Today’s News 13th January 2016

• The Demise Of Dollar Hegemony: Russia Breaks Wall St's Oil-Price Monopoly

  Submitted by William Engdahl via New Eastern Outlook,

  Russia has just taken significant steps that will break the present Wall Street oil price monopoly, at least for a huge part of the world oil market. The move is part of a longer-term strategy of decoupling Russia’s economy and especially its very significant export of oil, from the US dollar, today the Achilles Heel of the Russian economy.

  Later in November the Russian Energy Ministry has announced that it will begin test-trading of a new Russian oil benchmark. While this might sound like small beer to many, it’s huge. If successful, and there is no reason why it won’t be, the Russian crude oil benchmark futures contract traded on Russian exchanges, will price oil in rubles and no longer in US dollars. It is part of a de-dollarization move that Russia, China and a growing number of other countries have quietly begun.

  The setting of an oil benchmark price is at the heart of the method used by major Wall Street banks to control world oil prices. Oil is the world’s largest commodity in dollar terms. Today, the price of Russian crude oil is referenced to what is called the Brent price. The problem is that the Brent field, along with other major North Sea oil fields is in major decline, meaning that Wall Street can use a vanishing benchmark to leverage control over vastly larger oil volumes. The other problem is that the Brent contract is controlled essentially by Wall Street and the derivatives manipulations of banks like Goldman Sachs, Morgan Stanley, JP MorganChase and Citibank.

  The ‘Petrodollar’ demise

  The sale of oil denominated in dollars is essential for the support of the US dollar. In turn, maintaining demand for dollars by world central banks for their currency reserves to back foreign trade of countries like China, Japan or Germany, is essential if the United States dollar is to remain the leading world reserve currency. That status as world’s leading reserve currency is one of two pillars of American hegemony since the end of World War II. The second pillar is world military supremacy.

  US wars financed with others’ dollars

  Because all other nations need to acquire dollars to buy imports of oil and most other commodities, a country such as Russia or China typically invests the trade surplus dollars its companies earn in the form of US government bonds or similar US government securities. The only other candidate large enough, the Euro, since the 2010 Greek crisis, is seen as more risky.

  That leading reserve role of the US dollar, since August 1971 when the dollar broke from gold-backing, has essentially allowed the US Government to run seemingly endless budget deficits without having to worry about rising interest rates, like having a permanent overdraft credit at your bank.

  That in effect has allowed Washington to create a record $18.6 trillion federal debt without major concern. Today the ratio of US government debt to GDP is 111%. In 2001 when George W. Bush took office and before trillions were spent on the Afghan and Iraq “War on Terror,” US debt to GDP was just half, or 55%. The glib expression in Washington is that “debt doesn’t matter,” as the assumption is that the world—Russia, China, Japan, India, Germany–will always buy US debt with their trade surplus dollars. The ability of Washington to hold the lead reserve currency role, a strategic priority for Washington and Wall Street, is vitally tied to how world oil prices are determined.

  In the period up until the end of the 1980’s world oil prices were determined largely by real daily supply and demand. It was the province of oil buyers and oil sellers. Then Goldman Sachs decided to buy the small Wall Street commodity brokerage, J. Aron in the 1980’s. They had their eye set on transforming how oil is traded in world markets.

  It was the advent of “paper oil,” oil traded in futures, contracts independent of delivery of physical crude, easier for the large banks to manipulate based on rumors and derivative market skullduggery, as a handful of Wall Street banks dominated oil futures trades and knew just who held what positions, a convenient insider role that is rarely mentioned in polite company. It was the beginning of transforming oil trading into a casino where Goldman Sachs, Morgan Stanley, JP MorganChase and a few other giant Wall Street banks ran the crap tables.

  In the aftermath of the 1973 rise in the price of OPEC oil by some 400% in a matter of months following the October, 1973 Yom Kippur war, the US Treasury sent a high-level emissary to Riyadh, Saudi Arabia. In 1975 US Treasury Assistant Secretary, Jack F. Bennett, was sent to Saudi Arabia to secure an agreement with the monarchy that Saudi and all OPEC oil will only be traded in US dollars, not Japanese Yen or German Marks or any other. Bennett then went to take a high job at Exxon. The Saudis got major military guarantees and equipment in return and from that point, despite major efforts of oil importing countries, oil to this day is sold on world markets in dollars and the price is set by Wall Street via control of the derivatives or futures exchanges such as Intercontinental Exchange or ICE in London, the NYMEX commodity exchange in New York, or the Dubai Mercantile Exchange which sets the benchmark for Arab crude prices. All are owned by a tight-knit group of Wall Street banks–Goldman Sachs, JP MorganChase, Citigroup and others. At the time Secretary of State Henry Kissinger reportedly stated, “If you control the oil, you control entire nations.” Oil has been at the heart of the Dollar System since 1945.

  Russian benchmark importance

  Today, prices for Russian oil exports are set according to the Brent price in as traded London and New York. With the launch of Russia’s benchmark trading, that is due to change, likely very dramatically. The new contract for Russian crude in rubles, not dollars, will trade on the St. Petersburg International Mercantile Exchange (SPIMEX).

  The Brent benchmark contract are used presently to price not only Russian crude oil. It’s used to set the price for over two-thirds of all internationally traded oil. The problem is that the North Sea production of the Brent blend is declining to the point today only 1 million barrels Brent blend production sets the price for 67% of all international oil traded. The Russian ruble contract could make a major dent in the demand for oil dollars once it is accepted.

  Russia is the world’s largest oil producer, so creation of a Russian oil benchmark independent from the dollar is significant, to put it mildly. In 2013 Russia produced 10.5 million barrels per day, slightly more than Saudi Arabia. Because natural gas is mainly used in Russia, fully 75% of their oil can be exported. Europe is by far Russia’s main oil customer, buying 3.5 million barrels a day or 80% of total Russian oil exports. The Urals Blend, a mixture of Russian oil varieties, is Russia’s main exported oil grade. The main European customers are Germany, the Netherlands and Poland. To put Russia’s benchmark move into perspective, the other large suppliers of crude oil to Europe – Saudi Arabia (890,000 bpd), Nigeria (810,000 bpd), Kazakhstan (580,000 bpd) and Libya (560,000 bpd) – lag far behind Russia. As well, domestic production of crude oil in Europe is declining quickly. Oil output from Europe fell just below 3 Mb/d in 2013, following steady declines in the North Sea which is the basis of the Brent benchmark.

  End to dollar hegemony good for US

  The Russian move to price in rubles its large oil exports to world markets, especially Western Europe, and increasingly to China and Asia via the ESPO pipeline and other routes, on the new Russian oil benchmark in the St. Petersburg International Mercantile Exchange is by no means the only move to lessen dependence of countries on the dollar for oil. Sometime early next year China, the world’s second-largest oil importer, plans to launch its own oil benchmark contract. Like the Russian, China’s benchmark will be denominated not in dollars but in Chinese Yuan. It will be traded on the Shanghai International Energy Exchange.

  Step-by-step, Russia, China and other emerging economies are taking measures to lessen their dependency on the US dollar, to “de-dollarize.” Oil is the world’s largest traded commodity and it is almost entirely priced in dollars. Were that to end, the ability of the US military industrial complex to wage wars without end would be in deep trouble.

  Perhaps that would open some doors to more peaceful ideas such as spending US taxpayer dollars on rebuilding the horrendous deterioration of basic USA economic infrastructure. The American Society of Civil Engineers in 2013 estimated $3.6 trillion of basic infrastructure investment is needed in the United States over the next five years. They report that one out of every 9 bridges in America, more than 70,000 across the country, are deficient. Almost one-third of the major roads in the US are in poor condition. Only 2 of 14 major ports on the eastern seaboard will be able to accommodate the super-sized cargo ships that will soon be coming through the newly expanded Panama Canal. There are more than 14,000 miles of high-speed rail operating around the world, but none in the United States.

  That kind of basic infrastructure spending would be a far more economically beneficial source of real jobs and real tax revenue for the United States than more of John McCain’s endless wars. Investment in infrastructure, as I have noted in previous articles, has a multiplier effect in creating new markets. Infrastructure creates economic efficiencies and tax revenues of some 11 to 1 for every one dollar invested as the economy becomes more efficient.

  A dramatic decline for the role of the dollar as world reserve currency, if coupled with a Russia-styled domestic refocus on rebuilding America’s domestic economy, rather than out-sourcing everything, could go a major way to rebalance a world gone mad with war. Paradoxically, the de-dollarization, by denying Washington the ability to finance future wars by the investment in US Treasury debt from Chinese, Russian and other foreign bond buyers, could be a valuable contribution to genuine world peace. Wouldn’t that be nice for a change?

  

  

  

  

  

• Jews Told Not To Wear The Kippa After Machete Attack At Marseille Synagogue

  Last week, Cologne mayor Henriette Reker received a raucous tongue-lashing on social media after suggesting that it is German women’s collective responsibility to prevent sexual assaults by remaining an “arm’s length” away from would-be assailants.

  Reker’s remarks came as the international media suddenly woke up to the string of sexual assaults that allegedly took place in Cologne’s city center during New Year’s Eve celebrations. The incidents purportedly involved gangs of “Arabs” harassing and groping German women during the festivities.

  Hundreds of such attacks were reported in Germany and elsewhere across the bloc and before you knew it, a scandal was born. Some say authorities have been reluctant to publicize the assaults for fear of triggering a dangerous backlash against the millions of refugees who have fled to Western Europe from the war-torn Mid-East. Indeed, it now appears Sweden knew that these types of attacks were taking place as far back as last summer but between the media and police, failed to publicize the “problem.”

  Reker’s comments – combined with her contention that Germany needs to “explain to people from other cultures that the jolly and frisky attitude during Carnival is not a sign of sexual openness” – seemed to suggest she was at least partially blaming the victims for the attacks. Even is she wasn’t, the idea that it’s incumbent upon women to change their behavior rather than incumbent upon men not to assault them is patently absurd.

  Well, German women aren’t the only ones who are being encouraged by officials to alter their “behavior” in order to avoid becoming victims because as AFP reported earlier today, Jews in Marseille are now being told not to wear the kippa in the streets.

  That piece of advice comes from Zvi Ammar, the head of the Marseille Jews in the wake of an attack on a worshipper at the Marseille synagogue on Monday.

  For those who may have missed it, Binyamin Amsalem, a teacher, was minding his own business yesterday when a teenager waving a machete and allegedly shouting “Allahu Akbar” ran at him. Amsalem defended himself with a copy of the Torah he was carrying and sustained a “light” injury:

  

  “Not wearing the kippa can save lives and nothing is more important,” Zvi Ammar told La Provence daily. “It really hurts to reach that point but I don’t want anyone to die in Marseille because they have a kippa on their head.”

  “France’s Chief Rabbi Haim Korsia urged Jews in France to continue wearing the kippa and form a ‘united front'”, Reuters notes, adding that “Roger Cukierman, head of the French Jewish organization umbrella group, said not wearing the kippa in public was “a defeatist attitude”.

  So taking this together with Reker’s advice for German women, we suppose the message here is that if you want to avoid being attacked in Europe it’s your responsibility to stay a safe distance away from anyone who looks like they might be prepared to grope you or hack at you with a machete and try your best not to look outwardly religious.

  Or perhaps, just as Reker says Europe needs to “explain” to people from other cultures that sexual assault isn’t acceptable, the bloc also needs to explain that axe murder is equally, if not more repugnant. 

  

  

  

  

  

• Guest Post: 2016 – Year Of The 'Epocalypse'

  Some thoughts on what lies ahead while President Obama jawbones… (grab a glass of wine or bottle)

  Submitted by David Haggith via The Great Recession blog,

  An economic apocalypse upon us. My 2016 economic predictions provide the full explanation as to why 2016 will be the year of the Epocalypse — a word that encompasses the roots “economic, epoch, collapse” and “apocalypse.” I needed a word big enough to describe all that is about to befall the world in 2016. When you see the towering forces that are prevailing against failing global economic architecture and the pit of debt beneath that structure, as laid out here, I think you’ll recognize that the Epocalypse is here, and it is everywhere. The Great Collapse has already begun.

  What follows are the megatrends that will increasingly gang up in the first part of 2016 to stomp the deeply flawed global economy down into its own hole of debt. The economic collapse that is already developing includes the US economy and the US stock market that is now collapsing from the external forces and internal vacuum that I’ve been writing about for a few years here.

   

  Nations deep in the hole

  Fire in the hole. Brazil is already burning and has been declared by Bank of America and others to be in a recession deeper than the Great Depression — its worst since 1901. Brazil is struggling to combat runaway inflation at the same time. That’s is an impossible combination to battle.

  It ain’t Zimbabwe yet, but it’s looking like a place where Mugabe might want to run for president. Only a couple of years ago, Brazil was a nation of rising glory — the shining light of South America, one of the brightest of emerging markets. Now, as the US starts raising interest, its problems will grow worse as its debt, in a time of deep national crisis, is made impossible to manage.

  Japan, Canada, Australia, Venezuela, Russia, Ukraine, Brazil and Greece are just some of the nations officially in recession during 2015. The planet as a whole is in recession, meaning aggregate growth in GDP of all nations, if measured in dollars, has been in reverse for more than two quarters. And the head of the International Monetary Fund predicts that global “growth” will be worse in 2016 than it was in 2015, and 2015 looked pathetic!

