Today’s News July 20, 2015

• Governments Worldwide Will Crash the First Week of October … According to 2 Financial Forecasters

  Two well-known financial forecasters claim that virtually all governments worldwide will be hit with a gigantic economic crisis in the first week of October 2015.

  
  Martin Armstrong (Click for Larger Image)

   

  Martin Armstrong is a controversial market analyst who correctly predicted the 1987 crash, the top of the Japanese market, and many other market events … more or less to the day.   Many market timers think that Armstrong is one of the very best.

  (On the other hand, he was jailed for 11 years on allegations of contempt, fraud and an alleged Ponzi scheme. Armstrong’s supporters say the government jailed him on trumped-up charges as a way to try to pressure him into handing over his forecasting program).

  Armstrong has predicted for years that governments worldwide would melt down in a crisis of insolvency and lack of trust starting this October. Specifically, Armstrong predicts that a major cycle will turn on October 1, 2015, shifting investors’ trust from the public sector and governments to the private sector.

  Unlike other bears who predict that the stock market is about to collapse, Armstrong predicts that huge sums of capital will flow from bonds and the Euro into American stocks.  So he predicts a huge bull market in U.S. stocks.

  
   Larry Edelson (Click for Larger Image)

   

  Edelson is another long-time student of cycle theory.  (Edelson – a big fan Armstrong – has also studied decades of data from the Foundation for the Study of Cycles.)

  Edelson is predicting the biggest financial crisis in world history – including a collapse of government solvency – will start on October 7, 2015 – the same week as Armstrong’s prediction – when the European Union breaks up.

  Are Armstrong and Edelson right or wrong?

  We don’t have long to wait to test their very public predictions …

  

  

  

  

• Chinese Stocks Nosedive After Stabilization Fund Exit Comments

  Just when officials proclaimed Chinese stocks “the safest in the world,” and added that “the stock market rout has been ended by timely measures,” CSRC announces that they are studying an exit plan for the stock stabilization plan… and carnage ensues…

   

  

   

  Even ChiNext has give up its gains…

  

   

  We await the “just kiding” denial very soon.

  Chart: Bloomberg

  

  

  

  

  

• Concentrated Wealth + Widespread Stupidity = End Of Democracy

  Authored by Eric Zuesse,

  Today’s America is not a democracy:

  “Dark Money Groups Are Funded By Dark Money Groups That Fund Dark Money Groups That Fund…"

  That terrific investigative news report by Paul Blumenthal at Huffington Post, on 9 November 2013, penetrated beyond what the U.S. oligarchy — or more traditionally called aristocracy — requires its dark-money groups to disclose to the Federal Election Commission; and so Blumenthal researched also into what dark-money groups are required to report to the IRS (America’s tax-authorities). 

  This way, Blumenthal was able to discover, for example, that a "dark-money shell game allowed the Wisconsin Club for Growth to influence the elections with both its own ads and those of seemingly unrelated conservative groups with different public agendas. … The trail of cash moving from dark money nonprofit to dark money nonprofit can be traced, in part, through public records of the groups contributing it,” but only by accessing both FEC and IRS public records. And, even then, the picture was incomplete, because the 5-Republican bare majority, on the infamous pro-aristocracy 2010 U.S. Supreme Court Citizens United decision, by five traitors to the U.S. Constitution (which all judges are sworn to protect), prohibits public access to a complete picture of how (like in that Wisconsin election) a few psychopathic billionaires, plus millions of faith-driven fools they sucker with myth-affirming lies, can destroy government of the people, by the people, for the people, and turn it instead into government of the people, by the aristocracy, for the aristocracy. Blumenthal also showed the same billionaires+suckers system replacing democracy in other states. (Today’s Greece is a more extreme case of the same thing. Perhaps what’s today in Greece will betomorrow in America.)

  On 27 August 2012, the Republican commentator, Mike Lofgren, headlined in The American Conservative, “The Revolt of the Rich,” and he dumped upon his fellow conservatives for being now traitors to democracy in America. Anyone who thinks that America is still a democracy, and that the U.S. hasn’t descended into being ruled by the money of billionaire psychopaths in both Parties, needs to see that testimony by this passionate (lower-case “d”) democrat, who "served 16 years on the Republican staff of the House and Senate Budget Committees.” That same month, his stellar book was published: The Party Is Over: How Republicans Went Crazy, Democrats Became Useless, and the Middle Class Got Shafted. As one Amazon reader-review of that work accurately describes it: "Throughout the book he tells of some of his interactions with unnamed elected officials, but primarily he focuses on specific people in government … — Republicans like Bush, Cheney, Abramoff, Gingrich, Bachmann, the Koch Brothers; and Democrats like Obama, Rubin and Geithner. (Hint — you don't want to be mentioned in this book.)” Lofgren is refreshingly, sometimes shockingly, honest.

