Today’s News 29th February 2016

• Gold-Silver Ratio Breakout Report, 28 Feb, 2016

  The gold to silver ratio moved up very sharply this week, +4.2%. How did this happen? It was not because of a move in the price of gold, which barely budged this week. It was due entirely to silver being repriced 66 cents lower.

  This ratio is now 83.2. It takes 83.2 ounces of silver to buy an ounce of gold. Conversely, it takes 1/83.2oz (about 0.37 grams) of gold to buy an ounce of silver.

  This ratio is now within a hair’s breadth of breaking out past the high set on Oct 17, 2008. See the historical graph (based on LBMA silver fix and PM gold fix data, provided by Quandl).

  The Historical Ratio of the Gold Price to the Silver Price
  
  

  Monetary Metals has been predicting a ratio well over 80 for a long time. And for two months, we have been calling for it to go much higher still. Could there be a correction? Absolutely. Could the fundamentals change? We expect they will—at some point. We will call that when we see it.

  Speaking of the fundamentals, read on for the only true picture of the gold and silver supply and demand fundamentals…

  But first, here’s the graph of the metals’ prices.

          The Prices of Gold and Silver
  
  

  We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

  One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

  Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities,
  inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

  With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

  Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio was up substantially. 

  The Ratio of the Gold Price to the Silver Price
  
  

  For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide
  brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

  Here is the gold graph.

          The Gold Basis and Cobasis and the Dollar Price
  
  

  The price was basically unchanged. The cobasis (i.e. scarcity) was also just about unchanged. This, by the way, was also true for farther-out contracts although we only show April in this free Report.

  We calculate a fundamental gold price of over $1,440. This is the price we would have if the price effect of speculation was subtracted out of the market. Who would be shorting gold at this point? We have an idea of one group that may appear sacrilegious to the gold community.

  Let’s get it out of the way. No, it’s not the Powers That Be, the commercial banks, the central banks, or the Illuminati. It’s the silver bugs. Consider the widespread belief—at least outside of readers of this Report—in silver outperformance. Who doesn’t think the ratio should be far lower—50 for starters, on the way to 16 as in Ye Times of Olde?

  How would you trade this thesis? You would short gold futures and go long silver futures in equal dollar amounts. This would of course push up the price of silver, and push down the price of gold

  We would say to anyone in this trade to be careful, but obviously they don’t read this Report. If you must trade this trend, you should do the opposite: long gold, short silver (and be wary of violent corrections).

  How do we explain that the price of gold is 15% below its fundamental, while the price of silver is only at a 2% premium? The silver market is less liquid than the gold market, so equal dollar values of this trade would push the silver price up more than it would push the gold price down.

  We have two thoughts on this. One, if most traders think of the metals as commodities—we saw yet another article on this theme today—and if commodities are in a bear market, then the metals are hated. Perhaps silver would be 30% under its fundamental—i.e. about $10—if it weren’t for this trade that alters the relationship of silver to gold.

  Maybe. Our other thought is that if this is a new bull market in gold—i.e. a bear market in the dollar—it’s in stealth mode at the moment. Mainstream traders are not excited about gold speculation. They’re not buying gold futures, and may even be short. We are aware of the Commitment of Traders report (COT), showing that non-commercials (i.e. speculators) have a net long position. It’s the commercials (i.e. miners and jewelers) who have the short position. Perhaps it’s the miners putting on more hedges—i.e. selling more of their production forward. Maybe it’s the reduced forward buying of the gold users.

  Whatever the factors, one thing’s for sure. The price of gold in the futures market is sagging relative to the price of gold in the spot market.

  Our approach is not based on aggregate quantities. That’s why we don’t stop at the COT data. We look at spreads. Spreads inform us in a way that strict quantity analysis cannot. If you doubt this, ask how many COT analysts predicted the price action in silver or the ratio.

  This graph shows the rates we observe to carry gold for contracts in 2016 (i.e. basis).

          The Gold Bases for 2016 and LIBOR
  
  

  These yields are hardly worth anyone’s while to buy gold and sell a future against it, not to mention that the cost of funding this trade is about twice the return on the trade. Carrying gold does not pay, because gold is not abundant enough in the market to be available to carry.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  In May silver, we see the scarcity (i.e. cobasis) drops on Tuesday when the price of the dollar falls (i.e. the price of silver rises), and a rising scarcity as silver is becoming cheaper. It’s no surprise that the big rise in scarcity occurred on Friday, with the big drop in price. No question, futures sold off.

  Another glance confirms it. Look at the epic drop in the basis. It’s down almost to match the gold basis (though the cobasis is nowhere near what is in gold). To review, here are our definitions:

  Basis = Future(bid) – Spot(ask)

  Cobasis = Spot(bid) – Future(ask)

  The basis is down because the bid on the May contract is being pressed down. Silver—at this price—is no longer so abundant. The basis is well below LIBOR. However, it’s not particularly scarce. The ask on the May contract is still strong, still being lifted by buying pressure.

  Last week, we showed a picture of “icicles” dripping on the chart of spot silver.

  

  This is in contrast to the futures chart. First, thanks to several folks who wrote to say that these are usually called “shadows”. We used the term icicle because of its connotation of dripping down. We believe that the cause is that metal is being sold, pushing the price down. But then that creates an actionable arbitrage to carry silver. So the market makers buy spot and sell the future. This does two things. One, obviously, it records a trade in the spot market at ask price and lifts the ask. Two, it presses the bid price in the futures market.

  If this is correct, then silver is intermittently abundant. At times when there’s selling of metal in the spot market, it’s abundant enough to go into the warehouse. At other times, and we’ll see more of this if the price falls further, it’s not so abundant.

  The fundamental price of silver fell about a nickel this week. The market price is much closer to the fundamental now.

  This brings us to the ratio. The fundamental on the ratio hit over 100 this week.

  What does it mean that the market ratio is just about to break out past its 2008 high, while the fundamental is predicting we could hit the record set in 1991? Ironically, the gold-silver ratio is showing something that most mainstream signals cannot.

  The seasonally adjusted unemployment number looks brilliant at under 5%. The S&P 500 index of stocks is only about 10% off its highs from the first half of last year. Sure, there’s that epic collapse in the price of crude oil and other commodities, but pay no heed. Cheap oil means cheap gas which gives money back to consumer who can spend spend spend our way to prosperity.

  The gold to silver ratio is showing us that the junior money is getting cheaper relative to the senior money. It is showing us that the metal which has industrial demand as well as monetary is falling relative to the metal whose demand is entirely monetary. It is also showing us that tightening credit conditions are starting to matter. So far as silver is concerned, credit conditions today match those which existed in October 2008.

   

  © 2016 Monetary Metals

  

  

  

  

• The Empire Will Strike Back

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

  The populist revolt fueling non-mainstream political movements in both Europe and the US flows from a single source: you can not fool all the people all the time. The central lie of our time is that governments can and should forcibly assume control of individuals’ lives, in the name of vague and always shifting greater goods. The Command and Control Futility Principle holds that governments and central banks can control one, but not all variables in a multi-variable system. The number of variables global governments and central banks have arrogated to their purported control has grown beyond measure. Breakdowns are visible everywhere, and as those failures exact their ever-increasing toll on the masses, the masses are pushing back.

  

  The last financial crisis was a watershed. Capitalism’s rough justice was obviously, and gallingly, not allowed to play out. Favored financial institutions didn’t face the consequences—insolvency and bankruptcy—of their promotion of various bubbles and their leveraged business models. They were bailed out with taxpayer funds. Especially galling was that they knew they were going to be bailed out. More salt on the wound: improvident homeowners and housing speculators who took on too much mortgage debt were, other than a few spotty government programs, not bailed out or even offered appreciable relief. Since the crisis passed, banks have operated on the assumption they will be bailed out again during the next crisis. Despite all the hype about improved capital ratios and cleaned up loan books, fractional reserve banking is still fractional reserve banking; a leveraged business model that is wiped out if enough loans and speculations go bad.

  Still more salt: despite unprecedented government debt and spending, new programs, particularly Obamacare, central bank debt monetization, and ultra-low interest rates, the purported recovery is the weakest on record, with the labor force participation rate at a multi-decade low, the number of people on food stamps recently reaching a record high, and real incomes back where they were in the 1970s. Those ultra-low interest rates have destroyed the incentive to save and forced retirees back into the workforce (the one group whose labor force participation rate has increased), but provided cheap funding to the carry-trade set, stock options-laden corporate executives, and Silicon Valley moguls. Their trophy art, cars, mansions, and spouses grace the media. That’s beyond salt, it’s rubbing people’s noses in it.

  The messes the globalist powers that be have made outside their jurisdictions are even larger than the ones inside. Led by the US, the Western powers have bestowed unending chaos on the Middle East and Northern Africa. They have achieved none of their goals, (see “How To Defeat Your Enemies”) but have created massive blowback with the spread of terrorism and the refugee inundation of Europe. Not only have the war-torn lands not been reordered along liberal democratic lines, but mountains of money and barrels of blood continue to be spent in perpetual war. Meanwhile, ordinary citizens in Western homelands, not the elites, are left to contend with terrorist attacks, refugees burdening already strained social welfare systems, and obnoxious and illegal behavior by some of the new entrants. The elites shun even acknowledging these problems.

  It comes as a surprise only to the elites and their media mouthpieces that the peasants are revolting, tired of their prevarication, arrogance, and ineptitude. Don’t, however, expect them to pay attention to anything so insignificant as the popular will; they won’t go gentle into that good night. In the US, the establishment can live with Hillary, and if either Trump or Sanders—the revolution’s candidates—wins, the new president will soon learn who actually runs the government. Or he will have an unfortunate accident or heart attack. However, the Empire is leaving nothing to chance; it has already initiated a preemptive counterattack.

  

  The counterattack has three overlapping fronts: war, the economy, and civil liberties.

  “The Quagmire to End All Quagmires” stated that “the US faces the danger of being dragged into World War III.” That phrasing may have been an error (SLL reserves the right, in perpetuity, to make mistakes, see “On Failure”). The US government most likely won’t get “dragged” into World War III; it will probably initiate it. If Turkey and Saudi Arabia invade Syria, assume they’ve been green-lighted by the US government, which will join them in the carnage.

  As the economy goes down in flames, central bankers and the usual totalitarian creeps are embracing negative interest rates and bans on cash. Negative interest rates self-evidently destroy the incentive to save, the foundation of honest capitalism and progress. Many commentators have pointed out that negative rates lead to an increased demand for zero return cash, so the monetary Dr. Strangeloves have to ban it to drive money into the banking system. Although negative interest rates are patently absurd and counterproductive, always strong selling points for the Strangeloves, the real reason for locking money in the banking system is to prevent a systemic run. As in the last crisis, on a mark-to-market basis the leveraged banking system—with the largest US and European banks still massively exposed to derivatives—will be recognized as insolvent and subject to a run unless money is kept locked in the banks and expropriated.

  This assault on financial freedom goes hand in hand with the war against civil liberties, a specious battleground in the concocted “War on Terrorism.” The mainstream media and even some of the non-mainstream blogosphere have been filled with articles about the “complexity” of the Apple-FBI standoff on encryption. The word “complexity” is often a tip-off that someone’s about to pull an intellectual fast one.

  Encryption is simple. It’s one of those issues most people dread: an either-or. Either one’s computer communications are encrypted and safe from prying eyes, or they are not. There is no middle ground, and Apple is ostensibly cutting its throat asking Congress, of all people, to come up with one. Encryption that has been compromised, for any reason, is useless. At Apple and the rest of Big Tech’s behest an encryption “compromise” will emerge that fatally compromises encryption, cementing Big Tech’s partnership with government. Lovers of liberty and privacy will be left searching for quite possibly illegal encryption developed by smaller, guerrilla software outfits.

  Many will say that deliberate war, economic destruction, and technological repression are inconceivable; such a strategy is contradictory, counterproductive, depraved, deranged, diabolic, deadly, pathologic, sociopathic, psychotic, and out-and-out evil. All of the above, but if that’s your reaction, read, or reread, “Life, Or Death?” SLL recently posted Matt Bracken’s “Burning Down the House in 2016.” Bracken shares SLL’s forebodings of impending disaster, and it’s an excellent article, but he makes a mistake: granting the destroyers their stated intentions.

  The proto-Marxist Jacobins of the French Revolution put it this way: “Out of order, chaos.” But first the Jacobins had to create the chaos, with an artificially engineered grain shortage leading to food riots, which they exploited for their revolutionary ends. Vladimir Lenin put it this way, when told that bread riots were breaking out in Russia: “The worse, the better.” The better for creating the optimal revolutionary conditions. The Black Panthers, revolutionary Marxists of the 1960s, said, “Burn, baby, burn.”

  The currently existing social compact has to be burnt to the ground before the new world economic order can be built up from the ashes. This will be as true in 2017 as it was in 1917.

  Regardless of the rhetoric—Liberté, égalité, fraternité; Dictatorship of the Proletariat; The Thousand Year Reich; The New World Order—the truth is that the means—destruction and death—are the ends. Psychopaths kill millions of people because…they enjoy killing millions of people. As SLL posited in “Life, Or Death?”, citing Ayn Rand, a malevolent desire to kill others is, at root, a desire to kill one’s self. The slogans, the supposed omelets that justify cracking all those skulls eggs, are dross.

  That imparts analytic clarity to the future. When one understands that one’s life is on the line, one must fight with everything one has. Or else.

