Today’s News July 17, 2015

• Greece Is Just The Beginning: The 21st Century 'Enclosures' Have Begun

  Submitted by Paul Craig Roberts,

  All of Europe, and insouciant Americans and Canadians as well, are put on notice by Syriza’s surrender to the agents of the One Percent. The message from the collapse of Syriza is that the social welfare system throughout the West will be dismantled.

  The Greek prime minister Alexis Tsipras has agreed to the One Percent’s looting of the Greek people of the advances in social welfare that the Greeks achieved in the post-World War II 20th century. Pensions and health care for the elderly are on the way out. The One Percent needs the money.

  The protected Greek islands, ports, water companies, airports, the entire panoply of national patrimony, is to be sold to the One Percent. At bargain prices, of course, but the subsequent water bills will not be bargains.

  This is the third round of austerity imposed on Greece, austerity that has required the complicity of the Greeks’ own governments. The austerity agreements serve as a cover for the looting of the Greek people literally of everything. The IMF is one member of the Troika that is imposing the austerity, despite the fact that the IMF’s economists have said that the austerity measures have proven to be a mistake. The Greek economy has been driven down by the austerity. Therefore, Greece’s indebtedness has increased as a burden. Each round of austerity makes the debt less payable.

  But when the One Percent is looting, facts are of no interest. The austerity, that is the looting, has gone forward despite the fact that the IMF’s economists cannot justify it.

  Greek democracy has proven itself to be impotent. The looting is going forward despite the vote one week ago by the Greek people rejecting it. So what we observe in Alexis Tsipras is an elected prime minister representing not the Greek people but the One Percent.

  The One Percent’s sigh of relief has been heard around the world. The last European leftist party, or what passes as leftist, has been brought to heel, just like Britain’s Labour Party, the French Socialist Party, and all the rest.

  Without an ideology to sustain it, the European left is dead, just as is the Democratic Party in the US. With the death of these political parties, the people no longer have any voice. A government in which the people have no voice is not a democracy. We can see this clearly in Greece. One week after the Greek people express themselves decisively in a referendum, their government ignores them and accommodates the One Percent.

  The American Democratic Party died with jobs offshoring, which destroyed the party’s financial base in the manufacturing unions. The European left died with the Soviet Union.

  The Soviet Union was a symbol that there existed a socialist alternative to capitalism. The Soviet collapse and “the end of history” deprived the left of an economic program and left the left-wing, at least in America, with “social issues” such as abortion, homosexual marriage, gender equality, and racism, which undermined the left-wing’s traditional support with the working class. Class warfare disappeared in the warfare between heterosexuals and homosexuals, blacks and whites, men and women.

  Today with the Western peoples facing re-enserfment and with the world facing nuclear war as a result of the American neoconservatives’ claim to be History’s chosen people entitled to world hegemony, the American left is busy hating the Confederate battle flag.

  The collapse of Europe’s last left-wing party, Syrzia, means that unless more determined parties arise in Portugal, Spain, and Italy, the baton passes to the right-wing parties – to Nigel Farage’s UK Independence Party, to Marine Le Pen’s National Front in France, and to other right-wing parties who stand for nationalism against national extermination in EU membership.

  Syriza could not succeed once it failed to nationalize the Greek banks in response to the EU’s determination to make them fail. The Greek One Percent have the banks and the media, and the Greek military shows no sign of standing with the people. What we see here is the impossibility of peaceful change, as Karl Marx and Lenin explained.

  Revolutions and fundamental reforms are frustrated or overturned by the One Percent who are left alive. Marx, frustrated by the defeat of the Revolutions of 1848 and instructed by his materialist conception of history, concluded, as did Lenin, Mao, and Pol Pot, that leaving the members of the old order alive meant counter-revolution and the return of the people to serfdom. In Latin America every reformist government is vulnerable to overthrow by US economic interests acting in conjunction with the Spanish elites. We see this process underway today in Venezuela and Ecuador.

  Duly instructed, Lenin and Mao eliminated the old order. The class holocaust was many times greater than anything the Jews experienced in the Nazi racial holocaust. But there is no memorial to it.

  To this day Westerners do not understand why Pol Pot emptied Cambodia’s urban areas. The West dismisses Pol Pot as a psychopath and mass murderer, a psychiatric case, but Pol Pot was simply acting on the supposition that if he permitted representatives of the old order to remain his revolution would be overthrown. To use a legal concept enshrined by the George W. Bush regime, Pol Pot pre-empted counter-revolution by striking in advance of the act and eliminating the class inclined to counter-revolution. The class genocide associated with Lenin, Mao, and Pol Pot are the collateral damage of revolution.

  The English conservative Edmund Burke said that the path of progress was reform, not revolution. The English elite, although they dragged their heels, accepted reform in place of revolution, thus vindicating Burke. But today with the left so totally defeated, the One Percent does not have to agree to reforms. Compliance with their power is the only alternative.

  Greece is only the beginning. Greeks driven out of their country by the collapsed economy, demise of the social welfare system, and extraordinary rate of unemployment will take their poverty to other EU countries. Members of the EU are not bound by national boundaries and can freely emigrate. Closing down the support system in Greece will drive Greeks into the support systems of other EU countries, which will be closed down in turn by the One Percent’s privatizations.

  The 21st century Enclosures have begun.

  

  

  

  

  

• Tennessee Woman Arrested For Printing Money: "All These Other Bitches Get To Print Money So I Can Too"

  In what is either the best example why one should never believe anything they read on the internet, or just blatant frontrunning of the last QE by a few years, earlier this week a woman from Kingsport, Tennessee was arrested for counterfeiting money. That in itself is not surprising – it was her justification why she did it: she told police that she thought she was doing nothing wrong because she had read online that President Barack Obama made a new law allowing her to print her own money.

  

  Pamela Downs, 45
  

  TimesNews reports that police were called to a local grocery store on Sunday night in regards to a complaint about counterfeit money. When the reporting officer arrived, he spoke with a gas station clerk who said that just prior to the officer’s arrival, a white female had handed him a $5 bill, which he suspected to be counterfeit.

  Since the bill had been printed on regular computer paper and each side had been glued together (but was falling apart), the officer immediately recognized the bill as a fake.

  The officer spoke with the female, identified as Pamela Downs, 45. After initially responding that she had gotten the fake bill from a gas station, Downs was asked by the officer if her purse could be searched, to which she agreed. Inside her purse, the officer found a $100 which was also counterfeit, according to the report. The bill was printed in black and white and the backside of the bill was upside down.

  A couple of receipts from Walmart were also found inside the purse, showing Downs had purchased copy paper and a printer.

  At that point she was arrested, and she gave the best money-counterfeiting “defense” we have heard in a long time:

  “I don’t give a ****, all these other bitches get to print money so I can too.“

  It was not immediately clear which “bitches” she was referring to.

  The police then searched the apartment and found several items consistent with being used to print counterfeit currency including paper, scissors, glue and a printer.  Several more counterfeit bills, both cut and uncut, were located at the apartment. Officers estimated the total to be around $30,000 to $50,000.

  While at the jail, Downs reportedly told the officer the receipts that were found were items she used to print money in her apartment.

  And back to the rationalization: “She then told officers she read online that President Obama had made a new law that permitted her to print her own money because she is on a fixed income, the report stated.“

  She was charged with criminal simulation and counterfeiting.

  While there are literally countless angles one can go with this story, maybe the best conclusion is that if only she had waited a few more years before printing her own money with the “president’s blessing”, all of this unpleasantness could have been avoided.

  

  

  

  

  

• Balance Of Superpowers: Comparing The US And Chinese Armed Forces

  Whether China is busy championing trade deals outside of the US dollar, buying up some of the world’s biggest companies, taking over foreign housing markets, or building massive networks of nuclear or wind power grids, it is clear that the country is a world power to be reckoned with. To be considered a true force, China also needs to be able to back up its economic and political might with a top notch military. Today’s infographic compares the armed forces of China with the United States.

  click image fir massive legible version

  

  Original graphic by: SCMP

   

  In terms of military spending per capita, China is the new kid on the block. Although it has increased in recent years, China is still behind Russia, Turkey, South Korea, Japan, Germany, the United Kingdom, France, and the United States. However, the country does make up for it with in absolute terms by its sheer population. In terms of total military expenditures, China spends the second most worldwide with a total of approximately $216 billion per year, which is about one-third of the US.

  In GDP terms, China spends about 2.1% of its annual GDP on military, and the United States spends 3.8%.

  Perhaps the biggest difference between the two superpowers is influence in other parts of the world. The United States has 133 military bases outside of its territory, and China has zero. More specifically, the United States has bases in multiple jurisdictions that surround China: South Korea, Kyrgyzstan, Japan, Singapore, Guam, Afghanistan, and Diego Garcia, a set of small islands in Indian Ocean.