  Lofgren had first gone public earlier, on 3 September 2010, about his abandonment of the Republican Party. He headlined then at truthout, "Goodbye to All That: Reflections of a GOP Operative Who Left the Cult.” This is how he explained why he had left the Party:

  I left because I was appalled at the headlong rush of Republicans … to embrace policies that are deeply damaging to this country's future; and contemptuous of the feckless, craven incompetence of Democrats in their half-hearted attempts to stop them. And, in truth, I left as an act of rational self-interest. Having gutted private-sector pensions and health benefits as a result of their embrace of outsourcing, union busting and "shareholder value," the GOP now thinks it is only fair that public-sector workers give up their pensions and benefits, too. Hence the intensification of the GOP's decades-long campaign of scorn against government workers. Under the circumstances, it is simply safer to be a current retiree rather than a prospective one.

   

  If you think Paul Ryan and his Ayn Rand-worshipping colleagues aren't after your Social Security and Medicare, I am here to disabuse you of your naiveté.[5] They will move heaven and earth to force through tax cuts that will so starve the government of revenue that they will be "forced" to make "hard choices" – and that doesn't mean repealing those very same tax cuts, it means cutting the benefits for which you worked. …

   

  They prefer to rail against those government programs that actually help people. And when a program is too popular to attack directly, like Medicare or Social Security, they prefer to undermine it by feigning an agonized concern about the deficit. That concern, as we shall see, is largely fictitious. Undermining Americans' belief in their own institutions of self-government remains a prime GOP electoral strategy. …

   

  As for what they really believe, the Republican Party of 2011 believes in three principal tenets I have laid out below. The rest of their platform one may safely dismiss as window dressing:

   

  1. The GOP cares solely and exclusively about its rich contributors. The party has built a whole catechism on the protection and further enrichment of America's plutocracy. Their caterwauling about deficit and debt is so much eyewash to con the public. …

   

  2. They worship at the altar of Mars. While the me-too Democrats have set a horrible example of keeping up with the Joneses with respect to waging wars, they can never match GOP stalwarts such as John McCain or Lindsey Graham in their sheer, libidinous enthusiasm for invading other countries. …

   

  3. Give me that old time religion. Pandering to fundamentalism is a full-time vocation in the GOP. Beginning in the 1970s, religious cranks ceased simply to be a minor public nuisance in this country, and grew into the major element of the Republican rank and file.

  He lambastes today’s Democratic Party for its constant me-tooism. Just consider that the most Republican, pro-aristocratic, international-trade bills ever, are the three, TPP, TTIP, and TISA, that the ‘Democrat,’ Barack Obama, is ramming through into U.S. law, with almost solid Republican support in both the House and the Senate, and with only a minority but just enough Democrats to get them over the line. They will be the worst legislative acts in world history, and they are profoundly anti-democratic and pro-aristocratic (and are being rammed through under an unConstitutional Republican-pushed and aristocratic Democrat-passed 1974 law. But there is no new American Revolution, to throw out those traitors, to end the American Counter-Revolution that started with Richard Nixon (his Trade Act of 1974) and that’s being culminated by the Clintons and now Obama. None of this would happen if millions of Americans weren’t very stupid, very full of faith, not science — they’re accepting a Government that will actually produce hell for their own children, and for all future generations. All of this being done to enrich billionaires today. And, to lock in rule by billionaires in the future. Forget equal opportunity — that’s not what an aristocracy wants; that’s what it blocks.