  

  

  

  

  

• The Three Charts That No Small Cap Asset Manager Wants You To See

  A funny thing happens to an index's valuation when you choose not to entirely ignore the companies that have negative earnings (i.e. losses). Ever wondered what the P/E ratio of the Russell 2000 was given that it is full of companies where the 'E' is negative? The answer is simple – and ugly – as The Wall Street Journal exposes, the aggregate P/E of the Russell 2000 is over 200x which perhaps explains the gaping chasm between bond and equity valuations for this highly credit-sensitive cohort.

   

  It seems very few 'investors' are willing to read or study reality anymore…

  If you go to the “fact sheet” for the Russell 2000 index trying to find the standard PE valuation metric, the only one provided by the index keepers is something called “P/E Ex-Neg Earnings.” The current valuation offered is 19.8, which sounds much more reasonable than the latest raw PE estimate from The Wall Street Journal): 295.81…

  

  That can't be right, right? My friendly asset-gatherer would have warned me.. or CNBC's best and brightest would have raised red flags?

  It appears not… So here are 3 charts to show him/them next time they try to pile you into this underperforming index.

  As the 'dreaming' divergence between GAAP and non-GAAP (as we noted yesterday) widens ever more and the gap between Small cap earnings (inclusive and exclusive of 'losses' and extraordinary items) explodes…

  

  (in simpler terms, green is the index's earnings when you ignore the companies that have negative earnings; red is inclusive of all companies and aggregating losers and winners – which would you prefer to judge the index's valuation?)

  Which explains the surging reality of Russell 2000 P/E valuations…

  

  As Alhambra's Jeffrey Snider previously noted, if more and more small companies have started losing money, which the difference between the current real/raw PE and that figure Russell itself provides more than suggests, there are more than a few implications here.

  Which explains why Russell 2000 index remains suspended (on a string of faith and momentum) above the ugly reality that credit markets are prophesying…

  

   

  And given that small cap firms are the most-sensitive to credit market access, this is likely to continue as credit market conditions tighten (even absent The Fed)…

  

   

   

  h/t Randy W

   

  

  

  

  

  

• China Stocks Crash: Down More Than 4% To Fresh 15 Month Lows

  It all started off well-enough: the USDJPY was modestly lower but noting big, then the Yuan was fixed a little less modestly lower – well ok, it was the lowest fixing in 8 weeks confirming China just couldn’t wait for the Shanghai summit to be over – and then suddenly the Chinese market realized what we said earlier in the weekend, namely that with the much anticipated G-20 meeting a complete dud, and with no major stimulus on the horizon, suddenly the trapdoor below Chinese stocks opened and the Shanghai Composite has started the new month tumbling over 4%.

  

   

  With this latest plunge, Chinese stocks are now back to levels last seen in November 2014 when the Chinese “replacement” bubbles (out of shadow banking) was just getting started:

  

  And just in case it wasn’t obvious:

  • CHINA STOCKS’ TECHNICAL REBOUND IS OVER: HENGSHENG’S DAI MING

  But perhaps even more important as the G-20 fiasco, Shenwan Hongyuan Group analyst Qian Qimin told Bloomberg that “the red hot property mkt may attract more and more fund inflows and investors worry this might divert liquidity from the stk market” which incidentally is precisely what we said earlier this afternoon when observing the latest iteration of the Chinese housing bubble:

  To us, there is nothing surprising in this behavior: now that the Chinese stock market bubble has burst, the local population has to find a new asset class which to chase for the next few months, and for the time being that asset is housing.

  It also means that Chinese stocks are done for the time being. It remains to be seen how the rest of the world will digest this unpleasant fact.

  

  

  

  

• A Coherent Explanation of Obama's Foreign Policy

  Authored by Eric Zuesse,

  Foreign policy is both economic and military. An interpretation of U.S. President Barack Obama’s foreign policy will be presented here that explains both his economic and his military decisions to-date, and that shows he’s been carrying out the policies of his predecessors in office.

  On economic matters, he has turned out to be the most ambitious ‘free-trader’ of any U.S. President: he has proposed three gigantic international-trade treaties, two with North Atlantic countries (TTIP for products and TISA for services), and one with Pacific countries (TPP), not only in order to serve America’s aristocracy at the public’s expense (an international “race-to-the-bottom” in terms of workers’ wages, and race to the top in terms of stockholders’ profits and executive pay) (like NAFTA on steroids), but in order to extend the NATO military alliance against Russia, to include now these trade treaties as a companion economic alliance against Russia (to reduce Russian trade with Russia’s biggest market, which is Europe).

  Obama’s economic initiative with North Atlantic countries is even more intensive than his one with Pacific countries, because his TTIP & TISA would be economic treaties that would extend the North Atlantic Treaty, or NATO, directly from the military realm into the economic realm. With his TTIP & TISA, Obama is pursuing, essentially, a NATO economic  alliance to complement the military one — virtually the same members as NATO. TPP is less important, because that treaty attempts to isolate China, not Russia — and Russia is to be conquered before a conquest of China can be even seriously considered (in some future U.S. Presidency, though Obama is also ratcheting-up the military hostility against China).

  NATO was formed in the 1949 North Atlantic Treaty as being nominally an anti-communist mutual-defense treaty against the Soviet Union. But when the Soviet Union and its communism, and that communist group's equivalent of the NATO mutual-defense treaty, their Warsaw Pact, all disbanded in 1991, NATO continued on, now as being a purely anti-Russian military alliance. In 1990, the representatives of U.S. President George Herbert Walker Bush had told Mikhail Gorbachev of the Soviet Union that NATO wouldn’t expand eastward toward Russia, wouldn’t try to do to Russia what Nikita Khrushchev had tried to do to the U.S. in the Cuban Missile Crisis in 1962 (place nuclear missiles right next door), and Gorbachev accepted those assurances and disbanded the Soviet Union and its Warsaw Pact on that basis, but GHW Bush had actually lied there, and NATO not only continued on, it went right up to the very borders of Russia — exactly what the GHWB Administration had promised that the U.S. would never do.

  U.S. President Bill Clinton continued this GHWB policy of conquering Russia bit-by-bit by bringing into NATO the Czech Republic, Hungary, and Poland — a direct violation of Bush’s verbal promise to Gorbachev. However, Bush had actually intended  this violation: Bush had told both Helmut Kohl of Germany and Francois Mitterrand of France that the promise made to Gorbachev was only a lie, and that as far as fulfilling it, “To hell with that — we prevailed, they didn’t!” Clinton — and his successors — merely followed through on Bush’s lie. Bush’s son George, in 2004, brought into NATO: Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia.

  And that brought us to Obama’s Presidency, which is increasing this assault and threat against Russia to reach now a red-hot, no longer merely Cold, War. The bloody battlefields in this war so far have been in the countries that had been allied with Russia: Libya, Syria, and Ukraine. But the Cold War against Russia became hot in Ukraine first. That’s where Obama crossed Vladimir Putin’s red line.

  Russian leader Putin had long set as his red line that the U.S. mustn’t extend its NATO to include Ukraine, which has the longest border with Russia of any European country: 1,576 kilometers. If the U.S. is going to attempt a blitz-attack against Russia from next door, then Ukraine would be the most-dangerous country from which to launch it, and NATO membership for Ukraine would be the key to such success.

  In February 2014, Obama arranged a coup that overthrew the Russia-friendly and democratically elected President of Ukraine and replaced his government by one that's headed by the rabidly anti-Russian Arseniy Yatsenyuk. Obama’s operative who selected Yatsenyuk, Victoria Nuland, during the buildup to the coup, explained that, “Since 1991 [the breakup of the Soviet Union] .. we’ve invested over five billion dollars to assist Ukraine” to “build democratic skills and institutions” (which Ukraine already had, and which Obama — via her — was now tearing down).

  When she mentioned “1991,” she was thereby acknowledging  that GHWB had actually begun the overthrow of Ukraine. It was an exceedingly bloody coup d’etat in Ukraine, and Putin had always said that if Ukraine were to be added to NATO, that would be totally unacceptable — but now it was already in the process of happening.

  Immediately, the nuclear-arms race was resumed. This was very good for America’s ‘defense’ contractors such as Lockheed Martin, but not only for them. Right behind Nuland on the platform when she spoke of “1991” was the “Chevron” sign; and Chevron was the American oil-and-gas company that bought the rights to explore for oil and gas in western Ukraine — the area of Ukraine that had voted the most strongly against  the man whom Obama overthrew. (Chevron thus bought the safest  gas-rights. The locals there were happy to have a U.S. company exploring there.) Subsequently, a son of U.S. Vice President Joe Biden became appointed by the Ukrainian owner of Ukraine’s largest gas-exploration company in eastern Ukraine, to become a board-member. (That area was extremely hostile towards the United States, angry against the overthrow, and the residents there demonstrated against that company’s fracking and wanted to shut them down.) The American VP didn’t object that his son might become a billionaire from America’s Ukrainian coup — this was considered acceptable by the Obama regime and the aristocracy that it served (most of the U.S. public were never even informed of the now-booming Ukrainian-U.S. corruption).

  The overthrow of Ukraine’s democratically elected President (who had been corrupt himself, just as all  of Ukraine’s post-Soviet leaders had been) was an effort by Obama not only to take over Ukraine but to further isolate Russia, virtually all of whose former Warsaw Pact allies were by now now firmly in the anti-Russian NATO camp.

  However, Obama had actually been preparing for a renewed war against (now) Russia (no longer against the Soviet Union and communism), ever since he first became President in 2009, when his Administration responded to Syria’s drought-provoked 2008 request for food-aid not with food but with scheming to overthrow also that ally of Russia. And, then, Obama dusted off an old CIA plan from 1957, which had been drawn up by the mastermind of the successful 1953 overthrow of Iran’s freely and democratically elected progressive President Mohammed Mossadegh (replacing him with the brutal Shah); and, in this 1957 plan for Syria, the secular Ba’athist Party that ruled Syria was to become replaced by Saudi-allied Sunni fundamentalists — but this plan was placed on-hold until an appropriate time, which finally arrived during the Obama regime, when the widespread ‘Arab Spring’ demonstrations added fuel to the fires of Syria’s drought.

  That 1957 plan was itself a part of a longstanding CIA program.

  After Putin responded to those recent foreign invasions of Syria by Saudi-backed jihadists, by Russia’s starting on 30 September 2015 an all-out bombing-campaign against those tens of thousands of foreign invaders, Saudi Arabia and its fundamentalist-Sunni ally Turkey tried to draw the United States directly into an all-out invasion of Syria against both the Assad government and its now-committed Russian ally.

  In response, the Saud family teamed up with their Sunni-fundamentalist ally-and-NATO-member Turkey, to seek Obama’s support for an all-out ‘Western’ invasion of Syria to defeat both Assad and Russia, as well as to defeat two other allies of Assad: Iran and its Hezbollah ally in Lebanon.

  President Obama then reached out to the leaders of various European NATO member-nations, to seek at least one of them to join with the U.S. in making this not only a fundamentalist-Sunni invasion to overthrow and replace Syria’s Ba’athist government — the only remaining secular government in the Mideast. Thus far,Obama has failed to find any; and he seems unwilling to join the Sunni-Islamic countries as the only non-Islamic invader. However, Obama’s Secretary of State, John Kerry, is threatening to complete the 1957 CIA plan without Europe’s participation, if there’s no other way to do it. And the aristocracy’s Council on Foreign Relations recently headlined, “Divide and Conquer in Syria and Iraq; Why the West Should Plan for a Partition.” That ‘partition’ or breakup of Syria is the 1957 CIA plan. But that threat seems likely to be pure bluff from Kerry. After all, Kerry himself also says, “What do you want me to do? Go to war with Russia? Is that what you want?” He doesn’t want that. And he wasn’t bluffing when he said that he doesn’t. And Obama seems to recognize that the U.S. and NATO need at least several more years in order to have all the pieces in place for it to be launched.

  As regards Ukraine, Obama seems to have given up there, too. Ukraine is being left to rot, into perhaps sequences of regime-replacements and spiraling chaos: it’s a wrecked country.

  The end-result of Obama’s foreign policies, thus far, is to turn Russia’s allied nations into failed states. Whether his successor as the U.S. President will be satisfied with that (after all: it does hurt Russia), or else will ‘go for the gold’ (as Obama has thus far unsuccessfully tried to do) and resume the active quest to conquer Russia, might depend upon whether Obama can get his ‘trade’ deals passed and implemented; because, if that effort fails, then one would be hard-pressed to see any way in which the 1990-Bush-initiated war against Russia will be won, short of some sort of desperate nuclear invasion, for which Russia might be sufficiently well prepared so that whomever the survivors of that war would be (including even the top stockholders in firms such as Lockheed Martin) would wish they weren’t survivors. After all: what would any currency be worth then? Maybe enough to buy a gun and bullet to finish oneself off. Even for those corporate CEOs, their golf-days would be over, and only grim days would remain. But that’s when the true stature of such American Presidents as GHWB, Clinton, GWB, and Obama, would likewise become clear — to those survivors, or at least to the ones that don’t have the gun, or the bullet, or otherwise haven’t yet expired. It’s like the recognition-of-truth that people such as Palestinians, or Auschwitz-victims, or ISIS-victims, might have in their final moments. But here it would be happening even to the few aristocrats who cause such things to occur. Wouldn’t that be “a refreshing change”? After everything is said and done, and no one is around to enjoy it? But, anyway: it would be a change, and it would also be ironic. However, no one would be around to enjoy even the irony of it.