  Courtesy of: Visual Capitalist

  

  

  

  

  

• Tennessee Mass Killer Linked To Islamic Terrorism

  While the rest of the world was paying attention to the sad conclusion of the Greek tragedy now in its third bailout season, the US was focused on a another tragedy playing out in the nation’s heartland when in the latest mass shooting on US soil, 4 marines were killed when a gunman, since identified at Mohammod Youssuf Abdulazeez, 24, a naturalized citizen born in Kuwait, opened fire first at a military recruiting center and then at a Naval Reserve Center in Chattanooga, Tennessee in what officials have called a “brazen, brutal act of domestic terrorism.”

  Incidentally, the shooting took place hours before a jury found James Holmes, who killed 12 people in a Colorado theater shooting in 2012, guilty of murder.

  As reported subsequently, the suspect’s mother is originally from Kuwait and his father from Palestine. It is unclear when Abdulazeez came to the United States but for many years he lived with his parents in a two-story home in Hixson, a suburb of Chattanooga. He worked as an intern at Mohawk Industries Inc, a carpet manufacturer, and the Tennessee Valley Authority, which provides power to the area. He most recently worked with Global Trade Express, according to the posted resume.

  

  According to Reuters, the suspect, seen driving an open-top Ford Mustang, is believed to have first gone to a joint military recruiting center in a strip mall and sprayed it with gunfire, riddling the glass facade with bullet holes.

  

  “Everybody was at a standstill and as soon as he pulled away everyone scrambled trying to make sure everyone was OK,” said Erica Wright, who works two doors down from the center.

  The gunman then drove off to a Naval Reserve Center about 6 miles away, when around 10:45 am local time, he shot four Marines before being shot and killed in a firefight with police about half an hour later. Three others were wounded in the attacks, including a police officer reported in stable condition and a Marine.

  

  At least three people were wounded in the attacks, including a Marine and a Navy sailor who is in critical condition, according to the hospital. One of those hurt was a police officer who was in stable condition.

  According to Bill Killian, the U.S. Attorney for the Eastern District of Tennessee, the rampage was being treated “as an act of domestic terrorism,” adding that no official determination of the nature of the crime had yet been made and the Federal Bureau of Investigation has not ruled anything out.

  “While it would be premature to speculate on the motives of the shooter at this time, we will conduct a thorough investigation of this tragedy and provide updates as they are available,” the agency said in a statement.

  According to a resume believed to have been posted online by Abdulazeez, he attended high school in a Chattanooga suburb and graduated from the University of Tennessee with an engineering degree.

  “I remember him being very creative. He was a very light minded kind of individual. All his videos were always very unique and entertaining,” said Greg Raymond, 28, who worked with Abdulazeez on a high school television program.

   

  “He was a really calm, smart and cool person who joked around. Like me he wasn’t very popular so we always kind of got along. He seemed like a really normal guy,” Raymond said.

  The FBI said it was too early to speculate on the motive for the rampage although in a follow up report we learned that the 24 year old had blogged as recently as Monday that “life is short and bitter” and Muslims should not miss an opportunity to “submit to Allah,” according to an organization that tracks extremist groups.

  The SITE Intelligence Group said a July 13 post written by suspected gunman Mohammod Youssuf Abdulazeez stressed the sacrifice of the Sahaba (companions of the Prophet) “fought Jihad for the sake of Allah.” Reuters could not independently verify the blog postings. Tangentially, Site Intelligence which has been most famous recently for being the first to track down and release most of ISIS’ barbaric if Hollywood-style produced YouTube clips, was founded by Rita Katz who prior to her intelligence career served in the Israeli Defense Forces.

  Further ties linking the shooting to terrorist Islamist elements emerged when the NYT reported that the father of a suspected gunman who killed four Marines in Chattanooga, Tennessee, on Thursday was investigated several years ago for “possible ties to a foreign terrorist organization.”

  Citing unnamed law enforcement officials, the paper said the gunman’s father was at one point on a terrorist watch list and was questioned while on a trip overseas.

  The paper quoted an official as cautioning that the investigation was several years old and had not generated any information on the son. The father was eventually removed from the watch list, the paper quoted the official as saying.

  According to another, unconfirmed report, an Islamic State affiliated Twitter account tweeted about the Chattanooga military reserve center shootings by Muhammad Youssef Abdulazeez just as they began.

  

  The account has since been suspended. The time stamp reads 10:34 a.m. in our screenshot of the tweet, which we took in New York, which is in the same time zone as Chattanooga. The shootings were reported between 10 and 11 a.m.

  In a statement following the shootings  Obama condemned the “heartbreaking” shooting deaths of four Marines Thursday in Tennessee, and said a full investigation is under way.

  “We don’t know yet all the details,” Obama said. “We know that what appears to be a lone gunman carried out these attacks.” The president said he wanted to extend “the deepest sympathies of the American people” to the four Marines and their families, and asked all Americans to pray for them.

  And while Obama did not rush to judgment, and had no comment about what the potential next steps could be, it was roughly around this time that America’s practically assured next president, Hillary Clinton, made it quite clear what the endgame of all these tragic events will likely be in the very near future:

  • CLINTON: U.S. NEEDS ANTI-PROPAGANDA POLICY TO COMBAT ISIS

  What better way to fight propaganda than with even greater propaganda even if it means the deaths of countless innocent people caught in the cross fire.

  

  

  

  

  

• How Socialism Destroyed Puerto Rico, And Why More Defaults Are Looming

  With Puerto Rico missing a payment on a bond overnight "due to non-appropriation of funds" but denying that this constitutes anything close to a default, the territory may be about to retake the limelight as Greece is now "fixed." As MarketWatch reports,

  The missed payment could have serious implications for holders of Puerto Rico bonds, “as the signal from breaking a seven-decade streak of bond payments may imply more defaults are looming,” Daniel Hanson, an analyst at Height Securities, said in a note.

   

  Not all Puerto Rican bonds are created equal, being backed by different types of revenues, such as tax revenues, road tolls, electricity bills etc.

   

  The first thing investors should do is “find out what revenue backs their bonds and whether their bonds are insured or not,” said Mary Talbutt, head of fixed income at Bryn Mawr Trust.

   

  Approximately 30% of muni mutual funds have holdings in Puerto Rico, more than half of which are insured, according to a Charles Schwab Investment Management report. As for the revenue that backs the bonds, most exposure is with the sales-tax backed bonds, known as COFINA bonds from their Spanish-language acronym, and the general-obligation bonds, known as G.O. bonds, according to the report.

   

  In that sense, investors that hold the PFC bonds are somewhat in a bind because “the language in PFC bonds makes payment dependent on appropriations from Puerto Rico’s legislature,” Hanson said.

   

  This is the main difference between the PFC bonds and the G.O. bonds. The former require appropriation, while the latter are backed by the full faith and credit of the territory and their repayment is guaranteed by the constitution.

   

  “The language… makes [the PFC bonds] a weaker credit relative to G.O. bonds. But a default is still a default,” said Andrew Gadlin, a research analyst at Odeon Capital Group.

   

  This has investors worried about other types of bonds that face a repayment deadline, most notably those issued by the island’s Government Development Bank (GDB).

   

  “The market is becoming more skeptical of the payments due August 1 on GDB debt, though the budget does set aside funds for paying these obligations,” Gadlin said.

  And as Euro Pacific Capital's Peter Schiff explains, this is far from over

  While Greece is now dominating the debt default stage, the real tragedy is playing out much closer to home, with the downward spiral of Puerto Rico. As in Greece, the Puerto Rican economy has been destroyed by its participation in an unrealistic monetary system that it does not control and the failure of domestic politicians to confront their own insolvency. But the damage done to the Puerto Rican economy by the United States has been far more debilitating than whatever damage the European Union has inflicted on Greece. In fact, the lessons we should be learning in Puerto Rico, most notably how socialistic labor and tax policies can devastate an economy, should serve as a wake up call to those advocating prescribing the same for the mainland.  

   

  The U.S. has bombed the territory of Puerto Rico with five supposedly well-meaning, but economically devastating policies. It has:

  1. Exempted the Island's government debt from all U.S. taxes in the Jones-Shaforth Act.
  2. Eliminated U.S. tax breaks for private sector investment with the expiration of section 936 of the U.S. Internal Revenue Code.
  3. Required the nation to abide by a restrictive trade arrangement.
  4. Made the Island subject to the U.S. minimum wage.
  5. Enabled Puerto Rico to offer generous welfare benefits relative to income.

  While passage of such politically popular laws seems benign on the surface (and have allowed politicians to claim that their efforts have helped the poorest Puerto Ricans), in reality they have deepened the poverty of the very people the laws were supposedly designed to help. The lessons here are so obvious that only the most ardent supporters of government economic control can fail to comprehend them.

