- Greek Deposits Become Eligible For Bail-In On January 1, 2016
Earlier today, tucked away from the public eye’s, there was another round of drama involving Greek securities this time focused on Greek senior bank bonds which promptly tumbled back to post-referendum/pre-bailout #3 levels.
The catalyst was Friday’s pronouncement by Jeroen Dijsselbloem who said depositors will be shielded from any losses resulting from the restructuring of the nation’s financial system, but that senior bondholders would certainly be impaired and probably wiped out. In other words, once again the superpriority of various classes has been flipped on its head with general unsecured liabilities ending up senior to, well, senior bank claims.
As Bloomberg reported earlier today, while “Greece’s third bailout will spare depositors in any restructuring of the nation’s financial system, senior bank bondholders may not be so lucky, according to comments from Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem. The bondholders will be in line for losses if Greek lenders tap into any of the financial stability funds set aside in the new bailout.”
“Bondholders were overly optimistic because bail-in of senior bonds was not explicitly mentioned before,” said Robert Montague, a senior analyst at ECM Asset Management in London. “Today they were brought back down to earth with a bump.”
Which is bad news for bondholders, but the biggest losers will once again be depositors who represent the vast bulk of unsecured Greek bank liabilities.
Going back to Friday’s statement by the Eurogroup president, he specifically said that “the bail-in instrument will apply for senior bondholders, whereas the bail-in of depositors is explicitly excluded.” Which is confusing considering that bank stocks were broadly unchanged and in some cases rose. Of course, this makes no sense because as even a first year restructuring associate will tell you, according to traditional waterfall analysis, even the lowliest bond impairment means an equity wipeout. And yet, Greek bank equities are still trading at far more than just tip/nuisance value. Which, to repeat, makes no sense.
But that is not surprising: little of what Europe is doing with Greece makes any sense. Other agree:
“It is not clear how they will make it possible to bail-in bonds while excluding deposits, but as we have seen in other problematic situations, where there is a will there will be a way,” said Olly Burrows, London-based financials analyst at brokerage firm CRT Capital. “We call Dijsselbloem’s solution a bail-up: part bail-out, part bail-in and part cock-up.“
And yet, it appears that following the weekend, Europe realized that it is now openly flaunting the conventional restructuring protocol.
As a reminder, Greece’s euro-area creditors made adoption of the European Union’s Bank Resolution and Recovery Directive, or BRRD, a precondition of the bailout. The directive, which makes it easier to impose losses on senior creditors, should rank senior unsecured bondholders and depositors equally, said Olly Burrows, London-based financials analyst at brokerage firm CRT Capital.
This is something which Dijsselbloem may not have been aware of when he said that one senior class would be impaired while another pari passu group of liabilities, i.e., depositors, would be protected. As noted above, that makes no sense.
Which is probably why earlier today, Bloomberg followed up with a report that a recapitalization of Greek banks will exclude all depositors from losses until the EU’s Bank Recovery and Resolution Directive rules go into effect on Jan. 1, citing an EU official.
Needless to say this was vastly different to Dijsselbloem’s blanket guarantee statement, and suggests that depositors will indeed be bailed-in (if mostly those above the €100,000 insured limit, although as European history has shown, rules will be made up on the spot and we would not at all be surprised if deposits under the insured limit are also confiscated), but not right now: only after BRRD rules come in place on the first day of 2016.
Europe’s eagerness to promise depositor stability is transparent: the finmins will do everything in their power to halt the bank run from banks which will likely be grappling with capital controls for months if not years. Still, absent some assurance, there is no way that the depositors would be precluded from withdrawing all the money they had access to, which in turn would assure that the €86 billion bailout of which billions are set aside for bank recapitalization, would be insufficient long before the funds are even transfered.
According to an Aug. 14 Eurogroup statement an asset quality review of Greek banks will take place before the end of the year,
“We expect a comprehensive assessment of the banks – so-called Asset Quality Review and Stress Tests – by the ECB/SSM to take place first,” European Commission spokeswoman Annika Breidthardt tells reporters in Brussels. “And this naturally takes a few weeks.”
In other words Europe is stalling for time: time to get more Greeks to deposit their cash in the bank now, when deposits are “safe” and while everyone is shocked with confusion at the nonsensical financial acrobatics Europe is engaging in.
But once Jan.1, 2016 rolls around, it will be a vastly different story. This was confirmed by the very next statement: “I must also stress that, depositors will not be hit” in this year’s review, she says.
In this year’s, no. But the second the limitations from verbal promises of deposit immunity expire next year, everyone who is above the European deposit insurance limit becomes fair game for bail-in.
Dijsselbloem concluded on Friday that “Depositors have been excluded from the bail-in because in the first place it’s concerning SMEs and private persons. But it is only concerning depositors with more than 100,000 euros and those are mainly SMEs. That would again lead to a blow to the Greek economy. So the ministers said we will exclude them explicitly, it would bring damage the Greek economy.“
Right, exclude them… until January 1, 2016. And only then impair them because Greece will never again be allowed to escape a state of permanent “damage” fo the economy.
As for Greeks and local corporations whose funds are parked in a bank and who are wondering what all this means for their deposits, here is the answer: for the next 4.5 months, your deposits are safe, which under the current capital control regime doesn’t much matter: it’s not as if the money can be withdrawn in cash and moved offshore.
However, once January 1, 2016 hits and Greece becomes subject to a bank resolution process supervised and enforced by the BRRD, all bets are off. Which likely means that as the Greek bank balance sheet is finally “rationalized”, any outsized deposits will be promptly Cyprused.
For our part, we tried to warn our Greek readers about the endgame of this farcical process since January of this year: we will warn them again – capital controls or not, pull whatever money you can in the next few months because once 2016 rolls around, all the rules change, and those unsecured bank liabilities yielding precisely nothing, and which some call “deposits” will be promptly restructured to make the Greek financial balance sheet at least somewhat remotely viable.
- Caught On Tape: Native Americans Chase John McCain Off Navajo Land
Submitted by Derrick Broze via TheAntiMedia.org,
On Friday, August 14, Arizona Senator John McCain was confronted several times by Native activists and elders while visiting the Navajo Nation. McCain and Arizona Governor Doug Ducey were meeting with the Navajo at the Navajo Nation Museum in Window Rock for an event honoring the Navajo Code Talkers of World War 2.
The governor and senator were also meeting with local Navajo officials to discuss their concerns about a new proposal regarding the Little Colorado River rights. Navajo Nation President Russell Begay told the Navajo Times that water was going to be a part of the talks.
“We’re going to talk about it,” he told the Times. “The message we want to convey to Arizona is a discussion. We want to begin dialogue on securing our claim.”
McCain has recently received criticism for his role in passing the Southeast Arizona Land Exchange bill as part of the National Defense Authorization Act of 2015. The law allows for the sale of the Oak Flat campground to international mining company, Rio Tinto. Oak Flat is historically important to the San Carlos Apache. MintPress News recently wrote:
“The Apache Stronghold formed in December in response to a last-minute legislative provision included in the the National Defense Authorization Act of 2015. The provision at issue in the annual Defense Department funding bill grants Resolution Copper Mining, a subsidiary of Australian-English mining giant Rio Tinto, a 2,400-acre land parcel which includes parts of the Tonto National Forest, protected national forest in Arizona where it will create the continent’s largest copper mine.
Some of those lands are considered sacred by multiple Native American communities, including the Oak Flat campground. The area is not recognized as part of the San Carlos Apache Reservation, but it has historically been used by the Apache for trading purposes and spiritual ceremonies.”
While McCain met with Ducey and the Navajo nation, activists with the Apache Stronghold — and other groups and nations — rallied outside the museum, holding signs that read “McCain = Indian Killer” and “McCain’s Not Welcome Here.” Eventually, the activists made their way inside the building, locking arms and chanting, “Water is life!”
Inside the museum, John McCain was rubbing elbows with Navajo leaders and snapping photos with the community. One person decided to take an opportunity to confront John McCain with a message about Oak Flat. That person was Adriano Tsinigine. Tsinigine, a high school senior carrying a “Protect Oak Flat” card, walked up to McCain for a picture. Tsinigine told the Phoenix New Times about his experience:
“‘I pulled out my [Protect] Oak Flat card,’ he says. When McCain noticed it, ‘He took it, looked at it, and threw it back at me. How disrespectful to me and to the Apache people. I fully respect McCain as a veteran . . . and as a POW and for sacrificing [what could have been] his life, but I do not respect him as a U.S. senator. As an elected official, he should listen to all of the voices of people, [even] the people who are protesting against him.’”
Senator McCain would later be interviewed about the Oak flat controversy. “Historians have attested to the facts that Oak Flat is not anything to do with sacred grounds,” he told 12 News. “Several historians have attested to that. I respect people’s right to disagree.”
As McCain attempted a backdoor exit, the activists chanted in the hallway with their arms linked. Once they noticed McCain’s convoy making an escape, the group began chasing on foot. They were temporarily blocked by law enforcement but eventually made their way out of the building, chasing the cars as they exited the Navajo nation.
