Today’s News April 29, 2015

• Turning America Into A Battlefield: A Blueprint For Locking Down The Nation

  Submitted by John Whitehead via The Rutherford Institute,

  In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

  – President Dwight D. Eisenhower, 1961

  A standing army – something that propelled the early colonists into revolution – strips the American people of any vestige of freedom. How can there be any semblance of freedom when there are tanks in the streets, military encampments in cities, Blackhawk helicopters and armed drones patrolling overhead?

  It was for this reason that those who established America vested control of the military in a civilian government, with a civilian commander-in-chief. They did not want a military government, ruled by force. Rather, they opted for a republic bound by the rule of law: the U.S. Constitution.

  Unfortunately, with the Constitution under constant attack, the military’s power, influence and authority have grown dramatically. Even the Posse Comitatus Act of 1878, which makes it a crime for the government to use the military to carry out arrests, searches, seizure of evidence and other activities normally handled by a civilian police force, has been weakened by both Barack Obama and George W. Bush, who ushered in exemptions allowing troops to deploy domestically and arrest civilians in the wake of alleged terrorist acts.

  Now we find ourselves struggling to retain some semblance of freedom in the face of police and law enforcement agencies that look and act like the military and have just as little regard for the Fourth Amendment, laws such as the NDAA that allow the military to arrest and indefinitely detain American citizens, and military drills that acclimate the American people to the sight of armored tanks in the streets, military encampments in cities, and combat aircraft patrolling overhead.

  Making matters worse, we find out that the military plans to use southwestern states as staging grounds for guerilla warfare drills in which highly-trained military troops equipped with all manner of weapons turn American towns and cities in quasi-battlefields. Why? As they tell us, it’s so that special operations forces can get “realistic military training” in “hostile” territory.

  They’ve even got a name for the exercise: Jade Helm 15.

  Whether or not Americans have anything to fear from Jade Helm 15, a covert, multi-agency, multi-state, eight-week military training exercise set to take place this summer from July 15 through Sept. 15, remains to be seen.

  Insisting that there’s nothing to be alarmed about, the Washington Post took great pains to point out that these military exercises on American soil are nothing new. For instance, there was Operation Bold Alligator, in which in which thousands of Marines and sailors carried out amphibious exercises against “insurgent” forces in Georgia and Florida. Operation Robin Sage had Green Beret soldiers engaging in guerrilla warfare in North Carolina. And Operation Derna Bridge sends Marine special forces into parts of South Carolina and the National Forest.

  Yet if Americans are uneasy about this summer’s planned Jade Helm 15 military exercises, they have every right to be.

  After all, haven’t we been urged time and time again to just “trust” the government to respect our rights and abide by the rule of law only to find that, in fact, our rights were being plundered and the Constitution disregarded at every turn?

  Let’s assume, for the moment, that Jade Helm 15 is not a thinly veiled military plot to take over the country lifted straight out of director John Frankenheimer’s 1964 political thriller Seven Days in May, as some fear, but is merely a “routine” exercise for troops, albeit a blatantly intimidating flexing of the military’s muscles.

  The problem arises when you start to add Jade Helm onto the list of other troubling developments that have taken place over the past 30 years or more: the expansion of the military industrial complex and its influence in Washington DC, the rampant surveillance, the corporate-funded elections and revolving door between lobbyists and elected officials, the militarized police, the loss of our freedoms, the injustice of the courts, the privatized prisons, the school lockdowns, the roadside strip searches, the military drills on domestic soil, the fusion centers and the simultaneous fusing of every branch of law enforcement (federal, state and local), the stockpiling of ammunition by various government agencies, the active shooter drills that are indistinguishable from actual crises, the economy flirting with near collapse, etc.

  Suddenly, the overall picture seems that much more sinister. Clearly, as I point out in my new book Battlefield America: The War on the American People, there’s a larger agenda at work here.

  Seven years ago, the U.S. Army War College issued a report calling on the military to be prepared should they need to put down civil unrest within the country. Summarizing the report, investigative journalist Chris Hedges declared, “The military must be prepared, the document warned, for a ‘violent, strategic dislocation inside the United States,’ which could be provoked by ‘unforeseen economic collapse,’ ‘purposeful domestic resistance,’ ‘pervasive public health emergencies’ or ‘loss of functioning political and legal order.’ The ‘widespread civil violence,’ the document said, ‘would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.’”

  At what point will all of the government’s carefully drawn plans for dealing with civil unrest, “homegrown” terrorism and targeting pre-crime become a unified blueprint for locking down the nation?

  For instance, what’s the rationale behind turning government agencies into military outposts? There has been a notable buildup in recent years of SWAT teams within non-security-related federal agencies such as Department of Agriculture, the Railroad Retirement Board, the Tennessee Valley Authority, the Office of Personnel Management, the Consumer Product Safety Commission, the U.S. Fish and Wildlife Service and the Education Department. As of 2008, “73 federal law enforcement agencies… [employ] approximately 120,000 armed full-time on-duty officers with arrest authority.” Four-fifths of those officers are under the command of either the Department of Homeland Security (DHS) or the Department of Justice.

   

  What’s with all of the government agencies stockpiling hollow point bullets? For example, why does the Department of Agriculture need .40 caliber semiautomatic submachine guns and 320,000 rounds of hollow point bullets? For that matter, why do its agents need ballistic vests and body armor?

   

  Why does the Postal Service need “assorted small arms ammunition”? Why did the DHS purchase “1.6 billion rounds of hollow-point ammunition, along with 7,000 fully-automatic 5.56x45mm NATO ‘personal defense weapons’ plus a huge stash of 30-round high-capacity magazines”? That’s in addition to the FBI’s request for 100 million hollow-point rounds. The Department of Education, IRS, the Social Security Administration, and the National Oceanic and Atmospheric Administration, which oversees the National Weather Service, are also among the federal agencies which have taken to purchasing ammunition and weaponry in bulk.

   

  Why is the federal government distributing obscene amounts of military equipment, weapons and ammunition to police departments around the country? And why is DHS acquiring more than 2,500 Mine-Resistant Armored Protection (MRAP) vehicles, only to pass them around to local police departments across the country? According to the New York Times:

   

  [A]s President Obama ushers in the end of what he called America’s “long season of war,” the former tools of combat — M-16 rifles, grenade launchers, silencers and more — are ending up in local police departments, often with little public notice. During the Obama administration, according to Pentagon data, police departments have received tens of thousands of machine guns; nearly 200,000 ammunition magazines; thousands of pieces of camouflage and night-vision equipment; and hundreds of silencers, armored cars and aircraft. The equipment has been added to the armories of police departments that already look and act like military units.

   

  Why is the military partnering with local police to conduct training drills around the country? And what exactly are they training for? In Richland, South Carolina, for instance, U.S. army special forces participated in joint and secretive exercises and training with local deputies. The public was disallowed from obtaining any information about the purpose of the drills, other than being told that they might be loud and to not be alarmed. The Army and DHS also carried out similar drills and maneuvers involving Black Hawk helicopters in Texas, Florida, and other locations throughout the U.S., ostensibly in order to provide local police with “realistic” urban training.

   

  What is being done to protect the American populace from the threat of military arms and forces, including unarmed drones, being used against them? Policy analysts point to Directive No. 3025.18, “Defense Support of Civil Authorities” (issued on Dec. 29, 2010), as justification for the government’s use of military force to put down civil unrest within the United States.

   

  Why is FEMA stockpiling massive quantities of emergency supplies? On January 10, 2014, FEMA made a statement enlisting the service of contractors who could “supply medical biohazard disposal capabilities and 40 yard dumpsters to 1,000 tent hospitals across the United States; all required on 24-48 hour notice.” This coincides with other medical requests seeking massive amounts of supplies, such as “31,000,000 flu vaccinations,” “100,000 each of winter shirts and pants and the same for summer” and other goods and services requests as well like tarps, manufactured housing units, and beverages. And why does the TSA need $21,000 worth of potassium chlorate, a chemical compound often used in explosives?

   

  Why is the Pentagon continuing to purchase mass amounts of ammunition while at the same time preparing to destroy more than $1 billion worth of bullets and missiles that are still viable?

   

  Moreover, what is really being done to hold the Pentagon accountable for its doctored ledgers, fraud, waste and mismanagement, which has cost the taxpayer trillions of dollars? According to Reuters, “The Pentagon is the only federal agency that has not complied with a law that requires annual audits of all government departments. That means that the $8.5 trillion in taxpayer money doled out by Congress to the Pentagon since 1996, the first year it was supposed to be audited, has never been accounted for. That sum exceeds the value of China's economic output.”

   

  Given the similarities between the government’s Live Active Shooter Drill training exercises, carried out at schools, in shopping malls, and on public transit, which can and do fool law enforcement officials, students, teachers and bystanders into thinking it’s a real crisis, how much of what is being passed off as real is, in fact, being staged by DHS for the “benefit” of training law enforcement, leaving us none the wiser? These training exercises come complete with their own set of professionally trained Crisis Actors playing the parts of shooters, bystanders and victims in order to help schools and first responders create realistic drills, full-scale exercises, high-fidelity simulations, and interactive 3D films.

   

  Given that Americans are 110 times more likely to die of foodborne illness than in a terrorist attack, why is the government spending trillions of dollars on “national security”? How exactly is the $75 billion given to various intelligence agencies annually to keep us “safe” being spent? And why is the DHS giving away millions of dollars’ worth of federal security grants to states that federal intelligence agencies ruled have “no specific foreign or domestic terrorism threat”?

   

  Why is the government amassing names and information on Americans considered to be threats to the nation, and what criteria is the government using for this database? Keep in mind that this personal information is being acquired and kept without warrant or court order. It’s been suggested that in the event of nuclear war, the destruction of the U.S. Government, and the declaration of martial law, this Main Core database, which as of 2008 contained some 8 million names of Americans, would be used by military officials to locate and round up Americans seen as threats to national security, a program to be carried about by the Army and FEMA.

  Taken individually, these questions are alarming enough. But put them together and they add up to the kind of trouble that the American founding fathers not only warned against but from which they fought to free themselves.

  Indeed, when viewed collectively, they leave one wondering what exactly the U.S. government is preparing for and whether American citizens shouldn’t be preparing, as well, for that eventuality when our so-called “government of the people, by the people, for the people” is no longer answerable to “we the people.”

