Today’s News 19th January 2016

• U.S. Government Has Long Used Propaganda Against the American People

  The United States Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities found in 1975 that the CIA submitted stories to the American press:

  Wikipedia adds details:

  After 1953, the network was overseen by Allen W. Dulles, director of the CIA. By this time, Operation Mockingbird had a major influence over 25 newspapers and wire agencies. The usual methodology was placing reports developed from intelligence provided by the CIA to witting or unwitting reporters. Those reports would then be repeated or cited by the preceding reporters which in turn would then be cited throughout the media wire services.

   

  The Office of Policy Coordination (OPC) was funded by siphoning off funds intended for the Marshall Plan [i.e. the rebuilding of Europe by the U.S. after WWII]. Some of this money was used to bribe journalists and publishers.

  In 2008, the New York Times wrote:

  During the early years of the cold war, [prominent writers and artists, from Arthur Schlesinger Jr. to Jackson Pollock] were supported, sometimes lavishly, always secretly, by the C.I.A. as part of its propaganda war against the Soviet Union. It was perhaps the most successful use of “soft power” in American history.

  A CIA operative told Washington Post editor Philip Graham … in a conversation about the willingness of journalists to peddle CIA propaganda and cover stories:

  You could get a journalist cheaper than a good call girl, for a couple hundred dollars a month.

  Famed Watergate reporter Carl Bernstein wrote in 1977:

  More than 400 American journalists … in the past twenty?five years have secretly carried out assignments for the Central Intelligence Agency, according to documents on file at CIA headquarters.

   

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  In many instances, CIA documents show, journalists were engaged to perform tasks for the CIA with the consent of the managements of America’s leading news organizations.

   

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  Among the executives who lent their cooperation to the Agency were [the heads of CBS, Time, the New York Times, the Louisville Courier?Journal, and Copley News Service. Other organizations which cooperated with the CIA include [ABC, NBC, AP, UPI, Reuters], Hearst Newspapers, Scripps?Howard, Newsweek magazine, the Mutual Broadcasting System, the Miami Herald and the old Saturday Evening Post and New York Herald?Tribune.

   

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  There is ample evidence that America’s leading publishers and news executives allowed themselves and their organizations to become handmaidens to the intelligence services. “Let’s not pick on some poor reporters, for God’s sake,” William Colby exclaimed at one point to the Church committee’s investigators. “Let’s go to the managements.

   

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  The CIA even ran a formal training program in the 1950s to teach its agents to be journalists. Intelligence officers were “taught to make noises like reporters,” explained a high CIA official, and were then placed in major news organizations with help from management.

   

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  Once a year during the 1950s and early 1960s, CBS correspondents joined the CIA hierarchy for private dinners and briefings.

   

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  Allen Dulles often interceded with his good friend, the late Henry Luce, founder of Time and Life magazines, who readily allowed certain members of his staff to work for the Agency and agreed to provide jobs and credentials for other CIA operatives who lacked journalistic experience.

   

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  In the 1950s and early 1960s, Time magazine’s foreign correspondents attended CIA “briefing” dinners similar to those the CIA held for CBS.

   

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  When Newsweek waspurchased by the Washington Post Company, publisher Philip L. Graham was informed by Agency officials that the CIA occasionally used the magazine for cover purposes, according to CIA sources. “It was widely known that Phil Graham was somebody you could get help from,” said a former deputy director of the Agency. “Frank Wisner dealt with him.” Wisner, deputy director of the CIA from 1950 until shortly before his suicide in 1965, was the Agency’s premier orchestrator of “black” operations, including many in which journalists were involved. Wisner liked to boast of his “mighty Wurlitzer,” a wondrous propaganda instrument he built, and played, with help from the press.)

   

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  In November 1973, after [the CIA claimed to have ended the program], Colby told reporters and editors from the New York Times and the Washington Star that the Agency had “some three dozen” American newsmen “on the CIA payroll,” including five who worked for “general?circulation news organizations.” Yet even while the Senate Intelligence Committee was holding its hearings in 1976, according to high?level CIA sources, the CIA continued to maintain ties with seventy?five to ninety journalists of every description—executives, reporters, stringers, photographers, columnists, bureau clerks and members of broadcast technical crews. More than half of these had been moved off CIA contracts and payrolls but they were still bound by other secret agreements with the Agency. According to an unpublished report by the House Select Committee on Intelligence, chaired by Representative Otis Pike, at least fifteen news organizations were still providing cover for CIA operatives as of 1976.

   

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  Those officials most knowledgeable about the subject say that a figure of 400 American journalists is on the low side ….

   

  “There were a lot of representations that if this stuff got out some of the biggest names in journalism would get smeared” ….

  Former Newsweek and Associated Press reporter Robert Parry notes that Ronald Reagan and the CIA unleashed a propaganda campaign in the 1980’s to sell the American public on supporting the Contra rebels, utilizing private players such as Rupert Murdoch to spread disinformation:

  President Ronald Reagan meeting with media magnate Rupert Murdoch in the Oval Office on Jan. 18, 1983, with Charles Wick, director of the U.S. Information Agency, in the background. (Photo credit: Reagan presidential library)

  In the 1980s, the Reagan administration was determined to “kick the Vietnam Syndrome,” the revulsion that many Americans felt for warfare after all those years in the blood-soaked jungles of Vietnam and all the lies that clumsily justified the war.

   

  So, the challenge for the U.S. government became: how to present the actions of “enemies” always in the darkest light while bathing the behavior of the U.S. “side” in a rosy glow. You also had to stage this propaganda theater in an ostensibly “free country” with a supposedly “independent press.”

   

  From documents declassified or leaked over the past several decades, including an unpublished draft chapter of the congressional Iran-Contra investigation, we now know a great deal about how this remarkable project was undertaken and who the key players were.

   

  Perhaps not surprisingly much of the initiative came from the Central Intelligence Agency, which housed the expertise for manipulating target populations through propaganda and disinformation. The only difference this time would be that the American people would be the target population.

   

  For this project, Ronald Reagan’s CIA Director William J. Casey sent his top propaganda specialist Walter Raymond Jr. to the National Security Council staff to manage the inter-agency task forces that would brainstorm and coordinate this “public diplomacy” strategy.

   

  Many of the old intelligence operatives, including Casey and Raymond, are now dead, but other influential Washington figures who were deeply involved by these strategies remain, such as neocon stalwart Robert Kagan, whose first major job in Washington was as chief of Reagan’s State Department Office of Public Diplomacy for Latin America.

   

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  Declassified documents now reveal how extensive Reagan’s propaganda project became with inter-agency task forces assigned to develop “themes” that would push American “hot buttons.” Scores of documents came out during the Iran-Contra scandal in 1987 and hundreds more are now available at the Reagan presidential library in Simi Valley, California.

   

  What the documents reveal is that at the start of the Reagan administration, CIA Director Casey faced a daunting challenge in trying to rally public opinion behind aggressive U.S. interventions, especially in Central America. Bitter memories of the Vietnam War were still fresh and many Americans were horrified at the brutality of right-wing regimes in Guatemala and El Salvador, where Salvadoran soldiers raped and murdered four American churchwomen in December 1980.

   

  The new leftist Sandinista government in Nicaragua also was not viewed with much alarm. After all, Nicaragua was an impoverished country of only about three million people who had just cast off the brutal dictatorship of Anastasio Somoza.

   

  So, Reagan’s initial strategy of bolstering the Salvadoran and Guatemalan armies required defusing the negative publicity about them and somehow rallying the American people into supporting a covert CIA intervention inside Nicaragua via a counterrevolutionary force known as the Contras led by Somoza’s ex-National Guard officers.

   

  Reagan’s task was made tougher by the fact that the Cold War’s anti-communist arguments had so recently been discredited in Vietnam. As deputy assistant secretary to the Air Force, J. Michael Kelly, put it, “the most critical special operations mission we have … is to persuade the American people that the communists are out to get us.”

   

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  According to the draft report, the CIA officer who was recruited for the NSC job had served as Director of the Covert Action Staff at the CIA from 1978 to 1982 and was a “specialist in propaganda and disinformation.”

   

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  Federal law forbade taxpayers’ money from being spent on domestic propaganda or grassroots lobbying to pressure congressional representatives. Of course, every president and his team had vast resources to make their case in public, but by tradition and law, they were restricted to speeches, testimony and one-on-one persuasion of lawmakers.

   

  But things were about to change. In a Jan. 13, 1983, memo, NSC Advisor Clark foresaw the need for non-governmental money to advance this cause. “We will develop a scenario for obtaining private funding,” Clark wrote. (Just five days later, President Reagan personally welcomed media magnate Rupert Murdoch into the Oval Office for a private meeting, according to records on file at the Reagan library.)

   

  As administration officials reached out to wealthy supporters, lines against domestic propaganda soon were crossed as the operation took aim not only at foreign audiences but at U.S. public opinion, the press and congressional Democrats who opposed funding the Nicaraguan Contras.

   

  At the time, the Contras were earning a gruesome reputation as human rights violators and terrorists. To change this negative perception of the Contras as well as of the U.S.-backed regimes in El Salvador and Guatemala, the Reagan administration created a full-blown, clandestine propaganda network.

   

  In January 1983, President Reagan took the first formal step to create this unprecedented peacetime propaganda bureaucracy by signing National Security Decision Directive 77, entitled “Management of Public Diplomacy Relative to National Security.” Reagan deemed it “necessary to strengthen the organization, planning and coordination of the various aspects of public diplomacy of the United States Government.”

   

  Reagan ordered the creation of a special planning group within the National Security Council to direct these “public diplomacy” campaigns. The planning group would be headed by the CIA’s Walter Raymond Jr. and one of its principal arms would be a new Office of Public Diplomacy for Latin America, housed at the State Department but under the control of the NSC.

   

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  In the memo to then-U.S. Information Agency director Charles Wick, Raymond also noted that “via Murdock [sic] may be able to draw down added funds” to support pro-Reagan initiatives. Raymond’s reference to Rupert Murdoch possibly drawing down “added funds” suggests that the right-wing media mogul had been recruited to be part of the covert propaganda operation. During this period, Wick arranged at least two face-to-face meetings between Murdoch and Reagan.

   

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  Alarmed at a CIA director participating so brazenly in domestic propaganda, Raymond wrote that “I philosophized a bit with Bill Casey (in an effort to get him out of the loop)” but with little success.

   

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  Another part of the office’s job was to plant “white propaganda” in the news media through op-eds secretly financed by the government. In one memo, Jonathan Miller, a senior public diplomacy official, informed White House aide Patrick Buchanan about success placing an anti-Sandinista piece in The Wall Street Journal’s friendly pages. “Officially, this office had no role in its preparation,” Miller wrote.

