage or attic? Or perhaps you own an oil tanker you aren’t currently using. Or maybe you have a storage unit that’s got a little extra room next to an old mattress and box springs.

  If so, you may want to call up oil producers in North Dakota and ask if they’d care to send you some free oil, because the crude glut is now so acute that the Koch brothers are actually charging $0.50/bbl to take low grade oil at their Flint Hills Resources refining arm.

  
  

  North Dakota Sour is a high-sulfur grade of crude and “is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground,” Bloomberg notes, citing John Auers, executive vice president at Turner Mason & Co. in Dallas. “The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.”

  High-sulfur grades are more expensive to refine and thus fetch lower prices at market. As Bloomberg goes on to note, “Enbridge stopped allowing high-sulfur crudes on its pipeline out of North Dakota in 2011, forcing North Dakota Sour producers to rely on more expensive transport such as trucks and trains [and] the price for Canadian bitumen — the thick, sticky substance at the center of the heated debate over TransCanada Corp.’s Keystone XL pipeline — fell to $8.35 last week, down from as much as $80 less than two years ago.”

  

  So there you have it. The global deflationary supply glut has now reached the point that the market is effectively forcing producers to pay to give their oil away or else see it sit in bloated storage facilities until Riyadh decides enough is enough and until the world comes to terms with the return of Iranian supply. In other words, for some US producers the business isn’t just loss making, it’s an exercise in sadomasochistic futility.

  Meanwhile, MLP Plains All American is quoting Colorado Southeastern, Nebraska Intermediate, Eastern Kansas Common Special, and Oklahoma Sour at just $16.50/bbl, $16.00/bbl, $12.20/bbl, and $13.50/bbl, respectively.

  

  The message for the Wells Fargos and Citis of the world: you’re going to need a bigger loan loss reserve.

  It’s no wonder the Dallas Fed suspended mark-to-market on energy debts – there’s no market to mark to.

  

  

  

  

  

• Sage Investment Advice From Mike Tyson

  Submitted by Tim Price via SovereignMan.com,

  In a crisis, it helps to have good counsel. Consider the following sage advice from investment strategist Mike Tyson:

  “Everyone has a plan ‘til they get punched in the mouth.”

  Or as German military strategist Helmuth von Moltke the Elder put it, somewhat more formally:

  “No battle plan ever survives contact with the enemy.”

  The enemy has been quick to show himself this year, in the form of a bear market, at least for stocks.

  This bear has so far been quick, and indiscriminate: the US; Europe; China; stock markets have fallen sharply, internationally.

  Investors, being human, have scrambled in search of an explanatory narrative.

  Some have blamed the Fed’s baby steps towards raising interest rates. Some blame the collapse in the oil price.

  Last week’s movie night showed David Cronenberg’s 2012 thriller ‘Cosmopolis’, which has Robert Pattinson playing a 28-year-old hedge fund billionaire losing his entire fortune in a single day due to the unexpected rise of the Chinese renminbi.

  Other than getting the direction of the renminbi wrong, the movie could have been shot yesterday.

  But it has certainly been a good week for bears.

  Last week RBS told us to “Sell everything except high quality bonds”. This is somewhat problematic since there aren’t actually any high quality bonds out there.

  Tuesday brought us SocGen’s Global Strategy Conference, where guest speaker Russell Napier pointed out that growth in emerging market foreign exchange reserves from 2008 to 2014 amounted to the most rapid increase in emerging market money supply in history.

  As this process goes into reverse, emerging market growth will clearly suffer.

  And since many emerging market countries have over-borrowed in foreign currencies, the fighting in the global currency wars is set to get more intense this year.

  As Napier warns, 2016 has also ushered in new rules requiring bond and deposit holders to be bailed in when banks blow up.

  The EU (and many of its bank depositors) will come to regret not restructuring their banking system during the seven years post-Lehman when they had the opportunity.

  The search for an easy narrative to explain the bear market is probably a waste of time. The financial market is a complex adaptive system and investors are prone to irrational behaviour and mood swings.

  They are also prone to overpay. The great ‘value’ investor Benjamin Graham reminded us that,

  “Operations for profit should be based not on optimism but on arithmetic.”

  The optimists have had things their own way in an almost unbroken line since March 2009. January 2016 so far would suggest that the pragmatists are now in charge.

  So the pragmatic response to this month’s volatility – if any is indeed required at all – is as follows:

  1) Diversify by asset type.

   

  2) Limit or eliminate exposure to emerging market debt. Raise cash rather than cling to a benchmark with no conviction (and no obvious value).

   

  3) Concentrate any debt exposure to bonds issued by creditors, not debtors.

   

  4) Limit equity exposure to high quality and inexpensive markets offering a ‘margin of safety’. (Most of the US market does not qualify in this regard.) Russell Napier recommends Japanese equities, currency hedged, and so do we. And in a bear market, you don’t want to own expensive growth, you want to own defensive value.

   

  5) Complement traditional investments with alternatives. We would advocate systematic trend-following funds (which can profit in bear markets just as they did in 2008), and gold – the one form of currency that comes with no counterparty risk because it is the one asset that is no-one’s liability.

   

  6) Limit your exposure to mainstream financial media, and especially to economists employed by commercial banks.

  

  

  

  

  

• Dollar-Based Investors Eviscerated in Global Stocks

  In Saudi Arabia, the Tadawul All Share Index plunged 5.4% on Sunday and dropped further on Monday before ticking up a smidgen. It’s at the lowest level since March 2011. Soothsayers blamed oil, and what Iran will do to the already oversupplied oil market now that the nuclear sanctions have been lifted. But Saudi stocks started losing it in September 2014 and have since collapsed 50%.

  Russia’s MICEX stock market index is down only 13% from its high in November, 2015. But the RTSI dollar-calculated index of Russian shares plunged over 7% on Monday as I’m writing this, is down 40% since May 2015 and 70% since August 2011. Every big rally in between was followed by an even bigger slide. The major difference between the dollar-calculated RTSI and the ruble-calculated MICEX is the value of the ruble, which has plunged 2% today to 79.3 rubles to the dollar, a new all-time low. It’s down 57% against the dollar since mid-2014 and 64% since mid-2011. The Central Bank isn’t even trying anymore to prop it up.

  China’s Shanghai Composite is down 44% from its high in June 2015. During that time, the yuan has dropped about 6% against the dollar. So dollar-based investors took an additional loss, with the total loss amounting to over 52% (not including transaction costs and fees).

  Dollar-based investors, when they buy foreign stocks, make two bets: that those stocks rise; and that the currency of those stocks at least remains stable against the dollar. When they catch it right, with both stocks and currency going up, the returns can be breath-taking. But the opposite happens when both go down, as they’ve been doing recently. And dollar-based investors are getting totally crushed.

  There has been a lot of moaning and groaning about the decline in US stocks, with the S&P 500 down 12% from its all-time high in May last year, the Dow down 13%, and the Nasdaq down 14%. After seven years of bull market, those declines have a bone-chilling effect. No one is used to losing money in stocks anymore. A whole new generation of traders and investors never experienced a big loss.

  But those declines are still puny compared to what happened in past downdrafts in the US markets, and they’re puny compared what is already happening among the major indexes around the world. In fact, the beaten-down US indexes are the world’s best performers!

  This chart shows the plunges or crashes of the major indexes since their respective recent highs in 2014 or 2015. The one exception is the dollar-calculated index of Russian stocks, the RTSI$, which has been a dreary affair all the way back to 2011; hence the decline calculated since that date.

  Note the ever longer list of markets that have now dropped 20% or more from their recent highs (below the blue line) and are in what a lot of people call a bear market. India’s Sensex and the Nikkei are a hair away from sinking below the blue line (US as of Friday close, Toronto as of Monday morning, Asia as of Monday close, Europe as of Monday afternoon):

  

  So, add those equities-based losses to the currency-based losses for dollar-based investors, and suddenly some of these indexes are starting to look like the dollar-calculated RTSI. For dollar-based investors, it has been brutal out there.

  So why can’t central banks step in and stem the bleeding and restart the good times?

  The answer lies in the Eurozone: France is down 21% from the highs in April; Germany 23%; Spain 29%; and Italy takes the crown with a 45% plunge.

  These are the big four economies of the Eurozone. In early 2015, the ECB has unleashed a massive wave of QE and inflicted negative deposit rates on the Eurozone in an effort to flog savers until their mood improves and to drive asset prices up into the sky to create that special wealth effect. That worked wonderfully during the run-up before the well-telegraphed QE and NIRP became reality. But since April, the wealth effect has reversed. The ECB has since enhanced QE, but stock market losses have only increased.

  Turns out, our delicious central-bank alphabet soup of QE, ZIRP, and NIRP is losing its effectiveness in inflating stock prices. In fact, it may have the opposite effect. Also look at Japan and Sweden. Despite massive QE programs by their central banks, their stock markets have dropped 19% and 24% respectively.

  There’s no longer any guarantee that QE, even a much hoped-for QE4 in the US, will re-inflate stock markets. That era has passed. Central banks have lost their aura of omnipotence. And thus, they’ve lost their omnipotence.

  However, when it comes to government bonds, central banks still rule; QE, ZIRP, and NIRP still pump up bond prices and repress yields. Hence the low yields prevailing in fiscally challenged countries such as Japan and Italy. But at the low end of corporate bonds in the US — the lower end of junk bonds — the bottom has already fallen out, and rot is creeping up the rating scale.

  A special mention is due Canadian stocks. The TSX has been beaten down 28% since August 2014. Canada is in part a resource economy. Oil & gas, metals & mining, agricultural commodities, lumber, etc. have gotten caught up in a vicious commodities rout. But other stocks have gotten hammered too, including Canada’s formerly must-own hedge-fund darling and stock-market giant Valeant.

  During the time that the TSX swooned from its high in August 2014, the Canadian dollar also dropped 25% against the US dollar. A nightmare for USD-based investors.

  For instance, if USD-based investors in mid-August 2014 bought US$100 worth of Canadian dollars (C$109.50) and invested them in a Canadian index fund that parallels the TSX, they would have lost C$29.67 on those stocks by Friday. If they sold on Friday, they would have obtained C$79.83. They’d then convert that fortune into USD by paying C$1.45 per greenback and end up with US$55.05. A 45% loss. More realistically, including transaction costs and fees at every step, the loss would have been over 50%.

  So how well has the highly touted, strongly urged, even must-do diversification into global equities worked out recently? It has been a massive fee-generating Wall-Street bonanza for one side, and a slickly-engineered form of capital destruction for the other.

  Because in the markets, something big has changed. Read… Consensual Hallucination Fades, Global Stocks Crushed

  

  

  

  

• Italian Banks Collapse, Short Sales Banned As Loan Loss Fears Mount

  Italian bank stocks are crashing (with BMPS down 40% year-to-date) as Reuters reports that investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid. The broad banking sector is down 4% with stocks suspended, and in light of this bloodbath, Italian regulators have decided in their wisdom, to ban short-selling of some bank stocks (which has driven hedgers into the CDS market, spking BMPS credit risk).

  Italy's banking index was down over 4 percent with shares in several lenders, including the country's biggest retail bank Intesa Sanpaolo and the third biggest lender Banca Monte dei Paschi di Siena, suspended from trading after heavy losses.

  Bloodbath for Italian financials in 2016…

  

   

  But don't worry:

  • *MONTE PASCHI CEO CONFIRMS FINANCIAL STABILITY OF BANK
  • *MONTE PASCHI CEO: STOCK DECLINE NOT JUSTIFIED BY FUNDAMENTALS

  As Reuters reports,

  Investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid.

   

  Those concerns are trumping expectations about a wave of consolidation set to sweep the sector, with cooperative banks under pressure to merge following a government reform to reduce the number of lenders.

   

  JP Morgan said this month Italian banks should be avoided because low rates are expected to put pressure on revenues more than in other countries and credit problems limit a recovery in provisions.

   

  Traders have suggested exiting investments that have been particularly favoured, such as Popolare di Milano and Intesa, as the stocks have reached key supports.

   

  "I think upside on cooperative banks this year is much more limited," said a London-based equity sales person.

   

  Short interest in Popolare di Milano soared 50 percent to 1.1 percent in the last month, and it rose 10 percent to 3.9 percent for UBI, according to Markit data.

  And now, Italian regulators have re-enforced a short-selling ban (because that has always worked so well in the past)…

  Consob adopts a temporary ban on short selling on Banca MPS shares.The ban shall apply immediately and shall last until Tuesday 19 January 2016 end of day.

   

  Consob decided to temporary prohibit short sales of the share Banca MPS (ISIN code IT0005092165).

   

  The ban will apply immediately and will be enforce for the entire trading session of tomorrow, Tuesday 19 January 2016, on the MTA market of Borsa Italiana.

   

  The prohibition was adopted pursuant to Article 23 of the EU Regulation on short selling, considering the price change recorded by the share on 18 January 2016 (in excess of 10%).

   

  The prohibition applies to short sales backed by stock lending. This extended the scope of the prohibition of naked short selling, already in force for all shares from 1st November 2012 by virtue of the EU Regulation on short selling.

  And so hedgers have shifted to other markets – spiking default risk across the entire group, soaring back towards pre-"whatever it takes" levels…

  

  Get back to work Mr Draghi.

  

  

  

  

  

• "Countdown To The End": EU Officials Say Europe Is "Going Down The Drain"

  Back in September, when Berlin and Brussels were busy devising a quota plan to settle the millions of Mid-East asylum seekers flooding into the country, Slovakia said that if Germany called for financial penalties against countries unwilling to accommodate their “share” of migrants, it would be “the end of the EU.”

  That might have seemed hyperbolic at the time, but since then, the situation has spiraled out of control. Border fences have been erected, refugee camps are overflowing, and anti-migrant sentiment is running high after a series of reported sexual assaults on New Year’s Eve sparked a bloc-wide scandal.

  In a testament to just how tense things have become, Austria suspended Schengen on Saturday as new rules came into effect for those seeking to traverse the country on the way north.  “Anyone who arrives at our border is subject to control,” Chancellor Werner Faymann said. “If the EU does not manage to secure the external borders, Schengen as a whole is put into question… Then each country must control its national borders,” he added, before warning that if the EU could not better control its external borders “the whole EU [will be] in question.”

  Indeed, the idea that the worsening migrant crisis could well bring an end to the EU has made its way out of Eurosceptic circles and into discussions between the bloc’s top diplomats and officials.

  “The Germans, founders of the postwar union, shut their borders to refugees in a bid for political survival by the chancellor who let in a million migrants,” Reuters wrote on Sunday, describing a hypothetical European endgame. “And then — why not? — they decide to revive the Deutschmark while they’re at it.” 

  Both Angela Merkel and Jean-Claude Juncker were out last week with stark warnings about the prospects for the union’s survival in the face of widespread disagreement among member countries regarding how to handle the influx of asylum seekers. Europe is now “vulnerable” Merkel admitted, before saying the fate of the euro is “directly linked” to how the bloc handles the refugee crisis. “Nobody should act as though you can have a common currency without being able to cross borders reasonably easily,” the Chancellor, whose ratings have slipped amid the migrant debate, said at a business event in Mainz.

  Juncker’s assessment was more dire. Europe “is on its last chance” he warned, before saying he hopes this isn’t “the beginning of the end.” 

  “Some see that as mere scare tactics aimed at fellow Europeans by leaders with too much to lose from an EU collapse,” Reuters continues. “[But] empty threat or no, with efforts to engage Turkey’s help showing little sign yet of preventing migrants reaching Greek beaches, German and EU officials are warning that without a sharp drop in arrivals or a change of heart in other EU states to relieve Berlin of the lonely task of housing refugees, Germany could shut its doors, sparking wider crisis this spring.”

  Make no mistake, were Germany to stop accepting refugees, a dangerous chain of events would unfold just as warmer weather makes the journey more appealing for refugees. Arrivals have not slowed during the winter months, a senior conservative German lawmaker said. “You can only imagine what happens when the weather improves.” If Germany’s open-door slams shut in the spring, millions of asylum seekers would be stuck along the Balkan route where bottlenecks led to border clashes between Hungarian riot police and migrants last year. 

  Croatia, Serbia, and Slovenia are in no position to accommodate the influx. Indeed, Slovenian officials have long said that the only reason the tiny country has been able to cope is because just as many migrants leave each day on their way to Germany and Austria as enter via Croatia. On Monday, Slovenian PM Miro Cerar said that “if Germany or Austria adopt certain measures for stricter controls then of course we will adopt similar strict measures with our southern border with Croatia.”

  “Millions, and I stress millions of migrants from Afghanistan, Iraq, Syria, Algeria, Morocco are ready to enter the EU once the weather improves in the coming months,” he cautioned.

  The EU Commission sought to play down Austria’s implementation of border controls, saying it’s “nothing out of the ordinary.” Of course any emergency measure is “out of the ordinary” by definition. Border checks will continue until at least February. 

  Meanwhile, each passing day seems to present a new reason for Europeans to become increasingly disaffected with officials’ handling of the crisis. Two days ago for instance, German FinMin Wolfgang Schaeuble proposed a bloc-wide petrol tax to fund the cost of securing the EU’s external borders. While Europeans will surely support the notion that the EU needs to better secure the chokepoints through which the majority of asylum seekers enter, migrants will now be equated with higher prices as the pump just as they are becoming synonymous with terror and sexual assaults.

  Ultimately, it appears that Germany is beginning to crack. While Merkel has been careful to preserve the “yes we can” narrative, reality is setting in and the cold facts suggest that Europe simply cannot accommodate the people flows. It now appears that it is not a matter of “if” but rather “when” the Iron Chancellor finally gives in and shuts the doors, and on that note, we’ll close with two quotes from German and EU officials who spoke to Reuters “in private.”

  “We have until March, the summer maybe, for a European solution. Then Schengen goes down the drain.”

   

  “There is a big risk that Germany closes. From that, no Schengen … There is a risk that February could start a countdown to the end.”

  

  

  

  

  

• Crash Risk & The Imminent Likelihood Of Recession

  Via John Hussman's Weekly Market Comment,

  Since October, the economic evidence has shifted from supporting a growing risk of recession, to a guarded expectation of recession, to the present conclusion that a U.S. recession is not only a risk but an imminent likelihood, awaiting confirmation that typically only emerges after a recession is actually in progress. The reason the consensus of economists has never anticipated a recession is that so few distinguish between leading and lagging data, so they incorrectly interpret the information available at the start of a recession as “mixed” when, placed in proper sequence, the evidence forms a single, coherent freight train.

  While I’m among the only observers that anticipated oncoming recessions and market collapses in 2000 and 2007 (shifting to a constructive outlook in-between), I also admittedly anticipated a recession in 2011-2012 that did not emerge. Understand my error, so you don’t incorrectly dismiss the current evidence. Though not all of the components of our Recession Warning Composite were active in 2011-2012, I relied on an alternate criterion based on employment deterioration, which was later revised away, and I relied too little on confirmation from market action, which is the hinge between bubbles and crashes, between benign and recessionary deterioration in leading economic data, and between Fed easing that supports speculation and Fed easing that merely accompanies a collapse.

  Much of the disruption in the financial markets last week can be traced to data that continue to amplify the likelihood of recession. Remember the sequence.

  The earliest indications of an oncoming economic shift are observable in the financial markets, particularly in changes in the uniformity or divergence of broad market internals, and widening or narrowing of credit spreads between debt securities of varying creditworthiness. The next indication comes from measures of what I’ve called “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter. The last to move are employment indicators – starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment.

  Last week, following a long period of poor internals and weakening order surplus, we observed fresh declines in industrial production and retail sales. Industrial production has now also declined on a year-over-year basis. The weakness we presently observe is strongly associated with recession. The chart below (h/t Jeff Wilson) plots the cumulative number of month-over-month declines in Industrial Production during the preceding 12-month period, in data since 1919. Recessions are shaded. The current total of 10 (of a possible 12) month-over-month declines in Industrial Production has never been observed except in the context of a U.S. recession. Historically, as Dick Van Patten would say, eight is enough.

  

  A broad range of other leading measures, joined by deterioration in market action, point to the same conclusion that recession is now the dominant likelihood. Among confirming indicators that generally emerge fairly early once a recession has taken hold, we would be particularly attentive to the following: a sudden drop in consumer confidence about 20 points below its 12-month average (which would currently equate to a drop to the 75 level on the Conference Board measure), a decline in aggregate hours worked below its level 3-months prior, a year-over-year increase of about 20% in new claims for unemployment (which would currently equate to a level of about 340,000 weekly new claims), and slowing growth in real personal income.

  Valuations, market internals, and crash risk

  It’s largely irrelevant whether the Federal Reserve made a “policy mistake” by raising interest rates in December. As I’ve noted before, that would vastly understate the actual damage contributed by the Fed. The real policy mistake was to provoke years of yield-seeking speculation through Ben Bernanke’s deranged policy of quantitative easing. Just as the global financial collapse was the result of years of unbridled yield-seeking speculation in mortgage securities, the growing economic disruptions in the developing world are the result of years of unbridled yield-seeking capital flows that resulted from that policy, and the copycat behavior of other global central banks. The record ratio of corporate debt to corporate gross value added (GVA), and the elevation of equity market capitalizations to the highest ratio of GVA in history, outside of the 2000 bubble peak, have the same origins.

  Understand that just as mortgage securities were the primary objects of yield-seeking speculation during the housing bubble, equity securities have been the primary objects during the QE-bubble. This is not merely because of direct speculation and record levels of margin debt among investors. As covenant-lite debt issuance soared in recent years, the primary use of the proceeds was not the accumulation of productive capital goods and equipment, but rather financial speculation in the form of acquisitions, leveraged buyouts, and corporate stock repurchases at historically rich valuations. Once valuations become obscenely elevated, a wicked downside is unavoidably baked in the cake. That downside will emerge primarily during periods such as the present, where deterioration in market internals suggests risk-aversion among investors, in contrast to the internal uniformity that prevailed until mid-2014, which reflected a broad willingness among investors to speculate and embrace greater exposure to risk assets.

  To see how both corporate debt and equity capitalizations have soared to record levels relative to corporate GVA, and to understand why these imply dismal investment returns over the coming 10-12 years, see The Next Big Short: The Third Crest of a Rolling Tsunami. That commentary also includes a box detailing my own errors in the recent half cycle and the adaptations we introduced as a result, which require explicit deterioration in market internals (as we presently observe) before taking a hard-negative outlook. I openly discuss my own stumbles so that adherents and critics alike might benefit from the right lessons, before it becomes too late to do so.

  We’ll certainly welcome outcomes that better reflect our experience in other complete market cycles, but we won’t do touchdown dances if the market collapses. The likely distress as the current market cycle is completed is something I wish on nobody. The unfortunate reality is that someone will have to hold stocks over the completion of this cycle, and it would best be those who have either carefully evaluated and dismissed our concerns, or those who have appropriate risk tolerances and investment horizons to weather the likely 40-55% loss in the S&P 500 that would comprise a rather run-of-the-mill retreat from the 2015 valuation extremes.

  Our concerns about both the economy and the financial markets would be less immediate if we were to observe uniformly favorable market internals across a broad range of individual stocks, industries, sectors, and security types (including debt securities of varying creditworthiness). Instead, we currently observe negative leadership, weak breadth, and dismal participation, with only 17% of individual stocks still above their own respective 200-day moving averages. Meanwhile, credit spreads spiked to fresh highs last week.

  On a short-term basis, dismal market internals may be indicative of oversold conditions, but the prospect of a recovery on that basis is extremely unreliable in an environment where valuations remain extreme and market internals demonstrate few positive divergences. I continue to believe that a break of the prior support area around 1820-1850 on the S&P 500 could be the catalyst for self-reinforcing panic selling pressure among trend-following investors.

  Unfortunately, on historically reliable measures of value, current prices are nowhere near the levels that would be expected to produce adequate long-term total returns (see Rarefied Air: Valuations and Subsequent Market Returns). So there is presently an enormous chasm between the point where self-reinforcing selling pressure by speculators is likely to emerge, and the much lower point where balancing buying pressure by value-conscious investors is likely to support the market. Because every seller necessarily requires a buyer, the enormous gap between the two represents substantial crash risk.

  Remember that our own central lesson in recent years was to avoid inadvertently prioritizing overextended conditions (e.g. overvalued, overbought, overbullish) over-and-above the condition of market internals. Provided that market internals are uniformly favorable, even obscenely overvalued markets tend to be resistant to severe losses, and are instead inclined to become even more overvalued. Conversely, it would be a mistake here to prioritize short-term oversold conditions over-and-above the dismal behavior of market internals and credit spreads, particularly given that overvaluation remains extreme on reliable measures. In the current environment, oversold conditions are prone to becoming even more deeply oversold, not only because internals are weak, but because the economic evidence is quickly confirming an oncoming recession that remains almost universally denied by market participants.

  

  

  

  

  

• America's Cash Flow Negative Energy Companies Have $325 Billion In Debt Among Them

  With the topic of distress among U.S. oil and gas exploration and production companies becoming more important with every passing day that oil not only continues to drop, but certainly fails to rebound to levels that allow US energy companies to return to a cash flow positive state, we would like to show just how much debt is at stake.

  To do that, drawing inspiration from a tweet by J Pierpont Morgan, we have conducted a quick CapIQ sort through all US energy companies – both public and private – that have at least $100 million in annual revenue, and whose EBITDA less CapEx was a negative number in the LTM period.

  To be sure, this gives listed companies the benefit of not only higher EBITDA in the early quarters when the drop of oil was not as severe, but also of oil price hedges. As such as the true negative cash flow going forward assuming no rebound in the price of oil for the foreseeable future will be far worse as the benefit of the base effect dissipates with every passing quarter and as oil price hedges, which have so far cushioned the oil price blow, are unwound.

  Here are the results:

  • There are roughly 80 U.S. companies that had $100mm in LTM revenue and that had negative FCF or EBITDA less CapEx.
  • The combined market cap of these 80 companies is just shy of half a trillion dollars.
  • The combined Total Enterprise Value of these 80 companies is $775 billion.
  • The combined debt of these 80 companies is $325 billion.

  None of these companies are bankrupt, yet. As a reminder, putting as many of these companies out of business, and thus slashing non-OPEC oil production (as OPEC forecasted in its latest bulletin earlier today), is the primary motive behind Saudi Arabia’s relentless pumping spree.

  

   

  There is just one problem with the Saudi plan: even assuming all of these companies file Chapter 11, all that would happen is their debt would be wiped out, with the existing creditors getting the equity keys, and becoming the new owners of streamlined, debt-free corporations. This would means that the All In Cost Of Production would plunge as no debt payments would have to be satisfied with the free cash flow. Meanwhile, the entire existing E&P infrastructure would still be in place and ready to pump as before.

  This means that after the default and debt-for-equity deluge, US shale would be able to pump even more at far lower breakeven costs, forcing Saudi Arabia to overproduce for even longer ultimately shooting itself in the foot when its reserves run out!

  Of course, none of this is any comfort for those who have exposure to the pre-petition debt, which may explain why various regional Feds are suddenly so very defensive when it comes to US banks and other lenders who are on the hook when the default tsunami finally hits.

  

  

  

  

  

• And The Winner Of The Democrat Debate Is…

  Judging from the unbiased mainstream liberal media, Hillary Clinton won the Democratic debate last night thanks to her "formidable" performance "combined with her intelligence." The puke-worthy gushfest from Slate.com can de read here, but is summarized best as follows:

  

   

  The National Journal is a little more "balanced" –

  

   

  And here's the critical moment – in our opinion…

   

  "The first difference is I don't take money from big banks. I don't get personal speaking fees from Goldman Sachs," Sanders said.

   

  Clinton and Sanders then tussled at length over Wall Street regulations.

   

  "Goldman Sachs [was] recently fined $5 billion," he said. "Goldman Sachs has given this country two secretaries of Treasury — one on the Republicans, one on the Democrats."

   

  He continued by addressing Clinton directly: "You've received over $600,000 in speaking fees from Goldman Sachs in one year. I find it very strange that a major financial institution that pays $5 billion in fines for breaking the laws, not one of their executives is prosecuted while kids who smoke marijuana get a jail sentence."

  Which makes us wonder how the mainstream continues to suckle at the Clinton teet, when this data is exposed…

  

   

  As we recentlty reported Hillary is now doing worse than in 2008 which explains the unbiased media's desperation to talk up her debate performance.

  

  

  

  

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• Doug Casey: Why Do We Need Government?

  Submitted by Doug Casey via CaseyResearch.com,

  Rousseau was perhaps the first to popularize the fiction now taught in civics classes about how government was created. It holds that men sat down together and rationally thought out the concept of government as a solution to problems that confronted them. The government of the United States was, however, the first to be formed in any way remotely like Rousseau's ideal. Even then, it had far from universal support from the three million colonials whom it claimed to represent. The U.S. government, after all, grew out of an illegal conspiracy to overthrow and replace the existing government.

  There's no question that the result was, by an order of magnitude, the best blueprint for a government that had yet been conceived. Most of America's Founding Fathers believed the main purpose of government was to protect its subjects from the initiation of violence from any source; government itself prominently included. That made the U.S. government almost unique in history. And it was that concept – not natural resources, the ethnic composition of American immigrants, or luck – that turned America into the paragon it became.

  The origin of government itself, however, was nothing like Rousseau's fable or the origin of the United States Constitution. The most realistic scenario for the origin of government is a roving group of bandits deciding that life would be easier if they settled down in a particular locale, and simply taxing the residents for a fixed percentage (rather like "protection money") instead of periodically sweeping through and carrying off all they could get away with. It's no accident that the ruling classes everywhere have martial backgrounds. Royalty are really nothing more than successful marauders who have buried the origins of their wealth in romance.

  Romanticizing government, making it seem like Camelot, populated by brave knights and benevolent kings, painting it as noble and ennobling, helps people to accept its jurisdiction. But, like most things, government is shaped by its origins. Author Rick Maybury may have said it best in Whatever Happened to Justice?,

  "A castle was not so much a plush palace as the headquarters for a concentration camp. These camps, called feudal kingdoms, were established by conquering barbarians who'd enslaved the local people. When you see one, ask to see not just the stately halls and bedrooms, but the dungeons and torture chambers.

   

  "A castle was a hangout for silk-clad gangsters who were stealing from helpless workers. The king was the 'lord' who had control of the blackjack; he claimed a special 'divine right' to use force on the innocent.

   

  "Fantasies about handsome princes and beautiful princesses are dangerous; they whitewash the truth. They give children the impression political power is wonderful stuff."

  IS THE STATE NECESSARY?

  The violent and corrupt nature of government is widely acknowledged by almost everyone. That's been true since time immemorial, as have political satire and grousing about politicians. Yet almost everyone turns a blind eye; most not only put up with it, but actively support the charade. That's because, although many may believe government to be an evil, they believe it is a necessary evil (the larger question of whether anything that is evil is necessary, or whether anything that is necessary can be evil, is worth discussing, but this isn’t the forum).

  What (arguably) makes government necessary is the need for protection from other, even more dangerous, governments. I believe a case can be made that modern technology obviates this function.

  One of the most perversely misleading myths about government is that it promotes order within its own bailiwick, keeps groups from constantly warring with each other, and somehow creates togetherness and harmony. In fact, that's the exact opposite of the truth. There's no cosmic imperative for different people to rise up against one another… unless they're organized into political groups. The Middle East, now the world's most fertile breeding ground for hatred, provides an excellent example.

  Muslims, Christians, and Jews lived together peaceably in Palestine, Lebanon, and North Africa for centuries until the situation became politicized after World War I. Until then, an individual's background and beliefs were just personal attributes, not a casus belli. Government was at its most benign, an ineffectual nuisance that concerned itself mostly with extorting taxes. People were busy with that most harmless of activities: making money.

  But politics do not deal with people as individuals. It scoops them up into parties and nations. And some group inevitably winds up using the power of the state (however "innocently" or "justly" at first) to impose its values and wishes on others with predictably destructive results. What would otherwise be an interesting kaleidoscope of humanity then sorts itself out according to the lowest common denominator peculiar to the time and place.

  Sometimes that means along religious lines, as with the Muslims and Hindus in India or the Catholics and Protestants in Ireland; or ethnic lines, like the Kurds and Iraqis in the Middle East or Tamils and Sinhalese in Sri Lanka; sometimes it's mostly racial, as whites and East Indians found throughout Africa in the 1970s or Asians in California in the 1870s. Sometimes it's purely a matter of politics, as Argentines, Guatemalans, Salvadorans, and other Latins discovered more recently. Sometimes it amounts to no more than personal beliefs, as the McCarthy era in the 1950s and the Salem trials in the 1690s proved.

  Throughout history government has served as a vehicle for the organization of hatred and oppression, benefitting no one except those who are ambitious and ruthless enough to gain control of it. That's not to say government hasn't, then and now, performed useful functions. But the useful things it does could and would be done far better by the market.

   

  

  

  

  

  

• What Crisis Is The Gold/Oil Ratio Predicting This Time?

  The number of barrels of oil that a single ounce of gold can buy has never, ever been higher.

   

  

   

  For the last 30 years, when the ratio of gold-to-oil spikes, something systemically serious occurs globally (as opposed to the usual bullshit “this is transitory” statements).

   

  So what happens next?

  

  

  

  

  

• Caught With Our Pants Down In The Gulf

  Submitted by Justin Raimondo via AntiWar.com,

  Your bullshit-ometer should be making an awful racket in response to the shifting explanations given for the twenty-four-hour Iranian hostage scare involving two US Navy boats intercepted in the Gulf.

  First they told us “at least one of the boats” had experienced a “mechanical failure.” Then they said the boats had run out of fuel, although it wasn’t clear if they meant both boats. Then they said “there was no mechanical problem.” Then they claimed that the two crews had somehow not communicated with the military command, although “they could not explain how the military had lost contact with not one but both of the boats.” As the New York Times reported:

  “Even as Mr. Kerry was describing the release on Wednesday morning, American military officials were offering new explanations about how the two 49-foot patrol boats, formally called riverine command boats, had ended up in Iranian territorial waters while cruising from Kuwait to Bahrain.”

  And they still haven’t explained it – or any of the other distinctly odd circumstances surrounding this incident.

  The best they could do was have an anonymous Navy officer aver “When you’re navigating in those waters, the space around it gets pretty tight.” However, as the Times put it:

  “But that is hardly a new problem, and the boats’ crews would almost surely have mapped out their course in advance, paying close attention to the Iranian boundary waters. And each boat has radio equipment on board, so it was unclear how the crews suddenly lost communication with their base unless they were surrounded by Iranian vessels before they could alert their superiors.”

  We are told they were on a “training mission” – but what kind of mission? The Washington Post adds a helpful detail by telling us that “The vessels, known as riverine command boats, are agile and often carry Special Operations forces into smaller bodies of water.”

  Ah, now we’re getting somewhere.

  Amid all the faux outrage coming from the neocons and their enablers in the media over the alleged “humiliation” of the US – Iran “paraded” the sailors in their media! They made one of the sailors apologize! The Geneva Conventions were violated! – hardly anyone in this country is asking the hard questions, first and foremost: what in heck were those two boats doing in Iranian waters?

  And if you believe they somehow “drifted” within a few miles of Farsi Island, where a highly sensitive Iranian military base is located, then you probably think there’s a lot of money just waiting for you in a Nigerian bank account.

  Anyone who thinks the adversarial relationship between Washington and Tehran has turned into “détente” due to the nuclear deal is living in Never-Never Land. Our close ally, Saudi Arabia, has all but declared war on the Iranians and that means we are being dragged into the rapidly escalating conflict. In this context, two US military boats coming a mile and a half away from a major Iranian base in the Gulf isn’t an accident. This ‘training mission” was a military incursion, and although we have no way of knowing what mission the US hoped to accomplish, suffice to say that it wasn’t meant to be a kumbaya moment.

  Rachel Maddow is also raising questions about this: after a load of nonsense about how showing the sailors on Iranian media violated the Geneva Conventions – they didn’t: we aren’t at war with Iran yet – she pointed out the suspicious nature of the Pentagon’s shifting story during her January 13 broadcast.

  To add another layer to the mystery, the Iranian government released the sailors after holding them for less than twenty-four hours – which isn’t the sort of behavior one might expect if those sailors were on a spy mission. And the Iranians issued an Emily Litella-ish statement, as reported by the Los Angeles Times:

  “’After explanations the U.S. gave and the assurances they made, we determined that [the] violation of Iranian territorial waters was not deliberate, so we guided the boats out of Iranian waters,’ said Foreign Ministry spokesman Hossein Jaberi Ansari, according to the official Islamic Republic News Agency.”

  So if those two boats were “snooping,” as the Fars News Agency originally claimed, why  would Tehran come out with this all-is-forgiven statement?

  None of it makes any sense, at least not until one realizes that the Iranian government is hardly a monolith: power is divided up between various agencies and factions, with only the loosest sort of unity being enforced by the Supreme Leader. Farsi Island is controlled by the hard-line Iranian Revolutionary Guard Corps (IRGC), the hard-line faction of the ruling elite, which wields enormous political and economic power within the multi-polar Iranian state apparatus. It was the hard-liners who released the video and photos of the American sailors with their hands in the air, and their spokesmen demanded an apology from the US. It was the diplomats, however – the moderates, who negotiated the Iran deal – whose contacts with the US facilitated the sailors’ quick release.

  But it isn’t just the Iranians who are riven with factions and conflicting lines of authority: the American empire is overseen by a vast national security bureaucracy involving both military and civilians, and it isn’t monolithic, either. Although, in theory, civilians are in the drivers’ seat and the military just follows orders, in reality the Pentagon is an independent power that can obstruct or even effectively veto whatever diplomatic or military plans the White House has in mind. And while opposition to the nuke deal was centered in Congress, the Pentagon insisted at the last moment that sanctions on conventional arms and particularly those related to ballistic missiles remain in place. Iran’s recent testing of medium range ballistic missiles must have the generals in an uproar, and it could well be that this “training mission” in the Gulf was related – as either a spying mission, or an outright provocation designed to imperil relations. Or perhaps both.

  We’ll probably never know for sure: but what we certainly can know is that the official explanation for this latest incident stinks to high heaven. There’s no denying we were caught by the Iranians with our pants down. The only question is – how were we trying to f—k them over?

  I warned after the signing of the Iran deal that we are in for a long series of provocations in the Gulf, and this is only the beginning. In order to keep all this in perspective, just remember that the long dance between Washington and Tehran involves at least four partners, including their hard-liners and ours.

  

  

  

  

  

• China Stocks, Credit Risk Worsen Despite "Short-Squeezed" Yuan Strength

  On the heels of new reserve ratio regulations and the biggest strengthening in the Yuan fix in 4 weeks, offshore Yuan has strengthened notably (despite Chinese default/devaluation risk surging in the CDS markets). Chinese stocks are weaker in the early going but corporate bond yields continue to slide to new record lows as the “last bubble standing” stands ignorant of the risks around it.

  PBOC rixed the Yuan 0.07% stronger – the biggest gain in 4 weeks…

  • *PBOC STRENGTHENS YUAN FIXING BY 0.07%, MOST SINCE DEC. 21

  

   

  Offshore Yuan is rallying in early trading, because as Bloomberg notes,

  *PBOC TO IMPOSE RESERVE RATIO ON OFFSHORE BANK YUAN ACCOUNTS

  *PBOC SAYS RULE DOESN’T APPLY TO FOREIGN CENTRAL BANKS

  *PBOC SAYS RULE WON’T AFFECT DOMESTIC YUAN LIQUIDITY

  *PBOC SAYS WILL USE MONETARY TOOLS TO MAINTAIN LIQUIDITY
  

   

  PBOC will impose a required reserve ratio on offshore participant banks with yuan deposits in the mainland, according to people familiar with the matter.

   

  Raising reserve requirement is meant to increase cost of funding and discourage speculative short yuan trades, says Fiona Lim, Singapore-based senior FX analyst at Maybank

  This marks the PBOC’s latest attempt to make shorting the CNH prohibitively costly by forcing banks to purchase CNH in the open markets. As Reuters adds, by forcing banks offshore to hold more yuan in reserve, it would reduce the amount of the currency available in the market, squeezing supply further and making it more difficult and expensive for speculators.

  The costs of borrowing yuan “are set to rise” as a large volume of offshore yuan is actually being deposited back into China, explained an international investment banker who declined to be identified.

  “The expectation of yuan devaluation has led to massive remittance of yuan,” said China Industrial Bank’s chief economist Lu Zhengwei.

  “Raising the RRR will increase the cost of arbitrage,” Lu said.”Domestic banks conducting exchanges offshore and remitting yuan to China will be further controlled, pushing up the cost of offshore yuan funding.”

  As a result of this latest intervention, the Onshore-offshore Yuan spread once converged again:

   

  

   

  Although it does pose the question how desperate China must be, and how massive the capital outflow, if the PBOC is engaging in new FX manipulations virtually on a daily basis to prevent the ongoing uncontrolled devaluation of its currency.

  Perhaps related to that, Chinese sovereign default/devaluation risk surges.

  

   

  And stocks weaken:

  • *CHINA’S CSI 300 INDEX SET TO OPEN DOWN 1.6% TO 3,068.23
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.8% TO 2,847.54

  

  But the money continues to flow aimlessly into the “last bubble standing” as we detailed previously with record low corporate bond yields in China (despite a collapse in creditworthiness fundamentals and huge supply). 

  

   

  But analysts are starting to worry:

  “2016 is a year when we will see systemic risks emerge in China’s credit market,” said Ji Weijie, credit analyst in Beijing at China Securities Co., the top arranger of bond offerings from state-owned and listed firms.

   

  “There may be a chain reaction as more companies are likely to fail in a slowing economy and related firms could go down too.”

  Charts: Bloomberg

  

  

  

  

  

• Saudi Arabia Is Buying Up American Farmland To Export Agricultural Products Back Home

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Just what we need, cornfield crucifixions.

  Seriously though, this is very troubling. The Saudis are explicitly conserving their own resources at home, while exploiting land and water supplies here in America.

  CNBC reports:

  Saudi Arabia and other Persian Gulf countries are scooping up farmland in drought-afflicted regions of the U.S. Southwest, and that has some people in California and Arizona seeing red.

   

  Saudi Arabia grows alfalfa hay in both states for shipment back to its domestic dairy herds. In another real-life example of the world’s interconnected economy, the Saudis increasingly look to produce animal feed overseas in order to save water in their own territory, most of which is desert.

   

  Privately held Fondomonte California on Sunday announced that it bought 1,790 acres of farmland in Blythe, California — an agricultural town along the Colorado River — for nearly $32 million. Two years ago, Fondomont’s parent company, Saudi food giant Almarai, purchased another 10,000 acres of farmland about 50 miles away in Vicksburg, Arizona, for around $48 million.