  Obama has been carrying out a bipartisan Republican-and-Democratic foreign policy; it’s the policy of America’s aristocracy. Its results have been horrible for the world, but they’ll be even worse if it succeeds. Not only will there then no longer be democracy (but instead a global government by international corporations), but if it succeeds all the way, there won’t even be much of anything except universal misery and mass-death. It is, unquestionably, an extremely ambitious foreign policy. Thus far, it seems to be entirely in accord with the foreign policy of the Saud family. However, that may be about to change: perhaps Obama, and the United States, will simply quit its alliance with the Sauds, and separate from them. But, will Europe separate from NATO? If not, then the anti-Russia policy will continue even if the Sauds’ alliance with the U.S. comes to an end.

  *  *  *

  Investigative historian Eric Zuesse is the author, most recently, of  They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.

   

  

  

  

  

  

• China Devalues Most In 8 Weeks, Offshore Yuan Slides To 3-Week Lows

  Following USD strength last week, China has come back to work after the disappointment of the Shanghai non-accord and weakened the Yuan fix by 0.2% – the most since January 7th.

  

   

  This move follows pressure from offshore Yuan weakness since traders returned from Golden Week – driving the onshore-offshore spread out to its widest since The PBOC stepped in and stomped the shorts.

  

  After a few weeks of stability, it appears China is forced to let the Yuan slip back out to where its CDS (a market it is notr manipulating directly yet) implied it to be after shaking out some weak shorts at the end of January.

  Stocks are opening modestly to the downside – following weakness in US from Friday

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.3% TO 2,939.58
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 0.4% TO 2,754.81

  

  

  

  

  

• Central Banks Shiny New Tool: Cash-Escape-Inhibitors

  Submitted by JP Koning via Moneyness blog,

  Negative interests rates are the shiny new thing that everyone wants to talk about. I hate to ruin a good plot line, but they're actually kind of boring; just conventional monetary policy except in negative rate space. Same old tool, different sign.

  What about the tiering mechanisms that have been introduced by the Bank of Japan, Swiss National Bank, and Danmarks Nationalbank? Aren't they new? The SNB, for instance, provides an exemption threshold whereby any amount of deposits that a bank holds above a certain amount is charged -0.75% but everything within the exemption incurs no penalty. As for the Bank of Japan, it has three tiers: reserves up to a certain level (the 'basic balance') are allowed to earn 0.1%, the next tier earns 0%, and all remaining reserves above that are docked -0.1%.

  But as Nick Rowe writes, negative rate tiers—which can be thought of as maximum allowed reserves—are simply the mirror image of minimum required reserves at positive rates. So tiering isn't an innovation, it's just the same old tool we learnt in Macro 101, except in reverse.

  No, the novel tool that has been created is what I'm going to call a cash escape inhibitor.

  Consider this. When central bank deposit rates are positive, banks will try to minimize storage of 0%-yielding banknotes by converting them into deposits at the central bank. When rates fall into negative territory, banks do the opposite; they try to maximize storage of 0% banknote storage. Nothing novel here, just mirror images.

  But an asymmetry emerges. Central bankers don't care if banks minimize the storage of banknotes when rates are positive, but they do care about the maximization of paper storage at negative rates. After all, if banks escape from negative yielding central bank deposits into 0% yielding cash, this spells the end of monetary policy. Because once every bank holds only cash, the central bank has effectively lost its interest rate tool.

  If you really want to find something innovative in the shift from positive to negative rate territory, it's the mechanism that central bankers have instituted to inhibit the combined threat of mass paper storage and monetary policy impotence. Designed by the Swiss and recently adopted by the Bank of Japan, these cash escape inhibitors have no counterpart in positive rate land.

  The mechanics of cash escape inhibitors

  Cash escape inhibitors delay the onset of mass paper storage by penalizing any bank that tries to replace their holdings of negative yielding central bank deposits with 0%-yielding cash. The best way to get a feel for how they work is through an example. Say a central bank has issued a total of $1000 in deposits, all of it held by banks. The central bank currently charges banks 0% on deposits. Let's assume that if banks choose to hold cash in their vaults they will face handling & storage costs of 0.9% a year.

  Our central bank, which uses tiering, now reduces deposit rates from 0% to -1%. The first tier of deposits, say $700, is protected from negative rates, but the second tier of $300 is docked 1%, or $3 a year. Banks can improve their position by converting the entire second tier, the penalized portion of deposits, into cash. Each $100 worth of deposits that is swapped into cash results in cost savings of 10 cents since the $0.90 that banks will incur on storage & handling is an improvement over the $1 in negative interest they would otherwise have to pay. Banks will very rapidly withdraw all their tier-2 deposits, monetary impotence being the result.

  To avoid this scenario, central banks can install a Swiss-style cash escape inhibitor. The way this mechanism works is that each additional deposit that banks convert into vault cash reduces the size of the first tier, or the shield, rather than the second tier, the exposed portion. So when rates are reduced to -1%, should banks try to evade this charge by converting $100 worth of deposits into vault cash they will only succeed in reducing the protected tier from $700 to $600, the second tier still containing the same $300 in penalized deposits. This evasion effort will only have made banks worse off. Not only will they still be paying $3 a year in negative interest but they will also be incurring an extra $0.90 in storage & handling ($100 more in vault cash x 0.9% storage costs).

  Continuing on, if the banks convert $200 worth of deposits into vault cash, they end up worsening their position even more, accumulating $1.80 in storage & handling costs on top of $3.00 in interest. We can calculate the net loss that the inhibitor imposes on banks for each quantity of deposits converted into vault cash and plot it:
   

  The yearly cost of holding various quantities of cash at a -1% central bank deposit rate

  Notice that the graph is kinked. When a bank has replaced $700 in deposits with cash, additional cash withdrawals actually reduce its costs. This is because once the first tier, the $700 shield, is used up, the next deposit conversion reduces the second tier, the exposed portion, and thus absolves the bank of paying interest costs. And since interest costs are larger than storage costs, overall costs decline.

  If banks go all-out and cash in the full $1000 in deposits, this allows them to completely avoid the negative rate penalty. However, as the chart above shows, storage & handling costs come out to $9 per year ($1000 x 0.9%), much more than the $3 banks would bear if they simply maintained their $300 position in -1% yielding deposits.

  So at -1% deposit rates and with a fully armed inhibitor installed, banks will choose the left most point on the chart—100% exposure to deposits. Mass cash conversion and monetary policy sterility has been avoided.

  How deep can rates go?

  How powerful are these inhibitors? Specifically, how deep into negative rate territory can a central bank go before they start to be ineffective?

  Let's say our central banker reduces deposit rates to -2%. Banks must now pay $6 a year in interest ($300 x 2%). If banks convert all $1000 in deposits into cash, they will have to bear $9 in storage and handling costs, a more expensive option than remaining in deposits. So even at -2% rates, the cash inhibitor mechanism performs its task admirably.

  If the central bank ratchets rates down to -3%, banks will now be paying $9 a year in interest ($300 x 3%). If they convert all $1000 in deposits into cash, they'll have to pay $9 in storage & handling. So at -3%, bankers will be indifferent between staying invested in deposits or converting into cash. If rates go down just a bit more, say to -3.1%, interest costs are now $9.30. A tipping point is reached and cash will be the cheaper option. Mass cash storage ensues, the cash escape inhibitor having lost its effectiveness.

  The chart below shows the costs faced by banks at various levels of cash holdings when rates fall to -3%. The extreme left and right options on the plot, $0 in cash or $1000, bear the same costs.
   

  The yearly cost of holding various quantities of cash at a -3% central bank deposit rate

  So without an inhibitor, the tipping point for mass cash storage and monetary policy impotence lies at -0.9%, the cost of storing & handling cash. With an inhibitor installed the tipping point is reduced to -3.1%. The lesson being that cash escape inhibitors allow for extremely negative interest rates, but they do run into a limit.

  The exact location of the tipping point is sensitive to various assumptions. In deriving a -3.1% escape point, I've used what I think is a reasonable 0.9% a year in storage and handling costs. But let's assume these costs are lower, say just 0.75%. This shifts the cash tipping point to around -2.5%. If costs are only 0.5%, the tipping point rises to around -1.7%.

  This is where the size of note denominations is important. The Swiss issue the 1000 franc note, one of the largest denomination notes in the world, which means that Swiss cash storage costs are likely lower than in other countries. As such, the Swiss tipping point is closer to zero then in countries like the Japan or the U.S.. One way to push the tipping point further into negative terriotry would be a policy of embargoing the largest note. The central bank, say the SNB, stops printing new copies of its largest value note, the 1000 fr. Banks would no longer be able to flee into anything other than small value notes, raising their storage and handling costs and impinging on the profitability of mass cash storage.

  Good old fashioned financial innovation will counterbalance the authorities attempts to drag the tipping point deeper. Cecchetti & Shoenholtz, for instance, have hypothesized that in negative rate land, a new type of intermediary could emerge that provides 'cash reserve accounts.' These specialists in cash storage would compete to reduce the costs of keeping cash, pushing the tipping point back up to zero.

  The tipping point is also sensitive to the size of the first tier, or the shield. I've assumed that the central bank protects 70% of deposits from the negative deposit rate. The larger the exempted tier the bigger the subsidy central banks are providing banks. It is less advantageous for a bank to move into cash when the subsidy forgone is a large one. So a central bank can cut deeper into negative territory the larger the subsidy. For instance, using my initial assumptions, if the central bank protects 80% of deposits, then it can cut its deposit rate to -4.6% before mass paper storage ensues.

  Removing the tipping point?

  There are ways to modify these Swiss-designed cash escape inhibitors to remove the tipping point altogether. The way the SNB and BoJ have currently set things up, banks that try to escape negative rates only face onerous penalties on cash conversions as long as the first tier, the shield, has not been entirely drawn down. Any conversion after the first tier has been used up is profitable for a bank. That's why the charts above are kinked at $700.

  If a central bank were to penalize cumulative cash withdrawals (rather than cash withdrawals up to a fixed ceiling) then it will have succeeded in snipping away the tipping point. This is an idea that Miles Kimball has written about here. One way to implement this would be to require that the tier 1 exemption, the shield, go negative as deposits continue to be converted into cash, imposing an obligation on banks to pay interest. The SNB doesn't currently allow this; it sets a lower limit to its exemption threshold of 10 million francs. But if it were to remove this lower limit, then it would have also removed the tipping point.

  What about retail deposits?

  You may have noticed that I've left retail depositors out of this story. That's because the current generation of cash escape inhibitors is designed to prevent banks from storing cash, not the public.

  As central bank deposit rates fall ever deeper into negative territory, any failure to pass these rates on to retail depositors means that bank margins will steadily contract. If banks do start to pass them on, at some point the penalties may get so onerous that a run develops as retail depositors start to cash out of deposits. The entire banking industry could cease to exist.

  To get around this, the FT's Martin Sandbu suggests that banks could simply install cash escape inhibitors of their own. Miles Kimball weighs in, noting that banks may start applying a fee on withdrawals, although his preferred solution is a re-deposit fee managed by the central bank. Either option would allow banks to preserve their margins by passing negative rates on to their customers.

  Even if banks don't adopt cash escape inhibitors of their own, I'm not too worried about retail deposit flight in the face of negative central bank deposit rates of -3% or so. The deeper into negative rate territory a central bank progresses, the larger the subsidy it provides to banks via its first tier, the shield.  This shielding can in turn be transferred by a bank to its retail customers in the form of artificially slow-to-decline deposit rates. So even as a central bank reduces its deposit rate to -3% or so, banks might never need to reduce retail deposit rates below -0.5%. Given that cash handling & storage costs for retail depositors are probably about the same as institutional depositors, banks that set a -0.5% retail deposit rate probably needn't fear mass cash conversions.

  So there you have it. Central banks with cash escape inhibitors can get pretty far into negative rate land, maybe 3% or so. And with a few modifications they might be able to go even lower.

  

  

  

  

  

• GOP Super Tuesday: The Full Breakdown

  Much to the chagrin of the political establishment, Donald Trump is on the verge of locking up the GOP nomination.

  New Hampshire: Trump.

  Nevada: Trump.

  South Carolina: Trump.

  Put simply, if the brazen billionaire locks up Super Tuesday, it’s all over for the field. Here’s a preview of next week’s critical polls via Politico:

  Alabama primary; 50 delegates

  Don’t be fooled by Gov. Robert Bentley’s endorsement of his colleague John Kasich. This is conservative country. It’s the home of immigration hardliner Jeff Sessions, whose endorsement has been courted by both Cruz and Trump. There have been few polls of the largely rural state, but Trump dominated the most recent one, a December poll funded by state lawmakers that showed Trump with a 20-point edge over Cruz.

  Brent Buchanan, an unaligned Republican strategist in Alabama, said he expects the state to mirror the results of South Carolina: a strong Trump win, and a Rubio second-place finish. Buchanan noted that Rubio just earned the endorsement of 31 state lawmakers and Cruz pulled out of an Alabama forum set for Saturday, though Rubio still plans to attend. Anecdotally, he said, energy for Cruz has slid. It could leave Cruz empty-handed if he fails to reach 20 percent support in the state, the minimum threshold for receiving delegates.

  Alaska caucuses; 28 delegates

  The Alaska caucuses are virtually invisible. The low-population state is so far out of the way, few candidates devoted much time there. One potential factor: Sarah Palin. A longtime Cruz ally, Palin endorsed Trump last month. In a small state like Alaska, where Palin was governor before her vice presidential run in 2008, an endorsement could carry weight. The only poll that included Trump, taken in early January, showed a close race between the mogul and Cruz.

  Arkansas primary; 40 delegates

  One of the few obvious opportunities on the map for non-Trump candidates is here. The only recent poll shows Cruz with a narrow lead and a second-place tie between Trump and Rubio. Rubio is the beneficiary of a recent endorsement by Gov. Asa Hutchinson, part of a wave of establishment support he received after Jeb Bush dropped out of the race last weekend. Trump has spent time here, though. He held a rally shortly before the New Hampshire primary and he returned Saturday for a rally in Bentonville. He also recently hired Sarah Huckabee, daughter of former Arkansas Gov. Mike Huckabee, as a senior communications adviser.

