Today’s News 9th March 2016

• The Financial System Is A Larger Threat Than Terrorism

  Authored by Paul Craig Roberts,

  In the 21st century Americans have been distracted by the hyper-expensive “war on terror.” Trillions of dollars have been added to the taxpayers’ burden and many billions of dollars in profits to the military/security complex in order to combat insignificant foreign “threats,” such as the Taliban, that remain undefeated after 15 years. All this time the financial system, working hand-in-hand with policymakers, has done more damage to Americans than terrorists could possibly inflict.

  The purpose of the Federal Reserve and US Treasury’s policy of zero interest rates is to support the prices of the over-leveraged and fraudulent financial instruments that unregulated financial systems always create. If inflation was properly measured, these zero rates would be negative rates, which means not only that retirees have no income from their retirement savings but also that saving is a losing proposition. Instead of earning interest on your savings, you pay interest that shrinks the real value of your saving.

  Central banks, neoliberal economists, and the presstitute financial media advocate negative interest rates in order to force people to spend instead of save. The notion is that the economy’s poor economic performance is not due to the failure of economic policy but to people hoarding their money. The Federal Reserve and its coterie of economists and presstitutes maintain the fiction of too much savings despite the publication of the Federal Reserve’s own report that 52% of Americans cannot raise $400 without selling personal possessions or borrowing the money. 

  Negative interest rates, which have been introduced in some countries such as Switzerland and threatened in other countries, have caused people to avoid the tax on bank deposits by withdrawing their savings from banks in large denomination bills. In Switzerland, for example, demand for the 1,000 franc bill (about $1,000) has increased sharply. These large denomination bills now account for 60% of the Swiss currency in circulation.

  The response of depositors to negative interest rates has resulted in neoliberal economists, such as Larry Summers, calling for the elimination of large denomination bank notes in order to make it difficult for people to keep their cash balances outside of banks.

  Other neoliberal economists, such as Kenneth Rogoff want to eliminate cash altogether and have only electronic money. Electronic money cannot be removed from bank deposits except by spending it. With electronic money as the only money, financial institutions can use negative interest rates in order to steal the savings of their depositors.

  People would attempt to resort to gold, silver, and forms of private money, but other methods of payment and saving would be banned, and government would conduct sting operations in order to suppress evasions of electronic money with stiff penalties.

  What this picture shows is that government, economists, and presstitutes are allied against citizens achieving any financial independence from personal saving. Policymakers have a crackpot economic policy and those with control over your life value their scheme more than they value your welfare.

  This is the fate of people in the so-called democracies. Any remaining control that they have over their lives is being taken away. Governments serve a few powerful interest groups whose agendas result in the destruction of the host economies. The offshoring of middle class jobs transfers income and wealth from the middle class to the executives and owners of the corporation, but it also kills the domestic consumer market for the offshored goods and services. As Michael Hudson writes, it kills the host. The financialization of the economy also kills the host and the owners of corporations as well. When corporate executives borrow from banks in order to boost share prices and their performance bonuses by buying back the publicly held stock of the corporations, future profits are converted into interest payments to banks. The future income streams of the corporations are financialized. If the future income streams fail, the companies can be foreclosed, like homeowners, and the banks become the owners of the corporations.

  Between the offshoring of jobs and the conversion of more and more income streams into payments to banks, less and less is available to be spent on goods and services. Thus, the economy fails to grow and falls into long-term decline. Today many Americans can only pay the minimum payment on their credit card balance. The result is massive growth in a balance that can never be paid off. It is these people who are the least able to service debt who are hit with draconian charges. The way the credit card companies have it now, if you make one late payment or your payment is returned by your bank, you are hit for the next six months with a Penalty Annual Percentage Rate of 29.49%.

  In Europe entire countries are being foreclosed. Greece and Portugal have been forced into liquidation of national assets and the social security systems. So many women have been forced into poverty and prostitution that the hourly price of a prostitute has been driven down to $4.12.

  Throughout the Western world the financial system has become an exploiter of the people and a deadweight loss on economies. There are only two possible solutions. One is to break the large banks up into smaller and local entities such as existed prior to the concentration that deregulation fostered. The other is to nationalize them and operate them solely in the interest of the general welfare of the population.

  The banks are too powerful currently for either solution to occur. But the greed, fraud, and self-serving behavior of Western financial systems, aided and abeted by governments, could be leading to such a breakdown of economic life that the idea of a private financial system will become as abhorent in the future as Nazism is today.

  

  

  

  

  

• Sweden Warns Women Not To Go Out Alone After Dark: "This Is Serious"

  As you might have noticed, Europe is falling apart.

  Some manner of ambiguous “deal” with the Turks notwithstanding, the EU is going to collapse under the weight of the millions of asylum seekers that have inundated the bloc over the past 12 months.

  At this juncture, the so-called Balkan Route has for all intents and purposes been closed (Angela Merkel’s protestations aside). This has left Greece in a terribly precarious situation. Tens of thousands of migrants are stuck now that Macedonia has sealed its borders, and barring some kind of dramatic breakthrough, Alexis Tsipras is going to watch as his country descends into chaos for the second time in 18 months.

  But while multiple countries have now suspended the bloc’s beloved Schengen in an effort to “stop the madness,” as it were, it’s too late to stop the chaos. As we’ve documented extensively, Europe was remarkably resilient in the wake of the Paris attacks, but after New Year’s Eve, when (rightly or wrongly) adult male Mid-East asylum seekers garnered a reputation for sexual assault, sentiment soured. Markedly.

  Since then, the entirety of the EU has been on high alert. Not for terrorists, but for sexual predators of “foreign origin.”

  One particularly divisive issue is the extent to which officials have tended to “blame the victim”, so to speak. For instance, Cologne mayor Henriette Reker drew sharp criticism for suggesting that it was German womens’ duty to prevent assaults by keeping would-be assailants “at arm’s length.”

  Then there was the now infamous case of the 17-year-old Danish girl who faced a fine from police after she allegedly used “illegal” pepper spray to deter an attacker.

  Well, in the latest example of authorities suggesting that Europeans should adapt to threats rather than compelling authorities to protect citizens, police in Östersund advised women not to walk around by themselves at night, during at press conference on Monday.

  “Women in a town in northern Sweden have been warned not to walk alone at night in the wake of a spike in violent assaults and attempted rapes,” The Daily Mail writes. “Police in Östersund made the unusual move to ask women not to go out unaccompanied after dark, after reports of eight brutal attacks, some by ‘men of foreign appearance’, in just over two weeks.” Here’s more:

  It is extremely unusual for Swedish authorities to make such warnings, and it has not been well received in Sweden, a country proud of its progress in gender equality and women’s rights.

   

  All incidents have taken place in Östersund since the 20th of February, and involved outdoor attacks where the perpetrators have been unknown to their female victims.

   

  

  (Östersund)

  
  

  A police spokesperson added that in addition to the increased frequency, the attacks are also conspicuous as – despite being carried out late at night – none of the perpetrators were drunk.

  Yes, sober potential rapists! Now that is alarming. 

  “What stands out is also that none of these perpetrators have been under the influence,” regional police chief Stephen Jerand told Sveriges Television.

  No, Stephen, what “stands out” is that there are gangs of men raping unaccompanied women in the streets of Östersund. Whether they are drunk or not is entirely irrelevant.

  In any event, Swedes weren’t happy with the suggestion that women should stay off the streets at night. Here’s The Local: 

  The force’s recommendation that women should avoid being alone at night swiftly prompted criticism in Sweden, a nation that prides itself on promoting gender equality.

   

  “The solution can never be to not go out because of such a warning. We have very many women who work in home and social care at night for example. What are they supposed to do?” the city’s mayor Ann-Sofie Andersson told Swedish broadcaster SVT.

   

  The politician, who represents the government’s Social Democrat party at a regional level, said she wished police had told her about their intentions before issuing the warning.

   

  “It’s wrong if it calls on women to adapt to the criminals. It risks leading people the wrong way, if the victims must adapt to the perpetrators,” he said.

  Fair enough, but police say their warning was taken out of context. 

  “We are not limiting anyone’s freedom. This is purely factual information,” the police chief told the TT news agency. “This is serious, we care about the protection of women and that is why we are going out and talking about this.”

  Essentially, the police are admitting that they are essentially powerless to stop this. Is it better that they come clean and warn the populace or pretend that they can protect the citizenry when they in fact cannot?

  And who here, ultimately, is at fault? It’s certainly not the Swedes and it’s probably not the Östersund police who can’t possibly be expected to cope, on short notice, with what’s happening to the country. You could fault Angela Merkel for adopting the “open-door” mirgrant policy, but really, if you want to trace the roots, you might want to ask yourself who destabilized Syria in the first place…

  
  

  

  

  

  

  

• Trump Wins Michigan Primary; Hillary In Close Race

  Update: Donald Trump is projected to win the key Michigan primary on top of his triumph in Mississippi. 

