- "America's Ship Is Sinking" Former Bush Official Exposes The Unfixable Corruption Inside The Establishment
“This ship is sinking,” retired U.S. Army Colonel Lawrence Wilkerson tells Abby Martin, adding that “today the purpose of US foreign policy is to support the complex that we have created in the national security state that is fueled, funded, and powered by interminable war.”
The former national security advisor to the Reagan administration, who spent years as an assistant to Secretary of State Colin Powell during both Bush administrations reflects on the sad but honest reflection on what America has become as he exposes the unfixable corruption inside the establishment and the corporate interests driving foreign policy.
“It’s never been about altruism, it’s about sheer power.”
- A Decade Of 'Tech'tonic Shifts
How times have changed for the top 20 biggest companies in the world by market capitalization…
The question now is, will ‘old’ become ‘new’ again?
Source: Goldman Sachs
- "This Is Not Normalizing… And No, We Don't Have Any Precedent"
Submitted by Adam Taggart via PeakProsperity.com,
Financial repression authority Daniel Amerman returns this week to discuss the ramifications of the Federal Reserve's first interest rate hike in nearly a decade:
The key to understand the situation here is that this is not normalizing, and we don’t have a precedent. We really don’t. We’re kind of all being soothed and reassured by the Wall Street Journal and Bloomberg and the financial authorities that we’ve been down this path before, we’ve been down it many times, more often than not we’ve had rising markets as a result and, really, there’s nothing to worry about. The issue with that is there are many things this time that are entirely different, and what is presented as 'normalizing', for instance, is going back to say a projected interest rate cycle like we saw in the 2000’s or the 1990’s. What’s completely different, among many other things, is that we’ve never had rates forced so low before, and they’ve never been so low for so long. So, if you look, say at a long-term graph since 1954, what’s been going on with the Fed funds rates, we’ve had plenty of reversals in interest rate direction, but they’ve been these brief little dips that look nothing whatsoever like this.
The other big issue, and this goes back to our prior conversation on financial repression, is that I don’t think you can take any interest rate increases from the 2000’s, 1990’s, 1980’s, 1970’s as being comparable. Because, we have the greatest degree of national debt outstanding that we’ve had since the 1940’s and the 1950’s. So, you have to go much further back in time to see how a rate increase works when you have a country that’s just absolutely massively in debt. And, it’s a very different process than these recent historicals they’re talking about.
I just read the statement from the Federal Reserve and what they clearly showed was this was not normal. And, one of the clear ways that they showed it is that they made crystal clear that they would be keeping their current holdings of U.S. government and agency debt in roughly the 2.4 to 2.5 trillion dollar range, until this is fully confirmed and they’re sure they’re going forward with the interest cycle and so forth. Now, that by itself tells you this isn’t normal. Typically, if you’re talking about driving interest rates down, you want liquidity in the system, and you provide liquidity through asset purchases. If you want to drive interest rates up, you want to tighten the system and you might remove money from the system let’s say by selling many of those assets. And, they’ve made clear on the front end that they’re not doing that.
And, I think this, again, ties very closely into what we’ve talked about before, with the size of the national debt, with financial repression and so forth. For financial repression to work, for the government to keep a lid on and control of interest rates, they need a large captive audience. One of the largest components of captive audience is the federal funds currently holding such a large portion of the U.S. national debt. So, if they were to follow a true normalizing cycle, they should be selling those and they’re not.
Our national debt is a fantastic sum that most of can’t really understand. How could we possibly be that badly in debt? How can we make the payments on that debt in terms of principle and interest and so forth? And, people are right that if we were in a normal market situation, we would be in a huge degree of difficulty with the national debt. But, again, this is something that’s happened many times over the centuries. And, what governments typically do, their most popular choice when they get deeply into debt is they increase their control over the markets so they knock out the interest rate risk for themselves, they push rates way down as they’ve done to historical lows. There’s more to it than that (we'd need another full hour more to talk about financial repression), but basically, they transfer wealth from savers to the government in the process of paying down the debt, in a process that most people don’t understand.
Click the play button below to listen to Chris' interview with Daniel Amerman (60m:03s)
- Caught On Tape: The Ssssurprising Way Indians 'Deal' With Government Corruption
Unhappy with the demands for bribes from local officials, a disgruntled snake-charmer in the Uttar Pradesh region of Northern India took anti-corruption matters into his own hands…
Act of Terror? Or patriot?
- After Record 10-Day Devaluation Streak China Fixes Yuan Stronger
Since The IMF ‘blessed’ the Yuan with the same ambivalence-to-currency-manipulation as the rest of the world’s competitive devaluers, China weakened the currency for 10 straight days (a record streak). But the streak is over as tonight PBOC has decided to strengthen the Yuan fix (although admittedly by a small amount) to 6.4753 (barely off the 4 year lows).
It appears a pattern is developing…
10 days down and 1 day up… is the new “stability’
Chart: Bloomberg
- The Great Disconnect Is Palpable
Submitted by Jeffrey Snider via Alhambra Investment Partners,
The Fed’s industrial production series also includes estimates on total motor vehicle assemblies. Auto sales in general have been one of the only bright spots in the economy, especially since the 2012 slowdown (even though it has been boosted artificially via credit far, far more than income gains). Given that trend, it is still difficult to assess whether activity in recent months is meaningful. After surging in July, auto activity in terms of industrial production has slumped – now pushed into a fourth month.
Auto production is quite volatile, even where the Fed has attempted to “smooth out” that tendency via its seasonal adjustment factors, so more analysis is needed to establish some confidence about interpretation. Still, at the very least, it raises concerns expressed in the growing (surging) inventory of autos counted in manufacturer’s numbers but stuffed (unsold to end users) on dealer lots and in wholesale limbo.
Furthering those concerns, economic reports out of Canada today showed not just broad-based wholesale sales declines but also a four-month slide also in auto sales at that wholesale level. Canada being a primary exporter of autos to the US, the coincidence of further weakening is not likely to be random and yet another negative commentary on the state of US “demand.”
The agency also released October data for wholesale trade, which fell 0.6 per cent to $54.7 billion — its fourth-straight monthly drop.
It said lower trade figures were recorded in four areas that, when combined, represent 64 per cent of all sales.
Sales fell by three per cent to $10.5 billion in the food, beverage and tobacco category — its third decrease in four months. The category of motor vehicle and parts registered a 2.1 per cent drop to $9.5 billion, its fourth-straight tumble. [emphasis added]
Taken together with the rather steep drop in US industrial production, the risks of a full-blown and perhaps severe recession have undoubtedly grown. Unlike what the FOMC is trying to project via the federal funds rate, a rate that isn’t being fully complemented, either, at this point, visible economic risk is not just rising it is exploding. Nowhere is that more evident than in junk bonds and high yield. The collapse in those markets and tiers has been produced not through actual defaults, which, though slightly rising, remain historically low, but rather through greatly shifting perceptions of defaults that increasingly look likely and in bulk.
