Jul 23

Today’s News July 23, 2015

  • 11 Signs That America Has Already Gone Down The Toilet

    Submitted by Michael Snyder via The End of The American Dream blog,

    Just when you think that the depravity of the United States cannot possibly get any worse, something else comes along to surprise us.  Many of the things that you are about to read about in this article are incredibly disturbing, but it is important that we face the truth about how far this nation has fallen.  There are times when I will be having a conversation with someone else about the state of our country, and the other person will say something like this: “Wow – America is really going down the toilet.”  At one time, I would have totally agreed with that.  But at this point I would have to say that we have already circled the bowl and have made it all the way through to the other end.  Our society is absolutely addicted to entertainment (most of which is utter trash), tens of millions of us are hooked on drugs (both legal and illegal), and we have murdered more than 56 million of our own babies.  Our financial system is consumed with greed, we treat our military veterans like human garbage, and most of our “leaders” in Washington D.C. are deeply corrupt.  In America today, 64 percent of all men view pornography at least once per month, it is estimated that one out of every four girls is sexually abused before they become adults, and we have the highest teenage pregnancy rate in the entire industrialized world.  We like to think that we are an “example” to the rest of the world, but the only example that we are setting is a bad one.  The following are 11 signs that America has already gone down the toilet…

    #1 All over the United States, the body parts of aborted babies are being bought and sold, and the U.S. government gives the organization at the heart of this sick “industry” hundreds of millions of dollars a year.  This week, another incredibly shocking undercover video has been released which has given us even more evidence of what Planned Parenthood is really up to…

    The most recent video shows a luncheon conversation with Dr. Mary Gatter, who currently serves as president of Planned Parenthood’s Medical Directors’ Council and Medical Director of Planned Parenthood’s Pasadena abortion clinic.

     

    In the video, Gatter is heard haggling over the price she will charge for intact fetal body parts and is concerned that she will be “low-balled.” She asks for at least $75 per specimen, but wants to see what other Planned Parenthood abortionists are getting to make sure she gets similar compensation so she can buy an expensive sports car.

     

    “It’s been years since I’ve talked about compensation, so let me just figure out what others are getting and if this is in the ballpark, that’s fine. If it’s still low, we can bump it up. I want a Lamborghini,” Gatter laughed.

    This is wickedness at a level that is almost unspeakable, and it is being bankrolled by the U.S. government.

    Let’s hope that “I want a Lamborghini” gets plastered all over the Internet hundreds of millions of times.  I encourage everyone to get on Facebook and Twitter and start blasting out messages like this one to everyone that they know…

     

    If we cannot even stop the U.S. government from funding this kind of evil, what possible hope is there for the future of this nation?

    According to WND, some members of this “industry” even receive monetary bonuses “based on the baby parts they harvest”…

    StemExpress, which is run by Planned Parenthood abortion doctor Ronald Berman, offers its procurement technicians bonuses based on the baby parts they harvest, according to the Center for Medical Progress. Larger bonuses are offered for more valuable body parts, classified as “Category A” parts, while smaller bonuses are given for “Category C” parts.

    This alone is enough to prove that America has gone all the way down the toilet.  But I will continue with the list…

    #2 Just a few days ago, we learned that hackers had stolen personal information from 37 million users on an adultery website known as Ashley Madison…

    A hacking insider has told Sky News he thinks the people threatening to release personal details of users of an adultery website are bluffing and using the publicity as advertising to sell the data to the highest bidder.

     

    Hackers calling themselves Impact Team have stolen and leaked data from some of the Ashley Madison website’s 37 million users and are threatening to publish more.

    For now the group has released just 40MB of data, including some credit card details and several documents about its parent company Avid Life Media (ALM), it is reported.

    The big story here is not the hacking.

    Rather, the big story is the fact that 37 million of us have signed up to participate on a website that facilitates adultery.

    #3 Rates of violent crime are increasing by double digit percentages in many major U.S. cities in 2015, and some of the crimes being committed are almost too horrible to talk about.  Just consider the following example which comes from the Daily Mail…

    A 22-year-old man and his 21-year-old girlfriend were walking along McNichols Road near Birwood Street on Thursday around 11:30pm when a group of three to six men approached them in the well-lit area, WWJ reported.

     

    The couple was allegedly forced behind a nearby business, where the six men robbed and stripped them of their clothes.

     

    Police say the violent men took turns sexually assaulting the woman and when the attack ended, the victims ran nude to a nearby liquor store for help.

     

    Another couple was attacked just a few hours later at 2:40am when a 21-year-old man and his 19-year-old girlfriend were walking in the area of McNichols Road and Pierson Street.

     

    Four men ordered them to the ground and then took took turns sexually assaulting the woman, forcing her boyfriend to watch, WWJ reported.

    Incredibly, these gang rapes barely made a blip on the news here in the United States.  There are so many similar crimes taking place all around us that there is nothing really “unusual” about these horrific rapes.

    #4 Under the Obama administration, our federal government has become absolutely obsessed with political correctness and is spending money in some of the most bizarre ways imaginable.  For instance, the feds recently spent $125,000 “to study adjectives that could be perceived as sexist or racist“.

    #5 Speaking of pouring money down the toilet, the Obamaphone program is a perfect example.  It turns out that all you have to do to get a free cellphone from the federal government is to show them someone else’s food stamp card…

    The 2014 CBS4 investigation showed repeated instances of fraudulent activity and waste in the Lifeline program in Denver. It’s an FCC administered program designed to provide free monthly cellphone service to the needy so they can have cellphone service allowing them to seek employment or call for emergency help if needed. Recipients are required to show official documentation like Medicaid, housing assistance or food stamp cards verifying their low income status in order to receive the free phone service.

     

    But last year a vendor in Denver working under the FCC program had employees who volunteered to use someone else’s food stamp card to secure a free phone and service for a CBS4 producer who was not eligible for the program.

     

    Vendors typically receive $3 for every phone they are able to give out. In other cases, vendors said a CBS4 producer could simply show someone else’s electronics benefit card in order to secure a free phone and service.

    #6 Meanwhile, the government doesn’t even want to talk to normal, hard working citizens that just need a few questions answered.  According to a report that was just released, the IRS hung up on 8.8 million taxpayers that called in looking for help during this most recent tax season.

    #7 The federal government has made it exceedingly difficult for law-abiding people to immigrate to this nation legally, but meanwhile they have left our borders completely wide open and have actively encouraged people to immigrate illegally.  As a result, large numbers of criminals, drug dealers, gang members and welfare parasites have come pouring in.  According to one recent report, 2.5 million illegal immigrants have entered this country while Barack Obama has been in the White House…

    A new report estimates that 2.5 million illegal immigrants have entered the United States since Barack Obama took office in 2009.

     

    The Center for Immigration Studies released a study Monday citing data from the Center for Migration Studies, Pew Research Center and the Census Bureau that indicates 400,000 illegal immigrants on average have entered the country annually since 2009.

     

    From the middle of 2013 to May 2015 alone, 790,000 illegals have come into the United States. These undocumented individuals entered the country after President Obama unveiled a controversial executive order in 2012 to stop deporting young illegal immigrants who entered the country as children.

    And honestly, that 2.5 million number is probably on the low side.  These illegal immigrants are committing some of the most horrible crimes imaginable, and if you doubt this, just read this article.

    #8 Our society is being transformed into what I like to call “a Big Brother police state control grid”.  Just a few days ago, we learned of another example of this phenomenon.  The following comes from the New York Post…

    A key part of President Obama’s legacy will be the fed’s unprecedented collection of sensitive data on Americans by race. The government is prying into our most personal information at the most local levels, all for the purpose of “racial and economic justice.”

     

    Unbeknown to most Americans, Obama’s racial bean counters are furiously mining data on their health, home loans, credit cards, places of work, neighborhoods, even how their kids are disciplined in school — all to document “inequalities” between minorities and whites.

    What is truly sad is that so few Americans are actually upset that virtually everything we do is being watched, tracked and monitored.  For much more on all of this, please see this article.

    #9 Just recently, I authored a piece which railed about the fact that the average American citizen spends more than 10 hours a day plugged in to some form of media.  Many of us become extremely anxious if something is not playing at least in the background.  We spend endless hours watching television, listening to the radio, going to the movies, playing video games, messing with our smartphones and surfing the Internet.  Sadly, what most people don’t realize is that more than 90 percent of the “programming” that is being continually pumped into our brains through these various media outlets is controlled by just six absolutely enormous media corporations.

    #10 At the same time that the elite are endlessly pumping their twisted messages into all of our minds, they are becoming increasingly obsessed with controlling what the rest of us say.  In one recent article, I explained how support for “hate speech laws” in America is rapidly growing.  Today, 51 percent of all Democrats support these kinds of laws, and it is only a matter of time before liberal politicians start pushing really hard for the same kind of hate speech laws that have already been implemented in Europe and Canada.

    #11 On top of everything else, we have been stealing more than 100 million dollars an hour from future generations of Americans since Barack Obama entered the White House.

    Let that sink in for a moment.

    If someone were to write a movie script about the theft of 100 million dollars from a major financial institution, nobody would ever actually want to make that movie because such an amount would be too hard to believe.

    But this has actually been happening every single hour of every single day while Obama has been in power.

    In a frenzy of insatiable greed, we have been taking trillions of dollars that belong to our children and our grandchildren and spending it ourselves.  When you break it down, it comes to more than 100 million dollars every single hour of every single day.  This is a crime of unimaginable proportions, and if we lived in a just society a whole bunch of our “top politicians” would be going to prison for this.

    I could keep going, but I will stop for today.

  • Obama's Minimum Wage Utopia Just Hit A Brick Wall

    Who could have possibly seen this coming? Almost three years we first detailed how America has become an entitlement nation where "work is punished." It appears President Obama is about to discover this first hand as his populist 'raise the minimum wage' strategy is showing yet another major unintended consequence. On the same day as New York acts to mandate a $15 minimum wage for fast food workers, Seattle's $15 minimum wage law – which is supposed to lift workers out of poverty and off public assistance – has hit a snag. As Fox News reports, evidence is surfacing that some workers are asking their bosses for fewer hours as their wages rise – in a bid to keep overall income down so they don’t lose public subsidies for things like food, child care and rent. So not only is work 'punished' it is now 'disinentivized by mandate' as part-time America toils amid ever-rising costs of living.

     

    As we previously explained,

    This isthe painful reality in America: for increasingly more it is now more lucrative – in the form of actual disposable income – to sit, do nothing, and collect various welfare entitlements, than to work.

     

    This is graphically, and very painfully confirmed, in the below chart from Gary Alexander, Secretary of Public Welfare, Commonwealth of Pennsylvania (a state best known for its broke capital Harrisburg). As quantitied, and explained by Alexander, "the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

     

     

    We realize that this is a painful topic in a country in which the issue of welfare benefits, and cutting (or not) the spending side of the fiscal cliff, have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for most Americans who find themselves in a comparable situation: either being on the left side of minimum US wage, and relying on benefits, or move to the right side at far greater personal investment of work, and energy, and… have the same disposable income at the end of the day.

    And so, as Fox News reports, it is no surprise that the sudden gains in income from a government-mandated $15 minimum wage would tip some over the edge of their handouts entitlement… and thus dicincentize work altogether…

    Seattle’s $15 minimum wage law is supposed to lift workers out of poverty and move them off public assistance. But there may be a hitch in the plan.

     

    Evidence is surfacing that some workers are asking their bosses for fewer hours as their wages rise – in a bid to keep overall income down so they don’t lose public subsidies for things like food, child care and rent.

     

    Full Life Care, a home nursing nonprofit, told KIRO-TV in Seattle that several workers want to work less.

     

    “If they cut down their hours to stay on those subsidies because the $15 per hour minimum wage didn’t actually help get them out of poverty, all you’ve done is put a burden on the business and given false hope to a lot of people,” said Jason Rantz, host of the Jason Rantz show on 97.3 KIRO-FM.

     

    The twist is just one apparent side effect of the controversial — yet trendsetting — minimum wage law in Seattle, which is being copied in several other cities despite concerns over prices rising and businesses struggling to keep up.

     

    The notion that employees are intentionally working less to preserve their welfare has been a hot topic on talk radio. While the claims are difficult to track, state stats indeed suggest few are moving off welfare programs under the new wage.

     

    Despite a booming economy throughout western Washington, the state’s welfare caseload has dropped very little since the higher wage phase began in Seattle in April. In March 130,851 people were enrolled in the Basic Food program. In April, the caseload dropped to 130,376.

     

    At the same time, prices appear to be going up on just about everything.

     

    Some restaurants have tacked on a 15 percent surcharge to cover the higher wages. And some managers are no longer encouraging customers to tip, leading to a redistribution of income. Workers in the back of the kitchen, such as dishwashers and cooks, are getting paid more, but servers who rely on tips are seeing a pay cut.

     

    Some long-time Seattle restaurants have closed altogether, though none of the owners publicly blamed the minimum wage law.

     

    “It’s what happens when the government imposes a restriction on the labor market that normally wouldn’t be there, and marginal businesses get hit the hardest, and usually those are small, neighborhood businesses,” said Paul Guppy, of the Washington Policy Center.

    *  *  *

    As we previously concluded, with more than half of welfare spending going to working families…

    The irony here seems to be that because companies would rather spend their money on raises for "supervisors" and on stock buybacks which benefit the very same supervisory employees who are likey to own stocks (and which artificially inflate the bottom line), everyday taxpayers just like the ones who can't get a raise end up footing the bill via public assistance programs. The companies meanwhile, get to utilize nice little tricks like corporate tax inversions in order to avoid paying their share of the assistance handed out to the very same employees they underpay.

  • Greek Lawmakers Clear The Way For Formal Bailout Discussions

    Update: 36 Syriza lawmakers did not support the bill.

    As expected, the Greek parliament has approved a second set of prior measures, clearing the way for formal discussions on a third bailout program for the debt-stricken country.

    As Bloomberg notes, “several lawmakers of governing Syriza party, including Parliament Speaker Zoi Konstantopoulou, former deputy Finance Minister Nadia Valavani didn’t support bill.”

    As a reminder, Wednesday’s vote was largely a formality as the measures – which included EU rules on bank resolutions and civil justice reform – weren’t expected to be as contentious as those presented to lawmakers last week. Alexis Tsipras is desperately trying to regain the support of Syriza MPs who have refused to support the conditions creditors have attached to the €86 billion ESM aid package.

    Although negotiations will now likely begin within the next few days, another vote (on pensions and taxes for farmers) is expected during the first week of August.

    Earlier today, MNI – citing unnamed sources – reported that Tsipras will look to hold elections as soon as the third bailout is in place. Greek government officials promptly denied the report. 

    As a reminder, here’s what’s next for Greek politics, courtesy of Deutsche Bank.

    *  *  *

    From Deutsche Bank

    Potential political paths ahead

    We see the situation as potentially leading to three different political outcomes over the next few weeks.

    The first is near-term political instability that would put ESM negotiations on hold and return pressure on the Greek banking system ahead of the August 20th ECB bond redemption. This would be provoked by the PM tendering his government’s resignation either by losing additional government MPs in coming parliamentary votes or by losing support in the party’s Central Committee. Either would not necessarily cause a general election, with a government of national unity under very limited SYRIZA MP support possible until ESM talks are concluded (only 48 out of 149 MPs would be needed). Irrespectively, talks would be delayed, and the possibility of a more substantial shift in the SYRIZA position against the agreement could not be ruled out, whether before or after a new general election.

    The second potential outcome is a Greek PM decision to more aggressively position himself against internal party dissent and in favour of program implementation. This would likely involve a request from dissenting MPs to resign their parliamentary seats or, in case of refusal, exclusion from the SYRIZA parliamentary group. Such a decision would aim to consolidate the PM’s influence, with the ultimate aim of moving the party towards a more moderate direction in a future general election. Current electoral law stipulates that a general election within 12 months of the last one takes place under a “list” system, providing the Greek PM with the political cover to steer SYRIZA’s candidate list towards a more moderate direction.

    Still, any such decisions need to be approved by the party’s Central Committee. The latter is similarly responsible for excluding members from the party, even if the PM excludes MPs from the parliamentary group. Any such decision therefore requires the PM to take the risk of more formally splintering the party, with potential unpredictable results given his more uncertain influence over the party’s Central Committee

    The third – and what we believe the most likely outcome in coming weeks – is a continuation of the last few days’ status quo: persistent attempts by the PM to work through internal party dissent as well as the ESM negotiations, but without actively precipitating political change. In this instance the Greek PM would continue to preside over a de facto minority government, even if this is not explicitly acknowledged. A confidence vote may be called but dissenting MPs would still vote in favour and/or opposition parties would abstain. Any eventual ESM agreement would be ratified by a broad parliamentary majority, but with very strong SYRIZA dissents. Early elections could be called after. The benefit to this outcome is that near-term political uncertainty would be avoided, with dissenting and non-dissenting SYRIZA MPs as well as the opposition likely wanting to avoid near-term political instability. The cost would be that government commitment to the agreement would remain weak, maintaining the risk of a breakdown in negotiations as ESM negotiations get under way.

    Whatever the outcome above, events over the next few weeks are most likely to continue to be driven by the PM’s personal decisions as well as internal developments within SYRIZA. This will in turn depend on the ongoing economic and political cost of program implementation, with large upfront fiscal tightening already being legislated but additional fiscal and structural reform commitments needed to conclude the 3rd ESM program negotiations. The PMs own approval ratings will also matter, with opinion polls released after the negotiations continuing to show higher popularity ratings than other political leaders as well as a strong SYRIZA lead over other opposition parties. It remains to be seen how long this persists given the economic costs of the agreement, but the longer support is maintained, the greater the PM’s influence over internal party politics is likely to be.

    The endgame

    Irrespective of the near-term outcomes above, the inherent contradiction of program implementation by a government from within which the bulk of opposition originates will have to be resolved. It is unlikely that uncertainty around the stability of the Greek economy and banking system recedes until this is the case.

    Resolution could be led by Greek PM and current party president Tsipras moving SYRIZA in a more moderate direction followed by an early general election later this year after ESM negotiations have concluded. This would increase the odds of a government with greater commitment to implementation, irrespective of the electoral outcome. It would however risk a major splintering of the party or Tsipras’ own loss of authority in the process. An alternative is that the party retains its own internal contradictions, but that a government of national unity with broader-based participation is formed irrespectively. However, it remains unclear if this could materialize without an early general election, which the opposition may eventually request.

    Either way, implementation risks are likely to remain strong until greater political change materializes, likely driven by the strong internal contradictions within the current ruling party, but ultimately settled by the Greek PMs own political initiatives.

  • A Middle-East Game Of Thrones

    Submitted by Patrick J Buchanan,

    As President Obama’s nuclear deal with Iran is compared to Richard Nixon’s opening to China, Bibi Netanyahu must know how Chiang Kai-shek felt as he watched his old friend Nixon toasting Mao in Peking.

    The Iran nuclear deal is not on the same geostrategic level. Yet both moves, seen as betrayals by old U.S. allies, were born of a cold assessment in Washington of a need to shift policy to reflect new threats and new opportunities.

    Several events contributed to the U.S. move toward Tehran.

    First was the stunning victory in June 2013 of President Hassan Rouhani, who rode to power on the votes of the Green Revolution that had sought unsuccessfully to oust Mahmoud Ahmadinejad in 2009.

    Rouhani then won the Ayatollah’s authorization to negotiate a cutting and curtailing of Iran’s nuclear program, in return for a U.S.-U.N. lifting of sanctions. As preventing an Iranian bomb had long been a U.S. objective, the Americans could not spurn such an offer.

    Came then the Islamic State’s seizure of Raqqa in Syria, and Mosul and Anbar in Iraq. Viciously anti-Shiite as well as anti-American, ISIS made the U.S. and Iran de facto allies in preventing the fall of Baghdad.

    But as U.S. and Iranian interests converged, those of the U.S. and its old allies — Saudi Arabia, Israel and Turkey — were diverging.

    Turkey, as it sees Bashar Assad’s alliance with Iran as the greater threat, and fears anti-ISIS Kurds in Syria will carve out a second Kurdistan, has been abetting ISIS.

    Saudi Arabia sees Shiite Iran as a geostrategic rival in the Gulf, allied with Hezbollah in Lebanon, Assad in Damascus, the Shiite regime in Iraq and the Houthis in Yemen. It also sees Iran as a subversive threat in Bahrain and the heavily Shiite oil fields of Saudi Arabia itself.

    Indeed, Riyadh, with the Sunni challenge of ISIS rising, and the Shiite challenge of Iran growing, and its border states already on fire, does indeed face an existential threat. And, so, too, do the Gulf Arabs.

    Uneasy lies the head that wears a crown in the Middle East today.

    The Israelis, too, see Iran as their great enemy and indispensable pillar of Hezbollah. For Bibi, any U.S.-Iran rapprochement is a diplomatic disaster.

    Which brings us to a fundamental question of the Middle East.

    Is the U.S.-Iran nuclear deal and our de facto alliance against ISIS a temporary collaboration? Or is it the beginning of a detente between these ideological enemies of 35 years?

    Is an historic “reversal of alliances” in the Mideast at hand?

    Clearly the United States and Iran have overlapping interests.

    Neither wants all-out war with the other.

    For the Americans, such a war would set the Gulf ablaze, halt the flow of oil, and cause a recession in the West. For Iran, war with the USA could see their country smashed and splintered like Saddam’s Iraq, and the loss of an historic opportunity to achieve hegemony in the Gulf.

    Also, both Iran and the United States would like to see ISIS not only degraded and defeated, but annihilated. Both thus have a vested interest in preventing a collapse of either the Shiite regime in Baghdad or Assad’s regime in Syria.

    And, thus, Syria is probably where the next collision is going to come between the United States and its old allies.

    For Turkey, Saudi Arabia and Israel all want the Assad regime brought down to break up Iran’s Shiite Crescent and inflict a strategic defeat on Tehran. But the United States believes the fall of Assad means the rise of ISIS and al-Qaida, a massacre of Christians, and the coming to power of a Sunni terrorist state implacably hostile to us.

    Look for the Saudis and Israelis, their agents and lobbies, their think tanks and op-ed writers, to begin beating the drums for the United States to bring down Assad, who has been “killing his own people.”

    The case will be made that this is the way for America to rejoin its old allies, removing the principal obstacle to our getting together and going after ISIS. Once Assad is gone, the line is already being moved, then we can all go after ISIS. But, first, Assad.

    What is wrong with this scenario?

    A U.S. no-fly zone, for example, to stop Assad’s barrel bombs, would entail attacks on Syrian airfields and antiaircraft missiles and guns. These would be acts of war, which would put us into a de facto alliance with the al-Qaida Nusra Front and ISIS, and invite retaliations against Americans by Hezbollah in Beirut, and the Shiite militia in Baghdad.

    Any U.S.-Iran rapprochement would be dead, and we will have been sucked into a war to achieve the strategic goals of allies that are in conflict with the national interests of the United States. And our interests come first.

  • First China Arrests "Sellers", Now Bans "Defaulters" From Traveling

    In consequence-less America, the stigma of defaulting on one's personal responsibilities is a badge of honor for a risk-seeking public. No matter what, the government has your back if you want to buy a fridge, boat, or car – serial defaulter or not. However, hot on the heels of their proclamation that "malicious selling" of stocks is illegal, the Chinese government has extended its punitive measures against defaulting citizens, who are now banned from traveling on high-speed trains.

    • *CHINA BARS DEFAULTERS FROM TAKING HIGH-SPEED TRAINS: XINHUA

    This extends the already significant restrictions on 'defaulters' in place since last year (via Xinhua)…

    People who fail to fulfill court orders will face travel, financial and employment restrictions, said the Supreme People's Court (SPC) here Thursday.

     

    The SPC has signed a memorandum with six central government departments and China Railway Corporation to impose harsher restrictions on defaulters, said Jiang Bixin, vice president of the SPC, at a press conference here.

     

    They will be banned from flying and traveling in upper-class sleeper train compartments, as well as taking positions as legal representative, member of the board, member of the board of supervisors and senior executive of a company, Jiang said.

     

    Besides restrictions on traveling and employment, the defaulters will face constraints when applying for a loan or opening a credit card.

     

    When a corporation becomes a defaulter, its legal representatives, chief executives and those directly responsible for fulfilling the obligation will be subject to the same restrictions as individual defaulters, according to Jiang.

     

    Refusing to implement court judgements has become quite rampant in China, he said.

     

    "About 70 percent of debtors do not willingly fulfill court judgements. This not only harms legal interests of obligees but also social morals and mutual trust among people," he said.

     

    By Wednesday noon, there were 55,920 on the SPC's blacklist of defaulters, about 46,500 individuals and 9,400 corporations.

     

    The SPC will work with police and regulators of banks, state-owned enterprises, civil aviation, and business, Jiang said.

    *  *  *

    So while the Chinese government embraces the painful downside of capitalism in its personal defaults (and recognizes the moral hazrd), it entirely ignores it when it comes to stock market downside… perhaps they are learning from America what really matters after all.

  • US Government Reinstates Arm Sales To Bahrain Despite Rampant Human Rights Abuses

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    One of the many destructive myths Americans like to tell themselves is that the U.S. government is a staunch defender of human rights and democracy around the world. In reality, nothing could be further from the truth.

    Yes its true, there are plenty of well intentioned individuals and organizations across America that do care very deeply about such things; the U.S. government just isn’t one of them. The facts on the ground clearly prove this to be the case. The only thing those in charge care about is raw imperial power and money. Of course, they know this. They also know that keeping the myth alive is extremely important in order to maintain the moral high ground and some degree of legitimacy in the eyes of the public.

    The most recent example of what a sham the government’s purported commitment to human rights is, was last week’s revelation that the State Department may be prepared to upgrade Malaysia’s trafficking in persons ranking just to move the TPP forward. Here’s an excerpt from the post, To Pass TPP, U.S. State Dept. Upgrades Malaysia’s Human Trafficking Ranking Despite Discovery of Mass Graves:

    Earlier this week, we wrote about a troubling move by the US State Department to “upgrade” Malaysia from a “tier 3″ country to a “tier 2″ country regarding human trafficking. This move came despite a near total lack of evidence of any improvement by Malaysia. In fact, just two months ago 139 mass graves were discovered for migrant workers who had been trafficked and/or held for ransom. And the US ambassador to Malaysia had publicly criticized the country for failing to tackle its massive human trafficking problem.

    Today, we learn about how the U.S. government has reinstated arm sales to Bahrain despite horrific human rights abuses. From International Business Times:

    “The government of Bahrain has made some meaningful progress on human rights reform and reconciliation.”

     

    With this flexible formulation, the US justified the decision to lift the hold on arms transfers to the Bahrain Defence Force and National Guard, which had been in a place in an effort to pressure the Bahraini regime to reform its violent tactics towards protesters.

     

    But even as State Department employees were drafting and editing the arms-release statement, the government of Bahrain was disabusing the Obama Administration of the notion that it had the slightest interest in human rights protections and political reconciliation.

     

    Two weeks before the decision, a court sentenced Sheikh Ali Salman, head of the opposition society al-Wefaq, to four years in prison for “inciting hatred” and “insulting public institutions” charges which Amnesty International dismissed outright. The day before the U.S. dropped its hold, the government sentenced another opposition leader, Fadhel Abbas, to five years in prison for tweeting his condemnation of the war in Yemen.

     

    Not three days after the statement, authorities arrested Majeed Milad, another participant in the erstwhile National Dialogue, on charges of “instigating hatred of the regime.” Lest a casual observer think this to be all party politics, Nabeel Rajab, the prominent nonviolent and nonpartisan human rights defender, was only just released for unspecified “health reasons” after languishing in prison since 2 April. Authorities also targeted him for unwelcome criticism of the Yemeni conflict.

     

    This, even as the State Department declared that Bahraini officials were “contribut[ing] to an environment more conducive to reconciliation and progress.”

     

    The unkindest cut of all for the State Department, however, came on June 11, when the Bahrain Interior Ministry arrested Ebrahim Sharif. On that day, authorities arrested the former leader of the secular opposition society Wa’ad (“Promise”), for “incitement to overthrow the government”.

     

    As evidence, officials cited a twenty-minute speech Sharif had delivered on 10 July. An examination of Sharif’s words reveals nothing in the way of incitement or coup-plotting, but rather the nonviolent dissidence to which the members of Bahrain’s democratic movement have held for years.

    Well at least they aren’t abusing American citizens or anything. Oh, wait.

    Nevermind that “prisoners,” plural, was a misnomer, that human rights activists like Abdulhadi al-Khawaja and Naji Fateel are still imprisoned. Nevermind that American citizen Taqi al-Maidan remains behind bars, suffering torture and maltreatment on unsubstantiated charges.

  • China's Record Dumping Of US Treasuries Leaves Goldman Speechless

    On Friday, alongside China’s announcement that it had bought over 600 tons of gold in “one month”, the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.

     

    We then put China’s change in FX reserves alongside the total Treasury holdings of China and its “anonymous” offshore Treasury dealer Euroclear (aka “Belgium”) as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted – namely virtually the entire delta in Chinese FX reserves come via China’s US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.

     

    We explained all of his on Friday in “China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium“, and frankly we have been surprised that this extremely important topic has not gotten broader attention.

    Then, to our relief, first JPM noticed. This is what Nikolaos Panigirtzoglou, author of Flows and Liquidity had to say on the topic of China’s dramatic reserve liquidation

    Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.

    JPM conclusion is actually quite stunning:

    This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2).

    Incidentally, $520 billion is roughly triple what implied Treasury sales would suggest as China’s capital outflow, meaning that China is also liquidating some other USD-denominated asset(s) at a feverish pace. So far we do not know which, but the chart above and the magnitude of the Chinese capital outflow is certainly the biggest story surrounding the world’s most populous nation: what is happening in its stock market is just a diversion.

    At this point JPM goes into a tangent explaining what the practical implications of a massive capital outflow from China are for the global economy. Regular readers, especially those who have read our previous piece on the collapse in the Petrodollar, the plunge in EM capital inflows, and their impact on capital markets and global economies can skip this part. Those for whom the interplay of capital flows and the global economy are new, are urged to read the following:

    One way that slower EM capital flows and credit creation affect the rest of the world is via trade and trade finance. Trade finance datasets are unfortunately not homogeneous and different measures capture different aspects of trade finance activity. Reuters data on trade finance only aggregates loan syndication deals, which have mandated lead arrangers and thus capture the trends in the large-scale trade lending business, rather than providing an all-inclusive loans database. Perhaps the largest source of regularly collected and methodologically consistent data on trade finance is credit insurers (see “Testing the Trade Credit and Trade Link: Evidence from Data on Export Credit Insurance”, Auboin and Engemann, 2013). The Berne Union, the international trade association for credit and investment insurers with 79 members, includes the world’s largest private credit insurers and public export credit agencies. The volume of trade credit insured by members of the Berne Union covered more than 10% of international trade in 2012. The Berne Union provides data on insured trade credit, for both short-term (ST) and medium- and long-term transactions (MLT). Short-term trade credit insurance accounts for the vast majority at around 90% of new business in line with IMF estimates that the vast majority 80%-90% of trade credit is short term.

     

     

    Figure 4 shows both the Reuters (quarterly) and the Berne Union (annual) data on trade finance loan syndication and trade credit insurance volumes, respectively. The quarterly Reuters data showed a clear deceleration this year from the very high levels seen at the end of last year. Looking at the first two quarters of the year, Reuters volumes were down by 25% vs. the 2014 average (Figure 4). The more comprehensive Berne Union annual volumes are only available annually and the last observation is for 2014. These data showed a very benign trade finance picture up until the end of 2014. Trade finance volumes had been trending up since 2010 at an annual pace of 8.8% per annum (between 2010 and 2014) which is faster than global nominal GDP growth of 6% per annum, i.e. the trend in trade finance had been rather healthy up until 2014, but there are indications of material slowing this year. This is also reflected in world trade volumes which have also decelerated this year vs. strong growth in previous years (Figure 5).

    Summarizing the above as simply as possible: for all those confounded by why not only the US, but the global economy, hit another brick wall in Q1 the answer was neither snow, nor the West Coast strike, nor some other, arbitrary, goal-seeked excuse, but China, and specifically over half a trillion in still largely unexplained Chinese capital outflows.

    * * *

    But wait, because it wasn’t just JPM whose attention perked up over the weekend. This morning Goldman Sachs itself had a note titled “the Curious Case of China’s Capital Outflows“:

    China’s balance of payments has been undergoing important changes in recent quarters. The trade surplus has grown far above previous norms, running around $260bn in the first half of this year, compared with about $100bn during the same period last year and roughly $75bn on average during the previous seven years. Ordinarily, these kinds of numbers would see very rapid reserve accumulation, but this is not the case. Partly that is because China’s services balance has swung into meaningful deficit, so that the current account is quite a bit lower than the headline numbers from trade in goods would suggest. But the more important reason is that capital outflows have become very sizeable and now eclipse anything seen in the recent past.

     

    Headline FX reserves in the second quarter fell $36bn, from $3,730bn at end-March to $3,694bn at end-June. While we estimate that there was a large negative valuation effect in Q1 (due to the drop in EUR/$ on the ECB’s QE announcement), there was likely a positive valuation effect in Q2, which we put around $48bn. That means that our proxy for reserve accumulation in the second quarter is around -$85bn, i.e. the actual “flow” drop in reserves was bigger than the headline numbers suggest because of a flattering valuation effect. If we put that number together with the trade surplus in Q2 of $140bn, net capital outflows could be around -$224bn in the quarter, meaningfully up from the first quarter. There are caveats to this calculation, of course. There is obviously the services deficit that we mention above, which will tend to make this estimate less dramatic. It is also possible that our estimate for valuation effects is wrong. Indeed, there is some indication that valuation-related losses in Q1 were not nearly as large as implied by our calculations. But even if we adjust for these factors, net capital outflows might conceivably have run around -$200bn, an acceleration from Q1 and beyond anything seen historically.

    Granted, this is smaller than JPM’s $520 billion number but this also captures a far shorter time period. Annualizing a $224 billion outflow in one quarter would lead to a unprecedented $1 trillion capital outflow out of China for the year. Needless to say, a capital exodus of that pace and magnitude would suggest that something is very, very wrong with not only China’s economy, but its capital markets, and last but not least, its capital controls, which prohibit any substantial outbound capital flight (at least for ordinary people, the Politburo is clearly exempt from the regulations for the “common folk”).

    Back to Goldman:

    The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.

    In other words, for once Goldman is speechless, however it is quick to point out that what traditionally has been a major source of reserve reflow, the Chinese current and capital accounts, is no longer there.

    It also means that what may have been one of the biggest drivers of DM FX strength in recent years, if only against the pegged Renminbi, is suddenly no longer present.

    While the implications of this on the global FX scene are profound, they tie in to what we said last November when explaining the death of the petrodollar. For the most part, the country most and first impacted from this capital outflow will be China, something its stock market has already noticed in recent weeks.

    But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China’s Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman… and this website of course.

    Finally, if China’s selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.

    Or let us paraphrase: how soon until QE 4?

  • "It's Laughable Really": Why No One, Especially Not Jamie Dimon, Will Be Held Accountable For London Whale

    A few weeks back, Bruno Iksil, the man whose name shall live in CDX trading infamy and whose nicknames will forever haunt the desks at JP Morgan’s taxpayer-sponsored, London-based hedge fund (known in polite circles as “CIO”), got a break when the UK’s financial watchdog dropped its investigation saying it didn’t have a strong enough case. 

    Apparently, the fact that Iksil was the driving force (if not the most senior of the employees involved) behind a trade so large it noticeably displaced the market doesn’t count as a “strong case.” Indeed, the simple fact that Iksil was known across trading desks as “Voldemort“, “The London Whale“, and perhaps most telling, “He Who Must Not Be Named,” might fairly be said to constitute a compelling bit of anecdotal evidence. Alas, the whale is now scott-free, having secured immunity in the US in exchange for cooperating with the investigation and having been exonerated in the UK. 

    As we noted in “Free Willy: FCA Drops Case Against London Whale,” junior trader Julien Grout and Iksil’s boss Javier Martin-Artajo are still theoretically on the hook for the trade which, as a reminder, saw CIO sell massive amounts of protection on IG.9 back in Q1 of 2012 in what ultimately became a rather poignant example of the old adage “if you find yourself in a hole, stop digging.”

    We say “theoretically on the hook”, because in all likelihood, Grout and Martin-Artajo will never have to face the music either. Here’s NY Times with more on why “in all likelihood, no one will be held legally accountable”:

    The case of the London Whale has ended — with a whimper.

     

    Last week, Britain’s Financial Conduct Authority took the unusual step of announcing that it was dropping its investigation and would take no further action against Bruno Iksil, whose risky bets on complex derivative contracts ended up costing JPMorgan Chase $6.2 billion in losses.

     

    Today Mr. Iksil, 48, faces no charges. He does not even face civil claims, which have a much lower standard of proof. Preet Bharara, the United States attorney in Manhattan, disclosed in August 2013 that the government had entered into a nonprosecution agreement with Mr. Iksil, and that he would not be required to plead guilty to any crime. The Securities and Exchange Commission took no action against him. And now British regulators have dropped the case.

     

    The result has left many white-collar defense lawyers mystified, even as they profess admiration for Mr. Iksil’s lawyers. While Mr. Iksil has emerged scot-free, his immediate boss, Javier Martin-Artajo, a Spanish national, and Mr. Iksil’s lower-ranking assistant, Julien Grout, who is French, face criminal charges and civil claims. But Mr. Martin-Artajo is in Spain, where a court has refused to extradite him, and Mr. Grout is in France, which typically does not extradite its own citizens. Although the investigation in the United States officially remains open, it appears no one, in all likelihood, will be held legally accountable.

     

    (Martin-Artajo)

    And while it’s easy to write this off as yet another example of how no humans are ever held accountable for what happens when TBTF banks (with the implicit blessing of the US government via FDIC insurance) go all-in at the derivatives baccarat tables, the London Whale may also represent the tendency for regulators and prosecutors to place the blame on anyone but those who ultimately deserve it. Here’s the Times again:

    Far from being the rogue trader portrayed in early news coverage, Mr. Iksil emerges in government documents and interviews with people familiar with much of the evidence as a conflicted figure on the trading floor, troubled by conscience, even as he tried to please his bosses. They pushed him to undertake the risky derivatives trading that proved his undoing and caused the great losses. Then, as the losses mounted, he repeatedly warned his colleagues that they should be more forthcoming about their extent, to no avail.

     

    “It’s laughable, really, that so many banks have been prosecuted and it’s always the fault of a rogue trader, or an isolated trading desk,” said Brandon L. Garrett, a law professor at the University of Virginia and author of the book “Too Big to Jail.” “But when risky behavior is repeatedly tolerated or concealed, you have to wonder if higher-ranking people should have been targeted.”

    Yes, you do have to wonder about that.

    But as the ridiculous witch-hunt against flash crashing “mastermind” Nav Sarao proves, vested interests and well paid lobbyists will everywhere and always trump the truth, which is why, through it all, Jamie Dimon has not only managed to escape blame for the CIO fiasco, but has in fact become a billionaire in the interim. 

  • Peter Schiff: Currencies Depend On Faith, Gold Doesn't

    Submitted by Peter Schiff via Euro Pacific Capital,

    In his July 17th Blog, Let's Get Real About Gold, author and Wall Street Journal columnist Jason Zweig likened investor interest in gold with the "Pet Rock" craze of the 1970's, when consumers became convinced that a rock in a box would provide continuous companionship, elevate their social standing, and give them something hip to talk about at parties. Zweig asserts that investor faith in gold, which he argues is just another inert mineral with good marketing, is similarly irrational, and has kept people from putting money in the much more lucrative stock market.

    First off, Zweig's comparison of gold to equities as an investment vehicle sets up a false dichotomy. Gold is not an investment. It is, as Zweig indicates, nothing but a rock. But it is a rock that is extremely scarce, with highly desirable physical properties that have resulted in its being used as money for all of recorded human history. As a result, it should not be compared to stocks or real estate, but to other forms of money, such as any one of a number of fiat currencies now in circulation. Ironically, in a world awash in fiat currencies that are created at an ever increasing pace, and whose value is solely derived from faith in the issuing state, gold is the only form of money whose value does not require a leap of faith.

    I have no emotional attachment to gold. I don't use it to cover my walls, I don't run my fingers through it and laugh, I don't ask my wife to paint herself with it. What I do know is that before the world moved to a fiat monetary system in the latter half of the 20th Century, gold had become the money of choice for nearly every major culture in every age. This supremacy was based on gold's scarcity, its versatility as a metal, its unique and useful properties, its beauty, and its wide cultural acceptance as a hallmark of love, permanence, wealth and success. There can be little doubt that people will always be willing to desire and accumulate gold…for any of a variety of reasons. The only question is how much they will be willing to pay. On that point, reasonable minds can differ. But to imply that gold has no more intrinsic value than a pet rock, is to recklessly ignore reality.

    Up until 1971, the U.S. dollar was backed by the faith that the government would redeem its notes in gold. But, since then, that faith has been replaced by a simpler faith that others will always accept U.S. dollars in exchange for goods and services of real value. The transformation put the U.S. dollar in the same basket as all the other fiat currencies in the world whose value stems from the faith in the issuing government. In his piece, Zweigseems to assume that holding currencies is not an act of faith. But clearly this too involves a question of degree.

    Most investors would certainly prefer gold to Argentine Pesos, Ghanaian Cedis, or Venezuelan Bolivars. In reality, what Zweig is saying is that good fiat currencies (the U.S. dollar being the gold standard of fiat currencies) require no faith to buy and hold. But why is that?

    But the dollar's strength is supposed to derive from faith that the U.S. government will remain fiscally sound. There is little evidence that this will be the case. All of the traditional factors that determine a currency's value, i.e. trade balances, interest rates, government debt levels, economic growth, etc. should be putting downward pressure on the dollar. The U.S. government has done nothing to solve the nation's long-term debt crisis. Even the Congressional Budget Office admits that the Federal deficit will increase by an average of $35 billion annually until the end of the decade. By 2025, Trillion dollar plus deficits become entrenched (and those projections are based on economic growth assumptions that currently have proven to be far too optimistic.)

    Despite all this, the dollar has surged close to a 10-year high, based on the Bloomberg Dollar Spot Index. Wall Street has explained the dominance by pointing to troubles in Europe and Asia, saying that the dollar has its problems, but it is the "cleanest dirty shirt in the hamper." Analysts pointed to the expected higher interest rates from the Fed that would under-gird demand for the dollar as other central banks around the world were lowering rates. But that outcome has yet to materialize.

    At the end of 2014 most investors had assumed that the Fed would begin raising rates in the First Quarter of 2015. But disappointing economic growth has led the Fed to continuously delay lift off. Nevertheless, investors still think that the hikes are just around the corner. In reaching this conclusion, they blindly accept that our economy can survive higher rates when all the objective evidence leads to the conclusion that it can't.

    In reality, faith in the dollar is based solely on the belief that the U.S. dominance of the global economy will continue indefinitely, no matter how deeply we go into debt, how low our interest rates remain, and how unbalanced our trade becomes.

    We have seen this movie before. When confidence in the infallibility of central bankers is high,mainstream voices tend to cast aside gold and put their faith in the judgment of man. In 1999, New York Times columnist Floyd Norris penned an article entitled, "Who Needs Gold When We Have Alan Greenspan?" Despite Norris' dismissal, the real answer to that question was "everyone". In the following 12 years, at its high, gold rallied 650%.

    From my perspective, the markets are now placing more misplaced faith in the wisdom of Janet Yellen than they had in Greenspan. As a result, gold is being shunned as it was back in 1999. Alan Greenspan's penchant for easing monetary policy to prop up financial markets led to the creation of two dangerous bubbles, the first in stocks in 2000, and then in real estate, which finally burst in 2007, leading to the Great Recession. Given that the easing of monetary policy made by Greenspan's successors has been much larger, one can only imagine what may be the enormity ofan economic disaster that looms on the horizon.

    So yes, in a way my investment decisions are based on faith, but not the same type of faith that the Wall Street Journal assumes. My faith is that governments and central banks will continue to run up debt and debase currencies until a crisis brings the whole experiment to a disastrous conclusion. There is simply no historical precedent to reach any other conclusion. I also have faith that human beings will always prefer a piece of gold to a stack of paper. Separate a paper currency from its perceived value and you just have a stack of paper and ink. However, if they would just print it on softer and absorbent stock and put it on rolls, it might have some intrinsic value if we run out of toilet paper.

  • What Do Greece and Louisiana Have in Common? The War on Cash

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

     

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

     

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

     

    This sounds laughable to most people, but it is a reality in Europe… and in the US, in some regions. Louisiana has made it illegal to purchase second hand goods using cash.

     

    This is just the beginning. The War on Cash will be spreading in the coming weeks.

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

     

    This is precisely what happened in 2008…

     

    When the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.

     

    A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).

     

    This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.

     

    To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.

     

    When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.

     

    None of these issues have been resolved. The big banks remain as leveraged as ever and at risk of implosion should a significant percentage of capital get pulled into physical cash.

     

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

     

    This is why whenever things get messy in Europe, the ECB and EU begin implementing capital controls.

     

    Consider what recently happened in Greece. Depositors began to flee the banks in droves, so they declared a bank holiday. This holiday included safe deposit boxes… so all the bullion or physical cash Greeks had stashed there remained locked up… just like the “digital” money in their savings accounts.

     

    Again, it was impossible to get cash out of the banks… even cash that technically wasn’t “in the system” anymore but sitting in safe deposit banks.

     

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

     

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

     

    If you think the banks aren’t terrified of what this market could do to them, consider that JP Morgan managed to get Congress to put the US taxpayer on the hook for it derivatives trades.

     

    Mind you, this is the same bank that is now refusing to let clients store cash in safe deposit boxes.

     

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

     

    This is just the beginning.

     

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

     

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

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

    Survive the Fed's War on Cash.

     

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

     

    To pick up yours, swing by….

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

     

    Best Regards

    Phoenix Capital Research

     

     

     

  • "Two-Faced" Japan Accuses China Of Stealing Gas With Sea Rigs

    Over the course of the last several months, China has found itself at the center of a rather spirited international “debate” over the country’s land reclamation efforts in the disputed waters of the South China Sea. 

    To recap, Beijing has created more than 1,500 acres of sovereign territory in the Spratly archipelago by using dredgers to construct man-made islands atop reefs. Although China isn’t the first country to embark on reclamation efforts in the region, its projects have been described by the US and its allies as far more ambitious than those of its neighbors.

    The situation escalated rapidly when the Chinese Navy threatened a US spy plane with a CNN crew aboard. Shortly thereafter, the US claimed to have spotted artillery on one of the islands and the entire situation culminated in a hilarious propaganda campaign by the Chinese apparently designed to show that life on its new islands was really all about girls, gardening, pigs, and puppies. 

    Now, China finds itself at the center of yet another maritime dispute, this time over the construction of oil and gas platforms in the East China Sea. Reuters has more:

    China reserves the right to a “necessary reaction” after Japan issued a defense review that called on Beijing to stop building oil and gas exploration platforms close to disputed waters in the East China Sea, the Defense Ministry has said.

     

    In the paper issued on Tuesday, Tokyo expressed concern that Chinese drills could tap reservoirs that extend into Japan’s waters.

     

    “This kind of action completely lays bare the two-faced nature of Japan’s foreign policy and has a detrimental impact on peace and stability in the Asia Pacific region,” China’s Defense Ministry said in a statement issued late on Tuesday.

     

    China would further evaluate Japan’s defense review, or white paper, when the full text is issued and would then make a “necessary reaction depending on the situation”, it said.

     

    In an escalation of the spat, Japan released aerial photos of China’s construction activities in the area, accusing Beijing of unilateral development and a halfhearted attitude toward a 2008 agreement to jointly develop resources there.

     

    “China’s development activities in the East China Sea have shown no signs of ceasing. Given rising concerns within and outside of Japan over China’s various attempts to change the status quo, we have decided to release what can be released in an appropriate manner,” Chief Cabinet Secretary Yoshihide Suga told a regular news conference.

    Apparently “what can be released” are the following images:

    And here is a map showing where the rigs are located in relation to a demarcation line that separates the two countries’ exclusive economic zones.

    So what’s the problem, you ask? It seems as though all of the structures are on China’s side of the line. Here’s Bloomberg with more:

    Japan’s foreign ministry unveiled a map and photographs of what it said were 16 Chinese marine platforms close to Japan’s side of the disputed East China Sea.

     

     

    The platforms are on the Chinese side of a geographical median line that Japan contends should mark the border between their exclusive economic zones. Japan has long expressed concern that such developments could siphon gas out of undersea structures that extend to its own side.

    So essentially, Japan believes that China may be attempting to steal from Japan by building rigs right next to the line and sucking undersea gas back to the Chinese side. Or, in other words:

    As for Beijing’s take on the matter, the foreign ministry says its exploration activities are “justified, reasonable and legitimate.”

    Whatever the case may be, the dispute won’t do anything to help Sino-Japanese relations and although Suga claims the issue won’t derail diplomatic progress, one has to imagine that Beijing has had just about enough of being told what it can and can’t do in what it considers to be territorial waters. 

    *  *  *

    Full statement from Japanese Ministry of Foreign Affairs (Google translated): 

    In recent years, China has to revitalize the resource development in the East China Sea, as a government, the Chinese side of the geographic middle line during the day, it has been confirmed a total of 16 groups structures so far. 2 East China Sea exclusive economic zone and continental shelf boundary is is not yet defined, Japan is in a position of that should be carried out the demarcation that is based on the median line during the day. In this way, in a situation that is not yet defined boundaries, although the middle and at the Chinese side of the median line the day, it is extremely regrettable that the Chinese side has promoted the unilateral development activities. The government, for the Chinese side, it is possible to stop the unilateral development activities, it was consistent for the cooperation between Japan and China on the resource development of the East China Sea “in June 2008 agreement,” As to respond to early resumption of negotiations on the implementation of, it is where you are asking once again strongly. 

    Japan’s legal position on resource development in (Reference) East China Sea both in one day, based on the relevant provisions of the United Nations Convention on the Law of the Sea, has the title of the exclusive economic zone and continental shelf from the territorial sea baseline to 200 sea miles . Since the distance between each of the territorial sea baseline during the day when you are face to face across the East China Sea is less than 400 sea miles, for the part of the exclusive economic zone and continental shelf up to 200 nautical miles both overlap, bounded by day intermediate agreement there is a need to define a. In light of the relevant provisions and international precedents UNCLOS, in order to define the boundary in such waters may define the boundaries based on the intermediate line is a the equitable solution. (Note: one sea mile = 1.852 km, 200 sea miles = 370.4 km) for two (1) this, the Chinese side, the demarcation in the East China Sea, a natural extension of the continental shelf, the East China Sea of characteristics such as mainland and the island of contrasts Based in and are going to should be carried out, after the demarcation is not recognized by the intermediate line, without the Chinese side shows the assumed specific boundary line, claim that the are naturally extended to the Okinawa Trough for the continental shelf doing. (2) On the other hand, it is a natural extension theory, in the 1960s, such as that used in the case law on the demarcation of the adjacent country continental shelf, is a concept that has been taken in the past of international law. Based on the relevant provisions and the subsequent international precedents of the United Nations Convention on the Law of the Sea, which was adopted in 1982, upon the distance between the opposing countries to define the boundaries in waters of less than 400 nautical miles, the room found a natural extension theory rather, also, there is no legal meaning in the seabed terrain, such as the Okinawa trough (groove of the seabed). Therefore, the idea that can claim a continental shelf up to the Okinawa Trough, lacks evidence In light of the current international law. 3 standing on such premise to this, our country is, the border has been taken the position of the course and that our country has the ability to exercise sovereign rights and jurisdiction in the Japanese side of the body of water from at least the middle line in the waters of non-defined . This thing is totally without that abandoned the title of intermediate line beyond, last until the boundary is defined is for the time being that the exercise of the sovereign rights and jurisdiction in the waters to the middle line. Therefore, day middle of demarcation has not been made ??in the East China Sea, and, in a situation where the Chinese side does not recognize any claims relating to the middle line of our country, and exclusive economic zone of our country up to 200 sea miles from Japan’s territorial waters baseline no different in fact that has the title of continental shelf.

  • 'Trump'ing Political Success Through An Irate Silent Majority

    Submitted by Ben Tanosborn,

    Four years ago Tony Bennett and Lady Gaga rebirthed the musical-cicada of the 1937 song, “The Lady Is a Tramp”… which makes me think that maybe we could be facing in 2016 a reenactment of the 1968 presidential election, this time Donald Trump taking the role of George Wallace; a political musical that could appropriately be given the lyrical title, “The Politician Is a Trump.”

    Alabama’s Gov. Wallace, unable to represent the Democratic Party in the presidential election, created back then his own party: The American Independent Party; a party that by embracing Wallace’s views on segregation gave Richard Nixon ease-of-entry to the White House.  Donald Trump, with his equally verboten stand on immigration as Geo. Wallace was on segregation, is not likely to receive the seal of approval from the old guard in the Republican Party, which brings the possibility that Mr. Trump, in boastful arrogance, might decide to invest a few of his many millions in a third party candidacy which could add a new chapter to his book, “The Art of the Deal,” if elected; or create fresh material for his television pseudo-business repertoire, if turned down by the electorate.         

    Richard Nixon made hay of the term “Silent majority” back in November 1969 to defend his Vietnam War policy.  It has since been used by American politicians to legitimize and expand the nature of a non-descript huge following they claim as their own, quite often asserting the existence of magnified populism and an implied democracy.  Nixon’s baton seems to have been now passed to Donald Trump, as he submits his candidacy for the highest political office in the land, and grabs the microphone to broadcast his unfiltered stand on immigration.  A message that questionably-qualified experts in the media are quick to devour, then defecate, on a public more receptive to shallow issues dealing with celebrities than anything of social significance or depth.  

    In truth, there is no silent majority in the United States of America, and there has never existed one other than that represented by the number of converted-to-dust ancestors.  A collection of vocal minorities, yes; but most definitely not a political silent majority! [Oftentimes, however, low voter turnout may confuse us to the possible existence of a silent politically-indifferent majority; a topic worthy of study by our social scientists.]

    There are, nonetheless, silent substantial minorities bordering the majority rim on some specific critical issues that affect the body politic; their standing on those issues not adopted or represented by either of the two ruling parties openly because of political “incorrectness” or unsavory bigotry which politicians prefer to overlook or deny.  These days, the unwillingness, or incapacity, of the government to secure the nation’s borders from waves of economic invaders, negatively tagged as illegals by some, and positively by others as undocumented immigrants, is an issue not being properly, or directly, addressed politically by America’s Tweedledee and Tweedledum parties.

    It should come as no surprise when a politician, or would-be politician, unceremoniously breaks ranks with the party to claim leadership on a specific issue that overshadows the rest, and immigration seems to be one in our current political cycle, that such individual is going for broke, either because of his moral standing on such issue, or because he is powerful enough, usually through wealth, where personal risk is minimal or nonexistent.  Enter billionaire Donald Trump.  He may appear as a clown to the more sedate segment of the US population, but he’s nobody’s fool and can also break the straightjacket of an imposed political correctness simply because his wealth and power permit it.

    For all the polls taken on how Americans feel about almost any issue under the sun, a number of topics or issues seem out-of-bounds for pollsters; and how Americans in their diversity feel about immigration is one of them, remaining closeted so as not to create additional problems for an already fragmented society.  Trump, just like many others, senses that the majority of rank-and-file Republicans resent the do-nothing approach to resolve the ever-increasing number of illegal, or undocumented, residents, possibly exceeding 7 percent of the nation’s population.  And that the non-Latino rank-and-file Democrats probably hold a similar majority.

    Piling on by the dozen-and-a-half declared Republican candidates against outspoken Trump who’s now leading the pack might not be the best strategy for keeping the GOP whole.  And a rebuke by the Bobbsey Twins, war hawk senators Lindsey Graham and John McCain, will only fuel the existing party dissension.

    Much of Europe is facing the socio-economic-political reality of a Sub-Saharan economic invasion, just like the US is facing in its border with Mexico.  Politicians, whether in the EU or the US, must confront and resolve the problems created by such reality; and must do so at their career-peril… or a Trump-brand politician will replace them.

  • Americans Are Fleeing These US Cities In Droves

    What do El Paso, New York, and Chicago have in common? They are among the top 20 cities from which Americans are fleeing in droves…

    The map below shows the 20 metropolitan areas that lost the greatest share of local people to other parts of the country between July 2013 and July 2014, according to a Bloomberg News analysis of U.S. Census Bureau data. The New York City area ranked 2nd, losing about a net 163,000 U.S. residents, closely followed by a couple surrounding suburbs in Connecticut. Honolulu ranked fourth and Los Angeles ranked 14th. The Bloomberg calculations looked at the 100 most populous U.S. metropolitan areas.

     

    So what's going on here? As Bloomberg notes, Michael Stoll, a professor of public policy and urban planning at the University of California Los Angeles, has an idea.

    Soaring home prices are pushing local residents out and scaring away potential new ones from other parts of the country, he said. (Everyone knows how unaffordable the Manhattan area has become.)

     

    And as Americans leave, people from abroad move in to these bustling cities to fill the vacant low-skilled jobs. They are able to do so by living in what Stoll calls "creative housing arrangements" in which they pack six to eight individuals, or two to four families, into one apartment or home. It's an arrangement that most Americans just aren't willing to pursue, and even many immigrants decide it's not for them as time goes by, he said.

     

    El Paso, Texas, the city that residents fled from at the fastest pace, also saw a surprisingly small number of foreigners settling in given how close it is to Mexico.

     

    "A lot of young, reasonably educated people are having a hard time finding work there," Stoll said. "They're not staying in town after they graduate," leaving for the faster-growing economies."

    Source: Bloomberg

  • Kiwi Pops After RBNZ Cuts Rates, Citing Commodity Price Pressures

    While we know now that Greece is irrelevant, and China is irrelevant (fdrom what we are told by talking heads), it appears the commodity carnage of the last few months is relevant for at least one nation. Having already warned about Australia, it appears New Zealand has got nervous:

    • *NEW ZEALAND CUTS KEY INTEREST RATE TO 3.00% FROM 3.25%, FURTHER EASING LIKELY AT SOME POINT

    The Central bank blames softening economic outlook driven by commodity price pressures. Kiwi interestingly popped on the news to 0.66 before fading back a little, despite RBNZ noting a further NZD drop is necessary.

    *  *  *

    • *RBNZ SAYS SOME FURTHER EASING SEEMS LIKELY
    • *RBNZ SAYS FURTHER NZD DROP IS NECESSARY
    • *RBNZ: FURTHER NZ$ DEPRECIATION NECESSARY GIVEN COMMOD PRICES

    and finally…

    • *RBNZ SAYS FURTHER NZD DROP IS NECESSARY

    Disappointly, Kiwi is rallying…

     

    RBNZ Governor Graeme Wheeler Cuts Key Rate to 3.0%: Statement

    The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.0 percent.
     
    Global economic growth remains moderate, with only a gradual pickup in activity forecast. Recent developments in China and Europe led to heightened uncertainty and increased financial market volatility. Particular uncertainty remains around the impact of the expected tightening in US monetary policy.
     
    New Zealand’s economy is currently growing at an annual rate of around 2.5 percent, supported by low interest rates, construction activity, and high net immigration. However, the growth outlook is now softer than at the time of the June Statement. Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply.
     
    Headline inflation is currently below the Bank’s 1 to 3 percent target range, due largely to previous strength in the New Zealand dollar and a large decline in world oil prices. Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure. A key uncertainty is how quickly the exchange rate pass-through will occur.
     
    House prices in Auckland continue to increase rapidly, but, outside Auckland, house price inflation generally remains low. Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected.
     
    The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.
     
    A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely.

    *  *  *

  • $900 Million Payday Is Billionaires' Reward For Crushing Twinkie-Maker's Labor Unions

    Two days ago we reported that according to the new Chief Restructuring Officer of America’s “first national supermarket chain”, Great Atlantic & Pacific, also known as A&P, Superfresh and Pathmark supermarkets, which just filed its second chapter 11 bankruptcy protection in 5 years, it did so for one main reason: unions, and specifically legacy Collective Bargaining Agreements which made profitability for the (heavily levered) company impossible.

    While that argument is debatable, and as we said “if it wasn’t for unions, it would be something else, like loading up on massive amounts of debt to repay Yucaipa’s equity investment, which would then be unsustainable once rates rose and once interest expense became so high it soaked up all the company’s cash flow” one thing that is absolutely certain is that what A&P just did is a flashback to what Twinkies’ maker Hostess itself did as part of its November 2012 Chapter 7 bankruptcy liquidation.

    Then, too, the company sought to crush labor unions who “refused to negotiate in good faith”, and as a result the company went bankrupt, thereby ending all of its legacy labor agreements once and for all.

    Sure enough, freed of its cash-draining labor obligations, Hostess suddenly became a very attractive target and not only did it survive but it fourished when in 2013 Private Equity titan Apollo Global Management and billionaire investor C. Dean Metropoulos acquired the maker of Twinkies from liquidation.

    Very shortly thereafter, the equity investors did everything they could to reward themselves for an investment in the newly labor union-free company, which was quite viable as a standalone entity because demand for its products was as high as ever (the US will never have a problem with lack of obesity) and tried first to sell the company and then to take it public. They were unable do achieve either, so they decided to take a third route, one which takes advantage of the unprecedented debt bubble.

    As Bloomberg reports, “Hostess is selling $1.23 billion of term loans. Of that, $905 million will be used to pay a dividend to its shareholders, according to Standard & Poor’s. That’s more than double what they paid for the business.“

    Translated: after investing $410 million in March 2013, two billionaires are about to make a $500 million return an investment they have held just over two years, with the blessing of a whole lot of debt investors. And all they had to do was pick up the carcass of a company which did nothing more than crush its unions.

    Somewhat snydely, we hope, Bloomberg adds that “the deal is just the latest example of how record-low borrowing costs from the Federal Reserve are encouraging risky companies to add cheap debt — sometimes to enrich private-equity firms — as investors clamor for yield.”

    Not sometimes: every time there is a bond bubble resulting from years of ruinous monetary policy and cheap rates, it is the equity backers who are left with all the profits. In this case, Apollo and Metropolous will make a more than 100% return over a holding period of less than two years.

    They are not alone: “So-called dividend deals reached almost $16 billion in the second quarter, the most in a year, according to Bloomberg data. The downside of the loans is they can increase a borrower’s risk of default by piling on debt, without any of the cash going to improving operations or boosting revenues.”

    “Dividends aren’t designed to create value for the company,” Moody’s Investors Service analyst Brian Weddington said by phone. “This is a return of capital and profits to the founding investors.”

    No, the value for the company, its equity sponsors will claim, came from their involvement, and indeed company operations did pick up modestly:

    Business at Hostess has improved since the buyout. Earnings have increased “substantially,” said S&P’s Chiem. Revenue has risen to more than $600 million, and earnings before interest, taxes, depreciation and amortization to nearly $200 million, according to S&P. The snack business was able to cut costs by storing its products in a warehouse rather than delivering them directly to stores from where they’re made, according to Chiem.

    Happy with their achievement, which was only made possible as a result of the unbundling of the underlying business from its labor union ties, barely one year after their involvement, the billionaire owners sought to capitalize on their investment and Hostess began considering a sale last year, with sources saying in November that the business could fetch as much as $1.6 billion.

    The sale process went nowhere, as did a subsequent attempt to take Hostess public.

    So, why not follow the path of least resistance, and present credit investors using “other people’s money” with the chance to repay them. This is precisely what they did about to happen courtesy of Credit Suisse which is the lead underwriter on the new debt financing.

    Credit Suisse is leading the financing, which consists of an $825 million first-lien loan and a $400 million second-lien offering, according to data compiled by Bloomberg. It has asked investors to commit by July 30.

    But don’t say the new creditors, secured by a whole lot of Twinkies and Ho-Hos in company inventory, did not put up a fight demanding fair terms: “At a July 16 meeting held at Credit Suisse Group AG’s New York offices, potential investors were offered treats including Hostess orange cupcakes, according to three people with knowledge of the meeting. They were also offered an interest rate of as high as 7.75 percentage points” above LIBOR.

    End result: a company that went from 2x EBITDA leverage to an eye-popping 6x!

    For Hostess, the deal will triple debt levels to about six times a measure of earnings, according to an S&P report this month. Regulators including the Federal Reserve and the Office of the Comptroller of the Currency said in their 2013 leveraged lending guidance that debt levels exceeding six times raise concern as they seek to curb risky underwriting.

    The irony is that Apollo would have pulled out even more cash if there wasn’t a leverage cap. Still, even with “only” 6 turns of EBITDA in debt, most know how this deal will end:

    The dividend demonstrates “a very aggressive financial policy,” S&P analyst Bea Chiem said in the report. The credit grader is keeping Hostess’s corporate rating at B, or five levels below investment-grade, on the view that the baker’s operating performance will continue improving. The junior-ranked loan being marketed is rated CCC+, or seven levels below investment grade.

    In short: we give Hostess about 1-2 years before it files Chapter 33: it third bankruptcy a first one in 2004 and the second one in 2012.

    Only this time there will be no unions left to blame: it will be all about the insurmountable leverage, and the rapacious greed of its PE sponsors to strip the company of all pledgeable assets and extract as much cash as possible in the shortest possible time, while layering what the IMF would clearly dub is insurmountable debt.

    But before you blame them, blame the creditors who made it possible: all those “investors” who were tempted with “Hostess orange cupcakes” to dump billions of other people’s money entrusted to then, just so they could generate a modest return.

    And before you blame these individuals who are merely looking after their year-end bonus which is contingent on beating some risk (or rather return)-free benchmark, blame the Fed whose 7 years of ZIRP has made this kind of asset strip-mining not only possible but an acceptable, daily occurrence.

    Because the end result is clear: after the unions were crushed, and Hostess emerged with a clean balance sheet, the fact that it already has 6x debt guarantees it will be bankrupt once again. The only question is when.

    The losers will be the thousands of non-unionized full and part-time workers at the company.

    The only winners: the billionaire investors who are about to get even richer thanks to none other than the Federal Reserve and an entire world filled with lunatic central bankers who have clearly taken over the asylum.

  • 12 Ways The Economy Is In Worse Shape Now Than During The Depths Of The Last Recession

    Submitted by Michael Snyder via The Economic Collapse blog,

    Did you know that the percentage of children in the United States that are living in poverty is actually significantly higher than it was back in 2008?  When I write about an “economic collapse”, most people think of a collapse of the financial markets.  And without a doubt, one is coming very shortly, but let us not neglect the long-term economic collapse that is already happening all around us.  In this article, I am going to share with you a bunch of charts and statistics that show that economic conditions are already substantially worse than they were during the last financial crisis in a whole bunch of different ways.  Unfortunately, in our 48 hour news cycle world, a slow and steady decline does not produce many “sexy headlines”.  Those of us that are news junkies (myself included) are always looking for things that will shock us.  But if you stand back and take a broader view of things, what has been happening to the U.S. economy truly is quite shocking.  The following are 12 ways that the U.S. economy is already in worse shape than it was during the depths of the last recession…

    #1 Back in 2008, 18 percent of all Americans kids were living in poverty.  This week, we learned that number has now risen to 22 percent…

    There are nearly three million more children living in poverty today than during the recession, shocking new figures have revealed.

     

    Nearly a quarter of youngsters in the US (22 percent) or around 16.1 million individuals, were classed as living below the poverty line in 2013.

     

    This has soared from just 18 percent in 2008 – during the height of the economic crisis, the Casey Foundation’s 2015 Kids Count Data Book reported.

    #2 In early 2008, the homeownership rate in the U.S. was hovering around 68 percent.  Today, it has plunged below 64 percent.  Incredibly, it has not been this low in more than 20 years.  Just look at this chart – the homeownership rate has continued to plummet throughout Obama’s “economic recovery”…

    Homeownership Rate 2015

    #3 While Barack Obama has been in the White House, government dependence has skyrocketed to levels that we have never seen before.  In 2008, the federal government was spending about 37 billion dollars a year on the federal food stamp program.  Today, that number is above 74 billion dollars.  If the economy truly is “recovering”, why is government dependence so much higher than it was during the last recession?

    #4 On the chart below, you can see that the U.S. national debt was sitting at about 9 trillion dollars when we entered the last recession.  Since that time, the debt of the federal government has doubled.  We are on the exact same path that Greece has gone down, and what you are looking at below is a recipe for national economic suicide…

    Presentation National Debt

    #5 During Obama’s “recovery”, real median household income has actually gone down quite a bit.  Just prior to the last recession, it was above $54,000 per year, but now it has dropped to about $52,000 per year…

    Median Household Income

    #6 Even though our incomes are stagnating, the cost of living just continues to rise steadily.  This is especially true of basic things that we all purchase such as food.  As I wrote about earlier this year, the price of ground beef in the United States has doubled since the last recession.

    #7 In a healthy economy, lots of new businesses are opening and not that many are being forced to shut down.  But for each of the past six years, more businesses have closed in the United States than have opened.  Prior to 2008, this had never happened before in all of U.S. history.

    #8 Barack Obama is constantly telling us about how unemployment is “going down”, but the truth is that the  percentage of working age Americans that are either working or considered to be looking for work has steadily declined since the end of the last recession…

    Presentation Labor Force Participation Rate

    #9 Some have suggested that the decline in the labor force participation rate is due to large numbers of older people retiring.  But the reality of the matter is that we have seen a spike in the inactivity rate for Americans in their prime working years.  As you can see below, the percentage of males between the ages of 25 and 54 that aren’t working and that aren’t looking for work has surged to record highs since the end of the last recession…

    Presentation Inactivity Rate

    #10 A big reason why we don’t have enough jobs for everyone is the fact that millions upon millions of good paying jobs have been shipped overseas.  At the end of Barack Obama’s first year in office, our yearly trade deficit with China was 226 billion dollars.  Last year, it was more than 343 billion dollars.

    #11 Thanks to all of these factors, the middle class in America is dying.  In 2008, 53 percent of all Americans considered themselves to be “middle class”.  But by 2014, only 44 percent of all Americans still considered themselves to be “middle class”.

    When you take a look at our young people, the numbers become even more pronounced.  In 2008, 25 percent of all Americans in the 18 to 29-year-old age bracket considered themselves to be “lower class”.  But in 2014, an astounding 49 percent of all Americans in that age range considered themselves to be “lower class”.

    #12 This is something that I have covered before, but it bears repeating.  The velocity of money is a very important indicator of the health of an economy.  When an economy is functioning smoothly, people generally feel quite good about things and money flows freely through the system.  I buy something from you, then you take that money and buy something from someone else, etc.  But when an economy is in trouble, the velocity of money tends to go down.  As you can see on the chart below, a drop in the velocity of money has been associated with every single recession since 1960.  So why has the velocity of money continued to plummet since the end of the last recession?…

    Velocity Of Money M2

    If you are waiting for an “economic collapse” to happen, you can stop waiting.

    One is unfolding right now before our very eyes.

    But what most people really mean when they ask about these things is that they are wondering when the next great financial crisis will happen.  And as I discussed yesterday, things are lining up in textbook fashion for one to happen in our very near future.

    Once the next great financial crisis does strike, all of the numbers that I just discussed above are going to get a whole lot worse.

    So as bad as things are now, the truth is that this is just the beginning of the pain.

  • Ottawans Outed – 1 In 5 Found To Be "Cheating Dirtbags Who Deserve No Discretion"

    Canada's capital city, Ottawa, is, as MSN reports, also it's most potentially adulterous. Around 1 in 5 of the population is registered on Ashley Madison – the recently hacked social network for married people looking for an affair. The hotbed of infidelity was also the seat of power: The top postal code for new members matched that of Parliament Hill, according to Avid Live chief executive Noel Biderman in a newspaper report published earlier this year.

    As Reuters reports,

    Canada's prim capital is suddenly focused more on the state of people's affairs than the affairs of the state.

     

    One in five Ottawa residents allegedly subscribed to adulterers' website Ashley Madison, making one of the world's coldest capitals among the hottest for extra-marital hookups – and the most vulnerable to a breach of privacy after hackers targeted the site.

     

    The hackers, who referred to customers as "cheating dirtbags who deserve no discretion," appear uninterested in blackmailing individual clients, unlike an organized crime outfit.

     

    The website's Canadian parent, Avid Life Media, said it had since secured the site and was working with law enforcement agencies to trace those behind the attack.

     

    "Everybody says Ottawa is a sleepy town and here we are with 200,000 people running around on each other," said municipal employee Jon Weaks, 27, as he took a break at an outdoor cafe near the nation's Parliament.

     

    "I think a lot of people will be questioned tonight at dinner," added colleague Ali Cross, 28.

     

    Some 189,810 Ashley Madison users were registered in Ottawa, a city with a population of about 883,000, making the capital No. 1 for philanderers in Canada and potentially the highest globally per capita, according to previously published figures from the Toronto-based company.

    However, Canada may have bigger problems…

    The hotbed of infidelity was also the seat of power: The top postal code for new members matched that of Parliament Hill, according to Avid Live chief executive Noel Biderman in a newspaper report published earlier this year.

     

    Biderman said capital cities around the world typically top subscription rates, a phenomenon he chalks up to "power, fame and opportunity," along with the risk-taking personalities that find themselves in political cities.

     

    The Ottawa mayor's office and city council either declined to comment or did not return emails.

    *  *  *

     

     

    We suspect 'overweighting' Canadian divorce lawyers and 'undereweighting' Canadian hotels would be the optimum pair to profit from this…

  • "Far Worse Than 1986": The Oil Downturn Has No Parallel In Recorded History, Morgan Stanley Says

    On Tuesday the market got yet another reminder of just how painful the “current commodity price environment” has been for producers when Chesapeake eliminated its common dividend in order to conserve cash.

    After noting the plunge in Chesapeake’s shares (to a 12-year low) we subsequently outlined why the US shale “revolution” is now running out of lifelines as hedges roll off and as the next round of credit line assessments looms in October.

    A persistent theme here – as regular readers are no doubt aware – has been the extent to which an ultra-accommodative Fed has contributed to a deflationary supply glut by ensuring that beleaguered producers retain access to capital markets. In short, cash-strapped companies who would have otherwise gone out of business have been able to stay afloat thanks to the fact that Fed policy has herded investors into risk assets.

    In a ZIRP world, there’s plenty of demand for new HY issuance and ill-fated secondaries, which means the digging, drilling, and pumping gets to continue indefinitely in what may end up being one of the most dramatic instances of malinvestment the market has ever seen. 

    Those who contend that the downturn simply cannot last much longer – that the supply/demand imbalance will soon even out, that the market will clear sooner rather than later, and that even if the weaker hands are shaken out, the pain for the majors will be relatively short-lived – are perhaps ignoring the underlying narrative that helps to explain why the situation looks like it does. At heart, this is a struggle between the Fed’s ZIRP and the Saudis, who appear set to outlast the easy money that’s kept US producers alive.

    Against that backdrop, and amid Wednesday’s crude carnage, we turn to Morgan Stanley for more on why the current downturn will be “worse than 1986.” 

    From Morgan Stanley

    Worse than 1986? Really?


    We have been expecting the current downturn to be as severe as the one in 1986 – the worst for at least 45 years – but not worse than that. Still, if oil prices follow the path suggested by the forward curve, our thesis may yet prove too optimistic.

    Our constructive stance on the majors is based on four factors: 1) supply – we expected production growth to moderate following large capex cuts and the sharp decline in the rig count; 2) demand – we anticipated that the fall in price would boost oil products demand; 3) cost and capex – we foresaw both falling sharply, similar to the industry’s response in 1986; and 4) valuation – relative DY and P/BV indicated 35-year lows.

     

    So far this year, we can put a tick against three of them [but] our expectation on supply has not materialised: US tight oil production growth has started to roll over, but this has been more than offset by OPEC, which has added ~1.5 mb/d since February. 


    On current trajectory, this downturn could become worse than 1986: An additional +1.5 mb/d is roughly one year of oil demand growth. If sustained, this could delay the rebalancing of oil markets by a year as well. The forward curve has started to price this in: as the chart shows, the forward curve currently points towards a recovery in prices that is far worse than in 1986. This means the industrial downturn could also be worse. In that case, there would be little in analysable history that could be a guide to this cycle. 

     

     

    [There are] strong similarities between the current oil price downturn and the one that occurred in 1985/86. The trajectory of oil prices is similar on both occasions. There were also common reasons for the collapse. 

     

    A high and stable oil price in the preceding four years stimulated technological innovation and led to a high level of investment. This resulted in strong production growth outside OPEC, exceeding the rate of global demand growth. When it became clear that OPEC would no longer rein in production to balance the market (as it did during both the Nov 1985 and Nov 2014 OPEC meetings) the price collapsed. 

    And although MS notes that similar to 1986, costs and capex are likely to come in sharply while demand growth should materialize, the supply side of the equation is not cooperating thanks to increased output from OPEC. 

    Due to the sharp slowdown in drilling activity and the high decline rate of tight oil wells, we expected production in the US to flatline and start declining in 2H. This seems to be happening: according to the US Department of Energy, tight oil production in June was 94 kb/d below the April level, and it forecasts further falls of 90 kb/d in both July and August.