  Georgia primary; 76 delegates

  Donald Trump holds massive leads over his rivals in recent polls of Georgia, the second-largest prize on Super Tuesday. It may be the reason that Trump will spend his night of the week in Valdosta. The state also has a 20 percent support threshold for doling out delegates, a dangerous dynamic for Cruz and Rubio who have both floated around that level in recent polls. Rubio recently opened his first office in the state, though Trump and Cruz have had a presence there for a while.

  Massachusetts primary; 42 delegates

  Trump is poised to run away with a win in Massachusetts. The main question is by how much. A resounding victory that features buy-in from the state’s significant contingent of blue-collar, Reagan Democrat/independent voters is already spooking Democrats about Trump’s strength for the general election. It’s also bad news for Kasich, whose team and supporters hoped his second-place finish in New Hampshire would come with Massachusetts coattails. Kasich is expected to get crushed in the South and hasn’t had the resources to build much of an organization, so he’s been counting on victories on less conservative turf to carry him through Super Tuesday. He won’t find much shelter here though. He will, however, likely pick 

  The only Midwestern state on the calendar Tuesday, Minnesota will be a true wildcard. Trump reportedly has limited organization in the state, and the most recent poll there actually puts Rubio and Cruz in a statistical tie with Trump. That might explain Rubio’s recent visit there. He’s in search of any state to notch an outright win, so he’s not swept on Super Tuesday as he was in the early states. Rubio received endorsements last week from two prominent Minnesota Republicans, former Gov. Tim Pawlenty and former Sen. Norm Coleman. Trump didn’t schedule any time in Minnesota over the past week, as he barnstormed the South.

  State GOP chairman Keith Downey said Minnesota is one of the few mysteries on the map. He’s urged party officials to prepare for up to twice their record-level of turnout reached in 2008. “I think Cruz, Rubio and Trump might be a little more bunched together in Minnesota, similar to Iowa,” he said. Downey added that Trump, of late, has begun assembling a field team that could help him corral more votes on Tuesday.

  Oklahoma primary; 43 delegates

  Oklahoma is looking like the “bragging rights” state. That’s the way Party Chairwoman Pam Pollard sees it. Pollard noted that Oklahoma, one of three most conservative states in the country, also holds the first totally “closed” primaries — meaning only voters who registered as Republicans by Feb. 5 can cast ballots. Earlier states and even other Super Tuesday states allow some crossover voting by Democrats or voting by independents.

  That means, the winner here can demonstrate he won a stte in which only “Republicans voted for Republicans.” That might explain the late flurry of activity here. Trump was in Oklahoma City on Friday, and Pollard said Rubio would be in the state for two stops on Monday. Cruz, she said, had visited three times and would be back again before Tuesday’s primary.

  Polls have shown Trump holding a solid but potentially surmountable lead. The Oklahoman poll put Trump ahead with 29 percent support to Rubio’s 21 percent. According to the State Elections Board, as of Friday afternoon, mail-in absentee ballots in Oklahoma hit 13,600, already significantly outpacing the 10,500 in 2012, and early voting hit 15,700, already beating 2012’s 14,500

  Tennessee primary; 58 delegates

  The state — whose elongated geography drew candidates due to its overlap with media markets in a slew of surrounding states — is something of an ideological mystery. The state’s governor, Bill Haslam, was reelected resoundingly in 2014, but he drew ire from conservatives during a failed attempt to expand Medicaid. Haslam endorsed Rubio last week. An MTSU poll taken in mid-January showed Trump lapping the field with 33 percent to Cruz’s 17 percent, though more than a quarter of voters were still undecided.

  Texas primary; 155 delegates

  This is must-win turf for Cruz. In fact, anything other than a huge victory would be a problem for his campaign. Cruz’s path to the nomination revolves around dominance in the South, starting in his home state. If he doesn’t come away from Super Tuesday with a delegate lead, it will raise enormous questions about his viability going forward. Absent that kind of showing, his best hope may be a divided electorate that sends the contest to a floor fight at the July convention. Cruz has shown strength in recent polls, leading by double digits in a new Monmouth University survey.

  The state party requires a 20 percent threshold of support for candidates to receive delegates. Trump and Cruz may be the only two who come away with delegates if current polling trends hold.

  Vermont primary; 16 delegates

  The tiniest pot of delegates up for grabs Tuesday, Vermont hasn’t gotten much attention. But Trump did hold a rally here in January, and Kasich has argued that like Massachusetts, this generally liberal state could be a pickup opportunity for a more moderate candidate. The state’s only recent poll tells a different story. Trump is dominant, and trailed distantly by a second-place Rubio. If these, as well as Massachusetts poll results hold, Kasich could come away winless on the day. The state only doles out delegates to candidates who earn 20 percent support or more — meaning Trump could shut out his rivals if he holds his large lead.

  Virginia primary; 49 delegates

  Donald Trump held a double-digit lead over Rubio and Cruz here in recent polls of the state. But the state’s impact will be diluted because it doesn’t have a delegate threshold, ensuring that even lower-performing candidates will come away with a share of delegates. Kasich made three stops here last week, and his team has cast Virginia as a state where he could prove sneaky-strong, but polls don’t bear that out. A Roanoke College poll out Friday gives Trump a 23-point edge over Cruz, who is statistically tied with Rubio. Carson and Kasich lag the field with just 8 percent support apiece.

  Wyoming convention; 29 delegates

  No drama here. Wyoming will send its 29 delegates to the July convention unbound. It holds no presidential preference poll or vote of any kind, a decision shared only by North Dakota and Guam. If the Republican convention becomes a first-ballot nail-biter, these unbound delegates could help tip the balance.

  

  

  

  

• The Central Bankers' Greatest Blunder Yet: Negative Rates = Deleveraging

  In a world which has long since crossed the monetary twilight zone of negative rates, and which is spiraling ever deeper into NIRP, below we present some quite fascinating observations on debt, NIRP and how the latter leads to the deleveraging of the former, and thus encourages global deflation – something which in retrospect will be (and in many cases already has been) seen as a central bank fatal flaw, and confirmation said central bankers have zero understanding of the process they have unleashed.

  From HSBC’s Anton Tonev.

  Negative rates = deleveraging

  • Negative interest rates on developed world sovereign bonds could reduce debt burdens and may be a market solution to overleveraging
  • While the side effect of extreme money creation is inflation, the side effect of extreme debt creation is deflation
  • We argue that the need for further deleveraging may be a reason why negative interest rates persist in sovereign bond markets

  Bonds and deleveraging

  While conventional theory suggests that central banks set base interest rates and that negative rates are a result of low inflation and slow economic growth, we suggest there may be an alternative explanation. Drawing on historical and cultural analogies, we view negative rates as a possible market response to the growing levels of debt and inequality in income and wealth.

  In April last year, Switzerland became the first country to issue a 10-year sovereign bond at a negative yield. By the end of 2015, about a third of newly issued eurozone sovereign bonds came with a negative yield. Investors who buy these bonds and hold them to maturity will receive less than they put in and the issuer will ultimately pay back less than borrowed. Through this mechanism, we believe that negative interest rates can be a useful tool for deleveraging.

  We recognise that the challenge to this view is that the objective of this policy has been to encourage even more leverage; the case of the Swedish housing market comes to mind. The majority of the countries with negative yields on their government bonds have high levels of either government or private debt (or in some cases both). Historically, one would expect government yields to go up to discourage the issuance of more debt. This is not happening now. Why? We suggest that, precisely because of the high level of debt and the need to deleverage, nominal yields in those countries have become more and more negative to encourage the issuance of more debt and slowly roll down the existing debt stock.

  This suggests the market may be indicating there is too much debt. But this has an implication for the creation of new money, which is essential for the normal functioning of the economy. Most of the money creation in the developed world is done by the private banking  system through issuing loans. If there is no demand for new debt, the money creation process stalls. In other words, while under the gold standard our money creation was constrained by the availability of gold, in the current “fiat” monetary system, we cannot issue new money without the issuance of new debt. However, the system after 1971 was much more flexible than the metallic standard before because, as long as the economy was expanding, the banks could always find someone willing to borrow from them and thus increase the money supply.

  Nevertheless, there is a natural limit to how much debt an economy can sustain. The time after the financial crisis of 2008 coincided with ever decreasing rates of growth and, as a result, not only could the banks not find people to lend to (thus money supply growth slowed down) but people started deleveraging (which caused total liquidity to contract – see Figure 12).

  The US, and by extension most of the developed world post 2008, was in a very similar situation to where it was for most of the nineteenth or the early twentieth centuries, i.e. a deflationary environment characterised by intense progress (in our case we are starting to finally see the benefits of the Internet) and the inability to boost the money supply and thus create inflation.

  Figure 12. Total US liquidity decreased after the 2008 crisis

  

  It is this economic necessity and the mathematical impossibility of paying interest continuously which has created the present situation of negative interest rates: in our view the market has found a way to keep the monetary system going but this time without the risk of ever increasing debt.

  In the past, we used to deal with too much debt either using market forces, like growth and inflation, or non-market forces, like debt jubilees, debt restructurings or excessive seigniorage. History is full of examples which reinforce the notion that putting an unbearable burden on debtors would ultimately send the whole economy into a depression. Debt jubilees were very common in Mesopotamia, for example, where, by some accounts there were around thirty episodes of general debt cancellations from 2400 to 1400 BC.

  In 1819, as agriculture prices dropped, US state governments imposed moratoria on farmers’ debt payments and some debt was even completely forgiven. During the Great Depression, the US government, through the Home Ownership Loan Corporation, helped struggling homeowners by sometimes substantially lowering their mortgage payments. “One of the largest transfers of wealth (from creditors to debtors) in the history of the world”, however, happened when the US government broke off the gold standard in 1933. This was equivalent to restructuring its debt as, by removing the gold clause in US Treasury securities and devaluing the dollar, creditors’ claims were cut by more than 40%.

  None of these options was used after the Great Recession of 2008. In addition, the developed world economies seem unable to generate growth and inflation sufficient to offset the rise in debt. Without a policy response, the market is taking the matter in “its own hands” by starting to reduce the level of debt (in present value terms) via negative yields on sovereign bonds.

  
  

  

  

  

  

  

• The Agriculture Space – Grains (Video)

  By EconMatters

  

  The effects of a strong dollar the last 3 years can be seen quite dramatically in the Grain space – to the tune of 20 plus percent. People haven`t stopped eating, and there are more and more people on this planet every year, so the grains are probably a long term buy here over a five year time frame.

  

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

  

  

  

  

• EU's Evil Plan B: Cutting The Balkan Route Has Stranded 1000s Of Migrants In Greece

  Via KeepTalkingGreece.com,

  The closure of borders in the north of Greece has created chaos: thousands of refugees and migrants wandering from Athens to Idomeni without knowing where to sleep and what to eat, where to lay their kids and elderly to sleep.

  

   

  FYROM, Croatia, Slovenia and Austria has closed their border today. Slovenia, Croatia and Serbia said on Friday they would each restrict the number of migrants allowed to enter their territories to 580 per day, while Austria already introduced a daily cap of 80 asylum-seekers and said it would only let 3,200 migrants pass through each day. However, FYROM’s borders remained close all day Friday, onloy 150 crossed on Thursday. Albania, that had earlier said to accept refugees, decided otherwise at the end of the day, after the West Ballkan Conference initiated by Austria. Prime Minister Eddi Rama said that his country will not accept any refugees.

  Also the push-backs have started: Austria sent back 50 Syrians two days ago, they arrived in Idomeni , Greece a couple of hours ago. According to latest information, Serbia is going to push-back 1,000 people to FYROM and FYROM will forward them to Greece.

  Refugees, asylum-seekers, migrants: all in one pot. End of  story:

   

  Victoria square #athens #greece #refugeesGr #RefugeesCrisis #refugees pic.twitter.com/wYD6x9KM4K

  — prezatv (@prezatv) February 28, 2016

   

  The Balkan Route is cut.

  20,000-25,000 people are trapped in Greece.

  

  Allegedly concerned that a humanitarian crisis may occur, the European Commission is working out a contingency plan to tackle the crisis and avoid the disaster.

  “At this time we are preparing an emergency plan, ‘a humanitarian aid mechanism’ in order to avoid a humanitarian crisis in Greece,” European Commission spokesperson Natasha Bertaud said on Friday, however without elaborating on details. Correspondents of Greek TV channels in Brussels reported later that the “Emergency plan” would rather be in form of financial aid for food, logistics etc of even up to 3 billion euro. Greece has reportedly already submitted the relevant request to Brussels. According to Greek media, the Greek request aims to tackle the Refugee Crisis until March 7th.

   

  

   

  For one more time masks are fallen: the Wall Street Journal wrote on Friday:

  “Senior European officials are embracing the so-far taboo idea of cutting off the migrant trail in Greece, a step that they acknowledge could create a humanitarian crisis in the country, says a report in the Wall Street Journal.

   

  This so-called Plan B, floated until now only by Europe’s populist leaders, is a sign of rapidly waning confidence in other European Union policies to deal with the migration crisis—in particular in German Chancellor Angela Merkel’s game plan of relying mainly on Turkey to stem the human tide.”

  Apparently the EU are looking into the EU-Turkey Leaders Summit scheduled for March 7th. I saw on TV, German Chancellor Angela Merkel saying that “results of NATO mission have to be awaited, first.” NATO’s sea-monitoring mission has been officially launched in the eastern Aegean today.

