Today’s News 11th April 2016

• 28 Blank Pages: Washington’s Cover-Up Of The Saudi Role In The 9/11 Terrorist Attack Continues

  In light of today’s 60 Minutes segment, according to which classified “28 pages” may shed light on Saudi ties to terrorism, here is a an article which was originally posted in the December 2015 edition of Future of Freedom. More to follow tomorrow.

  28 Blank Pages: Washington’s Cover-Up Of The Saudi Role In The 9/11 Terrorist Attack Continues

  Do Americans have the right to learn whether a foreign government helped finance the 9/11 attacks? A growing number of congressmen and senators are demanding that a 28-page portion of a 2002 congressional report finally be declassified. The Obama administration appears to be resisting, and the stakes are huge. What is contained in those pages could radically change Americans’ perspective on the war on terror.

  The congressional Joint Inquiry Into Intelligence Community Activities Before and After the Terrorist Attacks of September 11, 2001, completed its investigation in December 2002. But the Bush administration stonewalled the release of the 838-page report until mid 2003 — after its invasion of Iraq was a fait accompli — and totally suppressed a key portion. Former U.S. Sen. Bob Graham (D-Fla.) chairman of the investigation, declared that “there is compelling evidence in the 28 pages that one or more foreign governments was involved in assisting some of the hijackers in their preparation for 9/11.” Graham later indicated that the Saudis were the guilty party. But disclosing Saudi links to 9/11 could have undermined efforts by some Bush administration officials to tie Iraqi leader Saddam Hussein to the 9/11 attacks.

  Almost everyone has forgotten how hard the Bush administration fought to torpedo that report. In April 2003, controversy raged on Capitol Hill over the Bush administration’s continuing efforts to suppress almost all of the report by the Joint Intelligence Committee investigation. Some intelligence officials even insisted on “reclassifying” as secret some of the information that had already been discussed in public hearings, such as the FBI Phoenix Memo. On May 13, Senator Graham accused the Bush administration of engaging in a “cover-up” and said that the report from the congressional investigation “has not been released because it is, frankly, embarrassing … embarrassing as to what happened before September 11th, but maybe even more so the fact that the lessons of September 11th are not being applied today to reduce the vulnerability of the American people.” Sen. Trent Lott (R-Miss.) complained that intelligence agencies sought to totally censor the report: “The initial thing that came back was absolutely an insult, and it would be laughable if it wasn’t so insulting, because they redacted half of what we had. A lot of it was to redact a word that revealed nothing.”

  When the report was finally released, Sen. Richard Shelby (R-Ala.) added an additional opinion in which he castigated “the FBI’s dismal recent history of disorganization and institutional incompetence in its national-security work.” The congressional report was far blunter than the subsequent 9/11 Commission. The congressional investigation concluded that the FBI’s “mixed record of attention contributed to the United States becoming, in effect, a sanctuary for radical terrorists.” But the Bush administration may have succeeded in stonewalling the most damaging revelations.

  Suppressing the 28 pages was intensely controversial at the time. Senator Shelby, the vice chairman of the joint inquiry, urged declassification of almost all of the 28 pages because “the American people are crying out to know more about who funds, aids, and abets terrorist activities in the world.” Forty-six senators, spearheaded by Sen. Chuck Schumer (D-N.Y.) and including almost all the Democratic members, signed a letter to President George W. Bush urging the release of the 28 pages.

  Bush, at a July 30, 2003 press conference, justified suppressing the 28 pages:

  We have an ongoing investigation about what may or may not have taken place prior to September the 11th. And therefore, it is important for us to hold this information close so that those who are being investigated aren’t alerted…. If we were to reveal the content of the document, 29 [sic] pages of a near-900-page report, it would reveal sources and methods. By that, I mean it would show people how we collect information and on whom we’re collecting information, which, in my judgment, and in the judgment of senior law-enforcement officials in my administration, would be harmful on the war against terror.

  And then he dangled a carrot: “Now, at some point in time, as we make progress on the investigation, and as a threat to our national security diminishes, perhaps we can put out the document. But in my judgment, now is not the time to do so.”

  Protecting incompetence

  The claim of secrecy is routinely a cloak for incompetence. As former Senator Graham said earlier this year, “Much of what passes for classification for national-security reasons is really classified because it would disclose incompetence. And since the people who are classifying are also often the subject of the materials, they have an institutional interest in avoiding exposure of their incompetence.”

  Rep. Walter Jones (R-N.C.) revived the push to declassify the pages in 2013. Jones is a conservative stalwart best known for coining the phrase “freedom fries” in 2003 when France opposed invading Iraq. He has since become one of the most outspoken opponents of reckless U.S. intervention abroad. He explained that he introduced a resolution because “the American people deserve the truth. Releasing these pages will enhance our national security, not harm it.”

  Jones further explained that “the information contained in the redacted pages is critical to our foreign policy moving forward and should thus be available to the American public. If the 9/11 hijackers had outside help — particularly from one or more foreign governments — the press and the public have a right to know what our government has or has not done to bring justice to all of the perpetrators.”

  Last May, Sen. Rand Paul (R-Ky.) fresh from a bracing filibuster against the renewal of the USA PATRIOT Act, joined the 28-page fight. He introduced the Transparency for the Families of 9/11 Victims and Survivors Act, co-sponsored by Sens. Ron Wyden (D-Ore.) and Kirsten Gillibrand (D-N.Y.). The suppressed pages are another wedge between Paul and other Republican presidential candidates: New Jersey Gov. Chris Christie rejects declassification, instead urging deference to the president’s judgment on the issue. A person attending a recent New Hampshire event asked Christie, “Don’t we have a right to know?” Christie replied, “That’s for the president of the United States to decide.… [The] question is: In his judgment and the judgment of the people in the national-security apparatus, do they believe there’s something in there that’s classified that would cause harm or danger to American interests?” But cravenness is never a good recipe for safety.

  Members of Congress can read the still-classified pages in a special secure room on Capitol Hill if they get prior permission from the House or Senate Intelligence Committee. Rep. Thomas Massie (R-Ky.),  one of the few members to read the report, was shocked: “I had to stop every couple of pages and just sort of absorb and try to rearrange my understanding of history for the past 13 years and the years leading up to that. It challenges you to rethink everything.” Massie is one of 18 co-sponsors of Jones’s resolution in the House.

  Too much trouble

  It is encouraging that the effort spearheaded by Congressman Jones has garnered support on Capitol Hill. But it is surprising that the 28-page disclosure campaign has not yet spurred far more members of Congress to read the document. Unfortunately, members of Congress were also grossly negligent when it came to the evidence to justify invading Iraq. In October 2002, prior to the vote on the congressional resolution to permit Bush to do as he pleased on Iraq, the CIA delivered a 92-page classified assessment of Iraq’s weapons of mass destruction to Capitol Hill. The classified CIA report raised far more doubts about the existence of Iraqi WMDs than did the five-page executive summary that all members of Congress received. The report was stored in two secure rooms — one each for the House and the Senate. Only six senators bothered to visit the room to look at the report, and only a “handful” of House members did the same, according to the Washington Post. Sen. John Rockefeller (D-W.Va.) explained that congressmen were too busy to read the report: “Everyone in the world wants to come to see you” in your office, and going to the secure room is “not easy to do.” Hundreds of thousands of Americans were sent 6,000 miles away to swelter for months in burning deserts because congressmen could not be bothered to walk across the street. Most congressmen had ample time to give saber-rattling speeches for war, but no time to sift the purported evidence for the invasion.

  Why is the Obama administration continuing to suppress a report completed more than a dozen years ago? It is not as if the White House’s credibility would be damaged by revelations of Saudi bankrolling the worst attack on American soil since Pearl Harbor (15 of the 19 hijackers were Saudis).

  And it is not as if the Saudis became squeaky-clean Boy Scouts after 9/11. Saudi sources are widely reported to be bankrolling Islamic State terrorists throughout the Middle East; Gen. Martin Dempsey, the chairman of the Joint Chiefs of Staff, told a Senate committee last September, “I know major Arab allies who fund [ISIS].”

  Barack Obama just ordered more U.S. troops to Iraq to seek to rebuff the ISIS onslaught. If the Saudis are helping sow fresh chaos in the Middle East, that is another reason to disclose their role in an attack that helped launch conflicts that have already cost thousands of American lives and more than $1.6 trillion, according to the Congressional Research Service.

  “Don’t confuse me with the facts” should be the motto of the war on terror. Self-government is an illusion if politicians can shroud the most important details driving federal policy. If Americans have learned anything since 9/11, it should be the folly of deferring to http://fff.org/explore-freedom/article/cover-damning-911-report-continues/Washington secrecy.

  

  

  

  

  

• China CPI Misses, Drops Sequentially As PPI Declines For 49 Consecutive Months

  There was some good and some bad news in tonight’s Chinese March inflation (and deflation in the case of PPI) data.

  The good news, for those who believe that rising inflation is a positive economic outcome, was that Producer Prices declined “only” 4.3% Y/Y, or less than the -4.6% exoected, and better than the -4.9% drop last month. On a sequential basis, PPI rose by 0.5% on the back of various commodity input prices posting a modest increase in the past month on the back of China’s epic January loan injection.

  However, putting that rebound in context, on an annual basis, Chinese gate inflation, or rather deflation, has now been negative for 49 consecutive months.

  

   

  The not so good news, was in the CPI print, which rose 2.3% Y/Y, missing expectations, and in line with last month’s identical increase. This tied headline inflation at a 22 month high, even as non-food inflation rose a paltry 1% in March.

  

   

  On a sequential basis, however, CPI dropped by 0.4% M/M, driven by a 0.1% decline in non-food inflation coupled with a much needed 1.8% drop in food inflation. As a reminder, in recent months Chinese food inflation has exploded driven by a 60% jump in pork prices which had risen to the point where the population was starting to grumble about the surging prices of this most popular protein in the mainland.

  Still, on a Y/Y basis, food inflation rose once more, increasing 7.6% Y/Y and remains the only stable component of inflation, hardly the “diet” for a stable, growing economy, in which consumers are forced to spend their discretionary income on staples instead of pushing up broader, core prices.

  

   

  The best news, however, since China’s inflation appears to have once again peaked, is that this means the media will be flooded with expectations of more stimulus from the PBOC in the form of either RRR or interest rate cuts, which in turn pushed the Shanghai Composite more than 1% higher and back over 3000 (which may  or may not be the result of more direct PBOC buying: as a reminder, as of last week we now know the Chinese central bank is directly buying bank stocks, breaking a core central banking taboo).

