Today’s News August 25, 2015

• The Raging Fire Within

  I’ve been trading the stock market for nearly thirty years, virtually non-stop. Today (that is, Monday, August 24) easily ranks in the top five strangest, craziest days in the thousands upon thousands of trading days I’ve ever witnessed. I felt like I was entering a cage of gorillas that had just ingested a large quantity of PCP. It felt dangerous and really, really unpredictable.

  As I mentioned on my lengthy Saturday post:

  I expect (and, again, hope – – because, God forgive me, I’m actually long five ETFs in size right now) we get a meaningful relief rally, carrying us up to the psychologically-important 17,000 level. At that point, please don’t be anywhere between me and my keyboard, because I am going to be shorting anything with a ticker symbol in size.

  Well, God most certainly did not forgive me. If this permabear’s time machine was working, he’d go back to Thursday morning, warn the slightly-younger Tim to not cover a single position, and further warn him not to buy a single thing.

  Instead, I waited sleeplessly through Sunday night and early Monday morning for the opening bell to see how big a chunk of flesh those longs would take out of my 55 (much smaller) short positions. Well, the “tax” was quite hefty. Hedging as I did wiped out half of the profits I would have had otherwise, just as covering wiped out half my profits the prior Friday. I had relinquished tens of thousands of dollars of extra profit just to be – – well – – “safe.”

  

  I think we can all agree that approximately nobody anticipated the Dow falling 1,000 points right from the start of Monday morning. Frankly, the kind of “lift” I am seeing at the moment I am typing this (with the ES up 42 points) is more along the lines of what I thought would happen.

  But the past few days have generated countless stories of triumph or woe, because in a market this volatile, you are going to have some accidental millionaires, and you’re going to have some people absolutely wiped out, never to enter the markets again.  Keep in mind the VIX was at 10 – 10!!!!!! – only a few weeks ago, and today it roared into the mid-50s. This is without precedent.

  I tend to think in metaphors and analogs, so here is what I have in mind for your consideration: think about a forest. In a large forest, from time to time, there are naturally-occurring fires. These take place due to, say, a lightning strike, and what happens is that all the dry underbrush lights up and damages the forest to a certain degree. Some trees are killed. Some animals are killed. There is loss.

  But, once the fire burns out of its own accord, life begins anew. The soil is rich with nutrients. More sunlight gets through to the surviving trees, and they flourish. The forest grows stronger. And, sooner or later, another fire will take place, but through this repeating cycle, in spite of Bambi getting killed from time to time, things improve and are relatively stable.

  The same can be said for a financial market which is allowed to rise and fall based on naturally-occurring market forces. Some people get hurt along the way. Some people prosper. But, on the whole, the system works, and it works in such a way that it is fair and, in the grand scheme of things, beneficial.

  What we have, instead, is a forest that hasn’t been allowed to catch fire. The forest has been drenched with water every day, for years on end, to ensure that no spark can take hold. Lightning still takes place, but it is simply snuffed out on wet tinder. The layers of dead limbs, leaves, and other crinkly detritus accumulate on the ground, and soon you have a forest that is several feet deep in tinder.

  So, in this instance, when a spark manages to get through, you don’t have a run-of-the-mill fire: you have an apocalypse. The natural give-and-take of the organic system has been suppressed, and a towering inferno rages with a ferocity that seems surreal. You have, at long last, a calamity on your hands.

  And that, my friends, is that we’ve been witnessing the past few trading days. Fire Marshall Yellen (and retired Fire Marshall Bernanke) have utterly perverted the natural order of things, and we are only now beginning to pay the price. The fire, I firmly believe, has only just started. We will indeed have some violent relief rallies along the way, but as we look at charts like these……….

  

  

  ……….my only conclusion is that the sensational bearish setups are firmly in place and, once the bounce is complete, you will be witness to a fury of plunging price quotes that will, in the end, prove that Monday, August 24th, was simply a shot across the bow.

  

  

  

  

• Brazil's Economy Is Now A Job Destruction Machine

  In more ways than one (or two, or three) Brazil is the poster child for the global emerging market unwind that, thanks to China’s yuan devaluation, has accelerated dramatically over the course of the last week. 

  To be sure, the combination of slowing demand from China, the (now lower) possibility of a Fed rate hike, and, perhaps most importantly, the end of the commodities supercycle which has seen prices crash to their lowest levels of the 21st century, would be more than enough to put Latin America’s most important economy into a tailspin.

  But unfortunately, a political crisis stemming from allegations of fiscal book cooking and corruption charges tied to Petrobras where President Dilma Rousseff was chairwoman for seven years have exacerbated the country’s woes and recently, Brazilians went (back) to the streets by the hundreds of thousands to call for Rousseff’s impeachment. 

  

  The fallout for the real economy has been catastrophic and indeed Brazilians suffered through the worst growth-inflation outcome (i.e. stagflation) in over a decade during Q2. Whether or not Rousseff can survive (politically speaking, we hope) and whether or not the government can hit primary fiscal surplus targets is an open question, but as we noted on Thursday, the populace is under tremendous pressure in the meantime with unemployment rising for a seventh consecutive month and soaring to its highest level in half a decade in July.

  On that note, we bring you the following chart and commentary from Barclays which underscores precisely what we said last month, namely that Brazil may well be in the midst a depression:

  

  In July, 157,905 jobs were eliminated in Brazil, compared to the creation of 11,796 positions in July 2014, according to data from CAGED, Brazil’s employment register. Year-to-date, 547,738 job positions have been eliminated (versus the creation of 504,914 jobs in the same period of 2014). In seasonally adjusted terms, today’s print is compatible with 140,939 job eliminations, pretty close to the historical low of -154,355 in June (Figure 1).

   

  Sector-wise, the industrial and retail sectors accumulate the largest job eliminations, which together sums up to 454k. The construction sector follows with a job destruction of 152k, and the only positive highlight is the agricultural sector, which created 99k formal jobs (Figure 2).

   

  The magnitude of the deterioration of the labor market continues to surprise in Brazil. This week the unemployment rate rose by the fastest pace in the historical series, with the data showing that even more people are looking for job positions, however without finding them (see Brazil unemployment rate: Increased pace of deterioration).

   

  The consequence of this is an even more prolonged recession, as disposable income falls and household consumption contracts. Coupled with business confidence indexes for August showing further drops to minimum-lows, this suggests that the worst in terms of growth is still ahead of us.

  Which means that BofAML is exactly right to say that out of all the charts one cares to examine for Brazil, the most important one may ultimately be this:

  

  

  

  

  

  

• The Raping Of America: Mile Markers On The Road To Fascism

  Submitted by John Whitehead via The Rutherford Institute,

  “Freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.”—Martin Luther King Jr.

  There’s an ill will blowing across the country. The economy is tanking. The people are directionless, and politics provides no answer. And like former regimes, the militarized police have stepped up to provide a façade of law and order manifested by an overt violence against the citizenry.

  Despite the revelations of the past several years, nothing has changed to push back against the American police state. Our freedoms—especially the Fourth Amendment—continue to be choked out by a prevailing view among government bureaucrats that they have the right to search, seize, strip, scan, spy on, probe, pat down, taser, and arrest any individual at any time and for the slightest provocation.

  Despite the recent outrage and protests, nothing has changed to restore us to our rightful role as having dominion over our bodies, our lives and our property, especially when it comes to interactions with the government.

  Forced cavity searches, forced colonoscopies, forced blood draws, forced breath-alcohol tests, forced DNA extractions, forced eye scans, forced inclusion in biometric databases—these are just a few ways in which Americans continue to be reminded that we have no control over what happens to our bodies during an encounter with government officials. Thus far, the courts have done little to preserve our Fourth Amendment rights, let alone what shreds of bodily integrity remain to us.

  Indeed, on a daily basis, Americans are being forced to relinquish the most intimate details of who we are—our biological makeup, our genetic blueprints, and our biometrics (facial characteristics and structure, fingerprints, iris scans, etc.)—in order to clear the nearly insurmountable hurdle that increasingly defines life in the United States.

  In other words, we are all guilty until proven innocent.

  Worst of all, it seems as if nothing will change as long as the American people remain distracted by politics, divided by their own prejudices, and brainwashed into believing that the Constitution still reigns supreme as the law of the land, when in fact, we have almost completed the shift into fascism.

  In other words, despite our occasional bursts of outrage over abusive police practices, sporadic calls for government reform, and periodic bouts of awareness that all is not what it seems, the police state continues to march steadily onward.

  Such is life in America today that individuals are being threatened with arrest and carted off to jail for the least hint of noncompliance, homes are being raided by police under the slightest pretext, and roadside police stops have devolved into government-sanctioned exercises in humiliation and degradation with a complete disregard for privacy and human dignity.

  Consider, for example, what happened to Charnesia Corley after allegedly being pulled over by Texas police for “rolling” through a stop sign. Claiming they smelled marijuana, police handcuffed Corley, placed her in the back of the police cruiser, and then searched her car for almost an hour. They found nothing in the car.

  As the Houston Chronicle reported:

  Returning to his car where Corley was held, the deputy again said he smelled marijuana and called in a female deputy to conduct a cavity search. When the female deputy arrived, she told Corley to pull her pants down, but Corley protested because she was cuffed and had no underwear on. The deputy ordered Corley to bend over, pulled down her pants and began to search her. Then…Corley stood up and protested, so the deputy threw her to the ground and restrained her while another female was called in to assist. When backup arrived, each deputy held one of Corley’s legs apart to conduct the probe.

  As shocking and disturbing as it seems, Corley’s roadside cavity search is becoming par for the course in an age in which police are taught to have no respect for the citizenry’s bodily integrity.

  For instance, 38-year-old Angel Dobbs and her 24-year-old niece, Ashley, were pulled over by a Texas state trooper on July 13, 2012, allegedly for flicking cigarette butts out of the car window. Insisting that he smelled marijuana, he proceeded to interrogate them and search the car. Despite the fact that both women denied smoking or possessing any marijuana, the police officer then called in a female trooper, who carried out a roadside cavity search, sticking her fingers into the older woman’s anus and vagina, then performing the same procedure on the younger woman, wearing the same pair of gloves. No marijuana was found.

