Today’s News December 7, 2015

• Get Rid of ISIS Using This 'One Weird Trick'

  Submitted by Dan Sanchez via DanSanchez.me,

  You’ve seen those internet ads that offer “one weird trick” for eliminating belly fat or boosting testosterone, right? Well, here’s one weird trick for getting rid of ISIS and boosting our security from terrorism. The “trick” is non-intervention. And it is only weird in the sense that it is so uncommon in this age of war. Nonetheless, it works.

  And it will work against ISIS because it was intervention that propelled its rise and it is intervention that sustains it. Non-intervention would eliminate ISIS by simply withholding its fuel and withdrawing its props.

  The “one weird trick” has three easy steps. These steps are only “easy” for Westerners, because they basically amount to us refraining from constantly fucking things up. Once we get out of their way, the hard work will be done by locals, which is as it should be.

  Step 1: The West should stop supporting the jihadist-led Syrian insurgency and stop supporting the regional allies (Turkey, Saudi Arabia, etc) that are also supporting it. With the flow of weapons and money cut off, rebels will defect and the ground forces of the secular Syrian regime that the U.S. has been idiotically trying to overthrow will be able to push ISIS and Syrian Al Qaeda out of Syria.

   

  Step 2: The U.S. should stop supporting the sectarian Shi’ite government in Iraq. Only when that flow of weapons and money is also halted will Baghdad be forced to compromise with the Iraqi Sunnis they have been brutally persecuting for a decade. And only then will the Sunni tribes feel they can afford to turn against ISIS again, as they did in 2006. This will give the terrorists fleeing Syria nowhere to run.

   

  Step 3: The West should stop directly bombing Syria and Iraq. Such attacks inevitably massacre civilians, and thereby only strengthen ISIS. Civil society is thus weakened and less capable of resisting the hardened extremists. Plus, more Muslim youth are thus radicalized by atrocity and more susceptible to extremist recruitment.

  More American boots, European bombs, Turkish guns, and Saudi money will only feed the fire that fuels ISIS and make our cities more vulnerable to terrorist attacks. Just stop constantly subsidizing and contributing to the war and chaos that ISIS thrives on. That alone can starve and weaken that death cult enough for the non-psychotic elements of Syria and Iraq to unite and finally destroy it.

  We have tolerated and enabled our governments’ bloody misadventures long enough. Get the West out of the Middle East, now.

  

  

  

  

  

• It Begins: Desperate Finland Set To Unleash Helicopter Money Drop To All Citizens

  With Citi's chief economist proclaiming "only helicopter money can save the world now," and the Bank of England pre-empting paradropping money concerns, it appears that Australia's largest investment bank's forecast that money-drops were 12-18 months away was too conservative.

  Over the last few months, in a prime example of currency failure and euro-defenders' narratives, Finland has been sliding deeper into depression. Almost 7 years into the the current global expansion, Finland's GDP is 6pc below its previous peak. As The Telegraph reports, this is a deeper and more protracted slump than the post-Soviet crash of the early 1990s, or the Great Depression of the 1930s. And so, having tried it all, Finnish authorities are preparing to unleash "helicopter money" to save their nation by giving every citizen a tax-free payout of around $900 each month!

  Just over two years ago, when the world was deciding who would be Bernanke Fed Chair replacement, Larry Summers or Janet Yellen (how ironic that Larry Summers did not get the nod just because a bunch of progressive economists thought he would not be dovish enough) we wrote about a different problem: with the end of QE3 upcoming and with the inevitable failure of the economy to reignite (again), we warned that there remains one option after (when not if) QE fails to stimulate growth: helicopter money.

  While QE may be ending, it certainly does not mean that the Fed is halting its effort to "boost" the economy. In fact… the end of QE may well be simply a redirection, whereby the broken monetary pathway, one which uses banks as intermediaries to stimulate inflation (supposedly a failure according to the economist mainstream), i.e., "second-round effects", is bypassed entirely and replaced with Plan Z, aka "Helicopter Money" mentioned previously as an all too real monetary policy option by none other than Milton Friedman and one Ben Bernanke. This is also known as the nuclear option.

  Today Finland needs the nuclear option. As The Telegraph explained, nobody can accuse Finland of being spendthrift, or undisciplined, or technologically backward, or corrupt, or captive of an entrenched oligarchy, the sort of accusations levelled against the Greco-Latins.

  The country's public debt is 62pc of GDP, lower than in Germany. Finland has long been held up as the EMU poster child of austerity, grit, and super-flexibility, the one member of the periphery that supposedly did its homework before joining monetary union and could therefore roll with the punches.

   

  

   

  Finland tops the EU in the World Economic Forum’s index of global competitiveness. It comes 1st in the entire world for primary schools, higher education and training, innovation, property rights, intellectual property protection, its legal framework and reliability, anti-monopoly policies, university R&D links, availability of latest technologies, as well as scientists and engineers.

   

  Its near-perfect profile demolishes the central claim of the German finance ministry – through its mouthpiece in Brussels – that countries get into bad trouble in EMU only if they drag their feet on reform and spend too much.

   

  The country has obviously been hit by a series of asymmetric shocks: the collapse of its hi-tech champion Nokia, the slump in forestry and commodity prices, and the recession in Russia.

   

  The relevant point is that it cannot now defend itself. Finland is trapped by a fixed exchange rate and by the fiscal straightjacket of the Stability Pact, a lawyers' construct that was never intended for such circumstances. The Pact is being enforced anyway because rules are rules and because leaders in the Teutonic bloc have an idee fixee that moral hazard will run rampant if any country in the EMU core sets a bad example.

   

  Finland's output shrank a further 0.6pc in the third quarter and the country's three-year long recession is turning into a fourth year. Industrial orders fell 31pc in September. "It's spooky," said Pasi Sorjonen from Nordea.

  Finland is digging itself into an ever deeper hole. The International Monetary Fund warned this week against austerity overkill and “pro-cyclical” cuts before the economy is strong enough to take it.

  The IMF spoke softly but the message was clear. Finland should not even be thinking of a “front-loaded” fiscal contraction or slashing investment at a time when its output gap is 3.2pc of GDP.

   

  The Finnish authorities admitted in their reply to the IMF's Article IV report that they had no choice because they had to comply with the Stability Pact. This is what European policy-making has come to.

   

  Some in Finland were quick to throw stones at Greece during the debt crisis, seemingly unaware at the time that they too lived in a glass house. Their own story is not really that different from the EMU disasters that unfolded in the South.

   

   

  

   

  Interest rates were too low for Finland’s needs during the commodity boom, causing the economy to overheat. Unit labour costs spiralled up 20pc from 2006 onwards, leaving the country high and dry when the music stopped. Public debt was low but private debt was high (somewhat like Spain and Ireland). The crisis hit later merely because the commodity bubble did not burst until 2012.

   

  Sweden was able to navigate similar shocks by letting its currency take the strain at key moments over the last decade. Swedish GDP is now 8pc above its pre-Lehman level.

   

  

   

  The divergence between Finland and Sweden is staggering for two Nordic economies with so much in common, and it has rekindled Finland’s dormant anti-euro movement.

  And that 'political' crisis may have been just the kick the authorities needed to unleash the nuclear money drop option, as The Telegraph continues,

  Authorities in Finland are considering giving every citizen a tax-free payout of €800 ($900) each month.

   

  Under proposals being draw up by the Finnish Social Insurance Institution (Kela), this national basic income would replace all other benefit payments, and would be paid to all adults regardless of whether or not they receive any other income.

   

  Unemployment in Finland is currently at record levels, and the basic income is intended to encourage more people back to work. At present, many unemployed people would be worse off if they took on low-paid temporary jobs due to loss of welfare payments.

   

  Detractors caution that a basic income would remove people's incentive to work and lead to higher unemployment. Those in favour point to previous experiments where a basic income has been successfully trialed.

   

  …

   

  Finnish Prime Minister Juha Sipilä supports the idea, saying: “For me, a basic income means simplifying the social security system.”

   

  The basic income will cost Finland roughly €46.7 billion per year if fully implemented. Kela's proposals are due to be submitted in November 2016.

  That's around 20% of GDP annually… and while politicians will claim it is temporary, these 'initiatives' never are – just ask Japan!

  *  *  *

  As we previously detailed, support is growing around the world for such spending to be funded by “People’s QE.” The idea behind “People’s QE” is that central banks would directly fund government spending… and even inject money directly into household bank accounts, if need be. And the idea is catching on.

  Already the European Central Bank is buying bonds of the European Investment Bank, an E.U. institution that finances infrastructure projects. And the new leader of Britain’s Labor Party, Jeremy Corbyn, is backing a British version of this scheme.

   

  That’s the monster coming to towns and villages near you! Call it “overt monetary financing.” Call it “money from helicopters.” Call in “insane.” 

   

  But it won’t be unpopular. Who will protest when the feds begin handing our money to “mid- and low-income households”?

  Simply put, The Keynesian Endgame is here… as  the only way to avoid secular stagnation (which, for the uninitiated, is just another complicated-sounding, economist buzzword for the more colloquial “everything grinds to a halt”) is for central bankers to call in the Krugman Kraken and go full-Keynes.

  Rather than buying assets, central banks drop money on the street. Or even better, in a more modern and civilised fashion, credit our bank accounts! That, after all, may be more effective than buying assets, and would not imply the same transfer of wealth as previous or current forms of QE. Indeed, ‘helicopter money’ can be seen as permanent QE, where the central bank commits to making the increase in the monetary base permanent.

   

  Again, crediting accounts does not guarantee that money will be spent – in contrast to monetary financing where the newly created cash can be used for fiscal spending. And in many cases, such policy would actually imply fiscal policy, as most central banks cannot conduct helicopter money operations on their own.

   

  …

   

  So again, the thing to realize here is that this has moved well beyond the theoretical and it's not entirely clear that most people understand how completely absurd this has become (and this isn't necessarily a specific critique of SocGen by the way, it's just an honest look at what's going on). At the risk of violating every semblance of capital market analysis decorum, allow us to just say that this is pure, unadulterated insanity. There's not even any humor in it anymore.

   

  You cannot simply print a piece of paper, sell it to yourself, and then use the virtual pieces of paper you just printed to buy your piece of paper to stimulate the economy. There's no credibility in that whatsoever, and we don't mean that in the somewhat academic language that everyone is now employing on the way to criticizing the Fed, the ECB, and the BoJ.

  And it will end only one way…

  The monetizing of state debt by the central bank is the engine of helicopter money. When the central state issues $1 trillion in bonds and drops the money into household bank accounts, the central bank buys the new bonds and promptly buries them in the bank's balance sheet as an asset.

   

  The Japanese model is to lower interest rates to the point that the cost of issuing new sovereign debt is reduced to near-zero. Until, of course, the sovereign debt piles up into a mountain so vast that servicing the interest absorbs 40+% of all tax revenues.

   

  But the downsides of helicopter money are never mentioned, of course. Like QE (i.e. monetary stimulus), fiscal stimulus (helicopter money) will be sold as a temporary measure that quickly become permanent, as the economy will crater the moment it is withdrawn.

  The temporary relief turns out to be, well, heroin, and the Cold Turkey withdrawal, full-blown depression.

   

  

  

  

  

  

• "Don't Believe The Hope" – When Forward Guidance Becomes Forward Mis-Direction

  Submitted by Joseph Calhoun via Alhambra Investment Partners, 

  When a problem comes along

  You must whip it

   Before the cream sets out too long
  You must whip it

  When something’s goin’ wrong

  You must whip it – Devo

  Did anyone get the license plate of the truck that hit the bulls last Thursday? If not, maybe you managed to catch a glimpse of it when it backed over the bears on Friday. I have it on good authority the driver was an Italian by the name of Mario Draghi. Mario’s German buddies managed to sober him up for a press conference Thursday but by Friday he was in New York and back on the sauce. Meanwhile, Janet Yellen spent the week explaining why she was going to take the ladle out of the punchbowl before Santa gets down the chimney. By the end of the week, traders were getting whiplash treatment and stocks were right back where they started.

  The market came into last week positioned for a big new dollop of monetary easing from the ECB. With the Fed poised to hike and the ECB ready to ease, the obvious trade was short Euros and long US dollars, most often in the form of US Treasuries but with a few FANG stocks and a call on the DAX thrown in for good measure. After last month’s meeting Draghi hinted that more easing was on the way and traders took him at his word. One wonders, with the benefit of hindsight, why he wasn’t questioned more about why he didn’t just ease at that last meeting. It seems obvious now that he wasn’t having any luck convincing the rest of the ECB to go along with his punchbowl spiking ways. And by the rest of the ECB, I mean the Germans who have an innate bias against anything that might turn into too much fun.

  So, when Draghi offered up his weak tea of slightly more negative interest rates and a six month extension of QE, all those short Euro/long Dollar trades suddenly looked rather crowded, foolish and not such a sure thing after all. And just like that, with visions of their already reduced bonuses dancing in their heads, traders started buying Euros, selling Treasuries and basically getting the heck out, price be damned. By the end of the day, the Euro was up four handles from 105 to 109, Treasuries were sucking for air and the Dow was down 250 points because…well just because.

  As Friday dawned all awaited the November employment report to gauge whether the FOMC would still be in a hiking mood come December 16th. Earlier in the week, the manufacturing ISM posted at 48.6 – sub 50 means the manufacturing sector is contracting – and combined with some dovish cooing from a couple of FOMC members had people wondering if the Fed would really get off zero this month. The employment report was typical of the series lately, posting an as expected or so 211k; not great, not bad but nothing that the labor market watching Yellen would fret about. That wasn’t enough for more than a mild rebound until Draghi’s speech to the Economic Club of New York. He averred that, “no doubt” the ECB would step up stimulus if needed. He didn’t define “needed” but stock traders didn’t wait for clarification. I guess, more accurately, the algorithms that do all the trading today didn’t wait for clarification. Who or whatever heard Draghi’s monetary dog whistle knew what it meant or what they wanted or hoped it to mean and stood on the buy button all afternoon.

