Today’s News December 9, 2015

• Putin Hopes "There Will Be No Need To Nuke" The Islamic State

  Earlier today, in a clear advance notice to the French and US navies which are both set to arrive just off the coast of Syria in the coming weeks, Russia for the first time targeted Islamic State targets in Syria with Kalibr land-attack cruise missiles launched from a submarine in the Mediterranean Sea off the Syrian coastline, according to Russia’s Defense Minister.

  According to RT, the 3M-54 Kalibr missiles were launched from the Kilo-class diesel-electric submarine “Rostov-on-Don”, Defense Minister Sergey Shoigu told President Vladimir Putin on Tuesday.

  While as reported here before, Russian warships based in the Caspian and Mediterranean seas had launched similar missiles targeting ISIS positions in late November, this was the first time that Russia has targeted IS in Syria from a submarine.

  The submarine cruise missile launch and subsequent strikes are shown in the clip below:

  According to a Kremlin transcript of the conversation, Shoigu told Putin that the missiles successfully targeted two major terrorist positions in the territory of Raqqa, adding that “we can say with absolute confidence that significant damage has been inflicted upon ammunition warehouses and a mine production plant, as well as the oil infrastructure.”

  In addition to the submarine, a Russian Ministry of Defense source revealed that the Rostov-on-Don, equipped with modern Russian Kalibr cruise missiles, had appeared near the Syrian coast. Additionally, just before the USS Harry S. Truman carrier arrives, the Russian cruiser Varyag, which is currently off India’s coast for Exercise Indra till Dec. 12, will set sail for the Mediterranean to replace the cruiser Moskva.

  

   

  However, what was most notable in today’s update by the Russian defense ministry was neither the news about the sub, or the second ship deployment, but what Putin told Shoigu during their conversation according to the Kremlin’s transcript. Which is as follows:

  Regarding the submarine strikes we must, of course, analyze everything that happens on the battlefield, how the weapons acts. Both the “Kalibrs” and the X-101 rockets as a whole proved to be very good. This new, modern, highly efficient, and highly precise weapon can be equipped with both a conventional warhead as well as a special, nuclear warhead.  Naturally, in the fight against terrorism that is unnecessary, and I hope there will be no need [to use nukes against the Islamic State].

  But, if it is…. which of course was the unsaid message: Russia not only can deploy tactical nuclear warheads to Syria overnight, but it may, “not now”, but eventually be forced to use them against “the Islamic State.”

  And just like that Putin hinted that the Syrian proxy war, as it escalates ever wider and drags in increasingly more countries in true “world war” fashion, may just have one or more mushroom clouds in its near future; clouds which will will target none other than the CIA’s pet project designed to take down Assad – the Islamic State. We are not sure if this particular cloud will have a silver lining, but we are confident that not even Turkey will want to buy ISIS oil if it happens to have the same radioactivity profile as Fukushima.

  

  

  

  

  

• Behold The Deflationary Wave: How China Is Flooding The World With Its Unwanted Commodities

  Between commodity-backed financing deals and the centrally-planned mal-investment boom-driven excess capacity, China has a lot of 'liquidation' to do to normalize from a credit-fueled smoke-and-mirrors world to a painful reality. As Bloomberg notes, there’s no let-up in the onslaught of commodities from China. While the country's total exports are slowing in dollar terms (as we noted last night), shipments of steel, oil products and aluminum are reaching for new highs, flooding the world with unwanted inventories. China's de-glutting is now the rest of the world's problem as the deflationary tsunami grows ever higher.

   

  Chinese trade data was ugly with exports down 5 straight months…

  

   

  But, as Bloomberg notes, shipments of steel, oil products and aluminum are reaching for new highs, according to trade data from the General Administration of Customs.

  That’s because mills, smelters and refiners are producing more than they need amid slowing domestic demand, and shipping the excess overseas.

   

  

   

  The flood is compounding a worldwide surplus of commodities that’s driven returns from raw materials to the lowest since 1999, threatening producers from India to Pennsylvania and aggravating trade disputes. While companies such as India’s JSW Steel Ltd. decry cheap exports as unfair, China says the overcapacity is a global problem.

   

  The flood of Chinese supplies is roiling manufacturers around the world and exacerbating trade frictions. The steel market is being overwhelmed with metal from China’s government-owned and state-supported producers, a collection of industry associations have said. The nine groups, including Eurofer and the American Iron and Steel Institute, said there is almost 700 million tons of excess capacity around the world, with the Asian nation contributing as much as 425 million tons.

   

  Low-cost supply from China in Europe prompted producer ArcelorMittal to reduce its profit forecast and suspend its dividend. India’s government has signaled it’s planning more curbs on steel imports while regulators in the U.S. are planning to lift levies on shipments from some Chinese companies.

  And finally, if offshore Yuan rates are to be believed, a devaluation looms (again)…

  

   

  Finally, as The Automatic Earth's Raul Ilargi Meijer notes, there’s another side to this, one that not a soul talks about, and it has Washington, London and Brussels very worried. Here goes:

  These large mining -including oil- corporations most often operate in regions in the world that are remote and located in countries with at best questionable governments (the corporations like it like that, it’s how they know who to bribe to be able to rape and pillage).

   

  The corporations de facto form a large part of the US/UK/EU political/military control system of these areas. They work in tandem with the CIA, MI5, the US and UK military, to keep the areas ‘friendly’ to western industries and regime.

   

  This has caused unimaginable misery across the globe, in for instance (a good example) the Congo, one of the world’s richest regions when it comes to minerals ‘we’ want, but one of the poorest areas on the planet. No coincidence there.

   

  Untold millions have died as a result. ‘We’ have done a lot more damage there than we are presently doing in Syria, if you can imagine. And many more millions are forced to live out their lives in miserable circumstances on top of the world’s richest riches. But that will now change.

   

  Thing is, with the major miners going belly up, ‘our’ control of these places will also fade. Because it’s all been about money all along, and the US won’t be able to afford the -political and military- control of these places if there are no profits to be made.

   

  They’ll be sinkholes for military budgets, and those will be stretched already ‘protecting’ other places. The demise of commodities is a harbinger of a dramatically changing US position in the world. Washington will be forced to focus on protecting it own soil, and move away from expansionist policies.

   

  Because it can’t afford those without the grotesque profits its corporations have squeezed out of the populations in these ‘forgotten’ lands. That’s going to change global politics a lot.

   

  And it’s not as if China will step in. They can’t afford to take over a losing proposition; the Chinese economy is not only growing at a slower pace, it may well be actually shrinking. Beijing’s new reality is that imports and exports both are falling quite considerably (no matter the ‘official’ numbers), and the cost of a huge expansion into global mining territory makes little sense right now.

   

  With the yuan now part of the IMF ‘basket‘m Beijing can no longer print at will. China must focus on what happens at home. So must the US. They have no choice. Other than going to war.

   

  And, granted, given that choice, they all probably will. But the mining companies will still be mere shells of their former selves by then. There’s no profit left to be made.

  This is not going to end well. Not for anybody. Other than the arms lobby. What it will do is change geopolitics forever, and a lot.

  Charts: Bloomberg

  

  

  

  

  

• Meet The Peer 2 Peer Lending Website That Funded The San Bernardino Shooters

  Over the course of the past nine months or so, we’ve documented the rise of online P2P lending. 

  Back in May, for instance, we highlighted a Bloomberg piece which suggested the volume of P2P loans is set to hit nearly $80 billion in 2015. “LendingClub, the No. 1 player worldwide, is trading at a market value of about $7 billion even though it lost $33 million last year,” Bloomberg said, before warning that “in a flashback to the subprime mortgage boom, P2P startups have begun bundling and selling off loans through securitizations.”

  Well of course they have. When it comes to new, potentially lucrative markets, Wall Street is a bit like Christopher Walken’s character Frank White from the 1990 cult classic “King Of New York”: “Nothing goes down unless I’m involved.” The more demand there is for P2P loans to securitize, the lower will be P2P lenders’ underwriting standards creating a repeat of the originate to sell dynamic that helped create the housing bubble and is now playing out across the auto loan space. But when it comes to P2P loans, there’s another problem. P2P loans create the conditions whereby borrowers can refi high-interest debt via personal loans, transferring credit risk from large financial institutions to private lenders in the process. It’s not entirely clear what the implications of that shift might ultimately be, especially if the market continues to grow rapidly, but one thing is clear: using a relatively low-interest P2P loan to pay off a high-interest credit card is no different in principle than using a new credit card that comes with a teaser rate to pay off an old credit card.

  As sinister as all of that sounds, it turns out P2P lending may have an even darker side. Those who follow trends in the ABS market – and let’s face it, who doesn’t, right? – might recall that back in January, BlackRock put together a $327 million deal dubbed “Consumer Credit Origination Loan Trust 2015-1.” The loans in the collateral pool were made through Prosper, the world’s second-biggest P2P lender. In an unprecedented move, Moody’s actually rated the damn thing, giving the senior tranche an investment-grade mark of “Baa3”. Here’s what Bloomberg said at the time: 

  The company, on behalf of its clients, scooped up more than $330 million of consumer debt arranged since November 2013 by Prosper Marketplace Inc., the so-called peer-to-peer lending platform that finds investors to fund borrowers, according to bond-offering documents. New York-based BlackRock is seeking to sell most of that debt to other institutions while retaining a risky slice.

   

  The purchases represent about a sixth of debt obtained through Prosper during that period, showing how the platform has moved beyond funding from mom-and-pop investors. BlackRock’s bond sale, known as a securitization, could be a harbinger for more such deals, said Matt Burton, chief executive officer of Orchard Platform, a data provider to clients investing through online markets like Prosper’s and one run by LendingClub Corp.

   

  “One of the large bottlenecks in this space for institutional investors has been volume,” he said. “That’s all changing.”

  Yes, “that’s all changing,” thanks to the proliferation of P2P lending. In fact, loans originated through San Francisco-based Prosper jumped to $1.6 billion, last year, up some 350 percent. 

  If you aren’t familiar with P2P, you might be asking yourself: “what kind of loans does Prosper make?” Well, according to their website, they arrange debt consolidation loans, home improvement loans, special occasion loans, and personal loans for business.