  

  

  
  
  

  

• Goldman Paid Bill Clinton $200K Before Lobbying Hillary On Export-Import Bank

  As documented here on several occasions of late, there are new questions surrounding charitable contributions to the Clinton Foundation. Most notably, a Reuters investigation revealed that the Clinton family charities may have suffered what we called a “Geithner moment” when they failed to report tens of millions in contributions from foreign governments on tax documents. The foundation will now refile five years worth of returns and hasn’t ruled out the possibility that it may need to amend returns dating back some 15 years. 

  This prompted acting CEO Maura Pally to pen a lengthy blog post in which she explains the “mistakes” and attempts to reassure the public that the Clinton Foundation is taking special care to guard against “conflicts of interest” as Hillary begins her run for The White House. Pally also notes that similar measures were taken when Clinton was Secretary of State although, as we noted, the charity accepted donations from the likes of Kuwait, Qatar and Oman while she was the nation’s top diplomat. 

  Now there are new questions as IBTimes suggests there may be a connection between a $200,000 payment made to Bill Clinton by Goldman Sachs in 2011, and the bank’s efforts to lobby the State Department ahead of legislation involving the Export-Import Bank which was set to provide a loan that would end up financing the purchase of millions of dollars in aircraft from a company partially owned by Goldman. Here’s more: 

  Goldman Sachs paid former President Bill Clinton $200,000 to deliver a speech in the spring of 2011, several months before the investment banking giant began lobbying the State Department, then headed by Hillary Clinton, federal records reviewed by International Business Times show.

   

  Goldman’s objective in lobbying the State Department could not be immediately discerned. The lobbying disclosure filings note only that Goldman sought to “monitor deficit reduction issues” — specifically, a bill known as the Budget Control Act — and the bank declined to answer questions about the precise nature of its interests…

   

  In recent days, attention to overlapping interests that have donated to the Clinton family’s private interests while also allegedly seeking to influence State Department policy has reached a fever pitch amid leaks from a forthcoming book on the subject, “Clinton Cash,” by Peter Schweizer.

   

  The involvement of Goldman Sachs seems certain to amplify that scrutiny. The bank brings a reputation as uniquely well-connected in Washington given that many of its former executives have landed in the uppermost ranks of the Treasury Department…

   

  State Department records show that Bill Clinton’s $200,000 Goldman Sachs speech was delivered April 11, 2011, to “approximately 250 high level clients and investors” at a United Nations dining room in New York.

   

  In federal disclosure documents, the Duberstein Group is listed as lobbying the Clinton State Department on behalf of Goldman Sachs between July and September 2011. Goldman Sachs paid the Duberstein Group $100,000 during that time.

   

  Those records show that the firm was specifically lobbying the department on “proposed legislation” linked to a series of budget bills. One bill continued congressional authorization for the Export-Import Bank, a government-backed lender whose financing was critical for the prospects of a company in which Goldman owned a stake. 

  
  

  The original budget bill was introduced in July and did not include an extension of the Export-Import Bank, but the bank reauthorization was added in late September, during the same period Goldman was lobbying the State Department on the bill.

   

  In August 2011, the bank authorized a $75 million loan enabling a Chinese firm to purchase aircraft from Beechcraft (known before emerging from bankruptcy in February 2013 as Hawker Beechcraft), a company that was part-owned by Goldman. Beechcraft had lobbied the Clinton State Department on issues relating to foreign military sales in 2009 and 2010, according to its lobbying disclosures.

  Readers can draw their own conclusions here, and we don’t think it’s any surprise that Wall Street lobbyists wield considerable power in Washington, but the takeaway is that, as we’ve said on a number of occasions recently, you can expect to learn much, much more in the coming months about the degree to which the Clinton Foundation — and any other avenue through which foreign governments, Vampire squids, and a whole host of other state and non-state actors can channel money — is used as a means of buying influence with America’s maybe next President.

  And because we can’t help ourselves, here is how we imagine Hillary would respond to the above:

  

  

  
  
  

  

• 2 Choices: Legislation Redestribuing Wealth Or Revolution Distributing Poverty

  Submitted by Simon Black via Sovereign Man blog,

  One of my favorite historians is a guy named Will Durant.

  Durant is unfortunately no longer with us, but he and his wife Ariel made history more interesting than all the soap operas my mother used to watch when I was a kid.

  I thought about something he wrote this morning when I glanced at the paper and saw a headline about the riots in Baltimore.

  In Durant’s seminal work on Louis the XIV, he wrote that “the men who can manage men manage the men who can manage only things, and the men who can manage money manage all.”

  Now if the quote is confusing, just focus on the last eight words.

  And Durant was right. There are people out there on one side, and they’re angry. They’re looting, they’re rioting.

  On the other side you have the state trying to stop them. Police and national guard units with their urban tactics and weapon systems.

  They are the ultimate expression of men managing men managing things.

  But is the men who manage money, who are managing all.

  In our system, we have an unelected central banking elite managing the money.

  Their policies have enriched a tiny percentage of wealthy individuals while utterly vanquishing untold millions.

  Those in the middle class find that they’re not able to keep up with the rising cost of living.

  Those little emergencies in life that we never plan on now completely wipe people out.

  And the dream of retirement has now become almost an immature fantasy rather than a realistic and achievable goal.

  People that are even lower on the socio-economic totem pole have it even worse.

  There’s a great social despair that falls when people feel resigned to their economic station with no hope of advancement.

  Hope is the most powerful of human emotions. More than fear.

  It’s the reason why many politicians get elected.

  When hope becomes crushed by the system, all you’re left with is fear and anger. That’s what we’re seeing in Baltimore.

  Everybody has a breaking point. And more and more people are starting to reach theirs.

  This isn’t just about racism.

  We’ve been force-fed a toxic monetary system that has destroyed any hope of upward mobility and long-term security.

  And it’s as if the collective immune system of the middle-class is simultaneously having a violent reaction to this financial poison.

  The objective data out there shows us that wealth inequality and income inequality are the highest they’ve been in modern times. And that’s really saying something.

  Now, inequality is entirely natural. There will always be those that are stronger and swifter, whether among humans or in the wild.

  Engineering economic despair as a matter of policy, however, is entirely unnatural. It’s immoral. Destructive. And as history shows, it’s dangerous.

  Plutarch tells us of Ancient Greece being on a knife’s edge in the 6th century B.C. until Solon came to power.

  Facing a peasant revolution, he devalued the currency, forgave debt, taxed the rich, established numerous social welfare programs, and even confiscated private property for redistribution.

  Durant himself tells us that anger and inequality become so great that nature has a way of correcting itself, either “by legislation redistributing wealth or by revolution distributing poverty”.

  This is happening all across the West, whether the anger in Baltimore or the neo-Nazi politicians being elected in Europe.

  The world’s not coming to an end, it’s changing. And sometimes that change can bring some difficult transition.

  We can’t stop it from happening. But we can take every sensible step to ensure that we are watching it from the sidelines.

  

  

  
  
  

  

• How Will Greece Default? Let Us Count The Ways

  What was once anathema has become conventional wisdom, and lately the only question when discussing the fate of Greece is not if but when it will default. Actually, there is another question: how? Because as the following UBS flow chart shows, when it comes to the matter of picking an obligation on which to not make a payment, Greece has a truly 5 star menu selection.

  

  Ths is what UBS says:

  We do not believe that Greece will leave the euro in our base case scenario. However, were it to happen, we think it would probably do so via one of two main routes:

  (1) The fast route: A rapid deposit withdrawal from the banking system, if the Eurosystem refused to finance it through expansion of the ELA facility. The government would then need to refinance (and probably recapitalise) the banking system by creating a new currency to do so. However, this could probably be slowed with the imposition of capital controls limiting deposit withdrawal.

  (2) The slow(er) route: The government, running out of funds, could substitute IOUs for euros in some of its payments. Starting with payments to suppliers (including for pharmaceuticals, as in 2011), and then – in theory – progressing on to public sector salaries and pensions over time. As current Greek debt obligations are not valued at their face value by the bond market, nor would these notes be, meaning that their purchasing power would likely be lower than that of the euro. In this way, the parallel currency would already be devalued.

  The more of these notes that were issued, the greater the need would be for the banking system to clear payments in them. The need would also increase for businesses and citizens to use them to pay taxes. As this continued, it would be likely that more euros would leak out of the Greek banking system and the economy would rely on the new currency to a greater extent.

  Nominally, Greece could (in theory, and just conceivably) remain in the euro under these circumstances, but there would come a point in this process at which it had in a practical sense already left.

  Below we look at the likely impact of impairment of some of the Greek government’s obligations, were any to take place.

  IMF loans

  The IMF has a “timetable of remedial measures” for overdue payments which we reproduce in the annex at the bottom of this note. As the cross-default clause in the bond documentation only refers to impairment of other securities, we doubt that non-payment to the IMF would accelerate bond repayments.

  

  However, it is possible that non-payment to the IMF causes an acceleration of amounts due to the EFSF, which in turn could accelerate repayment of bonds if as would seem likely they were also left unpaid.

  According to the “Master Financial Assistance Facility Agreement” between the EFSF and Greece, the EFSF may “declare the aggregate principal amount of any or all Financial Assistance made and outstanding… immediately due and payable, together with accrued interest” if (among other clauses) “the Beneficiary Member State does not make timely repurchases from the IMF in relation to the IMF Arrangement of any outstanding purchases… or has overdue charges on outstanding purchases”.

  It is important to note that the EFSF also states that it “may, but is not obliged to, exercise its rights under this Clause”.

  Were the EFSF to exercise this right, it is likely that bond repayments would also be accelerated. The documentation for the PSI bonds (those issued in exchange in the 2012 restructuring) cites as an event of default if amounts due to the EFSF “are declared to be due and payable prior to their scheduled maturity”. However, it should be noted that this clause does not appear in the prospectuses for the 2017 and 2019 bonds issued by the Greek government last year.

  Government bonds and bills

  The normal consequences of a failure to make a payment on a sovereign bond or bill are relatively well-known: the bonds enter into default and in due course CDS is triggered after a decision of the ISDA determinations committee. Additionally, in the case of non-payment on the “New Greek Bonds” (PSI bonds), the EFSF could decide to accelerate amounts due to it as with non-payment to the IMF (see above).

