- Ireland Refuses To Extradite Man To US Because Prison System Is Too Inhumane
Submitted by Cassius Methyl via TheAntiMedia.org,
Throughout the world, the U.S. prison system is often seen as inhumane and excessively large.
The American prison system is so reviled, in fact, that Irish officials recently refused to extradite an alleged terrorist to the U.S. The court cited concerns that if he were sent to the U.S., he would probably be placed in Colorado’s “Supermax” prison, ADX Florence (Administrative Maximum Facility). The prison is nicknamed Colorado’s “Alcatraz of the Rockies.”
Irish High Court Justice Aileen Donnelly went as far as to write a 333-page report about why the suspect shouldn’t be extradited. One highlight from the court’s ruling was that incarceration at ADX Florence prison would amount to “cruel and unusual punishment.”
Donnelly said the prison “amounts to a breach of the constitutional requirement to protect persons from inhuman and degrading treatment and to respect the dignity of the human being.”
“[P]rolonged exposure to involuntary solitary confinement exacts a significant physiological toll, is damaging to the integrity of the mind and personality, and is damaging to the bodily integrity of the person,” she continued.
According to the Los Angeles Times, “An Irish resident originally from Algiers, Damache, 50, [is]accused of using online chat rooms to recruit American women into a would-be terrorist cell operating in this country and Europe.
One man and two women, including Damache’s wife, have already been convicted in U.S. courts of providing material support to terrorists. And Damache was captured by Irish authorities in 2010 in Dublin on a separate charge of making a telephone death threat and held without bail.”
In 2011, Damache was indicted from a distance in a Philadelphia court on “charges of plotting to assassinate a Swedish cartoonist who depicted the prophet Muhammad as a dog.”
Damache was released in May after serving his time, but the U.S. is still pushing for his extradition.
“I always had faith in the Irish legal system,” he said in a statement presented by his lawyers. “After more than five years in jail, I am looking forward to moving on with my life here.”
The Colorado prison has held some of the most well-known criminals in American history, keeping them in solitary confinement with extremely limited access to outside communication. Notorious inmates include Timothy McVeigh and other people accused of high level terrorism—such as Zacarias Moussaoui, the only person convicted in a civilian court for involvement in the 9/11 attacks.
Lawyers have even argued that incarceration at ADX Florence is worse than the death penalty. Defense expert Mark Bezy called it “a mechanism to cut off an inmate’s communications with the outside world.”
* * *
The Irish court’s refusal to extradite Damache adds to a growing trend of nations that opt to exercise their own sovereignty amid pressure from powerful American influence.
Such nations are increasingly moving to decide issues for themselves as they refuse to be persuaded into following the orders of a more powerful empire.
- Japan-Korea Tensions Rise – 80 Year-Old Veteran Self-Immolates In Anti-Japan Protest
With China already stoking fears in The South China Sea (and now entering the currency war) and Japan re-militarizing (and having led the currency war for years) it appears tension within Asian nations is escalating. The latest egregious example of these tensions is evident, as Reuters reports, an 80-year old South Korean set himself on fire on Wednesday during a protest calling for Japan to apologize for forcing Korean girls and women to work in military brothels during World War Two, days ahead of the anniversary of the end of hostilities.
Warning: Graphic
The self-immolation occurred during a regular weekly demonstration outside the Japanese embassy ahead of the Aug. 15 anniversary marking 70 years since the end of Japan's colonial occupation of the Korean peninsula.
With the anniversary looming, Wednesday's protest was larger than usual, with about 2,000 demonstrators, including three of the 47 known surviving Korean "comfort women", as they were euphemistically called by Japan, organizers said.
Bystanders covered the man with protest banners to put out the flames and paramedics took him to hospital.
The man, identified as Choi Hyun-yeol by a civic group with which he was affiliated, was in critical condition with burns to his neck, face, and upper torso, a hospital professor said.
"The patient is old and has severe burns so his survival can't be guaranteed," the professor told reporters.
…
South Korea's ties with Japan have long been strained by what Seoul sees as Japanese leaders' reluctance to atone for the country's wartime past, including a full recognition of its role in forcing Korean girls and women to work in brothels.
* * *
With old war tensions mixing with new war tensions, Asia is quickly becoming yet another tinderbox in the centrally planned world.
- Did The EPA Intentionally Poison Animas River To Secure SuperFund Money?
A week before The EPA disastrously leaked millions of gallons of toxic waste into The Animas River in Colorado, this letter to the editor was published in The Silverton Standard & The Miner local newspaper, authored by a retired geologist detailing verbatim, how EPA would foul the Animas River on purpose in order to secure superfund money…
"But make no mistake, within seven days, all of the 500gpm flow will return to Cememnt Creek. Contamination may actually increase… The "grand experiment" in my opinion will fail.
And guess what [EPA's] Mr. Hestmark will say then?
Gee, "Plan A" didn't work so I guess we will have to build a treat¬ment plant at a cost to taxpayers of $100 million to $500 million (who knows).
Reading between the lines, I believe that has been the EPA's plan all along"
Sound like something a government entity would do? Just ask Lois Lerner…
As we concluded previously,
The EPA actually has no concern for the environment, they just happen to use the environment as a cover story to create laws and gain an advantage for the companies that lobbied for exemptions to the agency’s regulations, and to collect money in fines. There are solutions outside the common government paradigm, and that is mainly the ability for individuals, not governments, to hold polluters personally and financially accountable.
h/t Stephen
- Understanding Why The Clinton Emails Matter
Submitted by Peter van Buren via WeMeantWell.com,
In the world of handling America’s secrets, words – classified, secure, retroactive – have special meanings. I held a Top Secret clearance at the State Department for 24 years and was regularly trained in protecting information as part of that privilege. Here is what some of those words mean in the context of former Secretary of State Hillary Clinton’s emails.
The Inspectors General for the State Department and the intelligence community issued a statement saying Clinton’s personal email system contained classified information. This information, they said, “should never have been transmitted via an unclassified personal system.” The same statement voiced concern that a thumb drive held by Clinton’s lawyer also contains this same secret data. Another report claims the U.S. intelligence community is bracing for the possibility that Clinton’s private email account contains multiple instances of classified information, with some data originating at the CIA and NSA.
A Clinton spokesperson responded that “Any released emails deemed classified by the administration have been done so after the fact, and not at the time they were transmitted.” Clinton claims unequivocally her email contained no classified information, and that no message carried any security marking, such as Confidential or Top Secret.
The key issue in play with Clinton is that it is a violation of national security to maintain classified information on an unclassified system.
Classified, secure, computer systems use a variety of electronic (often generically called TEMPESTed) measures coupled with physical security (special locks, shielded conduits for cabling, armed guards) that differentiate them from an unclassified system. Some of the protections are themselves classified, and unavailable in the private sector. Such standards of protection are highly unlikely to be fulfilled outside a specially designed government facility.
Yet even if retroactive classification was applied only after Clinton hit “send” (and State’s own Inspector General says it wasn’t), she is not off the hook.
What matters in the world of secrets is the information itself, which may or may not be marked “classified.” Employees at the highest levels of access are expected to apply the highest levels of judgment, based on the standards in Executive Order 13526. The government’s basic nondisclosure agreement makes clear the rule is “marked or unmarked classified information.”