  Christine Lagarde, leader of the IMF, said higher interest rates on national debts owed to institutions in the US will increase vulnerability worldwide. It’s long been said that, “As goes the US economy, so goes the world;” but it is equally true to say, “As goes the global economy, so goes the US.” In other words, the US economy is so big and influential that this single economy can move the world (and almost always does); but the global economy is even bigger and, so, can and will move the US. That’s why my 2016 economic predictions state this is the year the world moves the US. There is a rapidly failing, intertwined global economies falling into their own holes of debt, and the US is certainly going to get swept down all of that. Recent interactions between China’s small stock market and the huge US stock market show the US is clearly not immune.

  The Federal Reserve’s rate increase is also generally expected to strengthen the dollar (though that is not certain as the dollar’s strength depends on other factors, t0o). If so, dollar-denominated debt in other nations gets a double whammy of higher interest and higher premiums on currency conversion to make the payments. Lagarde doesn’t see things as looking better after 2016 either due to aging demographics as baby boomers move into retirement and slow down a little. (A good time to invest in artificial hips and knees.) So, there are many reasons global economic collapse is a trend that will prevail throughout 2016.

  It’s already lining up poorly for the US. Both UBS and the Atlanta Fed have placed US GDP growth for 2016 at a likely 0.5%. Dutch Bank cut their predictions of US growth to 0.5% as well. The big boys are rapidly cutting back their expectations. While I think they are wrong because the truth will be much worse, o.5% is still a cloudy forecast for those particular institutions that are typically very conservative in their downgrades.

  These institutions have typically overestimated national growth. They started with 2016 expectations that were over 2%, which they cut back to 1.5%, which they’ve not cut back to 1% all in less time than a year. Their track record says they always overestimate. I form my 2016 economic predictions based on the many trends that will be affecting future data. Thus, you might say the Federal Reserve Bank of Atlanta is a trailing economic indicator.

  I believe that, as data for the last quarter of 2015 comes in, these institutions will be revising their projections for 2016 down even further, just as they did throughout 2015. That said, their figures are already borderline recession numbers.

  I think the US may already be in recession, given that recessions are never declared until six months after they begin (being officially defined by two successive quarters of contraction in GDP). The biggest of my 2016 economic predictions, however, is that the US experiences something far worse than what we normally thing of as a “recession.” Hence, coining the word “epocalypse” to refer to the crash that is just getting started — an economic demolition that will cause the whole world to rebuild its economic structures. This is truly epoch in the sense that it is an extinction-level event economically that will open the world to transition to a new global economy over time. The world you live in is about to change.

   

  Another basis for my 2016 economic predictions is the China Syndrome

  We are seeing it now. Even if China does not meltdown, it is certain beyond anyone’s reasonable doubt that China will slow more in 2016. Even China predicts its economy will slow more, and 2015 was already China’s slowest year in fifteen years. We already know what that slowing caused; so, it doesn’t take any brain wizardry to extrapolate what further slowing in China adds to the global problems just laid out above. Since major companies started going out of business or defaulting in 2015, more that are badly weakened from 2015 will fail to make it through 2016, and nations that have lost in selling resources will lose even more. So, the second of my 2016 economic predictions is that their times all get harder, not better.

  China’s stock market has a lot more crashing to do, as well. Consider that China has frozen its stock market in suspension for half a year now. Meanwhile, its companies are doing worse, and its economy has slowed a little more. That means the ground has moved out from under the suspended market. The economic landscape is now pretty far below where the market remains suspended. So, Beijing is stuck. If it releases the market to be free again, it will certainly crash just to make contact with reality below.

  As I finish up these predictions, the Chinese stock-market crash appears to have abated; but look deeper. Articles are already appearing that say stock prices were supported after a Chinese change in strategy by huge purchases of stock by the Chinese government. The flip side to that kind of rescue is that it simply means the free market is being re-absorbed into the Chinese colossus. Private industry is, again, being socialized.

   

  The oil pit

  Tom Kloza, founder and head of Oil Price Information Service predicted oil prices in 2015 more accurately than anyone, and his predictions for oil prices in 2016 are even more dour. So, the next major trend that my 2016 economic predictions encompasses, as a force that is changing global economics is the continued, long-term crash of oil. (Not just based on Khoza, but on many others, as well as my own sense of what has to happen in oil.)

  Kloza, to stay with the guy who did the best in 2015, predicts West Texas Intermediate will drop all the way to $32 per barrel, and it looks like he’s just about already right. Kloza predicted oil would drop to $35 in 2015, and it did. I said it would drop to $40 and not lower, which it did and held there for a couple of months (so that was a very close call), but eventually it went down further. I was overly optimistic. Kloza expects oil to go back to where it was in 2008.

  To make matters worse, Kloza expects a decoupling of oil and gasoline prices with gas starting to rise due to storage expenses. That means both the oil industry (and all of its backers and suppliers) and consumers lose. So, that’s worse than last. He doesn’t expect oil to stay down all year, however; but it will certainly deepen the wreckage in the first half of 2016.

  My own sense of it is this: With oil storage facilities full to the brim around the world and a promised glut from the Saudis to continue all of next year and Iran possibly coming back online, oil is almost certain to go down more. US companies are already being crushed at the present level. Saudi Arabia has strengthened its ability to hold its position by drastically altering its national budget and implementing new taxes to replace lost oil revenues. That says for certain they plan to be in this fight for the long haul.

  Moreover, Iranian oil is the cheapest oil to extract in the world; so, if they get back into the market, they can try to hurt the Saudis more with even lower prices and still make a profit. Iran and Saudi Arabia, two of the world’s largest oil producers are now practically at war with each other (see that trend below). The US government is determined to see its deal with Iran go through, so we can be fairly certain Iran will re-enter the oil market early this year.

  Saudi Arabia has used oil to keep its populace at peace by not taxing them. Iran will use that leverage against Saudi Arabia by dumping as much cheap oil on the market as it can pump in order to press the Saudis to raise taxes more as they lose more money, thus destabilizing the Saudi government. The Obama administration has already shown itself to be completely non-supporting of the Saudis as an old US ally and to prefer to form a new alliance with Iran. So, there is nothing to stand in Iran’s way, and Iran is dying to pump and sell oil anyway.

  To show you how rapidly the oil market is deteriorating, prices were close to $35/barrel for West Texas Intermediate crude oil when I started working on my 2016 economic predictions, and they almost touched Khoza’s $32 as I finished this up … and Iran hasn’t even entered the market yet. All of the trends in oil are worse for the global economy in 2016 than they were in 2015, and they have already been hugely devastating.

   

  US Industrial Recession also part of my 2016 economic predictions

  Two major manufacturing surveys over the past week have come in well below economists’ expectations — solidly in a manufacturing recession — with new orders also falling below expectations, offering no hope for an improvement in the near future. US manufacturing fell at its fastest pace in six years, and US factory orders have never fallen like they did in 2015 without the US going into recession. November’s reports brought the 13th month of year-on-year decline! And that, according to Zero Hedge, was with a 47% surge in defense spending — the largest defense increase since 9/11.

  The Baltic Dry Index, which tracks the cost of shipping dry goods overseas has reached an all-time low, partly because too many new ships were ordered in recent years but also because so little product is shipping as industry is sinking.

  When manufacturing falls and starts to layoff people, as it did at the end of 2015, then services to those people start to fall. A recession in the service sector, in other words, lags a recession in the manufacturing sector because it is largely a response to falling incomes and rising unemployment to where people cannot afford the services.

  Manufacturing in China and the UK has contracted significantly, as in US big-equipment manufacturers. The eurozone, however, saw manufacturing grow, probably due to the falling value of the euro causing a rise in demand for exports from that zone.

   

  Stocks in bondage

  The top-ten stocks that gave a positive average to a falling US stock market are now also declining with some of them now taking bigger hits than most other stocks. That means the last pillars of the stock market’s support are crumbling. The two biggest — the Big Ace’s, Apple and Amazon — have been pounded hard in the last couple of weeks. Sixty points for Amazon is a pretty hefty plunge. Apple, having become the most valued stock ever, is plummeting even faster.

  Apple has been in decline for roughly half a year as iPhone sales are flagging, and investors seem unwilling to be impressed by other Apple technology like the new Watch or more distant technology like whatever the heck Apple is doing with cars. Google, too, has been entering the car game by taking the driver out of the game. Given how much we text while driving, apparently we have a great desire to drive our telephones because it is now phone companies who are the innovators in the automobile industry. Apple’s iPhone production is anticipated to be cut by as much as 30%; but maybe that will be made up by the new iCar. (Don’t ask.)

  In the meantime, the top ten are descending. When you only have ten secure stocks to move to and then two of those go into retreat, index averages are bound to fall … and fall they have, triggered by China’s all-out, stock-market crash.

  The US market was also artificially inflated by cheap buybacks of company stock, which have been funded by cheap credit made widely available by the Fed’s zero-interest strategy. That stimulus scheme is now unwinding as credit costs start to rise. So, a market that remains flat, in spite of huge buybacks, now will be finding less of that support. It has to settle. One of the primary decisions makers in Fed policy, Richard Fisher, has just said he warned the Fed that the market would go wobbly when policy was reversed because, in his own words, the Fed “front-ran” the US stock market and created a huge asset bubble. He expects a 20% drop, but I think he is way conservative because he doesn’t want to think about his nightmares.

  UBS, Switzerland’s largest bank and one of the largest banks in the world, now says that it expects the S&P 500 to fall by 30% this year. UBS says we are definitely in the final stages of a bull market and adds,

  Last year’s rise in volatility was in our view just the beginning for a dramatic rise in cross-asset volatility over the next few years. (ZeroHedge)

  The Dow Jones Transportation sector has already become a bear market, and it is widely accepted in Dow theory that transportation stocks are leading indicators of the stock market’s direction as they respond more quickly to how the economy is doing overall than other stocks.

  The Russel 2000 index of smaller companies has already fallen 14% since its average is not buoyed by the top ten.

  So, one more major trend I see that will press the entire world and the US toward total economic collapse is the crash of the US stock market, which I have said is already beginning.

   

  The big bond bust

  Only the weakest fall first, as they did in the fall of 2015. The second tier of bond funds will start to fall in 2016. Companies that defaulted in 2015 did so when interest rates were the cheapest they have been in the history of the nation. So, how much more will others fall as interest rates now start rising? It’s just logical. Enough said because it is already happening, so it’s not a future scenario; it is a present scenario that will contribute to the failure of all sides of the US economy, which will add serious downward momentum to the epocalyptic collapse of the entire global economy, making this something the Fed cannot rescue.

   

  Hedge hogs head for the hills

  And not so much Beverley Hills. In crumbling markets, many take refuge in hedge funds. I don’t pretend to understand their mysterious incantations and inner machinations; but celebrated geniuses cast bets against other bets and then, I think, bet that you can’t figure out what they’re up to. The magic that is supposed to come out the other side is that, when something goes down, they go up.

  Well, a lot of somethings seem to be going down, and the hedge funds going down, too. The funds that were supposed to protect you from volatility are dying from volatility in a huge fund flush. The problem for the Hedge Hogs is that their old magic never accounted for new patterns that make no sense where governments like China buy stocks en mass, and where central banks buy their nation’s debt in really, really big chunks (like almost all of it) and where money is free or now, in some countries, you even have to pay someone to hold your money for you.

  Thus, the hogs are having a tough time of things, and many of them have put out their “going out of business sale” signs. More hedge funds boarded up their windows in 2015 than in any year on record. But, then, they haven’t been around long anyway. So, who cares? What’s a billion here and a half a billion there spread across a landscape of economic wreckage, especially when it is mostly the rich who use these things? A lot of what these funds buy is distressed debt, so what did the rich expect?

  Here’s what concerns me and why it enters my economic predictions for 2016: These funds were supposedly managed by the best and brightest … like those people who figured out how to create mortgaged-backed securities — complex organisms made of other microorganisms that most of the buyers didn’t understand at all — even the supposedly smart buyers like banks that make a lot of money.

  So, you have to wonder how smart the smart guys are and whether anyone is paying attention to anything anymore. How much junk is in the system that very few know about because of financial invertebrates? What kind of funny algorithms run the auto-trader market now, making stock trade decisions across nations in nano-seconds that no human being ever sees — decision that were designed in advance by people who read and write in ones and zeros and speak arcane languages like C++ over a cup of Java and who are married at their fingertips to names like Ruby and Perl?

  Can anyone be certain that some algorithm that is making auto-stock decisions for investors while they sleep won’t misfire now that the market is running in reverse where there are no more Fed puts? Most of the toddlers who created today’s robotrading applications never knew the real world where money wasn’t free. Will all their clients wake up some morning to find a soft-coded circuit breaker failed to trip, and the computers of the world got into a bidding war and priced all stocks down to zero?

  You think I’m kidding? A lot of supposedly smart people thought the hedge-fund managers were geniuses, yet those geniuses are being wiped out by the very volatility they were supposed to protect you from! The irony of the virologist who died from a head cold. When will some econovirus, first contrived in the desserts of Afghanistan, hit the robotraders? Will the giants be taken down by a simple virus like complex invaders were taken down in War of the Worlds — bitten by something they can’t even see?