  Then again, whether the PBOC agrees with such an assessment, one which by definition will further weaken the Yuan which has become the Achilles heel of China’s “Impossible Trinity” remains to be seen.

  

  

  

  

  

• Obama Announces Unexpected Meeting With Yellen Following Tomorrow's "Expedited Procedures" Fed Meeting

  One of the more significant, if largely underreported events from last Friday, was the Fed’s surprising announcement that it would conduct a closed meeting tomorrow, April 11, at 11:30am “under expedited procedures” during which the Board of Governors will review and determine advance and discount rates charged by the Fed banks.

  

  This is notable because the last time such a meeting took place was on November 21, less then a month before the Fed’s historic first rate hike in years.

  Moments ago things got even more interesting, when in yet another unexpected announcement, the White House said that both Obama and Joe Biden would meet with Janet Yellen on Monday to discuss the economy and Wall Street reform, the White House said late on Sunday. The meeting is expected to take place some time “in the afternoon.”

  “In the afternoon, the president will meet with Federal Reserve Chair Janet Yellen to discuss the state of the American and global economy, Wall Street reform, and the long-term economic outlook; the vice president will also attend,” the statement said.

  According to Reuters, the president and the Fed chair meet regularly to discuss economic issues. Still, one can’t help but wonder what will be said in these two back to back meetings, both of which will be closed to the public.

  In the meantime, we are confident numerous Fed speakers will explain how the Fed may or may not raise rates in the immediate future, unless it of course, does not, all depending on data which the Fed no longer cares about.

  

  

  

  

  

• Austria Just Announced A 54% Haircut Of Senior Creditors In First "Bail In" Under New European Rules

  Just over a year ago, a black swan landed in the middle of Europe, when in what was then dubbed a “Spectacular Development” In Austria, the “bad bank” of failed Hypo Alpe Adria – the Heta Asset Resolution AG – itself went from good to bad, with its creditors forced into an involuntary “bail-in” following the “discovery” of a $8.5 billion capital hole in its balance sheet primarily related to ongoing deterioration in central and eastern European economies.

  Austria had previously nationalized Heta’s predecessor Hypo Alpe-Adria-Bank International six years ago after it nearly collapsed under the bad loans it ran up when it grew rapidly in the former Yugoslavia. Having burnt through €5.5 euros of taxpayers’ money to prop up Hypo Alpe, Finance Minister Hans Joerg Schelling ended support in March 2015, triggering the FMA’s takeover.

  This was the first official proposed “Bail-In” of creditors, one that took place before similar ad hoc balance sheet restructuring would take place in Greece and Portugal in the coming months. Or rather, it wasn’t a fully executed “Bail-In” for the reason that creditors fought it tooth and nail.

  And then today, following a decision by the Austrian Banking Regulator, the Finanzmarktaufsicht or Financial Market Authority, Austria officially became the first European country to use a new law under the framework imposed by Bank the European Recovery and Resolution Directive to share losses of a failed bank with senior creditors as it slashed the value of debt owed by Heta Asset Resolution AG.

  The highlights from the announcement:

  Today, the Austrian Financial Market Authority (FMA) in its function as the resolution authority pursuant to the Bank Recovery and Resolution Act (BaSAG – Bundesgesetz über die Sanierung und Abwicklung von Banken) has issued the key features for the further steps for the resolution of HETA ASSET RESOLUTION AG. The most significant measures are:

  • a 100% bail-in for all subordinated liabilities,
  • a 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities,
  • the cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG,
  • as well as a harmonisation of the maturities of all eligible liabilities to 31.12.2023.

  According to the current resolution plan for HETA, the wind-down process should be concluded by 2020, although the repayment of all claims as well as the legally binding conclusion of all currently outstanding legal disputes will realistically only be concluded by the end of 2023. Only at that point will it be possible to finally distribute the assets and to liquidate the company.

  As part of the announcement, Austria has cut Heta’s senior liabilities by 54 percent and extended the maturities of all eligible debt to Dec. 31, 2023 to help cover an 8 billion-euro ($9.1 billion) hole in Heta’s balance sheet. It also wiped out any residual equity and the junior liabilities as well as any supplementary capital. The Finanzmarktaufsicht took control of Heta last year in the first application of European Union rules designed to end taxpayer-funded bank rescues.

  “While the application of the new European recovery and resolution framework for banks is uncharted territory in both legal and practical terms, we are on target with the resolution of Heta,” the FMA’s co-chiefs, Helmut Ettl and Klaus Kumpfmueller, said in the statement. “Orderly resolution is more advantageous than insolvency proceedings.”

  As Bloomberg writes, dealing with failing banks remains a thorny issue in the EU more than seven years after the collapse of Lehman Brothers Holdings Inc. Rescues in Portugal, Greece and Italy carried out before new rules came into force in those countries prompted protests over unequal or arbitrary creditor treatment. The EU’s untested Bank Recovery and Resolution Directive, now in force across the 28-nation bloc, provides rules and tools, including the so-called bail in, to make sure creditors share the burden.

  Creditors were not happy, and Heta became a battleground of what the first BRRD implementation would look like. “At the heart of the issue is 11 billion euros of Heta’s debt that’s guaranteed by the province of Carinthia, which owned Heta’s predecessor until 2007. Those guarantees blunt the intent of the new rules because they mean the losses imposed on bondholders become a claim on Carinthia, which says it can’t pay them. Sunday’s haircut means the province faces claims of about 6.4 billion euros, the FMA said.”

  Carinthia’s attempt to neutralize the guarantees by buying up the bonds at a discount was rejected by bondholders led by Commerzbank AG and Pacific Investment Management Co. last month. The creditors, who say that Austria should pay up if Carinthia can’t, also sued in a German court, arguing the BRRD’s rules don’t apply to Heta.

  The announcement ushers in the next, and even more contentuous phase of creditor negotiations: after initially ruling out a second offer, Austrian officials this week smoothed the way for new negotiations to avoid years of litigation. Gaby Schaunig, Carinthia’s finance secretary, said she will review a recent creditor proposal and that “any out-of-court solution is better than the legal route.”

  According to Bloomberg, some of the creditors are planning to make an offer to Austria that would result in a payout of 92 cents on the euro, a person familiar with the bid said Saturday. It’s unclear how many creditors support the offer. On Tuesday, representatives for both sides will also meet in London for talks, according to a report in Der Standard. Many creditors have rejected any haircut as an option over concerns how such an example could impact their investments in comparably impaired financial companies. Others are more willing to negotiate.

  Some creditors had already challenged the FMA’s decision to apply European bank resolution rules to Heta. Answering the objections, the FMA said the wind-down remains “fully binding,” adding that creditors are now free to appeal to Austria’s federal administrative court:

  Challenges may be submitted to the FMA against the emergency administrative decision of 10.4.2016, which sets out the significant resolution actions under BaSAG, within three months. If applicable, the FMA will initiate ordinary administrative proceedings, will recognise and examine the submitted challenges and will then issue an administrative decision in relation to the challenge procedure.

  Changes, if any, to today’s decision will likely take years to pass through the Austrian court system. In the meantime, the precedent has been set and we expect many more banks to follow suit in “bailing in” their senior debt creditors, and ultimately – if there is not enough value to satisfy claims – depositors.

  

  

  

  

  

• "I Used To Be A Big Deal… And Then A Billion Dollars Walked Out The Door" – Hugh Hendry's Sad Story

  In a somewhat more manic-than-usual introduction to his 2016 macro outlook, Eclectica’s Hugh Hendry – the first of the big bears to throw in the towel and kiss the ring of central planners – admits that things did not turn out quite as he expected, noting “I used to be a big deal”, that “I had $1.5 billion in AUM” most of which “walked out the door”, and that “life is cruel.”

  While the entirety of his presentation is certainly worth watching, what specifically caught our attention were the occasional, and rather troubling, streams of consciousness during which we get a glimpse into Hendry’s current frame of mind and, frankly, we are a little concerned, because while we have no doubt in Hendry’s investing genius (even if he did decide to infamously flipflop in 2013 and many of his LPs decided not to stick with him), the content of what he says is just a little troubling.

  Some excerpts:

  This morning i ended up in an accident in emergency and I just to dispel any rumors that it involved having superglue on my hands or anything else embarrassing. But I’m back, I’m better, albeit my ear is a little bit ringing. And life is cruel, people keep getting younger. The Joseph Stiglitz interview was broadcast on British TV 6 years ago in 2010.

   

  As I say to my children, I used to be a big deal ago 6 years ago. I was at a party recently with some younger girls who represent some fund of funds in New York, I said “I am in global macro, I run Eclectica”… nothing. They had never heard of me. So if I may continue with the introduction, I feel actually now that I have to.

   

  My shrink says I’ve got to get over it, that I keep wishing to express my identity. My identity lies in a post-dated envelope which is going to come through my door in ten years time, and on that number is my compound growth rate. I am that silly person who somehow defines myself by performances… I have survived, I am like when you spill red wine on the carpet and you scrub it, and that stain just won’t come out, it’s difficult to get rid of me. I’ve been running a global macro fund for 14 years, now one of the longest running London global macro teams, and we have compounded at 8%. I wish it was 18%, I would still be on the beach if it was 18%. But with 8% comes a degree of accomplishment I believe, because that 8% has been accomplished with a set of return that just have not correlated with anything. I am eclectic.

   

  * * *

   

  For two years I didn’t take any risk. I had $1.5 billion in AUM. For me that’s a big number and I had clients who thought I was negative correlated to the stock market and they were fearful, Investors are fearful: it’s one of the most bullish things about stocks today apart from their profound underperformance to fixed income markets.

  On his intellectual metamorphosis from bear to bull:

  I had a Damascene conversion. I was one of those angry, curmudgeonly Austrian economists. I made over 30% in 2008, I won. My AUM halved. But then you had this QE and all those people who didn’t see it, who took the reckless bets, they all came back. We had a chance to kill the vampires and we missed the chance. Purge the system of its rottenness; we failed to do it. That’s how I lived; one should never be angry, it’s such a negative force and I got over that. I survived for 14 years because I was good at making mistakes.