   

  Other times, the administration put out “black propaganda,” outright falsehoods. In 1983, one such theme was designed to anger American Jews by portraying the Sandinistas as anti-Semitic because much of Nicaragua’s small Jewish community fled after the revolution in 1979.

   

  However, the U.S. embassy in Managua investigated the charges and “found no verifiable ground on which to accuse the GRN [the Sandinista government] of anti-Semitism,” according to a July 28, 1983, cable. But the administration kept the cable secret and pushed the “hot button” anyway.

   

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  As one NSC official told me, the campaign was modeled after CIA covert operations abroad where a political goal is more important than the truth. “They were trying to manipulate [U.S.] public opinion … using the tools of Walt Raymond’s trade craft which he learned from his career in the CIA covert operation shop,” the official admitted.

   

  Another administration official gave a similar description to The Miami Herald’s Alfonso Chardy. “If you look at it as a whole, the Office of Public Diplomacy was carrying out a huge psychological operation, the kind the military conduct to influence the population in denied or enemy territory,” that official explained. [For more details, see Parry’s Lost History.]

  Parry notes that many of the same people that led Reagan’s domestic propaganda effort in the 1980’s are in power today:

  While the older generation that pioneered these domestic propaganda techniques has passed from the scene, many of their protégés are still around along with some of the same organizations. The National Endowment for Democracy, which was formed in 1983 at the urging of CIA Director Casey and under the supervision of Walter Raymond’s NSC operation, is still run by the same neocon, Carl Gershman, and has an even bigger budget, now exceeding $100 million a year.

   

  Gershman and his NED played important behind-the-scenes roles in instigating the Ukraine crisis by financing activists, journalists and other operatives who supported the coup against elected President Yanukovych. The NED-backed Freedom House also beat the propaganda drums. [See Consortiumnews.com’s “A Shadow Foreign Policy.”]

   

  Two other Reagan-era veterans, Elliott Abrams and Robert Kagan, have both provided important intellectual support for continuing U.S. interventionism around the world. Earlier this year, Kagan’s article for The New Republic, entitled “Superpowers Don’t Get to Retire,” touched such a raw nerve with President Obama that he hosted Kagan at a White House lunch and crafted the presidential commencement speech at West Point to deflect some of Kagan’s criticism of Obama’s hesitancy to use military force.

   

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  Rupert Murdoch’s media empire is bigger than ever ….

  An expert on propaganda testified under oath during trial that the CIA now employs THOUSANDS of reporters and OWNS its own media organizations. Whether or not his estimate is accurate, it is clear that many prominent reporters still report to the CIA.

  John Pilger is a highly-regarded journalist (the BBC’s world affairs editor John Simpson remarked, “A country that does not have a John Pilger in its journalism is a very feeble place indeed”). Pilger said in 2007:

  We now know that the BBC and other British media were used by the British secret intelligence service MI-6. In what they called Operation Mass Appeal, MI-6 agents planted stories about Saddam’s weapons of mass destruction, such as weapons hidden in his palaces and in secret underground bunkers. All of these stories were fake.

   

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  One of my favorite stories about the Cold War concerns a group of Russian journalists who were touring the United States. On the final day of their visit, they were asked by the host for their impressions. “I have to tell you,” said the spokesman, “that we were astonished to find after reading all the newspapers and watching TV day after day that all the opinions on all the vital issues are the same. To get that result in our country we send journalists to the gulag. We even tear out their fingernails. Here you don’t have to do any of that. What is the secret?”

  Nick Davies wrote in the Independent in 2008:

  For the first time in human history, there is a concerted strategy to manipulate global perception. And the mass media are operating as its compliant assistants, failing both to resist it and to expose it.

   

  The sheer ease with which this machinery has been able to do its work reflects a creeping structural weakness which now afflicts the production of our news. I’ve spent the last two years researching a book about falsehood, distortion and propaganda in the global media.

   

  The “Zarqawi letter” which made it on to the front page of The New York Times in February 2004 was one of a sequence of highly suspect documents which were said to have been written either by or to Zarqawi and which were fed into news media.

   

  This material is being generated, in part, by intelligence agencies who continue to work without effective oversight; and also by a new and essentially benign structure of “strategic communications” which was originally designed by doves in the Pentagon and Nato who wanted to use subtle and non-violent tactics to deal with Islamist terrorism but whose efforts are poorly regulated and badly supervised with the result that some of its practitioners are breaking loose and engaging in the black arts of propaganda.

   

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  The Pentagon has now designated “information operations” as its fifth “core competency” alongside land, sea, air and special forces. Since October 2006, every brigade, division and corps in the US military has had its own “psyop” element producing output for local media. This military activity is linked to the State Department’s campaign of “public diplomacy” which includes funding radio stations and news websites. In Britain, the Directorate of Targeting and Information Operations in the Ministry of Defence works with specialists from 15 UK psyops, based at the Defence Intelligence and Security School at Chicksands in Bedfordshire.

   

  In the case of British intelligence, you can see this combination of reckless propaganda and failure of oversight at work in the case of Operation Mass Appeal. This was exposed by the former UN arms inspector Scott Ritter, who describes in his book, Iraq Confidential, how, in London in June 1998, he was introduced to two “black propaganda specialists” from MI6 who wanted him to give them material which they could spread through “editors and writers who work with us from time to time”.

  The government is still paying off reporters to spread disinformation. And the corporate media are acting like virtual “escort services” for the moneyed elites, selling access – for a price – to powerful government officials, instead of actually investigating and reporting on what those officials are doing.

  One of the ways that the U.S. government spreads propaganda is by making sure that it gets its version out first.   For example, the head of the U.S. Information Agency’s television and film division – Alvin A. Snyder – wrote in his book Warriors of Disinformation: How Lies, Videotape, and the USIA Won the Cold War:

  All governments, including our own, lie when it suits their purposes. The key is to lie first.

   

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  Another casualty, always war’s first, was the truth. The story of [the accidental Russian shootdown of a Korean airliner] will be remembered pretty much the way we told it in 1983, not the way it really happened.

  In 2013, the American Congress repealed the formal ban against the deployment of propaganda against U.S. citizens living on American soil.  So there’s even less to constrain propaganda than before.

  Another key to American propaganda is the constant repetition of propaganda.    As Business Insider reported in 2013:

  Lt. Col. Daniel Davis, a highly-respected officer who released a critical report regarding the distortion of truth by senior military officials in Iraq and Afghanistan ….

   

  From Lt. Col. Davis:

   

  In context, Colonel Leap is implying we ought to change the law to enable Public Affairs officers to influence American public opinion when they deem it necessary to “protect a key friendly center of gravity, to wit US national will.”

   

  The Smith-Mundt Modernization Act of 2012 appears to serve this purpose by allowing for the American public to be a target audience of U.S. government-funded information campaigns.

   

  Davis also quotes Brigadier General Ralph O. Baker — the Pentagon officer responsible for the Department of Defense’s Joint Force Development — who defines Information Operations (IO) as activities undertaken to “shape the essential narrative of a conflict or situation and thus affect the attitudes and behaviors of the targeted audience.”

   

  Brig. Gen. Baker goes on to equate descriptions of combat operations with the standard marketing strategy of repeating something until it is accepted:

   

  For years, commercial advertisers have based their advertisement strategies on the premise that there is a positive correlation between the number of times a consumer is exposed to product advertisement and that consumer’s inclination to sample the new product. The very same principle applies to how we influence our target audiences when we conduct COIN.

   

  And those “thousands of hours per week of government-funded radio and TV programs” appear to serve Baker’s strategy, which states: “Repetition is a key tenet of IO execution, and the failure to constantly drive home a consistent message dilutes the impact on the target audiences.”

  Of course, the Web has become a huge media platform, and the Pentagon and other government agencies are influencing news on the web as well. Documents released by Snowden show that spies manipulate polls, website popularity and pageview counts, censor videos they don’t like and amplify messages they do.

  The CIA and other government agencies also put enormous energy into pushing propaganda through movies, television and video games.

  In 2012, the Pentagon launched a massive smear campaign against USA Today reporters investigating unlawful domestic propaganda by the Pentagon.

  End Notes:

  (1) One of the most common uses of propaganda is to sell unnecessary and counter-productive wars. Given that the American media is always pro-war, mainstream publishers, producers, editors, and reporters are willing participants.

  (2) A 4-part BBC documentary called the “Century of the Self” shows that an American – Freud’s nephew, Edward Bernays – created the modern field of manipulation of public perceptions, and the U.S. government has extensively used his techniques.

  (3) Sometimes, the government plants disinformation in American media in order to mislead foreigners. For example, an official government summary of America’s overthrow of the democratically-elected president of Iran in the 1950′s states, “In cooperation with the Department of State, CIA had several articles planted in major American newspapers and magazines which, when reproduced in Iran, had the desired psychological effect in Iran and contributed to the war of nerves against Mossadeq” (page x).

  

  

  

  

• The American Revolution – The Sequel

  Submitted by Jeff Thomas via InternationalMan.com,

  The US is the most observed country in the world. Since it’s the world’s current empire (and since it is beginning its death throes as an empire), it’s fascinating to watch.

  Those of us outside of the US watch it like Americans watch TV. It’s like a slow-motion car wreck that we observe almost daily, eager to see what’s going to happen next. We criticise the madness of it all, yet we can’t take our eyes off the unfolding drama. It has all the excitement of a blockbuster movie.

  • The national debt is, by far, the highest of any country in history.
  • The economic system is a house of cards, getting shakier every day.
  • The government has become mired in progress-numbing fascism and increasing collectivism.
  • The government is aggressively creating the world’s most organized police state.
  • The majority of the population have become wasteful, spendthrift consumers who apathetically hope that their government will somehow solve their problems.
  • The media consistently misrepresents international events, prodding the citizenry into accepting that the ongoing invasion of multiple other countries is essential.
  • The most popular candidates for president (both parties) are the candidates that are the most egotistical, out-of-control blowhards who preach provocative rhetoric rather than real solutions.

  Still, most Americans retain the hope that, somehow, it will all work out.

  Hope Is a Desire, Not a Plan

  There are growing numbers of Americans who have accepted that the US is unravelling rapidly and is headed for a social, economic, and political collapse of one form or another. Some talk of a new revolution (but hopefully a peaceful one, of the Tea Party sort). Some imagine that, if they can store enough guns and ammunition in their homes, they might be able to make a stand against government authorities. Others mull over the idea of organised secession by some of the states. A small, but growing, number are quietly leaving for more promising destinations.

