Today’s News December 15, 2015

• Will The Fed Hike Rates This Week? The Only 'Data' That Matters

  This is the real "data" that The Fed is "dependent" on…

   

  

   

  As Deutsche Bank notes, The Fed is “right” to be raising rates. If they had done it earlier all the problems they now have to face, they wouldn’t have had to. If they do it later, those same problems will be even worse. Of course had they done it earlier there may well have been other problems. Like for example, no growth and a much higher unemployment rate. But that’s all water under the bridge. Fact is this Fed is ready to go. And markets know it!

  But, what would it take for the Fed not to hike this coming meeting?

  We think SPX through 1860.

   

  Right through the 1900s, the Fed is likely to be complacent that this is normal market volatility. Pre-Prom nerves, if you will. It took the SPX just seven trading days to drop from 2102 to 1867 in August, an average of over 30 points a day. It could do the same but the pace would have to be closer to double. Possible but one wouldn’t make that a central forecast. More likely, the debate will quickly shift to how quickly the Fed stops tightening.

   

  It appears, we have discussed previously,  that the logic of the median dots is to raise rates to dampen a would be credit bubble (and 'disable' the record leverage that low risk premia have allowed). It’s hard to know how far rates have to rise for that outcome but we suspect it's more than one hike and less than what our adjusted Taylor rule model for terminal funds suggests, which is around 2.5 percent. Plus or minus 1 percent therefore seems a reasonable first proxy, which would have the Fed hiking say through to September, 2016.

  And then what…

  

  It looks like the market is already pricing in the next inevitable round of QE.

   

  Charts: Bloomberg

  

  

  

  

  

• Cornering Russia – Risking World War III

  Authored by Alastair Crooke, originally posted at ConsortiumNews.com,

  Official Washington is awash with tough talk about Russia and the need to punish President Putin for his role in Ukraine and Syria. But this bravado ignores Russia’s genuine national interests, its “red lines,” and the risk that “tough-guy-ism” can lead to nuclear war, as Alastair Crooke explains.

  We all know the narrative in which we (the West) are seized. It is the narrative of the Cold War: America versus the “Evil Empire.” And, as Professor Ira Chernus has written, since we are “human” and somehow they (the USSR or, now, ISIS) plainly are not, we must be their polar opposite in every way.

  “If they are absolute evil, we must be the absolute opposite. It’s the old apocalyptic tale: God’s people versus Satan’s. It ensures that we never have to admit to any meaningful connection with the enemy.” It is the basis to America’s and Europe’s claim to exceptionalism and leadership.

  And “buried in the assumption that the enemy is not in any sense human like us, is [an] absolution for whatever hand we may have had in sparking or contributing to evil’s rise and spread. How could we have fertilized the soil of absolute evil or bear any responsibility for its successes? It’s a basic postulate of wars against evil: God’s people must be innocent,” (and that the evil cannot be mediated, for how can one mediate with evil).

  Westerners may generally think ourselves to be rationalist and (mostly) secular, but Christian modes of conceptualizing the world still permeate contemporary foreign policy.

  It is this Cold War narrative of the Reagan era, with its correlates that America simply stared down the Soviet Empire through military and – as importantly – financial “pressures,” whilst making no concessions to the enemy.

  What is sometimes forgotten, is how the Bush neo-cons gave their “spin” to this narrative for the Middle East by casting Arab national secularists and Ba’athists as the offspring of “Satan”:  David Wurmser was advocating in 1996, “expediting the chaotic collapse” of secular-Arab nationalism in general, and Baathism in particular. He concurred with King Hussein of Jordan that “the phenomenon of Baathism” was, from the very beginning, “an agent of foreign, namely Soviet policy.”

  Moreover, apart from being agents of socialism, these states opposed Israel, too. So, on the principle that if these were the enemy, then my enemy’s enemy (the kings, Emirs and monarchs of the Middle East) became the Bush neo-cons friends.  And they remain such today – however much their interests now diverge from those of the U.S.

  The problem, as Professor Steve Cohen, the foremost Russia scholar in the U.S., laments, is that it is this narrative which has precluded America from ever concluding any real ability to find a mutually acceptable modus vivendi with Russia – which it sorely needs, if it is ever seriously to tackle the phenomenon of Wahhabist jihadism (or resolve the Syrian conflict).

  What is more, the “Cold War narrative” simply does not reflect history, but rather the narrative effaces history: It looses for us the ability to really understand the demonized “calous tyrant” – be it (Russian) President Vladimir Putin or (Ba’athist) President Bashar al-Assad – because we simply ignore the actual history of how that state came to be what it is, and, our part in it becoming what it is.

  Indeed the state, or its leaders, often are not what we think they are – at all. Cohen explains: “The chance for a durable Washington-Moscow strategic partnership was lost in the 1990 after the Soviet Union ended. Actually it began to be lost earlier, because it was [President Ronald] Reagan and [Soviet leader Mikhail] Gorbachev who gave us the opportunity for a strategic partnership between 1985-89.

  “And it certainly ended under the Clinton Administration, and it didn’t end in Moscow. It ended in Washington — it was squandered and lost in Washington. And it was lost so badly that today, and for at least the last several years (and I would argue since the Georgian war in 2008), we have literally been in a new Cold War with Russia.

  “Many people in politics and in the media don’t want to call it this, because if they admit, ‘Yes, we are in a Cold War,’ they would have to explain what they were doing during the past 20 years. So they instead say, ‘No, it is not a Cold War.’

  “Here is my next point. This new Cold War has all of the potential to be even more dangerous than the preceding 40-year Cold War, for several reasons. First of all, think about it. The epicentre of the earlier Cold War was in Berlin, not close to Russia. There was a vast buffer zone between Russia and the West in Eastern Europe.

  “Today, the epicentre is in Ukraine, literally on Russia’s borders. It was the Ukrainian conflict that set this off, and politically Ukraine remains a ticking time bomb. Today’s confrontation is not only on Russia’s borders, but it’s in the heart of Russian-Ukrainian ‘Slavic civilization.’ This is a civil war as profound in some ways as was America’s Civil War.”

  Cohen continued: “My next point: and still worse – You will remember that after the Cuban Missile Crisis, Washington and Moscow developed certain rules-of-mutual conduct. They saw how dangerously close they had come to a nuclear war, so they adopted “No-Nos,’ whether they were encoded in treaties or in unofficial understandings. Each side knew where the other’s red line was. Both sides tripped over them on occasion but immediately pulled back because there was a mutual understanding that there were red lines.

  “TODAY THERE ARE NO RED LINES. One of the things that Putin and his predecessor President Medvedev keep saying to Washington is: You are crossing our Red Lines! And Washington said, and continues to say, ‘You don’t have any red lines. We have red lines and we can have all the bases we want around your borders, but you can’t have bases in Canada or Mexico. Your red lines don’t exist.’  This clearly illustrates that today there are no mutual rules of conduct.

  “Another important point: Today there is absolutely no organized anti-Cold War or Pro-Detente political force or movement in the United States at all –– not in our political parties, not in the White House, not in the State Department, not in the mainstream media, not in the universities or the think tanks. … None of this exists today. …

  “My next point is a question: Who is responsible for this new Cold War? I don’t ask this question because I want to point a finger at anyone. The position of the current American political media establishment is that this new Cold War is all Putin’s fault – all of it, everything. We in America didn’t do anything wrong. At every stage, we were virtuous and wise and Putin was aggressive and a bad man. And therefore, what’s to rethink? Putin has to do all of the rethinking, not us.”

  These two narratives, the Cold War narrative, and the neocons’ subsequent “spin” on it: i.e. Bill Kristol’s formulation (in 2002) that precisely because of its Cold War “victory,” America could, and must, become the “benevolent global hegemon,” guaranteeing and sustaining the new American-authored global order – an “omelette that cannot be made without breaking eggs” – converge and conflate in Syria, in the persons of President Assad and President Putin.

  President Obama is no neocon, but he is constrained by the global hegemon legacy, which he must either sustain, or be labeled as the arch facilitator of America’s decline. And the President is also surrounded by R2P (“responsibility-to-protect”) proselytizers, such as Samantha Power, who seem to have convinced the President that “the tyrant” Assad’s ouster would puncture and collapse the Wahhabist jihadist balloon, allowing “moderate” jihadists such as Ahrar al-Sham to finish off the deflated fragments of the punctured ISIS balloon.

  In practice, President Assad’s imposed ouster precisely will empower ISIS, rather than implode it, and the consequences will ripple across the Middle East – and beyond. President Obama privately may understand the nature and dangers of the Wahhabist cultural revolution, but seems to adhere to the conviction that everything will change if only President Assad steps down. The Gulf States said the same about Prime Minister Nouri al-Maliki in Iraq. He has gone (for now), but what changed? ISIS got stronger.

  Of course if we think of ISIS as evil, for evil’s sake, bent on mindless, whimsical slaughter, “what a foolish task it obviously [would be] to think about the enemy’s actual motives. After all, to do so would be to treat them as humans, with human purposes arising out of history. It would smack of sympathy for the devil. Of course,” Professor Chernus continues, “this means that, whatever we might think of their actions, we generally ignore a wealth of evidence that the Islamic State’s fighters couldn’t be more human or have more comprehensible motivations.”

  Indeed, ISIS and the other Caliphate forces have very clear human motivations and clearly articulated political objectives, and none of these is in any way consistent with the type of Syrian State that America says it wants for Syria. This precisely reflects the danger of becoming hostage to a certain narrative, rather than being willing to examine the prevailing conceptual framework more critically.

  America lies far away from Syria and the Middle East, and as Professor Stephen Cohen notes, “unfortunately, today’s reports seem to indicate that the White House and State Department are thinking primarily how to counter Russia’s actions in Syria. They are worried, it was reported, that Russia is diminishing America’s leadership in the world.”

  It is a meme of perpetual national insecurity, of perpetual fears about America’s standing and of challenges to its standing, Professor Chernus suggests.

  But Europe is not “far away”; it lies on Syria’s doorstep.  It is also neighbor to Russia. And in this connection, it is worth pondering Professor Cohen’s last point: Washington’s disinclination to permit Russia any enhancement to its standing in Europe, or in the non-West, through its initiative strategically to defeat Wahhabist jihadism in Syria, is not only to play with fire in the Middle East. It is playing with a fire of even greater danger: to do both at the same time seems extraordinarily reckless.

