Today’s News 27th February 2016

• The Quagmire To End All Quagmires

  Submitted by StraightLineLogic.com's Robert Gore via The Burning Platform blog,

  There are few good reasons to go to war, but the US faces the danger of being dragged into World War III for the worst of reasons. It will be fighting in a region in which it has no overriding interest, picking a side in a sectarian battle far older than the US, and allied with Machiavellian, despotic regimes who have no regard for its interests. Even proponents of the war cannot specify what a “victory” would look like. They nourish a vague hope that the two primary antagonists will somehow be vanquished and a government cut to the specifications of the US will be imposed by force and magically accepted by its subjects. Such a miracle would require a huge military commitment, trillions of dollars, and years, if not decades, of sustained effort. That miracle would require another miracle: after the last fifteen years of counterproductive and costly warfare in the Middle East, US politicians and the public nevertheless supporting the engagement for its lengthy duration.

  Syria is a witches’ brew of conflicting internal and external forces. The US has been at odds with its leadership since Hafez al-Assad, father of the current leader, Bashar al-Assad, seized power in 1970. He aligned Syria with the Soviet Union and launched a war against Israel in 1973. He was a standard issue Middle Eastern autocrat in the Saddam Hussein, Muammar Gaddafi mold and his son has followed in his footsteps. The Assads’ Alawite Shiite Muslim sect, though a minority amidst a Sunni majority, controls the government and the leadership has fingers in all the worthwhile commercial and industrial pies. It has been religiously tolerant and politically intolerant.

  The Obama administration saw an opportunity to change the Syrian regime under cover of the Arab Spring movement in 2011. Initially peaceful demonstrations against Bashar al-Assad soon turned violent as the government cracked down on demonstrators. Within a year, the military attacked resistance strongholds and Syria was engulfed in civil war. The main opposition came from an alliance of Sunni groups, mostly al Qaeda and its offshoots, including ISIS. The Obama administration pursued a confused policy that it advertised as aiding moderate Syrian rebels, who were supposedly opposed to both the Assad government and Islamic extremist groups. In truth, most of the ostensible moderates had ties to the latter. The few that didn’t either joined the extremists when confronted or fled, leaving their US-supplied weaponry and provisions behind.

  None of this is news to either Obama or Congress. Nor is it a state secret that the Sunni extremists have received funding, supplies, and other aid from Sunni states—and US allies—Saudi Arabia, the Gulf States, and Turkey (See “With Friends Like These…” and “Who Needs Enemies?“). The US government wants to install a compliant regime in Syria, just as it wanted to install such regimes in Afghanistan, Iran, Iraq, Yemen, and Libya. Those efforts failed, stifled by the Sunni-Shiite schism, guerrilla warfare and terrorism, blowback, Middle Eastern intrigue, and the US government’s ignorance, hypocrisy, and duplicity. Although it has done virtually nothing to stop ISIS, it still pretends that its main goal in Syria is the eradication of Islamic extremism rather than Bashar Assad’s government.

  With his move into Syria and a remarkable speech at the United Nations, Vladimir Putin revealed the US government’s mendacity for all to see, except for the US public, where the mainstream media coverage ignored his speech in favor of the usual government propaganda. (Some questions were asked about the efficacy of US efforts to defeat ISIS after the San Bernardino shootings last December, but they quickly faded.) At the invitation of Assad, Russia joined with the Shiites—the Syrian government, Iraq, Iran, and Hezbollah—and Syrian and Iraqi Kurds. The Assad alliance treats all those opposed to Assad as terrorist enemies. The tide has turned and the alliance has regained territory. It is on the verge of recapturing Aleppo, Syria’s second largest city.

  Turkey, Saudi Arabia, and the Gulf States are alarmed that the Islamic extremists they have funded and supported, and the US and its Western allies, have failed to depose Assad. If the Assad alliance cuts the rebels’ supply line from Turkey and takes Aleppo, it will not only solidify Assad’s hold on western Syria, but also solidify the influence of archenemy Shiite Iran in Iraq, Syria, and Lebanon. It is a make or break moment for the rebellion. The Sunni nations, especially NATO member Turkey, would dearly love to have their fight become Europe and the United States’ fight, too. If they can ensnare the Western nations, then Syria inevitably becomes the launchpad for World War III.

  This next world war’s Archduke Ferdinand moment may come if Saudi Arabia, currently hosting a military exercise in its northern region called “Northern Thunder” involving at least 12 other nations, 350,000 soldiers, 20,000 tanks, 2,450 warplanes and 460 helicopters, leads that force into western Iraq en route to Syria. Or the trigger may come if Turkey, either in conjunction with Saudi Arabia or on its own, invades Syria from the north. With 600,000 troops, Turkey’s has the second largest armed forces in NATO. In addition to its loathing of the Shiites and Iran, Turkey fears Kurd nationalism. The Kurds, who have been the most effective fighting force against ISIS in both Iraq and Syria, have long desired their own state. Kurdish separatists are also a vociferous presence in Turkey. The US government has embraced the Kurds in Iraq and Syria, but like the Turkish government, labels the Turkish Kurds as terrorists. Turkey would probably concentrate on subduing the Kurds before it went after Assad.

  The US public is blissfully unaware either that the world is a hair’s breadth away from World War III or that their government has had an outsize role in creating that risk. The US may be dragged in by Turkey’s president Recep Tayyip Erdo?an, a corrupt, megalomaniac autocrat, or the corrupt, repressive House of Saud. The US will be in direct conflict with Russia and Iran, and lurking in the background, perhaps China. Neither the US’s so-called friends nor its foes care one whit about the best interests of the US and will in fact work against them. The blowback created will dwarf current levels of terrorism and refugee flows. The US’s degeneration into a police state will gain new momentum. Other than its deluded wish that both Assad and the Islamic extremists somehow disappear, the US government will have no clear idea of what would constitute victory, and consequently, no ability to attain it. And this war could go nuclear.

  It will be the quagmire to end all quagmires, supported by the same coalition of mental and moral midgets who have backed every disastrous US military foray since Afghanistan. It’s questionable how long the US will retain the support of Europe. Its refugee flood will turn into a deluge as the war spreads from Syria outward to the rest of the Middle East, central Asia, northern Africa, and quite possibly to Europe itself. Nor is it a sure thing that financial markets will fund this war at today’s rock-bottom interest rates. The conflict will add more trillions to the US government’s current $19 trillion debt, and with a depression looming, the government’s ability to pay will be called into question. There would be no political support for a another protracted, expensive, and bloody military commitment in the Middle East if the American people were explicitly told that just such a commitment is under consideration, especially if they were also told that it could lead to World War III. A populace fooled into war is unlikely to back it for any length of time.

  In Syria, the US will either fold or go all in. On past form, it will choose the latter and rue it ever after. Few Americans, inside or outside the government, realize either that those are the choices or that the stakes are so high. Sadly, such realizations may come only when their sons and daughters are drafted, or as the image of a mushroom cloud fills the screens of their mobile devices.

  

  

  

  

  

• Why A Hedge Fund Manager Who Made A Killing From Subprime Is Buying Bitcoin

  Long before “The Big Short’s” Michael Burry was a household name for his insight into the upcoming subprime crisis of 2006-2007, there were many others among them John Paulson, Kyle Bass, and Corriente Advisors’ Mark Hart. Just like Bass, Mark is another Texas-based hedge fund manager who correctly predicted, and profited from, the subprime crisis. He is also an expert on China, and in fact, just last month in the aftermath of the recent Chinese devaluation which roiled markets, he said that “China should weaken its currency by more than 50 percent this year.”

  In fact, it was Hart who (alongside ex-PBOC advisor Yi Yongding) first proposed the idea of the one-off devaluation that promptly afterwards become the conventional expectation for this weekend’s G-20 summit in Shangai. To wit:

  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.

  According to Hart, while a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position. 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.

  As we said one month ago, “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).”

  And while we explained that Hart’s “devaluation” trade consists of buying Yuan puts, according to a recent interview he gave to Raoul Pal RealVision, he has also put another trade on alongside his FX deval: buying bitcoin.

  Why bitcoin?

  The same reason we gave back on September 2, 2015 when Bitcoin was trading at $215 in a post titled “China Scrambles To Enforce Capital Controls (Which Is Great News For Bitcoin)” and long before the topic of China’s capital controls, and their circumvention, became a routine topic of conversation. As we explained simply, with Chinese capital controls increasingly more strict, the local population, which was nearly $25 trillion in deposits in local banks, will rush to transfer these massive amount of savings offshore, and will end up using bitcoin to do it. This is specifically what we said:

  … while China is doing everything in its power to not give the impression that it is panicking, the truth is that it is one viral capital outflow report away from an outright scramble to enforce the most draconian capital controls in its history, which – as every Cypriot and Greek knows by now – is a self-defeating exercise and assures an ever accelerating decline in the currency, which authorities are trying to both keep stable while also devaluing at a pace of their choosing. Said pace never quite works out.

   

  So what happens then: well, China’s propensity for gold is well-known. We would not be surprised to see a surge of gold imports into China, only instead of going to the traditional Commodity Financing Deals we have written extensively about before, where gold is merely a commodity used to fund domestic carry trades, it ends up in domestic households. However, while gold has historically been the best store of value in history and has outlasted every currency known to man, it is problematic when it comes to transferring funds in and out of a nation – it tends to show up quite distinctly on X-rays.

   

  Which is why we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented “forking” with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

   

  Yes, bitcoin may be slowly but surely leaving the domain of the libertarian fringe, but in exchange it is about to be embraced as the most lucrative and commercial “blockchained” way to capitalize on what may soon become the largest capital outflow in history…

  Two months later the value of bitcoin rose by more than 100%, but what was delightfully amusing to us was attempts by the self-appointed guardians of monetary wisdom to explain the move not as one of Chinese capital flight but because of some tiny, alleged Chinese Ponzi scheme. Apparently in the mainstream media if one can’t predict what happens, one tries to explain why something happened… and gets that wrong too. Because if bitcoin’s surge was only due to some two-bit Russian scammer exposed four months ago, it would be back at $215 if not lower, instead of trading at $432 as of this moment. 

  What really happened is what we said happened, and here is Mark Hart confirming precisely that. Here is the excerpt from an interview he gave to Raoul Pal’s RealVision:

  Bitcoin is interesting to me as a route for capital flight. I am not opining on the long-term viability of bitcoin – I do think there is something there – but I am long bitcoin specifically to capture capital flight from China.

  Sounds quite identical to what said 6 months ago. Full clip below:

   

  But this is where it gets really interesting: if one wants to bet on a massive Chinese devaluation (which is coming, the only question is when) one can simply short the Yuan as so many hedge funds have done in the past 2 months only to find that by “fighting the PBOC” they are gambling not only with their AUM, but their professional careers due to not only the unlimited downside of their trades, but to the substantial leverage involved in such FX trades.