     

    Now that capex is falling, we anticipated non-US production to be flat at best. Still, this has not yet been the case. At the time of our ‘Looking Beyond the Nadir’ report in February, OPEC production stood at ~30.2 mb/d. This increased substantially to 31.3 mb/d in May and 31.7 mb/d in June, i.e. OPEC has added 1.5 mb/d to global supply in the last four months alone.

     

    Our commodity analyst Adam Longson argues that the oil market is currently ~800,000 b/d oversupplied. This suggests that the current oversupply in the oil market is fully due to OPEC’s production increase since February alone. 


    We anticipated that OPEC would not cut, but we didn’t foresee such a sharp increase. In our view, this is the main reason why the rebalancing of oil markets had not yet gained momentum.



    If oil prices follow the path suggested by the forward curve, and essentially remain rangebound around levels seen in the last 2-3 months, this downturn would be more severe than that in 1986. As there was no sharp downturn in the ~15 years before that, the current downturn could be the worst of the last 45+ years.

     

    If this were to be the case, there would be nothing in our experience that would be a guide to the next phases of this cycle, especially over the relatively near term. In fact, there may be nothing in analysable history. 


     

    Needless to say, this does not bode well for everyone who has unwittingly thrown good money after bad on the assumption that the Saudis will cut production and trigger a rebound in crude.

    In addition to the immense pressure from persistently low prices, US producers also face a Fed rate hike cycle and thus the beginning of the end for easy money.

    Of course, the more expensive it is to fund money-losing producers, the less willing investors will be to perpetuate this delay-and-pray scheme, which brings us right back to what we’ve been saying for months: the expiration date for heavily indebted US drillers is fast approaching, and if Morgan Stanley thinks the oil downturn has no parallel in “analysable history,” wait until they see the carnage that will unfold in HY credit when a few high profile defaults in the oil patch send the retail crowd running for the junk bond ETF exits.

  • Commodisaster

    "Peak" Apple?

    And a quick message for Caesar's shareholders… (and AAPL Call buyers)…

    Stocks legged lower overnight on AAPL and MSFT, USDJPY helped them stage a rampaplooza as cash markets opened managing to get the S&P unahcnged for a brief moment…

     

    Cash indices on the day saw Small Caps (who have been big losers recently) outperform but the rest ended red..

     

    On the week, Trannies crept back into the green but The Dow remains the biggest loser as CAT, IBM, UTX, MSFT and AAPL weight it down

     

    Leaving The Dow back in the red for 2015…

     

    But that was not acceptable and so VIX was whacked to ensuire The Dow closed green for 2015…

     

    52 Week Lows continue to rise…

     

    As AAPL bounced off the 200DMA again

     

    Stocks decoupled from bonds early on – thanks to JPY – but recoupled later in the day…

     

    Treasury yields were mixed with the long-end testing down to 3.02% and the short-end selling off…

     

    As The Dollar bounced back…

     

    Commodities all suffered…

     

    Though silver held its own…

     

     

    Gold continues to tumble – 10 down days in a row is now the longest losing streak since 1996…

     

    Crude was clubbed over 3% on the day – testing a $48 handle and back at its lowest in 3 months… down 16 of the last 20 days

     

    Copper clubbed like a baby seal – down 7 of lats 9 days , hovering at cycle lows…

     

    Charts: Bloomberg

    Bonus Chart: Even more ominously for Copper – physical demand for withdrawals from inventory have collapsed…

     

    Bonus Bonus Chart: Lumber smashed again today and as a leading indicator is flashing red for new home sales…

     

    Bonus Bonus Bonus Chart: Any day now – clicks will beat bricks…

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Jul 22

Today’s News July 22, 2015

  • Greek Prime Minister Asked Putin For $10 Billion To "Print Drachmas", Greek Media Reports

    Back in January, when we reported what the very first official act of open European defiance by the then-brand new Greek prime minister Tsipras was (as a reminder it was his visit of a local rifle range where Nazis executed 200 Greeks on May 1, 1944) we noted that this was the start of a clear Greek pivot away from Europe and toward Russia.

    We further commented on many of the things that have since come to pass:

    Europe, for one, will be most displeased that Greece has decided to put its people first in the chain of priority over offshore bidders of Greek assets. Most displeased, especially since the liquidation sale of Greece is part of the Greek bailout agreement: an agreement which as the Troika has repeatedly stated, is not up for renegotiation

    But most importantly, even back then we explicitly said that in order for Greece to preserve its leverage (something it found out the hard way it did not have 6 months later), it would need a Plan B, one that involves an alternative source of funds, i.e., Russia and/or China, which could be the source of the much needed interim cash Greece needs as it prints its own currency and prepares for life outside the European prison.

    The Germans were not happy: A German central banker warned of dire problems should the new government call the country’s aid program into question, jeopardizing funding for the banks. “That would have fatal consequences for Greece’s financial system. Greek banks would then lose their access to central bank money,” Bundesbank board member Joachim Nagel told Handelsblatt newspaper.

     

    Well, maybe…. Unless of course Greece finds a new, alternative source of funding, one that has nothing to do with the establishmentarian IMF, whose “bailouts” are merely a smokescreen to implement pro-western policies and to allow the rapid liquidation of any “bailed out” society… Which naturally means that now Russia (and China) are set to become critical allies for Greece, which would immediately explain the logical pivot toward Moscow.

    Somewhat jokingly, on June 27, the day after Tsipras announced the shocking referendum decision, we repeated precisely this:

    As it turns out, none of this was a joke, and, if Greek newspaper “To Vima” is to be trusted, a “Plan B” involving an emergency $10 billion loan from Vladimir Putin which would be used to fund a new Greek currency, is precisely what Greece had been contemplating!

    According to Greek Reporter, Greek Prime Minister Alexis Tsipras has asked Russian President Vladimir Putin for 10 billion dollars in order to print drachmas.

    In other words, if true, then Greece did just as we said it should: approach Russia and the BRICs with a request for funding to be able to exit Europe’s gravitational pull…

    The newspaper report cited Tsipras saying in his last major interview to Greek national broadcaster ERT that “in order for a country to print its own national currency, it needs reserves in a strong currency.”

    … however, somewhat surprisingly, both Moscow and Beijing said no:

    Moscow’s response was a vague mention of a 5-billion-dollar advance on the new South Stream natural gas pipeline construction that will pass through Greece. Tsipras also sent similar loan requests to China and Iran, but to no avail, the report said.

    The report continues:

    Tsipras was planning the return to the drachma since early 2015 and was counting on Russia’s help to achieve this goal. According to the report, Panos Kammenos, Yiannis Dragasakis, Yanis Varoufakis, Nikos Pappas, Panagiotis Lafazanis and other key coalition members were aware of his plan.

     

    In his first visit to Moscow, Tsipras condemned the European Union policy in Ukraine and supported the referendum of east Ukraine seeking secession. It was then that Germany realized Greece was prepared to shift alliances, something that would threaten the Eurozone cohesion. Tsipras was hoping that Germany would back down under that threat and offer Greece a generous debt haircut. At the time, Tsipras had the rookie ambition that he could change Europe, the report continued.

     

    It also spoke of a “geopolitical matchmaking” as Tsipras was introduced to Leonid Resetnikof, Director of the Russian Institute of Strategic Studies, before the European Parliament elections in May 2014. The introduction was made by Professor of Russian Studies Nikos Kotzias, who later cashed in on his services by getting the chair of Foreign Affairs Minister.

    But the biggest stunner: it was Putin who declined the offer on the night of the referendum.

    The July 5 referendum was a test for Tsipras to see what the Greek
    people were thinking about Europe and the Eurozone. However, on the
    night of the referendum, word came from Russia that Putin did not want
    to support Greece’s return to the drachma    . That was confirmed the days
    that followed. After that, Tsipras had no choice left but to “surrender”
    to German Chancellor Angela Merkel and sign the third bailout package.

    In other words it was not Tsipras’ failure to predict how Greece would react to the Greek referendum nor was it his secret desire to lose it as previously suggested (expecting a Yes vote and getting 61% “No”s instead), but a last minute rejection by Putin that lead to the Greek government’s capitulation, and the expulsion of Varoufakis who most certainly was the propagator of this plan.

    It also means that Merkel suddenly has a massive debt of gratitude to pay to Vladimir, whose betrayal of the Greek “marxists” is what allowed the Eurozone to continue in its current form. The question then is what is Vlad’s pro quo in exchange for letting down the Greek government (and handing over its choicest assets to the (s)quid), whose fate was in the hands of the former KGB spy.

    Finally, it is very possible that To Vima is taking some liberties with truth. For confirmation we would suggest to get the official story from Varoufakis, who lately has been anything but radio silent. If confirmed, this will certainly be the biggest and most underreported story of the year, one which suggests that the perpetuation of Merkel’s dream of a united Europe was only possible thanks to this man.

     

    If confirmed, first and foremost look for a growing schism between Europe and the US (which has clearly been pushing Merkel’s buttons via the IMF’s ever louder demands for a debt haircut not to mention Jack Lew’s rather direct intervention in the Greek bailout negotiations) and an increasing sense of friendly proximity between Berlin (and Brussels) and Moscow.

    The biggest loser in this game of realpolitik, once again, are the ordinary Greek people.

  • The American Nightmare: The Tyranny Of The Criminal Justice System

    Submitted by John Whitehead via The Rutherford Institute,

    How can the life of such a man
    Be in the palm of some fool’s hand?
    To see him obviously framed
    Couldn’t help but make me feel ashamed to live in a land
    Where justice is a game.—Bob Dylan, “Hurricane”

    Justice in America is not all it’s cracked up to be.

    Just ask Jeffrey Deskovic, who spent 16 years in prison for a rape and murder he did not commit. Despite the fact that Deskovic’s DNA did not match what was found at the murder scene, he was singled out by police as a suspect because he wept at the victim’s funeral (he was 16 years old at the time), then badgered over the course of two months into confessing his guilt. He was eventually paid $6.5 million in reparation.

    James Bain spent 35 years in prison for the kidnapping and rape of a 9-year-old boy, but he too was innocent of the crime. Despite the fact that the prosecutor’s case was flimsy—it hinged on the similarity of Bain’s first name to the rapist’s, Bain’s ownership of a red motorcycle, and a misidentification of Bain in a lineup by a hysterical 9-year-old boy—Bain was sentenced to life in prison. He was finally freed after DNA testing proved his innocence, and was paid $1.7 million.

    Mark Weiner got off relatively easy when you compare his experience to the thousands of individuals who are spending lifetimes behind bars for crimes they did not commit.

    Weiner was wrongfully arrested, convicted, and jailed for more than two years for a crime he too did not commit. In his case, a young woman claimed Weiner had abducted her, knocked her out and then sent taunting text messages to her boyfriend about his plans to rape her. Despite the fact that cell phone signals, eyewitness accounts and expert testimony indicated the young woman had fabricated the entire incident, the prosecutor and judge repeatedly rejected any evidence contradicting the woman’s far-fetched account, sentencing Weiner to eight more years in jail. Weiner was only released after his accuser was caught selling cocaine to undercover cops.

    In the meantime, Weiner lost his job, his home, and his savings, and time with his wife and young son. As Slate reporter journalist Dahlia Lithwick warned, “If anyone suggests that the fact that Mark Weiner was released this week means ‘the system works,’ I fear that I will have to punch him in the neck. Because at every single turn, the system that should have worked to consider proof of Weiner’s innocence failed him.”

    The system that should have worked didn’t, because the system is broken, almost beyond repair.

    In courtroom thrillers like 12 Angry Men and To Kill a Mockingbird, justice is served in the end because someone—whether it’s Juror #8 or Atticus Finch—chooses to stand on principle and challenge wrongdoing, and truth wins.

    Unfortunately, in the real world, justice is harder to come by, fairness is almost unheard of, and truth rarely wins.

    On paper, you may be innocent until proven guilty, but in actuality, you’ve already been tried, found guilty and convicted by police officers, prosecutors and judges long before you ever appear in a courtroom.

    Chronic injustice has turned the American dream into a nightmare.

    At every step along the way, whether it’s encounters with the police, dealings with prosecutors, hearings in court before judges and juries, or jail terms in one of the nation’s many prisons, the system is riddled with corruption, abuse and an appalling disregard for the rights of the citizenry.

    Due process rights afforded to a person accused of a crime—the right to remain silent, the right to be informed of the charges against you, the right to representation by counsel, the right to a fair trial, the right to a speedy trial, the right to prove your innocence with witnesses and evidence, the right to a reasonable bail, the right to not languish in jail before being tried, the right to confront your accusers, etc.—mean nothing when the government is allowed to sidestep those safeguards against abuse whenever convenient.

    It’s telling that while President Obama said all the right things about the broken state of our criminal justice system—that we jail too many Americans for nonviolent crimes (we make up 5 percent of the world’s population, but our prison population constitutes nearly 25% of the world’s prisoners), that we spend more money on incarceration than any other nation ($80 billion a year), that we sentence people for longer jail terms than their crimes merit, that our criminal justice system is far from color-blind, that the nation’s school-to-prison pipeline is contributing to overcrowded jails, and that we need to focus on rehabilitation of criminals rather than retribution—he failed to own up to the government’s major role in contributing to this injustice in America.

    Indeed, while Obama placed the responsibility for reform squarely in the hands of prosecutors, judges and police, he failed to acknowledge that they bear the burden of our failed justice system, along with the legislatures and corporations who have worked with them to create an environment that is hostile to the rights of the accused.

    In such a climate, we are all the accused, the guilty and the suspect.

    As I document in my book Battlefield America: The War on the American People, we’re operating in a new paradigm where the citizenry are presumed guilty and treated as suspects, our movements tracked, our communications monitored, our property seized and searched, our bodily integrity disregarded, and our inalienable rights to “life, liberty and the pursuit of happiness” rendered insignificant when measured against the government’s priorities.

    Every American is now in jeopardy of being targeted and punished for a crime he did not commit thanks to an overabundance of arcane laws. Making matters worse, by allowing government agents to operate above the law, immune from wrongdoing, we have created a situation in which the law is one-sided and top-down, used as a hammer to oppress the populace, while useless in protecting us against government abuse.

    Add to the mix a profit-driven system of incarceration in which state and federal governments agree to keep the jails full in exchange for having private corporations run the prisons, and you will find the only word to describe such a state of abject corruption is “evil.” 

    How else do you explain a system that allows police officers to shoot first and ask questions later, without any real consequences for their misdeeds? Despite the initial outcry over the shootings of unarmed individuals in Ferguson and Baltimore, the pace of police shootings has yet to slow. In fact, close to 400 people were shot and killed by police nationwide in the first half of 2015, almost two shootings a day. Those are just the shootings that were tracked. Of those killed, almost 1 in 6 were either unarmed or carried a toy gun.

    For those who survive an encounter with the police only to end up on the inside of a jail cell, waiting for a “fair and speedy trial,” it’s often a long wait. Consider that 60 percent of the people in the nation’s jails have yet to be convicted of a crime. There are 2.3 million people in jails or prisons in America. Those who can’t afford bail, “some of them innocent, most of them nonviolent and a vast majority of them impoverished,” will spend about four months in jail before they even get a trial.

    Not even that promised “day in court” is a guarantee that justice will be served.

    As Judge Alex Kozinski of the Ninth Circuit Court of Appeals points out, there are an endless number of factors that can render an innocent man or woman a criminal and caged for life: unreliable eyewitnesses, fallible forensic evidence, flawed memories, coerced confessions, harsh interrogation tactics, uninformed jurors, prosecutorial misconduct, falsified evidence, and overly harsh sentences, to name just a few.

    In early 2015, the Justice Department and FBI “formally acknowledged that nearly every examiner in an elite FBI forensic unit gave flawed testimony in almost all trials in which they offered evidence against criminal defendants over more than a two-decade period…. The admissions mark a watershed in one of the country’s largest forensic scandals, highlighting the failure of the nation’s courts for decades to keep bogus scientific information from juries, legal analysts said.”

    “How do rogue forensic scientists and other bad cops thrive in our criminal justice system?” asks Judge Kozinski. “The simple answer is that some prosecutors turn a blind eye to such misconduct because they’re more interested in gaining a conviction than achieving a just result.”

    The power of prosecutors is not to be underestimated.

    Increasingly, when we talk about innocent people being jailed for crimes they did not commit, the prosecutor plays a critical role in bringing about that injustice. As The Washington Post reports, “Prosecutors win 95 percent of their cases, 90 percent of them without ever having to go to trial…. Are American prosecutors that much better? No… it is because of the plea bargain, a system of bullying and intimidation by government lawyers for which they ‘would be disbarred in most other serious countries….’”

    This phenomenon of innocent people pleading guilty makes a mockery of everything the criminal justice system is supposed to stand for: fairness, equality and justice. As Judge Jed S. Rakoff concludes, “our criminal justice system is almost exclusively a system of plea bargaining, negotiated behind closed doors and with no judicial oversight. The outcome is very largely determined by the prosecutor alone.”

    It’s estimated that between 2 and 8 percent of convicted felons who have agreed to a prosecutor’s plea bargain (remember, there are 2.3 million prisoners in America) are in prison for crimes they did not commit.

    Clearly, the Coalition for Public Safety was right when it concluded, “You don’t need to be a criminal to have your life destroyed by the U.S. criminal justice system.”

    It wasn’t always this way. As Judge Rakoff recounts, the Founding Fathers envisioned a criminal justice system in which the critical element “was the jury trial, which served not only as a truth-seeking mechanism and a means of achieving fairness, but also as a shield against tyranny.”

    That shield against tyranny has long since been shattered, leaving Americans vulnerable to the cruelties, vanities, errors, ambitions and greed of the government and its partners in crime.

    There is not enough money in the world to make reparation to those whose lives have been disrupted by wrongful convictions.

    Over the past quarter century, more than 1500 Americans have been released from prison after being cleared of crimes they did not commit. These are the fortunate ones. For every exonerated convict who is able to prove his innocence after 10, 20 or 30 years behind bars, Judge Kozinski estimates there may be dozens who are innocent but cannot prove it, lacking access to lawyers, evidence, money and avenues of appeal.

    For those who have yet to fully experience the injustice of the American system of justice, it’s only a matter of time.

    America no longer operates under a system of justice characterized by due process, an assumption of innocence, probable cause, and clear prohibitions on government overreach and police abuse. Instead, our courts of justice have been transformed into courts of order, advocating for the government’s interests, rather than championing the rights of the citizenry, as enshrined in the Constitution.

    Without courts willing to uphold the Constitution’s provisions when government officials disregard them, and a citizenry knowledgeable enough to be outraged when those provisions are undermined, the Constitution provides little protection against the police state.

    In other words, in this age of hollow justice, courts of order, and government-sanctioned tyranny, the Constitution is no safeguard against government wrongdoing such as SWAT team raids, domestic surveillance, police shootings of unarmed citizens, indefinite detentions, asset forfeitures, prosecutorial misconduct and the like.

  • Chinese Stocks Slide Into Red After Business Sentiment Crashes To 6-Year Lows

    After a modesly positive open, Chinese stocks have pushed back into the red after Chinese business sentiment collapsed in July. The MNI China Business Indicator fell a straggering 8.8pts to 48.8 in July (below 50 signifying pessimism) – the lowest since January 2009. It appears the encouraging bounce after the massive creduit injections into June has been eviscerated and future expectations also dropped 6.4 to 54.1 in July (below the long-run average). While bad news is good news for much of the rest of the world, for China, as it continues to try to project a strong underlying economy to sustain its still extremely rich stock market, bad news is bad news.

     

    Weakest business sentiment since Jan 2009…

     

    and stocks are not getting a bounce from the need for moar stimulus that this implies…

     

    The latest fall in overall sentiment outstripped the declines in the Production and New Orders indicators – although these both also fell significantly – suggesting that other factors, principally uncertainty brought on by the large correction in the stock market, may have played a part.

    So a Chinese stock market crash does matter after all?

    Charts: Bloomberg

  • US Economic 'Hope' Plunges To 10-Month Lows

    57% of Americans see the US economy "getting worse," according to Gallup's latest survey, sending 'hope' to its lowest since September. Overall economic confidence slipped once again, despite the Greek deal, now at its lowest since October. It appears rising gas prices trump the rising stock prices when it comes to the average joe in America.

     

    Americans More Negative About Economic Outlook Than Current Conditions

    Gallup's Economic Confidence Index is the average of two components: how Americans rate the current economy and whether they feel the economy is getting better or getting worse. As has been the case since March, Americans rated the outlook for the economy worse than they rated current economic conditions for the week ending July 19.

    The current conditions score was essentially unchanged from the week prior at -5. This was the result of 25% of Americans saying the economy is "excellent" or "good" and 30% saying it is "poor." Meanwhile, 39% of Americans said the economy is "getting better," while 57% said it is "getting worse."

    This resulted in an economic outlook score of -18, slightly below the -16 from the week prior, and the lowest weekly average since the week ending Sept. 21, 2014.

    Source: Gallup

  • Can You Hear the Fat Lady Singing?: The China Connection

    By Chris at www.CapitalistExploits.at

    Greece is connected to China by the very same thing which has been connecting sex, drugs, and rock’n’roll since Bretton Woods – dollars.

    Last week I shared some thoughts on the unintended consequences of actions taken in Europe and why Greece may matter as a result. There is zero chance that the actions taken will result in a stronger Europe, a stronger euro, or an economic strengthening in either Greece or the wider eurozone. Zero!

    As interesting as Greece and the euro is, my attention today is on China and how China may well be forced by events taking place globally to make some far reaching choices.

    Two scenarios have been widely discounted by the market with respect to China. The first is a remnimbi devaluation and the second is a hard landing for a slowing Chinese economy.

    We know that the Chinese economy is slowing. We know this because Beijing tells us it’s so. Their last numbers were that the economy has slowed to their growth target of 7%. Bang on their target rate. How convenient! Now of course these numbers are rubbish, but it’s telling that they’re acknowledging a slowing economy.

    We account for these government numbers in the same way we account for any government numbers: by acknowledging that underneath all the pompous sophistication of bureaucrats everywhere pulsates the brain of a tree shrew. The important takeaway is that they’re acknowledging they’re slowing.

    China’s Market Crash

    As everybody now knows, the Chinese stock market lost over 30% in 3 weeks wiping $2.8 trillion off the books. The only way to lose that much money in such a rapid period of time is by getting caught by your wife having hanky panky with her best friend.

    Shanghai Index

    Sure, investors who bought at the top are hurting, but consider that the stock market is up roughly 80% over the last 12 months, and this is AFTER the crash. Viewed with that timeframe and taken into context this is hardly problematic.

    This correction is nowhere near as big a concern as it would be if we had a similar occurrence take place in the US due to who is participating.

    80 – 90% of the domestic A-share market is made up of retail investors. Novices. This was a bubble waiting to burst as retail investors flooded the market with a record 40 million new brokerage accounts created in the last year. Not only were novices entering the market but they were entering it on margin. By June of this year margin lending as a percentage of market cap ran as high as 20%. While these investors make up the majority of the market they represent a small part of the population. The free float of China’s markets is about a third of GDP, whereas in the developed world this number is over 100%. A soaring stock market and a crashing stock market will have little effect on the vast majority of Chinese households. This is unlike the developed world.

    Essentially, this is a tiny portion of the market that got burned. It really needn’t be a problem unless someone does something stupid and causes unintended consequences. Sadly this is exactly what Beijing is doing.

    Is China or the US the Next Greece?

    Perhaps it’s simply a matter of timing and what’s racing across the news feeds but I’ve read quite a few articles about how the US and China are next after Greece. Debt levels are cited along with a host of other similarities. This is – how do I put this politely – rubbish. The US and China are NOT Greece. Even if the debt levels were the same the similarities end there. Greece cannot issue its own currency. In last week’s missive I mentioned that:

    Greece, however, no longer issues its own currency and as such there exists no release valve. Trapped in a deflationary spiral the economy continues to contract: 0.2% in the first quarter of this year following a 0.4% in the last quarter of 2014. When Greece joined the euro, they ceded monetary sovereignty to Brussels, and in doing so stuck a plug in its currency release valve.

    That makes Greece unique. The US, on the other hand, can print all the currency they want and pay their debts at par. Greece can’t do that. The bonds of the US, Japan and even China are not at all to be likened to the bonds of Greece. One needs to make a distinction between debt denominated in the country in questions own currency and debt denominated in some other currency.

    For countries sporting high debt levels and where simultaneously those debts are foreign denominated this can become a huge problem. Just ask that crazy woman in Argentina…

    The Asian crisis, which I discussed last week, is such an example whereby debts denominated in USD became unsustainable. Once the rout started a self-fulfilling trend developed whereby as the currencies in Southeast Asian nations moved lower this added multiples to the payments required on leveraged assets. A vicious unwinding of the carry trade.

    China’s Reaction

    What I find the most fascinating is not the correction in the Chinese stock market but the actions taken by the PBOC subsequently.

    This can only be described as outright panic. Consider the following actions taken.

    1. China Securities Finance Corp has lent $42 Billion to 21 brokers instructing them to buy blue chip stocks
    2. A $40 billion stimulus plan to “foster growth”
    3. Speeding up infrastructure spending.
    4. Capital controls by another name: controlling shareholders and board members are locked up for 6 months from selling stock.
    5. All new IPOs stopped
    6. PBOC slashed rates and eased reserve requirements.
    7. Chinese investors are now allowed to use their properties as collateral to buy stocks.

    Aside from the fact that they are doing exactly the opposite of what should be done I find it telling that they are so willing to slash rates and devalue the yuan.

    As mentioned, this needn’t be a problem if they simply let the market correct and find its equilibrium.

    They haven’t done that and this is what has caught my attention more than anything else.

    The Debt Component and What This May Mean for the Yuan

    Debt is important to understand as debt is the “gasoline” added to any trade. Debt, or more correctly put, leverage amplifies gains and losses and as such is both the prozac as well as the viagra of global markets. I wrote extensively about the US carry trade in our USD Bull Report but will summarise an important point.

    China boasts an estimated US$3 trillion borrowed and invested in various Chinese assets. A decline in those assets values materially affects investors who’ve leveraged their positions, but what really really matters is when the funding currency appreciates and those investors who are short dollars are forced to buy back their dollar positions.

    Now this is where Greece and China are interconnected. Greece, as mentioned, threatens to be a poster child of Europe and the euro. This is naturally bullish for the euro in the same way that spandex pants look good on Angela Merkel – not so much! 

    EURUSDThe euro against the USD

    In Europe we have intervention in the markets by Brussels. They may save Greece from introducing the drachma and devaluing it, and having German banks forced to realise losses but they can’t stop the market from devaluing the euro. Risk off is “on” and the dollar is moving higher.

    In China we have Beijing intervening in the markets and we have to wonder what those US$3 trillion in the USD carry trade are invested in and what they look like right now.

    Consider that globally we are seeing liquidity drying up and global capital flows moving into shorter term paper – US paper.

    Two months ago I wrote about capital moving into shorter maturity paper:

    Bond yields are rising sharply on the long end of the curve (long duration bonds) in favour of the short end. This is a rational move. Liquidity is crashing on all the long dated maturities and as you can see yields are breaking out. It makes perfect sense to sell the long end of the yield curve given the fundamentals. What we’re witnessing is that cash flooding into the shorter duration maturities.

    When looking to understand China I believe that the probability of of a devaluation of the yuan has just risen markedly.

    About the Yen?

    I would be remiss in mentioning the yen from any discussion on global capital flows. The yen goes lower. We’ve been saying that for 2 years now and I won’t rehash thoughts here. Few seem to understand that the devaluation of the yen exacerbates the probability of a Chinese hard landing and that increases the risks of a devaluation of the yuan.

    A rising dollar is globally deflationary. What happens when we get deflation in China?

    China absolutely cannot have deflation and will be stuck between attempting to maintain a strong currency and stimulating their economy. This threatens to rapidly become a situation where they run out of “palatable” options and the least painful will be to devalue the yuan. Both politically and economically it will be acceptable. Most importantly it will allow those in power to stay in power.

    To summarize, China has:

    • A huge USD carry trade which threatens to unwind
    • A trigger happy PBOC who have shown no restraint in slashing interest rates in order to support the market.
    • Increasing pressures being put on domestic competitiveness due to a strong currency

    Soros famously said to “find the premise which is false and bet against it”. When the market’s premise is false, coincidentally the pricing of assets reflects this. Looking at the futures and options markets right now the market is NOT expecting a Chinese devaluation. We think this is a mistake.

    The market typically has the collective mentality of a hive, and a pool hall understanding of the global interconnectedness that drives global capital flows. At the local level it believes in the ability of central bankers to forever prop markets. It believes in imposing rules and laws to circumvent free market forces, and it believes this because it views the world through the microcosm of an extremely limited timeframe and geography, much like a field mouse in a corn field surveying its landscape, unable to see the harvesters warming up.

    I will leave you with one last thought. This time from the brilliant Albert Edwards of SocGen

    We have long believed that China’s growth and deflation problems will necessitate a devaluation of the renminbi in a strong dollar environment. There is mounting evidence that this process may already be underway as the currency falls to a 28-month low against the dollar…

     

    In the current deflationary environment the Chinese authorities simply can no longer tolerate the continued appreciation of their real exchange rate caused by the dollar link.

    – Chris

  • China's Record Dumping Of US Treasuries Leaves Goldman Speechless

    On Friday, alongside China’s announcement that it had bought over 600 tons of gold in “one month”, the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.

     

    We then put China’s change in FX reserves alongside the total Treasury holdings of China and its “anonymous” offshore Treasury dealer Euroclear (aka “Belgium”) as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted – namely virtually the entire delta in Chinese FX reserves come via China’s US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.

     

    We explained all of his on Friday in “China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium“, and frankly we have been surprised that this extremely important topic has not gotten broader attention.

    Then, to our relief, first JPM noticed. This is what Nikolaos Panigirtzoglou, author of Flows and Liquidity had to say on the topic of China’s dramatic reserve liquidation

    Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.

    JPM conclusion is actually quite stunning:

    This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2).

    Incidentally, $520 billion is roughly triple what implied Treasury sales would suggest as China’s capital outflow, meaning that China is also liquidating some other USD-denominated asset(s) at a feverish pace. So far we do not know which, but the chart above and the magnitude of the Chinese capital outflow is certainly the biggest story surrounding the world’s most populous nation: what is happening in its stock market is just a diversion.

    At this point JPM goes into a tangent explaining what the practical implications of a massive capital outflow from China are for the global economy. Regular readers, especially those who have read our previous piece on the collapse in the Petrodollar, the plunge in EM capital inflows, and their impact on capital markets and global economies can skip this part. Those for whom the interplay of capital flows and the global economy are new, are urged to read the following:

    One way that slower EM capital flows and credit creation affect the rest of the world is via trade and trade finance. Trade finance datasets are unfortunately not homogeneous and different measures capture different aspects of trade finance activity. Reuters data on trade finance only aggregates loan syndication deals, which have mandated lead arrangers and thus capture the trends in the large-scale trade lending business, rather than providing an all-inclusive loans database. Perhaps the largest source of regularly collected and methodologically consistent data on trade finance is credit insurers (see “Testing the Trade Credit and Trade Link: Evidence from Data on Export Credit Insurance”, Auboin and Engemann, 2013). The Berne Union, the international trade association for credit and investment insurers with 79 members, includes the world’s largest private credit insurers and public export credit agencies. The volume of trade credit insured by members of the Berne Union covered more than 10% of international trade in 2012. The Berne Union provides data on insured trade credit, for both short-term (ST) and medium- and long-term transactions (MLT). Short-term trade credit insurance accounts for the vast majority at around 90% of new business in line with IMF estimates that the vast majority 80%-90% of trade credit is short term.

     

     

    Figure 4 shows both the Reuters (quarterly) and the Berne Union (annual) data on trade finance loan syndication and trade credit insurance volumes, respectively. The quarterly Reuters data showed a clear deceleration this year from the very high levels seen at the end of last year. Looking at the first two quarters of the year, Reuters volumes were down by 25% vs. the 2014 average (Figure 4). The more comprehensive Berne Union annual volumes are only available annually and the last observation is for 2014. These data showed a very benign trade finance picture up until the end of 2014. Trade finance volumes had been trending up since 2010 at an annual pace of 8.8% per annum (between 2010 and 2014) which is faster than global nominal GDP growth of 6% per annum, i.e. the trend in trade finance had been rather healthy up until 2014, but there are indications of material slowing this year. This is also reflected in world trade volumes which have also decelerated this year vs. strong growth in previous years (Figure 5).

    Summarizing the above as simply as possible: for all those confounded by why not only the US, but the global economy, hit another brick wall in Q1 the answer was neither snow, nor the West Coast strike, nor some other, arbitrary, goal-seeked excuse, but China, and specifically over half a trillion in still largely unexplained Chinese capital outflows.

    * * *

    But wait, because it wasn’t just JPM whose attention perked up over the weekend. This morning Goldman Sachs itself had a note titled “the Curious Case of China’s Capital Outflows“:

    China’s balance of payments has been undergoing important changes in recent quarters. The trade surplus has grown far above previous norms, running around $260bn in the first half of this year, compared with about $100bn during the same period last year and roughly $75bn on average during the previous seven years. Ordinarily, these kinds of numbers would see very rapid reserve accumulation, but this is not the case. Partly that is because China’s services balance has swung into meaningful deficit, so that the current account is quite a bit lower than the headline numbers from trade in goods would suggest. But the more important reason is that capital outflows have become very sizeable and now eclipse anything seen in the recent past.

     

    Headline FX reserves in the second quarter fell $36bn, from $3,730bn at end-March to $3,694bn at end-June. While we estimate that there was a large negative valuation effect in Q1 (due to the drop in EUR/$ on the ECB’s QE announcement), there was likely a positive valuation effect in Q2, which we put around $48bn. That means that our proxy for reserve accumulation in the second quarter is around -$85bn, i.e. the actual “flow” drop in reserves was bigger than the headline numbers suggest because of a flattering valuation effect. If we put that number together with the trade surplus in Q2 of $140bn, net capital outflows could be around -$224bn in the quarter, meaningfully up from the first quarter. There are caveats to this calculation, of course. There is obviously the services deficit that we mention above, which will tend to make this estimate less dramatic. It is also possible that our estimate for valuation effects is wrong. Indeed, there is some indication that valuation-related losses in Q1 were not nearly as large as implied by our calculations. But even if we adjust for these factors, net capital outflows might conceivably have run around -$200bn, an acceleration from Q1 and beyond anything seen historically.

    Granted, this is smaller than JPM’s $520 billion number but this also captures a far shorter time period. Annualizing a $224 billion outflow in one quarter would lead to a unprecedented $1 trillion capital outflow out of China for the year. Needless to say, a capital exodus of that pace and magnitude would suggest that something is very, very wrong with not only China’s economy, but its capital markets, and last but not least, its capital controls, which prohibit any substantial outbound capital flight (at least for ordinary people, the Politburo is clearly exempt from the regulations for the “common folk”).

    Back to Goldman:

    The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.

    In other words, for once Goldman is speechless, however it is quick to point out that what traditionally has been a major source of reserve reflow, the Chinese current and capital accounts, is no longer there.

    It also means that what may have been one of the biggest drivers of DM FX strength in recent years, if only against the pegged Renminbi, is suddenly no longer present.

    While the implications of this on the global FX scene are profound, they tie in to what we said last November when explaining the death of the petrodollar. For the most part, the country most and first impacted from this capital outflow will be China, something its stock market has already noticed in recent weeks.

    But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China’s Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman… and this website of course.

    Finally, if China’s selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.

    Or let us paraphrase: how soon until QE 4?

  • GOP Enters Panic Mode: Des Moines Register Calls For Trump To Withdraw From Presidential Race

    When Donald Trump announced he would give 2016 another try as a republican presidential candidate, the GOP saw him as a mild nuisance. Little did they appreciate just how big of a “nightmare” he would very soon become, a nightmare which now sees the flamboyant billionaire whose self-reported net worth fluctuates daily with a double digit percentage lead over his closest competitor Scott Walker.

     

    But the biggest mistake the GOP did is they inability to comprehend that either the US public enjoys being trolled, or is just so sick of the left/right paradigm, it will gladly latch on to anyone, even the most farcical, self-lampooning candidate, who promises a break from the old routine which has proven not to work for the common American.

    The latest confirmation that the Trump “nightmare” is causing not only sleepless nights but also panic attacks for a GOP that is scrambling to respond to the Donald’s juggernaut is not only open attempts at caricature, which however merely feed Trump’s ego and push him to troll his accusers even more, but to use the influential Des Moines Register, Iowa’s largest newspaper and a critical voice when it comes to endorsing, or panning, presidential candidates in this first caucus state, to call on Donald Trump to drop out of the 2016 presidential race.

    Officially the Register’s position was simply in escalation to the furor over the real estate magnate’s weekend comments about Sen. John McCain’s service during the Vietnam War. As Fox reports, in an editorial piece published late Monday, the Register said Trump’s comments were “not merely offensive, they were disgraceful. So much so, in fact, that they threaten to derail not just his campaign, but the manner in which we choose our nominees for president.”

    The paper, the most influential in the first-in-the-nation caucus state, went on to say that if “[Trump] had not already disqualified himself through his attempts to demonize immigrants as rapists and drug dealers, he certainly did so by questioning [McCain’s] war record.”

    Unofficially, it is called throwing everything at the wall and hoping something sticks.

    Following this weekend’s firestorm, Trump – who clearly enjoys playing the starring role in every social scandal – appeared to back off some of his comments Monday, telling Fox News’ Bill O’Reilly that “if there was a misunderstanding, I would totally take that back.” However, Trump also said he “used to like [McCain] a lot. I supported him … but I would love to see him do a much better job taking care of the veterans.”

    Whether Trump’s apology is sincere or not, the nationwide response he got for his comments, coupled with his popularity surge, will merely encourage him. And since for the real estate magnate, advertising is everything, the fact that he has become the only topic of discussion, whether at the water cooler or during the prime time news circuit, expect the Trump-eting to continue to whatever bitter end is in store.

    The Register, which broke a 40-year run of backing Democrats in presidential elections by endorsing Mitt Romney in 2012, was the latest voice to pile on Trump for his comments, joining veterans groups, Republican colleagues and President Obama’s spokesman, who defended McCain and called on Trump to apologize.

     

    Paul Rieckhoff, founder of Iraq and Afghanistan Veterans of America, said Monday that Trump’s “asinine comments” were “an insult to everyone who has ever worn the uniform — and to all Americans.”

     

    White House Press Secretary Josh Earnest said veterans “are entitled to an apology.”

    The bottom line is that the GOP did not take Trump seriously, which is precisely what he wanted. And now that underestimation is costing the GOP dearly, as it scrambles with damage control which merely adds insult to injury, because conventional retaliation that may have worked with any other candidate simply strengthens Trump.

    Then again, considering America’s artificially polarizing left/right model – all of it controlled by unelected corporations and bailed out Wall Street banks – has failed, and a vote for Trump is not “a vote for Trump” but a vote against America’s broken political system, perhaps it is the case that the president the US truly needs, and the one person the American electorate will select, is this guy.

  • Gold Warns Again

    Submitted by Jeffrey Snider via Alhambra Investment Partners,

    With all the problems right now beyond Greece and China, from Canada’s “puzzling” recession to Brazil’s unfolding disaster, and even the still-“shocking” US economic slump, it is interesting that gold garnered the most attention in early Monday trading. The fact that gold prices were slammed in Asian trading was certainly significant, but that really isn’t why gold is being highlighted all over the world. With gold prices at a five-year low, economists have some “market” indication that finally, they think, is moving in their favor, thus distracting, minutely, from all the global conflagration.

    “We have breached significant support levels, we know U.S. rate hikes are coming, there is no inflation and there is no catalyst to hold gold when other markets are doing better,” Societe Generale analyst Robin Bhar said.

    It is far more indirect than in 2013 when economists were positively crowing about the slams in gold, but the same basic setup remains even if almost coded; “U.S. rate hikes” are supposed to occur when the FOMC judges the US economy, and the globe by extension, quite sufficient so the drastic fall in gold is once more an indication, though indirect this time, that all will be well soon enough. You would think that after being so wrong about gold in 2013 that economists would be far more careful about appealing in that direction, and maybe they are since they have so far remained, as noted above, more muted than openly projecting great economic recovery with low gold prices this time.

    ABOOK July 2015 Dollar Gold ind

    That may itself be significant, in that while economists remain gold haters (literally) they aren’t, contra two years ago, declaring decisively its death as evidence of at the same time central bank omniscience. Of course, gold prices are not limited to simple-minded appeals upon interest rates or even differentials, as clearly mainstream commentary continues to have great trouble with gold behavior in any direction.

    The exact reason for the selling was unclear. Recent strength in the U.S. currency and expectations for higher U.S. rates have undermined the case for holding gold and other precious metals, while analysts also noted that China imported a record volume of gold in 2013 that has created an oversupply situation. Still, the swiftness of the decline surprised traders and resulted in two separate trade halts in U.S. gold futures.

    Again, 2013 provides a guide as to why gold prices may be declining in sharp moves, especially right at the open or in weaker trading hours, and it has very little to do with interest rates apart from fixed income suggesting the same factors about the “dollar.” Whether it is growing unease about the global economic picture or the “sudden” recurrence of financial irregularity almost wherever you wish to gaze, the “dollar” is once more wreaking havoc. This isn’t controversial at all, but somehow economists can miss that gold is global and universal collateral and when the eurodollar system is stressed it becomes activated in that manner. The correlations alone are strongly suggestive of these financial factors.

    ABOOK July 2015 Dollar Gold Real

    The relationship between gold and the real, for instance, is quite indicative of eurodollar financing trends. Apart from the sharp rise in gold just before the January 15 franc event, gold and the real have been almost inseparable in both timing and degree.

    The damage extends beyond that affiliation, however, as the “dollar” (bank balance sheet factors) is again moving quickly. Copper has been pushed back under $2.50 and crude oil, at least at WTI spot, is nearly back into the $40’s again for the first time in months (despite recent drawdowns in both inventory and production).

    ABOOK July 2015 Dollar Gold CopperABOOK July 2015 Dollar Gold WTI RecentABOOK July 2015 Dollar Gold WTI Less Contango

    In other words, there was a brief respite once Greece slipped on its noose and the Chinese rewrote their stock market, but that short enthusiasm hasn’t at all disrupted the renewed wholesale retreat. Since early to mid-May, the “dollar” has been spotty in its effects, but those negative pressures have clearly started to unify into renewed irregularity in late June and early July. In that respect, Greece and China may have just been visible sideshows of all that.

    ABOOK July 2015 Dollar Gold WTIABOOK July 2015 Dollar Gold RubleABOOK July 2015 Dollar Gold CHF

    Even the Swiss franc has found its way below 0.963, a low not posted since April. The catalyst may be the FOMC’s increased publicity about its preferred intentions to get “markets” to reflect the recovery and economy that isn’t there, but even that is rather unclear as eurodollar futures aren’t really anymore suggestive of that potential then they were back in March.

    ABOOK July 2015 Dollar Gold Euro Futures1ABOOK July 2015 Dollar Gold Euro Futures3

    The futures curve had sunk to an unusual level in early July (maybe that was Greece), so recent trading has simply pushed the curve back into the same cluster as dominated in May. In other words, it doesn’t appear, and certainly not decisive, that “higher U.S. interest rates” is actually being predicted here, rendering the mainstream ideas about gold once more grasping at straws.

    In my view, the “dollar’s” destructive tendencies here are more primal rather than exclusively policy-specific. I think in this accumulated view these “dollar” proxies suggest that regardless of the FOMC’s stated tendencies there is already more than a fair amount of volatility and disorder evident not just in these markets but in the global economy (“unexpected” only to economists). Thus, any perceptions about the FOMC raising rates (whatever they think they can) is just another element of amplification of that existing and underlying syndrome and distress.

    The initial “dollar” behavior after the March FOMC meeting strengthens that reading as I think it amounted to not better fortune but rather just some less distant hope that the without a suicidal FOMC “dollar” pressures might on their own ease and abate – that without a forced policy shift the underlying torment might be able to in shorter order resume more stable behavior and existence free from further depressive influence. The “dollar” and fixed income world had grown so bearish especially after December 1 that it was due for at least a minor retracement on even the most marginal of hope. I really believe that was the animating factor of credit and “dollars” out of 2013; that gold correctly predicted growing eurodollar problems that were parallel and related to fomenting economic decay. The FOMC’s role was simply to further antagonize those concerns, which they did repeatedly on the flimsiest of narratives.

    Yellen’s May 6 speech about stock bubbles and “reach for yield” was thus damaging in that respect; that the FOMC was instead going to push on with its amplification of negative pressure and send the world further into its tailspin regardless of how much discontent and disquiet was already evident.

    The action in gold in 2013 was a warning about the “dollar”, a warning that went completely unheeded yet has been largely fulfilled. Current gold prices and the rest of the “dollar’s” proxies are, if only in smaller doses this time, suggesting the same tendency. In short, while the magnitude might be diminished now that is only because the time component is so much shorter and the “wavelength” so much more widespread; the point of no-return may be at hand or already surpassed.

  • Obama Simply Switched from One War Crime Which Increases Terrorism to Another

    H20The Water Torture
    Facsimile of a woodcut in J. Damhoudère’s
    Praxis Rerum Criminalium,
    Antwerp, 1556

    It has now been proven beyond any shadow of a doubt that specific type of torture which the U.S. used during the Bush years was a war crime.

    Top terrorism and interrogation experts agree that torture creates more terrorists.  Indeed, the leaders of ISIS were motivated by U.S. torture.  And French terrorist Cherif Kouchi told a court in 2005 that he wasn’t radical until he learned about U.S. torture at Abu Ghraib prison in Iraq.

    Drone2

    But all Obama has done is to transition to drone assassinations which – beyond any shadow of a doubt – are a war crime (more here and here), and create more terrorists than they stop.

    As the eminent historian  Alfred McCoy notes:

    Back in 2006 readers may well have dismissed that warning about “state-sponsored murder” as improbable, even irresponsible. But now this distinguished panel [which includes former FBI director William S. Sessions, former Army intelligence chief Claudia Kennedy, and former DEA director Asa Hutchinson] tells us that is exactly what has happened. Under President Obama, the torture issue has faded not from reform but because we are no longer taking prisoners since, as this report states, “the regime of capture and detention has been…supplanted in large measure by the use of drones.” By killing high value targets with drones, “the troublesome issues of how to conduct detention and interrogation operations are minimized.” In effect, we have slid down the slippery slope of human rights abuse to find extra-judicial killings awaiting us like an unwelcome specter at the bottom.

    Postscript: In reality, the Obama regime has simply replaced Bush’s torture techniques with ones “that emphasize psychological torture,” and by outsourcing torture to our “allies.”

    And Obama is committing other war crimes which increase terrorism, like – according to a group of CIA officers – arming Al Qaeda in Libya so they would overthrow Gaddaffi.

  • Wall Street Prepares To Reap Billions From Another Main Street Wipe Out

    On Monday evening, we noted that market participants are reducing the size of their trades and turning to derivatives in order to avoid the perils associated with what are increasingly illiquid markets. 

    While we’ve been pounding the table on bond market liquidity for years, the rest of the world (operating on the standard 2-3 year time lag) has just begun to wake up to how thin markets have become. Now, pundits, analysts, billionaire bankers, and incorrigible corporate raiders alike are shouting from the rooftops about the pitfalls of illiquidity. The secondary market for corporate credit has received the lion’s share of the attention (for reasons we outlined yesterday) and as Carl Icahn was at pains to explain to Larry Fink last week, ETFs are a large part of the problem. 

    The story is simple. Shrinking dealer inventories (the result of a post-crisis regulatory regime wherein the term “prop trader” is taboo) have made it harder to transact in size without having an outsized effect on prices for corporate bonds. Meanwhile, artificially suppressed borrowing costs and the attendant hunt for yield have led to record corporate issuance and voracious investor demand. In short, the primary market is booming while the secondary market has become a veritable no man’s land. If you need an analogy, try this: the crowded theatre is getting larger and more crowded while the exit keeps getting smaller.

    The proliferation of ETFs has made it easier for the retail crowd to chase yield in corners of the bond market where they might not have dared to venture before, and this has only served to create still more demand for things like high yield credit. 

    Now, with the US staring down a rate hike cycle, and with some corners of the HY market (see HY energy for instance) facing a number of insurmountable headwinds going forward, the fear is that the retail crowd will all head for the exits at once, leaving fund managers with a very nondiversifiable, unidirectional flow which will force them to sell the underlying assets into illiquid markets. Due to a generalized lack of market depth, that selling pressure has the potential to trigger a rout. Of course a sharp decline in prices would send still more panicked retail investors to the exits necessitating even more asset sales by fund managers and so on, and so forth.

    But don’t take our word for it, here’s WSJ with more on how Wall Street is preparing to profit from an unwind in Main Street’s ETF and mutual fund portfolios:

    Wall Street is preparing for panic on Main Street.

     

    Hedge funds are lining up to profit from potential trouble at some “alternative” mutual funds and bond exchange-traded funds that have boomed in popularity among retirees and other individual investors.

     

    Financial advisers have pushed ordinary investors into those funds in search of higher returns, a strategy that has come into favor as Federal Reserve benchmark interest rates remain near zero. But many on Wall Street worry the junk bonds, bank loans and esoteric investments held by some of those funds will be extremely hard to sell if the market turns, leaving prices pummeled in a rush for the exits.

     

    Concerns about such scenarios have been escalating for some time. Now, investment firms such as Leon Black’s Apollo Global Management LLC and Oaktree Capital Management LP are laying the groundwork to cash in if they come to pass.

     

    Apollo has been raising money from wealthy investors and portfolio managers for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: “ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit.”

     

    Guided by a similar outlook, Reef Road Capital Management LLC, led by former J.P. Morgan Chase & Co. proprietary trader Eric Rosen, has been betting against, or shorting, exchange-traded funds that hold junk bonds and buying options that will pay off if the value of these high-yield securities falls.

     

    The hedge funds are taking aim at what is regarded by many on Wall Street as a weak spot in the markets. “Liquid-alternative”” funds have emerged as one of the hottest products in finance, fueled by a promise to deliver hedge-fund-style investing to the masses. They use many of the same strategies as hedge funds, with wagers both on and against markets, but are open to less-wealthy investors with fees closer to mutual-fund standards.

     


     

    Liquid-alternative funds manage a cumulative $446 billion, according to fund tracker Lipper, up from $83 billion at the start of 2009. High-yield bond ETFs, another popular product, manage more than $38 billion, and in the week ended last Wednesday took in their biggest inflows on record at $1.5 billion, Lipper said.

     

    Activist investor Carl Icahn brought the issue to the fore last week, saying at an investment conference that he feared a bubble was expanding in junk bonds thanks to the rush into high-yield exchange-traded funds run by companies like BlackRock Inc.

     

    Managers of ETFs and liquid-alternative funds said they are well-protected against any tumult. Some have lines of credit to cover redemptions if needed and point to research showing that even during past crises, mutual-fund investors generally withdraw no more than 2% of assets each month.

    When Reuters first reported that fund managers were lining up emergency liquidity lines like the ones mentioned above, we smelled trouble and were quick to note that not only did that not bode well for the market, but that funding redemptions with borrowed cash is a fool’s errand and depends upon the market stress being transitory (see here and here). But beyond that, it betrayed the extent to which the country’s largest and most influential ETF issuers have become worried about just the type of meltdown the hedge funds mentioned above are banking on.

    If you want a candid take on just what the smart money thinks is ahead for all of the retail money that’s been herded into esoteric ETFs, we’ll leave you with the following from David Tawil, president of hedge fund Maglan Capital, who spoke to WSJ:

    “They are going to be toast. It will be one of our first levels of shorting the moment we start to see cracks, because it’s ripe with retail, emotional investors.”

     

  • 470,000 Vehicles At Risk After Hackers "Take Control & Crash" Jeep Cherokee From A Sofa 10 Miles Away

    In what is being called "the first of its kind," Wired.com reports that hackers, using just a laptop and mobile phone, accessed a Jeep Cherokee's on-board systems (via its wireless internet connection), took control and crashed the car into a ditch from 10 miles away sitting on their sofa. As The Telegraph details, the breach was revealed by security researchers Charlie Miller, a former staffer at the NSA, and Chris Valasek, who warned that more than 470,000 cars made by Fiat Chrysler could be at risk of being attacked by similar means. Coming just weeks after the FBI claimed a US hacker took control of a passenger jet he was on in the first known such incident of its kind, the incident shows just how vulnerable we are to modern technology.

     

     

    As The Telegraph reports, the hackers (security experts) worked with Andy Greenberg, a writer with tech website Wired.com, who drove the Jeep Cherokee on public roads in St Louis, Missouri…

    In his disturbing account Greenberg described how the air vents started blasting out cold air and the radio came on full blast when the hack began.

     

    The windscreen wipers turned on with wiper fluid, blurring the glass, and a picture of the two hackers appeared on the car’s digital display to signify they had gained access.

     

    Greenberg said that the hackers then slowed the car to a halt just as he was getting on the highway, causing a tailback behind him – though it got worse after that.

     

    He wrote: ‘The most disturbing maneuver came when they cut the Jeep’s brakes, leaving me frantically pumping the pedal as the 2-ton SUV slid uncontrollably into a ditch.

     

    ‘The researchers say they’re working on perfecting their steering control – for now they can only hijack the wheel when the Jeep is in reverse.

     

    ‘Their hack enables surveillance too: They can track a targeted Jeep’s GPS coordinates, measure its speed, and even drop pins on a map to trace its route.’

     

    The hack was possible thanks to Uconnect, the Internet connected computer feature that has been installed in fleets of Fiat Chrysler cars since late 2013.

     

    It controls the entertainment system, deals with navigation and allows phone calls.

     

    The feature also allows owners to start the car remotely, flash the headlights using an app and unlock doors.

     

    But according to Miller and Valasek, the on-board Internet connection is a ‘super nice vulnerability’ for hackers.

     

    All they have to do is work out the car’s IP address and know how to break into its systems and they can take control.

    In a statement to Wired.com Fiat Chrysler said:

    "Under no circumstances does FCA condone or believe it’s appropriate to disclose ‘how-to information’ that would potentially encourage, or help enable hackers to gain unauthorised and unlawful access to vehicle systems.

     

    ‘We appreciate the contributions of cybersecurity advocates to augment the industry’s understanding of potential vulnerabilities. However, we caution advocates that in the pursuit of improved public safety they not, in fact, compromise public safety."

    *  *  *

  • So You Say You "Don't" Want A Revolution?

    Submitted by Dmitry Orlov via Club Orlov blog,

    Over the past few months we have been forced to bear witness to a humiliating farce unfolding in Europe. Greece, which was first accepted into the European Monetary Union under false pretenses, then saddled with excessive levels of debt, then crippled through the imposition of austerity, finally did something: the Greeks elected a government that promised to shake things up. The Syriza party platform had the following planks, which were quite revolutionary in spirit.

    • Put an end to austerity and put the Greek economy on a path toward recovery
    • Raise the income tax to 75% for all incomes over 500,000 euros, adopt a tax on financial transactions and a special tax on luxury goods.
    • Drastically cut military expenditures, close all foreign military bases on Greek soil and withdraw from NATO. End military cooperation with Israel and support the creation of a Palestinian State within the 1967 borders.
    • Nationalize the banks.
    • Enact constitutional reforms to guarantee the right to education, health care and the environment.
    • Hold referendums on treaties and other accords with the European Union.

    Of these, only the last bullet point was acted on: there was a lot made of the referendum which returned a resounding “No!” to EU demands for more austerity and the dismantling and selling off of Greek public assets. But a lot less was made of the fact that the results of this referendum were then ignored.

    But the trouble started before then. After being elected, Syriza representatives went to Brussels to negotiate. The negotiations generally went like this: Syriza would make an offer; the EU officials would reject it, and advance their own demands for more austerity; Syriza would make another offer, and the EU officials would reject it too and advance their own demands for even more austerity than in the last round; and so on, all the way until Greek capitulation. All the EU officials had to do to force the Greeks to capitulate was to stop the flow of Euros to Greek banks. Some revolutionaries, these! More like a toy poodle trying to negotiate for a little more kibble to be poured into its dish, if it pleases the master to do so. Stathis Kouvelakis (a Syriza member) summed up the Greek government's stance: “Here’s our program, but if we find that its implementation is incompatible with keeping the euro, then we’ll forget about it.”

    It is not as if revolutions don't happen any more. Just one country over from Greece there is a rather successful revolution unfolding as we speak: what used to be Northern Iraq and Syria is controlled by the revolutionary regime variously known as ISIS/ISIL/Daash/Islamic Caliphate. We can tell that it is a real revolution because of its use of terror. All revolutionaries deserving of the name use terror—and what they generally say is that their terror is in response to the terror of the pre-existing order they seek to overthrow, or the terror of their counterrevolutionary enemies. And by terror I mean mass murder, expropriation, exile and the taking of hostages.

    Just so that you understand me correctly, let me stress at the outset that I am not a revolutionary. I am an observer and a commentator on all sorts of things, including revolutions, but I choose not to participate. Remaining an observer and a commentator presupposes staying alive, and my personal longevity program calls for not being anywhere near any revolutions—because, as I just mentioned, revolutions involve mass murder.
     

    Good old Uncle Joe.
    The kids loved him.

    In the case of the French revolution, it started with liberté-égalité-fraternité and proceeded swiftly to guilliotiné. The Russian revolution of 1917 remains the gold standard for revolutions. There, thanks to Uncle Joe, so-called “red terror” went on and on, eventually claiming millions of victims. Mao and Pol Pot are also part of that revolutionary pantheon. The American revolution wasn't a revolution at all because the slave-owning, genocidal sponsors of international piracy remained in power under the new administration. Nor does the February 2014 putsch in the Ukraine qualify as a revolution; that was an externally imposed violent overthrow of the legitimate government and the installation of a US-managed puppet regime, but, as in the American Colonies, the same gang of thieves—the Ukrainian oligarchs—continue to rob the country blind just as before. But if the Nazi thugs from the “Right Sector” take over and kill the oligarchs, the government officials in Kiev and their US State Dept./CIA/NATO minders, and then proceed with a campaign of “brown terror” throughout the country, then I will start calling it a revolution.
     

    * * *

    The fact of mass murder does not automatically a revolution make: you have to make note of who is getting killed. So, if the dead consist of lots of volunteers, recruits, mercenaries, plus lots of nondescript civilians, that does not a revolution make. But if the dead include a good number of oligarchs, CEOs of major corporations, bankers, senators, congressmen, public officials, judges, corporate lawyers, high-ranking military officers, then, yes, that's starting to look like a proper revolution.

    Other than big huge pools of blood littered with the corpses of high-ranking representatives of the ancien régime, a revolution also requires an ideology—to corrupt and pervert. In general, the ideology you have is the ideology you make revolution with. It stands to reason that if you don't have an ideology, it's not really a revolution. For instance, the American Colonists had no ideology—just some demands. They didn't want to pay taxes to the British crown; they didn't want to maintain British troops; they didn't want limits on the slave trade; and they didn't want restrictions on profiting from piracy on the high seas. That's not an ideology; that's just simple old greed. With the Ukrainian “revolutionaries,” their “ideology” pretty much comes down to the statements “Europe is wonderful” and “Russians suck.” That's not an ideology either; the former is wishful thinking; the latter is simple bigotry.

    Taking the example of ISIS/ISIL/Daash/Islamic Caliphate, they are Islamists, and so the ideology they corrupt and pervert is Islam, with its Sharia law. How? Islamist scholars have been most helpful by compiling this top-ten list:

    1. It is obligatory to consider Yazidis as “People of the Scripture.”
    2. It is forbidden in Islam to deny women their rights.
    3. It is forbidden in Islam to force people to convert.
    4. It is forbidden in Islam to disfigure the dead.
    5. It is forbidden in Islam to destroy the graves and shrines of Prophets and Companions.
    6. It is forbidden in Islam to harm or mistreat Christians or any “People of the Scripture.”
    7. Jihad in Islam is a purely defensive struggle. It is not permissible without the right cause, the right purpose, and the right rules of conduct.
    8. It is forbidden in Islam to kill emissaries, ambassadors, and diplomats — hence it is forbidden to kill journalists and aid workers.
    9. Loyalty to one’s nation is permissible in Islam.
    10. It is forbidden in Islam to declare a Caliphate without consensus from all Muslims.

    But, as Lenin famously put it, “If You Want to Make an Omelet, You Must Be Willing to Break a Few Eggs.” And if you want to make a revolution, then you must be willing to pervert your ideology. Those Islamist scholars who eagerly exclaim “That's not Islam! Islam is a religion of peace and tolerance!” are missing the point: the ideology of ISIS/ISIL/Daash/Islamic Caliphate is still Islam—revolutionary Islam.

    The example of ISIS/ISIL/Daash/Islamic Caliphate is germane to the topic of Greece, because it is a contemporary example of what is definitely a revolution, and it is taking place just one country over from Greece. But the ideology of Syriza is not Islam—it's socialism, and philosophically they are Marxists. And so a better example for Syriza to follow, were they to suddenly stop being Europe's pathetic poodles and don the mantle of fearless, heroic revolutionaries, is still the good old Russian revolution of 1917.
     

    * * *

    As I mentioned, one of the most important tools of a revolution is terror. In Russia, revolutionary terror was called “red terror,” which, the revolutionaries claimed, arose in opposition to “white terror” of the Russian imperial regime, with its racist bigotry (Jews weren't allowed in any of the major cities), numerous forms of oppression, some major, some quite petty, and rampant corruption. An interesting feature of the Russian revolution is that the terror started several years prior to the event.

    Let us pause for a second to consider why revolutionary terror is necessary. A revolution is a drastic change in the direction of society. Left alone, society tends to worsen its worst tendencies over time: the rich get richer, the poor get poorer, the police state becomes more oppressive, the justice system becomes more riddled with injustice, the military-industrial complex produces ever less effective military hardware for ever more money, and so on. This is a matter of social inertia: the tendency of objects to travel in a straight line in absence of a force acting at an angle to its direction of motion. The formula for inertia is
     

    p=mv

    where p is inertia, m is mass and v is velocity.

    To make a radical course change, revolutionaries have to apply force, counteracting the social inertia. To make it so that it is within their limited means to do this, they can do two things: reduce v, or reduce m. Reducing v is a bad idea: the revolution must not lose its own momentum. But reducing m is, in fact, a good idea. Now, it turns out that, with regard to social momentum, most of the mass that gives rise to it resides in the heads of certain classes of people: government officials, judges and lawyers, police officers, military officers, rich people, certain types of professionals and so on.

    The rest of the population is much less of a problem. Suppose some revolutionaries show up and tell them that

    • they don't have to worry about paying taxes (because we are confiscating the property of the rich),
    • medicine and education are now free, 
    • those with mortgages can stop making payments; they automatically own their real estate free and clear
    • renters now automatically own their place of residence,
    • employees are automatically majority stockholders in their businesses,
    • they should fill out an application if they want a free (newly liberated) parcel of land to farm,
    • there is a general amnesty and their loved ones who have been locked up are coming home,
    • ration cards are being issued to make sure that nobody ever goes hungry again,
    • the homeless are going to be moving in with those whose residences are deemed unduly spacious,
    • they are now their own police and are in charge of patrolling their neighborhoods with the revolutionary guards available as back-up, and
    • if any non-revolutionary authorities, be they the former police or the former landlords, come around and bother any of them, then these traitors and impostors shall face swift, on-the-spot revolutionary justice.

    Most regular people would think that this is a pretty good deal. However, government officials, the police, military officers, judges, prosecutors, rich people whose property is to be confiscated, corporate officers and shareholders, those living on fat corporate or government pensions, etc., would no doubt think otherwise. The revolutionary solution is to take them as hostages, exile them, and, to make an example of the most recalcitrant and obstructive, kill them. This dramatically reduces m, allowing the revolutionaries to effect drastic course changes even as v increases. I compiled this list because it would be such an easy sell—piece of cake, a slam-dunk, a no-brainer. But I lack the uncontrollable desire to smash eggs and the insatiable appetite for omelets. As I mentioned, I am no revolutionary—just an observer.

    In the run-up to the Russian revolution, from 1901 through 1911, there were 17,000 such casualties. In 1907, the average toll was 18 people a day. According to police records, between February 1905 and May 1906, there were among those killed:

    • 8 governors
    • 5 vice-governors and other regional administrators
    • 21 chiefs of police, heads of municipalities and wardens
    • 8 high-ranking police officers
    • 4 generals
    • 7 military officers
    • 79 bailiffs
    • 125 inspectors
    • 346 police officers
    • 57 constables
    • 257 security personnel
    • 55 police service personnel
    • 18 state security agents
    • 85 government employees
    • 12 clergy
    • 52 rural government agents
    • 52 land-owners
    • 51 factory owners and managers
    • 54 bankers and businessmen
    Good old Zinka
    Schoolteacher, Revolutionary, Assassin

    Clearly, these terrorist acts must have had some not inconsiderable effect in softening the target, making the government overthrow easier. This was not an accident but a matter of well-articulated revolutionary policy. The concept of “red terror” was first introduced by Zinaida Konoplyannikova, a rural schoolteacher who first got on the police radar for being an atheist and was later convicted as a terrorist for shooting a notorious general-major at point-blank range. At her trial in 1906, she said this: “The [Socialist-Revolutionary] Party has decided to counter the white, yet bloody, terror of the government with red terror…” She was executed by hanging that same year, aged 26.

    After the revolution, red terror became government policy. Here is Lenin's response to being questioned by Communist party members about his “barbaric methods”: “I reason soberly and categorically: what is better—to imprison a few tens or hundreds provocateurs, guilty or innocent, acting consciously or unconsciously, or to lose thousands of soldiers and workers? The former is better. Let them accuse me of any deadly sins and violations of liberty—I plead guilty, but the interests of the workers win.”
     

    Grandpa Lenin belting out a tune
    Grandpa Trotsky going wild on the harmonica

    Trotsky produced a particularly crisp definition of “red terror.” He called it “a weapon to be used against a social class that has been condemned to extinction but won't die.”

    Estimates of the exact number of victims of “red terror” vary. Robert Conquest claimed that between 1917 and 1922 the revolutionary tribunals executed 140,000 people. But the historian O. B. Mozokhin, after an exhaustive study of the data available from government archives, put the number at no more than 50,000. He also noted that executions were the exception rather than the rule, and that most of those executed were sentenced for criminal rather than political acts.

    But this was nothing compared to what Stalin unleashed later on. The ideological foundation of Stalin's terror was “intensification of class struggle at the culmination of the building of socialism,” which he articulated at the plenum of the Central Committee in July of 1928. According to his logic, USSR was economically and culturally underdeveloped, surrounded by hostile capitalist states, and as long as there remained the threat of foreign military intervention with the goal of reestablishing the bourgeois order, only the preventive destruction of the remnants of “bourgeois elements” could guarantee the security and independence of the USSR. These elements included former police officers, government officials, clergy, land-owners and businessmen. The peak of Stalin's repression occurred in 1937 and 1938. During these two years 1,575,259 people were arrested, of which 681,692 were shot.

    You may be forgiven for thinking of Stalin as a psychopathic murderer, because he was certainly that, but more importantly he was a competent, and sufficiently ruthless, head of a revolutionary state. For a revolutionary regime, killing too many people is rarely a problem, but killing too few people can easily prove fatal. To play it safe, a revolutionary should always err on the side of murder. This attitude tends to pervade the entire power pyramid: if you give Stalin a memorandum recommending that 500 priests get shot, and Stalin crosses out 500 and pencils in 1000 in red pencil, then you better find 500 more priests to shoot, or the number becomes 1001 and includes you.

    This guarantee of security and independence did seem to hold. After all, there was a subsequent invasion by a hostile bourgeois capitalist state (Germany) and bourgeois order was temporarily reestablished on the territories it occupied. But there was nobody left to instigate anti-revolutionary rebellion elsewhere in the USSR because most of the would-be counterrevolutionaries were by then dead.

    Of course, this took a terrible toll on society. Here is what Putin had to say on the subject of “red terror”: “Think of the hostages who were shot during the civil war, the destruction of entire social strata—the clergy, the prosperous peasants, the Cossacks. Such tragedies have recurred more than once during the history of mankind. And it always happened when initially attractive but ultimately empty ideals were raised above the main value—the value of human life, above the rights and liberties of man. For our country this is especially tragic, because the scale was colossal. Thousands, millions of people were destroyed, sent to concentration camps, shot, tortured to death. And these were primarily people who had their own opinions, who weren't afraid to voice them. These were the most effective people—the flower of the nation. Even after many years we feel the effect of this tragedy on ourselves. We must do a great deal to make sure that this is never forgotten.”

    Given that the price is so high, perhaps it would be better after all if we just sat quietly, allowed the rich get richer as the poor get poorer, watched listlessly as the environment got completely destroyed by capitalist industrialists in blind pursuit of profit, and eventually curled up, kissed our sweet asses good-bye and died? Good luck selling that idea to young radicalized hotheads who have nothing to lose—except maybe you, if you happen to stand in their way as they change the world! No, revolution is here to stay, and one of its main weapons is terror. No matter how well we remember, the annihilation of counterrevolutionary social elements is bound to recur.
     

    * * *

    Getting back to Greece and Syriza: what if Syriza were not just a particularly fluffy breed of miniature Europoodle but actual honest-to-goodness revolutionaries, ready to do whatever it takes? How would they act differently? And what would be the result?

    Well, one thing that comes to mind immediately is that they wouldn't try to stay in the Eurozone—they would seek to destroy it. The solution is simple: no Eurozone—no Euro-debt—no problem. There is a general principle involved: never accept responsibility for that which you cannot control. Speaking from experience, suppose you invite a plumber to fix your toilet, and the plumber finds that the toilet has been Mickey-moused in multiple ways by an incompetent amateur. In this situation, the professional thing for the plumber to do is to completely obliterate that toilet. Now the solution becomes simple: install a new toilet.

    Here's a very simple one-two punch which Greece could have delivered instead of futile attempts at negotiation:

    1. Immediately announce an open-ended moratorium on all debt repayment, taking the position that Greece has no legitimate creditors within the Eurozone—it's all financial fraud at the highest levels. After a few months, the fake bail-out financial entities that magically convert garbage Eurozone debt into AAA-rated securities (because they are guaranteed by Eurozone governments) are forced to write off Greek debt. In turn, Eurozone governments, being pretty much broke, balk at refinancing them out of their national budgets, showing to the world that their guarantees aren't worth the paper they are written on. There follows a bond implosion. Shortly thereafter, the Euro goes extinct, and along with it all Eurozone debt.

     

    2. Start printing Euros without authorization from the European Central bank. When accused of forgery, make the forgery harder to detect by changing the letter at the front of the serial number from Y (for Greece) to X (for Germany). Flood Greece and the rest of the Eurozone with notionally counterfeit (but technically perfect) Euro notes. As the Euro plummets in value, institute food rationing and issue ration cards. Eventually convert from the now devalued and debased Euro to a newly reintroduced Drachma and reestablish trade links with the now “liberated” former Eurozone countries using trade deals based on barter and local currency swaps with gold reserves used to correct any minor imbalances.

    Could this have been done without any “red terror”? I doubt it. Greece is very much oligarch-ridden; even the celebrated former Syriza FM Yanis Varoufakis is the son an industrial magnate. The Greek oligarchs and the rich would have had to be rounded up and held as hostages. Numerous people in the government and in the military have a split allegiance—they work for Europe, not for Greece. They would have had to be sacked immediately and held incommunicado, under house arrest at a minimum. No doubt foreign special services would have run rampant, looking for ways to undermine the revolutionary government. This would have called for drastic preemptive measures to physically eliminate foreign spies and agents before they could have had a chance to act. And so on. This wouldn't have been a job for fluffy mini-poodles. As Stalin famously put it, “Cadres are the key to everything.” You can't make a revolution without revolutionaries.

  • Obamanomics? More Chidren Live In Poverty Now Than During Crisis

    For all the back-patting exuberance over manipulated record high stock prices and record periods of illusory job gains, it appears the administration and its Obamanomics forgot one important thing – the children! As USA Today reports, a higher percentage of children live in poverty now than did during the Great Recession, according to a new report from the Annie E. Casey Foundation released Tuesday.

    “Where you grew up is similar to where you end up when you’re an adult,” Bloome said. “That helps perpetuate racial segregation.”

     

    As USA Today reports,

    About 22% of children in the U.S. lived below the poverty line in 2013, compared with 18% in 2008, the foundation's 2015 Kids Count Data Book reported. In 2013, the U.S. Department of Human and Health Service's official poverty line was $23,624 for a family with two adults and two children.

     

    “The fact that it’s happening is disturbing on lots of levels,” said Laura Speer, the associate director for policy reform and advocacy at the Casey Foundation, a non-profit based in Baltimore. “Those kids often don’t have the access to the things they need to thrive.” The foundation says its mission is to help low-income children in the U.S. by providing grants and advocating for policies that promote economic opportunity.

    As AECF details,

    Millions of low-income U.S. families with children face considerable daily obstacles that can threaten the entire family’s stability and lead to lifelong difficulties for their kids. A family-supporting job that provides a steady source of parental income and opportunities for advancement is critical to moving children out of poverty.

     

     

    But having a job, even one that pays enough to support a family, is only part of the solution. Working parents need access to paid time off to adequately care for themselves and their children. Access to affordable, high-quality, flexible child care is critical for all working parents with young children, but the need is especially great for those parents working in low-paying jobs with irregular, often erratic work hours.

     

    Even several years after the recession ended, the number of children living in low-income working families continues to increase. In 2013, one in four children, 18.7 million, lived in a low-income working family in the United States. This is 1.7 million more than in 2008. And, 27 percent of children in low-income working families are younger than age 6.

    *  *  *

  • 'Buffett' Says Sell; BofAML Asks, Should We Listen?

    When Janet Yellen speaks, investors buy stocks (whether she tells you stock valuations are 'substantialy stretched' or not). When Warren Buffett speaks, investors listen… so when his favorite indicator is flashing a huge "sell signal" trading 80% 'expensive' to its long-term average, perhaps, as BofAML suggests, it is time to listen.

     

    On most measures, the S&P 500’s valuation remains elevated relative to history, the exceptions being Price to Normalized EPS and P/FCF. From an asset allocation standpoint, the S&P still looks attractive vs. bonds and small-caps, but trades at an historical premium to oil and gold.

     

    As if that was enough, BofAML further explains…

    One metric used by some (including Warren Buffett) to gauge whether the stock market is overextended is the Market Cap to GDP ratio. We show this using S&P 500 market cap below…

    While there are other variations…

     

    All of which are highly correlated and illustrate similar trends. The S&P 500 market cap to GDP ratio is 1.03, over 80% above its historical average since 1964.

    However, BofAML, provides a "different this time" silver lining – this metric may have limited utility:

    Problems with the numerator and denominator: Market Cap/GDP is analogous to Price/Sales, with all of its shortcomings and more. Price/Sales ratios do not account for structural changes in profit margins, which has been the case for the S&P 500, chiefly due to lower taxes, lower interest expense, and higher operating margins in Tech. Meanwhile, using market value or stock price as the numerator is not consistent given that sales accrue to the entire company and not just equity stakeholders. Enterprise value is more appropriate, and is particularly important today given lower leverage ratios vs. history.

     

    Geographic exposure differences: The S&P has increasingly derived sales and profits from overseas, and has thus become more tied to global GDP than US GDP. Comparing market cap to global GDP (since 1980), this metric trades a much lesser premium to its average – 30%, vs. 60% using US GDP over the same period.

     

    Mix differences: Many sectors (such as Tech, Industrials and Energy) carry a much larger weight within the US equity market than they do within the US economy. US GDP is also much more services-oriented, while S&P 500 profits are more goods-oriented.

    *  *  *
    So – no don't listen to anyone or anything apart from "buy" – when has that ever ended badly.

  • Three Huge Reasons Why the Fed Cannot Let Rates Normalize

    The Fed continues to dangle hints of a “rate hike” in front of investors… but the reality is that as far as any significant raise in rates, its hands are tied.

     

    True, the Fed may raise rates from 0.25% to 0.3% or possible even 0.5% sometime in the next 24 months… but these moves will be largely symbolic.

     

    There are three reasons for this:

     

    1)   There are over $555 trillion in interest-rate based derivatives trades sitting on the big banks balance sheets globally.

     

    2)   The US Dollar carry trade is over $9 trillion in size.

     

    3)   Many Western welfare states would go bankrupt if rates normalized.

     

    Regarding #1… the Fed cannot risk a significant rise in rates, as doing so would potentially burst the bond bubble. Bonds have been in a bull market for over 30 years now. Today, globally the bond market is over $100 trillion in size. And there are over $555 trillion in derivatives that trade based on these bonds.

     

    This is why former Fed Chairman Ben Bernanke admitted that rates would not normalize anytime during his “lifetime” during a closed-door luncheon with several hedge funds last year. For rates to normalize (meaning rise to the historic average of 4%+) would trigger a derivatives implosion. Bernanke knows this. And current Fed Chair Janet Yellen knows it too.

     

    Given that ALL of the Fed’s actions over the last seven years have been devoted to propping up the insolvent big banks (insolvent due to their massive derivatives portfolios), the Fed cannot and will not risk any interest rate surprises.