  We’re not sure which of those categories “jihadist massacre” falls under (we assume “special occasion”), but as Reuters reports, San Bernardino mass shooters Syed Farook and Tashfeen Malik, obtained a $28,500 loan through Prosper not long before killing 14 and injuring nearly two dozen in a bloody rampage last Wednesday. From Reuters: 

  Online lender Prosper recently made a $28,500 loan to Syed Rizwan Farook who, along with his wife, killed 14 people at a holiday party last week in San Bernardino, California, according to a source familiar with the matter.

   

  One of the Reuters government sources said Farook and Malik apparently pursued a scenario previously followed by U.S.-based militants by draining their bank accounts and maxing out credit lines before embarking on what they believe to be a suicide mission, knowing that they would not have to pay off the debts.

  
  

  Prosper evaluates borrowers for loans, which are originated by third-party bank WebBank. Prosper then sells the loans off to investors.

  

  As Prosper puts it in the “How It Works” section of its website, “Prosper is the market leader in peer-to-peer lending-a popular alternative to traditional loans and investing options. Prosper allows people to invest in each other in a way that is financially and socially rewarding. We cut out the middleman to connect people who need money with those who have money to invest…so everyone prospers!” 

  Well, “everyone” didn’t exactly “prosper” here and because this didn’t turn out to be one of the site’s more “socially rewarding” ventures you can bet the FBI is taking a hard look at just how the company went about evaluating this particular loan prior to approval. More from Prosper: 

  Here’s how it works:

  • Borrowers choose a loan amount, purpose and post a loan listing.
  • Investors review loan listings and invest in listings that meet their criteria.
  • Once the process is complete, borrowers make fixed monthly payments and investors receive a portion of those payments directly to their Prosper account.

  We’re reasonably sure Farook didn’t list “general terrorist purposes” as the reason for his loan request which begs the question of whether the person who provided the funding was complicit in the plot or whether it was merely some innocent benefactor who bought the story that Farook posted (indeed, given his occuption as an employee of the state, he probably looked, on paper, like a good credit). 

  In any event, they’ll surely be much more on this story in the very near future but for the time being, we’ll simply leave you with two images, the first from Prosper’s website, and the second from the aftermath of Farook and Malik’s shootout with police. Here’s what the pictures have in common: a husband, a wife, a car, and Prosper. We’ll leave it to readers to spot the differences.

  

  

   

  

  

  

  

  

• Canada Just Warned That Negative Interest Rates Are Coming

  Moments ago, the Bank of Canada’s chief finally said what we had been patiently waiting for over the past several months: admission that Europe’s experiment with negative rates is about to cross the Atlantic. From Market News:

  • BOC POLOZ: NOW SEES EFFECTIVE LOWER BOUND FOR POLICY RATE AROUND -0.5%
  • BOC POLOZ: CANADN FIN MKTS COULD FUNCTION IN A NEG INT RATE ENVRIONMNT
  • BOC POLOZ: ‘SHOULD THE NEED ARISE’ FOR UNCONVENTIONAL MONETARY POLICY, ‘WE’LL BE READY’

  That, as they say, is “forward guidance” of what is coming.

  And what is coming, is also precisely what Keith Dicker from IceCap Asset Management said in his latest monthly letter, would happen in Canada in the very near future. To wit:

  Canada

  Now that the election is over, the new government can quickly get down to work to missing all of their economic forecasts and budgets.

  IceCap is apolitical – we support neither the left, the center or the right. Instead, we see the world with our global goggles and can confirm that despite any and all economic policies from the new (or old) government – the Canadian economy will continue it’s downward trend.

  This negative outlook for Canada isn’t driven by an insular view or perspective. Rather, the global trend is downward. The economic and monetary foundation for the global economy has shifted and this is the reason for our downward view for the Great White North.
  During the election campaign, we shared this view with the eventual winning party. The response was a slow yawn and disapproving look which suggested either we didn’t know what we were talking about or they were not really interested in our answer to their question.

  This lack of empathy for the escalating global government debt crisis is also shared by many in the financial sector as well. Yes, increasingly more and more investment managers are echoing concerns similar to ours – but make no mistake, the majority, and especially the really big investment and mutual fund companies continue to see a recovery right around the ole corner.

  Of course, this mythical corner continues to be just as elusive as unicorns, trolls, elves and dragons. In 2014, Canada’s top Bay Street economists were all clamouring for the Bank of Canada to begin raising rates – after all, these economists had very big spreadsheets, with all kinds of neat formulas and corporate logos that predicted the Canadian economy was about to shoot to the moon.

  Yes, the good times were back.

  But they weren’t.

  At the time, IceCap stated that the global economy was beginning to roll over and that the Canadian economy would begin shooting in the opposite direction. As well, based upon our outlook for declining growth, we also expected the Bank of Canada to REDUCE interest rates, not INCREASE interest rates as predicted by Bay Street.

  Naturally, our view meant that the Canadian Dollar would decline significantly relative to the US Dollar. This provided us with a great opportunity to add a significant USD currency strategy within every Canadian Dollar Client Portfolio.

  Now here we are in 2015, and the Canadian Dollar (and other currencies) has in fact declined significantly, and the Bank of Canada has in fact REDUCED interest rates not once, but twice.

  We share this investment success story for 2 reasons:

  • Taking an insular view of your Country’s economy will lead you to losing money.
  • The global economy and financial markets continue to move in the direction which we expect. And this direction is going to produce outcomes that are being completely missed by many in the investment community.

  Which brings us back to Canada. Currently, both the Bank of Canada and Bay Street economists predict the Canadian economy to recover in 2016, and then to accelerate in 2017.

  The ONLY way for this to occur is if the global economy sheds it’s government debt problem. IceCap places a 0% probability of this occurring.

  Instead, everyone should expect:

  1. Canadian economy to be in recession in 2016
  2. Bank of Canada will be at 0% interest rates in 2016
  3. Bank of Canada will be at NEGATIVE interest rates in later 2016
  4. Bank of Canada will be PRINTING MONEY in later 2016

  And for the Canadian Dollar? It’s headed lower, a lot lower. If you are not Canadian, just know that you are in a similar boat. And when it comes to boating, there is one simple rule – going against the flow is difficult, it’s exhausting, and it can be humbling.

  * * *

  So, in order to force the Bank of Canada’s hand, is this what’s coming next?

  

  

  

  

  

  

• America's Reckless Fight Against Evil: Six Mistakes On The Road To Perpetual War

  Authored by Ira Chemus via TomDispatch.com,

  Oh, no! Not another American war against evil!

  This time, it’s the Islamic State (IS). After the attacks in Paris, Barack Obama, spokesman-in-chief for the United States of America, called that crew “the face of evil.” Shades of George W. Bush. The “evildoers” are back. And from every mountaintop, it seems, America now rings with calls to ramp up its war machine.

  By the way, George W., how did that last war against the “evildoers” work out for you? Not quite the way you expected, right? I bet you didn’t imagine that your Global War on Terror would plant the seeds of an Islamic State and turn significant stretches of Iraq (and Syria) into fertile soil in which IS would grow into a brand new, even more frightening enemy.

  But that’s the way wars against evil always seem to work.

  Pardon me if I vent my exasperation with all the Washington policymakers, past and present, surrounded by their so-called experts and those war-drum-beating pundits in the media. I know I shouldn’t be shocked anymore. I’ve seen it often enough as a historian studying wars against evil in the past — ever since biblical times, in fact — and as a citizen watching wars in my own lifetime, ever since the one that tore Vietnam (and, incidentally, America) apart.

  Still, it drives me crazy to watch policymakers and experts making the same dumb mistakes time after time, several mistakes, actually, which synergistically add up to one self-defeating blunder after another.

  What’s worse, the dominant trend in public opinion is so often on the side of just those mistakes. You’d think someone would learn something. And in that someone I include “we, the people,” the nation as a whole.

  Yet now, facing the Islamic State, you guessed it: we’re doing it all over again.

  Let me try to lay out our repetitive mistakes, all six of them, one by one, starting with…

  Mistake Number One: Treating the enemy as absolute evil, not even human.

   

  Barack Obama called the Paris tragedy “an attack on all of humanity,” which means that, even for the president, IS fighters stand outside that category. They are evidently some other species and merely appear to be human. And this was the mildest of descriptions in this overheated political season of ours. “The face of evil” sounds modest indeed compared to the vivid images offered by the Republicans vying to replace him. For Ben Carson, IS are a bunch of “rabid dogs”;  for Ted Cruz, “scorpions.”  Donald Trump calls them "insane," "animals."

   

  All point to the same dangerous conclusion: Since we are human and they are not, we are their opposite in every way. If they are absolute evil, we must be the absolute opposite. It’s the old apocalyptic tale: God’s people versus Satan’s. It ensures that we never have to admit to any meaningful connection with the enemy. By this logic, it couldn’t be more obvious that the nation our leaders endlessly call “exceptional” and “indispensable,” the only nation capable of leading the rest of the world in the war against evil, bears no relationship to that evil. 

   

  That leads to…

   

  Mistake Number Two: Buried in the assumption that the enemy is not in any sense human like us is absolution for whatever hand we may have had in sparking or contributing to evil’s rise and spread. How could we have fertilized the soil of absolute evil or bear any responsibility for its successes?  It’s a basic postulate of wars against evil: God’s people must be innocent.

   

  As a result, we don’t need to look at all the ways in which the U.S., even in battle mode, continues to contribute to the successes of Islamic State fighters in Sunni Arab lands by, for instance, supporting an Iraqi Shi’ite regime in Baghdad that has a grim history of oppressing Sunnis, a history that drives many of them to tolerate, or even actively support IS.

   

  By refusing a future role of any sort for Syria’s president Bashar al-Assad, we have hindered the diplomatic process that might heal the civil war in that country. Instead we let the Syrian chaos continue as a breeding ground for IS expansion (though perhaps this policy is just beginning to change). Our long-term alliance with Saudi Arabia is equally counterproductive, protecting funding networks that feed a burgeoning caliphate.

   

  Just as we don’t look at all this in the present, so we blind ourselves to what the U.S. has done in the past. Consider this…

   

  Mistake Number Three: Call it blotting out history. We lose the ability to really understand the enemy because we ignore the actual history of how that enemy came to be, of how a network of relationships grew up in which we played, and continue to play, a central role.

   

  The historical record is clear for all who care to look: The U.S. (the CIA in particular) was a key to the creation, funding, and arming of the mujahidin, the rebel fighters in Afghanistan who took on the Soviet army there in the 1980s, the men (often extreme Islamists) whom President Ronald Reagan compared to our founding fathers. From that situation came al-Qaeda.