  Furthermore, relentless interventions by a belligerent Chinese central bank in recent weeks have shown that even as the Yuan will ultimately devalue, and dramatically at that, the PBOC will do everything in its power to crush the “hated” speculators, among whom such brand names as George Soros, along the way by inspiring sudden, violent and massive surges in the currency, in the vein of the Bank of Japan circa 2011.

  So what is one trade that can be put on to bet on further Chinese devaluation (or outright economic collapse) with limited downside, with unlimited upside, and one which is guaranteed to be profitable if and when the local Chinese depositor herd gets out of Yuan en masse after the next 10%, 20%, 50% or more devaluation and rushes into bitcoin? Simple: do precisely what we said in September, and precisely what Corriente’s Mark Hart is saying now: buy bitcoin, because once the Chinese buying frenzy is unleashed, and $25 trillion in deposits scramble to be packed into a product with a $6.5 billion current market cap (but only when the price of a bitcoin is $430; the market cap does rise to $25 trillion if every bitcoin is worth $1.6 million) one thing will happen: the price of bitcoin will soar exponentially.

  

  

  

  

  

• Caught On Tape: U.S. Test Fires Nuclear ICBM, Warns "We Are Prepared To Use Nuclear Weapons"

  Less than two years ago, news of Russia test-firing an ICBM just as the east Ukraine civil war was heating up, was sufficient to send the stock market into a brief tailspin. Since then, the launches of nuclear-tipped intercontinental ballistic missiles has become an almost daily occurrence, with the market hardly batting an eyelid.

  In fact, it happened just last night at 11:01pm PST at Vandenberg Air Force Base in California, where – for the second time this week – the US test-fired its second intercontinental ballistic missile in the past seven days, seeking to demonstrate its nuclear arms capacity at a time of rising strategic tensions with Russia, North Korea, China and the middle east.

  The unarmed Minuteman III missile roared out of a silo at Vandenberg Air Force Base in California late at night, raced across the sky at speeds of up to 15,000 mph (24,000 kph) and landed a half hour later in a target area 4,200 miles (6,500 km) away near Kwajalein Atoll in the Marshall Islands of the South Pacific.

  The entire launch was caught on the following video, which was released by Vandenberg just 4 days after the previous ICBM launch.

   

  What was more disturbing than the actual launch, however, was the rhetoric behind it: instead of passing it off as another routine test, and letting US “adversaries” make up their own mind about what is going on, Deputy Defense Secretary Robert Work, who witnessed the launch, said the U.S. tests, conducted at least 15 times since January 2011, send a message to strategic rivals like Russia, China and North Korea that Washington has an effective nuclear arsenal. “That’s exactly why we do this,” Work told reporters before the launch.

  Of course, the #1 unspoken rule when launching ICBMs is to never explicitly say why you are doing it. By breaking said rule, it marks a much greater escalation in international diplomacy than merely test firing the nuclear-capable ballistic missile.

  That, however, was not an issue and Work piled on, with the following stunner

  “We and the Russians and the Chinese routinely do test shots to prove that the operational missiles that we have are reliable. And that is a signal … that we are prepared to use nuclear weapons in defense of our country if necessary.“

  Well that’s good to know.

  As Reuters adds, demonstrating the reliability of the nuclear force has taken on additional importance recently because the U.S. arsenal is near the end of its useful life and a spate of scandals in the nuclear force two years ago raised readiness questions.

  The Defense Department has poured millions of dollars into improving conditions for troops responsible for staffing and maintaining the nuclear systems. The administration also is putting more focus on upgrading the weapons.

   

  President Barack Obama’s final defense budget unveiled this month calls for a $1.8 billion hike in nuclear arms spending to overhaul the country’s aging nuclear bombers, missiles, submarines and other systems.

  That said, the irony of the Nobel Peace Prize winner re-escalating the arms race was not lost on Reuters: the nuclear spending boost is an ironic turn for a president who made reducing U.S. dependence on atomic weapons a centerpiece of his agenda during his first years in office.

  Obama called for a world eventually free of nuclear arms in a speech in Prague and later reached a new strategic weapons treaty with Russia. He received the Nobel Peace Prize in part based on his stance on reducing atomic arms.  “He was going to de-emphasize the role of nuclear weapons in U.S. national security policy … but in fact in the last few years he has emphasized new spending,” said John Isaacs of the Council for a Livable World, an arms control advocacy group.

  Perhaps the Nobel committee should watch the video above and decide if it is not too late to ask for their prize back.

  And just like that the nuclear arms race is back.

  Critics say the Pentagon’s plans are unaffordable and unnecessary because it intends to build a force capable of deploying the 1,550 warheads permitted under the New START treaty… Hans Kristensen, an analyst at the Federation of American Scientists, said the Pentagon’s costly “all-of-the-above” effort to rebuild all its nuclear systems was a “train wreck that everybody can see is coming.” Kingston Reif of the Arms Control Association, said the plans were “divorced from reality.”

   

  The Pentagon could save billions by building a more modest force that would delay the new long-range bomber, cancel the new air launched cruise missile and construct fewer ballistic submarines, arms control advocates said.

   

  Work said the Pentagon understood the financial problem. The department would need $18 billion a year between 2021 and 2035 for its portion of the nuclear modernization, which is coming at the same time as a huge “bow wave” of spending on conventional ships and aircraft, he said.

   

  “If it becomes clear that it’s too expensive, then it’s going to be up to our national leaders to debate” the issue, Work said, something that could take place during the next administration when spending pressures can no longer be ignored.

  As a reminder, the last time the U.S. engaged in a nuclear arms race with the USSR, it led to the collapse of the “evil empire.” It would be even more ironic that Obama launching nuclear rockets if this time around the tables on the ultimate loser are turned.

  In the meantime, just think of all the GDP-boosting “broken windows” that would result from a nuclear war.

  

  

  

  

• "Democracy Is Overrated" Doug Casey's Top 5 Reasons Not To Vote

  Submitted by Doug Casey via InternationalMan.com,

  Democracy is vastly overrated.

  It's not like the consensus of a bunch of friends agreeing to see the same movie. Most often, it boils down to a kinder and gentler variety of mob rule, dressed in a coat and tie. The essence of positive values like personal liberty, wealth, opportunity, fraternity, and equality lies not in democracy, but in free minds and free markets where government becomes trivial. Democracy focuses people's thoughts on politics, not production; on the collective, not on their own lives.

  Although democracy is just one way to structure a state, the concept has reached cult status; unassailable as political dogma. It is, as economist Joseph Schumpeter observed, "a surrogate faith for intellectuals deprived of religion." Most of the founders of America were more concerned with liberty than democracy. Tocqueville saw democracy and liberty as almost polar opposites.

  Democracy can work when everyone concerned knows one another, shares the same values and goals, and abhors any form of coercion. It is the natural way of accomplishing things among small groups.

  But once belief in democracy becomes a political ideology, it's necessarily transformed into majority rule. And, at that point, the majority (or even a plurality, a minority, or an individual) can enforce their will on everyone else by claiming to represent the will of the people.

  The only form of democracy that suits a free society is economic democracy in the laissez-faire form, where each person votes with his money for what he wants in the marketplace. Only then can every individual obtain what he wants without compromising the interests of any other person. That's the polar opposite of the "economic democracy" of socialist pundits who have twisted the term to mean the political allocation of wealth.

  But many terms in politics wind up with inverted meanings. "Liberal" is certainly one of them.

  The Spectrum of Politics

  The terms liberal (left) and conservative (right) define the conventional political spectrum; the terms are floating abstractions with meanings that change with every politician.

  In the 19th century, a liberal was someone who believed in free speech, social mobility, limited government, and strict property rights. The term has since been appropriated by those who, although sometimes still believing in limited free speech, always support strong government and weak property rights, and who see everyone as a member of a class or group.

  Conservatives have always tended to believe in strong government and nation­alism. Bismarck and Metternich were archetypes. Today's conservatives are some­times seen as defenders of economic liberty and free markets, although that is mostly true only when those concepts are perceived to coincide with the interests of big business and economic nationalism.

  Bracketing political beliefs on an illogical scale, running only from left to right, results in constrained thinking. It is as if science were still attempting to define the elements with air, earth, water, and fire.

  Politics is the theory and practice of government. It concerns itself with how force should be applied in controlling people, which is to say, in restricting their freedom. It should be analyzed on that basis. Since freedom is indivisible, it makes little sense to compartmentalize it; but there are two basic types of freedom: social and economic.

  According to the current usage, liberals tend to allow social freedom, but restrict economic freedom, while conservatives tend to restrict social freedom and allow economic freedom. An authoritarian (they now sometimes class them­selves as "middle-of-the-roaders") is one who believes both types of freedom should be restricted.

  But what do you call someone who believes in both types of freedom? Unfortunately, something without a name may get overlooked or, if the name is only known to a few, it may be ignored as unimportant. That may explain why so few people know they are libertarians.

  A useful chart of the political spectrum would look like this:

  

  A libertarian believes that individuals have a right to do anything that doesn't impinge on the common-law rights of others, namely force or fraud. Libertarians are the human equivalent of the Gamma rat, which bears a little explanation.

  Some years ago, scientists experimenting with rats categorized the vast major­ity of their subjects as Beta rats. These are basically followers who get the Alpha rats' leftovers. The Alpha rats establish territories, claim the choicest mates, and generally lord it over the Betas. This pretty well-corresponded with the way the researchers thought the world worked.

  But they were surprised to find a third type of rat as well: the Gamma. This creature staked out a territory and chose the pick of the litter for a mate, like the Alpha, but didn't attempt to dominate the Betas. A go-along-get-along rat. A libertarian rat, if you will.

  My guess, mixed with a dollop of hope, is that as society becomes more repressive, more Gamma people will tune in to the problem and drop out as a solution. No, they won't turn into middle-aged hippies practicing basket weaving and bead stringing in remote communes. Rather, they will structure their lives so that the government—which is to say taxes, regulations, and inflation—is a non-factor. Suppose they gave a war and nobody came? Suppose they gave an election and nobody voted, gave a tax and nobody paid, or imposed a regulation and nobody obeyed it?

  Libertarian beliefs have a strong following among Americans, but the Liber­tarian Party has never gained much prominence, possibly because the type of people who might support it have better things to do with their time than vote. And if they believe in voting, they tend to feel they are "wasting" their vote on someone who can't win. But voting is itself another part of the problem.

  None of the Above

  Until 1992, when many decided not to run, at least 98% of incumbents typically retained office. That is a higher proportion than in the Su­preme Soviet of the defunct USSR, and a lower turnover rate than in Britain's hereditary House of Lords where people lose their seats only by dying.

  The political system in the United States has, like all systems which grow old and large, become moribund and corrupt.

  The conventional wisdom holds a decline in voter turnout is a sign of apathy. But it may also be a sign of a renaissance in personal responsibility. It could be people saying, "I won't be fooled again, and I won't lend power to them."