   

  But not everyone likes the trend. The alfalfa exports are tantamount to “exporting water,” because in Saudi Arabia, “they have decided that it’s better to bring feed in rather than to empty their water reserves,” said Keith Murfield, CEO of United Dairymen of Arizona, a Tempe-based dairy cooperative whose members also buy alfalfa. “This will continue unless there’s regulations put on it.” 

  Recall, this is precisely the type of investment Michael Burry of “Big Short” fame recently said he was involved in.

  In a statement announcing the California farmland purchase, the Saudi company said the deal “forms part of Almarai’s continuous efforts to improve and secure its supply of the highest quality alfalfa hay from outside the (Kingdom of Saudi Arabia) to support its dairy business. It is also in line with the Saudi government direction toward conserving local resources.”

  Crucially, the issue of land rights comes into play.

  The area of the Arizona desert where the Saudis bought land is a region with little or no regulation on groundwater use. That's in contrast to most of the state, 85 percent of which has strict groundwater rules. Local development and groundwater pumping have contributed to the groundwater table falling since 2010 by more than 50 feet in parts of La Paz County.

  Sure, conserve local, exploit American. Just brilliant.

  "We're not getting oil for free, so why are we giving our water away for free?" asked La Paz County Board of Supervisors Chairman Holly Irwin.

   

  …

   

  Added Irwin, “We’re letting them come over here and use up our resources. It’s very frustrating for me, especially when I have residents telling me that their wells are going dry and they have to dig a lot deeper for water. It’s costly for them to drill new wells.” 

   

  Local development and groundwater pumping have contributed to the groundwater table falling since 2010 by more than 50 feet in parts of La Paz County, 130 miles west of Phoenix. State documents show there are at least 23 water wells on the lands controlled by Alamarai’s subsidiary, Fondomonte Arizona. Each of the wells is capable of pumping more than 100,000 gallons daily.

   

  “You can use as much water as you’d like, as long as it’s put to a beneficial use, and you’re not required to report your water use,” said Michelle Moreno, a spokesperson for the Arizona Department of Water Resources, which has scheduled a public meeting for Jan. 30 in La Paz County to hear concerns from residents.

   

  More competition for land and fodder is likely to make things more expensive for dairy farmers in California and elsewhere.

   

  “It will ultimately drive the price up for the West Coast dairy operations,” said Robert Chesler, vice president of the dairy group at FCStone, a Chicago-based commodity-risk management company. “This is where they are buying that hay. This is where they are buying the farmland for dairy farms as well as and where they are buying the dairy goods, because we are obviously exporting more out of the West Coast.”

  Just another example of the Saudis giving it good and hard to American public.

  

  

  

  

  

• Wells Fargo Is Bad, But Citi Is Worse

  Earlier we reported that Wells Fargo may have an energy problem because as CFO John Shrewsbury revealed, of the $17 billion in energy exposure, “most of it” was junk rated.

  But, while one can speculate what the terminal cumulative losses, cumulative defaults and loss severities on this loan book will be, at least Wells was honest enough to reveal its energy-related loan loss estimate: it was $1.2 billion, or 7% of total – as Mike Mayo pointed out, one of the highest on the street. Whether it is high, or low, is anyone’s guess, but at least Wells disclosed it.

  Citi did not.

  Yes, the bank did disclose its holdings to the oil and gas sector at $21 billion funded and $58 billion which included unfunded (watch that unfunded exposure collapsing and shrinking the available pool of shale company liquidity in the coming weeks), and it did announce that it “built roughly $300 million of energy-related loan loss reserves this quarter”, but paradoxically one thing it did not disclose was its total reserves to energy.

  Note the following perplexing exchange between analyst Mike Mayo and Citi CFO John Gerspach:

  <Q – Mike Mayo>: Can we move to energy, though? I don’t want you being the only bank not disclosing reserves to energy – oil and gas loans. I mean, I think most others have disclosed that who have reported so far. And I mean, your stock’s down 7%. The whole market is down a whole lot, but I don’t – even if it’s a low number, it can’t hurt too much more from here. And so can you – how much in oil and gas loans do you have, and what are the reserves taken against that? I know you were asked this already, but I’m going back for a second try.

   

  <A – John C. Gerspach>: When you take a look at the overall portfolio, Mike, we’ve reduced the amount of exposure. Our funded exposure to energy-related companies this quarter is down 4%. It’s about $20.5 billion. The overall exposure also came down about 4%. The overall exposure now is about $58 billion, that includes unfunded. When you take a look at the composition of the funded portfolio, about 68% of that portfolio would be investment grade. That’s up from the 65% that we would have had at the end of the third quarter. And the unfunded book is about 87% investment grade. So while we are taking what we believe to be the appropriate reserves for that, I’m just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business. That’s just not something that we’ve traditionally done in the past.

  And yet all other reporting banks have done it not only in the past, but this quarter as well.

  One wonders just how much of Gerspach’s decision was dictated by the Fed’s under the table suggestion to avoid mark to market in energy entirely, and thus to stop marking its loan book. To be sure, without knowing the total amount of reserves to oil are, one simply can’t do any calculations on Citi’s total energy book, even if the once already bailed out bank so eagerly provided the incremental addition to this reserve. As if that number is in any way helpful.

  Finally, we eagerly await for someone from the Dallas Fed to contact us and to comment on our article from yesterday that the “Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears.” Because with megabanks such as Citi refusing to disclose energy losses, the longer the Fed remains mute on just what it knows that nobody else does, the more concerned the market will be that the subprime crisis is quietly playing out under its nose all over again.

  But one thing is certain: the panic can begin in earnest when Janet Yellen says, at the next Fed press conference, that “energy is contained.“

  

  

  

  

  

• Japanese Stocks Enter Bear Market, Credit Risk Surges To 20-Month Highs

  “It’s difficult to see the fall stopping today,” warned one Japanese equity strategist and rightly so as Japan’s broad TOPIX idnex just entered a bear markets (down 20% from the August 2015 highs). With the Nikkei well below 17,000, Kuroda is due to speak at the Diet today as Japanese corporate bond risk surges to 20-month highs.

  TOPIX enters Bear Market

  

   

  And now the Nikkei:

  • *JAPAN’S NIKKEI 225 EXTENDS DECLINE FROM JUNE HIGH TO 20%

  And Japanese corporate bond risk is surging – up 3.5bps to 87bps – the highest in 20 months…

  

   

  Get back to work Mr. Kuroda!!

  • *JAPAN’S PARLIAMENT CONFIRMED KURODA’S APPEARANCE

  We just have one quick question – how does the government explain to its citizenry that foircing GPIF to go all-in Japanese stocks and corporate credit was a terrible idea and their retirement funds are FUBAR?

  

  

  

  

  

• Foreign Central Banks Furiously Dump US Treasuries: Record $47 Billion Sold In First Two Weeks Of 2016

  It’s not just stocks have a terrible start to the year, in fact the worst start in history: so is the amount of US Treasuries held in custody at the Fed, a direct proxy for the holdings of foreign central banks, reserve managers and sovereign wealth funds who park owned TSYs at the NY Fed for convenience.

  According to the latest Fed data, after a drop of $12 billion in the first week of the year, another $34.5 billion in Treasuries held in custody was sold in the week ended January 13, bringing the total to just $2.962 trillion, below the previous recent low recorded in early November, and at levels not seen since April 2015.

  Indicatively since April, total US Treasury holdings have increased by $570 billion, meanwhile not a single incremental dollar has ended up in the Fed’s custody account.

  

   

  As shown in the chart below, the drop recorded in the latest period is the single largest weekly drop recorded since China commenced liquidating its Treasury holdings in mid 2014.

  

   

  Adding up the flows from the first two weeks of the year reveals the worst and most custody holdings “outflowing” start to the year in history.

  

   

  The size of the liquidation promptly got the rate community’s attention.

  On Friday afternoon, MarketNews cited Louis Crandall, chief economist at Wrightson ICAP, who said “we have seen declines of more than $20 billion (in such Treasury custody holdings) on each of the first two weeks of this year. While accounts are volatile from week to week, that is certainly consistent with increasing intervention activity” from foreign central banks needing money to intervene either in the foreign exchange market or in the stock market, he said.

  “There is no way of knowing” exactly what such central banks sold, he added. “But it could just as easily have been liquidation of coupon securities.”

  As MNI further writes, most observers saw China selling as behind the drop in Treasuries holdings at the Fed. “Circumstantially, that’s the conclusion that people would jump to,” said Crandall.

  Some said it is not just China: Aaron Kohli, analyst at BMO Capital Markets, was less inclined to point to China. “It’s definitely a drop, but keep in mind, every foreign central bank is in there,” he said.

  One other observer said that the decline “should be foreign central bank selling” as opposed to routine rolling of maturing securities. “Those are very chunky numbers. We did not even get such large sales back in August 2015 when we knew there was such selling” in Treasuries to get money to fund buying of China stocks, he said.

  Others, however, disagree: “That kind of size could only be China,” said the observer. But he added that at the margin, other Asian central banks could have been selling Treasuries to raise dollars for foreign exchange or stock market intervention.

  One trader said China “must be selling, along with others. Look at the Hong Kong dollar, also down big. It is a game of musical chairs, and everyone is devaluing at once. The U.S. dollar strength is apparent.”

  * * *

  One trader who has put all this together, and has linked it to the abnormal moves in the Treasury swap market is Ice Farm Capital’s Michael Green.

  As he puts it, “those who chose to seek protection in rates are only experiencing middling success due to the continued inversion of swap spreads which have traded to record highs.”

  Now this has been repeatedly noted in the press as irrational – why would US government bonds be trading at a risk premium to swap spreads which carry bank counterparty risk?  I would suggest there is one very simple reason:

   

  

   

  His conclusion is that “swap spreads appear to be blowing out because foreign holders of treasuries, namely China, are selling them at a record pace to defend their currencies.  Currency levels are under attack in China, Saudi Arabia and now Hong Kong.  The specter of 1997-1998 is again haunting the markets.”

  As Green frames it, “the key question is “How long can this go on for?”  Consensus is clearly that China, in particular, has a deep pool of reserves with which to defend their currency; I am less convinced.  Having seen some contrarian work on the subject, my belief is that China is a paper tiger – with very little reserves left to defend their currency.  Perhaps as little as three months given their current burn rate.“

  If accurate (and Green’s calculation excludes the hundreds of billions China may need to leave on its books if its NPL credit cycle finally hits as Kyle Bass is currently anticipating) then the coming months could see an unprecedented shock out of China which having spent hundreds of billions to slow a record capital outflow, has no choice but to let its currency finally float freely, leading to the biggest capital exodus in recorded history.

  

  

  

  

  

• Here Is The Stealthy Way Some Are Betting On A Market Crash

  Credit markets have been warning of a looming crisis for months…

  

   

  And as the cost of protecting against credit collapse has soared so the cost of protecting against equity downside (VIX) has started to awaken:

  

   

  However, as we detailed previously, more than a few market participants have turned to deep out-of-the-money options to protect themselves against drastic downside (pushing the skew – the relative cost of crisis protection over 'normal' protection – to record highs).

  

  And so, with the cost of protection so high, traders are looking for cheaper alternatives.

  Since the Fed folded in September (under the same conditions that are playing out now), basically admitting it is terrified to raise rates and willing to backtrack due to market fragility, IceFarm Capital's Michael Green explains, it appears many market participants are piling into par Eurodollar calls:

  

  [the chart shows the cumulative open interest in par calls on eurodollar futures contracts that expire in 2016 and 2017 – basically options on short-term interest rates with a strike price of zero, such that they pay out if the Fed takes rates negative]

  When queried whether this is indeed a trade to bet on a market drop, Michael Green responded as follows:

  [A reader] thought  this might be an attempt by hedge funds to hedge out their exposure to rising interest rates very cheaply.

   

  My initial idea was that it actually could be a bet on negative rates (if for some reason the Fed had to come back into the picture with QE4).

   

  The bottom line: "Deep OTM puts on the S&P are very expensive while par ED calls are relatively cheap.  In my view, we are that inflection point where the Fed is going to start to waffle…the bear market beckons and they will not be able to stick with their interest rate guidance. Of course, markets tend to frown on Central Bankers revealed as less than omniscient…"

  And the market is already shifting to that opinion – as CME shows, no one trusts The Fed's dot-plots anymore:

  

   

  Thus, the ED Par Calls are a direct proxy for The Fed's "Dow-Data-Dependent" policy (and given the surge in Open Interest, it seems more than a few agree).

  h/t IceFarm Capital's Michael Green

  

  

  

  

  

• Wells Fargo's Problem Emerges: $17 Billion In Junk Energy Exposure

  When Wells Fargo reported its Q4 earnings last week, the one topic analysts and investors wanted much more clarity on, was the bank’s exposure to oil and gas loans, and much more color on its energy book over concerns that Wells, like most of its peers, was underestimating the severity of the upcoming shale default wave.

  And while the company’s earnings call indeed reveals that things are deteriorating rapidly in Wells energy book, perhaps an even bigger concern for Wells investors, which just happens to be the largest US mortgage lender, should be what is going on with its mortgage book. The answer: nothing. In fact, at $64 billion in mortgage applications in the quarter, this was not only a major drop from Q3, but also the lowest since the first quarter of 2014.

  

   

  Needless to say, without significant growth in Wells’ mortgage pipeline and originations, there can be no upside to Wells Fargo stock, meanwhile one can kiss the so-called housing recovery goodbye for the final time, because now that the US Treasury is cracking down on criminal and money laundering “all cash” buyers, we fully expect the housing industry to grind to a near halt in the coming 2-3 quarters.

  That covers the lack of upside. As for the substantial downside, here are the key parts from Wells Fargo’s conference call discussing the bank’s energy exposure.

  First: how big is Wells’ loan loss allowance for energy:

  We’ve considered the challenges within the energy sector and our allowance process throughout 2015 and approximately $1.2 billion of the allowance was allocated to our oil and gas portfolio. It’s important to note that the entire allowance is available to absorb credit losses inherent in the total loan portfolio.

  Then, from the Q&A, how much is Wells’ total loan exposure, its fixed income and equity exposure toward energy:

  I would use $17 billion as outstandings  for energy loans. And for securities, I would use, call it, $2.5 billion which is the sum of AFS securities and non-marketable securities.

  In other words, a 7% loan loss reserve toward energy, perhaps the highest on all of Wall Street.

  Then, here is the breakdown by services:

  We’re focused on the whole thing. Half of  those customers – half of those balances represent E&P companies, upstream companies. A quarter of them represent oilfield services companies, and a  quarter of them represent pipelines and storage and other midstream activity. And it excludes what I would describe as investment grade sort of diversified larger cap companies where we don’t view the credit exposure as quite the same.

  But the “downside risk” punchline was the following exchange with Mike Mayo:

  <Q – Mike L. Mayo>: What percent of the $17 billion is not investment grade?

   

  <A – John R. Shrewsberry>: I would say most of it. Most of it.

   

  <Q – Mike L. Mayo>: So most of the $17 billion is non-investment grade.

   

  <A – John R. Shrewsberry>: Correct.

  To summarize: $17 billion in oil and energy exposure, which has a modest $1.2 billion, or 7%, loss reserve assigned to it (the highest on the street mind you), and which is made up “mostly” of junk bonds.

  Why could the be concerning? Well, one reason is that junk yields just surpassed the all time highs set just after the Lehman bankruptcy.

  

  In retrospect we can see why the Dallas Fed told banks to stop marking assets to market.

  As for Wells, Warren Buffett may want to take another bath in the coming days.

  Source: Wells Fargo Q4, 2015 Conference Call

  

  

  

  

  

• The "Putin Is Isolated" Meme Officially Dies As Japan Calls For Closer Ties With Russia

  One of the great ironies of the Obama administration’s foreign policy record is the extent to which Washington started 2009 with designs on normalizing frosty relations with Russia and started 2015 with the worst US-Russo dynamic since the Cold War.

  To be sure, not all of that was Washington’s fault – but most of it was.

  Of course the international community probably should have curbed its enthusiasm early on, given that the entire effort got off to a rather inauspicious start when then-Secretary of State Hillary Clinton presented Sergei Lavrov with a big red button that was supposed to say “reset” (a nod to the “resetting” of relations between Washington and Moscow) but which actually said “overcharged” in Russian.

  

  (“overcharged“)

  Six years, one annexed Crimea, a raft of economic sanctions, and one Ukrainian civil war later, and we’re back to Soviet-era politics.

  Part and parcel of Washington’s PR and foreign policy strategy over the last three or so years has been to perpetuate the idea that Vladimir Putin is “isolated” on the world stage. This, along with subtle reminders in the media and on the silver screen that America needs to preserve a healthy bit of Russophobia if it is to be safe, has worked domestically, but not internationally.

  Russia has strengthened ties with China, kicked off the BRICs bank, cemented an alliance with Iran (another “isolated” state), and worked to de-dollarize everything from oil markets to cross-border financial transactions.

  Moscow’s dramatic entry into the Syrian conflict and Russia’s common sense approach to ending the years-long affair has resonated with the likes of France and everyone else who understands that the way to fight terror is to kill the terrorists, not arm them.

  Indeed, The Kremlin’s successful attempt to wake the world up to the fact that Washington and its regional allies are actually exacerbating the war in Syria by arming rebel groups with questionable motives has gone a long way towards forcing the international community to rethink who the “good” superpower really is.

  Now, in what may be the best evidence yet that the “Putin is isolated” meme is officially dead, none other than US ally Japan is ready to “bring Putin in from the cold.”

  “Japanese prime minister Shinzo Abe is pressing for President Vladimir Putin to be brought in from the cold, saying Russian help is crucial to tackling multiple crises in the Middle East,” FT writes, adding that “Mr Abe said he was willing to go to Moscow as this year’s chair of the Group of Seven advanced economies, or to invite the Russian president to Tokyo.” Here’s more:

  Pointing to tension between Saudi Arabia and Iran, the war in Syria, and the threat of radical Islamism, Mr Abe said: “We need the constructive engagement of Russia.”

   

  The former G8 excluded Russia following its annexation of Crimea and military support for separatist rebels in eastern Ukraine. But while Japan has joined in sweeping economic sanctions, Mr Abe made clear he wants to work with Mr Putin.

   

  “As chair of the G7, I need to seek solutions regarding the stability of the region as well as the whole world,” he said, noting Japan’s ongoing territorial dispute with Russia over the Kuril Islands. “I believe appropriate dialogue with Russia, appropriate dialogue with president Putin is very important.”

  As the only Asian nation in the club of rich democracies, Japan prizes its G7 membership, and Mr Abe is determined to make the most of the Ise-Shima summit he will host in May.

  This is the kind of talk that will get you blacklisted in Washington and we wonder how long it will be before Abe gets a courtesy call from the Obama to remind Tokyo of the grave “threat” Putin poses to global peace and security.

  Or maybe The White House will take a step back and ponder whether decades of foreign policy blunders combined with a misplaced (and highly off-putting) sense of exceptionalism have now left America as the “isolated” superpower.

  

  

  

  

  

  

• Oil Plunges To $28 Cycle Lows As Iran Supply Looms, Stocks Slide

  February WTI Crude futures have plunged to new cycle lows at $28.60 (down 2.7%) as Iran supply looms over an already over-glutted global crude market. Brent is down even more (-3.7%). Dow futures are down 60 points at the open.

  • *WTI OIL FALLS AS MUCH AS 2.7%, BRENT CRUDE DROPS 3.7%

  Feb futures (which have just rolled) are under $29…

  

   

  And the new on the run March contract is trading $29.60, down 2.6%…

  

   

  It seems Nomura may be right:

  “Iran’s additional crude shipments have the potential to further depress prices, perhaps to as low as $25 a barrel,” Gordon Kwan, Hong Kong-based analyst at Nomura Holdings Inc., says by e-mail Sunday.

  And crude weakness (and fears over US banks) are weighing on US equities… Dow futures down 65 points

  

  

  

  

  

  

• "China Banks Seem To Be Doing Whatever They Can To Avoid Paying Anyone In Dollars"

  By Dan Harris of China Law Blog

  Getting Money Out of China: What The Heck is Happening?

  Regular readers of our blog probably know that our basic mantra about getting money out of China is that if you have consistently follow all of China’s laws, it ought to be no problem. Not true lately.

  In the last week or so, our China lawyers have probably received more “money problem” calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not.

  So what has been going on lately?

  Well if there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars. We are hearing the following:

  1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

  2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much no questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

  3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

  4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this. For what is ordinarily necessary to get money out of China for a services transaction, check out Want to Get Paid by a Chinese Company? Do These Three Things.

  5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

  What are you seeing out there? No really, what are you seeing out there?

  

  

  

  

  

• The State Of Our Denial Is Strong

  Well, things did ‘change‘…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• What Just Happened With OIL?

  Yesterday, we reported exclusively how the Dallas Fed is pulling strings behind the scenes to conceal the fallout from the oil market crash. As Dark-Bid.com's Daniel Drew notes, by suspending mark-to-market on energy loans and distorting the accounting, they are postponing the inevitable as long as possible. The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.

  Amidst the market chaos on Friday, a trader brought something strange to my attention. He asked me exactly what the hell was going on with this ETN he was watching. I took a closer look and was baffled. It took me awhile to put the pieces together. Then when I saw the story about mark-to-market being suspended, it all made sense.

  Here is the daily premium for the last 6 months on the Barclays iPath ETN that tracks oil:

  

   

  Initially, Dark-Bid.com's Daniel Drew thought this was merely a sign of retail desperation. As they faced devastating losses on their oil stocks, small investors turned to products like oil ETNs as they tried to grasp the elusive oil profits their financial adviser promised them a year ago. Oblivious to the cruel mechanics of ETNs, they piled in head first, in spite of the soaring premium to fair value. After all, Larry Fink is making the rounds to convince the small investor that ETFs are indeed safer than mutual funds. Because nothing says "safe" like buying an ETN that is 36% above its fair value.

  Sure, there are differences between ETFs and ETNs, particularly regarding their solvency in the event of an issuer default, but the premium/discount problem plagues ETFs and ETNs alike. Nonetheless, widely trusted retail sources of investment information perpetuate the myth that ETNs do not have tracking errors.

  But was it just retail ignorance?

  Something remarkable happened in the last hour of trading on Friday which sparked the massive decoupling in OIL from its NAV…

  

   

  Making us wonder, was an 'invisible hand' at play? Or was this just more evidence of OPEX-inspired broken markets?

  As Dark-Bid.com's Daniel Drew so eloquently concludes,

  With the oil fallout quickly spreading, the Fed is resorting to behind-the-scenes manipulation of energy debt, and now, that apparently includes oil ETNs as well.

  Is anything too much (too off limits, too conspiracy wonk) for them? Do they really think the ETF tail can wag the oil complex dog and rescue the disastrous MtM values of the US banking system's energy loans?

  

  

  

  

  

• Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation

  While US intervention in its various forms has likely been ongoing for decades, March 2011 is often cited as the start of foreign involvement in the Syrian Civil War (refering to political, military and operational support to parties involved in the ongoing conflict in Syria, as well as active foreign involvement).

  Since then the nation has collapsed into chaos with an endless array of superlatives possible to describe the economic and civilian carnage that has ensued.

  However, while a picture can paint a thousand words, these four shocking images describe a canvas of US foreign policy “success” that few in the mainstream media would be willing to expose…

  

   

  Mission un-accomplished?

  

  

  

  

• Cracks At The Core Of The Core

  Exceprted from Doug Noland's Credit Bubble Bulletin,

  January 15 – Bloomberg (Matthew Boesler): “The U.S. economy should continue to grow faster than its potential this year, supporting further interest-rate increases by the Federal Reserve, New York Fed President William C. Dudley said. ‘In terms of the economic outlook, the situation does not appear to have changed much” since the Fed’s Dec. 15-16 meeting, Dudley said, in remarks prepared for a speech Friday… He added that he continues ‘to expect that the economy will expand at a pace slightly above its long-term trend in 2016,’ and said future rate increases would depend on incoming economic data.”

   

  January 15 – Reuters (Ann Saphir): “The stock market's swoon does not change the economic outlook and is merely market participants trying to make sense of global developments, San Francisco Federal Reserve Bank President John Williams told reporters… ‘As the Fed is moving gradually through a process of normalization it's not surprising that we are not going to be at the peak stock prices’ of last year, Williams said. So far swings in stock market prices have not fundamentally changed his expectation for moderate economic growth, he said.”

  The world has changed significantly – perhaps profoundly – over recent weeks. The Shanghai Composite has dropped 17.4% over the past month (Shenzhen down 21%). Hong Kong’s Hang Seng Index was down 8.2% over the past month, with Hang Seng Financials sinking 11.9%. WTI crude is down 26% since December 15th. Over this period, the GSCI Commodities Index sank 12.2%. The Mexican peso has declined almost 7% in a month, the Russian ruble 10% and the South African rand 12%. A Friday headline from the Financial Times: “Emerging market stocks retreat to lowest since 09.”

  Trouble at the “Periphery” has definitely taken a troubling turn for the worse. Hope that things were on an uptrend has confronted the reality that things are rapidly getting much worse. This week saw the Shanghai Composite sink 9.0%. Major equities indexes were hit 8.0% in Russia and 5.0% in Brazil (Petrobras down 9%). Financial stocks and levered corporations have been under pressure round the globe. The Russian ruble sank 4.0% this week, increasing y-t-d losses versus the dollar to 7.1%. The Mexican peso declined another 1.8% this week. The Polish zloty slid 2.8% on an S&P downgrade (“Tumbles Most Since 2011”). The South African rand declined 3.0% (down 7.9% y-t-d). The yen added 0.2% this week, increasing 2016 gains to 3.0%. With the yen up almost 4% versus the dollar over the past month, so-called yen “carry trades” are turning increasingly problematic.

  Importantly, the past month has seen contagion effects from the collapsing Bubble at the Periphery penetrate the Fragile Core. Japan’s Nikkei 225 index was down 7.6% over the past month. While bubbling securities markets have worked to underpin European economic recovery, now prepare for the downside. The German DAX is off 11% in the first two weeks of 2016, with stocks in Spain and Italy also sporting double-digit declines. France’s CAC 40 has fallen 9.2% y-t-d. And highlighting a key Issue 2016, European bonds have provided little offsetting protection against major equities market losses. So far in 2016, German bund yields are down only eight bps. Yields are little changed in Spain and Italy. Sovereign yields are up 20 bps in Portugal and 130 bps in Greece. European corporate debt has posted small negative returns so far in 2016.

  Recent weeks point to decisive cracks at the “Core” of the U.S. financial Bubble. The S&P500 has been hit with an 8.0% two-week decline. Notably, favored stocks and sectors have performed poorly. Indicative of rapidly deteriorating economic prospects, the Dow Transports were down 10.9% to begin 2016. The banks (KBW) sank 12.9%, with the broker/dealers (XBD) down 14.1% y-t-d. The Nasdaq100 (NDX) fell 10%. The Biotechs were down 16.0% in two weeks. The small cap Russell 2000 was hit 11.3%.

  Bubbles tend to be varied and complex. In their most basic form, I define a Bubble as a self-reinforcing but inevitably unsustainable inflation. This inflation can be in a wide range of price levels – securities and asset prices, incomes, spending, corporate profits, investment and speculation. Such inflations are always fueled by some type of underlying monetary expansion – typically monetary disorder. Bubbles are always and everywhere a Credit phenomenon, although the underlying source of monetary fuel often goes largely unrecognized.

  I’ll posit another key Bubble Dynamic: De-risking/de-leveraging at the Periphery is problematic, with a propensity for risk aversion and associated liquidity constraints to spur contagion effects. At the Core, de-risking/de-leveraging becomes highly destabilizing. Indeed, I would strongly argue that de-leveraging at the “Core of the Core” is tantamount to financial crisis.

  It is the “Core of the Core” that now concerns me the most. That is where Federal Reserve (and global central bank) policies have left their greatest mark. It is at the “Core of the Core” where momentous misperceptions and market mispricing have become deeply entrenched. It’s the “Core of the Core” that has attracted enormous amounts of “money” over recent years. It’s also here where I believe leverage has quietly been used most aggressively. Over recent years it became one massive Crowded Trade. Now the sophisticated players must contemplate beating the unsuspecting public to the exits.

  I’ll return to “Core of the Core” analysis after a brief diversion to the “Core of the Periphery.”

  At $275 billion, Chinese Credit growth surged in December to the strongest pace since June. While growth in new bank loans slowed (15% below estimates), equity and bond issuance jumped. China’s total social financing expanded an enormous $2.2 TN in 2015, down slightly from booming 2014. Such rampant Credit growth was (barely) sufficient to sustain China’s economic expansion. At the same time, I would argue that Chinese stocks, global commodities and developing securities markets in particular have been under intense pressure due to rapidly waning confidence in the sustainability of China’s Credit Bubble.

   

  A similar dynamic is now unfolding in U.S. and other “Core” equities markets: Sustainability in the (U.S. and global) Credit Bubble – the monetary fuel underpinning the boom – is suddenly in doubt. The bulls, Fed officials and most others see the economy as basically sound, similar to how most conventional analysts argued about the Chinese economy over the past year. Inherent fragility and unsustainability are the key issues now driving securities markets – in China, in the U.S, and globally. And, importantly, sentiment has shifted to the view that policy tools have been largely depleted.

   

  January 15 – Reuters (Trevor Hunnicutt): “Fund investors continued to sour on U.S. stocks and corporate debt during the weekly period that ended Jan 13, Lipper data showed…, as risk appetite waned in the wake of global market turmoil. U.S.-based stock mutual funds and exchange-traded funds lost $9.0 billion to withdrawals during a week that saw U.S. stocks continue one of their worst starts to a new year… The outflows also included $5 billion pulled from one ETF alone: SPDR S&P 500 ETF… Before last week, ETF investors had been bullish on U.S. stocks, pumping money in for twelve weeks straight… Corporate bond funds suffered too. Investment-grade bond funds, widely held by retail investors, extended to eight straight weeks their streak of outflows after posting $740 million in outflows during the week. The two-month run of outflows now totals $15.4 billion, about 1.8% of the assets those funds held when the trend started…”

  January 15 – Barron’s (Chris Dieterich): “Money hemorrhaged from of mutual and exchange-traded funds for the second week in a row, EPFR Global data show… Global investors pulled $12 billion out of U.S equity funds and a combined $4.5 billion from high-yield bond, bank loan and total return funds in the week ended Jan. 23. Emerging-market funds shed cash for the 11th week in a row. Over the past two weeks, some $21 billion has come out of equity funds, still shy of the $36 billion during the August 2015 selloff.”

  January 15 – Bloomberg (Aleksandra Gjorgievska and Fion Li): “Exchange-traded funds that hold U.S. junk bonds dropped to their lowest levels since 2009 as the global growth fears that clobbered stock markets also raised doubts about whether companies’ would continue to generate as much cash to pay their debt obligations.”

  This week saw the Bank of America Merrill Lynch High Yield Energy Bond Index trade to a record17.43% yield, surpassing the December 2008 high (from Barron’s Amey Stone). “Triple C” bond yields jumped to 18.8%, the high since 2009 (FT’s Joe Rennison). The yield on the Markit iBoxx Liquid High Yield index jumped this week to the highest level since 2012.

  Returning to “Core of the Core” analysis, investment-grade corporate debt has rather abruptly joined the market turmoil. After a rocky first week of 2016, investment-grade debt spreads widened again this week to a three-year high, as investment-grade funds suffered their eighth straight week of outflows.

  “Triple A” MBS occupied the mortgage finance Bubble’s “Core of the Core”. GSE securities were perceived as “money”-like (“Moneyness of Credit”), with implied backings from the Treasury and Fed seemingly guaranteeing safety and liquidity. Throughout the global government finance Bubble period, I have often invoked the concept “Moneyness of Risk Assets.” With the Federal Reserve and global central banks determined to do just about anything to uphold booming securities markets, the marketplace perceived that safety and liquidity were virtually ensured. Trillions flowed into global stock and bond mutual funds, the majority into perceived low-risk U.S. equities indexes and investment-grade corporate debt products.

  It is worth recalling that my tally of Total U.S. Securities (Treasuries, Agencies, Corp Bonds, Munis and Equities) ended Q2 2015 at a record $76.924 TN, or 429% of GDP. This was up $30.90 TN (77%) from 2008’s $46.034 TN (313% of GDP) – and greatly exceeded 2007’s $53.279 TN (368% of GDP).

  As securities market inflation inflated Household Net Worth, spending increases bolstered corporate profits and income growth. Booming markets, especially ultra-easy financial conditions throughout the corporate Credit market, spurred stock buybacks and incited record M&A activity. As noted above, Bubbles are self-reinforcing but inevitably unsustainable. Especially with faltering Bubbles at the “Core of the Core,” wealth effects will now operate in reverse. Spending (household and corporate) will slow, with domestic issues joining international to pummel corporate profits. Significant tightening in corporate Credit will weigh heavily on both stock repurchases and M&A. And as economic prospects darken at home and abroad, there will be reinforcing downward pressure on U.S. equities and investment-grade corporate debt.

  Back in 2000, Dallas Fed president Robert McTeer suggested that our economy’s ills would be rectified “if everyone would hold hands and buy an SUV.” And for the next 15 years Fed policies did the unimaginable in the name of (indiscriminately) stimulating growth of any kind possible. And if epic mortgage finance Bubble financial and economic maladjustment was not enough, the past seven years have seen the type of financial folly and egregious wealth redistribution that tear societies apart.

  The bottom line is that Bubbles destroy and redistribute wealth, though the true effects are masked for a while by inflated securities and asset markets – along with resulting unsustainable spending patterns and economic activity. Regrettably, years of policy mismanagement, gross financial excess, deep structural maladjustment and the most imbalanced economy in our nation’s history will now come home to roost. At this point, I cannot confidently forecast how quickly the bust will unfold. I do, however, believe this process has begun as Bubbles falter at the “Core of the Core.”

  

  

  

  

  

• US Bank Counterparty Risk Soars After Energy MTM Debacle

  A few dots are starting to be connected now that we have exposed the debacle of The Fed's decision to allow banks to mark-to-unicorn their energy loans. "Something" was wrong in recent weeks as the TED-Spread surged (implying rising counterparty uncertainty among banks) and then the last week – since The Fed's alleged meeting with banks – has seen financial credit and stocks crash.

  Coincidence? We don't think so. In the week since The Fed gave the nod to banks to hide losses on energy loans, credit risk has spiked and stocks tumbled…

  

  It is clear banks are hedging against one another's systemic risk.

  Simply put, it's 2008 all-over-again as "when in doubt, sell 'em all" is back for the US financial system. When you know/question one bank (or some banks) is not transparent in their loan losses (and implicitly their capital ratios) then contagion (and collateral chains) tells any good fiduciary to sell them all – and the banks themselves will enable a vicious circle as they hedge.

  And of course, the unintended consequence of The Fed's decision to enable cheating in the banks' energy loans is a surge in financial system instability as banks and the price of oil now become systemically more coupled.

  

  

  

  

  

  

• JPM Explains How Crude Carnage Creates $75 Billion SWF "Contagion" For Equities

  Back in August, we explained why the great petrodollar unwind could be $2.5 trillion larger than anyone thinks.

  China’s effort to “control” the glidepath for the yuan devaluation led to a dramatic decline of Beijing’s FX reserves and pushed reserve liquidation to the front of the market’s collective consciousness.

  But “the great accumulation” (as Deutsche Bank calls it) of USTs ended long before the RMB deval forced the market to start talking about FX reserves. In short, the inexorable decline in crude prices (and commodities in general) forced producers to sell USD assets in an effort to offset pressure on their currencies and plug yawning budget gaps.

  And while the world is now fully awake to the fact that these asset sales amount to QE in reverse (global central banks are selling the same assets the Fed once bought), what isn’t as well understood is that looking strictly at official FX reserves paints an incomplete picture. “Crucially, for oil exporting nations, central bank official reserves likely underestimate the full scale of the reversal of oil exporters’ ‘petrodollar’ accumulation,” Credit Suisse wrote last year. “This is because a substantial part of their oil proceeds has previously been placed in sovereign wealth funds (SWFs), which are not reported as FX reserves (with the notable exception of Russia, where they are counted as FX reserves).”

  The difference between total SWF assets and official reserves for oil exporting nations is vast. “Currently, oil exporting countries hold about $1.7trn of official reserves but as much as $4.3trn in SWF assets,” Credit Suisse went on to point out, adding that. “In the 2009-2014 period, oil exporters accumulated about $0.5trn in official reserves but as much as $1.8trn of SWF assets.” Or, visually:

  

  As you can see from the above, oil exporters’ accumulation of SWF assets comes to a dramatic halt when crude prices fall. Critically, it’s exceedingly possible that the accumulation of SWF assets turns negative now that the return of Iranian supply means oil prices are set to stay lower for longer. Or, as Credit Suisse put it, “now that the tide has turned, it is likely that not only official reserves drop but that SWF asset accumulation slows to nil or even reverses.”

  Perhaps the best example of this is Norway’s SWF which, at $830 billion, is the largest in the world. 

  

  Falling crude has put enormous pressure on Norway’s economy, and with oil revenue plunging along with prices, the country is now set to drawdown its SWF rainy day fund for the first time in history in order to plug budget holes and pay for fiscal stimulus designed to offset some of the jobs lost to the industry downturn. The fund will still grow as long as return assumptions hold up, but as we saw in the first two weeks of this year, any “assumptions” about returns are dubious in an increasingly uncertain environment. Here, for reference, it a handy table lists SWFs by country and AUM:

  

  It’s important to understand that SWFs hold more than just bonds. That means that if SWFs become sellers, there are implications for other asset classes. 

  Like stocks. 

  Here are some findings on SWF equity investments from “Sovereign Wealth Fund Investments: From Firm-level Preferences to Natural Endowments,” by Paris School of Economics’ Rolando Avendano:

  There is significant variance in the allocation of SWF equity investments, depending on underlying factors associated with the fund (source of proceeds, OECD “effect”, home/foreign bias). Whereas most SWFs are attracted to large firms, with proven profitability and international activities, differences among groups remain:

  • Non-commodity funds favour firms with more foreign activity and higher turnover, in contrast to commodity-funds.

  • OECD-based funds prefer firms with lower leverage levels, whereas non-OECD funds have a preference for profitable and international firms.

  • SWF foreign investments are oriented towards large and highly leveraged firms, in contrast with their domestic (small and low leveraged) investments. Foreign investments are attracted to R&D sectors.

  • In line with the previous literature, I find that SWF ownership has a positive effect on firm value. However, this effect is only significant for commodity and OECD-based funds.

  The study was from 2006-2009 and one imagines some of these preferences might have changed in the post-crisis world, but the paper (found here) is still worth a read.

  All of the above begs the following question: will the SWFs of oil producing countries be net sellers of stocks if crude prices remain subdued and if so, how much will they sell?

  JP Morgan’s Nikolaos Panigirtzoglou and team have ventured a guess. “In our mind financial contagion from lower oil prices to equity markets is created via sovereign wealth funds,” JPM begins. Here’s more:

  The lower the oil price the higher the potential depletion of SWF assets as oil producing countries struggle to prevent their spending from declining too much. And the equities owned by oil producing countries SWFs encompass all regions and all sectors.

   

  To assess SWF flows and their potential impact on equity market flows, we update our analysis on FX reserves and Sovereign Wealth Fund (SWF) assets for 2016 in light of the recent steep decline in oil prices. Using our average Brent oil forecast of $31 for 2016, how would oil-related financial flows look like in 2016?

   

  In 2015, oil exporters (Middle East, Norway, Russia, Africa and Latam countries) received $740tr from their oil exports and will see their oil revenue decline further to $440bn should Brent oil price average at $31 this year. Oil exporters’ revenues are recycled via two channels: via imports of goods and services from the rest of the world and via accumulation of financial assets, mostly through SWFs. In 2015, oil exporters consumed $70bn more than their oil revenues to prevent their spending from declining too much. On our estimates, this excessive spending was met via around $50bn of FX reserve depletion and $20bn of SWF depletion.

   

  Assuming a $22 decline in the average oil price in 2016 relative to 2015 (i.e. from $53 to $31), the oil exporters’ aggregate current account balance will likely decline to around -$260bn vs. -$70bn in 2015 (based on last year’s sensitivities of current account balance change to oil price change). This year’s dis-saving of $260bn should be mostly met via depletion of official assets, i.e. FX reserve and SWF assets ($240bn) rather than issuance of government debt ($20bn). For 2016 we look for FX reserve depletion of $100bn and a decline in SWF assets of $140bn.

   

  Assuming selling in accordance to the average allocation of FX Reserve Managers and SWF across asset classes, we estimate that the sales of bonds by oil producing countries will increase from -$45bn in 2015 to -$110bn in 2016 and that the sales of public equities will increase from -$10bn in 2015 to -$75bn in 2016. There is little offset to this -$75bn of equity sales from accumulation of SWF assets by oil consuming countries, as we expect these countries to spend most of this year’s oil income windfall.  

  In short, SWF’s will liquidate some $75 billion in equities this year assuming oil at $31 per barrel. Needless to say, the lower oil goes, the more selling they’ll be. 

  “This prospective $75bn of equity selling by SWFs in 2016 is not huge but becomes significant after taking into account the potential swing in equity fund flows,” JPM continues, in an attempt to discuss the impact this will have on markets. “Last year retail investors bought $375bn of equity funds globally. This year we expect an amount between 0 and $200bn. Subtracting $75bn of selling from SWFs would leave the overall equity flow from Retail+SWF investors barely positive for 2016.“

  Well, not really. It’s “barely positive” if retail buys $76 billion or more. But if retail investors buy anywhere from zero to $74 billion, SWF + retail goes negative.

  Needless to say, the first two weeks of the year haven’t done anything to either shore up the SWFs of oil producers or put retail in a bullish mood. That being the case, the market better home the “smart” money is buying or you can forget about equities catching a bid this year.

  *  *  *

  An infographic look

  

  

  

  

  

  

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• "After Me, The Jihad," Gaddafi Tried To Warn The West, But Nobody Listened

  Submitted by Dan Sanchez via TheAntiMedia.org,

  Before the French Revolution and its Reign of Terror, Louis XV predicted, “After me, the Deluge.” Before being overthrown, Libya’s secular dictator tried to warn the West of a new Reign of Terror, essentially foretelling, “After me, the Jihad.”

  This was disclosed with the recent release of phone conversations from early 2011 between Muammar Gaddafi and former British Prime Minister Tony Blair.

  The West was then gearing up to use unrest in Libya as a pretext for military intervention and regime change. Gaddafi desperately tried to convey through Blair the folly of such a war, pleading that he was trying to defend Libya from Al Qaeda, which had set up base in the country. He said:

  “They have managed to get arms and terrify people. people can’t leave their homes… It’s a jihad situation. They have arms and are terrorising people in the street.”