  Not only billionaires are behind this, however. They couldn’t do it if there weren’t many millions of suckers who vote for their corrupt candidates, in both Parties — candidates on the take, such as Bill Clinton, Hillary Clinton, Barack Obama, and all Republican politicians — candidates who speak truth only in private to their sponsors, like Obama did on 27 March 2009 when he told Wall Streeters cloistered in the White House, “I’m not out there to go after you. I’m protecting you. … I’m going to shield you from public and congressional anger. … My administration is the only thing between you and the pitchforks.” He said this to the top financial executives who had overseen frauds that had collapsed America’s and many of the world’s economies. And he fulfilled on that promise to America’s all-time-biggest crooks. But the overt Republican, McCain, was just as much in the aristocracy’s pocket as Obama was. This is what it means to live in an aristocracy, no democracy at all: it’s a type of dictatorship, a dictatorship not only by the richest, but by deception. In that Presidential contest (2008), there was no anti-aristocracy candidate in the general election, and almost all intelligent people voted for Obama because of his lies to the public; they couldn’t be blamed for believing his lies, because (unlike Hillary Clinton) he didn’t have enough of a public record for even intelligent people to know that he’s actually a fascist. And, so, virtually all of the fools voted in that election instead for the man who said, “Bomb, bomb, bomb, Iran.” (They’re dangerous fools; but, in a democracy, even dangerous fools have the right to vote.)

  This is how democracy has died in America. The formula is simple: billionaires + their (and their many clergy’s) suckers = aristocracy. The ‘Kingdom of God on Earth’ is just a front for the billionaires behind the screen, who receive their moral acceptability from preachers of some crackpot Scripture, regardless whether it’s the Bible or Ayn Rand, but preachers bought-and-paid-for all the same, who say “It’s God’s will,” or “They earned it.” The result is, in any case, an aristocratic dictatorship, no sort of authentic democracy whatsoever. And, when even the Democratic candidate has gotten there by a string of lies and no substantive record on which voters can know that his assertions don’t match his real beliefs or commitments, the voters are trapped by the aristocracy: they’ve got nothing else to go on but the aristocracy’s lies, and the aristocratically owned ‘news’ media’s stenographic transmissions of their politicians’ lies to the public.

  That’s how the American Counter-revolution (since 1974) was done. It’s how democracy ended in America.

  The American Revolution (1765-83) overthrew Britain’s aristocracy here. But now, the American people need to overthrow America’s own aristocracy, or else simply accept fascism (rule by an aristocracy). If America, under that condition, will be peaceful, then it can only be the peace of the graveyard — democracy’s graveyard.

  Same thing in Europe.

  The aristocracy is aiming to lock it in. The situation for democrats is now desperate.

  Fools think that because aristocrats compete with each other, they’re not essentially united against the public. The propaganda by aristocrats is believed, as if looking behind the curtain were some type of no-no.

  Anybody intentionally bringing children into a world like this has to be either an aristocrat, or a fool — or callous. (After all, an aristocrat’s child might be able to be largely insulated from the hell that’s now virtually inevitable to come.)

   

  

  

  

  

  

• Gold, Precious Metals Flash Crash Following $2.7 Billion Notional Dump

  The last time gold plummeted by just over $30 per ounce (dragging down silver and bitcoin with it) and resulted in a crash so furious it led to a “Velocity Logic” market halt for 10 seconds, was on January 6, 2014. Many said this was just perfectly normal selling, although we explicitly said (and showed) that it was a clear case of an HFT algo gone wild (following an order to do just that and slam all sell stops) when someone manipulated the market and repriced gold substantially lower.

  Precisely one month ago, some 18 months after the incident, the Comex admitted as much, when it blamed the collapse on “unusually large and atypical trading activity by several of the Firm’s customers and caused the mass entry of order messages by Zenfire, which resulted in a disruptive and rapid price movement in the February 2014 Gold Futures market and prompted a Velocity Logic event.” Curiously despite the “errant” order, gold did not rebound because the entire purpose of the selling slam was to reset the prevailing price far lower. This is what the Comex said in Disciplinary action 14-9807-BC:

  Pursuant to an offer of settlement Mirus Futures LLC (“Mirus” or the “Firm”) presented at a hearing on June 16, 2015, in which Mirus neither admitted nor denied the rule violations upon which the penalty is based, a Panel of the COMEX Business Conduct Committee (“BCC”) found that it had jurisdiction over Mirus pursuant to Exchange Rule 418 and that on January 6, 2014, Mirus failed to adequately monitor the operation of its trading platform (Zenfire), and connectivity of its trading system (Zenfire) with Globex. This failure resulted in unusually large and atypical trading activity by several of the Firm’s customers and caused the mass entry of order messages by Zenfire, which resulted in a disruptive and rapid price movement in the February 2014 Gold Futures market and prompted a Velocity Logic event.

   

  The Panel found that as a result, Mirus violated Rules 432.Q. (Conduct Detrimental to the Exchange) and 432.W.