  After all the central banker drama was complete the Dow had traversed a nearly 500 point range to end up less than 50 points from where it started. Which seems quite appropriate since there wasn’t much change in the fundamental backdrop of the markets. That ISM report earlier in the week did nothing but confirm what we all knew already. The manufacturing/industrial side of the US economy is weakening. That trend isn’t news to us and hopefully not to the FOMC but the ISM’s predictive track record isn’t that great and it was unlikely to change Yellen’s mind.

  The other data released last week did nothing to change the trends that have persisted all year. The auto sector reported another gangbuster month. The service sector continued to expand. Manufacturing data was weak. Imports and exports continued to contract and employment was positive but uninspiring. There was no change in the economic outlook for Europe either where a nascent cyclical recovery likely has little to do with the ECB’s actions, past, present or future.

  The market volatility last week was a byproduct of the open mouth policies of the world’s central banks. Forward guidance, intended to make monetary policy predictable and markets less volatile, creates confusion. Traders hang on every word, position themselves accordingly and get whipsawed when reality doesn’t align with expectations. Investors don’t know whether they should pay attention or not. The idea that monetary policy should be predictable was always based on a false premise. Forward guidance only works if central banks can predict the future course of the economy. Absent a working crystal ball, forward guidance adds to the considerable uncertainty that is inherent in all markets.

  As hard as it is sometimes, investors need to tune out the central bankers. Concentrate on the indicators that have provided accurate guidance in the past. As stated above the ISM isn’t one of those and while it does provide some extra information it isn’t anything on which to base investment or monetary policy. There are instances of recessions starting with the ISM above the 50 level that divides expansion and contraction. There are also plenty of instances of readings below 50 being nothing more than transitory noise. Having said that, a reading below 49 such as we got last week, has led to, about 1/3 of the time, a recession in short order. So, one shouldn’t ignore it but context is important.

  Of more importance is the developing credit crunch. It is notable I think that junk bonds did not join the stock rally Friday. Credit spreads did narrow a bit last week as Treasuries took a hit on the ECB disappointment but the trend is still wider. More meaningful, I think, is that the damage in credit markets has spread well beyond the energy sector. S&P reported $180 billion of distressed junk bonds from 228 companies in November and a distress ratio of 20.1%, the highest since 2009. (Distressed bonds’ yield 1000 basis points than comparable Treasuries.) The oil and gas sector represents just 37% of the total. Metals and mining is second and together those two sectors represent 53% of the total. Restaurants, media, technology, chemicals, consumer products and financials make up the rest of the top 8. As I said, it isn’t just energy.

  We can see the stress in dividends as well. Dividend cuts in November were 50% oil and mining, 23% finance, 18% manufacturing and 9% shipping. That’s a pretty diverse group affected not just by falling oil prices but global economic weakness.

  The Fed seems set on hiking rates this month and there are good arguments in favor of doing so. But we shouldn’t pretend that there will be no cost, no economic or market consequence for doing so. Market liquidity has already waned starting with the taper tantrum and continuing through the actual tapering and end of QE. Believe what you want but markets have spoken; the tightening cycle started long ago and the first rate hike is just the latest move. It seems inconsequential, a mere 25 basis points, but then the last hike in the last tightening cycle, in the fall of 2006, was only a quarter point too. Not only that but we have no idea how effective the Fed’s plan for hiking rates will be. We have to assume that if they are successful in raising the Fed Funds rate that it will reduce liquidity further. How much is anyone’s guess.

  As we approach the Fed meeting expect markets to get more volatile. While the odds favor a move, it isn’t a sure thing until it is actually done. We found out last week what happens when forward guidance turns out to be forward misdirection. All those traders who thought they had a sure thing, who assumed that Draghi wouldn’t dare disappoint the market, got whipped. Whipped good.

  *  *  *
  ZH: Just remember what happened the last time The Fed hiked into a recession… We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession. Here is what happened then, as we described previously in June.

  [No episode is more comparable to what is about to happen] than what happened in the US in 1937, smack in the middle of the Great Depression. This is the only time in US history which is analogous to what the Fed will attempt to do, and not only because short rates collapsed to zero between 1929-36 but because the Fed’s balance sheet jumped from 5% to 20% of GDP to offset the Great Depression.

  Just like now.

  Then, briefly, the economy started to improve superficially, just like now, and as a result the Fed tightened in a series of three steps between Aug’36 & May’37, doubling reserve requirements from $3bn to $6bn, causing 3-month rates to jump from 0.1% in Dec’36 to 0.7% in April’37.

  

  Here is a detailed narrative of precisely what happened from a recent Bridgewater note:

  The first tightening in August 1936 did not hurt stock prices or the economy, as is typical.

   

  The tightening of monetary policy was intensified by currency devaluations by France and Switzerland, which chose not to move in lock-step with the US tightening. The demand for dollars increased. By late 1936, the President and other policy makers became increasingly concerned by gold inflows (which allowed faster money and credit growth).

   

  The economy remained strong going into early 1937. The stock market was still rising, industrial production remained strong, and inflation had ticked up to around 5%. The second tightening came in March of 1937 and the third one came in May. While neither the Fed nor the Treasury anticipated that the increase in required reserves combined with the sterilization program would push rates higher, the tighter money and reduced liquidity led to a sell-off in bonds, a rise in the short rate, and a sell-off in stocks. Following the second increase in reserves in March 1937, both the short-term rate and the bond yield spiked.

   

  Stocks also fell that month nearly 10%. They bottomed a year later, in March of 1938, declining more than 50%!

  Or, as Bank of America summarizes it: "The Fed exit strategy completely failed as the money supply immediately contracted; Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones."

  

  As can be seen on the above, in 1938, the stock market began to recover some. However, despite the easing stocks didn't fully regain their 1937 highs until the end of the war nearly a decade later.

  It needed a world war for that.

  But wait, the Fed hiked only to ease? That's right: in response to the second increase in reserves that March, Treasury Secretary Morgenthau was furious and argued that the Fed should offset the "panic" through open market operations to make net purchases of bonds. Also known now as QE. He ordered the Treasury into the market to purchase bonds itself.

  

  

  

  

  

• A Beleaguered Wal-Mart Sues A Broke Puerto Rico For "Astonishing" Tax Hike

  It’s always amusing when unforeseen circumstances conspire to bring two previously disparate stories together in one hilarious boondoggle. 

  As regular readers are no doubt aware, Puerto Rico is broke. “Let us be clear: We have no cash left,” governor Alejandro Garcia Padilla told Congress last week, after the commonwealth used an absurd revenue clawback end-around to avoid defaulting on some $345 million in debt that came due on Tuesday. 

  The island owes another $300 million on January 1st and what might this week’s payment so important was that of the $354 million coming due, around $273 million was GO debt, and defaulting on that would mean a cascade of ugly litigation. 

  Of course the use of the clawback – which effectively allows the island to divert revenue earmarked for other bonds to GO debt repayments – is a bit like Greece tapping its IMF reserves to pay the IMF. That is, there’s a palpable sense of desperation here and the situation is going to get immeasurably worse without some manner of federal intervention. 

  Ok, so that’s Puerto Rico. 

  Regular readers are also no doubt aware that Wal-Mart has gotten itself into trouble this year after bowing to calls for increased wages for its lowest-paid employees. Those wage hikes (which are set to cost the retailer around $1.5 billion over two years) pinched margins, prompting the company to tighten the screws on suppliers with a series of measures that culminated in Wal-Mart demanding that its vendors pass on any savings they might have derived from the yuan deval. 

  The company also learned that when you hike wages for some employees but not others, the wage hierarchy gets thrown out of whack prompting workers higher up the ladder to either quit, or demand more money to restore the compensation pecking order. 

  Unable to cope and unable to squeeze anything else out of the supply chain without triggering a veritable vendor mutiny, Wal-Mart was forced to cut hours and then, to cut jobs at the Bentonville office. 

  It all fell apart in October when the retailer slashed its guidance, triggering a harrowing decline in the stock. 

  Well don’t look now, but a beleaguered Wal-Mart is suing a beleaguered Puerto Rico after the latter’s attempt to lift government revenue by raising taxes pushed the company’s tax burden in the commonwealth to nearly 92% of net income.

  As Bloomberg reports, “Puerto Rico’s Act 72-2015 increases to 6.5 percent from 2 percent the tax on goods imported from offshore affiliates to local companies with gross revenues of more than $2.75 billion.” 

  Wal-Mart “biggest private employer and hands over more sales tax to the island government than any other business,” Bloomberg continues, before noting that the company is “asking a federal judge to declare the new measure unconstitutional and block its enforcement.”

  “The new levy raised the estimated cumulative income tax on Wal-Mart Puerto Rico Inc. to an astonishing and unsustainable 91.5% of its net income!”, the company exclaimed, in a complaint filed Friday in San Juan.

  We’re sure they’ll be any number of amusing anecdotes to report once this case gets going, but for now we’ll simply close by saying that if you work at a Wal-Mart in Puerto Rico, you probably shouldn’t expect much in the way of wage gains from this point forward because apparently, the island is so broke that it now needs the company to turn over nearly all of its profits in order to make sure you have public services.

  

  

  

  

  

• What Polarized Politics Teaches Us About Stock Market Uncertainty

  Excerpted from Ben Hunt's Epsilon Theory blog,

  It’s important to respect the power of econometric models. It’s important to work with econometric models. But I don’t care who you are … whether you’re the leader of the world’s largest central bank or you’re the CIO of an enormous pension fund or you’re the world’s most successful financial advisor … it’s a terrible mistake to trust econometric models. But we all do, because we’ve been convinced by modeling’s henchman, The Central Tendency.

  What is the The Central Tendency? It’s the overwhelmingly widespread and enticing idea that there’s a single-peaked probability distribution associated with everything in life, and that more often than not it looks just like this:

  

  It’s our acceptance of The Central Tendency as The Way The World Works that transforms our healthy respect for econometric modeling into an unhealthy trust in econometric modeling. It’s what creates our unhealthy trust in projections of asset price returns. It’s what creates our unhealthy trust in projections of monetary policy impact.

  It also creates an unhealthy trust in the mainstream tools we use to project risk and reward in our investment portfolios.

  I’m not saying that The Central Tendency is wrong. I’m saying that it is (much) less useful in a world that is polarized by massive debt and the political efforts required to maintain that debt. I’m saying that it is (much) less useful in a market system where exchanges have been transformed into for-profit data centers and liquidity is provided by machines programmed to turn off when profit margins are uncertain.

  Polarized Politics

  The world is awash in debt, with debt/GDP levels back to 1930 levels and far higher than 2007 levels prior to the Great Recession. What’s different today in 2015 as compared to the beginning of the Great Recession, however, is that governments rather than banks are now the largest owners (and creators!) of that debt.

  Governments have more tools and time than corporations, households, or financial institutions when it comes to managing debt loads, but the tools they use to kick the can down the road always result in a more polarized electorate. Why? Because the tools of status quo debt maintenance, particularly as they inflate financial asset prices and perpetuate financial leverage, always exacerbate income and wealth inequality. I’m not saying that’s a good thing or a bad thing. I’m not saying that some alternative debt resolution path like austerity or loss assignment would be more or less injurious to income and wealth equality. I’m just observing that whether you’re talking about the 1930s or the 2010s, whether you’re talking about the US, Europe, or China, greater income and wealth inequality driven by government debt maintenance policy simply IS. 

  Greater income and wealth inequality reverberates throughout a society in every possible way, but most obviously in polarization of electorate preferences and party structure. Below is a visual representation of increased polarization in the US electorate, courtesy of the Pew Research Center. Other Western nations are worse, many much worse, and no nation is immune.

  

  There’s one inevitable consequence of significant political polarization: the center does not hold. Our expectation that The Central Tendency carries the day will fail, and this failure will occur at all levels of political organization, from your local school board to a congressional caucus to a national political party to the overall electorate. Political outcomes will always surprise in a polarized world, either surprisingly to the left or surprisingly to the right. And all too often, I might add, it’s a surprising outcome pushed by the illiberal left or the illiberal right.

  The failure of The Central Tendency occurs in markets, as well.

   

  Below is a chart of 3-month forward VIX expectations in December 2012, as the Fiscal Cliff crisis reared its ugly head, as calculated by Credit Suisse based on open option positions. If you calculated the average expectations of the market (the go-to move of all econometric models based on The Central Tendency), you’d predict a future VIX price of 19 or so.

   

  

   

  But that’s actually the least likely price outcome! The Fiscal Cliff outcome might be a policy surprise of government shutdown, resulting in a market bearish equilibrium (high VIX). Or it might be a policy surprise of government cooperation, resulting in a market bullish equilibrium (low VIX).

   

  But I can promise you that there was no possible outcome of the political game of Chicken between the White House and the Republican congressional caucus that would have resulted in a market “meh” equilibrium and a VIX of 19.

  If you want to read more about the Epsilon Theory perspective on polarized politics and the use of game theory to understand this dynamic, read “Inherent Vice”, “1914 Is the New Black”, and “The New TVA”.

  

  

  

  

  

• Iraq May Seek "Direct Military Intervention From Russia" To Expel Turkish Troops

  Turkey just can’t seem to help itself when it comes to escalations in the Mid-East. 

  First, Erdogan intentionally reignited the conflict between Ankara and the PKK in an effort to scare the public into nullifying a democratic election outcome. Then, the Turks shot down a Russian warplane near the Syrian border. Finally, in what very well might be an effort to protect Islamic State oil smuggling routes, Erdogan sent 150 troops and two dozen tanks to Bashiqa, just northeast of Mosul in a move that has infuriated Baghdad. 

  We discussed the troop deployment at length on Saturday in “Did Turkey Just Invade Iraq To Protect Erdogan’s ISIS Oil Smuggling Routes?,” and you’re encouraged to review the analysis in its entirety, but here was our conclusion:

  The backlash underscores the fact that Iraq does not want help from NATO when it comes to fighting ISIS. Iraqis generally believe the US is in bed with Islamic State and you can bet that Russia and Iran will be keen on advising Baghdad to be exceptionally assertive when it comes to expelling a highly suspicious Turkish presence near Najma. 

