Today’s News August 6, 2015

• Paul Craig Roberts: A Prescription For Peace & Prosperity

  Submitted by Paul Craig Roberts,

  The question is often asked: “What can we do?” Here is a prescription for peace and prosperity.

  We will begin with prosperity, because prosperity can contribute to peace. Sometimes governments begin wars in order to distract from unpromising economic prospects, and internal political stability can also be dependent on prosperity.

  The Road to Prosperity

  For the United States to return to a prosperous road, the middle class must be restored and the ladders of upward mobility put back in place. The middle class served domestic political stability by being a buffer between rich and poor. Ladders of upward mobility are a relief valve that permit determined folk to rise from poverty to success. Rising incomes throughout society provide the consumer demand that drives an economy. This is the way the US economy worked in the post-WWII period.

  To reestablish the middle class the offshored jobs have to be brought home, monopolies broken up, regulation restored, and the central bank put under accountable control or abolished.

  Jobs offshoring enriched owners and managers of capital at the expense of the middle class. Well paid manufacturing and industrial workers lost their livelihoods as did university graduates trained for tradable professional service jobs such as software engineering and information technology. No comparable wages and salaries could be found in the economy where the remaining jobs consist of domestic service employment, such as retail clerks, hospital orderlies, waitresses and bartenders. The current income loss is compounded by the loss of medical benefits and private pensions that supplemented Social Security retirement. Thus, jobs offshoring reduced both current and future consumer income.

  America’s middle class jobs can be brought home by changing the way corporations are taxed. Corporate income could be taxed on the basis of whether corporations add value to their product sold in US markets domestically or offshore. Domestic production would have a lower tax rate. Offshored production would be taxed at a higher rate. The tax rate could be set to cancel out the cost savings of producing offshore.

  Under long-term attack by free market economists, the Sherman Antitrust Act has become a dead-letter law. Free market economists argue that markets are self-correcting and that anti-monopoly legislation is unnecessary and serves mainly to protect inefficiency. A large array of traditionally small business activities have been monopolized by franchises and “big box” stores. Family owned auto parts stores, hardware stores, restaurants, men’s clothing stores, and dress shops, have been crowded out. Walmart’s destructive impact on Main Street businesses is legendary. National corporations have pushed local businesses into the trash bin.

  Monopoly has more than economic effect. When six mega-media companies have control of 90 percent of the American media, a dispersed and independent press no longer exists. Yet, democracy itself relies on media helping to hold government to account. The purpose of the First Amendment is to control the government, but today media serves as a propaganda ministry for government.

  Americans received better and less expensive communication services when AT&T was a regulated monopoly. Free trade in communications has resulted in the creation of many unregulated local monopolies with poor service and high charges. AT&T’s stability made the stock a “blue-chip” ideal for “widow and orphan” trust funds, pensions, and wealth preservation. No such risk free stock exists today.

  Monopoly was given a huge boost by financial deregulation. Federal Reserve chairman Alan Greenspan’s claim that “markets are self-regulating” and that government regulation is harmful was blown to pieces by the financial crisis of 2007-2008. Deregulation not only allowed banks to escape from prudent behavior but also allowed such concentration that America now has “banks too big to fail.” One of capitalism’s virtues and justifications is that inefficient enterprises fail and go out of business. Instead, we have banks that must be kept afloat with public or Federal Reserve subsidies. Clearly, one result of financial deregulation has been to protect the large banks from the operation of capitalism. The irony that freeing banks from regulation resulted in the destruction of capitalism is lost on free market economists.

  The cost of the Federal Reserve’s support for the banks too big to fail with zero and negative real interest rates has been devastating for savers and retirees. Americans have received no interest on their savings for seven years. To make ends meet, they have had to consume their savings. Moreover, the Federal Reserve’s policy has artificially driven up the stock market with the liquidity that the Federal Reserve has created and also caused a similar bubble in the bond market. The high prices of bonds are inconsistent with the buildup in debt and the money printed in order to keep the debt afloat. The dollar’s value itself depends on quantitative easing in Japan and the EU.

  In order to restore financial stability, an obvious precondition for prosperity, the large banks must be broken up and the distinction between investment and commercial banks restored.

  Since the Clinton regime, the majority of the Treasury secretaries have been top executives of the troubled large banks, and they have used their public position to benefit their banks and not the US economy. Additionally, executives of the large banks comprise the board of the New York Fed, the principal operating arm of the Federal Reserve. Consequently, a few large banks control US financial policy. This conspiracy must be broken up and the Federal Reserve made accountable or abolished.

  This requires getting money out of politics. The ability of a few powerful private interest groups to control election outcomes with their campaign contributions is anathema to democracy. A year ago the Republican Supreme Court ruled that the rich have a constitutional right to purchase the government with political campaign contributions in order to serve their selfish interests.

  These are the same Republican justices who apparently see no constitutional right to habeas corpus and, thus, have not prohibited indefinite detention of US citizens. These are the same Republican justices who apparently see no constitutional prohibition against self-incrimination and, thus, have tolerated torture. These are the same Republican justices who have abandoned due process and permit the US government to assassinate US citizens.

  To remove the control of money over political life would likely require a revolution. Unless prosperity is to be only for the One Percent, the Supreme Court’s assault on democracy must be overturned.

  The Road to Peace is Difficult

  To regain peace is even more difficult than to regain prosperity. As prosperity can be a precondition for peace, peace requires both changes in the economy and in foreign policy.

  To regain peace is especially challenging, not because Americans are threatened by Muslim terrorists, domestic extremists, and Russians. These “threats” are hoaxes orchestrated in behalf of special interests. “Security threats” provide more profit and more power for the military/security complex.

  The fabricated “war on terror” has been underway for 14 years and has succeeded in creating even more “terror” that must be combated with enormous expenditures of money. Apparently, Republicans intend that monies paid in Social Security and Medicare payroll taxes be redirected to the military/security complex.

  The promised three-week “cakewalk” in Iraq has become a 14 year defeat with the radical Islamic State controlling half of Iraq and Syria. Islamist resistance to Western domination has spread into Africa and Yemen, and Saudi Arabia, Jordan, and the oil emirates are ripe fruit ready to fall.

  Having let the genie out of the bottle in the Middle East, Washington has turned to conflict with Russia and by extension to China. This is a big bite for a government that has not been able to defeat the Taliban in Afghanistan after 14 years.

  Russia is not a country accustomed to defeat. Moreover, Russia has massive nuclear forces and massive territory into which to absorb any US/NATO invasion. Picking a fight with a well-armed country with by far the largest land mass of any country shows a lack of elementary strategic sense. But that is what Washington is doing.

  Washington is picking a fight with Russia, because Washington is committed to the neoconservative doctrine that History has chosen Washington to exercise hegemony over the world. The US is the “exceptional and indispensable” country, the Uni-power chosen to impose Washington’s will on the world.

  This ideology governs US foreign policy and requires war in its defense. In the 1990s Paul Wolfowitz enshrined the Wolfowitz Doctrine into US military and foreign policy. In its most bold form, the Doctrine states:

  “Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union. This is a dominant consideration underlying the new regional defense strategy and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power.”

  As a former member of the original Cold War Committee on the Present Danger, I can explain what these words mean. The “threat posed formerly by the Soviet Union” was the ability of the Soviet Union to block unilateral US action in some parts of the world. The Soviet Union was a constraint on US unilateral action, not everywhere but in some places. This constraint on Washington’s will is regarded as a threat.

  A “hostile power” is a country with an independent foreign policy, such as the BRICS (Brazil, Russia, India, China, and South Africa) have proclaimed. Iran, Bolivia, Ecuador, Venezuela, Argentina, Cuba, and North Korea have also proclaimed an independent foreign policy.

  This is too much independence for Washington to stomach. As Russian President Vladimir Putin recently stated, “Washington doesn’t want partners. Washington wants vassals.”

  The Wolfowitz doctrine requires Washington to dispense with governments that do not acquiesce to Washington’s will. It is a “first objective.”

  The collapse of the Soviet Union resulted in Boris Yeltsin becoming president of a dismembered Russia. Yeltsin was a compliant US puppet. Washington became accustomed to its new vassal and absorbed itself in its Middle Eastern wars, expecting Vladimir Putin to continue Russia’s vassalage.

  However at the 43rd Munich Conference on Security Policy, Putin said: “I consider that the unipolar model is not only unacceptable but also impossible in today’s world.”

  Putin went on to say: “We are seeing a greater and greater disdain for the basic principles of international law. And independent legal norms are, as a matter of fact, coming increasingly closer to one state’s legal system. One state and, of course, first and foremost the United States, has overstepped its national borders in every way. This is visible in the economic, political, cultural and educational policies it imposes on other nations. Well, who likes this? Who is happy about this?”

  When Putin issued this fundamental challenge to US Uni-power, Washington was preoccupied with its lack of success with its invasions of Afghanistan and Iraq. Mission was not accomplished.

  By 2014 it had entered the thick skulls of our rulers in Washington that while Washington was blowing up weddings, funerals, village elders, and children’s soccer games in the Middle East, Russia had achieved independence from Washington’s control and presented itself as a formidable challenge to Washington’s Uni-power. Putin and Russia have had enough of Washington’s arrogance.

  The unmistakable rise of Russia refocused Washington from the Middle East to Russia’s vulnerabilities. Ukraine, long a constituent part of Russia and subsequently the Soviet Union, was split off from Russia in the wake of the Soviet collapse by Washington’s maneuvering. In 2004 Washington had tried to capture Ukraine in the Orange Revolution, which failed to deliver Ukraine into Washington’s hands. Consequently, according to Assistant Secretary of State Victoria Nuland, Washington spent $5 billion over the following decade developing NGOs that could be called into the streets of Kiev and in developing political leaders who represented Washington’s interests.

  Washington launched its coup in February 2014 with orchestrated “demonstrations” that with the addition of violence resulted in the overthrow and flight of the elected democratic government of Victor Yanukovych. In other words, Washington destroyed democracy in a new country with a coup before democracy could take root.