  Except for the last of these, most of the “hopes” are understandable, but any attempt at a “Second American Revolution” is unlikely to succeed.

  Why? Well, just for a start,

  • The power of the US state is far greater than that of King George III in the late eighteenth century.
  • The present US state would be fighting on its own ground, not some continent thousands of miles across the ocean.
  • The US state is committed to the concept that it dealt definitively (and forever) with the concept of secession between 1861 and 1865.

  But, for the sake of argument, let’s say that a breakup of the union, or complete removal and replacement of the government were possible in the US. What then?

  Well, unfortunately, here comes the really bad news for those who hope that the US could start over as the free nation it was in its infancy:

  • In the late eighteenth century, America was a largely agrarian collection of colonies. Colonists had to work hard just to survive, so the work ethic and self-reliance were paramount in the colonists’ makeup. They were a brave people who were accustomed to providing for themselves and physically fighting off those who would challenge them.
  • Colonists received no significant largesse from the British or local governments. No welfare, no social security, no Medicare or Medicaid, no benefits of any kind.
  • Colonists made their own daily decisions. They had no government schools or media telling them what to think or what choices to make. They relied on common sense and self-determination to guide their decisions and actions.

  Today, of course, the opposite is true. Less than 2% of Americans are involved in agriculture. A mere 9% are actually employed in the production of goods. They are rarely directly involved in their own physical protection (Most, if not all, combat is overseas and fought by defence contractors or those who voluntarily serve the military).

  Most Americans receive benefits of one type or another from their government. Most recipients regard these benefits as “essential” and could not get by without them.

  Most Americans receive their opinions from the media. Although this is not apparent to many Americans, it’s glaringly clear to those outside the US who can only shake their heads at the misinformation proffered by the US media and the wholesale acceptance of this “alternate reality” by so many Americans.

  But what bearing does this have on what the future would be for Americans if they were to become determined enough to either remove their entire government or, alternatively, for some states to secede?

  There have been many revolutions in the history of the world, both peaceful and otherwise. In the case of the American Revolution of 1776, the colonists themselves were largely self-contained as a people and possessed the ideal ethos to succeed as a productive country. But this has rarely been true in history. Whenever a people have been heavily dependent on the State in one way or another, they had become accustomed to receiving largesse at the expense of others. This is a major, major factor. Such a group is unlikely in the extreme to either produce or elect a Washington or a Jefferson. They almost always choose, instead, to fall in behind someone who promises largesse from the State. In choosing such leaders, the people are more likely to receive a Robespierre or a Lenin. Out of the frying pan and into the fire.

  The pervasive difficulty here lies in the erroneous concept that there can be a return to freedom whilst maintaining the dependency upon largesse from the State. The two are mutually exclusive. Those who seek a return to greater freedom must also accept that “freedom for all” means an end to the State being empowered to steal from one person in order to give to another.

  Or, as stated by Frédéric Bastiat in the mid-nineteenth century, “Government is the great fiction, through which everybody endeavours to live at the expense of everybody else.”

  Whether the US continues on its present downward progression, or if it breaks free in a bid for greater freedom, the eventual outcome is likely to have more to do with the collectivist mindset of the majority than with the libertarian vision of a few.

  Unfortunately there’s little any individual can practically do to change the trajectory of this trend in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation.

  We think everyone should own some physical gold. Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

  But if you want to be truly “crisis-proof” there's more to do…

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

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• What Could Go Wrong? China Builds A Floating Nuclear Power Plant

  Back in August, a horrific explosion at a chemical storage facility in the Chinese port of Tianjin killed more than a hundred people and dispersed an unknown amount of toxic sodium cyanide into the air and water.

  Despite officials’ best efforts to play down the environmental impact, a series of “unexplained” events occurred in the days and weeks following the tragedy including a massive fish die-off and the appearance of an eerie white foam on the streets following a thunderstorm.

  Beijing promised a thorough investigation and unsurprisingly, there were questions as to the warehouse’s owners had ties to the Party and if so, whether those ties helped to explain why the amount of sodium cyanide in storage was orders of magnitude greater than what’s allowed by law.

  The blast itself was described by some as akin to a nuclear explosion and indeed, the footage backs up that assessment:

  Well don’t look now, but China is set to take it up a notch when it comes to creating the conditions for a “nuclear” disaster because as World Nuclear News reports, Beijing is now all set to build a portable, floating nuclear reactor. Here’s more:

  China General Nuclear (CGN) expects to complete construction of a demonstration small modular offshore multi-purpose reactor by 2020, the company announced.

   

  The 200 MWt (60 MWe) reactor has been developed for the supply of electricity, heat and desalination and could be used on islands or in coastal areas, or for offshore oil and gas exploration, according to CGN.

   

  CGN said the development of small-scale offshore and onshore nuclear power reactors will complement its large-scale plants and provide more diverse energy options.

  The only floating nuclear power plant today is the Akademik Lomonosov, under construction in Russia, where two 35 MWe reactors similar to those used to propel ships are being mounted on a barge to be moored at a harbour. The Baltiysky Zavod in St Petersburg is on schedule to deliver the first floating nuclear power plant to its customer, Russian nuclear power plant operator Rosenergoatom, in September 2016. It could start operating in Chukotka as early as in 2017.

  Here’s an artists’ impression of what this disaster-waiting-to-happen will look like once complete:

  

  Of course CGN is an SOE which means if and when something does go horribly wrong, there will be no transparency and no accountability whatsoever. 

  Check back in 2021 to find out what happens when a nuclear reactor melts down in the middle of the ocean.

  Until then, we’ll leave you with one final quote from CGN – make a mental note of the bolded passage:

  Floating plants offer various advantages: construction in a factory or shipyard should bring efficiencies; siting is simplified; environmental impact is extremely low; and decommissioning can take place at a specialised facility.

  

  

  

  

  

• Yuan Slides After Quadruple Whammy China Data Miss: GDP Both Matches And Misses

  Following China's growth slowing to 1999 levels in Q3 (but beating expectations with the mirage of a mysteriously large drop in the deflator), all eyes were on tonight's data, most notably the deflator (especially following the trade data debacle from last week). The quadriga struck at 2100ET with Industrial Production +5.9% (MISS vs +6.0% YoY expectations), Retail Sales +11.1% (MISS vs +11.3% YoY expectations), Fixed Asset Investment +10.0% (MISS vs +10.2% YoY expectations), and then the big kahuna Q4 GDP growth +6.8% (MISS vs +6.9% YoY expectations). China, US equities were higher going in but faded quickly on the miss only to be rescued higher again. Offshore Yuan is fading.

  Someone leaked it 5 minutes early:

  • CHINA 2015 REAL GDP +6.9% VS 2014 +7.3%; EXP. 6.9%

  And while the full year real GDP print was indeed inline with the 6.9% consensus – the weakest since 1990…

  

   

  …it was the Q4 number that was disappointing missing the 6.9% expectation by 0.1%

  • CHINA 4Q GDP GROWS 6.8% FROM YEAR EARLIER; EST. 6.9%

  As Bloomberg notes this was only the first time that China's quarterly GDP has missed the forecast since early 2013.

  

   

  Industrial Production

  • *CHINA DEC. INDUSTRIAL OUTPUT RISES 5.9% ON YEAR; EST. 6.0%

  

   

  Retail Sales

  • *CHINA DEC. RETAIL SALES RISE 11.1% ON YEAR; EST. 11.3%

  

   

  Fixed Asset Investment

  • *CHINA 2015 FIXED-ASSET INVESTMENT RISES 10% Y/Y; EST. 10.2%

  

   

  Dow futures were rallying confidently into the numbers (on the back suddeny JPY weakness following Kuroda's appearance in The Diet)… but started to fade on the quadruple whammy miss only to be rescued back higher again… and now fading…

  

   

  Offshore Yuan is extending losses but only marginally.

  

   

  Gold bid, crude slid…

  

   

  And just in case you question any of this:

  • *CHINA STATS BUREAU HEAD SAYS 6.9% GROWTH NOT LOW
  • *CHINA'S GDP CALCULATION IS BASED ON SOLID DATA: NBS WANG
  • CHINA NBS: OUR GDP NUMBER IS REAL AND CAN BE TRUSTED

     

  Think about that for a second – The world's 2nd largest economy has to come out publicly and say no seriously this was good data, you can trust it, seriously, we mean it!

  Anyone who doubts that China is growing at 6.9% is peddling fiction!!

   

  Charts: Bloomberg

   

  

  

  

  

  

• What Happens To A Dream Deferred? Ask Martin Luther King Jr.

  Submitted by John Whitehead via The Rutherford Institute,

  What happens to a dream deferred?
  Does it dry up
  like a raisin in the sun?
  Or fester like a sore—
  And then run?
  Does it stink like rotten meat?
  Or crust and sugar over—
  like a syrupy sweet?
  Maybe it just sags
  like a heavy load.
  Or does it explode?—Langston Hughes, “Harlem”

  Martin Luther King Jr. could tell you what happens to dreams deferred. They explode.

  As I point out in my book Battlefield America: The War on the American People, more than 50 years after King was assassinated, his dream of a world without racism, militarism and materialism remains a distant dream.

  Indeed, the reality we must contend with is far different from King’s dream for the future: America has become a ticking time bomb of racial unrest and injustice, police militarization, surveillance, government corruption and ineptitude, the blowblack from a battlefield mindset and endless wars abroad, and a growing economic inequality between the haves and have nots.

  King’s own legacy has suffered in the process.

  The image of the hard-talking, charismatic leader, voice of authority, and militant, nonviolent activist minister/peace warrior who staged sit-ins, boycotts and marches and lived through police attack dogs, water cannons and jail cells has been so watered down that younger generations recognize his face but know very little about his message.

  Rubbing salt in the wound, while those claiming to honor King’s legacy pay lip service to his life and the causes for which he died, they have done little to combat the evils about which King spoke and opposed so passionately: injustice, war, racism and economic inequality.

  For instance, President Obama speaks frequently of King, but what has he done to bring about peace or combat the racial injustices that continue to be meted out to young black Americans by the police state?

  Republican presidential candidate Donald Trump plans to “honor” Martin Luther King Jr.’s legacy by speaking at a convocation at Liberty University, but what has he done to combat economic injustice?

  Democratic presidential contender Hillary Clinton will pay tribute to King’s legacy by taking part in Columbia, South Carolina’s King Day at the Dome event, but has she done anything to dispel her track record’s impression that “machines and computers, profit motives and property rights are still considered more important than people”?