  You’re reminded that Iran wields considerable influence both politically and militarily in Iraq. The Iraqi military has proven largely ineffective at defending the country against the ISIS advance and so, the Quds-backed Shiite militias including the Badr Organisation, Asaib Ahl al-Haq and Kataib Hezbollah have stepped in to fill the void (see our full account here).

  Of course that means that the Ayatollah looms large in Iraq and when it comes to loyalty, both the militias and a number of Iraqi lawmakers pledge allegiance to Tehran and more specifically to Qassem Soleimani. The point is this: Iran is not going to stand idly by and let America and Turkey put more boots on the ground in Iraq which is why just hours after Ash Carter announced that The Pentagon is set to send in more US SpecOps, Kataib Hezbollah threatened to hunt them down and kill them. Not coincidentally, PM Haider al-Abadi rejected a larger US troop presence just moments later. 

  Now, Abadi has given Turkey 48 hours to get its troops out of Iraq or else.

  Or else what?, you might ask. Well, or else Baghdad will appeal to the UN Security Council where Russia and China would likely support the Iraqi cause.

  But that’s a little too meek of a solution for some Iraqi politicians including Hakim al-Zamili, the head of Iraq’s parliamentary committee on security and defense who said on Sunday that Iraq “may soon ask Russia for direct military intervention in response to the Turkish invasion and the violation of Iraqi sovereignty.”

  “Iraq has the ability to repel these forces and drive them out of Iraqi territory. We could also request Russia to intervene militarily in Iraq in response to Turkish violation of Iraqi sovereignty,” he told Al-Araby al-Jadeed. 

  Well guess what? Hakim al-Zamili is a somebody.

  He was arrested in 2007 by Iraqi and American troops while holding a high ranking office in the Health Ministry. Zamili was charged with sending millions of dollars to Shiite militants who subsequently kidnapped and killed Iraqi civilians. Sunni civilians. More specifically, the US suspected Zamili “of using his position to run a rogue unit of the Mahdi Army, the Shiite militia that claims loyalty to the cleric Moktada al-Sadr,” The New York Times reported at the time, adding that he was accused of “flooding the Health Ministry’s payroll with militants, embezzling American money meant to pay for Iraq’s overworked medical system and using Health Ministry ‘facilities and services for sectarian kidnapping and murder.”

  Here’s an interesting account from NPR ca. 2010, after parliamentary elections: 

  At Friday prayers yesterday in Baghdad’s Sadr City slum, one man in a gray suit seemed to attract as much attention as the preachers speaking over the P.A.

   

  After a sermon that praised both armed and political resistance to the occupation of Iraq, many from the crowd of thousands rushed up to the front to congratulate Hakim al-Zamili, who appears to have won a resounding mandate as a member of parliament from Baghdad.

   

  Though a celebrity here in Sadr City, many Iraqis call him a war criminal. Zamili was the deputy health minister during the ramp-up to Iraq’s civil war, and he’s accused of turning the ministry’s guards into a Shia death squad, kidnapping and killing hundreds of Sunnis. Another ministry official who denounced Zamili disappeared and is presumed dead.

   

  After being arrested and held over a year by the Americans, an Iraqi court acquitted Zamili after a brief trial.

   

  “If I were really involved in those crimes, the courts would have convicted me,” Zamili said. 

  Right.

  Anyway, the point is that as we’ve been saying for months, Shiite politicians along with Iran-backed militias now control Iraq, which has essentially been reduced to a colony of Tehran.

  There will be no unilateral decisions on the part of the US or Turkey to place troops in the country without pushback from Baghdad and everyone involved knows that when Baghdad pushes back, it means Iran disapproves.

  As Zamili’s warning makes clear, Iraq (and thereby Iran) won’t be shy about calling in the big guns from Moscow when they feel the situation demands it – and the militas won’t be shy about targeting the “invaders.”

  “Turkish interests in Iraq will now be a legitimate target because of Turkey’s assault on Iraqi territories,” Kata’ib Sayyid al-Shuhada, one of the Shia militias of the Popular Mobilisation said in a statement. Similarly, Harakat al-Nujaba called Turkey “a terrorist state.” You’re reminded that these groups have a reputation for fearing no one other that Khamenei himself. Not the US, not Turkey, not ISIS, no one:

  

  We close with what Zamili said after the establishment of the Baghdad-based joint intelligence cell comprising officials from Iran, Russia, Syria, and Iraq: 

  “The idea is to formalize the relationship with Iran, Russia and Syria. We wanted a full-blown military alliance.”

  *  *  *

  Bonus color from ISW:

  The recent deployment into northern Iraq differs from past deployments in three ways. First, Turkey does not appear to have undertaken the action in order to contain the PKK directly, as there is no significant PKK activity in or around Bashiqa. The base is also located too far from other priority territory for the PKK, including Sinjar west of Mosul, to be used as an effective staging point for future operations against the PKK. Second, the Turkish battalion, deployed to an area within the Disputed Internal Boundaries (DIBs) – areas that have substantial Kurdish populations but remain outside of Iraqi Kurdistan. Turkey likely intends to support Barzani and the KDP in securing control over the DIBs while also positioning its own forces to better influence what forces participate in the future operation to recapture Mosul, formerly an ethnically diverse city including Arabs, Kurds, and Turkmen. Third, the Turkish deployment came only four days after Defense Secretary Ashton Carter announced that additional U.S. Special Operations Forces (SOF) would deploy to Iraq to conduct raids and intelligence-gathering in Iraq and Syria, an announcement that generated denunciations from the Shi’a political parties and threats of no-confidence votes against the Prime Minister, forcing PM Abadi to reject publicly the presence of foreign ground troops in Iraq. The Turkish troops thus deployed at a particularly sensitive time. 

  Turkey also maintains close connections with key players in northern Iraq. Turkey has cooperated with Kurdistan Regional President Masoud Barzani since 2013, particularly over crude oil exports through the Kirkuk-Ceyhan pipeline. Barzani and Turkey share a mutual distrust of the PKK, and the KDP currently competes with the PKK for control over Sinjar district. Turkey also possesses close relations with former Ninewa Province governor Atheel al-Nujaifi, who maintains a camp of former local police and Arab fighters in Bashiqa called the “National Mobilization.” Turkish support was essential for Atheel al-Nujaifi’s elevation to the Ninewa governorship in 2009. Finally, Turkey has close relations Osama al-Nujaifi, Atheel’s brother and the leader of the Sunni Etihad bloc in the Council of Representatives (CoR). Turkey will likely leverage these connections in order to secure greater control over what armed and political actors participate in operations to recapture Mosul. In particular, Turkey will likely support the Nujaifis over Sunni Arabs with whom Turkey has not cultivated relations.

  Turkey’s deployment of troops sparked strong rejection from the full spectrum of Iraqi political actors. Iraqi Prime Minister Haidar al-Abadi and Iraqi President Fuad Masoum strongly condemned the deployment as a violation of Iraqi sovereignty and demanded that Turkey conduct an immediate withdrawal. All major Shi’a parties denounced the deployment as a violation of Iraqi sovereignty, with a leading Sadrist official calling for Iraqi airstrikes on the Turkish force if it did not depart the country. Another pro-Maliki CoR member suggesting that “a Russian force” could intervene to expel the Turkish battalion.

  The U.S. will not likely press Turkey on the issue, as anonymous U.S. defense sources merely indicated that the U.S. was “aware” of Turkey’s intentions. Iranian proxy militias, however, could challenge Turkey elsewhere in the country. Iran likely ordered Iranian proxy militias to kidnap 18 Turkish construction workers on September 2 in order to pressure Turkey into ordering Turkish-backed rebels to cooperate with a ceasefire around the besieged Shi’a majority towns of Fu’ah and Kifriya in northern Syria. The kidnappings provided sufficient leverage against Turkey and the kidnapped workers were released after Syrian rebels enacted a local ceasefire. Iran could pursue similar actions against Turkish assets in Baghdad or in southern Iraq.

  This situation may escalate further if Iran views the deployment as threatening its vital strategic objectives in Iraq or Syria. Iran rejects any foreign forces other than their own on Iraqi soil and backs the Patriotic Union of Kurdistan (PUK), Barzani’s rival in Iraqi Kurdish politics trying to contest his control over the Kurdistan regional presidency. Iranian proxies also recently sparred violently with the Peshmerga in Tuz Khurmato in eastern Salah al-Din proxies on November 12.

  Shi’a parties will use the episode to pressure PM Abadi to strongly reject foreign intervention, particularly if reports that Turkey and Barzani signed an agreement to establish a permanent Turkish base in Bashiqa are correct. These calls could complicate U.S. plans to additional Special Operations Forces (SOF) to Iraq to as a “specialized expeditionary targeting force” that will conduct raids and intelligence-gathering in Iraq and Syria.

  

  

  

  

  

• BIS Warns The Fed Rate Hike May Unleash The Biggest Dollar Margin Call In History

  Over the past several months, one of the biggest conundrums stumping the financial community has been the record negative swap spread which we profiled first in September,  and which as Goldman most recently concluded, “has been driven by funding and balance sheet strains, especially since August.”

  

   

  Today, in its latest quarterly report, the Bank of International Settlement focused precisely on this latest market dislocation.  According to the central banks’ central bank, “recent quarters have witnessed unusual price relationships in fixed income markets. US dollar swap spreads (ie the difference between the rate on the fixed leg of a swap and the corresponding Treasury yield) have turned negative, moving in the opposite direction from euro swap spreads (Graph A, left-hand panel).”

  Given that counterparties in derivatives markets, typically banks, are less creditworthy than the government, swap rates are normally higher than Treasury yields because of the additional risk premium. Hence, the negative spreads point to a possible dislocation. One set of factors relates to supply and demand conditions in interest rate swap and Treasury bond markets. In the swap markets, forces that can compress swap rates include credit enhancements in swaps, hedging demand from corporate bond issuers, and investors seeking to lock in longer durations (eg insurers and pension funds) by securing fixed rates via swaps.

   

  In cash markets, in turn, upward pressures on yields stemmed from the recent sales of US Treasury securities by EME reserve managers. The market impact of these Treasury bond sales may have been amplified by a second set of factors that curb arbitrage and impede smooth market functioning. First, the capacity of dealers’ balance sheets to absorb rising inventory may have been overwhelmed by the amount of US Treasury bonds reaching the secondary market in the third quarter (Graph A, centre panel), causing dealers to bid market yields above the corresponding swap rates. Second, balance sheet constraints may have made it more costly for intermediaries to engage in the speculative arbitrage needed to restore a positive swap spread. Such arbitrage is sensitive to balance sheet costs because it requires leverage, with a long Treasury position funded in the repo market.

  Meanwhile, while US swap spreads hit record negative levels, in Europe the market tensions have been of a different nature:

  Ten-year swap spreads started to widen in early 2015, around the time when the Swiss National Bank abandoned its currency peg, then increased further over subsequent months (Graph A, left-hand panel). While past episodes of widening swap spreads can be attributed to credit risk in the banking sector, the most recent developments may have more to do with hedging by institutional investors. While swap rates also fell (Graph A, right-hand panel), the swap spread widened, indicating that cash market yields fell by even more. One possible explanation is that, as yields fall amid expectations of ECB asset  purchases, institutional investors with long-duration liabilities, such as insurers and pension funds, would have been under pressure to extend their asset portfolio duration by purchasing additional longer-dated bonds, possibly compressing market yields below the swap rates.

  

  And with cash markets rapidly depleting of physical inventory as a result of central bank monetization, investors have had to rely on derivatives markets, especially swaptions.

  In addition to extending portfolio duration by purchasing longer-dated bonds or entering a long-term interest rate swap as a fixed rate receiver, investors may also hedge the risk of steeply falling yields by purchasing options to enter a swap contract at a future date (swaptions). Hence, swaptions tend to become more expensive in times of stress and when investors rush to hedge duration risk.

   

  As 10-year swap rates were compressed in early 2015, the cost of such options written on euro swap rates rose by a factor of three by 20 April 2015 (Graph B, left-hand panel). Steeply rising euro rate hedging costs preceded the actual correction in yields, which started rebounding around the weekend of 18 April culminating in the so-called bund tantrum. This suggests that this year’s turbulence in fixed income markets may have had its origins in derivatives and hedging activity, with reduced market depth in cash markets exacerbating the spillover.

  Why is there reduced market depth in cash markets? Simple: because of central banks intervention and soaking up of securities. So what the BIS is effectively saying is that as a result of central bank activity, investors have been forced to transact increasingly in the derivative arena as a result of which events like the Bund flash smash from April led to major market losses for those long Bund duration in either cash or derivative markets. Since then, volatility in European government bond markets has persisted culminating with the surge in yields this past Thursday in the aftermath of the ECB’s dramatic and extensively discussed here previously “disappointment.”

  The BIS’ conclusion:

  Such volatile movements in euro area interest rate derivatives markets raise questions about smooth pricing responses in the face of possibly transient order imbalances. Of question is liquidity in hedging markets and the capacity of traditional options writers, such as banks, to provide adequate counterparty services to institutional hedgers. Looking back at the events of late April, the rise in demand to receive fixed rate payments via swaps by institutional hedgers may have run into a lack of counterparties willing to receive floating (pay fixed) rates amid sharply falling market yields. The emergence of one-sided hedging demand pressures can be gleaned from the skew in swaption pricing (Graph B, centre and right-hand panels). The skew observed for euro rates approaching the bund tantrum resembled the developments in US dollar rates in December 2008, when US pension funds rushed to hedge interest rate risk via swaptions as market yields tumbled.

  

  But while the swap dislocation in the bond market can be attributed to anything from market illiquidity, to a shortage of cash market product, to lack of willing counterparties, to HFTs, and ultimately, to encroaching central bank intervention – something we have been warnings about since 2012 – perhaps an even more important question to emerge when observing broken swap markets are recent development in FX basis swaps.

  Recall our coverage of one particular and very prominent dislocation in the space, one which we covered first in March and then again in October when we noted that the “Global Dollar Funding Shortage Intesifies To Worst Level Since 2012“.