  My point is that we’re right back where we were in 2007 where banks and other major institutions were buying things they didn’t begin to comprehend. Are the big decision makers trusting risk management to software engineers? No surprise to me. I’ve long thought the big CEOs are just good at shaking hands and smiling and drinking overpriced, designer water. Have things become too complex to even identify risk in some cases? Maybe the actual market deciders — the software engineers — are so far out of touch with the real economic world that they’ve forgotten what gravity feels like.

  Well, gravity is here, Baby! So, hold on to your lead socks as we discover how robo-traders work when markets reverse.

   

  Mideast mania

  Iran’s Supreme Leader Ayatollah Ali Khamenei has threatened Saudi Arabia with “divine revenge” over its execution of Shi’ite cleric Nimir al-Nimir. Iran’s Revolutionary Guard made similar statements, promising “harsh revenge” and the “downfall” of the House of Saud.

  Saudi Arabia and Iran — longtime arch foes — support opposite sides of the war in Syria where ISIS, al Qaeda, Russia, Iran, Assad’s government, the US, France, and Turkey are all clustered in active battle. (Ah, what a bouquet of thorns.) The execution of Nimir also complicates relations for Saudi Arabia with Iraq’s Shi’ite-led government, where Saudi Arabia just re-opened an embassy after 25 years of shutdown only to have protestors shouting for its immediate closure following the execution.

  As far as I can see, Obama’s foreign policy of abandoning US allies in the Middle East has opened the doors to extraordinary conflict. The US is involved in more wars than we were under George Bush. Afghanistan continues to haunt us, as pulling out left the job undone. We’re now back to fighting in Iraq because the power vacuum created by Bush left a mess that can’t be cleaned up as other entities stepped in, and pulling out only made it worse. These were risks Obama was warned about from the beginning, should he pull out of Afghanistan and Iraq, not surprises.

  We’re now newly involved in Syria, as if we hadn’t kicked enough hornet nests in that region. Meanwhile, conflict continues to brew between Ukraine and Russia. China is threatening to raise its guns at US planes and boats in the South China Sea. North Korea this week made its first claim to have an H-bomb with “United States” written on it. Iran has admitted to having more long-range missiles than Obama ever knew about, yet the Obama administration seems to be ditching all allies in the Middle East in order to cosy up to Iran. Right or wrong, the US is involved in all of those conflicts, and all of it looks expensive.

  Obama’s foreign policy can be described as looking somewhat like throwing a bowl of meatballs and sticky rice at a wall. I don’t understand what the plan is, but that’s not what concerns me. What concerns me is that Obama doesn’t seem able to explain what the plan is either, and that makes me think he doesn’t know what the plan is. I will admit that he has certainly brought a great deal of change to the world.

  And then we have the Palestinians and Israelis, increasingly in tension that centers on the Temple Mount where the Bible predicts the events of the great apocalypse will happen. Both sides are increasingly less willing to talk to each other. So, this could all go biblical in scale.

  We haven’t been this close to the Middle East becoming a world war since the last World War.

   

  Fed float fled

  The precise timer for my 2015 economic predictions was the Fed’s change in its zero-interest policy. What many people missed with this event now gone by is that a tiny rise in interest was not the issue. Nevertheless, it is a bigger issue than thought. When the Fed only raised its interest target by one-quarter of a percent in December, and just two weeks later the high-yield spread (junk-bond spread) had grown by 2.5%. So, one concern is how much control the Fed has over interest rates as it starts trying to raise them. Do the math in terms of what this widening spread means to companies in the oil industry that are already struggling with their high-yield bonds. They will have to pay that much more if they need to refinance bonds they already cannot pay off.

  The bigger issue to the end of the Fed’s free float is that it transported us back out of Wonderland where bad news was good news for nearly seven years. For years we’ve seen the market go up when economic news was bad. That Mad-Hatter reaction happened because bad economic news meant the Fed would prolong its stimulus, and stimulus was, by far, the biggest game in town. That dynamic ended on December 16. Now we’re back in economic reality where bad news is simply bad news. We’re rightside-up again, and our re-entry into reality happened at a time when there is more bad economic news than I can ever remember.

  The instant move back to being rightside-up is why I predicted December 2016 would be a tiny trigger that would set off the explosives that bring our already crumbling structures down.

   

  The housing hustle hangs over us

  In the face of the Fed’s first looming rate hike, mortgage applications spiked — the rush of last-minute buyers wanting to make their move before interest started climbing. Now, two weeks after the Fed’s raise, mortgage applications have fallen off by a whopping 25%. A seasonal adjustment for bank closures over the holidays, etc., actually makes the figure come out a little worse at 27%. Most of the spike was in refi. Although applications for the purchase of homes has also fallen off 15%, they remained considerably higher than a year ago.

  Housing is NOT actually one of the bases for my 2016 economic predictions. I see no reason for housing to lead our collapse into the Epocalypse. However, will be a following trend that deepens the hole the Epocalypse crashes us into. As jobs fade back and unemployment starts to grow, mortgages will start to fail and housing prices will fall again.

  The large fall of home sales in November was largely because of rising prices (as some areas of the market now reach the peak they had before the Great Recession began) and because of a short supply of homes for sale. This peaking out of the housing market is similar to what we saw in 2007 and 2008 and shows the market is highly prone to topple again, so I don’t expect it to lag long as we now move into the Epocalypse.

  The fact is that the extraordinary home prices at the housing peak in 2007 could only be supported by loose credit. They have only been supported now by loose credit and low interest now, so prices have to start moving down as interest starts moving up, or we have to loosen the terms of credit even more, as we did last time around. Either road leads home to the same collapse.

   

  Student loan crisis also part of my 2016 economic predictions

  Outstanding student loans in the United States now top a trillion dollars. That’s not so outstanding. Nearly $1.2 trillion to come closer. How are people who are barely past the point of being kids going to pay that off? While student loans won’t be the cause of the Epocalypse, they will fail at a greater rate, intensifying band and government financial stress, thereby adding to the falling weight. The Ecocalypse is an economic collapse that happens throughout the world and in all sectors of the economy. It’s total. (But it is also so huge that it will likely take more than a year before its grandeur is truly appreciated.)

   

  Auto-traders are auto-traitors

  I’m speaking here of the financiers and the manufacturers, not the buyers. Auto sales are at a record high (up 15% in 2015), and some look to that as evidence that the US economy is strong. I would say, instead, it is the exception that proves the rule. It is one more part of the problem because that accounting is all baloney, and baloney is why most of the world’s economic experts don’t see any of this coming. They believe their own baloney.

  You have to consider what factors have taken auto sales to these supposedly soaring heights. In part, it’s consumer confidence, which is is a positive tail wind for the economy; but terms of credit on automobiles have been extended out to all-time extremes, too, of seven years on a highly depreciable asset. Down payments have, as they were just before the Great Recession, been minimized, as has interest. Most of all, most of these sales are not sales at all. The industry now leases far more cars than it sells.

  You have to wonder why so many economists are blind to how significant all of that is and to what it means. So blind, in fact, that they point to auto sales as an indicator of a good economy when it is the same mess we saw in the Great Recession. Apparently economists are incapable of learning anything. So, the biggest scare here is how blind it proves the experts are who guide the economy.

  Has anyone forgotten what supported auto sales in the year before the Great Recession? Zero interest, zero down, and zero payments for a year. At the time, I was asking, “What’s their end game? Where do they go from here now that they’ve spent the year giving away one-year leases because people can return all these cars at not loss?

  What we see now is that the automotive industry has doubled down on desperation by adding to that original mess longer-term loans and particularly by moving toward leases and calling them the new auto sales. As recently as 2010 fewer than one in ten auto loans exceeded a six-years term. Now, that is the average loan length.

  It’s dumbfounding to me that people are stupid enough to site autosaves as evidence of a healthy economy when they are built on such precarious terms and are mostly not even true sales. Just as in housing, we have switched from being a nation of auto owners to auto renters. As with housing, I expect a collapse of auto sales because it is built on a rickety foundation, but it will be trailing trend because it depends on a weakening of the consumer base as the economy slides back into recession. However, it will increase the speed and depth of the economic collapse as it joins the forces of the fall.

  Auto sales may not join the parade of panic until late in the year or 2017; but expect automakers within a year of so to end up right back where they were during the worst of the Great Recession … with less hope of a bailout. Oh, my goodness, the sheer stupidity!

  But enough of the cheery news. December sales fell to their lowest in six months, and December is supposed to be a really hot month when dealers close out all their inventory. Sales missed expectations by the most since November … of 2008! And while the year as a whole was up (as measured by counting bits of baloney strung on an abacus), the last half of the year fell more than any year since November … of 2008! Does anyone remember 2008 when automakers went bankrupt-or-bailout? They’re betraying the bailouts we gave them by setting up disaster all over again.

  Sales right now are particularly declining in China where the ratio of inventory to demand hasn’t been higher since the Great Recession. Sales might have hit a top since total car debt in the US right now is 30% higher than it was at its last peak right before … 2008! It has risen from about 600 billion dollars in outstanding debt to over a trillion dollars. Does that really leave any headroom for market expansion? Are you seeing a pattern here?

  All of this debt pressing down, even if it doesn’t go into default, certainly reduces our capability to do other things. It’s quite a load to carry.

   

  Black swans

  These are the events you cannot see coming, unlike the trends above that anyone can see if they take off their rose-colored glasses and look reality straight in its glowing red eyes. So, I’m not saying any of these will happen; whereas, I am saying all of the above are as close to certain as you can ever find in a world filled with chance.

  Cyber attacks on the energy grid or on corporations like that seen against Sony last year or into government computers could happen on a game-changing scale. One such attack on an energy grid just happened in Ukraine over the holidays where a virus was deployed to disconnect substations, causing a blackout; but it was minor. It’s only importance is in showing that the vulnerability is real.

  Sandworm, the organization believed to be responsible is targeting NATO, U.S. academic institutions, and government organizations in Ukraine, Poland and Western Europe. John Hultquist, head of iSIGHT Partner’s, the cyberespionage firm that discovered the virus, said,

  It’s always been the scenario we’ve been worried about for years because it has ramifications across broad sectors…. Operators who have previously targeted American and European sensitive systems look to have actually carried out a successful attack that turned the lights out. (The Washington Post)

  Of course, he has a service to sell, and fear of cyber attacks is a good marketing strategy for cyber espionage companies. On a positive note, Ukraine’s power grid rebounded in less than a day.

  What about internal terrorism as a black swan event? Millions of immigrants are flooding across borders from nations that are steeped in war, and they are being accepted as fast as they choose to come. How is it even remotely possible to screen out terrorists when you don’t have a government you can work with that knows anything about these people? Just recently people with terrorist connections were caught coming across the Mexican border from Afghanistan and Pakistan. Are we foolish enough to believe we actually catch all of them or that terrorists are too stupid to exploit this path of easy entry?

  It’s not politically correct to even question that some of these nice people might be hell-bent on destroying Western civilization. That Xenophobic. But let’s look at Germany. They have taken in over a million immigrants from Syria in less than one year. The culture class is growing rapidly. Citizens have been raped by a few bad people that entered. I know that most of the people are not bad, but when the conveyor is running at full speed, it’s hard to pick off the bad apples. Is it worth risking another few skyscraper collapses in order to help the refugees?

  What about a return of the Grexit. For those old enough to remember Snagglepuss the Cat, will it be “Grexit, stage left, politically eleven?” I still think a breakout of rage is on the near horizon. Between all the social issues from mass-immigration being forced on the citizenry of Europe and all the economic hardship of austerity forced on Greeks by their creditors, I’m thinking peasant revolts and storming of the castles may be seen in Europe in 2016.

   

  US debt problems

  A longer-term question, which may not come to bear this year, so is not one of my 2016 economic predictions, is how long can the US refinance its debt? Reductions in oil use and the plunge in oil prices mean fewer petrol dollars are necessary, so fewer US bonds might be purchased in other countries as a way of converting currencies to dollars and holding the dollars.

  China and Russia have teamed toward turing the yuan into a global currency as part of plan to intentionally move away from buying US dollar-denominated bonds. Russia’s role has been to make it illegal for former Soviet partners to trade in oil using US dollars. Neither wish to support US hegemony in world politics, so they have strong political reasons to damage the US economically and hope to use the yuan toward that end of weakening the US.

  This is, I’m sure, partly why China has also moved toward developing its internal consumer market, rather than focusing on exports. That will make it less dependent on exports to the US. Of course, it only makes good sense for them to make that kind of shift anyway.

  With the Federal Reserve now raising interest rates, the interest on US debt could also go up. I say, could because one mitigating factor here for the US is that it is, as I’ve said in the past, the best looking horse at the glue factory; so money streaming out of all the nations of the earth could try to pour into US bonds. Likewise with money fleeing the US stock market. That caveat is the only reason I’m not sure what will happen this year in terms of the US being able to refinance its debt; but longer term, this is a towering problem that will have a serious day of reckoning. And it could be the biggest black swan of all for 2016.

  The United States’ government is running annually on deficits that are measured in parts of a trillion!

   

  Fundamental flaws in the foundation

  While all of these severe forces will batter the global economy — US economy now fully included — they are not the reason the US economy now enters the Epocalypse. They are the overwhelming trends pressuring the global economy and the US economy, but there are fundamental economic fault lines throughout the US economy that I am banking on as the basis for my predictions.