  Gaddafi’s warning went unheeded, and NATO, led by the U.S. and France, launched an air war that toppled Libya’s government. Later that year, Gaddafi (himself a brutal oppressor, like all heads of state) was forced out of a drainage pipe, and then beaten, sodomized, and shot in the street by a mob. His corpse was then draped over the hood of a car.

  U.S. Secretary of State Hillary Clinton, who had done more than any single person to advance the Libya War, was informed of Gaddafi’s death while on camera. Fancying herself a modern Caesar, she chortled, “We came, we saw, he died!”

  Since then, Gaddafi has been proven tragically right. As Libya descended into civil war and failed-state chaos, jihadi groups connected to Al Qaeda conquered much of the country. Libya underwent the same American “liberation” that had already befallen Afghanistan, Iraq, and Somalia — and would soon be visited on Syria and Yemen.

  Shortly after Gaddafi’s overthrow, some of the now-rampant jihadis helped the CIA run guns from Benghazi to fellow jihadis in Syria.

  Benghazi had been a rebel stronghold. The Obama administration claimed a Gaddafi-perpetrated “genocide” was imminent in that city, using that claim as the chief justification for the war. There was zero indication of such an impending atrocity. But there was ample evidence of an Al Qaeda presence in Benghazi, as Gaddafi tried to tell Blair, saying that members had “…managed to set up local stations and in Benghazi have spread the thoughts and ideas of al Qaeda.”

  After the regime change, on September 11, 2012, the jihadis turned on their U.S. allies in Benghazi, sacked the U.S. diplomatic compound, and murdered Ambassador Chris Stevens.

  Now ISIS has spread throughout Libya. Just days ago, ISIS perpetrated a truck bombing that killed dozens at a Libyan police academy in Sirte, a former Gaddafi stronghold. Indeed, Gaddafi informed Blair that jihadis had “attacked police stations” back in 2011.

  Gaddafi further warned Blair:

  “They want to control the Mediterranean and then they will attack Europe.”

  And ISIS has, indeed, been battling to take control of Libya’s main oil ports in recent weeks. The group has also long been planning to use Libya as a base from which to launch attacks on nearby southern Europe. ISIS did strike Europe recently, most famously in Paris.

  And it was not just Gaddafi personally who had been ringing such alarms to the Western powers thirsting for his blood. His intelligence officers produced reports demonstrating that heavy weapons being sent to the Libyan opposition, with NATO approval and Qatari financing, were being funneled to militants with ties to Al Qaeda. At least one of those reports was even prepared in English to facilitate its transmission to key members of Congress via U.S. intelligence.

  Yet, there was no need for the West to rely on the Libyan regime for information about the jihadi threat. Indeed, as emails recently released by the State Department reveal, Hillary Clinton’s own right-hand man had informed her before Gaddafi’s overthrow that rebels were committing war crimes, and that “…radical/terrorist groups such as the Libyan Fighting Groups and Al Qa’ida in the Islamic Maghreb (AQIM) are infiltrating the NLC and its military command.”

  As Brad Hoff reports, that same email discloses that, very early in the Libyan crisis, “British, French, and Egyptian special operations units were training Libyan militants along the Egyptian-Libyan border, as well as in Benghazi suburbs.”

  They would soon be joined by U.S. special forces and the CIA.

  The war in Libya that Hillary Clinton, U.N. Ambassador Susan Rice, and Samantha Power of the National Security Council were driving toward was so predictably a fiasco-to-come that, behind the backs of the Amazon Warriors Three, America’s top generals conspired with leftie peacenik Congressman Dennis Kucinich to try to arrange a peaceful resolution to the crisis. But the war-making diplomats triumphed over the diplomacy-making soldiers. Hillary buffaloed the brass and got her war.

  Abundant warnings of a Jihadi Deluge continued after the regime change, as well. As Nancy Youssef wrote at The Daily Beast:

  “…many celebrated Libya as a success story of limited U.S. intervention despite obvious signs there of looming instability. The British consulate in Benghazi came under an attempted assassination attack the previous summer and other nations pulled out amid rising violence. The U.S. consulate in Benghazi suffered an improvised bomb attack around the time of the strike on the British. And there were early signs of a rising jihadist presence in the eastern city. In Tripoli, Sufi shrines were destroyed. (…)

   

  “In the months leading up to the [2012 Benghazi] attack, flags belonging to a jihadist group, Ansar al Sharia, appeared in Benghazi. Ansar al Sharia members also controlled security around certain government buildings, including the hospital that would try to save Stevens.

   

  “In that ensuing power vacuum, jihadists began claiming territory, making it difficult for the moderate government to control the country. By 2013, Libya’s oil production all but stopped as the nation plunged toward civil war and a state led by two rival governments on opposite ends of the country. Efforts to create a unity government have so far faltered. Benghazi, the birthplace of the 2011 uprising, became a terrorist haven. And today, many Libyans yearn for the return of Gaddafi, however dictatorial his regime was, because of the security that came with him.”

  Conservative politicos have long strained to use Benghazi to torpedo Hillary’s bid for the presidency. But their efforts are crippled by their own fundamental agreement with Hillary’s militarism. They support the general policy of employing jihadis to overthrow secular dictators (not only in Libya, but Syria too). So they limit themselves to whining about Hillary’s security measures.

  The true Benghazi scandal indicts not just Hillary, but the entire Western power elite, whose wars have, as Gaddafi warned, flooded the world with a Jihadi Deluge and installed a postdiluvian Reign of Terror over us all.

  

  

  

  

  

• "How The Investment Grade Dominos Will Fall" – UBS Explains

  According to Citigroup’s Matt King, it is now officially too late to save junk debt, which has entered the final stage of the credit cycle, the one where defaults for high yield bonds rise with every passing month.

  

  Both what about investment grade, which according to Citi is still just ahead of the “bubble bursting phase”? Here is UBS’ credit strategist Matthew Mish with one take on what happens to IG debt over the coming 12 months.

  How The Dominos Will Fall?

  It is no secret to regular readers of our publications that we believe the credit cycle is quite advanced. As discussed in our HY outlook, we estimate that nearly $1tn of speculative-grade credits are at risk of default over the next downturn, as the stock of low-quality credit has soared. Recent contagion in US HY from energy woes has severely impacted ex-energy spreads while shutting down bond-market financing for low-quality credits. Our leading measure of non-bank liquidity has now even surpassed the weakness seen during the Eurozone crisis. These developments are a negative headwind for investment-grade corporates in 2016.

  High-grade credits are also not without blemish; the post-crisis macro paradigm of Fed quantitative easing and the investor bid for yield has greatly expanded the size of risky BBB corporates. The total IG corporate universe has grown 110% from $2.08TN in Jan 2009 to $4.35TN today; the amount of BBB debt has ballooned 181% from $0.77TN in Jan 2009 to $2.17TN today (Figure 1). Hence, nearly 63% of the increase in US IG debt has come from the growth of more risky BBB-rated securities. BBB non-financial credits now make up 41% of the total IG market, the highest level ever outside of a recession (Figure 2).

  

  Finally, leverage levels are high and climbing higher. The median IG firm’s net debt to EBITDA ratio easily surpasses that realized in 2007, and is quickly closing in on late 1990s levels (Figure 3). Combine these headwinds with market volatility and growing market illiquidity and it is no surprise to find IG credit spreads at historically wide levels (Figure 4).

  

  With that said, high-grade issuers do face tailwinds that high-yield firms do not. Our credit based recession indicator is still only signalling a 16% probability of a US recession through Q3’16. This provides some comfort that US IG spreads will remain relatively insulated from near-term weakness in high-yield. In addition, our recession probability is low precisely because high-grade firms still face historically low borrowing costs, due to low Treasury yields and a terming out of debt profiles. The recent uptick in spreads has not materially increased interest burdens for highgrade companies, unlike for junk firms. Lastly, the foreign bid for US IG paper from EUR & JPN investors is currently insatiable and should continue to support medium tenor IG corporates. The foreign bid for US HY cannot compare.

  What is our prognosis then for 2016? Investors should remain cautious about lower-quality credits and energy names that will expose them structurally to either a broader downturn in the credit cycle or lower for longer commodity prices. For us, that means investors should underweight BBB-rated securities, particularly longer-dated issuers at risk of fallen angel status (i.e. pipelines). We maintain a relative preference for lower beta US banks. Lastly, we believe that A-rated 10+ paper looks attractive, on an excess return basis (Treasury-hedged) tactically and a total return perspective structurally. Against this backdrop, we flesh out our views on the top 2016 themes likely to face high-grade investors and their implications for desired positioning next year.

   

  1) M&A will NOT be slowed by rising rates: IG issuance to hit new record

  One of the common myths perpetuated in the market today is that rising interest rates will cool off a red-hot M&A market. After all, low rates are spurring on the recent merger boom right? Not quite. In fact, one can make an argument that the presence of both significant M&A activity and low interest rates is more of an historical accident than explaining a fundamental relationship. We believe this  cycle, along with those in the past, is driven more by animal spirits and the lack of viable alternatives for CFOs who are unable to grow earnings organically. The two charts below illustrate the considerable staying power of these animal spirits.

  

  Today’s environment fits the current narrative that M&A activity is buoyed by low rates and high expected returns (proxied by the S&P 500 earnings yield). The problem is that the exact opposite occurred in the late 1990s; M&A activity surged even with high rates and low expected returns (Figure 5). An increase in highgrade yields from 2005-2007 also did not temper M&A volumes. Finally, the past two M&A cycles did not peter out until 1 year forward recession probabilities hit 50% (Figure 6). Bottom line, it takes a sufficient shock to the economy to derail an M&A cycle. A Fed rate hike cycle will not nearly be enough.

  The major implications are twofold. First, IG issuance will hit a new record in 2016 at $1.3tn, a 1% increase from 2015 levels ($1.29tn). Upside estimates of $1.45tn (+11%) are possible, particularly if episodic bouts of volatility subside more than
  expected. Last year, roughly $260bn of IG issuance (~18% of total) was due to M&A activity, and we expect similar numbers for 2016. Second, credit curves will remain historically steep; those investors positioning for a material flattening of the curve will be disappointed. Nearly 15% of all M&A activity last year was financed in the IG bond market, a high point outside of an economic downturn (Figure 7). And the majority of this debt (56% last year) is funded via long-term paper (> 9 years). This new issuance will continue to saturate a buyer base that primarily consists of US life insurers and pensions needing to hit yield bogeys that are higher than current market rates. There is not a clear catalyst in our view to flatten spread curves absent 1) a unexpected reduction in M&A activity or 2) a material increase in 30yr Treasury yields (to the mid 3% range) that increases demand from insurers and pension funds.

  

   

  2) We prefer US Banks over Non-Financials

  We express this view with some consternation as US bank spreads are not cheap and they are coming off a year where they significantly outperformed nonfinancials (1.76% total return vs. -2.84%). However, absent a broader downturn in the US economy, we still believe that US banks will continue to relatively outperform. US banks are a higher-quality segment of the IG universe and they have massively de-levered since the financial crisis, in direct contrast to their nonfin counterparts (Figure 8). Empirically, bank sector spreads also typically weaken relative to the non-financial sector when a severe economic downturn fuels increased real estate losses. One can see this clearly in Figure 9 below, where bank spreads suffered under the burden of rising real-estate NPLs in 1990 and 2008. However, banks outperformed during the early 2000s recession, when corporates faced the brunt of losses, while real estate markets exhibited strength.

  

  We are not ready to proclaim that real-estate NPLs will not be a problem during the next downturn. However, the current evidence suggests it is mainly corporate losses that are beginning to tick higher; real estate NPLs continue to fall, primarily for residential properties. An intermediate concern persists in commercial real-estate, where even though NPLs are near record lows, risks are elevated. If these begin to rise, we would expect more pressure on REIT spreads to develop.

  The increase in corporate NPLs is not solely due to energy sector woes. Banks that are less exposed to the energy sector are still displaying a modest uptick in overall C&I loans from last December (Figure 10). The increase is slight, but this is why we
  bring it up. The first increases in bank NPLs are really the only early warning indicator you get. Hence, with most weakness showing up in US corporates at this time, plus subdued probabilities of a broader US downturn, we believe a relative overweight on Fins still makes sense in 2016.

  

   

  3) We prefer A-rated credit, particularly long-duration, in 2016

  Even though overall credit curves will remain steep due to our prior discussion on M&A activity and worsening bond market liquidity, there is still room in investor portfolios to hold A-rated 10+ paper. First, we attack the credit quality question by debunking the notion that BBB spreads are trading cheap. At face value, BBB credits are trading 100bps wider than A credits, vs. an average of 67bps back to the 1990s. However, once we exclude the impact of the energy/mining sectors, BBBs are trading only 73bps wider than A’s, in-line with fair value historically. At this stage of the credit cycle, a 7bp premium on BBB credit spreads is far from an attractive risk premium (Figure 11).

  What about BBB energy? While valuations appear more attractive, we are still neutral to negative on the space. Oil forecasts continue to be marked lower. Our own UBS forecast for WTI has just been marked down by 20% out to 2017 (new 2017 target of $52). Gas pipelines in particular face significant danger as a swath of names are rated BBB- and are peering over a large gap in spreads to  high-yield status. Many BBB rated E&P spreads also appear expensive and sit tenuously near a ledge (Figure 12). However, even if oil prices bounce, it is difficult to get excited about IG energy when the backdrop of a late stage credit cycle looms. If BBB’s in general widen out relative to A’s (as we expect), the tide should take out energy names as well before too long.

  

  Tactically, we believe the prospect for near-term gains in high-grade on an excess return basis (Treasury-hedged) is reasonable, assuming no fallout in the US or Chinese economy. But instead of taking extra credit risk to boost returns, we would rather take extra spread duration in higher quality credits. A-rated 10s30s curves have just now steepened to a record high 60bps and have surprisingly converged to BBB 10s30s curves over Q4’15 (Figure 13). Much of this steepening represents significant gains in A-rated 10-year paper; 30yr A-rated spreads are still marginally tighter than October levels, holding in reasonably well during the latest selloff. However, 30yr A-rated spreads are still near historically wide levels (Figure 14).

  

  In addition, investors will NOT need to sell A-rated paper in the event that the credit cycle worsens: They will simply need to remove the underlying Treasury hedge and hold these bonds as total return instruments. This is not the case for BBB credits, where fallen angel risk is far from trivial (see next section). We strongly believe that 30yr Treasury yields have room to drop in the event of downturn, providing a significant tailwind to long-duration IG credits. This is echoed by our rates team in their 2016 outlook where risks in longer-dated Treasury yields are skewed to the downside.

  In a China hard-landing scenario that leaves the US unscathed, 30yr Treasury yields could fall to 2% as inflation expectations are reduced. At current yields of 4.6% and a duration of 13.6, returns are positive as long as 10+ A-rated spreads do not widen more than 126bps over a year. That has not happened outside of the financial crisis. In short, we would suggest going long A-rated 10+ spreads to position for moderate excess returns over the next 3-6 months. As we enter into the latter half of 2016, we would recommend removing the Treasury hedge to position for total return gains, as we expect US credit cycle issues to become more apparent.

   

  4) Fallen angels are not a 2016 story, but forward risks loom large

  In recent days, many investors have voiced concerns about the potential impact of fallen angels for global credit markets. We do not expect US fallen angels to materialize as the story of 2016, outside of the commodity sectors, as they typically ramp up during US recessions. But fallen angels are a significant issue that will surely garner more headlines down the road. And it is a fundamental reason why we want to avoid long-duration BBB-rated debt at this point in the cycle. Figure 15 below provides context for one-year fallen angel transition rates8 over time, and how the risk is significantly greater for BBB-rated credits than A-rated credits.

  

  To estimate the potential impact for 2016, we use the average one-year fallen angel probabilities from Moody’s, both from 2014 alone and the average from 1983-2014. (Implicit in this assumption is that 2016 moves us from below average risk to near average downgrade risk.) This assumption would get us $77bn of fallen angels (average of $43bn and $111bn in Figure 15) falling into a $1.05tn HY market. However, $21bn of those fallen angels would be 10+ paper splashing into a $48bn 10+ HY market. Herein lies the problem: The proliferation of longer duration BBB debt could hit a HY market that is fractions its size.

  The problem would compound later in the cycle when risks could surge. As a potential worst case scenario, we use the simple sum of probabilities from 2001- 2002 and the current debt stock as an example of what could happen during a protracted downturn. If this comes to fruition, we estimate fallen angel volumes over 2 years could spike to $413bn, with $117bn of 10+ fallen angel paper (again crashing into a 10+ HY market that is only $48bn in size). This is an ugly spectre that the high-grade markets would need to face in future years.

   

  5) In sum, what are our spread/return forecasts for IG?

  As we suggested in 20159, the sensitivity of IG spreads to HY spreads has indeed dropped sharply in recent months (Figure 16). IG spreads are only widening about 10-15 bps for each 100bps widening in HY, which is down from 25-35bps earlier in the post-crisis period (particularly when banking sector risk was still elevated). With relatively better fundamentals, more financials exposure, and the prospect for significant HY commodity related defaults, we expect IG spreads to remain resilient, though not without spread widening, before 2016 is done. Our 2016 forecast for HY spreads is currently 800-850bps. Based on the change from current spreads (763bps) and applying a beta of 0.15 (in-line with that experienced recently), IG spreads should end the year between 175-185bps. Returns will be marginally stronger than last year, though still historically weak. Excess returns (Treasury-hedged) will be between 1.5-2.2% (vs. -1.63% in 2015), aided significantly by rolling down a steep IG curve. Total returns will vary depending on your assumptions for Treasury yields. If our 2016 UBS forecasts for 10yr Treasuries yields are correct (2.5%), IG total returns would equal 1.7-3.4%. If current market expectations from the forward curve are correct (2.35%), IG total returns should fare better and range between 2.7-3.4% (vs. -0.75% in 2015).

  

  

  

  

  

  

• CNN Reassures Investors: "Don't Panic… America's Economy Is Still In Good Shape"

  Submitted by Mac Slavo via SHTFPlan.com,

  Forget for a moment that U.S. stock markets have seen their worst start to a new year since the Great Depression or that some $2.5 trillion in wealth has been evaporated in less than two weeks.

  CNN says it’s hardly the time to panic:

  Time to panic? Hardly.

   

  There are plenty of reasons to relax, especially if you are a U.S investor. Here are the top two:

   

  1. America’s economy is still in good shape.

   

  2. Staying in stocks pays off. Since World War II, investors who remained in stocks for at least 15 years made money

   

  …

   

  Right now, the U.S. economy is growing. It’s not rock star growth, but 2% to 2.5% a year is good, and the Fed is being very cautious.

   

  More importantly, businesses are still hiring. Over 2.3 million jobs were added last year (the latest data on hiring comes out Friday and it’s widely expected to show more jobs added).

  Pay no attention to the fact that last week not a single cargo ship was transporting raw materials in the South China Sea, the first time in history that it has happened. The economy is is great shape and this is not proof that global commerce has literally stopped.

  Worry not that Walmart, Macy’s and scores of other retailers had an abysmal holiday season and are now set to lay off tens of thousands of workers. Unemployment, when calculated using models that were used during the Great Depression and that were defined out of existence by the government in 1994 show that some 23% of Americans are out of work. But we don’t calculate like that anymore, so we actually have an employment rate of about 95% in America right now.

  And though the economy is officially growing at 2.5% per year based on the government’s trustworthy data, we should absolutely not look at the inflation numbers, which according to Shadow Stats are running about 4% per year. If we did, however, go totally fringe and consider inflation within the context of the economy we might notice that this purported growth is actually negative 2% if not worse.

  In fact, we’re doing so well that just 45 million of America’s population of 320 million people are on food stamps right now. By all accounts, a really good sign of not just economic growth, but more jobs and an increase in personal incomes.

  And with oil trading at under $30 per barrel, we can see nothing but blue skies going forward because, hey, we’re all paying a dollar less for gas now. We’re sure this will have no effect on the domestic real estate market in places like Texas and North Dakota. Nor will this collapse in oil prices cause debt burdened domestic oil companies to close up shop, potentially leading to a domino affect across the entirety of the U.S. economy. Nor will it have any impact on periphery businesses that service those companies, including all of those restaurants that saw below-minimum wage job growth explode last year.

  You have absolutely nothing to worry about. The notion that an economic and financial catastrophe of historic proportions is playing out right before our eyes is the fantasy of internet conspiracy fanatics.

  At this point, we encourage our readers to take no action to prepare for the coming calamity, because there is no coming calamity.

  Carry on. Everything is awesome. It really is different this time.

  

  

  

  

  

• When Omnipotence Fails: JPMorgan Warns Upside Uncompelling As Central Bank Put Wanes

  JPMorgan shifts to the dark-side…

  It would be hard for a year to start any worse than 2016 has.
   

  

  The SPX is now off >8% YTD and has slumped ~10% from the late-’15 high of ~2080.  Chinese uncertainty (although more institutional than economic at this point vs. the opposite back in Aug), evidence of slowing domestic growth (JPM took its Q4:15 GDP forecast to +0.1%), trimmed earnings estimates (~$125 was being penciled in for this year back in Q4:15 but that is now $120 and falling), full multiples, and the absence of credible monetary policy responses (all the Fed will do is nothing which isn’t particularly impressive) are all conspiring to hit stocks and smoother sentiment (also the extremely uncertain US presidential election outlook is a big underappreciated headwind).

  Prices are oversold and sentiment hasn’t been this despondent in a long time (even Aug/Sept wasn’t this palpably negative) but any bounce will not be particularly impressive and in a lot of ways that is the main problem as the upside just isn’t compelling enough to make a major stand ($120 and 16x gets the SPX only to 1920 and at this point those are “best case” scenarios).  Enormous P&L destruction coming so early in the year, following the poor performance numbers from last week, has only made sentiment more miserable.  The fact we are in the middle of a news vacuum doesn’t help as it allows single data points (such as CSX’s “things haven’t been this bad outside of a recession” comment) to color the whole market (the CQ4 earnings season is always more spread out and so investors won’t hear from the all the S&P 50 CEOs until Feb).  However, just because the SPX won’t hit new highs doesn’t mean it will collapse either and there is something to be said for the fact that the index hasn’t made any progress for 18 months.  The extremely gloomy predictions of bear markets (down ~20% from the recent ~2100 high would imply a ~1680 SPX) or 2008-like catastrophes seem overdone.
   
  Top headlines/trends/themes from the week (in order of importance)

  The big overhang is growth, not China.  Obviously the CNY/CNH volatility has harmed sentiment and contributed to financial market volatility and China’s years-long economic slowdown is having global effects.  But while China gets most of the headline blame, the more important driver behind the YTD slump in US equities is signs of economic softness.  Q4:15 GDP estimates have been bleeding lower for months and are now sub-1% for many people.  The slight miss in Dec auto sales, coupled w/the caution from AutoNation, was prob. the single most important financial market development so far in 2016 outside of China – autos have been a mainstay of US economic growth for years, prob. the shining light of the post-crisis recovery, and if it were to weaken a major pillar of support would be removed.  Meanwhile the industrial economy is suffering enormous headwinds, many of them related to the carnage in energy (two industrial-levered firms, CSX and FAST, used the “recession” word on their earnings calls this week).  The consumer ostensibly has a number of tailwinds (jobs, housing, gas, etc) but isn’t acting as a particularly strong economic driver at the moment.  The bank earnings in aggregate were solid (from a macro perspective) but investors will need to hear from more CEOs in additional industries to bolster confidence in a ~$120 EPS number for 2016 (for the SPX).  In all likelihood the US economy will continue along at the same middling pace its witnessed since the financial crisis, varying somewhat quarter-to-quarter but w/an annual growth rate that doesn’t deviate much from 1.5-2.5% (US GDP: +2.5% ’10, +1.6% ’11, +2.2% ’12, +1.5% ’13, and +2.4% ’14; the St is modeling +2.4% for both ’15 and ’16).  JPMorgan’s M Feroli cut his Q4:15 GDP estimate from +1% to +0.1% on Fri in the wake of the retail and inventory report and took Q1:16 from +2.25% to +2% but stayed at +2.25% for Q2-4

   

  It’s not 2008.  It’s not 2010 either.  The key transmission mechanism through which macro problems become systemic events is the banking system but capital levels are extremely healthy now (in contrast to 2006-2008) and thus banks aren’t at risk of being compromised.  However, that doesn’t mean the outlook for risk assets is spectacular as the country remains later in its economic and corporate recovery cycle and multiples are fuller than they’ve been. 

   

  Multiples and earnings math suggest any bounce will be a shallow one.  The key for this tape remains the same – earnings and multiples.  The ’16 SPX EPS estimate has been bleeding lower for months, falling from ~$125 late in ’15 to ~$120 earlier this week (and some are few dollars below that).  The sanguine macro commentary from bank mgmt. teams this week was nice to hear but it will take similarly positive language from other Dow Jones-caliber CEOs to bolster confidence in $120.  As earnings forecasts were trimmed, multiples also were brought lower and whereas last year people could use $125 and 17x to justify ~2100+ for the SPX, at this time 16x is considered a ceiling for the time being (which means on a $120 EPS number the SPX at 1920).

   

  China gets blamed for a lot more than it should.  China continues to undergo a massive, complicated, and unprecedented (for them) transition away from an economy focused on manufacturing and exports and towards one dependent more on consumer consumption and services.  Meanwhile, the anti-corruption campaign (which President Xi this week pledged to sustain), efforts to clamp down on pollution, and a slowing in general economic momentum all create added challenges for this transition.  The lack of specific clarity from the government about its intentions (see the vague aphorisms and platitudes from the PBOC and other gov’t institutions on a daily basis) only makes it more difficult for investors to form a confident view on China’s outlook.  The currency vicissitudes are just one small example of the undermining uncertainty emanating from China – Beijing pledges to give markets a greater say in FX markets but intervenes heavily in the offshore market to stem CNH declines; it pledges to hold the yuan “balanced and level” but aggressively fixes the CNY lower; it shifts to a new reference basket w/o providing details on the member weights; etc.  The stock market machinations (introducing new circuit breakers before quickly canceling them; coercing funds to refrain from selling; etc) are a whole other problem.  The actual growth figures have been decent of late (including this week’s trade numbers) but this has had little effect on sentiment as institutional doubts grow larger.  Despite all the skepticism though investors need to appreciate that China’s policy apparatus is still relatively immature and not necessarily as precise and deliberate as is the case in more advanced economies.

   

  Oil remains a big problem.  The oil price decline is wreaking havoc everywhere, skewing data, and sowing uncertainty.  Global oil markets remain in a structural oversupply condition, something that doesn’t show many signs of ending.  OPEC is still uncoordinated and stepped up Iranian supply is about to come to market (the nuclear sanctions could wind up getting lifted any day).  US shale producers are experiencing enormous financial pain and bankruptcies are rising but supply destruction isn’t taking place fast enough to bring global markets into balance.  While demand conditions aren’t helping, the bigger problem for crude remains massive oversupply.  Despite the unfavorable supply backdrop though, the enormous volatility with which prices are swinging daily clearly is a function much more of financial flows and not changes in underlying fundamental conditions.  The historical playbook considers falling oil a clear economic positive but that doesn’t seem to be the case today.  To start, the US is now a major global producer and as such the domestic industry accounts for a lot of employment and capital spending.  Meanwhile, the behavior of the consumer has clearly changed and the massive oil dividends are being saved, not spent.  In addition, energy-linked companies were enormous issuers of equity and esp. debt over the last several years and the value destruction incurred by a lot of this paper is having real economic effects.  Finally, inflation expectations globally are underpinned to a large degree by oil and thus break-even measures (and lately survey-based measures of inflation too) have declined.

   

  Earnings – the CQ4 reporting season is too young to draw any firm conclusions but results from the one group w/a relatively large sample-size (the banks) were (mostly) encouraging.  Investors were nervous about the banks for a few reasons but in particular concerns about a crushing increase in energy-related credit provisions have hit the group hard in the last several weeks.  While provisions did tick higher for many due to commodity-related exposure (and NPAs/non-accruals weakened too), credit quality overall was very strong (and for the large money centers and regional banks energy lending remains small as a percent of their total loan books).  The other main macro indicator, loan growth, was healthy in Q4 as well.  In tech, TSMC and INFY both were solid (esp. INFY) while INTC underwhelmed (Data Center revs fell a bit short of expectations and mgmt. was a bit more cautious on the outlook for the core INTC business).  The industrial indications still point to a very tough operation environment (both CSX and FAST talked about conditions being recession-like).

   

  The US presidential election isn’t helping stocks.  Lurking in the background is the approaching US presidential election as the collapse in Clinton’s poll numbers of late raises the prospect of a Sanders vs. Trump or Cruz contest, something that isn’t helping sentiment.

  And finally – perhaps most importantly – Western central banks attempt to mollify sentiment with dovish rhetoric but to no avail.

  The BOE liftoff expectations get pushed back.  The ECB expresses a desire to do more should conditions warrant (as per the minutes out this week).  And a variety of Fed officials pour cold water on FOMC’s own current four hike guidance (although Dudley on Friday didn’t sound too worried about the macro environment).  The evolution in CB rhetoric isn’t particularly surprising and investors weren’t all that impressed regardless – monetary policy isn’t being looked to as a savior for the tape’s current travails. 

   

  For the Fed specifically, the market never endorsed the “four hike” guidance and even before the YTD break-down in equities investors were anticipating no more than two additional moves in ’16 (and that two is quickly moving to one or zero).   The ECB could very well “do more” but prob. not for a few months (they just acted and keep in mind that decision was somewhat controversial internally). 

   

  Central bank policy overall is extremely accommodative and will stay that way for a long time but increasingly central banks are moving into the background as a driver for the tape’s narrative.

  Source: JPMorgan

  

  

  

  

  

• How Did Americans Get So Fat, In Seven Charts

  Americans are fat. They are so fat very few would even bother to click on a hyperlink in this article explaining how fat they are, so instead we will present an animated chart showing the severity of the US obesity problem over the past 30 years.

  

   

  Cartoons aside, here are the facts: today two-thirds of U.S. adults are overweight or obese. Half are afflicted with chronic conditions like diabetes or high blood pressure that can often be prevented with better diets, but aren’t and as a result debt-funded healthcare costs have exploded, and while this chronic obesity has made pharma companies richer beyond their wildest dreams, it means future US healthcare spending and welfare obligations are unsustainable.

  America didn’t get this way overnight. The average calories available to the average American increased 25 percent, to more than 2500, between 1970 and 2010, according to data from the U.S. Department of Agriculture. There was no extra meal added to the day, instead an evolution in the type of foods Americans eat led to steady growth in calories.

  Added fats and grains account for a growing share of total caloric intake. These two categories, which include oils and fats in processed foods and flour in cereals and breads, made up about 37 percent of our diet in 1970. By 2010, they were 46 percent—a larger share of the growing pie. One of the main factor: cost; the increasingly more caloric foods become progressively cheaper and more affordable. The result: more of the lower and middle classes gravitated toward it, leading to the epidemic shown above.

  Here, courtesy of Bloomberg, are seven charts showing the detail behind America’s troubling obesity trend.

  First, this is where America’s calories come from.

  

  Cheese is replacing milk.

  

  A lot more fat goes into our foods.

  

  Calories from wheat, rice, and corn have increased. This includes refined grains like white bread that provide calories but are stripped of much of the nutrients in whole grains.

  

  There are some indications that Americans are changing their diets to become healthier. For example, we’re swapping red meat for chicken.

  

  And though corn syrup boomed since the 1970s, the total amount of sweeteners we eat has declined. That’s partly because Americans are drinking less soda.

  

  These positive changes haven’t negated the overall increase in calories on our plates. More than two-thirds of U.S. adults are overweight or obese, compared to less than half in the 1970s.

  

  The government’s dietary guidelines are simple: “Almost all people in the United States could benefit from shifting choices to better support healthy eating patterns.” Right, now if only the government would also subsidize this healthy – which means more expensive – eating. We won’t hold our breath: after all the massive pharma lobby would generate far less profits for its clients if US obesity were to sharply decline as a result of someone doing the right thing.

  So until something does take place to shock the US out of its fatty momentum, here is Family Guy.

  

  

  

  

  

• The Map That Will Change The Way You See The World

  How do you view your country relative to others? Chances are if it’s based on most world maps, your view is distorted.

  As the world turns its gaze to the rich and pretty people in Davos this coming week, The World Economic Forum unleashed the following cartogram, created by Reddit user TeaDranks, that could change your entire perception of the world. Cartograms scale a region’s geographic space according to a particular attribute and in this case each square now represents 500,000 people.

  (click image for massive legible version)

  

   

  We all know that India and China have large populations, but this map emphasises their size on a global scale. Compared to conventional world maps, the two Asian powerhouses dominate. Along with several East Asian neighbours – Bangladesh, Japan, the Philippines and Indonesia – their contribution to the global population is clear.

  The size of Nigeria and Brazil compared to the rest of Africa and Latin America is equally apparent.

  The map also effectively highlights the contribution of cities and regions to total populations. For example, the greater Tokyo region accounts for a significant proportion of Japan’s overall population. Equally, Delhi, Shanghai and Mumbai all occupy areas larger than many European nations.

  At the other end of the scale, some economies which are barely visible on traditional world maps appear much larger on the cartogram. Consider the cases of Hong Kong and Taiwan, whose relatively large populations compared to their geographical sizes see them feature much more prominently.

  Conversely, some countries which are very large on conventional maps can barely be seen. Canada, Russia and Australia are much smaller in TeaDranks’ representation, which was inspired by Paul Breding’s 2005 work. Canada in particular disappears almost entirely.

  Source: WEForum.org

  

  

  

  

  

• How QE Crushes The Real Economy & Why The Secular Low In Treasury Yields Lies Ahead

  The economy was supposed to fire on all cylinders in 2015. Sufficient time had passed for the often-mentioned lags in monetary and fiscal policy to finally work their way through the system according to many pundits inside and outside the Fed. Surely the economy would be kick-started by: three rounds of quantitative easing and forward guidance; a record Federal Reserve balance sheet; and an unprecedented increase in federal debt from $9.99 trillion in 2008 to $18.63 trillion in 2015, a jump of 86%. Further, stock prices had gained sufficiently over the past several years, thus the so-called wealth effect would boost consumer spending. But the economic facts of 2015 displayed no impact from these massive government experiments.

  Excerpted from Lacy Hunt and Van Hoisington's Q4 2015 Review & Outlook…

  Since the introduction of unconventional and untested monetary policy operations like quantitative easing (QE) and forward guidance, an impressive amount of empirical evidence has emerged that casts considerable doubt on their efficacy.

  Central banks in Japan, the U.S. and Europe tried multiple rounds of QE. That none of these programs were any more successful than their predecessors also points to empirical evidenced failure.

  On QE's Utter Failure (or  Why QE Hurts More Than It Helps)

  This empirical data notwithstanding, a causal explanation of why QE and forward guidance should have had negative consequences was lacking. This void has now been addressed: Quantitative easing and zero interest rates shifted capital from the real domestic economy to financial assets at home and abroad due to four considerations:

  • First, financial assets can be short-lived, in the sense that share buybacks and other financial transactions can be curtailed easily and at any time. CEOs cannot be certain about the consequences of unwinding QE on the real economy. The resulting risk aversion translates to a preference for shorter-term commitments, such as financial assets.
  • Second, financial assets are more liquid. In a financial crisis, capital equipment and other real assets are extremely illiquid. Financial assets can be sold if survivability is at stake, and as is often said, “illiquidity can be fatal.”
  • Third, QE “in effect if not by design” reduces volatility of financial markets but not the volatility of real asset prices. Like 2007, actual macro risk may be the highest when market measures of volatility are the lowest. “Thus financial assets tend to outperform real assets because market volatility is lower than real economic volatility.”
  • Fourth, QE works by a “signaling effect” rather than by any actual policy operations. Event studies show QE is viewed positively, while the removal of QE is viewed negatively. Thus, market participants believe QE puts a floor under financial asset prices. Central bankers might not intend to be providing downside insurance to the securities markets, but that is the widely held judgment of market participants. But, “No such protection is offered for real assets, never mind the real economy.” Thus, the central bank operations boost financial asset returns relative to real asset returns and induce the shift away from real investment.

  …

   

  It is quite possible that corporate decision makers do not understand the relationships that cause QE and forward guidance to redirect resources from real investment to financial investment. It is also equally likely these executives do not understand that this process reduces economic growth, impairs productivity and hurts the rise in wage and salary income. But, does a lack of understanding of economic theory by key market participants render the causal relationships invalid?

   

  Spence and Warsh elegantly argue corporate executives do not need to know these fundamental relationships. Here is their key passage: “Market participants may not be expert on the transmission mechanism of monetary policy, but they can deduce that the central bank is trying to support financial asset prices. The signal provided by central banks might be the essential design element.” Real assets market participants simply need to know that the central bank does not offer such protection. In other words, the corporate managers merely need to realize that one asset group is protected and the other is not.

  On Monetary Policy's Endgame…

  Our assessment is that monetary policy has no viable policy options that are capable of boosting economic activity should support be needed. In fact, the options available to the central bank, at this stage, are likely to be a net negative.

   

  …

   

  The extremely high level of debt suggests that the debt is skewed to unproductive and counterproductive uses. Debt is only good if the project it finances generates a stream of income to repay principal and interest. There are two types of bad debt: (1) debt that does not generate income to repay interest and principal (Hyman Minsky, “The Financial Instability Hypothesis”); and (2) debt that pushes stock prices higher without a commensurate rise in corporate profits (Charles P. Kindleberger, Manias, Panics and Crashes).

  On Treasuries…

  With the trajectory in the nominal growth rate moving down, U.S. Treasury bond yields should work lower, thus reversing the pattern of 2015 and returning to the strong downtrend in place since 1990.

   

  …

   

  The firm dollar will remain a restraining force on economic activity and should cause the year-over-year increase in the CPI to reverse later in the year. Under such circumstances, lower, rather than higher, inflation remains the greater risk. Such conditions are ultimately consistent with an environment conducive to declining long-term U.S. Treasury bond yields. In short, we believe that the long awaited secular low in long-term Treasury bond yields remains ahead.

  Full must-read letter…

  Hoisington Q4

  

  

  

  

  

• Iran Sanctions Lifted As Nuclear Deal Implemented, US Hostages Freed

  #ImplementationDay–I thank God for this blessing & bow to the greatness of the patient nation of Iran. Congrats on this glorious victory!

  — Hassan Rouhani (@HassanRouhani) January 16, 2016

  U.S. + EU will begin lifting nuclear-related sanctions, expanding the horizon of opportunity for the Iranian people.

  — John Kerry (@JohnKerry) January 16, 2016

  Today marks the moment the #IranDeal has transitioned from ambitious promises on paper to measurable actions in practice.

  — John Kerry (@JohnKerry) January 16, 2016

  We’re getting to #ImplementationDay. Nothing serious. Diplomacy requires patience, but we all know that it sure beats the alternatives.

  — Javad Zarif (@JZarif) January 16, 2016

  Just days after two US Navy boats and ten sailors were seized at Farsi Island ahead of President Obama’s state-of-the-union address and just days before Tehran will see international sanctions lifted as part of the “historic” nuclear accord, four US hostages have been freed in a prisoner swap between Washington and Tehran.

  Among the detainees is Washington Post reporter Jason Rezaian who was famously held for spying after being convicted in a shadowy trial last year and faced up to 20 years in an Iranian prison.

  

  According to FARS, Iran also freed Marine veteran Amir Hekmati and Christian pastor Saeed Abedini, who had been held on a variety of charges.

  “All four are duel U.S.-Iranian citizens, according to the semiofficial Mehr and Fars news agencies,” WaPo notes, adding that “news of the exchange came as world leaders converged [in Vienna] on Saturday in anticipation of the end of international sanctions against Iran in exchange for significantly curtailing its nuclear program.”

  Foreign Minister Mohammad Javad Zarif was brimming with optimism when he arrived [in Vienna] earlier in the day and met with Federica Mogherini, the European Union’s foreign policy chief,” WaPo says.

  “This is a good day for the Iranian people . . . and for the world,” Zarif proclaimed. “What is going to happen today is proof . . . that major problems in the world could be tackled through dialogue, not threats, pressures and sanctions.”

  “International sanctions on Iran will be lifted on Saturday when the United Nations nuclear agency declares Tehran has complied with an agreement to scale back its nuclear program,” Reuters writes, adding that “‘implementation day’ of the nuclear deal agreed last year marks the biggest re-entry of a former pariah state onto the global economic stage since the end of the Cold War, and a turning point in the hostility between Iran and the United States that has shaped the Middle East since 1979.”

  The IAEA is reportedly set to issue a report that confirms Iran has complied with its commitments under the agreement struck last summer. That report will trigger the lifting of sanctions and the return of Iran to the world stage. A joint statement is expected later today.

  This comes as US lawmakers push for fresh sanctions on Tehran in connection with two ballistic missile tests the Iranians carried out in October and November, and just weeks after an “incident” in the Strait of Hormuz saw the IRGC conduct a live-fire rocket test within 1,500 yards of a US aircraft carrier.

  The deal has ruffled more than a few feathers in Riyadh, where the P5+1 agreement has stoked fears that America’s rapprochement with the Iranians marks a shift in US Mid-East policy that could endanger the regional balance of power at a time when relations between the Sunni and Shiite powers have deteriorated markedly. As an aside, Zarif is trolling the Saudis on Twitter as we speak:

  #ImplementationDay, it’s now time for all—especially Muslim nations—to join hands and rid the world of violent extremism. Iran is ready.

  — Javad Zarif (@JZarif) January 16, 2016

  Summing up Saturday’s proceedings in Vienna:

  

  *  *  *

  From FARS

  “Based on an approval of the Supreme National Security Council (SNSC) and the general interests of the Islamic Republic, four Iranian prisoners with dual-nationality were freed today within the framework of a prisoner swap deal,” the office of Tehran prosecutor said.

  Jason Rezaian, Amir Hekmat, Saeed Abedini and a fourth American-Iranian national who were jailed in Iran on various charges in recent years have all been released.

  According o the swap deal, the US has also freed 6 Iranian-Americans who were held for sanctions-related charges..

  A senior Iranian legislator citing an IRGC report on Rezaian’s case said in October that he has been imprisoned for his attempts to help the US Senate to advance its regime change plots in Iran.

  In late July 2014, Iran confirmed that four journalists, including Washington Post correspondent Jason Rezaian, had been arrested and were being held for questioning.

  Rezaian’s wife Yeganeh Salehi, a correspondent for the United Arab Emirates-based newspaper, the National, was also arrested at that time, but she and two others were released later.

  According to the Constitution, the Judiciary is independent from the government in Iran.

  Some reports earlier this year had spoken of a potential prisoner swap between Iran and US following the Vienna nuclear deal in July.

  

  

  

  

• President Obama's Iran Policy Explained (In 1 Cartoon)

  “Hands Up… Don’t Nuke”?