   

  George W. Bush’s invasion of Iraq cracked the region open and paved the way for the Islamic State. The Bush administration tore Iraq to shreds and then demobilized Saddam Hussein’s army and dispatched its members to the unemployment lines of a wrecked country.

   

  One of those shreds, al-Qaeda in Iraq, populated by disaffected officers from that disbanded army, would later transform itself into the nucleus of the new Islamic State movement. Indeed the U.S. nurtured the present leadership of that movement in American military prisons in Iraq, where we introduced them to each other, so to speak. The process was at least hastened, and perhaps ultimately caused, by the vehement anti-Sunni bias of the Shi’ite Iraqi government, which the U.S. installed in power and also nurtured.

   

  To sustain our image of ourselves as innocents in the whole affair, we have to blot out this empirical history and replace it with a myth (not so surprising, given that any war against evil is a mythic enterprise). That’s not to say that we deny all the facts. We just pick and choose the ones that fit our myth best.

   

  In that tale, the enemy is simply what Christians for centuries have called the devil, which brings us to…

   

  Mistake Number Four: We assume that the enemy, like Lucifer himself, does evil just for the sake of doing it. Even the most liberal parts of the media often can’t see IS fighters as more than “lunatics” bent on “slaughter for its own sake.”

   

  Under such circumstances, what a foolish task it obviously is even to think about the enemy’s actual motives. After all, to do so would be to treat them as humans, with human purposes arising out of history. It would smack of sympathy for the devil.

   

  Of course, this means that, whatever we might think of their actions, we generally ignore a wealth of evidence that the Islamic State’s fighters couldn’t be more human or have more comprehensible motivations.  In fact, if you look hard enough, you can find evidence of just that.

   

  The Atlantic, for instance, gained some attention for publishing an article by Graeme Wood that explored the complex religious ideas of the IS movement. In the New York Review of Books, Scott Atran and Nafes Hamid offered insights from people who had taken the time to actually talk with IS fighters or former fighters about its strategy and their own motives in becoming part of it. In this manner, Atran and Hamid helped explain the great mystery of IS (if you believe it is an inhuman organization): How can it attract so many young followers, especially from the U.S. and Europe?  Why do some disaffected young men and women find the movement “profoundly alluring”?

   

  Olivier Roy, a leading scholar of political Islam, has answered that many of these youth, full of “frustration and resentment against society,” are lured by the fantasy of joining a “small brotherhood of super-heroes.”  But a recent study by the Program in Extremism at George Washington University, full of rich details on American IS supporters, concluded that “their motivations are diverse and defy easy analysis.”

   

  Add up this sort of evidence and you’re likely to come to a startling and, in our present context, deeply unsettling conclusion. It’s not just that IS fighters are distinctly human, but that in some ways they are eerily like us. After all, we, too, have a military that uses an ideological narrative to recruit young people and prepare them to be willing to die for it. Our military, too, is savvy in using social media and various forms of advertising and publicity to deploy its narrative effectively. Like IS recruits, youngsters join our military for all sorts of reasons, but some because they are rootless, disaffected, and in search of a belief system, or at least an exciting adventure (even one that may put them in danger of losing their lives). And don’t forget that those young recruits, like the IS fighters, often have only the sketchiest grasp of what exactly they are signing up to die for or of the nature of the conflicts they may be involved in.

   

  Our state ideology is, of course, secular. But most of us are certainly familiar personally (or at one remove) with American religious fundamentalists whose beliefs share much with the IS narrative. On both sides, people want to turn back the clock of history and live according to a sacred plan supposedly etched in stone many centuries ago.

   

  There are, in fact, striking parallels — and I say this as a professor of religious studies — between the evangelical mood and methods of our fundamentalists and those of the Islamic State.  Both agree that one must choose between God’s truth (derived from an ancient text) and the devil’s. Both offer the psycho-social comfort of a community supposedly living by immutable laws. Some of our fundamentalists, like the Christian Reconstructionists, would be happy to see this nation governed under religious law, as long as it’s their religion we’re talking about.

   

  Whatever any of us think of our homegrown fundamentalists, we would hardly deny them their humanity, even if we often wonder what leads them to such (to many of us) strange beliefs. So here’s the question: Why shouldn’t we be just as curious about the believers of the Islamic State, even if they are our enemies?

   

  Remember, to understand is not to justify. Quite the opposite, understanding often opens up ways of thinking more constructively and creatively about how to respond to such a challenge. It’s clear that Islamic State strategists understand American and European political cultures well indeed and, as they’ve repeatedly shown, they use that understanding to their grim advantage. They know just how to provoke us into anti-Muslim rhetoric and belligerent policies, which they find most useful to their project and their movement. Like classic judo warriors, they employ our immense strength remarkably effectively against us.

   

  Every one of Washington’s words and acts of war, every ally like Great Britain that joins the bombing campaign against IS, only confirms the Islamic State’s message that Muslims are under attack by the West. All of it only plays into the IS’s own apocalyptic worldview.  Every step in the process makes the IS more attractive to Muslims who feel oppressed and marginalized by the West. So think of every threat uttered in the presidential campaign here and every bomb now being dropped as yet more global recruitment posters arriving “like manna from heaven” for that movement.  Each is an invitation to launch yet more Paris-style attacks.

   

  Our blindness to them as human beings, and to all the ways we have influenced them, increases their power and undermines our power to shape the outcome of events in Iraq, Syria, and elsewhere in the Greater Middle East. Ironically, we accept this loss of power willingly, even eagerly, because it allows us to hold on to what seems to matter most to us: our vision of a war against inhuman evildoers, which brings us to…

   

  Mistake Number Five: To convince ourselves that the Islamic State is evil incarnate, we imagine that the enemy is as relentless, intractable, and implacable as the devil himself. As a result, we also imagine that nothing we could do might diminish their will to evil. Since, as we see it, we had nothing to do with creating these monsters, no changes in our policies or actions could possibly influence their behavior.  And since they are just crazy — not capable of normal rationality — there is no point in trying to talk with them.

   

  By this route we finally, inevitably, arrive at…

   

  Mistake Number Six: The belief that we have only one option: annihilation. Or if that proves impossible, despite the military forces at our disposal, then at least containing them forever.

   

  In fact, the presidential candidates of this moment all demand annihilation and nothing less. In Donald Trump’s words, “bomb the shit out of ‘em.” In Hillary Clinton’s more demure formulation, “crush ISIS… break the group’s momentum and then its back.”  Even Bernie Sanders agrees: “Our priority must be… to destroy the brutal and barbaric ISIS regime.”

   

  The dream of a war of annihilation against evil has a long, long history in white America.  It began in 1636 when Puritans in New England wiped out the Pequot tribe, promising that such a lesson would prevent further attacks by other tribes. In fact, it created a spiral of violence and counter-violence, and a war-against-evil template that the country still follows nearly four centuries later in its “war on terror.” The current conflict in Iraq and Syria seems only to be locking us into that template and its guaranteed cycle of violence ever more firmly.

  Why do we as a nation keep on playing into the same dismal scenario and committing the same mistakes? Why this seemingly irresistible urge to fight yet another war against evil?

  I worry that the answer to such questions may lie in what I’ve called an American myth of national insecurity. It tells us that we will always be at war with evildoers bent on destroying us; that this war (whichever the latest one may be) is the mission and the meaning of our nation; and that the only way to feel like a real American is to enlist permanently in permanent war.

  In other words, even as we stoke the Islamic State, we stoke ourselves as well. The longer we fight, the more deeply we are seized by fear. The more we fear, the more fiercely we are determined to fight. Perhaps the point is not to win the war but to remain trapped in this vicious circle, which feels perversely comforting because it offers a sense of unified national identity as nothing else can in our otherwise deeply divided nation.

  National myths are, however, invented by human beings, and we are always capable of changing our minds. Who knows? Maybe someday the Islamic State will figure out that brutal killing and other acts of horror in the name of the caliphate are not such a good idea after all. And maybe the United States will figure out that depending on an eternal, self-defeating war against evil for our national identity is a huge mistake after all. Maybe.

  

  

  

  

  

• Turkey Puts Medical Doctor On Trial For Comparing Erdogan To Gollum

  If there’s one thing you’d think Turks would have learned by now, it’s that you do not, under any circumstances, insult President Recep Tayyip Erdogan. 

  Nor in fact, do you suggest that the government is corrupt, that the PKK may not be “terrorists” after all, that elections may be rigged, or that the MIT is smuggling guns to militants in Syria. All of these things can and will get you arrested or much, much worse. 

  In the last two weeks alone we’ve witnessed the arrest and detention of two high profile journalists from Cumhuriyet, the arrest of the generals who were responsible for the investigation the Cumhuriyet journalists were arrested for reporting on, and the resignation of Today’s Zaman chief Bulent Kenes. 

  Cumhuriyet’s Can Dundar and Erdem Gul, were charged with spying and aiding a terrorist group, the gendarmerie with “forming and leading an armed terrorist organization,” and as for Bulent Kenes, he cited ongoing legal battles with the government for his resignation.

  This is all par for the course in Turkey. Indeed, it was just three months ago that three Vice News journalists (two British citizens and an Iraqi) were arrested for allegedly “engaging in terror activity” on behalf of ISIS. Their real “crime”: reporting on the conflict with the PKK.

  Well as those who frequent these pages are no doubt acutely aware, Erdogan has for all intents and purposes lost his mind since AKP put on a better showing at a re-run election the President engineered in early November. In addition to the renewed media crackdown, he’s shot down a Russian warplane and invaded Iraq.

  Well, just when you thought things couldn’t get any more surreal in Turkey, Dr. Bilgin Ciftci, a physician with the the Public Health Institution of Turkey has lost is job and now faces two years in prison for sharing the following on social media:

  

  Yes, that’s right, Erdogan is about to put a medical doctor in jail for comparing him to Gollum. 

  But it gets better.

  As The New York Times notes, “a judge said he did not know enough about the Tolkien creature to make an appropriate decision, five experts were ordered to conduct an investigation into Gollum’s moral character before the next phase of the trial begins in February.” 

  In what certainly comes across as a kind of slightly condescending (if you’re a Tolkein fan) attempt to make light of the situation without just coming out and calling the whole thing ridiculous, The Times went to the trouble of interviewing and quoting Michael D. C. Drout, an English professor at Wheaton College who edits an annual review of Tolkien’s works. 