  *  *  *

  Frontrunners Donald Trump and Hillary Clinton will both face fresh tests on Tuesday, in their respective quests for their party’s presidential nomination.

  Trump put on a respectable, if less spectacular performance on Saturday, prevailing in Louisiana and Kentucky but falling to Ted Cruz in Kansas and Maine. As Bloomberg writes, “Trump’s victories also were narrower than polling had indicated, suggesting that attacks on his crude language and ill-defined policies from 2012 nominee Mitt Romney and others could be having an impact.”

  Maybe.

  Or it could simply “suggest” polling error or the simple fact that blowing the field away by 20 points in every state simply isn’t realistic – even for a tycoon juggernaut with a groundswell of popular support and a “great head of hair.” Or, as The New York Times puts it, devoid of our trademark humor, “it is not clear whether he struggled to win because he had lost ground or because anti-Trump voters had consolidated around Mr. Cruz. [because] Mr. Trump’s share of the vote on Saturday was roughly in line with what he had won on Super Tuesday.”

  In any event, Trump still holds a commanding lead going into contests to be held today in Michigan, Mississippi, Idaho, and Hawaii. Here’s what the delegate count looks like currently:

  

  As the Democrats head into contests in Mississippi and Michigan, here’s how the delegates shape up:

  

  Make no mistake, Michigan is the biggest prize for both parties today.

  A Monmouth University poll shows Trump with a commanding 36-23% lead over Cruz, who is urging GOP voters to back him as he is now the only candidate capable of derailing The Donald. “It’s easy to talk about making America great again. You can even print that on a baseball cap, but the critical question is, do you understand the principles and values that made America great in the first place?” Cruz asked last night, at a rally.

  But Trump’s support among the white working class who feel left out in the cold by outsourcing and the inexorable decline of the American manufacturing sector will likely carry the day for the billionaire.

  

  (Trump speaks in Michigan last Friday)

  “Trump appeals especially to the blue-collar voters in areas such as Macomb County north of Detroit, home of automotive plants and parts supplies and mostly white, union-member voters,” Stu Sandler, a Republican consultant from Ann Arbor who is not affiliated with any of the candidates, told Bloomberg. “Donald Trump’s campaign has fixed like a laser on working-class voters, and I think it’s really paid off,” he said.

  

  For his part, John Kasich needs to perform well. “He has staked his presidential campaign on winning his home state, and Michigan’s industrial base and working-class roots bear similarities to the Buckeye State,” Bloomberg notes. “Kasich is betting that a strong finish in Michigan, followed by a victory a week later in Ohio with its 66 delegates, will prevent Trump from getting the needed delegates and start a new phase of the campaign.”

  Make no mistake folks, that’s a pipe dream.

  Here’s an aggregated poll from RealClearPolitics:

  

  On the Democratic side of the coin, Hillary is 13 points ahead of “The Bern” in Michigan. “On paper, Michigan should be a good state for Mr. Sanders,” The New York Times notes, explaining that it’s “a white, working-class state that has been ravaged by outsourcing and ought to be receptive to Mr. Sanders’s message on economic issues.”

  “It is also a fairly liberal state, with big college towns like Ann Arbor and Lansing,” The Times adds. But Sanders will need a dramatic come from behind win. Clinton is once again dominate when it comes to the African American vote and the elderly in Michigan clearly aren’t “feeling The Bern” either. Here’s the breakdown from Monmouth:

  Hillary Clinton currently holds a 55% to 42% lead over Bernie Sanders in the Michigan Democratic primary. Clinton enjoys a solid edge among non-white voters (68% to 27%), who make up more than one-fourth of the likely electorate. Clinton (49%) and Sanders (48%) are virtually tied among white voters. Clinton has a 57% to 40% lead among voters who earn less than $50,000 a year, and a 54% to 42% lead among those who earn $50,000 or more. Sanders holds a solid lead (58% to 39%) among voters under the age of 50, but this is offset by Clinton’s more than 2-to-1 advantage among voters age 50 and older (65% to 31%).

  

  As far as Sanders’ attempt to tie Hillary to trade deals that have cost Michigan manufacturing jobs, the former Secretary of State has proven to be teflon. “You would think that it would be a fertile issue in Michigan,” said the publisher of Inside Michigan Politics. “But it seems that Democrats are willing to give Clinton a pass on it.”

  

  (fear the blue pantsuit)

  As an aside, it seems like Clinton “gets a pass” on quite a bit. 

  In any event, Michigan polls close at 8 p.m. local time. Stay tuned here for live coverage and the results, which we suspect will show a thorough “schlogning” on the GOP side and a rather decisive “burn” for “The Bern” on the Democratic ticket.

  

  

  

  

  

• The 'Market State' Prediction Went Terribly Wrong

  Submitted by Richard Fernandez via PJMedia.com,

  Immediately after legal scholar Philip Bobbitt tried to explain the history and future of the State in his book The Shield of Achilles, a brief intellectual storm swept the non-American Anglosphere as intellectuals pored over it as a guide to a world made murky by September 11, 2001. "The Shield of Achilles generated much interest in the diplomatic and political community. Public officials who follow Bobbitt's works include the former Prime Minister of the United Kingdom, Tony Blair; the Archbishop of Canterbury, Rowan Williams, who built his Dimbleby Lecture around Bobbitt's thesis; and the former Prime Minister of Australia, John Howard, who referred to Bobbit's book in a 2004 address to the Australian Strategic Policy Institute."

  September 11, 2001 was a memento mori moment for a civilization which had almost come to believe it was chosen to be the End of History.  In that uncertain time much store was laid on Bobbitt's concept of the "Market State" which he predicted would succeed the Nation State.   For an Anglosphere bewildered by a storm, the idea of a chart proved irresistibly attractive.  Bobbit explained the future evolution of the State as follows:

  "The simple difference between the two is that the nation state derives its power through its promise to improve its citizens' material wellbeing, while the market state is legitimised through its promise to maximise its citizens' opportunities." Or to put it another way, where the nation state – be it fascist, communist or democratic – is highly centralized, the market state is fragmented and is run by outsourcing its powers to transnational, privatized organisations.

  While the Nation State was focused on defending territory and nationality the Market State would be concerned with preserving a portable bundle of opportunities and rights its 'citizens' could use anywhere in a transnational world. In Bobbitt's elegant prose, "the threat to the state lay primarily in the unrealized domain of its ideals … the security of the state depended on the security of the larger system and if the latter were infused with the ideals of the triumphant liberal democracies, the security of the democracies and of the system as a whole was assured."

  The State had to transcend itself to survive.  Australian intelligence analyst Paul Monk correctly characterized the shift as enlarging and at the same time diminishing the role of the traditional state:

  A nation state is a state defined by sovereignty within territorial borders, the defense of those borders by means of deterrence or retaliation for violation of them, and a public policy of large-scale social security for the population within those borders.

  A market state, by comparison, is defined by constitutional, economic and strategic adaptation to a world in which the claims of human rights, the reach of weapons of mass destruction, the proliferation of transnational threats to security and well-being, and the emergence of global capital markets that ignore borders, curtailing the power of states to control their own economies; while the development of telecommunications networks that likewise ignore borders, serves to undermine national languages, customs, cultures and regimes.

  The problem was that in the intervening years the Market State prediction went — or has seemed to go — terribly wrong.  As recent events painfully illustrate, we're not getting warmer.  The search is getting colder. In a recent article in the New Statesman Bobbitt  admitted:

  It wasn’t supposed to be like this. … It was generally expected that [the triumph of liberal democracy] would, in Henry Kissinger’s words, “automatically create a just, peaceful and inclusive world” …

  How far we have come since those words were written. The international order that so confidently expanded the G8 to the G20, that continued the enlargement of the European Union to 28 member states, that brought about the first democratic elections in Iraq and Afghanistan despite harrowing terrorist intimidation, that increased the membership of Nato to include not only former members of the Warsaw Pact but even the Baltic states that had been part of the Soviet Union, and that created the Association of South-East Asian Nations and brought China into the World Trade Organisation is now shuddering and fragmenting. …

  Now, Henry Kissinger has concluded, “The state itself is under threat.”

  What happened to the progression to the Market State?  Most alarmingly the greatest threats appeared to come from obsolete forms given unnatural vitality by modern technology.  The international order is being challenged by "national, ethnocultural groups", even by entities categorized not by "nationality but by religion".   It is as if we had gone backward in time.  An Internet-powered ISIS, a WMD enhanced North Korea, an unpredictably hybridized Russia arose as Frankenstein forces that international system could neither explain nor contain.

  This suggested something was seriously wrong with the paradigm.   A resurgent nationalism rose from the graveyard of history where it had been interred by the globalized, multicultural world. Vladimir Putin reinvented himself as a Russian nationalist, not a born-again Communist in a world where socialism was in vogue only on Western campuses. Like Wrong Way Corrigan Europe was building a borderless Schengen regime all the way until the moment it was collapsed by a tide of refugees.