That is as much economic commentary as anything that the FOMC might produce. The credit cycle in that respect is not so much monetary policy as a direct component of the foundation of the economy. In other words, if the Fed were truly correct in its economic assessments, that the economy isn’t now overheating but is about to, junk bonds would trade more so with that theme given that it would more than imply continued historically low default rates. There would be no such explosion, as there is now, in the perception of that animating risk factor.
Even so, estimates for default rates next year are conspicuously nowhere near keeping up with price behavior, almost assuredly because the models ratings agencies and selling firms use to project such things depend upon the same economic expectations and modeled forecasts as those which Janet Yellen uses to assure herself there is nothing to fear, economically and financially speaking. So the great disconnect is palpable even here:
So far in the month of December, three companies in the energy sector have combined to add $1.8 billion in default volume to the year-to-date total in institutional leveraged loan defaults. The three defaults will push the default rate even higher than the current 11-month rate of 1.7%.
The data come from the latest report on leveraged loan defaults from Fitch Ratings. The firm also forecasts that the leveraged loan default rate in 2016 will rise to 2.5%, or $24 billion.
The incongruity is obvious; the default rate in just leveraged loans is only to rise to 2.5% (from 1.7% the 11 months so far cataloged of 2015) yet leveraged loan prices, and only those of the most liquid and highly traded names, have sunk in the past week to levels last seen (on the way down) in the days just prior to Lehman Brother’s collapse!
That complements the price behavior from CCC’s which have already bled above the Lehman threshold for comparison. There is some great disconnect where junk bond prices are collapsing so far, with no end in sight, but the mainline estimates for defaults and the economy that is supposed to keep them low has hardly budged. Something is greatly out of line and increasingly it looks like that complacency is hugely misplaced.
Default rate estimates and mainstream commentary about the economy that conditions them continue to mark the favored track but that is nothing like what these junk bond prices are saying – same market, different worlds. The economic risks have heavily shifted and just in the past few months, a recession perception that is gaining a much wider audience. The industrial production figure was, in that respect, a major indication that that is the right insight.
Even the NBER will consider IP as a recession marker on its own if it is blatant enough, which it certainly was, given more mixed signals in other economy-wide indications (such as unstable GDP and the BLS’s unemployment rate and Establishment Survey that never seem to produce spending or even wage growth?).
The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
Those last three are already in the recession category, as wholesale sales have persistently contracted this year while retail sales continue to underperform the dot-com recession experience.
The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP). The Committee’s use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs.
I have no idea whether IP is enough for the NBER to consider a recession already (probably not), nor is it at all clear that such “official” determinations actually matter (they likely don’t). What is important and relevant is that even the NBER, the same economists who didn’t declare the Great Recession until December 1, 2008, long after the full panic and devastation had begun, considers IP a major factor. In other words, as you can plainly see from junk debt, we have been handed a major point of escalation in a startlingly broad fashion (maybe including Canada); that junk bonds are on to something that the “rest” of markets (outside the “dollar”, of course) will not yet consider.
If certain high yield segments, especially leveraged loans, are already priced to the collapse point of 2008, then that suggests something potentially awful about the future course. Industrial production already at -1.2% without any inventory correction yet tells the same worry. It is nowhere near what Janet Yellen had in mind when in her first press conference hinted at March 2015, the six-month point after QE’s end, as the first rate hike. It is, however, the same fears that kept her at bay for three-quarters of the year thereafter. Unfortunately for her, as these prices and data points increasingly survey, it is that progression that should have mattered most rather than blindly depending upon an economic trend that is forced more and more remote, a truly nasty downside gaining increasing visibility instead.
- Obama Abruptly Waives 1980 Foreign Investment in Real Property Tax Act
Submitted by Gordon T. Long of the Financial Repression Authority
Obama Abruptly Waives 1980 Foreign Investment in Real Property Tax Act
The Financial Repression Authority has consistently shown that Regulatory changes which “Ring Fence” US investors choices is a cornerstone of the Macro-Prudential Policy of “Financial Repression”. Through stealth programs like FATCA and PFIC the US government has steadily and quietly limited Americans ability to take cash out of the country and to invest abroad, other than through profitable public exchange traded products sold by the financial industry. However, it is one thing to shut the doors to American investing abroad but it is quite another to fully open the doors to foreigners! It begs the question why, why now and why the change needed to happen so urgently?
This week, as the BOJ, ECB and PBOC all continued to aggressively expand credit the Federal Reserve was “full ahead” in the process of withdrawing approximately $1 Trillion of liquidity to achieve its December FOMC decision to increase the Fed Funds rate by 0.25%. To counteract this policy initiative and the alarming collapse in the HY & IG bond market, the US government immediately opened the floodgates to easy foreign credit in a major policy reversal. A policy decision which was rushed through congress with almost no time for congressional debate. Obviously what was not lost on the White House was the fact that the now troubled $2.2 Trillion of High Yield bonds peddled to yield starved investors since the financial crisis matches 2/3’s of the $3.5 Trillion increase in the Federal Reserves balance sheet during the same period.
FIRPTA was implemented during a better era for Americans in response to international investors in the late 1980s and early 1990s buying U.S. farmland, as well as the more publicly visible buying of trophy U.S. property by the Japanese. The US government has now expediently waived FIRPTA.
President Barack Obama signed into law a measure easing a 35-year-old tax on foreign investment in U.S. real estate, potentially opening the door to greater purchases by overseas investors, a major source of capital since the financial crisis.
Contained in the $1.1 trillion spending measure that was passed to avoid a government shutdown is a provision that treats foreign pension funds the same as their U.S. counterparts for real estate investments. The provision waives the tax imposed on such investors under the 1980 Foreign Investment in Real Property Tax Act, known as FIRPTA.
“FIRPTA has historically made direct investment in U.S. property a non-starter for trillions of dollars worth of foreign pensions,” said James Corl, a managing director at private equity firm Siguler Guff & Co. “This tax-law modification is a game changer” that could result in hundreds of billions of new capital flows into U.S. real estate.
Foreign investors have flocked to U.S. real estate since the global economic meltdown, drawn by the relative yields and perceived safety of assets from office towers and shopping centers to apartments and warehouses. The demand has helped drive commercial real estate prices to record highs. Many foreign investors structured their purchases to make themselves minority investors and bypass FIRPTA.
REIT Purchases
The new law also allows foreign pensions to buy as much as 10 percent of a U.S. publicly traded real estate investment trust without triggering FIRPTA liability, up from 5 percent previously.
“By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects,” Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable, an industry lobbying group, said in a statement.
Cross-border investment in U.S. real estate has totaled about $78.4 billion this year, or 16 percent of the total $483 billion investment in U.S. property, according to Real Capital Analytics Inc. Pension funds accounted for about $7.5 billion, or almost 10 percent, of the foreign total, according to the New York-based property research firm.
“Foreign pensions are such a low percentage of foreign investment in U.S. real estate because of FIRPTA,” Corl said.
