Today’s News 12th February 2016

• Canada Sells Nearly Half Of All Its Gold Reserves

  By Monique Muise, as published on Global News

  Canada sells nearly half of all its gold reserves

  The government of Canada sold off nearly half its gold reserves in recent weeks, continuing a pattern of moving away from the precious metal as a government asset.

  According to the International Monetary Fund’s International Financial Statistics, Canada held three tonnes of gold reserves as of late 2015.

   

  The latest data, published last week, show the total Canadian gold reserves now stand at 1.7 tonnes. That’s just 0.1 per cent of the country’s total reserves, which also include foreign currency deposits and bonds. In comparison, the U.S. holds 8,133 tonnes of gold, while the United Kingdom weighs in at 310 tonnes.

  The decision to sell came from Finance Minister Bill Morneau’s office.

  “Canada’s gold reserves belong to the Government of Canada, and are held under the name of the Minister of Finance,” explained a spokesperson for the Bank of Canada on Wednesday. “Decisions relative to gold holdings are taken by the Minister of Finance.”

  Reached by Global News on Wednesday evening, a spokesperson for the finance department said the sale “was done in the normal course of business for the government. The decision to sell the gold was not tied to a specific gold price, and sales are being conducted over a long period and in a controlled manner.”

  This latest sell-off is indeed part of a much longer-term pattern of moving away from gold as a government-held asset. According to economist Ian Lee of the Sprott School of Business at Carleton University, Ottawa has no real reason to keep its gold reserves other than adhering to tradition.

  “Under the old system, (gold) backed up currencies,” Lee explained. “The U.S. dollar was tied to gold. One ounce was worth US$35. Then in 1971, for lots of reasons I won’t get into, Richard Nixon took the United States off the gold standard.”

  Gold and dollars were interchangeable until that point, he said, but in the modern financial world, the metal is no longer considered a form of currency.

  “It is a precious metal, like silver … they can be sold like any asset.”

  The amount of gold the Canadian government holds has therefore been falling steadily since the mid-1960s, when over 1,000 tonnes were kept tucked away. Half of those reserves were sold by 1985, and then almost all the rest were sold through the 1990s up to 2002.

  By last year, Canada’s reserves were down to just three tonnes, and the latest sales have now halved that. At the current market rate, the value of 1.7 tonnes of gold comes in at just under CAD$100 million, barely a drop in the bucket when you consider the broader scope of federal finances.

  According to Lee, there may soon come a time when Canada’s gold reserves are entirely a thing of the past. There are better assets to focus on, he argued, calling the government’s decision to dump gold “wise and astute.”

  “It gives them more strategic flexibility to sell the gold, take the money and invest in U.S. government bonds, or United Kingdom bonds or French bonds or German bonds,” Lee said.

  “Central banks can hold the government bonds of other countries, and they also hold actual dollars. The Chinese Central Bank actually holds hundreds of billions of U.S. dollars. Dollars are very liquid, so are government bonds, especially of a Western country.”

  

  

  

  

  

  

• If Credit Is Right, The S&P Is Facing A 40% Crash

  …and credit is always right in the end!

  1,100 is the target…

  

   

  High Yield bond yields and Leveraged Loan prices are at their worst since 2009 as it seems the hosepipe of QE3 liquidity (its the flow not the stock, stupid) is slowly unwound from a buybacks-are-over equity market.

  

  

  

  

  

• Liberty Activists And ISIS Will Soon Be Treated As Identical Threats

  Submitted by Brandon Smith via Alt-Market.com,

  Many of us saw it coming a long time ago — increasing confrontation between liberty proponents and the corrupt federal establishment leading to increasing calls by political elites and bureaucrats to apply to American citizens the terrorism countermeasures designed for foreign combatants. It was only a matter of time and timing.

  My stance has always been that the elites would wait until there was ample social and political distraction; a fog of fear allowing them to move more aggressively against anti-globalists. We are not quite there yet, but the ground is clearly being prepared.

  Economic uncertainty looms large over our fiscal structure today, more so even than in 2008. Global instability is rampant, with Europe at the forefront as mass migrations of “refugees” invade wholesale. At best, most of them intend to leach off of the EU’s already failing socialist welfare structure while refusing to integrate or respect western social principles. At worst, a percentage of these migrants are members of ISIS with the goals of infiltration, disruption and coordinated destruction.

  With similar immigration and transplantation measures being applied to the U.S. on a smaller scale (for now) the ISIS plague will inevitably hit our shores in a manner that will undoubtedly strike panic in the masses. I believe 2016 will be dubbed the “year of the terrorist,” and ISIS will not be the only “terrorists” in the spotlight.

  While scanning the pages of mainstream propaganda machines like Reuters, I came across this little gem of an article, which outlines plans by the U.S. Justice Department to apply existing enemy combatant laws used against ISIS terrorists and their supporters to “domestic extremists,” specifically mentioning the Bundy takeover of the federal refuge in Burns, Oregon as an example.

  “Extremist groups motivated by a range of U.S.-born philosophies present a “clear and present danger,” John Carlin, the Justice Department’s chief of national security, told Reuters in an interview. “Based on recent reports and the cases we are seeing, it seems like we’re in a heightened environment.”

  “Clear and present danger” is a vital phrase implemented in this statement from Carlin and he used it quite deliberately. It refers to something called the “clear and present danger doctrine or test,” a doctrine rarely used except during times of mass panic, such as during WWI and WWII. The doctrine applies specifically to the removal of 1st Amendment rights of free speech during moments of “distress.”

  What does this mean, exactly? “Clear and present danger” is a legal mechanism by which the government claims the right not only to prosecute or destroy enemies of the state, but also anyone who publicly supports those same enemies through speech or writing.

  Recently, the prospect of allowing the Federal Communications Commission to target and shut down websites related to ISIS has been fielded by congressional representatives. Many people have warned against this as setting a dangerous precedent by which the government could be given free license to censor and silence ANY websites they deem “harmful” to the public good, even those not tied to ISIS in any way.

  Of course, overt hatred of Islamic extremism amongst conservatives is at Defcon 1 right now, and with good reason. Unfortunately, this may lead constitutional conservatives, the most stalwart proponents of free speech, to mistakenly set the stage for the erasure of free speech rights all in the name of stopping ISIS activity. The greatest proponents of constitutional liberties could very well become the greatest enemies of constitutional liberties if they fall for the ploy set up by the establishment.

  The Reuters article outlines the future implications quite plainly:

  The U.S. State Department designates international terrorist organizations to which it is illegal to provide “material support.” No domestic groups have that designation, helping to create a disparity in charges faced by international extremist suspects compared to domestic ones.

  It has been applied in 58 of the government’s 79 Islamic State cases since 2014 against defendants who engaged in a wide range of activity, from traveling to Syria to fight alongside Islamic State to raising money for a friend who wished to do so.

  Prosecutors can bring “material support” terrorism charges against defendants who aren’t linked to groups on the State Department’s list, but they have only done so twice against non-jihadist suspects since the law was enacted in 1994. The law, which prohibits supporting people who have been deemed to be terrorists by their actions, carries a maximum sentence of 15 years in prison.”

  The Justice Department goes on to explain that they are “exploring” options to make “material support” charges more applicable to “domestic extremists.”

  So what constitutes “material support?” Well, as mentioned earlier, John Carlin just told us. His use of the phrase “clear and present danger” denotes that 1^st Amendment speech will be restricted, ostensibly because some speech will be labeled “material support” of terrorist organizations. The liberty movement, likely in the near future, is about to be outwardly defined by the establishment as a terrorist movement, and those who support it through speech will be designated as material supporters of said terrorism.

  To be utterly clear, this could apply to any and everyone who promotes anti-government sentiments online, and will likely be aimed more prominently at liberty analysts and journalists. The argument for this move is rather humorous in my view — bureaucrats and others complain that it is “not fair” that Islamic terrorists are being treated more harshly than “white rural domestic extremists” and that material support laws should be enforced against everyone equally.

  Yes, that’s right, the 1^st Amendment is under threat because the Justice Department does not want to appear “racist.” At least, that is their public excuse…

  I'm not sure whether it is depressing or hilariously ironic that the U.S. government (along with many other governments) is preparing the groundwork for prosecution of liberty activists for material support of terrorism when it is the government that has been proven time and again to be by far the most generous material supporter of terrorist organizations.

  Will this all take place in a vacuum? Of course not. Something terrible is brewing. Another Oklahoma City-stye bombing, perhaps. Or a standoff gone horribly awry. The standoff in Oregon continues without Ammon Bundy and is about to get worse in the next week according to my information (you will see what I mean). The point is, the narrative is being finalized in preparation for whatever trigger events may be in store, and that narrative closely associates ISIS with liberty activists as being in the same category.

  “As law enforcement experts confront domestic militia groups, “sovereign citizens” who do not recognize government authority, and other anti-government extremists, they also face a heightened threat from Islamic extremists like the couple who carried out the Dec. 2 shootings in San Bernardino, California.”

  This is why I have consistently argued against giving any extra-judicial powers to our already bloated federal system. I am a staunch opponent of Islamic immigration and terrorism, but some people are so desperate to fight one monster that they are willing to give unlimited powers to another monster thinking it will give their minds ease. These people are fools, and they are putting the rest of us at risk.