  With the UK on the verge of leaving the European Union in order to return governance of Britain to Britons, it is the political elites who seem seriously out of touch. In America the surprising ascendancy of Trump so traumatized the political establishment that Anne Applebaum gloomily asked in the Washington Post: "is this the end of the West as we know it?"

  Right now, we are two or three bad elections away from the end of NATO, the end of the European Union and maybe the end of the liberal world order as we know it. …

  In the United States, we are faced with the real possibility of Republican Party presidential nominee Donald Trump … A year from now, France also holds a presidential election. One of the front-runners, Marine Le Pen of the National Front, has promised to leave both NATO and the E.U. , to nationalize French companies and to restrict foreign investors. ….

   

  Britain may also be halfway out the door. In June, the British vote in a referendum to leave the E.U. Right now, the vote is too close to call — and if the “leave” vote prevails, then, as I’ve written, all bets are off. Copycat referendums may follow in other E.U. countries too. Viktor Orban, the Hungarian prime minister, sometimes speaks of leaving the West in favor of a strategic alliance with Istanbul or Moscow.

  "It wasn’t supposed to be like this," Bobbitt wrote.  But if so, why did the State fail to transition into the Market State?  The key fallacy may lie in his belief that the market state would work to "maximize its citizens' opportunities."  This belief rests on the unsupported assumption that such State would continue to act as the faithful agent of its citizens.  Yet once a State has been relieved of what Paul Monk called the duty to maintain "sovereignty within territorial borders … and a public policy of large-scale social security for the population within those borders" it acquires a rival claim to its services: the World.

  "World leaders" no longer work only for their own countries, but for the World.  Politicians like the Prime Minister of Greece suddenly find themselves working for "global capital markets that ignore borders", faceless bureaucrats in Brussels and accountable to a bewildering plethora of G's — G8, G20, etc — not to mention a United Nations and a United Europe.

  In retrospect the idea that an increasingly internationalized political elite would automatically remain faithful agents of their own populations should have rung alarm bells.  Although much has been made of the security violations of Hillary Clinton's private email system, its true value is as a record of how the Clinton's constituency grew beyond the borders of America.  It is not for nothing that the Clinton Foundation is also known as the Clinton Global Initiative.  It has received money from 20 foreign governments.

  A world where Angela Merkel feels compelled to accept millions of migrants for Europe even to the detriment of Germany and where president Obama feels he can sign major international treaties with Iran without reference to Congress is an unstable world locked in a game that is no longer transparent.  Who do politicians work for?  It creates a world of dubious loyalties and unpredictable coalitions.

  If the obvious conflict of interest has been ignored by the politicians, it has not been lost on the voters.  Many plainly sense what economists call an principal-agent problem, which may be the source of the current voter revolt.  Bobbitt comes near to identifying one of the causes of Market State failure when he observes that President Obama saw the ISIS problem from the standpoint of the international system rather than as president of the United States.

  In an interview in 2014, he described his vision of a new geopolitical balance of power in the region. “It would be profoundly in the interest of citizens throughout the region if . . . you could see an equilibrium developing between Sunni, or predominantly Sunni, Gulf states and Iran . . . If you can start unwinding some of [the distrust among the states of the region], that creates a new equilibrium. And so I think each individual piece of the puzzle is meant to paint a picture in which conflicts and competition still exist in the region but that it is contained.”

  What Obama did by putting "the interest of citizens throughout the region" in the forefront was unconsciously subordinate the claims of principal, the American people. Bobbitt notes, "it was only after "the San Bernardino killings in December 2015, [that] Obama acknowledged in a televised address to the nation that the US was at war, a concession he must have made with some reluctance."

  But Bobbitt has not taken his insight to its logical conclusion.  Obama's reluctance to recognize a threat to his country represents an unnatural state of affairs. The efficient cause of the current crisis lay in breaking the former chain of political accountability without replacing it with another.  If there is any truth to Anne Applebaum's belief that "we are two or three bad elections away from the end of NATO, the end of the European Union and maybe the end of the liberal world order as we know it," it must be that the fuse was lit before Trump; perhaps in 2008 or earlier.

  The fate of the State depends as much on principal/agent considerations as much as on Bobbit's duality of strategy and law.

  

  

  

  

  

• Gold ETF Holdings Rise For Record 40 Straight Days

  Yesterday marked the 40th day in a row that total known holdings of Gold in ETFs rose. Not since January 6th has the precious metal seen a reduction in holdings. This is the longest streak of increased holdings since ETFs were born…

  

   

  It seems, despite exuberant equity bounces, reassurance about the awesomeness of the “jobs” recovery, and Fed confidence-inspiring jawboning that more than a handful of ‘goldbugs’ are hoarding the pet rock.

   

  Charts: Bloomberg

  

  

  

  

  

• Bernie vs. Ron Paul: There's No Comparison

  Submitted by Llewellyn Rockwell via The Mises Institute,

  Super Tuesday may have been the beginning of the end for the Bernie Sanders campaign, but the ideas that propelled it are likely to linger for quite some time. With some writers comparing Bernie to Ron Paul (not in terms of economics and philosophy, of course, but as insurgent candidates), now seemed like an opportune moment to examine the Sanders message and legacy, and compare it to Ron’s.

  Like Ron, Bernie surprised all the pundits with his fundraising, polling, and electoral success. In fact, so successful has Sanders been that Hillary Clinton has been reduced to a pathetic and unconvincing “me, too” campaign — I can be just like Bernie, if that’s what you rubes want!

  Bernie has gained a lot of traction from his complaints that Hillary is in the tank for Wall Street and the big banks. He’s likewise pointed to the six-figure honoraria Hillary has earned from speeches given to the big banks.

  The best the now-hapless Bill Clinton could do in reply was to note that Bernie, too, had been paid to give speeches. Technically, Bill was right. Bernie had earned money from public speaking: a whopping $1,800 over the course of a year. The year before that, Bernie had earned $1,300 from public speaking. All of this money was donated to charity, as is the requirement for US senators.

  It’s true that Bernie is better than Hillary on foreign policy, but in keeping with Rothbard’s Law — everyone concentrates in the area in which he is worst — Bernie speaks very little about issues of war and peace. And even there, consistency and principle are elusive: he supported Bill Clinton’s bombing of Serbia over Kosovo, an act of terror based on propaganda that rivaled anything George W. Bush ever peddled. Sanders favors the ongoing drone campaigns, too, and even supported the F-35, one of the biggest boondoggles in the Pentagon’s long and sorry history.

  Bernie’s primary legacy will be to have resuscitated the idea of socialism in the minds of many Americans. It is a very confused socialism, to be sure. The young people who follow Bernie can’t even seem to define socialism, according to recent surveys. And in fact Bernie’s economics is really just a hyper-Keynesianism rather than out-and-out socialism. But by suggesting that the Scandinavian countries constitute a model that the United States should emulate, he has encouraged the idea that only large-scale, systemic change in the direction of vastly increased government power can produce the kind of society Americans want.

  Capitalism ought to be our default position, since it conforms to the basic moral insights we acquired in our youth: keep your word, live up to your agreements, don’t take what doesn’t belong to you, and do not cause anyone physical harm.

  But thanks to years of propaganda to the contrary, socialism has come to appear to many people as not simply a morally plausible position but clearly and obviously desirable and superior to the capitalist alternative. The free market, they are convinced from what they recall from their elementary school textbooks, leads to “monopoly” and oppression.

  Bernie speaks as if the system is rigged against the people because of business influence in government — a fair enough point, as far as it goes — but it’s hard to take this criticism seriously when his proposed solution is to extend the influence of politics over more and more areas of life and increase the powers and scope of the very government he is supposed to be criticizing.

  The Sanders narrative is rooted in two major historical claims, both of them dead wrong.

  First, Sanders believes “capitalism” was to blame for the 2008 crash. But as mises.org readers know, that downturn, like the Great Depression before it, was preceded by years of Federal Reserve credit expansion. According to the Austrian theory of the business cycle, the artificial lowering of interest rates below free-market levels sets in motion an unsustainable economic boom. The economy is set on a path that could be sustained only if real resource availability were greater than it really is. Eventually, when real savings and resources turn out not to exist in the abundance that the Fed’s interventions misled people into expecting, projects have to be abandoned and the phony prosperity becomes real recession.

  Sanders supporters will no doubt point to the great number of bad mortgages originated by private lenders. But would these mortgage loans have been extended in the first place if institutions like Countrywide couldn’t sell them to the government-privileged Fannie Mae and Freddie Mac? Fannie and Freddie enjoyed special tax and regulatory advantages and had a special line of credit from the US Treasury — a line of credit everyone knew would be essentially limitless if push ever came to shove.