In addition, the use of retroactive classification has been tested and approved by the courts, and employees are regularly held accountable for releasing information that was unclassified when they released it, but classified retroactively.
It is a way of doing business inside the government that may at first seem nonsensical, but in practice is essential for keeping secrets.
For example, if an employee were to be handed information sourced from an NSA intercept of a foreign government leader, somehow not marked as classified, she would be expected to recognize the sensitivity of the material itself and treat it as classified. In other cases, an employee might hear something sensitive and be expected to treat the information as classified. The emphasis throughout the classification system is not on strict legalities and coded markings, but on judgment. In essence, employees are required to know right from wrong. It is a duty, however subjective in appearance, one takes on in return for a security clearance.
“Not knowing” would be an unexpected defense from a person with years of government experience.
In addition to information sourced from intelligence, Clinton’s email may contain some back-and-forth discussions among trusted advisors. Such emails are among the most sensitive information inside State, and are otherwise always considered highly classified. Adversaries would very much like to know America’s bargaining strategy. The value of such information is why, for example, the NSA electronically monitored heads of state in Japan and Germany. The Freedom of Information Act recognizes the sensitivity of internal deliberation, and includes a specific exemption for such messages, blocking their release, even years after a decision occurred. If emails discussing policy or decisions were traded on an open network, that would be a serious concern.
The problem for Clinton may be particularly damaging. Every email sent within the State Department’s own systems contains a classification; an employee technically cannot hit “send” without one being applied. Just because Clinton chose to use her own hardware does not relieve her or her staff of this requirement.
Some may say even if Clinton committed security violations, there is no evidence the material got into the wrong hands – no blood, no foul. Legally that is irrelevant. Failing to safeguard information is the issue. It is not necessary to prove the information reached an adversary, or that an adversary did anything harmful with the information for a crime to have occurred. See the cases of Chelsea Manning, Edward Snowden, Jeff Sterling, Thomas Drake, John Kiriakou or even David Petraeus. The standard is “failure to protect” by itself.
None of these laws, rules, regulations or standards fall under the rubric of obscure legalities; they are drilled into persons holding a security clearance via formal training (mandatory yearly for State Department employees), and are common knowledge for the men and women who handle America’s most sensitive information. For those who use government computer systems, electronic tools enforce compliance and security personnel are quick to zero in on violations.
A mantra inside government is that protecting America’s secrets is everyone’s job. That was the standard against which I was measured throughout my career and the standard that should apply to everyone entrusted with classified information.
- 19-Year Old Sets Own Ferrari On Fire Because He Wanted A New One
On October 24, 2014, the 19-year old son of a wealthy Swiss businessman walked into a brothel in the Bavarian town of Augsburg.
Although by almost any standard he led a rather splendid existence, on this particular night he had reached his breaking point. The problem: he drove a 2011 Ferrari 458 Italia.
That may look nice enough, but the issue is that there’s a 2014 Ferrari Italia, and let’s face it, no one – and we mean no one – would want to be caught dead in the vehicle shown above when the one shown below is just waiting to be driven off the lot.
Of course this is exactly the type of situation that insurance – or, more acurately, insurance fraud – is for.
And so this young man – allegedly with the help of the Ferrari dealer – did what anyone would do in this situation: he drove to Bavaria, went to see a prostitute (one needs an alibi), and paid two accomplices $15,000 to douse the old junker in gasoline and light it on fire.
Part of the plan worked. From Tages-Anzeiger (Google translated):
He visited the neighboring brothel with other colleagues. Meanwhile, the two helpers poured a gasoline-nitro-mixture to the leather seats of the black sport car and set it on fire. The car exploded with a loud bang and burned out.
He even remembered to remove “the expensive specialty rims and carbon fiber parts.”
Initially, authorities came to the conclusion that the incident was retaliation for unpaid hooker fees. From 20 Minutes (Google translated from French):
Initially, the Bavarian authorities believed a settlement account in prostitution.
Yes, a “settlement account in prostitution,” but security camera footage and phone records told a different story. Ultimately, investigators concluded that this was all a not-so-elaborate ploy to collect the insurance money on the way to buying the newer model.
Asked by a judge why he had gone to such lengths given that his father had bought him 14 other cars (including a Lamborghini) as well as “several properties” worth in excess of $25 million, he confessed that although his monthly allowance (between CHF5,000 and CHF10,000) was generous enough, it wasn’t sufficient to cover the difference between the 2011 and the 2014 458s and he didn’t feel comfortable telling his father the truth – namely, that the 2011 458 “no longer pleased him.”
For his troubles, the young man received 30 months of probabtion and a €30,000 fine. There was no word on whether he was able to get the 2014 Speciale.
So although we think the moral of the story is quite obvious here, we’ll spell it out for you anyway: for anyone who thinks they’re having a bad day just remember that it could always be worse. You could be driving a 2011 Ferrari 458 Italia.
- Chinese Devaluation Extends To 3rd Day – Yuan Hits 4 Year Low, Japan Escalates Currency Race-To-The-Bottom Rhetoric
The "one-off" adjustment has now reached its 3rd day as The PBOC has now devalued the Yuan fix by 4.65% back to July 2011 lows.
Even before this evening's date with debasement history, Japan felt the need to step up the currency war rhetoric. Following disappointing Machine Orders data, Abe advisors Hamada warned that "Japan can offset Yuan devaluation by monetary easing," and so the race to the bottom escalates. China has its own problems as BofAML's leading economic indicator showed "the foundation for a growth recovery is not solid, facing more downward pressure," and while confusion reigns over why The PBOC would intervene at the close to strengthen the Yuan last night, the reality is the commitment isn’t to a devaluation for China’s exports, but undoubtedly its actions are directed toward trying to keep the wholesale finance interfaces somewhat orderly. Finally, China’s devaluation couldn’t come at a worse time for Argentina – about a quarter of the country’s $33.7 billion of foreign reserves are now denominated in yuan, which suffered its biggest loss since 1994 on Tuesday.
Having devalued the (onshore) Yuan fix by 3.5% in the last 2 days, China did it again… shifting Yuan to 4 year lows
- *CHINA SETS YUAN REFERENCE RATE AT 6.4010 AGAINST U.S. DOLLAR
Offshore Yuan dropped back to 6.50…
And China Stocks have opened lower…
- *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 1% TO 3,975.2
S&P Futures are fading…
Some more liquidity needed…
- *PBOC TO INJECT 40B YUAN WITH 7-DAY REVERSE REPOS: TRADER
And sure enough, not be outdone, Japan threatens to re-escalate the currency war…
- *ABE ADVISER HAMADA SAYS CHINA'S FX MOVE WILL TEND TO BOOST YEN
- *HAMADA: JAPAN CAN OFFSET YUAN DEVALUATION BY MONETARY EASING
- *HAMADA:BOJ MAY EASE IF CHINA MOVE HITS EXTERNAL DEMAND TOO MUCH
But China has it's own problems, as BofAML notes, China LEAP (leading economic activity pulse) fell to-3.9% YoY in July from -2.6% in June, as five of the seven LEAP components weakened.