  Cohen again: “The false idea [has taken root] that the nuclear threat ended with the Soviet Union: In fact, the threat became more diverse and difficult. This is something the political elite forgot. It was another disservice of the Clinton Administration (and to a certain extent the first President Bush in his re-election campaign) saying that the nuclear dangers of the preceding Cold War era no longer existed after 1991. The reality is that the threat grew, whether by inattention or accident, and is now more dangerous than ever.”

  As Europe becomes accomplice in raising the various pressures on Russia in Syria – economically through sanctions and other financial measures, in Ukraine and Crimea, and in beckoning Montenegro, Georgia and the Baltic towards NATO – we should perhaps contemplate the paradox that Russia’s determination to try to avoid war is leading to war.

  Russia’s call to co-operate with Western states against the scourge of ISIS; its low-key and carefully crafted responses to such provocations as the ambush of its SU-24 bomber in Syria; and President Putin’s calm rhetoric, are all being used by Washington and London to paint Russia as a “paper tiger,” whom no one needs fear.

  In short, Russia is being offered only the binary choice: to acquiesce to the “benevolent” hegemon, or to prepare for war.

  *  *  *

  Alastair Crooke (born 1950) is a British diplomat. Previously he was a ranking figure in British intelligence (MI6).

  

  

  

  

  

• "A Night In Aleppo": Scenes From Syria's Most War-Torn City

  Back in October, we brought you “Syrian Showdown: Russia, Iran Rally Forces, US Rearms Rebels As ‘Promised’ Battle For Aleppo Begins,” in which we detailed Russia and Iran’s preparations for an push north towards Aleppo, Syria’s second largest city that’s held by a hodgepodge of militants, rebels, and jihadists (if one is inclined to differentiate between the three). 

  As Reuters noted at the time, “the assault means the army is now pressing insurgents on several fronts near Syria’s main cities in the west, control of which would secure President Bashar al-Assad’s hold on power even if the east of the country is still held by Islamic State.” 

  In other words, we said, if Assad can secure Aleppo, Iran and Russia will have successfully restored his grip on the country for all intents and purposes. 

  To give you an idea of how critical the battle truly is, Quds commander Qassem Soleimani personally called thousands of Shiite militiamen over from Iraq to fight alongside Hezbollah in the ground operation. In fact, Soleimani showed up on the frontlines to rally the troops and according to a number of reports, was injured two weeks ago while commanding his armies near the city (no one knows his current status). 

  The fight for Aleppo rages on today and in the lead up to the assault we brought you a series of stark images from 2012 depicting the struggle facing those who remain trapped in the violence. Here are few representative samples:

  

  

  

  We also highlighted the following image which shows nighttime light emissions before and after the war began:

  

  Here’s a recent account from Reuters which summarizes where things stand in what has become a protracted, grinding offensive for Assad, Iran, and Russia:

  Syrian government forces backed by Iranian troops edged closer to a major rebel-controlled highway south of Aleppo on Tuesday, pushing further into insurgent-held areas supported by heavy Russian air strikes.

   

  After seizing a series of villages including Zitan, Humaira and Qalaajiya, the army said it had thrust to the outskirts of Zirba and encircled the town of Khan Touman, an advance rebels said had left them outgunned from the air and ground.

   

  The aim of government forces appeared to be to cut the main Aleppo-Damascus highway that fighters use to transport supplies from rebel-held Idlib province to the north.

   

  Two months of Russian air strikes twinned with army ground offensives backed by Iranian and Lebanese Hezbollah forces have shored up Syrian President Bashar al-Assad in his western heartland. 

  And here’s an account from Newsweek which gives you an idea of how desperate the situation is in the city:

  Dr. Rami Kalazi (a neurosurgeon) and his colleagues work in a building that, to most people, isn’t recognizable as a hospital. Seen in a photograph sent via messaging service WhatsApp, the hospital has worn metal bars covering two holes at the front of the beige three-story structure, where glass windows are supposed to be. Wires dangle down past exposed brick and around a dozen barrels containing concrete debris that are lined up outside. The sidewalk in front of the hospital has mostly been destroyed and the two-story clinic next door is in a similar state of disrepair.

   

  It’s hard to imagine these buildings as places that could save someone’s life, yet this is the reality for the remaining hospitals in rebel-held eastern Aleppo, Syria, where roughly 80 doctors remain, down from 1,500 in 2010. Nearly all the doctors—95 percent—in the eastern part of the city have fled, been detained or been killed, according to a startling report from international humanitarian organization Physicians For Human Rights. 

  It’s against that rather depressing backdrop that we present the following photos (courtesy of Reuters) which depict “A night in Aleppo” (click on the images to enlarge and observe how clear the stars are in the absence of any and all light emissions from the city; the last two images are of graveyards):

  

  

  

  

  

  

  

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  Congratulations, Washington. This is what “democratic regime change” looks like.

  

  

  

  

• Monday Humor: Barack Obama Reveals His Secret Plan To Crush ISIS

  Having earlier taken credit for the ‘success’ achieved recently against ISIS, one comedic trader had a suggestion for how President Obama could really “depress, deflate, defeat, and destroy” the terrorists:

  “We are going to break ISIS financially by requiring them to enroll in the Affordable Care Act by 2017”

   

  – POTUS

  That should put an end to it all.

  h/t @TopThird

  

  

  

  

  

• Martin Armstrong Slams "Myopic" Policymakers' Ignorance That Lower Rates Fuel Deflation

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

  

  Those in power never understand markets. They are very myopic in their view of the world. The assumption that lowering interest rates will “stimulate” the economy has NEVER worked, not even once. Nevertheless, they assume they can manipulate society in the Marxist-Keynesian ideal world, but what if they are wrong?

  By lowering interest rates, they ASSUME they will encourage people to borrow and thus expand the economy. They fail to comprehend that people will borrow only when they BELIEVE there is an opportunity to make money. Additionally, they told people to save for their retirement. Now they want to punish them for doing so by imposing negative interest rates (tax on money) to savings. They do not understand that lowering interest rates, when there is no confidence in the future anyhow, will not encourage people to start businesses and expand the economy. It wipes out the income of savers and then the only way to make and preserve money becomes ASSET investment, as in the stock market — not creating business startups.

  So lowering interest rates is DEFLATIONARY, not inflationary, for it reduces disposable income. This is particularly true for the elderly who are forced back to work to compete for jobs, which increases youth unemployment.

  Since the only way to make money has become ASSET INFLATION, they must withdraw money from banks and buy stocks. Now, they are in the hated class of the “rich” who are seen as the 1% because they are making money when the wage earner loses money as taxation rises and the economy declines. As taxes rise, machines are replacing workers and shrinking the job market, which only fuels more deflation. Then you have people like Hillary who say they will DOUBLE the minimum wage, which will cause companies to replace even more jobs with machines.

  

  Democrats, in particular, are really Marxists. They ignore Keynes who also pointed out that lowering taxes would stimulate the economy. Keynes, in all fairness, did not advocate deficit spending year after year nor never paying off the national debt. Keynes wrote regarding taxes:

  “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”

  Keynes obviously wanted to make it clear that the tax policy should be guided to the right level as to not discourage income. Keynes believed that government should strive to maximize income and therefore revenues. Nevertheless, Democrats demonized that as “trickle-down economics.”

  Keynes explained further:

  “For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

  

  This is the logic employed by those in power. They are raising taxes and destroying the economy; when revenues decline, they raise taxes further. The evidence that politicians are incompetent of managing the economy is simply illustrated here. Now, we have Hillary claiming that she will raise taxes on corporations, but that will reduce jobs for she will only attack small businesses and never the big entities and banks who fund her campaign.

  

  So when it comes to sanity on interest rates or taxes, we really need to throw out of office anyone who is a professional career politician before they wipe out everything. The balance sheet is, as Keynes said, “ZERO on both sides.”

   

  

  

  

  

  

• "Stealth" Currency War Continues – China Weakens Yuan Fix For 7th Consecutive Day

  The Yuan fix has now weakened for 7 consecutive days. Aside from the August devaluation, this is the biggest devaluation in the Yuan since records began in 2004. At the current level of 6.4559 per dollar, the Yuan has retraced to the level it was at when QE ended in July 2011. Chinese stocks are fading a smidge after yesterday's afternoon session "rescue" ramp.

   

  

  (note – CNY chart inverted to make comparisons easier – lower is weaker CNY compared to USD)

  It's good to have friends in The IMF where not a peep will be heard as the quietest currency war in the world is under way. We presume as long as US equities don't get hurt, then The Fed, Treasury, and Chuck Schumer will just ignore it (unless and until HY's collapse becomes just too painful to ignore for all those collateral chains as The Fed withdraws up to $800bn in liquidity this week).

   

  Charts: Bloomberg

  

  

  

  

  

• Bitcoin Or Gold: Did The Alleged Bitcoin Creator Just Settle Once And For All What Is More Valuable?

  Last Wednesday, we brought you the story of Craig Steven Wright who was “outed” by Wired and Gizmodo as Satoshi Nakamoto, the pseudonymous founder of bitcoin.

  Hours after two articles pegged Wright as the man behind the myth, Australian authorities moved in, raiding the residence “Cold fish Craig” (as he was known in his neighborhood) rented with his wife and conducting searches and interviews at his businesses. 

  Apparently, Australian tax authorities had questioned Wright in the past and according to a number of sources (and documents obtained by Wired and Gizmodo), there appears to have been some manner of dispute over how his bitcoin holdings should be taxed. The attention accorded to Wright on the heels of the two articles published late last Tuesday might have prompted the ATO to move in once and for all, although authorities claimed at the time that there was no connection between the new “revelations” about Wright’s identity and the raids. 

  Now, we get the latest twist in what is already a fairly bizarre story, as The Australian says that in May of 2013, Wright attempted to buy some $85 million in gold and software from Mark Ferrier, who at the time was working on a deal whereby his MJF Mining would obtain 50% of the gold discovered by ASX-listed goldminer Paynes Find Gold. 