  It was the perfect storm: the Fed’s crazed monetary policy injected huge quantities of additional credit circulating throughout the economy, and the federal government’s various mandates and regulations made real estate an artificially attractive outlet for all that new money. When this ramshackle edifice came crashing down, capitalism — which, in the midst of all this money creation and regulatory lunacy, had never been tried — took the blame.

  Indeed, what could be intellectually easier than blaming the “free market” for a phenomenon a critic doesn’t understand? Ron Paul, on the other hand, never tired in his own presidential campaigns of going beyond surface explanations to account for what really happened in the disaster of ’08, and identify who the real culprits were.

  The other part of the Sanders story — Scandinavia — is shallow and misleading, too.

  In fact, Denmark’s own prime minister, Lars Lokke Rasmussen, finally had to correct the Vermont senator’s references to his country as “socialist.” “I would like to make one thing clear,” Rasmussen said. “Denmark is far from a socialist planned economy. Denmark is a market economy.”

  Still, there’s no question Denmark has a large public sector. And it’s starting to suck the life out of the place. Denmark’s various benefits subsidize idleness to an absurd and unmanageable degree. In the country’s 98 municipalities, guess how many have a majority of residents working. If you answered three, you know far more about Denmark than Bernie and his supporters do.

  It’s a similar story in the rest of Scandinavia. For instance, Sweden’s welfare state was able to develop only because of the wealth created by decades and decades of a prosperous market economy. Private-sector job creation was anemic to nonexistent in the decades following the radical expansion of the Swedish welfare state. And as for Norway, there are lots of “free” things there, it’s true — if you’re prepared to pay a 75 percent effective tax rate.

  The comparison of Bernie to Ron goes like this: both launched insurgent, anti-establishment presidential campaigns while in their 70s, shook up their respective party establishments, and attracted large youth followings. But Bernie is no Ron.

  Just on the surface: Bernie is a grump and difficult to work with; Ron is a kindhearted gentleman who always showed his appreciation for the people in his office.

  More importantly, Ron urged his followers to read and learn. Countless high school and college students began reading dense and difficult treatises in economics and political philosophy because Ron encouraged them to. Bernie’s followers receive no such encouragement. And why should they? Bernie’s platform merely regurgitates the fallacies and prejudices his young followers already imbibed in school. What more is there to read?

  Ron’s followers, meanwhile, were curious enough to dig beneath the surface. Is the state really a benign institution that can costlessly provide us whatever we might demand? Or might there be moral, economic, and political factors standing in the way of these utopian dreams?

  Bernie’s supporters demand material things for themselves, to be handed to them at the expense of strangers they have been taught to despise. But like Ron himself — who as an OB/GYN opposed restrictions on midwives even though doing so was not in his material interest — the young Paulians embraced the message of liberty without a thought for material advantage.

  It’s not hard to cultivate a raving band of people demanding other people’s things. Such appeals arouse the basest aspects of our nature, and will always attract a crowd. It’s very hard, on the other hand, to build up an army of young people intellectually curious enough to read serious books and consider ideas that go beyond the conventional wisdom they learned in school about government and market. It’s hard to build up a movement of people whose moral sense is developed enough to recognize that barking demands and enforcing them with the state’s gun is the behavior of a thug, not a civilized person. And it’s hard to persuade people of the counter-intuitive idea that society runs better and individuals are more prosperous when no one is “in charge” at all.

  Yet Ron accomplished all these things. And that is why, when we position the Vermont senator against the Texas congressman, Ron’s achievement is so much greater and more historic.

  

  

  

  

  

• Who Makes What?

  From Bahamian crawfish to Mexican shoes, and from Argentine soybeans to Ethiopian coffee, the world makes (and trades) in far more than just crude oil and petroleum products. However, given the current deflationary world, it is very notable how many countries in the world are dependent on commodities as the primary source of foreign income.

  The following map of the world shows each country’s major export…

  

  Source: BofA

  

  

  

  

  

• Hillary's Scary New Cash Tax

  Submitted by Brian Hunt via InternationalMan.com,

  Have you heard of “negative interest rates”?

  It’s become a phenomenon with economists and the media.

  There’s a good chance you’ve read an article about it. We’ve covered it many times in the Dispatch.

  I’m writing to tell you something about negative interest rates you haven’t heard. You certainly won’t hear about it in the mainstream press.

  What’s coming at you is a historic event. It’s something our grandchildren will hear stories about…much like the Great Depression or the Cold War.

  What’s coming could send the price of gold much higher in the coming years…and hand gold stock owners 500%+ gains.

  If you know what’s coming, it could mean the difference between having lots of free cash in retirement or barely getting by.

  To understand the gravity of this moment, let’s cover one of the most bizarre ideas in the world…

  negative interest rates.

  In a normal world, your bank pays you interest on your savings. It takes your money, pools it with other people’s money and loans it out.

  The bank makes money by paying out less in interest on your deposit than it earns in interest from borrowers.

  For example, it might pay out 3% to depositors while earning 6% from borrowers.

  This is how it has worked for decades.

  Negative interest rates turn your “normal” bank account upside down.

  Negative interest rates could only exist in a crazy world where idiot politicians are in control.

  Unfortunately, that’s just what we’re dealing with right now.

  Politicians all over the world are ordering banks to charge depositors (you) a fee for storing cash.

  It’s a perversion of saving. It’s a perversion of capitalism. It’s a perversion of planning for the future.

  And it’s going to result in disaster.

  Politicians think that by making it unattractive for you to keep money in the bank, you’ll save less money. Instead, you’ll spend more money on things like smartphones and cars. You’ll invest in things like stocks and real estate.

  This would “stimulate” the economy.

  This thinking is very, very wrong. No matter what the government does, it can’t force you to spend money. It can’t force you to make investments if you don’t see good opportunities.

  Forcing people to pay banks to hold their money is a tax. It is wealth confiscation for the digital age.

  The government and the mainstream press won’t dare call it a tax.

  But that’s exactly what it is.

  A negative interest rate policy is a tax.

  Any time you hear a politician, central banker or news anchor say “negative interest rates,” just think “TAX.”

  Think “TAX ON MY CASH.”

  I’ll say it again: negative interest rates are going to result in financial disaster.

  The coming disaster will wipe out many people.

  But you don’t have to be one them.

  I’ll explain how you can sidestep this disaster—and even make a lot of money as a result of it—in a moment.

  But let’s quickly cover one more thing about negative interest rates…

  The Ugly Twin Sister of Negative Interest Rates

  If the government makes it unattractive for you to keep cash in the bank, you can pull cash out of the bank. You can simply store it in a safe or under a mattress.

  Politicians know this.

  That’s why they’ve created another dangerous policy that works hand-in-glove with negative interest rates.

  That policy is banning cash.

  You see, if you pull your money out of the banking system and stuff it under the mattress, you aren’t doing what the government wants you to do.

  You’re not spending money or investing in stocks.

  This is a major reason why governments are banning large cash transactions and large denomination bills.

  They are fighting a War on Cash.

  In just the past few years…

  ***Spain banned cash transactions over 2,500 euros.

  ***Italy banned cash transactions over 1,000 euros.

  ***France banned cash transactions over 1,000 euros, down from the previous limit of 3,000 euros.

  And just a few weeks ago, former U.S. Treasury Secretary Larry Summers called for a ban on the $100 bill!

  Historians aren’t surprised by Summers’ idea. Franklin Delano Roosevelt banned $500 and $1,000 bills in the 1930s.

  You can bet that Big Government types like Hillary Clinton and Donald Trump will do the same thing in a financial emergency.

  By making it so difficult (or illegal) to buy and sell things with cash, the government wants to force people into the banking system. That way, it can monitor us and coerce us into whatever it wants…like paying outrageous new taxes.

  It’s all a dream come true for government central planners.

  The governments say these new currency laws are for fighting terrorism, money laundering and drugs.

  But the ultimate goal is control of society…and to confiscate the wealth of private citizens.

  As former Congressman Ron Paul said, “The cashless society is the IRS’s dream: total knowledge of, and control over, the finances of every single American.”

  Whether you agree with these regulations or not, the conclusion is obvious:

  By driving us more and more toward trackable digital payments, the government has made it much, much easier to confiscate our wealth.

  We’re like sheep that have been “herded” into a corral, ready for shearing.

  And Hillary Clinton and her Big Government cronies are holding the clippers.

  However, you don’t have to be sheared.

  You can avoid the shearing by learning how to navigate what will become the largest underground currency market in history.

  Hillary Doesn’t Want Your Gold. She Wants Your Cash.

  On April 5, 1933, President Franklin Delano Roosevelt issued one of the most controversial orders in U.S. history.

  It went by the name “Executive Order 6102.”

  Not one American in 1,000 knows about this order. But to this day, many experts consider it to be one of the most destructive acts in U.S. history.

  It violated sacred principles held by our founding fathers. It impoverished millions and confiscated the savings of honest, hardworking Americans.