  It is possible (though for a variety of reasons very unlikely) that an attempt is made to restructure privately-held bonds at some point in the near-medium term. However, no bonds have been issued to the private sector under Greek law since before the 2012 restructuring, meaning that any restructuring within the law would have to take place via investor votes as per collective action clauses. As the investor base is mostly composed of hedge funds and foreign asset managers, it is reasonable to infer that such a restructuring attempt would be unsuccessful.

  Bilateral and EFSF loans

  No interest or principal payments are due on the loans made in the first and second Greek aid programmes until 2020. As a result, and unless the Greek government were formally to repudiate its debt obligations under these programmes, impairment would seem unlikely.

  * * *

  So now that you know your options Greece, choose. And remember: your last check should always bounce, or at least be written in a currency that will soon no longer exist.

  

  

  
  
  

  

• The First Rule Of Holes

  Submitted by Michael Lebowitz via 720Global.com,

  “Promoted by the intellectual glitterati of the central banks, our economic system has become addicted to all forms of debt, much of which has been unproductive”

   

  – The Humility of Rates and the Arrogance of Equities – 720 Global 4/20/2015

  The quote above from our recent article failed to acknowledge that it is not just central banks promoting misguided policies of exorbitant debt accumulation but also renowned economists from Wall Street and the world’s distinguished universities. Brad DeLong, a P.H.D. economist from Harvard, former Deputy Assistant Secretary for Economic Policy at the U.S. Department of Treasury, visiting scholar at the Federal Reserve Bank of San Francisco and University of California- Berkeley professor of economics casts a wide sphere of influence that includes the Federal Reserve and other central banks.

  At the IMF’s “Rethinking Macro” conference on April 15th and 16th 2015, DeLong made the following comments;

  “But how do we fix this risk-bearing capacity mobilization market failure? And isn’t the point of the market economy to make things that are valuable? And isn’t the debt of reserve-currency issuing sovereigns an extraordinarily valuable thing that is very cheap to make? So shouldn’t we be making more of it?”

  Click for link to Delong’s speech.

  What Mr. DeLong is arguing for is a marked increase of sovereign debt. In fairness, Delong prefaced his comment saying “I resist this logic.” However, in a startling contradiction, he goes on to promote that very logic, arguing such policy carries “relatively small danger”.

  In his book Economics in One Lesson, the late New York Times and Wall Street Journal columnist Henry Hazlitt writes,

  “Now all loans in the eyes of honest borrowers, must eventually be repaid. All credit is debt. Proposals for an increased volume of credit, therefore, are merely another name for proposals for an increased burden of debt. They would seem considerably less inviting if they were habitually referred to by the second name instead of by the first.”

  Intellectual rationalizations like Delong’s, which support ever expanding debt loads, highlight an uncomfortable paradox for our economy. On one hand, the lack of discipline accompanying calls for the expansion of debt is partially based upon experiential evidence from the recent financial crisis. As the economy witnessed in 2008, unless the parabolic expansion of debt continues, our economy will suffer mightily. At the same time, the on-going expansion of debt will eventually involuntarily stop precisely because the debt load will become unserviceable. Our economy will be faced with the inevitable Minsky Moment of a Ponzi finance system.

  720 Global disagrees with Delong.

  The seemingly universal agreement that the prerequisite for a healthy economy is the growth of debt at all costs highlights both a lack of discipline and an aversion to consider different ideas on the part of economic policy-makers.

   

  

   

  Leadership fails to grasp what truly constitutes a healthy economy and the longer-term consequences of their short term actions. A change in mindset does not demand a unique level of creative ingenuity, but it does require rejection of the destructive approach currently being employed.

   

  A much different approach to economic policy is ultimately required.

  The first rule of holes – when you are in one, stop digging.

  

  

  
  
  

  

• If Gold Is Not Money… Why Do Clearinghouses and Former Fed Chairs Say It Is?

  Everything that has happened since 2007, every Central Bank move, ever major political decision regarding the big banks, every trend, have all been focused solely on one issue.

   

  That issue is collateral.

   

  What is collateral?

   

  Collateral is an underlying asset that is pledged when a party enters into a financial arrangement.  It is essentially a promise that should things go awry, you have some “thing” that is of value, which the other party can get access to in order to compensate them for their losses.

   

  You no doubt are familiar with this concept on a personal level: any time you take out a bank loan the bank wants something pledged as collateral should you fail to pay the money back. In the case of property, the property itself is usually the collateral posted on the mortgage. So if you fail to pay your mortage, the bank can seize the home and sell it to recoup the losses on the mortgage loan (at least in theory).

   

  In this sense, collateral is a kind of “insurance” for any financial transaction; it is a way that the parties involved mitigate the risk of their deal not working out. 

   

  As many of you know, our entire global financial system is based on leverage or borrowed money. Collateral is what allows this to work. Without collateral, there is no trust between financial institutions. Without trust there is no borrowed money. And without borrowed money, money does not enter the financial system.

   

  In this sense, collateral is the “reality” underlying the “imaginary” or “borrowed” component of leverage: the asset is real and can be used to back-stop a proposed deal/ trade that has yet to come to fruition.

   

  For finacial firms, at the top of the corporate food chain, sovereign bonds are the senior-most form of collateral.

   

  Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country.

   

  Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc.) as the senior most asset pledged as collateral for hundreds of trillions of Dollars worth of trades.

   

  Indeed, the global derivatives market is roughly $700 trillion in size. That’s over TEN TIMES the world’s GDP. And sovereign bonds… including even bonds from bankrupt countries such as Spain… are one of, if not the primary collateral underlying all of these trades.

   

  How did the world get this way?

   

  Back in 2004, the large banks (think Goldman, JP Morgan, etc.) lobbied the SEC to allow them to increase their leverage levels. In very simple terms, the banks wanted to use the same collateral to backstop much larger trades. So whereas before a bank might have $1 worth of collateral for every $10 worth of trades, under the new regulation, banks would be able to have $1 worth of collateral for every $20, $30, even $50 worth of trades.

   

  Another component of the ruling was that the banks could abandon “mark to market” valuations for their securities. What this means is that the banks no longer had to value what they owned accurately, or based on what the “market” would pay for them.

   

  Instead, the banks could value everything they owned, including their massive derivatives portfolios worth tens of trillions of Dollars using in-house models… or basically make believe.

   

  This is getting a bit technical so let’s use a real world example. Imagine if you had $100,000 in savings in the bank. Then imagine that the bank let you use this $100,000 to buy millions and millions of dollars worth of real estate. Then imagine that the bank told you, “we aren’t going to have our analysts independently value your real estate, you can simply tell us what you think it’s worth.”

   

  In this set up, you would potentially buy $10 million worth of real estate or more… using just $100,000. But what if your newly purchased real estate drops in value to $5 million? No worries, you could simply tell the bank, “my analysis indicates that the properties are worth $20 million.”  The bank believes you so you continue to buy more properties.

   

  This sounds completely ludicrous, but that is precisely the environment that banks operated in post-2004. As a result, today US banks alone are sitting on over $200 TRILLION worth of derivates trades. These are trades that the banks can value at whatever valuation they want.

   

  Now, every large bank/ broker dealer knows that the other banks/dealers are overstating the value of their securities. As a result, these derivatives trades, like all financial instruments, require collateral to be pledged to insure that if the trades blow up, the other party has access to some asset to compensate it for the loss.

   

  As a result, the ultimate backstop for the $700+ trillion derivatives market today is sovereign bonds.

   

  When you realize this, the entire picture for the Central Banks’ actions over the last five years becomes clear: every move has been about accomplishing one of two things:

   

  1)   Giving the over-leveraged banks access to cash for immediate funding needs (QE 1, QE 2, QE3 and QE 4 in the US… and LTRO 1, LTRO 2 in the EU.)

  2)   Giving the banks a chance to swap out low grade collateral (Mortgage Backed Securities and other garbage debts) for cash that they could use to purchase higher grade collateral (QE 1’s MBS component, Operation Twist 2 which lets bank their long-term Treasuries and buy short-term Treasuries, QE 3, etc).

   

  All of this is a grand delusion meant to draw attention away from the fact that the financial system is on very, very thin ice due to the fact that there is very little high quality collateral backstopping the $700+ trillion derivatives market.

   

  Indeed, if you want further evidence that the financial elites are already preparing for a default from Spain and a collateral crunch, you should consider that the large clearing houses (ICE, CEM and LCH which oversee the trading of the $700+ trillion derivatives market) have ALL begun accepting Gold as collateral.

  Gold as Collateral Acceptable for Margin Cover Purposes

   

  From 28 August 2012 unallocated Gold (Loco London) will be accepted by LCH.Clearnet Limited (LCH.Clearnet) as collateral for margin cover purposes.

   

  This addition to acceptable margin collateral will be subject to the following criteria;

   

  Available for members clearing OTC precious metals forwards (LCH EnClear Precious Metals division) or precious metals contracts on the Hong Kong Mercantile Exchange. Acceptable to cover margin requirements for all markets cleared on both House and ‘Segregated’ omnibus Client accounts.

   

              http://www.lchclearnet.com/member_notices/circulars/2012-08-21.asp

   

              CME Clearing Europe to Accept Gold as Collateral on Demand

   

  CME Clearing Europe will accept physical gold as collateral, extending the list of assets it’s prepared to receive as regulators globally push more derivatives trading through clearing houses.

   

  CME Group Inc. (CME)’s European clearing house, based in London, appointed Deutsche Bank AG (DBK), HSBC Holdings Plc and JPMorgan Chase & Co. as gold depositaries. There will be a 15 percent charge on the market value of gold deposits and a limit of $200 million or 20 percent of the overall initial margin requirement per clearing member based on whichever is lower, Andrew Lamb, chief executive officer of CME Clearing Europe, said today.

   

  “We started with a narrow range of government securities and are now extending that,” Lamb said in an interview today. “We recognize there will be a massive demand for collateral as a result of the clearing mandate. This is part of our attempt to maintain the risk management standard and to offer greater flexibility to clearing members and end clients.”

   

  http://www.bloomberg.com/news/2012-08-17/cme-clearing-europe-to-accept-gold-as-collateral-on-demand-1-.html

   

  It is no coincidence that this began only when the possibility of a sovereign default from Greece or Spain began. The large clearinghouses see the writing on the wall (that defaults are coming accompanied by a mad scramble for collateral) and so are moving away from paper (sovereign bonds) into hard money to attempt to stay afloat.