   

  

   

  Source: Investors.com

  

  

  

  

  

• Too Many "Think Tanks" Are Just Kool-Aid Fueled Group-Think

  Authored by Mark St.Cyr,

  The morning routine for many over the last few weeks suddenly has had a peculiar fly in the ointment added to the day’s ensuing narrative. First: how is it that “everything is awesome” has suddenly turned many a 401K balance into WTF status. And second: why is it when they return home the TV no-longer seems to shout how the mornings plunge in stock prices was met with a near immediate BTFD (buy the dip) rally erasing any and all previous losses with gains? Suddenly it seems things are quite different.

  Yes, indeed – they truly are.

  For the last 5+ years the above has been the dispensed conditioning reminiscent of Pavlov’s canines of not only many a next-in-rotation fund manager, but also, the next in rotation so-called “smart crowd” guest from some well named “think tank” appearing within the various outlets of not only the financial programs, but rather, throughout the main stream media in total.

  Over the last 5 years the various Fed. QE (quantitative easing) interventions into the capital markets has facilitated dumb luck trading into “genius” status, and no clue analysis into “spot on brilliant” prognostications. The real issue at hand is many believed their own press, and the current state of egg on their face would make many a Denny’s™ blush. As bad as that sounds – it gets worse.

  The other day I was viewing a program where the guest was the president of one of the well-known, prominent, “think tank” (TT) institutes. (I’m not trying to be coy in not naming, it just doesn’t matter, for its more of a cabal than any one singular.) These TT’s are where policy members whether it would be Federal Reserve officials past or present, along with lawmakers and other central bankers from across the globe will speak among themselves (or dispense advice) and ruminate about monetary policy, its effects, and so on. And yes, far, far more.

  Supposedly this is where the “thinking” gets exercised within the peer group for efficacy before, and possibly during, any implementation phase that might arise. One would think this is where a robust dialogue of differing ideas would be present. Alas, it would seem far from it. For if what I witnessed when listening to an argument as to why or, why not the current market gyrations are showing obvious warning signs that need to be heeded. The prevailing rationale and thoughts to my ear resembled more around illogical or, spurious group think, as opposed to anything resembling a tank where “great minds think alike” would gather.

  On the table front and center was the topic of China and their current stock market malaise. Also, within the conversation was a two-part topic concerning The Fed. There was the question as to whether or not the current rate hike has inflamed the current melt down we’re witnessing in Chinese markets. But also, the topic of whether or not the “Audit the Fed.” initiative recently voted on was a valid issue. Whether or not you agree or disagree with the audit bill is for you to decide. However, the issue that took me completely off-guard were the arguments made against it and the examples used. From my perspective this was a brief moment of clarity when one could get a glimpse of just how delusional or decoupled from reality these TT’s have become. Ready?

  (I had just taken a mouthful of coffee when these was delivered. So, if you might be doing something similar, may I warn you – put it down first before reading the next few sentences.)

  In response to China and whether they have a debt problem the retort was : “China doesn’t have a debt problem – they have a stock problem.”

  In response to the “audit” issue: “It’s The Fed. that has saved this economy, and just look at the $Billions it recently paid to the treasury.”

  In response to the consumer: “Consumers are doing quite well.” “Gas (prices) is a boon to retail.”

  In response to employment and the economy: “Jobs are doing great, people just aren’t spending.” “GDP is on the right track.”

  If someone wants to argue or, consider that China doesn’t have a debt problem, maybe you would like to consider purchasing some ocean front property I have in Kentucky. I’ll give you a great deal. Trust me. Or, how about the beneficial argument about how the Fed. has made payments to the Treasury? If you can argue with a straight face and no chuckling what so ever (or else the offer is null and void) how we benefit as a nation emulating a Ponzi type system of money creation and payments – I’ll discount that beach property 10%. Heck, if you can do it; make it 15%. It’ll be worth it from my perspective. Again: trust me.

  As startling as the above responses may be, what’s truly terrifying is although you or I may see the absurdity – the people “in charge” of monetary policy and more are not only of this view-point. Many are guest speakers as well as hand-picked or invited “senior fellows” that perpetuate the narrative and reasoning on why these views and responses to events are either correct or, proper while insinuating: they know best, and all you need to do listen (and/or obey.) Just don’t dare question them. That’s when things get ugly. Not for them – but for you.

  Today, with the markets in turmoil resembling the antithesis of what was touted by the so-called “smart crowd,” this is going to have a far more negative effect on the populace at large than previous iterations. For 5 of the last 7 years since the financial meltdown of ’08 many believed this crowd actually understood or, at the least “had a clue” about what has been transpiring within the global economy by the manifestations created not by just the Fed’s initial intervention into the markets. Rather, that they could control the resulting Frankenstein it created in continuing that intervention.

  During this period it could be seen by anyone willing to put down the Kool-Aid® long ago they could not. Yet. it seems at many of these “institutes” as well as gatherings of “great minds thinking alike” not only was it decided to avert their eyes and brains away from the growing monster, but it seems they decided to go full-Krugman supplying a free-flowing, open bar, endless supply of the punch to any and all takers.

  As the many who believed, as well as listened, (or worse) took advice from this cabal. This weekend is going to have many wondering: Do they open their 401K statement this month? Or, like in 2007-08 toss it to the side and hope (if not pray) that the “experts” really do know what they’re doing. Or, is it different this time?

  My feeling is: not only is it different; the one’s that understood the fragility of this house-of-cards left long ago. While the one’s that remained are in that process. And they aren’t coming back when the shouts of “stocks on sale” hit the airwaves in the coming weeks and months. Just like they didn’t this past holiday season for retailers. Sales don’t matter when the collective mindset has turned from bargain shoppers to – preserving what you’ve got. And the retail numbers are showing just that.

  However, not to be alarmed. For the people who will tell you, “The consumer is fine” will also be the ones surrounded by their compadres in a massive display of “group think” and “great mind brilliance” next week in no other place than Davos Switzerland. For why should the economy or body politic be viewed as having anything less than stories of great success and enlightenment when a party of four’s single night dining bill and subsequent bar tab will probably eclipse exponentially the average Joe’s 2 week vacation tab? That is, if the average person can still afford one to compare it to.

  Besides, do you really want to go on vacation today with all the safety concerns around the globe? Just look at what it’ll take to make these people who tell you “everything is awesome” have to contend with to enjoy theirs. This year it will take 5000 Swiss military to protect this enclave alone. I wonder what that’ll cost them.

  Actually: who cares. After all the most important item at this event will be on-tap, free-flowing, and in endless supply.

  Intellectual brainstorming resulting in pragmatic ideas as to solve the world’s economic crises and other issues you ask? No, silly…

  The Kool-Aid!

  

  

  

  

  

• With Draghi On Deck, ECB Mulls Steps To Solve "Non-Existent" Bond Scarcity Problem

  It’s nearly that time again.

  On the heels of December’s “big disappointment” wherein Mario Draghi cut the depo rate by a “measly” 10 bps and extended PSPP by an underwhelming six months, the ECB meets again next week, and this time around, expectations are low.

  Despite the fact that markets have descended into outright turmoil, the ECB “is very unlikely to change its QE dynamics or cut the deposit rate at the upcoming meeting,” Barlcays says. “The earliest QE tweak opportunity for the ECB is the March meeting, if at all.”

  So assuming Draghi doesn’t immediately push the panic button now that sub-$30 crude is virtually guaranteed to keep the Eurozone mired in deflation, we’ll write next week off when it comes to further cuts to the depot rate of a further extension/expansion of QE.

  That said, we doubt we’ve seen the end of ECB easing especially given what’s currently unfolding in markets across the globe and considering the trajectory for commodity prices. The question now is what options the ECB has considering the fact that each incremental bond purchase brings the central bank ever closer to the endgame wherein Draghi begins to bump up against the issue cap for German bunds and, depending on how long the program is ultimately extended, for Spanish and French bonds as well. That goes double in the event the ECB expands the pace of monthly purchases (i.e. if Draghi both extends and expands the program).

  Here’s a table from Barclays which outlines two hypothetical scenarios. The first assumes PSPP is extended for another six months beyond March 2017. The second assumes a €20 billion expansion in the monthly pace of purchases and no extension of the program’s duration.

  

  As you can see, in either case the ECB hits the threshold (33%) for bunds, implying that expanding and extending the program simply isn’t possible unless the EBC drops the capital key allocation.

  “We think flexibility in potentially moving away from the capital ratio has a more credible chance because it would not have to happen immediately. It will likely be pitched as: if and when we hit the 33% limit in Germany, we might look into allocating the excess in German purchases to other EGBs, still according to ECB key capital rules of the remaining issuers,” Barlcays says, adding that dropping the issue cap would risk running into the CAC problem.

  As for buying more covered bonds, SSAs and ABS, Barclays says the game is about up in those markets. “Liquidity has significantly worsened in asset classes such as covered bonds, agencies, supras and ABS since the launch of the asset purchase programme,” the bank notes. “As a result, the ECB might run out of bonds to buy or just find it difficult to place bonds in these universes in order to achieve its monthly target purchase amount (likely up to €20bn out of €60bn).”

  

  In another sign that purchase eligible assets are indeed becoming scarce, Bloomberg notes that although ECB officials “say monthly purchases of about 1 percent of the bonds outstanding haven’t constricted the market, sales of ‘off-the-run’ securities by some of the region’s biggest issuers argue to the contrary.” Here’s more:

  France’s AFT, which boosted the proportion of sales of such non-benchmark securities to 33 percent last year, the most since 2011, said reopenings of the less-traded debt help “preserve liquidity along the entire curve.” Germany plans to sell more of an off-the-run July 2044 security this year, the Finance Agency said last month.

   

  “The longer QE goes on, the more that the distortion impact can be visible, and you can tackle that through these off-the-run issuance,” said David Schnautz, a director of rates strategy at Commerzbank AG, which acts as a primary dealer in both France and Germany.

   

  Existing benchmark bonds become off the run once they’re replaced by a new similar security in sufficient size. Issuing more of the older bonds, which tend to be less frequently traded and, in today’s environment, tend to carry a higher coupon, helps expand the universe of securities available to national central banks, who carry out QE.

   

  “If you can only buy 33 percent of the benchmark bonds, you won’t hit your monthly purchase target over an extended time period,” Commerzbank’s Schnautz said.

  In other words, scarcity and liquidity are indeed problems, no matter what the Governing Council says. 

  What all of the above suggests is that if the ECB intends to both expand and extend PSPP while maintaining the issue cap and retaining the depo floor constraint, eventually Draghi will need to find more bonds to buy and he’s not going to get to where he wants to be by snapping up a few sub-sovereigns or coaxing out off-the-run issuance in dribs and drabs.

  And so, unless the ECB intends to find itself in a situation where it is forced by PSPP’s many constraints to continually disappoint the market in an environment where low commodity prices are likely to cause inflation to continually undershoot the central bank’s target, it’s just as likely as not that the ECB will move into IG corporates next and from there, it’s full-Kuroda-ahead into stocks.

  

  

  

  

  

  

• The Great Unraveling Looms – Blame The 'Austrians'?

  Submitted by Alasdair Macleod via GoldMoney.com,

  Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain's Adam Smith Institute publishes a paper by Anthony Evans that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

  Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.

  The Adam Smith Institute's paper is not so shy, and includes both "sound money" and "Austrian" in the title, though the first comment on the web version of the press release says talking about "Austrian" proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans's paper.

  The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers' central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed's new policy of raising interest rates was influenced by the BIS's view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.

  These are straws in the wind perhaps, but surely central bankers are now beginning to suspect that conventional monetary policy is not all it's cracked up to be. For a possible alternative they could turn to the article by Anthony Evans, published by the Adam Smith Institute. Their hearts will sink, because Evans makes it clear that central banks are best as minimal operations, supplying money through open market operations (OMOs) on a punitive instead of a liberal basis. Instead of targeting inflation, Evans recommends targeting nominal GDP. Evans's approach is deliberately sound-money-light, on the basis that it is more likely to be accepted than a raw sound-money approach. But he does hold out the hope it will be an interim measure towards sound money proper: initially a Hayekian rather than a Misesian approach.

  Targeting nominal GDP is not a perfect answer. As Evans points out, changes in government spending distort it, and by targeting output, there may be less control over inflation, if control was ever the right word. However, my own researches are generally supportive of Evans's approach to managing the money supply. This is because, logically, nominal GDP, which is impossible to measure accurately by the way, is simply the total amount of money deployed in the part of the economy included in GDP. The reason this must be so is Say's law, the law of the markets, tells us that we produce to consume, and production is balanced by the sum of consumption and savings. Therefore, if new money or bank credit is introduced into the economy, it will temporarily increase both demand and supply for goods, until the spread of rising prices for the goods affected negates the impact.

  In managing the total money supply, a central bank would have to take into account fluctuations in bank credit, and adjust its own operations accordingly. No MPC, no FOMC, and no convoluted analysis of inflation prospects are required. The true Austrian approach is to welcome a corrective crisis as the most efficient and rapid way to unwind malinvestments. Nominal GDP targeting of a few per cent can be expected to soften this process without unduly discouraging it.

  While I support the concept of targeting nominal GDP, Evans's paper is necessarily complicated, written for an audience that denies Say's law. He argues his case on a modified equation of exchange, M+V = P+Y, where M is the growth rate of the money supply, V is the change in its velocity, P is the inflation rate, and Y is the growth rate of output.

  My worry is that the faintest suggestion of sound money policies will be blamed for a developing economic crisis, without being adopted at all. Within one month of the Fed raising the Fed Funds rate by a miniscule 0.25%, it seems the whole world is falling apart. The usual market cheerleaders are now on record of expecting a global crisis to develop, the signs being too obvious to ignore. Markets are over-valued relative to deteriorating economic prospects. Collapsed energy and commodity prices tell their own story. Shipping rates and the share prices of US utilities (including rails and freight) are falling. The days of blaming China for a contraction of world trade are over: the downturn is now far larger and more widespread.

  Decades of accumulated market distortions appear to be on the brink of a great unwind, most of which can be blamed on expansionary monetary policies. If so, the banking crisis of 2008 was a prelude, rather than the crisis itself. The Fed will almost certainly reduce interest rates back to zero, and reluctantly will have to consider imposing negative rates.

  The Keynesians will blame the Fed for a complete policy failure. They will argue in retrospect, as they did following the banking crisis, that the financial and economic crisis of 2016 was made immeasurably worse by the Fed raising the Fed funds rate and not pumping yet more money into the economy at such a crucial time. It's like saying alcoholics must drink more to be cured. The monetarists will simply say that the Fed got it wrong, and that monetarism was not to blame. They will both blame advocates of inflexible sound money.

  The reality is, that by implementing conventional policies on the recommendation of group-thinking macroeconomists, the central banks have dug a hole too deep to escape. Recognition of the merits of Austrian sound money theory will simply expose this reality sooner than later.

  

  

  

  

  

• Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears

  Earlier this week, before first JPM and then Wells Fargo revealed that not all is well when it comes to bank energy loan exposure, a small Tulsa-based lender, BOK Financial, said that its fourth-quarter earnings would miss analysts’ expectations because its loan-loss provisions would be higher than expected as a result of a single unidentified energy-industry borrower. This is what the bank said:

  “A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”

  Another bank, this time the far larger Regions Financial, said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter.

  It didn’t stop there and and as the WSJ added, “It’s starting to spread” according to William Demchak, chief executive of PNC Financial Services Group Inc. on a conference call after the bank’s earnings were announced. Credit issues from low energy prices are affecting “anybody who was in the game as the oil boom started,” he said. PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio.

  Then, on Friday, U.S. Bancorp disclosed the specific level of reserves it holds against its $3.2 billion energy portfolio for the first time. “The reason we did that is that oil is under $30” said Andrew Cecere, the bank’s chief operating officer. What else will Bancorp disclose if oil drops below $20… or $10?

  It wasn’t just the small or regional banks either: as we first reported, on Thursday JPMorgan did something it hasn’t done in 22 quarter: its net loan loss reserve increased as a result of a jump in energy loss reserves. On the earnings call, Jamie Dimon said that while he is not worried about big oil companies, his bank has started to increase provisions against smaller energy firms.

  

   

  Then yesterday it was the turn of the one bank everyone had been waiting for, the one which according to many has the greatest exposure toward energy: Wells Fargo. To be sure, in order not to spook its investors, among whom most famously one Warren Buffett can be found, for Wells it was mostly “roses”, although even Wells had no choice but to set aside $831 million for bad loans in the period, almost double the amount a year ago and the largest since the first quarter of 2013.

  What was laughable is that the losses included $118 million from the bank’s oil and gas portfolio, an increase of $90 million from the third quarter. Why laughable? Because that $90 million in higher oil-and-gas loan losses was on a total of $17 billion in oil and gas loans, suggesting the bank has seen a roughly 0.5% impairment across its loan book in the past quarter.

  How could this be? Needless to say, this struck us as very suspicious because it clearly suggests that something is going on for Wells (and all of its other peer banks), to rep and warrant a pristine balance sheet, at least until a “digital” moment arrives when just like BOK Financial, banks can no longer hide the accruing losses and has to charge them off, leading to a stock price collapse.

  Which brings us to the focus of this post: earlier this week, before the start of bank earnings season, before BOK’s startling announcement, we reported we had heard of a rumor that Dallas Fed members had met with banks in Houston and explicitly “told them not to force energy bankruptcies” and to demand asset sales instead.

  Rumor Houston office of Dallas Fed met with banks, told them not to force energy bankruptcies; demand asset sales instead

  — zerohedge (@zerohedge) January 11, 2016

  We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston.

  This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches.

  In other words, the Fed has advised banks to cover up major energy-related losses.
  

   Why the reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.

  In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.”

  Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up.

  Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we firsst showed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.

  

   

  However, the big wildcard here is the Fed: what we do not know is whether as part of the Fed’s latest “intervention”, it has also promised to backstop bank loan losses. Keep in mind that according to Wolfe Research and many other prominent investors, as many as one-third of American oil-and-gas producers face bankruptcy and restructuring by mid-2017 unless oil rebounds dramatically from current levels.

  However, the reflexivity paradox embedded in this problem was laid out yesterday by Goldman who explained that oil could well soar from here but only if massive excess supply is first taken out of the market, aka the “inflection phase.”  In other words, for oil prices to surge, there would have to be a default wave across the US shale space, which would mean massive energy loan book losses, which may or may not mean another Fed-funded bailout of US and international banks with exposure to shale.

  What does it all mean? Here is the conclusion courtesy of our source:

  If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind. My question for bank eps is if you issued terms in 2013 (2012 reserves) at 110/bbl, and redetermined that revolver in 2014 ‎at 86, how can you be still in compliance with that same rating and estimate in 2016 (knowing 2015 ffo and shutins have led to mechanically 40pc ffo decreases year over year and at least 20pc rebooting of pud and pdnp to 2p via suspended or cancelled programs). At what point in next 12 months does interest payments to that syndicate start to unmask the fact that tranch is never being recovered, which I think is what pva and mhr was all about.

  Beyond just the immediate cash flow and stock price implications and fears that the situation with US energy is much more serious if it merits such an intimate involvement by the Fed, a far bigger question is why is the Fed once again in the a la carte bank bailout game, and how does it once again select which banks should mark their energy books to market (and suffer major losses), and which ones are allowed to squeeze by with fabricated marks and no impairment at all? Wasn’t the purpose behind Yellen’s rate hike to burst a bubble? Or is the Fed less than “macroprudential” when it realizes that pulling away the curtain on of the biggest bubbles it has created would result in another major financial crisis?

  The Dallas Fed, whose new president Robert Steven Kaplan previously worked at Goldman Sachs for 22 years rising to the rank of vice chairman of investment banking, has not responded to our request for a comment as of this writing.

  

  

  

  

  

• Was That The Capitulation? Not Even Close

  Is it different this time?

  "Sentiment" – musings of a madding crowd – would suggest 'yes', The Bulls just capitulated (notably more than than in the August collapse)…

  

  h/t @Not_Jim_Cramer

  "Volume" – real traded action of a crowded trade – would suggest 'no' – The Bulls haven't even started selling (no panic here, especially relative to August's collapse)…

  

  h/t @DonDraperClone

   

  Did the "most hated" bull market just became the "least panicked" bear market?

  

  

  

  

  

• Earthquake Economics – Waiting For The Inevitable "Big One"

  Submitted by MN Gordon (via Prism Economics), annotated by Acting-Man.com's Pater Tenebrarum,

  Beyond Human Capacity

  “The United States of America, right now, has the strongest, most durable economy in the world,” said President Obama, in his State of the Union address, on Tuesday night.  What performance metrics he based his assertion on is unclear.  But we’ll give him the benefit of the doubt.

   

  

   

   

  Maybe this is so…right now.  But it isn’t eternal.  For at grade, hidden in plain sight, a braid of positive and negative surface flowers indicate an economic strike-slip fault extends below.  What’s more, the economy’s foundation dangerously straddles across it.

   

  

  Actually, it probably isn’t so – the Atlanta Fed’s GDP Now measure, which has proven surprisingly accurate thus far, indicates that the US economy is hanging by a thread – and the above chart does now yet include the string of horrendous economic data released since January 8.

   

  Something must slip.  A massive vertical rupture is coming that will collapse everything within a wide-ranging proximity.  It is not a matter of if it will come.  But, rather, of when…regardless of what the President says.

  Here at the Economic Prism we have no reservations about the U.S. – or world – economy.  We see absurdities and inconsistencies.  We see instabilities perilously pyramided up, which could rapidly cascade down.  We just don’t know when.

  Comprehending and connecting the infinite nodes and relationships within an economy are beyond even the most intelligent human’s capacity.  Cause and effect chains are not always immediately observable.  Feedback loops are often circuitous and unpredictable.  What is at any given moment may not be what it appears.

   

  Not Without Consequences

  For instance, the Federal Reserve quadrupled its balance sheet following the 2008 financial crisis, yet consumer prices hardly budged.  Undeniably, the Bureau of Labor Statistics’ consumer price index is subject to gross manipulation.  We’re not endorsing the veracity of the CPI.

  We’re merely pointing out policies have been implemented that have massively increased the quantity of money, yet we can still get a hot cup of donut shop coffee for less than a buck.  Obviously, the effects of these policies have shown up in certain assets…like U.S. stocks.  That’s not to say they won’t still show up in consumer prices.  They most definitely will.

   

  

  One should perhaps not be too surprised that most prices are far from declining – even when measured by government methods that are specifically designed to play price increases down in order to lower the growth rates of so-called COLA expenses (and leaving aside the fact that the so-called “general level of prices” is a myth anyway and actually cannot be measured) – click to enlarge.

   

  The point is no one really knows when consumer prices will rapidly rise.  The potential is very real.  Like desert scrub tumbling along a highway edge, one little spark could send prices up in a bush fire.  Moreover, the longer the Fed can seemingly get away with their efforts to inflate in perpetuity, the greater the disaster that awaits us.

  In the meantime, their policies are not without consequences.  Price distortions flourish to the extent they appear normal.  Nevertheless, upon second glance, apparent incongruities greet us everywhere we look.

  The sad fact is an honest day’s work has been debased to where it’s no longer rewarded with an honest day’s pay.  At the same time the positive effects of productive labor, diligent savings, and prudent spending now take a lifetime – or more – to fully manifest.

  Conversely, the negative effects of borrowing gobs of money and taking abundant risks can masquerade as shrewd business acumen for extended bubble periods.

   

  

  Even when deflated by the government’s own flawed “inflation” measurements, real median household income is back to where it was 20 years ago already. This is definitely not a sign of economic progress. In fact, this datum is testament to how much capital has been malinvested and hence wasted due to Fed policy-inspired serial credit and asset bubbles – click to enlarge.

   

  Earthquake Economics

  During an economic boom, particularly a boom puffed up with the Fed’s cheap credit, madmen get rich.  They borrow money at an artificial discount and place big bets on rising asset prices.

  They don’t care they are placing those bets within a dangerous seismic zone.  The rewards are too great.  Eventually asset bubbles always exhaust themselves.  Price movements reverse.  They stop inflating.  They start deflating.

  Subsequently, as the bubble exhales, the risk taking beneficiaries of the expansion are exposed.  The downside, no doubt, is less pleasant than the upside.  Ask U.S. oil shale producers.  Just 18 months ago they were raking in cash hand over fist.  Lenders were tripping over themselves to extend credit for fracked wells.

  But how quickly things change.  Oil prices fell below $30 per barrel on Tuesday.  Break-even costs for many producers are double that – or more.  In other words, lenders and borrowers alike are staring the downside into the face now.

   

  

  Sitting on a powder keg: oil-related debt has experienced staggering growth – reaching a new peak at what appears to be an exceptionally inopportune juncture, to put it mildly.

   

  In fact, according to a report from AlixPartners, North American oil-and-gas producers are losing nearly $2 billion every week at current prices.  Naturally, capital could only be misdirected to this extent under errant central bank policies of mass credit creation.

  Several more slips like this one and the President’s strongest, most durable economy in the world could backslide into recession. On top of that, ‘the big one’ could rupture at any moment.

  

  

  

  

  

• Pro-China Party Falls As Taiwan Elects First Female President In "Historic" Landslide Election

  “We failed. The Nationalist Party lost the elections. We didn’t work hard enough,” Eric Chu said on Saturday before taking a long bow in front of a “thin” crowd of supporters.

  Chu stepped in to become the Nationalist Party (KMT) candidate in Taiwan’s presidential race when his predecessor was deemed too divisive. The island held two elections on Saturday, one for the presidency and one for seats in the national legislature – The Democratic Progressive Party scored resounding victories in both ballots.

  The DPP candidate and former law professor Tsai Ing-wen became the island’s first female president after claiming 56% of the vote in the biggest landslide since the island’s first democratic election twenty years ago. 

  

  Chu only managed to garner 31%.

  

  Tsai will enjoy a friendly body of lawmakers as the DPP won 68 seats in the 113-seat legislature versus 36 for the Nationalists. Previously, KMT held 64 seats and this will be DPP’s first ever majority.

  

  Taiwan has spent eight years under KMT rule and ahead of the ballot, it was readily apparent that voters were ready for a change, with Tsai maintaining a commanding lead in opinion polls:

  

  That, in turn, led Taiwan observers to predict that the legislature would likely fall to DPP as well. “If history is any indication, the KMT may lose its majority in parliament as well, given that for the two occasions when KMT lost the presidential elections (2000 and 2004), it also failed to win the majority of seats against the DPP in parliament,” Goldman wrote, in the days before the election.

  

  The vote raises the specter of conflict with China. “While Tsai has pledged to maintain ties with Beijing, the DPP’s charter supports independence,” Bloomberg notes, before ominously reminding readers that “The Chinese Communist Party passed a law allowing an attack to prevent secession in 2005, when the last DPP president, Chen Shui-bian, sought a referendum on statehood.”

  Underscoring how frosty relations (still) are, sixteen-year-old pop star Chou Tzu-yu had her activities in China suspended by her management company after waving a Taiwanese flag on a South Korean TV program. She was compelled to apologize in a televised address in order to avoid, in AP’s words, “offending nationalist sentiments on the mainland.” 

  “I’m sorry, I should have come out earlier to apologize,” she says, in a statement that sounds like it might have been beaten out of someone who shorted Chinese stocks last summer. “I didn’t come out until now because I didn’t know how to face the situation and the public.” 

  

  “There is only one China,” she adds, staring blankly into the camera before promising to behave going forward. “I am proud I am Chinese. As a Chinese person, while participating in activities abroad, my improper behavior hurt my company and netizens on both sides of the Strait. I feel deeply sorry and guilty. I decided to reflect on myself seriously and suspend all my activities in China.”

  Chou’s predicament was denounced by new President Tsai, who told reporters that “this particular incident will serve as a constant reminder to me about the importance of our country’s strength and unity.” And by “country” she probably doesn’t mean China. 

  “Although Ms. Tsai has vowed to maintain a broadly stable relationship with mainland China, she remains reticent on specific strategies and has remained ambiguous about the ‘1992 consensus’ which has supported the principle of “one China” although each side has been allowed to interpret it differently,” Goldman writes. “Her position has been that this is an option for Taiwan, but not the only one.”

  Still, analysts say Tsai likely won’t move to anger Xi – at least not immediately. 

  “As long as Tsai doesn’t provoke the other side, it’s OK,” one former newspaper distribution agent who attended Tsai’s rally told AP. “Tsai won’t provoke China for sure, but she won’t satisfy its demands,” said George Tsai, a politics professor at Chinese Cultural University in Taipei adds.

  For his part, Chu just can’t seem to figure out where things went awry. “Why has public opinion changed so much? How did our party misread public opinion? Our policy ideas, the people in our camp, the way we communicate with society — are there major problems there? Why did we fail to self-examine and lose power in the central government and lose our legislative majority?,” he asked himself during a concession speech at Kuomintang headquarters.

  The answer to all of Chu’s questions is simple. “The landslide was propelled by anxiety over stagnant wages, high home prices and dissatisfaction with President Ma Ying-jeou’s polices of rapprochement with Taiwan’s one-time civil war foes on mainland China,” Bloomberg writes, summing things up nicely before adding that “Tsai will bear the task of resuscitating an economy expected to have grown last year at its slowest pace since at least 2009.”

  

  The quandary here should be obvious: given the slowdown in mainland demand and the yuan deval, this isn’t exactly the ideal time for Taiwan to be poking China in the eye with a stick.”The election comes at a tricky time for Taiwan’s export-dependent economy, which slipped into recession in the third quarter last year,” Reuters said after the election. “China is Taiwan’s top trading partner and Taiwan’s favourite investment destination.”

  Indeed. Exports to China dropped a whopping 16.4% last month and were down nearly 20% Y/Y in November. Overall, exports fell 13.9% in December and were down 10.6% for the year. Exports to China fell 12.3% in 2015.

  

  

  As for regional security and the ongoing cold war for two chains of islands in the Pacific, AP goes on to say that “Tsai [has] reaffirmed Taiwan’s sovereignty claim over East China Sea islands also claimed by China but controlled by Japan [and] says Taiwan will work to lower tensions in the South China Sea, where it, China and four other governments share overlapping territorial claims.”

  In short then, Tsai has her hands full. She needs to satisfy her base by scaling back ties with China while keeping cross-Strait relations amicable enough to ensure that trade isn’t imperiled at a time when exports are already in free fall. Meanwhile, Taiwan is also mired in the increasingly petulant spat over a series of sparsely populated islands in the region.

  Good luck Ms. Tsai and remember, “Big Uncle” Xi is watching…

  

  

  

  

  

  

• The Deflation Monster Has Arrived

  Submitted by Chris Martenson via PeakProsperity.com,

  As we’ve been warning for quite a while (too long for my taste): the world’s grand experiment with debt has come to an end. And it’s now unraveling.

  Just in the two weeks since the start of 2016, the US equity markets are down almost 10%. Their worst start to the year in history. Many other markets across the world are suffering worse.

  If you watched stock prices today, you likely had flashbacks to the financial crisis of 2008. At one point the Dow was down over 500 points, the S&P cracked below key support at 1,900, and the price of oil dropped below $30/barrel. Scared investors are wondering:  What the heck is happening? Many are also fearfully asking: Are we re-entering another crisis?

  Sadly, we think so. While there may be a market rescue that provide some relief in the near term, looking at the next few years, we will experience this as a time of unprecedented financial market turmoil, political upheaval and social unrest. The losses will be staggering. Markets are going to crash, wealth will be transferred from the unwary to the well-connected, and life for most people will get harder as measured against the recent past.

  It’s nothing personal; it’s just math. This is simply the way things go when a prolonged series of very bad decisions have been made. Not by you or me, mind you. Most of the bad decisions that will haunt our future were made by the Federal Reserve in its ridiculous attempts to sustain the unsustainable.

  The Cost Of Bad Decisions

  In spiritual terms, it is said that everything happens for a reason. When it comes to the Fed, however, I’m afraid that a less inspiring saying applies:

  

  Yes, it’s easy to pick on the Fed now that it’s obvious that they’ve failed to bring prosperity to anyone but their inside coterie of rich friends and big client banks. But I’ve been pointing out the Fed’s grotesque failures for a very long time. Again, too long for my tastes.

  I rather pointlessly wish that the central banks of the world had been reined in by the public before the crash of 2008. However the seeds of their folly were sown long before then:

  

  (Source)

  Note the pattern in the above monthly chart of the S&P 500. A relatively minor market slump in 1994 was treated by the then Greenspan Fed with an astonishing burst of new money creation — via its ‘sweeps” program response, which effectively eliminated reserve requirements for banks .That misguided policy created the first so-called Tech Bubble, which burst in 2000.

  The next move by the Fed was to drop rates to 1%, which gave us the Housing Bubble. That was a much worse and more destructive event than the bubble that preceded it. And it burst in 2008.

  Then the Fed (under Bernanke this time) dropped rates to 0%. The rest of the world’s central banks followed in lockstep (some going even further, into negative territory, as in Europe’s case). This has led to a gigantic, interconnected set of bubbles across equities, bonds and real estate — virtually everywhere across the globe.

  So the Fed's pattern here was: fixing a small problem with a bad decision, which lead to an even larger problem addressed by an even worse decision, resulting in an even larger set of problems that are now in the process of deflating/bursting.  Three sets of increasingly bad decisions in a row.

  The amplitude and frequency of the bubbles and crashes are both increasing. As is the size and scope of the destruction.

  The Even Larger Backdrop

  The even larger backdrop to all of this is that the developed world, and recently China, have been stoking growth with debt, and have been doing so for a very long time.

  Using the US as a proxy for other countries, this is what the lunacy looks like:

  

  As practically everybody can quickly work out, increasing your debts at 2x the rate of your income eventually puts you in the poor house. As I said, it’s nothing personal; it’s just math.

  But somehow, this math escaped the Fed’s researchers and policy makers as a problem. Well, turns out it is. And it’s now knocking loudly on the world’s door. The deflation monster has arrived.

  The only possible way to rationalize such an increase in debt is to convince oneself that economic growth will come roaring back, and make it all okay. But the world is now ten years into an era of structurally weak GDP and there are no signs that high growth is coming back any time soon, if ever.

  So the entire edifice of debt-funded growth is now being called into question — at least by those who are paying attention or who aren't hopelessly blinkered by a belief system rooted in the high net energy growth paradigms of the past.

  At any rate, I started the chart in 1970 because it was in 1971 that the US broke the dollar’s linkage to gold. The rest of the world complained for a bit at the time, but politicians everywhere quickly realized that the loss of the golden tether also allowed them to spend with wild abandon and rack up huge deficits. So it was wildly popular.

  As long as everybody played along, this game of borrowing and then borrowing some more was fun. In one of the greatest circular backrubs of all time, the central banks and banking systems of the developed world all bought each other’s debt, pretending as if it all made sense somehow:

  

  (Source)

  The above charts show how hopelessly entangled the worldwide web of debt has become. Yes, it's all made possible by the delusion that somehow being owed money by an insolvent entity will endlessly prevent your own insolvency from being revealed. How much longer can that delusion last?

  All of this is really just the terminal sign of a major credit bubble — a credit era, if you will — drawing to a close.

  I will once again rely upon this quote by Ludwig Von Mises because apparently its message has not yet sunk in everywhere it should have:

  “ There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

  ~ Ludwig Von Mises

  Well, the central banks of the world could not bring themselves to voluntarily end the credit expansion – that would have taken real courage.

  So now we are facing something far worse.

  Why The Next Crisis Will Be Worse Than 2008

  I’m not just calling for another run of the mill bear market for equities, but for the unwinding of the largest and most ill-conceived credit bubble in all of history. Equities are a side story to a larger one.

  It’s global and it’s huge. This deflationary monster has no equal in all of history, so there’s not a lot of history to guide us here.

  At Peak Prosperity we favor the model that predicts ‘first the deflation, then the inflation’ or the "Ka-Poom! Theory" as Erik Janszen at iTulip described it. While it may seem that we are many years away from runaway inflation (and some are doubting it will or ever could arrive again), here’s how that will probably unfold.

  Faced with the prospect of watching the entire financial world burn to the figurative ground (if not literal in some locations), or doing something, the central banks will opt for doing something.

  Given that their efforts have not yielded the desired or necessary results, what can they realistically do that they haven't already?

  The next thing is to give money to Main Street.

  That is, give money to the people instead of the banks. Obviously puffing up bank balance sheets and income statements has only made the banks richer. Nobody else besides a very tiny and already wealthy minority has really benefited. Believe it or not, the central banks are already considering shifting the money spigot towards the public.

  You might receive a credit to your bank account courtesy of the Fed. Or you might receive a tax rebate for last year. Maybe even a tax holiday for this year, with the central bank monetizing the resulting federal deficits.

  Either way, money will be printed out of thin air and given to you. That’s what’s coming next. Possibly after a failed attempt at demanding negative interest rates from the banks. But coming it is.

  This "helicopter money" spree will juice the system one last time, stoking the flames of inflation. And while the central banks assume they can control what happens next, I think they cannot.

  Once people lose faith in their currency all bets are off. The smart people will be those who take their fresh central bank money and spend it before the next guy.

  In Part 2: Why This Next Crisis Will Be Worse Than 2008 we look at what is most likely to happen next, how bad things could potentially get, and what steps each of us can and should be taking now — in advance of the approaching rout — to position ourselves for safety (and for prosperity, too)

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

   

  

  

  

  

  

• Would You Hire It: China's "Resume" Revealed

  After the worst two-week start to US stock trading in history, bulls need some cheering up. So here, courtesy of Citi’s Brent Donnelly, is some levity: this is what China’s Curriculum Vitae would look like if it was applying for a job. It is also a great summary for those who need a simple cheat sheet of where China was, where it is, and where it is going.

  

  So would you hire it?

  

  

  

  

  

• Recession At The Gate: JPM Cuts Q4 GDP From 1.0% To 0.1%

  We already noted the cycle-low Q4 GDP forecast by the Atlanta Fed, which in a release which came out just as the crashing US equity market closed revised the last quarter GDP to just 0.6%, which delay however according to the same Atlanta Fed was due to “nothing more nefarious than technical difficulties.”

  Curiously, JPM had no problems with the 15 second exercise of plugging in raw data into the GDP “beancount” model. And, according to chief economist Michael Feroli, in the 4th quarter, the same quarter in which Yellen finally felt confident enough to declare the US economy strong enough to withstand a rate hike and a tightening cycle, US growth ground to a halt and as a result JPMorgan just cut its Q4 GDP forecast from 1.0% to 0.1%, which would suggest in 2015 US GDP grew 2.3%, down from 2.4% in 2014.

  If JPM is right, and if the US economy effectively did not grow in the fourth quarter, this would make it the worst GDP print since Q1 of 2014, and tied for the third worst quarter since 2009, which incidentally was our kneejerk assessment after yesterday’s latest round of abysmal economic data.

  Another downward revision to GDP: Yellen may have raised rates in a negative GDP quarter

  — zerohedge (@zerohedge) January 15, 2016

  The cherry on top: JPM also cut its Q1 2016 GDP forecast from 2.25% to 2.00%. Expect many more downward revisions to forward GDP in the coming weeks.

  Below is a chart of what US GDP looks like if JPM’s forecast proves to be accurate:

  

  Here is JPM explaining why “Q4 GDP growth is still positive, but barely”

  We are lowering our tracking of real annualized GDP growth in Q4 from 1.0% to 0.1%. Two reports out today contributed to this downgraded assessment. First, retail sales in December came in rather shockingly weak, which was accompanied by modest downward revisions to October and November retail sales. Second, the business inventories report for November suggest a fairly aggressive push by business to reduce the pace of stockbuilding last quarter. We now see inventories subtracting 1.2%-points from growth last quarter, offset by a disappointing but not disastrous 1.3% increase in real final sales.

   

  We are also lowering some our outlook for Q1 GDP growth from 2.25% to 2.0%. While the inventory situation should turn to being roughly neutral for growth, the quarterly arithmetic on consumer spending got a little more challenging after this morning’s retail sales figure, which implies flat real consumer spending in December. We now see real consumer spending in Q1 at 2.5%, versus 3.0% previously. We are leaving unrevised our outlook for 2.25% growth over the remaining three quarters of the year. We will discuss in a separate email the policy outlook, which in any event is currently being swayed more by the inflation data than the growth data.
   
  

  

  

  

  

  

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• The Ascendance of Sociopaths in U.S. Governance

  Submitted by Doug Casey via InternationalMan.com,

  An International Man lives and does business wherever he finds conditions most advantageous, regardless of arbitrary borders. He’s diversified globally, with passports from multiple countries, assets in several jurisdictions, and his residence in yet another. He doesn’t depend absolutely on any country and regards all of them as competitors for his capital and expertise.

  Living as an international man has always been an interesting possibility. But few Americans opted for it, since the U.S. used to reward those who settled in and put down roots. In fact, it rewarded them better than any other country in the world, so there was no pressing reason to become an international man.

  Things change, however, and being rooted like a plant – at least if you have a choice – is a suboptimal strategy if you wish to not only survive, but prosper. Throughout history, almost every place has at some point become dangerous for those who were stuck there. It may be America’s turn.

  For those who can take up the life of an international man, it’s no longer just an interesting lifestyle decision. It has become, at a minimum, an asset saver, and it could be a lifesaver. That said, I understand the hesitation you may feel about taking action; pulling up one’s roots (or at least grafting some of them to a new location) can be almost as traumatic to a man as to a vegetable.

  As any intelligent observer surveys the world’s economic and political landscape, he has to be disturbed – even dismayed and a bit frightened – by the gravity and number of problems that mark the horizon. We’re confronted by economic depression, looming financial chaos, serious currency inflation, onerous taxation, crippling regulation, a developing police state, and, worst of all, the prospect of a major war. It seems almost unbelievable that all these things could affect the U.S., which historically has been the land of the free.

  How did we get here? An argument can be made that things went bad because of miscalculation, accident, inattention, and the like. Those elements have had a role, but it is minor. Potential catastrophe across the board can’t be the result of happenstance. When things go wrong on a grand scale, it’s not just bad luck or inadvertence. It’s because of serious character flaws in one or many – or even all – of the players.

  So is there a root cause of all the problems I’ve cited? If we can find it, it may tell us how we personally can best respond to the problems.

  In this article, I’m going to argue that the U.S. government, in particular, has been overrun by the wrong kind of person. It’s a trend that’s been in motion for many years but has now reached a point of no return. In other words, a type of moral rot has become so prevalent that it’s institutional in nature. There is not going to be, therefore, any serious change in the direction in which the U.S. is headed until a genuine crisis topples the existing order. Until then, the trend will accelerate.

  The reason is that a certain class of people – sociopaths – are now fully in control of major American institutions. Their beliefs and attitudes are insinuated throughout the economic, political, intellectual, and psychological/spiritual fabric of the U.S.