  Should NATO’s mission fail and Turkey would show show much willingness for cooperation,  refugees and migrants will be keep coming form Turkey to Greece. “And this has to be stopped” the EU officials think and they argue that bottling up the migrants in Greece would be more manageable than having them stranded in poorer, non-EU neighboring countries in the Balkans.

  This is an odd EU-thinking, then none of the refugees or migrants plans to stay in FYROM or in any othe rnon-EU Balkan countries. The majority of them declares, they want to Germany or in Scandinavian countries.

  “Greece wouldn’t be the worst place to have a humanitarian crisis for a few months,” one EU official told WSJ, adding that the population there was much more refugee-friendly than those in the Balkans or Eastern Europe.”Four senior EU officials said that Greece, as an EU member state, could receive more bloc funding and other practical help to cope with the stranded migrants than its Balkan neighbors, where ethnic conflicts could flare up anytime. Once the message trickles through that migrants are stuck in Greece, the officials said the hope is that fewer people would attempt to come in the first place.”

  An evil plan smitten in devils’ rooms in Brussels, behind closed doors., by those EU “partners” who do not want to stand to their responsibilities. thus violating the sames rules and the same decisions have have signed and agreed upon.

   

  The European Commission Legal Departmental reportedly consider the border closure by Austria, Croatia and Slovenia as “illegal”.

   

  United Nations Secretary-General Ban Ki-moon expressed concern on Friday over the increasing number of border restrictions targeting migrants in the Balkans and said they ran contrary to the international refugee convention.

   

  The border rules in Austria, Slovenia, Croatia, Serbia and Macedonia “are not in line” with the 1951 convention “because individual determination of refugee status and assessment of individual protection needs are not made possible,” said UN spokesman Stephane Dujarric.

   

  It looks as if the EU and Commission will certainly tolerate the closure of borders. Unofficially. But they will do, for the sake of protecting “migrants get stuck in non -EU Balkan countries,” as the joke in Brussels claims.

   

  At the end of the Balkan Route, the truth is this: Austria’s domino-effect initiative for borders closure serves primarily Germany’s interests for fewer refugees and migrants. Mutti (translated as 'Mom' – implying Merkel as "mom of the nation") will keep polishing around her image as political correct leader with a vision.

  

  

  

  

  

• Military Would Revolt Against Trump, Former CIA Director Says

  Earlier today, we noted that America’s presumed candidate for the GOP nomination is busy retweeting Mussolini quotes.

  That’s not necessarily a reflection of an explicit desire to move America towards fascism.

  It’s not entirely clear that Donald Trump understands the movement he’s started. But America’s entrenched political establishment is now scrambling to understand how to deal with the Trump juggernaut and it’s not just politicians who are concerned. 

  Indeed, former intelligence officials now say the brazen billionaire could face a veritable security rebellion if he’s elected. 

  “I would be incredibly concerned if a President Trump governed in a way that was consistent with the language that candidate Trump expressed during the campaign,” Former CIA director Michael Hayden said, in an interview with Bill Maher. Hayden also says that the armed forces would simply refuse to follow Trump’s orders were he to be elected and follow through on his campaign promises.  

  Here’s what Hayden had to say about Trump’s promise to kill family members of ISIS: “God, no! Let me give you a punchline: If he were to order that once in government, the American armed forces would refuse to act. You cannot—you are not committed, you are not required, in fact you’re required to not follow an unlawful order. That would be in violation of all the international laws of armed conflict. There would be a coup in this country.”

  Would Trump face a military coup or would Trump simply commandeer the military? You decide. Here’s the clip: 

  

  

  

  

  

• Forward Guidance: The Road Map To Crazy Town

  Authored by Mark St.Cyr,

  One of the premier features that was to help markets interpret upcoming policy moves made at the Federal Reserve was the idea and implementation of: forward guidance. This new feature was enacted by the former Chairman Ben Bernanke. The reasoning? In a nut shell it was no more than a heads up to the financial markets of what the Fed. would do, and when. i.e., Hit this metric of X and the Fed. will do Y. So – position accordingly.

  Although that’s an extreme over simplification, in effect, that’s precisely what it was supposed to be when contrasted with one “Fed. talk” laden speech against another. This way the markets (as well as other central bankers and/or governments) could take solace (in theory) of not being adversely surprised by some sudden, unannounced, or unforeseen policy decision and announcement from a FOMC meeting.

  An example might be: “We’ll do X if Y is reached. However, if Y is not – one can take solace that we’ll stand pat until the next meeting.” Rather than leaving everything from A-Z a guesstimate in between. Why? Because the natural conclusion is when it comes to money: confusion, or guessing equals selling or, at the least, non-participation. i.e. Sitting on hands.

  Again, it was in 2012 this type of communication strategy was implemented by Ben Bernanke. Then, he himself, did the exact opposite. To wit:

  From The Economist™ in February of 2014:

  “IN DECEMBER 2012 Ben Bernanke, then chairman of the Federal Reserve, reached deep into the central banker’s bag of tricks and pulled out something novel. Using a new trick which became known as “forward guidance”, the Fed declared that it would not raise interest rates until America’s unemployment rate dropped to at least 6.5%, so long as inflation remained below 2.5%. In August 2013 the Bank of England followed suit. Mark Carney (pictured), its governor, promised to leave rates low until unemployment was down to at least 7%—again, so long as inflation and financial markets remained well-behaved. In both America and Britain, unemployment fell quickly toward the thresholds. Yet neither central bank reacted by moving to boost rates, leading critics to argue that forward guidance had failed and should be scrapped. Central banks are instead tweaking their guidance: the Bank of England will update its guidelines on February 12th, and the Fed may soon do the same.”

  As one reads the above you can’t help but be astonished. Again: “…the Fed declared that it would not raise interest rates until America’s unemployment rate dropped to at least 6.5%, so long as inflation remained below 2.5%.” How’d that work out? Yes, it’s a rhetorical question.

  Using just the aforementioned criteria given by the Fed. in 2012 as “to give guidance” we could go on to list a litany of similar examples. Never-minding how many FOMC meetings were held where this criteria was hit, and hit, and hit again – and a policy move of raising rates was ever done. Well, there was actually one move. What move you ask?

  Lower the criteria. 6 became 5, and now since we’re at 4.9. It’s not a number that means X,Y, or Z anymore. It’s now ___________(to be announced….maybe…and subject to change….definitely.)

  As confusing and obtuse many a Fed. dissertation has become. What has been even more confusing too me is the near zealot manner I’ve heard one economist after another state with surety they know, or can interpret, precisely what the Fed. will do next based on what the Fed. has communicated.

  It doesn’t matter if it’s some “next in rotation” guest economist, or their own resident “Chief economist.” The inclinations are always the same. i.e., “The Fed. will do this when that happens. And, that has yet to happen. So, those who say one should worry, or think different, just don’t know what they’re talking about and should be ignored.”

  If one puts aside all of the moving metrics and policy talk that happened during Mr. Bernanke’s tenure. How would one assess “the guidance” or the “communications for clarity” we now have emanating from not only the Fed., but also, central bankers globally? Crazy Town is the only thing that comes to my mind. (Hint: look to the SNB or BoJ for clues)

  The Federal Reserve itself has made so many pauses or “moving of the goal posts” since 2012 alone, there is not enough digital ink to list them all. While as of today under Ms. Yellen’s tenure it’s been communicated that those once aforementioned data points are now no longer as weight-bearing for policy moves as they once were. Now instead of unemployment data, or inflation data, we’re now “data dependent.” And “data” represents whatever the Fed. decides whether today, tomorrow, or right now. I guess 4.9% which once represented statistically full employment doesn’t mean what it once was. Unless they decide it does. Or – doesn’t. Maybe.

  Just look at the communication delivered at the latest FOMC presser that took place just this past December. The Fed. declared in a unanimous voting of the affirmative it was fiscally prudent to raise interest rates, even if it were ever so slightly, as to begin the path towards more normalized accommodation. This was all predicated on what everyone was made to believe not only “the data” but more importantly, “a fulfillment of their forward guidance.” For remember, that “forward guidance” was thwarted in August and delayed because “data dependent” morphed into “international developments.” There was no “guidance” for that one was there?

  As soon as the markets showed weakness following that “international development” that hit the U.S. developed markets in the form of a market selloff, The Fed reversed course and did exactly what it implied it would not do – and punted till the next meeting. All against a backdrop that “data” was not supposed to mean solely “market” data. Yet, that’s what the move implied as was interpreted. Whether rightly or wrongly. And no official “communique” was going to change minds regardless.

  And here we are just two months since and we’ve had one Fed. official after another insinuate future “rate hikes” are both on the table and off the table. While QE will not be forth coming – unless it’s needed, definitely, if and when. Maybe. But don’t count on it – unless you need too. I think.

  This is the near insane way one has had to look to monetary policy makers and try to both run a business, as well as for others – run a country. Having to decide what policy means today or, if it means today, what it meant yesterday. Then; try to formulate and put to work real business plans or national policies for growth based on current directives, insinuations, flip-flops, and more. This is not only frustrating – it borders on lunacy trying to even comprehend.

  This communicated confusion also helps to elicit precisely the greatest, most dangerous of monetary manifestations to come into fruition. Here is where companies, people, as well as governments won’t commit to anything other than: Nothing. Or, worse – sell everything. Which is the antithesis of what today’s Keynesian devotees are trying to manifest. This is what “forward guidance” has wrought: directives straight to “Crazy Town.”

  There is one more extreme example coming up that may show just how much central banks have lost any remaining credibility. Where participants of all stripes or markets will no longer heed, or wait, to see what move a central bank may take in the future. That event happens later tonight in the U.S. or Monday morning in Asia as the markets react to what many believed (and possibly positioned for) might be a watershed event for coordinated, along with sizable interventions, via the G-20 participants that concluded Saturday. Many were implying, and inferring, possible “Plaza Accord” styled accommodations.

  There was great enthusiasm expressed by many of those participants and inferred the same by the markets. Only problem? It seems once again it was a meeting of all talk – no action.

  Now we’ll just have to wait and see if the markets will act first and ask questions later once its realized it was they who were crazy to think anything other than jawboning would take place.

  

  

  

  

  

• Kuroda's NIRP Backlash – Japanese Interbank Lending Crashes

  Not only has the Yen strengthened and stocks collapsed since BoJ's Kuroda descended into NIRP lunacy but, in a dramatic shift that threatens the entire transmission mechanism of negative-rate stimulus, Japanese banks (whether fearing counterparty risk or already over-burdened) have almost entirely stopped lending to one another. Confusion reigns everywhere in Japanese markets with short-term interest-rate swap spreads surging and bond market volatility spiking to 3 year highs (dragging gold with it).

  As Bloomberg reports,

  The outstanding balance of the interbank activity plunged 79 percent to a record low of 4.51 trillion yen ($40 billion) on Feb. 25 since Bank of Japan Governor Haruhiko Kuroda on Jan. 29 announced plans to charge interest on some lenders’ reserves at the monetary authority.

   

   

  

   

  While Kuroda wants to lower the starting point of the yield curve to reduce borrowing costs and spur shift of funds into riskier assets, the interbank rate has fallen only about as far as minus 0.01 percent, above the minus 0.1 percent charged on some BOJ reserves. The swings on bond yields will make it harder for financial institutions to determine how much business risks they can take, weighing on lending in a weak economy even as they are penalized for keeping some of their money at the central bank.

   

  It will take at least another month until the market finds a level where many dealings are settled, as financial institutions face uncertainty over how the new policy affects monthly fund flows, said Izuru Kato, the president of Totan Research Co. in Tokyo.

   

  “Since past patterns don’t apply under the entirely new structure, financial institutions will take a conservative approach until the financing picture is nailed down,” Kato said. “If the funding estimate proves wrong, banks might lose by prematurely lending in negative rates. People are cautious and staying on the sidelines.”

  All this chaos has sent risk premia surging everywhere you look in Japan:

  Reflecting the confusion among traders about the unprecedented negative-rate policy, the one-month premium for one-year interest-rate swaps have surged, according to data compiled by Bloomberg.

   

  “The swaption market is reacting to the heightening volatility because players don’t know where Libor will settle,” said Naoya Oshikubo, a rates strategist at Barclays Plc in Tokyo. “One reason behind this is the fact that unsecured overnight call rates and general collateral repo rates aren’t falling as intended by the BOJ.”

  And as Japanese bond volatility surges, it seems demand for gold rises (as perhaps VaR restrictions of Japanese bank balance sheets force a rotation to relatively lower risk assets)…

  

   

  And while the last week has seen a G20-Hope-fueled lull in the collapse,

  “It is still uncertain how deep into the negative the overnight call rates will sink,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “It won’t settle until funding flows in the new scheme become clear. That may pressure volatility to stay high for government bonds.”

  Simply put, “The focus will be how much money these institutions facing negative rates will lend out in the market,” or how little.

  

  

  

  

  

• The G-20 Meeting Was A Big Disappointment: What Happens Next

  Exactly one week ago, when BofA’s Michael Hartnett explained what global capital markets need to rebound from their recent doldrums, he laid out what he sees are the world’s two biggest problems:

  • Problem 1: US economy in “bad Goldilocks”, i.e. US economy not hot/strong enough to lift global GDP & EPS; but not cold/bad enough to induce global coordinated response
  • Problem 2: global policy-maker rhetoric in recent days shows “coordinated innocence” not stimulus, all blaming global economy for weak domestic economies (“Overseas factors are to blame”…Japan PM Abe; “drag on U.S. economy from greater-than-expected-slowdown in China & other EM economies“…FOMC minutes; “increasing concerns about the prospects for the global economy”…ECB Draghi; “the change in China’s growth rate can be attributed in part to weak performance of the global economy”…PBoC)

  That recaps the problems; as to what the markets need he said the following:

  “We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions.”