   

  The most telling item is that clearinghouses now view Gold as money. Indeed, you can see this fact in other stories indicating that various entites are concerned about having their gold stored “inhouse” if the stuff ever hits the fan.

   

  Heck, even the Alan Greenspan, the man most responsible for the 2008 financial crisis, has admitted that “gold is money.” Of course, he couldn’t admit this until he’d left the Fed. But this is a man who knows all too well just how the financial system works.

   

  Take note, Gold is officially money for the most powerful entities in the world. They are not only accepting Gold as collateral but are openly trying to insure that they have their own Gold in safe custody.

   

  If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits. Gold is just a part of this.

   

  You can pick up a FREE copy at:

   

  http://www.phoenixcapitalmarketing.com/roundtwo.html

   

   

  Best Regards

   

  Graham Summers

   

  Phoenix Capital Research

   

   

   

  

  
  
  

  

• Baltimore "Purge" Continues: National Guard Presence Builds As Curfew Arrives With "No Sign Of Crowd Thinning" – Live Feed

  Update: So much for the 10pm Curfew…

  

  

  

   

  Curfew activated in #Baltimore, crowds still in the streets http://t.co/U8Mitk0iKH pic.twitter.com/3teIMqeYFS

  — RT (@RT_com) April 29, 2015

   

  *  *  *

  It's not over yet. On the heels of a choatic Monday night in Baltimore that saw rioters burn buildings, loot stores, and clash with SWAT following the funeral of Freddie Gray, tensions are running high once again, and as you can see from the images and video below, it appears as though the situation could well escalate into the evening.

  Live Feed #1:

  Live Feed #2

  Broadcast live streaming video on Ustream

   

  Broadcast live streaming video on Ustream

  

  

  And as the militarization of American cities continues, the humvees are on their way…

  

  

  

  So this just happened. #Baltimore #FreddieGray amazing pic.twitter.com/psxrFR8PZK

  — Joshua Scott Albert (@jpegjoshua) April 26, 2015

  Someone got hit with pepper spray pic.twitter.com/BP6WdpQiS3

  — Joel D. Anderson (@byjoelanderson) April 28, 2015

  Some brawling around North and Penn. Cops respond with pepper spray. (Caught a bit of it, apologies for the swearing) pic.twitter.com/67YMen9ZrH

  — Asawin Suebsaeng (@swin24) April 28, 2015

  

  
  
  

  

• It's Official: Being Poor Makes People Unhappy

  Not long ago we noted that contrary to the old adage, money can indeed buy happiness. Given this, it stands to reason that the converse is likely true as well. That is, no money probably contributes to unhappiness.

  Sure enough, a study from Brookings finds that “poverty equals pain, worry, sadness, stress, and anger,” all things one might fairly equate with acute unhappiness. Here’s more:

  *  *  *

  The Cost of American Poverty

  Reported stress levels are higher on average in the U.S. than in Latin America. Importantly, the gap between the levels of the rich and poor is also much greater, with the U.S. poor reporting the highest levels of stress of all cohorts. Of course ‘stress’ is a complex phenomenon, however: “Good” stress is associated with the pursuit of goals, while “bad” stress is associated with struggling to cope. Bad stress, which is associated with an inability to plan ahead, lower life satisfaction levels, and worse health outcomes, is more common at the bottom of the distribution.

  Pain, worry, sadness, and anger (reported as experienced the day before or not) are also all significantly higher among low income cohorts than among wealthy ones, while reported satisfaction with life as a whole is significantly lower, according to our analysis of Gallup data:

  

  The cost and pain of poverty in the U.S. less about basic goods like water and electricity than nonmaterial factors: insecurity, stress, lack of opportunity and discrimination. Many of our policies, such as decent quality education, health insurance or savings incentives can help individuals to move out of poverty; they can also help to reduce the costs of being poor.

  *  *  *

  As a reminder, here is the proof that money buys happiness:

  

  This of course is bad news for America, where, as the St. Louis Fed has recently shown, the Middle Class is disappearing as Fed policy inflates the assets most likely to be concentrated in the hands of the wealthy and as wage growth remains elusive for 80% of the country’s workers even as the nation’s “supervisors” enjoy higher pay.

  

  

  
  
  

  

• Was Your Apple Watch "First Day" Experience Comparable To This?

  As the de minimus supply of Apple Watches meets the stupendous demand from wrists everywhere, The Daily Mash offers one satirically-conjured man’s perspective of his first day wearing the device…

  Sales manager Tom Logan’s new Apple Watch has been unexpectedly ridiculed by his work colleagues.

   

  32-year-old Logan felt confident that his futuristic timepiece would attract admiring glances rather than unflattering Knight Rider comparisons.

   

  

   

  He said: “I had it all planned out – not saying anything about it, but then somebody just notices and goes ‘is that the new Apple Watch?’. I would respond simply with a wry Clooney-esque smile and they would mouth the word ‘awesome’.

   

  “What actually happened is somebody said ‘what the fuck’s that weird-looking thing?’

   

  “I explained that it was the brand new Apple Watch and they went ‘HAHAHA’ in a really deliberately hurtful way. The accounts assistant said it was the opposite of a fanny magnet and everyone cracked up.

   

  “Then everyone started pretending to talk into their watches, saying things like ‘come in KITT, I am a massive tosser, please help’.”

   

  By 10am Logan had removed the watch. He explained: “It wasn’t because people were being sarcastic, I just had a hot wrist, everyone gets a hot wrist sometimes.

   

  “People get jealous of early adopters.”

  But it gets worse… Do not drop your up-to-$17,000 watch… ever!

   

  Especially not from your wrist!

  

  

  
  
  

  

• How To Play The "Common Knowledge Game" Effectively

  Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

   

  

   

  The more I practice, the luckier I get.
  – Gary Player (b. 1935)

   

   

  Luck is the residue of design.
  – Branch Rickey (1881 – 1965)

  I've found that you don't need to wear a necktie if you can hit.
  – Ted Williams (1918 – 2002)

   

   

   

   

   

   

   

   

   

   

  They say that nobody is perfect. Then they say that practice makes perfect. I wish they'd make up their minds.
  – Wilt Chamberlain (1936 – 1999)

  It took me 17 years to get 3,000 hits in baseball. I did it in one afternoon on the golf course.
  – Hank Aaron (b. 1934)

  Talent is cheaper than table salt. What separates the talented individual from the successful one is a lot of hard work.
  – Stephen King (b. 1947)

  At one time I thought the most important thing was talent. I think now that – the young man or the young woman must possess or teach himself, train himself, in infinite patience, which is to try and to try and to try until it comes right. He must train himself in ruthless intolerance. That is, to throw away anything that is false no matter how much he might love that page or that paragraph. The most important thing is insight, that is … curiosity to wonder, to mull, and to muse why it is that man does what he does. And if you have that, then I don't think the talent makes much difference, whether you've got that or not.
  – William Faulkner (1897 – 1962)

  Talent is its own expectation, Jim: you either live up to it or it waves a hankie, receding forever.
  – David Foster Wallace, "Infinite Jest" (1996)

  What is most vile and despicable about money is that it even confers talent. And it will do so until the end of the world.
  – Fyodor Dostoyevsky (1821 – 1881)

  Talent is a long patience, and originality an effort of will and intense observation.
  – Gustave Flaubert (1821 – 1880)

  There is nothing more deceptive than an obvious fact.
  – Arthur Conan Doyle, "The Boscombe Valley Mystery" (1891)

  Sheriff Metzger:	Mrs. Fletcher! Can I see you for a minute? [pause] Do me a favor, please, and tell me what goes on in this town!
  Jessica Fletcher:	I'm sorry, but …
  Sheriff Metzger:	I've been here one year, and this is my fifth murder. What is this, the death capital of Maine? On a per capita basis this place makes the South Bronx look like Sunny Brook farms!
  Jessica Fletcher:	But I assure you, Sheriff …
  Sheriff Metzger:	I mean, is that why Tupper quit? He couldn't take it anymore? Somebody really should've warned me, Mrs. Fletcher. Now, perfect strangers coming to Cabot Cove to die? I mean look at this guy! You don't know him, I don't know him. He has no ID, we don't know the first thing about this guy.

  

  – "Murder, She Wrote: Mirror, Mirror, on the Wall: Part 1" (1989)

  
  Dr. Yen Lo: His brain has not only been washed, as they say … It has been dry cleaned.
  – "The Manchurian Candidate" (1962)

  Dickie Greenleaf:	Everyone should have one talent. What's yours?
  Tom Ripley:	Forging signatures, telling lies … impersonating practically anybody.
  Dickie Greenleaf:	That's three. Nobody should have more than one talent.

  – "The Talented Mr. Ripley" (1999)

  My singular talent is seeing patterns that others don’t. That’s not a boast, but a fact, and frankly it’s been as much a source of alienation in my life as a source of success. As my father was fond of saying, “You know, Ben, if you’re two steps ahead it’s like you’re one step behind.” I can’t explain how I see the patterns – they just emerge from the fog if I stare long enough. It’s always been that way for me, for as far back as I have memories, and whether I’m 5 years old or 50 years old I’m always left with the same realization: I only see the pattern when I start asking the right question, when I allow myself to be, as Faulkner said, “ruthlessly intolerant” of anything that proves false under patient and curious observation.

  For example, I think the wrong question for anyone watching “Murder, She Wrote” is: whodunit? The right question is: how does Jessica Fletcher get away with murder this time? Once you recognize that it's a Bayesian certainty that the woman is a serial killer, that she controls the narrative of Cabot Cove (both figuratively as a crime novelist and literally as a crime investigator) and thus the behavior of everyone around her, you will discover a new appreciation for both the subliminal drivers of the show’s popularity as well as the acting genius of Angela Lansbury. Seriously, go back and watch the original “Manchurian Candidate” and focus on Lansbury. She’s a revelation.