  David Eckert was forced to undergo an anal cavity search, three enemas, and a colonoscopy after allegedly failing to yield to a stop sign at a Wal-Mart parking lot. Cops justified the searches on the grounds that they suspected Eckert was carrying drugs because his “posture [was] erect” and “he kept his legs together.” No drugs were found.

  Leila Tarantino was subjected to two roadside strip searches in plain view of passing traffic during a routine traffic stop, while her two children—ages 1 and 4—waited inside her car. During the second strip search, presumably in an effort to ferret out drugs, a female officer “forcibly removed” a tampon from Tarantino. Nothing illegal was found. Nevertheless, such searches have been sanctioned by the courts, especially if accompanied by a search warrant (which is easily procured), as justified in the government’s pursuit of drugs and weapons.

  Meanwhile, four Milwaukee police officers were charged with carrying out rectal searches of suspects on the street and in police district stations over the course of several years. One of the officers was accused of conducting searches of men’s anal and scrotal areas, often inserting his fingers into their rectums and leaving some of his victims with bleeding rectums. Halfway across the country, the city of Oakland, California, agreed to pay $4.6 million to 39 men who had their pants pulled down by police on city streets between 2002 and 2009.

  It’s gotten so bad that you don’t even have to be suspected of possessing drugs to be subjected to a strip search.

  In the wake of the U.S. Supreme Court’s ruling in Florence v. Burlison, any person who is arrested and processed at a jail house, regardless of the severity of his or her offense (i.e., they can be guilty of nothing more than a minor traffic offense), can be subjected to a strip search by police or jail officials without reasonable suspicion that the arrestee is carrying a weapon or contraband.

  Examples of minor infractions which have resulted in strip searches include: individuals arrested for driving with a noisy muffler, driving with an inoperable headlight, failing to use a turn signal, riding a bicycle without an audible bell, making an improper left turn, engaging in an antiwar demonstration (the individual searched was a nun, a Sister of Divine Providence for 50 years). Police have also carried out strip searches for passing a bad check, dog leash violations, filing a false police report, failing to produce a driver’s license after making an illegal left turn, having outstanding parking tickets, and public intoxication. A failure to pay child support can also result in a strip search.

  It must be remembered that the Fourth Amendment to the U.S. Constitution was intended to prevent government agents from searching an individual’s person or property without a warrant and probable cause (evidence that some kind of criminal activity was afoot). While the literal purpose of the amendment is to protect our property and our bodies from unwarranted government intrusion, the moral intention behind it is to protect our human dignity.

  Unfortunately, the indignities being heaped upon us by the architects and agents of the American police state—whether or not we’ve done anything wrong—don’t end with roadside strip searches. They’re just a foretaste of what is to come.

  As I make clear in my book Battlefield America: The War on the American People, the government doesn’t need to strip you naked by the side of the road in order to render you helpless. It has other methods, less subtle perhaps but equally humiliating, devastating and mind-altering, of stripping you of your independence, robbing you of your dignity, and undermining your rights.

  With every court ruling that allows the government to operate above the rule of law, every piece of legislation that limits our freedoms, and every act of government wrongdoing that goes unpunished, we’re slowly being conditioned to a society in which we have little real control over our lives. As Rod Serling, creator of the Twilight Zone and an insightful commentator on human nature, once observed, “We’re developing a new citizenry. One that will be very selective about cereals and automobiles, but won’t be able to think.”

  Indeed, not only are we developing a new citizenry incapable of thinking for themselves, we’re also instilling in them a complete and utter reliance on the government and its corporate partners to do everything for them—tell them what to eat, what to wear, how to think, what to believe, how long to sleep, who to vote for, whom to associate with, and on and on.

  In this way, we have created a welfare state, a nanny state, a police state, a surveillance state, an electronic concentration camp—call it what you will, the meaning is the same: in our quest for less personal responsibility, a greater sense of security, and no burdensome obligations to each other or to future generations, we have created a society in which we have no true freedom.

  Government surveillance, police abuse, SWAT team raids, economic instability, asset forfeiture schemes, pork barrel legislation, militarized police, drones, endless wars, private prisons, involuntary detentions, biometrics databases, free speech zones, etc.: these are mile markers on the road to a fascist state where citizens are treated like cattle, to be branded and eventually led to the slaughterhouse.

  If there is any hope to be found it will be found in local, grassroots activism. In the words of Martin Luther King Jr., it’s time for “militant nonviolent resistance.”

  First, however, Americans must break free of the apathy-inducing turpor of politics, entertainment spectacles and manufactured news. Only once we are free of the chains that bind us—or to be more exact, the chains that “blind” us—can we become actively aware of the injustices taking place around us and demand freedom of our oppressors.

  

  

  

  

  

• Chinese Stocks Are Crashing; Yuan Devalues, Deposit Rate Spikes To Record High, Japan Denies "G7 Response" Planned

  Following yesterday's bloodbath (and the continued carnage around the world), AsiaPac stocks are lower with Japan unable to mount any sustained bounce despite every effort to lift JPY. The propaganda-fest is in full swing as Amari claims JPY is safe-haven asset and Aso denies any coordinated G7 response is being planned (which means they are all feverishly trying to figure out how to 'save' the world again from a 4-day stock drop). China is ugly with stocks down hard in the pre-open (CSI-300 -4.3%) as offshore Yuan depo rates spike to 22.9% – a record high – as liquidity outflows must be accelerating (as PBOC adds another CBNY150bn liquidity). China devalues Yuan 0.2% – most in 11 days.

  Carnage –

  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 6.4% TO 3,004.13
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 6.3% TO 3,070.01

  This is the 5th day of crashing Chinese stocks in a row…

  

   

  Chinese Stocks are down 14% since Friday!!

  

   

  Year-to-date, Shangahi is now down 6.2% and CSI-300 (China's S&P) is down a stunning 15%!

  

   

  Where China will stop (or atleast aim for) – when QE-Lite (PSL) was unleashed…

  

   

  The Japanese are in full propaganda mode…

  • *SUGA: WATCHING MARKET MOVES ATTENTIVELY
  • *ASO: FX MOVES HAVE BEEN ROUGH ("rough" – well that's one word for complete and utter carnage)
  • *ASO: CONTINUING TO CLOSELY WATCH MARKET MOVES
  • *ASO: I HAVEN'T CONTACTED U.S. TREASURY (which means he has!)
  • *ASO: NOT AT STAGE FOR G-7, G-20 RESPONSE (which means there is)
  • *AMARI: UP TO BOJ TO DECIDE ON ADDL EASING (how's that last QQE2 working out?)
  • *AMARI: YEN IS BEING BOUGHT AS SAFE ASSET (nope it's a forced carry unwind sorry!)
  • *AMARI:YEN SEEN AS SAFE ASSET SHOWS VALUATION OF JAPAN ECONOMY (what utter crap!)

  So we await the coordinated response to the global vicious circle of carry unwinds and forced liquidations… but remember, RRR cuts so far have done absolutely nothing to hold back wave after wave of frenzied malicious Chinese sellers just wanting out of the ponzi.

  The talk is not working as Chinese stocks are weak in the pre-open…

  • *FTSE CHINA A50 SEPT. FUTURES DROP 3.4% IN SINGAPORE
  • *CHINA CSI 300 STOCK-INDEX FUTURES FALL 4.3%

  

  Some good news… China is deleveraging…

  • *SHANGHAI MARGIN DEBT DECLINES TO LOWEST IN FIVE MONTHS

  As China devalues Yuan by most in 11 days..

  • *PBOC WEAKENS YUAN FIXING BY 0.2%, MOST SINCE AUG. 13
  • *CHINA SETS YUAN REFERENCE RATE AT 6.3987 AGAINST U.S. DOLLAR

  

  And China adds yet more liquidity…

  • *PBOC TO INJECT 150B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  The desperation to keep liquidity from flooding out is very evident:

  • *ONE-WEEK OFFSHORE YUAN DEPOSIT RATE JUMPS 840 BPS TO 22.9%
  • *YUAN DEPOSIT RATE HEADED FOR RECORD CLOSE IN HONG KONG

  

   

  "Some are converting yuan back into USD or HKD amid the devaluation,’’ says Lawrence Kung, head of deposits department at Wing Lung Bank in Hong Kong

  *  *  *

  Hope continues for a huge broad-based RRR cut but The PBOC – just as it said – remains fixed on small targeted liquidity injections. This will not please the 'people' or Jim Cramer… "they know nothing."

  *  *  *

  And finally, we could not have put it better than The Onion as they explain how the "Shoddy Chinese-Made Stock Market Collapses"…

  Proving to be just as flimsy and precarious as many observers had previously warned, the Chinese-made Shanghai Composite index completely collapsed Monday, sources confirmed.

   

  “Sure, it looked fine from the outside, but anybody who saw it up close knew that it was of such poor quality that it wasn’t built to last,” said Allen Sigman of the London School of Economics, adding that the stock market, which he described as a crude knockoff of Western versions, was practically slapped together overnight and featured countless obvious structural weak points.

   

  “They pretty much ignored regulations, and inspections were a joke. The only surprise is that it didn’t fall apart sooner.” Sigman added that he just hopes there weren’t too many people who were hurt in the disaster.

  *  *  *

  We assume that is satire… though it does seem a little too real.

  

  

  

  

  

• Paul Craig Roberts: Central Banks Have Become A Corrupting Force

  Authored by Paul Craig Roberts and Dave Kranzler via PaulCraigRoberts.org,

  Are we witnessing the corruption of central banks? Are we observing the money-creating powers of central banks being used to drive up prices in the stock market for the benefit of the mega-rich?

  These questions came to mind when we learned that the central bank of Switzerland, the Swiss National Bank, purchased 3,300,000 shares of Apple stock in the first quarter of this year, adding 500,000 shares in the second quarter. Smart money would have been selling, not buying.

  It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations — Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.

  Among this list of the Swiss central bank’s holdings are stocks which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off.

  What is going on here?

  The purpose of central banks was to serve as a “lender of last resort” to commercial banks faced with a run on the bank by depositors demanding cash withdrawals of their deposits.