Similarly, other macro activity data released in July worsened from a surprisingly strong June and disappointed the market. It suggests the foundation for a growth recovery is not solid, and economic growth faces more downward pressure as financial sector activity has slowed after the recent stock market slump.
On the demand side, housing starts further declined to 16.4% yoy in July after dropping 14.3% in June. We think destocking could still be ongoing in tier 3-4 cities and the housing market recovery has yet to drive acceleration in housing starts. Auto sales growth slumped to -7.1% YoY from -2.3%, likely due to weakening consumer demand for some big-ticket items amid stock market turmoil while staple good sales remained resilient.
Production-side components were mixed, with weaker power and steel output growth but slightly better cement output growth. Power and steel output growth was particularly poor in July, likely due to plummet in commodity and raw material prices on a bearish growth outlook amid stock market turmoil.
Medium- to long-term loan growth edged down by 0.8pp, but if taking into account local government debt swap, the decline would be 0.3pp instead.
* * *
The fallout from China's decision is going global…
China’s devaluation couldn’t come at a worse time for Argentina.
About a quarter of the country’s $33.7 billion of foreign reserves are now denominated in yuan, which suffered its biggest loss since 1994 on Tuesday.
* * *
And finally, here is Jeffrey Snider of Alhambra Investment Partners discussing the other reality of what is occurring in China – as opposed to the paint-by-numbers version spun on TV – explaining why the PBOC would seemingly “allow” devaluation one day and then act against it the very next. They are just trying to hold on for dear life, managing imbalances that are beyond their grasp.
While everyone remains sure that the PBOC is actively trying to “allow” the yuan to depreciate as some kind of export catalyst, the “dollar” continues to show (not suggest) otherwise. Liquidity and “dollar” markets are still roiled rather than soothed, especially the US treasury market where the bid right at the open (what look very much like continued collateral calls) pushes more like a combination of October 15 and January 15.
As if to underscore the runaway nature, the PBOC apparently intervened against this “devaluation” just last night. From the Wall Street Journal:
Tuesday, the People’s Bank of China surprised global markets with what looked like a win-win currency depreciation for the country—appearing to cede more control of its exchange rate to market forces, which the International Monetary Fund and others have long urged it to do, while also helping Chinese exporters.
Its intervention only one day later raised questions about its commitment to an exchange rate driven more by supply and demand and less by government direction.
The Journal’s confusion here is demonstrated by what is a mistaken assumption in the first paragraph leading to the mystery of the second. The PBOC’s commitment isn’t to a devaluation for China’s exports, but undoubtedly its actions are directed toward trying to keep the wholesale finance interfaces somewhat orderly. When the yuan was trading exactly sideways for nearly five months, that was the same setup; the PBOC was keeping the yuan stable so that it wouldn’t devalue and thus signal the depth of the “dollar” financing strain.
That is the problem orthodox commentary and theory has with wholesale finance, they just don’t get it. Devaluation of currency doesn’t mean that in this context just as a “strong dollar” isn’t anything like the term. Both are forms of internal disruption, the direction of that is just an expression of what manner of wholesale finance is becoming most unruly. Credit-based “money” systems do not operate like the currency systems from before 1971. Floating currencies aren’t really that, so much as they are just another form of traded liabilities in global banking.
The Chinese have a “dollar” problem just the same as the Swiss, Brazilians and the rest (including the dollar). There is a global retreat in eurodollar funding that is wreaking havoc, expectedly, globally. And in China that is particularly true as the Chinese banks through external corporates joined the “dollar short” several years back. Joined now under PBOC “reform”, there has been an almost hostility if not at least disfavor over the “dollar” intrusion as it has been taken as one primary element of the bubbles (what mainstream mistakes for “hot money”). As a result, the PBOC has been almost chasing “dollars” out of the system in an attempted orderly purge.
That led to what looked like historic “outflows” in 2015 as “dollar” conditions for the Chinese “short”, so it is absolutely no surprise to see this occurring now. The only mystery has been, as I have been writing for some time, what the PBOC was doing to counteract it during those five months. That would tell us both how serious the turmoil was and how ineffective whatever intervention would ultimately be.
From July 22:
The yuan has suddenly, right at the March FOMC meeting, gone limp. Trading has been confined, except for very brief, intraday outbursts, to an increasingly narrow range. Given its behavior particularly as a full part of the reform agenda to that point, this amounts to what can only be hidden and inorganic factors. Whether that means PBOC intervention is unclear, though suggested by even TIC, but this is the most important and unexplained dynamic in the “dollar” world at present.
Perhaps the June TIC updates will help shed some light on what has been going on with China’s “dollar short”, but I doubt it. The nature and especially the scale of what might be happening in the money markets has global implications, and may (conjecture on my part) start to explain the reversal in the Chinese stock bubble and ultimately even relate to the “dollar’s” renewed disruption in July so far.
Earlier July 8:
It’s not enough to notice how this [zero yuan volatility] is odd, as it appears, given wider circumstances, to be almost odd with a purpose. Whenever uncertainties grew about China’s reform, especially “allowing” defaults, “dollar” supplies tightened significantly and the yuan devalued. Given the fragility of the current situation, you can understand why, possibly, the PBOC might not want too much to get so far out of hand and so they may be supplying “dollars” to maintain orderly money markets both onshore and off. Given the plunge in import activity they may not really need to supply all that much, particularly in combination with prior and intended outflows as they effectively tried to chase speculators out of the country. Perhaps they did too much?
Whatever the case may ultimately be, it bears close scrutiny for several reasons. First, if this is correct (a very big “if”) then the financial system in China is worse, far worse, than it appears. Second, central bank attempts such as this are extremely finite as they are, over time, hugely inefficient. The PBOC might just be throwing everything in its arsenal at the financial system short of open “flood” declarations (which are themselves destabilizing; declaring an open emergency is as much confirmation of how bad everything is) trying to calm everything down in order to reassess. [emphasis added]
That is why the PBOC would seemingly “allow” devaluation one day and then act against it the very next. They are just trying to hold on for dear life, managing imbalances that are beyond their grasp. That is what occurred last night, as the Wall Street Journal confirms that Chinese banks were “selling” dollars on the PBOC’s behalf; which is, in the wholesale context, supplying “dollars.” The currency translation is just the recognition of that imbalance, which is in many forms like this kind of convertibility almost a “run.”
The PBOC then instructed state-owned Chinese banks to sell dollars on its behalf in the last 15 minutes of Wednesday’s trading, according to people close to the state banks.
The central bank took it as far as it could and then the “dollar” dam just burst on really bad economic data that was expected instead to confirm the bottom. At this point, it looks like they are left only to try to mitigate the damage they had been for five months hoping would never occur as the global economy was supposed to have healed on its own long before then (which was nothing more than FOMC and orthodox pipe dreams).
Another central bank has fallen prey to the decomposing “dollar”, as the global tremors of such central bank upsets ripple further and further.
- 6 Years And One Witch Hunt Later, Goldman Changes Its Mind On "Secret Sauce" Software
For anyone who didn’t read Flash Boys or who hasn’t otherwise apprised themselves of the history behind the proliferation of the parasitic, vacuum tubes that have embedded themselves between real buyers and sellers in order to extract a tax on each and every trade in the name of “providing liquidity”, you might have missed out on the sad story of Sergey Aleynikov, the Russian computer programmer and target of a six-year Goldman witch hunt.