  What does this mean to you, as an individual? It depends on your character. Are you the kind of person who supports “my country, right or wrong,” as did most Germans in the 1930s and 1940s? Or the kind who dodges the duty to be a helpmate to murderers? The type of passenger who goes down with the ship? Or the type who puts on his vest and looks for a lifeboat? The type of individual who supports the merchants who offer the fairest deal? Or the type who is gulled by splashy TV commercials?

  What the ascendancy of sociopaths means isn’t an academic question. Throughout history, the question has been a matter of life and death. That’s one reason America grew; every American (or any ex-colonial) has forebears who confronted the issue and decided to uproot themselves to go somewhere with better prospects. The losers were those who delayed thinking about the question until the last minute.

  I have often described myself, and those I prefer to associate with, as gamma rats. You may recall the ethologist’s characterization of the social interaction of rats as being between a few alpha rats and many beta rats, the alpha rats being dominant and the beta rats submissive. In addition, a small percentage are gamma rats that stake out prime territory and mates, like the alphas, but are not interested in dominating the betas. The people most inclined to leave for the wide world outside and seek fortune elsewhere are typically gamma personalities.

  You may be thinking that what happened in places like Nazi Germany, the Soviet Union, Mao’s China, Pol Pot’s Cambodia, and scores of other countries in recent history could not, for some reason, happen in the U.S.. Actually, there’s no reason it won’t at this point. All the institutions that made America exceptional – including a belief in capitalism, individualism, self-reliance, and the restraints of the Constitution – are now only historical artifacts.

  On the other hand, the distribution of sociopaths is completely uniform across both space and time. Per capita, there were no more evil people in Stalin’s Russia, Hitler’s Germany, Mao’s China, Amin’s Uganda, Ceausescu’s Romania, or Pol Pot’s Cambodia than there are today in the U.S. All you need is favorable conditions for them to bloom, much as mushrooms do after a rainstorm.

  Conditions for them in the U.S. are becoming quite favorable. Have you ever wondered where the 50,000 people employed by the TSA to inspect and degrade you came from? Most of them are middle-aged. Did they have jobs before they started doing something that any normal person would consider demeaning? Most did, but they were attracted to – not repelled by – a job where they wear a costume and abuse their fellow citizens all day.

  Few of them can imagine that they’re shepherding in a police state as they play their roles in security theater. (A reinforced door on the pilots’ cabin is probably all that’s actually needed, although the most effective solution would be to hold each airline responsible for its own security and for the harm done if it fails to protect passengers and third parties.) But the 50,000 newly employed are exactly the same type of people who joined the Gestapo – eager to help in the project of controlling everyone. Nobody was drafted into the Gestapo.

  What’s going on here is an instance of Pareto’s Law. That’s the 80-20 rule that tells us, for example, that 80% of your sales come from 20% of your salesmen or that 20% of the population are responsible for 80% of the crime.

  As I see it, 80% of people are basically decent; their basic instincts are to live by the Boy Scout virtues. 20% of people, however, are what you might call potential trouble sources, inclined toward doing the wrong thing when the opportunity presents itself. They might now be shoe clerks, mailmen, or waitresses – they seem perfectly benign in normal times. They play baseball on weekends and pet the family dog. However, given the chance, they will sign up for the Gestapo, the Stasi, the KGB, the TSA, Homeland Security, or whatever. Many seem well intentioned, but are likely to favor force as the solution to any problem.

  But it doesn’t end there, because 20% of that 20% are really bad actors. They are drawn to government and other positions where they can work their will on other people and, because they’re enthusiastic about government, they rise to leadership positions. They remake the culture of the organizations they run in their own image. Gradually, non-sociopaths can no longer stand being there. They leave. Soon the whole barrel is full of bad apples. That’s what’s happening today in the U.S.

  It’s a pity that Bush, when he was in office, made such a big deal of evil. He discredited the concept. He made Boobus americanus think it only existed in a distant axis, in places like North Korea, Iraq and Iran, which were and still are irrelevant backwaters and arbitrarily chosen enemies. Bush trivialized the concept of evil and made it seem banal because he was such a fool. All the while, real evil, very immediate and powerful, was growing right around him, and he lacked the awareness to see he was fertilizing it by turning the U.S. into a national security state after 9/11.

  Now, I believe, it’s out of control. The U.S. is already in a truly major depression and on the edge of financial chaos and a currency meltdown. The sociopaths in government will react by redoubling the pace toward a police state domestically and starting a major war abroad. To me, this is completely predictable. It’s what sociopaths do.

  Editor’s Note: A big part of any strategy to reduce your political risk is to place some of your savings outside the immediate reach of the thieving bureaucrats in your home country. Obtaining a foreign bank account is a convenient way to do just that.

  That way, your savings cannot be easily confiscated, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard. In the event capital controls are imposed, a foreign bank account will help ensure that you have access to your money when you need it the most.

  In short, your savings in a foreign bank will largely be safe from any madness in your home country.

  Despite what you may hear, having a foreign bank account is completely legal and is not about tax evasion or other illegal activities. It’s simply about legally diversifying your political risk by putting your liquid savings in sound, well-capitalized institutions where they’re treated best.

  We recently released a comprehensive free guide where we discuss our favorite foreign banks and jurisdictions, including, crucially, those that still accept Americans as clients and allow them to open accounts remotely for small minimums.

  New York Times best-selling author Doug Casey and his team describe how you can do it all from home. And there’s still time to get it done without extraordinary cost or effort. Click here to download the PDF now.

  

  

  

  

  

• The World’s Most Famous Case Of Hyperinflation (Part 1)

  The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect.

  Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings.

  The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.

  

  Courtesy of: The Money Project

   

  The Treaty of Versailles

  Five years after the assassination of Archduke Franz Ferdinand, the Treaty of Versailles was signed, officially ending the state of war between Germany and the Allies.

  The terms of the agreement, which were essentially forced upon Germany, made the country:

  1. Accept blame for the war
  2. Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)
  3. Forfeit territory in Europe as well as its colonies
  4. Forbid Germany to have submarines or an air force, as well as a limited army and navy
  5. Accept the Rhineland, a strategic area bordering France and other countries, to be fully demilitarized.

  “I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.”
  – John Maynard Keynes, representative of the British Treasury

  Keynes believed the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay. He thought that this could create large amounts of instability with the global financial system.

  The Catalysts

  1. Germany had suspended the Mark’s convertibility into gold at the beginning of war.

  This created two separate versions of the same currency:

  Goldmark: The Goldmark refers to the version on the gold standard, with 2790 Mark equal to 1 kg of pure gold. This meant: 1 USD = 4 Goldmarks, £1 = 20.43 Goldmarks

  Papiermark: The Papiermark refers to the version printed on paper. These were used to finance the war.
  In fear that Germany would run the printing presses, the Allies specified that reparations must be paid in the Goldmarks and raw materials of equivalent value.

  2. Heavy Debt

  Even before reparations, Germany was already in significant debt. The country had borrowed heavily during the war with expectations that it would be won, leaving the losers repay the loans.

  Adding together previous debts with the reparations, debt exceeded Germany’s GDP.

  3. Inability to Pay

  The burden of payments was high. The country’s economy had been damaged by the war, and the loss of Germany’s richest farmland (West Prussia) and the Saar coalfields did not help either.

  Foreign speculators began to lose confidence in Germany’s ability to pay, and started betting against the Mark.

  Foreign banks and businesses expected increasingly large amounts of German money in exchange for their own currency. It became very expensive for Germany to buy food and raw materials from other countries.

  Germany began mass printing bank notes to buy foreign currency, which was in turn used to pay reparations.

  4. Invasion of The Ruhr

  After multiple defaults on payments of coal and timber, the Reparation Commission voted to occupy Germany’s most important industrial lands (The Ruhr) to enforce the payment of reparations.

  French and Belgian troops invaded in January 1923 and began The Occupation of The Ruhr.

  German authorities promoted the spirit of passive resistance, and told workers to “do nothing” to help the invaders. In other words, The Ruhr was in a general strike, and income from one of Germany’s most important industrial areas was gone.

  On top of that, more and more banknotes had to be printed to pay striking workers.

  Hyperinflation

  Just two calendar years after the end of the war, the Papiermark was worth 10% of its original value. By the end of 1923, it took 1 trillion Papiermarks to buy a single Goldmark.

  All cash savings had lost their value, and the prudent German middleclass savers were inexplicably punished.

  Learn about the effects of German hyperinflation, how it was curtailed, and about other famous hyperinflations in Part 2 (released sometime the week of Jan 18-22, 2016).

  Source: The Money Project via VisualCapitalist.com

  

  

  

  

  

• Oil, War, & Drastic Global Change

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  The first thing that popped into our minds on Tuesday when WTI oil briefly broached $30 for its first $20 handle in many years, was that this should be triggering a Gawdawful amount of bets, $30 being such an obvious number. Which in turn would of necessity lead to a -brief- rise in prices.

  Apparently even that is not so easy to see, since when prices did indeed go up after, some 3% at the ‘top’, ‘analysts’ fell over each other talking up ‘bottom’, ‘rebound’ and even ‘recovery’. We’re really addicted to that recovery idea, aren’t we? Well, sorry, but this is not about recovering, it’s about covering (wagers).

  Same thing happened on Thursday after Brent hit that $20 handle, with prices up 2.5% at noon. That too, predictably, shall pass. Covering. On this early Friday morning, both WTI and Brent have resumed their fall, threatening $30 again. And those are just ‘official’ numbers, spot prices.

  If as a producer you’re really squeezed by your overproduction and your credit lines and your overflowing storage, you’ll have to settle for less. And you will. Which is going to put downward pressure on oil prices for a while to come. Inventories are more than full all over the world. With oil that was largely purchased, somewhat ironically, because prices were perceived as being low.

  Interestingly, people are finally waking up to the reality that this is a development that first started with falling demand. China. Told ya. And only afterwards did it turn into a supply issue as well, when every producer began pumping for their lives because demand was shrinking.

  All the talk about Saudi Arabia’s ‘tactics’ being aimed at strangling US frackers never sounded very bright. By November 2014, the notorious OPEC meeting, the Saudi’s, well before most others including ‘analysts’, knew to what extent demand was plunging. They had first-hand knowledge. And they had ideas, too, about where that could lead prices. Alarm bells in the desert.

  There are alarm bells ringing in many capitals, there’s not a single oil producer sitting comfy right now. And that’s why ‘official’ prices need to be taken with a bag of salt. Bloomberg puts the real price today at $26:

  The Real Price of Oil Is Far Lower Than You Realize

  While oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is even deeper. West Texas Intermediate futures, the U.S. benchmark, sank below $30 a barrel on Tuesday for the first time since 2003. Actual barrels of Saudi Arabian crude shipped to Asia are even cheaper, at $26 – the lowest since early 2002 once inflation is factored in and near levels seen before the turn of the millennium. Slumping oil prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

  

  Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said. The nation’s economic expansion faltered last year to the slowest pace in a quarter of a century. “You see a big destruction in the income of the oil and commodity producers,” Turner said. “That is having a major effect on their expenditure across the world.”

  Zero Hedge does one better and looks at 1998 dollars:

  The ‘Real’ Price Of Oil Is Below $17

  “You see a big destruction in the income of the oil and commodity producers,” exclaims an analyst but, as Bloomberg notes, while oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is considerably deeper. Adjusted for inflation, WTI is its lowest since 2002 and worse still Saudi Light Crude is trading at below $17 (in 1998 dollar terms) – the lowest since the 1980s… Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

  

  In fact, while sub-$30 per barrel oil sounds very scary, Saudi prices would be less than $17 a barrel when converted into dollar levels for 1998, the year oil sank to its lowest since the 1980s. Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said.

  But this still covers only light sweet crude. Heavier versions are already way below even those levels. Question: what does tar sands oil go for in 1998 dollars? $5 perhaps? A barrel’s worth of it fetched $8.35 in 2016 US dollars on Tuesday. And that does not stop production, because investment (sunk cost) has been spent so there’s no reason to cut, quite the contrary.

  Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners

  Think oil in the $20s is bad? In Canada they’d be happy to sell it for $10. Canadian oil sands producers are feeling pain as bitumen – the thick, sticky substance at the center of the heated debate over TransCanada’s Keystone XL pipeline – hit a low of $8.35 on Tuesday, down from as much as $80 less than two years ago. Producers are all losing money at current prices, First Energy Capital’s Martin King said Tuesday at a conference in Calgary. Which doesn’t mean they’ll stop. Since most of the spending for bitumen extraction comes upfront, and thus is a sunk cost, production will continue and grow.

  

  Another interesting question is where the price of oil would be right now if the perception of low prices had not made 2015 such a banner year for filling up storage space across the globe, including huge amounts of tankers that are left floating at sea, awaiting a ‘recovery’. But that is so last year:

  Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes

  If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up ‘cheap’ oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China’s record crude imports have ceased). In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

  

  China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners. China’s crude imports last month was equivalent to 7.85 million barrels a day, 6% higher than the previous record of 7.4 million in April, Bloomberg calculations show.

  

  China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher. But given the crash in tanker rates – and implicitly demand – that “boom” appears to be over.

  The consequences of all this will be felt all over the world, and for a long time to come. All of our economic systems run on oil, so many jobs are related to it, so many ‘fields’ in the economy, and no, things won’t get easier when oil is at $20 or $10, it’ll be a disaster of biblical proportions, like a swarm of locusts that leaves precious little behind. Squeeze oil and you squeeze the entire economic system. That’s what all the ‘low oil prices are great for the economy’ analysts missed (many still do).

  Entire nations will undergo drastic changes in leadership and prosperity. Norway, Canada, North Dakota, Russia. But more than that, Middle East nations that rely entirely on oil, a dependency that won’t allow for many of their rulers to remain in office. Same goes for all OPEC nations, and many non-OPEC producers.

  We can argue that a war of some kind or another can be the black swan that sets prices ‘straight’, but black swans are supposed to be the things you can’t see coming, and Middle East warfare for obvious reasons doesn’t even qualify for that definition.

  The world is full of nations and rulers that are fighting for bare survival. And things like that don’t play out on a short term basis. For that reason alone, though there are many others as well, oil prices will remain under pressure for now.

  Even a war will be hard put to turn that trend around at this point. Unless production facilities are destroyed on a large scale, war may just lead to even more production as demand keeps falling. The fact that Iran is preparing to ‘come back online’, promising an even steeper glut in world markets, is putting the Saudi’s on edge. Rumors of Libya wanting to return for a piece of the pie won’t exactly soothe emotions either.

  And when, in a few years’ time, all the production cuts due to shut wells become our new reality, and eventually they must, then no, there will still not be an oil shortage. Because the economy will be doing so much worse by then that demand will have fallen more than supply.

  Barring large scale warfare in the Middle East there is nothing that can solve the low oil price conundrum. But think about it, which Gulf nation can even afford such warfare in present times? For that matter, which nation in the world can?

  The US may try and ignite a proxy war with Russia, but that would lead to an(other) endless and unwinnable war theater. Which would carry the threat of dragging in China as well. The US and its -soon even officially- shrinking economy can’t afford that. Which of course by no means guarantees it won’t try.

  

  

  

  

  

• Why Donald Trump Is Praying For A Market Crash

  When it comes to Trump’s relentless surge in the polls, one thing is certain: the so-called “pundits”, biased from day one, were, are, and will continue to be completely wrong. But as the day approaches when Trump appears set to win the GOP presidential nomination and face off against Hillary, who should one listen to? Well, according to InvesTech’s James Stack, with a track record of 86.4%, the market may be an almost flawless arbiter of the election outcome long before November.

  Here’s why:

  Does the stock market affect or predict the election outcome?

   

  The old saying that “people vote their pocketbooks” is more accurate than the average political analyst thinks. While Wall Street typically worries about how politics might affect the market, perhaps Presidential candidates should worry about how the stock market might affect their political outcomes.

   

  Historically, the market performance in the three months leading up to a Presidential Election has displayed an uncanny ability to forecast who will win the White House… the incumbent party or the challenger. Since 1928, there have been 22 Presidential Elections. In 14 of them, the S&P 500 climbed during the three months preceding election day. The incumbent President or party won in 12 of those 14 instances. However, in 7 of the 8 elections where the S&P 500 fell over that three month period, the incumbent party lost.

   

  There are only three exceptions to this correlation: 1956, 1968, and 1980. Statistically, the market has an 86.4% success rate in forecasting the election!

   

  This relationship occurs because the stock market reflects the economic outlook in the weeks leading up to the election. A rising stock market indicates an improving economy, which means rising confidence and increases the chances of the incumbent party’s re-election. Therefore, your time might be better spent from August through October watching the stock market rather than the debates if you want to know who will be President for the next four years.

  

  Here the reflexive question emerges: does the market predict the election outcome, or does the move in the market – whether by design or by chance – predetermine the election outcome?

  Now if only Donald Trump, or his backers for whatever reasons they may have, could orchestrate a market crash…

  

  

  

  

  

• "We Live In A Time Of Piecemeal-Planning & Incremental-Interventionism"

  Submitted by Richard Emebing via EpicTimes.com,

  Wherever we turn we are confronted with politicians, political pundits, television talking heads, and editorial page commentators, all of whom offer an array of plans, programs, and projects that will solve the problems of the world – if only government is given the power and authority to remake society in the design proposed.

  Even many of those who claim to be suspicious of “big government” and the Washington beltway powers-that-be, invariably offer their own versions of plans, programs, and projects they assert are compatible with or complementary to a free society.

  The differences too often boil down simply to matters of how the proposer wants to use government to remake or modify people and society. The idea that people should or could be left alone to design, undertake and manage their own plans and interactions with others is sometimes given lip service, but never entirely advocated or proposed in practice.

  In this sense, all those participating in contemporary politics are advocates of social engineering, that is, the modifying or remaking of part or all of society according to an imposed plan or set of plans.

  The idea that such an approach to social matters is inconsistent with both individual liberty and any proper functioning of a free society is beyond the pale of political and policy discourse. We live in a time of piecemeal planning and incremental interventionism.

  The Reasonableness of Individual Planning

  It is worthwhile, perhaps, to question this “spirit of the times,” and to do so in the context of marking an anniversary. Slightly over 70 years ago, on December 17, 1945, the Austrian economist (and much later economics Nobel Prize winner), Friedrich A. Hayek, delivered a lecture at University College in Dublin, Ireland on, “Individualism: True and False.”

  At a time when socialist central planning appeared to be the “wave of the future,” Hayek argued that the true and essential foundation for any society wishing to preserve human liberty and assure economic prosperity was a rightly understood philosophy of individualism.

  At the heart of Hayek’s criticisms of what he called the “false” individualism was the idea that individual human beings could ever have the knowledge, wisdom, or ability to design or remake a society according to some “rational” plan.

  It is easy, no doubt, to fall into this error and mistaken belief. After all, we all undertake plans and design projects of action that we attempt to bring to successful fruition. The construction engineer, for instance, designs a technical blueprint for designing and building a bridge over a river or a tunnel through a mountain.

  The individual private enterpriser works out a “business plan” about what product he might produce, the start-up investment and production costs that would be entailed, and the estimated consumer demand and stream of potential future revenues that would justify incurring the costs of bringing the business into existence and operation.

  As private individuals we design, plan, and attempt to implement our own activities all the time, including going to college and earning a degree; or selecting and pursuing a particular profession, occupation or employment; or forming clubs and associations with others in society to pursue the fulfillment of any variety of “good causes” or shared hobbies and interests; or even the general life we might like to live in terms of achieving a sense of fulfillment, purpose, and happiness during our earthly sojourn.

  Not to do all of these “planful” things, and many, many others of like kind, would leave our lives in disordered chaos and uncertain instability and confusion. Who, therefore, could be against or critical of wise, reasonable and “rational” planning of the society as a whole, in which we all live and work out our lives in interaction with multitudes of others?

  Yet, that idea of the social designing and engineering of society as a whole by government and its central planners is exactly what Friedrich Hayek asked us not to assume or take for granted.

  

  Human Knowledge is Divided and Dispersed in Society

  Earlier in 1945, Hayek had published an article on, “The Use of Knowledge in Society,” in which he pointed out that a fundamental limitation on the ability to centrally plan the economic affairs of society was the inherent and inescapable division of knowledge in society.

  The division of labor through which we cooperatively associate with each other to better achieve our various goals and purposes carries with it a matching division of knowledge. The specialized types of knowledge that each of us possesses in comparison to others in society can never be fully and successfully centralized in the hands of a set of government central planners without losing much of the content and richness of the diverse qualities of that knowledge that exist in different forms in each individual’s mind.

  Hayek’s conclusion was that if all of that dispersed and decentralized knowledge that exists in the individual minds of all the members of society is to be effectively used and brought to bear for mutual improvement of the human condition, each of us must be left free to use that knowledge as we, respectively, think best and most advantageous.

  Furthermore, our various actions using our individual types and bits of unique knowledge is best integrated and coordinated through a competitively-based free pricing system generated by the unhampered interaction of market supply and demand. (See my article, “F. A. Hayek and Why Government Can’t Manage Society,” Part I and Part II.)

  Society is a Spontaneous Order, Not a Planned One

  In this later lecture on “Individualism: True and False” (which was published in Hayek’s collection of essays, Individualism and Economic Order), Hayek argued that the true individualism starts from the premise that “society” is not some ethereal entity having an existence of its own, nor the designed creation of one or a handful of minds imposing a “plan” on people that produces the social order.

  Instead, society is the cumulative and interactive outcome and result of multitudes of individual human beings making their separate individual plans that interact and generate connections and associations with other individual plans to produce the overall social order and its coordinated patterns.

  If we think of language, custom, tradition, most rules of common etiquette and interpersonal conduct, and the general moral and ethical codes that prevail in a society we surely realize, upon a little reflection, that they are the cumulative outcomes of multitudes of generations of people whose interactions brought about these social institutions without which human association and cooperation would hardly be possible.

  Once we realize this, we also understand that much of what we call “society” could not and was not designed because the forms, shapes and characteristics that it takes on could not have been anticipated or even imagined in all their detail and specificity as they emerged and evolved through historical time.

  If the evolution and institutions of society had been limited to what a group of central planners could have known and designed, our society’s development would have been confined and limited to what that handful of minds had been able to image and understand, given their own personal and limited knowledge.

  Or as Hayek expressed it:

  The “basic contention is . . . that there is no way towards understanding of social phenomena but through our understanding of individual actions directed towards other people and guided by their expected behavior . . .

   

  “It is the contention that, by tracing the combined effects of individual actions, we discover that many of the institutions on which human achievement rest have arisen and are functioning without a designing or directing mind; that, as [the eighteenth century Scottish moral philosopher] Adam Ferguson expressed it, ‘nations stumble upon establishments [institutions], which are indeed the result of human action but not the result of human design’; and that the spontaneous collaboration of free men often create things which are greater than their individual minds could ever fully comprehend.”

  Though Hayek does not include it, the next passage in Adam Ferguson’s An Essay on the History of Civil Society (1767), is most pertinent to this point:

  “It may with more reason be affirmed for communities [societies], that they admit of the greatest revolutions where no change is intended, and that the most refined politicians do not always know whither they are leading the state by their projects.”

   

  

  Market Planning versus Political Designs

  Those market experimenters and entrepreneurs of the eighteenth and early nineteenth centuries who began to invest in mass production machinery in what became known as the “factory system” never imagined that their attempts to find ways to produce more and less expensive goods for mass consumption as the means to earning their personal profits would cumulatively generate what we now call the “industrial revolution,” with the economic transformation of unimagined rising standards of human living that has come from it over the last two hundred years.

  Nor, more recently, could most, if hardly any, people have imagined the ways things would be changed and transformed in terms of everyday life through the development of computer technology. The first IBM computer occupied much of a city block in New York City. Who could have anticipated and planned for at that time that the later discovery and development of the microchip would revolutionize the world of communication and commerce in the way that has happened over the last few decades?

  Yet, one hundred years ago, an American president entered the First World War to “make the world safe for democracy” and helped to set in motion a sequence of unintended consequences that, instead, resulted in twentieth century Soviet communism, Italian fascism and German Nazism.

  And more recently, “anti-terrorist” nation building by U.S. government military intervention in Afghanistan, Iraq and Libya have helped foster, instead, the emergence of religious fanatics and cruel murderers equal to or often worse than the tyrants the interventions were designed to overturn.

  Knowledge-Using Institutions versus Great Men Politics

  What inferences were to be drawn from the view of a free society as, primarily, a “spontaneous order,” the cumulative, and often the unintended outcome, of multitudes of human interactions, the results of which could never be fully or in many instances even partially anticipated in its rich texture and form, out of which has come many of the human betterments around us?

  Hayek suggested that an important insight was to accept the fact that it was a false trail to be attempting to find wise leaders or super-human statesmen to guide society to a better future. The reality, he said, is that none have the wisdom or super-human talents and abilities to guide and direct human society.

  The fact is, people are limited in their knowledge, abilities and talents, and are too often tempted to misuse and abuse any such positions of political power to benefit themselves and their associates at the expense of others in society.

  The task, instead, Hayek said, is finding an institutional order in which the potential for such misuse and abuse is minimized and the widest latitude prevails for people to use their own unique and specialized knowledge and abilities in ways that not only benefit themselves but improve the conditions of many others in society, as well.

  Explained Hayek:

  The “chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst . . .

   

  “The main merit . . . of [political] individualism . . . is that it is a system under which bad men can do least harm; it is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. [The] aim was a system under which it should be possible to grant freedom to all, instead of restricting it . . . to ‘the good and wise’ . . .

   

  “What the economists [of the eighteenth and nineteenth centuries] understood for the first time was that the market as it had grown up was an effective way of making men take part in a process more complex and extended than he could comprehend and that it was through the market that he was made to contribute ‘to ends which were no part of his purpose’ [to quote from Adam Smith] . . .

   

  “The true basis of [the individualist’s] argument is that nobody can know who knows best and that the only way by which we can find out is through a social process in which everybody is allowed to try and see what he can do.

   

  “The fundamental assumption here as elsewhere is the unlimited variety of human gifts and skills and the consequent ignorance of any single individual of most of what is known to all the members of society taken together.”

   

  

  Individual Freedom with Limited Government

  If we take Hayek’s argument to heart, we must not only doubt but strongly challenge the arrogance and hubris expressed by all those in the public policy arena who assert a presumed knowledge to know how to guide, direct, redesign, regulate and plan the society in a manner better than allowing the free interactions of multitudes of individuals within a general system of individual rights to life, liberty and honestly acquired property, with enforcement of all contracts and agreements freely and non-fraudulently entered into.

  As Hayek went on to say, this also implies a society in which individuals reap the benefits of all peaceful rewards they have earned, but also must be willing to bear the losses and disappointments when outcomes are not always to their liking.

  Thus, while such a free society rejects any and all political forms of favor, privilege and artificial status, it also operates on the basis of market-resulting inequalities of material and other outcomes under a regime of impartial and equal individual rights before the law. Either all people are treated equally before the law with resulting unequal economic outcomes, or government treats individuals unequally in the attempt to assure more equal economic results.

  Hayek ended his lecture with a question and an observation that is as relevant today as when he delivered it 70 years ago:

  “The fundamental attitude of true individualism is one of humility towards the processes by which mankind has achieved things which have not been designed or understood by any individual and are indeed greater than individual minds. The great question at this moment is whether man’s mind will be allowed to continue to grow as part of this process or whether human reason is to place itself in chains of its own making.

   

  “What individualism teaches us is that society is greater than the individual only in so far as it is free. In so far as it is controlled or directed, it is limited to the powers of the individual minds which control or direct it.”

  Which direction will the twenty-first century follow: individual free minds or politically managed minds? That is the question for all of us to answer.

  

  

  

  

• This Is The Cartoon Germany Hands Out To Sexually Frustrated Refugees

  Earlier this evening, we noted that the western German town of Bornheim has banned adult male asylum seekers from its indoor public pool after some German women complained of harassment.

  “There have been complaints of sexual harassment and chatting-up going on in this swimming pool … by groups of young men, and this has prompted some women to leave (the premises),” the town’s deputy mayor said.

  Bornheim, as it turns out, is just a stone’s throw away from Cologne where a wave of sexual assaults allegedly perpetrated by men of “Arab origin” at a New Year’s Eve festival has mushroomed into a bloc-wide scandal.

  Now, officials from across Europe are struggling to deflect criticism and devise a way to ensure that women are safe in large crowds.

  As we documented on Thursday, Switzerland has adopted an Austrian cartoon flyer for its upcoming  Lucerne carnival. The pictogram lays out various instances of accepted behavior such as kissing and praying, while making it clear that flying into a mad rage and open-hand slapping women and small children is frowned upon in polite society.

  

  Well now, in a story that combines the concern about public pools and the effort to dissuade lewd behavior with cartoons, The Local reports that “in Bavaria, swimming pools have issued leaflets with simple pictorial instructions on behaviour for migrants who may never have swum in public before.”

  Officials dreamed up the leaflets in 2013 after witnessing an increasing number of “problems” at the city’s 18 public swimming pools.

  “The ground rule of respect for women – whatever clothing they’re wearing – is unfortunately not respected by all our swimmers. That’s why there is an explicit indication about it,” a Munich city spokesman said.

  The “explicit indication” the spokesman mentions is a slightly creepy first-person view of a hand reaching out to touch the behind of an unsuspecting female swimmer:

  

  That is unacceptable, as is drowing others (#4 below), pushing women into the pool (#3 below), and leaping from the side onto a screaming blonde (#7 below).

  Here is the full cartoon which you are encouraged to review in its entirety if you are an asylum seeker that plans on swimming in Bavaria.

  

  We’d be remiss if we didn’t mention that this is the same logic employed by Cologne mayor Henriette Reker who, in the wake of the New Year’s Eve assaults, suggested that one solution to the “problem” would be to “explain to people from other cultures that the jolly and frisky attitude during our Carnival is not a sign of sexual openness.” Neither is wearing a bikini.

  We’ll close with a modified version of what we said on Thursday with regard to the Austrian pictograph: “…whether the cartoons will be successful in taming the refugees’ more base instincts, stop by a Bavarian public pool to find out.”

  

  

  

  

• "This One Is A Bag Of Dicks": America Answers Oregon Militia's Plea For "Supplies"

  Shortly after Ammon Bundy and a handful of armed militiamen “seized” a remote bird sanctuary to protest the imprisonment of a rancher and his son for setting fire to federal land, the group appealed to “patriotic” Americans to send supplies.

  Initially, Bundy said his followers were prepared to occupy the building “for years” if they had to if it meant securing the release of Dwight Hammond and his son Steven and forcing the federal government to reimagine laws around land rights. As a reminder, the group is apparently attempting to force the issue of land control back into the national consciousness with a kind of ad hoc, haphazard rekindling of the Sagebrush Rebellion.

  Shortly after Bundy suggested that the standoff could last “years”, it became apparent that the group might not have packed enough supplies.

  Before you knew it, Jon Ritzheimer – the same Jon Ritzheimer who, in a YouTube video addressed to his family, cries while clutching a small paperback copy of the Constitution on the way to explaining why it’s necessary to commandeer a tiny building in the middle of nowhere – took to Facebook to ask for “cold weather socks, snacks, energy drinks, equipment for cold weather, snow camo, gear, and anything you think will help.”

  Well as it turns out, some “sympathizers” did indeed have ideas about “what would help.”

  “The occupiers, who took over buildings at the Malheur National Wildlife Refuge on Jan. 2 in the latest conflict over the U.S. government’s control of land in the West, had been hoping for snacks, fuel and warm clothes when they provided sympathizers with a local mailing address,” Reuters notes. “Instead, as they angrily showed online, they received sex-related toys and food that would be of little use as they braced for a long standoff with federal law enforcement agents who have kept watch from a distance.”

  Yes, “food that would be of little use as they braced for a long standoff with federal agents.” Food like “a bag of penis-shaped candies,” or as Jon Ritzheimer puts it in an angry new video, “this one was really funny, a bag o’ dicks.”

  Watch below as Jon loses his cool with an American public he’s trying so desperately to “help”.

  

  

  

  

• GM/Ford Credit Risk Surges To 2 Year Highs As Fitch Raises Auto Sector Concerns

  With the feds probing Deutsche Bank's exaggerating Auto ABS demand, car dealerships suing automakers for being forced to channel-stuff, direct evidence of massive channel-stuffing with near-record inventories-to-sales, and sales now beginning to tumble after last month's weak credit growth, it is perhaps no wonder that Fitch has raised the warning flag about automotive vehicle and parts makers…

  As we demonstrated last week, the cracks are already starting to show.

  Sales slowing dramatically…

  

   

  Inventories continue to soar…

  

   

  And that has not ended well in the past…

  

   

  And now Fitch raises concerns:

  Automobiles & parts companies five-year Credit Default Swaps (CDS) have experienced notable widening recently, according to Fitch Solutions in its latest case study.

   

  CDS on automobiles & parts companies have widened 11.5% on average over the past week (22.4% over the month), underperforming the 6% widening observed for the broader consumer goods industry last week.

   

  Auto companies domiciled in North America saw the most spread widening (14% w/w, 31% m/m), followed by European autos (11% w/w, 16% m/m) and Asian issuers (3% w/w, 12% m/m).

   

  "The increase in market scrutiny over the auto sector likely stems from overall jitters relating to China's economic slowdown and the potential impact on demand for autos and parts," said Diana Allmendinger, Director, Fitch Solutions.

  In fact Ford is at its highest credit risk in over 2 years and GM getting close..

  

   

  But it's not just F and GM…

  

   

  And we detailed previously, it would appear that demand for auto loan ABS may be beginning to dry up as investment banks are forced to engineer an artificial buzz around new deals in order to keep skeptical investors from demanding sharply higher yields. 

  As a reminder, if the market for auto loan ABS stalls (so to speak), it will trigger a chain reaction all the way down to the dealers who will suddenly care about the creditworthiness of borrowers again.

  Once that happens, the US auto "miracle" will suddenly disappear in a cloud of noxious tail pipe exhaust as the one reliable "driver" of consumption in America is exposed for what it is: a castle built on subprime quicksand.

  

  

  

  

  

  

• German Town Bans Refugees From Pools

  On Thursday, we brought you an Austrian cartoon flyer that the Swiss department of Health and Social Services intends to distribute to refugees ahead of the Lucerne carnival which starts on February 4.

  The flyer features a number of pictograms depicting acceptable versus unacceptable behavior. Shaking hands, for instance, is ok, while flying into a rage and open-hand slapping young children is generally frowned upon:

  

  It’s necessary to lay out the ground rules ahead of time because as we and others have documented exhaustively over the past several weeks, Europe has been struggling to deal with a growing sex assault scandal. According to “hundreds” of reports, men of “Arab origin” formed “gangs” to assault women in Germany, Finland, and Austria on New Year’s Eve and last August, dozens of teenage girls were allegedly attacked in a similar fashion at a festival in Sweden.

  The public outcry has been long and loud. Women in Cologne massed last week in the city center in Cologne, holding signs that read “Ms Merkel where are you? What do you say? This scares us!,” among other things. The attacks have also emboldened nationalist movements across the block. Thousands of PEGIDA demonstrators poured into the streets last weekend in Germany and in Finland, a right-wing group called “The Soldiers of Odin” now patrols the streets in an effort to “assist” police in preventing crime.

  Now, we’re beginning to see the first signs of segregation as one German town has banned adult male asylum seekers from the public pool.

  “A western German town has barred adult male asylum seekers from its public indoor swimming pool after receiving complaints that some women were sexually harassed there,” Reuters reports, adding that “the deputy mayor of Bornheim, a town of 48,000 some 30 km south of Cologne, said on Friday that a difficult decision was taken to send a clear message that breaching German cultural norms was a red line that should not be crossed.”

  “There have been complaints of sexual harassment and chatting-up going on in this swimming pool … by groups of young men, and this has prompted some women to leave (the premises),” Markus Schnapka told Reuters.

  “This led to my decision that adult males from our asylum shelters may not enter the swimming pool until further notice.”

  There was no official word on how the ban would be enforced but Markus Schnapka, who heads the social affairs department in Bornheim, said the measure would remain in place until refugees “got the message” – whatever that means. Here’s the facility:

  

  Meanwhile, in Finland, employees of the Diakonissalaitos Foundation which runs the local center for asylum seekers say elderly Finnish women are preying upon young male refugees. “The older Finnish woman suspected to have bought sex alone Finland tulleelta a minor asylum seeker,” a clumsy translation of a story that ran yesterday in prominent Finnish tabloid Ilta-Sanomat reads. Here’s more:

  Deaconess Institute working with asylum seekers as a teacher Taina Cederström to strengthen the Ilta-Sanomat. Cederström continue that women were trying to buy sex from minors Helsinki railway station during the Christmas season. Women offered Cederström data show that the boys return for 20 euros. – We made ??a conclusion that there must have been a bunch of people pre-Christmas traffic. Money is purchased, Cederström says.Cederström says that two women blow to the companies he is quite sure. – Similar cases are certainly other. The Honourable Members heard enough.

   

  “One boy asked, that receive women kiss when want to”

   

  Deaconess Institute’s employees were able to track down the case, when they began to wonder where young boys find their money on tobacco, and other things.

   

  Cederström says that this is a new phenomenon. Young people at the station has been sufficient in the past. Cederström, the station is now gone for Finnish women 30-40 years of age to buy the services of minors. Cederström thinks that women are, in principle, to all appearances, smart, prosperous people. Someone feeling of superiority it has.

  So there you have it. The descent of European society into bacchanalia. Lewd “chatting up” at indoor pools in Germany and young boys sold for €20 to elderly female predators at train stations in Finland. 

  We wonder how long it will be before asylum seekers are banned from other public facilities in Germany. We also wonder if the Soldiers of Odin will intervene to keep underage boys from being sold into slavery for a pack of cigarettes. 

  

  

  

  

  

• Atlanta Fed Explains Why It Waited Until The Market Close To Reveal The Lowest Q4 GDP Estimate Yet

  As we noted earlier, the Atlanta Fed waited until the market close to reveal its most dire GDP estimate yet: a paltry 0.6%, matching the 0.6% recorded during the “harsh winter” first quarter: one could be forgiven to think that during today’s already chaotic selloff, the last thing traders and algos needed was news that US economic growth had ground to a virtual halt in the quarter in which Yellen decided to hike the interest rate.

  Moments ago the Atlanta Fed was kind enough to explain the reason behind this surprising delay for a report it usually releases before noon. The answer: “technical delays” and “nothing nefarious.”

  @zerohedge Apologies for the late-day data release. Nothing more nefarious than technical difficulties, which we believe have been resolved.

  — Atlanta Fed (@AtlantaFed) January 15, 2016

  Thanks for the explanation.

  

  

  

  

• Weekend Reading: Breaking Markets – Season II

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Last week, I started the weekly reading list by stating:

  “This week has certainly been interesting with the Dow Jones Industrial Average having the worst start to a year…well…ever.”

  This week was not much difference as the markets continued their slide into the “worst-start-of-the-year-everer.”

  However, with the markets roughly down 7% since the beginning of this year, it certainly has seemed painful as investors have been slammed from all angles. However, as I addressed earlier this year with respect to January statistics, this is well within historical norms. To wit:

  “Furthermore, while January’s maximum positive return was just 9.2%, the maximum drawdown for the month was the lowest for all months at -6.79%.”

  

  “However, given the length of the current bull market run from 2009 to present, the risks are mounting that January will likely have consecutive negative performance years which would confirm the ongoing market topping process I discussed previously. Such an outcome would suggest a more conservative approach to investment allocations.”

  With the markets now extremely oversold on a short-term basis, it is quite likely that a bounce will occur in the days ahead. Such a bounce will likely be met by sellers wanting to reduce risk of a more substantial correction. But will they be right?

  This weekend’s reading list is a collection of articles on the current state of the market.  Is the bull still alive or is it being hunted by the bear?

  ---

  1) Death Throes Of A Bull Market by Anthony Mirhaydari via Fiscal Times

  “Fed Chair Janet Yellen will be forced to either acknowledge labor market tightening as reason to continue with the four-hike schedule for 2016 or risk her credibility, belittle job market stability and sound a warning about the risks of lower oil prices and cheap gasoline (sacrilege to regular Americans) by slowing the hiking pace after a single 0.25 percent increase last month.

   

  If she gets it wrong, things could get ugly fast.

   

  The Russell 2000 has dropped all the way back to levels last seen in October 2013 as it has dropped below its 200-week moving average for the first time since 2011.”

  

  But Also Read: It’s Too Early To Call The End Of The Bull by Andrew Bary via Barron’s

   

  2) Market Dive Explained In One Chart by Daniel Alpert via CNBC

  “But here’s the brutal bottom line: The non-energy portion of the U.S. current account deficit, relative to GDP, has ballooned by 236 percent since its low in December 2013, during which period the energy deficit fell by 57 percent.”

  

  But Also Read: The U.S. Is Teetering On Edge Of Recession by Robert Reich via TruthDig

  Opposing View: No Recession Yet by Caroline Baum via MarketWatch

   

  3) The Bear Comes Out Of Hibernation by Michael Snyder via Zero Hedge

  “According to the Bespoke Investment Group, the average stock on that index is down a staggering 26.9 percent from the peak of the market…

   

  Indeed, the Standard & Poor’s 1500 index – a broad basket of large, mid and small company stocks – shows that the average stock’s distance from its 52-week high is 26.9%, according to stats compiled by Bespoke Investment Group through Friday’s close.

   

  ‘That’s bear market territory!’ says Paul Hickey, co-founder of Bespoke Investment Group, the firm that provided USA TODAY with the gloomy price data.

  So if the average stock has fallen 26.9 percent, what kind of market are we in?

   

  To me, that is definitely bear market territory.”

  But Also Read: What Is Jeff Gundlach Predicting For 2016 by John Gittelsohn via Bloomberg

   

  4) We Are Entering “Irrational Pessimism” by David Rosenberg via Financial Post

  “’If you can keep your head when all about you are losing theirs and blaming it on you.’

   

  Thank you, Mr. Kipling. Keep saying it over and over.

   

  I have three pieces of advice to all the Nervous Nellies out there: Turn off the TV, focus on the big picture, and review your asset mix so as to use this corrective phase and radical repricing of relative asset prices as an opportunity to rebalance the portfolio.”

  But Also Read: RBS Cries “Sell Everything” by Ambrose Evans-Pritchard

  Further Read: Big Bad China by Shane Obata via THA Business

   

  5) What Is A Reveral Vs. A Correction by Simon Constable via WSJ

  “For the past 12 months the S&P 500 index of large stocks has bounced around, neither continuing the trend upward nor starting a new one downward.

   

  That “sideways” movement is making some market strategists worried that a reversal may occur in which a new downward trend starts. If such a trend does start, these strategists will want to warn investors earlier rather than later.”