   

  Tax-Free Debt

   

  By exempting U.S. citizens from taxes on interest paid on Puerto Rican sovereign debt, Washington sought to help the Puerto Rican economy by making it easier and cheaper for the Island's government to borrow from the mainland. As a result, Puerto Rican government bonds became a staple holding of many U.S. municipal bond funds. As with Fannie Mae and Freddie Mac bonds a decade ago, many investors believed that these Puerto Rican bonds had an implied U.S. government guarantee. This meant that the Puerto Rican government could borrow for far less than it could have without such a belief. However, this subsidy did not grow the Puerto Rican economy, but simply the size of the government, which had the perverse effect of stifling private sector growth.  

   

  In contrast to the tax-free income earned by Americans who buy Puerto Rican government bonds, those with the bad sense to lend to Puerto Rican businesses were taxed on the interest payments that they received. Businesses could have used the funds for actual capital investment (that could have increased the Island's productivity), but instead the money flowed to the Government which used it to buy votes with generous public sector benefits that did nothing to grow the Island's economy or put it in a better position to repay. That problem was left for future taxpayers who no politician seeking votes in the present cared about.

   

  This dynamic is almost identical to what happened in Greece, where low borrowing costs, made possible by the strong euro currency and the implied backstop of the European Central Bank and the more solvent northern European nations, permitted the Greek government to borrow at far lower rates than its strained finances would have otherwise allowed.

   

  Taxing Private Investment

   

  Perversely, as the U.S. government made it easier for the Puerto Rican government to borrow, it made it harder for the private sector to do so. In 2006 the government ended a tax break that exempted corporate profits earned on private sector investment in Puerto Rico from U.S. taxes. As a result, U.S. businesses that had been making investments and hiring workers on the Island pulled up stakes and moved to more tax-friendly jurisdictions. The result was an erosion of the Island's local tax base, just as more borrowing (made possible by triple tax-free government debt) obligated the remaining Puerto Rican taxpayers to greater future liabilities.

   

  The Jones Act

   

  The Jones Act, a 1920 law designed to protect the U.S. merchant marine from foreign competition, has had a devastating effect on Puerto Rico, and should be used as a cautionary tale to illustrate the dangers of trade barriers. Under the terms of this horrible law, foreign-flagged ships are prevented from carrying cargo between two U.S. ports. According to the law, Puerto Rico counts as a U.S. port. So a container ship bringing goods from China to the U.S. mainland is prevented from stopping in Puerto Rico on the way. Instead, the cargo must be dropped off at a mainland port, then reloaded onto an expensive U.S.-flagged ship, and transported back to Puerto Rico. As a result, shipping costs to and from Puerto Rico are the highest in the Caribbean. This reduces trade between Puerto Rico and the rest of the world. Since a large percentage of the finished goods used by Puerto Ricans are imported, the result is much higher consumer prices and fewer private sector jobs. Even though median incomes in Puerto Rico are just over half that of the poorest U.S. state, thanks to the Jones Act, the cost of living is actually higher than the average state.

   

  The Federal Minimum Wage

   

  In 1938 the Fair Labor Standards Act subjected Puerto Rico to a federal minimum wage, but it was not until 1983 that a 1974 act, which required that the Island match the mainland's minimum wage, was fully phased in. The current Federal minimum wage of $7.25 per hour is 77% of Puerto Rico's current median wage of $9.42. In contrast, the Federal minimum is only 43% of the U.S. median wage of almost $17 per hour (Bureau of Labor Statistics (BLS), May 2014). The U.S. minimum wage would have to be more than $13 per hour to match that Puerto Rico proportion. The disparity is greater when comparing minimum wage income to per capita income.

   

  The imposition of an insupportably high minimum wage has meant that entry level jobs simply don't exist in Puerto Rico. Unemployment is over 12% (BLS), and the labor force participation rate is about 43% (as opposed to 63% on the mainland) (The World Bank). A "success" by the Obama administration in raising the Federal minimum to $10 per hour would mean that the minimum wage in Puerto Rico would be higher than the current medium wage. Such a move would result in layoffs on the Island and another step down into the economic pit. I predict that it could bring on a crisis similar to the one created in the last decade in American Samoa when that Island’s economy was devastated by an unsustainable increase in the minimum wage.

   

  It will be interesting to see if our progressive politicians will have enough forethought and mercy to exempt Puerto Rico from minimum wage increases. But to do so would force them to acknowledge the destructive nature of the law, an admission that they would take great pains to avoid. 

   

  Welfare   

   

  In 2013 median income in Puerto Rico was just over half  that of the poorest state in the union (Mississippi) but welfare benefits are very similar. This means that the incentive to forgo public assistance in favor of a job is greatly reduced in Puerto Rico, as a larger percentage of those on public assistance would do better financially by turning down a low paying job. Because of these perverse incentives not to work, fewer than half of working age males are employed and 45% of the Island's population lived below the federal poverty line (U.S. Census Bureau, American Community Survey Briefs issued Sep. 2014). According to a 2012 report by the New York Federal Reserve Bank, 40% of Island income consists of transfer payments, and 35% of the Island's residents receive food stamps (Fox News Latino, 3/11/14).

   

  In other words, Puerto Rico's problems are strikingly similar to those of Greece. Its government spends chronically more than it raises in taxes, its economy is trapped in a regulatory morass, and its economic destiny is largely in the hands of others.

   

  *  *  *

  As The FT notes,

  Puerto Rico’s economy and population have been shrinking for almost a decade, and debts have ballooned to about 100 per cent of its gross national product as the government took advantage of the tax exemption enjoyed by US municipal debt.

   

  The Puerto Rico Electric Power Authority is already restructuring $9bn of bonds and loans.

   

  By September 1 Puerto Rico is expected to deliver a plan for turning round its finances. Officials have called for patience from creditors about how its various bondholders will be treated.

  Patience… indeed.

   

  *  *  *

   

  The solutions to Puerto Rico's problems are simple, but, Peter Schiff warns, politically toxic for mainland politicians to acknowledge.

  Puerto Rico must be allowed to declare bankruptcy, the Federal incentive for the Puerto Rican government to borrow money must be eliminated, Puerto Rico must be exempted from both the Jones Act and the Federal Minimum wage, and Federal welfare requirements must be reduced. Puerto Rico already has the huge advantages of being exempt from both the Federal Income Tax and Obamacare, so with a fresh start, free from oppressive debt and federal regulations, capitalism could quickly restore the prosperity socialism destroyed.

   

  With the current incentives provided by Acts 20 and 22 (which basically exempt Puerto Rico-sourced income for new arrivals from local as well as federal income tax – see my report on America's Tax Free Zone) and with some additional local free market labor reforms, in a generation it's possible that Puerto Ricans could enjoy higher per capita incomes than citizens of any U.S. state.

  If Washington really wanted to accelerate the process, it should exempt mainland residents from all income taxes, including the AMT, on Puerto Rico-sourced investment income, including dividends, capital gains, and interest related to capital investment.

  

  

  

  

  

• BofA Confused "Why People Would Wake Up One Morning And Decide To Panic"

  Over the past twelve months, the decades-old economic infrastructure that supports global dollar dominance suffered irreparable damage to two of its load-bearing walls. 

  First, the petrodollar system quietly began to die late last year. As crude prices plunged, the deluge of oil proceeds which had for years been recycled into USD-denominated assets dried up. Indeed, OPEC nations drained liquidity from financial markets for the first time in nearly two decades last year: 

  

  As we noted last month, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018, according to Goldman.The implications, BofAML observed in February, are far reaching: “…the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed’s exit strategy.”

  Second, the world’s most influential emerging economies have lost faith in the US-dominated multilateral institutions that have dominated the post-war world. This has manifested itself in the creation of two new supranational lenders (the AIIB and the BRICS bank) and one major new infrastructure development fund (China’s Silk Road fund). China plays an outsized role in the AIIB and the BRICS bank and both should serve to help Beijing embed the yuan further in global investment and trade. 

  Meanwhile, Russia and China have begun settling crude imports in yuan amid the extension of Western economic sanctions on Moscow and Russia recently overtook Saudi Arabia as China’s number one crude supplier. 

  All of this marks a departure from the economic and political norms that have served to underwrite decades of dollar dominance and it goes without saying that printing trillions of dollars over the course of multiple QE iterations doesn’t help king dollar’s cause.

  In addition to the above, there’s certainly an argument to be made that the US effectively surrendered its right to print the world’s reserve currency long ago.

  That is, once the new economics succeeded in burying sound money once and for all, and when fine-tuning macroeconomic outcomes and “smoothing” out business cycles finally became so entrenched in modern economic thought that talk of balanced budgets and a gold standard was largely relegated to the annals of history, the dollar became nothing more than another example of fiat money, unworthy of the reserve currency title. 

  Nevertheless, the status quo must be perpetuated, which is why Washington launched a Quixote-esque campaign against the AIIB complete with President Obama tilting against environmental and governance windmills and it is also why the likes of Bank of America must issue “research” with titles like “Econ 101: The reserve status of the dollar.”

