Today’s News 20th January 2016

• People Trust Search Engines More than Traditional Media for News

  U.S. public relations firm Edelman polled 33,000 people in 28 countries, and found that people trust search engine results more than any other media:

  

  QZ redid the graphic to make it easier to read:

  

  Edelman also argues that search engines and the Internet have turned traditional power structures – and the sources of influence – on their head:

  This sounds good … but remember that the NSA and its British counter-part the GCHQ MASSIVELY manipulate the web – including making some websites artificially popular and others less so – to spread their influence and promote their agendas.

  And everyone obtains different search engine results … even if they run the exact same search.  For example, Google gathers information across all of its platforms, and personalizes search engine results based upon what you’ve looked for in past searches.

  So search engine results are not totally objective … they are based upon our past expressions of interest.

  And some even question whether the search engine companies themselves are really as neutral as they claim.  We express no opinion on that topic, other than to note it.

  

  

  

  

• The Bull Market in Stocks May Be Done

  by Keith Weiner

   

  It has come to my attention that, perhaps, the great stock bull market is done. To most people, a bull market is good, and its end is bad. After all, a rising market signifies a healthy economy. Investors are making money. And it seems to prove that the free market is validated, able to deliver miracles despite Obamacare. Share prices are connected to business productivity, aren’t they?

  In a free market they are, of course. However—and this cannot be said too often—we don’t have a free market. We have monetary policy. This is how our central planners try to stimulate us. They create a wealth effect.

  Whenever you come across a metaphor like wealth effect, I encourage you to ask what is actually happening. Obviously, the government can’t create wealth by decree Something else has to be happening. Let’s look at that.

  The term wealth effect is interesting. There are many other effects, such as the placebo effect and the cheerleader effect. In each effect, something manipulates your judgement. The placebo effect convinces you that you feel better. The cheerleader effect convinces you that a girl is prettier. And the wealth effect convinces you that you’re richer. They’re all just illusions.

  The medical journals talk about why placebos do that, and the psychology journals analyze the cheerleaders. Our concern is to understand the wealth effect—not by the magical thinking offered by many so called economists—but through monetary science.

  Mechanically, the wealth effect is a simple process. One, the Fed drives up the price of bonds. Two, investors begin to find bonds too pricey, so they switch out of bonds. Three, they buy stocks and real estate, the main alternatives to bonds. Four, stock and real estate owners feel richer. After all, their net worth is rising much faster than the cost of living. The wealth effect exploits the common assumption that your real wealth is your net worth divided by the cost of living. Five, people spend. If your wealth went from $150,000 to $250,000, you can spend part of the $100,000 profit, the reward of having invested wisely. All asset owners are empowered to spend.

  We’re painting a picture here, not of creating wealth, but spending it. The wealth effect is not about production, but consumption. To use my favorite farm analogy, the wealth-effected farmer is not operating his farm to grow crops. He’s just eating his seed corn.

  It works, because your purchasing power is increasing. The price of corn isn’t going up (quite the opposite, it’s down 55 percent since 2012). But the assets you can swap for corn have risen significantly (stocks are up 28 percent over the same time period). The same house that could be traded for 2 years’ worth of corn, can now be swapped for maybe four. The same stock whose liquidation would pay for corn for a year, will pay for groceries for about three now. So people indulge themselves, and spend some of their gains.

  Unfortunately, this is no real gain. The iron law of economics is that you must produce first, in order to consume. The Fed produces nothing when it drives up the price of your assets, and neither do you by simply holding them in the meantime.

  The wealth effect, in reality, is a process of consuming precious capital, previously accumulated by hard working people who consumed less than they produced. Their savings now enable a whole class of people who consume more than they produce.

  Fed monetary policy induces this consumption, by altering the purchasing power of assets. In other words, the ratio of asset prices to consumer prices is distorted. The more this playing field tilts, the more everyone runs downhill to the endless party.

  Well, it seems endless while it lasts. And now it may be coming to its inevitable end.

  Please take no shadenfreude—pleasure from someone else’s pain. For the sake of our civilization, we had better stop consuming the capital base on which it’s built.

  The end of the wealth effect is a good thing.

  

  

  

  

• Stocks, Commodities, & Bond Yields Are Collapsing

  10Y Treasury Yields are plunging back below 2.00% (lowest in 3 months), WTI crude front-month (March) has just tumbled to a $28 handle, and Dow futures are now down over 500 points from this morning's exuberant stimulus hope highs…

  Crude has collaped back below $29…

  

   

  Stocks are in free-fall…

  

   

  And 30Y bonds are soaring (10Y yield below 2.00%)

  

   

  What's wrong with this picture?

  

   

  With all major US equity indices in correction post-rate-hike…

  

   

  Black Monday, Turnaround Tuesday, WTF Wednesday!!

  

  

  

  

  

• Clinton Vs. Sanders – What Does Google Say… And The Facts

  With stunning polls showing Bernie Sanders with a 60% to 33% lead over Hillary Clinton in New Hampshire…

  The new poll, mostly conducted before Sunday night’s debate, found Sanders’ support has grown by 10 points since a late-November/early December CNN/WMUR poll, which found Sanders holding 50% to Clinton’s 40%.

  As Liberty Blitizkrieg’s Mike Krieger notes, the following “suggested searches” from Google pretty much sums up how the general public feels about the two leading candidates for the Democratic nomination…

   

  

   

  And here are the facts, as dissected by Politifact:

  

   

  Democrats choose wisely.

  

  

  

  

  

• The 21st Century: An Era Of Fraud

  Submitted by Paul Craig Roberts,

  In the last years of the 20th century fraud entered US foreign policy in a new way.  On false pretenses Washington dismantled Yugoslavia and Serbia in order to advance an undeclared agenda.  In the 21st century this fraud multiplied many times. Afghanistan, Iraq, Somalia, and Libya were destroyed, and Iran and Syria would also have been destroyed if the President of Russia had not prevented it.  Washington is also behind the current destruction of Yemen, and Washington has enabled and financed the Israeli destruction of Palestine.  Additionally, Washington operated militarily within Pakistan without declaring war, murdering many women, children, and village elders under the guise of “combating terrorism.”  Washington’s war crimes rival those of any country in history.

  I have documented these crimes in my columns and books (Clarity Press). Anyone who still believes in the purity of Washington’s foreign policy is a lost soul.

  Russia and China now have a strategic alliance that is too strong for Washington. Russia and China will prevent Washington from further encroachments on their security and national interests. Those countries important to Russia and China will be protected by the alliance.  As the world wakes up and sees the evil that the West represents, more countries will seek the protection of Russia and China. 

  America is also failing on the economic front.  My columns and my book, The Failure of Laissez Faire Capitalism, which has been published in English, Chinese, Korean, Czech, and German, have shown how Washington has stood aside, indeed cheering it on, while the short-term profit interests of management, shareholders, and Wall Street eviscerated the American economy, sending manufacturing jobs, business know-how, and technology, along with professional tradeable skill jobs, to China, India, and other countries, leaving America with such a hollowed out economy that the median family income has been falling for years. Today 50% of 25 year-old Americans are living with their parents or grandparents because they cannot find employment sufficient to sustain an independent existance.  This brutal fact is covered up by the presstitute US media, a source of fantasy stories of America’s economic recovery.

  The facts of our existence are so different from what is reported that I am astonished. As a former professor of economics, Wall Street Journal editor and Assistant Secretary of the Treasury for Economic Policy, I am astonished at the corruption that rules in the financial sector, the Treasury, the financial regulatory agencies, and the Federal Reserve.  In my day, there would have been indictments and prison sentences of bankers and high government officials. 

  In America today there are no free financial markets.  All the markets are rigged by the Federal Reserve and the Treasury. The regulatory agencies, controlled by those the agencies are supposed to regulate, turn a blind eye, and even if they did not, they are helpless to enforce any law, because private interests are more powerful than the law.

  Even the government’s statistical agencies have been corrupted. Inflation measures have been concocted in order to understate inflation. This lie not only saves Washington from paying Social Security cost-of-living adjustments and frees the money for more wars, but also by understating inflation, the government can create real GDP growth by counting inflation as real growth, just as the government creates 5% unemployment by not counting any discouraged workers who have looked for jobs until they can no longer afford the cost of looking and give up.  The official unemployment rate is 5%, but no one can find a job.  How can the unemployment rate be 5% when half of 25-year olds are living with relatives because they cannot afford an independent existence?  As John Williams (shadowfacts) reports, the unemployment rate that includes those Americans who have given up looking for a job because there are no jobs to be found is 23%.

  The Federal Reserve, a tool of a small handful of banks, has succeeded in creating the illusion of an economic recovery since June, 2009, by printing trillions of dollars that found their way not into the economy but into the prices of financial assets.  Artificially booming stock and bond markets are the presstitute financial media’s “proof” of a booming economy.  

  The handful of learned people that America has left, and it is only a small handful, understand that there has been no recovery from the previous recession and that a new downturn is upon us.  John Williams has pointed out that US industrial production, when properly adjusted for inflation, has never recovered its 2008 level, much less its 2000 peak, and has again turned down.

  The American consumer is exhausted, overwhelmed by debt and lack of income growth. The entire economic policy of America is focused on saving a handful of NY banks, not on saving the American economy. 

  Economists and other Wall Street shills will dismiss the decline in industrial production as America is now a service economy. Economists pretend that these are high-tech services of the New Economy, but in fact waitresses, bartenders, part time retail clerks, and ambulatory health care services have replaced manufacturing and engineering jobs at a fraction of the pay, thus collapsing effective aggregate demand in the US. On occasions when neoliberal economists recognize problems, they blame them on China.

  It is unclear that the US economy can be revived. To revive the US economy would require the re-regulation of the financial system and the recall of the jobs and US GDP that offshoring gave to foreign countries. It would require, as Michael Hudson demonstrates in his new book, Killing the Host, a revolution in tax policy that would prevent the financial sector from extracting economic surplus and capitalizing it in debt obligations paying interest to the financial sector. 

  The US government, controlled as it is by corrupt economic interests, would never permit policies that impinged on executive bonuses and Wall Street profits.  Today US capitalism makes its money by selling out the American economy and the people dependent upon it. 

  In “freedom and democracy” America, the government and the economy serve interests totally removed from the interests of the American people. The sellout of the American people is protected by a huge canopy of propaganda provided by free market economists and financial presstitutes paid to lie for their living. 

  When America fails, so will Washington’s vassal states in Europe, Canada, Australia, and Japan.  Unless Washington destroys the world in nuclear war, the world will be remade, and the corrupt and dissolute West will be an insignificant part of the new world.

  

  

  

  

  

• What Keeps Bank Of America's Junk Bond Analyst Up At Night

  From BofA’s Michael Contopoulos

  You don’t need a recession

  Over the last several weeks much has been made of the near-term risks of recession. Some have argued that the widening in high yield is suggestive of an economy that is ready to roll over and with the manufacturing sector already reeling and China growth concerns growing, we think the fears are well justified. However, given we are not economists we ask whether a recession is a necessary backdrop for further weakness in high yield. In our view, the answer is no.

