Today’s News August 5, 2015

• Yield Purchasing Power: $100M Today Matches $100K in 1979

  by Keith Weiner

   

  I wrote a story about poor Clarence who retired in 1979, and even poorer Larry who retired last year. I created these characters to challenge the notion of calculating a real interest rate by subtracting inflation. The idea is that the decline of a currency can be measured by the rate of price increases. This price-centric view leads to the concept of purchasing power—the amount of stuff that a dollar can buy. It’s the flip side of prices. When prices rise, purchasing power falls.

  Recall in the story, Clarence retired in 1979. At the time, inflation was running at 14% but he could only get 11% interest. Real interest was -3%, and Clarence had a problem. He was losing his purchasing power.

  Suppose Clarence bought gold. The purchasing power of gold held steady for the rest of his life (see this chart of oil priced in gold). Gold does solve this problem. However, gold has no yield. Clarence is only jumping out of the frying pan and into the fire. Sure, he escapes dollar debasement, but then he gets zero interest.

  Let’s look at how zero interest impacts Larry. He makes $25/month on his million dollars. Obviously he can’t live on that. So he gives up his nest egg, for eggs. For a year, he feasts on omelets. Since inflation was
  slightly negative, the same swap in 2015 nets him the same plus a few additional quiches.

  Through the lens of purchasing power, we don’t focus on the liquidation of Larry’s wealth. We ignore—or take it for granted—that he’s trading his life savings for bread. We only ask how many loaves he got.

  

  If you had a farm, would you consider trading it away, to feed your family for a year? I hope not. A farm should grow food forever. Its true worth is its crop yield, not the pile of bacon from a one-time deal.

  How perverse is that? It’s nothing more than what zero interest is forcing Larry to do.

  A dollar still buys about as much as it did last year. Larry’s purchasing power didn’t change much. However, debasement continues to wreak its destruction.  Steady purchasing power does not mean that the dollar is holding its value.

  It means that prices are wholly inadequate for measuring monetary decay.

  Our monetary disaster becomes clear when we look at the collapse in yield purchasing power. This new concept does not tell you how many groceries you can get by liquidating your capital. It tells how much you can buy with the return on it.

  In 1979, Clarence’s $100,000 savings earned enough to support his middle class lifestyle. In 2014, Larry’s million dollars didn’t earn enough to pay his phone bill. To live in the middle class, Larry would need over a
  hundred million bucks. That’s a pitiful income to make on such a massive pile of cash. It reveals a hyperinflation in the price of capital, which has gone up 1100X in 35 years.

  It also shows that the productivity of capital is collapsing. Back in Clarence’s day, businesses earned a high return on capital. It was high enough for Clarence to get 11% interest in a short-term CD. Unfortunately, the dollar rot is in the advanced stage now. There is scant interest to be earned. Return on capital is low, and so borrowers can’t pay much.

  Retirees suffer first, because they can’t earn wages. Normally they would depend on interest, but now they’re forced to live like the Prodigal Son. They consume their wealth, leave nothing for the next generation, and hope
  they don’t live too long. Zero interest rates has reversed the tradition of centuries of capital accumulation.

  Purchasing power may look fine, but yield purchasing power shows the true picture of monetary collapse.

   

  This article is from Keith Weiner’s weekly column, called The Gold Standard, at the Swiss National Bank and Swiss Franc Blog SNBCHF.com.

  

  

  

  

• They Live, We Sleep: A Dictatorship Disguised As A Democracy

  Submitted by John Whitehead via The Rutherford Institute,

  “You see them on the street. You watch them on TV. You might even vote for one this fall. You think they’re people just like you. You're wrong. Dead wrong.”—They Live

  We’re living in two worlds, you and I.

  There’s the world we see (or are made to see) and then there’s the one we sense (and occasionally catch a glimpse of), the latter of which is a far cry from the propaganda-driven reality manufactured by the government and its corporate sponsors, including the media.

  Indeed, what most Americans perceive as life in America—privileged, progressive and free—is a far cry from reality, where economic inequality is growing, real agendas and real power are buried beneath layers of Orwellian doublespeak and corporate obfuscation, and “freedom,” such that it is, is meted out in small, legalistic doses by militarized police armed to the teeth.

  All is not as it seems.

  This is the premise of John Carpenter’s film They Live (1988), in which two migrant workers discover that the world’s population is actually being controlled and exploited by aliens working in partnership with an oligarchic elite. All the while, the populace—blissfully unaware of the real agenda at work in their lives—has been lulled into complacency, indoctrinated into compliance, bombarded with media distractions, and hypnotized by subliminal messages beamed out of television and various electronic devices, billboards and the like.

  It is only when homeless drifter John Nada (played to the hilt by the late Roddy Piper) discovers a pair of doctored sunglasses—Hoffman lenses—that Nada sees what lies beneath the elite’s fabricated reality: control and bondage.

  When viewed through the lens of truth, the elite, who appear human until stripped of their disguises, are shown to be monsters who have enslaved the citizenry in order to prey on them. Likewise, billboards blare out hidden, authoritative messages: a bikini-clad woman in one ad is actually ordering viewers to “MARRY AND REPRODUCE.” Magazine racks scream “CONSUME” and “OBEY.” A wad of dollar bills in a vendor’s hand proclaims, “THIS IS YOUR GOD.”

  When viewed through Nada’s Hoffman lenses, some of the other hidden messages being drummed into the people’s subconscious include: NO INDEPENDENT THOUGHT, CONFORM, SUBMIT, STAY ASLEEP, BUY, WATCH TV, NO IMAGINATION, and DO NOT QUESTION AUTHORITY.

  This indoctrination campaign engineered by the elite in They Live is painfully familiar to anyone who has studied the decline of American culture. A citizenry that does not think for themselves, obeys without question, is submissive, does not challenge authority, does not think outside the box, and is content to sit back and be entertained is a citizenry that can be easily controlled.

  In this way, the subtle message of They Live provides an apt analogy of our own distorted vision of life in the American police state, what philosopher Slavoj Žižek refers to as dictatorship in democracy, “the invisible order which sustains your apparent freedom.”

  We’re being fed a series of carefully contrived fictions that bear no resemblance to reality. The powers-that-be want us to feel threatened by forces beyond our control (terrorists, shooters, bombers). They want us afraid and dependent on the government and its militarized armies for our safety and well-being. They want us distrustful of each other, divided by our prejudices, and at each other’s throats. Most of all, they want us to continue to march in lockstep with their dictates.

  Tune out the government’s attempts to distract, divert and befuddle us and tune into what’s really going on in this country, and you’ll run headlong into an unmistakable, unpalatable truth: the moneyed elite who rule us view us as expendable resources to be used, abused and discarded.

  In fact, a 2014 study conducted by Princeton and Northwestern University concluded that the U.S. government does not represent the majority of American citizens. Instead, the study found that the government is ruled by the rich and powerful, or the so-called “economic elite.” Moreover, the researchers concluded that policies enacted by this governmental elite nearly always favor special interests and lobbying groups.

  In other words, we are being ruled by an oligarchy disguised as a democracy, and arguably on our way towards fascism—a form of government where private corporate interests rule, money calls the shots, and the people are seen as mere subjects to be controlled.

  Consider this: it is estimated that the 2016 presidential election could cost as much as $5 billion, more than double what was spent getting Obama re-elected in 2012.

  Not only do you have to be rich—or beholden to the rich—to get elected these days, but getting elected is also a surefire way to get rich. As CBS News reports, “Once in office, members of Congress enjoy access to connections and information they can use to increase their wealth, in ways that are unparalleled in the private sector. And once politicians leave office, their connections allow them to profit even further.”

  In denouncing this blatant corruption of America’s political system, former president Jimmy Carter blasted the process of getting elected—to the White House, governor’s mansion, Congress or state legislatures—as “unlimited political bribery… a subversion of our political system as a payoff to major contributors, who want and expect, and sometimes get, favors for themselves after the election is over.”

  Rest assured that when and if fascism finally takes hold in America, the basic forms of government will remain. As I point out in my book Battlefield America: The War on the American People, fascism will appear to be friendly. The legislators will be in session. There will be elections, and the news media will continue to cover the entertainment and political trivia. Consent of the governed, however, will no longer apply. Actual control will have finally passed to the oligarchic elite controlling the government behind the scenes.

  By creating the illusion that it preserves democratic traditions, fascism creeps slowly until it consumes the political system. And in times of “crisis,” expediency is upheld as the central principle—that is, in order to keep us safe and secure, the government must militarize the police, strip us of basic constitutional rights, criminalize virtually every form of behavior, and build enough private prisons to house all of us nonviolent criminals.

  Clearly, we are now ruled by an oligarchic elite of governmental and corporate interests. We have moved into “corporatism” (favored by Benito Mussolini), which is a halfway point on the road to full-blown fascism.

  Vast sectors of the economy, government and politics are managed by private business concerns, otherwise referred to as “privatization” by various government politicians. Just study modern government policies. “Every industry is regulated. Every profession is classified and organized,” writes economic analyst Jeffrey Tucker. “Every good or service is taxed. Endless debt accumulation is preserved. Immense doesn’t begin to describe the bureaucracy. Military preparedness never stops, and war with some evil foreign foe, remains a daily prospect.”

  In other words, the government in America today does whatever it wants.

  Corporatism is where the few moneyed interests—not elected by the citizenry—rule over the many. In this way, it is not a democracy or a republican form of government, which is what the American government was established to be. It is a top-down form of government and one which has a terrifying history typified by the developments that occurred in totalitarian regimes of the past: police states where everyone is watched and spied on, rounded up for minor infractions by government agents, placed under police control, and placed in detention (a.k.a. concentration) camps.

  For the final hammer of fascism to fall, it will require the most crucial ingredient: the majority of the people will have to agree that it’s not only expedient but necessary. But why would a people agree to such an oppressive regime? The answer is the same in every age: fear.

  Fear makes people stupid.

  Fear is the method most often used by politicians to increase the power of government. And, as most social commentators recognize, an atmosphere of fear permeates modern America: fear of terrorism, fear of the police, fear of our neighbors and so on.

  The propaganda of fear has been used quite effectively by those who want to gain control, and it is working on the American populace.

  Despite the fact that we are 17,600 times more likely to die from heart disease than from a terrorist attack; 11,000 times more likely to die from an airplane accident than from a terrorist plot involving an airplane; 1,048 times more likely to die from a car accident than a terrorist attack, and 8 times more likely to be killed by a police officer than by a terrorist, we have handed over control of our lives to government officials who treat us as a means to an end—the source of money and power.

  We have allowed ourselves to become fearful, controlled, pacified zombies.

  In this regard, we’re not so different from the oppressed citizens in They Live. Most everyone keeps their heads down these days while staring zombie-like into an electronic screen, even when they’re crossing the street. Families sit in restaurants with their heads down, separated by their screen devices and unaware of what’s going on around them. Young people especially seem dominated by the devices they hold in their hands, oblivious to the fact that they can simply push a button, turn the thing off and walk away.

  Indeed, there is no larger group activity than that connected with those who watch screens—that is, television, lap tops, personal computers, cell phones and so on. In fact, a Nielsen study reports that American screen viewing is at an all-time high. For example, the average American watches approximately 151 hours of television per month.

  The question, of course, is what effect does such screen consumption have on one’s mind?

