• Why It Really All Comes Down To The Death Of The Petrodollar

  Last week, in the global currency war’s latest escalation, Kazakhstan instituted a free float for the tenge. The currency immediately plunged by some 25%. 

  The rationale behind the move was clear enough. The plunge in crude prices along with the relative weakness of the Russian ruble had severely strained Kazakhstan, which is central Asia’s largest crude exporter. As a quick look at a chart of the tenge’s effective exchange rate makes clear, the pressure had been mounting for quite a while and when China devalued the yuan earlier this month, the outlook for trade competitiveness worsened. 

  What might not be as clear (on the surface anyway) is how recent events in developing economy FX markets following the devaluation of the yuan stem from a seismic shift we began discussing late last year – namely, the death of the petrodollar system which has served to underwrite decades of dollar dominance and was, until recently, a fixture of the post-war global economic order. 

  

  In short, the world seems to have underestimated how structurally important collapsing crude prices are to global finance. For years, producers funnelled their dollar proceeds into USD assets providing a perpetual source of liquidity, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop. That all came to an abrupt, if quiet end last year when a confluence of economic (e.g. shale production) and geopolitical (e.g. squeeze the Russians) factors led the Saudis to, as we put it, Plaxico themselves and the US.

  The ensuing plunge in crude meant that suddenly, the flow of petrodollars was set to dry up and FX reserves across commodity producing countries were poised to come under increased pressure. For the first time in decades, exported petrodollar capital turned negative. 

  

  That set the stage for a prolonged downturn in emerging market currencies, and as worries about China’s economy – the engine of global growth and trade – grew, so did the pressure.

  

  Thus when Beijing moved to devalue the yuan, it drove a stake through the heart of the EM world by simultaneously i) validating concerns about weak Chinese growth, thus guaranteeing further pressure on commodities, ii) delivering a staggering blow to the export competitiveness of multiple emerging economies, iii) depressing demand from the mainland by making imports more expensive. Thanks to the conditions that resulted from the death of the petrodollar (e.g. falling FX reserves and growing fiscal headwinds), the world’s emerging markets were in no position to defend themselves against the fallout from the yuan devaluation. Complicating matters is a looming Fed hike. Included below is a look at flows into (or, more appropriately, “out of”) EM bonds. As Barclays notes, the $2.5 billion outflow in the week to August 21 is the highest level since February of last year. 

  

  We are, to put it mildly, entering a not-so-brave new world and the shift was catalyzed by the dying petrodollar. Kazakhstan’s move to float the tenge is but the beginning and indeed Kazakh Prime Minister Karim Massimov told Bloomberg on Saturday that the world has entered “a new era” and that soon, any and all petro currency dollar pegs are set to fall like dominoes. Here’s more:

  Currency pegs in crude-producing nations are set to topple as the world enters a “new era” of low oil prices, according to the prime minister of Kazakhstan, which rattled markets this week with a surprise decision to abandon control of its exchange rate.

   

  “At the end of the day, most of the oil-producing countries will go into the free floating regime,” including Saudi Arabia and the United Arab Emirates, Karim Massimov said in an interview on Saturday in the capital, Astana. “I do not think that for the next three to five, maybe seven years, the price for commodities will come back to the level that it used to be at in 2014.”

   

  Central Asia’s biggest energy producer cut its currency loose on Thursday, triggering a 22 percent slide in the tenge to a record low versus the dollar. The move followed China’s shock devaluation of the yuan the week before, which drove down oil prices on concern global growth will stutter and nudged nations with managed exchange rates toward competitive devaluations of their own.

   

  More than $3.3 trillion has been erased from the value of global equities after China’s decision spurred a wave of selling across emerging markets. Brent crude touched a six year-low of $45.07 per barrel on Friday, while the Dow Jones Industrial Average entered a correction.

   

  “After I watched what is happening on the financial market and stock market in the U.S. on Friday night, I thought that we did it at the right time,” Massimov, 50, said in his office in the government’s headquarters. The decision avoided “big speculation and pressure this weekend in Kazakhstan,” he said.

   

  The central bank spent $28 billion this and last year to support the tenge, including $10 billion in 2015, Kazakh President Nursultan Nazarbayev said this week. After its slump on Thursday, the currency rallied 7.4 percent to close at 234.99 against the dollar a day later. The country’s dollar bonds due July 2025 climbed after the announcement, lowering the yield nine basis points to 5.74 percent in the last two days of the week.

   

  Before the currency shift, Kazakhstan was at a competitive disadvantage to Russia, its neighbor and top trading partner along with China. The tenge had fallen by only 7.6 percent against he dollar in the 12 months up to Aug. 20, compared with a 46 percent depreciation for the ruble, while crude had plummeted 55 percent in the period.

  We discussed this in great detail on Friday (with quite a bit of color on the fiscal impact for Saudi Arabia) and we’ve included a chart from Deutsche Bank which should have some explanatory and predictive value below, but the big picture takeaway is that the world is now beginning to feel the impact of the petrodollar’s quiet demise, and because this is only the beginning, we’ve included below the entire text of the petrodollar’s obituary which we penned last November .

  

  *  *  *

  How The Petrodollar Quietly Died And Nobody Noticed

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

  The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today’s FT, why China’s Renminbi offshore market has gone from nothing to billions in a short space of time.

  And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico’ed both itself, and its closest Petrodollar trading partner, the US of A.

  As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their “petrodollars” out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

  A consequence of this year’s dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

  This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

  But no more: “this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.”

  In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

  

  According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all…

  “At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out,” said David Spegel, global head of emerging market sovereign and corporate Research at BNP.

   

  Spegel acknowledged that the net withdrawal was small. But he added: “What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds.”

  In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.

  Which is hardly great news: because in a world in which central banks are actively soaking up high-quality collateral, at a pace that is unprecedented in history, and led to the world’s allegedly most liquid bond market to suffer a 10-sigma move on October 15, the last thing the market needs is even less liquidity, and even sharper moves on ever less volume, until finally the next big sell order crushes the entire market or at least force the [NYSE|Nasdaq|BATS|Sigma X] to shut down indefinitely until further notice. 

  So what happens next, now that the primary USD-recycling mechanism of the past 2 decades is no longer applicable? Well, nothing good.

  Here are the highlights of David Spegel’s note Energy price shock scenarios: Impact on EM ratings, funding gaps, debt, inflation and fiscal risks.

  Whatever the reason, whether a function of supply, demand or political risks, oil prices plummeted in Q3 2014 and remain volatile. Theories related to the price plunge vary widely: some argue it is an additional means for Western allies in the Middle East to punish Russia. Others state it is the result of a price war between Opec and new shale oil producers. In the end, it may just reflect the traditional inverted relationship between the international value of the dollar and the price of hard-currency-based commodities (Figure 6). In any event, the impact of the energy price drop will be wide-ranging (if sustained) and will have implications for debt service costs, inflation, fiscal accounts and GDP growth.

  Have you noticed a reduction of financial markets liquidity?

  Outside from the domestic economic impact within EMs due to the downward oil price shock, we believe that the implications for financial market liquidity via the reduced recycling of petrodollars should not be underestimated. Because energy exporters do not fully invest their export receipts and effectively ‘save’ a considerable portion of their income, these surplus funds find their way back into bank deposits (fuelling the loan market) as well as into financial markets and other assets. This capital has helped fund debt among importers, helping to boost overall growth as well as other financial markets liquidity conditions.

  Last year, capital flows from energy exporting countries (see list in Figure 12) amounted to USD812bn (Figure 3), with USD109bn taking the form of financial portfolio capital and USD177bn in the form of direct equity investment and USD527bn of other capital over half of which we estimate made its way into bank deposits (ie and therefore mostly into loan markets).

  

  

  

  The recycling of petro-dollars has benefited financial markets liquidity conditions. However, this year, we expect that incremental liquidity typically provided by such recycled flows will be markedly reduced, estimating that direct and other capital outflows from energy exporters will have declined by USD253bn YoY. Of course, these economies also receive inward capital, so on a net basis, the additional capital provided externally is much lower. This year, we expect that net capital flows will be negative for EM, representing the first net inflow of capital (USD8bn) for the first time in eighteen years. This compares with USD60bn last year, which itself was down from USD248bn in 2012. At its peak, recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen since 2006 not only reflect the changed  global environment, but also the propensity of underlying exporters to begin investing the money domestically rather than save. The implications for financial markets liquidity – not to mention related downward pressure on US Treasury yields – is negative.

  * * *

  Even scarcer liquidity in US Capital markets aside, this is how BNP sees the inflation and growth for energy exporters:

  Household consumption benefits: While we recognise that the relationship is not entirely linear, we use inflation basket weights for ‘transportation’ and ‘household & utilities’ (shown in the ‘Economic components’ section of Figure 27) as a means to address the differing demand elasticities prevalent across countries. These act as our proxy for consumption the consumption basket in order to determine the economic benefit that would result as lower energy prices improve household disposable income. This is weighted by the level of domestic consumption relative to the economy, which we also show in the ‘Economic components’ section of Figure 27.

  Reduced industrial production costs: Outside the energy industry, manufacturers will benefit from falling operating costs. Agriculture will not benefit as much and services will benefit even less.

  Trade gains and losses: Lost trade as a result of lower demand from oil-producing trade partners will impact both growth and the current account balance. On the other hand, better consumption from many energy-importing trade partners will provide some offset. The percentage of each country’s exports to energy producing partners represents relative to its total exports is used to determine potential lost growth and CAR due to lower demand from trade partners.

  Domestic FX moves are beyond the scope of our analysis. These will be tied to the level of openness of the economy and the impact of changed demand conditions among trade partners as well as dollar effects. Neither do we address non-oil related political risks (eg sanctions) or any fiscal or monetary policy responses to oil shocks.

  GDP growth

  The least impacted oil producing country, from a GDP perspective, is Brazil followed by Mexico, Argentina, Tunisia and Trinidad & Tobago. The impact on fiscal accounts also appears lower for these than most other EMs.

  Remarkably, the impact of lower oil for Russia’s economic growth is not as severe as might be expected. Sustained oil at USD80/bbl would see growth slow by 1.8pp to 0.6%. This compares with the worst hit economies of Angola (where growth is nearly 8pp lower at -2%), Iraq (GDP slows to -1.6% from 4.5% growth), Kazakhstan and Azerbaijan (growth falls to -0.9% from 5.8%).

  For a drop to USD 80/bbl, it can be seen (in Figure 27) that, in some cases, such as the UAE, Qatar and Kuwait, the negative impact on GDP can be comfortably offset by fiscal stimulus. These economies will probably benefit from such a policy in which case our ‘model-based’ GDP growth estimate would represent the low end of the likely outcome (unless a fiscal policy response is not forthcoming).

  

  

  Global growth in 2015? More like how great will the hit to GDP be if oil prices don’t rebound immediately?

  On the whole, we can say that the fall in oil prices will prove negative, shaving 0.4pp from 2015 EM GDP growth. The collective current account balance will fall 0.58pp to 0.6% of GDP, while the budget deficit will deteriorate by 0.61pp to -2.9%. This probably has the worst implications for EM as an asset class in the credit world.

  Energy exporters will fare worst, with growth falling by 1.9pp and their current account balances suffering negative pressure to the tune of 2.69pp of GDP. Budget balances will suffer a 1.67pp of GDP fall, despite benefits from lower subsidy costs. The impact of oil falling USD 25/bbl will be likely to put push the current account balance into deficit, with our analysis indicating a 0.3% of GDP deficit from a 2.4% surplus before. Fortunately, the benefit to inflation will be the best in EM and could help offset some of the political risks from reduced growth.

  As might be expected, energy importers will benefit by 0.4pp better growth in this scenario. Their collective current account will improve by 0.6pp to 1.1% of GDP.

  The regions worst hit are the Middle East, with GDP growth slowing to 0.3%, which is 3.8pp lower than when oil was averaging USD105/bbl. The regions’ fiscal accounts will also suffer most in EM, moving from a 1.7% of GDP surplus to a 1.8% deficit. Meanwhile, the CAB will drop 5.3pp, although remain in surplus at 3.9%. The CIS is the next-worst hit, from a GDP perspective, with regional growth flat-lined versus 1.91% previously. The region’s fiscal deficit will worsen from 0.7% of GDP to -1.8% and CAB shrink to 0.7% from 3% of GDP. Africa’s growth will come in 1.4pp slower at 2.8% while Latam growth will be 0.4pp slower at 2.2%. For Africa, the CAB/GDP ratio will fall by 2.4pp pushing it deep into deficit (-2.9% of GDP).

  Some regions benefit, however, with Asia ex-China growing 0.45bpp faster at 5.5% and EM Europe (ex-CIS) growing 0.55pp faster at 3.9%, with the region’s CAB/GDP improving 0.69pp, although remain in deficit to the tune of -2.4% of GDP.

  

  And so on, but to summarize, here are the key points once more:

  • The stronger US dollar is having an inverse impact on dollar-denominated commodity prices, including oil. This will affect emerging market (EM) credit quality in various ways.
  • The implications of reduced recycled petrodollars has significant ramifications for financial markets, loan markets and Treasury yields. In fact, EM energy exporters will post their first net drain on global capital (USD8bn) in eighteen years.
  • Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds. For these economies, the impact will be on lost fiscal revenue, lost GDP growth and the contribution to reserves of oil and gas-related export receipts. Together, these will have a significant effect on sustainability and liquidity ratios and as a consequence are negative for dollar debt-servicing risks and credit ratings.

  

  

  

  

  

  

• Where Does The Market Go From Here?

  Back in 2011, we showed the one and only correlation that has mattered to traders during the entire past 7 year period, in which capital markets lost their discounting ability and instead became policy tools micromanaged by central bankers, for an administration which equated the level of the S&P500 with policy success: that of the Fed balance sheet with everything else, and most certainly, asset and stock prices.

  

   

  Then, just before the completion of QE tapering by the Fed, we showed what was also the only chart that has mattered since October, when the Fed stopped directly propping up risk assets when the Taper ended.

  

   

  At the time, we quoted one of the few respectable strategists on Wall Street, DB’s Jim Reid who said that “since the Fed balance sheet was used as an aggressive policy tool post-GFC, the graph suggests that the S&P 500 is well correlated with the size of the Fed balance sheet with the former leading the latter by 3 months. Given that the Fed have recently signalled that they will likely be finishing expanding their balance sheet in October, 3 months before that was July. This is important as virtually all of the mega rally in the last 5 years has come in the Fed balance sheet expansion periods. The other periods have been more challenging for markets.”

  Fast forward one year when after last week’s furious selloff in stocks, the biggest in four years… stocks are precisely where they were a year ago. Just as we expected.

  In fact, on Thursday, when the S&P500 closed at 2027, we merely remarked that based on its fair Fed balance sheet value, the S&P was “almost there“, “there” being a level of just about 1970.

  Almost there pic.twitter.com/UzNDDEibcB

  — zerohedge (@zerohedge) August 20, 2015

   

  What happened on Friday? Precisely that: the convergence between the Fed’s balance sheet and the stock market, which had traded “rich” to the Fed’s BS for just under a year, finally took place, and the S&P is now trading back to where it should be, based on the Fed’s $4.5 trillion in “assets.”

  

  And so, here we are, with the S&P500 back to where it was a year ago, and where it should be based on a Fed balance sheet which amounts to 25% of US GDP.

  Which should come as a surprise to nobody: after all, it is now clear to even the most discredited self-proclaimed finance gurus well maybe not all) that it has all been a function of Fed liquidity injections into stocks (and withdrawals from other asset classes such as Treasurys which tend to flash crash on a monthly basis now).

  The only question, now that stocks are back to their fair excess-liquidity implied value, is what happens next?

  Because since it is once again shown that the S&P is all about the balance sheet, a rate hike, which make no mistake is tightening pure and simple, will simply accelerate the already violent decline. Which may be why Janet Yellen should indeed take Suze Orman’s advice and “comment on rate increases” because suddenly the new generation of 17-year-old hedge fund managers is feeling just a little vulnerable.

  Worse, the next leg up in stocks in this Pavlovian market, may well require the Fed doing precisely what we have said all along is the next inevitable step: QE4…. then 5… then 6…  and so on, until finally the helicopter money finally rains.

  

  

  

  

  

• China Chooses Her Weapons

  By Alasdair Macleod of Gold Money

  China’s recent mini-devaluations had less to do with her mounting economic challenges, and more to do with a statement from the IMF on 4 August, that it was proposing to defer the decision to include the yuan in the SDR until next October

  The IMF’s excuse was to avoid changes at the calendar year-end and to allow users of the SDR time to “adjust to a potential changed basket composition”. It was a poor explanation that was hardly credible, given that SDR users have already had five years to prepare; but the decision confirming the delay was finally released by the IMF in a statement on Wednesday 19th.

  One cannot blame China for taking the view that these are delaying tactics designed to keep the yuan out, and if so suspicion falls squarely on the US as instigators. America has most to lose, because if the yuan is accepted in the SDR the dollar’s future hegemony will be compromised, and everyone knows it. The final decision as to whether the yuan will be included is not due to be taken until later this year, so China still has time to persuade, by any means at her disposal, all the IMF members to agree to include the yuan in the SDR as originally proposed, even if its inclusion is temporarily deferred.

  China was first rejected in this quest in 2010 and since then has worked hard to address the deficiencies raised at that time by the IMF’s executive board. That is the background to China’s new currency policy and what also looks like becoming frequent updates on her gold reserves. It bears repeating that these moves had little to do with her domestic economic conditions, for the following reasons:

  • To have an economic effect a substantial devaluation would be required. That is not what is happening. Furthermore devaluation as an economic solution is essentially a Keynesian proposal and it is far from clear China’s leadership embraces Keynesian economics.
  • Together with Russia through the Shanghai Cooperation Organisation, China is planning an infrastructure revolution encompassing the whole of Asia, which will replicate China’s economic development post-1980, but on a grander scale. This is why “those in the know” jumped at the chance of participating in the financing opportunities through the Asian Infrastructure Investment Bank, which will be the principal financing channel.
  • China’s strategy in the decades to come is to be the provider of high-end products and services to the whole of the Eurasian continent, evolving from her current status as a low-cost manufacturer for the rest of the world.

  China’s leaders have a vision, and it is a mistake to think of China solely in the context of a country whose economy is on the wrong end of a credit cycle. This is of course true and is creating enormous problems, but the government plans to reallocate capital resources from legacy industries to future projects. Rightly or wrongly and unlike any western government at this point in a credit cycle, China accepts that a deflating credit bubble is a necessary consequence of a deliberate policy that supports her future plans. She is prepared to live with and manage the fall-out from declining asset valuations and business failures, facilitated by state ownership of the banks.

  Instead, to understand why she is changing the yuan-dollar rate we must look at currencies from China’s perspective. China is the world’s largest manufacturing power by far, and can be said to control global trade pricing as a result. It then becomes obvious that China is not so much devaluing the yuan, but causing a dollar revaluation upwards relative to international trade prices. She is aware that the US economy is in difficulties and that the Fed is worried about the prospect of price deflation, so lower import prices are the last thing the Fed needs. Now China’s currency move begins to make sense.

  The mini-devaluations were a signal to Washington and the rest of the world that if she so wishes China can dictate the global economic outlook through the foreign exchange markets. China believes, with good reason, that she is more politically and economically robust, and has a better grasp over the actions of her own citizens, than the welfare economies of the west in the event of an economic downturn. Therefore, she is pursuing her foreign exchange policy from a position of strength. And the increments that will now be added to gold reserves month by month are a signal that China believes she can destabilise the dollar through her control of the physical gold market, because it gently reminds us of an unanswered question always ducked by the US Treasury: what evidence is there of the state of the US’s gold reserves?

  China would probably live with a deferral of her SDR membership for another year, if there is a definite decision in October to include her currency in the SDR basket. That being the case, China must be tempted to increase pressure on all IMF members ahead of the October meeting. The strategy therefore changes from less passivity to more aggression over both foreign exchange rates and gold ownership over the next eight weeks. We can expect China to tighten the screw if necessary.

  The stakes are high, and China’s devaluation of only a few per cent has caused enough chaos in capital markets for now. But if the eventual answer is that the yuan will not be allowed to join the SDR basket, it will be in China’s interest to increase the pace of development of the new BRICS bank instead with its own version of an SDR, selling dollar reserves and underlying Treasuries to fund it. The threat that China will turn her back on the post-war financial system and the IMF would also undermine the credibility of that institution more rapidly perhaps than the dollar’s hegemony if the yuan was accepted. And if a US-controlled IMF loses its credibility, even America’s allies will desert her, just as they did to join the Asian Infrastructure Investment Bank a few months ago.

  It was always going to be the US that faced a predicament from China’s growing economic power. She has chosen to bluff it out instead of gracefully accepting the winds of change, as Britain did over her empire sixty years ago. Change in the economic pecking-order is happening again whether we like it or not and China will have her way.

  * * *

  And, as a reminder from 2013, here again is the “US vs China Currency War For Dummies”

  

  

  

  

  

  

• Speak, That I May See Thee

  My stomach rolled over when I read this post from ZeroHedge about Suze “the teeth” Orman. She tweeted out the following, indicating not only that she’s so well off that she’s just going to kick back for a year, but that she wants Yellen to “help us out” since we’ve all suffered the unspeakable calamity of stocks actually going down a few percent.

  

  Right on the heels of this, everyone’s favorite financial clown, Jim Cramer, sycophantically acknowledged the counsel of his “good friend’ and retweeted her plea:

  

  What struck me, thumbing through the reactions, was the sharp contrast between those who apparently support these two nincompoops and those who didn’t. The tone of the naysayers was along these lines:

     

  So we have a plethora of intelligent, well-spoken people pushing back against these disgusting bulls who demand to suck at the government teat until the end of time. In sharp juxtaposition to this, here’s a sampling of those who applaud Suze and Jimze:

  

  

  

  We have a smattering of bleating (“request help!”), illiteracy to a degree that I didn’t think possible (“advise” instead of “advice” and “invester’s“, which manages to not only be misspelled but also is an oaf-like way of attempting to express a plural noun), and the completely deluded notion that Janet Yellen is sitting around reading tweets from the likes of these buffoons.

  I’ve said it before, and I’ll say it again: stock market bulls are welfare queens par excellance, and I suppose we should not be surprised that since they’ve been on the dole since October 2008, that they’ve become very accustomed to what is a gargantuan version of the entire nation arranging to be receiving liability checks from the federal government since actually working is just too hard.

  

  

  

  

• Clinton Madison: Tying It All Together

  There is at least one hacked account that is sure to have been mysteriously deleted… You know, for personal reasons.

  

  h/t @joshgreenman

  

  

  

  

  

• Productivity In America Now On Par With Agrarian Slave Economy

  Submitted by Eugen Bohm-Bawerk

  In the first episode we showed how the US became an unsustainable service sector based economy from the 1970s onward when service sector employment diverged from manufacturing without a corresponding boost in productivity. In the second episode we laid out the consequences that transition has had on labour in terms of lower wages and benefits. In addition, we reiterated our argument that monetary policy has become slave to the service sector as it has become linked to the much touted wealth effect (capital consumption) that is now an integral part of the American business cycle.

  Now it is time to take a closer look at productivity measured in terms of GDP per capita. While this is not an entirely correct way to measure productivity, it does adhere to new classical growth model theories which posit that in a developed economy, reached steady state, the only way to increase GDP per capita is through increased total factor productivity. In plain English, growth in GDP per capita equals productivity growth. The reason we use this concept instead of more advanced productivity measures is to get a long enough time series to properly understand the underlying fundamental forces driving society forward.

  In our main chart we have tried to see through all the underlying noise in the annual data by looking at a 10-year rolling average and a polynomial trend line.

  In the period prior to the War of 1812 US productivity growth was lacklustre as the economy was mainly driven by agriculture and slaves (slaves have no incentive to work hard or innovate, only to work just hard enough to avoid being beaten). From 1790 to 1840 annual growth averaged only 0.7 per cent.

  As the first industrial revolution started to take hold in the north-east, productivity growth rose rapidly, and even more during the second industrial revolution which propelled the US economy to become the world largest and eventually the global hegemon (see bonus chart at the end).

  As a side note, it is worth noting that while the US became the world largest economy already by 1871, Britain held onto the role as a world hegemon until 1945. Applied to today’s situation in light of the fact that China is, by some measures, already the largest economy on the planet, it does not mean it will rule the seven seas anytime soon. In our view, they probably never will, but that is a story for another time.

  

  Adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold. The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2 per cent from 1975 up to today. If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.

  In addition, the last 15 years also saw an outsized contribution to GDP from finance. If we look at the US GDP by contribution from value added by industry we clearly see how finance stands out in what would otherwise have been an impressively diversified economy.

  

  With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3 per cent from 2000 to 2015. From 2008 the annual average has been negative 0.5 per cent!

  In other words, we have seen a progressive (pun intended) weakening of the US economy from the 1970s and the reason is simple enough when we know that monetary policy broken down to its most basic is a transaction of nothing (fiat money) for something (real production of goods and services). Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.

  The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.

  Do this on a grand scale, over a long period of time, even a capital rich economy as the US will eventually be depleted. Capital per worker falls relative to competitors abroad, cost goes up and competitiveness falls (think rust-belt). Productive structures cannot be properly funded and the economy must regress to align funding with its level of specialization.

  In its final stage, investment give way for speculation, and suddenly finance is the most important industry, pulling the best and brightest away from every corner of the globe, just to find more ingenious ways to maximise capital consumption.

  As the slave economy got perverted by incentives not to work, so does the speculative fiat based economy, which consequently create debt serfs on a grand scale.

  Bonus chart:

  

  

  

  

  

  

• Jim Chanos' Dire Prediction On China: "Whatever You Might Think, It's Worse"

  “In fact, like many of us, sometimes they don’t have a clue.”

  That’s from Jim Chanos, who sat down on Friday with CNBC’s Fast Money A-Team which, like the rest of the mainstream financial media punditry, can’t seem to figure why things unravelled so quickly last week. 

  Chanos was referring to the Chinese government and more specifically to their efforts to simultaneously manage a decelerating economy, a currency devaluation, and a bursting stock market bubble.

  As we’ve said on too many occasions to count, the task is quite simply impossible, a reality which often manifests itself in contradictory policy initiatives and directives emanating from Beijing. Despite the plunge protection national team’s best efforts to channel some CNY900 billion into SHCOMP large caps, China’s stock market looks to be on the verge of an outright meltdown, and the effort to support the yuan after the devaluation is draining liquidity and tightening money markets, rendering policy rate cuts less effective even as further easing becomes more necessary with every FX intervention. 

  In short, the situation is, as Chanos puts it, “worse than you think,” and because it’s sometimes hard to get through to CNBC’s Halftime crew, Chanos reiterated the sentiment: “Whatever you might think, it’s worse.”

  See the interview below.

  

  

  

  

  

• "The Seven Year Glitch" – Has The Time Come

  A couple of interesting charts from State Street’s “Mr Risk” Fred Goodwin, courtetsy of Saxo’s Steen Jakobsen, both of which deal with business cycles, the first in the economy by way of the Citigroup surprise index which may have recently hit its local maximum and is now due for a substantial deterioration, in line with virtually all other high frequency economic indicators except for the job market which is kept afloat courtesy of low-quality, low paying waiters and bartender jobs (resulting in the “surprising” zero wage growth).

  

   

  The second one is more suggestive: it looks at key events occuring in 7 year cycles, finds that every recent multiple of the year 2015 going back in 7 year increments brings
  with it some major adverse market event, and asks: is it 2015’s turn?

  

  

  

  

  

  

• What Does The Fed Do Now? The FOMC Decision Tree

  Over the past few months, numerous so-called “experts” (they know who they are) desperately tried to come up with both their own facts and their own history by saying that, far from fearing the Fed’s decision, “a rate hike would be good for stocks.” Well, as last week’s historic VIX surge, and biggest market plunge in years confirmed, that was not the case. In fact, what happened is what we summarized in 7 words late last week:

  The Rate Hike Tantrum has finally arrived

  — zerohedge (@zerohedge) August 20, 2015

  In short: the market made it very clear that a rate hike is not welcome. Promptly other so-called “personal finance experts” joined in the demands for a bailout.

  Others, such as Bank of America, were slightly more tongue-in-cheek in their “explanation” of what it would take for the Fed to panic and not only delay rate hikes but pass Go and proceed straight to QE4 (for those who missed our post on the topic, the answer is go short Glencore and Noble Group).

  But back to the $64TN question: what does the Fed do? One attempt at an explanation taking into account last week’s market plunge comes from Nomura, which provides a “2015 Scenario Analysis” in which it “breaks down various monetary policy (rate hike options) and rates market implications ahead.”

  This is the summary:

  The minutes to the July meeting revealed that the Committee has doubts about a variety of aspects of the economic outlook, including growth, inflation, and developments abroad. Incoming data since the July FOMC meeting have not really answered those questions, all the while financial conditions have tightened materially recently. As such, we believe that the probability the FOMC will raise short-term interest rates for the first time in September has decreased materially while the probability of liftoff in December or no interest rate increase this year has increased. We now only put a 20% probability of liftoff in September (previously 35%) while we have raised the likelihood of liftoff in December to 44% (previously 40%) and liftoff after December to 36% (previously 25%). 

  Here are the details broken down by meeting:

  The September FOMC meeting

   

  We think there is only a 20% likelihood that the FOMC will decide to raise interest rates at its meeting in September. The minutes to the July meeting revealed that the Committee has doubts about a variety of aspects of the economic outlook, including growth, inflation, and developments abroad (see Minutes of the July FOMC Meeting, Policy Watch, 20 August 2015). Incoming data since the July FOMC meeting have not really answered those questions. Moreover, developments abroad, notably in China, have raised new questions about the outlook for the rest of the global economy. Last, as noted above, financial conditions have tightened materially.

   

  A decision to raise interest rates at the FOMC meeting in September would probably require a combination of factors. The economic data released between now and the meeting—both real side and inflation—would have to surprise to the upside. Developments abroad and financial conditions would have to stabilize. There would have to be a strong consensus within the Committee on the need to start the interest rate adjustment sooner rather than later. This is certainly possible, but it does not seem likely.

   

  We will get some new data between now and the September FOMC meeting (see Fig. 10). But the amount of additional information that the FOMC will have at its September meeting will be limited. An important reason why we doubt that the FOMC will raise rates in September is that there simply isn’t enough time to answer the questions that the Committee seemed to be struggling with at its meeting in July.

   

  The December Meeting

   

  If the FOMC does not raise rates at its meeting in September (and it stays on hold in October), the issues that will drive a decision in December are mostly the same. That is: a decision will depend on the outlook for growth and inflation, financial conditions, and developments abroad. We think there is a good likelihood (55%) that the economy will have evolved in a way that leads the FOMC to initiate liftoff in December. We think that positive fundamentals for consumers will drive stronger spending. We think that investment will recover as drilling activity in the oil gas sector stabilizes. We think that housing activity will continue to grow at a healthy pace. We think that growth in China will remain on target and that financial conditions are likely to stabilize. We think that labor markets will continue to improve. We think that a forward-looking assessment of inflation will be more positive. The additional time between the September and December meetings will make all of these positive developments apparent.

   

  Of course, there may not be enough progress on these measures to convince the Committee that it is time to raise short-term interest rates. Moreover, concerns about year-end issues may cause it to delay liftoff until next year.

  For what it’s worth, we remain in “concerns about year-end issues” camp (clearly the Fed realizes there is nothing quite as destructive as 6 inches of snow to the Apple Sachs Industrial Average, pardon the world’s biggest economy as the past two “harsh winters” have shown), or in the worst case: a rate hike followed promptly by QE4.

  Here, for those who naively still think the Fed is data-driven, here is Nomura’s full decision-tree.

  

  

  

  

  

  

• A Modern-Day Shoeshine Boy Moment

  By Pater Tenebrarum of Acting Man

  A Modern-Day Shoeshine Boy Moment

  There is a well-known – though likely apocryphal – anecdote from the end of the roaring 20s. It involves Joseph P. Kennedy, US ambassador to the UK from the late 1930s to mid 1940s. Before he entered the civil service and politics, he had made a name (and a fortune) for himself as a businessman and investor. On Wall Street he inter alia ran the Libby-Owens-Ford stock pool with a number of Irishmen, a loose association of investors pooling their resources and dedicated to manipulating the hell out of Libby-Owens-Ford stock by deftly using insider information to their advantage.

  Today he would be deemed a criminal, but at the time his activities on the stock exchange were perfectly legal and he was widely admired for being a wily operator. Rightly so, we should add.

  

  Meet Joseph P. Kennedy, wily Wall Street operator.
  Photo credit: Wide World Photos

   

  As the story goes, Kennedy realized several months before the crash of 1929 that he had to get out of the market. What made him realize it was this: In the winter of 1928, he decided to stop to have his shoes shined before going to his office. When the shoe-shine boy had finished, he suddenly offered Kennedy a stock tip, without having been solicited to do so: “Buy Hindenburg!”

  Kennedy is said to later have told people that he sold off his stock market positions shortly thereafter, as he was thinking: “You know it is time to sell when shoeshine boys start giving you stock tips. This bull market is over.”

  

  A member of the anonymous stock tipsters association at work
  Photo credit: pa/akg

  A Modern-Day Equivalent

  The unusual escalation in the stock market’s recent weakness (right into an options expiration – this is practically unheard of these days!) and our brief discussion of the situation yesterday (see “The Stock Market in Trouble” for details), caused us to wonder whether we could think of anything along similar lines that has happened recently.

  Of course we are no Joseph Kennedy, but we are continually exposed to market-related information, including assorted spam. Keep in mind in this context that after Kennedy received his shoeshine boy warning, the market still rose for another eight months. So there is a certain lead time involved when the shoeshine boy bell rings, and given the market’s oversold state, it may actually be ripe for a bounce here.

  As we also noted yesterday, the current bubble is not comparable to the mania that culminated in the year 2000. At the time, one could actually watch out for very close equivalents to the shoeshine boy, given the huge participation of retail traders in the market. Nowadays we have a “bubble of professionals”, so we must look for something slightly different. And we have found it – or rather, it actually fell into our lap yesterday, or rather, suddenly appeared in our inbox.

  What we found there was this ad:

  “Capture Top Momentum Opportunities! Investing in securities or asset classes with positive price momentum can potentially deliver higher returns than a traditional buy-and-hold strategy. The Horizons Managed Multi-Asset Momentum ETF (“HMA”) is the first actively managed ETF in Canada to give investors access to a globally diversified portfolio of momentum investment opportunities.”

   

  Just to make that clear, we don’t want to pick in any way on the firm offering this undoubtedly well-managed (if potentially crash-prone) product. We are quite sure countless other examples along similar lines exist, but we were certainly struck by the timing of this offer. It almost screams “shoeshine boy”.

  This became even more clear when a friend shortly thereafter pointed us to the following chart published by Bloomberg :

  

  The “momentum trade” over the past 11 months, click to enlarge.

  To be sure, the associated Bloomberg article expresses a certain degree of skepticism, which could end up giving this trade another lease of life:

  “Virtually nothing has worked better in this year’s thinning equity market than momentum, where you load up on stocks that have risen the most in the past two to 12 months and hope they keep going up. Sent aloft by sustained rallies in biotech and media shares, concern is mounting that the trade has gotten too popular, setting the stage for sharper swings.

   

  […]

   

  With breadth narrowing before the Federal Reserve raises rates, sticking with winners has been a blueprint for success in 2015.

   

  […]

   

  Individual investors have noticed. One of the largest exchange-traded funds employing the tactic, the iShares MSCI USA Momentum Index Fund, lured a record $125 million in July, boosting its total by about a fifth. It hasn’t had a single month of outflows since it started in 2013.

   

  Owning it has paid off, too: the fund is up 8.2 percent in 2015, compared with 1.8 percent in the S&P 500. Another ETF, the Powershares DWA Momentum Portfolio, recently saw assets cross $2 billion and has returned more than 7 percent this year. Still, some of the trades contributing the success have been weakening.”

  (emphasis added)

  All in all we would say that it is probably not the most auspicious moment in time to offer yet another “momentum” ETF to the public – even a “multi-asset” one.

   

  Conclusion:

  In recent days, the market’s momentum darlings have suffered a bit. We cannot say with certainty if they deserve to be called “former momentum darlings” already, as there is always a chance that they will rebound shortly. Especially with us poking fun at the concept, they might decide to poke back (good thing we are wearing glasses, so they can’t poke us in the eye).

  Readers are more than welcome to tell us their shoeshine boy stories, if they have any to tell. We would certainly consider publishing the best ones (mail us at info@acting-man.com, or alternatively use the comments section if you need to get it off your chest right away).

  

  

  

  

  

  

• Is This Where The Long Lost Nazi "Gold Train" Is Located

  Earlier this week, two people, a Pole and a German, said they may have found the legendary, long-lost Nazi train rumored to be full of gold, gems and guns, i.e., the prize possessions of years of Third Reich plunder, that disappeared just before the end of World War Two. As BBC first reported, the train was believed to have gone missing near what is now the Polish city of Wroclaw as Soviet forces approached in 1945.

  It is said, the Mail adds, that Nazis loaded all the valuables they had looted in Wroclaw, then called Breslau and part of Greater Germany, to escape the advancing Red Army. According to a local website, the train was 150m long and may have up to 300 tonnes of gold as well as unknown “hazardous materials” on board.

  

  A law firm in south-west Poland says it has been contacted by the two men who have discovered the armored train: their demand to unveil the precise whereabout of their discovery: 10% of the value of the train’s contents. Since the contents of the train has been said to be in the billions, such an agreement would make the two discoverers rich overnight.

  

  The two men who claim to have found the long lost gold train

  According to local news websites the apparent find matched reports in local folklore of a train carrying gold and gems that went missing at the end of World War Two near the gothic Ksiaz castle, which served as the Nazi’s headquarters in the area during World War II. The claim was made to a law office in Walbrzych, 3km (2 miles) from Ksiaz castle.

  

  Ksiaz castle, Nazi headquarters during World War II

  Some of the locals are skeptical, perhaps because all previous searches for the train had so far proved fruitless: Walbrzych’s local leader Roman Szelemej said he doubted the supposed find but would monitor developments. “Lawyers, the army, the police and the fire brigade are dealing with this,” Marika Tokarska, an official at the Walbrzych district council, told Reuters.

  Still this time may be different: Joanna Lamparska, a historian who focuses on the Walbrzych area, told Radio Wroclaw the train was rumored to have disappeared into a tunnel. “The area has never been excavated before and we don’t know what we might find.”

  At this point the story turns bizarre, because the latest discovery – if it is indeed that – may not be genuine: according to the Mail, a group calling itself The Silesian Research Group insists that it in fact found the legendary train here over two years ago.  The group claims the  duo who made the news this week by filing the discovery claim with local authorities pilfered their information.

  

  There is a second group of treasure hunters who claim to have found the train.
  Andzrej Boczek, one of the members, showed MailOnline where he believes it to be hidden 

  One group member, who asked not to be identified after receiving threatening phone calls from a ‘mysterious man,’ told MailOnline: ‘About two or three years ago we carried out extensive research of the area using geo-radar and magnetic readings. We came across an anomaly about 70 metres below the surface and further investigation revealed this was most likely a train.

  ‘It is well-known that the Nazis built a network of railway lines under the mountains.

  ‘And we know that in May 1945 gold and other valuables from the city of Wroclaw were being transported to Walbrzych when they disappeared between the towns of Lubiechow and Swiebodzice.’

  Resting at the foot of the Sowa (Owl) mountains in woods three miles outside of the town of Walbrzeg in western Poland, is the alleged train, filled with gold, possibly diamonds and maybe even masterpieces stolen from Polish noble families and museums. Specifically, according to the researchers, the actual train is now resting somewhere under the surface of the hill shown in the photo below.

  

  The “gold train” is said to be located under this hill

  The researcher went on: ‘During the war, there used to be an SS barracks here which was heavily guarded. And just behind the railway bridge was the entrance to the tunnel. We recorded our findings and marked the location on a map as well as storing the information on computer records.”

  Here the researcher’s story becomes even more bizarre: “We were and are convinced that this is where the gold train is. But, soon after our discovery, the map and data for the area went missing. At first we thought it had been mislaid, but then we heard about the findings of these two people and we realised they must have got hold of our information.”

  He then added that he had been ‘warned off’ talking about the subject or investigating it further” adding that “last night I received a phone call from a mysterious man who warned me to stay away from the story and to not get involved.

  “A lot of dangerous people are interested in finding this train, this could have been a warning from one of them. This man who called me knows that I know something.”

  Joanna Lamparska explains that there are two main theories about the gold train. “One is that is hidden under the mountain itself. The second is that it is somewhere around Wa?brzych. Until now, no-one has ever seen documents that confirm the existence of this train.”

  The story is given credence because under the local hills is a mammoth subterranean project called RIESE – German for giant – which was the construction of a honeycomb of tunnels, bunkers and underground stations begun in 1941. 

  Stretching from the gothic castle of Ksiaz overlooking the town of Walbrzeg they built the labyrinth deep into the surrounding mountains. The idea was to move supplies, factories and workers underground in the event of Allied bombing.

  

  One of a series of tunnels the Nazis built in the mountain

  Local explorer and treasure hunter Andrzej Boczek, who is also a member of the Silesian Research Group, guided MailOnline to the site where he says the train is buried. He said: ‘We think it is here because first of all it is between the two places were we know it disappeared. And it is just 2.37km from Ksiaz castle which was the German headquarters during the war. That’s where all treasures were taken.’

  The 55-year-old, who has been searching the region for 25 years and has already found numerous artefacts, said: ‘Also, this path used to be where the path ran down to the tunnel,’ he says pointing at a dirt track leading towards the woods. “We don’t know where the entrance is as we need permission to dig. But we have carried out tests and we know something is there. During the war this place was open to the public and then it suddenly was closed by the Germans, they clearly had a secret to hide. A man who lived nearby told me he used to see strange activity at night with trains rolling in and disappearing into the tunnel.”

  Two other locations identified by local media in Poland have since been rubbished by experts. One is close to the town of Walbrzych the other in the town of Walim, 17km away. Historian Mrs. Lamparska added: “These two areas are very well known and have been well-researched. The chances of the train being there are zero. It is likely that they found something, however, whether this is the gold train is a different matter.”

  But while the latest rumor that the legendary train has been found may end up being a red herring once again, people in the region have woken up their Indiana Jones and are rushing into the area: the news of the possible discovery has sent people from across Germany and Poland to the area with metal detectors. Germans piling on to trains the spoils of their carpetbagging in foreign lands towards the end of the war was not a rare occurrence. And the Reichsbank in Berlin, many of its buildings and vaults shattered by intense American and British air raids, used precious Deutsche Bahn rolling stock to hide treasure in regional towns, often in the cellars of fortified post offices.

  The loot was destined for a number of purposes: getaway money for high-ranking war criminals, the basis for a German resistance movement called ‘Werewolf’ intended to fight the occupiers; and to become the pension funds for generals whose vast estates bequeathed to them by a grateful Fuhrer in the east which fell into the hands of new, unforgiving owners.

  That is why the story of the 590-foot long train which steamed into the tunnel long ago has fired the imagination of many. But it also comes with many caveats, as expressed by Focus magazine in Germany, which asked: ‘Is there really a train and is it mined?

  Real or not, the story may be enough to provide an aspiring screenwriter enough ammo for the next Indiana Jones, or at least American, er European, Treasure sequel.

  Finally, for those looking for real treasure, forget the Third Reich’s plunder, which by 1945 had been mostly spent, but focus on trains and other vehicles operated by the Bank of International Settlements: the discovery of even one such train should be enough to keep a small country funded in perpetuity.

  

  

  

  

  

• Making Sense Of The Sudden Market Plunge

  Submitted by Chris Martenson of PeakProsperity

  Making Sense Of The Sudden Market Plunge

  The global deflationary wave we have been tracking since last fall is picking up steam.  This is the natural and unavoidable aftereffect of a global liquidity bubble brought to you courtesy of the world’s main central banks.  What goes up must come down – and that’s especially true for the world’s many poorly-constructed financial bubbles, built out of nothing more than gauzy narratives and inflated with hopium.

  What this means is that the traditional summer lull in financial markets has turned August into an unusually active and interesting month. August, it appears, is the new October.

  Markets are quite possibly in crash mode right now, although events are unfolding so quickly – currency spikes, equity sell offs, emerging market routs and dislocations, and commodity declines –  that it’s hard to tell for sure.  However, that’s usually the case right before and during big market declines.

  Before you read any further, you probably should be made aware that, at Peak Prosperity, our market outlook has been one of extreme caution for several years.  We never bought into so-called “recovery” because much of it was purely statistical in nature, and had to rely on heavily distorted and tortured ‘statistics’ to be believed.  Okay, lies is probably a more accurate term in many cases.

  Further, most of the gains in financial assets engineered by the central banks were false and destined to burstbecause they were based on bubble psychology, not actual returns.

  Which bubbles you ask?  There are almost too many to track. But here are the main ones:

  • Corporate bond bubble
  • Corporate earnings bubble
  • Junk bond bubble
  • Sovereign debt bubble
  • Equity bubbles in various markets (US, China) and sectors (Tech, Biotech, Energy)
  • Real estate bubbles, especially in the commodity exporting countries
  • Central bank credibility bubble (perhaps the largest and most dangerous of them all)

  What’s the one thing that binds all of these bubbles together?  Central bank money printing.

  Passing The Baton

  Operating in collusion, the world’s major central banks passed the liquidity baton back and forth between them, first from the US to Japan, then from Japan to Europe, then back to the US, then over to Europe again where it now resides.  Seemingly endless rounds of QE that didn’t always do what they were supposed to do, and plenty of things they were not intended to do.

  The purpose of printing up trillions and trillions of dollars (supposedly) was to create economic growth, drive down unemployment, and stoke moderate inflation.  On those fronts, the results have been dismal, horrible, and ineffective, respectively.

  However, the results weren’t all dismal.  Big banks reaped windfall profits while heaping record bonuses on themselves for being at the front of the Fed’s feeding trough. The über-wealthy enjoyed the largest increase in wealth gains in recorded history, and governments were able to borrow more and more money at cheaper and cheaper rates allowing them to deficit spend at extreme levels.

  But all of that partying at the top is going to have huge costs for ‘the little people’ when the bill comes due.  And it always comes due.  Money printing is fake wealth; it causes bubbles, and when bubbles burst there’s only one question that has to be answered: Who’s going to eat the losses?

  The poor populace of Greece is just now discovering that it collectively is responsible for paying for the mistakes of a small number of French and German banks, aided by the collusion of Goldman Sachs, in hiding the true state of Greek debt-to-GDP using sophisticated off-balance sheet derivative shenanigans. As a direct result, the people of Greece are in the process of losing their airports, ports, and electrical distribution and phone networks to ‘private investors’ — mainly foreigners harvesting the last cash-generating assets the Greeks have left to their names.

  Broken Markets

  As we’ve detailed repeatedly, our “markets” no longer resemble markets.  They are so distorted, both by central bank policy and technologically-driven cheating, that they no longer really qualify as legitimate markets.  Therefore we’ve taken to putting double quote marks around the word “”market”” often when we use it.  That’s how bad they’ve become.

  Where normal markets are a place for legitimate price discovery, todays “”markets”” are a place where computers battle each other over scraps in the blink of an eye, ‘investors’ hinge their decisions based on what the Fed might or might not do next, and rationalizations are trotted out by the media for why inexplicable market price movements make sense.

  Instead, we view the “”markets”” as increasingly the playgrounds of, by and for the gigantic market-controlling firms whose technology and market information have created one of the most lopsided playing fields in our lifetimes.

  Signs of these distortions abound. One completely odd chart is this one, showing that the average trading range of the Dow (ytd) was the lowest in history as of last week (before this week’s market turmoil hit).  And that was despite Greece, China, QE, Japan, oil’s slump, Ukraine, Syria, Iran and all of the other ample market-disturbing news:

  

  (Source)

  Based on the above chart, you’d think that 2015 up through mid-August was the most serene year of the last 120 years. Of course, it’s been anything but serene.

  The explanation for this locked-in trading range is a combination of ultra-low trading volume and the rise of the machines.  There have been times recently when practically 100% of market volume was just machines playing against each other…no actual investors (i.e, humans) were involved. 

  As long as there was ample liquidity, then the machines were content to just play ping pong with the “”market””. Which they did, crossing the S&P 500 over the 2,100 line 13 times before the recent sell-off took hold.

  But that’s not the most concerning part about having broken markets.  The most concerning thing centers on the fact that things that should never, ever happen in true markets are happening in todays “”markets”” all the time.

  One measure of this is how many standard deviations (std dev) an event is away from the mean. For example, if the price of a financial asset moves an average of 1% per year, with a std dev of 0.25 %, then it would be slightly unusual for it to 2%, or 3%.  However it would be highly unusual if it moved as much as 6% or 7%.

  Statistics tells us that something that 3 std dev movements are very unlikely, having only a 0.1% chance of happening.  By the time we get to 6 std devs, the chance is so small that what we’re measuring should only happen about once every 1.3 billion years. At 7 std dev, the chance jumps up to once every 3 billion years. 

  Why take it to such a ridiculous level? Because those sorts of events are happening all the time in our “”markets”” now. And that should be deeply concerning to everyone, as it was to Jamie Dimon, CEO of JP Morgan:

  ‘Once-in-3-Billion-Year’ Jump in Bonds Was a Warning Shot, Dimon Says

   

  Apr 8, 2015

   

  JPMorgan Chase & Co. head Jamie Dimon said last year’s volatility in U.S. Treasuries is a “warning shot” to investors and that the next financial crisis could be exacerbated by a shortage of the securities.

   

  The Oct. 15 gyration, when Treasury yields fluctuated by almost 0.4 percentage point, was an “unprecedented move” that would have serious consequences in a stressed environment, Dimon, the New York-based bank’s chairman and chief executive officer, said in a letter Wednesday to shareholders. Treasuries are supposed to be among the most stable securities.

   

  Dimon, 59, cited the incident as he waded into a debate about whether bank regulations implemented after the 2008 financial crisis exacerbate price declines by limiting the ability of Wall Street banks to make markets. It’s just a matter of time until some political, economic or market event triggers another financial crisis, he said, without predicting one is imminent.

   

  The Treasuries move was “an event that is supposed to happen only once in every 3 billion years or so,” Dimon wrote. A future crisis could be worsened because there “is a greatly reduced supply of Treasuries to go around.”

   

  (Source)

  While Mr. Dimon used the event to suggest that bank regulations were somehow to blame, that explanation is self-serving and disingenuous.  He’d use any excuse to try and blame bank regulations; that’s his job, I guess.

  Instead what happened was that our “”market”” structure is so distorted by computer trading algorithms, with volume so heavily distorted by their lighting-fast reflexes, that one of those ‘once in 3-billion years events’ resulted.

  This simply wouldn’t have happened if humans were still the ones doing the trading, but they aren’t. All the colored jackets have been hung up at the CME, and human market makers on the floor of the NYSE are rapidly slipping away into the sunset as algorithms now run the show.

  The good news about computers is that they allow our trading to be faster and cheaper, presumably with better price discovery.  The bad news is that nobody really understands how the whole connected universe of them interact and that, from time to time, they go nuts.

  As Mr. Dimon hinted, they have the chance of taking the next financial downturn and converting it into a certified financial meltdown

  How common are these ‘billion year events’?

  They happen all the time now. Here’s a short list:

  

  (Source)

  All of this leads us to conclude that the chance of a very serious, market-busting accident is not only possible, but that the probability approaches 100% over even relatively short time horizons. 

  The deflation we’ve been warning about is now at the door. And one of our big concerns is that we’ve got “”markets”” instead of markets, which means that something could break our financial system as we know and love it.

  From the Outside In

  One of our main operating models at Peak Prosperity is that when trouble starts it always begins at the edges and moves from the outside in.

  This is true whether you are looking at people in a society (food banks see a spike in demand well before expensive houses decline in price), stocks in a sector (the weakest companies decline first), bonds (junk debt yields spike first), or across the globe where weaker countries get in trouble first.

  What we’re seeing today is an especially fast moving set of ‘outside in’ indicators that are cropping up so fast it’s difficult to keep track of them all.  Here are the biggest ones.

  Currency Declines

  The recent declines in emerging market (EM) currencies is a huge red flag.  This combined chart of EM foreign exchange shows the escalating declines of late.

  

  (Source)

  Since last Monday, here’s the ugly truth:

  

  Many of these countries have been using precious foreign reserves to try and stem the rapid declines of their currencies, but I fear they will all run out of ammo before the carnage is over.

  What’s happening here is the reverse part of the liquidity flood that the western central banks unleashed.  The virtuous part of this cycle sees investors borrow money cheaply in Europe, the US or Japan, and then park in in EM countries, usually by buying sovereign bonds, or investing in local companies (especially those making a bundle off of the commodity boom that was happening).

  So on the virtuous side, a major currency was borrowed, and then used to buy whatever local EM currency was involved (which drove up the value of that currency), and then local assets were bought which either drove up the stock market or drove down bond yields (which move as in inverse to price).

  The virtuous part of the cycle is loved by local businesses and politicians.  Everything works great.  The currency is stable to rising, bond yields are falling, stocks are rising, and everyone is generally happy.

  However when the worm turns, and it always does, the back side of this cycle, the vicious part, really hurts and that’s what we’re now seeing.

  The investors decide that enough is enough, and so they sell the local bonds and equities they bought, driving both down in price (so falling stock markets and rising yields), and then sell the local currency in exchange for dollars or yen or euros, whichever were borrowed in the first place.

  And thus we see falling EM currencies.

  To put this in context, many of the above listed currencies are now trading at levels either not seen since the Asian currency crisis of 1997, or at levels never before seen at all.  The poor Mexican peso is one of the involved currencies, which has fallen by 12% just this year, and almost made it to 17 to the dollar early this morning (16.9950).  Battering the peso is also the low price of oil which is absolutely on track to destroy the Mexican federal budget next year.

  Stock Market Declines

  In concert with the currency unwinds we are seeing deep distress in the peripheral stock markets.  There are now more than 20 that are in ‘bear country’ meaning they’ve suffered declines of 20% or more from their peaks.