  Consider that between March 1998 and December 2000 our high yield index widened from 283bp to 916bp during a period of US economic growth that averaged 4.2%. Furthermore, as growth slowed to just 1.1% over the next 8 quarters, high yield averaged about 873bp during that time. In other words, the widening in high yield occurred in the lead up to economic weakness, not during. Defaults and the economic cycle, however, seem much more aligned; the 12-month default rate leading into the end of 1998, 1999 and 2000 was 3.4%, 6.3% and 6.4% respectively. It wasn’t until 2001, after spreads had blown out, that default rates increased to double digits.

  As we look at the index in more detail, we see that the non-commodity portion of high yield today compares favorably to the ex-Telecom index in early 2000. Although this portion of high yield eventually widened to 1000bp, the bulk of the selloff occurred before US growth slowed meaningfully. Should non-commodity spreads today go to levels we saw non-Telecom go in late 2000, we could see as much as 100bp of widening before reaching a temporary peak. Coupled with a couple points of loss due to default, and it’s not difficult to envision another year of negative total returns without a contraction in GDP or a spike to double digit default rates.

  

   

  What keeps us up at night, however, is a situation where history is little indicator of what’s to come. Although there is no doubt that we do not need to have a recession in 2016 to experience further high yield weakness, we are concerned that this cycle could prove to be not only different, but more severe than past cycles. The economic slowdown earlier this century was a modest one and was associated with a Fed that had significant policy tools. Should a slowdown today be swifter and deeper, more akin to 2008 than 2002, we are concerned about the ability of the central bank to create enough monetary stimulus to stem a crisis.

  

  

  

  

  

• When Correlation Is Causation – The Most Important Chart In The World If You're A Realtor In London Or NYC

  If ever there was any doubts about the narrative of freedom-seeking China capital outflows driving the irrationally exuberant prices of homes in some of the world's largest cities to record highs, the following two charts will extinguish them entirely. As China continues to strengthen (as quietly as possible) its capital controls to slow the leak of money from the devaluing currency nation, and US authorities clamp-down on the anonymity of cash-only transactions, realtors in NYC, Miami, and London better hope that correlation is not causation.

  Over three years ago, in August 2012, we described how while US regulators and authorities were cracking down on such "illegal" banks as Standard Chartered and HSBC, they were allowing the non-corporate shielded entities, the actual individuals who benefited from the bank crimes, slip through the cracks simply by allowing them to park billions of ill-gotten gains in US real estate:

  When it comes to the true elephant in the room, which is not foreign and is fully domestic, they continue to ignore events such as this one just described by the Wall Street Journal: "A Florida home that originally listed for $60 million has sold for $47 million, a record for a single-family house in Miami-Dade County. The home, in Indian Creek Village, had been on the market since early 2011, when construction was still being completed. The asking price was reduced to $52 million this year." And the punchline: "The identity of the buyer, a foreigner who purchased the home in the name of a U.S.-based limited-liability company, couldn't be learned."

   

  In other words a foreigner who may or may not have engaged in massive criminal activity and/or dealt with Iran, Afghanistan, or any other bogeyman du jour at some point in their past, and is using US real estate merely as a money-laundering front perhaps? Sadly, we will never know. Why? As explained before, it is all thanks to the National Association of Realtors – those wonderful people who bring you the existing home sales update every month (with a documented upward bias every single time) – which just so happens is the only organization that actively lobbied for and received an exemption from AML regulation compliance. In other words, unlike HSBC, the NAR is untouchable, even if it were to sell a triplex to Ahmedinejad on West 57th street.

  If after skimming the above, as we detailed recently, readers are still confused what the reason is for the luxury segment of the US housing market continuing to rise in price and hit record highs, even as all other segments of the quadruplicate US housing market as explained here languish, the explanation was very simple (and explained most recently back in October): the "hot money" belonging to Chinese and all other global oligarchs would be laundered by parking into the new "Swiss bank account" that U.S. real estate has become.

  Still not convinced? Here are the two most important charts in the world if you are a realtor in NYC or London…

  London home prices have soared on the back of this illicit capital outflow desperate for hard non-Yuan assets to bury itself in (within property rights protecting nations)

  

   

  And even more so in New York City homes…

  

   

  Where cash sales have been soaring…

  

   

  However, as we detailed here, just like Swiss bank accounts lost all their anonymity shortly after the Global Financial Crisis, and led to massive fund outflows from Switzerland (and ironically, into luxury US real estate), so after many years of us explaining how the ultra luxury segment of the US real estate market was being used as a money laundry vehicle, the US government has finally decided to crack down on these "secret" buyers.

  As the NYT reports, "concerned about illicit money flowing into luxury real estate, the Treasury Department said Wednesday that it would begin identifying and tracking secret buyers of high-end properties."

  The initiative will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County. It will shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers’ identities.

   

  

   

  It is the first time the federal government has required real estate companies to disclose names behind all-cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.

  The logic behind the move is clear: "this initiative is part of a broader federal effort to increase the focus on money laundering in real estate. Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like limited liability companies, often known as L.L.C.s; partnerships; and other entities."

  …  a top Treasury official, Jennifer Shasky Calvery, said her agency had seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell companies.

   

  “We are concerned about the possibility that dirty money is being put into luxury real estate,” said Ms. Calvery, the director of the Financial Crimes Enforcement Network, the Treasury unit running the initiative. “We think some of the bigger risk is around the least transparent transactions.”

  Our only question is what took so long?

  What happens next remains to be seen, but now that the buyer anonymity of luxury real estate buyers is gone, and with it the opportunity to launder illegal money in the US, much to the chagrin of the NAR, we would expect a substantial drop in both demand and prices for the one segment that has so far been the most stable support of the entire U.S. housing market.

  

  

  

  

  

• Shanghai Opens Below 3,000 As Animal Spirits Leave The Building: Longest Margin Debt Drop In 6 Months

  Traders who may have napped through the earlier oil slide below $28 finally woke up just in time for the China open to find that while there was little excitement on the currency front following a Yuan fixing, which at 6.5578 was practially unchanged from yesterday's midpoint of 6.5596…

  

   

  …the Shanghai composite – following yesterday's torrid, manipulated last hour surge – opened 0.5% lower, sliding back below the 3,000 level which was breached last week for the first time since last summer.

  

   

  More troubling for China's market manipulators is that they will very quickly and aggressively need to get involved today if they wish to prop up the market, now that the animal spirits are officially gone.

  Below is a chart of the Chinese stock market "animal spirits" leaving the building. 

  

  According to Bloomberg, the outstanding balance of Shanghai margin debt dropped for 13th consecutive day on Tuesday, the longest since July 9. Balance fell 0.1%, or 610m yuan, to 583.4b yuan or the lowest level since October 9. This was the longest losing streak in 6 months as the public now leave the market bubble in droves.

  Elsewhere in related securities, while the onshore Yuan is peaceful, there was less peace for its offshore cousin, where the USD/CNH 12-month forwards tumbled following selling by Asia-based leveraged accounts, and trigger stop-losses through the 2,900 area.  PBOC intervention time? Perhaps, but it's early.

  

   

  Also troubling was the Bloomberg note that after the PBOC broke the Hong Kong interbank market by crushing all available FX liquidity in order to manipulate the CNH higher, now the offshore spillover appears to have spilled right back into China as follows:

  • CHINA'S OVERNIGHT REPURCHASE RATE JUMPS TO NINE-MONTH HIGH

  At this point it is practically impossible to track all the Chinese market breakages, which like connected vessels appear at the most random of places, and the moment one hole is patched up, another immediately takes its place.

  Finally, for those interested in the Hong Kong market, the Hang Seng Index slid 1.6% to 19,325.56 at the open, resuming declines after snapping a three-day losing streak yday, with losses led by energy companies such as Sinopec -3.6% and PetroChina -3.3% which were among the biggest drops on HSI.

  However perhaps most crucially, the Hong Kong Dollar is systematically collapsing towards the weak-end of its USD-peg band…

  

   

  And crude is unable to sustain any bounces…

  

  

  

  

  

  

• Washington Unveils Investigation Into "Russian Meddling" In The EU

  Submitted by Danielle Ryan, op-ed via RT.com,

  News broke last Saturday evening that the United States is to conduct a “major investigation” into how the Kremlin is “infiltrating political parties in Europe” amid “mounting concerns” of a new Cold War.

  The exclusive, which was published by the UK’s Telegraph newspaper, revealed that James Clapper, the US Director of National Intelligence has been instructed by Congress to begin the major review into Russia’s “clandestine” funding of EU parties over the last decade.

  Hypocritical? Oh, let us count the ways…

  “Moscow-backed destabilization” of Europe

  First, to get a sense of the motives behind this investigation, look no further than the wording used to justify it. The Russians have been “fostering agitation against NATO missile defense” and attempting to “exploit European disunity” on the subject.

  That’s right everyone, the way to deal with European “disunity” over NATO, is not to address the root causes — it’s to start investigating how the Russians might be exploiting it. In a roundabout way, that makes sense as a temporary distraction. But realistically, Washington may be giving the Russians a bit too much credit. This so-called “Moscow-backed destabilization” should be the least of their worries. In actual fact, there are plenty of reasons for Europeans to have grown naturally disillusioned with the military bloc all on their own: a massive refugee crisis, the threat of the Schengen agreement crumbling before their eyes, terrorism paying more frequent visits to Europe’s foremost cities — not to mention growing concerns over potential repeats of the mass sexual assaults seen in Cologne on New Year’s Eve.

  In other words, years of NATO interventionism have stirred up a toxic political cocktail and dropped it off on Europe’s doorstep — and that, frankly, has very little to do with Russia.

  Look who cares — and who doesn’t

  Young as it is, the investigation into the Kremlin’s “meddling” has already scored some big fans.

  “Finally waking up to the problem,” tweeted Bill Browder along with a link to the Telegraph story. Banker-turned-activist Browder was convicted of a massive tax fraud scheme in Russia (and has subsequently turned into somewhat of a hero in the Western media, despite the emergence of holes in his story and his interesting preference for speaking to an adoring press rather than under oath).

  Anders Aslund, senior fellow at the Atlantic Council also tweeted the story. Aslund’s tweets are interesting, to say the least. In November, he suggested on the platform that the “broader implication” of a Reuter’s investigation into the identity of Putin’s daughters meant that one of those alleged daughters, Ekaterina Tikhonova, would be a “successor” to her father, thus renewing a Russian “monarchy”.

  And such good news deserves to be tweeted thrice, seems to have been the thinking for Jacek Saryusz-Wolski, Polish MEP and Vice President of the European People’s Party.