  Politics has always been a way of redistributing wealth from those who produce to those who are politically favored. As H.L. Mencken observed, every election amounts to no more than an advance auction on stolen goods, a process few would support if they saw its true nature.

  Protesters in the 1960s had their flaws, but they were quite correct when they said, "If you're not part of the solution, you're part of the problem." If politics is the problem, what is the solution? I have an answer that may appeal to you.

  The first step in solving the problem is to stop actively encouraging it.

  Many Americans have intuitively recognized that government is the problem and have stopped voting. There are at least five reasons many people do not vote:

  1. Voting in a political election is unethical. The political process is one of institutionalized coercion and force. If you disapprove of those things, then you shouldn't participate in them, even indirectly.

  1. Voting compromises your privacy. It gets your name in another government computer database.

  1. Voting, as well as registering, entails hanging around government offices and dealing with petty bureaucrats. Most people can find something more enjoyable or productive to do with their time.

  1. Voting encourages politicians. A vote against one candidate—a major, and quite understandable, reason why many people vote—is always interpreted as a vote for his opponent. And even though you may be voting for the lesser of two evils, the lesser of two evils is still evil. It amounts to giving the candidate a tacit mandate to impose his will on society.

  1. Your vote doesn't count. Politicians like to say it counts because it is to their advantage to get everyone into a busybody mode. But, statistically, one vote in scores of millions makes no more difference than a single grain of sand on a beach. That's entirely apart from the fact that officials manifestly do what they want, not what you want, once they are in office.

  Some of these thoughts may impress you as vaguely "unpatriotic"; that is certainly not my intention. But, unfortunately, America isn't the place it once was, either. The United States has evolved from the land of the free and the home of the brave to something more closely resembling the land of entitlements and the home of whining lawsuit filers.

  The founding ideas of the country, which were highly libertarian, have been thoroughly distorted. What passes for tradition today is something against which the Founding Fathers would have led a second revolution.

  This sorry, scary state of affairs is one reason some people emphasize the importance of joining the process, "working within the system" and "making your voice heard," to ensure that "the bad guys" don't get in. They seem to think that increasing the number of voters will improve the quality of their choices.

  This argument compels many sincere people, who otherwise wouldn't dream of coercing their neighbors, to take part in the political process. But it only feeds power to people in politics and government, validating their existence and making them more powerful in the process.

  Of course, everybody involved gets something out of it, psychologically if not monetarily. Politics gives people a sense of belonging to something bigger than themselves and so has special appeal for those who cannot find satisfaction within themselves.

  We cluck in amazement at the enthusiasm shown at Hitler's giant rallies but figure what goes on here, today, is different. Well, it's never quite the same. But the mindless sloganeering, the cult of the personality, and a certainty of the masses that "their" candidate will kiss their personal lives and make them better are identical.

  And even if the favored candidate doesn't help them, then at least he'll keep others from getting too much. Politics is the institutionalization of envy, a vice which proclaims "You've got something I want, and if I can't get one, I'll take yours. And if I can't have yours, I'll destroy it so you can't have it either." Participating in politics is an act of ethical bankruptcy.

  The key to getting "rubes" (i.e., voters) to vote and "marks" (i.e., contribu­tors) to give is to talk in generalities while sounding specific and looking sincere and thoughtful, yet decisive. Vapid, venal party hacks can be shaped, like Silly Putty, into salable candidates. People like to kid themselves that they are voting for either "the man" or "the ideas." But few "ideas" are more than slogans artfully packaged to push the right buttons. Voting for "the man" doesn't help much either since these guys are more diligently programmed, posed, and rehearsed than any actor.

  This is probably more true today than it's ever been since elections are now won on television, and television is not a forum for expressing complex ideas and philosophies. It lends itself to slogans and glib people who look and talk like game show hosts. People with really "new ideas" wouldn't dream of introducing them to politics because they know ideas can't be explained in 60 seconds.

  I'm not intimating, incidentally, that people disinvolve themselves from their communities, social groups, or other voluntary organizations; just the opposite since those relationships are the lifeblood of society. But the political process, or government, is not synonymous with society or even complementary to it. Government is a dead hand on society.

  

  

  

  

  

• Hypocrisy Defined: Hank Paulson Tells China "Let Failing Companies Fail"

  "Do as I say, not as I do" is the clear message of hypocrisy spewed forth by former US Treasury Secretary Henry Paulson this week. Having presided over the largest redistriubution of taxpayer funds to bailout the banking system, while exclaiming fire and brimstone should they not be saved, he now has some advice for an over-levered, over-capacity, systemically-stymied China – "let failing companies fail."

  Some other Paulson comments:

  "As Americans, we shouldn't like bailouts. Where I come from, if someone takes a risk and they're going to make the profit from that risk, they shouldn't have the taxpayer pay for the losses."

   

  "If the financial system collapses, it's really, really hard to put it back together again."

   

  "What I've said repeatedly is, 'I think the auto industry is a very important industry.'"

  But for China – screw them all…

  "They can show right now they're very serious about dealing with inefficient state-owned enterprises as they take capacity out of the steel industry, coal industry and others by letting some failing companies fail," Paulson told CNBC's Squawk Box on the sidelines of an Institute of International Finance event organized in conjunction with the G20 meeting in Shanghai.

   

  Of course this is exactly what China 'should' do – just as America 'should' have faced up to its own malinvestment boom, dealt with the bust, and moved on to renewed growth. But that would have meant the elites lost, and that can never happen.

  Just remember, risking US taxpayer money to fill a bottomless pit of bank balance sheets was "for your own good."

  

  

  

  

  

• How The Seeds Of Revolution Take Root

  Submitted by Charles Hugh-Smith via PeakProsperity.com,

  That the dramatic upheavals of war, pestilence and environmental collapse can trigger social disorder and revolution is well-established. Indeed, this dynamic can be viewed as the standard model of social disorder/revolution: a large-scale crisis—often a bolt-from-the-blue externality—upends the status quo.

  Another model identifies warring elites and imperial meddling as a source of revolution: a new elite forcibly replaces the current elite (known colloquially as meet the new boss, same as the old boss) or a dominant nation-state/empire arranges a political coup to replace the current leadership with a more compliant elite.

  A third model was described by David Hackett Fischer in The Great Wave: Price Revolutions and the Rhythm of History. By assembling price and wage data stretching back hundreds of years, Fischer found that cycles of economic growth spawn population growth, resulting in more workers entering the market economy. Their earnings trigger a demand-driven expansion of essential commodities such as grain and energy (wood, coal, oil, etc.).

  In the initial phase, wages rise and commodity prices remain stable as supplies of essential goods expand and the demand for labor pushes up wages.

  But this virtuous cycle reverses when the supply of essentials no longer keeps pace with rising population and demand: the price of essentials begin an inexorable rise even as an oversupply of labor drives down wages.

  Fisher found that this wage/price cycle often ends in transformational social upheaval.

  While proponents of these models have a wealth of historical examples to draw upon, these models miss a key factor:  the vulnerability or resilience of the nation-state facing crises.

  Some nations survive invasions, environmental catastrophes, epidemics and inflation without disintegrating into disorder. Something about these nation’s social/ economic /political order makes them more resilient than other nations.

  So rather than accept the proximate causes of disorder as the sole factors, we should look deeper into the social order for the factors behind a nation’s relative fragility or resilience.

  The Decline Of Shared Purpose

  Historian Peter Turchin defined a key factor in the resilience of the social order as "the degree of solidarity felt between the commons and aristocracy," that is, the sense of purpose and identity shared by the aristocracy and commoners alike.

  As Turchin explains in War and Peace and War: The Rise and Fall of Empires:

  "Unlike the selfish elites of the later periods, the aristocracy of the early Republic did not spare its blood or treasure in the service of the common interest. When 50,000 Romans, a staggering one fifth of Rome’s total manpower, perished in the battle of Cannae, the senate lost almost one third of its membership. This suggests that the senatorial aristocracy was more likely to be killed in wars than the average citizen…

   

  The wealthy classes were also the first to volunteer extra taxes when they were needed… A graduated scale was used in which the senators paid the most, followed by the knights, and then other citizens. In addition, officers and centurions (but not common soldiers!) served without pay, saving the state 20 percent of the legion’s payroll…

   

  The richest 1 percent of the Romans during the early Republic was only 10 to 20 times as wealthy as an average Roman citizen.

  Roman historians of the later age stressed the modest way of life, even poverty of the leading citizens. For example, when Cincinnatus was summoned to be dictator, while working at the plow, he reportedly exclaimed, 'My land will not be sown this year and so we shall run the risk of not having enough to eat!'"

  Once the aristocracy’s ethic of public unity and service was replaced by personal greed and pursuit of self-interest, the empire lost its social resilience.

  Turchin also identified rising wealth inequality as a factor in weakening social solidarity. By the end-days of the Western Roman Empire, elites held not 10 times as much wealth commoners but 10,000 times as much as average citizens.

  Wealth inequality is both a cause and a symptom: it is a cause of weakening social resilience, but it also symptomatic of a system that enables the concentration of wealth and power in the hands of the few at the expense of the many.

  Diminishing Returns On Complexity & Expansion

  Thomas Homer-Dixon’s excellent book The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization  outlines two systemic sources of increasing fragility: diminishing returns on complexity and the rising costs of continuing strategies that worked well in the past but no longer yield positive results.

  Successful economies generate surpluses that are skimmed by various elites to support new layers of complexity: temple priests, state bureaucracies, standing armies, etc.

  All this complexity adds cost but beyond the initial positive impact of rationalizing production, it reduces productivity by draining potentially productive investments from the economy.

  Building temple complexes and vast palaces for the aristocracy appears affordable in the initial surge of productivity, but as investment in productivity declines and the population of state dependents expands, surpluses shrink while costs rise.

  Meanwhile, strategies that boosted yields in the beginning also suffer diminishing returns. Conquering nearby lands and extracting their wealth paid off handsomely at first, but as the distance to newly conquered territories lengthen, the payoff declines: supplying distant armies to maintain control over distant lands costs more, while the yield on marginal new conquests drops.

  Expanding land under production was easy in the river valley, but once water has to be carried up hillsides, the net yield plummets.

  What worked well at first no longer works well, but those in charge are wedded to the existing system; why change what has worked so brilliantly?

  As the costs of complexity and state dependents rise, productive people grow tired of supporting an economy suffering from terminal diminishing returns.

  Empires do not just suddenly collapse; they are abandoned by the productive citizenry as the burdens become unbearable. The independent class of tradespeople (a.k.a. the middle class), driven into serfdom by taxes, lose their shared identity with the aristocracy. Beneath the surface, social cohesion frays. Once the benefits of the status quo no longer outweigh its costs, the system is vulnerable to an external disruption that would have been easily handled in previous eras.