Once news reports began circulating that John McCain was chased off Navajo land, the senator’s office released a response to the Phoenix New Times:
“Senator McCain was honored to be invited by the Navajo Nation to meet with tribal and community leaders and to speak at the celebration of the Navajo Code Talkers on Friday. It was a great visit and he received a very warm reception from the Navajo community in Window Rock. He certainly wasn’t ‘chased off’ the reservation – this small group of young protesters had no practical impact on his productive meetings with top tribal leaders on a range of key issues, including the EPA’s recent Gold King Mine spill which threatens to contaminate the Navajo Nation’s water supply.”
Despite the senator’s office denying that the protesters had any “practical impact” on his meeting, it is clear that a new community of Native activists is on the rise. This is only the latest in the reemergence of an active resistance to the colonization of Native peoples and First Nations.
- "Global Shock Absorber" China Holds Currency Stable, Margin Debt Rises For 7th Day
Offshore Yuan continues to trade at a discount to onshore against the USD (imply a modest further devaluation is due) but the spread is narrowing and today's practically unch Yuan fix is dragging USDCNH lower (stronger Yuan). Yesterday's afternoon session ramp in stocks managed to extend its gains as margin debt rises for the 7th straight day. The PBOC injects 120 bn Yuan liquidity via 7-day reverse-repo (notably more than the 50bn maturing), as HSBC's Stephen King concludes, the message from last week's surprise devaluation is clear – China no longer wants to play the "global shock absorber" role – instead is more focused on domestic instability… and there is no other nation yet willing (or able) to shoulder the responsibility.
- *CHINA SETS YUAN REFERENCE RATE AT 6.3966 AGAINST U.S. DOLLAR
And offshore Yuan is fading…
- *SHANGHAI MARGIN DEBT RISES FOR SEVENTH DAY
- *CHINA'S CSI 300 STOCK-INDEX FUTURES RISE 0.7% TO 4,015.4
- *PBOC TO INJECT 120B YUAN WITH 7-DAY REVERSE REPOS: TRADER – The most since February
The People’s Bank of China stepped up injections via reverse-repurchase agreements Tuesday to offset a tightening in the money market.
The central bank sold 120 billion yuan ($18.8 billion) of seven-day reverse repos, according to a trader at a primary dealer required to bid at the auctions. That compared with 50 billion yuan maturing Tuesday.
Rather ominously HSBC's chief economist Stephen King has a common-sense explanation for how China ended up here…
… and where we go next…
China’s role as a “stabiliser” for the global economy has contributed to instability within China itself.
Yes, the global economy has done better as a consequence of China’s behaviour but, for China, there have been significant costs: an overheated property market, a substantial increase in indebtedness, a roller-coaster ride for the stock market, a highly leveraged shadow banking system and a declining marginal rate of return on capital spending…
It is easy to criticise China’s internal imbalances. Doing so without taking into account the role of those imbalances in stabilising the global economy is, however, a major mistake. It doubtless makes sense for China now to address its internal imbalances. Yet, in doing so, the rest of the world needs to find a new shock absorber. It’s not at all obvious whether any economy is really up to the task.
Simply put, a stronger USD will crush an already fragile US economy and Europe is hardly ready for a strengthening currency and to 'absorb' the world's deflationary pressures. With no obvious shock absorber on the horizon, China just passed the hot potato back to The Fed – hike rates, help the world stabilize at the cost of the domestic economy… or don't and currency wars escalate (not helping US) and global deflationary pressures hit (just as we are seeing in commodities and high yield bonds).
- Officials Admit ISIS, Like Al-Qaeda, Was A Creation Of US Foreign Policy
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
Telling Hasan that he had read the document himself, Flynn said that it was among a range of intelligence being circulated throughout the US intelligence community that had led him to attempt to dissuade the White House from supporting these groups, albeit without success.
Despite this, Flynn’s account shows that the US commitment to supporting the Syrian insurgency against Bashir al-Assad led the US to deliberately support the very al-Qaeda affiliated forces it had previously fought in Iraq.
The US anti-Assad strategy in Syria, in other words, bolstered the very al-Qaeda factions the US had fought in Iraq, by using the Gulf states and Turkey to finance the same groups in Syria. As a direct consequence, the secular and moderate elements of the Free Syrian Army were increasingly supplanted by virulent Islamist extremists backed by US allies.
It should be noted that precisely at this time, the West, the Gulf states and Turkey, according to the DIA’s internal intelligence reports, were supporting AQI and other Islamist factions in Syria to “isolate” the Assad regime. By Flynn’s account, despite his warnings to the White House that an ISIS attack on Iraq was imminent, and could lead to the destabilization of the region, senior Obama officials deliberately continued the covert support to these factions.
“It was well known at the time that ISIS were beginning serious plans to attack Iraq. Saudi Arabia, Qatar and Turkey played a key role in supporting ISIS at this time, but the UAE played a bigger role in financial support than the others, which is not widely recognized.”
Springmann says that during his tenure at the US embassy in Jeddah, he was repeatedly asked by his superiors to grant illegal visas to Islamist militants transiting through Jeddah from various Muslim countries. He eventually learned that the visa bureau was heavily penetrated by CIA officers, who used their diplomatic status as cover for all manner of classified operations?—?including giving visas to the same terrorists who would later execute the 9/11 attacks.
Thirteen out of the 15 Saudis among the 9/11 hijackers received US visas. Ten of them received visas from the US embassy in Jeddah. All of them were in fact unqualified, and should have been denied entry to the US.
– From the excellent article by Dr. Nafeez Ahmed: Officials: Islamic State Arose from U.S. Support for al-Qaeda in Iraq
Investigative journalist Dr. Nafeez Ahmed has been relentless in exploring and highlighting U.S. government complicity in the origins and eventual success of ISIS. In case you aren’t familiar with his work, here’s a quick bio:
Dr Nafeez Ahmed is an investigative journalist, bestselling author and international security scholar. A former Guardian writer, he writes the ‘System Shift’ column for VICE’s Motherboard, and is also a columnist for Middle East Eye.
He is the winner of a 2015 Project Censored Award, known as the ‘Alternative Pulitzer Prize’, for Outstanding Investigative Journalism for his Guardian work, and was selected in the Evening Standard’s ‘Power 1,000’ most globally influential Londoners.
Nafeez has also written for The Independent, Sydney Morning Herald, The Age, The Scotsman, Foreign Policy, The Atlantic, Quartz, Prospect, New Statesman, Le Monde diplomatique, New Internationalist, Counterpunch, Truthout, among others. He is a Visiting Research Fellow at the Faculty of Science and Technology at Anglia Ruskin University.
Dr. Ahmed has been leading the way in documenting how declassified documents from the Pentagon prove that U.S. intelligence officials warned the White House that supporting al-Qaeda just to depose of Syria’s Bashir al-Assad would have serious blowback and end up funding and empowering radical Islamic extremists. The White House ignored this advice.
Two years later ISIS exploded onto the scene, and the American public was once again relentlessly fear-mongered into turning its sole, determined focus toward fighting this barbaric external enemy birthed by U.S. government policy. Civil liberties and treasure must once again be bequeathed to the military-intelligence-industrial complex to combat an enemy it funded and armed in the first place. The cruel joke; however, is that just like al-Qaeda before it, ISIS was a direct creation of intentional U.S. foreign policy.
The entire charade is frighteningly similar to giving the Federal Reserve more power to “save” an economy it destroyed in the first place. Am I the only one seeing a pattern here?
But I digress. Back to the topic at hand, which is the fact that the retired head of the Pentagon’s Defense Intelligence Agency (DIA), Michael T. Flynn, has admitted that the White House made a willful decision to support al-Qaeda fighters in Syria against Assad despite warnings from the intelligence community. These fighters, and others, later became ISIS.
Here are some excerpts from Dr. Ahmed’s incredible article. Prepare to have your mind blown:
A new memoir by a former senior State Department analyst provides stunning details on how decades of support for Islamist militants linked to Osama bin Laden brought about the emergence of the ‘Islamic State’ (ISIS).
The book establishes a crucial context for recent admissions by Michael T. Flynn, the retired head of the Pentagon’s Defense Intelligence Agency (DIA), confirming that White House officials made a “willful decision” to support al-Qaeda affiliated jihadists in Syria?—?despite being warned by the DIA that doing so would likely create an ‘ISIS’-like entity in the region.
J. Michael Springmann, a retired career US diplomat whose last government post was in the State Department’s Bureau of Intelligence and Research, reveals in his new book that US covert operations in alliance with Middle East states funding anti-Western terrorist groups are nothing new. Such operations, he shows, have been carried out for various short-sighted reasons since the Cold War and after.
But in a recent interview on Al-Jazeera’s flagship talk-show ‘Head to Head,’former DIA chief Lieutenant General (Lt. Gen.) Michael Flynn told host Mehdi Hasan that the rise of ISIS was a direct consequence of US support for Syrian insurgents whose core fighters were from al-Qaeda in Iraq.
Back in May, INSURGE intelligence undertook an exclusive investigation into a controversial declassified DIA document appearing to show that as early as August 2012, the DIA knew that the US-backed Syrian insurgency was dominated by Islamist militant groups including “the Salafists, the Muslim Brotherhood and al-Qaeda in Iraq.”