  If you want to fight ISIS, then fight them yourself. Do not give the same government that helped create ISIS and then deliberately transplanted them to Europe and the U.S. even more legal authority over our lives to supposedly “stop” ISIS. This would be absurd.

  In the meantime, I would point out that regardless of how the federal government wishes to label us, the liberty movement could not be more different from the Islamic State:

  1) We don’t enjoy covert funding and training from the government at large as ISIS does. (Though according to leftists, we all take our marching orders from the Koch Brothers).

   

  2) Most of us were born in this country and are rather attached to it.

   

  3) ISIS fights to dismantle traditional Western values. We fight to restore traditional Western values, and we will not only fight ISIS but also cultural Marxists and collectivists who share the same disdain for liberty.

   

  4) Many of us are far better trained than ISIS goons, so if anything, we are a more severe threat to the enemies of free society. (We actually look down our sights when we shoot rather than hiding behind cars with the rifle over our head and squatting like a constipated dog. We can also operate their AK-47s better than they can).

   

  5) We are as opposed to Sharia Law as we are to martial law. In fact, we see them as essentially the same unacceptable circumstance.

   

  6) We don’t cannibalize our enemies. (Who would want to take a bite out of Henry Kissinger’s spleen?)

   

  7) We might look down on the insane ramblings of today’s feminists, but at least we would not stone them, enforce female circumcision, then rape them, then throw acid in their faces, then slap a hijab on them and take away their driver’s licenses. So maybe, just maybe, we toxic masculine conservative barbarians aren’t as bad as they seem to think we are.

   

  8) We understand that black pajamas are not the best camouflage, but ISIS may have better fashion sense than we do.

   

  9) Our beards are all-American. Their beards are just plain creepy.

   

  10) They fight to be martyred. We fight to win.

  When all is said and done, who is the greater threat to you and your freedoms? A psychotic theocrat that has taken his religion so far into the forbidden zone that any evil, no matter how heinous, is justified through the circular logic of zealotry? The criminal government that funded that psycho, trained him, slapped a rocket launcher in his hands and then gave him a free plane ride to your favorite shopping mall? Or, some weirdo that stores lots of food and gas masks in his basement and every once in a while talks to you about 9/11? Come on, think about it…

  

  

  

  

  

• This Is What Central Bank Failure Looks Like (Part 4)

  First, it was The BoJ's utter collapse from omnipotence to impotence. Then came the collapse of The Fed's credibility in the short-term…. and the longer-term. And now it is the turn of Mario Draghi's ECB to face total failure, as the European banking system – the prime beneficiary of "whatever it takes" – has crashed back to pre-Draghi levels.

   

  

   

  As former Morgan Stanley guru Gerard Minack explains, the most corrosive factor for markets currently is the downgrading of perceived central bank potency.

  There are several recent hints of this decline.

   

  Mario Draghi’s ‘whatever it takes’ comment in 2012 was, in my view, the single most important central bank action of the past 5 years.  However, European bank stocks – a principal beneficiary of ‘whatever it takes’ – have now almost given up all their ‘whatever it takes’ gains, despite recent ‘whatever it takes with steroids’ comments from Mr. Draghi.

   

  Likewise, the Bank of Japan’s bazooka now seems to be firing blanks.  The yen strengthened and equities fell after the cash rate was cut below zero – the opposite of what was presumably expected.

   

  Second, the central bank bubble seems to be deflating.   Central banks have long been over-rated in my view; markets seem to be starting to agree.

  The equity sell-down is changing: it had been led by economically-sensitive sectors but is now shifting to financial risk ….financial stress is not good for growth.

  Some further clarifications from Bloomberg:

  Financial markets are signaling that investors have lost faith in central banks’ ability to support the global economy.

  And some more:

  "The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “It’s a reasonable question to ask given the events of the last few weeks.”

   

  “The notion that central banks and regulators could not act if the financial panic were to turn into a serious threat to the real economy and hence to jobs looks wrong,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Central banks can bolster confidence if they really have to in order to support the real economy.”

   

  "The period of central bank ‘shock and awe’ operations is likely to be behind us," Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist, wrote in a note on Friday. "This will be the year that ‘gravity’ will overwhelm the central bank policies," he said, recommending selling equities during rallies.

  

  

  

  

  

• JPM's Kolanovic Warns Upcoming Recession Could Be Comparable To 2008 Crisis; Says "Buy Gold, Cash And VIX"

  By now all of our readers should be familiar with JPM’s head quant Marko Kolanovic whose unblemished track record of accurate market calls is not only second to none, but is the equivalent in absolute value terms of Dennis Gartman’s consistently wrong calls, which is why we won’t spend time introducing him.

  Instead we cut right to the chase with the highlights of his latest note released moments before the market close today, in which he lays out the biggest risks to the market, which are as follows:

  • deterioration of sentiment and fundamental selling (hedge funds, pensions, wealth funds, retail, etc.).
  • deleveraging of Equity Long-Short hedge funds is an overhang
  • quant funds may pare gross leverage.
  • increased volatility, deleveraging, rotation out of momentum, and weak sentiment will continue to be a headwind

  Kolanovic then explains how to hedge against this ongoing storm (“increased allocation to gold, cash and VIX”), with the section on gold particularly delightful for his crucifixion of the strawman created by the most famous Obama tax advisor and crony capitalist from Omaha:

  The arguments against gold that we have heard were along two lines: The first is what can be loosely called “Warren Buffet’s” argument: “Gold is a relic of past; aliens visiting earth would be puzzled why people hold it at all.” As the argument is non-quantitative in nature, one can only address it as such. If indeed aliens could overcome space-time barriers, they would also know that the metal was used as a store of value longer than any other real asset. Since the beginning of written history, countless currencies and governments emerged and failed while gold kept approximately the same purchasing power (albeit with some volatility, and positive correlation to levels of risk).

  All we can say here is that when JPM employees viciously attack Buffett for his position on gold, hold on tight.

  Kolanovic also crushes Wall Street’s penguin momentum train:

  The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor).

  More apropos to the current global bear market and economic slowdown, is Kolanovic’ warning that a recession as a result of the market’s loss of trillions in market cap now seems inevitable:

  Global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.

  Finally, to our applause, Kolanovic concludes by slamming ole’ crony uncle Warren one final time (no point in wasting too much time on the senile billionaire).

  Finally, we think the aliens from the previous section would likely be surprised: not with the gold price, but with markets and an economy that are driven by a handful of central bankers taking active market views.

  The aliens would quickly understand, however, when they realize they are dealing with a banana planet in which the central bankers only serve a handful of billionaire oligarchs, while leaving billions of people to fend for themselves.

  * * *

  Kolanovic’s full note:

  EQUITIES: Exposure of systematic strategies (CTA, Risk Parity, Vol Targeting) to equities is relative low, which reduces some downside tail risk for the S&P 500. Currently, the main risk comes from deterioration of sentiment and fundamental selling (hedge funds, pensions, wealth funds, retail, etc.). Deleveraging of Equity Long-Short hedge funds is an overhang as well, given the poor performance YTD (see, for example, HFRXEH index). Quant funds took a significant hit with the momentum sell-off during the first week of February (see HFRXEMN index) and may pare gross leverage. A market-neutral portfolio of Momentum stocks declined ~6% in the first week of February and has been recovering slightly over the last two days. Increased volatility, deleveraging, rotation out of momentum, and weak sentiment will continue to be a headwind for the S&P 500 in coming days.
   
  GOLD: Since the end of last year, we have been advocating increased allocation to gold, cash and VIX. Specifically on gold, we have argued that it would benefit from the main market concern, which is the rising risk of a global recession, as well as potential mitigation of these risks: the Fed turning more dovish and a weaker dollar removing pressure from emerging markets and the commodities sector. In an unlikely tail scenario that we see as a temporary loss of confidence in central banks, gold would likely benefit as well. The arguments against gold that we have heard were along two lines: The first is what can be loosely called “Warren Buffet’s” argument: “Gold is a relic of past; aliens visiting earth would be puzzled why people hold it at all.” As the argument is non-quantitative in nature, one can only address it as such. If indeed aliens could overcome space-time barriers, they would also know that the metal was used as a store of value longer than any other real asset. Since the beginning of written history, countless currencies and governments emerged and failed while gold kept approximately the same purchasing power (albeit with some volatility, and positive correlation to levels of risk).

  The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor). We have written on market turning points from a theoretical perspective, as well as in the context of recent market moves, specifically in terms of positioning, gold CTA signal turning positive, etc. For a further rationale behind the gold thesis, see notes from our Metals strategist (here and here). 
   