  Psychologically it is similar to drug addiction. Researchers found that “almost immediately after turning on the TV, subjects reported feeling more relaxed, and because this occurs so quickly and the tension returns so rapidly after the TV is turned off, people are conditioned to associate TV viewing with a lack of tension.” Research also shows that regardless of the programming, viewers’ brain waves slow down, thus transforming them into a more passive, nonresistant state.

  Historically, television has been used by those in authority to quiet discontent and pacify disruptive people. “Faced with severe overcrowding and limited budgets for rehabilitation and counseling, more and more prison officials are using TV to keep inmates quiet,” according to Newsweek.

  Given that the majority of what Americans watch on television is provided through channels controlled by six mega corporations, what we watch is now controlled by a corporate elite and, if that elite needs to foster a particular viewpoint or pacify its viewers, it can do so on a large scale.

  If we’re watching, we’re not doing.

  The powers-that-be understand this. As television journalist Edward R. Murrow warned in a 1958 speech:

  We are currently wealthy, fat, comfortable and complacent. We have currently a built-in allergy to unpleasant or disturbing information. Our mass media reflect this. But unless we get up off our fat surpluses and recognize that television in the main is being used to distract, delude, amuse, and insulate us, then television and those who finance it, those who look at it, and those who work at it, may see a totally different picture too late.

  This brings me back to They Live, in which the real zombies are not the aliens calling the shots but the populace who are content to remain controlled.

  When all is said and done, the world of They Live is not so different from our own. As one of the characters points out, “The poor and the underclass are growing. Racial justice and human rights are nonexistent. They have created a repressive society and we are their unwitting accomplices. Their intention to rule rests with the annihilation of consciousness. We have been lulled into a trance. They have made us indifferent to ourselves, to others. We are focused only on our own gain.”

  We, too, are focused only on our own pleasures, prejudices and gains. Our poor and underclasses are also growing. Racial injustice is growing. Human rights is nearly nonexistent. We too have been lulled into a trance, indifferent to others.

  Oblivious to what lies ahead, we’ve been manipulated into believing that if we continue to consume, obey, and have faith, things will work out. But that’s never been true of emerging regimes. And by the time we feel the hammer coming down upon us, it will be too late.

  

  

  

  

  

• Chinese Stock Short Squeeze Stalls After IMF Delays Decision On Yuan SDR Inclusion

  Yesterday afternoon’s meltup short-squeeze in China – after regulators announced their latest restrictions on short-selling – has stalled in the early trading tonight following The IMF’s decision to delay inclusion of Yuan in the SDR pending a review in September 2016. Though this will be a disappointment to the Chinese, the door is still open though given waringse from BMW and Toyota over “normalizing” auto sales, the market problems may be morphing quickly into economic problems.

  Chinese stocks see a modest lift at the open…

  

   

  The IMF has delayed its decision on including The Yuan in The SDR…

  • *IMF ISSUES REPORT ON CRITERIA FOR YUAN RESERVE-CURRENCY STATUS
  • *IMF STAFF PROPOSES DELAYING ANY CHANGE IN SDR TO SEPT. 2016
  • *IMF SAYS `SIGNIFICANT WORK REMAINS’ ON REVIEW OF YUAN IN SDR
  • *IMF: OPERATIONAL ISSUES MUST BE RESOLVED IF YUAN PART OF SDR
  • *IMF: YUAN MADE `SUBSTANTIAL PROGRESS’ ON INTL USE SINCE 2010

  As Bloomberg reports, though there is a delay the endgame remains in sight…

  The International Monetary Fund said the yuan trails its global counterparts in major benchmarks and that “significant work” in analyzing data is needed before deciding whether to grant the Chinese currency reserve status.

   

  IMF staff members also opened the door to a possible delay in any approval with a proposal to postpone by nine months, until September 2016, the implementation of a change in the basket of currencies that make up the lender’s Special Drawing Rights, according to an update on the five-yearly review released Tuesday. The IMF said postponing the change would make the transition to a new basket smoother.

   

  The report suggests that while approval by the IMF board isn’t yet assured, it’s within reach, and the decision will come down to more than just the staff’s assessment. China has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket; while countries such as France have welcomed China’s push, the U.S. has urged the nation to keep moving toward a flexible exchange rate and undertaking financial reforms.

   

  “The ultimate assessment by the board will involve a significant element of judgment,” the IMF report said.

   

  The postponement sets the stage for the IMF to add the SDR to the yuan just before Chinese President Xi Jinping hosts a meeting of Group of 20 leaders next year, said David Loevinger, managing director of emerging-markets sovereign research at asset manager TCW Group Inc. in Los Angeles.

  “The end game is obvious,” said Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department. “If the Chinese make this a priority, it’s pretty certain President Xi will have his deliverable at the G-20.”

  But problems remain…

  • *CHINA CAR SALES SLOWDOWN ‘HEADWIND’ FOR GASOLINE DEMAND: BMI

  As Bloomberg reports,

  China has gone from growth engine to source of concern for carmakers including BMW AG and Toyota Motor Corp., with both warning Tuesday that the sales slowdown in the world’s biggest market will probably last through year-end.

   

  BMW said decelerating delivery growth in China may force it to lower this year’s profitability goals, as consumers spooked by a stock-market rout and flagging economy stop spending on cars. Toyota likewise warned that higher costs and lower prices are making competition tougher.

   

  “Things may well get worse from here,” Max Warburton, an analyst at Sanford C. Bernstein Ltd., wrote in a note on Tuesday. “The market continues to deteriorate.”

   

  Carmakers are struggling to adjust to what BMW has called a “normalization” of a market that has grown eightfold since 2000, pushing it past the U.S. as the world’s biggest car market in 2009.

  which is neither unequivocally good for refiners or automakers.

  

  

  

  

  

• Fed Lunacy Is To Blame For The Coming Crash

  Submitted by Jim Quinn via The Burning Platform blog,

  This week John Hussman’s pondering about the state of our markets is as clear and concise as it’s ever been. He starts off by describing the difference between an economy operating at a low level versus a high level. He’s essentially describing a 2% GDP economy versus a 4% GDP economy. We have been stuck in a low level economy since 2008. And there is one primary culprit for the suffering of millions – The Federal Reserve and their Wall Street Bank owners. They are the reason incomes are stagnant, the labor participation rate is at 40 year lows, savers can only earn .25% on their savings, and consumers have been forced further into debt to make ends meet. Meanwhile, corporate America and the Wall Street banks are siphoning off record profits, paying obscene pay packages to their executives, buying off the politicians in Washington to pass legislation (TPP) designed to enrich them further, and arrogantly telling the peasants to work harder.

  In economics, we often describe “equilibrium” as a condition where demand is equal to supply. Textbooks usually depict this as a single point where a demand curve and a supply curve intersect, and all is right with the world.

  In reality, we know that economies often face a whole range of possible equilibria. One can imagine “low level” equilibria where producers are idle, jobs are scarce, incomes stagnate, consumers struggle or go into debt to make ends meet, and the economy sits in a state of depression – which is often the case in developing countries. One can also imagine “high level” equilibria where producers generate desirable goods and services, jobs are plentiful, and household income is sufficient to demand all of that output.

  The problem is that troubled economies don’t just naturally slide up to “high level” equilibria. Low level equilibria are typically supported and reinforced by a whole set of distortions, constraints, and even incentives for the low level equilibrium to persist. In developing countries, these often take the form of legal restrictions, price controls, weak property rights, political and civil instability, savings disincentives, lending restrictions, and a full catastrophe of other barriers to economic improvement. Good economic policy involves the art of relaxing constraints where they are binding, and imposing constraints where their absence allows the activities of some to injure or violate the rights of others.

  In the United States, observers seem to scratch their heads as to why the economy has shifted down to such a low level of labor force participation. Even after years of recovery and trillions of dollars directed toward persistent monetary intervention, the economy seems locked in a low level equilibrium. Yet at the same time, corporate profits and margins have pushed to record highs, contributing to gaping income disparities.

  Dr. Hussman presents his case against the Federal Reserve as clearly as anything I’ve ever read. Bailing out criminally negligent Wall Street banks with taxpayer money, allowing fraudulent accounting to cover up insolvency, printing $3 trillion out of thin air and handing it to the Wall Street banks, penalizing savings while encouraging consumers and corporations to go further into debt, and gearing all of your efforts towards creating stock, bond, and real estate bubbles, is the height of lunacy – unless you are a captured entity working on behalf of a corrupt status quo.

  From our perspective, the fundamental reason for economic stagnation and growing income disparity is straightforward: Our current set of economic policies supports and encourages a low level equilibrium by encouraging debt-financed consumption and discouraging saving and productive investment. We permit an insular group of professors and bankers to fling trillions of dollars about like Frisbees in the simplistic, misguided, and repeatedly destructive attempt to buy prosperity by maximally distorting the financial markets.

  We offer cheap capital and safety nets to too-big-to-fail banks by allowing them to speculate with the same balance sheets that we protect with deposit insurance. We pursue easy monetary fixes aimed at making people “feel” wealthier on paper, far beyond the fundamental value that has historically backed up that wealth. We view saving as dangerous and consumption as desirable, failing to recognize a basic accounting identity: there can only be a “savings glut” in countries that fail to stimulate investment.

  We leave central bankers in charge of our economic future because we’re too timid to directly initiate or encourage productive investment through fiscal policy. When zero interest rates don’t do the trick, we begin to imagine that maybe negative interest rates and penalties on saving might coerce people to spend now. Look around the world, and that same basic policy set is the hallmark of economic failure on every continent.

  Our leaders have failed the American people. We had an opportunity as a country in 2009 to purge our system of our unpayable debt. We could have allowed the orderly liquidation of the Too Big To Fail Wall Street banks, GM, Chrysler, and thousands of other over indebted bloated corporate pigs. We would have had a short deep depression. The excesses would have been wrung out of our economic system and we would have experienced a real recovery based upon savings and investment. Instead we allowed politicians and central bankers to do the complete opposite. We believed their lies. The system was not going to collapse if the Wall Street banks went down. Rich people and bankers would have been wiped out.

  When a country allows its central bank to encourage yield-seeking speculative malinvestment; suppresses interest rates in a way that punishes those on fixed incomes and destroys the incentive to save; allows too-big-to-fail institutions to use deposit insurance as a public subsidy to expand trading activity instead of traditional banking; focuses fiscal policy on boosting transfer payments to make up for lost income without at the same time encouraging investment – both private and public – that could create new sources of income; that country is going to keep failing its people.

  Jim Grant, Bill Gross and a number of other truth telling financial analysts have described how QE and ZIRP have done nothing but allow zombie corporations which should have gone bankrupt to survive and contribute to the low level economy we are experiencing. The creative destruction essential to produce a dynamic economy has been outlawed by the Federal Reserve. The encouragement of consumption through low interest rates has failed. Economies grow through investment, not consumption.

  Every economy funnels its income toward factors that are most scarce and useful. If a country diverts its resources toward consumption and speculation rather than productive investment, it shelters the profitability of existing companies by making their capital more scarce and therefore more profitable, while at the same time discouraging new job creation. A vast pool of unused labor also has little ability to demand more compensation. In contrast, when an economy encourages productive investment at every level, more jobs are created, and yet capital becomes less scarce – so profit margins fall back to normal. The income from economic activity is then available to both labor and capital, rather than funneling income into a basket that reads “winner-take-all.”

  It seems the Fed’s motto is: “The Lunacy Will Continue Until Moral Improves”. The Fed has accomplished only one thing over the last six years – creating multiple bubbles with no exit plan that will not pop those bubbles. The Fed has trapped themselves and there is no way out. They must either raise rates now and trigger the next market collapse or wait and trigger an even larger collapse. Hussman thinks legislation may be necessary to restrain the Fed, but he fails to realize the politicians are captured by the very banks who control the Fed.