  Unlike the politicians of our present day, King was a clear moral voice that cut through the fog of distortion. He spoke like a prophet and commanded that you listen. King dared to speak truth to the establishment and called for an end to oppression and racism. He raised his voice against the Vietnam War and challenged the military-industrial complex. And King didn’t just threaten boycotts and sit-ins for the sake of photo ops and media headlines. Rather, he carefully planned and staged them to great effect.

  The following key principles formed the backbone of Rev. King’s life and work. King spoke of them incessantly, in every sermon he preached, every speech he delivered and every article he wrote. They are the lessons we failed to learn and, in failing to do so, we have set ourselves up for a future in which a militarized surveillance state is poised to eradicate freedom.

  Practice militant non-violence, resist militarism and put an end to war.

   

  “I could never again raise my voice against the violence of the oppressed in the ghettos without having first spoken clearly to the greatest purveyor of violence in the world today—my own government.”—Martin Luther King Jr., Sermon at New York’s Riverside Church (April 4, 1967)

   

  On April 4, 1967, exactly one year before his murder, King used the power of his pulpit to condemn the U.S. for “using massive doses of violence to solve its problems, to bring about the changes it wanted.” King called on the U.S. to end all bombing in Vietnam, declare a unilateral cease-fire, curtail its military buildup, and set a date for troop withdrawals. In that same sermon, King warned that “a nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death.”

   

  Fifty-some years later, America’s military empire has been expanded at great cost to the nation, with the White House leading the charge. Indeed, in his recent State of the Union address, President Obama bragged that the U.S. spends more on its military than the next eight nations combined. Mind you, the money spent on wars abroad, weapons and military personnel is money that is not being spent on education, poverty and disease.

   

  Stand against injustice.

   

  “Injustice anywhere is a threat to justice everywhere… there are two types of laws: just and unjust. I would be the first to advocate obeying just laws. One has not only a legal but a moral responsibility to obey just laws. Conversely, one has a moral responsibility to disobey unjust laws.”? Martin Luther King Jr., “Letter from a Birmingham Jail” (April 16, 1963)

   

  Arrested and jailed for taking part in a nonviolent protest against racial segregation in Birmingham, Ala., King used his time behind bars to respond to Alabama clergymen who criticized his methods of civil disobedience and suggested that the courts were the only legitimate means for enacting change. His “Letter from a Birmingham Jail,” makes the case for disobeying unjust laws when they are “out of harmony with the moral law.”

  Fifty-some years later, we are being bombarded with unjust laws at both the national and state levels, from laws authorizing the military to indefinitely detain American citizens and allowing the NSA to spy on American citizens to laws making it illegal to protest near an elected official or in front of the U.S. Supreme Court. As King warned, “Never forget that everything Hitler did in Germany was legal.”

   

  Work to end poverty. Prioritize people over corporations.

   

  “When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered.” —Martin Luther King Jr., Sermon at New York’s Riverside Church (April 4, 1967)

   

  Especially in the latter part of his life, King was unflinching in his determination to hold Americans accountable to alleviating the suffering of the poor, going so far as to call for a march on Washington, DC, to pressure Congress to pass an Economic Bill of Rights.

   

  Fifty-some years later, a monied, oligarchic elite calls the shots in Washington, while militarized police and the surveillance sector keep the masses under control. With roughly 23 lobbyists per Congressman, corporate greed largely dictates what happens in the nation’s capital, enabling our so-called elected representatives to grow richer and the people poorer. One can only imagine what King would have said about a nation whose political processes, everything from elections to legislation, are driven by war chests and corporate benefactors rather than the needs and desires of the citizenry.

   

  Stand up for what is right, rather than what is politically expedient.

   

  “On some positions, cowardice asks the question, is it expedient? And then expedience comes along and asks the question, is it politic? Vanity asks the question, is it popular? Conscience asks the question, is it right? There comes a time when one must take the position that is neither safe nor politic nor popular, but he must do it because conscience tells him it is right.”—Martin Luther King Jr., Sermon at National Cathedral (March 31, 1968)

   

  Five days before his assassination, King delivered a sermon at National Cathedral in Washington, DC, in which he noted that “one of the great liabilities of life is that all too many people find themselves living amid a great period of social change, and yet they fail to develop the new attitudes, the new mental responses, that the new situation demands. They end up sleeping through a revolution.”

   

  Freedom, human dignity, brotherhood, spirituality, peace, justice, equality, putting an end to war and poverty: these are just a few of the big themes that shaped King’s life and his activism. As King recognized, there is much to be done if we are to make this world a better place, and we cannot afford to play politics when so much hangs in the balance.

  It’s time to wake up, America.

  To quote my hero: “[O]ur very survival depends on our ability to stay awake, to adjust to new ideas, to remain vigilant and to face the challenge of change. The large house in which we live demands that we transform this world-wide neighborhood into a world-wide brotherhood. Together we must learn to live as brothers or together we will be forced to perish as fools.”

  

  

  

  

  

• Offshore Yuan Weaker, Margin Debt Tumbles Ahead Of Key Chinese Data

  While all eyes will be glued to the data avalanche unleashed by China's 'official' data creators in an hour, offshore Yuan is fading modestly, giving back half of the regulatory shift gains. PBOC injects another CNY155 billion (clearly reflecting last night's spike in 1mth HIBOR) and holds the Yuan fix 'steady' for the 8th day. Finally on the somewhat bright side following the CSRC shief's resignation, Shanghai margin debt has dropped for the 12th day in a row – the longest streak in 4 months.

  PBOC fixed YUan "stable" for the 8th day in a row but injects Yuan 155 billion for good measure… The People’s Bank of China will inject 80b yuan into the banking system using 7-day reverse repurchase agreements, and 75b yuan via 28-day reverse repo today, according to traders at primary dealers required to bid at the auctions.

  

   

  Offshore Yuan just can't extend gains on the back of China's latest attempt to squeeze shorts…

  

   

  Meanwhile in what is relatively good news for the world's sanity:

  *SHANGHAI MARGIN DEBT POSTS LONGEST LOSING STREAK IN FOUR MONTHS

   

  

   

  The outstanding balance of Shanghai margin debt dropped for 12th consecutive day on Monday, matching longest losing streak ended on Sept. 2.

   

  Balance fell 0.3%, or 1.47b yuan, to 584b yuan for the lowest level since Oct. 9

  Which likely explains why the CSRC head quit – they lost the bubble! Luckily there is one still standing…

  

   

  Eyes down for +6.9% GDP growth…

  Charts: Bloomberg

  

  

  

  

  

• Demographic Doldrums: Visualizing 100 Years Of The Most Populous Countries

  Submityted by Jeff Desjardins vai The Visual Capitalist,

  “I think ageing demographics is a bigger issue in China than people think. And the problems it creates should be become evident as early as 2016.” – Stan Druckenmiller, a 2013 quote

  Over the last year, we’ve been very skeptical of the near-term potential for robust global economic growth.

  The media narrative throughout 2015 was that U.S. rates were on the rise, and that the American economy would finally normalize post-crisis. Stock and real estate prices reached record highs on this optimism, and many pundits expected growth and interest rates to return to more traditional levels.

  Over the last few months, we’ve noticed that this narrative has changed significantly. Even though the U.S. is doing “okay” for growth, the global economy is now more entwined than ever. It’s more challenging than ever before for one economy to prop up the rest during stagnation.

  Markets this year got off to their worst-ever start after jitters from China rippled through international markets. Oil has continued its plunge and is now trading near $30/bbl. Manufacturing is slowing in the United States. Europe and Japan are going nowhere, and the amount of global debt is starting to signal alarm bells.

  Finally, media and investors are accepting the idea that things may not normalize the way they “should”. Instead, the question has become more fundamental: are there even any bright spots in the first place?

  A major drive of this un-growth is demographics, or the changing composition of population over time.

  Today’s animation, which covers the change in populations over 100 years for the most populous countries, is a starting place for this.

   

  

  Courtesy of: Visual Capitalist

   

  The first point of interest is that by about the year 2000, all European countries dropped out of the rankings. At the beginning of the animation, the United Kingdom, Germany, France, and Italy were all there. Birth rates have declined to the lowest in the world, which establishes immigration as the only potential option for economic growth. With the recent events in Paris and the current backlash against Middle Eastern immigrants, this Catch-22 becomes even more interesting and important.

  Germany, in particular, faces a crucial demographic cliff. We aim to cover this in the very near future, since the country is an important engine for Europe.

  Another major point of interest, as we referenced in the opening quote, is the changing demographics of China. In the next decade or so, China’s population will stop growing altogether – and then it will start shrinking. This is the predictable aftermath of China’s one-child policy for many decades. The country still has a giant portion of the population that will continue to move up the ladder economically, but we will be looking at what these circumstances could mean as they loom closer.

  Lastly, the rise of India and Nigeria can’t be understated in importance. Both are home to the fastest growing cities in the world. Nigeria will pass the U.S. to become the third largest country in the world by population in the coming decades, and India could be the world’s next China.

  

  

  

  

• China's Housing Is Recovering, Just Ignore The 10 Billion Square Feet Of Vacant Housing

  While we await China’s fabricated and goalseeked Q4 GDP number (less than 3 weeks after the year end) which barring some even more humorous miracle will show China’s slowest growth in a quarter century, here is a quick recap of what the world’s second largest economy said about the most important part of its economy overnight.

  Why most important? Because as shown previously when remarking on the futility of China’s attempts to create a massive wealth effect by blowing an epic stock market bubble, in China the vast bulk of household wealth is allocated to real estate, unlike in the US, where three quarters of household net worth is in financial assets.

  

   

  According to China’s entertaining National Statistics Bureau, in December new home prices rose in 39 out of 70 cities, up from 33 cities in November, representing a 7.7% increase year-over-year in new home prices.

  On the surface this is great news for China, whose housing bubble had burst in early 2014 and which has been desperately doing everything in its power to reflate it once more. So was this the long-awaited light at the end of the tunnel? Not so fast. 

  As Reuters notes, the headline number masks China’s massive property problem – a vast amount of unsold apartments mainly in its smaller cities. “Property prices were rising fast in mega cities like southern Shenzhen, where prices rocketed by nearly 47%, Shanghai, up a healthy 15.5%, and Beijing, which posted a respectable 8% gain over a year ago.”

  But the recovery that began in October, after 13 months of straight decline, has only spread to just over half the 70 cities captured by official data, leaving others languishing far behind.

  The chart below shows the unprecedented divergence that has developed between prime Chinese cities and the rest of the nation.

  

  

   

  The last time Tier 1 home prices soared as much as they have relative to the rest of the nation in late 2013, China suffered its worst housing crash in recent history, leading to the bursting of the shadow banking bubble in late 2014 and the current hard landing predicament faced by most Chinese commodity producers.