  “I don’t think there’s any consensus that Gollum is evil. He is the most tragic character in ‘The Lord of the Rings.’ The context is this: Gollum accidentally, not intentionally, saves the entire world. [Tolkein] didn’t see him as irredeemably evil. He saw him as someone who had been destroyed by this evil ring.”

  Meanwhile, Peter Jackson – who directed the famous big screen adaptations of Tolkein’s trilogy, weighed in as well. “If the images are in fact the ones forming the basis of this Turkish lawsuit, we can state categorically: None of them feature the character known as Gollum. All of them are images of the character called Smeagol. Smeagol would never dream of wielding power over those weaker than himself. He is not a bully. In fact he’s very loveable. This is why audiences all over the world have warmed to his character.”

  Hilariously, Ciftci’s lawyer Hicran Danisman told the AP that the reason it came to this in the first place is that a common sense, freedom of expression defense didn’t fly in the face of the government’s accusations, so she was effectively forced to argue that Gollum isn’t all bad. Here’s a bit more on the history of the case from al-Monitor:

  Initially, almost everyone involved thought the case would be promptly dismissed. However, the case took an unusual turn. The Gollum meme was declared “ideological” and banned at the Public Health Institution, where Ciftci worked. The investigation prepared several reports, one of which claimed that this sort of offensive memes goes against the will of the Turkish people. In a nutshell, the report argued that it should be remembered that such memes target a man who has been elected president by 52% of the vote, about 21 million Turks. The report claimed, “These sorts of memes have no positive impact and … [are] part of an operation to tarnish the elected government’s reputation.”

   

  Article 299 of the Turkish penal code says that anyone who insults the president can face up to four years in prison, and the prison term goes up if the crime is committed publicly. If found guilty, Ciftci may be imprisoned for his Facebook post.

   

  If Gollum is found to be evil, then the meme will be considered “offensive” and Ciftci would be guilty of offending Erdogan. Yet the judge was not familiar with the Tolkien series, and could not independently decide on the character of Smeagol or Gollum. So he asked for an expert council to gather. The court-appointed council contains two academics, a “TV expert” and two behavioral scientists. The absurdity of putting Gollum on trial has sparked a domestic and international uproar.

  “What if the meme is found to depict Smeagol? Would there then be a new court-appointed council to investigate the character of Smeagol the hobbit?,” al-Monitor goes on to ask, incredulous. Ciftci’s lawyer is apparently set to inlcude Peter Jackson’s statement in the case file which means that it’s at least possible a Turkish court could end up analyzing Gollum and Smeagol as two separate beings on the way to determining whether the good doctor was actually comparing Erdogan to a vile, murderous creature driven mad by the powers of a magical ring, or a tormented, largely misunderstood anti-hero with a good heart.

  This, ladies and gentlemen, is what’s going on in Turkey, a NATO member and an ally that’s apparently so valuable to Washington, that the US is prepared to appease Erdogan even if it means risking open warfare with Russia and alienating any friends America still has in Baghdad.

  Although we wish Dr. Ciftci the best, we’d argue that Erdogan is a lot closer to Gollum than Smeagol. Decide for yourself:

  

  

  

  

• China Fixes Yuan At Weakest Since August 2011 After 45th Consecutive Month Of Deflation

  Chinese Producer Prices have now fallen YoY for 45 consecutive months and November's 5.9% YoY drop is the largest since the crisis in 2009. Following weak trade data overnight (and with The IMF having blessed any and all currency movements), it appears Chinese authorities have decided to do something about and continue the slowest, quietest, stealthiest currency war in the world. With today's Yuan fix, PBOC has weakened the Yuan back below the August devaluation lows, back to its weakest against the USD since August 2011. Judging by Offshore Yuan, there is a lot more weakening to come.

  PPI dropped the most since 2009…

  

   

  So China 'devalued' the Yuan a little more… to August 2011 lows…

  

   

  But judging by Offshore Yuan weakness, there's more 'devaluation' to come…

  

   

  And all with the new blessing of The IMF…

  

   

  Because if Japan can, then China can too.

   

  Charts: bloomberg

  

  

  

  

  

• Here Are HSBC's Top Risks For 2016

  With the end of the fiscal and calendar year upon us, sellside research rushes to put to print its latest forecasts about the coming year, and HSBC – which recently made headlines when it slashed its 2016 year-end forecast on 10-Year yields from 2.8% to 1.5% – is no exception.

  Earlier today, the firm’s research team issued a report laying out the top 10 risks for 2016, which had a peculiar caveat suggesting some at the bank is not in a rush to get arrested…

  

  … in which it laid out what it believes are the 2 “good” risks to the economy – a US capex recovery and a return to EM capital inflows – as well as the 6 “bad” risks such as policy paralysis, supply-led oil price increase, a UK vote for Brexit, political crises in Europe’s periphery, more frequent flash crashes, and an increase in China’s corporate defaults, as well as HSBC’s two “ugly” tail-risks: a US recession and Fed policy error.

  

  We will focus on the negative ones. This is how HSBC prefaces its risk packet:

  The “bad” category dominates, filling six of the 10 slots. This is not because we are particularly gloomy; on the contrary, our base case is for continued slow growth in 2016. But “bad” risks often have a more immediate impact than “good” ones, and our focus here is on 2016. Indeed, upside risks tend to be gradual in nature. Global trade agreements such as the Trans Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP) and technological improvements should add to global growth beyond next year. It is rare that a growth positive shock surprises markets.

   

  We don’t want to cry wolf about any of these risks. But in a world that remains highly leveraged and with limited policy ammunition to offset any new downturn, markets will be sensitive to any shift in consensus. The global economy and markets are more exposed to downside risks today than they would have been if the expansion had been more robust, or we were earlier in the global business cycle.

  With that caveat, here are the key downside risks:

  1. Policy paralysis

  Policymakers appear to run out of policy options, or are either unwilling or unable to adopt new policy to stimulate growth

  Policymakers may wish to try something else to stimulate growth but what happens when there are no obvious viable options? A number of unconventional and conventional policies have been tried in recent years, all with the objective of boosting nominal GDP. Quantitative easing, negative rates and fiscal policy have been put in place. Helicopter money is for now just a theoretical concept but it could be tested.

  What happens when policies appear not to work? Between lurching from one type of policy to another or when absolutely everything appears to have been tried, perceptions of policy paralysis may set in. This may be a direct consequence of the lack of ability or willingness to try something new at a time when existing policies are not effective. Policymakers are seen as impotent, either unable or unwilling to take the bold steps necessary.

  In the Eurozone this might apply to the ECB if it reaches the outer limits of what is technically and legally feasible, whilst governments fail to forge ahead with the necessary integration and supply-side reform. It is already controversial that the ECB is expanding its balance sheet and paying a negative rate on deposits. We wonder how much further the ECB can go before exhaustion (see our report Quantitative Exhaustion, 4 November 2015) is followed by policy paralysis.

  Faced with another downturn, just as the US presidential election approaches, it is hardly the right time for the US to unleash fiscal loosening, especially given the starting point for debt levels. And it is difficult to imagine the Fed starting QE4. The US could be much closer to the policy buffers than central bankers and politicians would care to admit.

  Investment implications

  • Flatter yield curves
  • Wider credit spreads
  • Equities suffer – particularly in EM

   

  2. Supply-Led Oil Price Increase

  Oversupply should fall and low spare capacity in OPEC offers limited buffers to supply disruptions, meaning oil could move sharply higher

  Following the 60% drop in crude prices since mid-2014, the market seems to be fixated on the risk of further falls. This is understandable given a backdrop of firm supply pressure from OPEC, large inventory overhangs and the potential for increased Iranian exports next year. However, we believe investors should be increasingly concerned about the risks of a sharp move higher in crude prices. Not only should the extent of oversupply fall dramatically in 2016, but low spare capacity within OPEC means that buffers against unexpected supply disruptions are very limited. Moreover, if OPEC abandons its policy and reduces output, prices could well rally considerably. As far as tail risks go, they seem skewed firmly to the upside, in our view.

  Producers outside OPEC have responded much more quickly to lower oil prices than the market was expecting. The most striking evidence of this is the relentless series of downgrades to non-OPEC supply growth estimates. Looking at the monthly evolution of the US Energy Information Administration’s (EIA) forecasts, 2016 non-OPEC supply growth was seen at 0.8mbd in February. Just nine months later, the forecast points to a y-o-y decline of 0.3mbd. The International Energy Agency (IEA) sees an even larger fall of 0.6mbd, which would be the largest annual decline in non-OPEC output since 1992 (when the collapse of the Soviet Union resulted in a 1mbd contraction). According to the IEA, non-OPEC volumes grew 2.5mbd as recently as 2014.

  The biggest supply response thus far has come from US tight oil production, which has a much shorter production cycle than conventional oil extraction. The US onshore rig count has fallen sharply by 66% since the peak in Q4 2014, and the full effects of this have only recently started to translate into falling production. On our estimates, liquids output from the main US onshore plays should fall around 650kbd y/y in 2016. However, it’s important to remember that US tight oil only accounts for around 5mbd out of total non-OPEC supply of nearly 60mbd. Large project deferrals and cancellations will only impact supply some years down the line, but decline rates from existing production are likely to rise in the near term as the industry cuts back on maintenance capex such as infill drilling.

  While this risk would present a drag to global growth it would be beneficial for a number of oil producing nations. As such, the investment implications are quite clear. Firstly, markets will be looking for direct oil exposure. This should lead MYR and RUB to appreciate and IND and JPY to depreciate. The global equity energy sector is also likely to be well bid. In particular, we believe the Russian market should rally. Furthermore, oil services companies should outperform the majors in the integrated sector. USD high yield debt is also likely to benefit due to diminished credit risks in the shale oil sector which makes up roughly 15% of the market. In addition, any concerns about GCC currency pegs are likely to evaporate; hence, 5-year Saudi Arabian CDS should come down from today’s elevated level. We would also expect US high yield to be of particular interest. Spreads in the USD high yield energy sector would tighten significantly.