In 2010, a federal court convicted Aleynikov of stealing trading code from Goldman. As WSJ notes, Aleynikov was “acquitted of those charges on appeal, then charged again by the Manhattan District Attorney and convicted a second time, [before] a state judge dismissed the case last month on grounds that prosecutors failed to show enough evidence to support the verdict.”
And while the Manhattan DA is appealing the ruling, Goldman is busy doing the exact same thing that Aleynikov is supposedly “guilty” of – distributing open source code. Here’s WSJ with the story:
Goldman will soon offer clients access to more of its in-house tools, such as high-powered databases that analyze markets and manage risk, according to the firm’s executives. Those proprietary systems have long been key elements enabling Goldman to sidestep market turmoil and ring up outsized profits in better conditions.
Given direct access to these tools, Goldman clients could use the technology to build their own trading systems and potentially make purchases independent of the firm.
But the firm’s executives believe the upside outweighs those concerns. Goldman is betting that its clients, such as hedge funds and other money managers, will use the individual applications, or apps, to develop strategies and then execute their trades with the firm.
By deepening ties with those clients, Goldman hopes it will pick up other business from them as well.
The development has been a centerpiece of a new technology strategy developed by R. Martin Chavez, the firm’s chief information officer.
“We’re constantly asking ourselves about all of it,” Mr. Chavez said. “Is this software better for clients and the planet if it’s inside Goldman? Or is it better if we extend the platform to clients, or in some cases does a spinout into open source or a company make more sense?”
Now clearly, there are all kinds of amusing things about that last statement, including the notion that anything going on over at 200 West is good “for the planet” (they’re just “doing God’s work” over there, you know), but the idea that the firm now sees the utility in actively distributing open source code when by all accounts what Aleynikov took with him on the way out the door wasn’t proprietary at all, is evidence of blatant hypocrisy on the part of current management or complete incompetence on the part of those who came before – or both.
Furthermore, one wonders what happened to the notion that allowing this type of code to fall into the “wrong” hands, would be the capital markets equivalent of giving al-Qaeda a suitcase nuke. Remember, Goldman’s contention when Aleynikov was arrested was that the code he allegedly stole (the open source code) could be used to “manipulate markets in unfair ways.” Does that, by extension, mean that Goldman will now equip its most important clients with the tools to manipulate markets?
Well yes, but that doesn’t mean they weren’t already doing that. Here’s the Journal again:
The concept of giving clients potentially valuable information in hopes of winning business isn’t unprecedented: Goldman and other investment banks have for years given clients trading ideas and market research on the same presumption.
Of course given what we know about the tendency for Goldman to “muppetize” clients who take the firm’s “recommendations” at face value, we can’t help but wonder if the same fate isn’t in store for anyone who buys what the bank is selling (or giving away) in terms of software.
In any event, one thing we’re quite sure of is that Goldman won’t be trying to convince the Manhattan DA that given the firm’s enlightened stance on open source software, the torment of Sergey Aleynikov should finally come to an end.
- Albert Edwards: "Prepare For Sub-1% Treasury Yields And Another Financial Crisis"
Make no mistake, warns SocGen's Albert Edwards, this is the start of something big, something ugly. For while the west has been heaving a sigh of relief over the past few months that deflation pressures have abated somewhat – especially at the core level – we have been emphasising that deflation has only been intensifying in Asia and that like any puss-filled boil, this deflationary pressure would soon need to be lanced…
We have long believed that we are only one misstep from outright deflation in the west with core inflation in both the US and eurozone at just 1%. We expect the acceleration of EM devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession. As investors realise yet another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.
* * *
Aside from the relentlessly weak economic and inflation data out of China in recent months (notwithstanding the surge in pork prices), the one thing that has changed dramatically over the last 18 months is China’s huge swing into a Balance of Payments deficit. This has exerted chronic downward pressure on the renminbi, forcing the Peoples Bank of China (PBoC) to start selling its vast foreign exchange reserves to prop up the beleaguered currency (FX reserves have slid $300bn over the last four quarters). Now, though it was only a little over two months ago the IMF declared the renminbi to be no longer undervalued, many of us felt the situation had gone far beyond that stage and that indeed, the currency was substantially overvalued, especially with the rest of Asia devaluing alongside the Japanese yen. The most shocking illustration of China’s loss of competitiveness in recent years is the 50% surge in its Real Effective Exchange Rate (REER) against the US (see chart below).
In some ways the question is not whether the renminbi is competitive or uncompetitive. The problem is that the renminbi is unambiguously less competitive than it was. This comes at a time when the Chinese economy is struggling and the stock market bubble is bursting. We have always said renminbi devaluation would not be a preferred policy lever, but it was one that would be yanked vigorously if needed – viz FX intervention to stop the renminbi falling is effectively a monetary tightening, the last thing China needs at present! Many had felt it would continue to keep the renminbi stable while the IMF was still deliberating whether to admit the renminbi into the IMF’s basket of reserve currencies (SDR). But the IMF’s announcement last week to defer a decision until the autumn of 2016 may well have been sufficient reason for the PBoC to stand aside from FX intervention and bow to the inevitable.
The key thing here is that Tuesday’s devaluation is not just a one-off – you will see persistent weakness from hereon in. For although the PBoC said the move was a one-time adjustment to reflect changes in the way it calculates the daily fix, it also said that the price would be set “in conjunction with demand and supply conditions in the foreign exchange market and exchange rate movements of the major currencies”. To all but the most PollyAnna’ish of observers that means this is the start of a major renminbi devaluation because of the massive downward market pressure the currency is under via the BoP deficit.
This move will transform perceptions about the resilience of the US economy. The recent strength of the trade-weighted US dollar has already contributed to deflation being imported into the US (see right-hand chart above), at a time when core consumer price inflation is already too low. Up until now Japanese yen devaluation has been the main driver of falling US import prices (see top right-hand chart above). Another way to view this is to look at the level of US import prices from various countries/regions since the start of this recovery (see chart below). Despite much talk of Japanese exporters maintaining dollar prices to expand margins and profits, dollar import prices have definitely slumped and China is about to catch up with Japan! For although the renminbi Is not actually included in the trade-weighted DXY calculation, the Fed estimate China’s importance to be 21% of their own broad tradeweighted dollar index – a steep rise from only 15% a decade ago. Japan by contrast currently accounts for 7% of the index, but it has been yen devaluation that has helped heap pressure on China to devalue. Watch that dark blue line below closely.
Many observers, such as myself, believe the US dollar has now entered a secular bull market irrespective whether the Fed raises interest rates in September or not. But in any case, with an ongoing renminbi (read EM …) currency devaluation now underway, the US will import even more of the world’s unwanted deflation. We see this as the end-game in this cycle. With US profits already falling (sharply in the case of whole economy profits), the cycle is already very vulnerable indeed, as it is the business investment component of GDP that causes recessions.