  Fortunately, that particular piece of crisply-worded dollar cheerleader propaganda has one footnote that makes the five minutes we spent reading it all worth while. We present it below and leave it to readers to respond.

  From BofAML:

  Another mechanism could be a self-fulfilling feedback loop. If the general public watches the gloom and doom videos, loses faith in paper money and dumps it in favor of hard assets the dollar would collapse. On a similar note, if global investors believe QE is a signal of the central bank giving up on controlling inflation, they could dump the dollar, driving up the price of imported products. However, after seeing that QE has not caused inflation or triggered a dollar collapse in the last five years, it is not clear why people would wake up one morning and decide to panic. 

  

  

  

  

  

• "Safest Market In The World" China Opens Mixed As Margin Debt Drops To 4-Month Lows

  After a brief "don't fight the PBOC" three days of releveraging, China margin debt declined once again to 4-month lows. An opening pop – as is now ubiquitous has faded in FTSE China A50 futures but CSI-300 futures (which expire today and are this subject to some 'odd' behavior) are holding modest gains, despite a quarter of Chinese stocks remain halted. For those tempted back in to the deep end of global equity risk, we offer what must go down as the Baghdad Bob quote of the year, from the Chairman of HKEX, "China's stock market is the safest in the world."

  Some context on the decline and its massively manipulated bounce (which is now fading fast)…

  

   

  FTSE China A50 Futures opened a smidge higher but are leaking lower (while CSI-300 Futures are holding 1% gains pre-open)

  

   

  Deleveraging is happening… but has a long way to go…

  • *SHANGHAI MARGIN DEBT FALLS TO FOUR-MONTH LOW

  China margin debt is down 37% from its highs…

  

  And then there's this utter bollocks…

  • *CHINA STOCK MARKET IS "SAFEST" IN WORLD, HKEX CHAIR LI SAYS

  Yep, looks totally "safe"…

  

   

  Finally, on China, we leave you with Credit Suisse's Andrew garthwaite: "Our concern is that a triple bubble in housing, credit and investment comes with the significant risk of a hard landing."

  *  *  *

  In other news, Japan has its fair share of disasters…

  Sharp is the worst-performing stock on Japan's benchmark average this morning after the Nikkei newspaper said the electronics giant is likely to lose big in the April to June quarter.

   

  As the Nikkei 225 struggles to gain for a fifth day – up 0.1 per cent – Sharp shares are down 3 per cent in the first hour of trade.

  And Korea…

  And Samsung Heavy is down 17% to 7 year lows – this is the biggest drop since 1994

   

  

   Charts: Bloomberg

   

   

  

  

  

  

  

• Law Firm Stops Hiring Ivy League Grads, Demands "Gritty Street Lawyers"

  Having taken on hundreds of thousands of dollars worth of loans to achieve the ultimate goal of becoming an Ivy League law graduate, it appears, in at least one case, that your abilities are not required. As WSJ reports, Adam Leitman Bailey, a Manhattan attorney who runs a real estate firm, says he looks to hire law school graduates who have grit, ambition and a resolve to succeed in the legal profession. For that reason, he says, his firm has instituted a rule: If your resume lists your law school as Yale, Harvard, Columbia, Cornell or University of Pennsylvania, you need not apply because you won’t get the job.

  
  As The Wall Street Journal reports,

  Mr. Bailey, a graduate of Syracuse University Law School, says he admires the nation’s top law schools and doesn’t deny they attract some of the brightest minds. But says the best applicants hail from schools lower down the totem pole of prestige.

   

  In an article titled “Why We Do Not Hire Law School Graduates from the Ivy League Schools.” Mr. Bailey told Law Blog his ban applies to other elite schools outside the Ivy League, like Stanford and New York University.

   

  Explaining the policy, he writes that students who are accepted into top-ranked schools may have aced the LSAT, but, very broadly generalizing, they’ve climbed their way to a law degree without testing their mettle.

   

  [M]any of these law schools either fail to rank their students or do not even grade them at all. (1) Ergo, the students have no incentive to work hard and learn when they have guaranteed summer associate positions and guaranteed job offers. Their students typically have no incentive to get the best grades in their classes. They also have no incentive to squeeze as much learning as possible out of the law school experience. Most importantly, the real world simulation of dealing with the pressures of a case or deal may be removed when the students do not need to compete for a job in a difficult market…

   

  [T]hese students may become a United States Supreme Court Justice or a future President of the United States so political theory and international law and classes on capital punishment may be extremely important to them. However, we need our street lawyers ready for battle and taking trial practice, corporations, tax, civil procedure and any real estate and litigation course offered.

   

  In his piece he concedes that a few of the senior lawyers at Adam Leitman Bailey PC are indeed Ivy Leaguers, including the head of the firm’s real estate litigation practice group, a graduate of University of Pennsylvania Law School.

   

  “By the time these Ivy League attorneys come to our firm, we have seen them in the courtroom and observed their talents,” Mr. Bailey told Law Blog by email.

  *  *  *

  Ironically, Mr. Bailey, whose firm hires one to three law school graduates a year, also writes that the top students from the highest ranked schools “have no interest in applying for a job at our firm.”

  

  

  

  

  

• The World Explained (In 1 Cartoon)

  Presented with no comment…

   

  

   

  Source: @RoykoLePoyko

  

  

  

  

  

• How Likely Is Hyperinflation In The U.S?

  Authored by Seaborn Hall, originally posted at Advisor Perspectives,

  My previous article, “How likely is hyperinflation in the US? Part One,” covered hyperinflation's history, process, effects, definition, types and causes, as well as how to measure its emergence in nations using casual symptoms. Part Two answers the questions of how to gauge the likelihood of hyperinflation in the United States, what the emerging dangers are, how it might happen here and how to prepare if it does.

  As stated in Part One, because there are so many conflicting or just different views among analysts relative to hyperinflation, it is difficult for the average advisor or person investing for retirement – or just self-preservation – to know what to believe and how to act. Many of the warnings related to hyperinflation sound like Chicken Little's cry that the sky is falling.

  In the midst of the alarmism and confusion, these articles sift through the best resources available, including Bank for International Settlements (BIS), International Monetary Fund (IMF), Cato Institute and Fed papers to provide some clarity.

  Measuring hyperinflation in the U.S.A.

  The U.S. has come just short of hyperinflation twice before: once during the Revolutionary War and the second time, in March 1864, towards the end of the Civil War. The wars created high debt and supply disruptions within the continental states, congruent with fast acting hyperinflation, as explained in Part One.

  The U.S. has geographic advantages. It has natural supply routes made up of rivers, natural ports and inter-coastal waterways connected by a sophisticated rail and interstate system. It is protected by the natural boundaries of oceans, mountains and friendly bordering states. It is also not dependent on one export, like oil. These geographical and man-enhanced attributes temper any economic trend towards hyperinflation in the modern U.S.

  As previously noted, hyperinflation may be expected when there is persistent monetization and when the currency exchange premium – the premium the most-used foreign currency commands over the native currency – rises above 50%. This later sign typically occurs during a period of high inflation and up to three years before hyperinflation appears. This period may or may not include a currency crisis, which is distinct from, and can be an initial phase of, high inflation or hyperinflation. More broadly, the dangers of hyperinflation are measured by casual symptoms. These include fiscal, monetary and political causes and symptoms.

  As to fiscal symptoms in the U.S., according to a recent JP Morgan (JPM) presentation, net U.S. debt is presently around 75% of GDP, high, but non-critical. Foreign officials hold 35% of this debt; the Fed holds 16 percent. Both are significant, but not excessive. And, as Prasad and Ye note, debt cements the U.S. dollar role as global reserve; that is, as long as it is not unsustainable, and interest is a manageable piece of the total budget (chart, below).

  On this front, the U.S. does not have enough reserves to cover its short-term debt, but the Guidotti-Greenspan rule may not apply to Advanced Economies. And, as long as 10-year yields, currently about 2.35%, stay below 7% global bond investors tend not to panic, especially when the U.S. is the best of a bad lot.

  

  Deficits-to-expenditures is marginal at about 18%. According to the Wall Street Journal, the deficit has decreased to only 3% of GDP in 2014. The deficit was $1.4 trillion six years ago and the Congressional Budget Office (CBO) projects it to be just $486 billion this year. But, it is expected to increase in 2016 and according to The Heritage Foundation could be worrisome again by 2021.

  Also on the down side, according to Heritage, net U.S. debt, above, will reach 100% of GDP, a dangerous level, around 2028. At $18.2 trillion, total federal debt is already 102.5% of GDP. But most analysts feel that net debt (total minus intra-governmental debt) is the more critical measure. By 2024, mandatory expenditures, or entitlements plus interest on the debt, will be 75% of revenues. By 2030 they will consume revenues (chart, below).