  On the other hand, a lot of the reader reaction on the story was quite different. One Twitter user posted the link and asked: “When do we investigate US meddling, globally?” while one noted “several levels of irony” in the news, and another warned that merely talking about ending NATO in Europe could soon earn you the honor of being labeled part of a “Moscow-backed destabilization program”. On Facebook, the comment on the story which received the most ‘likes’ simply said: “Please investigate US meddling in Europe first.”

   

  If you talk about ending NATO, you could soon be called being part of a "Moscow-backed destabilisation" program https://t.co/LQlBcBniWq

  — Tilo Jung (@TiloJung) January 17, 2016

   

  It’s only democracy if you agree with us

  How, pray tell, would Washington and Brussels react if tomorrow Moscow announced a ‘massive investigation’ into alleged US-funding of opposition figures and parties in Russia — an investigation designed purely to stigmatize the opposition and paint them as foreign agents. Oh wait; we already know how they would react. They would scream blue murder about Putin’s ‘punitive’ and ‘authoritarian’ regime that seeks to silence dissidents and opposition figures. The headlines practically write themselves.

  The message is clear and the double standard could not be more obvious: Decades of US influence in the EU is inherently good and acceptable, while any modicum of Russian influence is awful and must be stamped out. In Europe, democracy is only democracy when pro-EU, pro-NATO parties win elections — but it’s “destabilization” and undermining “political cohesion” when anti-establishment parties and politicians gain traction.

  Neo-McCarthyism kicked up a notch

  Why the EU can’t conduct this investigation itself is not made clear in the Telegraph piece, but one could venture a guess that it’s because what’s happening here has little to do with EU interests. It’s US intelligence — with permission from Brussels — nosing around in the European democratic process in an effort to identify and weed out parties and political figures that hurt Washington’s interests. Sounds a bit like what they’re accusing the Russians of doing, only worse.

  But why should we be surprised? Something similar has already happened within the media and academia. Journalists, analysts and historians who have attempted to rationalize or explain Russia’s actions from Ukraine to Syria have been labeled agents of the Kremlin and have been pushed to the fringes for having the audacity to go against the accepted consensus. This investigation in large part will simply be an extension of that blossoming neo-McCarthyism. We’re just moving on from individual journalists and politicians to stigmatizing entire political parties.

  Already in the UK, Labour leader Jeremy Corbyn, for the sin of suggesting he would not use nuclear weapons and his reluctance to dive head-first into conflict with Russia, has already been labeled ‘Comrade Corbyn’ by the Daily Mail, while his director of communications, acclaimed journalist Seumas Milne, has been branded a ‘Stalinist’ by Politico.  

  RT gets name-checked again

  What would a story about an investigation into Russian meddling in Europe be without a mention of Russia Today? Analysts have noted that RT, the “Kremlin-controlled television channel, which operates in Britain” (gasp) gave “very positive and extensive” coverage to Corbyn during his leadership campaign. This naturally is cited as part of the Kremlin’s nefarious campaign of influence in the UK elections. No mention is made, however, of the brutal anti-Corbyn campaign waged by the majority of the UK establishment media for months in the run up to his election. In this context, the fact that RT gave Corbyn some positive attention is hardly earth-shattering stuff.

  But again, we’ve come smack-bang into another case of hypocritical nonsense. Western media treats the Russian opposition like it’s the Second Coming of Jesus — and yet we’re all supposed to get our pants in a twist over Russian media taking an interest in anti-NATO candidates in Europe? In Western capitals, the red carpet is rolled out for anyone with a Russian passport and something remotely anti-Putin to say. Criminal background? No matter. History of racist comments? Don’t worry about it. Fan of museum orgies? It’s all good. Like to set historic buildings on fire? Go ahead; you’re an ‘artist’.

  Europe’s crisis of leadership

  The Telegraph story hasn’t been covered widely since it broke at the weekend, but rest assured of the coming onslaught – and remember that the analysts overjoyed by the prospect of another excuse to divert all blame east, are the same ones that never bothered to worry about the decades-long US-backed destabilization of the Middle East, which, it’s fair to say, is proving to be a far bigger problem for Europe than Putin and RT.

  Europe is going through a crisis of leadership — and the current crew steering the ship are still blind to the fact that their passengers are beginning to look longingly out at the waves wondering whether it might not be better to just jump overboard and see what happens. In Britain, the threat of a ‘Brexit’ looms as a very real possibility. Poland’s newly-elected nationalist government doesn’t appear ready to play ball with Brussels. Spain has elected a ‘hung’ parliament. Far right and far left movements are gaining ground in Germany and France. Greece is barely holding on and a question mark remains hanging over the future of the euro.

  But the real problem is obviously Putin’s meddling. Yeah, let’s just go with that.

   

  

  

  

  

  

• "What To Own In An Equity Death Spiral"

  Just one month ago, BofA’s excited head equity strategist Savita Subramanian told Barron‘s that storm clouds would disperse and that the S&P would close out 2016 at 2,200, incidentally the same level as her year ago forecast for where 2015 would close. Fast forward to today and things are far less euphoric.

  This is what Savita writes in a note released overnight:

  Correction or bear market? The S&P 500 is in correction territory, the Russell 2000 and almost 80% of regional stock indices are in bear markets. The average S&P 500 stock is in a bear market – down more than 25% from its 52-week high. Stocks are down a lot. Let’s move on.

  Ok moving on.

  Let’s focus just on energy, where things are a disaster: “Energy is in a profits recession but Energy stock prices have fallen by more than the market falls during a recession (-44% vs. -40%), the Energy recession has lasted twice as long as a typical recession, and Energy earnings have seen 2x the cut that the S&P 500 typically sees (-65% vs. -29%).”

  What about the economy?

  Same story for the economy: should we care whether or not the NBER will one day deem this slowdown an official recession, if PMIs suggest that manufacturing sectors have been in a recession in the three biggest economies (China, US, India) and Energy has been in a profit recession that has lasted twice as long as a typical economic recession.

  Yes, we probably should care, because it takes us to the next question Savita tries to answer: “Are we at a bottom?” Her answer: “Near-term model suggests caution”

  The earnings revision ratio, which has historically been a predictor of market returns over the next 1-2 months, has been falling since July and currently sits at a nine-month low. Short term investors might want to wait for signs of stabilization in this framework.

   

  

  Subramanian then points out what we showed yesterday, namely that sentiment right now is about as bearish as it has been in the past decade, with the least number of AAII bulls since 2005. She confirms this, saying “sentiment is already bearish”

  Global investors are significantly underweight US equities (Exhibit 1) according to our BofAML Global Fund Manager Survey. The most recent survey (in December) also suggests cash levels were raised to 5.2% ahead of the recent sell-off, in “Buy” territory according to their trading rule (Exhibit 2). And our Sell Side Indicator suggests that strategists are as bearish today as they were in March of 2009, recommending investors allocate just 53% to equities, below the long-term benchmark weighting of 60-65%, and at the threshold of a contrarian “Buy” signal (Chart 4). And short interest, another measure of positioning, despite declining in the last three months, remains at its highest levels since 2009.

   

  

  In theory, as an otherwise dour JPM said yesterday, and virtually all chartists agree, this means a rebound is imminent. However, a bigger question beyond merely the technicals is whather we are now entering a bear market, which would blow up all technical models. Savita’s answer:

  Are we entering a bear market? Bear markets in context

   

  The S&P identifies 13 bear markets since 1928, of which 10 have coincided with US recessions (Chart 5). The exceptions were 1961, 1966 and 1987, which precisely because they did not occur alongside recessions, were relatively short-lived and followed by swift recoveries. The market declined ~30% on average during these three bear markets, vs. ~40% on average during the remaining bear markets which coincided with recessions. S&P EPS has historically fallen 30% on average during recessions since 1929 or 20% on average during recessions since 1960.

   

  The general rule of thumb is that the stock market leads the economy by 1-2 quarters, and on average, the market peak has historically peaked 7-8 months before a recession. But the range has been remarkably wide, from the peak of the market coinciding with the start of the recession to as early as 2.5 years before the start of the recession (1948).

   

  

  Curiously, a bear market without a recession may offer little solace, because as BofA calculates, “in bear markets without recessions (1961, 1966, 1987), returns in the subsequent twelve months after the market peak were -12%. If we assume the S&P 500 peaked at May 2015 highs, this would imply today’s levels for May 2016.”

  

  What do markets imply are recession odds? According to the S&P the odds have soared to 50%, but accordint to rates the probability is “only” 18%:

  

  Of course, whether and when the NBER will acknowledge the US has entered into a recession, only time will tell.

  * * *

  Which brings us to the core topic of this post: BofA’s response to “What To Own In An Equity Death Spiral”?

  According to BofA, first pick large, high quality, cash-rich companies:

  Large caps over small caps

  Leverage for large cap stocks remains below average, while small-cap leverage is at all-time highs (and also above-average even when excluding Energy and Materials).

   

  

  Second, pick “liquidity over leverage”

  S&P 500 companies with high yield debt have traded at a premium to those with investment grade debt for over two decades, but this has recently begun to reverse, with investment grade stocks trading at a slight premium for the first time since 1994. Cash-rich companies have also traded at a discount to levered companies post-crisis, but we expect them to re-rate as credit sensitivity is penalized and cash becomes a positive as opposed to a drag on earnings.

   

  

  Finally, choose “High quality over low quality“

  Volatility may be here to stay, and high quality stocks typically outperform low quality stocks in volatile environments. And high quality stocks have traded at a discount to low quality stocks—which have been buoyed by fiscal and monetary stimulus—since the Tech Bubble, but are starting to re-rate. We expect this normalization in multiples to continue, and believe high quality stocks will eventually trade at a premium.

   

  

  * * *

  Putting all this together, here is the answer: BofA screens for companies that fufill the following criteria:

  • Market cap > $10bn
  • S&P quality rank of B+ or better
  • Net Debt (Cash) to Market Cap < index median of 16%
  • Total Cash to Market Cap > index median of 5%
  • S&P Long-Term Credit Rating is Investment Grade
  • Underowned by active managers (relative weight <1.0 in latest fund holdings)

  The result:

  

  

  

  

  

  

• We Know How This Ends – Part 1

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The finance ministers and representatives of central banks from the world’s ten largest “capitalist” economies gathered in Bonn, West Germany on November 20, 1968. The global financial system was then enthralled by a third major currency crisis of the past year or so and there was great angst and disagreement as to what to do about it. While sterling had become something of a recurring devaluation tendency and francs perpetually, it seemed, in disarray, this time it was the Deutsche mark that was the great object of conjecture and anger. What happened at that meeting, a discussion that lasted thirty-two hours, depends upon which source material you choose to dissect it. From the point of view of the Germans, it was a convivial exchange of ideas from among partners; the Americans and British, a sometimes testy and perhaps heated debate about clearly divergent merits; the French were just outraged.

  The communique issued at the end of the “conference” only said, “The ministers and governors had a comprehensive and thorough exchange of views on the basic problems of balance-of-payments disequilibria and on the recent speculative capital movements.” In reality, none of them truly cared about the former except as may be controlled by the latter. These “speculative capital movements” became the target of focused energy which would not restore balance and stability but ultimately see the end of the global monetary system.