While investors have already talked about the eurozone looking similar to Japan, a deflationary recession also beckons for the US. Core inflation on the Fed’s preferred measure (core PCE) is hovering around the 1% level and a new round of in the currency war will see a move in core inflation below zero to accompany the headline rate.
Prepare for sub-1% 10y Treasury yields and another financial crisis as policy impotence is soon revealed to all.
Source: SocGen
- There's More To Come – Offshore Yuan Signals Further Devaluation Tonight
Despite 2 significant interventions to stall what is likely an avalanche of wrong-way carry trade unwinds (or perhaps to stop the boat swinging to the other side too much), offshore Yuan has continued to depreciate since China closed and now implies another 1% devaluation is looming (having been up to a 2.6% discount earlier in the day).
PBOC intervened in CNY overnight…
But CNH remains adamant that more devaluation is coming…
CNH nailed it overnight… will it be right again tonight?
Charts: Bloomberg
- Mysterious Dip Buyer Found – Goldman Buyback Desk Has Busiest Day Since 2011
On Tuesday, in “Even The Dumb Money Is Dumping Stocks Now,” we highlighted weekly flows data from BofAML which showed that not only were hedge funds and institutional clients (still) selling in the five days ended 8/07, but private clients were net sellers for a second consecutive week, dumping the most equities in a year.
But not everyone was selling last week.
Stocks still benefited from the perpetual corporate management bid that’s helped to sustain the equity rally since the flow from that other price insensitive buyer (the Fed) tapered off.
Given the above – and given everything we’ve said this year about debt-funded corporate buybacks buoying equities – no one should be surprised that Wednesday’s magical levitation came courtesy of US corporations. Here’s Bloomberg with more:
Who did the buying as U.S. stocks staged the biggest turnaround in three years? The companies that issued them.
The Goldman Sachs Group Inc. unit that executes share buybacks for clients had its busiest day since 2011 on Wednesday, according to a note from the firm’s corporate agency desk. Based on the value of equities repurchased, volume handled by the bank set a record. The note was confirmed by spokeswoman Tiffany Galvin.
Corporations have emerged as one of the biggest sources of fresh cash in the stock market, eclipsing even mutual funds with more than half a trillion dollars spent last year, according to data compiled by S&P Dow Jones Indices. They swooped in and bought again on Wednesday as the Standard & Poor’s 500 Index flirted with its largest two-day selloff since January.
In short, today should serve as a real-world example of what GMO’s Ben Inker said in the firm’s latest quarterly letter: “…in order to see massive changes in the price of a security, you don’t need the price-insensitive buyer to become a seller. You merely need him to cease being the marginal buyer. If price-insensitive buyers actually become price-insensitive sellers, it becomes possible that price falls could take asset prices significantly below historical norms.”
Oh, and by the way, here’s what we said early in the session:
Quick, add more cash to the AAPL buyback.
— zerohedge (@zerohedge) August 12, 2015
- Why More Conflict Is Inevitable In The Middle East
Submitted by Erico Matias Tavares via Sinclar & Co.,
We all know how sectarian, religious and political differences have thrown many Middle Eastern countries into chaos and armed conflict. But there is a deeper factor at play which deserves greater recognition: severe water scarcity.
This scarcity will not be addressed overnight, no matter who ends up prevailing in those conflicts. As such, the region will very likely continue to suffer from significant turmoil for many years to come.
Using satellite data, scientists from the University of California (Irvine), NASA and the National Center for Atmospheric Research found that large parts of the arid Middle East region saw a dramatic loss of freshwater reserves over a seven-year period starting in 2003. This is shown in the following map:
Parts of Turkey, Syria, Iraq and Iran along the Tigris and Euphrates river basins lost some 144 cubic kilometers of total stored freshwater – almost the total amount of water in the Dead Sea. The scientists attributed the majority of this loss to pumping from underground reservoirs.
Indeed, Syria and Iraq are facing severe water availability issues, compounded by the fact that the majority of their renewable water resources comes from other countries. As such, the Euphrates River – which has sustained Mesopotamian civilization from its very start – is critically important for them.
However, rampant demand, wasteful government policies, intensive agriculture, pesticides and industrial use have all substantially reduced both the quality and the quantity of water available. According to a Chatham House study, this overexploitation has curtailed the flow of the Euphrates from Turkey to downstream countries by at least 40% since 1972.
This is a major concern for the 27 million people across these three countries who depend on these water supplies directly, and many millions more reliant on the food and energy coming out of that region. All the wars since 2003 have only made matters worse.
It is not surprising then that the Islamic State is securing strongholds along the river and using them to exert pressure on their enemies. But there is one thing that the opposing factions in the brutal war raging across Syria and Iraq agree on, and that is accusing Turkey of further reducing their fair share of water supplies from the Euphrates. The latter will soon complete an ambitious US$35 billion dam and irrigation works program, which will put further pressure downstream.
Other countries in the region are facing even more severe water problems. Take Yemen for instance, a country with 24 million people and one of the lowest per capita water availability levels in the world. Critical water supply sources are being depleted so rapidly that they will become exhausted before the end of the decade. Dwindling oil production has hit the economy hard, at a time when big investments in infrastructure are needed to tackle the issue. And now there’s a conflict raging between Yemeni factions, internally and against Saudi Arabia.
So we can see another pattern emerging beyond the sectarian power play across the region… and arguably even more significant: where water supplies become acutely scarce, armed conflict rapidly follows.
An Explosive Mix
The population growth rate in the Middle East is one of the highest in the world. From 1990 to 2010, population in that region as a whole increased by 50% – 124 million people in absolute terms, more than four times the increase in the European Union over the same period. In some of the most parched countries that increase has been absolutely staggering, as shown in the following table:
Population (MM) and Military Expenditures (constant 2011 US$) in Selected Middle East Countries: 1990 – 2010
Source: World Bank, OECD, SIPRI.
(a) Yemen is from 1990 to 2008 and UAE from 1997 to 2010.These are quite young populations as most of the growth has been organic. And it’s always the young who tend to get really agitated when a problem emerges. Military expenditures in most of these countries have increased at rates even higher than population. So not only there is a rapidly expanding number of people facing a dire water situation; they also have more weapons at their disposal.
Accordingly, the world and its superpowers should not be surprised by the expansion of armed conflict across the Middle East we have witnessed in recent years. And unfortunately things might get even worse from here.
Policy Implications
There is no civilization without water. If current water trends persist, pardon the hyperbole but large parts of the Middle East may turn into one of the worst humanitarian disasters the world has ever seen, particularly given the large size of those populations.
The immediate consequence is of course a continuation if not expansion of armed conflicts across the region, as people fight over the remaining drops of water.
Desperate civilians will try to get out any way they can. Italy and especially Greece are already overwhelmed by the flood of migrants crossing the Mediterranean. Just imagine those flows increasing by many multiples over the coming years.
And it’s not only civilians who are looking to come across. The map above shows the ultimate territorial ambitions of the Islamic Caliphate. Seems farfetched particularly as many of those countries are NATO members or part of China, but this will not dissuade them from trying by any means. Time and demographics are on their side, with large pools of disillusioned young people at their disposal (with relatives and sympathizers already in Europe), as well as potential access to advanced weaponry manufactured in the West, Russia and China.