  The stock markets of the entire world have positioned themselves for years now on the premise that central banks could prevail in getting us out of the Great Recession by printing copious amounts of money and piling debt on debt. I am certain beyond the slightest doubt — and have been since the very beginning of the Great Recession — that you cannot bail yourself out of a debt-caused recession by quadrupling down on debt! It’s insane. Nor can you repair bubbles by inflating them into balloons!

  Since the beginning of the Federal fantasy, I’ve said that the only thing we have done is push the debt further forward until it will become an immovable mountain of debt. We have taken deflated assets and re-inflated them to levels where only ludicrous terms of credit can finance them.

  My running analogy has been that of snowplows, pushing the snow straight ahead, instead of angling their blades to shove it off the side of the road. The general slowing of the entire global economy that you see right now is the sound of all the snowplows grinding to a stop as the mountain of snow finally becomes to big to push.

  We have built all of our markets on debt because that is how central banks created money. Stocks, bonds, houses, automobiles, etc. are all really mountains of debt, not stored assets. And I believe this is the year the grand scheme comes down (though it may take longer than a year to fully unfold, given the sheer scale of the collapse).

  Creating greater debt to solve something we knew was a debt problem in 2008 has been the wrong solution from the beginning. I’ve said all along that it would go forward for quite a long time because you can do a lot of partying when you are not paying for it; and governments have a lot of capacity. That’s why, over all the years of writing this blog, I have not predicted such a big collapse as being imminent (already happening, in fact, but unseen by most) as I am now. It is now the immovable mountain, built up so high above us, that it is going to avalanche down on us.

  So, it is not just that the free money has been invested in stocks and bonds, but that the entire market is positioned on top of a delusion. Once the delusion of recovery begins to break up, the market has enormous repositioning to do in order to line itself up with reality. Now that we are leaving Wonderland where bad news is just bad news, the cracks in the bad structure will show up quickly.

  Banks have continued to be freewheeling throughout this so-called recovery, playing the same games that created the Great Recession. Both the government and the Fed wanted to keep the old dinosaur economy alive because neither has the creativity to envision another way to grow an economy. The Federal Reserve is based on economic expansion through debt because its method of creating new money is through banks issuing loans that give out money that didn’t exist before the loan was made. Both the government and the Federal reserve believe expanding the money supply is what we need to do to goose the economy.

  Currently banks appear to be backed with stronger reserves than they had before the Great Recession, so investors, the media, the public in general and the government and Fed all believe they are in stronger shape. BUT, as stocks crash and bonds go bust, those reserves will evaporate.

   

  What will be the recovery plan?

  The full degree to which the Epocalypse develops will depend on how soon and how strongly the government and the Fed intervene now that things are beginning to fall.

  Bear in mind, though, that few economists or stock analysts are predicting a recession in 2016. Therefore, there is a very good chance of having one. Why, after all, would you listen to the people who predicted a rising market in 2007? (I’m sure glad I took my own advice back then.) By the same token, the Fed gives all appearances of believing in its recovery, so it will be slow to intervene C.ogress clearly can’t work together long enough to come up with a solution and also believes in the Fed’s recovery. The Obama Administration will just look to the same experts it turned to who came out of the Bush Administration.

  How much of the full depth of this collapse you see will depend on how soon intervention happens and what the intervention is; but my snapshot of government’s ability to see what is coming, its creativity and its ability to work together indicates that response will come too slow and too late. They certainly will respond before things get as bad as I’m saying they will if they fall to their full potential, but will they respond before the momentum is more than they can arrest?

  The lack even a hint toward ideas that follow any different course does not give much hope that government or central banks, when they propose a solution, will propose a good one. My prediction is that all of this leads to the presentation of a global solution for a global problem. What stop-gaps governments will take as they try to develop a global solution, I don’t know.

  The economic expansion is in its seventh year, and that is about as long as they usually run. If anyone wants to believe this one can endure longer, they can go right ahead. I’m more than glad to let them make the big, easy money that they think is out there. I’ve already taken shelter because I don’t want to try to squeeze outside the door alongside the rushing masses. As a result, I sleep easy. My money isn’t making any money, but I sleep easy.

  

  

  

  

  

• China Trade Balance Surges As Exports Surprise To The Upside

  Mission Accomplished? It’s a modern monetary miracle – China’s trade surplus surged to CNY382bn (from 434bn), dramaticlaly higher than the expected drop to 338bn thanks to better than expected data for imports and exports. Imports dropped 4.0% (less than the 7.9% drop expected) and the smallest decline since December 2014 but it was exports that “proved” China’s policymakers are large and in charge. For the first time since February 2015, China exports rose year-over-year (by 2.3%) dramatically better than the 4.1% plunge expected.

  Everything is awesome again!!

  

  So – no need for more policy support… despite earlier comments from officials of export policy support?

  Offshore Yuan is rallying modestly on this news…

  

   

  Now we look forward to all of China’s trading partners report how their exports also rose this month (leaving some magical off-Earth entity making up the “difference”).

  And finally – not wanting to pour cold water on the celebrations, we note that it is crucial to understand this is the extremely seasonal period leading up to Chinese New Year and is most likely an outlier… but for now, everything is awesome.

  

  

  

  

  

• President Obama's Final State Of The Union Address – Live Feed

  As President Obama prepares to unleash his final State Of The Union speech, The White House has conveniently focused attention on the following six "success stories": The Economy (record low number of men in workforce), The Climate (too hot for retail, too cold for construction), Foreign Policy (bwuahahaha), Health Care (record number of Americans cutting back to afford medical costs), and Social Progress (record high racial tensions, police state, surveillance state,  and record low trust in government). But apart from that, Americans have The Kardashians, iGadgets, record levels of syphillis, and, of course, a record surge in national debt during any President's "reign."

   

  Mission Accomplished President Obama…

  

   

  For the hard of hearing and propaganda-impaired – here is a quick summary of President Obama's 'tenure'

  

   

  The decline and fall of American Exceptionalism in one simple SOTU Speech reading level chart…

  Take the under #SOTU pic.twitter.com/7TqXdMNwdQ

  — Not Jim Cramer (@Not_Jim_Cramer) January 12, 2016

  Most crucially – how exactly will President Obama claim a "victory" of a deal with Iran – safeguarding the world from their nuclear threat – when they are holding 2 vessels and 10 navy crewmen "hostage"?

  The full speech can be read here but why bother: here is the abbreviated word cloud:

  

  Live Feed (President Obama is due to speak at 9pmET)

   

  If it's too much to bear, here is the ubiquitous drinking game…

  

   

  As DebateDrinking.com explains, when you hear a word on your selected list of drink words – take a drink*! We recommend something domestic – we are drinking for America after all.

  *We define a drink as a gulp of beer or sip of wine or liquor. Know your limits and please drink responsibly.

  And here is the live score on this drinking game…

   

  Finally, this…

  

  

  

  

  

• China Is The New Japan After All: Here's How To Trade It

  In an odd coincidence, just as we were preparing an article showing how China is becoming increasingly more like Japan and hot to trade this convergence, we happened to glance at the slide that Jeff Gundlach was talking about at that exact same moment during his afternoon presentation, and lo and behold, the “new bond king” was discussing why, among the reasons why “China may not bounce back”, is that China is increasingly becoming a Japanese demographic doppelganger…

  

  … in a slide that was sourced from, of all places, Zero Hedge.

  So with that reflexive quandary out of the way, we go to the latest presentation by BofA’s Michael Harnett, who among the 6 key investment themes and trades for 2016″ lays out the “Black Dragon” as one of the key ones, and one whose core thesis is that “China, like Japan in the early-1990s, has entered a secular period of significantly slower economic growth, compounded greatly by debt deflation; like Japan in the 1990s, Chinese asset prices, currency, banks (Chart 5) and capital flows will periodically cause severe disruptions to global financial markets, even if China does not itself cause a global recession.”

  In other words, China is Japan, and not just demographically but financially as well.

  This is what else Hartnett said:

  China has de-pegged its currency from the US dollar: history is replete with illustrations of how major FX regime changes cause cross-asset volatility: Britain’s departure from the gold standard (1931), collapse of Bretton Woods system (1971-3), UK ending ERM membership (1992), Asia crisis (1997-8), the Euro (2000-). 

   

  Why

   

  China = Japan: China, like Japan in the early-1990s, has entered a secular period of significantly slower economic growth, compounded greatly by debt deflation; like Japan in the 1990s, Chinese asset prices, currency, banks (Chart 5) and capital flows will periodically cause severe disruptions to global financial markets, even if China does not itself cause a global recession.

   

  Chinese devaluation: a cyclical collapse in export growth, extreme FX devaluations in recent years in Japan, Europe and across Emerging Markets, and capital flight, are all causing an accelerated devaluation of the Chinese yuan; BofAML forecast CNY6.9 and CNH7.0 by 2016 year-end; we see downside risk to these forecasts (n.b. PBoC has spent $200bn in reserves in past two months and yet the extent of private capital outflows means CNY has still fallen).

   

  The great EM devaluation: until there is two-way risk in RMB, there is one-way risk in oil, commodities and EM; once Chinese exports begin to react positively to the cheaper currency, we think a bid is likely to return to Chinese and EM assets; until then, China asset prices are a threat to global asset prices (n.b. Chinese corporate bonds are at multi-year highs despite a credit crunch).

  

   

  Ok, fine, China is the new Japan. How does one trade it?

  Here are Hartnett’s 5 proposed trades:

  • Long 6-month forward USD/CNH: for exposure to Chinese devaluation.
  • Long 3-month USD vs basket of KRW, TWD, MYR: for exposure to Chinese devaluation.
  • Long India 10-year bond: BofAML Asia strategists argue that weak commodity prices are positive for India; macro backdrop is still favorable for India bonds, inflation outlook benign, and they expect further monetary easing by the RBI (entry: 7.737%).
  • Short M2JP0EXE index: European exporters with EM exposure have sold-off sharply; Japanese exporters have yet to sell-off sharply (Chart 6).

  

  • Buy KOSPI forward volatility (KOSPI2 Jun-16/Jun-17 forward vol agreement): BofAML derivatives team recommends owning volatility via KOSPI; cheapest globally, high downside beta to global markets; favorable technicals in 2016; good hedge against HSCEI/China downside and/or global recession.

  Then again, perhaps it is a good thing Hartnett said to short the CNH today and not yesterday; if anyone had shorted the currency yesterday when it was soaring hundreds of pips wider only to hit parity hours later, their trading career would be over right about now.

  

  

  

  

  

• Some Chinese Banks Run Out Of Physical Dollars As PBOC Holds Yuan Fix Flat For 4th Day

  Having apparently taken the day off from selling US Treasuries and buying Offshore Yuan (following yesterday's "murderous" short-squeeze"), completing a 40 handle round trip in the "stable" currency year-to-date, PBOC decided to hold Yuan flat for the 4th day but make a statement that they would "give policy support to exports" – in other words devalue more. The unintended consequence of their decision to withdraw liquidity and crush shorts in offshore Yuan is more problematic as it has reportedly left Chinese banks short of dollars at their ATMs (and are delaying withdrawals). Meanwhile, another of China's favorite outlets for capital outflows – Bitcoin – just got stomped.

   

  "Stability" – apart from in money-markets and offshore Yuan…

  

   

  As Offshore Yuan roundtrips 40 handles…

  

  So a free-floating curreny as blessed by The IMF will only be allowed to move as The PBOC decides (as opposed to those nasty carry trade speculators):

  • *YUAN EXCHANGE RATE SHOULD BE DETERMINED BY ONSHORE MKT: DAILY
  • *PBOC NEEDS TO LEAD FOREX MARKET EXPECTATION: DAILY COMMENTARY
  • *CHINA SHOULD CONTROL YUAN SUPPLY IN OFFSHORE MARKET: INFO DAILY

  But then this…

  • *CHINA LIKELY TO GIVE POLICY SUPPORT TO EXPORTS THIS YR: DAILY

  Which rougly translated means – pile on into shorts and we are going to devalue until exports pick up.

  Of course the whole world is waiting for China trade data tonight.

  However, it seems someone just stomped on Bitcoin – one of the Chinese favored outlets for capital flows – to show tthat the 'transitory' capital controls can't be worked around

  

  On heavy volume.

  By way of a reminder, this is what was said last night…

  A jump in the overnight cost for borrowing yuan in Hong Kong is "reflecting further PBOC efforts to stamp out speculation," according to Michael Every, head of financial markets research at Rabobank Group. Hong Kong-based Every told Bloomberg in an interview, following a massive spike in overnight borrowing rates for Offshore Yuan that "a 66% rate is murderous for others being swept up in this who are not speculating."

   

  PBOC advisor Han earlier warned that short selling the yuan "will not succeed," adding that "it is pure imagination that the Chinese yuan will act like a wild horse without any rein." But as Every notes, the unintended consequences could be a problem, "imagine you needed access to CNH for other purposes for a few days," concluding ominously that "in other EM crises we see that central banks usually win a round like this, but lose in the end."

  Sure enough: *SOME BANKS IN BEIJING, SHANGHAI RUN SHORT OF DOLLAR BILLS: 21ST

  Some banks in China’s Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency, 21st Century Business Herald reports, citing reporter’s investigation.

   

  BOC, CCB, China Merchants Bank in these cities require appointment at least 2 days in advance for >$5,000 purchases; appointment could take as long as 1 week at some branches.