  Some background is needed before jumping into West Germany’s financial energy. The gold exchange standard under the Bretton Woods framework had appeared to have lasted as far as this monetary conference, but it had ended in practicality long before. In the late 1950’s, central banks, the Federal Reserve primary among them, had rendered gold especially and increasingly irrelevant in settling the world’s trade finance.

  It took almost a decade, but Bretton Woods was mostly gone by 1968 when gold started trading at a two-tiered price. In reality, functionally, Bretton Woods ended not long after October 20, 1960, in the formation of what would become known as the London Gold Pool – a consortium of government and central bank allocations that would actively supply gold when needed to “hold” its price and enforce the official price. By the standards of Bretton Woods, to have a foreign pool established in order to maintain the convertibility of the dollar alone was breaking the rules.

   

  That fact occurred almost immediately after gold flirted with $40. In fact, on October 27, 1960, the Bank of England was called upon to work closely with the Fed to supply gold in an attempt to calm that market (though there is little paper trail, you know there were gold swaps flying the Atlantic from that point). It was the initial formation of the Gold Pool, and had some success in at least keeping further “devaluation” from rapidly destabilizing global affairs, financial and economic.

  The Gold Pool invoked but temporary calm and obviously failed. By 1967, sterling “had” to be devalued once more (from $2.80 to $2.40) and it kicked off an age that was fomented by chronic instability, or what we now call the Great Inflation. For the Gold Pool, the imbalance had grown so large that it was forced to cease operations in March 1968, having sold a massive, almost unthinkable $3 billion in gold in just the four months prior to its end – $400 million on March 14, 1968, alone (it bears emphasizing that these were just huge amounts even though in today’s inflationary context they seem quite quaint; and that is the point of comparison and devaluation where once $1 billion meant something but today we need trillions to merit any attention at all, but how we got to that point is a story nobody seems to appreciate in its relevant comprehensiveness). Of the $3 billion, the United States official reserves accounted for $2.2 billion, or an 18% drop. From that point forward, gold would trade on a two-tiered basis; the official exchange rates would be maintained but there would also be a separate price for the private market.

  If you were a European bank in early 1968 and had accumulated dollars, there wasn’t really much you could do with them without bearing currency and inflationary risk. The Bretton Woods system had been designed, intentionally, to be funneled through official channels, as that was what economists wanted (proclaiming their own enlightenment the key to fomenting permanent stability; markets = mess). Thus, any bank holding dollars wishing to exchange them at the official rate had to turn them over to their national central bank for payment in local currency. But that wasn’t as straightforward as it sounded, either.

  In truth, with gold no longer providing a satisfactory monetary anchor anywhere, banks proficient in global finance found themselves increasingly devoted to currency “speculation.” It had been a specialist trade dating back to the late 1950’s, but this Merchant’s Bank market, as it was first known, began to marry fund flows including those plying interest rate differentials and inflation risks among the world’s great currencies. Central banks, too, were active in this Merchant’s market finding it often a means to express monetary policy without having to resort to drastic and direct action.

  The object of desire in November 1968 among the world’s “great” economic policymakers was to get Bundesbank to support the mark. It had shown far too great a tendency toward devaluation even though Germany had become a standard of stability in both economic and financial terms. At first, Germany had refused the offer but, as disorder rose, before long Buba had acted.

  In the last two weeks of December 1968, Buba delivered some $400 million to the “market” and an additional $850 million in the first week of January in both spot and swap operations. Over the next two weeks, Bundesbank had grossed up its operations to a total of $650 million in spot exchange and an enormous $1.05 billion in swaps. By the end of January, the operations in support of the mark against the dollar had reached $2 billion.

  The February 4, 1968, FOMC meeting Memorandum of Discussion (the MOD, a detailed summary in lieu of verbatim transcripts) tells us what happened next:

  The drain on German reserves had actually reached the point at which they were running low on cash and were becoming concerned about the continuation of the losses. Consequently, the German Federal Bank raised its rates on swaps to make them less attractive to the commercial banks, and at the same time it permitted the spot rate to fall well below par. [emphasis added]

  Even though Germany’s reserves were counted as 33.7 billion Deutsche marks worth of deposit account balances with the world’s other central banks and commercial banks, physical currency and Federal gold holdings, barely one full cycle of intervention had run to its limit. Consequently, Bundesbank was forced to shorten up its maturities even while still intervening supposedly against the dollar. By March, as that original batch of swaps and forwards started to mature, Buba was still intervening heavily in forex but getting nowhere for the trouble. For the month, the German Federal Bank had issued another $1 billion in currency swaps and sold another $250 million dollars in spot interventions, but the reserve position of West Germany hadn’t changed. The maturing swaps had delivered back to Buba an almost equivalent amount of dollars, “sterilizing” the whole regime.

  The effort was doomed from the start by its very nature. It was nothing more than an attempt to buy time so that whatever imbalance causing general stress and disorder could by itself dissipate. That was the Keynesian handbook even at that time, to focus only upon the short run so that a steady state may once more present itself with but that minimal boost. Except in early 1969 the imbalance was more than a minor disturbance, it was a general and serialized decay.

  It only got worse from that point on since reserves under these circumstances of swaps and forward liabilities are never what they seem to be (because accounting, as policy, is taken from only the short run perspective). Just six months later, in September 1969, the Bundesbank had no choice but to allow the D-mark temporarily float; a month later, it was officially revalued from $0.25 to $0.273. In other words, despite the gigantic impression left by impressive-sounding numbers and the arcane and complex programs meant to present them in conclusive fashion, the German central bank was helpless to withstand what was already transforming the global financial landscape. Worse, the fact that the world’s other economies had come crawling to Bonn to try to force Buba’s hand to do it in the first place was no position of strength but rather another indication they were just as powerless if not more so.

  The Bundesbank’s monthly report from December 1969 makes this very plain, despite all that it had done (and other central banks) over the prior year.

  The domestic money market has in fact been tighter than ever in the last few weeks. Money-market rates reached unprecedented heights, both in absolute terms (day-to-day money on 4 December, the last day before the advance rate was raised, stood at 8 ¾ to 9%) and in relation to the advance rate, which, exceptionally, was substantially exceeded at times by the day-to-day money rate. The decisive factor behind this strain was the massive exodus of foreign exchange, which was partly due to the fact that funds placed in Germany before the revaluation flowed out again and partly to the fact that the other external transactions also ran large deficits.

  It was the “other” that was most troubling. Because of the float and revaluation, Bundesbank’s reserves had fallen by 16 billion D-marks, an amount so large that it reveals the nature of what was taking place. This was no convoy of armored trucks moving huge piles of cash across international borders, it was exchange accounts and liability settling among the modern currency regimes. What was different about 1968 and 1969 was how far that new system had penetrated. Again, Buba’s December 1969 report:

  In contrast to the situation during the preceding period of speculative money inflows into Germany, when the banks considerably stepped up their monetary investment abroad with the concurrence and at times the active assistance of the Bundesbank, the efflux of foreign exchange between the end of September and early December came solely out of central money reserves; indeed, there were calls on the reserves over and above this, as the banks continued to export funds even after the revaluation.

  In other words, currency intervention is always a losing proposition because it amounts to handing your own banking system the tools for your undoing. This was very much unexpected and had not been the case historically. What changed? Bundesbank was supposedly delivering dollars in support of the mark, and further getting German banks to aid in the effort (by handing out preferential swap rates), but where were all those dollars going? It is typically believed they were loosed upon the “market” in some generic and nonspecific conception, but forex of this kind in the late 1960’s was more and more concentrated in that Merchant’s market – the EURODOLLAR market.

  With these money exports – and with their capital exports, which were also at a very high level – the banks exploited the interest differential between Germany and the Euro-money market or the Euro-capital market. However, prior to revaluation, the capital exports ultimately did not affect the banks’ liquidity position since the latter were, so to speak, only re-exporting speculative inflows. Now, though, the capital exports made additional inroads into the banks’ liquidity cushions, which were already depleted by the reflux of foreign funds referred to above.

  We would recognize this last paragraph in today’s terms as the “dollar short.”

  In fact, you can practically exchange Germany for China and 2015(16) for 1968(69) in all of the above, leaving an eerie and thus tragic near replay of everything. That includes, relevant to our current Chinese fixation, the fact that swaps, over the intermediate term, are your ultimate enemy. However, the mark example in 1969 was not unique, as it was also the case for many, many other global currency connections just as yuan is but the most visible example of currency degradation now (real, ruble, lira, rand, etc.). The eurodollar had suddenly become not just a manner in which global trade could be accounted and settled but rather, owing to its “short” and therefore lack of actual convertibility, a central mechanism of global monetary conditions for which there was no control.

  Part 2 Tomorrow

  

  

  

  

  

• And You Thought QE Was Over: The Fed Will Monetize Half Of This Year's U.S. Treasury Issuance

  The Fed may have officially tapered QE at the end of 2014 but that doesn’t mean it is done buying Treasuries: since the Fed never ended rolling over maturing paper, it means that it will remain indefinitely active in the open market. And while there were no sizable maturities from the Fed’s various QEs to date (only $474 million in 2014 and $3.5 billion in 2015) that will change dramatically this year, when Brian Sack’s team will have to purchase about $216 billion to replace matured TSYs. According to JPM calculations, this represents half the net new government debt that will be issued over the next 12 months.

  The amounts rise from there: $194 billion comes due in 2017, about $373 billion in 2018 and $329 billion in 2019 for a grand total of $1.1 trillion over the next four years as shown in the following Bloomberg chart:

  

   

  The Fed’s intervention in the Treasury market is well known: here is a brief Bloomberg summary of where we’ve been and where we are going:

  The Fed is the biggest holder of the government’s debt. Its $2.5 trillion hoard, amassed in a bid to support the economy after the financial crisis, is more of a focus for some investors than the trajectory of interest rates. From this month through 2019, about $1.1 trillion of Treasuries in the portfolio are set to mature.

  Even though the Fed’s holdings of Treasurys won’t rise and remain flat at about $2.5 trillion, the Fed’s reinvestment mandate means a return to active POMO which also means that there will remain a backstop net buyer for 1 of every 2 bonds issued by the US government.

  Clearly this is bullish for bond bulls (one can stop wondering why year after year Goldman is so bearish on TSYs every year with its 3.00% yield target and is so eager to buy everything its clients have to sell) for whom “the Fed’s signals that it will roll over the obligations have been another reason to doubt the consensus forecast that yields will rise in 2016. If officials had chosen to stop funneling that money into new debt, the government would likely have to boost borrowing in the market by roughly an equivalent amount this year, potentially pushing up Treasury yields.”