Asked about the DIA document by Hasan, who noted that “the US was helping coordinate arms transfers to those same groups,” Flynn confirmed that the intelligence described by the document was entirely accurate.
Telling Hasan that he had read the document himself, Flynn said that it was among a range of intelligence being circulated throughout the US intelligence community that had led him to attempt to dissuade the White House from supporting these groups, albeit without success.
Despite this, Flynn’s account shows that the US commitment to supporting the Syrian insurgency against Bashir al-Assad led the US to deliberately support the very al-Qaeda affiliated forces it had previously fought in Iraq.
Far from simply turning a blind eye, Flynn said that the White House’s decision to support al-Qaeda linked rebels against the Assad regime was not a mistake, but intentional:
Prior to his stint as DIA chief, Lt. Gen. Flynn was Director of Intelligence for the Joint Special Operations Command (JSOC) and Commander of the Joint Functional Component Command.
Flynn is the highest ranking former US intelligence official to confirm that the DIA intelligence report dated August 2012, released earlier this year, proves a White House covert strategy to support Islamist terrorists in Iraq and Syria even before 2011.
Right-wing pundits have often claimed due to this background that the decision to withdraw troops from Iraq was the key enabling factor in the resurgence of AQI, and its eventual metamorphosis into ISIS.
This is key to understand. Jeb Bush and other neocons are attempting to claim that the Iraq invasion wasn’t what led to the creation of ISIS, but that it was the decision to withdraw that caused it. While ridiculous on its face since there wouldn’t have been troops to withdraw if the U.S. government hadn’t invaded in the first place, Flynn’s revelations disprove this theory even more scathingly.
But Flynn’s revelations prove the opposite?—?that far from the rise of ISIS being solely due to a vacuum of power in Iraq due to the withdrawal of US troops, it was the post-2011 covert intervention of the US and its allies, the Gulf states and Turkey, which siphoned arms and funds to AQI as part of their anti-Assad strategy.
There you go. That’s where ISIS really came from.
In 2008, a US Army-commissioned RAND report confirmed that the US was attempting to “to create divisions in the jihadist camp. Today in Iraq such a strategy is being used at the tactical level.” This included forming “temporary alliances” with al-Qaeda affiliated “nationalist insurgent groups” that have fought the US for four years, now receiving “weapons and cash” from the US.
In the same year, former CIA military intelligence officer and counter-terrorism specialist Philip Geraldi, stated that US intelligence analysts “are warning that the United States is now arming and otherwise subsidizing all three major groups in Iraq.” The analysts “believe that the house of cards is likely to fall down as soon as one group feels either strong or frisky enough to assert itself.”
Giraldi predicted:
During this period in which the US, the Gulf states, and Turkey supported Syrian insurgents linked to AQI and the Muslim Brotherhood, AQI experienced an unprecedented resurgence.
Meanwhile, Turkey, a close U.S. “ally” is actively bombing Kurdish forces who are successfully fighting ISIS. No, I’m not making this up. See last week’s piece: Turkey Bombs Kurds Fighting ISIS, Then Hires Same Lobbying Firm Supporting U.S. Presidential Candidates.
Moving along…
In the same month, the European Union voted to ease the embargo on Syria to allow al-Qaeda and ISIS dominated Syrian rebels to sell oil to global markets, including European companies. From this date to the following year when ISIS invaded Mosul, several EU countries were buying ISIS oil exported from the Syrian fields under its control.
The US anti-Assad strategy in Syria, in other words, bolstered the very al-Qaeda factions the US had fought in Iraq, by using the Gulf states and Turkey to finance the same groups in Syria. As a direct consequence, the secular and moderate elements of the Free Syrian Army were increasingly supplanted by virulent Islamist extremists backed by US allies.
In February 2014, Lt. Gen. Flynn delivered the annual DIA threat assessment to the Senate Armed Services Committee. His testimony revealed that rather than coming out of the blue, as the Obama administration claimed, US intelligence had anticipated the ISIS attack on Iraq.
It should be noted that precisely at this time, the West, the Gulf states and Turkey, according to the DIA’s internal intelligence reports, were supporting AQI and other Islamist factions in Syria to “isolate” the Assad regime. By Flynn’s account, despite his warnings to the White House that an ISIS attack on Iraq was imminent, and could lead to the destabilization of the region, senior Obama officials deliberately continued the covert support to these factions.
US intelligence was also fully cognizant of Iraq’s inability to repel a prospective ISIS attack on Iraq, raising further questions about why the White House did nothing.
Intelligence was not precise on the exact timing of the assault, one source said, but it was known that various regional powers were complicit in the planned ISIS offensive, particularly Qatar, Saudi Arabia and Turkey:
“It was well known at the time that ISIS were beginning serious plans to attack Iraq. Saudi Arabia, Qatar and Turkey played a key role in supporting ISIS at this time, but the UAE played a bigger role in financial support than the others, which is not widely recognized.”
No surprise there. We knew about this years ago (see: America’s Disastrous Foreign Policy – My Thoughts on Iraq).
Back to Dr. Ahmed…
“The Americans allowed ISIS to rise to power because they wanted to get Assad out from Syria. But they didn’t anticipate that the results would be so far beyond their control.”
This was not, then, a US intelligence failure as such. Rather, the US failure to to curtail the rise of ISIS and its likely destabilization of both Iraq and Syria, was not due to a lack of accurate intelligence?—?which was abundant and precise?—?but due to an ill-conceived political decision to impose ‘regime change’ on Syria at any cost.
Springmann says that during his tenure at the US embassy in Jeddah, he was repeatedly asked by his superiors to grant illegal visas to Islamist militants transiting through Jeddah from various Muslim countries. He eventually learned that the visa bureau was heavily penetrated by CIA officers, who used their diplomatic status as cover for all manner of classified operations?—?including giving visas to the same terrorists who would later execute the 9/11 attacks.
Thirteen out of the 15 Saudis among the 9/11 hijackers received US visas. Ten of them received visas from the US embassy in Jeddah. All of them were in fact unqualified, and should have been denied entry to the US.
Bunch of conspiracy theory nut jobs, right? Rather, you’d have to be a complete imbecile to believe the U.S. government’s tale of 9/11 at this point. See:
The New York Post Reports – FBI is Covering Up Saudi Links to 9/11 Attack
Two Congressmen Push for Release of 28-Page Document Showing Saudi Involvement in 9/11
Springmann was fired from the State Department after filing dozens of Freedom of Information requests, formal complaints, and requests for inquiries at multiple levels in the US government and Congress about what he had uncovered. Not only were all his attempts to gain disclosure and accountability systematically stonewalled, in the end his whistleblowing cost him his career.
Springmann’s experiences at Jeddah, though, were not unique. He points out that Sheikh Omar Abdel Rahman, who was convicted as the mastermind of the 1993 World Trade Center bombing, received his first US visa from a CIA case officer undercover as a consular officer at the US embassy in Khartoum in Sudan.
The ‘Blind Sheikh’ as he was known received six CIA-approved US visas in this way between 1986 and 1990, also from the US embassy in Egypt. But as Springmann writes:
“The ‘blind’ Sheikh had been on a State Department terrorist watch list when he was issued the visa, entering the United States by way of Saudi Arabia, Pakistan, and the Sudan in 1990.”
We should all thank Dr. Ahmed for this service for publishing this article. Please spread it around to everyone you know. It’s imperative the world understand just how ISISI came into being.
Personally, it seems clear to me that U.S. foreign policy has been so inept and destructive over the past couple of decades, it often brings to mind the quote:
Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.
I’ve asked this sort of question before. For example, here’s an excerpt from the article, The Forgotten War – Understanding the Incredible Debacle Left Behind by NATO in Libya.
There are only two logical conclusions that can be reached about American foreign policy leadership in the 21st century.
1) American leadership is ruthlessly pursuing immoral wars all over the world with the intent of creating outside enemies to focus public anger on, as a conscious diversion away from the criminality happening domestically. As an added bonus, the intelligence-military-industrial complex makes an incredible sum of money. The end result: serfs are distracted with inane nationalistic fervor, while the “elites” earn billions.
2) American leadership is completely and totally inept; being easily manipulated into overseas conflicts by ruthless corporate interests and cunning foreign “rebels” in order to advance their own selfish interests, which are in conflict with the interests of the general public.
I can’t come up with any other logical conclusion. Either way, such people have no business running the affairs of these United States, and their actions are merely increasing instability and violence across the planet. The longer they remain in charge with no accountability, the more dangerous this world will become.
This observation remains as relevant as than ever before.
Now here’s the interview with Michael T Flynn referenced in Dr. Ahmed’s article:
- America's "Over-Promise & Under-Deliver" Economy
Two words – “Nailed it!”
How much longer will the unquestionable faith in central planners “just one more quarter” narrative last?
This time really is no different. Maybe just one more year of ZIRP… or another round of QE? Because that worked so well before.
h/t @Not_Jim_Cramer
- The Fed Is Scared To Raise Rates, Ron Paul Warns "Everything Is Too Vulnerable"
Submitted by Mac Slavo via SHTFPlan.com,
The system is teetering on edge, and nearly everyone in the financial sector is waiting for one decision – will the Fed finally raise rates?