  We need to re-think which constraints are actually binding us. With trillions of dollars sitting idly in bank reserves, and interest rates next to zero, the Federal Reserve continues to behave as if bank reserves and interest rates are a binding constraint – that somehow loosening those further might free the economy to grow. This is lunacy. Fed policy is no longer relieving constraints; it is introducing distortions. That – not the exact level of wage growth, inflation, or unemployment – is the primary reason to normalize policy, and to start along that path as soon as possible. Current Fed policy discourages saving while diverting the little saving that remains toward yield-seeking malinvestment. If the members of the FOMC cannot restrain themselves from extraordinary policy distortions on their own, it may be time for legislation to explicitly remove the discretion from their hands.

  Those who think low interest rates will forever sustain extremely overvalued financial markets are kidding themselves. First of all, the Fed can’t ease. When interest rates are at 0%, there is no place left to go. The credibility of the Fed is already declining rapidly. Once faith in their ability to elevate markets is lost, the collapse will commence. The slope of hope will become the crash of cash.

  The difficulty with creating a bubble of speculative distortion is that there is always hell to pay, and once valuations have already been driven to extreme levels, that hell is baked in the cake. It can’t be avoided, and once investors have shifted toward risk-aversion, history indicates it can’t even be managed well. Recall that the Fed was easing persistently and continuously throughout the 2000-2002 and 2007-2009 market collapses. As a reminder of how fruitless official interventions can be once investors have shifted to risk-aversion, I’ve reprinted the instructive chart that Robert Prechter of EWT published in October 2008, as the S&P 500 was on its way to the 700 level. Investors who actually believe that Fed easing creates a “put option” for stocks have a very short memory of the past two bear market collapses.

  

  As Sergeant Esterhaus used to say on Hill Street Blues, be careful out there. We are presently at the 2nd most overvalued point in stock market history. It’s dangerous out there. The Fed doesn’t have your back. Anyone in the stock market today has a high likelihood of losing 50% of there money in a very short time. If you think you can get out when everyone else decides to get out, you’re a lunatic. Lunacy does seem to be the primary trait amongst our financial elite, political class, and willfully ignorant masses.

  

  Be careful here – deteriorating internals matter. The condition of market internals is precisely the same hinge that – in market cycles across history – has separated overvalued markets that continued to advance from overvalued markets that collapsed through a trap door.

  Put simply, the recent market peak represents the second most overvalued point in history for the capitalization-weighted stock market, and the single most overvalued point in history for the broad market.

  When weak participation has been accompanied by rich valuations, scarce bearish sentiment, and recent market highs, the number of instances narrow to some of the worst points in history to invest.

  When weak participation, rich valuations and scarce bearish sentiment accompanied a record high in the same week, the handful of instances diminish to surround the precise market highs of 1973, 2000, and 2007, as well as 1929 on imputed sentiment data – and the week ended July 17, 2015.

  Understand that the present deterioration of market internals is broad-based, unusual, and historically dangerous.

  Read Hussman’s Weekly Letter

  

  

  

  

  

• Russia Ready To Send Paratroopers To Syria

  As Syria’s civil war enters its fourth year, it’s become something of an open secret that ISIS, for all their bluster and Hollywood-level video editing capabilities, are at best an unhappy side effect of efforts to train and arm the Syrian resistance and at worst, are a “strategic asset” funded and supported by coalition governments. 

  In other words, there is indeed a geopolitical chess match going on here that will have far-reaching consequences when the blood and dust settle, but it has nothing to do with ISIS’ far-fetched quest to establish a Medieval caliphate and everything to do with installing a government in Syria that will be more friendly to the interests of the West and its Middle Eastern allies. 

  ISIS will remain in play as long as they are necessary, but once the time comes for the US to clean up the mess left by Syria’s three-front war once and for all, that will be all she wrote for this particular CIA asset. Until then, everyone apparently gets to use Islamic State as an excuse to pursue their own political agenda, as evidenced by Turkey’s new war on “terrorists.” Not wanting to miss an opportunity to justify what would otherwise be a rather brash declaration, Russia is reportedly ready to send in the paratroopers should Syria request Moscow’s help in battling terrorist elements. Here’s more via Tass:

  The Russian Airborne Troops are ready to assist Syria in countering terrorists, if such a task is set by Russia’s leaders, commander of the Airborne Troops Colonel-General Vladimir Shamanov told reporters on Tuesday.

   

  

  (USSR paratroopers ca. 1975)

   

  “Of course we will execute the decisions set forth by the country’s leadership, if there is a task at hand,” Shamanov said, in response to a Syrian reporter’s question about the readiness of the Russian Airborne Troops to render assistance to Syria’s government in its battle against terrorism.

   

  Shamanov noted that Russia and Syria have “long-term good relations.” “Many Syrian experts, including military, received education in the Soviet Union and in Russia,” Shamanov added.

   

  
  

  In other words, two (or three, or four) can play at the “use ISIS as an excuse to go to war with our real enemies” game and just like the US can send in trainers and “forward spotters” to protect its interests in Iraq, so too can Russia send in a few airborne troops to protect its interests in Damascus. 

  It’s now only a question of political will and as we’ve outlined on a few occasions recently, it’s not entirely clear how much longer Vladimir Putin is willing to support Bashar al-Assad in the face of the debilitating, Saudi-engineered slump in crude prices and the biting economic sanctions imposed on the Kremlin by Europe.

  

  

  

  

  

• Dramatic Footage Of Saudi Tanks Invading Yemen

  There are competing accounts as to exactly what happened at the Al Anad airbase in Yemen on Monday, where Saudi-backed forces loyal to President Abed Rabbo Mansour Hadi reportedly routed Houthi rebels, marking the latest in a series of setbacks for the Iran-backed group which forced Hadi to flee to Riyadh earlier this year, plunging Yemen into a bloody civil war. 

  According to the Houthis, coalition forces were “crushed” and their vehicles destroyed, but a spokesman for the Popular Resistance said most of the base was in coalition hands. Here’s WSJ:

  Forces fighting for a Saudi-led military coalition in Yemen have defeated the country’s Houthi rebels at a strategic southern air base, the Yemeni defense ministry said Tuesday.

   

  The Houthis denied that the base had fallen. However, if it has been captured this would extend a recent turning of the tide in favor of the coalition in the four-month-old conflict.

   

  The defense ministry said the operation at Al Anad, a large complex from which the U.S. had launched drone attacks against Al Qaeda in the Arabian Peninsula before the recent instability, was “a true representation of national will and noble sacrifices that are being made to liberate Yemen from the grip of overthrowing militias.”

   

  A report Tuesday by the Houthi-run Saba news agency denied that Al Anad base had been taken, citing an unnamed military official. The Houthis had “crushed all [coalition] offensives” against the base and destroyed scores of military vehicles,  Houthi spokesman Nasruddin Amer said Monday evening.

   

  If confirmed, the turn of fortunes in favor of the coalition at Al Anad build upon a string of recent gains in the south by the allies, which include Saudi Arabia, the U.A.E., Qatar, Bahrain, Egypt and a number of other Arab states.

   

  Houthi rebels have been driven from Aden in recent weeks, setting the stage for coalition forces to make a further push northward into other Houthi-controlled areas.

  Here’s footage of the actual battle courtesy of RT:

  And here’s footage of Saudi tanks pushing north as the coalition offensive gathers steam: 

  *  *  *

  Importantly, Saudi and coalition boots are now officially on the ground in Yemen, under the guise of tank trainers. Here’s The Washington Post:

  Saudi and Emirati troops are assisting Yemeni pro-government forces at al-Anad by operating many of the tanks and sophisticated military equipment, military officials said.

   

  A Yemeni military official said thus far, few Yemeni troops have been trained in operating the tanks that have arrived by sea from Gulf allies in recent weeks. He added that the Yemeni military sought help from coalition countries in the al-Anad operation, calling them “partners in the liberation operation of Aden and other provinces.”

  Obviously, that seems like a rather transparent way of saying that the recent “turning of the tide” in Yemen may indeed be attributable to the fact that the Houthis are now fighting an open war with the Saudi army which turns out to be quite a bit more challenging than urban warfare in the backalleys of Aden with poorly trained Hadi holdouts.

  In any event, we suppose the real question is whether Iran is willing to stand by and watch as the Houthis are dismantled by Saudi Arabia, or whether Tehran decides it’s time to provide more than just “logistical support”, at which point Yemen’s proxy “conflict” will officially morph into a regional sectarian war. 

  

  

  

  

• Inflation Nation: College Textbook Prices Soar 1000% Since 1977

  Wondering why the drop-out rate from college is so high? One reason could be that a stunning 65% of students avoided buying textbooks due to the cost. As NBCNews reports, textbook prices have risen over three times the rate of inflation from January 1977 to June 2015, a 1,041 percent increase – dwarfing the government’s official CPI data. Just as government-subsidized healthcare has ‘enabled’ dramatic rises in the costs of drugs so government-subsidized education has sparked hyperinflation-esque pricing in college textbooks

  As NBCNews reports, students hitting the college bookstore this fall will get a stark lesson in economics before they’ve cracked open their first chapter. Textbook prices are soaring. Some experts say it’s because they’re sold like drugs.

  According to NBC’s review of Bureau of Labor Statistics (BLS) data, textbook prices have risen over three times the rate of inflation from January 1977 to June 2015, a 1,041 percent increase.

   

  “They’ve been able to keep raising prices because students are ‘captive consumers.’ They have to buy whatever books they’re assigned,” said Nicole Allen, a spokeswoman for the Scholarly Publishing and Academic Resources Coalition.

   

  In some ways, this is similar to a pharmaceutical sales model where the publishers spend their time wooing the decision makers to adopt their product. In this case, it’s professors instead of doctors.

   

  “Professors are not price-sensitive and they then assign and students have no say,” said Ariel Diaz, CEO of Boundless, a free and low-cost textbook publisher.

   

  

   

  But whether individual students are paying a literal 1,041 percent more today than they were in 1977 is not the question, said Mark Perry, a professor of economics at the University of Michigan who has tracked rising textbook prices for years.

   

  “College textbook prices are increasing way more than parents’ ability to pay for them,” he said. At the extreme end, one specialized chemistry textbook on his campus costs $400 at the campus bookstore.

  How rising textbook prices mirrors rising drug costs…

  

  

  

  

  

• Some Clear Thinking About The Price Of Gold

  Submitted by Simon Black via Sovereign Man blog,

  On April 2, 2001, the price of gold closed the market trading session at $255.30.

  And that was the lowest price that gold has seen ever since.

  In US dollar terms, gold closed the 2001 calendar year higher than it did in 2000. Then it did the same thing again in 2002. And again in 2003.

  In fact, after reaching its low in April 2001, gold closed higher for twelve consecutive years– something that had never happened before in ANY financial market with ANY asset.

  Then came a correction; the price started falling, and gold is now on track for 2015 to be its third down year in a row.

  What’s incredible is that, despite its history of gains, and 5,000 years of tradition behind it, gold is rapidly becoming one of the most widely despised assets.

  But before we pronounce it dead and write the final gold eulogy, however, let’s consider the following:

  1) Nothing goes up (or down) in a straight line. After 12 straight years of unprecedented gains with any asset class, it’s not unusual to have a meaningful correction.

  (Just imagine how severe the correction in stocks will be. . .)