  This is how JPM explained most recently the phenomenon which can simply be ascribed to a global dollar funding shortage:

  “continued monetary policy divergence between the US and the rest of the world as well as retrenchment of EM corporates from dollar funding markets are sustaining an imbalance in funding markets making it likely that the current episode of dollar funding shortage will persist.“

  The BIS also touched on this topic in its quarterly review, when it picked up the “policy divergence” torch from JPM and describing the ongoing USD funding shortage as follows:

  The increased likelihood of policy divergence between the US, the euro area and other major currency areas also rippled through global US dollar funding markets. Historically, cross-currency basis swap spreads – a measure of tensions in global funding markets – were virtually zero, consistent with the absence of arbitrage opportunities. Since 2008, the basis has widened repeatedly in favour of the US dollar lender, ie there is a higher cost for borrowing in dollars than in other currencies even after hedging the corresponding foreign exchange risk – conventionally recorded on a negative basis (Graph 5, left-hand panel). As such, negative basis swap spreads indicate the absence of arbitrageurs to meet heightened demand for US dollar liquidity.

  Visually:

  

  To be sure, our readers were aware of this implication of diverging monetary policy. However, thanks to the BIS, we now can add a quantitative dimension to what until recently what mostly a qualitative problem: i.e., how much is the dollar shortage as implied by the near record negative USDJPY currency basis swap spreads.

  The US dollar premium in FX swap markets widened substantially – in particular vis-à-vis the Japanese yen – after the odds of Fed tightening reached 70%. At the end of November, the basis swap spread of the Japanese yen versus the US dollar was minus 90 basis points, possibly reflecting in part the more than $300 billion US dollar funding gap at Japanese banks.

  The BIS does its best not to sound the alarm at this stunning observation:

  While funding continued to be available, such a large negative basis indicates potential market dislocations. And this may call into question how smoothly US dollar funding conditions will adjust in the event of an increase in US onshore interest rates. Similar pricing anomalies have also emerged in interest rate swap markets recently, raising related concerns.

  Indeed, once the Fed does hike rates as it now seems almost certain it will do in 10 days time, we will find out just how profound the USD funding shortage truly is. Readers may recall that in 2009 we cited a BIS report which said that “were all liabilities to non-banks treated as short-term funding, the upper-bound estimate [of the dollar short] would be $6.5 trillion”.

  

   

  This time around, as a result of the dramatic increase in USD-funded debt around the globe in the past 5 years, it will certainly be far greater.

  And, as a further reminder, the last time a global USD margin call was launched with the failure of Lehman, the Fed had to unleash an unprecedented global bailout by way of virtually limitless swap lines opened with every central bank that has a shortfall in USD exposure.

  

   

  As a result, our only question for the upcoming Fed rate hike is how long it will take before the Fed, shortly after increasing rates by a modest 25 bps to “prove” to itself if not so much anyone else that the US economy is fine, will be forced to mainline trillions of dollars around the globe via swap lines for the second time in a row as the world experiences the biggest USD margin call in history.

  

  

  

  

  

• An Open Letter Calling For The Resignation Of Saudi-Sympathizing Politicians

  Submitted by SM Gibson via TheAntiMedia.org,

  Whether you are Nobel Peace Prize recipient Barack Obama or unabashed warmonger John McCain, if you hold a federally elected office in the United States and are calling for more military action in the Middle East without first addressing the crimes against humanity carried out by Saudi Arabia, you are a fraud and should resign – effective immediately.

  I don’t mean resign next week or later today. I mean now. Stop what you’re doing, write out a letter (or get a staff member to write one for you), and give a press conference. I don’t care how you do it — just resign. Don’t put your name on the ballot for another term in Congress, don’t seek higher office, and certainly don’t run for president. Stop the charade. You do not represent your constituents. You are a disgrace. Resign.

  Why do you glorify spending our tax dollars on establishing a military presence in Syria and Iraq for your stated purpose of obliterating ISIS – a group of ‘radical Muslims’ who barbarically behead human beings — all while the Kingdom of Saudi Arabia (KSA) has been responsible for at least 152 public beheadings of their own since January 1, 2015? If you don’t consider a nation that sentences a man to decapitation for writing love poems (which Saudi Arabia recently did) to be “radical,” then you are deranged. Why do one group’s human rights violations warrant swift military action while another group that commits the same transgressions is heralded as an ally?

  How stupid do you think “we the people” are?

  The world can see you smiling through your scowl as we become wise to the fact that you are using the instability created by ISIS as an excuse to overthrow Assad.

  You may retort that President Obama has repeatedly stated there will be no boots on the ground in Syria (even though there have been) — and how dare I claim that ISIS is being used as a tool for American interests? Aside from the 44th president’s words not being worth much, Obama has advanced the U.S. government’s policy to train and arm “moderate” Syrian rebels in the region — while simultaneously launching airstrikes on their behalf. You and I both know this practice has undeniably resulted in the perpetual arming and strengthening of ISIS. And since it is no secret that the U.S. wants Bashar al-Assad out of power as the leader of Syria, it is glaringly obvious you are willing to tolerate a few radical jihadis running amok over in the Middle East as long as your interests are served as a result of their presence. Although we can agree Assad is a dictator who has committed many ruthless acts of his own, we both know this is not why you wish for him to be ousted, nor is it a legitimate reason to overthrow the Syrian government.

  If any of you truly cared about ending atrocity and oppression, you would be speaking out against the vicious Saudi regime. Instead, you welcomed King Salman with open arms in September when he and his entourage rented out all 222 rooms of the elegant and costly Georgetown Four Seasons during an official state visit to meet with President Obama at the White House. You allowed the Pentagon to honor King Abdullah at the time of his passing in January, when the DoD sponsored an essay contest as a “tribute to the life and leadership” of the brutal monarch. Instead, you stay quiet as Saudi Arabia is elected to chair the UN Human Rights Council (a decision beyond ludicrous). Instead, you remain silent as the U.S. State Department approves the sale of $1.3 billion worth of air-to-ground munitions, such as laser-guided bombs and “general purpose” bombs, to the kingdom just last month — not to mention the $90 billion worth of Saudi arms sales you approved between 2010 and 2015.

  What is Saudi Arabia doing with the legions of weapons you are supplying to them? They are using them on civilians. Of the 5,700 people killed in Yemen by Saudi-led forces since March 26, over 2,500 have been civilians, including 830 women and children, according to the United Nations.

  In October, KSA threatened its own citizens with the death penalty for spreading ‘rumors’ about the government on social media. The kingdom also recently sentenced multiple activists to death by crucifixion for protesting — including 20-year-old Ali Mohammed al-Nimr, who was 17 at the time of his arrest.

  Also, you know how you have used “9/11″ as an excuse to carry out every single one of your constitutional shredding whims over the past 14 years? You are aware the government says 15 of the 19 hijackers on 9/11 were Saudi nationals, right? Your response? Invade Iraq — a country that had nothing to do with the attacks. Meanwhile, the Saudi royal family enjoyed a day out on the farm with George W. Bush at his Crawford, Texas ranch.

  You have also helped block the release of 28 redacted pages from a congressional intelligence report said to contain damning information implicating Saudi complicity in the attacks on 9/11. And of course, you use the tired line of “national security” to keep those pages suppressed . . . because 9/11, of course. Can you see the irony here?

  Republicans, you love to find reasons to scold the president, but I have never once heard one of you criticize him for accepting around $1.35 million in gifts from the kingdom in 2014. That’s probably because you would have taken it, too.

  How about the front-running Democratic nominee for president of the United States, Hillary Clinton? You, too, are someone who has benefitted greatly from a relationship with Saudi Arabia.

  According to Mother Jones:

  “In 2011, the State Department cleared an enormous arms deal: Led by Boeing, a consortium of American defense contractors would deliver $29 billion worth of advanced fighter jets to Saudi Arabia, despite concerns over the kingdom’s troublesome human rights record. In the years before Hillary Clinton became secretary of state, Saudi Arabia had contributed $10 million to the Clinton Foundation, and just two months before the jet deal was finalized, Boeing donated $900,000 to the Clinton Foundation.”

  Although you don’t currently hold office, Hillary, you should hold yourself accountable (yeah, fat chance) and drop out of the race. And you should do it today.

  We both know the Saudi Arabian Embassy keeps Tony Podesta, the brother of Hillary Clinton’s campaign chairman, on retainer. Podesta is head of one of the largest Republican Super PACs in the U.S. and chairs a law firm with deep ties to the Obama administration. Ignacio Sanchez, one of Jeb Bush’s top fundraisers, also lobbies on behalf of the Saudi Kingdom. But you don’t see a conflict of interest, I’m sure.

  During King Salman’s visit in September, the Kingdom helped sponsor lavish galas at Washington’s Ritz Carlton and the Andrew Mellon Auditorium. These affairs were attended by chief executives of Lockheed Martin and General Electric, as well as the chairman of Marriott International. Do you see a problem, yet? At all?

  How about Qorvis, the PR firm that has openly worked for the Saudis since, ironically, a few months after 9/11. They must do something for the $7 million they received from the Saudi government between April and September of this year alone. How much influence does that purchase? The $2,000 Qorvis paid to former Republican congressman Mark Kennedy for a speaking engagement is nothing compared to what is spent to garner airtime on cable news networks — something Saudi officials have been doing more and more regularly.

  Politicians who hypocritically align themselves with figures as merciless as those they publicly rebuke have shown themselves to be untrustworthy. They should represent no one. Working alongside the Saudis while bombing other countries for similar actions demonstrates your shameful willingness to go along with whatever self-serving agenda is presented to you. You were for sale but now have sold, and the time has arrived for you to pay up.

  Should you continue your flagrant support of Saudi Arabia by way of foreign aid and weapons sales, you are no longer to be trusted to hold an elected position of influence. You should therefore resign, effective immediately.

  The question is: Is your allegiance to the people of the United States, or are you beholden to another kingdom?

  A petition has been started requesting the resignation of every single federally elected U.S.official continuing to support the brutal Saudi regime. You can add your name in support here.

  

  

  

  

  

• Previewing Obama's 8:00 PM Speech On Gun Control

  Two days ago we reported that in the aftermath of the San Bernardino mass shooting, two democrats had emerged with diametrically opposing proposals how to respond to the resurgent threat of domestic terrorism: one, a Sheriff in an uptown New York state county proposed that all handgun owners who are licensed to carry, should “PLEASE DO SO” in order to prevent future terrorist incidents; while another, New York City mayor de Blasio urged the city’s pension funds to divest their holdings in stocks of US gunmakers.

  As we concluded then, “these two dramatically opposing reactions to the same “terrorist” event, which one can claim the US brought on itself with the CIA’s creation of the Islamic State as a clandestine method to overthrow Syria’s president al Assad, and by two people who are both democrats, shows just how ridiculous the gun control debate is set to become in the coming days.”

  But more importantly, we said that at this point, “if we had to forecast the final outcome, we would say that just as we accurately predicted the terrorist events in Paris two months earlier, so this time the “terrorist attacks” together with comprehensive 24/7 TV coverage, in the US will get worse and worse until one of two things happen, if not both: the NSA will see all of its surveillance powers reinstated legally in the coming months, while the US will see increasingly more escalating “attacks” until ultimately Obama’s crackdown on gun sales and possession hits its breaking point and the president’s gun confiscation mandate is finally executed. We hope we are wrong.”

  Not even 24 hours later the New York Times confirmed that the push for gun control is about to take a major leg higher with its first front-page Op-Ed since 1920 in which it called to “End the Gun Epidemic in America.”

  Parallel to that, the NSA went on a “passive-aggressive” marketing campaign yesterday when the AP reported that the U.S. government‘s ability to review and analyze five years’ worth of telephone records for the married couple blamed in the deadly shootings in California lapsed just four days earlier when the National Security Agency’s controversial mass surveillance program was formally shut down.

  As the AP added, under a court order, those historical calling records at the NSA are now off-limits to agents running the FBI terrorism investigation even with a warrant.  Instead, under the new USA Freedom Act, authorities were able to obtain roughly two years’ worth of calling records directly from the phone companies of the married couple blamed in the attack. The period covered the entire time that the wife, Tashfeen Malik, lived in the United States, although her husband, Syed Farook, had been here much longer. She moved from Pakistan to the U.S. in July 2014 and married Farook the following month. He was born in Chicago in 1987 and raised in southern California.

  And while FBI Director James Comey declined to say Friday whether the NSA program’s shutdown affected the government’s terrorism investigation in California, the implications was clear: if the American people want “safety from terrorism”, they better say goodbye to privacy, and restore the NSA in the process.

  We are confident that this will happen one way or another, and that quite soon even though the most token of inquiry would reveal that the NSA’s entire premise is nothing but a lie:

  No mention from AP that the carriers also retain call records, often for more than 5 years, https://t.co/9ysYoayi1C pic.twitter.com/vwGETqXDaf

  — Christopher Soghoian (@csoghoian) December 5, 2015

  However, the biggest validation of our prediction for a major escalation in Obama’s crackdown against gun sales and ownership came from Obama himself which last night announced that Obama would hold an impromptu address to the nation at 8:00 pm on the “threat of terrorism and keeping the American people safe.” Translation: another surge in gun sales is imminent as fears of gun confiscation rise to unprecedented heights.

  Tomorrow at 8pm ET, @POTUS will address the nation on the threat of terrorism and keeping the American people safe ? https://t.co/b68B45RuKg

  — The White House (@WhiteHouse) December 5, 2015

  What will Obama say?  In an appearance on NBC’s “Meet the Press,” Attorney General Loretta Lynch gave advance hints about the remarks President Barack Obama will make when he speaks to the country Sunday evening about the recent terrorist attack in San Bernardino.

  “What you’re going to hear from him is a discussion about what government is doing to ensure all of our highest priority — the protection of the American people,” the attorney general said.

  She also said that he’ll speak on the actions the United States has taken to keep the homeland safe since the attacks in Paris last month. But there will be an element of politics to the speech. President Obama will do more than just call for calm, he will ask “Congress to review measures and take action.”