Ron Paul has made a bold prediction that the Federal Reserve likely will NOT raise interest rates, something which would have enormous consequences in the market, because it is hesitant to do so with so many negative risk factors the market already faces.
Fed Chair Janet Yellen – and most in the financial sector – know how much is impinging upon the possible decision to raise rates after years and years of quantitative easing have pushed the limits of stimulating the economy. According to CNBC:
By Paul’s reasoning, the Fed is too scared to raise interest rates in the middle of an already weak recovery and risk sending the U.S. economy back into recession, or worse… The Fed chief “does not want to be responsible for the depression that I think we’ve been in the midst of all along,” Paul added. “Everything is vulnerable, so we’re living in very dangerous times,” Paul added.
The banks have basically become junkies to constant cheap money, and QE3 has gone so far over the edge and upside down that pensions, insurance policies and savers can no longer earn future value through basic investment.
But according to the former Congressman and presidential candidate, big trouble in China, or our own potential economic breakdown, may be enough to call off action by the Fed because bigger problems may prevail.
Ron Paul told CNBC:
She’s going to be more hesitant to raise rates because she sees how fragile the global economy is… I could be wrong, but I don’t think they are going to raise interest rates.”
“I think there’s going to be enough problems existing, whether it’s the Chinese precipitating some crisis, or whether it’s our economy breaking down,” he said.
Does this count as yet another prominent warning by experts that the U.S. economy is headed for another crash, and perhaps even a prolonged collapse?
The Chinese problems are having a huge impact in America right now, with so much reliance upon China for global trade. Now that instability has hit, it is putting significant pressure on the faults and weaknesses of Wall Street and the rest of the U.S.
Ron Paul, a very learned critic of the financial system, is outright suggesting that the central banks are no longer in control.
Right now, the Fed isn’t sure if it can back off from artificially stimulating the economy, because it is making the biggest moves out there.
Simultaneously, it doesn’t know how to maneuver away from that position without rocking the boat enough to create a tidal wave that is certainly going to hurt for someone.
If a Fed rate hike did occur in September, as many reports have suggested, it would be the first increase in nearly a decade – enough to keep the experts up late at night, crunching numbers, to see how bad it could get.
I could save them all a lot of time and sum it up – it could obviously get pretty bad. Can crisis be averted?
- These Are The "People" That Really Run Your State
Back in June we showed you “who” really runs your state. By “who” we actually meant “what company”, but since corporations are now people, we suppose it’s all the same.
The map showed the largest corporations by revenue in each state and as we noted at the time, there were some surprises (Chevron, not Apple runs California; Costco, not Microsoft runs Washington, for example).
Below, we present a similar graphic only this time, it’s market cap rather than revenue that’s in focus and as you can see, some of the surprises have disappeared.
As Broadview Networks explains:
You may have seen the Largest Companies by Revenue 2015 map we put together in June. Well we’re back with an updated version using the latest Market Cap data. Last year’s map and last month’s map created so much buzz and insightful conversation that we felt it was best to expand on our ideas.
We’ve heard your questions, such as, “Where are Apple and Microsoft?”. These huge companies could not be represented on the total revenue maps we had posted, since other companies had a higher total revenue. Your questions end here because the wait is over! This map reveals the largest companies by their market value in each state, which is what most people think of when they hear about big businesses. It’s safe to say, most people will not be surprised with the results.
Please note: We used Market Cap value on 7/27/2015 for the list from Yahoo Finance. Because of its ever changing value, some of the values may be different today.
- Which Are The Most Illiquid Assets In The Market Right Now
Following quarters of declining investment bank revenue from sales and trading even at such Fed-backstopped hedge funds as Goldman Sachs, and especially the one-time golden goose, FICC, we hardly need to explain that over the past several years, whether or not due to declining liquidity, total trading turnover/volume and thus commissions, especially in high-margin, OTC products has plunged.
Where has it plunged the most?
To answer that question, which in retrospect may appear trick in nature since it is more or less “all”, we go to the latest Trading Turnover Monitor from JPMorgan which looks at the total Turnover ratio (i.e. the ratio of monthly trading volumes annualized divided by the outstanding amount), for all key asset classes, equities, government bonds, credit and commodities, with a Min-Max range going back to January 2005, and find that with the exception of gold, where turnover in the past 3 months has soared, excluding the “Asian” assets, i.e., EM equities (think China, which incidentally is the asset class that saved bank Q2 earnings; the volume surge won’t be repeated in Q3) and Japan bonds (most of which due to the BOJ’s open monetization almost daily), the turnover ratio virtually across the board is non-existent and is the lowest it has been in the past decade!
Indeed, as the chart below shows, from oil to bunds, to US HG and Convertible debt, to USTs and even to Developed Market stocks, turnovers are virtually non-existent, while the only place where there has been a transitory surge in turnover has something to do with Chinese stocks, where volume however has been quite muted in recent months ever since the bubble died.
The take home message from the above is simple: anyone hoping for a rebound in trading volumes… don’t.
And since the bank stock rebound over the past few months is still completely inexplicable to anyone who is not a lobotomized momo, perhaps somehow in the past 2-3 years, the complete collapse of Net Interest Margin to record lows (and soon to be inverted) was spun, alongside with a Fed hiking rates and tightening financial conditions, as bullish. We don’t know.
What we do know is that when it comes to trading trends, the direction is clear: down. Because as the past several days have shown, the only time this market can levitate is during volumeless ramps right around the open, and then again, before the close. Any time volume does pick up, the market always tumbles. So perhaps for the central planners it is not a bad thing that nobody even bothers to trade anymore.
To be sure, they will “bother” once the selling begins, but then, as we have seen so many times, the markets will simply freeze, the exchanges will lock up, and nobody will be allowed to sell. And that’s how this particular final bubble will end.
* * *
For those curious how JPM calculates its turnover monitor here are the details:
3 month avg. USTs are primary dealer transactions in all US government securities. JGBs are OTC volumes in all Japanese government securities. Bunds, Gold, Oil and Copper are futures. Gold includes Gold ETFs. Min-Max chart is based on Turnover ratio i.e. the ratio of monthly trading volumes annualized divided by the outstanding amount. For Bunds and Commodities, futures trading volumes are used while the outstanding amount is proxied by open interest. The diamond reflects the latest turnover observation. The thin blue line marks the distance between the min and max for the complete time series since Jan-2005 onwards. Y/Y change is change in YTD notional
volumes over the same period last year.
- From Crisis To Confiscation – Where Do I Store My Wealth?
Submitted by Jeff Thomas via InternationalMan.com,
International diversification of wealth (no matter how large or small) can save your economic freedom. Although most of our readers thoroughly understand this concept, one of the most oft-heard concerns is that, by offshoring assets, one may not be able to get to them as easily as they now can. Here’s the response to that, and some practical advice on what you can do to protect yourself.
Let’s say you presently regard yourself as being economically diversified. You own stocks and bonds, you have some cash, you have a retirement fund and you have a bit of gold stuffed away at home. On the surface, it would seem that you’re covered.
Trouble is, you have all your wealth in one jurisdiction, and should that jurisdiction find itself in an economic crisis, all that “diversification” will be seriously at risk.
Of course, it’s human nature for us to want to keep our wealth close at hand. It feels more secure than having it miles away from us. We tend to follow this concept even though we’re well aware that to have our wealth really close (i.e., on our person) we would be asking to have someone with a gun take it away.
Although we understand this, we somehow manage to convince ourselves that our own government, should they decide that they wish to get their hands on our wealth, is less of a threat to us than some thief. If we’re being really truthful with ourselves, governments pose a greater threat than the average thief, as they can steal legally.
Confiscations and Bubbles
In recent years, the governments of the US (in 2010), Canada (in 2013) and the EU (in 2014) have passed bail-in legislation, allowing the confiscation of deposits in bank accounts. When confiscation does occur, I believe it will happen without warning, as it did in Cyprus. One day, you wake up and your money is gone. What can you do? Nothing. It’s legal.
But you may still be all right, since you’re diversified. How about your retirement fund? Well, both the US and EU have announced that, should the investments of your fund be deemed to be at risk, the government will ensure that you will not lose your money, by requiring that your fund be heavily invested in government Treasury bonds, which are guaranteed. However, should there be an economic crisis, that guarantee will quickly go south.
Again, when this happens, it will happen suddenly, without warning.
Well, how about those stocks and bonds? You broker assures you that he has wisely invested your money in a variety of stocks and bonds and he declares that your investment is therefore diversified.
Trouble is, the bond and stock markets are presently in the greatest bubbles the world has ever seen. Even a minor crisis can put a pin to those bubbles without warning.
In actual fact, the only investment you have that’s not at risk from a financial crisis is the gold you have at home. It will actually benefit from a crisis. Precious metals have been described as the only investment today that is not concurrently someone else’s liability, and this is quite true.
In actual fact, your bank accounts, retirement fund, stocks and bonds are not diversified at all. They are, in fact, totally at risk, should you reside in one of the above jurisdictions.
Crises and Complications
But that, of course, hinges entirely on whether a crisis may occur in the future. Unfortunately, those jurisdictions are all experiencing major debt problems. The US in particular is in the greatest level of debt the world has ever seen.