  CENTRAL BANKS AND OIL: Central banks outside of the US have been trying to push on a string recently with negative rates. It has not produced desired results (e.g., a sell-off in the banking sector). Our view is that over the past 18 months, the Fed has been too concerned with the risk of inflation, and perhaps too little with global deflationary pressures and a crisis outside of the US. This has contributed to a rapid strengthening of the USD and put additional pressure on Emerging Markets and certain segments of the US economy. As a result global markets are now facing a significant ‘negative wealth effect’ that has a potential to result in a recession. This negative wealth effect of low commodity prices and a strong USD combined with the slowdown in China could be comparable to that of the 2008/2009 crisis (it involves diverse effects ranging from layoffs in the Global Energy sector to a lack of EM Sovereign wealth flowing into developed market equity hedge funds). While the economists were debating if the low-priced oil is good or bad for the economy, the equity markets never had any doubts – Oil and Equities were moving down together.
   
  So, if the negative rates and more bond purchases are losing effectiveness, what else could central banks do at this point? Could they buy commodities (other than gold)? Should they urge for a fiscal stimulus (they are governments’ biggest bondholders)? Perhaps as a start, a hold could be placed on all planned rate hikes. Finally, we think the aliens from the previous section would likely be surprised: not with the gold price, but with markets and an economy that are driven by a handful of central bankers taking active market views (on inflation, oil, etc.). Last but not least, they may wonder how the current levels of oil production outside of the US make any economic sense.
   

  

  

  

  

  

• Crushing The "Oil's Just A Supply Issue" Meme In 1 Painful Chart

  Day after day we are told that the plunge in oil prices (just like the collapse in The Baltic Dry freight index) is a “supply” issue… it’s transitory and global demand is doing fine thank you very much. Sadly, as everyone really knows deep down inside their Keynesian hearts, this is utter crap and as Barclays shows the shocking 18% YoY crash in distillates “demand” – something that has never happened outside of a recession – blows the one-sided argument of the energy complex out of the water.

   

  

   

  Still gonna claim “it’s a supply issue?”

  

  

  

  

  

• Abewrongics – 16 Months Of Japanese Money-Printing For Nothing

  Neither USDJPY nor Japanese stocks can hold a bid in the early going in Asia markets which has dragged both into the red post-QQE2. Since Kuroda took over from The Fed by doubling down on his cunning plan in October 2014, Japanese stocks are down 11.4%, USDJPY is unchanged, and only Japanese bonds have made any gains (up 3.7%).

  

   

  So what we want to know is – how will Abe et al. explain to the Japanese people how they lost so much of their retirement funds by forcing GPIF to allocate so much to stocks?

  Worst still – Japanese real household earnings have tumbled!
  

  

  

  

  

  

• HSBC Cancels Pay Freeze After Two Weeks Following "Staff Revolt"

  Late last month, HSBC Holdings CEO Stuart Gulliver announced a global freeze on hiring and compensation in a move designed to help the bank cut some $5 billion in costs by the end of next year.

  To be sure, HSBC isn’t alone in seeking to roll back costs amid bouts of global market turmoil. As Bloomberg notes, “UBS froze investment bank salaries this week and Barclays Plc extended a freeze on hiring new staff indefinitely in December, while Credit Suisse Group AG and Deutsche Bank AG are cutting thousands of jobs.”

  “It would be inappropriate vis-à-vis society to post €5.2bn in legal provisions in one year and not reflect that in compensation, particularly when the share price has fallen, and shareholders have suffered,” Deutsche’s John Cryan said, on the heels of what analysts described as “horrible,” “grim” annual and quarterly results. “By and large, I think we are underpaying against our international peer group this year and I hope that many staff understand why.”

  In short, this isn’t the best time to work at a systemically important bank if job security is your thing.

  The likes of Credit Suisse, Deutsche Bank, and SocGen have reported horrendous results over the last several weeks and there’s every reason to believe things are about to get a whole lot worse, which is why the “DB is fixed” enthusiasm (triggered by a supposed plan by the bank to repurchase its debt) was immediately faded.

  

  But while cutting compensation may indeed be the right move for many of the world’s largest and most nefarious financial institutions, it turns out employees aren’t really big on getting paid less – even if it’s “appropriate vis-à-vis society,” to quote Cryan.

  That’s why after a veritable insurrection, HSBC has decided to cancel the global pay freeze.

  “HSBC staff have been complaining to managers since the pay freeze was announced, which would have cancelled increases already recommended as part of the bank’s 2015 pay review,” Bloomberg reports, citing unnamed sources.

  “We have listened to feedback and as a result decided to change the way these cost savings are to be achieved,” Gulliver said in a memo sent to staff on Thursday, which was confirmed by an HSBC spokeswoman. “We will proceed with the pay rises as originally proposed by managers as part of the 2015 pay review, noting that, consistent with prior years, not all staff will receive a pay rise.” And why shouldn’t they “proceed with the pay rises?” Things are going so well:

  

  One wonders why Gulliver even bothered with the pay freeze in the first place.

  After all, it’s a bit difficult to imagine what the counterfactual would have been here: did someone actually think employees were going to be happy about getting less money?

  Meanwhile, the families of multiple US citizens murdered by Mexican drug cartels are suing the bank for providing drug lords with “material support.” “Without the ability to place, layer and integrate their illicit proceeds into the global financial network, the cartels’ ability to corrupt law enforcement and public officials, and acquire personnel, weapons and ammunition, vehicles, planes, communication devices, raw materials for drug production and all other instrumentalities essential to their operations would be substantially impeded,” a complaint filed in a federal court in Texas reads.

  In short, plaintiffs say the bank’s employees are largely responsible for financing a multi-billion dollar global “terrorist” drug organzation. That, we suppose, is why Gulliver pays them the big bucks.

  

  

  

  

  

• Oil Fears Spook Investors (Again)

  From Phil Davis’s Monday article at Phil’s Stock World

  “We should all fear Oilmageddon!” 

  That’s the word from CitiBank, which is SUPPOSED to be the voice of reason in these markets. When Banksters tell us to get out of something – it’s usually time to get in.

  Nattering Naybob had a very good summary of the weeks events, reminding us of my Wednesday warning that we were simply in a “dead cat bounce” and likely to fall even further this morning. I wrote,

  Some are connecting the dots so the 1859 to 1940 SP500 rally, could be the dead cat bounce we alluded to as the overall trend reasserts itself. I said ES could test 1930 and to wake me up when it got there, where it was rejected in a big way. I have a funny feeling this Super Bowl, Monday, and week could all be ugly.

  And ugly it is this morning but I’ll be on Money Talk on BNN Wednesday night, explaining why the collapse of oil does NOT mean the Global Economy is collapsing and I’ll write it down here so you can get ahead of the game and, as Buffett advises: “Be greedy while others are fearful.”

  The big problem is that most “analysts” don’t know anything more than they knew in college – especially the ones who wrote books and who, even if they know better, almost never contradict what they have published – no matter how much evidence to the contrary has piled up against them.  Those who aren’t slaves to the status quo are often paid by the-powers-that-be to steer the sheeple in and out of positions as needs dictate, and even the honest media loves a conflict – and they’ll present both sides of an argument as valid – even when one side is clearly idiotic.

  So, getting back to oil – many people think oil pricing is a function of supply and demand. Long-term it is. But short-term it’s a function of sentiment and manipulation. We take full advantage of that at PSW and I could give you a dozen examples from our 10 years in circulation but suffice it to say it’s not that hard to spot those patterns. One great pattern we observe is the fake, Fake, FAKE!!! trading of oil contracts over at the NYMEX.

  

   

  As you can see from the 5-month strip at the NYMEX, there are 515,000 open contracts for March delivery and that’s very high, which puts downward pressure on the price because the contracts close on Feb. 22 (10 trading days, we’re closed next Monday) and, not only are the storage facilities at Cushing, OK (the point of delivery) full to the brim with unwanted oil, but Cushing can only handle about 40M actual barrels of oil per month so there is NO WAY ON EARTH that 515,000 contracts, representing 515 MILLION barrels of oil, can possibly be delivered.

  Of course the traders know this and they pull this scam off every month in order to create a false sense of demand for oil and, every month, they whittle their fake orders down to 15-25M actual barrels worth of contacts (15-25,000) and the rests are fake, Fake, FAKE!!! – ALL of the time.

  Yes, trading on the NYMEX is a complete and utter fraud but knowing it’s a fraud helps our trading… This month, over 3M contracts will change hands at the NYMEX, representing 600M barrels of oil – all so just 20M can actually be delivered to the US consumers. The rest of the nonsense (99%) is just a game to move the prices around with the US consumers picking up the tab for all the fees that monthly churning generates.

  There are 515,000 contracts worth of open orders for March delivery and, since only 25M barrels are likely to be delivered, they have 10 days to cancel or roll 490M barrels worth of crude orders to longer months.  Since most of those contracts are trading at a loss, and since hope springs eternal, and since humans and their corporate masters have a huge aversion to taking losses – we can expect those contracts to be rolled to longer months – only perpetuating the problem.

  In addition, we know that “THEY” have trouble rolling more than 40,000 contracts in a single day – usually that causes downward price pressure and they have 10 days to roll 490,000 contracts – so oil will remain under pressure until 2/22, when we should get a nice pop into the end of that week. Meanwhile, rumors are accelerating regarding a possible OPEC production cutback and that’s keeping oil off the $25 line – for now. As I said – we’re playing for a bounce off $30 (with tight stops below) because we expect more rumors to lift oil into Wednesday’s inventory report.