  Apparently, Paynes needed machinery which Ferrier – via MJF – was willing to provide in exchange for a claim on any future discoveries. According to the Australian, “Mr Ferrier is alleged to have told Mr Wright gold was good security in the event the ‘funny money’ of Bitcoin failed.” Here’s what supposedly happened next: 

  Mr Wright has alleged payments were made in August 2013 of $38.8m — then the equivalent of 245,103 Bitcoin — for Siemens software and gold from Paynes. He then claimed payments were made to Mr Ferrier of $20.3m — or 135,100 Bitcoin — in September 2013 for the “core software” from Al-Baraka. In September that year Mr Ferrier was arrested in Perth and the gold partnership with Paynes was discontinued.

   

  In December 2013 Mr Wright filed actions in the Federal Court and NSW Supreme Court suing for his share of the gold, claiming the sum of $84.42m based on the market value of the alleged Bitcoin payments for the gold.

  Paynes’ annual financial report for the year ending June 30, 2014 contains the following passage about the partnership:

  The company terminated a mining services and profit sharing agreement with MJF on October 1, 2013. Mr. Mark Ferrier has lodged a statement of claim with the District Court of New South Wales, claiming an amount of $279,621 related to the loss of profits from the small scale mining.The company considers the claim to be completely false.

  Here’s an excerpt from a transcript of an ATO meeting that tells part of the story (this is from a John Chesher, who was Wright’s accountant):

  Craig Wright was speaking in a conference in Melbourne. He was giving a talk about Bitcoins and mining. He was then approached by a man by the name of Mark Ferrier and that was how they met. This was how the relationship was formed. They started talking. Craig Wright told Mark Ferrier that he wanted to start up a Bitcoin bank. They then started emailing. Mark Ferrier told him that he knew someone who could help him start up the bank. This was all done in early June 2013. Everything was done very quickly- most of it was done in one weekend. Craig Wright, with the help of Mark Ferrier, agreed to purchase banking software from Al Baraka. Mark Ferrier also convinced him to purchase gold ore.

   

  He also offered Ian Ferrier’s services to Mark Ferrier. Ian Ferrier is Mark Ferrier’s father. Before engaging in Mark Ferrier’s services, Craig Wright had conducted lots of checks on him and everything came up clean. So in essence, Craig Wright wanted the banking software and Mark Ferrier wanted Bitcoins. Around mid-July/August,

   

  Craig Wright released funds from an entity located in the UK to MJF Consulting. This was all going through a server located in Central West Africa. Mark Ferrier was then arrested in September 2013. Craig Wright then started to take action to protect his own rights. Your director, Des McMaster has informed us that ASIC documents show that Mark Ferrier was only put on as a director for one day. Craig Wright then contacted Pitcher Partners in Brisbane and asked them for an explanation. We found out that Mark Ferrier was never a director. The address that he had on ASIC was false as well. Craig Wright was able to get hold of the banking software and automation system. He has everything but not the gold ore. He was expected to receive the gold ore in 2015 but now that’s not happening as the gold can’t be delivered.

   

  Craig Wright has also contacted Ian Ferrier. Ian Ferrier advised us that he has not spoken to Mark Ferrier for 2 years and wants nothing to do with him. We have a case against MJF Consulting with the Supreme Court of NSW and also the Federal Court. The case with the Federal Court is for deceptive conduct against Mark Ferrier personally as an individual.

   

  Due diligence was conducted on Mark Ferrier before we engaged him. We have done all we could to protect ourselves. If you look at the transactions made, you will see that every transaction was pegged against the currency exchange rate at the time. Craig Wright has already advised you that the accounting method for this personal enterprise should be changed from cash to accruals. The accounts should be on accruals from the start of the 2013 income year. Craig Wright has previously informed the ATO of this. We have previously been dealing with ATO officers from different sites at first, e.g. some initial work was being conducted from the Hurstville office, Brisbane office etc. But then Des McMaster made a decision for all the audits to be done from Parramatta. The audits were then being conducted by Celso. I am uncomfortable with the fact that Des McMaster is looking after these audits. We have had past dealings with him in the previous audits. 

  For those interested in attempting to get to the bottom of this, you can read more here (just use a word search for “Ferrier), and we’re sure they’ll be much, much more revealed as time goes on, unless of course the Craig Wright story goes the way of all other Satoshi Nakamoto discovery claims (see Newsweek). 

  What’s immediately interesting however is that while Ferrier might not have “actually wanted any Bitcoin,” (to quote Wright), it does seem clear that Wright did and still does, want gold. 

  The takeaway: if you believe Wright is Satoshi, then the founder of bitcoin is skeptical enough of his creation’s intrinsic value compared to hard assets that he was at one time willing to trade a sizeable portion of his cryptocurrency wealth for physical gold. 

  Trade – or “mine”, as it were – accordingly. 

  

  

  

  

  

• Chesapeake Bonds Plummet To 27 Cents Of Par After Company Hires Restructuring Advisor

  After numerous false starts and months of hollow hopes for the stakeholders of beleaguered gas producer Chesapeake Energy, including an activist stake built up by none other than Carl Icahn which was the source of much transitory joy, various notional reducing debt exchanges, and speculation of asset sales, the time is coming when the inevitable debt-for-equity restructuring, one which could wipe away most or all of the existing $2.6 billion equity tranche (down from $11 billion a year ago) is on the table.

  According to the WSJ, Chesapeake has hired restructuring advisor Evercore “to shore up its balance sheet as commodity prices extend their decline.” This means that Evercore will seek to further slash its debt, almost certainly be equitizing a substantial portion of it, and handing it over as equity in the new company to CHK’s bondholders.

  And while many saw the restructuring, and potential prepackaged bankruptcy, coming from a mile away, what precipitated it was the plunge in the company’s liquidity as a result of the ongoing collapse in commodity prices. Just earlier today, nat gas hit the lowest price in 13 years, which meant that after ending 2014 with $4.1 billion in cash, the company is down to just $1.8 billion in cash, or about 1-2 quarter of liquidity at the current cash burn rate.

  But while CHK’s stock has imploded, falling 79% this year to around $4.09 per share or a $2.7 billion market cap, the real story is in the company’s bonds.

  Chesapeake’s $1.3 billion in bonds due in 2020 bearing 6.625% interest recently traded at 29 cents on the dollar, down from 47 cents late last month, according to MarketAxess.

  Worse, the company’s 2023 bonds which were trading at par as recently as late May, just rumbled to a record low 27 cents on the dollar.

  

   

  What is troubling is that Chesapeake has already taken steps to reduce its debt load, and is offering to exchange bonds at a discount for up to $1.5 billion of new debt, while offering a partial priming and a stronger claim on the company’s assets. As the WSJ adds, the proposed swap follows a deal Chesapeake cut with its banks earlier this year that allowed it to issue the new high-ranking debt. In return, Chesapeake agreed to secure its $4 billion credit line with a top-ranking claim on its assets.

  In other words, what Chesapeake is doing is using and abusing the goodwill of its creditors, both secured and unsecured, to extract every last penny from them while promising the sun and the moon to both groups.

  This is hardly new: “Dozens of money-losing oil-and-gas companies have issued new debt this year, sometimes swapping it for discounted bonds, in an effort to ride out the slump in prices. SandRidge Energy Inc., Midstates Petroleum Co. and Halcon Resources Corp. all have done such deals this year.”

  However, in the aftermath of the most recent implosion in the high yield space, of which Chesapeake is a proud member, we expect that the banks, realizing at this point they are only throwing good money after bad will slam the issuance (and voluntary refi) window shut, forcing the company to burn the last of its cash which at current commodity prices should be gone by the summer of 2016, at which point it will have no choice but to file for bankruptcy. The only question is whether it will be a prepackaged consensual affair or a free-fall Chapter 11.

  Our only question is whether Carl Icahn will be as generous with lending Chesapeake the Debtoi In Possession loan it will need, as he was in building up his 11% “BTFD” equity stake.

  

  

  

  

  

• Ron Paul: "If You Want Security, Pursue Liberty"

  Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,

  Judging by his prime-time speech last week, the final year of Barack Obama’s presidency will be marked by increased militarism abroad and authoritarianism at home. The centerpiece of the president’s speech was his demand for a new law forbidding anyone on the federal government’s terrorist watch list from purchasing a firearm. There has never been a mass shooter who was on the terrorist watch list, so this proposal will not increase security. However, it will decrease liberty.

  Federal officials can have an American citizen placed on the terrorist watch list based solely on their suspicions that the individual might be involved in terrorist activity. Individuals placed on the list are not informed that they have been labeled as suspected terrorists, much less given an opportunity to challenge that designation, until a Transportation Security Administration agent stops them from boarding a plane.

  Individuals can be placed on the list if their Facebook or Twitter posts seem “suspicious” to a federal agent. You can also be placed on the list if your behavior somehow suggests that you are a “representative” of a terrorist group (even if you have no associations with any terrorist organizations). Individuals can even be put on the list because the FBI wants to interview them about friends or family members!

  Thousands of Americans, including several members of Congress and many employees of the Department of Homeland Security, have been mistakenly placed on the terrorist watch list. Some Americans are placed on the list because they happen to have the same names as terrorist suspects. Those mistakenly placed on the terrorist watch list must go through a lengthy “redress” process to clear their names.

  It is likely that some Americans are on the list solely because of their political views and activities. Anyone who doubts this should consider the long history of federal agencies, such as the IRS and the FBI, using their power to harass political movements that challenge the status quo. Are the American people really so desperate for the illusion of security that they will support a law that results in some Americans losing their Second Amendment rights because of a bureaucratic error or because of their political beliefs?

  President Obama is also preparing an executive order expanding the federal background check system. Expanding background checks will not keep guns out of the hands of criminals or terrorists. However, it will make obtaining a firearm more difficult for those needing, for example, to defend themselves against abusive spouses.

  Sadly, many who understand that new gun control laws will leave us less free and less safe support expanding the surveillance state. Like those promoting gun control, people calling for expanded surveillance do not let facts deter their efforts to take more of our liberties. There is no evidence that mass surveillance has prevented even one terrorist attack.

  France’s mass surveillance system is much more widespread and intrusive than ours. Yet it failed to prevent the recent attacks. France’s gun control laws, which are much more restrictive than ours, not only failed to keep guns out of the hands of their attackers, they left victims defenseless. It is thus amazing that many American politicians want to make us more like France by taking away our Second and Fourth Amendment rights.

  Expanding government power will not increase our safety; it will only diminish our freedom. Americans will have neither liberty nor security until they abandon the fantasy that the US government can provide economic security, personal security, and global security.