Investment Surges
Foreign investment has surged from just $4.7 billion in 2009, according to Real Capital. Foreign buying this year as a percentage of total investment in U.S. real estate is about double the 8.1 percent average in the 10 years through 2012.
Despite a perception that FIRPTA was a response to the wave of Japanese buying of trophy U.S. property in the late 1980s and early 1990s, including Rockefeller Center and Pebble Beach, the act was actually passed in 1980 in response to international investors buying U.S. farmland. Under old rules, foreign majority sellers had to pay 10 percent of gross proceeds from the sale of U.S. real estate as well as additional federal, state and local levies that could increase the total tax burden to as much as 60 percent, according to the National Association of Real Estate Investment Trusts.
The change “is a huge deal,” said Jim Fetgatter, chief executive of the Association of Foreign Investors in Real Estate. “There’s no question” it will increase the amount of foreign investment in U.S. property, he said.
Warning
The FRA predicts that Americans will face significant increases in US property taxes over the next five years starting in 2016. With the change in FIRPTA Americans should additionally expect property values to increase in 2016-2017.
Clearly, foreigners, the “1%” and property owners will all gain from this, but most Americans will simply face significantly increasing property taxes on elevated asset values to fund the ever increasing government debt burden.
Americans owning a house can be expected to initially focus on their net worth being higher, and not that they once again will have even less disposable income. Some will learn painfully why the number one killer of small business is cash flow, not profits..
- Star Wars Smashes Opening Weekend Box Office Record, But Will It Be Enough?
This weekend the force was strong with thirty (and forty, and fifty) year-olds, wishing to awaken memories of their youthful days with an admirable redo of the first Star Wars movie, first released nearly 40 years ago. But the force has never been stronger with Disney which is expected to rake in a record-breaking $238 million in opening weekend box office sales in the US and Canada, and a near-record $279 million overseas, a grand total of well over half a billion around the globe.
That is just the beginning of an epic annuity created by Disney under director J.J. Abrams. As the WSJ notes, “Star Wars: The Force Awakens” isn’t just a hit, but the spark Disney needs for years of sequels, toys, videogames, television series, theme-park attractions and more that it is planning or already producing.”
Although it has been a decade since the last “Star Wars” movie, Disney and Mr. Abrams’ has to revive a franchise that has been largely dormant since the release of “Return of the Jedi” in 1983. A trio of prequels—produced by then-independent Lucasfilm between 1999 and 2005 and directed by George Lucas—performed well financially but were largely scorned by fans, who considered them inferior to the original trilogy. However, with the new Star Wars, Disney has a sure hit on its hands, and the only question is just how far will it go?
The “Star Wars” sequel easily routed the prior record for a domestic movie opening of $209 million set by “Jurassic World” in June, and caps the Top 5 of biggest weekend box-offices, all attained in recent years by fantasy-fiction films ranging from Iron Man 3, to the original Avengers and its “Age of Ultron” sequel:
The movie also set new opening weekend records in the U.K., Germany, Australia, Russia, and 14 other countries. It wasn’t a smash hit everywhere, though, and produced less than “sensational” ticket sales in countries such as Brazil, Japan and Mexico, while it underperformed in South Korea, where a more popular local film also was released at the same time.
Still, the only reason the Star Wars sequel may have failed to achieve the biggest international opening of all time, is because it has yet to open in China: the Chinese release is delayed to January next year as all quota slots for imported movies are taken for this year.
How did the watching public react to the movie? According to Dow Jones, there was little disappointment with U.S. moviegoers giving it an average grade of A, according to market research firm CinemaScore, mirroring its very strong reviews and boding well for word-of mouth.
On Friday, 63% of the audience was male, but by Saturday that percentage dropped to 58% as the fanboy-driven early crowds started to broaden, said Dave Hollis, executive vice president of distribution at Disney’s movie studio. “Seeing the way younger audiences and women are responding bodes really well for the future of the franchise,” Mr. Hollis said.
“The Force Awakens” was designed to emulate the original in style and substance. It returned stars Harrison Ford, Carrie Fisher and Mark Hamill to their original roles and introduced a new cast of Jedi Knights, storm troopers and imperial officers led by Daisy Ridley and John Boyega.
Coming out of a screening at the TCL Chinese Theater in Los Angeles, stay-at-home mother Jessica Sisoer, who had waited in line 12 days with other hard-core fans, said the new movie “felt like going home” because it reminded her so much of the original trilogy.
Among the factors that will determine if it rivals the all-time global box-office record of $2.79 billion held by “Avatar” is whether strong word-of-mouth draws infrequent moviegoers, how many times fans return to theaters to watch again. The biggest question mark, however, is how the movie will perform in China, the world’s second biggest movie market, where “Star Wars” isn’t well known because the original trilogy was never released there.
As DJN adds, the film, which cost a little over $200 million to produce, is now poised to gross well over $1 billion, and could go much higher, particularly with people expected to take time off from work during the holidays.
And yet, despite the movie euphoria, Disney stock tumbled on Friday, closing down 4% at the days lows, following a surprising downgrade by BTIG’s Rich Greenfield, who downgraded DIS stock from Neutral to Sell on Friday, lobbing a $90 price target, with the thesis that “Disney management made a fundamental mistake by overpaying for sports rights based on overly aggressive multichannel video subscriber projections. Not only did Disney overpay for individual sports rights packages, they also acquired too many sports rights in an effort to prevent new competitors such as Fox Sports 1 and NBC Sports from growing stronger. As a result, we believe Disney’s cable network profitability will meaningfully underperform investor expectations – with cable networks representing 44% of Disney’s segment operating income. We are now estimating that Disney’s FY2017 cable network operating income will be DOWN year-over-year, with total Disney FY2017 operating income flat.”
Not even expectations of record global box office receipts by Star Wars were enough to appears Greenfield:
While we believe the strength of Star Wars Episode VII: The Force Awakens (estimated at $2.6 bn in global box office) will lead to Disney modestly exceeding consensus expectations for fiscal (Sept) 2016 earnings, we now believe consensus earnings are too high for FY2017 and far too high for FY2018. We believe if Star Wars Episode VII does not exceed $2.0 billion in worldwide box office revenue, Disney will miss our FY2016 and consensus earnings estimates as well.
Given that we now expect Disney EPS growth to slow dramatically and miss current Street consensus EPS expectations in both FY2017 and FY2018, we believe its current multiple is unwarranted. We are now forecasting EPS growth of just 3%-4% in FY2017 and 6% in FY2018. In turn, we are reducing our rating on Disney to SELL from Neutral with a $90 one-year price target. Our $90 one-year price target is based on a P/E of 15x FY2017, which also equates to 14x FY2018. Disney is currently trading at 20x FY2016, 19x FY2017 and 18x FY2018 based on our estimates.
- In March 2015, with Disney shares at $106, we downgraded the stock from Buy to Neutral (link), nearly five years after we put a Buy on the stock. Our downgrade was based on the view that even though consensus EPS expectations still needed to move higher, Disney shares were approaching full value.