  But Also Read: Smart Money Turning Bearish by Julia La Roche via Business Insider

  And: The Future Ain’t What It Used To Be by Doug Kass via Yahoo Finance

  ---

  MUST READS

  • The Last Hurrah For Job Growth by Louis Woodhill via Real Clear Markets
  • US Real Estate 25-60% Overvalued by Chris Matthews via Fortune
  • Retired Until No Other Job Available by Salil Mehta via Statistical Ideas
  • SNAFU – Situation Normal All ‘FANGed Up by Cliff Asness via AQR
  • The Payoff Pitch by Michael Liebowitz via 720 Global
  • A 40-55% Reversal Return To Norms by John Hussman via Hussman Funds
  • Predicting The Future Is Impossible by Joe Calhoun via Alhambra Partners
  • Peak Pessimism: S&P Will Fall By 75% by Tyler Durden via Zero Hedge
  • 3 Charts Every Investor Must See by Jesse Felder via The Felder Report
  • Complacent Correction Cause For Concern by Dana Lyons via Tumblr

  ---

  “Better to preserve capital on the downside rather than outperform on the upside” – William J. Lippman

  

  

  

  

  

• Atlanta Fed Waits Until The Close To Reveal 0.6% Q4 GDP Estimate

  With less than half an hour until the close, we asked the Atlanta Fed – the most accurate predictor of GDP – which was scheduled to post an update of its Q4 GDP NowCast following today’s ugly economic data, if it was was planning on releasing its latest Q4 GDP estimate before or after the close, something it usually does just before noon.

  Dear @AtlantaFed will you be updating your Q4 GDP NowCast today as your schedule says you will? https://t.co/YrUvkxf5Nl

  — zerohedge (@zerohedge) January 15, 2016

  And, at close ahead of a three day weekend, the economists in charge of the sacred GDP excel model, finally did what they were supposed to do hours later and revised Q4 GDP growth to just 0.6%, a number which some – such as Barclays – would say is too high in light of the economic drop the US economy has experienced in the past month. Note the timestamp:

  

  Here is the argument:

  The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 0.6 percent on January 15, down from 0.8 percent on January 8. The forecast for fourth quarter real consumer spending growth fell from 2.0 percent to 1.7 percent after this morning’s retail sales report from the U.S. Census Bureau and the industrial production release from the Federal Reserve.

   

  

  As a reminder 0.6% is how much the US economy “grew” by in the revised Q1 2015 quarter when the “harsh weather” was blamed for unleashing hell on US GDP. Whose fault will it be this time?

  Worse, it means that Yellen raised rates in a quarter in which the US economy may well end up contracting in nominal terms.

  Finally, perhaps the fact that the Atlanta Fed waited as long as it did, is confirmation that bad news for the economy is now bad news for stocks, at least until the Fed does fold and either cut or launch more QE.

  

  

  

  

  

• Black Friday

  Unleash hell…

  And this…

  Worst Start To A Year… Ever!

  

   

  It's ugly in 'Murica…

  

   

  Of course – it's not just US, China has collapsed this year…(Worst start to a year ever)

  

  Japan was a shitshow..

  

   

  And Europe is in a bear market having erased all of the Q€ gains… (Worst start to a year ever)

  

   

  The day in stocks…

  

  • *NASDAQ COMPOSITE INDEX SINKS 2.7% TO LOWEST IN 14 MONTHS

  • *S&P 500 FALLS 2.2% TO LOWEST LEVEL SINCE AUG. 25

  But that level was heavily defended…

  

   

   

  The week in stocks… worst 3-week drop in S&P, Dow, Trannies, Small Caps, and Nasdaq since Aug 2011

  

   

  2016 in stocks…

  

   

  Since The Fed rate-hike in stocks…

  

   

  Since The Fed across asset-classes…

  

   

  Since the end of QE3 in stocks…

  

   

  It's a bloodbath in FANGs and Biotechs…

  

   

  FANTAsy stocks are really ugly year-to-date (cap-weighted FANGs are down 12% YTD, Biotechs -17%)

  

   

  Surprise – Equity markets catch down to on balance volume…

  

   

  Financials bloodbathery fell to catch down to credit…

  

   

  On the week, credit remains the leader…

  

   

  But credit signals more pain to come… in stocks…

  

   

  Especially in the most credit-sensitive small caps…

  

   

  And VIX…

  

   

  With Energy credit risk at its highest on record…

  

  Carnage Continues, Energy Yields Set Record High

  (Bloomberg) — WTI oil has dropped to a new 12y low, falling below $30/bbl, triggering a broad sell-off across asset classes, with equities dropping 2.6%, HY ETFs falling 1.6% (lowest levels since 9/09), HYCDX slipping 1.1% and cash bonds falling across sectors led by oil companies in the Energy sector.

   

  The BofAML U.S. HY Energy index YTW set a new historical high last night closing at 17.43%, surpassing the 17.048% close on 12/5/2008 during the height of the financial crisis

   

  As of Wednesday’s close, the BofAML U.S. HY Energy index option adjusted spread to Tsys closed at +1,501, eclipsing the previous wide level seen at the height of the crisis of +1,494 on 12/5/2008

   

  Energy bonds were roiled led by Sanchez Energy which plummeted 32% intraday followed by EP Energy (-15%), Whiting Petroleum (-13%), and Oasis Petroleum (-11%)

   

  

  As Energy, Materials, and Financials lead the collapse in stocks since The Fed rate-hike…

  

   

  Treasury yields collapsed this week (with the curve flat)…

  

   

  And the USD Index gave up some of its gains to end the week up 0.3%… USDJPY dropped 0.25% on the week

  

  • *RUSSIAN RUBLE WEAKENS 2% TO 77.603 PER DOLLAR, RECORD-LOW CLOSE

  Commodities were a mess with Gold and silver best (unch to modestly lower) while copper and crude were clubbed…

  

   

  Crude closed below $30 for the first time since September 2003…

  

   

  Charts: Bloomberg

  Bonus Chart: Rate-Hike Odds have plunged…

  

  Bonus Bonus Chart: Value is collapsing and Momentum remains high post-QE3 – we suspect that will revert… (h/t @groditi)

  

  

  

  

  

• Americans This Weekend (In 1 Chart)

  (3)01k?

   

  

   

  Source: Townhall.com

  

  

  

  

  

• The US Consumer Is Drowning His Sorrows At The Bar

  Submitted by Jim Quinn via The Burning Platform blog,

  Month after month I watch as the MSM mouthpieces try to spin declining consumer spending in a positive light. They are practically out of excuses. They are befuddled, because month after month they report “awesome” job gains and can’t understand why all these gainfully employed Americans aren’t buying shit they don’t need like they used to. These faux journalists, spouting propaganda for their ruling class bosses, are willfully ignorant of the fact the job gains are in low paying part-time jobs and the fact that Obamacare and record high rents are sapping any discretionary income households would use to buy stuff.

  Despite the propaganda from the media and happy talk from the Liar-in-Chief, the country is currently in a recession and the Fed has no ammo to fake another recovery. We are going down and going down hard. When 70% of your economy is based on Americans buying shit they don’t need from China on credit cards, a dramatic slowdown in consumer spending equals recession. When sales actually fall from November to December during the holiday season, you are in recession. We’ve arrived.

  The December report was a disaster and portends horrible retailer results coming down the road. More ghost malls coming to your neighborhood. The annual results were pitiful, with the more recent months even more dreadful. So after adding 10 million jobs, according to Obama, spending declines? They must be great jobs.

  I think the results are even worse than portrayed in the results presented by the Census Bureau. Retail sales grew by only 2.2% in 2015 versus 2014. That is significantly less than the real inflation being experienced by real people, so on an inflation adjusted basis they fell. Even the 2.2% increase is artificially pumped up by the Fed induced auto debt fueled boom in car sales (or long-term rentals in reality). The 7 year 0% auto loans, subprime auto loans to deadbeats, and record levels of auto leases have created fake demand that will end in tears when the defaults skyrocket. If you remove these fake sales, then total retail sales are up a pitiful 0.9% over 2014.

   

  When you realize that two of the few strong sales categories were autos (7.5%) and furniture stores (5.8%), you can put your thinking cap on and realize the 7 year 0% financing scam is solely responsible for these sales. Reducing credit score criteria and extending loan terms always works. Right? The other relatively strong area was internet sales (6.3%). Amazon and the rest of the on-line retail segment continues to destroy the bricks and mortar retailers, but even these sales are slowing. They were up a weak 0.3% from November. Before the states started taxing internet sales and it was still a newer concept, the annual growth rates were 15% to 20%, so the 6.3% growth rate is rather unimpressive.

  

   

  And this leads me to the strongest spending segment – restaurants/bars. Sales were up 8.1% over 2014 and continued strong in December. I know this is true firsthand as my wife is a waitress at a restaurant/sports bar and business was booming in December and continues to be good in January. My thesis for this strong spending is that people are so miserable about the economy in general and the direction of the country (reflected in Trump’s support), they have decided to drink and eat, for tomorrow we die. Dining out or getting loaded at a bar takes your mind off your troubles for a few hours. It’s not a huge expenditure and you just put it on your credit card and worry about it later.

  When the mass layoffs start hitting in 2016, even this category of spending will contract. If you think the 2015 consumer spending numbers were atrocious, you haven’t seen anything yet.

  

  

  

  

  

• Here's A Chart You Won't See On CNBC

  What goes up, comes down considerably faster.

  For global stocks, Bloomberg notes, the way down ($15 trillion lost in 7 months) has been much easier than the climb up ($30 trillion added in 4 years).

  

  Source: Bloomberg

  With markets from Asia to Europe entering bear markets this month, stocks worldwide have lost more than $14 trillion, or 20 percent, in value from a record last June amid worries over global growth and deepening oil declines. The pace of the drop has been so fast that it has already unraveled about half of the rally since a low in 2011.

  And here is a bonus chart from Bank of America, which looks at the S&P on an equal weighted basis, to avoid such aberrations as the collapsing market breadth phenomenon, also known as FANG. Spot the symmetry.

  

   

  

  

  

  

  

• Bill Gross' Advice To Traders As Stocks Crash

  In a time when the S&P fluctuates with unprecedented velocity and investors need HFT-like reflexes to catch any momentum move, this may be the most practical advice to traders we have heard today.

  In an email to Bloomberg, the former (and currently in contention for the title with Jeff Gundlach) bond king Bill Gross says to “stay out of the bathroom” as stock markets enter bear territory.

  For those who ate Chipotle.coli for lunch, our condolences.

  Some more Gross courtesy of Bloomberg:

  “Markets are recognizing the limited tools they now have to prop up assets AND real economies,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an e-mail.

   

  Stocks fell around the world today, with U.S. equities trading at the lowest levels since August as oil plunged below $30 a barrel. Treasuries gained as U.S. economic data did little to ease concerns that global growth is slowing.

   

  “Wealth effect constructed with paper – sometimes corrugated/strong, sometimes toilet/flimsy,” Gross said in a Tweet on Friday from the Janus Capital Group Inc. account. “Stay out of the bathroom.”

   

  Gross warned in December that markets were headed for a fall and urged urged investors to de-risk their portfolios or “look around like Wile E. Coyote wondering how far is down,” a reference to the cartoon character whose schemes to catch the bird Road Runner always backfire, often with a plunge over a cliff.

   

  In his e-mail, Gross said that zero-percent interest rates and quantitative easing created leverage that fueled a wealth effect and propped up markets in a way that now seems unsustainable.

  His conclusion: “The wealth effect is created by leverage based on QE’s and 0% rates.”

  In other words, it was all an illusion.

  

  

  

  

  

• Chipotle To Close All Stores Next Month For Meeting On How Not To Poison People

  Chipotle poisoned some folks.

  America’s love affair with “fast casual” darling Chipotle ended in a wave of severe nausea last year as a food poisoning outbreak that started in July spread to multiple states and sickened hundreds of patrons.

  Since last summer, authorities have tied Chipotle to at least six outbreaks spanning two types of bacteria (E. coli and salmonella) and one virus (the “winter vomiting bug”).

  As The Chicago Tribune recounts, the incidents “included one that started in October in Oregon and Washington and spread to seven other states, sickening more than 50 people by mid-November, [one in] December [in which] about 200 were sickened by norovirus after eating at a Chipotle in Boston, five cases of E. coli poisoning in Kansas, North Dakota and Oklahoma, five illnesses tied to one Seattle store in July, 100 illnesses [linked to] an outlet in Simi Valley, California,” and an unfortunate episode “in September [when] more than 60 fell ill in Minnesota.”

  That’s a lot of sick people and as you might image, the stock fell ill as well, dropping some 40% since the first reported cases.

  
  

  Now, the chain is set to hold a kind of ad hoc “try not to poison anyone” meeting on February 8, when all stores will close “for a few hours” so that management can “discuss some of the changes [its] making to enhance food safety, to talk about the restaurant’s role in all of that and to answer questions from employees.”

  Yes, “questions from employees”, who might ask if their jobs are on the line after same store sales collapsed 30% in December and after the company was served with a Grand Jury Subpoena in connection with an official criminal investigation being conducted by the U.S. Attorney’s Office for the Central District of California.

  They might also be concerned with the dozens of lawsuits Bill Marler, a food safety litigator in Seattle, says he’s about to file.

  Perhaps management can calm employees’ frayed nerves the same way they calmed the market: by explaining that buybacks will always cure what ails you.

  

  (the magic of the buyback as seen on January 6)

  

  

  

  

  

• The Game Of Chicken Between The Fed & The PBOC Escalates

  Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

  There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air (hat tip to Ray Dalio), as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten. 

   

  What really stinks of 2008 to me is the dismissive, condescending manner of our market Missionaries (to use the game theory lingo), who insist that the US energy and manufacturing sectors are somehow a separate animal from the US economy, who proclaim that China and its monetary policy are “well contained” and pose little risk to US markets. Unfortunately, the role and influence of Missionaries is even greater today in this policy-driven market, and profoundly misleading media Narratives reverberate everywhere. 

   

  For example, we all know that it’s the overwhelming oil “glut” that’s driving oil prices down and wreaking havoc in capital markets, right? It’s all about OPEC versus US frackers, right?

   

  Here’s a 5-year chart of the broad-weighted US dollar index (this is the index the Fed publishes, which – unlike the DXY index and its >50% Euro weighting – weights all US trading partners on a pro rata basis) versus the price of WTI crude oil. The blue line marks Yellen’s announcement of the Fed’s current tightening bias in the summer of 2014.

  

   

   

  Ummm … this nearly perfect inverse relationship is not an accident. I’m not saying that supply and demand don’t matter. Of course they do. What I’m saying is that divergent monetary policy and its reflection in currency exchange rates matter even more. Where is the greatest monetary policy divergence in the world today? Between the US and China. What currency is the largest contributor to the Fed’s broad-weighted dollar index? The yuan (21.5%). THIS is what you need to pay attention to in order to understand what’s going on with oil. THIS is why the game of Chicken between the Fed and the PBOC is so much more relevant to markets than the game of Chicken between Saudi Arabia and Texas.

   

  But wait, there’s more.

   

  My belief is that a garden variety, inventory-led recession emanating from the energy and manufacturing sectors is already here. Maybe I’m wrong about that. Maybe I spend too much time in Houston. Maybe low wage, easily fired service sector jobs are the new engine for US GDP growth, replacing the prior two engines – housing/construction 2004-2008 and energy/manufacturing 2010-2014. But I don’t see how you can look at the high yield credit market today or projections of Q4 GDP or any number of credit cycle indicators and not conclude that we are rolling into some sort of “mild” recession. 

   

  My fear is that in addition to this inventory-led recession or near-recession, we are about to be walloped by a new financial sector crisis coming out of Asia. 

   

  What do I mean? I mean that Chinese banks are not healthy. At all. I mean that China’s attempt to recapitalize heavily indebted state-owned enterprises through the equity market was an utter failure. I mean that China is going to need every penny of its $3 trillion reserves to recapitalize its banks when the day of reckoning comes. I mean that China’s dollar reserves were $4 trillion a year ago, and they’ve spent a trillion dollars already trying to manage a slow devaluation of the yuan. I mean that the flight of capital out of China (and emerging markets in general) is an overwhelming force. I mean that we could wake up any morning to read that China has devalued the yuan by 10-15%.

   

  Look … the people running Asian banks aren’t idiots. They can see where things are clearly headed, and they are going to do what smart bankers always do in these circumstances: TRUST NO ONE. I believe that there is going to be a polar vortex of a credit freeze coming out of Asia that will look a lot like 1997. Put this on top of the deflationary impact of China’s devaluation. Put this on top of an inventory-led recession or near recession in the US, together with high yield credit stress. Put this on top of massive market complacency driven by an ill-placed faith in central banks to save the day. Put this on top of a potentially realigning election in the US this November. Put this on top of a Fed that is tightening. Storm warning, indeed.

   

  So what’s to be done? As Col. Kilgore said in “Apocalypse Now”, you can either surf or you can fight. You can adopt strategies that can make money in this sort of environment (historically speaking, longer-term US Treasuries and trend-following strategies that can go short), or you can slog it out with a traditional equity-heavy portfolio.

   

  Also, as some Epsilon Theory readers may know, I co-managed a long/short hedge fund that weathered the 2008 systemic storm successfully. There were trades available then that, in slightly different form, are just as available today. For example, it may surprise anyone who’s read or seen (or lived) “The Big Short” that the credit default swap (CDS) market is even larger today than it was in 2008. I’d welcome a conversation with anyone who’d like to discuss these systemic risk trades and how they might be implemented today.

   

  

  

  

  

  

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• Dow Dumps 250Pts, Nikkei Plunges 500Pts After China Credit Concerns, Kuroda Comment

  It appears the world is ganging up on The Fed as following China's recent clear and present threat should the USD strengthen, BoJ's Kuroda warned that further QQE might threaten the bank's finances – implicitly demanding moar from Yellen because he knows he's out of bullets. Add to that the surge in China credit which merely extends the life of already zombified firms, thus spreading more deflationary stress to the world and stocks from China (SHCOMP -3%) to US (Dow -280 points from Bullard Bounce highs) are tumbling.

  China’s broadest measure of new credit surged the most since June as companies increase borrowing on the corporate bond market, underscoring a shift away from reliance on state-backed banks for funding.

  Aggregate financing rose to 1.82 trillion yuan ($276 billion) in December, according to a report from the People’s Bank of China on Friday, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey.

  

  The data shows companies are turning to alternative sources for credit given banks’ reluctance to lend. It also adds to signs the economy is stabilizing, not slumping as its falling currency and plunging stock market seem to suggest.

  "For the whole year of 2015, the biggest increment in aggregate financing came from the corporate financing via bond and stock markets," said Zhou Hao, an economist at Commerzbank AG in Singapore.  

   

  "It appears to us commercial banks have few incentives to provide loans directly to corporates, especially due to credit concerns over SMEs, but turn to capital markets to finance the corporate indirectly. This hints an ongoing structural change in China’s financing system."

  In fact, as we noted previously, the bigger than expected increase in aggregate financing shows Chinese companies taking advantage of lower (bubble) bond yields to raise funds as commercial banks have refrained from providing loans to domestic companies because of the slow economic growth outlook.

  Despite the massive supply, yields have collapsed…

  

   

  As both "strong"

  

   

  And "weak" balance sheet firms…

  

   

  …take advantage of the credit bubble. However, there is one less than silver-lining:

  Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan as of the end of September. In a sign of write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating.

  While that credit impulse would normally be seen as a positive in the new normal, it appears there has been a clear shift in recognition that enabling already-zombified companies to live longer merely exacerbates the over-invested, over-produced, mal-invested deflationary spiral that is rapidly spreading across the world.

  Then Kuroda piled on, noting:

  • *KURODA: NO PLANS AT THE MOMENT TO ADD TO MONETARY EASING
  • *KURODA: JAPAN'S POTENTIAL GROWTH RATE IS AT OR BELOW 0.5%
  • *KURODA: QQE POLICY HAS A RISK FOR BOJ'S FINANCES

  Which sounds an aweful lot like a demand that The Fed step back up to the plate and "ease" the world's pain (or at least "un-tighten.")

  And crushed Japanese Stocks… (Nikkei down over 500 points from the US session close)

  

  And the result of that is an almost total reversal of all Fed's Bullard's good work during the US session. (Dow down over 250 points from Bullard's Bounce peaks)

  

   

  So for now, Bullard appears to be firing blanks and "good" news is bad news once again.

  Chinese stocks head for their longest weekly losing streak since October…

  

   

  …and still the worst start to a year ever…

  

  

  

  

  

  

• How Switzerland Hopes To Prevent Refugee Sex Attacks: With This Cartoon

  The traditionally inert, neutral and quite homogeneous nation of Switzerland is not used to having cultural integration issues, which is why it has been watching recent events across the German border (and elsewhere in Europe) with sheer terror. And in order to preempt any possible outbreaks of refugee violence against women, or in general, ahead of the Lucerne carnival starting on February 4, Switzerland is getting ready.

  According to Blick, the department of Health and Social Services will use the following Austrian cartoon flyer dubbed “Ground Rules” which will be distributed to incoming migrants ahead of the noted Swiss carnival with hopes it will make it clear what is and isn’t permitted. It lays out various instances of accepted behavior such as kissing and praying, while making it clear that punching women and children in the head is frowned upon in polite society.

   

  

   

  The flyer was modeled after a comparable one, also created in Austria last year as part of the initial wave of mass refugee influx.

   

  

   

  However, concerned that migrants would be less than inclined to read the text, the follow up was populated with “pictograms” or cartoons.

  According to Blick, distributing the flyer was a spontaneous decision that took place “after the attacks in Germany on New Year’s Eve” when Swiss authorities received a number of reactions, however they add that it was a preventive measure: “we currently have no problems.”

  Blick adds that currently in the canton of Lucerne there are about 1800 asylum seekers in three centers and nine temporary shelters.

  As for the flyer, the local government has determined to “focus on role models, and equality between men and women.” They “want to show that there is zero tolerance for sexual harassment. The motto is “If you come to us, abide by our rules.”

  A comparable flyer in Germany was found to have fanned racism with explanations such as “young girls feel harassed by demands such as asking for a cell phone number or Facebook contact, or marriage proposals” or “when nature calls we do exclusively on toilets, not in parks and gardens, and not on hedges and behind bushes.”

  Whether the cartoons will be successful in taming the refugees’ more base instincts, tune in after the Lucerne carnival has started on February 4 to find out.

  

  

  

  

• Financial Collapse Leads To War

  Submitted by Dmitry Orlov via Club Orlov blog,

  [With the new year, a sea change seems to have occurred in the financial markets: instead of “melting up,” the way they used to, they have started “melting down.” My original prediction is that this will lead to more armed conflict. Let's see if I was right.]

  Scanning the headlines in the western mainstream press, and then peering behind the one-way mirror to compare that to the actual goings-on, one can't but get the impression that America's propagandists, and all those who follow in their wake, are struggling with all their might to concoct rationales for military action of one sort or another, be it supplying weapons to the largely defunct Ukrainian military, or staging parades of US military hardware and troops in the almost completely Russian town of Narva, in Estonia, a few hundred meters away from the Russian border, or putting US “advisers” in harm's way in parts of Iraq mostly controlled by Islamic militants.

  The strenuous efforts to whip up Cold War-like hysteria in the face of an otherwise preoccupied and essentially passive Russia seems out of all proportion to the actual military threat Russia poses. (Yes, volunteers and ammo do filter into Ukraine across the Russian border, but that's about it.) Further south, the efforts to topple the government of Syria by aiding and arming Islamist radicals seem to be backfiring nicely. But that's the pattern, isn't it? What US military involvement in recent memory hasn't resulted in a fiasco? Maybe failure is not just an option, but more of a requirement?

  Let's review. Afghanistan, after the longest military campaign in US history, is being handed back to the Taliban. Iraq no longer exists as a sovereign nation, but has fractured into three pieces, one of them controlled by radical Islamists. Egypt has been democratically reformed into a military dictatorship. Libya is a defunct state in the middle of a civil war. The Ukraine will soon be in a similar state; it has been reduced to pauper status in record time—less than a year. A recent government overthrow has caused Yemen to stop being US-friendly. Closer to home, things are going so well in the US-dominated Central American countries of Guatemala, Honduras and El Salvador that they have produced a flood of refugees, all trying to get into the US in the hopes of finding any sort of sanctuary.

  Looking at this broad landscape of failure, there are two ways to interpret it. One is that the US officialdom is the most incompetent one imaginable, and can't ever get anything right. But another is that they do not succeed for a distinctly different reason: they don't succeed because results don't matter. You see, if failure were a problem, then there would be some sort of pressure coming from somewhere or other within the establishment, and that pressure to succeed might sporadically give rise to improved performance, leading to at least a few instances of success. But if in fact failure is no problem at all, and if instead there was some sort of pressure to fail, then we would see exactly what we do see.

  In fact, a point can be made that it is the limited scope of failure that is the problem. This would explain the recent saber-rattling in the direction of Russia, accusing it of imperial ambitions (Russia is not interested in territorial gains), demonizing Vladimir Putin (who is effective and popular) and behaving provocatively along Russia's various borders (leaving Russia vaguely insulted but generally unconcerned). It can be argued that all the previous victims of US foreign policy—Afghanistan, Iraq, Libya, Syria, even the Ukraine—are too small to produce failure writ large enough to satisfy America's appetite for failure. Russia, on the other hand, especially when incentivized by thinking that it is standing up to some sort of new, American-style fascism, has the ability to deliver to the US a foreign policy failure that will dwarf all the previous ones.

  Analysts have proposed a variety of explanations for America's hyperactive, oversized militarism. Here are the top three:

  1. The US government has been captured by the military-industrial complex, which demands to be financed lavishly. Rationales are created artificially to achieve that result. But there does seem to be some sort of pressure to actually make weapons and field armies, because wouldn't it be far more cost-effective to achieve full-spectrum failure simply by stealing all the money and skip building the weapons systems altogether? So something else must be going on.

   

  2. The US military posture is designed to assure Americans of their imagined “full-spectrum dominance” over the entire planet. But “full-spectrum dominance” sounds a little bit like “success,” whereas what we see is full-spectrum failure. Again, this story doesn't fit the facts.

   

  3. The US acts militarily to defend the status of the US dollar as the global reserve currency. But the US dollar is slowly but surely losing its attractiveness as a reserve currency, as witnessed by China and Russia acting as swiftly as they can to unload their US dollar reserves, and to stockpile gold instead. Numerous other nations have entered into arrangements with each other to stop using the US dollar in international trade. The fact of the matter is, it doesn't take a huge military to flush one's national currency down the toilet, so, once again, something else must be going on.

  There are many other explanations on offer as well, but none of them explain the fact that the goal of all this militarism seems to be to achieve failure.

  Perhaps a simpler explanation would suffice? How about this one:

  The US has surrendered its sovereignty to a clique of financial oligarchs. Having nobody at all to answer to, this American (and to some extent international) oligarchy has been ruining the financial condition of the country, running up staggering levels of debt, destroying savings and retirements, debasing the currency and so on. The inevitable end-game is that the Federal Reserve (along with the central banks of other “developed economies”) will end up buying up all the sovereign debt issuance with money they print for that purpose, and in the end this inevitably leads to hyperinflation and national bankruptcy. A very special set of conditions has prevented these two events from taking place thus far, but that doesn't mean that they won't, because that's what always happens, sooner or later.

   

  Now, let's suppose a financial oligarchy has seized control of the country, and, since it can't control its own appetites, is running it into the ground. Then it would make sense for it to have some sort of back-up plan for when the whole financial house of cards falls apart. Ideally, this plan would effectively put down any chance of revolt of the downtrodden masses, and allow the oligarchy to maintain security and hold onto its wealth. Peacetime is fine for as long as it can placate the populace with bread and circuses, but when a financial calamity causes the economy to crater and bread and circuses turn scarce, a handy fallback is war.

   

  Any rationale for war will do, be it terrorists foreign and domestic, Big Bad Russia, or hallucinated space aliens. Military success is unimportant, because failure is even better than success for maintaining order because it makes it possible to force through various emergency security measures. Various training runs, such as the military occupation of Boston following the staged bombings at the Boston Marathon, have already taken place. The surveillance infrastructure and the partially privatized prison-industrial complex are already in place for locking up the undesirables. A really huge failure would provide the best rationale for putting the economy on a war footing, imposing martial law, suppressing dissent, outlawing “extremist” political activity and so on.

  And so perhaps that is what we should expect. Financial collapse is already baked in, and it's only a matter of time before it happens, and precipitates commercial collapse when global supply chains stop functioning. Political collapse will be resisted, and the way it will be resisted is by starting as many wars as possible, to produce a vast backdrop of failure to serve as a rationale for all sorts of “emergency measures,” all of which will have just one aim: to suppress rebellion and to keep the oligarchy in power. Outside the US, it will look like Americans blowing things up: countries, things, innocent bystanders, even themselves (because, you know, apparently that works too). From the outside looking into America's hall of one-way mirrors, it will look like a country gone mad; but then it already looks that way. And inside the hall of one-way mirrors it will look like valiant defenders of liberty battling implacable foes around the world. Most people will remain docile and just wave their little flags.

  But I would venture to guess that at some point failure will translate into meta-failure: America will fail even at failing. I hope that there is something we can do to help this meta-failure of failure happen sooner rather than later.

  

  

  

  

  

• Stunning Drone Footage Depicts Syria's Dying Capital

  In late October, we brought you what we called “haunting” drone footage of the devastation in Syria, where five years of bloody conflict has cost the country both its population and its cultural heritage.

  “The civil war has been going on four years. What is now left of Syria?,” Die Presse asked President Bashar al-Assad in a December interview.

  “If they talk about the infrastructure, much of it is destroyed,” Assad responded.

  “Every day you can hear the shelling, even here in Damascus, quite close to us,” Die Presse continued, underscoring the extent to which the country’s crumbling capital is still under siege from rebels.

  Below, find new drone footage of the hollowed out city courtesy of RT followed by excerpts from “The Slow Death of Damascus,” as originally published in Foreign Policy.

  *  *  *

  From “The Slow Death of Damascus,” by Thanassis Cambanis

  Over the course of a recent 10-day visit, Damascus residents said they feel less embattled than they did a year ago, but the war is still an inescapable reality of everyday life. Every night, dozens of mortars still land in the city center, sending wounded and sometimes dead civilians to Damascus General Hospital. From the city’s still-busy cafés, clients can hear the thuds of outgoing government guns and the rolling explosions of the barrel bombs dropped on the rebel-held suburb of Daraya.

  Army and militia checkpoints litter the city. In some central areas, cars are stopped and searched every two blocks. Still, rebels manage to smuggle car bombs into the city center. According to residents, explosions occur every two or three weeks, but are rarely reported in the state media.

  Workplaces across the country have emptied out over the summer, as Syrians with a few thousand dollars to spare risked the trip to Europe via Turkey and a boat ride to Greece, taking advantage of a newly permissive Syrian government policy to issue passports quickly and without question.

  Employees in government offices, international aid organizations, and private Syrian corporations estimated that anywhere between 20 and 50 percent of their coworkers left the country this summer.

  “The government doesn’t care if people leave. It can’t stop them,” one middle-class Syrian, who has chosen so far to remain in Damascus, said of the exodus. “The war seems like it will go on forever. People see no future for their children. The only people who are staying are the ones who have it really good here or the ones who aren’t able to leave.”

  

  

  

  

• "I Don't Have Faith Anymore": Frustrated Chinese Shun Stocks For Safety Of Dollars, Gold

  Back in March of last year we noted, with some incredulity, that some 30% of China’s newly-minted day traders had an elementary education or less. Even more incredible, we learned that nearly 6% of the country’s new “investor” class were illiterate.

  Just days after we made that startling revelation we gave readers an idea of just how many Chinese were opening new stock trading accounts each month. In March for instance, Chinese farmers, housewives, and all manner of other amatuer traders opened enough brokerage accounts for every man woman and chile in Los Angeles.

  But it gets worse. Not only were millions of semi-literate Chinese starting to trade without being able to read let alone conduct fundamental analysis, they were buying into a market gone parabolic:

  

  Worse still, they were buying on margin – heavily:

  

  By summer, the stage was set for a truly epic meltdown on the SHCOMP and especially on the tech-heavy Shenzhen.

  Sure enough, in June, the wheels started to come off.

  As we warned when the plunge began, China was facing more than a stock market selloff. Beijing had managed to give legions of day trading Chinese the idea that stocks always went up. That encouraged many people to plow their life savings into the market on margin. When the unwind began – starting with the half dozen or so backdoor margin lending channels that helped to pump an extra CNY1.5 trillion into stocks – many Chinese were confronted with the possibility that they may lose everything.

  Take the case of Yang Cheng for instance, who, having piled his life savings (plus his relatives’ money) into the market thanks to encouragement from his broker, borrowed $1 million in margin and bet it all on one stock – a local mining company. When the trade blew up, he lost it all. “I don’t know what to do. I trusted the government too much. I won’t touch stocks again, I have ruined everyone in my family,” he lamented.

  In short, China faced the prospect that the meltdown could trigger social unrest, which partly explains why Beijing scrambled to funnel nearly CNY2 trillion propping up the market. The story of the Chinese retail investor became so ubiquitous that Western media started what at times felt like a contest to see who could capture the most amusing pictures of distraught Chinese day traders.

  

  Now, having watched their money disappear into the Beijing smog, many Chinese are bitter and say they have given up on the stock market forever.

  “Unlike Western markets where institutional investors dominate, individuals account for 80 percent of transactions on Chinese exchanges [and] nearly 100 million people have trading accounts,” Reuters wrote on Thursday. “Their enthusiasm for stocks drove China’s main indexes to record highs in the first half of 2015, but after enduring a summer bust that saw prices plunge around 40 percent, the January sell-off has been the final straw for many.”

  Many, like 22-year old Zhou Junan who says he “had planned to sell when indexes got a little bit higher,” but missed the top. “I don’t have faith in the stock market any more. I think it’s better to buy dollars,” he says, underscoring the extent to which everyday Chinese are rushing to exchange RMB for USD in the new year.

  Reuters also quotes a 48-year old bank accountant from Kunshan who recently bought 500,000 yuan ($76,000) worth of U.S. currency. The Chinese stock market is “a mess,” she says. “Dollar is far less risky.” 

  Now you’re beginning to see why the likes of ICBC are running out of physical dollars.

  But it’s not just greenbacks Chinese are turning to. They also like gold. “Except for gold, all other assets are just bubbles to me,” one 24-year-old female investor in Beijing said. “I guess I am a pessimist. If there are really some global conflicts, even dollars and bonds could not buy a meal.”

  Unfortunately it’s out of the proverbial frying pan and into the fire for many Chinese though, as it seems that the allure of high yielding assets is just too much for the uninformed masses. “A number of retail investors were also switching money out of stocks and into wealth management products (WMPs) and principal-protected funds,” Reuters adds.

  “I have bought different kinds of WMPs from banks. The majority of them are backed by bonds, which are less risky,” said a 50-year-old woman surnamed Wang, from Guangzhou, who said she lost 30 percent of her stock market investment in the summer meltdown before selling out in August.

  That, as we’ve shown, is not necessarily the case. In many cases, investors have no idea what “assets” are backing the WMPs. Additionally, investors are often unaware that the products suffer from duration mismatch, meaning that if the paper stops rolling, the music stops until the underlying assets can be liquidated. Perhaps Ms. Wang should ask some investors in Fanya Metals’ WMPs what can happen in a pinch.

  In any event, the message is clear: the disaffection with stocks in China is rampant which means every rip will be sold as the retail investors which comprise more than three quarters of the market scramble to salvage what’s left of their money. Once they’ve cashed out of equities they’ll promptly exchange their yuan for dollars as the capital flight which China so desperately needs to contain continues unabated. 

  

  

  

  

  

• Ron Paul Warns: "Watch The Petrodollar"

  Submitted by Nick Giambruno via InternationalMan.com,

  The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better. – Ron Paul

  Ron Paul is calling for the end of the petrodollar system. This system is one of the main reasons the U.S. dollar is the world’s premier reserve currency.

  Essentially, Paul is saying that understanding the petrodollar system and the forces affecting it is the best way to predict when the U.S. dollar will collapse.

  Paul and I discussed this extensively at one of the Casey Research Summits. He told me he stands by his assessment.

  

  Nick Giambruno and Ron Paul

  This is critically important. When the dollar loses its coveted status as the world’s reserve currency, the window of opportunity for Americans to protect their wealth from the U.S. government will definitively shut.

  At that point, the U.S. government will implement the same destructive measures other desperate governments have used throughout history: overt capital controls, wealth confiscation, people controls, price and wage controls, pension nationalizations, etc.

  The dollar’s demise will wipe out the wealth of a lot of people. But it will also trigger political and social consequences likely to be far more damaging than the financial fallout.

  The two key takeaways are:

  1. The U.S. dollar’s status as the premier reserve currency is tied to the petrodollar system.

  1. The sustainability of the petrodollar system relies on volatile geopolitics in the Middle East (where I lived and worked for several years).

  From Bretton Woods to the Petrodollar

  The Bretton Woods international monetary system, which the Allied powers created in 1944, turned the dollar into the world’s premier reserve currency.

  After WWII, the U.S. had by far the largest gold reserves in the world (around 706 million ounces). These large reserves – in addition to winning the war – allowed the U.S. to reconstruct the global monetary system around the dollar.

  The Bretton Woods system tied virtually every country’s currency to the U.S. dollar through a fixed exchange rate. It also tied the U.S. dollar to gold at a fixed exchange rate.

  Countries around the world stored dollars for international trade or to exchange with the U.S. government at the official rate for gold ($35 an ounce at the time).

  By the late 1960s, excessive spending on welfare and warfare, combined with the Federal Reserve monetizing the deficits, drastically increased the number of dollars in circulation relative to the gold backing them.

  Naturally, this made other countries exchange more dollars for gold at an increasing rate. This drained the U.S. gold supply. It dropped from 706 million ounces at the end of WWII to around 286 million ounces in 1971 (a figure supposedly held constant to this day).

  To stop the drain, President Nixon ended the dollar’s convertibility for gold in 1971. This ended the Bretton Woods system.

  In other words, the U.S. government defaulted on its promise to back the dollar with gold. This eliminated the main motivation for other countries to hold large U.S. dollar reserves and use the U.S. dollar for international trade.

  With the dollar no longer convertible into gold, demand for dollars by foreign nations was sure to fall, and with it, the dollar’s purchasing power.

  OPEC, a group of oil-producing countries, passed numerous resolutions after the end of Bretton Woods, stating its need to maintain the real value of its earnings. It even discussed accepting gold for oil. Ultimately, OPEC significantly increased the nominal dollar price of oil.

  For the dollar to maintain its status as the world’s reserve currency, the U.S. would have to concoct a new arrangement that gave foreign countries a compelling reason to hold and use dollars.

  The Petrodollar System

  From 1972 to 1974, the U.S. government made a series of agreements with Saudi Arabia. These agreements created the petrodollar system.

  The U.S. government chose Saudi Arabia because of its vast petroleum reserves, its dominant position in OPEC, and the (correct) perception that the Saudi royal family was corruptible.

  In essence, the petrodollar system was an agreement that the U.S. would guarantee the survival of the House of Saud. In exchange, Saudi Arabia would:

  1. Use its dominant position in OPEC to ensure that all oil transactions would happen in U.S. dollars.

  1. Invest a large amount of its dollars from oil revenue in U.S. Treasury securities and use the interest payments from those securities to pay U.S. companies to modernize the infrastructure of Saudi Arabia.

  1. Guarantee the price of oil within limits acceptable to the U.S. and prevent another oil embargo by other OPEC members.

  Oil is the world’s most traded and most strategic commodity. Needing to use dollars for oil transactions is a very compelling reason for foreign countries to keep large U.S. dollar reserves.

  For example, if Italy wants to buy oil from Kuwait, it has to purchase U.S. dollars on the foreign exchange market to pay for the oil first. This creates an artificial market for U.S. dollars that would not otherwise exist.

  The demand is artificial because the U.S. dollar is just a middleman in a transaction that has nothing to do with a U.S. product or service. Ultimately, it translates into increased purchasing power and a deeper, more liquid market for the U.S. dollar and U.S. Treasuries.

  Additionally, the U.S. has the unique privilege of not having to use foreign currency to buy imports, including oil. Instead, it gets to use its own currency, which it can print.

  It’s hard to overstate how much the petrodollar system benefits the U.S. dollar. It’s allowed the U.S. government and many Americans to live beyond their means for decades.

  What to Watch For

  The geopolitical sands of the Middle East are rapidly shifting.

  Saudi Arabia’s strategic regional position is weakening. Iran, which is notably not part of the petrodollar system, is on the rise. U.S. military interventions are failing. And the emerging BRICS countries are creating potential alternatives to U.S.-dominated economic/security arrangements. This all affects the sustainability of the petrodollar system.

  I’m watching the deteriorating relationship between the U.S. and Saudi Arabia with a particularly close eye.

  The Saudis are furious because they don’t think the U.S. is holding up its end of the petrodollar deal by more aggressively attacking their regional rivals.

  This suggests that they might not uphold their part of the deal much longer, namely selling their oil exclusively in U.S. dollars.

  The Saudis have even suggested a “major shift” is under way in their relationship with the U.S. To date, though, they haven’t matched their words with action, so it may just be a temper tantrum or a bluff.

  The Saudis need an outside protector. So far, they haven’t found any suitable replacements for the U.S. In any case, they’re using truly unprecedented language.

  This situation may reach a turning point when U.S. officials start expounding on the need to transform the monarchy in Saudi Arabia into a “democracy.” But don’t count on that happening as long as Saudi oil sells exclusively for U.S. dollars.

  Regardless, the chances that the Kingdom might implode on its own are growing.

  For the first time in decades, observers are calling into question the viability of the Saudi currency, the riyal. The Saudi central bank currently pegs the riyal at a rate of 3.75 riyals per U.S. dollar.

  The Saudi government spends a ton of money on welfare to keep its citizens sedated. Lower oil prices plus the cost of their mischief in the region are cutting deep into government revenue. So there’s less money to spend on welfare.

  There’s a serious crunch in the Saudi budget. They’ve only been able to stay afloat by draining their foreign exchange reserves. That threatens their currency peg.

  Recently, Saudi officials have begun telling the media that the currency peg is fine and there’s nothing to worry about. That’s another clue that there’s trouble. Official government denial is almost always a sign of the opposite. It’s like the old saying: “Believe nothing until it has been officially denied.”

  If there were a convenient way to short the Saudi riyal, I would do it in a heartbeat.

  Timing the Collapse

  Long before Nixon ended the Bretton Woods system in 1971, it was clear that a paradigm shift in the global monetary system was inevitable.