  Here are a few select ones, with Brazil being in the worst shape:

  

  

  

  

  All of these signs reinforce the idea that the great central back liquidity tsunami has reversed course and is about to create a lot of damage and suck a lot of debris out to sea.

  The Commodity Rout

  A lot of EM countries are commodity exporters.  They sell their minerals trees and rocks to the rest of the world, by which we mean to China first and foremost.

  Commodities are not just doing badly in terms of price, they are absolutely being crushed, now down some 50% over the past four years.

  

  (Source)

  Commodities tells a number of things besides the extent of EM economic happiness or pain – they tells us whether the world economy is growing or shrinking.  Right now they are saying “shrinking” which is confirmed by all of the recent Chinese import, export and manufacturing data, along with the dismal results coming out of Japan (in recession), Europe and the US.

  Conclusion Part I

  As we’ve been warning for a long time, you cannot print your way to prosperity, you can only delay the inevitable by trading time for elevation.   Now, instead of finding ourselves saddled with $155 trillion of global debt as we did in 2008, we’re entering this next crisis with $200 trillion on the books and interest rates already stuck at zero.  We are 30 feet up the ladder instead of 10 and it’s a long way down.

  What tools do the central banks really have left to fight the forces of deflation which are now romping across the financial landscape from the outside in?

  If the computers hiccup and give us some institution smashing or market busting 8 sigma move what will the authorities do?  Shut down the markets?  It’s a possibility, and one for which you should be prepared.

  Where are we headed with all this?  Hopefully not the way of Venezuela which is now so embroiled in a hyperinflationary disaster that stores are stripped clean of basic supplies, social unrest grows, and creative street vendors are now selling empanadas wrapped in 2 bolivar notes because they are, literally, far cheaper than napkins.  Cleaner?  Maybe not so much.  I wouldn’t want to eat off of currency.

  

  (Source)

  But make no mistake, the eventual outcome to all this is captured brilliantly in this quote by Ludwig Von Mises, the Austrian economist:

  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.

  The credit expansion happened between 1980 and 2008, there was a warning shot which was soundly ignored by ignorant central bankers, and now we have more, not less, debt with which to contend.

  Venezuela has already entered the ‘total catastrophe’ stage for its currency, but Japan will follow along, as will everyone eventually who lives in a country that finds itself unable to voluntarily abandon the sweet relief of booms enabled by credit creation.

  

  

  

  

  

• Deez Nuts On Top Of Hillary Clinton

  On Wednesday we documented the unlikely rise of dark horse Presidential candidate “Deez Nuts” who, at last count, was polling at or near 9% in three states. 

  Obviously, this is a story where the punchlines write themselves, and while there’s no doubt that some of Nuts’ popularity is simply a reflection of the fact that voters in Iowa, Minnesota, and North Carolina have a sense of humor, it also says something about the state of American politics and, indirectly, about Donald Trump’s rise to the top of the polls. Here’s how we put it:

  The endemic corruption, crony capitalism, rampant regulatory capture, and licentious logrolling that many voters have come to associate with the American political process has created a deep-seated desire for change and if there are two names which most certainly do not portend a break from business as usual inside the Beltway they are “Bush” and “Clinton.”

  And while some were disappointed to learn that Deez Nuts is actually a 15-year-old farm boy from Iowa (apparently at least some voters were hoping to see Nuts make a real run for The White House), his popularity is still growing and it certainly seems as though the media and at least one polling company are set to see just how far Deez Nuts can run (so to speak).

  Below, find a graphic which shows that search interest for Nuts is now greater than for Hillary Clinton along with the backstory from The New York Times.

  

  From The New York Times:

  The presidential candidate Deez Nuts was surging on Wednesday in a poll, albeit unscientific, in North Carolina.

   

  Deez Nuts was also the No. 1 trending topic on Twitter.

   

  For anyone who has fallen 24 hours behind the campaign news cycle, Deez Nuts is a registered independent, a supporter of a balanced budget and the Iran nuclear deal — and a 15-year-old farm boy from Iowa.

   

  In registering with the Federal Election Commission last month, Deez Nuts listed an address in rural Wallingford, Iowa, that is the home of Mark and 

   

  Teresa Olson. Mr. Olson, who farms 2,000 acres of corn and soybeans, said in an interview that Deez Nuts was his son Brady, who begins his sophomore year in high school next week.

   

  Like any surging candidate, Deez Nuts has been besieged with requests from the national news media since becoming an Internet meme, but has said he would be interviewed only by email. “School’s starting back up and I still have to sort this out,’’ he wrote to this reporter.

   

  Asked why Deez Nuts entered the presidential race, Brady replied, “To clear the way for a future third-party movement.’’

   

  Tom Jensen, the director of Public Policy Polling, said he added Deez Nuts to statewide survey three weeks ago because “the name makes people laugh, and it’s a long presidential election.’’

   

  But Mr. Jensen also drew a serious conclusion from the Deez Nuts surge.

   

  “I would say Mr. Nuts is the most ludicrous and unqualified third-party candidate you could have, but he’s still polling at 7, 8, 9 percent,’’ Mr. Jensen said. “Right now the voters don’t like either of the people leading in the two main parties, and that creates an appetite for a third-party candidate.’’

   

  After the North Carolina results, which were picked up by television news broadcast, Mr. Jensen thought the joke had run its course. But now that Deez 

   

  Nuts is receiving a wave of publicity, the pollster is curious to see if the Deez Nuts candidacy can be lifted higher. Mr. Jensen plans to include the independent in polls in New Hampshire this weekend and in a national survey next week.

  *  *  *

  Bonus: the Deez Nuts campaign platform from the candidate’s official campaign website

  Illegal Immigration

  I believe that anyone who is found as an illegal immigrant in this country must be deported back to their country of origin, with the lone exception of being a minor.

  Federal Budget & Government Spending

  I believe that the US Government should not be allowed to spend more than it makes from tax revenue. The reason we are in a budget crisis is because the two main parties refuse to compromise on this issue. Every federal official in either Congress, President, or the Cabinet, should immediately have their salary cut in half.  Once the budget is balanced, those salaries may slowly rise. If the budget returns negative, salaries go back to where they started.

  Abortion & Same-Sex Marriage

  I feel that as equal human beings that we should be allowed to choose how to live our lives without being discriminated by one another. At the same time however, I also understand that people believe that Christian religion outweighs government policy. But America is no longer mainly Christian. It is Christian, Jewish, Islam, Hebrew, and many others.

  Foreign Policy

  I support the work that John Kerry and the State Department did with the Iran nuclear deal, considering it took nearly two years to reach this point. Everyone wants a better deal, but that’s the whole point of negotiating. Look at your wants, then their wants, and meet in the middle. Now is the time  being respected instead of feared by other nations. I also feel that we need to stop being a world watchdog and limit our positions in international conflicts.

  Energy

  I support cutting subsidies to oil companies and giving tax incentives to individuals and corporations that implement green technology and renewable energy sources into their communities. I also support giving grants to communities for the purpose of installing municipal wind turbines, hydroelectric dams, and rooftop solar panels.

  Economy

  I support giving corporations tax incentives for the sole purpose of creating jobs IN America TO Americans FOR Americans. This will in turn stimulate the economy and make us more self-sufficient instead of relying on products from foreign countries.

  Territorial Voting Rights

  I support giving citizens in our American territories voting rights. I also support giving American Samoan citizens automatic US citizenship. I would give Puerto Rico 3 electoral votes since Puerto Rico is bigger than many states. Guam, the US Virgin Islands, and the Northern Marianas all get 2 since they are smaller, but still incorporated territories. Finally, American Samoa would only get 1 since it is still considered an “unincorporated” territory. This would bring the total of electoral votes from 538 to 548. I also support giving all 5 territories plus Washington, D.C. 1 seat in the House of Representatives instead of non-voting delegates. This would bring seats in the House from 435 to 441.

  

  

  

  

• Venezuela Announces Martial Law In Border State, Dispatches 1500 Soldiers

  While Venezuela’s collapse to a socialist singularity best defined by total economic devastation has been chronicled extensively here over the years…

  

  … to the point where neither the country’s hyperinflation, nor the total collapse of its currency…

  

   

  … nor its return to a barter economy, nor even the fact that it has run out of condoms, fake breasts, or beer engender much of a reaction, perhaps the only thing readers seem attuned to is when will the social implosion lead to renewed political tensions which will likely result in another violent political overthrow, one which may or may not involve the local military.

  Today Venezuela took a step in that direction when its president Maduro declared a state of emergency in a border region near Colombia following an attack by smugglers in which three soldiers and a civilian were injured, resulting in 60 days of martial law in five municipalities of the state of Tachira. He also said the closure of the border, announced on Thursday, will be extended until further notice.

  

  Petrol and food smugglers have increasingly clashed with officers. According to the BBC, Maduro said Colombian paramilitary groups regularly travel to Venezuela, generating chaos and shortages in order to destabilise the revolution.

  Many are openly speculating that the official explanation is bogus, and Maduro merely wants a pretext to deploy the army first to one state in which social tensions have led to violence and death as a test, then everywhere else where anti-government sentiment is on the rise.

  Maduro said an extra 1,500 soldiers had arrived to reinforce the area. “This decree provides ample power to civil and military authorities to restore peace,” he said in a broadcast on state television.

  

  It also empowers the local army to deal with the population as it sees fit, and in general to confirm that Venezuela society is rapidly spiraling out of control.

  On Wednesday, three Venezuelan army officers and a civilian were injured in riots with Colombian smugglers.

  Venezuela closed its border with Colombia for the first time last year.

  Colombian President Juan Manuel Santos has criticised the move. Mr Santos said ordinary people on both sides of the border, including children, would suffer the most.  “If we co-operate, the only ones to lose are the criminals, but if the border is closed, there is no co-ordination and the only ones to gain are the criminals,” said Mr Santos.

  Tensions run high along the porous 2,200-kilometre (1,370-mile) border.

  And unless the price of oil somehow rebounds, Venezuela, whose economy is entirely dependent on oil exports, will surely see tensions migrate to the capital Caracas, where a far more violent ending is assured, as well as the country’s inevitable default. Recall as of a few weeks ago, according to the CDS market VENZ was determined to be the state most likely to default in the coming months.

  

  Perhaps at this point the question is not whether Maduro will lose control – he will – but which US-baked banking interests will step in to wrest control of the Venezuelan oil industry from the state, and just how will this be implemented?

  

  

  

  

  

• Is It Time to Get into Crash Positions, Or Will The Market Just Enter A Glide Path Rather Than A Tailspin

  Submitted by Charles Hugh Smith from Of Two Minds

  Is It Time to Get into Crash Positions?

  Maybe this flight won’t go into a tailspin; perhaps it simply runs out of fuel.With stock markets diving around the globe, a pressing question arises: is it time to get into Crash Positions?

  In case you forgot how to get into Crash Positions, here’s a reminder:

  

  After a dizzying 500+ point drop in the Dow on Friday, should we brace for impact? There are plenty of fundamental and technical reasons to view the swoon this week as the initial downturn that presages a crash landing.

  But if we look at the last equivalent spike down in October 2014, we’re not so sure. Both spikes (October 2014 and August 2015) smashed through the lower Bollinger band, but the volume in last week’s plummet was nothing special compared to the 2014 swoon.

  Big moves have a bit more credence if they’re accompanied by massive volume.

  

  This leaves the door open to a sharp rebound, i.e. what followed the spike down last October.

  The Put-Call Ratio (CPC) has actually exceeded the spike of October 2014, suggesting fear and panic are at higher levels now than back then. Sharp peaks in the CPC typically signal market bottoms.

  

  But even if the market rebounds sharply, that doesn’t necessarily signal the return of higher highs. Recent lows in the CPC signaling extremes of complacency did not result in new highs; the market has been range-bound for months. This suggests the Bull is tiring–even if price pops back up.

  The SPX MACD has worked its way down to the neutral line, threatening to punch through to negative territory. Bad things tend to happen when MACD stumbles below the neutral line, and that suggests the next decline might be different from the spike-down-snapback pattern of last year.

  Is it time to get into Crash Positions? It never hurts to be prepared, but if the market pulls another October 2014 snapback here, the market could enter a glide path rather than a tailspin.

  Keep an eye on the fuel gauges. Maybe this flight won’t go into a tailspin; perhaps it simply runs out of fuel.

  

  

  

  

  

• The Demands For Another Fed Bailout Have Begun

  Back in August 2007, just as the quant funds had their first taste of what the upcoming collapse would look like and when the Fed for the first time realized that the subprime woes were “not contained” despite what Ben Bernanke had promised previously to Congress, financial comedy TV’s best known mascot, Jim Cramer had a meltdown on CNBC following Bear Stearns’ CFO admission that the fixed-income market turmoil was the worst in 22 years, ranting how the Fed “knows nothing” and how it should promptly bail out the financial system.

   

  Little did Bear Stearns know that less than 9 months later it would no longer exist, but not before the same Jim Cramer proclaimed Bear Stearns was “fine” and is not in trouble when it was trading at $62/share. A week later the company was insolvent and was handed to JPM for a forced take-out at $2/share.

   

  Fast forward 8 years when we just witnessed the biggest weekly market rout in 4 years and largest VIX surge in history, and when – like clockwork – the financial “experts” come crawling out demanding, you guessed it, another Fed bailout.

  Here is Suze Orman, self-described as “America’s Most Trusted Personal Finance Expert” who, hilariously enough, in a Twitter conversation with none other than financial comedy’s prime mascot made it quite clear how she feels about the market rout:

  I am taking this year off but it is hard to sit silently and watch these markets. Fed Chair Yellen help us out. Commit to no rate increases

  — Suze Orman (@SuzeOrmanShow) August 21, 2015

  Cramer’s prompt response was essentially a rerun of 2007:

  .@SuzeOrmanShow Could not be more right. Silence the Fed heads who say all is good. IMF is dead right! https://t.co/f1BV7JfSyr

  — Jim Cramer (@jimcramer) August 21, 2015

  The “trusted expert” chimes in, demanding someone do something to crush the selling which “did not need to happen” – after all only buying is allowed under central planning.

  @jimcramer Jim do something. This is so crazy. This did not need to happen. I know run for President.

  — Suze Orman (@SuzeOrmanShow) August 21, 2015

  The punchline, as usual, belongs to Cramer:

  Everyone should be following my good friend @SuzeOrmanShow as she is the most commonsensical individual in finance.

  — Jim Cramer (@jimcramer) August 21, 2015

  So let’s get this straight: when the Fed-manipulated market keeps levitating ever higher, even as the Fed itself admits QE has failed to help the economy, America’s “most trusted personal finance expert” is delighted.

  But once we have even a modest stock correction – arguably because stocks are no longer allowed to drop… ever – the same expert comes out demanding a bailout, because you see it was beyond her “expert” skills to prepare America for tthe inconceivable contingency of a market drop. And just in case her message is lost on someone, Cramer defines this same “expert” as the most commonsensical individual in finance.

  Is it any wonder that with “personal finance experts” such as these, that the personal finances of America have never been worse?

  

  

  

  

• Caught On Tape: Another Huge Chemical Warehouse Explosion Rocks China

  Who could have seen this coming? 

  Just a little over a week after a powerful explosion killed 114 and injured more than 700 in the Chinese port of Tianjin, it appears as though a second blast has occurred at a chemical warehouse, this time in China’s eastern Shandong province. A residential area is reportedly located just 1 km away.

  

  We’ll await the details which we imagine will suggest that, as was the case in Tianjin, many more tonnes of something terribly toxic were stored than is allowed under China’s regulatory regime which apparently only applies to those who are not somehow connected to the Politburo. Indeed, The People’s Daily is reporting that the plant contained adiponitrile, which the CDC says can cause “irritation eyes, skin, respiratory system; headache, dizziness, lassitude (weakness, exhaustion), confusion, convulsions; blurred vision; dyspnea (breathing difficulty); abdominal pain, nausea, [and] vomiting.”

  There are two videos shown below. As of now, there’s some confusion as to which is authentic.

  

  BREAKING: Chemical warehouse in Shandong exploded on Sat. Firefighters are at the site now pic.twitter.com/DdZ5o3k4sk

  — People’s Daily,China (@PDChina) August 22, 2015

  #BREAKING Explosion occurs to a chemical plant in E China’s Shandong on Saturday evening, flames spotted at site pic.twitter.com/CG9cRwlOAM

  — CCTVNEWS (@cctvnews) August 22, 2015

  From BBC:

  An explosion has been reported at a chemical plant in China’s eastern province of Shandong.

   

  Large flames can be seen from the site of the blast in Zibo County. There are so far no reports of any casualties.

   

  The People’s Daily said a warehouse at the plant exploded and firefighters are at the scene. There is a residential area about 1km from the plant.

   

  Earlier this month blasts in the northern city of Tianjin killed at least 116 people, with hundreds hurt.

   

  Unverified YouTube footage showed a massive explosion at the Shandong plant.

   

  It is not yet clear if homes in the Shandong area have been damaged.

  And from Reuters:

  The factory produced adiponitrile, a colorless liquid that releases poisonous gases when it reacts with fire, the People’s Daily said, citing the state-run Beijing Times.

   

  Seven fire brigades consisting of a total of 150 fire fighters and 20 fire engines were sent to the scene and fire brigades that are trained to work with fires involving chemicals are being dispatched, Xinhua said.

   

  Windows shattered in the village where the blast occurred, state media said, and tremors reverberated within 2 kilometers (1 mile) of the site of the explosion.

  

  

  

  

• Introducing The Gigantic And Dangerous Wall Street Loophole You’ve Never Heard Of

  By Mike Krieger of Liberty Blitzkrieg

  Introducing the Gigantic and Dangerous Wall Street Loophole You’ve Never Heard of

  
  

  This spring, traders and analysts working deep in the global swaps markets began picking up peculiar readings: Hundreds of billions of dollars of trades by U.S. banks had seemingly vanished.

   

  The vanishing of the trades was little noted outside a circle of specialists. But the implications were big. The missing transactions reflected an effort by some of the largest U.S. banks — including Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley — to get around new regulations on derivatives enacted in the wake of the financial crisis, say current and former financial regulators.

   

  The trades hadn’t really disappeared. Instead, the major banks had tweaked a few key words in swaps contracts and shifted some other  trades to affiliates in London, where regulations are far more lenient. Those affiliates remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013.

   

  Many of the CFTC employees who were lobbied in these meetings went on to work for banks. Between 2010 and 2013, there were 50 CFTC staffers who met with the top five U.S. banks 10 or more times. Of those 50 staffers, at least 25 now work for the big five or other top swaps-dealing banks, or for law firms and lobbyists representing these banks.

   

  The lobbying blitz helped win a ruling from the CFTC that left U.S. banks’ overseas operations largely outside the jurisdiction of U.S. regulators. After that rule passed, U.S. banks simply shipped more trades overseas. By December of 2014, certain U.S. swaps markets had seen 95 percent of their trading volume disappear in less than two years.

  – From the excellent Reuters article: U.S. Banks Moved Billions of Dollars in Trades Beyond Washington’s Reach

  The following story is guaranteed to make you sick. Once again, we’re shown that following trillions in taxpayer funded bailouts and backstops, TBTF Wall Street banks immediately went ahead and focused all their attention obtaining loopholes in order to transfer risk and make billions upon billions of dollars in the financial matrix, as opposed to adding any benefit whatsoever to society.

  From Reuters:

  NEW YORK – This spring, traders and analysts working deep in the global swaps markets began picking up peculiar readings: Hundreds of billions of dollars of trades by U.S. banks had seemingly vanished.

   

  “We saw strange things in the data,” said Chris Barnes, a former swaps trader now with ClarusFT, a London-based data firm.

   

  The vanishing of the trades was little noted outside a circle of specialists. But the implications were big. The missing transactions reflected an effort by some of the largest U.S. banks — including Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Morgan Stanley — to get around new regulations on derivatives enacted in the wake of the financial crisis, say current and former financial regulators.

   

  The trades hadn’t really disappeared. Instead, the major banks had tweaked a few key words in swaps contracts and shifted some other  trades to affiliates in London, where regulations are far more lenient. Those affiliates remain largely outside the jurisdiction of U.S. regulators, thanks to a loophole in swaps rules that banks successfully won from the Commodity Futures Trading Commission in 2013.

   

  For large investors, the products are an important tool to hedge risk. But in times of crisis, they can turn toxic. In 2008, some of these instruments helped topple major financial institutions, crashing the U.S. economy and leading to government bailouts.

   

  After the crisis, Congress and regulators sought to rein in this risk, and the banks fought back. From 2010 to 2013, when the CFTC was drafting new rules, representatives of the five largest U.S. banks met with the regulator more than 300 times, according to CFTC records. Goldman Sachs attended at least 160 of those meetings.

   

  Many of the CFTC employees who were lobbied in these meetings went on to work for banks. Between 2010 and 2013, there were 50 CFTC staffers who met with the top five U.S. banks 10 or more times. Of those 50 staffers, at least 25 now work for the big five or other top swaps-dealing banks, or for law firms and lobbyists representing these banks.

   

  The lobbying blitz helped win a ruling from the CFTC that left U.S. banks’ overseas operations largely outside the jurisdiction of U.S. regulators. After that rule passed, U.S. banks simply shipped more trades overseas. By December of 2014, certain U.S. swaps markets had seen 95 percent of their trading volume disappear in less than two years.

   

  While many swaps trades are now booked abroad, some people in the markets believe the risk remains firmly on U.S. shores. They say the big American banks are still on the hook for swaps they’re parking offshore with subsidiaries.

   

  Still, the banks’ victory on the swaps loophole leaves a concentrated knot of risk at the heart of the financial system. The U.S. derivatives market has shrunk but remains large, with outstanding contracts worth $220 trillion at face value. And the top five top banks account for 92 percent of that.

   

  In 2009, President Barack Obama tapped Gary Gensler, then 51 years old, to chair the CFTC. Liberals grumbled about Gensler’s résumé. The son of a cigarette and pinball-machine salesman in working class Baltimore, Gensler, at 30, had become the youngest banker ever to make partner at Goldman Sachs.

   

  Among other jobs, he oversaw the bank’s derivatives trading in Asia. Later, as an undersecretary of the Treasury, Gensler helped push through the 2000 law that had banned regulation of derivatives markets.

   

  Kenneth Raisler, a former Enron lobbyist representing JP Morgan, Citigroup, and Bank of America, argued in a letter that the CFTC should allow U.S. banks to do things overseas “even if those activities were not permissible for a U.S. bank domestically.”

  “Kenneth Raisler, a former Enron lobbyist representing JP Morgan, Citigroup, and Bank of America.”

  You just can’t make this stuff up. Gold Jerry, gold.

  Meanwhile, Obama was hard at work as always proving himself to be a capable banker coddler in order to ensure his payday upon leaving office.

  In his place, Obama nominated a long time aide to Democratic Senator Harry Reid, Mark Wetjen. Gensler and other pro-reform allies assumed that the veteran Democrat would vote with the Democrats on the commission.

   

  Wetjen, a derivatives newcomer, was not a conventional liberal. He came with an endorsement from the U.S. Chamber of Commerce, an opponent of the Dodd-Frank Act. As his policy adviser, Wetjen hired Scott Reinhart, former in-house counsel at the structured credit products division at Lehman Brothers – the bank whose collapse in 2008 set off the financial crisis.

   

  Rosen, the banks’ lead lawyer, discussed Wetjen often on calls with his bank clients. The newcomer, Rosen told them, was key to swinging the commission in the banks’ favor.

   

  Banks got dramatically more face time with commissioners after Wetjen’s appointment. In 2010, Gensler had met with the top five U.S. banks 13 times, and in 2011, 10 times. That was still more than any other staffer or commissioner at the CFTC.

   

  In the year after Wetjen’s appointment, Wetjen aide Reinhart met with the top five banks 36 times, more than anyone else at the CFTC. Wetjen himself met with the top banks second-most often, 34 times. Gensler met them less than half as frequently, as did nearly every other commissioner and staffer, according to the records.

   

  In June, Reinhart left the CFTC to join Rosen’s practice at Cleary Gottlieb.

   

  Gensler had little patience for the bank-friendly Wetjen, former CFTC officials say. As their disagreements sharpened, Wetjen’s pro-bank views seemed to harden, these people said.

   

  “Mark was struggling a little with the substance,” one former CFTC official said. “Gary treated Mark like he was a moron, and then Mark refused to budge.”

   

  “The fight over this provision was one of the biggest policy fights in all of Dodd Frank,” said Kelleher, of the think tank Better Markets. “Once the banks got that loophole, then a lot of that predatory behavior migrated overseas to wherever there was less regulation.”

   

  Goldman had already started moving to restructure its trading operations to get around Dodd-Frank. In March 2012, it sent out a four-page letter to its derivatives clients with an unusual demand. Goldman wanted clients to sign off on giving the bank standing permission to move a client’s swaps trades to different affiliates around the world, whenever and wherever the bank saw fit.

   

  Goldman called the letter the “Multi-entity ISDA Master Agreement.” It meant that a client might strike a derivatives deal with Goldman in New York in the morning, and that afternoon, with no disclosure, a Goldman office in London or Singapore or Hong Kong could take over the deal. With each shift, the trade could fall under different regulators.

  Perhaps I should ask John Hilsenrath whether it is “anti-Semitic” to point this out.

  Just in case you need a reminder of how incredibly putrid and corrupt Banana Republic America has become…

  

  The global inter-dealer market for interest rate swaps in Euros is one of the largest derivatives markets in the world. U.S. banks’ monthly share of the market had plunged nearly 90 percent since January 2013, from over $1 trillion to $125 billion, according to ISDA.

   

  The data were misleading. U.S. banks were still trading as vigorously as ever. But their trades, booked through London affiliates, without any credit guarantees linking them back to the U.S.,  were now showing up in the data as the work of European banks.

   

  In mid 2014, the Securities Industry and Financial Markets Association, a banking lobby in Washington, circulated a private memo to its members. The memo consisted of talking points banks could use to justify the de-guaranteed contracts and shifting of trades if questioned by regulators and lawmakers. 

  Where have you heard about the Securities Industry and Financial Markets Association, or SIFMA, before? Recall the following from the post, Ex-NSA Chief Keith Alexander is Now Pimping Advice to Wall Street Banks for $1 Million a Month:

  So what is Mr. Alexander charging for his expertise? He’s looking for $1 million per month. Yes, you read that right. That’s the rate that his firm, IronNet Cybersecurity Inc., pitched to Wall Street’s largest lobbying group the Securities Industry and Financial Markets Association (SIFMA), which ultimately negotiated it down to a mere $600,000 a month. In case you need a refresher on how much of a slimy character this guy is, I suggest you read the following posts…

  What would we have done without the bailouts…

  For related articles, see:

  Why Obama Allowed Bailouts Without Indictments by Janet Tavakoli

  Why Bailouts are Anti-American in One Minute by Max Keiser

  “Bank Lives Matter” – Obama Administration Makes Another Move to Protect Profits of Criminal Mega Banks

  Wall Street Moves to Put Taxpayers on the Hook for Derivatives Trades

  Cronyism Pays – Eric “Too Big to Jail” Holder Triumphantly Returns to His Prior Corporate Law Firm Job

  The U.S. Department of Justice Handles Banker Criminals Like Juvenile Offenders…Literally

  Why Obama Allowed Bailouts Without Indictments by Janet Tavakoli

  Elizabeth Warren Confronts Eric Holder, Ben Bernanke and Mary Jo White on Bankster Immunity

  Even Washington D.C. Insiders Admit Eric Holder is a Bankster Puppet

  

  

  

  

  

• 7 Million People Haven't Made A Single Student Loan Payment In At Least A Year

  Perhaps it’s all the talk about across-the-board debt forgiveness or maybe the total amount of outstanding student debt has simply grown so large ($1.3 trillion) that even those with no conception of how much money that actually is realize that it’s simply never going to paid back so there’s no point worrying about, but whatever the case, the general level of concern regarding America’s student debt bubble doesn’t seem to be at all commensurate with the size of the problem. 

  And it’s not just the sheer size of the debt pile that’s worrisome. There’s also the knock-on effects, such as delayed household formation and the attendant downward pressure on the homeownership rate, and of course hyperinflation in the rental market. 

  Of course one reason no one is panicking – yet – is that the severity of the problem is masked by artificially suppressed delinquency rates. As we’ve documented in excruciating detail, if one excludes loans in deferment and forbearance from the numerator in the delinquency calculation, but includes those loans in the denominator then the delinquency rate will be deceptively low. In any event, as WSJ reports, even if one looks at something very simple like, say, the number of borrowers who haven’t made a payment in a year, the picture is not pretty and it’s getting worse all the time. Here’s more:

  Nearly seven million Americans have gone at least a year without making a payment on their federal student loans, a staggering level of default that highlights how student debt continues to burden households despite an improving labor market.

   

  As of July, 6.9 million Americans with student loans hadn’t sent a payment to the government in at least 360 days, quarterly data from the Education Department showed this week. That was up 6%, or 400,000 borrowers, from a year earlier.

   

  The figures translate into about 17% of all borrowers with federal loans being severely delinquent—and that share would be even higher if borrowers currently in school were excluded. Additionally, millions of other borrowers who haven’t hit the 360-day threshold that the government defines as a default are months behind on their payments.

   

  Each new crop of students is experiencing the same problems” with repaying, said Mark Kantrowitz, a higher-education expert and publisher of the information website Edvisors.com. “The entire situation isn’t getting better.”

   

  The development carries big implications for borrowers, taxpayers and the economy. Economists have warned of student-debt defaults damaging borrowers’ credit standing, which would hurt their ability to borrow for things like cars and homes. That in turn would hamper the economy, which relies heavily on consumer purchases for economic activity. Delinquencies also drain government revenues, which are used to make future loans.

  So what’s the solution you ask? According to the government, the answer is the income based repayment plans. Here’s The Journal again:

  Education Secretary Arne Duncan said declines [in some categories of delinquencies] resulted from rising participation in income-based repayment plans, which lower borrowers’ monthly bills by tying payments to their incomes. Enrollment in the plans surged 56% over the past year among direct-loan borrowers.

   

  The administration has urgently promoted the plans, mainly through emails to borrowers, over the past two years in an effort to stem defaults. The plans set payments as 10% or 15% of their discretionary income, defined as adjusted gross income minus 150% the federal poverty level.

   

  The plans carry risks, though, for both borrowers and the government. Many borrowers’ payments aren’t enough to cover the interest on their debt, allowing their balances to grow and threatening to trap them under debt for years.

   

  At the same time, the government could be left forgiving huge amounts of debt if borrowers stay in the plans. The government forgives balances after 10, 20 or 25 years of on-time payments, depending on the plan.

   

  
  

  But aside from the fact that these plans will cost taxpayers an estimated $39 billion over the next decade – and that’s just counting those expected to enroll in plans going forward and ignoring the $200 billion or so in loans already enrolled in an IBR plan – the most absurd thing about Duncan’s claim is that, as we’ve shown, IBR programs don’t drive down delinquency rates, they just change the meaning of the term “payment”:

  

  See how that works? If you can’t afford to pay, just tell the Department of Education and they’ll enroll you in an IBR plan where your “payments” can be $0 and you won’t be counted as delinquent.

  So we suppose we should retract the statement we made above. You are correct Mr. Duncan, these plans are actually very effective at bringing down delinquencies and the method is remarkably straightforward: the government just stopped couting delinquent borrowers as delinquent.  

  

  

  

  

  

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• Paul Craig Roberts: "America Is A Gulag"

  Submitted by Paul Craig Roberts,

  America’s First Black President is a traitor to his race and also to justice.

  Obama has permitted the corrupt US Department of Justice (sic), over which he wields authority, to overturn the ruling of a US Federal Court of Appeals that prisoners sentenced illegally to longer terms than the law permits must be released once the legal portion of their sentence is served. The DOJ, devoid of all integrity, compassion, and sense of justice, said that “finality” of conviction was more important than justice.

  Indeed, the US Justice (sic) Department’s motto is: “Justice? We don’t need no stinkin’ justice!”

  Alec Karakatsanis, a civil rights attorney and co-founder of Equal Justice Under Law, tells the story here: http://www.nytimes.com/2015/08/18/opinion/president-obamas-department-of-injustice.html?_r=1

  See also here: http://www.opednews.com/articles/Obama-s-DOJ-Perpetrates-In-by-Rob-Kall-Dept-Of-Justice-DoJ_Dept-Of-Justice-DoJ-Failures_Eric-Holder_Injustice-150820-644.html

  The concept of “finality” was an invention of a harebrained Republican conservative academic lionized by the Republican Federalist Society. In years past conservatives believed—indeed, still do—that the criminal justice system coddles criminals by allowing too many appeals against their unlawful convictions. The appeals were granted by judges who thought that the system was supposed to serve justice, but conservatives demonized justice as something that enabled criminals. A succession of Republican presidents turned the US Supreme Court into an organization that only serves the interests of private corporations. Justice is nowhere in the picture.

  Appeals Court Judge, James Hill, a member of the court that ruled that prisoners did not have to serve the illegal portion of their sentences, when confronted with the Obama/DOJ deep-sixing of justice had this to say:

  “A judicial system that values finality over justice is morally bankrupt.”

  Obama’s DOJ says that there are too many black prisoners illegally sentenced to be released without upsetting the crime-fearful white population. According to Obama’s Justice (sic) Department, the fears of brainwashed whites take precedence over justice.

  Judge Hill said that the DOJ “calls itself, without a trace of irony, the Department of Justice.”

  Judge Hill added: We used to call such systems as people sitting in prison serving sentences that were illegally imposed “gulags.” “Now we call them the United States.”

  America is a gulag. We are ruled by a government that is devoid of all morality, all integrity, all compassion, all justice. The government of the United States stands for one thing and one thing only: Evil.

  It is just as Chavez told the United Nations in 2006 referring to President George W. Bush’s address to the assembly the day before: “Yesterday, at this very podium, Satan himself stood speaking as if he owned the world. You can still smell the sulfur.”

  If you are an American and you cannot smell the sulfur, you are tightly locked down in The Matrix. God help you. There is no Neo to rescue you. And you are too brainwashed and ignorant to be rescued by me.

  You are part of the new Captive Nation.

  

  

  

  

  

• How Big Are China's Man-Made Military Outposts? The Pentagon Explains

  Apparently, someone at the Pentagon thought that between the four-year civil war in Syria, the heightened violence in Turkey, the proxy war in Ukraine, and the threat of a new war in the Korean Peninsula, the geopolitical situation wasn’t unstable enough, because on Thursday the DoD issued a report entitled “Asia Pacific Maritime Security Strategy,” in which a considerable amount of space is spent discussing China’s land reclamation efforts in the Spratlys. 

  As you might recall, Beijing has embarked on an ambitious effort to build artificial islands atop reefs in the disputed waters of the South China Sea. The US and its regional allies say it’s an illegitimate attempt to redraw maritime boundaries and project military supremacy while China claims it’s simply doing what other countries in the region have been doing for years. The dispute came to a head earlier this year when the PLA essentially threatened to shoot down a US spy plane carrying a CNN crew.

  Below, find some interesting and provocative commentary from the Pentagon about the islands along with some telling visuals. Note that Beijing is all but sure to view this as an escalation. 

  *  *  *

  From Asia Pacific Maritime Security Strategy

  One of the most notable recent developments in the South China Sea is China’s expansion of disputed features and artificial island construction in the Spratly Islands, using large-scale land reclamation. Although land reclamation – the dredging of seafloor material for use as landfill – is not a new development in the South China Sea, China’s recent land reclamation campaign significantly outweighs other efforts in size, pace, and nature. 

  China’s recent efforts involve land reclamation on various types of features within the South China Sea. At least some of these features were not naturally formed areas of land that were above water at high tide and, thus, under international law as reflected in the Law of the Sea Convention, cannot generate any maritime zones (e.g., territorial seas or exclusive economic zones). Artificial islands built on such features could, at most, generate 500-meter safety zones, which must be established in conformity with requirements specified in the Law of the Sea Convention.

  

  Although China’s expedited land reclamation efforts in the Spratlys are occurring ahead of an anticipated ruling by the arbitral tribunal in the Philippines v. China arbitration under the Law of the Sea Convention, they would not be likely to bolster the maritime entitlements those features would enjoy under the Convention. Since Chinese land reclamation efforts began in December 2013, China has reclaimed land at seven of its eight Spratly outposts and, as of June 2015, had reclaimed more than 2,900 acres of land. By comparison, Vietnam has reclaimed a total of approximately 80 acres; Malaysia, 70 acres; the Philippines, 14 acres; and Taiwan, 8 acres. China has now reclaimed 17 times more land in 20 months than the other claimants combined over the past 40 years, accounting for approximately 95 percent of all reclaimed land in the Spratly Islands. 

  
  

  Though other claimants have reclaimed land on disputed features in the South China Sea, China’s latest efforts are substantively different from previous efforts both in scope and effect. The infrastructure China appears to be building would enable it to establish a more robust power projection presence into the South China Sea. Its latest land reclamation and construction will also allow it to berth deeper draft ships at outposts; expand its law enforcement and naval presence farther south into the South China Sea; and potentially operate aircraft – possibly as a divert airstrip for carrier-based aircraft – that could enable China to conduct sustained operations with aircraft carriers in the area.

  Ongoing island reclamation activity will also support MLEs’ ability to sustain longer deployments in the South China Sea. Potentially higher-end military upgrades on these features would be a further destabilizing step. By undertaking these actions, China is unilaterally altering the physical status quo in the region, thereby complicating diplomatic initiatives that could lower tensions.

  Ndaa a p Maritime Security Strategy 08142015 1300 Finalformat

  

  

  

  

  

• The Federal Reserve Is Not Your Friend

  Submitted by Rand Paul & Mark Spitznagel via Reason.com,

  Imagine that the Food and Drug Administration (FDA) was a corporation, with its shares owned by the nation's major pharmaceutical companies. How would you feel about the regulation of medications?  Whose interests would this corporation be serving? Or suppose that major oil companies appointed a small committee to periodically announce the price of a barrel of crude in the United States. How would that impact you at the gasoline pump?

  Such hypotheticals would strike the majority of Americans as completely absurd, but it's exactly how our banking system operates.

  The Federal Reserve is literally owned by the nation's commercial banks, with a rotation of the regional Reserve Bank presidents constituting 5 of the 12 voting members of the Federal Open Market Committee (FOMC), the body that sets targets for certain interest rates. The other 7 members of the FOMC are the D.C.-based Board of Governors—which includes the Fed chairperson, currently Janet Yellen—and are nominated by the President. The Fed serves its owners and patrons—the big banks and the federal government, while the rest of Americans get left behind.

  The Federal Reserve has the ability to create legal tender through mere bookkeeping operations. By the simple act of buying, for example, $10 million worth of bonds, the Federal Reserve literally creates $10 million worth of money and adds it into the system. The seller's account goes up by $10 million once the Fed's monies are received.  Nobody's account gets debited for $10 million. This is a tremendous amount of power for an institution to possess, and yet the Fed shrouds itself in secrecy and is accountable to no one.

  In December 2008, Congress summoned then-Fed Chairman Ben Bernanke to provide information concerning the enormous "emergency liquidity" programs that had begun during the financial crisis earlier that fall—all the new acronyms Wall Street analysts would come to know, such as TAF (Term Auction Facility), PDCF (Primary Dealer Credit Facility), and TSLF (Term Securities Lending Facility). Bernanke did not need Congress' permission to conduct those programs, but even worse, he refused to disclose the recipients of the $1.2 trillion in short-term loans that we now know were being administered behind closed doors.  This staggering secret loan payouts doesn't even include hundreds of billions in "swaps" to foreign central banks. Bernanke's rationale was that if the Fed announced the names of the big banks being rescued, then depositors and investors would flee, thus defeating the whole purpose of the rescue operations.

  Americans then and now were lectured that the trillions in loans and asset purchases were all for their own good and eventual benefit, to resuscitate the credit markets and bolster home values. Yet the truth remains—it is Wall Street that benefits from the Fed at the expense of Main Street.  To make things worse, in October 2008—one month after Lehman Brothers collapsed and precipitated the worst of the financial crisis—the Fed began exercising a new policy of paying interest on reserves. The Fed began to subsidize and directly pay the nation's bankers not to make loans to their customers and keep their reserves parked on deposit with the Fed.

  Today, Fed officials can give all sorts of technical explanations for that policy—a move that remains in effect today.  Yet your average depositor received no such direct subsidy and likely still receives almost no interest on short term deposits.

  It's unfortunately in keeping with Fed policies that disproportionately favor wealth—like low interest rates, a policy benefiting those that have the most assets and first access to borrowing, not for people who have little or no capital.

  No matter how much the Fed protests to the contrary, it shows little regard for the average Joe or Jane. Consider the types of assets it bought as the Fed's balance sheet exploded from $905 billion in the beginning of September 2008 to $2.2 trillion by the end of the year. (The Fed currently holds some $4.5 trillion in total assets, after the various rounds of "quantitative easing.")

  Rather than bailing out struggling homeowners who were underwater, with higher mortgage debt than their homes were worth, the Fed instead loaded up on U.S. Treasuries (its own IOUs) and mortgage-backed securities—the very same "toxic assets" that reflected the horrible judgment of many investment bankers and the ratings agencies that signed off on the shenanigans.  It is no coincidence that the federal government was able to run trillion-dollar-plus deficits for four consecutive years with no concern from the financial markets; everyone knows the Fed stands in the wings, willing to "print" new legal tender and sop up Uncle Sam's IOUs (which eventually come due, as we are now seeing in Greece).

  When it comes to money, politicians are often seen as the least trustworthy. But in the debate over income and wealth inequality, few people point the finger at the biggest benefactor of the wheeler dealer crony capitalists: the Federal Reserve. The nation's central bank, which regulates all other banks and has the power to create money simply by buying assets, should be under the utmost scrutiny. Yet, perversely, members of Congress have to fight an uphill battle just to audit the Fed. We do not want to politicize monetary policy (as our detractors allege), but rather simply shine a very bright light on this unaccountable and unchecked (and thus entirely un-American) power. By doing this, we may finally be able to rein it in.

  

  

  

  

  

• Mal-Asia: Politcal, Currency Crises Converge As Stocks Head For Bear Market

  As the great EM unwind continues unabated, we’ve noted that in some hard-hit countries, the terrible trio of falling commodity prices, decelerating Chinese demand, and looming Fed hike has been exacerbated by political turmoil. 

  In Brazil, for instance, President Dilma Rousseff’s approval rating is at 8% and voters are calling for her impeachment amid allegations of fiscal book cooking and corruption at Petrobras where she was chairwoman for seven years. This comes as the BRL looks set for further weakness and as the country grapples with stagflation and dual deficits. 

  In Turkey, President Recep Tayyip Erdogan has brought the country to the brink of civil war in an effort to nullify a strong showing at the ballot box by the pro-Kurdish HDP. In the process, he’s managed to put the lira under more pressure than it might already be under and indeed, the currency is putting in new lows against the dollar on almost daily basis. 

  Now, we turn to Malaysia where, as we documented exactly a week ago, the situation is tenuous at best and nearing a veritable meltdown at worst. As a reminder, here’s what happened last Friday:

  With some Asian currencies already falling to levels last seen 17 years ago, some analysts fear that an Asian Financial Crisis 2.0 may be just around the corner. That rather dire prediction may have been validated on Friday when Malaysia’s ringgit registered its largest one-day loss in almost two decades. As FT notes, “sentiment towards Malaysia has been damped by a range of factors including sharp falls in global energy prices since the end of June. Malaysia is a major exporter of both oil and natural gas, with crude accounting for almost a third of government revenue.” The central bank meanwhile, “has opted to step back from intervening in the market in response to the falling renminbi, unleashing pent-up downward pressure on the ringgit.” That, apparently, marks a notable change in policy. “The most immediate challenge is the limited scope of Malaysia’s central bank to step in,” WSJ says, adding that “for weeks, it tried to stem the currency’s slide, digging into its foreign-exchange reserves to prop up the ringgit and warning banks from aggressively trading against its currency.”

  As you can see from the following, Malaysia’s reserves are plunging in tandem with the ringgit’s collapse:

  

  On Thursday, central bank governor Zeti Akhtar Aziz was out reiterating that Malaysia has no plans to introduce a currency peg. That echoes comments she made last week, and along with a promise from Prime Minister Najib Razak that capital controls are not in the cards, is meant to reassure the market, where some fear the country may resort to the same drastic measures it undertook 17 years ago. Here’s Citi:

  The ringgit has traded to the weakest level vs. the US dollar since the 1998 Asian crisis, weakening by 30% even though BNM’s FX reserves have fallen $35bn over the past 12 months. On an effective exchange rate basis too, we estimate that the ringgit is just 1-2% from post-crisis lows. Together with the acceleration of the currency weakness in recent weeks and the unexpected jump in July CPI inflation to 3.3% – which we think is partly on account of the weaker currency – this has led investors to question how much further this move could extend.

   

  The proximate cause of the pressure on the ringgit has been the weakness in energy commodity prices, the strength of the US dollar, relatively weaker FX reserve cover, and growing political uncertainty in Malaysia. The pressure is also magnified by the large participation of foreign investors in local markets. Foreign investors’ holdings of debt were $54bn (government bonds alone accounted for $43.2bn) and of equities were an estimated $98bn (on market-capitalization basis) at end-July. Reports of foreign investors trimming their exposure and of local corporates responding by increasing currency hedges have thus added to market concern about the ringgit.

   

  Investors thus continue to look for a response from Malaysian policymakers. While we admit that heavy-handed measures are not warranted yet, the absence of policy intent even to restore confidence could further feed investors’ fear. Co-ordinated comments by Prime Minister Najib (who is also Finance Minister) and BNM Governor Zeti (highlighting still sufficient reserves, ruling out capital controls or a repeg) may have been such an attempt, although in these comments they did not suggest an intention to act to reverse or limit the pressure on the ringgit.

   

  
  

  Malaysia’s reserves stood at $94.5 billion as of August 14 and Zeti was quick to remind reporters that the country had built up its reserves “precisely for reversals.” Reversals like this:

  

  And lest anyone should think that there aren’t political considerations at play in Malaysia just as there are in Brazil and Turkey, note that PM Najib Razak is facing calls for a no-confidence vote amid allegations he embezzled some $700 million from the country’s development fund, charges which, when reported earlier this year by WSJ, caused the ringgit to fall to its lowest level against the dollar in a decade.

  “A vote of non-confidence is necessary now because Najib has made BN members of parliament beholden to him by giving them lucrative posts in the government,” former PM Mahathir Mohamad (who once called George Soros a “moron” for helping to trigger the ringgit’s previous collapse) said in a blog post on Thursday. From Reuters:

  Najib, under growing pressure over allegations of graft and financial mismanagement at debt-laden state fund 1Malaysia Development Bhd (1MDB), in August sacked his deputy, Muhyiddin Yassin, replaced the country’s attorney general and transferred officers involved in the 1MDB investigation.

   

  Mahathir, Malaysia’s longest-serving prime minister, has become Najib’s fiercest critic and withdrew support for him last year after the ruling Barisan Nasional (BN) coalition’s poor showing in 2013 elections.

   

  “A vote of non-confidence is necessary now because Najib has made BN members of Parliament beholden to him by giving them lucrative posts in the Government,” Mahathir said in a post published on his blog late on Thursday.

   

  “Even those who had come to me complaining about Najib’s administration before, upon being given posts in his government, have now changed their stand.”

   

  The 90-year-old, who was once Najib’s patron and remains highly influential in the country, has called for the prime minister to step down over the 1MDB furore.

  For his part, Najib says no one should attempt to “hijack his leadership” as the PM post is for Malyasian voters to “give and take away.”

  And while that may be true, this will do absolutely nothing to help the country’s already precarious situation and neither will persistently low crude prices, which is why when Citi asks (in the note cited above) “Malaysian ringgit, are we there yet?”, we would have to respond “no, probably not.”

  *  *  *

  Bonus: Stocks unhappy, nearing bear market:

  

  Bonus Bonus: In case anyone forgot

  
  

  

  

  

  

  

• China Tests Most Dangerous Nuclear Weapon of All Time

  Submitted by Zachary Zeck via The National Interest,

  China conducted a flight test of its new intercontinental ballistic missile (ICBM) this month.

  This week, Bill Gertz reported that earlier this month, China conducted the fourth flight test of its DF-41 road-mobile ICBM.

  “The DF-41, with a range of between 6,835 miles and 7,456 miles, is viewed by the Pentagon as Beijing’s most potent nuclear missile and one of several new long-range missiles in development or being deployed,” Gertz reports.

  He goes on to note that this is the fourth time in the past three years that China has tested the DF-41, indicating that the missile is nearing deployment. Notably, according to Gertz, in the latest test China shot two independently targetable warheads from the DF-41, further confirming that the DF-41 will hold multiple independently targetable reentry vehicles (MIRV).

  As I’ve noted before, China’s acquisition of a MIRVed capability is one of the most dangerous nuclear weapons developments that no one is talking about.

  MIRVed missiles carry payloads of several nuclear warheads each capable of being directed at a different set of targets. They are considered extremely destabilizing to the strategic balance primarily because they place a premium on striking first and create a “use em or lose em” nuclear mentality.

  Along with being less vulnerable to anti-ballistic missile systems, this is true for two primary reasons. First, and most obviously, a single MIRVed missile can be used to eliminate numerous enemy nuclear sites simultaneously. Thus, theoretically at least, only a small portion of an adversary’s missile force would be necessary to completely eliminate one’s strategic deterrent. Secondly, MIRVed missiles enable countries to use cross-targeting techniques of employing two or more missiles against a single target, which increases the kill probability.

  In other words, MIRVs are extremely destabilizing because they make adversary’s nuclear arsenals vulnerable to being wiped out in a surprise first strike. In the case of China, Beijing’s acquisition of a MIRVed capability is likely to force India to greatly increase the size of its nuclear arsenal, as well as force it to disperse its nuclear weapons across a greater sway of land to prevent China from being able to conduct a successful decapitation strike. Such a development in Delhi would upset the Indo-Pakistani nuclear balance, likely prompting Islamabad to take corresponding actions of its own.

  China’s acquisition of a MIRVed capability is also likely to upset the strategic balance with Russia. As Moscow’s conventional military capabilities have eroded since the fall of the Soviet Union, Russia has leaned more heavily on nuclear weapons for its national defense. It therefore seeks to maintain a clear nuclear advantage over potential adversaries like China. Beijing’s acquisition of MIRVed missiles threatens to erode this advantage.

  As Gertz’s notes, the U.S. intelligence community believes that the DF-41 will ultimately be able to carry up to 10 nuclear warheads. Such a development would likely force China to increase the size of its nuclear arsenal. To date, China and India (as well as the world’s other nuclear powers) have maintained relatively small nuclear arsenals compared with Russia and the United States.

  The introduction of MIRVed technologies into the Asian nuclear balance may render this no longer true. For this reason— along with its long-range and solid fuel—the DF-41 is the most dangerous nuclear weapon in China’s arsenal.

  

  

  

  

  

• "Teflon" Donald Trump Holds Giant "Pep Rally" At Football Stadium – Live Feed

  Live feed

  *  *  *

  Last weekend, Donald Trump served notice that he hasn’t lost his flair for the dramatic when, after a short flight from LaGuardia in his private 757, the brazen billionaire arrived at the Iowa State Fair in a $7 million Sikorsky.

  On Friday evening, Trump will look to one up himself in Alabama where, sensing an opportunity to create the biggest spectacle yet, his campaign decided to move a rally originally scheduled for the Mobile, Alabama Civic Center to Ladd-Peebles Stadium. 

  

  That’s right, this evening, Donald Trump will hold what he’s calling a “pep rally” at a football field that seats 43,000 people.

  We are going to have a wild time in Alabama tonight! Finally, the silent majority is back! http://t.co/Vj8vho1ro7

  — Donald J. Trump (@realDonaldTrump) August 21, 2015

  Here’s more from The Washington Post on why there’s more to the event (from a strategy perspective) than meets the eye:

  Mobile, Ala., doesn’t usually host presidential primary rallies. But this weekend it’s expected to host a doozy. Donald Trump will take over Ladd-Peebles Stadium, usually home to high school football games on Friday nights, not presidential pep rallies. Trump’s campaign shifted from a smaller venue to the stadium after seeing big demand for tickets; it expects 35,000 to attend.

   

  As with all most things Trump, there’s a level of savvy that’s not immediately apparent on the surface.

   

  Alabama is one of the so-called SEC primary states that lands early in the cycle, adding importance that Alabama doesn’t usually have.

   

  But Mobile County also lies on the Gulf Coast, one of a string of relatively populous nearby counties. It’s close to other big population centers. New Orleans is only two hours away, and Tallahassee 3½ hours. For Trump fans willing to embark on a longer drive, Birmingham and Atlanta aren’t too far, either. 

   

  
  

   

  What Trump’s doing, clearly, is not just trying to hold a rally in Mobile. He’s trying to show strength across the entire Deep South. If his grandiose expectations come true — which they have a recent habit of doing — his point will be made.

  

  

  

  

  

• (Alleged) Footage Of Hillary's Email Scrubbing Strategy

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  We’ve posted a lot of “dismal’ stuff today, but since it’s better to laugh than to cry, we give you the following…

  I don’t know what’s more horrifying, Hillary’s blatant disregard for the law, or the thought of her doing yoga.

  Thanks for playin’

  

  *Image courtesy of William Banzai7

  *  *  *

  For related articles, see:

  Released Hillary Clinton Emails Reveal…She Was Reading a Book on How to Delete Emails

  Bernie Sanders Takes the Lead from Hillary in Latest New Hampshire Poll

  So Yeah, Hillary Clinton Did Send Classified Emails From Her Private Account After All

  Hillary Clinton Blasts High Frequency Trading Ahead of Fundraiser with High Frequency Trader

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

  Arizona State Hikes Tuition Dramatically, Yet Pays the Clintons $500,000 to Make an Appearance

  How Donations to the Clinton Foundation Led to Tens of Billions in Weapons Sales to Autocratic Regimes

  

  

  

  

  

• These Currencies Could Be The Next To Tumble In Global FX Wars

  Earlier this week, Kazakhstan moved to a free float for the tenge, prompting the currency to plunge by some 25%.

  The move came after the country’s exporters could no longer stand the pain from plunging crude prices and the RUB’s relative weakness. China’s move to devalue the yuan was the straw that broke the camel’s back.