  Banks would call in loans in an effort to raise cash to pay off depositors. Businesses would fail, and the banks would fail from their inability to pay depositors their money on demand.

  As time passed, this rationale for a central bank was made redundant by government deposit insurance for bank depositors, and central banks found additional functions for their existence. The Federal Reserve, for example, under the Humphrey-Hawkins Act, is responsible for maintaining full employment and low inflation. By the time this legislation was passed, the worsening “Phillips Curve tradeoffs” between inflation and employment had made the goals inconsistent. The result was the introduction by the Reagan administration of the supply-side economic policy that cured the simultaneously rising inflation and unemployment.

  Neither the Federal Reserve’s charter nor the Humphrey-Hawkins Act says that the Federal Reserve is supposed to stabilize the stock market by purchasing stocks. The Federal Reserve is supposed to buy and sell bonds in open market operations in order to encourage employment with lower interest rates or to restrict inflation with higher interest rates.

  If central banks purchase stocks in order to support equity prices, what is the point of having a stock market? The central bank’s ability to create money to support stock prices negates the price discovery function of the stock market.

  The problem with central banks is that humans are fallible, including the chairman of the Federal Reserve Board and all the board members and staff. Nobel prize-winner Milton Friedman and Anna Schwartz established that the Great Depression was the consequence of the failure of the Federal Reserve to expand monetary policy sufficiently to offset the restriction of the money supply due to bank failure. When a bank failed in the pre-deposit insurance era, the money supply would shrink by the amount of the bank’s deposits. During the Great Depression, thousands of banks failed, wiping out the purchasing power of millions of Americans and the credit creating power of thousands of banks.

  The Fed is prohibited from buying equities by the Federal Reserve Act. But an amendment in 2010 – Section 13(3) – was enacted to permit the Fed to buy AIG’s insolvent Maiden Lane assets. This amendment also created a loophole which enables the Fed to lend money to entities that can use the funds to buy stocks. Thus, the Swiss central bank could be operating as an agent of the Federal Reserve.

  If central banks cannot properly conduct monetary policy, how can they conduct an equity policy? Some astute observers believe that the Swiss National Bank is acting as an agent for the Federal Reserve and purchases large blocs of US equities at critical times to arrest stock market declines that would puncture the propagandized belief that all is fine here in the US economy.

  We know that the US government has a “plunge protection team” consisting of the US Treasury and Federal Reserve. The purpose of this team is to prevent unwanted stock market crashes.

  Is the current stock market decline welcome or unwelcome?

  At this point we do not know. In order to keep the dollar up, the basis of US power, the Federal Reserve has promised to raise interest rates, but always in the future. The latest future is next month. The belief that a hike in interest rates is in the cards keeps the US dollar from losing exchange value in relation to other currencies, thus preventing a flight from the dollar that would reduce the Uni-power to Third World status.

  The Federal Reserve can say that the stock market decline indicates that the recovery is in doubt and requires more stimulus. The prospect of more liquidity could drive the stock market back up. As asset bubbles are in the way of the Fed’s policy, a decline in stock prices removes the equity market bubble and enables the Fed to print more money and start the process up again.

  On the other hand, the stock market decline last Thursday and Friday could indicate that the players in the market have comprehended that the stock market is an artificially inflated bubble that has no real basis. Once the psychology is destroyed, flight sets in.

  If flight turns out to be the case, it will be interesting to see if central bank liquidity and purchases of stocks can stop the rout.

  

  

  

  

  

• Is This The Next Dollar Peg To Fall?

  On Monday, we showed you the dramatic visual evidence in support of Kazakh PM Karim Massimov’s contention that “at the end of the day, most of the oil-producing countries will go into the free floating regime [including Saudi Arabia and the United Arab Emirates because] for the next three to five, maybe seven years, the price for commodities will [not] come back to the level that it used to be at in 2014.” 

  Expectations for an FX regime change in Saudi Arabia in the face of a ballooning budget gap and the first current account deficit in a decade are readily apparent in riyal 12-month forwards and just to drive the point home, have a look at the following, which shows that anticipation for a dirham deval is running at a veritable fever pitch: 

  

  For more on the genesis of the “new era”, see “Why It Really All Comes Down To The Death Of The Petrodollar.”

  

  

  

  

  

• Aug 25 – China Bloodbath Rattles Global Markets

  EMOTION MOVING MARKETS NOW: 3/100 EXTREME FEAR

  PREVIOUS CLOSE: 5/100 EXTREME FEAR

  ONE WEEK AGO: 12/100 EXTREME FEAR

  ONE MONTH AGO: 10/100 EXTREME FEAR

  ONE YEAR AGO: 34/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 10.07% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility: EXTREME FEAR The CBOE Volatility Index (VIX) is at 40.74 and indicates that investors remain concerned about declines in the stock market.

  Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows is slightly greater than the number hitting highs and is at the lower end of its range, indicating extreme fear.

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
  

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B)

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL)

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – IT’S THE JERKS

   

  UNUSUAL ACTIVITY

  IDTI Vol weakness SEP 19 PUT ACTIVITY @$1.25 on offer 4500+ Contracts

  SLB SEP 80 PUT ACTIVITY @$1.31 on offer 4000+ Contracts

  PYPL SEP WEEKLY4 PUTS on the BID @$1.35 3700 Contracts

  SPLS DEC 15 CALLS on the OFFER @$.90-.95 6000 Contracts

  SEMI – CEO Purchased $300k+ total

  AVHI Director Purchase 1,920 @$ 13.9989 Purchase 1,280 @$13.99

  More Unusual Activity…

   

  HEADLINES

   

  China bloodbath rattles global markets

  Stocks, dollar softer as commodities hammered

  WTI settles at 6.5yr lows at $38.24/bbl

  US 10y yield briefly dips below 2% on flight to safety

  VIX spikes to highest in three years

  WH: US Treasury closely monitoring financial markets

  Ex US Tsy Sec Summers: ‘Far from clear’ next Fed move a hike

  SF Fed: Fed not likely to be misled by noise in GDP and PCE data

  NABE Policy Survey: 77% See Liftoff in 2015; 37% Expect Sept

  DoubleLine’s Gundlach sees another ‘major leg down’ in US stocks

  German Dax equity index technically enters bear market

  BoE asked to review code of conduct for rate-setters

  ECB PSPP: EUR279.761B (Prev EUR269.875B)

  ECB CBPP3: EUR1090.179B (Prev EUR108.059B)

  ECB ABSPP: EUR11.218B (Prev EUR10.961B)

   

  GOVERNMENTS/CENTRAL BANKS

  SF Fed: Fed not likely to be misled by noise in GDP and PCE data

  White House: US Treasury Department is closely monitoring financial markets –Livesquawk

  Fed RRP (24 Aug): $73.8bn and 32 bidders (prev 35 bidders, $92.4bn) –Livesquawk

  Ex US Tsy Sec Summers: ‘Far from clear’ next Fed move a hike –Twitter

  NABE Policy Survey: 77% See Liftoff in 2015; 37% Expect Sept –MNI

  FORECASTS: Barclays pushes call for Fed hike from Sept to March -FT

  BlackRock’s Rieder: ‘Window is closing’ on Fed to move in September –Rtrs

  LOOK AHEAD: What to expect from the Fed’s Jackson Hole meeting –BBG

  UK FinMin Osborne: China not a specific G20 item –ForexLive

  BoE asked to review code of conduct for rate-setters –CityAM

  OVERNIGHT: Japan Abe: Sympathises with BoJ difficulty in hitting infl tgt amid oil drop –MNI

  GREECE: Popular Unity party will get the baton to try and form a government –Koutsomitis

  GREECE: Moody’s: Tsipras resignation a credit positive for Greece

  GEOPOLITICS

  North, South Korea reach deal to ease tensions –Yonhap

  FIXED INCOME

  US 10y yield briefly dips below 2%, first time since April –WSJ

  US 10y B/E rate below 1.5%, first time since May 2009 –FT

  US HY squeezed by rush to exit –FT

  ECB PSPP (21 Aug): EUR279.761B (Prev EUR269.875B)

  ECB CBPP3: EUR1090.179B (Prev EUR108.059B)

  ECB ABSPP: EUR11.218B (Prev EUR10.961B)

  Eonia closes -0.126% (prev -0.119) –Livesquawk

  UK DMO planning 2 short, 2 medium, 3 long, 3 linker issues next Qtr –MNI

  FX

  USD: Dollar under pressure after China rout –Rtrs

  USD COMMENT: The Fed is looking at a very different dollar than Wall St –BBG

  EUR: Euro climbs to new 8-month high vs USD –FT

  EUR COMMENT: Euro shorts still have a big buffer to play with –ForexLive

  CAD: Canadian Dollar Hits 11-Year-Low Against US Dollar –WSJ

  ILS: Shekel on the up after rate decision –FT

  ZAR: South Africa rand hits all-time low against the dollar –BBC

  ZAR: SARB Says Could Consider FX Intervention If Fin. Stability Is Risked

  HKD: Bears look to HK dollar risks –FT

  ENERGY/COMMODITIES

  CRUDE: WTI futures settle 5.5% lower at $38.24 per barrel –Livesquawk

  CRUDE: Brent futures settle 6.1% lower at $42.69 per barrel –Livesquawk

  CRUDE: Oil slides to 6-year low as commodities tumble –FT

  CRUDE: East Libyan state oil firm wants to discuss contracts –Malta Times

  COMMODS: Broad commodities selloff after China Black Monday — WSJ

  METALS: Gold climbs to fresh 7-week high as global equities, U.S. dollar tumble –Investing

  EQUITIES

  COMMENT: DoubleLine’s Gundlach sees another ‘major leg down’ in US equities –Rtrs

  VOLS: VIX rises to highest level in over 3 years –MW

  BIOTECH: US biotech index enters bear market –FT

  M&A: Southern Co becomes No.2 U.S. utility with $8 bln AGL deal –Rtrs

  M&A: FTC clears Pfizer acquisition of Hospira –StreetInsider

  M&A: Monsanto sweetens offer for Syngenta to CHF470 a share –Rtrs

  M&A: Markit to Buy Foreign Exchange Trading Company DealHub –WSJ

  TECH: Apple’s Cook: Still seeing strong growth in China –CNBC

  TECH: Apple CEO Tim Cook may have violated SEC rules with Jim Cramer email –MW

  O&G: Shell eyes Iran, to pay debt when sanctions end –Rtrs

  SUPERMARKETS: Carrefour Announces Planned Acquisition of Rue du Commerce –BW

  EXCHANGES: Nasdaq poised to launch FX trading platform-top executive –StreetInsider

  AUTOS: GM China joint venture building $470 mln green car plant –Rtrs

  EMERGING MARKETS

  CHINA: China stocks drop 8.5% –Guardian

  CHINA PRIMER: China’s latest stock market crash: the basics

  China NDRC: China expects economic growth to be stable in H2 2015 –ForexLive

   

  China pension fund to invest in stock market –BBC

   

  

  

  

  

  

• The Stunning Comparisons Between The "Flash Crash" Of August 24, 2015 And May 6, 2010

  Following today’s stunning not one but countless flash crashes, many have asked: just how was the flash crash of August 24, 2015 different from that of May 6, 2010. The answer is shown in the Nanex chart below, and the simple summary is that 2015’s was orders of magnitude worse than 2010’s as a result of E-Mini liquidity that was orders of magnitude worse throughout the entire day.