  Why the surge in Tier 1? Simple: another round of massive government stimulus.

  Shanghai-based property consultancy Centaline noted new home sales hit a seven-year high in December thanks to a swathe of government measures to spur demand, and a series of interest rate cuts. Realtors are hopeful that buyers unable to afford the cities in the first two tiers will eventually go elsewhere.

  Unless, of course, like in the US, buyers only buy in specific locations because they hope to find a greater fool and flip it as a quick investment. Because last time we checked nobody is buying in North Dakota because New York was too expensive.

  This logic appears to have gained a foothold in China as well: Wang Jianlin, China’s richest man and chairman of property and entertainment conglomerate Dalian Wanda Group, said on Monday that it could take four to five years for the market to digest the inventory in tier three and four cities.

  “Sales are highly concentrated in first- and second-tier cities, where 36 top cities account for three-quarters of the total sales value. So the portion from third- and fourth-tier cities is very low. As long as they destock slowly, there is no problem,” he told the Asia Financial Forum in Hong Kong.

  Indeed, as the chart above quite clearly shows.

  So while prices in China’s Tier 1 cities are soaring, let’s put the country’s vacant housing problem in context: China has some 13 million homes vacant – enough to house the families of several small countries .

  Actually, it’s worse: Zhu Min, deputy managing director at the International Monetary Fund, recently admitted that China’s real estate bubble now manifests itself in 10. 7 billion square feet  (1 billion square meters) of unused housing! Min added that many housing stock go unused, and the market may see a significant price correction in the future, wiping out vast household wealth.
  

  According to the Epoch Times, “despite limited demand, many third- and fourth-tier cities are laden with huge housing inventories, forming a bubble which may burst, especially in view of the low transaction volume for new houses in these cities” said Zhang Dawei, superintendent of the market research department at Centaline Property, according to Mingtiandi, a website that reports on China’s property sector.

  According to Zhang Liqun, a researcher with a Chinese regime think tank, the bulk of China’s housing projects have shifted to smaller, so-called third- and fourth-tier cities. But market demand has not kept up, a fact that Zhang said could well lead to those cities becoming ghost towns.

  Because that is precisely what China needs: even more ghost towns.

  So with China’s GDP print, as fabricated as it may be, looming what does this mean for China’s economic growth?

  Even more bad news.

  “Property investment is expected to see a single-digit decline this year despite recovering home prices, so it will continue to weigh on GDP,” said Liao Qun, China chief economist at Citic Bank International in Hong Kong.

  For the first 11 months of 2015, property investment accounted for 13 percent of gross domestic product. But the sector’s multiplier effect on other industries, from building materials to white goods and furniture, means its impact on the economy is far greater.

  “Looking forward, the property market would continue to drag on the broad economy in 2016, with property investment probably showing weak growth momentum,” said Wang Jun, senior economist at the China Centre for International Economic Exchanges (CCIEE), a Beijing-based think-tank.

  And here is a spoiler alert: Premier Li Keqiang said this past Saturday that China’s economy grew by around 7% in 2015, which generated much laughter among the China-watchers, because if the currently global pre-recession environment is the result of China growing at 7%, one wonders just how acute the global depression will be when Chna grows at 5%, or 3%, or 1%, or stops growing altogether. 

  What does the Wall Street consensus expect? Just a fraction lower, or 6.9%.

  But analysts polled by Reuters have forecast fourth-quarter GDP data set to be released on Tuesday will show growth slipped to 6.9 percent last year, the slowest in a quarter century and down from 7.3 percent in 2014. China’s growth is expected to drop to 6.5% by the end of the year.

  The reality is that nobody has any clue what China’s real growth was in 2015, with estimate ranging as low as 1%. One thing is certain: whatever China’s National Bureau of Statistics reports GDP was in 2015, the real number will be far, far lower, and it will only drop from there once the commodity defaults begin in earnest.

  

  

  

  

  

• Mission Accomplished? The U.S. Spent Half A Billion On Mining In Afghanistan With "Limited Progress"

  Submitted by ProPubolica via TheAntiMedia.org,

  The United States has spent nearly half a billion dollars and five years developing Afghanistan’s oil, gas and minerals industries — and has little to show for it, a government watchdog reported today.

  The project’s failings are the result of poorly planned programs, inadequate infrastructure and a challenging partnership with the Afghan government, the Special Inspector General for Afghanistan Reconstruction wrote in its newest damning assessment of U.S. efforts in the war-torn country. The finding comes after some 200 SIGAR reports have detailed inefficient, unsuccessful or downright wasteful reconstruction projects. A recent ProPublica analysis of the reports found that there has been at least $17 billion in questionable spending.

  The United States Agency for International Development and a Pentagon task force were in charge of developing a so-called “extractive” industry in Afghanistan – basically a system for getting precious resources out of the ground and to the commercial market. SIGAR called out both USAID and the Defense Department last year for their failures to coordinate and to ascertain the ability of Afghans to sustain the project, which unsurprisingly is not promising. In fact, when international aid stopped supporting the Afghan office responsible for oversight of the petroleum and natural gas industries, two-thirds of the staff were fired.

  Exploiting these resources, which are estimated to be worth as much as $1 trillion, is pivotal to Afghanistan’s economic future. SIGAR noted that the Afghan government has shown progress under USAID’s tutelage in regulating and developing the commercial export of the resources. But the report said the project was still hampered by corruption, structural problems and a lack of infrastructure for the mining industry, such as reliable roads. Many of the mines operate illegally, with some profit going to the insurgency, SIGAR said.

  When it came to individual extractive projects, there was little progress made, the IG found.

  The controversial Pentagon task force in charge of much of the effort, the Task Force for Business Stability Operations, spent $215 million on 11 extractive programs, but “after operating in Afghanistan for 5 years, TFBSO left with nearly all of its extractive projects incomplete,” SIGAR found. Three of the programs technically met objectives, but one of those is of questionable value at best. The task force built a gas station for an outrageously inflated cost and in the end it didn’t have any customers. So while the objective to create the station was achieved, SIGAR doubted it was a worthwhile venture.

  The task force, made up of mostly civilian business experts and designed to develop the Afghan economy, has come under fire from SIGAR and Congress for demanding unusual and expensive accommodations in the country, allegedly punishing a whistleblower, and lacking overall accountability. The Senate is holding a hearing on the task force next week.

  In today’s report, SIGAR highlighted that the task force spent $46.5 million to try to convince companies to agree to develop the resources, but not one ended up signing a contract. About $122 million worth of task force programs had mixed results, SIGAR said.

  The Defense Department declined SIGAR’s request to comment on its findings. In its response, USAID said it has helped Afghanistan “enact investor-friendly extractive legislation, improve the ability to market, negotiate and regulate contracts, and generate geological data to identify areas of interest to attract investors.” Any conclusions and criticisms, USAID told SIGAR, “need to be substantially tempered by the reality that mining is a long-term endeavor.”

  

  

  

  

  

• Art Cashin: This Is "What You Get Before You Slip Into A Crisis"

  Via Christoph Gisiger of Finanz Und Wirtschaft,

  Wall Street veteran Art Cashin warns that bankruptcies in the US oil industry could cause severe stress in the financial system. He believes the rate hike of the Federal Reserve was a mistake.

  Around the globe financial markets are in turmoil. Alarming news out of China and the crash in the oil market is causing angst among investors everywhere. In the United States, the S&P 500 is down more than 8% since the beginning of the year. Art Cashin, director of floor operations for UBS at the New York Stock Exchange, thinks that the rate hike of the Federal Reserve is one of the main reasons for the sell-off in the stock market. The highly respected Wall Street veteran fears that America will fall into a recession if the Fed doesn’t change its course and lowers interest rates back to zero.

  Mr. Cashin, the pressure on the financial markets is rising. How’s the mood on the trading floor of the New York Stock Exchange?

  The mood is both concerning and frustrated. On Friday, we traded temporarily lower than we got during the August spike down. That is never a good indication and it is troublesome. Here in the US, there was some concern that the markets will be closed for a holiday on Monday whereas the exchanges in Europe and in Asia are going to be open. So a lot of investors were worried about the exposure they will have for this extra day.

  You’re working on the floor of the stock exchange for almost six decades. During that time you have seen many difficult moments. How severe is the situation right now?

  It is very similar to what you get before you slip into a crisis. Also, it’s earnings season and because of that many corporate buybacks have to be paused during this period. That removes an important potential support for the market. Over the last year, companies buying back their own stock have put more money into the market than all of the public has. The cessation of those buybacks is probably a reason why we’re seeing the rather sharp selling that has occurred.

  A main source of concern is the sharp drop in oil prices. Both, WTI and Brent, closed below $30 on Friday. Why is this causing so much havoc on Wall Street?

  Investors are concerned that many of the small and domestic producers here in the United States have money owned in the high yield market. So if oil prices continue to go lower they’re afraid that up to two thirds of those fracking companies may go into bankruptcy. They fear that through financial contagion those bankruptcies would then begin to spread into other areas of the financial markets.

  Are there already signs of contagion?

  Several market participants have been asked to put up more collateral to prepare for bad loans. Also, on Wednesday there were both rumors and indications that there was a good deal of forced selling going on. There were rumors that it could have been either a hedge fund or a sovereign wealth fund, maybe investors who are exposed to the oil prices. It could have been Saudi  Arabia or Norway. Forced selling and margin calls are very hard to deal with because such an investor basically has no latitude. Positions must be sold at any price and that’s very difficult for the market.

  Also, there is  alarming news coming out of China. What’s the problem here?

  On Friday, before trading started in New York, Chinese equity markets were down another 3,5% already overnight –  and that is despite the best efforts of the Chinese government and the central bank to keep prices from destabilizing.

  Then again, the US economy seems hardly to be related to China.

  China is the second biggest economy in the world. The US may not sell much to China. But many of our economic partners like the countries in Europe do have big markets with China. There are other aspects to the China problem, too: The Chinese currency is relatively pegged to the US dollar.

  What’s the problem with that?

  When the Fed began raising interest rates and the dollar strengthened it made the Chinese currency go higher which put China at a disadvantage. So the Chinese began to try to find ways to slightly weaken their currency and that is disruptive throughout all the other currencies in the emerging markets and the small Asian economies. Back in 1997 when Thai baht broke everybody thought that won’t mean too much since the US doesn’t deal too much with Thailand. But in fact what happened was it rapidly spread through the financial industry and a great deal of money was lost. So investors are worried of seeing something like that happening again.

  So you think the rate hike of the Federal Reserve is one of the main sources for all the turmoil?