  The Suppression Of Social Mobility

  There is another key factor in the resilience or fragility of social order: the permeability of the barrier between the ruling class and everyone below. We call this permeability social mobility: how easy is it for a working class family to rise up to the middle class, and how easy is it for a middle class family to enter the political and financial aristocracy?

  I recently read Venice: A New History, a fascinating account of Venice's rise to regional empire and its decline to tourist destination.

  What struck me most powerfully was Venice's long success as a republic: it was the world's only republic for roughly 1,000 years.

  How did the Venetians manage this?  Their system of participatory democracy accreted over time, and was by no means perfect; only men of substance had much of a say. But strikingly, key political turning points were often triggered by mass gatherings of craftsmen and laborers.

  Most importantly, the system was carefully designed to enable new blood to enter the higher levels of power. Commoners could rise to power (and take their families with them if their wealth outlasted the founding generation) via commercial success or military service.

  The Republic also developed a culture that frowned on personal glorification and cults of personality: the nobility and commoners alike deferred to the Republic rather than any one leader.

  In Venice, the political leadership (the doge and the Council) were elected via a convoluted series of steps that made it essentially impossible for one clique to control the entire process.

  The doge was elected for a term, not for life, and he had to be acceptable not just to the elites but to the much larger class of movers and shakers–roughly 1,000 people in a city of at most 150,000.

  Venice's crises emerged when the upwelling of social and financial mobility was capped by elites who were over-zealous in their pursuit of hegemony: all those blocked from rising to power/influence became the source of political revolt.

  If you cap the volcano, eventually the pressure beneath rises to the point that the cap gets blown off in spectacular fashion.

  The suppression of social mobility and the monopolization of power by the few at the expense of the many are universal dynamics in social orders.

  Broadly speaking, Venice's 1,000-year Republican government, with its complex rules to limit concentrations of power and insure the boundaries between elites and commoners were porous enough to diffuse revolution and social disorder, speak to what is once again in play around the world: social unrest due to the concentration of power and the suppression of social mobility.

  I don't think it's a stretch to say that the greater the concentration of power, the lower the social mobility, the greater the odds that the system will collapse when faced with crisis.

  When the entire economy is expanding faster than population, and this tide is raising all ships, the majority of people feel their chances of getting ahead are positive.

  But when the economy is stagnating, and those in power are amassing most of the gains, the majority realizes their chances of securing a better life are declining. This is the pressure that is being capped by the status quo that first and foremost protects the privileged.

  How porous are the barriers to social mobility in our society? That a few people become billionaires from technological innovations that scale globally is not a real measure of social mobility for the masses.

  In Part 2 we identify the wellspring of revolution, and reach a conclusion that may surprise many.

  Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

   

  

  

  

  

  

• Presenting America's Own "Ghost Cities"

  We’ve written quite a bit about the decline of America’s once proud manufacturing industry which is now but a shadow of its former self and long ago ceded its place in the public’s heart and mind to the service industry, as US citizens are far more concerned with whether they can get a $6 latte than with whether the economy provides enough breadwinner jobs to keep the majority of the population from having to… well, serve $6 lattes for a living.

  And if it was already bad, it’s getting worse.

  In fact, as we noted just days ago, the last time manufacturing was this bad in the US, Ben Bernanke introduced QE3. 

  

  Make no mistake, the decline of American industry isn’t something that can be reversed.

  In other words, no populist presidential candidate promising to “make the country great again” is going to turn this around – and it won’t be for lack of effort. It’s just economics. The jobs aren’t coming back from China and the “made in America” stamp is a relic a bygone era. The American economy is now a bartender and waiter creation machine and it’s come at the expense of the still declining manufacturing sector. 

  

  Needless to say, this has gutted America’s Rust Belt, which is now nothing more than a now desolate reminder of a golden era in America’s history that has long since passed and as RealtyTrac reports, “among 147 metropolitan statistical areas with at least 100,000 residential properties, those with the highest share of vacant properties were [unsurprisingly] Flint, Michigan (7.5 percent), Detroit (5.3 percent), Youngstown, Ohio (4.4 percent), Beaumont-Port Arthur, Texas (3.8 percent), and Atlantic City, New Jersey (3.7 percent).”

  Port Arthur has never been a bastion of stability and the decline of Atlantic City has been well documented, but the malaise in Flint, Detroit, and Youngstown clearly reflects the decline in American industry and suggests the pain (exacerbated by China’s acute overcapacity problem) is only beginning. In Flint, for instance, one in six houses is vacant and in the metro area, the vacancy rate is 7.5%. In all, some 9,800 homes are empty in Flint. Some of this is attributable to the water scandal. “The water crisis did not cause the high vacancy rate in Flint, but it will certainly exacerbate it,” RealtyTrac VP Daren Blomquist said. Here’s more:

  “Distressed cities like Flint struggle to generate enough revenue locally to reinvest back into critical infrastructure, such as water systems. Decades of disinvestment and job and population loss have led to a phenomenal erosion of the tax base, both in terms of the number of taxpayers and in terms of the value of the land. As a result, cities with high levels of abandonment, like Flint, are faced with the financial challenge of needing to maintain and reinvest in a scale of infrastructure that was once supported by a tax base more than twice its current size.

  In Detroit, there are 53,000 empty homes – that’s one empty home for every five.

  Below, find a graphic from RealtyTrac which documents the struggle:

  

  *  *  *

  Blame China? Maybe. But some officials say other factors are at play.

  “There’s a philosophy of government that has been writing these places off — places like Flint get written off,” Rep. Dan Kildee (D-Mich.) previously told HuffPost. “And, to me, even though those people making those decisions might not see it this way, it’s hard for me to accept the fact that race is not the most significant factor.”

  

  

  

  

• The Week in Review for Financial Markets 2 26 2016 (Video)

  By EconMatters

  

  A positive week for risk assets, we consolidated recent gains and even finished the week higher in most risk assets. Gasoline had a stellar week, and points to a bottom in the Oil Market.

  © EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle  

  

  

  

  

• "There’s A Feeling Of Bits Of Ice Cracking All At Once" – This Is The 'Big New Threat' To Oil Prices

  One week ago, we reported that even as traders were focusing on the daily headline barrage out of OPEC members discussing whether or not they would cut production (they won’t) or merely freeze it (at fresh record levels as Russia reported earlier today) a bigger threat in the near-term will be whether the relentless supply of excess oil will force Cushing, and PADD 2 in general, inventory to reach operational capacity.

  As Genscape added in a recent presentation, when looking specifically at Cushing, the storage facility is virtually operationally full (at 80%) with just 4-5 more months at current inventory build left until the choke point is breached, and as we have reported previously, storage requests for specific grades have already been denied.

  Goldman summarizes the dire near-term options before the industry as follows:

  The large builds in gasoline and crude stocks have brought PADD 2 storage utilization near record high levels. While the recent decline in Midcontinent refining margins should help avoid breaching storage capacity, by finally bringing gasoline back into deficit, this will likely only exacerbate the build in crude inventories in coming months and should require further weakness in PADD2 crude prices to spread this build to the USGC. Weaker gasoline demand/exports, or higher margins/runs or finally resilient crude imports/production, could create binding storage issues beyond the intermittent Cushing WTI cash price weakness observed so far, which would require another large leg lower in crude prices to shut production in the Midcontinent and Canada. As we have argued, this continued testing of storage constraints should keep price and margin volatility elevated.

  However, while the threat from overproduction on soaring crude inventories, or in other words “supply”, has been extensively documented, far less has been said about another just as big problem: “demand”, or the potential supply-chain bottleneck that will hit the moment refiners finds themselves flooded with too much unwanted product, in turn telling producers they have to turn oil back simply because they have no more capacity.

  Is this possible? It’s already happening.

  As the WSJ reports in a piece titled “The Big New Threat to Oil Prices: A Glut of Gasoline“, refineries in the U.S. Midwest are losing their thirst for oil, posing a new risk for the battered crude market. The Midwest accounts for nearly a quarter of the crude processed in the U.S. and is home to shale producers that have few other outlets for their oil. But refiners there are already swimming in gasoline and other fuel, forcing them to cut back production until the excess can be worked off.

  In other words, not enough intermediate demand in the supply-chain with the result the same as oversupply: more crude oil is available in the market, worsening a glut that has been undermining oil prices for the past year and a half. As the WSJ adds, “with U.S. crude inventories at the highest level in more than 80 years, some storage hubs have little room left to store oil.“

  This means that storage hubs are now being hit on both sides: from excess production in a global market oversupplied by 3 million barrels daily, and from collapsing demand by the refiners for whom operating at current prices has become uneconomical. The result is that refinery production capacity, while already running at record levels for this time of the year, has tumbled from 98.2% a month ago to just 92.9% last week.

  This drop is significant because, as the WSJ explains, it marks the first time several refineries in the region have opted to reduce activity for economic reasons— a marked change after more than a year of refiners processing as much crude as possible.

  Here is the problem illustrated: gasoline stocks are literally off the charts in terms of the past 10 year min-max range:

  

   

  … as refineries operate at a record pace for this time of the year…

  

   

  … while gasoline demand is well within its past decade range:

  

   

  Which means refining production has no choice but to decline, which is precisely what it is doing. Three examples:

  • CVR Refining LP is among the companies that have scaled back. The company said recently that it reduced runs at its 70,000-barrels-a-day refinery in Wynnewood, Okla., by as much as 10,000 barrels a day. “It doesn’t make sense to process something when you’re not making anything on it,” Chief Executive Jack Lipinski said during a Feb. 18 earnings call.
  • HollyFrontier Corp. said Wednesday that it has trimmed production at refineries in Kansas and New Mexico due to lower margins.
  • PBF Energy Inc. Chief Executive Tom Nimbley said during a conference call on Feb. 11 that the industry “turned the dials to make more gasoline” in the last quarter of 2015 and overshot demand. “The gasoline is not going to the consumer,” he said. “It’s going into a tank.”

  The first immediate consequence of overproduction are dropping margins as refiners try to sell their product into a glutted market, and sure enough refining margins are lower throughout the country this year, including in the Gulf Coast region, where more than 50% the country’s refining capacity is concentrated. But refiners there have more choices when it comes to buying crude oil and can substitute cheaper options if they become available. And they can put fuel on tankers to sell overseas if supplies build up too much.

  In other areas, there are fewer viable options: recent cutbacks have been enough to nudge gasoline prices higher in the Midwest, though it’s still cheap in some places: Gas was selling for as low as $1.11 a gallon on Wednesday in Granite Falls, Minn., according to Gasbuddy.com. Gasoline futures for March delivery rose 4.6% on Wednesday to $1.0104 a gallon, up from a seven-year low hit earlier this month.

  Which again brings us to the most important commercial hub in the US, located in the heart of the Midwest in Cushing, Oklahoma.