     

    Regarding item #2 (the US Dollar carry trade), there are over $9 trillion in borrowed US Dollars sloshing around the financial system. These are effectively US Dollar (shorts) as when you borrow in one currency to fund a carry trade you are effectively shorting that currency.

     

    US Dollar deposits yield 0.25%. The Yen yields 0.001%, while the Euro yields negative 0.2% and the Swiss Franc yields negative 0.75%.

     

    In simple terms, the US Dollar is extremely attractive as a store of value relative to most major world currencies. This is why capital has been flowing into the US Dollar, pushing the US Dollar to a 10 year high.

     

    The flip side of this is that every upward move the Dollar makes against other currencies puts more pressure on the $9 trillion worth of US Dollar carry trades. This is why the US Dollar’s rally has been so aggressive: because much of it was carry trades blowing up forcing traders to cover their US Dollar shorts.

    On that note, the US Dollar is currently breaking out against most major world currencies.

     

     

    This is already a big enough concern that the Fed has been mentioning it in FOMC communiqués. Any rate hike will only INCREASE the interest rate differential between the US Dollar and other major world currencies… which in turn would drive even more capital to the US Dollar… and put even more pressure on the $9 trillion US Dollar carry trade.

     

    Finally, regarding #3 (the impact of interest rates on welfare states)… it is no secret that most western nations are bankrupt due to excessive social welfare expenses. Most nations rely heavily on the bond markets to fund their social spending patterns as tax revenues don’t come anywhere near enough to cover them.

     

     

    In the US, a 1% increase in interest rates means over $100 billion more in interest rate payments. The US is already running a deficit (meaning that it spends more than it takes in via taxes) and has been for most of the last 20 years. As the above charts who, most Western developed nations are in similar situations.

     

    If the Fed began to let rates normalize it would render numerous nations insolvent.  Every asset under the sun trades based on its risk relative to Us Treasuries (the so called “risk free rate”). If US yields rise, so will yields around the world.

     

    And the world cannot afford that.

     

    In short, the world is awash with debt. The bond market has ballooned up to $100 trillion in size. And most nations are struggling to service their debt loads even with rates at historic lows.

     

    At some point, the bond bubble will burst. And when it does, entire countries will go bust.

     

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

     

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

     

    We are currently down to the last 25.

     

    To pick up yours, swing by….

     

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

     

    Best Regards

     

     

     

  • Meet The Newest Enemy Of Your Financial Privacy: George Clooney

    Submitted by Simon Black via Sovereign Man blog,

    I’m at a complete loss for words.

    I keep waiting for the deep baritone of that guy who voices all the action movie trailers to chime in. But it doesn’t come. Because this all real.

    I’m talking about the trailer George Clooney has just released to promote his new non-profit, entitled THE SENTRY.

    (Yes, they use all-caps. It sounds like a great name for the next Marvel superhero movie.)

    THE SENTRY is an initiative that “seeks to disrupt and ultimately dismantle the networks of perpetrators, facilitators, and enablers who fund and profit from America’s deadliest conflicts.”

    Wow, eliminating genocide sounds like an incredibly noble cause. Of course, in order to do so, Mr. Clooney’s aim is break down financial privacy.

    There’s been a long-standing war against financial privacy for years.

    As western governments have slid further into bankruptcy, they’ve made coordinated efforts to interdict privacy across the world through tax information exchange agreements, black lists, and turning bankers into unpaid spies.

    Plus they’ve been extremely clever in their marketing campaign, working tirelessly to associate financial privacy with some of the worst elements of society.

    At first, their propaganda suggested that only people interested in financial privacy were guilty of tax evasion. Then organized crime. Then terrorist financing.

    Now it’s genocide.

    This is really insane. Privacy is completely natural and part of our most basic social edicts.

    Privacy is why it’s taboo to discuss how much money you make. It’s why we thrive on keeping secrets and knowing other people’s secrets.

    Privacy is normal. And for years it was something that used to be the rule, not the exception. Especially in regards to finance.

    That was the origin of the term “private banking”. It wasn’t about money laundering. It was about being a grown adult and keeping your business to yourself.

    Now they’ve destroyed the concept to the point that anyone who seeks out financial privacy is suspect of tax evasion. Or organized crime. Or terror financing. Or now genocide.

    And it’s not just finance; it’s privacy in all things.

    Here in Europe the British Prime Minister wants to outlaw encryption technology… because apparently only terrorist criminals and ISIS members use secure email.

    What’s even more bizarre is how a guy like George Clooney even has a say in the global financial regulations.

    Yes, Ocean’s Eleven was very entertaining.

    But I’m completely baffled at how George Clooney has any influence over my financial privacy. Or anybody else’s except for his own.

    Ominously, THE SENTRY has been among the first that I’ve seen which specifically mentions gold as a means of illicit finance.

    And governments have already taken dramatic steps to criminalize the holding of physical cash.

    Apparently they want to ensure that your only financial option is to deposit your money with a shaky bank in a bankrupt country earning a rate of interest that fails to keep up with inflation.

    Now, I think we can all agree that dictators are bad people (as are rapists, murderers, pedophiles, fraudsters, and corrupt politicians). And stopping them is a nice idea.

    But the road to tyranny is always paved with the stones of good intentions.

    Because no matter how many financial regulations get passed, and no matter how far the dictators are chased by Mr. Clooney on his white horse, the fact remains that bad people will always find the resources to do bad things.

    And in the meantime, the crusade to save the world only serves to make everyone else less free.

    This war on privacy is a war on freedom. And it’s getting totally out of control.

  • Apple Plunges Despite EPS Beat On iPhone Sales Miss, Drop In China Sales, Weak Guidance And Strong Dollar Warning

    Apple is important. Perhaps the most important company not only for the Dow Jones, but because it also happens to be the largest company by market cap, in the world. As such nobody will be happy that moments ago AAPL reported results which were in a word, lousy.

    It wasn't so much the earnings, because the EPS of $1.85 was a modest beat of expectations of $1.81, while revenues also beat consensus of $49.4 billion fractionally, printing at $49.6 billion; the margin also beat slightly coming at 39.7% above the exp. 39.5%.

    The problem was in the detail, with 47.5 million iPhone shipments missing expectations by 1.3 million units, even as both iPad (whose ASP came at $415 below the $426 expected), and Mac units coming in as expected.

    But the biggest surprise was in China, where as we warned previously, the Apple euphoria appears to have ended with a bang, with greater China sales tumbling by 21% from $16.8 billion to $13.2 billion. And keep in mind this was in the quarter when the Composite was hitting multi year highs, and the July crash was not even on the horizon.

    As for the cherry on top it was the company's guidance which now sees Q4 revenue at $49-$51 billion, or below the $51.1 bn consensus estimate, with the CFO adding that the strong USD is finally getting to the company, warning that Apple "faced a difficult foreign exchange environment."

    And all this happened in a quarter in which AAPL bought back $10 billion of its own stock.

    The above in charts:

    Revenue:

     

    Unit shipments:

     

    Geographic breakdown:

     

    Margins:

     

    Finally, AAPL's net cash (excluding steadily rising debt) remains flat:

     

    As expected, there was no mention of either the iWatch or Apple TV. Or a new buyback.

    * * *

    And here, from the WSJ, is a reminder why AAPL is so very crucial to not only the tech sector, but the entire market:

    No company produces bigger profits than Apple Inc. Likewise, no company contributes more to the profit picture of the S&P 500 than Apple.

     

    Apple is a leviathan of a company that is a major contributor of profits in corporate America. Its fortunes, also, are inextricably intertwined with two of the biggest growth markets that exist, smartphones and China. That makes it a bellwether. Because of its success, Apple is also an out-sized member of the S&P 500. We noted yesterday that the stock comprises about one percentage point of the S&P 500's 3.5% gain for this year (before Tuesday's selloff). It is also, due to its massive profits and market-cap weighting within the index, the largest single contributor to S&P 500 profits. By a long shot.

     

    Now, there certainly isn't anything to be worried about here. Apple is expected to earn about $1.80 a share, or about $10.4 billion, on nearly $50 billion in sales, and as usual with this company, the only real question is by how far will it exceed Street estimates.

     

    Apple is projected to single-handedly give the tech sector all of its earnings growth this quarter, just edging it up by 0.2%. Without Apple, the sector would see a contraction of 6%.

     

    It has a big impact on the overall market as well. Since the third quarter of 2011, Apple, for every single quarter, has comprised no less than 3% of the S&P 500's operating earnings, according to data from S&P Dow Jones Indices. It accounted for 2.87% of the index's operating earnings of $25.29 in September 2011, and has ranged higher since then. In the first quarter of 2015, it comprised 5.97% of the $25.81 operating profit. In the fourth quarter of 2014, it was 7.62% of the $26.75 profit.

     

    Think of its this way. If all 500 of the companies in the index contributed an even amount, Apple's earnings would account for about 0.2% of the overall profit. On the contrary, Apple is by far the single biggest contributor to the index's earnings. The next largest contributor is J.P. Morgan, which is contributed about half of that, at 64 cents. For comparison sake, this is what other tech names are contributing: Microsoft Inc. (estimated): 52 cents, IBM: 42 cents, Google Inc.: 38 cents; Cisco Systems Inc. (estimated): 32 cents, Intel Corp.: 32 cents.

    The result, AAPL is down over 7% after hours (and Nasdaq futures down 1.2%), with the 200DMA serving as support for now, so all those hoping for the "leviathan" break out will have to wait until the next quarter, or the release of the iWatch 2.0, whichever comes first.

  • How A Pork Bellies Trader And Milton Friedman Created "The Greatest Trading Casino In World History"

    “I held in my hand the Holy Grail for the Chicago Mercantile Exchange. The most influential economic mind of the twentieth century provided the CME with the intellectual foundation upon which to build its financial superstructure.”

    Nixon’s estimable free market advisors who gathered at the Camp David weekend were to an astonishing degree clueless as to the consequences of their recommendation to close the gold window and float the dollar. In their wildest imaginations they did not foresee that this would unhinge the monetary and financial nervous system of capitalism. They had no premonition at all that it would pave the way for a forty-year storm of financialization and a debt-besotted symbiosis between central bankers possessed by delusions of grandeur and private gamblers intoxicated with visions of delirious wealth.

    In fact, when Nixon announced on August 15, 1971, that the dollar was no longer convertible to gold at $35 per ounce, his advisors had barely a scratch pad’s worth of ideas as to what should come next. 

    Its first attempted solution was a Burns-Connally hybrid known as the Smithsonian Agreement of December 1971. The United States needed precisely a $13 billion favorable swing in its balance of trade. This was not to be achieved the honest way—by domestic belt tightening and thereby a reduction of swollen US imports that were being funded by borrowing from foreigners. Instead, America’s trading partners were to revalue their currencies upward by about 15 percent against the dollar.

    Connally’s blatant mercantilist offensive was cut short in late November 1971, however, when the initially jubilant stock market started heading rapidly south on fears that a global trade war was in the offing. 

    As it turned out, a few weeks later Connally’s protectionist gauntlet ended in an amicable paint-by-the-numbers exercise in diplomatic pettifoggery. The United States agreed to drop the 10 percent import surtax and raise the price of gold by 9 percent to $38 per ounce. 

    Quite simply, the United States had made no commitment whatsoever to redeem paper dollars for gold at the new $38 price or to defend the gold parity in any other manner. At bottom, the Smithsonian Agreement attempted the futile task of perpetuating the Bretton Woods gold exchange standard without any role for gold. 

    During the next eight months, further international negotiations attempted to rescue the Smithsonian Agreement with more baling wire and bubble gum. But the die was already cast and the monetary oxymoron which had prevailed in the interim, a gold standard system without monetary gold, was officially dropped in favor of pure floating currencies in March 1973.

    Now, for the first time in modern history, all of the world’s major nations would operate their economies on the basis of what old-fashioned economists called “fiduciary money.” In practical terms, it amounted to a promise that currencies would retain as much, or as little, purchasing power as central bankers determined to be expedient.

    In stumbling to this outcome, Nixon’s advisors were strikingly oblivious to the monetary disorder they were unleashing. The passivity of the “religious floaters” club in the White House was owing to their reflexive adherence to the profoundly erroneous monetarist doctrines of Milton Friedman.

    A Friedmanite Fed would keep the money growth dial set strictly at 3 percent, year in and year out, ever steady as she goes. 

    Friedman’s pre-1971 writings nowhere give an account of the massive hedging industry that would flourish under a régime of floating paper money. This omission occurred for good reason: Friedman didn’t think there would be much volatility to hedge if his Chicago-trained central bankers stuck to the monetarist rulebook.

    Most certainly, Friedman did not see that an unshackled central bank would eventually transform his beloved free markets into gambling halls and venues of uneconomic speculative finance. 

    It thus happened that Leo Melamed, a small-time pork-belly (i.e., bacon) trader who kept his modest office near the Chicago Mercantile Exchange trading floor stocked with generous supplies of Tums and Camels, found his opening and hired Professor Friedman. 

    THE PORK-BELLY PITS: WHERE THE AGE OF SPECULATIVE FINANCE STARTED

    Leo Melamed was the genius founder of the financial futures market and presided over its explosive growth on the Chicago “Merc” during the last three decades of the twentieth century. 

    At the time of the Camp David weekend that changed the world, the Chicago Merc was still a backwater outpost of the farm commodity futures business.

    The next chapters in the tale of Melamed and the Merc are downright astonishing. In 1970, Melamed made an intensive inquiry into currency and other financial markets about which he knew very little, in a desperate search for something to replace the Merc’s rapidly dwindling eggs contract. The latter was the core of its legacy business and was then perhaps $50 million per year in annual turnover.

    Four decades later, Leo Melamed’s study program had mushroomed into a vast menu of futures and options contracts—covering currencies, commodities, fixed-income, and equities, which trade twenty-four hours per day on immense computerized platforms. The entire annual volume of the old eggs contract is now exceeded in literally the blink of an eye.

    The reason futures contracts on D-marks and T-bills took off like rocket ships is that the fundamental nature of money and finance was turned upside down at Camp David. In effect, Professor Friedman’s floating money contraption created a massive market for hedging that did not have any reason for existence in the gold standard world of Bretton Woods, and most especially under its more robust pre-1914 antecedents.

    When currency exchange rates were firmly fixed and some or all of the main ones were redeemable in a defined weight of gold, exporters and importers had no need to hedge future purchases or deliveries denominated in foreign currencies. The spot and forward exchange rates, save for technical differentials, were always the same.

    Even more importantly, the newly emergent need of corporations and investors to hedge against currency and interest rate risk caused other fateful developments in financial markets; namely, the accumulation of capital and trading resources by firms which became specialized in the intermediation of financial hedges. Purely an artifact of an unstable monetary régime, this new industry resulted in prodigious and wasteful consumption of capital, technology, and labor resources.

    The four decades since Camp David also show that the Friedmanite régime of floating money is dynamically unstable. Each business cycle recovery since 1971 has amplified the ratio of credit to income in the system, causing the daisy chains of debt upon debt to become ever more distended and fragile.

    Currently, the daily volume of foreign exchange hedging activity in global futures and options markets, for example, is estimated at $4 trillion, compared to daily merchandise trade of only $40 billion. This 100:1 ratio of hedging volume to the underlying activity rate does not exist because the currency managers at exporters like Toyota re-trade their hedges over and over all day; that is, every fourteen minutes.

    Due to the dead-weight losses to society from this massive churning, the hedging casinos are a profound deformation of capitalism, not its crowning innovation. They consume vast resources without adding to society’s output or wealth, and flush income and net worth to the very top rungs of the economic ladder—rarefied redoubts of opulence which are currently occupied by the most aggressive and adept speculators. The talented Leo Melamed thus did not spend forty years doing God’s work, as he believed. He was just an adroit gambler in the devil’s financial workshop—the great hedging venues—necessitated by Professor Friedman’s contraption of floating, untethered money.

    THE LUNCH AT THE WALDORF-ASTORIA THAT OPENED THE FUTURES

    According to Melamed’s later telling, by 1970 he had “become a committed and ardent disciple in the army that was forming around Milton Friedman’s ideas. He had become our hero, our teacher, our mentor.”

    Thus inspired, Melamed sought to establish a short position against the pound, but after visiting all of the great Loop banks in Chicago he soon discovered they weren’t much interested in pure speculators: “if you didn’t have any commercial reasons, the banks weren’t likely to be very helpful.”

    The banking system was not in the business of financing currency speculators, and for good reason. In a fixed exchange rate régime the currency departments of the great international banks were purely service operations which deployed no capital and conducted their operations out of hushed dealing rooms, not noisy cavernous trading floors. The foreign currency business was no different than trusts and estates. Even Melamed had wondered at the time whether “foreign currency instruments could succeed” within the strictures designed for soybeans and eggs, and pretended to answer his own question: “Perhaps there was some fundamental economic reason why no one had before successfully applied financial instruments to futures.”

    In point of fact, yes, there was a huge reason and it suggests that while Melamed might have audited Milton Friedman’s course, he had evidently not actually passed it. There were no currency futures contracts because there was no opportunity for speculative profit in forward exchange transactions as long as the fixed-rate monetary régime remained reasonably stable.

    Indeed, this reality was evident in a rebuke from an unnamed New York banker which Melamed recalled having received in response to his entreaties shortly before the Smithsonian Agreement was announced. “It is ludicrous to think that foreign exchange can be entrusted to a bunch of pork belly crapshooters,” the banker had allegedly sniffed.

    Whether apocryphal or not, this anecdote captures the essence of what happened at Camp David in August 1971. There a motley crew of economic nationalists, Friedman acolytes, and political cynics supinely embraced Richard Nixon’s monetary madness. In so doing, they opened the financial system to a forty-year swarm of “crapshooters” who eventually engulfed capitalism itself in endless waves of speculation and fevered gambling, activities which redistributed the income upward but did not expand the economic pie.

    As it happened, Melamed did not waste any time getting an audience with the wizard behind the White House screen. At a luncheon meeting with Professor Friedman at the New York Waldorf-Astoria on November 13, 1971, which Melamed later described as his “moment of truth,” he laid out his case.

    After asking Friedman “not to laugh,” Melamed described his scheme: “I held my breath as I put forth the idea of a futures market in foreign currency. The great man did not hesitate.”

    “It’s a wonderful idea,” Friedman told him. “You must do it!”

    Melamed then suggested that his colleagues in the pork-belly pits might be more reassured about the venture if Friedman would put his endorsement in writing. At that, Friedman famously replied, “You know I am a capitalist?”

    He was apparently a pretty timid capitalist, however. In consideration of the aforementioned $7,500, Melamed got an eleven-page paper that launched the greatest trading casino in world history. It made Melamed extremely wealthy and also millionaires out of countless other recycled eggs and bacon traders that Friedman never even met.

    Modestly entitled “The Need for a Futures Market in Currencies,” the paper today reads like so much free market eyewash. But back then it played a decisive role in conveying Friedman’s imprimatur.

    In describing the paper’s impact, Melamed did not spare the superlatives: “I held in my hand the Holy Grail for the Chicago Mercantile Exchange. The most influential economic mind of the twentieth century provided the CME with the intellectual foundation upon which to build its financial superstructure.”

    *****

    Source: The Great Deformation by David Stockman

  • Earnings Avalanche: CMG, GPRO, YHOO, MSFT All Lower After Hours

    Unleash the talking head spin…

     

    Yahoo misses and cuts guidance…

    • *YAHOO 2Q ADJ. EPS 16C, EST. 19C
    • *YAHOO SEES 3Q ADJ. EBITDA $200M-$240M, EST. $279.7M
    • *YAHOO SEES 3Q REV EX-TAC $1B-$1.04B, EST. $1.07B

    Micorosft beat bottom, missed top line…

    • *MICROSOFT 4Q ADJ. EPS 62C, EST. 58C
    • *MICROSOFT 4Q UNEARNED REV. $25.32B, EST. $25.96B

    Chipotle beat bottom line but missed comps and revenues…

    • *CHIPOTLE 2Q COMP SALES UP 4.3%, EST. UP 5.8%
    • *CHIPOTLE 2Q EPS $4.45 , EST. $4.43
    • *CHIPOTLE 2Q REV. $1.2B, EST. $1.22B

    GoPro beats but fails to raise guidance, reiterating prior margins

    • *GOPRO 2Q REV. $419.9M, EST. $395.2M
    • *GOPRO 2Q ADJ. EPS 35C, EST. 26C
    • *GOPRO REPEATS L-T GROSS MARGIN, OPER MARGIN TARGETS IN SLIDES

    And the result…

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Jul 21

Today’s News July 21, 2015

  • You'Re FiReD!

    FOUNDING FIRED..

     

     

    .
    YOU'RE FIRED.

    MORON ROLL CALL

  • General Wesley Clark Suggests Putting "Disloyal Americans" In Internment Camps

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    If these people are radicalized and don’t support the United States, and they’re disloyal to the United States, as a matter of principal that’s fine, that’s their right. It’s our right and our obligation to segregate them from the normal community for the duration of the conflict.

     

    – General Wesley Clark in a MSNBC interview

    Noting that the recent tyrannical, entirely anti-American comments made by General Wesley Clark during a MSNBC interview are statist and disturbing would be the understatement of the century.

    What General Clark is advocating in no uncertain terms is that the U.S. rewrite it laws to allow for the internment of Americans who the government feels have engaged in thought crime. Mind you, laws on the books are sufficiently strong to punish people engaged in actual criminal behavior. What Clark is suggesting is forcibly separating people based on their political views.

    Sure, he couches it in the war against ISIS (an entity created by U.S. government foreign policy), but once you make it policy to disappear people based on one particular type of thought, it will quickly spread to other undesirable political views.

    Please share this video with everyone you know. It’s that crazy:

     

    The interview is so fascist, desperate and creepy you wonder why General Clark is willing to say such totalitarian things. Does he owe powerful people favors for his crime of telling the truth about the Iraq war  many years ago when he outed U.S. Plan To Invade Iraq, Syria, Lebanon, Libya, Somalia, Sudan, and Iran right after 9/11?

    Perhaps he has to make certain amends to his overlords, recall that he took a job with financial giant Blackstone a couple of years ago: Meet the Military-Industrial-Wall Street Complex: Blackstone Hires General Wesley Clark.

    Screen Shot 2015-07-20 at 9.35.34 AM

     

    I wonder, did MSNBC mention that General Clark works for Blackstone? Moreover, what should happen to foundations that accept money from countries directly funding ISIS? Should their founders also be placed in internment camps? Seem like Hillary and Bill might qualify for such treatment: Hillary Clinton Exposed Part 2 – Clinton Foundation Took Millions From Countries That Also Fund ISIS.

    With generals like these…

  • The Greek Economy Is Finished! A Quarter Of Firms Shifting Abroad

    Capital controls imposed by the Greek government are taking a heavy toll on Greek businesses, according to a new report from Endeavour Greece. With over two-thirds of respondents reporting a "significant drop in revenues," and 1 in 9 firms forced to suspend production due to shortages of raw materials (unable to buy due to capital controls), the problems created by The Greek government's action seem asymmetric as almost a quarter (23%) of firms are now "planning to transfer their headquarters abroad for security, cashflow, and stability reasons."

     

     

    As ekathimerini reports,

    Endeavour Greece, a non-profit group that supports entrepreneurs, found that 58 percent of the 300 companies it surveyed between July 13 and July 17 reported a "significant impact on their operations caused by the limitations imposed to cross-border transactions."

     

    "Many of these companies cannot import raw material or have access to foreign services and infrastructure," the group said in a statement, adding that 23 percent "plan to transfer their headquarters abroad for security, cash flow and stability reasons."

     

    More than two thirds of the companies – 69 percent – reported a "significant drop in turnover," with 11 percent forced to decrease or suspend production due to shortages of raw materials.

     

    Greece imposed a raft of capital controls on July 29, closing the banks and restricting cash withdrawals in a bid to prevent a disastrous bank run from draining money out of the financial system.

     

    Banks reopened on Monday and restrictions on cash withdrawals have been partially relaxed, though the capital controls remain in place.

     

    Endeavour Greece reported that businesses were facing "significant impediments" due to the continuing ATM limits, but on "a smaller scale."

     

    Nearly half of the companies – 45 percent – said they had been forced to postpone payments to suppliers.

    This offers little hope for a silver lining as the nation is hollowed out. As Jeffrey Sachs notes, the formula for success is to match reforms with debt relief, in line with the real needs of the economy.

    A smart creditor of Greece would ask some serious and probing questions. How can we help Greece to get credit moving again within the banking system? How can we help Greece to spur exports? What is needed to promote the rapid growth of small and medium-size Greek enterprises?

     

    For five years now, Germany has not asked these questions. Indeed, over time, questions have been replaced by German frustration at Greeks’ alleged indolence, corruption, and incorrigibility. It has become ugly and personal on both sides. And the creditors have failed to propose a realistic approach to Greece’s debts, perhaps out of Germany’s fear that Italy, Portugal, and Spain might ask for relief down the line.

     

    Whatever the reason, Germany has treated Greece badly, failing to offer the empathy, analysis, and debt relief that are required. And if it did so to scare Italy and Spain, it should be reminded of Kant’s categorical imperative: Countries, like individuals, should be treated as ends, not means.

     

    Creditors are sometimes wise and sometimes incredibly stupid. America, Britain, and France were incredibly stupid in the 1920s to impose excessive reparations payments on Germany after World War I. In the 1940s and 1950s, the United States was a wise creditor, giving Germany new funds under the Marshall Plan, followed by debt relief in 1953.

     

    In the 1980s, the US was a bad creditor when it demanded excessive debt payments from Latin America and Africa; in the 1990s and later, it smartened up, putting debt relief on the table. In 1989, the US was smart to give Poland debt relief (and Germany went along, albeit grudgingly). In 1992, its stupid insistence on strict Russian debt servicing of Soviet-era debts sowed the seeds for today’s bitter relations.

    Germany’s demands have brought Greece to the point of near-collapse, with potentially disastrous consequences for Greece, Europe, and Germany’s global reputation. This is a time for wisdom, not rigidity. And wisdom is not softness. Maintaining a peaceful and prosperous Europe is Germany’s most vital responsibility; but it is surely its most vital national interest as well.

  • New Obama Initiative To Ban Guns For Some Social Security Recipients, Veterans, And Disabled

    Submitted by Brandon Turbeville via ActivistPost.com,

    Whenever one thinks the Obama administration’s war on the Second Amendment couldn’t get any more insane, Barack Obama prances onto the stage to prove everyone wrong yet again.

    This time, it is not merely a carefully planned and orchestrated jig on the graves of mass shooting victims or pathetic whining about “gun crime” and the amount of time he must give regarding the issue. It is a push to ban a large number of Social Security benefits recipients from owning guns.

    That’s correct. When the Obama administration can’t get its way by attacking gun owners head on, it merely turns to extorting the elderly and disabled whom it holds hostage via their need to receive Social Security benefits – benefits I might add, that are owed to them.

    Thus, the Obama administration is pushing to prohibit Social Security benefit recipients from owning firearms if they “lack the mental capacity to manage their own affairs,” a move which the Los Angeles Times reports would affect millions of people whose disability payments – for one reason or another – are handled by other people.

    The idea is to bring the Social Security Administration under the jurisdiction of laws that regulate who gets reported to the National Instant Criminal Background Check System (NICS), a database that was initially supposed to pertain to illegal immigrants, drug addicts, and felons.

    Of course, it should be pointed out that, with the exception of illegal immigrants, prohibiting American citizens who are not confined to a prison cell from owning weapons is itself unconstitutional. Clearly, the push to add the Social Security Administration and thus millions of SS recipients under this new policy is unconstitutional as well.

    Nevertheless, it is difficult to remember a time when a Presidential administration even pretended to be concerned with what the US Constitution had to say about anything.

    As the Los Angeles Times reports,

    A potentially large group within Social Security are people who, in the language of federal gun laws, are unable to manage their own affairs due to "marked subnormal intelligence, or mental illness, incompetency, condition, or disease."

    There is no simple way to identify that group, but a strategy used by the Department of Veterans Affairs since the creation of the background check system is reporting anyone who has been declared incompetent to manage pension or disability payments and assigned a fiduciary.

    If Social Security, which has never participated in the background check system, uses the same standard as the VA, millions of its beneficiaries would be affected. About 4.2 million adults receive monthly benefits that are managed by "representative payees."

    The move is part of a concerted effort by the Obama administration after the 2012 Sandy Hook Elementary School shooting in Newtown, Conn., to strengthen gun control, including by plugging holes in the background check system.

    The Obama Administration and Social Security Administration have been crafting this new policy in relative secret. Finally informed about the issue, the National Rifle Association and the National Council on Disability are both opposing the initiative, the latter in opposition due to the fact that millions of disabled Americans will have their rights eviscerated as a result of this policy. Of the many enrolled who may be affected, disabled veterans are among the high risk category for having their Second Amendment violated.

  • Chinese Stocks Tumble As Labor Market Starts To Crack

    While the rest of the world attempts to convince themselves that a Chinese stock market bubble and bust is at worst irrelevant, CapitalEconomics notes, evidence that the labor market is coming off the boil arguably matters more to China’s economy. Chinese stocks futures are down 2% in today's pre-open after yesterday's whipsaw action as 'exit plans' for the stabilization were discussed (dumping stocks) and then denied (surging stocks) shows just how fragile (and quickly and entirely addicted to China's new 'measures' investors have become); but as BofAML warned earlier, selling pressure will likely remain relentless. Now that the spell is broken, we expect that many holders may want to sell to the forced buyers in the market.

    So not fear there will be plenty of liquidity…

    • *PBOC TO MAINTAIN LIQUIDITY AT MODERATE LEVEL: FINANCIAL NEWS
    • *PBOC TO INJECT 35B YUAN WITH 7-DAY REVERSE REPOS: TRADER

    While the market may need more than just moderate amounts. As while yesterday's stability bounce helped,. futures are pointing lower as we open tonighht…

    • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 2.0%
    • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.3% TO 3,939.90

     

    The real economy (goalseeked headline data aside) appears to be showing further cracks… (via CapitalEconomics)

    The equity market has received all the attention recently but evidence that the labour market is coming off the boil arguably matters more to China’s economy. There was a big fall in the ratio of job openings to job seekers in Q2 and slightly fewer new jobs were created in the first half of 2015 than a year before.

     

     

    None of this is evidence of major stress and other indicators remain upbeat – for example, migrant wages are still rising at near 10% y/y. But the leadership is aware that economic changes are often only reflected in labour markets with a lag and it is already responding. Alongside broad policy easing, the government has introduced tax breaks for migrants setting up companies, cheap loans for start-ups, a reduction in employers’ social insurance contributions, and tax incentives and subsidies for some firms hiring workers.

    *  *  *

    Finally we have Goldman sounding the alarm for iron ore…

    *IRON ORE SEEN DROPPING EVERY QUARTER THRU 2Q 2016, GOLDMAN SAYS

     

     

    Prices seen at $49/ton in Q3 2015, $48 in Q4, $46 in Q1 2016 and $44 in Q2 2016, bank says in report.

     

    “We expect seaborne supply to increase sequentially over the next two quarters and to gradually overwhelm the weak demand from Chinese steel mills,” bank says

     

    While housing starts in China bounced back and infrastructure has overtaken property as largest end-market for steel, improvement during 2H 2015 may not be strong enough to support iron ore prices, Goldman says

    Not great news for Australia.

     

  • Charting The Slow, 30-Year Death Of The US Middle Class In A Global Context

    When it comes to the favorable aspects of capitalism, one thing is clear: with the largest concentration of millionaires and billionaires from around the globe, the US is second to none when it comes to letting the entrepreneurial spirit flourish and rewarding it (and letting the rich get even richer).

    Unfortunately, when it comes to the malignant, “crony” aspects of capitalism, the US is also the world’s undisputed leader.

    Because while we have shown previously that over the past 30 years median incomes in the US have barely grown (indicative of a middle class whose income has been largely stagnant for some 35 years), we have never before shown just what how this middle class “stasis” looks like in comparison to other developed nations. Now, thanks to Max Roser and “Our world in Data“, we know. Sadly, in this particular sample of median income growth since 1980, the US is dead last, behind such countries as the UK, Canada and even Spain and France!

     

    Of course, the chart above does not mean that the entire US population have seen their wealth stuck at virtually the same level in the past 35 years. Only 90% of it. As for the remaining, top 1%, the past 35 years is precisely when the sky became the limit…

     

    … and perhaps also why, as we wondered previously, there is nothing more hated by the very same 1% who have benefitted the most from the unbridled proliferation of credit money since the advent of the Greenspan regime, than the gold standard.

  • "The Spell Is Broken" In China, Selling Pressure To Remain "Relentless": BofAML

    Just three days ago, we outlined the series of events that ultimately led Beijing to transform China Securities Finance Corp into a half-trillion dollar, state-sponsored margin trading Frankenstein.

    To recap, two weeks ago the PBoC said it was set to inject capital into China Securities Finance Corp., which is effectively a subsidiary of the China Securities Regulatory Commission. “China’s central bank is now underwriting brokerages’ margin lending businesses,” we said, before driving the point home with this: “The PBoC is now in the business of financing leveraged stock buying.”

    Since then, the plunge protection funds channeled through the CSF have ballooned and on Friday, China’s commercial banks agreed to lend another CNY209 billion to the margin finance vehicle. All in, the CSF has around $483 billion in available funds it can use to “support” Chinese stocks. 

    Amusingly, China sounded the all clear on Monday as officials claimed that “timely measures” had arrested (perhaps literally) the panic and restored “order” to the market. If “order” means the conditions which persisted prior to June, then we suppose margin trading that totals nearly 20% of the free float market cap and straight-line, limit up buying is just around the corner.

    China is apparently so confident that three week’s worth of unprecedented (and comically absurd) intervention has stabilized the situation and repaired what we still contend is irreparable damage to the collective psyche of the Chinese retail investor, that the PBoC is set to wind down the CSF’s plunge protection activities just days after several commercial banks pledged billions more in support for the margin lender.

    The CSRC is “studying stock stabilization fund exit plan,” Bloomberg reported on Monday morning, citing Caijing. The market’s response was not favorable:

     

     

    Although Chinese stocks closed green after the CSRC said it would “continue to focus on stabilizing [the] market and preventing systemic risks,” it seems clear that China’s unsustainable equity bubble is … well, rather unsustainable without explicit government support.

    That of course is bad news for China in terms of its push to liberalize markets and promote the yuan in international investment and trade by projecting an air of stepped up transparency and market-based reforms. 

    BofAML has more on why Beijing’s attempts to support equities will ultimately fail (note the reference to the “broken spell” which is another way of saying what we said weeks ago about the change in retail investors’ mentaility) and on the negative effect intervention has on China’s international reputation. 

    *  *  *

    From BofAML

    The A-share market may see another leg down within months

    Forces holding up the market may not last long

    In our view, the short-term stability in the A-share market was achieved at the expense of: 1) the government’s reform credentials and 2) the wallets of state-directed entities, including brokers, banks, insurers and the PBoC. Faced with relentless selling pressure, neither of these two can last long, in our opinion. As a result, we expect the market to experience another leg down, possibly within months. 

    The price for the short-term market stability is heavy.

    Essentially, how the government stabilized the market was by limiting selling activity and then using state-directed money to buy broadly in the market (Table 1, a detailed list of the government’s market-supporting measures since late June). At the peak, roughly half of the A-shares were suspended from trading (Chart 1) and the police heavy-handedly investigated selling activities, especially in the index futures market. Meanwhile, banks may have provided an Rmb2tr credit line, in addition to the PBoC’s lending, to the China Securities Finance Corp (CSFC) for it to buy stocks directly or indirectly. Based on media reports, CSFC had probably spent at least Rmb860bn by Jul 17 to support the market.

    Reform credential is important to the government.

    What happened in recent weeks has made many question the government’s reform resolve. As a result, we believe that the government’s desire to roll back the administrative controls is strong.

    Given the expensive market valuation, the Prisoner’s Dilemma dictates that most state directed buyers may want to stop buying and reduce their stock exposure as soon as possible. That means that the buyer of the last resort will be the PBoC, via direct lending to the CSFC or by underwriting bank loans to the CSFC. If this practice persists for long, it may do the PBoC’s reputation irreversible damage and hurt RMB’s globalization. In addition, loans to the CSFC may crowd out bank lending in the real economy by using up their loan quotas.

    Selling pressure will likely remain relentless.

    Now that the spell is broken, we expect that many holders may want to sell to the forced buyers in the market. In addition, although difficult to assess accurately, due to a lack of data, we estimate that around 1/5 of the free float is still carried on margin. The high margin cost means that selling pressure is high as long as investors do not expect the market to go up significantly.

  • Pay Attention Greece: Puerto Rico Refuses To Pay Creditors Before It Fully Funds Its Citizens' Needs

    While Greece may be “contained” for the time being, the only reason why its creditors were eager to collaborate on an expedited basis with the humiliated Syriza government is because as we noted earlier, of the €7.1 billion bridge loan released to Greece €6.8 billion would promptly be used to repay Greece’s creditors including the ECB for whom an event of default would be unthinkable unlike the IMF.

    The sad part, as we laid out in “The Unspoken Tragedy In The Upcoming Greek Bailout” is that both with the bridge loan(s) and the actual €86 billion (or more) EFSF bailout still to come, the vast majority of funds will be used to repay creditors, and even that wouldn’t be sufficient hence the need to put €50 billion in Greek assets in escrow as a repayment pledge for all incremental overages.

    Said otherwise, very little if anything from Europe’s generous third bailout would actually reach the Greek people yet again (and quite likely there would be a funding deficiency hence the need to sell assets).

    Compare that to the position taken by Puerto Rico today, when its budget director said the commonwealth won’t redirect cash from its operating budget to make debt payments, in the process “ratcheting up the pressure to restructure the island’s $72 billion debt burden” as Bloomberg reports.

    The comments from Luis Cruz, director of the Office of Management and Budget, come as Standard & Poor’s slashed its rating on the Public Finance Corp.’s bonds to CC from CCC-, calling an Aug. 1 default on the securities a “virtual certainty.”

    Puerto Rico has $36.3 million of Public Finance Corp. debt maturing Aug. 1 that needs to be repaid through legislative appropriation and as previously reported, Puerto Rico said last week the agency failed to transfer $36.3 million to a trustee to cover the Aug. 1 debt payment because the legislature didn’t appropriate the funds.

    The junk-rated island must first pay health, security and education expenses, Luis Cruz, director of the Office of Management and Budget, said during a press conference Monday in San Juan.

    “It is the government’s priority to provide public services and we will not be transferring funds from these assignments to pay the debt,” Cruz said.

    “We all know the difficult situation we are facing in terms of cash flow,” Cruz added, “And we have to decide how we handle that cash flow and our priority is to provide services to citizens: health, safety, education.“

    Bloomberg adds that last month the island’s legislators approved a budget for the fiscal year that began July 1 that doesn’t include $93.7 million to repay debt-service costs on PFC bonds. “The legislature did create a fund that the Government Development Bank can use to repay debt. The bank, which handles the island’s borrowing deals, must ask the legislature before it can access that money. The legislature doesn’t reconvene again until mid-August, after the bonds mature. Governor Alejandro Garcia Padilla doesn’t plan to call a special legislative session to bring lawmakers back earlier to discuss the Aug. 1 payment, Cruz said.”

    David Hitchcock, a S&P analyst in New York, wrote that “A default on the PFC bonds would be further demonstration of increasing unwillingness to pay debt in full and also raises the potential for future unequal treatment between various types of bondholders.”

    And while it would be easy to say that Puerto Rico and Greece are comparable, the reality is that unlike the soon to be default island, Greece truly did have, and still has, a gun to its head, as a result of its unwillingness to prepare for the Plan B it itself was eager to escalate to, namely existing in a world without the financial backing of the ECB which it found the hard way, means capital controls, bank runs, and a paralyzed financial system.

    Which is why Puerto Rico is lucky that its creditors are largely inert entities – mostly municipal funds and a few activist hedge funds – who have no leverage over the island. Which is why PR can default on them without fear of retaliation – surely the US will never throw the commonwealth out of the Dollarzone, whether permanently or “temporarily”, and why Greece can only stand and watch as two case studies emerge: one of an insolvent state which can at least prioritize its own population over the demands of foreign creditors, and another insolvent state, whose creditors can take advantage of the European monetary “union” which for Greece is now a prison, and set any and every demand they want, knowing full well they can crush the local economy all over again with just one ELA-limiting press release.

    In this regard, it is quite clear that Schauble was joking when he offered to trade Greece, which has zero leverage over its creditors (at least until it implements plans for existence outside of the Eurozone) for Puerto Rico, whose creditors have zero leverage over the island.

    Finally, we hope the Greek government is watching and learning, and taking appropriate measures so that it too can, at least once, prioritize its own people’s needs over those of a global banking oligarchy.

  • 42 Billion Reasons Why Putin's Time May Be Running Out

    Russian municipal bond risk is surging once again (at 6-week highs) heading towards crisis-levels as Bloomberg reports numerous regions (including Chukotka – across from Alaska, Belgorod -near Ukraine, and three North Caucus republics) are prompting concerns as debt-to-revenue levels top 100% (144% in the case of Chukotka).

    Risk is on the rise once again…

     

    The clock is ticking for President Vladimir Putin to defuse a situation he set off in 2012 with decrees to raise social spending. That contributed to a doubling in the debt load of Russia’s more than 80 regions to 2.4 trillion rubles ($42 billion) in the past five years and it all rolls within the next two to three years.

     

    As Bloomberg details, threats to municipal finances are snowballing as sanctions over Ukraine choke access to capital markets, forcing local governments to fund social outlays with costlier bank loans.

    While regional debt sales are down 53 percent so far this year, Moody’s Investors Service estimates borrowing will grow as much as 25 percent in 2015, driven by spending on health care, education and utilities.

     

    The squeeze is putting regions in jeopardy. They’re facing “an increasing likelihood of defaults,” S&P warned in June. At least one non-rated local government delayed a principal repayment on a bank loan in the first quarter, it said.

     

    “A default by a large region could block market access for the Finance Ministry itself,” said Karen Vartapetov, associate director of S&P’s Moscow office. “Right now the federal center has an opportunity to help regions. In three years, there may be fewer resources, while regional debt may be bigger, and that will result in greater risks.”

     

    Local administrations are running a 625 billion-ruble deficit, up 42 percent from 2014, according to S&P. Seventy-five regions had a budget gap last year, the Higher School of Economics in Moscow said in a May report.

    Even The Russian Central Bank is nervous…

    “Because of the high debt burden, access to market sources of financing may be partly closed for some regions,” it said. “In addition, these regions may have difficulties with refinancing existing debt because banks are becoming more selective in assessing regional risk.”

    Charts: Bloomberg

  • The Case Of China’s Missing Gold

    Following China’s official revelation on Friday that, for the first time since April 2009, it increased its gold holdings by “only” over 600 tons – supposedly in one month, which goes without saying is impossible and confirms how even the PBOC not only cooks its books but is willing to confirm that it does so – many have sprung to ask: what is really going on behind the scenes at the central bank which even Bloomberg’s conservative estimates saw its gold tripling to over 3,510 tons.

    Perhaps the answer is very simple: while many assume that the only reason China revealed (some of) its latest gold holdings is to further bolster its case for admission into the IMF’s Special Drawing Right, the real reason why the PBOC may have resorted to telegraph to the world that it has much more gold is simply to prop up its markets.

    Impossible?

    Recall what little-noticed quote Reuters cited on July 3, just as Chinese stocks were plummeting 7% on a daily basis, with index futures halted limit down, and half of Chinese stocks halted from trading:

    The Shanghai Composite Index plummeted more than 7 percent at one point in early trade. It ended the morning session down 3.3 percent at 3.785.6 points, heading for a weekly loss of nearly 10 percent. “This is a stock disaster. If it’s not, what is it?” said Fu Xuejun, strategist at Huarong Securities Co.

     

    “The government must rescue the market, not with empty words, but with real silver and gold,” he said, saying a full-blown market crash would endanger the banking system, hit consumption and trigger social instability.

    Perhaps all the PBOC did was take Fu’s advice, and gently pull the curtain on what its true holdings are for no other reason than to restore confidence in its balance sheet and from there, to stabilize the market.

    Incidentally, this is precisely what we said on Friday when the PBOC stunner hit the wires. Recall what China SAFE’s official explanation was for the unexpected revelation:

    Gold as a special asset, with multiple attributes financial and commodities, together with other assets to help regulate and optimize the overall risk-return characteristics of international reserves portfolio. From the perspective of long-term and strategic perspective, if necessary, dynamically adjusted international reserves portfolio allocation, safety, liquidity and increasing the value of international reserve assets.

    And as we further noted “China had to wait until its stock market was crashing to present the “systemic stability” bazooka: gold. Because in revealing a surge in its gold holdings, the PBOC is hoping to finally provide that final missing link that will boost investor sentiment, and get people buying stocks all over again.”

    And now that the seal has been finally broken after so many years, and since today’s update indicates that Chinese gold numbers are clearly goal-seeked with a specific policy purpose – to boost confidence – we await for the PBOC to start leaking incremental gold holding data every month (and especially in months when the market crashes) which will bring us ever closer to what China’s true gold holdings are.

    So perhaps it is a simple case of revealing the PBOC owns more gold than expected simply to preserve some more confidence after engaging in an unprecedented series of “plunge protecting” events few of which have had much success (at least until threats of outright arrests of sellers emerged).

    Then another potential explanation was offered by Telegraph’s Ambrose Evans-Pritchard who late today quoted Sharps Pixley’s analyst Ross Norman as saying that “the level of gold reserves announced by China massively understates the country’s true holdings. “We think they have at least twice as much, maybe even 4,000 tonnes,” he said. “Sharps Pixley said a “seismic change” is under way in the bullion markets as economic power shifts to the East, boosting gold prices over time.”

    A division of the People’s Liberation Army mines gold and transfers the metal to the Chinese finance ministry, acting outside normal commercial channels. The government also buys gold directly from Chinese producers. This is an internal transaction and is therefore not necessarily recorded in China’s external reserves.

    Then AEP goes on to quote David Marsh, from the monetary forum OMFIF, who said “China would risk unsettling the world gold market if it revealed bullion reserves of 2,000 or 3,000 tonnes. This might be interpreted as an unfriendly move against the dollar at a “delicate time.”

    And from a purely logical standpoint, it would be far more sensible for the PBOC to reveal just a fraction of its gold holdings, whether it was to stabilize its stock market or to boost its chances of SDR admission, than to expose the entire vault, especially if it wanted to buy more: it doesn’t take rocket surgery to realize that one can buy more assets for cheaper, if one is not exposed as amassing a huge position in a given asset.

    So the next question is if China does indeed have more gold than is represented, and if the PBOC is simply exposing its holdings one month at a time for whatever reason (especially since we know the PBOC did not buy 600+ tons in the month of June), then where is this gold “hidden” or, rather, where did all of China’s gold – the thousands of tons both mined domestically and imported over the past five years – go?

    One answer is presented by Louis Cammarasno in the following Smaulgld blog post:

    “The Case Of China’s Missing Gold”

    • The People’s Bank of China Updates Its Gold Reserve Holdings
    • Chinese Gold reserves jump 604 tons from 1,054 tons last reported in 2009 to 1,658 tons.
    • Many gold observers ask – ‘Is that it’?
    • Since 2009 China has mined over 2,000 tons of gold and imported over 3,300 tons of gold through Hong Kong*.
    • Where did it all go?

    The Case of China’s Missing Gold

    On July 17, 2015, the People’s Bank of China (PBOC) updated its gold reserves holdings for the first time since 2009. The PBOC reported adding 604 tons of gold to their reserves bringing the total from 1,054 tons to 1,658 tons.

    The PBOC announcement was widely anticipated as a pre-requisite of China’s application for inclusion in the International Monetary Funds’ (IMF) Special Drawing Rights (“SDRs”).

    China’s announced gold reserves are a respectible amount, but far lower than what many gold observers believe China has.

    1,658 Tons of Gold – Good Enough For the IMF?

    Having large gold reserves are not required to be in the SDR. England is in the SDR and has just over 310 tons of gold.

    We have argued that China’s primary objective is not acceptance into the SDR but rather to establish a viable parallel international financial structure to rival the IMF.

    We think China holds a portion of its gold at the PBOC as reserves with the rest held elsewhere in China.

    The PBOC’s updated gold reserves are five times more than England’s and certainly enough to show the financial heft required for admission to the SDR. The PBOC doesn’t need to report thousands of tons of gold to get into the SDR and they don’t need to upstage their largest single country trading partner, the United States at this point (whose stated gold reserves are 8,135 tons).

    China’s recent update to its gold holdings put it in fifth place among gold holding nations.

    How China Reported The Update to its Gold Reserves

    The PBOC’s addition of more than 600 tons of gold to their reserves showed up as a single entry in June 2015!

    Unlike Russia that reports increases in its gold reserves monthly (that we catalogue here), the PBOC chose to include all of the increase in its gold reserves since 2009 in just one month.

    The People’s Bank of China supposedly added 1,943,000 ounces of gold (approx 600 tons) to its reserves in June.

    How Much Gold is There in China?

    The additional amount of gold that the PBOC reported doesn’t seem to square with publically available reports on the amount of Chinese gold production and imports.

    Chinese Mining Production

    China is now the world’s largest gold mining nation and exports virtually none of it.

    China has produced over 2,000 tons of gold since 2009.

    Chinese Mining Reserves

    There’s plenty more where that came from!

    On June 25, 2015, Zhang Bignan Chairman and Secretary General of the China Gold Association presented this slide at London Bullion Market forum indicating that China’s gold mining reserves were approximately 9,800 tons.

    According to the Chairman and Secretary General of the China Gold Association, China has over 9,800 tons of gold in mining reserves.

    Chinese Gold Imports

    China has also ramped up its gold imports significaly since 2009. From 2010 to May 2015 net Chinese gold imports through Hong Kong were well over 3,300 tons.

    Chinese gold imports through Hong Kong have amounted to over 3,300 tons since 2009.

    *China also imports an undisclosed, but large amount of gold through Shanghai.

    Chinese Gold Trading on the Shanghai Gold Exchange

    In addition to massive gold production and imports, China also operates the Shanghai Gold Exchange (SGE) a major physical gold trading hub. Withdrawals of physical gold on the SGE to date in 2015 are well over 1,200 tons and over 9,000 tons since January 2009.

    Withdrawals of physical gold on the Shanghai Gold Exchange are well over 1,200 tons year to date in 2015.

    Who’s Got the Chinese Gold?

    If Chinese gold mining production and imports through Hong Kong and Shanghai don’t end up at the PBOC, where is it?

    The Chinese People

    A good portion of Chinese gold is with its citizens. The famed gold crazed “Da Ma” or Chinese housewives who buy any dip in gold prices supposedly hold a good portion of the nation’s gold. Some estimate that Chinese citizens hold thousands of tons of gold. One estimate claims Chinese citizens hold 6,000 tons of gold.

    Chinese State Owned Banks

    Perhaps another chunk of the Chinese nation’s gold is held in other state owned banks, not necessarily with the PBOC, such as the Agricultural Bank of China, Bank of China, China Construction Bank, China Development Bank and Industrial and Commerical Bank of China all located, like the PBOC, in Beijing, China.

    Chinese Sovereign Wealth Fund

    The China Investment Corporation (CIC), also located in Bejiing, is a sovereign wealth fund responsible for managing part of the People’s Republic of China’s foreign exchange reserves. The CIC has $746.7 billion in assets under management and reports to the State Council of the People’s Republic of China.

    Off Balance Sheet Accounting?

    The CIC lists $225.321 billion in finacial assets and about $3.130 billion of “other assets” on its balance sheet. It’s possible that some of these “assets” are in the form of gold.

    The CIC has three subsidiaries: CIC International (responsible for internatonal equity and bond investments), CIC Capital (direct investments) and Central Huijin (equity investments in Chinese state owned financial institutions and state owned enterprises).

    Central Huijin owns significant equity stakes in each of: Agricultural Bank of China (40.28%), Bank of China (65.52%), China Construction Bank(57.26%), China Development Bank (47.63%) and Industrial and Commerical Bank of China (35.12%).

    For a gold backed Chinese Remnimbi 1,658 tons of gold reserves are insufficient, but for admission to the SDR are perfectly adequate.

    If indeed China holds gold with the CIC and/or with any of the Chinese state owned banks, the PBOC could roll up that gold on to its own balance sheet in order to show more gold reserves quickly and easily in one month with a single entry.

  • Desperate California Farmers Turn To "Water Witches" As Drought Deepens

    You know it's bad when… With most of California experiencing "extreme to exceptional drought," and the crisis now in its fourth year, state officials recently unleashed the first cutback to farmers' water rights since 1977, ordering cities and towns to cut water use by as much as 36%. With the drought showing no sign of letting up any time soon, and the state’s agricultural industry suffering (a recent study by UC Davis projected that the drought would cost California’s economy $2.7 billion in 2015 alone), Yahoo reports farmers have begun desperately turning to "water witches" who "dowse" for water sources using rods and sticks.

    As Yahoo reports,

    With nearly 50 percent of the state in “exceptional drought” — the highest intensity on the scale — and no immediate relief in sight, Californians are increasingly turning to spiritual methods and even magic in their desperation to bring an end to the dry spell. At greatest risk is the state’s central farming valley, a region that provides fully half the nation’s fruit and vegetables. Already, hundreds of thousands of acres have been fallowed, and farmers say if they can’t find water to sustain their remaining crops, the drought could destroy their livelihoods, cause mass unemployment and damage the land in ways that could take decades to recover.

    Meet Vern Tassey…

    Vern Tassey doesn’t advertise. He’s never even had a business card. But here in California’s Central Valley, word has gotten around that he’s a man with “the gift,” and Tassey, a plainspoken, 76-year-old grandfather, has never been busier.

     

     

    Farmers call him day and night — some from as far away as the outskirts of San Francisco and even across the state line in Nevada. They ask, sometimes even beg, him to come to their land. “Name your price,” one told him. But Tassey has so far declined. What he does has never been about money, he says, and he prefers to work closer to home.

     

    And that’s where he was on a recent Wednesday morning, quietly marching along the edge of a bushy orange grove here in the heart of California’s citrus belt, where he’s lived nearly his entire life. Dressed in faded Wranglers, dusty work boots and an old cap, Tassey held in his hands a slender metal rod, which he clutched close to his chest and positioned outward like a sword as he slowly walked along the trees. Suddenly, the rod began to bounce up and down, as if it were possessed, and he quickly paused and scratched a spot in the dirt with his foot before continuing on.

     

    A few feet away stood the Wollenmans — Guy, his brother Jody and their cousin Tommy — third-generation citrus farmers whose family maintains some of the oldest orange groves in the region. Like so many Central Valley farmers, their legacy is in danger — put at risk by California’s worst drought in decades. The lack of rain and snow runoff from the nearby Sierra Nevada has caused many of their wells to go dry. To save their hundreds of acres of trees, they’ll need to find new, deeper sources of water — and that’s where Tassey comes in.

    *  *  *
    Tassey is what is known as a “water witch,” or a dowser — someone who uses little more than intuition and a rod or a stick to locate underground sources of water. It’s an ancient art that dates back at least to the 1500s — though some dowsers have argued the origins are even earlier, pointing to what they say is Biblical evidence of Moses using a rod to summon water. In California, farmers have been “witching the land” for decades — though the practitioners of this obscure ritual have never been as high profile or as in demand as during the last year.

    “It’s an energy of some sort. … Like how some people can run a Ouija board. You either have it or you don’t. You can’t learn how to get it, but if you do have it, you have to learn how to use it,” he said. “It took me years to get my confidence. … At first, you are a bit leery of telling someone they are going to have to go dig a $50,000 hole. What if nothing is there? But over time, I learned to trust.”

    Across the Central Valley, churches are admonishing their parishioners to pray for rain. Native American tribal leaders have been called in to say blessings on the land in hopes that water will come. But perhaps nothing is more unorthodox or popular than the water witches — even though the practice has been scorned by scientists and government officials who say there’s no evidence that water divining, as it is also known, actually works. They’ve dismissed the dowsers’ occasional success as the equivalent of a fortunate roll of the dice — nothing but pure, simple luck. But as the drought is expected to only get worse in coming months, it’s a gamble that many California farmers seem increasingly willing to take.

    *  *  *

    As Gaius Publius (via Down woith Tyranny blog) concludes, here's what's more likely to happen…

    The social contract will break in California and the rest of the Southwest (and don't forget Mexico, which also has water rights from the Colorado and a reason to contest them). This will occur even if the fastest, man-on-the-moon–style conversion to renewables is attempted starting tomorrow.

     

    This means, the very very rich will take the best for themselves and leave the rest of us to marinate in the consequences — to hang, in other words. (For a French-Saudi example of that, read this. Typical "the rich are always entitled" behavior.) This means war between the industries, regions, classes. The rich didn't get where they are, don't stay where they are, by surrender.

     

    Government will have to decide between the wealthy and the citizenry. How do you expect that to go?

     

    Government dithering and the increase in social conflict will delay real solutions until a wake-up moment. Then the real market will kick in — the market for agricultural land and the market for urban property. Both will start to decline in absolute value. If there's a mass awareness moment when all of a sudden people in and out of the Southwest "get it," those markets will collapse. Hedge funds will sell their interests in California agriculture as bad investments; urban populations will level, then shrink; the fountains in Las Vagas and the golf courses in Scottsdale will go brown and dry, collapsing those populations and economies as well.

     

    Ask yourself — If you were thirty with a small family, would you move to Phoenix or Los Angeles County if the "no water" writing were on the wall and the population declining? Answer: Only if you had to, because land and housing would be suddenly affordable.

    All of which means that the American Southwest has most likely passed a tipping point — over the cliff, but with a long way to the bottom to go.

  • Liquidity Is "Thin To Zero": Worried Bond Managers Shrink Trades, Dodge Cash Markets

    It would be no exaggeration to say that with the exception of Grexit and the spectacular collapse of the Chinese equity bubble, bond market liquidity is now the most talked about subject on Wall Street. The focus on illiquid markets comes years (literally) after the subject was first discussed in these pages, but over the past several months, pundits, analysts, billionaire bankers, and incorrigible corporate raiders alike have weighed in. 

    Make no mistake, the liquidity problem is pervasive (i.e. it exists across markets) and generally stems from a combination of central bank largesse, HFT proliferation, and the (possibly) unintended consequences of the post-crisis regulatory regime. 

    Thus far, illiquidity in Treasury and FX markets has been somewhat of a delicate subject as an honest assessment of the conditions that led to last October’s Treasury flash crash and that help explain similar gyrations in the currency markets invariably entails placing blame squarely with central bankers and algos run amok, and that risks upsetting both the central planning committees that are now in charge of business cycle “management” and the deeply entrenched HFT lobby. 

    As such, discussing illiquid corporate credit markets is easier if you find yourself among polite company. You see, the lack of liquidity in the secondary market for corporate bonds is a somewhat benign discussion because although it unquestionably stems from a noxious combination of regulatory incompetence and irresponsible monetary policy, myopic corporate management teams and the BTFD crowd, not to mention ETF issuers, have also played an outsized role, so there’s no need to lay the blame entirely on the masters of the universe who occupy the Eccles Building and on the “liquidity providing” HFT crowd that’s found regulatory capture to be just as easy as frontrunning. 

    But while explanations for the absence of liquidity vary from market to market, the response is becoming increasingly homogenous. Put simply: market participants are simply moving away from cash markets and into derivatives. Where market depth has disappeared, it’s become increasingly difficult to transact in size without having an outsized effect on prices. This means that for big players – fund managers, for instance – selling into ever thinner secondary markets is a dangerous proposition. And not just for the manager, but for market prices in general.

    In Treasury markets, traders have turned to futures to mitigate illiquidty… 

    …while corporate bond fund managers utilize ETFs and other portfolio products to avoid trading the underlying assets…

    With the stage thus set, Bloomberg has more on the move to smaller trades and cash market substitutes:

    Sometimes less is more. At least according to investment managers trying to navigate Europe’s credit markets.

     

    TwentyFour Asset Management capped a bond fund to new investors at 750 million pounds ($1.2 billion) and JPMorgan Asset Management, which is marketing a 128 million-pound fund, said smaller investments are more flexible in a sell-off. Other managers are also limiting the size of their trades and using derivatives to avoid getting trapped in positions.

     

    It’s become more difficult to buy and sell securities as Greece’s financial crisis curbs risk taking and dealers scale back trading activity to meet regulations introduced since the financial crisis. The Bank for International Settlements warned of a “liquidity illusion” in June because bond holdings are becoming concentrated in the hands of fund managers as banks pull back.

     

    “Liquidity is generally poor in corporate bond markets and in the U.K. market it’s thin to zero,” said Mike Parsons, head of U.K. fund sales at JPMorgan Asset Management in London. “You don’t want to be in a gigantic fund where there’s potential for a lot of investors rushing for the exit at the same time. Smaller funds are more nimble.”

     

    “Without enough strong liquidity, it’s hard to execute bond trades in sufficient size or price to move portfolio risk around quickly or cheaply,” he said. “The bigger the position, the harder it is to find enough liquidity to sell it or buy it.”

     

    Liquidity in credit markets has dropped about 90 percent since 2006, according to Royal Bank of Scotland Group Plc. That’s because dealers are using less of their own money to trade as new regulation makes it less profitable.

     

    Euro-denominated corporate bonds got an average of 5.3 dealer quotes per trade last week, up from 4.5 recorded in January and compared with a peak of 8.8 in 2009, according to Morgan Stanley data. That’s based on dealer prices compiled by Markit Group Ltd. for bonds in its iBoxx indexes.

     

    Liquidity is especially bad in the U.K. corporate bond market, which is being abandoned by companies looking to take advantage of lower borrowing costs in euros and investors seeking securities that are easier to buy and sell.

     

    NN Investment Partners said it seeks to manage difficult trading conditions by diversifying positions and capping trade size. The Netherlands-based asset manager avoids owning large concentrations of a single bond and uses derivatives such as credit-default swaps or futures that are easier to buy and sell, said Hans van Zwol, a portfolio manager.

     

    “We really want to stay away from positions we can’t get out of,” he said.

    The conundrum here is that the more reluctant market participants are to venture into increasingly illiquid cash markets, the more illiquid those markets become.

    At the end of the day, one is reminded of what Howard Marks’ recently said about ETFs: 

    “[They] can’t be more liquid than the underlying and we know the underlying can be quite illiquid.”

     

  • Why America's First National Supermarket Chain Just Filed For Bankruptcy, Again

    Back in December 2010, we were “stunned” when we learned that in a what was a clear case of a supermarket chain unable to pass through costs to consumers, the Great Atlantic & Pacific Company (“Great Atlantic”, “A&P” or the “Debtors”), which in 1936 became the first national supermarket chain in the US, would file for bankruptcy adding that “it is ironic that instead of passing through costs supermarkets are instead opting out to default”. Although perhaps even back then it was clear to A&P that the capacity of US consumer to shoulder higher prices is far worse than what the mainstream media would lead everyone to believe.

    Fast forward to last night, when less than five years after its first Chapter 11 filing (and three years after emerging from a bankruptcy in March 2012 as a privately-held company part owned by Ron Burkle’s Yucaipa with a clean balance sheet including $490 million in new debt and equity financing), overnight Great Atlantic, which controls such supermarket brand names as A&P, Waldbaum’s, SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars, and A&P Liquors – filed for repeat bankruptcy, or as it is better known in restructuring folklore, Chapter 22.

    So what happened in the intervening 5 years that caused the company which employes 28,500 workers (93% of whom are members of one of twelve local unions and who are employed by A&P under some 35 separate collective bargaining agreements) to deteriorate so badly that it burned through all of its post (first) petition cash and redefault?

    In one word: unions.

     Because just like in the case of comparable Chapter 22 (and subsequently liquidation) case of Twinkies maker Hostess, so A&P is blaming the unwillingness of its biggest cost center, its employees, to negotiate their way out of what will be an event in which at least half the company’s employees will be laid off.

    Here is the full story, as narrated by Christopher W. McGarry, Great Atlantic’s Chief Restructuring Officer:

    [Great Atlantic is] one of the nation’s oldest leading supermarket and food retailers, operating approximately 300 supermarkets, beer, wine, and liquor stores, combination food and drug stores, and limited assortment food stores across six Northeastern states. The Debtors’ primary retail operations consist of supermarkets operated under a variety of wellknown trade names, or “banners,” including A&P, Waldbaum’s, SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars, and A&P Liquors. The Debtors currently employ approximately 28,500 employees, over 90% of whom are members of one of twelve local unions whose members are employed by the Debtors under the authority of 35 separate collective bargaining agreements (collectively, the “CBAs”). As of February 28, 2015, the Debtors reported total assets of approximately $1.6 billion and total liabilities of approximately $2.3 billion.

     

     

    A&P was founded in 1859. By 1878, The Great Atlantic & Pacific Tea Company (A&P)—originally referred to as The Great American Tea Company—had grown to 70 stores. A&P introduced the nation’s first “supermarket”—a 28,125 square foot store in Braddock, Pennsylvania—in 1936 and, by the 1940s, operated at nearly 16,000 locations. The Tengelmann Group of West Germany’s purchase A&P in 1979 precipitated an expansion effort that led to the acquisition of, among others, a number of Stop & Shops in New Jersey, the Kohl’s chain in Wisconsin, and Shopwell. Due to a series of operational and financial obstacles, including high labor costs and fast-changing trends within the grocery industry, by 2006 A&P had reduced its footprint to just over 400.

     

    In 2008, A&P acquired its largest competitor, Pathmark Stores, Inc., in an effort to continue expanding its brand portfolio and, in doing so, became the largest supermarket chain in the New York City area. A&P continued to experience significant liquidity pressures on account of burdensome supplier contracts, overwhelming labor costs, and other significant legacy obligations. Moreover, A&P had become highly leveraged and was unable to operate as a profitable company.

    Did we mention this is the second Great Atlantic bankruptcy in under five years? Yes, we did.

    This is the Debtors’ second bankruptcy in just five years. A&P previously filed the 2010 Cases seeking to achieve an operational and financial restructuring. The 2010 Cases were difficult and challenging. Unfortunately, despite best efforts and the infusion of more than $500 million in new capital in the 2010 Cases, A&P did not achieve nearly as much as was needed to turn around its business and sustain profitability. For example, during the 2010 Cases, A&P decided against closing approximately 50-60 underperforming stores in their supermarket portfolio in favor of preserving the jobs in those stores. Instead, A&P pursued a financial restructuring and negotiated a reduction in labor and vendor costs to attempt to return these stores to profitability. Those efforts have failed. Similarly, A&P did not seek to address its multi-employer pension and certain other significant legacy obligations. These obligations have been a drain on the Company for the entire post-emergence period. From February 2014 through February 2015, A&P lost more than $300 million.

    Which was more than half of the total exit funding Great Atlantic obtained as part of its first bankruptcy process.  And now comes the blame:

    In addition to their weak performance, the Debtors’ businesses remain plagued by other limitations that have prevented them from operating in an efficient and profitable manner. Among other things, most of the Debtors’ CBAs contain “bumping” provisions that require A&P to conduct layoffs by seniority, i.e., by terminating junior union members before more senior members. Bumping provisions also have an inter-store component: upon the closing of a store, terminated union employees are permitted to take the job of a more junior employee at another store (resulting in the most junior employee at that store losing his or her job). As a result, the closing of one store results in increased salaries—the same high salaries that may have in part precipitated the store closing—being transferred to another (possibly profitable) store. In fact, the Debtors have continued to operate certain stores that regularly operate at a loss because continuing to operate such stores at a loss is less costly to A&P than the bumping costs (combined with other “legacy” costs) that would be triggered by closing such stores.

    It’s not just the unions: A&P takes at least some blame for being unable to properly invest CapEx into growth, instead squandering its cash on unresolved cash drains: look for this excuse to be prevalents during the mass bankruptcies to follow in the next few years when hundreds of companies which are buying back stock now will lament loudly they did not invest in their own future instead.

    The Debtors’ deteriorating financial condition has also been compounded by the fact that, since emerging from the 2010 Cases, their unsustainable cost structure has prevented them from investing sufficiently in their businesses at a pivotal time in the competitive grocery industry, when their peers were investing heavily in new stores and existing store remodels, robust pricing initiatives, and were introducing technological advances and other initiatives to customize and improve the consumer experience. For example, under its plan of reorganization in the 2010 Cases, A&P was projected to invest over $500 million in capital improvements during the ensuing 5-year period. Since emergence, due to insufficient capital and declining operations, among other things, the Debtors have been able to deploy capex at scarcely more than half that rate. As a result, many of the Debtors’ stores have remained outdated and/or underinvested, making it difficult to attract and retain new customers during a crucial time of rebranding and rebuilding

    And then, once the market realized A&P was in dire straits, it didn’t take long for the “JCPenney effect” to materialize and for suppliers to tighten vendor terms, draining the company of even more cash:

    In addition to the historical pressures on their liquidity, as news of the Debtors’ continued financial challenges recently began to permeate throughout the market, a number of the Debtors’ suppliers and vendors began contacting management and demanding changes in payment and credit terms. Certain of the Debtors’ vendors have negotiated reduction in trade terms while others have demanded that the Debtors pay cash in advance as a condition for further deliveries. Although the Debtors have been working diligently with their advisors to resolve open vendor issues and avoid supply chain interruption, the actions taken by these vendors have further diminished the Debtors’ cash position by approximately $24 million in the weeks prior to the Commencement Date. Furthermore, on July 14, 2015, C&S Wholesale Grocers, Inc. (“C&S”) – the Debtors’ primary supplier of approximately 65% of all goods – issued a notice of default for non-payment of the $17 million deferred paymen.

    The end result of this escalation of bad management decision and intransigent labor unions: “cash burn rates averaging $14.5 million during the first four periods of Fiscal Year 2015”  which gave the company no choice but “to commence these Chapter 11 Cases as the only viable alternative to avoid a fire sale liquidation of the company.”

    But why not try to do what the company tried in 2010 with its first bankruptcy, and get it right this time? Here is what happened the last time A&P bet on a post-bankruptcy existence:

    Upon emergence from the 2010 Cases, the Debtors had $93.3 million of cash on their balance sheet and were prepared to invest in the growth of their business. In an effort to distance their businesses from the specter of bankruptcy, the Debtors designed and implemented an integrated marketing campaign intended to show customers that they had successfully emerged from bankruptcy and were prepared to move forward by offering highquality, localized products and enhanced services. The campaign entailed temporary price reductions and promotional advertising of the same through print, television, and radio. The Debtors’ investments did not, however, achieve the desired returns. Although the Debtors’ strategy drew more customers to their stores, such efforts were at the expense of margin income and the Debtors were not building productive, long-lasting relationships with their customers.

     

    The Debtors’ thwarted attempts to attract and retain a new customer base compounded with their lingering legacy obligations drove down sales throughout many of their stores and negatively impacted their bottom line. During the first six months of fiscal year 2012, the Debtors were losing approximately $28 million per month. In an effort to turnaround their businesses, the Debtors’ management team launched a business strategy intended to restore stability and offset increasing post-restructuring liquidity pressures by scaling back the temporary price reductions they had implemented in certain of their stores because such reductions were showing diminishing marginal returns, setting up better controls over cash management, and monetizing a number of their real estate assets. Over a period of six to ten months, the Debtors generated over $200 million in asset sales, including sale leasebacks, while only relinquishing a handful of stores. The proceeds from these sales were used largely to pay down debt, while also giving the businesses with a slim liquidity buffer.

     

    The Debtors’ business strategy showed signs of success and, by the end of fiscal year 2013, the Debtors had $192 million in cash, EBITDA was in the range of $121 million, and four-wall EBITDA was approximately $228 million. Still, due to the increasing competitive nature of the industry, during the same year, sales were down by 7.6% when compared to the prior year.

    And this was during a period when the US economy was allegedly growing like gangbusters. Still, Yucaipa did not enjoy the prospect of losing its entire investment and pushed the company to sell itself. That did not work out:

    After stabilizing their businesses during fiscal year 2013, the Debtors’ private equity owners began to evaluate potential strategic alternatives and, in Spring 2013, the Debtors retained Credit Suisse AG (“Credit Suisse”) to review such alternatives, including a possible going concern sale of the company. Credit Suisse initiated contact with a number of potential buyers and financial sponsors and marketed an equity-based sale of the company. Although the Credit Suisse marketing process garnered meaningful interest in the Debtors’ assets, the Debtors did not receive a viable offer for the stock of the company. The Debtors and their advisors ultimately determined that selling assets in smaller or one-off sales was not the best way to maximize recoveries and protect the interest of stakeholders, including their thousands of employees. Accordingly, plans to sell the Debtors’ businesses were placed in a state of suspension.

    Right, they were concerned about the thousands of employees, sure.

    In any event, then came the endgame, right at a time when the US recovery had never been stronger if one listens to the propaganda media:

    The Debtors continued to suffer declining revenues. The Debtors showed a net loss of $305 million in Fiscal Year 2014, compared with a net loss of $68 million in Fiscal Year 2013. The Debtors generated a negative EBIT of -1.9% of sales or $105 million in Fiscal Year 2014, compared to a positive EBIT of 1.1% of sales, or $62 million, in Fiscal Year 2013. In 2014, the Debtors experienced a sales decline of approximately 6% when compared with 2013, and the trend continued into 2015.

     

    The Debtors determined that they may continue to lose up to $10 to 12 million in cash per period during 2015. Additionally, the recent tightening of vendor terms has adversely affected working capital by approximately $24 million. Those situations  would make them unable to maintain sufficient liquidity to meet the minimum cash requirements during 2015. Based on preliminary projections, the Debtors expected EBITDA of approximately $40 to $50 million in the 52 weeks ending February 29, 2016 (“Fiscal Year 2015”). With maintenance capital expenditures (approximately $35 million), higher cash contributions for workers’ compensation payments than expense (approximately $17 million), pension contributions greater than the actuarially-calculated book expenses (approximately $17 million), the tightening of accounts payables terms (approximately $24 million) and an eroding sales base, the company projected it would be unable to satisfy the $38 million in interest and principal due during Fiscal Year 2015.

    So here is the CRO’s summary of the two key factors that precipitated Great Atlantic’s second, and final, bankruptcy. Chief among them: labor unions:

    • Inflexible Collective Bargaining Agreements [aka Unions]. In addition to mandating direct labor costs, the CBAs contain a variety of different work rules that have functioned to hamstring the Debtors’ operations. For example, as stated above, most of the CBAs contain “bumping” provisions that require the Debtors to hire employees from a closed store  location at a different nearby store and replace less senior employees at such store. Because any healthy store in close proximity to a store that is closing must take on the increased costs of retaining more senior level employees, “bumping” costs make it difficult and, in some cases, financially impractical, to close unprofitable stores notwithstanding that such stores continue to strain the Debtors’ balance sheet. For instance, one of the Debtors’ stores in Hackensack, New Jersey loses approximately $4 million per year but, under the applicable CBA, closing that store would require the Debtors to “bump” certain senior employees to a number of nearby stores— increasing labor costs by around $1.5 million per year. Preliminary analysis conducted by the Debtors’ advisors indicates that closing Initial Closing Stores alone could generate bumping costs as high as almost $14.8 million—making it more efficient to keep these stores open, absent relief from such provisions pursuant to the MA& Strategy.
    • Crippling Legacy Costs. Historically, the Debtors’ legacy costs have not been aligned with the operating reality of their  businesses. The Debtor’ labor-related costs make up 17.75% of sales while the total merchandising income before any warehousing/transportation and operating expenses is 35.48% of sales.

    And then there was the usual red herring excuse:

    • Competitive Industry. The Debtors also continue to face competitive pressure within the supermarket industry. For the reasons set forth herein, upon emerging from the 2010 Cases, the Debtors had a diminished capacity to invest in long-term  capital projects. Thus, as the Debtors’ competitors realized new technology platforms, remodeled and enhanced their stores, and implemented localization strategies geared toward tailoring each store to specific neighborhood needs, the Debtors have not been able to invest in creating an operational distinction between their various “banners” and tailor stores to customer needs.

    Which brings us to what happens next to Great Atlantic, which instead of simply throwing more good money after bad and hoping for a different outcome this time, is filing bankruptcy to break all existing labor union collective bargaining agreements (CBAs). Briefly, the company had conducted a pre-petition asset sale process and found that the best it can do is find buyers for just 120 stores, which employ 12,500 employees, for an aggregate purchase price of almost $600 million as part of a Stalking Horse process.

    In other words, one failed acquisition and one failed bankruptcy later, A&P is about to go from 300 supermarkets to at most 120, and over 15,000 workers or well over half of the work force is about to be laid off.

    The irony is that if it wasn’t for unions, it would be something else, like loading up on massive amounts of debt to repay Yucaipa’s equity investment, which would then be unsustainable once rates rose and once interest expense became so high it soaked up all the company’s cash flow (a harbinger of what is coming for the rest of US corporations who have rushed to issued trillions in debt just to pay their shareholders).

    And, sure enough, the Union wasted no time in responding: The United Food and Commercial Workers Union, which represents A&P’s 30,000 employees, called on the company and any potential buyers to “do what is right” for the membership.

    “As difficult as this bankruptcy process is, our message to A&P is a simple one. For the sake of the men and women of A&P, now is the time for A&P and any potential buyers to focus on doing what is right for our hard-working members and their families,” the union said.