The EU owes less but is also more economically fragile and is already popping its buttons. The US will follow and its neighbour, Canada, will be pulled down with it. That’s why they’ve all passed bail-in legislation, so that they can use your wealth in a last ditch effort to buy a bit of time on the way down.
Not a very promising situation. So, will everyone go down with the ship? Not at all. There will be those who recognise that “keeping the wealth close” is not the most important aspect of retaining wealth.
Internationalisation: The practice of spreading one’s self both physically and economically over several jurisdictions in order to avoid being controlled or victimised by any one jurisdiction.
Internationalisation is not merely sending wealth offshore, it is the art of studying those jurisdictions in the world that, at any given moment, have no confiscation legislation, have a reputation for political stability and have firm non-intrusive national policies.
Internationalisation and Diversification
Those countries whose governments stay out of your bank account, stay out of your retirement fund and stay out of your other investments to the greatest degree are invariably the safest places for your wealth. Although there are no guarantees, these jurisdictions are less likely to go after your wealth and will be the last to do so, even if other jurisdictions have taken all you have.
So, is the “keeping the wealth close” idea valueless? Not strictly, no. Someone in Australia might very sensibly choose Singapore or Hong Kong as his first choice for internationalising. Someone in Europe would be likely to make Switzerland his first pick.
In the Western Hemisphere, the British Virgin Islands (BVI), the Cayman Islands and the Bahamas are top choices. A one-hour flight from Miami provides a far less rapacious government, in addition to true diversification.
The greater the level of wealth, the more diversified the investor will want to be. Those who diversify into Switzerland, Singapore and BVI will increase their safety level beyond those who have utilised only one or two locations.
Today, those who are living in a jurisdiction that may, in the near future, be looking at a national economic crisis at home, should regard any wealth in banks to be sacrificial, i.e., that it might very well be swallowed up soon.
So, the first concern is to get the wealth out. But what then? Aren’t overseas banks being threatened as well? Well, yes, they are. Although they’re subject to local laws, rather than the laws of the EU, US or Canada, many of those banks are being threatened by those countries and are under pressure.
So, whilst they represent a very definite step away from risk, they cannot maximise that safety. Therefore, the second step is, as much as possible, to transfer the wealth into a form that is difficult (or impossible) for other governments to confiscate.
The two ideals are precious metals and real estate. For any government, even a powerful one, to attempt to confiscate real estate in another country is an act of war.
Hence, if the EU were to attempt to confiscate land in, say, Hong Kong, it would be an act of war against China. If the US were to attempt to confiscate land in, say, the Cayman Islands, it would be an act of war against its closest ally, the UK. Possible? Yes. Likely? Very far from it.
The other investment, precious metals, tends to be off the radar from reporting requirements for tax purposes. It additionally has the advantage of being liquid. Bullion can be sold quickly and is therefore the ideal for emergency purposes.
The ideal, of course, is to diversify, so a balance of bullion and real estate are advised. Cash, privately held (again offshore), should be part of the mix. If you have the expertise to diversify further into fine art and other collectibles, so much the better.
Much of the world has gone on a massive spending spree and has, in effect, used a credit card to do so. Soon, that bill will need to be paid and the jurisdictions that are in debt will unquestionably be revealed to be insolvent.
The economic crisis, when it hits, will be sudden and will be devastating. Everyone in those jurisdictions will be negatively impacted, but those who have internationalised their wealth will fare best. When the dust settles, they will be the ones who are in place to recover and rebuild.
- What Options Are Saying About A Possible September Rate Hike
While 75% of 'expert economists' expect The Fed to raise rates in September, Goldman Sachs warns that if investors are worried about a September rate hike then it is not being priced via S&P 500 options…
September it is?
But what is the options market saying? Nothing to see here.
If investors are worried about a September rate hike then it is not being priced via S&P 500 options. Exhibit 1 shows the term structure of S&P 500 implied volatility. If investors were pricing event risk via S&P 500 options then we would expect to see a kink in the curve the week of the September 16-17 FOMC meeting. The typical tent-shaped pattern surrounding an event is not currently present. Instead of pricing additional risk at one point, S&P 500 options seem to be pricing additional risk throughout the entire curve post the September FOMC meeting (a parallel shift).
A few other highlights:
- S&P 500 1m 50 delta implied volatility ended last week at 11.3. One-month twenty-five delta calls dropped to 9. S&P 500 ten-day realized volatility is 10.4; one-month is at 10.
- Exhibit 1 plots the implied volatility for S&P 500 options from -10% OTM puts to +10% otm calls. The entire 1m implied vol curve is trading ~1.5 vol points below its 2015 average.
- The S&P 500 1m straddle is pricing in a +/-2.6% market move over the next month. That corresponds to break-evens of 2146 and 2037.
- S&P 500 1m 25-delta normalized skew is currently in-line with its 1y average.
What about the VIX market?
A big caveat when looking at the VIX futures or VIX options market. VIX options expire Wednesday September 16. Therefore they do not cover the FOMC press conference on September 17. S&P 500 options expiring Friday September 18th do. The VIX ended last week at 12.8. The VIX futures curve is showing no distinct event risk either. VIX 25-delta call implied volatility ended last week trading at 103.5, slightly below its 1y average of 106.
Source: Goldman Sachs
- The Wall Street Ponzi At Work – The Stock Pumping Swindle Behind Four Retail Zombies
Submitted by David Stockman via Contra Corner blog,
In the nearby column Jim Quinn debunks Wall Street’s latest claim that the American consumer is bounding back. He points out that on an inflation-adjusted basis retail sales are barely higher than they were a year ago, and, for that matter, are still only 4% greater in real terms than they were way back in November 2007.
That’s right. Nearly eight years and $3.5 trillion of Fed money printing later, yet the vaunted American consumer is struggling to stay above the flat line, not shopping up a storm.
And there is no mystery as to why. After a 40-year borrowing spree culminating in the final mortgage credit blow-off on the eve of the great financial crisis, the US household sector had reached peak debt. It was tapped out with $13 trillion of mortgages, credit cards, auto, student and other loans —–a colossal financial burden that amounted to nearly 220% of wage and salary income or nearly triple the leverage ratio that had prevailed before 1971.
Household Leverage Ratio – Click to enlarge
So, as is evident from the graph above, we are now in a completely different economic ball game than the consumer debt binge cycle that culminated in 2008. Households are deleveraging out of necessity, and that means that consumer spending is tethered to the tepid growth of national output and wage income.
Yet sell side economists and the financial press are so desperate for factoids that confirm the Keynesian “recovery” narrative——that is, the false claim that the US economy has been successfully lifted out of a growth rut by mega-injections of fiscal and monetary “stimulus”—— that they get just plain giddy about Washington’s seasonally maladjusted, endlessly revised monthly data squiggles.
Thus, in response to the 0.6% gain in July retail sales, The Wall Street Journal’s headline proclaimed, “In a Show of Confidence, Americans Boost Spending”.
Even that was fair and balanced compared to the typical economist’s fare. Opined Richard Moody of Regions Financial Corp:
“The July retail sales report should help allay any remaining concerns as to the state, and psyche, of U.S. consumers…… “U.S. consumers are just fine.”
Oh, c’mon. The July retail sales number was barely 1% higher than it was in November 2014, and has been up, down and around the barn in the nine months since then. Indeed, the “signal” in July’s monthly “noise” was that the American consumer remains stranded on the sidelines, and that consumption driven “escape velocity” isn’t going to materialize no matter how long the Fed dispenses zero or near-zero cost money to the Wall Street casino.
Instead of gumming about the last 30 days of heavily medicated preliminary “advanced” retail sales data, the sell side bulls would do well to look at the last 25 years of inflation-adjusted retail spending. In a word, the trend has drastically decelerated, and, in fact, has nearly lapsed to stall speed since households hit peak debt seven years ago.
Compared to a 3.3% annualized rate of gain in the 1990s recovery cycle (when household leverage ratios were racing upwards) and 1.9% during the 2001-2007 Greenspan housing bubble, real retail sales have only grown at only a 0.5% rate since the November 2007 pre-crisis peak. After 93 months that is not a recession induced, transient dislocation; it’s a deeply embedded trend.
Indeed, this business expansion is already long in the tooth at 74 months compared to a post war-average of 61 months. So given the 2% +/- real growth trends of the last few years, there is no chance whatsoever that retail spending will rebound to historic rates of over-the-cycle gain before the next recession takes its toll.
Real Retail Sales
This radical downshift in the trend rate of real retail sales surely demonstrates that the radical dose of QE and ZIRP hurtled at the American consumer by the Fed has not worked. But it also points to the actual blatant deformations that it has inflicted on the financial markets in the process.
To wit, the last thing that you would expect in an environment were the consumer sector is dramatically and visibly stalling is a rampage of borrowing to open new retail stores and to fund the buyback of gobs of retailer stock.
But the fact is, debt financed retail leases are so cheap that new capacity never stops coming. At the same time, some of the nation’s largest retailers, faced by withering competition from what amounts to Fed subsidized supply expansion, have been loading-up their balance sheets with the very same kind of cheap debt in order to buy back stock at rates which far exceed their faltering net income. It goes without saying that this development is reckless in the extreme in light of their imperiled business circumstances.