  We bring this up because moments ago, just before 9:30pm Eastern time or right as China opened for trading, gold (as well as platinum, silver, and virtually all precious metals) flashed crashed when “someone” sold $2.7 billion notional in gold, resulting in a 4.2% or about $50 to just over $1,086/oz, the lowest level since March 2010.

  Gold:

  

   

  Silver:

  

   

  Platinum:

  

   

  Once again, as in February 2014 and on various prior cases, the fact that someone meant to take out the entire bid stack reveals that this was not a normal order and price discovery was the last thing on the seller’s mind, but an intentional HFT-induced slam with one purpose: force the sell stops.

  So what caused it?

  The answer is probably irrelevant: it could be another HFT-orchestrated smash a la February 2014, or it could be the BIS’ gold and FX trading desk under Benoit Gilson, or it could be just a massive Chinese commodity financing deal unwind as we schematically showed last March…

  

  … or it could be simply Citigroup, which as we showed earlier this month has now captured the precious metals market via derivatives.

  

   

  Whatever the reason, gold just had its biggest flash crash in nearly two years, as a targeted stop hunt launched by the dumping of $2.7 billion notional in product, accelerates the capitulation of the momentum buyers (and in this case sellers) pushing gold to a level not seen almost since 2009.

  The price appears to have rebounded after the initial shock, up about $20 from the intraday low of $1,086 but we expect that to be retested shortly, and for gold to plunge further into triple digits, at which point gold miners will simply cease to produce the metal whose all-in production cost is in the $1100 and higher range, when it will also become clear that only derivatives and “paper” are the marginal “price” setters.

  

  But perhaps the biggest irony of the night is that moments before the flash crash, the PBOC revised its shocking Friday announcement revealing its gold holdings had increased by 57%. As Bloomberg said:

  • CHINA PBOC REVISES GOLD RESERVES TO 53.32M FINE TROY OUNCES

  Previously, this was said to be 53.31 million ounces or 10,000 ounces lower, confirming China is literally just making up gold inventory “numbers” as it goes along, and clearly buying ever more physical while the price of paper precious metals conveniently plunges ever lower.

  Before:

  

   

  And now:

  

  One thing is certain: the PBOC will be quite grateful to whoever (or whatever) was the catalyst for the latest and greatest gold flash crash as well.

  

  

  

  

• Is Australia The Next Greece?

  Australian consumers are more worried about the medium term outlook than at the peak of the financial crisis, and rightfully so.

  

  Source: @ANZ_WarrenHogan

  As The Telegraph reports, by the end of the first quarter this year, Australia’s net foreign debt had climbed to a record $955bn, equal to an already unsustainable 60pc of gross domestic product, and is set to rise as RBA's bet that depreciation in the value of the country’s currency would help to offset the decline in its overbearing mining industry hasn’t happened to the extent they would have wished.

   

  

   

  Furthermore, as UBS explains, China's real GDP growth cycles have become an increasingly important driver of Australia's nominal GDP growth this last decade. With iron ore and coal prices plumbing new record lows, a Chinese (real) economy firing on perhaps 1 cyclinder, and equity investors reeling from China's collapse; perhaps the situation facing Australia is more like Greece than many want to admit, as Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock mining dynasty stunned her workers this week: accept a 10% pay cut or face redundancies.

   

  

   

  The government in Canberra and the Reserve Bank of Australia, The Telegraph explains,  had bet that depreciation in the value of the country’s currency would help to offset the decline in its overbearing mining industry. However, that hasn’t happened to the extent they would have wished.

  Last month Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock mining dynasty delivered an unwelcome shock to her workers in Western Australia: accept a possible 10pc pay cut or face the risk of future redundancies.

   

  Ms Rinehart, whose family have accumulated vast wealth from iron ore mining, has seen her fortune dwindle since commodity prices began their inexorable slide last year. The Australian mining mogul has seen her estimated wealth collapse to around $11bn (£7bn) from a fortune that was thought to be worth around $30bn just three years ago.

   

  This colossal collapse in wealth is symptomatic of the wider economic problem now facing Australia, which for years has been known as the lucky country due to its preponderance in natural resources such as iron ore, coal and gold. During the boom years of the so-called commodities “super cycle” when China couldn’t buy enough of everything that Australia dug out of the ground, the country’s economy resembled oil-rich Saudi Arabia.