  

  

  

  

  

• Chinese Officials Admit To "Significantly Faking And Overstating" Economic Data

  Slowly all the wheels of the legacy propaganda narrative are falling off, only this time dealing not with some ridiculous economic “recovery” tripe (for those still confused, the global economy just suffered its worst USD-denominated GDP collapse in 50 years), but with the credibility of Chinese data, which most have known is completely fabricated, only there was never an actual admission from within. Now there is.

  According to China Daily, several local officials in China’s Northeast region sought to explain dramatic economic drops in their areas by admitting they had faked economic data in the past few years to show high growth when the real numbers were much lower, Xinhua News Agency reported on Friday.

  The report cited several officials in the region who acknowledged they had “significantly overstated data ranging from fiscal revenue and household income to GDP.”

  Three years ago Liaoning province’s GDP growth was reported at 9.5 percent, but its current figure?over the first three quarters of this year?is just 2.7 percent. Jilin’s growth was reported at 12 percent three years ago, but its current rate is 6.3 percent in the same period.

  The revelation about the inflated figures came as the GDP growth of the three Northeast provinces ranked the lowest nationwide.

  Of course, while the economy was growing, nobody cared that the numbers were absolutely ridiculous: after all, it confirmed the narrative of growth. Guan Yingmin, an official in Heilongjiang province, said local investment figures were inflated by at least 20 percent, which translates to nearly 100 billion yuan ($15.7 billion).

  As a reminder, Heilongjiang province is where we reported recently a local coal miner, Longmay Mining Holding Group, the biggest met coal miner in Northeast China laid off a record 100,000 workers in one fine September day.

  China Daily also notes that if the local financial reports were true, some single counties’ GDP would have surpassed Hong Kong. An earlier audit by the National Audit Office found one county in Liaoning that reported annual fiscal revenues 127 percent higher than the actual number.

  Again: as long as everyone was “growing”, it didn’t matter if the numbers were fabricated – in fact, the more made up the better.

  Why? As a staff member in the Jilin provincial finance department, who asked not to be identified, told China Daily that in past years, local officials competed each other to lure external investment projects. They reported the promised investment value, whether it had been achieved or not, as the investment figure. So the bigger the “reported” growth, the higher the likelihood of being awarded the project, which in turn means millions in government funds being directly embezzled by corrupt local officials, money which would promptly then end up in some duplex in NYC, San Fran or Vancouver.

  But why is all this emerging now? Simple: it is all the fabricated data’s fault why the current growth (or rather, economic collapse) is so terrible:

  “If the past data had not been inflated, the current growth figures would not show such a precipitous fall,” one official was quoted as saying.

  Brilliant: if only we hadn’t made up ridiculously high data in the past, the comps to one, two or more years ago would not look so terrible.

  What was left unsaid is that if “data had not been inflated”, it would be negative and instead of 7% GDP growth we would be asking just how big China’s GDP contraction will be this year.

  We bring all this up in the aftermath of this weekend’s “strong” Chinese industrial production and retail sales data because it too is completely fabricated and goalseeked. Only now there is no doubt.

  

  

  

  

  

• Meet The Burmese "Slaves" Helping Wal-Mart Maintain Margins

  Peak globalization? Burmese men, women and children are being sold to factories in Thailand – "no names are used, just numbers" – and forced to peel shrimp that ends up in global supply chains. As a recent AP investigation uncovered, U.S. customs records show the shrimp made its way into the supply chains of major U.S. food stores and retailers such as Wal-Mart, Kroger, Whole Foods, Dollar General and Petco, along with restaurants such as Red Lobster and Olive Garden.

  Shrimp is the most-loved seafood in the U.S., with Americans downing 1.3 billion pounds every year, or about 4 pounds per person. Once a luxury reserved for special occasions, it became cheap enough for stir-fries and scampis when Asian farmers started growing it in ponds three decades ago. Thailand quickly dominated the market and now sends nearly half of its supply to the U.S.

  And the way to keep those prices low enough for a stagnant-wage-earning America… "slavery"

  Full AP story here..

  

  

  

  

  

• These Are Deutsche Bank's Two Top Trades After A Fed Rate Hike

  When it comes to Wednesday’s rate hike, the opinion of Deutsche Bank, which has openly called such a move a “policy error” in the past, is quite clear: “the Fed’s objective is to slow credit. With deficient market liquidity that is easier done and said. In doing so it appears they also may help tidy up outstanding FX issues around RMB. Neither are good for risk on now and both favor curve flattening.”

  To be sure, DB does not want to come out sounding like a tinfoil hat blog by telling the whole truth without spinning it at least a little bit, which is why it adds that “Doom and gloom is not the official call on either the US economy, the Fed nor China. But it is our rates view that doom and gloom should be hedged. Do not underestimate how far rates can fall or the curve can flatten depending on the extent to which the Fed insists on tightening and the sensitivity of credit creation and EM/China fall out.”

  That is about as close as DB’s Dominic Konstam will come to saying “doom and gloom” is now the base case.

  But that’s in the medium-term. How to trade the short-term which even a resigned DB believes means a Fed rate hike (even if it is promptly undone with a rate cut or worse as Hilsenrath hinted yesterday)? Here are Konstam’s two core trade recos for the next few days… which some may say is really one trade.

  It’ll take some deep dives in SPX to stop the Fed from tightening. Possible but even we cannot be that pessimistic. So they hike. Then what? How many can they really manage. Less rather than more. And it all depends on how quickly they achieve their real goal. The real goal is not managing inflation higher, otherwise they wouldn’t hike at all. Nor is it managing unemployment higher. That’s not the mandate. The real goal is to cut credit – the evil eye of leverage that threatens longer term sustainable growth. Partly thanks to an already over extended credit cycle and super deficient liquidity, they probably don’t need to hike very much at all. For safety we’ll assume they might try to get to 1 percent. That’s still plenty good enough to expect the curve to flatten and bullishly from the long end. Don’t under estimate how far rates can fall in this scenario. 5y5y easily can trade to old lows and 2s-bonds can flatten to 150 bps. China, like credit should also “get resolved” in Fed tightening. A golden opportunity to have more extensive depreciation.

  Here DB makes an amusing detour between what it “really” thinks, and its “official” bullish, optimistic position which is spun by the cheerleaders such as LaVorgna and Bianco, whose only job is to placate bullish clients who hear what they want to hear, and spend some “soft dollars” with the German bank:

  Of course to be clear our official view on China is not that. Officially, we have been optimistic on Chinese growth and limited scope for depreciation. Officially we also think the Fed has plenty of ability to raise rates without flaying the economy and credit markets.

  But… “Officially though also, we think investors should use the rates market to hedge those official views.”

  We get it: ixnay on the Koolaid-ay.

  What is more surprising is that rarely if ever have we seen a more acute example of just how profoundly one group within a bank disagrees with the bank’s “official” cheerleading narrative: things must be really bad internally for the discord to be so public.

  So putting all this together, what is DB’s recommendation, assuming the market does not crash by over 100 points overnight and trigger a rate hike pause?

  It’s two fold: either buy bonds, or buy even more bonds.

  Even without the profit constrained world for the dim labor market view, the Fed wants credit to slowdown. When credit slows down, buybacks slow. A roll over in the credit cycle is always associated with significant slowing in the labor market. It is true there are some metrics that suggests the corporate sector still has some juice in it, in terms of net worth, outlays to profits. It is not nearly as stretched overall as it has been on these other metrics this time around. But at this rate, it pretty much will become mid 2016. If it wasn’t the Fed wouldn’t be raising rates after all. So maybe there is an immaculate tightening but the choice seems to be either the Fed achieves its goals quickly to a very low terminal Funds rate. Buy bonds. Or they need to be even more aggressive. Buy even longer duration bonds. The choice is more about where to put the long leg of the curve flattener not about whether to steepen or flatten the curve.

  And just to confirm that it is all about return of capital, not on DB also points out what has been the topic of the past week, namely the spectacular implosions in various junk bond funds, something which should not be happening if the economy and financial conditions were strong enough to handle a tiny 25 bps rate increase:

  Credit stresses in the market place appear to be fast emerging. As our HY strategists have argued it is not good enough to “ignore” credit woes simply because they are concentrated in one sector. Crises are always concentrated in one sector but that then leads to contagion. Contagion occurs because of leveraged and forced selling and forced refinancing that then cannot take place.

  Taking all this together, what DB’s “unofficial” message is, since there is no “immaculate tightening”, one which soaks up $600-800 billion in liquidity to start and goes up as much as $3 trillion at 1%, is to start frontrunning QE4 and/or NIRP by the Fed, something which the market will “force” on Yellen in two distinct ways – by causing a sell of in stocks, and by inverting the yield curve hinting a recession is imminent unless the Fed eases immediately once it begins tightening.

  Just as Hilsenrath warned yesterday would happen.

  

  

  

  

  

• Will The Market Force Yellen Into 'None-And-Done'?

  

  The market has a way of getting what it wants. And right now, it surely does not want Yellen to hike this week. Will she nevertheless, as is widely expected? Or will the buoyant markets force yet another delay, ultimately resulting in a ‘none-and-done’?

  There’s no denying that the Fed policies fueled this stock bull market. The liquidity of QE 1 to 4 propelled the markets to new highs with every shot. At the completion of the QE tapering in October 2014, the S&P 500 hovered around the 2,000 mark. Today, we’re trading at exactly the same levels. No QE, no advance.
  

  

  Leon Cooperman, manager of Omega Advisors, argues that interest rate hikes are positive for stocks. That might historically be the case. But this time around, things could be different. We know, that’s the most dangerous sentence in the world. But this is not your average business cycle. Nowhere near. The cumulative GDP-addition since the end of the financial crisis might be equal to the the point of prior rate hike cycles, as bond king Jeff Gundlach pointed out early last week. But there’s barely GDP growth to be found.

  Also, inflation usually picks up in the late expansion of the business cycle. Commodities outperform as the slack in the economy diminishes. That’s the point where the Fed normally starts tightening. Right now, we’re looking at the worst commodity crash in decades. Inventories-to-sales are rising as well. The yuan is plummeting. There is just no slack.