  Executive Order 6102 made it illegal for private citizens to own gold. Citizens were ordered to turn in their gold to the government.

  Why would the government confiscate the wealth of private citizens?

  You can fill a book on the history surrounding Executive Order 6102. But in a nutshell, it was the act of a desperate government in the midst of a financial crisis.

  The government wanted the gold in order to increase the nation’s money supply. It believed an increase in the money supply would revive the struggling economy.

  Please review those last two paragraphs…

  An increase in the money supply…a struggling economy…a desperate government.

  Sound similar to what is happening right now?

  Since the answer to that question is “YES,” we have to ask another question…

  Could such a confiscation happen again?

  As the crisis develops, our deeply indebted government will act like a giant wounded beast, lashing out in all directions. It will grow more desperate for control. It will grow desperate for money.

  And just like FDR did in the 1930s, it will confiscate the wealth of private citizens.

  But Hillary Clinton (or Donald Trump, or whoever wins the election) won’t go after your gold.

  Nowadays, the gold market is very small compared to the overall economy.

  Going after gold would be too much work for the government.

  The government is going to go after YOUR CASH.

  It will regulate your cash. It will tax your cash. It will take your cash.

  This has all kinds of implications for banking and the economy.

  But here’s the most important thing you need to know as an investor:

  Negative interest rates and their partner, the War on Cash, will create a renewed interest in gold. This could cause gold to double or even triple in value.

  Even children know what the government is doing is crazy.

  And people aren’t going to take this lying down.

  Rather than participate in the government’s monetary farce, people will go underground.

  They will pull cash out of banks and hoard it in safe places. And they will seek the safety, anonymity and reliability of gold and silver.

  Gold and silver have served as money for centuries.

  Gold is the ultimate currency because it doesn’t rot or corrode…it is durable…easily divisible…portable…has intrinsic value…is consistent around the world…and it cannot be created from thin air. It cannot be debased by the government.

  By enforcing negative interest rates and fighting a War on Cash, the government will create a huge underground currency market.

  And the ultimate underground currency will be gold and its sister metal, silver.

  Gold is trading for around $1,260 an ounce right now.

  As the government blunders into a negative interest rate disaster, gold will likely rise 50%…100%…possibly even 200% higher.

  There’s an underground currency market coming to your neighborhood.

  If you own enough gold, you’ll be its king.

  If you don’t yet own gold, buy it now.

  If you own a lot of gold, buy more.

  

  

  

  

  

• "War Is A Drug": Images From The Eerie Syrian Ceasefire

  Late last month, John Kerry and Sergei Lavrov celebrated a “temporary cessation of hostilities” in Syria.

  Obviously, the “ceasefire” didn’t include ISIS, but more critically for peace, it didn’t include al-Nusra either.

  Nusra is of course al-Qaeda’s Syrian arm, and what’s important to understand is that unlike ISIS, their positions are difficult to distinguish from those of the FSA and other rebel groups that are a party to the US-Russian agreement. As we noted late last month:

  “While the ISIS presence is concentrated in eastern Syria, al-Nusra has positions in Aleppo City, the Jabal Turkman region of Northeastern Latakia, the Jabal Zawiya region in Southern Idlib Province, and the Quneitra Province along the Golan Heights. Just to name a few. That effectively means Russia can bomb anywhere along the country’s urban backbone in the west and claim to be targeting the group.”

  By all accounts, that fact alone should have made the ceasefire a no-go but relatively speaking (and when it comes to ceasefires, it’s all “relative” in Syria) things actually haven’t gone so badly. Sure, more than 200 people have reportedly been killed, but according to “sources” (and we use that term very loosely because it almost always refers to one guy in London) Sunday was the “calmest” day yet, with “only” 14 people killed.

  While we’re certain (and saddened) that hostilities will resume anew in relatively short order, we found the following images from the ceasefire to be interesting if only for the degree to which some fighters seem bored – almost dejected – at the lack of violence.

  “War”, as Chris Hedges famously wrote, “is a drug.”

  

  

  

  

  

  

  

  

  

  

  

  *  *  * 

  “I learned early on that war forms its own culture. The rush of battle is a potent and often lethal addiction. Many of us, restless and unfulfilled, see no supreme worth in our lives. We want more out of life. And war, at least, gives a sense that we can rise above our smallness and divisiveness.”

  

  

  

  

• API Oil Report Relatively Good for This Time of Year (Video)

  By EconMatters

  

  The API Report Much Better than Expected. The EIA Report will be out tomorrow, focus on the U.S. Production Number – the most important element of the report. How many more EIA Reports until we break the 9 Million Barrel per day threshold in U.S. Oil Production.

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

  

  

  

  

• India Gold Imports Strong Despite Government's Perpetual Obstruction

  Submitted by Koos Jansen via BullionStar.com,

  While India’s gross gold bullion import in 2015 reached the third highest amount ever at 947 tonnes and gross silver bullion import reached the highest amount ever at 8,504 tonnes, the Indian government is perpetually trying to obstruct the populace from protecting their wealth.

  Last week I was going through gold and silver trade data released by the Indian Directorate General of Commercial Intelligence and Statistics (DGCIS) and observed strong import of precious metals in 2015. At the same time I was reading the documents, news came out that stated the Indian government was to implement extra rules to hinder its people from buying gold. In my view, the situation in India is another perfect example of a government’s nonsensical fight against the economic tide. Central banks do it all time don’t they?

  In an ongoing failure to understand what capitalism is about, the Indian government continues to “disagree” with its citizenry where savings should be placed. Whenever the Indian people increase gold purchases to secure their financial wellbeing, the government is keen to find new tactics to suppress this free market expression. The government aims the country’s wealth to be where it suits them – in the fiat currency they issue and control, but the populace believes fiat currency is inherently vulnerable and chooses physical gold for its long-term wealth preservation. It seems the more the Indian rulers resist private gold demand, the stronger the forces they’re fighting become. As we’ll see below, most undertakings by the government to keep its people from buying gold have been in vain.

  First, let’s have a look at an overview of all the measures undertaken in the past years. At the end of the post I will present the details of the latest gold and silver import data (India mostly relies on import for its precious metals hunger).

  When the price of gold made its famous nosedive in April 2013 Indian physical gold demand skyrocketed off the charts; in May 2013 India imported 165 tonnes of gold, the highest monthly tonnage ever. In reaction, the government decided in June 2013 to raise the import duty on gold from 4 % to 8 % and in August 2013 from 8 % to 10 %. In addition, in July 2013 the “80/20 rule” was implemented, forcing traders to export 20 % of all imported gold. The import duty on silver was raised to 10 % as well, although silver was not subjected to the 80/20 rule. The result was that by September 2013 India’s gold import through official channels had fallen to a mere 16 tonnes, but smuggling in gold had exploded. Gold trade was diverted to the black market with all due consequences – thriving criminality threatens social and economic stability – and India’s established gold industry organizations fiercely objected the government’s policy. Another consequence was that silver import has seen spectacular increases ever since (see further below).

  Although heavily restricted, Indian gold import through official channels bounced of the lows in mid 2014. Eventually, the 80/20 rule was withdrawn in November 2014 while the Indian government was preparing a new trick: the gold monetization scheme, which was to “to mobilize the gold held by households and institutions in the country” and ”be able to reduce reliance on import of gold over time to meet domestic demand”. In my words, the scheme was intended to oversubscribe the people’s gold by exciting them to deposit their metal at commercial banks. The catch is that the gold depositor is technically lending his gold to the bank, whereby he risks losing his metal if the counterparty goes belly up – although these risks were not disclosed in the brochure. Ironically, the essence why people buy gold in the first place is protect their wealth, not to take risks (ie by lending). Not surprisingly, the gold monetization scheme has failed miserably.1– bear in mind, there is an estimated 20,000 tonnes of physical gold owned by the Indian private sector. It does not look like the gold monetization scheme will ever succeed in India.

  Data from the World Gold Council shows Indian consumer gold demand accounted for 848.9 tonnes in 2015. Reasons enough for the Indian rulers to continue their hopeless quest to limit demand. In January 2016 the government introduced a rule that forces jewelry buyers to show a Permanent Account Number (PAN), which the vast majority of rural customers do not have, for any purchase above Rs 200,000. And it proposed the re-imposition of a 1 % excise duty. Remarkably, the excise duty was first introduced in 2012 but rolled back the same year as jewelers went on strike. This time around jewelers are seeking the same relief. Since 2 March they’re on strike indefinitely (speculating; the excise duty will not succeed).

  Let’s head over to the most recent (final) trade data released by India’s customs department, the DGCIS. India’s gross gold bullion import in December 2015 was robust at 111 tonnes, up 9 % from November and up 218 % from December 2014. Total gross gold import for India in 2015 came in at 947 tonnes, up 22 % from 2014, the third highest amount ever.