  As to monetary symptoms, Federal Reserve liabilities are also high, about $4.4 trillion. According to Guggenheim, the Federal Reserve's debt/equity ratio was 51:1 in July 2012, more than double 2008, and almost double commercial institutions that failed. And Fed Assets as a percentage of GDP have more than doubled since 2007. But central banks are judged differently, as Japan's experience implies, thus far at least. John Cochrane, a professor of finance at the University of Chicago, points out more specifically that Fed reserves do not lead to hyperinflation. It is also important to understand that printing money or QE is not necessarily the same as monetizing the debt.

  

  In most cases, central banks control interest rates and reserves through government security and foreign currency purchases. To create money, a central bank purchases securities when it digitally credits the accounts of dealers with whom it does business. These dealer banks, like JP Morgan, are immediately richer. In some cases they park the money with the Fed, earning interest; in others, they invest it, some in riskier ways, like derivatives. For money velocity to increase they must actually loan it, which, according to Hanke, few currently do. This is partially due to increased federal regulations, like Dodd-Frank, instituted since the GFC, that place strict restrictions on lending activities.

  

  Monetizing is when the central bank buys government securities directly from the Treasury to fund existing or, unplanned debt, as in the case of Zimbabwe or Japan at present (see Part One). An independent central bank firmly resists such pressure from the political power. The danger, of course, is that this distinction becomes unclear.

  And, as a 2008 IMF report on the Fed stated, "Compared with its posture during the Great Depression, the Fed today is taking considerably more risk and the scope for possible profit and loss outcomes is much greater." The report also points out that the Fed's ability to make a profit during every year of the Great Depression era was largely due to its accumulation of gold. This is a far cry from the make-up of the Fed's burgeoning balance sheet today.

  Another emerging hyperinflation danger is in the area of political management relative to economic health. The Obama administration has less business experience than previous administrations (chart above). Surveys also show that the American people see themselves as more divided than at any time in history (below), and other studies show that the political center is shrinking. Political mismanagement that suddenly increases the debt and social tensions could lead to a crisis that results in high inflation.

  Years ago, R. E. McMaster, author of No Time for Slaves, proposed a simple formula to facilitate understanding of the interplay between government and economics: government + religion = economics. According to Hanke, the problem with Venezuela and its hyperinflation is Hugo Chavez's successor, Maduro; the problem in Yugoslavia was Milosevic; the problem in Zimbabwe was and is Mugabe. They all adhered to the ten-point playbook of the Communist Manifesto, which wrecked their economies and the social order. According to McMaster government does not operate in a vacuum, but those who lead administer by their philosophy or religion.

  

  This simple, but profound theorem plays out around the world today. It can lead to prosperity or economic crisis and hyperinflation. In America, this theorem has led to prosperity. The respect for individual rights and property rights are the pillars of the free market. The founders assured these rights through the founding documents, especially the U.S. Constitution.

  

  According to Coltart (see Part One), the primary reason for Zimbabwe's hyperinflation was that the deficiencies of their constitution allowed a vast disparity of power between the executive office and the legislative and judicial branches. Most worrisome relative to the U.S. Constitution are a list of Supreme Court reversed Executive Orders that even liberal law scholars say blatantly violate the Constitution. It is the quality, not the quantity (above ) of these orders that is the issue. If Americans continue to allow this executive tendency to span administrations, as they have in the past, the dilution of their constitutional rights may eventually lead to hyperinflation in the U.S.A.

  For the present, inflation and money velocity remain low. Though there are various reasons high inflation may appear, typically, there need to be two elements: economic capacity, including low unemployment, and high money velocity. With even core inflation (PCE) currently under 1.2% (as of June 15th headline PCE is 0.2%), economic capacity and lower unemployment just emerging, and money velocity still quite low, high inflation does not appear to be on the horizon.

  This is not to say that other factors could not instigate high inflation or hyperinflation. Some of these "black swans" are dealt with below. But, while Reinhart and Rogoff are no doubt right about the rampant denial afflicting advanced nations relative to future sub-par growth, QE, debt restructuring and coming high inflation, a crisis appears years away. Greece is symbolic of that looming crisis; but it is not Bear Stearns or Lehman.

  This time is not different; but global reserve status, the trust and confidence of investors and deep and wide financial markets make the U.S. unique. There are still enough questions not to be dogmatic, but until the U.S. experiences an increase in causal symptoms or a black swan that fractures global confidence in its economy, hyperinflation is not a worry.

  Black swans that could lead to high inflation or hyperinflation

  The above being noted, according to FT, the global system is in many ways more fragile today than before the GFC. And, considering its fragile nature, many incidents could come out of nowhere and lead to a crisis, or series of crises, that eventually results in a currency crisis and/or hyperinflation.

  One of the prominent possibilities is a successful cyber-attack on a major institution or the U.S. itself, especially the nation's power grids, its nuclear plants, its water supply or its major financial institutions. JPM's, NASDAQ's, and Sony's recent experience serve as examples, and with increasing tensions with Russia and China this area will continue to be a challenge. The director of the NSA recently warned that a cyber-attack will cause a major systems collapse within a decade unless the U.S. develops counter strategy immediately. According to Greg Medcraft, chairman of the board of the International Organization of Securities Commissions, the next black swan will be a cyber-attack.

  

  Though the U.S. has largely avoided catastrophe in the past, there is also the possibility that it might experience more natural disasters in the future. Remember Zimbabwe? About 19% of the U.S. is presently in severe or extreme drought, 29% in moderate to extreme conditions and approximately 40% in abnormal dryness or greater. 100% of California is in extreme, severe or exceptional drought. Also alarming is that according to the Wall Street Journal U.S. beekeepers have been losing 30% of their bees for the last decade, above the 19% sustainable rate. The above issues may place strains on agriculture, lead to supply disruptions and drive up food prices in future years.

  As I covered more extensively in “Evaluating the Arguments for the Dollar's Demise,” in the last decade, globally, at least, there has been an, apparent, increase in natural disasters. According to a 2013 article in The New England Journal of Medicine, there were three times as many natural disasters from 2000 to 2009 as there were from 1980 to 1989. And, according to one account, it was the 1906 San Francisco earthquake and fire that led directly to the Financial Panic of 1907.

  In another critical area, both George W. Bush and Barack Obama have identified nuclear terrorism as the greatest threat to national security. According to a 2008 FBI study, any terrorist nuclear weapon is likely to have a yield of about 1-kiloton (chart, below ), large enough to destroy a city center and with the potential to contaminate surrounding area for up to 4 miles, depending on wind direction (chart, 2nd below ). According to Nukemap, a 1-kiloton detonation in lower Manhattan would kill about 30,000 people and cause three times as many injuries, some fatal. A smaller possibility is a 10-kiloton event with fallout reaching 20 miles.

  

  Even before 911, the U.S. recognized that terrorist groups were attempting to acquire nuclear material. According to one recent joint report by Belfer Center at Harvard endorsed by military leaders, constructing a crude nuclear device is easier today than constructing a safe, reliable weapon. Tests indicate that intelligent operatives could defeat security systems holding weapons or materials and in the last five years several sites have been penetrated. As of 2014, at least four key core Al Qaeda nuclear operatives were still at large. And the difficulty of smuggling nuclear material into the U.S. is largely overstated. But the primary concern is that with one detonation terrorists could claim they had more bombs hidden, creating mass panic.

  

  The nuclear scenario would be a global catastrophe, claiming thousands of lives, shutting down trade and exporting dire consequences to other nations. The cost in response and retaliation would also add enormously to U.S. debt, potentially accelerating the nation towards economic crisis. According to the above Belfer report, the risk of a nuclear terrorist attack on U.S. soil is greater than 1 in 100 every single year.

  In addition to all of the above possibilities there are ongoing currency wars, the reemergence of the Eurozone crisis, the Ukraine and the potential destabilization of Russia, the China slowdown and real estate bubble, Japanese debt, the Sino-Japanese conflict and the craziness of mad regimes like North Korea and Iran to worry about. And we haven't even addressed nuclear sabotage, dirty bombs, an EMP device, ISIS and the Middle East as a whole, other U.S. terrorist events, central bank errors or another financial meltdown due to the approximately $70 trillion in global derivatives. In many ways, the world we currently live in is like dry kindling waiting for an inerrant spark to set it ablaze.

  Hyperinflation in the U.S.A.: How and when it might happen

  The risk of the economy collapsing and instigating hyperinflation is much like the theory of the avalanche: many of the items are in place, and all that is needed is the right trigger to set them off. Whether it comes in the next few years or twenty years from now is impossible to predict and depends on too many unknowns.

  Some, like Eswar S. Prasad, argue in The Dollar Trap that the intricate nature of global mechanisms will keep the dollar in play indefinitely – and the world largely in balance. Others, like James Rickards, in The Death of Money, insist that the complexity of global financial interactions and their tipping points will crash the U.S. economic system. Who is right?