  So in their haste to withhold liquidity and spank the spceculators, The PBOC may have just started their very own domestic bank run…

  Coming just 2 days after lines began to form at currency exchanges (as Chinese want Dollars for their Yuan),

  As Ming Pao, the most influential Chinese newspaper in Hong Kong, reports that Shanghai residents are lining up at local banks to sell Yuan for Dollars over fears of even more Yuan devaluation.

  We are sure Ms. Lagarde is produly standing by her decision to allow this "free" currency to be part of the SDR basket.

  But then again – this is what "frozen liquidty" really looks like in China…

   

  Charts: Bloomberg

  

  

  

  

  

• CHaNGe THiS!

  

  

  

  

  

• How Corrupt Is The US: An Extraordinary Example

  Eric Zuesse, originally posted at strategic-culture.org

  How Corrupt The U.S. Is: An Extraordinary Example

  Incarceration rates don’t necessarily correlate with corruption, but they do reflect the extent to which a given nation’s government is (by means of its laws and its enforcement of those laws) at war against its own population; and, so, technically speaking, it’s supposed to reflect the prevalence of law-breaking within that nation. After all, by definition, people are presumed to be in prison for law-breaking, irrespective of whether the given nation’s laws are just – and, if they’re not just, then this fact reflects even more strongly that the nation itself is corrupt. So, a high incarceration-rate does strongly tend to go along with a nation’s being highly corrupt, in more than merely a technical sense.

  Out of the world’s 223 countries, the US has the world’s second-highest incarceration rate: 698 per 100,000, just behind #1 Seychelles, with 799 per 100,000. Seychelles doesn’t even have as many as 100,000 people (but only 90,024 – as many people as are in the city of Temple Texas). By contrast, the US has 322,369,319; so, the US is surely the global leader in imprisonment. And, furthermore, #3, St. Kitts and Nevis, with an incarceration-rate of 607 per 100,000, has only 54,961 people (as many people as are in the city of Columbus Indiana). The only other country that might actually be close to the US in imprisoning its own people is North Korea, which could even beat out the US there, but wouldn’t likely beat tiny Seychelles: North Korea is estimated to have «600-800 people incarcerated per 100,000», and a total population of 24,895,000.

  Thus, for imprisonments, the US really does have no close second: it’s the unquestionable global market-leader, for prisons and prisoners.

  

  And this gets us to the market-leader for prisons within America itself, and to the stunning corruption that stands behind it.

  So, here’s that extraordinary example, and the story behind its corruption, which will provide a close-up view of America’s general corruption, from the top (including the government itself) on down:

  In order to protect the profits of privately run prisons in the US (where «Sixty-two percent of detention beds are administered by private prison corporations», meaning that most US prisoners are being ‘served’ by for-profit corporations in for-profit-run prisons), the US Federal Government is refusing to honor Freedom Of Information Act (FOIA) requests by the Center for Constitutional Rights (CCR), which is trying to find out why people are being imprisoned as illegal immigrants who ought not to be. Wrongly-imprisoned people are a device by which private prison-operating companies keep their prison-beds occupied and thus drawing income from the US government, just like a high occupancy-rate is essential for a hotelier’s profitability. But –unlike in the hotel trade – this coercive bed-occupancy produces more than mere profits; it produces also distressed families, of those individuals who are yanked and unjustifiably imprisoned, families suffering needlessly.

  It turns out that federal laws, passed mainly by the Republicans, but also with votes from corrupt Democrats, require (in H.R.3547) the US government to pay for «a level of not less than 34,000 detention beds» for ‘illegal immigrants.’ (You can see that requirement being cited by the Republican interrogator of an Obama Administration official, Department of Homeland Security, at 1:03:00- in this video, where the Obama official is being criticized for not locking up enough people to meet the law’s requirements.) (Republicans and other conservatives love to punish people, irrespective of justice. To be concerned about justice, as the CCR is, is to be ‘soft on crime’, as Republicans view it. Instead of justice, Republicans seek revenge; thus, for example, Republicans overwhelmingly support torture against ‘terrorist’ suspects; Democrats overwhelmingly oppose it. Torture greatly reduces the trustworthiness of a suspect’s statements, but it always serves as a vent for revenge, even when the suspect actually had nothing to do with terrorism; so, Republicans strongly approve of torture. Similarly, the most-conservative Muslims approve of beheading ‘infidels’. Conservatives everywhere, and in every faith, support harsh punishments; and the US is a conservative country; so, sentences are long, and the conditions are harsh.)

  However, the Obama Administration itself, even as it locks up, on some days, just shy of the legally mandated minimum of 34,000 accused ‘illegal immigrants’ (which shortfall is here drawing the ire of that congressional Republican in the video), is also actively blocking CCR from access to the information about how the government and private corporations set rates for immigration detention beds and facilities. CCR argues that private profits are being given higher priority by the Administration than is the welfare of the public; and, thus, that the General Welfare Clause of the US Constitution is being violated here.

  The Obama Administration says that it won’t release the information, because to do so would «harm corporations competitively».

  CCR claims, and the Obama Administration is opposing their accusation, that «there is essentially no competitive market in government contracts that could be harmed by the release of information, that there should be nothing proprietary about the terms of a government contract, and that the public has a right to understand how Congress funds immigration detention and how that funding is influenced».

  The Obama Administration is arguing that if this same cost-information were being requested concerning any of the 38% of government-run prisons, then the FOIA request would be complied with, but that contracting-out or privatizing that function has freed the government of any such obligation.

  However, CCR is concerned specifically about that profit-motive here – that the revolving door between government service and the private sector might itself be a key part of the explanation for the government’s requiring that at least 34,000 people will be in prison for, or awaiting trial on charges of, ‘illegal immigration’. CCR contends that the only reason why people should be imprisoned in America is that they’ve actually broken laws for which the correct punishment is a prison term. But the position of the US government is contrary: if the beneficiary of someone’s imprisonment is a private corporation, the public shouldn’t necessarily be allowed to know what’s going on, nor why. And, so, that’s the issue here. Does a private corporation’s privacy-right exceed the public’s right-to-know? The government says yes; CCR says no. CCR argues that to privatize is not to immunize: the government has the same obligations to the public, regardless of how it has chosen to carry out its obligations. The Obama Administration argues that a private corporation is private, protected from the public’s scrutiny – and that the corporation’s only obligations are to the government, not to the public; thus, no such FOIA requests will be honored.

  Here’s what’s not in dispute about the case: the man who, in the first Obama Administration, was the head of the US Department of Homeland Security’s Office of Immigration and Customs Enforcement’s Office of Enforcement and Removal Operations, David Venturella, is now the top sales official at GEO Group, which is «the world’s leading provider of correctional detention, and residential treatment services around the globe» – and that’s also the first thing GEO says about itself, on its own «Who We Are» page. And Mr Venturella is now being cited by the Obama Administration as an ‘expert’ in order to deny CCA’s FOIA request.

  As a GEO official, Venturella claims in his 22 December 2015 declaration in the court-case, that, «the winning proposal in almost every Federal procurement competition is awarded to the lowest priced bidder», and that, «the disclosure of GEO’s proprietary bed-day rates and staffing plans would result in substantial competitive financial harm to GEO». He claims that, «Even with access to their larger competitors’ staffing plans, the smaller private companies do not have access to the capital needed to compete to win a large facility». In other words, he pretends that GEO is one of «the smaller private companies». But then he goes on to say (just in case a reader might happen to consider GEO not to be one of «the smaller private companies»): «The second stage would be acrimonious competition between the larger organizations, public and private, that will very likely lead to their withdrawal from the detention market as well, thereby leaving ICE [Immigration and Customs Enforcement] with no viable detention service providers». Venturella assumes here that ICE cannot itself own and operate its prisons. (He doesn’t say why; he merely assumes that it’s the case – perhaps that everything should be privatized, and must be privatized, so ICE shouldn’t run its own prisons.)

  So, that (false) argument is the reason why injustices to defendants in the US immigration system must continue, Venturella, the salesman for GEO (his title is «Senior Vice President»), is here arguing.

  Essentially, the Obama Administration is joining with GEO arguing that the profitability of private prison companies is more important than any injustices that might happen to be caused by Congress’s establishment of an arbitrary fixed and stable minimum number of prisoners every day – and, since the head of the top prison-company is saying that profits would be threatened by adhering to FOIA in this particular matter, the Freedom of Information Act request in this case must be denied.

  The basic argument, in other words, is that privatization is more important than the US Constitution and its General Welfare Clause.

  How close are these contractors to the government?

  Here are five of the seven members of the Board of Directors of GEO:

  One is «Former Director, Federal Bureau of Prisons».

  Another is «Former Under Secretary United States Air Force».

  Another is «Executive Director, National League of Cities».

  Another is «Chairman and CEO of ElectedFace Inc»., which «will connect people to their elected officials in every political district».

  Another is George C Zoley, the company’s Founder and CEO, who is also «America’s Highest Paid ‘Corrections Officer.’»

  In fact, «GEO Group’s revenue in 2012 exceeded $1.4 billion and CMD [Center for Media and Democracy] estimates that 86% of this money came out of the pockets of taxpayers. CMD’s investigation of GEO Group unearthed how the company’s cost-cutting strategies lead to a vicious cycle where lower wages and benefits for workers, high employee turnover, insufficient training, and under-staffing results in poor oversight and mistreatment of detained persons, increased violence, and riots». (If so, then that would add to the misery that’s produced by the improper imprisonments.)

  «According to Nasdaq, major investors in GEO Group include: Vanguard, BlackRock, Scopia Capital (a hedge fund run by Jeremy Mindich and Matt Sirovich) Barclays Global Investors, Bank of New York Mellon, and more. George Zoley, CEO of GEO, is a major stockholder with over 500,000 shares. For more on investors, see Ray Downs, ‘Who’s Getting Rich Off the Prison-Industrial Complex?’ Vice, June 2013».

  Privatization is very profitable. But not for everybody. Only for the well-connected. For everybody else, it’s just more poor and abused workers, and unjustly imprisoned people. But virtually all Republicans, and also the Obama Administration and other corrupt Democrats (and Obama will get his enrichment after he leaves office), think that privatization is necessary – even more necessary than is adherence to the US Constitution, or than a justly ruled nation, and prosperous public.

  This type of government fits with America’s extraordinarily high incarceration rate.

  But a few US officials do whatever they can to reduce the country’s corruption. For example, the «Immigration Detention Bed Quota Timeline» shows that, in September 2015, US Senator Bernie Sanders (who probably is the US federal government’s leading campaigner against corruption) «introduces the Justice is Not for Sale Act of 2015, which seeks to end the bed quota among other criminal justice and immigration detention reforms. The bill is the first effort in the US Senate to eliminate the bed quota. In addition, Reps. Raúl Grijalva (D-AZ), Keith Ellison (D-MN), and Bobby Rush (D-IL) introduce the bill in the US House of Representatives».

  Those are the most progressive members of the US Congress. Arrayed against them are the billions of dollars in political propaganda that cause the number of such progressives to be extremely few in the US government. For that bill to pass in Congress, practically all conservatives would first have to become replaced by progressives, and by other supposed non-conservatives (called ‘liberals’), in Congress. Sanders says that it would require «a political revolution», and he’s correct on that. But that’s the least likely type of «revolution» the US is likely to have. Perhaps Sanders knows this but doesn’t want to shock people, who are too indoctrinated to be able to accept the uncomfortably ugly truth, that things might already be too far gone for that type of «revolution» to be sufficient (even if it were feasible).

  

  

  

  

  

• The International War On Cash

  Submitted by Jeff Thomas via InterntionalMan.com,

  Back in 2008, I began warning of increasing capital controls that we would see in the future, as a component in the decline of Western economies (Western in the broad sense, including Japan, Australia, etc.)

  Along the way, it occurred to me that, at some point, governments might collectively attempt to eliminate paper currency in favour of an electronic currency – transferred from party to party solely through licensed banks. Sound farfetched? Well, maybe, but what if the U.S. and EU agreed on an overall plan, then suggested it to other governments? On the face of it, this smacks of conspiracy theory, yet certainly, all governments would benefit from this control and would be likely to get on board. In fact, it might prove to be the only way out of their present economic problems.

  So, how would it play out? Here’s roughly how I saw Phase I:

  • Link the free movement of cash to terrorism (Create a consciousness that any movement of large sums suggests criminal activity.);
  • Establish upper limits on the amount of money that can be moved without reporting to some government investigatory agency;
  • Periodically lower those limits;
  • Accustom people to making all purchases, however small or large, through a bank card;
  • Create a consciousness that the mere possession of cash is suspect, since it’s no longer “necessary”.

  When I first wrote on the subject, there was considerable criticism as to the possibility that such a programme would ever be attempted, let alone succeed. And, granted, it was so Orwellian that it was understandably seen as a crackpot idea. But since that time, the programme has been developing extremely rapidly. In the last six months alone, it has become so visible that it has even garnered a name – “the War on Cash”.

  References in the media have been made that terrorist groups fund their attacks with cash. Dozens of countries have placed limits on the maximum amount of money that can be moved without reporting. Some, notably France, have already begun lowering their limits. Banks in some countries, notably Sweden, are already treating all cash transactions as suspicious. The previously theoretical Phase I is now well under way.