  And then this:

  Back to my rant about central banks: they were right, I was wrong. The notion that QE has distorted the integrity of market prices is kinda right, but is kinda right in a benevolent manner because without the courageous intellectual decision by the American Federal Reserve to introduce QE shortly followed by the Bank of England, I think without a doubt we would have had another Great Depression. So QE has influenced the integrity of market pricing because it took away the very real risk of a depression. In that sense, equities are worth more.

  So without the “courageous intellectual decision” by the Fed to take away “tail risk” and thus eliminate one of the fundamental tenets of capitalism, namely “risk”, equities are worth more? Well, sure. The only question is what happens when the market finally sees through this massive, global experiment in central-planning, one which by definition means that every asset is overvalued. Indicatively we saw glimpses of that before the Shanghai Accord unleashed an unprecedented central bank re-stimulus attempt.

  But the saddest part is Hendry’s James Joyceian lament of how he lost virtually all of his AUM – it happened when he infamously flipflopped from bearish to bullish in 2013, a shift we profiled in “Hugh Hendry Throws In The Bearish Towel: His Full Must-Read Letter.”

  A funny thing happened at the end of 2013 I wrote a letter to my new clients and I began with the preface “what if I was to tell you that I’d become bullish on equities; is that something you’d be interested in.”

   

  The resounding message no. A billion dollars walked out the door. “What, really, you’re bullish?” This is cabaret maybe I should be in show business. Bullishness, optimstic, bearishness, there are adjectives that are very demeaning to the endeavor of global markets.

   

  In 2013 I was flat and I had one client who said “Gee, if only you had been down 15% I could give you more money, but this being flat, I feel uncomfortable.”

  At this point Hendry proceeds to lay out his returns, proudly noting that in 2014 he made 10%, in 2015 he made 6% (mostly on the back of China), and “this year we are flat” (according to the latest HSBC report as of March 31, as of March 31, Eclectica is down to -5.9%).

  He goes on: “I am not very good in the company of others; with the greatest of respect to bank credit analysts I’ve never had a call from a buddy at Goldman Sachs, JPMorgan, Morgan Stanley, so I am the author of my own mistakes, but I want to tell you I am very, very good at making mistakes.”

  We honestly hope this is not the latest one. 

  His sad story aside, we urge readers to watch the entire presentation below to see how an honest, in their own mind, transformation from crushed bear to just as crushed bull takes place, as well as Hugh’s quasi-contrarian view on what will happen to China next as well as to the Renminbi (he completely disagrees with the Kyle Bass view that a major devaluation is inevitable) which he says “is the key to the markets today”, something he also touch upon in “Hugh Hendry: “If China Devalues By 20% The World Is Over, Everything Hits A Wall.”

  Full presentation to Skagen

  

  

  

  

  

• This Vancouver Home Just Sold For More Than $1 Million Above The Asking Price

  Not a day passes without the Vancouver real estate market succeeding to amaze us all over again.

  Just over a month ago we were amazed to learn that, in confirmation of the local buying frenzy, the Vancouver home shown on the photo below sold for $735,000 above asking.

  

  As Vancity Buzz wrote, “The house at 3555 West 1st Avenue was built in 1912, is 3,400 square feet and sits on a standard 33 x 120 foot lot without a view. The selling price of $4.23 million is about $1.6 million above the lot’s assessed property value.”

  For his part, real estate agent Brandan Price is incredulous. “For it to go over $4 million is remarkable. I had five offers,” he said. “These were local buyers just looking to make a shift who wanted to move into this area.”

   

  “They were willing to sacrifice lot size to move into this area.” Maybe, but things seem to be getting out of hand and part of the “problem” may indeed be demand from investors attempting to find a home for capital they’ve moved out of China. As Thomas Davidoff with UBC’s Sauder School of Business told Vancity Buzz: “These prices are getting pretty freaking nuts in my opinion.”

  Which led us to observe that in Canada, an interesting paradox is visible. On the one hand, the country’s oil patch in Alberta is mired in a painful depression, where the worst 12 months for job losses in 34 years is contributing to rising property crime, higher food bank usage, and a rash of unsold condos and empty office space in Calgary.

  On the other hand, if simply looking at real estate in Vancouver and Ontario you’d think you were looking at home prices for an economy that is thriving. In fact, prices in Vancouver have reached nosebleed levels. In January for instance, the average selling price of detached homes was an astronomical $1.82 million.

  

  According to a recent report by Knight Frank, prime residential property prices in Vancouver increased by 25% in 2015 “due to lack of supply, foreign demand and weaker Canadian dollar.” But mostly foreign demand as Chinese buyers scramble to launder their money in this Canadian city.

  Vancouver’s soaring home prices posted nearly double the growth rate of the next few residential markets of Syndey (14.8% Y/Y), Shanghai (14.1%), Istanbul (13.0%) and Munich (12.0%).

  And while there has been some speculation the government may crackdown on this runaway home price inflation, this has yet to happen. In the meantime, the horror stories of Vancouver’s houing market persist.

  According to the National Post, another west side Vancouver home has sold for more than $1 million above the asking price. The Dunbar area bungalow was listed for $3.188 million and sold earlier this week for $4.19 million.

  

  SunThis Dunbar area house sold for $1 million over the asking price this week.

  This is the second time in just one month when a Vancouver home sells more than $1 million above asking. Just over a month ago, a Point Grey home with a view sold for $1.172 million more than the asking price. The sale price for the house on Bellevue Drive was more than $9 million and the new owner planned to rent it out then tear it down and rebuild in a couple of years, according to the realtor. The house had not been updated.

  

  SunThe house has a new roof, updated bathrooms and a gourmet kitchen.

  But the 71-year-old Dunbar house has been fully renovated, according to the MLS listing. It sits on a 44 by 122-foot lot and has a view from the back of the North Shore mountains. The house has a new roof, updated bathrooms and a gourmet kitchen as well as a one-bedroom basement suite.

  “Perfect for families,” says the listing. Or, “hold and build.” 

  

  SunThe bungalow was listed for $3.188 million and sold for $4.19 million

  University of B.C. real estate professor Tsur Somerville said the Dunbar home may have been listed low. “That is one third more than the asking price,” he said. “It looks a whole lot like a realtor playing games.”

  That or the panic buying frenzy is getting bigger by the day.

  Getting the right listing price for a property in Metro Vancouver’s overheated market is difficult, Somerville acknowledged.

  “Because prices are going up so rapidly, so out of control, it’s hard to know what the price is,” he said. “The rate of price increases is reaching hysteria levels. It’s not sustainable.”

  This is what is known as a bubble, and while everyone admits it, the frenzy goes on.

  

  SunThe house sits on a 44 by 122-foot lot and has a view from the back of the North Shore mountains.

  Homes sales in Metro Vancouver surpassed 5,000 last month, making it a record-breaking month according to statistics from the Real Estate Board of Greater Vancouver. The benchmark price for detached properties in the region increased 27.4 per cent to $1,342,500 in March 2016 compared to the same month last year.

  Something else everyone can agree on: the Vancouver housing bubble will eventually burst. The question is when, and how much longer will the government ignore this ridiculous surge in prices while pretending everything is perfectly normal. Naturally, when it does burst leading to a collapse in the local economy and crushed living standards for everyone, the excuse will be a well-known one: “nobody could have seen it coming.“

  

  

  

  

• CEO Keith Neumeyer: "There's Going To Be A Major Revolt If We See Negative Rates"

  Submitted by Mac Slabo of SHFTPlan.com

  CEO Keith Neumeyer Warns: “There’s Going To Be a Major Revolt… We’re Going To See Riots“
  

  With negative interest rates now the order of the day in much of the Western world, it’s only a matter of time before financial institutions start charging American depositors for the privilege of keeping their money safe in the U.S. banking system.

  And according to Keith Neumeyer in his latest interview with SGT Report, that could spell disaster for socio-economic stability. Neumeyer, who is the CEO of one of the world’s top primary silver producers First Majestic Silver and the Chairman of mineral bank firm First Mining Finance, says that should The Fed and government policy makers implement negative interest rates and continue on their current course of bailing out big business while impoverishing average Americans, we could well see riots in the streets.

  Negative interest rates are a way that governments are trying to tax the people… it’s going to start with big corporations that have a lot of cash sitting around in the banks and then it’s going to trickle down to the average person on the street… the people that get hurt are the small investor… the people that could least afford it…  the retired people that rely on their interest on their savings that they expected to have… this is all changing… the world is changing…

   

  I think there’s going to be a major revolt… If we actually do see negative interest rates in North America…  we’re going to see riots.

  The Fed has lost credibility. And that has left the average person on the street with an air of uncertainty and concern over the stability of the system.

  This, says Neumeyer, is why many investors, both large and small, have started turning to tangible assets as a safe haven.

  The Fed is losing credibility… there’s talk of negative interest rates… people are looking to gold now as a safe haven to be in as protection against these major forces that are occurring in the world.

  But it’s not just the retail investor that is terrified of the consequences of Fed policy.

  We’re seeing State mining companies go on an acquisition spree looking around the world for gold mines to buy. They are very bottom-up players… very long-term players… a lot of the people we’re talking to are actually looking to buy gold mines…

   

  Of course there’s the institutional investor and retail investor who wants to have the physical gold…

  Last year Neumeyer warned that a global reset is in the cards and urged investors to start positioning themselves for that eventuality.

  He also famously penned an open letter to the CFTC highlighting the rampant manipulation in the system in which he claimed that a small concentration of market players were attempting to control the price of silver through paper trading.

  But that manipulation will eventually become ineffective, he says, because industrial and retail demand for physical silver will overwhelm the paper markets:

  I’m a believer in the market. We go through phases where we have imperfections… and that’s one of the areas now that we have a price fixing mechanism that is very inefficient… it is very damaging to the miners… it’s damaging for investors who believe the metal should be at higher prices… so as long as the regulators allow the banks to sell unlimited amounts of silver and gold, I’m not sure if the system can ever be fixed on its own.

   

  What I think is going to happen is there will simply be a physical shortage of metal. We’re consuming more silver today than we ever have as a human race. The use of silver is climbing each year. We’ve seen production in 2015 drop from 2014 in silver. It looks like 2016 is going to be another year for lower silver production as well.

   

  Silver is a very rare metal and people don’t understand that. We’re currently mining on a global basis 10 ounces of silver for every 1 ounce of gold.

   

  That’s a shocking number. 

   

  We’re trading at 80-to-1 [silver-to-gold]. So how can you possibly trade at 80-to-1 and be mining at 10-to-1. That relationship cannot possibly last.