  Ukrainian democracy meant nothing to Washington intent on seizing Ukraine in order to present Russia with a security problem and also to justify sanctions against “Russian aggression” in order to break up Russia’s growing economic and political relationships with Europe.

  Having launched on this reckless and irresponsible attack on a nuclear power, can Washington eat crow and back off? Would the neoconservative-controlled mass media permit that? The Russian government, backed 89% by the Russian people, have made it clear that Russia rejects vassalage status as the price of being part of the West. The implication of the Wolfowitz Doctrine is that Russia must be destroyed.

  This implies our own destruction.

  What can be done to restore peace? Obviously, the EU must abandon NATO and declare that Washington is a greater threat than Russia. Without NATO Washington has no cover for its aggression and no military bases with which to surround Russia.

  It is Washington, not Russia, that has an ideology of “uber alles.” Obama endorsed the neoconservative claim that “America is the exceptional country.” Putin has made no such claim for Russia. Putin’s response to Obama’s claim is that “God created us equal.”

  In order to restore peace, the neoconservatives must be removed from foreign policy positions in the government and media. This means that Victoria Nuland must be removed as Assistant Secretary of State, that Susan Rice must be removed as National Security Adviser, that Samantha Power must be removed as US UN ambassador.

  The warmonger neoconservatives must be removed from Fox ‘News,’ CNN, the New York Times, Washington Post, and Wall Street Journal, and in their places independent voices must replace propagandists for war.

  Clearly, none of this is going to happen, but it must if we are to escape armageddon.

  The prescription for peace and prosperity is sound. The question is: Can we implement it?

  

  

  

  

• "I Sure Am Glad There's No Inflation"

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  I sure am glad there's no inflation, because these "stable prices" the Federal Reserve keeps jaw-jacking about are putting us in a world of hurt.

  We are constantly bombarded with two messages about inflation:

  1. Inflation is near-zero

  2. This worries the Federal Reserve terribly, because stable prices are deflationary and deflation is (for reasons that are never explained) like the financial Black Plague that will wipe out humanity if it isn't vanquished by a healthy dose of inflation (i.e. getting less for your money).

  Those of us outside the inner circles of power are glad there's no inflation, because we'd rather get more for our money (deflation) rather than less for our money (inflation). You know what I mean: the package that once held 16 ounces now only holds 13 ounces. A medication that once cost $79 now costs $79,000. (This is a much slighter exaggeration than you might imagine.)

  Our excellent F-18 Super Hornet fighter aircraft cost us taxpayers $54 million a piece. Now the replacement fighter, the wallowing collection of defective parts flying in close proximity known as the F-35 costs $250 million each–unless you want an engine in it. That'll cost you extra, partner.

  Despite all these widely known examples of rampant inflation, every month we're told there's no inflation. Just to reassure myself there's no inflation, I looked up a few charts on the St. Louis Fed's FRED database.

  I have to say, I'm scratching my head here because the cost of things has gone up a lot since 2000.

  The consumer price index is up 38% from 2000. Now if somebody were to give me a choice between getting 10 gallons of gasoline and 10 gallons minus 3.8 gallons of gasoline, I'd take the 10 gallons. So how the heck can a 38% increase be near-zero inflation?

  If I took $38 of every $100 you earned, would you reckon I'd taken next to nothing from you? Do you earn 38% more than you did in 2000? If so, congratulations; most people can't answer "yes."

  

  Urban-area rents are up 56% from 2000. Now this is even worse inflation, because you just paid $156 for what used to cost you only $100.

  

  State and local government taxes are up 75% since 2000. And this doesn't even include the rip-off fishing license fees that have gone through the roof, the boat registration fees that have shot to the moon, and the legal-looting parking ticket that used to be $12 and is now $60.

  Taxes naturally rise with the economic expansion due to rising population, which has gone up about 13.8% since 2000: from 281 million residents of the USA to 320 million in 2015. So taxes rising a few percentage points each year along with growth and population would make sense. But 75%?

  

  I've got a real treat for all you parents, uncles, aunts and grandparents who are planning to put the kids through college: the costs have only risen about 100% since 2000. That means instead of scraping up $80,000 per kid (assuming they can get all their required classes and grind the thing out in four years) you now need to scrape up $160,000 per kid.

  

  The price index for college tuition grew by nearly 80 percent between August 2003 and August 2013. Now to make this apples to apples with the rest of the data here, we need to add in the nearly 5 missing years: from 1/1/2000 to 8/1/2003 and from 8/1/2013 to 8/1/2015. I'd say putting the increase at 100% is being conservative.

  I sure am glad there's no inflation, because these "stable prices" the Federal Reserve keeps jaw-jacking about are putting us in a world of hurt. If we had honest-to-goodness inflation, that would push us right over the edge.

  

  

  

  

  

• Hillary Clinton's FBI Investigation Is A "Criminal Probe": Post

  Following the embarrassing Snafu two weeks ago, in which the NYT reported, then unreported, that Hillary Clinton had sent at least four emails from her personal account containing classified information during her time heading the State Department and as a result both the DOJ and FBI had gotten involved (with lots of confusion over what is active and what is passive voice) many were confused: was or wasn’t the DOJ or FBI involved, and if not, why not? After all, there was sufficient evidence of enough negligence to merit at least a fact-finding mission.

  Last night we got a part of the answer, when WaPo reported that what the NYT reported, then unreported, was in fact accurate: “The FBI has begun looking into the security of Hillary Rodham Clinton’s private e-mail setup, contacting in the past week a Denver-based technology firm that helped manage the unusual system, according to two government officials.

  Also last week, the FBI contacted Clinton’s lawyer, David Ken­dall, with questions about the security of a thumb drive in his possession that contains copies of work e-mails Clinton sent during her time as secretary of state.”

  As a reminder, David Kendall is “a prominent Williams & Connolly attorney who defended former CIA director David Petraeus against charges of mishandling classified information.” That Clinton has resorted to using him reveals just how far she thinks this could escalate.

  As the WaPo further added, “the FBI’s interest in Clinton’s e-mail system comes after the intelligence community’s inspector general referred the issue to the Justice Department in July. Intelligence officials expressed concern that some sensitive information was not in the government’s possession and could be “compromised.” The referral did not accuse Clinton of any wrongdoing, and the two officials said Tuesday that the FBI is not targeting her.”

  Maybe that’s true, or maybe that’s how the Amazon Post was told to spin the narrative. However, moments ago a far less liberal outlet, came out with its own interpretation of the ongoing FBI escalation involving Hillary, and according to the NY Post, “the FBI investigation into former Secretary of State Hillary Rodham Clinton’s unsecured e-mail account is not just a fact-finding venture — it’s a criminal probe, sources told The Post on Wednesday.”

  The feds are investigating to what extent Clinton relied on her home server and other private devices to send and store classified documents, according to a federal source with knowledge of the inquiry.

   

  “It’s definitely a criminal probe,” said the source. “I’m not sure why they’re not calling it a criminal probe.

  Well, there are several reasons, one of which is that a presidential candidacy would be all but scuttled if they had to fight a criminal probe at the same time as they were trying to convince the rest of the US of their pristine moral character.

  The DOJ [Department of Justice] and FBI can conduct civil investigations in very limited circumstances,” but that’s not what this is, the source stressed. “In this case, a security violation would lead to criminal charges. Maybe DOJ is trying to protect her campaign.”

  Clinton’s camp has downplayed the inquiry as civil and fact-finding in nature. Clinton herself has said she is “confident” that she never knowingly sent or received anything that was classified.

  As reported on July 24, the inspector general told Congress that of 40 Clinton e-mails randomly reviewed as a sample of her correspondence as secretary of state, four contained classified information. Post adds that “if Clinton is proven to have knowingly sent, received or stored classified information in an unauthorized location, she risks prosecution under the same misdemeanor federal security statute used to prosecute former CIA Director Gen. David Petraeus, said former federal prosecutor Bradley Simon.”

  Which also explains why she hired his lawyer.

  The statute — which was also used to prosecute Bill Clinton’s national security adviser, Sandy Berger, in 2005, is rarely used and would be subject to the discretion of the attorney general.

   

  Still, “They didn’t hesitate to charge Gen. Petraeus with doing the same thing, downloading documents that are classified,” Simon said. “The threshold under the statute is not high — they only need to prove there was an unauthorized removal and retention” of classified material, he said.

   

  “My guess is they’re looking to see if there’s been either any breach of that data that’s gone into the wrong hands [in Clinton’s case], through their counter-intelligence group, or they are looking to see if a crime has been committed,” said Makin Delrahim, former chief counsel to the Senate Judiciary Committee, who served as a deputy assistant secretary in the Bush DOJ.

   

  “They’re not in the business of providing advisory security services,” Delrahim said of the FBI. “This is real.”

  To be sure, this may just be the Post trying to stir the pot with its “sources” ahead of what promises to be the most watched republican primary debate in history. But on the off chance Rupert Murdoch’s outlet is accurate, then one wonders why and how did Obama greenlight such an investigation, whose blessing could only come from the very top.

  And if the administration has decided to sacrifice Hillary, whose favorability numbers just plunged to the point she may not need outside help to prematurely end her presidential run, just who does the current regime have in mind for the next US president?

  

  

  

  

  

• US Allows Ally Turkey to Bomb Only Group Effectively Fighting ISIS

  Submitted by Naji Dahl via Anti-Media,

  Late in July, the Anti-Media reported that Turkey joined the U.S. led coalition conducting airstrikes against the Islamic State (IS, ISIS, ISIL). Since then, it has become clear that Turkey’s strategy is part of a larger agreement with the U.S. to conduct a war against “extremism” in the region.