  It was the expectation of a “massive policy stimulus” out of this weekend’s G-20 that unleashed last week’s furious short squeeze on concerns that shorts could be steamrolled by some G-20 surprise, as remote as it may have been. Citi’s Brent Donnelly confirmed as much: “the relevant question now is whether or not this 160-handle rally in SPX (!) is partially attributable to shorts squaring up ahead of the G20 meeting.” His answer: absolutely.

  Indeed, as we reported yesterday, the G-20 has come and gone and has been a total flop, which was also not exactly a surprise: As Hartnett also said one week ago, “stabilization of “4C’s” (China, Commodities, Credit, Consumer) allowed SPX 1800 to hold/bounce to 1950-2000; weak policy stimulus in coming weeks could end rally/risk fresh declines to induce growth-boosting policy accord.“

  Donnelly was just as blunt: “I would say the rally in the past two days has had extra momentum because of G20 and now shorts should be looking to reestablish—so I think stocks should trade weak from here into Monday.”

  Worse, it was not just that the G-20 disappointed; it actually left everyone even more confused than going into the weekend:

  Ambiguity on dealing with exchange rate swings also left market participants guessing. The policymakers reiterated that such volatility “can have adverse implications for economic and financial stability. At the same, they forswore “competitive devaluations” and vowed not to “target our exchange rates for competitive purposes.” It isn’t clear from these two sentences whether Japan has license to try to reverse the yen’s gains against the dollar since the start of the year, assuming it can stop the run-up.

  Ok, so the G-20 not only disappointed it also left market watchers scratching their head making the case for further downside more credible, but what about the lingering risk of another major central bank intervention in the coming days: after all on deck as the BOJ’s meeting as well the the ECB.

  The problem for the BOJ is that after it pulled the ridiculous NIRP stunt, it may have no political capital left for further surprises, and certainly no ammo. According to the Nikkei, “Bank of Japan Gov. Haruhiko Kuroda assured reporters on Saturday that no fellow G-20 officials had voiced objections to the BOJ’s negative interest rate policy. But Jeroen Dijsselbloem, the Dutch finance minister and president of the Eurogroup of eurozone finance chiefs, said “there was some concern that we would get into a situation of competitive devaluations” as a result of the BOJ’s move.

  Osamu Takashima at Citigroup Global Markets Japan said that “Japan’s policy of trying to lift its economy by moving the yen in a weaker direction with monetary policy isn’t very welcome.”

  He added that if the G-20 statement is seen as a deterrent against fresh monetary stimulus from the BOJ, another bout of yen appreciation may follow, and with it a renewed sell-off in Japanese stocks.

  As the Yen appreciates, that would imply further selling in the S&P as more carry trades are forced to be unwound, especially since the market finally understands what Hartnett really meant when he said that “we remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response begins.”

  In other words, after the squeeze, now the next leg lower can start – one which prompts central banks to intervene. And since the BOJ is now sidelined, it means the ball is entirely in the court of the ECB. This is how Citi’s head of FX Steven Englander lays out the next steps:

  1. Policymakers are more likely to blame bad luck than policy ineffectiveness for the way in which currencies move. They will be mindful of concerns on banks from negative rates and flat curves, and will probably find some way of cushioning banks from the impact of their moves.
  2. The fear of policy ineffectiveness has led investors to downgrade both the impact of future policy moves and the probability of future policy moves. If central banks come back with further eases, with some provisions to cushion the impact on bank profits, there will be a partial bounce back in asset markets. Financial markets may still respond, even if the expected impact on final demand on inflation is limited.
  3. The ECB is in focus. EZ is undershooting on growth and inflation, and ECB President Draghi has been impassioned on the need to provide more stimulus. If they lowball or grudgingly meet expectations, we could face another December 4 move because market participants will see it as the equivalent of a ‘last ease in the cycle announcement’, basically ECB throwing in the towel. If they move aggressively (and take measures beyond vanilla QE and 10bps on rates), they will catch market off guard and unwind the view that policymakers see themselves as powerless.

  In other words, the next big move in the market is now entirely in Mario Draghi’s hands.

  

  

  

  

  

  

• Philadelphia – Heads The Union Wins, Tails The Taxpayers Lose

  Submitted by Jim Quinn via The Burning Platform blog,

  More Than 30 Blocks Of Fiscal Irresponsibility

  “Democracy is a pathetic belief in the collective wisdom of individual ignorance. No one in this world, so far as I know—and I have researched the records for years, and employed agents to help me—has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.” – H.L. Mencken, Notes on Democracy

  I’ve written dozens of articles about the 30 Blocks of Squalor over the years. The 30 blocks are essentially from 69th Street to 39th Street encompassing the wretched potholed route from unsafe Upper Darby through the killing fields of West Philly. The fine union government workers in the Streets Department have consistently maintained Chestnut Street in a constant state of disrepair. Not that drivers notice.

  

  When there is an accident on the Schuylkill Expressway in the morning I’m forced to run the 30 Blocks gauntlet down Chestnut Street. I’ve had to do it a few times in recent days. The expletives flowed in waves as I hit four unmarked craters in the center lane. These were not the common everyday West Philly potholes that pock the landscape like it’s the moon. At least if you see a local resident fishing in the pothole, you can avoid it.

  

  These four separate craters were man made, or to be honest, created by a bunch of government union drones, not refilled with blacktop or marked with an orange cone. The question is whether this is utter incompetence, blatant indifference, spite or a business transaction between government drones and local tire dealers. Luckily, government traffic engineers have been too swamped to properly time the lights on Chestnut Street for the last 20 years, so no one can travel faster than 15 mph anyway. Government lessens the pain of their ineptitude through their ineptitude in another area. They call that a win win in Philly. As the light at 57th and Chestnut remains on blinking yellow for a week, it makes you wonder what pressing issues are occupying the fine highly compensated union Streets employees.

   

  I’ve now been navigating the crumbling ghetto of West Philly for the last ten years. I can without equivocation state I have not seen one new private business open its doors on Chestnut Street, in Mantua, or any other area I travel in West Philly during the entirety of those ten years. The existing businesses – nail and hair salons, fast food joints, bars, liquor stores, porn video outlets, smoke shops, car washes, more bars, and hysterically tax return offices (earned income tax credits) – haven’t invested a dime in keeping up their appearances. Maybe they used all their spare cash to sure up the bars on their windows and the roll down steel gates necessary to keep the upstanding neighborhood honor student juveniles from having a little fun.

  It appears there is an existential shortage of paint, hammers, garbage bags, wedding rings, and employed upstanding men taking responsibility for the children they father in West Philly. There is plenty of yellow crime scene tape, as West Philly accounts for a significant portion of Philadelphia’s 280 annual murders (up 13% in 2015). Houses originally well built in the 1950s and with some upkeep would still be fine homes, are in disrepair, with collapsing porches, dilapidated gutters and roofs, crumbling sidewalks, boarded up windows, and satellite dishes on every one.

  

  The lucky end units usually have a mural of black people doing great things, with trash, garbage and overgrown weeds underneath and black people not doing great things shuffling along the streets.

  

  As you witness the crumbling infrastructure of West Philly, with water mains bursting on a regular basis, streets sinking, houses falling down during heavy rainstorms, boarded up rat infested hovels housing drug addicts, and schools resembling prisons, it leaves you pondering how it came to this and why the fifty year War on Poverty left the people in these neighborhoods mover impoverished. I don’t blame the people stuck living in West Philly. I blame the corrupt politicians who have run the city for the last sixty years.

  Liberal solutions based upon welfare handouts, union government workers, idiotic solutions sold by slimy politicians and high taxes have combined to create a morass of uneducated, unmotivated, unmarried people who live in squalor created by the very politicians they have been voting for over the last six decades. The city has been under the complete control of the Democratic Party the entire time.

  The only things built in West Philly in the last ten years are government boondoggle projects using taxpayer money. There is a new Social Security Administration building so it’s easy to apply for SSDI because you’re overweight and depressed. There are other government social services buildings to dole out various forms of welfare to the plantation recipients. The welfare slaves don’t even notice their chains.

  The government slave owners provide the bare minimum of sustenance to their ghetto slaves in return for their unquestioned voting support in elections. Obama received 98% of  West Philly votes in the last election. There is no need for private businesses, new jobs, marriage (less benefits), personal responsibility, sense of community, education, or self respect. Government knows best and has all the solutions, until they run out of producers to tax into oblivion.

  I’ve previously written about the $24 million 683 parking spot garage built on top of a perfectly fine ground level parking lot at the Philadelphia zoo, totally paid for by taxpayer funds and government debt. At least it was built at a 30% union construction premium. I drive by this testament to government pork every work day. It is closed in the morning. It is closed at night. It is empty the entire winter. It is unoccupied at least 75% of the time during a given year. It will never be paid off by the minimal parking fees collected.

  The privately owned parking garages in Center City are gold mines. Central Parking is highly profitable. This government created white elephant was unnecessary. The zoo gets busy on a few nice weather weekends all year. They had sufficient parking and overflow parking. It was built because the broke Federal government and the even more broke PA government forked over $16 million of taxpayer funds to create some temporary union construction jobs. It’s a complete waste of taxpayer money.

  And then there is the ongoing saga of the Section 8 gated estate called Mantua Square, a $28 million, 101 townhouse, 8 store front testimonial to Keynesian idiocy that sits in the middle of an Obama Keystone Zone. As you cross the bridge on 34th Street to enter the Mantua section of West Philly, there are beautiful murals on the bridge.

  

  There are murals of colorful flowers along the entire bridge.

   

  I guarantee you they are the only flowers you’ll ever see in Mantua. Weeds, diseased barren trees, garbage and crumbling sidewalks is what you get in West Philly, along with an occasional dead body. Mantua Square was one of Obama’s shovel ready projects funded by his $800 billion porkulus package in 2009. Every dime came from taxpayers. It was touted as a game changer for Mantua. We were told businesses would open in the 8 pre-built retail spaces and other businesses would follow. A glorious revitalization would materialize due to brilliant government apparatchiks spending your money.

  It is now 5 years later and not one storefront is occupied by a single business. Not one black entrepreneur has used their Philadelphia public school education to create a viable business and the jobs that would follow. Of course, no one living at Mantua Square would apply for a job anyway. They would lose their welfare benefits and free housing. Plus it’s only a short walk to the local church handing out free food every Thursday morning. The best part is that union construction workers spent the last six months replacing the facing of all 101 townhouse units due to shoddy union construction in the first place. No biggie. Just another couple million for the taxpayers to fund. The motto of government selected union construction firms in Philly is: “We’re slow, we’re incompetent, but at least we’re the most expensive”.

  Did I mention this is gated Section 8 housing, with each unit costing over $250,000, when the median value of the hovels surrounding it is $36,000? The cars parked around this government white elephant include BMWs, Cadillacs, Lexus, and Ford F150s. I also see garbage strewn on the sidewalks, but as I pass by at 7:30 am on the way to my job I don’t see anyone rushing out of their luxury townhouses because they are late for work.

  The neighborhood is still a dangerous, drug infested, decaying shithole because one off government created projects do not change the culture or the people. More welfare promotes more dependency. Young black men get murdered in that neighborhood. A young child was raped on the way to school in that neighborhood. The school across from Mantua Square has been muraled, but the kids inside are unruly and uneducated.

  

  Every public school in the city has metal detectors to cut down on the in school murders. They can do that out on the streets, where it belongs. And despite six decades of failed policies, the politicians, teacher’s union, and liberals who run the city insist more taxpayer money will fix everything. One problem. They’ve run out of other people’s money. Maybe the money spent on useless parking garages and Section 8 estates should have been spent replacing water pipes, streets, and encouraging businesses to open in the city through lower taxes and regulations.

  I stumbled across an article in the Financial Times the other day revealing why Philadelphia’s infrastructure is crumbling, with absolutely zero possibility of reversing the downward spiral. I find it fascinating a foreign publication had to uncover the ugly truth, while the liberal rag Phila. Inquirer is completely silent on the issue. They just spout the mantra of how the Feds and PA need to give Philadelphia more money. It’s always for the children. The hundreds of billions poured into the public education system in this country over the last decade has been a complete waste of time, mainly because a huge portion of the money doesn’t go towards education, but bloated pensions and administration costs.

  More mediocre teachers, more government control, more social engineering, more free breakfasts and lunches, more catchy slogans and more promises have achieved steady declines in SAT scores across the board. The next solution is to phase out SAT scores. Measuring failure isn’t allowed in our politically correct, trophy generation, safe spaces world. Reporting declines in scores on a test that has been an accurate predictor of college success for generations is a micro aggression against the intellectually stunted morons being matriculated through the government run public education system. The $14,000 to $20,000 per student per year spent by the taxpayers across this country just isn’t enough according to those of a liberal ilk. The children would be smart if we just upped the ante by another $2,000 per kid. They’d hire more below average education majors into the teacher’s union. That’s a can’t miss solution.

  

  If you think the national scores are atrocious, and they are, wait until you see the scores from the Philadelphia School District. The students who took the SAT from Philadelphia public schools “achieved” these averages:

  Reading – 398 (PA average was 480)

  Math – 405 (PA average was 483)

  It gets even better. Only the cream of the crop even took the exam. There were 25,768 students in the Phila. public school 11th and 12th grades. Only 5,172 students even took the exam, or 20%. Based on their scores, they probably wouldn’t know how I arrived at 20%. To paraphrase George Carlin, when you see how stupid the 20% SAT takers are, just imagine how stupid the 80% who didn’t take the exam must be. The SAT score predicts your possibility of achieving a passing grade in college.