To illustrate the dodgy condition of the debt-strapped American consumer, Jim Quinn dissected the most recent financial results of four of the largest US mall retailers——Macy’s, Kohl’s, Sears and J.C. Penney. Their combined sales in the most recent quarter of $19.1 billion were down 10% from the prior year; and even when you take Eddie Lambert’s trainwreck at Sears out of the basket, the results are not much better. Sales are flat versus the year ago quarter and combined net income of the other three retailers amounts to a piddling 1.4% of sales.
To be sure, these results are not surprising in the face of a tepid consumer and shift of sales to on-line venues. Department stores sales in July, for example, were down by 2.6% from prior year, and now stand 18% below their pre-recession level. But what is surprising is that the four hardest hit among these once and former retail kings have spent years feeding the Wall Street casino with prodigious sums of cash via stock buybacks and dividends.
In fact, during the 10 years between 2005 and 2014, these four retailers spent $34 billion on stock buybacks and dividends. But, alas, their cumulative net income during the period was only $13 billion.
So they pumped 2.6X more into the casino than they earned!
Again, it wasn’t just Eddie Lambert and his hedge fund pals sucking the life out of Sears. On a combined basis, J.C. Penney, Macy’s and Kohl’s pumped $28 billion into the stock market in the form of buybacks and dividends during a period when they posted cumulative net income of just $16.5 billion.
In a market where the price of debt is not falsified and where the C-suite is not rewarded for mortgaging company balance sheets to feed the fast money speculators and thereby goose short-term share prices and their stock option winnings, nothing remotely this reckless could happen.
Instead, in the face of the powerful secular shift of main street consumers to the internet and new retail concepts, companies on an honest free market in finance would plough their cash flow into debt reduction and into investments to improve the competitive viability of their stores, not massive financial engineering.
In fact, these four companies raised their combined debt from the equivalent of $6 billion in 2005 (adjusted for sale of their credit card receivables operations to third parties) to nearly $19 billion in the most recent reporting period. Given the overall-trend in department stores sales versus one-line retailing shown in the graph below, this is nothing short of a death wish.
Needless to say, J.C. Penney’s and Sears are already on deaths door and the other two are stuck with $10 billion of debt and seriously eroding cash flow. In fact, during the first half of this year, Kohl’s and Macy’s reported operating free cash flow of negative $250 million, representing nearly a billion dollar adverse swing from the $725 million of positive free cash flow reported during the first half of 2014.
So here’s the long and short of it. Owing to the Fed’s bubble finance, traditional retailers like the four zombies spotlighted above face endless competition from internet competitors like Amazon and every manner of new bricks and mortar retail concept that entrepreneurs and financiers can dream-up. But much of that new age competition is not on the level economically because it is based on ultra-cheap capital available in both the equity and debt markets.
It does not take much analysis to see that this fantastic proliferation of retail capacity—-both on-line and in the mall—does not represent sustainable prosperity unfolding across the land. For example, around 1990 real median income was $56k per household and now, 25 years later, its just $53k—-meaning that main street living standards have plunged by about 6% during the last quarter century.
But what has not dropped is the opportunity for Americans to drop shopping: square footage per capita during the same period more than doubled, rising from 19 square feet per capita at the earlier date to 47 square feet for each and every American at present.
This complete contradiction—declining real living standards and soaring investment in retail space—did not occur due to some embedded irrational impulse in America to speculate in real estate, or because capitalism has an inherent tendency to go off the deep-end. The fact that in equally “prosperous” Germany today there is only 12 square feet of retail space per capita is an obvious tip-off, and this is not a teutonic aberration. America’s prize-winning number of 47 square feet of retail space per capita is 3-8X higher than anywhere else in the developed world!
When the aggregate level of shopping space is looked at during the above longer-term time frame, the aberration is even more apparent. At the time of the S&L fiasco around 1990 there were only about 5 billion square feet of shopping space in the nation—meaning that capacity tripled during the subsequent a quarter century. Yet this was a period when the real incomes of the middle class were essentially dead in the water. So what market signals could have possibly given rise to such a disconnect?
The answer is the relentless drive for yield among fixed income investors during a period when time and again the Fed intervened in financial markets to prevent the benchmark rate—that is, the 10 year treasury note—- from finding its natural economic price/yield in what was becoming a savings parched economy.
Accordingly, there developed a massive tidal wave called “retail operating leases” that quenched this thirst for yield—helped along by accounting loopholes which allowed trillions of these operating leases to be kept off borrower balance sheets and which thrived on the illusion that the proliferating chains of new retail concepts served up by the Wall Street IPO machine were “national credit tenants”.
These overnight sensations were peddled on the basis of allegedly solid and sustainable “business models”, implying blue chip credit status. This meant, in turn, that retailers were afforded such attractive terms (10-15 years) and razor thin leasing spreads over benchmark rates that retail occupancy costs were dirt cheap relative to the true long-run economics and risks.
Suffice it to say that operating leases and national credit tenant financing by banks and institutional fixed income investors like insurance companies and pension funds account for virtually all of the stupendous gain of 10 billion square feet of retail space since 1990. And all of the cheap debt which funded this vast deformation will not be found on the balance sheet of any known retailer.
Thus, during the last 25 years when overall retail space was rising from 5 billion square feet to 15 billion square feet, the total number of shopping centers—–and especially cheap debt driven strip malls (under 100,000 square feet)—–and total footage has also soared.
Needless to say, vacancy rates have steadily risen and mall rents have started to roll over. Yet the market for retail space doesn’t clear because the Fed’s drastic, sustained financial repression keeps cash flowing to faltering incumbents and dodgy new competitors alike.
So the dance of the zombies goes on. Sears shows how it is done, but it’s only an advanced case.
In that episode, Eddie Lambert was the willing agent of its demise, but the casino momo games among the hedge funds which clambered onboard in the early days when massive amounts of cash were being sucked out of the company, and its ability to access cheap debt markets during the long years when the disaster was unfolding, were enabled by the mad money printers in the Eccles Building.
In short, last week’s tepid retail reports were not only a reminder that QE and ZIRP have by-passed main street entirely. The faltering department store sector is also a reminder that the monumental amount of Fed confected cash pooling-up in the canyons of Wall Street is breeding debt-laden zombies throughout the length and breadth of the land.
- Today's Most Stunning Statistic
It appears some are finally waking up…
Correction: three of the Fed’s 12 presidents are now Goldman Sachs alums. NY, Dallas and Philly. 25% from one bank. Amazing.
— Josh Zumbrun (@JoshZumbrun) August 17, 2015
Others, broadly disparaged by the “some” as “conspiracy theorists“, have known all of this for a long, long time.
- "Avoid ALL Contact" With Rain, American Embassy In Beijing Warns
First in “China Sends In Chemical Warfare Troops, Orders Tianjin Blast Site Evacuation After Toxic Sodium Cyanide Found” and subsequently in “Poison Rain Feared In Tianjin As Death Toll Rumored At 1,400“, we documented China’s frantic attempts to reassure an increasingly agitated and frightened public that the air and water are safe after last Wednesday’s deadly chemical explosion at Tianjin.
Although the full environmental implications of the blast likely won’t be known for quite some time, the immediate concern is that rain could react with water soluble sodium cyanide, transforming the chemical into potentially fatal hydrogen cyanide gas.
And while Beijing has already begun the censorship (some 400 Weibo and WeChat accounts have reportedly been shut down), the American Embassy isn’t mincing words.
The following unconfirmed text message is said to have originated at the Embassy:
For your information and consideration for action. First rain expected today or tonight. Avoid ALL contact with skin. If on clothing, remove and wash as soon as possible, and also shower yourself. Avoid pets coming into contact with rains, or wet ground, and wash them immediately if they do. Rise umbrellas thoroughly in your bath or shower once inside, following contact with rain. Exercise caution for any rains until all fires in Tianjin are extinguished and for the period 10 days following. These steps are for you to be as safe as possible, since we are not completely sure what might be in the air. Remember the brave firefighters and their families along with all those suffering from the accident in Tianjin. Stand strong together China!
And meanwhile, the Embassy is “aware” of these social media messages, which it claims aren’t official. Here’s the official line:
Media sources have reported extensively on explosions at the port of Tianjin, China on August 13 and August 15. The U.S. Embassy urges U.S. citizens in Tianjin to follow the guidance of local authorities and avoid the blast area until given further instructions. We are aware that local authorities are taking measures to prevent secondary disasters and are monitoring air and water pollution in the area to prevent further chemical contamination. The Embassy in Beijing remains in regular contact with local Tianjin government and hospital officials, and we have no information other than that which has been provided to the public by Chinese authorities. We continue to liaise with local authorities, businesses, and healthcare providers to seek information on any U.S. citizens who may have been affected by the explosions.
The Embassy is also aware of social media messages relating to the Tianjin explosions from sources claiming to represent the U.S. Embassy. These messages were not issued by the U.S. Embassy.
You decide.