  Or take the Masters tournament earlier this month. I was lucky enough to attend Wednesday’s practice round, and I was sitting in a shady spot on the 10th green watching the players come by and try their luck at 15 foot putts. At first, like the other spectators, my question was: how are they such good putters? This was “the obvious fact,” to quote Sherlock Holmes, and I watched for any clues that I could adopt for my laughable game – a forward tilt of the wrist, a stance adjustment … anything, really. We all watched carefully and we all dutifully oohed and aahed when the ball occasionally dropped in the cup. But suddenly, a new pattern emerged from the fog, and I realized that we were all asking the wrong question. Instead, I started to ask myself, why are they such poor putters?

  Now I realize that I just alienated at least half of the reading audience, but bear with me. I’m not saying that professional golfers are poor putters compared to you or me. Of course not. They are miracle workers compared to you or me. But it’s a stationary ball with a green topography that never changes. The speed of the greens is measured multiple times a day to the nth degree. These players have practiced putting for thousands of hours. They have superior eyesight, amazing muscular self-awareness, and precision equipment. And yet … after charting about 50 putts in the 12 – 15 foot range, the pattern of failure was unmistakable. These professional golfers were aiming at a Point A, but they would have sunk exactly as many putts if the cup had actually been located 6 inches to the right. Or 6 inches to the left. Or 12 inches back. Or 12 inches forward. The fact that a putt actually went in the hole from a distance of 12 – 15 feet was essentially a random event within a 15 x 30 inch oval, with distressingly fat probabilistic tails outside that oval. This from the finest golf players in the world. I saw Ben Crenshaw, a historically great putter who was playing in something like his 44th Masters and probably knows the 10th green better than any other living person, miss a long putt by 6 feet.

  But here’s the thing. When a player took a second putt from the same location, or even close to the same location, his accuracy increased by well more than an order of magnitude. Suddenly the ball had eyes. So I went to the practice green, where I saw Jordan Spieth putt ball after ball from exactly the same location about 10 feet from the hole. He made 50 in a row before I got tired of watching. Now granted, Spieth is a wizard with the putter, a lot like Tiger was at the same age. See it; make it. But then I watched one of the no-name amateurs for a while, a guy who had no chance of making the cut, and it was exactly the same thing – putt after putt after putt rolled in from the same spot at a considerable distance.

  The best golfers in the world are surprisingly poor aimers. Surprising to me, anyway. They are pretty miserable predictors of where a de novo putt is going to end up, even though we all believe that they are wonderful at this activity. But they are phenomenally successful and adaptive learners, even though we rarely focus on this activity.

  I think the same pattern exists in other areas of the sports world. Take basketball free throws. I’d be willing to make a substantial bet that whatever a professional’s overall free throw shooting percentage might be – whether it’s DeAndre Jordan at 50% or Steph Curry at 90% – their shooting percentage on the second of two free throws is better at a statistically significant level than their shooting percentage on the first of two free throws. I have no idea where to access this data, but with the ubiquitous measurement of every sports function and sub-function I’m certain it must exist. Someone give Nate Silver or Zach Lowe a call! 

  I think the same pattern exists in the investing world, too.

  We are remarkably poor aimers and predictors of market outcomes, even though we collectively spend astronomical sums of money and time engaged in this activity, and even though we collectively ooh and aah over the professional who occasionally sinks one of these long putts. True story … in 2008 the long/short equity hedge fund that I co-managed was up nicely, and we were deluged by investors and allocators asking the wrong question: how did you have such a great year? At no point did anyone ask the right question: given your fundamental views and avowed process, why weren’t you up twice as much? Most investors, just like the spectators at Augusta, are asking the wrong questions … questions that conflate performance with talent, and questions that underestimate the role of process and learning in translating talent into performance.

  I’m not saying that idiosyncratic talent doesn’t exist or that it isn’t connected to performance or that it can’t be identified. What I’m saying is that it’s as rare as Jordan Spieth. What I’m saying is that the talents that are most actionable in the investment world are not found in the predictions and the aiming of a single person. They are found within the learned and practiced behaviors that exist across a broad group of investment professionals. Jordan Spieth is a very talented putter and he works very hard at his craft. But there is no individual golf pro, not even Jordan Spieth, who I would trust with my life’s savings to make a single 15 foot putt. On the other hand, I would absolutely put my life’s savings on the line if I could invest in the process by which all golf pros practice their putting. I am far more interested in identifying the learned behaviors of a mass of investment professionals than I am in identifying a specific investment professional who might or might not be able to sink his next long putt.

  What’s the biggest learned behavior of professionals in the investing world right now? Simple: QE works. Not for the real economy– I don’t know any professional investor who believes that the trillions of dollars in Fed balance sheet expansion has done very much at all for the real economy – but for the inflation of financial asset prices. This is what I’ve called the Narrative of Central Bank Omnipotence, the overwhelmingly powerful common knowledge that central bank policy determines market outcomes. The primary manifestation of this learned behavior today is to go long Europe financial assets … stocks, bonds, whatever. QE worked for US markets – that’s the lesson – and everyone who learned that lesson is applying it now in Europe. China, too. Here’s a great summary of this common knowledge position from a market Missionary, Deutsche Bank’s Chief International Economist Torsten Slok:
   

  

  In my view, every asset allocation team in the world should have this chart hanging on their wall. Based on forward OIS curves the market expects the Fed to hike in March 2016 and the ECB to hike in December 2019. A year ago, the expectation was that the Fed and the ECB would both hike in November 2016. This discrepancy has significant relative value implications for FX, equities and rates. EURUSD should continue to go down and European equities will look attractive for many more years. Another consequence of this chart is that with ECB rates at zero for another five years, many European housing markets should continue to do well. The investment implication is clear: Expect that the benefits we have seen of QE in the US over the past 3 to 5 years will be playing out in Europe over the coming 3 to 5 years. – Torsten Slok, Deutsche Bank Chief International Economist, April 9, 2015

  Just as a recap on how to play the Common Knowledge Game effectively, the goal here is to read Torsten’s note for its description and creation of common knowledge (information that everyone thinks that everyone has heard), not to evaluate it for Truth with a capital T. That’s the mistake many investors make when they read something like this … they start thinking about whether or not they personally agree with the Fed hike expectations embodied in forward OIS curves, or whether or not they personally agree with Torsten’s macroeconomic predictions on things like the European housing market, or whether or not they personally agree with the social value of the Fed or ECB policies that are impacting markets. In the Common Knowledge Game, fundamentals – whether they are of the stock-picking sort or the macroeconomic sort – don’t matter a whit, and your personal view of those fundamentals matters even less. The only thing that matters is whether or not the QE-works lesson has been absorbed by the learning process of investment professionals, and that’s driven by the lesson’s transformation into common knowledge by Missionaries like Torsten.

  From that perspective I don’t think there’s any doubt that what Torsten is saying is true, not with a capital T but with a little t, and that the long-Europe-because-of-ECB-QE trade has got a lot of behavioral life left to it. 

  One last point … I know that I’m a broken record in the fervency and persistence of my belief that Big Data is going to rock the foundations of the investment world, but this topic of talent, learning, and asking the right question is just too on-point for me to let it slide. I started this note with the alienating observation that I don’t believe that professional golfers are particularly good putters, certainly not in their ability to size up and sink a de novo putt from 15 feet or more. On the other hand, I am pretty certain that with a few months and a few million dollars, it’s possible to build a mobile robotic system with the appropriate sensors and mechanical tolerances that would sink pretty much every de novo putt it took from a distance of 15 feet. Or a robotic system that would hit 99% of its free throws. Machines are far more accurate aimers and more precise estimators of the environment than humans, and that’s a useful observation whether we’re talking about sports or investing.

  But that’s not my point about Big Data. My point about Big Data is that such systems are ALSO better than humans at learning. They are ALSO better than humans at pattern recognition. I can remember when this wasn’t the case. As recently as 20 years ago you could read artificial intelligence textbooks that praised the computer’s ability to process information quickly with various backhanded compliments … yes, isn’t it amazing how wonderfully a computer can sort through a list, but of course only a human brain can perform tasks like facial recognition … yes, isn’t it amazing how many facts a computer can store in its memory chips, but of course only a human brain can truly learn those facts by placing them within the proper context. We have entire social systems – like sports and markets – that are designed to reward humans who are superior learners and pattern recognizers. Why in the world would we believe that clever and observant humans will continue to maintain their primacy in these fields when challenged by non-human intelligences that are, quite literally, god-like in their analytical talents and ruthless intolerance of what is false? At least in sports it’s illegal to have non-human participants … honestly, I can see a day where investing is reduced to sport, where we maintain human-only markets as part of a competitive entertainment system rather than as a fundamental economic endeavor. In some respects I think we’re already there. 

  I’ll close with a teaser. There’s still a path for humans to maintain an important role, even if it’s not a uniformly dominant role, within markets that we share with non-human intelligences. Humans are more likely than non-human intelligences to ask the right question within social systems, like markets, that are dominated by strategic interactions (i.e., games). That’s not because non-human intelligences are somehow thinking in an inferior fashion or aren’t asking questions at all. No, it’s because Big Data systems are giant Induction Machines, designed to ask ALL of the questions. The distinction between asking the right question and asking all of the questions is always interesting and occasionally vital, depending on the circumstances. More on this to come in future notes, and hopefully in a future investment strategy …

   

  

  
  

• Goldman Asks "Should Stocks Fear Rate Hikes?" (Spoiler Alert: Yes)

  While day after day we are bombarded with musings from talking-heads proclaiming that no matter what happens in the future, buying stocks and buying moar stocks is the way to go, the data has a different story to tell. As Goldman Sachs notes, at a forward PE of 17.5x, the equity market looks more expensive today than it was during any of the last four cycles. Furthermore, as Goldman puts it, we find it more challenging to rationalize the current high PE multiples.

  Via Goldman Sachs,

  The PE ratio for the S&P 500 based on a 4-quarter trailing sum of earnings currently stands at 18.1x. This compares to values of 13.6x, 16.1x, 29.0x and 19.1x at the start of the last four hiking cycles, respectively. When the PE ratio is based on an estimated 4-quarter forward sum – which is the valuation metric preferred by our equity strategists – equities look even more expensive. At a forward PE of 17.5x, the equity market looks more expensive today than it was during any of the last four cycles except for hikes than began during the tech bubble of the late 1990s.