  Investment implications

  • Positive for USD high yield debt markets and oil exporter currencies
  • Saudi Arabia 5-year CDS should come down
  • Saudi and Russian equity markets rally most

   

  3. UK votes for Brexit

  Repercussions would be felt across Europe but terms of the exit would be key

  David Cameron, the UK prime minister, has promised that by the end of 2017 at the latest there will be a referendum on whether the UK should remain in the European Union. But it is clear he would like to hold the vote in 2016, if at all possible, not least to reduce the uncertainty the event will engender.

  There would be significant uncertainty in the immediate aftermath of a “leave” vote. The UK cannot negotiate the terms of its exit on a hypothetical basis, so there would be no clarity on what the post-EU arrangement would look like. If the UK remained a member of the European Economic Area, alongside countries such as Norway and Iceland, the economic implications would be very different to those of a complete withdrawal.

  The UK’s transition to non-EU member status could take up to two years, at which point its membership would end automatically, if no agreement has been ratified by the European Council. The longer the period of uncertainty, the greater the likely impact on investment and growth. Untangling European laws and replacing them with domestic legislation could be a very long process, requiring government resources to be diverted from other areas of policymaking.

  Also, the future of the UK itself could once again be called into question. If the regional breakdown of the referendum voting showed a majority of Scottish people had voted to stay in the EU, calls for a second Scottish independence referendum would intensify.

  If there is a “leave” vote, it is highly likely that the UK would seek to preserve the extensive and mutually advantageous goods trade between it and the other EU members. The impact on services trade, which is very important to the UK, is harder to call. For example, some financial services may opt to leave the UK in order to retain full access to EU markets. Depending on the exit agreement, migration flows could be restricted which could reduce the labour supply and risk a loss of competitiveness.

  From the EU’s perspective, a UK exit would send out the message that EU membership is not a one-way street, raising concerns about other potential withdrawals and denting investor confidence across the region. If the UK were to impose restrictions on migration, it would also be negative for countries that benefit from employment opportunities for their citizens and remittances from the UK.

  Investment implications

  • GBP would sell off…
  • This would shelter the FTSE 100 given the large share of overseas revenues
  • The possibility of contagion could put peripheral rates under pressure

   

  4. Periphery issues rise again

  2016 is shaping up to be an important year from a political perspective in the eurozone periphery:

  • After the inconclusive elections on 4 October, the leader of the Portuguese Socialist Party Antonio Costa was officially named Prime Minister on 26 November, securing the support of other left-wing parties for his minority government. However, the government faces many challenges ahead. This will start with the approval of the 2016 budget – which will then have to go under the scrutiny of the European Commission – as the parties supporting the government have been arguing for a relaxation of austerity and a U-turn on key reforms in the labour market and on pensions (see our report Portugal’s new government: Are markets right to be relaxed, 27 November 2015)
  • Spain also has general elections on 20 December, with an increasingly fragmented electorate. The latest polls show a close race between the ruling Partido Popular, socialist PSOE and reformist Ciudadanos, with leftist radical Podemos a more distant fourth. The electoral law complicates things, but in a nutshell it is unlikely any party will obtain an absolute majority and even a two-party coalition might fall short. This could result in delays before a government can be formed and prolonged uncertainty. Meanwhile, the pro-independence platform of parties that won the Catalonia election on 27 September has formally started the process towards  declaring independence – defying a ruling by the Spanish constitutional court – and uncertainty could continue well beyond 20 December (see our report Notes from Madrid, signs of economic rebalancing, political uncertainty dominates, 5 November 2015)
  • In Greece, progress on the implementation of the third programme of financial assistance of up to EUR86bn agreed in August has been slow. Further delays can be expected in the first programme review – due to start in the coming weeks – which will tackle politically-sensitive issues such as pension reform and privatisations. Debt relief, which is the key precondition for the IMF to be on board, will only be discussed on completion of the review. The prospect of a successful review completion is also a condition for the ECB to accept Greek bonds as collateral in its refinancing operations, and buy them under QE (see our report Greece and its creditors: Today’s deal is just the first step, expect delays in negotiations, 19 November 2015)

  So far, the ECB QE programme has helped contain the market reaction to some of the political uncertainty that has been building up in these countries, even if we have seen a widening of the spreads in the sovereign bonds space, for example compared to Italy which is experiencing a period of relative political stability. Yet, there is the potential for things to go wrong, and if this was the case, even an expansion of the ECB QE programme might not be enough to avoid a further widening of spreads, renewed escalation of the eurozone sovereign crisis and fears of a possible exit by a country from the union. Such a scenario could be triggered by a combination of the following events:

  • In Portugal, the new government puts forward a very expansionary 2016 budget, which is rejected by Brussels. This simultaneously triggers a downgrade by the DBRS agency, making Portuguese debt ineligible for QE and no longer accepted as collateral in the ECB refinancing operations, leading to a spike in spreads and rising concerns for the banking sector. The government loses the support of the radical left-wing parties and elections are called for the end-April 2016 – the earliest they can be called – and the prolonged period of political uncertainty starts weighing on the already weak economic recovery
  • Inconclusive elections in Spain, with parties unable to form a governing coalition, lead to a prolonged period of uncertainty. The country is unable to pass a revised 2016 budget as requested by the European Commission to meet EU fiscal targets and therefore Brussels formally starts a procedure to sanction the Spanish government. Meanwhile, the escalation of tensions between Catalonia and Madrid on the issue of independence starts to hit consumer and investor confidence – Catalonia accounts for almost 20% of Spanish GDP – leading to a marked slowdown in the economy, which together with the fiscal slippages and rising debt triggers a rating downgrade. As a result, the spread widens significantly
  • Greek negotiations with its creditors, including on debt relief, prove difficult as the continuous delays end up harming the level of trust between the parties. Syriza MPs split on the issues of pension reform and privatisations and the government – already relying on a thin majority by only three MPs in the 300-seat parliament – loses its majority. Opposition parties decide not to support the government in passing the necessary reforms, which leads to a stall in the programme negotiations and new elections being called, amid rising fears of a possible Grexit in the markets

  The potential for one or more country to leave the Eurozone and the net effect on peripheral (and other) asset markets has been hotly debated since the Eurozone crisis of 2011. The potential for erratic cross border capital flows and contagion across the periphery, and potentially core countries, are the most feared outcomes of a Eurozone break up or country exit scenario.

  Investment implications

  • Periphery spreads widen and Bunds enjoy safe-haven flows
  • European equities fall
  • EUR sells off

   

  5. More frequent flash crashes

  What if a combination of regulation, dealer balance sheet constraints and electronic trading leads to further declines in liquidity?

  On many days, the markets function well, with investors and dealers able to buy and sell what they want to without significantly moving prices. But, on some days, a market nearly stops functioning – and prices can swing dramatically, impact the value of assets significantly, and make it difficult to buy or sell. This was seen in the October 2014 US Treasury market flash crash and the August 2015 equity flash crash.

  We see two main reasons for the changes in market behaviour. First is the shift from human to automated trading. Second is the reduction in the size of dealer balance sheets, a reflection of shifts in financial regulations introduced after the 2008 financial crisis.  Dealer balance sheet size has fallen by 40% from its peak to June 2015 and repurchase agreements fell by over 50%.

  Historically, dealers had incentives to moderate market reactions to flows and thus maintain profitable relationships with their customers. The market structure meant that dealers often had better flow information than customers, which facilitated liquidity. Changes in market structure, such as the widespread use of automated trading, and higher costs of maintaining large balance sheets on the back of regulatory changes, have, in some cases, changed the market reaction to flows. There are now fewer incentives for dealers to step in and moderate market reactions to flows and, in some cases, dealers do not have as much information about flows  as before.

  We expect the impact of these shifts to continue to be felt. What is unclear is just how much market trading patterns and liquidity in recent decades will change, or whether the way assets are priced will be affected on a temporary or even permanent basis.

  Until recently, the impact of reduced liquidity has been most visible in short-term “flash crash” events. However, the effects could be longer term. For example, the higher cost of maintaining large balance sheet seems to be causing a shift in the pricing of US interest rate swaps. The swap spread, representing short-term bank borrowing costs, is negative from five- to 30-year maturities. Financial theory suggests this spread inversion should only occur if the banking system was less risky than US Treasury securities. This is clearly not the case, as seen by the positive spread in the corporate bond market for financial credits. In our view, the swap spread  shifts are best explained by the high cost of balance sheet for US banks and dealers. If this is a long-term change in market structure, then spread shift may be long term as well, with implications for asset values and investment strategies going forward.

  Less liquidity may affect the structure of markets over time. The shift to lower yields and more competitive bond markets since the 1980s illustrates this. The number of primary Treasury dealers fell by half as the bid-to-offer spread narrowed and yields fell. There was even more consolidation in the buy side of the bond market as market liquidity encouraged consolidation.

  With automated trading, the bid-to-offer spread will likely remain narrow in the most liquid markets. Potential market effects from this, combined with smaller balance sheets, are:

  1. Further drops in market liquidity to reflect the risk of a flash crash on dealer capital and investor performance
  2. Increased buy-side focus on capacity constraints in an uncertain liquidity environment. This favours a trend towards a more boutique style trading set-up, even within larger firms
  3. Trading activity migrating to less constrained venues and a further reduction in the liquidity of the most-affected areas
  4. Wider bid-to-offer spreads in less automated markets to reflect the true liquidity risk or an increase in the market impact of trades in all markets

  Investment implications

  • Buy volatility on dips
  • Bonds tend to outperform equities in these events
  • 2-year US Treasury yield should drop

   

  6. China corporate defaults rise

  Credit stress is rising especially amongst industrial sectors that suffer from overcapacity and output price deflation

  2016 will see a continued rise in credit stress especially amongst the traditional industrial players, led by State-Owned-Enterprises (SOEs). There is a risk that a rise in defaults amongst these issuers has the potential to have wider implications.

  Identifying the fragile issuers

  We conducted credit tests on the universe of onshore Chinese credit bonds maturing within H1 2016. Based on a combination of liquidity, earnings and debt coverage criteria, we identified 30 issuers (with 43 bonds outstanding) that we think are vulnerable to potential debt servicing issues in H1 2016. Without external intervention or support, we think these issuers are particularly fragile against refinancing risks and may face potential creditor actions (especially banks) if financial profiles weaken further.

  By maturity breakdown, the first half of next year is particularly heavy in vulnerable bonds coming due, with nearly 30% (or RMB16.7bn) concentrated in April alone (Chart 10).