  Hypotheticals aside, the Fed’s indirect monetization of debt has led to the Fed being the owner of about 30% of all 10-Year equivalents currently, further leading to dramatic notional scarcities among CUSIPs that were most actively purchased by the open markets desk, usually in the form of Off The Run paper, which meant that the Fed has far less On The Turn to lend to Treasury shorts in repo, leading to major “special” prints in the repo market manifesting by near-fail, or -3.00%, levels when one wishes to borrow any given Treasury.

  However, as Bloomberg explains, as the Fed will rolls over maturing Treasuries, it will add new On The Run issues to its balance sheet. Since Operation Twist, the Fed has had less of those sought-after securities to lend out in a daily program it has to ease shortages in the market. As a result, these Treasuries have frequently commanded a premium in the repo market — leading more trades to go uncompleted, or ‘fail,’ in bond parlance.

  If the Fed’s stock of those Treasuries grows, the central bank should be better able to alleviate the shortages through its SOMA Securities Lending program, said Joseph Abate, a money-market strategist in New York at Barclays Plc, a primary dealer.

   

  It will become “easier for people to access the securities they need to cover any shorts in the on-the-runs and, correspondingly, the level of fails should fall,” Abate said. “The more difficult it is to cover a short, the less liquidity there is in the market.”

   

  Dealers say bond trading has become more difficult as regulator-imposed risk limits make it costlier for banks to transact in all types of debt. While Treasuries remain one of the most liquid global markets, failing trades rose this month to about 2.5 percent of average daily volume, from about 1 percent before Twist, according to Barclays. The dollar amount of uncompleted Treasuries trades reached the highest since 2011 last month, Fed data show.

  The topic of soaring repo “fails” was covered recently, and is shown in the chart below: a direct function of the Fed’s encroachment in the open market.

  

  Then there is the question of remitting interest payments back to the Treasury, about as close to directly funding the US government as it gets (with the exception of course of the Fed directly paying $19 billion to fund the Highway Bill: that was undisputed direct funding of the US government by the banks that make up the Federal Reserve system). According to Bloomberg, if the Fed had opted not to reinvest this year, the Treasury would have had to make up for the lost funding with additional debt sales that might have boosted 10-year yields by 0.08-0.12 percentage point, according to Priya Misra at TD Securities LLC.

  One wonders just how much more debt the Treasury will have to issue and how much higher yields will go up by if the Fed ever does unwind its balance sheet?

  It also leads to another question: why did the Fed decide to begin the “normalization” process by hiking rates first instead of first removing the truly unorthodox support for asset classes, namely unwinding its balance sheet, or at least stopping the reinvestment of maturing bonds. The answer: because the Fed’s rate hike is a farce, further compounded by the fact that the Fed Funds rate on December 31, the only day it actually matters for bank balance sheet purposes, was well below the Fed’s 25bps floor.

  But that’s a topic for another post.

  For now, we leave it to Mark MacQueen, co-founder of Sage Advisory Services Ltd., which manages $12 billion in Austin, Texas, to explain precisely why those who are long assets could care less about nominal rate hikes but are terrified of the Fed’s actual balance sheet unwind: “The Fed tightening gave us little worry, but the unwind of the balance sheet gives us major worries. The Fed is keenly aware that the balance sheet has a much greater impact on the overall yield levels in the markets going forward than raising rates.”

  And there’s your answer why the Fed is hiking instead of winding down its gargantuan $4.5 trillion balance sheet: it might actually achieve the intended effect.

  

  

  

  

  

• Crude Oil Slides Below $28, Lowest Since 2003, Dragging US Equity Futures Lower

  Traders had some hope that they could take at least a brief nap ahead of the China open before all risk hell broke loose in the latest evening session, however either some liquidating algo or the Iranian oil trading desk had different plans, and moments ago WTI dipped below $28 per barrel, sliding as low as $27.92, doing so only for the first time since 2003, a new 12 year low.

  

  The plunge in the highly correlated asset promptly dragged not only the USDJPY carry pair but also the E-Mini well lower, with ES sliding as low at 1861 moments ago before recouping some of the losses.

  

  And now we turn our attention to the China open, and for the real pandemonium to begin.

  

  

  

  

  

• Borderland Homicides Show Mexico's Gun Control Has Failed

  Submitted by Ryan McMaken via The Mises Institute,

  We often  hear about homicide rates in Mexico and how they are among the highest in the world. While that is true for some parts of Mexico, much of Mexico — where nearly 80 percent of the population lives — has much lower rates than what are often quoted in the media.

  Most of the high-homicide areas in Mexico are found along the US border, and to a certain extent reflect the work of drug cartels working to keep drug trafficking channels open to the US.

  And yet, right across the border in the US, homicide rates are remarkable low. In fact, homicide rates along the US side of the border are significantly below the US average.

  Why is this?

  Homicide Rates in Mexico, By State

  First, to get a better understanding of these phenomena, let's look at homicide rates in Mexico by state. 

  While not as decentralized as the US, Mexico has a weak federal system like the United States with 31 states and one federal district (somewhat like the District of Columbia) that is Mexico City.

   

  Using OECD data (for 2013), I mapped the Mexican states by homicide rate: 

   

   

  

  Source: OECD, map by Ryan McMaken

   

  Clearly, homicides are not evenly distributed across Mexico, and some areas are lopsidedly affected. Those familiar with the Mexican Drug War will note that this pattern does indeed appear to reflect trends in cartel activity and the Drug War. Here is map to help you identify each state:

   

  

  Source: Mexconnect

   

  Most Mexicans live in states with homicide rates well below those found among the ten states with the worst rates. Indeed, the total population living outside these areas constitutes nearly 80 percent of Mexico's 117 million people (as of the 2010 census). Population is concentrated around Mexico State, Pueblo State, and other states in the southern and eastern parts of the country. However, even in these parts of the country, homicide rates remains well above the US average.

   

  Also of note is the fact that the states with the lowest percentages of indigenous Mexican populations also tend to have the highest homicide rates. Note, for example, that among heavily indigenous states in the far south and in the Yucatan, homicide rates are quie low by national standards. Chihuahua, by contrast, which historically has tended to have the largest population of non indigenous (i.e., "white") Mexicans (proportionally speaking) has the highest homicide rate.

   

  And finally, we note that northern Mexico, including the high-homicide states discussed here, tend to have higher per capital income levels than the rest of the country.

   

  The old assumptions about how the poor and non-whites cause higher homicide rates require a closer look in the case of Mexico.

   

  Big Differences on Different Sides of the Border

   

  Let's now turn our attention to the problematic north.

   

  It's not an accident that some of the highest homicide rates are found along the border. Mexican drug cartels have an incentive to ensure they maintain control of drug supplies moving norther to where the demand is (in the United States.)

   

  However, those drugs still need to be moved on the northern side of the border. So, do homicide rates continue onto the northern side? It turns out they don't. Using the same color coding (and the same data source) as the homicide map above, the border states (two states deep) on both sides look like this:

  

  Source: OECD. Map by Ryan McMaken

   

  On the other hand, Chihuahua and Texas are very big places. Perhaps if we take a more detailed look at the counties right on the border, we'll get a better feel for how things look at the border.

   

  Thanks to Omar Garcia Ponce and Hannah Postel at the Center for Global Development, the work's already been done for me. Here is a map of the border at the county/municipality level: 

  

   

  Source: Center for Global Development

   

  The general scenario remains the same.  In fact, the borderland on the US side of the border have fewer homicides than the US overall.  The authors note: 

  The map [above] illustrates the striking disparity between homicide rates on each side of the border. In 2012 (the most recent year available for all locations), Mexican border municipalities experienced 34.5 murders for every 100,000 people.  By contrast, the homicide rate in US border counties was only 1.4, far below the US national average (4.7), and a tiny fraction of that experienced by their Southern neighbors.

  While almost half of the Mexican municipalities along the border experienced more than 40 murders per 100,000 people in 2012 (176 in Tamaulipas’ Ciudad Mier), the highest homicide rate in the US border counties was 12.9 (Yuma, AZ). The next most violent county experienced only 5.4 murders per 100,000 people. Notably, some of the safest locations in the United States are contiguous to many of the most dangerous places in Mexico. Most striking is the contrast between Ciudad Juárez and El Paso, two large cities that constitute a binational metropolitan area. Once called “the murder capital of the world,” Mexico’s Ciudad Juárez is only 300 feet from El Paso, “America’s safest city.” In 2012, Ciudad Juárez had 58 homicides per 100,000 people, while El Paso experienced fewer than one (0.6).

  So why is there such an immense difference here? 

   

  Restrictive Gun Laws in Mexico

   

  The pre-packaged retort to this phenomena often repeated in the media is that the US causes the high homicide rates in Mexico by exporting guns to Mexico. We're told that criminals go into the US, buy guns legally in Texas (for example) and then sell the guns illegally to cartels in Mexico.

   

  Dave Kopel has shown that this claim isn't true. But, even if it were true, it wouldn't explain much by itself since we're left asking ourselves why criminals don' just do the same thing to the same homicidal effect in the United States. If it's so fruitful for violent criminals to buy guns in the US and sell them to organized crime rings, why aren't those criminals doing the same thing in the US?

   

  Well, the answer is the criminals probably are are well armed in the US, and have a lot of guns just like criminals in Mexico do. The difference in actual crimes carried out, however, likely lies in the fact that law abiding Mexicans have been disarmed, while law abiding Americans have not.

   

  Gun laws are very restrictive in Mexico, as The Atlantic notes: 

  Mexico can hardly be described as a heavily armed society. With around 2.5 million registered gun owners and at least 13 million more illegal arms in circulation, the country has a ratio of just 15 guns for every 100 people, well below the global average. Unlike in the U.S., civilian possession in Mexico is considered a privilege, not a right and is tightly regulated under federal law since the 1970s. Extensive background checks are required of all purchasers, and there are heavy penalties and even imprisonment for non-compliance. Astonishingly, there is just one legal gun shop in the country, compared to more than 54,000 federally licensed firearm dealers and thousands of pawnshops and gun shows scattered across the U.S.

  In other words, in Mexico, there is an immense asymmetry in gun ownership between violent criminals and law-abiding citizens. Criminals have abundant access to the means of violent coercion, and the will to use it. Ordinary citizens, on the other hand, have, practically speaking, no access. Meanwhile, local officials can be bought by the criminals, which means that private citizens will then find themselves facing two heavily armed groups who are free to behave maliciously toward the general population with little fear of reprisals.

   

  The Atlantic author notes that in Mexico, there are about 15 guns per 100 persons, which is likely referencing the data released by the Small Arms Survey. The same survey estimates that, by contrast, there are from 88 to 100 guns per 100  persons in the United States. The US far outpaces even gun-friendly Switzerland which has about 45 guns per 100 persons. 

  In response to this lopsided situation that favors the cartels, some Mexicans have formed their own militia groups, but these are considered only quasi-legal, and they are certainly rare compared to the number of armed cartel members.

   

  In the US, by contrast, violent criminals can guess that a not-insignificant percentage of Americans are armed on the street, and far more are armed in the home.