  In fact, the trough liquidity on May 6 is where ES liquidity was throughout the entire day on August 24, 2015.

  

   

  The outcome of this total liquidity devastation was what we summarized just after the open:

  Curious why few if any traders can actually execute any trades, whether buys or sells? The reason is that despite the relative calmness of the index prints, what is going on beneath the surface is an unprecedented wave of constant halt and unhalts as all stop levels were taken out, many in circuit breaker territory, making it virtually impossible for any matching enginge to, well, match buyers and sellers. The resulting halts made it impossible for regular traders to step in, requiring central banks to buy via the CME’s Central Bank Incentive Program, to restore some market stability.

  

   

  So to be technically accurate, what happened in May 2010 was one marketwide flash crash, while today we had a market paralysis which was the direct result of countless distributed, isolated mini flash events, all of which precipitated the market’s failure for the first 30 minutes of trading.

  Nanex provides some other truly amazing charts showing the first minutes of trading and how there was practically no market for a period of about 30 minutes due to every single HFT algo going haywire almost as the same time…

  At the open in $AAPL today, the price varied between $92 and $97. Many, many times. Each dot a trade pic.twitter.com/zOQ5eYYzgJ

  — Eric Scott Hunsader (@nanexllc) August 24, 2015

  $GE liquidity during the open. Wow. pic.twitter.com/Tb8KOf6l56

  — Eric Scott Hunsader (@nanexllc) August 24, 2015

  Opening liquidity in $JPM was crazy: pic.twitter.com/5xpad4L9Qk

  — Eric Scott Hunsader (@nanexllc) August 24, 2015

  … in the process leading to what may have been the most dramatic collapse in ETF logic to date.

  The market farce was so profound, and the outcry from the handful of people who still care about “markets” large enough that even CNN had no choice but to opine:

  Normally there are a few dozen trading halts a day. But Monday wasn’t a normal day with 1,200 halts. “That’s huge. I’ve never seen that many halts,” said Dennis Dick, a market structure consultant at Bright Trading. Dick said he believes the stock market may have suffered even worse losses if it weren’t for the trading pauses. “The circuit breakers are designed to prevent a full-on flash crash. Those circuit breakers kind of saved the day,” he said.

  Maybe, then again, the circuit breakers gave us a glimpse into the ETF endgame:

  The circuit breakers were implemented more than 600 times on ETFs, the increasingly-popular securities that trade like stocks. ETFs hold a basket of stocks, removing the risk of betting on a single company. ETF.com examined the pricing action and discovered at least eight ETFs that showed “flash-crash” style drops at the opening of trading.

   

  * * *

  ETFs that experienced panic selling are far larger and wouldn’t be expected to have that kind of turbulence. For example, the iShares Select Dividend ETF (DVY) plummeted as much as 35% at its lows.

   

  That’s a stunning move considering this BlackRock (BLK)-backed ETF is worth over $13 billion and is focused on stable American stocks that have a long history of paying dividends.

   

  None of this ETF’s top holdings — like Lockheed Martin (LMT), Philip Morris Internationa (PM)l and McDonald’s (MCD) — suffered losses north of 11%.  It was even worse for the Guggenheim S&P 500 equal weight ETF (RSP). The $10 billion fund, which holds some well-known stocks like Chipotle (CMG) and ConAgra (CAG), plummeted nearly 43% at one point on Monday.

   

  Another popular ETF that seeks to capitalize on the booming cybersecurity business plummeted as much as 32%. The ETF, PureFunds ISE Cyber Security ETF (HACK), has a market value of more than $1.2 billion.

  Said otherwise, for minutes at a time, there was an unprecedented disconnect in ETF fair value as hedge funds sold off ETFs however correlation arbitrageurs were unable to capitalize on the discrepancy with the underlying leading to historic, and extremely lucrative divergences.

  At this point, experts are still scratching their heads over what may have caused these ETFs to nosedive. One possible explanation is that liquidity providers — think high-speed traders and other Wall Street firms — charged with stabilizing the market weren’t there when needed. That’s what happened during the flash crash of 2010.

   

  “When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over,” said Matt Hougan, CEO of ETF.com. Despite the steep selloffs, Hougan said ETFs generally “functioned well” during the market difficulty.

  The bottom line, as Themis Trading’s Joe Saluzzi summarized, “Something went wrong here. Somewhere along the way, the ETF pricing model was broken today.” Noting that there are more than $3 trillion in ETF assets, Saluzzi said: “They better hope they don’t have a confidence problem there.”

  The good news is that with liquidity inevitably collapsing ever further to a state of near singularity with ongoing central bank interventions, and with markets broken beyond repaid, we will very soon have a repeat flash crash like today, one which will provide enough satisfactory answers to the question of just happened that lead to a market that was completely broken for nearly an hour, and where the VIX was so very off the charts, the CBOE was afraid to show it for at least thirty minutes.

  One thing is certain though: while the market dies a slow, painful, miserable death, the biggest HFTs will continue pocketing millions. Such as Virtu: “Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive.”

  “Our firm is made for this kind of market,” said the CEO, Douglas Cifu.

  

  Correction: your firm made this kind of market.

  

  

  

  

  

• Behold: Insanity

  This is not normal… Dow futures moved over 4,500 points intraday today!!!

   

  

  

  

  

  

  

• Why Government Hates Cash

  Submitted by Joseph Salerno via The Mises Institute,

  In April it was announced that Greece was imposing a surcharge for all cash withdrawals from bank accounts to deter citizens from clearing out their accounts. So now the Greeks will have to pay one euro per 1,000 euros that they withdraw, which is one-tenth of a percent. It doesn’t seem very big, but the principle at work is extremely big because what they’re in effect doing is breaking the exchange rate between a unit of bank deposits and a unit of currency.

  Why would they do this? Why would they want to do this? Well, it’s one of the anti-cash policies that mainstream economists have vigorously been promoting.

  PAVING THE WAY FOR NEGATIVE INTEREST

  To make the calculations easier, and to illustrate the effect, let’s say that the Greek “surcharge” is ten dollars for every 100 dollars withdrawn. Now, instead of being able to convert one euro in your checking account into one euro in cash, on demand, you will only be able to buy one euro in cash by spending 1.10 euros in your bank accounts. That’s a negative 10-percent rate in some sense. That is to say that you can only take out one euro from the bank if you’re willing to pay 1.10 euros. So, you would only really get ninety cents for every dollar that you wanted to withdraw and that’s very significant because this means it will be more expensive to buy an item with cash than with bank deposits.

  At the same time, the Greek government made it very clear that if you deposit the cash in the banks, you don’t get 1.10 euros of bank money for every euro you deposit.

  So the system is now structured to lock the money in the banks. Now, what does that allow them to do? If you lose 10 percent every time you withdraw one euro in cash, they can lower the interest rate that you get on bank deposits to negative 5 percent, or negative 6 percent. You still wouldn’t withdraw your cash from the banks even if the interest rate went negative.

  What we are witnessing is a war on cash in which governments make it either illegal or inconvenient to use cash. This, in turn, allows governments the ability to spy on and regulate financial transactions more completely, while also allowing governments more leeway in manipulating the money supply.

  THE ORIGINS OF THE WAR ON CASH

  It all started really with the Bank Secrecy Act of 1970, passed in the US, which requires financial institutions in the United States to assist US government agencies in detecting and preventing money laundering. That was the rationale. Specifically, the act requires financial institutions to keep records of cash payments and file reports of cash purchases or negotiable instruments of more than $10,000 as a daily aggregate amount. Of course, this is all sold as a way of tracking criminals.

  The US government employs other means of making war on cash also. Up until 1945, there were 500 dollar bills, 1,000 dollar bills, and 10,000 dollar bills in circulation. There was even a 100,000 dollar bill in the 1930s with which banks made clearings between one another. The US government stopped issuing these bills in 1945 and by 1969 had withdrawn all from circulation. So, in the guise of fighting organized crime and money laundering, what’s actually occurred is that they made it very inconvenient to use cash. A one hundred dollar bill today has $15.50 worth of purchasing power in 1969 dollars, when they removed the last big bills.

  THE PROBLEM IS INTERNATIONAL

  The war on cash in Sweden has gone probably the furthest and Scandinavian governments in general are notable for their opposition to cash. In Swedish cities, tickets for public buses no longer can be purchased for cash; they must be purchased in advance by a cell phone or text message — in other words, via bank accounts.

  The deputy governor of the Swedish Central Bank gloated, before his retirement a few years back, that cash will survive “like the crocodile,” even though it may be forced to see its habitat gradually cut back.

  The analogy is apt since three of the four major Swedish banks combined have more than two-thirds of their offices no longer accepting or paying out cash. These three banks want to phase out the manual handling of cash at their offices at a very rapid pace and have been doing that since 2012.