  What about the job market? Isn’t the unemployment rate at the 5% target? Well yes, it is. And at first glance, it’s looking much better than Europe’s 9% unemployment. But wait a second. If we adjust the unemployment for the participation rate, like GMO’s Jeremy Grantham did recently, we’re looking at worse employment figures in the US than in Europe. While even counting in Italy and Spain. You know, the same Europe where ECB-president Mario Draghi just put the QE-pedal further to the metal.

  

  But the Fed seems to want to hike anyway. Why? First of all, there are two tools for monetary policy: words and deeds. And if you use too much of the former compared to the latter, you lose credibility. The Fed put itself in a corner. It is pretty much forced to act.

  Secondly: the US elections are coming up next year. President Obama would like to finish on a positive note. And of course, he would like to see a Democratic successor. To that end, he needs to ‘build confidence’. And a rate hike is a sign of confidence – whether it’s just keeping up appearances or not. If you don’t believe politics matter: it was Obama himself who nominated Yellen as Fed chair in October 2013.

  Now, let’s be crystal clear. These are not valid reasons for a rate hike. On the contrary.

  To make matters worse, market conditions have already significantly tightened since mid-2014. The stress accelerated during this year, culminating in the high yield turmoil we’re currently witnessing. But it’s not just the the well-known HYG and JNK junk bond ETFs that are crashing. Another example is the BKLN Senior Loan ETF pictured below, which includes leveraged loans. There are some rumors of margins calls on total return swaps, which participants use to leverage loan portfolios.

  
  

  Even spreads in investment grade credits are widening sharply.

  

  We are on the cusp on a surge in corporate defaults. Does that sound like a good time to hike rates?

  

  In August 2007, with the first mortgage shockwaves hitting the market, Jim Cramer of all people literally begged Fed chairman Bernanke to “wake up” and “open the discount window”. The CNBC commentator noted: “We have armageddon in the fixed income markets”. The stock market shrugged and made new highs in October, before slipping somewhat. It was not until early 2008 before the summer lows were breached. And it took more than a year for the market to eventually melt down.

  Will the Fed disregard the current bond market turmoil, either on purpose or because of basic ignorance? Or will it hold rates steady yet again, forced by the high yield markets and making ‘none-and-done’ the new mantra? We will find out shortly.

  >>> Protect Your Wealth: Download our Exclusive Gold Report

  Secular Investor offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies are transformed into the Gold & Silver Report and the Commodity Report.
  

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• Paper Money Versus The Gold Standard

  Submitted by Richard Ebeling via EpicTimes.com,

  We are living in a time that can only be considered monetary chaos. The U.S. Federal Reserve has manipulated key interest rates down to practically zero for the last six years, and expanded the money supply in the banking system by $4 trillion dollars over that time. And with the true mentality of the monetary central planner, the Fed Board of Governors are now planning to manipulate key interest rates in an upward direction that they deem desirable.

  The European Central Bank (ECB) has instituted a conscious policy of “negative” interest rates and planned an additional monetary expansion of well over a trillion Euros over the next year. Plus, the head of the ECB has assured the public and financial markets that there is “no limit” to the amount of paper money that will be produced to push the European economies in the direct that those monetary central planners consider best.

  We also should not forget that it was the Federal Reserve that earlier in the twenty-first century undertook a monetary expansion and policy of interest rate manipulation that set the stage for the severe and prolonged “great recession” that began in 2008-2009, in conjunction with a Federal government distorting subsidization of the American housing market.

  The media and the policy pundits may focus on the day-to-day zigs and zags of central bank monetary and interest rate policy, but what really needs to be asked is whether or not we should continue to leave monetary and banking policy in the discretionary hands of central banks and the monetary central planners who manage them.

  

   

  Central Banking as Monetary Central Planning

  And make no mistake about it. Central banking is monetary central planning. The United States and, indeed, virtually the entire world operate under a regime of monetary socialism. Historically, socialism has meant an economic system in which the government owned, managed, and planned the use of the factors of production.

  Modern central banking is a system in which the government, either directly or through some appointed agency such as the Federal Reserve in the United States, has monopoly ownership and control of the medium of exchange. Through this control the government and its agency has predominant influence over the value, or purchasing power, of the monetary unit, and can significantly influence a variety of market relationships. These include the rates of interest as which borrowing and lending goes on in the banking and financial sectors of the economy, and therefore the patterns of savings and investment in the market.

  If there is one lesson to be learned from the history of the last one hundred years – during which the world and the United States moved off the gold standard and onto a government-managed fiat, or paper, money system – is the fundamental disaster of placing control of the money supply in the hands of governments.

   

  Continual Government Abuse of Money

  If is worth recalling that money did not originate in the laws or decrees of kings and princes. Money, as the most widely used and generally accepted medium of exchange, emerged out of the market transactions of a growing number of buyers and sellers in an expanding arena of trade.

  Commodities such as gold and silver were selected over generations of market participants as the monies of free choice, due to their useful characteristics to better facilitate the exchange of goods in the market place.

  For almost all of recorded history, governments have attempted to gain control of the production and manipulation of money to serve their seemingly insatiable appetite to extract more and more of the wealth produced by the ordinary members of society. Ancient rulers would clip and debase the gold and silver coins of their subjects.

  More modern rulers – whether despotically self-appointed through force or democratically elected by voting majorities – have taken advantage of the monetary printing press to churn out paper money to fund their expenditures and redistributive largess in excess of the taxes they impose on the citizenry.

  Today the process has become even easier through the mere click of a “mouse” on a computer screen, which in the blink of an eye can create tens of billions of dollars out of thin air.

  Thus, monetary debasement and the price inflation that normally accompanies it have served as a method for imposing a “hidden taxation” on the wealth of the citizenry. As John Maynard Keynes insightfully observed in 1919 (before he became a “Keynesian”!):

  “By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.”

  It is the corrosive, distortive, and destructive effects from monetary manipulation by governments that led virtually all of the leading economists of the nineteenth century to endorse the “anchoring” of the monetary system in a commodity such as gold, to prevent governments from using their powers over the creation of paper monies to cover their budgetary extravagance. John Stuart Mill’s words from the middle of the nineteenth century are worth recalling:

  “No doctrine in political economy rests on more obvious grounds than the mischief of a paper currency not maintained at the same value with a metallic, either by convertibility, or by some principle of limitation equivalent to it . . . All variations in the value of the circulating medium are mischievous; they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious . . .

   

  “Great as this evil would be if it [the supply of money] depended on [the] accident [of gold production], it is still greater when placed at the arbitrary disposal of an individual or a body of individuals; who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes; and who have at any rate a strong interest in issuing as much [inconvertible paper money] as possible, each issue being itself a source of profit.

   

  “Not to add, that the issuers have, and in the case of government paper, always have, a direct interest in lowering the value of the currency because it is the medium in which their own debts are computed . . . Such power, in whomsoever vested, is an intolerable evil.”

  

   

  The Social Benefits of a Gold Standard

  Under a gold standard, it is gold that is the actual money. Paper currency and various forms of checking and other deposit accounts that may be used in market transactions in exchange for goods and services are money substitutes, representing a fixed quantity of the gold-money on deposit with a banking or other financial institution that are redeemable on demand.

  Any net increases in the quantity of currency and checking and related deposits are dependent upon increases in the quantity of gold that depositors with banking and financial institutions add to their individual accounts. And any withdrawal of gold from their accounts through redemption requires that the quantity of currency notes and checking and related accounts in circulation be reduced by the same amount. Under a gold standard, a central bank is relieved of all authority and power to arbitrarily “manage” the monetary order.

  Many critics of the gold standard consider this a rigid and inflexible “rule” about how the monetary system and the quantity of money in the society is to be determined and constrained. Yet, the advocates of the gold standard have long argued that this relative inflexibility is essential to discipline governments within the confines of a “hard budget.”

   

  A Gold Standard Can Limit Government Monetary Abuse

  Without the “escape hatch” of the monetary printing press, governments either must tax the citizenry or borrow a part of the savings of the private sector to cover its expenditures. Those proposing government spending must either justify it by explaining where the tax dollars will come from and upon whom the taxes will fall; or make the case for borrowing a part of the savings of the society to cover those expenditures – but at market rates of interest that tell the truth about what it will cost to attract lenders to lend that sum to the government rather than to private sector borrowers, and therefore, at the social cost of private sector investment and future growth that will have to be foregone.

  In other words, it prevents the government from “monetizing the debt” to cover all or part of its budget deficits. The borrowed sums cannot be created out of thin air through central bank monetary expansion. The government, under a gold standard, can no longer create the illusion that something can be had for nothing.

  As Austrian economist, Ludwig von Mises, expressed it:

  “Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, and political parties, and pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called ‘sound money’.”

  

   

  Milton Friedman’s “Second Thoughts” About the Benefits of Paper Money

  It must be admitted that even some advocates of economic freedom and limited government have been advocates of paper money. The most notable one in the second half of the twentieth century was the Nobel Prize economist, Milton Friedman. Over most of his professional career he argued that maintaining a gold standard was a waste of society’s resources.

  Why squander the men, material and machinery digging gold out of the ground to then simply store it away in the vaults of banks? It is better to use those scarce resources to produce more of the ordinary goods and services that can enhance the standard and quality of people’s lives. Control the potential arbitrary recklessness of central banks, Friedman proposed, by setting up a monetary “rule” that says: Increase the paper money supply by some small annual percent, with no discretion left in the hands of the monetary managers.

  But it less well known is that in the years after Friedman won the Nobel Prize in Economics in 1976, he had second thoughts about this monetary prescription. In a 1986 article on, “The Resource Costs of Irredeemable Paper Money,” he argued that when looking over the monetary mismanagement and mischief caused by governments and central banks during the twentieth century, it was “crystal clear” that the costs of mining, minting and storing gold as the basis of a monetary system would have been far less than the disruptive and destabilizing costs imposed on society due to paper money inflations and the booms and busts of the business cycle brought about by central bank manipulations of money and interest rates.

  In his 1985 presidential address before the Western Economic Association on “Economists and Public Policy,” Friedman said that Public Choice theory – the use of economics to analyze the workings of the political process – had persuaded him that it would never be in the long-run self-interest of governments or central bankers to manage the monetary system according to some hypothetical “public interest.”

  Those in government or holding the levers of the monetary printing press will always be susceptible to the temptations and pressures of short-run political gains that monetary expansion can fund. He admitted that it had been a “waste of time” on his part to try to get governments and central banks to follow his idea for a monetary rule.