  “Many industry players and analysts think refiners will ramp up production after spring maintenance and they expect activity to pick up in the summer as cheap gasoline spurs Americans to take more road trips. But for producers in the Midwest and Canada, any decline in Midwest refining activity is worrisome. The region is home to the crucial oil storage hub at Cushing, Okla.—the delivery point for the U.S. oil futures contract.”

  

  Sellers in the futures market can either deliver physical crude or buy futures to offset their obligations. A lack of storage space can force buyers out of the market and supplies in Cushing are at their highest level ever. Analysts warn U.S. oil futures could fall further as Cushing nears full capacity.

  This is precisely what we have been warning about for months, or as Paul Horsnell, global head of commodities research at Standard Chartered puts it, “There’s a feeling of various bits of ice cracking all at once” in the oil market, with both crude-oil and gasoline inventories at extremely high levels… People are worried about a short-term issue, particularly in the U.S., particularly at Cushing.“

  The good news is that we are likely very close to the worst case scenario playing out: refiners are unlikely to start buying more crude in the coming weeks. Instead, many will begin seasonal maintenance ahead of the busy summer-driving season. That could leave some oil producers scrambling to find places to store their output. Prices in some regions might have to drop sharply to justify the cost of shipping the oil to where it can be stored.

  Which means there are just two options: find some undiscovered storage, or hope demand picks up.

  On the first, there is always hope: “we’ll just look for every other nook and cranny throughout North America to stuff crude oil into,” said Andy Lipow, president of consulting firm Lipow Oil Associates in Houston. “The market is just not going to like it.”

  However, it is the second that is the biggest wildcard: refiners profit on the difference between oil prices and fuel prices. Oil prices have dropped 70% since mid-2014 to around $32 a barrel currently, but robust demand for gasoline kept prices at the pump from falling as quickly last year, boosting refiner margins. However, analysts question whether demand will increase strongly this year, especially given broader concerns about sluggish economic growth. 

  Which brings us to the punchline: on a four-week average basis, U.S. gasoline demand fell in January compared with the year before, according to Energy Information Administration estimates.

  This despite the alleged increase in US consumer purchasing power or the so-called “tax-savings” from low gasoline prices, which should have boosted overall gasoline demand.

  It has not.

  Which is why with the market having debated the supply issue for over a year, and overanalyzed the OPEC and non-OPEC supply question to death, what virtually nobody has discussed is the just as important demand side of the equation, perhaps because nobody dares to admit the obvious: the much needed rebound in demand is just not there.

  If that is indeed the case, expect a sharp, violent move lower in the price of oil in the coming weeks as the fundamental oil reality finally catches up with the imaginary world of stop-hunting, momentum-igniting, algorithmic daytraders.

  

  

  

  

  

• Dead Piglet Inscribed With "Mother Merkel" Found At German Mosque

  “In view of the circumstances it appears likely that this is a xenophobic act.”

  That’s from a police spokesperson who spoke to dpa after a dead pig with Angela Merkel’s name “daubed on it” was discovered at a site where a mosque is being constructed in Leipzig.

  “Mutti Merkel” was reportedly scribed on the animal’s corpse. “Mutti,” or “mom” is a term of endearment that’s been variously applied to the chancellor. When Merkel made the push to take in some 1 million refugees last year, she was dubbed a “kind hearted lion mother” by some Mid-East asylum seekers.

  But “mother” Merkel’s reputation has suffered irreparable damage over the past six months thanks to her role in fueling the bloc’s worsening refugee crisis. Germany took in more than a million migrants in 2015 and reports of mass sexual assaults carried out by immigrants combined with ever-present concerns about terror have soured Europeans on the chancellor’s “yes we can” message.

  Indeed, the narrative is increasingly “no we can’t, even if we wanted to.” In fact, the situation is so bad that EU migration commissioner Dimitris Avramopoulos warned on Thursday that if Turkey and Greece can’t work together on a solution to secure the bloc’s external borders, the entire project will collapse in the next 10 days.

  Norwegian PM Erna Solberg is preparing her country for that eventuality by passing a new bill that will allow Norway to essentially lock down the borders and turn all comers away by force if necessary.

  As NBC reports, it wasn’t exactly surprising that the pig turned up at the site. “In a 2013 incident after plans for the mosque became known, pigs’ heads were found at the same site. Police say no perpetrator has ever been found.”

  “I see this as just a stupid act. I don’t know what they mean to say with this, but our mosque construction project will continue,” Dr Rashid Nawaz of the Leipzig branch of the Ahmadiyya Muslim Jamaat (AMJ) organization told The Local. 

  Stupid act, yes. But we’re not sure what Dr. Nawaz is confused about what the “perpetrator(s) “mean to say.” They mean to send an anti-migrant, anti-Islam message. The piglet, Nawaz says, “was hurled into a patch of earth overnight.” 

  “The planned mosque for 100 people would be the second newly built mosque to be constructed in eastern Germany,” Deutsche Welle reports. “The Ahmadiyya Muslim Jamaat (AMJ), a global Islamic community with 35,000 members in Germany, has built a new mosque in Berlin’s Pankow neighborhood.”

  Leipzig mayor Burkhard Jung wasn’t particularly enamored with the display. “Insulting, reviling and smearing a whole religious community is narrow-minded and outrageous,” he said, adding that “leaving a dead pig with the words ‘Mutti Merkel’ on it isn’t just tasteless, but demonstrates fundamental failings of democratic education and conviction.”

  It seemed to have escaped Jung that when you are mayor, “fundamental failings of democratic education” among the populace are ultimately your fault.

  *  *  *

  Below, find the original article from Leipziger Volkszeitung (Google translated)

  Leipzig . The site for the new mosque of the Ahmadiyya community in Leipzig-Gohlis has been ruined again on Wednesday. As police spokesman Uwe Voigt told LVZ.de, found a passerby about 13 pm dead piglets in a bush, on the red paint “Mutti Merkel” was written. The perpetrators were not seen, but it was assumed that the animal has been filed on the day on the site at the corner Georg Schumann / Bleichertstraße.

  Meanwhile, the state protection had been turned on. Investigators from a politically motivated act from, among others, it also go to an insult to the Chancellor, so Voigt further.

  Construction in early September with religious leader

  The Ahmadiyya community itself responded on Thursday with serenity the fact. “We will not be intimidated. What the perpetrators are hoping, will not happen: This has no impact on the construction process of our mosque, “spokesman Rashid Nawaz told LVZ.de. For discussions, community’m always ready to violence and attacks were not to be tolerated.

  The Ahmadiyya plans to begin in early September with the construction of their new mosque. Approximately 700,000 Euro investments are planned for the project. “There are some other things that are now regulated. Then we hope the final construction permit, “Nawaz said. For groundbreaking ceremony then will also the London-based spiritual leader of the religious community, Mirza Masroor Ahmad, expected in the fair site, the spokesman said.

  OBM Jung condemned fact – Man: “Another low point.”

  Perella (SPD) responded on Thursday dismayed at the attack, “offend an entire religious community, to denigrate and insult is petty and despicable.The vast majority of Muslims, like most members of other religions also, peaceful believers who find in their denomination support and guidance, “said the Social Democrat.

  For the member of parliament Holger man the perpetrators expose more clearly than democracy enemies. “A dead pig with red lettering, Mutti Merkel ‘store, is not only tasteless, but discloses basic lack of democratic education as conviction. Symbolically compare a man with pigs and threaten the Chancellor with death is another low point and evidence of the brutality of the political climate “, the SPD politician said.

  The attack on Thursday was not the first attack on the planned Ahmadiyya Mosque in Leipzig. In November 2013 Unknown speared bloody pigs’ heads on poles, placed them along a beaten track that leads through the site and set fire to a garbage can. This attack sparked already nationwide revulsion.

  In addition, there were months incitement and protests in the district against the planned mosque, led by the far-right NPD. In April 2014, the former NPD politician Alexander Kurth also tried to hand over a petition against the mosque properties on the city council. Mayor Jung refused to accept.Proponents of the sacred building had previously collected more than 6,000 signatures.

  

  

  

  

  

• Can Maduro Mayhem Last To 2017?

  Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

  Things are turning increasingly ugly in Venezuela between President Maduro and the opposition MUD. The core political problem after December 2015 elections is the PSUV are now using the courts to neuter any opposition voices that formally hold a legislative majority to start holding the government to account.

  Right on cue, Mr. Maduro just railed a decree through the Supreme Court (TSJ) giving him total control over budgetary measures, utilize any property, suspect constitutional rights and if needs be mobilize the military for a period of 60 days (effective from 15th January) with another 60 day extension not only ‘Constitutionally possible’, but increasingly likely. The ‘good news’ from that, is President Maduro is at least starting to take some tepid measures that might help to get Venezuela onto a more realistic track, including 37% devaluation with a view to bringing Venezuela’s three tiered exchange rate into a dual system.

  Looks good on ‘paper’, but don’t be fooled. It merely leaves official rates of 10 bolivares to the US dollar, 200 bolivares (likely floated as the second tranche), compared to black market rates that’s more like 1000 to the greenback. Unsurprisingly, domestic price reforms got similarly ‘piecemeal treatment’, where memories of the 1989 Caracozo riots still ring loud in the PSUV’s ears. Going from 0.07 bolivar a litre to 1 bolivar sounds huge at 1,329% price hikes for 91 octane, but it still makes Venezuelan gasoline the cheapest in the world. PDVSA will only save around $800m from the move, and that’s assuming the government continues to adjust prices give Mr. Maduro’s measures will send inflation into the 1000% stratosphere. The IMF was already being very polite with 720% estimates on basic goods, including fabled toilet paper and condoms in increasingly short Venezuelan supply these days. 

  

   

  But so much for the ‘economic story’, what about the political backdrop?

  Unsurprisingly, Mr. Maduro’s Supreme Court stunt has left the opposition with little choice but to push for regime change at this stage. To be clear, the Venezuelan constitution is explicitly worded that any emergency Presidential enabling powers should have the approval of the Supreme Court and the National Assembly. The fact they’ve run roughshod straight over them and made up their own rules, basically renders the Assembly dead in the water at this stage. Regime change is the only card the MUD now have left to play.

  The question is how to pull it off? The preferred option would almost certainly be to hold a constituent assembly to re-write the constitution, including shortening and limiting presidential terms. The snag is that the MUD needs a two-thirds assembly majority to do so. And it’s the same ‘super-majority’ the PSUV and TSJ evidently blocked from the December 2015 poll, which makes a so called ‘recall referendum’ the obvious plan B against Mr. Maduro in April 2016 once the President is officially half way through his term. The MUD will need to garner 25% of registered voters to trigger the process, in what’s then a five month ordeal from start to finish, with multiple National Election Board (CNE) hurdles along the way. It’s almost certain the CNE and Courts will drag their heels as long as they can, mimicking previous 2003-04 tactics to forestall Chavez’s removal.