  Here, summed up in one chart, was the problem:

  

  This “may prop up growth in the country and help [the] fiscal sector to accommodate external pressures in case they continue to mount,” Deutsche Bank said, commenting shortly after the news hit. 

  In many ways, the decision to float the tenge (like the move by Vietnam to allow the dong to swing in a wider channel) is emblematic of what’s taking place in FX markets from Brazil to South Korea.

  Shockwaves from China’s devaluation have conspired with sluggish global demand and an attendant commodities slump to wreak havoc on developing market currencies the world over. For Asia ex-Japan, the outlook is especially dire, as the PBoC’s FX bombshell threatens to undermine regional export competitiveness, put upward pressure on the region’s REER, and will likely serve to further depress demand from the mainland.

  Idiosyncratic political events have only made the situation worse for the likes of Brazil, Turkey, and Malaysia. 

  Here are some brief comments from Citi:

  Is this Asian Currency Crisis Part 2? It sure feels like it. It would be more accurate to call it the Great EM Deval-Meltdown as emerging market currencies are in freefall and another peg bites the dust overnight (Kazakhstan). There are few pegs left besides Saudi Arabia and EURCZK and both are under pressure. The 1-year SAR forwards are at 12-year wides and EURCZK is pinned to the 27.00 floor. Take a look at the white chart below right which shows Malaysian Ringgit and you can get a sense of the 1997/1998 crisis vs. now. The moves are not as big yet and volatility has not exploded in the same way but it feels like we are in an EM crisis right now. Gold agrees. RIP BRICs thesis.

  Against this backdrop, Bloomberg has taken a look at which currencies “are among those most at risk from this conflux of global developments.” Here’s more:

  • Saudi Arabia’s riyal: Armed with $672 billion in foreign reserves, Saudi Arabia, the world’s largest oil exporter, has enough capacity to hold the peg, according to Deutsche Bank AG. Nonetheless, speculators are betting on a break of the currency regime as crude oil tumbled to a seven-year low. The forwards, contracts used by traders to bet on or hedge against future price moves, fell to the weakest since 2003, implying about a 1 percent decline in the riyal over the next 12 months.
  • Turkmenistan’s mana
  • Tajikistan’s somoni
  • Armenia’s dram
  • Kyrgyzstan’s som
  • Egypt’s pound: The country has limited investors’ access to foreign currencies amid a shortage since the 2011 Arab Spring protests. Traders are betting the pound will weaken about 22 percent in a year, according to 12-month non-deliverable forwards.
  • Turkey’s lira: It’s one of the world’s worst-performing currencies since China’s devaluation on Aug. 11. An escalation in political violence and the probability of early elections compound the issues.
  • Nigeria’s naira
  • Ghana’s cedi
  • Zambia’s kwacha
  • Malaysia’s ringgit: The currency slid to a 17-year low on Thursday and foreign-exchange reserves fell below the $100 billion mark for the first time since 2010.

  Below, find a bit of color on the three highlighted currencies followed by comments from Deutsche Bank on the vulnerability of various pegs going forward.

  *  *  *

  As far as Saudi Arabia and the peg go, it’s worth noting that as we outlined in detail (here and here), the Kingdom’s financial situation looks to be deteriorating as evidenced both by the country’s move to open its stock market and by the decision to tap the bond market for cash amid a draw down in FX reserves. As we put it back in June, “the move to allow direct foreign ownership of domestic equities [may reflect the fact that] falling crude prices and military action in Yemen have weighed on Saudi Arabia’s fiscal position.” Here’s a bit of additional color from Citi:

  The impact on FX reserves has been marked. The Saudi government traditionally parks its excess revenues with SAMA, the central bank, rather than with a sovereign wealth fund as is the case in some other GCC countries. As a result, fiscal reserves are co-mingled with FX reserves as SAMA invests the government deposits alongside the rest of its funds. Figure 2 shows that since last summer, when oil prices began to fall, the Saudi government has drawn down deposits with SAMA to the tune of over $100bn as it sought to finance a growing deficit. As a consequence, this has brought down SAMA’s overall FX reserve position.

   

  

  
  

  But the decline in headline reserves is a significant factor fuelling speculation in markets that the Saudi Riyal peg to the dollar may be unsustainable, and that Saudi may follow China’s lead and revalue (depreciate) or depeg its currency. 12-month forward rates have risen to 3.78 SAR to the dollar in the past week, not a huge change from 3.75 but still the highest divergence from the spot rate since 2009, which is noteworthy. 

   

  

  And some color on Egypt, also from Citi:

  Although we had expected the recovery in the economy to suffer periodic setbacks, it is clear that the Central Bank of Egypt (CBE) has become concerned. Not only has it not raised rates in response to the rise in inflation in 1H 2015, but it also allowed the EGP to weaken further in July. Although this step down in EGP was of a smaller scale than in January, it may signal that with no significant improvement in the growth of current account outlook in 2H 2015 the CBE may allow further similar scale periodic currency adjustments.

  As for the lira, we’ve said quite a bit why it’s been under so much pressure of late. In short, political turmoil and an escalating civil war have plunged the country into crisis, undermined confidence, and sent stocks into bear market territory. For the full breakdown, see here.

  Finally, we close with comments from Deutsche bank:

  Where next?

   

  The immediate implications of the Kazakh devaluation for the rest of the EMEA region should not be exaggerated. Kazakhstan’s huge loss of competitiveness relative to its largest trading partner, with which it has a customs union, made it unique. The pressure on other dollar pegs is nevertheless understandable and to varying degrees justified. Before the tenge was allowed to float freely this week, it was 11% stronger than it had been on average over the last 10 years. The four other major currencies in the region that are even more overvalued according to this admittedly simple metric all still maintain dollar pegs: the Saudi Riyal, the United Arab Emirate dirham, the Nigerian naira, and the Egyptian pound. Bulgaria, Croatia, and Romania also peg or manage their exchange rate regimes tightly, but against the euro rather than the dollar; and in their cases, currencies look more fairly valued.

   

  

  Incidentally, you would have seen all of this coming and would have been well on your way to understanding how structurally important collapsing crude prices are to global finance had you simply read “How The Petrodollar Quiety Died, And No One Noticed,” last November.

  

  

  

  

  

• A Different Perspective On Market Valuations

  Submitted by Michael Lebowitz via 720Global.com,

  Risk is not a number. Risk is simply overpaying for an asset. 

  Investment managers who avoid overpaying for assets increase their odds of purchasing fruitful investments and limiting their drawdowns when investments turn against them. Shunning overpriced assets helps one generate steadily growing investment returns which has proven to be one of the most effective ways to grow wealth over time due to the underappreciated power of compounding. While this approach sounds straight-forward, investment prudence is typically disregarded in frothy markets such as we have today and also when markets are in the grips of fear as was most recently experienced in the financial crisis of 2008/2009. In our essay “To Win, the First Thing you have to do is not Lose”, we documented how the volatility of investment returns can significantly hamper portfolio growth over the long term. In particular it stressed that large percentage losses require even larger percentage gains to simply recover original losses.  

  This article takes a unique, common-sense approach to describe the current market’s expectations for earnings growth in order to gauge the reasonableness of valuations and ultimately prices. This analysis is intended to help determine whether the currently elevated Cyclically Adjusted Price to Earnings Ratio (CAPE 10) reflects overly optimistic prospects causing investors to “overpay” for assets or is it an assessment based on realistic earnings expectations reflective of a market that is fairly priced or possibly undervalued. This determination is important for investors to understand as CAPE 10, like most valuation statistics, is currently at an extreme when viewed through the prism of historical valuations. 

  CAPE 10 and its value

  Robert Shiller’s CAPE 10 stands out amongst price to earnings (P/E) calculations in that it incorporates earnings over ten year periods, while most other P/E measures use forecasted future earnings or a relatively short period of recent earnings. The longer time frame used in CAPE 10 provides a better measure of earnings sustainability, and according to Ben Graham and David Dodd, offers a more dependable earnings proxy. It is this approach to earnings valuation that makes CAPE 10 a successful indicator of future market returns over time. The graph below, from John Hussman of Hussman Funds documents the strong correlation between CAPE 10 and future 10-year equity returns and emphasizes the durability of this approach.

  CAPE 10 Correlation with Future Market Return

  

  The following table from “The Humility of Rates and the Arrogance of Equites”, compares prior CAPE 10 readings to the average GDP in the two years following each CAPE 10 measurement. Not surprisingly, the worst S&P 500 performance occurred when CAPE 10 was high and subsequent economic growth was weak. The best returns are achieved when a low CAPE 10 was followed by strong economic growth. The current CAPE and GDP expectations are highlighted by the box at the bottom right. The numbers in the table are annualized, so doubling the results produce the potential 2-year total return.

  2yr Annualized S&P 500 Returns at Various CAPE 10/GDP Combinations

  

  The graph and table highlight that the odds of good returns are clearly in the investors favor when CAPE 10 is low and they decrease significantly when it is elevated.

  CAPE 10 today

  Before detailing the results of the analysis, the graph below offers a current perspective of CAPE 10 valuations. 

  CAPE 10  

  

  Presently, CAPE 10 is at a level seldom witnessed. CAPE 10 is on par with levels preceding the 2008/09 financial crisis and eclipsed only by the 1990’s technology bubble and the Great Depression of the 1930’s. In each of these other instances the ultimate drawdown from the peak was over 50%! The red dotted line highlights average CAPE 10 since 1900 and the black dotted line the average since 1980. The shorter time period starting in 1980 was included as some analysts prefer to rely upon the “modern era” as a baseline for analysis. The modern era includes the technology bubble which produced unparalleled CAPE 10 readings. If one excludes data from the heart of the technology bubble (1995-2001), the average CAPE 10 for the “modern era” drops from 21.44 to 18.60 during this era, closer to the 16.58 average since 1900. Compared to the full time series and the shorter “modern era”, current CAPE 10 is 60% and 24% overvalued respectively and 43% overvalued when the technology bubble is excluded from the “modern era”. Based on the current CAPE 10 ratio, investors have overly optimistic expectations for future earnings growth and are willing to pay premiums rarely seen in over 100 years. Alternatively, investors might simply be unclear about the risks they are assuming, confused by the market distortions created by the Federal Reserve’s zero interest rate policy and quantitative easing.

  CAPE 10 analysis

  The formula used here is similar to that applied in “Shorting the Buyback Contradiction” and is employed to measure earnings expectations. The formula assumes no change in the stock price (the numerator), and then calculates the rate at which earnings (the denominator) must grow in order for the market’s current P/E ratio to match its historical average. It quantifies the earnings that investors require over a given time period. With an understanding of expected annualized earnings per share (EPS) growth, one can better determine the validity of the current premium paid for each dollar of earnings versus what investors have historically paid for each dollar of earnings. To quantify the market’s assumption for earnings growth we compare the current CAPE 10 ratio to the average CAPE 10 ratio over the aforementioned time frames.

  The table below summarizes the results. Regardless of which data set (1900 or 1980 to current) one uses and which term (3 or 5 years) one selects to allow earnings to grow, currently required EPS growth is multiples of what has occurred over the last 3-5 years. U.S. Gross Domestic Product (GDP) growth, a large driver of corporate earnings, sends the same message – expectations for future performance are way too optimistic against recent observations. That is not to say these rates of growth are impossible, but the probability seems quite low and one should question the likelihood given weak economic conditions. Using the observations since 1900 in the table below to help interpret the data, annual EPS must grow 13.78% over the next 5 years to normalize the current CAPE 10 with its historic average. This is nearly double the 7.64% annualized EPS growth and 4 times the 3.45% annualized GDP growth over the prior five years. 

  

  As opposed to solving for expected earnings as we discussed above, one can also normalize CAPE 10 by keeping EPS fixed and solving for the one-time change in price that would bring the current CAPE 10 to its historical average. Those figures (-37.70% and -19.45%) are also shown above (note they are one time price changes thus identical both time periods).  Readers are heavily cautioned that during an economic and market downturn these figures likely underestimate the potential losses. If earnings drop, as is common in recessions, the price change required to normalize would be larger than shown. Furthermore, markets rarely retrace to fair value, which is to say they have a tendency to over-correct further extending the downside risk.

  Summary

  • In the long run investment success is attained through a steady stream of growing investment returns coupled with the compounding of those returns
  • The CAPE 10 ratio and many other valuation techniques are at extreme levels rarely seen in history
  • Historical precedence foretells large drawdowns at current CAPE 10 levels
  • The earnings estimates embedded within current CAPE 10 readings are likely unrealistic
  • The combination of a normalizing CAPE 10 and a concurrent decrease in earnings would be problematic for share prices
  • Wealth preservation should be top of mind for all investment managers, especially given the extreme valuations.

  When paying a premium for equities, or any asset for that matter, one runs the serious risk of capital impairment. Worse, most professional investment managers falling prey to the bullish sentiment currently surrounding this period of extreme valuations will likely not live up to their overriding fiduciary duty – the preservation of wealth.

  Following the herd may have its benefits at times, but following the herd over a cliff never ends well. 

  Ending in the words of Seth Klarman: “Risk is not inherent in an investment; it is always relative to the price paid”

  

  

  

  

  

• Is The Oil Crash A Result Of Excess Supply Or Plunging Demand: The Unpleasant Answer In One Chart

  One of the most vocal discussions in the past year has been whether the collapse, subsequent rebound, and recent relapse in the price of oil is due to surging supply as Saudi Arabia pumps out month after month of record production to bankrupt as many shale companies before its reserves are depleted, or tumbling demand as a result of a global economic slowdown. Naturally, the bulls have been pounding the table on the former, because if it is the later it suggests the global economy is in far worse shape than anyone but those long the 10Year have imagined.

  Courtesy of the following chart by BofA, we have the answer: while for the most part of 2015, the move in the price of oil was a combination of both supply and demand, the most recent plunge has been entirely a function of what now appears to be a global economic recession, one which will get far worse if the Fed indeed hikes rates as it has repeatedly threatened as it begins to undo 7 years of ultra easy monetary policy.

  Here is BofA:

  Retreating global equities, bond yields and DM breakevens confirm that EM has company. Much as in late 2014, global markets are going through a significant global growth scare. To illustrate this, we update our oil price decomposition exercise, breaking down changes in crude prices into supply and demand drivers (The disinflation red-herring).

   

  Chart 6 shows that, in early July, the drop in oil prices seems to have reflected primarily abundant supply (related, for example, to the Iran deal). Over the past month, however, falling oil prices have all but reflected weak demand.

  

  BofA’s conclusion:

  The global outlook has indeed worsened. Our economists have recently trimmed GDP forecasts in Japan, Brazil, Mexico, Colombia and South Africa, while noting greater downside risks in Turkey due to political uncertainty. Asian exports continue to underwhelm, and capital outflows are adding to regional woes. Looking ahead, we still expect the largest DM economies to keep expanding at above-trend pace but global headwinds have intensified.

  And yet, BofA’s crack economist Ethan Harris still expects a September Fed rate hike. Perhaps the price of oil should turn negative (yes, just like NIRP, negative commodity prices are very possible) for the Fed to realize just how cornered it truly is.

  

  

  

  

  

• Cop Tries To Cook Meth At Government Science Lab, Blows Up Building

  Back on July 18, Christopher Bartley (a police lieutenant for the National Institutes of Standards and Technology), tried to refill a butane lighter. 

  Or he tried to cook a batch of meth. 

  Either way, the result was the same: he accidentally blew the windows out of a highly secured government research facility.

  Bartley, who served in the army and was recently acting chief of NIST’s police department, was on duty at around 7:30 last month when an explosion “ripped through the lab sending a blast shield flying about 25 feet.”

  Firefighters got the butane lighter explanation from Bartley, but investigators became suspicious when they found pseudoephedrine and drain opener at the scene. 

  They became even more suspicious when they found a recipe for methamphetamine.

  That discovery apparently prompted Bartley to admit that in fact, the explosion was the result of an attempt to cook meth at the site. He resigned the next day and would later be charged with “knowingly and intentionally attempt[ing] to manufacture a mixture and substance containing a detectable amount of methamphetamine.”

  Open and shut, right? Not so fast, says Bartley’s attorney, Steven VanGrack. 

  You see, what looks to everyone like one man’s attempt to use a government research lab to live out a fantasy of becoming Walter White, was actually a well meaning attempt to “understand more about this substance.” It was “unauthorized training experiment,” VanGrack continues, adding that it “clearly failed.”

  Apparently, the court is meant to believe that had Bartley succeeded in cooking the drug, he was merely going to educate his fellow officers on the process, presumably in an attempt to increase awareness. 

  “He wanted to see how to make it,” VanGrack concluded.

  And on that point, there seems to be little doubt, but as Rep. Lamar Smith (R-Texas) said after the blast made news, this isn’t exactly what taxpayer money is supposed to be funding. “The fact that this explosion took place at a taxpayer-funded NIST facility, potentially endangering NIST employees, is of great concern,” Smith said, in a letter to the Secretary of the Department of Commerce (embedded below). 

  As for the facility itself, we’ll leave you with the following description from the official government website. The punchline is highlighted for your amusement:

  Welcome to the National Institute of Standards and Technology’s web site. Founded in 1901 and now part of the U.S. Department of Commerce, NIST is one of the nation’s oldest physical science laboratories. Congress established the agency to remove a major handicap to U.S. industrial competitiveness at the time—a second-rate measurement infrastructure that lagged behind the capabilities of the United Kingdom, Germany, and other economic rivals. Today, NIST measurements support the smallest of technologies—nanoscale devices so tiny that tens of thousands can fit on the end of a single human hair—to the largest and most complex of human-made creations, from earthquake-resistant skyscrapers to wide-body jetliners to global communication networks. We invite you to learn about our current projects, to find out how you can work with us, or to make use of our products and services.

  CLS to Pritzker – Lab Explosion

  

  

  

  

  

• Paul Krugman "What Ails The World Right Now Is That Governments Aren’t Deep Enough In Debt"

  This was written by a Nobel prize winning economist without a trace or sarcasm, irony or humor. It is excerpted, and presented without commentary.

  From the NYT:

  Debt Is Good

  … the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?

  Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.

  I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.

  But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.

  Why?

  One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.

  Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.

  * * *

  [L]ow interest rates, Mr. Kocherlakota declares, are a problem. When interest rates on government debt are very low even when the economy is strong, there’s not much room to cut them when the economy is weak, making it much harder to fight recessions.  There may also be consequences for financial stability: Very low returns on safe assets may push investors into too much risk-taking — or for that matter encourage another round of destructive Wall Street hocus-pocus.

  What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery. What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt.

  * * *

  Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound….

  * * *

  

  * * *

  At this point we stopped reading.

  

  

  

  

  

• Weekend Reading: Is This The Big One?

  Submitted by Lance Roberts via STA Wealth Management,

  Some month's back I posted an article entitled "No One Rings A Bell At The Top" wherein I stated:

  "The current levels of investor complacency are more usually associated with late-stage bull markets rather than the beginning of new ones. Of course, if you think about it, this only makes sense if you refer to the investor psychology chart above.

   

  The point here is simple. The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the 'ingredients' for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that 'this time is different.'

   

  Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst, they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time."

  Of course, what I didn't realize at the time was that, on Thursday, the markets would plunge like a stone sending investors running for cover and the media scrambling for answers. What caused it? Is this THE correction? What happens now?

  This weekend's reading list is a collection of thoughts as to whether the current correction is just a buying opportunity, or whether this is Redd Foxx's "Big One."

  ---

  RETORT REPORT

  Wallace Witkowski penned: "One out of four stocks on the S&P 500 Thursday are firmly in correction territory, or down 20% or more off their 52-week highs. At last count, 133 stocks on the index are bearish, according to FactSet data."

  G Shelter retorted: "Well the Bear is just growling so far. He hasn't mauled anyone yet. He's afraid of The Bullard."

  ---

   THE LIST

  1) Tom McClellan Sees Market Decline by Tomi Kilgore via MarketWatch

  At the moment, they are telling him to be bullish on the stock market for all of his trading time frames, including those that trade every few days, weeks and months. But bulls should be ready to flee, as soon as this week.

   

  That's because McClellan said his timing models suggest 'THE' top in stocks will be hit some time over the next week. He expects "nothing good for the bulls for the rest of the year," he said in a phone interview with MarketWatch."

  

  Read Also: Great News: Investors Are Dumping US Stocks by Howard Gold via MarketWatch

   

  2) The Bulls Are In Danger Of Turning Into Lemmings by Doug Kass via Kass' Korner

  "Though the bullish cabal postulates that serious market tops and corrections can only occur in response to recession, those observers may not be focused on the changing landscape of a flat, networked and interconnected world and could be failing to properly analyze failed or less effective monetary policy.

   

  The current conditions that have presaged a possible developing global economic crisis are sui generis – in a class by itself, unique and served up by a financial culture and orthodoxy that may have never existed before. And, though history rhymes, the outgrowth of malinvestment that has been emitted from current conditions is taking different forms, as it has done in each progressive cycle."

  

  Read Also: Bear Markets & Contractions: Then And Now by Chris Ciovacco via Ciovacco Capital

   

  3) The Tide Has Turned by Thad Beversdorf via Stockman's Contra Corner

  "I've been writing for almost a year now about the economic cannibalism that has been feeding earnings growth. I have discussed this concept with a dire warning that feeding earnings expansion through operational contraction is a short lived meal. And well we are now seeing the indications that the growth through contraction has now hit its inevitable end. Have a look at the following chart which is really the only chart one needs to study at this point. The chart depicts S&P 500 adjusted earnings per share (blue line), S&P Price level (green line), S&P 500 Revs per share (red line) and US Productivity of Total Industry (olive line)."

  

  Read Also: Listen Up-The Do Ring A Bell At The Top by Jim Quinn via Stockman's Contra Corner

   

  4) Big Stocks Are Last Hope For Decaying Market by Michael Kahn via Barron's

  "We can add the already falling trend in the small-company Russell 2000 to the mix, but the S&P 500 still rules. Its resilience, thanks to the strength of a limited number of big stocks, hides the fact that market breadth has been falling since April, according to the New York Stock Exchange advance-decline line. More stocks have been falling than rising. And Wednesday afternoon the number of NYSE stocks hitting new 52-week lows soared to 267. That is more than 8% of all issues traded that day, and it is quite ominous."

  

  But Also Read: S&P 500 Ready To Rally? by Tiho via The Short Side Of Long

   

  5) Is High Yield Sending A Warning by Urban Camel via The Fat Pitch Blog

  "Spreads on high yield (junk) bonds relative to treasuries have widened. This implies heightened credit risk. The widening and narrowing of spreads is correlated to equity performance over time. Since mid -2014, these have diverged (data from Gavekal Capital).

   

  Are equities setting up for a fall? The short answer is no, at least not based on this measure alone."

  

  Read Also: Junk Is Getting Junkier by Ed Yardeni via Dr. Ed's Blog

  ---

  Other Reading

  The Genius Of Warren Buffett In 23 Quotes by Paul Merriman via MarketWatch

  A False Sense Of Security by Ben Carlson via A Wealth Of Common Sense

  After 6-Years Of QE – St. Louis Fed Admits QE Was A Mistake by Tyler Durden via ZeroHedge

  The Fuss About Market Liquidity by Yves Smith via Naked Capitalism

  Debt-Financed Buybacks Has Placed Investors On Margin by Dr. John Hussman via Hussman Funds

  ---

  "Most Bull Markets Have A Copper Ceiling" – Anthony Gallea

  Have a great weekend.

  

  

  

  

  

• Carnage: Worst Week For Stocks In 4 Years, VIX Soars Most Ever

  Only one thing seemed appropriate…

   

  *  *  *

  The mainstream media really nailed this move in the past month (here and here)

  

  

  • China's worst week since July – closes at 5 month lows
  • Global Stocks' worst week since May 2012
  • US Stocks' worst week in 4 years
  • VIX's biggest weekly rise ever
  • Crude's longest losing streak in 29 years
  • Gold's best week since January
  • 5Y TSY Yield's biggest absolute drop in 2 years

  *  *  *

  Did you get message Fed?

  

   

  THE CLEAR MESSAGE FROM THE MARKETS IS – HIKE RATES AND YOU'RE DONE, GIVE US QE4 OR IT'S ALL OVER!!!

  So let's start with stocks…

  Bloodbathery… This was the worst week for global stocks (MSCI World) since May 2012

  

   

  And the worst week for US equities since Nov 2011…

  

   

  Futures show the pain started with China PMI, then dumped as Europe collapsed,  then there was no help from the machines as gamma was so imbalanced…

  

   

  Of course we saw The BoJ in da house to help squeeze stocks with some USDJPY crushing…but that only worked for the small caps (easiest to squeeze)… and then it all collapsed…

  

   

  Putting these moves in context, the red lines show how long since the US Majors are unchanged…

  

   

  Dow enters correction… this was the 9th largest point drop in the history of The Dow…

  

   

  Financials and Energy were monkeyhammered this week (as both were completely decoupled from their credit markets)…

  

   

  Financials crash…

  

   

  And Surprise!!! Energy stocks collapse to credit…

  

   

  Who could have seen that coming?

  No brainer: short energy stocks, long credit pic.twitter.com/rC05G32OkS

  — zerohedge (@zerohedge) August 11, 2015

  Carnage in AAPL slammed the Nasdaq…

  

   

  Since QE3, all but The Nasdaq are now red… (and Nasdaq is collapsing fast)…Trannies down almost 10% since the end of QE3!!

  

   

  VIX exploded this week with the biggest jump ever…

  

   

  And The VIX ETF saw its biggest 2-day rise since 2011 (no wonder with 61.7mm shares short agaionst just 60.6mm outstanding)

  

   

  As VIX catches up to credit risk…

  

   

  and before we leave stock-land, her is perhaps the 'spookiest' chart… a Fibonnaci 61.8% extension of the 2007 high to 2009 lows 'nails the top' for now… (h/t @allstarcharts )

  

  *  *  *

  OK… so let's look at bond-land. Treasury yields collapsed this week with 10Y nearing a 1 handle… 5y yield down over 17bps is the bigest absolute drop since Sept 2013

  

   

  Leaving the entire bond complex lower in yield on the year…

  

   

  And stocks finally caught down to credot's reality…

  

   

  FX Markets have seen some serious carnage this week…

  The US Dollar index futures contract was down 2.7% on the week – its biggest drop since June 2013…

  

   

  EM FX was a disaster…

  

   

  Finally – the commodity space…

  Very mixed picture with PMs holding gains (despite Silver's slam today) as industrial commodities were clobbered…

  

   

  Bloomberg's Commodity Index is at its lowest since 1999…

  

   

  Crude oil fell to a 3 handle –

  

   

  Dropping for 8 straight weeks for the first time since 1986…

  

   

  Note that gold reversed today early on after touching its 100DMA… and silver revsed today to its 50DMA

  

   

  And finally, because we suspect the mainstream media will be looking for an excuse to explain all this carnage… here is the culprit…

  This mornings culprit for the nasty sell-off pic.twitter.com/OYbBFQyYvI

  — Stalingrad & Poorski (@Stalingrad_Poor) August 21, 2015

  Charts: Bloomberg

  Bonus Chart: Today…

  @BarbarianCap not what I'm seeing pic.twitter.com/YkvyBArsgX

  — 3:30 Ramp Capital™ (@RampCapitalLLC) August 21, 2015

  

  

  

  

• Summarizing "Investor" Thoughts Today (In 1 Cartoon)

  Presented with no comment…

   

  

   

  h/t @Stalingrad_Poor

  

  

  

  

  

• You Can Buy These Companies' Cash At Up To A 60% Discount

  Several days ago, some were confused to read a Bloomberg article about Chinese cell phone maker HTC whose market cap dipped below its net cash (it has no debt), meaning one could buy its cash at a discount. Since then HTC’s stock has continued sinking, and as of today, using CapIQ data, the company’s cash of $1.7 billion, which the market is assigning value to as its only asset, was worth about 55% more than its entire market cap. This means that if one were to buy the company today, and liquidate it as it stood the same day, one would – at least on paper – buy the company’s cash at a 36% discount and end up with an immediate cash profit of more than 50%.

  Said otherwise, HTC now has a negative Total Enterprise Value (market cap plus debt less cash).

  It isn’t the only one: in this “baby with the bathwater” selling which we have seen in the past few weeks especially in EMs and China, various other such opportunities have presented themselves, and to assist readers who may be looking to buy cash at a discount of as much as 60%, we have compiled a list of some of the most prominent global companies with a negative TEV, and whose cash can be bought at a substantial discount to fair value: in some cases as much as 60%.

  Of course, it goes without saying that if a company’s cash is trading at 60% discount below fair value, there probably is a reason. So before anyone blindly rushes into these discounted opportunities, feel free to find out first just why the cash can be bought at 40 cents on the dollar…

  

  

  

  

  

  

• Why The Market Is Crashing Into The Close: JPM Explains

  Curious why someone just pulled a trapdoor from under the market? JPM’s Marko Kolanovic, head of quant strategies explains.

  Impact of option hedging on the S&P 500 into the close

  S&P 500 put option gamma exceeded call option gamma by more than $50bn prior to the option expiry this morning. This was the highest S&P 500 put gamma imbalance ever. The impact of this imbalance was evident in the intraday market momentum developed from 3:30PM to the close yesterday. The Figure below left show yesterday’s intraday price action for the S&P 500. We note that the market selloff accelerated into the close, with a 60bp fall in the last 30 minutes. Consistent with theory on the impact of gamma hedging (see our report Impact of Derivatives Hedging), this temporary market impact reversed near the market open today (57bps recovery in the first 30 minutes, right Figure).
   
  Despite the fact that S&P 500 options expired this morning, put gamma is still higher than call gamma by ~$38bn, which is a large imbalance (on account of other S&P 500 option maturities and SPY options expiring at the close). This can lead to further selling pressure into the close today.

  Given that the market is already down ~2%, we expect the market selloff to accelerate after 3:30PM into the close with peak hedging pressure ~3:45PM. The magnitude of the negative price impact could be ~30-60bps in the absence of any other fundamental buying or selling pressure into the close.

  

  Good luck.

  

  

  

  

  

• The Stock Market Is In Trouble – How Bad Can It Get?

  Submitted by Pater Tenebrarum via Acting-Man.com,

  A Look at the Broader Market’s Internals

  We have previously discussed the stock market’s deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively.

  When more than 60% of stocks in the broader market trade below their 200 dma with the SPX not too far off an all time high, it is clear that cap-weighted indexes are helped up by an ever smaller number of big cap stocks. This typically happens near important trend changes, but it is not always certain that the market will decline significantly when such a divergence occurs.

   

  

  Is he about to make his entrance?

  Cartoon via wallstreetsurvivor.com

  One possibility is also that the market merely corrects, and resume its rally once a sufficient number of stocks becomes oversold. That said, the broader market hasn’t made any headway in more than half a year, with the volatility of major indexes and averages declining to multi-decade lows. It is certainly tempting to classify this period as one of distribution, especially given recent weakness.

  In the short term, the large number of stocks in a downtrend may actually help produce a bounce, especially as some sentiment indicators such as equity put/call ratios have increased to a level usually associated with short term lows. However, we believe one has to take a differentiated approach to interpreting sentiment and positioning data at this juncture and we will explain why in more detail further below.

  First let us look at the NYA internals mentioned above. In addition to the percentage of stocks below their 200 and 50 day moving averages, we show the cumulative NYA advance/decline line in the second chart below. The A/D line has been in a downtrend since late April.

   

  

  The NYA and the percentage of stocks still above their 200 and 50 day moving averages. The market’s momentum peak occurred more than a year ago, in early July 2014 – click to enlarge.

   

  

  The cumulative NYA A/D line has peaked in late April – then a divergence between the A/D line and the NYA was created in May. Such divergences don’t have to be meaningful, but they do occur at every major trend change. In other words, there doesn’t have to be a trend change when such divergences are spotted, but no trend change happens without them – click to enlarge.

   

  

  The CBOE equity put/call ratio is currently at 0.81 – this is in the general area (0.70-1.10) that is often associated with short term lows – click to enlarge.

   

  The Sentiment and Positioning Backdrop

  Several recent articles at Marketwatch are trying to make the point that a “contrarian bullish situation” now exists. One author writes “Great News: Investors are Dumping US Stocks”, but goes on to explain that they are instead buying international and more specifically, primarily European stocks. This makes no difference in our opinion – as long as they are buying stocks, they are not bearish.

  There continues to be a widespread conviction that retail investors have to beat down the doors and rush into the market before it can top out. We believe this is actually a “bearish hook”. This has been a “bubble of professionals” for 6 years running and this isn’t going to change anytime soon. First of all, retail investors have been burned twice over the past 15 years by two of the worst bear markets in history. Secondly, demographics dictate that retiring boomers will become sellers of stocks for a number of years. They simply cannot take the risk of buying into an overvalued market again in their retirement years.

  Anther article discusses recent sentiment/positioning data and is more interesting from our perspective. As to its assertion that “insider buying has increased and has therefore turned bullish”, we would note that insiders have been dumping stocks left and right for three years running. One or two weeks of buying are hardly making a dent in the longer term picture. Moreover, we are not appraised of the sectors in which the buying is occurring. We only know fur sure that it isn’t happening in the stocks that are actually holding the market up – i.e., assorted big cap tech, biotech, retail, etc. stocks.

  As we have recently reported, there has been a huge surge in buying by insiders in the gold sector – this is very rare, and therefore worthy of attention. We strongly suspect that insider buying is also occurring in other beaten down commodity stocks, but these stocks cannot be expected to push up the market as a whole – their share of total market cap is too small (their collapse hasn’t dragged the indexes down either after all). If e.g. the stocks of copper and iron ore producers were to rally, this would be a great relief to long-suffering holders of these shares, but it wouldn’t help the overall market much. Commodities are quite oversold though, and a rally in these sectors wouldn’t surprise us.

  Let us look at some of the other factors mentioned in the article:

  1  The Investor’s Intelligence Bull/Bear Ratio, which polls investment pros on their market outlooks, fell last week for the third week in a row, to a 10-month low of 2.16. A reading below  is a clear buy signal, and we are pretty close.

   

  2  The Chicago Board Options Exchange (CBOE) put/call ratio, on a three-day basis, recently rose to 0.8. Anything above 0.7 is bullish because it represents excessive pessimism, in that the number of puts purchased compared to calls has reached relative highs. Remember, put options give the right to buy a stock at a preset price. So they can be seen as insurance against a market decline, or a bet that a drop will happen. The put/call ratio measured over the 10 days also shows a high level of pessimism, which is bullish, says Bruce Bittles, chief investment strategist at brokerage Robert W. Baird & Co.

   

  3  The Ned Davis Research Crowd Sentiment Poll recently showed extreme pessimism, also bullish in the contrarian sense.

  We will address these in more detail further below (except for the put/call ratio, which we have already commented on above), but for now we would note that all of this is important only for the short term – and it may actually not even be overly relevant to the short term. Remember what we said above: this is a “bubble of professionals” – which has made sentiment indicators highly unreliable on the way up, as many of our readers probably recall. The question is, why should they be any more reliable on the way down?

  Furthermore, all sentiment indicators that are relevant for the long term, are in the “beyond good and evil” zone and have been there for quite some time. Three of those are shown below: Margin debt, the mutual fund cash ratio, and retail money fund assets as a percentage of the S&P’s market cap. We are commenting below the charts as to their significance.

   

  

  Margin debt is just off an all time high, well above previous peaks. If the market weakens beyond a certain point, this huge amount of margin debt could easily trigger an avalanche of forced selling. It isn’t going to sink the market per se, it just creates the potential for a very large sell-off – click to enlarge.

   

  

  Mutual fund cash to assets ratio. At an all time low of 3.2%, mutual fund managers are definitely “all in”. They are not going to be buyers if the market declines – on the contrary, if they are hit with redemptions, they will turn into forced sellers as well – click to enlarge.

   

  

  Retail money market funds as a percentage of the S&P 500 market cap sits at an all time low as well, far below previous historic low points. We can safely conclude that retail investors aren’t going to step up to the plate either – click to enlarge.

   

  At the end of June we sent a list of objections to a friend with respect to the widely touted phrase that this is such a “hated” bull market. Many of the data in the list have been put together by Robert Prechter of EWI and we added a few observations of our own. The list inter alia contains references to the Investors Intelligence (II) Poll and an indicator published by Ned Davis, which are both mentioned in the Marketwatch article quoted above. We have highlighted them.

  Once again, this list shows you something that is relevant from the perspective of a different time frame – namely the long term. A dip in the II poll may help create a short term low, but the long term data on this poll are actually nothing short of frightening. Given that this was posted in late June, some of the percentages may look slightly different by now, but not by much.

  1.  The percentage of cash in mutual funds has been below 4% for all but one of the past 70 months. At the peak of the late 1990s tech mania  in 2000, it stood at 4.2%
  2.  Rydex bear assets have practically been wiped out. The amount left in bearish Rydex funds is now so small, that the ratio between bull and bear assets has soared to nearly 30. It was at approx. 18 at the year 2000 peak.
  3.  Margin debt is at an all time high (approx. 82% above the peak level of 2000 in nominal terms), and investor net worth is concurrently at an all time low, in spite of soaring asset prices (people have borrowed so much to buy stocks, that they have record negative net worth in spite of the SPX nearly at 2200 and the NAZ at a new ATH.
  4.  If the CAPE (Shiller P/E) and Tobin’s Q ratio were to peak here, it would be their fourth, resp. second highest peaks in history (since at least 1876, so we may assume all of history, as markets never got this overvalued prior to the fiat money era). The previous peaks that were close to the current ones are the who’s who of bad times to invest in stocks, to paraphrase John Hussmann: 1929, 2000 and 2007 – that’s it. No other time in history is comparable.
  5.  The valuation of the median stock and the price/sales ratios are both at all time highs (even exceeding the year 2000 peak, which hitherto stood alone as a monument to stock market insanity).
  6.  The ratio of bullish to bearish advisors in the Investor’s Intelligence survey finally eclipsed the peak of August 1987 last year. The 30-week moving average of the bear percentage is at a 38 year low, while the 200-week moving average of the bear percentage (at 21.44%) is the lowest in the entire history of the survey. There has never been similarly persistent bullishness, which is astonishing in light of the fact that the past 15 years have seen two of the four worst bear markets in history. By the way, all these sentiment-related data are the exact opposite of their readings in 1982, when the secular bull market began. Back then, people were extremely cautious and bearish, in spite of the fact that the market was up nearly 100% from its late 1974 low. 
  7.  The ratio of money in retail money funds to market cap is – you guessed it – at an all time low, by a huge margin. It is nearly 50% below the levels recorded in 2000 and 2007. People are evidently convinced that cash is trash.
  8.  The DJIA’s dividend yield has been below 3% for 96% of the time since 1995, i.e., over the past 20.5 years, the dividend yield has been above 3% in only 9 months. Prior to 1995, it managed this feat only in a single month: in September 1929.
  9.   According to Ned Davis, the stock market allocation of US households is at its third highest since 1952 – the only two exceptions are 2000 and 2007 (not the happiest moments in time to be loaded to the gills with stocks).

  We continued as follows:

  Admittedly, none of this tells us how much bigger the bubble will become. Money supply growth is still fairly brisk (TMS-2 above 8% annualized) and administered interest rates remain at zero, with the Fed evidently scared of the 1937 precedent (their entire policy is informed by a single and highly unusual event in economic history, the Great Depression). It could thus become still crazier.

  However, it would be a big mistake to call this bull market “unloved” based on anecdotal data like postings in financial forums. In reality, it is not only one of the most overvalued, but definitely one of the most over-loved markets in history, perhaps even the most over-loved overall. Many will remember the day trading craze and CNBC’s ratings in the late 1990s, and it is true that the underlying mood seems outwardly more subdued this time around (this is no wonder, as many people have a very negative assessment of the real economy. After all, the fact that the BLS is simply not counting people as unemployed once they have been jobless for a certain time period makes them no less unemployed).

   

  Let us not forget though, it is not opinions that count, but human action. And by their actions (as evidenced by the positioning data listed above), investors have never been more certain that a bull market would continue than they are today.

  There is certainly no reason to change this assessment, even though there are now signs that the market is getting sufficiently “hated” and oversold in the short term to allow for a bounce. One must not lose sight of the fact though that in spite of the strength in the major indexes, most investors are actually losing money, simply because most stocks are actually in a downtrend since April. Sentiment is simply following prices in other words.

   

  Money Supply Growth

  As we frequently point out, there is one reason not to get carried away with bearish projections either, at least not yet – and that is the pace of money supply growth. Below you can see that broad money TMS-2 has been growing at 8.4% annualized as of the end of July, while annualized growth of narrow money M1 has re-accelerated in the week to August 3 to slightly above 10%, after dipping to as low as 6.15% at the end of July. In both cases, growth is mired in a sideways to downtrend though, and may no longer be sufficient to keep the market going higher.

   

  

  Annual growth of broad money TMS-2 – click to enlarge.

   

  

  Annual growth of M1 – click to enlarge.

   

  Conclusion

  Even if it is short term oversold, this is actually a quite dangerous market – caveat emptor, as they say.

  

  

  

  

  

• Bombshell: Clinton E-Mails Were "Classified From The Get-Go", Reuters Says

  Just last night, we reported that Hillary Clinton’s campaign had finally admitted that the former First Lady’s private e-mail server – which she used to handle sensitive information while serving as Secretary of State – did indeed contain documents that have since been marked classified. 

  The admission comes after Clinton sought to appease GOP lawmakers by turning over her personal server to the FBI. Subsequently, reports suggested the server had been wiped clean while an audit of the e-mails Clinton handed in to the State Department showed that some of the threads looked to contain chatter about the CIA’s drone program. 

  Clinton’s defense – until now anyway – is that regardless of whether some of the information was retroactively stamped “classified”, it wasn’t marked as such at the time it was sent and received and therefore, no classified information was stored on her private server. As we’ve noted, those with a security clearance are expected to exercise the highest discretion when it comes to their handling of sensitive information and as such, Clinton should have been more careful. Here’s what we said on Thursday:

  While it’s certainly disconcerting that the nation’s one-time top diplomat was sending and receiving sensitive information over an unsecure private e-mail server, the issue for Clinton – because it would probably be naive to think that anyone besides voters will actually hold her accountable – is that her handling of the ordeal has served to reinforce the perception that she’s too arrogant and untrustworthy to be given the reins to the country.

   

  That is, the public was already wary of electing yet another member of America’s political aristocracy (or oligarchy, if you will) and the fact that Clinton apparently expects Americans to believe that she had no idea the information she was receiving on her home server might one day be deemed classified (even though she’s been privy to such information in various capacities for decades) seems to underscore her arrogance and highlight her propensity to, as Jean Claude-Juncker famously put it, lie when “things become serious.”

  Now, according to Reuters, Clinton’s last line of defense – that anything which is now marked “classified” wasn’t designated as such initially – may be in question. Here’s the story:

  For months, the U.S. State Department has stood behind its former boss Hillary Clinton as she has repeatedly said she did not send or receive classified information on her unsecured, private email account, a practice the government forbids.

   

  While the department is now stamping a few dozen of the publicly released emails as “Classified,” it stresses this is not evidence of rule-breaking. 

   

  Those stamps are new, it says, and do not mean the information was classified when Clinton, the Democratic frontrunner in the 2016 presidential election, first sent or received it.

   

  But the details included in those “Classified” stamps — which include a string of dates, letters and numbers describing the nature of the classification — appear to undermine this account, a Reuters examination of the emails and the relevant regulations has found.

   

  The new stamps indicate that some of Clinton’s emails from her time as the nation’s most senior diplomat are filled with a type of information the U.S. government and the department’s own regulations automatically deems classified from the get-go — regardless of whether it is already marked that way or not.

   

  In the small fraction of emails made public so far, Reuters has found at least 30 email threads from 2009, representing scores of individual emails, that include what the State Department’s own “Classified” stamps now identify as so-called ‘foreign government information.’ The U.S. government defines this as any information, written or spoken, provided in confidence to U.S. officials by their foreign counterparts.

   

  This sort of information, which the department says Clinton both sent and received in her emails, is the only kind that must be “presumed” classified, in part to protect national security and the integrity of diplomatic interactions, according to U.S. regulations examined by Reuters.

   

  “It’s born classified,” said J. William Leonard, a former director of the U.S. government’s Information Security Oversight Office (ISOO). Leonard was director of ISOO, part of the White House’s National Archives and Records Administration, from 2002 until 2008, and worked for both the Bill Clinton and George W. Bush administrations.

   

  “If a foreign minister just told the secretary of state something in confidence, by U.S. rules that is classified at the moment it’s in U.S. channels and U.S. possession,” he said in a telephone interview, adding that for the State Department to say otherwise was “blowing smoke.”

  We’re sure they’ll be far more on this to come, and while American voters are by now very much used to having “smoke” blown at them on the campaign trail, the poll numbers for Donald Trump (and, incidentally, for dark horse candidate “Deez Nuts“) would seem to suggest that the public’s patience with being lied to by America’s political aristocracy may have run out.

  

  

  

  

  

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• China's "Judgment Day" Arrives – Malicious Sellers Slam Stocks Below Communist Floor

  Chinese media are describing tonight’s market action as “Judgment Day” for China, as SCMP’s George Chen explains, the crusade of ‘malicious short sellers’ against the Communist central planners and their ‘funds’ is in full swing. The “manage-the-economy-by-technical-analysis” strategy appears to have failed as Shanghai Composite has broken notably below its 200-day moving average – which six times before has been defended aggressively. Chinese Stocks are back at 7-week lows, just off the crash lows in July.

  • *CHINA’S SHANGHAI COMPOSITE FALLS 3% TO 3,552.82 AT BREAK
  • *CHINA’S CSI 300 INDEX FALLS 3.1% TO 3,646.45 AT BREAK

  The big showdown – can the 200DMA be defended… or more crucially, the July lows!!

  

   

   

  Chinese media describe today as another “Judgement Day” as short-sellers fight back against Communist funds amid futures delivery deadline!

  — George Chen (@george_chen) August 21, 2015

  If you believe in the power of Communist Party, now it’s time to buy as key index falls below 3600s “policy bottom” again? Rebound later?

  — George Chen (@george_chen) August 21, 2015

   

   

  Charts: Bloomberg

  

  

  

  

  

• US Equity Futures Nosedive After China PMI Plunge

  It appears bad news in China is "bad news" for everyone. With Chinese authorities already in full liquidity spigot-mode, the fact that China PMI for August collapsed to its lowest since March 2009 strongly suggests that – unlike every talking-head's proclamation – a crashing stock market does (whether reflexively or not) impact the real economy. US equity futures legged significantly lower on the news – S&P 500 to 7-month lows, eyeing the stunning 2,000 level; and Japanese stocks also legged lower.

   

  Weakest China Manufacturing PMI since March 2009…

  

   

  and the breakdown is ugly..

  

  The 'confidence-inspiring' Caixin/Markit economists proclaim…

  The Caixin Flash China General Manufacturing PMI for August has fallen further from July’s two-year low, indicating that the economy is still in the process of bottoming out. But overall, the likelihood of a systemic risk remains under control and the structure of the economy is still improving. There is still pressure on the front of maintaining growth rates, and to realize the goal set for this year the government needs to fine tune fiscal and monetary policies to ensure macroeconomic stability and speed up the structural reform. This will lead the market to confidence and renew the vigour of the economy.”

  Thouigh we are unsure where there enthusiasm that a bottom is forming comes from.

   

  And the result…

  \

   

  Charts: Bloomberg

  

  

  

  

  

• Paul Craig Roberts: "Insouciance Rules The West"

  Submitted by Paul Craig Roberts,

  Europe is being overrun by refugees from Washington’s, and Israel’s, hegemonic policies in the Middle East and North Africa that are resulting in the slaughter of massive numbers of civilians. The inflows are so heavy that European governments are squabbling among themselves about who is to take the refugees. Hungary is considering constructing a fence, like the US and Israel, to keep out the undesirables. Everywhere in the Western media there are reports deploring the influx of migrants; yet nowhere is there any reference to the cause of the problem.

  The European governments and their insouciant populations are themselves responsible for their immigrant problems. For 14 years Europe has supported Washington’s aggressive militarism that has murdered and dislocated millions of peoples who never lifted a finger against Washington. The destruction of entire countries such as Iraq, Libya, and Afghanistan, and now Syria and Yemen, and the continuing US slaughter of Pakistani civilians with the full complicity of the corrupt and traitorous Pakistani government, produced a refugee problem that the moronic Europeans brought upon themselves.

  Europe deserves the problem, but it is not enough punishment for their crimes against humanity in support of Washington’s world hegemony.

  In the Western world insouciance rules governments as well as peoples, and most likely also everywhere else in the world. It remains to be seen whether Russia and China have any clearer grasp of the reality that confronts them.

  Lt. Gen. Michael Flynn, Director of the US Defense Intelligence Agency until his retirement in August 2014, has confirmed that the Obama regime disregarded his advice and made a willful decision to support the jihadists who now comprise ISIS. ( https://medium.com/insurge-intelligence/officials-islamic-state-arose-from-us-support-for-al-qaeda-in-iraq-a37c9a60be4 ) Here we have an American government so insouciant, and with nothing but tunnel vision, empowering the various elements that comprise Washington’s excuse for the “war on terror” and the destruction of several countries. Just as the idiot Europeans produce their own refugee problems, the idiot Americans produce their own terrorist problems. It is mindless. And there is no end to it.

  Consider the insanity of the Obama regime’s policy toward the Soviet Union. Kissinger and Brzezinski, two of the left-wing’s most hated bogymen, are astonished at the total unawareness of Washington and the EU of the consequences of their aggression and false accusations toward Russia. Kissinger says that America’s foreign policy is in the hands of “ahistorical people,” who do not comprehend that “we should not engage in international conflicts if, at the beginning, we cannot describe an end.” Kissinger criticizes Washington and the EU for their misconception that the West could act in Ukraine in ways inconsistent with Russian interests and receive a pass from the Russian government.

  As for the Idiotic claim that Putin is responsible for the Ukrainian tragedy, Kissinger says:

  “It is not conceivable that Putin spends sixty billion euros on turning a summer resort into a winter Olympic village in order to start a military crisis the week after a concluding Olympic ceremony that depicted Russia as a part of Western civilization.” ( http://sputniknews.com/world/20150819/1025918194/us-russia-policy-history-kissinger.html )

  Don’t expect the low-grade morons who comprise the Western media to notice anything as obvious as the meaning Kissinger’s observation.

  Brzezinski has joined Kissinger in stating unequivocally that “Russia must be reassured that Ukraine will never become a NATO member.” ( http://sputniknews.com/politics/20150630/1024022244.html )

  Kissinger is correct that Americans and their leaders are ahistorical. The US operates on the basis of a priori theories that justify American preconceptions and desires. This is a prescription for war, disaster, and the demise of humanity.

  Even American commentators whom one would consider to be intelligent are ahistorical. Writing on OpEdNews (8-18-15) William Bike says that Ronald Reagan advocated the destruction of the Soviet Union. Reagan did no such thing. Reagan was respectful of the Soviet leadership and worked with Gorbachev to end the Cold War. Reagan never spoke about winning the Cold War, only about bringing it to an end. The Soviet Union collapsed as a consequence of Gorbachev being arrested by hardline communists, opposed to Gorbachev’s policies, who launched a coup. The coup failed, but it took down the Soviet government. Reagan had nothing to do with it and was no longer in office.

  Some ahistorical Americans cannot tell the difference between the war criminals Clinton, Bush, Cheney, and Obama, and Jimmy Carter, who spent his life doing, and trying to do, good deeds. No sooner do we hear that the 90-year old former president has cancer than Matt Peppe regals us on CounterPunch about “Jimmy Carter’s Blood-Drenched Legacy” (8-18-15). Peppe describes Carter as just another hypocrite who professed human rights but had a “penchant for bloodshed.” What Peppe means is that Carter did not stop bloodshed initiated by foreigners abroad. In other words Carter failed as a global policeman. Peppe’s criticism of Carter, of course, is the stale and false neoconservative criticism of Carter.

  Peppe, like so many others, shows an astonishing ignorance of the constraints existing policies institutionalized in government exercise over presidents. In American politics, interest groups are more powerful than the elected politicians. Look around you. The federal agencies created to oversea the wellbeing of the national forests, public lands, air and water are staffed with the executives of the very polluting and clear-cutting industries that the agencies are supposed to be regulating. Read CounterPunch editor Jeffrey St. Clair’s book, Born Under A Bad Sky, to understand that those who are supposed to be regulated are in fact doing the regulating, and in their interests. The public interest is nowhere in the picture.

  Look away from the environment to economic policy. The same financial executives who caused the ongoing financial crisis resulting in enormous ongoing public subsidies to the private banking system, now into the eight year, are the ones who run the US Treasury and Federal Reserve.

  Without a strong movement behind him, from whose ranks a president can staff an administration committed to major changes, the president is in effect a captive of the private interests who finance political campaigns. Reagan is the only president of our time who had even a semblance of a movement behind him, and the “Reaganites” in his administration were counterbalanced by the Bush Establishment Republicans.

  During the 1930s, President Franklin D. Roosevelt had a movement behind him consisting of New Dealers. Consequently, Roosevelt was able to achieve a number of overdue reforms such as Social Security.

  Nevertheless, Roosevelt did not see himself as being in charge. In The Age of Acquiescence (2015), Steve Fraser quotes President Roosevelt telling Treasury Secretary Henry Morgenthau at the end of 1934 that “the people I have called the ‘money changers in the Temple’ are still in absolute control. It will take many years and possibly several revolutions to eliminate them.”

  Eight decades later as Nomi Prins has made clear in All The Presidents’ Bankers (2014), the money changers are still in control. Nothing less than fire and the sword can dislodge them.

  Yet, and it will forever be the case, America has commentators who really believe that a president can change things but refuses to do so because he prefers the way that they are.

  Unless there is a major disaster, such as the Great Depression, or a lessor challenge, such as stagflation for which solutions were scarce, a president without a movement is outgunned by powerful private interest groups, and sometimes even if he has a movement.

  Private interests were empowered by the Republican Supreme Court’s decision that the purchase of the US government by corporate money is the constitutionally protected exercise of free speech.