In light of all of this, the lack of a concrete strategy and response thus far by European Union leaders is truly baffling. It is becoming increasingly obvious that they will not be able to solve this problem just by throwing some money at it and moving a few refugees around; not when its scale can dramatically increase in magnitude.
What will this do to the Middle East’s main export, crude oil? Our guess is that producing countries will continue to expand production, even if prices in the world markets correct further. After all they have big bills to pay: fighting insurgents, ramping up their defenses, investing in infrastructure, importing food (to mitigate domestic production declines)… But if any slack in capacity is exhausted, or worse, conflict expands to the point where their upstream or logistical infrastructure is impaired, then supply could quickly go the other way.
While conventional, tar sands and tight oil producers in North America may get the last laugh, it is clear that the world economy needs the abundant reserves of the Middle East.
It is also curious to note how ill equipped Western central banks would be to deal with the inflationary consequences of an oil supply shock. Why? Because any material increase in interest rates would blow up government budgets in many developed countries, given the high debt loads that they have taken on since the 2008 financial crisis.
Rather than adding more fuel to the Middle Eastern fire, it seems that the world’s superpowers have a vested interest to negotiate and implement credible solutions to the unfolding catastrophe in the region.
Unfortunately, such vision and leadership seem to be in even shorter supply than water in the Middle East.
- Why Credit Market Moves Are Now "Hyperbolic," Citi Explains
We’ve made no secret of our views on just how precarious corporate credit markets have become.
For anyone in need of a refresher, the dynamic is very simple. The ZIRP-induced hunt for yield has driven investors away from risk-free assets and into anything that promises to generate at least some semblance of income. Corporate management teams have taken advantage of the situation to issue record amounts of debt, the proceeds from which have either been plowed into EPS-inflating, stock-boosting buybacks, or used to keep struggling businesses (like heavily indebted drillers, for instance) in business. The proliferation of fixed income ETFs and mutual funds have helped funnel retail money into areas of the bond market where it might normally have never penetrated. Meanwhile, Wall Street has pulled back from its traditional role as warehouser (i.e. liquidity provider). The result: record issuance of corporate credit and record low liquidity in the secondary market. In other words, a very crowded theatre, and an ever shrinking exit.
Making matters worse is the fact that retail money tends to chase returns, resulting in a “positive” rather than a “negative” feedback loop, where mean reversion simply falls by the wayside.
With that in mind, we present the following graphic which, while simple, has quite a bit of explanatory value.
Via Citi’s Matt King:
- Charting A Decade Of Yuan Moves
China’s central bank has taken global markets by surprise with a historic shift in its management of the yuan. As Bloomberg's Tom Orlik notes, The PBOC also signaled that going forward it would adopt a more hands-off approach to the exchange rate. Given the current direction of market pressure, that likely means depreciation. The yuan has already fallen to 6.3858 at the close of trading on Wednesday afternoon, from 6.2097 at Monday's close — a level last seen in the summer of 2012. In this chart, we map out the history of moves in the yuan in the decade since the PBOC broke the dollar peg in 2005… and all the rhetoric that will now be undone…
- 12 Signs That An Imminent Global Financial Crash Has Become Even More Likely
Submitted by Michael Snyder via The Economic Collapse blog,
Did you see what just happened? The devaluation of the yuan by China triggered the largest one day drop for that currency in the modern era. This caused other global currencies to crash relative to the U.S. dollar, the price of oil hit a six year low, and stock markets all over the world were rattled. The Dow fell 212 points on Tuesday, and Apple stock plummeted another 5 percent.
As we hurtle toward the absolutely critical months of September and October, the unraveling of the global financial system is beginning to accelerate. At this point, it is not going to take very much to push us into a full-blown worldwide financial crisis. The following are 12 signs that indicate that a global financial crash has become even more likely after the events of the past few days…
#1 The devaluation of the yuan on Tuesday took virtually the entire planet by surprise (and not in a good way). The following comes from Reuters…
China’s 2 percent devaluation of the yuan on Tuesday pushed the U.S. dollar higher and hit Wall Street and other global equity markets as it raised fears of a new round of currency wars and fed worries about slowing Chinese economic growth.
#2 One of the big reasons why China devalued the yuan was to try to boost exports. China’s exports declined 8.3 percent in July, and global trade overall is falling at a pace that we haven’t seen since the last recession.
#3 Now that the Chinese have devalued their currency, other nations that rely on exports are indicating that they might do the same thing. If you scan the big financial news sites, it seems like the term “currency war” is now being bandied about quite a bit.
#4 This is the very first time that the 50 day moving average for the Dow has moved below the 200 day moving average in the last four years. This is known as a “death cross”, and it is a very troubling sign. We are just about at the point where all of the most common technical signals that investors typically use to make investment decisions will be screaming “sell”.
#5 The price of oil just closed at a brand new six year low. When the price of oil started to decline back in late 2014, a whole lot of people were proclaiming that this would be a good thing for the U.S. economy. Now we can see just how wrong they were.
At this point, the price of oil has already fallen to a level that is going to be absolutely nightmarish for the global economy if it stays here. Just consider what Jeff Gundlach had to say about this in December…
And back in December 2014, “Bond King” Jeff Gundlach had a serious warning for the world if oil prices got to $40 a barrel.
“I hope it does not go to $40,” Gundlach said in a presentation, “because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.”
#6 This week we learned that OPEC has been pumping more oil than we thought, and it is being projected that this could cause the price of oil to plunge into the 30s…
Increased pumping by OPEC as Chinese demand appears to be slackening could drive oil to the lowest prices since the peak of the financial crisis.
West Texas Intermediate crude futures skidded through the year’s lows and looked set to break into the $30s-per-barrel range after the Organization of the Petroleum Exporting Countries admitted to more pumping and China devalued its currency, sending ripples through global markets.
#7 In a recent article, I explained that the collapse in commodity prices that we are witnessing right now is eerily similar to what we witnessed just before the stock market crash of 2008. On Tuesday, things got even worse for commodities as the price of copper closed at a brand new six year low.
#8 The South American debt crisis of 2015 continues to intensify. Brazil’s government bonds have been downgraded to just one level above junk status, and the approval rating of Brazil’s president has fallen into the single digits.
#9 Just before the financial crisis of 2008, a surging U.S. dollar put an extraordinary amount of stress on emerging markets. Now that is happening again. Emerging market stocks just hit a brand new four year low on Tuesday thanks to the stunt that China just pulled.
#10 Things are not so great in the United States either. The ratio of wholesale inventories to sales in the United States just hit the highest level since the last recession. What that means is that there is a whole lot of stuff sitting in warehouses out there that is waiting to be sold in an economy that is rapidly slowing down.
#11 Speaking of slowing down, the growth of consumer spending in the United States has just plummeted to multi-year lows.
#12 Deep inside, most of us can feel what is coming. According to Gallup, the number of Americans that believe that the economy is getting worse is almost 50 percent higher than the number of Americans that believe that the economy is getting better.
Things are lining up perfectly for a global financial crisis and a major recession beginning in the fall and winter of 2015.
But just because things look like they will happen a certain way does not necessarily mean that they will. All it takes is a single “event” of some sort to change everything.