  The Chinese currency isn’t the only one that is under some stress. For instance, the Saudi Arabian currency is also partially pegged to the dollar. So you’re seeing many other nations beginning to suffer somewhat in reaction to the Fed move to begin raising rates.

  The appreciation of the dollar is also putting pressure on the export sector in the United States. Manufacturing has slowed down significantly over the last months.

  In its hundred year history the Fed had never before raised rates with the ISM index for the manufacturing sector below fifty which is showing that the manufacturing sector is in somewhat of a recession. I think the Fed basically painted itself into a corner. In September, because of the turmoil in the international markets, they were afraid to raise rates and they said:  »We didn’t want to move with the markets destabilized.» Because of that they found some critics here in the US who said: »Hey, you’re the central bank of the United States and not the central bank of the world. Therefore, do worry about us and do what you think our economy requires. Don’t pay attention to other economies.» So when the December meeting came the Fed talked itself into a corner with no chance to change.

  On the other hand, many economists are seeing encouraging signs in the US labor market. In December payroll employment rose by over 290’000 and beat expectations handily.

  When you look closer into the numbers you see that 280’000 of those jobs were seasonal adjustments. In other words it wasn’t physical people standing there, it was an assumption by the Bureau of Labor Statistics. They said it was December and the weather normally is cold so they had to add on some people. And If you went over to the household survey you saw that 35% of the new jobs were people under the age of nineteen. In fact, only 3% of the jobs went to people in the prime category between the ages of 25 and 55. So the vast majority of the new jobs went to people under 24 and over 55. To me, that looked liked holiday hiring: people who make deliveries, wrap packages etc. These are not long lasting jobs. That’s why I think the next couple of payroll numbers will not show that kind of strength.

  So was it a policy mistake to raise rates?

  Yes, I thinks so. I believe we may be back at zero percent interest rates before we see one percent interest rates. I think the Fed will wind up having to do that to try to avoid a recession. Before they moved Christine Lagarde, the head of the IMF, told them they shouldn’t move. Larry Summers, the former secretary of the Treasury, told them they shouldn’t move. The Bank of International Settlements told them they shouldn’t move. But they insisted upon it and I think part of the turmoil that we are seeing now is indirectly connected with the Fed’s decision to go ahead.

  But on the day the Fed raised rates for the first time since the financial crisis many investors applauded and stock prices rallied. Why has the mood soured?

  The rate hike had to work its way through the system. Investors had to see what would happen to the Chinese currency and how the Chinese central bank and the Chinese government respond to what happened to their currency. Not a lot of people guessed that immediately when they saw that the Fed raised the rate. It’s now working through the system and it’s contributing to the turmoil that we’re experiencing.

  Looking ahead, what’s going to happen next?

  The bumpy ride is probably not over yet. I would remain very careful. I think efforts have to be made to stabilize the oil price. Investors have to review their risk exposure. So make sure you’re on guard.

   

  

  

  

  

  

• Regrets

  We’ve got a few…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Negative Oil Prices Arrive: Koch Brothers' Refinery "Pays" -$0.50 For North Dakota Crude

  Do you have some extra space in your garage or attic? Or perhaps you own an oil tanker you aren’t currently using. Or maybe you have a storage unit that’s got a little extra room next to an old mattress and box springs.

  If so, you may want to call up oil producers in North Dakota and ask if they’d care to send you some free oil, because the crude glut is now so acute that the Koch brothers are actually charging $0.50/bbl to take low grade oil at their Flint Hills Resources refining arm.

  
  

  North Dakota Sour is a high-sulfur grade of crude and “is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground,” Bloomberg notes, citing John Auers, executive vice president at Turner Mason & Co. in Dallas. “The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.”

  High-sulfur grades are more expensive to refine and thus fetch lower prices at market. As Bloomberg goes on to note, “Enbridge stopped allowing high-sulfur crudes on its pipeline out of North Dakota in 2011, forcing North Dakota Sour producers to rely on more expensive transport such as trucks and trains [and] the price for Canadian bitumen — the thick, sticky substance at the center of the heated debate over TransCanada Corp.’s Keystone XL pipeline — fell to $8.35 last week, down from as much as $80 less than two years ago.”

  

  So there you have it. The global deflationary supply glut has now reached the point that the market is effectively forcing producers to pay to give their oil away or else see it sit in bloated storage facilities until Riyadh decides enough is enough and until the world comes to terms with the return of Iranian supply. In other words, for some US producers the business isn’t just loss making, it’s an exercise in sadomasochistic futility.

  Meanwhile, MLP Plains All American is quoting Colorado Southeastern, Nebraska Intermediate, Eastern Kansas Common Special, and Oklahoma Sour at just $16.50/bbl, $16.00/bbl, $12.20/bbl, and $13.50/bbl, respectively.

  

  The message for the Wells Fargos and Citis of the world: you’re going to need a bigger loan loss reserve.

  It’s no wonder the Dallas Fed suspended mark-to-market on energy debts – there’s no market to mark to.

  

  

  

  

  

• Sage Investment Advice From Mike Tyson

  Submitted by Tim Price via SovereignMan.com,

  In a crisis, it helps to have good counsel. Consider the following sage advice from investment strategist Mike Tyson:

  “Everyone has a plan ‘til they get punched in the mouth.”

  Or as German military strategist Helmuth von Moltke the Elder put it, somewhat more formally:

  “No battle plan ever survives contact with the enemy.”

  The enemy has been quick to show himself this year, in the form of a bear market, at least for stocks.

  This bear has so far been quick, and indiscriminate: the US; Europe; China; stock markets have fallen sharply, internationally.

  Investors, being human, have scrambled in search of an explanatory narrative.

  Some have blamed the Fed’s baby steps towards raising interest rates. Some blame the collapse in the oil price.

  Last week’s movie night showed David Cronenberg’s 2012 thriller ‘Cosmopolis’, which has Robert Pattinson playing a 28-year-old hedge fund billionaire losing his entire fortune in a single day due to the unexpected rise of the Chinese renminbi.

  Other than getting the direction of the renminbi wrong, the movie could have been shot yesterday.

  But it has certainly been a good week for bears.

  Last week RBS told us to “Sell everything except high quality bonds”. This is somewhat problematic since there aren’t actually any high quality bonds out there.

  Tuesday brought us SocGen’s Global Strategy Conference, where guest speaker Russell Napier pointed out that growth in emerging market foreign exchange reserves from 2008 to 2014 amounted to the most rapid increase in emerging market money supply in history.

  As this process goes into reverse, emerging market growth will clearly suffer.

  And since many emerging market countries have over-borrowed in foreign currencies, the fighting in the global currency wars is set to get more intense this year.

  As Napier warns, 2016 has also ushered in new rules requiring bond and deposit holders to be bailed in when banks blow up.

  The EU (and many of its bank depositors) will come to regret not restructuring their banking system during the seven years post-Lehman when they had the opportunity.

  The search for an easy narrative to explain the bear market is probably a waste of time. The financial market is a complex adaptive system and investors are prone to irrational behaviour and mood swings.

  They are also prone to overpay. The great ‘value’ investor Benjamin Graham reminded us that,

  “Operations for profit should be based not on optimism but on arithmetic.”

  The optimists have had things their own way in an almost unbroken line since March 2009. January 2016 so far would suggest that the pragmatists are now in charge.

  So the pragmatic response to this month’s volatility – if any is indeed required at all – is as follows:

  1) Diversify by asset type.

   

  2) Limit or eliminate exposure to emerging market debt. Raise cash rather than cling to a benchmark with no conviction (and no obvious value).

   

  3) Concentrate any debt exposure to bonds issued by creditors, not debtors.

   

  4) Limit equity exposure to high quality and inexpensive markets offering a ‘margin of safety’. (Most of the US market does not qualify in this regard.) Russell Napier recommends Japanese equities, currency hedged, and so do we. And in a bear market, you don’t want to own expensive growth, you want to own defensive value.

   

  5) Complement traditional investments with alternatives. We would advocate systematic trend-following funds (which can profit in bear markets just as they did in 2008), and gold – the one form of currency that comes with no counterparty risk because it is the one asset that is no-one’s liability.

   

  6) Limit your exposure to mainstream financial media, and especially to economists employed by commercial banks.

  

  

  

  

  

• Dollar-Based Investors Eviscerated in Global Stocks

  In Saudi Arabia, the Tadawul All Share Index plunged 5.4% on Sunday and dropped further on Monday before ticking up a smidgen. It’s at the lowest level since March 2011. Soothsayers blamed oil, and what Iran will do to the already oversupplied oil market now that the nuclear sanctions have been lifted. But Saudi stocks started losing it in September 2014 and have since collapsed 50%.

  Russia’s MICEX stock market index is down only 13% from its high in November, 2015. But the RTSI dollar-calculated index of Russian shares plunged over 7% on Monday as I’m writing this, is down 40% since May 2015 and 70% since August 2011. Every big rally in between was followed by an even bigger slide. The major difference between the dollar-calculated RTSI and the ruble-calculated MICEX is the value of the ruble, which has plunged 2% today to 79.3 rubles to the dollar, a new all-time low. It’s down 57% against the dollar since mid-2014 and 64% since mid-2011. The Central Bank isn’t even trying anymore to prop it up.

  China’s Shanghai Composite is down 44% from its high in June 2015. During that time, the yuan has dropped about 6% against the dollar. So dollar-based investors took an additional loss, with the total loss amounting to over 52% (not including transaction costs and fees).

  Dollar-based investors, when they buy foreign stocks, make two bets: that those stocks rise; and that the currency of those stocks at least remains stable against the dollar. When they catch it right, with both stocks and currency going up, the returns can be breath-taking. But the opposite happens when both go down, as they’ve been doing recently. And dollar-based investors are getting totally crushed.

  There has been a lot of moaning and groaning about the decline in US stocks, with the S&P 500 down 12% from its all-time high in May last year, the Dow down 13%, and the Nasdaq down 14%. After seven years of bull market, those declines have a bone-chilling effect. No one is used to losing money in stocks anymore. A whole new generation of traders and investors never experienced a big loss.

  But those declines are still puny compared to what happened in past downdrafts in the US markets, and they’re puny compared what is already happening among the major indexes around the world. In fact, the beaten-down US indexes are the world’s best performers!

  This chart shows the plunges or crashes of the major indexes since their respective recent highs in 2014 or 2015. The one exception is the dollar-calculated index of Russian stocks, the RTSI$, which has been a dreary affair all the way back to 2011; hence the decline calculated since that date.