  And like all frantic booms which go way past sustainable levels, corrections also overshoot fair value.

  This correction in the gold market could easily last for several more years, with prices potentially well below $1,000.

  But then we could just as easily see another massive surge all the way past $2,000 and beyond.

  That’s the nature of these markets– to be extremely fickle (and highly manipulated).

  Even over a period of a few years, the market can show about as much maturity as a middle school lunchroom, complete with pubescent gossip and inane popularity contests.

  But it’s rather short-sighted to completely lose confidence in an asset that has a 5,000 year track record because of a few down years.

  2) The gold price shed nearly 5% after the government of China announced recently that they owned 1,658 metric tons of gold.

  This amount was lower than what many investors and analysts had been expecting, and the price of gold dropped as a result.

  My question- since when did anyone start believing official reports from the Chinese government?

  Seriously. The Chinese have a vested interest in understating their gold holdings.

  They know that doing so will push the price of gold LOWER, which is exactly what they want.

  China is sitting on trillions of dollars in reserves right now, a portion of which they’re rapidly trying to rotate OUT of US dollars.

  So it’s clearly beneficial to the Chinese government if they can sell dollars while they’re strong and buy gold while it’s cheap.

  And if they can push gold to become cheaper, even better for them.

  3) Remember why you own gold to begin with.

  Gold is a very long-term store of value. Notwithstanding a few down years, gold has maintained its purchasing power for thousands of years.

  Paper currencies come and go. They get devalued, revalued, and extinguished altogether.

  How much would you be able to buy today with paper money issued by the 7th century Tang Dynasty? Nothing. It no longer exists.

  Or a pound sterling from 1817? Very little. It’s barely pocket change today.

  Yet the gold backing up that same pound sterling from 1817 is worth over $250 today (165 pounds).

  Even in modern history, the gold backing up a single US dollar from 1971 is worth vastly more than the paper currency that was printed 44 years ago.

  But even more importantly, aside from being a long-term store of value, gold is a hedge— a form of money that acts as an insurance policy against a dangerously overleveraged financial system.

  How much will your dollars and euros buy you in the event of real financial calamity? Or if there’s a major government default or central bank failure?

  No matter what happens in the financial system– whether it collapses under its own weight, or cryptofinance technology revolutionizes how we do business– gold ensures that you’re protected.

  4) Resist the urge to value gold in paper currency. We all have this tendency– we invest in something, and then hope it goes up in value.

  But that’s a mistake with gold. It’s a hard thing for some people to do, but try to stop yourself from thinking about gold in terms of its paper price.

  (It’s also important to remember that there’s a huge disconnect between the ‘paper price’ of gold, and the physical price of gold.)

  Remember, gold is not an investment; there are plenty of better options out there if you’re looking for a great speculation.

  So the notion of trading a stack of paper currency for gold, only to trade the gold back for a taller stack of paper currency misses the point entirely.

  5) Having said that, if you find it too difficult to do this, and you catch yourself constantly refreshing the gold price and checking your portfolio, you might own too much.

  Listen to your instincts; if you’re always feeling frantic about the daily gyrations in the market, lighten your load.

  Don’t love anything that won’t love you back. Stay rational. Own enough gold that, in the event of a crisis, you will feel comfortable that you have enough ‘real savings’… but don’t own so much that you’re constantly worrying about the paper price.

  

  

  

  

  

• Peter Schiff: What If "They" Are Wrong (Again)?

  Submitted by Peter Schiff via Euro Pacific Capital,

  While the world can count dozens of important currencies, when it comes to top line financial and investment discussions, the currency marketplace really comes down to a one-on-one cage match between the two top contenders: the U.S. Dollar and the Euro.

  In recent years the contest has become a blowout, with the Dollar pummeling the Euro into apparent submission. Based on the turmoil created by the European Debt Crisis and the continuing problems in Greece and other overly indebted southern tier European economies, many investors may have come to assume that Euro boosters will be forced to ultimately throw in the towel and call off the entire experiment, thereby leaving the Dollar completely unchallenged as the champion currency, now and for the foreseeable future. This is a stunning turnaround for a currency that was seen just a few years ago as a credible threat to supplant the dollar as the world's reserve.

    

  Putting aside the fact that there are many important currency relationships besides the euro/dollar axis, economists, journalists, and investors have forgotten the 16-year history of the Euro and how the currency has survived and prospered after many had assumed it might be consigned to the dustbin of history.

    

  The Euro was created in 1992 by the Maastricht Treaty (which created the European Union) but did not come into being as an accounting unit (not a physical currency) until January of 1999. In the lead up to its launch, many had argued that the Euro would become the heir to the rock solid Deutsche Mark, the German currency that had risen to preeminence on the back of Germany's post war resurgence, high savings rate, enviable trade balance, and post-Soviet unification. With German bankers in a firm leadership position in the European Central Bank and the European Union, many had hoped that the new Euro would adopt the virtues of the Mark. As a result, the Euro debuted with a value of 1.18 dollars. But the honeymoon was short-lived.

    

  Almost immediately from the point it began freely trading the Euro began to encounter severe headwinds. The Russian debt default and the Asian currency crisis in the late 1990's caused investors to sell assets in the emerging markets and seek safe havens in the dominant economies. This provided a crucial early test for the Euro. But the new currency failed to attract much of this fast flowing transnational investment flow. On the other hand, the U.S. markets and the U.S. Dollar were beckoning as extremely attractive targets.

    

  In the second term of Bill Clinton's presidency, America, at least on paper, looked very strong. From 1998-2000, based on Bureau of Economic Analysis (BEA) figures, GDP growth averaged 4.4%, which is roughly four times the rate that we have seen since 2008. The expanding economy and the relative spending restraints that had been made by the Clinton Administration and the newly elected Republican Congress resulted in hundreds of billions of annual U.S. government surpluses, the first such black ink in generations. Many economists comically concluded that the surpluses would become permanent (in fact they lasted just a few years). At the same time, U.S. stock markets were notching some of the biggest gains in their history. From the beginning of 1997 to the end of 1999 the Dow Jones surged by approximately 69%. The tech heavy Nasdaq, the epicenter of the "dotcom" bubble, rallied by an eye popping 294%.

   

  As a result, international money began pouring into the Dollar, taking the wind out of the sails of the newly launched Euro. The stretched valuations that had pushed up U.S. stocks to nosebleed levels failed to dissuade investors from piling in well into the mid-point of 2000. Not only had Wall Street spread the gospel of the new economy, where negative earnings and high debt no longer mattered, but many were convinced that the interventionist tendencies of the Alan Greenspan-led Federal Reserve would protect investors against losses.

   

  As a result of these forces, the Euro first fell to below parity against the dollar on January 27, 2000 when it closed at 98.9 U.S. cents, a fall of 16% from its debut. After that psychological barrier was breached, the selling intensified. By May 8, 2000 the Euro traded at just 89.5 U.S. cents, an additional 9% decline in just three months. This prompted news stories like a BBC article entitled "Was the Euro a Mistake?" Top economists and investors began wondering if the new currency would last much longer.

   

  The Euro's reputation was further tarnished in September of 2000 when Danish voters rejected their country's plans to adopt the Euro. The distaste shown by a small country widely considered squarely in the mainstream of Western European culture was a huge black eye for the Euro experiment. The pessimism sent the currency down another 6% in just one month following the Danish election, reaching what would become an all-time low of just 82.7 U.S. cents on October 25, 2000. At that level the Euro had fallen a full 30% from its debut valuation. It looked like game over. The Euro vs. Dollar was shaping up to be a Bambi vs. Godzilla scenario.

    

  By the late 1990's gold had been in a bear market that had lasted almost 20 years. As a result, investor sentiment for the metal, which had historically been considered a safe haven asset, was at an all-time low. As a result, many Europeans moved into the dollar to seek shelter instead. At that time gold was trading below Euros 300 per ounce (FRED, FRB St. Louis). Those who had exchanged their Euros for Dollars (when the Euro was 83 cents) would have seen those holdings decline by 50% over the following eight years. On the other hand gold nearly doubled in Euro terms over the same time frame. As this article is being written, gold is now trading at 1,000 Euros per ounce (even after the recent big drop) while the Euro hovers around $1.10. So Europeans who bought and held Dollars continuouslywhen the Euro hit its low in 2000 would be down 25%, but those who bought and held gold instead would have seen those holdings triple. (Past performance does not guarantee future results).

   

  The bursting of the dotcom bubble in mid-2000 finally caused a decisive break with the investment trends that had predominated in the previous number of years (see my recent article "The Big Picture"). Just as the dotcom wealth began disappearing, taking the U.S. federal budget surpluses with it, the emerging markets began to recover, and the much-maligned Euro started getting some attention.

    

  By January 5, 2001 the Euro had hit 95.4 cents, a stunning 15.3% rally in just over two months. And although the Euro zigzagged substantially over the next year and a half (with an early retreat in 2002, causing the Organization for Economic Cooperation and Development (OECD) to wonder whether the Euro was a "Doomed Currency"), by the second half of 2002 the uptrend was firmly in place, with the Euro reaching parity again with the Dollar by July 15, 2002, 30 months after it had fallen below that level. By April 22, 2008 the Euro traded at $1.60 to the Dollar, a price that represented a 36% increase over its debut level and a stunning 93% rally from its October 2000 low.

    

  But when the Financial Crisis of 2008 reached full flower in August, September, and October of 2008, investors once again panicked as they had eight years before. In seeking a safe haven, they once again chose the U.S. Dollar (perhaps motivated by the low valuations then assigned to the greenback). As funds began flowing out of the Euro and into the Dollar, the Euro dropped rapidly. By the end of October the Euro only fetched $1.26, a 21% drop from its April high. But when the markets stabilized in 2009 so did the Euro. It essentially traded sideways against the Dollar over the next two years, reaching back to $1.46 by June 6, 2011.

   

  

  Compiled by Euro Pacific Capital using data from the Federal Reserve Economic Data (FRED) from Federal Reserve Bank (FRB) of St. Louis

   

  When the European debt crisis really started grabbing headlines in 2011, with yields on sovereign debt of the so-called PIIGS nations (Portugal, Italy, Ireland, Greece, and Spain) widening to record territory in comparison to the sovereign bonds of Germany, scrutiny of the Euro came into question once again. The uncertainty over possible bailouts for European banks that were holding potentially toxic government debt was too much uncertainty for the market to handle. The pressure on the Euro was intensified by the slowing Eurozone economy. These forces combined helped to push the Euro down steadily during 2012 and 2013.

    

  But the straw that really broke the camel's back came at the end of 2014 when it became clear that the European Central Bank, under the new leadership of Mario Draghi, would finally succeed in short-circuiting the anti-bailout restrictions of the Maastricht Treaty and outflank the objections of the German financial and political establishment in order to bring full blown Quantitative Easing (QE) to the Eurozone. The QE program essentially involves creating Euros out of thin air in order to buy government debt and hold down long-term interest rates.

    

  Expectations about European QE came at a time when most observers concluded that the U.S. economy was finally on track for a strong recovery in 2015 and that the Federal Reserve (which has already showered the United States with almost six full years of QE) had finally done away with the program and would begin raising rates for the first time in almost 10 years. Despite a languishing economy, the U.S. markets had once again delivered stellar returns, with the S&P 500 rising 64% between 2011 and 2014, doing so without ever experiencing a correction of more than 10%.