  Based on the above analysis, unless the U.S. experiences a crisis greater than 911 or the GFC, hyperinflation is not a likely scenario for the next five years and probably more like twenty years. But, the greater and the more numerous crises are, the more likely that hyperinflation will come quickly. What if a black swan or a series of crises led to a perfect storm?

  A 1 kiloton nuclear terrorist attack strikes the U.S. in either New York City or Washington D.C. The stock markets crash, losing half their value. The EZ breaks apart and the resulting malaise spreads to the global economy. Instead of the confidence in crisis coming to the U.S., the U.S. bond market implodes and global money runs to gold, silver, foreign currencies and various ex-US bonds. In the U.S. prices rise and stocks rebound some with them – eventually. The U.S. military retaliates in foreign lands for the nuclear attack but walks into a trap.

  Disunity disintegrates into political civil war and panic incites unrest, resulting in martial law. The current drought increases and food supply is cut in half. Fed printing presses finally result in high inflation. Destruction from an earthquake and/or a volcanic eruption lays waste to much of a major city. All of these events combined destroy infrastructure, disrupt distribution, exacerbate the drought and kill leaders. Foreign governments take advantage of America's weakness and institute a cyber-attack. Power failures occur nation-wide.

  Hyperinflation ensues. The stock market falls as confidence wanes. Loss of control leads to a government coup, bank account freezes and despotism. The U.S. descends into an inflationary depression leading to fear of invasion, the dollar's fall and its replacement as the global reserve.

  It would probably take more than one isolated event – even a major one – to create the conditions for hyperinflation in the U.S. And, it took a decade for a similar process to unfold in other nations. But, it can occur faster in the midst of critical events.

  As I stated in “Evaluating the Arguments for the Dollar's Demise,” the U.S. has been protected by a hedge when it comes to disaster. But, events like Katrina, national drought, and the recent Supreme Court decisions relative to Constitutional interpretation hint at a new and more divisive era. Though for the present things seem fine, there is more than one route to an avalanche now than there may have been just a few years ago.

  Replacement of the dollar as global reserve as an isolated event might instigate hyperinflation more quickly. However, only one reserve currency nation has ever experienced a hyperinflation – France, from 1795-96, during the years of the French Revolution. And no nation has ever experienced a hyperinflation as a result of losing global reserve status. Other causal symptoms would likely be apparent, leaving some time to prepare.

  How to prepare for hyperinflation

  Here is some broad investment advice that takes into account the dichotomy of the above conclusions relative to hyperinflation. Portfolio allocations can start small and increase as events on the ground change:

  1. Protect what you have: Diversify your portfolio globally. Hold some real estate. Borrow at fixed rates while interest rates are low.

  2. Consider an international account. Set up expeditious portfolio transitions into foreign currency accounts and international funds with a flexible strategy for transference of at least some assets in the event of escalating volatility, major U.S. weakness or black swans.

  3. Allocate part of your portfolio to alternative funds and hedge-fund-like strategies. If qualified, consider hedge funds, especially those with a global macro and/or event-driven focus.

     

  4. Consider natural resources, agriculture and commodities based funds, especially now when commodities overall, including oil, have corrected and mining is near a historical low cost point versus gold. Remember that water is liquid gold and may be scarcer in the future.

  5. Accumulate tradable items: physical gold and silver (the chart above shows the rise of gold and silver during the Weimar Germany hyperinflation); jewelry; stored food and water; wine; and foreign currency.

  Hyperinflation in the U.S. is coming sometime in the next 20 years or so, and this isn't a cry from a Chicken Little, but a conclusion that the analysis strongly suggests. It is possible hyperinflation could happen during the next few years, but that seems unlikely since it would require a series of major crises and political blunders – events unprecedented in the history of the United States. If this led to a corruption of Constitutional rights in the midst of an exaltation of the Executive Branch that resulted in loss of the rule of law, hyperinflation might result. This is why the understanding and interpretation of the U.S. Constitution, especially in the context of executive orders, may be the most important issue before Congress, the judicial branch and the American people over the next few years – regardless of which party rules.

  It is much more probable that hyperinflation, when it comes to the U.S., will be preceded by a long slow decline that will include a protracted period of high inflation, and that the crash of the dollar and hyperinflation will be the final tumble off a looming, steep cliff. The indications from this analysis point to a convergence of events sometime in the mid-2020's to early 2030's – unless the American people can somehow unite and motivate their politicians to accomplish the hard, almost impossible task of cutting mountainous entitlements adding annually to U.S. debt. But, of course, if the perfect storm occurs, hyperinflation could arrive sooner.

  For the chaos of change it brings, hyperinflation has been described as an economy without memory. It can also be viewed as a furtive civil war a nation's political leaders wage with its people over who will pay for the nation's sins. Its battlegrounds, victories and defeats answer the question of who will wave the white flag over the extravagance of the nation's mismanagement. Ultimately, the people – and the leaders – are both forced to surrender.

  The good news is that, with time, every nation returns from the devastation of hyperinflation to the degree that it embraces corrective measures and free market principles. Regardless of what else might occur, in this sense the U.S. has a sure foundation, a rich history and a hopeful future.

  

  

  

  

  

• Fearing Greek Fallout, ECB Extends "Secret" Credit Lines To Balkans

  As discussions between Greece and its creditors deteriorated and pressure on the country’s banking sector mounted, some analysts began to look nervously towards Bulgaria and Romania where Greek banks control a substantial percentage of total banking assets. 

  The Monday following Greek PM Alexis Tsipras’ referendum call, yields on Bulgarian, Romanian, and Serbian bonds jumped, reflecting souring investor sentiment and the countries’ central banks quickly released statements aimed at calming the nerves of investors and, more importantly, of depositors. 

  As Morgan Stanley noted in May, the real risk  “is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits.” The bank continued: “Although well capitalised and liquid, Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in.”

  Shortly thereafter the “no contagion risk” myth collapsed entirely when Bloomberg reported that the ECB had stepped in to shield Bulgaria from any potential fallout from capital controls in Greece. “The ECB is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation. The ECB would provide access to its refinancing operations, offering euros to the banking system against eligible collateral,” Bloomberg said, citing unnamed officials. 

  Now, FT is out reporting that the ECB has extended “secret credit lines” to Bulgaria and Romania in order to forestall asset seizures. Here’s more:

  The European Central Bank has introduced secret credit lines to Bulgaria and Romania as part of a broader effort to convince foreign regulators not to pull the plug on the local subsidiaries of Greek banks.

   

  News of the behind-the-scenes support for the subsidiaries comes as ECB governors decide on Thursday whether to extend a €89bn lifeline in emergency eurozone funding to Greece’s beleaguered financial sector.

   

  Greece’s Piraeus, National Bank of Greece, Eurobank and Alpha Bank all have substantial assets in central and eastern Europe. If those assets were seized by local regulators, the parent banks would take an immediate capital hit, dealing a potentially terminal blow to Greece’s domestic financial system, which is already hanging by a thread as the country battles to agree a new rescue package with international creditors.

   

  “The fear is that if someone goes first, and pulls the plug, everyone will follow,” said a person familiar with the situation.

   

  The person said the ECB had put in place special “swap” arrangements, or bilateral credit lines, with Romania and Bulgaria to reassure them that the Greek banks there would have funding support throughout the current crisis.

   

  Similar swap lines, which enable foreign central banks to borrow from the ECB and relend that money locally, were used during the eurozone financial crisis, but were typically publicly announced.

  So essentially, the ECB is now set to lend to Bulgaria and Romania in order to ensure that those countries’ regulators do not take any actions with regard to domestic subsidiaries of Greek banks that might serve to further destabilize the Greek banking sector as Europe scrambles to keep it afloat.

  As a reminder, Kathimerini reported in April that the central banks of Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia had “all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk (bonds, treasury bills, deposits to Greek banks, loans etc.) down to zero in order to shield themselves and minimize the danger of contagion in case the negotiations between the Greek government and the eurozone do not bear fruit.” The ECB’s fear seems to be that “quarantines” could turn to “asset seizures” which could in turn further impair the balance sheets of the parent companies and introduce yet another element of uncertainty into already indeterminate discussions around recapitalizing Greece’s ailing banks. 

  And as for the idea that depositors in the Balkans aren’t at risk, we’ll close with the following excerpt from the FT article cited above:

  The National Bank of Romania declined to comment specifically on the new funding line. It said its Greek banking offshoots are “sound”, adding that they could refuse to let shareholders withdraw deposits and could also raise liquidity from the local central bank if the situation worsened.

  

  

  

  

  

• Icahn Vs. Fink: Wall Street Legends Clash Over "Dangerous" ETFs

  In the interest of not burying the lead, so to speak, we’ll begin with a clip from this week’s Delivering Alpha conference.