  The deal between the U.S. and Turkey has the following contours: Turkey will allow the U.S. to use its military base at Incirlik to conduct airstrikes against the Islamic State. In exchange, the U.S. will allow Turkey to create a buffer zone on Syrian soil free of Islamic State and Kurdish fighters. The stated aim of the “safe zone” is to create a refuge for internally displaced Syrian civilians inside Syria. According to the New York Times,

  “The plan would create what officials from both countries are calling an Islamic State-free zone controlled by relatively moderate Syrian insurgents, which the Turks say could also be a ‘safe zone’ for displaced Syrians.”

  

  For Turkey, however, the real aim is to prevent the YPG Kurdish fighters from linking up their three zones of control (Efrin, Kobani, and Cizir pictured below; Tal Abyad is already under YPG control) in northern Syria with each other. These Kurdish fighters also happen to be the sole force that has shown the ability to effectively defeat ISIS in battle. However, the real aim of Turkey was voiced by the leader of the Kurdish opposition party—HDP— in the Turkish parliament, Selahattin Demirtas:

  “‘Turkey doesn’t intend to target IS with this safe zone. The Turkish government was seriously disturbed by Kurds trying to create an autonomous state in Syria,’ he said, adding that ‘the safe zone is intended to stop the Kurds, not IS.'”

  

  It is a poorly-kept secret that the YPG intends to create an independent state in northern Syria, known as Rojava. The YPG has already been accused of ethnically cleansing the non-Kurds from that region as a precursor for a Kurdish state. The YPG—and its civilian arm, the PYD—are linked to the PKK (Kurdistan Workers Party), a Kurdish separatist group that Turkey, the U.S., and the E.U. consider a terrorist organization. At 14.5 million, Turkey has the largest population of Kurds in the southeastern part of its territory. The PKK waged a long war with the Turkish state during the 1980s and the 1990s that killed about 30,000 people.

  Encouraged by the gains of the YPG in northern Syria, the PKK seems to have re-started its war with Turkey. This new war started when on July 2oth, an IS suicide bomber blew herself up in the southern Turkish border town of Suruc. The attack killed 32 Kurdish youths and left more than 100 wounded. The Kurdish youths were meeting to organize a rebuilding effort of the town of Kobani in Syria. Suruc played a pivotal role in helping YPG rebels take control of Kobani and Tal Abyad from IS.

  The PKK blamed the IS attack on the indifference the Turkish state has shown towards IS. The PKK retaliated against the Turkish state by killing two Turkish police officers. These attacks were followed by another that killed three Turkish soldiers, a police officer, and a civilian. On August 2nd, a car bomb killed two Turkish soldiers and injured 31 when it blew up close to a police station in the Southeastern Turkish town of Dogubayazit.

  For its part, the Turkish military responded by attacking PKK positions in northern Iraq (the Kurdistan Regional Government of Iraq has allowed the PKK to have bases there). There are also reports that the Turkish military attacked YPG positions in northern Syria. Not only that, the Turkish state has initiated a crack-down on PKK and other militants, arresting 590 people on terror charges inside Turkey. Even more sinister is president Erdogan’s call to strip the immunity of parliamentarians with alleged ties to the PKK.

  According to sociologist Max Weber, a state is an entity that has a boundary, has sovereignty (controls what happens within its boundary), has the ability to legitimately use force, and the ability to tax and borrow. Whenever any of these functions are threatened, a state responds with violence towards the source of the threat.

  The PKK poses a serious threat to Turkey’s territorial integrity and sovereignty. It is hard to fathom a situation where Turkey will ever allow an independent Kurdish state, whether in northern Iraq, in Syria, or in Turkey. For the Turkish state, the Kurdish threat is far more serious than the threat from ISIS. If the Kurds are successful in their bid for their own state, they will detach about a third of Turkey’s territory (to understand the seriousness of the Kurdish challenge to the Turkish state, just imagine what the American government would do if a separatist Mexican movement sought to detach the southwest from the United States and create an independent state). The seriousness is underscored by the declarations of the president of Turkey regarding a Kurdish state. In contrast, the Islamic State has no such aims on Turkey and does not have the wherewithal to undertake such an enterprise—even if it wanted to. Turks have a long history of secularism and are not receptive to the strict Islamism of ISIS. For the time being, therefore, the Turkish state will pretend to be fighting ISIS while directing its violence towards the PKK and the YPG.

  If the violence between the PKK and YPG and the Turkish state spirals out of control, it is highly likely that a military coup d’etat will take place against the AKP (the Islamic-based Justice and Development party of Erdogan). The military will jail leading government politicians, end democratic rule, wage war against the PKK/YPG, restore order, and then return power to civilian hands. This has happened three times in modern Turkish history—in 1960, 1971, and 1980. If conditions continue to deteriorate inside and outside Turkey, a coup is likely to happen again.

  

  

  

  

  

• Iran Refuses UN Inspector Access To Scientists, Caught Trying To "Clean Up" Suspected Nuclear Site

  Surprise! In what must be the most predictable geopolitical event in recent days, WSJ reports that Iran has refused to let United Nations inspectors interview key scientists and military officers to investigate allegations Tehran maintained a covert nuclear-weapons program. This comes hours after CNN reported that the intelligence community believes Iran has been attempting to clean up the suspected nuclear site at Parchin prior to the arrival of international inspectors based on new satellite imagery. While the administration attempts to 'clear up' any misunderstandings, Senate Foreign Relations Committee Chairman Bob Corker told reporters. "It was not a reassuring meeting…I would say most members left with greater concerns about the inspection regime than we came in with."

  For now, the landmark nuclear agreement forged between world powers and Iran on July 14 in Vienna is on hold. As The Wall Street Journal reports, Iran’s stance complicates the International Atomic Energy Agency’s investigation into Tehran’s suspected nuclear-military program—a study that is scheduled to be finished by mid-October, as required by the treaty.

  The IAEA and its director-general, Yukiya Amano, have been trying for more than five years to debrief Mohsen Fakhrizadeh-Mahabadi, an Iranian military officer the U.S., Israel and IAEA suspect oversaw weaponization work in Tehran until at least 2003.

   

  Mr. Amano said Tehran still hasn’t agreed to let Mr. Fakhrizadeh or other Iranian military officers and nuclear scientists help the IAEA complete its investigation. The Japanese diplomat indicated that he believed his agency could complete its probe even without access to top-level Iranian personnel.

   

  Tehran has repeatedly denied it ever had a secret nuclear weapons program.

   

  But Mr. Amano said in a 25-minute interview in Washington that Iran still hasn’t agreed to provide access to Mr. Fakhrizadeh or other top Iranian military officers and nuclear scientists to assist the IAEA in completing its probe.

   

  “We don’t know yet,” Mr. Amano said about the agency’s interview requests. “If someone who has a different name to Fakhrizadeh can clarify our issues, that is fine with us.

  But, as CNN reports, the intelligence community believes Iran has been attempting to clean up the suspected nuclear site at Parchin prior to the arrival of international inspectors based on new satellite imagery, a senior intelligence official told CNN on Wednesday.

  The commercial imagery shows that Iran has moved heavy construction equipment to the area. But the senior intelligence official, who is familiar with the imagery in question, said the U.S. is confident that such sanitization efforts cannot succeed because radioactive materials, if present, are extremely difficult to conceal.

   

  "The (International Atomic Energy Agency) is familiar with sanitization efforts and the international community has confidence in the IAEA's technical expertise," the official said.

   

  Sen. Chris Coons, D-Delaware, told reporters on Tuesday that he has "concerns about the vigorous efforts by Iran to sanitize Parchin."

   

  A furious lobbying effort by both supporters and foes of the Iran nuclear deal continues in the Senate ahead of a mid-September vote on the agreement. On Wednesday, Senate Majority Leader Mitch McConnell said the Iran debate will begin on the Senate floor on Sept. 8 after the August recess is over.

  As The Journal concludes,

  Mr. Amano visited Capitol Hill on Wednesday in a bid to assure skeptical U.S. lawmakers the IAEA is capable of implementing a vast inspections regime of Iran’s nuclear facilities and clarifying the weaponization issue.

  Senate Republicans and skeptical Democrats, however, left the 90-minute closed-door meeting frustrated that Mr. Amano refused to share the agency’s classified agreements on access to Iranian military sites, scientists and documents.

  “I would say most members left with greater concerns about the inspection regime than we came in with,” Senate Foreign Relations Committee Chairman Bob Corker (R., Tenn.) told reporters. “It was not a reassuring meeting.”

  *  *  *
  Somewhere Benjamin Netanyahu is doing "the told you so" dance… as Kerry's deal and Obama's legacy hang by a thread.

  

  

  

  

  

• Chinese Stocks Tumble Despite Margin Debt Rises As Virtu Is Unleashed To Provide "Liquidity" After Citadel Ban

  No lesser liquidity-providing high-frequency-trading never-a-losing-trade shop than Virtu financial has been 'allowed' to trade Chinese capital markets. Coming just days after Citadel's ban, one can only assume that Chinese regulators made a deal with the devil CEO Doug Cifu to levitate markets at any and every cost in order to pick up pennies in front of de-leveraging, over-margined army of farmers and grandmas now seeking exits. Sure enough for the second day in a row margin debt is on the rise again. The retail-dominated Chinese stock market will be ripe picking for the HFTs, as long as not to many are allowed and a tail-chasing flash-crash ensues… but for now its appears yesterday afternoon's selling pressure continues with CSI-300 down almost 2% at the open.

  Each bounce yesterday saw immediate selling pressure..

  

   

  All that matters for now is keeping Shanghai Composite above the 200-day moving average…

  

   

  So today's key level will be what happens when SHCOMP hits 3574?

   

  And it appears the 200DMA will be tested again…

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.7% TO 3,802.93
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.9% TO 3,625.50

  

   

  As Bloomberg reports, Virtu Financial Inc., one of the world’s biggest high-speed trading firms, has started trading in its 35th country: China.

  The company reached an agreement during the second quarter with a Chinese brokerage house to provide liquidity on “a very limited basis,” according to Virtu Chief Executive Officer Doug Cifu. Virtu is using automated market-making strategies to buy and sell commodities listed in mainland China. In other markets, it trades other assets including stocks and currencies.