    

  These movements provided a strong rationale for investors to sell Euros and buy Dollars. In the 12 months from May 2014 to May 2015 the Euro fell by about 20%. When it bottomed out at $1.05 on March 11, 2015, the Euro had fallen 34% from its peak seven years earlier. This revived the opinions that the Euro was dead and that the Dollar would be the only real reserve currency for the foreseeable future.

    

  But what if the assumptions about a U.S. economic recovery and Fed rate hikes were wrong? Could observers be mistaken now about the trajectory of the Dollar vs. the Euro as they were back in 2000? While some had warned that the dotcom bubble of 2000 could end badly, very few understood how deeply the mania was the root of the economic expansion and how severely the final flameout would threaten the entire economy. Similarly, very few had foreseen the dangers that the housing and mortgage bubble had presented to the wider economy in 2008. The economic and market contractions in 2000 and 2008 might have been much worse if the Fed had not been able to cut interest rates by almost 500 basis points in the face of the crises. (No such options are available if the economy contracts today). In other words, complacency can be very dangerous, especially if there is no ammunition to combat a crisis if it arrives unexpectedly .

   

  Confidence is the only thing that really undergirds modern fiat currencies. But confidence can be very ephemeral…disappearing as quickly as it arrives. The U.S. Dollar benefits from confidence that the Euro currency may just be unworkable, that the U.S. economy will continue to improve, and that the Fed will raise rates throughout the remainder of 2015 and into 2016. If these expectations are unfulfilled, there could be a Euro reversal.

    

  When a trend remains in place for a while, people tend to think it will continue forever. When it reverses, the shock can be widespread. Just as currency speculators over-estimated the strength of the U.S. economy in 2000, I believe they are making the same mistake again today. But the U.S. economy is actually much weaker and more vulnerable now than it was in 2000. If the spell of confidence surrounding the Dollar is broken, it may also reverse the fortunes of other beaten down currencies. This could present a sea change in the global investment landscape for which wise investors should be prepared.

   

  

  

  

  

  

• We, The Sheeple

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  

  

  

• "You're Gonna Need a Bigger Boat" – Does Size Matter When It Comes To The Debt Markets

  Back in June we presented for the first time the writing of former Dallas Fed advisor to president Dick Fisher, Danielle DiMartino, who in a CNBC interview slammed The Fed for “allowing the [market] tail to wag the [monetary policy] dog,” warning that “The Fed’s credibility itself is at stake… they have backed themselves into a very tight corner… the tightest ever.”

  As she further warned in her first op-ed for the Liscio Report “the hope today is that the current era of easy monetary policy will have no deep economic ramifications. Such thinking, though, may prove to be naive… All retirees’ security is thus at risk when the massive overvaluation in fixed income and equity markets eventually rights itself.”

  Today she follows it up with another insightful piece, looking at the record stock of global debt, some $200 trillion and rising exponentially, and frames the “question for the ages” namely whether “size really does matter when it comes to the debt markets.” As she correctly observes “it’s virtually impossible to pinpoint the next stressor” in the great debt collapse game.

  And while she keeps with the theme of the piece – that the massive wall of debt will need ever bigger boats – by throwing in the occasional analogy to great white sharks, the true “animalistic” symbols relevant to the current global economy are of a more heavenly nature:

  Nary are any of us far removed from a poor stricken soul who has suffered a fall from grace. In the debt markets, a “fallen angel” is a term assigned to a high grade issuer that descends to a junk-rated state. It could just as easily refer to any credit in the $200 trillion universe investors perceive as being risk-free. Should the need arise, will there be enough room on policymakers’ boats to provide seating for every fallen angel? That is certainly the hope. But what if the real bubble IS the sheer size of the collective balance sheet? If that’s the case, we really are gonna need a bigger boat.  

  Actually, what we will need if and when the great pyramid of trillions upon trillions of claims, guarantees, promises to repay, robosigned mortgages and collateral chains in which suddenly the weakest links decide to let all inbound calls go straight to voicemail, is an asset without counterparty risk.

  There is only one such asset: the oldest one; the one which those whose job is to create artificial faith in insolvent counterparties deem neccesary to cast as a “barbarous relic” – the asset which just happens to be at the very bottom of the Exter pyramid.

  

  The one asset which, in the words of J.P.Morgan himself, is money. Nothing else.

  * * *

  From The Liscio Report, by Danielle DiMartino

  You’re Gonna Need a Bigger Boat

  Size matters. Just ask Roy Scheider. As incredulous as it may seem, I only recently sat myself down to watch that American scare-you-out-of-the-water staple Jaws for the first time. As a baby born in 1970, the movie at its debut in 1975 was hugely inappropriate for my always precocious, but nevertheless only five-year old self. And by the time this Texas girl and those Yankee cousins of mine were pondering breaking the movie rules during those long-ago summers in Madison, Connecticut, it was not Jaws but rather Brat Pack movies that tempted us. We started down our road of movie rebellion with St. Elmo’s Fire, then caught up with a poor Molly Ringwald in Pretty in Pink and then really stretched our boundaries with Less than Zero – you get the picture.   

  And so finally during this long, hot summer of 2015, a seemingly appropriate time with our country gripped from coast to coast with real-life shark hysteria, I watched Jaws for the first time and heard Roy Scheider as Chief Martin Brody utter those words, “You’re gonna need a bigger boat.”    

  Prophetically, the reality might just be that the collective “we,” and quite possibly sooner than we think, really will need a bigger boat. That is, as it pertains to the global debt markets, which have swollen past the $200 trillion mark this year rendering the great white featured in Jaws which can be equated with past debt markets as defenseless and small as a small, striped Nemo by comparison.

  The question for the ages will be whether size really does matter when it comes to the debt markets. It’s been more than three years since Bridgewater Associates’ Ray Dalio excited the investing world with the notion that the levered excesses that culminated in the financial crisis could be unwound in a “beautiful” way. A finely balanced combination of austerity, debt restructuring and money printing could provide the pathway to a gentle outcome to an egregious era. In Mr. Dalio’s words, “When done in the right mix, it isn’t dramatic. It doesn’t produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ration of debt-to-income go down. That’s a beautiful deleveraging.”

  I’ll give him the slow growth part. Since exiting recession in the summer of 2009, the economy has expanded at a 2.1-percent rate. I know beauty is in the eye of the beholder but the wimpiest expansion in 70 years is something only a mother could feign admiration for. That not-so-pretty baby still requires the wearing of deeply tinted rose-colored glasses to maintain the allusion.    

  As for the money printing, $11 trillion worldwide and counting certainly checks off another of Dalio’s boxes. But refer to said growth extracted and consider the price tag and one does begin to wonder. As for debt restructuring, it’s questionable how much has been accomplished. There’s no doubt that some creditors, somewhere on the planet, have been left holding the proverbial bag — think Cypriot depositors and (yet-to-be-determined) Energy Future Holdings’ creditors. Still, the Fed’s extraordinary measures in the wake of Lehman’s collapse largely stunted the culmination of what was to be the great default cycle. Had that cycle been allowed to proceed unhampered, there would be much less in the way of overcapacity across a wide swath of industries.   

  Instead, as a recent McKinsey report pointed out, and to the astonishment of those lulled into falsely believing that deleveraging is in the background quietly working 24/7 to right debt’s ship, re-leveraging has emerged as the defeatist word of the day. Apparently, the only way to supply the seemingly endless need for more noxious cargo to fill the world’s rotting debt hulk is by astoundingly creating more toxic debt. Since 2007, global debt has risen by $57 trillion, pushing the global debt-to-GDP ratio to 286 percent from its starting point of 269 percent.   

  Of course, the Fed is not alone in its very liberal inking and priming of the presses. Central banks across the globe have been engaged in an increasingly high stakes race to descend into what is fast becoming a bottomless abyss in the hopes of spurring the lending they pray will jump start their respective economies. Perhaps it’s time to consider the possibility that low interest rates are not the solution.   

  Debt is a fickle witch. When left to its own devices, which it has been for nearly seven years with interest rates at the zero bound, it tends to get into trouble. Unchecked credit initially seeps, and eventually finds itself fracked, into the dark, dank nooks and crannies of the fixed income markets whose infrastructures and borrowers are ill-suited to handle the capacity. Consider the two flashiest badges of wealth in America – cars and homes. These two big-line items sales’ trends used to move in lockstep — that is until the powers that be at the FOMC opted to leave interest rates too low for too long. In Part I, aka the housing bubble, home sales outpaced car sales as credit forced its way onto the household balance sheets of those who could no more afford to buy a house than they could drive a Ferrari. True deleveraging of mortgage debt has indeed taken place since that bubble burst, mainly through the mechanism of some 10 million homes going into foreclosure. It’s no secret that credit has resultantly struggled mightily to return to the mortgage space since.    

  Today though, Part II of this saga features an opposite imbalance that’s taken hold. Car sales have come unhinged from that of homes and are roaring ahead at full speed, up 76 percent since the recession ended six years ago, more than three times the pace of home sales over the same period. It’s difficult to fathom how car sales are so strong. Disposable income, adjusted for inflation, is up a barely discernible 1.5 percent in the three years through 2014. Add the loosest car lending standards on record to the equation and you quickly square the circle. Little wonder that the issuance of securities backed by car loans is racing ahead of last year’s pace. If sustained, this year will take out the 2006 record. At what cost? Maybe the record 16 percent of used car buyers taking out 73-84 month loans should answer that question.   

  To be sure, car loans are but a drop in the $57 trillion debt bucket. The true overachievers, at the opposite end of the issuance spectrum, have been governments. The growth rate of government debt since 2007 has been 9.3 percent, a figure that explains the fact that global government debt is nearing $60 trillion, nearly double that of 2007. The plausibility of the summit to the peak of this mountain of debt is sound enough considering the task central bankers faced as the global financial system threatened to implode (thanks to their prior actions, mind you). In theory, government securities are as money good as you can get. Practice has yet to be attempted.   

  The challenge when pondering $200 trillion of debt is that it’s virtually impossible to pinpoint the next stressor. Those who follow the fixed income markets closely have their sights on the black box called Chinese local currency debt. A few basics on China and its anything-but-beautiful leverage. Since 2007 China’s debt has quadrupled to $28 trillion, a journey that leaves its debt-to-GDP ratio at 282 percent, roughly double its 2007 starting point of 158 percent. For comparison purposes, that of Argentina is 33 percent (hard to borrow with no access to debt markets); the US is 233 percent while Japan’s is 400 percent. If Chinese debt growth continues at its pace, it will rocket past the debt sound barrier (Japan) by 2018. As big as it is, China’s debt markets have yet to withstand a rate-hiking cycle, hence investors’ angst.   

  My fear is of that always menacing great white swimming in ever smaller circles closer and closer to our shores. I worry about sanguine labels attached to untested markets. US high-grade bonds come to mind in that respect even as investors calmly but determinately exit junk bonds. Over the course of the past decade, the US corporate bond market has doubled to an $8.2 trillion market. A good portion of that growth has come from high yield bonds. But the magnificence has emanated from pristine issuers who have had unfettered access to the capital markets as starved-for-yield investors clamor to debt they deem to have a credit ratings close to that of Uncle Sam’s. Again, labels are troublesome devils. Remember subprime AAA-rated mortgage-backed securities?