  Lynch’s staff later confirmed that the president will specifically call on Congress to review certain gun control measures.

  And since Congress has long ago given up on taking action in a world in which the Fed’s Chairman/woman is expected to “get to work“, it will again be up to an Obama executive order to restore peace to the land by continuing his crusade against the Second amendment.

  In short, the latest steps in Obama’s crusade to disarm the US and make even legal purchases of guns as difficult as possible, even though limiting the legal means of purchasing guns will have absolutely no impact on gun violence in the US – for the perpetual case study, see Chicago. That, however, does not mean that Obama won’t try or succeed.

  That said, while the content of Obama’s speech may now be well known, what will likely be the entertainment highlight of the night is not Obama as much as the man who remains the biggest “Republican” contender for the role of Obama’s successor: Donald Trump, who has promised to heckle Obama’s entire speech even before it begins.

  I will be live-tweeting President Obama’s prime-time speech tonight starting at 7:50 P.M. (Eastern).Will he finally state the real problems?

  — Donald J. Trump (@realDonaldTrump) December 6, 2015

  

  

  

  

  

• Turkey Detains Russian Ships In Black Sea, Blasts Moscow For Brandishing Rocket Launcher In Strait

  Exactly a week ago, we warned that Turkey does have one trump card when it comes to dealing with an angry Russian bear that’s hell bent on making life miserable for Ankara in the wake of Erdogan’s brazen move to shoot down a Russian Su-24 near the Syrian border. Turkey, we explained, could move to close the Bosphorus Strait, cutting one of Moscow’s key supply lines to Latakia. 

  We went on to explain, that such a move would probably be illegal based on the 1936 Montreux Convention, but as Sputnik noted, “in times of war, the passage of warships shall be left entirely to the discretion of the Turkish government.” 

  Obviously, Turkey and Russia haven’t formally declared war on one another, but the plane “incident” marked the first time a NATO member has engaged a Russian or Soviet aircraft in more than six decades and given the gravity of that escalation, one would hardly put it past Erdogan to start interfering with Moscow’s warships, especially if it means delaying their arrival in Syria where the Russians are on the verge of restoring an Assad government that’s Turkey despises. 

  Well sure enough, the tit-for-tat mutual escalation that’s ensued since the Su-24 crash has spilled over into the maritime arena with Moscow and Ankara detaining each other’s ships. 

  After five Turkish vessels were held at the port of Novorossiysk for “inspections,” Turkey retaliated on Friday by holding four Russian ships at the Black Sea port of Samsun. The following table reveals a hilarious list of the Russian vessels’ alleged infractions which apparently include fire safety violations, pollution prevention violations, and problems with “life saving appliances.”:

  

  One of the vessels – the cargo ship Crystal – has yet to be released. 

  “Six ships with a Russian flag were checked at Samsun Port on Dec. 5. The ships were found to be in compliance with Port State Control (PSC) rules, a series of international standards that all ships are required to meet, but some problems were subsequently detected in four of the ships,” Hurriyet says, adding that “three of the ships consequently met the requirements and were permitted to leave, but the remaining vessel has not yet been permitted to depart.” 

  The Crystal apparently lacks the “required documents.”

  Obviously, Russia and Turkey are engaged in a bit of petty mutual escalation here, but it’s worth noting that Samsun isn’t far from the Bosphorus: 

  

  And while Turkey now appears content to harrass Russian cargo vessels, one shouldn’t discount the possibility that Erodgan will look to do something more provocative now that it looks like the UN will ultimately be dragged into the ISIS oil smuggling debate. 

  Indeed, Moscow seems to be taking the Bosphorus issue quite seriously because as Hurriyet reported just hours ago, when the Russian warship Caesar Kunikov made its way through the strait on Saturday, a Russian soldier stood on deck with a shoulder ground-to-air missile at the ready. 

  

  Turkish Foreign Minister Mevlut Cavusoglu’s response: “For a Russian soldier to display a rocket launcher or something similar while passing on a Russian warship is a provocation. If we perceive a threatening situation, we will give the necessary response.”” Indeed.

  And meanwhile, three NATO warships have dropped anchor off Istanbul’s Sarayburnu coast: Portugal’s F-334 NRP Francisco de Almeida, Spain’s F-105 ESPS Blaz de Lezo, and Canada’s FFG-338 HMCS Winnipeg.

  

  

  

  

  Source: Bosphorus Naval News

  

  

  

  

  

• Extreme Gold Positioning Grows As Hedge Funds Add To Record Shorts

  With an all time high of 293 ounces of paper per ounce of registered physical gold…

  

   

  …it appears hedge funds continue to ignore systemic risk and surging physical demand, following the trend lower in paper gold prices by adding to already record short positions in gold last week. With the speculative world near-record long the USDollar and record short gold, how much longer can the status quo boat can remain upright with so many on the same side.

  

   

  The normal market position is for speculators, such as hedge funds, to be net long, averaging about 110,000 contracts. But as GoldMoney details,

  Only twice since the Commitment of Traders disaggregated data has been made available has this condition not been true: last July and today. The market's sentiment is indeed at an extreme, making the paper markets vulnerable to a sharp correction of trend. The problem, as with all bubbles, is that we know this must end soon and violently, but we don't know at what level prices will revert.

   

  Meanwhile, demand for physical metal notches up on every markdown. The reason this can occur and prices still fall is that there is a large body of above-ground stock in vaults to draw down. However, the stock in western vaults has been depleted by accelerating Asian demand, far in excess of the sum of mine production and scrap. Since 2011, the Chinese public alone have taken delivery of 8,645 tonnes of gold, during which time annual demand has more than doubled.

   

  It is important to note that Asian buyers are savers, rather than investors. This distinction is crucial: a saver invests for the long-term and is only interested in value. Investors nowadays are interested in a shorter time horizon, are generally unconcerned with value, and will only buy into a rising trend.

  Furthermore, as Acting-Man.com's Pater Tenebrarum explains, even while gold’s fundamental price according to Keith Weiner’s calculations (in which he compares spot to futures prices) stands some $140 above the current market price (as of the end of last week), futures market speculators have turned more bearish on gold than at any time in the past 13 years.

   

  

  When there is great unanimity among traders about a market’s direction, they are very often going to be proved wrong – at least in the short to medium term (i.e., over time periods lasting from weeks to months). The caveat is that even more pronounced positioning extremes have occurred in a few short time periods during the 1980s and the 1990s, and there is obviously no law that says this cannot happen again.

   

  

  Last week, the smallest net speculative long position since January of 2002 was reported (this chart shows the net hedger position, which is the inverse of the net speculative position) – click to enlarge.

   

  However, it is still quite noteworthy that speculators as a group are more bearish on gold today than they were at the lows of its 20 year long secular bear market in 1999-2000. This definitely means one thing: once a rally does get underway, there is going to be a lot of fuel to support it as this extreme in pessimism unwinds. Gold stocks meanwhile continue to diverge positively from gold and silver, just as they have exhibited persistent negative divergences near the 2011 – 2012 highs.

  Here are a few more charts illustrating the current situation; first different ways of charting the net positions of speculators and hedgers:

   

  

  Net speculator and hedger positions, as well as open interest in bar chart form – click to enlarge.

   

  The next chart shows the very same thing, but trader positions are further dehomogenized, with small and large speculators as well as hedgers shown separately in a line chart. Open interest is charted as a line as well. Open interest in COMEX gold futures is actually historically quite large at the moment.

   

  

  Gold futures market positioning dehomogenized further – click to enlarge.

   

  The Bullish Consensus Compared to the 1999-2000 Lows

  Sentimentrader has created the so-called Optimism Index, or Optix for short, which is an average of the most popular and well-known sentiment surveys and positioning data. From the web site’s description of the indicator:

  “To calculate this gauge of public opinion, we have created an index based on many of the established surveys currently in existence, some of which are noted below, along with other measures of sentiment, such as from the options and futures markets. The combination of that data is the foundation of the Optimism Index, or Optix.

   

  No matter what population the survey monitors, it tends to correlate very highly with all the other populations. People tend to think alike, and it’s rare to see any of the surveys diverge too far from all the others. The correlations among them are very high, and have been consistently so for many years.

   

  Like most sentiment data, this one is a contrary indicator. When optimism becomes too high, we should look for prices to stall out or decline; when it is too low, we should look for rallies.

   

  When the Optix moves above the red dotted line in the chart, it means that compared to other readings, we’re seeing a statistically extreme value. The bands are based on the past few years of trading, but you also want to look at the absolute level – if it’s at 90%, then there’s no question we’re seeing an historic level of bullish opinion. Watch for readings above 80% (or especially 90%) to spot those dangerous times when the public is overly enthusiastic about a commodity.

   

  Conversely, when the Optix moves below the green dotted line, then the public is too pessimistic about the commodity’s prospects for further gains compared to their opinion over the past year. Looking for absolute readings under 20% (or especially 10%) can lead to good longer-term buying opportunities.”

   

  

  The Gold Optix readings since mid 2013 are among the lowest in history. On average they are far more extreme than those recorded at the secular bear market lows in 1999-2000. The most recent reading showing bullish consensus of a mere 14% is only 6 points above the all time low recorded in late 1997 and lower than any of the readings of the 1999-2000 period (the absolute low in that time period was seen in late February 2001 and stood at 16%) – click to enlarge.

   

  As you can see, the recent period has been one of quite persistent and extreme pessimism. Since sentiment is largely a function of price movements, one must of course not overestimate its meaningfulness. However, one thing is certain: rare and noteworthy extremes tend to at least have short to medium term significance. Once a long string of extreme readings has been recorded, the probability that they will prove to be of long term importance rises strongly.

  This is especially so given the fact that gold is currently approaching an important technical support area in the $1,040 to $1,050 region (the March 2008 high). Moreover, there are actually many parallels to the 1999-2000 period, most notable among them a rising stock market combined with ever greater weakness in junk bonds, a tightening Fed and concomitant dollar strength, and a flattening yield curve.

   

  

  The flattening yield curve, illustrated by the ratio between 10 and 2 year treasury note yields. In the short term, this flattening is actually quite bearish for gold, but at the same time it is actually long term bullish. This is so because it will ultimately trip up the echo boom and the economic recovery (such as it is), and bring about a reversal of the Fed’s current monetary policy stance – click to enlarge.

   

  The next chart shows what has happened in terms of Fed policy and the dollar in 1999-2000 compared to 2014-2015. This may be helpful in terms of providing a potential road-map:

   

  

  Fed policy, the dollar and gold in 1999-2000 vs. 2014-2015 – click to enlarge.

   

  Conclusion: As we have pointed out on previous occasions, it is time for both traders and investors to pay very close attention to this market. What could turn out to be a major opportunity is slowly but surely taking shape.

  *  *  *

  After this week's shake-out of USD longs courtesy of Draghi, one wonders if the gold squeeze is about to begin?

  

  

  

  

  

• ISIS Makes Major Move In Yemen, Assassinates Aden's Governor After Executing Two Dozen Houthis

  One point we’ve been keen on driving home as the war in Syria intensifies is that while the sheer number of combatants and the overt involvement of at least seven world powers certainly means that among the many conflicts raging in the Mid-East, the war in Syria is the fight that matters most for the non-Arab world, it’s important not to miss the forest for the trees.

  That is, it’s critical to see the bigger picture here, and that entails understanding how Syria is related to the conflicts raging in Iraq, Yemen, and to a lesser extent, Afghanistan. Iran is determined to expand its regional influence. Tehran is the power broker in Iraq, Syria, and Lebanon and it’s no coincidence that the Houthis in Yemen are backed by the Iranians and neither is it a coincidence that Iran is rumored to be funneling weapons and money to its old enemy the Taliban in Afghanistan. This is about checking the spread of Sunni extremism and, concurrently, curtailing and diminishing Saudi influence. While Iran and the Taliban make for strange bedfellows (the militants are, after all, Sunni extremists), Tehran is determined to check the spread of Islamic State and with the IRGC, Hezbollah, and the Quds-controlled Shiite militias already fighting ISIS on two fronts (Syria and Iraq), the Ayatollah isn’t particularly thrilled about the prospect of an expanded ISIS presence on its eastern border. Supporting the Taliban in Afghanistan (with whom Iran nearly went to war in 1998), should help to check ISIS gains in the country and has the added benefit of keeping the US off guard which itself speaks to how quickly alliances can change as it was just 12 years ago that Iran assisted the US in picking Taliban and al-Qaeda targets (read more here).

  As for ISIS, the official line is that everyone is an enemy. The Taliban are led by “illiterate warlords,” al-Qaeda are “a bunch of donkeys”, the Houthis are heretics as are the Iranians, the Saudis are just plain in the way in Yemen, and everyone else is an infidel. Of course there’s no telling what the group’s leadership really thinks given the support they undoubtedly receive from any number of states governed by “nonbelievers,” but we’ll leave that aside for now. 

  Ok, so why are we telling you this? Because on Sunday, ISIS killed the governor of the Yemeni port city of Aden in what amounts to the group’s most brazen attack in the country to date. As WSJ reports, “in a statement distributed on social media and translated by the extremist-tracking SITE Intelligence Group, an Aden-based branch of Islamic State claimed responsibility for a suicide car bomb that killed governor Jaafar Saad and several of his guards as his convoy traveled through the city.”

  

  

  Sunday’s explosion could be heard about 10 km (seven miles) away,” Reuters reports. “Medics said the body of Saad and the others who were killed were burned beyond recognition.”

  In a statement ISIS said it detonated a car packed with explosives as Saad’s convoy drove by. The group promised more operations against “the heads of apostasy in Yemen”. Here’s the statement:

  

  Recall that Aden was a major battleground during the spring and it was also the site of China’s first naval rescue operation involving foreign nationals. The Houthis nearly took control of the city earlier this year after driving President Abed Rabbo Mansour Hadi out of the country, but a summer offensive by the Saudi-led, UAE- and Qatar- assisted coalition drove the rebels back. Now, the coalition wants to retake San’a. 