   

  … The regulators are sitting on their hands… the banks are making too much money… there’s no incentive to change the system… but it will be a supply squeeze that will eventually change the system.

  As SGT Report echos, there is no incentive for them to change the system except for the time when people actually do reach their boiling point and start to march in the streets because they’ve been thrown under the bus for much too long.

  And when those riots do start, just as Zero Hedge previously reported during the Greek riots, the price of physical precious metals versus the bank manipulated paper prices will skyrocket. In 2010 the price difference between the two was as high as 40% above the paper spot price as Greeks scrambled for real money in the midst of their country’s collapse.

  Things will be no different in America when a jobless, hungry, and marginalized majority takes to the streets. When that comes to pass we will see the real value of physical silver and gold emerge, and you can be almost certain that it will be significantly higher than the suppressed paper prices the banks want us to believe.

  

  

  

  

  

• Blackrock Turns Its Back On Japan Leaving Kuroda Scrambling

  Things are going from bad to worse for the efficacy of the grand – and failed from the beginning – experiment known as Abenomics. As Bloomberg reports, Larry Fink’s Blackrock has changed its stance on investing in Japan, and joins Citigroup, Credit Suisse, and LGT Capital Partners, the $50 billion asset manager based in Switzerland in their decision to head for the exits.

  Ironically, Blackrock’s decision comes only a few months after blogging about “The Case for Investing in Japan”, in which they explicitly cited increased demand for Japanese stocks.

  INCREASED DEMAND FOR JAPANESE STOCKS

   

  The BOJ and other large institutions have increased their investments in Japanese equities. Meanwhile, the recent successful Japan Post initial public offering has renewed domestic interest in equities and likely increased demand for Japanese equities by investors around the globe.

  This is the latest in a long list of setbacks for Japan in their quest to inflate consumer prices and their stock market. Foreign investors have been getting out of the market all year long, as concerns about the global economy and a strenthening yen continue to be at the forefront. So far they’ve dumped $46 billion in shares according to Bloomberg.

  

   

  Meanwhile, Japan is doing all it can (according to the Abenomics playbook). NIRP, Japan’s latest central bank tool form the proverbial “toolbox” has been fully implemented, with a negative 10Y bond auctioned just last month. So far it is not enough.

  It has also apparently done enough damage on the fixed income side to sway the worlds biggest state investor, their very own Government Pension Investment Fund, to move more into equities. However with other major players not wanting to be invested in Japan, the BoJ may very well have to increase their ETF holdings to roughly 100%.

  

   

  But most entertaining would be Peter Panic’s reaction. A photographer’s s rendering of Kuroda’s face upon hearing that even his most devoted supporters are now giving up on him would probably look like the change from this…

  

   

  … To this

  

  

  

  

  

  

• Japan Says G-20 Accord Barring FX Devaluations Does Not "Rule Out Intervention" In The Yen

  One of the biggest unconfirmed secrets of recent market action was whether or not there was a Shanghai Accord in February, in which the G20 and central bankers decided to push the dollar lower to benefit China at the expense of Japan and Europe, both of whom have suffered substantially in recent weeks as a result of their own currencies surging, pushing local stock markets lower (and sending European banks sliding).

  Earlier today, Japan’s government spokesman Suga came as close as possible to admitting that there was in fact a tacit “Shanghai Accord” agreement when he said that the Group of 20’s agreement to avoid competitive currency devaluation “does not mean Japan cannot intervene in response to one-sided currency moves.”

  It got better: in an interview with Reuters Suga added that Japanese Prime Minister Shinzo Abe’s comment to the Wall Street Journal last week that countries should avoid “arbitrary intervention,” was misunderstood and does not rule out intervention for Japan, Suga said.

  And yet it did rule out intervention until now? He clarified. “What the G20 is talking about is arbitrary intervention, which is different from responding to a one-sided move,” Suga told Reuters in an interview on Saturday.

  So arbitrary is not really arbitrary if as a result of other arbitrary devaluations the market decides to focus on Japan… which sound oddly like Obama defending Hillary and explaining how confidential is not confidential.

  As Reuters notes, some traders have said Japan cannot sell its own currency now, because the G20 warned countries in February to refrain from competitive devaluation. Suga, who coordinates other ministers in Abe’s cabinet, rejected this idea outright and said Abe’s remarks about arbitrary intervention in a Wall Street Journal interview last week were misunderstood.

  “The prime minister’s comments were based on the G20 understanding that long-term manipulation of currencies is undesirable.”

  As a reminder, the last time Japanese authorities intervened directly in the market was in 2011, when Tokyo got an explicit G7 consent to stem a yen spike driven by speculation that a devastating earthquake and nuclear disaster in March would force Japanese insurers to repatriate funds to pay claims.

  What is fascinating is how weak even Japan’s attempts at verbal intervention have become.

  The attempts at posturing continued:

  Suga also rejected the argument that the adoption of negative rates was a sign the BOJ’s attempts to meet its 2-percent price target had reached a limit.

   

  Abe is meeting foreign economists to prepare to host a summit of G7 finance ministers and central bank governors in May, where he will urge other countries to coordinate policies to accelerate global growth.

   

  “The prime minister strongly believes G7 should lead the global economy with sustainable growth,” Suga said.

  At this point Japan has become such a joke in trader circles, the nickname which we penned for Kuroda aka “Peter Panic”, appears to have stuck.

  Of course, there is a quick way to find out just how much leeway Japan actually has: if at the next BOJ meeting, one which have taken place after a tremendous surge in the Yen which is up over 10% YTD, Kuroda does nothing, then as expected all of the above will have been merely the latest bout of ridiculous posturing, and the Shanghai Accord indeed made it so that only the USD is allowed to weaken.

  Meanwhile, keep an eye on the USDJPY downside. As we reported last week, this is where various banks expect the BOJ will have no choice but to intervene:

  •     Bank of Singapore: 100
  •     BofAML: 105
  •     CBA: 100
  •     Daiwa Securities: 100
  •     JPMorgan: 95
  •     Julius Baer: 100-105
  •     Macquarie: 100
  •     Mitsubishi UFJ Morgan Stanley: 99
  •     NAB: 100
  •     Nomura: 105
  •     RBS: 105-110
  •     Societe Generale: 104
  •     Swissquote Bank: 100
  •     Westpac: 106.5

  Finally, here is SocGen chiming in on the matter with a note released this afternoon.

  We do not believe in a “secret” currency agreement reached at the February G20 meeting in Shanghai. We do, however, believe that the official statement places certain limitations of what policymakers can do with the sentence ”we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes”. Interestingly, Chief Cabinet Secretary Suga noted in a Reuters interview on Saturday that the G20 statement does not exclude intervention against “one-sided” currency moves.

   

  To our minds, intervention is likely to remain verbal for now given not only the poor track record of one sided intervention and the fact that politically the situation is challenging for Japan as it prepares to host the G7 summit in May. Japan last intervened unilaterally in October 2011; the impact proved short-lived and back then USD/JPY was below 80 when the intervention took place. The March 2011 intervention was more successful, but this one enjoyed the blessing of the G7 post the Fukushima disaster. Then too, USD/JPY was below 80 when the intervention began.

   

  Turning to the BoJ, the recent move in the yen has not changed our probability of 30% for additional easing. Our Chief Japan Economist, Takuji Aida, would increase this to 40% if USD/JPY breaks 105. The problem of effective BoJ tools remains, however. Given the poor public image of negative rates, PM Abe would be amongst those disappointed to see it used again and not least ahead of the Upper House elections in July.  

   

  More likely to our minds is that PM Abe will use the current situation to further build the case to delay the consumption tax hike (due next April) as part of a new fiscal package that we expect will be released in the course of May. Ironically, such a policy could be argued to favour further yen strength – at least in the short-term.

  Perhaps, although Abe has made it repeatedly clear that Japan’s sales tax will be raised to 10% from 8% in April 2017  unless there is a”barring a crisis like the one caused by the collapse of Lehman Brothers.“

  So Perhaps all Japan needs to send its Yen crashing again is another Lehman-like crisis? Surely that too can be arranged.

   

  

  

  

  

  

• Caught On Tape: U.S. Plane Allegedly Drops Weapons for ISIS Militants in Iraq

  One day after reprorting that British military information services Janes, had found confirmation of several shipments amounting to 3,000 tons of weapons and ammo to Al-Qaeda linked Syrian rebels in a transport solicitation on the U.S. government website FedBizOps.gov, today Veterans Today goes deeper into the rabbit hole and reports that several Iraqi policemen claim to have seen US aircraft dropping weapons and munitions for ISIS terrorists in a region west of the Anbar province on Friday.

  

  According to VT, in a video posted on Iraq’s al-Maaloomah news website on Sunday, the policemen are purportedly heard saying that the American plane had also jammed their communication devices in the Hadisah Island district.

  “There is an American aircraft seen at four o’clock in the morning on Friday over the Hadisah Island district of the Anbar province, delivering weapons and munitions to ISIS criminals,” one of the policemen says.

  “The plane proceeded to jam radar devices of the police regiment stationed in Hadisah Island to prevent contact between the affiliates and the headquarters of the regiment,” he added.

  

  The man said they had seen a military vehicle of ISIS arriving in the region a few minutes later and transferring the weapons to the place the group controlled.

  

  In the video, the man and his associates are heard appealing to Iraqi Prime Minister Haidar al-Abadi to follow up the issue.

  

  VT adds that the Iraqi army and the volunteer Hashd al-Shaabi forces liberated the district from ISIS terrorists just last month. The US may have different plans, however.

  

  Ironically, this took place just hours after US SecState John Kerry visited Baghdad on Frday, where he said ISIS was losing ground, including more than 40 percent of the territory that they once controlled in the country.

  President Barack Obama is reportedly weighing an increase in the number of American troops in Iraq but Kerry said there had been no formal request from the Iraqis and the issue had not been raised on Friday.

  Even more curiously, the Daily Beast reported last week that there are at least 12 U.S. generals in Iraq, “a stunningly high number for a war that, if you believe the White House talking points, doesn’t involve American troops in combat. And that number is, if anything, a conservative estimate, not taking into account the flag officers running the U.S. air war, the admirals helping wage the war from the sea, or their superiors back at the Pentagon.”

  For now any additional deployments are being kept under the curtain of fighting ISIS: the US, officials said, looked to “accelerate recent gains” against ISIS.

  Further to that, recall that as reported this morning, the US Air Force deployed B-52 bombers to Qatar, the first time they have been based in the Middle East since the end of the Persian Gulf War in 1991.