  We’ve grown desensitized to multi-billion issues from high grade companies. Most investors sleep peacefully with the knowledge that their portfolios are indemnified thanks to a credit rating agency’s stamp of approval. Mom and pop investors in particular are vulnerable to a jolt: the portion of the bond market they own through perceived-to-be-safe mutual funds and ETFs has doubled over the past decade. Retail investors probably have little understanding of the required, intricate behind-the-scenes hopscotching being played out by huge mutual fund companies. This allows high yield redemptions to present a smooth, tranquil surface with little in the way of annoying ripples. That might have something to do with liquidity being portable between junk and high grade funds – moves made under the working assumption that the Fed will always step in and assure markets that more cowbell will always be forthcoming rather than risk the slightest of dramas unfolding. Once the reassurance is acknowledged by the market, all can be righted in the ledgers. It’s worked so far. But investors have yet to even consider selling their high grade holdings. It’s unthinkable.     It’s hard to fathom that back in 1975 when I was a kindergartener, security markets’ share of U.S. GDP was negligible. Forty years later, liquidity is everywhere and always a monetary phenomenon. That is, until it’s not.

  Nary are any of us far removed from a poor stricken soul who has suffered a fall from grace. In the debt markets, a “fallen angel” is a term assigned to a high grade issuer that descends to a junk-rated state. It could just as easily refer to any credit in the $200 trillion universe investors perceive as being risk-free. Should the need arise, will there be enough room on policymakers’ boats to provide seating for every fallen angel? That is certainly the hope. But what if the real bubble IS the sheer size of the collective balance sheet? If that’s the case, we really are gonna need a bigger boat.  

  

  

  

  

  

• TEPCO Officials To Be Tried for Role In Fukushima Meltdown

  Submitted by Andy Tully via OilPrice.com,

  A Japanese citizens’ judicial committee has overruled government prosecutors and forced them to bring three former executives of the Tokyo Electric Power Co. (TEPCO) to trial on charges of criminal negligence for their inability to prevent the 2011 nuclear disaster at the Fukushima Daiichi nuclear power plant. But it appears unlikely that the defendants can be convicted.

  The decision by the panel of 22 anonymous citizens, was reached July 17 but not announced until July 31. It overrules two previous decisions by the Tokyo prosecutors not to indict the former executives. The defendants are Tsunehisa Katsumata, 75, chairman of Tokyo Electric Power Co. at the time of the crisis, along with Sakae Muto, 65, and Ichiro Takekuro, 69, who were then vice presidents of the utility.

  Decisions by the prosecutors in September 2013 and in January 2015 said they lacked sufficient evidence to bring criminal charges against the three men. In response, the citizens’ panel voted twice to demand the former executives’ indictment, trumping the prosecutors’ decisions.

  Such citizens’ committees became a powerful features of Japan’s judicial system after World War II in an effort to combat government abuse of power. Their members are chosen by lottery and the panelists’ identities are kept secret. While they’re powerful, these committees are seldom used.

  The committee concluded that the three defendants hadn’t taken necessary steps to reinforce the Fukushima Daiichi power plant, situated on Japan’s Pacific coast and therefore vulnerable to severe damage if it were struck by a tsunami in the earthquake-prone region.

  That fear was realized in March 2011 when a Pacific tsunami slammed into Japan, causing widespread destruction, including such heavy damage to three of the four reactors at Fukushima Daichi that they melted down and began leaking radiation. The accident forced the evacuation of tens of thousands of people from the general vicinity of the power plant.

  The decision was good news for surviving victims of the disaster. “We had given up hope that there would be a criminal trial,” said Ruiko Muto, who leads the Fukushima Nuclear Disaster Plaintiffs Group, which represents about 15,000 people, including residents displaced by the accident and their supporters. “We’ve finally gotten this far.”

  But the victory may be merely symbolic because most legal observers say it’s unlikely the rigors that the defendants will face will go beyond giving public testimony at trial. There’s also little likelihood any of them will be convicted of a criminal charge because Japanese prosecutors, with 99 percent conviction rates, rarely bring charges unless they are virtually certain they can win the cases.

  Cases imposed on them by citizens’ judicial committees are generally those in which prosecutors have concluded lack enough evidence to convict. One former prosecutor, Nobuo Gohara, told The New York Times that virtually all of such cases end in acquittals.

  In the TEPCO case, for example, Gohara said the prosecutors now must prove that the defendants were guilty of criminal oversight of the Fukushima Daiichi power plant by failing to predict the huge tsunami that caused the disaster and neglecting to protect the facility sufficiently.

  Further, Gohara said, it will be extremely challenging for the prosecutors to prove that the meltdowns at three of the plant’s reactors even killed anyone. Several people died while the area was being evacuated in 2011, but most were elderly who were too weak to be moved during the chaos of moment. But he stressed that no one so far has died from radiation poisoning.

  “This is a very unusual case,” Gohara said. “The hurdles to conviction are high.”

  

  

  

  

  

• Twin Trillion-Dollar Bubbles Prompt Dramatic Rise In Non-Mortgage Debt

  Don’t look now, but the US is staring down not one but two trillion-dollar bubbles, both of which have been documented here extensively. 

  The first is the US auto loan bubble which has ballooned to $900 billion on the back of loose underwriting standards. Don’t believe easy credit is behind the inexorable rise in auto loan debt? Consider the following Q1 statistics from Experian which we never tire of showing:

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

  Sitting behind the auto lending boom is Wall Street’s securitization machine which will churn out around $100 billion in auto loan-backed paper this year (for perspective, that accounts for around half of total projected consumer ABS issuance). The longer the Fed-driven hunt for yield persists, the more demand they’ll be for this paper and the more demand there is, the easier it will be to get a car loan and larger the bubble will become. 

  Meanwhile, the nation’s student debt bubble has reached epic proportions, with students and former students laboring (or perhaps “not laboring” is more appropriate given what we know about how difficult it is for degreed millennials to find good jobs) under a debt burden that averages $35,000 per student and totals a staggering $1.2 trillion in aggregate. As we’ve detailed exhaustively, debt service payments on these loans are causing delays in household formation and driving up demand for rentals in a market that’s already red hot thanks to the fact that the collapse of the housing bubble turned a nation of homeowners into a nation of renters. 

  Considering all of the above, we weren’t at all surprised to learn that US households’ non-mortgage debt is soaring and the two main drivers are student loan debt and auto loans. Here’s more from HousingWire:

  Black Knight Financial Services analyzed U.S. mortgage holders’ levels of non-mortgage-related debt and found those levels are at their highest in over 10 years.

   

  What we’ve found is that mortgage holders today are carrying more non-mortgage debt than at any point in the past 10 years, with an average of $25,000 per borrower. That’s $1,400 more on average than one year ago, and nearly $2,600 more than in 2011,” he said. “The primary driver of this increase is a rise in auto-related debt, which accounted for 81% of the overall non-mortgage debt increase over the past four years. We also noticed a clear correlation between non-mortgage debt and borrowers inquiring about a new mortgage, with those who have recent mortgage inquiries on their credit reports carrying nearly 40% more debt than borrowers who do not.”

   

  Black Knight found that the student loan debt of U.S. mortgage holders is at all-time high: 15% of mortgage holders are carrying student loan debt, with average balances of nearly $35,000. The average student loan debt for all mortgages has more than doubled since 2006, and the share of mortgage holders carrying that debt has increased by 44% over that 9-year span.

  Here are some of the key findings:

  • Black Knight found that U.S. mortgage holders are carrying the most non-mortgage debt they have – an average of approximately $25,000 each – in over 10 years
  • Student loan debt among mortgage holders is at an all time high 
  • Among mortgage holders, student loan debt has increased by roughly 56% since 2006, to an average balance of nearly $35,000 
  • The share of borrowers carrying student loan debt has increased by 44% in that same time span
  • 48% of mortgage holders have automobile debt as well
  • Auto debt accounted for 81% of the increase in overall non-mortgage debt among mortgage holders over the past 4 years
  • Nearly 15% of those with homes in the lowest 20% of values are still underwater, compared to just 1.7% of those in the top 20%
  • Some 5.7 million borrowers lack enough equity in their homes to cover the cost to sell them

  

  

  

  

  

• Chart Of The Day – Americans Are Not Happy

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  Readers of this site don’t need me to tell you, but the following statistics from the Wall Street Journal prove that despite record stock prices and non-stop propaganda, fewer and fewer people are believing the hype.

  We learn that:

  On a benchmark measure of Americans’ unease, 65% of those surveyed said the country is on the wrong track. That is the highest level of unease since November 2014, and nears the levels seen at other historical moments of voter discontent.

   

  In May 1992, after H. Ross Perot had launched his populist independent run for president, 71% said the country was on the wrong track. In September 2007, when frustration with President George W. Bush was peaking, wrong-track sentiment was 63%.

   

  The new poll also found increased pessimism about the economy: 24% said they thought the economy would get worse over the next year, up from 17% in December.

  Now, here’s that chart:

  

  What’s so interesting about the above, other than the elevated levels of dissatisfaction six years into an “economic recovery,” is to look at when in recent history Americans were starting to think things were on the right track. Specifically, Americans became encouraged around 2009.

  Barack Obama said all the right things, and a lot of people believed him. He had a chance to do the right thing, and people wanted him to do just that. Instead, he proved to be nothing but a shameless oligarch coddler, who essentially continued George W. Bush’s presidency without a hitch. Once that became clear, perceptions about a “wrong track” America starting surging again.

   

  So yeah, Americans are NOT happy, and they have every right to be pissed off.

  

  

  

  

• Why Turkey's "ISIS-Free Zone" Is The Most Ridiculous US Foreign Policy Outcome In History

  The truly incredible thing about US foreign policy outcomes is that there are seemingly no limits on how absurd they can be. Indeed, Washington’s uncanny ability to paint itself into policy corners and create the most thoroughly flummoxing geopolitical quagmires in the history of statecraft knows absolutely no bounds. 

  This was on full display back in April when Iran-backed Houthi rebels armed with some $500 million in small arms, ammunition, night-vision goggles, vehicles and “other supplies” that the Defense Department “donated” and then subsequently lost track of when US-backed President Abed Rabbo Mansour Hadi fled to Riyadh, looked set to loot the Aden branch of Yemen’s central bank. Then there was the extremely unfortunate situation that unfolded in Mosul, Iraq last summer when militants that may well have received training from the US at some point overran the city and captured some 2,300 humvees and at least one Black Hawk helicopter which would not have been parked in Mosul in the first place were it not for Washington’s ill-advised decision to invade Iraq for the second time in barely a decade in the wake of the 9/11 terrorist attacks.  

  As ridiculous as those incidents most certainly were (and there are of course countless other examples), the situation currently playing out on Syria’s border with Turkey may mark a new high (or low, depending on how you look at it) point for US foreign policy – and that truly is saying something. 

  Over the past several days, we’ve traced the escalating violence in Turkey to the ongoing conflict between Ankara and the PKK and to a landmark election outcome which saw President President Recep Tayyip Erdogan lose his absolute majority in parliament for the first time in over a decade. Here’s a brief recap: 

  Last week, it became abundantly clear that Turkey’s newfound zeal for accelerating the demise of Islamic State is motivated chiefly by President Recep Tayyip Erdogan’s desire to nullify a ballot box victory by the pro-Kurdish HDP, which grabbed 13% of the vote and won party representation in June in an election that also saw AKP lose its absolute majority for the first time in over a decade. Now, Erdogan looks set to call for new elections as “efforts” to build a coalition government have largely failed. Erdogan needs but a two percentage-point swing to restore AKP’s absolute majority, which would in turn pave the way for his push to consolidate power by altering the structure of the government. A conveniently timed suicide bombing in Suruc that killed 32 people in late July was promptly pinned on ISIS sympathizers, setting off a chain of events that would culminate in NATO backing a renewed Turkish offensive against the Kurdish PKK. The escalation of violence between PKK forces and the Turkish army should help Erdogan undermine HDP’s popularity ahead of new elections. Long story short: Turkey is essentially using a mock campaign against Islamic State to justify a renewed conflict with the PKK (they’re all “terrorists” after all) which Ankara will promptly cite as evidence of why voters should not back HDP when elections are held again in a few months. 