  There are over 1 BILLION barrels worth of FAKE!!! orders for oil deliver at the NYMEX in the front 4 months – soon to be the front 3 months in 10 trading days.  The US currently imports just 5.7M barrels per day or 171M barrels per month (but not all to Cushing, of course) so the deliveries FALSELY scheduled for Cushing alone, in March, represent a 3-month supply for the entire US!

  There’s problem number one – energy trading is a complete and utter scam (as if Enron didn’t make that plainly obvious 15 years ago) and don’t get me started about the ICE (see: Goldman’s Global Oil Scam Passes the 50 Madoff Mark).  Oil is not racing back to $50 because $50 is not the mid-point on oil – it’s a top and oil should NEVER have been anywhere close to $100 per barrel and that bubble has long since burst.

  Again we have to think about the rigid and limited mind-set of the average analyst who thinks that low oil prices mean a bad economy because, clearly, demand must be off.  That was a very solid assumption since the birth of the internal combustion engine but now that we have electric cars and solar and wind power – it’s no longer such a direct correlation.  While we do have an oversupply of oil, to be sure – it’s wrong to blame it on a slow economy.

  One solid example of this is auto demand.  You are probably aware that auto sales hit records in 2015, with 50M cares delivered globally.  While this somewhat represents a bump in demand, it’s mainly about replacement cars. What kind of cars are we replacing?  The average age of the US fleet is 11.5 years and we can safely assume that most cars being replaced fall on the longer end of the scale.  Well, the average car in 2005 got just 22 miles per gallon and we’re replacing them with cars that get 35 miles per gallon (new car fleet average) thanks to Obama’s CAFE standard rules.  And it’s not just the US – the whole world is getting more efficient:

   

  

   

  A car being driven 15,000 miles a year (average) that used to use 750 gallons at 20 miles per gallon is replaced by a car driven the same 15,000 miles a year that now gets 35 miles per gallon and used 428 gallons.  That’s 42% LESS fuel than the previous car!  An oil barrel is 42 gallons and it’s not all refined to gasoline but let’s just say that each new car sold requires 10 less barrels per year than it’s predecessor.  At 50M cars a year that’s 500M less barrels per year required for our auto fleet – a 1.5Mb/day demand cut that becomes 3Mb/day in year 2 and 4.5Mb/day in year 3 and THAT is where our demand is going and it’s NOT coming back!

   

  

   

  In fact, we also are getting more efficient trucks and more efficient planes and more efficient machines in our factories and a lot of equipment is using wave, wind and solar energy for power and not using any oil at all to run.  So our economy could be off to the races and oil consumption would still be going downhill and, ironically, the better our economy does the faster the old gas-guzzling machines get replaced and the faster the demand for oil declines but that’s a GOOD THING, not a reason to panic.

  Yes, there will be disruptions as we move into a post-oil economy – especially for economies that depend on oil.  Saudi Arabia alone has enough oil in the ground to supply the World for 40 years and, sadly, it’s not likely they’ll even use half of it before oil is a fuel of the past and THAT is why no one wants to cut production – despite this persistent glut that is without end – because they know they are playing a game of musical chairs with oil barrels and they are all going to be stuck with a worthless fuel of the past with a rapidly declining inventory value.

  This is also bad news for companies like Exxon (XOM), Chevron (CVX) which are, unfortunately, Dow Components.  It’s bad news for the energy sector and the banks that lent them money so there WILL be disruption – but it’s the good and healthy kind as our society moves on from using oil and it’s NOT a sign of a slowing global economy – that’s why we flipped long this morning!

   

  Try Phil’s Stock World Daily Report, free, by signing up here.

  

  

  

  

• The War On Cash – The Central Banks' Survival Campaign

  Submitted by Paul Rosenberg via Free-Man's Perspective blog,

  Over the last few months a stream of articles have crossed my screen, all proclaiming the need of governments and banks to eliminate cash. I’m sure you’ve noticed them too.

  It is terrorists and other assorted madmen, we are told, who use cash. And so, to protect us from being blown up and dismembered on our very own street corners, governments will have to ban it.

  It would actually take some effort to imagine a more obvious, naked attempt at fearmongering. Cash – in daily use for centuries if not millennia – is now, suddenly, the agent of spring-loaded, instant death? And we’re supposed to just accept that line?

  But there are good reasons why the insiders are promoting these stories now. The first of them, perhaps, is simply that they can: After 9/11, a massive wave of compliance surged through the West. It may not last forever, but it’s still rolling, and if the entertainment corporations can pump enough fear into minds that want to believe, they may just get them to buy it.

  The second reason, however, is the real driver:

  Negative Interest Rates

  The urgency of their move to ban one of the longest-lasting pillars of daily life means that the backroom elites think it will be necessary soon. It would appear that the central banks, the IMF, the World Bank, the BIS, and all their backers, see the elimination of cash as a central survival strategy.

  The reason is simple: cash would allow people to escape from the one thing that could save their larcenous currency system: negative interest rates.

  To make this clear, I like to paraphrase a famous (and good) quote from Alan Greenspan, back from 1966, during his Ayn Randian days: The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

  That was a true statement, and with a slight modification, it succinctly explains the new war on cash:

  The preservation of an insolvent currency system requires that the owners of currency have no way to protect it.

  Cash is currency that you hold in your own hands, that stands more or less alone. It is primarily external to bank control. Electronic money – bank balances, credit, etc. – remains inside the banking system and fully subject to bank control.

  A combination of no cash and negative interest rates would be a quiet, permanent version of what was done in Cyprus, where the government simply shut down everything, allowed only the smallest deductions via ATMs, and then stole money from thousands of bank accounts at once.

  The Cypriot spectacle was fairly large, however, and that tends to undermine the legitimacy of rulership. So, it is much better to have no ATMs and no cash at all. There would be no lines of angry people talking to each other, only isolated losers with no recourse, licking their wounds while the talking heads on television tell them to stay calm and watch the flashing images.

  Negative interest rates would give the banks 100% control over your purchases. They could, even in the worst pinch, allow you to purchase food while freezing the rest of your money. The average person would have no recourse and would simply be robbed… but very smoothly and with no human face to blame on.

  Negative interest rates mean that your bank account shrinks day by day, automatically. Your $1000 in January becomes $950 by December. And where does that money go? To the banks, of course, and to the government. They syphon your money away, drip by drip, and there’s nothing you can do about it. This accomplishes several things for them at once:

  • It finances government, limitlessly and automatically. Forget tax filings; they can just take as they please.

  • It pays off the bad debt of the big banks. (And there are oceans of debt.)

  • It forces you to spend everything you’ve got, as soon as you get it. (Otherwise it will shrink.)

  • It gives the system full control over your financial life. Everything is monitored, everything is tracked, and every single transaction must be approved by them (or not). If they decide they don’t like you, you’re instantly reduced to begging.

  In short, this is a direct return to serfdom.

  

  

  

  

  

• The Best And Worst Performing Assets Since The End Of QE3

  Since The Fed stopped its money-printing extravaganza things have changed a little for the status-quo “believers”…

   

  

   

  So, after all this time, we were right – “It’s The Fed, Stupid”

  

  

  

  

  

• Russian Prime Minister Warns There Will Be A "Permanent World War" If Saudis Invade Syria

  “It’s a joke. We couldn’t wish [for] more than that. If they can do it, then let them do it — but talking militarily, this is not easy for a country already facing defeat in another war, in Yemen, where after almost one year they have failed in achieving any real victory.”

  That’s what one source in the Iranian military had to say about reports that Saudi Arabia is preparing to send ground troops into Syria.

  If you frequent these pages you know why Riyadh (and Ankara for that matter) is considering the ground option. The effort to oust Bashar al-Assad and the Alawite government was going reasonably well right up until September. Sure, the conflict was dragging into its fifth year, but Assad’s army was on the ropes and absent a miracle, it seemed likely that his government would fall.

  As it turns out, Assad did indeed get a miracle from above although instead of divine intervention it was Russian airstrikes which commenced from Latakia starting on September 30. Contrary to The White House’s prediction that Putin would find himself in a “quagmire,” Russia and Hezbollah have rolled up the opposition and are preparing to recapture Aleppo, the country’s largest city and a major commercial hub. If that happens, the rebellion is over.

  
  

  That would be a disaster to the rebels’ Sunni benefactors as it would mean Iran will preserve the Shiite crescent and its supply lines to Hezbollah. It would also give Tehran bragging rights in the bitter ideological war with Riyadh. Simply put, that’s unacceptable for the Saudis and so, it’s time to call upon the ground troops.

  But this isn’t Yemen where the Iranians are fighting via proxies. If the Saudis start shooting at the IRGC or at Hezbollah in Syria it’s just as likely as not that the two countries will go to war and just like that, you’d have the beginning of World War III.

  Don’t believe us? Just ask Russian PM Dmitry Medvedev.

  “If Arab forces entered the Syrian war they could spark a new world war,” Medvedev warned on Thursday. “Ground offensives usually lead to wars becoming permanent”. Here’s what else he told Handelsblatt:

  “The Americans and our Arabic partners must think hard about this: do they want a permanent war?”