  

  In contrast to Treasury term premia, for which it is easy to tell “fundamental” stories that can explain why the term premia are low (even if we declined to attempt this empirically), we find it more challenging to rationalize high PE multiples. A fundamentally-based argument would need to argue that relative to past rate-hike cycles, some combination of the following three factors would presumably need to hold true: that expected growth is higher, equity risk premia are lower, and/or risk-free discount rates are lower.

  Of these three possible arguments for high PEs, the latter is the easiest to make, because long-run risk-free interest rates are, in fact, extraordinarily low. Indeed, it is common to hear that equities are the “least-bad” investment option in such a low-yield world, which is just the colloquial version of the valuation math. That said, if term premia are low due to low and falling inflation risk, and if equities hedge inflation risk better than fixed-coupon bonds, then the drop in term premia doesn’t necessarily imply higher equity PE multiples. The links between bond premia and equity premia are subtle; one needn’t imply the other.

  The remaining ways to justify a high PE are to argue either that long-run potential growth rates for real GDP or that equity risk premia are higher today than in past rate-hike cycles. While growth expectations are difficult to judge, it’s our view that the poor growth performance of the post-crisis period has done more to foster pessimism than optimism; “secular stagnation” is the theme du jour.

  *  *  *

  Translation: Stocks are anything but cheap and are anything but prepared for a rate hike.

  

  

  
  
  

  

• Cyber-Attacks Are The New Cold War

  Via Scotiabank's Guy Haselmann,

  The Invisible Enemy

  Earlier this month President Obama declared foreign cyber-threats a “national emergency”.   During the State of the Union address, he said that “if the US government does not improve cyber defenses, we leave our nation and our economy vulnerable”.  This past weekend the TV program 60 Minutes ran a special on cyber security, particularly pertaining to the importance of our nation’s satellite systems.

  In the April issue of CIO Magazine, the President and CEO of IDG Communications wrote an article about cybersecurity, stating “significant data breaches at Anthem, Sony, Home Depot, eBay, JPMorgan Chase, Target and many more have caused headline-grabbing business upheavals that worry customers, affect profit margins, and derail corporate careers”.   It seems there are now daily news articles about sinister cyber-activity.

  Cyber-threats or crimes can be orchestrated in various ways.   Targets can be aimed at critical infrastructure, manufacturing, power grids, or water supplies.   They could be aimed at disrupting the availability of websites and networks, or at stealing trade secrets and financial information.  Others could be driven by espionage, vandalism, terrorism, sabotage, or any form of criminality.   Activities of the US and British governments have focused on surveillance and hacking of telecommunications.

  It is difficult to fight cyber-activity, because the enemy is often invisible and their home address typically unclear.  Building defenses are challenging while continuous ‘patchwork’ is a deficient solution.  Threats morph and change quickly.  For corporations many threats are internal and could come from rogue employees or from senior managers with weak passwords who have access to sensitive files.  Some companies are now even looking into having retaliatory capabilities. 

  Warfare today (and in the future) is (and will be) fought differently.  In the 1950’s with the creation of more destructive bombs and weaponry, the idea was ‘Mutually Assured Destruction’ (MAD).   The movie War Games helped us learn that there are no winners.  The warfare ideology today is ‘Multilateral Unconstrained Disruption’ (MUD).  This unrestrictive warfare is meant to disrupt societal functioning; to ‘poison’ information to elevate distrust of all computer information.

  Cyber-activity is the new ‘cold war’.   Here are some random facts.

  • 95% of all computers are non-governmental.
  • It is estimated that 40% of all computers are run by pirated copies, and 17% run no antivirus protection.   
  • There are over 6 million known unique Malware viruses.
  • According to a Mandiant report, attackers had free range in a breached system for a median of 205 days in 2014 and 69% of breaches where learned from an outside entity.

  The scariest fact I learned in reading up on this topic is that 100% of all microprocessors and chips are produced overseas.   In other words, it is hard to be certain what is really on them.  Like the Stuxnet virus, computers can have a ‘zero-day’ where they are taught to do the wrong thing.

  KCS Group, one of the world’s leading strategic intelligence and risk companies, reports a significant increase in cyber-attacks from Iran directed against Saudi Arabia and the US.  The combination of Saudi policies (Yemen), the general rise in Middle East tensions, and the Stuxnet attack on Iran nuclear facilities are all likely motivations.  The virus that infected Saudi state oil company Aramco’s IT system in 2012, for example, erased data on three-quarters of their PC’s, and replaced emails and documents with an image of the US flag in flames.

  There is a positive correlation between cyber-attacks and the rise of geopolitical tensions.  Pricing these heightened risks into markets however is impossible.  ‘Event risk’ always exists, but handicapping it appropriately is a futile exercise.  Markets participants do not try, because of improvements in data mining and due to the speed of news when there is something concrete to react to.

  • In a similar manner, markets are not reacting to the threats or rumors of a Greece default or a Fed rate hike, because those threats have been delayed time and time again.  Markets have learned to react only to concrete news.

  At this point, you might be wondering why I bothered writing this note and how can these factors can help in terms of financial risk management.  Well, I believe good traders, portfolio managers, and business managers should try to think through every conceivable contingency.   In doing so ahead of time, managers should have a better handle on how to proceed should one of these events occur.  They will be two steps ahead.

  It might be helpful to analyze what happened to the stock prices of the companies mentioned above when they were hacked.  How deeply were the firms impacted?  How long did the impacts last?  Some may have ultimately been left stronger as weaknesses were exposed and then stronger processes implemented.   Oil traders should know if oil prices were affected by the Aramco attack?

  Game plans are not just applicable to portfolio exposures, but directly to individuals personally.   Corporate managers should have a plan B, contingency plans, and a disaster recovery site.  I heard Jamie Dimon of JPM say at a conference that his firm is doubling the amount they spend on computer security in 2015 to $1.2 billion.

  On June 5 in New York City, I am attending the Information Security Summit to hear more from industry experts in this area.  Simply waiting for an event to react to may be too costly.  I hope to obtain some suggestions for being proactive.   The experts may even have some good suggestions for preventative medicine.  At a minimum, I recommend that you encourage your firm’s Chief Security Officer to attend.  Welcome to 2015.

  “Never trust a computer you can’t throw out a window.” – Steve Wozniak

  

  

  
  
  

  

• WalMart's Mysterious Store Closure Devastates California City

  Earlier this month, we brought you the short history of worker protests at the Pico Rivera, CA Wal-Mart location. The store has been at the forefront of pickets, walkouts, and sit-ins for some time, with workers staging demonstrations every year since 2012, the latest of which came in November of last year and resulted in the arrest of two dozen workers. The employees — whose grievances generally revolve around wages, working conditions, and retaliation — have been supported by The United Food and Commercial Workers International Union or, UFCW, which last year prevailed in a Canadian Supreme Court case against the retailer stemming from a decade-old incident in Quebec when Wal-Mart closed a location after workers voted for UFCW representation. 

  Given the store’s history, one can hardly be blamed for wondering if Wal-Mart’s recent decision to close the location for “plumbing issues” was in fact an excuse to shutter a “problem” store. The plight of the Pico Rivera location is of course part of a larger story wherein Wal-Mart — in what we have suggested is an attempt to cut costs — has closed multiple stores nationwide (laying off some 2,200 employees in the process) to fix what the company says are “clogs and leaks.” The absence of plumbing permits, the company’s express desire to rein in costs on the back of an across-the-board wage hike, and the history of the Pico Rivera location led us to suggest that factors unrelated to pipes and drains may be at play. 

  Sure enough, just days after our Pico Rivera story ran, the UFCW filed a complaint with the National Labor Relations board alleging that the California store was closed to punish employees for worker activism.

  In the latest from Pico Rivera, the city now says the company’s decision to close the location could have a decisively deleterious effect on tax revenue, 10% of which came from the local Wal-Mart. Here’s more via LA Times:

  “It’s a severe blow to our community, certainly, with the local economy, the homes and families, in terms of those people that were counting on those paychecks,” mayor Gregory Salcido said.

   

  With 530 workers, the Wal-Mart store is the city’s second-biggest employer, topped only by the El Rancho Unified School District. Pico Rivera’s nearly 64,000 residents have a median household income of almost $57,000, about average for the county.

   

  Salcido estimated that Pico Rivera receives about $1.4 million a year in tax revenue from the retailer, potentially 10% of the city’s sales tax revenue. City officials, he said, are trying to figure out how to deal with the lost revenue if the store remains closed for at least six months, as Wal-Mart Stores Inc. has announced…

   

  The Wal-Mart was built on the grounds of two prior Pico Rivera employment giants…

  The city then helped develop a portion of the site into the Pico Rivera Towne Center, a 630,000-square-foot open-air shopping center.

   

  When Wal-Mart arrived, the low prices were an immediate hit in the largely Latino town. It was open 24 hours; the aisles were often jammed.

   

  The store was renovated in 2007 to become a Wal-Mart Supercenter that sold groceries and underwent further remodeling in 2014 (ZH: hold this thought)

   

  Jenny Mills, a nine-year Pico Rivera Wal-Mart employee, lives in her car with her husband and their cat in the parking lot of her former store. The couple lost their apartment in Monterey Park about a year ago when the rent was raised and they couldn’t make payments.

   

  She’s now part of the National Labor Relations Board filing and said she hopes to get her job back.

   

  The Pico Rivera Towne Center has become an “economic engine” for the city in terms of retail, Salcido said. Other tenants in the center include Lowe’s, Marshalls, PetSmart and Panera Bread.

   

  But the loss of the Wal-Mart store, even temporarily, Salcido said, “is significant, no doubt about it.”

  Meanwhile, the LA Times also notes that the Pico Rivera location underwent a half-million dollar refurbishment last year that included some of the very same plumbing issues (see embedded document below) cited in the closure of the store this year, which begs two rather obvious questions: 1) why weren’t the problems fixed during the refurbishment and 2) why was WalMart able to complete last year’s plumbing work without closing the doors? 

  For reference, here is the complaint sent to the Labor Relations Board:

  Dear Regional Director:

   

  Enclosed is a Charge we are filing on behalf of OUR Walmart.

   

  This charge arises out of the well-publicized decision by Walmart to suddenly close five stores on the pretext of a “plumbing”problem in each of the stores. Walmart’s action was intended to target the Pico Rivera store, which has been the focal point of activity by Associates for better working conditions.