   

  “This agreement is the first step in what we view as a very long process,” Cifu said in a conference call on Wednesday. He did not identify the firm’s Chinese partner.

   

  …

   

  Mainland exchanges have frozen 38 accounts, including one owned by Citadel Securities, as the local authorities investigate algorithmic traders.

   

  “We are certainly cognizant of the recent market volatility in China, and the regulatory scrutiny being placed on electronic trading by the local regulator,” Cifu said. “Long term, we view China as an established capital market with volumes comparable to the largest markets in which we operate.”

   

  Virtu will confine its presence to Chinese data centers. It won’t be opening offices or “putting boots on the ground,” he said.

  What does it take for famers to learn?

  • *SHANGHAI EXCHANGE MARGIN DEBT RISES FOR SECOND DAY

  Another crash it would appear…

  *  *  *

  Having tried (and failed) with everything so far, it seems China is willing to unleash HFT hell on their retail citizens… we suspect Virtu's agreement will be torn up if stocks drop any more..

  

  

  

  

  

• Japan's Dire Message To Yellen: "Don't Raise Rates Soon"

  Originally posted at KesslerCompanies.com,

  We think it is more useful to compare economics and interest rates in

  • the period since 2007 in the U.S. (The Great Recession) with
  • the period since 1990 in Japan (Japan’s 2+ lost decades) as well as
  • the period after 1929 in the US (The Great Depression)

  ...because they are all periods of a ‘balance-sheet recession’ (or similarly, ‘secular stagnation’).

  Many commentators and policy makers don’t fully appreciate or acknowledge this distinction from the more frequent ‘inventory-cycle’ type recessions.

  There are so many parallels between these three that it is next to impossible to dismiss the comparison. (note: for a previous writing of ours on this topic, click here) Using this, there is an important lesson for the Fed to consider now in weighing whether to raise rates.

  In the two charts below, we’ve offset US interest rates to Japan’s interest rates by 16 years to roughly align the major peaks in their respective main stock markets. The charts each cover a 27 year period. Other than the US lowering rates quicker than in Japan (Ben Bernanke’s main legacy), and Japan’s term rates starting the cycle in the 8%+ range, these charts are quite similar; interest rates steadily grind lower over a long period of time.

  Soon after the ‘NOW’ line in the comparison below, Japan raised rates one time in August 2000 (top chart) from 0.0% to 0.25%, yet almost immediately, term interest rates crashed as the economy faltered. Within 7 months, the Bank of Japan had to lower short-term rates back to 0.15% in February 2001 (note: the US interest rate target is already at 0.125%, not 0%). As US short-term interest rate expectations are priced now (dotted blue line in lower chart), the market expects a continuous Fed raising cycle to about 3% in 2024. We continue to think that the Fed Funds rate will be forced to stay much lower than that over the next 10 years, and all rates across the yield curve will need to drop to reflect that.

  

  But there is a more specific issue that the Federal Open Market Committee (FOMC) faces at their next few meetings. The FOMC have, for a very long time, predictably moved their policy levers in opposition to the state of macroeconomics. In taking a survey of economics now, the US economy could easily warrant a further easing of policy. Wage stagnation, output gap slack, global recession-level commodity prices, sub-target inflation, China’s slowdown in its early stages, the rest of the world’s central banks in an easing mode, and US production indicators showing weakness are each, by themselves, a good reason not to raise rates. 

  Yet, part of the FOMC is contemplating a ‘philosophical’ rate rise this year simply because the Fed funds rate has been near 0% for close to 7 years, and it somehow seems reckless to them to leave the rate low indefinitely.

  Our suggestion to the FOMC as we approach these dates is to be extra careful, look at the historical comparisons, and don’t underestimate the trust the markets have for the FOMC to act rationally. We all expect the FOMC to act counter-cyclically; a rate rise now would be pro-cyclical, or making the problem worse. Anything FOMC members say after a ‘philosophical’ rate rise would greatly diminish its value. This comparison with Japan suggests that raising rates prematurely is detrimental and avoidable.

   

  

  

  

  

  

• Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed's Blessing

  Two weeks ago, Morgan Stanley made a decisively bearish call on oil, noting that if the forward curve was any indication, the recovery in prices will be “far worse than 1986” meaning “there would be little in analysable history that could be a guide to [the] cycle.”

  As we said at the time, “those who contend that the downturn simply cannot last much longer are perhaps ignoring the underlying narrative that helps to explain why the situation looks like it does.”

  “At heart,” we continued, “this is a struggle between the Fed’s ZIRP and the Saudis, who appear set to outlast the easy money that’s kept US producers alive.” This is an allusion to the fact that the weakest players in the US shale industry – which the Saudis figure they can effectively wipe out – have been able to hold on thus far thanks largely to accommodative capital markets.

  But persistently low crude prices – which, if you believe Morgan Stanley, are at this point driven pretty much entirely by OPEC supply – are taking their toll on producers the world over. That is, the damage isn’t confined to US producers.

  In fact, the protracted downturn in prices is slowly killing the petrodollar and exporters sucked liquidity from global markets for the first time in 18 years in 2014. To let Goldman tell it, a “new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn” by 2018.

  As Bloomberg noted a few months back, the turmoil in commodities has produced a “concomitant drop in FX reserves … in nations from oil producer Oman to copper-rich Chile and cotton-growing Burkina Faso.”

  And don’t forget Saudi Arabia which, as you can see from the chart below, isn’t immune to the ill-effects of its own policies.

  

  The financial strain comes at an inopportune time for the Saudis and indeed, as we noted when the country moved to open its stock market to foreign investment in June, “the move to allow direct foreign ownership of domestic equities [may reflect the fact that] falling crude prices and military action in Yemen have weighed on Saudi Arabia’s fiscal position.”

  “Our forecast is for Brent to average US$54 per barrel in 2015 [and] at this price, we expect total Saudi government revenues to fall by some 41% in 2015.[resulting] in [sharp] cuts to expenditures,” Citi said at the time.

  Now that Saudi boots are officially on the ground in Yemen (if only to provide “training“) and now that it appears the Kingdom is prepared to step up its military efforts in Syria, the financial strain from lower crude prices looks set to drive the Saudis into the bond market. Here’s FT with more:

  Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter.

   

  Bankers say the kingdom’s central bank has been sounding out demand for an issuance of about SR20bn ($5.3bn) a month in bonds — in tranches of five, seven and 10 years — for the rest of the year.

   

  The latest plans represent a major expansion of that programme, which bankers believe could even extend into 2016, given the outlook for the oil price.

   

  Saudi Arabia’s resort to further domestic borrowing highlights the challenges facing the region’s largest economy amid one of the steepest falls in the oil price in recent decades. Brent, the international benchmark, has dropped from $115 a barrel in June last year to about $50 this week.

   

  Oil’s decline accelerated in November when Opec, the producers’ cartel, decided not to cut output, a major departure from its traditional policy of trimming production to prop up prices. Saudi Arabia said it was an attempt to defend market share against rivals such as the US shale industry.

   

  But the decision to ride out a sustained period of lower prices has put a huge strain on the finances of major oil exporters, including Saudi Arabia which requires an oil price of $105 a barrel to balance its budget.

   

  The kingdom has drained $65bn of its fiscal reserves to maintain government spending since the oil price plunge began. Sama currently has $672bn in foreign reserves, down from their peak of $737bn in August 2014.

   

  The plan to resort to capital markets, if confirmed, demonstrates the priority Riyadh is placing on maintaining government spending, despite the pressure cheap oil is putting on its budget.

   

  The monthly bond issuance plan would only cover part of the deficit, which economists estimate will reach SR400bn this year amid falling revenues and continuing high expenditure on big infrastructure projects, public sector wages and the continuing war in Yemen.

  In case the irony here isn’t clear, allow us to explain.

  Saudi Arabia has effectively kept oil prices suppressed in an effort to wipe out the US shale industry which has only managed to stay afloat this long because Fed policies have kept monetary conditions loose and driven investors into HY credit and other risk assets. Now, Saudi Arabia is set to take advantage of the very same forgiving capital markets that have served to keep its US competition in business as persistently low oil prices and two armed conflicts look set to strain the Kingdom’s finances. 

  Of course one option for keeping the cash drain to a minimum would be to avoid getting involved in multiple regional proxy wars – but where’s the fun in that? 

  

  

  

  

  

• Police Officer Caught On Tape Discussing "Ways To Kill A Black Man And Cover It Up"

  Earlier this week we reported a stunning statistic: in July, the US police had killed 118 people mostly through gunfire, the highest number of police “induced” fatalities in 2015, and on pace for a record 1150 deaths for all of 2015.

  To be sure, most of these deaths took place in the “ordinary course” of police business, primarily in self-defense. However, two things are troubling:

  • first is that even after a surge in police violence and scandals involving on tape killings of innocent people, the US still has no comprehensive record of the number of people killed by law enforcement, which is why the Guardian tasked itself with its The Counted initiative;
  • second, that on numerous cases, the killings took place in “less than ordinary course”, usually involving the police officer making a rash judgment that cost the victim their life, and in many cases shooting without a clear cause.

  But the worst example of what is increasingly, and broadly, referred to as “police brutality”, are cases such as that of Alexander City officer Troy Middlebrooks, was, as NBC reports, was “caught on a secret recording discussing ways to kill a black man and cover it up” by planting bogus evidence.

  

  Alexander City police officer Troy Middlebrooks. The secret recording of his comments was played to police chiefs and the mayor. Photograph: Alabama state bureau of investigation

  The recording, which was first reported by the Guardian and subsequently by NBC News, captures Middlebrooks during a May 2013 visit to a home where the suspect, Vincent Bias, was visiting relatives.  At one point, the officer pulls Bias’ brother-in-law – who is white – aside and tells him he doesn’t trust Bias. Middlebrooks had arrested Bias on drug charges weeks earlier, and was clearly frustrated that he had made bail.