  As WSJ goes on to note, “Mr. Saad, a major general in Yemen’s army, was a prominent figure among pro-Saudi forces in Aden before his appointment as governor in October.” Here’s a bit more color: 

  Islamic State and al Qaeda in the Arabian Peninsula, or AQAP, have both exploited the instability to carry out attacks and make territorial gains.

   

  Numerous Islamic State branches have sprouted since the Saudi campaign began. Twin attacks by Islamic State militants on Houthi mosques in San’a killed more than 140 people in March.

   

  Islamic State attacks have targeted the Houthis and the Saudi coalition, both of which the group considers enemies.

  This comes just days after Wilayat Aden Abyan (you can identify the origin of ISIS videos by whatever comes after the word “Wilayat” in the introduction that always precedes the clip) released a video depicting the execution of around two dozen Houthis.

  We’ll spare you the footage, but here are some screenshots that should give you a decent idea of the fate that befell the men.

  

  

  

  

  

  What this suggests is that ISIS is now set to expand its influence in Yemen. Remember, the country’s proxy war is really no different in character to what’s going on in Syria. The distinction is that in Yemen, Iran is fighting via proxy while the Saudis and Qatar are there in person while in Syria, Iran has boots on the ground while the Saudis and Qatar are fighting via proxies.

  Of course one of Riyadh and Doha’s proxies in the Syrian conflict is ISIS, and as mentioned above, the group is now targeting the Saudi coalition’s support base in Aden which would seem to indicate – and this is a colorful metaphor we’ve used before – that this is but another example of Frankenstein breaking out of the lab and attacking its creators. Whether or not an expanded ISIS presence in Yemen will benefit the Saudi cause largely depends on whether the Houthis become Islamic State’s main target in the country, or whether they intend to wage a protracted war against pro-Hadi forces.

  Given the sectarian divide, we’re inclined to believe that the Houthis will get the worst of this and that’s just fine with Riyadh and Doha as anything that weakens Iran’s proxies helps to restore Hadi by default.

  And you never know, it could be that much like the cost of destabilizing Assad involves the loss of civilian lives in places like Paris and in the skies over the Sinai Peninsula, the cost of having one more anti-Houthi force on the ground in Yemen is that occasionally a few pro-Hadi government officials end up vaporized in a car bombing, because at the end of the day, covertly supporting groups like ISIS and al-Qaeda (who of course are also operating in Yemen) is a bit like raising tigers as pets – you can foster quite a bit of loyalty over time, but there’s always a chance they might kill you.

  

  

  

  

• France's Far-Right Party Leads Regional Elections With Unprecedented 30%-Plus Of Votes

  As we warned last week, Europe is about to change forever, and sure enough, Marine Le Pen's National Front party is on course for a historic result in regional elections on Sunday, winning more than 30 per cent of the vote and leading the country’s two mainstream parties. Our words from the day after the Paris attacks, when Le Pen called for "eradication" of Muslims and demanded the nation "re-arm itself," seem extraordinarlity prophetic now "if there is one 'winner' from last night's terrible events in Paris, it is France's anti-EU, anti-immigration far-right wing Front Nationale party leader Marine Le Pen."

   

  As Bloomberg headlines show, exit polls have FN in a significant lead…

  • *NATIONAL FRONT LEADS FRENCH REGIONAL VOTE, IPSOS SAYS
  • *FRANCE'S NATIONAL FRONT TAKES 30.8% OF NATIONAL VOTE: IFOP
  • *FRANCE'S REPUBLICANS TAKE 27.2% OF NATIONAL VOTE: IFOP
  • *FRANCE'S SOCIALIST PARTY TAKES 22.7% OF NATIONAL VOTE: IFOP

  Le Pen is over the moon…

  "Vive la République française ! Et vive la France !" #régionales2015

  — Marine Le Pen (@MLP_officiel) December 6, 2015

         As The FT reports,   in the first test of public opinion since the November 13 terrorist attacks, Marine Le Pen’s anti-immigration party looked set to notch up its best result since it was founded in 1972…

  President François Hollande’s Socialists and leftwing allies had just 22.3 per cent of the vote while former president Nicolas Sarkozy’s centre-right bloc had 26.4 per cent, according to the preliminary figures.

   

  Victory in at least one of France’s 13 regions – definitive results will only be known after next Sunday’s second-round vote – would be a first for the FN, helping to build momentum as it looks to the 2017 presidential contest.

   

  Opinion polls before the vote suggested the party could come top in as many as six of France’s 13 regions in Sunday’s first round.

   

  The election, to be completed in a second round next Sunday, will decide the make-up of regional governments, which have power over issues such as local transport, airports, ports and some schools.

  The result provides a sense of the national political mood barely 18 months before the presidential election.

  “Taking control of even a single region in these elections would be an unprecedented achievement,” said James Shields, professor of French politics at Aston University.

  “This is the first test of public political opinion since the terrorist attacks of 13 November. It’s also the last opportunity to gauge the standing of political parties and potential candidates some 16 months before the critical presidential elections of 2017.

  “Though essentially about regional governance, these elections are important as a barometer of the political climate in France as we begin to near the end of President Hollande’s term of office.”

  Mr Hollande, whose Socialist party holds 12 of the 13 regions, has seen his popularity rise from record lows since the attacks… but Le Pen's success will force an uncomfortable alliance…

  *  *  *

  Founded by Jean-Marie Le Pen in 1972, the FN has long been associated with anti-Semitism. As recently as April this year, Mr Le Pen, father of Marine, sparked a family feud as he defended a past comment that Nazi gas chambers were “a detail” of history.

  But Ms Le Pen, the party’s leader since 2011, has tried to “detoxify” the FN’s image and to bring it more into the mainstream. As part of that process, she has started to push other policies such as abandoning the euro in favour of the franc and giving the state an even bigger role as a promoter — and protector — of national industry. Those ideas have gone down well in a country where economic growth has remained sluggish in recent years, and where unemployment is at record highs. The FN’s popularity has soared in the north of the country, an industrial region particularly affected by France’s economic plight.

  As is clear below…

  

  Le Pen leads among France's top politicians…

  

   

  And she is gaining further…

  #France tonight. Dark blue = FN, light blue = "Republicans" (traditional right), rose = Socialists. pic.twitter.com/5L40vFoW3i

  — Mathieu von Rohr (@mathieuvonrohr) December 6, 2015

  

  

  

  

  

• Central Banks Continue To Rule Equity And Commodity Markets

  Submitted by Leonard Brecken via OilPrice.com,

  First, let’s review 2015 to see what could occur in 2016. What was most noteworthy was the continuation of investor focus on central bank interventions vs. fundamentals across all asset classes. That focus has continued since the 2008 crisis and if anything has gotten worse.

  The overall theme as a result has been: long high-risk, high-beta such as technology/biotech and short commodities, which accelerated beginning last year when the Fed signaled its desire to raise rates and refrain from more QE, as it allowed the EU and Japan to take lead on QE.

  The so-called China “crisis” last summer ended like every other crisis – largely seen as a day trading event that quickly became ignored as focus shifted back to what central bank polices will be. Chinese authorities basically strong armed markets from collapsing by imposing trading restrictions.

  Buy the dip theme continued to be the favored course despite deteriorating macroeconomics as U.S. retail spending, manufacturing, trade and capital expenditures all markedly slowed, as did the overall U.S. GDP and global GDP for that matter.

  Markets started the year expecting 3 percent GDP in the 2nd half of 2015 but are now likely to end below 2 percent, yet financial markets are near highs mostly driven by large cap names (FANG – Facebook, Amazon, Netflix, Google—45X P/E combined!).

  Credit markets largely deteriorated as well, especially in high-yield, which declined some 20 percent on an average. Access to credit became increasingly hard to come by for the energy sector as banks tightened their policies. The energy sector saw a 50 percent decline in debt issuance throughout Q3.

  We also sensed that private equity also got tighter due to the ongoing fiasco at SunEdison, which witnessed a 90 percent plunge in its share price. Investors finally realized that their debt/equity at 600 percent was unsustainable and questioned their ability to sell projects off to private equity to finance its business.

  Surprisingly enough, this event was largely ignored in the clean energy-biased media while energy default risk was all the rage. In energy we witnessed what looks like the start of an inventory and overall production decline, although the contraction has stalled a bit due to some seasonal factors.

  Demand remained at five-year highs despite focus on absolute inventory levels. OPEC added to the existing supply pressure by adding over 1 million barrels per day (mb/d) since mid-2014, and the pending return of Iran to global oil markets following the nuclear deal also raises supply questions.

  All of which translated to NYMEX futures net positions of front month remaining net-short and bearish as ever. Oil prices as a result continued to decline but hold above $40, eclipsing the longest period (even as compared to the 1986 crisis) on length of time for price recovery.

  The main driver on the price pressure comes from currency markets, as the dollar was under pressure in the first half of 2015, but recently rallied because of more QE from the EU and an expected rate hike from the Fed. The oil price plunge and the USD have tracked pretty closely (inversely) since June 2014.

  Recent terrorism events and geopolitical conflicts being largely ignored as markets rallied further on expectations of more QE in the Euro zone. All of this translated into a third quarter of 2015 where earnings slowed and revenue growth slowed even more. Some of the air in the technology/biotechnology bubbles was let out in part tied to slowing EPS and the attention brought to drug price increases and the VRX scandal.

  At this moment, the dollar appears to be poised to move higher despite weakening U.S. economic performance, not because it should, but because the Fed desires it and will continue to play the rate hike card threat. We don’t foresee a change in the macro trade of long beta and short commodities with that in mind. Goldman Sachs’ chief equity strategist agreed in a recent CNBC appearance, despite valuations being in the 96 percent valuation range historically.

  *  *  *

  So take more risk right? The recent inclusion of the Yuan in the IMF basket of currencies in 2016 should incrementally add to dollar selling. However, how many times have we seen fundamentals ignored and asset prices move in the opposite direction because of central bank policy? A lot! So don’t bet on it.

  Investors who still pay attention to fundamentals are largely sitting at the sidelines as reflected in lower market volume. Incremental volumes are from money center banks, algos and short sellers, and as a result we have a market driven by central bank interventions with asset prices becoming more and more distorted.

  One relationship I repeatedly cite in measuring this distortion is the relationship between NASDAQ and oil prices, which have NEVER diverged before by this much in the stock market’s history.

  

  If this doesn’t tell you what’s afoot I don’t know what does. I maintain it’s not a coincidence that this distortion is occurring and it’s born out of central bank policies vs fundamentals. My view is that the Fed is intentionally keeping the dollar strong (for a host of reasons) in part to depress commodities in lieu of more conventional QE.

  And it’s fairly clear the Fed will raise rates despite the fundamentals dictating otherwise to reinforce that view of a strong dollar policy, even though there is pressure on corporate earnings.

  In sum, the Fed has shifted from propping up Wall Street the last 7 years to propping up Main Street. QE has largely increased income disparity as the 1 percent have seen their wealth increase via asset price appreciation while Main Street suffered through inflation, decreasing wages, lower discretionary income and largely lower paying jobs in the service sector. Going into an election year do you think this shift is some coincidence?

  2016 will likely bring more back door means to prop up flailing U.S. economy through higher fiscal spending, student loan forbearance or some gimmick to reduce bank reserve requirements, all with an eye on maintaining the dollar status quo.

  Essentially what is going on is an attempt by the Fed to have their cake and eat it too by declaring victory, raising rates 0.25 percent, and maintaining all the benefits associated with lower commodity prices for Main Street as the U.S. dollar remains strong.

  I don’t foresee anything other than a complete reversal in Fed policy or an OPEC cut to derail these trends.

  Despite massaged economic statistics (overstating growth while under stating inflation) in 2016, U.S. GDP growth will likely remain slow. That will likely keep commodity prices depressed through the election cycle. In energy, I expect the U.S. supply/demand imbalance to improve dramatically. Every investor knows, whether they want to admit it or not, $40 Oil and $2.20 won’t produce free cash flow for E&P companies, especially when hedges will roll off in 2016.

  As a side note: Chesapeake Energy recently admitted that in 2012 54 percent of projects weren’t cash flow positive, so clearly this cannot be sustained. If WTI remains under $50 U.S. oil production will decline by between 5 and 10 percent as E&P companies see the effects of depletion, hedges rolling off, debt funding drying up, and highly profitable projects become increasingly scarce.

  By spring 2016 I fully expect a wave of defaults leading to a period of consolidation by oil majors and private equity. I don’t believe that this will lead to a Lehman like credit crisis when defaults begin. But it will constrain production, leading to a draw down in U.S. inventories and add to slower growth as it did in 2015. Whether that gets realized is another matter as the EIA/IEA continues to underestimate demand and over-estimate supply while OPEC continues to pump above its quotas.

  Until pro-growth, low taxation and less regulation policy changes are enacted, I don’t foresee any changes to central bank policy nor the unsustainable market divergences and asset price distortions.

  Expect more media propaganda on how great the economy is while the reality is another story. Early signs are that retail sales this holiday season are poor. Nobody can predict when reality will set in and equity markets revert back to pre QE levels in 2008/09. The longer this charade continues, the lower equity markets will eventually go, and in the short-term so will commodities. Then the super cycle in commodities will begin anew. Much this will hinge on next fall’s election cycle.

  

  

  

  

  

• University President Urges Students: Carry Weapons On Campus, "End Those Muslims"

  In an age of uncontrollable political correctness and micro-aggression across America's colleges, one university has taken a different tack this week. Speaking to an estimated 10,000 strong campus community, Liberty University President Jerry Falwell Jr. urged students, staff and faculty at his Christian school to get a permit to carry a concealed weapon on campus, so that "we could end those Muslims before they walked in." Students reportedly erupted into applause at the call to arms.

  “It just blows my mind when I see that the President of the United States [says] that the answer to circumstances like that is more gun control,” he said. 

  As AP reports, Liberty University President Jerry Falwell Jr. urged students, staff and faculty at his Christian school to get a permit to carry a concealed weapon on campus to counter any copycat attack like the deadly rampage in California just days ago.