  To be completely clear, the US Supreme Court has ruled that organized interest groups have the right to control the US government.

  Under this Supreme Court ruling, how can the United States pretend to be a democracy?

  How can Washington justify its genocidal murders as “bringing democracy” to the decimated?

  Unless the world wakes up and realizes that total evil has the reins in the West, humanity has no future.

  

  

  

  

  

• What Will It Take For The Fed To Panic And Bail Out The Market Once Again: BofA Explains

  One of the main reasons a month ago we started carefully following the commodity trading giants, the Glencores, Mercurias and Trafiguras of the world…

  Which will be first: Trafigura, Mercuria or Glencore

  — zerohedge (@zerohedge) July 22, 2015

  … is because nobody else was.

  Perhaps due to their commodity-trading operations, these companies were expected to be immune from the mark-to-market vagaries of the commodity collapse on their balance sheet, and as such presented far less interest to market participants than pure-play miners whose stocks have gotten crushed since the commodity collapse and subsequent relapse.

  And then, yesterday, Glencore “happened” and everyone was so shocked by the company’s abysmal results, which as we explained may servce as “The Next Leg Of The Commodity Carnage: Attention Shifts To Traders – Glencore Crashes, Noble Default Risk Soars.” This took place a day after we penned “Noble Group’s Kurtosis Awakening Moment For The Commodity Markets” in which we profiled the ongoing slow-motion trainwreck of Asia’s largest commodity trader.

  Of course, Glencore’s problems should not have been reason for surprise: after all it was a bet on a surge in Glencore’s default risk that prompted us to write “Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?” in March of 2014 as a levered and relatively safe way to trade crashing copper prices (since then, Glencore CDS have doubled).

  And so others started to notice.

  So with Wall Street’s attention suddenly focused, with the usual delay, almost exclusively on the commodity hybrids, it was none other than Bank of America which earlier today reserved a very special place for a possible collapse of these companies. In fact, the “credit event” (read “failure”) of a company like Glencore is precisely what BofA’s Michael Hartnett said “may be necessary to cause policy-makers to panic.“

  Bank of America starts with a chart that ZH readers are all too familiar with: a comparison of the CDS of Noble and Glencore which as duly noted many times already, have recently spiked:

  

  And here is why Bank of America decided to suddenly focus on a small subset of the commodity sector, one which we have been fascinated with for over a month: to BofA the collapse of either of these two companies is the necessary and/or sufficient condition for the Fed to exit its recent trance, and reenter and bailout the market.

  That’s right: Bank of America is begging for another Fed-assisted market bailout, which gladly hints would be accelerated should Glencore experience a premature “credit event.” To wit:

  Short-term, markets seem intent on forcing either the Fed to pass in September, or the Chinese to launch a more comprehensive and credible policy package to boost growth expectations. Alternatively, a credit event in commodities (note CDS is widening sharply for resources companies – front page chart) may be necessary to cause policy-makers to panic. Markets stop panicking when central banks start panicking. We think that is increasingly likely in September, thus arguing that risk-takers should soon look to add risk, particularly on any further weakness.

  We thank Bank of America for making it quite clear what the catalyst for QE4 will be (and why we should double down on the Glencore long CDS trade), but we are confused: how is the Fed expected to “panic” in September when that is when BofA’s crack economists predict the Fed will hike rates. If anything, a rate hike is supposed to calm the market and give confidence that the Fed is on top of the situation, even if as has been clearly the case, the US economy, not to mention the global one, are both going into reverse.

  And while that is a major loose end to any trading thesis BofA may want to present, it does hedge by saying that all bets on a market bailout are off if the Fed and other central banks have now “lost their potency”, i.e., if the market’s faith in money printing has ended.

  Finally, we believe the inexorable rise in volatility as QE programs wane leads to the ultimate risk. In our view, all investment strategies have been tied in recent years to the power of central banks. There are few bond vigilantes willing to punish profligate governments, fewer currency speculators willing to defy central bank intervention, and investors have become adept at front-running policy-makers and/or expecting central banks will “blink” at signs of market volatility. We believe a loss of central bank potency is an unambiguous risk-off.

  Indeed, we too believe that if not even central banks can boost this market, then the time to get the hell out of Dodge is at hand. And while exiting, make sure to have a lot of gold, silver and lead. Because if the days of Keynesian voodoo and fiat are almost over, then absolutely nobody has any idea what lies ahead.

  

  

  

  

  

• America (In 9 Words)

  Presented with no comment…

   

  

   

  Source: Jim Quinn’s Burning Platform blog

  

  

  

  

  

• Gold Surges Amid Asian Sea Of Red, China Strengthens Yuan By Most In 4 Months

  Hong Kong's Hang Seng index is now down over 21% from the highs, having fallen over 9% in the last week, and Taiwan's TAIEX is down over 20% from April highs, joining Chinese stocks, both joining Chinese stocks in official bear markets. Japanese markets are down over 6% in the last few days (which Amari simply brushes off, blaming the global selloff stemming from China), a JGB trading volumes slump to a record low. Tensions in Korea are not helping. With all eyes on China's flash PMI (though why we are not sure since PBOC is already full liquidity-tard with CNY350bn this week alone), The PBOC fixed Yuan at 6.3864, up from yesterday's biggest strengthening in 3 months to 6.3915 (the biggest 2 day strengthening since April), and margin debt fell for the 3rd day. Gold is surging in the Asia session, near $1160.

  The 3 Bears…

  • *HONG KONG'S HANG SENG INDEX FALLS 1.8% IN PREMARKET

  

   

  China remains ugly…

  • *SHANGHAI MARGIN DEBT DECLINES FOR THIRD DAY (Good News!)
  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 0.6% TO 3,580.2
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.3% TO 3,714.29
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.5% TO 3,609.96

  

   

  As The Yuan fix is strengthened notably..biggest 2 days strengthening in over 4 months…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3864 AGAINST U.S. DOLLAR

  

   

  The question is will China's PPT rescue them from the 200DMA…

  

   

  Japan is rapidly getting uglier…

  • *JAPAN'S TOPIX INDEX EXTENDS LOSS TO 2.3%

  

   

  But don't worry about Japanese stocks…

  • *AMARI: JAPAN STOCKS REFLECT GLOBAL SELLOFF STARTING IN CHINA
  • *ASO: HAVE TO CAREFULLY WATCH CHINA CURRENCY SYSTEM

  But perhaps this will wake some Japanese up…

  Japanese government bond trading has slumped to a record low and the Bank of Japan’s own analysis shows a market still in stress across a range of indicators.

   

  Trading volume sank to 15.6 trillion yen ($126 billion) in July, based on BOJ calculations using figures from the Japan Securities Dealers Association on Thursday. That’s down 73 percent from as high as 57.4 trillion yen in April 2012, a year before BOJ Governor Haruhiko Kuroda began unprecedented debt purchases.

  As we noted earlier, Korean tensions are rising…

  • *S.KOREA, U.S. FORCES UPGRADE JOINT SURVEILLANCE WATCHCON:YONHAP
  • *N. KOREA’S KIM JONG UN ORDERS ARMY INTO STATE OF WAR: XINHUA
  • *N. KOREA SEEN MOVING ARTILLERIES CLOSER TO BORDER: YONHAP NEWS

  But there is some Green…. in Gold…

  

  *  *  *

  Charts: Bloomberg

  

  

  

  

  

• No, Credit Growth In China Is Not "Surging"…

  Back in May, the BEA officially jumped the shark when, to delighted cheers from the San Francisco Fed and Steve Liesman, it announced that going forward, US GDP data would be double seasonally adjusted. 

  Somewhere deep in the bowels of China’s National Statistics Bureau someone was probably chuckling under their breath at how long it took US statisticians to realize that the beauty of being in government is that you can make the numbers say whatever you want them to say.

  Indeed, for China (whose GDP growth is at best exaggerated due to an understated deflator and at worst is completely made up) going full-shark-jumping-retard means doing something so completely ridiculous that it hides in plain sight.

  Something like loaning yourself a trillion yuan to prop up the stock market and then counting that trillion yuan loan towards credit growth. 

  Well as we reported not once, but twice (here and here), that’s exactly what China did in July when it reported that new RMB loans for the month nearly doubled expectations, coming in at CNY1.48 trillion and somehow, even though it was one of the worst kept secrets in the financial universe, some people actually believed the numbers. Case in point:

  @Coffeeisforclo1 mini-boom may be too strong, but hard to square surging credit growth and money supply with imminent collapse

  — A Evans-Pritchard (@AmbroseEP) August 20, 2015

  Yes, “surging credit growth”, only 60% of which is completely made up. 

  Here’s a look a look at the breakdown for anyone who missed it earlier this month:

  

  

  So what should be abundantly clear there is that loans to the real economy (i.e. loans China did not make to itself in the form of equity plunge protection funding) fell a staggering 55%. In case it isn’t clear enough from the above how embarrassingly anomalous the “loans to non-banking financial institutions” figure is, allow us to break it down (again):

  

  And because we somehow get the feeling that quite a few people might be missing the point on just how significant this was from a big picture point of view, here’s a look at the data, with helpful arrows that demonstrate the effect of China’s decision to include these loans:

  

  Behold, the power of counting a trillion yuan in stock market manipulation money towards credit growth.

  

  

  

  

• "Mystery" Cyanide Foam Covers Streets In China As "Massive Fish Die-Off" Observed After Tianjin Explosion

  Update: The latest images from the massive fish die-off…

  

  

  

  

  On Wednesday evening we noted that China, in what looks like an attempt to discourage investigative reports into Communist Party culpability for the explosion at Tianjin which killed more than a hundred people and injured more than 700 last week, revealed the previously unnamed majority shareholders of Tianjin International Ruihai Logistics. 

  The two men – a Mr. Yu and a Mr. Dong – have Party ties and admitted to using their political connections to skirt restrictions on the storage and handling of hazardous chemicals like sodium cyanide. 

  That admission isn’t likely to satisfy the Chinese public, which is looking for the head (figuratively speaking we hope) of someone higher up in the party, as scapegoating a few locals with tenuous Party ties doesn’t seem to constitute the type of wholesale, rigorous investigation that would indicate Beijing is serious about getting to the bottom of how 700 tonnes of toxic chemicals ended up being stored at a facility that was only licensed to warehouse a fraction of that total.

  In any event, the “cyanide thunderstorms” we warned were rolling into the area have now blanketed Tianjin in a “mysterious” white foam. The images are below.

  

  

  

  

  

  Source

  And as The South China Morning Post reports, some claimed the rain had burned their skin and lips, which would be consistent with a text message purported to have emanated from the American Embassy (which immediately denied its authenticity) advising workers to “avoid ALL contact” between their skin and any rain:

  Some residents and journalists near the blast site in Tianjin experienced skin burns as rain hit the Binhai New Area on Tuesday.

   

  Amid fears the rain could spark toxic reactions with chemicals at the site – in particular with hundreds of tonnes of sodium cyanide – an official urged the public to “stay far away”.

   

  As the rain progressed, an unusual white foam emerged on roads near the blast site. A journalist for Caixin reported feeling burns on the lips and arms after being exposed to the rain.

  As for the official explanation for why the streets in Tianjin are now running white with what might very well be an extremely toxic, cyanide-laced foam, Tianjin’s environmental monitoring center says it’s “a normal phenomenon when rain falls, and similar things have occurred before.” 

  And in case that wasn’t enough of a punchline for you, here’s a look at what happened after no chemicals were detected in the seawater around the blast site:

  No #cyanide detected in sample water where massive fish die-off occurred, says #Tianjin’s environmental watchdog pic.twitter.com/hkeykoc8RK

  — CCTVNEWS (@cctvnews) August 20, 2015

  

  

  

  

• How Google Could Rig The 2016 Election

  Authored by Robert Epstein (@DrREpstein – senior research psychologist at the American Institute for Behavioral Research and Technology), originally posted at Politico.com,

  America’s next president could be eased into office not just by TV ads or speeches, but by Google’s secret decisions, and no one—except for me and perhaps a few other obscure researchers—would know how this was accomplished.

  Research I have been directing in recent years suggests that Google, Inc., has amassed far more power to control elections—indeed, to control a wide variety of opinions and beliefs—than any company in history has ever had. Google’s search algorithm can easily shift the voting preferences of undecided voters by 20 percent or more—up to 80 percent in some demographic groups—with virtually no one knowing they are being manipulated, according to experiments I conducted recently with Ronald E. Robertson.

  Given that many elections are won by small margins, this gives Google the power, right now, to flip upwards of 25 percent of the national elections worldwide. In the United States, half of our presidential elections have been won by margins under 7.6 percent, and the 2012 election was won by a margin of only 3.9 percent—well within Google’s control.

  There are at least three very real scenarios whereby Google—perhaps even without its leaders’ knowledge—could shape or even decide the election next year. Whether or not Google executives see it this way, the employees who constantly adjust the search giant’s algorithms are manipulating people every minute of every day. The adjustments they make increasingly influence our thinking—including, it turns out, our voting preferences.

  What we call in our research the Search Engine Manipulation Effect (SEME) turns out to be one of the largest behavioral effects ever discovered. Our comprehensive new study, just published in the Proceedings of the National Academy of Sciences (PNAS), includes the results of five experiments we conducted with more than 4,500 participants in two countries. Because SEME is virtually invisible as a form of social influence, because the effect is so large and because there are currently no specific regulations anywhere in the world that would prevent Google from using and abusing this technique, we believe SEME is a serious threat to the democratic system of government.

  According to Google Trends, at this writing Donald Trump is currently trouncing all other candidates in search activity in 47 of 50 states. Could this activity push him higher in search rankings, and could higher rankings in turn bring him more support? Most definitely—depending, that is, on how Google employees choose to adjust numeric weightings in the search algorithm. Google acknowledges adjusting the algorithm 600 times a year, but the process is secret, so what effect Mr. Trump’s success will have on how he shows up in Google searches is presumably out of his hands.

  ***

  Our new research leaves little doubt about whether Google has the ability to control voters. In laboratory and online experiments conducted in the United States, we were able to boost the proportion of people who favored any candidate by between 37 and 63 percent after just one search session. The impact of viewing biased rankings repeatedly over a period of weeks or months would undoubtedly be larger.

  In our basic experiment, participants were randomly assigned to one of three groups in which search rankings favored either Candidate A, Candidate B or neither candidate. Participants were given brief descriptions of each candidate and then asked how much they liked and trusted each candidate and whom they would vote for. Then they were allowed up to 15 minutes to conduct online research on the candidates using a Google-like search engine we created called Kadoodle.

  Each group had access to the same 30 search results—all real search results linking to real web pages from a past election. Only the ordering of the results differed in the three groups. People could click freely on any result or shift between any of five different results pages, just as one can on Google’s search engine.

  When our participants were done searching, we asked them those questions again, and, voilà: On all measures, opinions shifted in the direction of the candidate who was favored in the rankings. Trust, liking and voting preferences all shifted predictably.

  More alarmingly, we also demonstrated this shift with real voters during an actual electoral campaign—in an experiment conducted with more than 2,000 eligible, undecided voters throughout India during the 2014 Lok Sabha election there—the largest democratic election in history, with more than 800 million eligible voters and 480 million votes ultimately cast. Even here, with real voters who were highly familiar with the candidates and who were being bombarded with campaign rhetoric every day, we showed that search rankings could boost the proportion of people favoring any candidate by more than 20 percent—more than 60 percent in some demographic groups.

  

  Given how powerful this effect is, it’s possible that Google decided the winner of the Indian election.  Google’s own daily data on election-related search activity (subsequently removed from the Internet, but not before my colleagues and I downloaded the pages) showed that Narendra Modi, the ultimate winner, outscored his rivals in search activity by more than 25 percent for sixty-one consecutive days before the final votes were cast. That high volume of search activity could easily have been generated by higher search rankings for Modi.

  Google’s official comment on SEME research is always the same: “Providing relevant answers has been the cornerstone of Google’s approach to search from the very beginning. It would undermine the people’s trust in our results and company if we were to change course.”

  Could any comment be more meaningless? How does providing “relevant answers” to election-related questions rule out the possibility of favoring one candidate over another in search rankings? Google’s statement seems far short of a blanket denial that it ever puts its finger on the scales.

  There are three credible scenarios under which Google could easily be flipping elections worldwide as you read this:

  First, there is the Western Union Scenario

  Google’s executives decide which candidate is best for us—and for the company, of course—and they fiddle with search rankings accordingly. There is precedent in the United States for this kind of backroom king-making. Rutherford B. Hayes, the 19th president of the United States, was put into office in part because of strong support by Western Union. In the late 1800s, Western Union had a monopoly on communications in America, and just before the election of 1876, the company did its best to assure that only positive news stories about Hayes appeared in newspapers nationwide. It also shared all the telegrams sent by his opponent’s campaign staff with Hayes’s staff. Perhaps the most effective way to wield political influence in today’s high-tech world is to donate money to a candidate and then to use technology to make sure he or she wins. The technology guarantees the win, and the donation guarantees allegiance, which Google has certainly tapped in recent years with the Obama administration.

   

  Given Google’s strong ties to Democrats, there is reason to suspect that if Google or its employees intervene to favor their candidates, it will be to adjust the search algorithm to favor Hillary Clinton. In 2012, Google and its top executives donated more than $800,000 to Obama but only $37,000 to Romney. At least six top tech officials in the Obama administration, including Megan Smith, the country’s chief technology officer, are former Google employees. According to a recent report by the Wall Street Journal, since Obama took office, Google representatives have visited the White House ten times as frequently as representatives from comparable companies—once a week, on average.

   

  Hillary Clinton clearly has Google’s support and is well aware of Google’s value in elections. In April of this year, she hired a top Google executive, Stephanie Hannon, to serve as her chief technology officer. I don’t have any reason to suspect Hannon would use her old connections to aid her candidate, but the fact that she—or any other individual with sufficient clout at Google—has the power to decide elections threatens to undermine the legitimacy of our electoral system, particularly in close elections.

   

  This is, in any case, the most implausible scenario. What company would risk the public outrage and corporate punishment that would follow from being caught manipulating an election?

  Second, there is the Marius Milner Scenario

  A rogue employee at Google who has sufficient password authority or hacking skills makes a few tweaks in the rankings (perhaps after receiving a text message from some old friend who now works on a campaign), and the deed is done. In 2010, when Google got caught sweeping up personal information from unprotected Wi-Fi networks in more than 30 countries using its Street View vehicles, the entire operation was blamed on one Google employee: software engineer Marius Milner. So they fired him, right? Nope. He’s still there, and on LinkedIn he currently identifies his profession as “hacker.” If, somehow, you have gotten the impression that at least a few of Google’s 37,000 employees are every bit as smart as Milner and possess a certain mischievousness—well, you are probably right, which is why the rogue employee scenario isn’t as far-fetched as it might seem.

  And third—and this is the scariest possibility—there is the Algorithm Scenario

  Under this scenario, all of Google’s employees are innocent little lambs, but the software is evil. Google’s search algorithm is pushing one candidate to the top of rankings because of what the company coyly dismisses as “organic” search activity by users; it’s harmless, you see, because it’s all natural. Under this scenario, a computer program is picking our elected officials.

   

  To put this another way, our research suggests that no matter how innocent or disinterested Google’s employees may be, Google’s search algorithm, propelled by user activity, has been determining the outcomes of close elections worldwide for years, with increasing impact every year because of increasing Internet penetration.

  SEME is powerful precisely because Google is so good at what it does; its search results are generally superb. Having learned that fact over time, we have come to trust those results to a high degree. We have also learned that higher rankings mean better material, which is why 50 percent of our clicks go to the first two items, with more than 90 percent of all clicks going to that precious first search page. Unfortunately, when it comes to elections, that extreme trust we have developed makes us vulnerable to manipulation.

  In the final days of a campaign, fortunes are spent on media blitzes directed at a handful of counties where swing voters will determine the winners in the all-important swing states. What a waste of resources! The right person at Google could influence those key voters more than any stump speech could; there is no cheaper, more efficient or subtler way to turn swing voters than SEME. SEME also has one eerie advantage over billboards: when people are unaware of a source of influence, they believe they weren’t being influenced at all; they believe they made up their own minds.

  Republicans, take note: A manipulation on Hillary Clinton’s behalf would be particularly easy for Google to carry out, because of all the demographic groups we have looked at so far, no group has been more vulnerable to SEME—in other words, so blindly trusting of search rankings—than moderate Republicans. In a national experiment we conducted in the United States, we were able to shift a whopping 80 percent of moderate Republicans in any direction we chose just by varying search rankings.

  There are many ways to influence voters—more ways than ever these days, thanks to cable television, mobile devices and the Internet. Why be so afraid of Google’s search engine? If rankings are so influential, won’t all the candidates be using the latest SEO techniques to make sure they rank high?

  SEO is competitive, as are billboards and TV commercials. No problem there. The problem is that for all practical purposes, there is just one search engine. More than 75 percent of online search in the United States is conducted on Google, and in most other countries that proportion is 90 percent. That means that if Google’s CEO, a rogue employee or even just the search algorithm itself favors one candidate, there is no way to counteract that influence. It would be as if Fox News were the only television channel in the country. As Internet penetration grows and more people get their information about candidates online, SEME will become an increasingly powerful form of influence, which means that the programmers and executives who control search engines will also become more powerful.

  Worse still, our research shows that even when people do notice they are seeing biased search rankings, their voting preferences still shift in the desired directions—even more than the preferences of people who are oblivious to the bias. In our national study in the United States, 36 percent of people who were unaware of the rankings bias shifted toward the candidate we chose for them, but 45 percent of those who were aware of the bias also shifted. It’s as if the bias was serving as a form of social proof; the search engine clearly prefers one candidate, so that candidate must be the best. (Search results are supposed to be biased, after all; they’re supposed to show us what’s best, second best, and so on.)

  Biased rankings are hard for individuals to detect, but what about regulators or election watchdogs? Unfortunately, SEME is easy to hide. The best way to wield this type of influence is to do what Google is becoming better at doing every day: send out customized search results. If search results favoring one candidate were sent only to vulnerable individuals, regulators and watchdogs would be especially hard pressed to find them.

  For the record, by the way, our experiments meet the gold standards of research in the behavioral sciences: They are randomized (which means people are randomly assigned to different groups), controlled (which means they include groups in which interventions are either present or absent), counterbalanced (which means critical details, such as names, are presented to half the participants in one order and to half in the opposite order) and double-blind (which means that neither the subjects nor anyone who interacts with them has any idea what the hypotheses are or what groups people are assigned to). Our subject pools are diverse, matched as closely as possible to characteristics of a country’s electorate. Finally, our recent report in PNAS included four replications; in other words, we showed repeatedly—under different conditions and with different groups—that SEME is real.

  Our newest research on SEME, conducted with nearly 4,000 people just before the national elections in the UK this past spring, is looking at ways we might be able to protect people from the manipulation. We found the monster; now we’re trying to figure out how to kill it. What we have learned so far is that the only way to protect people from biased search rankings is to break the trust Google has worked so hard to build. When we deliberately mix rankings up, or when we display various kinds of alerts that identify bias, we can suppress SEME to some extent.

  It’s hard to imagine Google ever degrading its product and undermining its credibility in such ways, however. To protect the free and fair election, that might leave only one option, as unpalatable as it might seem: government regulation.

  

  

  

  

  

• July Was Warmest Month On Record NOAA Reports, Lists All "Signifiicant Climate Anomalies And Events"

  While some, perhaps not California farmers, will disagree with NOAA’s assessment of the world’s atmospheric conditions, earlier today the National Oceanic and Atmospheric Administration declared that July was the warmest month ever recorded for the globe and was also the record warmest for global oceans, putting a full stop to a year that has been characterized by numerous perplexing atmospheric outliers around the globe but perhaps none other more so than NOAA’s earlier assessment that the winter of 2015 was also the warmest on record despite the much discussed US winter, where for the second year in a row the economic slowdown was blamed on a colder than usual winter. Go figure: perhaps here too we need double seasonal adjustments.

  

  Among some of the highlights noted by NOAA:

  • The combined average temperature over global land and ocean surfaces for July 2015 was the highest for July in the 136-year period of record, at 0.81°C (1.46°F) above the 20th century average of 15.8°C (60.4°F), surpassing the previous record set in 1998 by 0.08°C (0.14°F). As July is climatologically the warmest month of the year globally, this monthly global temperature of 16.61°C (61.86°F) was also the highest among all 1627 months in the record that began in January 1880. The July temperature is currently increasing at an average rate of 0.65°C (1.17°F) per century.
  • The July globally-averaged land surface temperature was 1.73°F (0.96°C) above the 20th century average. This was the sixth highest for July in the 1880–2015 record.
  • The July globally-averaged sea surface temperature was 1.35°F (0.75°C) above the 20th century average. This was the highest temperature for any month in the 1880–2015 record, surpassing the previous record set in July 2014 by 0.13°F (0.07°C). The global value was driven by record warmth across large expanses of the Pacific and Indian Oceans.

  

   

  NOAA goes on to note some of the headline-grabbing “significant climate anomalies and events” including the Arctic and Antarctic Sea Ice Extent, Typhoon Nangka, the abnormally hot summer in western and central Europe coupled with the cooler than average weather in North Europe, the “widespread snow” in eastern Australia, the second warmest July in Africa, the fifth warmest July on record for South America, and the strange distribution of atmospheric conditions in the US, where the record California drought was contrasted with the cool Central states.

  

   

  Some other highlights from the report:

  • The average Arctic sea ice extent for July was 350,000 square miles (9.5 percent) below the 1981–2010 average. This was the eighth smallest July extent since records began in 1979 and largest since 2009, according to analysis by the National Snow and Ice Data Center using data from NOAA and NASA.
  • Antarctic sea ice during July was 240,000 square miles (3.8 percent) above the 1981–2010 average. This was the fourth largest July Antarctic sea ice extent on record and 140,000 square miles smaller than the record-large July extent of 2014.
  • Austria  recorded its hottest July since national records began in 1767. The average temperature was 3.0°C (5.0°F) higher than the 1981–2010 average, beating the previous record of +2.7°C (+4.9°F) set just a few years earlier in 2006. Two major heatwaves, with temperatures reaching 38°C (100°F), contributed to this heat record. At some stations in major cities, including Innsbruck University, Linz, and Klagenfurt, it was not only the hottest July, but the hottest month ever recorded in the 249-year period of record. On July 7^th, the daily temperature reached 38.2°C (100.8°F) in Innsbruck, its highest temperature in recorded history.
  • The heat waves extended to France, where the country had its third warmest July in its 116-year period of record. Overall, the temperature was 2.1°C (3.8°F) higher than the 1981–2010 average, with localized departures of more than 4°C (7°F) in the Massif Central to the North East and the Alps, according to MeteoFrance .
  • The Netherlands also experienced abnormally hot July temperatures at the beginning of the month. Under an intense heat wave that gripped much of western and central Europe, the southeastern town of Maastricht observed a temperature of 38.2°C (100.8°F) on July 2^nd the highest temperature on record for that town and one of the highest for the country. The highest temperature ever recorded was 38.6°C (101.5°F) in Warnsveld in 1944. The heat did not last however. The temperature was below 0°C (32°F) at a station in Twente in the eastern part of the country on July 9^th and 10^th, the first time the temperature dropped below freezing in July since 1984.
  • Record-breaking heat was observed in parts of the southern United Kingdom at the beginning of July, including the highest temperature recorded in the country since August 2003. However, the heat did not last as westerly Atlantic air flowed in, bringing cooler-than-average temperatures for much of the remainder of the month. So, despite the early record heat, overall, the average July temperature for the UK was 0.7°C (1.1°F) lower than the 1981–2010 average.
  • Despite a heatwave over part of Sweden at the beginning of the month, temperatures remained cool for the reminder of July across much of the country. While temperatures across southeastern Sweden were slightly above average, other areas, particularly in the far north, were not. Pajala observed its coolest July since 1965 and Gaddede its coolest since 1951, although SMHI notes that the station has been relocated a few times over the years.
  • Norway experienced cooler-than-average temperatures for the third consecutive month. The average July temperature was 0.7°C (1.1°F) lower than the 1961–1990 average. Temperatures were as much as 3°C (5°F) below average at some stations in Finnmark.
  • A high pressure dome over the Middle East brought what may be one of the most extreme heat indices ever recorded in the world on July 31^st. According to media reports, in the city of Bandar Mahshahr, the air temperature of 46°C (115°F) combined with a dew point of 32°C (90°F) for a heat index on 74°C (165°F). The highest known heat index of 81°C (178°F) occurred in Dhahran, Saudi Arabia on July 8^th, 2003.

  Putting this in context, in the 180 or so State of the Climate summaries since 2000, the NOAA has documented what it defines to be 13 of the 15 warmest years on record. Which means that the US government is hoping the population is not habituated to seeing such reports by now, especially not ahead of the politically important Paris climate conference this December, when a “comprehensive climate plan” is expected to be proposed. A plan which, just like the entire carbon credit fiasco, is certain to enrich some – such as Goldman Sachs – and do little for everyone else, because it is far better for financial elites and the political oligarchy to keep the world always one step away from a state of permanent crisis.

  

  

  

  

  

• What Obama Gets Wrong On Foreign Policy

  Last year, in what was surely one of the more unfortunately timed declarations in recent foreign policy history, President Obama described Yemen as a counter terrorism success story. 

  The first thing that sticks out about that statement is that, as we documented in June, it’s at least possible that Abdullah Saleh and his lieutenants not only turned a blind eye to AQAP operations in the country, but in fact played a direct role in facilitating al-Qaeda attacks even as the government accepted anti-terrorism financing from the US government, but the truly ridiculous thing about claiming that Yemen should be viewed as a “success” is that here we are less than a year later and the country is the exact opposite. That is, it’s a failed state, and if it weren’t for the Saudi boots which, no matter what Riyadh says, are most assuredly on the ground in Yemen, the country would be controlled by Iran-backed Houthi rebels wielding some $500 million in arms that the US “lost” after President Abd Rabbuh Mansur Hadi was forced to flee to the Saudi capital. 

  Of course that isn’t the only example of foreign policy debacles that have unfolded on the current administration’s watch. There’s Ukraine, for instance, where deposing a Russia-backed leader led, in short order, to civil war and may soon culminate in a coup by fascist militants. Then there’s Syria, where efforts to support “freedom fighters” in their battle against the Assad regime ended up creating a marauding band of blag flag-waving jihadists, bent on establishing a medieval caliphate. Finally there’s the deteriorating relationship with China, which culminated in a tense war of words after Beijing essentially threatened to shoot down a US spy plane over the Spratlys.

  Against that backdrop we bring you the following excerpts from “What Obama Gets Wrong” as originally published in Foreign Affairs’ September/October issue:

  Gideon Rose’s intriguing essay on President Barack Obama’s foreign policy raises a vexing question: When does the statute of limitations on blaming President George W. Bush for the record of the current administration finally expire?

   

  Rose devotes much of his article to rehearsing a litany of the Bush administration’s sins in an effort to persuade readers that Obama inherited a uniquely bad set of cards when he came to the White House—a “mess,” as the president liked to say—and must therefore be judged accordingly. But this is doubtful as a matter of history and past its sell-by date as a form of apology.

   

  Every president inherits a mixed bag when he comes to office, and Obama’s was hardly the worst.

   

  Obama’s supporters also need to acknowledge that they cannot celebrate the president’s supposed successes at one point and then disavow responsibility later when those successes turn to dust. If Obama can take credit for putting the core of al Qaeda “on the path to defeat” and bringing the war on terror effectively to an end—as he did at the National Defense University in May 2013, to much liberal applause—then it becomes difficult for him to evade responsibility for the resurgence of jihadism in the two years since then. If the administration can celebrate the success of its Iraq policy in 2012 (“What is beyond debate,” said Antony Blinken, one of Obama’s senior foreign policy advisers, “is that Iraq today is less violent, more democratic and more prosperous, and the United States more deeply engaged there, than at any time in recent history”), then maybe Bush can be exempted from blame for Iraq’s travails in 2014.

   

  
  

   

  Every president should be judged on a few fundamentals—his ability to deliver what he promised, weaken the country’s foes and strengthen its friends, elaborate a concept of the American interest that is persuasive and true, and pass on a world heading in the right direction. Obama rates well on none of these.

   

  [Stability was supposed] to be restored in such places as Cairo, Istanbul, and Damascus. Israeli settlement expansion [was supposed to have] ended, and peace with the Palestinians would be forged. Much of this was to be achieved, so it seemed, through the sheer moral force of Obama’s personality and the compelling logic of his ideas. Yet none of it occurred. Obama became the president who, to use one of Rose’s baseball metaphors, called his shot only to strike out.

   

  As for U.S. enemies, the core of al Qaeda might be weaker today than it was when Obama took office, but the groups he once cavalierly dismissed as jihad’s “JV team” are vastly more potent, successful, and aggressive. The Russian economy may have been badly hit by the fall in global oil prices, but Ukraine is bracing for the next phase in a Russian offensive that Obama has opposed with only token measures. The deal with Iran exchanges billions of dollars in tangible economic relief for Tehran—some of which will be used to fund anti-American proxies in Lebanon, Yemen, Iraq, the Gaza Strip, and Afghanistan—in return for the paper promise of a temporary lull in Iran’s nuclear program.

   

  The truth is that Obama’s idea of U.S. foreign policy is that there should be less of it, that the United States generally ought not to meddle in the internal affairs of other states and certainly not do so without a UN warrant, and that Washington should focus on what it does at home more than on what it does abroad.

   

  Now, however, the consequences of that foreign policy are becoming more obvious. 

   

  Full article here

  

  

  

  

  

• North Korea Declares State Of War After Argument Over Loudspeaker Spirals Out Of Control

  Kim Jong-un has declared a state of war following an escalation of hostilities across the DMZ. Here’s Xinhua:

  The top leader of the Democratic People’s Republic of Korea (DPRK) Kim Jong Un has ordered the country’s frontline combined forces to enter state of war from 5pm (0830 GMT) Friday. the official KCNA news agency reported Friday, the official KCNA news agency reported early Friday.

   

  Kim made the order at an emergency enlarged meeting of the central military commission of the ruling Workers’ Party of Korea, said the report.

   

  He ordered the forces to be well armed to cope with any possible operations at any time. Kim also gave the order that the frontline area enter quasi state of war from 5 pm Friday.

   

  During the emergency meeting, political and military countermeasures aimed to smash the enemy’s war provocations were discussed while the military’s combat plan of the frontline command was approved, according to the KCNA.

  How did it come to this you ask? Below is the amusing backstory…

  North Korea’s Kim Jong-un – the world’s sabre rattler par excellence – doesn’t like to stray too far from the spotlight when it comes to global conflict, which is why we weren’t terribly surprised when, a few days ago, the pariah state threatened to invade the US mainland and use “weapons unknown to the world.”

  

  Of course a lot of what goes on inside the country is “unknown to the world”, much as the world is largely “unknown” to North Koreans and that’s just fine with Kim, whose regime depends on a combination of propaganda and censorship to keep the populace transfixed in a perpetual state of hypnotic hero worship. Of course the West and its allies – and now even China – have a tendency to dismiss Kim’s threats as the ravings of a delusional child, which is why occasionally, Pyongyang will actually fire a missile into the ocean or execute a member of the military top brass with an anti-aircraft gun just to remind everyone that the regime isn’t totally bluffing. 

  Given Pyongyang’s propensity for lobbing bombastic threats that, were they to emanate from virtually any other government on the planet would be met with a sharp rebuke, it’s something of a miracle that sour relations between Kim and US ally South Korea haven’t already produced an armed conflict, and as Bloomberg reports, the “maiming” of two South Korean soldiers along the DMZ and subsequent “blaring of propaganda through loudspeakers” by the South culminated in the exchange of artillery fire on Thursday, marking the worst escalation between the two countries in five years. Here’s more:

  North and South Korea exchanged fire across the demilitarized zone between the two countries in one of the worst incidents since 2010, sparking fears that hostilities will worsen.

   

  The incident started when North Korea fired a rocket at a South Korean border area, prompting Seoul’s forces to reply with an artillery barrage. It was unclear whether there were any casualties.

   

  Tensions have flared in recent weeks across the so-called DMZ that bisects the Korean peninsula. Two South Korean soldiers were maimed on Aug. 4 by land mines that the Seoul government says were recently laid by North Korea. Pyongyang denied any role in the blasts.

   

  Relations deteriorated further when South Korea started blaring propaganda at the North through loudspeakers along the DMZ. After today’s exchange, North Korea threatened to “start a military action” unless South Korea stops all propaganda broadcasts and withdraws the loudspeakers within 48 hours.

   

  “The ball is in North Korea’s court now,” Koh Yu Hwan, professor of North Korea studies at Dongguk University in Seoul, said by phone. “If North Korea decides to fire back, that means the conflict will broaden, something probably neither Korea wants.”

   

  Today’s exchange was among the most serious since North Korea shelled a front-line island in the south in 2010, killing two marines and two civilians. Last year, their ships exchanged warning fire near a disputed Yellow Sea boundary.

   

  South Korea’s military remains on heightened alert after today’s incident and is closely monitoring the situation, the Defense Ministry said in an e-mailed statement. The exchange began when North Korea fired a single rocket across the border, the ministry said. South Korean troops fired “dozens of shells” back, the statement said.

  And while the above would suggest that North Korea was largely responsible for the escalation by firing “a rocket” at South Korean positions, it looks like it’s also possible that the North was shooting at a loudspeaker after its soldiers tired of an endless stream of broadcasted rheotric. Here’s CNN:

  South Korea also has accused the North of planting mines, an allegation that Pyongyang denies.

   

  Seoul vowed a “harsh” response to the landmines and resumed blaring propaganda messages over the border from huge loudspeakers.

   

  The move infuriated North Korea, which called the broadcasting “a direct action of declaring a war.” Over the weekend, it threatened to blow up the South Korean speakers and also warned of “indiscriminate strikes.”

   

  And a U.S. official told CNN’s Barbara Starr that the U.S. believes that North Korea fired a shot at a South Korean loudspeaker, and South Korea responded with 36 artillery shells.

  So an eye for an eye, we suppose. You shoot at our loudspeakers, and we’ll resort to heavy artillery fire. Here’s a look at one of the loudspeakers South Korea installed along the border in the wake of the land mine incident: 

  

  We shall see, in the days and weeks ahead, if a pot-shot at a speaker system will go down in history as the event that triggered another war in the Korean Peninsula, but in the meantime, we would caution observers that determining whose account offers a more accurate description of when exactly things started to go wrong will be more difficult than usual this time around because thanks to Kim’s move to establish his own time zone earlier this week, the two countries are half an hour apart.

  

  

  

  

  

• Looking Back On The Presidency Of Donald Trump – A Dispatch From The Future

  Authored by Jon Lovett, originally posted at The Atlantic,

  “It was the terrific leader of India, Gandhi, who said, ‘First they ignore you, then they laugh at you, then they attack you, and then you win.’ Well we won, didn’t we?”

  That’s how President Donald John Trump began his inaugural address, that clear morning in January of 2017. The fact that Gandhi never said these words was among the very least of our problems. Besides, the line drew rapturous applause from the crowd. According to a joint statement released by the White House and Nielsen, the Trump Inaugural drew the largest television audience in human history. As President Trump himself pointed out in his second press availability that afternoon, the numbers would only go up, once you factored in DVR.

  It’s amazing isn’t? How adaptable we are as human beings? It was only a year earlier that Trump was a punch line. Obviously, everyone knew, he could never actually get anywhere once the votes were cast. American democracy was too robust to let that happen. He was too dangerous to win, and to win would be too dangerous. It couldn’t happen because it couldn’t happen.

  And then, just like that, it did.

  There’s no need to rehash how it all went down. He won the nomination, and then he won the general election. It wasn’t more complicated than that. Some have compared the tenor of the news on election night to the coverage of a tragedy or disaster. But that’s not exactly right. It wasn’t like a meteor strike. It was more like finding out a meteor is heading our way. The anchors were dazed and somber. There was a real effort on the part of journalists to assuage viewers. Twitter was a shit show, but Twitter is always a shit show. Many immediately expressed their regret for voting Trump. Some had just wanted to register a protest, not realizing that they would be swinging the election to an insecure, undisciplined narcissist unfit for public office.

  The next morning, President Obama declared a bank holiday, to the chagrin of President-Elect Trump, who blamed the fear mongering of Washington elites for the massive sell off roiling global markets. No one seemed more surprised by the returns than the Donald himself who—at the one moment in his life when it was truly needed—couldn’t muster the bravura for which he was famous. Being elected president made him seem tiny, and of course it did.

  Those were the darkest moments. Yet, in the dull terror of those first days, there were the stirrings of redemption. You could see it in the pride that journalists—even cynical, sneering political reporters—took in covering this historic and surprising transition. You could see it on display in the meetings that President Obama and White House staff held almost around-the-clock with congressional leaders and aides of both parties. But most of all, you could see it everywhere. Everyone was talking about the news. Everyone was watching and reading the news. There was a sense, in those weeks between Election Day and Inauguration Day, that Americans were all in this together, preparing, girding, for what we didn’t know. And maybe it’s crazy, but we grew closer to each other, kinder, as we all participated in this event as one country. Some still scoff at this, and as time passes, it’s harder and harder to prove. But I think it’s true. I think we are different now.

  Maybe Trump was a mirror, and we hated him because we hated what we saw in our reflection.

  By the time President Trump raised his right hand and swore to preserve, protect, and defend the Constitution, the Constitution itself had been enlisted. In what Trump supporters called the “Christmas Coup” and what everyone else called a historic act of national preservation, President Obama signed into law a bill passed with overwhelming bipartisan support (with the exception of a few House Republicans and Ted Cruz, who abstained) which reasserted congressional primacy over the republic and stripped away the presidential prerogatives that had accrued over the previous century. In a talk at the Heritage Foundation, Chief Justice John Roberts, speaking only hypothetically of course, suggested such a law would survive judicial review. The liberals on the high court offered similar hints. The only source of debate was which parts of the law ought to be permanent and which should sunset after four years. You can imagine how that went.

  Anyway, there’s no need to belabor the details of how the next four years unfolded: the budget crisis, President Trump’s impeachment, Vice President Cruz’s inauguration, the second budget crisis. It’s all pretty straightforward. It was a painful and frightening time, to be sure. And while it didn’t bring about the collapse of society, it did hurt us. Our economy suffered, as did our standing in the world. (Relations with Mexico remain tense.) One bright spot: We elected a man who loves to name things after himself, but all we named after him is the “Trump Recession.” He’ll be remembered for that forever. The irony was almost worth the price.

  And maybe it was a price the American people had to pay. Maybe Trump was a mirror, and we hated him because we hated what we saw in our reflection. We were coasting and knew it. A generation of elites prized shamelessness and ambition over virtue. Our newness and pride as a nation didn’t protect us from decadence, but it did allow us to ignore it, glued to our grievances and our phones as our culture and politics grew ever more brittle and shallow and crass.

  In the end, Trump is what America had earned. Trump is what America deserved. Trump was our reckoning. And while his rise to power was born of our failings, it also forced us to find our strength. It’s amazing how adaptable we are as human beings, isn’t it? Trump saved us.

  Now it’s all up to President Fieri.

  *  *  *

  Don't laugh yet…

  

   

  

  

  

  

  

• It's A Divorce Lawyer Orgy: "Ashley Madison Hack Is The Best Thing To Happen Since Moses"

  Husbands and wives across the world are waking up to their partners' extramarital affairs after, as AP calls it, a catastrophic leak at adultery website Ashley Madison spewed electronic evidence of infidelity across the Internet. Online forums were buzzing Thursday with users claiming to have found evidence that their significant others were on the site. But it's not all doom and gloom… as Reuters notes many professions stand to benefit from the unfolding saga, from lawyers to therapists to cyber security firms. Prominent divorce lawyer Raoul Felder said the release is the best thing to happen to his profession since the seventh Commandment forbade adultery in the Bible, "I've never had anything like this before."

  

  As AP explains,

  Ashley Madison marketed itself as the premier venue for cheating spouses before data stolen by hackers started spreading across the Internet earlier this week. The prospect of finding the name of a loved one or an acquaintance amid the site's more than 35 million registered members has drawn strong interest worldwide.

   

  Websites devoted to checking emails against the leaked data appeared to be experiencing heavy traffic. Forums such as Reddit — the user-powered news and discussion site — carried stories of anguished husbands and wives confronting their partners after finding their data among the massive dump of information.

   

  When the hosts of a morning show in Sydney, Australia, asked listeners to phone in if they wanted their spouse's details run through the database, a woman called saying she was suspicious because her husband had been acting strangely since the news of the leak broke. The hosts plugged his details into a website and said they found a match.

   

  "Are you serious? Are you freaking kidding me?" the woman asked, her voice shaking. "These websites are disgusting." She then hung up.

   

  Family law experts are divided on the likely offline impact of the leak, but Los Angeles-based divorce lawyer Steve Mindel predicted an uptick in business for him and his colleagues.

  And, as Reuters reports, that is a silver lining of sorts…

  The hacker attack has been a big blow to Toronto-based assignation website firm Avid Life Media, which owns Ashley Madison and has indefinitely postponed the adultery site's IPO plans. But many professions stand to benefit from the unfolding saga, from lawyers to therapists to cyber security firms.

   

  Prominent divorce lawyer Raoul Felder said the release is the best thing to happen to his profession since the seventh Commandment forbade adultery in the Bible. "I've never had anything like this before," he said.

   

  The public embarrassment and emotional toll is likely to be enormous on unsuspecting people whose extra-marital affairs may have been exposed on the web or even whose emails were used without their knowledge to sign up for the site.

   

  "These poor people will be dealing with it in such a public way. It will be absolutely devastating," said Michele Weiner Davis, marriage therapist in Colorado and author of Divorce Busting.

  But there are other problems,

  The data release could have severe consequences for U.S. service members if found to be real. Several tech websites reported that more than 15,000 email addresses were government and military ones.

   

  Adultery, under certain criteria including the misuse of government time and resources, is a crime in the U.S. armed forces and can lead to dishonorable discharge or imprisonment.

   

  "Fall on your sword if you want to save your relationship," said Dr B. Janet Hibbs, a psychologist and couples therapist in Philadelphia. "Be prepared for them to ask a lot of questions, to not be defensive, to be compassionate."

  *  *  *

  So hey, those cheating spouses are now helping the economy grow…

  

  

  

  

  

  

• This Fraud Of A Company Is Trying To Sell Stock, But Who Cares: Here Are Semi-Naked Women In Bikinis

  Here’s a business idea:

  1. Hire a bunch of hot women
  2. Tell them to pretend to punch each other on camera while wearing just a string bikini
  3. Go public (kind of) and hope to sell $20 million worth of stock which you paid a few hundred bucks for before making even one dollar in revenue
  4. Profit

  That’s exactly what Las Vegas-based Lingerie Fighting Championships (LFC), formerly known as Spaking Events, Xodetec Group,  Xodetec LED and Cala Energy Cor,p which has a very appropriate OTC Pink trading symbol: BOTY, decided to do according to its just filed amended S-1 statement.

  Only it is not exactly a public offering: the company’s stock which rarely if ever trades on the pink sheets, is selling 3.9 million shares of selling shareholder stock for total proceeds of just under $20 million, as part of a reverse acquisition (no, not a reverse merger, a reverse acquisition) of its predecessor shell company with LFC.

  The offering is part of a broader transaction involving a reverse acquisition using a shell company, the trademark of “unshady” deals:

  On March 31, 2015, we acquired Lingerie Fighting Championships, Inc. (“LFC”) in a transaction which is accounted for as a reverse acquisition.  As a result of the reverse acquisition, we ceased to be a shell company and our business became the business of LFC, and our historical financial statements became the financial statements of LFC, to the extent that such financial statements relate to periods prior to the completion of the reverse acquisition transaction.  In connection with the reverse acquisition, we changed our fiscal year to the calendar year.  Since LFC was formed in July 2014, we do not show results of operations or cash flows for any periods prior to LFC’s organization in July 2014.  On April 1, 2015, LFC was merged into us, and our corporate name was changed to Lingerie Fighting Championships Inc.

  Boring stuff: the company’s description is more exciting:

  We are a development-stage media company, which is in the process of developing and implementing a program of original entertainment which we plan to make available predominantly through live entertainment events, as well as through digital home video, broadcast television networks, video-on-demand and digital media channels.  Our business is focused on developing mixed martial arts fighting techniques, known as MMA, together with fictional character persona portrayed by beautiful women in attractive costumes based on their respective fictional characters for the purpose of providing entertainment.

   

  On August 8, 2015, we presented our first program, Lingerie Fighting Championships 20:  A Midsummer Night’s Dream, at the Hard Rock Hotel and Casino in Las Vegas, Nevada.  The program featured eight matches with 16 fighters.  The fighters are beautiful women in attractive costumes.  Each of the fighters has a specific and unique persona and appearance.  Our event was live and carried on pay per view cable in United States and Canada. We expect that the program or a one-hour edited version will be available through video on demand in a number of countries, including the United States, Canada, Mexico, most of South America, the United Kingdom, Italy, India, Australia and New Zealand.  Our source of revenue from this program includes a percentage of the fees received by the media distribution companies who carries our program, as well as from ticket sales and products related to the program.  We may also receive additional revenue from sales of products through our website and from sale of the program through video on demand and other post-event media distribution.  We are commencing discussions with respect to our second program, which we hope to schedule for October 2015.

   

  We promote our events in a manner to create interest in each of the fighters and in the success of each fighter against the others, in the manner similar to a MMA league.  We believe that our female fighters and their characters will enable us to develop and maintain an audience willing to attend our events or watch our events either live or through video on demand, and well as buying merchandise related to the events. Some of the fighters have followings independent of their participation in our events and perform in their character in other media or venues.

  The punchlines above, in addition to “beautiful women in attractive costumes” is that this is a “development-stage media company”, and sure enough, a quick look at the financials reveals just that: zero revenue…

  

   

  … but a whole lot of outstanding shares, shares which the selling shareholders are now rushing to liquidate:

  

   

  Why are they rushing to dump their holdings. That actually is a very interesting question.

  We find this riveting description in the related transactions section:

  On December 31, 2014, Mr. Butler, Mr. Chan and one non-affiliated person each made a $12,000 loan to us (then known as Cala Energy Corp.) and received a 10% senior promissory note in the principal amount of $12,000.  The notes were due December 31, 2015 or earlier in the event that we completed a private placement of our stock.  The notes were paid from the proceeds of a $200,000 private placement of our common stock on March 31, 2015, contemporaneously with the completion of the reverse acquisition with LFC.  Mr. Chan was not a related party at December 31, 2014, and is deemed to have become a related party solely as a result of his acquisition of more than 5% of our common stock on March 31, 2015 pursuant to the Share Exchange Agreement relating to the reverse acquisition transaction.

   

  In February 2015, Mr. Butler and Mr. Chan each made a loan to LFC in the amount of $1,925.  The notes had a September 30, 2015 maturity date, and were converted into 1,925,000 shares of common stock pursuant to the share exchange agreement relating to the reverse acquisition.  At the time of the issuance of the shares upon conversion of the promissory notes, neither Mr. Butler nor Mr. Chan held any equity interest in our securities.  Two non-affiliated individuals, Giselle Dufourcq and Natilia Lopera, who are selling shareholder, each made a $700 loan to LFC and received 700,000 shares of common stock pursuant to the Share Exchange Agreement.  Neither Mr. Butler nor Mr. Chan had any stock or other equity interest in our equity securities other than the convertible notes prior to the completion of the reverse acquisition.

   

  In addition, during 2014, Mr. Butler made a $100 advance to us, and Mr. Donnelly made a $115 advance to LFC prior to the reverse acquisition.  These advances are included in loans payable at March 15, 2015.

   

  Through December 31, 2014, Mr. Butler had accrued compensation of $270,000, which represented compensation through August 31, 2014 from us, then known as Cala Energy Corp.  In February 2015, Mr. Butler forgave $270,000 of accrued compensation which was treated as a contribution to our capital.  The forgiveness of compensation was effective prior to the reverse acquisition transaction.

   

  Pursuant to the share exchange agreement relating to the reverse acquisition with LFC, on March 31, 2015, Mr. Donnelly exchanged his common stock in LFC for 9,350,000 shares of common stock, representing 47.3% of our outstanding common stock after giving effect to the shares of common stock issued in connection with the reverse acquisition transaction and the related private placement.  Prior to the issuance of these shares, Mr. Donnelly had no equity or other interest in us.  He became our chief executive officer and a director as a result of the reverse acquisition transaction.

  So a couple of people lent out the company a few hundred dollars (literally) for which they got millions of shares in stock, and now they are looking to sell these shares at a price of up to $5/share? Something tells us they won’t succeed not just because the “company” has no chance of ever generating any actual material revenue, let alone a profit, but because even a cursory glance at the “relationships” section reveals this is nothing but a fraud.

  Still, in a world where CYNK, a company without assets, operations or frankly anything except for an office in a stripmall and one employee can soar to billions in market cap on zero volume and then crash just as fast to zero, all of that is largely boring especially to the SEC and the Feds who certainly should be looking under the cover of Lingerie Fighting Championships very closely but they won’t, so let’s cut to the chase.

  Here is the company’s one and only “product” – “beautiful women in attractive costumes.“

   

  Chloe “Ladykillah” Cameron

  

  

  

  

   

  Feather “The Hammer” Hadden

  

  

   

  Suzanne “Hawaiian Punch” Nakata

  

  

   

  Shelly “Aphrodite” DaSilva

  

  

   

  Lauren “The Animal” Erickson

  

  

   

  Jenny Valentine

  

  

   

  Holly “The Lotus” Mei

  

  

   

   

  Some more deep research into the nature of the company’s future revenue stream:

   

  And remember: if anyone gives you dirty looks for scouring through a post of semi-naked women at work, just say it’s due diligence for an equity offering, which incidentally is what all the bankers who were caught on Ashley Madison should be telling their spouses and girlfriends.

  

  

  

  

• Aug 21 – Greek PM Tsipras Resigns, Calls Snap Elections

  EMOTION MOVING MARKETS NOW: 11/100 EXTREME FEAR

  PREVIOUS CLOSE: 11/100 EXTREME FEAR

  ONE WEEK AGO: 9/100 EXTREME FEAR

  ONE MONTH AGO: 25/100 EXTREME FEAR

  ONE YEAR AGO: 37/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 25.60% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.
  Market Volatility: EXTREME FEAR The CBOE Volatility Index (VIX) is at 19.14, 34.83% above its 50-day moving average and indicates that investors are concerned about the near-term values of their portfolios.

  Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
  

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – IT’S THE JERKS

   

  UNUSUAL ACTIVITY

  IDTI Vol weakness SEP 19 PUT ACTIVITY @$1.25 on offer 4500+ Contracts

  SLB SEP 80 PUT ACTIVITY @$1.31 on offer 4000+ Contracts

  PYPL SEP WEEKLY4 PUTS on the BID @$1.35 3700 Contracts

  SPLS DEC 15 CALLS on the OFFER @$.90-.95 6000 Contracts

  SEMI – CEO Purchased $300k+ total

  AVHI Director Purchase 1,920 @$ 13.9989 Purchase 1,280 @$13.99

  More Unusual Activity…

   

  HEADLINES

   

  Greek PM Tsipras resigns, calls snap elections

  US Philly Fed Business Index (Aug): 8.3 (est 6.5; prev 5.7)

  US Existing Home Sales (MoM) (Jul): 2.0%% (est -1.20%; prev rev 3.0%)

  US Leading Index (MoM) (Jul): -0.2% (est 0.20%; prev 0.60%)

  US Initial Jobless Claims Aug-15: 277K (est 271K; rev prev 273K)

  US Continuing Claims Aug-08: 2254K (est 2265K; rev prev 2278K)

  US EIA Natural Gas Storage Change (Aug): 53 (est 59; prev 65)

  US Commercial Paper Outstanding (SA) (19 Aug): -$1.8bn

  CA Wholesale Trade Sales (MoM) Jun: 1.30% (est 0.90%; rev prev -0.90%)

  ECB Nowotny: No signals for early QE end, dismisses idea of FX wars

  Bank Of Spain bends ECB rules to favour own banks –HB

  SNB’s Jordan: SNB prepared to intervene in CHF if necessary

  M&A: Visa In $21bn Bid To Merge US, European Units

  M&A: Valeant pays $1bn for women’s libido drug

  Fitch: China’s capital injections support policy banks, economy

   

  GOVERNMENTS/CENTRAL BANKS

  US Commercial Paper Outstanding (SA) (19 Aug): -$1.8bn

  Allianz’s El-Erian: Fed missed earlier chance to hike rates –Rtrs

  Liberty St Econ: The Evolution of Workups in UST Securities Market

  ECB’s Nowotny: There is no signal for early end to QE –FXStreet

  ECB’s Nowotny dismisses ‘currency wars’ talk –Rtrs

  ECB: E155m Borrowed Using Overnight Loan Facility, E157bn Deposited –Livesquawk

  ECB: EZ Excess Liquidity Fell To E471.705bn From E472.92bn

  Bank Of Spain bends ECB rules to favour own banks –Handelsblatt

  SNB’s Jordan: SNB prepared to intervene in CHF if necessary –FoerxLive

  France’s Hollande: Tax cuts will come with higher growth next year –Rtrs

  GREECE

  Greek PM Tsipras to resign, calls nsap elections –Tele

  ECB confirms Greece payment received –Livesquawk

  EC signs 3yr ESM stability support programme for Greece –EC

  Greece Authorizes $3.6B Payment on ECB-Held Bonds –BBG

  GEOPOLITICS

  North And South Korea ‘Trade Artillery Fire’ –Rtrs

  UK to reopen Tehran embassy –Sky

  FIXED INCOME

  UST to auction $26bn 2s, $35bn 5s, $29bn 7sm $13bn 2y FRN –Livesquawk

  Bankrate: US Mortgage Rates Rise, Boosted By Improved Housing Market –Bankrate

  Apple releases Kangaroo guidance –IFR

  FX

  USD: Dollar slips as Fed rate hike hopes recede –Rtrs

  EUR: Euro rises to 7-week peak against dollar –FT

  CHF: SNB’s Jordan: SNB prepared to intervene in CHF if necessary –FoerxLive

  CHF: Swiss EconMin: CHF Should Move Towards 1.22 Vs Euro, Hopes Will Weaken Towards 1.10

  CNY: IMF decision rattles China’s yuan –WSJ

  CNY: ECB Nowotny: Yuan Drop Sign of Slowing Growth, Not FX War

  EMFX: EM currency turmoil escalates –FT

  ENERGY/COMMODITIES

  CRUDE: WTI futures settle 0.8% higher at $41.14 per barrel –Livesquawk

  CRUDE: Brent futures settle down 1.2% at $46.62 per barrel –Livesquawk

  CRUDE: US EIA Natural Gas Storage Change (Aug): 53 (est 59; prev 65)

  CRUDE: Rigzone: Some offshore rigs being bid at break even rates –BBG

  CRUDE: Mexico hedges 2016 oil exports at $49 a barrel –FT

  WEATHER: Hurricane Danny named as first major storm of Atlantic season –Guardian

  METALS: Gold breaks above $1150; highest since July 15 –CNBC

  EQUITIES

  M&A: Visa In $21bn Bid To Merge US, European Units –Sky

  M&A: Valeant pays $1bn for women’s libido drug –FT

  M&A: Zurich Insurance drafts Evercore in RSA pursuit –FT

  M&A: United Tech in talks to buy Nortek –WSJ

  TRADING: FTSE 100 falls into correction territory –FT

  TECH: Twitter falls below IPO price –BI

  TECH: Gartner: Worldwide Smartphone Sales Recorded Slowest Growth Rate Since 2013

  BANKS: FDIC sues Citigroup, 2 other banks over soured mortgages –Rtrs

  UTILITIES: RWE To Replace Head Of British Unit –Rtrs

  MEDIA: Netflix slumps amid broad media selloff –MW

  EARNINGS: Sears reports first quarterly profit since 2012, sales still tumble -Rtrs

  REGULATION: US senators urge recall of all autos with Takata airbags –BI

  COMMODS: Moody’s downgrades ConocoPhillips’ unsecured ratings to A2, stable outlook

  EMERGING MARKETS

  Fitch: China’s Capital Injections Boost Support For Policy Banks, Economy

   

  El-Erian: Seeing a classical overshoot, starting in emerging markets –CNBC

  

  

  

  

  

• Hillary Clinton Admits Classified Information Was Stored On Home Server

  “What, with a cloth or something?,” Democratic frontrunner (for now anyway) Hillary Clinton said earlier this week, in a sarcastic and fairly condescending reply to a reporter who pressed her on whether she had attempted to wipe her private e-mail server clean before turning it over to the FBI. 

  That was the second time in a week that Clinton has attempted to deflect questions about the server with a dark mix of humor and disdain, and it’s backfired both times.

  When Clinton first handed over the server along with a thumb drive, an attorney for the Colorado-based company that managed Clinton’s private e-mail said the server the FBI got “is blank and does not contain any useful data.” That only exacerbated GOP lawmakers’ aggravation and may well have cost Clinton in the polls, as the socialist Bernie Sanders surged ahead in New Hampshire. 

  Subsequently, reports surfaced that an audit of the e-mails the former First Lady turned over to the State Department revealed that at least two e-mails may have contained top secret information about the CIA’s drone program.

  With the controversy unlikely to dissipate any time soon, and with many analysts claiming that the issue could well imperil her run for The White House, Clinton has now admitted that in fact, her private server did contain classified e-mails. Here’s the story from WSJ:

  Hillary Clinton’s campaign said Wednesday that emails on the private server she used when she was secretary of state contained material that is now classified, the clearest explanation thus far of an issue that has roiled her bid for the presidency.

   

  At the same time, the campaign sought to play down the disclosure by saying the material had been retroactively classified out of an abundance of caution by U.S. intelligence agencies.

   

  “She was at worst a passive recipient of unwitting information that subsequently became deemed as classified,” said Brian Fallon, a spokesman for Mrs. Clinton’s campaign.

   

  
  

   

  Mrs. Clinton has been criticized for using a private email server when she was in office. Since 2013, the server was maintained by a small Denver company and stored at a secure data center in New Jersey until it was turned over to the FBI last week. Her use of the server has prompted an FBI counterintelligence investigation.

   

  Republicans portrayed the Clinton campaign’s disclosure as a tacit admission that her previous statements about the partisan direction of the investigation were in error. Earlier this year, Mrs. Clinton said “there is no classified material,” before shifting her emphasis to say she didn’t receive any materials marked as classified.

   

  “Secretary Clinton has repeatedly made false claims about her email records, and her charge that these investigations are partisan have been widely ridiculed. If she and her campaign are having a change of heart, she should personally admit the truth and retract her false statements,” said Kevin Smith, a spokesman for House Speaker John Boehner.

  While it’s certainly disconcerting that the nation’s one-time top diplomat was sending and receiving sensitive information over an unsecure private e-mail server, the issue for Clinton – because it would probably be naive to think that anyone besides voters will actually hold her accountable – is that her handling of the ordeal has served to reinforce the perception that she’s too arrogant and untrustworthy to be given the reins to the country.

  That is, the public was already wary of electing yet another member of America’s political aristocracy (or oligarchy, if you will) and the fact that Clinton apparently expects Americans to believe that she had no idea the information she was receiving on her home server might one day be deemed classified (even though she’s been privy to such information in various capacities for decades) seems to underscore her arrogance and highlight her propsensity to, as Jean Claude-Juncker famously put it, lie when “things become serious.”

  

  

  

  

  

• FBI Had 12-Page File On George Carlin Because He Made Jokes About Government

  Submitted by John Vibes via TheAntiMedia.org,

  Comedian George Carlin is known as one of the most controversial and outspoken entertainers of his time, and as far as the government is concerned, he could have possibly been a terrorist.

  Carlin was not a violent or criminal person in any way, but he said things during his routines that struck at the root of the problems in our society. He went into great detail about corruption in government and business.

  During the 1978 Supreme Court case, FCC v Pacifica Foundation, the government cited Carlin’s work as an example of profanity. They used his “Seven Dirty Words” segment to show the type of language that was being used in records and broadcasts. However, the government’s interest in his work did not stop there.

  Just after his 1969 appearance on the Jackie Gleason show, Carlin caught the attention of the FBI because he made jokes about then-FBI chief J. Edgar Hoover. According to the government, Carlin had “referred to the Bureau and the Director in a satirical vein.”

  They added that his act was “considered to be in very poor taste” and “it was obvious that he was using the prestige of the Bureau and Mr. Hoover to enhance his performance.”

  

  After Carlin’s appearance on the show, the staff of Jackie Gleason received a number of anonymous letters — allegedly from fans but possibly from the FBI — condemning Carlin for speaking about the government in the critical way that he did. It has been proven that the FBI has indeed sent threatening letters to public figures in the past, pretending to be concerned colleagues or a member of the public, including to Dr. Martin Luther King Jr.

  

  A letter claiming to be from a viewer of the Jackie Gleason show, criticizing Carlin’s statements.

  Anyone that speaks out against the injustices of the world, whether they are a dangerous terrorist or a harmless comedian, will receive unwanted attention from government.

  Below is a video showing Carlin’s deep political analysis in action:

  Read the 12 pages of FBI documents on Carlin here.

  

  

  

  

  

• Wall Street To Form New Tech Company To "Clean Up" Dirty Data

  Back in June, when commenting on a lawsuit brought by a group of pension and retirement funds which amusingly accused Wall Street and its progeny Markit of conspiring to monopolize the CDS market to the detriment of potential new entrants that we’re sure had only the best intentions (like Citadel), we said the following: 

  While the entire world is now, with the benefit of hindsight, able to see how a setup that allowed rate traders to communicate with benchmark submitters might have been a recipe for disaster, what should be even more obvious is that allowing a firm controlled by Wall Street’s largest banks to effectively monopolize the market for the derivatives that not only played a rather large role in the financial crisis but also serve as the go-to instrument for hedging tail risk is likely also a bad idea and could very well lead to manipulation and all sorts of other nefarious things like, for instance, attempts to create and preserve a lucrative monopoly by adopting anti-competitive practices. 

  We were of course referring to Markit, the Wall Street-backed provider for CDS data, and as WSJ reports, it now appears that Wall Street will conspire to form another reference data entity in which everyone will have a stake. The project is called “SPReD” and it will be implemented by SmartStream Technologies ltd. Here are the (convoluted) details:

  The initiative is currently dubbed “SPReD”, which stands for Securities Product Reference Data, and is likely to be launched as a new entity in the next six to 12 months, the people said. Each founding bank is investing “seven figures” for the entity, the people said.

   

  The company will work specifically with reference data on financial instruments, including identifiers like names, codes and symbols that each institution already buys. It will start with listed derivatives and equity data, with fixed income-related data added later.

   

  The project would consolidate efforts to clean and store the vast amount of data, centralizing a function that many banks have previously done individually, with some housing data in a variety of units within their organization.

   

  Banks typically use market data from vendors and glean it from public sources, run it through their systems and “scrub” the data to get so-called “golden copies” that are consistent and ready for use across the business, one of these people said. That consistent data can help save on transaction costs across the organization.

   

  The new entity will create tailored data feeds for each client using existing sources of data that firms receive from a variety of vendors. Each bank or client will continue to negotiate those data vendor relationships themselves.

   

  Earlier this year J.P. Morgan created a central system within the bank that pulled streams of reference data from all of its providers into one hub, a person familiar with the process said. The new entity will take over scrubbing reference data for the bank, ultimately feeding it back into J.P. Morgan’s system, as part of its cost savings initiative.

   

  Using consistent data allows the banks to form accurate pricing for trades and can be essential for risk and compliance reviews that could arise.

  While it’s not entirely clear from the above exactly what all will be included in the data sets that comprise SPReD – and we’ll probably never know until someone gets caught manipulating something – this seems to be an attempt to standardize data across markets in a way that allows the banks to control the tracking.

  What that will mean going forward is anyone’s guess but as is clear from the last line excerpted above, standardizing this data will supposedly help banks “form accurate pricing for trades”, and we all know what can happen when Wall Street gets together to “standardize” a reference point on which trades are based. 

  

  

  

  

  

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• Lehman's Gift To Jeb Bush For Funneling Pension Money: A $1.3 Million Consulting "Job"

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  At this point, it almost feels like kicking someone while he’s down. Jeb Bush can’t even stand up to Donald Trump, let alone his own growing series of scandals.

  In the latest revelation from David Sirota and team at International Business Daily, we learn that:

  For Florida taxpayers, the move by the administration of then-Gov. Jeb Bush to forge a relationship with Lehman Brothers would ultimately prove disastrous. Transactions in 2005 and 2006 put the Wall Street investment bank in charge of some $250 million worth of pension funds for Florida cops, teachers and firefighters. Lehman would capture more than $5 million in fees on these deals, while gaining additional contracts to manage another $1.2 billion of Florida’s money. Then, in the fall of 2008, Lehman collapsed into bankruptcy, leaving Florida facing up to $1 billion in losses.

   

  But for Jeb Bush personally, his enduring relationship with Lehman would prove lucrative. In 2007, just as he left office, Bush secured a job as a Lehman consultant for $1.3 million a year, Bloomberg reported.

   

  Next time, please just ride off into the sunset and paint landscapes with your brother.

  Weeks after Bush took the Lehman job, the Florida State Board of Administration (SBA) — a three-member body that makes investment decisions about state pension funds and whose ranks had recently included one Jeb Bush — gave Lehman additional business: SBA purchased $842 million worth of separate investments in Lehman’s mortgage-backed securities. Over the course of one year from June 2007 to June 2008, the SBA would shift an additional $420 million of pension money into the same fund in which the state had begun investing under Bush.

   

  In short, during Bush’s first year working for Lehman, his former colleagues in Tallahassee, the state capital, moved vast sums of Florida pension money into the doomed Wall Street investment bank, even as warnings about its financial troubles began to emerge.

   

  “This is a breathtaking conflict of interest going on here,” said Craig Holman, governmental ethics lobbyist with Public Citizen, a good-government group. “This cost Florida very dearly, and it enriched Jeb Bush.”

   

  Jeff Connaughton, author of the book “The Payoff: Why Wall Street Always Wins,” said the transactions illustrate a larger culture that dominates the politics of finance.

   

  Florida originally began investing money in Lehman in 2005, while Bush was the highest profile member of the SBA, which oversees the $150 billion pension fund. The Bush-led SBA that year committed $176 million to Lehman; in 2006, as Florida moved another $87 million into the Lehman investment, the firm hired Jeb Bush’s cousin, George Herbert Walker, to run the firm’s investment management division.

   

  The next year, Lehman offered the outgoing Florida governor the consulting job. Bush had worked briefly at a Texas-based bank after college, but he lacked significant Wall Street experience.

  Fortunately for Jeb, being a crony doesn’t take any real skill.

  Most of the investment losses that hit Florida starting in July 2007 were tied to the Lehman mortgage-backed securities bought the year Bush began his employment at the firm.

  

  *  *  *

  For related articles, see:

  Jeb Bush Calls Iraq War a “Good Deal,” Expresses Support for Torture and NSA Spying While Campaigning in Iowa

  How Jeb Bush’s Recent Speech Bashing Lobbyists Was Organized by Lobbyists

  Election 2016 Data Released – Jeb Bush Receives 3% of Funds from Small Donors vs. Bernie Sanders at 81%

  A Message to the Peasants – Jeb Bush Says Americans Need to Work Longer Hours

  Jeb Bush’s Deep Love Affair with Lobbyists and Cronyism While Governor of Florida Exposed

  Poor Jeb Bush – Poll Numbers Plunge in Home State of Florida and Remain Dismal in Ohio and Pennsylvania

  Jeb Bush Doubles Down on His Love Affair with the NSA in Recent Interview

  An Oligarch Dilemma – Recent Poll Shows 42% of Republican Primary Voters Couldn’t Support Jeb Bush

  Jeb Bush Exposed Part 1 – His Top Advisors Will Be the Architects of His Brother’s Iraq War

  Jeb Bush Exposed Part 2 – He Thinks Unconstitutional NSA Spying is “Hugely Important”

  

  

  

  

  

• Economic Crisis Goes Mainstream – What Happens Next?

  Submitted by Brandon Smith via Alt-Market.com,

  

  Last year, when alternative economic analysts were warning that the commodities crush and oil crash just after the taper of QE3 were blaring signals for a downshift in all other financial indicators, the general response in the mainstream was that we were overreacting and paranoid and that the commodities jolt was temporary. Perhaps the fact needs repeating that it’s not paranoia if they are really out to get you.

  Only a short time later, it is truly amazing how the rhetoric from the mainstream economic yes-men is changing. The blind analysts who were cheerleading for the nonexistent global recovery are now being carefully relegated to the janitor’s closet over at The New York Times, where Paul Krugman’s office should be. Media outlets are begrudgingly admitting to global instabilities like, for instance, a U.S. interest rate hike leading to a return to recession. (Special note to the mainstream media: Take away the fruitless manipulation of indicators through Fed stimulus, and we never left the recession.) They also are now forced to acknowledge that China’s market crash and yuan devaluation have far-reaching implications for global crisis, whereas a year ago the claim was that China’s problems would stay in China. Even China’s own media are now warning of the chain of fiscally interdependent economies and what the nation’s downturn means for everyone.

  The MSM are finally entertaining the obvious notion that the vast financial problems of the EU have little to do with the crisis in Greece and more to do with crushing debt obligations and employment problems in primary nations like France and Italy.

  And suddenly, pundits are once again concerned with Japan’s epidemic of mini-recessions and the truth of fiscal contraction that is not just a way of life, but an exponential dynamic that is getting worse fast, rather than staying static. This concern is, of course, always followed with suggestions that the light can be seen at the end of the tunnel and that growth will inevitably return. The mainstream media may be discussing points of reality, but that does not stop them at times from mixing in fairy tales.

  This alteration in rhetoric from the mainstream may not necessarily be due to an awakening in the media. Rather, it may be due to the new narratives being put forth by core banking elite institutions like the International Monetary Fund and the Bank of International Settlements, institutions that have established a mission to appear competent in the wake of an economic crisis they KNOW is about to be triggered. The IMF is consistently making statements regarding potential disaster in global markets due to central banking stimulus measures (which it originally championed), as well as potential rate hikes, sending mixed messages to devout mainstream followers. The IMF’s latest overviews of global markets have been far gloomier than mainstream media outlets until recently. Suddenly, it would seem, the media has been given direction to parrot internationalist talking points.

  The BIS warns that the world is currently defenseless against the next market crisis. I would point out that the BIS has a record of predicting economic crashes, including back in 2007 just before the derivatives and credit crisis began. This ability to foresee fiscal disasters is far more likely due to the fact that the BIS is the dominant force in global central banking and is the cause of crisis, rather than merely a predictor of crisis. That is to say, it is easy to predict disasters you yourself are about to initiate.

  It is no mistake that the warnings from the BIS and the IMF tend to come too little too late, or that they are beginning to compose cautionary press releases today that sound much like what alternative analysts were saying a few years ago. The goal of these globalist organizations is not to help people prepare, only to set themselves up as Johnny-come-lately prognosticators so that after a collapse they can claim they warned us all, which can then be used as a rationalization for why they are the best people to administrate the economies of the planet as a whole.

  So now that the mainstream is willing to report on clear economic dangers, what happens next?

  The change in the MSM narrative is a bad sign. The initial media coverage of the derivatives implosion in 2008 did not become negative until we were well within the shadow of the avalanche. If the same holds true today, then a market event is imminent. Here are some of the issues you may hear more about as the year goes forward.

  China ‘Contagion’

  Forget about Greek contagion, we will be hearing far more about Chinese contagion over the next several months.  The globalist run Carnegie Endowment for International Peace is already fielding the concept in their magazine 'Foreign Policy'. With the devaluation of the yuan, mainstream analysts are frantic over the possibility of currency wars, a concept they rarely ever entertained in the past. Yuan devaluation is not, though, necessarily a negative for China itself. In fact, the IMF in recent statements argues that China’s economy is entering a “new normal” of slower but more “stable” growth. The IMF also has announced that the recent shock of the falling yuan to global markets actually makes the currency MORE viable for inclusion in the Special Drawing Rights global currency basket, a decision that is supposed to be finalized by November (though a year long extension has been recommended by the IMF before approval).

  Expect that economic news will be focused nonstop on China for the rest of the year, perhaps leading to the perpetuation of the false East/West paradigm and the idea that Americans should blame China for the overall financial crisis rather than the global bankers who engineered the mess.  In the meantime, top globalists will continue to remain "neutral", presenting themselves as peacemakers and problem solvers arguing that the crash is "no one's fault", that over-complexity is the danger,  and that interconnected economies must be simplified down to a single global currency and single global authority.

  U.S. Economy Feeling Effects

  The Federal Reserve push for a rate hike will likely be determined before 2015 is over. Talk of a September increase in interest rates may be a ploy, and a last-minute decision to delay could be on the table. This tactic of edge-of-the-seat meetings and surprise delays was used during the QE taper scenario, which threw a lot of analysts off their guard and caused many to believe that a taper would never happen. Well, it did happen, just as a rate hike will happen, only slightly later than mainstream analysts expect.

  If a delay occurs, it will be short-lived, triggering a dead cat bounce in stocks, with rates increasing before December as dismal retail sales become undeniable leading into the Christmas season.  It is important to remember that the Fed's job is to DERAIL the U.S. economy, NOT protect it.

  In the meantime, the IMF’s SDR conference continues, with the inclusion of the yuan now widely considered a threat to the dollar’s world-reserve status. The mainstream media are now preparing the American people (or at least those who are paying any attention) for the coming loss of world-reserve status. The propaganda aims to paint the dollar’s reserve position as a bad thing. The MSM argue that loss of reserve status could actually help the U.S. economy get back on track and that a global harmonization of sovereign currencies will be a boost to our fiscal outlook. This is clearly an attempt to inoculate the public against any concern over the eventual crash of dollar value.

  Oil Price Panic

  Oil prices will continue to deflate, and the after-effects will be difficult to gauge. With John Kerry publicly warning that the failure of an Iran deal (including the lucrative oil export deals that would be included) could lead to the loss of the dollar’s world-reserve status, I am not very optimistic about the future prospects of energy markets.

  Kerry claims that a failed Iran agreement would put the U.S. at odds with allies who brokered the deal, but this is not the whole story. What is really taking place is an attempt by Kerry to distract the public away from the real reasons for the future fall of the dollar, including the rise of the SDR and the likelihood that Saudi Arabia will soon decouple from the dollar as the solitary purchasing mechanism for their oil (Saudi Arabia is surprisingly one of the main supporters of an Iran deal). It is perhaps possible that a collapse of the Iran agreement could be used as an excuse for a loss of dollar reserve status that was going to happen anyway.

  Events Moving Faster

  Economic news is moving extremely fast this year, and it will only become more frenetic as we close in on 2016. The general consensus among alternative economic investigators seems to be that 2015 will be the year for trigger events and dead fantasies. In my six part series entitled 'One Last Look At The Real Economy Before It Implodes' I essentially agree with this timetable. If 2014 was the new 2007 with all its immediate warning signs, then 2015 is the new 2008 with all the chaos and broken paradigms.

  

  

  

  

  

• 10 Things Every Economist Should Know About The Gold Standard

  Submitted by George Selgin via Alt-M.org,

  At the risk of sounding like a broken record (well, OK–at the risk of continuing to sound like a broken record), I'd like to say a bit more about economists' tendency to get their monetary history wrong.  In particular, I'd like to take aim at common myths about the gold standard.

  If there's one monetary history topic that tends to get handled especially sloppily by monetary economists, not to mention other sorts, this is it.   Sure, the gold standard was hardly perfect, and gold bugs themselves sometimes make silly claims about their favorite former monetary standard.   But these things don't excuse the errors many economists commit in their eagerness to find fault with that "barbarous relic."

  The false claims I have in mind are mostly ones I and others–notably Larry White–have countered  before.  Still I thought it would be useful to address them again here, because they're still far from being dead horses, and also so that students wrapping-up the semester will have something convenient to send to their misinformed gold-bashing profs (though I urge them to wait until grades are in before sharing!).

  For the sake of those who don't care to wade through the whole post, here is a "jump to" list of the points covered:

  1. The Gold Standard wasn't an instance of government price fixing. Not traditionally, anyway.
  2. A gold standard isn't particularly expensive. In fact, fiat money tends to cost more.
  3. Gold supply "shocks" weren't particularly shocking.
  4. The deflation that the gold standard permitted  wasn't such a bad thing.
  5.  It wasn't to blame for 19th-century American financial crises.
  6.  On the whole, the classical gold standard worked remarkably well (while it lasted).
  7.  It didn't have to be "managed" by central bankers.
  8.  In fact, central banking tends to throw a wrench in the works.
  9.  "The" Gold Standard wasn't to blame for the Great Depression.
  10.  It didn't manage money according to any economists' theoretical ideal.  But neither has any fiat-money-issuing central bank.

   

  1.  The Gold Standard wasn't an instance of government price fixing.  Not traditionally, anyway.

  As Larry  White has made the essential point as well as I ever could, I hope I may be excused for quoting him at length:

  Barry Eichengreen writes that countries using gold as money 'fix its price in domestic-currency terms (in the U.S. case, in dollars).'   He finds this perplexing:

  But the idea that government should legislate the price of a particular commodity, be it gold, milk or gasoline, sits uneasily with conservative Republicanism’s commitment to letting market forces work, much less with Tea Party–esque libertarianism.  Surely a believer in the free market would argue that if there is an increase in the demand for gold, whatever the reason, then the price should be allowed to rise, giving the gold-mining industry an incentive to produce more, eventually bringing that price back down. Thus, the notion that the U.S. government should peg the price, as in gold standards past, is curious at the least.

  To describe a gold standard as "fixing" gold’s "price" in terms of a distinct good, domestic currency, is to get off on the wrong foot.  A gold standard means that a standard mass of gold (so many grams or ounces of pure or standard-alloy gold) defines the domestic currency unit.  The currency unit (“dollar”) is nothing other than a unit of gold, not a separate good with a potentially fluctuating market price against gold.  That one dollar, defined as so many grams of gold, continues be worth the specified amount of gold—or in other words that one unit of gold continues to be worth one unit of gold—does not involve the pegging of any relative price. Domestic currency notes (and checking account balances) are denominated in and redeemable for gold, not priced in gold.  They don’t have a price in gold any more than checking account balances in our current system, denominated in fiat dollars, have a price in fiat dollars.  Presumably Eichengreen does not find it curious or objectionable that his bank maintains a fixed dollar-for-dollar redemption rate, cash for checking balances, at his ATM.

  Remarkably, as White goes on to show, the rest of Eichengreen's statement proves that, besides not having understood the meaning of gold's "fixed" dollar price, Eichengreen has an uncertain grasp of the rudimentary economics of gold production:

  As to what a believer in the free market would argue, surely Eichengreen understands that if there is an increase in the demand for gold under a gold standard, whatever the reason, then the relative price of gold (the purchasing power per unit of gold over other goods and services) will in fact rise, that this rise will in fact give the gold-mining industry an incentive to produce more, and that the increase in gold output will in fact eventually bring the relative price back down.

  I've said more than once that, the more vehement an economist's criticisms of the gold standard, the more likely he or she knows little about it.  Of course Eichengreen knows far more about the gold standard than most economists, and is far from being its harshest critic, so he'd undoubtedly be an outlier in  the simple regression, y =   ? + ?(x) (where y is vehemence of criticism of the gold standard and x is ignorance of the subject).  Nevertheless, his statement shows that even the understanding of one of the gold standard's most well-known critics leaves much to be desired.

  Although, at bottom, the gold standard isn't a matter of government "fixing" gold's price in terms of paper money, it is true that governments' creation of monopoly banks of issue, and the consequent tendency for such monopolies to be treated as government- or quasi-government authorities, ultimately led to their being granted sovereign immunity from the legal consequences to which ordinary, private intermediaries are usually subject when they dishonor their promises.  Because a modern central bank can renege on its promises with impunity, a gold standard administered by such a bank more closely resembles a price-fixing scheme than one administered by a commercial bank.  Still, economists should be careful to distinguish the special features of a traditional gold standard from those of  central-bank administered fixed exchange rate schemes.

   

  2.  A gold standard isn't particularly expensive.  In fact, fiat money tends to cost more.

  Back in the early 1950s, and again in 1960,  Milton Friedman estimated that the gold required for the U.S. to have a "real" gold standard would have cost 2.5% of its annual GNP.  But that's because Friedman's idea of a "real" gold standard was one in which gold coins alone served as money, with no fractionally-backed bank-supplied substitutes.  As Larry White shows in his Theory of Monetary Institutions (p. 47) allowing for 2% specie reserves–which is more than what some former gold-based free-banking systems needed–the resource cost of a gold standard taking advantage of fractionally-backed banknotes and deposits would be about one-fiftieth of the number Friedman came up with.  That's a helluva bargain for a gold "seal of approval" that could mean having access to international capital at substantially reduced rates, according to research by Mike Bordo and Hugh Rockoff.

  Friedman himself eventually changed his mind about the economies to be achieved by employing fiat money:

  Monetary economists have generally treated irredeemable paper money as involving negligible real resource costs compared with a commodity currency.  To judge from recent experience, that view is clearly false as a result of the decline in long-term price predictability.

  I took it for granted that the real resource cost of producing irredeemable paper money was negligible, consisting only of the cost of paper and printing.  Experience under a universal irredeemable paper money standard makes it crystal clear that such an assumption, while it may be correct with respect to the direct cost to the government of issuing fiat outside money, is false for society as a whole and is likely to remain so unless and until a monetary structure emerges under an irredeemable paper standard that provides a high degree of long-run price level predictability.*

  Unfortunately, neither White's criticism of Friedman's early calculations nor Friedman's own about-face have kept gold standard critics from repeating the old canard that a fiat standard is more economical than a gold standard.  Ross Starr, for example, observes in his 2013 book on money  that "The use of paper or fiduciary money instead of commodity money is resource saving, allowing commodity inventories to be liquidated."  Although he understands that fractionally-backed banknotes and deposits may go some way toward economizing on commodity-money reserves, Starr (quoting Adam Smith, but failing to look up historic Scottish bank reserve ratios) insists nonetheless that "a significant quantity of the commodity backing must be maintained in inventory to successfully back the currency," and then proceeds to build a case for fiat money from this unwarranted assertion:

  The next step in economizing on the capital tied up in backing the currency is to use a fiat money.  Substituting a government decree for commodity backing frees up a significant fraction of the economy's capital stock for productive use.  No longer must the economy hold gold, silver, or other commodities in inventory to back the currency.  No longer must additional labor and capital be used to extract them from the earth.  Those resources are freed up and a simple virtually costless government decree is substituted for them.

  Tempting as it is to respond to such hooey simply by noting that the vaults of the world's official fiat-money managing institutions presently contain rather more than zero ounces of gold–31,957.5 metric tons more, to be precise–that response only hints at the fundamental flaw in Starr's reasoning, which is his treatment of fiat money as a culmination, or limiting case, of the resource savings to be had by resort to fractional commodity-money reserves.  That treatment overlooks a crucial difference between fiat money and readily redeemable banknotes and deposits, for whereas redeemable banknotes and deposits are generally understood by their users to be close, if not perfect, substitutes for commodity money, fiat money, the purchasing power of which is unhinged from that of any former money commodity, is nothing of the sort.  On the contrary: its tendency to depreciate relative to real commodities, and to gold in particular, is notorious.   Consequently holders of fiat money have reason to hold  "commodity inventories" as a hedge against the risk that fiat money will depreciate.

  If the hedge demand for a former money commodity is large enough, resort to fiat money doesn't save any resources at all.  Indeed, as Roger Garrison notes, "a paper standard administered by an irresponsible monetary authority may drive the monetary value of gold so high that more resource costs are incurred under the paper standard than would have been incurred under a gold standard."  A glance at the history of gold's real price suffices to show that this is precisely what has happened:

  From "After the Gold Rush," The Economist, July 6, 2010.

  Taking the long-run average price of gold, in 2010 prices, to be somewhere around $470, prior to the closing of the gold window in 1971, that price was exceeded on only three occasions, and never dramatically: around the time of the California gold rush, around the turn of the 20th century, and for several years following FDR's devaluation of the dollar.  Since 1971, in contrast, it has exceeded that average, and exceeded it substantially, more often than not.  Here is Roger Garrison again:

  There is a certain asymmetry in the cost comparison that turns the resource-cost argument against paper standards.  When an irresponsible monetary authority begins to overissue paper money, market participants begin to hoard gold, which stimulates the gold-mining industry and drives up the resource costs. But when new discoveries of gold are made, market participants do not begin to hoard paper or to set up printing presses for the issue of unbacked currency.  Gold is a good substitute for an officially instituted paper money, but paper is not a good substitute for an officially recognized metallic money. Because of this asymmetry, the resource costs incurred by the State in its efforts to impose a paper standard on the economy and manage the supply of paper money could be avoided if the State would simply recognize gold as money. These costs, then, can be counted against the paper standard.

  So if it's avoidance of gold resource costs that's desired, including avoidance of the very real environmental consequences of gold mining, a gold standard looks like the right way to go.

   

  3.  Gold supply "shocks" weren't particularly shocking

  Of the many misinformed criticisms of the gold standard, none seems to me more wrong-headed than the complaint that the gold standard isn't even a reliable guarantee against serious inflation.  The RationalWiki entry on the gold standard is as good an example of this as any:

  Even gold can suffer problems with inflation.  Gold rushes such as the California Gold Rush expanded the money supply and, when not matched with a simultaneous increase in economic output, caused inflation.  The "Price Revolution" of the 16th century demonstrates a case of dramatic long-run inflation. During this period, western European nations used a bimetallic standard (gold and silver). The Price Revolution was the result of a huge influx of silver from central European mines starting during the late 15th century combined with a flood of new bullion from the Spanish treasure fleets and the demographic shift brought about by the Black Plague (i.e., depopulation). 

  Admittedly the anonymous authors of this article may not be professional economists; but take my word for it that the same arguments might be heard from any number of such professionals.  Brad DeLong, for example, in a list of "Talking Points on the Likely Consequences of re-establishment of the Gold Standard" (my emphasis), includes observation that "significant advances in gold mining technology could provide a significant boost to the average rate of inflation over decades."

  Like I said, the gold standard is hardly free of defects.  But being vulnerable to bouts of serious inflation isn't one of them.   Consider the "dramatic" 16th century inflation referred to in the RationalWiki entry.  Had that entries' authors referred to plain-old Wikipedia's entry on "Price revolution," they would have read there that

  Prices rose on average roughly sixfold over 150 years. This level of inflation amounts to 1-1.5% per year, a relatively low inflation rate for the 20th century standards, but rather high given the monetary policy in place in the 16th century.

  I have no idea what the authors mean by their second statement, as there was certainly no such thing as "monetary policy" at the time, and they offer no further explanation or citation.    So far as I can tell, they mean nothing more than that prices hadn't been rising as fast before the price revolution than they did during it, which though trivially true says nothing about how "high" the inflation was by any standards, including those of the 16th century.   In any case it was not only "not high" but dangerously low according to standards set, rightly or wrongly, by today's monetary experts.  Finally, though the point is often overlooked, the European Price Revolution actually began well in advance of major American specie shipments, which means that, far from being attributable to such shipments alone, it was a result of several causes, including coin debasements.

  What about the California Gold rush, which is also supposed to show how changes in the supply of gold will lead to inflation "when not matched with a simultaneous increase in economic output"?  To judge from available statistics, it appears that producers of other goods were almost a match for all those indefatigable forty-niners:  as Larry White reports, although the U.S. GDP deflator did rise a bit in the years following the gold rush,

  The magnitude was surprisingly small. Even over the most inflationary interval, the [GDP deflator] rose from 5.71 in 1849 (year 2000 = 100) to 6.42 in 1857, an increase of 12.4 percent spread over eight years. The compound annual price inflation rate over those eight years was slightly less than 1.5 percent.

  Once again, the inflation rate was such as would have had today's central banks rushing to expand their balance sheets.

  Nor do the CPI estimates tell a different story.   See if you can spot the gold-rush-induced inflation in this chart:

  *Graphing Various Historical Economic Series," MeasuringWorth, 2015.

  Despite popular beliefs, the California gold rush was actually not the biggest 19th-century gold supply innovation, at least to judge from its bearing on the course of prices.  That honor belongs instead to the Witwatersrand gold rush of 1886, the effects of which later combined with those of  the Klondike rush of 1896 to end a long interval of gradual deflation (discussed further below) and begin one of gradual inflation.

  Brad DeLong is thus quite right to refer to the South African discoveries in observing that even a gold standard poses some risk of inflation:

  For example, the discovery and exploitation of large gold reserves near present-day Johannesburg at the end of the nineteenth century was responsible for a four percentage point per year shift in the worldwide rate of inflation–from a deflation of roughly two percent per year before 1896 to an inflation of roughly two percent per year after 1896.

  Allowing for the general inaccuracy of 19th-century CPI estimates, DeLong's statistics are correct.  But that "For example" is quite misleading.  Like I said: this is the most serious instance of an inflationary gold "supply shock" of which I'm aware.  Yet even it served mainly to  put an end to a deflationary trend, without ever giving rise to an inflation rate substantially above what central banks today consider (rightly or wrongly) optimal.  As for the four percentage point change in the rate of inflation "per year," presumably meaning "in one year," it's hardly remarkable:  changes as big or larger are common throughout the 19th century, partly owing to the notoriously limited data on which CPI estimates for that era are based.   Even so, they can't be compared to the much larger jumps in inflation with which the history of fiat monies is riddled, even setting hyperinflations aside.  Keep this in mind as you reflect upon Brad's conclusion that

  Under the gold standard, the average rate of inflation or deflation over decades ceases to be under the control of the government or the central bank, and becomes the result of the balance between growing world production and the pace of gold mining.

  Alas, keeping matters in perspective–that is, comparing the gold standard's actual inflation record, not to that which might be achieved by means of an ideally-managed fiat money, but to the actual inflation record of historic fiat-money systems, is something many critics of the gold standard seem reluctant to do, perhaps for good reason.

  While we're on the subject, nothing could be more absurd than attempts to demonstrate the unsuitability of gold as a monetary medium by referring to gold's unstable real value in the years since the gold standard was abandoned.  Yet this is a favorite debating point among the gold standard's less thoughtful critics, including Paul Krugman:

  There is a remarkably widespread view that at least gold has had stable purchasing power. But nothing could be further from the truth.  Here’s the real price of gold — the price deflated by the consumer price index — since 1968:

  

   

  Compare Professor Krugman's chart to the one in the previous section.  Then ask yourself (1) Has gold's price behaved differently since 1968 than it did before?; and (2) Why might this be so?  If your answers are "Yes" and "Because gold and paper dollars are no longer close substitutes, and gold is now widely used to hedge against depreciation of the dollar and other fiat currencies," you understand the gold standard better than Krugman does.  But don't get a swelled head over it, because it really isn't saying much: Krugman is one of the observations that sits squarely on the upper right end of y =   ? + ?(x).

   

  4. The deflation that the gold standard permitted  wasn't such a bad thing.

  The complaint that a gold standard doesn't rule out inflation is but a footnote to the more frequent complaint that it suffers, in Brad DeLong's words, from "a deflationary bias which makes it likely that a gold standard regime will see a higher average unemployment rate than an alternative managed regime."   According to Ben Bernanke "There is…a high correlation in the data between deflation (falling prices) and depression (falling output)."

  That the gold standard tended to be deflationary–or that it tended to be so for sometimes long intervals between gold discoveries–can't be denied.  But what certainly can be denied is that these periods of slow deflation went hand-in-hand with high unemployment.   Having thoroughly reviewed the empirical record,  Andrew Atkeson and Patrick Kehoe conclude as follows:

  Deflation and depression do seem to have been linked during the1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.

  More recently Claudio Borio and several of his BIS colleagues reported similar findings.  How then (you may wonder), did Bernanke arrive at his opposite conclusion?  Easy:  he looked only at data for the 1930s–the worst deflationary crisis ever–ignoring all the rest.

  Why is deflation sometimes depressing, and sometimes not?  The simple answer is that there is more than one sort of deflation.  There's the sort that's caused by a collapse of spending, like the "Great Contraction" of the 1930s, and then there's the sort that's driven by greater output of real goods and services–that is, by outward shifts in aggregate supply rather than inward shifts in aggregate demand.   Most of the deflation that occurred during the classical gold standard era (1873-1914) was of the latter, "good" sort.

  Although I've been banging the drum for good deflation since the 1990s, and Mike Bordo and others have made the specific point that the gold standard mostly involved deflation of the good rather than bad sort,  too many economists, and way too many of those who have got more than their fare share of the public's attention, continue to ignore the very possibility of supply-driven deflation.

  Of the many misunderstandings propagated by economists' tendency to assume that deflation and depression must go hand-in-hand, none has been more pernicious than the widespread belief that throughout the U.S. and Europe, the entire period from 1873 to 1896 constituted one "Great" or "Long Depression ."  That belief is now largely discredited, except perhaps among some newspaper pundits and die-hard Marxists, thanks to the efforts of G.B. Saul and others.   The myth of a somewhat shorter "Long Depression," lasting from 1873-1879,  persists, however, though economic historians have begun chipping away at that one as well.

   

  5.  It wasn't to blame for 19th-century American financial crises.

  Speaking of 1873, after claiming that a gold standard is undesirable because it makes deflation (and therefore, according to his reasoning, depression) more likely, Krugman observes:

  The gold bugs will no doubt reply that under a gold standard big bubbles couldn’t happen, and therefore there wouldn’t be major financial crises. And it’s true: under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.  Oh, wait.

  Let me see if I understand this.  If financial  crises happen under base-money regime X, then that regime must be the cause of the crises, and is therefore best avoided.  So if crises happen under a fiat money regime, I guess we'd better stay away from fiat money.  Oh, wait.

  You get the point: while the nature of an economy's monetary standard may have some bearing on the frequency of its financial crises, it hardly follows that that frequency depends mainly on its monetary standard rather than on other factors, like the structure, industrial and regulatory, of the financial system.

  That U.S. financial crises during the gold standard era had more to do with U.S. financial regulations than with the workings of the gold standard itself is recognized by all competent financial historians.    The lack of branch banking made U.S. banks  uniquely vulnerable to shocks, while Civil-War rules linked the supply of banknotes to the extent of the Federal government's indebtedness., instead  of allowing that supply to adjust with seasonal and cyclical needs.   But there's no need to delve into the precise ways in which  such misguided legal restrictions to the umerous crises to which  Krugman refers.  It should suffice to point out that Canada, which employed the very same gold dollar, depended heavily on exports to the U.S., and (owing to its much smaller size) was far less diversified, endured no banking crises at all, and very few bank failures, between 1870 and 1939.

   

  6.  0n the whole, the classical gold standard worked remarkably well (while it lasted).

  Since Keynes's reference to gold as a "barbarous relic" is so often quoted by the gold standard's critics,  it seems only fair to repeat what Keynes had to say, a few years before, not about gold per se, itself, but about the gold-standard era:

  What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot.  But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages.  The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages… He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank or such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference.  But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.

  It would, of course, be foolish to suggest that the gold standard was entirely or even largely responsible for this Arcadia, such as it was.  But it certainly did contribute both to the general abundance of goods of all sorts, to the ease with which goods and capital flowed from nation to nation, and, especially, to the sense of a state of affairs that was "normal, certain, and permanent."

  The gold standard achieved these things mainly by securing a degree of price-level and exchange rate stability and predictability that has never been matched since.  According to Finn Kydland and Mark Wynne:

  The contrast between the price stability that prevailed in most countries under the gold standard and the instability under fiat standards is striking. This reflects the fact that under commodity standards (such as the gold standard), increases in the price level (which were frequently associated with wars) tended to be reversed, resulting in a price level that was stable over long periods. No such tendency is apparent under the fiat standards that most countries have followed since the breakdown of the gold standard between World War I and World War II.

  The high degree of price level predictability, together with the system of fixed exchange rates that was incidental to the gold standard's widespread adoption, substantially reduced the riskiness of both production and international trade, while the commitment to maintain the standard resulted, as I noted, in considerably lower international borrowing costs.

  Those pundits who find it easy to say "good riddance" to the gold standard, in either its classical or its decadent variants, need to ask themselves what all the fuss over monetary "reconstruction" was about, following each of the world wars, if not achieving a simulacrum at least of the stability that the classical  gold standard achieved.  True, those efforts all failed.  But that hardly means that the ends sought weren't very worthwhile ones, or that those who sought them were "lulled by the myth of a golden age."  Though they may have entertained wrong beliefs concerning how the old system worked, they weren't wrong in believing that it did work, somehow.

   

  7. It didn't have to be managed by central bankers.

  But how?  The once common view that the classical gold standard worked well only thanks to its having been carefully managed by the Bank of England and other central banks, as well as the related view that its success depended on international agreements and other forms of central bank cooperation, is now, thankfully, no longer subscribed to even by the gold-standard's more well-informed critics.    Instead, as Julio Gallarotti observes, the outcomes of that standard "were primarily the resultants [sic] of private transactions in the markets for goods and money" rather than of any sort of government or central-bank management or intervention.   But the now accepted view doesn't quite go far enough.  In fact, central banks played no essential part at all in achieving the gold standard's most desirable outcomes, which could have been achieved as well, or better, by systems of competing banks-of-issue, and which were in fact achieved by means of such systems in many participating nations, including the United States, Switzerland (until 1901), and Canada.  And although it is common for central banking advocates to portray such banks as sources of emergency liquidity to private banks, during the classical gold standard era liquidity assistance often flowed the other way, and did so notwithstanding monopoly privileges that gave central banks so many advantages over their commercial counterparts.  As Gallarotti observes (p. 81),

  That central banks sometimes went to other central banks instead of the private market suggests nothing more than the fact that the rates offered by central banks were better, or too great an amount of liquidity may have been needed to be covered in the private market.

   

  8.  In fact, central banking tends to throw a wrench in the works.

  To the extent that central banks did exercise any special influence on gold-standard era monetary adjustments, that influence, instead of helping, made things worse.   Because an expanding central bank isn't subject to the internal constraint of reserve losses stemming from adverse interbank clearings,  it can create an external imbalance that must eventually trigger a disruptive drain of specie reserves.   During liquidity crunches, on the other hand, central banks were more likely than commercial banks to become, in Jacob Viner's words, "engaged in competitive increases of their discount rates and in raid's on each other's reserves."    Finally, central banks could and did muck-up the gold standard works by sterilizing gold inflows and outflows, violating the "rules of the gold standard game" that called for loosening in response to gold receipts and tightening in response to gold losses.

  Competing banks of issue could be expected to play by these "rules," because doing so was consistent with profit maximization.  The semi-public status of central banks, on the other hand, confronted them with a sort of dual mandate, in which profits had to be weighed against other, "public" responsibilities (ibid., pp. 117ff.).  Of the latter, the most pernicious was the perceived obligation to occasionally set aside the requirements for preserving international  monetary equilibrium ("external balance") for the sake of preserving or achieving preferred domestic monetary conditions ("internal balance").   As Barry Ickes observes, playing by the gold standards rules could be "very unpopular, potentially, as it involves sacrificing internal balance for external balance."   Commercial bankers couldn't care less.  Central bankers, on the other hand, had to care when to not care was to risk losing some of their privileges.

  Today, of course, achieving internal balance is generally considered the sine qua non of sound central bank practice; and even where fixed or at least stable exchange rates are considered desirable it is taken for granted that external balance ought occasionally to be sacrificed for the sake of preserving domestic monetary stability.  But to apply such thinking to the classical gold standard, and thereby conclude that in that context a similar sacrifice of external for internal stability represented a turn toward more enlightened monetary policy, is to badly misunderstand the nature of that arrangement, which was not just a fixed exchange rate arrangement but something more akin to an multinational monetary union or currency area.    Within such an area, the fact that one central bank gains reserves while another looses them was itself no more significant, and no more a justification for violating the "rules of the game," than the fact that a commercial bank somewhere gained reserves at the expense of another.

  The presence of central banks did, however, tend to aggravate the disturbing effects of changes in international trade patterns compared to the case of international free banking.  Central-bank sterilization of gold flows could, on the other hand, lead to more severe longer-run adjustments, as it was to do, to a far more dramatic extent, in the interwar period.

   

  9.  "The "Gold Standard" wasn't to blame for the Great Depression.

  I know I'm about to skate onto thin ice, so  let me be more precise.  To say that "The gold standard caused the Great Depression " (or words to that effect, like "the gold standard was itself the principal threat to financial stability and economic prosperity between the wars”), is at best extremely misleading.  The more accurate claim is that the Great Depression was triggered by the collapse of the jury-rigged version of the gold standard cobbled together after World War I, which was really a hodge-podge of genuine, gold-exchange, and gold-bullion versions of the gold standard, the last two of which were supposed to "economize" on gold.    Call it "gold standard light."

  Admittedly there is one sense in which the real gold standard can be said to have contributed to the disastrous shenanigans of the 1920s, and hence to the depression that followed.  It contributed by failing to survive the outbreak of World War I.  The prewar gold standard thus played the part of Humpty Dumpty to the King's and Queen's men who were to piece the still-more-fragile postwar arrangement together.  Yet even this is being a bit unfair to gold, for the fragility of the  gold standard on the eve of World War I was itself largely due to the fact that, in most of the belligerent nations, it had come to be administered by central banks that were all-too easily dragooned by their sponsoring governments into serving as instruments of wartime inflationary finance.

  Kydland and Wynne offer the case of the Bank of Sweden as illustrating the practical impossibility of preserving a gold standard in the face of a major shock:

  During the period in which Sweden adhered to the gold standard (1873–1914), the Swedish constitution guaranteed the convertibility into gold of banknotes issued by the Bank of Sweden.  Furthermore, laws pertaining to the gold standard could only be changed by two identical decisions of the Swedish Parliament, with an election in between. Nevertheless, when World War I broke out, the Bank of Sweden unilaterally decided to make its notes inconvertible. The constitutionality of this step was never challenged, thus ending the gold standard era in Sweden.

  The episode seems rather less surprising, however, when one considers that "the Bank of Sweden," which secured a monopoly of Swedish paper currency in 1901, is more accurately known as the Sveriges Riksbank, or "Bank of the Swedish Parliament."

  If the world crisis of the 1930s was triggered by the failure, not of the classical gold standard, but of a hybrid arrangement, can it not be said that the U.S. , which was among the few nations that retained a full-fledged gold standard, was fated by that decision to suffer a particularly severe downturn?  According to Brad DeLong,

  Commitment to the gold standard prevented Federal Reserve action to expand the money supply in 1930 and 1931–and forced President Hoover into destructive attempts at budget-balancing in order to avoid a gold standard-generated run on the dollar.

  It's true that Hoover tried to balance the Federal budget, and that his attempt to do so had all sorts of unfortunate consequences.   But the gold standard, far from forcing his hand, had little to do with it.  Hoover simply subscribed to the prevailing orthodoxy favoring a balanced budget.  So, for that matter, did FDR, until events forced him too change his tune: during the 1932 presidential campaign the New-Dealer-to-be assailed his opponent both for running a deficit and for his government's excessive spending.

  As for the gold standard's having prevented the Fed from expanding the money supply (or, more precisely, from expanding the monetary base to keep the broader money supply from shrinking), nothing could be further from the truth.   Dick Timberlake sets  the record straight:

  By August 1931, Fed gold had reached $3.5 billion (from $3.1 billion in 1929), an amount that was 81 percent of outstanding Fed monetary obligations and more than double the reserves required by the Federal Reserve Act.  Even in March 1933 at the nadir of the monetary contraction, Federal Reserve Banks had more than $1 billion of excess gold reserves.

  Moreover,

  Whether Fed Banks had excess gold reserves or not, all of the Fed Banks’ gold holdings were expendable in a crisis.  The Federal Reserve Board had statutory authority to suspend all gold reserve requirements for Fed Banks for an indefinite period.

  Nor, according to a statistical study by Chang-Tai Hsieh and Christina Romer, did the Fed have reason to fear that by allowing its reserves to decline it would have raised fears of  a devaluation.    On the contrary: by taking steps to avoid a monetary contraction, the Fed would have helped to allay fears of a devaluation, while, in Timberlake's words,  initiating a "spending dynamic" that would have  helped to restore "all the monetary vitals both in the United States and the rest of the world."