  And in another article in 1986 (co-authored with Anna Schwartz) on, “Has Government Any Role in Money?” Friedman said that while he was not ready at that time to advocate a return to the gold standard, he did conclude that “that leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement.”

  

   

  Monetary Mismanagement versus Markets and Gold

  But it is not only the political dangers arising from government mismanagement of paper money that justifies the establishment of a gold standard. It is also and equally the fact that monetary central planning is unworkable as a means to maintain economy-wide stability, full employment, and growth.

  Especially since the 1930s, many economists and policy makers influenced by Keynes and the Keynesian Revolution have believed markets are potentially unstable and susceptible to wide and prolonged fluctuations in employment and output that only can be prevented or reduced in severity through “activist” monetary and fiscal policy.

  But in reality, the causation runs the in the opposite direction. It is central bank manipulations of money, credit and interest rates that have generated the instability and periodic swings in economy-wide production and employment.

  The fact is financial institutions and interest rates have important work to do in the market economy. Banks and other financial intermediaries are supposed to serve as the “middlemen” who bring together those who wish to save portions of their earned income with others who desire to borrow and invest that savings in profit-oriented productive ways that generate capital formation, technological improvements, and cost-efficient production of new, better and more goods and services to satisfy consumer demands in the future.

  Market-determined interest rates are meant to bring those savings and investment plans into coordination with each other, so the amount of invested capital and the time-shape of the investment horizons undertaken are consistent with the available real savings to support them to maintainable completion.

  Monetary expansion by central banks creates the illusion that there is more actual investable savings in the economy than really exists. And the false interest rate signals generated in the banking system by the monetary expansion not only misinforms potential investment borrowers about the amount of real savings available for capital projects, but creates an incorrect basis for determining the present value calculations that influence the time horizons for the investments undertaken.

  It is these false monetary and interest rate signals that induces the misdirection of resources, the mal-investment of capital, and the incorrect allocation of labor among employments in the economy that sets the stage for an inevitable and inescapable “correction” and readjustment that represents the recession stage of the business cycle that follows the collapse of the artificial boom.

  The monetary central planners can never be more successful in determining a “optimal” quantity of money or the “right” interest rates to assure savings-investment coordination than all other socialist planners were when they tried to centrally plan agricultural production or investment output for an entire society.

  All such attempts at monetary planning and management by central bankers are instances of what Friedrich A. Hayek called in his Nobel Lecture a, “pretense of knowledge,” that they can know better and do better than the outcomes generated by competitive interactions of the market participants, themselves. And as Adam Smith warned, nowhere is such regulatory power “so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.”

  There is no way of knowing the optimal amount of money in the economy other than allowing market participants in the competitive exchange process to decide what they want to use as money – which has historically been a commodity such as gold or silver. And there is no way of knowing what interest rates should be other than allowing the market forces of supply and demand for lending and borrowing to determine those interest rates through the process of private sector financial intermediation, without government or central bank interference or manipulation.

  

   

  The Return to the Gold Standard as a Monetary Constitution

  Finally, how do we return to a functioning and workable gold standard? Under the current government and central bank-controlled monetary system the simplest method might be for the monetary authority to stop creating and printing money and credit. Over a short period of time a fairly reasonable estimate could be made about the actual quantity of a nation’s currency and checking and related deposits that are in existence and in circulation. A new legal redemption ratio could be established by dividing the estimated total quantity of all forms of these money-substitutes into the quantity of gold possessed by the government and the central bank.

  A country following this procedure would then, once again, be on the gold standard. Its long-run maintainability, of course, would require the government and the central bank to follow those “rules of the game” that no increase in the quantity of money-substitutes may be created and brought into circulation unless there have been net deposits of gold in people’s accounts with banking and other financial institutions.

  Can we trust governments and central banks to abide by these rules of the game? The temptations to violate them will still remain strong in a political environment dominated by ideologies of wealth redistribution, special interest favoritism, and numerous “entitlement” demands.

  It is why the real long-run goal of monetary reform should be the denationalization of money. That is, the separation of money from the state by ending of central banking, altogether. In its place would emerge private, competitive free banking – a truly market-based money and banking system.

  But nevertheless, in the meantime, a gold standard can serve as a form of a “monetary constitution” setting formal limits and imposing restraints on those in government who would want to abuse the monetary printing press, similar to the way political constitutions, however imperfectly, are meant to limit the abuses of power-lusting monarchs and the plundering majorities in functioning democracies.

  If it fails, it should not be for want of trying. And a gold standard can be one of the positive institutional reforms in the attempt and on the way to a fully free market monetary system.

  

  

  

  

  

• Prominent Tennessee Senator Fails To Disclose Millions In Hedge Fund, Real Estate Investments

  Earlier this year, quite a few members of the American electorate were distressed to learn that the Clinton Foundation had apparently suffered what we called a “Geithner Moment.” 

  For those who might have missed the story, when a Reuters investigation revealed discrepancies, the charity decided to refile five years worth of tax returns and review filings dating back as far as fifteen years. At issue were disclosures around contributions from US and foreign governments which Reuters claimed totaled “tens of millions” of dollars in a typical year but which mysteriously disappeared altogether from the organization’s 990s starting in 2010. As we noted at the time, the Foundation was quick to point out that when it comes to charities, it is exemplary in terms of being forthright, but the missing disclosures will likely serve to fan the flames for Republicans who claim Clinton’s ties to the charities could make her susceptible to the influence of outside interests. 

  A few days later, the charity’s acting CEO penned a lengthy blog post explaining the “mistakes” and assuring voters that the organization goes to great lengths to avoid conflicts of interest. Finally, a few days after that, IB Times questioned whether a $200,000 payment made to Bill Clinton by Goldman Sachs (ostensibly as compensation for a speaking appearance) was an effort to influence the State Dept’s decision making process surrounding a loan from the Export-Import Bank to a company that was set to purchase planes from a Goldman-backed supplier. Revelations that Hillary Clinton’s State Department approved $165 billion in arms deals to nations who had previously given money to the Clinton Foundation didn’t help to reassure anyone. 

  Put simply: if voters don’t know where the money is coming from (even if the contributions are “charitable”) they are operating with incomplete information with regard to who may be influencing the candidates. 

  Now, it turns out Tennessee Senator Bob Corker – who you might recall had a run in or two with Ben Bernanke and once penned a scathing FT Op-Ed about the market’s unhealthy fixation with the Fed – failed to disclose millions in income from hedge funds and real estate investments. 

  As WSJ reports, “Mr. Corker late Friday filed a series of amendments showing that his personal financial reports as originally filed included dozens of errors and omissions.”

  Ok, so what’s the nature of these “mistakes?” 

  The new forms show that Mr. Corker had failed to properly disclose at least $2 million in income from investments in three small hedge funds based in his home state.

  Wow. Ok, was there anything else? 

  He also didn’t properly report millions of dollars in income from commercial real-estate investments due to an accounting error. 

  This is starting to seem like a rather glaring omission – surely a member of the Senate Banking Committee wouldn’t have “forgotten” to disclose anything else, right? 

  And he didn’t disclose millions of dollars in other assets and income from other financial transactions.

  Goodness. So what’s the grand total? 

  His report for 2014 didn’t include a gain of between $304,000 and $1.4 million in hedge fund Gerber/Taylor.

   

  In 2013, he failed to disclose a gain of between $100,001 and $1 million in hedge fund TSW II. And in 2012, he made a gain of $1.2 million in Pointer (QP) LP, though his previous statement reported income of $100,001 to $1 million from the hedge fund.

   

  The amendments also show that he failed to disclose a 2014 investment in Gerber/Taylor of between $500,001 and $1 million and a 2013 investment in Pointer of between $1 million and $5 million.

   

  The senator also underreported rental income from his commercial real-estate investments in Corker Properties, a company he founded years before being elected to the Senate. 

   

  As a result of the accounting error, Mr. Corker’s new forms show additional income of at least $3.8 million between 2007 and 2014 from his commercial real-estate holdings.

  So millions upon millions upon millions. Got it.

  “This is not a situation calling for punishment or admonition by the Ethics Committee,” Robert Walker, a former chief counsel for the Senate ethics panel told The Journal. “You can’t just disclose once you get caught,” Anne Weismann, president of the Campaign for Accountability, counters.

  For those unfamiliar, this isn’t the first time Corker has come under scrutiny for his investments. Just last month, the Campaign for Accountability (CFA), a D.C. watchdog, called for an SEC and ethics investigation of Corker in connection with his family’s trading in shares of CBL & Associates (a REIT based in Tennessee). Here are some excerpts from the CBA’s press release:

  Between 2008 and 2015, Sen. Corker, his wife and daughters made an astonishing 70 trades of stock in the real estate investment giant CBL & Associates Properties – more than triple the number of transactions he made of any other stock. Some of the trades closely preceded company announcements that led to changes in the stock’s price and seemingly resulted in the senator making millions of dollars.

   

  CfA Executive Director Anne Weismann stated, “Sen. Corker’s trades followed a consistent pattern — he bought low and sold high. It beggars belief to suggest these trades – netting the senator and his family millions – were mere coincidences.”

   

  As the Wall Street Journal has reported, Sen. Corker failed to report numerous trades of CBL stock. Federal law requires members of Congress to report stock trades and file reports disclosing their assets. Many of Sen. Corker’s profitable trades were made in advance of his broker, UBS, issuing reports impacting CBL’s trading price.

   

  Sen. Corker recently amended his filings to reveal a 2009 purchase of between $1 and $5 million of CBL stock, sold just five months later in 2010 at a 42% profit. Similarly, Sen. Corker made purchases worth between $3 and $15 million in 2010 and, just after his last trade, UBS said it was upgrading its outlook. The stock went up 18%. Shortly thereafter, Sen. Corker began selling; a week later, UBS downgraded the stock and the share price soon declined about 10%.

  Nope, nothing suspicious about that. But it gets better.

  As CBA also notes, “as a member of the Senate Banking Committee, Sen. Corker has advanced legislation that would financially benefit UBS and CBL.” Here are some excerpts from a piece by Vanity Fair contributing editor Bethany McClean who parsed the CBA’s entire complaint (enbedded below): 

  As the complaint—filed with the SEC and the Senate Select Committee on Ethics—details, Corker and CBL go way back. Corker began his career at a company whose primary business was subcontracting for CBL and which is now substantially owned by CBL. CBL executives were Corker’s “first and most generous donors,” as the complaint put it, when Corker filed to run for Congress in 2006.