  “The B-52 demonstrates our continued resolve to apply persistent pressure on Daesh and defend the region in any future contingency,” said Charles Brown, commander of US Air Forces Central Command.

  Contingecy such as carpet bombing and paradropping supplies to unknown recipients?

  But back to the alleged US delivery of weapons for ISIS – it would not be the first time this has happened. In October 2014, ISIS released a new video in which it bragged it recovered weapons and supplies that the US military intended to deliver to Kurdish fighters in the Syrian city of Kobani.

  Some Iraqi MPs have also accused the US of deliberately arming ISIS, citing an arms air-drop case in Tikrit, but government officials have rejected it.

  In Syria, the US military has airdropped tons of ammunition to Al Qaeda-linked rebels and militants.

  If all this US weaponry is indeed ending up in Al Nusra and/or ISIS’ hands, it remains to be seen where just it will be used.

  

  

  

  

• Obama Defends Hillary In Email Scandal: "There's Classified And There's Classified"

  Following Hillary’s recent interview with Matt Lauer, in which she very boldly declared she’ll never be seen in handcuffs, none other than President Obama weighed in on the topic.

  In an interview with Chris Wallace, the President discussed his thoughts around Hillary Clinton’s email debacle.

  On this subject, Obama has gone from categorically denying any wrongdoing, to a slightly different tone. Be that as it may, the President wants the American public to feel fine about Hillary’s unsecured server and blackberry, because, well, he’s handled a lot of confidential information.

  And then he goes on to explain that “there’s classified, and there’s classified. There’s stuff that’s really top secret, top secret, and then there’s just stuff being presented to the President or Secretary of State.” 

  Another quote worth noting is how the President responded when Wallace asked him if he could direct the DOJ to ensure the investigation into Hillary Clinton will be handled based on fact, and it’s to to go where the evidence leads. That Hillary won’t be in any way protected.

  I can guarantee that. I guarantee that there is no political influence in any investigation conducted by the Justice Department. Full stop, period.

  So there we have it. As far as national security concerns around Hillary’s unsecured communications, don’t be alarmed because there’s classified, and then there’s classified. As far as whether or not justice will be served if it is determined that Hillary broke the law, everyone can also rest assured that the outcome of the FBI’s investigation will be solely based on evidence, and nothing more – just as the process is supposed to work.

  At this juncture, we’re still trying to wrap our minds around what the difference between classified and classified is, but it’s something Edward Snowden certainly wishes he knew about.

  If only I had known. https://t.co/yrPg8uxiQO

  — Edward Snowden (@Snowden) April 10, 2016

  We want to also quickly point out that the following comment from this interview came literally less than 24 hours after we learned the US is sending B-52 bombers in order to help fight against ISIS.

  I hear some candidates say we should carpet bomb innocent civilians, that is not a productive approach to defeating terrorism. Our approach has to be smart.
  

  You can view the full interview here

  

  

  

  

  

• Guest Post: The U.S. Dollar – Return Of The King?

  Submitted by $hane Obata

  USD: Return Of The King

  Falling oil prices, China growth fears, submerging markets, Brexit and Italian banks. All of those risks have one thing in common: They have not derailed the US economy. Despite concerns about a recession, it continues to grow at a steady pace. According to the Atlanta Fed, real GDP is expected to grow by 0.7% in Q1’16. That is not a great number; however, the series is extremely volatile.

  
  sources: Bloomberg, @Not_Jim_Cramer

  It would not be surprising to see growth rebound to 2% or more in the coming quarters.

  Global investors are counting on the US because of lackluster growth elsewhere. Europe is doing fine; however, deflation remains a concern and bank credit growth is turning down. Japan continues to fall in and out of recession. In the emerging world, the BRICs are crumbling. Brazil & Russia are suffering due to falling commodity prices while China continues to decelerate. Going forward, rate differentials, relative economic strength and divergent monetary policies should provide support for the USD.

  Sentiment & Positioning

  With all that said, as of Mar29’16, the net speculative long position in the USD was 7% of open interest, the lowest it has been since Q2’14. This indicates that speculators are the least bullish they have been in nearly two years.

  

  The US Dollar Index is sitting at 94.62, just above a critical support zone at 93-94. Meanwhile, the Trade-Weighted Dollar Index has pulled back ~3.4% from its high on Jan20’16. It is hard to tell that long USD is a consensus trade because investors have lost their conviction.

  FX, Rates & Monetary Policy

  USDCAD: Has fallen to 1.3011 from a high of 1.4692 on Jan20’16. This is a direct result of the relief rally in oil, which has risen to $36.79 from a low of $26.05 on Feb11’16. These moves have not been driven by improving fundamentals. Rather, they are mostly attributable to short covering.

  
  
  via @Ole_S_Hansen

  Rate differentials (see the following chart), relative economic strength and divergent monetary policies should support USDCAD in the near term. Also, it is unlikely that the bear market in commodities is over.

  
  sources: Bloomberg, @sobata416

  EURUSD & USDJPY: In Europe and Japan, easy monetary policy will be present for an extended period of time. The ECB and BOJ have made it clear that they will do “whatever it takes” to protect their countries from deflation. The ECB recently announced a set of new measures intended to support the Euro Zone. Equities have responded positively but the Euro has not. EURUSD is trading at 1.1389, up from a low of 1.0538 on Dec3’15. Japan is facing the same issue. Even though Japanese equities are up since oil bottomed on February 11^th, the Yen is the strongest it has been since Q4’14. It is unlikely EUR and JPY strength will persist for the same reasons mentioned in the previous paragraph.

  

  World Reserve Currency

  The USD is the most widely held reserve currency in the world. It represented 64% of official foreign exchange reserves at the end of Q3’15. Countries tend to hold Dollar-denominated assets because they are relatively stable. Foreign central banks also use the USD as collateral for loans and to protect their currencies. For example, if the ECB feels as though the EUR is too strong, it can sell Euros to buy Dollars, thereby reducing the amount of USD in circulation. In theory, this would weaken the Euro.

  The foreign exchange market also speaks to the structural importance of the USD. According to the BIS’ Triennial Central Bank Survey, “FX deals with the US Dollar on one side of the transaction represented 87% of all deals initiated in April 2013.”

  Lastly, it is important to recognize that many commodities are priced in USD. Therefore, people who want to buy or sell them are required to hold Dollars.

  These facts help to explain why demand for the USD will persist. It is still the world reserve currency and that will not change in the near future.

  Major Risks

  The two major risks to the USD are a dovish Fed and slowing US economic growth.

  The Fed is the world’s central bank. Even though both of its mandates are domestic, the Fed has become increasingly concerned about the global economy. This is evident when we look at the rising number of times the Fed has mentioned key terms such as “Global” and “Dollar” in recent meetings.

  

  A strong USD is good for US consumers and bad for commodities & exporters. The Fed is well aware of this relationship; however, it alone does not guarantee dovish monetary policy. Not long ago, market participants thought that 4 rate hikes in 2016 was a possibility. Now, it is unclear whether or not we will see 1. As of Mar29’16, the probability of a hike in December was just 65%. The market is positioned for easy US monetary policy. As such, positive surprises from the US or negative surprises out of Europe or Japan will force investors to reassess their outlooks. If that happens then the Fed may turn more hawkish, which would be positive for the US Dollar.

  2) Slowing US Growth

  The US economy continues to muddle along, backed by steady employment and consumption growth. The Eurozone is doing fine but most of its gains are attributable to Germany. Other major players such as France and Italy have not fared as well. Moreover, Japan continues to tread water. Canada has rebounded. That said, its economy is dependent on commodity prices, which may roll over in the short run.

  All in all, the US still looks good on a relative basis. Especially versus developed market peers.

  Return of the King

  Rate differentials, relative economic strength and divergent monetary policies should provide support for the USD. In addition, it will likely benefit from safe haven flows when global risks return to the headlines.

  If the Dollar resumes its uptrend then commodities will suffer.

  
  via @NickatFP

  Oversupply in many industries such as oil, iron ore and coal remains an issue. On the demand side, China’s deceleration is not helping. The emerging markets are inextricably linked to commodities. If prices fall then the EMs will underperform.

  There can only be one king.

  

  

  

  

  

• Stunning Video Reveals Why You Shouldn't Trust Anything You See On Television

  In recent years, many have voiced increasing concerns with their ability to place trust in official data, and have faith in conventional narratives.

  And for good reason: just yesterday a University of Chicago finance professor, while being interviewed at the Ambrosetti Forum, said that it is all about preserving confidence and trust in a “rigged game”: “if people are told enough by smart people on television that the economy has been fixed, and the market is a reflection of the fundamentals, then they’ll blindly support anything the Fed does.”

  But while the saying “don’t believe everything [or anything] you read” and “trust but verify” may be more appropriate now than ever, the following video is an absolute stunner in its revelation of just how deep “real-time” media deception can truly go.

  In a recently published paper by the Stanford lab of Matthias Niessner titled “Face2Face: Real-time Face Capture and Reenactment of RGB Videos“, the authors show how disturbingly easy it is to take a surrogate actor and, in real time using everyday available tools, reenact their face and create the illusion that someone else, notably someone famous or important, is speaking. Even more disturbing: one doesn’t need sophisticated equipment to create a “talking” clone – a commodity webcam and some software is all one needs to create the greatest of sensory manipulations.

  From the paper abstract:

  We present a novel approach for real-time facial reenactment of a monocular target video sequence (e.g., Youtube video). The source sequence is also a monocular video stream, captured live with a commodity webcam. Our goal is to animate the facial expressions of the target video by a source actor and re-render the manipulated output video in a photo-realistic fashion. To this end, we first address the under-constrained problem of facial identity recovery from monocular video by non-rigid model-based bundling. At run time, we track facial expressions of both source and target video using a dense photometric consistency measure. Reenactment is then achieved by fast and efficient deformation transfer between source and target. The mouth interior that best matches the re-targeted expression is retrieved from the target sequence and warped to produce an accurate fit. Finally, we convincingly re-render the synthesized target face on top of the corresponding video stream such that it seamlessly blends with the real-world illumination. We demonstrate our method in a live setup, where Youtube videos are reenacted in real time.

  In simple English: famous “talking heads” speaking, chatting, interacting on TV can be practically anyone masquerading as said celebrity, and due to the real time conversion, they can talk, react, answer questions and generally emote so that the deception is flawless and totally convincing.