  In France, opponents of cash tried to pass a law in 2012 which would restrict the use of cash from a maximum of 3,000 euros per exchange to 1,000. The law failed, but then there was the attack on Charlie Hebdo and on a Jewish supermarket, so immediately the state used this as a reason for getting the 1,000 maximum limit. They got their maximum limit. Why? Well, proponents claim that these attacks were partially financed by cash.

  The terrorists used cash to purchase some of the stuff they needed. No doubt, these murderers also wore shoes and clothing and used cell phones and cars during the planning and execution of their mayhem. Why not ban these things? A naked barefoot terrorist without communications is surely less effective than the fully clothed and equipped one.

  Finally, Switzerland, formerly a great bastion of economic liberty and financial privacy, has succumbed under the bare-knuckle tactics of the US government. The Swiss government has banned all cash payments of more than 100,000 francs (about $106,000), including transactions involving watches, real estate, precious metals, and cars. This was done under the threat of blacklisting by the Organization of Economic Development, with the US no doubt pushing behind the scenes. Transactions above 100,000 francs will now have to be processed through the banking system. The reason is to prevent the catch-all crime, of course, of money laundering.

  Chase Bank has also recently joined the war on cash. It’s the largest bank in the US, a subsidiary of JP Morgan Chase and Co., and according to Forbes, the world’s third largest public company. It also received $25 billion in bailout loans from the US Treasury. As of March, Chase began restricting the use of cash in selected markets. The new policy restricts borrowers from using cash to make payments on credit cards, mortgages, equity lines, and auto loans.

  Chase even goes as far as to prohibit the storage of cash in its safe deposit boxes. In a letter to its customers, dated April 1, 2015, pertaining to its “updated safe deposit box lease agreement,” one of the high-lighted items reads, “You agree not to store any cash or coins other than those found to have a collectible value.” Whether or not this pertains to gold and silver coins with no collectible value is not explained, but of course it does. As one observer warned, “This policy is unusual, but since Chase is the nation’s largest bank, I wouldn’t be surprised if we start seeing more of this in this era of sensitivity about funding terrorists and other illegal causes.” So, get your money out of those safe deposit boxes, your currency and probably your gold and silver.

  ONLY (SUPERVISED) SPENDING IS ALLOWED

  Gregory Mankiw, a prominent macroeconomist, came up with a scheme in 2009: the Fed would announce that a year from the date of the announcement, it intended to pick a numeral from 0 to 9 out of a hat. All currency with a serial number ending in that numeral, would instantly lose status as legal tender, causing the expected return on holding currency to plummet to -10 percent. This would allow the Fed to reduce interest rates below zero for a year or even more because people would happily loan money for say, -2 percent or -4 percent because that would stop them from losing 10 percent.

  Now the reason given by our rulers for suppressing cash is to keep society safe from terrorists, tax evaders, money launderers, drug cartels, and other villains real or imagined. The actual aim of the ?ood of laws restricting or even prohibiting the use of cash is to force the public to make payments through the financial system. This enables governments to expand their ability to spy on and keep track of their citizens’ most private financial dealings, in order to milk their citizens of every last dollar of tax payments that they claim are due.

  Other reasons for suppressing cash are (1) to prop up the unstable fractional reserve banking system, which is in a state of collapse all over the world, and (2) to give central banks the power to impose negative nominal interest rates. That is, to make you spend money by subtracting money from your bank account for every day you leave it in the bank account and don’t spend it.

  

  

  

  

  

• Did Tim Cook Violate Regulation "Fair Disclosure" By Emailing Jim Cramer To Save AAPL Stock This Morning

  Earlier today, as AAPL stock was plummeting and had lost a whopping $75 billion in market cap, dropping as low as $92/share, CNBC’s Jim Cramer pulled a rabit out of a hat, or in this case a previously undisclosed email out of his inbox. An email from AAPL CEO Tim Cook which said the following (as subsequently conveyed by Cramer to CNBC viewers):

  Jim,

   

  As you know, we don’t give mid-quarter updates and we rarely comment on moves in Apple stock. But I know your question is on the minds of many investors.

   

  I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August. Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks.

   

  Obviously I can’t predict the future, but our performance so far this quarter is reassuring. Additionally, I continue to believe that China represents an unprecedented opportunity over the long term as LTE penetration is very low and most importantly the growth of the middle class over the next several years will be huge.

   

  Tim

  While we are delighted by Tim Cook’s subjective take of AAPL’s Chinese prospects, we have a different question: where is the public filing that accompanies this letter which constitutes nothing short of a private business update with an outside, and unregulated by Apple, market cheerleader?

  Because as the AAPL reaction to Tim’s letter, which was clearly in Cramer’s private possession for at least 1 millisecond before it was made public (and thus we don’t know who else may have had access to it before its public dissemination), just how is this not a Regulation Fair Disclosure violation?

  Needless to say, the fate of AAPL, which is the most important stock in the world, held by a record 181 hedge funds, determines the intraday (and not only) fate of the entire market.

  Remember: the fate of AAPL determines the fate of the US stock market pic.twitter.com/04NAbgVR2k

  — zerohedge (@zerohedge) August 24, 2015

  And for those who may have missed it, this is what AAPL’s stock has done today, ever since this clearly market moving letter, helped AAPL regain an unprecedented $80 billion in market cap since the lows.

  

   

  We are eagerly looking to find an 8K public filing of Tim Cook’s letter among AAPL’s EDGAR filings, even if it will have taken place hours after the market moving event, or alternatively, perhaps the SEC or any other authorities who were not too stunned to react today, can explain just why this is not a Reg FD violation?

  Then again, with AAPL leading the S&P rapidly into the green, we are confident this, too, will be promptly forgotten and swept under the carpet of “whatever it takes to keep the market green.”

  

  

  

  

  

• Coming To America? China Censors Bad Market Talk Amid Meltdown

  Back in July, after a dramatic unwind in the half dozen or so backdoor margin lending channels that had helped drive Chinese stocks to nosebleed levels triggered a terrifying 30% decline (vaporizing billions in paper profits in the process), the Politburo predictably stepped in to rescue the market. 

  However, when it started to become clear that a succession of declarations, directives, policy rate cuts, and even threats weren’t going to be enough to alleviate the pressure on equities, Beijing looked to take back the narrative by banning the use of certain undesirable phrases.

  
  

  Here’s what happened (as detailed in “China Bans Use Of Terms ‘Equity Disaster’ And ‘Rescue The Market’“):

  Although it’s not possible to know exactly what the mood is among Party officials in China regarding the inexorable slide in stock prices that’s unfolded over the course of the last three weeks, it’s reasonable to assume that at least some officials in Beijing are in the throes of Politburo panic after watching some $3 trillion in market value disappear into thin (and probably polluted) air. 

   

  Amid the turmoil, China has resorted to an eye-watering array of policy maneuvers, pronouncements, and plunge protection schemes aimed at arresting the slide.

   

  Nothing has worked.

   

  Not suspending compulsory liquidation for unmet margin calls, not billions in committed market support from brokerages, not a PBoC backstop for the CFSC, and not even a ban on selling by the Social Security Council. 

   

  And so, with every attempt to manipulate the market higher falling flat in the face of selling pressure from the hairdresser/ farmer/ banana vendor day trading crowd (which has now thrown in the towel on the whole “it’s easier than farm work” theory and now just wants to break even and head for the hills) the only thing left for China to do is “fix” the narrative.

   

  In other words, when banning selling doesn’t work, the logical next step is to ban talking about selling. As FT reports, one domestic journalist, who did not want to be named, said the government had banned local media from using the terms ‘equity disaster’ and ‘rescue the market’ in their reports on the stock market.”

  Given the above it shouldn’t come as a surprise that after Chinese stocks collapsed overnight, Beijing has reportedly banned discussion and forbade “negative market reports.”

  BREAKING: Chinese authorities issued notice to state media to censor negative market reports following #BlackMonday pic.twitter.com/hQ6vbksYtw

  — George Chen (@george_chen) August 24, 2015

  So with the censorship machine in high gear, Xi Jinping had better hope that Beijing can at least still exert some control over the narrative because as we saw over the weekend when angry investors captured the head of Fanya Metals Exchange, and as is clear from the outcry surrounding the chemical blast in Tianjin, the public is restless, and the collapse of the stock market might just be the catalyst for social upheaval.

  

  

  

  

  

• Return To Junk Status "Only A Matter Of Time" For Latin America's Most Important Economy: Barclays

  Brazil’s embattled President Dilma Rousseff suffered another setback on Monday when Vice President Michel Temer elected to drop his role as Rousseff’s day-to-day liaison in Congress.

  As Reuters reports, “Temer is an important ally of Rousseff and his decision will further hamstring the unpopular president, who is facing calls for her resignation or impeachment as the economy flounders.” Here’s more: 

  Temer’s decision is seen as a prelude to the departure of his Brazilian Democratic Movement Party (PMDB), the nation’s largest, from the governing coalition of the Workers’ Party to field its own candidate in 2018.

   

  Valor Economico newspaper reported on Friday that the PMDB would formally announce its decision to break with the Rousseff government at a party congress on Nov. 15.

   

  PMDB officials told Reuters the party would break with Rousseff’s coalition at some point because it plans to field its own presidential candidate in 2018, but it was not considering leaving this year. The PMDB controls both houses of Congress and its break with the government would seriously weaken Rousseff.

  The move comes as the government elected to drop one in four ministries in an effort to rein in spending although, as one Sao Paulo political analyst told Reuters, “[Temer’s decision] will reinforce market worries about the government’s ability to execute economic policies.”

  Those worries come as the country struggles to cope with both fiscal and current account deficits and a nasty bout of stagflation, all of which we’ve discussed at length. Visually, the problem looks like this:

  

  

  The political and economic turmoil (with the latter punctuated by a horrendous unemployment print for July) couldn’t come at a worse time.

  The country sits at the center of the global EM unwind and between the uncertainties surrounding the government’s ability to implement austerity combined with the pain from falling commodity prices and sluggish demand from China, there are now very real questions about how long the country can maintain its investment grade rating.