  Middlebrooks tells Bias’ brother-in-law, that if he were the suspect’s relative, he would “fucking kill that motherfucker” and “before the police got here I would put marks all over my shit to make it look like he was trying to fucking kill me. I god damn guarantee. What it would look like? Self-fucking defense. Fuck that piece of shit. I’m a lot different from a lot of these other folks. I’ll fucking tell you what’s on my fucking mind.”

  At another point, Middlebrooks tells the brother-in-law that Bias “needs a goddamn bullet.”

  And since this is America, and since the entire episode was recorded, a month after that incident, Bias’ lawyers told the city they intended to sue the city of 14,875 people for $600,000. They drafted a lawsuit that accused Alexander City police of harassing him, and included the contention that Middlebrooks also called Bias the N-word. Bias’ legal notice was passed to the city’s insurance company, which arranged a settlement of far smaller amount: $35,000, according to Alexander City’s attorney, Larkin Radney.

  With that agreement, Bias never sued and the incident was quietly settled out of court and ended with the officer keeping his job, according to legal documents and interviews with lawyers and officials involved in the case.

  Middlebrooks, meanwhile, remains on the job. Chief Robinson, who is black, told the Guardian that Middlebrooks was disciplined, but he declined the paper’s request for details.

  Robinson defended Middlebrooks, saying, “He was just talking. He didn’t really mean that.”

  The chief also told the paper that he personally disagreed with the city’s decision to settle with Bias. “It’s a whole lot different if you hear both sides,” Robinson said. It also makes itt seem that the Chief was happy to admit guilt and settle for the smallest possible fine.

  On the other hand, why did Bias rush to accept the judgment if he too thought he had a case? “Bias, 49, told NBC News that he took the money in hopes of moving away from Alexander City, where he claims he was unfairly targeted by police, in part because of his race.” Well, sure, but he wouldn’t have the money if he hadn’t been unfairly targeted.

  Then it got even more surreal:  Bias said that after the recording surfaced, and he threatened a lawsuit, the police added to the drug charges against him until he felt he had no choice but to plead guilty. “They forced my hand,” he said. Bias said he served 14 months in a county jail, and was released two months ago.

  * * *

  Within months of the recording, Middlebrooks was the first officer to respond to a controversial fatal shooting by a colleague of an unarmed black man in the city. He was closely involved in handling the scene and gave a key account of what happened to state investigators. His fellow officer was eventually cleared of any wrongdoing and both men continue to police the city of about 15,000 people about 55 miles north-east of Montgomery.

  * * *

  The biggest travesty in this episode is not the subsequent courtroom screw up, and who did what or why, but the fact that a cop, whether he meant it or not, made it very clear and and on the leaked record, that among the various other standard operating procedures in a policeman’s arsenal, is to kill a suspect while fabricating evidence to stage an episode of self-defense, in this case with a racial bias. Whether he did mean it or not is irrelevant because this is precisely the ammunition the Louis Farrakhans of the world need when in their violent fire and brimstone sermons, they call on those present to “rise up and kill those who kill us“, i.e., white people.

  Because they can simply claim this is in retaliation to what “that guy” did, or said. And that is how race wars really start: not with one explicit catalyst, but with countless small but very meaningful escalations, until finally the shooting starts for real.

  The Middlebrooks recording is below

  

  

  

  

  

• China Responds To US Declaration Of Cyber War

  Authored Op-Ed via Government mouthpiece Xinhua,

  The United States is on the brink of making another grave mistake under the name of protecting cyber security, as it is reportedly considering retaliatory measures against China for unfounded hacking accusations.

  Senior U.S. government and intelligence officials were quoted by a U.S. newspaper as saying Friday that President Barack Obama's administration has determined to retaliate against China for its alleged theft of personnel information of more than 20 million Americans from the database of the Office of Personnel Management (OPM), but the forms and specific measures of the retaliation have not been decided.

  The report added that Obama has allegedly ordered his staff to come up with "a more creative set of responses," while a U.S. official hinted that the United States will employ "a full range of tools to tailor a response."

  The decision came amid a growing chorus in the United States demonizing China as the culprit behind the massive breach of the OPM computer networks. As witnessed by most past similar cases, the U.S. government, Congress and media once again called for punishing China for this after a top U.S. intelligence official indirectly pointed a finger at China.

  Obviously, cyber security has become another tool for Washington to exert pressure on China and another barrier that restrains the further development of China-U.S. relations.

  Washington will be blamed for any adverse effects this might have on its ties with China, as all the U.S. accusations against China were made without providing concrete evidence.

  The U.S. government was also self-contradictory for declining to directly name China as the attacker on the one hand, while deciding to target China for retaliation on the other.

  By repeatedly blaming China for hacking into its government computers, Washington apparently tries to portray Beijing as the No. 1 bad guy in cyber space, but this is doomed to fail because the United States is the most powerful country with the most advanced cyber technologies.

  As exposed by former U.S. defense contractor Edward Snowden, the U.S. government has been notoriously and blatantly engaged in worldwide surveillance operations against numerous other countries. To divert criticism against its relentless espionage activities, it portrays itself as a victim of cyber attacks.

  By heating up the issue of the OPM hacking, Washington perhaps also aims to pressure China to restore the bilateral cyber work group which was suspended last year after Washington sued five Chinese military officers on so-called charges of commercial espionage despite strong protests from China.

  China has repeatedly stated that it is against all forms of cyber attacks and will crack down on them, as it has long been a major victim of such illegal activities, many of which originated from the United States.

  China has also called for conducting cooperation with the U.S. side and any other country to protect cyber security and its peaceful order.

  Just like protecting its territorial sovereignty and integrity, China is strongly determined to protect the safety of its cyber space and reserves all rights to counter any outside threats and intrusions. It will meet any form of political or economic retaliation with corresponding countermeasures.

  The United States, which made a mistake last year with its false charges against the Chinese officers, should not repeat the mistake by taking retaliatory measures against China over the OPM incident.

  If it stubbornly implements retaliatory measures against China in cyber space, it will be known for being a cyber bully and will have to shoulder responsibility for escalating confrontation and disrupting the peaceful order in the cyber space.

  

  

  

  

  

• Me So Einhorny!

  Greetings from the Starbucks on the Google campus, which is cram-packed with people and laptops (these aren’t Google employees, naturally; just slobs like me; I hang out here a lot because there’s a Tesla supercharger here, and I can suck down all the electricity I want for free).

  Anyway, when I saw all the chatter about how Keurig Green Mountain was getting its balls blown off after-hours, I was reminded of a post I did way back in November. The post relayed the news that, at long last, famed hedge fund manager David Einhorn was throwing in the towel on his GMCR short position. Here’s a snippet from that post:

  

  Well, David Einhorn has clay feet, just like you and me, so………naturally……….this very public announcement came within days of the stock’s highest point in history. From that point, well, things looked sort of like this (including after-hours action tonight, which is why I’m using TOS Charts instead of my beloved ProphetCharts). It’s basically down nearly 70%…….

  

  It just goes to show you……..sometimes you have to be just a little more patient. (And in case you think this is an oddball exception, Einhorn actually just announced his fund had its worst month since August 2008).

  A few other unrelated things on my mind……

  • Even I’ve had it up to the proverbial “here” with the Steve Jobs worship. On the radio today, while I was hearing endless coverage of the new opera based on Cold Mountain (!) they let it be known that another opera was in the works for 2017………..about the life of Steve Jobs.
  • Why do I keep getting the feeling that the Tesla X is going to suck once it’s finally released? Every time Musk talks about it (and keep in mind, this goddamned thing has been delayed over and over again, and I’m one of tens of thousands of people with a paid reservation) he whines about how challenging it is. And it always comes back to those gull-wing doors. Just you watch: those doors are going to be failing left and right. The fact they keep bringing up what a nightmare the doors are just tells you it’s going to be a problem, because even with my Model S, one of the (relatively simple!) door handles doesn’t work anymore.
  • Oh, and while I’m griping about Tesla, one other thing………..I think their success is starting to hurt them. It used to be that I could come in at once for service. These days, they are scheduling appointments nearly two months out! I frankly think Tesla has peaked, and – – how shall I say this – – there won’t be any operas commissioned about Elon Musk’s life in the coming years.

  

  

  

  

• China's Plunge Protection "National Team" Bought 900 Billion In Stocks, Goldman Calculates

  In, “The Complete Guide To China’s CNY 4 Trillion Margin Doomsday Machine,” we presented a comprehensive look at the various backdoor channels the country has used to skirt official restrictions on leveraged stock trading. Here, courtesy of BofAML, is a breakdown of these channels and the bank’s best estimates of their size.

  

  The dramatic sell-off that made international headlines last month and, along with the Greek drama, dominated financial market news, was precipitated by an unwind in these unofficial margin lending channels.

  In a frantic attempt to restore the equity bubble that has for the better part of a year served as a distraction for China’s flagging economic growth and bursting property bubble, Beijing unleashed a plunge protection effort of epic proportions that included everything from threatening to arrest sellers to using China Securities Finance Corp. as a state-controlled margin lender.

  In short, the PBoC, with the help of the country’s banks, helped CSF mushroom into a multi-trillion yuan Frankenstein and now that the mentality of the retail crowd (which in China had accounted for around 80% of daily turnover) has transformed from “buy the dip and get rich” to “sell the rip and break even,”any indication that CSF is set to exit the market is greeted with panic by market participants. 

  Here with a breakdown of just how much money has been funneled into Chinese equities by the so-called “national team” and on how, just like the Fed with QE, the PBoC will find that a swift exit is effectively impossible, is Goldman.

  *  *  *

  From Goldman

  China musings: How much has the government bought in the market?

  The Chinese government’s recent measures to support the domestic equity market through the so-called ‘national team’ institution are being frequently discussed by investors and in the media. In this commentary, we estimate the amount of money the ‘national team’ has spent to support the market, the remaining capital left available for use, the sectors that have likely benefitted from government support, the potential overhang on the equity market from government support measures, and our views on the equity market over coming months.