     

    “Our hard-working members are not just employees — they are the heart and soul of these stores. They are committed to their success and determined to make them even stronger. We look forward to working with any company that will do what is right by our members and their families.”

     

    Addressing the members themselves, the union said, “We understand the uncertainty and concern that this bankruptcy announcement brings. We want our members and their families to know we are here to help in every way we can.”

     

    The UFCW also said it expects A&P “to stay in business during this bankruptcy process and honor its responsibilities to its employees … The UFCW and UFCW local unions will work hard to ensure that the process for selling stores protects our members’ jobs, working conditions and benefits.

     

    “We will also hold A&P to its commitments to involve UFCW in the sales process [and] protect union contracts and these good jobs.”

    Good luck.

    In conclusion, one can’t help but wonder if current events that are taking place behind the non-GAAP facade of America’s public companies, what is going on at A&P is far more indicative of the true state of the economy, an economy where due to both legacy constraints, bad management and, naturally, a deteriorating economy for all but the top 1%, the best that companies can do is support at most half their employees… after filing for bankruptcy of course.

    Full A&P affidavit below

  • 95% Of The Real Estate Market In Greece Is "All Cash"

    When PM Alexis Tsipras announced that he was set to put Greece’s creditors’ proposals to a popular vote, lines quickly formed at ATMs despite the fact that the referendum call came after midnight local time. And while the long queues served as a poignant reminder of just how worried the Greek people truly were about the future, the more shocking images surfaced around 24 hours later when the shelves at Greek grocery stores began to resemble those of another socialist paradise: Venezuela. 

    The empty supermarket shelves and long waits at gas stations presaged the acute credit crunch that accompanied the imposition of capital controls. Ultimately, the Greek economy was crippled as vendors, unable to obtain credit from suppliers, faced the possibility that they would have to close the doors if they couldn’t manage to keep the shelves stocked. In short, an economy already in free fall slipped into a terminal decline. 

    There’s quite a bit of disagreement about whether or not more austerity will succeed in returning Greece to growth – some say the situation can only get worse under the terms of the proposed third bailout agreement while creditors insist that the mandated “reforms” are meant to put Greece back on track. Whatever the case, the country remains, for now, stuck in what can only be described as a depression which is why we weren’t entirely surprised to hear that half of Athens’ real estate agents have been forced to close their doors as the property market in Greece is now almost completely dependent upon buyers who can afford to pay cash. Here’s Bloomberg with “a day in the life of a Greek realtor.”

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  • Trump Lead Surges In Polls, Again

    Since last week's FOX News poll, Donald Trump has extended his gains dramatically in the race to be GOP Presidential nominee. According to ABC-Washington Post latest poll, 24% of Republicans prefer Trump (up from 18% last week) with Scott Walker nudging ahead of Jeb Bush. Notably the poll was taken from Thursday to Sunday and so does include some reaction from Trump's McCain comments…

     

     

    As Jim Kunstler concluded earlier,

    I’ve proposed for many years that we are all set up to welcome a red-white-and-blue, corn-pone Nazi political savior type. I don’t think Donald Trump is it. But he will be a stalking horse for a far more skillful demagogue when the time comes. There’s a fair chance that the wheels will come off the banking and monetary system well before the 2016 election. Who knows who or what will come out of the woodwork before then.

    *  *  * 

    *  *  *

    Here's Martin Armstrong on the matter…

    Tump-Donald

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

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

    *  *  *

  • Oil and Coal Indicate the Global Economy is in a Free Fall

    In the US, Coal has become a political hot button. Consequently it is very easy to forget just how important the commodity is to global energy demand. Coal accounts for 40% of global electrical generation. It might be the single most economically sensitive commodity on the planet.

     

    With that in mind, consider that Coal ENDED a multi-decade bull market back in 2012. In fact, not only did the bull market end… but Coal has erased ALL of the bull market’s gains (the green line represents the pre-bull market low). For all intensive purposes, the last 13 years were a wash.

     

     

    Those who believe that the global is in an economic expansion will shrug this off as the result if the US’s shift away from Coal as an energy source. The US accounts for only 15% of global Coal demand. The collapse in Coal prices goes well beyond US changes in energy policy.

    What’s happening in Coal is nothing short of “price discovery” as the commodity moves to align itself with economic reality. In short, the era of “growth” pronounced by Governments and Central Banks around the world ended. The “growth” or “recovery” that followed was nothing but illusion created by fraudulent economic data points.

     

    We get confirmation of this from Oil.

     

    For most of the “so called” recovery, Oil gradually moved higher, creating the illusion that the world was returning to economic growth (demand was rising, hence higher prices).

     

     

    That blue line could very well represent the “false floor” for the recovery I mentioned earlier. Provided Oil remained above this trendline, the illusion of growth via higher energy demand was firmly in place.

     

    And then Oil fell nearly 60% from top to bottom in less than six months.

     

     

    As was the case for Coal, Oil’s drop was nothing short of a bubble bursting. From 2009 until 2014 Oil’s price was disconnected from economic realities. Then price discovery hit resulting in a massive collapse.

     

    Moreover, the damage to Oil was extreme. Not only did it collapse 60% in a matter of months. It actually TOOK out the trendline going back to the beginning of the bull market in 1999.

     

    This is a classic “ending” pattern. Breaking a critical trendline (particularly one that has been in place for several decades) is one thing. Breaking it and then failing to reclaim it during the following bounce is far more damning.

     

    We’ve just took out this line AGAIN a week or so ago. Oil will be dropping down to $30 per barrel if not lower.

     

    In short, the era the phony recovery narrative has come unhinged.  We have no entered a cycle of actual price discovery in which financial assets fall to more accurate values. This will eventually result in a stock market crash, very likely within the next 12 months.

     

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

     

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

     

    We are currently down to the last 25.

     

    To pick up yours, swing by….

     

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

     

    Best Regards

     

  • Martin Armstrong: "Little By Little These People Are Destroying Everything That Made Society Function"

    Submitted by Martin Armstrong via ArmstrongEconomics.com,

     

    Germany Replacing Bank Cards Eliminating Cash Withdrawals

     

    MAESTRO

    The game is afoot to eliminate CASH. We have been informed with reliable sources that in Germany where Maestro was a multi-national debit card service owned by MasterCard that was founded in 1992 is seriously under attack. Maestro cards are obtained from associate banks and can be linked to the card holder’s current account, or they can be prepaid cards.

    Already we find such cards are being cancelled and new debit cards are being issued. Why? The new cards cannot be used at an ATM outside of Germany to obtain cash. Any attempt to get cash can only be as an advance on a credit card.

    G20-Photo

    Little by little, these people are destroying everything that held the world economy together.

    Their hunt for spare change for tax purposes is undermining every aspect of civilization. This will NEVER END NICELY for they can only think about their immediate needs with no comprehension of the future they are creating.

    Indeed – somebody better pray for us, for those in charge truly do not know what they are doing.

    ctrl_alt_del

    We serious need to hit the Cntrl-Alt-Delete button on government.

    This is total insanity and we are losing absolutely everything that made society function.

    Once they eliminate CASH, they will have total control over who can buy or sell anything.

     

  • California Regulators Slap Farmers With Record $1.5 Million "Water-Taking" Fine

    In what seems a lot like a strawman for just how much they can pressure the population, AP reports California water regulators proposed a first-of-its-kind, $1.5 million fine for a group of Central Valley farmers accused of illegally taking water during the drought. This would be the first such fine for holders of California's oldest (most senior) claims to water, and follows suits from the farmers to the government arguing their 'law changes' are illegal.

     

    As AP reports, the State Water Resources Control Board said the Byron-Bethany Irrigation District in Tracy illegally took water from a pumping plant even after it was warned there wasn't enough water legally available.

    The move by the board was the first against an individual or district with claims to water that are more than a century-old, known as senior water rights holders.

     

    The action reflects the rising severity of California's four-year drought that has prompted the state to demand cutbacks from those historically sheltered from mandatory conservation.

     

    The Byron-Bethany district serves farmers in three counties in the agriculture-rich Central Valley and a residential community of 12,000 people relying on water rights dating to 1914.

     

    District general manager Rick Gilmore said he did not know a penalty was coming and wasn't aware of the details.

     

    "Perhaps the state water resources control board is not taking into account we purchased supplemental supplies," he said.

    The district has sued the state over the board's June warning to immediately stop taking water because the watershed was running too dry to meet demand.

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

     

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

     

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

     

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

     

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

     

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

    The board has sent out more than 9,000 notices across parched California warning there wasn't enough water entitled under rights.

    The water board issued a cease-and-desist order last week against the West Side Irrigation District, also in Tracy, to immediately stop taking water. That district also had filed a lawsuit challenging the board's cuts, but the state denies it's retaliating against the agency.

     

    Courts have not yet settled the question of whether the board has authority to demand cutbacks from farmers, cities and individuals with California's oldest claims to water.

    *  *  *

    Of course we suspectthe proposed fine will be reduced but it is likley testing the waters with just how much a fine is required to scare the people into not exercising their senior rights to water. But as Gaius Publius (via Down woith Tyranny blog) concludes, here's what's likely to happen next…

    The social contract will break in California and the rest of the Southwest (and don't forget Mexico, which also has water rights from the Colorado and a reason to contest them). This will occur even if the fastest, man-on-the-moon–style conversion to renewables is attempted starting tomorrow.

     

    This means, the very very rich will take the best for themselves and leave the rest of us to marinate in the consequences — to hang, in other words. (For a French-Saudi example of that, read this. Typical "the rich are always entitled" behavior.) This means war between the industries, regions, classes. The rich didn't get where they are, don't stay where they are, by surrender.

     

    Government will have to decide between the wealthy and the citizenry. How do you expect that to go?

    *  *  *

    We suspect the tipping point in this situation is looming soon as tensions between the government's tyrannical law changes (albeit due to historic weather conditions) become unbearable for the citizenry.

  • What Happened The Last Time The Mainstream Media Unleashed The Anti-Gold Artillery

    With the mainstream media onslaught against precious metals climaxing this weekend as WSJ's Jason Zweig proclaimed gold "like a pet rock," describing owning gold as "an act of faith," we thought it worthwhile looking back at the last time 'everyone' was slamming gold and entirely enthused by the omnipotence of central bankers… May 4th, 1999 – "Who Needs Gold When We Have Greenspan?"

    Over 16 years ago, The New York Times' Floyd Norris unleashed the last big gold slamming piece topping a period of precious metal bashing…

    Who Needs Gold When We Have Greenspan?

     

    Is gold on its way to becoming just another commodity? The people who run the world's financial system are doing their best to secure that fate for the metal that once was viewed as the only ''real'' money.

     

    The process of removing the glitter from gold has been a gradual but inexorable one, and is one of the most telling counters to the argument that national governments are less important in this era of globalization. Much of the world is now quite happy to accept the idea that a greenback backed by Alan Greenspan is just as good as one backed by gold.

     

    Certainly gold's reputation as a store of value has eroded. At the peak of the gold frenzy in 1980, an ounce of gold cost $873, precisely that day's level of the Dow Jones industrial average. Now the Dow is at 11,014.69, about 38 times higher than the $287.60 price of gold.

     

    Actually, that measurement understates the amount by which stocks have outperformed gold. If you had owned stocks all those years, you would have received substantial dividends. If you owned a lot of gold, you got no dividends but did have to pay storage fees for the stuff.

     

    That is, in fact, how the central bankers of the world look at gold these days. Michel Camdessus, the managing director of the International Monetary Fund, said last week he expected the fund to sell gold for the first time in two decades. The Clinton Administration is pushing for such sales by the I.M.F. to help finance a laudable program to forgive debts owed by very poor countries.

     

    The money received from the gold sales is to be invested in Government securities that will provide income, and that income will pay off the loans. The implicit assumption is that gold, which does not pay interest, is a lousy investment.

     

    A couple of weeks ago, the Swiss electorate voted to begin untying the Swiss franc from its gold backing. The Swiss central bank could begin selling gold as early as next year. Once again, the argument was that selling gold was a way to find easy money for good deeds. To those who still view gold as the only real money, having the Swiss defect is a bit like discovering that Rome is embracing Protestantism. It is the last place that should happen.

     

    But it is happening, and it seems likely that more central banks — like the Australian and Dutch banks — will join those that have already begun selling gold.

     

    The argument against retaining gold is that its day is past. Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.

     

    Once gold served as protection for investors against governments that debased their currencies. Now there is plenty of debasing going on — the Brazilian real is down 27 percent this year — but the lesson people have drawn is to believe in the dollar. There is growing support for the idea that all of Latin America should adopt the dollar as a currency.

     

    Dollarization, as that idea is called, amounts to a sort of a gold standard without gold. There would be a universal money whose value was based not on gold in the vaults, but on the wisdom of Mr. Greenspan and his successors at the Federal Reserve. Few fear that one of those successors might resemble G. William Miller, the Fed chairman in the late 1970's who seemed to have no idea how to slow inflation.

     

    If the demonetization of gold continues, the price is likely to keep falling as central-bank sales more than offset any increase in demand from jewelers or industrial users. That could change if it turns out that central bankers are not the geniuses they are now deemed to be. But for now, the world believes in Mr. Greenspan and sees little need for gold.

    What happened next? A 650% run over the next 12 years:

     

    Not to mention a complete about-face by the very same Alan Greenspan:

    Remember what we're looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.

     

    …

     

    And the question is, why do central banks put money into an asset which has no rate of return, but cost of storage and insurance and everything else like that, why are they doing that? If you look at the data with a very few exceptions, all of the developed countries have gold reserves. Why?

    As we concluded previously,

    So here's a thought Jason: instead of quoting a Barclays analyst why "a lot of investors have become disillusioned with gold" and why "safe-haven demand hasn’t been strong enough to lift prices, but has only been strong enough to keep them from falling", maybe you can try to figure out why that is the case.

     

    Start by making a few phone calls to Citi or JPM and find out why their commodity/precious metal derivatives exploded as they did – as can be factually seen in the OCC's Q1 report – at a time when gold has not only not risen following a surge in global risk, but has tumbled to its lowest value since 2010.

     

    Because that's what actual "reporters" do – they report, something the WSJ may have forgotten.

    It appears the mainstream media's total indoctrination of a narrative handed down by the central bank… in the face of central bank hording of gold – once again shows the desperation of the status quo to keep the dream alive (and suppress any signs of fragility) as The Fed moves to tighten.

    Paraphrasing The New York Times from the 1999 lows in gold,

    If the demonization of gold continues, the price is likely to keep falling as central-bank buys are nmore than offset byu paper manipulation. That could change if it turns out that central bankers are not the geniuses they are now deemed to be. But for now, the world believes in [Mrs. Yellen] and sees little need for gold.

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Jul 20

Today’s News July 20, 2015

  • Governments Worldwide Will Crash the First Week of October … According to 2 Financial Forecasters

    Two well-known financial forecasters claim that virtually all governments worldwide will be hit with a gigantic economic crisis in the first week of October 2015.

    Armstrong Painting
    Martin Armstrong (Click for Larger Image)

     

    Martin Armstrong is a controversial market analyst who correctly predicted the 1987 crash, the top of the Japanese market, and many other market events … more or less to the day.   Many market timers think that Armstrong is one of the very best.

    (On the other hand, he was jailed for 11 years on allegations of contempt, fraud and an alleged Ponzi scheme. Armstrong’s supporters say the government jailed him on trumped-up charges as a way to try to pressure him into handing over his forecasting program).

    Armstrong has predicted for years that governments worldwide would melt down in a crisis of insolvency and lack of trust starting this October. Specifically, Armstrong predicts that a major cycle will turn on October 1, 2015, shifting investors’ trust from the public sector and governments to the private sector.

    Unlike other bears who predict that the stock market is about to collapse, Armstrong predicts that huge sums of capital will flow from bonds and the Euro into American stocks.  So he predicts a huge bull market in U.S. stocks.

    Edelson Paint Painting
     Larry Edelson (Click for Larger Image)

     

    Edelson is another long-time student of cycle theory.  (Edelson – a big fan Armstrong – has also studied decades of data from the Foundation for the Study of Cycles.)

    Edelson is predicting the biggest financial crisis in world history – including a collapse of government solvency – will start on October 7, 2015 – the same week as Armstrong’s prediction – when the European Union breaks up.

    Are Armstrong and Edelson right or wrong?

    We don’t have long to wait to test their very public predictions …

  • Chinese Stocks Nosedive After Stabilization Fund Exit Comments

    Just when officials proclaimed Chinese stocks “the safest in the world,” and added that “the stock market rout has been ended by timely measures,” CSRC announces that they are studying an exit plan for the stock stabilization plan… and carnage ensues…

     

     

    Even ChiNext has give up its gains…

     

    We await the “just kiding” denial very soon.

    Chart: Bloomberg

  • Concentrated Wealth + Widespread Stupidity = End Of Democracy

    Authored by Eric Zuesse,

    Today’s America is not a democracy:

    That terrific investigative news report by Paul Blumenthal at Huffington Post, on 9 November 2013, penetrated beyond what the U.S. oligarchy — or more traditionally called aristocracy — requires its dark-money groups to disclose to the Federal Election Commission; and so Blumenthal researched also into what dark-money groups are required to report to the IRS (America’s tax-authorities). 

    This way, Blumenthal was able to discover, for example, that a "dark-money shell game allowed the Wisconsin Club for Growth to influence the elections with both its own ads and those of seemingly unrelated conservative groups with different public agendas. … The trail of cash moving from dark money nonprofit to dark money nonprofit can be traced, in part, through public records of the groups contributing it,” but only by accessing both FEC and IRS public records. And, even then, the picture was incomplete, because the 5-Republican bare majority, on the infamous pro-aristocracy 2010 U.S. Supreme Court Citizens United decision, by five traitors to the U.S. Constitution (which all judges are sworn to protect), prohibits public access to a complete picture of how (like in that Wisconsin election) a few psychopathic billionaires, plus millions of faith-driven fools they sucker with myth-affirming lies, can destroy government of the people, by the people, for the people, and turn it instead into government of the people, by the aristocracy, for the aristocracy. Blumenthal also showed the same billionaires+suckers system replacing democracy in other states. (Today’s Greece is a more extreme case of the same thing. Perhaps what’s today in Greece will betomorrow in America.)

    On 27 August 2012, the Republican commentator, Mike Lofgren, headlined in The American Conservative, “The Revolt of the Rich,” and he dumped upon his fellow conservatives for being now traitors to democracy in America. Anyone who thinks that America is still a democracy, and that the U.S. hasn’t descended into being ruled by the money of billionaire psychopaths in both Parties, needs to see that testimony by this passionate (lower-case “d”) democrat, who "served 16 years on the Republican staff of the House and Senate Budget Committees.” That same month, his stellar book was published: The Party Is Over: How Republicans Went Crazy, Democrats Became Useless, and the Middle Class Got Shafted. As one Amazon reader-review of that work accurately describes it: "Throughout the book he tells of some of his interactions with unnamed elected officials, but primarily he focuses on specific people in government … — Republicans like Bush, Cheney, Abramoff, Gingrich, Bachmann, the Koch Brothers; and Democrats like Obama, Rubin and Geithner. (Hint — you don't want to be mentioned in this book.)” Lofgren is refreshingly, sometimes shockingly, honest.

    Lofgren had first gone public earlier, on 3 September 2010, about his abandonment of the Republican Party. He headlined then at truthout, "Goodbye to All That: Reflections of a GOP Operative Who Left the Cult.” This is how he explained why he had left the Party:

    I left because I was appalled at the headlong rush of Republicans … to embrace policies that are deeply damaging to this country's future; and contemptuous of the feckless, craven incompetence of Democrats in their half-hearted attempts to stop them. And, in truth, I left as an act of rational self-interest. Having gutted private-sector pensions and health benefits as a result of their embrace of outsourcing, union busting and "shareholder value," the GOP now thinks it is only fair that public-sector workers give up their pensions and benefits, too. Hence the intensification of the GOP's decades-long campaign of scorn against government workers. Under the circumstances, it is simply safer to be a current retiree rather than a prospective one.

     

    If you think Paul Ryan and his Ayn Rand-worshipping colleagues aren't after your Social Security and Medicare, I am here to disabuse you of your naiveté.[5] They will move heaven and earth to force through tax cuts that will so starve the government of revenue that they will be "forced" to make "hard choices" – and that doesn't mean repealing those very same tax cuts, it means cutting the benefits for which you worked. …

     

    They prefer to rail against those government programs that actually help people. And when a program is too popular to attack directly, like Medicare or Social Security, they prefer to undermine it by feigning an agonized concern about the deficit. That concern, as we shall see, is largely fictitious. Undermining Americans' belief in their own institutions of self-government remains a prime GOP electoral strategy. …

     

    As for what they really believe, the Republican Party of 2011 believes in three principal tenets I have laid out below. The rest of their platform one may safely dismiss as window dressing:

     

    1. The GOP cares solely and exclusively about its rich contributors. The party has built a whole catechism on the protection and further enrichment of America's plutocracy. Their caterwauling about deficit and debt is so much eyewash to con the public. …

     

    2. They worship at the altar of Mars. While the me-too Democrats have set a horrible example of keeping up with the Joneses with respect to waging wars, they can never match GOP stalwarts such as John McCain or Lindsey Graham in their sheer, libidinous enthusiasm for invading other countries. …

     

    3. Give me that old time religion. Pandering to fundamentalism is a full-time vocation in the GOP. Beginning in the 1970s, religious cranks ceased simply to be a minor public nuisance in this country, and grew into the major element of the Republican rank and file.

    He lambastes today’s Democratic Party for its constant me-tooism. Just consider that the most Republican, pro-aristocratic, international-trade bills ever, are the three, TPP, TTIP, and TISA, that the ‘Democrat,’ Barack Obama, is ramming through into U.S. law, with almost solid Republican support in both the House and the Senate, and with only a minority but just enough Democrats to get them over the line. They will be the worst legislative acts in world history, and they are profoundly anti-democratic and pro-aristocratic (and are being rammed through under an unConstitutional Republican-pushed and aristocratic Democrat-passed 1974 law. But there is no new American Revolution, to throw out those traitors, to end the American Counter-Revolution that started with Richard Nixon (his Trade Act of 1974) and that’s being culminated by the Clintons and now Obama. None of this would happen if millions of Americans weren’t very stupid, very full of faith, not science — they’re accepting a Government that will actually produce hell for their own children, and for all future generations. All of this being done to enrich billionaires today. And, to lock in rule by billionaires in the future. Forget equal opportunity — that’s not what an aristocracy wants; that’s what it blocks.

    Not only billionaires are behind this, however. They couldn’t do it if there weren’t many millions of suckers who vote for their corrupt candidates, in both Parties — candidates on the take, such as Bill Clinton, Hillary Clinton, Barack Obama, and all Republican politicians — candidates who speak truth only in private to their sponsors, like Obama did on 27 March 2009 when he told Wall Streeters cloistered in the White House, “I’m not out there to go after you. I’m protecting you. … I’m going to shield you from public and congressional anger. … My administration is the only thing between you and the pitchforks.” He said this to the top financial executives who had overseen frauds that had collapsed America’s and many of the world’s economies. And he fulfilled on that promise to America’s all-time-biggest crooks. But the overt Republican, McCain, was just as much in the aristocracy’s pocket as Obama was. This is what it means to live in an aristocracy, no democracy at all: it’s a type of dictatorship, a dictatorship not only by the richest, but by deception. In that Presidential contest (2008), there was no anti-aristocracy candidate in the general election, and almost all intelligent people voted for Obama because of his lies to the public; they couldn’t be blamed for believing his lies, because (unlike Hillary Clinton) he didn’t have enough of a public record for even intelligent people to know that he’s actually a fascist. And, so, virtually all of the fools voted in that election instead for the man who said, “Bomb, bomb, bomb, Iran.” (They’re dangerous fools; but, in a democracy, even dangerous fools have the right to vote.)

    This is how democracy has died in America. The formula is simple: billionaires + their (and their many clergy’s) suckers = aristocracy. The ‘Kingdom of God on Earth’ is just a front for the billionaires behind the screen, who receive their moral acceptability from preachers of some crackpot Scripture, regardless whether it’s the Bible or Ayn Rand, but preachers bought-and-paid-for all the same, who say “It’s God’s will,” or “They earned it.” The result is, in any case, an aristocratic dictatorship, no sort of authentic democracy whatsoever. And, when even the Democratic candidate has gotten there by a string of lies and no substantive record on which voters can know that his assertions don’t match his real beliefs or commitments, the voters are trapped by the aristocracy: they’ve got nothing else to go on but the aristocracy’s lies, and the aristocratically owned ‘news’ media’s stenographic transmissions of their politicians’ lies to the public.

    That’s how the American Counter-revolution (since 1974) was done. It’s how democracy ended in America.

    The American Revolution (1765-83) overthrew Britain’s aristocracy here. But now, the American people need to overthrow America’s own aristocracy, or else simply accept fascism (rule by an aristocracy). If America, under that condition, will be peaceful, then it can only be the peace of the graveyard — democracy’s graveyard.

    The aristocracy is aiming to lock it in. The situation for democrats is now desperate.

    Fools think that because aristocrats compete with each other, they’re not essentially united against the public. The propaganda by aristocrats is believed, as if looking behind the curtain were some type of no-no.

    Anybody intentionally bringing children into a world like this has to be either an aristocrat, or a fool — or callous. (After all, an aristocrat’s child might be able to be largely insulated from the hell that’s now virtually inevitable to come.)

     

  • Gold, Precious Metals Flash Crash Following $2.7 Billion Notional Dump

    The last time gold plummeted by just over $30 per ounce (dragging down silver and bitcoin with it) and resulted in a crash so furious it led to a “Velocity Logic” market halt for 10 seconds, was on January 6, 2014. Many said this was just perfectly normal selling, although we explicitly said (and showed) that it was a clear case of an HFT algo gone wild (following an order to do just that and slam all sell stops) when someone manipulated the market and repriced gold substantially lower.

    Precisely one month ago, some 18 months after the incident, the Comex admitted as much, when it blamed the collapse on “unusually large and atypical trading activity by several of the Firm’s customers and caused the mass entry of order messages by Zenfire, which resulted in a disruptive and rapid price movement in the February 2014 Gold Futures market and prompted a Velocity Logic event.” Curiously despite the “errant” order, gold did not rebound because the entire purpose of the selling slam was to reset the prevailing price far lower. This is what the Comex said in Disciplinary action 14-9807-BC:

    Pursuant to an offer of settlement Mirus Futures LLC (“Mirus” or the “Firm”) presented at a hearing on June 16, 2015, in which Mirus neither admitted nor denied the rule violations upon which the penalty is based, a Panel of the COMEX Business Conduct Committee (“BCC”) found that it had jurisdiction over Mirus pursuant to Exchange Rule 418 and that on January 6, 2014, Mirus failed to adequately monitor the operation of its trading platform (Zenfire), and connectivity of its trading system (Zenfire) with Globex. This failure resulted in unusually large and atypical trading activity by several of the Firm’s customers and caused the mass entry of order messages by Zenfire, which resulted in a disruptive and rapid price movement in the February 2014 Gold Futures market and prompted a Velocity Logic event.

     

    The Panel found that as a result, Mirus violated Rules 432.Q. (Conduct Detrimental to the Exchange) and 432.W.

    We bring this up because moments ago, just before 9:30pm Eastern time or right as China opened for trading, gold (as well as platinum, silver, and virtually all precious metals) flashed crashed when “someone” sold $2.7 billion notional in gold, resulting in a 4.2% or about $50 to just over $1,086/oz, the lowest level since March 2010.

    Gold:

     

    Silver:

     

    Platinum:

     

    Once again, as in February 2014 and on various prior cases, the fact that someone meant to take out the entire bid stack reveals that this was not a normal order and price discovery was the last thing on the seller’s mind, but an intentional HFT-induced slam with one purpose: force the sell stops.

    So what caused it?

    The answer is probably irrelevant: it could be another HFT-orchestrated smash a la February 2014, or it could be the BIS’ gold and FX trading desk under Benoit Gilson, or it could be just a massive Chinese commodity financing deal unwind as we schematically showed last March…

    … or it could be simply Citigroup, which as we showed earlier this month has now captured the precious metals market via derivatives.

     

    Whatever the reason, gold just had its biggest flash crash in nearly two years, as a targeted stop hunt launched by the dumping of $2.7 billion notional in product, accelerates the capitulation of the momentum buyers (and in this case sellers) pushing gold to a level not seen almost since 2009.

    The price appears to have rebounded after the initial shock, up about $20 from the intraday low of $1,086 but we expect that to be retested shortly, and for gold to plunge further into triple digits, at which point gold miners will simply cease to produce the metal whose all-in production cost is in the $1100 and higher range, when it will also become clear that only derivatives and “paper” are the marginal “price” setters.

    But perhaps the biggest irony of the night is that moments before the flash crash, the PBOC revised its shocking Friday announcement revealing its gold holdings had increased by 57%. As Bloomberg said:

    • CHINA PBOC REVISES GOLD RESERVES TO 53.32M FINE TROY OUNCES

    Previously, this was said to be 53.31 million ounces or 10,000 ounces lower, confirming China is literally just making up gold inventory “numbers” as it goes along, and clearly buying ever more physical while the price of paper precious metals conveniently plunges ever lower.

    Before:

     

    And now:

    One thing is certain: the PBOC will be quite grateful to whoever (or whatever) was the catalyst for the latest and greatest gold flash crash as well.

  • Is Australia The Next Greece?

    Australian consumers are more worried about the medium term outlook than at the peak of the financial crisis, and rightfully so.

    Source: @ANZ_WarrenHogan

    As The Telegraph reports, by the end of the first quarter this year, Australia’s net foreign debt had climbed to a record $955bn, equal to an already unsustainable 60pc of gross domestic product, and is set to rise as RBA's bet that depreciation in the value of the country’s currency would help to offset the decline in its overbearing mining industry hasn’t happened to the extent they would have wished.

     

     

    Furthermore, as UBS explains, China's real GDP growth cycles have become an increasingly important driver of Australia's nominal GDP growth this last decade. With iron ore and coal prices plumbing new record lows, a Chinese (real) economy firing on perhaps 1 cyclinder, and equity investors reeling from China's collapse; perhaps the situation facing Australia is more like Greece than many want to admit, as Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock mining dynasty stunned her workers this week: accept a 10% pay cut or face redundancies.

     

     

    The government in Canberra and the Reserve Bank of Australia, The Telegraph explains,  had bet that depreciation in the value of the country’s currency would help to offset the decline in its overbearing mining industry. However, that hasn’t happened to the extent they would have wished.

    Last month Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock mining dynasty delivered an unwelcome shock to her workers in Western Australia: accept a possible 10pc pay cut or face the risk of future redundancies.

     

    Ms Rinehart, whose family have accumulated vast wealth from iron ore mining, has seen her fortune dwindle since commodity prices began their inexorable slide last year. The Australian mining mogul has seen her estimated wealth collapse to around $11bn (£7bn) from a fortune that was thought to be worth around $30bn just three years ago.

     

    This colossal collapse in wealth is symptomatic of the wider economic problem now facing Australia, which for years has been known as the lucky country due to its preponderance in natural resources such as iron ore, coal and gold. During the boom years of the so-called commodities “super cycle” when China couldn’t buy enough of everything that Australia dug out of the ground, the country’s economy resembled oil-rich Saudi Arabia.

     

    However, a collapse in iron ore and coal prices coupled with the impact of large international mining companies slashing investment has exposed Australia’s true vulnerability. Just like Saudi Arabia, which is now burning its foreign reserves to compensate for falling oil prices, Australia faces a collapse in export revenue.

     

    Recently revised figures for April show that the country’s trade deficit with the rest of the world ballooned to a record A$4.14bn (£2bn). That gap between the value of exports and imports is expected to increase as the value of Australia’s most important resources reaches new multi-year lows. Iron ore is now trading at around $50 per tonne, compared with a peak of around $180 per tonne achieved in 2011. Thermal coal has also suffered heavy losses, now trading at around $60 per tonne compared with around $150 per tonne four years ago.

     

    For an economy which in 2012 depended on resources for 65pc of its total trade in goods and services these dramatic falls in prices are almost impossible to absorb without inflicting wider damage. The drop in foreign currency earnings has seen Australia forced to borrow more in order to maintain government spending.

     

    The respected Australian economist Stephen Koukoulas recently wrote of the dangers that escalating levels of foreign debt could present for future generations. Could a prolonged period of depressed commodity prices even turn Australia into Asia’s version of Greece, with China being its banker of last resort instead of the European Union.

    As UBS further explains, China's real GDP growth cycles have become an increasingly important driver of Australia's nominal GDP growth this last decade.

     The property-driven slowdown in China's GDP growth is continuing to having a disproportionately large negative impact on Australia's economy. This is because China clearly remains Australia's largest export destination, having peaked at a record high ~? share of total exports last year (equivalent to ~7% of GDP), but more recently retracing sharply to the current 28% share. This reflects the >20%y/y drop in Australia's nominal exports to China in FY15 – which is on track to subtract ~1¼%pts y/y from nominal GDP.

     

    In contrast, FY14 export values surged 26%y/y, adding 1¼%pts y/y to nominal GDP. Notably, this turnaround entirely reflects collapsing prices, which more than offset surging volumes. (Indeed, this overall fall in export values is despite a boom in Chinese tourism arrivals which are currently growing ~20%y/y.)

     

    Weak Chinese demand remains a key downside risk for not only Australia's economy but also the RBA & AUD outlook. The weakness in Chinese growth is having the most obvious negative impact on Australia because our basket of exports is (almost) uniquely concentrated in commodities (back down to ~? share), where China is generally the marginal price-setter. Indeed, after iron ore alone reached a 30% share of total Australian exports in 2013, the recent renewed collapse in iron ore prices saw its export share drop back closer to 20%. The price effect has been a key driver behind Australia's terms of trade collapsing by ? since its peak in 2011.

     

    This negative income shock is weighing heavily on Australia's fiscal position, which has seen its deficit consistently worse than expected over that period; as well as leading to a 'capex cliff', which has seen the RBA cut rates and drag the AUD/USD down to a 6-year low. Indeed, an ABS survey of the outlook for mining investment in FY15/16 implies a ~37% collapse which could directly subtract a massive 2%pts y/y from nominal GDP. As such, weak Chinese demand remains a key downside risk for not only Australia's economy but also the RBA & AUD outlook (with the latter still expected to depreciate further to 0.70USD ahead).

    *  *  *

    As The Telegraph concludes, rather ominously,

    The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.

     

    Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

  • Chinese Stocks Drop'n'Pop After Officials Confirm "Stock Market Rout Stopped By Timely Measures"

    With shenanigans in precious metals, investors are rushing back into the safety of Chinese high beta idiotmakers stocks…

    Shanghai Composite Tops 4000 Once again

     

    One wonders if gold manipulation played a hand…

     

    After two days of deleveraging and a squeeze into the expiration of CSI-300 Futures pushing Chinese stocks higher, the grandmas and farmers have decided now is an opportune moment to once again start adding margin debt. Who is to blame? Simple – Chinese officials have confirmed that “the stock market rout is over thanks to their timely measures.” Futures opened modestly higher but are fading as the cash open looms…

     

    Rest assured world…

    • *CHINA’S ZHU SAYS STK MKT ROUT CEASED BY TIMELY MEASURES: DAILY

     

    And so, after 2 days of rationality, PBOC reports,

    • *SHANGHAI MARGIN DEBT RISES FOR FIRST TIME IN THREE DAYS

    As the Chinese just can’t help themselves…

    CSI-300 hovering flat (China’s S&P 500)

    CHINA FTSE A50 (China’s Dow) lower….

     

    Finally, here is a brief explanation from Stratfor on the political consequences of China’s stock market collapse:

  • Lies, Damned Lies, & Inflation Statistics

    Submitted by Jim Quinn via The Burning Platform blog,

    The government released their monthly CPI report this week. Even though it came in at an annualized rate of 3.6%, they and their mouthpieces in the corporate mainstream media dutifully downplayed the uptrend. They can’t let the plebs know the truth. That might upend their economic recovery storyline and put a crimp into their artificial free money, zero interest rate, stock market rally. If they were to admit inflation is rising, the Fed would be forced to raise rates. That is unacceptable in our rigged .01% economy. There are banker bonuses, CEO stock options, corporate stock buyback earnings per share goals and captured politician elections at stake.

    The corporate MSM immediately shifted the focus to the annual CPI figure of 0.1%. That’s right. Your government keepers expect you to believe the prices you pay to live your everyday life have been essentially flat in the last year. Anyone who lives in the real world, not the BLS Bizarro world of models, seasonal adjustments, hedonic adjustments, and substitution adjustments, knows this is a lie. The original concept of CPI was to measure the true cost of maintaining a constant standard of living. It should reflect your true inflation of out of pocket costs to live a daily existence in this country.

    Instead, it has become a manipulated statistic using academic theories as a cover to systematically under-report the true level of inflation. The purpose has been to cut annual cost of living adjustments to Social Security and other government benefits, while over-estimating the true level of GDP. Artificially low inflation figures allow the mega-corporations who control the country to keep wage increases to workers low. Under-reporting the true level of inflation also allows the Federal Reserve to keep their discount rate far lower than it would be in an honest free market. The Wall Street banks, who own and control the Federal Reserve, are free to charge 18% on credit card balances while paying .25% to savers. The manipulation of the CPI benefits the vested interests, impoverishes the masses, and slowly but surely contributes to the destruction of our economic system.

    A deep dive into Table 2 from the BLS reveals some truth and uncovers more lies. Their weighting of everyday living expenditures is warped and purposefully misleading. Let’s look at the annual increases in some food items we might consume in the course of a month, living in this empire of lies:

    • Ground Beef – 10.1%
    • Roast Beef – 11.8%
    • Steak – 11.1%
    • Eggs – 21.8%
    • Chicken – 3.7%
    • Coffee – 3.4%
    • Sugar – 4.2%
    • Candy – 4.6%
    • Snacks – 3.5%
    • Salt & Seasonings – 5.3%
    • Food Away From Home – 3.0%

     

    Despite these documented increases, the BLS says food inflation only ran at 1.8% in the last year. They show large decreases in pork, seafood, dairy, and vegetable prices. I grocery shop every week. I buy milk, fish, and vegetables and the prices have not fallen. The price of pork products has decreased from all-time highs, but is still well above prices from a few years ago. The BLS fraudulently keeps the food price increase lower by assuming you switch from beef to pork when the price of beef soars. That assumption does not lower the price of food. The assumption essentially builds in a lower standard of living for you in their model of the world. The other ridiculous assumption is the weighting for food eaten away from home. Giving this a weighting of 5.8% is outrageous when everyone knows obese Americans are chowing down at Taco Bell and the millions of other purveyors of toxic food sludge multiple times per day.

    If you are like me, you probably need to live someplace. Food and shelter are the most basic of needs in a society. But according to the BLS they account for less than 50% of your expenses. Let’s examine some shelter related costs to see how badly the BLS is lying in this area:

    • Rent – 3.5%
    • Owner’s Equivalent Rent – 3.0%
    • Insurance – 3.1%
    • Water, Sewer, Trash – 4.7%
    • Household Operations – 3.6%

    There is so much wrong with the BLS data, I don’t know where to start. The rental market has been on fire since 2012. Builders are erecting apartments at a breakneck pace. Independent, non-captured, neutral real estate organizations show rents surging to all time highs, growing by 5.1% on an annual basis. Real rents in the real world have grown by 14% since 2012. The BLS says they’ve grown by 9%. Who do you believe?

    It’s funny how the mysterious owner’s equivalent rent calculation spits out a 3% increase in the last year. National home prices, based on Case Shiller data and NAR data shows prices up between 5% and 10% in the last year and up by 25% since 2012. Mortgage rates have risen to 4% from the low 3% range. Property taxes are soaring across the country as indebted localities rape taxpayers to pay for their gold plated government benefits and pensions. Evidently the BLS just ignores prices, mortgage payments, and real estate taxes when calculating their lies.

    The final outrage is the weighting applied by the BLS to the owners equivalent rent. It accounts for 24% of the CPI calculation, virtually the same as it did in 2007. In case you haven’t noticed, the home ownership rate has plunged to 22 year lows since 2007, as millions of foreclosures booted people out of homes and millions of millennials are so loaded with student loan debt and stuck with low paying Obama jobs that home ownership is a distant dream. How can the BLS continue to weight home ownership at the same level when the percentage of rental units has soared?

    There is no question the BLS should have dramatically increased the weighting of rental housing. In reality, the large increases in rental rates and the surge of rental households reflects a much higher inflation rate than is being reported by the government. The BLS figure is a blatant lie. The recent report from the Center for Housing Studies reveals the falsity of the government reported propaganda. Over 20.7 million renter households (49.0%) pay more than 30% of their income on housing. More than a quarter of all renter households, or 11.2 million, spend more than 50% of their income on housing. The median US renter household earned $32,700 in 2013 and spent $900 per month on housing costs. Renter housing costs are gross rents, which include contract rents and utilities. If the median renter household spends 33% of their income on housing costs how can the BLS give it only a 7.2% weighting in the CPI calculation?

    The Center for Housing Studies report drives a stake into the heart of the manipulated, politically massaged, false data put out by the BLS to keep the masses sedated and their bosses fat, happy and rich:

    Over the span of just 10 years, the share of renters aged 25–34 with cost burdens (paying more than 30 percent of their incomes for housing) increased from 40 percent to 46 percent, while the share with severe burdens (paying more than 50 percent of income) rose from 19 percent to 23 percent. During roughly the same period, the share of renters aged 25–34 with student loan debt jumped from 30 percent in 2004 to 41 percent in 2013, with the average amount of debt up 50 percent, to $30,700.

    The faux journalists in the dying legacy media act baffled by the continued real decline in retail sales when the answer is staring them right in the face. True inflation in essential living expenses combined with declining real wages and increasing debt burdens has left the average household with little or no money to spend.

    The next blatantly manipulated false data is related to healthcare. Let’s peruse some this detailed inflation data:

    • Prescription Drugs – 4.8%
    • Non-Prescription Drugs – Negative 1.6%
    • Medical Equipment – 0.0%
    • Medical Care Services – 2.3%
    • Hospital Services – 3.5%
    • Health Insurance – 0.7%

    Anyone living in the real world knows Obamacare has resulted in a tremendous increase in demand for drugs, medical services, and medical equipment. Health insurance companies, drug companies, drug wholesalers, hospital corporations, and drug stores are reporting record profits as their stock prices hit all-time highs. When was the last time you saw prices drop or stay flat in the healthcare arena?

    It is patently outrageous for the BLS to report an annual health insurance cost increase of a mere 0.7%. The annual cost of employee sponsored health insurance is 6.3% higher than last year, with the employee portion skyrocketing by 8.0% based on real data in the real world. I work for the largest employer in Philadelphia, with the most negotiating clout against insurers, and my portion has gone up by 10% to 20% annually for the last five years. Everyone working for a company has experienced the same or higher increases.

    Even the Obamacare exchanges are seeing double digit premium increases in many states. Studies from Price Waterhouse Coopers and McKinsey found increases in average premiums between 6% and 10% across the country. It takes major cajones for the BLS to report 0.7% health insurance inflation, but their job is not to report factual information. Their job is to keep the ignorant masses ignorant of their plight. The bigger the lie, the more likely it is to be believed. The even more ridiculous aspect to the BLS data is that health insurance is weighted at .75% in the CPI calculation. The median household income in this country is $52,000. Employees are paying approximately $4,000 in health insurance per year on average. That is 7.7% of their income. The BLS weighting is absurd. Using a true inflation rate and true weighting would add at least 2% to the CPI figure.

    Another area that impacts every American every day is transportation. People need to drive or take public transportation in order to live their lives. Here are some more crucial inflation data points from the BLS:

    • New Cars – 1.2%
    • Used Cars – Negative 0.7%
    • Gasoline – Negative 23.3%
    • Vehicle Leasing – Negative 1.1%
    • Vehicle Insurance – 5.1%
    • Parking & Tolls – 2.4%
    • Public Transportation – Negative 3.2%

    So we have near record levels of new auto sales, driven by subprime auto debt and 7 year 0% financing, with average vehicle prices at all-time highs, and the BLS reports prices only went up 1.2% in the last year. Edmunds, the authority in auto data, says prices went up 2.6% in the last year. Do you believe the BLS model or real data from the real world, broken down by automaker and vehicle? The even more ridiculous contention is that used car prices fell. I’ve bought two used cars in the last year and I can attest that prices are not falling. Edmunds reported that used car prices have risen by 7.1% in the last year. Leases as a percentage of total auto sales is also at record levels. Does this really jive with a decrease in leasing expenses? I think not.

    There are 254 million passenger vehicles registered in the United States. We have a record level of auto loan debt totaling $1 trillion and a record level of auto leases. According to Edmunds, the average monthly car payment is $479. That is $5,748 per year. That equals 11% of the median household income. Why would the BLS only give this category a 5.7% weighting? Bankrupt states across the country have been jacking up tolls. The BLS says they went up by 2.4%. My beloved state of Pennsylvania has increased them by 10% per year for the last three years. The BLS says the cost of public transportation is plummeting. Has a Amtrak or any municipal public transportation system EVER reduced fares? Not a chance. They need more revenue to fund the government pensions of their union employees.

    There are a few other categories that might be of interest to you:

    • Banking Fees – 5.9%
    • College Tuition – 3.4%
    • Childcare – 4.3%
    • Sporting Events – 8.8%
    • Pet Care – 3.5%
    • Cigarettes – 2.5%
    • Alcohol Served Away from Home – 4.0%

    Isn’t it delightful that your friendly neighborhood Wall Street bank gets free money from the Fed, charges you 18% on your credit card balance, pays you nothing for your deposits, and then jacks up your bank fees? The relentless inflation in college tuition is being driven by the relentless doling out of student loans by the Federal Government to people who aren’t intellectually capable of completing college level material. The $1.4 trillion of student loans will never be repaid. The taxpayer will be on the hook for hundreds of billions in write-offs.

    To celebrate the near zero inflation reported by your friendly government drones at the BLS take your family of four to a baseball game, spending $160 for tickets, $25 to park your car, $20 for two warm beers, $10 for two sodas, $24 for four hot dogs, and $10 for an order of cheese fries. Make sure you toast Greenspan, Bernanke, Yellen and the rest of the Federal Reserve governors who have purposefully reduced the purchasing power of your dollar by 96% over the last century.

    You know your true level of inflation. You know it’s not 0.1%. You know it’s somewhere between 4% and 10%. You know your government is lying to you. You know the captured corporate media perpetuates the lies. You know those in control of the government must lie to keep their Ponzi scheme going. You know they are just following the Edward Bernays playbook. They want you to believe it’s for your own good. Do you think it’s for your own good?

    “The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. …We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. …In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons…who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.” – Edward Bernays – Propaganda – 1928

  • Janet Yellen Was Half Right

    Just over a year ago, Janet Yellen did the unthinkable. In a moment of clarity, The Fed called out two darlings of the momentum-chasing euphoria-driven stock buying frenzy for 'special' treatment when Yellen uttered the Cramer-mind-blowing fact that "small cap social media and biotech stock valuations were substantially stretched." It appears, judging by today's market, that she was half right…

     

    The equal-weighted basket of nine social media stocks (Angie's List, Demand Media, Groupon, Jive Software, King Digital, Pandora Media, United Online, Yelp, and Zynga) is down 23% since Yellen's truthiness (underperforming the broad small cap universe by almost 32%). However, Small cap Biotechs have soared rather than stalled – now up almost 89% since The Fed chair's drubbing.

     

    Of course – she is actually right about both but timing is everything (just ask Greenspan) as small cap biotech valuations move on to be "substantially stretched"-er.

     

    Charts: Bloomberg

  • How The Fed And Wall Street Are Eating Their Seed Corn

    Submitted by Mark St.Cyr,

    When it comes to the stock market these days the overriding theme you hear from the financial media is “You’ve got to get in.” Another is, “Buy on the dips and average in.” Or, “You can’t profit if you aren’t in it” and more. So many more it would fill its own multi-volume set. However, there was some truth to many of those quips just a few years ago. Today, the amount of hidden reality to the actual destruction of one’s wealth is far more factual than any will let on. Let alone reveal.

    I hear and speak to a lot of entrepreneurs who are absolutely mystified by not only the rise in the markets since the financial crisis in 2008. Rather, what many just can’t wrap their heads around is: “If the markets are a reflection of the economy. Then how in the world did we get up here?”  That line of thought I rendered down to be the overwhelming theme when discussing the current state of business affairs throughout the economy. This confusion is coming from a group of people who at one time would seek out Wall Street aficionados for insight or expertise. Today, they tend more to distrust what they hear. For what they lack in stock market expertise   – they make up in spades with an acutely precise B.S. meter honed by years of business acumen. And many confirm today; it’s off the charts far more than they can ever remember. So much so, as to avoid stepping in any of it – they just avoid it all together.

    At one time entrepreneurs were not only sought out by Wall Street, rather, entrepreneurs did the same in kind. Before the advent of 401K plans and more it was entrepreneurs with the sale of their business, or profits from something else that fueled many a brokerage firms bottom line. And in many cases that relationship did well for both sides. There was true expertise needed to help one navigate the pitfalls of exactly how and where one was to put their money to work (usually a substantial amount such as after a business sale etc.) in relative safety as to finance the remainder of one’s years. Today, not only in much of that expertise gone – so too is the safety.

    There’s probably no better example of this than what transpires at any bank branch today (those that are left that is). Opening a checking or savings account? You used to be incentivized to do so. But what this initial transaction is really designed for today is more along the lines of “a soft opening” to ask…”So, do you have a 401K account elsewhere?” Then the sales pitch is on by some seemingly just out of grad school quota seeking “financial adviser” with an array of pamphlets, jargon, and sales phrases anyone with any financial sense can see through. “Index this… diversify that…dividend paying yields ” and on and on. Along with whatever might be the latest tagline from the financial shows.

    This is the true face of Wall St. today. As much as Wall St. would like to think of itself as it was in the glory days of a Gordon Gekko – that image is long gone. Today, what most people see is nothing more than some recent college grad trying desperately to say anything that might convince one to switch 401K accounts as to possibly make this months quota. For if not they too will have to join the hordes of recently dislocated tellers they once worked with. And the numbers show this to be true because not only is the vast majority not switching – they aren’t even staying, let alone “getting in.”

    Let’s use a few scenarios that are emblematic to the challenges facing the likes of both the recently cashed out entrepreneur as well as a recent retiree of any sorts. I’ll use the dollar amount of $3,000,000.00 ($3MM). To some this may seem high, to others it’s not all that great. However, for many entrepreneurs it’s an amount easily understood as well as feasible. I also use if because it’s a representative amount even Julian Robertson of Tiger Management™ has used to describe the dilemma many entrepreneurs find themselves in with navigating today’s financial morass.

    (The following of course is over simplified, I mean it as such. However, the questions, answers, as well as premise can not be over stated as to their importance.)

    The “buy and hold” strategy. Sounds great, makes perfect sense – unless you can’t hold. Retirement for many means just that: no more working to generate income. Income is now derived via their stock holdings. If one doesn’t sell (e.g., their stocks) – there’s no money to eat. Better to “stay and hold” in one’s business and take their chances rather than try to “cash out” and place their livelihoods (i.e., money) in someone else’s hands. Especially what constitutes as today’s “investment adviser.”

     

    “Buy stocks that pay out dividends!” Again, sounds great and seems to solve the problem of the above. Problem is, in a stock rout, what’s the first thing companies cut? Dividends. You had just better hope and pray the companies that do cut – aren’t the ones you were sold. Or, you’re now cut out. But not too worry, they say skipping a meal or two here and there is healthy. And that’s what you’ll need to remember when there’s no food on the table because – there’s no “dividend” in the mailbox. I’ll also add: it’s probably safe to assume in another financial rout, the “financial adviser” that sold you those “dividend” plays is no longer employed themselves. So calling them for further “advice” might be more challenging than it is frustrating.

     

    “Buy the dips!” Sure, there’s only one problem. If there is a “dip” doesn’t that mean the markets lost value? So if one didn’t sell at the heights where is the money to buy on the dip? And if one is selling on the high to fund retirement as to eat and pay bills: That money is now gone. There is no money to now “buy the f’n dip!”

     

    “A stock market correction of 20% to 30% is a gift to buy great companies that are now on sale!” No. A 20% to 30% market correction is a loss of $600,000.00 to just shy of  $1,000,000.00 of ones net worth. More than likely a “net worth” that was to be “worth” food to eat, and pay living expenses.

     

    “If you’re nervous about the markets just be diversified.” This line means squat. Diversified as in what? Other markets? Other vehicles? Lot of good that did during the financial crisis of ’08 when everything was going down and coming apart together. And if one believes the markets to be more stable today, and better fortified to withstand another such calamity, even one only half as extreme – I have some beautiful oceanfront property here in Kentucky I’d love to sell you. Cheap!

     

    Don’t like the “markets?” Don’t worry – you can be safe in bonds. Only problem? Today they pay next to nothing. The bigger problem? Tomorrow they may charge you. All while having to be willing to accept: if you want out sooner than later – it’s gonna cost you a plenty if that sooner is at the wrong time. But don’t worry. It’s not like you need to eat or pay bills anytime sooner or later, right?

     

    Want to keep your money as safe as possible? “Keep it in liquid instruments such as C.D.’s or savings accounts here at our bank.” Unless of course it’s over $100K. Then depending on the bank not only might you have to pay for the privilege, if they deem you have too much they might ask you to take your money elsewhere. Why? Easy. Your “cash” is now a hindrance that needs to be protected as well as accounted for. And that’s not what a “bank” is in business for any longer. Silly you for thinking “bank” today means anything what “bank” meant in the past.

     

    “Don’t like banks? Put you’re money in a money market!” Right. Only problem there is after the financial meltdown of 2008 where it was shown a great deal of distress was caused by funds needing to keep 1 for 1 notional values in their cash accounts, it’s now been deemed that pesky thing of trying to preserve someones cash balance was just too hard. So a new rule was implemented where this pesky detail is no longer relevant. Now if your “cash” value in a money market account resembles an equation of cents on the dollar rather than a dollar for a dollar – oh well; it is 2015 after all. And the times – they have a changed. I’ll bet you didn’t even get a toaster when you opened that six or seven figured account. So there should be no need to whine about not having any bread to cook in it. After all it’s no longer even clear when you may gain or regain access to it (if there’s anything left) in another market rout. For any doubts on this just look to the bottom of your latest statement. it’s written right there in black and white. (Just have your 10X magnifying glass at the ready is all I’ll say.)

    I could go on and on, yet I believe, you get the point. Ask just one of the above scenarios to what constitutes a “Wall St. maven” today and I’ll bet dollars to doughnuts you’ll hear more back peddling or more evasive, jargon laced, mumbo-jumbo – it will have you questioning humanity itself let alone just financially.

    What both Wall Street in general as well as the Federal Reserve has wrought is a market so adulterated, so anemic, and so mistrusted the euphemistic “money on the sidelines” has more in common with nursery rhymes than it does with anything reality based. There is no money on the sidelines. Nobody wants “in” to this market. Anyone with half a brain and a modicum of common sense wants out – and the outflow numbers show it still to be true.

    “Buying the right index, diversification, and thinking like a billionaire” is not only nonsensical in today’s marketplace. It can cause one a whole lot of pain when one is unable to fully comprehend as well as separate euphemisms for real world panic and dismay.  All one needs to do is look east to see just how well that type of thinking is doing in China today. For “bubbles” no matter the culture when it comes to one’s money “pop” the same way: First panic – then distrust – then the repeating of another euphemism that sometimes lasts for generations: Never trust a bank or the markets. Never, ever, ever!
     

  • French President Calls For The Creation Of United States Of Europe

    On Friday, SocGen’s Albert Edwards was confused: when describing the events of last weekend, when Greece seemed on the verge of being “temporarily” exiled from Europe thus confirming once and for all that the Euro is in fact quite reversible, it was not Germany against France, a France whose total government liabilities assure that its countdown to sovereign insolvency is just a few years behind that of Greece…

    … but France alongside Germany, playing the good cop to Schauble’s now traditional “Dr Evil” routine. To wit:

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

     

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

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

    Today Bloomberg confirmed just that, when it reported that instead of seeking a mathematical resolution to France’s unsustainable government liability brick wall, Hollande is now likewise prepared to follow in Tsipras’ footsteps and hand over French sovereignty to a German-led European “government” if it means extending the unsustainable French status quo as long as possible. To wit:

    French President Francois Hollande said that the 19 countries using the euro need their own government complete with a budget and parliament to cooperate better and overcome the Greek crisis.

     

    “Circumstances are leading us to accelerate,” Hollande said in an opinion piece published by the Journal du Dimanche on Sunday. “What threatens us is not too much Europe, but a lack of it.”

    In other words, France just called for the creation of the United States Of Europe, where the dominant power (Germany) is in charge, and where the people of all the smaller, weaker countries, pardon pro forma European states, are merely slaves. See Greece.

    And speaking of Greece, somehow we doubt the insolvent nation, which justt last week just handed over its sovereignty to Germany and Brussels, feels there is a “lack of Europe.“

    While the euro zone has a common currency, fiscal and economic policies remain mostly in the hands of each member state. European Central Bank President Mario Draghi made a plea this week for deeper cooperation between the euro members after political squabbles over Greece almost led to a rupture in the single currency.

     

    Countries in favor of more integration should move ahead, forming an “avant-garde,” Hollande said.

     

    “Europe has let its institutions weaken and the 28 European Union member countries are struggling to agree to move ahead,” Hollande said on Sunday in a text which was also a homage to his mentor Jacques Delors, a former European Commission President who proposed similar ideas. Draghi called for the creation of a shared treasury within 10 years in a joint proposal with politicians.

    Well, of course Draghi would call for that: after all, the more “globalized” end markets are, and the greater the stock of monetizable debt collateralized by a supergovernment, the greater the profits for Goldman (followed shortly thereafter by a global government controlled by the Inner Party; call it “Oceania” for lack of a better made up word).

    Not to mention that what would happen in Hollande’s “avant-garde” world is that Germany will have achieved its World War II goal of taking over Europe without firing a single shot, with every other country, first Greece now France, and everyone inbetween, handing over its sovereignty to the Bundestag (not to mention to German exporters) to run the show.

    As for Hollande, and his all time low approval rating, his immediate concern is not how to hand over Paris to Berlin, but how to prevent Marine Le Pen aka “Madame Frexit” from taking his seat in two years because as we wrote before the Greek referendum was even announced, “Forget Grexit, “Madame Frexit” Says France Is Next: French Presidential Frontrunner Wants Out Of “Failed” Euro.”

    Greece is now a sideshow even as its economy implodes completely and the country ultimately exits the Euro – the real question is can Germany build on the Hollande momentum to finally implement a Berlin-controlled, Frankfurt-funded “government” before Le Pen crushes the European dream, or nightmare as it is better known in Greece and for the half of Europe’s peripheral youth who are permanently unemployed, once and for all.

  • China Destroyed Its Stock Market In Order To Save It

    Submitted by Patrick Chovanec via ForeignPolicy.com,

    During the Vietnam War, surveying the shelled wreckage of Ben Tre, an American officer famously remarked, “It became necessary to destroy the town to save it.” His comment came to epitomize the sort of self-defeating “victory” that undoes what it aims to achieve.

    Last week, China destroyed its stock market in order to save it. Faced with a crash in share prices from a bubble of its own making, the Chinese government intervened ruthlessly, and recklessly, to turn those prices around. Its heavy-handed approach seemed to work, for the moment, but only by severely damaging far more important goals and ambitions.

    Prior to the crash, China’s stock market had enjoyed a blissful disconnect from reality. As China’s economy slowed and corporate profits declined, share prices soared, nearly tripling in just 12 months. By the peak, half the companies listed on the Shanghai and Shenzhen exchanges were priced above a preposterous 85-times earnings. It was a clear warning flag — one that Chinese regulators encouraged people to ignore. Then reality caught up.

    At first, when prices began to fall, the central bank responded by cutting interest rates and bank reserve requirements — measures to inject more money that had never failed to juice the market. But prices continued to fall. Then the government rallied the major brokerages to form a $19 billion fund to buy shares and waded directly into the market to buy stocks too. A few stocks rose, but most fell even further.

    The relentless crash was intensified by a new factor in Chinese markets: margin lending. Chinese punters were borrowing in large sums, from both brokerages and more shadowy sources — like “umbrella trusts” and peer-to-peer lending websites — to buy shares, with the shares themselves as collateral. At the peak, according to Goldman Sachs, formal margin lending alone accounted for 12 percent of the market float and 3.5 percent of China’s GDP, “easily the highest in the history of global equity markets.” Margin loans served as rocket fuel for the market on its way up, but prices began to fall and borrowers received “margin calls” that forced them to liquidate their positions, pushing prices down further in a kind of death spiral.

    Chinese regulators, who had been trying (ineffectually) to rein in risky margin lending, now suddenly reversed course. They waved rules requiring brokerages to ask for more collateral when stock prices fall and allowed them to accept any kind of asset — including people’s homes — as collateral for stock-buying loans. They also encouraged brokerages to securitize and sell their margin-lending portfolios to the public so that they could go out and make even more loans. All these steps knowingly exposed major financial institutions, and their customers, to much greater risk. Yet no one will borrow if no one is confident enough to buy, and the market continued to fall, wiping out nearly all its gains since the start of the year.

    By this point last week, China’s state media was talking openly of a “war on stocks.” And in that war, China’s leaders chose to employ the nuclear option: In effect, they closed down the market and outlawed selling. As of the morning of July 10, about half of China’s 2,800 listed companies filed to suspend trading. Many of their owners had pledged shares as collateral for corporate and personal loans and were facing margin calls that would cause them to lose control of their companies. Chinese regulators also banned major shareholders from selling any shares for the next six months. Additionally, they directed companies to start buying back their own shares and instructed state-run banks to provide whatever financing was needed.

    But the real turn in the market came when China’s Ministry of Public Security — the no-nonsense tough guys normally tasked with cracking down on political dissent — announced that it would arrest what it called “malicious” short-sellers. It was clear, however, that this meant anyone whose selling (not just “short” selling) interfered with the government’s efforts to boost prices. The announcement cast a chill over the market. I have heard multiple reports of Chinese brokers refusing to accept sell orders for fear of angering the authorities. So when we say China’s stock market stabilized, we need to put quotation marks around the word “market.”

    China’s temporary success at manipulating a share-price rebound has come at a terrible longer-term cost.

    Two years ago, China’s leaders adopted “market forces will be decisive” as the guiding principle behind a much-lauded push for reforms needed to reinvigorate China’s slowing economy. That principle now lies in ashes.

    For years, China has dreamed of Shanghai’s becoming a global financial center. Now, one analyst at the global investment firm Julius Baer told the Financial Times, “confidence in the local Chinese equity market has been shattered and is unlikely to come back anytime soon.” Just a few weeks ago, observers confidently predicted it was “inevitable” that domestic Chinese stocks would soon be added to the major global indices that serve as benchmarks for professional investors. Today, with a mere rump of China’s stock market trading at all, and with investors afraid they will be thrown in prison for selling at the wrong time for the “wrong” price, it’s inconceivable.

    It didn’t have to be this way. Some compare China’s intervention to the U.S. Troubled Asset Relief Program (TARP), but the difference is striking. TARP didn’t try to stop market prices from falling; it focused on containing the damage. If Chinese authorities identified a large securities firm that was at risk of failing from bad margin loans and stepped in to prevent a chain reaction, that would make more sense — and do a lot less damage — than trying to prop up the entire stock market by fair means and foul. Memories are short, but in 2007, China allowed an equally large stock bubble to collapse without its economy suffering irreparable harm. Caixin, one of China’s most prominent financial magazines, argued recently that this time around, the government “had no reason to intervene” to prevent a much-needed market correction and had grossly overreacted.

    China needs a functioning stock market that allocates investors’ capital to the most promising enterprises. This means prices that aren’t obedient to the whims of the state, or the party. China may have arrested the stock market’s fall by threatening to arrest sellers. But when it did that, it destroyed the town it was trying to save.

  • Russia Unveils "Terminator T-1" Inspired Killer Robots

    The first time Russia’s armed forces demonstrated the Platform-M combat robot was one year ago in mid-June 2014, when in the course of military drills by the Baltic Fleet near Kaliningrad, the robotic combat platforms, armed with grenade launchers and Kalashnikov rifles saw their first action, executing their military missions alongside their live colleagues.

     

    But what is the Platform-M aside from looking like a very angry, heavily armed version of Wall-E, or a predecessor of the T-1 Series terminator? As explained by RBTH, “the Platform-M is a remote controlled robotic unit on a crawler” one which resembles the protagonist of the 2008 Pixar computer animation WALL-E as well as the original T-1 terminator.

    The Terminator Series T-1

    The affinity between Platform-M and the animated character can also be seen in the robot’s prototype, which appeared on the Russian internet in an animated presentation. In the video, the robotic vehicles, which resemble Platform-M (only on wheels instead of tracks), easily destroy a force of enemy militants armed with NATO weaponry.

    According to some data provided by the Russian military, the Platform-M unit is supplied with “a differentiated defensive chassis and a firing platform and can carry out combative tasks during the night without unmasking instruments.”
    The robot is armed with the famous Kalashnikov rifle made in Izhevsk and four grenade launchers.

    At the Progress Scientific Research Technological Institute of Izhevsk, where it was made, the “crawling creation” was given the following assessment: “Platform-M is a universal combat platform. It is used for gathering intelligence, for discovering and eliminating stationary and mobile targets, for firepower support, for patrolling and for guarding important sites. The unit’s weapons can be guided, it can carry out supportive tasks and it can destroy targets in automatic or semiautomatic control systems; it is supplied with optical-electronic and radio reconnaissance locators.”

    As RBTH adds, Russian robotic technology has existed since the days of the Moon rovers. Back in 1964 the Russian Air Force acquired a system of long-range pilotless photo and radio technological reconnaissance called the DBP-1. This reconnaissance machine, launched from western parts of the country, could carry out its assignments over all of Central and Western Europe.

    In 1973 the Soviet Union initiated the first state scientific and technological program devoted to the creation and implementation of industrial robots. Consequently, by 1985 the USSR had 40 percent of the world’s industrial robots at its disposal, having surpassed the U.S. These units were guided by network-centric principles and artificial intelligence was embedded in the military sphere.

    Still, many had believed that Russia was years behind the envelope when it comes to putting advanced robotic technology on the battlefield. Until today, when a video showcased Russia’s latest military equipment in Sevastopol, ranging from the “Bastion” air defense and anti-ship complexes missile system to sniper rifles and special ops naval guns, also showed none other than the Platform-M combat robot mingling among the population of this most important Crimean city.

    Now all that is needed is for some hacker to penetrate the Platform-M firewall and take control of a small army of these units and then we can finally move the Terminator series into the non-fiction section.

  • Creator Of Internet Privacy Device Silenced: "Effective Immediately We Are Halting Further Development"

    Submitted by Mac Slavo via SHTFPlan.com,

    ProxyHam

    (Pictured: Proxyham by Benjamin Caudill / Rhino Security Labs)

    Data collection and invasive monitoring of American citizens has been at the forefront of government activities for decades. After revelations by Edward Snowden in recent years, the fringe conspiracy theorists who warned of Big Brother surveillance and had been laughed at by the general population were finally proven right.

    But despite the literal hundreds of thousands of pages of information about government snooping and the Congressional “investigations” that followed, nothing has been done to curb the unabated violations of Americans’ Constitutional rights to be secure in their homes and personal effects.

    Thus, as always, the free market began developing its own solutions. Earlier this year an inventor by the name of Benjamin Caudill announced a device he dubbed the ProxyHam which was going to literally change everything about how those concerned with privacy could connect to the internet:

    “I PRESENT PROXYHAM, A HARDWARE DEVICE WHICH UTILIZES BOTH WIFI AND THE 900MHZ BAND TO ACT AS A HARDWARE PROXY, ROUTING LOCAL TRAFFIC THROUGH A FAR-OFF WIRELESS NETWORK – AND SIGNIFICANTLY INCREASING THE DIFFICULTY IN IDENTIFYING THE TRUE SOURCE OF THE TRAFFIC. IN ADDITION TO A DEMONSTRATION OF THE DEVICE ITSELF, FULL HARDWARE SCHEMATICS AND CODE WILL BE MADE FREELY AVAILABLE.”

    Rhino Security Labs via HackRead

    What Caudill had built is a device that would mix up your personal WIFI signal in such a way that no one, not even the National Security Agency, could track down where it originated.

    That, of course, is not something the government wants in the hands of ordinary citizens, and the events of the last week show exactly how dangerous of a device this is to the Big Brother Surveillance State.

    Just hours before Caudill was to reveal a fully-functioning ProxyHam at the DefCon hacking conference his presentation was abruptly cancelled. No reason was given and Caudill posted several cryptic Tweets that left many baffled.

    The device had been disappeared, the company was cancelling production on retail units, and the source code and blueprints would no longer be released to the public.

    rhinosecurity

    Some have suggested that a private business approached Caudill before the conference and made him an offer for retail distribution.

    But the more likely scenario, given what we’re privy to about the device and the government’s incessant need to know everything about everyone, is that someone made Caudill an offer he couldn’t refuse. Hackread explains:

    There’s another possibility of this sudden cancellation i.e. intrusion by the government. Maybe that is the reason why Caudill is not discussing the reason behind this halt. Even though the security firm was “excited” to unveil ProxyHam at Def Con.

     

    Steve Ragan of CSO Online said:

    “IT WOULD LOOK AS IF A HIGHER POWER – NAMELY THE U.S. GOVERNMENT – HAS PUT THEIR FOOT DOWN AND KILLED THIS TALK […] IT ISN’T PERFECT, BUT A TOOL LIKE PROXYHAM – WHEN COMBINED WITH TOR OR OTHER VPN SERVICES, WOULD BE POWERFUL.”

    Incidents like this give us clear insight into what the goals of government surveillance are. As we noted in 2011, well before the Snowden revelations, everything we do is monitored.

    They want to know everything. They want to monitor everyone. And they will stop at nothing to accomplish their goals.

    But despite these obvious attempts to maintain tight, centralized control over the populace, the hacking community has never been one to just sit back and take it from the tyrants in charge. John McAfee, known for creating one of the first virus security programs for computers, has also been working on a new gadget that would create a “dark web” of interconnected devices designed to shield individuals from government monitoring. The device, according to McAfee would cost less than $100.

    The cat is out of the bag with the ProxyHam and its abilities. It shouldn’t be long before source codes and blueprints for similar gadgets begin appearing on the open market.

    The government can push all it wants. Freedom loving people will always push back.

  • The Complete Guide To ETF Phantom Liquidity

    Two months ago, in “ETF Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity,” we outlined the rather disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity facilities that can be tapped in the event of a sudden retail exodus from bond funds. 

    “The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show,” Reuters reported at the time, in a story we suspect did not get the attention it deserved. 

    At a base level, these precautionary measures are the result of the interplay between central bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand there is for new corporate issuance (the rationale being that at least corporate credit offers some semblance of yield). More demand means rates on corporate credit are driven still lower, and once yields on high grade issues get close to the lower limit, yield-starved investors are then herded into HY.

    All of this supply in the primary market comes at a time when liquidity in the secondary market for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the government’s (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre with a tiny exit.

    This situation has been exacerbated by the proliferation of bond ETFs which have allowed retail investors to pile into corners of the fixed income world where they might not belong. 

    All of the above can be summarized as follows.

    “MF assets too large versus dealer inventories” (via Citi)…

    … clear evidence of “structural damage in corporate bond trading liquidity” (via JP Morgan)…

    … and the rapid growth of bond funds in the post-crisis world (via BIS)…

    So given the above, the question is this: if something were to spook the market – a rate hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical shock – causing an exodus from these funds, what would happen to prices if fund managers were suddenly forced to transact in size in an illiquid secondary market in order to meet redemptions?

    “Nothing good”, is the answer. 

    The solution is to avoid selling the underlying bonds – even when investors are selling their shares in the funds.

    But how is this possible? 

    To a certain extent, outflows in one fund can be offset by inflows to another. These “diversifiable flows” are one happy byproduct of the great ETF proliferation. Here’s a refresher on how this works courtesy of Barclays.

    *  *  *

    Portfolio Products Replace Dealer Inventory

    While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.

    The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.

    This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate bonds.

    *  *  *

    Ok great, so ETFs provide a kind of “phantom” liquidity if you will. There are two problems with this:

    • It only works when flows are diversifiable. Once flows become unidirectional, it all goes out the window.
    • It makes the underlying markets even more illiquid.

    Here’s how we put it last month in “How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown“:

    In other words, if I’m a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There’s a term for that kind of business. It’s called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses. 

     

    Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.

    So what is a fund manager to do? 

    This is where we come full circle to the emergency liquidity lines mentioned at the outset. In order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional, fund managers may instead pay out redemptions in borrowed cash. 

    This is, to quote Citi’s Matt King, “creative destruction destroyed.”

    Only worse.

    That is, this represents the willful delay of a long overdue episode of creative destruction layered atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy references, that can be translated as follows: this strategy is yet another example of delaying the inevitable. If fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they’re holding have done to stay in business. It’s a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course. 

    In closing, it’s important to note that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds. 

    In other words, when the exodus comes, the illiquidity that’s been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.

  • What's Scarce Geopolitically: Stability, Ways To Get Ahead, & Innovation

    Submitted by Charles Hugh-Smith of OfTwoMinds blog,

    Conserving what is failing is not a path to stability.

    What's in demand but scarce is valuable. This is one of those scale-invariant principles: businesses large and small want what's scarce and in demand, because that's what generates profits.

    What's abundant but not in demand is cheap. What's scarce but not in demand is ignored. Capital, talent and profits flow to whatever is scarce and valued as an engine of wealth creation.

    Geopolitically speaking, tangible assets have self-evident value: seas between your borders and potential enemies, a wealth of natural resources, and so on. But equally important are intangible assets: the human, social and symbolic capital of the people, culture and institutions of the nation.

    What seems scarce in the world is not just a specific tangible asset or intangible form of capital, but a mix that provides stability, ways for average citizens to get ahead and fosters innovations that can quickly spread through the society and economy.

    We could say engines of wealth creation are scarce, but if the wealth isn't distributed somewhat broadly, or the source of the wealth is not innovation but extraction of resources, any stability is temporary or illusory: resources run out, and wealth inequality fuels social and political instability.

    What's exceptional is a mix of assets and attributes that yield the stability needed for for people to get ahead, a playing field that's level enough for people to get ahead, and a culture of innovation, because ultimately only innovation increases productivity, and increasing productivity is the only sustainable source of wealth.

    For example, cheap energy is a gift to its owners and consumers; but eventually cheap energy is consumed and what's left becomes expensive. Innovation is needed to extract more work from the remaining energy.

    There is no one combination that yields Stability, Ways for Everyone to Get Ahead and Innovation; a variety of potentially successful models exist. Resource-poor Japan, for example, has been stable and wealthy for decades, despite a sclerotic economy.

    But as history speeds up and volatility increases, some elements of that mix become increasingly important. Resources that are suddenly unavailable due to weather or crises elsewhere can derail stability, so autarky (self-sufficiency) in key assets starts becoming consequential.

    By default, most institutions are conservative; they avoid rapid changes out of caution. It's a safe bet that what worked in the past will work in the future. But as history speeds up, clinging to "this is the way we've always done it" can become a losing strategy.

    How big is the slice of the culture and economy that spurs and spreads innovation–not just technological innovation, but social innovation? If that slice is tiny, then the society simply doesn't have the capacity to absorb innovations fast enough to change direction. If only 1% of a society and economy are encouraged to innovate, experiment and fail, that tiny slice simply doesn't have the mass to move the 99% in time to avoid instability.

    The Pareto Principle suggests that a minimum 4% of the society/economy must be actively innovating to eventually influence 20% of the society/economy, which then influences 80%. If 20% of a society/economy mutates/adapts rapidly due to the fast cycling of innovation, experimentation and failure, that nation has an exceptional advantage over other societies/economies that lack the ability to respond/adapt to changing circumstances.

    When what's worked for decades no longer works, the ability to find solutions and quickly distribute those solutions will make a profound difference in stability, ways to get ahead and innovation. Innovation disrupts the old ways, and that means some people will lose their jobs. The distribution of opportunity and wealth (ways to get ahead) are as critical as stability and innovation: the society/economy must have mechanisms for enabling those disrupted by change to adjust and find their footing.

    Another way of saying all this is: it's not wealth that counts, it's the engines of wealth creation that count, and the distribution mechanisms for that wealth. Wealth dissipates or is consumed if it isn't renewed; wealth that flows into the hands of the few at the expense of the many triggers instability.

    Those nations with the greatest stability, meritocracy and engines of innovation/dispersal of innovation will naturally attract capital and talent from nations that cannot muster up a mix of capital and attributes that generate Stability, Ways to Get Ahead and Innovation.

    We tend to assume that the key to stability is keeping everything the same, but as history speeds up, stability will require maintaining an active sector of instability that cycles efficiently through innovation, experimentation and failure and rapidly distributes what's faster, better cheaper.

    Conserving what is failing is not a path to stability. As Charles Darwin observed, "It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change."