  India gross exported 11 tonnes of gold bullion in December 2015, down 22 % from November and up 35 % from December 2014. Gross gold export for the year 2015 aggregated to 150 tonnes, the highest ever, up 136 % compared to 2014. Gold bullion export might be elevated due to India’s increased refining capacity.

  Net gold bullion import in December 2015 came in at 100 tonnes. Total net gold import for 2015 accounted for 797 tonnes, up 11 % year on year.

  

  

  

  India’s gross silver bullion import was very strong in December 2015 at 1,042 tonnes, up 71 % from November and up 198 % from December 2014. Total gross silver import in 2015 accounted for a staggering 8,504 tonnes (!), up 20 % from 2014.

  As, silver bullion export from India is neglectable, net import in December 2015 accounted for 1,041 tonnes and total net import for 2015 came in at 8,494 tonnes. The latter being 31 % of world silver mining output!

  

  

  From looking at official precious metals import and demand numbers we can wonder if the many restrictions from the Indian government have accomplished anything to their likes. One thing is for sure; the Indian people did not substantially bought less gold – and did buy substantially more silver.

  Instead of hopelessly resisting and intervening in the Indian economy, the government could also choose to allow free market forces and/or even support the people’s love for gold to bolster India’s gold industry for it to become a global powerhouse. Wouldn’t that be much more effective?

  Kindly note, the cross-border trade tonnages for this post, calculated by myself and Nick Laird from Sharelynx.com, are based on the Rupee values disclosed by the DGCIS and the monthly average metal prices. The gold and silver bullion import and export figures mentioned in this post exclude smuggling and cross-border trade in precious metals jewelry.

  

  

  

  

  

• Deflation Is Coming To The Auto Industry As Used Car Prices Drop, Off-Lease Deluge Looms

  Last week, we learned that vehicle leasing as a percentage of monthly light-vehicle sales hit a record in February at 32.3%.

  In other words, a third of the over 1 million cars and light trucks “sold” during the month were leases, according to J.D. Power.

  This is indicative of what is now a long-term trend. Have a look at the following chart from WSJ, which shows that since 2009, the share of monthly auto leases as a percentage of vehicle sales well more than tripled:

  

  Of course the thing about leased vehicles is that they come back, and as WSJ wrote last week, “about 3.1 million vehicles will return to dealer lots off leases this year, up 20% from 2015 [and] the number will climb to 3.6 million in 2017 and 4 million in 2018.”

  So what does that mean for dealers? Deflation. 

  And what does that mean for the automakers? Hefty losses.

  Nothing about this is hard to understand. You get a supply glut causing pricing assumptions for your existing inventory to prove wildly optimistic and you end up with giant writedowns.

  This has happened before. “The auto industry expanded the use of leasing in the mid-1990s, helping to fuel retail sales of new vehicles,” WSJ recounts. “Eventually, a glut of off-lease cars sent resale values down and auto lenders who had bet residuals would remain high ended up racking up billions of dollars in losses, having to sell the cars for much less than they anticipated.”

  Right. Nothing difficult to grasp about that. But the especially silly thing about the dynamic with auto leases is that it was the dealers and the automaker-affiliated financing companies that made the leases in the first place. In other words, it’s not like this was some supply shock that couldn’t have been forecast ahead of time. In fact, they knew exactly when the off-lease deluge would start, so it’s not entirely clear why they would have set optimistic residual assumptions.

  Anyway, the cracks are already starting to show.

  The Manheim Used Vehicle Value Index posted its largest Y/Y decline in over two years last month, falling -1.4% and -1.5% M/M. We’re now 3.5% below the peak. 

  

  “All else equal, it puts pressure on lease residuals – though we note most fincos had assumed declining used vehicle prices in their lease writing,” Goldman said, earlier today. “Second, while improving inventory acquisition cost for the dealers, it may put downward pressure on the value of existing dealer inventories, which can be negative for used margins.”

  Well yes, declining used vehicle prices “may” be a “negative for used margins” – in fact that’s almost a tautology. 

  

  And of course falling used car prices means pressure on new car prices as well, which would be a shock to America’s booming auto market.

  Obviously, the scariest part about all of the above is that consumers still have the pedal to the metal (pun fully intended) when it comes to leases, which means there’s no end in sight to the off-leases and thus no way to determine, at this juncture, how big the residual writedown wave and deflationary auto industry calamity will ultimately end up being.

  So, you know… “buckle up.”

  *  *  *

  Bonus chart: largest used car price decline for any February since 2008

  

  

  

  

  

  

• The Oil Short Squeeze Explained: Why Banks Are Aggressively Propping Up Energy Stocks

  Last week, during the peak of the commodity short squeeze, we pointed out how this default cycle is shaping up to be vastly different from previous one: recovery rates for both secured and unsecured debts are at record low levels. More importantly, we noted how this notable variance is impacting lender behavior, explaining that banks – aware that the next leg lower in commodities is imminent – are not only forcing the squeeze in the most trashed stocks (by pulling borrow) but are doing everything in their power to “assist” energy companies to sell equity, and “persuade management” to use the proceeds to take out as much of the banks’ balance sheet exposure as possible, so that when the default tsunami finally arrives, banks will be far, far, away from the carnage.

  All of this was predicated on prior lender conversations with the Dallas Fed and the OCC, discussions which the Dallas Fed vocally denied and accused us of lying, yet which the WSJ confirmed, showing that it was the Dallas Fed who was lying.

  This was our punchline:

  [Record low] recovery rate explain what we discussed earlier, namely the desire of banks to force an equity short squeeze in energy stocks, so these distressed names are able to issue equity with which to repay secured loans to banks who are scrambling to get out of the capital structure of distressed E&P names. Or as MatlinPatterson’s Michael Lipsky put it: “we always assume that secured lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy as the new secured debt of the company. But they don’t want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money.“

   

  And so, one by one the pieces of the puzzle fall into place: banks, well aware that they are facing paltry recoveries in bankruptcy on their secured exposure (and unsecured creditors looking at 10 cents on the dollar), have engineered an oil short squeeze via oil ETFs…

   

  

   

   

  … to push oil prices higher, to unleash the current record equity follow-on offering spree…

  

  … to take advantage of panicked investors some of whom are desperate to cover their shorts, and others who are just as desperate to buy the new equity issued. Those proceeds, however, will not go to organic growth or even to shore liquidity but straight to the bank to refi loan facilities and let banks, currently on the hook, leave silently by the back door. Meanwhile, the new investors have no security claims and zero liens, are at the very bottom of the capital structure, and  face near certain wipe outs.

   

  In short, once the current short squeeze is over, expect everyone to start paying far more attention to recovery rates and the true value of “fundamentals.”

  Going back to what Lipsky said, “the banks do not want to be there.” So where do they want to be? As far away as possible from the shale carnage when it does hit.

  Today, courtesy of The New York Shock Exchange, we present just the case study demonstrating how this takes place in the real world. Here the story of troubled energy company “Lower oil prices for longer” Weatherford, its secured lender JPM, the incestuous relationship between the two, and how the latter can’t wait to get as far from the former as possible, in…

  “Why Would JP Morgan Raise Equity For An Insolvent Company”

   

  I am on record saying that Weatherford International is so highly-leveraged that it needs equity to stay afloat. With debt/EBITDA at 8x and $1 billion in principal payments coming due over the next year, the oilfield services giant is in dire straits. Weatherford has been in talks with JP Morgan Chase to re-negotiate its revolving credit facility — the only thing keeping the company afloat. However, in a move that shocked the financial markets, JP Morgan led an equity offering that raised $565 million for Weatherford. Based on liquidation value Weatherford is insolvent. The question remains, why would JP Morgan risk its reputation by selling shares in an insolvent company?

   

  According to the prospectus, at Q4 2015 Weatherford had cash of $467 million debt of $7.5 billion. It debt was broken down as follows: [i] revolving credit facility ($967 million), [ii] other short-term loans ($214 million), [iii] current portion of long-term debt of $401 million and [iv] long-term debt of $5.9 billion. JP Morgan is head of a banking syndicate that has the revolving credit facility.

   

  Even in an optimistic scenario I estimate Weatherford’s liquidation value is about $6.7 billion less than its stated book value. The lion’s share of the mark-downs are related to inventory ($1.1B), PP&E ($1.9B), intangibles and non-current assets ($3.5B). The write-offs would reduce Weatherford’s stated book value of $4.4 billion to – $2.2 billion. After the equity offering the liquidation value would rise to -$1.6 billion.

  

   

  JP Morgan and Morgan Stanley also happen to be lead underwriters on the equity offering. The proceeds from the offering are expected to be used to repay the revolving credit facility.