  This issue has expanded more quickly than I’d anticipated. Clearly, the governments that are forcing it into being are running out of time. There can only be one reason why they’d rush a programme that normally would be given more time for people to accept, and that’s that they see a crash coming before they can get Phase II of the programme underway.

  Although most anyone who’s paying attention recognises that Phase I is in motion, Phase II (as I perceive it) is not yet on the radar, but I believe it will be soon. Phase II will be the second wave of measures and they will be more draconian than Phase I:

  • Create a definitive false flag event that demonstrates how physical cash is the primary means of funding evil acts in the world;
  • Declare a date on which paper currency will become illegal (Until that date, it can be deposited into a bank. After that date, it becomes criminal to possess it.);
  • Once all cash has been deposited in banks, increase negative interest rates;
  • Confiscation of deposits can then be implemented, as desired, by banks (Confiscation of deposits is already legal in Canada, the U.S., and the EU.);
  • Confiscate contents of selected safe deposit boxes;
  • End “voluntary” taxation. All taxation will, in future, be by direct debit;
  • Declare money to be the property of the State that issued it. (The people are allowed to trade in it, but it is not truly theirs. The State therefore can freeze or confiscate the funds in any account, if any crime is “suspected”.).

  In recent months, I’ve warned repeatedly that, since confiscations of deposits will take place, we must assume that banks will additionally raid safe deposit boxes, as stated in the above list. Some banks, beginning with JPMorgan Chase, have placed limits on what forms of wealth can be placed in safe deposit boxes. Since then, Greece has taken this one step further. In future, Greek citizens will be required to declare cash exceeding €15,000, jewellery and precious stones valued at over €30,000 and declare the location of the safe deposit box in which they’re stored.

  The declaration is fraught with difficulties for the depositor, as he bears the obligation to accurately appraise each item. Should authorities disagree with the appraisal of, say, Grandma’s diamond brooch, the depositor would be suspect and may face confiscation.

  State Wealth Control

  Once Phase II is completed, state wealth control will exist. And, again, this prediction will seem at first glance to be Orwellian – a mere fiction. But then, less than a year ago, the War on Cash was regarded by only a few as being even within the realm of possibility, let alone right around the corner. And so it is with Phase II. Now that Phase I is in motion, it’s accepted as an unsettling reality, but Phase II is the obvious sequel.

  If you have cash in a bank, you think of it as your own. This is not the case. It’s wealth that you’ve loaned to the bank. In the future, the bank (with governmental approval) will have the power to decide if and when they will return all, or a part, of that cash to you. They will set the rules as to how that decision will be arrived at and those rules will be changed periodically. Since those rules will be arrived at by the banks (without need for your consent), the outcome will most certainly not be in your favour.

  Those who read this statement might react in one of three ways:

  • “This can’t be happening.”
  • “Okay, it’s happening, but there’s nothing I can do about it. It’s global.”
  • “There must be something I can do to keep from being robbed.”

  The first group will be the largest. They will freeze up, do little or nothing, and become victims.

  The second group may complain and even struggle a bit against these developments, but won’t prepare sufficiently and, ultimately, will also become victims.

  The third group will seek alternatives, and here’s where the light appears at the end of the tunnel. Yes, this effort will be international, but it won’t be fully global. There will be those jurisdictions that, traditionally, have not been willing to fall into line with the world’s foremost powers. They will not wish to go off the same cliff as the others and will take a different tack. They will be the recipients of those people who seek to escape the collapsing system. But, more than ever before, time is limited; the window is clearly closing.

  Escape from Confiscation

  The solution is surprisingly simple, although it will take work and dedication:

  • If you’re a resident of any jurisdiction that’s presently going down this road, move your money to a jurisdiction that has a consistent history for stable government, low (or no) direct taxation, and minimal interference or regulation over wealth;
  • Convert your wealth into those forms of assets that are hardest for rapacious governments to confiscate (foreign-held precious metals and real estate);
  • Create an exit plan for your own physical escape, should it become necessary.

  Editor’s Note: The War on Cash and negative interest rates are radical and insane measures. They are a sign of desperation.

  They are also huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

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

  How will you protect your savings in the event of a currency crisis? This just-released video will show you exactly how. Click here to watch it now.

  

  

  

  

  

• Former UK Cop Says Jihadists Are Hiding In Refugee "Jungle" Camp

  Behold!

  France has figured out what to do with all of the empty shipping containers the world no longer needs now that global trade has ground to a halt.

  

  

  

  That’s the “new and improved” refugee camp in Calais where authorities are, to quote Reuters, seeking “to bring some order to the so-called ‘jungle’ camp in sand dunes near the port.”

  As you can see from the above, the encampment was previously made up of shoddy tents and the conditions are deplorable. Variously described as “squalid” and “unsanitary” the “jungle” (that’s actually the camp’s nickname) is home to some 4,000 asylum seekers hoping to reach the UK. Now, the idea is to pack the migrants into the shipping containers.

  “The metal boxes are equipped with bunk beds, heaters and windows, but lack water or sanitary facilities,” Reuters writes, adding that the 1,500 or so refugees who live in the containers will have access to toilets and showers “at an existing facility now reserved for women and children.”

  And while that sounds infinitely better than hanging out in a tent on the ground with no heat, some fear the new facilities are a ruse. The shipping container village is surrounded by a fence with access controlled by handprint technology.”Some of [the refugees] said they were suspicious of this set-up,” Reuters notes, before quoting 25-year-old Abdullah from Iraq, who says “he and his friend Saad plan to stay in their tents despite freezing winter temperatures and frequent rainstorms that turn the sand to mud.”

  “Once you are in there (shelter), they will not let you go out,” he said. Perhaps they’re afraid France plans to load the shipping containers onto a boat bound for Syria.

  In any event, the push to improve Calais comes as at least one former British police terror chief says the camp is being used by jihadists who are “hiding in plain sight.” 

  “During a visit to inspect the area Kevin Hurley said he was concerned the camp was ‘completely un-policed’,” BBC reports. Here’s more:

  Mr Hurley, the former lead on counter-terrorism at the City of London Police and current police and crime commissioner for Surrey, spent several hours in the camp with BBC London’s Inside Out team.

   

  He said he was worried the camp was “a potential hiding space” and that people there could be being exploited by organised criminals.

   

  “If I were a returning jihadi, I would smuggle myself in amongst this group; you would easily get lost,” he said.

   

  Speaking to migrants at the camp, Mr Hurley was told that there were dangerous people staying in the “jungle”.

   

  One migrant said there were people at the camp who were “working for way of Daesh”, although they were not part of the jihadist group.

   

  However, the founder of Care4Calais, a UK charity set up to help migrants staying in the camp, dismissed the claims as “the most ridiculous thing I have ever heard”.

   

  Clare Moseley said: “You would have to be the world’s stupidest terrorist to try and enter Britain as a refugee, because when you come as a refugee you are subject to detailed background checks.”

  Perhaps, but Hurley’s contention is the safer bet. That is, if you say there are terrorists camped out at Calais and no attacks ever occur, no one is going to blame you for being cautious.

  On the other hand, if you call the notion that there are jihadists in the camp “the most ridiculous thing you’ve ever heard,” and an attack is later perpetrated by someone with ties to Calais, well then the public isn’t going to be very sympathetic.

  Below, find an interactive video from BBC that gives you a 360 look at “the jungle” along with a Banksy mural painted at the camp which reminds the world that Steve Jobs was the son of a Syrian refugee.

  

  

  

  

  

  

• Sorry Warren Buffett: Things Just Went From Bad To Worse For U.S. Railroads

  Back in November 2009, knowing he had both the inside track and the final decision on US energy policy under his crony president Obama, Warren Buffett acquired the 77% of the Burlington Northern (aka BNSF) Railroad he did not own for one simple reason: realizing he could pressure the “progressive president” Obama to curb all pipeline progress, confirmed recently with the terminal failure of TransCanada’s Keystone XL pipeline, Buffett would be ahead of everyone by controlling one of the key actors among “the New US Petroleum Pipelines.” The “pipelines” in question were shown in the following chart from our March 2013 post.

  

   

  And while Buffett’s strategy worked great for many years, certainly as long as oil was rising and above $100, over the past year, things went downhill fast. Nowhere, was this more visible than in a one year chart of transports, which have crashed over the past several months entering their first bear market since 2008 in late December.

  

   

  While all transportation components contributed to this plunge, rails were the biggest culprit. To be sure slumping railroad traffic was something we have covered extensively in the past year – together with ocean freight, together with trucks – and most recently covered it on January 3 in “What Rail Traffic Tells Us About The U.S. Economy.” The short answer: bad things.

  But while we were quite concerned about the implications of plunging railroad traffic, others ignored it, claiming as they always do, that “it is only coal, or only oil, or only [insert commodity related factor]”.

  However, a Bank of America report issued on January 6 revealed that the decline in rails was much more widespread than just “it’s only X.” This is what BofA’s Ken Hoexter said in a report titled “Carloads flashing a warning signal; lower 4Q estimates again“

  Longest and deepest carload decline since 2009

   

  We believe rail data may be signaling a warning for the broader economy. Carloads have declined more than 5% in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1% decline, has not occurred since 2009. In looking at carload data going back nearly 30 years, similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009. We exclude the period in 1996 from our analysis, as we consider it anomalous given that it overlapped with harsh winter conditions and was limited to January and early February of that year. Of the remaining instances, all either overlapped with a recession, or preceded a recession by a few quarters. The current period starting in October and continuing through the present has been accompanied by weak ISM results, with the purchasing managers index recently falling to 48.2 in December from 48.6 in November (a reading below 50 suggests contraction), and our proprietary BofAML Truck Shipper Indicator recently falling to its lowest level since 2012.

  Here is a rather troubling finding from BofA: the manufacturing recession has spilled over from purely the industrial sector and into “other, more consumer-oriented segments.” In other words, the service recession is imminent.

  Weakness no longer limited to industrials or coal

   

  For much of 2015, it was easy to dismiss weakness in carloads as being concentrated in industrial segments, and reflective of a secular shift away from coal. More recently, the softness has spread to other, more consumer-oriented segments. Intermodal carloads, which were up +1.0% and +3.6% in 1Q15 and 2Q15, respectively, posted a tepid +0.9% gain in 3Q15 and were down -1.7% in 4Q15. This follows the broader trend in 2015 of carloads accelerating to the downside through the year. Until recently, the difficult comparison year of 2014 was another reason to be dismissive of the decline percentages. Despite soft year-over-year results, absolute carloads remained above the 2010-2013 levels through the first 3 quarters of 2015. However, in 4Q15, volume is at its lowest level since 2010. BofAML Multi-Industrials analyst Andrew Obin recently noted that industrial weakness has not always been coupled with severe GDP declines, despite the high correlation between the two (86% correlation coefficient). However, as non-industrial segments post declining carload volumes, we are increasingly concerned with the breadth of the weakness.

   

  

  All of the above is very bad news for the US economy of which railroad traffic is just one of the proxies, but isn’t necessarily bad for Warren Buffett’s major gamble on the “new pipelines.”

  This is.

  According to a report in the FT, “the amount of oil hauled on US railways has declined steeply in the past year as refineries swallow more foreign supplies in the face of falling domestic crude output.”

  From a peak in January 2015 to last October, movements of crude by rail declined more than a fifth, the latest data from the US energy department show. Genscape, a research group, said rail deliveries to US Atlantic coast terminals continued to drop to the end of the year and the spot market for crude delivered by rail from North Dakota’s Bakken region “is at a near standstill”.

   

  Once seen as a 19th century relic, moving crude oil by train re-emerged as a hot technology five years ago as surging output from long-neglected shale oil regions overwhelmed pipeline capacity. Investors from oil companies to Wall Street banks clamoured for tank cars, while fiery accidents prompted federal regulators to impose more stringent standards on rolling stock.

  And Buffett was there to provide the needed cars, for a generous fee of course, while doing everything in his power (it’s a lot) to delay implementations of stringent, or even any standards, on “rolling stock.” Here are some highlights of the outcome:

  • Dramatic Explosion Footage: Warren Buffett-Owned Oil Freight Train Derails, Bursts Into Flames
  • Massive Fire Rages After Another Buffett-Owned Oiltrain Derails In North Dakota, Town Evacuated
  • One Day After Obama Kills Keystone XL Pipeline Another Buffett-Owned Oil Tanker Train Derails In Wisconsin
  • Fire Burns After Another Oil Freight Train Derails, This Time In Canada
  • Train Carrying Toxic Gas Derails In Tennessee, Catches Fire; Thousands Evacuated

  And so on. However, the following brief blurb in the FT article reveals that the time to pay the Piper has finally arrived.

  Tank cars, once feverishly ordered during the US shale boom, are sitting on sidings. Lessors are obtaining car rents 20-30 per cent below early 2015 — “if you’re lucky enough to keep your car in service”, said James Husband of RailSolutions, a consultancy.

  This means that the rail industry is about to be slammed with a dramatic repricing, one which is only the start and the longer oil prices remain at these depressed levels, the lower the rents will drop (think Baltic Dry but on land), until soon most rails will lose money on every trip and will follow the shale companies into a race to the bottom, where “they make up for its with volume.” After all, those billions in debt interest payments won’t pay themselves, meaning doughnuts for equity holders like folksy uncle Warren.

  Then again, we are confident that in the end, the Avuncular Octogenarian of Omaha will find a way to avoid being on the receiving end of yet another bad decision, courtesy of two things: this…

  

  … and this.