  1. We estimate the ‘national team’ has spent around Rmb860-900bn to support the domestic equity market.

  Our estimate is based on two dimensions: (1) top-down analysis based on our liquidity model; and (2) bottom-up analysis based on fund flow changes in key investment channels based on public information released by relevant media sources.

  (1) Top-down approach: This method suggests the ‘national team’ bought approximately Rmb900bn in the market.

  (2) Bottom-up approach: The ‘national team’ has bought around Rmb860bn if we sum up each channel.

  Potential size, investment direction and the stock holders of the ‘national team’.

  (i) The potential capital available for market support is roughly Rmb2tn (including the money already spent). According to public information released by media sources including Sina and Caijing (July 24, 2015), 17 commercial banks have lent CSFC nearly Rmb1.3tn in total. CSFC’s own debt issuance plus the PBOC’s multi-channel liquidity injections imply a total of around Rmb2tn. It seems the government still has sufficient support capacity in the pipeline.

  (ii) Government support has largely focused on large-cap blue chips and certain defensive sectors. Due to insufficient high-frequency data for fund flows across sectors, we used the sectors’ performance fluctuation from end-June to July and concluded that supportive capital has mostly flowed into large-cap blue chips or certain defensive sectors, such as banks, insurance, F&B and healthcare. Admittedly, the ‘national team’ has also invested in some ChiNext stocks and SME stocks according to media reports and the listed companies’ reports, although these investments appear to have taken up only a small proportion of the total government buying.

  (iii) Which entities actually hold the stocks? Based on information from public media (Sina and Caijing), the ‘national team’ bought stock through three channels: 1) CSFC bought stocks directly (at least Rmb400bn); 2) subscribing to some major mutual funds (around Rmb200bn); and 3) CSFC provided credit lines for some brokers (around Rmb260bn).

  3. Short-term market implications

  (1) Potential index range-trading in the near term

  a. Given the ample liquidity that the ‘national team’ still has, we expect market volatility to moderate and for A shares to find support in the mid-3000 level (around the previous dip, 3400 on the CSI300 Index). Recent trading patterns suggest that government support may be forceful around this level.

  b. On the other hand, the media reports (Caijing, July 8, 2015) suggest that the regulatory authorities are dissuading institutional investors from reducing positions before the SHCOMP Index reaches 4500 (approximately 4600 for the CSI300 Index). Therefore, this level is now widely regarded as the upper range limit for near-term market performance. Once the index exceeds this level, we believe investors such as brokerage proprietary desks will be able to reduce positions.

  (2) Market concerns over the exit by the ‘national team’ from its supporting measures

  Many clients have expressed their concern over the ‘national team’s’ potential exit from the market and view this as a supply overhang. In our view, the probability of a rash exit is low as the market has not yet stabilized and the government has no pressing need for the funds. Moreover, two notable examples of exits from government direct or indirect support for equity markets show long waiting periods: The Hong Kong Monetary Authority took four years to divest stock purchased during the Asian Financial Crisis in 1998 and the Federal Reserve in the US began to taper its quantitative easing policy in 2013, five years after initiating its first round of quantitative easing in late 2008.

  

  

  

  

  

  

  

• "Debt Is A Fickle Witch"

  Via The Liscio Report,

  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.  

   

  

  

  

  

  

• Six Warning Signs That The Economy Is In Trouble

  Submitted by Tony Sagami via MauldinEconomics.com,

  On July 14, I wrote about the danger developing in the transportation sector, and things are looking even worse today. Here’s what I mean:

  Look Out Below #1: Royal Dutch Shell reported its quarterly results last week—$3.4 billion, down from $5.1 billion for the same quarter a year ago—and warned that “today’s oil price downturn could last for several years.”

  

  In anticipation of tough times, Shell slashed its 2015 capital expenditure budget by 20% and is going to lay off 6,500 high-paying jobs (not Burger King-type jobs) this year.

  Look Out Below #2: UPS is a very good barometer of the consumer end of our economy: It’s the largest component of the Dow Jones Transportation Average both by sales and market valuation.

  

  And UPS isn’t very confident about the US economy. Here is what UPS CEO David Abney said in a recent conference call with analysts:

  If you just look at in [sic] January, the GDP forecast we thought was going to be about 3.1%. Now the thinking in July is about 2.3%, so let’s say a pretty significant decrease.

  Why so glum?

  The continued strength of the US dollar and I think this impending rate hike by the Fed appears to be holding back some US growth.

  Abney has good reason to complain: UPS’s revenue fell 1.2% over the last 12 months. Not good.

  Look Out Below #3: Rolls Royce may be best known for its luxury limousines, but the heart of its business is making engines for jet airplanes. Along with General Electric, the company dominates the aerospace engine business.

  

  Business isn’t so good. Rolls Royce just issued its fourth profit warning in the last year and a half and is shutting down its $1.56 billion share buyback, introduced a year ago, to conserve cash.

  The problem? Weak demand for its jet engines.

  Hey, if Rolls Royce doesn’t want to buy its own stock… why should you?

  Look Out Below #4: The reason Rolls Royce is suffering is that the airborne freight market is shrinking. While the passenger cabins you and I sit in may be full, the belly of the plane where the cargo freight is held is growing increasingly empty.

  

  The International Air Transport Association (IATA) reported that air freight load factors have dropped to lows not seen since 2009.

  “The expansion in volumes we saw in 2014 has ground to a halt, and load factors are falling… we have to recognize that business confidence is flat and export orders in decline,” said the CEO of IATA, Tony Tyler.

  Look Out Below #5: The trans-ocean freight business isn’t doing any better; the number of idle container ships has increased two months in a row.

  

  The number of idle ships (over 500 20-foot-equivalent units) has jumped from 82 to 108. Yup… business is so bad that the owners of 108 ships don’t have any business whatsoever.

  “The traditional peak summer season has so far failed to provide a boost to vessel demand, as the weak cargo outlook is forcing carriers to cut back on their capacity deployment plans,” reported Alphaliner, a container shipping watchdog.

  Look Out Below #6: The reason why all these transportation companies are struggling is that global trade is simply shrinking.

  

  Moreover, world trade is falling at the fastest pace we’ve seen since the last financial crisis. Global trade shrank 1.2% in May from the previous month, and the little-followed World Trade index (which tracks import and export volume) fell to 135.1 in May.

  Look, transportation companies prosper when the economy is rocking and rolling. However, they are among the first to feel a business slowdown when things turn downward.

  My bashing of the transportation industry is just as much of a warning about the overall economy as transportation stocks. Do you have a contingency plan to protect your portfolio when things turn ugly?

  The best time to prepare for trouble… is before trouble arrives.

  

  

  

  

• For Commodities, It's 2008 All Over Again

  18 of the 22 components in the Bloomberg Commodity Index have dropped at least 20% from recent closing highs, meeting the common definition of a bear market.

  

   

  As Bloomberg details, that’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon.

  Dear Commodity Investors – Welcome back to 2008!!

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  Charts: Bloomberg

  

  

  

  

  

• 8 Financial Experts That Are Warning A Great Financial Crisis Is Imminent

  Submitted by Michael Snyder via The Economic Collapse blog,

  Will there be a financial collapse in the United States before the end of 2015?  An increasing number of respected financial experts are now warning that we are right on the verge of another great economic crisis.  Of course that doesn’t mean that it will happen.  Experts have been wrong before.  But without a doubt, red flags are popping up all over the place and things are lining up in textbook fashion for a new financial crisis.  As I write this article, U.S. stocks have declined four days in a row, the Dow is down more than 750 points from the peak of the market in May, and one out of every five U.S. stocks is already in a bear market.  I fully expect the next several months to be extremely chaotic, and I am far from alone.  The following are 8 financial experts that are warning that a great financial crisis is imminent…

  #1 During one recent interview, Doug Casey stated that we are heading for “a catastrophe of historic proportions”…

  “With these stupid governments printing trillions and trillions of new currency units,” says investor Doug Casey, “it’s building up to a catastrophe of historic proportions.”

   

  Doug Casey, a wildly successful investor who’s the head of the outfit Casey Research, is predicting doom and gloom for the global economy.

  “I wouldn’t keep significant capital in banks,” he told Reason magazine Editor-in-Chief Matt Welch. “Most of the banks in the world are bankrupt.”

  #2 Bill Fleckenstein is warning that U.S. markets could be headed for calamity in the coming months…

  Noted short seller Bill Fleckenstein, who correctly predicted the financial crisis in 2007, says he is one step closer to opening up a short-focused fund for the first time since 2009. In the meantime, Fleckenstein says the entire market could be heading for calamity in the coming months.

   

  “The market is uniquely crash-prone,” Fleckenstein told CNBC’s “Fast Money” this week. “I think the market is very brittle because of high-frequency trading, ETFs, a lot of momentum investors. I don’t think there’s going to be any painless back door.”

  #3 Richard Russell believes that the bear market that is coming “will tear apart the current economic system”…

  From my standpoint, this is the strangest period that I have gone through since the 1940s. The Industrials are declining faster than the Transports. If this continues, at some point the Industrials will touch the Transports. When that happens, I believe a bear market will be signaled, as both Industrials and Transports accelerate on the downside.

   

  I expect a brief period of higher prices which will draw in the amateurish retail public. This brief breather will be followed by an historic bear market that will tear apart the current economic system.

  #4 Larry Edelson is “100% confident” that a global financial crisis will be triggered “within the next few months”…

  “On October 7, 2015, the first economic supercycle since 1929 will trigger a global financial crisis of epic proportions. It will bring Europe, Japan and the United States to their knees, sending nearly one billion human beings on a roller-coaster ride through hell for the next five years. A ride like no generation has ever seen. I am 100% confident it will hit within the next few months.”