  In exchange for backing Ankara’s offensive against the PKK and by extension, Erdogan’s political agenda, the US gets to use Turkey’s Incirlik Air Base to launch strikes on ISIS. As noted above, Turkey is ostensibly also executing airstrikes against the group (that’s part of the deal) but it’s abundantly clear to everyone involved that Ankara – which has long been suspected of cooperating with ISIS and has provided funding to other extremist groups fighting for control of Syria – is only concerned with eradicating the PKK, and if that means weakening YPG, PKK’s Syrian affiliate in the process, then so be it. 

  The problem here – and this is where one can begin to see why this particular situation wins the blue ribbon for US foreign policy gone awry – is that YPG is extremely effective when it comes to fighting ISIS and indeed, the US has conducted airstrikes to support the group’s efforts to drive Islamic State from northern Syria. Here’s WSJ with more:

  The U.S.-led coalition fighting the extremist group has conducted numerous airstrikes over the past year to back the Kurdish YPG militia in northern Syria, which has proved to be the most effective ground force fighting Islamic State.

   

  Before Syria’s war erupted four years ago, the country’s Kurds were concentrated in three enclaves spread along the northern border. Over the past year, they have risen up to beat back advancing Islamic State fighters, most notably in the border town of Kobani.

   

  The YPG advances have allowed Kurdish forces to establish authority over more Syrian territory than before the war, according to the Institute for the Study of War, which tracks control of land in the fight against Islamic State. In recent months, backed by U.S. airstrikes, the YPG has forced Islamic State fighters out of 2,000 square miles of territory in northern Syria—an area the size of Delaware—according to the U.S. military.

   

  Since regime forces withdrew from Kurdish areas, the Syrian Kurds have secured a degree of newfound autonomy that has fueled aspirations for independence across the region. They have set up their own administration and defense forces that have started taking responsibility for security in the three Kurdish cantons. The YPG victory over Islamic State in the town of Tal Abyad this summer established a physical link between two of the three Kurdish cantons for the first time.

  So essentially, YPG has defeated ISIS in northern Syria, taken complete control of the area, and indeed, only one swath of land separates the group from commanding the entire border with Turkey.

  Great, right? Wrong. Here’s The Journal again:

  The U.S. and Turkey have reached an understanding meant to assure the Ankara government that plans to drive Islamic State militants from a proposed safe zone in northern Syria won’t clear the way for Kurdish fighters to move in.

   

  The U.S.-allied Turkish government is embroiled in a decades-old conflict with its own Kurdish minority. Turkey has resisted working with the YPG out of concern that the militants are laying the groundwork for the creation of a new Kurdish nation along Syria’s northern border with Turkey.

   

  Two weeks ago, Turkey agreed to launch airstrikes targeting Islamic State fighters in Syria and allow the U.S. to use bases on its soil for the first time to do the same. At Turkey’s urging, the U.S. agreed to use airstrikes to protect a border zone free of Islamic State and controlled by moderate Syrian rebels.

   

  The Syrian Kurdish militia has pushed toward the eastern banks of the Euphrates River, the edge of Islamic State-controlled areas on the other side. The border zone the U.S. and Turkey want to set up is on the western side of the river.

   

  

   

  YPG leaders said Monday they would work closely with allies, including the U.S.-led coalition and moderate rebel forces such as the Free Syrian Army or FSA, in the fight against Islamic State—also known as ISIS or ISIL.

   

  However, they said they had made no commitment not to cross the Euphrates.

   

  “The initial plan is to move to liberate the western side of the Euphrates once the areas to the east have been cleared of ISIS,” said Idres Nassan, a senior Kurdish official in Kobani. 

  That may have been the “initial plan”, and indeed it certainly sounds like a good one, especially considering that, as is clear from the map above, it would mean YPG would have succeeded in driving ISIS completely off the country’s northern border, but that plan will apparently have to change now because Washington, after supporting YPG on the battlefield for the better part of a year, will now deliberately prevent the group from doing what they do best (defeating ISIS in northern Syria) because Ankara wants to ensure that the imagined “ISIS-free zone” (that’s the actual term) is also a Kurd-free zone:

  The area where Turkey hopes to establish the border zone is filled with ethnic Turkmen and Arabs and Turkish leaders fear that the Kurdish fighters will try to drive them out.

   

  “That’s a red line,” said one Turkish official. “There are almost no Kurds in the area that would be the ISIL-free zone. Forcing the issue would trigger a new wave of ethnic cleansing, which is unacceptable to us.”

  To be sure, Washington isn’t entirely oblivious to how ridiculous this looks:

  Keeping Kurdish fighters from moving farther west restricts America’s ability to work in northwestern Syria with a Kurdish militia that has proved an effective fighting force. U.S. officials have offered Turkey reassurances that they won’t rely on the YPG in that area, but have sought to give themselves wiggle room to work with the Kurdish fighters in that area if the needs arise.

  Crystallizing the above and putting it in context is admittedly quite challenging because after all, trying to make sense of something so thoroughly nonsensical is probably an exercise in futility, but nevertheless, we’ll try to untangle the situation as best we can. Turkey has long been criticized for not taking an active role in combatting the ISIS threat that is quite literally on the country’s doorstep. Quite possibly, that reluctance stems from an amicable relationship between ISIS and Ankara and that relationship might well have remained amicable if Erdogan hadn’t lost his grip on parliament in June. Now, the country’s relationship with the militants will become a casualty of Erdogan’s ruthless politically-motivated crackdown on the Kurdish PKK which, thanks to their classification as a “terrorist” group, is now sanctioned by the US which is of course using ISIS as an excuse to facilitate the ouster of Assad, a goal Washington shares with Ankara. Lost in the shuffle is YPG who, unlike the US and Turkey, is actually concerned with defeating Islamic State and is indeed on the verge of doing just that, but will sadly be stopped in their tracks by the same US military which has so far supported them because allowing YPG to complete their sweep of northern Syria risks aggravating Turkey which is a NATO member and which the US figures it may need once Assad is gone and the Qatar-Turkey natural gas pipeline gets the go ahead. 

  So the US is now quite literally impeding the progress of the group which has so far “proven to be the most effective ground force fighting Islamic State,” and the general public is so obtuse that most people will completely miss the completely ridiculous fact that the excuse the US and Turkey are giving for their efforts to stop YPG from routing ISIS in northern Syria is that the two countries are currently working on building an “ISIS-free zone” and YPG, which has in fact made virtually the entire northern border region “ISIS-free”, is not welcome due to its fighters’ ethnicity. 

  

  

  

  

  

• Politicians Seek Short-Term Advantages By Lecturing Capitalists About The Long Term

  Submitted by Gary Galles via The Mises Institute,

  Hillary Clinton’s latest campaign salvo attacked “quarterly capitalism,” the supposedly irresponsible corporate focus on short-term results at the expense of long-term growth. She promised government fixes.

  Short-Termism, Share Prices, and Incentives

  Is there too much short-termism in business firms? To answer this, let’s look at participants’ incentives.

  Shareholders own the present value of their pro-rata share of net earnings, not just present earnings. They do not want to hurt themselves by sacrificing good investments today which raise that expected present value. Owners often tarred as too selfish do not ignore those consequences. Critics also confuse short-term corporate results as the goal, when they are actually valuable indicators of the likely future course of net earnings. Just because good short-term results raise stock prices does not imply excessive short-termism.

  Since share prices are both a primary metric for managerial success and basis for their rewards, and they reflect the present value of expected future net earnings, managers’ time horizons reflect shareholders’ time horizons, stretching far beyond immediate measures.

  Bondholders, who want to be paid back, incorporate the future, where repayment risks lie, in their choices. Workers and suppliers are also sensitive to firms’ future prospects, and the prospect of those relationships being terminated if things start turning south forces consideration of the future in present choices.

  Beyond misinterpreting share price responses to good short-term results as short-term bias, Clinton’s main proof of short-termism was that firms have increased stock buybacks, supposedly sacrificing worthwhile investments by returning funds to shareholders. She ignores that those funds will largely be invested elsewhere with better prospects. But she also ignores that the buyback binge reflects the Fed’s long-term artificial cheapening of borrowed money. When debt financing gets cheaper relative to equity financing, firms substitute toward debt. But a firm substituting debt financing for an equal amount of equity controls no fewer funds for future-oriented investments.

  The Role of the Fed and Government Intervention

  Confusing business responses to artificial Fed interventions as business-caused only begins the list of government created biases toward short-termism. Constant proposals to raise corporate tax rates and worsen capital gains treatment in the future reduce the after-tax profitability of good investments. Regulatory mandates and impositions pile up, with far more put in the pipeline for the future, doing the same. Energy policy threatens huge increases in costs, reducing likely investment returns. And the list goes on.

  That government regulators will put more emphasis on the future than the private sector is also contradicted by political incentives. Owners bear predictable future consequences in current share prices, but politicians’ incentives are far more short-sighted.

  Government Is More Short-Term Oriented Than the Private Sector

  An election loser will be out of office, and capture no appreciable benefit from efforts invested. So when an upcoming election is in doubt, everything goes on the auction block to buy short-term political advantage. And politicians’ incentives drive those facing the DC patronage machine. That is why so much “reform” meets Ambrose Bierce’s definition of “A thing that mostly satisfies reformers opposed to reformation.” The mere passage of bills in the political nick of time, even largely unread ones, can be declared victorious legacies, with harmful consequences never effectively brought to bear on decision-makers.

  Not only is politics inherently more short-sighted than private ownership and voluntary contractual arrangements, there is a cornucopia of examples of government short-termism at the expense of the future, whose magnitude dwarfs anything they promise to reform.

  Unwinding Social Security and Medicare’s 14-digit unfunded liabilities will punish future generations, caused by massive government overpromising to buy earlier elections. Other underfunded trust and pension funds threaten similar future atonement for earlier short-term “sins.” Expanding government debt similarly represents future punishment for short-term political payoffs. Foreign and military policy have similarly turned away from dealing with long-term issues. But serious long-run issues like immigration escape serious attention because “public servants” are afraid of short-run interest group punishment.

  Political attacks on short-termism, and reforms to fix it, are beyond confused. They ignore financial market participants’ clear incentives to take future effects into account. They are clueless about what provides evidence of short-termism. They treat private sector responses to government impositions as private sector failures. They ignore far worse political incentives facing “reformers.” And they act as if the most egregious examples of short-termism in America, all government progeny, don’t exist.

  There is little to Clinton’s criticism and alleged solutions beyond misunderstanding and misrepresentation. We should recognize, with Henry Hazlitt, that “today is already the tomorrow which the bad economist yesterday urged us to ignore,” and that expanding government’s power to do more of the same is not in Americans’ interests.

   

  

  

  

  

  

• Creditors May Have To Hire Pirates To Seize Oil Ship From "Deadbeat" Ex-Billionaire

  Sometimes it’s not worth it for creditors to seize collateral when a deal goes bad. 