  "Let's teach them a lesson if they ever show up here," Falwell told an estimated 10,000 of the campus community at convocation Friday in Lynchburg. While Falwell's call to arms was applauded, his remarks also seemed to target Muslims.

   

  "I've always thought if more good people had concealed carry permits, then we could end those Muslims before they walked in .," Falwell said. The final words of his statement could not be clearly heard on a videotape of the remarks.

   

  However, Falwell told The Associated Press on Saturday he was specifically referring to Syed Farook and Tashfeen Malik, the husband and wife who shot and killed 14 people at a holiday party in San Bernardino on Wednesday.

   

  Falwell also said he believed the campus needed to be prepared in the face of the increasing frequency of mass killings. He cited, for example, the 2007 massacre of 32 people at Virginia Tech, the deadliest mass shooting in modern U.S. history, and less than 100 miles southwest of Liberty.

   

  "What if just one of those students or one of those faculty members had a concealed permit and was carrying a weapon when the shooter walked into Virginia Tech? Countless lives could have been saved," he said.

  Falwell's remarks generated a sharp rebuke from Virginia Gov. Terry McAuliffe, who called the comments "reckless."

  "My administration is committed to making Virginia an open and welcoming Commonwealth, while also ensuring the safety of all of our citizens," McAuliffe said in a statement issued late Saturday. "Mr. Falwell's rash and repugnant comments detract from both of those crucial goals."

  But Falwell's message is apparently being heeded. He said more than 100 people had asked Liberty police about a free class to obtain a permit to carry a concealed weapon.

  *  *  *

  Liberty University, an evangelical school in Lynchburg, Va., has a reputation as a conservative college; and as a reminder, Falwell is the son of the late Moral Majority founder Jerry Falwell, who infamously blamed the 9/11 terrorist attacks on abortionists and homosexuals.

  

  

  

  

  

• Why Some Are Questioning The Zuckerberg Charity Story

  Authored by Mark St.Cyr,

  This week not only did social media come a buzz, so too did the main stream when it was announced Mark Zuckerberg and his wife were marking the occasion of the birth of their child by starting a philanthropic organization named in their child’s honor. They also declared they pledged to give 99% of their Facebook™ shares (worth some $45 Billion) to help fund its mission. Yet, one little item or detail seemed not to go unnoticed by some (which I am of this crowd.) Rather, it stood out like a sore thumb. That detail was: rather than what is typically structured as a nonprofit (i.e., what one expects to see and is traditionally administered when charity is involved) this “Initiative” was structured as an LLC. i.e., Can be used for both profit and maybe more importantly – political influence.

  Here is a quote from the Facebook post they wrote to help illustrate their intentions. It was this passage which both caught my eye, as well as made me think deeper as to just what didn’t sit squarely in my mind at first take. To wit:

  “The Chan Zuckerberg Initiative is structured as an LLC rather than a traditional foundation. This enables us to pursue our mission by funding non-profit organizations, making private investments and participating in policy debates — in each case with the goal of generating a positive impact in areas of great need. Any net profits from investments will also be used to advance this mission.”

  The line “making private investments and participating in policy debates” sounds innocuous enough. However, most (if not all) of those who spend their every waking moment glued to social media wondering if they too can keep up to this weeks misanthropic escapades of the Kardashian’s are the first to take to Facebook and any other social media outlet and bash, excoriate, and what ever else can be thrown around to pummel any Wall Street Billionaire or for that matter Billionaires in general from influencing public policy. Unless you’re deemed “their Billionaire.” Then have at it; as hard, as messy, and/or dirty as you like. Blindfolds will be supplied freely to blind-eyes everywhere.

  Do not let this point be lost. If one thinks for a nanosecond people with enormous wealth don’t factor such things into any form of estate planning as well as everyday living planning – I have some ocean front property here in Kentucky you can have at a discount.

  Why do I say such a thing? Well, I’ll use one of the most overused examples of “Look it’s not like I’m trying to skirt something I’m actually glad to pay” known to the wealthy as to show “Hey, I’m just one of you with a bigger bank balance by golly, gee whiz.” Again, from the same post as above, to wit:

  “By using an LLC instead of a traditional foundation, we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively. In fact, if we transferred our shares to a traditional foundation, then we would have received an immediate tax benefit, but by using an LLC we do not. And just like everyone else, we will pay capital gains taxes when our shares are sold by the LLC.”

  And there’s that inference again that I pointed out in the first that made me think deeper. Or, as some might say, “Made me go hmmm.” That inference? “…but we gain flexibility to execute our mission more effectively.” I’ll construe: in a world that is driven by politics and political donations – I bet it does. And will.

  Again, let me remind you, this is all conjecture on my part. However, like I stated earlier, I’m not the only (although one of the few) that feels there’s more to all this than what’s been bandied about by the main stream media et al.

  Two examples of such “heart-fullness” voiced were the immediate comparisons to the philanthropy of both Warren Buffett and Bill Gates. Many of the observations posited by the media was how Mark (I’m using the personal’s only for ease) has seen the value in sharing ones wealth and all the good it can do, and wants to do the same. It’s a fair point. However, I’ll posit there are a few other additional points no one likes to point out. Yet, that doesn’t mean they aren’t there.

  Let’s take Warren for one. What’s lost on the general public (as well as many others) is the obvious double standard of how he is both viewed as well as reported on in the press. He too is giving all his fortune away. Makes for great press and keeps him in that almost blinding limelight of ole “Uncle Warren” when he’s doing or making any type of investment or doling out advice. He gives political causes great sound bites or quote lines similar to “I need to pay more taxes!” and more. Yet…

  When it comes to those taxes on lower wage earners or the outright cost of employing people who need to pay them. It’s a far different tune. All that you saw reported nearly ad nausea during that period was what seemed like a video loop stuck on continuous play. That or footage of him playing the ukulele surrounded by the Fruit Of The Loom™ ensemble belting out tunes at his investor meeting. What you didn’t see reported anywhere (for there was no warning as per the story) was a complete Fruit Of The Loom factory that had been the mainstay of an area in Kentucky for decades: closed and all its textile operations sent to Honduras leaving hundreds unemployed. Good jobs at good wages. Only not here, that’s too expensive. There now in Honduras.

  Another example would be how you never see ole “Uncle Warren” demonized for the sin of all sins: being connected with fossil fuels. e.g., Oil.

  Koch Brothers and a pipeline? Vilified as a scourge or pariah on the Earth. (I’m not taking a side nor endorsing one side or the other. I’m simply pointing out a demonstrable difference as viewed via the light of the media and reports – nothing more. Use you’re own insight as to ascertain any meaning or not) Warren’s investment into the trains which carry that same oil that seemed to derail weekly for a time causing environmental catastrophes? If his name was mentioned is was at a whispers breath. If that. But hey – He’s giving away all his Billions – He’s one of the good guy’s. Not some greedy capitalist. Right?

  Then there’s Bill Gates as of late. Again, his foundation may be doing great work. Yet then again, it doesn’t hurt to make sure you profess as loud and as much as possible: “Hey, I’m giving everything away, don’t think or call me some greedy capitalist.” i.e., Hey, go after those people’s money – not mine. I’m one of you! See!!”

  It has been reported that he’s publicly stated to have taken all his philanthropy cues from Warren for they have been very close friends for years now. But Gates has done something even more head scratching than even Buffett. Lately Gates has publicly stated that it’s going to take both socialism and climate change advocates favorite tax (e.g., a carbon tax) to solve the ills of the world. Calling the private sector “inept.”

  Nothing like self inoculating oneself with the right combo of political antibodies once one’s made their wealth via capitalism. Especially if one wants to keep both its use, as well as their new-found media persona intact. Kills two birds with one stone is all I’ll say. Almost like going for a political flu shot and receiving a double dose on the house. Again, all conjecture on my part, however, does one think for a moment Bill would say such things when he was developing privately what Microsoft™ was able to do for the public sector at large? That’s a decision for you to ponder and come to your own conclusions.

  Which brings us back to Zuck and his latest philanthropic proclamation. As Gates learned and emulated Warren with his own brand of philanthropy. So too must Mark be watching and learning also. I may be critical of Zuck on many differing issues , but what I would never imply is that he is not a shrewd businessman. He’s demonstrated that in spades. Which by the way is exactly the basis for why as I stated at the beginning I’m not quite buying what’s being sold.

  I also believe it is exactly for these reasons one should look for clues as to what might be on the horizon in other ways. For this could portend or, be a precursor that those “storm clouds” myself and a few others have been sighting are indeed becoming more obvious to Silicon Valley than many will let on. Here’s my reasoning…

  You know the one thing Mark Zuckerberg with all his Billions can’t do today without causing a media sensation throughout Wall Street? Hint: Sell.

  Let me express it this way: How would you think it would look to analysts, the financial media, stockholders, et al if Zuck announced he too decided to sell a Billion $dollars worth of stock when only weeks ago it was reported Mark Andreessen sold out nearly all (73%) his holdings in Facebook? This coming on the heels of the August 24th historic plunge in the markets. Think it would be seen in a “favorable” light? Neither do I.

  You know what else an observant business Silicon Valley person might contemplate?

  If we were in fact at the edge of a bubble in the Valley – how would one be able to sell at the top without bringing on some negative feedback loop in their stock price? After all, if history is any guide part of the problem for many during the dot-com burst was they never sold at the top. Many rode it all the way down to oblivion, and only a choice few (like Gates) made it through.

  However, Bill had an operating system that was needed regardless of the economy’s state. Mark only has an operating platform that needs to sell ads. And if ads go dry – so too does your stock value and personal wealth. See AOL™ for clues.

  With this newly formed “Initiative” any selling is now wrapped into a wonderful meme of “We’re not selling to profit. (or preserve) It’s for charity. And we’ve stated openly we were going to do just that. So, nothing to see here, please move along, thanks so much.”

  Are you beginning to see why something seemed “more than what meets the eye” at first blush?

  You know what else might be on the horizon that I’m more than sure will be brought up if things do begin to turn sour in the Valley? Mark’s near unrestricted power of authority to make acquisitions.

  Right now he doesn’t need Board approval to spend. He’s been very shrewd in keeping that ability solely within his own purview. However, as I’ve written many times previous, “You’ll know everything in the Valley has changed once you see Wall Street calling for that oversight.” I believe that ship has already began to sail and will be coming much sooner than later if we have more hiccups like the one’s we saw in Aug. or if Facebook shares begin going the wrong way.

  Yet, you know where that privilege will probably remain, unfettered, as well as with more influencing authority? Hint: “Initiative.”

  Look, I’m fully aware this is a lot of conjecture, as well as speculation and more on my part. I’m also of the belief that there is truly some real intention to do good with one’s wealth. Especially once one has a child for it really does change perspective on everything you never would contemplate until. That said, I’m also of fact and well aware that there is nothing wrong with capitalizing on events no matter how they present themselves in manners, and ways, as to promote or protect one’s wealth. As well as image.

  What caught my eye was, again – the structure. e.g. LLC. It was once you ask a few question and ponder “why” while looking at the event horizon that only a very few of us are stating or trying to bring attention as it nears does one look closer at what might also be driving the reasoning behind such announcements.

  Yes, it may be a wonderful vehicle for charity in the name of his daughter. And – it might also be a tell-tale vehicle for those willing to look as the first sign of a vehicle trying to “get-out-of-Dodge” before or, as fast as time will allow without causing others to panic first clogging the exits leaving themselves stuck. After all, what’s one to think about the “eyeball for ads” business when one of the other undisputed “eyeball” counted sights Yahoo™ is openly contemplating this weekend if it should sell its internet business?

  Remember, also, this year is the first year that the once Holy Grail of “IPO’s to the promised land” have been mired in quicksand. (Just look at Square™ and Match™ for the latest clues) Funny how things like this happen when there’s no longer QE to fuel it. That, and the Federal Reserve has all but declared without question that a rate hike will in fact take place (unless they don’t) nearly forsaking corporate profits to $Dollar denominated purgatory.

  Again this exercise could all be for naught and there may be nothing to ponder or, extrapolate. And Mark, Bill, and Warren may indeed have no ulterior motives to their philanthropic activities other than what they’ve stated. And that’s fine with me. Yet, there’s two sayings I’ve lived by most of my adult business life that have served me well. The first comes from Andrew Carnegie, “I no longer listen to what men say – I watch what they do.” The second I learned on my own after being blindsided by someone I thought was a friend, “It’s not what people do too you that’s the problem. It’s the way you have to treat everybody coming after that’s the problem.”

  If you think the Carnegie quote is just some antiquated insight that no longer fits today’s circumstances or maybe can’t see how the second could apply to the circumstances of today. Need I remind you of another person who had philanthropy at the core of their decisions of just “doing good” where his actions were to be taken beyond reproach? Lance Armstrong.

  Questioning is a prudent exercise regardless of the individual. Especially when they’ve proclaimed politics is going to be one of their predominate activities. For if it’s a business – I don’t have to buy or participate. When it’s political – I might not have a choice.

  Charitable or not.

  

  

  

  

  

• Putin Accuses US Of ISIS Oil Coverup

  Last Wednesday, the Russian MoD delivered a lengthy presentation which contained compelling visual evidence of a connection between Islamic State’s illegal and highly profitable trade in stolen Iraqi and Syrian crude and Turkey. Here are some highlights:

  After loading up with oil, a truck convoy in east Syria heads toward Turkey in direction Al-Qamishli:

  

  

  

  

  October 18: in the Drer-ez-zor region a satellite imagte reveals 1772 oil trucks:

  

  

  

  November 14: in the Tavan and Zaho regions, in the zone where coalition forces are active, one can see a gathering of oil trucks:

  

  November 28: in the region Kara-Choh on the territory of an oil refinery one can see 50 oil trucks:

  

  

  The routes of alleged oil smuggling from Syria and Iraq to Turkey:

  

  A substantial part from east Syria enter a refinery in Batman, Turkey (100km from the Syria border):

  

  The slide show, hosted by Deputy Minister of Defence Anatoly Antonov, featured photos of oil trucks, videos of airstrikes and maps detailing the trafficking of stolen oil. It was the latest PR snafu for Erdogan who is struggling to convince Turkey’s allies that The Kremlin’s accusations are unfounded and that Ankara isn’t set to put NATO in an awkward position by effectively instigating a shooting war with Russia. 