  Based on the scores of the Phila. students, less than 10% of high school seniors are capable of succeeding in college. To prove how warped our higher educational system has become, there were 8,439 graduates and 54% of them enrolled in college. If you were wondering where the hundreds of billions in taxpayer funded student loans are going – here’s your answer. It’s getting doled out to functional illiterates with zero chance of succeeding in college. There’s a 100% chance you will end up paying for the billions in student loan defaults.

  Despite a $2.8 billion annual budget, with over $1 billion coming from the State and Feds, the Phila. public school system is a complete and utter disaster. It is so bad the State had to seize control a few years ago by forming a commission to manage it. The buildings are dilapidated, rat infested, filled with mold, and need to be patrolled by police. Teachers are assaulted, principles fake test scores, students brawl, the learning materials are pitiful and little or no learning occurs. It begs to question, where did all the money go? Considering there are only 8,400 teachers and 300 principals, one wonders what the other 9,000 district employees actually do.

  There are 199,000 public school students, but only 134,000 are in the Phila. district schools. The other 65,000 are in charter schools. The 16 to 1 student to teacher ratio equals the national average. There were 212,000 students in 2003 with less teachers. More government employees were hired even though student enrollment declined 6%. The teacher’s union doesn’t care about the children. They care about getting their teachers as much as possible, and they’ve done a phenomenal job getting below average teachers gold plated benefits and pensions. The government unions use their voting power over the Democrat politicians to shakedown the taxpayers.

  

  It’s a perfect storm of governmental incompetence, union greed, political corruption, parental disinterest, societal disintegration, and poor life choices, creating the downfall of Philadelphia and other urban enclaves around the country. The Phila. public school system consists of 80% minorities (60% black, 20% hispanic). Over 75% of the population in West Philly is black.

  Over 71% of the black kids in West Philly are born out of wedlock. Only 17% of all households are occupied by married couples, while 40% are single mother households. The black men of West Philly are the primary culprits for this ongoing cesspool of ignorance, dependence, crime, and hopelessness. The disregard and scorn for the institution of marriage is a major reason for the median household income wallowing at $26,000, over 50% below the national average.

  You get more of what you incentivize and the warped welfare policies in this country incentivize the people of West Philly to not get married and not work. So they don’t. The best method to succeed in life is through higher education. It leads to higher lifetime income. Children from married households do better in school. Married couples also have a much better chance of producing higher household income. Marriage increases the odds of success tremendously for the married couple and their children. The residents of West Philly are caught in an inescapable cycle of poverty, exacerbated by the government welfare policies supposed to help them.

  The Financial Times article details why spending on essential infrastructure needs has been ignored and why the future is even bleaker. Government worker pension funds across the nation are in deep trouble, with no chance of honoring their promises. Public pension plans have promised to pay out $4.7 trillion more than they have on hand. Every U.S. citizen would have to pitch in $15,000 to pay every government worker’s promised pension. It’s not gonna happen.

  BlackRock, the world’s largest money manager, expects 85% of U.S. public pensions to fail over the next three decades. Certain state pensions are ridiculously underfunded, with Illinois only able to cover 22% of its promised payments, Connecticut only 23%, and Kentucky only 24%. The Central States Pension Fund, which manages almost $18 billion for 400,000 workers in 37 states recently was forced to cut benefit payments by as much as 61%. Retirees currently getting monthly checks for $3,000 will only get $1,180 now.

  This will happen to every government pension fund in the country because math is hard. Politicians promised government union workers more than they could ever deliver in order to secure their votes. Any government worker counting on these promises from corrupt politicians should acquire a taste for cat food and get used to setting their heat at 55 degrees in the winter. The City of Philadelphia has one of the worst pension schemes in the country. It is mathematically unsustainable, but no politician or union boss would ever utter those words to the citizens of their city. They’ll just lie until its too late.

  And it’s even worse than the published numbers. According to its actuaries, the City pension owes government workers $10.5 billion, with only $4.8 billion of assets. The annual return assumption of 7.5% is ridiculously overstated. With bonds and stocks priced to deliver 0% returns over the next ten years, the pension is really underfunded by at least $8 billion and not the reported $5.7 billion. The retirement payouts to the 64,000 current and former government employees will eventually be slashed dramatically. It’s just a matter of time.

  According to FT:

  The fund lost almost 20% in 2009 in the midst of the financial crisis. Overall, however, it has performed well, returning 7.4% a year on average since 1995, making its huge deficit all the more surprising. The pension contributions are eating up more and more of the city’s budget, leaving less money to spend on services such as the fire brigade, police and recycling. The cost of pension contributions has increased from 6% of the city’s budget to 15% over the past decade.

  The contractually required pension contributions are on automatic pilot to consume 20% of the city budget over the next five years, and the plan will still be underfunded by 60% to 70%. The average pension plan in the U.S. is “only” underfunded by 25%. Rather than deal with reality, city politicians have funded the pension deficits with higher sales taxes and cigarette taxes, further punishing their poorest citizens. As pensions account for an ever larger share of the city budget, the infrastructure of the city and schools will continue to crumble. Businesses and the producer class will continue to flee the city as taxes are relentlessly raised to honor union worker contracts. The downward spiral will accelerate.

  FT was flabbergasted by the ridiculous nature of a plan created by corrupt politicians and greedy unions:

  Despite the strain the pension fund puts on the city’s services, the scheme paid out a bonus to its members last year. Under the city’s rules, when the fund performs better than its target, some retirees get a bonus. In 2014, the scheme returned 15.7%, double its target. The bonus payout is one of the few topics Mr Dubow seems reluctant to discuss — notably whether it is controversial to pay bonuses to retired members when the scheme has less than half the money it needs for those actively paying into it. He cautiously responds that this is a requirement of the fund and will not discuss the matter further.

  Heads the union workers win, tails the taxpayer loses. When the market does well select high level retirees get bonus payments, but when the market performs below expectations there is no penalty for those same retirees. The fiscal debacle destroying Philadelphia was willfully constructed over decades by corrupt politicians, incompetent bureaucrats, greedy government unions, and a foolish citizenry who believed the lies and were too ignorant to do the math. A city run by welfare redistributionists eventually runs out of other people’s money. The wisest citizen in Philadelphia history understood the danger of creating a welfare culture 250 years ago. He was a big supporter of education (founded the University of Pennsylvania) and lifting yourself up by your bootstraps to succeed in life. Too bad his wisdom was not heeded.

  “I am for doing good to the poor, but…I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed…that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”

  Benjamin Franklin

  

  

  

  

  

• "Trump Must Be Stopped" Plead 'The Economist' And CFR As Financial Establishment Panics

  It’s one thing for the republican establishment to throw up all over the candidacy of Donald Trump: frankly, the GOP has not been relevant as a political power ever since Boehner started folding like a lawn chair to Obama’s every demand just around the time of the first US downgrade, and as such what the Republican party – torn apart and very much irrelevant as the best of the “establishment” GOP candidates demonstrate – thinks is largely irrelevant.

  However, when such stalwart titans of financial establishmentarianism as the Council of Foreign Relations and “The Economist”, who until now had been largely ignoring Trump’s ascent in the political hierarchy finally unleash an all out assault and go after Trump on the very same day, you know that the flamboyant, hyperbolic billionaire has finally gotten on the nerves of some very high net worth individuals.

  Below are excerpts from the panicked lamentations of the Economist as written down this weekend in “Time to fire Trump“

  * * *

  The front-runner is unfit to lead a great political party, let alone America

   

  

   

  IN A week’s time, the race for the Republican nomination could be all but over. Donald Trump has already won three of the first four contests. On March 1st, Super Tuesday, 12 more states will vote. Mr Trump has a polling lead in all but three of them. Were these polls to translate into results, as they have so far, Mr Trump would not quite be unbeatable. It would still be possible for another candidate to win enough delegates to overtake him. But that would require the front-runner to have a late, spectacular electoral collapse of a kind that has not been seen before. Right now the Republican nomination is his to lose.

   

  When pollsters ask voters to choose in a face-off between Mr Trump and Hillary Clinton, the Democratic front-runner wins by less than three percentage points. Mr Trump would have plenty of time to try to close that gap. An economy that falls back into recession or an indictment for Mrs Clinton might do it for him.

   

  That is an appalling prospect. The things Mr Trump has said in this campaign make him unworthy of leading one of the world’s great political parties, let alone America. One way to judge politicians is by whether they appeal to our better natures: Mr Trump has prospered by inciting hatred and violence. He is so unpredictable that the thought of him anywhere near high office is terrifying. He must be stopped.

  … just in case there was any confusion what The Economist thinks.

  If the field remains split as it is now, it is possible for Mr Trump to win with just a plurality of votes. To prevent that, others must drop out. Although we are yet to be convinced by Mr Rubio, he stands a better chance of beating Mr Trump than anyone else. All the other candidates—including Mr Cruz, who wrongly sees himself as the likeliest challenger—should get out of his way. If they decline to do so, it could soon be too late to prevent the party of Abraham Lincoln from being led into a presidential election by Donald Trump.

  And then there is the Council of Foreign Relations’ Benn Steil with “Selling America Short” of which sections have been excerpted below:

  The country would cease to be great under a President Trump

   

  Following his primary victories in New Hampshire, South Carolina, and Nevada, Donald Trump has established himself as the clear frontrunner for the Republican presidential nomination. He has done so offering grandiose slogans — He’ll Make America Great Again! He’ll have us win so much we’ll get bored with winning! — and precious little in specifics. He has said, for example, that he would repeal Obamacare, without saying a word about what would replace it — beyond promising that his health program would be “terrific” and “take care of everyone.”

   

  * * *

   

  If Trump were to order the U.S. military to act as he suggests, the likely result would be a crisis in civil-military relations. Many military personnel would refuse to carry out orders so blatantly at odds with the laws of war; soldiers know that they could face prosecution under a future administration. If soldiers were to do as President Trump ordered, moreover, terrorist organizations would have a new recruiting pitch with the world’s Muslims — the need to counter American barbarism.

   

  * * *

  The radical changes that Trump proposes are all the more dangerous because he is so singularly ill-equipped to manage the resulting turmoil. This is a candidate, after all, who doesn’t know the difference between the Kurds and the Quds Force or have any idea what the “nuclear triad” is. Nor has Trump so far made good on his pledge to attract “top top people” to help him run things; he has still not unveiled a campaign foreign policy team in spite of months of pledges to do so. In any case, advisers cannot make up for a president’s ignorance and prejudice; presidents always get conflicting advice, and it is their job, and their job alone, to make the most difficult judgment calls in the world.

   

  Trump has already done considerable damage to America’s reputation with his crude, bombastic, and often ugly rhetoric. American standing, as measured both in “soft power” and more traditional realpolitik terms, would suffer far more if he were to become commander in chief. A Trump presidency threatens the post-World War II liberal international order that American presidents of both parties have so laboriously built up — an order based on free trade and alliances with other democracies.

   

  His policies would not make America “great.” Just the opposite. A Trump presidency would represent the death knell of America as a great power.

  So just whose nerves has Trump gotten on?

  Here is a summary of the current and honorary directors of the CFR, who basically double down as a ‘who is who’ list of everyone relevant in modern finance:

  • Carla A. Hills
  • Robert E. Rubin
  • David M. Rubenstein
  • Richard N. Haass
  • John P. Abizaid
  • Zoë Baird
  • Alan S. Blinder
  • Mary Boies
  • David G. Bradley
  • Nicholas Burns
  • Steven A. Denning
  • Blair Effron
  • Laurence D. Fink
  • Stephen Friedman
  • Ann M. Fudge
  • Timothy F. Geithner
  • Thomas H. Glocer
  • Stephen J. Hadley
  • Peter B. Henry
  • J. Tomilson Hill
  • Susan Hockfield
  • Donna J. Hrinak
  • Shirley Ann Jackson
  • James Manyika
  • Jami Miscik
  • Eduardo J. Padrón
  • John A. Paulson
  • Richard L. Plepler
  • Ruth Porat
  • Colin L. Powell
  • Richard E. Salomon
  • James G. Stavridis
  • Margaret Warner
  • Vin Weber
  • Christine Todd Whitman
  • Daniel H. Yergin
  • Madeleine K. Albright
  • Martin S. Feldstein
  • Leslie H. Gelb
  • Maurice R. Greenberg
  • Peter G. Peterson
  • David Rockefeller

  And here are the Trustees and the Board of The Economist:

  • Baroness Bottomley of Nettlestone PC, DL
  • Tim Clark
  • Lord O’Donnell CB, KCB, GCB
  • Bryan Sanderson
  • Rupert Pennant-Rea
  • Chris Stibbs   
  •  Sir David Bell   
  • John Elkann   
  • Brent Hoberman   
  • Suzanne Heywood   
  • Zanny Minton Beddoes
  • Baroness Jowell
  • Sir Simon Robertson
  • Lady Lynn Forester de Rothschild

  It is the fact that practically every member of the ultra high net worth establishment and “0.01%” loathes Trump with a passion, that he may be just a few months from claiming the US presidency.

  

  

  

  

  

• Ukraine Collapse Is Now Imminent

  Via GEFIRA,

  Two years have passed since Yanukovich was deposed and, as it turns out, another ruthless clan of oligarchs has taken power. No wonder then that Ukraine is heading for a new wave of violence and chaos. Oligarchs are fighting each other, the IMF is pulling out of the country, officials issue laws and regulations only to see them repealed within a day or two by others, and raided European companies are leaving the country after being robbed by the so-called pro-Brussels oligarchic elite. 