  Note the ever longer list of markets that have now dropped 20% or more from their recent highs (below the blue line) and are in what a lot of people call a bear market. India’s Sensex and the Nikkei are a hair away from sinking below the blue line (US as of Friday close, Toronto as of Monday morning, Asia as of Monday close, Europe as of Monday afternoon):

  

  So, add those equities-based losses to the currency-based losses for dollar-based investors, and suddenly some of these indexes are starting to look like the dollar-calculated RTSI. For dollar-based investors, it has been brutal out there.

  So why can’t central banks step in and stem the bleeding and restart the good times?

  The answer lies in the Eurozone: France is down 21% from the highs in April; Germany 23%; Spain 29%; and Italy takes the crown with a 45% plunge.

  These are the big four economies of the Eurozone. In early 2015, the ECB has unleashed a massive wave of QE and inflicted negative deposit rates on the Eurozone in an effort to flog savers until their mood improves and to drive asset prices up into the sky to create that special wealth effect. That worked wonderfully during the run-up before the well-telegraphed QE and NIRP became reality. But since April, the wealth effect has reversed. The ECB has since enhanced QE, but stock market losses have only increased.

  Turns out, our delicious central-bank alphabet soup of QE, ZIRP, and NIRP is losing its effectiveness in inflating stock prices. In fact, it may have the opposite effect. Also look at Japan and Sweden. Despite massive QE programs by their central banks, their stock markets have dropped 19% and 24% respectively.

  There’s no longer any guarantee that QE, even a much hoped-for QE4 in the US, will re-inflate stock markets. That era has passed. Central banks have lost their aura of omnipotence. And thus, they’ve lost their omnipotence.

  However, when it comes to government bonds, central banks still rule; QE, ZIRP, and NIRP still pump up bond prices and repress yields. Hence the low yields prevailing in fiscally challenged countries such as Japan and Italy. But at the low end of corporate bonds in the US — the lower end of junk bonds — the bottom has already fallen out, and rot is creeping up the rating scale.

  A special mention is due Canadian stocks. The TSX has been beaten down 28% since August 2014. Canada is in part a resource economy. Oil & gas, metals & mining, agricultural commodities, lumber, etc. have gotten caught up in a vicious commodities rout. But other stocks have gotten hammered too, including Canada’s formerly must-own hedge-fund darling and stock-market giant Valeant.

  During the time that the TSX swooned from its high in August 2014, the Canadian dollar also dropped 25% against the US dollar. A nightmare for USD-based investors.

  For instance, if USD-based investors in mid-August 2014 bought US$100 worth of Canadian dollars (C$109.50) and invested them in a Canadian index fund that parallels the TSX, they would have lost C$29.67 on those stocks by Friday. If they sold on Friday, they would have obtained C$79.83. They’d then convert that fortune into USD by paying C$1.45 per greenback and end up with US$55.05. A 45% loss. More realistically, including transaction costs and fees at every step, the loss would have been over 50%.

  So how well has the highly touted, strongly urged, even must-do diversification into global equities worked out recently? It has been a massive fee-generating Wall-Street bonanza for one side, and a slickly-engineered form of capital destruction for the other.

  Because in the markets, something big has changed. Read… Consensual Hallucination Fades, Global Stocks Crushed

  

  

  

  

• Italian Banks Collapse, Short Sales Banned As Loan Loss Fears Mount

  Italian bank stocks are crashing (with BMPS down 40% year-to-date) as Reuters reports that investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid. The broad banking sector is down 4% with stocks suspended, and in light of this bloodbath, Italian regulators have decided in their wisdom, to ban short-selling of some bank stocks (which has driven hedgers into the CDS market, spking BMPS credit risk).

  Italy's banking index was down over 4 percent with shares in several lenders, including the country's biggest retail bank Intesa Sanpaolo and the third biggest lender Banca Monte dei Paschi di Siena, suspended from trading after heavy losses.

  Bloodbath for Italian financials in 2016…

  

   

  But don't worry:

  • *MONTE PASCHI CEO CONFIRMS FINANCIAL STABILITY OF BANK
  • *MONTE PASCHI CEO: STOCK DECLINE NOT JUSTIFIED BY FUNDAMENTALS

  As Reuters reports,

  Investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid.

   

  Those concerns are trumping expectations about a wave of consolidation set to sweep the sector, with cooperative banks under pressure to merge following a government reform to reduce the number of lenders.

   

  JP Morgan said this month Italian banks should be avoided because low rates are expected to put pressure on revenues more than in other countries and credit problems limit a recovery in provisions.

   

  Traders have suggested exiting investments that have been particularly favoured, such as Popolare di Milano and Intesa, as the stocks have reached key supports.

   

  "I think upside on cooperative banks this year is much more limited," said a London-based equity sales person.

   

  Short interest in Popolare di Milano soared 50 percent to 1.1 percent in the last month, and it rose 10 percent to 3.9 percent for UBI, according to Markit data.

  And now, Italian regulators have re-enforced a short-selling ban (because that has always worked so well in the past)…

  Consob adopts a temporary ban on short selling on Banca MPS shares.The ban shall apply immediately and shall last until Tuesday 19 January 2016 end of day.

   

  Consob decided to temporary prohibit short sales of the share Banca MPS (ISIN code IT0005092165).

   

  The ban will apply immediately and will be enforce for the entire trading session of tomorrow, Tuesday 19 January 2016, on the MTA market of Borsa Italiana.

   

  The prohibition was adopted pursuant to Article 23 of the EU Regulation on short selling, considering the price change recorded by the share on 18 January 2016 (in excess of 10%).

   

  The prohibition applies to short sales backed by stock lending. This extended the scope of the prohibition of naked short selling, already in force for all shares from 1st November 2012 by virtue of the EU Regulation on short selling.

  And so hedgers have shifted to other markets – spiking default risk across the entire group, soaring back towards pre-"whatever it takes" levels…

  

  Get back to work Mr Draghi.

  

  

  

  

  

• "Countdown To The End": EU Officials Say Europe Is "Going Down The Drain"

  Back in September, when Berlin and Brussels were busy devising a quota plan to settle the millions of Mid-East asylum seekers flooding into the country, Slovakia said that if Germany called for financial penalties against countries unwilling to accommodate their “share” of migrants, it would be “the end of the EU.”

  That might have seemed hyperbolic at the time, but since then, the situation has spiraled out of control. Border fences have been erected, refugee camps are overflowing, and anti-migrant sentiment is running high after a series of reported sexual assaults on New Year’s Eve sparked a bloc-wide scandal.

  In a testament to just how tense things have become, Austria suspended Schengen on Saturday as new rules came into effect for those seeking to traverse the country on the way north.  “Anyone who arrives at our border is subject to control,” Chancellor Werner Faymann said. “If the EU does not manage to secure the external borders, Schengen as a whole is put into question… Then each country must control its national borders,” he added, before warning that if the EU could not better control its external borders “the whole EU [will be] in question.”

  Indeed, the idea that the worsening migrant crisis could well bring an end to the EU has made its way out of Eurosceptic circles and into discussions between the bloc’s top diplomats and officials.

  “The Germans, founders of the postwar union, shut their borders to refugees in a bid for political survival by the chancellor who let in a million migrants,” Reuters wrote on Sunday, describing a hypothetical European endgame. “And then — why not? — they decide to revive the Deutschmark while they’re at it.” 

  Both Angela Merkel and Jean-Claude Juncker were out last week with stark warnings about the prospects for the union’s survival in the face of widespread disagreement among member countries regarding how to handle the influx of asylum seekers. Europe is now “vulnerable” Merkel admitted, before saying the fate of the euro is “directly linked” to how the bloc handles the refugee crisis. “Nobody should act as though you can have a common currency without being able to cross borders reasonably easily,” the Chancellor, whose ratings have slipped amid the migrant debate, said at a business event in Mainz.

  Juncker’s assessment was more dire. Europe “is on its last chance” he warned, before saying he hopes this isn’t “the beginning of the end.” 

  “Some see that as mere scare tactics aimed at fellow Europeans by leaders with too much to lose from an EU collapse,” Reuters continues. “[But] empty threat or no, with efforts to engage Turkey’s help showing little sign yet of preventing migrants reaching Greek beaches, German and EU officials are warning that without a sharp drop in arrivals or a change of heart in other EU states to relieve Berlin of the lonely task of housing refugees, Germany could shut its doors, sparking wider crisis this spring.”

  Make no mistake, were Germany to stop accepting refugees, a dangerous chain of events would unfold just as warmer weather makes the journey more appealing for refugees. Arrivals have not slowed during the winter months, a senior conservative German lawmaker said. “You can only imagine what happens when the weather improves.” If Germany’s open-door slams shut in the spring, millions of asylum seekers would be stuck along the Balkan route where bottlenecks led to border clashes between Hungarian riot police and migrants last year. 

  Croatia, Serbia, and Slovenia are in no position to accommodate the influx. Indeed, Slovenian officials have long said that the only reason the tiny country has been able to cope is because just as many migrants leave each day on their way to Germany and Austria as enter via Croatia. On Monday, Slovenian PM Miro Cerar said that “if Germany or Austria adopt certain measures for stricter controls then of course we will adopt similar strict measures with our southern border with Croatia.”

  “Millions, and I stress millions of migrants from Afghanistan, Iraq, Syria, Algeria, Morocco are ready to enter the EU once the weather improves in the coming months,” he cautioned.

  The EU Commission sought to play down Austria’s implementation of border controls, saying it’s “nothing out of the ordinary.” Of course any emergency measure is “out of the ordinary” by definition. Border checks will continue until at least February. 

  Meanwhile, each passing day seems to present a new reason for Europeans to become increasingly disaffected with officials’ handling of the crisis. Two days ago for instance, German FinMin Wolfgang Schaeuble proposed a bloc-wide petrol tax to fund the cost of securing the EU’s external borders. While Europeans will surely support the notion that the EU needs to better secure the chokepoints through which the majority of asylum seekers enter, migrants will now be equated with higher prices as the pump just as they are becoming synonymous with terror and sexual assaults.

  Ultimately, it appears that Germany is beginning to crack. While Merkel has been careful to preserve the “yes we can” narrative, reality is setting in and the cold facts suggest that Europe simply cannot accommodate the people flows. It now appears that it is not a matter of “if” but rather “when” the Iron Chancellor finally gives in and shuts the doors, and on that note, we’ll close with two quotes from German and EU officials who spoke to Reuters “in private.”

  “We have until March, the summer maybe, for a European solution. Then Schengen goes down the drain.”

   

  “There is a big risk that Germany closes. From that, no Schengen … There is a risk that February could start a countdown to the end.”