- Emerging Market Currencies To Crash 30-50%, Jen Says
Less than 24 hours ago, we argued that although it might have seemed as though Brazil hit rock bottom in Q2 when it suffered through the worst inflation-growth mix in over a decade, things were likely to get worse still.
The country, which is also coping with twin deficits and a terribly fractious political environment, is at the center of what Morgan Stanley recently called “a triple unwind of EM credit, China’s leverage, and US monetary easing” and now that its most critical trading partner has officially entered the global currency war, all roads lead to further devaluation of the faltering BRL.
And it’s not just the BRL. As Bloomberg reports, former IMF economist Stephen Jen (who called the 1997 Asian crisis while at Morgan Stanley) thinks EM currencies could fall by an average of 30% going forward on the back of the PBoC’s move to devalue the yuan. Here’s more:
[The] devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil’s real to Indonesia’s rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen.
Volatility measures were already signaling rising distress in emerging markets even before China’s shock move. An index of anticipated price swings climbed above a rich-world gauge at the end of July, reversing the trend seen for most of the past six months.
“If this is the beginning of a new phase in Beijing’s currency policy, it would be the biggest development in the currency world this year,” said Jen, founder of London-based hedge fund SLJ Macro Partners LLP. “The emerging-market currency weakening trend is now going global.”
Latin America is a particular concern because of the region’s high levels of corporate debt, said Jen
Jen recommends selling the real, rupiah and South African rand — all currencies of commodity exporters, which rely on China for a large chunk of their foreign earnings.
As well as the drop in raw-materials prices, the prospect of higher interest rates in the U.S. has also drawn away investment, pushing a Bloomberg index of emerging-market exchange rates down 20 percent in the past year. A Latin American measure headed for its 13th monthly loss out of 14, while an Asian gauge plunged Tuesday to its lowest in six years.
And a bit more color from WSJ:
If China’s devaluation deepens, pressure to weaken currencies could become particularly intense in other Asian nations that export large amounts to China or compete with Beijing in other markets. Asian currencies tumbled on Tuesday, notably the South Korean won, Australian dollar and Thai baht, as investors bet China’s move could lead to further monetary easing in those nations. Many Asian nations have cut rates this year and could be forced to take further action in coming months.
“A new theme has emerged—one of Asian currency weakness,” said Wai Ho Leong, an economist in Asia at Barclays.
To be sure, it’s all down hill from here, and on that note, we’ll reprise our conclusion from last week’s “Emerging Market Mayhem” piece: Between an inevitable (if now delayed) Fed hike, stubbornly low commodities prices, the entry of the world’s most important economy into the global currency wars, and, perhaps most importantly from a big picture, long-term perspective, a seismic shift in the pace of global demand and trade, we could begin to see a wholesale shift in which the markets formerly known as “emerging” quickly descend into “frontier” status and after that, well, cue the “humanitarian aid” packages.
* * *
Here’s a look at the damage since Monday, right before the devaluation:
- "Severe Correction Or Cyclical Bear" Ahead: Leuthold Major Trend Index Turns Negative
Courtesy of The Leuthold Group,
Based on data for the week ended August 7th, the Major Trend Index dropped to a NEGATIVE reading of 0.90, led by declines in both the Attitudinal and Momentum/Breadth/Divergence work. The topping action evident in the MTI and other disciplines is consistent with either a severe correction, or a cyclical bear in the near future. We’ve therefore cut net equity exposure in both the Leuthold Core and Leuthold Global Funds to 38%, down from 48% in late July, and 61-62% in late June. A further reduction is possible in the days ahead.
Sentiment has clearly cooled off from the ebullience seen throughout 2014 and early this year, and some analysts contend there’s a new “wall of worry” for the stock market to climb (concerns over China’s market air pocket, crude’s retest of March lows, and the weak quarterly earnings season now in progress). But the MTI’s Attitudinal category staged a sharp drop last week, reflecting bearish flips in three models tracking investor preferences between stocks and bonds.
The Momentum/Breadth/Divergence category also recorded a small loss on the week, reflecting further weakness in market breadth and small losses in the chart scores. Yet the net reading for this category is still positive at +92; the weakness to date has largely been concentrated in “anticipatory” indicator groupings related to momentum, breadth, and industry leadership. We obviously prefer acting on this type of evidence rather than waiting for formal bear signals from indicators based on the major indexes, but the markets don’t always afford us that opportunity.
The Supply/Demand category carries the smallest potential weight of the five categories but can be an important swing factor at major turning points. The current category reading is a bearish –93, reflecting evidence of increasing institutional selling across three measures.
* * *
Full August letter below…
Leuthold Group – From August 2015 Green Book
- Solyndra 2.0 Nears Bankruptcy As Bonds Collapse To Record Lows
Two weeks ago we introduced you to Abengoa – the Spanish renewable-energy company – that received over $230 million in US taxpayer subsidies and loos set to become Solyndra 2.0. While all the politicians have taken their pound of flesh, Abengoa bonds have collapsed for five days in a row, now trading at record lows around 45 cents on the dollar – flashing the bankruptcy imminent light. Solyndra 2.0?
Abengoa 2020s fell over 5 points today to around 45 cents on the dollar…
As we concluded previously, the company’s political connections are emblematic of an industry that remains reliant on taxpayer subsidies, according to William Yeatman, a senior fellow specializing in energy policy at the Competitive Enterprise Institute.
“It could not be more clear that this company could not survive without access to government favors from political friends,” Yeatman said, citing its reliance on the Renewable Fuels Standard and continued financial support from DOE.
“Alas, the same can be said for the green energy industry as a whole, which would fast wither and die absent a steady diet of taxpayer and ratepayer subsidies,” Yeatman said.
In addition to its DOE subsidies, Abengoa received $185 million in financing in 2012 and 2013 through the U.S. Export-Import bank as former New Mexico Gov. Bill Richardson (D) sat on the boards of both the federal agency and the company it was subsidizing.
Despite extensive federal support for the company, Alhalabi described a culture of disregard for workplace safety and environmental contamination. Concern over high costs has led to lackluster engineering work at the company’s Mojave facility that could result in an “environmental disaster,” he said.
Solyndra 2.0? Another one off? Or another symptom of the Oligrachic ignorance of where the money comes from…It appears US taxpayers can kiss that money goodbye…
“The equity increase gives the impression that the company urgently needs cash,” said Fischer. “They’ve not done enough to win back investors’ trust.”
- Asset-Price Inflation Enters Its Dangerous Late Phase
Submitted by Brendan Brown via The Mises Institute,
Asset price inflation, a disease whose source always lies in monetary disorder, is not a new affliction. It was virtually inevitable that the present wild experimentation by the Federal Reserve — joined by the Bank of Japan and ECB — would produce a severe outbreak. And indications from the markets are that the disease is in a late phase, though still short of the final deadly stage characterized by pervasive falls in asset markets, sometimes financial panic, and the onset of recession.
Global Signs of Danger
A key sign of danger, recognizable from historical patterns of how the disease progresses, is the combination of steep speculative temperature falls in some markets, with still-high — and in some cases, soaring — temperatures in other markets. Another sign is some pull-back in the carry trade, featuring, in particular, the uncovered arbitrage between a low (or zero) interest rate, and higher rate currencies. For now, however, this is still booming in some areas of the global market-place.