   

  This case warrants immediate relief under Section1Q(j). Approximately 2200 Walmart Associates around the country have been thrown out of their jobs. Although Walmart has offered WARN Act payments, the employees are being asked to sign severance agreements in order to receive additional severance pay.

   

  Thus, Walmart is attempting to weed out many of the activists in the Pico Rivera store as well as the other stores who are subject to this sudden and wholly unexplained “closure” because of unexplained “plumbing problems.”

   

  We are prepared to present a number of workers immediately to the Region who worked in the Pico Rivera store. They will describe the activity which has gone on in that store and elsewhere since at least 2012.

   

  The Region is already familiar with much of this because of Case 21-CA-10541, as well as other consolidated cases which are pending in various Regions or before various Administrative Law Judges.

   

  Please assign this immediately to a Board Agent who can begin taking statements in the next day or so.

   

  We will be presenting additional evidence in support of this.

   

  We expect that Walmart will come up with some pretextual argument that there was a “plumbing problem.” No one in the City Administration of Pico Rivera  was aware of any plumbing problem. No permits have been pulled or sought. This, in fact, is true of all five of the stores as far as we can tell. 

   

  And here is the permit for last year’s refurbishments:

  Pico Rivera Permitfinal

  

  

  
  
  

  

• Dear CFTC: Here Is Today's Illegal "Spoofing" In Gold Futures

  Dear CFTC,

  It’s us again and as promised, we’re here to lend you a helping hand in your very serious quest to eliminate all vesitges of illegal manipulation from our beloved markets. Today, we bring you 3 examples of spoofing in gold futures which, you’ll note, aren’t difficult to spot if one is willing to expend the tiniest effort. 

  Without further ado, here (courtesy of Nanex) are several examples in the June 2015 Comex Gold Futures this morning. All times are Eastern Daylight. In each of these cases, no trades (or a tiny few) executed against the large “spoof” order. You can see how prices were influenced by the sudden appearance (and disappearance) of these large, outsized orders.

  1. June 2015 Comex Gold

  Note how large buy and sell orders push prices up and down.

  

  2. Another set of instances appear about 50 minutes after the first set (shown in chart 1).

  

  3. Another set of spoofing instances appear about an hour after the second set (shown in chart 2).

  

  You’re welcome CFTC — it’s the least we can do.

  Best wishes,

  Zero Hedge

  Reminder: We won’t stop this until you are forced to address the glaring hypocrisy and utter incompetence of everyone involved in the regulation of market microstructure.

  

  

  
  
  

  

• Crude Slides On Bigger-Than-Expected API Inventory Build (Small Cushing Draw)

  Against expectations of a 3.3mm bbl build, API reported a 4.2mm bbl build – the 16th weekly build in a row (and record streak). Cushing saw a small draw of 162k bbls.

  

   

  WTI Crude fell back below $57…

  

   

  Charts: Bloomberg

  

  

  
  
  

  

• Why Markets Are Manic – The Fed Is Addicted To The "Easy Button"

  Submitted by David Stockman via Contra Corner blog,

  Later this week another Fed meeting will pass with the policy rate still pinned to the zero bound. The month of May will make the 77th consecutive month of ZIRP—–an outcome that would have been utterly unimaginable even a decade ago; and most especially not with the unemployment rate at 5.5% and after 23 quarters had elapsed since the official end of the recession.

  There never was an Armageddon-like crisis in 2008 that justified all this; it all happened because two emotionally unstable and misguided high officials—-Ben Bernanke and Hank Paulson—-panicked Washington into the utterly false fear that Great Depression 2.0 was at hand.

  

  I debunked this urban legend by chapter and verse in The Great Deformation, but suffice it to say here that not withstanding all the crony capitalist larceny that this financial terrorism enabled, it is impossible with the stock market at 2100—-50% above its pre-crisis level—that there remains any justification for maintaining these “extraordinary policies” seven years later.

  In fact, the Fed’s cowardly dithering for yet another meeting this week has precious little to do with the so-called Great Financial Crisis—-the ostensible reason why we ended up with perpetual free money subsidies for financial market speculators. Instead, it is a product of a policy ideology and insular culture that has been building at the Fed and most other major central banks for more than two decades.

  Central bankers now have their big fat thumbs perpetually on the Easy Button because they are addicted to it. In the case of the Fed, it has been in a rate cutting or rate holding mode during 80% of the time since 1990. Stated differently, during 240 of the last 304 months, the Fed has been riding the Easy Button.

  

  The Fed’s Addiction To The ‘Easy Button': Rates Falling Or Flat 80% Of The Time Since 1990 – Click to enlarge

  This is not just a case of an excess of zeal or too much of a good thing. In fact, the above chart constitutes just one more piece of evidence that world’s financial system is being destroyed by a few hundred central bankers and a couple of brigades of PhD’s and policy apparatchiks which populate their bounteous payrolls. Over the last two decades, this infinitesimal slice of mankind has engaged in a campaign of mission creep that dwarfs all prior aggrandizements of state power.

  The result is that free market price discovery has been extinguished. The central nervous system of capitalism—-the markets for money, debt and other capital securities—-now goose-steps to the pegged prices and monumental liquidity infusions of the central bankers.

  The truly diabolical aspect of this development is that central banks have seized an enormous aggregation of power that is utterly unaccountable. As a result, an increasingly threadbare ideology of self-justification goes unchallenged.

  Moreover, this exemption from accountability insulates the actions and theories of central bankers in a manner that is different than all other institutions of the modern world. Namely, central banks are flat-out exempt from the discipline of both the market and the democratic process. Indeed, they are the most unaccountable concentrations of power since the era of absolute monarchy.

  It is not hard to understand why this astonishing coup d’état has been so easily achieved. It suits the politicians just fine because the resulting massive monetization of the public debt has enabled nearly pain-free fiscal profligacy. The ancient threat of rising interest rates “crowding out” private investment has been eliminated long ago, thereby making “kick the can” the fiscal policy of choice.

  Likewise, the central bank coup has generated its own praetorian guard in the financial system. That is, a giant class of speculators now exists in the form of hedge funds, traders, money managers and investment bankers which would not have a fraction of their current girth in an honest, at-risk financial system.

  Needless to say, this giant speculative class is showered with immense windfalls in the casino system that inexorably supplants traditional financial markets under a regime of modern Keynesian monetary policy. The speculative class, in turn, returns the favor in the form of political support for the so-called “independence” of the Fed and via embracing the self-justifying ideology of the central bank usurpers.

  At its most protean level, this central bank ideology holds that capitalism is chronically prone to accidents and under-performance. Indeed, it is claimed to exhibit  a suicidal tendency for recession and depression absent the wise ministrations and counter-cyclical management skills of either the high priests or the monetary politburo——depending upon whether you prefer religious or secular metaphors—-who run the central banks.

  This core central bankers’ proposition is absolute hogwash. Every one of the 10 business cycle downturns since 1950 have been caused by Washington, not the inherent tendencies of market capitalism.

  Two were caused by abrupt but temporary economic cooling spells consequent to the end of an economic mobilization for war, as in the downturns after the Korean and Vietnam wars. The other eight cycles were caused by the Fed itself after it enabled a runaway increase in household and business credit that resulted in too much inventory accumulation and phony aggregate demand based on unsound credit extensions.

  Later this week we will present chapter and verse with respect to these ten so-called business cycles, but the essence of the mater is this: When the war demobilizations were finished after the Korean and Vietnam downturns and after the Fed had brought to a halt the excessive credit growth rates it had first enabled during the other cycles, the nation’s capitalist economy recovered on its own.

  In none of the cycles since 1950—including the so-called “deep” recessions of 1975, 1982 and 2008-2009—- was the US economy sliding into an economic black-hole that was self-feeding and irreversible save for the external intervention of the central bank.

  In fact, all of these downturns were quite shallow—-once you set aside the inventory liquidation component, which is inherently self-limiting. To wit, when businesses over-invest in inventory owing to a central bank induced credit boom, they do not commit suicide in the process of adjusting their levels of raw, intermediate and finished goods. Instead, the heaviest portion of the inventory liquidation occurs quickly during the course of two or three quarters and then its done.

  So the real measure of business cycle downturn is not the inventory fattened oscillations of the GDP number, but the change in real final sales.  In not one case since 1950—-not even the so-called Great Recession—has real final sales declined by more than 3%, and, on average, it dropped barely 1% over the ten post-1950 cycles.

  There is no reason to believe that the US economy would not have “recovered” on its own after these shallow downturns in real final sales—-downturns which were caused by central bank induced credit booms in the first place. So all along, then, the Fed has been fighting a bogeyman.

  More importantly, it has been claiming powers of economic recuperation that do not exist. In fact, the Fed’s historical “counter-cycle” stimulus measures amounted to little more  than a cheap parlor trick. That is, slashing interest rates to induce a temporary spurt of credit growth that does not  actually generate sustainable gains in real wealth, but merely steals spending from the future by hocking balance sheets and imposing preemptive claims on future incomes.

  In any event, by the time of the 2008 crisis the Fed’s cheap parlor trick was over and done because American households had reached a condition of “peak debt”. The proper measure of household leverage is the ratio of debt to wage and salary income because sooner or later debt will demand a normalize interest rate that reflects an economic return; and because the Keynesian focus on “disposable personal income” (DPI) as the denominator fails to recognize that 25% of the latter consists of transfer payments including Medicare and Medicaid, and that borrowing by transfer recipients doesn’t amount to a hill of beans in the scheme of things anyway. The preponderant share of the household debt of America is owed by wage and salary workers.

  Needless to say, the true peak of household leverage was reached in 2008 after nearly tripling from the pre-1970 level. It has now begun to slowly retrace, but still has a long way to go. Other than the special case of the $1.3 trillion of student loans, which are really education stipends with a lifetime lien, and junk debt financed auto loans, there has been no expansion of household leverage during this cycle.

  

  Household Leverage Ratio – Click to enlarge

  As a matter of fundamental economics, therefore, when households don’t ratchet up their leverage ratios against income there is no Fed “stimulus”. The massive amounts of new cash that the Fed pumps into the financial system—-and the only thing it is really capable of doing is minting new cash out of thin air by depositing self-manufactured credit into the bank accounts of dealers selling securities to its open markets desk—-never leaves the canyons of Wall Street.