   

  Both directly and indirectly, CBL have given generously to Corker. According to the complaint, CBL’s executives, directors and their spouses rank among the senator’s top campaign donors, contributing $88,706 to his campaign committee and PAC since his 2006 run. Since Corker’s arrival in the Senate, CBL executives have contributed more than $50,000 each to NAREIT and ICSC—which, in turn, were part of a nine-PAC consortium that held a fundraiser for Corker in Washington in 2011. NAREIT and ICSC also donated $15,000 directly to his campaign committee since his arrival in the Senate.

   

  A few years ago, the Environmental Protection Agency and the Army Corps of Engineers issued a rule called “Waters of the United States,” which would have expanded the EPA’s jurisdiction.

   

  Both the ICSC and NAREIT were among the many who fought against it.

   

  Using a rarely used tool called a Congressional Review Act, the Senate passed a resolution last month by a vote of 53 to 44 to rescind the rule. Corker’s vote in favor of rescinding the rule was celebrated on Twitter. 

  Senate passes Resolution of Disapproval on #WOTUS rule 53-44. Both Senators @SenAlexander and @SenBobCorker voted yes.

  — TN Farm Bureau (@FBonTheHill) November 4, 2015

  Then there’s the long, vicious fight over online retailers not charging sales tax, because states are barred from collecting sales tax from out-of-state companies. This has been an area of particular concern to companies like CBL, which own shopping malls, and which stand to lose out if consumers choose to buy online.

   

  Back in 2013, a measure called the Marketplace Fairness Act, which would have required online retailers to collect sales taxes, failed in part because some top Republicans opposed it. Corker supported it. Just this spring though, a bipartisan group of senators including Corker reintroduced the measure. 

  And on, and on, and on. 

  You’ll also note that Corker comes in at number 23 on the richest members of Congress list. Here’s the entry from Roll Call:

  

  So if you needed another reason (or three, or four) to distrust politicians and to despise business as usual inside the Beltway, you can find plenty of things to be disgusted with here. Indeed, the latest revelations about Corker’s “ommissions” look like par for the course for the Senator.

  While none of the above will likely come as any surprise to readers, what we would note is that it’s precisely this kind of thing that’s driven voters to support a certain Presidential candidate who, like Corker, knows a thing or two about real estate…

  289155471 Campaign for Accountability Requests SEC and Ethics Investigation of Sen Robert Corker R TN for I…

  

  

  

  

  

• Did Goldman Just Do It Again?

  For anyone who managed to avoid Goldman’s “can’t miss” recommendation and get short the EURUSD two weeks ago ahead of the ECB’s stunning disappointment which sent the pair soaring and crushing virtually every macro hedge fund and FX trader, Goldman’s Asset Management group has another recommendation just for you.

  

  In case the fine print is a little too small, here it is in normal font:

  High Yield & Bank Loans: We have increased our overweight in high yield.

  Why?

  • High yield returned -1.53% over the week, with spreads widening by 23bps, driven by underperformance in energy-related markets. Bank loans returned -0.27% and European high yield returned -0.58%.
  • High yield funds experienced $398mn in inflows over the week, while loan funds saw $387mn in outflows.
  • High yield primary market activity increased over the week, with eight deals pricing for $4.1bn. Bank loan new issue volumes fell, with nine deals pricing for $2.3bn.

  

   

  Here is one simple explanation of what Goldman suggests you do:

  

  Here is another: buy everything that Goldman has to sell. Confused: see Abacus.

  h/t @insidegame

  

  

  

  

• Credit Carnage & Contagion Sparks Panic… Buying Of Stocks

  Today…

  The Yellen effect pic.twitter.com/ogQgxINN2r

  — Morris Cabrioli (@insidegame) December 14, 2015

   Today's focus was on credit markets – rightly – as the contagion spread to IG markets… 

  

   

  But it started when China devalued the Yuan yet again…for the 6th day in a row – and in growing size – PBOC fixed the Yuan weaker to its weakest since July 2011

  

   

  And The National Team stepped in to save Chinese stocks again…

  

   

  The equity market "went nuts" just after 10am ET this morning with a wild algo seeming wreaking haov in S&P Futures and the VIX ETF complex…

  

   

  But, despite the carnage in credit, VIX was crushed in an effort to prove to 'mom-and-pop' that everything is awesome…

  

   

  But USDJPY did the heavy-lifting as stops were run to 121…

  

   

  Leaving stocks soaring into the close (Trannies and Small Caps remained red)…

  

   

  Year-to-Date, it's ugly with only Nasdaq holding any gains…

  

   

  And the last time this kind of vol hit, The Fed folded…

  

   

  Trannies entered a bear-market (down 21% from the highs)…

  

   

  Stocks and credit did not agree…

  

   

  Treasury yields rose notably today (China selling? or liquidation flows from bond redemption requests)

  

   

  The US Dollar closed unchanged against the majors – dumping into the European close and rallying all the way back this afternoon…

  

   

   

  Commodities were mixed today but as the USD rallied after Europe's closed so they all leaked lower (despite crude's exciting algo ramp this morning)…

  

   

  Crude prices rebounded… running stops at the lows and highs…

  

   

  After Speculative crude shorts hit a new record high…

  

   

   

  Charts: Bloomberg

  

  

  

  

• Fed-pocalypse Now?

  Submitted by Howard Kunstler via Kunstler.com,

  “Here’s another fine mess you’ve gotten me into….”

  — Oliver Hardy

  If ever such a thing was, the stage is set this Monday and Tuesday for a rush to the exits in financial markets as the world prepares for the US central bank to take one baby step out of the corner it’s in. Everybody can see Janet Yellen standing naked in that corner — more like a box canyon — and it’s not a pretty sight. Despite her well-broadcasted insistence that the economic skies are blue, storm clouds scud through every realm and quarter. Equities barfed nearly four percent just last week, credit is crumbling (nobody wants to lend), junk bonds are tanking (as defaults loom), currencies all around the world are crashing, hedge funds can’t give investors their money back, “liquidity” is AWOL (no buyers for janky securities), commodities are in freefall, oil is going so deep into the sub-basement of value that the industry may never recover, international trade is evaporating, the president is doing everything possible in Syria to start World War Three, and the monster called globalism is lying in its coffin with a stake pointed over its heart.

  Folks who didn’t go to cash a month ago must be hyperventilating today.

  But the mundane truth probably is that events have finally caught up with the structural distortions of a financial world running on illusion. To everything there is a season, turn, turn, turn, and economic winter is finally upon us. All the world ‘round, people borrowed too much to buy stuff and now they’re all borrowed out and stuffed up. Welcome to the successor to the global economy: the yard sale economy, with all the previously-bought stuff going back into circulation on its way to the dump.

  A generous view of the American predicament might suppose that the unfortunate empire of lies constructed over the last several decades was no more than a desperate attempt to preserve our manifold mis-investments and bad choices. The odious Trump has made such a splash by pointing to a few of them, for instance, gifting US industrial production to the slave-labor nations, at the expense of American workers not fortunate enough to work in Goldman Sachs’s CDO boiler rooms. Readers know I don’t relish the prospect of Trump in the White House. What I don’t hear anyone asking: is he the best we can come up with under the circumstances? Is there not one decent, capable, eligible adult out there in America who can string two coherent thoughts together that comport with reality? Apparently not.

  The class of people who formerly trafficked in political ideas have been too busy celebrating the wondrous valor of transgender. Well, now the wheels are going to come off the things that actually matter, such as being able to get food and pay the rent, and might perforce shove aside the neurotic preoccupations with race, gender, privilege, and artificial grievance that have bamboozled vast swathes of citizens wasting a generation of political capital on phantoms and figments. Contrary to current appearances, the election year is hardly over. There is still time for events to steer history in another direction.

  Mrs. Yellen and her cortege of necromancers may just lose their nerve and twiddle their thumbs come Wednesday. If they actually make the bold leap to raise the fed funds rate one measly quarter of a percent, they might finally succeed in blowing up a banking system that deserves all the carnage that comes its way. There is something in the air like a gigantic static charge, longing for release.

  

  

  

  

  

• "Nobody Could Have Possibly Seen This Coming"

  We have been watching the market’s “sudden panic” about the implosion in the junk bond space with bemused detachment because, for the better part of the past year, we have been warning that this is about to take place. Here is a modest sample of articles from the past year commenting on the dangers from junk:

  • Junk Bonds Are Going To Tell Us Where The Stock Market Is Heading In 2015
  • Add Junk Bonds To The Growing Pile Of Concerns
  • This Alarming Indicator Is Back At A Level Last Seen 10 Days Before The Bear Stearns Collapse
  • Junk Bonds “Even More Dangerous” Than Stocks, Icahn Says
  • “This Will End Badly” High Yield Bonds Tumble To Worst Since 2011
  • High Yield Credit Risk Explodes To Its Highest Since June 2013
  • 4 Telltale Signs The Credit Cycle Is Turning Now
  • The Complete Guide To ETF Phantom Liquidity
  • How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown
  • What Would Happen If ETF Holders Sold All At Once? Howard Marks Explains
  • ETF Issuers Quietly Prepare For “Market Meltdown” With Billions In Emergency Liquidity
  • Wall Street Sees Junk Bond Collapse, Prepares to Profit from it
  • This Is When Junk Bonds Go Kaboom!

  And so on.

  All this culminated with a recent piece titled simply: “How To Profit From The Coming High Yield Meltdown.”

  To be sure, now that the carnage has been finally appreciated, everyone is on it. Cue Bloomberg:

  Debt of struggling companies has slumped, with one market gauge falling to a six-year low, as declining energy and commodity prices hit producers just as the Federal Reserve prepares to raise borrowing costs for the first time in almost a decade. Scott Minerd, global chief investment officer at Guggenheim Partners, predicts 10 percent to 15 percent of junk bond funds may face high withdrawals as more investors worry about getting their money back. He joins money managers Jeffrey Gundlach, Carl Icahn, Bill Gross and Wilbur Ross in warning of more high-yield trouble ahead.