Specifically, we now observe steep falls in commodity markets (also in commodity currencies and mining equities) which were the original area of the global market-place where the QE-asset price inflation disease attacked (back in 2009–11).
Previously hot real estate markets in emerging market economies (especially China and Brazil) have cooled at least to a moderate extent. Most emerging market currencies — with the key exception of the Chinese yuan — once the darling of the carry traders, are in ugly bear markets. The Shanghai equity market bubble has burst.
Yet in large areas of the high-yield credit markets (including in particular the so-called covenant-lite paper issued by highly leveraged corporations) speculative temperatures remain at scorching levels. Meanwhile, Silicon Valley equities (both in the public and private markets), and private equity funds enjoy fantasy valuations. Ten-year Spanish and Italian government bond yields are hovering below 2 percent, and hot spots in global advanced-economy real estate — whether San Francisco, Sydney, or Vancouver — just seem to get hotter, even though we should qualify these last two observations by noting the slump in the Canadian and Australian dollars. Also, there is tentative evidence that London high-end real estate is weakening somewhat.
How to Identify Late Stages of Asset Inflation
We can identify similar late phases of asset price inflation characterized by highly divergent speculative temperatures across markets in past episodes of the disease. In 1927–28, steep drops of speculative temperature in Florida real estate, the Berlin stock market, and then more generally in US real estate, occurred at the same time as speculative temperatures continued to soar in the US equity market. In the late 1980s, a crash in Wall Street equities (October 1987) did not mark the end-stage of asset price inflation but a late phase of the disease which featured still-rising speculation in real estate and high-yield credits.
In the next episode of asset price inflation (the mid-late 1990s), the Asian currency and debt crisis in 1997, and the bursting of the Russian debt bubble the following year, accompanied still rising speculation in equities culminating in the Nasdaq bubble. In the episode of the mid-2000s, the first quakes in the credit markets during summer 2007 did not prevent a further build-up of speculation in equity markets and a soaring of speculative temperatures in winter 2007–08 and spring 2008 in commodity markets, especially oil.
What insights can we gain from the identification of the QE-asset price inflation disease as being in a late phase?
The skeptics would say not much. Each episode is highly distinct and the disease can “progress” in very different ways. Any prediction as to the next stage and its severity has much more to do with intuition than scientific observation. Indeed some critics go as far as to suggest that diagnosis and prognosis of this disease is so difficult that we should not even list it as such. Historically, such critics have ranged from Milton Friedman and Anna Schwartz (who do not even mention the disease in their epic monetary history of the US), to Alan Greenspan and Ben Bernanke who claimed throughout their years in power — and these included three virulent attacks of asset price inflation originating in the Federal Reserve — that it was futile to try to diagnose bubbles.
We Can’t Ignore the Problem Just Because It’s Hard to Measure
Difficulties in diagnosis though do not mean that the disease is phantom or safely ignored as just a minor nuisance. That observation holds as much in the field of economics as medicine. And indeed there may be a reliable way in which to prevent the disease from emerging in the first place. The critics do not engage with those who argue that the free society’s best defense against the asset price inflation disease is to follow John Stuart Mill’s prescription of making sure that “the monkey wrench does not get into the machinery of money.”
Instead, the practitioners of “positive economics” demonstrate an aversion to analyzing a disease which cannot be readily identified by scientific measurement. Yes, the disease corrupts market signals, but by how much, where, and in what time sequence? Some empiricists might acknowledge the defining characteristic of the disease as “where monetary disequilibrium empowers forces of irrationality in global markets.” They might agree that flawed mental processes as described by the behavioral finance theorists become apparent at such times. But they despair at the lack of testable propositions.
Mis-Measuring Increases in Asset Prices
The critics who reject the usefulness of studying asset price inflation have no such qualms with respect to its twin disease — goods and services inflation. After all, we can depend on the official statisticians!
In the present monetary inflation, a cumulative large decline in equilibrium real wages across much of the labor market, together with state of the art “hedonic accounting” (adjusting prices downward to take account of quality improvements) has meant that the official CPI has climbed by “only” 11 percent since the peak of the last business cycle (December 2007). The severity of the asset price inflation disease makes it implausible that the official statisticians are measuring correctly the force of monetary inflation in goods and services markets.
What Is the Final Stage?
A progression of the asset price inflation disease into its final stage (general speculative bust and recession) would mean the end of monetary inflation and also inflation in goods and services markets. What could bring about this transition? Most plausibly it will be a splintering of rose-colored spectacles worn by investors in the still hot speculative markets rather than Janet Yellen’s much heralded “lift-off” (raising official short-term rates from zero). What could cause the splinter?
Perhaps it will be a sudden rush for the exit in the high-yield credit markets, provoked by alarm at losses on energy-related and emerging market paper. Or financial system stress could jump in consequence of the steep falls of speculative temperature already occurring (including China and commodities). Perhaps there will be a run from those European banks and credit funds which are up to their neck in Spanish and Italian government bonds. Or the Chinese currency could tumble as Beijing pulls back its support and the one trillion US dollar carry trade into the People’s Republic implodes. Perhaps scandal and shock, accompanied by economic disappointment will break the fantasy spell regarding US corporate earnings, especially in Silicon Valley. As the late French President Mitterrand used to say, “give time to Time!”
- Schizo Stocks Shrug Off China, Europe Fears As Dow Roundtrips 700 Points In Giant Stop Hunt
Translating every mainstream business media channel this week…
The Dow gave up all of its post-QE3 gains…
Which leaves this – Fed 'flow' vs stock performance – once again the most important chart in US equity investing…
h/t @Not_Jim_Cramer
It appears the market is threatening (or calling the bluff of) The Fed… QE or else…
Across asset classes the day broke down into 3 sections – China (gappy pressure), Europe (carry unwinds escalate) and post-Europe US session (buy stocks and STFU!!)…
US equities gapped lower on China's double whammy devaluation overnight and kept tumbling through the European close.. then levitated magically to get the S&P just green for the week (algos running stops)
But cash indices all ended the day in the green for the week…
The S&P and Nasdaq managed to hold green for the day… and Dow closed unch…
Almost 700 point roundtrip in The Dow…
Humpday Humor… come on!!!
VIX was demolished after surging up to recent highs over 16… The Twin Peaks Of Vol…
Stocks keep rallying away from and then plunging back towards HY credit…
Treasury yields were mixed with all but the long-end very modestly lower in yield on the day after a mini-meltup in yields after Europe closed…
The dollar tumbled further as EURCNH cary trades unwound en masse…
Note – it appears hope today was driven by the fact that the PBOC appeared to step in and support onshore Yuan towards the close..
Commodities were mixed today with crude and copper flat (after early weakness) and gold and silver surging…
Summing it all up…
Faith restored. +33 handles off the lows. Thanks for playing.
— Stalingrad & Poorski (@Stalingrad_Poor) August 12, 2015
Charts: Bloomberg and @Not_Jim_Cramer
Bonus Chart: Deja Vu – time speeding up…
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