   

  However, a collapse in iron ore and coal prices coupled with the impact of large international mining companies slashing investment has exposed Australia’s true vulnerability. Just like Saudi Arabia, which is now burning its foreign reserves to compensate for falling oil prices, Australia faces a collapse in export revenue.

   

  Recently revised figures for April show that the country’s trade deficit with the rest of the world ballooned to a record A$4.14bn (£2bn). That gap between the value of exports and imports is expected to increase as the value of Australia’s most important resources reaches new multi-year lows. Iron ore is now trading at around $50 per tonne, compared with a peak of around $180 per tonne achieved in 2011. Thermal coal has also suffered heavy losses, now trading at around $60 per tonne compared with around $150 per tonne four years ago.

   

  For an economy which in 2012 depended on resources for 65pc of its total trade in goods and services these dramatic falls in prices are almost impossible to absorb without inflicting wider damage. The drop in foreign currency earnings has seen Australia forced to borrow more in order to maintain government spending.

   

  The respected Australian economist Stephen Koukoulas recently wrote of the dangers that escalating levels of foreign debt could present for future generations. Could a prolonged period of depressed commodity prices even turn Australia into Asia’s version of Greece, with China being its banker of last resort instead of the European Union.

  As UBS further explains, China's real GDP growth cycles have become an increasingly important driver of Australia's nominal GDP growth this last decade.

   The property-driven slowdown in China's GDP growth is continuing to having a disproportionately large negative impact on Australia's economy. This is because China clearly remains Australia's largest export destination, having peaked at a record high ~? share of total exports last year (equivalent to ~7% of GDP), but more recently retracing sharply to the current 28% share. This reflects the >20%y/y drop in Australia's nominal exports to China in FY15 – which is on track to subtract ~1¼%pts y/y from nominal GDP.

   

  In contrast, FY14 export values surged 26%y/y, adding 1¼%pts y/y to nominal GDP. Notably, this turnaround entirely reflects collapsing prices, which more than offset surging volumes. (Indeed, this overall fall in export values is despite a boom in Chinese tourism arrivals which are currently growing ~20%y/y.)

   

  Weak Chinese demand remains a key downside risk for not only Australia's economy but also the RBA & AUD outlook. The weakness in Chinese growth is having the most obvious negative impact on Australia because our basket of exports is (almost) uniquely concentrated in commodities (back down to ~? share), where China is generally the marginal price-setter. Indeed, after iron ore alone reached a 30% share of total Australian exports in 2013, the recent renewed collapse in iron ore prices saw its export share drop back closer to 20%. The price effect has been a key driver behind Australia's terms of trade collapsing by ? since its peak in 2011.

   

  This negative income shock is weighing heavily on Australia's fiscal position, which has seen its deficit consistently worse than expected over that period; as well as leading to a 'capex cliff', which has seen the RBA cut rates and drag the AUD/USD down to a 6-year low. Indeed, an ABS survey of the outlook for mining investment in FY15/16 implies a ~37% collapse which could directly subtract a massive 2%pts y/y from nominal GDP. As such, weak Chinese demand remains a key downside risk for not only Australia's economy but also the RBA & AUD outlook (with the latter still expected to depreciate further to 0.70USD ahead).

  *  *  *

  As The Telegraph concludes, rather ominously,

  The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.

   

  Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

  

  

  

  

  

• Chinese Stocks Drop'n'Pop After Officials Confirm "Stock Market Rout Stopped By Timely Measures"

  With shenanigans in precious metals, investors are rushing back into the safety of Chinese high beta idiotmakers stocks…

  Shanghai Composite Tops 4000 Once again

  

   

  One wonders if gold manipulation played a hand…

  

   

  After two days of deleveraging and a squeeze into the expiration of CSI-300 Futures pushing Chinese stocks higher, the grandmas and farmers have decided now is an opportune moment to once again start adding margin debt. Who is to blame? Simple – Chinese officials have confirmed that “the stock market rout is over thanks to their timely measures.” Futures opened modestly higher but are fading as the cash open looms…

   

  Rest assured world…

  • *CHINA’S ZHU SAYS STK MKT ROUT CEASED BY TIMELY MEASURES: DAILY

   

  And so, after 2 days of rationality, PBOC reports,

  • *SHANGHAI MARGIN DEBT RISES FOR FIRST TIME IN THREE DAYS

  As the Chinese just can’t help themselves…

  CSI-300 hovering flat (China’s S&P 500)

  

  CHINA FTSE A50 (China’s Dow) lower….