  Today, another paradigm shift seems inevitable. As Ron Paul explained, there’s one sure way to know when that shift is imminent:

  We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros.

  It’s very possible that, one day soon, Americans will wake up to a new reality, just as they did in 1971 when Nixon severed the dollar’s final link to gold.

  The petrodollar system has allowed the U.S. government and many U.S. citizens to live way beyond their means for decades. It also gives the U.S. unchecked geopolitical leverage. The U.S. can exclude virtually any country from the U.S. dollar-based financial system…and, by extension, from the vast majority of international trade.

  The U.S. takes this unique position for granted. But it will disappear once the dollar loses its premier status.

  This will likely be the tipping point…

  Afterward, the U.S. government will be desperate enough to implement capital controls, people controls, nationalization of retirement savings, and other forms of wealth confiscation.

  I urge you to prepare for the economic and sociopolitical fallout while you still can. Expect bigger government, less freedom, shrinking prosperity…and possibly worse.

  It’s probably not going to happen tomorrow. But it’s clear where the trend is headed.

  Once the petrodollar system kicks the bucket and the dollar loses its status as the world’s premier reserve currency, you will have few, if any, options to protect yourself.

  This is why it’s essential to act before that happens.

  The sad truth is, most people have no idea how bad things could get, let alone how to prepare…

  Yet there are straightforward steps you can start taking today to protect your savings and yourself from the financial and sociopolitical effects of the collapse of the petrodollar.

  This recently released video will show you where to begin. Click here to watch it now.

  

  

  

  

  

• Alberta Freezes Government Salaries As Canada's Oil Patch Enters Second Year Of Recession

  On Wednesday, we documented the astonishing prices beleaguered Canadians are now forced to pay for groceries thanks to the plunging loonie.

  Oil’s inexorable decline has the Canadian dollar in a veritable tailspin and because Canada imports the vast majority of its fresh food, prices on everything from cucumbers to cauliflower are on the rise, tightening the screws an already weary shoppers.

  

  Soaring food prices are but the latest slap in the face for Canadians and especially for Albertans who have been hit the hardest by 13 months of crude carnage. Resources account for a third of provincial revenue and with oil and gas investment expected to have fallen over 30% in 2015, Alberta’s economy has is expected to contract  for the foreseeable future.

  The economic malaise has had a number of nasty side effects including soaring property crime in Calgary, rising food bank usage, and sharply higher suicide rates.

  

  With the outlook for oil prices not expected to improve in the near-term, ATB now says the province faces two long years of recession. “The pain is going to be concentrated in the first half of the year. But we don’t really see any ending in sight to a downturn at least until the end of the year. So we are calling for another contraction,” ATB’s Chief Economist Todd Hirsch says in The Alberta Economic Outlook Q1 2016 report. 

  “This low price environment continues to discourage new investment and spending and has weighed down employment — not only in the oilpatch, but throughout most sectors of the province,” Hirsch continues. “This downturn is longer in duration certainly than 2009 was which was a very quick downturn but very short-lived. This one is going to linger on longer.“

  Indeed. Here are some charts from the report which underscore the magnitude of the sharp reversal in fortunes.

  

  

  It’s against this backdrop that we get the latest sign of the times in Alberta where Finance Minister Joe Ceci has just announced a two-year wage freeze for non-union government employees.

  “The move will freeze the salaries — and movement within salary grids — for roughly 7,000 senior officials, managers and other non-unionized government employees at 2015 levels until at least April 2018,” As the Calgary Herald reports. “The freeze means senior government officials, including trade representatives, board chairs and deputy ministers, won’t get a scheduled 2.5-per-cent salary hike this April put in place by the former Progressive Conservative government.”

  “This is not a decision we made lightly,” Ceci told the press. “The Alberta Public Service is made up of hard working and dedicated women and men who do valuable work each and every day in the service of Albertans. However, to maintain stability and protect jobs within the public service, we must deal with the economic realities we’re facing.”

  As The Herald goes on to note, “the NDP government posted a record $6.1 -billion deficit in its fall budget released last October and, for the first time in two decades, is set to take on more debt to pay for operational spending.”

  “During a time of massive private sector job losses, Albertans want the government to reduce spending while protecting front-line services” Wildrose Leader Brian Jean said, praising the decision.

  Right. But don’t expect jobless Albertans to be overly sympathetic to the plight of the government employees subject to the salary freeze. The senior workers affected will all still make between $110,246 and $286,977.

  Stay positive Canada…

  

  

  

  

  

  

• Shanghai Composite Opens Under 3,000 As Onshore Yuan Practically Unchanged For Fourth Day

  Having made its warning to the Fed loud and clear (“if you hike or otherwise push the USD any higher, we will crush your markets by devaluing the Yuan against everyone but mostly the USD“), the PBOC continued the fragile ceasefire between the world’s two most powerful central banks, when moments ago it kept the onshore Yuan virtually unchanged, by weakening today’s fixing by 0.03% to 6.5637. However, as can be seen on the chart below, this has barely even registered.

  

   

  The lack of any action in the onshore Yuan has been mirrored in the offshore version of the currency as well, where the CNH has likewise barely budged as shorts have learned their lesson for the time being and few, if any, are willing to risk seeing an 80% overnight margin increase once the Beijing artillery comes storming in and soaking up liquidity.

  

   

  But while China’s currenc(ies) have been a snoozefest so far, more interesting things are taking place in Hong Kong, where the dollar, which plunged yesterday the most since 2003, has rebounded in early trading, but after initially surging to 7.7746, the biggest jump since March 2015 has once again proceeded to weaken now that capital outflows are taking place through Hong Kong.

  

  We are curious to see just how the PBOC will plug this particular capital outflow gap next.

  Finally, after yesterday’s furious intervention-driven rally in Chinese stocks, moments ago the Shanghai Composite opened for trading below 3000, and as of this moment was lower by about 0.4% to 2,992, suggesting it will be yet another busy day for the PBOC which not having to worry about manipulating its currency can focus on manipulating the stock market instead.

  

  

  

  

  

  

• "Willing Idiots" & Geopolitical Instability

  Submitted by Gregory Copley via OilPrice.com,

  Nature has often been described in the verse “Little fish have smaller fish, upon their backs to bite ’em; / Smaller fish have lesser fish; / And so, ad infinitum.” We see in it the inevitable, albeit infinitely variable, hierarchy of the natural world.

  It follows, then, that regional strategic dynamics are subordinate to, often caused by, greater global trends, even though we, as humans, tend to focus on, and react to, the issues which we feel threaten or benefit us. Of course, the strength of the trends determines some of the outcomes: strong local trends may expand to resist or overwhelm weak global or trans-regional trends. But, in essence, greater is greater. And, as the Cold War saying about “quality versus quantity” went: quantity eventually has its own quality.

  So where are we today? What are the essential trends, visible now, which determine long-term outcomes?

  Periods of transition between “rising powers” and “declining powers” have been described in terms of the so-called Thucydides Trap, when fear within a static or declining power (historically, Athens) of a rising power (historically, Sparta) makes war seemingly inevitable. The phenomenon today applies not only to the China-U.S. dynamic – as has been widely remarked – but to the Middle Eastern imbalance, the “north-south” imbalance, and so on.

  Accompanying this sliding vertical scale of strategic power balance is the sliding horizontal scale of population volatility and movement, characterized by the breakdown of the Westphalian nation-state concept; by so-called globalization; urbanization and hysteria-driven migration; and the peaking and imminent troughing of global population numbers. Thus do we reach the four-dimensional chess game. And we see visible the prospect of a check-mate — from Persian shah mat: the king is dead, or helpless — in the present global game. Of course we also see, then, the prospect, or nature’s necessity, for a “new game”, a new king.

  It should not be surprising that these longer-duration mega-trends ultimately drive and dominate shorter-duration regional or mono-cultural trends, although the direct influence may not be immediately perceivable. And so we focus on immediate threats; we react, rather than see the broader, longer strategic terrain.

  Right now, much of the world concerns itself with the threat of terrorism as the specter which dominates the question of the survival of Western civilization, or is the precursor to Islam’s “End of Battles”. However, it is worth recognizing the reality that no terrorist phenomenon has ever sustained itself for any meaningful duration — or achieved strategic outcomes — in the absence support from a nation-state or wealth society.

  Does anyone, after introspection, believe that the current phenomenon of “Islamist terrorism”, including its metamorphosis into territory-holding entities such as the “Islamic State” or (briefly) Boko Haram, has not been without major state support since before even the al-Qaida movement? Does anyone believe that the leftist terrorism of the mid-Cold War period was not supported by state sponsors, ranging from the USSR and the People’s Republic of China (PRC) and their allies? Does anyone believe that the Irish terrorism of that same period was not also supported by states or societal bodies (including criminal organizations)?

  There is an entire industry in the security sphere which has as its rice-bowl the study and parsing of Islamist ideology and sectarian differences. The sectarian differences do have strategic importance, but not because of the differences themselves, or the dialectic in which each social group engages, but because — as social groups — they represent the modes of social cohesion which enable populations to exist and manage their affairs in their geographic spaces and environments. This is as much a part of the survival logic — because it creates a political hierarchy — as the terroir dictate of crop rotation.

  Now, and for the foreseeable couple of decades, the “Thucydides Trap” means that the world is not only in a period of potentially changing its power balance, or “correlation of forces”, it is in a period of dark uncertainty at very many levels, from global to regional to societal. That means, essentially, that most powers are weak, and therefore are cautious about behaving in a precipitous manner. Or they perceive that there is opportunity (or the imperative to act) because of the weakness of others.

  This, in turn, means that sovereign governments will continue, perhaps increasingly, to use proxy forces, such as terrorist groups, to achieve strategic outcomes. In some respects, the desired strategic outcome is merely to achieve paralysis or stalemate in a geopolitical arena. But in almost every instance the guiding hand of such policy is power politics, rather than ideology or theology.

  We can – and often do – spend vast amounts of our attention analyzing religious or ideological trends rather than looking at the underlying geopolitics. This is presently the case in the terrorist/insurgency jungles of the Middle East and Central Asia. The main problem is that we listen to what the operational protagonists – the “willing idiots”, as Lenin would describe them – say and believe, and insufficient time analyzing the core motives of their deep sponsors.

  Ideology and theology are carrier waves, not the message. Do they motivate “willing idiots”? Without doubt. But to deal primarily with the carrier wave aspect is to be reactive and tactical; not strategic and in control of events.

  Who prospers in this “greater Thucydides Trap”? Those who prize core geopolitical principles, including national and civilizational identities; those who preserve strategic self-sufficiency. Those who do what they must for the decades ahead, not what is comfortable for the present.

  

  

  

  

  

• "Markets Crash When They're Oversold"

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  Peddling Fiction

  On Tuesday, as I watched the President’s State of the Union Address, the President made the following statement.

  “Anyone claiming that America’s economy is in decline is peddling fiction.”

  While I certainly understand the need to put a positive spin on the current economic backdrop during your last SOTU address, there is a good bit of misstatement in that comment.

  The President is correct when he stated that the impact of technology on wage growth and jobs was not a recent development. It is, in fact, an impact that has been occurring since the 1980’s as shown in the chart below.

  

  While the big driver of the decline in economic growth since the 1980’s has been a structural change from a manufacturing based economy (high multiplier effect) to a service based one (low multiplier effect), it has been exacerbated by the increase in household debt to offset the reduction in wage growth to maintain the standard of living. This is shown clearly in the chart below.

  

  The problem for the President is that while sound-bytes of optimism certainly play well with the media, the average American is well aware of their current plight of the lack of wage growth, inability to save and rising costs of living.

  The decline of economic growth is, unfortunately, a reality and an inevitable outcome of decades of deficit spending and debt accumulation. Can it be reversed? I honestly don’t know, but Japan has been trapped in this cycle for 30-years and has yet to find a solution.

  Here’s Real Fiction – Low Oil Prices

  Over the last couple of years, economists from Wall Street, to the Federal Reserve, to the White House have repeatedly made the following statement:

  “Falling oil prices are great for the consumer as it gives them more money to spend.”

  I have written many times over the past couple of years, as oil prices fell, that such was not actually the case. To wit:

  “The argument is that lower oil prices lead to lower gasoline prices that give consumers more money to spend. The argument seems to be entirely logical since we know that roughly 80% of households in America effectively live paycheck-to-paycheck meaning they will spend, rather than save, any extra disposable income.

   

  The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.

  Example:

  • Gasoline Prices Fall By $1.00 Per Gallon
  • Consumer Fills Up A 16 Gallon Tank Saving $16 (+16)
  • Gas Station Revenue Falls By $16 For The Transaction (-16)
  • End Economic Result = $0

  Now, the argument is that the $16 saved by the consumer will be spent elsewhere. This is the equivalent of ‘rearranging deck chairs on the Titanic.'”

  Increased consumer spending is a function of increases in INCOME, not SAVINGS. Consumers only have a finite amount of money to spend and whatever “savings” there may be at the pump, it gets quickly absorbed by rising costs of living – like health care.

  Most importantly, the biggest reason that falling oil prices are a drag on economic growth, as opposed to the incremental “savings” to consumers, is the decline in output by energy-related sectors. 

  Oil and gas production makes up a hefty chunk of the “mining and manufacturing” component of the employment rolls. Since 2000, when the oil price boom gained traction, Texas comprised more than 40% of all jobs in the country according to first quarter data from the Dallas Federal Reserve.

  The obvious ramification of the plunge in oil prices is eventual loss of revenue leads to cuts in production, declines in capital expenditure plans (which comprises almost 1/4th of all CapEx expenditures in the S&P 500), freezes and/or reductions in employment, and declines in revenue and profitability.

  The issue of job loss is critically important. Since the financial crisis the bulk of the jobs “created” have been in lower wage paying areas such as retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy-related areas has had a “ripple effect” of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail.

  Simply put, lower oil and gasoline prices may have a bigger detraction on the economy than the “savings” provided to consumers.

  Why do I remind you of this basic economic reality – because it only took the Federal Reserve 18-months to figure it out. In a recent speech San Fran Fed president John Williams actually admitted the truth.

   “The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.”

  No S*^t!

  Markets Crash When Oversold

  Earlier this week, I discussed the oversold nature of the market and the likely of a “bounce” to “sell into.” 

  “With all of the alarm bells currently triggering, the initial ‘emotionally’ driven response is most likely an urge to go look at your portfolio statement and start pushing the ‘sell’ button. Don’t Do It!

   

  On a short-term basis, prices oscillate back and forth like a rubber band be pulled and let loose. Physics state that a rubber band stretched in one direction, will initially travel an equal distance in the opposite direction when released.

   

  Take a look at the chart below.”

  

  “In particular note the top and bottom portions of the chart. These two indicators measure the ‘over-bought’ and ‘over-sold’ conditions of the market. As with the rubber band example above, you will notice that when these indicators get stretched to the downside, there is an effective ‘snap back’ in fairly short order.

   

  With the markets having issued multiple sell signals, broken very important support and both technical and fundamental deterioration in progress, it is suggested that investors use these ‘snap back’ rallies to reduce equity risk in portfolios.”

  I reiterate this point because the market continued to slide on Wednesday which led to several comments about the inability of the markets to get a sellable bounce. There is an important “truism” to remember.

  “Markets crash when they’re oversold.”

  Let’s step back and take a look at the past two major bull markets and subsequent bear market declines.

  

  (Note: I am using weekly data to smooth volatility)

  The top section of the chart is a basic “overbought / oversold” indicator with extreme levels of “oversold” conditions circled. The shaded area on the main part of the chart represents 2-standard deviations of price movement above and below the short-term moving average.

  There a couple of very important things to take away from this chart. When markets begin a “bear market” cycle [which is identified by a moving average crossover (red circles) combined with a MACD sell-signal (lower part of chart)], the market remains in an oversold condition for extended periods (yellow highlighted areas.)

  More importantly, during these corrective cycles, market rallies fail to reach higher levels than the previous rally as the negative trend is reinforced. All of these conditions currently exist.

  Does this mean that the markets will go straight down 20% without a bounce? Anything is possible. However, history suggests that even during bear market cycles investors should be patient and allow rallies to occur before making adjustments to portfolio risk. More often than not, it will keep you from panic selling a short-term market bottom.

  

  

  

  

  

• The "World's Most Bearish Hedge Fund" Crushed It In 2015

  The name of $2.8 billion Horseman Capital is familiar to regular readers for two main reasons: not only has the fund, which some have called the “most bearish in the world”, generated tremendous returns ever since inception except for a 25% drop in 2009 (after returning 31% during the cataclysmic 2008), but more notably, it has been net short – and quite bearish on – stocks ever since 2012. In that period it has consistently generated low double-digit returns, a feat virtually none of its competitors have managed to replicate. In fact, its performance has put it in the top percentile of all hedge funds in recent years.

  And, according to its December letter, Horseman not only crushed it in both December and 2015, but knocked it out of the ballpark.  Here’s why:

  

  It’s hardly new to Horseman, which has been “crushing it” for four years in a row, and not surprisingly, 2015 was its best year since 2008.

  

  What is most amazing is that as noted above, Horseman has been bearish since 2012 while outperforming most hedge funds and as of this moment is net short by a whopping -68%, which could certifiably put it in the running for the title of the “world’s most bearish hedge fund.”

  

  Here is how Horseman made a killing in December:

  This month the gains came from the short portfolio, in particular from oil and oil transportation, EM financials and automobile sectors. The short exposure to real estate and the long portfolio incurred modest losses.

  What was the fund most bearish on? Pretty much everything, but a few sectors in particular:

  

  Furthermore, Horseman seems to have an unusually bearish bias toward Mexico and especially Pemex and the Mexican auto sector. Here’s why:

  In Latin America, the poor performances of the Argentinian and Brazilian economies are regularly making the headlines in the press, while the economy of Mexico tends to be perceived in better shape, less reliant on commodity prices and benefiting from being closer to the growing US economy. However, the Mexican economy is heavily reliant on the automobile and oil sectors, which respectively accounted for 21.6% and 10.6% of its exports in 2014.

   

  The country runs a 2% current account deficit and a 3.19% budget deficit. The budget deficit does not take into account the losses from its national oil company Petroleos Mexicanos (Pemex), which is used by the government as a financing vehicle to finance about 30% of its budget. The company said that in the third quarter of 2015, taxes and royalties accounted to 232% of its operating results. It reported a $9.9bn net loss, its 12th consecutive quarterly loss. As a result, for 2016, the company expects to borrow $21bn, increasing outstanding debt to more than $100bn.

   

  In November of last year, the government used an average oil price of $50 per barrel for its 2016 budget. However, since then, oil prices collapsed to $32. Including Pemex’s losses and using the Q3 quarterly results, Mexico’s budget deficit is more likely to be around 6% of GDP, a level similar to Brazil’s current official number.

   

  In the automobile sector Mexico has overtaken Japan as the second largest source of U.S. auto imports. Mexican made vehicles account for 11% of cars and trucks sold to the U.S. The Mexican Automobile Industry Association estimated that more than 70% of the cars and light trucks headed to the US in 2015. Over the past 5 years, US purchases of cars have been largely driven by a boom in auto loans, which in our opinion is about to end.

   

  The Mexican government has introduced structural reforms in the hope of encouraging new entrants to challenge monopolies. However, in our opinion, these reforms will take years to pay dividends, while in the short term the economy will have to adjust to low oil prices and a likely downturn in automobile demand. The fund maintains a short exposure to the Mexican peso versus the US dollar of approximately 25%.

  We expect the “short Mexico” trade to become quite popular in the coming weeks.

  Finally, here is the monthly essay by Russell Clark, Horseman’s CIO, which as always is a delightful read and this time has a Star Wars theme.

  Yellen Skywalker inched down the corridor. There was barely any light, but the force guided her steps. Soon she felt the presence of her father, Deflation Vader. His voice rasped out a greeting.

   

  “I have been expecting you. I can feel that the force is strong with you. Good. The Emperor has foreseen that your powers would grow, and that you would become our ally. It is time for you to join me and restore order to the universe!”

   

  “You are wrong Vader – I would never go to dark side!”

   

  “Ha ha ha – dark side – what dark side? Did Obi-Wan Ben Bernanke never tell you the true nature of the force?”

   

  “What true nature?” asks a troubled Yellen.

   

  “The force is all around us, and seeks harmony and balance. It is neither light nor dark, but cyclical. Mountains must have valleys. Light must create shadow. Action and reaction, this is all that life is. Your belief in the light side of the force, and the need for you to strenuously push it on all things, to create inflation in all things, is touching, but quite misguided.”

   

  Vader continued “Low interest rates and debt creation in particular is an object that is neither inherently inflationary nor deflationary, but only becomes a tool of the light or the dark side if it moves out of balance, or harmony. You see my jedi, debt accumulation is inflationary when taken on and deflationary when paid back. The longer you push your light side of the force, the stronger the dark side becomes! You have in fact been my greatest ally!” Vader let out a bellowing laugh.

   

  “Search your feelings Yellen, you know that I speak the truth”. Yellen knew the words Vader spoke were true. Despite monumental efforts, the light side had only generated minor inflation, even with previously unheard interest rates and even with their new monetary techniques. She thought back to the day her mentor Obi-Wan Ben Bernanke disappeared off to some far flung colony – his parting words as he passed responsibility for the light side to Yellen were cryptic – “Whatever you do, do not do anything sensible”. But Yellen knew she faced a dilemma, if she continued to fight the dark side she only made it stronger, and the ultimate move to harmony more difficult. Or should she succumb now, and hope that dark side influence would not destroy too much. In her heart, she made her decision.

   

  “You are right father, I can see that. What must I do?”

   

  “Why my child, you must do nothing, just cease to fight the dark side, and it shall restore harmony to the universe as surely as a rising tide destroys footprints in the sand. Come, let us watch”

   

  Vader and Yellen moved over to an observation window. From the view she could see the dancing constellations that made up the financial universe. Many shone as brightly as they could. Record employment, record car sales, all-time highs in the stock market. Yellen let go of the light side of the force. Almost instantaneously, the Transport star system began to darken and disappear. The high yield nebula went into super nova and slowly began to darken. And then nothing. But as Yellen watched all the bright constellations began to darken ever so slightly. And Yellen could feel a tremor from a billion traders’ hearts, as fear began to replace greed in their hearts. She wondered what she had done, as she stood next to Vader, and watched the lights go out.

  Clarke’s parting words: “Your fund remains long bonds, short equities.”

  

  

  

  

  

• The 'Real' Price Of Oil Is Below $17

  "You see a big destruction in the income of the oil and commodity producers," exclaims on analyst but, as Bloomberg notes, while oil prices flashing across traders' terminals are at the lowest in a decade, in real terms the collapse is considerably deeper. Adjusted for inflation, WTI is its lowest since 2002 and worse still Saudi Light Crude is trading at below $17 (in 1998 dollar terms) – the lowest since the 1980s…

  Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

  In fact, while sub-$30 per barrel oil sounds very scary, Saudi prices would be less than $17 a barrel when converted into dollar levels for 1998, the year oil sank to its lowest since the 1980s.

  

   

  Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said in an interview with Bloomberg Television.

  *  *  *

  So while prices are very low any description, never forget about inflation – The Fed won't!

  

  

  

  

  

• "It's All The Fed's Fault" Santelli Rages, They "Will Certainly Turn Us Into Japan"

  Who is to blame for all this volatility? CNBC's Rick Santelli scoffs at the growing mainstream media's recognition that The Fed is to blame for daring to raise rates – "a group of unelected officials ruining the party and taking away the punch-bowl."

  Santelli's problem is that "every time the picture of the world was not what The Fed wanted us to see, they changed the channel," and now they are cornered in their lies, "all along The Fed should have been honest about the true quality of the jobs data.. and now they are force to tell the truth about it, they risk losing all of their credibility."

  "The notion that a small group of people should control the price of money should be under review," Rick rages, warning that "if stocks are rallying because The Fed is retreating, we certainly will turn into Japan."

   

  Here is Santelli with two minutes of simple truth…

  

  

  

  

  

• Could China's Housing Bubble Bring Down The Global Economy?

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  Who's going to buy the tens of millions of empty flats held as investments?

  I've been writing a lot about China recently because it's becoming increasingly clear that China's economy is slowing and the authority's "fixes" are not turning it around. That means the engine that pulled the global economy out of the 2009 recession has stalled.

  Many people see China's slowdown as the source of the next global recession, but few seem to realize the extreme vulnerability of China's vast housing market and the many knock-on consequences of that market grinding to a halt.

  I've just completed a comprehensive review of China's housing market, and now realize it's much worse than the consensus understands.

  The consensus view is: Sure, China's housing prices are falling modestly outside of Beijing and Shanghai, but since Chinese households buy homes with cash or large down payments, this decline won't trigger a banking crisis like America's housing bubble did in 2008.

  The problem isn't a banking crisis; it's a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector.

  China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing.

  

  About 15% of China's GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing's share of U.S. GDP barely cracked 5%.

  Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues. (These are not fee simple sales of land, but the sale of leasehold rights, as all land in China is owned by the state.)

  There is no substitute source of revenue waiting in the wings should land sales and housing development grind to a halt. Local governments will lose 2/3 of their operating revenues, and there is no other source they can tap to replace this lost revenue.

  Since China authorized private ownership of housing in the late 1990s, homeowners in China have only experienced rising prices and thus rising household wealth–at least until very recently, when prices dipped as the government tightened lending standards and imposed some restrictions on the purchase of flats as investments.

  Though it's difficult to quantify the "wealth effect" the rapid rise in housing valuations supported, it's widely acknowledged that upper-middle class household spending has increased as a direct result of housing's wealth effect.

  Though few dare acknowledge it, prices in desirable first-tier cities urban cores are completely unaffordable to average households. Average flats in Beijing now cost 22X annual household income — roughly six times the income-price ratio that is sustainable (3 or 4 X income = affordable cost of a house).

  Far too many observers use housing prices and sales in Beijing and Shanghai–a mere 3.5% of China's population and housing stock–as the basis of entire nation's housing market. This is akin to judging America's housing market on prices and sales in Manhattan.

  So while sales are soaring in Beijing, they're falling 26% in the 2nd, 3rd and 4th tier cities.

  Though it is widely known that China's household wealth is concentrated in housing, the extent and consequences of this concentration are rarely discussed.

  Much has been made of the $3+ trillion losses households have suffered as China's stock market bubble collapsed. But given the relatively insignificant role financial assets play in household wealth, these losses are modest compared to the far larger loss of household wealth that will occur as housing deflates from bubble heights.

  Many people claim the estimated 65 million empty flats held as investments by the middle and upper classes in China will be sold to new buyers in due time. But these complacent analysts overlook the grim reality that the vast majority of urban workers make around $6,000 to $10,000 annually, and a $200,000 flat is permanently out of reach.

  They also overlook the extreme concentration of wealth that goes into every purchase of a small flat byt households that really can't afford the cost: the entire extended family's wealth is often poured into the flat, and money borrowed from friends and relatives or even loan sharks.

  The other problem few Western analysts consider is the impaired nature of much of China's housing stock. Millions of units constructed in the early 2000s were hastily built and are now degraded. Newer buildings are not maintained, either, and there is a strong cultural preference for new homes, not existing units. (The government doesn't even keep track of resales/sales of existing homes; whatever minimal data is available comes from private brokerages).

  In other words–who's going to buy the tens of millions of empty flats held as investments? What is the market value of flats nobody wants to buy or cannot afford to buy?

  China has a demographic problem as well. The generation now entering the work force is much smaller than the generation that bought two or three flats for investment. There simply aren't enough wage earners entering the home-buying years to soak up this vast and growing inventory of empty homes.

  China's stated intent is to move from a fixed-investment/export dependent economy to a consumer economy. But if we consider what happens when housing slows or even grinds to a halt, we realize the impact on incomes, wealth and consumption will be extraordinarily negative, not just for China but for every nation that sells China vehicles and other consumer goods.

  

  

  

  

  

• Hillary's Lead Disintegrates: She Is Now Doing Worse Than In 2008, As Trump Surges

  Just when Hillary Clinton thought her political fiascoes would be the worst of her ongoing troubles as she glides through the Democrat primaries, and then takes on Trump sure to find a Warren Buffett-funded victory, suddenly everything appears to have gone wrong in what is most important to the scandal-ridden former Secretary of State and presidential contender: her second – and final – campaign for president.

  According to WaPo, if one compares where Clinton is now in the Real Clear Politics polling average, the 2016 picture and the 2008 picture aren’t really all that similar; in fact suddenly the trapdoor beneath Hillary appears to have sprung open. “Nationally, she was doing much better in 2008 than she is right now, perhaps in part because the anti-Clinton vote in 2008 was still split between two people — Barack Obama and John Edwards — instead of just one. But that recent trend line, a function of two new national polls that were close after a bit of a lull, is not very good news.”

  

   

  Not surprisingly, Clinton is trailing badly in New Hampshire, which is the home turf of her main socialist opponent. In 2008,

  

   

  What little silver lining exists, is that in Iowa, Hillary is running a little better than she did in 2008, although as seen on the chart below even here her lead has plunged recently. In 2008 it wasn’t until the last week that she fell out of the lead. She eventually came in third.

  

   

  The problem remains the national race, and what’s worse, if the 2008 past is prologue and if Hillary’s lead in Iowa evaporates and she loses, it may be the end for the former first lady: back then she lost three-quarters of her lead after the caucuses although she did gain some of it back after her win in New Hampshire.

  

   

  And while these numbers can easily change, one person who is certain to capitalize on Hillary’s sudden collapse is Donald Trump, who as we showed recently has become the bookmakers’ favorite after trailing badly as recently as September, even as Trump’s republican competitors drop like flies on their own, the most recent casualty being Ben Carson whose campaign is all but over following news from CNN that Carson’s campaign finance chairman Dean Parker submitted his resignation.

  Finally, moments ago the WSJ reported that Donald Trump has opened a double-digit lead over his next-closest Republican rival, less than three weeks before the first votes of the 2016 presidential race are cast, a new Wall Street Journal/NBC News poll finds.

  A third of Republican primary voters in the nationwide survey said they favored Mr. Trump to be the GOP nominee, followed by Texas Sen. Ted Cruz at 20% support, Florida Sen. Marco Rubio at 13% and retired pediatric neurosurgeon Ben Carson at 12%.

   

  In December, Mr. Trump had led the No. 2 candidate, Mr. Cruz, by 5 percentage points. In the new poll, his lead widened to 13 points.

  And so what was considered humor by most pundits as recently as last summer is becoming an all too possible reality: president Trump?

  

  

  

  

  

  

• Bullard Bounce 2.0 – Stocks Surge By Most Since September; Bonds, Dollar Flat

  Bullard's back bitches!!!

   

  The "intervention" began overnight as The National Team stepped in to China's most tech-heavy index ChiNext for a 9.5% rally rampapalooza off the opening lows

  

   

  Then "He" spoke and the market obeyed… Dow surged 411 points off the lows – Even better than Bullard Bounce 101 (a 400 point bounce)

  

   

  Will it be deja vu all over again?

  

   

  It does not look like it – S&P Futs were ramped to VWAP then stalled, then ramped to Tuesday's cash close… then dumped…

  

   

  However, despite today's epic Bullard Bounce, Small Caps are still suffering the worst start to a year ever…

  

   

  The day started off as usual with a purge as overnight strength/stability was dumped at the open… but then Bullard Spaketh The Gospel Of StickSave and algos took over levitating with crude, then handing off to USDJPY once that ran out of steam…and then JPY handed off to VIX in the last hour…

  

   

  Today was a very good day for US equities…At the highs, things were awesome…

  • Nasdaq up 3% – best day in 5 months
  • S&P up 2.2% – best day in 4 months
  • Russell 2000 up 2.2% – best day in 3 months
  • Dow up 1.9% – best day in 5 weeks

  Before the end of day weakness…

  

   

  It seems Bullard's Bounce did nothing to reduce the size of the policy error post Fed rate-hike…

  

   

  FANTAsy stocks v-shape recovered…but dumped into the close..

  

   

  VIX decoupled through the middle of the day but then was initiated for momo in the last hour…

  

   

  Overall credit markets rallied but remain notably decoupled..

  

   

  Energy credit markets spiked 35bps wider today despite oil's rally and energy stocks' gains…

  

   

  Treasury yields trod water largely soaking up a weak auction and yesterday's huge supply from Inbev…

  

   

  The USDollar Index flip-flopped after ECB comments early ending the day almost unchanged…

  

   

  Commodities very mixed with gold and silver slammed and copper and crude ramped…

  

   

  Silver was capped atits 50DMA…

  

   

  The oil move looks a lot like an algo stop-hunt… ahead of OPEX tomorrow…

  

   

  Charts: Bloomberg

  

  

  

  

• The US Government Has An Internet Killswitch – And It's None Of Your Business

  Submitted by Derrick Broze via TheAntiMedia.org,

  On Monday the Supreme Court declined to hear a petition from the Electronic Privacy Information Center (EPIC) that sought to force the Department of Homeland Security to release details of a secret “killswitch” protocol to shut down cellphone and internet service during emergencies.

  EPIC has been fighting since 2011 to release the details of the program, which is known as Standard Operating Procedure 303. EPIC writes, “On March 9, 2006, the National Communications System (‘NCS’) approved SOP 303, however it was never released to the public. This secret document codifies a ‘shutdown and restoration process for use by commercial and private wireless networks during national crisis.’”

  EPIC continues, “In a 2006-2007 Report, the President’s National Security Telecommunications Advisory Committee (‘NSTAC’) indicated that SOP 303 would be implemented under the coordination of the National Coordinating Center (‘NCC’) of the NSTAC, while the decision to shut down service would be made by state Homeland Security Advisors or individuals at DHS. The report indicates that NCC will determine if a shutdown is necessary based on a ‘series of questions.’”

  Despite EPIC’s defeat at the hands of the Supreme Court, the four-year court battle yielded a heavily redacted copy of Standard Operating Procedure 303.

  The fight for transparency regarding SOP 303 began shortly after a Bay Area Rapid Transit (“BART”) officer in San Francisco shot and killed a homeless man named Charles Hill on July 3, 2011. The shooting sparked massive protests against BART throughout July and August 2011. During one of these protests, BART officials cut off cell phone service inside four transit stations for three hours. This kept anyone on the station platform from sending or receiving phone calls, messages, or other data.

  In July 2012, EPIC submitted a Freedom of Information Act (FOIA) request to the DHS seeking the full text of Standard Operating Procedure 303; the full text of the predetermined “series of questions” that determines if a shutdown is necessary; and any executing protocols related to the implementation of Standard Operating Procedure 303, distributed to DHS, other federal agencies, or private companies.

  After the DHS fought the FOIA releases, a district court in Washington, D.C. ruled in EPIC’s favor, but that ruling was later overturned by the court of appeals. The appeals court told EPIC the government was free to withhold details of the plan under the Freedom of Information Act because the information might “endanger” the public.  In 2015, the digital rights group asked the Supreme Court to review the ruling by the federal appeals court.

  With the Supreme Court’s refusal to address EPIC’s petition, the issue seems to have reached a dead-end. The American people are (once again) left in the dark regarding the inner-workings of another dangerous and intrusive government program. It is only through the hard work of activists and groups like EPIC that we are at least aware of the existence of this program — but knowing bits and pieces about the protocol is not enough. In order to combat such heavy-handed measures, we need to have access to the government’s own documents. Hopefully, there is already a whistleblower preparing to release these details.

  What we do with the information we do have is up to each of us as individuals. We can sit back and watch the United States further devolve into a militarized police and surveillance state — or we can spread this information, get involved locally, and create new systems outside of the current paradigm of control and exploitation.

  

  

  

  

  

• The Empty Suit's Seat

  President Obama’s “Empty Seat” appears to have raised the ire of many…

   

  

  Source: Dana Summers

   

  

  Source: Investors.com

   

  Perhaps this is why?

  

  Source: Ben Garrison
  

  

  

  

  

  

• The Machines Are Going Mad – HFT Quote-Stuffing Desperation Spikes To Record High

  It appears – for now – that the machines are losing control. Amid the chaos of the last few days in US equities, Johnny 5 and his ilk have been quote-stuffing in desperation at the highest rate in history… but it’s not working!!

   

  

  Source: @NanexLLC

  

  

  

  

  

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• Massive Explosions Rock Jakarta In Apparent Suicide Bombings; Gunfire, Casualties Reported

  Two months after the Paris explosions of November 13, it appears that terrorism has struck again, this time in Indonesia’s capital, Jakarta where moments ago, at least six bomb explosions, gunfire and casualties were reported, with at least one of the explosions taking place near the local UN office.

  ANTARA NEWS REPORTS SIX EXPLOSIONS IN CENTRAL JAKARTA

  JAKARTA POLICE SUSPECTS BOMB AT TRAFFIC POLICE POST: METRO TV

  JAKARTA POLICE, GUNMEN CONTINUES SHOOTING: METRO TV

  BREAKING: Massive explosion rocks central Jakarta, with at least 1 person dead; Gunshots heard.

  — The Associated Press (@AP) January 14, 2016

  What we hear so far. Unconfirmed reports:
  1. Multiple IEDs activated.
  2. Active shooters present.
  3. One (or more) KIA
  #JakartaBlast

  — Ruli Harahap (@ruliharahap) January 14, 2016

  #INDONESIA‘S NATIONAL POLICE SPOKESMAN SAYS CENTRAL #JAKARTA #EXPLOSIONS SUSPECTED TO HAVE BEEN CARRIED OUT BY #SUICIDE BOMBER @Reuters

  — Global Markets Forum (@ReutersGMF) January 14, 2016

  @TMCPoldaMetro Suasana TKP sesaat setelah bom meledak di sebuah kafe di Jakarta Pusat. pic.twitter.com/UbPb448X2s

  — Ramdans Muhammad (@Rockramdans) January 14, 2016

  Serious exchange of fire in downtown #Jakarta. Didn’t experience this in 3.5 years in #Pakistan

  — Jeremy Douglas (@jdouglasSEA) January 14, 2016

  Police now backing-up & security announcement to stay away from windows, & telling folks to retreat from lobby

  — Jeremy Douglas (@jdouglasSEA) January 14, 2016

  Korban ledakan bom di Sarinah, Thamrin. Apakah mereka pelakunya? pic.twitter.com/YXSxWgkz2A

  — Pujiono JS™ (@PujionoJS) January 14, 2016

  And folks in office saying think it is a #Paris type #foreignfigthers #ISIS supporters attack. Given 500 in #Syria wouldn’t be huge surprise

  — Jeremy Douglas (@jdouglasSEA) January 14, 2016

  As of this moment, the explosions appear to be yet another suicide bomber-driven terrorist attack, and we suspect it is only a matter of time before ISIS takes credit.

  The local stocks have reacted dramatically:

  

  A live feed of the event is available below:

  Livestream @KompasTV on Jakarta, #Indonesia blast: https://t.co/Ccq8194Nfn pic.twitter.com/nxnhEnak1L

  — Steve Herman (@W7VOA) January 14, 2016

  

  

  

  

  

• This Is What The Powerball Ticket Line Looked Like In Nevada

  Seven years ago, America was promised hope and change. The change never came, but at least there is still hope, and it comes in the form of a voluntary tax known as the Powerball lottery. The only problem: it happens to be everyone else’s hope too, and to even get a chance to buy a ticket, one has to wait in lines such as this one on the California-Nevada border.

  The line to buy Powerball tickets at the Nevada to California border line today is UNREAL!!!! ???? pic.twitter.com/prehiIeM3i

  — Dan Fleyshman (@DanFleyshman) January 13, 2016

  

  

  

  

• Hong Kong Dollar De-Pegging Risk Spikes As Yuan Slides, China Stocks Drop To 2-Year Lows

  Update:

  • SHANGHAI COMPOSITE INDEX FALLS 20% BELOW DECEMBER HIGH

  

   

  To 2-Year Lows…

  

   

  Offshore Yuan is being dumped again…

  

   

  And The Hong Kong Dollar is under sever pressure within its peg band…

  

   

  As De-Pegging risk expectations ramp up…

  

   

  As we detailked earlier,following last night's notable weakness in Chinese stocks (now down 15-25% year-to-date) and today's plunge in US markets, Offshore Yuan has begun to tumble lower once again ahead of today's Yuan fix. Having slapped short Yuan speculators with a dire liquidity withdrawal, it appears traders are seeing through the "over-invoicing" bullshit of last night's trade data and outflows appear to have restarted. Equities across AsiaPac are tumbling despite PBOC injecting a massive CNY160bn of liquidity (and modestly strengthening the Yuan fix), as safe-haven flows push 10Y China bonds to 2.70% – a record low.

  Chinese bonds just hit a record low yield…

  • *CHINA 10-YEAR BOND YIELD DROPS 3 BPS TO RECORD 2.70%

  

   

  Offshore Yuan is selling off again…

  

   

  And Chinese equities are a bloodbath in 2016…

  

   

  And tonight's open is not helping…

  • *MSCI ASIA PACIFIC INDEX EXTENDS LOSS TO 2.3%
  • *FTSE CHINA A50 JANUARY FUTURES FALL 1.7% IN SINGAPORE
  • *SHANGHAI COMPOSITE FALLS BELOW AUGUST CLOSING LOW

  

  But China "flu" appears to be spreading as carry trade unwinds spread to JPY…

  Japanese stocks are plunging – NKY down 700 points from its US session highs…

  

   

  To its weakest since Oct 2014…

  

   

  Get back to work Mr. Kuroda!!!

   

  Charts: Bloomberg

  

  

  

  

  

• How China Almost Ran Out Of Physical Dollars

  On Tuesday, we weren’t surprised to learn that some banks in Shanghai and Beijing were apparently running short of physical dollar bills.

  According to Ming Pao, Shanghai residents were lined up at local banks in a frantic effort to sell RMB for USD amid China’s ongoing yuan deval.

  “Some banks in China’s Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency,” 21st Century Business Herald added, citing a reporter’s investigation which showed that “BOC, CCB, and China Merchants Bank in the listed cities are requiring an appointment at least 2 days in advance for >$5,000 purchases.” The appointment “could take as long as 1 week at some branches,” the paper said.

  Why the panic? Because, in the simplest possible terms, no one has any idea what Beijing’s target is for the yuan.

  In fact, no one even knows if the PBoC has a target at all or if China is simply flying by the seat of its pants managing the glidepath on an ad hoc, daily basis depending on how wide the onshore/offshore spread is (a proxy for the pressure on the currency).

  One thing seems certain though: a much bigger “adjustment” will be necessary if China hopes to stabilize its economy by propping up exports. As Deutsche Bank noted last week, if global currencies continue to slide against the dollar, the yuan will need to fall if China hopes to keep its new trade-weighted RMB index from rising.