- Despite a temporary correction in August 2015, Disney shares have continued to climb higher since our March downgrade, having notably outperformed their media industry peers over the past year and currently sitting just 7% below their all-time peak of $122. We believe Disney’s outperformance has been driven by film slate excitement, most notably Star Wars Episode VII: The Force Awakens (which opened last night), despite increasing concerns facing Disney’s cable network franchise.
The conclusion: “#FadetheForce: Downgrade to SELL with $90 Price Target.”
In other words, not even world records may be enough for a stock priced beyond record perfection, and a very forlorn looking Luke Skywalker better have something big up his sleeves for 2017 when the next sequel, Episode VIII, is due.
- False Premises: The Biggest Myths About The Fed's Rate Hike
Submitted by Bill Bonner via Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),
False Premise
The Fed did as expected. It announced it would raise its key rate by a quarter of a percentage point to 0.5% and gradually raise it up over the next three years.
Reports the Financial Times: “Historic gamble for Yellen, as Fed makes quarter-point rise.” If all goes well, we’ll be back to “normal” in 2019 – 10 years after the long emergency began!
Esmeralda, one of the many forecasters known to be superior to the Fed (a lot cheaper too).
But wait …
The daily effective federal funds rate, a volume-weighted average of trades arranged by major brokers. It is now at its highest point since late 2008, ending seven years of “ZIRP” – click to enlarge.
How does the Fed know what a normal rate will be in 2019? Won’t conditions change? Besides, there are sidewalk astrologers and mall palm readers with a better record of market forecasting than the Fed.
To borrow a phrase from George Soros, our mission at the Diary is to “find the trend whose premise is false and bet against it.” Is it true that the Fed is really going to follow through with its promise to return interest rates back to normal?
Is it true that terrorists are out to get us? Is it true that Donald Trump is a fool? Of course, we are all fools… but some more than others. The wise man is the one who knows he is a fool. For our part, we deny it. And we resent readers who remind us.
But we admit to being wrong, from time to time. (Any man who has been married for as long as we have must be accustomed to this kind of admission.) And since investors so heartily endorsed the Fed’s move, we will reexamine our position.
The premises of the rate increase are several:
…that the Fed knows best what interest rate is good for the economy…
…that a recovery is sufficiently established to permit an end to the emergency micro rates of the last seven years…
…and that otherwise everything is more or less hunky-dory.
The “Dollar Recession”
And they are all false? We dismiss the first one as poppycock. No serious economist – if there are any left – would believe that the Fed can do a better job of setting the price of credit than willing buyers and sellers.
As to the second premise – that the recovery is solid – we present evidence to the contrary practically every day. Today, we submit to the jury some additional facts:
- Last month, U.S. industrial production fell more than any time in the last three and a half years. This marks the eighth monthly decline in 10 months. This slowdown is shadowed overseas by what Deutsche Bank describes as “a huge global dollar nominal GDP recession – the worst since the 1960s.”
- According to the Fed, there are now 61 million people of working age in the U.S. who don’t have jobs. That’s out of 204 million people between 15 and 64 years old. So, if you pass five people on the street, the odds are that one and a half of them is jobless.
- The “labor participation rate” – the amount of people in the working-age population either employed or looking for work – is at its lowest level since 1977. For men, it has never been lower.
If it were true that the economy was in good health, how is it possible that men would have a harder time finding a job than ever before?
Everything is awesome, unless it isn’t. In terms of a lagging indicator the construction of which obfuscates more than it reveals, everything is fine. Most other indicators (especially the leading kind) say it just isn’t so.
Cartoon by Ben Garrison
When the Going Gets Tough
Now, we turn to the third premise – that everything else is more or less hunky-dory. Supposedly, in this wide world of everything that is not directly under the Fed’s control, or included in its inventory of conceits and fantasies, there is nothing that poses a serious obstacle on the road to normalcy.
If this were true, we are wrong. Because our guess is that the Fed is trapped and that it cannot continue down this road for long. It is only a matter of time until it runs into trouble. What kind of trouble?
You can get any kind of “facts” you want. But on the road to normalcy, the Fed is bound to encounter a normal stock market sell-off or a normal recession. Ms. Yellen has dismissed worries of a recession. But unless the Fed has triumphed over the business cycle – which we doubt – a recession will appear sooner or later.
A long term chart of “real GDP growth” – as useless a statistic as GDP is, this chart does reveal two important facts: 1. the Fed has no control over the business cycle, and 2. its influence on the economy is thoroughly negative, as even in terms of this massaged and in many ways phony aggregate (inter alia it is designed to make things look better than they actually are), growth is in a persistent downtrend – click to enlarge.
In the face of such adversity, how likely is it that the Fed will persevere? The Fed’s future actions are “data dependent,” says Yellen. But imagine if Christopher Columbus had taken a “fact-dependent” voyage across the Atlantic.
Fact No.1: He ran out of food.
Fact No.2: His men were sick and dying of scurvy, malnutrition, and other diseases.
Fact No.3: India was not where he thought it was.
Any one of these facts, presented to him forcefully by his crew, would have been enough to cause him to turn around. When the going gets tough, “fact-dependent” travelers go home.
1492: Christopher Columbus and what’s left of his malnourished and scurvy-mangled crew arrives in “India”
- Superheroes Of The GOP Debate
With Hillary Clinton cast as their arch-nemesis, the new ‘avenging superheroes’ – some the same as the old avengers – of the GOP presidential nominee race each have their own unique skills…
- Paul Craig Roberts Warns "Everything Is Disintegrating"
The American people are asleep at the wheel. The blame is not totally their’s, but they do bare the brunt of the blame. The mainstream media does not report what is happening within our economy or the geopolitical arena, unless they can spew on and on about the endless rainbows, unicorns and how “America is the greatest and Putin is the devil." As Paul Craig Roberts warns, we are facing a world in change and the pace is quickening.
Below is a conversation that is unlike any that I have heard before. When preparing for interviews Dave Kranzler and I usually go over what we are going to discuss, how to get the show started and how we will hand off the conversation. It’s a good formula that has served us well. We are very, very grateful Dr. Roberts had other ideas.
Our world, as many of you know, is experiencing massive, unprecedented change at an ever increasing pace. Dr. Paul Craig Roberts, is not only one of the foremost economist in the world, but he also has one of the world’s most respected voices covering the geopolitical landscape.
The American people are asleep at the wheel. The blame is not totally their’s, but they do bare the brunt of the blame. The mainstream media does not report what is happening within our economy or the geopolitical arena, unless they can spew on and on about the endless rainbows, unicorns and how “America is the greatest and Putin is the devil.” No depth of coverage, nothing of real value reported, so the American people are left ignorant and wanting for truth. When you work 2 or more part time jobs, are struggling with keeping a roof over your head and the kids need new shoes, it becomes a challenge to seek the truth even though you know the “report” Brian Williams just delivered is a fabricated piece of fantasy. There is almost no truth to be found in the American mainstream media.