   

  Possible Other Factors

   

  Now, I'm not going to claim that gun control is the only factor at play here. Deeply ingrained issues related to government corruption, and the chaotic effect of the Drug War are clearly important factors.  However, the differences between Northern Mexico and Southern Texas or Southern Arizona are not as immense as some might think. For example, in Chihuahua, across the river from El Paso, the people share a nearly identical geography, and a very similar ethnic makeup. Even economically, northern Mexico is closer to the US than is southern Mexico, while a majority of Chihuahuans are of European descent. And, of course, it would be risible to suggest that the US is free of political corruption. However, all of these issues are exacerbated by the fact that the Mexican's state's stringent gun controls greatly enhance the coercive power of cartels and government agents at the expense of ordinary citizens. 

  And there is no denying that when one crosses the border from Chihuahua to Texas, some of the biggest differences one encounters are legal and political in nature.

   

  Among these differences is the fact that south of the border only government agents and criminals are allowed meaningful access to firearms, while norther of the border, criminals and ordinary citizens share similar levels of access.

   

  What we are witnessing in northern Mexico then, is a tragic mixture of failed Drug War policies mixed with a government refusal to allow Mexicans to arm themselves. Yes, there are many factors at work. Take out some of them — whether drug war, ethnic conflict, or poverty — and the situation would likely be improved.

   

  But, when we add gun control into the mix, things are far worse than these ever need have been. Moreover, if one's position is that the fault lies with poverty and corruption, then the pro-gun-control position is nothing more than the position that the same regime responsible for this corruption and poverty should be granted even more absolute power over the population it abuses.

   

  It is instructive that, on the northern side of the border, meanwhile, there is still a drug war, there is a lot of ethnic diversity, and the US border areas have some of the highest poverty rates in the United States. And yet, homicide rates are far, far below what they are on the southern side. Indeed, right along the border, they're among the lowest rates we see anywhere in the world.

   

  What About the Canada-US Border?

   

  Do we see similar issues along the Canadian-US border?

   

  As I noted in this article, American states near the northern US border tend to have low homicide rates with states like Idaho, Oregon, New Hampshire, and Maine reporting remarkably low homicide rates that are similar too or even lower than Canadian homicide rates.

   

  Using the same color coding as the previous maps (and the same data source), we see that, with the exception of Michigan (i.e., Detroit) the US-Canada border is marked by homicide rates all below 5 per 100,000:

   

  

  Source: OECD. Map by Ryan McMaken

   

  Of course, the situation in the Canadian border is immensely different from the situation on the Mexican border in terms of ethnicity, income levels, and climate. Crossing the northern border, however, brings nowhere near the sorts of changes in crime that are encountered on the southern side.

   

  Nevertheless, part of this might be attributed to the fact that Canada is far more gun-friendly than Mexico. There is certainly more than one gun store in Canada (to say the least), and it is estimated by the Small Arms Survey that Canada has twice as many guns per capita as Mexico, with 30 per 100 persons.

   

  Mexican Politicians (and American Politicians) Blame Everyone Else

   

  While it refuses to admit the abject failure of its gun control program, the Mexican state instead attempts to shift the blame to Americans and has attempted to impose international gun control measures on the US.

   

  For Mexican politicians, it's easier to shift the blame than to recognize the fact that neighboring Americans right across the border enjoy far lower homicide rates along side relatively easy access to firearms. (Even California looks like a gun-owner's paradise compared to Mexico.)

   

  The Mexican state (and many Mexicans) are unfortunately impervious to these facts, and, many Mexicans still believe that Mexicans will be safer if the Mexican regime tightens its grip even more on firearms, in spite of the spectacular failure of gun control in that country. 

   

  

  

  

  

  

• Hedge Fund Which Predicted The Subprime Crisis Expects Massive Yuan Devaluation In 2016

  Earlier this month, even before China unleashed the end phase of its latest currency devaluation which since forced the PBOC to enforce even more capital controls to avoid accelerating capital outflows, Kyle Bass revealed that his best investment idea for 2016 was to short the Chinese currency:

  “Given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency…. “We are not short Chinese equities, but we are very invested in the Chinese currency: we think we are going to see a pretty material devaluation; we think it’s going to be in the next 12-18 months.”

  He did not specify exactly what he means by “pretty material devaluation” however according to our own December calculations, an indicative number is likely in the 10-15% ballpark.

  

  Today, another Texas-based hedge fund manager who just like Kyle Bass correctly predicted, and profited from, the subprime crisis, Corriente Advisors’ Mark Hart, has not only reiterated Kyle Bass CNY devaluation call, but has gone as far as quantifying by how much the Chinese currency will have to fall. Cited by Bloomberg, Hart has said that “China should weaken its currency by more than 50 percent this year.“

  Hart believes that the Chinese crawling devaluation is an error as it carries with its the latent threat of much more devaluation in the future, thus encouraging even more outflows, which in turn forces China to sell even more reserves, which destabilizes the economy even further, forcing even more devaluation and so on.

  Instead, a one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. He adds that China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.

  Incidentally, this is precisely what Ex-PBOC adviser Yi Yongding says yesterday China should do, as quoted by the 21st Century Herald, adding that the PBOC’s forex reform in Aug. 2015, known as “crawling peg” by foreign investment banks, has many flaws and should be abandoned. Accoding to Yi, the scheme won’t be able to break mid- or long-term depreciation expectations because those are decided by fundamentals, even if they are misinterpreted. His conclusion is a widely accepted one by now, namely that China may not have better choice but to strengthen control over capital flows to stabilize financial market.

  Back to Hart who says that “there wouldn’t be anything underhanded about a sharp devaluation. Why should China be forced to suffer deflationary effects of defending its currency when everyone else isn’t?”

  In other words, why peel the bandaid one millimeter at a time when China should just rip it off in one motion?

  Here’s a reason why: or rather over 20 trillion reasons, which is how much in dollar equivalent deposits Chinese savers have parker at their local banks. If those depositors realize that their net purchasing power for foreign goods and services has suddenly lost 50%, in the words case, there would be riots in China, and in the best case an unprecedented capital outflow. Which is also why China has been so unwilling to do the “bandaid” approach.

  As Bloomberg adds, Hart, whose prescription clashes with consensus forecasts for the yuan and recent comments from senior government officials, said China would be justified in weakening the currency after central banks in Europe and Japan fueled declines in their exchange rates to stoke economic growth in recent years. Such a move would likely come as a surprise to global investors, who were rattled by a drop of less than 3 percent in the yuan last August.

  

  “They’re trying to drive a car with one foot on the brake,” said Hart, who estimates the People’s Bank of China spent more than $100 billion supporting the yuan in onshore and offshore markets during the first 12 days of January. “If China were to devalue to a level that wasn’t actually a true equilibrium they will get run over pretty quickly, they will blow through FX reserves, and then they will lose face because they’ll be forced to devalue.”

  There is another implication from a sharp devaluation: a world in which not even the IMF can deny any longer that a full blown currency war has broken out. Bloomberg adds more:

  While a one-off drop in the yuan could ease selling pressure on the currency and support exports, it would also entail risks for China and the rest of the world. Chinese borrowers have amassed $1.5 trillion of foreign-currency debt, according to an official estimate at the end of September, which would become instantly harder to repay after a sharp decline in the yuan.

   

  A devaluation could also fan fears of a global currency war — a risk that Mexico’s finance minister cited earlier this month — and spur the U.S. Federal Reserve to backtrack on plans to raise interest rates, according to Hart.

  For now, Chinese policy makers have signaled there are no plans for a big drop in the yuan. Premier Li Keqiang on Friday pledged a “stable” exchange rate and said the nation has no intention of stimulating exports through a competitive devaluation. Bets against the currency will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said last week in New York.

  However, while in August 2015 China did engage a modest one-off devaluation, there is a precedent for a far sharper devaluation. The currency slid 33 percent at the start of 1994 as authorities unified official and market exchange rates, and the yuan has stayed stronger than that level ever since March of that year. That decision was a “wild success,” helping to set the stage for years of economic growth and foreign-exchange inflows, said Hart, who founded his hedge fund in 2001.

  While a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position, according to Hart. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

  It would also most likely unleash another global currency crisis, first among the Emerging Nations, and then among their Developed peers, as country after country scrambled to implement comparable currency destruction as China, in order to preserve their relative share in dwindling global trade, where the shortest way to boost one’s exports has over the past 7 years, been a very simple one: destroy your currency faster than your exporting competitors.  

  The reality, however, is that Hart is correct, and China will have to pick one option: either a sharp devaluation, or failing that, debt defaults: the current course of gradual CNY debasement will only results in an acceleration in capital outflows until ultimately China’s $3 trillion rainy day fund is whittled away to nothing (and as a reminder, according to some estimate just a little over $1 trillion in it is actually liquid assets).

  Hart is not alone in predicting a massive Yuan devaluation: Carlyle Group’s Emerging Sovereign Group in New York and Omni Partners in London are also positioned for a retreat in the currency. Crispin Odey, who runs Odey Asset Management, said in September that the yuan should fall by at least 30 percent.

  Finally, this is how Hart is trading the upcoming devaluation: Hart said he’s wagering against the currency with put options, contracts that provide the right to sell at a specific price within a set period. Bets on a sharp devaluation aren’t common among his hedge fund peers, who only recently started to wager on a gradual depreciation, Hart said. 

  “It strikes me as odd that the world would assume that China wouldn’t pursue same the same type of monetary policies” that led to weaker exchange rates in other nations, Hart said. “They’re between a rock and a hard place.”

  Which is 100% correct, and is also why the market is finally starting to pay attention to the China in the bull store, after years of stubbornly ignoring it.

  

  

  

  

  

• How Elon Musk Stole My Car

  Submitted by Marty via Atlantic.net,

  This was my personal experience with Tesla Motors. I’m a fan of what Tesla Motors is trying to accomplish, and hope they get their issues worked out.

  With a new baby on the way, I was in the market for a new vehicle.  I scheduled a test-drive with Tesla Motors (Tesla) in mid-November, and was on the fence about purchasing a Tesla. I had some questions which I emailed my test-drive consultant, but didn’t receive any response and I wasn’t particularly in love with the car, so I let it go.

  A few weeks later, I was talking to a friend of mine who had just leased a Tesla. I explained my experience, and how I felt the price of the car was too high for what it is. While Tesla doesn’t offer discount cars, he explained there is a way to pay less. Tesla has what are referred to as “inventory cars”. These are cars used for test drives, showrooms, as well as loaners. They do have mileage, you have to take them “as is”, and there is no custom configuration. But, if you can find one to your liking you can get a pretty big discount.  He recommended I speak with his Owner Advisor, Kevin, and he connected me with him.

  Tesla doesn’t have a traditional dealership network; it is pioneering the luxury electric vehicle (EV) segment, and pioneering selling cars without traditional dealerships. That means it operates its service centers, and showrooms itself. By unifying this process it should give a better experience to it customers. Kevin, the Owner Advisor (salesperson) I was referred to, is based out of Tesla HQ in Palo Alto, California.