  #5 John Hussman is warning that market conditions such as we are observing right now have only happened at a few key moments throughout our history…

  In any event, this is no time to be on autopilot. Look at the data, and you’ll realize that our present concerns are not hyperbole or exaggeration. We simply have not observed the market conditions we observe today except in a handful of instances in market history, and they have typically ended quite badly (see When You Look Back on This Moment in History and All Their Eggs in Janet’s Basket for a more extended discussion of current conditions). In my view, this is one of the most important moments in a generation to examine all of your risk exposures, the extent to which you believe historical evidence is informative, your tolerance for loss, your comfort or discomfort with missing out on potential rallies even in a wickedly overvalued market, and your true investment horizon.

  #6 During a recent appearance on CNBC, Marc Faber suggested that U.S. stocks could soon plummet by up to 40 percent…

  The U.S. stock market could “easily” drop 20 percent to 40 percent, closely followed contrarian Marc Faber said Wednesday—citing a host of factors including the growing list of companies trading below their 200-day moving average.

   

  In recent days, “there were [also] more declining than advancing stocks, and the list of 12-month new lows was very high on Friday,” the publisher of The Gloom, Boom & Doom Report told CNBC’s “Squawk Box.”

   

  “It shows you a lot of stocks are already declining.”

  #7 In a previous article, I noted that Henry Blodget of Business Insider is suggesting that U.S. stocks could soon drop by up to 50 percent…

  As regular readers know, for the past ~21 months I have been worrying out loud about US stock prices. Specifically, I have suggested that a decline of 30% to 50% would not be a surprise.

   

  I haven’t predicted a crash. But I have said clearly that I think stocks will deliver returns that are way below average for the next seven to 10 years. And I certainly won’t be surprised to see stocks crash. So don’t say no one warned you!

  #8 Egon von Greyerz is even more bearish.  He recently told King World News that we are heading for “the most historic wealth destruction ever”…

  Eric, there are now more problem areas in the world, rather than stable situations. No major nation in the West can repay its debts. The same is true for Japan and most of the emerging markets. Europe is a failed experiment for socialism and deficit spending. China is a massive bubble, in terms of its stock markets, property markets and shadow banking system. Japan is also a basket case and the U.S. is the most indebted country in the world and has lived above its means for over 50 years.

   

  So we will see twin $200 trillion debt and $1.5 quadrillion derivatives implosions. That will lead to the most historic wealth destruction ever in global stock, with bond and property markets declining at least 75 – 95 percent. World trade will also contract dramatically and we will see massive hardship across the globe.

  So are they right?

  We’ll know soon.

  And of course they are not the only ones with a bad feeling about what is ahead.  A recent WSJ/NBC News survey found that 65 percent of all Americans believe that the country is currently on the wrong track.

  Also, Gallup’s Economic Confidence Index just plunged to the lowest level that we have seen so far in 2015…

  Americans confidence in the US economy dropped sharply in July to its lowest level in 2015, according to a new US Economic Confidence Index rating released by Gallup on Tuesday.

   

  “Gallup’s Economic Confidence Index declined to an average of —12 in July from —8 in June. This is the lowest monthly average since last October, and is a noticeable departure from the +3 average in January,” the polling company said.

   

  Gallup said that “unsettled economic” conditions, including tumult in Chinese markets and uncertainty in Europe over a Greek debt deal, as well as US stock market volatility are factors driving lower confidence in the US economy.

  These “bad feelings” are also reflected in the hard economic data.  U.S. consumer spending has declined for three months in a row, and U.S. factory orders have fallen for eight months in a row.

  The numbers are screaming that we are heading for another major recession.

  But could it be possible that this is just another false alarm?

  Could it be possible that the blind optimists are right and that everything will work out okay somehow?

  

  

  

  

  

• "I Pay $271 A Month To Schools And I Don't Have Kids": Illinois Bureaucracy Sucks Homeowners Dry

  Ever since the Illinois Supreme Court struck down a pension reform bid in May, prompting Moody’s to downgrade the city of Chicago to junk, the state’s financial woes have becoming something of a symbol for the various fiscal crises that plague state and local governments across the country. 

  The state High Court’s decision was reinforced late last month when a Cook County judge ruled that a plan to change Chicago’s pensions was unconstitutional.

  As we’ve discussed at length, these rulings set a de facto precedent for lawmakers across the country and will make it exceedingly difficult for cities and states to address a pension shortfall which totals anywhere between $1.5 trillion and $2.4 trillion depending on who you ask.

  For Illinois, the situation is especially vexing. As you can see from the following graphics, the state’s unfunded pension problem is quite severe. 

  

  (Charts: Chicago Tribune)

  As the New York Times explains, “pension costs in many American states and cities are growing much faster than the money available to pay them, causing a painful squeeze. Officials who try to restore balance by reducing pensions in some way are almost always sued; outcomes of these lawsuits vary widely from state to state. Some of the worst problems have been brewing for years in Illinois, particularly in Chicago, where the city’s pension contributions have long been set artificially low by lawmakers in Springfield, the state capital. With more and more city workers now retiring, a $20 billion deficit has materialized.”

  And while we’ve spent quite a bit of time discussing the various issues involved in the pension debate from overly optimistic return assumptions to the use of pension-obligation bonds as stopgap measures, even we were surprised to learn just how convoluted the fiscal situation truly is in Illinois.

  As the following excerpts from a Reuters special report make clear, Illinois is in bad shape, and fixing things isn’t going to be easy.

  *  *  *

  From Reuters

  “Multitude of local authorities soak Illinois homeowners in taxes“

  Mary Beth Jachec [a] 53-year-old insurance manager gets a real estate tax bill for 20 different local government authorities and a total payout of about $7,000 in 2014. They include the Village of Wauconda, the Wauconda Park District, the Township of Wauconda, the Forest Preserve, the Wauconda Area Public Library District, and the Wauconda Fire Protection District.

  Jachec, looking at her property tax bill, is dismayed. “It’s ridiculous,” she said.

  A lot has been said about the budget crisis faced by Illinois – the state government itself is drowning in $37 billion of debt, and has the lowest credit ratings and worst-funded pension system among the 50 U.S. states. But at street level, the picture can be even more troubling.

  The average homeowner pays taxes to six layers of government, and in Wauconda and many other places a lot more. In Ingleside, 55 miles north of Chicago, Dan Koivisto pays taxes to 18 local bodies. “I pay $271 a month just to the school district alone,” he said. “And I don’t have children.”

  The state is home to nearly 8,500 local government units, with 6,026 empowered to raise taxes, by far the highest number in the U.S. 

  Many of these taxing authorities, which mostly rely on property tax for their financing, have their own budget problems. That includes badly underfunded pension funds, mainly for cops and firefighters.

  A Reuters analysis of property tax data shows that the sheer number of local government entities, and a lack of oversight of their operations, can lead to inefficient spending of taxpayer money, whether through duplication of services or high overhead costs. It leads to a proliferation of pension funds serving different groups of employees. And there are also signs that nepotism is rife within some of the authorities.

  On average, Illinois’ effective property taxes are the third highest in the U.S. at 1.92 percent of residential property values.

  In many Illinois cities and towns, high taxation still isn’t enough to keep up with increasing outlays, especially soaring pension costs, and some services have been cut. For example, in the state capital Springfield, pension costs for police and fire alone will this year consume nearly 90 percent of property tax revenues, according to the city’s budget director, Bill McCarty. 

  Sam Yingling, a state representative who until 2012 was supervisor of Avon Township, north of Chicago, has become an outspoken critic of the multiple layers of local government.

  Yingling said when he left the township three years ago, the township supervisor’s office had annual overheads from salaries and benefits of $120,000. He claimed its sole mandated statutory duty was to administer just $10,000 of living assistance to poor residents.

  The large number of local governments is a legacy of Illinois’ 1870 constitution, which was in effect until 1970. The constitution limited the amount that counties and cities could borrow, an effort to control spending.

  So when a new road or library needed building, a new authority of government would be created to get around the borrowing restrictions and to raise more money. Today, for example, there are over 800 drainage districts, most of which levy taxes.

  And it isn’t only the number of authorities that is a concern. Illinois has about one sixth of America’s public pension plans – 657 out of almost 4,000.

  Local authorities in Illinois are mandated by law to keep the Illinois Municipal Retirement Fund, with 400,000 local government members, fully funded. They had to contribute $923 million in 2014, up from $543 million in 2005.

  However, there is no such requirement for the local pension funds. The result: Many of these funds throughout the state are woefully underfunded, and some have less than 20 percent of what they need to meet obligations.

  *  *  *

  The piece – which you’re encouraged to read in full as it contains several of the most egregious examples of government waste and inefficiency you’ll ever come across – goes on to say that reform simply isn’t an option, as the Illinois legislature is filled with lawmakers who have at one time or another themselves benefited from the state’s sprawling local bureaucracies. Reuters also says it has identified nearly a dozen instances where husbands employ wives, mothers employ daughters, and fathers hire sons,” suggesting nepotism weighs heavily on the already elephantine system. 

  Bear in mind that this is the same state whose court system refuses to allow efforts at pension reform to move forward, and while all of this may seem like a recipe for default disaster, just remember, PIMCO sees a lot of “long-term value” in Chicago’s debt.

  

  

  

  

  

• Scotiabank Warns "The Fed Is Cornered And There Are Visible Market Stresses Everywhere"

  Via Scotiabank's Guy Haselmann,

  Part One, China

  An economic slowdown is underway in China.  This is reflected in the steep drop in the commodity complex and in the currencies of emerging market countries. Large imbalances are being worked off as Beijing attempts to shift the composition of its growth.  Policy decision are not always economic.

  New sources of growth are being sought by Beijing as deleveraging occurs.  Since officials care foremost about social stability, they try to preserve as many current jobs as possible during their attempt at economic transformation.  During this period, banks might be averse to calling in loans.  State owned enterprises (SOEs) are pressured to keep producing, so that workers can continue to receive a pay check.  The result is over-production and downward pressure on prices.
   