One of the best ways to understand what is happening today in places like Syria, Ukraine and the Middle East is to take a step back and see what history has shown. Most all situations in the human experience have roots in the past. As Mark Twain said, “History does not repeat itself, but it does rhyme.” that certainly applies to the ever encroaching American police state, the unfolding war in Syria, Ukraine, and the Middle East. Does that sound like world war or is it just me?
What has happened over the past several years in places like Iraq, Libya and Syria have roots in the late 1990’s. The Project for a New American Century, a “think-tank”, founded by Dick Cheney, one of the most die-hard neocons the world has ever seen, developed a plan to invade – that’s right, invade – 7 countries in 5 years. Their plan is taking longer than originally thought, but I am not sure if Russian and Chinese resistance was part of the calculation. The development of al-Queada, that has now morphed into ISIS, has not gone as planned either. ISIS appears to be morphing into their own entity that the CIA is having a hard time controlling. The rogue band of mercenaries are going rogue in a way that was not foreseen.
Dr. Roberts describes the evolution of the “deep state” and how the neocons have a strangle hold on the American political process that is hard to shake. These psychopathic warmongers are not concerned with anything except power, blood-lust and their own sense of “destiny”. The tapestry that Dr. Roberts weaves begins with Nixon, the Vietnam War and winds it’s way through the latest meeting between President Putin and Secretary of State, John Kerry. The picture is clear and details how we have arrived at the brink of nuclear annihilation. The three part series is not to be missed. To get the whole picture you need to listen all the way through. It was intentionally broken into smaller pieces to allow the info to sink in. As I said we are facing a world in change and the pace is quickening. Give this a good listen and let us know what you think.
Dr. Paul Craig Roberts: The Law Only Applies to the Helpless Pt 1
Dr. Paul Craig Roberts: NeoCons Run America Pt 2
Dr. Paul Craig Roberts: Everything is Disintegrating
- California's Worst Gas Leak In 40 Years (And Crews Can't Stop It)
While world leaders signed the 'historic' agreement signed in Paris to fix the world's "greatest threat," a natural gas storage site in southern California is belching 145,000 pounds per hour of Methane – a greenhouse gas 70 times more potent than carbon dioxide. What is worse, while official proclaim this a "top priority" a fix won't arrive until spring as emergency crews recognize "the leak was far from routine, and the problem was deeper underground."
As Wired reports, in just the first month, that’s added up to 80,000 tons, or about a quarter of the state’s ordinary methane emissions over the same period.
The Federal Aviation Administration recently banned low-flying planes from flying over the site, since engines plus combustible gas equals kaboom.
Steve Bohlen, who until recently was state oil and gas supervisor, can’t remember the last time California had to deal with a gas leak this big. “I asked this question of our staff of 30 years,” says Bohlen. “This is unique in the last three or four decades. This is an unusual event, period.”
Families living downwind of the site have also noticed the leak—boy, have they noticed. Methane itself is odorless, but the mercaptan added to natural gas gives it a characteristic sulfurous smell. Over 700 households have at least temporarily relocated, and one family has filed a lawsuit against the Southern California Gas Company alleging health problems from the gas. The gas levels are too low for long-term health effects, according to health officials, but the odor is hard to ignore.
Given both the local and global effects of the gas leak, why is it taking so long to stop? The answer has to do with the site at Aliso Canyon, an abandoned oil field. Yes, that’s right, natural gas is stored underground in old oil fields. It’s common practice in the US, but largely unique to this country. The idea goes that geological sites that were good at keeping in oil for millions of years would also be good at keeping in gas.
Across the US, over 300 depleted oil fields, of which a dozen are in California, are now natural gas storage sites. “We have the largest natural gas storage system in the world,” says Chris McGill, a vice president of the American Gas Association. And the site at Aliso Canyon is one of the largest in the country, with a capacity of 86 billion cubic feet. Aliso became a natural gas storage site in the 1970s. Each summer, SoCalGas pumps natural gas into the field, and each winter, it pumps it out. The sites are basically giant underground reserves for winter heating.
On October 23, workers noticed the leak at a 40-year-old well in Aliso Canyon. Small leaks are routine, says Bohlen, and SoCalGas did what it routinely does: put fluid down the well to stop the leak and tinker with the well head. It didn’t work. The company tried it five more times, and the gas kept leaking. At this point, it was clear the leak was far from routine, and the problem was deeper underground.
Here’s the new plan:
SoCalGas began drilling a relief well on December 4. The relief well will intercept the steel pipe of the original well—all of seven inches in diameter—thousands of feet below ground. Then crews will pour in cement to seal the wells off permanently. “Relief wells are a proven approach to shutting down oil and gas wells,” said SoCalGas in a statement.
As if finding a skinny pipe hundreds of feet below ground weren’t hard enough, the presence of all that explosive natural gas adds an extra layer of complication. A tiny spark and everything can go boom. So at the leaking well site, work is restricted to daylight, says Bohlen, as lighting equipment could produce stray sparks. (The relief well is far enough away that drilling there can proceed 24/7.) Back in 1975, a well at Aliso Canyon caught fire because of sparks from sand flying up the well.
And crews can’t set a deliberate fire, also known as flaring, which they often do at other remote areas with excess gas. The leak is so big and the flare would be so hot that it could make the mess even harder to contain.
“There is no stone being left unturned to get this well closed. It’s our top priority,” says Bohlen. But even that is slow, with months of drilling to come as methane continues to billow into the air.
- Either Martin Shkreli's Twitter Was Hacked Or He Has Gone Totally Insane
This just happened…
As it appears Martin Shkreli has taken on the persona of a gangsta rapper…
So, either the world’s “most hated” man has been hacked, or he has gone totally insane: both appear equally likely at this point
- The Fed Has Delivered Far More Than Just A Lump Of Coal This Time
If one meme has been constant these subsequent years since the great financial melt down of 2008 it’s been: BTFD (buy the dip) Not just some dips – but every dip. And why not? The Federal Reserve had all but assured Wall Street that since its first intervention into the markets and the resulting “risk on” behavior it produced resembling a Pavlovian experiment, it would indeed reincarnate the procedure every-time there seemed to be even the slightest hiccup in the markets. “Emergency monetary policy measures” would indeed be left in place for “an extended period.”
Wall Street didn’t need any secret decoder ring to read the hidden message that laid within. i.e., “The Fed’s got your back so buy, buy, buy!” And they did horns-over-hooves tripling the values of many of the major indexes sending them to never before seen in the history of mankind highs. Even the dot-com era highs were taken out. And all of it, and I do mean – all of it – on fairy-tale reporting of economic measurements. Need an example? 5% unemployment rate signals people are getting jobs. However, don’t pay any attention to the 94 million (and growing) that can’t and – are out of the workforce. All while the food stamp program and other government assistance program roles have swelled to historic levels. Because, other than that: “Everything is awesome!”