   

  In effect, JP Morgan is raising equity in a company with questionable prospects and using the funds to repay debt the company owes JP Morgan. The arrangement allows JP Morgan to get its money out prior to lenders subordinated to it get their $401 million payment. That’s smart in a way. What’s the point of having a priority position if you can’t use that leverage to get cashed out first before the ship sinks? The rub is that [i] it might represent a conflict of interest and [ii] would JP Morgan think it would be a good idea to hawk shares in an insolvent company if said insolvent company didn’t owe JP Morgan money?

  The answer? JP Morgan doesn’t care how it looks; JP Morgan wants out and is happy to do it while algos and momentum chasing daytraders are bidding up the stock because this time oil has finally bottomed… we promise.

  So here’s the good news: as a result of this coordinated lender collusion to prop up the energy sector long enough for the affected companies to sell equity and repay secured debt, the squeeze may last a while; as for the bad news: the only reason the squeeze is taking place is because banks are looking to get as far from the shale patch and the companies on it, as possible.

  We leave it up to readers to decide which “news” is more relevant to their investing strategy.

  

  

  

  

  

• Millennials Are The Deflation Generation

  Via ConvergEx's Nicholas Colas,

  While the world’s central banks struggle with deflation, millennials (those born between 1980 – 2000) are busy creating a world where persistently lower prices will be an economic cornerstone.  “A feature, not a bug,” as they say in the tech world.

   

  The immediate reason for that is simple: our cohort got stuck with educational hyperinflation, something economists miss when they look at the headline numbers. Education is only 6% of the CPI basket. For millennials, that number can easily exceed 20% because of student loans. We are therefore turning to a new tech-enabled service economy to help us make ends meet, and the majority of these new services are profoundly “Disruptive” to old business models.

   

  “Disruption” is often code for “deflation”, since more taxis (Uber), hotel rooms (Airbnb), food delivery (too many examples to mention) means more price competition. And when the next wave of disruption comes along to put the current crop of “Disruptors” out of business, we’ll switch to them.  Deflation will be permanent, and we’re OK with that.  And when my cohort runs the Fed, or the ECB, or the BoJ, we will be unlikely to care if prices decline. We may even consider it the sign of a successful economy that serves its citizens well.

  Note from Nick: Baby boomers know a lot about inflation.  We came of age in the 1970s, when food and gas prices rose so quickly that it was easy to come up short on cash at the checkout line. I still keep an extra $20 tucked away in my wallet because of those experiences. Jessica’s generation saw none of this, with the notable exception of educational cost inflation. Today she describes just how differently her demographic group thinks about price levels. And it is VERY different from the Boomers…

  It’s no secret we millennials are pro multi-taskers when it comes to technology, and we’re often on our mobile phones and laptops while watching TV all at the same time. There is one device, however, of the three that is far harder for us to give up. No prizes for guessing which one:

  • A recent Harris Poll of 2,193 U.S. adults surveyed in January shows that 61% of millennials name mobile phones as the most difficult device to unplug from, compared to television (21%) and computer/laptop (22%).
  • That contrasts our parents’ generation – the baby boomers – with mobile phones nearing the bottom of the list (28%) and the top two spots going to computer/laptop (37%) and television (44%).

  Dig deeper into the survey and the reasoning becomes clear, as the utility of mobile phones has increased dramatically during our lifetimes. For example, the survey notes that unplugging to the broader population means avoiding: social media (71%), the Internet (64%), email (58%), text messages (55%), mobile or tablet apps (55%), video games on consoles or handheld game devices (51%), computer games (50%), phone calls (48%), television (45%), eBooks (30%), and audio books (21%). People can participate in nearly all of these activities on mobile phones, and we’ve grown up with this benefit. So of course we’d opt for our cell phone over a TV or laptop – we can use it for all three functions.

  The dominance of mobile phones and technology in our lives not only impact how we use our time, but how we spend our money. The Federal Reserve has based its inflation expectations on a relatively static basket of goods for decades, but millennials’ experience with inflation differs from our parents. Services replace physical goods, for example, while convenience gets baked into costs. Here are four variables that shape our inflation expectations:

  #1 – Technology (Deflationary): When I go to the mall with friends, I rarely buy anything. Why? Because I know I can find whatever I like cheaper online. Merchants used to earn a premium for holding products customers couldn’t find elsewhere locally. Technology and the internet erase this premium and put downward pressure on the price of goods because they provide access to products all over the world, increasing competition and acting as an arbitrage.

   

  For example, I’ll browse bookstores, but when a book peaks my interest, I’ll only take note of the title. Same goes for technology gadgets or devices. I know I can buy them from Amazon, for example, for a lower price, either from the site or another merchant the site hosts. I don’t even need to pay for shipping since I have a prime account, and receive my purchase in just two days. Like many other sites, Amazon’s business model hinges on maintaining competitive prices and making the consumer experience more convenient. In short, the internet offers ample price comparisons and serves as an effective platform to highlight promotional sales. Paying full price at the mall is rare except for last minute needs.

   

  #2 – Sharing Economy (Deflationary): During my adolescence, I’d dedicate one category on my Christmas list to CDs. That was until iTunes came along and I could more affordably purchase single songs I particularly enjoyed. Now, music streaming services have totally changed the game. On Spotify, for example, I can make customized song lists and listen to them for a month, all for the price of less than a CD. A premium subscription to Spotify costs $10 per month versus buying a CD at Target for upwards of $15. You can even listen to music streaming services for free, if you’re willing to listen to ads and in shuffle play mode.

   

  Here are some other similar examples. I don’t pay for cable because I can stream numerous shows and movies for only $8.99 a month on Netflix (in this case I don’t even need a TV since I can watch on my laptop or cell phone). I’m also able to travel a little more due to services like Airbnb, as I can find an inexpensive, comfortable place to stay. Lastly, many of my friends who live in the city don’t have a car because they can take an Uber if necessary. It’s like having a personal driver that picks them up where and at what time they want to get them to their intended destination. Bottom line: these examples show services substituting physical goods, enabling the sharing economy to act as a deflationary force in millennials’ lives.

   

  #3 – Social Media (Weirdly Inflationary): I’ll be the first to admit, I often covet a friend’s new handbag or latest trip when I see pictures on Instagram. Has this inspired a few purchases or vacations on my behalf? I think you know the answer. Social media, in this sense, has created what you’ve probably heard of as “lifestyle inflation”.

   

  “Keeping up with the Joneses” is nothing new, but platforms like Facebook have taken it to a new level. Everyone you know or connect with on social media can view your life more intimately than ever before, even if they live halfway around the world. A Facebook or Instagram account, for example, gives people the opportunity to portray a glamorized life. This creates competition, and may spur more expensive purchases than some individuals would have otherwise pursued. This includes everything from clothes to experiences in order to show off on the web. We also value peer reviews on products and restaurants, and will heed these opinions to attain a better quality product or service. All in all, social media is inflationary as millennials try to match or outdo each other’s lifestyle, and is a seamless advertising medium.

   

  # 4 – Convenience (Inflationary, but by choice): I don’t know about you, but I dread going to the supermarket. Having to navigate through crowds and carve a chunk of time out of my busy schedule is less than ideal. That’s why I will gladly pay a grocery store delivery service to do it for me. I know I’m not alone on this front in light of the plethora of startups launching delivery services related to everything from groceries (Instacart)  and laundry (Cleanly) to alcohol (Saucey) and takeout (GrubHub). Some apps only serve certain cities, but larger companies are working to fill the void elsewhere. Amazon, for example, shows this in its effort to deliver by drone or its own trucks. They are also working on making delivery times faster with Prime Now, a same-day delivery app. Bottom line here: we’ll pay extra for convenience (inflationary), but expect this premium to abate overtime as we transition to a more on demand economy.

  In sum, millennials’ inflationary basket isn’t as simple as weighting goods within large standard components like food, housing, transportation, and entertainment. Student loans, obviously not directly in the Consumer Price Index, account for one of our largest monthly payments. We therefore can’t afford a house, and a lot of us live with our parents as rental costs continue to climb. Many also can’t afford a car, in which Uber proves especially helpful. That’s why we depend on services that provide access to goods without requiring ownership. This keeps expenses low and convenience high. We care about what our friends think and have serious FOMO (fear of missing out), so we’re less reluctant to save and more inclined to travel or buy new clothes when we can. Fortunately, however, technology and startups continue to bring costs down as we benefit from each other’s contributions online and in the sharing economy. In this sense, we are more privy to the deflationary impact of technology and services, in contrast to our parents’ experience with inflation of physical goods, such as food and gasoline.

  Now, I realize economists wouldn’t consider the four themes I outlined as actual inflation or deflation. They simply show how my cohort experiences price pressures that inform our thinking on the topic. This is important, however, for policy going forward as it could alter the Fed’s dual mandate on the inflation side. The expectation of deflation is already incorporated in millennial psyche, so it doesn’t necessarily delay spending as seen in Japan. We adopt technologies that force deflation. Therefore, in our world, deflation is the mark of a healthy economy. 