  So striking is the real time effect of the conversion, the creators of this algorithm felt the need to clarify their intentions:

  This demo video is purely research-focused and we would like to clarify the goals and intent of our work. Our aim is to demonstrate the capabilities of modern computer vision and graphics technology, and convey it in an approachable and fun way. We want to emphasize that computer-generated videos have been part in feature-film movies for over 30 years. Virtually every high-end movie production contains a significant percentage of synthetically-generated content (from Lord of the Rings to Benjamin Button). These results are hard to distinguish from reality and it often goes unnoticed that the content is not real. The novelty and contribution of our work is that we can edit pre-recorded videos in real-time on a commodity PC. Please also note that our efforts include the detection of edits in video footage in order to verify a clip’s authenticity. For additional information, we refer to our project website (see above). Hopefully, you enjoyed watching our video, and we hope to provide a positive takeaway 🙂

  Sadly, while the creators of this stunning technology are forthcoming about their intentions, we doubt many others, those who seek to manipulate and deceive the mass population by ways of the one medium everyone can relate to, namely TV, will be.

  

   

  And to appreciate just how profoundly deceptive this technology can (and will) be for mass media manipulative purposes, watch the shocking 6 minute clip below.

  

  

  

  

• "It's Pure Chaos Now; There Is No Way Back" – Venezuela Morgues Are Overflowing

  When we previewed Venezuela’s upcoming hyperinflation, which in January was predicted to be 720% and as of this moment is likely far higher…

  

   

  … we said “This Is What The Death Of A Nation Looks Like” and said “there is no good news in any of the above for the long-suffering citizens of this “socialist paradise” which any minute now will be downgraded to its fair value of “socialist hell.“

  Subsequent news that Venezuela was now openly liquidating its gold reserves while its president, in an amusing twist, announced last week, that henceforth every Friday will be a holiday, (the term there was a slightly different meaning) to cut down on electricity usage (while blaming El Nino for its electricity rationing) merely confirmed that the end if nigh for this once flourishing Latin American nation.

  Sadly, while we have been warning for years about Venezuela’s inevitable, economic devastation, we said it was only a matter of time before the chaos spreads to broader society and leads to total collapse.

  That may have arrived because as even the FT now admits, after visiting the main Caracas morgue, Venezuela risks a descent into chaos.

  But back to the morgue of central Caracas, where FT correspondent Andres Schipani writes that the stench forces everyone to cover their nostrils. “Now things are worse than ever,” says Yuli Sánchez. “They kill people and no one is punished while families have to keep their pain to themselves.”

  Ms Sánchez’s 14-year-old nephew, Oliver, was shot five times by malandros, or thugs, while riding on the back of a friend’s motorcycle. His uncle, Luis Mejía, remarked that in a fortnight three members of their family had been shot, including two youths who were shot by police.

  Sounds a little like Chicago on a Friday… only in Venezuela things are even worse: “an economic, social and political crisis facing Nicolás Maduro, Venezuela’s unpopular president, is being aggravated by a rise in violence which is prompting fears that this oil-rich country risks becoming a failed state.”

  Even the morgue employees are asking if they should give up.

  “What can we do?” Mr Mejía asks. “Give up.” The morgue employee in charge of handling the corpses notes that a decade ago he received seven or eight bodies every weekend. These days, he says, that number has risen to between 40 and 50: “This is now wilder than the wild west.”

  Critics say that the Venezuelan government is increasingly unable to provide citizens with water, electricity, health or a functioning economy which can supply basic food staples or indispensable medicines, let alone personal safety.

  In other words, total socioeconomic collapse. This is what it looks like:

  Last month alone, Venezuelans learned of the summary execution of at least 17 gold miners supposedly by a mining Mafia, the killing of two police officers allegedly by a group of students who drove a bus into a barricade, and a hostage drama inside a prison at the hands of a grenade-wielding criminal gang. On Wednesday, three policemen were killed when an armed gang busted a member out of a lock-up in the capital.

   

  At least 10 were killed in a Caracas shanty town after a confrontation between local thugs armed with assault rifles, while a local mayor was gunned down outside his home in Trujillo state last month. There are widespread reports of lynchings.

   

  All this is creating a broad unease that Mr Maduro is unable to maintain order… There is a lack of basic goods. Analysts warn that the economic crisis risks turning in to a humanitarian one.

  Some refuse to acknowledge that a state erected on so much oil wealth can be a failed state:

  “Failed state is a nebulous concept often used too lightly. That’s not the case with today’s Venezuela,” says Moisés Naím a Venezuelan distinguished fellow at the Carnegie Endowment for International Peace. “The evidence of state failure is very concrete in the country that sits on top of the world’s largest oil reserves.”

  Alas, a failed state is precisely what Venezuela has become: Venezuela is already one of the world’s deadliest countries. The Venezuelan Observatory of Violence, a local think-tank, says the murder rate rose last year to 92 killings per 100,000 residents. The attorney-general cites a lower figure of 58 homicides per 100,000. This is up from 19 per 100,000 in 1998, before Maduro’s predecessor Hugo Chavez took power.

  It gets worse, because in addition to a soaring murder rate, the government itself is implicated.

  “Venezuelans are facing one of the highest murder rates in the hemisphere and urgently need effective protection from violent crime,” said José Miguel Vivanco HRW’s Americas director. “But in multiple raids throughout the country, the security forces themselves have allegedly committed serious abuses.”

  Their findings show that police and military raids in low-income and immigrant communities in Venezuela have led to widespread allegations of abuse, including extrajudicial killings, mass arbitrary detentions, maltreatment of detainees, forced evictions, the destruction of homes, and arbitrary deportations.

  And like all other failed governments, Maduro’s administration is quick to deflect blame, instead accusing violence within its borders on Colombian rightwing paramilitaries “engaged in a war against its revolution.” But as David Smilde and Hugo Pérez Hernáiz of the Washington Office on Latin America, a think-tank, recently wrote: “Attributing violence in Venezuela to paramilitary activity has been a common rhetorical move used by the government over the past year, effectively making a citizen security problem into a national security problem.”

  For many Venezuelans it no longer matters who is to blame. “It is a state policy of letting anarchy sink in,” says a former policeman outside the gates of a compound in Caracas.

  The FT adds that the former police station now houses the Frente 5 de Marzo, one of the political groups that consider themselves the keepers of socialism’s sacred flame. The gates bear the colours of the Venezuelan flag and are marked with bullet holes. The man believes there is something akin to a civil war going on.

  “Venezuela is pure chaos now. It seems to me there is no way back,” the former policeman says.  He is right.

  * * *

  And since words can not fully do a failed state justice, here is a video clip from Jeff Berwick showing the reality on the ground in the country where “socialism’s sacred flame” is about to go out for good.

  

  

  

  

  

• Italy Seeks "Last Resort" Bailout Fund To "Ringfence" Troubled Banks, Meeting Monday

  Submitted by Mike “Mish” Shedlock of Mishtalk

  Italy Seeks “Last Resort” Bailout Fund to “Ringfence” Troubled Banks, Meeting Monday; Italy vs. Austria

  Italy’s finance minister, Pier Carlo Padoan, wants to “ringfence” its troubled banks.

  Padoan called for a meeting of executive of the troubled banks in Rome on Monday. The banks allegedly will come up with a “Last Resort” bailout fund.

  Last resort or first resort, is there a difference at this point in time?

  Please consider Italy Pushes for Bank Rescue Fund. I highlight the key buzzwords and phrases italics.

  Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan.

   

  Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks, Monte dei Paschi di Siena, from contagion, according to people involved in the talks.

   

  Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. Lenders’ profitability has been hit by a crippling three-year recession.

   

  The plan being worked on, which could be officially announced as soon as Monday evening, recalls the Sareb bad bank created in 2012 by the Spanish government to deal with financial crisis in its smaller cajas banks, say people involved.

   

  Although the details remain under discussion, it foresees the establishment of a private vehicle that will include upwards of €5bn in equity contributions — mostly from Italy’s banks, insurers and asset managers — and then a larger debt component. The fund will then mop up shares in distressed lenders.

   

  A second vehicle will seek to buy non-performing loans at market prices.

   

  “It is a backstop fund,” said one person involved in the talks.

   

  The Italian government can provide only limited financial backing because of EU state aid rules and because it is already struggling under a public debt load that amounts to 132.5 per cent of GDP.

   

  People involved in the talks question whether the plan would have the financial scope to provide a buffer of last resort for Monte dei Paschi di Siena. Italy’s third-largest bank was the worst performer in the 2014 European stress tests, with about €170bn in assets and about €50bn in bad loans. It is considered by many bankers to be the major risk to Italian financial stability and regarded as too big to fail.

   

  “Monte Paschi is the elephant in the room,” says one of Italy’s top bankers.

   

  Monte Paschi is already trading at zero compared with its tangible equity value if its bad debt disposal is taken into account at current prices, says Johan De Mulder of Bernstein Research. By comparison, when Lehman Brothers collapsed in 2008 it was trading at about 20 per cent of its tangible equity.

   

  Berenberg analyst Eion Mullany argued that the “Italian banking sector is at a pivotal moment in its history”.

   

  “We worry that a bail-in of an Italian bank may cause a chain reaction with ripple effects felt across the European banking system,” Mr Mullany added, referring to the possibility of bondholders and depositors in Italian banks being forced to participate in a rescue.

  Key Buzzword and Phrases

  1. Last resort
  2. Ringfence
  3. €360bn pile of non-performing loans
  4. Sareb bad bank
  5. Equity contributions, mostly from Italy’s banks, insurers and asset managers
  6. Backstop fund
  7. Public debt load that amounts to 132.5 per cent of GDP
  8. Buffer of last resort
  9. €170bn in assets and about €50bn in bad loans
  10. Too big to fail
  11. Elephant in the room
  12. Trading at zero compared with its tangible equity
  13. Lehman Brothers
  14. Pivotal moment in its history
  15. Bail-in of an Italian bank may cause a chain reaction with ripple effects

  Those were the key buzzwords in order. Using those buzzword in the same order, let’s condense the article down to the essence with as few sentences as possible.

  Mish’s Concise Summation

  As a last resort to ringfence a massive €360bn pile of non-performing loans of Italian banks, Finance minister Pier Carlo Padoan has called for a meeting of minds in Rome on Monday. Padoan seeks a plan reminiscent of the Sareb bad bank structure in Spain, even though that plan blew up several times.