  

  

  

  

  

• Crash Risk & The Imminent Likelihood Of Recession

  Via John Hussman's Weekly Market Comment,

  Since October, the economic evidence has shifted from supporting a growing risk of recession, to a guarded expectation of recession, to the present conclusion that a U.S. recession is not only a risk but an imminent likelihood, awaiting confirmation that typically only emerges after a recession is actually in progress. The reason the consensus of economists has never anticipated a recession is that so few distinguish between leading and lagging data, so they incorrectly interpret the information available at the start of a recession as “mixed” when, placed in proper sequence, the evidence forms a single, coherent freight train.

  While I’m among the only observers that anticipated oncoming recessions and market collapses in 2000 and 2007 (shifting to a constructive outlook in-between), I also admittedly anticipated a recession in 2011-2012 that did not emerge. Understand my error, so you don’t incorrectly dismiss the current evidence. Though not all of the components of our Recession Warning Composite were active in 2011-2012, I relied on an alternate criterion based on employment deterioration, which was later revised away, and I relied too little on confirmation from market action, which is the hinge between bubbles and crashes, between benign and recessionary deterioration in leading economic data, and between Fed easing that supports speculation and Fed easing that merely accompanies a collapse.

  Much of the disruption in the financial markets last week can be traced to data that continue to amplify the likelihood of recession. Remember the sequence.

  The earliest indications of an oncoming economic shift are observable in the financial markets, particularly in changes in the uniformity or divergence of broad market internals, and widening or narrowing of credit spreads between debt securities of varying creditworthiness. The next indication comes from measures of what I’ve called “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter. The last to move are employment indicators – starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment.

  Last week, following a long period of poor internals and weakening order surplus, we observed fresh declines in industrial production and retail sales. Industrial production has now also declined on a year-over-year basis. The weakness we presently observe is strongly associated with recession. The chart below (h/t Jeff Wilson) plots the cumulative number of month-over-month declines in Industrial Production during the preceding 12-month period, in data since 1919. Recessions are shaded. The current total of 10 (of a possible 12) month-over-month declines in Industrial Production has never been observed except in the context of a U.S. recession. Historically, as Dick Van Patten would say, eight is enough.

  

  A broad range of other leading measures, joined by deterioration in market action, point to the same conclusion that recession is now the dominant likelihood. Among confirming indicators that generally emerge fairly early once a recession has taken hold, we would be particularly attentive to the following: a sudden drop in consumer confidence about 20 points below its 12-month average (which would currently equate to a drop to the 75 level on the Conference Board measure), a decline in aggregate hours worked below its level 3-months prior, a year-over-year increase of about 20% in new claims for unemployment (which would currently equate to a level of about 340,000 weekly new claims), and slowing growth in real personal income.

  Valuations, market internals, and crash risk

  It’s largely irrelevant whether the Federal Reserve made a “policy mistake” by raising interest rates in December. As I’ve noted before, that would vastly understate the actual damage contributed by the Fed. The real policy mistake was to provoke years of yield-seeking speculation through Ben Bernanke’s deranged policy of quantitative easing. Just as the global financial collapse was the result of years of unbridled yield-seeking speculation in mortgage securities, the growing economic disruptions in the developing world are the result of years of unbridled yield-seeking capital flows that resulted from that policy, and the copycat behavior of other global central banks. The record ratio of corporate debt to corporate gross value added (GVA), and the elevation of equity market capitalizations to the highest ratio of GVA in history, outside of the 2000 bubble peak, have the same origins.

  Understand that just as mortgage securities were the primary objects of yield-seeking speculation during the housing bubble, equity securities have been the primary objects during the QE-bubble. This is not merely because of direct speculation and record levels of margin debt among investors. As covenant-lite debt issuance soared in recent years, the primary use of the proceeds was not the accumulation of productive capital goods and equipment, but rather financial speculation in the form of acquisitions, leveraged buyouts, and corporate stock repurchases at historically rich valuations. Once valuations become obscenely elevated, a wicked downside is unavoidably baked in the cake. That downside will emerge primarily during periods such as the present, where deterioration in market internals suggests risk-aversion among investors, in contrast to the internal uniformity that prevailed until mid-2014, which reflected a broad willingness among investors to speculate and embrace greater exposure to risk assets.

  To see how both corporate debt and equity capitalizations have soared to record levels relative to corporate GVA, and to understand why these imply dismal investment returns over the coming 10-12 years, see The Next Big Short: The Third Crest of a Rolling Tsunami. That commentary also includes a box detailing my own errors in the recent half cycle and the adaptations we introduced as a result, which require explicit deterioration in market internals (as we presently observe) before taking a hard-negative outlook. I openly discuss my own stumbles so that adherents and critics alike might benefit from the right lessons, before it becomes too late to do so.

  We’ll certainly welcome outcomes that better reflect our experience in other complete market cycles, but we won’t do touchdown dances if the market collapses. The likely distress as the current market cycle is completed is something I wish on nobody. The unfortunate reality is that someone will have to hold stocks over the completion of this cycle, and it would best be those who have either carefully evaluated and dismissed our concerns, or those who have appropriate risk tolerances and investment horizons to weather the likely 40-55% loss in the S&P 500 that would comprise a rather run-of-the-mill retreat from the 2015 valuation extremes.

  Our concerns about both the economy and the financial markets would be less immediate if we were to observe uniformly favorable market internals across a broad range of individual stocks, industries, sectors, and security types (including debt securities of varying creditworthiness). Instead, we currently observe negative leadership, weak breadth, and dismal participation, with only 17% of individual stocks still above their own respective 200-day moving averages. Meanwhile, credit spreads spiked to fresh highs last week.

  On a short-term basis, dismal market internals may be indicative of oversold conditions, but the prospect of a recovery on that basis is extremely unreliable in an environment where valuations remain extreme and market internals demonstrate few positive divergences. I continue to believe that a break of the prior support area around 1820-1850 on the S&P 500 could be the catalyst for self-reinforcing panic selling pressure among trend-following investors.

  Unfortunately, on historically reliable measures of value, current prices are nowhere near the levels that would be expected to produce adequate long-term total returns (see Rarefied Air: Valuations and Subsequent Market Returns). So there is presently an enormous chasm between the point where self-reinforcing selling pressure by speculators is likely to emerge, and the much lower point where balancing buying pressure by value-conscious investors is likely to support the market. Because every seller necessarily requires a buyer, the enormous gap between the two represents substantial crash risk.

  Remember that our own central lesson in recent years was to avoid inadvertently prioritizing overextended conditions (e.g. overvalued, overbought, overbullish) over-and-above the condition of market internals. Provided that market internals are uniformly favorable, even obscenely overvalued markets tend to be resistant to severe losses, and are instead inclined to become even more overvalued. Conversely, it would be a mistake here to prioritize short-term oversold conditions over-and-above the dismal behavior of market internals and credit spreads, particularly given that overvaluation remains extreme on reliable measures. In the current environment, oversold conditions are prone to becoming even more deeply oversold, not only because internals are weak, but because the economic evidence is quickly confirming an oncoming recession that remains almost universally denied by market participants.

  

  

  

  

  

• America's Cash Flow Negative Energy Companies Have $325 Billion In Debt Among Them

  With the topic of distress among U.S. oil and gas exploration and production companies becoming more important with every passing day that oil not only continues to drop, but certainly fails to rebound to levels that allow US energy companies to return to a cash flow positive state, we would like to show just how much debt is at stake.

  To do that, drawing inspiration from a tweet by J Pierpont Morgan, we have conducted a quick CapIQ sort through all US energy companies – both public and private – that have at least $100 million in annual revenue, and whose EBITDA less CapEx was a negative number in the LTM period.

  To be sure, this gives listed companies the benefit of not only higher EBITDA in the early quarters when the drop of oil was not as severe, but also of oil price hedges. As such as the true negative cash flow going forward assuming no rebound in the price of oil for the foreseeable future will be far worse as the benefit of the base effect dissipates with every passing quarter and as oil price hedges, which have so far cushioned the oil price blow, are unwound.

  Here are the results:

  • There are roughly 80 U.S. companies that had $100mm in LTM revenue and that had negative FCF or EBITDA less CapEx.
  • The combined market cap of these 80 companies is just shy of half a trillion dollars.
  • The combined Total Enterprise Value of these 80 companies is $775 billion.
  • The combined debt of these 80 companies is $325 billion.

  None of these companies are bankrupt, yet. As a reminder, putting as many of these companies out of business, and thus slashing non-OPEC oil production (as OPEC forecasted in its latest bulletin earlier today), is the primary motive behind Saudi Arabia’s relentless pumping spree.

  

   

  There is just one problem with the Saudi plan: even assuming all of these companies file Chapter 11, all that would happen is their debt would be wiped out, with the existing creditors getting the equity keys, and becoming the new owners of streamlined, debt-free corporations. This would means that the All In Cost Of Production would plunge as no debt payments would have to be satisfied with the free cash flow. Meanwhile, the entire existing E&P infrastructure would still be in place and ready to pump as before.

  This means that after the default and debt-for-equity deluge, US shale would be able to pump even more at far lower breakeven costs, forcing Saudi Arabia to overproduce for even longer ultimately shooting itself in the foot when its reserves run out!

  Of course, none of this is any comfort for those who have exposure to the pre-petition debt, which may explain why various regional Feds are suddenly so very defensive when it comes to US banks and other lenders who are on the hook when the default tsunami finally hits.

  

  

  

  

  

• And The Winner Of The Democrat Debate Is…

  Judging from the unbiased mainstream liberal media, Hillary Clinton won the Democratic debate last night thanks to her "formidable" performance "combined with her intelligence." The puke-worthy gushfest from Slate.com can de read here, but is summarized best as follows:

  

   

  The National Journal is a little more "balanced" –

  

   

  And here's the critical moment – in our opinion…

   

  "The first difference is I don't take money from big banks. I don't get personal speaking fees from Goldman Sachs," Sanders said.

   

  Clinton and Sanders then tussled at length over Wall Street regulations.

   

  "Goldman Sachs [was] recently fined $5 billion," he said. "Goldman Sachs has given this country two secretaries of Treasury — one on the Republicans, one on the Democrats."

   

  He continued by addressing Clinton directly: "You've received over $600,000 in speaking fees from Goldman Sachs in one year. I find it very strange that a major financial institution that pays $5 billion in fines for breaking the laws, not one of their executives is prosecuted while kids who smoke marijuana get a jail sentence."

  Which makes us wonder how the mainstream continues to suckle at the Clinton teet, when this data is exposed…

  

   

  As we recentlty reported Hillary is now doing worse than in 2008 which explains the unbiased media's desperation to talk up her debate performance.

  

  

  

  

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