  

  

  

  

  

  

• Iran Seizes 2 US Navy Boats, Crewmen For "Illegally Entering Iranian Waters"

  Update: Iran plans to return the crewmen to a ship from the USS Truman carrier strike group on Wednesday.

  JUST IN: Plans are in place for Iran to return U.S. sailors to U.S. Navy Wed. morning, gulf time, US defense official says – Reuters

  — CNBC Now (@CNBCnow) January 13, 2016

  JUST IN: #Iran to return detained #US sailors to a ship from USS Truman carrier strike group: US defence official

  — The Straits Times (@STcom) January 13, 2016

  So we suppose we can just call the sailors “State of the Union hostages”. The rationale for waiting until tomorrow (i.e. until after Obama’s speech): it’s safer to carry out the exchange in daylight, according to an unnamed US official.

  In short, the Ayatollah has just pulled off one epic publicity stunt. 

  *  *  *

  Tensions were already running high between Tehran and Washington in the wake of Iran’s move to test-fire a next generation surface-to-surface ballistic missile with the range to hit Israel. 

   

  And then the IRGC conducted a live-fire rocket test within 1,500 yards of a US aircraft carrier in the Strait of Hormuz. 

  Now, in a further escalation, Iran has reportedly seized two US Navy ships. 

  • 2 U.S. NAVY BOATS IN IRANIAN CUSTODY, PENTAGON SAYS: AP
  • RHODES SAYS U.S. WORKING ON RETURN OF CREW
  • RHODES SAYS U.S. WORKING TO RESOLV

  But nobody panic, because Iran has promised to return the crew “promptly” and as CNN adds, according to Iran the sailors are safe:

  .@PressSec: “We have received assurances from the Iranians that our sailors are safe” https://t.co/GV9hdWZy3P https://t.co/1ioOtqYVH4

  — CNN (@CNN) January 12, 2016

  That appears to contradict a statement from Fars which says the US has “repeated” calls for the crew’s release.

  AP writes that the Pentagon says it briefly lost contact with two small Navy craft in the Persian Gulf on Tuesday but has received assurances from Iran that the crew and vessels will be returned safely and promptly.

  Pentagon says these photos show examples of the type of craft involved in Iran incident pic.twitter.com/47ClLilOZK

  — Oliver Darcy (@oliverdarcy) January 12, 2016

  “Riverine command boats or RCBs, are actually Swedish CB-90s and are a type of fast attack craft,” WaPo notes, adding that “in a number of pictures released by the U.S. Navy, the boats are outfitted with a number of light, medium and heavy weapons including .50 caliber heavy machine guns and GAU-19 miniguns.”

  

  “RCB’s can carry contingents of infantry and special operation forces and are often crewed by sailors in Riverine squadrons, known by some as River Rats,” WaPo continues. “The riverine force came of age in the Vietnam War in what was then known as the Brown Water Navy. In the 1960s and early 1970s boats such as Patrol Boat, River (from ‘Apocalypse Now’ fame) and Swift Boats were the River Rats vessels of choice.”

  

  Pentagon spokesman Peter Cook tells The Associated Press that the boats were moving between Kuwait and Bahrain when the US lost contact with them.

  Cook says, “We have been in contact with Iran and have received assurances that the crew and the vessels will be returned promptly.”

  The crews, which total 10 Navy sailors, are being held at Farsi Island, a highly restricted island between Bahrain and Kuwait, where Iran has a naval base. US officials are saying it is unclear how the crew members ended up in Iranian waters, though Secretary of State John Kerry has kept phone contact with Iranian officials in Tehran, urging for a release. A senior official told NBC News the Iranians understand a mistake was made and have agreed to a release to come in hours.

  According to AP, an anonymous senior official says Kerry “personally engaged with” Iranian Foreign Minister Javad Zarif to work out a solution almost immediately upon hearing of the development around 12:30 pm EST.

  Josh Earnest, the White House spokesperson, said the sailors will be released “promptly” and ” allowed to continue their journey.”

  The international incident comes on the day President Obama will give his final State of the Union speech of his tenure. Obama’s political opponents are capitalizing on the timing, especially since the International Spectator, citing Iran Revolutionary Guard, reports that “seized US sailors will not be released tonight or before State of the Union address.”

  Senator Tom Cotton (R-Arkansas) told CNN, “senior members of Barack Obama’s administration are apologizing for Iran seizing two US Navy vessels and holding 10 sailors hostage. The White House tonight is a hot bed of cold feet.”

  Presidential candidates Dr. Ben Carson and Jeb Bush have taken to Twitter to criticize Obama’s reaction. Bush called for “no more bargaining” and an immediate return home for the sailors, whereas Carson took a shot at Obama’s “preparing to talk about his so called ‘accomplishments'” in reference to tonight’s national address.

  If our sailors aren’t coming home yet, they need to be now. No more bargaining. Obama’s humiliatingly weak Iran policy is exposed again.

  — Jeb Bush (@JebBush) January 12, 2016

  BREAKING: While POTUS is preparing to talk about his so called “accomplishments”, 10 of our American sailors are being held by #Iran.

  — Dr. Ben Carson (@RealBenCarson) January 12, 2016

  This marks the second time in as many weeks that the President’s “soft” policy on Iran has come under fire. Following the abovementioned rocket incident GOP lawmakers called for fresh sanctions on Tehran in connection with two ballistic missile launches in October and November. The White House was apparently prepared to announce a new set of measures aimed at around a dozen individuals and companies but at the last minute, the administration backed out. Obama’s cold feet came after President Rouhani ordered the defense ministry to accelerate the country’s ballistic missile program in the event new sanctions were put in place.

  Meanwhile, according to Iran’s version of today’s events, Fars News agency says US sailors picked up by Revolutionary Guard Corps, from hardline camp who are opposed to the nuclear deal. Fars adds that the sailors were detained for illegally and “intentionally” entering Iranian waters even though they knew the area well. Tehran also contends the US ships were having “technical difficulties.” 

  Fars News says IRGC detained 10 US military personnel in 2 boats for illegally entering Iranian waters in Gulf https://t.co/daqeCflOrM

  — Borzou Daragahi (@borzou) January 12, 2016

  Fars says US sailors know area, carrying GPS, intentionally entered Iran’s territorial waters

  — Sobhan Hassanvand (@Hassanvand) January 12, 2016

  Fars: Both US boats “illegally” entered 2 km into Iranian waters, and IRGC confirms this info on their GPS record. https://t.co/V266Fsx42h

  — FDD’s Iran Project (@FDD_Iran) January 12, 2016

  Just in: Iran’s Fars news agency says 10 US sailors held include one woman

  — Jim Sciutto (@jimsciutto) January 12, 2016

  #Iran Questions:
  – Kuwait to Bahrain is 300 nautical miles. Why were US sailors traveling by small boats? Joy ride? https://t.co/xmRCY6Or36

  — Tarek Fatah (@TarekFatah) January 13, 2016

  And here is the full Fars statement, google translated:

  According to defense Fars News Agency, Iranian Revolutionary Guards 10 US military with two boats illegally entered Iranian waters in the Persian Gulf had been detained.

   

  According to the information received by the Fars news agency every American boat is equipped with 3 machine guns caliber 50 (one in front and two on the sides of the float).

   

  The two vessels illegally entered and patrolled about 2 km deep inside Iranian waters, and the information recorded on their GPS device and is now in the hands of Iranian Revolutionary Guards.

   

  The military said among the arrested were 9 men and one woman. They carried heavy weapons in their vessels.

   

  US officials repeated calls for the release of prisoners will continue with Tehran.

  So, they are prisoners, and unlike the White House tried to spin it, guests of honor?

  Ironically, earlier we asked:

  Is Iran going to wait until the end of the SOTU address before returning the 10 sailors?

  — zerohedge (@zerohedge) January 12, 2016

  We now have the answer: 

  BREAKING: Iranian Revolutionary Guards official says seized US sailors will not be released tonight or before State of the Union address.

  — The Int’l Spectator (@intlspectator) January 12, 2016

  

  

  

  

• What Bernie And The Donald Portend

  Submitted by Patrick Buchanan via Buchanan.org,

  Three weeks out from the Iowa caucuses, and clarity emerges.

  Hillary Clinton, the likely Democratic nominee, is in trouble.

  Polls show her slightly ahead of socialist Bernie Sanders in Iowa, but narrowly behind in New Hampshire. And the weekend brought new revelations about yet more classified and secret documents sent over her private email server when she was secretary of state.

  Between now and November, she will be traversing a minefield, with detonations to be decided upon by FBI investigators who may not cherish Clinton and might like to appear in the history books.

  Clinton’s charge about Donald Trump’s alleged “penchant for sexism” brought a counterstrike – her being the “enabler” of Bill Clinton’s long career as a sexual predator – that rendered her mute.

  But with Hillary Clinton having raised the subject, it is almost certain to be reintroduced in the fall, if she is the nominee.

  Then there is the newly recognized reality that Clinton, who ran a terrific comeback race against Barack Obama in 2008, is not the candidate she was. Nor is Bill the imposing surrogate he once was.

  Both are eight years older, and show it. “Low energy” nails it.

  Lastly, Hillary Clinton now has a record to defend as secretary of state, a four-year term in which it is hard to see, looking back, a success.

  Moreover, a defeat by Sanders in Iowa or New Hampshire could prove unraveling, with the press herd tapping out early obits.

  New Hampshire has consequences.

  A Granite State defeat by Sen. Estes Kefauver ended Harry Truman’s bid for re-election in 1952. Lyndon Johnson’s narrow write-in victory over Sen. Eugene McCarthy, 49-42, brought Bobby Kennedy into the race – and LBJ’s withdrawal two weeks later.

  George H. W. Bush’s unimpressive New Hampshire win in 1992 brought Ross Perot in as a third-party candidate two days later, and Bob Dole’s loss in 1996 portended defeat in the general election.

  But if a cloud is forming over the Clinton campaign, the sun continues to shine on The Donald.

  Last July, in a column, “Could Trump Win?” this writer argued that if Trump held his then 20 percent share, he would make the final four and almost surely be in the finals in the GOP nomination race.

  Now, in every national and state poll save Iowa, Trump runs first with more than 30 percent, sometimes touching 40. And, save in New Hampshire, Sen. Ted Cruz runs second to Trump.

  What does the surge for socialist Sanders and the Republican base’s backing of the outsiders Trump and Cruz and collective recoil from the Republican establishment candidates tell us?

  “The times they are a changing,” sang Bob Dylan in 1964.

  Dylan was right about the social, cultural and moral revolution that would hit with Category 5 force when the boomers arrived on campuses that same year.

  A concomitant conservative revolution would dethrone the GOP establishment of Govs. Nelson Rockefeller, George Romney and William Scranton in 1964, and nominate Barry Goldwater.

  Will the Clintons ever be held accountable? Help make sure they are by supporting the Hillary Clinton Investigative Justice Project, an effort targeting the racketeering enterprise known as the Clinton Family Foundation

  Something like that is afoot again. Only, this time, the GOP has a far better shot of capturing the White House than in 1964 or, indeed, than it appeared to have at this point in 1980, The Year of Reagan.

  In June 1964, Goldwater, about to be nominated, was 59 points behind LBJ, 77-18, in the Gallup Poll. On Sept. 1, he was still 36 points behind, 65-29. In mid-October, Barry was still 36 points behind, when some of us concluded that Mr. Conservative just might not make it.

  Yet, in January and February of 1980, Ronald Reagan, during the Iowa Caucuses and New Hampshire Primary, never got closer than 25 points behind President Jimmy Carter, who led Reagan, on March 1, 58-33. Yet, that November, 1980, Reagan won a 44-state landslide.

  Today, according to a new Fox Poll, Trump would beat Clinton by 3 points in the general election, if held now. Another poll shows Trump pulling 20 percent of the Democratic vote.

  What this suggests is that nominating Trump is by no means a guarantee of GOP defeat. But beyond politics, what do the successes of Sanders, Trump and Cruz portend?

  Well, Sanders and Trump both opposed the war in Iraq that the Bush Republicans and Clinton Democrats supported.

  Both Sanders and Trump oppose NAFTA and MFN for China and the free-trade deals that Clinton Democrats and Bush Republicans backed, which have cost us thousands of lost factories, millions of lost jobs and four decades of lost wage increases for Middle America.

  Trump has taken the toughest line on the invasion across the U.S.-Mexican border and against Muslim refugees entering unvetted.

  Immigration, securing the border, fair trade – Trump’s issues are the issues of 2016.

  If a Trump-Clinton race came down to the Keystone State of Pennsylvania, and Trump was for backing our men in blue, gun rights, securing America’s borders, no more NAFTAs and a foreign policy that defends America first, who would you bet on?

  

  

  

  

  

• Meanwhile In Chicago, 120 People Shot In First 10 Days Of 2016

  Even as Obama takes his anti-gun crusade to new highs with every passing week, having recently started dispensing executive orders, the president conveniently continues to ignore the state of affairs in his native Chicago – a city in which guns are banned – yet where the shooting epidemic has never been worse, and is truly emblematic of the “gun problem” America has.

  Judging by the most recent developments, Obama will have nothing to say about Chicago gun violence either during tonight’s state of the union address, or ever for that matter, because recent developments are downright disastrous.