- Corporate Debt – Road To Oblivion In A Bear Market
Submitted by Jim Quinn via The Burning Platform blog,
Any article that starts with a quote from Jim Grant is guaranteed to be a fact based, common sense, reasoned analysis of our warped, debt saturated, over-valued, Federal Reserve rigged financial markets. John Hussman starts his weekly letter with this quote from Jim Grant:
“The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell.” – James Grant
We’ve been in a Fed QE and ZIRP induced six year bull market that has been sputtering since QE 3 ended in October 2014. Leveraging yourself to the hilt and piling into the stock market has been the road to riches for six years, just as leveraging to the hilt in real estate was the road to riches from 2002 through 2007, and leveraging to the hilt in internet stocks was the road to riches from 1998 through 2000. Of course, the dot.com and housing road to riches detoured into ditches that wiped out trillions of phantom wealth, just as the current road is leading to a grand canyon size ditch.
Total credit market debt has reached all-time highs. The de-leveraging of consumers, liquidation of insolvent Wall Street banks, and bankruptcies of zombie retailers, real estate developers, and mall owners was postponed by Federal Reserve intervention, changing accounting rules to hide bad debt, political shenanigans, and taxpayers paying for the extreme risk taking by bankers and corporate CEOs. Total credit market debt sits at $59 trillion, up from $52 trillion in 2009 at the depths of the recession. This increase has been entirely driven by a $5.3 trillion increase in government debt and a $1.6 trillion increase in corporate debt. The propaganda about corporations flush with cash is bold faced lie. Corporations have increased their debt load by 25% since 2009.
As Dr. Hussman points out, the Fed has encouraged this behavior by the biggest corporations on the planet with their suppression of market interest rates and their gift of $3 trillion to the Wall Street banks. Corporate CEOs are supposed to be the smartest guys in the room, but they haven’t been able to grow their businesses through innovation, creativity, new products, or new investments in plant and equipment. Their entire playbook consists of outsourcing jobs to foreign countries, keeping wages below the level of inflation, and borrowing cheaply from Wall Street banks to buyback their stock and boost earnings per share, so their stock price will go higher, enriching themselves.
The opposite of a debt-equity swap, of course, is a debt-financed stock repurchase, which leverages up the claims of existing shareholders. One of the more troubling aspects of the Federal Reserve’s suppression of interest rates is the speculation it has encouraged, by giving companies access to enormously cheap funding on a 5-7 year horizon. Though nominal economic growth has been tepid, revenue growth has turned negative, and profits as a share of GDP have been falling for more than a year, companies have scampered to boost their per-share earnings by taking out debt to repurchase and reduce the number of shares outstanding. This leveraging has been done at market valuations that are near the highest levels in history on historically reliable measures.
These Ivy League educated CEO titans are nothing but greedy lemmings, following the guidance of corrupt Wall Street bankers by buying back their stock at all-time high valuations. They did it from 2005 through 2008 and paid the price shortly thereafter. It appears some one taught them the “buy low, sell high” concept backwards. They bought no stock at the 2009 lows.
See, the timing of buybacks at an aggregate level has nothing to do with value. As Albert Edwards at SocGen has often observed, not only do buybacks increase at rich market valuations and dry up in depressed markets, they are also typically financed by issuing debt. What drives buyback activity is not value, but the availability of cheap, speculative capital at points in the business cycle where profit margins are temporarily elevated and make the increased debt burden seem easy to handle. The chart below showed the developing situation a few years ago…
They are presently buying back their own stock at a pace never before seen in market history. Every valuation metric known to mankind is flashing red and showing the market to be as overvalued as any time in history, but corporate CEO’s are borrowing like madmen and buying their own stock. Where is the prudence, risk management, and responsibility for the long-term financial viability of these corporations from the executives running these companies? Does only next quarter’s EPS matter?
… and the chart below shows the frantic pace that repurchases have reached – at what are now the most extreme levels of valuation in U.S. history outside of a few months surrounding the 2000 market peak.
Hussman, inconveniently for the Wall Street huckster crowd and CNBC cheerleaders, points out that corporate profits peaked two quarters ago and are headed downward. Revenue growth is non-existent and corporate debt yields are rising. The high yield financed shale oil boom is imploding, zombie retailers are struggling, and marginal players are seeing interest rates rise. Borrowing to buy back stock as a recession takes hold becomes untenable, even for delusional greedy CEOs. Stockholders are going to wish these CEO’s hadn’t levered their balance sheets just before Depression 2.0 hit.
One emerging problem here is that credit spreads in corporate debt have begun to widen considerably, increasing the cost of debt, while profit margins continue (predictably) to come under pressure. Corporations tend to press their luck when it comes to buybacks, largely because profit margins tend to be deceptively high at major market peaks, but it’s difficult to maintain a high pace of repurchases when fading revenue growth and narrowing profit margins are joined by wider credit spreads.
The larger problem with repurchases is that debt-financed buybacks effectively put investors on margin. As corporations have borrowed in order to aggressively buy back their stock near the highest market valuations in history, existing stockholders have quietly become heavily leveraged, without even realizing it.
You can thank Janet, Ben and their merry band of central bankers for this epic level of malinvestment. Their ongoing ZIRP has left pensions plans, life insurance companies, and other large institutional investors with no yields. The Fed is a perpetual bubble machine and the latest bubble is in debt financed corporate equity purchases. It will end the same way all Fed bubbles end, with a financial crisis, trillions in losses, bankruptcies, and soaring unemployment. The unwind of these excesses will be epic.
So not only is the equity market at the second most overvalued point in U.S. history, it is also more leveraged against probable long-term corporate cash flows than at any previous point in history. As we observed during the housing bubble, yield-seeking by investors opens the door to every form of malinvestment. The best way to create a debt-financed wave of speculative and unproductive activity is to starve investors of safe return. In 2000 that wave of speculation focused on technology. The next Fed-induced wave of speculation focused on mortgage securities, which financed a housing bubble. In our view, the primary avenue of speculation in the current cycle has been debt-financed corporate equity purchases.
Over the completion of this cycle, we fully expect that many companies and private-equity firms will be forced to reverse this activity through involuntary debt-equity swaps, with a corresponding dilution in the ownership stakes of existing shareholders. Indeed, the group that led the largest leveraged buyout in the oil and gas sector in 2011 announced last week that its ownership stake would be handed over to lenders. Back in 2011, profit margins were elevated in the energy sector, making the new debt burdens seem easy to handle. But part of the signature of an emerging global economic slowdown has been pressure on energy and industrial commodity prices (see the February 2, 2015 comment, Market Action Suggests an Abrupt Slowing in Global Economic Activity). The grandiose leveraged buy-outs of 2011, now facing Chapter 11, are the canaries in the global economic coal mine. In the words of Bad Company, “It ain’t the first time baby… baby it won’t be the last.”
The market was down 275 points last Wednesday and finished flat on the day. The market was down 135 points today and reversed by 200 points in a matter of minutes. In these low volume markets, large corporations are propping up their stocks and the market by wading in and buying back their stock. The savvy investors have been selling hand over foot, while the lemming CEO crowd keeps wasting their cash on their over-priced stocks. They call this adding value.
As usual, Dr. Hussman provides a succinct, factual, and dire warning to anyone invested in this market. The current overvalued market conditions have only been present 8% of the time over the last century. Market crashes have only occurred when the current conditions existed in the past. The ghosts of 1929, 2000 and 2007 are warning you to beware. Ignore the warnings at your own peril.
The current set of conditions has been observed in only about 8% of market history, and that 8% of history captures the only set of conditions that we associate with expected and severe market losses. It’s the 8% of history that matches current conditions where most market crashes have occurred.
- The Biggest Surprise About Claren Road's Upcoming Liquidation
That one (and pretty much all) of Carlyle’s hedge funds, namely the commodity-focused Vermillion Asset Management, did not have a good 2015 was well-known after as Bloomberg reported, its founders – Chris Nygaard and Drew Gilbert – left after losses. Actually, losses is putting it mildly: AUM imploded to a paltry $50 million from $2 billion following horrible bets on the path of commodity prices.
As Bloomberg further noted, “losses in Vermillion’s Viridian commodity fund, which invested in oil, metals and agriculture assets, have led to investor redemptions that shrank its size. The vehicle had $1.7 billion when Washington-based Carlyle bought a 55 percent stake in Vermillion in 2012, before starting its decline.”
The collapse driven by a record commodity crash, while unpleasant for all the millionaires and billionaires involved, was explainable: the hedge fund which was just a glorified and levered beta chaser, was simply betting everything – and then added some leverage for good measure – that the BTFD “investment strategy” would work and commodities would rebound.
They did not, and Vermillion is now shutting its doors, and leaving Carlyle with another hedge fund implosion on its hands.
But, as noted above, there was nothing particularly surprising about that: invest badly for long enough, and you get wiped out.
What, however, is far more surprising was the fate of that other, far bigger Carlyle hedge funds, Claren Road, which as we learned moments ago from Bloomberg is also on death’s door following a whopping $2 billion in redemption requests, representing about half of the firm’s total $4.1 billion in AUM.
By way of background, Claren Road was founded in 2005 by former Citigroup Inc. credit traders Brian Riano, John Eckerson, Sean Fahey and Marino. Carlyle bought a 55 percent stake in Claren Road five years ago as part of a push into hedge funds.