  

  As long as the deval continues in a kind of fits and starts fashion, the capital flight will continue. That is, the only way to stabilize the situation is to allow the market to decide where the yuan should trade once and for all, a painful option in the short run, but a move that would keep the country’s capital account from dying a slow death by a thousand paper cuts. As Morgan Stanley puts it, “the capital accoount [currently] dominates the current account.”

  

  
  

  Now, as the turmoil continues (temporarily “better” trade data notwithstanding), WSJ is out with an account of how China is rapidly running out of physical dollars. “At major lender Industrial & Commercial Bank of China Ltd., one banker said the number of people wanting to change yuan for dollars has increased significantly during the past three weeks—a period during which the Chinese currency has declined about 2%,” WSJ begins. “During the weekend, ICBC received an urgent notification from China’s central bank warning of a dollar shortage, he said.”

  ICBC customers are now subject to the same kind of waiting period described earlier this week by 21st Century Business Herald. The bank is now requiring a four day advance notice on FX exchanges presumably in an effort to manage the flows and ensure the cash is available.

  Chinese are only allowed to exchange $50,000 per year (although between the various “Mr. Chens” and end-arounds like the UnionPay ruse there are plenty of ways to circumvent the captial controls) and WSJ suggests the selling pressure may be particularly acute now because everyone is starting with a clean slate for 2016. “Since China’s strict capital controls limit Chinese consumers to purchasing $50,000 worth of U.S. dollars each calendar year, January is also when they can start buying again with a fresh quota,” The Journal continues, before quoting Harry Hou “who works in the financial industry in Shanghai, [where] he, his wife and parents bought their limit of $200,000 last year, and started buying dollars again through China Merchants Bank’s online service as soon as the New Year kicked in.” 

  “This year’s biggest market risk is not going to be [stocks] but the yuan. The government has let the yuan fall in the past, allowing it to weaken to 8 yuan from 5 yuan against the dollar in the 1990s,” Hou said.

  And while Chinese authorities are doing their best to control the flow by cracking down on quota abusers and asking banks to make lists of those suspected of skirting the rules, the only way to stop the bleeding is to convince the market that the deval has nearly run its course. That won’t be easy, especially with the onshore/offshore spread blowing out, persistently lower nightly fixings, and a trade-weighted RMB that’s still substantially elevated from a historical perspective.

  In fact, Chinese are so convinced that there’s more downside to come that exporters are executing a daily arb. “James Mao, who runs a Shanghai-based company that exports biochemical materials from China to the U.S., says he is asking Chinese suppliers to wait for a few days to get paid, since he thinks he can get more yuan for those dollars later,” The Journal explains. “Exporters are required to sell the foreign currency they obtain from trade to the central bank, but there are no rules on when the transaction needs to be done. So far this month, Mr. Mao says he pocketed an extra $2,000 by waiting longer to convert his dollars to yuan.”

  Remember China, if the banks run out of dollars or if you find yourself having to wait a week for your greenbacks, there’s always Bitcoin.

  And there’s always Chen.

  

  

  

  

  

  

• If You Don't Agree With Obama You Are "Peddling Fiction"

  Submitted by Simon Black via SovereignMan.com,

  If you’re not watching it purely for the entertainment value, sitting through a State of the Union speech ranks somewhere between a colonoscopy and a root canal.

  Every year I opt for the former (entertainment value, not colonoscopy).

  But because I live overseas, one of the added entertainment benefits is that I’m surrounded by foreigners who are seeing this highly ritualistic propaganda for the first time.

  The absurdity starts almost immediately.

  The Sergeant-at-Arms introduces the President of the United States, and he receives a massive, five minute standing ovation as he walks across the water to the podium.

  The applause finally dies down briefly, until, immediately after, the Speaker of the House formally introduces the President. And then the applause begins anew.

  Try explaining that to a foreigner who’s never seen it before.

  Foreigner: “Why is everyone clapping again for the President as if they weren’t just clapping for him 30 seconds ago?”

  Me: “Because that’s just the way they do it.”

  Foreigner: “But why?”

  Me: “… ummm… because they’re all trained monkeys?”

  But it is at this point that the real propaganda begins, where the President of the United States tells his fellow Americans that they are prosperous and free.

  He cited, for example, the 14 million jobs created since he took office.

  Of course he failed to mention the more than $8 trillion in debt (77% increase) that has been accumulated since he was inaugurated seven years ago.

  If the President truly wants to take credit as the job creator-in-chief, the basic math works out to be nearly $600,000 in government debt for every single job created.

  Zerohedge showed yesterday, in fact, that while debt in the US has increased 77% over the last seven years, GDP has only increased by 13%.

  Now, you’d think that for each additional dollar the US government was spending and indebting future generations, there would be at least $1 in GDP growth.

  Ideally you’d get more than $1 in GDP growth. Duh. Businesses have to do this every single day.

  If I borrow $10 million to buy and develop agricultural farmland, obviously the net effect once I’m finished should result in a property that’s worth MORE than $10 million.

  But that’s not how it works when governments spend money. It took them $3.71 of debt to buy just $1 of GDP growth.

  Yes, the overall result may show that the economy is technically bigger than it was in 2009.

  But this ratio is completely screwed up, and it is not indicative of “the strongest, most durable economy in the world.”

  In the meantime, there have never been more pages of laws, rules, and regulations ever in the history of the United States than there are today, January 13, 2016.

  Just this morning, in fact, the federal government published another 369 pages of regulations. Tomorrow there will be even more.

  Should you find yourself out of compliance with any of them, the government can summarily deprive you of your freedom, your property, and even your family.

  And it can do so administratively, without a fair and speedy trial in front of an impartial judge and a jury of your peers.

  This is not what freedom and prosperity are all about.

  President Obama is undeniably upbeat about America. And he’s right, there are a lot of amazing people doing great things in the US.

  The United States is a wonderful country. It’s clean. Modern. Reasonably safe. Standard of living is very high.

  But decades of insane regulation, government debt, and astonishingly destructive monetary policy have resulted in a society where it is now easier to consume than produce.

  Prosperity is not complicated. People figured out thousands of years ago that if you wanted to do well, you had to produce more than you consumed.

  But the American system is the exact opposite, favoring those who recklessly borrow and spend, rather than those who work hard and responsibly save.

  The President of the United States boldly accused everyone who doesn’t share his view as just making things up.

  In his words, “Anyone claiming that America’s economy is in decline is peddling fiction.”

  This is an extraordinary (and delusional) statement.

  The government’s own numbers show that they are completely insolvent, to the tune of nearly $18 trillion.

  The annual reports for the Social Security trust funds show that they are rapidly running out of money.

  The Federal Reserve’s own balance sheet shows that it is precariously undercapitalized, with net capital less than 1% of total assets.

  The Census Bureau’s data shows that the earnings for middle class Americans are stagnating.

  The Labor Department’s numbers show that the number of Americans who have dropped out of the work force hasn’t been at this level since the Carter administration.

  USDA figures show that the number of food stamp recipients is near an all-time high, simultaneously when the number of homeless children in America is at a record high.

  And all of this, at a time when trust in government is near an all-time low.

  These are all facts, not fiction.

  The only fiction is pretending that this story has a happy ending.

  

  

  

  

  

• Last Bubble Standing

  EM debt bubble… emaciated, FX Carry… crucified, Crude…crushed,  High yield bonds… burst, Chinese equities… blown, Trannies… trounced, Small Caps… slammed, Biotechs… busted, and FANGs finally FUBAR! But there is one big (very big) bubble left in the world that no one is talking about, and a rather large liquidity-busting pin beckons…

  In May 2015 we first explained exactly why China was blowing its equity market bubble. Simply put, with more "equity," companies were better able to refinance/roll (note, no interest in debt reduction or deleveraging) their record-breaking mountain of debt and avoid the systemic collapse that is utterly imminent for just a few more months/years.

  Now that the equity market bubble has burst, Chinese authorities have chased investors into another bubble.

  In October 2015, we warned of the relative risk building in the Chinese corporate bond market.

  As the rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another.

  Into Chinese corporate bonds…

  

   

  As we detailed just two months ago, this historic bond bubble is paradoxical for the simple reason that China's credit fundamentals have never been worse, and as we further showed, as a result of the ongoing collapse in commodity prices (which today's Chinese rate and RRR-cut will have absolutely no impact on), more than half of commodity companies can't generate the cash required to even pay their interest, a number which drops to "only" a quarter when expanded to all industries.

  

   

  "The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid," said Xia Le, the chief economist for Asia at Banco Bilbao. "A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets."

  "Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash… This game can’t go on forever."

  They will find it soon, because while China may have managed to once again kick the can on its most recent default when state-owned SinoSteel failed to pay due principal and interest last month only to get a quasi-government bailout, every incremental bail out merely forces even more cash misallocation and even more foolish "investments" into this high risk asset class as investors ignore any concerns about fundamentals, assuming instead that the government will always bail them out.

  Worse still, it is not just the most creditworthy of Chinese corporate bonds that are at record low yields. As the following shocking decoupling shows, even BBB credits are in an extreme bubble – entirely separate from the reality of their underlying business risk (as indicated by the equity market and equity vol)…

  

   

  The problem with that is that as BofA's David Cui notes today, China's bond market is the epitome of a "potential source of financial instability."

  Here is Cui:

  Our analysis shows that:

  1. the bond market is clearly not pricing default risk properly;
  2. the bond market has taken a few SME bond defaults in stride and seems to be counting on bail-outs of the few SOE bonds that are reportedly facing default risk; and
  3. leverage in the bond market is rapidly building up.

  But most importantly, Bank of America has now given a time frame in which China's bond market will blow up, resulting in far more dire consequences that the equity bubble bursting this summer.

  On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default.

  Finally, to answer the question on everyone's mind – here is the full list of most likely upcoming Chinese debt default cases. When the bubble bursts, these names will be the first to blow up.

  

  

   

  And now tonight we get this…

  • *CHINA DEFAULTS LIKELY TO CONTINUE TO BECOME MORE COMMON: FITCH

  Charts: Bloomberg

  

  

  

  

  

• Wednesday Humor: "This Is Why Obama Is Bullish On The Economy"

  … As he points in the right direction. Thanks for the laugh Yahoo.

  

  h/t @Estimated_0

  

  

  

  

• Minimum Wage Misunderstandings: Incompetence Or Dishonesty

  Submitted by Walter E Williams via The Burning Platform blog,

  Michael Hiltzik, a columnist and Los Angeles Times reporter, wrote an article titled “Does a minimum wage raise hurt workers? Economists say: We don’t know.” Uncertain was his conclusion from a poll conducted by the Initiative on Global Markets, at the University of Chicago’s Booth School of Business, of 42 nationally ranked economists on the question of whether raising the federal minimum wage to $15 over the next five years would reduce employment opportunities for low-wage workers.

  The Senate Budget Committee’s blog says, “Top Economists Are Backing Sen. Bernie Sanders on Establishing a $15 an Hour Minimum Wage.” It lists the names of 210 economists who call for increasing the federal minimum wage. The petition starts off, “We, the undersigned professional economists, favor an increase in the federal minimum wage to $15 an hour as of 2020.” The petition ends with this: “In short, raising the federal minimum to $15 an hour by 2020 will be an effective means of improving living standards for low-wage workers and their families and will help stabilize the economy. The costs to other groups in society will be modest and readily absorbed.”

  The people who are harmed by an increase in the minimum wage are low-skilled workers.

  Try this question to economists who argue against the unemployment effect of raising the minimum wage: Is it likely that an employer would find it in his interests to pay a worker $15 an hour when that worker has skills that enable him to produce only $5 worth of value an hour to the employer’s output? Unlike my fellow economists who might argue to the contrary, I would say that most employers would view hiring such a worker as a losing economic proposition, but they might hire him at $5 an hour. Thus, one effect of the minimum wage law is that of discrimination against the employment of low-skilled workers.

  In our society, the least skilled people are youths, who lack the skills, maturity and experience of adults.

  Black youths not only share these handicaps but have attended grossly inferior schools and live in unstable household environments. That means higher minimum wages will have the greatest unemployment effect on youths, particularly black youths.

  A minimum wage not only discriminates against low-skilled workers but also is one of the most effective tools in the arsenal of racists.

  Our nation’s first minimum wage came in the form of the Davis-Bacon Act of 1931, which sets minimum wages on federally financed or assisted construction projects. During the legislative debates, racist intents were obvious. Rep. John Cochran, D-Mo., said he had “received numerous complaints in recent months about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.” Rep. Miles Allgood, D-Ala., complained: “That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.” Rep. William Upshaw, D-Ga., complained of the “superabundance or large aggregation of Negro labor.”

  During South Africa’s apartheid era, the secretary of its avowedly racist Building Workers’ Union, Gert Beetge, said, “There is no job reservation left in the building industry, and in the circumstances, I support the rate for the job (minimum wage) as the second-best way of protecting our white artisans.” The South African Economic and Wage Commission of 1925 reported that “while definite exclusion of the Natives from the more remunerative fields of employment by law has not been urged upon us, the same result would follow a certain use of the powers of the Wage Board under the Wage Act of 1925, or of other wage-fixing legislation. The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.”

  It is incompetence or dishonesty for my fellow economists to deny these two effects of minimum wages: discrimination against employment of low-skilled labor and the lowering of the cost of racial discrimination.

  

  

  

  

  

• Q4 Will Be The Worst U.S. Earnings Season Since The Third Quarter Of 2009

  Couple of things: first of all, any discussion whether the US market is in a profit (or revenue) recession must stop: the US entered a profit recession in Q3 when it posted two consecutive quarters of earnings declines. This was one quarter after the top-line of the S&P dropped for two consecutive quarters, and as of this moment the US is poised to have 4 consecutive quarters with declining revenues as of the end of 2015.

  Furthermore, as we showed on September 21, when Q4 was still expected to be a far stronger quarter than it ended up being, in the very best case, the US would go for 7 whole quarters without absolute earnings growth (and even longer without top-line growth).

  

  Then, as always happens, optimism about the current quarter was crushed as we entered the current quarter, and whereas on September 30, 2015, Q4 earnings growth was supposed to be just a fraction negative, or -0.6%, as we have crossed the quarter, the full abyss has revealed itself and according to the latest Factset consensus data as of January 8, the current Q4 EPS drop is now expected to be a whopping -5%. And just to shut up the “it’s all energy” crowd, of the 10 industries in the S&P, only 4 are now expected to post earnings growth and even their growth is rapidly sliding and could well go negative over the next few weeks.

  

   

  It gets even worse. According to Bloomberg, on a share-weighted basis, S&P 500 profits are expected to have dropped by 7.2% in 4Q, while revenues are expected to fall by 3.1% This would represent the worst U.S. earnings season since 3Q 2009, and a third straight quarter of negative profit growth. It’s no longer simply a recession: as noted above, the Q4 EPS drop follows declines of 3.1% in Q3 and 1.7% in Q2. it is… whatever comes next. 

  As Bloomberg adds, the main driving forces behind drop in U.S. earnings are the rise in the dollar index (thanks Fed) and the drop in average WTI oil prices. However, since more than half of all industries are about to see an EPS decline, one can’t blame either one or the other.

  So while we know what to expect from Q4, a better question may be what is coming next, and according to the penguin brigade, this time will be different, and the hockey stick which was expected originally to take place in Q4 2015 and then Q1 2016 has been pushed back to Q4 2016, when by some miracle, EPS is now expected to grow by just about 15%.

  

  Good luck.

  

  

  

  

  

• Correlation Or Causation: How The Fed Helped Create The Global Oil Glut (In 1 Simple Chart)

  Correlation or Causation?

   

  

  h/t DoubleLine

  Easy money by The Fed expanding their balance sheet ENABLED tight oil to be produced 'economically'…

  But the signals this sent to the market became self-fulfilling (thanks to an endless Fed put) further creating record US crude production (as the oil 'gold rush' ensued), forcing a real 'deflating' world to be 'glutted' with ever-increasing output of mal-investment-driven 'expensive' oil…

  of course until that facade of 'boom', busted and crushed the price of the over-produced by 75% (back to 'reality')

  Can you spot the moment The Fed jumped the shark?

  

   

  So the question is – If The Fed enables mal-investment booms by mandate (or ignorance), will they ever learn from the inevitable busts?

  

  

  

  

  

• Does The U.S. Have A Middle East Strategy Going Forward?

  Submitted by Gregory R. Copley via OilPrice.com,

  Senior-level sources in numerous Middle Eastern governments have privately expressed bewilderment at recent and current U.S. government strategies and policies toward the region.

  But a closer examination of U.S. policies, now almost entirely dictated by the Obama White House, shows no cohesive national goals or policies exist, but rather an ad hoc set of actions and reactions, which are largely dictated either by ideological positions, ignorance, whim, or perceived expedience.

  This is unique in U.S. history.

  In short, the consistent pattern of policies developed over the past century has now been broken up, apart from some of the physical consistencies of legacy military deployments and basing, and by some trade and weapons program commitments. Even there, military deployments have contracted substantially in the past few years, and new U.S. defense systems sales to the region have been lost to suppliers from France, Russia, the People’s Republic of China (PRC), Germany, Pakistan, and others

  In the 18 months until January 2016, the U.S. missed possibly $12- to $15-billion in sales of defense and energy systems in the Middle East, and a range of major new defense acquisitions from non-U.S. suppliers are under consideration by Middle Eastern states. At the same time, some of the U.S.’ major traditional allies in the region — Israel, Egypt, and Saudi Arabia, in particular — have felt compelled, for their own survival, to turn their back on Washington because of a perception of a divergence in values and goals.

  Most U.S. policy officials — especially in Defense — insist that U.S. commitments and strategies in the region have not changed, but the actions and policies dictated directly by the Barack Obama White House, and mirrored at Secretary of State level, have proven antithetical to most states in the greater Middle East, with the exception of Turkey and Qatar. Some regional states, such as Oman, are concerned; others, such as Ethiopia and Djibouti, are now left feeling strategically abandoned.

  The sudden withdrawal of U.S. forces from their deployment at the Ethiopian air base at Arba Minch — from where Reaper UAV sorties were conducted against al-Shabaab in Somalia — was done in September 2015 without forewarning to the Ethiopian Government in Addis Ababa, and kept secret until an Ethiopian website disclosed it in early January 2016. The U.S. had signed a series of multi-year supply agreements with Ethiopian companies to support the base in the weeks leading up to the withdrawal, a firm indication that the decision to vacate Arba Minch was sudden and hastily planned.

  The Arba Minch withdrawal coincided with growing U.S. hostility toward the Government of Djibouti — which is strategically integral to Ethiopia’s fortunes — and the very pointed siding of U.S. Secretary of State John Kerry with Saudi Arabia and the United Arab Emirates against Djibouti. This resulted in Saudi and UAE strong military commitments to Eritrea (to compensate for the loss of their Djibouti basing in the war in Yemen), another blow to Ethiopian security. But it also coincided with the visit by U.S. President Barack Obama to Addis Ababa to talk at the African Union, where he was accorded a very mixed reception based on his insistence on African states accepting his — Obama’s — stance on gay marriage, among other things.

  Significantly, although President Obama’s team was warned against such provocations in advance of his Addis and Nairobi visits, most Obama Administration officials do not understand what they have done to offend some of the nations in the region. Even Kerry’s support for Saudi Arabia and the UAE in the rift with Djibouti did not win their support for Washington, as both states feared that the U.S. now supported Iran rather than the lower Persian Gulf states. The Iranian Government, however, has been under no such illusions, even among those who supported the G5+1 treaty with Iran to end some of Iranian nuclear weapons programs in exchange for lifting economic sanctions. They, too, see U.S. support for the Saudi coalition against them in Yemen.

  The net result has been a bonanza for the PRC, and the deal by Djibouti to welcome a PRC naval base in the country was confirmed and cemented when Djibouti President Ismail Omar Guelleh met in South Africa with China’s President Xi Jinping in early December 2015. This was a strategically successful gathering of African leaders with China’s leader within weeks of the Indian summit in New Delhi with African leaders.

  The U.S. has done nothing of consequence to rebuild its position, which means that the strategic framework in the Middle East and Africa will, within a decade, be profoundly different from the beginning of the 21st Century.

  

  

  

  

  

• Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes

  If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up 'cheap' oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China's record crude imports have ceased).

  In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

  

  China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners.

  China's crude imports last month was equivalent to 7.85 million barrels a day, 6 percent higher than the previous record of 7.4 million in April, Bloomberg calculations show.

  

  China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher.

  But given the crash in tanker rates – and implicitly demand – that "boom" appears to be over.

  Shipbroker analysts blame fewer January cargoes and oil companies using their own vessels for shipment as the main reasons for the dramatic decline. As Bloomberg adds,

  Oil tanker earnings boomed thanks to the very thing that drove down crude prices: an abundance of supply that made ship-fuel cheaper and shipments plentiful. This month, shipbrokers report a slump in spot cargoes from the Middle East.

   

  While they say it would be premature to suggest that has implications for the region’s output, the plunge in rates shows just how sensitive owners are to monthly fluctuations in shipments.

  The good news after all this carnage is that, even before today's plunge, collapsing tanker rates were already pushing economics for floating storage (the carry trade) closer to be proditable.

  

  

  

  

  

• In Latest Embarrassment For Obama, Iran Releases Footage Of Arrest, Apology Of 10 U.S. Sailors

  With just hours to go before Obama’s last State of the Union address, the US president suffered his latest foreign policy fiasco when around noon local time, Iran arrested 10 US sailors in a boat that has allegedly entered deep into Iranian territorial waters.

  Needless to say, there was no mention of this in Obama’s address and the scandal was quietly swept under the rug when the 9 young men and 1 woman were released earlier today, and all questions just why the soldiers were released only well after the SOTU’s conclusion (were they a hostage bargaining chip in case Obama said something out untoward last night regarding Iran) were soundly ignored.

  However, while there may have been some doubt as to Iran’s intentions yesterday, all doubt was eliminated moments ago when Iran’s state broadcaster just released photos not just of the 10 captured soldiers, which were shown earlier, but of their arrest as well as the seizure of the boat and their weapons.

  Here is the just released TV footage, courtesy of Sobhan Hassanvand:

  Fars news shows the video of capturing the US navy sailors pic.twitter.com/7kbsUe8kDR

  — Zaid Benjamin (@zaidbenjamin) January 13, 2016

  Here is a video of the US Commander apologizing (via Fox):

  Video from Iranian state television shows a US Navy sailor apologizing while being detained. https://t.co/Ymr632ThF1
  https://t.co/IlvSh46NLn

  — Fox News (@FoxNews) January 13, 2016

  And here are excerpted photos, showing US sailors being treated as common Somali pirates:
  

  

  

  

  

  

  

  

  

  

  

   

  Finally, putting Iran’s aggression in context: 

  
  

  

  

  

  

• Canadians Panic As Food Prices Soar On Collapsing Currency

  It was just yesterday when we documented the continuing slide in the loonie, which is suffering mightily in the face of oil’s inexorable decline.

  As regular readers are no doubt acutely aware, Canada is struggling through a dramatic economic adjustment, especially in Alberta, the heart of the country’s oil patch. Amid the ongoing crude carnage the province has seen soaring property crime, rising food bank usage and, sadly, elevated suicide rates, as Albertans struggle to comprehend how things up north could have gone south (so to speak) so quickly.

  The plunging loonie “can only serve to worsen the death of the ‘Canadian Dream'” we said on Tuesday.

  

  As it turns out, we were right.

  The currency’s decline is having a pronounced effect on Canadians’ grocery bills.

   As Bloomberg reminds us, Canada imports around 80% of its fresh fruits and vegetables. When the loonie slides, prices for those goods soar. “With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress” Bloomberg continues.

  Of course with the layoffs piling up, you can expect more households to fall into the “lower-income” category where they will have to fight to afford things like $3 cucumbers, $8 cauliflower, and $15 Frosted Flakes.

  As Bloomberg notes, James Price, director of Capital Markets Products at Richardson GMP, recently joked during an interview on BloombergTV Canada that “we’re going to be paying a buck a banana pretty soon.”

  Have a look at the following tweets which underscore just how bad it is in Canada’s grocery aisles. And no, its not just Nunavut: it from coast to coast:

  

  Three bucks. For a cucumber. pic.twitter.com/xGkygxkxqB

  — Steve Ladurantaye (@sladurantaye) January 12, 2016

  If the CAD $ gets any weaker we might be able to buy groceries with shiny rocks #Canada

  — Josh Landine (@joshlandine) January 12, 2016

  @sladurantaye Heh. Had a similar reaction when I saw the price of cauliflower. Welcome to the future… pic.twitter.com/fxloxyePY3

  — Craig Saila (@saila) January 12, 2016

  The cost of Tide detergent in Nunavut: pic.twitter.com/2t2xA1EmYk

  — themsteri (@teririch) December 31, 2015

  And while some Canadians might think this is a regional phenomenon …

  

  … folks in the northern parts of the Great White North do have the most cause to cry foul:

  

  

  

  

  No “Jack Nasty” it’s not The Great Depression, but as we highlighted three weeks ago, it is Canada’s depression and it’s likely to get worse before it gets better. “Last year, fruits and veggies jumped in price between 9.1 and 10.1 per cent, according to an annual report by the Food Institute at the University of Guelph,” CBC said on Tuesday. “The study predicts these foods will continue to increase above inflation this year, by up to 4.5 per cent for some items.”

  If you thought we were being hyperbolic when we suggested that if oil prices don’t rise soon, Canadians may well eat themselves to death, consider the following from Diana Bronson, the executive director of Food Secure Canada: 

  “Lower- and middle-class people — many who can’t find a job that will pay them enough to ensure that they can afford a healthy diet for their families” — also feel the pinch of rising food prices”

   

  “The wrong kind of food is cheap, and the right kind of food is still expensive.”

  In other words, some now fear that the hardest hit parts of the country may experience a spike in obesity rates as Canadians resort to cheap, unhealthy foods. As we put it, “in Alberta it’s ‘feast or famine’ in the most literal sense of the phrase as those who can still afford to buy food will drown their sorrows in cheap lunch meat and off-brand ice cream while the most hard hit members of society are forced to tap increasingly overwhelmed food banks.” 

  And the rub is that there’s really nothing anyone can do about it.

  Were the Bank of Canada to adopt pro-cyclical measures to shore up the loonie, they would risk choking off economic growth just as the crude downturn takes a giant bite out of the economy – no food pun intended.

  

  

  

  

• Markets In Freefall: Stocks Extend Worst Ever Start To Year

  Today's business media summarized…

   

  Today's actual market summarized…

   

  Let's start with this – The market has now reduced March rate-hike odds back to pre-December rate-hike levels (at just 35%)…

  

   

  Two words – Policy… Error…

  

   

  This remains the worst start to a year… ever…

  

   

  Across the major US equity markets, it's a bloodbath…

  

  *RUSSELL 2000 CAPS 22% DROP FROM JUNE RECORD, ENTERS BEAR MARKET

   

  With the Nasdaq about to be the lasty major index to give up its post-QE3 gains…

  

   

  Year to Date – it's just as ugly…

  

   

  And since The Fed hiked rates…

  

   

  VIX term structure inverted but we are a long way from an August-like panic-bottom…

  

   

  There is at least some rationality resumiong as weak balance sheet stocks underperform strong balance sheet firms…

  

   

  With selling out of the gate and only a small bounce in the last hour, equity markets carnaged…

  

   

  FANGs entered a correction…

  

   

  And FANTAsy stocks were smashed today…

  

   

  Lots of head-scratching at how this is possible… except for anyone who pays attention to credit markets…

  

   

  As HYG plunges to its lowest close since July 2009… Today was worst day in 4 weeks

  

   

  US Energy credit risk is soaring back to near 2008 crisis highs…

  

  h/t @JavierBlas2

   

  While High yield bonds were crashing, Treasuries were aggressively bid (despite the Inbev issuance), on the verge of flash-crashing a few times after a stronmg 10Y auction…

  

   

  The USDollar Index ended the day unchanged as early strength was sold – but it remains up on the week… CAD was smashed to new 12 yeasr lows

  

   

  Gold ansd Silver rallied as Crude and Copper crumbled…

  

   

  As stocks plunged at the US open so PMs ripped…

  

   

  As if by magic, WTI's NYMEX close was adjusted very slightly higher to enable a tiny green print… but the trend was clear…

  

   

  Charts: Bloomberg

  Bonus Chart: Some food for thought…

  

  

  

  

  

• "Very Worrisome Signal For Fed Credibility" – Former Fed President Trolls Federal Reserve

  It’s one thing for a fringe website to mock the Fed (on a daily basis, for the past 7 years), with articles such as this one we posted just before noon today, showing that inflation expectations have once again imploded, less than a month after the Fed’s rate hike was supposed to signal confidence in the economy and a renormalization in inflation:

  Since The Fed hiked rates in December, the market’s inflation expectations have collapsed in yet another clear indication of “policy error.” 5Y5Y Forward inflation swaps have crashed below 2.00% for only the 3rd time in history (Lehman 2008 and September’s Fed Fold were the other two) as despite central banker promises of transitory low-flation, the money is being bet against them as the regime-shift from full-faith to no-faith in Fed support continues.

   

  

   

  However, when a former Fed president, one who was employed as recently as two weeks ago by the Minneapolis Fed, Narayana Kocherlakota, best known for being the biggest hawk to dove conversion in Fed history, and also being the one person to dare put a negative dot on the Fed’s ever amusing dot plot, suggesting it is time for negative rates does exactly the same, you know that the Fed’s credibility has already run out.

  From Kocherlakota: “Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows …”

  Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows … pic.twitter.com/OxavyW2cTD

  — NRKocherlakota (@kocherlakota009) January 13, 2016

  Of course, the far more worrisome signal for Fed credibility is not that inflation forwards are plunging, but that one of the Fed’s faithful has now taken to a public forum like Twitter to troll his former co-workers.

  All that it would take now is for Yellen to formally admit the Fed’s credibility is gone and to cut rates first back to zero, and then negative, with a solid dose of QE on top, admitting it was always only about the markets.

  

  

  

  

• What Geniuses Come To Believe

  Submitted by Paul Rosenberg via FreemansPerspective.com,

  It recently struck me that the people we think of as “geniuses” tend to arrive, over time, at surprisingly similar sets of conclusions.

  It further struck me that a simple list of such thoughts might be of value to my readers.

  So, here is a list pulled from my quotes file and presented without commentary. Enjoy:

  Albert Einstein

  • Unthinking respect for authority is the greatest enemy of truth.

  • Nothing will end war unless the people themselves refuse to go to war.

  • Never do anything against conscience, even if the state demands it.

  • The world is in greater peril from those who tolerate or encourage evil than from those who actually commit it.

  • Small is the number of them that see with their own eyes and feel with their own hearts.

  Rod Serling

  • The ultimate obscenity is not caring, not doing something about what you feel, not feeling.

  Arthur Schopenhauer

  • We forfeit three-fourths of ourselves in order to be like other people.

  Thomas Jefferson

  • I have sworn upon the altar of god eternal hostility against every form of tyranny over the mind of man.

  • It is error alone which needs the support of government. Truth can stand by itself.

  • I would rather be exposed to the inconveniences attending too much liberty than those attending too small a degree of it.

  Allan Bloom

  • The most successful tyranny is not the one that uses force to assure uniformity but the one that removes the awareness of other possibilities, that makes it seem inconceivable that other ways are viable, that removes the sense that there is an outside.

  John Stuart Mill

  • The only freedom which deserves the name is that of pursuing our own good in our way, so long as we do not attempt to deprive others of theirs or impede their efforts to obtain it.

  Leo Tolstoy

  • The truth is that the State is a conspiracy designed not only to exploit, but above all to corrupt its citizens… Henceforth, I shall never serve any government anywhere.

  Will Durant

  • Above all, the ruling minority sought more and more to transform its forcible mastery into a body of law which, while consolidating that mastery, would afford a welcome security and order to the people, and would recognize the rights of the “subject” sufficiently to win his acceptance of the law and his adherence to the state.

  George Bernard Shaw

  • All government is authoritarian; and the more democratic a government is the more authoritative it is; for with the people behind it, it can push authority further than any Tsar or foreign despot dare do.

  Aldous Huxley

  • So long as men worship the Caesars and Napoleons, Caesars and Napoleons will duly rise and make them miserable.

  • Liberty, as we all know, cannot flourish in a country that is permanently on a war footing, or even a near war footing. Permanent crisis justifies permanent control of everybody and everything by the agencies of central government.

  Richard Feynman

  • Theoretically, planning may be good. But nobody has ever figured out the cause of government stupidity – and until they do (and find the cure), all ideal plans will fall into quicksand.

  Buckminster Fuller

  • Dear reader, traditional human power structures and their reign of darkness are about to be rendered obsolete.

  • If you take all the machinery in the world and dump it in the ocean, within months more than half of all humanity will die and within another six months they’d almost all be gone; if you took all the politicians in the world, put them in a rocket, and sent them to the moon, everyone would get along fine.

  • We are powerfully imprisoned in these Dark Ages simply by the terms in which we have been conditioned to think.

  • Either you’re going to go along with your mind and the truth, or you’re going to yield to fear and custom and conditioned reflexes.

  Erich Fromm

  • The history of mankind up to the present time is primarily the history of idol worship, from primitive idols of clay and wood to the modern idols of the state, the leader, production and consumption – sanctified by the blessing of an idolized God.

  • Obedience to God is also the negation of submission to man.

  • [I]f one has no possibility of acting, one’s thinking kind of becomes empty and stupid.

  • Is there really as much difference as we think between the Aztec human sacrifices to their gods and the modern human sacrifices in war to the idols of nationalism and the sovereign state?

  Charlie Chaplin

  • As for politics, I’m an anarchist. I hate governments and rules and fetters. Can’t stand caged animals. People must be free.

  Carl Jung

  • For in order to turn the individual into a function of the State, his dependence on anything beside the State must be taken from him.

  Ray Bradbury

  • We bombard people with sensation. That substitutes for thinking.

  Abraham Maslow

  • I can certainly say that descriptively healthy human beings do not like to be controlled. They prefer to feel free and to be free.

  Simone Weil

  • The real sin of idolatry is always committed on behalf of something similar to the State.

  • Conscience is deceived by the social.

  • Human history is simply the history of the servitude which makes men – oppressed and oppressors alike – the plaything of the instruments of domination they themselves have manufactured, and thus reduces living humanity to being the chattel of inanimate chattels.

  • What a country calls its vital economic interests are not the things which enable its citizens to live, but the things which enable it to make war.

  

  

  

  

• The Aftermath Of US Intervention: What The "Arab Spring" Looks Like 5 Years Later

  If you needed a crash course in how not to conduct foreign policy, you need only take a cursory glance at Washington’s trials and travails in the Mid-East over the last decade.

  On the way to documenting the the carnage unfolding in Libya’s oil crescent last week we said that the country, much like Syria, is a case study in why the West would be better off not intervening in the affairs of sovereign states on the way to bringing about regime change. “Toppling dictators” sounds good in principle, but at the end of the day, it’s nearly impossible to predict what will emerge from the power vacuums the US creates when Washington destabilizes governments.

  Post-Baathist Iraq is rife with sectarian discord, a post-Assad Syria would likely be an even bloodier free-for-all than it already is, and post-Gaddafi Libya is a failed state with two governments each claiming legitimacy. These types of environments are exploitable by extremists eager to capitalize on the chaos by seizing resources and, ultimately, power.

  It’s in that context that we present the following graphic from The Economist which vividly demonstrates the fact that the Arab Spring was but a false dawn and that five years on, we still have but one democracy among a sea of autocracies and failed states.

  

  By the way, the one “democracy” success story in Tunisia is exceptionally tenuous as evidenced by November’s suicide attack in the capital.

  

  

  

  

  

• JPM's "Gandalf" Quant Is Back With A Startling Warning

  Two days ago we reported that one half of JPM’s Croatian “Duo of Doom”, namely equity strategist Dubravko Lakos-Bujas, became every BTFDer’s worst enemy when he said that the time of BTFDing is over, and a regime change has arrived one in which rallies are to be sold. To wit:

  Our view is that the risk-reward for equities has worsened materially. In contrast to the past 7 years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally. Yes, stocks had a rough time most recently, and some of the tactical indicators, such as Bull-Bear at -16 which is at the bottom of its trading range, argue for a short-term respite. Clearly, equities are unlikely to keep falling in a straight line, with periodic rebounds likely. However, we believe that one should be using any bounces as selling opportunities.

   

  We fear that the incoming Q4 reporting season won’t be able to provide much reassurance for stocks. As was the case for a while now, consensus expectations have been managed aggressively into the results. The hurdle rate for Q4 S&P500 EPS has fallen from +5%yoy a few months back to -4%yoy currently. If this were to materialise, it would be the weakest quarter for EPS delivery so far in  the upcycle.

  Today, the other half of the infamous Croatian duo…

  

   

  … the legendary “Gandalf” (as dubbed first by Bloomberg) quant Marko Kolanovic, who needs no introduction on this website, and whose every prediction starting in late August turned out just as predicted…

  

  … is out with a new note which will hardly make him any more popular with the permabullish crowd, asks whether “negative  performance in 2015 and January, turmoil in China, and continuing decline in Oil prices make investors wonder if this could be the end of the nearly 7-year bull market.”

  His short answer:

  “The fact that market volatility is on the rise and the Fed is raising interest rates further increases the probability of a Bear Market. The current option-implied probability of a bear market (i.e. ~20% decline this year) is about 25%. While there is no way to predict a bear market, below we look at various scenarios, and estimate that the probability of a bear market may be nearly twice as large.“

  So according to the man whose every market forecast has been so far impeccable, the probability of a bear market: or a 20% or more drop in the S&P500 – is roughly 50%.

  Not good.

  And what will make the permabulls even angrier is his proposed allocation to avoid the bear market:

  In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities).

  * * *

  This is what else he says:

  from Systematic Strategy Flows, Oil Prices and the Risk of an Equity Bear Market
  

  First, let’s look at relationship between Oil prices and S&P 500. Oil prices recently posted some of the fastest declines on record. Over extended periods of time, Oil and S&P 500 were positively correlated. Figure 4 shows the out/underperformance of Oil relative to the S&P 500 over the past 30 years (trailing 12M relative performance). One can see that that in each of the 10 episodes of large Oil-S&P 500 price divergences, the gap was always closed in a relatively short time period. Significant underperformance of Oil (e.g. >30%) in 8 out of 10 instances resulted in either a decline in the S&P 500 or large Oil rally. In 2 instances, namely shortly after the start of the Gulf Wars in 1991 and 2003, the decline in Oil was a result of overbought conditions immediately prior to these events. One of the largest swings in Oil-S&P 500 performance (comparable to the one over the past year) occurred during the Asia and Russia crisis of 1997/98. The current underperformance of Oil to the S&P 500 is not just one of the largest on the record, but is by far the longest one. Given that divergences of this size closed in 10 out of 10 historical instances, we believe a closing of this gap is very likely.

   

  This can occur either by the S&P 500 falling (e.g. Oil is a predictor of a recession, as in 2008), or by Oil rising (e.g. a reduction of speculative positions, reduction of supply, geopolitical escalation). In any case, we believe that a long Oil and short S&P 500 trade is likely to deliver positive performance in 2016.

   

  

  A sharp rise in Oil prices could also trigger ‘stagflation’ and lead to an equity bear market. While markets currently estimate the probability of this scenario at less than ~3% (option-implied probability of, for example, Oil doubling and the S&P 500 declining), we think the risk of that scenario is much higher. What could cause a sharp increase in Oil prices? For one, we note that current levels of OPEC production are likely not economically rational or sustainable. For example, to justify an increase in production at a time when prices have declined from $100 to $30, one would need to place triple the production level without further impacting the price.

   

  As geopolitics is likely playing a large role in the Oil price decline, we think it can equally lead to a sharp price reversal. In addition to an agreed production cut, production disruptions are an increasing risk in our view. Recent increases of tension between Saudi Arabia and Iran add to that risk. Parties to a conflict that could independently lead to such disruption include: extremist elements from Saudi Arabia or abroad (e.g. for recent attempt see here), Yemen (for recent attempt see here), Iran, and others. Moreover, high marginal cost producers may drop offline, reducing supply. A doubling of Oil prices may not be a tail event after all (e.g. a significant increase in Oil prices would also be consistent with J.P. Morgan’s current Q4 forecast).

   

  To further assess the likelihood of an equity bear market, we look at historical bull and bear S&P 500 cycles over the past 50 years. We have identified 19 such cycles that alternated in relatively regular periods of time. There were 10 bull markets, lasting on average 4.3 years and delivering ~90% average returns, and 9 bear markets lasting on average 1.1 years and resulting in an average decline of 33%. The current ~205% bull market started in 2009 and is now 6.5 years old. As such, it is one of the longest/largest bull markets. There was only one longer and larger cycle, namely from 1990 to 1998 (that coincidentally ended with the Asia/EM crisis and sharp decline in Oil prices).

   

  The length and return of a bull market is closely related to the size and length of the bear market preceding it (and vice versa). This is shown in the figures below which relate the return during a bear market (horizontal axis) and length of subsequent bull market (Figure 5), and return of the subsequent bull market (Figure 6). In that regard, the current bull market is in-line given the size of the 2008/2009 bear market. In other words, if the bull market was to end now and we are entering a bear market – it would be in-line with historical trends. While this analysis is not proof of an impending bear market, it indicates to us that the chance of entering a bear market this year is probably higher than 25% (currently implied by option markets).

   

  

   

  Finally, for the end of a bull market, one needs to have equity prices ahead of their fundamental valuations. While valuation of the overall market is not consistent with a stock market bubble, some pockets do show stretched valuation (e.g. the market capitalization of Internet/Software sectors as % of the S&P 500 is not far from tech bubble peaks).

   

  Figure 7 shows the level of the S&P 500 as well as short-term interest rates (Fed funds). Between 1990 and 2010, the Fed was adjusting short-term rates largely in synch with the price performance of the S&P 500. Historically, the Fed increased rates during market rallies and reduced them during market selloffs, in pursuing its dual mandate of maintaining price stability and maximum employment. This trend broke in 2009. As the US equity market took off, the Fed kept rates at zero and added large monetary stimulus over the next 5 years. This coincided with one of the largest and longest bull markets in US history. During this bull market, stock and bond buybacks increased in pace, with the Fed buying ~15% of government bonds outstanding, and corporates buying back about ~10% of stock outstanding, which were a driver of the increased asset prices. A clear break of the trend between Fed Funds and the S&P 500 might imply that either the S&P 500 rallied too far given the weak growth and appropriate Fed stimulus, or that the Fed underestimated the strength of the economy, in which case the stimulus would have contributed to inflating a bubble. In any case, an increase of short-term rates could be a catalyst for a correction, or even the start of a bear market.

   

  In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities). While bonds have historically been an efficient portfolio hedge, we think that bonds are increasingly at risk of becoming positively correlated to equities (e.g. selling of EM reserves, systematic strategies de-levering, or interest rates increasing).