  It was evident from the beginning that the US and NATO-sponsored power transition was doomed to fail. Prime Minister Yatsenyuk made no secret on his personal website about his principal partners, NATO and Victor Pinchuk’s foundation. Victor Pinchuk is a link between the Ukraine corrupt oligarchic establishment and the Western political elite. In 2005, the BBC depicted him as a paragon of Ukraine’s kleptocracy:

  “Ukraine’s largest steel mill has been bought by Mittal Steel for $4.8bn (£2.7bn) after an earlier sale was annulled amid corruption allegations.

   

  The Kryvorizhstal mill was originally sold to the son-in-law (Mr. Pinchuck) of former President Leonid Kuchma for $800m.

   

  It was one of the scandals that sparked the Orange Revolution and propelled President Viktor Yushchenko into power.")

  Directly after the power transition, European leaders understood that the situation in the Ukraine was unmanageable, which we know from a confidential telephone conversation between Minister Paet (Minister of Foreign Affairs of Estonia) and Mrs. Ashton (High Representative of the Union for Foreign Affairs and Security Policy) that became public. Both politicians understood that the Maidan protesters had no trust in the politicians who formed the new coalition. Mr Paet said, “there is now stronger and stronger understanding that behind snipers it was not Yanukovich, but it was somebody from the new coalition." Their conversation makes it clear that both European politicians understood that, contrary to the official statements coming from Brussels, Europe has no solution for Ukraine’s problems and no trust in its new leaders.

  Petro Poroshenko, one of the oligarchs, became the fifth president. In line with his predecessors, he had amassed an astonishing personal wealth by mixing politics and business on behalf of the Ukraine population. He started his career under the notorious President Kuchma and served as a minister under deposed President Victor Yanukovich. One can hardly imagine a more troubled new president for a country that has to reform itself and get rid of corruption.

  In 2014 Brian Bonner, the Kyivpost chief editor, wrote: “Allowing prosecution of Kuchma (concerning the murder of a journalist) is acid test for whether Poroshenko will put national interests above his own.". Asking Poroshenko to “kill” his close friend and crony, former President Kuchma and the father-in-law of the powerful Pinchuk is a dramatic plea by the chief editor aimed at forcing President Poroshenko to show whose side he takes. Poroshenko’s answer came quickly: he rewarded Kuchma with a top position in the Minsk negation team.

  Within months after the power transition, investigative journalist Tetiana Chornovol, who lead an anti-graft body, quit, calling her time in the government “useless” because there was no political will to conduct “a full-scale war" on corruption.

  In the two years that followed rumour of ongoing corruption has not ceased. For Poroshenko and his fellow oligarchs, the biggest threat is not Putin and the separatists in the East, but the pro-Ukraine militia that only on paper were merged with the Ukraine army.

  The militia regards the Western-backed oligarchs as the second biggest threat to the Ukrainian nation. We believe the oligarchs are the primary cause of the rot in Ukraine’s government.

  Meanwhile, the Brussels elite is trying to sell the Ukraine 2014 power grab and the resultant association treaty as a way to help Ukraine to overcome its political corruption.

  The Dutch government wrote in its communique to its citizens: “This cooperation gives Ukraine a chance for a better future. The country wants to become a genuine democracy, without corruption and with a wealthy population. The European association treaty is the foundation for the national reforms.”

  Maybe this is the intention of many naive European politicians, it is not the intention of the Ukrainian elite who under Poroshenko consolidate their power. The Swiss-based company Swissport, a leading airport service company, and its French investors learned this the hard way.

  In 2012 the UK-based logistic website the “theloadstar” wrote:

  “Swissport, the Swiss ground handler stands to lose some $8m in assets in the Ukraine while other foreign investors could shun Ukraine, following an attempt to forcibly strip the company of its majority stake in Swissport Ukraine.

   

  In a move alleged to be ‘corporate raiding’, an increasingly common phenomenon in the country, 30% shareholder of Swissport Ukraine, Ukraine International Airlines (UIA), has claimed that Swissport International (SPI) violated its minority rights – a “baseless” allegation, according to the handler. During interim court proceedings the judges were changed twice – at the very last minute – before the hearings.”

  During the reign of Yanukovich, Kolomoisky (Poroshenko ally) try to strip Swissport from it assets. It did so by forcing the company to sell its multi-million majority stake for 400.000 Euro, using the corrupt Ukraine administration and the justice system. We cannot blame the company that it believed its problem was solved in 2014. The Washington and Brussels elite presented the new Kiev government as a tool in the fight against inherited Ukrainian corruption. During 2014 Swissport seems to have fought a successful battle against injustice. But at the end of 2014, the highest judicial body in Ukraine ruled that the company had to sell its multi-million investment to Kolomoisky for 400.000 dollars. The company said that it never received the 400.000 Euro from Mr. Kolomysky.

  Ihor Kolomoiskyi is the oligarch President Poroshenko installed as governor of Dnepropetrovsk. That Kolomoisky enjoyed the full protection of Poroshenko became apparent as he was not prosecuted after he had orchestrated an armed raid on UkrTransNafta Ukraine state-owned oil firm. To spare President Poroshenko the embarrassment, Kolomoyskyi offered his resignation.

  Ihor Kolomoiskyi is the founder of the Brussels-based European Jewish Parliament that served to increase his influence in Brussels. A worrisome sign that Ukraine’s political rot is spreading into the European Union.

  Swissport raid and forceful eviction from Ukraine was an embarrassment for those who try to uphold the illusion Ukraine was in the process of becoming a genuine democracy free of corruption.

  It could hardly be a surprise that a year after Kyivpost publication that Swissport had left Ukraine, Aivaras Abromavi?ius, Minister of Economics in Poroshenko’s cabinet and one of Washington’s principal allies in Kiev resigned.

  After Abromavi?ius it was Deputy Prosecutor General that resigns due to unstoppable corruption. 15 February Deputy Prosecutor General Vitaliy Kasko wrote in his resignation letter:

  “…This desire is based on the fact that the current leadership of the prosecutor’s office has once and for all turned it into a body where corruption dominates, and corrupt schemes are covered up. Any attempts to change this situation at the prosecutor’s office are immediately and demonstratively persecuted.

   

  Lawlessness, not the law, rules here…..”

  A day later General Prosecutor Victor Shokin, who analysts say, is an ally of President Poroshenko, has to quit. Viktor Shokin agrees to step down after President Poroshenko asked him to leave office Western leaders and reform-minded Ukrainian officials have long been calling for Shokin’s resignation.

  At the same time, Ukraine headed for a standoff between its two most powerful politicians after Prime Minister Arseniy Yatsenyuk had defied President Petro Poroshenko’s call for his resignation and defeated a no-confidence motion in parliament.

  The current chaos in Kiev makes it for the IMF extremely hard to keep Ukraine funded. Brazil’s IMF Director already in 2014 urged not to bend rules for Ukraine. Ukraine had failed the IMF twice before. There is now a sense of panic in Kiev, and so Ukraine leaders start to issue opposite orders. The Central Bank Governor’s ban on money exchange was repealed immediately by Yatsenyuk.

  The situation of the population deteriorates rapidly as Ukraine’s currency devalues fast and bond yields spike. Companies start to understand that direct investment can disappear overnight as raided foreign companies are forced to leave the country. Protesters take over Hotels in Kyiv and return to Maidan to demand the resignation of the Ukraine rulers who came to power with the support of Washington and Brussels. Yatsenyuk now becomes a liability for its partner NATO.

  It is a just matter of time before the Ukraine nationalistic militias will take power, resulting in a definite split of the country. Poroshenko can postpone the people final verdict by reviving the war in the east, but in the end, he can not escape the day of reconning.

  

  

  

  

  

• China's Housing Bubble Is Back: Locals Wait In Line For Days To Flip Houses

  Back in early 2014, we warned that the Chinese housing bubble has burst, promptly followed by official confirmation by China’s National Bureau of Statistics which showed that in the subsequent several months Chinese home prices and transactions plunged. Since then, however, China – whose economy has been on a steep downward spiral – has desperately scrambled to reflate this most important to its economy bubble, because as a reminder in China three quarters of all household assets are in Real Estate…

  

   

  … despite first suffering the bursting of a shadow debt bubble and then its stock market doing the same.

  Still, because in China where there is an excess $30 trillion in closed liquidity (due to China’s closed capital account and outbound capital controls) it has long meant that all that happens when one bubble bursts, is to create another asset bubble, which then bursts and the original bubble is again reflated.

  Which is precisely what has happened to China’s housing where we can now officially say that the bubble is back…

  

   

  … if only however in the first-tier cities. In fact, according to the latest data, the bubble among China’s top, or “Tier 1” cities has never been bigger entirely at the expense of all other cities.

  

  According to the latest NBS new home price update, in November the first-tier plus Xiamen were 55% of the national price increase, with Shenzhen nabbing 22% of the total national increase the Investing in Chinese Stocks blog reports. In December, those numbers were 54% and 23%, almost no change. In January, the first tier and Xiamen accounted for 52% of the total increase, with Shenzhen alone accounting for 21%, rising 4% mom. In the past year, prices are up an average of 1% nationally. Shenzhen alone is 74% of the total increase yoy. The first-tier plus Xiamen accounted for 141% of the total increase, or without those 5, prices fell 0.4% yoy nationally across 65 cities.

  But nowhere is the return of the Chinese housing bubble more obvious than in Beijing where scalpers are charging up to ?3000 for service numbers at the government office where property transfers are recorded, due to long wait times in the wake of the recent transaction tax cuts launched by the government to spur the housing market.

  Courtesy of the ICS blog, we get the following translation of what is taking place on the ground in China, where the current bubble du jou has sparked a veritable house-flipping mania:

  Transaction Tax Cut Spurs Bubble Activity in Beijing: ?1000 For Reservation Number

   

  The specific policies to Beijing, but later than 140 square meters of the only family housing, deed tax increased from 3% to 1.5% of the total housing fund. It does not look great, but the effect was particularly evident.

   

  …According to data center statistics, in the first week (February 14 to February 20) after the Spring Festival, Beijing new home net signed volume of only 1006 sets. The secondary residential net signed volume is as high as 6048 units, average daily turnover of 864 units, the highest trading volume since 2010.

   

  From the price perspective, the average transaction price 41,490 yuan / square meter, compared with 2015 annual average price rose about 5%.

   

  …The new policy to the owners and customers have brought mental changes, including the owners of more brewing prices. Xiao Gu said in Beijing many owners are selling the house for a house, he wants to buy a house prices, he will increase his selling price, eventually leading to a chain reaction.

   

  

  

  This has resulted in some bubbly behavior: paying for a reservation number:

  Now that the volume is large, the transfer of more people, so the reservation number is quite difficult. Due to the large number of people go through, on behalf of the reservation business is also booming. Taobao, enter the word Beijing transfer agent may be seized several shops in this business. In some shops turnover ranking, monthly volume of dozens, mostly ordinary numbers in the thousand or so, the price is even higher if expedited.

   

  In a shop, the owner drying out a series of successful single theme, saying last week, supplied a total of 168 successful reservation number, each priced at 999 yuan, if you need a specified time the price increases by 499 yuan.

   

  Online news says that there are already scalpers charging ?3000 for a number this week, ?1000 for next week.

  IICS then lays out another example of the house-buying frenzy in Beijing, first described in Ifeng:

  Last week I posted one example of bubble behavior in Beijing, as people paid up to ?1000 for a service ticket in order to avoid wait times at the property office. Transaction Tax Cut Spurs Bubble Activity in Beijing: ?1000 For Reservation Number

   

  Now another example emerges as sellers are throwing out high opening prices. It begins with a sale in Daxing, an outer suburb of Beijing, which saw a property sell for ?47,000 per square meter, followed by news that Vanke had hiked prices on all its projects in Beijing; the company denied the report.

   

  The latest news says ?3 million yuan is now the “opening price” for homes that are not too far outside the city. Analysts are more conservative in their estimates, projecting an increase of 5% to 10% in 2016, and say these high prices may be artificial. Still, even if that is true, it reflects an attempt by sellers to cash in on the current mood which increasingly bears the hallmarks of speculative fervor. After Spring Festival, prices in the East Fourth Ring increased ?4,000 to ?5,000 yuan per square meter, or about 10%. The average price hike in the city is about ?1,000 per sqm. 

   

  One property near Jinsong subway station (between Guomao and Panjiauan on the 10 line) sold for ?1.8 million before this year, now a similar property is listed for ?2.1 million. The transacted price will be closer to ?1.9 million according to analysts, reflecting the ?1,000 per sqm rise in price.

  This behaviour is confusing to our friends from IICS:

  I can understand someone wanting to pay to skip at the hospital, but waiting a few days to transfer a property? One reason someone might want to do this is if they fear rising prices. Chinese buyers and sellers will sometimes back out of a transaction if the market moves against them. In this case, if you bought a property before the tax was announced, the seller might try to claw back some of the tax savings. It may also be the case that, as in other situations, wealthier people would rather pay than wait.

  To us, there is nothing surprising in this behavior: now that the Chinese stock market bubble has burst, the local population has to find a new asset class which to chase for the next few months, and for the time being that asset is housing; and since the politburo gets to boast that the Chinese economy is “improving” as a result of this scramble, no “macroproudential brakes” will be deployed before it is again too late, the bubble bursts, and all the excess money has to rotate into another bubble du jour. Unless, of course, by then China’s capital account has been fully liberalized and those $30 trillion in Chinese funds can finally chase global assets without the detrminet of even a token capital control firewall.

  

  

  

  

  

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