   

  10.  It didn't manage money according to any economists' theoretical ideal.  But neither has any fiat-money-issuing central bank.

  Just as "paper" always beats "rock" in the rock-paper-scissors game, so does managed paper money always beat gold in the rock-paper monetary standards game economists like to play.   But that's only because under a fiat standard any pattern of money supply adjustment is possible, including a "perfect" pattern, where "perfect" means perfect according to the player's own understanding.    Even under the best of circumstances a gold standard is, on the other hand, unlikely to achieve any economist's ideal of monetary perfection.  Hence, paper beats rock.  More precisely, paper beats rock, on paper.

  And what does this impeccable logic tell us concerning the relative merits of gold versus paper money in practice?   Diddly-squat.  I mean it.   To say something about the relative merits of paper and gold, you have to have theories–good ol' fashioned, rational optimizing firm and agent theories–of how the supply of basic money adjusts under various conditions in the two sorts of monetary regimes.    We have a pretty good theory of the gold standard, meaning one that meshes well with how that standard actually worked.  The theory of fiat money is, in contrast,  a joke, in part because it's much harder to pin-down central bankers' objectives (or any objectives apart from profit-maximization, which is at play in the case of gold), but mostly thanks to economists' tendency to simply assume that central bankers behave like omniscient angels who, among other things, understand the finer points of DSGE models.   That may do for a graduate class, or a paper in the AER.  But good economics it most certainly isn't.

  *  *  *

  I close with a few words concerning why it matters that we get the facts straight about the gold standard.  It isn't simply a matter of winning people over to that standard.  Though I'm perhaps as ready as anyone to shed a tear for the old gold standard, I doubt that we can ever again create anything like it.   But getting a proper grip on gold serves, not just to make the gold standard seem less unattractive than it is often portrayed to be, but to remove some of the sheen that has been applied to modern fiat-money arrangements using the same brush by which gold has been blackened.  The point, in other words, isn't to make a pitch for gold.  It's to make a pitch for something –anything– that's better than our present, lousy money.

  *  *  *

  *I'm astonished to find that Friedman's important and very interesting 1986 article, despite appearing in one of the leading academic journals, has to date been cited only 64 times (Google Scholar).  Of these, nine are in works by myself, Kevin Dowd, and Lawrence White!  I only wish I could attribute this neglect to monetary economists' pro-fiat money bias.  More likely it reflects their general lack of interest in alternative monetary arrangements.

  

  

  

  

  

• It Begins – Hillary "Trump'd" By The Donald In Key Swing State

  It appears the deceitful imbroglio of Hillary's campaign have begun to wear on her most admiring ("well everyone lies a little bit right?") apologists and voters. As The Hill reports, Donald Trump tops Hillary Clinton (45% to 42%) in the latest poll from swing-state North Carolina. Clinton tops Jeb Bush and Rand Paul, so there's that, but eight Republicans (including Trump) are beating the former secretary of state. Perhaps most notably however, is that a new survey from FOX shows Trump (45%) closing in on Hillary (51%) in the presidential election matchup.

  As The Hill reports,

  Hillary Clinton lags behind eight Republican contenders in hypothetical head to head match-ups in North Carolina, including GOP front-runner Donald Trump.

   

  Trump tops Clinton 45 percent to 42 percent in the latest survey from Democratic firm Public Policy Polling released Wednesday.

   

  …

   

  Democratic contender Sen. Bernie Sanders (I-Vt.) polls similarly against the Republican field, on average about 1.5 percent worse than Clinton, the party front-runner, according to PPP’s average.

   

  North Carolina is considered a swing state in the general election. GOP nominee Mitt Romney won it by a small margin in 2012, four years after then-Illlinois Sen. Barack Obama won his own slight victory.

   

  Trump continues to add to his large lead in the state. His lead on the GOP side has grown 8 percentage points over the past month, with support now from 24 percent of Republican primary voters. Carson currently polls second at 14 percent, followed by Cruz at 10 percent, Rubio at 9 percent, and Fiorina, Huckabee and Walker at 6 percent.

   

  Carson’s stock rose 5 percentage points over the past month, while Cruz gained 4 percentage points.

   

  The poll shows significant declines in support for Walker, Huckabee, Paul and Christie. Walker’s support dropped 6 percent, Huckabee is down 5 percent, Paul lost 4 percent and Christie fell 3 percent.

  And from known knowns to known unknowns…

  

   

  But it seems Trump's contenders have a trick up their sleeves (coming soon)… The Anti-Trump ad blitz starts after Labor Day…

  Watch the latest video at video.foxnews.com

  

  

  

  

  

• China Strengthens Yuan By Most In 2 Months Following Another Massive Liquidity Injection

  The PBOC set the Yuan fix 0.08% stronger – the biggest 'strengthening in 2 months, which is interesting because following The IMF's confirmation of a delay to Yuan inclusion in the SDR basket to Oct 2016 (pending a year-end decision and asking for more flexibility), Offshore Yuan forwards notably devalued (shifting 350pips higher to 6.65, the highest/weakest Yuan in a week) pricing a 20 handle (or 3%) devaluation by August 2016. Overnight saw another CNY110bn liquidity injection rescue from The PPT in the afternoon session (saving SHCOMP from a close below the 200DMA) and tonight we see promise to recap Ag Bank along with another CNY 120bn reverse repo injection. Shanghai margin debt declined for a 2nd day in a row and Chinese stocks look set to open weaker.

  Offshore Yuan forwards point to further devaluation to come…

  

   

  But The PBOC strengthened The FIx..

  • *PBOC YUAN FIXING RISES 0.08%, THE MOST IN MORE THAN TWO MONTHS
  • *CHINA SETS YUAN REFERENCE RATE AT 6.3915 AGAINST U.S. DOLLAR

  

   

  More focused liquidity injections today…

  • *PBOC TO REPLENISH CAPITAL OF AG DEVELOPMENT BANK: CHINA NEWS

  But overnight saw another large liquidity injection…

  The People's Bank of China intervened in the interbank market for a second time this week on Wednesday, pumping in 110 billion yuan through open market operations to steady interbank rates that have been shooting up as investors pull out of the yuan.

   

  The PBOC confirmed after the market close that it injected 110 billion yuan to 14 financial institutions for a period of 6 months at a rate of 3.35 per cent.

   

  This followed an injection on Tuesday when it added 120 billion yuan in repurchase agreements to the market.

  The back-to-back cash injections came a week after the central bank allowed the yuan to devalue by more than 3 per cent over a three-day period, sparking concerns over capital outflow.

  Last night's injection save stocks from a close below the 200DMA…

  

   

  And today looks set to open weaker

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1% TO 3,848.40
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1% TO 3,754.57

  Despite another massive liquidity injection:

  • *PBOC TO INJECT 120B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  3,650 is today's level to worry about today in the Shanghai Composite

  

   

  Commodity firms getting hammered:

  • *GLENCORE SHARES FALL 5.8% TO HK$19.60 IN HONG KONG
  • *NOBLE GROUP SHARES FALL 1.2% AT OPEN IN SINGAPORE

  As Margin debt declined for 2nd day in a row…

  Outstanding balance of Shanghai margin lending fell by 0.5%, or 4.5b yuan, from previous day to 875.4b yuan on Wed., according to exchange data.

  Well it seems The PBOC has a different problem than wanting to devalue to save its 'exports'… the massive liquidity injection suggest the country has a dollar 'run' after all.

  Charts: Bloomberg

  

  

  

  

  

• The Unlikely Rise Of Donald Trump And Bernie Sanders

  Submitted by Bill O'Grady via Confluence Investment Management,

  In the spring of 2014, we wrote a series of Weekly Geopolitical Reports that looked at the 2016 elections. In these reports, we described the economic and political environment that had the potential to make the 2016 election historically important. The emergence and remarkable staying power of Donald Trump and Bernie Sanders suggests that our earlier analysis and conclusions may be coming to pass.

  In this report, we will recap the economic and political factors that led us to conclude last year that the next presidential cycle could be unusually significant. From there, we will look at the unlikely rise of Donald Trump and Bernie Sanders and what their success thus far signals about the electorate and the next presidential election. Finally, we will analyze their potential impact on the election, including the possibility that each might mount an extra-party candidacy. As always, we will conclude with market ramifications.

  The Economic Problem

  The U.S. economy is growing at a very slow pace, slow enough that some prominent economists are calling the current situation “secular stagnation,” a period of substandard growth. We think there is ample evidence that secular stagnation has developed in the U.S. and it is affecting global economic growth as well.

  

   

  This chart shows real GDP from 1901 through 2018 on a logarithmic scale; the 2015-18 period, shown in gray on the above chart, is the consensus forecast from the Philadelphia FRB’s survey of professional forecasters. The key point of this graph is the deviation from trend. Note that GDP has been well below trend in two periods, the Great Depression and now. It is worth noting that the theory of secular stagnation originated during the 1930s.

  Although the reasons for persistently below-trend growth are complicated, the most common factor from both eras is excessive private sector debt growth.

  The chart below shows detrended GDP (the lower line on the above graph) along with private sector non-financial debt as a percentage of GDP.

  

   

  In both periods of below-trend growth, debt levels had reached high levels. In the 1930s debt crisis, both household and business debt increased but the latter was probably the more important factor. In the current situation, household debt is more critical. It appears to us that until debt levels fall to what borrowers feel is a manageable level, economic growth will remain depressed.

  The first debt increase mainly occurred due to the export boom that developed after WWI. After the 1921 recession, business activity rose as the U.S. economy began to take a pre-eminent position in the world. However, much like Japan in the 1980s or China today, the investment/export growth model only works if the rest of the world can absorb the goods that the exporting nation wants to sell. When that avenue began to falter,3 the U.S. found itself with too much productive capacity and too much debt.

  In the 1930-45 period, debt levels were reduced by two methods—vicious foreclosures and bankruptcies before WWII and essentially a “debt swap” between the private sector and the government sector, facilitated by war spending. As the government increased defense spending, jobs were created that increased household income. Ration programs limited household spending which freed up cash for debt service, and increased business activity allowed the business sector to repair balance sheets. This allowed private sector debt to fall; however, it was replaced with expanding government debt that was used to fund the war effort. After the war ended, debt levels were at such low levels that both businesses and households were able to borrow to lift the economy. Financial repression where interest rates were held below the rate of inflation allowed the government to reduce the debt burden to manageable levels by the 1970s.

  The steady increase in debt levels after the war peaked in 2008. This rising debt occurred mostly due to the burdens brought by the U.S. superpower role. As part of that role, America provides the reserve currency, meaning it must run persistent trade deficits in order to provide the reserve currency to support global liquidity and trade. The U.S. has used two methods to provide this liquidity since 1945. The first policy structure was designed to build a regulated economy that created a large number of high-paying, relatively low-skilled jobs. The program restricted disruptive technologies by concentrating industries and fostering the growth of labor unions.4 It also featured high marginal tax rates to discourage entrepreneurship as new businesses can upset the established order and lead to job losses. This led to hiring and rising incomes for average households.

  Although the economy successfully created a broad path to the middle class, it was inefficient. Persistent inflation became a serious issue. To address inflation, President Carter implemented a series of supply side measures designed to improve the efficiency of the economy. These included the deregulation of financial services and transportation. He also appointed Paul Volcker as Federal Reserve Chairman; he implemented a “hard money” monetary policy. President Reagan took Carter’s reforms and expanded them further, leading to additional deregulation and globalization.

  The good news was that the policies brought inflation under control. The problem was the broad path to the middle class in the developed world was dramatically narrowed. To now survive in the labor force, workers needed to rapidly adapt to new technologies and methods and compete on a global scale. Those who could were greatly rewarded; those who could not were left behind.

  

   

  This chart shows the share of total income captured by the top 10% of income earners and inflation as measured by CPI. As the data shows, when this share is above 42%, inflation tends to be non-existent. When the top 10% share is below 42%, the CPI average is 5.3%. Inequality isn’t necessarily the cause of low inflation, but deregulation and globalization, which are effective against inflation, tend to cause increasing income inequality.

  This led to a conflict between domestic and foreign policy. Containing inflation was a key domestic goal, but widening income differentials weakened the average household’s ability to consume, which undermined the reserve currency role of the superpower. The way the U.S. resolved this conundrum was through debt.

  

   

  This chart shows how much of U.S. consumption is being funded through employee compensation. From 1950 to the early 1980s, wages generally funded between 90% and 95% of consumption. After deregulation, wages funded a steadily shrinking degree of consumption. Much of consumption was funded by household debt, as shown on the chart; note how it rose steadily as deregulation and globalization expanded. Of course, transfer payments played a role as well.

  Donald Trump The Political Situation

  Using debt to address the requirements of providing the reserve currency was never going to be a permanent solution to the problem of running a domestic economy and meeting the requirements of global hegemony. However, as long as credit was widely available, the political situation was manageable. The financial crisis of 2008 has made it clear that the debt option is no longer viable. And, to a great extent, the election of 2016 should be about answering these two questions:

  1. Should the U.S. continue to act as global hegemon, which includes providing the reserve currency?
  2. If the answer to #1 is yes, then how should the economy be restructured in order to fulfill the hegemon role in a sustainable fashion?

  In the aforementioned 2016 reports we published in the spring of 2014, in Part 2 we described the four archetypes of American politics. There are two establishment classes and two populist classes. The establishment classes are the rentier/professional and the entrepreneurial. Within the first, there are two sub-categories, the center-left and center-right. Most of the Democratic Party establishment occupy the center-left whereas the GOP establishment is center-right. The rentier/professional groups have strong disagreements among themselves about social policy, but on economic policy they are firmly united behind deregulation, globalization and maintenance of America’s global hegemony. The entrepreneurial group strongly supports deregulation and globalization but tends to oppose the military part of the hegemonic role.

  There are also two populist groups, left- and right-wing populists. In common parlance, these are the “bases” of the major political parties. For the most part, these groups represent those who have not fared well in the current environment of globalization, deregulation and global hegemony.

   

  The political coalition that created the economic system in place from 1932 to 1980 was comprised of right-wing populists and the rentier/professional classes. The coalition mostly excluded the entrepreneurial class and the left-wing populists. However, the civil and gender rights movements of the 1960s and 1970s led the working coalition to broaden to include the left-wing populists as well. This action threatened the status and position of the right-wing populists and they opposed the decision. The turmoil experienced by the Democratic Party in the 1968 and 1972 presidential elections was due, in part, to this tension. In addition, the inability of this coalition to resolve the inflation problem led to this arrangement’s demise.

  The Reagan Revolution meant that the establishment classes were in charge as the entrepreneurial class gained power. The establishment controlled political financing but did not have enough votes to win without the support of the populist classes. Thus, both the center-left and center-right used social issues to woo the “base”; the most successful political figures were able to inspire the base to vote for them. However, neither the left- or right-wing populists’ economic goals were ever met. In effect, the establishment classes ran the economy, an economy based on globalization and deregulation.

  As time has passed, populists on both sides have discovered that they are not getting their economic needs met. However, to gain political power, either a durable relationship must reemerge with one of the establishment classes or the populist classes must create their own coalition.8 In our estimation, the populist classes will struggle to find common ground. Thus, we do not expect the right and left wing to agree on a common cause. Still, that doesn’t mean that politicians that take up the populist cause won’t have an impact on the next election.

  Donald Trump and Bernie

  Into this power vacuum enter two unlikely presidential candidates, Donald Trump And Bernie Sanders. The former is a billionaire real estate mogul who has an aura of celebrity. The latter is a socialist senator from Vermont, a small liberal-leaning state, who caucuses with Democrats but accuses most of them of being in league with the establishment class. They could not be more different. However, what they have in common is that their campaigns have captured the anger of the populists on both wings.

  Donald Trump is gaining favor among the right-wing populists. How is this wealthy establishment figure wooing this populist group? One of the concerns among right-wing populists is that the expense of campaigns means that candidates must raise money from the establishment classes which prevents them from representing populist interests. Since Donald Trump is independently wealthy, he is viewed as “being his own man.” In fact, his comments stating that former Secretary of State Hillary Clinton had to go to his wedding because of his campaign contributions suggest that Donald Trump may “own” a few politicians. The brash statements he makes, comments that appear so offensive that they would have likely ended a traditional candidate’s chances, only seem to improve Donald Trump’s poll numbers.

  Donald Trump’s economic message is that illegal immigration and unfair foreign competition are the reasons the economy is in trouble. If a “hard man” were in office, forcing other governments to trade fairly or halt illegal immigration, then the economy would do better.

  Right-wing populists no longer trust government; that trust was lost when the rentier/managerial and the right-wing populist coalition was disrupted by the gender and civil rights movements of the 1960s and 1970s. The right wing doesn’t want the government to give handouts per se. However, it does want laws and regulations designed to recreate the economic structure that existed after WWII into the late 1960s. Trump’s “outsider” status resonates strongly with this class because they don’t trust government to support their interests. For example, right-wing populists are very skeptical of the Affordable Care Act (ACA).

  Sanders’s message is that large corporations and the financial system are unfair to common people, and government policies are designed to protect those with power and money. Unlike Donald Trump, who faces a plethora of competitors, Sanders really only has one other candidate he is running against, Hillary Clinton. Sanders has been able to portray her as a member of the establishment who cannot represent the interests of “regular folks.” Thus, far, he is making the charges stick. Although he does not have the great wealth of Donald Trump, Sanders is well known as a man who does not need much money to exist; he can run a “cheap” campaign and thus isn’t beholden to establishment wealth.

  Left-wing populists tend to be sympathetic to “identity politics” and are more trustful of government. They tend to support many government programs and generally approve of the ACA. Although they are currently angry at the government, they still seem to believe that if it worked properly (e.g., if regulators did their jobs), then bigger government would be acceptable.

  The other issue that makes both candidates powerful is that neither is strongly affiliated with the parties they are trying to be nominated from. Donald Trump has endorsed policies over his history that have been more affiliated with Democrats. Sanders represents the Socialist Party; he isn’t even a Democrat. At the GOP debate, Donald Trump refused to rule out an extra-party candidacy. We suspect Sanders may consider such a position as well. And so, even if they fail to gain enough delegates to defeat an establishment candidate, they may still affect the outcome of the election in November 2016.

  Among the pundit groups, both candidates are regularly written off as having no staying power. This stance is understandable. Donald Trump’s stump speeches fail the test of simple logic. For Sanders, the U.S. has almost no history of supporting socialist causes on a national level. The expectation is that as the nominating process wears on, both candidates will falter and join other failed fringe candidates seen throughout history.

  We have our doubts. Populists of both stripes are angry. They feel that no one represents their interests. They don’t necessarily want politicians with well developed “wonkish” platforms that detail the nuance of tax policy or health care. What they want is someone who is independent and promises to “get things done.” The message that “your life would be better if you didn’t have politicians in Washington who oppose your interests” is one that resonates.

  Donald Trump The Consequences

  The key is to return to the two questions above; can populism exist alongside American hegemony? We don’t think so. For left-wing populists, that is probably acceptable. They are mostly Jeffersonian in foreign policy and would be comfortable with adopting a more isolationist stance. Right-wing populists are mostly Jacksonian; they want a military-focused hegemonic United States but fail to connect the financial role. The U.S. cannot run a trade surplus without threatening the global economy as such action would withdraw dollar liquidity from the world. Thus, the tough talk from Donald Trump about trade deals is really just that; as long as one is the superpower, domestic industries will always face strong foreign competition, in part because the rest of the world has strong incentives to skew policy to run trade surpluses with the U.S. It is hard to see how even the most crafty negotiator can overcome that issue. In addition, the global hegemon has an interest in encouraging other nations to use its currency as a way of projecting power.

  To date, no one has developed a plan that would meet the needs of the domestic economy and maintain America’s superpower status. That fact partially explains why there is so much anger against the political establishment. It appears the current model has failed but the elites have not developed a replacement. The lack of replacement has led to the charge that the elites do not intend to change the system because it works for them. If the superpower status is jettisoned, it would be much easier to develop a new policy; after all, only domestic policy would matter at that point. However, history shows that periods when the world lacks a dominant superpower tend to have more frequent wars and revolutions.

  Donald Trump Ramifications

  Elections with four significant candidates are not common in U.S. history, but they are not unprecedented either. The 1948 presidential campaign featured Harry Truman, Thomas Dewey, Strom Thurmond (Dixiecrat) and Henry Wallace (Progressive), with Thurmond capturing 39 electoral votes. During that period, those votes would have gone to Truman, so Thurmond’s candidacy did not affect the outcome of the election. Perhaps the most famous four-candidate race was the 1860 election, featuring Abraham Lincoln (Republican), John Breckinridge (Southern Democrat), John Bell (Constitutional Union) and Stephen Douglas (Northern Democrat). All four candidates gained electoral votes, with Lincoln winning a majority within the college with 39.8% of the popular vote.

  It is worth noting that both of these elections occurred during conditions of great uncertainty. In 1948, the country was trying to ascertain the best direction for both foreign and domestic policy. In 1860, the issues of slavery and the lack of clarity surrounding Federal and State power, an issue that emerged at the founding of the republic, were in dispute. In periods of great tumult, elections with multiple candidates often emerge.

  If the establishment candidates win the major party nominations, but Sanders and Donald Trump decide to run as extra-party candidates, the uncertainty will likely weigh on financial markets. Handicapping elections with two major candidates is difficult enough. Determining a winner with three or four candidates is quite hard and the lack of certainty will not play well with risk assets.

  The rise of populism is not just a U.S. issue. Globalization and deregulation, especially with regard to the open adoption of new technology and work structures, is increasingly being called into question. As we noted in our earlier reports on the 2016 election, there is increasing potential that major political and economic changes will emerge from this vote. The emergence of Donald Trump and Bernie Sanders is a reflection that the populists want a change in the direction of American policy. We will be watching closely to see whether any serious changes result.

  

  

  

  

  

• Facing Public Fury, China Reveals Owners Of Tianjin Warehouse

  Last Wednesday’s catastrophic chemical explosion in Tianjin – that at last count had killed 114 people and injured more than 700 – put Beijing in a particularly tough spot at a decisively inopportune time. 

  Just two days earlier, China devalued the yuan in an effort to rescue its flagging economy which has stubbornly refused to respond to multiple policy rate cuts. Of course that wasn’t the official line. The PBoC’s excuse for the move is that it’s part of a larger effort to liberalize markets and allow the metaphorical invisible hand to play a larger role in determining everything from exchange rates to defaults. But as should be abundantly clear by the near daily interventions in both the FX and equity markets, Beijing is finding it difficult to relinquish control over the narrative. 

  The same dynamic often plays out outside of capital markets. That is, as China’s economy marks a difficult and sometimes tenuous transition towards consumption and services-led growth (i.e. towards a more Westernized system), egregious instances of censorship and the Communist party’s heavy-handed approach to shaping everyday life are seen as evidence that Beijing isn’t truly committed to liberalization.This was evident in the wake of the Tianjin explosion when China moved to shut down hundreds of social media accounts due to the dissemination of “blast rumors.” It also appeared as though China was set to leave the public in the dark regarding possible connections between the Party and the owners of Tianjin International Ruihai Logistics. As we noted on Tuesday, “it looks as though determining who actually owns Ruihai will be complicated by the fact that in China, it’s not uncommon for front men to hold shares on behalf of a company’s real owners. This is of course an effort to obscure Communist party involvement in some enterprises.”

  With all eyes on China in the wake of the devaluation, just about the last thing Beijing needed in terms of shaping its international image and pacifying an increasingly agitated public was to be seen as complicit in a massive coverup of a completely avoidable disaster that ultimately caused the deaths of more than 100 people and may well have far-reaching environmental consequences for the blast zone and beyond. 

  So faced with a swelling public backlash, Beijing has embarked on an effort to prove how serious it is about launching a transparent and honest investigation. We certainly doubt anyone was impressed with the fact that a handful of Ruihai executives had been detained but now, it looks like China has compelled the mystery owners whose shares were held on their behalf by front-men, to reveal themselves – and their ties to the Politburo – to the public. The New York Times has the story:

  The mayor of the northern Chinese city where huge explosions killed over 100 people last week took responsibility for the disaster on Wednesday, as the authorities sought to contain growing public anger about the accident.

   

  “I bear unshirkable responsibility for this accident as head of the city,” said Huang Xingguo, the mayor and acting Communist Party secretary of the metropolis, Tianjin, in his first news conference since the blasts at a chemical warehouse on Aug. 12. 

   

  The mayor’s televised mea culpa appeared to signal a shift in the authorities’ response to the political fallout from the disaster. After days of official silence, the government has begun releasing information about the owners of the warehouse company, Rui Hai International Logistics, including their admission of corruption, in an effort to quash public accusations of a cover-up.

   

  On Wednesday, China’s state-run Xinhua news agency reported that two major shareholders in Rui Hai had admitted to using their political connections to gain government approvals for the site, despite clear violations of rules prohibiting the storage of hazardous chemicals within 3,200 feet of residential areas.

   

  Yu Xuewei, the company chairman, is a former executive at a state-owned chemical company, and Dong Shexuan, the vice chairman, is the son of a former police chief at the Tianjin port. The two executives, who deliberately concealed their ownership stakes behind a murky corporate structure, told Xinhua that they had leveraged their personal relationships with government officials to obtain licenses for the site. Both men have been detained.

   

  “The first safety appraisal company said our warehouses were too close to the apartment building,” said Mr. Dong, 34, referring to a residential complex that was severely damaged and now stands empty. “Then we found another company who got us the documents we needed.”

   

  The executives established Rui Hai in 2012 but had other people list their shares to avoid the appearance of a conflict of interest. Mr. Yu, 41, admitted that he held 55 percent of the shares through his cousin, Li Liang, the president of the company. Mr. Dong holds 45 percent of the shares through a former classmate.

   

  “I had my schoolmate hold shares for me because of my father,” a former police chief who died in 2014, Mr. Dong told Xinhua. “If the news of me investing in a business leaked, it could have brought bad influence.”

  Now clearly, these admissions are so straightforward and so obviously scripted that they almost certainly were handed down from above. In other words, rather than risk a series of exposés aimed at determining exactly who was involved in the manangement of Ruihai and how deep their political connections ran (FT had already picked up on the story), Beijing apparently thought the safer route to go was to simply out Mr. Yu and Mr. Dong along with their political connections, and force them to tell the public exactly what it wants to hear in the most unequivocal language possible. 

  Whether or not this will be sufficient to quell the growing public discontent remains to be seen, but it’s interesting to note that Sinochem, a state-owned chemical company, controls two other warehouses in Tianjin that, as WSJ notes, are “within a kilometer of residences, a hospital, a busy highway, schools and other public facilities, despite rules forbidding such proximity.”

  In other words: Ruihai is more the rule than the exception when it comes to politically-connected enterprises skirting restrictions on the storage and handling of hazardous chemicals. 

  

  As for what everyday Chinese citizens think about the public admissions of guilt and corruption by Ruihai’s major shareholders, we go to Wang Baoshun, a newsstand owner in Beijing who spoke to The Times: “The corruption is like cancer, and we are a patient at a late stage. You can have a few surgeries, but you won’t be able to get rid of it for good.” 

  We can only hope that the cancerous corruption that helped pave the way for the disaster in Tianjin doesn’t end up causing an increased incidence of real cancer among the thousands of people who have now been exposed to toxic sodium cyanide and its gaseous derivative, hydrogen cyanide.  

  

  

  

  

  

• After 6 Years Of QE, And A $4.5 Trillion Balance Sheet, St. Louis Fed Admits QE Was A Mistake

  As you’re no doubt aware, the Fed is fond of using the research departments at its various branches to validate policy and analyze away bad economic outcomes. For instance, earlier this year, the San Francisco Fed came up with an academic justification for the now infamous double seasonally adjusted GDP print – they call it “residual seasonality.” Then there’s the NY Fed, where researchers recently took to the bank’s blog to explain why, despite all evidence to the contrary, Treasury liquidity is “fairly favorable.”

  Be that as it may, someone will occasionally say something really inconvenient – like when, back in April, the St. Louis Fed warned that the American Middle Class was “under more pressure than you think,” a situation the bank blamed on the diverging fortunes (literally) of the haves and the have nots in the post-crisis world. The implication – made clear in the accompanying graphics – was that QE was effectively eliminating the Middle Class.

  Now, the very same St. Louis Fed (this time in the form of a white paper by the bank’s vice president Stephen D. Williamson), is out questioning the efficacy of QE when it comes to stoking inflation and boosting economic activity. 

  Williamson says the theory behind QE is “not well-developed”, and calls the evidence in support of Ben Bernanke’s views on the transmission mechanisms whereby asset purchases affect outcomes “mixed at best.”

  “All of [the] research is problematic,” Williamson continues, as “there is no way to determine whether asset prices move in response to a QE announcement simply because of a signalling effect, whereby QE matters not because of the direct effects of the asset swaps, but because it provides information about future central bank actions with respect to the policy interest rate.” In other words, it could be that the market is just reading QE as a signal that rates will stay lower for longer and that read is what drives market behavior, not the actual bond purchases. 

  But the most damning critique of Bernanke’s response to the crisis is this:

  There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.

  And then there’s this:

  A Taylor-rule central banker may be convinced that lowering the central bank’s nominal interest rate target will increase inflation. This can lead to a situation in which the central banker becomes permanently trapped in ZIRP. With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate. But this never happens and, as long as the central banker adheres to a sufficiently aggressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely. This idea seems to fit nicely with the recent observed behavior of the worldís central banks.

  And this: 

  Thus, the Fed’s forward guidance experiments after the Great Recession would seem to have done more to sow confusion than to clarify the Fed’s policy rule.

  So in sum, the vice President of the St. Louis Fed has taken a look around and discovered that in fact, not only have trillions in asset purchases not worked when it comes to creating “healthy” inflation and boosting growth in the US, these asset purchases haven’t worked anywhere they’ve been tried. Furthermore, he’s noticed that central bankers that adhere, in a perpetual state of Einsteinian insanity, to the Taylor principle, will never be able to raise rates and finally, he thinks that the more the Fed talks, the more confused the public gets about what it is the central bank intends to do. 

  We would agree on all accounts here, although when it comes to forward guidance and discerning what the Fed’s goal is, actions, as they say, speak far louder than words and with the S&P 500 having levitated some 200% since March of 2009, we don’t think anyone is truly “confused.” 

  St Louis Fed Qe Study

  

  

  

  

  

• Presidential Candidate "Deez Nuts" Surges In Polls

  If Donald Trump’s unlikely rise to the top of the polls tells us anything, it’s that Americans (or at least GOP primary voters) are sick of business as usual in Washington. 

  The endemic corruption, crony capitalism, rampant regulatory capture, and licentious logrolling that many voters have come to associate with the American political process has created a deep-seated desire for change and if there are two names which most certainly do not portend a break from business as usual inside the Beltway they are “Bush” and “Clinton.” Indeed, the prospect that America will once again be faced with a choice that really isn’t a choice by being compelled to choose between two candidates from Washington’s political aristocracy has only served to boost Trump’s appeal. 

  All of the above certainly seems to suggest that America is fully prepared to accept and embrace the candidacy of those who promise anything but the political status quo, which, we imagine helps to explain why the dark horse candidate “Deez Nuts” is now polling at 9% in North Carolina. 

  

  Deez Nuts is running for president. This is a true statement. pic.twitter.com/834etY4cMH

  — Josh Moon (@Josh_Moon) August 19, 2015

  From PublicPolicyPolling:

  The specter of Trump running as an independent candidate in the general election continues to be a big potential problem for Republicans. In such a scenario Clinton leads with 38% with Bush at 28% and Trump at 27% basically tying for second place. Trump wins independents with 38% (to 28% for Clinton and 24% for Bush), takes 38% of Republicans, and 14% of Democrats.

   

  Finally another declared independent candidate, Deez Nuts, polls at 9% in North Carolina to go along with his 8% in Minnesota and 7% in Iowa in our recent polling. Trump leads Clinton 40/38 when he’s in the mix.

  Finally Deez Nuts get 9% in NC to go with their 8% in Minnesota and 7% in Iowa. Pretty consistent support: http://t.co/EIPkTvW3Ti

  — PublicPolicyPolling (@ppppolls) August 19, 2015

  As you can see from the following, North Carolina voters aren’t yet sure what to expect from Nuts, but 9% of voters know that if forced to choose between Hillary Clinton, Donald Trump, and Deez Nuts, they’ll take Nuts any day of the week.

  

  Breaking down the polling data, it looks like 9% of voters who chose Mitt Romney in 2012 would go with Deez Nuts in 2016 while an astonishing 25% of voters who voted for someone other than Obama or Romney would prefer Nuts over Clinton or Trump. Most of Nuts’ support looks to come from the center of the policitcal spectrum and when broken down by gender, men seem to have a more favorable view of Nuts than women. When it comes to age, voters 18-29 were far more likely to have a favorable view of Nuts although surprisingly, when Nuts is pitted against Trump and Clinton, a shocking 15% of voters 30-45 say they would choose Nuts. 

  

  

  

  

  Full breakdown:

  Deez Nuts

  

  

  

  

  

• "There Is No Other End Than A Bad One… It's A Mathematical Certainty"

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  I recently watched a video clip of Bernie Sanders laying the boots to Alan Greenspan back in 2003, for Greenspan’s seemingly out of touch perspective of the average American.  Now while we do have a repentant banker in Greenspan, a rare phenomenon for sure, I found the scolding interesting in that essentially every accusation Sanders lays on Greenspan could be repeated today to our subsequent central banking gods.  During the video notice that all the figures Sanders explicates not only remain true today but have gotten far worse.  Particularly note the national debt figure which has now increased by more than 400% since then!!!  The clip is well worth the 5 minutes…

   But so let’s dig in a little to what Bernie is really saying to Greenspan.  The overall theme of the trouncing is that the Federal Reserve, the keeper of American monetary policy, had implemented policies that clearly had done significant damage to the vast majority of Americans.  Specifically Sanders is suggesting that the policies were a cancer to the economic prosperity of Americans and all the while creating extreme wealth for a select few.  And while that is bad in and of itself, what Sanders finds despicable is that the Fed seems to not only deny the harm they were responsible for but Greenspan seemed to be alleging success by focusing solely on the massive wealth it had provided to the very few on top.

  Now in a recent whitepaper by Stephen Williams, VP of the St. Loius Fed, a case is made that the Fed’s ‘recovery’ policies have not helped to boost the economy.  And while I agree with that conclusion, I feel the paper is a fraud.  Not only on the surface of that argument does it create a false dichotomy of either helped or not helped (dismissing the idea that the policies may have actually been harmful) but Williams explicitly suggests the policies were not harmful to the economy.  And that was the real intended message.  Remember nobody publicly denounces their employer without being fired.  And so if Williams keeps his job we know that this message was a coordinated message.  Further, by the structure of his argument the objective is clear.  The Fed is already setting up the argument that while they were not entirely effective in a recovery they are not to blame for the inevitable second coming of the credit crisis (a definite dead canary).

  You see the problem comes down to the moral hazard created by fiat currency.  Specifically, I mean that when you have essentially infinite resources you become very careless about each unit of resource.  Subsequent to ending Bretton/Woods in 1971 the US has succumb to such a moral hazard.  This is clear when looking at the collapse of fiscal discipline immediately following the end of Bretton/Woods, which was a quasi gold standard that necessitated fiscal discipline.

  

  And so that chart tells us the moral hazard absolutely exists but it doesn’t explain why that is bad.  To do that we need to look at a visual representation of this moral hazard and its respective destructive characteristics over time.  But before we do let’s remember, as I recently laid out in some detail in The Fed’s Fatal Flaw, the central banking system is designed to require perpetually increasing money stock.  The reason is simple.  The Central Banking Act of 1913 was designed by three banking families (refer to Jekyll Island) whose profits expanded along with money supply.  And so a system that necessarily required the expansion of money supply was to create immense wealth for banking families that drafted the Bill.  While that is certainly unethical, it is the destructiveness of such a system that is the real evil.  The system is such that profits for the very few come directly at the expense of the masses.  Let’s look deeper into this matter.

  What must be understood but seems to be lost on most PhD economists today is that money in our system can either be a fuel or a drag, but it cannot be neither.  Remember that our system attaches a unit of debt to each unit of currency.  That means that each unit of currency must return an amount greater than itself.  If it does, it is fuel.  If it doesn’t it is a drag.

  The problem then with the system is the destructive force inherent of the moral hazard (having the ability to create infinite currency) as depicted in the next chart.   That is, currency created and used for consumption rather than investment becomes a drag rather than a fuel and the economy becomes less efficient.  This increasing inefficiency has been occurring since the end of Bretton/Woods or since the beginning of the moral hazard.  That said, you will never hear very intelligent but also very disingenuous guys like Alan Goolsbee discuss the secular economic deterioration as it doesn’t suit their role of policy champions.

  The following chart depicts corporate domestic investment as a percentage of M2 money stock (blue line) and real GDP (red line).

  

  What becomes immediately apparent is the correlation between the percentage of money stock being used for corporate investment and real economic growth and the significantly negative slope of both.

  One might wonder then what are corporations doing with their money if not reinvesting it?

  

  Well the answer is clear.  While for decades domestic investment (i.e. fixed capital reinvestment) as a percent of money stock averaged around 8% today it has declined to about 5%, a 40% decline. On the other hand corporate dividend payments (green line) have increased to a 15 year average of about 7% from 4% of money stock, a 75% increase.  So each year, 3% of money stock is being reallocated from private domestic investment to corporate dividend payments.  And make no mistake, dividend payments do not fuel the economy as some +90% are reinvested into the secondary market.  An investment which provides almost no economic benefit (with the exception of very few secondary offerings that add cash to corporate balance sheets) as opposed to domestic fixed reinvestment which is pure economic fuel.

  But let’s take a closer look at the moral hazard and its direct implication on the economy.

  

  What we see by adding trendlines to both parametres is that very shortly after the US went to a pure fiat currency in 1971, domestic investment as a percentage of money stock began to drop, resulting in the secular deterioration in real GDP that continues today.  I say resulting rather than mere correlation and let me explain.

  Again the reality is that excess money stock is a drag on the economy because each unit of money stock necessarily has a unit of debt attached to it.  Logically then, as the percentage of money stock allocated to investment (meaning potential positive net returns) declines the percentage of unpayable debt (attached to the uninvested money stock) requires the perpetual rolling over of ever more debt.

  This results in massive drag on the economy because remember that mathematically debt used for consumption rather than investment is a net negative on medium and long term output.  The implication is that while all debt gets included into current GDP (through its expenditure today), all consumed debt plus interest is removed (paid back) from output later on.  This effect is not easily seen because the reduced medium and long term output is being continuously offset by even more consumer debt.

  

  So what we’ve ended up with is a death spiral of economic prosperity dressed in sheep’s clothing.  The above chart depicts that every worker in America today has increased their consumer debt levels by about 40% since the ‘end’ of the credit crisis.  Think about that for a moment.  Perhaps the most destructive economic collapse in history that was triggered by excessive credit has led American workers to take on 40% more consumer debt.

  Allow me to digress for a moment about the concept of consumer debt and why if it is such a destructive thing policymakers would allow it to continue its record expansion.  Think of it like this; where a purchase made with earned money is a two party transaction a purchase made on debt is a three party transaction.  Essentially banks become a party to every consumer transaction that is done on debt.  And so banks essentially are feeding off of every transaction between a consumer and a proprietor.  In the natural world we call that a parasite.  For the corporations the parasite is helpful because it magically turns the consumer’s debt into profit and so they don’t mind.  However, for consumers, the transaction doesn’t end after they eat the candy bar.  The debt not only remains, it builds, and so the parasite slowly deteriorates the consumer’s ability to prosper.  But because the parasite controls the economic policies of the nation the policies actually drive the indebtedness that we see in the above chart which benefit both the banks’ and the corporations’ profits but to the detriment of the working class (discussion as to the borrowers’ responsibility in the matter won’t take place here but I will note the data today suggests more than ever consumer debt is being used on inflating staples – healthcare, food and rent – rather than discretionary purchases).

  And yet we are told by the very elite PhD economists that the credit crisis ended back in 2009.  And worse we are told that the expansion of excess credit will end differently this time around. And still worse, any Americans who actually have savings have been forced into bloating equity valuations (along with corporations for the same reason but from the other side of the coin) because interest rate securities have been set to return effectively nothing.

  

  The above chart depicts income from private savings (using the 2 yr rate as a proxy, which is likely being generous today) has declined from about 2.0% of GDP in the early 1980’s to 0.6% in 2000 to around 0.2% today.  And so while consumer borrowers have been forced into a state of perpetual borrowing, savers has been forced to lend money into secondary markets which will once again be transferred to the very few upon the inevitable next market crash.  A crash that is already being signaled around the world.

  So when we watch guys like Bernie Sanders get visibly angry at guys like Alan Greenspan it behooves all of us to go beyond the entertainment of it or some prima facie agreement and to truly understand why the anger is justified.  When we do we will be asking why in the hell is no one yelling at Janet Yellen??

  Economics has become hostage to academia where PhD’s want to ring fence the subject with statistics and calculus to ensure only those who have done the very narrow and otherwise irrelevant studies can play.  But economics has very little to do with stats and calculus.  Economics is a subject of interrelatedness based on logic with a little basic math thrown in.

  If we were to all take the responsibility to understand the lifeblood of our American existence i.e. the economy, we will most certainly be moved to remove not only the policymakers but the system that together serve only those at the top of the economic food chain and at a cost to the rest of us.  At the end of the day the system is a zero sum game in a monetary system that is based on trading a unit of currency for a unit of debt.  There is no other end than a bad one and I’m sorry my friends but that is a (simple) mathematical certainty.

  

  

  

  

  

• Echoes Of 1997: China Devaluation "Rekindles" Asian Crisis Memories, BofA Warns

  In “Currency Carnage: Gross Warns On ‘Fakers And Breakers’; Morgan Stanley Tells Asia To Watch Its REER,” we outlined which Asia ex-Japan economies faced the biggest risk from China’s decision to devalue the yuan. 

  Broadly speaking, a weaker yuan will likely cause regional economies to suffer a loss of export competitiveness in combination with decreased demand for their products on the mainland.

  Even before the latest shot across the bow in the escalating global currency wars, EM FX was beset by falling commodity prices, stumbling Chinese demand, and a looming Fed hike.

  Now, the situation is immeasurably worse.

  We got a preview of what is perhaps in store when, on Tuesday, Indonesia reported that trade had collapsed in July, while Friday’s meltdown in the ringgit as well as Malaysian stocks and bonds underscored just how fragile the situation has become. And while, as Barclays notes, “estimating the global effects China has via the exchange rate and growth remains a rough exercise,” more than a few observers believe the effect may be to spark a Asian Financial Crisis redux.

  For their part, BofAML has endeavored to compare last week’s move to the 1994 renminbi devaluation, on the way to drawing comparisons between what happened in 1997 and what may unfold in the months ahead. 

  “On 1 Jan 1994, China unified its exchange rate by bringing the official in line with swap market rate, devaluing the RMB official rate by nearly 50% (from 5.8 to 8.7 RMB/USD),” BofA reminds us, adding that because only a fifth of transactions occurred at the official rate, the effect was a devaluation on the order of 7%. Because the bank (and they aren’t alone here) ultimately sees the yuan weakening by 10% against the dollar this time around, “the magnitude of devaluation [will] effectively be larger than the 1994 move.”

  As for the fallout, BofA is “concerned about the competitive impact from China’s devaluation on rest of Asia, as the devaluation comes on top of [1] China’s deflation; [2] China’s growing market share in key third markets; and [3] Asia’s sluggish exports.” As the following charts and subsequent commentary make clear, China was already taking share and now, that dynamic could accelerate and demand, already depressed, could be reduced further by the weaker yuan: 

  China’s market share of US and EU’s imports was already expanding, pre- devaluation (Chart 5 & Chart 6). China was already eating into rest of Asia’s market share, even with an anchored RMB. China’s market share of both US and Europe’s imports generally rose strongly from 2000 – 2010, before moderating during the GFC but has since picked up. China now accounts for about 20% of US imports and 7% of Europe’s imports. In contrast, ASEAN’s share of US imports has declined to 4.4% over 2011-14 from 7% in 2000, before recovering to about 5% in the first half of this year.

   

  

   

  In Europe, ASEAN’s share has declined to about 1.8% in 2008 from 2.6% in 2000, before picking up to about 2.4% this year. The IMF Regional Outlook also highlights that China, a major player in Asian supply chains, is capturing an increasingly larger part of the chain as domestically sourced intermediates (from either locally owned producers or subsidiaries of foreign firms) increasingly replaced imported intermediate goods. China’s “on-shoring” is thus one more reason why rest of Asia’s exports is struggling.

   

  Northeast Asia economies will likely face greater competitive pressures from China’s devaluation given stronger trade linkages and overlapping exports. Trade links with China are highest for the Northeast Asian economies: Taiwan (16% of GDP) and Korea (10%). More than a quarter of exports from Korea and Taiwan are destined for China. China’s lower tech exports also compete more closely with Korea and Taiwan. Almost a fifth of Japan’s exports are for China. For Southeast Asia, only 10% of exports go to China, with Malaysia and Singapore having a larger share. But ASEAN commodity exporters (Indo, Mal and Thai) will also be hit if China’s devaluation reduces import demand and intensifies the deflationary pressures on commodity prices.

  BofAML’s conclusion is that China’s devaluation has added “another layer of risk and uncertainty for the rest of Asia, on top of the looming Fed funds rate hike cycle.”

  “Asia,” the bank’s FX strategy team continues, “is already not in a good place (compared to past Fed rate hike episodes), as exports are contracting, domestic demand is sluggish and monetary policy is out of sync with the Fed,” which means that between the weaker RMB and a Fed that will eventually have to try and prove that contrary to what the St. Louis Fed’s Stephen Williamson says, an exit from ZIRP is actually possible, a 1997 replay may indeed be in the cards.

  

  

  

  

• Aug 20 – Fed Minutes: Conditions For Rate Hike Approaching Hike….

  EMOTION MOVING MARKETS NOW: 11/100 EXTREME FEAR

  PREVIOUS CLOSE: 14/100 EXTREME FEAR

  ONE WEEK AGO: 10/100 EXTREME FEAR

  ONE MONTH AGO: 36/100 FEAR

  ONE YEAR AGO: 32/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 27.71% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.
  Market Volatility: NEUTRAL The CBOE Volatility Index (VIX) is at 15.25. This is a neutral reading and indicates that market risks appear low.

  Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
  

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – IT’S THE JERKS

   

  UNUSUAL ACTIVITY

  IDTI Vol weakness SEP 19 PUT ACTIVITY @$1.25 on offer 4500+ Contracts

  SLB SEP 80 PUT ACTIVITY @$1.31 on offer 4000+ Contracts

  PYPL SEP WEEKLY4 PUTS on the BID @$1.35 3700 Contracts

  SPLS DEC 15 CALLS on the OFFER @$.90-.95 6000 Contracts

  SEMI – CEO Purchased $300k+ total

  AVHI Director Purchase 1,920 @$ 13.9989 Purchase 1,280 @$13.99

  More Unusual Activity…

   

  HEADLINES

   

  Fed Minutes: Conditions for rate hike approaching hike, but not there yet

  Fed’s Bullard says he Will argue for September liftoff

  Fed’s Kocherlakota: Raising rates now would be a mistake

  US CPI (MoM) Jul: 0.10% (est 0.20%; prev 0.30%)

  US CPI (YoY) Jul: 0.20% (est 0.20%; prev 0.10%)

  US CPI Core (MoM) Jul: 0.10% (est 0.20%; prev 0.20%)

  US CPI Core (YoY) Jul: 1.80% (est 1.80%; prev 1.80%)

  US Real Avg Weekly Earnings (YoY) Jul: 2.20% (prev 1.80%)

  US MBA Mortgage Applications (14 Aug): 3.60% (prev 0.10%)

  US DOE Crude Inventories (WoW) Aug-14: 2.62m (est -820K; prev -1682K)

  WTI futures settle 4.3% lower at $40.80/barrel

  ESM: Greece to receive EUR 13bln disbursement on Thursday

  ESM: Greek debt relief to be considered in Oct-Nov

   

  GOVERNMENTS/CENTRAL BANKS

  Fed Minutes: ‘Approaching’ hike, not there yet –CNBC

  Hilsenrath: Fed’s Signals Mixed on Rate Increase at September Meeting –WSJ

  Fed’s Bullard says he Will argue for September liftoff –MNI

  Fed’s Kocherlakota: Raising rates now would be a mistake –WSJ Op-Ed

  Fed RRP (19 Aug): 31 bidders. $84.4bn (prev 34 bidders, $88.1bn)

  PBOC’s Zhou urges ‘capital restraint’ over three policy banks –Caijing bia BBG

  IMF: China won’t join SDR till Sept 2016 at earliest –FT

  ECB: EZ excess liquidity rose to E472.92bn (prev E471.54bn) –Livesquawk

  ECB: E781m borrowed using overnight loan facility, E156.8bn deposited –Livesquawk

  Dutch defeats no-confidence motion in parliament –Rtrs

  Ex-BoE Miles: Rates will rise pretty soon –BBC

  GREECE

  ESM: Greece to receive EUR 13bln disbursement tomorrow, –Livesquawk

  ESM: Greek debt relief to be considered in Oct-Nov –Livesquawk

  Greek finance ministry official says that ESM board will have a teleconference tonight to approve first aid tranche to Greece –Rtrs

  EG’s Dijsselbloem: IMF, euro zone can agree on Greek debt

  Greek bailout moves ahead after German parliament backs programme –BBG

  German FinMin Schaeuble rules out debt haircut for Greece –Rtrs

  Schaeuble: IMF will join Greek deal if conditions met –ForexLive

  Fitch Upgrades 2 Greek Banks’ State-Guaranteed Debt To ‘CCC’ On Sovereign Upgrade

  GEOPOLITICS

  OSCE not prepared to work in Gorlovka under fire

  Poroshenko to discuss Ukraine situation with Hollande and Angela –Armenpress

  Merkel calls summit over rising violence in Ukraine –FT

  Reports of gunfire near Dolmabahce Palace in Istanbul –ForexLive

  UN to let Iran inspect alleged nuke work site –AP

  Iran boosting strategic defense production –PressTV

  FIXED INCOME

  U.S. Government Bonds Strengthen After Fed Minutes –WSJ

  Norway SWF posts first decline in three years on bonds –BBG

  Iraq courts investors before international debt sale –FT

  Glencore bonds slump on poor earnings –IFR

  FX

  USD: Dollar dips after Fed minutes –FT

  CNY: IMF says China won’t join SDR till Sept 2016 at earliest –FT

  COMMODITY FX: Oil currencies under fire as WTI tumbles –FT

  TRY: Turkish lira hits fresh record low –FT

  ENERGY/COMMODITIES

  WTI futures settle 4.3% lower at $40.80/barrel –Livesquawk

  Brent futures settle 3.4% lower at $47.16/barrel –Livesquawk

  DOE US Crude Oil Inventory Change (WoW) Aug-14: 2620k (est -820K; prev -1682K)

  DOE US Distillate Inventory Change (WoW) Aug-14: 594K (est 1500K; prev 2994K)

  DOE Cushing OK Crude Inventory Change (WoW) Aug-14: 326K (est 505K; prev -51K)

  DOE US Gasoline Inventory Change (WoW) Aug-14: -2708K (est -1250K; prev -1251K)

  DOE US Refinery Utilization (WoW) Aug-14: -1.00% (est -0.50%; prev 0.00%)

  CRUDE: Oil down on surprise inventory build –ForexLive

  CRUDE: EIA cuts WTI forecast for 2015, 2016 –FT

  EQUITIES

  EARNINGS: Glencore profits hit by oil and metal price slowdown –BBC

  EARNINGS: Target raises 2015 earnings forecast for second time –Rtrs

  EARNINGS: Staples reports profit decline as sales slide –MW

  EARNINGS: Lowe’s earnings miss estimates –CNBC

  M&A: AbbVie buys special review voucher for $350m –Rtrs

  SALES UPDATE: Imperial Tobacco upbeat despite falling volumes –FT

  TRADING: Short sellers target European luxury stocks –FT

  JV: India’s Tata to invest almost $100m in Uber –FT

  F&B: Carlsberg shareholders drown sorrows after warning –FT

  F&B: Coke takes minority stake in organic juice maker Suja –CNBC

  LEGAL: Citi to Pay $15m to Settle US Compliance Charges –FBN

  CRA: Moody’s: HSBC’s challenging profitability target for its Mexico unit could raise asset quality risks

  Toyota to seek price cuts from suppliers –Nikkei via BBG

  EMERGING MARKETS

  FLOW: Investors pulled near $1trln from EMs –CNBC

  CHINA: China stocks rebound, but who is buying?

   

  CHINA: PBOC Confirms CNY110 Bln In Funding Ops Weds

  

  

  

  

  

• US Plans Dramatic Increase In Global Lethal & Surveillance Drone Flights By 2019

  Submitted by Claire Bernish via TheAntiMedia.org,

  As if in complete defiance of the extensive contention at home and abroad, the Pentagon announced plans this week to dramatically ramp up global drone operations over the next four years.

  Daily drone flights will increase by 50% during this time, and will include lethal air strikes and surveillance missions to deal with the increase in global hot spots and crises, according to an unnamed (and unverified) senior defense official, as reported by The Wall Street Journal.

  “We’ve seen a steady signal from all our geographic combatant commanders to have more of this capability,” said Defense Department spokesperson, Navy Captain Jeff Davis to reporters at the Pentagon.

  Capacity for lethal airstrikes — despite the U.S.’ existent infamous reputation in its massive current program — will increase still further through a joint effort by the Air Force, Army, and Special Operations Command. Ironically, this news comes on the heels of a report that — because of what amounts to sibling rivalry — around $500 million has been wasted in attempts to bring the Air Force and Army into a combined drone purchasing program of the same Predator drones whose flights are now to be increased.

  “The combatant commanders and the Department of Defense need to take a truly joint approach to delivering the kinds of capabilities that remotely piloted aircraft can provide,” said retired Air Force three-star general David Deptula. “I’m glad to hear they’re taking a more joint approach. That’ll be a great help right there.”