  • "The Streets Of Athens Will Fill With Tanks": Kathimerini Reveals Grexit "Black Book" Shocker

    Over the course of six painful months, round after round of fraught negotiations between Greece and its creditors produced all manner of speculation about what a “Grexit” would actually entail. 

    With no precedent to turn to for guidance, mapping out the implications of an exit from the currency bloc was (and still is) a virtually impossible task, but the collective efforts of the sellside, the mainstream media, political analysts, and economists did manage to produce a veritable smorgasbord of diagrams, decision trees, flowcharts, and schematics, in a futile attempt to map the complex interplay of politics, economics, and financial concerns that would invariably follow if Athens decided to finally break off its ill-fated relationship with Brussels.

    And it wasn’t just outside observers drawing up Grexit plans. Despite the fact that EU officials denied the existence of a “Plan B” right up until German FinMin Wolfgang Schaeuble’s “swift time-out” alternative was “leaked” last weekend, no one outside of polite eurocrat circles pretends that a Greek exit wasn’t contemplated all along and indeed Yanis Varoufakis contends that Athens was threatened with capital controls as early as February if it did not acquiesce to creditor demands. 

    Now, in what is perhaps the most shocking revelation yet about what EU officials really thought may happen in the event Greece crashed out of the EMU and unceremoniously reintroduced the drachma, Kathimerini is out with a description of what the Greek daily calls the “Grexit Black Book,” which purportedly contained the suggestion that civil war would breakout in Greece in the event the country was forced out of the currency bloc.

    Here’s more (Google translated):

    On the 13th floor of the building Verlaymont in Brussels, a few meters from the office of the European Commission President, Jean-Claude Juncker, stored in a special security room and in a safe Greece’s exit plan from the Eurozone. There, in a multi-page volume, written in less than a month from 15-member team of the European Commission, answered questions on how to tackle such an outflow, including, as shocking as it may sound, even the possibility of the country out of the Treaty Schengen, and not only being driven outside the euro, but also outside the EU

     

    According to European official, in that the European Commission Summit already had a bound volume, a multi-page document, which described the Greek prime minister, before the start of the session, by the same Mr. Juncker with all the details of a Grexit , giving him to understand the legal and political context of such a decision. In multipage document in accordance with European official who has the ability to know its contents, there are detailed answers to 200 questions that would arise in case Grexit.

     

    These questions, as he explains official, are interrelated, as an exit from the euro would create a cascade of events, which would evolve in a relatively short time. From  the drachmopoiisi economy to foreign exchange controls that would take place at the country’s borders and which will ultimately lead at the exit of Greece from the Schengen Treaty.

     

    The authors of the draft, according to European official, conducted under conditions of absolute secrecy. A special group of 15 people of the European Commission, by direct contact with Greece started to prepare, and was also in direct contact with a number of senior officials and DGs in the European Commission who had expertise in specific areas. The writing of the project started when the expiry date of the program (end of June) was approaching, so it is the Commission prepared for every eventuality, and by the time the referendum was announced, Friday, June 26, the relevant procedures were accelerated. The weekend of the work referendum intensified, so now two days later, Tuesday of that Synod, the project has been finalized.

     

    According to well-informed source, involved in creating the plan worked “suffer the pain” as typically describe the “K” and “overwhelmed” because they could not believe that things had reached this point, and most of them had direct involvement with the Greek rescue programs. The European Commission also was hoped that even until the last minute solution would be found as members of this group knew better than anyone the consequences exit of Greece from the Eurozone and understand the cost of such a decision. One of those involved with direct knowledge of Greek reality in the critical phase of the training, he said the rest of the group that “if implemented this plan, the streets of Athens will sound tracks of tanks.”

    Sight unseen, it’s not entirely clear what is meant by “will sound the tracks of tanks,” and we assume the suggestion is not that the EU and its constituent member states would somehow seek to orchestrate a military takeover of the Greek state in the event Athens makes the ‘wrong’ decision about EMU membership. 

    Rather, the suggestion seems to be – and again this is simply an interpretation based on the information presented by Kathimerini – that Brussels was of the opinion that the referendum results together with the divergent rhetoric emanating from Greek lawmakers on the right and far-left betrayed the degree to which the Greek people were deeply divided. Although Tsipras’ concessions will undoubtedly have far-reaching implications for politics and Greek society in general, it looks as though Brussels feared that the economic malaise that would have resulted from redenomination might have triggered widespread social unrest that would ultimately have to be brought under control by the Greek army. 

    We’ll leave it to readers to determine both the accuracy of our interpretation and the degree to which the “secret” document’s mention of “tanks” represented an accurate assessment of the situation versus yet another attempt to scare Tsipras into capitulating, but one thing is for sure, even mentioning the possibility that “the streets of Athens” will be occupied by the military doesn’t seem like something one “partner” would say to another.

  • Inside Look At US Government Cyber Security

    Do you feel safe?

     

     

    Source: Townhall.com

  • Can You Hear the Fat Lady Singing? – Part I

    By Chris at www.CapitalistExploits.at

    Raoul Pal, author of the Global Macro Investor and the co-founder of Real Vision TV, is one of my favourite thinkers and investment minds. Regrettably I’ve not met him… yet, though I’ve been fortunate enough to meet his business partner Grant Williams, who is both smart, genuine and intellectually curious.

    One of the concepts Raoul discusses is “The Law of Unintended Consequence”. You can and absolutely should go watch it on Real Vision TV!

    The unintended consequences of the very decisions being made right now at a macro level set the stage for some particularly catastrophic outcomes. This relates in particular to Europe and China which I’ll delve into over the next few weeks.

    Global debt

    The chart above shows the incredible increase in global debt since 2000. The bond market, powered by a powerful combination of kryptonite, dilithium crystals and central bankers who have completely misread the market forces is beginning to crack around the edges.

    It’s worth remembering that absolutely no nation has ever survived a debt crisis and it’s equally important to understand that global debt is now about twice the size of the ENTIRE world economy – something the world has never dealt with before.

    Greece with 177% debt to GDP just came dangerously close to exiting the euro. Greeks themselves voted to regain their sovereignty but in the end Tsipras caved in to Eurocrat pressure. For the Eurocrats, an unelected group of intellectually challenged but progressively greedy group of bureaucrats, the last thing they need is citizens of Europe choosing their own outcomes. That would mean a rise of multiple fringe political groups. Greece had to be pulled into line and though it’ll inevitably and finally assist in the downfall of the entire European Union, for now it keeps an increasingly angry Europe glued together… just that little bit longer.

    The release valve for a country at risk of defaulting on its debt is the currency.

    Greece, however, no longer issues its own currency and as such there exists no release valve. Trapped in a deflationary spiral the economy continues to contract: 0.2% in the first quarter of this year following a 0.4% in the last quarter of 2014. When Greece joined the euro, they ceded monetary sovereignty to Brussels, and in doing so stuck a plug in its currency release valve.

    Greece GDP Growth

    Tourism, for example, makes up 18% of Greek GDP and remains relatively uncompetitive since everything is still priced in euros. If Greece threw off the shackles of the euro they’d be printing drachma with abandon, defaulting on their debts, and Germans and Brits would be turning lobster pink on their beaches while overindulging on ouzo.

    As unbalanced as the pink Germans and Brits would be this would allow for a re-balancing of the market. But it isn’t going to happen and Greece will remain in deflation, except it’ll do so now with ever increasing debts. This promises to simply increase the deflationary forces in play and create a much larger problem in the near future.

    These are some of the unintended consequences of the euro and the decisions being made across Europe. This is important since Greece is but one of 19 of the 28 member states officially using the euro.

    Greece is fairly meaningless on its own. It accounts for just 2.5% of European GDP – about the same as Maryland in the US. Inconsequential some say.

    But why Greece matters can be seen from the following chart:

    Debt EU

    Clearly Greece has bedfellows. What happens in Greece has the potential to become a trigger point and poster child for what happens elsewhere in Europe.

    Global capital flows are probably THE most important macro factor we look at.

    Right now we don’t see global capital flows within the EU states quite so clearly since they’re all using the same currency. Where we do see movement is in the spread between Bunds and both other member state bonds but particularly US bonds.

    Gavekal wrote an interesting piece on the topic of the widening spread between German and US bonds here. If you look at the chart below taken from Gavekal you’ll see the widening spread between German Bund’s and the US 10-year bond.

    Spread

    Bond holders are puking risk and they see risk particularly in European member states debt but they see risk in Europe in general and this includes Germany. This is a clear sign of stress in the system.

    An Asian Example

    The Asian crisis which began in Thailand provides a text book example of how over-indebted economies can unravel with the speed of a bush fire.

    February 5th, 1997, was the date that Somprasong Land, a Thai property developer, announced that it had failed to make a scheduled $3.1 million interest payment on an $80 billion Eurobond loan. Much like the Greeks are now tied to the euro, the Thai baht was pegged to the dollar plugging the currency release valve.

    Currency traders saw the anomalies much like bond traders currently see the anomalies between European countries, and began betting against the baht. The Thai central bank spent $5 billion defending the baht, reducing their currency reserves to $33 billion, before the Thai government bowed to the pressures allowing the baht to float freely. Once this took place the Thai debt bomb blew out as many debts priced in dollars became unpayable and the Baht collapsed.

    Much like Europe of today, the entire Asian region had taken on unsustainable levels of debt and once Thailand had “shown the way” it didn’t take long for a wave of selling hit Malaysia, Indonesia, South Korea and Japan.

    Similarly, consider that the Latam crisis in the early 80s was a direct result of the huge dollar bull market. Currency trends tend to be self-reinforcing in nature which is also why they tend to last longer than other market trends.

    This is what Raoul refers to as “unintended consequences”.

    As we’ve detailed in our Dollar Bull Report we believe we’re in a dollar bull market. The reasons for this are many though the largest by far is an unwinding of the USD carry trade, something I explained in “The Anatomy of a Carry Trade Bubble”.

    Credit bubbles and fixed exchange rates never end well. We have the mechanics of both in Europe. Greece is simply a symptom of a much larger problem. Yes, it’s small but that may be missing a more important point.

    Greece matters since the repercussions from what takes place in Greece increase the probability of the following happening:

    • Debt holders, largely German banks, risk having to mark to market existing debt held on their balance sheets at par.
    • Political fringe parties in neighboring European countries will be provided a blueprint to rally political support and exit the euro.
    • Investors noticing all of the above will actively look for the next “ugly girl” to eliminate for the EU popularity contest.
    • High levels of debt historically lead to war. Taking away release valves for this debt increases the probability of war.

    We’re already in a USD bull market and any of the above will only add fuel to this fire.

    Next week I’ll explain how I see this relating to China.

    – Chris

     

    “Politics is tricky; it cuts both ways. Every time you make a choice, it has unintended consequences.” – Stone Gossard

  • Caught On Tape: Pro Surfer Attacked By Shark On Live TV

    If you thought your day was bad, remember: it can always get worse as pro surfer Mick Fanning found out earlier today when during the final of the World Surfing League’s J-Bay Open in South Africa, he was attacked by a shark.

    Perhaps for the first time ever, the stunning encounter was captured on live TV. But most amazing, after Fanning felt the shark attack, he “punched” the shark in the back, which then promptly lost interest and Fanning got away completely unscathed.

    From CBS:

    “I felt something grab, got stuck in my leg rope, and I instantly just jumped,” a still-shocked Fanning said immediately after the incident. “It just kept coming at my board.”

     

    The Australian three-time world champion was lifted out of the water by a rescue jet ski mere seconds after the attack, which happened when he was paddling out to catch his first wave.

     

    “I just saw fins, I didn’t see teeth,” he said. “I was waiting for the teeth to come at me. I punched it in the back.”

     

    The WSL issued an official statement following the incident: “We are incredibly grateful that no one was seriously injured today. Mick’s composure and quick acting in the face of a terrifying situation was nothing short of heroic and the rapid response of our Water Safety personnel was commendable — they are truly world class at what they do.”

     

    The competition was canceled following the attack.

    The full dramatic encounter shown here.

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Jul 19

Today’s News July 19, 2015

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

    Originally authored by Pepe Escobar, via Asia Times,

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

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

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

    Foreign ministers pose for a group picture at UN building in Vienna

     

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

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

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

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

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

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

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

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

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

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

    And what about all that oil?

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

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

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

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

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

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

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

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

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

    Now for a real war on terror?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

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

     

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

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

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

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

  • Paul Craig Roberts: Greece's Lesson For Russia

    Submitted by Paul Craig Roberts,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  • Trumpism: The Ideology

    Submitted by Jeffrey Tucker via Liberty.me,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Trump believes himself to be that man.

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

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

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

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

  • All Hail Our Banking Overlords!

    Submitted by Chris Martenson via PeakProseprity.com,

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

    Consider this:

    Eurozone backs €7bn bridging loan

    Jul 16, 2105

     

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

     

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

     

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

     

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

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

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

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

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

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

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

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

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

    Greece: Banks Can Reopen … for Deposits

    Jul 17, 2015

     

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

     

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

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

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

    Savers have to be punished so debtors can be saved.

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

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

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

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

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

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

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

    (Source)

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

    Conclusion

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

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

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

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

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

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

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

  • Peak "Reach For Yield"

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

     

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

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

     

    Source: BofAML

  • How Student Loans Create Demand For Useless Degrees

    Submitted by Josh Grossman via The Mises Institute,

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

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

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

    All Degrees Are Not of Equal Value

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

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

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

    Ignoring Careers That Don’t Require a Degree

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

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

    Loans Drive Overall Demand

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

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

  • Putin Orders Formation Of New Military Reserve Force

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

    As The Telegraph details,

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

     

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

     

     

     

     

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

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

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

     

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

     

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

     

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

     

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

    *  *  *

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

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

  • Was Greece Set Up To Fail?

    Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

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

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

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

     

    and:

     

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

    *  *  *  *

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

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

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

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

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

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

     

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

     

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

     

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

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

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

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

     

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

     

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

     

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

     

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

     

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

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

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

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

    Greece is the tree – the rest is the forest .

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

    How Goldman Sachs Profited From the Greek Debt Crisis

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

     

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

     

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

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

     

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

     

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

     

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

     

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

     

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

    This time, though, Greece didn’t bite.

     

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

     

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

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

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

    Here’s a short timeline.

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

     

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

     

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

     

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

     

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

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

    From Citi

    How does a downgrade create a feedback loop? 

     

    Payment induced liquidity shock

    For many issuers’ credit contracts, a drop to a speculative grade rating acts as a payments trigger. For instance, the issuer may have commercial paper programs and line of credit agreements as a part of its short term borrowing program and a rating downgrade could qualify as an event of default for these borrowing arrangements. This enables the banks to declare all outstanding obligations as immediately due and payable.

     

    A rating downgrade could also force accelerated repayment schedules and penalty bank bond rates on swap contracts and variable-rate debt agreements.

     

    Thus, as a result of the rating action, an issuer could face increased liquidity risk at an unfortunate time

    when it is working to navigate its way out of a fiscal crisis.

     

     

    Knock-on rating downgrade risk

    In some instances, rating agencies may disagree on an issuer’s creditworthiness which could result in a split level rating for a prolonged period. But a drastic rating action by one main rating agency (either Moody’s or S&P) which knocks the issuer’s debt to below investment grade could force the other rating agencies to follow with a similar downgrade. While the other rating agencies might feel that underlying credit fundamentals of the issuer do not merit a sub-investment grade rating, their rating action could be dictated by negative implications due to the liquidity pressures posed by the first downgrade to junk status. Recently, S&P downgraded a credit as a result of Moody’s rating action that stated that its rating action reflected its view that the issuer’s efforts “are challenged by short-term interference” that prevents a solid and credible approach to resolving their fiscal problems.

     

    Shrinking buyer base

    Many investors have mandates to buy investment grade debt only and a fall to speculative grade status could cause existing investors to liquidate the holdings of the fallen credit and shrink the universe of buyers.

     

    Rising issuance costs

    In many cases the issuer may have been working diligently to reduce its exposure to bank credit risks in the event of a ratings deterioration (for e.g. shifting its variable-rate GOs and sales tax paper to a fixed rate by tapping its short-term paper program then converting it into long-term debt) but the unfortunate timing of the downgrade will make this task much more challenging as a shrunken buyer base for an entity’s debt, quite naturally, translates into a higher cost of debt.

    A higher cost of debt exacerbates liquidity problems and thus the feedback loop could continue to gain traction.

  • The Greatest Collapse In The History Of The VIX Index

    Submitted by Christopher Cole via Artemis Capital Management,

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

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

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     


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

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

    Submitted by Michael Snyder via The Economic Collapse blog,

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

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

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

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

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

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

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

    So what should be done about this?

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

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

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

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

     

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

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

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

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

     

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

    Things in Asia look quite ominous as well.

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

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

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

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

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

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

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

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

     

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

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

  • Gold, Stocks, Oil… Choose One

    Via ConvergEx's Nick Colas,

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

     

     

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

     

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

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

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

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

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

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

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

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

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

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

    Maybe not…

     

     

    Source: Investors.com

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

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

     

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

     

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

     

    Let’s take a quick walk down history lane.

     

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

     

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

     

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

     

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

     

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

     

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

     

     

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

     

    This process has accelerated in 2015.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    We are currently down to the last 25.

     

    To pick up yours, swing by…

     

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

     

    Best Regards

    Phoenix Capital Research

     

     

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

    Submitted by Roger Thomas via Valuewalk.com,

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

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

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

    Here's a look.

    Retail Sales vs Fed tightening cycles

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

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

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

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

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

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

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

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

    1 Retail Fed

     

    Industrial Production

    Here's a look at the Industrial Production picture.

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

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

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

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

     

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

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

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

    2 - IP and Fed Funds

     

    Capacity Utilization

    Here's a look at the Capacity Utilization picture.

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

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

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

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

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

    3 - Capacity Utilization and Fed Rate

     

    Conclusion

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

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

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

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

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

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

    It also cost Wheatley his job.

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

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

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

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

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

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

    We wonder where he may have gotten that idea:

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

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

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

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

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

     

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

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

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

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

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

     

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

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

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

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

    Via Scotiabank's Guy Haselmann,

    FOMC

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

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

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

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

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

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

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

    Bottom line.

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

    Financial Markets

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

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

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

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

    “Easy money is not costless” – Anonymous

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Jul 18

Today’s News July 18, 2015

  • A Ratio Worth Respecting

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

    0717-SPYGLD 
    What’s interesting is that the last major inflection point wasn’t precisely before the financial crisis took hold, as you might suspect. It was precisely a decade ago, in mid-2005. Back then, gold was dirt cheap, and as we know now, equities still had more than two years to go flying higher.

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

    0717-GLD 

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

    0717-SPY

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

  • Does This Chart Look Bullish To You?

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

     

     

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

     

    h/t @HumbleStudent

    Charts: Bloomberg

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

    Submitted by Michael Snyder via The Economic Collapse blog,

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

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

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

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

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

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

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

    So what should be done about this?

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

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

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

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

     

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

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

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

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

     

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

    Things in Asia look quite ominous as well.

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

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

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

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

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

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

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

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

     

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

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

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

    Submitted by Dr. Richard Ebeling via The Cobden Centre,

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

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

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

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

    Greek and European Union Crisis is the Result of Collectivism

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

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

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

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

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

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

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

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

    Greek Spendicus cartoon

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

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

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

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

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

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

    Mythical Greek Creatures cartoon

    The Politicized Economy of Power, Privilege and Connections

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

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

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

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

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

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

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

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

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

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

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

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

    Greek Bailout is a Sieve cartoon

    A New Politics and Economics of Freedom for Prosperity

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

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

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

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

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

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

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

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

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

    A Time When Euro was a Currency cartoon

    The Need to End Special Interest Politics and Privileges

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

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

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

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

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

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

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

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

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

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

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

  • Blankfein Joins The Billionaire Bankers' Club

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

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

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

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

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

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

     

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

     

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

     

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

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

  • Donald Trump The Demagogue

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

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

     

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

     

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

     

    Trump believes himself to be that man.

     

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

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

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

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

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

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

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    Trump believes himself to be that man.

     

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

     

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

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

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

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

     

    The long recession

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

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

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

     

    Dwindling jobs

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

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

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

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

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

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

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

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

     

    Plummeting income

    The Greek people are also facing dropping wages.

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

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

     

    Rising poverty

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

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

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

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

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

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

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

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

     

    Cuts to essential services

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

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

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

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

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

     

    Mental wellbeing

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

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

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

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

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

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

     

    The brain drain

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

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

     

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

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

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

     

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

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

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

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

    Submitted by Martin Armstrong via ArmstrongEconomics.com,

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

     

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

    Greek-Protest-Natzi

     

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

     

    cyprus-fuck-europe

     

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

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

     

    Draghi-Lagarde

     

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

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

    This is authoritarian government if we have ever seen one.

     

    Draghi-Euro

     

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

     

    european-parliament

     

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

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

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

     

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

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

     

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

    This is what we said last month:

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

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

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

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

     

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

     

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

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

  • Peru Sued By Illinois Firm For Unpaid Birdshit Bonds

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

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

    We were wrong. 

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

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

     

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

     

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

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

     

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

     

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

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

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

    (Don Manuel Freyre, Envoy Extraordinaire)  

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

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

     

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

     

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

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

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

     

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

     

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

     

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

     

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

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

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

     

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

     

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

     

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

     

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

    Still the farmers face an uphill battle…

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

     

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

     

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

     

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

     

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

     

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

    *  *  *

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

  • The Wall Of Worry

    Greece… just another brick in the wall…

     

     

    Nothing to see here, move along…

     

     

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

     

    Source: @StockCats

  • 5 Things To Ponder: Beach Reading

    Submitted by Lance Roberts via STA Wealth Management,

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

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

    SP500-Technical-Analysis-071615

    As I noted earlier this week:

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

     

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

     

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

     

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

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

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

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

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

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

     

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

     

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

     

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

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

     

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

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

     

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

     

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

     

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

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

     

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

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

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

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

     

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

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

    01-One-and-Done-Chart-1

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

     

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

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

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

    Psychology of Risk-Behavioral Finance Perspective

    Other Interesting Reads

    The Future Of Politically Correct Cultism by Brandon Smith via ZeroHedge

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

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

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

    Have a great weekend.

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

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

     

    Just as we said this morning…

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

     

    And Volume just got worse and worse all week…

     

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

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

    Trannies and Small Caps disappointed on the week…

     

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

     

    But Small Caps were ugly today…

     

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

     

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

     

    Google had a day…

     

    And Netflix had a week…

     

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

     

    • VIX -28% – biggest drop since Jan 2013

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

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

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

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

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

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

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

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

     

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

     

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

     

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

     

    Charts: Bloomberg

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

    Don’t ask. Period.

     

     

    Source: Cagle Post

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

    Submitted by George Kinits of Alcimos

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

    As FOX reports,

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

     

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

     

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

    *  *  * 

    *  *  *

    Here's Martin Armstrong on the matter…

    Tump-Donald

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

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

    *  *  *

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

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

    Searching for ships that do not want to be found…

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

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

     

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

     

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

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

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

     

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

     

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

     

    …

     

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

     

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

    *  *  *

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

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Jul 17

Today’s News July 17, 2015

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

    Submitted by Paul Craig Roberts,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    The 21st century Enclosures have begun.

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

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

    Pamela Downs, 45

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

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

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

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

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

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

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

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

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

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

    She was charged with criminal simulation and counterfeiting.

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

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

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

    click image fir massive legible version

     

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

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

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

    Courtesy of: Visual Capitalist

  • Tennessee Mass Killer Linked To Islamic Terrorism

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

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

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

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

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

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

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

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

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

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

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

     

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

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

    While Greece is now dominating the debt default stage, the real tragedy is playing out much closer to home, with the downward spiral of Puerto Rico. As in Greece, the Puerto Rican economy has been destroyed by its participation in an unrealistic monetary system that it does not control and the failure of domestic politicians to confront their own insolvency. But the damage done to the Puerto Rican economy by the United States has been far more debilitating than whatever damage the European Union has inflicted on Greece. In fact, the lessons we should be learning in Puerto Rico, most notably how socialistic labor and tax policies can devastate an economy, should serve as a wake up call to those advocating prescribing the same for the mainland.  
     
    The U.S. has bombed the territory of Puerto Rico with five supposedly well-meaning, but economically devastating policies. It has:
    1. Exempted the Island's government debt from all U.S. taxes in the Jones-Shaforth Act.
    2. Eliminated U.S. tax breaks for private sector investment with the expiration of section 936 of the U.S. Internal Revenue Code.
    3. Required the nation to abide by a restrictive trade arrangement.
    4. Made the Island subject to the U.S. minimum wage.
    5. Enabled Puerto Rico to offer generous welfare benefits relative to income.
    While passage of such politically popular laws seems benign on the surface (and have allowed politicians to claim that their efforts have helped the poorest Puerto Ricans), in reality they have deepened the poverty of the very people the laws were supposedly designed to help. The lessons here are so obvious that only the most ardent supporters of government economic control can fail to comprehend them.
     
    Tax-Free Debt
     
    By exempting U.S. citizens from taxes on interest paid on Puerto Rican sovereign debt, Washington sought to help the Puerto Rican economy by making it easier and cheaper for the Island's government to borrow from the mainland. As a result, Puerto Rican government bonds became a staple holding of many U.S. municipal bond funds. As with Fannie Mae and Freddie Mac bonds a decade ago, many investors believed that these Puerto Rican bonds had an implied U.S. government guarantee. This meant that the Puerto Rican government could borrow for far less than it could have without such a belief. However, this subsidy did not grow the Puerto Rican economy, but simply the size of the government, which had the perverse effect of stifling private sector growth.  
     
    In contrast to the tax-free income earned by Americans who buy Puerto Rican government bonds, those with the bad sense to lend to Puerto Rican businesses were taxed on the interest payments that they received. Businesses could have used the funds for actual capital investment (that could have increased the Island's productivity), but instead the money flowed to the Government which used it to buy votes with generous public sector benefits that did nothing to grow the Island's economy or put it in a better position to repay. That problem was left for future taxpayers who no politician seeking votes in the present cared about.
     
    This dynamic is almost identical to what happened in Greece, where low borrowing costs, made possible by the strong euro currency and the implied backstop of the European Central Bank and the more solvent northern European nations, permitted the Greek government to borrow at far lower rates than its strained finances would have otherwise allowed.
     
    Taxing Private Investment
     
    Perversely, as the U.S. government made it easier for the Puerto Rican government to borrow, it made it harder for the private sector to do so. In 2006 the government ended a tax break that exempted corporate profits earned on private sector investment in Puerto Rico from U.S. taxes. As a result, U.S. businesses that had been making investments and hiring workers on the Island pulled up stakes and moved to more tax-friendly jurisdictions. The result was an erosion of the Island's local tax base, just as more borrowing (made possible by triple tax-free government debt) obligated the remaining Puerto Rican taxpayers to greater future liabilities.
     
    The Jones Act
     
    The Jones Act, a 1920 law designed to protect the U.S. merchant marine from foreign competition, has had a devastating effect on Puerto Rico, and should be used as a cautionary tale to illustrate the dangers of trade barriers. Under the terms of this horrible law, foreign-flagged ships are prevented from carrying cargo between two U.S. ports. According to the law, Puerto Rico counts as a U.S. port. So a container ship bringing goods from China to the U.S. mainland is prevented from stopping in Puerto Rico on the way. Instead, the cargo must be dropped off at a mainland port, then reloaded onto an expensive U.S.-flagged ship, and transported back to Puerto Rico. As a result, shipping costs to and from Puerto Rico are the highest in the Caribbean. This reduces trade between Puerto Rico and the rest of the world. Since a large percentage of the finished goods used by Puerto Ricans are imported, the result is much higher consumer prices and fewer private sector jobs. Even though median incomes in Puerto Rico are just over half that of the poorest U.S. state, thanks to the Jones Act, the cost of living is actually higher than the average state.
     
    The Federal Minimum Wage
     
    In 1938 the Fair Labor Standards Act subjected Puerto Rico to a federal minimum wage, but it was not until 1983 that a 1974 act, which required that the Island match the mainland's minimum wage, was fully phased in. The current Federal minimum wage of $7.25 per hour is 77% of Puerto Rico's current median wage of $9.42. In contrast, the Federal minimum is only 43% of the U.S. median wage of almost $17 per hour (Bureau of Labor Statistics (BLS), May 2014). The U.S. minimum wage would have to be more than $13 per hour to match that Puerto Rico proportion. The disparity is greater when comparing minimum wage income to per capita income.
     
    The imposition of an insupportably high minimum wage has meant that entry level jobs simply don't exist in Puerto Rico. Unemployment is over 12% (BLS), and the labor force participation rate is about 43% (as opposed to 63% on the mainland) (The World Bank). A "success" by the Obama administration in raising the Federal minimum to $10 per hour would mean that the minimum wage in Puerto Rico would be higher than the current medium wage. Such a move would result in layoffs on the Island and another step down into the economic pit. I predict that it could bring on a crisis similar to the one created in the last decade in American Samoa when that Island’s economy was devastated by an unsustainable increase in the minimum wage.
     
    It will be interesting to see if our progressive politicians will have enough forethought and mercy to exempt Puerto Rico from minimum wage increases. But to do so would force them to acknowledge the destructive nature of the law, an admission that they would take great pains to avoid. 
     
    Welfare   
     
    In 2013 median income in Puerto Rico was just over half  that of the poorest state in the union (Mississippi) but welfare benefits are very similar. This means that the incentive to forgo public assistance in favor of a job is greatly reduced in Puerto Rico, as a larger percentage of those on public assistance would do better financially by turning down a low paying job. Because of these perverse incentives not to work, fewer than half of working age males are employed and 45% of the Island's population lived below the federal poverty line (U.S. Census Bureau, American Community Survey Briefs issued Sep. 2014). According to a 2012 report by the New York Federal Reserve Bank, 40% of Island income consists of transfer payments, and 35% of the Island's residents receive food stamps (Fox News Latino, 3/11/14).
     
    In other words, Puerto Rico's problems are strikingly similar to those of Greece. Its government spends chronically more than it raises in taxes, its economy is trapped in a regulatory morass, and its economic destiny is largely in the hands of others.
     
    *  *  *
    Puerto Rico’s economy and population have been shrinking for almost a decade, and debts have ballooned to about 100 per cent of its gross national product as the government took advantage of the tax exemption enjoyed by US municipal debt.
     
    The Puerto Rico Electric Power Authority is already restructuring $9bn of bonds and loans.
     
    By September 1 Puerto Rico is expected to deliver a plan for turning round its finances. Officials have called for patience from creditors about how its various bondholders will be treated.
    Patience… indeed.
     
    *  *  *
     
    The solutions to Puerto Rico's problems are simple, but, Peter Schiff warns, politically toxic for mainland politicians to acknowledge.
    Puerto Rico must be allowed to declare bankruptcy, the Federal incentive for the Puerto Rican government to borrow money must be eliminated, Puerto Rico must be exempted from both the Jones Act and the Federal Minimum wage, and Federal welfare requirements must be reduced. Puerto Rico already has the huge advantages of being exempt from both the Federal Income Tax and Obamacare, so with a fresh start, free from oppressive debt and federal regulations, capitalism could quickly restore the prosperity socialism destroyed.
     
    With the current incentives provided by Acts 20 and 22 (which basically exempt Puerto Rico-sourced income for new arrivals from local as well as federal income tax – see my report on America's Tax Free Zone) and with some additional local free market labor reforms, in a generation it's possible that Puerto Ricans could enjoy higher per capita incomes than citizens of any U.S. state.
    If Washington really wanted to accelerate the process, it should exempt mainland residents from all income taxes, including the AMT, on Puerto Rico-sourced investment income, including dividends, capital gains, and interest related to capital investment.

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

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

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

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

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

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

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

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

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

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

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

    From BofAML:

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

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

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

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

     

    FTSE China A50 Futures opened a smidge higher but are leaking lower (while CSI-300 Futures are holding 1% gains pre-open)

     

    Deleveraging is happening… but has a long way to go…

    • *SHANGHAI MARGIN DEBT FALLS TO FOUR-MONTH LOW

    China margin debt is down 37% from its highs…

    And then there's this utter bollocks…

    • *CHINA STOCK MARKET IS "SAFEST" IN WORLD, HKEX CHAIR LI SAYS

    Yep, looks totally "safe"…

     

    Finally, on China, we leave you with Credit Suisse's Andrew garthwaite: "Our concern is that a triple bubble in housing, credit and investment comes with the significant risk of a hard landing."

    *  *  *

    In other news, Japan has its fair share of disasters…

    Sharp is the worst-performing stock on Japan's benchmark average this morning after the Nikkei newspaper said the electronics giant is likely to lose big in the April to June quarter.

     

    As the Nikkei 225 struggles to gain for a fifth day – up 0.1 per cent – Sharp shares are down 3 per cent in the first hour of trade.

    And Korea…

    And Samsung Heavy is down 17% to 7 year lows – this is the biggest drop since 1994

     

     Charts: Bloomberg

     

     

  • Law Firm Stops Hiring Ivy League Grads, Demands "Gritty Street Lawyers"

    Having taken on hundreds of thousands of dollars worth of loans to achieve the ultimate goal of becoming an Ivy League law graduate, it appears, in at least one case, that your abilities are not required. As WSJ reports, Adam Leitman Bailey, a Manhattan attorney who runs a real estate firm, says he looks to hire law school graduates who have grit, ambition and a resolve to succeed in the legal profession. For that reason, he says, his firm has instituted a rule: If your resume lists your law school as Yale, Harvard, Columbia, Cornell or University of Pennsylvania, you need not apply because you won’t get the job.


    As The Wall Street Journal reports    ,

    Mr. Bailey, a graduate of Syracuse University Law School, says he admires the nation’s top law schools and doesn’t deny they attract some of the brightest minds. But says the best applicants hail from schools lower down the totem pole of prestige.

     

    In an article titled “Why We Do Not Hire Law School Graduates from the Ivy League Schools.” Mr. Bailey told Law Blog his ban applies to other elite schools outside the Ivy League, like Stanford and New York University.

     

    Explaining the policy, he writes that students who are accepted into top-ranked schools may have aced the LSAT, but, very broadly generalizing, they’ve climbed their way to a law degree without testing their mettle.

     

    [M]any of these law schools either fail to rank their students or do not even grade them at all. (1) Ergo, the students have no incentive to work hard and learn when they have guaranteed summer associate positions and guaranteed job offers. Their students typically have no incentive to get the best grades in their classes. They also have no incentive to squeeze as much learning as possible out of the law school experience. Most importantly, the real world simulation of dealing with the pressures of a case or deal may be removed when the students do not need to compete for a job in a difficult market…

     

    [T]hese students may become a United States Supreme Court Justice or a future President of the United States so political theory and international law and classes on capital punishment may be extremely important to them. However, we need our street lawyers ready for battle and taking trial practice, corporations, tax, civil procedure and any real estate and litigation course offered.

     

    In his piece he concedes that a few of the senior lawyers at Adam Leitman Bailey PC are indeed Ivy Leaguers, including the head of the firm’s real estate litigation practice group, a graduate of University of Pennsylvania Law School.

     

    “By the time these Ivy League attorneys come to our firm, we have seen them in the courtroom and observed their talents,” Mr. Bailey told Law Blog by email.

    *  *  *

    Ironically, Mr. Bailey, whose firm hires one to three law school graduates a year, also writes that the top students from the highest ranked schools “have no interest in applying for a job at our firm.”

  • The World Explained (In 1 Cartoon)

    Presented with no comment…

     

     

    Source: @RoykoLePoyko

  • How Likely Is Hyperinflation In The U.S?

    Authored by Seaborn Hall, originally posted at Advisor Perspectives,

    My previous article, “How likely is hyperinflation in the US? Part One,” covered hyperinflation's history, process, effects, definition, types and causes, as well as how to measure its emergence in nations using casual symptoms. Part Two answers the questions of how to gauge the likelihood of hyperinflation in the United States, what the emerging dangers are, how it might happen here and how to prepare if it does.

    As stated in Part One, because there are so many conflicting or just different views among analysts relative to hyperinflation, it is difficult for the average advisor or person investing for retirement – or just self-preservation – to know what to believe and how to act. Many of the warnings related to hyperinflation sound like Chicken Little's cry that the sky is falling.

    In the midst of the alarmism and confusion, these articles sift through the best resources available, including Bank for International Settlements (BIS), International Monetary Fund (IMF), Cato Institute and Fed papers to provide some clarity.

    Measuring hyperinflation in the U.S.A.

    The U.S. has come just short of hyperinflation twice before: once during the Revolutionary War and the second time, in March 1864, towards the end of the Civil War. The wars created high debt and supply disruptions within the continental states, congruent with fast acting hyperinflation, as explained in Part One.

    The U.S. has geographic advantages. It has natural supply routes made up of rivers, natural ports and inter-coastal waterways connected by a sophisticated rail and interstate system. It is protected by the natural boundaries of oceans, mountains and friendly bordering states. It is also not dependent on one export, like oil. These geographical and man-enhanced attributes temper any economic trend towards hyperinflation in the modern U.S.

    As previously noted, hyperinflation may be expected when there is persistent monetization and when the currency exchange premium – the premium the most-used foreign currency commands over the native currency – rises above 50%. This later sign typically occurs during a period of high inflation and up to three years before hyperinflation appears. This period may or may not include a currency crisis, which is distinct from, and can be an initial phase of, high inflation or hyperinflation. More broadly, the dangers of hyperinflation are measured by casual symptoms. These include fiscal, monetary and political causes and symptoms.

    As to fiscal symptoms in the U.S., according to a recent JP Morgan (JPM) presentation, net U.S. debt is presently around 75% of GDP, high, but non-critical. Foreign officials hold 35% of this debt; the Fed holds 16 percent. Both are significant, but not excessive. And, as Prasad and Ye note, debt cements the U.S. dollar role as global reserve; that is, as long as it is not unsustainable, and interest is a manageable piece of the total budget (chart, below).

    On this front, the U.S. does not have enough reserves to cover its short-term debt, but the Guidotti-Greenspan rule may not apply to Advanced Economies. And, as long as 10-year yields, currently about 2.35%, stay below 7% global bond investors tend not to panic, especially when the U.S. is the best of a bad lot.

    Where Does All the Money Go

    Deficits-to-expenditures is marginal at about 18%. According to the Wall Street Journal, the deficit has decreased to only 3% of GDP in 2014. The deficit was $1.4 trillion six years ago and the Congressional Budget Office (CBO) projects it to be just $486 billion this year. But, it is expected to increase in 2016 and according to The Heritage Foundation could be worrisome again by 2021.

    Also on the down side, according to Heritage, net U.S. debt, above, will reach 100% of GDP, a dangerous level, around 2028. At $18.2 trillion, total federal debt is already 102.5% of GDP. But most analysts feel that net debt (total minus intra-governmental debt) is the more critical measure. By 2024, mandatory expenditures, or entitlements plus interest on the debt, will be 75% of revenues. By 2030 they will consume revenues (chart, below).

    As to monetary symptoms, Federal Reserve liabilities are also high, about $4.4 trillion. According to Guggenheim, the Federal Reserve's debt/equity ratio was 51:1 in July 2012, more than double 2008, and almost double commercial institutions that failed. And Fed Assets as a percentage of GDP have more than doubled since 2007. But central banks are judged differently, as Japan's experience implies, thus far at least. John Cochrane, a professor of finance at the University of Chicago, points out more specifically that Fed reserves do not lead to hyperinflation. It is also important to understand that printing money or QE is not necessarily the same as monetizing the debt.

    All Tax Revenue Will Go Toward Entitlements and Net Interest by 2030

    In most cases, central banks control interest rates and reserves through government security and foreign currency purchases. To create money, a central bank purchases securities when it digitally credits the accounts of dealers with whom it does business. These dealer banks, like JP Morgan, are immediately richer. In some cases they park the money with the Fed, earning interest; in others, they invest it, some in riskier ways, like derivatives. For money velocity to increase they must actually loan it, which, according to Hanke, few currently do. This is partially due to increased federal regulations, like Dodd-Frank, instituted since the GFC, that place strict restrictions on lending activities.

    Cabinet Appointments: Prior Private Sector Experience, 1900-2009

    Monetizing is when the central bank buys government securities directly from the Treasury to fund existing or, unplanned debt, as in the case of Zimbabwe or Japan at present (see Part One). An independent central bank firmly resists such pressure from the political power. The danger, of course, is that this distinction becomes unclear.

    And, as a 2008 IMF report on the Fed stated, "Compared with its posture during the Great Depression, the Fed today is taking considerably more risk and the scope for possible profit and loss outcomes is much greater." The report also points out that the Fed's ability to make a profit during every year of the Great Depression era was largely due to its accumulation of gold. This is a far cry from the make-up of the Fed's burgeoning balance sheet today.

    Another emerging hyperinflation danger is in the area of political management relative to economic health. The Obama administration has less business experience than previous administrations (chart above). Surveys also show that the American people see themselves as more divided than at any time in history (below), and other studies show that the political center is shrinking. Political mismanagement that suddenly increases the debt and social tensions could lead to a crisis that results in high inflation.

    Years ago, R. E. McMaster, author of No Time for Slaves, proposed a simple formula to facilitate understanding of the interplay between government and economics: government + religion = economics. According to Hanke, the problem with Venezuela and its hyperinflation is Hugo Chavez's successor, Maduro; the problem in Yugoslavia was Milosevic; the problem in Zimbabwe was and is Mugabe. They all adhered to the ten-point playbook of the Communist Manifesto, which wrecked their economies and the social order. According to McMaster government does not operate in a vacuum, but those who lead administer by their philosophy or religion.

    Public Sees Deeper Political Divisions, Most Expect Them to Continue

    This simple, but profound theorem plays out around the world today. It can lead to prosperity or economic crisis and hyperinflation. In America, this theorem has led to prosperity. The respect for individual rights and property rights are the pillars of the free market. The founders assured these rights through the founding documents, especially the U.S. Constitution.

    Executive Orders over the years

    According to Coltart (see Part One), the primary reason for Zimbabwe's hyperinflation was that the deficiencies of their constitution allowed a vast disparity of power between the executive office and the legislative and judicial branches. Most worrisome relative to the U.S. Constitution are a list of Supreme Court reversed Executive Orders that even liberal law scholars say blatantly violate the Constitution. It is the quality, not the quantity (above ) of these orders that is the issue. If Americans continue to allow this executive tendency to span administrations, as they have in the past, the dilution of their constitutional rights may eventually lead to hyperinflation in the U.S.A.

    For the present, inflation and money velocity remain low. Though there are various reasons high inflation may appear, typically, there need to be two elements: economic capacity, including low unemployment, and high money velocity. With even core inflation (PCE) currently under 1.2% (as of June 15th headline PCE is 0.2%), economic capacity and lower unemployment just emerging, and money velocity still quite low, high inflation does not appear to be on the horizon.

    This is not to say that other factors could not instigate high inflation or hyperinflation. Some of these "black swans" are dealt with below. But, while Reinhart and Rogoff are no doubt right about the rampant denial afflicting advanced nations relative to future sub-par growth, QE, debt restructuring and coming high inflation, a crisis appears years away. Greece is symbolic of that looming crisis; but it is not Bear Stearns or Lehman.

    This time is not different; but global reserve status, the trust and confidence of investors and deep and wide financial markets make the U.S. unique. There are still enough questions not to be dogmatic, but until the U.S. experiences an increase in causal symptoms or a black swan that fractures global confidence in its economy, hyperinflation is not a worry.

    Black swans that could lead to high inflation or hyperinflation

    The above being noted, according to FT, the global system is in many ways more fragile today than before the GFC. And, considering its fragile nature, many incidents could come out of nowhere and lead to a crisis, or series of crises, that eventually results in a currency crisis and/or hyperinflation.

    One of the prominent possibilities is a successful cyber-attack on a major institution or the U.S. itself, especially the nation's power grids, its nuclear plants, its water supply or its major financial institutions. JPM's, NASDAQ's, and Sony's recent experience serve as examples, and with increasing tensions with Russia and China this area will continue to be a challenge. The director of the NSA recently warned that a cyber-attack will cause a major systems collapse within a decade unless the U.S. develops counter strategy immediately. According to Greg Medcraft, chairman of the board of the International Organization of Securities Commissions, the next black swan will be a cyber-attack.

    SG Swan chart: Political and financial risks now outnumber real economy risks

    Though the U.S. has largely avoided catastrophe in the past, there is also the possibility that it might experience more natural disasters in the future. Remember Zimbabwe? About 19% of the U.S. is presently in severe or extreme drought, 29% in moderate to extreme conditions and approximately 40% in abnormal dryness or greater. 100% of California is in extreme, severe or exceptional drought. Also alarming is that according to the Wall Street Journal U.S. beekeepers have been losing 30% of their bees for the last decade, above the 19% sustainable rate. The above issues may place strains on agriculture, lead to supply disruptions and drive up food prices in future years.

    As I covered more extensively in “Evaluating the Arguments for the Dollar's Demise,” in the last decade, globally, at least, there has been an, apparent, increase in natural disasters. According to a 2013 article in The New England Journal of Medicine, there were three times as many natural disasters from 2000 to 2009 as there were from 1980 to 1989. And, according to one account, it was the 1906 San Francisco earthquake and fire that led directly to the Financial Panic of 1907.

    In another critical area, both George W. Bush and Barack Obama have identified nuclear terrorism as the greatest threat to national security. According to a 2008 FBI study, any terrorist nuclear weapon is likely to have a yield of about 1-kiloton (chart, below ), large enough to destroy a city center and with the potential to contaminate surrounding area for up to 4 miles, depending on wind direction (chart, 2nd below ). According to Nukemap, a 1-kiloton detonation in lower Manhattan would kill about 30,000 people and cause three times as many injuries, some fatal. A smaller possibility is a 10-kiloton event with fallout reaching 20 miles.

    Miles from ground-zero

    Even before 911, the U.S. recognized that terrorist groups were attempting to acquire nuclear material. According to one recent joint report by Belfer Center at Harvard endorsed by military leaders, constructing a crude nuclear device is easier today than constructing a safe, reliable weapon. Tests indicate that intelligent operatives could defeat security systems holding weapons or materials and in the last five years several sites have been penetrated. As of 2014, at least four key core Al Qaeda nuclear operatives were still at large. And the difficulty of smuggling nuclear material into the U.S. is largely overstated. But the primary concern is that with one detonation terrorists could claim they had more bombs hidden, creating mass panic.

    General radioactive fallout pattern

    The nuclear scenario would be a global catastrophe, claiming thousands of lives, shutting down trade and exporting dire consequences to other nations. The cost in response and retaliation would also add enormously to U.S. debt, potentially accelerating the nation towards economic crisis. According to the above Belfer report, the risk of a nuclear terrorist attack on U.S. soil is greater than 1 in 100 every single year.

    In addition to all of the above possibilities there are ongoing currency wars, the reemergence of the Eurozone crisis, the Ukraine and the potential destabilization of Russia, the China slowdown and real estate bubble, Japanese debt, the Sino-Japanese conflict and the craziness of mad regimes like North Korea and Iran to worry about. And we haven't even addressed nuclear sabotage, dirty bombs, an EMP device, ISIS and the Middle East as a whole, other U.S. terrorist events, central bank errors or another financial meltdown due to the approximately $70 trillion in global derivatives. In many ways, the world we currently live in is like dry kindling waiting for an inerrant spark to set it ablaze.

    Hyperinflation in the U.S.A.: How and when it might happen

    The risk of the economy collapsing and instigating hyperinflation is much like the theory of the avalanche: many of the items are in place, and all that is needed is the right trigger to set them off. Whether it comes in the next few years or twenty years from now is impossible to predict and depends on too many unknowns.

    Some, like Eswar S. Prasad, argue in The Dollar Trap that the intricate nature of global mechanisms will keep the dollar in play indefinitely – and the world largely in balance. Others, like James Rickards, in The Death of Money, insist that the complexity of global financial interactions and their tipping points will crash the U.S. economic system. Who is right?

    Based on the above analysis, unless the U.S. experiences a crisis greater than 911 or the GFC, hyperinflation is not a likely scenario for the next five years and probably more like twenty years. But, the greater and the more numerous crises are, the more likely that hyperinflation will come quickly. What if a black swan or a series of crises led to a perfect storm?

    A 1 kiloton nuclear terrorist attack strikes the U.S. in either New York City or Washington D.C. The stock markets crash, losing half their value. The EZ breaks apart and the resulting malaise spreads to the global economy. Instead of the confidence in crisis coming to the U.S., the U.S. bond market implodes and global money runs to gold, silver, foreign currencies and various ex-US bonds. In the U.S. prices rise and stocks rebound some with them – eventually. The U.S. military retaliates in foreign lands for the nuclear attack but walks into a trap.

    Disunity disintegrates into political civil war and panic incites unrest, resulting in martial law. The current drought increases and food supply is cut in half. Fed printing presses finally result in high inflation. Destruction from an earthquake and/or a volcanic eruption lays waste to much of a major city. All of these events combined destroy infrastructure, disrupt distribution, exacerbate the drought and kill leaders. Foreign governments take advantage of America's weakness and institute a cyber-attack. Power failures occur nation-wide.

    Hyperinflation ensues. The stock market falls as confidence wanes. Loss of control leads to a government coup, bank account freezes and despotism. The U.S. descends into an inflationary depression leading to fear of invasion, the dollar's fall and its replacement as the global reserve.

    It would probably take more than one isolated event – even a major one – to create the conditions for hyperinflation in the U.S. And, it took a decade for a similar process to unfold in other nations. But, it can occur faster in the midst of critical events.

    As I stated in “Evaluating the Arguments for the Dollar's Demise,” the U.S. has been protected by a hedge when it comes to disaster. But, events like Katrina, national drought, and the recent Supreme Court decisions relative to Constitutional interpretation hint at a new and more divisive era. Though for the present things seem fine, there is more than one route to an avalanche now than there may have been just a few years ago.

    Replacement of the dollar as global reserve as an isolated event might instigate hyperinflation more quickly. However, only one reserve currency nation has ever experienced a hyperinflation – France, from 1795-96, during the years of the French Revolution. And no nation has ever experienced a hyperinflation as a result of losing global reserve status. Other causal symptoms would likely be apparent, leaving some time to prepare.

    How to prepare for hyperinflation

    Here is some broad investment advice that takes into account the dichotomy of the above conclusions relative to hyperinflation. Portfolio allocations can start small and increase as events on the ground change:

    1. Protect what you have: Diversify your portfolio globally. Hold some real estate. Borrow at fixed rates while interest rates are low.

    2. Consider an international account. Set up expeditious portfolio transitions into foreign currency accounts and international funds with a flexible strategy for transference of at least some assets in the event of escalating volatility, major U.S. weakness or black swans.

    3. Allocate part of your portfolio to alternative funds and hedge-fund-like strategies. If qualified, consider hedge funds, especially those with a global macro and/or event-driven focus.

      Silver and gold in marks

    4. Consider natural resources, agriculture and commodities based funds, especially now when commodities overall, including oil, have corrected and mining is near a historical low cost point versus gold. Remember that water is liquid gold and may be scarcer in the future.

    5. Accumulate tradable items: physical gold and silver (the chart above shows the rise of gold and silver during the Weimar Germany hyperinflation); jewelry; stored food and water; wine; and foreign currency.

    Hyperinflation in the U.S. is coming sometime in the next 20 years or so, and this isn't a cry from a Chicken Little, but a conclusion that the analysis strongly suggests. It is possible hyperinflation could happen during the next few years, but that seems unlikely since it would require a series of major crises and political blunders – events unprecedented in the history of the United States. If this led to a corruption of Constitutional rights in the midst of an exaltation of the Executive Branch that resulted in loss of the rule of law, hyperinflation might result. This is why the understanding and interpretation of the U.S. Constitution, especially in the context of executive orders, may be the most important issue before Congress, the judicial branch and the American people over the next few years – regardless of which party rules.

    It is much more probable that hyperinflation, when it comes to the U.S., will be preceded by a long slow decline that will include a protracted period of high inflation, and that the crash of the dollar and hyperinflation will be the final tumble off a looming, steep cliff. The indications from this analysis point to a convergence of events sometime in the mid-2020's to early 2030's – unless the American people can somehow unite and motivate their politicians to accomplish the hard, almost impossible task of cutting mountainous entitlements adding annually to U.S. debt. But, of course, if the perfect storm occurs, hyperinflation could arrive sooner.

    For the chaos of change it brings, hyperinflation has been described as an economy without memory. It can also be viewed as a furtive civil war a nation's political leaders wage with its people over who will pay for the nation's sins. Its battlegrounds, victories and defeats answer the question of who will wave the white flag over the extravagance of the nation's mismanagement. Ultimately, the people – and the leaders – are both forced to surrender.

    The good news is that, with time, every nation returns from the devastation of hyperinflation to the degree that it embraces corrective measures and free market principles. Regardless of what else might occur, in this sense the U.S. has a sure foundation, a rich history and a hopeful future.

  • Fearing Greek Fallout, ECB Extends "Secret" Credit Lines To Balkans

    As discussions between Greece and its creditors deteriorated and pressure on the country’s banking sector mounted, some analysts began to look nervously towards Bulgaria and Romania where Greek banks control a substantial percentage of total banking assets. 

    The Monday following Greek PM Alexis Tsipras’ referendum call, yields on Bulgarian, Romanian, and Serbian bonds jumped, reflecting souring investor sentiment and the countries’ central banks quickly released statements aimed at calming the nerves of investors and, more importantly, of depositors. 

    As Morgan Stanley noted in May, the real risk  “is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits.” The bank continued: “Although well capitalised and liquid, Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in.”

    Shortly thereafter the “no contagion risk” myth collapsed entirely when Bloomberg reported that the ECB had stepped in to shield Bulgaria from any potential fallout from capital controls in Greece. “The ECB is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation. The ECB would provide access to its refinancing operations, offering euros to the banking system against eligible collateral,” Bloomberg said, citing unnamed officials. 

    Now, FT is out reporting that the ECB has extended “secret credit lines” to Bulgaria and Romania in order to forestall asset seizures. Here’s more:

    The European Central Bank has introduced secret credit lines to Bulgaria and Romania as part of a broader effort to convince foreign regulators not to pull the plug on the local subsidiaries of Greek banks.

     

    News of the behind-the-scenes support for the subsidiaries comes as ECB governors decide on Thursday whether to extend a €89bn lifeline in emergency eurozone funding to Greece’s beleaguered financial sector.

     

    Greece’s Piraeus, National Bank of Greece, Eurobank and Alpha Bank all have substantial assets in central and eastern Europe. If those assets were seized by local regulators, the parent banks would take an immediate capital hit, dealing a potentially terminal blow to Greece’s domestic financial system, which is already hanging by a thread as the country battles to agree a new rescue package with international creditors.

     

    “The fear is that if someone goes first, and pulls the plug, everyone will follow,” said a person familiar with the situation.

     

    The person said the ECB had put in place special “swap” arrangements, or bilateral credit lines, with Romania and Bulgaria to reassure them that the Greek banks there would have funding support throughout the current crisis.

     

    Similar swap lines, which enable foreign central banks to borrow from the ECB and relend that money locally, were used during the eurozone financial crisis, but were typically publicly announced.

    So essentially, the ECB is now set to lend to Bulgaria and Romania in order to ensure that those countries’ regulators do not take any actions with regard to domestic subsidiaries of Greek banks that might serve to further destabilize the Greek banking sector as Europe scrambles to keep it afloat.

    As a reminder, Kathimerini reported in April that the central banks of Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia had “all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk (bonds, treasury bills, deposits to Greek banks, loans etc.) down to zero in order to shield themselves and minimize the danger of contagion in case the negotiations between the Greek government and the eurozone do not bear fruit.” The ECB’s fear seems to be that “quarantines” could turn to “asset seizures” which could in turn further impair the balance sheets of the parent companies and introduce yet another element of uncertainty into already indeterminate discussions around recapitalizing Greece’s ailing banks. 

    And as for the idea that depositors in the Balkans aren’t at risk, we’ll close with the following excerpt from the FT article cited above:

    The National Bank of Romania declined to comment specifically on the new funding line. It said its Greek banking offshoots are “sound”, adding that they could refuse to let shareholders withdraw deposits and could also raise liquidity from the local central bank if the situation worsened.

  • Icahn Vs. Fink: Wall Street Legends Clash Over "Dangerous" ETFs

    In the interest of not burying the lead, so to speak, we’ll begin with a clip from this week’s Delivering Alpha conference.

    In it, Carl Icahn essentially rehashes everything we’ve said over the past several months about the systemic risk posed by phantom ETF liquidity. He then proceeds to explain to Larry Fink how BlackRock is a part of the problem, calling the firm “a dangerous company”, before opining that Fink and Janet Yellen are “pushing the damn thing off a cliff.” Needless to say, Fink did not agree with Icahn’s assessment. Here are the fireworks:

    For those interested to know more, below is the complete Zero Hegde guide to phantom ETF liquidity and a discussion of how it has set the stage for a bond market meltdown.

    *  *  *

    Two months ago, in “ETF Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity,” we outlined the rather disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity facilities that can be tapped in the event of a sudden retail exodus from bond funds. 

    “The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show,” Reuters reported at the time, in a story we suspect did not get the attention it deserved. 

    At a base level, these precautionary measures are the result of the interplay between central bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand there is for new corporate issuance (the rationale being that at least corporate credit offers some semblance of yield). More demand means rates on corporate credit are driven still lower, and once yields on high grade issues get close to the lower limit, yield-starved investors are then herded into HY.

    All of this supply in the primary market comes at a time when liquidity in the secondary market for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the government’s (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre with a tiny exit.

    This situation has been exacerbated by the proliferation of bond ETFs which have allowed retail investors to pile into corners of the fixed income world where they might not belong. 

    All of the above can be summarized as follows.

    “MF assets too large versus dealer inventories” (via Citi)…

    … clear evidence of “structural damage in corporate bond trading liquidity” (via JP Morgan)…

    … and the rapid growth of bond funds in the post-crisis world (via BIS)…

    So given the above, the question is this: if something were to spook the market – a rate hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical shock – causing an exodus from these funds, what would happen to prices if fund managers were suddenly forced to transact in size in an illiquid secondary market in order to meet redemptions?

    “Nothing good”, is the answer. 

    The solution is to avoid selling the underlying bonds – even when investors are selling their shares in the funds.

    But how is this possible? 

    To a certain extent, outflows in one fund can be offset by inflows to another. These “diversifiable flows” are one happy byproduct of the great ETF proliferation. Here’s a refresher on how this works courtesy of Barclays.

    *  *  *

    Portfolio Products Replace Dealer Inventory

    While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.

    The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.

    This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate bonds.

    *  *  *

    Ok great, so ETFs provide a kind of “phantom” liquidity if you will. There are two problems with this:

    • It only works when flows are diversifiable. Once flows become unidirectional, it all goes out the window.
    • It makes the underlying markets even more illiquid.

    Here’s how we put it last month in “How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown“:

    In other words, if I’m a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There’s a term for that kind of business. It’s called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses. 

     

    Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.

    So what is a fund manager to do? 

    This is where we come full circle to the emergency liquidity lines mentioned at the outset. In order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional, fund managers may instead pay out redemptions in borrowed cash. 

    This is, to quote Citi’s Matt King, “creative destruction destroyed.”

    Only worse.

    That is, this represents the willful delay of a long overdue episode of creative destruction layered atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy references, that can be translated as follows: this strategy is yet another example of delaying the inevitable. If fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they’re holding have done to stay in business. It’s a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course. 

    In closing, it’s important to note that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds. 

    In other words, when the exodus comes, the illiquidity that’s been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.

  • So You Want To Be A Central Banker? Then Answer This Question

    Do you see a bubble?

     

     

    If your answer is “no”, proceed to job offer!

     

    h/t @NorthmanTrader

  • Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

    Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

    In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

    In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

    Oh, and both CEOs resigned on June 7. 

    On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

    Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

    BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

     

    Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

     


    So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

    (From the report)

     

    Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

     

    Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

     

    In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

    Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

    An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

    Hmm. Well, maybe Jain didn’t read that article. 

    This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

     

    The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

     

    This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

    Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

    The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

     

    There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

     

    The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

    Christian, who is Christian?

    Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

    Wow. So how well did Jain know Bittar? 

    The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

    That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

    And on, and on, and on.

    The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

    Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

     

    Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

     

    Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

     

    Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

    And finally, the accusation that may prove most damaging of all: 

    There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

    There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

    So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

    The full BaFin report is below.

    Baf in Deutsche Report

  • Greece And The Worst Possible Way To Correct Trade/Productivity Imbalances

    Submitted by Charles Hugh-Smith of OfTwoMinds blog,

    Piling on more debt is the worst possible way to correct structural trade and productivity imbalances.

    In Greece and the End of the Euroland Fantasy, I suggested the trade imbalances at the heart of Greece's debt crisis could only be resolved by Greece returning to its own national currency. Correspondent Michael Gorback observed that there are other mechanisms for correcting imbalances in trade and productivity:

    "There is not one but 4 ways to address international productivity imbalances: currency revaluation, fiscal transfers, labor migration, and changes in local wages.

     

    If you peg one of those the others must adjust. In the case of the Eurozone and Greece, the adjustment was largely through fiscal transfers with a bit of migration. Wages are not so much sticky as fossilized.

     

    I submit that the reason the US does well under monetary union (ED NOTE: that is, all 50 states use the same currency, the U.S. dollar) is not so much its fiscal union as it is the strength of compensatory mechanisms that are far less developed in Europe. American states and localities still engage in their own fiscal policies and productivity is by no means homogeneous.

     

    The US enjoys excellent labor mobility – about 10x that of Europe. It has seen numerous population shifts based on economics: the early western migration, the Gold Rush, migration of freed slaves to the north, Okies leaving the midwest during the Dust Bowl, the population shift from New England to the Sun Belt, and more recently the oil-boom-related migrations, to name a few.

     

    Employers are also mobile. Furniture manufacturers moved from Western NY state to the South decades ago. GE once had 14,000 employees in the town of Pittsfield, MA. Now it's gone. Boeing is moving ops to SC. Beretta moved to TN. If the wages don't adjust, the employers migrate to the lower wages.

     

    The US, having a large and relatively less regulated private sector that's also relatively unencumbered by unions, has greater wage flexibility than most developed countries.

     

    I think these compensation mechanisms in mobility and wages work better for the US and that's why the US handles monetary union better than the Eurozone. The US still has to engage in interstate fiscal transfers but they're mediated through the central government and few citizens give it a second thought. Is the State of NY frothing over the fact that it gets back less federal dollars than it pays, and that the difference is going to Kentucky?

     

    Why does Boeing open a plant in South Carolina and China open factories in Africa but BMW hasn't opened a plant in Greece? If I were negotiating a bailout, those would be the reforms I'd demand – reforms that make business thrive."

    Easing the process of labor migration within Europe was one goal of the Eurozone, and in terms of making it relatively easy for someone to take a job in another Eurozone member nation, it was a successful reform.

    But this doesn't really address imbalances in productivity due to differences in skills, education, cultural values and corruption. Low-skill labor is more easily recruited than high-skill labor, and in a global economy, the choice of where to site a new plant or call center depends on many factors, not just wage arbitrage, i.e. going to where the labor is currently cheaper.

    Many assume corporations have shifted production to China to take advantage of lower wages. But as wages rise in China, this is not necessarily the deciding factor: proximity to China's growing market is often the over-riding factor.

    A new book, Thieves of State: Why Corruption Threatens Global Security, highlights the many systemic costs of corruption. The corruption that is endemic to Greece and China (among many others) imposes profound systemic costs on those economies, costs that may well loom much larger in the next global downturn than they did in the last Global Financial Meltdown.

    I think it is safe to say that piling on more debt is the worst possible way to correct structural trade and productivity imbalances, yet that is the Eurozone's "solution" to Greece's debt/ trade/ productivity/ corruption crisis. The discussion should be (as Michael pointed out) about creating conditions for business and real wealth creation to thrive, not jamming more debt down the throats of everyone on either side of the structural imbalances.

  • Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

    Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

    In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

    In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

    Oh, and both CEOs resigned on June 7. 

    On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

    Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

    BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

     

    Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

     


    So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

    (From the report)

     

    Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

     

    Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

     

    In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

    Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

    An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

    Hmm. Well, maybe Jain didn’t read that article. 

    This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

     

    The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

     

    This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

    Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

    The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

     

    There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

     

    The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

    Christian, who is Christian?

    Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

    Wow. So how well did Jain know Bittar? 

    The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

    That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

    And on, and on, and on.

    The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

    Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

     

    Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

     

    Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

     

    Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

    And finally, the accusation that may prove most damaging of all: 

    There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

    There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

    So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

    The full BaFin report is below.

    Baf in Deutsche Report

  • Stock Bubble And Its Buyback Genesis Suddenly Vulnerable

    Submitted by Jeffrey Snider via Alhambra Investment Partners,

    Having now passed the anniversary of the “rising dollar”, it is interesting to see the related and continued effects on the stock bubble(s). As should be obvious by now, stock buybacks, funded via corporate bonds and loosely categorized C&I loans, are responsible for the post-QE3 nearly uninterrupted rise. Repurchases are forming a separate “liquidity” conduit, indirect leverage if you will, which has already started to fray. Various broader “market” indices have diverged, starting with the Russell 2000 in early 2014 (with the economic slowdown that was supposed to be an anomaly of weather).

    ABOOK July 2015 Stock Bubble Buyback Russell

    Since then, other indices have also broken away, notably the broad NYSE Composite index which includes the greatest cluster of ETF’s. The deviation there coincides exactly with the “dollar” tightening in eurodollar liquidity and less-smoothened wholesale transactions.

    ABOOK July 2015 Stock Bubble SP500 NYSE CompABOOK July 2015 Stock Bubble Buyback Broader

    There really cannot be much doubt anymore that QE is the central focus of the stock bubble, especially the third and fourth applications. The timing is so obvious as to preclude any other interpretation – most especially a growing and sustainable recovery that never materialized despite all public and heavy exaltation.

    ABOOK July 2015 Stock Bubble QE Buybacks

    While there is undoubtedly some reinforcing inflation due to various views of “tail risks” and perceptions about volatility which become self-fulfilling, it really is repurchases that are driving price action. The most “effective” transmission is corporate debt funneled through shareholder returns, which are not very efficient in terms of economic circulation (especially by comparison to the opportunity cost of them).

    In that respect, along with recession fears, it is perhaps quite significant that the S&P Buyback Index has suffered its first extended reversal since the 2012 slowdown, coincidental then to European concerns and just prior to both Draghi’s promise and QE3. It is unclear at the moment what exactly has caused that dramatic shift but the more likely explanations point to fears about corporate ability to continue repurchasing with economic weakness bearing down against both internal cash flow and even corporate bond pricing and liquidity.

    Whatever the case may be ultimately, the stock bubble’s ties to central bank policy seem to suggest the quite waning influence; both in terms of active participation (on the Fed side) and, more importantly in my view, how blind faith in monetarism may be reversing because of that widespread economic fruitlessness. Stock momentum, for the first time since 2012, is decidedly waning on all fronts:

    ABOOK July 2015 Stock Bubble Buyback MomentumABOOK July 2015 Stock Bubble SP500 MomentumABOOK July 2015 Stock Bubble NYSE Momentum

    I find it significant that the broader market index, the NYSE Composite, has shifted negative in its one-year comparison again tied to last year’s “dollar” disruption. At the very least it might imply that the central bank paradigm that lasted since the middle of 2012 has greatly eroded or even ended.

  • If You Like Your Nuclear Bomb-Free Iran, You Can Keep It…

    “Read my lips…”

     

     

    Source: Investors.com

  • Nasdaq Soars To Record High With Biggest Rally Since October's "Bullard" Bounce

    Artist's imprerssion of Nasdaq trader's reaction to the greek deal this week (forward to 45 seconds in…and feel the anticipation)

    Stock went up… some more than others… as Futures show gapped up on the Greek vote – kept squeezing into the US open and then diverged with Nasdaq melting up…

     

    Cash indices all gapped higher at the open but from that squeeze – there was major divergence (Dow Industrials and Trannies actually lower)

     

    On the week, the Nasdaq is now up over 3.25%…

     

    In summary…

    *  *  *

    The last few days saw the biggest short-squeeze in 5 months…

     

    Which is helping The Nasdaq to its biggest 6-day run since October's Bullard ramp…

     

    And then there's this massively free-cash-flow negative idiot-maker…

     

    One more good reason why stocks just keep surging… JPY carry is back on now that Grexit event risk has been 'removed' from carry traders risks… fun-durr-mentals

     

    VIXnado…back at an 11 handle!!

     

    as The backwardation unwinds to the steepest in 2 months…

     

    Bonds continued their rally with 30Y leading the way…

     

    As it appears the Moar QE trade is back in full swing…

     

    FX markets continued to be dominated by a plunge in EUR and JPY…

     

    And, digging into the details, your daily FX roundup (courtesy of ForexLive):

    We learned a few things from the ECB but nothing earth-shattering. The economic assessment gave a lift to the euro but it was quickly wiped out. The FX market reacted little to the Greek ELA but European stocks rallied.

     

    After the press conference a second wave of euro buying hit and pulled it from a session low of 1.0856 to 1.0927 at the options cut. From there, the sellers returned in a broad USD mini-rally and it slipped to 1.0875 at the end of the week (hold your horses there buddy … its Friday here in the world's greatest country but not the weekend yet – Eamonn) day.

     

    USD/JPY hit a session high of 124.18 very early in US trading but slipped into the options cut, falling to 123.89. Steady buying from there took it back to 124.13. Yellen had very little effect, if any.

     

    Cable hit a bump today, falling to 1.5560 from 1.5615 but the dip buyers were ready and it climbed all the way back. A second dip also found support and the pair finishes only modestly lower on the day at 1.5612.

     

    USD/CAD finishes at the highs of the day at 1.2966. Dips toward 1.2900 have found good support since the BOC cut. A touch off 1.2906 at the options cut set the stage for a steady rally to the highs.

     

    The Aussie was generally perky as it clawed back some of yesterday's losses. The high of 0.7437 peaked just above the 61.8% retracement of the slump on Wednesday but some sellers appeared late and drove it to 0.7401. There were some massive options running off in AUD and that was the buzz. The lows in USD right across the board today were at the cut.

    Commodities were mixed with copper limping higher as PMs leaked a little more and crude tumbled…

     

     

    Crude continues to tumble back to a $50 handle as Iran and default fears mount…

     

    Charts: Bloomberg

    Bonus Chart: VXX hits its 347th Record Low……

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Jul 17

Today’s News July 17, 2015

  • Greece Is Just The Beginning: The 21st Century 'Enclosures' Have Begun

    Submitted by Paul Craig Roberts,

    All of Europe, and insouciant Americans and Canadians as well, are put on notice by Syriza’s surrender to the agents of the One Percent. The message from the collapse of Syriza is that the social welfare system throughout the West will be dismantled.

    The Greek prime minister Alexis Tsipras has agreed to the One Percent’s looting of the Greek people of the advances in social welfare that the Greeks achieved in the post-World War II 20th century. Pensions and health care for the elderly are on the way out. The One Percent needs the money.

    The protected Greek islands, ports, water companies, airports, the entire panoply of national patrimony, is to be sold to the One Percent. At bargain prices, of course, but the subsequent water bills will not be bargains.

    This is the third round of austerity imposed on Greece, austerity that has required the complicity of the Greeks’ own governments. The austerity agreements serve as a cover for the looting of the Greek people literally of everything. The IMF is one member of the Troika that is imposing the austerity, despite the fact that the IMF’s economists have said that the austerity measures have proven to be a mistake. The Greek economy has been driven down by the austerity. Therefore, Greece’s indebtedness has increased as a burden. Each round of austerity makes the debt less payable.

    But when the One Percent is looting, facts are of no interest. The austerity, that is the looting, has gone forward despite the fact that the IMF’s economists cannot justify it.

    Greek democracy has proven itself to be impotent. The looting is going forward despite the vote one week ago by the Greek people rejecting it. So what we observe in Alexis Tsipras is an elected prime minister representing not the Greek people but the One Percent.

    The One Percent’s sigh of relief has been heard around the world. The last European leftist party, or what passes as leftist, has been brought to heel, just like Britain’s Labour Party, the French Socialist Party, and all the rest.

    Without an ideology to sustain it, the European left is dead, just as is the Democratic Party in the US. With the death of these political parties, the people no longer have any voice. A government in which the people have no voice is not a democracy. We can see this clearly in Greece. One week after the Greek people express themselves decisively in a referendum, their government ignores them and accommodates the One Percent.

    The American Democratic Party died with jobs offshoring, which destroyed the party’s financial base in the manufacturing unions. The European left died with the Soviet Union.

    The Soviet Union was a symbol that there existed a socialist alternative to capitalism. The Soviet collapse and “the end of history” deprived the left of an economic program and left the left-wing, at least in America, with “social issues” such as abortion, homosexual marriage, gender equality, and racism, which undermined the left-wing’s traditional support with the working class. Class warfare disappeared in the warfare between heterosexuals and homosexuals, blacks and whites, men and women.

    Today with the Western peoples facing re-enserfment and with the world facing nuclear war as a result of the American neoconservatives’ claim to be History’s chosen people entitled to world hegemony, the American left is busy hating the Confederate battle flag.

    The collapse of Europe’s last left-wing party, Syrzia, means that unless more determined parties arise in Portugal, Spain, and Italy, the baton passes to the right-wing parties – to Nigel Farage’s UK Independence Party, to Marine Le Pen’s National Front in France, and to other right-wing parties who stand for nationalism against national extermination in EU membership.

    Syriza could not succeed once it failed to nationalize the Greek banks in response to the EU’s determination to make them fail. The Greek One Percent have the banks and the media, and the Greek military shows no sign of standing with the people. What we see here is the impossibility of peaceful change, as Karl Marx and Lenin explained.

    Revolutions and fundamental reforms are frustrated or overturned by the One Percent who are left alive. Marx, frustrated by the defeat of the Revolutions of 1848 and instructed by his materialist conception of history, concluded, as did Lenin, Mao, and Pol Pot, that leaving the members of the old order alive meant counter-revolution and the return of the people to serfdom. In Latin America every reformist government is vulnerable to overthrow by US economic interests acting in conjunction with the Spanish elites. We see this process underway today in Venezuela and Ecuador.

    Duly instructed, Lenin and Mao eliminated the old order. The class holocaust was many times greater than anything the Jews experienced in the Nazi racial holocaust. But there is no memorial to it.

    To this day Westerners do not understand why Pol Pot emptied Cambodia’s urban areas. The West dismisses Pol Pot as a psychopath and mass murderer, a psychiatric case, but Pol Pot was simply acting on the supposition that if he permitted representatives of the old order to remain his revolution would be overthrown. To use a legal concept enshrined by the George W. Bush regime, Pol Pot pre-empted counter-revolution by striking in advance of the act and eliminating the class inclined to counter-revolution. The class genocide associated with Lenin, Mao, and Pol Pot are the collateral damage of revolution.

    The English conservative Edmund Burke said that the path of progress was reform, not revolution. The English elite, although they dragged their heels, accepted reform in place of revolution, thus vindicating Burke. But today with the left so totally defeated, the One Percent does not have to agree to reforms. Compliance with their power is the only alternative.

    Greece is only the beginning. Greeks driven out of their country by the collapsed economy, demise of the social welfare system, and extraordinary rate of unemployment will take their poverty to other EU countries. Members of the EU are not bound by national boundaries and can freely emigrate. Closing down the support system in Greece will drive Greeks into the support systems of other EU countries, which will be closed down in turn by the One Percent’s privatizations.

    The 21st century Enclosures have begun.

  • Tennessee Woman Arrested For Printing Money: "All These Other Bitches Get To Print Money So I Can Too"

    In what is either the best example why one should never believe anything they read on the internet, or just blatant frontrunning of the last QE by a few years, earlier this week a woman from Kingsport, Tennessee was arrested for counterfeiting money. That in itself is not surprising – it was her justification why she did it: she told police that she thought she was doing nothing wrong because she had read online that President Barack Obama made a new law allowing her to print her own money.

    Pamela Downs, 45

    TimesNews reports that police were called to a local grocery store on Sunday night in regards to a complaint about counterfeit money. When the reporting officer arrived, he spoke with a gas station clerk who said that just prior to the officer’s arrival, a white female had handed him a $5 bill, which he suspected to be counterfeit.

    Since the bill had been printed on regular computer paper and each side had been glued together (but was falling apart), the officer immediately recognized the bill as a fake.

    The officer spoke with the female, identified as Pamela Downs, 45. After initially responding that she had gotten the fake bill from a gas station, Downs was asked by the officer if her purse could be searched, to which she agreed. Inside her purse, the officer found a $100 which was also counterfeit, according to the report. The bill was printed in black and white and the backside of the bill was upside down.

    A couple of receipts from Walmart were also found inside the purse, showing Downs had purchased copy paper and a printer.

    At that point she was arrested, and she gave the best money-counterfeiting “defense” we have heard in a long time:

    “I don’t give a ****, all these other bitches get to print money so I can too.“

    It was not immediately clear which “bitches” she was referring to.

    The police then searched the apartment and found several items consistent with being used to print counterfeit currency including paper, scissors, glue and a printer.  Several more counterfeit bills, both cut and uncut, were located at the apartment. Officers estimated the total to be around $30,000 to $50,000.

    While at the jail, Downs reportedly told the officer the receipts that were found were items she used to print money in her apartment.