  Here’s Barclays with more:

  The global and domestic environments have soured, and the clock is ticking for Brazil to prove its creditors that it still belongs to the investment grade club. The Fed is about to embark on policy normalization that should, albeit gradually, put the period of easy dollar funding behind us. China seems to be accepting the inevitable fact that its large economy is structurally slowing and has so far resisted fighting the slowdown with fiscal stimulus as it did in the past. Commodity prices have been responding to this new outlook for some time, and they now look particularly vulnerable following China’s recent steps. 

   

  For Brazil, the global backdrop, while still better than during most of its history, feels hostile relative to the one it faced in its recent past.

   

  As they should, excesses have been exposed by tough times; however, this time, policy mismanagement likely carries more blame than complacency to the now gone good times. Brazil’s fiscal slippage accelerated ahead of the elections (Figure 1), in line with most of LatAm’s well-documented historical pattern. To varying degrees, most observers were not surprised by the Rousseff administration’s decision to boost spending before the polls. The surprise, instead, was how it handled it after winning the election.

   

  The Petrobras corruption scandal eroded what was left of President Rousseff’s already damaged political goodwill.

   

  This backdrop has left the country in a recession, its fiscal accounts shaky and consumer sentiment depressed. Latent social unrest may deprive the already weakened administration of the vigor needed to keep the country from losing its hard-earned investment grade rating.

   

  The country is at a crossroads and markets are taking note. With the economy contracting and the central bank raising rates, 2y inflation breakevens are receding from recent highs. At the same time, however, long-dated breakevens are creeping up, likely a sign of rising fiscal concerns. Markets may be pricing risks that Brazil’s challenging fiscal dynamics could end up being monetized (Figure 2).

   

  Doubts about the fiscal plan are thus raising questions of whether the central bank will remain committed to honor its inflation target at all times. The central bank, which is not independent, will be left between a rock and a hard place. On one hand it will be tempted to ease rates to support its battled economy as soon as near-term inflation and expectations stabilize. On the other, it will have to keep a hawkish eye on long-dated breakevens to avoid worsening credibility concerns.

   

  

  *  *  *

  The takeaway: “We conclude that, under current circumstances, it is only a matter of time until Brazil loses its investment grade status.”

  Or, summed up in a picture:

  
  

  

  

  

  

  

• In Less Than 10 Years, The Federal Reserve Has Driven Millions Of American Women Into Prostitution

  Submitted by SouthBay Research

  Hookernomices: In less than 10 years, the Federal Reserve Has Driven Millions of American Women into Prostitution

  Mainstreaming Prostitution: Beginning last year, the Bank of England included prostitution in GDP measurements.  According to the Office of National Statistics, prostitution generated $9B a year, adding 0.7% to the UK GDP.  They aren’t alone: Sweden, Norway and a few other European countries already include it.  And if you can measure it, you can tax it.  And legalization is necessary for measurement.

  Prostitution is legal in most of the developed world.  In fact, of the G20 countries, prostitution is illegal in just 5: China, South Korea, Saudi Arabia, South Africa, and, of course, the United States.

  Mainstreaming Prostitution US-Style: Seeking Arrangement

  Leave it to the 1% to find a way around the law.

  SeekingArrangement.com (SA) is a website catering to men and women who exchange sex for compensation, like an allowance or paying bills like student loans and rent.  It has 4.5M registered users

  • 3.3M Sugar Babies
  • 1.2M Sponsors (aka Sugar Daddies & Mommies)
  • Average age of Sugar Baby: 21
  • Average age of Sugar Daddy/Mommy: 45
  • Average Income of Sugar Daddy/Mommy: $500K
  • Average compensation: $5K per month

  

  The Economic Relevance of SA – It’s where the 1% converges with the 99%.

  Earning $500K or more and spending $60K per year on a mistress: this is the 1%.  Needing help with college loans and rent: this is the other 99%.

  It’s not an online dating website.  If someone wants a relationship or a liaison, there are plenty of other sites like Craigslist and Ashley Madison.

  Is it a prostitution website?  According to SA they are not, repeat not, engaged in prostitution.  Their disclaimer: “An arrangement is not an escort service.  SeekingArrangement in no way, shape or form supports escorts or prostitutes using our website for personal gain.” 

  Seeking Arrangement: A Form of Prostitution, for the 1%.  As a prostitution website, it may not be as explicit as WhatsYourPrice or Backpage, but SA has at its core a business transaction: companionship with extras in return for cash and/or the equivalent.  Or, as they call it themselves, a dating site with “mutually beneficial relationships.”  And the Sugar Babies aren’t paid, they are given an allowance.  A financial arrangement for sex is prostitution, and when it involves millions of participants, it’s worth measuring.

  Why Can’t Millions of Young Women Afford Rent

  SeekingArrangement: A Sign of Today’s Financial Stress 

  Millions of college students and recent grads are struggling to make ends meet.  Talk about excess supply: there is a 3:1 ratio of Babies to Daddies/Mommies.  Sugar Babies need help with their basics: college loans, rent, & car payments.  (Which works well for Daddies/Mommies because these can be hidden as business expenses, which is helpful when dealing with the IRS and/or the spouse.)

  The Unbearable Weight of Rent  Rent is now 40% of income in most major metro cities.  It’s 50% in New York. 

  Following the recent Recession, home ownership began to plunge while rental vacancies dropped.  Clearly people were being squeezed out of home ownership and forced into renting.  Home ownership has collapsed to 40 year lows, rental vacancies has dropped to 30 year lows.  The connection is simple: housing is unaffordable and more people have to rent.

  

  But how can this be?  The National Realtor Association’s Housing Affordability Index assures us that housing affordability has never been better.  Young people should be snatching up homes and leaving apartments.

  

  The Reality: Housing is Incredibly Unaffordable

  The difference between buying a house today and buying a house in the last cycle is that yesterday’s buyers didn’t need a down payment.  Today they need 20%.

  San Francisco’s median home price just hit $1M.  What recent college graduate has $200K cash for the down payment?  It’s like saying Disneyland rides are free, why aren’t more families going – and conveniently forgetting about the $100 per person entry fee, super high airfares, and hotel costs

  For young people, renting is the only option.  And that presents another problem.

  Out of Control Rent

  From 2000-2014, incomes have grown 25% while rents have grown 53%. 
  Housing used to require 25% of incomes.  Today it is bumping 40% in all major metro areas.  50% in New York.

  The result: today’s young people can’t buy homes.  And neither can they afford rents. 
  That’s why millions have turned to the newly legalized form of prostitution: Seeking Arrangement.

  How The Fed Created the Jump in Prostitution 

  Real estate inflation is outpacing incomes by such a wide margin thanks to loose monetary policy under Greenspan and then Bernanke.  It has led to real estate being bid up, making both homes and rental properties more expensive.  Landlords in turn pass along the higher prices.

  It’s a case of economic policy run amuck.  Real estate development can boost the economy, under the right conditions: lots of jobs and economic activity get generated when homes are built or refurbished.  And there is the wealth effect when home prices rise.  But when taken to extremes – as it is today and was in the previous economic cycle consumer spending gets squeezed out in order to pay mortgages and rent.  It becomes an incredibly unproductive use of capital.

  (Almost as unfortunate, having created the problem of runaway housing inflation, the government has decided that the best solution is to address it via wage inflation by dictating higher minimum wages.)  

  Simply put, we have a surge in college-age prostitution and it’s the Fed’s fault. It gives new meaning to the term “perverse monetary policies”

  

  

  

  

  

• Marc Faber: The Global Economy Is Entering An Epic Slump

  Submitted by Adam Taggart via PeakProsperity.com,

  Famed investor and author of the Gloom, Doom, Boom Report, Marc Faber, returns to the podcast this week to discuss the slowdown in the global economy, signs of which he claims are multiplying fast all around the world.

  He predicts the next year is going to be an especially bruising one for investors, and recommends a combination of diversification and defense for those with financial capital to protect:

  I do not believe that the global economy is healing. I believe that the global economy is heading into a slump once again.

   

  We have a slowdown practically everywhere and if you take out the fudging of statistics, the economy for the median household everywhere in the world is not doing particularly well. If the global economy were doing so fantastically well, how would it be that commodities collapsed to the extent that they have declined? Or how would it be that the currencies of American markets and some of them have actually declined by more than 50 percent against the U.S. dollar in the last three years. How would this happen? So I do not believe that we have a healing of the global economy. On the contrary, I believe that the global economy is slowing down and that essentially equity markets are not particularly attractive.

   

  Preceding every bubble, you have a huge expansion of credit. That was the case in the period ’97 to 2000, and in the period 2003 to 2007, and on previous occasions in economic history. In the case of China, credit as a percent of the economy has grown by more than 50% over the last five years, which is essentially a world record. And in my view, its economy is slowing down rapidly. I had a drink with a friend of mine the other day who has car dealerships, luxury car dealerships, in China. He said sales have hit a brick wall. Not 'slowed down'; a brick wall. And indeed, exports were down and car sales were down in July. I think that this will then spill over again into other emerging economies because China is a large buyer of commodities and a large trading partner to other countries.

   

  I travel extensively. I can see roughly what is going on. So I really believe that the American market complex is not doing well at the present time. And everywhere, people basically are faced with rising costs of living and essentially declining currencies so that the persons in power goes down. So it's not a pretty picture. 

  Click the play button below to listen to Chris' interview with Marc Faber (37m:21s)

   

  

  

  

  

  

• Guest Post: Is Trump Worse Than Hitler?

  Submitted by James H. Kunstler via Kunstler.com,

  Even the formerly august New York Times grants that Donald J. Trump has ignited a voter firestorm of grievance against a dumb show election process that rewards a craven avoidance of real issues. Immigration is actually a stand-in for the paralysis, incompetence, overreach, and bloatedness of government generally in our time — but it is a good doorway into the larger problem.

  Immigration is a practical problem, with visible effects on-the-ground, easy to understand. I’m enjoying the Trump-provoked debate mostly because it is a pushback against the disgusting dishonesty of political correctness that has bogged down the educated classes in a swamp of sentimentality. For instance, Times Sunday Magazine staffer Emily Bazelon wrote a polemic last week inveighing against the use of the word “illegal” applied to people who cross the border without permission on the grounds that it “justifies their mistreatment.” One infers she means that sending them back where they came from equals mistreatment.