   

  “Do they really think they would win such a war very quickly? That’s impossible, especially in the Arabic world. There everyone is fighting against everyone… everything is far more complicated. It could take years or decades.”

   

  “Why is that necessary? All sides must be forced to the negotiating table instead of sparking a new world war.”

  Yes, “all sides must come to the negotiating table.” Of course that’s easy for Medvedev to say. After all, it’s a lot easier to sit at the table when you’ve already won and are negotiating from a position of strength. 

  That is, there won’t be anything left to negotiate in a couple of weeks if things keep going like they’re going. What Moscow pretty clearly wants to do is crush the opposition in Aleppo and then discuss how to proceed with some kind of political “agreement” that will prevent whatever remains of the rebels from launching a prolonged war of attrition involving periodic attacks on government forces.

  In any event, don’t say Russia didn’t warn everyone when the Saudis and the Turks end up setting the world on the road to a global conflict. Below, find excerpts from an interview The Atlantic conducted with Andrew Tabler of the Washington Institute for Near East Policy.

  Kathy Gilsinan: I wanted to start with what the significance of Aleppo has been to the Syrian uprising up to this point.

  Andrew Tabler: Aleppo is Syria’s largest city. It’s the commercial hub. It is extremely important, particularly to the opposition, because Aleppo, along with the other northwestern cities, have been some of the strongest opponents to the Assad regime historically. I think the decision in 2012 to take [the city] was one of the first real major offensives of the armed opposition in Syria. And they hoped that by denying the regime Aleppo, it would set up an alternative capital and allow for a process where the Assad regime’s power was whittled away. Since that time, it has instead been one of the most bombed, barrel-bombed, and decimated parts of Syria, and now is much more like Dresden than anything else.

  Gilsinan: If Aleppo falls, walk me through what happens next. First, how would it change the balance of power, within the civil war, between the rebels and the regime?

  Tabler: I think it would cement the regime’s hold on “essential Syria”—western Syria, perhaps with the exception of Idlib province [to] the south [of Aleppo]. But basically you would have the regime presence from Aleppo the whole way down to Hama, Homs, and Damascus, and that’s the spine of the country, and that’s what concerns the regime and the Iranians in particular. It would then allow them to free up forces, potentially, to go on the offensive elsewhere, directly into Idlib province, most likely, and then eventually into the south. Then after that they could turn their attention finally to ISIS.

  

  Gilsinan: And then what happens to the regional balance of power within that war?

  Tabler: It would be a tremendous loss for the U.S. and its traditional allies: Turkey, Saudi Arabia, Qatar, and Jordan. It’s already been extremely costly for most of those allies, but it would be a defeat [in the face of] the Russian-Iranian intervention in Syria. This would also be a huge loss for the United States vis-à-vis Russia in its Middle East policy, certainly. And because of the flow of refugees as a result of this, if they go northward to Europe, then you would see a migrant crisis in Europe that could lead to far-right governments coming to power which are much more friendly to Russia than they are to the United States. I think that is likely to happen.

  Gilsinan: So it changes the entire orientation, not just of the Middle East, but of Europe as well.

  Tabler: It will soften up American power in Europe, yeah. And put into jeopardy a lot of the advances in the NATO-accession countries, which are adjacent to Russia, as well.

  *  *  *

  Or, summed up:

  

  

  

  

  

  

• America's National Debt Bomb Caused By The Welfare State

  Submitted by Richard Ebeling via EpicTimes.com,

  

  The news is filled with the everyday zigzags of those competing against each other for the Democrat and Republican Party nominations to run for the presidency of the United States. But one of the most important issues receiving little or no attention in this circus of political power lusting is the long-term danger from the huge and rising Federal government debt.

  The Federal debt has now crossed the $19 trillion mark. When George W. Bush entered the White House in 2001, Uncle Sam’s debt stood at $5 trillion. When President Bush left office in January of 2009, it had increased to $10 trillion. Now into seven years of Barack Obama’s presidency, the Federal debt has almost doubled again.

  And it is going to get much worse, according to the Congressional Budget Office. On January 26, 2016, the CBO released it latest “Budget and Economic Outlook” analysis for the next ten years, from 2016 to 2026.

  Continuing Deficits and Growing National Debt

  The economists at the CBO estimate that the Federal budget deficit for the fiscal year, 2016, will be $544 billion, or $105 billions more than Uncle Sam’s budget deficit in fiscal year 2015. And each year’s budget deficit will continue to be larger than the previous year from here on. Indeed, the CBO estimates the Federal government’s annual deficits will once more be over $1 trillion starting in 2022 and thereafter.

  Between 2016 and 2026, the Federal debt, as a result, is projected to increase by a cumulative amount of almost $9.5 trillion, for a total national debt of around $30 trillion just ten years from now.

  The reason for the continuing ocean of Federal red ink is the fact that while government revenues are projected to be around 49.5 percent higher in fiscal year 2026 ($5,035 trillion) than in fiscal year 2016 ($3.376 trillion), government spending will be over 63 percent more in fiscal year 2016 ($6,401 trillion) than in fiscal year 2016 ($3,919 trillion).

  Understanding the Fiscal History of America

  The famous Austrian-born economist, Joseph A. Schumpeter (1883-1950), once wrote an article on, “The Crisis of the Tax State” (1918). He said the following about a country’s fiscal history:

  “[A country’s] budget is the skeleton of the state stripped of all misleading ideologies – a collection of hard facts . . . The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which its results are put . . . The view of the state, of its nature, its forms, its fate [are] seen form the fiscal side . . .

   

  “The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare – all this and more is written in its fiscal history, stripped of all phrases. He who know how to listen to its message here discerns the thunder of world history more clearly than anywhere else . . . The public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life.”

  A hundred years ago, around 1913, before the beginning of the First World War, all levels of government in the United States – Federal, State, and local – taxed and spent less than 8 percent of national income, with the Federal government absorbing less than half of this amount.

  By 1966, Federal outlays alone took 17.2 percent of Gross Domestic Product and are projected to rise to 21.2 percent in 2016 and will to 23.1 percent of GDP by 2026. Over the fifty years between 1966 and 2016, government outlays as a percentage of GDP increased by nearly 24 percent, and will be growing more over the next decade.

  The Welfare State Drives the Deficits and the Debt

  What can America’s fiscal history, as Schumpeter suggested, tell us about the direction and drift of government over the last half-century and looking to the future? Perhaps not too surprisingly for both supporters and critiques of the welfare state, it has been and is being driven by the continuing expansion of the “mandatory spending” of the redistributive “entitlement” programs.

  In 1966, the intergenerational redistribution program known as Social Security absorbed 2.6 percent of GDP; in 2016, it will suck up 4.9 percent, for a nearly 90 percent increase. And by 2026, Social Security spending will represent 5.9 percent of GDP, for a 20 percent increase over the coming decade. (See my article, “There is No Social Security Santa Claus.”)

  Major Federal-funded health care programs (Medicare, Medicaid and related programs) siphoned off a mere 0.1 percent of GDP in 1966; in 2016 this will have increased to 5.6 percent of GDP, a more than 500 percent increase over fifty years. By 2026, the CBO estimates, these Federal health care programs (now including ObamaCare) will take 6.6 percent of GDP, for a nearly 18 percent increase in the next ten years. (See my article, “For Healthcare the Best Government Plan is No Plan.”)

  Summing over all of these and related mandatory entitlement spending programs, in 1966 the redistributive welfare state absorbed 4.5 percent of the nation’s Gross Domestic Product; in 2016 this will be 13.3 percent of GDP, and 15 percent of GDP in 2026. Or a 317 percent increase over the fifty years between 1966 and 2016, and an additional 13 percent increase between 2016 and 2026.

  Due to all of the deficit spending to finance this redistributive largess over what the government collects in tax revenues to fund it, interest on the Federal debt will increase from 1. 4 percent of GDP in 2016 to 3.0 percent of GDP in 2026, or more than a 100 percent increase in the interest cost on the national debt over the next ten years as a percentage of GDP.

  Welfare state spending plus mandatory interest payments on the Federal debt now absorbs around 60 percent of everything Uncle Sam spends.

  For a point of comparison in this tilted direction of government spending, all non-entitlement spending represented 11. 5 percent of GDP in 1966, and will be down to 6.5 percent of GDP in 2016 and is projected to be 5.2 percent of GDP in 2026. This represents a decrease as a percentage of GDP in non-entitlement spending of 45 percent over the last fifty years, and another 20 percent decline as a percentage of GDP over the coming decade.

  Now in absolute terms all government spending has grown over the last fifty years. But what America’s fiscal history highlights, looking over the half-century that is behind us, is that it is the dynamics of a growing domestic welfare state that is fundamentally driving the country’s financial ruin.

  The Force of Collectivist Ideology and Political Privilege

  This has been coming about due to two fundamental and interconnected factors at work: First, the ideology of a right to other people’s wealth and income, and, second, the democratization of political privilege.

  For more than a century, now, the older American political tradition of classical liberalism, with its belief in individual liberty, economic freedom and constitutionally limited government, has been slowly but surely eroded by the “progressive” ideal of political, social and economic collectivism.