  

  Unsurprisingly, the vast majority of the vulnerable issuers/bonds fall in the coal mining (75% by bond notional), chemicals (9%) or steel (8%) sectors (Chart 11). In terms of company types, the risk group is dominated by provincial-level SOEs (73% by bond notional), followed by Central SOEs (Chart 12). POEs have the lowest percentage in our fragile list, probably due to a biased selection effect of onshore capital markets. These conclusions are consistent with our findings highlighted in our report China Onshore Monthly: Look out for a correction, 4 November 2015, where we screen for the weaker links in a bigger universe.

  

  Given, however, that borrowers are heavily concentrated at the provincial level of local government (there are 33 of them, see Chart 12), Beijing should have quite strong direct control over potential defaults. So, whilst we believe a credit-led risk scenario is a significant tail risk, it is a low likelihood event, to which we attribute a less than 5% probability.

  Clearly, a deterioration of the Chinese credit environment would have a significant impact on Chinese assets. As SOEs would have the support of the central government it is fairly likely that the private sector would suffer more and earlier than the state-owned sector. From that perspective, it is likely that Chinese equity markets would suffer most. That said, dim sum markets would also face significant selling pressure.

  Investment implications

  • Chinese equities and dim sum bonds directly impacted
  • Policy action from Beijing limits downside risks
  • Global assets would be exposed towards any CNY weakness

   

  7. US recession

  Slumping profits leads to downturn in business investment

  A protracted slump in profitability can make companies more uncertain about the future and often leads to a downturn in business investment spending. Once the contraction in investment is severe enough, a recession is usually the result.

  Continued strength in the US dollar is one factor that might pressure corporate profits, reducing export demand and boosting import competition. Sluggish global growth would exacerbate the drag from net exports.

  A drop in the stock market as profits disappoint would impact business and consumer sentiment and further restrain spending. Even if interest rates were to hold steady or decline, businesses would still refrain from making new investments due to a lack of confidence in final demand.

  A full-fledged recession would involve firms making cutbacks in their workforces in addition to reductions in capital expenditures. Accelerating layoffs would lead to a drop in personal incomes and additional weakness in household spending.

  Corporate profits as measured in the national accounts have slumped in the past year, and real growth in business fixed investment has been sluggish. A US recession is a possible risk in 2016 if growth in profits does not improve.

  

  A sharp slowdown in US growth leading to a recession is likely to precipitate a broad “risk off” move. We believe the main beneficiaries of this shift would be the US dollar and Treasuries. A strong USD could thus be both the cause and the effect of a US recession, with dollar strength first driving a reduction in corporate profits and then benefiting from safe-haven flows in the ensuing downturn. These flows should also drive 10-year US Treasury yields lowers. The HSBC Fixed Income Strategy sees 10-year yields falling to 1.5%. But, a US recession should push yields even lower.

  Equity markets are likely to sell-off fairly sharply as weakness in the US economy is exacerbated by sluggish global growth. Perhaps counterintuitively though, we would expect the relative safe-haven status of US equities to mean that it outperforms the wider equity market, with emerging-market equities likely to be the hardest hit. Within the US, we believe the sectors which are mostly dependent on exports would suffer given further USD strength. As such, we would expect IT, materials, energy and industrials to be the biggest underperformers.

  Investment implications

  • Broad “risk off” move, with USD and US Treasuries rallying
  • IT, materials, energy and industrials equity sectors likely to suffer
  • Brazil, Russia, South Africa, Turkey and Mexico would be the big losers in EM

   

  8. Fed policy error

  An uptick in inflation could convince the Fed to speed up its pace of tightening, which could act as a drag on economic activity

  In September, the median FOMC policymaker projected a rise in the federal funds rate to nearly 1.5% at the end of 2016 and to over 2.5% at the end of 2017. The real federal funds rate, according to the FOMC’s projections for core inflation, would rise from around -1.0% currently up to 0.7% at the end of 2017.

  There is a risk that following this path of rate increases could slow the growth of aggregate demand in the economy by more than anticipated. The equilibrium real rate of interest appears to have declined compared to the past and may not rise very much in the near future if labour force and productivity growth remain low.

  Uncertainty about the equilibrium rate of interest may lead Fed policymakers to react even more strongly to actual inflation outcomes than would otherwise be the case. Any uptick in core inflation could convince the FOMC to speed up its pace of policy tightening.

  In this scenario, the lagged effects of monetary tightening could end up slowing economic activity more rapidly than expected, leading to a stop-and-go policy and increased volatility in financial markets.

  

  Emerging markets investors have adapted to the idea of Fed lift-off at the end of this year and have moved to focus on the pace and duration of tightening. The overwhelming consensus in the market is that the Fed will revise down its dot-plot towards lower market expectations, as it has repeatedly done so throughout 2015. The improvement in EM risk appetite since October, following a dismal third quarter, rests on the idea that this is going to be the most ‘dovish’ tightening cycle ever with potential long pauses, even reversals of the hike(s).

  In our recent report, our base-case entails near zero US real interest rates on 10-Y Treasury for 2016, which, everything else held constant, gives us stable non-resident capital flow at around 2015 level of 1.8% of GDP, or nearly USD500bn. If we were to increase US real interest rate assumption to slightly over 1.0%, this would nearly halve EM capital flows to around USD280bn or c1.2% of GDP, the slowest capital flow since 1990. Assuming the same extent of capital outflows by residents (such as external asset acquisition and external debt repayments), this might give even deeper net negative capital flows (net of resident and non-residents).

  This scenario is problematic for most assets. The key theme of the market would be one of asset depreciation – where most assets would sell off. This sets this risk apart from other ‘Risk-Off’ events as the impact would be felt in both equity and bond markets. Given that market returns have predominantly been driven by valuation expansions since the great recession this presents most markets with fairly large downside risks. Bond markets would struggle initially which would raise discount rates and make current equity market valuations unsustainable.

  Investment implications

  • General ‘asset deflation’ scenario. Both bonds and equities sell off.
  • US dollar likely to strengthen as EM currencies and assets sell off materially
  • Assets in Brazil, Colombia, South Africa, Mexico and Turkey would suffer disproportionally

  

  

  

  

• Declassified CIA Manual Shows How US Uses Bureaucracy to Destabilize Governments

  Submitted by Jake Anderson via TheAntiMedia.org,

  When most people think of CIA sabotage, they think of coups, assassinations, proxy wars, armed rebel groups, and even false flags – not strategic stupidity and purposeful bureaucratic ineptitude. However, according to a declassified document from 1944, the Office of Strategic Services (OSS), which later became the CIA, used and trained a curious breed of “citizen-saboteurs” in occupied nations like Norway and France.

  The World War II-era document, called Simple Sabotage Field Manual, outlines ways in which operatives can disrupt and demoralize enemy administrators and police forces. The first section of the document, which can be read in its entirety here, addresses “Organizations and Conferences” — and how to turn them into a “dysfunctional mess”:

  • Insist on doing everything through “channels.” Never permit short-cuts to be taken in order to expedite decisions.
  • Make “speeches.” Talk as frequently as possible and at great length. Illustrate your “points” by long anecdotes and accounts of personal experiences.
  • When possible, refer all matters to committees, for “further study and consideration.” Attempt to make the committee as large as possible — never less than five.
  • Bring up irrelevant issues as frequently as possible.
  • Haggle over precise wordings of communications, minutes, resolutions.
  • Refer back to matters decided upon at the last meeting and attempt to re-open the question of the advisability of that decision.
  • Advocate “caution.” Be “reasonable” and urge your fellow-conferees to be “reasonable” and avoid haste which might result in embarrassments or difficulties later on.

  On its official webpage, the CIA boasts about finding innovative ways to bring about sabotage, calling their tactics for destabilization “surprisingly relevant.” While they admit that some of the ideas may seem a bit outdated, they claim that “Together they are a reminder of how easily productivity and order can be undermined.”

  In a second section targeted at manager-saboteurs, the guide lists the following tactical moves:

  • In making work assignments, always sign out the unimportant jobs first. See that important jobs are assigned to inefficient workers.
  • Insist on perfect work in relatively unimportant products; send back for refinishing those which have the least flaw.
  • To lower morale and with it, production, be pleasant to inefficient workers; give them undeserved promotions.
  • Hold conferences when there is more critical work to be done.
  • Multiply the procedures and clearances involved in issuing instructions, paychecks, and so on. See that three people have to approve everything where one would do.

  Finally, the guide presents protocol for how saboteur-employees can disrupt enemy operations, too:

  • Work slowly.
  • Contrive as many interruptions to your work as you can.
  • Do your work poorly and blame it on bad tools, machinery, or equipment. Complain that these things are preventing you from doing your job right.
  • Never pass on your skill and experience to a new or less skillful worker.

  The CIA is proud of its Kafkaesque field manual and evidently still views it as an unorthodox but effective form of destabilizing enemy operations around the world. Of course, so too might an anarchist or revolutionary look at such tactics and view them in the context of disrupting certain domestic power structures, many of which are already built like a bureaucratic house of cards.

  It seems if any country should refrain from showcasing how easy it is to disrupt inefficient federal agencies, however, it would be the United States.

  

  

  

  

  

• "We're At War, Get It Through Your Head", Trump Doubles Down During Combative Follow Up Interviews

  12 hours after his dramatic campaign statement to shut out Muslims arrivals into the US, Donald Trump doubled down and in a series of interviews early on Tuesday, he repeatedly told anchors such as CNN’s Chris Cuomo that “we’re at war – get it through your head” in his latest heated exchange, during which he reminded America how quickly people have forgotten “World Trade Center #1 and World Trade Center #2.“

  One thing that Trump did stress throughout the media blitz is that his plan to prevent Muslims from entering the U.S. was “temporary.” and in a follow up interview on ABC’s “Good Morning America” he clarified that American Muslims living abroad could return to the U.S., following conflicting statements by his campaign yesterday: when asked if Trump’s proposal applied to U.S. citizens living abroad, a Trump spokesperson had told The Hill on Monday that Trump’s proposal applied to “everyone.”

  In the aftermath of yesterday’s announcement, there has been a surge of media outlets comparing Trump to Hitler (as seen below).

  

  George Stephanopoulos asked Trump during the ABC interview whether the candidate was bothered by the increasing number of such comparisons, to which Trump responded with a simple, “No.” 