  The key reason for that is by early 2017, the PSUV can legitimately remove Maduro themselves where they could essentially put its own puppet back into office. And far more importantly, protect their own (and military) patronage networks in what’s left of an economically gutted Venezuela. The ailing bus driver soaks up all the bad PSUV news along the way, while the Party gets to work jailing more MUD figures, dividing and ruling all the way.

  Whether things can realistically be strung out that far frankly remains contingent on the ‘Venezuelan street’, somewhat ironically mirrored by what’s happening within military elites, where the Generals are getting increasingly nervous they might have to oversee a ‘transitional’ period of military rule to safeguard their own interests. Try as his might, President Maduro can politically run, but he can’t economically hide from the fact that Venezuelan will see another 5% contraction this year, with around $20bn of debt payments due by the end of 2016 with little foreign reserves left to do it.

  0

  A third of that is owed by the Central Bank, a third owed by PDVSA, and another tranche directly payable to China under oil for loans. To its ‘credit’ Venezuela has tried to honour its international obligations, even to the point of squeezing imports to avoid the political embarrassment of tanker seizures to date. But under current benchmark prices, Venezuela will have to spend around 90% of oil export revenues purely servicing debts to get through the year. Our take is that’s going to be politically impossible to do given some of those scarce dollars will be needed to provide the most basic of basic goods. That means structural default is inevitable sooner or later, at least without any fundamental regime change to try and chart a new course.

  

   

  On that ironic note, anyone expecting things to get better under a drastically fractured MUD consisting of 27 internal groups will prove very disappointed. Cut to the chase, and that ultimately leaves the ball in China’s court given its massive ($50bn) sunk costs in Venezuela where it’s thrown caution to the Caracas wind over the past decade. Sure, CNPC can directly tie new capital to its operations all it likes, but at some point, Beijing needs to decide between propping up the PSUV with more cash, or just let the house of cards fall and take their chances with a hostile MUD.

  Then again, ‘plan C’ might prove the most attractive for Beijing: Ditch the democratic niceties and do what China does best, cut a deal with the military to maintain status quo interests. Either way, Beijing will have a key role on what does or doesn’t happen with Maduro’s Mayhem in 2016-17. Force us to make a call, Mr. Maduro ultimately won’t be part of the Sino script over the longer term….

  

  

  

  

  

• HSBC Looks At "Life Below Zero," Says "Helicopter Money" May Be The Only Savior

  In many ways, 2016 has been the year that the world woke up to how far down Krugman’s rabbit hole (trademark) DM central bankers have plunged in a largely futile effort to resuscitate global growth.

  For whatever reason, Haruhiko Kuroda’s move into NIRP seemed to spark a heretofore unseen level of public debate about the drawbacks of negative rates. Indeed, NIRP became so prevalent in the public consciousness that celebrities began to discuss central bank policy on Twitter.

  When we say “for whatever reason” we don’t mean that the public shouldn’t be concerned about NIRP. In fact, we mean the exact opposite. The ECB, the Nationalbank, the SNB, and the Riksbank have all been mired in ineffectual NIRP for quite sometime and the public seemed almost completely oblivious. Indeed, even the financial media treated this lunacy as though it were some kind of cute Keynesian experiment that could be safely confined to Europe which would serve as a testing ground for whether policies that fly in the face of the financial market equivalent of Newtonian physics could be implemented without the world suddenly imploding.

  We imagine the fact that equity markets got off to such a volatile start to the year, combined with the fact that crude continued to plunge and at one point looked as though it might sink into the teens, led quite a few people to look towards the monetary Mount Olympus (where “gods” like Draghi, Yellen, and Kuroda intervene in human affairs when necessary to secure “desirable” economic outcomes) only to discover that not only has all the counter-cyclical maneuverability been exhausted, we’ve actually moved beyond the point where the ammo is gone into a realm where the negative rate mortgage is a reality. That shock was compounded by Kuroda’s adoption of NIRP and another cut from the Riksbank, and before you knew it, everyone was shouting what we’ve been shouting for more than seven years: the emperors have no clothes!

  But central banks aren’t willing to surrender just yet. Admitting that this entire experiment has been a mistake would be a disaster at this juncture. And while some brave sellside desks are indeed going full-tinfoil-hat-fringe-blog by daring to suggest that this whole damn thing simply isn’t working when it comes to reviving aggregate demand and boosting inflation, there are still those who want you to know that the “gods” are not out of lightening bolts just yet. Take HSBC for instance, where the fixed income team is out with an excellent – if rather disturbing for its references to helicopter money and even negative-er-er rates – summary of “life below zero.”

  First off, HSBC doesn’t buy the idea that rates can’t go lower – even given the constraint imposed by physical bank notes (that damn barbarous paper relic).

  “The Swiss National Bank currently operates the most negative rate at -75bp (see table 2). If the costs incurred by Swiss banks – expressed as a proportion of total assets at the negative rate – were applied to the eurozone banking system, the ECB’s depo rate would be much more negative. A simple calculation would put the ECB’s repo rate at -180bp, assuming the current level of excess reserves would all be charged at the negative rat,” the bank writes.

  

  HSBC then moves to address the constraints that keep central banks from taking rates even lower. Those contraints (in order) are:

  • Constraint 1: The ability to switch into cash, which yields zero
  • Constraint 2: Downward pressure on the earnings of banks
  • Constraint 3: Does it work? 

  We’ve discussed all of this at length. The cash constraint is simply a function of the fact that physical cash makes it impossible for central banks to move too far into NIRP. At a certain point, they’ll be a bank run. Indeed, Japanese are already loading up on safes and 10,000 yen notes. 

  The second constraint has already manifested itself in the steady grind lower in banks’ NIMs. Indeed, that’s one of the reasons investors are so concerned about European banks. With investment banking revenue constrained and NIM (i.e. traditional banking) hampered by NIRP, there’s no way for banks to cushion the blow from mountainous bad loans. 

  HSBC goes on to ask “how much more accommodation is needed?” Amusingly, they don’t really answer their own question but they do note that Ray Dalio’s “beautiful deleveraging” is a myth. Plain and simple:

  “Eight years after the financial crisis started, many global central banks are still looking to increase monetary accommodation. This follows 500bp of rate cuts by the Fed and BoE, 400bp by the ECB and rates held near zero at the BoJ. Add to this USD trillions of QE asset purchases and tightening moves that were subsequently reversed by a number of central banks. The challenge to the traditional central bank framework has come from the impact of structural factors, such as the debt overhang, which rather than disappearing over the last eight years, has actually got worse. If the role of ultra-loose monetary policy, combined with unconventional measures such as QE, was to facilitate an orderly deleverage, it has not worked.”

   

  

   

  And while it’s impossible to quantify how much MOAR we need, what we do know is that inflation expectations are no longer responding (and that language assumes they “responded” at some point post-2008 which is itself a dubious proposition): 

  

  And because you can count on policy makers to view this not as evidence that what they’re doing not only isn’t working but may in fact be contributing to deflation, but rather as proof of why they need to continue the experiment in an increasingly ludicrous example of Einsteinian insanity, you can bet that more accommodation is coming. The next to ease further will be the ECB and the Norges Bank (which, unlike other CBs, actually has a number of good reasons to cut) in March.

  Of course none of this will work. The problem isn’t monetary conditions. There’s not a shortage of liquidity – well, actually there is, ironically courtesy of central bank asset purchases, but the point is, it’s not as though the financial sector doesn’t have access to cash. The problem is that somewhere along the way, weak global growth and trade became systemic rather than cyclical and because the “gods” can’t print trade, they’re going to need to figure something else out to boost aggregate demand. 

  As for what that “something” is, we’ll simply close with one last quote from HSBC: “If central banks do not achieve their medium-term inflation targets through NIRP, they may have to adopt other policy measures: looser fiscal policy and even helicopter money are possible in scenarios beyond QE and negative rates.”

  

  

  

  

  

  

• "Peak Stupidity" – Where We Go From Here

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  So I’m currently teaching applied financial modeling at Marquette University in the beautiful blue collar town of Milwaukee, WI; home of the Harley, the (Miller) High-Life and SummerFest.  It’s a great town and a great school.  A few years ago the business college brought in a pretty savvy guy called David Krause who then started a program called AIM, where the top finance students actually manage more than $2M.  Because of the program’s success US News & World Report ranked Marquette’s finance program 21st in the nation this year.  Not bad for a small Jesuit school in the midwest.

  Now I mention this because after 15 years in banking, teaching financial modeling has forced me to reacquaint myself with some of the basic tenets of markets and valuation.  Such things tend to get lost in the midst of “getting the deal done” and chasing paper profits.  This reacquaintance process has been quite illuminating for me and I thought perhaps for others too.

  A reminder of what the market actually represents is a good place to start.  The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders.  Those cash flows are generated from revenues less costs of the underlying companies that make up the market.  Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations.  It’s level actually represents market capital in billions.

  

  So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer.  So let’s take a look at the growth in cash flows of US corporations over that same period. 

  We should expect to find a growth pattern in free cash flows similar to the above growth pattern in the overall market valuation (the Wilshire is a statistically large enough sample to be representative of total US corporations).  Let’s have a look…

  

  The above chart depicts corporate free cash flows (blue line) indexed to 100 in Jan 2012.  It is obtained by taking the BEA’s Net Cash Flow with IVA and CCAdj adding back depreciation and net dividends and subtracting net capex.  (The actual definitions of these can be found here.)

  What we find is that while the current valuation of expected future free cash flows to equity holders (i.e. market cap of Wilshire) has increased by some 55% since the end of 2011, the actual free cash flows of US corporations have only increased by 4%.

  This becomes a very difficult fact to reconcile inside the classroom.  Why would market participants be baking in so much growth when the actual data simply doesn’t support it?

  Well there are plenty of potential explanations.  For instance, rarely are investors rational.  While buy low and sell high is rational investing behaviour, often market euphoria comes at the market top right before a major sell off, leading to a buy high and sell low strategy.  Another reason is that the Fed has been providing a free put to all investors for the past 7 years essentially significantly reducing naturally occurring risk factors.  But whatever the reason this dislocation between expected and realized growth begs the question, how long can it last?  So let’s explore this issue.

  Below is a longer term growth chart of the Wilshire vs US corporate free cash flows to equity holders both indexed to 1995 (i.e. 1995 = 100).

  

  And so over the past 20 years we’ve seen this same type of dislocation three times.  That is, we see expectations of growth far exceeding actual growth of free cash flows to equity holders.  In the previous two dislocations we reached a peak dislocation (peak stupidity) followed by a reversion to reality (epiphany) where expected growth moves back in line with actual growth. Let’s have a closer look at specific indicators as to when the epiphany takes place.

  

  What we find is that the epiphany trigger occurs when YoY growth of free cash flows to equity holders drops down to or below zero.  The last two bubbles began their burst when medium term moving average of free cash flows dropped to zero.  We see the very same pattern occurring presently.  Today we appear to have just passed the peak stupidity inflection point as seen in the two charts above.