  After working with Kevin for a few weeks, I was able to find a car that met my needs in Pasadena, California. On December 24, I placed my order with Kevin by paying $4,000 as a deposit. Kevin assured me that this secured the vehicle for me, and that it was marked as sold and unavailable for anyone else to sell. I followed up with him the next week, and he said they were just trying to find a carrier to ship the car to Florida, and I should begin working with my Delivery Specialists.

   

  

  (Above, the confirmation screen with VIN of the Tesla Model S Elon Musk is driving)

  Tesla has Delivery Orientation Specialists and Delivery Experience Specialists who work to help you through the process of getting the car. In my case, it was Caroline and Chelsea. Caroline explained to me that typically it takes a week to get the car, but because it was late in the year it might take up to two weeks, with the latest delivery date being Jan 8. She also explained that there was no way to get the car by the end of 2015. This made sense, because as a public company, Tesla was striving to meet its delivery commitments to its shareholders. By prioritizing deliveries of cars that could actually be delivered before the end of 2015, they could meet their quotas, and then deliver cars (like mine) early in 2016. Because I wanted to support Tesla, I didn’t think much of anything when I didn’t hear from anyone from that point on.

  The week of what I thought would be my expected delivery, my electrician was calling to schedule the installation of my additional power receptacle in my garage. We had agreed to do it once I got the car. I began calling my local Tesla location and choosing the “New Vehicle Delivery” option, but it would only ring and go to a voicemail that hadn’t been set up. I called repeatedly and no one would answer. Frustrated, I called and chose the “sales” option and spoke with an representative there that took my message and assured me someone would call me back.  Still, I got no calls back. Since the car was coming by January 8, I was starting to get concerned. I had to coordinate the car, the power installation, disposing of my old car in a sequence of events that I couldn’t start until I knew when I would get the car.

  By Wednesday, I was emailing my delivery specialist and calling. I didn’t know what was going on. By Thursday I was showing people at work how they don’t answer the phone or respond to my email. I was very concerned that I was paying over $100k for a car, and if this was the new sales process how terrible would the service be? Should I just cancel? How could I cancel if no one would even talk or communicate with me? Was there a problem in transit? Basically, I was stuck and frustrated, plus I had already paid for a deposit which covered the non-refundable transportation cost.

  Exasperated, I called the local Tesla dealer again. This time, no one answered and my call was transferred to Tesla HQ. The representative asked for the 6-six digits of my vehicle VIN. Tesla offers a “my Tesla” portion of their site that new buyers login in to, to sign electronic paperwork, upload copies of driver’s licenses as well as proof of insurance. In addition, it shows a model of the car and some advice on how to power it. Most importantly, after you make your initial payment, the reservation number for your car is replaced with a VIN (Vehicle Identification Number) which signifies the specific car which is allocated to you. This is done shortly after you send in your initial payment. Therefore, I was able to provide my VIN information to the Tesla representative, who promised me Kevin my original Owner Advisor would call me back.

  On the evening of January 7, the day before I was to receive my car, Kevin called me to explain he had a call in with the Office of the CEO at Tesla and was working with his team in Tesla to resolve a problem that had come up — their CEO, Elon Musk, had taken my car and was using it as his personal vehicle to test a new version of autopilot. Even worse, he said he could see all the calls I had made into the Orlando delivery center this past week, and no one was taking my calls because no one knew what to do.

  Tesla logs every in-bound call to their centers, and stores all of this in a national database. This is most likely tied into a CRM (Customer Relationship Management) system, to provide better service. So, for example, Kevin in California saw detailed records of all my attempts to connect with someone in Orlando.  Since no one knew what to do, they were deliberately avoiding taking my calls or communicating with me.

  I was floored. Not only because my car had been taken by their CEO, not only that no one bothered to reach out or communicate with me, but they were actively trying to avoid me.  I called and reached Kevin again on the evening of Jan 8. He explained my original car was so aftermarket at this point there was no way I would get it. Kevin began suggesting a different car that didn’t match what I was looking for, then suggested another car for $20k more.

  Frustrated, I called Tesla HQ to complain, and requested to speak to someone in the Office of CEO. The person answering wanted to know why, so I explained the situation and was transferred to a Ms. Kloskey (sp?). As was typical with Tesla, not only did she not answer, her voicemail was full so I couldn’t leave a message. I hung up and called back, and reached a representative who I explained my situation to, and requested escalation to someone who could make things right. The representative took my message, and said he would forward it to the appropriate person.

  I received a call back from Kevin, who explained he had gotten the memo that I called. Once again, I couldn’t penetrate Tesla’s screening system to find someone who cared, empathized, or treated me like a human. I could only speak with Kevin who was unhappy that they didn’t give me the right experience.

  Tesla has a strange way of communicating with customers I think is best described as customer service vaporware. That is, they spend more time trying to create the illusion of customer service, rather than actually providing it. There is no mechanism for them to get feedback, as I tried to provide, so its difficult to see how they can improve if they don’t know where they are going wrong.

  Tesla is pioneering two things at once, (a) a luxury full-EV segment for passenger vehicles, and (b) bypassing the traditional dealer network and selling directly to consumers. Since I never got my car, I can’t speak to (a). But, because (b) is so horribly broken, I don’t think (a) can succeed. My concern is if Tesla fails the experiment of directly selling cars to consumers may be considered a failure, when in reality it was tremendous missteps on Teslas part that caused it to not work. Right now, Tesla ships low volumes of cars to early adopters and ardent enthusiasts who will overlook the organizations short-comings. But I think launching a higher volume (Model 3) sedan later this year with their current organization will be watching a slow-motion train wreck.

  Thought questions for Tesla:

  • Why was Elon Musk (CEO of the company) allowed to take a car that was marked in their system as sold?
  • When Tesla employees became aware of what happened, why didn’t they reach out to me? How did no one involved think of the customer?
  • Even worse, why did Tesla employees actively work to avoid my calls and email?
  • If Tesla is logging interactions with their customers (like phone-calls) to a national database, why didn’t they notice that someone was calling in and only getting voicemail. Shouldn’t this be a red-flag, or shouldn’t someone at Telsa HQ be reaching out to find out why/whats going on/why someone keeps calling so often?
  • The only person who communicated with me (in the end) was Kevin. At no point did he ever apologize or ask how to make things right. He only communicated he was disappointed and not the experience Tesla wanted to provide. (He did apologize for “handing this incorrectly”, but I think this was in regards to my requesting my money back). What is the escalation policy here?
  • I tried three times to communicate with Tesla HQ, the first on their post test-drive e-mail form which they automatically send. I wrote constructive criticism and didn’t get any follow up. As detailed in my experience here, I called the Tesla HQ twice and was unable to reach anyone that cared or could help me.

  In the end, I cancelled my order and Tesla agreed to refund my money. If a tech-savvy $100k car buyer can have this experience, what hope is there for this organization to go mainstream? Tesla is a publicly traded company that loses money. So, strictly speaking, it doesn’t need customers as long as it can fund its losses via Wall Street. In my experience, its a hobby masquerading as a company, and it can probably run as a hobbyist organization for some time. But, at some point, customers will matter, they always do. Hopefully, if this posts reaches the right people in Tesla it will serve as a wake-up call to right their ways before its too late.

  In 21 years as a founder/CEO of my own company, dealing with Tesla has been the most bizarre and strange experience I’ve had interacting with another organization.

  Note: There were many other errors, selling me a Ludicrous upgrade which didn’t apply to my car, Tesla endorsed electricians not familiar with Tesla, dual charger availability issues, etc. My experience regarding these issues may have been affected by their employees trying to avoid me.

  

  

  

  

  

• U.S. Ally Turkey Arrests Academics For The Crime Of Signing A Peace Petition

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  A senior Western official familiar with a large cache of intelligence obtained this summer told the Guardian that “direct dealings between Turkish officials and ranking ISIS members was now ‘undeniable.’”

   

  ISIS, in other words, is state-sponsored?—?indeed, sponsored by purportedly Western-friendly regimes in the Muslim world, who are integral to the anti-ISIS coalition. Which then begs the question as to why Hollande and other Western leaders expressing their determination to “destroy” ISIS using all means necessary, would prefer to avoid the most significant factor of all: the material infrastructure of ISIS’ emergence in the context of ongoing Gulf and Turkish state support for Islamist militancy in the region.

   

  There are many explanations, but one perhaps stands out: the West’s abject dependence on terror-toting Muslim regimes, largely to maintain access to Middle East, Mediterranean and Central Asian oil and gas resources.

   

  – From the post: So Who’s Really Sponsoring ISIS? Turkey, Saudi Arabia, and Other U.S. “Allies”

  There’s been a lot going on lately, so I wouldn’t be surprised if you missed the latest drama from of U.S. ally, and sometimes ISIS/al-Qaeda supporter Turkey.

  Recently, a peace petition circled the globe calling on the Turkish government to end fighting against Kurdish militants in the country’s southeast, which has reportedly led to thousands of civilian deaths. By January 15th, 2,000 Turkish academics had signed the petition, which was too much for authoritarian president Recep Tayyip Erdo?an to handle. He not only publicly denounced the entire affair, he went ahead and started arresting people.

  Nature reports:

  Hundreds of Turkish academics are waiting to find out whether they will be prosecuted or sacked for spreading “terrorist propaganda”, after they signed a petition calling for violence to end in Turkey’s southeast, where government forces have been fighting Kurdish separatists.

   

  After the petition provoked a furious response from Turkey’s president Recep Tayyip Erdo?an, several universities in the country have begun investigations into signatories among their faculty — which could lead to their dismissal if accusations of unlawful political agitation hold up. On 15 January, police arrested and later released 27 academics, according to local media reports, including economists, physicians and scientists.

   

  “We are accused of defamation of the state and of terrorist propaganda,” says Zeynep K?v?lc?m, a law professor at Istanbul University, who has signed the petition and said she knew of several arrests. “We are all waiting for the police,” she told Nature on 15 January.

   

  Turkey’s government has previously clamped down on scientists and students who question its policies, imprisoned scientists charged with terrorism offenses, and restricted the freedom of funding agencies and scientific academies. But the number of arrests and investigations makes the current episode one of the larger Turkish attacks on freedom of expression in recent years, prompting outrage among human-rights advocates.

   

  By 15 January, almost 2,000 Turkish academics from 90 or so universities had signed a petition — launched a week earlier — that called on the Turkish government to end the fighting against Kurdish militants. Thousands of civilians have been killed in the longstanding conflict, which flared up again last July after a ceasefire collapsed.

   

  In an 12 January speech (made in the wake of terrorist attacks in Istanbul) Erdo?an accused signatories of spreading and supporting Kurdish terrorist propaganda and undermining Turkey’s national security. “I call upon all our institutions: everyone who benefits from this state but is now an enemy of the state must be punished without further delay,” he said.