The problem with all of this is that it’s now becoming apparent to everyone. The amount of mal-investment along with just how intertwined all the subsequent carry trades and more is becoming frightfully obvious and can no longer be hidden from view. The real problem now facing the Fed. which I believe they themselves did not fully comprehend was the extent in which all of this was: so blatantly obvious. Again: to anyone who truly wanted to look.
Without the Fed’s interventionism – there is (and was) no market. And now with the raising of rates; no one will be able to miss or avoid that fact any longer. No matter how hard they try.
Another of the problems for the Fed. began to express itself when they seemingly became comfortable with this new paradigm and even appeared to relish this new-found fame and power as they took to any (and just about every) media source whenever needed and delivered either sedative policies or, soothing tones with near immediacy as to help quell any and all market fears. Over these ensuing years the frequency of appearance by Fed. speakers across the media has only been rivaled by the grueling tour of some where-are-they-now rock-band. I have a feeling they’re not going to relish this new limelight as they did the old.
This past Wednesday they unwittingly threw back their own curtain and implied, “See, we fixed it. Nothing to see here. The economy is just fine. So – we’re raising rates” to what appeared to be thunderous applause. However, what that motion truly revealed was not some blank or empty space. No, what they unknowingly revealed was a caged monster whose door just came unhinged. The resulting consequences began to bear its teeth Thursday and Friday. Yet, figuratively, that monster is still within the theater. The ensuing days is probably when this beast actually hits the streets, as in Wall Street. Then, all bets are off on exactly what mayhem we’ll see as a result. However, what we do know is this: It ain’t gonna be a present anyone wanted under their tree.
Suddenly we’re finding out (much like cockroaches) when you see one nasty issue – there’s many more just hidden from view. No where is this analogy more fitting then what is currently taking place in the High Yield space. e.g., junk bonds. First there were signs of stress just weeks ago. Then almost overnight (literally) many woke to the news that their “investments” were suddenly gated. Gated as in: Want your money? Sorry, maybe later, if not much later along with maybe not worth that much at all. Thanks for investing!
These are only the first warning shots being fired as to just how precarious, as well as onerous, this debt monster that the Fed. has unleashed might be along with the resulting chaos. For the tentacles of this beast combined with its destructive power is going to give the Kracken a run for its money in my estimation. What we’re not talking about is some monetary policy that can now be moved around with the frequency of some elf on a shelf. That’s fantasy land. This bane tale is currently becoming all too real.
I am now quite convinced that all of this was not only absolutely lost within the halls of the Eccles building rather, what might be even worse is that it seems it may have not even had been contemplated or, thought to be unfathomable by its very creators. I feel I can say this soundly by what I observed during the subsequent press conference given by the Fed. Chair Ms. Yellen on Wednesday.
What absolutely left me slack-jawed was her tone, tenor, and facial expressions during her opening remarks. Usually when one is delivering statements about monetary policy and other matters they tend to take on a tone of mundane, somber, expressionless, drawn out reading from prepared texts. It’s not like you’re going to see entertainment (well, maybe comedy come to think of it but I digress.) These are more or less information dispensing venues. Read the text. Answer any questions. Thanks, see you in a few months. This one was far, far different in what it revealed to my eye.
Ms. Yellen seemed to be almost giddy in her demeanor when delivering the news that the Fed. would indeed raise rates. It appeared as if the act of raising rates was some type of banner announcement where “Mission Accomplished” should be brought up in bright lights and champagne bottles uncorked. I implore anyone who thinks I’m exaggerating to find that conference in any search engine and watch for themselves with a more discerning eye. It truly was uncharacteristic by any Fed. Chair that I can recall. Yes these indications are subtle. Yet, to a trained or informed eye – they are there nonetheless. Noticing subtle variations such as these are required if one is serious about understanding Negotiations 101.
It may sound like something inconsequential however, what I would argue is it shows just how clueless the Fed. truly might have been. The only thing worse is it may show that they truly did believe their own press. e.g., That the economy really was as good as they said (or thought) it was. If that’s the case – then we really are in trouble. Big time!
This act of raising rates was not some seminal event as to mark the economy’s return to health. If one is truthful (although most continue to kid themselves) the Fed. raising rates on Wednesday was more or less an act of desperation as to “get off of zero.” Hopefully, without causing too much stress so that if and when the economy does show signs of stuttering (which it clearly is) the Fed. would then have some dry powder in reserve as to cut once again. Hopefully (once again) instilling the same Pavlovian reaction they’ve come to expect. That’s a far, far, far (did I say far?) cry from doing it because the economy is getting a clean bill of health. Or, “Mission Accomplished” sign off from extreme monetary measures.
Again, I must implore anyone: watch her opening remarks again and you’ll see it clearly. But you shouldn’t just stop there. What you should do is also watch the Q&A. For this too was also quite revealing.
When asked about the possible effects upcoming on bond yields and more some of the questions seemed to just confound the Fed. Chair appearing to catch her off guard like a deer in the headlights. So striking were some of the moments of silence even Tom Keene of Bloomberg™ commented during his show how he was taken aback. I believe the word he used was “stunning.” I have to agree with him. However, I myself was even more stunned on the non-answering answering composition of Fed. speak Ms. Yellen retorted at length. I mean, just how many ways can one use “transitory?” After a while I wished hearing transitory itself had been more transitory.
If we are in fact witnessing the first stages of a blatant, as well as avoidable policy error by the Fed. the resulting mayhem will be far worse than anyone ever expected. And I use the word “avoidable” precisely for that reason. For it has been clear to anyone without a Ph.D in economics; who has just a modicum of common sense; and acquired their education at the school of hard knocks; that this economy was not only far worse off than any of the reporting stated but – was being made that way with the consistent heavy hand of intervention being carried out by the Fed. itself. And this fact is coming to light brighter, and more plainly visible with each passing day. All to what I feel will be the Fed’s horror. Yet, it will be us that has to navigate the real life nightmare filled with debt leviathans and carry trade tentacles rivaling the Kracken for tenacity as well as fury.
This will probably go down as the first time Wall Street will have ever wished the Fed. had indeed left only a lump of coal in their bonus stockings rather, than the surprise they might wake to this holiday year-end. If you want to see a clue about just how much of a bloodbath is still possible in the once highly touted arena of fixed income – just look at Jefferies™.
It’s now self-evident: Winter is not coming… It’s all ready here.
And the Fed. is expecting you to be happy with their latest present. For by all indications expressed they thought long, hard, and decided this was exactly the right gift, at the right time. Just don’t look for any gift return receipt. The exchange window for returns to BTFD once again are currently closed. That’s an option I’m confident they also did not contemplate fully. For I’m sure they felt they knew exactly what they were doing – and the “markets” would be thrilled.
Ho, Ho, Ho?