  These dangers were already present in the late nineteenth century with the rise of the socialist movement, and its then appearance on this side of the Atlantic. “The workers,” however, were not the vanguard of socialism in either Europe or America. It was mostly intellectuals and political philosophers who arrogantly dreamed dreams of new and “better worlds” designed and planned according to what they considered a more moral and “socially just” society. (See my article,“American Progressives are Bismarck’s Grandchildren.”)

  Its Not Your Fault and Others Owe You

  Over the decades, for a century now, the socialist criticisms of capitalist society have eaten away, little by little, the understanding, belief in, and desire for a truly free market society. Your pay seems to be too low in comparison to what you think or have been told you deserve? It must be due to the exploitation and unfairness of profit-making businessmen.

  You’re afraid that you might not have the health care you want or the retirement money you think you’ll need, surely it must because “the rich” have squandered their unearned wealth on things other than what “the people” really need. Your child cannot go to the topnotch college or university you would want them to attend for your offspring’s future? That can be cured along with those other injustices by taxing or regulating those who have more than you, and who don’t deserve it.

  The social game is rigged; nothing is your fault, it is all due to those who have more than you, and who don’t pay their “fair share” to fund what “working people” like you need and have a “right” to.

  When such thinking is repeated enough, time-after-time over years and, now, generations, a large number of people in our society implicitly take it all to be true. If only government has sufficient taxing and regulating authority, the world can be made better for “the many” against the greed and social disregard of the few (the “one percent.”)

  Losing the Spirit and Practice of Individualism

  The dangers in all this was warned about long ago, for instance, by J. Laurence Laughlin, an economist who was the founder of the economics department at the University of Chicago. In his 1887 book, The Elements of Political Economy Laughlin said:

  “Socialism, or the reliance on the state for help, stands in antagonism to self-help, or the activity of the individual. That body of people certainly is the strongest and the happiest in which each person is thinking for himself, is independent, self-respecting, self-confident, self-controlled and self-mastered. Whenever a man does a thing for himself he values it infinitely more than if it is done for him, and he is better for having done it . . .

   

  “If, on the other hand, men constantly hear it said that they are oppressed and downtrodden, deprived of their own, ground down by the rich, and that the state will set all things right for them in time, what other effect can that teaching have on the character and energy of the ignorant than the complete destruction of all self-help?

   

  “They begin to think that they can have commodities which they have not helped to produce. They begin to believe that two and two make five. It is for this reason that socialistic teaching strikes at the root of individuality and independent character, and lowers the self-respect of men who ought to be taught self-reliance . . .

   

  “The right policy is a matter of supreme importance, and we should not like to see in our country the system of interference as exhibited in the paternal theory of government existing in France and Germany.”

  What Professor Laughlin feared and warned about nearly 130 years ago has increasingly come to pass with the social attitudes and political desires and demands of too many of our fellow countrymen. European collectivism invaded and continues to conquer America’s original spirit and politics of individualism.

  The Rise of Democratized Privilege

  The other force at work in bringing about our growing fiscal socialism is what I would suggest calling democratized privilege. Before the rise of democratic governments in the nineteenth century, the State was seen as a political force for exploitation and abuse. Under monarchy, kings and princes used their taxing and policing powers to plunder their subjects for their own gain as while as for the benefit of the aristocrats and noblemen who gave allegiance, obedience and support to the monarch. Power, privilege and plunder were for the political few at the expense of the many in society.

  At first the call for democratic government was to place limits on the powers of kings and their lords-of-the-manor supporters, so to restrain political abuses that threatened or violated individuals’ rights in their lives, liberty and private property.

  But with the rise of socialist and welfare-statist ideas as the nineteenth century progressed, there emerged a new ideal: a welfare-providing government for “the masses.” The view came to be that government was no longer a fearful master needed restraint and limits. No, democratically-elected government was now conceived as “the people’s” servant to do its bidding and to provide it with benefits.

  People hoping to gain favors and privileges from new democratic governments formed themselves into groups of common economic interests. In this way, they aimed to pool the costs of the lobbying and politicking that was required to obtain what they increasingly came to view as their “right,” that is, to those things to which they were told and demanded they were “entitled.”

  No longer were redistributive privileges to be limited to the few, as under the old system of monarchy. Now privileges and favors were to be available to all, heralding a new age, an Age of Democratized Privilege. More and more people are dependent upon government spending of one form or another for significant portions of their income. And what the government does not redistribute directly, it furnishes indirectly through industrial regulations price and production controls, and occupational licensing procedures.

  Government Dependency and Resistance to Repeal

  As dependency upon the State has expanded, the incentives to resist any diminution in either governmental spending or intervention have increased. All cuts in government spending and repeal of interventions threaten an immediate and often significant reduction in the incomes of the affected, privileged groups.

  And since many of the benefits that accrue to society as a whole from greater market competition and more self-responsibility are not immediate but rather are spread out over a period of time, there are few present-day advocates of a comprehensive reversal of all that makes up the modern welfare state, and most certainly not in an election year.

  While it may not be the center of political discussion and debate in this election year, the dilemma of ever-worsening government deficits and expanding national debt is not going to go away.

  It will have to be, eventually, faced and confronted. But as Joseph Schumpeter pointed out to us, the fiscal history of a country tells us the underlying ideological and cultural currents at work that pull a nation in a particular direction.

  The real dilemma is not whether this or that government program can be cut or reduced in terms of how fast it is growing at present and future taxpayers’ expense. The real challenge is to reverse the political and cultural trends toward more and growing fiscal redistributive socialism.

  This will require a strong and articulate revival of a culture and a politics of individualism. It is, ultimately, a battle of ideas, not budgetary line items.

  

  

  

  

  

• Here Is The Real Reason Why Authorities Want To Ban High Denomination Bank Notes

  Over the past month, one of the more alarming developments in Europe has been the move to eliminate high denomination bank notes like the €500 bill.

  Indeed, as Bank of America reports, having changed its mind on the matter over the past few years, the ECB is now considering abolishing the €500 note. In a recent interview, Executive Board member Benoit Coeure said that “the ECB is assessing the fate of the €500 euro banknote, as concerns about its use in money laundering and crime grow and its usefulness for large payments comes into question” adding that “competent authorities increasingly suspect that they are being used for illegal purposes, an argument that we can no longer ignore.” (like all other ECB matters, there appears to be infighting on this issue too, and subsequently another ECB member Yves Mersch stated that the he would like to see “proof that high-denomination notes are used by criminals”).

  So what, big deal, eliminate it. The people will still have 5, 10, 20, 50, 100 and 200 euro bills right.

  Well, here’s the thing: the €500 note is the second highest currency denomination in G10, after the CHF1,000 note. More importantly, the total value of €500 notes in circulation amounts to €306.8bn and has been rising.

  

  As a share of the value of total euros in circulation, the €500 note is the second-highest, after the €50 note.

  

  In other words, if overnight the €307 billion worth of €500 bills were eliminated, the notional value of the entire amount of European physical currency in circulation would decline by 30% to €700 billion!

  And there you have it: while it may not be banning all European cash outright, we are confident the ECB would be delighted if one third of it was to start, while pretending to be fighting financial crime, terrorism, corruption and dryg dealers. 

  Of course, what Europe would be truly doing is setting the scene for ever more aggressive NIRP, and by removing the highest denomination bank notes, it would make evading negative that much more difficult and costly (albeit would certainly favor gold).
  

  Here Bank of America points out that while abolishing the €500 note may even end up weakening the EUR currency. This is what it said:

  “we would expect that abolishing a note that represents almost 30% of the total Euros in circulation would be negative for the currency, keeping everything else constant. The share of the €500 note in the total value of Euros in circulation has been falling since 2009 and this has coincided with a weakening Euro in real effective terms. This is not evidence of causality, but we should not ignore it.

   

  If we are right, the Euro will weaken, primarily against the USD and the CHF. The USD is the most liquid currency and we would expect it to capture a large share of the drop in the demand for the Euro as a store of value. However, the CHF could also benefit, having the largest note denomination in G10 economies. Indeed, the CHF1000 note is already very popular, representing more than 60% of the CHF  notes in circulation, unless the SNB follows the example of the ECB and also abolishes the CHF1000 note.

  Maybe not: the EUR would certainly not weaken against the Dollar if at the same time as Europe is eliminating its highest denomination bill, the US were to likewise to eliminate its own “high denomination” bills. This is the push by current Harvard School of Government senior fellow Peter Sands who recently was booted from beleaguered British bank Standard Chartered (whose exposure to China is among the highest in Europe).

  Sands appeared on CNBC earlier today to double down on his “modest proposal” that the US should eliminate its highest denominated bill, aka the Benjamins, because doing so would “deter tax evasion, financial crime, terrorism and corruption.”

  

   

  Ok fine, remove the $100 bill: surely it won’t affect much right.

  Wrong. As the latest Treasury data shows, $1.08 trillion of the total $1.38 trillion in physical US currency exist in the form of $100 bills.

   

  

   

  In other words, there is now an all too explicit “trial balloon” push to ban the one banknote that accounts for a whopping 78% of all US currency in circulation.