  According to the unnamed official, intelligence surveillance and collection will be broadened in Iraq, Syria, Ukraine, North Africa, and the South China Sea, among other locations.

  Overall, daily drone flights have exponentially increased over the past decade — from about five in 2004 to 61 today, and a goal of around 90 by 2019. That would amount to 32,850 a year if the goal is met. The latest expansion is the largest since 2011.

  Part of the reason for expansion is the current use of military drone flights on behalf of the CIA — as many as 22 of the 61 daily flights are committed to CIA surveillance missions. Using military personnel, the agency essentially directs the missions and benefits from the surveillance, and though the military can use the agency’s information, it isn’t in command of those flights and thus loses that capacity while they are deployed that way.

  No budget figures were immediately available, but once they are, they will be subject to congressional approval.

  Nearly 5,500 people have been killed in U.S. drone strikes in Pakistan, Yemen, Somalia, and Afghanistan, alone — of which nearly 1,100 were civilian casualties, including over 200 children, according to the Bureau for Investigative Journalism. Now, there is no way to avoid an increase in the number of civilians who pay with their lives for being in the wrong place when the U.S. feels the need to carry out more strikes.

  As former drone sensor operator Brandon Bryant disturbingly told RT, “There was no oversight. I just know that the inside of the entire program was diseased and people need to know what happens to those that were on the inside. People need to know the lack of oversight, the lack of accountability, that happen.”

  But they hate us for our freedom. Right?

  

  

  

  

  

• U.S. Military Leaders Support Iran Deal

  Scores of high-level American military leaders support the Iran deal.  For example, the following 35 military officials – from the Army, Navy, Air Force and Marine Corps – signed a letter urging support for the deal:

  • General James “Hoss” Cartwright, U.S. Marine Corps
  • General Joseph P. Hoar, U.S. Marine Corps
  • General Merrill “Tony” McPeak, U.S. Air Force
  • General Lloyd W. “Fig” Newton, US. Air Force
  • Lieutenant General Robert G. Gard, Jr., U.S. Army
  • Lieutenant General Arlen D. Jameson, U.S. Air Force
  • Lieutenant General Frank Kearney, U.S. Army
  • Lieutenant General Claudia J. Kennedy, U.S. Army
  • Lieutenant General Donald L. Kerrick, U.S. Army
  • Lieutenant General Charles P. Otstott, U.S. Army
  • Lieutenant General Norman R. Seip, U.S. Air Force
  • Lieutenant General James M. Thompson, U.S. Army
  • Vice Admiral Kevin P. Green, U.S. Navy
  • Vice Admiral Lee F. Gunn, US. Navy
  • Major General George Buskirk, US Army
  • Major General Paul D. Eaton, U.S. Army
  • Major General Marcelite J. Harris, U.S. Air Force
  • Major General Frederick H. Lawson, U.S. Army Major General William L. Nash, U.S. Army
  • Major General Tony Taguba, U.S. Army
  • Rear Admiral John Hutson, U.S. Navy
  • Rear Admiral Malcolm MacKinnon HI, US. Navy
  • Rear Admiral Edward “Sonny” Masco, U.S. Navy
  • Rear Admiral Joseph Sestak, U.S. Navy
  • Rear Admiral Garland “Gar” P. Wright, US. Navy
  • Brigadier General John Adams, US. Air Force
  • Brigadier General Stephen A. Cheney, U.S. Marine Corps
  • Brigadier General Patricia “Pat” Foote, U.S. Army
  • Brigadier General Lawrence E. Gillespie, U.S. Army
  • Brigadier General John Johns, U.S. Army
  • Brigadier General David McGinnis, U.S. Army
  • Brigadier General Stephen Xenakis, U.S. Army
  • Rear Admiral James Arden “Jamie” Barnett, Jr., U.S. Navy
  • Rear Admiral Jay A. DeLoach, U.S. Navy
  • Rear Admiral Harold L. Robinson, U.S. Navy
  • Rear Admiral Alan Steinman, U.S. Coast Guard

  General Martin Dempsey – Chairman of the Joint Chiefs of Staff – agrees.

  So does Admiral Cecil E.D. Haney, U.S. Navy, who is commander of the U.S. Strategic Command.

  And Admiral Eric Olson, U.S. Navy, who was Commander of U.S. Special Operations Command.

  So do:

  • Secretary of Defense William Perry
  • National Security Advisor Zbigniew Brzezinski
  • National Security Advisor General Brent Scowcroft
  • National Security Advisor Samuel Berger
  • Secretary of State Madeline Albright
  • Assistant Secretary of Defense and Chairman National Intelligence Council Joseph Nye
  • Director for Iran, National Security Council and Deputy Coordinator for Sanctions Policy at the Department of State Richard Nephew
  • National Security Council Member for Iran and the Persian Gulf Gary Sick
  • Numerous additional high-level American defense, intelligence and diplomatic officials

  Scores of top Israeli generals and intelligence chiefs endorse the deal as well.

  So do 340 U.S. rabbis from across the political spectrum. And the majority of American Jews. And see this.

  

  

  

  

• The Next Leg Of The Commodity Carnage: Attention Shifts To Traders – Glencore Crashes, Noble Default Risk Soars

  One month ago we asked:

  Which will be first: Trafigura, Mercuria or Glencore

  — zerohedge (@zerohedge) July 22, 2015

  Today we got our answer.

  Commodity trading giant Glencore may have top-ticked the commodity supercycle with its 2011 IPO, but it’s been downhill ever since (66% downhill to be precise if measured by the tumble in the stock price), culminating this morning when the Baar, Switzerland-based mining and commodity giant reported a first half net loss of $676 million, compared with net profit of $1.72 billion a year ago.

  Revenue tumbled 25% to $85.7 billion after the company admitted China’s economic slowdown had caught the company “by surprise” and that no one in the mining industry “can read China” at the moment. The result: GLEN stock had plunged by 9% as of the last check, wiping out $3 billion in market value, and down a whopping 44% in the past three months, substantially underperforming its peers Rio Tinto (which Glencore once tried to acquire) and BHP Billiton.

  

  In addition to the poor earnings, the company slashed both its operating outlook and its spending plans: Glencore said it expected trading, or what the company calls its marketing division, to post full-year earnings before interest and tax of $2.5 billion to $2.6 billion. Glencore Chief Executive Ivan Glasenberg had previously said he expected the trading division to generate $2.7 billion to $3.7 billion in full-year earnings before interest and tax “no matter what commodity prices are doing”.

  It would appear what commodity prices are doing mattered after all.

  Perhaps more concerning is that as a result of Glencore’s 29% EBITDA tumble to $4.6 billion the company’s default risk as measured by its CDS, had surged to the highest in over two years. The reason is that while the company has been deleveraging its debt load “somewhat” it appears not to be enough, and now fears have appeared that at this rate, Glencore may lose its investment grade rating soon. CEO Ivan Glasenberg hinted as much when during the conference call he said a a modest rating cut was manageable. “Even if we drop one notch, it isn’t a high cost to the company,” he said on the call. To many this sounded like a confirmation that a downgrade is imminent.

  The company attempted to smooth over the damage when it said it lowered net debt by almost $1 billion to $29.6 billion, by reducing capital expenditure together with lower requirements for funding working capital at its trading business, adding that Glencore plans to reduce net debt to
  $27 billion by the end of 2016, while maintaining its dividend-payment
  plans.

  However, judging by the stock and CDS price chart below, it did not quite achieve the desired result.

  

  The FT summarizes the company’s cap table, which is not pretty: “The value of the company’s shares has shrunk to £22bn, compared with net debt of $29.6bn excluding inventories of $17bn it says it can sell swiftly. Glencore aims to maintain dividends, which cost more than $2bn a year, alongside a ratio of net debt to earnings of under three times. At an estimated net debt level of $27bn, earnings of $9bn will be required in 2016.”

  In other words, a dividend cut for Glencore now appears in the cards, and is virtually inevitable if copper, which is trading under $5000 at six year lows and is massively levered to how China’s economy dies, is unable to stage a bounce.That looks increasingly unlikely especially following the recent breach of copper’s 15 year support trendline:

  

  Why copper? As Reuters reminds us, formerly just a commodities trader, Glencore merged with mining company Xstrata in 2013. The marketing business was seen as a plus in diversifying earnings of the combined company as its success was not so closely tied to commodity prices.

  The price of copper, Glencore’s largest earner, is at six-year lows weighed down by a slowdown in China, one of the world’s biggest consumers of metals and other raw materials.

  “We are still looking for growth in both copper and zinc production in the second half of 2015 and then continuing in 2016,” Kalmin told Reuters. “Those in particular are the two commodities that we see going forward fundamentally looking in much better shape than other commodities.”

  Coal prices, another major commodity for Glencore, also show no sign of recovering due to a supply glut.

  Yet despite the collapse in coal, copper and other commodity prices, Glencore has been slow to adjuts. Competitor Rio Tinto this month said it planned $1 billion in cost cuts this year and Anglo American is to cut thousands of jobs in the next few years and may sell assets. Analysts had expected deeper cost cuts by Glencore to ease the strain on its debt levels and protect its credit rating. However, perhaps in expecting yet another dead cat bounce, the Swiss company has so far avoided dealing with the looming commodity crunch. Its stock is reflecting that this morning.

  Worst of all, however, is that while Glencore’s existing commodity exposure as a result of its miner “hybrid” nature may go up and down, its trading operation was supposed to be a natural hedge to deteriorating fundamentals: after all, commodity trading should be vibrant even when (and perhaps especially) prices drop. That also did not happen: the company’s trading division reported a 29% drop in first-half adjusted EBIT to $1.1 billion over the same period, lower than some analysts expected. According to the WSJ, the company blamed everything but itself for this disappointment:

  Glencore blamed tough trading conditions, particularly in aluminum and nickel, as well as coal markets. A slowdown in Chinese economic growth caught the company by surprise, it said, restricting access to credit there and softening demand. All that squeezed trading profits.

   

  The company’s agricultural-trading division also suffered, due in part to Russia’s unexpected imposition of a new Russian export tax in February. The only bright spot in trading was in energy, where volatility in the oil markets helped the company report a profit despite the slump in coal prices.

  But the punchline came during the call when Glasenberg blamed “speculators”, not so much China, for the lower commodity prices. Of course, it goes without saying that when commodity prices were at record highs, it was all thanks to the fundamentals.

  In any event, while the market remains focused on the miners, our warning from one month ago remains more relevant than ever: the real surprise will be the traders: the Glencores, Mercurias and Trafiguras of the world, who may indeed be quietly liquidating billions in paper commodity exposure.

  And not just them: yesterday we noted the ongoing collapse in Asia’s largest commodity trader, Noble Group. This is the real canary in the Asian coal, and copper, mine. Judging by the ongoing blowout in Noble Group CDS, up another 48 bps since yesterday’s note…

  

  … the pain in the commodity world may be about to get a whole lot worse especially if Noble Group suffer a liquidity/capitalization ‘event’ and is forced to liquidate any of its billions in commodity holdings.

  It is at that point that we will see just how immune to the commodity carnage the US stock market truly is.

  

  

  

  

  

• ClusterF'ed: Bonds & Bullion Pumped While Stocks & Dollar Dumped

  Seemed appropriate…

   

  Let's start with a quick intraday across the major asset classes…

  

   

  Surprise! Volume's back…

  

   

  Quite a day for stocks… Something changed today!! No follow through on a post Fed pump…

  

   

  Stocks on the week have been wild…

  

   

  With all major cash indices red on the week…

  

   

  Energy stocks atrting to catch down to reality…

  

   

  VIX crashed to unchanged on the FOMC minutes only to rip back higher to 15…

  

   

  Who could have seen this coming?

  

   

  This is starting to worry us… Financials CDS is really starting to decouple…

  

   

  The Treasury Complex was a mess – an inflation spike in yields after the CPI print, followed by a rally as stock dumped.. then a spike in yields on the leaked minutes followed by an aggressive bid…

  

   

  The US Dollar held gains after the CPI print (after its flash crash) but started to wilt into the European close. The leaked minutes saw an itial pop then a big dump in the dollar (note the strength all day in Swissy)…

  

   

  Commodities were very mixed. Silver screamed higher on the day and gold pushed on to new 1-month highs as Crude and Copper were crushed…

  

   

  The October WTI contract was glued at the $40/$41 barrier intop the close after collapsing 4.7% on the day – its biggest drop in 7 weeks and lowest since March 2009 (when the Fed initiated QE1)

  

   

  And Copper broke its 15-year trendline…

  

   

  We leave you with the following from a St. Louis Fed vice President:

  "A Taylor-rule central banker may be convinced that lowering the central bank's nominal interest rate target will increase inflation. This can lead to a situation in which the central banker becomes permanently trapped in ZIRP."

  On that note…

  Charts: Bloomberg

  

  

  

  

• The "Best Way To Play The Chinese Credit-Commodity Crunch" Is About To Pay Off Big

  China’s upcoming (or already present) hard-landing and credit/commodity crunch should be no surprise to anyone: we have been previewing it since 2010, and – just like the upcoming crash in the S&P and all other “developed” mareets – was always just a question of when, not if.

  However, knowing the endgame and trading it correctly, with the timing so uncertain, are two vastly different things.

  To be sure, anyone who bet that the Chinese economic crash would lead to a plunge in the stock market, has long been bankrupted by China’s plunge protection aka “National” team, which unlike the Fed/Citadel spoofing/ETF buying joint venture, is hardly shy about making itself apparent.

  Alternatively, playing the commodity crunch would have been a fool’s game until Saudi Arabia was politely asked by Kerry to crush Putin’s oil empire, and then decided to also destroy its biggest competitor, the marginal US shale producers, by fracturing OPEC and pumping so much oil that even the Saudis can no longer “make up for it with volume” and are now forced to issue debt to fund the country’s depleting fx reserves.

  Which is why we remind readers that what may be best China crash trade, not only in terms of total possible profit, but the best trade in terms of upside/downside, was one we laid out in collaboration with Manal Mehta last March in an article titled, appropriately enough “Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?”

  Here are some excerpts of what we said 17 months ago in an article laying out Glencore CDS as the best way to trade the inevitable China blow up:

  The economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal – exacerbated by the vicious cycle of credit-collateral-contraction. What is the cheapest way to play continued stress (with potentially limited downside)?

   

  The diversified natural resources company Glencore has a huge $55 billion of debt, is drastically sensitive to copper (and other commodity) prices, and its CDS remains just off record tights.

   

  

   

  Is Glencore the most exposed to a decline in commodities prices? – A trading giant rated BBB with over $55bn of debt and heavy exposure to commodities. A downgrade to below investment grade would be catastrophic to Glencore’s trading business. 

   

  Company’s 12/31/2013 presentation says a 10% decline in Copper Prices would reduce EBIT By $1.2bn!

  
  

  
   

   

  As of 12/31/13, Glencore had $55.185 billion in Gross Debt.

   

  By 3/12/2014, Copper has declined to a 44 month low, 12% decline in YTD 2014

   

  Glencore reports Net Debt of $35.882bn, which is $55.2bn of gross debt minus $2bn of cash minus $16.4bn of “Readily Marketable Inventories.” Nowhere do they define what’s included in the Readily Marketable Inventories and whether or not the RMIs are hedged.  The firm is still highly levered for investment grade even if RMIs can be converted into cash at stated value.

   

  * * *

  At 170bps and with 155bps as a floor for the last 6 months, it seems like a cheap protection play on further Chinese/Commodity contraction

  To be sure, the fact that going long GLEN CDS had limited downside was by far the most appealing aspect of the trade. As for the maximum upside, well that’s the real question.

  As we reported earlier today in “The Next Leg Of The Commodity Carnage: Attention Shifts To Traders – Glencore Crashes“, after sweeping the Chinese crisis under the rug, today – at long last – the first day of reckoning for Glencore emerged, leading to a 10% crash in the stock price following the company’s report of abysmal first half earnings and just as bad guidance.

  But more importantly, after trading at what we postulated was the rough floor for the CDS at 150 bps for over a year, in the past month Glencore CDS have exploded higher, and at last check was trading 315 bps wide, about 150 wider from the March 2014 levels…

  

   

  …  with the likelihood of a major gap wider when the rating agencies downgrade the company from investment grade to junk, which in turn would trigger an unknown amount of cascading collateral calls and an accelerated liquidity depletion, which would then further hammer Glencore’s bonds, and as a result, send its default risk, and CDS, surging.

  But even absent a credit-risk crashing downgrade, one can see that Glencore CDS is cheap when simply comparing it to the price of its most important commodity, copper.

  As a reminder, and as we highlighted in 2014, a 10% drop in copper reduces Glencore’s EBIT by $1.2 billion. Copper, currently, is at six and a half year lows and has now broken its 15 year support line. What happens next for the “doctor” which has now lost all technical support is anyone’s guess.

  But what is certain is that if the market realizes just how levered to copper Glencore truly is, and decides to price its bonds and CDS to account appropriately for the implied risk, then the one trade which over a year ago we said is the “cheapest and most levered” way to trade China’s “Credit-Commodity Crunch”, is about to pay off big as seen in the chart below.

  

   

  So is 700 bps, or much wider, in the cards for Glencore CDS? We don’t know, but we would certainly take it.

  

  

  

  

  

• Keeping The Bubble-Boom Going

  Submitted by Thorstein Pollett via The Mises Institute,

  As The FOMC Minutes just showed, The US Federal Reserve is playing with the idea of raising interest rates, possibly as early as September this year. After a six-year period of virtually zero interest rates, a ramping up of borrowing costs will certainly have tremendous consequences. It will be like taking away the punch bowl on which all the party fun rests.

  Low Central Bank Rates have been Fueling Asset Price Inflation

  The current situation has, of course, a history to it. Around the middle of the 1990s, the Fed’s easy monetary policy — that of Chairman Alan Greenspan — ushered in the “New Economy” boom. Generous credit and money expansion resulted in a pumping up of asset prices, in particular stock prices and their valuations.

  

  A Brief History of Low Interest Rates

  When this boom-bubble burst, the Fed slashed rates from 6.5 percent in January 2001 to 1 percent in June 2003. It held borrowing costs at this level until June 2004. This easy Fed policy not only halted the slowdown in bank credit and money expansion, it sowed the seeds for an unprecedented credit boom which took off as early as the middle of 2002.

  When the Fed had put on the brakes by having pushed rates back up to 5.25 percent in June 2006, the credit boom was pretty much doomed. The ensuing bust grew into the most severe financial and economic meltdown seen since the late 1920s and early 1930s. It affected not only in the US, but the world economy on a grand scale.

  Thanks to Austrian-school insights, we can know the real source of all this trouble. The root cause is central banks’ producing fake money out of thin air. This induces, and necessarily so, a recurrence of boom and bust, bringing great misery for many people and businesses and eventually ruining the monetary and economic system.

  Central banks — in cooperation with commercial banks — create additional money through credit expansion, thereby artificially lowering the market interest rates to below the level that would prevail if there was no credit and money expansion “out of thin air.”

  Such a boom will end in a bust if and when credit and money expansion dries up and interest rates go up. In For A New Liberty (1973), Murray N. Rothbard put this insight succinctly:

  Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, the piper must be paid, and the inevitable readjustments must liquidate the unsound over-investments of the boom and redirect the economy more toward consumer goods production. And, of course, the longer the boom is kept going, the greater the malinvestments that must be liquidated, and the more harrowing the readjustments that must be made.

  To keep the credit induced boom going, more credit and more money, provided at ever lower interest rates, are required. Somehow central bankers around the world seem to know this economic insight, as their policies have been desperately trying to encourage additional bank lending and money creation.

  Why Raise Rates Now?

  Why then do the decision makers at the Fed want to increase rates? Perhaps some think that a policy of de facto zero rates is no longer warranted, as the US economy is showing signs of returning to positive and sustainable growth, which the official statistics seem to suggest.

  Others might fear that credit market investors will jump ship once they convince themselves that US interest rates will stay at rock bottom forever. Such an expectation could deal a heavy, if not deadly, blow to credit markets, making the unbacked paper money system come crashing down.

  In any case, if Fed members follow up their words with deeds, they might soon learn that the ghosts they have been calling will indeed appear — and possibly won’t go away. For instance, higher US rates will suck in capital from around the word, pulling the rug out from under many emerging and developed markets.

  What is more, credit and liquidity conditions around the world will tighten, giving credit-hungry governments, corporate banks, and consumers a painful awakening after having been surfing the wave of easy credit for quite some time.

  China, which devalued the renminbi exchange rate against the US dollar by a total of 3.5 percent on August 11 and 12, seems to have sent the message that it doesn’t want to follow the Fed’s policy — and has by its devaluation made the Fed’s hiking plan appear as an extravagant undertaking.

  A normalization of interest rates, after years of excessively low interest rates, is not possible without a likely crash in production and employment. If the Fed goes ahead with its plan to raise rates, times will get tough in the world’s economic and financial system.

  To be on the safe side: It would be the right thing to do. The sooner the artificial boom comes to an end, the sooner the recession-depression sets in, which is the inevitable process of adjusting the economy and allowing an economically sound recovery to begin.

   

  

  

  

  

  

• Momo No Mo' – BofAML Warns Stocks "Close To A Tipping Point"

  Momentum traders – relying on the 'trend is your friend' theme – may have a rude awakening soon as momentum stocks trade at a stunning 50% premium to the market (vs an average 20%). As BofAML notes, high growth, high multiple names that have been leading the market over the past year are showing some signs suggest we are close to a tipping point. The growth-to-value spread is at its highest since the peak of the dotcom bubble in 2000 and, as Subramanian ominously notes, when momentum ends, it ends badly – with an average loss of 25% over the next 12 months.

   

  Momentum stocks are now trading at about a 50% premium to the market, where the average has been closer to a 20% premium.

  

   

  Via BofAML,

  Mo’ and growth – are we done yet?

  Of the factor groups we follow, price momentum and growth factors are outperforming by the widest margin this year, and are roughly neck and neck for the year – largely, because the two strategies represent the same stocks: high growth, high multiple names that have been leading the market over the past year. Some signs suggest we are close to a tipping point. Market breadth amongst the growth strategies we track is starting to narrow, with only one factor of five continuing to outperform in July. Valuations and flows, explored below, suggest further risks of a reversal. And it could be felt hard: as the market has narrowed, funds have doubled down on their winning bets, with the 10 biggest overweights now more overweight than ever.

  Growth vs. value spread now highest since 2000

  Another eerie sign that the end of momentum may be nigh: July’s outperformance of high secular growth names pushed the Growth / Value outperformance gap to 6.5ppt in the YTD, the widest gap for this point in the year since 2000, the year of the Tech Bubble peak. Meanwhile, buying inexpensive names has been a route to underperformance. July saw a further meltdown, with some valuation factors logging their worst returns this year: EV/EBITDA and Price/Book lost ~5% each and ranked in the bottom 5 screens.

  When momentum ends, it ends badly: avg NTM loss of 25%

  The outsized performance of 12-month momentum stocks has now pushed valuations of the winners to the highest levels we have seen since the financial crisis. Being priced for perfection renders the group even more vulnerable to a change in leadership. Momentum, by definition, tends to work very well until it breaks, but the magnitude of absolute and relative losses post-break has been extreme: from 1986 to now, cycle peaks in 12-month momentum have been followed by extremely weak momentum returns in the next twelve months: relative underperformance of 16ppt, and absolute losses of 25% on average.

  As Bloomberg reports,

  Virtually nothing has worked better in this year's thinning equity market than momentum, where you load up on stocks that have risen the most in the past two to 12 months and hope they keep going up. Sent aloft by sustained rallies in biotech and media shares, concern is mounting that the trade has gotten too popular, setting the stage for sharper swings.

   

  "In the past few years, including this year, there have been a lot of moments when trades have become crowded," said Arvin Soh, a New York-based fund manager who develops global macro strategies at GAM, which oversees $130 billion. "What's different is that the reversals that eventually come do tend to be more severe now than what we've seen over a longer-time horizon."

   

  "The question is whether you're seeing the narrative change around biotech and it's causing that momentum trade to lose steam," said Grieves, a London-based portfolio manager at Miton, who runs the firm's U.S. Opportunities Fund. "The problem with momentum trades is that you have no margin of safety. When you get on the bandwagon, you shut your eyes to valuation."

  *  *  *

  Crowded trades and thin liquidity… grab the popcorn…

  

  

  

  

  

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• Chinese Stocks Crash 10% In 2 Days Despite Stable Yuan, Margin Debt Drops First Time In 8 Days

  At the end of the morning session there is more blood on the streets as The PPT never turned up…

  • *INVESTORS SELLING CHINA SHARES ON WEAKER YUAN: CHANGJIANG SEC.
  • *CHINA GOVT INACTION ON STOCKS CLD SPUR SELLING: CHANGJIANG SEC.

  

  *  *  *

  As we noted earlier…

  Following yesterday's massive CNY120bn liquidity injection – the largest since Jan 2014 – and the notable absence of the plunge protection team in the afternoon rout ("we're only here for emergencies"), we note that margin debt fell for the first time in 8 days as Chinese farmers and grandmas realized once again that the stock market is not a free-ride to nirvana. Chinese stock futures indicate the losses will be extended at the open (SHCOMP -2.7%) as the Yuan fix is held unchanged.

  Weakness in stocks continues…

  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 0.6% TO 3,603
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 2.7% TO 3,646.80

  

   

  We suspect The Chinese Plunge Protection Team will be out today as we near the 200DMA once again…

  

   

   

  And The PBOC sets the CNY Fix unchanged:

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3963 AGAINST U.S. DOLLAR

  

  For now, no further liquidity injections following yesterday's outpouring…

  In a routine operation Tuesday, the People’s Bank offered 120 billion yuan ($18.77 billion) worth of seven-day reverse repurchase agreements, or reverse repos, short-term loans to commercial lenders in the money market.

   

  The cash injection marks the biggest of its kind since Jan. 28, 2014, when the bank offered 150 billion yuan via 14-day reverse repos.

  Some good news – or sanity…

  • *SHANGHAI MARGIN DEBT FALLS FOR FIRST TIME IN EIGHT DAYS

  Outstanding balance of Shanghai margin lending fell by 1.6%, or 14.6b yuan, from previous day to 879.9b yuan on Tuesday, according to exchange data. Tuesday’s percentage drop was biggest since Aug. 3.

  *  *  *

  Finally, we offer, once again, Alhambra Investment Partners' Jeffrey Snider's perspective on the "dollar run" that China is undergoing…

  To start this week, Ma Jun, chief economist for the PBOC, gave an email interview where he expressed his belief that the yuan will be more volatile but in either direction. Many still took those comments as if it were a veiled prescription toward devaluation.

  In the near term, it is more likely there will be “two way volatility,” or appreciation and depreciation of the yuan, Ma said in a question-and-answer statement sent by email.

   

  The central bank would move only in “exceptional circumstances” to iron out “excessive volatility” in the exchange rate, Ma said.

  If the central bank will only intervene under “exceptional circumstances” then the mainstream immediately turned that into “the PBOC is allowing devaluation because that is what it wants.” How any such thoughts could be considered consistent with what the PBOC has been doing until last week can only be misunderstanding the wholesale nature of global finance. Before last week, the PBOC had been intervening (who else could it have been?) so that the yuan wouldn’t move at all.

  

  This week has so far conformed to the wholesale interpretation. Just two days after Ma’s “exceptional circumstances” reference, the PBOC was “forced” to act once more, this time in one of its largest internal injections to, one more time, keep the yuan from depreciating sharply. Pay close attention to net results despite the conventional language:

  China’s central bank poured the largest amount of cash into the financial system on a single day in almost 19 months, signaling Beijing’s growing concerns about capital flowing out of the country following the recent weakening of its currency.

   

  Short-term interest rates and bond yields in the world’s second-largest economy have spiked in the past week, following an abrupt decision by the Chinese authorities to devalue the yuan last week. As money leaves the country, the amount of cash in the financial system declines, pushing rates higher.

  How is that not a “dollar” run, especially since it predates the assumed “devaluation”? The fact that the PBOC continues to flush “dollars” only suggests that it is not over; not even close (the amount of reverse repos PBOC undertakes in yuan is related and proportional to any “dollar” activity). Thus, I think that is why Ma reinforced the idea that China’s economy is in recovery and that the worst had passed at least economically. As I mentioned last week, after holding the yuan steady for five months the PBOC is just hanging on for dear life, hoping that the recovery message takes root and ends the run because it is obviously unable to do so in any fashion of either direction.

  

  While some indications show that perhaps the most acute part of the turmoil has passed, dating to around last Wednesday, that isn’t nearly the same as its welcome end.

  

  

  

  

  

• We Are The Government: Tactics For Taking Down The Police State

  Submitted by John Whitehead via The Rutherford Institute,

  “The people have the power, all we have to do is awaken that power in the people. The people are unaware. They’re not educated to realize that they have power. The system is so geared that everyone believes the government will fix everything. We are the government.”—John Lennon

  Saddled with a corporate media that marches in lockstep with the government, elected officials who dance to the tune of their corporate benefactors, and a court system that serves to maintain order rather than mete out justice, Americans often feel as if they have no voice, no authority and no recourse when it comes to holding government officials accountable and combatting rampant corruption and injustice.

  We’re impotent in the face of SWAT teams that break down doors and leave toddlers scarred for life. We’re helpless to prevent police shootings that leave unarmed citizens dead for no other reason than the police officer involved felt “threatened.” We shrug dismissively over the plight of fellow citizens who have their heads cracked, their bodies broken and their rights violated for failing to jump to attention when a police officer issues an order. And we fail to care about the thousands of individuals who have been punished with extreme sentences for nonviolent offenses and are forced to spend their lives as modern-day slaves in bondage to private prisons and the profit-driven corporations they serve.

  Make no mistake about it: virtually anything and everything is a crime nowadays (feeding the birds, growing vegetables in your front yard, etc.) to such an extent that if a prosecutor, police officer and judge were so inclined, you could be locked up for any inane reason.

  This is tyranny dressed up in the official garb of the police state. It is the self-righteous, heavy-handed arm of the law being used as a decoy to divert your attention to the so-called criminals in your midst (the fisherman who threw back small fish into the ocean, the mother who let her child walk to the playground alone, the pastor holding Bible studies in his backyard) so that you don’t focus on the criminal behavior being perpetrated by the government (bribery, cronyism, electoral fraud, slush funds, graft, pork, theft, and on and on).

  In the face of such abject injustice, outright corruption and overt inequality, it’s hard to feel empowered to believe the average citizen can make a difference. It’s hard to persuade anyone to stand against tyranny when all you can promise them as a reward is persecution, prosecution and a one-way trip to the morgue. And when the outcome seems to be a foregone conclusion—the government always wins—it can seem pointless, even foolhardy, to dare to challenge the system. As such, it’s far easier to buy into the political process, even though elections amount to nothing of consequence.

  There are also those who subscribe to the notion that an armed revolution is the only thing that will save America. These armed resistors are making themselves easy targets and will be the first to be taken down by militarized police who are trained to kill and armed to the teeth with every kind of weapon imaginable, from grenade launchers and sniper rifles to armored vehicles and Black Hawk helicopters.

  So how do you not only push back against the police state’s bureaucracy, corruption and cruelty but also launch a counterrevolution aimed at reclaiming control over the government using nonviolent means?

  You start by changing the rules and engaging in some (nonviolent) guerilla tactics.

  Employ militant nonviolent resistance and civil disobedience, which Martin Luther King Jr. used to great effect through the use of sit-ins, boycotts and marches.

  Take part in grassroots activism, which takes a trickle-up approach to governmental reform by implementing change at the local level (in other words, think nationally, but act locally).

  And then, while you’re at it, nullify everything the government does that is illegitimate, egregious or blatantly unconstitutional.

  Various cities and states have been using this historic doctrine with mixed results on issues as wide ranging as gun control and healthcare to “claim freedom from federal laws they find onerous or wrongheaded.”

  Where nullification can be particularly powerful, however, is in the hands of the juror.

  As law professor Ilya Somin explains, jury nullification is the practice by which a jury refuses to convict someone accused of a crime if they believe the “law in question is unjust or the punishment is excessive.”

  According to former federal prosecutor Paul Butler, the doctrine of jury nullification is “premised on the idea that ordinary citizens, not government officials, should have the final say as to whether a person should be punished.”

  Imagine that: a world where the citizenry—not the government or its corporate controllers—actually calls the shots and determines what is just.

  In a world of “rampant overcriminalization,” where the average citizen unknowingly breaks three laws a day, jury nullification acts as “a check on runaway authoritarian criminalization and the increasing network of confusing laws that are passed with neither the approval nor oftentimes even the knowledge of the citizenry.”

  Indeed, Butler believes so strongly in the power of nullification to balance the scales between the power of the prosecutor and the power of the people that he advises:

  If you are ever on a jury in a marijuana case, I recommend that you vote “not guilty” — even if you think the defendant actually smoked pot, or sold it to another consenting adult. As a juror, you have this power under the Bill of Rights; if you exercise it, you become part of a proud tradition of American jurors who helped make our laws fairer.

  In other words, it’s “we the people” who can and should be determining what laws are just, what activities are criminal and who can be jailed for what crimes.

  Not only should the punishment fit the crime, but the laws of the land should also reflect the concerns of the citizenry as opposed to the profit-driven priorities of Corporate America.

  Unfortunately, for thousands of Americans who are serving life sentences for nonviolent crimes as a result of harsh mandatory sentencing laws passed by “tough on crime” politicians, the punishment rarely fits the crime.

  As I point out in my book Battlefield America: The War on the American People, with every ill inflicted upon us by the American police state, from overcriminalization and surveillance to militarized police and private prisons, it’s money that drives the police state. And there is a lot of money to be made from criminalizing nonviolent activities and jailing Americans for nonviolent offenses.

  This is where the power of jury nullification is so critical: to reject inane laws and extreme sentences and counteract the edicts of a profit-driven governmental elite that sees nothing wrong with jailing someone for a lifetime for a relatively insignificant crime.

  Of course, the powers-that-be don’t want the citizenry to know that it has any power at all.

  They would prefer that we remain clueless about the government’s many illicit activities, ignorant about our constitutional rights, and powerless to bring about any real change. Indeed, so determined are they to keep us in the dark about the powers vested in “we the people” that the U.S. Supreme Court ruled in 1895 that jurors had no right during trials to be told about nullification.

  Moreover, anyone daring to educate a jury about nullification runs the risk of prosecution. Just recently, for example, 56-year-old Mark Iannicelli was charged with seven counts of jury tampering for handing out jury nullification fliers outside a Denver courtroom. Now Iannicelli is not being accused of advocating for or against any case in progress, nor is he charged with targeting any particular members of the jury. Nevertheless, Iannicelli could be sentenced to one to three years in prison because he dared to educate the jurors about an option that no judge or prosecutor ever mentions in court: the right to acquit someone who may be guilty if they also believe that the law is unjust.

  Such intimidation tactics proved less successful when used against Julian Heicklen, who was accused of jury tampering for handing out nullifications pamphlets in Manhattan. A federal district court judge found Heicklen not only innocent of the charge of jury tampering, but went so far as to warn that the law—18 U.S.C. § 1504—raises significant First Amendment concerns (“the First Amendment squarely protects speech concerning judicial proceedings and public debate regarding the functioning of the judicial system, so long as that speech does not interfere with the fair and impartial administration of justice”).

  Jury nullification has played a significant role in our nation’s history. It was championed early on by John Hancock and John Adams and relied on at various points since then to push back against laws deemed egregious, unjust or simply out of step with the times. Most recently, jury nullification has become a popular tactic to thwart laws that mandate harsh punishments for those convicted of possessing even minimal amounts of marijuana.

  For instance, in one case I worked on years ago, a jury refused to convict a 54-year-old man who had been charged with possession of marijuana. Prosecutors claimed that a SWAT team, doing an area-wide land and air sweep, had spotted two marijuana plants growing in the hollow of a dead tree on the man’s 39-acre property. Had the man been found guilty, he would have been sentenced to jail and his 90-year-old mother, blind, deaf and dependent on him for care, would have had to be institutionalized.

  In delivering his closing arguments, the prosecutor warned the jury that disagreement with the laws against pot possession and disapproval of police tactics are not valid reasons to nullify a case. Of course, those are exactly the reasons why more Americans should opt for nullification.

  In an age in which government officials accused of wrongdoing—police officers, elected officials, etc.—are treated with general leniency, while the average citizen is prosecuted to the full extent of the law, jury nullification is a powerful reminder that, as the Constitution tells us, “we the people” are the government.

  For too long we’ve allowed our so-called “representatives” to call the shots. Now it’s time to restore the citizenry to their rightful place in the republic: as the masters, not the servants.

  Jury nullification is one way of doing so.

  The reality with which we must contend is that justice in America is reserved for those who can afford to buy their way out of jail.

  For the rest of us who are dependent on the “fairness” of the system, there exists a multitude of ways in which justice can and does go wrong every day. Police misconduct. Prosecutorial misconduct. Judicial bias. Inadequate defense. Prosecutors who care more about winning a case than seeking justice. Judges who care more about what is legal than what is just. Jurors who know nothing of the law and are left to deliberate in the dark about life-and-death decisions. And an overwhelming body of laws, statutes and ordinances that render the average American a criminal, no matter how law-abiding they might think themselves.

  As I’ve said before, when you go into a courtroom, you’re going up against three adversaries who more often than not are operating off the same playbook: the police, the prosecutor and the judge.

  If you’re to have any hope of remaining free—and I use that word loosely—your best bet remains in your fellow citizens.

  They may not know what the Constitution says (studies have shown Americans to be abysmally ignorant about their rights), they may not know what the laws are (there are so many on the books that the average American breaks three laws a day without knowing it), and they may not even believe in your innocence, but if you’re lucky, they will have a conscience that speaks louder than the legalistic tones of the prosecutors and the judges and reminds them that justice and fairness go hand in hand.

  That’s ultimately what jury nullification is all about: restoring a sense of fairness to our system of justice. It’s the best protection for “we the people” against the oppression and tyranny of the government, and God knows, we can use all the protection we can get.

  Most of all, jury nullification is a powerful way to remind the government—all of those bureaucrats who have appointed themselves judge, jury and jailer over all that we are, have and do—that we’re the ones who set the rules.

  If they don’t like it, they can get another job.

  

  

  

  

  

• 23 Nations Around The World Where Stock Market Crashes Are Already Happening

  Submitted by Michael Snyder via The Economic Collapse blog,

  You can stop waiting for a global financial crisis to happen.  The truth is that one is happening right now.  All over the world, stock markets are already crashing.  Most of these stock market crashes are occurring in nations that are known as “emerging markets”.  In recent years, developing countries in Asia, South America and Africa loaded up on lots of cheap loans that were denominated in U.S. dollars.  But now that the U.S. dollar has been surging, those borrowers are finding that it takes much more of their own local currencies to service those loans.  At the same time, prices are crashing for many of the commodities that those countries export.  The exact same kind of double whammy caused the Latin American debt crisis of the 1980s and the Asian financial crisis of the 1990s.

  As you read this article, almost every single stock market in the world is down significantly from a record high that was set either earlier this year or late in 2014.  But even though stocks have been sliding in the western world, they haven’t completely collapsed just yet.

  In much of the developing world, it is a very different story.  Emerging market currencies are crashing hard, recessions are starting, and equity prices are getting absolutely hammered.

  Posted below is a list that I put together of 23 nations around the world where stock market crashes are already happening.  To see the stock market chart for each country, just click the link…

  1. Malaysia

  2. Brazil

  3. Egypt

  4. China

  5. Indonesia

  6. South Korea

  7. Turkey

  8. Chile

  9. Colombia

  10. Peru

  11. Bulgaria

  12. Greece

  13. Poland

  14. Serbia

  15. Slovenia

  16. Ukraine

  17. Ghana

  18. Kenya

  19. Morocco

  20. Nigeria

  21. Singapore

  22. Taiwan

  23. Thailand

  Of course this is just the beginning.  The western world is going to feel this kind of pain as well very soon.  I want to share with you an excerpt from an article that just appeared in the Telegraph entitled “Doomsday clock for global market crash strikes one minute to midnight as central banks lose control“.  You see, the Telegraph is not just one of the most important newspapers in the UK – it is truly one of the most important newspapers in the entire world.  When it speaks on financial matters, millions of people listen very carefully.  So for the Telegraph to declare that the countdown to a “global market crash” is “one minute to midnight” is a very, very big deal…

  When the banking crisis crippled global markets seven years ago, central bankers stepped in as lenders of last resort. Profligate private-sector loans were moved on to the public-sector balance sheet and vast money-printing gave the global economy room to heal.

   

  Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.

  I encourage you to read the rest of that excellent article right here.  It contains lots of charts and graphs, and it discusses many of the exact same things that I have been hammering on for months.

  When one of the newspapers of record for the entire planet starts sounding exactly like The Economic Collapse Blog, then you know that it is late in the game.

  Others are sounding the alarm about an imminent global financial crash as well.  For example, just consider what Egon von Greyerz recently told King World News…

  Eric, I fear that this coming September – October all hell will break loose in the world economy and markets. A lot of factors point to that, both fundamental and technical indicators and this indicates that we could have a number of shocks this autumn.

   

  Sadly, most investors will hold stocks, bonds and property and will see any decline in value as an opportunity. It will be a long time and a very big fall before they realize that the system will not help them this time because the central bankers have run out of ammunition to save the global financial system one more time. Yes, we will see more massive money printing, but it will just make things worse. And at some stage, which could be quite soon, real fear will set in, a fear of a magnitude the world has not experienced before.

  Hmm – there is another example of someone talking about September.  It is funny how often that month keeps coming up.

  And of course most of the major stock market crashes in U.S. history have been in the fall.  Just go back and take a look at what happened in 1929, 1987, 2001 and 2008.

  The “smart money” has been pulling their money out of stocks for quite a while now, and at this point a lot of others have hopped on the bandwagon.  The following comes from CNBC…

  The flight of investor money from U.S. stocks has turned into a stampede.

   

  In fact, the $78.7 billion leaving domestic equity-focused funds has been worse in 2015 than it was even during the financial crisis years, when the S&P 500 tumbled some 60 percent, according to data released Friday by Morningstar. The total is the highest since 1993.

   

  Domestic equity funds surrendered $20.4 billion in July alone and have seen $158.6 billion in redemptions over the past 12 months. Even a strong flow of money into passively managed exchange-traded funds has been unable to offset the stream to the exit among retail investors, who generally focus more on mutual funds than ETFs.

  A global financial crisis has already begun.

  So those that were claiming that one would not happen in 2015 are already wrong.

  Over the coming months we will find out how bad it will ultimately be.

  Sometimes I get criticized for talking about these things.  There are a few people out there that don’t like all of the “doom and gloom” that I discuss on my website.  Apparently it is a bad thing to talk about the things that really matter and we should all just be “keeping up with the Kardashians” instead.

  I consider myself just to be another watchman on the wall.  From our spots on the wall, watchmen such as myself all over the nation are sounding the alarm about what we clearly see coming.

  If we saw what was coming and we did not warn the people, their blood would be on our hands.  But if we do warn the people, then we have done our duty.

  Every day I just do the best that I can with what I have been given.  And there are many others just like me that are doing exactly the same thing.

  Those that do not like the warning message are going to feel really stupid when things start falling apart all around them and they finally realize how wrong they truly were.

  

  

  

  

  

• Vietnam Can't Keep Currency Up – Devalues Dong 3rd Time This Year, Widened Trading Bands

  Asian currency war contagion is spreading. Tonight’s victim is the Dong with Vietnam ‘devaluing’ the reference rate (for the 3rd time this year) by 1% to 21,890 and also widened the trading bands from 2% to 3% (since the recently widened 2% band was already broken)…

  • *VIETNAM CENTRAL BANK DEVALUES DONG BY 1%
  • *VIETNAM DEVALUES DONG REFERENCE RATE TO 21,890 PER DOLLAR
  • *VIETNAM CENTRAL BANK WIDENS DONG TRADING BAND TO 3% OF RATE

  

  Chart: Bloomberg

  

  

  

  

  

• Court To Bakery Owners: You Have No Property Rights

  Submitted by Ryan McMaken via The Mises Institute,

  The Colorado Appeals Court ruled that the owners of a bakery do not have any right to control their property, and that they shall be forced to provide bakery services to a couple that the owner would rather not do business with. In other words, they have no property rights. The court writes:

  Masterpiece remains free to continue espousing its religious beliefs, including its opposition to same-sex marriage. However, if it wishes to operate as a public accommodation and conduct business within the State of Colorado, CADA prohibits it from picking and choosing customers based on their sexual orientation.

  These sorts of rulings essentially rewrite the very nature of commerce and our whole concept of contracts. A business agreement (i.e., a contract) is based on two parties agreeing to a voluntary relationship. This is the foundation not only of business relationships, but of the relationship between citizens and states themselves. This is why "social contract" theory is so popular among theorists. Everyone recognizes that coerced relationships are inherently unjust, which is why defenders of the modern state system claim that states derive their legitimacy from a "social contract" in which both parties agree to the relationship.

  Without this contract into which both parties have presumably entered voluntarily, the relationship is unjust and a violation of basic human rights. But that all just goes out the window, apparently, when we're talking about discrimination. With court decisions like these, the court is saying that we can have contracts in which one only side agrees to it. But let's just call this what it is: seizure of one of the party's private property.

  Moreover, in an attempt to muddy the waters further, we're being told that this case is about religion. Ultimately, though, cases like these are really about nothing more than the simple right to control one's private property:

  In practice, the decision to exclude is always based on some type of discrimination. The type of discrimination can run the gamut from “you’re banned from my store because you groped customers” to “I don’t serve your (racial) kind.” In everyday life, the merchant, salesman, clerk, or owner of any kind must — because time is scarce — make constant discriminatory decisions as to whether or not he will do business with client A or client B. Indeed, every single economic act requires this sort of discrimination. A person may prefer to do business with more attractive people, or people who are friendlier. Or he may wish to work only with his co-religionists or citizens of his own nation-state. On a fundamental level, everyone knows this is the case, but many accept that it is the legitimate role of the state to decide which types of discrimination are acceptable and which are not. Hence, discrimination against unattractive people remains acceptable. Discrimination against certain racial groups is not.

  Regardless of what groups end up being favored, the effect of any anti-discrimination law is to curtail the freedom of the owner and to increase the size and scope of government’s coercive power over the lives and livelihoods of property owners. Moreover, since anti-discrimination law is heavily dependent on proving intent and motivation, such regulation also puts the government in the position of investigating the thoughts and opinions of owners. Sometimes, owners make this easy for regulators by stating their motivations outright, but in other cases, private owners are investigated and inferences are made as to the feelings and views of owners. This is necessary because, since every business transaction requires some sort of discrimination, the mere act of not entering into a business transaction is not sufficient to prove not-government-approved discrimination.  

  And even from a consequentialist angle, there is no real "cost" on the party being refused service. In this case, the refused party merely needs to drive down the road to one of dozens of similar bakeries in the Denver metropolitan area. But even if there were no other bakery in town (which is untrue of any community but the tiniest) the answer to this is to encourage more commercial freedom. Restricting commercial freedom merely produced the opposite effect of producing fewer bakeries:

  Thus, those who wish to lessen the negative effects of discrimination on consumers ought to concentrate on expanding the economic options for those who face discrimination. This is done through deregulation of industry and the elimination of corporate welfare and other anti-market programs and regulations that favor incumbent and semi-monopolist firms. Unfortunately, however, those who favor regulation of discrimination also tend to favor government regulation in general, including wage rates, employment practices, lending practices, food “purity,” and nearly everything else, in spite of the fact that the sum effect of such regulations is to prevent the entry of new firms into the market place while protecting the standing of large politically-powerful firms. The result is fewer merchants, fewer firms, fewer jobs, and more monopoly power which leads precisely to the negative discrimination-imposed burdens that the pro-regulation lobby claims to be fighting against.

  

  

  

  

  

• And The Best Way To Make Money In Chinese Stocks Is…

  For anyone who missed it, things spun out of control in China’s equity markets on Tuesday when a violent bout of afternoon selling sent the SHCOMP and the Shenzhen tumbling by more than 6%.

  More than half of the market traded limit-down.

  “At 2 p.m. it started to turn south again at a very fast rate,” one analyst told WSJ, adding that “people questioned why the government hadn’t yet stepped in.”

  That’s a testament to just how dependent China’s equity markets have become on the plunge protection “national team” spearheaded by China Securities Finance, the state-run margin lender that so far, has purchased nearly CNY1 trillion in shares. 

  

  It’s easy to see why investors would expect Beijing to intervene during a sell-off. After all, it was just four days ago that CSRC promised that the CSF would remain in the market “for years to come” and will “enter the market during times of volatility.” Times like Tuesday. 

  Of course it’s not at all difficult to spot a buyer of this size lumbering around in the market. Here’s what Goldman had to say on the subject earlier this month:

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

   

  

  Given the above it shouldn’t come as a surprise that some enterprising investors have now taken to simply frontrunning the plunge protection team, because as any vacuum tube will tell you, frontrunning big trades is a great way to establish an impressive track record. Here’s Reuters:

  Some foreign investors have found a new and simple way to make money from China’s dysfunctional stock markets – by dispensing with market research and playing “follow the leader” instead.

   

  Rather than crunching data on earnings and stock valuations to come up with investment strategies, they are mimicking China’s so-called “national team”, a group of state-backed financial institutions tasked with propping up share prices.

   

  “Some of the recent policy measures taken by China’s authorities in the markets have been quite puzzling and it hasn’t really increased confidence among foreign investors,” said Karine Hirn, Hong Kong-based partner of Swedish group East Capital, a $3.5 billion fund management firm.

   

  “That has prompted some investors to closely follow the intervention tactics taken by authorities rather than analyzing and investing fundamentals which we think is required.”

   

  The national team is easy to identify and simple to follow, foreign investors say.

   

  It generally buys index heavyweights opportunistically when the market is tanking to shore up confidence.

   

  PetroChina Co Ltd is one of its favorites: with a free-float of only 2.4 percent but a weighting of more than 6 percent of the Shanghai Composite Index, it can have an outsized impact on the nation’s biggest stock exchange.

   

  Last week, when the index posted its biggest weekly gain in nearly two months, the top 10 index heavyweights, including PetroChina as well as state-owned banks and insurers, gained even as most other constituents declined, indicating authorities were intervening aggressively.

   

  Most of these purchases happen in the last 30 minutes of trading and in heavy volumes, according to Reuters data analysis of last week’s trades, indicating the aim of this intervention is to ensure benchmark indexes close higher.

  In case that’s not clear enough for you, consider this quote from a trader at an equity derivatives desk at a European bank in Hong Kong: “We watch what the large Chinese brokers are doing everyday and follow them blindly as that can be quite profitable in these illiquid markets.”

  Yes, “quite profitable”, and quite dangerous as well because as Reuters also notes, “the national team is unwittingly encouraging short-term trading patterns that amplify the detachment of stock markets, which have become less responsive to fundamental drivers such as earnings trends, domestic economic data and shifts in global markets.”

  So basically, China is doing the same thing everyone else is doing. All hail manipulated markets.

  

  

  

  

  

• FallMart

  From the Slope of Hope: On Tuesday morning, WalMart reportedly a 15% drop in profits year-over-year and warned they would be dropping estimates for forthcoming periods. I’ve placed countless thousands of trades in my life, but I don’t think I’ve ever traded a single share of WalMart. In spite of this, I decided to dust off the WMT chart and take a look at what was going on.

  Take a look at this long-term chart of the company below (click for a larger image):

  

  I’ve tinted the chart various colors to indicate these broad periods:

  • Green – the Growth Years (1977-1993): this was the period where long-term holders were awarded with life-changing gains. The stocked moved up 33,000%. A few thousand bucks bought while Jimmy Carter was President was worth a million bucks around the time Bill Clinton was inaugurated. The ascent in the stock was virtually uninterrupted. This is a textbook example of a long-term growth stock.
  • Cyan – Short Stagnation (1993-1997): The stock spent about half a decade digesting its gains and going nowhere. Latecomers, envious of the eye-popping returns from the “green” period, jumped on board, but they were evenly matched by those taking profits. After five years, a newcomer to the stock would have nothing to show for it.
  • Yellow – Internet Wannabe (1997-2000): Here the stock enjoyed the zany market of the late 1990s and also rode along Amazon’s coattails. The gain of 260% which was nothing to sneeze at, but 260% isn’t 33,000%. The big money had been made already.
  • Magenta – Long Stagnation (2000-2012): Here was a dozen year period in which WMT lost about a third of its value and gained it back again a number of times. There was plenty of money to be made by swing traders, but long-term holders, after a full dozen years, had absolutely nothing to show for their patience.
  • Gray – Sputter (2012-Present): WalMart starting regaining some of its past glory during the start of this period, and by January of this year, it reached the highest price in its entire multi-decade history as a public entity. It was up about 65% at that time from the start of the “gray” period, but then it started to slip. As you can see by the more detailed chart below, the stock eroded its gains away, and at present, less than half of the “gray” profits still exist. I’ve put a green tint to show the gap-down in price today.

  

  Thus, over the past half-year, sixty billion dollars in shareholder wealth have vanished, and it seems altogether likely that WalMart has seen its peak stock price for a long, long time.

  What’s striking to me about the recent activity is that this a singularly ugly period of WMT stock behavior. Over the years, there has been a lot of “backing and filling”, but what’s happened over the past six months is a different beast altogether: lots of “backing” and hardly any “filling”.

  I think we’re witnessing a sea change in the behavior of WalMart, and this is probably a helpful harbinger of the American economy as a whole.

  

  

  

  

  

• Citizen Patrols Return To Central Park After 26% Jump In Crime, Mayor de Blasio Blamed

  Until recently, the “socialization” of New York under newish mayor Bill DeBlasio mostly involved snowfall snafus, exploding manhole covers, giant sinkholes in the middle of the city, and boycotting NYPD cops. The rest was mostly still on auto pilot, and as a result, worked. However, slowly but surely, even the mecca of crony capitalism where at least 1% of the population has never had it better, is starting to succumb to the general economic malaise of the second great depression. Case in point, crime in Central Park is up 26% this year, which at a time of record wealth, gentrification and all time high stock prices, should be unheard of.

  It also confirms that not all is well with the “recovery” propaganda.