  But let’s be sure not to ignore the technical patterns, so let’s do some charting.  If we look to volatility and price level patterns between our current market and the last bubble cycle (credit crisis) we find incredible similarities.

  

  The above chart depicts weekly high vs low intra-week price spreads and price level.  What we find is that at this point in the last bubble cycle we had a period of reduced volatility (small green box in 08) that followed a period of increased volatility as the market slowly rolled over.  Today’s bubble is just entering that period of reduced volatility following the period of increased volatility as the market rolled over.

  And so what should we expect from here?

  Well the fundamental charts above suggest we have significantly overvalued growth expectations and historically those over-inflated expectations can drop very sharply back in line with actual growth.  So from a fundamentals perspective we should expect a significant drop in overall valuations (i.e. market cap).

  And from a technical perspective, if we are in fact following the previous bubble cycle pattern (which we seem to be), we should expect a nice bounce in price level from the recent lows (to perhaps somewhere between 2000 – 2030) accompanied by relative calm before an explosion of volatility and a market price plunge that sends us into the next crisis sometime around May (give or take).  Happy trading!

  

  

  

  

  

• Stocks Stumble After Best Gains Since 2014's Bullard Bounce

  The week explained…

   

  Stocks extend gains this week – now the best 2-weeks since Bullard's Oct 2014 lows… BULLARD 2 – 0 REALITY

  

   

  But ended on a weak note…

  

   

  Futures give us a glimpse of the sudden buying panic into Europe's Open/China's close, selling at US Open on the "good" news… Weak close…

  

   

  Even though Trannies and Small Caps gained on the day (more squeezes)…

  

   

  Materials and Homebuilders outperformed on the week but note that financials and energy lagged today…

  

   

  One thing of note is "noise" in VIX – this was not seen during the rise in VIX but now that the trend is lower, we see these paniccy spikes lower…

  

   

  The S&P is still having the worst start to a year since 2009.

  This has been the biggest 2-week short-squeeze since October 2011…

  

   

  And the weakest momentum stocks soared…

  

   

  Treasury yields swung around like a penny stock this week. The three red lines show a delayed POMO, a delayed auction, and the actual auction… all of which triggered selling…

  

   

  This was the best week for The USD Index in almost 4 months…

  

   

  Led by serious weakness in cable (and EUR)… and general strength today after positive econ data… (note quite a significant decoupling between AUD and CAD today)

  

   

  Commodities were a very mixed bag with crude (best week since Aug 2015) and copper gaining on China stimulus hopes and PMs sold (Silver's worst 2 week drop in over 3 months)

  

   

  Oil and Silver seemed somewhat coupled with their crazy moves…

  

   

  And finally, despite an ugly week for Silver, this is the best start to a year in Gold since 1980…

  

   

  Charts: Bloomberg

  

  

  

  

• Syrian Souvenir Shops Sell Out Of Putin Mugs

  “One of the calmest periods [in Damascus] since the start of the war,” is due to Russia’s hit on Jaysh al Islam chief Zahran Alloush, Reuters wrote on Friday, citing local sources.

  Alloush was something of a hero among some Sunnis but as we said in the wake of the airstrike that killed him in December, he was, in reality, a radical militant who advocated the extermination of Alawites and Shiites in Syria.

  His death was emblematic of what the Russian intervention represents to many Syrians who are still loyal to Bashar al-Assad and the Alawite government. As we’ve noted before, regardless of how skeptical you are regarding the Western media’s portrayal of the Assad government, there’s no argument to be made that Assad is some kind of benevolent statesman. He’s not. Plain and simple. Indeed, he himself admits that the Mid-East isn’t ready for democracy (he’s said as much on a number of occasions). But the fact is this: Sunni extremist elements have made life a living hell in Syria and the country was much better off when Assad was firmly in power. Even if he wielded that power irresponsibly.

  So when Russia kills commanders like Alloush, the Syrian people feel some sense of hope that at the very least, Vladimir Putin, the Ayatollah, and Bashar al-Assad will be able to restore some sense of normalcy to everyday life. For those in the West who constantly spew the whole “Syrians want democracy and it’s the international community’s duty to support the opposition to that end” line, have a look at the images from the aftermath of the suicide blasts that killed dozens in Homs and Damascus last Sunday (see here).

  If that’s what a “democratic revolution” looks like, then we can assure you that Syrians would just prefer to be governed by an autocrat. 

  In any event, we say all of that to introduce the following punchline and image. From Reuters: “Bashar al-Seyala, who owns a souvenir shop in the Old City, said he had just sold out of mugs printed with Putin’s face.”

  

  Also visible are cups emblazoned with the face of Hezbollah leader Hassan Nasrallah. We imagine they’re selling out as well.

  So tell us again John Kerry, about how Syrians want the US to “liberate” their country and rid them of an evil dictator and rollback Iranian influence.

  *  *  *

  Forget Goldman’s muppetizing recos. Zero Hedge top trade idea for the remainder of Q1: Long Putin wearing sunglasses mugs.

  

  

  

  

  

  

• Weekend Reading: Heterogeneous Elucidations

  Submitted by Lance Roberts via RealInvestmentAdvice.com,

  I was wrong.

  I wrote last year that the economists in charge of monetary policy at the Fed were the worst economic forecasters on the planet. To wit:

  “Importantly, while Janet Yellen suggested the Fed’s economic forecast was ‘not a weak one,’ the reality is it actually was. I have repeatedly stated over the last two years that we are in for a low growth economy due to debt deleveraging, deficits and continued fiscal and monetary policies that are retardants for economic prosperity. The simple fact is that when the economy requires roughly $4 of debt to provide $1 of economic growth – the engine of growth is broken.

   

  Economic data continues to show signs of sluggishness, despite intermittent pops of activity, and with higher taxes, increased healthcare costs, and regulation, the fiscal drag on the economy could be larger than expected.

   

  What is very important is the long run outlook of 2.15% economic growth. As shown in the chart below, real economic growth used to run close to 4%. Today, the Fed’s prediction is down markedly from the 2.7% rate they were predicting in 2011.”

  

  Why anyone actually takes the Federal Reserve’s projections seriously is beyond me. However, as bad as the Fed is at making projections, the IMF has proven to be worse.  To wit:

  “Since 2010, the International Monetary Fund’s outlook for global growth has disappointed.

   

  And every year, the IMF cuts its global growth forecast only to have that lowered forecast eventually prove too aggressive.

   

  This chart, which comes from the Economic Report of the President, shows the sad state of global growth and perennially disappointed IMF forecasts.

   

  And while the failure of these forecasts for one or two years out is notable, it might be most depressing to see the IMF’s 2011 forecast for 2016 gross-domestic-product growth of 5% miss the mark so widely.”

  

  Considering that Central Banks globally are basing monetary policy decisions on faulty assumptions about economics, the potential for a severe negative outcome is an increasing possibility.

  But most importantly, it is probably a good time to stop believing the people making these decisions actually have a level of useful insight. If they did, their forecasts would be substantially more accurate.

  This week’s reading list is a collection of articles from people who have been “getting it right” for the last few years. While they are often dismissed by the media because they disagree with  “mainstream thinking,” it is quite apparent they had a better grasp of the issues in the end.

  ---

  1) Earnings & Revenue Confirm Weak Economy by Jeffrey Snider via Alhambra Partners

  “Again, with revenue and EPS expected to decline further in Q1, that will make at least four straight quarters of EPS contraction and five for revenue. Currently, analysts are not predicting positive growth in either until Q3, but that is as tenuous as the once much more robust predictions for right now.

   

  S&P Capital IQ, for example, was also as late as the end of September (even after all the August messiness and ongoing uncertainty) projecting slightly positive EPS growth in Q4 and then much better throughout the start and rest of 2016.

   

  They chose to ignore everything in order to follow the mainline narrative. Last January, S&P Capital IQ was calling for almost 12% growth for the S&P 500 overall in both Q3 2015 and FY2015. The reason for that optimism was nothing other than “transitory”, which marks the baseline for all these unraveling forecasts.

   

  In their April 2015 projections they had Q1 2016 EPS growth accelerating to 15.1%, and were still looking for +5% as late as October; they now suggest -2.5%. Estimates for future quarters are also coming down and rapidly: last April and July they expected Q2 2016 EPS growth of more than 13%; down to 6.78% in October and just 1.25% currently. For Q3 2016: also more than 13% at both the April and July estimates, shooting higher to almost 15% at the October update, though now down to 7.22%. Current market disruptions suggest only that these downgrades are far from over.”

  But Also Read: S&P Earnings Far Worse Than Advertised by Justin Lahart via WSJ

  2)  Closing Tick As A Sentiment Tool by Tom McClellan via McClellan

  “The robust rally in mid-February 2016 has pushed the TICK’s 10MA up to its highest reading since late 2014 (just off the left end of the chart).  The message is that traders were a bit too eager in chasing that counter-trend rally, and so the stage is set for the next leg down. “

  

  But Also Read: I Am Bearish – Period by Doug Kass via Real Clear Markets

  3) Difference Between Past Fed Tightening & Now by Comstock Partners

  “Another reason we are skeptical about the U.S. economy avoiding a recession in 2016 is because of the breadth being as weak as it was in 2015.  The top 10 companies in the S&P 500 accounted for virtually all the gains, but were overwhelmed by the 490 stocks that accounted for the decline in the index.  This is also true about the number of stocks in the S&P 500 above the 10 day, 150 day and 200 day moving averages.

   

  In fact, we believe the Fed’s decisions over the past 20 years were instrumental in the dot com and housing bubbles.  In the Fed’s mind they have done everything possible (including increasing their balance sheet from $800 bn. to $4.5tn.) to resurrect the U.S. economy.  Instead, their legacy will be tarnished by the outrageous policies that were used over the past 8 years, and in our view, will not result in the salvaging of our economy, but rather what may become one of the greatest destructions of wealth in history.”

  Also Read: The Fed’s Nightmare Scenario by Peter Schiff via EuroPacific Capital

  4) S&P Could Plunge 75% by Sara Sjolin via MarketWatch

  “According to Edwards, global strategist at Société Générale and prominent perma-bear, the stock benchmark could falls as much as 75% from the recent peak of 2,100 to trade around 550. Edwards argues that stocks are already in a bear market—commonly defined as a 20% fall from a recent high—and that U.S. industrial production is shaky and could represent the beginning phases of a recession. That’s bad news for stock-market bulls.

   

  A fall to below 666 would have been a plunge of 65% from Tuesday levels, but if the bottom is around 550, the size of the decline would be 72%. Measured against the recent peak, it would be a steeper 75%.”

  Also Read: 3 Day Rally Says Bear Market Is Over by Simon Maierhofer via MarketWatch

  5) Houston, You Have A Problem by Terry Wade & Anna Driver via Reuters

  “Prices for mansions in Houston’s swankiest neighborhood have tumbled in lock step with crude prices. The Houston Opera has offered free season tickets to patrons who lost their jobs in the oil bust. A fancy restaurant offers cut-price dinners.