  As could have been expected, Trump’s interview  on MSNBC’s “Morning Joe” turned combative when co-host Joe Scarborough tried to interject a question, while the real estate mogul continued to speak during the phone call-in interview.  As the Hill reports, Scarborough threatened to send the interview to a break if Trump didn’t allow him to ask a question. After Trump didn’t relent, Scarborough instructed producers to cut to commercials.

  After the break, Trump discussed comparisons to former President Franklin Delano Roosevelt. Questioned about whether he was proposing internment camps like the ones FDR created for the Japanese, Trump said, “I am not proposing that. This is a whole different thing,” he added later during another combative exchange.

  It wasn’t just the leftist media that attacked Trump – so did the GOP, where rivals blasted Trump, including former Florida Gov. Jeb Bush who called it “unhinged,” as well as the Republican party chairs in the early voting states of Iowa, New Hampshire and South Carolina. The White House and Democratic presidential front-runner Hillary Clinton also panned the idea as un-American and unconstitutional.

  Despite the condemnations, Trump said on MSNBC that “we have to get our hands around a very serious problem” adding that “not everybody has condemned” his comments.

  Full CNN clip below:

  

  

  

  

  

• What Happens When Yellen Raises Rates?

  “The world’s central bankers will print until deflation gives way,” warns Mike Maloney, “they have the arrogance to just think they can control it.” They can’t. With Janet Yellen on the verge of what many believe will be a policy error in the face of overwhelmingly weak data (and global turmoil once again), it’s never been more important to understand the limits of how much ‘actual’ control the central banks have over the economy. There’s one force moving our economy they can not influence, and Maloney explains it in this brief clip…

   

  

  

  

  

  

• Blowing Up The Death Star Didn't Destroy The Empire, Building It Did

  Submitted by Tho Bishop via The Mises Institute,

  A paper written by Zachary Feinstein discussing the economic consequences of blowing up the Death Star has been making the rounds on social media. While I’m a fan of using Star Wars to teach economics, Feinstein makes a very basic economic mistake in his focus on the Death Star’s destruction.

  The paper actually starts out strong. Feinstein notes that, “Economics and finance, much like the Force as explained by Jedi Master Obi-Wan Kenobi, is ‘created by all living things. It surrounds us and penetrates us; it binds the galaxy together.’” Unfortunately, the author shifts from looking at the organic economy towards the dark side of economic models and aggregates – in this case Gross Galactic Product. The paper goes on to outline the quintillions that would be spent in the construction of the Death Star, the estimated size of the galactic banking system and the bailout that would be needed to restore financial confidence after the collapse of the Empire.

  While some of the points made are interesting, the paper overlooks that the real economic problem with the Death Star is that a genocidal government built it at all.

  I would point both Feinstein (and Emperor Palpatine) to Henry Hazlitt’s Economic in One Lesson. In the words of Hazlitt:

  The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

  By simply focusing on the seen – the Death Star – Feinstein fails to consider the opportunity costs involved in the creation of the vessel in the first place. For example, the paper notes that the steel required to build the Death Star would be valued in the equivalent of hundreds of quintillions of dollars. Imagine the number of sometimes-helpful droids that could have been built by that same steel on a free galactic market if it were not reallocated to the diabolical plans of the government!

  While noted science fiction fan Paul Krugman may point to the number of jobs that the Death Star created, Hazlitt is also ready with a response. Using the example of government building an unnecessary bridge:

  [F]or every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence.

  The paper also doesn’t look at the impact the Death Star’s construction would have on the galaxy’s tax burden. As Rothbard notes in War, Peace and the State, “State wars can only be waged through aggression against the taxpayer.” Since we know George Lucas’s fictional galaxy has its own version of the IRS, I believe it is safe to assume that the same aggression applies to star wars.

  In fact, a closer look at Star Wars economics highlights that any hope for Galactic harmony does not come from the return of the Jedi, but from embracing capitalism. After all, a true market economy would make the construction of a Death Star nearly impossible in the first place. As Ludwig von Mises explained in The Causes of the Economic Crisis:

  It is inherent in the nature of the capitalistic economy that, in the final analysis, the employment of the factors of production is aimed only toward serving the wishes of consumers.

  If the Galaxy had free enterprise, is it likely that consumer demand would lead to the creation of a moon-sized battle station designed to destroy inhabited planets? Further, would anyone without the taxation powers of the Empire be able to afford such a monstrosity? Highly doubtful. In fact, the whole chain of events that led to the rise of Darth Vader and the eventual election of Jar Jar Binks was all set in place due to a dispute over burdensome tariffs!

  Perhaps when the world is treated to the release of The Force Awakens, we will see Princess Leia call out, "Help Me, Ludwig von Mises. You're My Only Hope." After all, if a Mises reference is good enough for Batman – it’s good enough for Star Wars. 

  

  

  

  

  

• Is It Time To Make Saudi Arabia Pay For Underwriting International Terrorism?

  In the wake of the carnage that left 14 dead and nearly two dozen injured at a San Bernardino holiday party last week, we learned that Tashfeen Malik – Syed Farook’s wife and female accomplice in the massacre – lived in Saudi Arabia for some 25 years after moving to the kingdom from Pakistan with her father. 

  According to Malik’s uncle, one Javed Rabbani, Tashfeen’s father “changed a lot” when he moved to Saudi Arabia. “When relatives visited him, they would come back and tell us how conservative and hardline he had become” (read more here).

  Needless to say, we weren’t surprised.

  “Now clearly there are no smoking guns here, but it’s worth noting that when it comes to radicalization, no one does it quite like the Saudis,” we said, the day after the attacks once the media revealed that Farook traveled to Saudi Arabia to marry Malik.

  We continued: “Although we would urge caution when it comes to drawing conclusions around the sectarian divide, we’d be remiss if we didn’t note that ISIS, al-Qaeda, and many of the other groups the public generally identifies with extremism, are Sunni and Saudi Arabia (where Farook allegedly found his wife) promotes puritanical Wahhabism.”

  That echoes the sentiments of Kamel Daoud, a columnist for Quotidien d’Oran, and the author of “The Meursault Investigation” who, in a New York Times Op-ed published earlier this month, called Saudi Arabia “an ISIS that made it.” Here’s an excerpt:

  Black Daesh, white Daesh. The former slits throats, kills, stones, cuts off hands, destroys humanity’s common heritage and despises archaeology, women and non-Muslims. The latter is better dressed and neater but does the same things. The Islamic State; Saudi Arabia. In its struggle against terrorism, the West wages war on one, but shakes hands with the other. This is a mechanism of denial, and denial has a price: preserving the famous strategic alliance with Saudi Arabia at the risk of forgetting that the kingdom also relies on an alliance with a religious clergy that produces, legitimizes, spreads, preaches and defends Wahhabism, the ultra-puritanical form of Islam that Daesh feeds on.

  For those who prefer a visual representation, this should help:

  

  It now appears that the world may finally be waking up to what’s going on. While it’s undoubtedly important to understand the role the Saudis and Qatar have played in funding, arming, and training Sunni extremists across the region, it’s perhaps even more critical that public begins to come to terms with the fact that it’s the ideology Riyadh pushes that’s perhaps more dangerous than anything else. Note that this isn’t a comment on Islam or Muslims. It’s a comment on the Saudi’s brand of puritanical Islam that frankly, is poisonous. 

  Here with some fresh commentary on all of the above and on why it’s time for the US to reevaluate its relationship with Riyadh, is Politico. 

  *  *  *

  From “Saudi Arabia Is Underwriting Terrorism. Let’s Start Making It Pay,” by Charles Kenny as originally published in Politico

  We don’t know yet what happened to San Bernardino shooter Tashfeen Malik during her many years living in Saudi Arabia, or what her U.S.-born husband and accomplice, Syed Farook, might have experienced during his two recent visits to the country. But it isn’t news that Saudi Arabia, a supposed U.S. ally, has a long record of promoting religious extremism at home and exporting it abroad. According to a Reuters report, relatives of the Pakistani-born Malik say she and her father appeared to have become more radicalized during years they spent in Saudi Arabia. Between 1,500 and 2,500 Saudis have joined the fighting in Iraq and Syria in part thanks to the close relationship between the ideology of the Islamic State and of Saudi Wahabism. In the last month alone, Saudi Arabia has declared its intent to behead 50 people across the country and has threatened legal action against any who suggest beheading is “ISIS-like.”

  For years since 9/11, U.S. and Western officials have mostly looked the other way at all this ideological support for extremism: Saudi oil was just too important to the global economy, even though many of these Saudi petro-dollars were underwriting repression at home and the growth of Salafist fundamentalism abroad. But today, two things have changed: first, the global cost of Saudi-backed extremism has continued to climb—with the rise of ISIS and Boko Haram, the bombings in Beirut and Paris and the shootings in San Bernardino.

  The other factor that has changed is that there is no longer as much economic justification for America to kowtow to the Saudi regime. With Saudi Arabian dominance of the global oil market declining, and the United States moving itself closer to energy independence—and the deal to halt Iranian nuclear weapons technology moving ahead, neutralizing for the moment at least the threat of a Mideast arms race—there has never been a better time to reconsider America’s close relationship with the House of Saud.

  It’s long past time, in other words, to make Saudi Arabia pay for its ideological support of extremism. The United States should be pressuring Saudi Arabia to reform and—if necessary—move on to targeted sanctions modeled on those the United States has applied to Russia, Zimbabwe and Venezuela.

  Saudi Arabia, of course, denies that it is involved in underwriting extremism; it maintains, on the contrary, that it is part of the coalition against Islamic State and it has been a victim of extremist terror attacks. But the record of Saudi Arabia’s global support for extremists suggests it should be on the shortlist for inclusion on the State Sponsors of Terrorism list, at the least. 

  This support for radicalism abroad should come as little surprise given that Islamic State is an ideological cousin of Saudi Arabia’s own state-sponsored extremist Wahhabi sect—which the country has spent more than $10 billion to promote worldwide through charitable organizations like the World Assembly of Muslim Youth. The country will continue to export extremism as long as it practices the same policies at home.

  In fact, the country’s domestic human rights abuses are enough reason to impose sanctions alone. Venezuela is under U.S. sanctions at the moment for “erosion of human rights guarantees, persecution of political opponents, curtailment of press freedoms, use of violence and human rights violations.” It might be shorter to list the human rights Saudi Arabia upholds than those it abuses. 