  The bad bank will require equity contributions, mostly from Italy’s banks, insurers and asset managers to build up a backstop fund. This approach is necessary because Italy has public debt load that amounts to 132.5 per cent of GDP in gross violation of Eurozone rules.

  The structure needs a buffer of last resort because Monte dei Paschi di Siena, Italy’s third-largest bank, has €170bn in assets and about €50bn in bad loans. Monte dei Paschi di Siena is regarded as too big to fail, a veritable elephant in the room, trading at zero compared with tangible equity. Lehman Brothers collapsed in 2008 it was trading at about 20 per cent of its tangible equity.

  This is a pivotal moment in history because a bail-in of an Italian bank may cause a chain reaction with ripple effects that will be felt across the European banking system.

  Comparisons

  I used 4 paragraphs, the Financial Times used 20. I threw in bonus buzz phrases “meeting of minds” and “blew up several times”.

  Italy is desperate to avoid the path Austria announced today, a 54% Haircut Of Senior Creditors In First “Bail In” Under New European Rules as commented on by Zerohedge.

  • 100% bail-in for all subordinated liabilities
  • 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities
  • Cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG
  • Harmonization of the maturities of all eligible liabilities to 31.12.2023

  In contrast, Italy is the “too big to fail”, “elephant in the room”. Should Italy try Austria’s solution, it presumably would cause a “chain reaction with ripple effects that would be felt across the European banking system.”

  Instead, officials will attempt to “ringfence” the problem, hoping to “sweep it under the rug” where presumably a “€360bn pile of non-performing loans” will cure itself, eliminating the need for additional bail-ins

  

  

  

  

  

• Barclays Warns "Grexit" May Return This Summer While Tsipras "Demonizes" IMF

  As we predicted last week when Wikileaks released an IMF transcript which suggested trubulent times may be ahead for Greece, Reuters today writes that “the leaking of a conference call of International Monetary Fund officials on Greece’s latest bailout review has further undermined mutual trust in fraught debt talks, embarrassed the European Commission and infuriated the IMF and Germany.”

  At stake are many things, not the least of which is the IMF’s reputation as a stern enforcer of financial rescue programmes meant to make indebted states viable and the European Union’s determination to hold the euro zone together and avert another damaging Greek crisis.

  And as Reuters adds, Greek Prime Minister Alexis Tsipras “exploited the leak at home to demonize the IMF, rally his left-wing Syriza party ahead of more painful sacrifices to secure the next slice of European loans, and try to put his conservative opponents in a corner.”

  However, his efforts to drive a wedge between the EU institutions and the IMF, and isolate IMF Europe director Paul Thomsen, a veteran of six years of acrimonious negotiations with Athens, fell flat. “Each time Tsipras is going to have to compromise, he needs to create an external enemy,” said George Pagoulatos, professor of European politics and economy at Athens University. “It’s part of his old populist playbook. It’s smart domestic politics even if it is dumb diplomacy.”

  

  Diplomatic pandering aside, Tsipras rebuke undercut months of patient efforts by Tsipras himself and Finance Minister Euclid Tsakalotos to rebuild lenders’ trust following last summer’s turbulent events which culminated with a bank run, capital controls and a banking system that relies on the ECB for its daily existence.

  As Reuters writes, it also shone a light on a complex, three-dimensional chess game the IMF is playing to try to make Greece accept painful reforms of pensions, taxation and bad loans while pressuring Germany and its allies to grant Athens substantial debt relief.

  “Put simply, the IMF’s position is that the Greek economy is in worse shape than rosy EU forecasts suggest, and that a necessary relaxation of fiscal targets must be balanced by greater debt relief from euro zone lenders.” 

  Because apparently it is news to someone that while Europe was pretending it was helping Greece (when it was merely making sure none of the bond held by the ECB were defaulted on), Greece was pretending to reform.

  Of course, since Greek reform in any measurable way is unachievable, there was the question of whether it makes sense to chop off some of the debt it can never repay, as a confirmation of what a great job Greece had been doing (or perhaps as impetus to force it to actually do something). By antagonizing the IMF – the only part of the Troika that was pushing for a haircut – that also is now off the table.

  Germany, the biggest creditor, is the most reluctant about major debt restructuring. Its parliament insists on a continued IMF presence to enforce budget savings and minimize the need for stretching out loans and freezing interest payments.

  “The bottom line is the debt will not be repaid in our lifetime,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington.

  Or ever.

  “The IMF is gearing up for new clients in the emerging economies. That is not best done by being soft on Greece. They won’t go to the (IMF) board to approve participation in a third Greek bailout without something they think is tough and credible,” he said.

  Brussels contends that both the economy and Greek compliance with the bailout programme are better than the IMF thinks, hence the first review should be concluded soon, allowing Athens to access the next 5 billion euros ($5.70 billion) of loans.

  Reuters conclusion: “How the three-way tug-of-war between the IMF, Greece and Berlin will play out remains uncertain. The sequencing will be tricky, but no side seems to have an interest in walking away.”

  Ironically, Greece finally has some true leverage over Germany as Merkel is more dependent now on Greece to act as Europe’s gatekeeper than she was during last year’s crisis over a possible “Grexit” from the euro zone. Berlin needs Athens’ cooperation to process and detain migrants and refugees until they can be send back to Turkey. If Greece really wants to flex its muscles, it will simply demand a debt haircut in exchange for keeping refugees within its borders.

  Then again, now that the Western Balkan route has been closed, with Austria now openly sending migrants back, Greece may have lost what little leverage it had…

  As for the IMF, it too does not want to abandon Greece as a black mark on its record. “Four of the five euro zone bailouts have gone pretty well – an 80 percent success rate. Yet if the IMF walks away from Greece now, everything they’ve done in Europe will be remembered as a failure,” said Kirkegaard.

  * * *

  Which brings us to point #2: also last week, we warned “it may be another turbulent summer in Europe” and on Thursday Barclays seems to have agreed with this assessment. This is what Francois Cabau said in a note titled “Greece – Back To The Fore” in which he says that we do not rule out the prospect of “Grexit” returning.

  Here are the highlights:

  We continue to think Greece has the potential to return to the headlines, and we do not rule out the prospect of “Grexit” returning. Our baseline remains that the current government will ultimately remain in power, managing to pass the creditors’ required reforms through Parliament.

   

  We nonetheless note the more fragile European political environment (Dutch referendum, UK’s EU referendum, likely snap elections in Spain, key elections in France and Germany in 2017) compared to previous episodes, and the possibility that the increased noise around Greece could potentially influence the UK referendum on EU membership. Furthermore, the ongoing migration crisis in which Greece plays a central role is exacerbating tensions at both domestic and European levels.

   

  Market-wise, we believe the escalation of the situation in Greece in conjunction with the UK referendum on EU membership could drive further peripheral spreads. On the FX front, Greece’s large projected repayments in June and July, which coincide with the impending UK EU Referendum, could result in heightened volatility and EUR depreciation as redenomination fears re-emerge, in our view.

  Here is an interesting tangent on the wildcard in this summer’s Greek events: “Migration”

  We believe that the migration crisis has entered Greece’s programme review through the back door. It is our belief that Greece has most likely looked to extend the talks and attempted to bargain with EU leaders on completing the programme review and achieving OSI, by exerting pressure given its crucial role on the migrant crisis, before the EU referendum takes place on 23 June in the UK. Now that the Western Balkan route is effectively closed to migrants, and that the EU has decided on an action plan (agreement with Turkey), we think Greece is likely to have less bargaining power than earlier this year; however, we still expect it to play a major role in addressing the crisis. Further delay in the programme negotiations has only been possible due to a relatively light repayment calendar (see below).

  Finally, the key timing choke point, which as always when dealing with Greece has to do with when the money runs out. The answer: late June.

  Looking ahead, IMF redemptions totalling €0.46bn are due to take place on 30 April, while ECB bonds of c.€50mn fall due on 11 April (a c.€2.171bn outstanding bond due on 24 April was issued purely to provide funding for Greek banks at the ECB and so should not be considered as part of funding needs, in our view). Thereafter, the next significant outflows are due in June and July with €750mn due to the IMF and then c.€2.3bn due to the ECB. Therefore, we think Greece is likely to be able to negotiate payments up until June (albeit narrowly and with likely recourse to allowing arrears to rise again). However, the July repayments appear more challenging should further ESM disbursements not be forthcoming.

  Will another “Greek summer” ruin the vacation plans for numerous bond trading algos? Find out in three short months.

  

  

  

  

  

  

• Did The Canary Of New York's Luxury Housing Market Just Die: Real Estate Developer Files For Bankruptcy

  We’re starting to see some concerning developments in the luxury real estate market. First, we observed as Urbancorp, one of Toronto’s largest property developers, quietly canceled a condo complex they had been working on, and instead converting the project into rental apartments. This was one of the first signs that demand for luxury real estate is declining. 

  And then early last week, some more troubling news was reported, when Urbancorp’s attorneys took the highly unusual step of severing their contract with the company. Not only that, but board member James Somerville announced he was quitting, just two weeks after he had been appointed, namely to provide expertise in accounting. 

  If that wasn’t bad enough, Haaretz reports that Canada’s Tarion Warranty Corporation said they would no longer issue insurance for deposits from buyers of Urbancorp properties. This means that those who put down payments on units being developed by Urbancorp are on their own if the firm stops the project and can’t pay them back. That also means that insurance companies are concerned about the developers’ ability to pay deposits back.

  

  Due to the fact that Urbancorp has yet to release its 2015 financials after its audit committee voted to delay due to “open issues and questions”, we’re eager to find out just what is happening behind the scenes.

  Urbancorp bonds traded on the Israeli Stock Exchange plummeted on all of the news, as creditors aren’t trying to stick around for the potential bankruptcy filing.

  

   

  Speaking of bankruptcy filings, we now learn courtesy of the Wall Street Journal, that the Bauhouse Group has filed bankruptcy for BH Sutton Mezz LLC, their entity that was to build out a 78 floor luxury condominium tower at Sutton Place, located on Manhattan’s Upper East Side.

  The Sutton Place tower’s sheer scale—with 78 floors it would reach far higher than surrounding buildings—and location in the middle of a narrow residential street not far from Billionaire’s Row, drew immediate backlash from the community.

  

  The bankruptcy comes on the heels of foreclosure efforts by Gamma Real Estate, who alleges that Bauhouse has defaulted on a loan of roughly $147 million.