  Just ask Deutsche Bank, or any of the other investment banks which would have been forced to book billions in mark-to-market losses on Canadian asset-backed commercial paper deals gone bad in 2007 had they chosen to collect the available collateral and cancel their swaps rather than negotiate a restructuring. 

  Or you could ask OSX Brasil SA bondholders who are technically entitled to take possession of an oil ship the size of the Chrysler building which is currently sitting 130 miles off Brazil’s coast.

  As Bloomberg explains, OSX effectively forfeited its claim on the ship when the company – part of former billionaire Eike Batista’s crumbled empire – defaulted in March, giving creditors the option to sail out and tow the vessel in. 

  The issue, of course, is that there are significant logistical problems associated with repossessing a giant oil ship and while creditors work on figuring those problems out, OGpar (another Batista venture) is still pumping 10,000 barrels of oil a day, because…well…because why not if no one is going to come and stop you.

  To add insult to injury, OGpar is refusing to pay the nearly $300,000/day rental fee to use the vessel, money which, considering OSX is bankrupt, presumably also belongs to creditors. Here’s more from Bloomberg:

  The clash is the latest chapter in the saga of Brazil’s once-richest man, an investor-darling-turned-pariah who sold shares in six companies in a span of six years and lost more than $30 billion even faster when his commodities and energy empire collapsed. It’s also a cautionary tale for Brazilian creditors, whose claims can get tied up for years and even decades in the nation’s maze-like legal system.

   

  [Bondholders] could try to seize the ship, but only if a court and the government approves. And the tumble in crude prices means the vessel isn’t worth what they’re owed, anyway. They could leave the rig to OGpar while waiting for asset prices to rebound, but the oil producer is refusing to pay rental fees of as much as $265,000 a day.

   

  OSX’s bondholders — including Redwood Capital Management LLC, DW Partners LP and Rimrock Capital Management LLC — are asking a Brazilian court to make OGpar pay $70 million in past-due fees.

   

  Batista and OgPar and OSX’s management “are doing what they can to abuse the Brazilian legal system to prevent investors from being paid what they are owed,” said Ruben Kliksberg, a partner at hedge fund Redwood Capital. Batista and the management teams, as well as courts, “are having a material impact on the reputation of Brazil as a foreign investment jurisdiction.”

  Maybe so, but as OGpar CEO Paulo Narcelio will patiently explain to you, the company (which is also bankrupt) is trying to squeeze out a living here, and if it is forced to pay the money it owes, then the offshore oil operation that it shouldn’t be allowed to run in the first place will cease to be economically viable.

  OGpar Chief Executive Officer Paulo Narcelio said paying the $70 million could force the Rio de Janeiro-based company to shut down and liquidate. OGPar also has been operating under bankruptcy protection since 2013.

   

  The oil company is producing only about 10,000 barrels a day — about 10 percent of capacity — from the vessel in Brazil’s offshore Tubarao Martelo field. Paying the full daily rate would make the operation unprofitable, Narcelio said.

   

  “There will only be losers if they keep insisting,” Narcelio said in an interview in Rio de Janeiro. “It’s stupidity. They’re portfolio-management kids just out of college, and they think they’re powerful.”

  Yes, these newly graduated greenhorns were under the mistaken impression that the bond covenants represented legally-binding agreements between creditors and borrowers (thanks a lot undergrad finance professors). What these “kids” don’t understand is that in a world ruled by debt, “insisting” that people pay back what they borrowed produces nothing but “losers.”

  You know, it’s the old “if I owe you a dollar that’s my problem, but if I owe you a 1,000 foot oil ship, that’s your problem” argument – or something. 

  As Bloomberg goes on to note, “disconnecting and hauling away the 284,000-ton vessel would cost millions of dollars and require approval from Brazil’s oil regulator and maybe even the Navy,” meaning there aren’t really any good options here for the bondholders.

  Well, that’s not entirely true.  

  Leonardo Theon de Moraes, a bankruptcy expert in Sao Paulo who spoke to Bloomberg did say that there was one possibly cheaper alternative creditors could pursue: 

  “The costs of executing the collateral are very high unless creditors send pirates from Algeria to go and get the vessel.”

   

  
  

  

  

  

  

  

• Goldman Is Confused: If The Economy Is Recovering, Then How Is This Possible

  Following last week’s news that household formation jumped and was revised higher, the logical consequence is that young Americans living in their parents’ basement must finally be moving out.

  They are not.

  In fact, as the chart below from Goldman shows, Millennials are doing anything but moving out, a development that has left Goldman’s economists stumped.

  Below is a chart showing that the share of young people (18-34) living with parents has held steady over the last half year, and close to the highest since the financial crisis.

  

   

  This is how Goldman frames its confusion:

  “The share of young people living with their parents–which rose sharply during the recession and its aftermath–finally began to decline in 2014. But over the last six months, this decline seems to have stalled.“

  But the economy is recovering, jobs are plenty, credit is available to all. How can this be???

  Unless… it is all baseless propaganda meant simply to inspire confidence in rigged data.

  Unpossible, right? Well, even Goldman is no longer so sure:

  We find that the share of young people living with their parents has increased relative to pre-recession rates for all labor force status groups, not just the unemployed and underemployed. Overall, above-average youth underemployment rates alone account for about one-third of the increase in the share of young people living with their parents, and lagged effects of the recession probably account for a bit more.

  Goldman tries to explain this counterintuitive… assuming the “intuitive” is that the economy is recovering.

  To what extent do current labor market conditions explain the elevated rate of young people living with their parents? To answer this question, we use the CPS micro data to calculate the share of 18-34 year olds living with their parents by labor market status (employed, voluntary part-time, involuntary part-time, unemployed, and not in the labor force). Because the data are noisy and not seasonally adjusted, we use the 12-month average ending June 2015 and then compare with the 2007 average. Our first finding, shown [below] is that the percentage living with parents is higher across all labor force status classifications. Even among the employed, the share of young people living with their parents remains about 2pp higher than in 2007.

  The Share of Young People Living with Parents Has Risen for All Labor Force Status Groups

  

  And then another nail in the “economy is recovering” coffin:

  What accounts for the rest? Part of the explanation is likely that the legacy of the recession wears off only gradually, and looking at current employment status therefore understates the degree to which this is ultimately a labor market problem. Indeed, using a panel of state-level data constructed from the CPS, we find that the effect of unemployment shocks on the share of young people living with their parents dissipates slowly. Why might this be? While moving into a rental unit usually presents a lower hurdle than becoming a homeowner, young people who now have jobs but struggled in recent years might not have enough savings to cover an initial deposit or might fall short of landlords’ expectations for a potential tenant’s credit score, savings, or income history.

   

  Three other factors might also have played a role. First, researchers at the New York Fed and the Fed Board have found evidence that rising student debt and poor credit scores have contributed to the elevated share of young people living with their parents. Second, the median age at first marriage has increased at a faster than usual rate since 2007 (1.8 years for men and 1.4 years for women). While economic conditions might have played a role, we have found evidence that marriage rates are an important determinant of headship rates. Third, as Exhibit 4 shows, rent-to-income ratios are at historic highs, especially for young people. The future trajectory of these three factors is less clear, suggesting that the share of 18-34 year-olds living at home might not fully return to pre-recession rates.

  Rent-to-Income Ratios Are Quite High, Especially for Young People

  

  It’s not just Goldman that can’t wrap its head around this most fundamental refutation that contrary to the propaganda, there is no recovery for the biggest, and most important, US generation currently alive. Here is more from USA Today:

  Despite continued signs of economic recovery, a growing number of Millennials are moving back in with Mom and Dad.

   

  The percentage of Millennials living with their parents increased from 24% in 2010 to 26% in the first third of 2015, according to a Pew Research Center report, which is based on Census data. The study, which was released last week, compared figures to 2010 because it was the beginning of the economic recovery and one of the worst years for the labor market, said Richard Fry, senior economist at Pew. This is despite a lower unemployment rate. In 2010, that rate was 12.4%; it has fallen to 7.7% so far in 2015, according to Pew.

   

  Roughly the same number of Millennials — 25 million — head their own households today since before the recession in 2007, said the report.

   

  The data are bad news for the housing industry, which is looking for a boost from young, first-time buyers.

   

  “The pattern of household formation has become unglued from the job market,” Fry says. “This is concerning because … there’s a lot of spending that goes with setting up households. Young adults are not establishing more households, and that’s proving to be one of the drags on the housing recovery and the larger economy.”

  To summarize: a terrible labor market for the young generation as a result of “sticky” elderly workers who can’t fall back on interest from their savings thanks to the Fed’s ZIRP policy and are thus unable to retire clearing the labor market for the nextt generation, an unprecedented student debt load, and soaring rents which Millennial incomes simply can not cover.

  And that is why the economy is far worse than anyone in the mainstream media will admit.

  But wait, because here comes the paradoxical punchline: as more and more Millennials are stuck in the basement for whatever reason, and refuse to be a part of the labor force, the immediate implication is that due to their inertness, and unwillingness to even try to get a job, the US labor force participation rate is crashing and artificially low as millions of young Americans remain either in their parents’ basement or in college (with the benefit of a very generous student loan from Uncle Sam). The result – a chart which looks eerily comparable to the one up top, showing the number of Millennials living with their parents: the US labor force participation rate inverted.

  

   

  Why is this a paradox?

  Because as the participation rate declines, so does the unemployment rate (thanks to a record 94 million Americans not in the labor force). In fact, the worse the US economy is for tens of millions of millennials, the lower the broader unemployment rate drops, sending a false signal to the Fed and economists that the economy is actually stronger!

  And the supreme irony: the worse the economy, and the lower the unemployment rate, the closer the Fed is to hiking rates. In fact, as Lockhart hinted today, the Fed may well hike rates in just one month due to one massive misinterpretation of what is really going on in an economy in which a record number of people choosing not to look for work, but to continue playing Xbox in their parents’ basement… right next to their bed.

  No wonder Goldman is confused. As for the Fed hiking right into what is by implication an economy that is grinding to a halt if not already in recession, well… just read our notes on what happened when the very same Fed woke up the “Ghost of 1937” in an almost identical scenario.

  The outcomes, one of which was the second World War, were anything but pleasant…

  

  

  

  

  

• AAPLocalypse & Lockhart-nado Spoil Stock Party; Dollar & Bond Yields Surge

  The last week in stocks (and Apple and Twitter) in 19 seconds…

   

  Strength in China on new short-selling-curbs provided very littlc comfort for US investors. Early strength quickly faded as Dennis Lockhart peed in the Kool-Aid…

  

   

  On the day…only Trannies closed green…

  

   

  From Lockhart's comments, S&P and Dow were weak…

  

   

  And since Friday… Dow and Smal lCaps underperform

  

   

  The machines were in charge as AAPL selling pressure demanded index support to sustain institutional sells…

  

   

  With AAPL getting clubbed…

  

   

  VIX was as gappy as a hillbilly's teeth…

  

   

  Treasury yields all rose notably after Lockhart jawboned…

  

   

  Which drove the curve to its flattest in almost 4 months…and flattening at the fastest pace this year

  

   

  The Dollar Index surged after Lockhart's comments as money fled EUR and CHF…

  

   

  Dollar strength sparked more commodity weakness…

  

   

  Fed credibility remains near zero as the long-bond tracks reality and short-end tracks Fed promises… As one witty chap said "Data Dependent, my arse!!"

  

   

  Charts: Bloomberg

  Bonus Chart: Just a little reminder – The Fed f##ked up before…"The Fed exit strategy completely failed as the money supply immediately contracted; Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones."

  

  

  

  

  

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