    And back to the rationalization: “She then told officers she read online that President Obama had made a new law that permitted her to print her own money because she is on a fixed income, the report stated.“

    She was charged with criminal simulation and counterfeiting.

    While there are literally countless angles one can go with this story, maybe the best conclusion is that if only she had waited a few more years before printing her own money with the “president’s blessing”, all of this unpleasantness could have been avoided.

  • Balance Of Superpowers: Comparing The US And Chinese Armed Forces

    Whether China is busy championing trade deals outside of the US dollar, buying up some of the world’s biggest companies, taking over foreign housing markets, or building massive networks of nuclear or wind power grids, it is clear that the country is a world power to be reckoned with. To be considered a true force, China also needs to be able to back up its economic and political might with a top notch military. Today’s infographic compares the armed forces of China with the United States.

    click image fir massive legible version

     

    In terms of military spending per capita, China is the new kid on the block. Although it has increased in recent years, China is still behind Russia, Turkey, South Korea, Japan, Germany, the United Kingdom, France, and the United States. However, the country does make up for it with in absolute terms by its sheer population. In terms of total military expenditures, China spends the second most worldwide with a total of approximately $216 billion per year, which is about one-third of the US.

    In GDP terms, China spends about 2.1% of its annual GDP on military, and the United States spends 3.8%.

    Perhaps the biggest difference between the two superpowers is influence in other parts of the world. The United States has 133 military bases outside of its territory, and China has zero. More specifically, the United States has bases in multiple jurisdictions that surround China: South Korea, Kyrgyzstan, Japan, Singapore, Guam, Afghanistan, and Diego Garcia, a set of small islands in Indian Ocean.

    Courtesy of: Visual Capitalist

  • Tennessee Mass Killer Linked To Islamic Terrorism

    While the rest of the world was paying attention to the sad conclusion of the Greek tragedy now in its third bailout season, the US was focused on a another tragedy playing out in the nation’s heartland when in the latest mass shooting on US soil, 4 marines were killed when a gunman, since identified at Mohammod Youssuf Abdulazeez, 24, a naturalized citizen born in Kuwait, opened fire first at a military recruiting center and then at a Naval Reserve Center in Chattanooga, Tennessee in what officials have called a “brazen, brutal act of domestic terrorism.”

    Incidentally, the shooting took place hours before a jury found James Holmes, who killed 12 people in a Colorado theater shooting in 2012, guilty of murder.

    As reported subsequently, the suspect’s mother is originally from Kuwait and his father from Palestine. It is unclear when Abdulazeez came to the United States but for many years he lived with his parents in a two-story home in Hixson, a suburb of Chattanooga. He worked as an intern at Mohawk Industries Inc, a carpet manufacturer, and the Tennessee Valley Authority, which provides power to the area. He most recently worked with Global Trade Express, according to the posted resume.

    According to Reuters, the suspect, seen driving an open-top Ford Mustang, is believed to have first gone to a joint military recruiting center in a strip mall and sprayed it with gunfire, riddling the glass facade with bullet holes.

    “Everybody was at a standstill and as soon as he pulled away everyone scrambled trying to make sure everyone was OK,” said Erica Wright, who works two doors down from the center.

    The gunman then drove off to a Naval Reserve Center about 6 miles away, when around 10:45 am local time, he shot four Marines before being shot and killed in a firefight with police about half an hour later. Three others were wounded in the attacks, including a police officer reported in stable condition and a Marine.

    At least three people were wounded in the attacks, including a Marine and a Navy sailor who is in critical condition, according to the hospital. One of those hurt was a police officer who was in stable condition.

    According to Bill Killian, the U.S. Attorney for the Eastern District of Tennessee, the rampage was being treated “as an act of domestic terrorism,” adding that no official determination of the nature of the crime had yet been made and the Federal Bureau of Investigation has not ruled anything out.

    “While it would be premature to speculate on the motives of the shooter at this time, we will conduct a thorough investigation of this tragedy and provide updates as they are available,” the agency said in a statement.

    According to a resume believed to have been posted online by Abdulazeez, he attended high school in a Chattanooga suburb and graduated from the University of Tennessee with an engineering degree.

    “I remember him being very creative. He was a very light minded kind of individual. All his videos were always very unique and entertaining,” said Greg Raymond, 28, who worked with Abdulazeez on a high school television program.

     

    “He was a really calm, smart and cool person who joked around. Like me he wasn’t very popular so we always kind of got along. He seemed like a really normal guy,” Raymond said.

    The FBI said it was too early to speculate on the motive for the rampage although in a follow up report we learned that the 24 year old had blogged as recently as Monday that “life is short and bitter” and Muslims should not miss an opportunity to “submit to Allah,” according to an organization that tracks extremist groups.

    The SITE Intelligence Group said a July 13 post written by suspected gunman Mohammod Youssuf Abdulazeez stressed the sacrifice of the Sahaba (companions of the Prophet) “fought Jihad for the sake of Allah.” Reuters could not independently verify the blog postings. Tangentially, Site Intelligence which has been most famous recently for being the first to track down and release most of ISIS’ barbaric if Hollywood-style produced YouTube clips, was founded by Rita Katz who prior to her intelligence career served in the Israeli Defense Forces.

    Further ties linking the shooting to terrorist Islamist elements emerged when the NYT reported that the father of a suspected gunman who killed four Marines in Chattanooga, Tennessee, on Thursday was investigated several years ago for “possible ties to a foreign terrorist organization.”

    Citing unnamed law enforcement officials, the paper said the gunman’s father was at one point on a terrorist watch list and was questioned while on a trip overseas.

    The paper quoted an official as cautioning that the investigation was several years old and had not generated any information on the son. The father was eventually removed from the watch list, the paper quoted the official as saying.

    According to another, unconfirmed report, an Islamic State affiliated Twitter account tweeted about the Chattanooga military reserve center shootings by Muhammad Youssef Abdulazeez just as they began.

    The account has since been suspended. The time stamp reads 10:34 a.m. in our screenshot of the tweet, which we took in New York, which is in the same time zone as Chattanooga. The shootings were reported between 10 and 11 a.m.

    In a statement following the shootings  Obama condemned the “heartbreaking” shooting deaths of four Marines Thursday in Tennessee, and said a full investigation is under way.

    “We don’t know yet all the details,” Obama said. “We know that what appears to be a lone gunman carried out these attacks.” The president said he wanted to extend “the deepest sympathies of the American people” to the four Marines and their families, and asked all Americans to pray for them.

    And while Obama did not rush to judgment, and had no comment about what the potential next steps could be, it was roughly around this time that America’s practically assured next president, Hillary Clinton, made it quite clear what the endgame of all these tragic events will likely be in the very near future:

    • CLINTON: U.S. NEEDS ANTI-PROPAGANDA POLICY TO COMBAT ISIS

    What better way to fight propaganda than with even greater propaganda even if it means the deaths of countless innocent people caught in the cross fire.

  • How Socialism Destroyed Puerto Rico, And Why More Defaults Are Looming

    With Puerto Rico missing a payment on a bond overnight "due to non-appropriation of funds" but denying that this constitutes anything close to a default, the territory may be about to retake the limelight as Greece is now "fixed." As MarketWatch reports,

    The missed payment could have serious implications for holders of Puerto Rico bonds, “as the signal from breaking a seven-decade streak of bond payments may imply more defaults are looming,” Daniel Hanson, an analyst at Height Securities, said in a note.

     

    Not all Puerto Rican bonds are created equal, being backed by different types of revenues, such as tax revenues, road tolls, electricity bills etc.

     

    The first thing investors should do is “find out what revenue backs their bonds and whether their bonds are insured or not,” said Mary Talbutt, head of fixed income at Bryn Mawr Trust.

     

    Approximately 30% of muni mutual funds have holdings in Puerto Rico, more than half of which are insured, according to a Charles Schwab Investment Management report. As for the revenue that backs the bonds, most exposure is with the sales-tax backed bonds, known as COFINA bonds from their Spanish-language acronym, and the general-obligation bonds, known as G.O. bonds, according to the report.

     

    In that sense, investors that hold the PFC bonds are somewhat in a bind because “the language in PFC bonds makes payment dependent on appropriations from Puerto Rico’s legislature,” Hanson said.

     

    This is the main difference between the PFC bonds and the G.O. bonds. The former require appropriation, while the latter are backed by the full faith and credit of the territory and their repayment is guaranteed by the constitution.

     

    “The language… makes [the PFC bonds] a weaker credit relative to G.O. bonds. But a default is still a default,” said Andrew Gadlin, a research analyst at Odeon Capital Group.

     

    This has investors worried about other types of bonds that face a repayment deadline, most notably those issued by the island’s Government Development Bank (GDB).

     

    “The market is becoming more skeptical of the payments due August 1 on GDB debt, though the budget does set aside funds for paying these obligations,” Gadlin said.

    And as Euro Pacific Capital's Peter Schiff explains, this is far from over

    While Greece is now dominating the debt default stage, the real tragedy is playing out much closer to home, with the downward spiral of Puerto Rico. As in Greece, the Puerto Rican economy has been destroyed by its participation in an unrealistic monetary system that it does not control and the failure of domestic politicians to confront their own insolvency. But the damage done to the Puerto Rican economy by the United States has been far more debilitating than whatever damage the European Union has inflicted on Greece. In fact, the lessons we should be learning in Puerto Rico, most notably how socialistic labor and tax policies can devastate an economy, should serve as a wake up call to those advocating prescribing the same for the mainland.  
     
    The U.S. has bombed the territory of Puerto Rico with five supposedly well-meaning, but economically devastating policies. It has:
    1. Exempted the Island's government debt from all U.S. taxes in the Jones-Shaforth Act.
    2. Eliminated U.S. tax breaks for private sector investment with the expiration of section 936 of the U.S. Internal Revenue Code.
    3. Required the nation to abide by a restrictive trade arrangement.
    4. Made the Island subject to the U.S. minimum wage.
    5. Enabled Puerto Rico to offer generous welfare benefits relative to income.
    While passage of such politically popular laws seems benign on the surface (and have allowed politicians to claim that their efforts have helped the poorest Puerto Ricans), in reality they have deepened the poverty of the very people the laws were supposedly designed to help. The lessons here are so obvious that only the most ardent supporters of government economic control can fail to comprehend them.
     
    Tax-Free Debt
     
    By exempting U.S. citizens from taxes on interest paid on Puerto Rican sovereign debt, Washington sought to help the Puerto Rican economy by making it easier and cheaper for the Island's government to borrow from the mainland. As a result, Puerto Rican government bonds became a staple holding of many U.S. municipal bond funds. As with Fannie Mae and Freddie Mac bonds a decade ago, many investors believed that these Puerto Rican bonds had an implied U.S. government guarantee. This meant that the Puerto Rican government could borrow for far less than it could have without such a belief. However, this subsidy did not grow the Puerto Rican economy, but simply the size of the government, which had the perverse effect of stifling private sector growth.  
     
    In contrast to the tax-free income earned by Americans who buy Puerto Rican government bonds, those with the bad sense to lend to Puerto Rican businesses were taxed on the interest payments that they received. Businesses could have used the funds for actual capital investment (that could have increased the Island's productivity), but instead the money flowed to the Government which used it to buy votes with generous public sector benefits that did nothing to grow the Island's economy or put it in a better position to repay. That problem was left for future taxpayers who no politician seeking votes in the present cared about.
     
    This dynamic is almost identical to what happened in Greece, where low borrowing costs, made possible by the strong euro currency and the implied backstop of the European Central Bank and the more solvent northern European nations, permitted the Greek government to borrow at far lower rates than its strained finances would have otherwise allowed.
     
    Taxing Private Investment
     
    Perversely, as the U.S. government made it easier for the Puerto Rican government to borrow, it made it harder for the private sector to do so. In 2006 the government ended a tax break that exempted corporate profits earned on private sector investment in Puerto Rico from U.S. taxes. As a result, U.S. businesses that had been making investments and hiring workers on the Island pulled up stakes and moved to more tax-friendly jurisdictions. The result was an erosion of the Island's local tax base, just as more borrowing (made possible by triple tax-free government debt) obligated the remaining Puerto Rican taxpayers to greater future liabilities.
     
    The Jones Act
     
    The Jones Act, a 1920 law designed to protect the U.S. merchant marine from foreign competition, has had a devastating effect on Puerto Rico, and should be used as a cautionary tale to illustrate the dangers of trade barriers. Under the terms of this horrible law, foreign-flagged ships are prevented from carrying cargo between two U.S. ports. According to the law, Puerto Rico counts as a U.S. port. So a container ship bringing goods from China to the U.S. mainland is prevented from stopping in Puerto Rico on the way. Instead, the cargo must be dropped off at a mainland port, then reloaded onto an expensive U.S.-flagged ship, and transported back to Puerto Rico. As a result, shipping costs to and from Puerto Rico are the highest in the Caribbean. This reduces trade between Puerto Rico and the rest of the world. Since a large percentage of the finished goods used by Puerto Ricans are imported, the result is much higher consumer prices and fewer private sector jobs. Even though median incomes in Puerto Rico are just over half that of the poorest U.S. state, thanks to the Jones Act, the cost of living is actually higher than the average state.
     
    The Federal Minimum Wage
     
    In 1938 the Fair Labor Standards Act subjected Puerto Rico to a federal minimum wage, but it was not until 1983 that a 1974 act, which required that the Island match the mainland's minimum wage, was fully phased in. The current Federal minimum wage of $7.25 per hour is 77% of Puerto Rico's current median wage of $9.42. In contrast, the Federal minimum is only 43% of the U.S. median wage of almost $17 per hour (Bureau of Labor Statistics (BLS), May 2014). The U.S. minimum wage would have to be more than $13 per hour to match that Puerto Rico proportion. The disparity is greater when comparing minimum wage income to per capita income.
     
    The imposition of an insupportably high minimum wage has meant that entry level jobs simply don't exist in Puerto Rico. Unemployment is over 12% (BLS), and the labor force participation rate is about 43% (as opposed to 63% on the mainland) (The World Bank). A "success" by the Obama administration in raising the Federal minimum to $10 per hour would mean that the minimum wage in Puerto Rico would be higher than the current medium wage. Such a move would result in layoffs on the Island and another step down into the economic pit. I predict that it could bring on a crisis similar to the one created in the last decade in American Samoa when that Island’s economy was devastated by an unsustainable increase in the minimum wage.
     
    It will be interesting to see if our progressive politicians will have enough forethought and mercy to exempt Puerto Rico from minimum wage increases. But to do so would force them to acknowledge the destructive nature of the law, an admission that they would take great pains to avoid. 
     
    Welfare   
     
    In 2013 median income in Puerto Rico was just over half  that of the poorest state in the union (Mississippi) but welfare benefits are very similar. This means that the incentive to forgo public assistance in favor of a job is greatly reduced in Puerto Rico, as a larger percentage of those on public assistance would do better financially by turning down a low paying job. Because of these perverse incentives not to work, fewer than half of working age males are employed and 45% of the Island's population lived below the federal poverty line (U.S. Census Bureau, American Community Survey Briefs issued Sep. 2014). According to a 2012 report by the New York Federal Reserve Bank, 40% of Island income consists of transfer payments, and 35% of the Island's residents receive food stamps (Fox News Latino, 3/11/14).
     
    In other words, Puerto Rico's problems are strikingly similar to those of Greece. Its government spends chronically more than it raises in taxes, its economy is trapped in a regulatory morass, and its economic destiny is largely in the hands of others.
     
    *  *  *
    Puerto Rico’s economy and population have been shrinking for almost a decade, and debts have ballooned to about 100 per cent of its gross national product as the government took advantage of the tax exemption enjoyed by US municipal debt.
     
    The Puerto Rico Electric Power Authority is already restructuring $9bn of bonds and loans.
     
    By September 1 Puerto Rico is expected to deliver a plan for turning round its finances. Officials have called for patience from creditors about how its various bondholders will be treated.
    Patience… indeed.
     
    *  *  *
     
    The solutions to Puerto Rico's problems are simple, but, Peter Schiff warns, politically toxic for mainland politicians to acknowledge.
    Puerto Rico must be allowed to declare bankruptcy, the Federal incentive for the Puerto Rican government to borrow money must be eliminated, Puerto Rico must be exempted from both the Jones Act and the Federal Minimum wage, and Federal welfare requirements must be reduced. Puerto Rico already has the huge advantages of being exempt from both the Federal Income Tax and Obamacare, so with a fresh start, free from oppressive debt and federal regulations, capitalism could quickly restore the prosperity socialism destroyed.
     
    With the current incentives provided by Acts 20 and 22 (which basically exempt Puerto Rico-sourced income for new arrivals from local as well as federal income tax – see my report on America's Tax Free Zone) and with some additional local free market labor reforms, in a generation it's possible that Puerto Ricans could enjoy higher per capita incomes than citizens of any U.S. state.
    If Washington really wanted to accelerate the process, it should exempt mainland residents from all income taxes, including the AMT, on Puerto Rico-sourced investment income, including dividends, capital gains, and interest related to capital investment.

  • BofA Confused "Why People Would Wake Up One Morning And Decide To Panic"

    Over the past twelve months, the decades-old economic infrastructure that supports global dollar dominance suffered irreparable damage to two of its load-bearing walls. 

    First, the petrodollar system quietly began to die late last year. As crude prices plunged, the deluge of oil proceeds which had for years been recycled into USD-denominated assets dried up. Indeed, OPEC nations drained liquidity from financial markets for the first time in nearly two decades last year: 

    As we noted last month, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018, according to Goldman.The implications, BofAML observed in February, are far reaching: “…the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed’s exit strategy.”

    Second, the world’s most influential emerging economies have lost faith in the US-dominated multilateral institutions that have dominated the post-war world. This has manifested itself in the creation of two new supranational lenders (the AIIB and the BRICS bank) and one major new infrastructure development fund (China’s Silk Road fund). China plays an outsized role in the AIIB and the BRICS bank and both should serve to help Beijing embed the yuan further in global investment and trade. 

    Meanwhile, Russia and China have begun settling crude imports in yuan amid the extension of Western economic sanctions on Moscow and Russia recently overtook Saudi Arabia as China’s number one crude supplier. 

    All of this marks a departure from the economic and political norms that have served to underwrite decades of dollar dominance and it goes without saying that printing trillions of dollars over the course of multiple QE iterations doesn’t help king dollar’s cause.

    In addition to the above, there’s certainly an argument to be made that the US effectively surrendered its right to print the world’s reserve currency long ago.

    That is, once the new economics succeeded in burying sound money once and for all, and when fine-tuning macroeconomic outcomes and “smoothing” out business cycles finally became so entrenched in modern economic thought that talk of balanced budgets and a gold standard was largely relegated to the annals of history, the dollar became nothing more than another example of fiat money, unworthy of the reserve currency title. 

    Nevertheless, the status quo must be perpetuated, which is why Washington launched a Quixote-esque campaign against the AIIB complete with President Obama tilting against environmental and governance windmills and it is also why the likes of Bank of America must issue “research” with titles like “Econ 101: The reserve status of the dollar.”

    Fortunately, that particular piece of crisply-worded dollar cheerleader propaganda has one footnote that makes the five minutes we spent reading it all worth while. We present it below and leave it to readers to respond.

    From BofAML:

    Another mechanism could be a self-fulfilling feedback loop. If the general public watches the gloom and doom videos, loses faith in paper money and dumps it in favor of hard assets the dollar would collapse. On a similar note, if global investors believe QE is a signal of the central bank giving up on controlling inflation, they could dump the dollar, driving up the price of imported products. However, after seeing that QE has not caused inflation or triggered a dollar collapse in the last five years, it is not clear why people would wake up one morning and decide to panic. 

  • "Safest Market In The World" China Opens Mixed As Margin Debt Drops To 4-Month Lows

    After a brief "don't fight the PBOC" three days of releveraging, China margin debt declined once again to 4-month lows. An opening pop – as is now ubiquitous has faded in FTSE China A50 futures but CSI-300 futures (which expire today and are this subject to some 'odd' behavior) are holding modest gains, despite a quarter of Chinese stocks remain halted. For those tempted back in to the deep end of global equity risk, we offer what must go down as the Baghdad Bob quote of the year, from the Chairman of HKEX, "China's stock market is the safest in the world."

    Some context on the decline and its massively manipulated bounce (which is now fading fast)…

     

    FTSE China A50 Futures opened a smidge higher but are leaking lower (while CSI-300 Futures are holding 1% gains pre-open)

     

    Deleveraging is happening… but has a long way to go…

    • *SHANGHAI MARGIN DEBT FALLS TO FOUR-MONTH LOW

    China margin debt is down 37% from its highs…

    And then there's this utter bollocks…

    • *CHINA STOCK MARKET IS "SAFEST" IN WORLD, HKEX CHAIR LI SAYS

    Yep, looks totally "safe"…

     

    Finally, on China, we leave you with Credit Suisse's Andrew garthwaite: "Our concern is that a triple bubble in housing, credit and investment comes with the significant risk of a hard landing."

    *  *  *

    In other news, Japan has its fair share of disasters…

    Sharp is the worst-performing stock on Japan's benchmark average this morning after the Nikkei newspaper said the electronics giant is likely to lose big in the April to June quarter.

     

    As the Nikkei 225 struggles to gain for a fifth day – up 0.1 per cent – Sharp shares are down 3 per cent in the first hour of trade.

    And Korea…

    And Samsung Heavy is down 17% to 7 year lows – this is the biggest drop since 1994

     

     Charts: Bloomberg

     

     

  • Law Firm Stops Hiring Ivy League Grads, Demands "Gritty Street Lawyers"

    Having taken on hundreds of thousands of dollars worth of loans to achieve the ultimate goal of becoming an Ivy League law graduate, it appears, in at least one case, that your abilities are not required. As WSJ reports, Adam Leitman Bailey, a Manhattan attorney who runs a real estate firm, says he looks to hire law school graduates who have grit, ambition and a resolve to succeed in the legal profession. For that reason, he says, his firm has instituted a rule: If your resume lists your law school as Yale, Harvard, Columbia, Cornell or University of Pennsylvania, you need not apply because you won’t get the job.


    As The Wall Street Journal reports    ,

    Mr. Bailey, a graduate of Syracuse University Law School, says he admires the nation’s top law schools and doesn’t deny they attract some of the brightest minds. But says the best applicants hail from schools lower down the totem pole of prestige.

     

    In an article titled “Why We Do Not Hire Law School Graduates from the Ivy League Schools.” Mr. Bailey told Law Blog his ban applies to other elite schools outside the Ivy League, like Stanford and New York University.

     

    Explaining the policy, he writes that students who are accepted into top-ranked schools may have aced the LSAT, but, very broadly generalizing, they’ve climbed their way to a law degree without testing their mettle.

     

    [M]any of these law schools either fail to rank their students or do not even grade them at all. (1) Ergo, the students have no incentive to work hard and learn when they have guaranteed summer associate positions and guaranteed job offers. Their students typically have no incentive to get the best grades in their classes. They also have no incentive to squeeze as much learning as possible out of the law school experience. Most importantly, the real world simulation of dealing with the pressures of a case or deal may be removed when the students do not need to compete for a job in a difficult market…

     

    [T]hese students may become a United States Supreme Court Justice or a future President of the United States so political theory and international law and classes on capital punishment may be extremely important to them. However, we need our street lawyers ready for battle and taking trial practice, corporations, tax, civil procedure and any real estate and litigation course offered.

     

    In his piece he concedes that a few of the senior lawyers at Adam Leitman Bailey PC are indeed Ivy Leaguers, including the head of the firm’s real estate litigation practice group, a graduate of University of Pennsylvania Law School.

     

    “By the time these Ivy League attorneys come to our firm, we have seen them in the courtroom and observed their talents,” Mr. Bailey told Law Blog by email.

    *  *  *

    Ironically, Mr. Bailey, whose firm hires one to three law school graduates a year, also writes that the top students from the highest ranked schools “have no interest in applying for a job at our firm.”

  • The World Explained (In 1 Cartoon)

    Presented with no comment…

     

     

    Source: @RoykoLePoyko

  • How Likely Is Hyperinflation In The U.S?

    Authored by Seaborn Hall, originally posted at Advisor Perspectives,

    My previous article, “How likely is hyperinflation in the US? Part One,” covered hyperinflation's history, process, effects, definition, types and causes, as well as how to measure its emergence in nations using casual symptoms. Part Two answers the questions of how to gauge the likelihood of hyperinflation in the United States, what the emerging dangers are, how it might happen here and how to prepare if it does.

    As stated in Part One, because there are so many conflicting or just different views among analysts relative to hyperinflation, it is difficult for the average advisor or person investing for retirement – or just self-preservation – to know what to believe and how to act. Many of the warnings related to hyperinflation sound like Chicken Little's cry that the sky is falling.

    In the midst of the alarmism and confusion, these articles sift through the best resources available, including Bank for International Settlements (BIS), International Monetary Fund (IMF), Cato Institute and Fed papers to provide some clarity.

    Measuring hyperinflation in the U.S.A.

    The U.S. has come just short of hyperinflation twice before: once during the Revolutionary War and the second time, in March 1864, towards the end of the Civil War. The wars created high debt and supply disruptions within the continental states, congruent with fast acting hyperinflation, as explained in Part One.

    The U.S. has geographic advantages. It has natural supply routes made up of rivers, natural ports and inter-coastal waterways connected by a sophisticated rail and interstate system. It is protected by the natural boundaries of oceans, mountains and friendly bordering states. It is also not dependent on one export, like oil. These geographical and man-enhanced attributes temper any economic trend towards hyperinflation in the modern U.S.

    As previously noted, hyperinflation may be expected when there is persistent monetization and when the currency exchange premium – the premium the most-used foreign currency commands over the native currency – rises above 50%. This later sign typically occurs during a period of high inflation and up to three years before hyperinflation appears. This period may or may not include a currency crisis, which is distinct from, and can be an initial phase of, high inflation or hyperinflation. More broadly, the dangers of hyperinflation are measured by casual symptoms. These include fiscal, monetary and political causes and symptoms.

    As to fiscal symptoms in the U.S., according to a recent JP Morgan (JPM) presentation, net U.S. debt is presently around 75% of GDP, high, but non-critical. Foreign officials hold 35% of this debt; the Fed holds 16 percent. Both are significant, but not excessive. And, as Prasad and Ye note, debt cements the U.S. dollar role as global reserve; that is, as long as it is not unsustainable, and interest is a manageable piece of the total budget (chart, below).

    On this front, the U.S. does not have enough reserves to cover its short-term debt, but the Guidotti-Greenspan rule may not apply to Advanced Economies. And, as long as 10-year yields, currently about 2.35%, stay below 7% global bond investors tend not to panic, especially when the U.S. is the best of a bad lot.

    Where Does All the Money Go

    Deficits-to-expenditures is marginal at about 18%. According to the Wall Street Journal, the deficit has decreased to only 3% of GDP in 2014. The deficit was $1.4 trillion six years ago and the Congressional Budget Office (CBO) projects it to be just $486 billion this year. But, it is expected to increase in 2016 and according to The Heritage Foundation could be worrisome again by 2021.

    Also on the down side, according to Heritage, net U.S. debt, above, will reach 100% of GDP, a dangerous level, around 2028. At $18.2 trillion, total federal debt is already 102.5% of GDP. But most analysts feel that net debt (total minus intra-governmental debt) is the more critical measure. By 2024, mandatory expenditures, or entitlements plus interest on the debt, will be 75% of revenues. By 2030 they will consume revenues (chart, below).

    As to monetary symptoms, Federal Reserve liabilities are also high, about $4.4 trillion. According to Guggenheim, the Federal Reserve's debt/equity ratio was 51:1 in July 2012, more than double 2008, and almost double commercial institutions that failed. And Fed Assets as a percentage of GDP have more than doubled since 2007. But central banks are judged differently, as Japan's experience implies, thus far at least. John Cochrane, a professor of finance at the University of Chicago, points out more specifically that Fed reserves do not lead to hyperinflation. It is also important to understand that printing money or QE is not necessarily the same as monetizing the debt.

    All Tax Revenue Will Go Toward Entitlements and Net Interest by 2030

    In most cases, central banks control interest rates and reserves through government security and foreign currency purchases. To create money, a central bank purchases securities when it digitally credits the accounts of dealers with whom it does business. These dealer banks, like JP Morgan, are immediately richer. In some cases they park the money with the Fed, earning interest; in others, they invest it, some in riskier ways, like derivatives. For money velocity to increase they must actually loan it, which, according to Hanke, few currently do. This is partially due to increased federal regulations, like Dodd-Frank, instituted since the GFC, that place strict restrictions on lending activities.

    Cabinet Appointments: Prior Private Sector Experience, 1900-2009

    Monetizing is when the central bank buys government securities directly from the Treasury to fund existing or, unplanned debt, as in the case of Zimbabwe or Japan at present (see Part One). An independent central bank firmly resists such pressure from the political power. The danger, of course, is that this distinction becomes unclear.

    And, as a 2008 IMF report on the Fed stated, "Compared with its posture during the Great Depression, the Fed today is taking considerably more risk and the scope for possible profit and loss outcomes is much greater." The report also points out that the Fed's ability to make a profit during every year of the Great Depression era was largely due to its accumulation of gold. This is a far cry from the make-up of the Fed's burgeoning balance sheet today.

    Another emerging hyperinflation danger is in the area of political management relative to economic health. The Obama administration has less business experience than previous administrations (chart above). Surveys also show that the American people see themselves as more divided than at any time in history (below), and other studies show that the political center is shrinking. Political mismanagement that suddenly increases the debt and social tensions could lead to a crisis that results in high inflation.

    Years ago, R. E. McMaster, author of No Time for Slaves, proposed a simple formula to facilitate understanding of the interplay between government and economics: government + religion = economics. According to Hanke, the problem with Venezuela and its hyperinflation is Hugo Chavez's successor, Maduro; the problem in Yugoslavia was Milosevic; the problem in Zimbabwe was and is Mugabe. They all adhered to the ten-point playbook of the Communist Manifesto, which wrecked their economies and the social order. According to McMaster government does not operate in a vacuum, but those who lead administer by their philosophy or religion.

    Public Sees Deeper Political Divisions, Most Expect Them to Continue

    This simple, but profound theorem plays out around the world today. It can lead to prosperity or economic crisis and hyperinflation. In America, this theorem has led to prosperity. The respect for individual rights and property rights are the pillars of the free market. The founders assured these rights through the founding documents, especially the U.S. Constitution.

    Executive Orders over the years

    According to Coltart (see Part One), the primary reason for Zimbabwe's hyperinflation was that the deficiencies of their constitution allowed a vast disparity of power between the executive office and the legislative and judicial branches. Most worrisome relative to the U.S. Constitution are a list of Supreme Court reversed Executive Orders that even liberal law scholars say blatantly violate the Constitution. It is the quality, not the quantity (above ) of these orders that is the issue. If Americans continue to allow this executive tendency to span administrations, as they have in the past, the dilution of their constitutional rights may eventually lead to hyperinflation in the U.S.A.

    For the present, inflation and money velocity remain low. Though there are various reasons high inflation may appear, typically, there need to be two elements: economic capacity, including low unemployment, and high money velocity. With even core inflation (PCE) currently under 1.2% (as of June 15th headline PCE is 0.2%), economic capacity and lower unemployment just emerging, and money velocity still quite low, high inflation does not appear to be on the horizon.

    This is not to say that other factors could not instigate high inflation or hyperinflation. Some of these "black swans" are dealt with below. But, while Reinhart and Rogoff are no doubt right about the rampant denial afflicting advanced nations relative to future sub-par growth, QE, debt restructuring and coming high inflation, a crisis appears years away. Greece is symbolic of that looming crisis; but it is not Bear Stearns or Lehman.

    This time is not different; but global reserve status, the trust and confidence of investors and deep and wide financial markets make the U.S. unique. There are still enough questions not to be dogmatic, but until the U.S. experiences an increase in causal symptoms or a black swan that fractures global confidence in its economy, hyperinflation is not a worry.

    Black swans that could lead to high inflation or hyperinflation

    The above being noted, according to FT, the global system is in many ways more fragile today than before the GFC. And, considering its fragile nature, many incidents could come out of nowhere and lead to a crisis, or series of crises, that eventually results in a currency crisis and/or hyperinflation.

    One of the prominent possibilities is a successful cyber-attack on a major institution or the U.S. itself, especially the nation's power grids, its nuclear plants, its water supply or its major financial institutions. JPM's, NASDAQ's, and Sony's recent experience serve as examples, and with increasing tensions with Russia and China this area will continue to be a challenge. The director of the NSA recently warned that a cyber-attack will cause a major systems collapse within a decade unless the U.S. develops counter strategy immediately. According to Greg Medcraft, chairman of the board of the International Organization of Securities Commissions, the next black swan will be a cyber-attack.

    SG Swan chart: Political and financial risks now outnumber real economy risks

    Though the U.S. has largely avoided catastrophe in the past, there is also the possibility that it might experience more natural disasters in the future. Remember Zimbabwe? About 19% of the U.S. is presently in severe or extreme drought, 29% in moderate to extreme conditions and approximately 40% in abnormal dryness or greater. 100% of California is in extreme, severe or exceptional drought. Also alarming is that according to the Wall Street Journal U.S. beekeepers have been losing 30% of their bees for the last decade, above the 19% sustainable rate. The above issues may place strains on agriculture, lead to supply disruptions and drive up food prices in future years.

    As I covered more extensively in “Evaluating the Arguments for the Dollar's Demise,” in the last decade, globally, at least, there has been an, apparent, increase in natural disasters. According to a 2013 article in The New England Journal of Medicine, there were three times as many natural disasters from 2000 to 2009 as there were from 1980 to 1989. And, according to one account, it was the 1906 San Francisco earthquake and fire that led directly to the Financial Panic of 1907.

    In another critical area, both George W. Bush and Barack Obama have identified nuclear terrorism as the greatest threat to national security. According to a 2008 FBI study, any terrorist nuclear weapon is likely to have a yield of about 1-kiloton (chart, below ), large enough to destroy a city center and with the potential to contaminate surrounding area for up to 4 miles, depending on wind direction (chart, 2nd below ). According to Nukemap, a 1-kiloton detonation in lower Manhattan would kill about 30,000 people and cause three times as many injuries, some fatal. A smaller possibility is a 10-kiloton event with fallout reaching 20 miles.

    Miles from ground-zero

    Even before 911, the U.S. recognized that terrorist groups were attempting to acquire nuclear material. According to one recent joint report by Belfer Center at Harvard endorsed by military leaders, constructing a crude nuclear device is easier today than constructing a safe, reliable weapon. Tests indicate that intelligent operatives could defeat security systems holding weapons or materials and in the last five years several sites have been penetrated. As of 2014, at least four key core Al Qaeda nuclear operatives were still at large. And the difficulty of smuggling nuclear material into the U.S. is largely overstated. But the primary concern is that with one detonation terrorists could claim they had more bombs hidden, creating mass panic.

    General radioactive fallout pattern

    The nuclear scenario would be a global catastrophe, claiming thousands of lives, shutting down trade and exporting dire consequences to other nations. The cost in response and retaliation would also add enormously to U.S. debt, potentially accelerating the nation towards economic crisis. According to the above Belfer report, the risk of a nuclear terrorist attack on U.S. soil is greater than 1 in 100 every single year.

    In addition to all of the above possibilities there are ongoing currency wars, the reemergence of the Eurozone crisis, the Ukraine and the potential destabilization of Russia, the China slowdown and real estate bubble, Japanese debt, the Sino-Japanese conflict and the craziness of mad regimes like North Korea and Iran to worry about. And we haven't even addressed nuclear sabotage, dirty bombs, an EMP device, ISIS and the Middle East as a whole, other U.S. terrorist events, central bank errors or another financial meltdown due to the approximately $70 trillion in global derivatives. In many ways, the world we currently live in is like dry kindling waiting for an inerrant spark to set it ablaze.

    Hyperinflation in the U.S.A.: How and when it might happen

    The risk of the economy collapsing and instigating hyperinflation is much like the theory of the avalanche: many of the items are in place, and all that is needed is the right trigger to set them off. Whether it comes in the next few years or twenty years from now is impossible to predict and depends on too many unknowns.

    Some, like Eswar S. Prasad, argue in The Dollar Trap that the intricate nature of global mechanisms will keep the dollar in play indefinitely – and the world largely in balance. Others, like James Rickards, in The Death of Money, insist that the complexity of global financial interactions and their tipping points will crash the U.S. economic system. Who is right?

    Based on the above analysis, unless the U.S. experiences a crisis greater than 911 or the GFC, hyperinflation is not a likely scenario for the next five years and probably more like twenty years. But, the greater and the more numerous crises are, the more likely that hyperinflation will come quickly. What if a black swan or a series of crises led to a perfect storm?

    A 1 kiloton nuclear terrorist attack strikes the U.S. in either New York City or Washington D.C. The stock markets crash, losing half their value. The EZ breaks apart and the resulting malaise spreads to the global economy. Instead of the confidence in crisis coming to the U.S., the U.S. bond market implodes and global money runs to gold, silver, foreign currencies and various ex-US bonds. In the U.S. prices rise and stocks rebound some with them – eventually. The U.S. military retaliates in foreign lands for the nuclear attack but walks into a trap.

    Disunity disintegrates into political civil war and panic incites unrest, resulting in martial law. The current drought increases and food supply is cut in half. Fed printing presses finally result in high inflation. Destruction from an earthquake and/or a volcanic eruption lays waste to much of a major city. All of these events combined destroy infrastructure, disrupt distribution, exacerbate the drought and kill leaders. Foreign governments take advantage of America's weakness and institute a cyber-attack. Power failures occur nation-wide.

    Hyperinflation ensues. The stock market falls as confidence wanes. Loss of control leads to a government coup, bank account freezes and despotism. The U.S. descends into an inflationary depression leading to fear of invasion, the dollar's fall and its replacement as the global reserve.

    It would probably take more than one isolated event – even a major one – to create the conditions for hyperinflation in the U.S. And, it took a decade for a similar process to unfold in other nations. But, it can occur faster in the midst of critical events.

    As I stated in “Evaluating the Arguments for the Dollar's Demise,” the U.S. has been protected by a hedge when it comes to disaster. But, events like Katrina, national drought, and the recent Supreme Court decisions relative to Constitutional interpretation hint at a new and more divisive era. Though for the present things seem fine, there is more than one route to an avalanche now than there may have been just a few years ago.

    Replacement of the dollar as global reserve as an isolated event might instigate hyperinflation more quickly. However, only one reserve currency nation has ever experienced a hyperinflation – France, from 1795-96, during the years of the French Revolution. And no nation has ever experienced a hyperinflation as a result of losing global reserve status. Other causal symptoms would likely be apparent, leaving some time to prepare.

    How to prepare for hyperinflation

    Here is some broad investment advice that takes into account the dichotomy of the above conclusions relative to hyperinflation. Portfolio allocations can start small and increase as events on the ground change:

    1. Protect what you have: Diversify your portfolio globally. Hold some real estate. Borrow at fixed rates while interest rates are low.

    2. Consider an international account. Set up expeditious portfolio transitions into foreign currency accounts and international funds with a flexible strategy for transference of at least some assets in the event of escalating volatility, major U.S. weakness or black swans.

    3. Allocate part of your portfolio to alternative funds and hedge-fund-like strategies. If qualified, consider hedge funds, especially those with a global macro and/or event-driven focus.

      Silver and gold in marks

    4. Consider natural resources, agriculture and commodities based funds, especially now when commodities overall, including oil, have corrected and mining is near a historical low cost point versus gold. Remember that water is liquid gold and may be scarcer in the future.

    5. Accumulate tradable items: physical gold and silver (the chart above shows the rise of gold and silver during the Weimar Germany hyperinflation); jewelry; stored food and water; wine; and foreign currency.

    Hyperinflation in the U.S. is coming sometime in the next 20 years or so, and this isn't a cry from a Chicken Little, but a conclusion that the analysis strongly suggests. It is possible hyperinflation could happen during the next few years, but that seems unlikely since it would require a series of major crises and political blunders – events unprecedented in the history of the United States. If this led to a corruption of Constitutional rights in the midst of an exaltation of the Executive Branch that resulted in loss of the rule of law, hyperinflation might result. This is why the understanding and interpretation of the U.S. Constitution, especially in the context of executive orders, may be the most important issue before Congress, the judicial branch and the American people over the next few years – regardless of which party rules.

    It is much more probable that hyperinflation, when it comes to the U.S., will be preceded by a long slow decline that will include a protracted period of high inflation, and that the crash of the dollar and hyperinflation will be the final tumble off a looming, steep cliff. The indications from this analysis point to a convergence of events sometime in the mid-2020's to early 2030's – unless the American people can somehow unite and motivate their politicians to accomplish the hard, almost impossible task of cutting mountainous entitlements adding annually to U.S. debt. But, of course, if the perfect storm occurs, hyperinflation could arrive sooner.

    For the chaos of change it brings, hyperinflation has been described as an economy without memory. It can also be viewed as a furtive civil war a nation's political leaders wage with its people over who will pay for the nation's sins. Its battlegrounds, victories and defeats answer the question of who will wave the white flag over the extravagance of the nation's mismanagement. Ultimately, the people – and the leaders – are both forced to surrender.

    The good news is that, with time, every nation returns from the devastation of hyperinflation to the degree that it embraces corrective measures and free market principles. Regardless of what else might occur, in this sense the U.S. has a sure foundation, a rich history and a hopeful future.

  • Fearing Greek Fallout, ECB Extends "Secret" Credit Lines To Balkans

    As discussions between Greece and its creditors deteriorated and pressure on the country’s banking sector mounted, some analysts began to look nervously towards Bulgaria and Romania where Greek banks control a substantial percentage of total banking assets. 

    The Monday following Greek PM Alexis Tsipras’ referendum call, yields on Bulgarian, Romanian, and Serbian bonds jumped, reflecting souring investor sentiment and the countries’ central banks quickly released statements aimed at calming the nerves of investors and, more importantly, of depositors. 

    As Morgan Stanley noted in May, the real risk  “is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits.” The bank continued: “Although well capitalised and liquid, Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in.”

    Shortly thereafter the “no contagion risk” myth collapsed entirely when Bloomberg reported that the ECB had stepped in to shield Bulgaria from any potential fallout from capital controls in Greece. “The ECB is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation. The ECB would provide access to its refinancing operations, offering euros to the banking system against eligible collateral,” Bloomberg said, citing unnamed officials. 

    Now, FT is out reporting that the ECB has extended “secret credit lines” to Bulgaria and Romania in order to forestall asset seizures. Here’s more:

    The European Central Bank has introduced secret credit lines to Bulgaria and Romania as part of a broader effort to convince foreign regulators not to pull the plug on the local subsidiaries of Greek banks.

     

    News of the behind-the-scenes support for the subsidiaries comes as ECB governors decide on Thursday whether to extend a €89bn lifeline in emergency eurozone funding to Greece’s beleaguered financial sector.

     

    Greece’s Piraeus, National Bank of Greece, Eurobank and Alpha Bank all have substantial assets in central and eastern Europe. If those assets were seized by local regulators, the parent banks would take an immediate capital hit, dealing a potentially terminal blow to Greece’s domestic financial system, which is already hanging by a thread as the country battles to agree a new rescue package with international creditors.

     

    “The fear is that if someone goes first, and pulls the plug, everyone will follow,” said a person familiar with the situation.

     

    The person said the ECB had put in place special “swap” arrangements, or bilateral credit lines, with Romania and Bulgaria to reassure them that the Greek banks there would have funding support throughout the current crisis.

     

    Similar swap lines, which enable foreign central banks to borrow from the ECB and relend that money locally, were used during the eurozone financial crisis, but were typically publicly announced.

    So essentially, the ECB is now set to lend to Bulgaria and Romania in order to ensure that those countries’ regulators do not take any actions with regard to domestic subsidiaries of Greek banks that might serve to further destabilize the Greek banking sector as Europe scrambles to keep it afloat.

    As a reminder, Kathimerini reported in April that the central banks of Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia had “all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk (bonds, treasury bills, deposits to Greek banks, loans etc.) down to zero in order to shield themselves and minimize the danger of contagion in case the negotiations between the Greek government and the eurozone do not bear fruit.” The ECB’s fear seems to be that “quarantines” could turn to “asset seizures” which could in turn further impair the balance sheets of the parent companies and introduce yet another element of uncertainty into already indeterminate discussions around recapitalizing Greece’s ailing banks. 

    And as for the idea that depositors in the Balkans aren’t at risk, we’ll close with the following excerpt from the FT article cited above:

    The National Bank of Romania declined to comment specifically on the new funding line. It said its Greek banking offshoots are “sound”, adding that they could refuse to let shareholders withdraw deposits and could also raise liquidity from the local central bank if the situation worsened.

  • Icahn Vs. Fink: Wall Street Legends Clash Over "Dangerous" ETFs

    In the interest of not burying the lead, so to speak, we’ll begin with a clip from this week’s Delivering Alpha conference.

    In it, Carl Icahn essentially rehashes everything we’ve said over the past several months about the systemic risk posed by phantom ETF liquidity. He then proceeds to explain to Larry Fink how BlackRock is a part of the problem, calling the firm “a dangerous company”, before opining that Fink and Janet Yellen are “pushing the damn thing off a cliff.” Needless to say, Fink did not agree with Icahn’s assessment. Here are the fireworks:

    For those interested to know more, below is the complete Zero Hegde guide to phantom ETF liquidity and a discussion of how it has set the stage for a bond market meltdown.

    *  *  *

    Two months ago, in “ETF Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity,” we outlined the rather disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity facilities that can be tapped in the event of a sudden retail exodus from bond funds. 

    “The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show,” Reuters reported at the time, in a story we suspect did not get the attention it deserved. 

    At a base level, these precautionary measures are the result of the interplay between central bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand there is for new corporate issuance (the rationale being that at least corporate credit offers some semblance of yield). More demand means rates on corporate credit are driven still lower, and once yields on high grade issues get close to the lower limit, yield-starved investors are then herded into HY.

    All of this supply in the primary market comes at a time when liquidity in the secondary market for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the government’s (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre with a tiny exit.

    This situation has been exacerbated by the proliferation of bond ETFs which have allowed retail investors to pile into corners of the fixed income world where they might not belong. 

    All of the above can be summarized as follows.

    “MF assets too large versus dealer inventories” (via Citi)…

    … clear evidence of “structural damage in corporate bond trading liquidity” (via JP Morgan)…

    … and the rapid growth of bond funds in the post-crisis world (via BIS)…

    So given the above, the question is this: if something were to spook the market – a rate hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical shock – causing an exodus from these funds, what would happen to prices if fund managers were suddenly forced to transact in size in an illiquid secondary market in order to meet redemptions?

    “Nothing good”, is the answer. 

    The solution is to avoid selling the underlying bonds – even when investors are selling their shares in the funds.

    But how is this possible? 

    To a certain extent, outflows in one fund can be offset by inflows to another. These “diversifiable flows” are one happy byproduct of the great ETF proliferation. Here’s a refresher on how this works courtesy of Barclays.

    *  *  *

    Portfolio Products Replace Dealer Inventory

    While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.

    The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.

    This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate bonds.

    *  *  *

    Ok great, so ETFs provide a kind of “phantom” liquidity if you will. There are two problems with this:

    • It only works when flows are diversifiable. Once flows become unidirectional, it all goes out the window.
    • It makes the underlying markets even more illiquid.

    Here’s how we put it last month in “How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown“:

    In other words, if I’m a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There’s a term for that kind of business. It’s called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses. 

     

    Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.

    So what is a fund manager to do? 

    This is where we come full circle to the emergency liquidity lines mentioned at the outset. In order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional, fund managers may instead pay out redemptions in borrowed cash. 

    This is, to quote Citi’s Matt King, “creative destruction destroyed.”

    Only worse.

    That is, this represents the willful delay of a long overdue episode of creative destruction layered atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy references, that can be translated as follows: this strategy is yet another example of delaying the inevitable. If fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they’re holding have done to stay in business. It’s a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course. 

    In closing, it’s important to note that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds. 

    In other words, when the exodus comes, the illiquidity that’s been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.

  • So You Want To Be A Central Banker? Then Answer This Question

    Do you see a bubble?

     

     

    If your answer is “no”, proceed to job offer!

     

    h/t @NorthmanTrader

  • Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

    Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

    In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

    In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

    Oh, and both CEOs resigned on June 7. 

    On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

    Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

    BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

     

    Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

     


    So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

    (From the report)

     

    Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

     

    Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

     

    In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

    Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

    An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

    Hmm. Well, maybe Jain didn’t read that article. 

    This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

     

    The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

     

    This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

    Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

    The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

     

    There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

     

    The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

    Christian, who is Christian?

    Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

    Wow. So how well did Jain know Bittar? 

    The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

    That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

    And on, and on, and on.

    The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

    Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

     

    Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

     

    Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

     

    Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

    And finally, the accusation that may prove most damaging of all: 

    There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

    There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

    So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

    The full BaFin report is below.

    Baf in Deutsche Report

  • Greece And The Worst Possible Way To Correct Trade/Productivity Imbalances

    Submitted by Charles Hugh-Smith of OfTwoMinds blog,

    Piling on more debt is the worst possible way to correct structural trade and productivity imbalances.

    In Greece and the End of the Euroland Fantasy, I suggested the trade imbalances at the heart of Greece's debt crisis could only be resolved by Greece returning to its own national currency. Correspondent Michael Gorback observed that there are other mechanisms for correcting imbalances in trade and productivity:

    "There is not one but 4 ways to address international productivity imbalances: currency revaluation, fiscal transfers, labor migration, and changes in local wages.

     

    If you peg one of those the others must adjust. In the case of the Eurozone and Greece, the adjustment was largely through fiscal transfers with a bit of migration. Wages are not so much sticky as fossilized.

     

    I submit that the reason the US does well under monetary union (ED NOTE: that is, all 50 states use the same currency, the U.S. dollar) is not so much its fiscal union as it is the strength of compensatory mechanisms that are far less developed in Europe. American states and localities still engage in their own fiscal policies and productivity is by no means homogeneous.

     

    The US enjoys excellent labor mobility – about 10x that of Europe. It has seen numerous population shifts based on economics: the early western migration, the Gold Rush, migration of freed slaves to the north, Okies leaving the midwest during the Dust Bowl, the population shift from New England to the Sun Belt, and more recently the oil-boom-related migrations, to name a few.

     

    Employers are also mobile. Furniture manufacturers moved from Western NY state to the South decades ago. GE once had 14,000 employees in the town of Pittsfield, MA. Now it's gone. Boeing is moving ops to SC. Beretta moved to TN. If the wages don't adjust, the employers migrate to the lower wages.

     

    The US, having a large and relatively less regulated private sector that's also relatively unencumbered by unions, has greater wage flexibility than most developed countries.

     

    I think these compensation mechanisms in mobility and wages work better for the US and that's why the US handles monetary union better than the Eurozone. The US still has to engage in interstate fiscal transfers but they're mediated through the central government and few citizens give it a second thought. Is the State of NY frothing over the fact that it gets back less federal dollars than it pays, and that the difference is going to Kentucky?

     

    Why does Boeing open a plant in South Carolina and China open factories in Africa but BMW hasn't opened a plant in Greece? If I were negotiating a bailout, those would be the reforms I'd demand – reforms that make business thrive."

    Easing the process of labor migration within Europe was one goal of the Eurozone, and in terms of making it relatively easy for someone to take a job in another Eurozone member nation, it was a successful reform.

    But this doesn't really address imbalances in productivity due to differences in skills, education, cultural values and corruption. Low-skill labor is more easily recruited than high-skill labor, and in a global economy, the choice of where to site a new plant or call center depends on many factors, not just wage arbitrage, i.e. going to where the labor is currently cheaper.

    Many assume corporations have shifted production to China to take advantage of lower wages. But as wages rise in China, this is not necessarily the deciding factor: proximity to China's growing market is often the over-riding factor.

    A new book, Thieves of State: Why Corruption Threatens Global Security, highlights the many systemic costs of corruption. The corruption that is endemic to Greece and China (among many others) imposes profound systemic costs on those economies, costs that may well loom much larger in the next global downturn than they did in the last Global Financial Meltdown.

    I think it is safe to say that piling on more debt is the worst possible way to correct structural trade and productivity imbalances, yet that is the Eurozone's "solution" to Greece's debt/ trade/ productivity/ corruption crisis. The discussion should be (as Michael pointed out) about creating conditions for business and real wealth creation to thrive, not jamming more debt down the throats of everyone on either side of the structural imbalances.

  • Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

    Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

    In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

    In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

    Oh, and both CEOs resigned on June 7. 

    On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

    Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

    BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

     

    Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

     


    So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

    (From the report)

     

    Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

     

    Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

     

    In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

    Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

    An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

    Hmm. Well, maybe Jain didn’t read that article. 

    This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

     

    The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

     

    This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

    Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

    The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

     

    There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

     

    The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

    Christian, who is Christian?

    Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

    Wow. So how well did Jain know Bittar? 

    The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

    That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

    And on, and on, and on.

    The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

    Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

     

    Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

     

    Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

     

    Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

    And finally, the accusation that may prove most damaging of all: 

    There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

    There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

    So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

    The full BaFin report is below.

    Baf in Deutsche Report

  • Stock Bubble And Its Buyback Genesis Suddenly Vulnerable

    Submitted by Jeffrey Snider via Alhambra Investment Partners,

    Having now passed the anniversary of the “rising dollar”, it is interesting to see the related and continued effects on the stock bubble(s). As should be obvious by now, stock buybacks, funded via corporate bonds and loosely categorized C&I loans, are responsible for the post-QE3 nearly uninterrupted rise. Repurchases are forming a separate “liquidity” conduit, indirect leverage if you will, which has already started to fray. Various broader “market” indices have diverged, starting with the Russell 2000 in early 2014 (with the economic slowdown that was supposed to be an anomaly of weather).

    ABOOK July 2015 Stock Bubble Buyback Russell

    Since then, other indices have also broken away, notably the broad NYSE Composite index which includes the greatest cluster of ETF’s. The deviation there coincides exactly with the “dollar” tightening in eurodollar liquidity and less-smoothened wholesale transactions.

    ABOOK July 2015 Stock Bubble SP500 NYSE CompABOOK July 2015 Stock Bubble Buyback Broader

    There really cannot be much doubt anymore that QE is the central focus of the stock bubble, especially the third and fourth applications. The timing is so obvious as to preclude any other interpretation – most especially a growing and sustainable recovery that never materialized despite all public and heavy exaltation.

    ABOOK July 2015 Stock Bubble QE Buybacks

    While there is undoubtedly some reinforcing inflation due to various views of “tail risks” and perceptions about volatility which become self-fulfilling, it really is repurchases that are driving price action. The most “effective” transmission is corporate debt funneled through shareholder returns, which are not very efficient in terms of economic circulation (especially by comparison to the opportunity cost of them).

    In that respect, along with recession fears, it is perhaps quite significant that the S&P Buyback Index has suffered its first extended reversal since the 2012 slowdown, coincidental then to European concerns and just prior to both Draghi’s promise and QE3. It is unclear at the moment what exactly has caused that dramatic shift but the more likely explanations point to fears about corporate ability to continue repurchasing with economic weakness bearing down against both internal cash flow and even corporate bond pricing and liquidity.

    Whatever the case may be ultimately, the stock bubble’s ties to central bank policy seem to suggest the quite waning influence; both in terms of active participation (on the Fed side) and, more importantly in my view, how blind faith in monetarism may be reversing because of that widespread economic fruitlessness. Stock momentum, for the first time since 2012, is decidedly waning on all fronts:

    ABOOK July 2015 Stock Bubble Buyback MomentumABOOK July 2015 Stock Bubble SP500 MomentumABOOK July 2015 Stock Bubble NYSE Momentum

    I find it significant that the broader market index, the NYSE Composite, has shifted negative in its one-year comparison again tied to last year’s “dollar” disruption. At the very least it might imply that the central bank paradigm that lasted since the middle of 2012 has greatly eroded or even ended.

  • If You Like Your Nuclear Bomb-Free Iran, You Can Keep It…

    “Read my lips…”

     

     

    Source: Investors.com

  • Nasdaq Soars To Record High With Biggest Rally Since October's "Bullard" Bounce

    Artist's imprerssion of Nasdaq trader's reaction to the greek deal this week (forward to 45 seconds in…and feel the anticipation)

    Stock went up… some more than others… as Futures show gapped up on the Greek vote – kept squeezing into the US open and then diverged with Nasdaq melting up…

     

    Cash indices all gapped higher at the open but from that squeeze – there was major divergence (Dow Industrials and Trannies actually lower)

     

    On the week, the Nasdaq is now up over 3.25%…

     

    In summary…

    *  *  *

    The last few days saw the biggest short-squeeze in 5 months…

     

    Which is helping The Nasdaq to its biggest 6-day run since October's Bullard ramp…

     

    And then there's this massively free-cash-flow negative idiot-maker…

     

    One more good reason why stocks just keep surging… JPY carry is back on now that Grexit event risk has been 'removed' from carry traders risks… fun-durr-mentals

     

    VIXnado…back at an 11 handle!!

     

    as The backwardation unwinds to the steepest in 2 months…

     

    Bonds continued their rally with 30Y leading the way…

     

    As it appears the Moar QE trade is back in full swing…

     

    FX markets continued to be dominated by a plunge in EUR and JPY…

     

    And, digging into the details, your daily FX roundup (courtesy of ForexLive):

    We learned a few things from the ECB but nothing earth-shattering. The economic assessment gave a lift to the euro but it was quickly wiped out. The FX market reacted little to the Greek ELA but European stocks rallied.

     

    After the press conference a second wave of euro buying hit and pulled it from a session low of 1.0856 to 1.0927 at the options cut. From there, the sellers returned in a broad USD mini-rally and it slipped to 1.0875 at the end of the week (hold your horses there buddy … its Friday here in the world's greatest country but not the weekend yet – Eamonn) day.

     

    USD/JPY hit a session high of 124.18 very early in US trading but slipped into the options cut, falling to 123.89. Steady buying from there took it back to 124.13. Yellen had very little effect, if any.

     

    Cable hit a bump today, falling to 1.5560 from 1.5615 but the dip buyers were ready and it climbed all the way back. A second dip also found support and the pair finishes only modestly lower on the day at 1.5612.

     

    USD/CAD finishes at the highs of the day at 1.2966. Dips toward 1.2900 have found good support since the BOC cut. A touch off 1.2906 at the options cut set the stage for a steady rally to the highs.

     

    The Aussie was generally perky as it clawed back some of yesterday's losses. The high of 0.7437 peaked just above the 61.8% retracement of the slump on Wednesday but some sellers appeared late and drove it to 0.7401. There were some massive options running off in AUD and that was the buzz. The lows in USD right across the board today were at the cut.

    Commodities were mixed with copper limping higher as PMs leaked a little more and crude tumbled…

     

     

    Crude continues to tumble back to a $50 handle as Iran and default fears mount…

     

    Charts: Bloomberg

    Bonus Chart: VXX hits its 347th Record Low……

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Jul 16

Today’s News July 16, 2015

  • The Future Costs Of Politically Correct Cultism

    Submitted by Brandon Smith via Alt-Market.com,

    I rarely touch on the subject of political correctness as a focus in my writings, partially because the entire issue is so awash in pundits on either side that the scrambling clatter of voices tends to drown out the liberty movement perspective. Also, I don’t really see PC cultism as separate from the problems I am always battling against: collectivism and the erasure of the individual in the name of pleasing society. Political correctness is nothing more than a tool that collectivists and statists exploit in order to better achieve their endgame, which is conning the masses into believing that the group mind is real and that the individual mind is fiction.

    Last year, I covered the PC issue in my article “The Twisted Motives Behind Political Correctness.” I believe I analyzed the bulk of the issue extensively. However, the times are changing at a pace that boggles the mind; and this is by design. So, it may be necessary to square off against this monstrosity once again.

    In order to better examine the true insanity of what many people now term “social justice warriors,” I must study a few aspects of that strange movement separately. First, let’s take a brief look at the mindset of your average social justice circus clown so that we might better understand what makes him/her/it tick.

    Rebel Without A Legitimate Cause

    I spent several years (up until 2004, when I woke up from the false paradigm madness) as a Democrat. And before anyone judges that particular decision, I would suggest they keep in mind the outright fascist brothel for the military-industrial complex the Republican Party had become at that point and remains to this day. Almost every stepping stone that Barack Obama is using today to eradicate the Constitution was set in place by the Bush dynasty, including the Authorization Of Military Force, which was the foundation for the National Defence Authorization Act and the legal precedence for indefinite detention without trial of ANY person (including an American citizen) accused of terrorism by the president of the U.S., as well as the use of assassination by executive order and the implementation of mass electronic surveillance without warrant.

    But, hell, these are real issues — issues that many of my fellow Democrats at the time claimed they actually cared about. Today, though, liberal concerns about unconstitutional actions by the federal government have all but vanished. Today, the left fights the good fight against flags on the hoods of cars from long-canceled television shows and battles tooth and nail for the “right” of boys wearing wigs and skirts to use the girl’s bathroom. Today, the left even fights to remove the words “boy” and “girl” from our vocabulary. Yes, such noble pursuits as these will surely be remembered as a pinnacle in the annals of societal reform.

    Maybe I realize the ideological goals of the social justice machine are meaningless on a surface level; and maybe you realize this, too. But these people live in their own little universe, which doesn’t extend far beyond the borders of their college campuses, the various Web forums they have hijacked and a trendy Marxist wine-and-swinger party here and there in New York or Hollywood. They actually think that they are on some great social crusade on par with the civil rights movements of the mid-1900s. They think they are the next Martin Luther King Jr. or the next Gandhi. The underlying banality and pointlessness of their cause completely escapes them. The PC cult is, in many respects, the antithesis of the liberty movement. We fight legitimate threats against legitimate freedoms; they fight mostly imaginary threats and seek to eradicate freedoms.

    Don’t get me wrong; sometimes our concerns do align. For instance, liberty proponents fight back against the militarization of police just as avidly as leftists do, if not more so. But our movements handle the problem in very different ways. Look at Ferguson, Missouri, where anyone with any sense should be able to admit that the government response to protests was absolutely a step toward tyranny, ignoring violent looters while attacking peaceful activists. Leftists and PC cultists decided to follow the Saul Alinsky/communist playbook, busing in provocateurs from Chicago to further loot and burn down businesses even if they belonged to ethnic minorities. In the meantime, the liberty movement and Oath Keepers sent armed and trained men to defend those businesses REGARDLESS of who owned them and defied police and federal agents who tried to stop them.

    The left gave the police and government a rationale for being draconian, while we removed the need for police and government entirely by providing security for the neighborhood (killing two birds with one stone). Either their methods are purely ignorant and do not work, or their methods are meant to achieve the opposite of their claims. In the end, the PC movement only serves establishment goals toward a fully collectivist and centralized society.  Their publicly stated intentions are otherwise pointless.

    Your average PC drone does not understand the grander plan at work, nor does he want to. All he cares about is that he has found a “purpose” — a fabricated purpose as a useful idiot for power brokers, but a purpose nonetheless.

    People Must Be Forced To Bake Gay Cakes

    I personally do not care if two people of the same gender want to be in a relationship, but I do find the issue of gay marriage (and marriage in general) a rather odd conflict that misses the whole point. Marriage has been and always will be a religious institution, not federal; and I find government involvement in this institution to be rather despicable. When the Supreme Court’s decision on gay marriage came down, I felt a little sorry for all the joyfully hopping homosexuals on the marbled steps of the hallowed building, primarily because they essentially were fighting for the state to provide recognition and legitimacy for their relationships. Frankly, who gives a rip what the state has to say in terms of your relationships or mine? The state is an arbitrary edifice, a facade wielding illusory power. If a relationship is based on true and enduring connection, then that is all that matters, whether the Supreme Court dignifies it or not.

    The only advantage to solidifying gay marriage in the eyes of the state is the advantage of being able to then use the state as an attack dog in order to force religious institutions to accept the status of gays in the same way the government does. And unfortunately, this is exactly what the PC cult is doing.  What they do not seem to understand is that recognition by the state does not necessarily translate to recognition by religious organizations, nor should it.

    Should an individual, organization or business be allowed to refuse service to anyone for any reason? Should the state be allowed to force people into servitude to one group or another even if it is against their core values?

    PC champions desperately try to make these questions a matter of “discrimination” alone. But they are more about personal rights and personal property and less about “hate speech.” Under natural law, as well as under the constitution, an individual has every right to refuse association with any other person for ANY reason. If I do not like you, the government does not have the authority to force me to be around you or to work for you. But this line has been consistently blurred over the years through legal chicanery. As I’m sure most readers are familiar, the issue of gay cakes seems to arise over and over, as in cases in Colorado and Oregon in which religiously oriented business owners were punished for refusing to provide service for gay customers.  Keep in mind, these businesses did not refuse outright service to gays.  What they did refuse, was to make gay wedding cakes.  To do so would have been in outright conflict with their religious principles.

    Punishments have included crippling fines designed to put store owners out of business and have even included gag orders restricting the freedom of businesses to continue speaking out against the orientation of customers they have refused to do business with.

    In order to validate such actions, leftists will invariably bring up segregation as a backdrop for the gay cake debate. “What if the customers were black,” they ask. “Is it OK for a business to be whites only?”

    My response?  Yes, according the dictates of individual liberty, yes it is okay.

    First, to be clear, I am talking specifically about private individuals and businesses, not public institutions as in the argument explored during Brown v. Board of Education. Private and public spaces are different issues with different nuances. I personally believe it is ignorant to judge someone solely on the color of his skin, and sexual orientation is not necessarily an issue to me. But it is equally ignorant for someone to think that the state exists to protect his feelings from being hurt. I’m sorry, but discrimination is a fact of life and always will be as long as individualism exists. The PC cultists don’t just want government recognition of their status; they want to homogenize individualism, erase it, and force the rest of us to vehemently approve of that status without question. This is unacceptable.

    Your feelings do not matter. They are not superior in importance to the fundamental freedom of each individual to choose his associations.

    If a business refuses to serve blacks, or gays, or Tibetans, then, hey, it probably just lost a lot of potential profit. But that should absolutely be the business’s choice and not up to the government to dictate. And in the case of “gay discrimination,” I think it is clear that the PC crowd is using the newfound legal victim group status of gays as a weapon to attack religiously based organizations. Make no mistake, this will not end with gay cakes. It is only a matter of time before pressure is brought to bear against churches as well for “discrimination.” And at the very least, I foresee many churches abandoning their 501(c)(3) tax exempt status.  Again, marriage has been and always will be a religious institution.  The PC crowd will not be happy with government recognition alone.  They want to force recognition from everyone.

    If a group wants fair treatment in this world, that is one thing. I believe a gay person has every right to open HIS OWN bakery and bake gay marriage cakes to his little heart’s content. I believe a black person has every right to dislike white people, as some do, and refuse to associate with them or or do business with them if that’s what he/she wants. I also believe that under natural and constitutional law, a religious business owner is an independent and free individual with the right to choose who he will work for or accept money from. If he finds a customer’s behavior to be against his principles, he should not be forced to serve that person, their feelings be damned.

    This is fair.

    What is not fair is the use of government by some groups to gain an advantage over others based on the legal illusion of victim group status. PC cultists want us to think that choice of association is immoral and damaging to the group. I have to say I find them to be far more intolerant and dangerous than the people they claim to be fighting against, and this attitude is quickly devolving into full bore tyranny under the guise of “humanitarianism.”

    Gender Bending Does Not Make You Special

    A man shaves his head and eyebrows, straps a plastic bottle to his face, and has his feet surgically modified to resemble flippers: Does this make him a dolphin, and should he be given victim group status as trans-species? I’m going to be brief here because I covered this issue in a previous article, but let’s lay everything on the table, as it were…

    PC cultists are clamoring to redefine the scientific FACT of gender as an “undefinable” and even discriminatory social perception. No one, no matter how dedicated, will EVER be able to redefine gender, unless they have the ability to change their very chromosomes. Nature defines gender, not man; and a man who undergoes numerous surgeries and body-changing steroid treatments will always have the genetics of a man even if he gives the appearance of a woman. Take away the drugs, and no amount of make-up will hide the chest hair growth and deepening voice.

    This might be deemed a “narrow” view of gender, and I don’t care. Nature’s view of gender is the only one that counts. Psychological orientations are irrelevant to biological definitions. Are you a man trapped in a woman’s body? Irrelevant. A woman trapped in a man’s body? Doesn’t matter. If we are talking about legal bearings, then biological definitions are the only scale that makes sense. I realize that gender bending is very trendy right now, and Hollywood sure seems to want everyone to jump on that freaky disco bandwagon, but there is no such thing as gender-neutral people. They are not a group, let alone a victim group, and do not necessitate special attention or government protection. There are men, and there are women; these are the only gender groups that count. Whether they would like to be the opposite does not change the inherent genetic definition. Period. To make such foolishness into an ideology or a legal battle is to attempt to bewilder man’s relationship to nature, and this will only lead to social distraction and disaster.

    There Is No Such Thing As ‘White Privilege’

    A person determines his success in life by his character and his choices. Color does not define success, as there are many people of every color who are indeed successful. Do you have to work harder to gain success because you are brown, or black, or neon green? I’ve seen no concrete evidence that this is the case. I know that people who identify as “white” are still around 70% of the American population, thus there are more white people in successful positions only due to sheer numbers.

    I know that I personally grew up in a low-wage household and had little to no financial help as I entered the working world. Everything I have accomplished in my life to this point was done alongside people of color, some of whom had far more advantages than I did. I cannot speak for other people’s experiences, but I can say that being white was never more important in my life than being stubborn and dedicated.

    I also find it a little absurd that most PC cultists who harp about so-called white privilege are often white themselves and haven’t the slightest experience or insight on what it is to be a person of color anyway.  All of their concepts of discrimination are based purely on assumption. White privilege seems to be the PC cult’s answer to the argument that racism is a universal construct. Only whites can be racist, they claim, because only whites benefit from racism. I defy these jokers to show any tangible proof that an individual white person has more of a chance at success than a person of color due to predominant racism. Or are we just supposed to have blind faith in the high priests of PC academia and their morally relative roots?

    The Cost Of Cultural Marxism

    Marxism (collectivism) uses many vehicles or Trojan horses to gain access to political and cultural spaces. Once present, it gestates like cancer, erasing previous models of heritage and history in order to destroy any competing models of society.  If you want to understand what is happening in America today, I suggest you research the Chinese Cultural Revolution of the 1960's.  We are experiencing the same Marxist program of historical and social destruction, only slightly slower and more strategic.

    Younger generations are highly susceptible to social trends and are often easily manipulated by popular culture and academic authority, which is why we are seeing PC cultism explode with the millennials and post-millennials. In my brief participation on the left side of the false paradigm, political correctness was only beginning to take hold. A decade later, the speed of the propaganda has far accelerated, and we now have a bewildering manure storm on our hands. The result is a vast division within American society that cannot be mended. Those of us on the side of liberty are so different in our philosophies and solutions to social Marxists that there can be no compromise.  The whole carnival can end only one way: a fight. And perhaps this is exactly what the elites want: left against right, black against white, gay against religious and straight, etc. As long as the PC movement continues to unwittingly do the bidding of power brokers in their efforts toward the destruction of individual liberty, I see no other alternative but utter conflict.

  • China-Led Bank Will "Keep America Honest," Provide Alternative To IMF, Nomura Says

    The membership drive and subsequent launch of the Asian Infrastructure Investment Bank has been a favorite topic of ours since the UK threw its support behind the China-led venture in March.

    London’s move to join the bank marked a diplomatic break with Washington, where fears about the potential for the new lender to supplant traditional US-dominated multilateral institutions prompted The White House to lead an absurdly transparent campaign aimed at deterring US allies from supporting Beijing by claiming that the AIIB would not adhere to international standards around governance and environmental protection. 

    In the weeks and months following the UK’s decision, dozens of countries (including many traditional US allies) expressed interest in the new lender and by the time the bank officially launched late last month, the US and Japan (who dominate the IMF and ADB, respectively) were the only notable holdouts. 

    As we never tire of discussing, the reason the AIIB matters is that it represents far more than a new foreign policy tool for Beijing to deploy on the way to cementing its status as regional hegemon.

    The lender’s real significance lies in the degree to which it represents a shift away from the multilateral institutions that have dominated the post-war world economic order. In short, it’s a response not only to the IMF’s failure to provide the world’s most important emerging economies with representation that’s commensurate with their economic clout, but also to the perceived shortcomings of the IMF and ADB. The AIIB isn’t alone in this regard. Indeed, the BRICS bank can be viewed through a similar lens. 

    It’s against this backdrop that we bring you the following insight from Nomura’s Richard Koo, who suggests that the Greek experience with the IMF shows how the institution sometimes fails to deliver and by extension, how important it is for the countries in need to have more than one option when it comes to securing crucial aid.

    *  *  *

    AIIB a way around western opposition to IMF and World Bank reforms

    In light of US and European opposition to IMF and World Bank reforms, few should have been surprised that China decided it made more sense to create a new institution than to stand around waiting for the status quo to change. Eventually it announced the creation of the AIIB.

    Europe quickly declared that it would participate in the new institution. I see this as an attempt to smooth over relations with China after its earlier reluctance to allow the nation a more prominent role at the IMF.

    The US administration, while arguing China’s voting rights needed to be expanded to make the IMF a truly global institution, ultimately faced opposition from the legislative branch of government. The end result was a significant loss of US influence with both Europe and China.

    AIIB gives alternative to countries in need of help

    The US sought to expand China’s voting rights and thereby maintain the IMF and World Bank’s central positions in the global economy because allowing the creation of a similar institution would give cash-strapped countries more than one “lender of last resort” to turn to.

    Until now the IMF was the only choice for countries in need of financial assistance, which meant they had no choice but to accept the economic and fiscal reforms it demanded.

    But if the IMF has competition, countries in need of help will most likely shop around for the institution offering the easiest terms, which means necessary reforms may be delayed.

    China may also create an alternative to IMF

    In its current form, at least, the AIIB has a different role from the IMF; it is designed to provide development funds, much like the World Bank or Asian Development Bank (ADB). Given that the World Bank and the IMF were created as a pair under the postwar Bretton-Woods regime, US officials may be concerned that China will come up with a sister institution to the AIIB that has an intended role similar to that of the IMF.

    If the IMF’s rival is heavily under China’s influence, countries receiving its support will rebuild their economies under what is effectively Chinese guidance, increasing the likelihood they will fall directly or indirectly under that country’s influence.

    Lending of development funds to the countries of Asia by a Chinese-led AIIB will also bring about an increase in the nation’s influence throughout the region. That would be of concern to the US, which has succeeded in extending its own influence in the area via the World Bank and IMF.

    IMF and the US fundamentally misread Asian currency crisis

    There is something to be said for the US argument that there should be only one refuge for economically troubled nations which takes responsibility for ensuring they carry out necessary reforms. However, that view is based on the underlying assumption that the US and the IMF will correctly diagnose the problems it encounters.

    In reality, the US and the IMF completely misread the Asian currency crisis that began in 1997, and their errors caused tremendous damage to crisis-struck countries in the region.

    The decision of many Asian countries to participate in the AIIB is probably due in part to a distrust of the US born during the currency crisis.

    In that sense, I think the AIIB may come to play an important role in keeping America honest.

    It is difficult to say at this point whether the AIIB will have a negative or a positive impact on the global economy. At the very least, however, I think the emergence of an international institution with a viewpoint different from that of western creditors will help enhance the quality of debate over emerging economies’ debt problems. 

  • China Stocks Slump Over 10% Post-Intervention: Derivatives Dealers Reveal $150 Billion In "Questionable" Exposure

    "Right now, dealers are going through their books trying to work out what their positions are worth," explains a major participant in the Asian derivatives market as Reuters reports the suspension of hundreds of mainland China stocks has created disputes between banks and their clients over the valuation of billions of dollars of equity derivatives. "In the end, someone is going to have to call the value of those deals, and someone else will lose out," and with over 1000 stocks still suspended, and Chinese stocks now 12% off post-intervention highs, ISDA – the body that represents the world's largest dealers – is worried that at least $150 billion of outstanding OTC equity derivatives on mainland-listed shares may not have the appropriate language to deal with these events. After 3 days of "you will never learn" rises, margin debt declined following China's great data last night and the continued good news is bad news sell off today.

    • *PBOC TO INJECT 20B YUAN WITH 7-DAY REVERSE REPOS: TRADER

    Post-intervention, there is some "malicious selling" going on…

    • *FTSE CHINA A50 JULY FUTURES DECLINE 0.6%

    China's "Dow"…

     

    And CSI-300 (China's "S&P 500") is now down over 12% from the post-intervention highs…

     

    As after 3 days of "you will never learn" rises…

    • *SHANGHAI MARGIN DEBT DECLINES FIRST TIME IN FOUR DAYS

    And last night's data pushed China's debt-to-GDP to record highs…

     

    But a far bigger risk looms, as Reuters reports,

    The suspension of hundreds of mainland China stocks during a market plunge from mid-June could lead to disputes between banks and their clients over the valuation of billions of dollars of equity derivatives.

     

    Banks dealing in derivatives are concerned that valuation terms covering market disruptions in other Asian markets, such as trading halts when stocks move up or down by the exchange's daily range limits, might not apply to the wave of stock suspensions in China.