  Washington came to Erdogan’s defense in the aftermath of Moscow’s claims as State Department spokesman Mark Toner said the US is confident that Ankara “is not complicit in Islamic State oil smuggling.” Russia seemed to take that denial in stride, but after US special envoy and coordinator for international energy affairs, Amos Hochstein, said on Friday that the amount of oil smuggled into Turkey from Syria is “of no significance from a volume perspective”, Moscow appears to have had enough. 

  On Saturday, Russia accused the US of participating in a cover-up. “Our colleagues from the State Department and the Pentagon have confirmed that the photo-proof, which we presented at a briefing [on December 2], of the origin and destination of the stolen oil, coming from the areas controlled by the terrorists, is authentic. However, the US claim that they ‘don’t see the border crossings with tanker trucks crossing the border,’ raises a smile, if only, because the photos are still images,”  Major General Igor Konashenkov, a Defense Ministry spokesman said. “We advise the American side to have a look at how the tanker trucks not only drive through checkpoints at the Turkish border, but pass through them without even stopping.”

  As RT notes, an unnamed US State Department official confirmed to Reuters on Friday that the Russian photos of thousands of oil tanker trucks in Syria were authentic [but] stressed that he hasn’t seen “the imagery of the border crossing with trucks crossing the border, and that’s because [the US doesn’t] believe it exists.”

  Well, here it is:

  “The declarations of the Pentagon and the State Department seem like a theatre of the absurd,” the MoD added, before noting that Washington should “watch the videos taken by its (own) drones which have recently been three times as numerous over the Turkey-Syria border and above the oil zones”. That, by the way, is an attempt to mock Washington for increasing the number of drones monitoring the situation while failing to actually conduct strikes. Earlier this week, Russia said that despite Washington’s claims, the US and its partners are actually not bombing ISIS oil infrastructure or convoys.

  In case the above isn’t clear enough, here’s more from the Russian MoD’s Facebook: “When US officials say they don’t see how the terrorists’ oil is smuggled to Turkey… it smells badly of a desire to cover up these acts.”

  We have on any number of occasions suggested that Washington has avoided striking ISIS oil convoys in an effort to ensure that the group retains the funding it needs to continue to destabilize Syria and the Assad government (see here for instance) and in order to preserve amicable relations with Ankara which appears to benefit from the trafficking of illegal crude both from Kurdistan and Islamic State.

  And so, Russia once again turns the screws on the West in an effort to expose what at this point looks to be a coordinated effort to facilitate the funding of international terrorism via the establishment and maintenance of smuggling routes for some 50,000 b/d of oil looted from fields in eastern Syria and northern Iraq. If the US is indeed complicit in this, it might be time to cut ties with Erdogan because Moscow is on the PR warpath and it’s just a matter of time before the smoking gun emerges.

  

  

  

  

  

• Why To Fred Hickey These Are The "Last Gasps Of A Dying Bull Market (And Economy)"

  Once upon a time, the “Tech Strategist” Fred Hickey used to be part of Barron’s Roundtable. Alas, the famed newsletter writer, who accurately predicted the bursting of the 2000 and 2007 bubbles, was deemed too bearish and was cut from the magazine whose hyperbolic covers have long been used as contrarian inflection point signal by the markets.

  How bearish? As the following excerpt from his latest excellent monthly newsletter titled “Last Gasps of a Dying Bull Market (and economy)” reveals, the answer is “about as bearish as Hickey has ever been.”

  * * *

  Last Gasps of a Dying Bull Market (and economy)

  Deteriorating market breadth and herding into an ever-narrower number of stocks is classic market top behavior. Currently, there are many other warning signs that are also being ignored. The merger mania (prior tops occurred in 2000 and 2007), the stock buyback frenzy (after the record amount of buybacks in 2007 buybacks were less than one-sixth of that level at the bottom in 2009), the year-over-year declines in corporate sales (-4% in Q3 and down every quarter this year) and falling earnings for the entire S&P 500 index, the plunges this year in the high-yield (junk bond) and leveraged loan markets, the topping and rolling over (the unwind) of the massive (record) level of stock margin debt… and I could go on.

  It was very lonely as a bear at the tops in 2000 and 2007. I was just a teenager in 1972 so I was not an active investor, but just a few days prior to the early 1973 January top, Barron ‘s featured a story titled: “Not a Bear Among Them.” By “them” Barron ‘s meant institutional investors. I do vividly remember my Dad listening to the stock market wrap-ups on the kitchen radio nearly every night in 1973-74. It seemed to me back then that the stock market only went in one direction — and that was DOWN.

  The global economy is in disarray. It’s the legacy of the central planners at the central banks. China’s economy has been rapidly slowing despite all sorts of attempts by the government to prop it up (including extreme actions to hold up stocks). China’s economic slowdown has cratered commodity prices to multi-year lows and helped drive oil down to around $40 a barrel.

  All the “commodity country” economies (and others) that relied on exports to China are suffering. Brazil is now in a deep recession. Last month Taiwan officially entered recession driven by double-digit declines (for five consecutive months) in exports. Also last month Japan officially reentered recession. Canada and South Korea’s governments recently cut forecasts for economic growth. Despite the lift from an extremely weak euro, Germany’s Federal Statistical Office reported last month that the economy slowed in Q3 due to weak exports and slack corporate investment. The German slowdown led a slide in the overall eurozone economy in Q3 per data from the European Union’s statistics agency. The recent immigration and terrorist problems make matters worse. Tourism will suffer. ECB President Mario Draghi is expected to react later this week by providing even more QE (money printing) and driving interest rates to even deeper negative levels (unprecedented).

  Here in the U.S., the economy appears relatively healthier only because the rest of the world is so awful. That has driven the U.S. dollar skyward (DXY index over 100), hurting tourism and multinational companies exporting goods and services overseas. Last month the U.S. Agriculture Department forecast that U.S. farm incomes will plummet 38% this year to $56 billion – the lowest level since 2002. Yesterday’s ISM (Institute for Supply Management) manufacturing index for November fell into contraction territory at 48.6, the lowest reading since the 2009 recession. Economists expected a reading over 50. Industrial production fell in October from September. It was the ninth month-to-month drop in the ten months of the year.

  Ports around the country have been reporting declining exports and imports all year. Last month the nation’s busiest port (Los Angeles) reported that loaded exports were down 15% for the year and empty container volumes in October were up 13% year-over-year. Empty containers are shipped overseas to be sent back to the U.S. filled with goods. The Cass Freight Index (primarily measures truck and rail shipments) dropped 5% in October from September and 5% year-over-year. Last month trade researcher Zepol Corp. reported that for the first time in at least a decade, imports in both September and October (the peak shipping season) at each of the three busiest U.S. seaports fell. They didn’t just fall. They dropped by more than 10% between August and October. The three ports handle over 50% of the goods entering the U.S. by sea.

  With freight shipments slowing, carriers are cutting way back on capacity additions. According to the Railway Supply Institute, North American railcar orders plunged 83% year-over-year in the third quarter, the biggest drop in at least 27 years. ACT Research reported last month that trucking companies ordered 44% fewer large trucks year-over-year in October. The causes of this are falling industrial production and lower consumer demand, which has led to an unwanted buildup in inventories. American Trucking Association (ATA) chief economist Bob Costello recently said (in an ATA statement): “I remain concerned about the high level of inventories throughout the supply chain.” The gap between wholesale inventories and wholesale sales (as reported by the U.S. Census Bureau) is greater than what was seen prior to the 2009 recession.

  Despite plunging gasoline prices (below $2 a gallon in some places), sales reports from most of the major U.S. retailers have been soft for several months. The latest round of reports released last month continued the trend. Target, Macy’s. Dick’s Sporting Goods, Best Buy, Nordstrom, Kohl’s, Tiffany (in other word, the gamut) and many more reported disappointing sales results. A Nordstrom exec on the conference call: “All we can tell you is, in our business, we saw a slowdown. And it was across the board.” Wal-Mart’s existing store sales grew 1.5% in its latest quarter, but profits fell 11% due to higher costs. Macy’s and Kohl’s spoke of excess merchandise inventories at the end of their quarters that needed to be cleared. Dick’s inventories jumped 13.1% from a year earlier while sales grew just 7.6% in the quarter.

  Last week the Wall Street Journal wrote a story titled: “Retailers Ring Alarm Bells for the Holiday Season.” Two weeks earlier the Journal’s story was: “Retailers’ Full Shelves May Force Holiday Discounts.” Yesterday, the Atlanta Fed reported that its GDPNow model is forecasting just 1.4% seasonally adjusted annual GDP growth in Q4, down from the prior 1.8% forecast. Part of the reason for the Q4 slowdown is the anticipated hit to growth coming from the necessary inventory reductions.

  There are pockets of strength in the economy, namely auto sales and housing. However, auto sales appear to be peaking out at just above the 18 million annual unit mark (extremely easy credit can only take the industry so far). In general, the majority of U.S. consumers are being squeezed by a combination of higher expenses and stagnant (or lower) real incomes. Due to rapidly rising rents (renters are paying the highest percentage of their income on rent ever per Zillow), high levels of consumer debt (record auto and student loans outstanding), and for many (including my family), sharply higher (record) healthcare costs (see chart below sourced from Meridian Macro Research); it doesn’t matter if there are lots of low-paying healthcare and service industry (hamburger flipping) jobs available. The U.S. consumer is under siege.

  

  The Final Straw?

  When the Fed was printing money (quantitative easing) in 2008-2014, the Fed itself described QE as the equivalent of monetary easing. Therefore, stopping quantitative easing (more than $1 trillion annually at its peak) as the Fed did late last year is tightening even though Wall Streeters are loath to admit it. As the result of this tightening, we’ve watched the broad stock markets slowly break down all year and the economy steadily weaken.

  The Fed should have raised rates from the emergency zero-bound level long ago. However, since the economy never reached “escape velocity” as the Fed expected (all of the Fed’s forecasts have been wrong), they never got up the gumption to pull the trigger, despite leading people on that they were about to do it – over and over again. In 2015 there’s one last Fed meeting (December 15-16) remaining and next year there will be a presidential election, so in order to save face, it appears the Fed will try to pull off one tiny, quarter point rate hike and talk as dovishly as possible in order to minimize the damage. But remember, this is tightening on top of the prior tightening in an aging, though wretched, seven-year “recovery,” that’s worsening by the day.

  Moreover, as noted earlier, the stock market is giving every indication that it’s about to collapse. Looks like bad timing to me. The Wall Street Journal’s Jon Hilsenrath issued the following warning two months ago: “In the seven years since the world’s central banks responded to the financial crisis by slashing interest rates, more than a dozen banks in the advanced world have tried to raise them again. All have been force to retreat.” Assuming they can pull it off, the Fed will rescind this hike too — but not before there’s a lot of damage to the stock market.

  

  

  

  

  

• Jordanian Man Screaming He "Wants To Join Allah" Tries To Open Lufthansa Airplane Cabin Door In Mid Flight

  Last week, the US experienced what is now widely reported to be the worst terrorism-driven mass killing in the US since 9/11; yesterday terrorism allegedly spread to London which had so far been insulated from any Islamic State-related events; just one thing was missing to push the global panic envelope to the “September 11 flashback” redzone in a month that started with the mass murder of dozens of people in Paris and has gotten progressively worse since: airplane terrorism. 

  Moments ago we may have gotten just that after a report that a Lufthansa crew and passengers overpowered a Jordanian man with a US passport, who tried to open the cabin door on a Frankfurt-Belgrade flight on Sunday, while screaming that he wished to join Allah along with all the passengers, according to Serbian TV RTS.

  However, as AFP adds, the man was promptly overpowered by crew and passengers with the German carrier insisting the safety of the plane had not been threatened. The airplane proceeded to land safely at 12:45pm local time.

  

  More from AFP:

  “A passenger got up and tried to do something at the door, but was stopped by crew members and other passengers,” said airline spokesman Andreas Bartels.

   

  “The passenger was then restrained for the remainder of the flight in his seat and handed over to the authorities in Belgrade,” he said.

   

  “It was a normal door, which of course cannot be opened in-flight… it was not the cockpit door,” he said. “The safety of the flight was not jeopardised and the flight landed safely in Belgrade”.

   

  Bartels declined to provide information on the identity of the passenger or his nationality, or what he said during the incident.

  Serbian state-run television provided more details on the passenger, reporting that police had arrested a Jordanian man after he tried to forced his way into the cockpit of the Lufthansa flight. The Serb press said the Jordanian was called Laken and had a US passport. He had cried out that he wished to join Allah along with all the passengers, RTS said.

  The man had suddenly got up during the flight, banged on the cockpit door and demanded to be allowed to enter, threatening to open one of the plane’s doors while it was flying over Austria, Serbia’s RTS television reported.

   

  He was overpowered by flight crew and members of a Serb handball team who subdued him until the flight landed in Belgrade where he was arrested, the report said.

  RTS adds that the coach of the Vojvodina handball team, Nikola Markovic said that during the incident on the plane there was no panic. Google translated:

  “We are all from the back of the plane saw that something was happening, but we thought that because of the extraordinary situation in each plane has someone from the security services. Nothing spectacular happened everything was all right. Most of us did not have information about what was happening, “Markovic said.

   

  According to him, the flight attendant accompanied by two players took the man who caused an accident in business class, and there they sat down with him, without any difficult situation.

   

  “After 15 minutes I called one of my players and he told me what happened. Most of the passengers did not even know what happened on the plane, until they found out later what had happened. The flight was calm, do not panic, all are well “Markovic said.

   

  The plane landed safely when the other passengers learned about the incident after they were announced to the police.

  Luckily, this time there were no consequences, however expect in light of this event, airline security checks to return to post-September 11 levels, especially if as we expect, tonight’s 8pm impromptu Obama statement seeking to “reassure the nervous nation“, achieves precisely the opposite.

  

  

  

  

  

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