  So there you have the real reason why suddenly high denomination bank notes are the target: it is not because “drug dealers” and tax-evaders use them, but because between banning Europe’s €500 bill and the US $100 bill, over 56% of all physical currency currently in circulation in Europe and the US would disappear.

  And all in the name of “fighting crime”, when the real reason is to set the stage for NIRP and to progressively move down the chain and ban increasingly smaller denominations.

  Will this drive to start the elimination of physical cash succeed? We don’t know, but for once the Greeks are far ahead of the curve. As Kathimerini reports, “citizens who keep cash outside the banking system are running in droves to bank branches to ask for details and clarifications on reports that the European Central Bank is planning to withdraw 500-euro notes.”

  With the country already in a seven-year crisis, many people have opted to hide their money at home, in vaults, mattresses and other places. Banking sources say that many people have chosen 500-euro notes because they are more practical for carrying and hiding – after all, just 20 such notes come to 10,000 euros.

   

  In 2015 alone deposits in Greece declined by 40 billion euros, with banks estimating that at least 20 billion of that went into safe deposits and mattresses.

   

  Following the publication that European authorities were questioning whether it makes sense to have 500-euro notes in circulation, many in Greece – especially older people – rushed to deposit the money in their accounts. ECB governing council member Benoit Coeure spoke yesterday in favor of the withdrawal of the largest notes, stressing that the ECB will make a decision to that effect soon.

   

  A new Morgan Stanley survey on Greece showed that 80 percent of people who withdrew their deposits from the banking system in recent months have not returned them, with 93 percent being determined not to do so. The survey also found that confidence in the Greek banking system remains low, as 62 percent of people are uncomfortable about placing money in a bank account.

  Naturally, by removing the highest denomination bank note, all Europe would do is make it that much more difficult to find alternatives to holding large amounts of money in physical form and thus outside the banking system, where money is about to be taxed with negative rates.

  There is the question whether this no to clever ploy will backfire, and instead of forcing people out of cash, instead lead to a run on bank cash, which will then be converted into physical precious markets. The Greeks have already figured it out; we wonder how long until the US population follows suit.

  

  

  

  

  

• Millennials Now Prefer Socialism To Capitalism

  On Tuesday, Bernie Sanders swept to victory in the New Hampshire primary over rival Hillary Clinton.

  To be sure, Sanders was expected to win. Handily.

  Still, there’s something surreal about the fact that America is edging ever closer to a situation that will see an avowed socialist square off against one of the country’s quintessential capitalists for the keys to The White House.

  As we and others have documented, the American electorate is fed up with politics as usual in Washington. Many voters have no hope that the system can be changed as long as both parties continually field mainstream, establishment candidates all of whom are connected to powerful lobbyists, Wall Street, and corporate America.

  So disgruntled are Americans that the candidates with the most buzz around their campaigns are Donald Trump and Bernie Sanders.

  The capitalist and the socialist.

  Against that backdrop we present the following interesting chart from a recent YouGov survey and brief color from WaPo. As you can see, respondents younger than 30 now rate socialism more favorably than capitalism. We suppose it’s all that good will towards Wall Street.

  

  From WaPo’s Catherine Rampell: 

  In my column today, I mentioned that one reason millennials prefer Bernie Sanders to Hillary Clinton is that they’re not just willing to look past Sanders’s socialism — they actually like his socialism. It’s a feature, not a bug.

   

  Here are some of the data I was referring to.

   

  In a recent YouGov survey, respondents were asked whether they had a “favorable or unfavorable opinion” of socialism and of capitalism. Below are the results of their answers, broken down by various demographic groups.

   

  Democrats rated socialism and capitalism equally positively (both at 42 percent favorability). And respondents younger than 30 were the only group that rated socialism morefavorably than capitalism (43 percent vs. 32 percent, respectively).

  *  *  *

  “Feel the Bern”…

  

  
  

  

  

  

  

  

• Through The Looking Glass On Rates

  Submitted by John Browne via Euro Pacific Capital,

  On January 29^th, Japan’s central bank governor, Haruhiko Kuroda, announced that the Bank of Japan would introduce a Negative Interest Rate Policy, or NIRP, on bank reserve deposits held in excess of the minimum requisite. The European Central Bank, and central banks in Switzerland, Denmark and Sweden have already partially blazed this mysterious trail. The banks have done so in order to weaken their respective currencies and to light a fire under inflation. Swiss national bonds now carry negative rates out to maturities of eleven years, meaning investors must lock up funds for eleven years to receive even a small positive nominal return!

  There are economists and investors to whom these policies seem logical. After all, if low interest rates are good, wouldn’t negative rates be better? Many have argued that the “zero bound’, or the point past which rates can go no lower, is simply the same type of archaic thinking that brought us the gold standard and moral hazard.

  These contemporary economists like to suggest that markets should become comfortable with negative rates and accept that they have an important role to play in the “science” of modern finance. But this analysis ignores the fundamental absurdity of the concept.

  Money has a time value. Funds available today are worth more to the owner than money available tomorrow. I would imagine that, if asked, 100% of people would choose to receive $10,000 today rather than the same sum a year from now. Many might even pay for the quicker delivery. Even if we allow for the unlikely possibility that real deflation exists, and that consumers are therefore making sensible decisions in deferring purchases, life is uncertain and consumers are impatient. That’s why banks have always had to offer interest to savers to lock up their funds on account. Paying for the privilege of not spending one’s money is a completely new development in human history, and one that I believe is at odds with fundamental concepts of economics and psychology.

  The ECB, as did the Bank of Japan (BoJ), cited economic stimulation as its main reason for negative rates. These sentiments were recently cited in a blog post by former Fed President Narayana Kocherlakota where he urged his former Fed colleagues to bring rates into negative territory. The logic is that people and businesses would refuse to pay to keep their money on deposit, and would instead withdraw those funds to spend and invest. However, zero percent interest rates do not appear to have had this affect. The money may, in fact, have been spent, but the growth never materialized. So will the dead horse we are beating suddenly get up if we beat it harder? Apparently so.

  Only eight days before taking the dramatic and highly debatable step to trigger negative rates, Bank of Japan President Haruhiko Kuroda had assured his Parliament in Tokyo that such a policy was not even being considered (Reuters, 1/21/16). But less than six days later, after attending the World Economic Forum in Davos, his position had changed. Did private discussions with world leaders in Davos convince him that a serious international recession and credit crisis would unfold unless all central bankers could fire all available weaponry?

  After the financial crisis of 2008, the U.S. Fed and the Bank of England (BoE) followed the lead of Japan to experiment with QE and ZIRP, even though those policies never delivered a recovery to the Japanese. The Fed and BoE unleashed stimulation with unprecedented vigor at home and then urged acceptance by other central banks. In essence, a huge global debt crisis was to be cured, or at least postponed, by even more international liquidity based on massive debt creation and the socialization of bank losses.

  Much of the massive synthetic liquidity created by the QE experiment was funneled into financial assets. This diverted business investment away from job-creating investment in plants, equipment and employment. Wages remained stagnant and consumer demand and GDP growth were disappointingly flat. According to data from the Bureau of Economic Analysis, expansion of real U.S. GDP growth between 2009 and 2015 averaged 1.4 percent per year or less than half the average rate of 3.5 percent experienced between 1930 and 2008.

  Meanwhile, ZIRP has caused mal-investment along with an unhealthy reach by banks and investors for high yield, but riskier investments. This became most obvious in the high yield debt market, which now is being hit hard by the fall in oil prices.

  Negative interest rates mean that borrowers are paid to borrow. This serves as a powerful inducement for companies to borrow up to the hilt to buy other companies, to pay dividends that are unjustified by earnings levels and to invest in financial assets. Often this includes buying back their own corporate shares thereby increasing earnings per share, the share price and linked executive bonuses.

  For savers, negative rates discourage savings, stifling future business investment and consumer demand. However, central banks hope that discouraged savers will instead be lured into spending on consumer products and create short-term economic growth albeit at the price of future growth.

  Negative interest rates mean that lenders have to pay borrowers and that depositors have to pay banks to keep and use their money. One does not require a PhD in economics to recognize this as an unnatural distortion that will create more problems than it solves.

  If individual and business depositors draw down their balances, the deposit base of banks will fall as will the velocity of money circulation. This will not only discourage lending, but, through reverse leverage, cause bank liquidity problems. Should banks with loans to high-yield companies and emerging market nations, especially those hit by falling oil prices, see their loans become non-performing at the same time as deposits are falling, a potentially catastrophic banking crisis could threaten. Since the Financial Crisis of 2008, over $50 trillion dollars of new debt have been added globally to the levels that precipitated the banking crisis in the first place.

  Negative interest rates act effectively as a hidden tax funneled directly to banks. They are inherently unhealthy. Currently, they could indicate also a measure of unease among two of the four most powerful central banks. If so, that could well escalate. Depositors should be aware acutely of the hidden risks to their deposits. Already, nations with looming bank liquidity problems, such as Russia and many in Africa, are increasing their levels of bank deposit insurance to reduce potential political unrest.

  Readers know that we have felt for many months that the U.S. is far from ready for interest rate increases. We are of the opinion, now echoed by others, that the U.S. will see zero and possibly even negative interest rates before it experiences a one percent Fed rate. This does not bode well for our future.