  

  

  

  

  

• The "Outrageous" Reasons Donald Trump Will Never Be President

  So Un-Presidential…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Commodities, Stocks, & Bond Yields Plunge As Super-Short-Squeeze Stalls

  We suspect the following will be heard a little more this week than last…

   

  The squeeze is over… for now thanks To Fed's Fischer…After 10 straight days without dropping, "Most Shorted" tumbled the most in 2 months…

  

   

  And crude oil ETF short-squeeze is over – Oil ETF long/short is back to recent norms…

  

   

  And the major indices were extremely overbought… Trannies are as overbought as they were at the peak in Nov 2014 (after Bullard's QE4 bounce)…

  

   

  And Small Caps are as overbought as they were at their peak in June 2015.

  

   

  Which left stocks sliding after dismal China trade data and Goldman pouring cold water on the crude ramp…

  

   

  Futures show the reactions as Japanese GDP stayed in recession, China Trade Data disappointed, Germany beat… and reality struck in the crude complex…

  

   

  Leaving S&P Futures right at the crucial trendline…

  

   

  As VIX was dumped in the last minute to ensure 1980 was held…

  

   

  VIX surged near 19 again…

  

   

  Energy & Financials went from winners to biggest losers very quick… This was energy sector's 2nd biggest daily drop since August Black Monday

  

   

  We're gonna need another Mclendon death…

  

   

  And Tilson's short LL again..

  

   

  Oil decoupled from stocks…but stocks caught down in the end amid Crude's drop in 2 weeks

  

   

  Bonds decoupled from stocks… but they recoupled into the close…

  

   

  And after this yuuge rally aimed at supporting energy stocks to get secondaries (and banks to unload), credit risk on the junkiest junk has not improved at all…widest since 2009

  

   

  And with everyone chasing HYG (not realizing this is a placeholder for fund manager cash as the primary market is dead for now – but due to pick up), we thought the following chart might help with some rationality…

  

   

  And noting that HYG has stalled at its 100DMA…

  

   

  Treasury yiuelds plunged on the day as repomarkets imploded…(and JGB yields collapsed)…

  

   

  The USD Index rose very modestly on the day as commodity currencies (CAD, AUD) tumbled and JPY strengthened (as carry was unwound en masse)

  

   

  Commodities were all weak, led by crude and copper on the day…

  

   

  Copper's worst day in 2 months…

  

   

  Charts: Bloomberg

  

  

  

  

• Crude Chaos As Cushing Inventories Rise For 6th Straight Week

  Following Genscape's projection that Cushing inventories rose less than expected, various sources on Twitter report that API sees a 4.4mm build (in line with expectations of a 3.9mm build) after EIA's massive build of over 10.3mm barrels last week. Cushing saw a 692k build – the 6th week in a row but gasoline and distillates saw a draw. Crude sold off all day as the short-covering squeeze ended but as the data hit, WTI dipped, ripped, and dipped again… only to rally once more…

   

  API

  • Crude +4.4mm
  • Cushing +692k
  • Gasoline -2.1mm
  • Distillates -128k

  Sixth weekly rise in Cushing Inventories…

  

   

  And the reaction in crude…

  

   

  Charts: Bloomberg

  

  

  

  

  

• This 4,000-Year-Old Financial Indicator Says That A Major Crisis Is Looming

  Submitted by Simon Black via SovereignMan.com,

  Over 4,000 years ago during Sargon the Great’s reign of the Akkadian Empire, it took 8 units of silver to buy one unit of gold.

  This was a time long before coins. It would be thousands of years before the Lydians in modern day Turkey would invent gold coins as a form of money.

  Back in the Akkadian Empire, gold and silver were still used as a medium of exchange.

  But the prices of goods and services were based on the weight of metal, and typically denominated in a unit called a ‘shekel’, about 8.33 grams.

  For example, you could have bought 100 quarts of grain in ancient Mesopotamia for about 2 shekels of silver, a weight close to half an ounce in our modern units.

  Both gold and silver were used in trade. And at the time the ‘exchange rate’ between the two metals was fixed at 8:1.

  Throughout ancient times, the gold/silver ratio kept pretty close to that figure.

  During the time of Hamurabbi in ancient Babylon, the ratio was roughly 6:1.

  In ancient Egypt, it varied wildly, from 13:1 all the way to 2:1.

  In Rome, around 12:1 (though Roman emperors routinely manipulated the ratio to suit their needs).

  In the United States, the ratio between silver and gold was fixed at 15:1 in 1792. And throughout the 20th century it averaged about 50:1.

  But given that gold is still traditionally seen as a safe haven, the ratio tends to rise dramatically in times of crisis, panic, and economic slowdown.

  Just prior to World War II as Hitler rolled into Poland, the gold/silver ratio hit 98:1.

  In January 1991 as the first Gulf War kicked off, the ratio once again reached 100:1, twice its normal level.

  In nearly every single major recession and panic of the last century, there was a sharp rise in the gold/silver ratio.

  The crash of 1987. The Dot-Com bust in the late 1990s. The 2008 financial crisis.

  These panics invariably led to a gold/silver ratio in the 70s or higher.

  In 2008, in fact, the gold/silver ratio surged from below 50 to a high of roughly 84 in just two months.

  We’re seeing another major increase once again. Right now as I write this, the gold/silver ratio is 81.7, nearly as high as the peak of the 2008 financial crisis.

  This isn’t normal.

  In modern history, the gold/silver ratio has only been this high three other times, all periods of extreme turmoil—the 2008 crisis, Gulf War, and World War II.

  

  This suggests that something is seriously wrong. Or at least that people perceive something is seriously wrong.

  There are so many macroeconomic and financial indicators suggesting that a recession is looming, if not an all-out crisis.

  In the US, manufacturing data show that the country is already in recession (more on this soon).

  Default rates are rising; corporate defaults in the US are actually higher now than when Lehman Brothers went bankrupt back in 2008.

  These defaults have put a ton of pressure on banks, whose stock prices are tanking worldwide as they scramble to reinforce their balance sheets against losses.

  I just had a meeting with a commercial banker here in Sydney who told me that Australian regulators are forcing the bank to increase its already plentiful capital reserves by over 40% within the next several months.

  This is an astonishing (and almost impossible) order.

  The regulators wouldn’t be doing that if they weren’t getting ready for a major storm. So even the financial establishment is planning for the worst.

  Good times never last forever, especially with governments and central banks engineering artificial prosperity by going into debt and printing money.

  These tactics destroy a financial system. And the cracks are visibly expanding.

  So while the gold/silver ratio isn’t any kind of smoking gun, it is an obvious symptom alongside many, many others.

  Now, the ratio may certainly go even higher in the event of a major banking or financial crisis. We may see it touch 100 again.

  But it is reasonable to expect that someday the gold/silver ratio will eventually fall to more ‘normal’ levels.

  In other words, today you can trade 1 ounce of gold for 80 ounces of silver.

  But perhaps, say, over the next two years the gold/silver ratio returns to a more historic norm of 55. (Remember, it was as low as 30 in 2011)

  This means that in the future you’ll be able to trade the 80 ounces of silver you acquired today for 1.45 ounces of gold.

  The final result is that, in gold terms, you earn a 45% “profit”. Essentially you end up with 45% more gold than you started with today.

  So bottom line, if you’re a speculator in precious metals, now may be a good time to consider trading in some gold for silver.

  

  

  

  

  

• Jeff Gundlach Explains Why "The Rally Is Ending" – Live Webcast

  At 4:15pm ET, DoubleLine’s Jeff Gundlach who continues to do no wrong in the market (even if it means buying stocks at his most doom and gloomish ahead of a record short squeeze), will hold his latest webcast titled “Connect the Dots” and in which he will explain why, as he told Reuters moments ago, “the rally in risk assets is nearing the end”, which in turn explains why when the short covering frenzy had gripped the market last week, Gundlach was cashing out.

  To register for the webcast, click on the image below.

  

   

  More details from Reuters Jennifer Ablan:

  Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said on Tuesday the recent rally in risk assets is nearing an end.

   

  Gundlach, who told Reuters last week that the firm is now considering closing out some of its long positions in the stocks they had purchased in February, said risk assets will struggle in sympathy with oil.

   

  “Oil, like I said, had an easy time rallying from 28 to 38. Now the hard work begins,” Gundlach said. “Oil is the key to everything.”

   

  Gundlach said unless oil rallies another $10 a barrel or more, “a lot of companies are going to go under, which will kill the banking system. The rally off the 200 low (in copper) hasn’t been that impressive, and looks to possibly be over.”

   

  Gundlach said in a webcast later Tuesday that the Standard & Poor’s 500 Index, which he characterized as being in a bear-market rally that is close to being over, has 2 percent upside but 20 percent downside.

  Gundlach’s punchline: “I think we are near the end of a bear market rally with a 10:1 risk/reward ratio.” We agree.

  The full presentation is below:

  

  

  

  

  

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