  These are major developments in the luxury real estate market. As developers rode soaring prices and demand for the past few years, they have now clearly gotten ahead of themselves just as demand has pulled back. They’ve purchased properties they won’t be able to finish, and built developments that have created an overhang of inventory. 

  As we showed earlier this month, the demand for luxury real estate has shown signs of slowing. Although prices have soared, signed contracts (the underlying driver of the future pricing), has dropped 11% y/y.

  

  First Toronto, now Manhattan. The luxury real estate market is starting to crack, as we now await to see which city the weakness spreads to next.

  In the  meantime, you can expect to see more debt write off’s by lenders, more bankruptcies by developers, and ultimately, when it’s all said and done, luxury real estate prices falling back down to earth as the market figures out that the bubble has burst, and it is impossible to sell the glut of available units into a market where there are no buyers at current prices.

  As the Wall Street Journal summarizes: “this slowdown has made lenders extra cautious when considering high-end condominium projects, making it harder for less-established developers to get financing, said Adi Chugh, founder of Maverick Commercial Properties, an advisory service for lenders. People don’t want to lend on megaprojects and certainly not to sponsors who don’t have strong balance sheets or strong track records.”

  

  

  

  

  

• Japan Needs A Stronger Dollar, China Wants A Weaker Dollar: The Fed Can't Please Both

  Submitted by Charles Hugh Smith from Of Two Minds

  Japan Desperately Needs A Stronger Dollar, China Desperately Wants A Weaker Dollar: The Fed Can’t Please Both

  The FX market is about to blow up in the Fed’s face, and there’s nothing they can do about it.

  Foreign exchange (FX) is a zero-sum game: if one currency weakens, another must strengthen. Since the value of a currency is relative to other currencies, all currencies can’t weaken together: at least one currency must strengthen as others weaken.

  That one strengthening currency has been the U.S. dollar (USD) since mid-2014. The USD has strengthened by 20%, while the Japanese yen and the euro weakened by 20%. Many developing-economy currencies (rand, peso, real, etc.) have fallen off a cliff, suffering 40% to 50% (or even more) declines against the U.S. dollar.

  Why does any of this matter? Simply put, the stock market is a monkey on a leash held by central banks–just give the leash a little tug, and the monkey jumps. Bonds are a gorilla–harder to control, but still manageable–but foreign exchange is King Kong, trading $5 trillion a day and impossible to control beyond short-term manipulations.

  Currencies set the underlying trend, not just for bonds and stocks, but for entire economies. A weakening currency makes a nation’s exports cheaper in other countries, and the theory is that expanding exports will boost the overall economy–especially if that economy is stagnating or in recession.

  A weakening currency also makes imports more expensive in the domestic economy, pushing inflation higher–precisely what every central bank in the world desires, on the theory that inflation will make people spend more (since their money is losing value) and reduce the costs of borrowing (which is presumed to stimulate more borrowing and spending).

  This is why everybody seems to want a weaker currency. But as noted above, every currency can’t go down; if some weaken, others have to strengthen.

  Which brings us to the current brewing crisis: beneath the propaganda that all is well in the world, the soaring dollar has destabilized the global economy in subtle ways: carry trades have been thrown over, capital flows have reversed, commodities priced in dollars have tanked, and so on.

  The typical econo-pundit has welcomed the recent weakening of the USD, a reversal of the strong-USD trend:

  

   

  Japan sought to weaken the yen to boost its exports and inflation. Now the weakening dollar is crushing those plans, as the yen is soaring:

  

  As the yen soars, Japan is being pushed into a self-reinforcing recession. After 20+ years of borrowing to fund fiscal stimulus, money-printing, bond-buying, etc., Japan has run out of options. Weakening the yen was the last best hope to boost exports and inflation.

  The strengthening yen is an economic crisis for Japan.

  Meanwhile, the strengthening dollar pushed China into its own crisis. China’s currency, the renminbi (RMB, a.k.a. yuan), is a special case because its relative value is pegged to the USD by Chinese monetary authorities. The peg was about 9 to the USD in 2005, and in the following decade China pushed the yuan up to 6 to the dollar.

  A currency peg means the pegged currency goes up and down with the master currency. As the dollar soared, it dragged the yuan higher, making China’s exports more expensive. Given the stagnation of China’s debt-bubble dependent economy, the last thing chinese authorities wanted to see was a faltering export sector.

  As the USD rose, the pressure to devalue the yuan also rose. If you think your money is about to lose 20% of its value due to a devaluation, what can you do to protect your wealth? Get your cash out of the currency that’s being devalued and into a currency that’s strengthening.

  Just the possibility of a yuan devaluation has sparked an unprecedented capital flight of cash flooding out of China into USD and assets such as homes in British Columbia and chateaux in France. Capital flight is not a sign of a flourishing economy or evidence that the monied class trusts the currency or the economy.

  Recently, China has taken baby-steps to devalue the yuan: not enough to trigger global panic but more than enough to trigger capital flight and deep unease.

  

  As a result, China desperately wants a weaker dollar, as a weaker dollar will weaken the yuan and relieve the pressure on Chinese exports and demands for devaluation.

  Many savvy observers have concluded that the recent G20 meeting in Shanghai led to an informal accord to weaken the dollar to prop up the global economy’s shaky foundations–and most acutely, to relieve the pressure on China’s yuan, which threatened to destabilize the faltering global economy.

  But now the world faces the consequences of a weakening USD: a crisis triggered by a stronger yen. The USD has been yo-yoing in a trading range for a year, as the Federal Reserve has yo-yoed between hawkish declarations of rising rates (which make the USD more attractive and thus stronger) and dovish backtracking (we’re never going to raise rates), which then push the USD lower.

  No wonder the Fed is wobbling: it can’t please both Japan and China. If the dollar plummets, China is delighted but Japan is pushed into crisis. If the USD continues its march higher, Japan is “saved” but China will be forced to devalue the yuan or watch its export sector decline.

  As I often note, no nation or empire ever devalued its way to dominance or even prosperity. Rather, the devaluation of one’s currency is the kiss of death, as everyone quickly learns your money is a ball that can quickly lose air or go flat.

  Here’s my take: Japan has no options left. China, on the other hand, can devalue the yuan as the USD strengthens. Indeed, a very good case can be made that China should devalue the yuan, as a practical adjustment to new global realities.

  The Fed has a stark choice, and the 2-minute warning just sounded. It can break the informal Shanghai Accord to weaken the USD to save Japan from the slow-moving catastrophe of a soaring yen, or it can let the USD weaken further to placate China and the commodity-dependent economies.

  What it can’t do is please everybody. This is the evitable consequence of manipulating markets: you end up being unable to please anyone, because your constant manipulation has created unsustainable carry trades and speculative gambles.

  The FX market is about to blow up in the Fed’s face, and there’s nothing they can do about it. What central banks fear most are markets that are not tightly controlled by central banks. The world’s central banks are about to sit down to a banquet of consequences arising from seven long years of relentless manipulation.

  

  

  

  

  

• Hazlitt, 1946: Inflation, Deflation, Confusion

  By Mises.org, Originally printed in Newsweek on October 14th, 1946 as “Inflation, Deflation, Confusion.” Available in Business Tides: The Newsweek Era of Henry Hazlitt

  Hazlitt, 1946: Inflation, Deflation, Confusion

  In the last two years left-wingers have been fond of referring to private enterprise as a “boom-bust” economy; OPA officials have contended that only price fixing can prevent a repetition of the 1920–21 boom and collapse, and British statesmen have insisted that their new “democratic socialism” will work beautifully if only mercurial America doesn’t crack again and drag the rest of the world down with it. Small wonder that so many people now ask each other whether the recent slump in the stock market does not at last foreshadow this longpredicted business setback.

  The question is not easy to answer, because the American economy has now become the football of political policies and counterpolicies that are not inherent in it but essentially external. These conflicting political policies are on the one hand those tending to create inflation, and on the other those tending to bring about disruption.

  The inflationary forces are obvious, and until now have been controlling. Their primary causes are government deficit financing and other political policies that increase the volume of money and credit. Past inflationary forces are roughly measured by the increase in the national debt to $265,000,000,000 and of money and credit to more than three times the prewar volume. Potential future inflation is indicated by a still unbalanced budget in prospect (in spite of a balance in the first quarter of the current fiscal year), and by a policy of artificially low interest rates that promotes further increases in credit and further monetization of the public debt. As long as inflation raises prices faster than costs it stimulates business expansion, new ventures, and employment. 

  Against this, however, are equally powerful forces of disruption. The chief of them is price control, administered in a spirit hostile to profits and business. This has distorted relationships among profit margins and disrupted and unbalanced production. Builders find themselves with bricks and no doors, glass, or bathtubs. Automobiles wait on assembly lines for bumpers or batteries.

  The profit squeeze from the top meets another from the bottom. Endless strikes, interrupting output, are followed by endless wage increases. To encourage or compel such wage increases the Administration ignores elementary property rights, seizes coal mines, and signs wage-boosting contracts itself. These wage increases must ultimately either raise costs to the point where many firms can no longer operate, or force up prices to levels that will cut off buying. In either case they will slow down production and force unemployment. Add to all this a basic hostility to business on the part of Washington agencies which is reflected in countless harassments.

  Which of these two sets of forces will dominate the next six to twelve months—the inflationary or the depressive? That is impossible to say until we know the complexion of the next Congress and the main decisions that key political figures—President Truman, Secretaries Snyder, Byrnes, and Anderson, Paul Porter, Wilson Wyatt, Marriner Eccles, and members of the PDB, ICC, OWMR, NLRB and CPA—are going to make. The decisions of such men are incomparably more important today in determining the future course of business than the merely derivative decisions made by private businessmen.

  One thing we could not have simultaneously is both “inflation” and “deflation,” for we could not have simultaneously both an expansion and contraction of the money supply. But we could have a frustrated inflation. We could have simultaneously, as experience in Europe has already proved, both inflation and industrial disruption, inflation and unemployment, inflation and stagnation.

  The real danger we face in the next six to twelve months is that if the present combination of political policies brings about this result, Administration officials, instead of removing the throttling controls that cause it, may decide that the real trouble has been insufficient inflation, and may embark upon the disastrous policy of further increasing and debasing the money and credit supply. Our greatest enemy today, in short, is the economic illiteracy and confusion on the part of those who insist on “planning,” “stabilizing,” and straitjacketing the economy and who have the political power to do it.

  

  

  

  

  

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