  It’s refreshing that Trump is able to cut through this kind of tendentious crap. If that were his only role, it would be a good one, because political correctness is an intellectual disease that is making it impossible for even educated people to think — especially people who affect to be political leaders. Trump’s fellow Republicans are entertainingly trapped in their own cowardliness and it’s fun to watch them squirm.

  But for me, everything else about Trump is frankly sickening, from his sneering manner of speech, to the worldview he reveals day by day, to the incoherence of his rhetoric, to the wolverine that lives on top of his head. The thought of Trump actually getting elected makes me wonder where Arthur Bremer is when we really need him.

  Did any of you actually catch Trump’s performance last week at the so-called “town meeting” event in New Hampshire (really just a trumped-up pep rally)? I don’t think I miscounted that Trump told the audience he was “very smart” 23 times in the course of his remarks. If he really was smart, he would know that such tedious assertions only suggest he is deeply insecure about his own intelligence. After all, this is a man whose lifework has been putting up giant buildings that resemble bowling trophies, some of them in the service of one of the worst activities of our time, legalized gambling, which is based on the socially pernicious idea that it’s possible to get something for nothing.

  I daresay that legalized gambling has had a possibly worse effect on American life the past three decades than illegal immigration. Gambling is a marginal activity for marginal people that belongs on the margins — the back rooms and back alleys. It was consigned there for decades because it was understood that it’s not healthy for the public to believe that it’s possible to get something for nothing, that it undermines perhaps the most fundamental principle of human life.

  Trump’s verbal incoherence is really something to behold. He’s incapable of expressing a complete thought without venturing down a dendritic maze of digressions, often leading to an assertion of how much he is loved (another sign of insecurity). For example, when he attacked Jeb’s (no last name necessary) statement that we have to show Iraqi leaders that “we have skin in the game,” Trump invoked the “wounded warriors,” saying “I love them. They’re everywhere. They love me.” In the immortal words of Tina Turner, “what’s love got to do with it?”

  Trump’s notion that he can push around world leaders such as Vladimir Putin by treating them as though they were president of the Cement Workers’ Union ought to give thoughtful people the vapors. It doesn’t seem to occur to Trump that other countries could easily get pugnacious towards us. He would have us in a world war before the inaugural parade was over.

  The trouble is that it’s not inconceivable Trump could get elected. Farfetched, perhaps, but not out of the question. The USA is heading for a very rough patch of history — as those of you with your eyes on the stock indexes lately may suspect. The country stands an excellent chance of waking up some morning soon to discover it is broke and broken. When that happens, all the anxiety and animus will be focused on looking for scapegoats, and they are likely to be the wrong ones. World leaders considered Hitler a clown in the early going, too, you know. But the Germans were wild about him. He pushed a lot of the right buttons under the circumstances. Trump is worse than Hitler. And the American people, alas, are now surely a worse lot of ignorant, raging, tattooed slobs than the German people were in 1933. Be very afraid.

  

  

  

  

  

• The Ghost Of 1997 Beckons, Can Asia Escape? Morgan Stanley, BofA Weigh In

  Needless to say, the past 24 hours have done nothing to dispel worries that we’re spiraling towards a repeat of the Asian Financial Crisis. 

  Asia ex-Japan currencies have been battered along with their EM counterparts worldwide on the back of China’s move to devalue the yuan which seemed to telegraph Beijing’s concern about the true state of the country’s flagging economy.

  This has driven commodities to their lowest levels of the 21st century (yes, you read that correctly), pressuring EM FX from LatAm to Asia-Pac and sparking worries that emerging economies – even those armed with far higher FX reserves than they held two decades ago – may be ill-equipped to cope with accelerating outflows.

  Indeed the similarities between the current crisis and that which unfolded in 1997/98 were so readily apparent that many analysts began to draw comparisons and that may have added fuel to fire over the past week.

  Now, there seems to be a concerted effort to calm the market by explaining that while there are similarities, there are also differences. Of course this goes without saying. No two crises are identical and as the old saying goes, “history doesn’t repeat, but it does rhyme,” and to the extent some of the imperiled economies are in better shape to defend themselves this time around (e.g. because they are in a better position from an FX reserve and capital account perspective) that’s a positive, but when attempting to cope with a meltdown, it may be more important to look at where things are similar and on that note, here’s some color from Morgan Stanley and BofAML.

  *  *  *

  From Morgan

  As highlighted in our answer to the question on “What is wrong with Asia’s macro story”, the region today has a number of similarities with the 1990s cycle in terms of a misallocation led by a low real rate environment led and then an adjustment cycle triggered by reversal in US Fed monetary policy.

  Specifically: 

  • A low real rates environment – aided by starting point of high excess saving and easy monetary policy in the US. 
  • Domestic misallocation – in both cycles, there has been trailing misallocation of resources into unproductive areas. This is best seen in the rise in the region’s ICOR in both cycles. 
  • Debt build-up – Since 2008, the region’s debt to GDP has risen by 52ppt, to 206% in 2014. Similarly in the 1990s, there had been a buildup of debt in the run-up to the Asian Financial Crisis. 
  • External trigger – the adjustment phase in both cycles had been triggered by the rise in US real rates and appreciation of the US dollar (though in this cycle, the slowdown in China has been an additional factor in driving the adjustment). 

  

   

  *  *  *

  From BofAML:

  Can Asia escape the ghost of 1997?

  The aftermath of CNY devaluation

  Asian financial markets are seeing an intensification of selling pressure in the aftermath of the recent CNY devaluation. Investors are now asking if this is a repeat of the 1997 Asian financial crisis that was preceded by China’s 1994 devaluation. Our Asia Chief Economist, Hak Bin Chua, touched upon the similarities last week (see Tremors from China’s devaluation), but in light of the impending sense of crisis it is worthwhile exploring the issue further and asking whether Asia can escape history repeating itself. 

  Revisionist history and the blame game

  The CNY’s recent depreciation and subsequent sell-off in global markets naturally prompts investors to put the blame on China’s doorstep and revisit its 1994 depreciation as the cause of the 1997 Asia financial crisis. The difficulty in blaming China for the 1997 crisis is that its economy was much smaller at the time, and not integrated into the WTO trade system. Its “devaluation” resulted from a merging of two exchange rates (one for trade and another for investments) producing a net devaluation of 7-8% (according to World Bank estimates) as the bulk of Chinese exports were already sold at the swap market exchange rate. This measure is much lower compared to the nominal 33% devaluation.

  However, there are two alternative explanations for Asia’s 1997 crisis. The first is the “crony capitalism” narrative, in which Asia undertook unsustainable short-term FX borrowing to finance unsustainable current account deficits. This FX borrowing was guaranteed against implicit FX pegs that funded questionable investments. These investments were premised on the thesis of an Asian Miracle that proved unfounded and resulted in capital outflows and a collapse of Asian currency pegs.

  The second explanation is that the seeds of the Asian financial crisis were sown by the 1985 Plaza Accord, which was aimed at halting USD strength and reversing JPY weakness. Ultimately, the subsequent JPY appreciation deflated Japan’s economic bubble in the early 1990s. Asia then faced a triple whammy of slower Japanese growth, ensuing JPY depreciation and a Fed tightening cycle initiated in 1994.

  Japan vs China this time

  No doubt the truth lies somewhere in between these three narratives. But it is worth exploring the similarity between China and Japan. Indeed, the CNY has embarked on a sustained appreciation since its managed float in July 2005 under pressure from G7 countries to “rebalance” its economy.

  Chart 1 shows the similarity of the JPY REER appreciation since the Plaza Accord with the CNY appreciation since 2005 and the call from congressmen Graham and Schumer for a 30% appreciation. Another stylized feature of both economies was their sustained property market appreciation and asset bubble risk – this is illustrated in Chart 2. In nominal terms, the JPY appreciated 65% versus the USD in the decade following the Plaza Accord. Meanwhile, the CNY appreciated 22% since the 2005 de-peg from the USD.

  

  The final key commonality between the Asia crisis and now is the transmission through falling commodity prices and its aftershocks for EM commodity producers, especially those with pegged exchange rates and a negative terms of trade shock. Kazakhstan’s FX shift from peg to float and risk premium being built into GCC FX forwards for the Saudi rial and Omani rial illustrate this fragility now.

  

  

  

  

  

• "They're Getting Away With Murder": Trump Blasts "Paper-Pushing Hedge Fund Guys" On Taxes

  A couple of weeks ago, Carl Icahn took to Twitter to “accept” Donald Trump’s offer to become Secretary of Treasury should America, in a fit of extreme frustration with business as usual inside the Beltway, do the previously unthinkable and put Trump in The White House. 

  1/3 After last night’s debate I decided to accept @realDonaldTrump offer for Secretary of Treasury.

  — Carl Icahn (@Carl_C_Icahn) August 7, 2015

  According to a series of statements Trump made on Friday at a “pep rally” held at an Alabama football stadium, Icahn would also be in charge of negotiating trade deals with Japan and China in a Trump administration.

  “Everyone is killing us” Trump told a crowd estimated at about 20,000, adding that when he was told of China’s move to devalue the yuan he heard a “sucking action.”

  But lest anyone should think that Trump’s cozy relationship with Uncle Carl means the Teflon Don would go easy on billionaire hedge fund managers, the GOP frontrunner told CBS’ Face The Nation on Sunday that the hedgies are just a bunch of “paper pushers [that] get away with murder” from a tax perspective. Here’s Reuters:

  “The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky,” Trump said.

   

  “They are energetic. They are very smart. But a lot of them – they are paper-pushers. They make a fortune. They pay no tax. It’s ridiculous, ok?”

   

  Trump’s comments were referring to the so-called “carried interest loophole” – a provision in the tax code which allows private equity and hedge fund managers pay taxes at the capital gains rate instead of the ordinary income rate.

   

  Many fund managers are in the top income bracket, but the capital gains tax bracket is only 20 percent.