     

    …

     

    Dealers have written at least $150 billion of outstanding over-the-counter (OTC) equity derivatives on mainland-listed shares, according to estimates by Shanghai-based investment consultancy Z-Ben Advisors.

     

    "It's not yet clear if the existing disruption event language for other Asian jurisdictions can be applied to China or how the existing disruption definitions for limit-up, limit-down would apply to suspended stocks," said Keith Noyes, regional director, Asia Pacific, at the International Swaps and Derivatives Association (ISDA), which represents the world's largest derivatives dealers.

    And for those who proclaimed the surge in China stocks a victory, think again…

    "There could be wrangling over issues such as whether the Shanghai composite index closing price, which would generally be the easiest to use to value contracts, is a good price or a disrupted price, given that so many stocks are now suspended," said Noyes.

     

    "Right now, dealers are going through their books trying to work out what their positions are worth," said Adam Sussman, head of execution and quantitative services at international brokerage Liquidnet. "In the end, someone is going to have to call the value of those deals, and someone else will lose out."

    *  *  *

    We know who…

  • Forget Stocks – China Is Trying To Centrally Plan Its Way Out Of Another Black Hole

    Submitted by Simon Black via SovereignMan.com,

    It’s here in southwestern China’s postcard-perfect Yunnan province that the mighty Mekong River rises.

    From its source in a nearby mountain range, the river proceeds south, cutting its way across Southeast Asia’s fertile lands through Burma, Laos, Thailand, Vietnam, and Cambodia.

    The Mekong is hugely important; its waters irrigate million of acres of land and provide untold quantities of fish, both of which support tens of millions of people in the region.

    So it’s a major concern that China appears to be unilaterally diverting the Mekong to support its own needs.

    We’ve discussed China’s worrisome drought several times in the past.

    It would not be the slightest overstatement to say that China’s water situation is rapidly approaching crisis levels.

    Even China’s Agriculture Ministry is sounding the alarm bells.

    The numbers they’re reporting show that China already has to import more water than the United States imports oil.

    And this is creating major problems for their food security– for without staggering food imports, China cannot feed itself.

    If you add up all the acres of farmland that it takes to grow the amount of food China must now import each year, the total area is larger than the entire state of California.

    And this problem is only getting bigger.

    Here in Yunnan, the scenic countryside stretches to the horizon with beautiful farms and vast walnut groves, benefiting from the province’s gentle climate.

    Yunnan is actually one of the biggest walnut producing regions in China, which itself is the largest walnut producer in the world.

    But this won’t last. It can’t. They simply don’t have enough water.

    That’s actually the reason I’m here– walnuts.

    One of the two major focuses of our Chilean agriculture business is walnuts– something we chose precisely because of the long-term water crisis in China (not to mention the water crisis in California, another major walnut producer).

    As Chinese production declines, the resulting shortage should boost prices and substantially benefit our firm.

    For now, China’s government is doing everything they can to stem their food security and water crises from getting worse. And that includes commandeering the Mekong.

    Over the last few years, the Chinese government has built several massive dams along the Mekong River in Yunnan province.

    The Nuozhadu and Xiaowan dams are so large, in fact, that their combined reservoirs have enough capacity to cover the entire state of Maryland in five feet of water.

    In addition to providing bountiful hydroelectricity for Chinese industry, these dams are also being used to hoard water.

    China has a long history of trying to tame rivers.

    It goes back to the days of Mao when legions of engineers did everything they could to alter and divert natural rivers for the betterment of farmers.

    (Even China’s former President Hu Jintao started off as an engineer for SinoHydro…)

    It didn’t work. And combined with the rest of Mao’s absurd central planning, millions of people starved to death.

    Trying to fight nature always ends badly. But governments never learn.

    This is exactly what the Chinese government is trying to do right now with its bubbly stock markets.

    Like their water crisis, this is a force of nature. When a market bubble gets too inflated, its natural course is to pop.

    No amount of clever engineering can prevent this. Delay, perhaps. But never prevent.

    China’s response to their financial emergency has been the same as their water emergency: deceit and desperation.

    They suspended trading, encouraged small investors to mortgage themselves to the hilt, pushed bank balance sheets onto even shakier ground, and published the most insane propaganda worthy of the Pulitzer Prize for fiction.

    They even took a suggestion from Shakespeare’s Henry VI: “The first thing we do, let’s [imprison] all the lawyers.” And yes, they actually did throw a bunch of lawyers in jail for ‘encouraging dissent.’

    But like their water crisis, this isn’t something they can out-engineer.

    It would be like expecting a bunch of bureaucrats to centrally plan their way out of a black hole.

    It’s just not going to happen– nature is too powerful a force, like an unstoppable train.

    And fundamentally in this world, there are two kinds of people: those who see it coming, and those who don’t.

    For those who see it coming, you have options. You have freedom.

    You can choose, at a minimum, to simply get out of the way, and ensure that the train doesn’t hit you or your family.

    Or you might even choose to find a way to profit from it, just as we are doing with China’s water crisis.

    Undoubtedly, whenever a nation as large and populous as China’s experiences such severe financial gyrations, there’s money to be made; if nothing else, potentially some great bargains for patient investors.

    The other type of person is the one who doesn’t see it coming and must suffer the consequences of ignorance and inaction.

    Being one or the other isn’t random. It’s a choice– a decision to be ignorant. Or a decision to be educated and prepared.

    Which one will you decide?

  • "Subsidizing Scroungers" – The Germans Knew How 'Europe' Would End Back In 1997

    In 1997, Arnulf Baring (of the German-British family of Baring bankers) unleashed the following ‘Nostradamus’-like prediction of how the euro would end (from a German perspective)…

    “They will be subsidizing scroungers, lounging in cafes on the Mediterranean beaches.

     

    Monetary union, in the end, will result in a gigantic blackmailing operation.

     

    When we Germans demand monetray discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More they will perceive us as a kind of economic policeman.

     

    We risk once again becoming the most hated people in Europe.“

    It appears that Arnulf pretty much ‘nailed it’.

    h/t @DanHannanMP and @K_Niemietz

  • Japan's Economic Disaster: Real Wages Lowest Since 1990, Record Numbers Describe "Hard" Living Conditions

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    With so much attention rightly focused on China at the moment (see: Chinese Authorities Arrest Over 100 Human Rights Activists and Lawyers in Desperate Crackdown on Dissent), people aren’t paying enough attention to the budding economic calamity unfolding in Japan.

    While “Abenomics” has succeeded in boosting the stock market and food prices, it has utterly failed to raise wages. In fact, wages adjusted for inflation have plunged to the lowest since 1990. As such, a record number of households now describe their living conditions as “somewhat hard” or “very hard.”

    From Bloomberg:

    Prime Minister Shinzo Abe came to power vowing to drag Japan out of deflation and stagnation. His logic was that rising prices would drive higher salaries and increased consumption. More than two years on, prices are rising, but wages adjusted for inflation have sunk to the lowest since at least 1990.

     

    Screen Shot 2015-07-14 at 11.19.49 AM

     

    A record 62 percent of Japanese households described their livelihoods as “hard” last year in a survey on incomes. A sales-tax increase in 2014 helped drive up living costs faster than wage gains.  At the same time, the Bank of Japan’s quantitative easing drove down the currency, boosting the cost of imported energy.

     


    Screen Shot 2015-07-14 at 11.21.15 AM

    Not that verifiable proof of failed economic policies will convince the central planners in Japan or anywhere else to change course. These people are simply dangerously insane and can’t help themselves.

    In case you missed it the first time, here’s my most recent important post on Japan:

    The Stock Market Myth and How the Japanese Middle Class is on the Precipice Thanks to Abenomics

  • Banking "Explained" In 6 Minutes

    Banks are a riddle wrapped up in an enigma (as we just described what unsound banking is). Everyone kind of knows that they do stuff with money we don’t understand, while the last crisis left a feeling of deep mistrust and confusion. We try to shed a bit of light onto the banking system. Why were banks invented, why did they cause the last crisis and are there alternatives?

     

  • "The Stock Market Is Too Important To Leave To The Vagaries Of An Actual Market"

    Submitted by Babar Rafique of Setter Capital,

    As equity markets have become increasingly critical to the global financial and economic system, we're actively subverting them into meaninglessness.

    Equity markets are efficient, rational, and accurately reflect the value of assets, we're told. Sure, there might be bouts of euphoria or panicked selling, but those are short-term anomalies in an otherwise rational system.

    The simplicity of this idea is undeniably appealing — if we can trust in markets to broadly be an efficient allocator of value and accurately representative of short-term economic potential, then we can use it for a range of economic decision-making. An investor who wants exposure to a particular country can buy ETFs linked to that country's stock market(s), for example, with the confidence that the investment outcome will bear a meaningful relationship with that of the economy invested in.

    This requires, of course, that the price numbers on global stock indices mean something. The trouble is, to an increasing degree, they mean nothing at all. And we are busy creating more meaningless stock markets precisely because we need the ticker numbers to be more and more meaningful.

    The equity market is a leading indicator for an economy, we're told, and from TV talking-heads to academics to wealth managers, we all conduct ourselves as if that's the case. A rising stock market thus means that confidence is improving and economic performance should shortly be rising as well. By that measure, the US economy should be doing fantastically well, matching or at least meaningfully correlated with the eye-popping performance of its major stock indices since 2008. Unfortunately, that's just not the case — labour force participation remains appallingly low, wages remain depressed with lackluster wage growth, more and more wealth has become concentrated at the very top of the income scale, etc. In reality, while US markets have galloped ahead, the actual economy has been sleepwalking since the 'Great Recession'.

    This begs the question then — if US markets don't meaningfully reflect the American economy, what do they reflect? To an increasing degree, they represent the fact and perception of central bank intervention into the markets. All major US indices share a meaningful correlation with the capital flows of the Fed's successive QE programs, and speculation on the Fed's future actions as communicated in various Fed meetings and press announcements move the markets in a big way. I'm certainly not saying that the Fed is all that matters for the US markets, but the market does listen to the Fed a lot more then it should and it sure seems like the Fed listens back. It's worth noting here that the Fed's dual mandate is to promote maximum employment and price stability, not manage market expectations — theoretically, they shouldn't directly impact stock markets in the short term at all.

    The story is much the same in the other major financial centres of the world, where the numbers on the big boards seem to be less and less meaningful as well. Broad European indices have been reaching for the heavens — after the ECB has reintroduced us to the pleasures of ZIRP and NIRP and launched a massive QE program of its own. Japanese intervention into their equity markets went even further, with the Bank of Japan directly buying ETFs to help keep the Nikkei going in the right direction.

    The Chinese take the cake here though, with their level of intervention into their equity markets made abundantly transparent after the recent popping of the Shanghai SSE Composite Index bubble. After more conventional tools failed to stem the tide of panicked selling, the authorities deemed selling to be unpatriotic, halted trading in about half of the market, ordered companies to buy their own shares and generally made it clear that there was a preferred direction for the stock market to be moving in. Going against that direction would have you risk a lot more then what any definition of a halfway efficient market would suggest.

    What has brought global equity markets to the point of becoming increasingly decoupled from their respective economies? I think it's our need to have stock and stock index prices be meaningful that ultimately has driven the shift towards meaninglessness. From a top-down perspective, an example here is that politicians point to the stock market as proof of what a good job they're doing in managing the economy and in some countries even derive their legitimacy from the continued performance of the local stock markets. Also, hundreds of millions of investors of all sizes have invested in stock markets through all sorts of financial instruments and stand to lose heavily in a market crash — that didn't go over too well the last time around and we're still struggling to recover.

    From a bottom-up perspective, an example is company boards that partially link executive compensation to the performance of the company's stock (which usually will have a positive correlation with the overall stock market). As a sidenote, Roger Martin, ex-Dean of Rotman School of Management (where I'm currently a student) has written extensively about this kind of executive compensation being problematic for the integrity of the markets as well — although he may not see it as a small symptom of a much larger threat to market integrity, as I do.

    The stock market is just too important to leave to the vagaries of an actual market now. Too much depends on good-looking numbers now. It must be guided and controlled, or else the stilts on which our global financial system balances become shakier and more visible. The market must be rendered increasingly meaningless simply because it's too meaningful to our current economic system.

  • Paul Singer Blasts "Manipulated" Markets, Says China Collapse "Way Bigger Than Subprime"

    This week, dozens of billionaire fund managers, institutional investors, and financial market luminaries descended on that “iconic flagship of Taj Hotels on New York’s Fifth Avenue” The Pierre with a mission to “deliver alpha” for conference host CNBC, a network which, incidentally, very often has a difficult time “finding alpha.”

    On the guest list was Elliott Management’s Paul Singer, who was on hand Wednesday to discuss the perils of investing in a world dominated by Keynesian central planners, paper money, the “craziness” of China’s margin-fueled equity bubble, and “connecting the dots.” 

    Here are some notable bullets via Bloomberg:

    • ELLIOTT’S SINGER: CHINA CRASH ‘WAY BIGGER THAN SUBPRIME’
    • SINGER ISN’T OPTIMISTIC ABOUT GREEK SITUATION
    • SINGER SAYS GREECE SHOULD HAVE PULLED OUT OF EURO

    And here’s a recap, followed by a short video excerpt: 

    China’s government “encouraged” an equities boom, and the “craziness” of the country’s stock market echoes the late 1920s in the United States, hedge fund manager Paul Singer said Wednesday. 

     

    “It’s not just a bull market, it’s wild,” the founder and president of Elliott Management said at the Delivering Alpha conference presented by CNBC and Institutional Investor.

     

    Activity in China, which has included government efforts to ease policy and ramp up economic growth, reflects an “ever-growing” trend toward intervention, Singer said. He contended that bond-buying and easy interest rates in many corners of the world make it difficult to quantify how much markets are really worth.

     

    China’s Shanghai composite index, for instance, has climbed more than 80 percent in the last year. 

     

    “The prices are manipulated by governments,” he said, adding that investors “can’t trust” the value of some equities.

     

    Singer also criticized the central banks in the United States and Europe, as he decried the risks of continued near-zero interest rate policy from the Federal Reserve. A recession in the U.S. or Europe amid loose monetary policy would turn “truly ugly” for global markets, he said.

     

    A downturn in either area could lead to additional quantitative easing, bringing even more uncertainty into bonds.

  • July 5: Greek Independence Day; July 15: Greek In Dependence Day

    The Greek parliament just voted, in a 229 for and 64 against landslide, to implement the austerity Europe demands to grant Greece the funds for Bailout #3 so that Greece can then repay European creditors (as opposed to facing up to the pain imminently and suffering through a Grexit) implicitly giving up their sovereignty and sending their 61% “Oxi” voting citizenry into what will inevitably be an even deeper economic depression.

    • *GREEK GOVERNMENT HAS VOTES TO APPROVE BAILOUT BILL, TALLY SHOWS

    As Bloomberg reports,

    A majority of 229 Greek lawmakers voted in favor of bill which includes prior actions demanded by creditors for a bailout agreement that the govt has applied for, Parliament Speaker says.

     

    64 lawmakers voted against bill, 6 abstained, in Greece’s 300-seat chamber

     

    Bill titled “urgent measures for the negotiation and signing of an agreement with the European Stability Mechanism”

     

    38 lawmakers of governing Syriza party, including former finance minister Yanis Varoufakis, former deputy Finance Minister Nadia Valavani, and Energy Minister Panagiotis Lafazanis didn’t support bill

     

    Out of 149 Syriza MPs, 32 voted against bill, 6 abstained, 1 didn’t show up

    More to the point, with 38 defections, Syriza has now officially lost its majority and a cabinet reshuffle is imminent as the drama goes on.

    And as noted:

    But the biggest surprise of the night was that the former finance minister and Tsipras’ right-hand man, Yanis Varoufakis, voted against the bailout.

    And his Energy Minister (who also voted No)…

    • *GREECE’S ENERGY MINISTER LAFAZANIS SAYS HE SUPPORTS GOVERNMENT
    • *LAFAZANIS SAYS `WE ‘RE THE HEART AND SOUL OF SYRIZA’
    • *LAFAZANIS SAYS HE DOESN’T WANT SNAP ELECTIONS

    In summary – this just happened:

     

     

    And because all the algos know is to buy when the elites get their way, S&P futures are rallying

  • Unholy Alliance: Blythe Masters Named Chairman Of Subprime Auto Lender

    Earlier today, on the way to presenting data from the NY Fed which shows that auto loan rejection rates hit an all-time low of just 3.3% in June, we said that if one wanted to understand the circumstances that led to the housing bubble in the US, a good place to start would be the modern day auto loan market where the “originate to sell” model that characterized pre-crisis mortgage lending is alive and well. We also recommended reading a bit about the history of the GSEs, and taking “a hard look at Blythe Masters and the wizards who created the credit default swap.”

    We’re not exaggerating when we say that just minutes after we penned those words – which drew an explicit link between the dynamics driving the auto loan market, the “originate to sell model” that fed Wall Street’s pre-crisis securitization machine, and the financial weapons of mass destruction that Blythe Masters helped to create – the following headline hit the wires: 

    • BLYTHE MASTERS NAMED CHAIRMAN OF SANTANDER CONSUMER USA HOLDING

    That’s right, dear readers. The mother of the credit default swap is now the chairman (err.. chairwoman) of Santander Consumer, the largest subprime auto lender in the country.

    You cannot make this stuff up. 

    For those unfamiliar with Santander Consumer, they are the lender who, as of Q4 2014, had $15 billion in oustanding subprime auto loans on the books. Here’s a peek into the company’s recent trials and travails:

    Santander Consumer — a unit of one of only two banks to receive the dubious honor of failing the Fed’s stress tests yesterday and the market leader in subprime auto lending — allegedly ignored a law that requires lenders to obtain a court order before repossessing cars from members of the military and will now pay $9.35 million to settle the issue with the government. Apparently, Santander illegally repoed nearly 800 vehicles from active service members over the course of 5 years and then attempted to extract fees from some 350 additional soldiers in connection with repossessions the bank didn’t even execute. 

     

    This is the same Santander Consumer that was subpoenaed last year by the Justice Department in connection with its packaging of subprime auto loans into ABS and whose lending practices also got the attention of the New York Dept. of Consumer Affairs. 

     

    Don’t think for a second that any of this is slowing down the Santander Consumer subprime auto securitization machine though. The company, which leads all other lenders when it comes to the total amount of subprime auto loan debt outstanding, has already done a deal this year worth $1.2 billion which accounts for nearly 25% of all subprime auto ABS issuance YTD.

     


    That’s from March. 

    And for those unfamiliar with Masters, we encourage you to simply Google her name along with “credit default swap” and “JP Morgan” (and throw in “Boca Raton“, “BISTRO“, and “Demchak” if you really want to take a trip down the “shit that sounded good in principle but almost destroyed the financial universe” rabbit hole), but that’s ancient history now, so here’s a useful summary of Masters’ more recent activities:

    About a year ago we wrote that the “farce is complete” when we learned that the former head of JPM’s commodities group – Blythe Masters – the person caught red-handed in trying to pull off Enron 2.0, and responsible for manipulating electricity prices in California, was about to join the CFTC: yes, the person who created perhaps the most important derivative product of the pre-crash period, the massively levered Credit Default Swaps, was about to become an advisor to the very agency tasked with regulating all derivatives. Just 24 hours later, following a furious public backlash against what is perhaps the most corrupt regulators in the US, the CFTC, Masters withdrew her candidacy from the CFTC. Not surprisingly, following the humiliating CFTC episode, Blythe disappeared completely from the public radar. Now, with a one year delay, she has finally reappeared. That’s not the surprising part. What is shocking is the capacity in which she has reappeared. According to the FT, the former JPM commodities head has re-emerged as chief executive of the Bitcoin startup, Digital Asset Holdings.

    That’s also from March. 

    Finally, here’s The NY Times on Santander Consumer’s “curious choice“: 

    Facing regulatory pressure related to its governance and lending practices, the subprime auto lender Santander Consumer USA has appointed Blythe Masters, a former longtime executive at JPMorgan Chase, its chairwoman.

     

    Ms. Masters, 46, who left JPMorgan last year and now heads a Bitcoin-related start-up, joins the board of Santander Consumer less than two weeks after it announced abruptly that its chief executive had resigned.

     

    Santander Consumer — a unit of the Spanish giant Banco Santander that is based in Dallas — has faced questions about its oversight after regulatory stumbles with the Federal Reserve and an investigation into its securitization of its auto loans.

     

    One of the company’s founders, Thomas Dundon, stepped down as chairman and chief executive at the start of the month, taking home more than $900 million as part of his exit.

     

    Masters is credited with helping to pioneer credit default swaps, financial instruments that contributed to the 2008 financial crisis. Most recently, Ms. Masters ran JPMorgan’s giant commodities unit. She left the bank in April 2014 among struggles in the commodities business broadly.

     

    While known for her stellar financial acumen and innovative thinking, in some ways Ms. Masters seems a curious choice for chairwoman of Santander Consumer USA, which, like Santander Holdings USA, its parent company, is seeking to improve its regulatory status. Santander Holdings has failed the Federal Reserve’s annual stress test for two consecutive years.

     

    While running the commodities business at JPMorgan, Ms. Masters came under regulatory scrutiny from the Federal Energy Regulatory Commission in 2013 for statements she made about some problematic trading activity. At the time, the bank disputed that Ms. Masters had acted inappropriately.

    For now, we’ll refrain from speculating on what it says about Masters’ career that she has gone from capo in the “Morgan Mafia” to bitcoin CEO and chairman of a subprime auto lender, but we would note that this unholy alliance between the king of a subprime prime auto market that’s driven by Wall Street’s ABS machine and the mother of the credit default swap may not be as “curious” as The NY Times believes.  


  • Presenting The "Greek Terms Of Surrender" As Annotated By Yanis Varoufakis

    The Greek “deal” has already been dubbed “a new Versailles Treaty” for good reason: for Greece, the agreement which effectively abdicates sovereignty to Germany, is precisely that.

    And while few if any in Greece – and certainly its parliament – have carefully read the actual contents of the Summit statement, and instead rushed to pass the deal shortly after 1am Athens time, with hopes that just approving its contents may lead to the ECB blessing a prompt reopening of banks so Greeks can resume withdrawing their frozen deposits before the public realizes it was betrayed by its rulers once again, one person who has read it is the former finance minister Yanis Varoufakis.

    And not only that: just hours before what may be the most critical vote in Greek history, he has released an annotated version of what the Euro Summit statement really means for Greece.

    In his words: The Euro Summit statement (or Terms of Greece’s Surrender – as it will go down in history) follows, annotated by yours truly. The original text is untouched with my notes confined to square brackets (and in red). Read and weep… [For a pdf copy click here.]

    Full annotated statement:

    Euro Summit Statement Brussels, 12 July 2015

    The Euro Summit stresses the crucial need to rebuild trust with the Greek authorities [i.e. the Greek government must introduce new stringent austerity directed at the weakest Greeks that have already suffered grossly] as a pre- requisite for a possible future agreement on a new ESM programme [i.e. for a new extend-and-pretend loan].

    In this context, the ownership by the Greek authorities is key [i.e. the Syriza government must sign a declaration of having defected to the troika’s ‘logic’], and successful implementation should follow policy commitments.

    A euro area Member State requesting financial assistance from the ESM is expected to address, wherever possible, a similar request to the IMF This is a precondition for the Eurogroup to agree on a new ESM programme. Therefore Greece will request continued IMF support (monitoring and financing) from March 2016 [i.e. Berlin continues to believe that the Commission cannot be trusted to ‘police’ Europe’s own ‘bailout’ programs].

    Given the need to rebuild trust with Greece, the Euro Summit welcomes the commitments of the Greek authorities to legislate without delay a first set of measures [i.e. Greece must subject itself to fiscal waterboarding, even before any financing is offered]. These measures, taken in full prior agreement with the Institutions, will include:

    By 15 July

    • the streamlining of the VAT system [i.e. making it more regressive, through rate rises that encourage more VAT evasion]and the broadening of the tax base to increase revenue [i.e. dealing a major blow at the only Greek growth industry – tourism].
    • upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform programme [i.e. reducing the lowest of the low of pensions, while ignoring that the depletion of pension funds’ capital due to the 2012 troika-designed PSI and the ill effects of low employment & undeclared paid labour].
    • the safeguarding of the full legal independence of ELSTAT [i.e. the troika demands complete control of the way Greece’s budget balance is computed, with a view to controlling fully the magnitude of austerity it imposes on the government.]
    • full implementation of the relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, in particular by making the Fiscal Council operational before finalizing the MoU and introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions [i.e. the Greek government, which knows that the imposed fiscal targets will never be achieved under the imposed austerity, must commit to further, automated austerity as a result of the troika’s newest failures.]

    By 22 July

    • the adoption of the Code of Civil Procedure, which is a major overhaul of procedures and arrangements for the civil justice system and can significantly accelerate the judicial process and reduce costs [i.e. foreclosures, evictions and liquidation of thousands of homes and businesses who are not in a position to keep up with their mortgages/loans.]
    • the transposition of the BRRD with support from the European Commission.

    Immediately, and only subsequent to legal implementation of the first four above-mentioned measures as well as endorsement of all the commitments included in this document by the Greek Parliament, verified by the Institutions and the Eurogroup, may a decision to mandate the Institutions to negotiate a Memorandum of Understanding (MoU) be taken [i.e. The Syriza government must be humiliated to the extent that it is asked to impose harsh austerity upon itself as a first step towards requesting another toxic bailout loan, of the sort that Syriza became internationally famous for opposing.]

    This decision would be taken subject to national procedures having been completed and if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1. In order to form the basis for a successful conclusion of the MoU, the Greek offer of reform measures needs to be seriously strengthened to take into account the strongly deteriorated economic and fiscal position of the country during the last year [i.e. the Syriza government must accept the lie that it, and not the asphyxiation tactics of the creditors, caused the sharp economic deterioration of the past six months – the victim is being asked to take the blame by the on behalf of the villain.]

    The Greek government needs to formally commit to strengthening their proposals [i.e. to make them more regressive and more inhuman] in a number of areas identified by the Institutions, with a satisfactory clear timetable for legislation and implementation, including structural benchmarks, milestones and quantitative benchmarks, to have clarity on the direction of policies over the medium-run. They notably need, in agreement with the Institutions, to:

    • carry out ambitious pension reforms [i.e. cuts] and specify policies to fully compensate for the fiscal impact of the Constitutional Court ruling on the 2012 pension reform [i.e. cancel the Court’s decision in favour of pensioners] and to implement the zero deficit clause [i.e. cut by 85% the secondary pensions that the Syriza government fought tooth and nail to preserve over the past five months] or mutually agreeable alternative measures [i.e. find ‘equivalent’ victims] by October 2015;
    • adopt more ambitious product market reforms with a clear timetable for implementation of all OECD toolkit I recommendations [i.e. the recommendations that the OECD has now renounced after having re-designed these reforms in collaboration with the Syriza government], including Sunday trade, sales periods, pharmacy ownership, milk and bakeries, except over-the-counter pharmaceutical products, which will be implemented in a next step, as well as for the opening of macro-critical closed professions (e.g. ferry transportation). On the follow-up of the OECD toolkit-II, manufacturing needs to be included in the prior action;
    • on energy markets, proceed with the privatisation of the electricity transmission network operator (ADMIE), unless replacement measures can be found that have equivalent effect on competition, as agreed by the Institutions [i.e. ADMIE will be sold off to specific foreign vested interests at the behest of the Institutions.]
    • on labour markets, undertake rigorous reviews and modernisation of collective bargaining [i.e. to make sure that no collective bargaining is allowed], industrial action [i.e. that must be banned] and, in line with the relevant EU directive and best practice, collective dismissals [i.e. that should be allowed at the employers’ whim], along the timetable and the approach agreed with the Institutions [i.e. the Troika decides.]

    On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth [i.e. there should be no mechanisms that waged labour can use to extract better conditions from employers.]

    • adopt the necessary steps to strengthen the financial sector, including decisive action on non-performing loans [i.e. a tsunami of foreclosures is ante portas] and measures to strengthen governance of the HFSF and the banks [i.e. the Greek people who maintain the HFSF and the banks will have precisely zero control over the HFSF and the banks.], in particular by eliminating any possibility for political interference especially in appointment processes. [i.e. except the political interference of the Troika.] On top of that, the Greek authorities shall take the following actions:
    • to develop a significantly scaled up privatisation programme with improved governance; valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means [i.e. an East German-like Treuhand is envisaged to sell off all public property but without the equivalent large investments that W. Germany put into E. Germany in compensation for the Treuhand disaster.] The monetization of the assets will be one source to make the scheduled repayment of the new loan of ESM and generate over the life of the new loan a targeted total of EUR 50bn of which EUR 25bn will be used for the repayment of recapitalization of banks and other assets and 50 % of every remaining euro (i.e. 50% of EUR 25bn) will be used for decreasing the debt to GDP ratio and the remaining 50 % will be used for investments [i.e. public property will be sold off and the pitiful sums will go toward servicing an un-serviceable debt – with precisely nothing left over for public or private investments.] This fund would be established in Greece and be managed by the Greek authorities under the supervision of the relevant European Institutions [i.e. it will be nominally in Greece but, just like the HFSF or the Bank of Greece, it will be controlled fully by the creditors.] In agreement with Institutions and building on best international practices, a legislative framework should be adopted to ensure transparent procedures and adequate asset sale pricing, according to OECD principles and standards on the management of State Owned Enterprises (SOEs) [i.e. the Troika will do what it likes.]
    • in line with the Greek government ambitions, to modernise and significantly strengthen the Greek administration, and to put in place a programme, under the auspices of the European Commission, for capacity-building and de-politicizing the Greek administration [i.e. Turning Greece into a democracy-free zone modelled on Brussels, a form of supposedly technocratic government, which is politically toxic and macro-economically inept] A first proposal should be provided by 20 July after discussions with the Institutions. The Greek government commits to reduce further the costs of the Greek administration [i.e. to reduce the lowest wages while increasing a little the wages some of the Troika-friendly apparatchiks], in line with a schedule agreed with the Institutions.
    • to fully normalize working methods with the Institutions, including the necessary work on the ground in Athens, to improve programme implementation and monitoring [i.e. The Troika strikes back and demands that the Greek government invite it to return to Athens as Conqueror – the Carthaginian Peace in all its glory.] The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament [i.e. Greek Parliament must, again, after five months of short-lived independence, become an appendage of the Troika – passing translated legislation mechanistically.] The Euro Summit stresses again that implementation is key, and in that context welcomes the intention of the Greek authorities to request by 20 July support from the Institutions and Member States for technical assistance, and asks the European Commission to coordinate this support from Europe;
    • With the exception of the humanitarian crisis bill, the Greek government will reexamine with a view to amending legislations that were introduced counter to the February 20 agreement by backtracking on previous programme commitments or identify clear compensatory equivalents for the vested rights that were subsequently created [i.e. In addition to promising that it will no longer legislative autonomously, the Greek government will retrospectively annul all Bills it passed over the past five months.]

    The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities. However, the Euro Summit made it clear that the start of negotiations does not preclude any final possible agreement on a new ESM programme, which will have to be based on a decision on the whole package (including financing needs, debt sustainability and possible bridge financing) [i.e. self-flagellate, impose further austerity upon an economy crushed by austerity, and then we shall see whether the Eurogroup will grave you with another toxic, unsustainable loans.]

    The Euro Summit takes note of the possible programme financing needs of between EUR 82 and 86bn, as assessed by the Institutions [i.e. the Eurogroup conjured up a huge number, well above what is necessary, in order to signal the debt restructuring is out and that debt bondage ad infinitum is the name of the game.] It invites the Institutions to explore possibilities to reduce the financing envelope, through an alternative fiscal path or higher privatisation proceeds [i.e. And, yes, it may possible that pigs will fly.] Restoring market access, which is an objective of any financial assistance programme, lowers the need to draw on the total financing envelope [i.e. which is something the creditors will do their utmost to avoid, e.g. by ensuring that Greece will only enter the ECB’s quantitative easing program in 2018, once quantitative easing is… over.]

    The Euro Summit takes note of the urgent financing needs of Greece which underline the need for very swift progress in reaching a decision on a new MoU: these are estimated to amount to EUR 7bn by 20 July and an additional EUR 5bn by mid August [i.e. Extend and Pretend gets another spin.] The Euro Summit acknowledges the importance of ensuring that the Greek sovereign can clear its arrears to the IMF and to the Bank of Greece and honour its debt obligations in the coming weeks to create conditions which allow for an orderly conclusion of the negotiations. The risks of not concluding swiftly the negotiations remain fully with Greece [i.e. Once more, demanding that the victim takes all the blame in behalf of the villain.] The Euro Summit invites the Eurogroup to discuss these issues as a matter of urgency.

    Given the acute challenges of the Greek financial sector, the total envelope of a possible new ESM programme would have to include the establishment of a buffer of EUR 10 to 25bn for the banking sector in order to address potential bank recapitalisation needs and resolution costs, of which EUR 10bn would be made available immediately in a segregated account at the ESM [i.e. the Troika admits that the 2013-14 recapitalisation of the banks, which would only need a top up of at most 10 billion, was insufficient – but, of course, blames it on… the Syriza government.]

    The Euro Summit is aware that a rapid decision on a new programme is a condition to allow banks to reopen, thus avoiding an increase in the total financing envelope [i.e. The Troika closed Greece’s banks to force the Syriza government to capitulate and now cries out for their re-opening.] The ECB/SSM will conduct a comprehensive assessment after the summer. The overall buffer will cater for possible capital shortfalls following the comprehensive assessment after the legal framework is applied.

    There are serious concerns regarding the sustainability of Greek debt [N.b. Really? Gosh!] This is due to the easing of policies during the last twelve months, which resulted in the recent deterioration in the domestic macroeconomic and financial environment [i.e. It is not the Extend and Pretend ‘bailout’ loans of 2010 and 2012 that, in conjunction with GDP-sapping austerity, caused the debt to scale immense heights – it was the prospect, and reality, of a government that criticized the the Extend and Pretend ‘bailout’ loans that… caused Debt’s Unustainability!]

    The Euro Summit recalls that the euro area Member States have, throughout the last few years, adopted a remarkable set of measures supporting Greece’s debt sustainability, which have smoothed Greece’s debt servicing path and reduced costs significantly [i.e. The 1st & 2nd ‘bailout’ programs failed, the debt skyrocketing as it was always going to since the real purpose of the ‘bailout’ programs was to transfer banking losses to Europe’s taxpayers.] Against this background, in the context of a possible future ESM programme, and in line with the spirit of the Eurogroup statement of November 2012 [i.e. a promise of debt restructure to the previous Greek government was never kept by the creditors], the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme and will be considered after the first positive completion of a review [i.e. Yet again, the Troika shall let the Greek government labour under un-payable debt and when, as a result, the program fails, poverty rises further and incomes collapse much more, then we may haircut some of the debt – as the Troika did in 2012.]

    The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken [N.b. The Syriza government has been suggesting, since January, a moderate debt restructure, with no haircuts, maximizing the expected net present value of Greece’s repayments to creditors’ – which was rejected by the Troika because their aim was, simply, to humiliate Syriza.] Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and in a timely manner [N.b. Which can only happen after a substantial debt restrucuture.] Provided that all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM Board of Governors may, in accordance with Article 13.2 of the ESM Treaty, mandate the Institutions to negotiate a new ESM programme, if the preconditions of Article 13 of the ESM Treaty are met on the basis of the assessment referred to in Article 13.1. To help support growth and job creation in Greece (in the next 3-5 years) [N.b. Having already destroyed growth and jobs for the past five years…] the Commission will work closely with the Greek authorities to mobilise up to EUR 35bn (under various EU programmes) to fund investment and economic activity, including in SMEs [i.e. Will use the same order of magnitude of structural funds, plus some fantasy money, as were available in 2010-2014.] As an exceptional measure and given the unique situation of Greece the Commission will propose to increase the level of pre-financing by EUR 1bn to give an immediate boost to investment to be dealt with by the EU co-legislators [i.e. Of the headline 35 billion, consider 1 billion as real money.] The Investment Plan for Europe will also provide funding opportunities for Greece [i.e. the same plan that most Eurozone ministers of finance refer to as a phantom program].

  • The Oldest Trick In The Accounting Book: The Reason For Intel's Massive EPS Beat In One Chart

    Moments ago, INTC reported EPS of $0.55 which solidly beat expectations $0.50, with revenue of $13.2 billion printing just above consensus, if a substantial 5% drop compared to the $13.8 billion one year ago.

    This has sent the stock soaring in the after hours by about 6%. This is also despite the company lowering it full year revenue guidance from flat to -1%, with the bulls saying just look at that massive EPS beat.

     

    So for all those wondering just how INTC did it, here’s the reason for Intel’s beat in one simple chart:

     

    In other words, it is only thanks to the oldest trick in the accounting book, an artificially low tax rate, that INTC was able to make its plunging operating income, which was down 25% from a year ago, better than expected and make its EPS of $0.55 equal to the $0.55 reported one year ago.

    Crashing Operating Income:

     

    And yet, flat EPS:

     

    If INTC had used a 29% tax rate – the same as last year – EPS would have been $0.43, a 7 cent loss and that’s even using a more modern trick in the accounting book, some $700 million in stock buybacks!

    And that is how you use report unchanged EPS from a year ago despit sliding revenues and plunging earnings.

  • Unsound Banking: Why Most Of The World’s Banks Are Headed For Collapse

    Submitted by Doug Casey via InternationalMan.com,

    You’re likely thinking that a discussion of “sound banking” will be a bit boring. Well, banking should be boring. And we’re sure officials at central banks all over the world today—many of whom have trouble sleeping—wish it were.

    This brief article will explain why the world’s banking system is unsound, and what differentiates a sound from an unsound bank. I suspect not one person in 1,000 actually understands the difference. As a result, the world’s economy is now based upon unsound banks dealing in unsound currencies. Both have degenerated considerably from their origins.

    Modern banking emerged from the goldsmithing trade of the Middle Ages. Being a goldsmith required a working inventory of precious metal, and managing that inventory profitably required expertise in buying and selling metal and storing it securely. Those capacities segued easily into the business of lending and borrowing gold, which is to say the business of lending and borrowing money.

    Most people today are only dimly aware that until the early 1930s, gold coins were used in everyday commerce by the general public. In addition, gold backed most national currencies at a fixed rate of convertibility. Banks were just another business—nothing special. They were distinguished from other enterprises only by the fact they stored, lent, and borrowed gold coins, not as a sideline but as a primary business. Bankers had become goldsmiths without the hammers.

    Bank deposits, until quite recently, fell strictly into two classes, depending on the preference of the depositor and the terms offered by banks: time deposits, and demand deposits. Although the distinction between them has been lost in recent years, respecting the difference is a critical element of sound banking practice.

    Time Deposits. With a time deposit—a savings account, in essence—a customer contracts to leave his money with the banker for a specified period. In return, he receives a specified fee (interest) for his risk, for his inconvenience, and as consideration for allowing the banker the use of the depositor’s money. The banker, secure in knowing he has a specific amount of gold for a specific amount of time, is able to lend it; he’ll do so at an interest rate high enough to cover expenses (including the interest promised to the depositor), fund a loan-loss reserve, and if all goes according to plan, make a profit.

    A time deposit entails a commitment by both parties. The depositor is locked in until the due date. How could a sound banker promise to give a time depositor his money back on demand and without penalty when he’s planning to lend it out?

    In the business of accepting time deposits, a banker is a dealer in credit, acting as an intermediary between lenders and borrowers. To avoid loss, bankers customarily preferred to lend on productive assets, whose earnings offered assurance that the borrower could cover the interest as it came due. And they were willing to lend only a fraction of the value of a pledged asset, to ensure a margin of safety for the principal. And only for a limited time—such as against the harvest of a crop or the sale of an inventory. And finally, only to people of known good character—the first line of defense against fraud. Long-term loans were the province of bond syndicators.

    That’s time deposits. Demand deposits were a completely different matter.

    Demand Deposits. Demand deposits were so called because, unlike time deposits, they were payable to the customer on demand. These are the basis of checking accounts. The banker doesn’t pay interest on the money, because he supposedly never has the use of it; to the contrary, he necessarily charged the depositor a fee for:

    1. Assuming the responsibility of keeping the money safe, available for immediate withdrawal, and
    1. Administering the transfer of the money if the depositor so chooses by either writing a check or passing along a warehouse receipt that represents the gold on deposit.

    An honest banker should no more lend out demand deposit money than Allied Van and Storage should lend out the furniture you’ve paid it to store. The warehouse receipts for gold were called banknotes. When a government issued them, they were called currency. Gold bullion, gold coinage, banknotes, and currency together constituted the society’s supply of transaction media. But its amount was strictly limited by the amount of gold actually available to people.

    Sound principles of banking are identical to sound principles of warehousing any kind of merchandise, whether it’s autos, potatoes, or books. Or money. There’s nothing mysterious about sound banking. But banking all over the world has been fundamentally unsound since government-sponsored central banks came to dominate the financial system.

    Central banks are a linchpin of today’s world financial system. By purchasing government debt, banks can allow the state—for a while—to finance its activities without taxation. On the surface, this appears to be a “free lunch.” But it’s actually quite pernicious and is the engine of currency debasement.

    Central banks may seem like a permanent part of the cosmic landscape, but in fact they are a recent invention. The US Federal Reserve, for instance, didn’t exist before 1913.

    Unsound Banking

    Fraud can creep into any business. A banker, seeing other people’s gold sitting idle in his vault, might think, “What is the point of taking gold out of the ground from a mine, only to put it back into the ground in a vault?” People are writing checks against it and using his banknotes. But the gold itself seldom moves. A restless banker might conclude that, even though it might be a fraud on depositors (depending on exactly what the bank has promised them), he could easily create lots more banknotes and lend them out, and keep 100% of the interest for himself.

    Left solely to their own devices, some bankers would try that. But most would be careful not to go too far, since the game would end abruptly if any doubt emerged about the bank’s ability to hand over gold on demand. The arrival of central banks eased that fear by introducing a lender of last resort. Because the central bank is always standing by with credit, bankers are free to make promises they know they might not be able to keep on their own.

    How Banking Works Today

    In the past, when a bank created too much currency out of nothing, people eventually would notice, and a “bank run” would materialize. But when a central bank authorizes all banks to do the same thing, that’s less likely—unless it becomes known that an individual bank has made some really foolish loans.

    Central banks were originally justified—especially the creation of the Federal Reserve in the US—as a device for economic stability. The occasional chastisement of imprudent bankers and their foolish customers was an excuse to get government into the banking business. As has happened in so many cases, an occasional and local problem was “solved” by making it systemic and housing it in a national institution. It’s loosely analogous to the way the government handles the problem of forest fires: extinguishing them quickly provides an immediate and visible benefit. But the delayed and forgotten consequence of doing so is that it allows decades of deadwood to accumulate. Now when a fire starts, it can be a once-in-a-century conflagration.

    Banking all over the world now operates on a “fractional reserve” system. In our earlier example, our sound banker kept a 100% reserve against demand deposits: he held one ounce of gold in his vault for every one-ounce banknote he issued. And he could only lend the proceeds of time deposits, not demand deposits. A “fractional reserve” system can’t work in a free market; it has to be legislated. And it can’t work where banknotes are redeemable in a commodity, such as gold; the banknotes have to be “legal tender” or strictly paper money that can be created by fiat.

    The fractional reserve system is why banking is more profitable than normal businesses. In any industry, rich average returns attract competition, which reduces returns. A banker can lend out a dollar, which a businessman might use to buy a widget. When that seller of the widget re-deposits the dollar, a banker can lend it out at interest again. The good news for the banker is that his earnings are compounded several times over. The bad news is that, because of the pyramided leverage, a default can cascade. In each country, the central bank periodically changes the percentage reserve (theoretically, from 100% down to 0% of deposits) that banks must keep with it, according to how the bureaucrats in charge perceive the state of the economy.

    In any event, in the US (and actually most everywhere in the world), protection against runs on banks isn’t provided by sound practices, but by laws. In 1934, to restore confidence in commercial banks, the US government instituted the Federal Deposit Insurance Corporation (FDIC) deposit insurance in the amount of $2,500 per depositor per bank, eventually raising coverage to today’s $250,000. In Europe, €100,000 is the amount guaranteed by the state.

    FDIC insurance covers about $9.3 trillion of deposits, but the institution has assets of only $25 billion. That’s less than one cent on the dollar. I’ll be surprised if the FDIC doesn’t go bust and need to be recapitalized by the government. That money—many billions—will likely be created out of thin air by selling Treasury debt to the Fed.

    The fractional reserve banking system, with all of its unfortunate attributes, is critical to the world’s financial system as it is currently structured. You can plan your life around the fact the world’s governments and central banks will do everything they can to maintain confidence in the financial system. To do so, they must prevent a deflation at all costs. And to do that, they will continue printing up more dollars, pounds, euros, yen, and what-have-you.

  • White House Cuts 2015 GDP Outlook By 33%

    Despite President Obama’s hubris over the ‘recovery’, his crowing about the jobs record, and his insistence that while “there’s more to be done,” everything is awesome, The White House just took the meat-cleaver to its US economic growth forecasts…cutting 2015 growth from 3% to 2%. That was not all though as their forecasts see no recession until at least 2025, unemployment under 5.0% for at least the next decade, stable inflation for 10 years, and last but not least – a 3-month T-Bill rate of over 3% within the next few years.

     

    So growth is going to drop… but there’ll be no rise in unemployment, rates will surge but there will be no inflation outbreak, and trend growth now appears to be just 2.3%…

     

    As The Wall Street Journal reports,

    The White House said it sees U.S. growth rising by just 2% this year before rebounding to 2.9% in 2016 – down from its earlier forecast of 3% growth for both 2015 and 2016 released in February – after the economy stalled during the first quarter.

     

    The new estimate came Tuesday in the White House budget office’s “Mid-Session Review,” which updates the economic and budget projections it made at the beginning of the year. The new growth forecast largely reflects the current thinking among private economists.

     

    The economy contracted at a 0.2% seasonally adjusted annual rate in the first quarter.

    *  *  *

    Full report here (link)

    This should make things a little awkward for Janet…

  • Live Webcast: Greek Parliament Votes On Bailout

    Update: And Tsipras is speaking now.

    It is almost 1:00am Athens time, and as of this moment the speaker of the Parliament, Zoi Konstantopoulou is at the podium, blasting the terms of the Third Greek bailout. She may or may not be the last speaker, although there is some speculation that PM Tsipras, who has been absent from the entire session so far, may follow her. Whether he does or not, the parliamentarians will vote shortly in a paradoxical vote in which the Opposition will support a law brought on by a European proxy government whose majority will vote against its own proposal, a proposal it swore to fight as its primary electoral campaign.

    So, in a nutshell, confusion reigns. But then again, this is Greece or as it will soon be known: the Greek vassal state of Europe.

    Watch the live, and translated, webcast below as the moment when Greece votes to hand over its sovereignty to Brussels will surely be a historic moment if only for some 11 million Greeks and a few European oligarchs who plot the expansion of “Empire Europe.”

  • Hillary Clinton Blasts High Frequency Trading Ahead Of Fundraiser With High Frequency Trader

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    One of the most entertaining angles of the imperial spectacle known as the 2016 U.S. Presidential campaign, has been watching Hillary Clinton, the consummate insider, pretend to be an outsider. The fact that anyone eats this up is a testament to the epic stupidity and ignorance of the American public.

    In her latest attempt at faux populism, Her Highness was found criticizing high frequency traders, as well as other Wall Street “fat cats,” with whom she is extremely cozy, during a speech at the New School. Her next stop? A fundraiser thrown by a high frequency trader.

    From the Weekly Standard:

    Today, in an economic speech at the New School in Manhattan, Hillary Clinton spoke out against short-term traders.

     

    “The problems are not limited to the big banks that get all the headlines. Serious risks are emerging from institutions in the so-called shadow banking system, including hedge funds, high-frequency traders, non-bank finance companies,” said the Democratic presidential candidate. 

    That’s Hillary the pantsuit rebel singing to the gullible plebs. Now here’s the real Hillary.

    Raj Fernando, the CEO of high-frequency trading firm Chopper Trading, is hosting a fundraiser for Clinton next week.

     

    “Hillary Clinton is coming to Chicago for a private fundraiser July 21 hosted at the home of Raj Fernando, CEO of Chopper Trading, a high-frequency trading firm that recently was purchased by Chicago-based DRW,” Chicago Business reports.

    Are you ready?

    Screen Shot 2015-02-20 at 1.43.43 PM

  • Auto Loan Rejection Rate Falls To Lowest Level On Record

    If you were interested in learning about the conditions that conspired to create the great American housing bubble which burst in spectacular fashion in 2008 and brought the entire global financial system to its knees, you might start by reading the history of Fannie and Freddie, or you might take a hard look at Blythe Masters and the wizards who created the credit default swap, or, if you wanted to save yourself quite a bit of time and effort, you could just look at the current market for subprime auto loans. 

    You see, the much maligned “originate to sell” model – which was instrumental in making the American homeownership dream a reality for underqualified borrowers in the lead up to the crisis – is alive and well and is ‘in the driver’s seat’ so to speak when it comes to auto sales in America. 

    As we noted last month, in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit) auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers.

    The push to feed the securitization machine begets more competition among lenders for a shrinking pool of creditworthy borrowers and when that pool dries up, well, the definition of “creditworthy” must necessarily be relaxed, otherwise the securitization machine stalls for lack of fuel. For those who missed it, here are three charts which tell you everything you need to know about the market for auto loan-backed ABS:

    First, note that auto ABS issuance is set to hit record highs in 2015.

    Next, consider that the percentage of prime loans backing new supply is now at an all-time low. 

    Finally, here’s a look at the percentage of new financing extended to non-prime borrowers. As BofAML observes, the prime segements are losing share.

    Now, the NY Fed is out with what is perhaps the most shocking statistic yet (with the possible exception of the 137% average LTV ratio we highlighted earlier this month) on auto loans in America.

    As the following graphic shows, the rejection rate for auto loans was just 3.3% in June – the lowest on record:

    And here’s Bloomberg’s take on why virtually anyone who wants a car, gets a car:

    One reason for the looser credit has been the renewed appetite for securities backed by automobile debt, including to the riskiest borrowers, with subprime loans feeding about $13.2 billion of bond sales on Wall Street this year, according to data compiled by Bloomberg.

    Finally, to drive the point home, we’ll leave you with a set of statistics which speaks volumes about why this will certainly not end well.

    Q1 data from Experian:

    • Average loan term for new cars is now 67 months — a record.
    • Average loan term for used cars is now 62 months — a record.
    • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
    • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
    • The average amount financed for a new vehicle was $28,711 — a record.
    • The average payment for new vehicles was $488 — a record.
    • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

  • A Complete Farce: Ex-Obamacare Head To Lead Health Insurance Lobby

    If there was any doubt just who Obamacare was created to serve from day one (spoiler alert: it was never America’s population), we now have the answer and it is so simple, even a 5-year-old can get it. Moments ago Politico reported that former Medicare chief Marilyn Tavenner, and the infamous former administrator of the Centers for Medicare and Medicaid Services who was responsible for writing many of Obamacare’s rules and regulations for the insurance industry, only to be fired following the disastrous rollout of the HealthCare.gov enrollment website, has been hired as the new CEO of America’s Health Insurance Plans, the “powerful K Street lobbying group.“

    Cited by Politico, AHIP board chairman Mark Ganz in a statement that”There is no better individual than Marilyn to lead our industry through the increasingly complex health care transformation that is underway. She has the respect and trust of policymakers and stakeholders from all sides, and a personal commitment to advance meaningful solutions for improving access to quality, affordable care for all Americans.”

    Well, maybe for some Americans: those who are shareholder or employees of US health insurance companies, which as it now emerges, are the biggest benefactors of Obamacare because from the very beginning, they had their own operative setting up the rules and regulations of the biggest US healthcare overhaul in history to benefit, drum roll, them.

    And now the same insurance companies, just to benefit some more, are poised or already in process of hiking insurance premiums across America and crush the spending power of ordinary Americans, those who were supposed to benefit from Obama’s socialized healthcare dream.

    The Affordable Care Act has been a mixed bag financially for insurers, said Robert Laszewski, an industry consultant. The expansion of Medicaid and the continued growth of private Medicare plans have been a boon for insurers, he noted. But the law’s new health insurance exchanges have been more troublesome for health plans, many of which are seeking greater rate hikes in 2016.

     

    “They’re getting creamed,” Laszewski said of plans in the exchange business. “Any time you see a rate increase above 7, 8, 9 percent, they’re losing money.”

    Actually, that’s bullshit: any time you see a 9% increase (or much more), it means there is cartel pricing in action, and thanks to the Supreme Court’s ruling supporting Obamacare, healthcare is now a tax on Americans and one has no choice but to pay whatever premium incueases are imposed on them.

    It gets even more comical:

    Tavenner can push the group’s agenda in Congress, but she will face a ban on direct communications with the agency that she oversaw. That restriction shouldn’t present too much of a hurdle to being an effective advocate for the industry, said Meredith McGehee, policy director for the Campaign Legal Center.

    It won’t be a hurdle, but in the meantime, Tavenner will be paid about 20 to 30 times more than when we was a mere government lackey (and quite incompetent considering the billions spent to rollout a broken healthcare.gov) available for hire to the highest bidder, unprecedented conflicts of interest notwithstanding.

    And just to show how extensive the revolving door is, Tavenner is replacing AHIP’s longtime head Karen Ignagni, who left the group to run EmblemHealth, a big New York insurer. Her departure was soon followed the announcement that UnitedHealth Group, the country’s largest insurer, would leave AHIP.

    So for any 5 year old who are still confused: the insurance industry wrote the rules of Obamacare, and is now set to profit from it, which incidentally was obvious to anyone who has been following the stock prices of publicly traded insurance companies, which if the recent merger mania is any indication will shortly roll up into one monopoly enterprise, thus concluding Obama’s dream of a single-payer health system.

    And just like that, the corporations win again.

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Jul 15

Today’s News July 15, 2015

  • ViCHY 2.0

    VICHY 2.0

  • Freedom Or The Slaughterhouse? The American Police State From A To Z

    Submitted by John Whitehead via The Rutherford Institute,

    “Who needs direct repression when one can convince the chicken to walk freely into the slaughterhouse?”—Philosopher Slavoj Žižek

    Despite the best efforts of some to sound the alarm, the nation is being locked down into a militarized, mechanized, hypersensitive, legalistic, self-righteous, goose-stepping antithesis of every principle upon which this nation was founded.

    All the while, the nation’s citizens seem content to buy into a carefully constructed, benevolent vision of life in America that bears little resemblance to the gritty, pain-etched reality that plagues those unfortunate enough to not belong to the rarefied elite.

    For those whose minds have been short-circuited into believing the candy-coated propaganda peddled by the politicians, here is an A-to-Z, back-to-the-basics primer of what life in the United States of America is really all about.

    A is for the AMERICAN POLICE STATE. As I point out in my book Battlefield America: The War on the American People, a police state “is characterized by bureaucracy, secrecy, perpetual wars, a nation of suspects, militarization, surveillance, widespread police presence, and a citizenry with little recourse against police actions.”

    B is for our battered BILL OF RIGHTS. In the cop culture that is America today, where you can be kicked, punched, tasered, shot, intimidated, harassed, stripped, searched, brutalized, terrorized, wrongfully arrested, and even killed by a police officer, and that officer is rarely held accountable for violating your rights, the Bill of Rights doesn’t amount to much.

    C is for CIVIL ASSET FORFEITURE. The latest governmental scheme to deprive Americans of their liberties—namely, the right to property—is being carried out under the guise of civil asset forfeiture, a government practice wherein government agents (usually the police) seize private property they “suspect” may be connected to criminal activity. Then, whether or not any crime is actually proven to have taken place, the government keeps the citizen’s property.

    D is for DRONES. It is estimated that at least 30,000 drones will be airborne in American airspace by 2020, part of an $80 billion industry. Although some drones will be used for benevolent purposes, many will also be equipped with lasers, tasers and scanning devices, among other weapons.

    E is for ELECTRONIC CONCENTRATION CAMP. In the electronic concentration camp, as I have dubbed the surveillance state, all aspects of a person’s life are policed by government agents and all citizens are suspects, their activities monitored and regulated, their movements tracked, their communications spied upon, and their lives, liberties and pursuit of happiness dependent on the government’s say-so.

    F is for FUSION CENTERS. Fusion centers, data collecting agencies spread throughout the country and aided by the National Security Agency, serve as a clearinghouse for information shared between state, local and federal agencies. These fusion centers constantly monitor our communications, everything from our internet activity and web searches to text messages, phone calls and emails. This data is then fed to government agencies, which are now interconnected: the CIA to the FBI, the FBI to local police.

    G is for GRENADE LAUNCHERS. The federal government has distributed more than $18 billion worth of battlefield-appropriate military weapons, vehicles and equipment such as drones, tanks, and grenade launchers to domestic police departments across the country. As a result, most small-town police forces now have enough firepower to render any citizen resistance futile.

    H is for HOLLOW-POINT BULLETS. The government’s efforts to militarize and weaponize its agencies and employees is reaching epic proportions, with federal agencies as varied as the Department of Homeland Security and the Social Security Administration stockpiling millions of lethal hollow-point bullets, which violate international law. Ironically, while the government continues to push for stricter gun laws for the general populace, the U.S. military’s arsenal of weapons makes the average American’s handgun look like a Tinker Toy.

    I is for the INTERNET OF THINGS, in which internet-connected “things” will monitor your home, your health and your habits in order to keep your pantry stocked, your utilities regulated and your life under control and relatively worry-free. The key word here, however, is control. This “connected” industry propels us closer to a future where police agencies apprehend virtually anyone if the government “thinks” they may commit a crime, driverless cars populate the highways, and a person’s biometrics are constantly scanned and used to track their movements, target them for advertising, and keep them under perpetual surveillance.

    J is for JAILING FOR PROFIT. Having outsourced their inmate population to private prisons run by private corporations, this profit-driven form of mass punishment has given rise to a $70 billion private prison industry that relies on the complicity of state governments to keep their privately run prisons full by jailing large numbers of Americans for inane crimes.

    K is for KENTUCKY V. KING. In an 8-1 ruling, the Supreme Court ruled that police officers can break into homes, without a warrant, even if it’s the wrong home as long as they think they have a reason to do so. Despite the fact that the police in question ended up pursuing the wrong suspect, invaded the wrong apartment and violated just about every tenet that stands between us and a police state, the Court sanctioned the warrantless raid, leaving Americans with little real protection in the face of all manner of abuses by law enforcement officials.

    L is for LICENSE PLATE READERS, which enable law enforcement and private agencies to track the whereabouts of vehicles, and their occupants, all across the country. This data collected on tens of thousands of innocent people is also being shared between police agencies, as well as with fusion centers and private companies.

    M is for MAIN CORE. Since the 1980s, the U.S. government has acquired and maintained, without warrant or court order, a database of names and information on Americans considered to be threats to the nation. As Salon reports, this database, reportedly dubbed “Main Core,” is to be used by the Army and FEMA in times of national emergency or under martial law to locate and round up Americans seen as threats to national security. As of 2008, there were some 8 million Americans in the Main Core database.

    N is for NO-KNOCK RAIDS. Owing to the militarization of the nation’s police forces, SWAT teams are now increasingly being deployed for routine police matters. In fact, more than 80,000 of these paramilitary raids are carried out every year. That translates to more than 200 SWAT team raids every day in which police crash through doors, damage private property, terrorize adults and children alike, kill family pets, assault or shoot anyone that is perceived as threatening—and all in the pursuit of someone merely suspected of a crime, usually some small amount of drugs.

    O is for OVERCRIMINALIZATION. Thanks to an overabundance of 4500-plus federal crimes and 400,000 plus rules and regulations, it’s estimated that the average American actually commits three felonies a day without knowing it. As a result of this overcriminalization, we’re seeing an uptick in Americans being arrested and jailed for such absurd “violations” as letting their kids play at a park unsupervised, collecting rainwater and snow runoff on their own property, growing vegetables in their yard, and holding Bible studies in their living room.

    P is for PATHOCRACY. When our own government treats us as things to be manipulated, maneuvered, mined for data, manhandled by police, mistreated, and then jailed in profit-driven private prisons if we dare step out of line, we are no longer operating under a constitutional republic. Instead, what we are experiencing is a pathocracy: tyranny at the hands of a psychopathic government, which “operates against the interests of its own people except for favoring certain groups.”

    Q is for QUALIFIED IMMUNITY. Qualified immunity allows officers to walk away without paying a dime for their wrongdoing. Conveniently, those deciding whether a police officer should be immune from having to personally pay for misbehavior on the job all belong to the same system, all cronies with a vested interest in protecting the police and their infamous code of silence: city and county attorneys, police commissioners, city councils and judges.

    R is for ROADSIDE STRIP SEARCHES and BLOOD DRAWS. The courts have increasingly erred on the side of giving government officials—especially the police—vast discretion in carrying out strip searches, blood draws and even anal probes for a broad range of violations, no matter how minor the offense. In the past, strip searches were resorted to only in exceptional circumstances where police were confident that a serious crime was in progress. In recent years, however, strip searches have become routine operating procedures in which everyone is rendered a suspect and, as such, is subjected to treatment once reserved for only the most serious of criminals.

    S is for the SURVEILLANCE STATE. On any given day, the average American going about his daily business will be monitored, surveilled, spied on and tracked in more than 20 different ways, by both government and corporate eyes and ears. A byproduct of this new age in which we live, whether you’re walking through a store, driving your car, checking email, or talking to friends and family on the phone, you can be sure that some government agency, whether the NSA or some other entity, is listening in and tracking your behavior. This doesn’t even begin to touch on the corporate trackers that monitor your purchases, web browsing, Facebook posts and other activities taking place in the cyber sphere.

    T is for TASERS. Nonlethal weapons such as tasers, stun guns, rubber pellets and the like, have resulted in police using them as weapons of compliance more often and with less restraint—even against women and children—and in some instances, even causing death. These “nonlethal” weapons also enable police to aggress with the push of a button, making the potential for overblown confrontations over minor incidents that much more likely. A Taser Shockwave, for instance, can electrocute a crowd of people at the touch of a button.

    U is for UNARMED CITIZENS SHOT BY POLICE. No longer is it unusual to hear about incidents in which police shoot unarmed individuals first and ask questions later, often attributed to a fear for their safety. Yet the fatality rate of on-duty patrol officers is reportedly far lower than many other professions, including construction, logging, fishing, truck driving, and even trash collection.

    V is for VIPR SQUADS. So-called “soft target” security inspections, carried out by roving VIPR task forces, comprised of federal air marshals, surface transportation security inspectors, transportation security officers, behavior detection officers and explosive detection canine teams, are taking place whenever and wherever the government deems appropriate, at random times and places, and without needing the justification of a particular threat.

    W is for WHOLE-BODY SCANNERS. Using either x-ray radiation or radio waves, scanning devices are being used not only to “see” through your clothes but government mobile units can drive by your home and spy on you within the privacy of your home. While these mobile scanners are being sold to the American public as necessary security and safety measures, we can ill afford to forget that such systems are rife with the potential for abuse, not only by government bureaucrats but by the technicians employed to operate them.

    X is for X-KEYSCORE. One of the many spying programs carried out by the National Security Agency (NSA) that targets every person in the United States who uses a computer or phone. This top-secret program “allows analysts to search with no prior authorization through vast databases containing emails, online chats and the browsing histories of millions of individuals.”

    Y is for YOU-NESS. Using your face, mannerisms, social media and “you-ness” against you, you can now be tracked based on what you buy, where you go, what you do in public, and how you do what you do. Facial recognition software promises to create a society in which every individual who steps out into public is tracked and recorded as they go about their daily business. The goal is for government agents to be able to scan a crowd of people and instantaneously identify all of the individuals present. Facial recognition programs are being rolled out in states all across the country.

    Z is for ZERO TOLERANCE. We have moved into a new paradigm in which young people are increasingly viewed as suspects and treated as criminals by school officials and law enforcement alike, often for engaging in little more than childish behavior. In some jurisdictions, students have also been penalized under school zero tolerance policies for such inane "crimes" as carrying cough drops, wearing black lipstick, bringing nail clippers to school, using Listerine or Scope, and carrying fold-out combs that resemble switchblades.

    As you can see, the warning signs are all around us. The question is whether you will organize, take a stand and fight for freedom, or will you, like so many clueless Americans, freely walk into the slaughterhouse?

  • "Everything Is Awesome" In China – Retail Sales, Industrial Production, & GDP All Mysteriously Crush Expectations

    Retail Sales increased 10.6% YoY (smashing expectations of a 10.2% YoY Gain); Industrial Production rose 6.8% (crushing expectations of a 6.0% YoY gain); and the big daddy of goalseeked data, China GDP managed to rise 7.0% (comfortably beating expectations of just 6.8% but still the lowest since Q1 2009). Now it is up to the markets to decide if good data is bad news because it gives the government less excuses to throw more "measures" at the market; or is good data, good news as it "proves" the economic fundamentals underlying massively exponential gains in Chinese stocks (and excessive valuations compared to the rest of the world) are justified. When the data hit Chinese stocks were at the lows of the day, and for now, it appears good data is bad news as stocks are not bouncing at all.

     

     

    Why would we ever think that?

    Everything Is Awesome!!!

     

    One quick question… What exactly are the Chinese suddenly producing so much of? Because its not steel, its not houses, and its not being exported overseas…

     

    Do not question this!!

    • *CHINA'S GDP 'NOT OVERESTIMATED', NBS SHENG SAYS

    China – we are going to need some worse data than that…

     

    *  *  *

    Finally here is Cornerstone Macro with a less 'optimistic' look ahead…

    • PBOC easing hasn’t worked b/c investment and credit are bubbles, lowering demand for credit and slowing investment, Cornerstone Macro economists led by Nancy Lazar write in note.
    • Expect China official real GDP by 4Q to have 5% handle
    • Inventory destocking likely to be drag on 2H growth; industrial production will probably slow further
    • Implications of Chinese hard landing incl. slower global growth; risk of disappointing multinational earnings; inflation and rates, both lower for longer; continued decline in commodity prices; rising USD trend
    • Potential ramifications for China incl. PBOC continues to ease, cutting base lending rate to zero from 4.85%, loweringRRR to 6% from 18.5%; weaker outbound investment, which presents problem for other EMs; weaker FDI into China; downturn in employment, retail sales; social unrest and geopolitical turmoil

    One last thing – we're going to need a lot more betterer data…

     

    Charts: Bloomberg

  • De-Dollarization – Mapping The Ruin Of A Reserve Currency

    The dollar has been a stalwart of international trade over the majority of the last century. Around the time of the formation of the Eurozone, it reached its recent peak at 71.0% of official foreign exchange reserves. Since then, its composition of global reserves has more recently dropped to a more modest 62.9% in 2014.

    However, the dollar is slowly losing its status as the world’s undisputed reserve currency.

     

     

    This is not an unusual event as far as history goes. In fact, about every century or so since the Renaissance, the global reserve currency has shifted. Portugal, Spain, The Netherlands, France, and Britain have had dominant currencies at different times.

    Today’s infographic shows that the wind is shifting in international trade. With less countries and organizations using the dollar to settle international transactions, it slowly chips away at its hegemony of the dollar. China is at the epicenter and the country is making continued progress in cutting deals outside of the U.S. dollar framework. Deals shown in the graphic are currency flows between countries that have abandoned the dollar in bilateral trade, as well as countries that are considering such measures.

    The most recent culmination of these trends is the creation of the Asian Infrastructure Investment Bank (AIIB), a China-led rival to the World Bank and IMF that includes 57 founding countries and $100 billion of capital. The United States is not a member and has actively lobbied its allies to avoid joining due to perceived governance issues.

    Other recent deals by China include: a 30-year $400 billion energy alliance with Russia, a second energy deal focusing on natural gas worth $284 billion with Russia, and a deal removing tariffs on 85% of Australian commodity exports to China. Further, China and Russia have agreed to pay each other in domestic currencies in order to bypass the U.S. dollar.

    It is not only the Chinese that are starting to question the viability of the dollar. A report in 2010 by the United Nations called for the abandonment of the U.S. dollar as the single reserve currency. The Gulf Cooperation Council has also expressed desires for an independent reserve currency.

    In the short term, especially with a crashing Chinese stock market and fledgling Eurozone, the dollar will likely reign supreme. It’s still a stretch for the yuan to make its way into foreign reserve coffers so long as capital controls remain in place and the country’s bond market is not open or transparent to offshore investors. However, Beijing is currently mulling ways to internationalize the yuan, and each step it takes will take China closer to challenging dollar hegemony.

    With more bilateral trade transactions bypassing the dollar, and the increasing internationalization of the Chinese financial system, the yuan is eventually going to give the dollar a run for its money.

     

    Source: Visual Capitalist

  • How The US Government Blew $1 Billion In Taxpayer Funds On "Ghost Schools" In Afghanistan

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    BuzzFeed News obtained internal Ministry of Education data for 2011 that has never before been made public. For Afghanistan overall, the data showed 1,174 schools — almost 1 in every 12 — was a ghost school, an educational facility that the Afghan government publicly claimed was open but that was, in fact, not operating. In the provinces that are the most dangerous to monitor — and into which the U.S. poured the most aid money — that proportion soared. In Kandahar province, where DeNenno served, a full third of the 423 schools the Ministry of Education publicly reported as open in 2011 were not functioning, and in Helmand, it was more than half.

     

    But teacher salaries continued to go to these ghost schools — and still do, according to numerous Afghan and U.S. sources. While the Afghan government puts in some of its own money to pay teachers, more than two-thirds of teacher salaries are provided through a World Bank fund, to which the United States is the biggest donor. The World Bank fund did not respond to requests for comment, but USAID said that World Bank financial controls guard against salaries going to ghost teachers.

     

    And just as with ghost students, the U.S. government has known about ghost teachers for years. Back in 2005 and 2006, an internal education ministry task force calculated that at least $12 million in salaries were going to so-called ghost teachers annually, according to several former employees of the USAID contractors embedded in the ministry. A scathing, confidential 2013 USAID audit of the Afghan education ministry obtained by BuzzFeed News reveals that the United States had been injecting hundreds of millions of dollars for more than a decade into a ministry marred by an “inadequate payroll system” and lacking even the most basic auditing practices.

     

    In some areas, the belief that ghost schools have enriched fat cats at the expense of Afghan children has stoked such widespread ire that American education aid is actually doing the opposite of what the U.S. intended: It’s turning locals against the government.

     

    – From the Buzzfeed article: Ghost Students, Ghost Teachers, Ghost Schools

    In the wake of so many wasteful, inhumane and disastrous foreign policy failures, the U.S. government has been desperate to highlight some significant successes in order to justify all of these tragic foreign imperial blunders.

    One such supposed success relates to education in Afghanistan, an area into which some $1 billion in taxpayer money has been spent to build schools and pay teachers according to Buzzfeed. U.S. Government officials have consistently trumpeted all of the good work that has been done in this regard, but there’s one slight problem. Not only are most of the statistics complete bogus, but in many cases, a lot of this U.S. wealth that was meant to be targeted for education, has gone straight to the coffers of some of the most ruthless warlords in the county. How could this happen you ask? Here’s how.

    From Buzzfeed:

    Nearly four years later, water seeps through the leaky roof and drips onto students in this more than $250,000 construction. Doors are cut in half; some are missing altogether. There is no running water for the approximately 200 boys — and zero girls — who attend. But the school did enrich a notorious local warlord. In exchange for donating the land on which the school sits, he extracted a contract from the U.S. military worth hundreds of thousands of dollars.

     

    Over and over, the United States has touted education — for which it has spent more than $1 billion — as one of its premier successes in Afghanistan, a signature achievement that helped win over ordinary Afghans and dissuade a future generation of Taliban recruits. As the American mission faltered, U.S. officials repeatedly trumpeted impressive statistics — the number of schools built, girls enrolled, textbooks distributed, teachers trained, and dollars spent — to help justify the 13 years and more than 2,000 Americans killed since the United States invaded.

     

    But a BuzzFeed News investigation — the first comprehensive journalistic reckoning, based on visits to schools across the country, internal U.S. and Afghan databases and documents, and more than 150 interviews — has found those claims to be massively exaggerated, riddled with ghost schools, teachers, and students that exist only on paper. The American effort to educate Afghanistan’s children was hollowed out by corruption and by short-term political and military goals that, time and again, took precedence over building a viable school system. And the U.S. government has known for years that it has been peddling hype.

     

    BuzzFeed News exclusively acquired the GPS coordinates and contractor information for every school that the U.S. Agency for International Development (USAID) claims to have refurbished or built since 2002, as well as Department of Defense records of school constructions funded by the U.S. military.

     

    At least a tenth of the schools BuzzFeed News visited no longer exist, are not operating, or were never built in the first place. “While regrettable,” USAID said in response, “it is hardly surprising to find the occasional shuttered schools in war zones.”

     

    USAID program reports obtained by BuzzFeed News indicate the agency knew as far back as 2006 that enrollment figures were inflated, but American officials continued to cite them to Congress and the American public.

    All they do is lie. Constantly, and about pretty much everything.

    As for the schools America truly did build, U.S. officials repeatedly emphasized to Congress that they were constructed to high-quality standards. But in 2010, USAID’s inspector general published a review based on site visits to 30 schools. More than three-quarters suffered from physical problems, poor hardware, or other deficiencies that might expose students to “unhealthy and even dangerous conditions.” Also, the review found that “the International Building Code was not adhered to” in USAID’s school-building program.

     

    This year, BuzzFeed News found that the overwhelming majority of the more than 50 U.S.-funded schools it visited resemble abandoned buildings — marred by collapsing roofs, shattered glass, boarded-up windows, protruding electrical wires, decaying doors, or other structural defects. At least a quarter of the schools BuzzFeed News visited do not have running water.

     

    By obtaining internal records from the Afghan Ministry of Education, never before made public, BuzzFeed News also learned that more than 1,100 schools that the ministry publicly reported as active in 2011 were in fact not operating at all. Provincial documents show that teacher salaries — largely paid for with U.S. funds — continued to pour into ghost schools.

     

    Some local officials even allege that those salaries sometimes end up in the hands of the Taliban. Certainly, U.S.-funded school projects have often lined the pockets of brutal warlords and reviled strongmen, which sometimes soured the local population on the U.S. and the Afghan government.

     

    One place where it’s a lot less than it’s cracked up to be is the province where America poured more aid money than almost any other: Kandahar, home to Zhari district, where DeNenno’s school sits.

     

    Habibullah Jan had fled the country, but when the Americans overthrew the Taliban in 2001, he returned and reimposed his checkpoints. With more than 2,000 men under his command and, soon, a seat in parliament, he became the most powerful man in Zhari. When his old foe the Taliban began to surge in 2005, the Americans turned to him for help.

     

    To put it plainly: The U.S. allied itself with a warlord so oppressive and kleptocratic that he helped create the Taliban in the first place.

    You really can’t make this stuff up.

    Few American soldiers knew that Haji Lala and Habibullah Jan were brothers, let alone of Habibullah Jan’s role in fomenting the Taliban. “I liked Haji Lala,” a soldier in DeNenno’s unit said. “I’m pretty sure he did some bad stuff, but for us he was helpful.” He added, “I knew he was a warlord, but he was our warlord.”

    America: Apple pie, democracy and Afghan warlords.

    One of the most common payments the military made was compensation. If U.S. soldiers killed an innocent bystander, or blew up a civilian’s house, or killed someone’s sheep, commanders would pay compensation. The amounts were often modest — from less than $100 to more than $25,000 — but in total they added up to more than $2.5 million, from which strongmen could take a cut. DeNenno said that Haji Lala would sometimes tell the Taliban, “Go blow up this area because we wanna get the Americans to pay for it.”

    The American taxpayer, the biggest patsy on earth, as usual.

    But the goal was never just to educate children. Education was also a means to advance America’s short-term military and political objectives. In 2003, a National Security Council–led “Accelerating Success” program demanded that USAID hasten its work and complete 314 schools by June 2004. The reason: The U.S. wanted achievements — statistics — to extol ahead of the Afghan presidential election.

    As a result of the NSC directive, USAID Director Patrick Fine wrote in an October 2004 internal memo, first obtained by the Washington Post, “awards were made without having design specifications, without agreed sites selected or surveyed or a process to do this, and without adequate consultation with either the [Ministry of Education or Ministry of Health] or the beneficiary communities.” The target numbers, he continued, “had gained a life of their own and were driving USAID to continue to rush the process.”

     

    Profiteers exploited that rush. A full reckoning of the waste and outright fraud has never happened, in part because cases of corruption have often been hidden for years.

     

    When an accountant went to federal investigators in 2006 with evidence that one of USAID’s largest contractors, Louis Berger Group, had been defrauding the agency of millions for years, the investigation was kept under federal seal until late 2010. Only then did the Justice Department reveal that two executives had pleaded guilty to fraud and announce the deal it had reached behind closed doors: The company as a whole would avoid criminal charges and be allowed to continue winning government contracts in exchange for implementing new financial controls and paying nearly $70 million in fines. Since the whistleblower came forward, USAID has awarded the company contracts worth more than 10 times what it was fined.

    Looks like Louis Berger was handed out some banker justice. Must be nice.