  Instead, it ends-up bidding up the price of financial assets–that is, inflating financial bubbles. And this is exceedingly perverse because sooner or later financial bubbles burst when they reach utterly irrational levels and the last sucker is fleeced in the casino. Bursting bubbles, in turn, cause a sharp retrenchment of household and business confidence, resulting in lower spending and intense liquidation of excess inventories and labor accumulated by bullish businesses during the financial bubbles apex.

  Needless to say, the central bankers and their Wall Street shills then say I told you so——claiming that the economy is now caught in a circular swirl toward the drain. It can only be “saved” if our indispensable central bankers have the “courage” to crank up the printing presses for another cycle of rinse and repeat.

  By now this is getting tiresome as we tip-toe near the edge of the third central bank generated financial bust of this century. But there is absolutely no way of stopping the crash landing just ahead.

  The fast money dealers and traders in the inner circle of the casino have now learned to hedge their speculations with downside insurance (i.e. S&P “puts” and like instruments) that is inherently dirt cheap owing to ZIRP and the Fed’s safety nets under the market. Accordingly, they will get out of harms’ way quickly when the break finally arrives, collect their hedging insurance gains and wait for a new round of bottom fishing 40-60% below today’s levels for the market averages and at even lower entry points for the momo names, ETF’s and sectors.

  Once upon a time, the proprietors of the central bank might have taken preemptive action in the face of the absolutely lunatic speculation now evident in the stock and bond markets. Back in 1958, for example, Fed Chairman William McChesney Martin, actually began to raise interest rates and increase stock market margin requirements within six months of the recession’s end, arguing that its was the Fed’s job to lean against the wind, dampen speculation and take away the punch bowl before the gamblers got out of hand.

  Needless to say, Martin grew up in the Roaring Twenties, experienced the 1929 crash first hand and ran the New York Stock Exchange during the dismal era of the 1930s when they were still trying to pick up the pieces. And on that score, even Alan Greenspan, as late as December 1996, worried in public about “irrational exuberance” and actually did make a tepid effort to raise rates and cool speculation in March 1997.

  By contrast, the current Fed will complete another meeting this week without moving interest rates one iota off the zero bound. That will mark 77 straight months of ZIRP.  It will occur at a time when the S&P 500 is priced in the nose bleed section of history at 21X reported earnings; when the Russell 2000 is at 70X reported profits; and when margin debt is at an all-time high in absolute terms and near the 1929 peaks relative to GDP.

  

  You might think they would know better by now, but that fails to appreciate the true evil of the central banks’ sweeping usurpation of power. Namely, that they are so caught up in their own self-justifying group think that they are utterly incapable of seeing the massive financial derangement all about them.

  A few days ago, the Boston Fed published a note that starkly reflects the intellectual enfeeblement that exists inside the politburo. The note suggested that maybe QE is destined to become a permanent tool of policy because in a world of low-inflation ZIRP is not enough.

  But the argument presented as to why the world needs to be afflicted permanently by QE was astonishing. Written by a PhD economist from Johns Hopkins, Michelle Barnes, it argued the following:

  During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases.

  C’mon!

  How do you think the Fed stair-stepped the funds rate down from 8.0% to zero between 1990 and 2008? Well, it wasn’t purely by means of Alan Greenspan’s mumbling or Ben Bernanke’s scary stories to Congressmen in the aftermath of the Lehman meltdown. No, it was accomplished in the same way central banks have always manipulated and pegged interest rates at non-market clearing levels. Namely, by buying securities and expanding their balance sheets.

  During the 18 years between 1990 and the eve of the financial crisis, the Fed expanded its balance sheet from $240 billion to $800 billion or by 7% annually. Obviously, that rate is far greater than the sustainable growth capacity of the US economy.

  

  So there is no difference in the Fed’s fundamental policy tool—monetization of the public debt and other existing assets—- before and after QE. It is only a question of magnitude and the degree to which the resulting injections of fiat credit into the financial system falsify financial prices.

  Needless to say, the sweeping deformations that have now accumulated in the financial systems of the world owing to this kind of heavy-handed central bank market manipulation have reached an acute stage. Every day there is more evidence that we are approaching a blow-off top—-evidenced once again last night by the Shanghai stock market’s explosive rise on the news that the government is looking for newer and even more ingenious ways to keep it $28 trillion credit bubble expanding.
  

  ^SSEA data by YCharts

  But the table below is surely the smoking gun. It shows that central bank financial repression has totally deformed the US corporate sector as represented by the S&P 500. The rewards for speculation—-including speculation in the C-suite via rampant financial engineering—-have now become so powerful and insidious that big business is consuming its cash flow and balance sheet borrowing capacity in a mindless pursuit of M&A deals and cash disgorgement to the casino in the form of share buybacks and dividends.

  During 2014 virtually 100% of S&P 500s reported profits of $1 trillion were disgorged as shareholder distributions to meet the clamoring demand from the casino and the sheer greed of top executives determined to pocket maximum possible stock option winnings before the system blows.

  Even Goldman has warned that this form of slow financial liquidation will not have a happy ending. As shown in one of its tables below, the S&P 500 companies have devoted $4.2 trillion to financial engineering—-M&A, stock buybacks and dividends—-during the last four years (including estimates for 2015) or almost 60% of their cash dispositions during that period.

  That amounts to 160 percent of their gross CapEx during this four year period and the emphasis is on “gross”. The fact is, the S&P 500 companies’ CapEx barely equals current year depreciation. So in truth, the 500 largest US based companies are spending virtually nothing on plant and equipment expansion versus more than $4 trillion on financial engineering.

  Likewise, total spending for the S&P companies on research and development over this same four year period is just $930 billion or only 22% of the outlays for financial engineering. In all, it is hard to imagine a set of figures which embodies a more perverse campaign of eating the seed corn of the US business economy.

  

  In short, there is a reason that honest price discovery is essential to capitalist prosperity. It is the miraculous mechanism by which capital is raised from savers and investors and efficiently allocated among producers, entrepreneurs and genuine market-rate borrowers.

  What the central banks have generated, instead, is a casino that is blindly impelled to churn the secondary capital markets and inflate the price of existing assets to higher and higher levels—-until they ultimately roll-over under their own weight. That is, the central banks have fostered an unstable and destructive system of speculative finance that everywhere and always is the enemy of genuine capitalist prosperity.

  The Easy Button addiction of our central bankers is thus not just another large public policy problem. It is the very economic and social scourge of our times.

  

  

  
  
  

  

• Gold & Silver Surge As Schizophrenic Stocks Slump-And-Pump

  As the world hopes for "no comment" from The Fed tomorrow, anxiety in markets remains very evident… This about sums it up!

   

  Stocks continued yesterday's weakness overnight… ramped obdeiently into the open in NY… then plunged on bad data and Iran Ship Seizure headlines before v-shape-recovering thanks to someone's generosity in selling massive amounts of protection (VIX) just as you would ahead of any FOMC??!!

  

   

  Stocks clung to modest gains somehow despite weakness in Biotechs and AAPL… but Nasdaq unhderperformed…

  

   

  Some may have missed the fact that once again the broken market was used to slow the descent of markets… Nasdaq feeds were down for 7 minutes and that enabled some rescue among the VWAP-mongers…

  

   

  All thanks to the Kathmandu Pattern in VIX…

  

   

  Because nothing says Sell Vol to 2015 lows like an FOMC meeting…

  

   

  and AAPL ended at its lows… $140 Billion is just not enough – just ask Icahn

  

   

  Biotech bounced but could not hold it…

  

   

  TWTR "accidentally" released earnings before the bell… and turmoil ensued

  

   

  Oops…

  

   

  Treasury yields leaked higher all day long – as they somewhat ubiquitously do ahead of FOMC meetings… (and despite a strong 5Y Auction) 30Y Yields blew 9bps higher – 3rd biggest move this year

  

   

  The USDollar slid lower from the early start ofthe US session with huge AUD strength…

  

   

  Dollar weakness helped extend gains in commodities but gold and silver were the big movers… Gold's biggest 2-day move in 3 months, Silver's biggest 2-day rise in 5 months

  

   

  Crude's reaction to the Iran ship seizure news is evident here but disappeared quickly as The Pentagon confirmed it was a non-US Ship…

  

   

  Gold and Silver have quite a couple of days… that will never be allowed aftwer the FOMC surely…

  

   

  Charts: Bloomberg

  

  
  
  

  

• The Beginning Of The End Of Social Media? The Case Of Twitter

  One look at the charts below and one should start wondering just how viable is social media any more as a business model.

  

  

   

  Which brings us to to what we reported a week ago were the prophetic words of Snapchat CEO Evan Spiegel, who just may have missed his IPO window…

  When  the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease – compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough. Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.

  Facebook… or any other “social media”stock.

  Source

  

  

  
  
  

  

• ActionAlertPLUS!

  Posted 24 hours ago at TheStreet.com. No comment necessary.

  Insight from TheStreet’s Research Team:

  Twitter is a core holding of Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. During the most recent weekly roundup, this is what Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research – Action Alerts PLUS had to say about the stock:

  Twitter (TWTR:NYSE; $50.82; 1,400 shares; 2.69%; Sector: Technology): The shares traded higher this week following strong performance and underlying trends seen in both Facebook’s (FB) and Google’s (GOOGL) results. We believe Twitter is partially out of the sentiment doghouse heading into first-quarter 2015 results next week, but is still largely under-owned relative to most large-cap Internet stocks.

   

  Twitter has likely the greatest array of company-specific catalysts of any company in its sphere this year, including Periscope, core monthly active user (MAU) acceleration from the Google partnership, and new core features like embedded video. Industry channel checks point to solid uptake of Twitter’s new targeting features and formats in the first quarter, but the greatest lever the company can pull, in our view, is the pace of on-boarding of new advertiser demand. For some perspective, we estimate that Google generates half of its revenue from smaller advertisers who spend less than $250k per year, which make up 95% of the 8 million-plus AdWords accounts, so building out the “tail” should allow Twitter to grow well-above average over the next several years. With a global ad load between 1% to 2% and 85% from mobile, we think TWTR has more revenue runway than any other company in the Internet space. Our target is $55.

       – Jim Cramer and Jack Mohr, ‘Weekly Roundup’ originally published 4/24/2015 on ActionAlertsPLUS.com.

  

  

  
  
  

  

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