  Beyond the floggings and beheadings meted out to those who dare suggest reform, Saudi Arabia’s record on women is a sick form of gender apartheid. They are banned from obtaining a passport, marrying, traveling or going to college without the approval of their husband or other male guardian. 

  Yet we haven’t really even started this discussion about Saudi Arabia in America. Indeed, the United States is still deeply implicated in Saudi Arabia’s abuses. According to the Stockholm International Peace Research Institute, the U.S. exported $934 million in arms to Saudi Arabia from 2005 to 2009. From 2010 to 2014, it exported $2.4 billion more. This month, it approved another billion-dollar shipment. The U.S. provides training, shares intelligence and gives logistics support to Saudi Arabia’s military. And President Barack Obama rushed to Riyadh to pay obeisance to the country’s new king, Salman, early in 2015, only days after the death of his predecessor, Abdullah.

  *  *  *

  In short, if the US wants to dial back the “crazy”, Washington should consider the fact that despite incessant Ayatollah trolling, an admittedly insane judicial system, and valid charges that the Quds have, at times, engaged in acts that can only be described as “terrorism”, the world would benefit from a little more of this…

  

  … and a whole hell of a lot less of this…

  

  

  

  

  

  

• Jeff Gundlach's Most Bearish Presentation Yet: The Complete Slide Pack

  In what may have been Jeff Gundlach’s most bearish presentation to date, explainably under the theme of “Tick, Tick, Tick“, and with references to such board games as “Kaboom – Baloon Busting Game”, “Sorry”, “Dynamite Shack”, “Trouble” and “Twister“, DoubleLine’s (with an AUM of $80 billion set to surpass Pimco’s TRF quite soon) founder was at a loss for words trying to explain just why Yellen is hell bent to hike rates in one week, just when the global economy is not only clearly not in the required shape, but warning that the outcome from a Fed rate hike will lead to a dramatic repricing (lower) across all asset classes.

  As Reuters notes, despite soft growth in the U.S. and weakening global growth, the Fed is “hell bent” on raising interest rates because it has said in many speeches that it would do so, Gundlach says. “It’s possible the Fed pulls another Lucy and the football,” Gundlach said, referring to peanut character Lucy yanking a football away from Charlie Brown.

  Gundlach, who has been warning that the U.S. Federal Reserve should not tighten monetary policy in December, cited a number of other asset classes that are signaling deteriorating conditions. The commodities market has been facing monstrous declines with copper prices, as an example, down 37 percent since July 2014 while “the breadth of the equity market may be the worst ever.” Gundlach characterized commodities as the “widow maker” of the markets.

   

  Overall, Gundlach said it is “unthinkable” to raise rates with junk bonds and leveraged loans struggling so much.

  Gundlach predicts that the Fed could end up looking like Sweden’s Riksbank, which hiked back in 2010 and 2011 only to have to quickly reverse and quickly slash rates. The Fed “philosophically” wants to raise interest rates and will use “selectively back-tested evidence” to justify an increase in rates, he added.

  His most dire warning: “If the Fed hikes it will be a different world; everyone will have to unwind at the same time. If you think junk bonds are bad now, just wait.”

  As to whether he is buying any beaten down assets here, the answer is probably not: “we are looking at real carnage in the junk bond market,” Gundlach said. Gundlach also said it was too early to buy high-yield junk bonds and energy debt. “I don’t like things when they go down every single day.”

  As for equities: “The breadth of the equity market may be the worst ever” and no, he is not a fan of the overall market either: “The S&P500 has been whistling through the graveyard.”

  Finally, what could prevent a rate hike: “market turmoil would be the main factor that delays a hike by the Fed next week.”

  In that case, the market has exactly one week in which to “turmoil”…

   

  

  

  

  

• Did Merrill Lynch Just Cancel Christmas?

  From "Thundering Herd" to thundering-mad. Having recently laid off 100s of staff and cut compensation plans, AdvisorHub reports that Mother Merrill may be canceling Christmas for its roughly 14,500 brokers – "we’re hearing that in many regions the Bank of America-owned brokerage firm has sent out word that there will be no Merrill-financed holiday parties this year." Such Grinch-like moves have little precedent, and brokers in some areas have retaliated.

  One large office in the New York area quietly arranged a party but was so cautious that it issued no email invitations and kept it so far below the radar “for fear of Big Brother ‘catching them” that a good number of people “missed the event amidst general disarray,” a well-connected source tells us.

   

  “In the old days, we’d just do one [party] and deal with the consequences, but now managers are just too scared,’” he writes.

   

  One branch manager in another New York-area branch with about two dozen advisors is getting kudos for throwing a holiday event for staff, spouses and significant others – and paying for it out of his own pocket, according to our source.  We are eager to hear what happens when management gets wind of the manager’s winning audacity.

   

  What’s the holiday spirit in your shop this season?  Is the sobering increase in mass shootings and terrorism eroding the urge to celebrate?  Are robo-advisors, regulatory fears and mediocre investment outlooks casting cold water on the holiday spirit?

   

  We hardly think that these times are comparable to 2001, when many holiday parties were canceled in the wake of 9/11, or even in the aftermath of the 2008-2009 credit crisis when partying again seemed unseemly when so many Americans were losing jobs and homes.

  *  *  *

  Interestingly, Bank of America’s wealth management business is having a very good year, booking a profit margin of 24% last quarter, better than archrival Morgan Stanley’s 22%. Perhaps what’s changed is parent company expectations.

  

  

  

  

  

• Has The Fed Ever (Accurately) Predicted A Recession?

  Submitted by Peter Diekmeyer via SprottMoney.com,

  In a recent survey not a single major central bank could provide an example of an accurate “a priori” recession forecast. The silence from the Federal Reserve, European Central Bank, BOE, BOJ and the Bank of Canada is deafening.

  Precious metals investors rely heavily on economic projections when deciding where to put their money. But there’s something fishy in the land of mainstream forecasting. The US economy is now in its seventh year of recovery; however, Fed officials project growth as far ahead as the eye can see.

  The Fed isn’t alone. Despite the fact that the US economy contracts for two consecutive quarters every six or seven years and is on schedule to do so again soon, not a single major central bank is forecasting a US recession as its baseline scenario. Why is that?

  A miserable forecasting record

  The Fed’s lousy forecasting record is well known. The US central bank completely missed predicting the 2008–2009 financial crisis and ensuing recession. Worse, it has consistently issued over-optimistic projections since then. Less well known is the fact that the US central bank appears to have never accurately forecast a recession before the country was already in one.

  Two weeks ago I surveyed five major central banks, and not a single one could provide an example of an accurate “a priori” recession forecast. The silence from the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Bank of Canada was deafening.

  Signs of a slowdown abound

  The lousy forecasting records of major banks is of particular concern these days because signs of imminent trouble are everywhere. According to the Bank for International Settlements global personal, business and government debt has risen by more than 40% since the 2008 recession. Central banks have been printing money at their fastest pace since the Weimar Republic. The S&P 500 index continues to flirt with record highs.

  Trade barriers, which caused immense damage during the Great Depression, are popping up everywhere, a sign of worse things to come. These include “Buy America” and other similar policies, as well as investment and capital flow restrictions.

  For example, the office of Jeff Sessions, a US senator, printed out a copy of the recently signed Trans Pacific Partnership Agreement. The 5,544-page document stood over two feet tall. The TPP is so filled with fine print that even its writers didn’t use the words “free trade” in its title. “Managed trade” (by bureaucrats) would be a better term.

  Consulting a range of opinions

  According to one of Canada’s top economists, who I spoke to at a recent symposium held by the Association of Quebec Economists, governments worry that if central banks issue a recession forecast, businesses and consumers will pare back their investing and purchasing; this alone could cause a recession even if one weren’t already on the way. Large financial institutions have similar worries. If they predict a recession, their borrowing business will drop.

  There is a good argument to be made that the more independent the forecaster, the better they are able to “call a spade a spade.” For example, Glen Hodgson of the Conference Board of Canada (a mainstream organization, but one that is outside the financial sector) was one of the first economists to suggest that Alberta had entered its most recent recession.

  In short, if precious metals investors are relying on central bank forecasts to guide their investment decisions, they may be in for a rude surprise. By the time the Fed “projects” the next recession, there is a good chance that the US economy will already be in one.

  

  

  

  

  

• HoW ABouT A NiCe CuP OF…

  

  

  

  

  

• Something Snaps In China As Bitcoin Takes Out Stops, Soars Higher

  At 1815ET, after trading in a very narrow $1 range for hours, Bitcoin suddenly exploded $17 higher on very heavy volume. Normally this wouldn't warrant an explicit mention, but this time… something odd happened in Chinese currency markets…

  Offshore Yuan suddenly snapped 12 pips lower after noise trading in a 1 pip range for hours… just as Bitcoin spiked…

  

   

  On heavy volume…

  

   

  Both moves signal a move away from the USDollar with Bitcoin and Yuan strengthening.

  The last time Bitcoin spiked notably like this was at the start of the Chinese crackdown on capital controls.

  But… with the spread between Offshore and Onshore Yuan (the former dramatically weaker than the latter), it appears the market is expecting a devaluation sooner rather than later…

   

  

   

  Perhaps, just perhaps, that is what Bitcoin is 'hinting' at. For sure, a Yuan devaluation now would be enough to spook global markets once again, and force The Fed to put a rate hike on hold… only this time, everyone and their pet rabbit is neck-deep in "priced in" liftoff expectations.

   

  Charts: Bloomberg

  

  

  

  

  

• Watch As The White House Says "Fake Hair" Trump's Comments "Disqualify Him From Serving As President"

  White House Press Secretary Josh Earnest lambasted Donald Trump's "carnival barker routine" Tuesday, as Mediaite.com reports Earnest proclaiming the Republican presidential candidate's recent proposal to ban Muslims from the United States is "disqualifying." But the bastion of respectability did not stop there… "The Trump campaign, for some time now, has had a 'dustbin of history'-like quality to it, from the vacuous sloganeering, to the outright lies; even the fake hair," Earnest said, adding the pertinent question is whether Republicans are "going to be dragged into the dustbin of history" with the Trump campaign.

   
  Earnest told reporters that Trump’s proposal shows the business mogul is incapable of preserving, protecting, and defending the Constitution, and thus “disqualifies him from serving as president.”

  Earnest – reading this straight from his notes – explains…

  However, lying to the American public time and time again makes the current (and prospective Democrat nominee) President highly qualified?

  

  

  

  

  

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