At its peak less than a year ago, in September of 2014, Claren Road managed $8.5 billion. Now, in one month, Claren Road is facing redemptions that will pull 48% of the funds investments, forcing across the board liquidations, mass layoffs, and what will ultimately almost certainly be the fund’s liquidation. Incidentally, the pain for Claren Road started at the end of 2014:
Claren Road investors had asked to redeem $374 million last quarter, a person with knowledge of the matter said earlier this month. The firm had faced redemptions of $1.9 billion at the end of last year.
Which means that bleeding billions is not exactly a new thing for Claren Road (or Carlyle). And, it goes without saying, a few “expert networks” left in operation would have surely prevented the fund’s demise.
But, as in the case of Vermillion, liquidations are perfectly normal, and happen every time there is a major market meltdown, such as what commodities experienced, if not the centrally-planned and central bank-micromanaged US equities, which are the last recourse policy tool for the legacy status quo to preserve confidence in a crumbling global economy.
No, what is most surprising, is that Claren Road actually did not perform that badly: “Claren Road’s main fund gained 1.7 percent in the first two weeks of August, according to the person. It had declined 7.2 percent this year through July. Its smaller credit opportunities fund has lost 6.2 percent this year through mid-month after rising 1.9 percent in the first two weeks of August.”
In other words, Claren Road was down a palrty 5.6% through mid-August, or underperforming the broader market by just 5.6% and was likely performing in line or even better than its benchmark, and yet its skittish investors saw that return as sufficient to require a liquidation.
One then wonders: if a single-digit underperformance was enough to lead to the wipe out of one of the formerly biggest hedge funds, just how big, literally and metaphorically, will the hedge fund gates have to be when the central banks finally lose control, and hedge funds experience double digit losses (or get Madoffed).
Because if truly investors are so jittery that one bad quarter is enough to force the 50% of one’s cash, then what happens during the market downturn is now very clear, and is precisely what we warned in “How The Market Is Like CYNK“, and how investors in China’s epic fraud Hanergy learned the hard way: you can make paper profits in a rigged market on the way up all you want, but once the time to cash out comes, you can never leave.
- Savannah River Nuclear Facility Under Lockdown Amid "Security Event"
According to the Savannah River site, a potential security threat is in progress that has caused emergency response. SRS says site barricades are closed to incoming traffic. According to SRS, there is no indication of any threat outside of the SRS boundaries.
The Savannah River Site confirmed the facility is experiencing a “security event” at the site’s H Area; however, the Aiken County Sheriff’s Office is calling the event a “lockdown.”
As of now, no one is allowed in or out of the facility and site barricades are closed off to incoming traffic.
Savannah River Site issued a press release stating “a potential security event is in progress that has triggered emergency response activities at the Department of Energy’s Savannah River Site,” and the release is “being sent to you as part of our emergency response organization information process.”
SRS also stated there is no indication of a “consequence beyond the Savannah River Site boundaries,” and the Site will provide further information when it becomes available.
The site’s H Area is the location of H Canyon, the only hardened chemical separations facility still operating in the U.S. The primary mission of the H-Canyon Complex is to dissolve, purify and blend-down surplus highly enriched uranium from both within American borders and materials that come from other countries.
A secondary mission for H-Canyon is to dissolve excess plutonium and transfer it for vitrification in the Defense Waste Processing Facility at SRS.
From earlier this month:
* * *
From the official SRS fact sheet:
H Canyon and HB Line remain and are supporting the DOE Enriched Uranium and Plutonium Disposition Programs by reducing the quantity of fissile materials in storage throughout the United States. This supports both the environmental cleanup and nuclear nonproliferation efforts and the creation of a smaller, safer, more secure and less expensive nuclear weapons complex. The canyon is used to support the disposition of highly enriched uranium and plutonium from across the DOE Complex.
- LOLume Lifts Stock; Bonds Bid As Crude, Copper, & Credit Crumble
On a day such as this, there is only one clip to sum it all up…
First things first – there was NO Volume!!!!
The opening oif the US equity market was incredibly bullish 'fundamentally' as disnal-date-driven weakness was BTFD'd all the way to last week's highs…
Cash indices all soared off the opening highs… Note the S&P 500 cash tested down to its 200DMA today (2077), and ripped back above its 50DMA (2095)…
S&P 2100 baby!!
Today explained….
2100 pic.twitter.com/JQlzyNdpws
— Stalingrad & Poorski (@Stalingrad_Poor) August 17, 2015
The Russell 2000 rallied right up to its 200DMA…
Homebuilders squeezed higher once again on a completely self-serving NAHB sentiment print…
Energy stocks held onto gains in the face of surging credit risk and plunging oil prices…
Financial stocks have had a good couple of days but we note that credit risk continues to tick wider (most notable among the moves is Goldman Sachs). While the moves are small in absolute terms, relative to stocks they suggest some conuterparty risk starting to bleed into banks (and most notably a decent leg wider after China's move)…
Another day, another collapse in VIX…
Bonds, stocks, and bullion were all higher on the day…
Credit markets were not as excited about the crappy data today as stocks…
As HYG has now dumped into the close for the 4th day in a row…
The Treasury Complex gagged lower in yield after the collapse in Empire Fed…
The US Dollar limped higher all daya with some volatility around the data…
Crude & Copper were clubbed amid crazy volatility intraday as Gold and silver snapped higher after the data and held on to gains..
And the idiocy of the day would nt be complete without reference to crude oil's farcical moves today… all on no news whatsoever!!
Charts: Bloomberg
Bonus Chart: Bloomberg IPO Index is having its worst year since 2011…
- The Front Runner?
- Fed Goes Looking For Evidence Of Broken Treasury Market, Decides Everything Is Fine
One doesn’t have to look very far to find evidence that the Fed’s monumental attempt to corner the Treasury market is producing all manner of distortions and anomalies.
For example, one could point to episodic instances of acute collateral shortages manifested by “immensely” special repo rates. If that’s too esoteric for you, just go and have a look at a 10Y chart from October 15 of last year and ask yourself what happened there. Put simply, when someone comes along and does a multi-trillion dollar bellyflop into any market – even one that could previously be described as the deepest and most liquid on the planet – there are bound to be far-reaching repercussions for market function and that’s precisely what’s happening, and not only in USTs but in JGBs and most recently in German bunds.
Apparently someone at the NY Fed decided that with everyone in the financial universe suddenly screaming about liquidity (or a lack thereof) it was time to take a cursory look at the issue and make a half-hearted, slightly disingenuous attempt to find out if there’s really a problem.
So that’s exactly what Tobias Adrian, Michael Fleming, Daniel Stackman, and Erik Vogt did. There results are posted on the NY Fed’s blog and we present some of the highlights below.
Bid-ask spreads suggest ample liquidity
One of the most direct liquidity measures is the bid-ask spread: the difference between the highest bid price and the lowest ask price for a security. As shown in the chart below, bid-ask spreads widened markedly during the crisis, but have been relatively narrow and stable since.
Of course bid-asks aren’t really the best way to assess this – market depth is. That is, the question is this: can you transact in size without accidently causing some kind of catastrophe?
On that question the NY Fed is a bit less optimistic.
But other high-frequency measures point to some deterioration
Other measures paint a less sanguine picture of Treasury market liquidity. The chart below plots order book depth, measured as the average quantity of securities available for sale or purchase at the best bid and offer prices. Depth rebounded healthily after the crisis, but declined markedly during the 2013 taper tantrum and around the October 15, 2014 flash rally. It is not unusually low at present by recent historical standards.
Measures of the price impact of trades also suggest some recent deterioration of liquidity. The next chart plots the estimated price impact per $100 million net order flow as calculated weekly over five-minute intervals; higher impacts suggest reduced liquidity. Price impact rose sharply during the crisis, declined markedly after, and then increased some during the taper tantrum and in the week including October 15, 2014. The measure remained somewhat elevated after October 15, but is not now especially high by recent historical standards.
The authors’ takeaway from the above is that “high-frequency liquidity measures provide a mixed message regarding the state of Treasury liquidity.” And while that doesn’t sound particularly comforting, we shouldn’t worry because the Fed doesn’t think those are actually the right measures. When one looks at another set of indicators, everything is actually ok. To wit: “…the daily measures we consider are more consistent.”
As an aside, it would have helped if, in the depth chart shown above, they hadn’t plotted the 10Y on the same chart with the 2Y because as you can see from the following, the picture looks a little different when the 10Y is plotted on its own.
All in all, the authors conclude that “the current state of Treasury market liquidity [is] fairly favorable,” but do concede that “the events of October 15 and similar episodes of sharp, seemingly unexplained price changes in the dollar-euro and German Bund markets have heightened worry about tail events in which liquidity suddenly evaporates.”
Why yes, yes they do “heighten worries” because as you can see from the following, market depth just seems to disappear out of the clear blue nowadays.
We also noticed that at the end of the article, the authors promise to ferret out the causes of such anomalous events “in a future blog post.”
To the NY Fed we say this: we know the good folks at 33 Liberty have more important things to do (like running the equity plunge protection team) than spending time searching for the culprits behind the Treasury flash crash, so we’ll go ahead and point you in the right direction. First, look in the mirror, next refer to the graphic shown below.
Mystery solved. You are welcome.
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