   

  While these individuals are also required to pay an additional 3.8 percent surtax on their net investment income, this total rate is still far lower than the 39.6 percent rate that top wage earners must pay on their ordinary income.

   

  “Some of them are friends of mine. Some of them, I couldn’t care less about,” Trump said.

  Trump went on to suggest that he would move to restore America’s Middle Class which, as regular readers are no doubt aware, is being eroded by a monetary policy regime bent on inflating the value of the assets most likely to be concentrated in the hands of the wealthy.

  “I want to lower the rates for the middle class. The middle class is the one, they’re getting absolutely destroyed. This country doesn’t have—won’t have a middle class very soon,” he said. 

  But he wasn’t done.

  Trump then took to Fox & Friends on Monday morning to explain why he doesn’t support anything that even looks like a flat tax before suggesting that no matter what she says on the campaign trail, Hillary Clinton can’t be trusted to eliminate the carried-interest loophole because when she hangs out in the Hamptons, it’s “with the hedge fund guys.” Here’s WaPo:

  “The one problem I have with a flat tax is that rich people are paying the same as people that are making very little money,” Trump, who is worth an estimated $2.9 billion, said Monday morning on “Fox & Friends.” “I think there should be a graduation of some kind.”

   

  Clinton said she’d close the loophole, and while Trump didn’t mention carried interest specifically, he did say that hedge-fund managers should pay more in taxes.

   

  “They should be taxed a fair amount of money,” he said, without offering details. “They’re not paying enough tax.”

   

  He later criticized Clinton as being too close to Wall Street.

   

  “The hedge-fund guys are the ones that are giving her the money,” he said. “When she was in the Hamptons, she was with the hedge-fund guys.”

  Reading the above, one is left to wonder if Trump is leaving himself open to criticism regarding the consistency of his message. That is, when one is a billionaire and has just endorsed another billionaire (who is perhaps the most recognizable hedge fund manager in the history of capital markets) to be Treasury Secretary, to then turn around and call billionaire hedge fund managers “paper pushers” who “didn’t build this country” and consistently “get away with murder” at tax time, might well strike some voters as contradictory or even hypocritical, even if the idea that an unfair tax system is contributing to the demise of the Middle Class turns out to be a message that resonates with large blocks of voters.

  If building a platform on an ad hoc basis ultimately proves to be sustainable, then all the better for Trump’s chances, but even if he were to run as an independent, it’s critical that voters be able to figure out how the pieces fit together. That is, it’s not enough to be consistent and emphatic on individual issues (e.g. “I’m tough on immigation” and “I think billionaires should pay more taxes“), Trump will eventually need to figure out how to take his positions on the issues and turn them into a cohesive platform that voters can understand and, perhaps more importantly, that doesn’t end up tripping over itself when the debates start getting serious.

  If he can do that successfully, then the rest of the field – both Republicans and Democrats alike – may face an uphill battle when it comes to slowing Trump’s momentum. 

  In the meantime, things seem to still be going well:

  New Reuters Poll just came out and has me at 32%, highest number yet.The silent majority is back and we will MAKE AMERICA GREAT AGAIN!

  — Donald J. Trump (@realDonaldTrump) August 23, 2015

  *  *  *

  Bonus: Trump’s new campaign message for Jeb Bush

  Even Barbara Bush agrees with me.

  A video posted by Donald J. Trump (@realdonaldtrump) on Aug 24, 2015 at 10:15am PDT

  

  

  

  

  

• Peter Schiff Warns "The Fed Is Spooking The Markets, Not China"

  Submitted by Peter Schiff via Euro Pacific Capital,

  Fasten your seat belts, this ride is getting interesting. Last week the Dow Jones Industrial Average was down more than 1,000 points, notching its worst weekly performance in four years. The sell-off took the Dow Jones down more than 10% from its peak valuations, thereby constituting the first official correction in four years. One third of all S&P 500 companies are already in bear market territory, having declined more than 20% from their peaks. Scarier still, the selling intensified as the week drew to a close, with the Dow losing 530 points on Friday, after falling 350 points on Thursday. The new week is even worse, with the Dow dropping almost 1,100 points near the open today before cutting its losses significantly. However, no one should expect that this selling is over. The correction may soon morph into a full-fledged bear market if the Fed makes good on its supposed intentions to raise interest rates this year. Have no illusions, while most market observers are quick to blame the sell-off on China, this market was given life by the Fed, and the Fed is the only force that will keep it alive.

  

   
  The Dow has now blown through the lows from October 2014, when fears over life without quantitative easing and zero percent interest rates had caused the markets to pull back about 5%. Back then when market fear began spreading, St. Louis Fed President James Bullard publically issued a few choice words which reassured the markets that the Fed stood ready to reignite the QE engines if the economy really needed a fresh dose of stimulus. By the end of the year the Dow had rallied 10%.
   
  Amid last week's carnage, Mr. Bullard was at it once again. But instead of throwing the market a much needed life preserver, he threw it an unwanted anchor. He offered that the economy was still strong enough to warrant a rate increase in September. He was careful to say, however, that the Fed is still "data dependent" and will therefore base its decision on information that will come out over the next three weeks. So after nearly seven years of zero percent interest rates, the most momentous decision the Fed has made since the Great Recession will be dictated by a few weekly data points that have yet to emerge. Haven't seven years of data provided them enough information already? What's next? Will they have to check the five-day forecast to insure that there will be no rain before they pull the trigger?
   
  As I have been saying for years, the Fed has always known that the fragile economy created through stimulus might prove unable to survive even the most marginal of rate increases. But in order to instill confidence in the markets, it has pretended that it could. Wall Street has largely played along in the charade, insisting that rate increases were justified by an apparently strengthening economy and needed to restore normalcy to the financial markets.
   
  But the recovery Wall Street had anticipated never arrived, and traders who had earlier demanded that the Fed get on with the show, have now panicked that the rate hikes are about to occur in the face of a weakening economy. As a result, we are seeing a redux of the 2013 "taper tantrum" when stocks sold off when the Fed announced that it would be winding down its QE purchases of bonds.
   
  The question now is how much further the markets will have to fall before the Fed comes to the rescue by calling off any threatened rate increase? What else could pull the markets out of the current nose dive?
   
  Think about where we are. Stock valuations are extremely high and earnings are falling and the economy is clearly decelerating. The steady march upward in stock prices has been enabled by a wave of cheap financing and share buybacks. There are very few reasons to currently suspect that earnings, profits, and share prices will suddenly improve organically. This market is just about the Fed. After one of the longest uninterrupted bull runs in history, bearish investors have learned the hard way that they can't fight the Fed. So why should they now expect to win when the Fed is posturing that its about to embark on a tightening cycle? 
   
  If the Fed were to do what it pretends it wants to do (embark on a tightening campaign that brings rates to about 2.0% in 18 months), and in the process ignore the carnage on Wall Street, I believe we would see a consistent sell off in which most of the gains made since 2009 would be surrendered. After all, how much of those gains came from bona fide improvements in the economy? It was all about the twin props of Quantitative Easing and zero percent interest rates. The Fed has already removed one of the props, and it's no accident that the markets have gained no ground whatsoever in the eight months since the QE program was officially wound down.
   
  As the market considers a world without the second prop, a free fall could ensue. Now that we have broken through the October 2014 lows, there is very little technical support that should come in to play. A free fall in stocks could be an existential threat to an already weak economy.  It should be clear the Janet Yellen-controlled Fed would not want to risk such a scenario. This is why I believe that if the sharp sell off in stocks continues, we will get a clear signal that rate hikes are off the table.
   
  Of course, even if it does throw us that bone, the Fed will pretend that the weakness was unexpected and that it does not come from within (but is caused by external forces coming from China and Europe). Using that excuse, it will attempt to prolong the bluff that its delay is just temporary. For now at least Wall Street is happy to play along with the blame China game. This ignores the fact that China has had much bigger sell offs in recent weeks that did not lead to follow-on losses on Wall Street. I think the problems in China are the same problems confronting other emerging economies, namely the fear of a Fed tightening cycle that would weaken U.S. demand, depress commodity prices while simultaneously sucking investment capital into the United States, and away from the emerging markets, as a result of higher domestic interest rates and the strengthening dollar. 
   
  But if a temporary halt in rate hike rhetoric is not enough to stem the tide, a more definitive repudiation may be needed. Such an admission should finally open some eyes on Wall Street about the true nature of the economy and the unjustified strength of the U.S. dollar. That already may be happening. The dollar index closed at 95 on Friday…down from a high of 98 two weeks prior. On Monday, the index blew through the 93.50 support level and dropped more than 3% in just one day, down to intraday low of 92.6. Who knows where it stops now?
   
  Gold is rallying in the face of the crisis and has moved quickly back to $1,160, up around $80 in just two weeks. The bounce in gold must be causing extreme angst on Wall Street. Just two weeks ago, amid widening conviction that gold would fall below $1,000, it was revealed that hedge funds, for the first time, held net short positions on gold. Those trades are not working out. With the major currencies and gold now strengthening against the dollar, the greenback has had some success against far lesser rivals like the Thai baht and the Kazakhstan tenge. But these victories against currencies largely tied to commodities may be the last fights the dollar wins for a while, especially if Janet Yellen finally comes clean about the Fed's inherent dovishness. Those currencies now falling the farthest may be the biggest gainers if the Fed shelves rate increases.
   
  Some still cling to the belief that the Fed will deliver one or two token 25 basis point rate increase before year end. But this could expose the Fed to a bigger catastrophe than doing nothing at all. If it actually raises rates, and the crisis on Wall Street intensifies, further weakening an already slowing economy, the Fed would have to quickly reverse course and cut back to zero. This would put the Fed's cluelessness and impotency into very sharp focus. From its perspective anything is better than that. If it does nothing, and the economy continues to slow, ultimately "requiring" additional stimulus, it will at least appear that its caution was justified.
   
  Unfortunately for the Fed, it won't be able to get away with doing nothing for too much longer. Events may soon force it to show its hand. Then perhaps some may notice that the Fed is holding absolutely nothing and has been bluffing the entire time.

  

  

  

  

  

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