   

  In response, the Turkish Higher Education Board (YÖK) and public prosecutors in several Turkish university cities launched investigations against academics who signed the petition. And several Turkish universities launched their own investigations into signatories at their institutions; some of them, including Abdullah Gül University in Kayseri, have asked signatories to resign. The rector of that university, ?hsan Sabuncuo?lu, has not responded to Nature’s e-mail requests for comment.

  The drama doesn’t end in Turkey. Both the U.S. ambassador to Turkey and Noam Chomsky are involved. As relates to the U.S ambassador, let’s turn to Al-Monitor:

  Melih Gokcek has been the mayor of the Turkish capital, Ankara, since 1994. He is known as a flamboyant and loquacious member of the Justice and Development Party (AKP) and is quite active on social media. He appears on television frequently and has over 3 million followers on Twitter. He frequently engages pundits and colleagues into virtual duels.

   

  The mood changed quickly when the US Embassy posted a brief message indicating the ambassador’s support for freedom of expression for academics who signed a petition titled “We do not want to be partners to the crime,” which asked the Turkish government to find a way for peace in the southeast. As Al-Monitor’s Cengiz Candar has written, the government sees the petition as supporting terrorism. Consequently, the academics were targeted on multiple fronts, with some being detained or suspended. The social pressure against them was not limited to traditional virtual attacks. It also involved marking office doors of academics who signed the petition, and even publicizing their home addresses, the religious affiliation of their spouses and occupations of their parents.

   

  Bass’ statement read: “Expressions of concerns about violence do not equal support for terrorism.” Bass said that while the United States “may not agree with the opinions expressed by those academics,” he emphasized US support for freedom of expression, regardless of the contents of the petition.

   

  Yet, what might seem to many a simple generic document from the US Embassy was branded as a direct attack on the government by the mayor. Gokcek shared 10 consecutive tweets on Jan. 15 directly addressing Bass. His tweets received hundreds of retweets and promptly became a trending topic in Turkey. The news that Gokcek declared Bass persona non grata made the headlines in national media outlets.

   

  In his Twitter feed, Gokcek said, “Bass is incapable of comprehending what he reads. Those shady academics are saying there is a massacre against the armed terrorists. Dear Bass, in the US, the police shoot citizens like pears for simply not putting up their hands.” “And you guys call this [method] security? In our country, heavily armed terrorists are attacking the police and soldiers. You tell us to accept it in the name of democracy. Well, we cannot.” Gokcek then shared some photos of the PKK’s devastating attacks, with collapsed buildings and a few YouTube videos displaying PKK violence. He wrote: “Bass, apologize to Turkey. Take a look at these [videos and photos] where PKK killed babies yesterday. Perhaps your blind eyes will see. You are the wrong choice for Turkey. I think you should go back to your country. Another ambassador who knows us should take your place.” Gokcek concluded by stating that Turkish officials are trying to bring US-Turkey relations to their best level, while Bass is personally damaging the relationship. He recommended that Bass should at least know when to remain silent, and “not back these academics who support murderers.”

  Well then.

  Now on to Chomsky, who was one of the non-Turkish academics to sign the petition. The Guardian reports:

  The leftwing US academic Noam Chomsky has hit back at Recep Tayyip Erdo?anafter the Turkish president accused him of ignorance and sympathizing with terrorists.

   

  Hours after Tuesday’s bomb attack on a tourist area of Istanbul, Erdo?an delivered a sneering criticism of Chomsky and “so-called intellectuals” who had signed a letter calling on Turkey to end the “deliberate massacre” of Kurdish people in the south east of the country, 

  Chomsky came back with the perfect response:

  Turkey blamed Isis [for the attack on Istanbul], which Erdo?an has been aiding in many ways, while also supporting the al-Nusra Front, which is hardly different. He then launched a tirade against those who condemn his crimes against Kurds – who happen to be the main ground force opposing Isis in both Syria and Iraq. Is there any need for further comment?

  Game. Set. Match.

  

  

  

  

  

• Dutch Politician: Male Refugees Are "Testosterone Bombs," Must Be Locked Up To Save Women From "Sexual Jihad"

  Earlier today, we brought you footage from riots that took place on Monday in the Netherlands.

  When the town of Heesch attempted to hold a meeting to discuss the prospect of placing some 500 refugees, around 1,000 demonstrators arrived to storm town hall. “The atmosphere turned nasty”, to quote AFP, and ultimately, police were forced to use “extra powers” to disperse the crowd.

  The riots came just hours after far-right Dutch politician Geert Wilders aired a new campaign spot for his Freedom Party.

  “Wilders’s views have already proved controversial,” AFP reminds us. “He is expected to go on trial in March for inciting racial hatred after pledging in local elections that he would ensure there will be ‘fewer Moroccans’ in the country.” Here’s the clip:

  But trial or no trial, Moroccans or no Moroccans, Wilders’s party is expected to put up its best ever showing in the next parliamentary elections, due in 2017. Were elections held today, polls show The Freedom Party would grab some 36 seats in the 150-seat Lower House.

  Needless to say, the party’s cause has gotten a boost from the wave of sexual assaults that occurred across Europe on New Year’s Eve.

  Not one to let a good crisis go to waste, Wilders’s new video finds the PVV leader calling on European officials to “lock up” male refugees in asylum centers in ordert to save the bloc’s women from “Islamic testosterone bombs.” 

  “We have seen what they are capable of,” Wilders continues, “it’s sexual terrorism, a sexual jihad.” 

  Fortunately, Wilders has a “solution”: “I propose we lock the male asylum seekers up in the asylum centers.”

  

  

  

  

  

• Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens

  This Wednesday, the Bank of Canada has a decision to make.

  Canada’s oil “dream” is dying thanks to the inexorable slide in crude prices and as the IEA made clear earlier today, the pain is set to persist for the foreseeable future as the world “drowns in oversupply.”

  “Lower for longer” has hit the country’s oil patch hard. We’ve spent quite a bit of time documenting the plight of Alberta, where job cuts tied to crude’s slide have led directly to rising suicide rates, soaring property crime, and increased food bank usage (not to mention booming business for repo men).

  

  Adding insult to injury for Canadians is the plunging loonie. Because the country imports most of its fresh fruits and vegetables, the weak currency has triggered a sharp increase in the price of many items in the grocery aisle as documented in a hilarious series of tweets by incredulous Canadian shoppers.

  The question for the Bank of Canada is this: is the risk of an even weaker loonie worth taking if a rate cut has the potential to head off the myriad risks facing the economy?

  We’ll find out what the BOC thinks tomorrow, but in the meantime, analysts have weighed in. JP Morgan’s Daniel Hui says CAD needs to fall further lest producers should simply close up shop. “[W]ith West Canada Select (WCS) now sitting just a dollar above the average per-barrel operational cost of $20 (Canadian), the risk is that any further decline will cause a whole new host of spillovers including potential shutdown and retrenchment of energy extraction and exports (with its attendant growth and balance of payment effects) or the potential of highly leveraged companies running operational losses, and the more contagious financial impact that might have in Canada, with broader spillovers.”

  None of those outcomes are particularly palatable. If the loonie continues to plunge however, it would act as a kind of shock absorber (producers’ costs are predominantly in CAD terms whereas the crude they sell is obviously denominated in USD), keeping CAD-denominated prices above the marginal cost of production.

  

  “One of the few scenarios that would keep bitumen producers above marginal cost amid a further decline in global energy prices, is for CAD to depreciate substantially and at a much higher beta to oil price than has been the case in the past 18 months,” Hui adds, driving the point home.

  But this is a Catch-22. The BOC can cut and drive the loonie even lower thus allowing zombie producers to keep pumping and thus prevent still more oil patch job losses, but a falling CAD may have undesirable knock-on effects, like reduced consumer spending, for instance. Additionally, if uneconomic producers keep drilling and pumping, they’re just digging their own grave by contributing to an already oversupplied global market.

  In short: there’s no “right” answer. “Economists are united in one view, that new plunges in oil prices, in the Canadian dollar, and weaker global financial conditions, make the Bank of Canada’s policy interest rate decision Wednesday a very close call,” MNI writes.

  “We now are looking for a rate cut next week,” Bank of Montreal Chief Economist Douglas Porter told Market News. “We believe that the balance of weight has slightly tipped in favor of them going” for a rate cut, he added, pointing out that the market is pricing in a 50-50 chance of a BOC action this week.

  

  Royal Bank of Canada assistant chief economist Paul Ferley, doesn’t agree. “We think that Governor (Stephen) Poloz will maintain his confidence that growth in exports will counter weakening business investment and he will hold the rate steady,” he says.

  Perhaps, but as we noted early last month, the BOC has already hinted that Europe’s not-so-grand experiment in the Keynesian Twilight Zone known as NIRP may be about to cross the pond. “The effective lower bound for policy rates is around -0.5%,” governor Stephen Poloz said in December, setting the stage for negative rates in Canada.

  For their part, IceCap Asset Management says NIRP is a virtual certainty for the BOC. Here’s IceCap’s straightforward, bullet point roadmap for Canadian monetary policy:

  1. Canadian economy to be in recession in 2016

  2. Bank of Canada will be at 0% interest rates in 2016

  3. Bank of Canada will be at NEGATIVE interest rates in later 2016

  4. Bank of Canada will be PRINTING MONEY in later 2016

  Ahead of Wednesday’s decision, Barclays is out with a preview and sure enough, NIRP makes a cameo.

  “The BoC would need to cut at least 50bp this year to partially counteract the continued slide in crude oil prices,” the bank begins, adding that although the price of Western Canadian Select (WCS) has fallen by half since the publication of the BoC’s last Monetary Policy Report, “this has been only partially offset by the 8% nominal multilateral depreciation of the CAD.”

  

  To fully offset the effect on GDP, Barclays says “the BoC would need to cut policy rates by at least 50bp in 2016.”

  Yes, by “at least” 50bps, and that’s assuming oil prices don’t plunge further.

  Of course 50bps puts the BOC at zero, so when Barclays says “at least”, they mean NIRP is likely on the way. To wit:

  The central bank has room to act even if rates hit zero. A 50bp cut in 2016 would bring the overnight rate to zero. The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound. The BoC estimates that the effective lower bound for Canada could be around -50bp, giving room for further cuts if needed. Without the immediate worry of hitting the effective lower bound, the central bank might be more willing to ease sooner rather than later.

   

  

  There you have it. Of course it’s difficult to see how 100bps of theoretical policy flexibility will be enough to keep the shut-ins from starting in the oil patch especially considering there’s only a CAD1 cushion above the marginal cost of production and considering the outlook for oil prices is particularly bleak now that 500,000 b/d of new Iranian supply are coming to market. 

  As for what the BOC does in the event Poloz hits the lower bound of -0.50% and the loonie still needs to weaken to offset the ill effects of declining crude, we’ll leave you with one indelible image that should serve as a harbinger of what’s to come…

  

  

  

  

  

  

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