   

  Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world’s oil capital are among the hardest hit largely because tanking energy firm shares make up much of oil and gas executives’ compensation.“

  Also Read: Recession Sign That Is 81% Accurate by Jeff Cox via CNBC

  ---

  MUST READS

  • The Problem Of Negative Interest Rates by Rick Rieder via BlackRock
  • More Subprime Borrowers Falling Behind by Matt Scully via Bloomberg
  • Citi: “We Have A Problem by Tyler Durden via Zero Hedge
  • One Chart That Should Scare Investors by Matt Turner via BusinessInsider
  • “Gig Economy” – Lots Of Workers, Few Full-Time Jobs by Eric Morath via WSJ
  • 100 Reasons To Audit The Fed by Michael Snyder via Economic Collapse
  • Beware Of The Second Half-Cycle by John Hussman via Hussman Funds
  • Market Calm May Be Short-Lived by Mohamed El-Erian via Bloomberg
  • The Big Earnings Con by Jesse Felder via The Felder Report
  • Stock Rally Glass – Half Full Or Empty via Dana Lyons via Tumblr
  • Agriculture – Asset Worth Harvesting by Michael Lebowitz via 720 Global
  • Ranking Global Markets By Valuation by Meb Faber via Faber Research

  ---

  “Investors are condemned by almost mathematical law to lose” – Ben Graham

  

  

  

  

  

• This Is The Best Year For Gold Since The Hunt Brothers

  As gold prices "Golden Cross," the precious metal is set for its best month in 4 years, and best 2-month rise since 2011. The entire precious metals complex is active with the largest fund inflows since 2009 and the biggest February COMEX trading volume in history.

  All of this adds up to the best start to a year for gold since 1980, when The Hunt Brothers tried to corner the silver market and sent all precious metals soaring.

  

   

  The best 2 months in gold since 2011…

  

   

  Pushed prices to a "Golden Cross"…

  

   

  As Bloomberg reports, gold's rally is spurring investor interest with volume on the biggest futures exchange rocketing. With prices set for the best month in four years, trading on the Comex is poised for the strongest-ever February.

  

   

  Aggregated volumes on the New York futures exchange rose 54 percent from the same month a year ago to about 4 million contracts with one trading day left.

  Amid the highest inflows since 2009…

  

  

  

  

  

  

• Satyajit Das: This Is Why You Can Expect Another Global Stock Market Meltdown

  Authored by Satyajit Das', author of the new book "The Age Of Stagnation" (via MarketWatch),

  The mispricing of assets across world markets has reached epidemic proportions.

  Stock prices have made strong advances over the past several years, yet market analysts see further gains, arguing that the selloffs of August 2015 and early 2016 represent a healthy correction.

  But this rise in stock values has been underpinned by financial engineering and liquidity — setting the stage for a global financial crisis rivaling 2008 and early 2009.

  The conditions for a crisis are now firmly established: overvaluation of financial assets; significant leverage; persistent low-growth and deflation; excessive risk taking reliant on central banks for liquidity, and the suppression of volatility.

  Steve Blumenthal, CEO of CMG Capital Management Group, tells Barron's funds writer Chris Dieterich that his firm has been clinging to ultra-safe bonds and utility stocks during the market storm.

  For example, U.S. stock buybacks have reached 2007 levels and are running at around $500 billion annually. When dividends are included, companies are returning around $1 trillion annually to shareholders, close to 90% of earnings. Additional factors affecting share prices are mergers and acquisitions activity and also activist hedge funds, which have forced returns of capital or corporate restructures.

  The major driver of stock prices is liquidity, in the form of zero interest rates and quantitative easing.

  To be sure, stronger earnings have supported stocks. But on average, 70% to 80% of the improvement has come from cost-cutting, not revenue growth. Since mid-2014, corporate profit margins have stagnated and may even be declining.

  A key factor is currency volatility. The strong U.S. dollar is pressuring American corporate earnings. A 10% rise in the value of the dollar equates to a 4%-5% percent decline in earnings. Rallies in European and Japanese stocks have been driven, in part, by the fall in the value of the euro and yen  respectively. Lower commodity prices, especially in the energy sector, affects resource firms’ earnings. In the U.S., wage increases may also erode profit margins. The major concern is weak global demand, with lackluster growth in Europe and Japan and deterioration in emerging markets.

  The lack of revenue improvement and deceleration in earnings growth mean that recent price increases reflect high price/earnings and price/ book ratios. The S&P 500  now trades at around 17-18 times forward earnings, a level that is historically expensive and only exceeded during the 1999-2000 tech-stock bubble. Other markets are also priced above historical levels.

  The frothy environment is also evident in other investor behaviors. Investors chasing revenue and earnings growth have pushed up valuations, while more than 80% of new initial public offerings were for companies with no earnings. A significant component of activity has been private equity investors taking advantage of high valuations to sell holdings.

  Other asset classes show similar stresses. Government bonds around the world, unless distressed such as Greece, Ukraine, or Venezuela, trade at artificially low rates. More than $7 trillion of sovereign debt globally now trades at negative yields.

  This perverse environment has prompted David Rosenberg, chief economist and market strategist at money manager Gluskin Sheff + Associates in Toronto, to muse about the strange phenomenon of investors buying low- or zero-yielding bonds for capital gains and purchasing shares for income. With risk on government bonds increasing, equity analysts argue that investment in shares was preferable to bonds as they offered better protection from a rise in risk-free rates.

  The lack of returns in government bonds has driven overvaluation in credit markets. Investors have taken on additional risk, moving into corporate bonds, driving rates lower, with the average falling under 2.9% in early 2015.

  With rates on investment-grade corporate debt declining, investors have invested increasingly in higher yielding non-investment grade and emerging market debt, including by ever-more exotic issuers for Africa or Asia.

  The risk-return relationship has deteriorated with investors no longer being compensated for the true default risk. Given the low absolute rates, investors are also increasingly exposed to higher interest rates. A 1% rate-rise will result in around a 7% loss in the value of U.S. corporate bonds, an increase of around 40% from the 5% percent loss five years ago.

  Real estate prices have risen globally with investors purchasing rental income streams to diversify away from low income financial assets. Markets as disparate as the U.S., Canada, U.K., Germany, France, Scandinavia, Australia, New Zealand, China, India and many other emerging countries have become overheated.

  Collectibles including fire art, vintage cars, wine, and the like also are showing the effects of excessive enthusiasm. Their prices reflect in part the desire by the world’s “smart money” to escape the manipulation of financial markets and the tremors that could be signaling a big quake to come.

  

  

  

  

  

• US Government Releases 2015 Financial Statements: "Keeps Getting Worse"

  Submitted by Simon Black via SovereignMan.com,

  Hot off the presses, the US government just published its audited financial statements this morning, signed and sealed by Treasury Secretary Jack Lew.

  These reports are intended provide an accurate accounting of government finances, just like any big corporation would do.

  And once again, the US government’s financial condition has declined significantly from the previous year.

  For 2015, the government reports $3.2 trillion in total assets.

  This includes everything from financial assets like bank balances to physical assets like tanks, bullets, aircraft carriers, and the federal highway system.

  Curiously, the single biggest line item amongst these listed assets is the $1.2 trillion in student loans that are owed to the government by the young people of America.

  This is pretty extraordinary when you think about it.

  37% of the government’s total reported assets are student loans, which is now considered one of the most precarious bubbles in finance.

  $1.2 trillion is similar to the size of the subprime mortgage market back in 2008. And delinquency rates are rising, now at 11.5% according to Federal Reserve data.

  Plus, it’s simply astonishing that so much of the federal government’s asset base is tantamount to indentured servitude as young people pay off expensive university degrees that barely land them jobs making coffee at Starbucks.

  On the other side of the equation are a reported $21.5 trillion in liabilities, giving the government an official net worth of negative $18.2 trillion.

  This is down from last year’s negative $17.7 trillion and $16.9 trillion the year prior. It just keeps getting worse.

  But there’s one thing that’s even more incredible about all of this.

  You see, each year these financial statements are audited by the government’s in-house agency known as the Government Accountability Office (GAO).

  All big companies do this. They publish financial statements, which are then reviewed by an independent audit firm.

  Auditors are a critical component of the financial reporting process.

  It’s their responsibility to make sure that shareholders and the public can have confidence in a company’s financial statements.

  When Apple publishes an annual report, auditors go through all the books of the company and make sure that management is accurately representing the company’s true condition.

  Thus when an auditor issues a failing grade, or what’s known as a qualified opinion, there’s usually hell to pay.

  At the very hint of impropriety a company’s stock price will tank immediately. People get fired. SEC investigations are launched.

  And now based on US securities law and section 404 of the Sarbanes-Oxley Act from 2002, senior executives can face criminal charges if their companies receive a failing grade from their auditors.

  This is serious stuff.

  Yet year after year the GAO gives the federal government a failing grade in its audit report of America’s financial statements.

  In this latest report, not only did the GAO chastise the federal government for its “unsustainable fiscal path”, but they state that the federal government consistently fails to prepare “reliable and complete financial information– both for individual federal entities and for the federal government as a whole.”

  The Department of Defense, Department of Housing and Urban Development, and the Department of Agriculture are all singled out for their failure to prepare complete and accurate financial statements.

  This is corroborated by a report published last year stating that the Defense Department has somehow “misplaced” $8.5 trillion of taxpayer money over the last 20 years.

  The GAO cites other material weaknesses in the government’s reporting of supposed cost reductions in Medicare and Social Security.

  In all, the GAO calculates that these financial uncertainties total $27.9 trillion, suggesting that the government’s true financial condition is far worse than reported.

  Bottom line– if this were a private company, Barack Obama and Jack Lew would be wearing dayglo orange jumpsuits in court while facing felony fraud charges.

  It’s not just the $18.2 trillion in negative net worth. Or the $41+ trillion (by their own calculations) in the Social Security shortfall.

  It’s the fact that they can’t even stand in front of the American people with an honest accounting of how pitiful the financial situation really is.

  The government of the United States is totally, desperately, hopelessly bankrupt. And they become even more insolvent with each passing year.

  Nearly every single dominant superpower throughout history was eventually consumed by its unsustainable finances.

  And in their decline from power, bankrupt governments rely on a simple playbook to desperately try to maintain the status quo by every means available.

  They destroy freedom. They impose a police and surveillance state. They seize assets. They wage campaigns of violence and intimidation.

  They impose capital controls. Cash controls. People controls. Whatever it takes.

  This time is not different. The finances of the US government are obvious, as is the trend.

  We’re not talking about what ‘might happen’ or ‘could happen’. We’re talking about what IS happening.

  And this is not a consequence free environment.

  

  

  

  

  

Digest powered by RSS Digest