  Here are some of the relevant NYPD crime stats through Aug. 9:

  • A 100 percent increase in robberies so far this year — From 11 in 2014 to 22 in 2015
  • Grand larceny is up nearly 14 percent, from 29 in 2014 to 35 this year

  And with de Blasio avoiding the ugly reality literally in the middle of his city, the Guardian Angels have resumed crime patrols for the first time in 20 years. Many park-goers said they were happy to see them. Some even posed for pictures with them.

  According to CBS, the increase in robberies and other crimes this year has Guardian Angels founder Curtis Sliwa calling it a “mugger’s delight” and he wants Mayor Bill de Blasio to do something about it, CBS2’s Marcia Kramer reported Monday. “The mayor, he’s impervious to it. He’s oblivious,” Sliwa said. From CBS:

  The Guardian Angels want to take Mayor de Blasio on a tour of Central Park to show him what they see every night.

   

  “He acts like, ‘oh, but it doesn’t indicate it in the stats.’ He needs to leave Gracie Mansion and City Hall and stop worrying about the future of the world and start worrying about the here and now of our city,” Sliwa said.Their patrols are mostly at night, but when CBS2 cameras followed them Monday — and it was daylight – there were still some scary moments.

  Not surprisingly, Sliwa, who is also a conservative radio talk show host, laid the increase in crime in Central Park squarely on the mayor’s doorstep. “It’s no question that the cops no longer rule the park at night, and if they don’t rule the park at night they may not rule the city at night and that means the thugs, thug life will rule,” Sliwa said.

  One such example was homeless man with his pants seen cinched below his underwear, running around and screaming. He was drinking openly from a liquor bottle. City laws make it illegal to drink alcohol in public spaces like parks and streets.

  “That gentleman that you have on video, imagine if he would be in the rambles or a secluded area,” Guardian Angel Ben Garcia said. “Out of nowhere he pops up and starts screaming. Someone could get a heart attack and God forbid he decides to rob that person.”

  It could get much worse.

  And the truth is that while crime may have jumped in recent months, it is still a far cry from 2 decades ago.  Since 1994, overall crime including rape, robbery and felony assault is down 80 percent. During this same time, the number of visitors has climbed to 40 million a year. The likelihood of being a victim of crime in Central Park is roughly 1 in 350,000 visits or so.

  So for now there is no reason to panic, however if the current trend persists, and if at least one resident or visitor is violently mugged or, worse, killed in Central Park, that may mark the moment when NYC’s gentrification officially went into reverse.

  

  

  

  

  

• Is The New U.S. 'Law Of War Manual' Actually ‘Hitlerian'?

  Submitted by Eric Zuesse, author, most recently, of  They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of Christ’s Ventriloquists: The Event that Created Christianity

  Is the New U.S. ‘Law of War Manual’ Actually ‘Hitlerian’?

  The Obama U.S. Department of Defense (DoD) has quietly issued its important Law of War Manual, and, unlike its predecessor, the 1956 U.S. Army Field Manual, which was not designed to approve of the worst practices by both the United States and its enemies in World War II, or after 9/11, this new document has been alleged specifically to do just that: to allow such attacks as the United States did on Dresden, Hiroshima, and Nagasaki, and in Iraq, and elsewhere.

  First here will be a summary of previous news reports about this historically important document; then, extensive quotations from the actual document itself will be provided, relating to the allegations in those previous news reports. Finally will be conclusions regarding whether, or the extent to which, those earlier news reports about it were true.

  EARLIER REPORTS ABOUT THE MANUAL:

  The document was first reported by DoD in a curt press release on June 12th, with a short-lived link to the source-document, and headlined, “DoD Announces New Law of War Manual.” This press release was published and discussed only in a few military newsmedia, not in the general press.

  The document was then anonymously reported on June 25th, at the non-military site, under the headline, “The USA writes their own version of ‘International Law’: Pentagon Rewrites ‘Law of War’ Declaring ‘Belligerent’ Journalists as Legitimate Targets.”

  That news article attracted some attention from journalists, but no link was provided to the actual document, which the U.S. DoD removed promptly after issuing it.

  A professor of journalism was quoted there as being opposed to the document’s allegedly allowing America’s embedded war journalists to kill the other side’s journalists. He said: “It gives them license to attack or even murder journalists that they don’t particularly like but aren’t on the other side.”

  Patrick Martin at the World Socialist Web Site, then headlined on August 11th, “Pentagon manual justifies war crimes and press censorship,” and he reported that the Committee to Protect Journalists was obsessed with the document’s implications regarding journalists.

  Then, Sherwood Ross headlined at opednews on August 13th, “Boyle: New Pentagon War Manual Reduces Us to ‘Level of Nazis’,” and he interviewed the famous expert on international law, Francis Boyle, about it, who had read the report. Ross opened: “The Pentagon’s new Law of War Manual(LOWM) sanctioning nuclear attacks and the killing of civilians, ‘reads like it was written by Hitler’s Ministry of War,’ says international law authority Francis Boyle of the University of Illinois at Champaign.” Ross continued: “Boyle points out the new manual is designed to supplant the 1956 U.S. Army Field Manual 27-10 written by Richard Baxter, the world’s leading authority on the Laws of War. Baxter was the Manley O. Hudson Professor of Law at Harvard Law School and a Judge on the International Court of Justice. Boyle was his top student.”

  The document is 1,204 pages. Here the general public can see the document and make their own judgments about it. What follows will concern specifically the claims about it that were made in those prior news articles, and will compare those claims with the relevant actual statements in the document itself. Reading what the document says is worthwhile, because its predecessor, the Army Field Manual, became central in the news coverage about torture and other Bush Administration war-crimes.

  THE DOCUMENT:

  First of all, regarding “journalists,” the document, in Chapter 4, says: “4.24.2 Journalists and other media representatives are regarded as civilians;471 i.e., journalism does not constitute taking a direct part in hostilities such that such a person would be deprived of protection from being made the object of attack.472.” Consequently, the journalism professor’s remark is dubious, at best, but probably can be considered to be outright false.

  The charge by the international lawyer, Professor Boyle, is a different matter altogether.

  This document says, in Chapter 5: “5.3.1 Responsibility of the Party Controlling Civilian 5.3.1 Persons and Objects. The party controlling civilians and civilian objects has the primary responsibility for the protection of civilians and civilian objects.13[13 See  J. Fred Buzhardt, DoD General Counsel, Letter to Senator Edward Kennedy, Sept. 22, 1972. …] The party controlling the civilian population generally has the greater opportunity to minimize risk to civilians.14[14  FINAL  REPORT ON  THE PERSIAN  GULF  WAR  614. …] Civilians also may share in the responsibility to take precautions for their own protection.15[15 U.S. Comments on the International Committee of the Red Cross’s Memorandum on the Applicability of International Humanitarian Law in the Gulf Region, Jan. 11, 1991. …]” This is directly counter to what Professor Boyle was alleged to have charged about the document.

  The document continues: “5.3.2 Essentially Negative Duties to Respect Civilians and to Refrain From Directing Military Operations Against Them. In general, military operations must not be directed against enemy civilians.16 In particular:
  • Civilians must not be made the object of attack;17
  • Military objectives may not be attacked when the expected incidental loss of life and injury to civilians or damage to civilian objects would be excessive in relation to the concrete and direct military advantage expected to be gained;18
  • Civilians must not be used as shields or as hostages;19 and
  • Measures of intimidation or terrorism against the civilian population are prohibited, including acts or threats of violence, the primary purpose of which is to spread terror among the civilian population.20″

  Furthermore: “5.3.3 Affirmative Duties to Take Feasible Precautions for the Protection of Civilians and Other Protected Persons and Objects. Parties to a conflict must take feasible precautions to reduce the risk of harm to the civilian population and other protected persons and objects.27 Feasible precautions to reduce the risk of harm to civilians and civilian objects must be taken when planning and conducting attacks.28”

  Moreover: “5.5.2 Parties to a conflict must conduct attacks in accordance with the principles of distinction and proportionality. In particular, the following rules must be observed:
  • Combatants may make military objectives the object of attack, but may not direct attacks against civilians, civilian objects, or other protected persons and objects.66
  • Combatants must refrain from attacks in which the expected loss of life or injury to civilians, and damage to civilian objects incidental to the attack, would be excessive in relation to the concrete and direct military advantage expected to be gained.67
  • Combatants must take feasible precautions in conducting attacks to reduce the risk of harm to civilians and other protected persons and objects.68
  • In conducting attacks, combatants must assess in good faith the information that is available to them.69
  • Combatants may not kill or wound the enemy by resort to perfidy.70
  • Specific rules apply to the use of certain types of weapons.71”

  In addition: “5.5.3.2 AP I Presumptions in Favor of Civilian Status in Conducting Attacks. In the context of conducting attacks, certain provisions of AP I reflect a presumption in favor of civilian status in cases of doubt. Article 52(3) of AP I provides that ‘[i]n case of doubt whether an object which is normally dedicated to civilian purposes, such as a place of worship, a house or other dwelling or a school, is being used to make an effective contribution to military actions, it shall be presumed not to be so used.’76 Article 50(1) of AP I provides that ‘[i]n case of doubt whether a person is a civilian, that person shall be considered to be a civilian.’”

  Then, there is this: “5.15 UNDEFENDED CITIES, TOWNS, AND VILLAGES. Attack, by whatever means, of a village, town, or city that is undefended is prohibited.360 Undefended villages, towns, or cities may, however, be captured.”

  Furthermore: “5.17 SEIZURE AND DESTRUCTION OF ENEMY PROPERTY. Outside the context of attacks, certain rules apply to the seizure and destruction of enemy property:
  • Enemy property may not be seized or destroyed unless imperatively demanded by the necessities of war.”

  These features too are not in accord with the phrase ‘reads like it was written by Hitler’s Ministry of War.’

  However, then, there is also this in Chapter 6, under “6.5 Lawful Weapons”:

  “6.5.1 Certain types of weapons, however, are subject to specific rules that apply to their use by the U.S. armed forces. These rules may reflect U.S. obligations under international law or national policy. These weapons include:
  • mines, booby-traps, and other devices (except certain specific classes of prohibited mines, booby-traps, and other devices);38
  • cluster munitions;39
  • incendiary weapons;40
  • laser weapons (except blinding lasers);41
  • riot control agents;42
  • herbicides;43
  • nuclear weapons; 44 and
  • explosive ordnance.45
  6.5.2 Other Examples of Lawful Weapons. In particular, aside from the rules prohibiting weapons calculated to cause superfluous injury and inherently indiscriminate weapons,46 there are no law of war rules specifically prohibiting or restricting the following types of weapons by the U.S. armed forces: …
  • depleted uranium munitions;51”

  Mines, cluster munitions, incendiary weapons, herbicides, nuclear weapons, and depleted uranium munitions, are all almost uncontrollably violative of the restrictions that were set forth in Chapter 5, preceding.

  There are also passages like this:

  “6.5.4.4 Expanding Bullets. The law of war does not prohibit the use of bullets that expand or flatten easily in the human body. Like other weapons, such bullets are only prohibited if they are calculated to cause superfluous injury.74 The U.S. armed forces have used expanding bullets in various counterterrorism and hostage rescue operations, some of which have been conducted in the context of armed conflict.
  The 1899 Declaration on Expanding Bullets prohibits the use of expanding bullets in armed conflicts in which all States that are parties to the conflict are also Party to the 1899 Declaration on Expanding Bullets.75 The United States is not a Party to the 1899 Declaration on Expanding Bullets, in part because evidence was not presented at the diplomatic conference that expanding bullets produced unnecessarily severe or cruel wounds.76”

  The United States still has not gone as far as the 1899 Declaration on Expanding Bullets. The U.S. presumption is instead that expanding bullets have not “produced unnecessarily severe or cruel wounds.” This is like George W. Bush saying that waterboarding, etc., aren’t “torture.” The document goes on to explain that, “expanding bullets are widely used by law enforcement agencies today, which also supports the conclusion that States do not regard such bullets are inherently inhumane or needlessly cruel.81” And, of course, the Republicans on the U.S. Supreme Court do not think that the death penalty is either “cruel” or “unusual” punishment. Perhaps Obama is a closeted Republican himself.

  The use of depleted uranium was justified by an American Ambassador’s statement asserting that, “The environmental and long-term health effects of the use of depleted uranium munitions have been thoroughly investigated by the World Health Organization, the United Nations Environmental Program, the International Atomic Energy Agency, NATO, the Centres for Disease Control, the European Commission, and others. None of these inquiries has documented long-term environmental or health effects attributable to use of these munitions.”

  However, according to Al Jazeera’s Dahr Jamail, on 15 March 2013: “Official Iraqi government statistics show that, prior to the outbreak of the First Gulf War in 1991, the rate of cancer cases in Iraq was 40 out of 100,000 people. By 1995, it had increased to 800 out of 100,000 people, and, by 2005, it had doubled to at least 1,600 out of 100,000 people. Current estimates show the increasing trend continuing. As shocking as these statistics are, due to a lack of adequate documentation, research, and reporting of cases, the actual rate of cancer and other diseases is likely to be much higher than even these figures suggest.” If those figures are accurate, then the reasonable presumption would be that depleted uranium should have been banned long ago. Continuing to assert that it’s not as dangerous a material as people think it is, seems likely to be based on cover-up, rather than on science. Until there is proof that it’s not that toxic, the presumption should be that it must be outlawed.

  Finally, though the press reports on this document have not generally focused on the issue of torture, it’s worth pointing out what the document does say, about that:

  “5.26.2 Information Gathering. The employment of measures necessary for obtaining information about the enemy and their country is considered permissible.727
  Information gathering measures, however, may not violate specific law of war rules.728
  For example, it would be unlawful, of course, to use torture or abuse to interrogate detainees for purposes of gathering information.”

  And: “9.8.1 Humane Treatment During Interrogation. Interrogation must be carried out in a manner consistent with the requirements for humane treatment, including the prohibition against acts of violence or intimidation, and insults.153
  No physical or mental torture, nor any other form of coercion, may be inflicted on POWs to secure from them information of any kind whatever.154 POWs who refuse to answer may not be threatened, insulted, or exposed to unpleasant or disadvantageous treatment of any kind.155
  Prohibited means include imposing inhumane conditions,156 denial of medical treatment, or the use of mind-altering chemicals.157”

  Those provisions would eliminate George W. Bush’s ‘justification’ for the use of tortures such as waterboarding, and humiliation.

  Furthermore: “8.2.1 Protection Against Violence, Torture, and Cruel Treatment. Detainees must be protected against violence to life and person, in particular murder of all kinds, mutilation, cruel treatment, torture, and any form of corporal punishment.29” 

  Therefore, even if Bush’s approved forms of torture were otherwise allowable under Obama’s new legal regime, some of those forms, such as waterboarding, and even “insults,” would be excluded by this provision.

  Moreover: “8.2.4 Threats to Commit Inhumane Treatment. Threats to commit the unlawful acts described above (i.e., violence against detainees, or humiliating or degrading treatment, or biological or medical experiments) are also prohibited.37”

  And: “8.14.4.1 U.S. Policy Prohibiting Transfers in Cases in Which Detainees Would Likely Be Tortured. U.S. policy provides that no person shall be transferred to another State if it is more likely than not that the person would be tortured in the receiving country.”

  Therefore, specifically as regards torture, the Obama system emphatically and clearly excludes what the Bush interpretation of the U.S. Army Field Manual  allowed.

  CONCLUSIONS:

  What seems undeniable about the Law of War Manual, is that there are self-contradictions within it. To assert that it “reads like it was written by Hitler’s Ministry of War,” is going too far. But, to say that it’s hypocritical (except, perhaps, on torture, where it’s clearly a repudiation of GWB’s practices), seems safely true.

  This being so, Obama’s Law of War Manual  should ultimately be judged by Obama’s actions as the U.S. Commander in Chief, and not merely by the document’s words. Actions speak truer than words, even if they don’t speak louder than words (and plenty of people still think that Obama isn’t a Republican in ‘Democratic’ verbal garb: they’re not tone-deaf, but they surely are action-deaf; lots of people judge by words not actions). For example: it was Obama himself who arranged the bloody coup in Ukraine and the resulting necessary ethnic cleansing there in order to exterminate or else drive out the residents in the area of Ukraine that had voted 90+% for the Ukrainian President whom Obama’s people (via their Ukrainian agents) had overthrown. Cluster bombs, firebombs, and other such munitions have been used by their stooges for this purpose, that ethnic cleansing: against the residents there. Obama has spoken publicly many times defending what they are doing, but using euphemisms to refer to it. He is certainly behind the coup and its follow-through in the ethnic cleansing, and none of it would be happening if he did not approve of it. Judging the mere words of Obama’s Law of War Manual  by Obama’s actions (such as in Ukraine, but also Syria, and Libya) is judging it by how he actually interprets it, and this technique of interpreting the document provides the answer to the document’s real meaning. It answers the question whenever there are contradictions within the document (as there indeed are).

  Consequently, what Francis Boyle was reported to have said is, in the final analysis, true, at least in practical terms — which is all that really counts — except on torture, where his allegation is simply false.

  Obama’s intent, like that of anyone, must be drawn from his actions, his decisons, not from his words, whenever the words and the actions don’t jibe, don’t match. When his Administration produced its Law of War Manual, it should be interpreted to mean what his Administration has done and is doing, not by its words, wherever there is a contradiction between those two.

  This also means that no matter how much one reads the document itself, some of what one is reading is deception if it’s not being interpreted by, and in the light of, an even more careful reading of Obama’s relevant actions regarding the matters to which the document pertains.

  Otherwise, the document is being read in a way that confuses its policy statements with its propaganda statements.

  Parts of the document are propaganda. The purpose isn’t to fool the public, who won’t read the document. The purpose of the propaganda is to enable future presidents to say, “But if you will look at this part of the Manual, you will see that what we are doing is perfectly legal.” Those mutually contradictory passages are there in order to provide answers which will satisfy both  the ‘hawks’ and  the ‘doves.’

  

  

  

  

  

• The 8 Trillion Black Swan: Is China's Shadow Banking System About To Collapse?

  “Wealth management products in China have come under the spotlight after a series of missed payments raised concerns over the shadow banking sector that often directs credit to firms shut out from bank lending or capital markets,” Reuters said in February, after reporting that CITIC (China’s top brokerage), was looking at ways to repay investors after the issuer of one of the wealth management products the broker sold missed a $1.12 million payment to investors.

  That news came a little over a year after the now infamous “Credit Equals Gold #1 Collective Trust Product” incident and a subsequent default scare on a similar product backed by loans to a struggling coal company. 

  Although wealth management products and CTPs (which differ from WMPs) are often described as “murky” and “opaque”, the basic concept is fairly simple. WMPs are marketed to investors as a way to get more bang for their buck (er.. yuan) than they would with bank deposits. Funds from these investors are then invested at a higher rate. If the assets investors’ money is used to fund run into trouble, that’s not good news for WMP investors. Simple. 

  The main issue here is the sheer size of the market. As FT notes, “in 2010, as regulators tried to rein in the explosion in bank credit resulting from the country’s Rmb4tn economic stimulus plan, banks turned to trusts to help them comply with lending controls.” So essentially, trusts helped banks offload credit risk at the behest of the PBoC. Here’s the process whereby banks use trusts to get balance sheet relief:

  

  The amount of trust loans outstanding in China has ballooned to nearly CNY7 trillion (total trust assets under management is something like CNY14 trillion) and now, Hebei Financing Investment Guarantee Group – which, as Caixan notes, is “the largest loan guarantee company in the northern province of Hebei [and] is wholly owned by the provincial regulator of state-owned assets” – is apparently broke, and that’s bad news because it guaranteed some CNY50 billion in loans made by dozens of trusts who in turn issued wealth management products to investors. 

  In short, if Hebei can’t guarantee the loans, WMP investors could be forced to take a loss and as anyone who follows developments in China’s financial markets knows, Beijing is not particularly keen on permitting SOEs to collapse – especially if there’s a risk of rattling retail investors’ fragile psyche. Here’s FT with the story:

  Eleven shadow banks have written an open letter to the top Communist party official in northern China’s Hebei province asking for a bailout that would enable the bankrupt credit guarantee company to continue to backstop loans to borrowers. If the guarantor cannot pay, it could spark defaults on at least 24 high-yielding wealth management products (WMPs).

   

  Hebei Financing Investment Guarantee Group has guaranteed Rmb50bn ($7.8bn) in loans from nearly 50 financial institutions, according to Caixin, a respected financial magazine. More than half of this total is from non-bank lenders, mainly trust companies, who lent to property developers and factories in overcapacity industries 

   

  The letter appeals directly to the government’s concern about social stability and the fear of retail investors protesting the loss of “blood and sweat money”. The 11 companies sold 24 separate WMPs worth Rmb5.5bn.

   

  “The domino effect from the successive and intersecting defaults of these trust products involves a multitude of financial institutions, an immense amount of money, and wide-ranging public interests,” 10 trust companies and a fund manager wrote to Zhao Kezhi, Hebei party secretary.

   

  “In order to prevent this incident from inciting panic among common people and creating an unnecessary social influence, we represent more than a thousand investors, more than a thousand families, in asking for a resolution.”

   

  Hebei Financing stopped paying out on all loan guarantees in January, when its chairman was replaced and another state-owned group was appointed as custodian.

   

  Though Hebei Financing guaranteed loans underlying WMPs, the products themselves did not guarantee investors against losses. Caixin reported that several trust companies, fearing reputational damage, have used their own capital to repay investors. 

   

  The 11 groups behind the recent letter have taken a different approach, pressuring the government for a rescue.

  There a few things to note here. First, the reason the underling assets are going bad is because WMP investors’ money was funneled into real estate development and all manner of other parts of the economy which are now struggling mightily. Second, the idea that China should allow for defaults on trust products is nothing new. In fact, we’ve been saying just that for at least a year. Finally, and perhaps most importantly, the banks’ playing of the social instability card underscores an argument we made when China’s equity market was in the midst of its harrowing plunge last month. In “Why China’s Stock Collapse Could Lead To Revolution” we warned that “it is only a matter of time before all the ‘nouveau riche’ farmers and grandparents see all their paper profits wiped out and hopefully go silently into that good night without starting mass riots or a revolution.”

  Yes, “hopefully”, but maybe not because as is becoming increasingly clear by the day, simultaneously micro managing the stock market, the FX market, the command economy, the media, and just about every other corner of society is becoming a task too tall even for the Politburo and sooner or later, something is going to break and shatter the “everything is under control” narrative.

  Whether or not the catalyst for widespread social upheaval will be a catastrophic chain reaction in the shadow banking system we can’t say for sure, but as FT reminds us, technical defaults on trust products have in the past been met with “public protests by angry investors at bank branches.”

  Here’s a snapshot of WMP issuance (note the durations as it gives you an idea of what kind volume we’re talking about on maturing products):

  

  As you might have noticed from the above, it appears that maturity mismatch could be a real problem here. Here’s what the RBA had to say about this in a bulletin dated June of this year:

  A key risk of unguaranteed bank WMPs is the maturity mismatch between most WMPs sold to investors and the assets they ultimately fund. Many WMPs are, at least partly, invested in illiquid assets with maturities in excess of one year, while the products themselves tend to have much shorter maturities; around 60 per cent of WMPs issued have a maturity of less than three months (Graph 5). A maturity mismatch between longer-term assets and shorter-term liabilities is typical for banks’ balance sheets, and they are accustomed to managing this. However, in the case of WMPs, the maturity mismatch exists for each individual and legally separate product, as the entire funding source for a particular WMP matures in one day. This results in considerable rollover risk. 

   

  

  In other words, the WMP issuers are perpetually borrowing short to lend long. The degree to which this is the case apparently varies depending what type of WMP (or trust product) one is looking at, and we will mercifully spare you the breakdown of the market by type (other than to include the pie chart shown below), but the important thing to note here is that it seems highly likely that at least CNY8 trillion in WMPs are exposed to the “considerable rollover risk” mentioned above.

  

  Allow us to explain how this could end. If China allows a state-run guarantor like Hebei Financing Investment Guarantee Group (the subject of the FT article cited above) to go broke and that in turn triggers losses for investors in WMP products, demand for those WMPs will dry up – and right quick. If that happens, WMPs will stop rolling, freezing the market and triggering a cascade of forced liquidations of the underlying (likely illiquid) assets. 

  It’s either that, or China bails everyone out. As the RBA concludes, “a key issue is whether the presumption of implicit guarantees is upheld or the authorities allow failing WMPs to default and investors to experience losses arising from these products.”

  And while that is certainly a key issue, the key issue is what those investors will do next.

  

  

  

  

  

• What Will You Do When The Government Checks Stop?

  Submitted by Tom Chatham via Project Chesapeake,

  Preppers talk about the day when paper currency becomes worthless and how they plan to barter when things fall apart. But, what will most people do when the government check they depend on stops forever more. Over 50% of the people in America now get some kind of government check every month. That is a question that I think many people have not come to grips with yet. At some point, the checks will stop.

  Social security and Medicare are running dry fast and it is only a matter of time before they stop paying out in whole or in part. If someone relies on these payments then they likely do not have sufficient money stored away to survive on in the event payments stop.

  Not only that, the many other entitlement payments sent out monthly that are keeping the population clothed, fed and housed will stop at some point as well. When that happens we already know what the result will be, especially in the cities. It is inevitable but many people still trust the government line and do not worry about it.

  There are those that realize the threat but have not taken any action to mitigate the problems that will result when the fateful day comes. Many hope it will be forestalled for their lifetimes and some hope if they ignore it, it simply will not happen. If government checks stop it will also mean the destruction of retirement plans and savings accounts and if you do not hold it you will not have it.

  One of the most vulnerable groups are the babyboomers that are now retiring at the rate of 10,000 per day. If this growing group suddenly looses their monthly check along with most or all of their savings, it is going to put a lot of pressure on society as these people suddenly try to return to the job market to survive.

  With the job market shrinking on a daily basis it is now imperative to develop a backup plan to generate some type of income when you can no longer rely on past promises to be honored. If you can store away some real money or valuable items to utilize later that is great but that will not last you forever.

  Anyone that survives the coming currency crisis will be someone that planned ahead and had some way to generate income after everything falls apart. If you can generate income to live on, be it money, food, medicine or some other item you need, you will be able to care for yourself for the duration.

  That is going to be a critical element in any long range plan you come up with. This means you will need to have the ability to produce something of value that society will need on a daily basis. The first things people seek out are food, shelter and clothing. Having some abilities in one or more of these areas will be the closest thing to guaranteed sales potential that you can get.

  Once these needs have been met by society other things will become important such as energy, security, transportation and medicine. Having some abilities in one or more of these areas will insure income for a long time to come as society rebuilds itself.

  If you have abilities in a primary need and a secondary need, you will be way ahead of the majority of the people seeking to survive the chaos that follows the loss of jobs and a functional currency.

  This plan could be as simple as growing a small garden to have vegetables and seeds to sell. At the same time it would be little trouble to add a few medicinal plants to your plot. You might be able to offer shelter in the form of a spare room or a cottage in your back yard. You could combine this with transportation or security services. In a breakdown of services, energy would be heavily affected. If you had the ability to produce electricity for refrigeration or ice production or the ability to power a vehicle with a wood gas system, you would have a valuable commodity. The ability to make small wood stoves for people without power would give you a large market for this type of appliance.

  It is important to think about all of the systems we rely on every day that people take for granted. This will give you a large list of potential goods or services that you may be able to provide after these things become difficult to get. A few dozen chickens producing eggs in your backyard could be the difference between getting by and suffering terribly.

  It is also important to think about the support systems you will need to supply the raw materials to produce your goods or services. Chickens need feed. Wood gas producers need a supply of wood. Making wood stoves requires steel. Growing a garden requires not only the knowledge but seeds, tools and fertilizer.

  It is important to keep in mind that retirement is a relatively new invention that came about in the 20th century. Until then, people worked until they literally dropped dead. When the current financial system breaks permanently, people will be forced to go back to work and keep doing so until the day they die. That is the reality many people will have to face in the near future. It is a reality that many have not considered and do not want to think about. You can ignore reality, but you cannot ignore the consequences of ignoring reality. When the government checks stop and your savings are gone, what will you do?

  

  

  

  

  

• Hillary Mocks FBI Claim She Wiped Email Server Clean, "What With A Cloth Or Something?"

  The stunning imbroglio of Hillary Clinton’s path to The White House took another absurd twist tonight when just hours after The FBI confirmed an “attempt” was made to wipe the hard drive of her email server (or in other words, remove all data on it), the former secretary of state seemed to mock the claims in a press conference. When asked specifically if she wiped the server, she ‘ummed’ and ‘ahhed’ then jokingly said “what with a cloth or something?”

   

   

  As The Daily Beast reports,

  NBC News quotes an FBI official as being optimistic that data can be recovered. Clinton’s campaign told Politifact “work-related emails were deleted after she turned them over to the State Department” last December, which means before she handed the server over to the FBI last month. The exact date is unknown.

   

  The Associated Press reported earlier Tuesday that investigators may be able to discern how secure her email system was, whether its files had been backed up, and if anyone else had accounts on the system.

  *  *  *

  And then there’s this…

  

  

  

  

  

• The Secret To Trump's Popularity (In 1 Cartoon)

  The career-politician’s Kryptonite – saying what you really think…

   

  

  
  

  Source: USNews.com

  

  

  

  

  

• Aug 19 – PBOC injects $48bn into China Development Bank

  EMOTION MOVING MARKETS NOW: 14/100 EXTREME FEAR

  PREVIOUS CLOSE: 12/100 EXTREME FEAR

  ONE WEEK AGO: 9/100 EXTREME FEAR

  ONE MONTH AGO: 32/100 EXTREME FEAR

  ONE YEAR AGO: 26/100 EXTREME FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 29.04% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.
  Market Volatility: NEUTRAL The CBOE Volatility Index (VIX) is at 13.79. This is a neutral reading and indicates that market risks appear low.

  Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
  

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – NYSE GOES DOWN

   

  UNUSUAL ACTIVITY

  IDTI Vol weakness SEP 19 PUT ACTIVITY @$1.25 on offer 4500+ Contracts

  SLB SEP 80 PUT ACTIVITY @$1.31 on offer 4000+ Contracts

  PYPL SEP WEEKLY4 PUTS on the BID @$1.35 3700 Contracts

  SPLS DEC 15 CALLS on the OFFER @$.90-.95 6000 Contracts

  SEMI – CEO Purchased $300k+ total

  AVHI Director Purchase 1,920 @$ 13.9989 Purchase 1,280 @$13.99

  More Unusual Activity…

   

  HEADLINES

   

  PBOC injects $48bn into China Development Bank –Xinhua

  Fitch Affirms Canada at ‘AAA’; Outlook Stable

  Fonterra GDT Price Index Rises +14.8% (prev -9.3%)

  ECB balance sheet expanded by EUR 5.31bn in latest week

  ECB lowers ELA cap for Greek banks to EUR89.7bn –Rtrs

  Tsipras, Advisors Consider Delaying Call For Confidence Vote – kathimerini

  Greek Finance Ministry Makes 7 Changes To Capital Controls – enikos

  Merkel To Press Dissenting Lawmakers To Support Bailout – ekathimerini

  IMF Calls On Saudi Arabia To Rely Less On Oil – MarketWatch

  Walmart Cuts Full Year Earnings Guidance After Disappointing Results – FT

  Home Depot Q2 EPS In-Line; Comps Outpace Expectations – Street Insider

  Lindt Half-Year Results Helped By Russell Stover Buy – RTRS

  Deutsche Bank AG ‘BBB+/A-2’ Ratings Affirmed; Outlook Stable – S&P

  Austria, Spain parliaments approve Greek aid deal

  56 Merkel lawmakers to reject bailout deal –BBG

  GOVERNMENTS/CENTRAL BANKS

  Atlanta Fed GDPnow (Q3): 1.3% (prev 0.7% on 13 August 2015)

  Fitch Affirms Canada at ‘AAA’; Outlook Stable

  COMMENT: Hilsenrath: Dallas Fed Gets a Non-Economist with a Controversial Resume

  ECB balance sheet expanded by EUR 5.31bn euros last week –Rtrs

  BoE analyzes whether Twitter can help predict a bank run –WSJ

  Irish cbank appoints advisers to beef up credit union regulation –Examiner

  GREECE

  ECB cuts Greek bank ELA cap to E89.7bn after Bank of Greece request –Rtrs

  Austria, Spain parliaments approve Greek aid deal –Livesquawk

  Greece eases capital controls for students and payments –Rtrs

  Merkel to Press Dissenting Lawmakers to Back Greece Bailout –BBG

  Dutch PM Rutte to Face Dutch Criticism Over Broken Greek-Aid Promise –BBG

  EU Spokeswoman: ESM Will Cover Greek Aid Without ‘New National Money’ –Livesquawk

  Greece Moves Forward With First Privatization Since Bailout Deal –BBG

  GEOPOLITICS

  Ukraine Says Separatist Attacks Ease for First Time in Week –BBG

  Putin Escalates Again in Ukraine –WSJ

  FIXED INCOME

  European Bonds Decline After Global Economic Data Beat Forecasts –BBG

  Corporate bond and equity market confidence diverging –FT

  NTMA Cancels EUR500 Mln Of The Irish Floating Rate Treasury Bond 2038 –NTMA

  High-grade leverage rose in Q2 –IFR

  Russian domestic dollar debt binge prompts liquidity fears –IFR

  Iraq Hires Banks Including Citigroup for $6bn bond Sale –BBG

  FX

  USD – Dollar buoyed by US housing data, Fed ahead –Investing.com

  GBP – Sterling rallies after UK inflation beats expectations –Rtrs

  TRY – Turkish lira hits record low after bank holds rates –CNBC

  IDR – Indonesia Cbank to Change Dollar Purchase Rules –WSJ

  RUB – Russians Feel Ruble’s Fall –NYT

  CLP – Chilean peso takes turn in EM filing line –FT

  ENERGY/COMMODITIES

  WTI futures settle 1.8% higher at $42.62 per barrel

  Brent futures settle 0.1% higher at $48.81 per barrel

  O&G – UK fracking industry set for a boost –FT

  AGS – Fonterra GDT Price Index Rises +14.8% (prev -9.3%)

  AGS – Fonterra chief bullish on dairy prices –FT

  METALS – Copper tumbles below $5,000 to fresh 6-year low –FT

  EQUITIES

  EARNINGS – Walmart profit misses expectations, lowers guidance –BBC

  EARNINGS – Home Depot Inc Q2 16 Adj EPS: $1.71 (est $1.71) –USAToday

  COMMODS – Rio considers Hunter coal break-up –AFR

  COMMODS – Noble Group Plunges to Seven-Year Low as CEO Defends Finances –BBG

  COMMODS – Glencore examines closure of platinum mine –FT

  COMMODS – Cairn Energy expects to begin drilling in Q4

  TECH: Sprint CEO escalates Twitter war with T-Mobile CEO –CNBC

  BANKS – Deutsche Bank’s Fingeroot Said to Take Credit Suisse Equity Role –BBG

  BANKS – S&P: Deutsche Bank AG ‘BBB+/A-2’ Ratings Affirmed; Outlook Stable

  BANKS – RBS sells Luxembourg fund business –FT

  BANKS – BNY Mellon to pay $14.8m to settle US SEC bribery charges –Rtrs

  EM – India’s Snapdeal raises $500m from Alibaba, Foxconn –FT

  EMERGING MARKETS

  CHINA – PBOC injects $48bn into China Development Bank –Xinhua

  CHINA OVERNIGHT – China’s central bank injects 120 bln into market –Xinhua

  CHINA COMMENT – Top analyst says Chinese authorities to maintain stability of the equity market –BI

  TURKEY – Turkey’s CBank Leaves Rates Unchanged –WSJ

   

  INDONESIA – Indonesia central bank holds key rate at 7.50% as expected –ST

  

  

  

  

  

• Ron Paul On The Seamless Web Of Liberty

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

  Many people think the Internal Revenue Service was violating civil liberties when it harassed tea party groups. After all, the groups were targeted because they wanted to exercise their civil liberty to challenge government policies. However, the specific issue in the IRS case was the groups’ application for tax-exempt status, which seems to be an aspect of economic liberty. In fact, the IRS case demonstrates that there is no meaningful distinction between civil and economic liberties. A true friend of the free society defends both civil and economic liberties.

  Many “civil libertarians” who oppose government laws interfering in the personal choices of consenting adults support laws preventing consenting adults from working for below the minimum wage. Other civil libertarians support government programs forcing consenting adults to purchase health insurance. Many liberals who join libertarians in opposing the NSA’s warrantless wiretapping fail to protest Obamacare’s assault on medical privacy. Even worse are those “First Amendment defenders” who cheer on government actions preventing religious individuals from operating their businesses in accord with the teachings of their faith.

  The hypocrisy of left-wing civil libertarians is matched by the hypocrisy of many “economic conservatives.” Too many conservatives combine opposition to high taxes and Obamacare with support for authoritarian measures aimed at stopping individuals from engaging in “immoral" behavior. These conservatives do not understand that using force to stop people from engaging in nonviolent activities that some consider immoral is just as wrong as using force to make people purchase health insurance. Obamacare and the drug war both violate individual rights, and neither has any place in a free society.

  In a free society, individuals must respect the right of others to make their own choices free from government coercion. However they do not have to approve of those choices. Individuals are free to use peaceful persuasion to stop others from engaging in immoral or destructive behavior. They can also avoid associating with individuals or businesses whose actions they find immoral or simply distasteful.

  Many civil and economic libertarians also mistakenly believe that they can defend liberty while supporting an imperialist foreign policy. It is impossible to be a true civil libertarian, or a true fiscal conservative, and support the warfare state.

  America’s imperialist foreign policy is the underlying justification for the rise of the modern surveillance state, and the reason Americans cannot board an airplane without being harassed and humiliated by the Transportation Security Administration. The warfare state is also the justification for the government’s greatest infringement on personal liberties: the military draft.

  The United States government’s militaristic foreign policy costs taxpayers over $1 trillion a year. The costs of empire are major drivers of the American debt. Yet many of the most fervent opponents of domestic spending oppose even minuscule cuts to the defense budget. The government’s budget will never be balanced until conservatives give up their love affair with the welfare state and military Keynesianism.

  Scholars, commentators, and other public figures who defend liberty in some areas and authoritarianism in other areas – or combine a defense of economic or civil liberty with a defense of the warfare state – undermine the case for the liberties they claim to cherish. Restoring the link between economic liberty, civil liberty, and peace is a vital task for those seeking to restore a society of liberty, peace, and prosperity. I examine the link between an interventionist foreign policy and a loss of our civil and economy liberties in my new book Swords into Plowshares.

  

  

  

  

  

• China's Richest Traders Are Rushing To Dump Their Stocks To The Retail Masses, Just Like In The US

  One of the things you will never hear on propaganda financial comedy TV, is that for all the endless prattle of cheap stocks and unlimited upside, the only purpose of pundit after pundit appearing inbetween commercials for incontinence diapers and get rich quick while trading options books (call now for a free copy while supplies last, for the next 3 years, is to sucker you, dear reader, in a casino that has been rigged by HFTs, and manipulated by central banks, into buying stocks so someone can collect a commission and someone else can offload a bag of overvalued toxic garbage to the infamous “dumb money” retail investor.

  The only problem is that after the Lehman collapse which revealed to everyone just how rigged everything truly was, the “dumb money” refused to participate in this so-called bull market, forcing global central banks to monetize $13 trillion in risk assets, and corporations to buyback their own stock at a record pace since Joe Sixpack refuses to bid it up.

  But who can blame the “dumb money” – here, as a reminder, is what the “smart money” has been doing not only in 2014…

  

   

  … but ever since the start of the second great depression also known as the “bull market”:

  

   

  As it turns out it is not just in the US that the “smart money” is bailing out as fast as it can: according to Bloomberg, the wealthiest investors in China’s stock market are also scrambling for the exits. To wit:

  The number of traders with more than 10 million yuan ($1.6 million) of shares in their accounts shrank by 28 percent in July, even as those with less than 100,000 yuan rose by 8 percent, according to the nation’s clearing agency. While some of the drop is explained by falling market values, CLSA Ltd. says China’s rich have taken advantage of state buying to cash out after the nation’s record-long bull market peaked in June.

  Visually:

  

  

  Now the reason the smart money is called that, is because, by and large, they know when the game is over and only some last minute government bailouts are keeping the farce upright, although as selloffs such as last night in China showed, it doesn’t take much to spook everyone that the government may not be backstopping the market for long unleashing a furious selling rampage.

  And, as Bloomberg adds, “investors with the most at stake are finding fewer reasons to own Chinese shares amid weak corporate earnings and some of the world’s highest valuations. With this month’s devaluation of the yuan adding to outflow pressures, bulls have started to question whether there’s enough buying power to prop up prices once the government pares back its unprecedented rescue effort – – a concern that contributed to the Shanghai Composite Index’s 6 percent plunge on Tuesday.”

  As a reminder, the median mainland stock traded at 72 times reported earnings on Monday, more expensive than any of the world’s 10 largest markets. The ratio was 68 at the peak of China’s equity bubble in 2007, according to data compiled by Bloomberg.

  Just a tad frothy. “The high net worth clients are the ones who moved the market,” Francis Cheung, the head of China and Hong Kong strategy at CLSA, wrote in an e-mail. “They tend to be more savvy.” What he meant is “they tend to be more selly.”

  Not only that, but they tend to own the government, and the press: the same press that promised untold stock market riches on the way up, and is now promising that the government can halt the market crash on the way down so please come back in, the water is warm.

  The problem is that only the dumbest money believe it, those with “<100,000 Yuan“, which will be nowhere near enough to satisfy the selling pressure once the whales start really dumping their holdings, leading to another Hanergy-type perpetual halt.

  “There is not a lot of fundamental support for the A-share market,” Cheung said. “Earnings are weak.”

  The rich know this: “the ranks of investors with at least 10 million yuan in stocks dropped to about 55,000 in July from 76,000 in June. Those with between 1 million yuan and 10 million yuan declined by 22 percent, according to data compiled by China Securities Depository and Clearing Corp.“

  The bottom line: “Wealthy investors, who have been through bear markets, are better at exiting,” said Hu Xingdou, an economics professor at the Beijing Institute of Technology.

  That’s true not only in China, it is certainly the case in the US as well, where the Fed has desperately been scrambling to give the impression that a $4.5 trillion balance sheet has made things “normal” again, when it apparently can’t realize that the greater the central bank intervention, the less the confidence anyone, not just smart, but dumb, and all other money, has in the market.

  Which is why the Fed may be on the verge of throwing the towel, and all those “smart” investors who still have not sold, tough.

  Until, of course, they scream and demand to be bailed out once again, when it’s all comes crashing down, which is precisely what will happen because in a banana republic like the US, it is those who never believed that the worst could happen to them for the second time in under a decade, that call the shots and control not only the legislative and the judicial branches of government, but the clueless economists who control the money printer as well. 

  Rinse. Repeat.

  

  

  

  

  

• Cyanide Thunderstorms Feared As Mystery Deepens Around $1.5 Billion Tianjin Explosion

  The story behind the chemical explosion that rocked China’s Tianjin port last Wednesday continues to evolve amid fears that the public could be at risk from the hundreds of tonnes of sodium cyanide stored at the facility.

  More specifically, Monday’s heightened concerns were related to the possibility that rain could interact with the water soluble chemical, releasing deadly hydrogen cyanide gas into the air. “First rain expected today or tonight. Avoid ALL contact with skin,” a text message purported to have originated at the US Embassy in Beijing read. The Embassy would later deny the message’s authenticity, perhaps at the behest of the Politburo which has kicked off the censorship campaign by shutting down hundreds of social media accounts for “spreading blast rumors.”

  Despite efforts to preserve order and clamp down on discussion, the anger in China is palpable as citizens demand answers as to how a catastrophe of this magnitude could have happened and as it turns out, not only was Tianjin International Ruihai Logistics storing sodium cyanide in amounts that were orders of magnitude larger than what they were supposed to be storing, but they were apparently doing so without a license. “The company has handled hazardous chemicals during a period without a licence,” an unnamed company official said on Tuesday. Apparently, Ruihai received the licenses it needed to handle the chemicals just two months ago, BBC reports, citing Xinhua. 

  Meanwhile, it looks as though determining who actually owns Ruihai will be complicated by the fact that in China, it’s not uncommon for front men to hold shares on behalf of a company’s real owners. This is of course an effort to obscure Communist party involvement in some enterprises and as FT reports, “that seems to be the case for Shu Jing and Li Liang, who appear in State Administration of Industry and Commerce records as holding 45 and 55 per cent of Ruihai International Logistics.” “Both Mr Shu and Mr Li told Chinese media they were holding their shares on behalf of someone else,” FT adds, “but would not say who.”

  Here’s more from FT:

  Licensing to operate a hazardous goods warehouse is not easy to come by, and Ruihai Logistics’ operation seems to have been approved after neighbouring lots had already been auctioned to residential developers.

   

  Adding to the speculation, Tianjin’s online corporate registry database was inaccessible for four days after the blasts. When access resumed on Monday, a search for Ruihai Logistics yielded a curious gap.

  The company was registered in 2012 but its current legal owners only bought their shares in 2013. The historic list of changes that should have reflected the previous owners did not appear.

   

  The records reveal that many Ruihai executives are former employees of Sinochem, the giant state-owned chemicals, fertiliser and iron ore trader that owns the largest hazardous warehouse operation in Tianjin.

  You get the idea. And although we’ll likely never know the true extent of the Party’s involvement with the company, local residents are furious, as evidenced by protests near the blast zone on Tuesday morning, which means Beijing must at least pretend to be serious about investigating the incident. In an effort to pacify the country’s censored masses, party mouthpiece The People’s Daily said 10 people, including the head and deputy head of Ruihai had been detained since Thursday. As Reuters reports, Yang Dongliang, head of the State Administration of Work Safety, is also under investigation:

  China said on Tuesday it is investigating the head of its work safety regulator who for years allowed companies to operate without a license for dangerous chemicals, days after blasts in a port warehouse storing such material killed 114 people.

   

  Yang Dongliang, head of the State Administration of Work Safety, is “currently undergoing investigation” for suspected violations of party discipline and the law, China’s anti-graft watchdog said in a statement on its website.

   

  The agency, the Central Commission for Discipline Inspection, did not say that Yang’s behavior was connected to the explosions in the port of Tianjin but the company that operated the chemical warehouse that blew up did not have a license to work with such dangerous materials for more than a year.

  While Beijing is busy engineering a smoke screen to appease the locals, thunderstorms are rolling into the area, which, as noted above, is bad news as the hundreds of tons of water soluble sodium cyanide are now exposed to the elements. Here’s Xinhua:

  Rains are expected to complicate rescue efforts and may spread pollution at the Tianjin port, which was rocked by warehouse blasts last week. China’s central meteorological authority has predicted a thunder storm over the blast site, where hundreds of tonnes of toxic cyanide still reside. A chemical weapon specialist at the site told Xinhua that rain water may merge with the scattered chemicals, adding to probability for new explosions and spreading toxins.

  On Tuesday, the Tianjin Environment Protection Bureau said it had collected 76 samples from around the blast site. “With regards to the safety levels, in total there are 29 cyanide inspection sites [and] of them, eight exceeded safety levels [with] the largest reading was 28 times over the safety standard,” said Bao Jingling, the agency’s chief engineer.

  Indeed, some have observed what’s been described as a “white foam” on the ground. 

  

  And as for the forecast, well, things don’t look promising:

  

  Finally, the first estimates of the damage are beginning to trickle in and while we won’t know the full extent of the human toll for quite sometime (if ever), Fitch puts the financial impact of the blasts for Chinese insurance companies at between $1-$1.5 billion. For anyone out there who’s long (or looking to get short) the Chinese P&C space, here’s Deutsche Bank’s take:

  Based on reported data, PICC was the largest P&C player in Tianjin with 28% market share in 2014, followed by Ping An at 23%, CPIC at 12% and Taiping at 5%. Tianjin is a relatively small market for listed insurers, accounted for 1.2% of 2014 premiums for PICC, 1.8% for Ping An, 1.4% for CPIC and 4.1% for Taiping.

   

  We note that it may be too early to assess ultimate losses from this event as it generally takes time for all claims to be filed. However, assuming losses are shared based on their respective market share in Tianjin, we estimate that every Rmb1bn ultimate loss, PICC’s 2015E combined ratio could increase by 12bps, Ping An by 18bps, CPIC by 14bps, and Taiping by 32bps and PICC’s 2015E net profit would decline by 1.6%, Ping An by 0.5%, CPIC by 0.8% and Taiping by 1.2%.

   

  We maintain our relatively cautious stance on Chinese P&C insurers as we expect underwriting profitability to be under pressure in the next 6-12 months amidst auto premium deregulation, potential increase in competition from online players and a tougher comp in 2H15E. 

  It also looks as though the government could be on the hook for tens of millions of yuan in insurance claims for injuries and deaths. The full Fitch statement is below.

  And meanwhile:

  Tianjin city sells 376m yuan of 3-yr bonds at 3.38%.

   

  China’s Tianjin Sells 1.46b Yuan Special Bonds in Placement.

  *  *  *

  Full statement from Fitch

  The insured losses from a series of explosions at a chemical warehouse in Tianjin on 12 August are likely to be material for Chinese insurance companies, potentially exceeding USD1bn-1.5bn, says Fitch Ratings. The high insurance penetration rate in this area could make the blasts one of the most costly catastrophe claims for the Chinese insurance sector in the last few years. While the incident is still developing, Fitch expects the number of reported insurance claims cases to surge further in the coming few weeks. 

  Fitch believes that claims from the blasts are likely to undermine the financial performance of some regional players and those property and casualty insurers with high risk accumulation in the affected areas. That said, it is too early to determine the exact impact that this incident will have on the credit strength of the Chinese insurance sector as a whole. 

  According to the China Insurance Regulatory Commission, non-life insurance premiums from Tianjin city amounted to CNY11bn (USD1.7bn) in 2014. As such, should insured losses come in at the high end of the initial USD1-1.5bn estimate, they would represent about 88% of total direct premiums written in Tianjin or roughly 5.4% of aggregated shareholder capital for the six most active issuers at end-2014. PICC Property and Casualty Company, Ping An Property & Casualty Insurance Company of China, China Pacific Property Insurance, China Continent Property & Casualty Insurance, Sunshine Property & Casualty Insurance and Taiping General Insurance are the most active insurers in the region, accounting for more than 77% of the non-life segment as measured by direct premiums written. 

  Claims from the blasts could be shared with both local and international reinsurers, which could mitigate the direct impact on the Chinese insurance sector. While insurers could recover a portion of their property claims from their reinsurers, their exposure, the amount of retention and the number of reinstatements under the catastrophe reinsurance program are likely to determine the degree of severity to which they are affected. Fitch estimates that the overall risk cession ratios of major non-life players active in the Tianjin region range from 10% to 15%. 

  Chinese media have reported that more than 8,000 vehicles were destroyed by the explosions. Claims from motor insurance could impair insurers’ margins and capital if their reinsurance protection is marginal and the degree of risk accumulation within the affected region is significant. Aside from motor excess of loss treaties, in which the reinsurers indemnify the ceding companies for losses that exceed a specified limit, it is common for Chinese insurers to use quota share reinsurance treaties to mitigate their solvency strain due to the strong growth in recent years from the motor insurance book of business. 

  The majority of claims will come from motor, cargo, liability and property insurance. However, medical and life insurance claims are also likely to be substantial. Victims of death and injuries are covered by a government-supported accident insurance plan for the Tianjin region, in addition to their own medical and life insurance policies. Each injured person who is insured by the government plan can claim compensation of between CNY20,000 and CNY35,000, depending on the extent of injuries while compensation of CNY50,000 will be paid in the event of death. 

  

  

  

  

  

• Gold Is "Undervalued" For 1st Time In 6 Years, BofAML Says

  With hedge funds net short for the first time ever, and Commercial Hedgers are holding the lowest net short position in gold futures since the launch of the gold bull market in 2001, we thought it interesting that – for the first time since 2009, BofAML's fund managers' survey finds Gold is "undervalued."

   

  For the first time since records began, hedge funds are net short gold futures, according to CFTC data…

   

  

   

  This is what happened the last time gold saw a 'low' net long position…

  

   

  And as of this week, Commercial Hedgers are holding the lowest net short position in gold futures since the launch of the gold bull market in 2001.

   

  

   

  And now… BofAML fund manager survey shows Gold is "undervalued" for the first time since 2009…

  

   

  So in aummary – Fast Money short, Smart Money least hedged,  Gold "undervalued"

   

  Source: Bloomberg and BofAML

  

  

  

  

  

• Noble Group’s Kurtosis Awakening Moment For The Commodity Markets

  Submitted by Simon Jacques

  Noble Group’s Kurtosis Awakening Moment For The Commodity Markets

  

  Trust is everything in commodity trading, it is also what is maintaining a constant risk premia in this market.

  Noble Group is Asia’s largest commodities trader.

  According to GMT research, Noble Group took what they have estimated as between $4 to $6 billions worth of fair value gains on asset valuation over the last 5 years.

  Just prior their Q2 earnings release, we published the reasons outlining why we believe that the trader is an accounting hocus-pocus.

  Since we are exactly one week after their Q2 results, in theory Standard and Poor’s had time to do their homework.

  We expect a big announcement of S&P on Noble Group later this week.

  UK insurers (who have also a foot in the cargo insurance market) have dumped Noble Group bonds overnight.

  The S&P downgrade was leaked or they have just anticipated it.

  Bonds maturing 2020 now trading in mid 80’s; private bank clients waking up to risks? Company no longer has access to capital markets.

  6 months after repeated ­assurances from Alireza that the financial accounting inquiry’s findings would not trigger a scramble for capital…

   

  

  … 5 yrs CDS paper quoted at 743 bps, stands at the highest level since 2009, 100bps bid-ask

  Energy credit analysts wonder where Noble Group’s financing will come from going forward with the downgrades.

  The trader will lose its access to their counter parties because of stricter limitations to deal with them now.

  Below is an excellent interview from GMT Research founder Gillem Tulloch made on Bloomberg Television.

  //

  Trading firms should be the experts at managing market risks; it’s at the core of our job to stay in business but when a major trader is on the brink of, and the market is pricing an event, the commodity market and market risk become extremely fungible.