  

  

  

  

  

• Subprime Auto Is "NOT" The Next Big Short, Citi Insists

  We’ve been shouting from the rooftops about the dangers inherent in the subprime auto market for more than a year.

  Auto debt in America has joined student loan debt in the trillion dollar bubble club and part of the reason why is that Wall Street is once again perpetuating the “originate to sell” model whereby lenders relax underwriting standards because they know they’ll be able to offload the credit risk.

  Looser standards mean the eligible pool of borrowers expands, but it also means the loans being pooled and securitized by Wall Street are increasingly dubious. Data from Experian shows that terms for new and used car loans are beginning to border on the absurd, as the percentage of new vehicles with financing rose to 86.6% in Q3 (that’s up from 79.9% in 2010), the average amount financed climbed $1,137 from the same period a year ago, and the average loan term inched up to 67 months.

  There’s also evidence – from the NY Fed – to suggest that a higher and higher percentage of auto loan originations are going to borrowers with lower credit scores. Here’s the chart (note the highlighted portion in the bottom right hand corner):

  

  For those who might have missed it, the industry went full-retard in November when Skopos Financial – the king of unbelievably bad securitizations – sold a deal in which 14% of the loans “backing” $154 million in new ABS were made to borrowers with no credit score at all. 

  Given all of the above, you can see why some money managers would be interested in shorting that paper and according to Citi, quite a few hedge fund managers, inspired by “The Big Short” are inundating banks wil requests to bet agains the market. “We have received an explosion of calls from equity and hedge fund investors looking to short auto ABS,” Citi’s Mary Kane wrote in a note out last month. 

  For her part, Mary doesn’t think it’s a good idea. Here’s why: 

  There are four principal reasons to NOT short auto ABS: 1) consistent and stable long-term performance through numerous cycles; 2) robust credit enhancement protecting principal at risk 3) auto loan growth historically in line while securitization rates remain low, 4) originate-to-sell practices are not and have never been prevalent. Data shows that auto loan growth is not out of line with historical growth and that auto loan financing is not excessively reliant on the ABS market. The auto ABS securitization rate varied from 15–28% from 2004–present. Currently at 16%, it shows that most US auto loans are held on lenders’ balance sheet.

   

  

  Now first of all, Mary can say the originate to sell model isn’t “prevalent” all she wants, but it’s at 16% and at one point around 2010 was nearly a third of the market, so we’re not entirely sure what counts as “prevalent”, but it’s definitely a big piece of the puzzle. Additionally, auto loan ABS supply rose by something like 25% in 2015 and the types of deals getting done clearly involve shoddy credits.

  Of course you’d think that if this was such a “bad” idea, then Citi would gladly dream-up some bespoke deals, take the other side of the trade, and sit back as the premiums come in. 

  In any event, we suppose the point is this: just because the originate to sell model isn’t as “prevalent” as it could be in some hypothetical world where the market is even riskier than it is now, doesn’t mean that shorting specific issues isn’t a good idea. Especially when the Skopos Financials and Santander Consumers of the world are selling deals that are obviously filled with junk. Unfortunately, there’s no way to get synthetic exposure to the market and Kane is correct that shorting the cash bonds would likely turn into an expensive proposition. 

  Kane’s conclusion: “It seems like too many people have seen the movie “The Big Short” and are starting to think the movie heroes’ short strategy would translate to the ABS market. By the way, the ABS conference did NOT take place at Caesar’s Palace that year as per the film, it was at The Venetian. So, it’s not wise to believe everything you see in a movie and hit films are not the best source for trade ideas.” 

  Right. Movies “aren’t the best source for trade ideas.” 

  Neither are sellside desks.

  Just ask a Goldman client.

  

  

  

  

  

• Oil Headline Rescues Stocks From Bloodbath As Precious Metals Soar

  Market Psychology has swung from this…

   

  To this…Losing SPY Religion

   

  And seemingly back.

  *  *  *

  Gold grabs the headlines today. After beginning to surge yesterday, Hong Kong's reopen sparked a spike which then accelerated all day.

  

   

  This was gold's best day since Nov 2008 and the highest level in a year…

  

   

  With the best quarter in 30 years…

  

   

  Perhaps even more stunning is the collapse in USDJPY since Kuroda unleashed NIRP – this is the worst 2-week drop (Yen strength) since LTCM in 1998…

  

   

  Damn It, Janet!

  

   

  It seems much of today's turmoil began as Hong Kong re-opened last night…

  

   

  An OPEC Rumor – which struck perfectly as the S&P broke 1812 – a crucial technical level (January's intraday low back to Feb 2014)… And just look at VIX!!! Does that look like a "normal" market?

  

   

  Spiked stocks briefly (enabling NASDAQ to briefly get green before dropping), and the soared again…

  

   

  Techs managed to scramble green in the last hour but financials were the biggest loser…

  

   

  Deutsche Bank's dead-cat-bounce died and is back to tracking Lehman's analog…

  

   

  And it is spreading to US banks – Sub financial credit risk is up 18% this week – the worst week since at least 2011…

  

   

  High Yield Bond yields and Leveraged Loan prices are at their worst levels since 2009…

  

   

  Treasury yields crashed overnight – 2Y was down 10bps and 10Y down 20bps at its apex, before a miraculous bid for USDJPY appeared and rescued risk…

  

   

  The yield curve (2s10s) collapsed even further below 100bps – to Dec 07 lows near 95bps at its lows today – leading financials lower…

  

   

  The last time 2s10s was flattening and at these levels was Jan 2005

  

   

  FX markets were volatile early on (with a huge drop in USDJPY when HK opened) and the USD drifted weaker…

  

   

  The biggest 2-week drop in USD Index in 4 years…

  

   

  Crude and Copper slumped as Gold & Silver surged…

  

   

  As front-month crude plunged relative to 2nd month crude to 5 year lows..

  

   

  Charts: Bloomberg

  Bonus Chart: If everything is awesome, why is USA default risk on the rise?
  

  

  

  

  

• Jeff Gundlach: Gold To $1,400 As Faith In Central Banks Is Lost

  It’s a day ending in -day, which means it is time for another Jeff Gundlach fire sermon, as transcribed by Reuters. And while in his most recent address to the mortals the new bond king from DoubleLine focused on tremors in the bond market, predicting that “credit fund bankruptcies are coming,” and that “the VIX needs to surge above 40 before a bottom can be made in the high-yield junk bond market”, today he focused on a topic we have been covering all day, namely the collapse of faith in central bankers and the ascent of gold as a preferred asset class to paper money and bank deposits.

  In his latest communication with the outside world, Gundlach said that gold prices are likely to reach $1400 an ounce “as investors lose faith in central banks“, Reuters reported.

  “The evidence that negative rates are harmful and not helpful has piled up to the point that the ‘In Central Banks We Trust’ mantra has finally been laid bare as a hoax,” Gundlach said.

  Well, yes, even Bloomberg finally admitted it.

  

  But the question is why does Gundlach see gold rising to only $1400. After all if, as JPM calculated the ECB, BOJ and Fed will cut rates to as low at -4.5%, then gold – as the only form of currency that will remain in physical form and is not taxable (at least until the government confiscates it) – will end up far, far higher than just $1,400, which is less than 15% from the current price.

  Indeed, if the Chinese population decides to reallocate just a tiny fraction of their $25 trillion in deposits away from cash and into gold ahead of the inevitable massive Chinese devaluation, the question is how many zeroes Gundlach’s forecast will be off by.

  Anyway, back to Gundlach who said that negative rates are highly correlated with equities, particularly with banks and financials. Their stocks have come under severe selling pressure as negative rates would hurt their balance sheets.

  “What’s scaring people is the ’12 rate hikes in three years’ in the dots. When are they going to change the dots? They are still there,” Gundlach said about the Fed’s dot plot.

  He repeeated that “the market is going to humiliate the Fed. It’s bizarro to have rate hike projections while at the same time, Yellen is talking about negative rates. What a mess.”

  Gundlach’s predictive track record speaks for itself:  last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China’s slowing economy would pressure emerging markets. In 2014, Gundlach correctly also forecast U.S. Treasury yields would fall, not rise as many others had expected.

  “The Fed raising rates in this environment is unthinkable,” Gundlach said. Gundlach also told Reuters that he purchased more Puerto Rico general obligation bonds at around 70 cents on the dollar. He added: “You make money on the short side. The market is moving too fast for the Fed to keep up.”

  Or, if one wants to avoid the threat of idiotic short squeezes driven by idiotic headlines such as the recurring “OPEC is cutting production” hoax (note: the Saudis aren’t cutting anything until the US shale sector lies in a rubble of chapter 11s and 7s), one can just buy gold.

  Yes, the BIS will do its best to slam it down with naked shorting, but that only provides lower entry points to accumulate positions in a commodity which as even the Amazon Post’s Keynesian lackey correctly put it, is “a bet that the people in charge don’t know what they’re doing.” 

  If by now it is not clear that the people in charge are idiots – and the US 2016 presidential race should have sealed it – it never will be.

  

  

  

  

  

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