- Peak "Office Space"
With the unprecedented surge in unicorns and incessant faith in the ever-increasing productivity of a globalization-crushed American worker, it is perhaps a surprise that the “office space” provided to the intellectual capital-providing, wage-stagnating middle-American, has never been smaller…
It seems since The Fed unleahes its ‘temporary emergency policy’, the need for “office space” has collapsed… because, in the new normal, all that matters for shareholder wealth creation is ‘buybacks’ not productivity.
Source: Goldman Sachs
- CISA: “Just Another Example Of Corruption”
Last week, Congress passed CISA by hiding it in the middle of a sure-to-pass spending bill, and Obama signed it into law … even though the Department of Homeland Security had previously said that the bill will HURT national security and destroy privacy (numerous experts agreed).
And – just like with previous spying laws – the government has a secret interpretation of CISA which will make it even worse.
So why was the bill passed?
As the American public is starting to learn – and politicians from both side of the aisle admit – corruption has thoroughly destroyed America.
The highest-level NSA whistleblower in history – William Binney – the high-level NSA executive who created the agency’s mass surveillance program for digital information, 36-year NSA veteran widely regarded as a “legend” within the agency, who served as the senior technical director within the agency, and managed thousands of NSA employees – explains that corruption is what’s motivating mass surveillance against the American people … and it’s what’s making us vulnerable to terrorism.
Washington’s Blog asked Binney what he thought of CISA, and he said:
This is just another example of the White House, leadership (if you want to call it that) in Congress, the intelligence committees, and the intelligence agencies manipulating the system to get what they want (more money and more knowledge to control).
Clearly, CISA would not stand on it’s own; so, they had to sneak it through buried inside a massive funding bill at the end of the year.
Again, we see just another example of corruption in our government in Washington DC. They don’t have the courage or backbone to stand for what they want out in the open where there can be an honest debate like we are suppose to have in a democracy.
The established political parties should not be confused as to why citizens are sick of them. Our only solution is to fire them all in the next election and try to get honest citizens in these jobs.
Binney points out:
It would be good if most people in DC read the [articles of impeachment against Richard Nixon]. Nixon did only a miniscule amount of what the last two presidents and their co-conspirators have done and continue to do.
And it’s not just the politicos … Binney says we also have to fire the bums running the intelligence agencies. And see this.
- Putin Blasts Interventionist US Foreign Policy, Calls Forcible Regime Change "Intolerable"
“Let’s remember why we became part of a coalition to stop [Libyan dictator Muammar] Gaddafi from committing atrocities against his people.”
That’s from Hillary Clinton who defended here foreign policy credentials in Saturday night’s third Democratic presidential debate. Hitting back at Bernie Sanders, who accused her of being “too much into regime change and a little bit too aggressive without knowing what the unintended consequences might be,” the former Secretary of State said the US “will not get the support on the ground in Syria to dislodge ISIS if the fighters there – who are not associated with ISIS, but whose principal goal is getting rid of Assad – don’t believe there is a political diplomatic channel that is ongoing.”
“I am not giving up on Libya and no one should,” she added.
Unfortunately, we probably should “give up” on Libya, because the power vacuum created by Gaddafi’s fall has turned the country into a lawless wasteland and a breeding ground for ISIS. For those who might have forgotten what “democratic regime changed” looked like in Libya, allow us to refresh your memory:
Ah, yes, a peaceful transition in the true spirit of democracy.
For his part, Putin asked the following: “Who gave the West the right to carry out regime change?” Here’s the clip from 2011:
Well, in the wake of Hillary’s comments during the debate, Putin is out with a bit of fresh criticism with regard to what Russia calls illegitimate attempts to bring about the downfall of governments deemed “undesirable” by Western powers.
“Outsiders forcing change of legitimate powers in other countries is intolerable,” Putin told Rossiya TV.
While geopolitical disagreements are “inevitable and “all right”, foreign policy needs to be conducted “by civilized rules”, he continued. We assume that “civilized rules” do not include arming and funding Sunni extremists especially ones who The Pentagon knows are likely to establish Salafist principalities within the borders of sovereign states.
Putin went on to say that by becoming a puppet of the US, “Europe has given up [an] independent foreign policy” thereby surrendering part of its sovereignty to US.”
When it comes to intervening in order to keep the geoplotical scales in balance, “Russia isn’t afraid” to step in, and will always act with “maximum caution,” (we’re not entirely sure one can classify the rather rapid and aggressive deployment in Syria as being conducted with “maximum caution”, but it’s certainly a more cautious approach than arming any and all anti-government elements in hopes that one of them will turn out not to be extremists).
In the end though, Putin concedes that Russia has no catch-all solution for color revolutions. The “only recipe for how to deal with them is to strengthen international law,” he concludes.
Exactly. Which means that at some point, the international community needs to insist that the US and its allies both in the Mid-East and Europe cease the ubiquitous practice of fomenting discord within sovereign states. It never works where “works” means a stable deomcracy takes root in the ashes of a dictatorship. Between Libya, Iraq, and Syria, the US truly has “become Death, the destroyer of worlds.”
- Market Figures Out Fed No Longer Has Its Back
Submitted by John Rubino via DollarCollapse.com,
US stocks soared while the Fed was meeting to raise interest rates this week – though it’s not clear why that should be so since monetary tightening isn’t generally a good thing for stock prices.
In any event, it didn’t last. Over the past 48 hours the Dow is down more than 3%, with many, many individual stocks down far more.
Why the quick reversal? For one thing, that’s pretty much how it always goes. The Fed tends to aim its statements directly at traders, who are so desperate for adult supervision that they can’t help responding positively. But when the Fed goes quiet, reality once again bites, and the general trend turns negative.
That it’s happening so quickly is a sign of how different things are this time around.
The Fed is now – for the first time in adult memory for half the world’s traders and money managers – tightening rather than loosening monetary conditions. A quick look at financial history is all it takes to lead anyone with leveraged money at risk to lighten up.
Equally important — and vastly more strange when you think about it — this tightening comes at a time when major parts of the global economy are either grinding to a halt or imploding. See Torrent Of Bad News Greets Fed As It Prepares to Raise Rates for some of the disturbing events reported while the Fed was meeting.
And since then (that is, in just two days), a whole new series of similarly-scary stories have surfaced, including:
China Beige Book Shows ‘Disturbing’ Economic Deterioration
(Bloomberg) – China’s economic conditions deteriorated across the board in the fourth quarter, according to a private survey from a New York-based research group that contrasted with recent official indicators that signaled some stabilization in the country’s slowdown.
National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International. The indicator is modeled on the survey compiled by the Federal Reserve on the U.S. economy, and was first published in 2012.
The world’s second-largest economy lacks the kind of comprehensive data available on developed nations, making it harder for investors to get a clear read — particularly as China transitions from reliance on manufacturing and investment toward services and consumption. Official data on industrial production, retail sales and fixed-asset investment all exceeded forecasts for November, while consumer inflation perked up and a slide in imports moderated.
Earnings Deterioration
The Beige Book’s profit reading is “particularly disturbing,” with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the release. While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening.