  

   

  According to the Chicago Tribune, following the seven people shot to death and 30 more wounded during the latest weekend, the total number of shootings in the windy city has risen to 120 in just over a week into the new year, according to police.

  The fatal shootings included two teens killed by a store clerk during a robbery in the Gresham neighborhood on the South Side, and one of three people shot at a party four blocks from Mayor Rahm Emanuel’s home.

  As the Tribune tabulates as of Monday morning, at least 19 people have been killed in gun violence and at least 101 more have been wounded. This is three times higher than compared to the same period one year ago: in the first 10 days of 2015, “only” nine people were killed and another 31 wounded.

  Chicago police spokesman Anthony Guglielmi released a statement blaming most of the violence on “chronic gang conflicts.”

  “Every year Chicago Police recover more illegal guns than officers in any other city, and as more and more illegal guns continue to find their way into our neighborhoods.” 

  So the problem is smuggling of illegal guns, got it. What is the proposed solution?

  “So it is clear we need stronger state and federal gun laws,” Guglielmi said in the statement.

  Because those who illegally procure guns will follow gun purchasing laws, and the only thing preventing them from doing so is not enough laws? One can almost see why Chicago’s gun problem is getting worse by the day.

  The statement continues:

  “So far this year, the majority of the gun violence we’ve seen are a result of chronic gang conflicts driven in part by social media commentary and petty disputes among rival factions. Despite an overall lack of cooperation from gang members, detectives are working aggressively and making optimistic progress in several cases.”

  At least 2,986 people were shot in Chicago in 2015. Many more will be shot – by illegally obtained weapons in a city with unprecedented gun control – in 2016.

  For an interactive summary of the “hot spots” in Chicago, click on the map below.

  

  

  

  

  

  

• Here's Why Automaker Stocks Are Falling (Despite The Media's Exuberance)

  How can it be that automaker stock prices are tumbling given that auto sales (if one listens to CNBC) are surging, that (if one listens to the CEOs) everything is awesome for automakers, and (if one listens to Phil LeBeau) there is no bubble in auto credit? The answer is simple… (you just don't want to admit it)

   

  Two words – channel-stuffing!

  

   

  In fact, as IceFarm Capital's Michael Green details, the credit-fueled over-productiuon has historically been disastrous for the global auto sector…

  

   

  So once again – a mal-investment boom has pulled forward demand (from who knows where) and signalled entirely incorrect production expectations to executives who can only see 1 quarter ahead and the amount of buybacks they must do in order to maintain their own personal wealth.

  

  

  

  

  

• 93% Of American Counties Haven't Recovered From The Recession

  Supposedly, the Fed’s decision to hike rates last month conveyed something about the strength of the US economy. “I think the economy is on the road to recovery,” diminutive Chairwoman Yellen told the the Economic Club of Washington two weeks before liftoff.  “We’re doing well,” she added, for good measure.

  Now first, the idea that we’re “on the road” to recovery is a bit disconcerting in and of itself. After all, it’s not as if the crisis happened last year. We’re talking about recovering from something that happened eight long years ago. If we’re not there yet, one would be forgiven for suggesting that we’re not ever going to get there.

  Second, to the extent the “data” do show something that to the untrained eye might be mistaken for a robust recovery, you have to remember that the statistics can be made to show whatever a bunch of central planners want them to show.

  Take December’s “blockbuster” jobs report for instance. How, you might ask, is it possible that the US can add 292,000 jobs while average hourly wages decline? Simple: the hiring was a veritable minimum wage deluge as well-paying jobs barely budged while temp help soared by 34,400 and waiter and bartenders added another 36,900 to the country’s growing army of Food and Bev workers which now numbers a record 11.3 million. 

  And then there was what we called “the most troubling aspect” of the latest NFP report: the number of multiple job holders soared by 324,000 to 7.738 million, the highest since August 2008. Meanwhile, a record number of retired Americans worked part-time in December which means the elderly are either bored or broke – you guess which.

  So that’s the “robust” labor market. When it comes to GDP it’s all about the cost of socialized medicine as quarter after quarter, all of the “growth” comes from soaring healthcare spending. And then there is of course the infamous “residual seasonality”, a truly ridiculous bit of statistical Tomfoolery that effectively allows the BEA to simply adjust away all of the bad stuff on the way to publishing sanitized, “double adjusted” data.

  But even as the macro picture is hopelessly obscured by the mischievous tinkering of bureaucrats, the county-level data reveals the dismal truth: according to a new study by the National Association of Counties, 93% of America’s counties have not yet recovered from the recession.

  “Overall, the county economies recovered on all four indicators by 2015 still represent only 7 percent of all county economies,” the organization writes. “In contrast, almost 16 percent of county economies had not recovered on any indicator by 2015, mostly in the South and Midwest. States such as Florida, Georgia, Illinois and Mississippi have more than a third of their county economies still reeling from the latest downturn across all economic indicators.” 

  

  Note where the “good” counties are. As you can see from the map, the counties that have recovered on 3-4 of the indicators NAC measured are predominantly in the modwest and Texas. How long, one might fairly ask, will that last in the face of a prolonged slump in crude prices? 

  It wasn’t all bad news, and Emilia Istrate, the association’s director of research and outreach will fill you in on the rest of the details in the video below, but the bottom line, to quote Istrate is this: “[This] tells you why many Americans don’t feel the good economic numbers they see on TV.”

  

  

  

  

  

• WTI Slides After API Reports Massive Build In Gasoline & Distillate Inventories

  With the seasonally drawdown-prone December completed, we begin seasonally build-prone January with expectations for a 2mm barrel build. However, according to API, both total and Cushing inventory levels tumbled (-3.9mm and 300k respectively). Great news – so why is crude tumbling? Simple – massive builds in end-products again with Gasoline up a massive 7mm barrels and Distillates up 3.6mm barrels. Having ramped off sub-$30 levels aftwr NYMEX closed, and lifted by the Iran-US news, WTI is sliding back rapidly.

  The largest 2-week Gasoline invenrtiory build ever…

  

   

  And so while algos saw the inventrory draw headlines, real traders know what record-breaking builds in end-product means…

  

   

  December saw a very flat inventory overall (despite being a seasonally extreme period for drawdowns into year-end tax planning)…

  

   

  Judging from history, as Bloomberg notes, it should resume as soon as the festive season is over: Stocks have built by 3.2 million barrels on average in January since 1921.

  

  

  

  

  

• You Know Negative Interest Rates Are Bad When…

  Submitted by Simon Black via SovereignMan.com,

  Switzerland is famous for being punctual.

  The trains. The buses. The meticulously crafted, hand polished luxury watches.

  The Swiss are so culturally punctual that they even tend to pay their taxes well in advance of the filing deadline.

  So it was quite a shock to hear this morning that the Swiss canton of Zug is asking its citizens to delay paying their taxes for as long as possible.

  Why? Negative interest rates.

  The cantonal government doesn’t want to take in a pile of cash, only to end up paying the bank interest on all the tax revenue.

  Interest rates in Switzerland are among the lowest in the world; the official policy rate set by the Swiss National Bank is MINUS 0.75%.

  Initially these negative interest rates only apply to banks; minus 0.75% is a wholesale rate pertaining to transactions among banks, and deposits they hold with the central bank.

  But banks aren’t exactly charities.

  So if a bank is paying interest to hold funds with the central bank, eventually they’re going to pass that cost on to the consumer. Even if that consumer is the government.

  According to the Financial Times, the cantonal government of Zug estimates that they will save $2.5 million in negative interest rate charges by delaying tax receipts.

  Just consider the magnitude of this decision: the monetary system has become so screwed up that a local government doesn’t want its citizens to pay taxes early.

  In fairness, it’s not just Switzerland. All across Europe, interest rates are negative.

  In the Euro zone, the main policy rate is only slightly ‘less negative’ at minus 0.3%.

  And many of the bonds issued by European governments also yield negative rates.

  In other words, you have to pay money for the privilege of loaning a bankrupt government your money.

  In Germany, bond yields are negative all the way out to five years. It’s insane.

  Clearly any rational individual is much better off simply holding physical cash, rather than keeping substantial funds in a savings account.

  Cash doesn’t pay any interest. But it doesn’t cost any either.

  It’s pretty sad statement when the 0% you earn from holding physical cash is considered ‘high yield’.

  Of course, governments know this. They realize that no rational person is going to want to keep money in a bank, especially as negative interest rates cascade into consumer banking.

  And that’s a huge reason why there’s such a push to outlaw cash.

  If even a small percentage of depositors decided to close their bank accounts and withdraw all their savings in cash, the banking system would collapse.

  There simply isn’t enough physical cash in the system.

  Plus most banks are so highly leveraged, and they lack the liquidity to honor any meaningful amount of withdrawal requests.

  This is one of the fundamental dangers of negative interest rates.

  Central bankers, in an absurd, desperate attempt to generate inflation, are accomplishing nothing more than destroying the banking system.

  And even when it doesn’t work– even when the numbers prove that their ridiculous goal of increasing inflation isn’t working– they just keep trying the same thing over and over again, making interest rates even MORE negative.

  It’s madness.

  These people have broken the concept of money.

  Money is one of the most important social technologies in the history of the world, almost as important as language.

  Money is supposed to mean something. It is supposed to be the metric by which we measure economic value.

  But they’ve destroyed that. And it’s so obvious now.

  But cutting the price of money (interest rates) so far into negative territory, money has become so worthless that even a government doesn’t want it.

  And in doing so they have created the most absurd problems imaginable.

  It’s pretty clear that this is not a risk free environment.

  And as my colleague Tim Price pointed out yesterday, there is no single solution to protect yourself from the consequences of this madness.

  We discussed last week that holding physical cash is a great option to hedge short-term risks in the banking system.

  (In Switzerland, the highest denomination is the 1,000 Swiss franc note. In Europe, it’s 500 euros. In the US and Canada, it’s $100.)

  But with so many politicians and idiotic economists calling for a ban on cash, plus all the greater risks with fiat currency, physical cash is only part of the answer.

  Clearly precious metals make sense as part of a long-term, balanced approach.

  But owning gold requires a steely-eyed, willful ignorance of the daily fluctuations in its paper price.

  You can’t own gold and fret about it falling $20 in a single day, or 10% in a year.

  Gold is simultaneously a form of money… as well as an insurance policy.

  Trading fiat currency for gold, only hoping to trade the gold back for more fiat currency at a later date, pretty much defeats that purpose.

  But even gold is not a single solution.

  It may also make sense to own shares of a productive business– ideally one that’s recession-proof, has minimal debt, and is managed by competent people of integrity.

  There are plenty of other options out there, and this short list is by no means exhaustive.

  But the larger point is to start thinking in this direction. Look at the obvious risks and determine what makes sense for your situation.

  Most people will unfortunately succumb to the default option– doing nothing and assuming that it’s all going to be OK because the smart guys in government will figure it out.

  But this is pretty dangerous thinking.

  You won’t be worse off for taking sensible steps to protect yourself from undeniable risks.

  But should any serious consequences ever arise from this financial madness, they’ll happen very quickly, and it will be too late to do anything about it.

  And at that time, looking back, it will all seem so obvious.

  * * *

  In fact, the concept of negative rates has become so ubiquitous that BNP Strategist Reiko Tokukatsu has written a book "Negative Rates" which has stunningly become a bestseller in Japan on their failed experience with negative interest rates and directly challenges the economic playbooks adopted by central bankers around the developed world. As Bloomberg reports,

  The book, ranked the top among finance books since it went on sale on Dec. 10, says bond yields lower than inflation pass the debt burden to future generations and impoverish their lives, while keeping zombie companies alive, contradicting the Bank of Japan’s goal of reviving economic growth. The main beneficiary of the monetary easing is the government, which sees interest costs drop and a devaluation of its debt pile.

   

  Tokukatsu is among skeptics of bond-buying stimulus including U.S. hedge fund manager David Einhorn, who said in 2012 that lower rates would cause people to hoard savings rather than consume as their investment returns drop while the cost of commodities surges. The BOJ and monetary authorities across Europe are betting that interest rates below zero will reduce borrowing costs for companies and households, driving demand for loans as well as encouraging investment in higher-yielding assets.

   

  “Textbooks say negative rates are risk free but they are camouflaging the reality that contradicts the theory,” Tokukatsu said in an interview in Tokyo Jan. 6.

   

  “It’s nonsense to strengthen a policy where risk and return don’t match,” said Hidenori Suezawa, an analyst at SMBC Nikko Securities Inc. in Tokyo. “Despite the easing, the 2 percent target wasn’t reached in two years. It raises questions about the necessity of strengthening a policy that carries side effects without results or extending it for three or five more years.”

   

  Japan’s “declining working population and increasing number of pensioners are keeping demand down and helping keep inflation rates low,” said Comely. “QE is not going to deal with that structural issue.”

   

  “The time is right for the BOJ to end quantitative and qualitative easing and taper,” said Tokukatsu at BNP Paribas. “The inflation rate isn’t negative so it isn’t deflation. The 2 percent target is too high but 1 percent is achievable.”

   

  “Monetary easing has lasted too long,” Tokukatsu said. “Japan should lower targets appropriate for a mature economy with a falling potential growth rate.”

  Simply put, Tokukatsu concludes:  “It’s beneficial for the government but it’s financial repression for the people.”

  

  

  

  

  

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