  However, in all honesty the warnings were there for those who cared long ago and not just on this website. Back in July, the WSJ wrote:

  Reef Road Capital LLC, led by former J.P. Morgan Chase & Co. proprietary trader Eric Rosen, has been betting against, or shorting, exchange-traded funds that hold junk bonds and buying options that will pay off if the value of these high-yield securities falls.

   

  “They are going to be toast,” David Tawil, president of hedge fund Maglan Capital LP, said of the funds holding hard-to-sell assets like emerging-market debt and small-capitalization stocks. “It will be one of our first levels of shorting the moment we start to see cracks, because it’s ripe with retail, emotional investors.”

   

  In a way, the moves resemble efforts by some hedge funds to find a way to wager against the U.S. housing market ahead of the financial crisis. At the time, the country brimmed with highly indebted homeowners who had been encouraged to borrow more in a low-interest-rate environment… The risk now is that this latest era of low interest rates has made risky junk bonds, which pay relatively high returns, disproportionately attractive for investors.

  And then there was everyone else.

  Here is an extensive selection of various warnings noted over the past year which cautioned everyone that a rout in junk is coming courtesy of Deutsche Bank.

  Here are the hedge fund suggestions to go short the high yield space:

  • April 2015, Pacific Alternative, Ross associate director, “Although ‘bank-run’ risk exists in all mutual fund structures because the investors in them have daily liquidity, the risk is heightened with liquid alts due to the relative novelty of the strategy to the retail investor”
  • July 2015, Apollo, “ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit”
  • July 2015, Maglan Capital, Tawil President, “They (the funds holding hard-to-sell assets) are going to be toast“ “It will be one of our first levels of shorting the moment we start to see cracks, because it’s ripe with retail, emotional investors“
  • 8 December 2015, DoubleLine, Gundlach co-founder, “We’re looking at some real carnage in the junkbond market” “This is a little bit disconcerting that we’re talking about raising interest rates with the credit markets in corporate credit absolutely tanking. They’re falling apart“
  • December 2015, Legal & General Investment Management, Roe head of multi asset funds, “The problem dates back to the financial crisis, as there is not the liquidity in the market to cope with a wave of redemptions and investors know this” “We saw this kind of thing before in 2008-09 in the property market, when a number of funds had to be closed because of liquidity problems”
  • December 2015, USAA Mutual Funds, Freund CIO and portfolio manager, “A precursor of a period of substantial defaults“
  • December 2015, Lehmann Livian Fridson Advisors, Fridson money manager, “It’s significantly bad news for the market, and another straw on the camel’s back” “It’s not typical, but it raises the question: Can this happen to the next-worst fund? You just don’t know. It certainly doesn’t encourage people to put money in, and that just exacerbates the liquidity problem there”
  • 10 December 2015, Carl Icahn, “The meltdown in High Yield is just beginning“

  Here are official regulators warning about “run risk”:

  • 8 October 2014, IMF, “Capital markets have become more significant providers of credit since the crisis, shifting the locus of risks to the shadow banking system. The share of credit instruments held in mutual fund portfolios has been growing, doubling since 2007, and now amounts to 27 percent of global high-yield debt. At the same time, the fund management industry has become more concentrated. The top 10 global asset management firms now account for more than $19 trillion in assets under management. The combination of asset concentration, extended portfolio positions and valuations, flightprone investors, and vulnerable liquidity structures have increased the sensitivity of key credit markets, increasing market and liquidity risks” … Redemption fees that benefit remaining shareholders are one option; however, the calibration of such a fee is challenging and to the extent possible, should not be time varying, as this could encourage asset flight. Similarly, gates to limit redemptions appear to solve some incentive problems, but may simply accelerate redemptions ahead of potential imposition and lead to contagion“
  • 10 October 2014, IMF, Lagarde Managing Director, “There is too little economic risk taking, and too much financial risk taking” “One side effect is the danger, once again, of a rush toward reckless risk taking. While there are a number of warning signs, the risks are particularly acute in the nonbank sector. One example: mutual funds now account for 27 percent of global high-yield debt, twice as much as in 2007. This is larger than the world’s largest economy—the United States. History teaches us a clear lesson—the bigger the boom, the bigger the bust. A sudden shift in sentiment could easily cascade across the entire globe”
  • 18 February 2015, FRB, Powell Governor, “Caution on the part of supervisors is certainly understandable here. It is worth  remembering that the destructive potential of the subprime mortgage market was not obvious in advance and not fully reflected in real-time measures of balance sheet exposure” “Mutual funds that invest in fixed income assets have seen large inflows and have become more significant investors in this market. Some of these funds, including those holding syndicated leveraged loans and high-yield bonds, provide investors with what is called “liquidity transformation”–providing daily liquidity even when the underlying assets are relatively illiquid. The risk is that, in the event of a shock or a panic, investors will demand all of their money back at the exact time when the liquidity of the already illiquid underlying assets deteriorates even further. Investors may not anticipate or recognize this problem until it is too late–the so-called liquidity illusion” “Bank loan funds, which attract retail investors and offer daily liquidity, now total about $150 billion, or 20 percent of institutional leveraged loans outstanding…. supervisors and market participants have raised valid concerns that stressful times could well bring large-scale redemptions and threaten runs.
  • 2 June 2015, Goldman Sachs, Cohn COO, “I am concerned like many others that there’s a rather large imbalance being created between the daily liquidity in the AUM (investment trust) world and the broker-dealer liquidity available to that world” “The industry as a whole has been shrinking their balance sheets because of regulatory constraints and the ability for dealers to create liquidity because of other regulatory constraints that are not balance sheet are kicking in, and we’re implementing those too. And I think there’s a relatively large disconnect happening there. And you don’t see it most days. If you ask me how liquidity is on a normal day, I would say normal day liquidity is quite normal. The problem is on the days when you need liquidity, it probably won’t be there”
  • 3 September 2015, FAC (Federal Advisory Council), “Under normal conditions in well-functioning markets, banks will provide necessary liquidity, but under stress, liquidity shortage may be very problematic. Liquidity constraints may become more apparent as interest rates rise in the coming months and years to more normal levels” “High-yield bonds, in particular, are prospectively the asset class where illiquidity will become most acute in a downturn”
  • 7 October 2015, IMF, “Changes in market structures appear to have increased the fragility of liquidity. Larger holdings of corporate bonds by mutual funds, and a higher concentration of holdings among mutual funds, pension funds, and insurance companies, are associated with less resilient liquidity”
  • 3 December 2015, FRB, Fischer Vice Chairman, “Valuation pressures had been high for a while, before risk spreads widened and issuance slowed over the past year” “The high issuance of corporate debt in recent years is evident in the near-record-high debt-to-asset ratios at speculative-grade and unrated corporations, making this sector vulnerable to adverse shocks“

  And even the regulators chimed in about the quality of underlying “junk” assets and levered loans:

  • 21 May 2013, U.S. Treasury Secretary Lew, “The issuance of high-yield bonds reached a historical high in the fourth quarter of 2012. While underwriting standards remain conservative in many markets, there are some examples of loosening standards“
  • 25 February 2014, FRB, Tarullo Governor, “High-yield corporate bond and leveraged loan funds, for instance, have seen strong inflows, reflecting greater investor appetite for risky corporate credits, while underwriting standards have deteriorated, raising the possibility of large losses going forward“
  • 18 June 2014, FRB, Yellen chair, “With respect to financial stability, we monitor potential threats to financial stability very, very carefully, and we have spoken about some – I’ve spoken in recent congressional testimonies and speeches about some threats to financial stability that are on our radar screen that we are monitoring, trends in leverage lending and the underwriting standards there, diminished risk spreads in lower-grade corporate bonds. High-yield bonds have certainly caught our attention. There is some evidence of reach for yield behavior. That’s one of the reasons I mentioned that this environment of low volatility is very much on my radar screen and would be a concern to me if it prompted an increase in leverage or other kinds of risk-taking behavior that could unwind in a sharp way and provoke a sharp, for example, jump in interest rates.”
  • 7 October 2014, NY fed, Federal Reserve Bank of New York, Dudley President, “We are following up with those banks to see how closely they are following the guidance (regarding standard of leveraged loan)” “We think the market is a bit frothy”
  • 18 February 2015, FRB, Powell Governor, “Investors may take highly leveraged positions in leveraged loans through total return swaps and secured funding transactions, and a substantial buildup of these positions could present run and fire-sale risks if asset values started to fall…. “Another issue to consider when contemplating such intervention is that, particularly in the United States, activity is free to migrate outside the commercial banking system into less regulated entities. As supervisory scrutiny has increased in recent years, a growing number of nonbanks have become involved in the distribution of leveraged loans.”
  • 6 May 2015, FRB, Yellen chair, “I would highlight that equity market valuations at this point generally are quite high” “There are potential dangers there” “Long-term interest rates are at very low levels, and that would appear to embody low term premiums, which can move, and can move very rapidly” “When the Fed decides it’s time to begin raising rates, these term premiums could move up and we could see a sharp jump in long-term rates“
  • 22 October 2015, Bank of England, Cunliffe Deputy Governor: Challenge for the market: “A particular concern occupying both the (BoE’s) Financial Policy Committee and authorities internationally is that simultaneous redemptions from open-ended funds offering short-term redemptions could test the resilience of market liquidity” “It is quite conceivable that given the range and speed of regulatory reforms, there are parts of the framework that might not work in the way we intended“

  Finally, ETFs:

  “ETFs are another form of financial engineering that have grown rapidly over the past decade or so – from a small base in the early 2000s to more than US$2 trillion today. Equity funds still comprise the majority of ETFs. But the share of fixed income ETFs, in which the underlying assets are much less liquid, has grown substantially – in Europe, from around 5% in the early 2000s to around 25% today” “In times of stress not only can their liquidity characteristics revert back to that of their underlying assets, they can also trade at a discount to the value of these assets. We saw some of this effect in the market turmoil last summer. We need to understand better why these effects happened and the circumstances in which they could reoccur”

  * * *

  All of the above? Ignore, as our friend Eddie Morra sarcastically remarks:

  Holy Shit!! This HY mess came out of nowhere

  — Eddie Morra_ZH (@convert_trader) December 14, 2015

  Bottom line, if junk bonds end up being the precursor to a wholesale market swoon or something even more serious, one can be certain that the common refrain from all the financial “experts” will be a very well known one:

  “nobody could have possibly seen this coming.“

  

  

  

  

  

  

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