  In it, Carl Icahn essentially rehashes everything we’ve said over the past several months about the systemic risk posed by phantom ETF liquidity. He then proceeds to explain to Larry Fink how BlackRock is a part of the problem, calling the firm “a dangerous company”, before opining that Fink and Janet Yellen are “pushing the damn thing off a cliff.” Needless to say, Fink did not agree with Icahn’s assessment. Here are the fireworks:

  For those interested to know more, below is the complete Zero Hegde guide to phantom ETF liquidity and a discussion of how it has set the stage for a bond market meltdown.

  *  *  *

  Two months ago, in “ETF Issuers Quietly Prepare For Meltdown With Billions In Emergency Liquidity,” we outlined the rather disconcerting circumstances that have led some large fund managers to quietly line up emergency liquidity facilities that can be tapped in the event of a sudden retail exodus from bond funds. 

  “The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show,” Reuters reported at the time, in a story we suspect did not get the attention it deserved. 

  At a base level, these precautionary measures are the result of the interplay between central bank policy and the unintended consequences of the post-crisis regulatory regime. ZIRP creates a hunt a for yield and simultaneously incentivizes companies (especially cash strapped companies) to tap the bond market while borrowing costs remain artificially suppressed. Clearly, this is a self-fulfilling prophecy. The longer rates on risk free assets remain near, at, or even below zero, the more demand there is for new corporate issuance (the rationale being that at least corporate credit offers some semblance of yield). More demand means rates on corporate credit are driven still lower, and once yields on high grade issues get close to the lower limit, yield-starved investors are then herded into HY.

  All of this supply in the primary market comes at a time when liquidity in the secondary market for corporate credit is non-existent thanks to the shrinking dealer books that resulted from the government’s (maybe) well-meaning attempt to crack down on prop trading. The result: a crowded theatre with a tiny exit.

  This situation has been exacerbated by the proliferation of bond ETFs which have allowed retail investors to pile into corners of the fixed income world where they might not belong. 

  All of the above can be summarized as follows.

  “MF assets too large versus dealer inventories” (via Citi)…

  

  … clear evidence of “structural damage in corporate bond trading liquidity” (via JP Morgan)…

  

  … and the rapid growth of bond funds in the post-crisis world (via BIS)…

  

  So given the above, the question is this: if something were to spook the market – a rate hike cycle for instance, or an October revolver raid on HY energy names, or an exogenous geopolitical shock – causing an exodus from these funds, what would happen to prices if fund managers were suddenly forced to transact in size in an illiquid secondary market in order to meet redemptions?

  “Nothing good”, is the answer. 

  The solution is to avoid selling the underlying bonds – even when investors are selling their shares in the funds.

  But how is this possible? 

  To a certain extent, outflows in one fund can be offset by inflows to another. These “diversifiable flows” are one happy byproduct of the great ETF proliferation. Here’s a refresher on how this works courtesy of Barclays.

  *  *  *

  Portfolio Products Replace Dealer Inventory

  While diversifiable flows limit the risks to portfolio managers in principle, the reality of the high yield market is more complicated. Managers have specific views on tenor, callability, sectors, covenants, and, most importantly, individual credits, such that actually finding buyers for specific bonds can be quite difficult. In the pre-crisis period, dealers ran large inventories that effectively facilitated the netting of flows across funds (Figure 1). A fund with an outflow would sell bonds into the dealer community, and funds with outflows would buy bonds out of the dealer inventory. When inventory is large, the fact that the specific bonds bought and sold did not match was largely irrelevant. Funds with outflows could sell the bonds of their choice, and the funds with inflows could pick investments from the large variety of inventory held by dealers.

  

  The matching problem has become more acute as dealer inventories have declined. Even funds can net flows in principle, dealers are much less willing to warehouse bonds, and are much more likely to buy only when they believe they can quickly offload the risk. Under this scenario, the fact that flows can theoretically be netted is of little practical use to fund managers – actually netting individual bonds is extremely difficult, particularly in the short time frame required by funds offering daily liquidity to end investors.

  This is where portfolio products come in. Investors can use portfolio products to fund outflows/invest inflows immediately and execute the necessary single-name bond trades over time as liquidity in the underlying bond market allows (Figure 2). In this scenario, funds with inflows and outflows simply exchange portfolio products, sidestepping the immediate need to trade single-name corporate bonds.

  

  *  *  *

  Ok great, so ETFs provide a kind of “phantom” liquidity if you will. There are two problems with this:

  • It only works when flows are diversifiable. Once flows become unidirectional, it all goes out the window.
  • It makes the underlying markets even more illiquid.

  Here’s how we put it last month in “How Fund Managers Use ETF Phantom Liquidity To Avert A Meltdown“:

  In other words, if I’m a fund manager, the idea that ETFs provide liquidity rests on the assumption that when I experience outflows, someone else will be experiencing inflows and thus I can sell ETFs and avoid offloading my bonds into an illiquid corporate credit market. Put another way: I am depending on new money coming into the market to fund redemptions from previous investors who are exiting the market, all so that I can avoid liquidating assets that are declining in value and that I believe will be difficult to sell. There’s a term for that kind of business. It’s called a ponzi scheme and just like all other ponzi schemes, when the new money dries up (so, for example, when HY bond ETF flows are all headed in the wrong direction), the only way to meet redemptions is to get what I can for the assets I have and when the market for those assets is thin (as the secondary market for corporate credit most certainly is), I may incur substantial losses. 

   

  Note also that the more often ETFs are used as a way of avoiding the underlying bond market, the more illiquid that market becomes, making the situation still more precarious in the event of a panic.

  So what is a fund manager to do? 

  This is where we come full circle to the emergency liquidity lines mentioned at the outset. In order to avoid tapping the underlying illiquid bond market in a situation where flows are unidirectional, fund managers may instead pay out redemptions in borrowed cash. 

  This is, to quote Citi’s Matt King, “creative destruction destroyed.”

  Only worse.

  That is, this represents the willful delay of a long overdue episode of creative destruction layered atop another delay of the much needed Schumpeterian endgame. Stripping out the metaphysics and philosophy references, that can be translated as follows: this strategy is yet another example of delaying the inevitable. If fund managers are forced to tap these liquidity lines it likely means investors have found a reason to sell en masse and if that reason turns out to be something that permanently impairs the value of the underlying bonds (as opposed to a transitory, irrational panic) then all the funds are doing by borrowing to meet redemptions is employing leverage to stave off the recognition of losses, which is ironically the same thing (in principle anyway) that the companies whose bonds they’re holding have done to stay in business. It’s a delay-and-pray scheme designed to avoid selling the debt of companies whose similar delay-and-pray schemes have run their course. 

  In closing, it’s important to note that no fund manager in the world will be able to line up enough emergency liquidity protection to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds. 

  In other words, when the exodus comes, the illiquidity that’s been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.

  

  

  

  

  

• So You Want To Be A Central Banker? Then Answer This Question

  Do you see a bubble?

   

  

   

  If your answer is “no”, proceed to job offer!

   

  h/t @NorthmanTrader

  

  

  

  

  

• Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

  Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

  In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

  In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

  Oh, and both CEOs resigned on June 7. 

  On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

  Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

  BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

   

  Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

   

  
  

  So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

  (From the report)

   

  Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

   

  Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

   

  In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

  Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

  An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

  Hmm. Well, maybe Jain didn’t read that article. 

  This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

   

  The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

   

  This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

  Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

  The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

   

  There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

   

  The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

  Christian, who is Christian?

  Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

  Wow. So how well did Jain know Bittar? 

  The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

  That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

  And on, and on, and on.

  The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

  Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

   

  Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

   

  Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

   

  Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

  And finally, the accusation that may prove most damaging of all: 

  There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

  There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

  So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

• Greece And The Worst Possible Way To Correct Trade/Productivity Imbalances

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  Piling on more debt is the worst possible way to correct structural trade and productivity imbalances.

  In Greece and the End of the Euroland Fantasy, I suggested the trade imbalances at the heart of Greece's debt crisis could only be resolved by Greece returning to its own national currency. Correspondent Michael Gorback observed that there are other mechanisms for correcting imbalances in trade and productivity:

  "There is not one but 4 ways to address international productivity imbalances: currency revaluation, fiscal transfers, labor migration, and changes in local wages.

   

  If you peg one of those the others must adjust. In the case of the Eurozone and Greece, the adjustment was largely through fiscal transfers with a bit of migration. Wages are not so much sticky as fossilized.

   

  I submit that the reason the US does well under monetary union (ED NOTE: that is, all 50 states use the same currency, the U.S. dollar) is not so much its fiscal union as it is the strength of compensatory mechanisms that are far less developed in Europe. American states and localities still engage in their own fiscal policies and productivity is by no means homogeneous.

   

  The US enjoys excellent labor mobility – about 10x that of Europe. It has seen numerous population shifts based on economics: the early western migration, the Gold Rush, migration of freed slaves to the north, Okies leaving the midwest during the Dust Bowl, the population shift from New England to the Sun Belt, and more recently the oil-boom-related migrations, to name a few.