    From 2008 to at least August 2013, USAID claimed it had built or refurbished more than 680 schools in the country since the U.S. invaded — a figure the agency sometimes used to counter bad press and that it repeated on Twitter and in blog posts, press releases, and a report from USAID’s Office of the Inspector General, not to mention in Secretary Clinton’s submission to Congress.

     

    But over the last two years, USAID has quietly whittled away at that number without explaining what happened to the more than 115 schools it no longer says it built or refurbished. After BuzzFeed News pressed for an answer, Larry Sampler, the head of USAID’s Office of Afghanistan and Pakistan Affairs, said the agency had “revised its operational definition of school construction” to a “stricter definition.”

     

    Less than 20 miles southeast of DeNenno’s school, Deh-e-Bagh Primary School was recorded in U.S. military records as completed in 2012, at cost and up to standard. The nine-room building, along with latrines and a security wall, would allow children to go to school regularly and provide a “tangible source of community pride and legitimacy” for local elders and the Afghan government, the records say.

     

    But Deh-e-Bagh Primary School has never seen a single student. Only partially completed in 2012, its doors have never opened. There are no latrines, no running water. Without a security wall surrounding it, the building has deteriorated. Windows are smashed. Rooms are littered with construction materials.

     

    That same year, 2012, a military unit distributed supplies to the Sher Mohammad Hotak Primary School, located just a few miles down Highway 1 from DeNenno’s base. Fifty girls attended the school, according to the unit’s records. In photos the unit posted to Facebook, both girls and boys are seen smiling and collecting new backpacks. Together, USAID and the Pentagon have pumped more than $200,000 into the school.

     

    But in an unannounced visit to the school this March, not a single girl was in attendance. Instead, the seven tents that made up the school were filled with boys, some of whom had no chairs or desks. They sat on rocky ground, fading backpacks emblazoned with the Afghan flag next to them.

     

    It was that way across Afghanistan, with school after school visited by BuzzFeed News showing fewer students than were on the books. In 2011 and 2012, USAID sent monitors to many of the schools it had funded to check the number of students and other key information. Since then it has relied almost exclusively on data provided by the Afghan Ministry of Education to determine how many students and teachers are in schools. But no matter who came up with the official count, it often exaggerated the reality on the ground.

     

    At the USAID-funded Mujahed Sameullah Middle School in Kunar province, for example, there were fewer than 50 boys, sometimes sitting two per classroom. That’s only about a fifth of the 274 boys USAID’s quality assurance monitors recorded in 2011 or the 264 the Afghan government told BuzzFeed News are currently enrolled. Overall, in the schools BuzzFeed News visited for which comparison data was available, official figures overcounted students by an average of nearly a fifth — and girls by about two-fifths.

     

    In response to questions, USAID said that it takes seriously any allegations of falsified data and “will continue to work with the ministry to improve reliability.” It also said that beginning in 2012, the agency and other donors recommended that the ministry tighten that standard from three years to one. To date, the ministry has not done so. Still, USAID told BuzzFeed News that while it could not “be absolutely sure of all attendance numbers in all Afghan schools at all times,” in general it “is confident in overall attendance numbers provided by the MoE.”

     

    But Elizabeth Royall, a U.S. liaison to the ministry in 2011 and 2012, said, “There was a lack of scrutiny. I would just report MOE numbers, and that’s what we went with.”

     

    The U.S. just went with the ministry’s numbers for teachers, too. And those numbers were used to pay salaries — even when the teachers weren’t teaching.

     

    BuzzFeed News obtained internal Ministry of Education data for 2011 that has never before been made public. For Afghanistan overall, the data showed 1,174 schools — almost 1 in every 12 — was a ghost school, an educational facility that the Afghan government publicly claimed was open but that was, in fact, not operating. In the provinces that are the most dangerous to monitor — and into which the U.S. poured the most aid money — that proportion soared. In Kandahar province, where DeNenno served, a full third of the 423 schools the Ministry of Education publicly reported as open in 2011 were not functioning, and in Helmand, it was more than half.

     

    But teacher salaries continued to go to these ghost schools — and still do, according to numerous Afghan and U.S. sources. While the Afghan government puts in some of its own money to pay teachers, more than two-thirds of teacher salaries are provided through a World Bank fund, to which the United States is the biggest donor. The World Bank fund did not respond to requests for comment, but USAID said that World Bank financial controls guard against salaries going to ghost teachers.

     

    And just as with ghost students, the U.S. government has known about ghost teachers for years. Back in 2005 and 2006, an internal education ministry task force calculated that at least $12 million in salaries were going to so-called ghost teachers annually, according to several former employees of the USAID contractors embedded in the ministry. A scathing, confidential 2013 USAID audit of the Afghan education ministry obtained by BuzzFeed News reveals that the United States had been injecting hundreds of millions of dollars for more than a decade into a ministry marred by an “inadequate payroll system” and lacking even the most basic auditing practices.

     

    In some areas, the belief that ghost schools have enriched fat cats at the expense of Afghan children has stoked such widespread ire that American education aid is actually doing the opposite of what the U.S. intended: It’s turning locals against the government.

     

    At one point, the provincial police chief shouts out who he thinks are commandeering the payments: “Everyone knows the salaries of teachers come to the province, and then they go to the Taliban.”

     

    Military spending under the CERP program required very little paperwork for most projects. The point was to help win a war. But that flexibility means, quite literally, that the military does not know what it spent on education in Afghanistan, or what it got for its money. The military conceded that many CERP projects were not entered into “procurement database systems” but said it “does maintain extensive project records.” Last year, however, the Defense Department told the special inspector general for Afghanistan Reconstruction just how little it knew: For more than 40% of CERP projects, the Pentagon could not say who ultimately received its money.

     

    Pressed by BuzzFeed News, the Pentagon said it could not provide an exact number of schools it actually built. It also could not say how the more than $250 million in CERP funding earmarked for education was actually spent. To try to drill down on those figures, BuzzFeed News filed a Freedom of Information request and obtained CERP funding records — but found that entire projects were missing, including Joe DeNenno’s permanent school.

     

    “The CERP database was an absolute mess, literally a disaster,” one government official familiar with the records said. “Saying disaster doesn’t even do it justice.”

     

    Since 2002, the United States has invested more than $1 billion to provide education to Afghan children. But the American government does not know how many schools it has built, how many Afghan students are actually attending school, or how many teachers are actually teaching. What’s certain is the numbers for all of those are far less than what it has been peddling.

    While it’s bad enough U.S. taxpayer’s were sent a bill for $1 billion to fund education in Afghanistan when we have so many enormous domestic problems of our own, it’s downright criminal that so much of this money was irresponsibly wasted in political schemes, not to mention some of it going to directly to murderous warlords. Then again, none of this should surprise you. We are all familiar with the seemingly endless list of humanitarian disasters created by inept U.S. foreign policy since 9/11, such as:

    “Stop Thanking Me for My Service” – Former U.S. Army Ranger Blasts American Foreign Policy and The Corporate State

    More Foreign Policy Incompetence – U.S. Humanitarian Aid is Going Directly to ISIS

    Afghan President Hamid Karzai Slams U.S. Foreign Policy in Farewell Speech

    America’s Disastrous Foreign Policy – My Thoughts on Iraq

    The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya

  • Chinese Big Cap Stocks Continue To Slide; Bridgewater Warns, "Typical Of Market Dominated by Unsophisticated Investors"

    As $170 billion hedge fund Bridgewater noted, "new participants are now discovering that making money in the markets is difficult," and sure enough, as WSJ reports, Asian hedge funds have suffered steep losses in June. Several hedge funds were hit with losses on longs (unable to square positions due to suspensions) as well as a dearth of effective tools to short, or bet against, Chinese stocks as they dropped, highlighting the downside of investing in an environment where managing risks is difficult and government actions are unpredictable.As the world anxiously awaits tonight's Retail Sales, Industrial Production, and crucially #goalseeked GDP, Chinese big cap stocks are continuing losses from the last 2 days. The CSI-300 – China's S&P 500 – is now down over 7% from post-intervention highs on Monday.

    Rather stunningly, as Bloomberg reports, more than 52 percent of the past six months' buy transactions by major shareholders and management in China companies happened in the past week. So it seems that after selling to the farmers on the way up they are no forced to buy the shares back from them…BUT these 4 were selling (off with their heads!!!!)

     

    It looks like China is going to need a bigger boatload of intervention (though we note that ChiNext and Shenzhen continue to rise). After opening modestly in the green, CSI-300 is fading…

    • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.3% TO 3,874.97
    • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.1% TO 4,068.88

    or we are going to see a lot more of this…

    As WSJ reports,

    Only a third of Asian hedge funds tracked by Credit Suisse Group AG posted gains in June, and the group saw an average loss of 1.6%.

     

    “Up until the end of last month, most people thought it was a healthy correction,” said Richard Johnston, Asia head for alternative-investments consultancy Albourne Partners Ltd. “I think it went a lot further than many people thought.”

     

    …

     

    Highflying hedge-fund managers aren’t big players in China, which has only recently allowed foreign investors to freely buy mainland stocks through the Shanghai-Hong Kong trading link opened in November. Mom-and-pop investors in the country drive the market and have taken the brunt of the recent rout.

     

    “The Chinese market’s price action is typical for a newly developing equity market that is dominated by unsophisticated speculators,” said Bridgewater Associates LP, the world’s largest hedge-fund manager with about $170 billion under management, in a July note to clients. “New participants are now discovering that making money in the markets is difficult.”

    *  *  *

    But all eyes will be pinned to China at 2200ET when the data drops…

     

    in all it's "manipulated" wonder.

    *  *  *

     

  • Gold And The Silver Stand-Off: Is The Selling Of Paper Gold And Silver Finally Ending?

    Submitted by Paul Mylchreest of ADM Investor Services Intl. (pdf version)

    Gold and the Silver stand-off: Demarketing and Deep Value

    The demarketing (in the 1971 Harvard Business Review, Kotler and Levy defined demarketing as “discouraging customers in general or a certain class of customers in particular on either a temporary or a permanent basis.” This is normally done when there is a shortage of supply or desire to promote other products) of gold may be close to running its course as it seems that sellers of paper gold instruments are attempting to induce one more sell-off to fully cover their diminishing short positions. Indeed, signs are emerging that the long Nikkei/short gold trade, which has done so much damage to gold’s price, is becoming problematic.

    This could be due to one or more of: less desire to run large paper short positions by some banks/funds; rising cost of repo funding; larger bids emerging for physical bullion below $1,200/oz; and/or a view that the BoJ is reluctant to engage in ever greater stimulus. The gold basis and four major identifiable sources of gold demand (Shanghai Gold Exchange withdrawals, Indian imports, net ETF changes and net central bank changes) are indicating strong physical demand right now.

    Anomalies in the silver market, such as large positive divergences in open interest and ETF holdings versus gold, suggest that entities which have been shorting gold may have been hedging (at least partly) in silver. What appears to be a stand-off in this much smaller market means that enormous volatility in the silver price is probably inevitable, especially with physical supply drying up.

    It could be argued that a deep value case for gold, silver and related equities is becoming more and more apparent. For example gold, the HUI (NYSE Gold Bugs Index) and the GDXJ (Junior Gold Miners ETF) have underperformed the S&P 500 by 66%, 87% and 91%, respectively, since their peaks.

    The gold price is still performing poorly in US dollars.

    That said, it is close to being in a bull market in Yen, now 18.2% above its 2013 low…

    …which says something about gold’s value (even in today’s seriously flawed gold market) in the face of a currency which has been deliberately and cynically debased by the BoJ (QQE running at 17% p.a. of GDP).

    Price discovery in the gold and silver markets remains misunderstood by an overwhelming majority of financial market participants. It was been hijacked by two factors.

    • The extreme domination of “paper gold” trading vis-à-vis a comparatively tiny amount of physical bullion; and
    • Gold has been on the “wrong” side of a long/short trade since about September 2012.

    In a January 2013 report “Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs”, the Reserve Bank of India estimated that the ratio of paper gold trading to physical gold trading is 92:1. That is a lot of unbacked paper gold instruments.

    This has almost entirely separated the “gold price”, such as it is (the clearing price for vast volumes of paper gold “representations” with a fractional backing) from the fundamental supply and demand dynamics for actual physical gold bullion.

    As Mr L. famously quipped.

    “Ever get the feeling you’ve been cheated?“

    Using the net short position of the Commercials (mainly banks) on the COMEX as a proxy for paper gold supply, the chart below shows how on the three occasions during 2006-11 that more paper gold was NOT supplied into a rising gold market, the gold price went parabolic.

    In terms of the long/short trade, we outlined a thesis in late-2014 which drew together a complex web of interactions between the gold price, Japan’s Nikkei index, repo financing, BoJ policy meetings and anomalies in the silver market.

    In brief, our thesis was as follows.

    The interactions began forming in late-2012, specifically around September, which was a pivotal period in recent financial history, when central banks (notably the Fed and BoJ) embarked on a new phase of aggressive credit creation.

    We believe that at the centre of these interactions is a large, leveraged long/short trade which we think is long the Nikkei index and short paper gold. The more the Nikkei rose, the more the gold price was pushed down and, in many cases, major price moves in both were closely tied to BoJ policy meetings, especially announcements of (even) more aggressive monetary policy under “Abenomics”.

    We began to suspect that gold might be the short in a long/short trade when we noticed a reasonably close correlation between gold and interest rates in the repo market. In particular, the gold price tended to decline with the cost of repo funding. The repo market is a major part of the “shadow banking” sector and is the nexus for investment strategies involving leverage and short selling.

    Controlling the short gold/long Nikkei trade may have become more problematic in recent months. For example, repo rates have been on the rise since late-2014. As funding costs increased, the downward pressure on gold has eased somewhat— they may be related.

    Suspecting that gold was the short in a long/short trade is one thing, finding the corresponding long was another. When we first looked at the charts of gold and the Nikkei, there was nothing to see…

    …until we inverted the Nikkei axis. Now can you see it?

    Then the almost perfect correlation between the two was visible from September 2012 until the beginning of 2015.

    And one that wasn’t there beforehand…either in the previous year (see chart below) or earlier.

    As we’ve said before, the long/short could be Yen/gold, rather than Nikkei/gold, although the correlation is not quite as good.

    Since late-2014, the gold price has traded sideways while the Nikkei continued to rise. We can only speculate on why this is, but four possible explanations come to mind.

    • The rising cost of repo funding; and/or
    • Solid bids emerging for physical bullion, around US$1,200/oz and below; and/or
    • A decreasing desire to maintain large short positions by some of the Commercials (banks); and/or
    • A view that the BoJ is reluctant to implement even more monetary stimulus with QQE already running at an annualised rate of 17% of GDP – although we wouldn’t rule it out given the lunacy demonstrated so far.

    Before the renewed gold sell-off in recent days, gold volatility had fallen to a level which was close to a 10-year low.

    Gold was/still is due for a significant price move, one way or another. In a free market, this would most likely be up since the Greek crisis led to reports of a strong pick-up in demand from bullion dealers. For example, Torgny Persson, CEO of BullionStar, noted.

    “Precious metals demand in the last week leading up to the Greek referendum has been about 150 % higher than normal both in terms of order quantity and order volume…Based on my conversations with the western world’s leading refineries and precious metals wholesalers, they have experienced similar increases in the last week.”

    In contrast, Bitcoin, a perceived “gold substitute”, safe haven (maybe) with finite supply (although lacking any kind of “tangible” value and track record down the millennia, has performed much better.

    However, a surging gold price is the last thing that anybody who’s concerned with maintaining the veneer of financial stability wants to see.

    We suspect that the Commercials are hoping that a renewed bout of weakness will attract additional shorting by the Non-Commercials. This would allow further reduction in the Commercials’ own net short position – which has been kept on a tighter leash since 2013 (and was facilitated by the price smash in April that year).

    Our guess is that this is the final shakeout in gold’s sell-off which has been in progress ever since the gold price peaked on 6 September 2011 – when the Swiss franc, i.e. one of the few safe havens, was pegged to the Euro (and common sense suggests should have been gold positive).

    Kotler and Levy, in “Demarketing, Yes, Demarketing” published in the Harvard Business Review in 1971, defined demarketing as.
    “discouraging customers in general or a certain class of customers in particular on either a temporary or a permanent basis.”

    The academic literature argues that this is normally done when (our emphasis).

    • There is a shortage of supply; and/or
    • There is a desire to promote other products; and/or
    • A product is unprofitable in a particular region.

    A demarketing campaign is usually undertaken via increasing prices, restricting availability or cutting back on advertising.
    But…how is this relevant to the gold and silver markets?

    What if gold and silver naturally (in free markets) act as Giffen Goods in the latter stages of a global debt bubble? To recap, a Giffen Good is one that violates the normal laws of supply and demand with people buying more of the good as its price increases.

    Intuitively, this makes sense. Rising gold and silver prices should naturally reflect increasing risk to the financial system— especially counterparty risk since gold and silver bullion are the only financial assets which have none (i.e. they are not somebody else’s liability).

    Following this argument, if gold has Giffen Good characteristics, the best way to reduce demand from western investors (eastern investors have a natural affinity for gold) would be to reduce the gold price. The point being that any sustained demand for physical bullion from the enormous pools of capital in the western world would hasten the inevitable onset of supply shortage.

    It’s reminiscent of what happened in the prelude to the end of gold’s bear market in the 1990s. This was from a famous (in gold market circles), but anonymous, source on western tactics at the time.

    “(They) needed to keep the price of gold down so it could flow where they needed it to flow. The key to free up gold was simple. The western public will not hold an asset that is going nowhere.”

    This discussion about demarketing in conditions of limited supply raise another point which seems to have gone unnoticed.

    It’s become alarmingly clear in recent months how liquidity on the downside is drying up in many markets, with Chinese equities being the most grotesque of many examples. In physical gold and silver, we believe the polar opposite is the case, i.e. there is very little liquidity to the upside.

    It is impossible to model supply and demand for gold due to the extreme stock-to-flow ratio which renders it entirely different from any commodity (although gold is money not a commodity).That doesn’t stop most gold analysts, however. Nevertheless, there are ways to gauge the strength of the physical gold demand.

    Firstly, by comparing the spot price with the near-month future, i.e. what’s known as the gold basis. Given its stock-to-flow ratio, the gold price should always trade in contango, i.e. with the near-month future at a premium to spot (positive basis). If gold is in backwardation (negative basis), there is a “free profit” for speculators from selling spot gold and buying the near-month future and taking delivery (SINCE SUPPLY SHOULD NEVER BE A CONSTRAINT).

    Backwardation in gold should be arbitraged away unless speculators are nervous about the availability of physical supply (IF OFFERS OF PHYSICAL GOLD ARE WITHHELD AT A PREVAILING PRICE WHICH IS DEEMED TOO LOW BY MARKET PARTICIPANTS). The chart below shows that gold has spent much of the time in backwardation since 2013.

    This was Professor Antal Fekete of Fekete Research writing in 2006.

    “We may grant that gold futures trading has materially added to the longevity of the regime of irredeemable currency. But while the central bankers are buying time, sand in the hour-glass of the gold basis keeps trickling down. When it runs out, the trickle of cash gold from warehouses will have become an avalanche that could no longer be stopped.”

    The run on gold has not reached avalanche scale yet, but it’s picking up. While physical gold demand can’t be measured in aggregate, we track four major identifiable indicators of physical gold demand to get a sense of demand conditions.

    These are.

    • Gold withdrawals on the Shanghai Gold Exchange;
    • Gross gold imports into India;
    • Net change in gold holdings of all-known ETFs; and
    • Net change in central bank gold holdings.

    The chart below shows that in aggregate these four sources of gold demand alone have exceeded the output of every gold mine in the world on a monthly basis during most of the last year.

    Suddenly, the negative gold basis starts to make sense. It’s also important to remember that the PBoC has not disclosed its purchases since 2009 (an update is due this year) and does not acquire gold on the SGE. So PBoC purchases would be additional.

    We should take a moment to explain the significance of withdrawals on the Shanghai Gold Exchange. Under Chinese law, all gold either mined domestically or imported has to be sold through the SGE, which allows the Chinese authorities to monitor non-government gold reserves. Once bars are withdrawn from the SGE, they are not allowed to be redeposited (Article 23 of the SGE rule book). Withdrawn SGE bars which are resold have to be recast and assayed as new bars. This gold is counted as scrap supply.

    Consequently, SGE withdrawals are a close proxy for incremental Chinese demand. The aggregate of SGE withdrawals was 2,197 tonnes in 2013 and 2,100 tonnes in 2014, which is equivalent to more than 70% of the world’s newly mined gold. We just want to emphasise that this is Chinese demand EXCLUDING the PBoC.

    When China’s purchases of copper and other metals were ramping up 50-60% of world supply in the “go-go” years of 2003-07, the investment world was transfixed by the potential of commodity investing in all its forms. This author was a Mining sector analyst at the time. Fast forward today and gold advocates like us are as rare as hen’s teeth in today’s financial markets.

    Chinese demand of c.2,000 tonnes was higher than the World Gold Council figure, but was confirmed by official Chinese sources. The China Gold Network reported a speech by the Chairman of the Shanghai Gold Exchange (SGE), Xu Luode, on 15 May 2014 in which he stated.

    “Xu pointed out that the current gold market, especially the physical gold market, is actually in the East, mainly in China. Last year China’s own gold-enterprises produced 428 tons; at the same time China imported 1,540 tons of gold, adding up to nearly 2,000 tons.”

    BullionStar’s Torgny Persson attended the LBMA forum in Singapore in July 2014. He reported on comments made by Xu Luode in another speech which Koos Jansen published on the “In Gold We Trust” website.

    “In the speech Mr Xu mentioned and I quote from the official translation in the headphones ‘as the Chinese consumption demand of gold hit 2,000 tonnes in 2013.”

    So, in summary, physical gold demand remains strong while the screen price of gold is being shorted into the ground…which brings us to anomalies in the silver market.

    We don’t mean price anomalies…yet.

    Instead…

    Look at how open interest in silver diverged from gold from late-2012 onwards – which is when we believe the short gold/long Nikkei trade was put on. Silver open interest is at an all-time high and note that the scales of the axes on the chart below are (almost) identical.

    The open interest of about 200,000 contracts is equivalent to 1.0 BILLION ounces of silver, which is approximately 114% of all silver mined worldwide in 2014. In contrast, the open interest in gold is equivalent to approximately 49% of all gold mined last year.

    Since almost all the gold ever mined remains as inventory (potential supply) while the majority of silver is consumed in industrial fabrication, there appears to be huge instability coming in the silver market.

    The second anomaly in the silver market relates to ETF holdings of silver versus gold. Gold peaked at the end of 2012 (!) while silver holdings have remained at high levels despite the sharp fall in the silver price, even more than gold in percentage terms.

    It’s not easy to reconcile these anomalies, but one explanation is that some entity/entities is/are building a long position in silver.

    If so, why? What if the “somebody” who is shorting the gold market is hedging themselves in silver, knowing that when these metals turn, the silver price moves like gold on steroids.

    Let’s speculate for a moment. If the silver market had to be “controlled” for as long as possible… a long hedge built up in silver would need an equally large and offsetting increase in short positions by another “controlling” entity. This might explain the “blow out” in silver open interest.

    Let’s look at the long and short positions of the Commercials since QE3 in September 2012. Until (very) recently, they had both increased by about 40,000 contracts, i.e. 200 million oz. or nearly a quarter of the world’s annual silver supply.

    It looked like a stand-off was developing. Now it looks like the shorts are using the price weakness to cover their positions.

    A third anomaly in the silver market was highlighted by Zero Hedge in its analysis of the latest report on the US derivatives report from the Office of the Comptroller of Currency. In the precious metals segment, gold derivatives were excluded and placed in the foreign exchange category instead (without explanation). The remaining precious metals derivatives are primarily silver. At the end of the first quarter of 2015, Citigroup’s precious metals derivatives exposure rose from US$3.9bn to US$53bn, a nearly fourteen fold increase.

    It’s far too opaque to discover what Citibank is actually doing but, if we assume that 90% of it is silver, the notional derivatives value is equivalent to 3.06bn oz, or three and a half years of world silver mine output, every single ounce of it. As a percentage of total precious metals derivatives outstanding, Citibank increased its market share from 17% to 70%.

    Calling the regulators…

    This was Zero Hedge’s comment.

    “there is just one word for what Citigroup has done to what the Precious Metals ex Gold (i.e., almost exclusively silver) derivatives market. Cornering.”

    Silver is volatile at the best of times, but enormous volatility in the silver price is probably inevitable.

    In our opinion, we are in the latter stages of gold and silver price discovery which is (almost) entirely dominated by related paper substitutes. The emergence and recognition of supply shortage will begin to alter the balance of price discovery, slowly at first, then rapidly.

    Having looked at trends in the gold market, what about indications of the strength of physical silver demand? Like gold, there is evidence that physical silver supply is getting increasingly tight.

    The silver basis has been in almost continuous decline in recent years and has recently moved into backwardation.

    Nobody knows the volume of above ground silver inventory although it is believed to be about 1.0 billion ounces (over 30,000 tonnes). Three points are worth considering in terms of the emerging tightness in physical silver supply:

    • There is considerably less above ground silver inventory compared with gold inventory (approx. 6.0bn oz.);
    • Central banks do not have silver reserves that can be leased into the market; and
    • Unlike gold, the majority of silver is consumed in industrial applications with silver being unique in terms of its dual nature of being both a monetary metal and an industrial metal.

    Finally…

    There is a deep value argument for gold and silver and the related equities. In a debt crisis, as we saw in 2007-08, counterparty risk becomes critical.

    Physical gold and silver are the only financial assets with no counterparty risk at all.

    Gold has underperformed the S&P 500 by 65.8% since the peak.

    Banks, in contrast, epitomise counterparty risk. Gold has underperformed the BKX banks index in the US by 70.6% since the peak in 2011.

    Silver has underperformed the BKX banks index in the US by 83.2% since the peak in 2011.

    Gold (and silver) equities have suffered far worse than the respective metals. The HUI Gold Bugs Index, for example, has fallen 80.3% versus the gold price since the peak more than a decade ago now.

    Relative to the S&P500, the HUI has underperformed by 87.1% since the peak.

    The GDXJ ETF of small cap. gold mining shares has underperformed the S&P 500 by 91.4%.

    The quote below is from (in our opinion) one of the best road movies of all time, but one that is masquerading as a war movie. It’s the story of American soldiers in World War Two who travel deep behind German lines to recover $16m of gold from a bank. When they get close to their goal, they find that the gold is guarded by three Tiger tanks while they only have one Sherman. It reminds us of how it’s felt to be a gold investor during the last few years.

    Kelly: Well Oddball, what do you think?

    Oddball: It’s a wasted trip baby. Nobody said nothing about locking horns with no Tigers.

    Big Joe: Hey look, you just keep them Tigers busy and we’ll take care of the rest.

    Oddball: The only way I got to keep them Tigers busy is to LET THEM SHOOT HOLES IN ME!

    Crapgame: Hey, Oddball, this is your hour of glory. And you’re chickening out!

    Oddball: To a New Yorker like you, a hero is some type of weird sandwich, not some nut who takes on three Tigers.

    Kelly: Nobody’s asking you to be a hero.

    Oddball: No? Then YOU sit up in that turret baby.

    Kelly: No, because you’re gonna be up there, baby, and I’ll be right outside showing you which way to go.

    Oddball: Yeah?

    Kelly: Yeah.

    Oddball: Crazy… I mean like, so many positive waves… maybe we can’t lose, you’re on!

    From Kelly’s Heroes (1970, MGM, Kelly = Clint Eastwood, Oddball = Donald Sutherland, Big Joe = Telly Savalas, Crapgame = Don Rickles)

    * * *

    Full report

  • Varoufakis: Greek Deal Is "Coup", Turns Greece Into "Vassal" State, And Deals "Decisive Blow" To European Project

    Yanis Varoufakis, fresh off a few relaxing days at his island getaway, will be back in the Greek parliament this week to weigh in on the “compromise” deal his successor Euclid Tsakalotos and PM Alexis Tsipras struck in Brussels over the weekend.

    Considering the eyewitness accounts of the highly contentious Eurogroup meeting – out of which came the exceedingly punitive term sheet which would serve as the basis for Greece’s agreement with creditors – one can only imagine what might have unfolded if Varoufakis had been present for the “crazy kindergarten” finance minister free-for-all which reportedly took place on Saturday night. 

    For those curious to know what Yanis thinks about the deal, below are some “impressionistic thoughts” from the man himself. Highlights include the characterization of the Greek deal as a “decisive blow against the Euorpean project”, a “statement confirming that Greece acquiesces to becoming a vassal of the Eurogroup”, and the “culmination of a coup”.

    *  *  *

    On the Euro Summit’s Statement on Greece: First thoughts via Yanis Varoufakis

    In the next hours and days, I shall be sitting in Parliament to assess the legislation that is part of the recent Euro Summit agreement on Greece. I am also looking forward to hearing in person from my comrades, Alexis Tsipras and Euclid Tsakalotos, who have been through so much over the past few days. Till then, I shall reserve judgment regarding the legislation before us. Meanwhile, here are some first, impressionistic thoughts stirred up by the Euro Summit’s Statement.

    • A New Versailles Treaty is haunting Europe – I used that expression back in the Spring of 2010 to describe the first Greek ‘bailout’ that was being prepared at that time. If that allegory was pertinent then it is, sadly, all too germane now.
    • Never before has the European Union made a decision that undermines so fundamentally the project of European Integration. Europe’s leaders, in treating Alexis Tsipras and our government the way they did, dealt a decisive blow against the European project.
    • The project of European integration has, indeed, been fatally wounded over the past few days. And as Paul Krugman rightly says, whatever you think of Syriza, or Greece, it wasn’t the Greeks or Syriza who killed off the dream of a democratic, united Europe.
    • Back in 1971 Nick Kaldor, the noted Cambridge economist, had warned that forging monetary union before a political union was possible would lead not only to a failed monetary union but also to the deconstruction of the European political project. Later on, in 1999, German-British sociologist Ralf Dahrendorf also warned that economic and monetary union would split rather than unite Europe. All these years I hoped that they were wrong. Now, the powers that be in Brussels, in Berlin and in Frankfurt have conspired to prove them right.
    • The Euro Summit statement of yesterday morning reads like a document committing to paper Greece’s Terms of Surrender. It is meant as a statement confirming that Greece acquiesces to becoming a vassal of the Eurogroup.
    • The Euro Summit statement of yesterday morning has nothing to do with economics, nor with any concern for the type of reform agenda capable of lifting Greece out of its mire. It is purely and simply a manifestation of the politics of humiliation in action. Even if one loathes our government one must see that the Eurogroup’s list of demands represents a major departure from decency and reason.
    • The Euro Summit statement of yesterday morning signalled a complete annulment of national sovereignty, without putting in its place a supra-national, pan-European, sovereign body politic. Europeans, even those who give not a damn for Greece, ought to beware.
    • Much energy is expended by the media on whether the Terms of Surrender will pass through Greek Parliament, and in particular on whether MPs like myself will toe the line and vote in favour of the relevant legislation. I do not think this is the most interesting of questions. The crucial question is: Does the Greek economy stand any chance of recovery under these terms? This is the question that will preoccupy me during the Parliamentary sessions that follow in the next hours and days. The greatest worry is that even a complete surrender on our part would lead to a deepening of the never-ending crisis.
    • The recent Euro Summit is indeed nothing short of the culmination of a coup. In 1967 it was the tanks that foreign powers used to end Greek democracy. In my interview with Philip Adams, on ABC Radio National’s LNL, I claimed that in 2015 another coup was staged by foreign powers using, instead of tanks, Greece’s banks. Perhaps the main economic difference is that, whereas in 1967 Greece’s public property was not targeted, in 2015 the powers behind the coup demanded the handing over of all remaining public assets, so that they would be put into the servicing of our un-payble, unsustainable debt.

  • 'Wanted' Obama "Hope" Artist Has None Left, Turns Himself In To Police

    World-renowned street artist Shepard Fairey – infamous for creating Obama's "Hope" image during the 2008 presidential campaign and more recently the "obey" street art – has apparently run out of it.

     

    He was arraigned today, after turning himself into Detroit police, on felony charges that he illegally tagged public and private property in the city. Detroit Police last month said Fairey set a bad example for other artists when he plastered his signature Andre the Giant posters on buildings in and near downtown.

     

     

    As Detroit Free Press reports,

     Fairey, 45, took a flight from Los Angeles — where he was initially detained last week — to Detroit on Monday evening.

     

    He is accused of causing about $9,000 in damage to nine illegally tagged properties while he was in Detroit in May. He was invited here for commissioned work that included an 18-story mural on One Campus Martius for Dan Gilbert's Bedrock Real Estate Services and others.

     

    Fairey faces two counts of malicious destruction of property, which carry a maximum penalty of five years in jail, plus fines that could exceed $10,000.

     

    Approached after the flight, Fairey declined to speak on the issue: "Can't talk about anything," he said.

     

    He didn't speak at his arraignment Wednesday morning, and his attorney Bradley Friedman declined to comment on the charges.

     

    Doug Baker, attorney for the city of Detroit and a retired Wayne County prosecutor, is taking graffiti cases through an arrangement with the Wayne County Prosecutor's Office. He said there are about eight to 10 other cases the city is working to "vigorously" enforce laws against defacing property.

     

    Asked what Baker thinks of people treating Detroit as a place they can get away with graffiti, he replied:

     

    "That is an attitude that we run into, because we get people coming into the city that view it as a free-fire zone, that view at as a place where no one cares," Baker said. "And that's what we'er changing. We're changing that culture of belief."

    *  *  *
    Just lucky he is not a young black "hope"-less "thug" or things could have got serious.

  • (Not So) Elementary My Dear Watson: The Problem With Pension Plans

    Submitted by Keith Dicker of IceCap Asset Management

    Elementary my Dear Watson

    If you’re into mysteries, there’s certainly no shortage of them around the world. Enjoying them is one thing, solving them is quite another.

    In the mystery solving world, Sherlock Holmes was clearly heads, hands and feet above everyone else. His unorthodox thinking was the key to solving the mystery behind the Hounds of Baskerville, while shrewd decision making always proved valuable when up against the maniacal Moriarty.

    Lieutenant Columbo meanwhile, was also a sharp cookie. Whereas Sherlock dove straight into a mystery and aggressively confronted his foes, the affable Columbo excelled at bumbling around the problem which caused his foes to underestimate him. Which of course, always helped everyone’s favourite detective gather more clues and crack the case.

    Mysterious hounds and mysterious criminals certainly help keep our minds razor sharp as well as entertained. Yet, perhaps the biggest mystery in the world today involves – pension plans.

    Many people have them, and most people fully know what their eventual pension payout will be. Unfortunately, the average person doesn’t know how their pension plan is actually taped together, and fewer still, appreciate that the “promise” of their “eventual pension payout” is not as guaranteed as they may believe.

    Let’s leave no doubt – considering the mysterious complexity of these plans, to understand them one must certainly be a sharp cookie – that’s the easy part.

    However, to fully understand them, one must use unorthodox thinking and make shrewd analytical decisions. Last but not least, never underestimate how today’s financial environment is about to leave many pension plans scratching their heads with confusion and despair.

    * * *
    Pension Plan Assets

    Everyone knows their pension plan owns stocks and bonds. What few know is how they are actually valued.

    Because stock and bond markets can be very volatile in the short-term, and pension plans provide benefits over the long-term, many argue that it is unfair to determine the financial health of a pension plan based upon short-term, recent market performance.

    Unless of course, the short-term market performance is exceptionally good – then the above doesn’t apply.

    However, if markets whipsaw around like they did in 2012, 2009, 2008, 2002, 2001, 1998, 1994 (we could go on but…), then pension plan consultants prefer to smooth out these return fluctuations when reporting their financial check-up.

    The main tool used for smoothing returns is called the Expected Rate of Return. It isn’t the actual rate of return, but rather, it is an estimate of what the pension plan will earn over the long-term.

    Now, here’s the trick – the higher the expected rate of return, the higher the expected value of plan assets.

    The higher the expected plan assets, the lower the expected deficit.

    And, the lower the expected deficit, the lower the expected contributions that is required by the employer.

    Note: these expected returns are theoretical – not actual.

    In a nutshell – high expected rates of return are good. But only good if they retain a semblance of reality. And since most people live in reality, the expected rate of return used by pension plans should also resemble reality.

    And this brings us to the very big problem for pension plans today. Theoretical or expected returns used by pension funds today are no where close to what may be earned in reality.

    60% Stocks + 40% Bonds

    In order to better appreciate reality, one must first understand that most pension funds typically hold about 60% in stocks and 40% in bonds.

    The popularity of DBP pension funds really surged in the 1980s only to plateau in the 1990s. And during that time, a diversified portfolio with a roughly 60-40 split almost always produced a really nice return experience, which made everyone really happy.

    And since all of today’s consultants cut their teeth during this period, or learned from people who worked during this period – then a balanced 60-40 split will do just fine for everyone today. After all, the 80s and 90s happened over 25 years ago. For any investment strategy to endure over that amount of time, it must be good.

    Unfortunately, due to high expected rates of return, many pension funds are actually living in a fantasy world.

    Case in point, consider the Expected Rate of Returns for:

    • Ohio Police & Fire Pension Fund = +8.25%
    • California Public Employees Retirement System = +7.50%

    More conservative Expected Rates of Return can be found with:

    • Nova Scotia Public Service Superannuation Plan = +6.50%
    • Healthcare of Ontario Pension Plan = +6.34%

    To the naked eye, these return expectations may appear quite reasonable – after all, we’ve always been told that over 100 years, the stock market always averages 10% annual returns or higher.

    However, our regular readers know that it isn’t the stock market that worries us. Instead, it’s the bond market that should be keeping people awake at night.

    Yet, even long-term stock market returns have a major flaws. For starters, the 10% number comes from the well-known Ibbotson/Morningstar studies which show that since 1926, the US stock market returned 10% annually.

    With almost 90 years of history, this must be pretty darn accurate. However, if the Ibbotson study started 20 years earlier, the annual return declines to about 7% a year (source: Crestmont Research).

    Think about this; a 90 year study shows a 10% annual return, but a 110 year study shows a 7% annual return. That’s a pretty big difference, and certainly throws doubt on what exactly is the long-term average.

    Better still, Chart 1 (this page) shows the 10% average return is actually rarely achieved. Since 1900, 44% of the time the average 10-year return was < 8%.

    Think about that one – whether you exceed an 8% return has effectively become a flip of the coin.

    While that describes the challenges of using long-term returns from the stock market, our real concern is actually with the bond market. We’ve written, presented, interviewed and even web-casted many times before about the bubble in the bond market. It’s a very big deal, and when it bursts it will have cascading effects in every market, all over the world.

    And considering that the average pension plan has 40% of its investments in the bond market – this is a BIG deal.

    To fully appreciate how big of a deal this is, one needs to appreciate the complete picture of:

    • expected rates of return
    • stock market returns
    • bond market returns

    Since most pension plans hold about 60% in stocks and 40% in bonds, the pension plan’s total return is simply:

    60% * Stock Market Return + 40%*Bond Market Return

    As an example, if Stocks increased 10% and Bonds increased 5%, the pension plan’s total return = 60%*10% + 40%*5% = 8% Total Return.

    Simple enough and in theory, that’s how it works. However, it’s reality that has us concerned.

    To demonstrate exactly why pension funds are in trouble, note the above calculation. Due to the way the bond market works, it is fairly easy today to accurately predict the maximum return achievable – we’ll get to the minimum return in a moment.

    Today, the yield or interest received on a 10 year US Government Treasury Bond is about 2%. This means if you buy the bond today, the best return possible is 2% a year for the next 10 years.

    This is where our technical readers point out that bond investors also hold corporate bonds, junk bonds and emerging market bonds which will increase the yield further. As a result, even using the Barclay’s US Aggregate Bond Index as a different return proxy still only increases the yield to 2.2%. For this example, we’ll simply round down to 2%.

    Putting it all together: below we show using a 6.5% Expected Rate of Return and a 2% Bond Market return, the pension plan would need a 9.50% return from the stock market to meet it’s return objective.

    Most people would agree that over the long-run stocks will produce a 9.50% return.

    This is true for a 6.50% Expected Rate of Return. Watch happens to the poor folks at the Ohio Police & Fire Pension Fund who has elected to use a 8.25% Expected Rate of Return.

    Whoa – this pension plan needs a +12.45% return from the stock market to meet it’s return objective. And considering everyone swims in the same stock market, the probability of the Ohio Police & Fire Pension Fund meetings its return objectives are next to 0%.

    And that’s assuming a +2% return from the Bond Market.

    Next, and this is the most critical aspect of the pension mystery and why we are writing about it – what happens to pension funds when (not if), the bond bubble breaks? 

    * * *

    The full note can be read in the pdf below (link)


  • IMF Rips Pandora's Box To Shreds, Demands Greek Debt Relief "Far Beyond What Europe Has Been Willing To Consider"

    Earlier today, Reuters first leaked that just two weeks after the IMF released its first revised Greek debt sustainability report, one which the Eurogroup desperately tried to squash as it urged for a 30% debt haircut and came hours before the Greek referendum vote giving the Oxi camp hope and crushing Tsipras’ carefully laid plan to lose the vote and capitulate with integrity instead of having to capitulate a week later after 17 hours of “mental waterboarding” and have his reputation torn to shreds, the IMF would release a follow up report updating its view on the Greek economy which in just two short weeks of capital controls has utterly imploded.

    Just like the first IMF report, which we correctly compared to the opening of a Pandora’s box, and with which the IMF also obliterated the careful plans of the Troika, so with this follow up the IMF effectively crushes the glideslope of the latest Greek bailout process barely scraped together on Monday morning and has torn Pandora’s box to shreds with the following summary assessment: “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”

    Yes, debt relief… just the others’ debt: not the IMF’s, please.

    So what just happened?

    As of this moment the IMF is telling Greece that if nothing changes, it will die of cancer with 100% certainty; on the other hand the Eurogroup is telling Greece it will die of a heart attack also wih 100% certainty if anything changes.

    Good luck with the choice.

    Here are the report punchlines:

    • Greece’s public debt has become highly unsustainable. This is due to the easing of policies during the last year, with the recent deterioration in the domestic macroeconomic and financial environment because of the closure of the banking system adding significantly to the adverse dynamics. The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.
    • … significant shortfalls in program implementation during the last year led to a significant increase in the financing need—by more than Euro 60 billion—estimated only a few weeks ago. As a result, debt-to-GDP by 2022 was projected to increase from an estimate less than a year ago of about 105 percent to a revised estimate of 142 percent, significantly above the target of 110 percent of GDP. This would under the November 2012 agreement have implied significant additional measures to reduce the face-value of debt.
    • Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective.
    • The events of the past two weeks—the closure of banks and imposition of capital controls—are extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability relative to what was projected in our recently published DSA. A full and comprehensive revision of this debt sustainability analysis can only be done at a later stage, taking into account the deterioration in the economic situation as a result of the closing of the banking system and the details of policies yet to be agreed. However, it is already clear at this stage that there will be a significant increase in the financing need. The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion, or some Euro 25 billion above what was projected in the IMF’s published DSA only two weeks ago, largely on account of the estimated need for a larger banking sector backstop for Euro 25 billion. Adjusting our recent DSA mechanically for these changes, and taking into account the agreed weaker growth path for the next two years, gives rise to the following main revisions:
      • Debt would peak at close to 200 percent of GDP in the next two years. This contrasts with earlier projections that the peak in debt—at 177 percent of GDP in 2014—is already behind us.
      • By 2022, debt is now projected to be at 170 percent of GDP, compared to an estimate of 142 percent of GDP projected in our published DSA.
      • Gross financing needs would rise to levels well above what they were at the last review (and above the 15 percent of GDP  threshold deemed safe) and continue rising in the long term.

    In other words, for every week that the Greek capital controls remain , the total cost of the Greek bailout (the funding needs) increases by €10 billion.

    Another way of putting it: with every passing day, another 1% of Greece’s €210 billion in bank loans becomes “non-performing.”

    It gets worse: “these projections remain subject to considerable downside risk, suggesting that there could be a need for additional further exceptional financing from Member States with an attendant deterioration in the debt dynamics.”

    • Medium-term primary surplus target: Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so. The reversal of key public sector reforms already in place— notably pension and civil service reforms—without yet any specification of alternative reforms raises concerns about Greece’s ability to reach this target. Moreover, the failure to resist political pressures to ease the target that became evident as soon as the primary balance swung into surplus also raise doubts about the assumption that such targets can be sustained for prolonged periods. The Government and its European partners need to address these concerns in the coming months.
    • Growth: Greece is still assumed to go from the lowest to among the highest productivity growth and labor force participation rates in the euro area, which will require very ambitious and steadfast reforms. For this to happen, the Government— which has put on hold key structural reforms—would need to specify strong and credible alternatives in the context of the forthcoming program discussions.
    • Bank support: the proposed additional injection of large-scale support for the banking system would be the third such publicly funded rescue in the last 5 years. Further capital injections could be needed in the future, absent a radical solution to the  governance issues that are at the root of the problems of the Greek banking system. There are at this stage no concrete plans in this regard.

    The conclusion:

    The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM. There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance. This reflects the basic premise that debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates close to the current AAA rates before debt levels have been brought to much lower levels; borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades. Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide.

    Actually, it is no longer Greece’s: Greece is about to hand over its sovereignty to Brussels on a silver platter. The choice is now all up to the European “partners” to decide.

    Full report (pdf)

     

     

  • "Everybody Benefits By Avoiding Defaults": Citi Explains How To Goalseek Student Loan ABS Ratings

    We last checked in on America’s $1.2 trillion student debt bubble a little over two weeks ago. 

    At the time, we noted that Moody’s had just placed 106 tranches in 57 securitizations backed by student loans on review for downgrade. It was the second such warning Moody’s had issued in the space of just 3 months. 

    Meanwhile, Fitch was getting worried as well and had also moved to place dozens of tranches in FFELP-backed paper on watch. Our takeaway: The fact that Moody’s and Fitch are beginning to reevaluate student loan ABS is indicative of an underlying shift in the market. Between the proliferation of IBR and the Department of Education’s recent move to open the door for debt forgiveness in the wake of the Corinthian collapse, financial markets are beginning to see the writing on the wall. Perhaps Bill Ackman said it best: “there’s no way students are going to pay it all back.” 

    Moody’s concerns revolve around the likelihood of rising defaults attributable to “low payment rates … persistently high volumes of loans in deferment and forbearance, and the growing popularity of the Income-Based Repayment and extended repayment programs.” We’ve discussed all of the above at length and have taken a particular interest in IBR, which we recently dubbed “the student loan bubble’s dirty little secret.”

    Facing shifting market dynamics, Moody’s last week called for comments on its methodology for rating FFELP-backed paper:

    Moody’s Investors Service has published a Request for Comment (RFC) proposing changes to the cash flow assumptions the agency uses in its approach to rating US Federal Family Education Loan Program (FFELP) securitizations.

     

    Low prepayment rates, persistently high rates of deferment and forbearance, and the growing use of IBR and other similar programs have increased the risk that some tranches will not pay off by their final maturity dates, which would trigger an event of default for the securitizations. 

     

    Since the recession, many student loan borrowers have struggled to make their monthly payments. This has resulted in historically low rates of voluntary prepayments, high volumes of loans in deferment and forbearance, and the growing popularity of IBR and other similar programs.

     

    “These trends have persisted despite the economic recovery and improving employment picture, and some levels of deferment, forbearance and IBR will be sustained through the life of the FFELP loan pools. Some repayment plans can extend loan repayment periods significantly, from the standard 10-year term for non-consolidation loans.”

    And here’s more from Bloomberg: 

    Top-rated securities backed by U.S. government-guaranteed student loans face cuts to as low as junk that may further roil the market for the debt, according to Citigroup Inc…

     

    In terms of ratings on the bonds, Moody’s said that any cuts could lower bonds to either low investment grades or speculative rankings. Fitch said in a June 26 statement that it could also lower top-rated debt to junk as a result of its review over the next three to six months.

     

    “Many triple-A investors would not be able to tolerate downgrades, and barring a cure of the possible maturity default, downgrades would present a significant market disruption,” Kane and Belostotsky wrote in the report.

     

    Rating analysts are likely to attach little-to-no value for future buybacks from a non-investment grade company” such as Navient, the Citigroup analysts wrote.

    Got that? No? That’s ok. Here’s a summary. Some of these student loan-backed deals are going to experience technical defaults in the collateral pool because people aren’t paying off the loans in time, which means Moody’s needs to downgrade some of the tranches, but downgrades would be bad, and Moody’s can’t use projected future servicer buybacks as an excuse not to downgrade because the servicers aren’t rated as highly as the securitizations themselves (which is of course absurd and suggests the paper never should have been investment grade in the first place). Therefore, someone needs to find another way to make this paper look less risky, and the best option may be to “cure” maturity default (i.e. extend the maturities). Here’s Citi with more on how Moody’s might go about goal seeking its FFELP-backed ABS ratings:

    Controversy endures in the FFELP ABS market amidst another rating agency voicing concern about breaching legal final maturities and some secondary selling activity. 

     

    The rating agencies assign ratings based on legal final maturity date. Without additional sponsor buybacks, certain SLMA classes are likely to extend beyond the legal final maturity if they continue paying at a slow rate. Rating agency analysts are likely to attach little value for future buybacks from the double-B rated Navient, thus the cash flow delays that are inherent in FFELP structures are problematic from a ratings perspective.

    Yes, “cash flow delays” in the collateral pool are definitely “problematic” and really, it’s not a problem that should be “solved” by tinkering with ratings methodology, because after all, if you just adjust the methodology instead of downgrading the securitizations… well, then what good is the rating? Citi continues:

    Ironically, it was the rating agencies that required the sponsor to initially assign presently defined legal final maturities. Yet the numerous moving parts endemic to FFELP student loans make setting prepayment assumptions and setting legal maturity dates a virtually impossible task. At cutoff, almost every deal had about 50% of the loans in-school. The pricing prepayment estimates had to incorporate numerous moving parts, including the borrower’s graduation date, payment type (conventional, graduated payment or income-based payment) loan maturity and proportions of loans in grace, deferment or forbearance. In our view, the legal final maturity is meaningless.

    See how that works? There are a lot of factors that make it “virtually impossible” to figure out when students might pay back their loans, so really, any estimate of when ABS investors might get their principal back is “meaningless,” and because one can’t really default on a loan with an indeterminate maturity date, “curing” the legal maturity problem, and thus eliminating the need for downgrades, is as simple as “amending” the bond indentures. “The sponsor could approach bondholders to formally extend the legal maturity date,” Citi happily notes. 

    What’s clear from the above is that billions in student loan-backed paper probably should be downgraded because as Citi correctly notes, there’s really no telling when or even if any of these loans are going to be paid off given the proliferation of IBR and the prevalence of deferement and forbearance.

    But rather than risk a “market disruption,” Citi thinks it might be better for Moody’s to consider doing away with definitive maturity dates because in the end (and this is the actual subheader for Citi’s concluding paragraph), “everyone benefits by avoiding default.” 

    *  *  *

  • IMF May Walk Away From Greek Bailout

    Earlier today, a “secret” IMF paper surfaced in which the Fund reiterates the need for EU creditors to writedown their holdings of Greek debt.

    According to Reuters, who broke the story after reviewing the document, “the updated debt sustainability analysis was sent to euro zone governments late on Monday, and argues that ‘the dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM.'” The IMF goes on to say that Greece’s debt will likely hit 200% of GDP over the next two years and will sit at a still-elevated 170% of output in 2022.

    As a refresher, here’s a (very) brief recap of the IMFs position on haircuts for Greece: 

    A divide between the IMF and Europe (read: Germany), regarding writedowns on Greece’s debt to the EU has been brewing for quite some time and recently returned to the international spotlight when, a few months back, the Fund indicated debt relief was a precondition for its participation in any further aid for Athens. More recently, the IMF released a report on Greece’s debt sustainability just prior to the referendum. The timing appeared to be strategic and may have helped secure the “no” vote for Tsipras. Today, another “secret” IMF document on the sustainability of Greece’s debt burden has surfaced and not surprisingly, the Fund is once again pounding the table on a haircut.

    Although Tsipras had resisted IMF involvement in the country’s third program, Germany made it clear that the Fund’s participation was mandatory. Now, FT says Chrsitine Lagarge may consider pulling out of the deal in light of the fact that Athens’ debt is not seen as sustainable. Here’s more: 

    The International Monetary Fund has sent its strongest signal that it may walk away from Greece’s new bailout programme, arguing in a confidential analysis that the country’s debt is skyrocketing and budget surplus targets set by Athens cannot be achieved.

     

    “Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the memo reads. Under its rules, the IMF is not allowed to participate in a bailout if a country’s debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the memo suggests it can no longer do so.

     

    IMF involvement in Greece’s rescue has been critical to a German-led group of eurozone hardliners who believe the European Commission, one of the other Greek bailout monitors, is not sufficiently rigorous in its evaluations.

     

    The issue became one of the major sticking points during all-night negotiations between Alexis Tsipras, the Greek prime minister, and Angela Merkel, his German counterpart, at the weekend, with Mr Tsipras repeatedly refusing to accept IMF participation in a new bailout.

     

    According to EU officials, Ms Merkel stood firm on the issue, telling the Greek premier there would be no bailout — and therefore “Grexit” from the eurozone — without a formal request made to the IMF for participation in a new programme. The final bailout deal states that “Greece will request continued IMF support” once its current IMF programme expires.

    What happens if the IMF walks away you ask? Well, the entire “deal” could fall apart, as the Fund is expected to put up a not insignificant portion of the bailout money, and in the absence of that funding, the gap would have to be filled with “privitization proceeds” which the IMF itself has projected will come to just €2 billion over the next three years. Furthermore, German lawmakers, already exasperated with the protracted negotiations, would likely pull their support altogether. Here’s FT again:

    If the IMF were to walk away from the Greek programme, it could cause significant political and financial problems for Berlin and other eurozone creditors. Without the IMF’s imprimatur, German officials have said they would struggle to win approval for any new bailout funding in the Bundestag. German MPs must approve both the reopening of new talks and the final terms of the third bailout.

     

    In addition, an EU official said that of the €86bn in Greek financing requirements, the European Stability Mechanism — the eurozone’s €500bn bailout fund — was expected to put up only €40bn-€50bn.

     

    The current IMF programme, which still has €16.4bn in undisbursed funds and runs through March 2016, is expected to make up some of the difference, and eurozone officials had been assuming a follow-on IMF programme would contribute as well.

     

    Any shortfall would have to be made up through Greek privatisation proceeds, which have repeatedly fallen short of expectations, or through Greek borrowing on the bond market, which has dried up since the Syriza-led government took power in Athens in January — and which the IMF memo said was highly unlikely to materialise.

     

    “Greece cannot return to markets anytime soon at interest rates that it can afford from a medium-term perspective,” the IMF wrote.

    So in addition to a parliamentary revolt and uncertainty surround urgently needed bridge financing, Greece also faces the possibility that the IMF may walk away, throwing the entire “deal” into question. Here’s The Telegraph’s Ambrose Evans-Pritchard summing up the ramifications of the IMF’s analysis and reinforcing our contention that the US (and its IMF veto power) are pulling the strings behind the scenes and orchestrating “leaks” at opportune times.

    The findings are explosive. The document amounts to a warning that the IMF will not take part in any EMU-led rescue package for Greece unless Germany and the EMU creditor powers finally agree to sweeping debt relief.

     

    This vastly complicates the rescue deal agreed by eurozone leaders in marathon talks over the weekend since Germany insists that the bail-out cannot go ahead unless the IMF is involved. 

     

    It claimed that capital controls and the shutdown of the Greek banking system had entirely changed the picture for debt dynamics, an implicit criticism of both the Greek government and the eurozone authorities for letting the political dispute get out of hand. 

     

     Debt forgiveness alone would not be enough. There would also have to be “new assistance”, and perhaps “explicit annual transfers to the Greek budget”.

     

    This is the worst nightmare of the northern creditor states. The term “Transfer Union” has been dirty in the German political debate ever since the debt crisis erupted in 2010. 

     

    The backdrop to this sudden shift in position is almost certainly political. It follows an intense push for debt relief over recent days by the US Treasury, the dominant voice on the IMF Board in Washington. 

    Should the Fund threaten to pull its support, Germany would face a tough decision: remain belligerent in the face of pressure from IMF (and tacitly from the US), or concede to writedowns which could open the door for Italy, Spain, and Portugal to demand debt relief. 

    Imf Greece Sustainability Analysis

  • Systemic Risks Surge As Correlation Among Stocks Shoots Higher

    Despite everyone saying "it's a stock-picking market" (notably one of Cliff Asness' pet peeves) recent co-movements in global equities suggests once again that there is just one factor driving returns as systemic codependence surges…

     

    Via Gavekal Capital blog,

    Over the past several weeks, correlations among stocks have been increasing which makes it increasingly difficult for stock pickers to outperform. The most dramatic example of this is happening in Europe. The 20-day moving average correlation of European equities stands at 82%, the highest level since July 2012, which not coincidently was another period when the European economic crisis was escalating. The 65-day moving average correlation has increased to 69%, which is the highest level since the end of 2012 and the 200-day moving average also increased over 60% to 62%. This is the highest level since June 2013.

    image

    In North America, the 20-day moving average correlation has also shot above 60% for the first time since April and to the highest level since January. The 65-day moving average correlation has increased recently from 46% to 51%.

    image

    Asia-Pacific remains the best environment for stock pickers. However, even there, we have seen the 20-day moving average correlation increase to 55% from a low of 34% in June.

    image

    *  *  *

    And forward-looking market implied estimates of correlation suggest this will remain the case…

     

    Charts: Bloomberg

  • Trump Tramples Trends, Dominates National Poll For Second Week

    Despite losing marquee PGA and LPGA events, a bankruptcy at his Puerto Rico golf course, and the lowest ratings for Miss USA pageant ever, Donald Trump has topped the rest of the GOP presidential field in polls for the second time in as many weeks…

     

    Among voters who identify either as Republicans or independents and who plan to vote in their states’ Republican primaries or caucuses, 17 percent named Trump as their first choice for the GOP nomination in the 2016 presidential race.

     

    Trump was followed by former Florida Gov. Jeb Bush (14 percent), Wisconsin Gov. Scott Walker (8 percent), Texas Sen. Ted Cruz (6 percent), Florida Sen. Marco Rubio (5 percent), retired neurosurgeon Ben Carson (4 percent), Kentucky Sen. Rand Paul (4 percent), former Arkansas Gov. Mike Huckabee (4 percent) and New Jersey Gov. Chris Christie (3 percent).

    Receiving less than 2 percent each were former Texas Gov. Rick Perry, former Pennsylvania Sen. Rick Santorum, Louisiana Gov. Bobby Jindal, businesswoman Carly Fiorina, Ohio Gov. John Kasich, South Carolina Sen. Lindsey Graham, and former New York Gov. George Pataki.

     

    As the Suffolk University/USA Today poll also showed, among self-identified conservative or very conservative Republican likely voters, Trump led Bush 17 percent to 11 percent, with all other candidates in single digits.

    However, among voters of all parties, Trump’s negatives were the highest, at 61 percent.

    *  *  *

    Finally, Trump appears to be the most-searched Presidential candidates in the last six months in several regions…

     

    “United” States of America indeed.

  • Exclusive: The Inside Story Of How Deutsche Bank "Deals With" Whistleblowers

    Back in May we brought you “The Real Story Behind Deutsche Bank’s Latest Book Cooking Settlement,” in which we detailed the circumstances that led the bank to settle claims it mismarked its crisis-era derivatives book to the tune of at least $5 billion. 

    Deutsche Bank settled the issue with the SEC for the laughable sum of $55 million a few months back.

    The SEC inquiry was prompted, in part, by Dr. Eric Ben-Artzi who was fired from Deutsche Bank in 2011 after expressing his concerns about the bank’s valuation methodology. 

    What follows is the real, play-by-play account of Ben-Artzi’s dismissal from Deutsche Bank, told in its entirety for the first time. 

    *  *  *

    Your Services Are No Longer Needed

    On November 7, 2011 Dr. Eric Ben-Artzi walked into a conference room at Deutsche Bank’s U.S. headquarters in lower Manhattan. Seated at a conference table was Sharon Wilson from the Human Resources department. Lars Popken, DB’s head of market risk methodology and Ben-Artzi’s manager, was videoconferenced in.

    Ben-Artzi had just returned from FMLA paternity leave and although things had gotten tense just prior to his time off, he certainly didn’t expect what came next. Ben-Artzi’s job, Popken said, was being moved to Germany.

    Ben-Artzi thought back to the summer when, in response to rumors that some U.S. positions were likely to be moved overseas, he had mentioned he’d be happy to relocate to Berlin. No such luck. Minutes later, he was terminated and Wilson hurriedly ushered him out of the building. Ben-Artzi wasn’t even allowed to collect his personal belongings. 


    The (Brief) Backstory

    The events that ultimately led Deutsche Bank to boot Ben-Artzi from 60 Wall without so much as a cardboard box for his pictures, pens, and legal pads date back to 1998 and for the sake of brevity, we won’t recount the whole story but encourage anyone interested in the entire narrative to review it here. 

    In short, Deutsche Bank was heavily involved in every single aspect of the market for third-party asset backed commercial paper in Canada prior to the financial crisis. They had an equity stake in the parent of at least two issuers, they served as a liquidity provider on over half of all Series A commercial paper issued by Canadian conduits, they sold the paper through their securities division, and perhaps most importantly, they structured the programs (e.g. LSS deals) that backed the paper. But in the simplest possible terms: Detusche Bank was deeply embedded in a market that collapsed in August of 2007.

    As mentioned above, the events that unfolded between June and October of that year are a story in and of themselves, but suffice to say that the market for commercial paper issued by the Canadian conduits imploded on August 13, 2007 (BNP’s move to freeze three ABS funds four days earlier sparked a panic) imperiling retail investors, small- to mid-size corporations, and pension funds and triggering a massive (and incredibly messy) restructuring effort.

    Most of this drama had ended by the time Eric Ben-Artzi arrived at Deutsche Bank in June of 2010 and the former Goldmanite likely had no idea what he was about to uncover when he began to look at how Deutsche went about accounting for their exposure to the Canadian conduits during the crisis. 

    Deutsche Bank played an outsized role in the market for LSS deals in the years leading up to the crisis. In fact, Deutsche Bank accounted for between $120 and $130 billion of the $200 billion (notional) in total LSS deals between 2005 and 2007.

    When Ben-Artzi, who has a PhD in applied mathematics from NYU Courant, began to look at how the bank was valuing the gap option on the LSS trades, he made a rather disconcerting discovery. 

    As a refresher, here’s a simple explanation of the gap option problem with LSS deals: 

    The laughable thing about LSS deals was that they were effectively non-recourse, meaning that the protection seller was allowed to sell protection on a notional amount that was multiples of the collateral posted, but in the event the market moved against the seller enough to chew through that collateral and a margin call was made, that seller could just say “to hell with it” and walk away from the deal. More simply, I, the seller, insure $100 million in debt, but only post $10 million up front. If there’s a credit market meltdown and my $10 million is no longer sufficient and you, the protection (insurance) buyer, call me looking for more money to compensate you for the elevated risk, I can politely tell you to piss off. The risk that I tell you to piss off is called “gap risk.”

    To be a bit more specific, the seller of protection (in this case the Canadian conduits) had the option to walk away from the deal without posting additional collateral (this is the “gap option”), and the value of that option changed depending on a number of factors including credit spreads and correlation. 

    As it turns out, Deutsche Bank began making these trades without even having a model to value the gap option — standard models (e.g. a copula model) cannot be used for LSS trades. Not only that, the bank’s credit correlation desk didn’t even bother to consult the market risk methodology department (where Ben-Artzi worked and which was responsible for verifying the appropriateness of valuation models) and instead decided to simply discount the value of the trades by 15%. Sensing that this was likely inadequate, Deutsche briefly attempted to determine the actual value of the gap option on the trades, but when the numbers came back looking rather nasty, the bank did what any pre-crisis sell side firm worth its salt would do: they scrapped that model and went with something that made the results look more favorable. In this case, Deutsche simply set up the equivalent of a loan loss reserve for the entire book and called it a day. At the time (i.e. between 2007 and 2009), other players in the industry valued the gap option at between 2% and 8% of notional. Taking the midpoint there, and taking the midpoint between Deutsche’s estimated $110 and $120 billion in notional exposure, the value of the gap option for the bank would have been nearly $6 billion.

    How Deutsche Bank Deals With ‘Problem’ Employees

    Sometime around October of 2010, Ben-Artzi began to ask questions, starting with the Director and Head of Risk Research and Development. Discussions with management continued into the new year until finally, fed up with what he perceived to be an attempt to sweep the issue under the rug, Ben-Artzi contacted the SEC on March 7, 2011 and called Deutsche Bank’s employee hotline four days later. 

    On March 17, Ben-Artzi met with Robert Rice, then Deutsche’s Head of Governance, Litigation & Regulation for the Americas who said there was an ongoing investigation into some of the issues Ben-Artzi had raised. Later that month, Ben-Artzi suffered through a lengthy meeting with Rice and William Johnson, Deutsche’s outside counsel. 

    What’s important to note here is that Bob and Bill (as Rice and Johnson are known to their friends) weren’t exactly strangers. As it turns out, they both worked in the  U.S. Attorney’s Office for the Southern District of New York with Mary Jo White and Robert Khuzami.

    After his first stint in public service, Khuzami went on to become General Counsel to  the Americas at Deutsche and by the time Ben-Artzi reported his concerns to the government in 2011, Khuzami had moved on to become Director of Enforcement for the SEC. Mary Jo White would of course become SEC Chair in 2013, and almost two years to the day after Ben-Artzi first met with Rice, Bob would be named Chief Counsel to White.

    As such, Ben-Artzi was (and still is) essentially squaring off against a tight-knit faction of former attorneys for the Southern District of New York who have managed to turn the SEC into an extension of Deutsche Bank, much as Goldman has turned the Fed into an extension of the Vampire Squid. As an aside, Deutsche’s General Counsel Richard Walker worked at the SEC for a decade and served as Director Of Enforcement from 1998 until his move to join the bank in 2001. 

    On May 12, 2011, Ben-Artzi sat down to discuss the issue further with Rice and Matt Spaulding (then global head of finance for Deutsche). Also in attendance were two employees from the corporate and investment bank, Stefan Schafer and Andreas Kodell, both of whom had come over from London.

    Maybe it was the jet lag, or maybe it was the fact that Ben-Artzi was essentially threatening to expose a multi-billion dollar “error” in the way the bank was valuing its LSS book, but whatever the case, Schafer and Kodell weren’t happy. The two proceeded to give Ben-Artzi a rather sharp tongue-lashing for questioning the bank’s valuation of the trades.

    In the process, Schafer and Kodell did shed some light on Deutsche’s previous attempts to evaluate their exposure to the gap option. Unfortunately, they were unable to explain why Ben-Artzi’s calculations were incorrect and Spaulding was similarly unable to justify the bank’s initial use of a 15% haircut or explain how the subsequent decision to adopt a reserve against the trades was in any way sufficient. Lars Popken, who was also in attendance, remained surprisingly quiet.

    On May 23, in a meeting that included Sharon Wilson from HR, Rice said Deutsche Bank would be providing no further information into how it valued the trades and suggested Ben-Artzi contact an SEC attorney.

    At the end of that month, Popken assured Ben-Artzi that despite the controversy, no retaliatory action would be taken by the bank.

    Ben-Artzi began his leave of absence on June 30 and returned to work on October 19.

    Less than three weeks later, he was fired. 

    *  *  *

    Epilogue

    If ever there was a story that exemplified virtually everything that is wrong on Wall Street surely this is it. Here we had one of the largest banks in the world by assets agreeing to facilitate leveraged bets in synthetic credit by Canadian special purpose entities which had virtually no equity whatsoever on their books. Deutsche knew the collateral for these bets came from the sale of commercial paper to clueless retail investors and pension funds, and not only did the bank not care, Deutsche actually encouraged the conduits to pile leverage on top of the posted collateral, creating an enormous amount of risk not only for the holders of the commercial paper, but for the bank itself. Deutsche then proceeded to guarantee the commercial paper in the event the market ceased to function only to refuse payment to noteholders when the market finally did collapse in August of 2007, leaving retail investors and pension funds out in the cold.

    Meanwhile, the bank intentionally underreported its exposure by systematically refusing to model the gap option built into the trades and when someone honest finally came along and called them on their obfuscation, they summarily dismissed him. 

    Of course the punchline here is that convincing the SEC to acknowledge the sheer absurdity of the entire ordeal has been, and will continue to be well nigh impossible for the following reasons: 1) Robert Khuzami, the agency’s head of enforcement when Ben-Artzi’s complaint was filed, was Deutsche’s General Counsel to the Americas the entire time the bank was mismarking its LSS book, 2) Bob Rice, the SEC’s current Chief Counsel, was Deutsche’s Head of Governance, Litigation & Regulation during Ben-Artzi’s tenure at the bank, 3) the current SEC Chair, Mary Jo White, goes way back with both Rice and Khuzami as well as with Bill Johnson, Deutsche’s outside counsel at time of Ben-Artzi’s complaint, and 4) Deutsche’s current General Counsel worked at the SEC for 10 years, including a stint as chief enforcement officer. 

    In the end, all the boxes are checked. This story truly has it all: risky derivatives, leverage, the destruction of retail investors’ savings, hidden risk, the termination of honest employees, and the revolving door between Wall Street and the U.S. government. 

  • Beware: The "Made In China" Global Recession Is Coming, Morgan Stanley Warns

    The next global recession may come with a label that reads “made in China” Morgan Stanley’s Head of EM Ruchir Sharma, says. 

    As regular readers are no doubt aware, decelerating economic growth in China has been a major drag on worldwide demand and is one of the main reasons why global trade is in the doldrums.

    Flagging export growth (June’s “strong” 2.1% showing notwithstanding), a painful transition from an investment-led model to a consumption and services-driven economy, and an industrial production-sapping war on pollution have all conspired to bring the Chinese economic growth engine to a virtual halt, with some independent estimates putting output as low as 3.8% (which would constitute a blistering pace in the West but might as well be 0% if you’re China), far below the “official” headline figure which you can bet will remain at or above the Politburo-mandated 7%.

    Here’s Bloomberg with more from Sharma on the “Made In China” recession: 

    Forget about all the shoes, toys and other exports. China may soon have another thing to offer the world: a recession.

     

    That is the prediction from Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, who says a continuation of China’s slowdown in the next years may drag global economic growth below 2 percent, a threshold he views as equivalent to a world recession. It would be the first global slump over the past 50 years without the U.S. contracting.

     

    “The next global recession will be made by China,” Sharma, who manages more than $25 billion, said in an interview at Bloomberg’s headquarters in New York. “Over the next couple of years, China is likely to be the biggest source of vulnerability for the global economy.”

     

    While China’s growth is slowing, the country’s influence has increased as it became the world’s second-largest economy. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010, according to Morgan Stanley. It’s the world’s largest importer of copper, aluminum and cotton, and the biggest trading partner for countries from Brazil to South Africa.

    Yes it is, which explains why, as we noted on Monday evening, commodity producers which levered up in anticipation of a perpetual bid from China are now buried under hundreds of billions in debt amid slumping prices and a global deflationary supply glut. 

    And while the country’s shifting economic model undercuts global trade, the sharp decline in Chinese stocks poses a threat to the country’s presumed new engine for growth: the consumer.

    China’s $6.8 trillion equity market roiled global investors over the last few weeks after a yearlong rally accompanied by record borrowing and surging valuations ended in a bear market.

     

    “What happened in China last week was so significant in that for the first time, you’ve got this sign that something is out of control,” Sharma said. “Confidence damage is going to last for a while.”

    Indeed it will, and as we’ve argued on several occasions of late (here for instance), the equity market sell-off has caused irreparable damage to retail investors’ collective psyche, which could well have knock-on effects for consumer spending.

    This means that just as the world begins to come to terms with the new Chinese reality wherein shifting priorities and more importantly, shifting demographics (the fabled “Lewis Turning Point“), transfer the burden of economic growth from the industrial sector to the consumer, the propensity for everyday Chinese citizens to spend may be constrained by the psychological effects of watching trillions in margin-fueled paper gains vanish into thin air. 

    So yes, Mr. Sharma, we agree with your assessment – we only hope you realize how right you are and position your clients accordingly.

    //

  • What's Wrong With Our Monetary System (And How To Fix It)

    Submitted by Adrian Kuzminski via Club Orlov blog,

    Something's profoundly wrong with our global financial system. Pope Francis is only the latest to raise the alarm:

    “Human beings and nature must not be at the service of money. Let us say no to an economy of exclusion and inequality, where money rules, rather than service. That economy kills. That economy excludes. That economy destroys Mother Earth.”

    What the Pope calls “an economy of exclusion and inequality, where money rules” is widely evident. What is not so clear is how we got into this situation, and what to do about it.

    Most people take our monetary system for granted, and are shocked to learn that the government doesn't issue our money. Almost all of it is created by loans made “out of thin air” as bookkeeping entries by private banks. For this sleight-of-hand, they charge interest, making a tidy profit for doing essentially nothing. The currency printed by the government – coins and bills – is a negligible amount by comparison.

    The idea of giving private banks a monopoly over money creation goes back to seventeenth century England. The British government, in a Faustian bargain, agreed to allow a group of private bankers to assume the national debt as collateral for the issuance of loans, confident that the state would be able to service the debt on the backs of taxpayers.

    And so it has been ever since. Alexander Hamilton much admired this scheme, which he called “the English system,” and he and his successors were finally able to establish it in the United States, and subsequently most of the world.

    But money is too important to be left to the bankers. There is no good reason to give any private group a lucrative monopoly over the creation of money; money creation should be the public service most people mistakenly believe it to be. Further, privatized money creation allows a few large banks and financial institutions not only to profit by simply making bookkeeping entries, but to direct overall investment in the economy to their corporate cronies, not the public at large.

    Ordinary people can get the financing they need only on burdensome if not ruinous terms, leaving them as debt peons weighed down by mortgages, student loans, auto loans, credit card balances, etc. The interest payments extracted from these loans feed the private investment machine of Wall Street finance, represented by the ultimate creditor class: the notorious “one percenters.”

    There are two main critics of our privatized financial system: goldbugs and public banking advocates. The goldbugs would return us to a gold standard, making gold our currency. The problem is that it would become almost impossible to borrow money since the amount of gold which could be put into circulation is relatively miniscule and inelastic. They is no way easily to expand the supply of gold in the world

    Credit—the ability to borrow money—is vital to any economy. If we cannot borrow against the future for capital investment—roads and infrastructure, housing, businesses, hospitals, education, etc.—then we cannot fund essential services. To that end, we need an elastic money supply.

    Public banking advocates—like Stephen Zarlenga and Ellen Brown–appreciate the need for credit. Their aim is to transfer the monopoly on the creation of credit from private to public hands. Unfortunately, there is no guarantee that this form of "progressive" state finance would be any better than private finance.

    If we had a truly democratic government actually accountable to the public, such a system might work. But in fact governments in the United States and most developed countries are oligarchies controlled by special interests. A centralized public bank—without a political revolution–would likely favor government contractors and continue to squeeze borrowers for interest payments, now supposedly directed to “the public good.”

    This is curiously reminiscent of the system in the old Soviet Union and today's China, where a political nomenklatura ends up calling the shots and enriching itself. Our current system of centralized private finance, as well as the "progressive" proposal of centralized public finance, are no more than twin versions of top-down financial control by an elite.

    Fortunately, there is another model available. There is a long tradition in America, beginning with colonial resistance to “the English system,” and continuing with anti-federalists, Jeffersonians, Jacksonians, and post-Civil war populists. This tradition opposed any kind of centralized banking in favor of some kind of decentralized issuance of money.

    The idea they developed is to prohibit any kind of central bank—public or private—and instead have money issued exclusively locally on the basis of good collateral to individuals and businesses. It's a grassroots, ground-up approach. Priority is given to local citizens and businesses, who can get interest-free loans from local public credit banks to finance what they need to do.

    Such a system would have to be publicly regulated to ensure fair and uniform standards of lending at the local level. It would, in that sense, be a public banking system. The absence of a centralized issuing authority, however, would prevent any concentration of financial power, public or private.

    Any top-down system of financial control – private or public – presupposes some kind of control by elites, that is, some kind of central planning, whether in corporate board rooms or in the offices of government agencies, or some combination of both. The historical record suggests that such top-down decision-making is inevitably self-serving, distorted, and socially counter-productive.

    Indeed, whether public or private, it is the love of money empowered by centralized finance which creates the “economy of exclusion and inequality” which Pope Francis decries.

    The decentralized system of populist finance would operate with no central planning. Instead, countless local decisions about lending and credit-worthiness would function as a genuine “hidden hand” of finance, one which would be self-regulating. Here the love of money would find no way to leverage its power. Instead it would be dispersed among the general population, as it should be, without burdensome interest charges, to the benefit of all.

  • Crude Extends Gains After API Reports Large Drop In Inventories

    After a brief respite of 2 weeks of inventory builds, API just reported a major 7.3 million barrel inventory draw (far bigger than the 1.2mm barrel expected) and the biggest since July 2014…

     

     

    WTI Crude has jumped back above $53 on the news…

     

    Charts: Bloomberg

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