  Part Two, The Seven Year Fed Subsidy

  The Fed’s zero interest rate policy has provided a subsidy to investors for the past 7 years.  The lure of easy profits from cheap money was wildly attractive and readily accepted by investors. The Fed “put” gave investors great confidence that they could outperform their exceptionally low cost of capital.  These implicit promises by central banks encouraged trillions of dollars into ‘carry trades’ and various forms of market speculation.

  Complacent investors maintain these trades, despite the Fed’s warning of a looming reduction in the subsidy, and despite a balance sheet expected to shrink in 2016.  It has been a risk-chasing ‘game of chicken’ that is coming to an end.  Changing conditions have skewed risk/reward to the downside.  This is particularly true because financial assets prices are exceptionally expensive.

  Maybe investors do not believe ‘lift-off’ looms, because the Fed has changed its guidance so many times.  Or maybe, investors are interpreting plummeting commodity prices and the steep fall in global trade as warning signs that global growth and inflation are under pressure.  Is this why the US 30 year has rallied 40 basis points in the past 3 weeks?  (see my July 17th note, “Bonds are Back”)

  Either scenario creates a paradox for risk-seeking investors.  If the US economy continues on its current slow progress pace, then the Fed will act on its warning and hike rates in September.  However, if the Fed does not hike in September it is likely because problems from China, commodities, Greece, or emerging markets (etc) cause the global outlook to deteriorate further.  Neither scenario should be good for risk assets.
   
  Part Three, “Carry Trade”

  During the 2008 crisis, Special Investment Vehicles (SIVs) were primarily responsible for freezing the interbank lending market. SIVs were separate entities set up primarily to earn the ‘carry’ differential between short-dated loans and longer-dated assets purchased with the proceeds of the loans. This legal structure allowed banks to own billions of dollars of securities (CDOs and such) off of their balance sheets. Since the entities were wholly-owned with liquidity guarantees, the vehicles received the same attractive funding rates as the parent banks.

  When the housing crisis (and Lehman collapse) spurred loan delinquencies, banks had to place all of these hidden securities onto their balance sheets. Since the magnitude of the SIV levered assets was unknown to others, bank solvency was questioned, and interbank lending froze.  Many of these securities had to be sold at fire sale prices, i.e., prices well below their economic value.

  When the Fed begins to normalize rates, trillions in carry trades will likely begin to unwind.  The similarity to 2008 is glaring, except that banks no longer own SIVs.  Regulations have chased the ‘carry trades’ from the banking system into the shadow banking system where officials can’t see or measure the risk. The banking system today is, no doubt, far less exposed, but too many sellers could overwhelm the depth of the market, leading to asset price contagion that filters into the real economy.   

  The FOMC is probably fearful of such an outcome, and its unknown impact on the broader economy, which could explain why it has delayed ‘lift-off’.  It may also be the reason why the Fed emphasizes that the pace of rate normalization will be “gradual”, and will remain “overly-accommodative”.   Unfortunately, the Fed recognizes that speculators do not wait to retreat in an orderly manner.  They are also fully aware that regulations have impaired market liquidity; figuratively shrinking the exit doors.  This is where ‘macro-prudential’ comes in. 
   
  Part Four, Counter-Productive Policies Back the Fed into a Corner

  Few lessons have been learned by market ‘booms’, and the ‘busts’ that always follow.  ‘Booms’ occur when the Fed diverges the price of money too far below the ‘natural rate of interest’.  Easy money flows into ever less-productive assets.  As prices are pushed ever-higher, the yield drop cascades down the capital curve.  The process cannot be sustained. High prices directly infer lower future returns.  Late-stage investors receive the lowest return with the highest level of risk (game of chicken).

  These cycles are tragic because ‘busts’ have negative consequences that are worse than the ‘booms’ are beneficial.  During the ‘bust’, elevated asset prices go back down to their original or fundamental value. They may even overshoot on the downside due to the regulatory limitations that have been put in place during the ‘boom’ years.

  The ‘wealth effect’ is, at a minimum, reversed during the ‘bust’.  There is no ‘free lunch’.  More importantly, after the ‘bust’, the newly acquired higher levels of debt remain.  The result is a lower natural economic growth rate, lower levels of future investment, and more regulation, which all lead to decreased profits.

  Zero interest rates undermine market incentive structures.   Share buybacks have surpassed capital expenditures. Cheap money makes acquisitions attractive relative to new investment projects. Why not, cheap money implies high uncertainty.  Furthermore, excess liquidity encourages malinvestment and over-capacity, and acts as a headwind for both of the Fed’s dual mandates.

  Experimental monetary policy over the past seven years should reveal that attempts at artificial monetary inflation are ineffective. Yet, they give no hints of discarding this failed ideology. Unless this ideology changes, ever-greater quantities of printing just to repair the inevitable bust will be required as the chosen response.  No wonder why Bitcoin is intriguing and confidence in fiat currencies has come into question.

  ·    “Two roads converged in the woods and I took the one less traveled by and that has made all the difference.” – Robert Frost

  Part Five, Notice the Warning Signs

  There are warning signs and visible market stresses beyond those mentioned yesterday.  To list them all is beyond the scope of this note.

  Nonetheless, the impact of a slowing China is being under-estimated by markets.  The steep drop in commodities is telling us something about demand. (It’s not just oil: suppliers don’t frack copper)

  Equity market ‘internals’ are deteriorating and momentum is faltering.

  Similar to 2008, the subprime corporate sector (CCC-rated credits) are showing cracks beyond the energy sector, e.g., into chemicals and technology.  This is typically a late-stage phenomenon and a warning sign of growing risk aversion.

  FOMC members are threatening ‘lift-off’, but markets don’t believe them, because they have ‘moved the goal posts’ of their guidance so many times.  The Fed appears to want an ideal set of conditions which rarely ever materializes. Investors are inclined to stay fully invested until they actually see a hike with their own eyes.  Complacency is high.  Anyone who has entered the financial industry in the past 9 years has never witnessed a rate hike.

  Investing during ZIRP and QE has more to do with fully capitalizing on aggressive Fed policy, and less about finding value for the long run.  The investment industry is so focused on short term investment results that decisions are motivated by the necessity of beating peers and benchmarks in order to keep one’s job. 

  Yet, “lift-off” will reduce the Fed’s subsidy.  Total rate normalization is the removal of ‘the gift’ provided to the private sector.  The process in getting there will be the catalyst that begins the reduction of carry trades and market speculation.

  Positional unwinds may begin as a trickle, but morph into a cascade. Those who try to hold on will likely confront a shrinking Fed balance sheet in 2016.  Investors should do their own homework to understand what this is likely to mean for risk assets (Hint: it’s not a good result).

  *  *  *
   
  Part Six, Portfolio Adjustment Recommendations During Policy Pivot (with a few forecasts thrown in)

  Raise cash levels.  Cash has great optionality enables it to be deployed at better levels.  With rates so low, cash has never had such a low opportunity cost.

   

  Increase portfolio liquidity, while reducing portfolio volatility.

   

  Buy long-dated on-the-run Treasury securities, or the highest quality and most liquid corporate bonds.  I expect an abrupt ‘risk-off’ trade as the Fed begins ‘normalization’ that will bring UST 10’s and 30’s well thru 2% and 2.75%, respectively.  I can envision this happening prior to the September FOMC meeting.

  • If the Fed hikes it will likely help the long end.
  • If the global economy sputters due to China or due to other factors that force the Fed to remain on hold, then long Treasuries will again perform well.
  • If the Fed loses its window of opportunity to hike due to worsening financial and economic conditions then it has few tools left to provide further stimulus.  Moreover, markets might begin to question the effectiveness of past actions and not believe future ones. In such, cries of “more Fed” which have benefited financial assets over the past few years would no longer help risk assets.

  Own US Treasuries versus European debt.

   

  Investors should decrease trades that try to play the Fed subsidy too aggressively even in a world of ‘gradual’.

   

  Take down equity beta and hidden betas.  Hedge, buy puts, sell calls, and buy tail risk on equity exposures.

   

  Set up for a long term structural bull market in the US Dollar.

  • As mentioned, slowing demand for industrial commodities from China is putting significant pressure on the budgets of emerging market countries and commodity exporters. Some of these countries may be incentivized to boost revenues by selling more at discounted prices. EM currencies have been leaking lower all year and have room to fall to levels not seen since the early part of this century.  (Own USD:  EM = lower still, EUR<100, $/CAD>1.40, AUD<.6500)

  Commodities are over-sold, but have been struggling to have any bounce at all. This week the CRB commodity index fell below its 2009 low, sinking to a level last seen in 2003. In many areas, supply continues to surpass any increases in demand.  Oil risks testing the $40 support level.  Other industrial commodities risk falling to multi-decade lows. (Supply destruction takes time, and demand is slow to pick up).

  Investor outperformance in the next year will likely come from defensive strategies and reversing to risk under-weights with an emphasis on liquidity and reducing portfolio volatility.

  “Actions speak louder than words, but not nearly as often” – Mark Twain

  

  

  

  

  

• Mapping The Global War On Terror

  Thanks in no small part to ISIS’ uncanny (not to mention highly suspicious) film editing capabilities, the global war on terror is back in the limelight this year as the black flag-waving, marauding militants have served notice that not only did the death of Osama Bin Laden not spell the beginning of the end for the jihadist cause, but in fact, the world has entered a new era in which the advent of the “lone wolf” attack effectively means Islamic State-inspired terror can strike anywhere, anytime.

  Or at least that’s the narrative, and if the events that have transpired in Turkey and Syria over the last several weeks prove anything, it’s that the terror narrative is just as effective today as it was 13 years ago when it comes to justifying the aggressive pursuit of narrow political and/or geopolitical agendas that might otherwise prove to be decisively unpopular. 

  And so, as the US gets set to justify another invasion of a sovereign country by claiming that the war on terror demands it, we bring you the following map from BofAML which purports to show every terrorist attack worldwide perpetrated since 2000.

  Some “highlights” from 2013 include:

  • 9,814 total attacks
  • Nearly 18,000 people killed
  • Attacks highly concentrated

  

  

  

  

  

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