   

  Employers are also mobile. Furniture manufacturers moved from Western NY state to the South decades ago. GE once had 14,000 employees in the town of Pittsfield, MA. Now it's gone. Boeing is moving ops to SC. Beretta moved to TN. If the wages don't adjust, the employers migrate to the lower wages.

   

  The US, having a large and relatively less regulated private sector that's also relatively unencumbered by unions, has greater wage flexibility than most developed countries.

   

  I think these compensation mechanisms in mobility and wages work better for the US and that's why the US handles monetary union better than the Eurozone. The US still has to engage in interstate fiscal transfers but they're mediated through the central government and few citizens give it a second thought. Is the State of NY frothing over the fact that it gets back less federal dollars than it pays, and that the difference is going to Kentucky?

   

  Why does Boeing open a plant in South Carolina and China open factories in Africa but BMW hasn't opened a plant in Greece? If I were negotiating a bailout, those would be the reforms I'd demand – reforms that make business thrive."

  Easing the process of labor migration within Europe was one goal of the Eurozone, and in terms of making it relatively easy for someone to take a job in another Eurozone member nation, it was a successful reform.

  But this doesn't really address imbalances in productivity due to differences in skills, education, cultural values and corruption. Low-skill labor is more easily recruited than high-skill labor, and in a global economy, the choice of where to site a new plant or call center depends on many factors, not just wage arbitrage, i.e. going to where the labor is currently cheaper.

  Many assume corporations have shifted production to China to take advantage of lower wages. But as wages rise in China, this is not necessarily the deciding factor: proximity to China's growing market is often the over-riding factor.

  A new book, Thieves of State: Why Corruption Threatens Global Security, highlights the many systemic costs of corruption. The corruption that is endemic to Greece and China (among many others) imposes profound systemic costs on those economies, costs that may well loom much larger in the next global downturn than they did in the last Global Financial Meltdown.

  I think it is safe to say that piling on more debt is the worst possible way to correct structural trade and productivity imbalances, yet that is the Eurozone's "solution" to Greece's debt/ trade/ productivity/ corruption crisis. The discussion should be (as Michael pointed out) about creating conditions for business and real wealth creation to thrive, not jamming more debt down the throats of everyone on either side of the structural imbalances.

  

  

  

  

  

• Deutsche Bank Stunner: An Inside Look At Former CEO's Role In Liborgate

  Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

  In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

  In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

  Oh, and both CEOs resigned on June 7. 

  On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

  Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

  BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

   

  Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

   

  
  

  So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

  (From the report)

   

  Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

   

  Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

   

  In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

  Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

  An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

  Hmm. Well, maybe Jain didn’t read that article. 

  This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

   

  The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

   

  This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

  Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

  The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

   

  There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

   

  The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

  Christian, who is Christian?

  Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

  Wow. So how well did Jain know Bittar? 

  The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

  That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

  And on, and on, and on.

  The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

  Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

   

  Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

   

  Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

   

  Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

  And finally, the accusation that may prove most damaging of all: 

  There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

  There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

  So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

  The full BaFin report is below.

  Baf in Deutsche Report

  

  

  

  

  

• Stock Bubble And Its Buyback Genesis Suddenly Vulnerable

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  Having now passed the anniversary of the “rising dollar”, it is interesting to see the related and continued effects on the stock bubble(s). As should be obvious by now, stock buybacks, funded via corporate bonds and loosely categorized C&I loans, are responsible for the post-QE3 nearly uninterrupted rise. Repurchases are forming a separate “liquidity” conduit, indirect leverage if you will, which has already started to fray. Various broader “market” indices have diverged, starting with the Russell 2000 in early 2014 (with the economic slowdown that was supposed to be an anomaly of weather).

  

  Since then, other indices have also broken away, notably the broad NYSE Composite index which includes the greatest cluster of ETF’s. The deviation there coincides exactly with the “dollar” tightening in eurodollar liquidity and less-smoothened wholesale transactions.

  

  There really cannot be much doubt anymore that QE is the central focus of the stock bubble, especially the third and fourth applications. The timing is so obvious as to preclude any other interpretation – most especially a growing and sustainable recovery that never materialized despite all public and heavy exaltation.

  

  While there is undoubtedly some reinforcing inflation due to various views of “tail risks” and perceptions about volatility which become self-fulfilling, it really is repurchases that are driving price action. The most “effective” transmission is corporate debt funneled through shareholder returns, which are not very efficient in terms of economic circulation (especially by comparison to the opportunity cost of them).

  In that respect, along with recession fears, it is perhaps quite significant that the S&P Buyback Index has suffered its first extended reversal since the 2012 slowdown, coincidental then to European concerns and just prior to both Draghi’s promise and QE3. It is unclear at the moment what exactly has caused that dramatic shift but the more likely explanations point to fears about corporate ability to continue repurchasing with economic weakness bearing down against both internal cash flow and even corporate bond pricing and liquidity.

  Whatever the case may be ultimately, the stock bubble’s ties to central bank policy seem to suggest the quite waning influence; both in terms of active participation (on the Fed side) and, more importantly in my view, how blind faith in monetarism may be reversing because of that widespread economic fruitlessness. Stock momentum, for the first time since 2012, is decidedly waning on all fronts:

  

  I find it significant that the broader market index, the NYSE Composite, has shifted negative in its one-year comparison again tied to last year’s “dollar” disruption. At the very least it might imply that the central bank paradigm that lasted since the middle of 2012 has greatly eroded or even ended.

  

  

  

  

  

• If You Like Your Nuclear Bomb-Free Iran, You Can Keep It…

  “Read my lips…”

   

  

   

  Source: Investors.com

  

  

  

  

  

• Nasdaq Soars To Record High With Biggest Rally Since October's "Bullard" Bounce

  Artist's imprerssion of Nasdaq trader's reaction to the greek deal this week (forward to 45 seconds in…and feel the anticipation)

  Stock went up… some more than others… as Futures show gapped up on the Greek vote – kept squeezing into the US open and then diverged with Nasdaq melting up…

  

   

  Cash indices all gapped higher at the open but from that squeeze – there was major divergence (Dow Industrials and Trannies actually lower)

  

   

  On the week, the Nasdaq is now up over 3.25%…

  

   

  In summary…

  *  *  *

  The last few days saw the biggest short-squeeze in 5 months…

  

   

  Which is helping The Nasdaq to its biggest 6-day run since October's Bullard ramp…

  

   

  And then there's this massively free-cash-flow negative idiot-maker…

  

   

  One more good reason why stocks just keep surging… JPY carry is back on now that Grexit event risk has been 'removed' from carry traders risks… fun-durr-mentals

  

   

  VIXnado…back at an 11 handle!!

  

   

  as The backwardation unwinds to the steepest in 2 months…

  

   

  Bonds continued their rally with 30Y leading the way…

  

   

  As it appears the Moar QE trade is back in full swing…

  

   

  FX markets continued to be dominated by a plunge in EUR and JPY…

  

   

  And, digging into the details, your daily FX roundup (courtesy of ForexLive):

  We learned a few things from the ECB but nothing earth-shattering. The economic assessment gave a lift to the euro but it was quickly wiped out. The FX market reacted little to the Greek ELA but European stocks rallied.

   

  After the press conference a second wave of euro buying hit and pulled it from a session low of 1.0856 to 1.0927 at the options cut. From there, the sellers returned in a broad USD mini-rally and it slipped to 1.0875 at the end of the week (hold your horses there buddy … its Friday here in the world's greatest country but not the weekend yet – Eamonn) day.

   

  USD/JPY hit a session high of 124.18 very early in US trading but slipped into the options cut, falling to 123.89. Steady buying from there took it back to 124.13. Yellen had very little effect, if any.

   

  Cable hit a bump today, falling to 1.5560 from 1.5615 but the dip buyers were ready and it climbed all the way back. A second dip also found support and the pair finishes only modestly lower on the day at 1.5612.

   

  USD/CAD finishes at the highs of the day at 1.2966. Dips toward 1.2900 have found good support since the BOC cut. A touch off 1.2906 at the options cut set the stage for a steady rally to the highs.

   

  The Aussie was generally perky as it clawed back some of yesterday's losses. The high of 0.7437 peaked just above the 61.8% retracement of the slump on Wednesday but some sellers appeared late and drove it to 0.7401. There were some massive options running off in AUD and that was the buzz. The lows in USD right across the board today were at the cut.

  Commodities were mixed with copper limping higher as PMs leaked a little more and crude tumbled…

  

   

   

  Crude continues to tumble back to a $50 handle as Iran and default fears mount…

  

   

  Charts: Bloomberg

  Bonus Chart: VXX hits its 347th Record Low……

  This is pretty stunning 347 out of 1625 days that $VXX traded: new all time lows were set pic.twitter.com/KlFrtQPVHi

  — Eric Scott Hunsader (@nanexllc) July 16, 2015

  

  

  

  

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