The survey shows “pervasive weakness,” Miller wrote in the report. “The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true.”
Japan’s November Exports Fell 3.3%
(Khaleej Times) – Japan’s exports in November fell at the fastest pace in almost three years as shipments to Asia declined in a worrying sign that weakness in overseas demand could curb economic growth.
Japan’s gross domestic product is likely to avoid a contraction for the time being as domestic demand has performed better than expected, but declining exports highlight the risks that China’s slowdown and turmoil in emerging markets pose to the outlook.
Ministry of Finance data showed on Thursday that exports fell 3.3 percent in November from a year earlier, more than the median estimate for a 1.5 percent annual decline in a Reuters poll. That was the biggest decline since a 5.8 percent year-on-year fall in December 2012.
Hedge Funds Just Had Their Worst Quarter Since the Crisis
(Bloomberg) – Hedge fund closures surged in the three months to the end of September as money managers reeled from declines in commodity and equity markets, while high-yield credit spreads widened.
The number of funds liquidated climbed to 257, up from 200 in the previous three months, according to a report from Hedge Fund Research Inc. on Friday, and taking total closures in the first nine months to 674, compared with 661 during the same period last year. Cargill Inc.’s Black River Asset Management shut four units, while Armajaro Asset Management LLP also closed one of its funds.
Liquidations rose “as investor risk tolerance fell sharply, and energy commodities and equities posted sharp declines, resulting in net capital outflows, wider performance dispersion and meaningful differentiation between hedge funds,” Kenneth Heinz, president of HFR, said in a statement.
Bond funds see record outflows after junk jitters
(CNBC) – Investor fears about liquidity in junk bonds have leaked into the investment grade sector of the market, with redemptions from corporate bond funds hitting record highs in the week running up to the Federal Reserve meeting.
Global bond funds saw their largest outflows since June 2013 in the week to Wednesday 16th December, with some $13 billion being pulled from the sector, including, high-yield and investment-grade strategies.
BofAML said the “carnage in fixed income” was still focused on junk bond funds, which saw $5.3 billion of the outflows. Meanwhile, corporate investment-grade debt funds saw around $4.8 billion in net redemptions, according to separate data from Thomson Reuters Lipper which also showed that the net outflows from bond funds over the period were the largest weekly outflows since Lipper started tracking fund flow data in 1992.
There’s more, but you get the point. These are the kinds of things that happen in the early stages of recession, not the middle of an expansion. As such, they’re usually signals to a central bank to ease conditions.
But the Fed has locked itself into tightening for a while, and will need a serious crisis to make a change of course possible. That’s what the markets are figuring out, that they can’t count on free money falling from the sky in the next couple of months, no matter what happens.
So, for the first time in a long time, they’re responding to fundamentals rather than artificial easy money. And the fundamentals, by any historical or common sense standard, are terrible.
- Hedge Fund AUM Falls By Most Since Crisis As Desperate Managers Cut Fees To Keep Clients
Make no mistake, it’s been a tough year for the 2 and 20 crowd.
Between an inexorable slump in commodities (which has led directly to a burgeoning HY crisis), the volatility that comes with pervasive monetary policy confusion, a “surprise” China deval, tail risk galore, and a variety of spectacular blow ups (see Ackman and Valeant), it’s become abundantly clear that when it comes to truth in advertising, hedge funds fail miserably as protecting against massive fat tail events apparently isn’t their cup of tea after all (see here for more).
Even risk parity has suffered in an environment characterized by increasingly interdependent and correlated markets.
Well, now that pension funds (and everyone else for that matter) have come to the realization that in a market backstopped by the central bank put, it makes a lot more sense to just buy the SPY for a fraction of a percentage point (in terms of expense ratios) than to pay 2 and 20 for someone to ride the beta train with the most leverage possible hoping that the Fed will prevent any events that actually need hedging, and now that HY is finally rolling over just like we said it would, the liquidations are multiplying.
“Funds depend on institutional investors such as insurers and pension schemes, who cannot afford to miss minimum return targets and are themselves under pressure from boards that oversee investments,” FT writes.
“Most [fund] managers prefer to haggle like rug-salesmen at a bazaar; institutional investors would rather shop at Ikea,” says Simon Ruddick, founder of consultant Albourne and that means the trend shown in the following graph is likely to reverse going foward:
In a sign that things are getting progressively worse, “the number of funds liquidated climbed to 257 [in Q3], up from 200 in the previous three months,” Bloomberg notes, citing Hedge Fund Research Inc.
Total closures in the first nine months of the year hit 674, while AUM fell by $95 billion to $2.87 trillion during the quarter, “the most since the fourth quarter of 2008, when the industry lost $314.4 billion amid the global financial crisis.”
“The HFRI Fund Weighted Composite Index declined by more than 4 percent in the three months through September, its biggest quarterly drop in four years, as money managers were caught out by the devaluation of the Chinese yuan in August, which pummeled markets, and as oil and gold prices slumped,” Bloomberg adds.
Now obviously – as noted above and as we documented extensively in the wake of the flash crashing madness that unfolded on August 24 – hedge funds are supposed to be a safe haven when market turmoil strikes but as it turns out, they aren’t particularly adept at actually “hedging” and so, when the black swans come calling, the losses pile up.
So what’s a “poor” hedgie to do? Well, cut fees for one thing. Here’s FT again:
Many hedge funds are cutting fees and negotiating with investors to trim some of their hefty costs and avert withdrawals after another mediocre year for returns.
The industry has been shifting for several years away from its traditional model of charging 2 per cent of assets and keeping 20 per cent of profit. Some funds are already wooing customers with fees closer to 1 per cent and 15 per cent, people in the industry say.
Management fees declined this year in every strategy except event driven, falling to a mean of 1.61 per cent from 1.69 per cent, according to JPMorgan’s Capital Introduction Group.
Several big-name funds have closed to outside investors or shut entirely this year: Michael Novogratz’s $2bn fund at Fortress Investment Group shut in October after having lost 17.5 per cent in 2015, and this month BlueCrest pushed out external investors, saying 2 and 20 was “no longer a particularly profitable business”.
Carlyle’s Claren Road, facing an exodus of half its clients after losses, delayed giving some money back, and offered reduced fees if investors agreed to stay with the fund for another two years, according to people familiar with the offer.
Glenview Capital manager Larry Robbins, whose fund is down 17 per cent this year, has now offered existing clients a chance to put new money into a healthcare-focused side fund, with no fees of any kind.
Of course at the end of the day, if you’re losing double-digits, it really doesn’t matter if the fee is 1 and 15 or 2 and 20 – you’re losing money and underperforming benchmarks that can bought via ultra-low cost vehicles and on that note, we’ll close with the following quote from Emma Bewley, Connection Capital’s head of fund investment:
“If you’re pushing for lower management fees to save minimal basis points on a fund where you are unhappy with performance, as a fiduciary, you have to decide whether you want to keep that fund at all.”
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