  

   

  Finally, here is a brief explanation from Stratfor on the political consequences of China’s stock market collapse:

  

  

  

  

  

• Lies, Damned Lies, & Inflation Statistics

  Submitted by Jim Quinn via The Burning Platform blog,

  The government released their monthly CPI report this week. Even though it came in at an annualized rate of 3.6%, they and their mouthpieces in the corporate mainstream media dutifully downplayed the uptrend. They can’t let the plebs know the truth. That might upend their economic recovery storyline and put a crimp into their artificial free money, zero interest rate, stock market rally. If they were to admit inflation is rising, the Fed would be forced to raise rates. That is unacceptable in our rigged .01% economy. There are banker bonuses, CEO stock options, corporate stock buyback earnings per share goals and captured politician elections at stake.

  The corporate MSM immediately shifted the focus to the annual CPI figure of 0.1%. That’s right. Your government keepers expect you to believe the prices you pay to live your everyday life have been essentially flat in the last year. Anyone who lives in the real world, not the BLS Bizarro world of models, seasonal adjustments, hedonic adjustments, and substitution adjustments, knows this is a lie. The original concept of CPI was to measure the true cost of maintaining a constant standard of living. It should reflect your true inflation of out of pocket costs to live a daily existence in this country.

  Instead, it has become a manipulated statistic using academic theories as a cover to systematically under-report the true level of inflation. The purpose has been to cut annual cost of living adjustments to Social Security and other government benefits, while over-estimating the true level of GDP. Artificially low inflation figures allow the mega-corporations who control the country to keep wage increases to workers low. Under-reporting the true level of inflation also allows the Federal Reserve to keep their discount rate far lower than it would be in an honest free market. The Wall Street banks, who own and control the Federal Reserve, are free to charge 18% on credit card balances while paying .25% to savers. The manipulation of the CPI benefits the vested interests, impoverishes the masses, and slowly but surely contributes to the destruction of our economic system.

  A deep dive into Table 2 from the BLS reveals some truth and uncovers more lies. Their weighting of everyday living expenditures is warped and purposefully misleading. Let’s look at the annual increases in some food items we might consume in the course of a month, living in this empire of lies:

  • Ground Beef – 10.1%
  • Roast Beef – 11.8%
  • Steak – 11.1%
  • Eggs – 21.8%
  • Chicken – 3.7%
  • Coffee – 3.4%
  • Sugar – 4.2%
  • Candy – 4.6%
  • Snacks – 3.5%
  • Salt & Seasonings – 5.3%
  • Food Away From Home – 3.0%

   

  Despite these documented increases, the BLS says food inflation only ran at 1.8% in the last year. They show large decreases in pork, seafood, dairy, and vegetable prices. I grocery shop every week. I buy milk, fish, and vegetables and the prices have not fallen. The price of pork products has decreased from all-time highs, but is still well above prices from a few years ago. The BLS fraudulently keeps the food price increase lower by assuming you switch from beef to pork when the price of beef soars. That assumption does not lower the price of food. The assumption essentially builds in a lower standard of living for you in their model of the world. The other ridiculous assumption is the weighting for food eaten away from home. Giving this a weighting of 5.8% is outrageous when everyone knows obese Americans are chowing down at Taco Bell and the millions of other purveyors of toxic food sludge multiple times per day.

  If you are like me, you probably need to live someplace. Food and shelter are the most basic of needs in a society. But according to the BLS they account for less than 50% of your expenses. Let’s examine some shelter related costs to see how badly the BLS is lying in this area:

  • Rent – 3.5%
  • Owner’s Equivalent Rent – 3.0%
  • Insurance – 3.1%
  • Water, Sewer, Trash – 4.7%
  • Household Operations – 3.6%

  There is so much wrong with the BLS data, I don’t know where to start. The rental market has been on fire since 2012. Builders are erecting apartments at a breakneck pace. Independent, non-captured, neutral real estate organizations show rents surging to all time highs, growing by 5.1% on an annual basis. Real rents in the real world have grown by 14% since 2012. The BLS says they’ve grown by 9%. Who do you believe?

  

  It’s funny how the mysterious owner’s equivalent rent calculation spits out a 3% increase in the last year. National home prices, based on Case Shiller data and NAR data shows prices up between 5% and 10% in the last year and up by 25% since 2012. Mortgage rates have risen to 4% from the low 3% range. Property taxes are soaring across the country as indebted localities rape taxpayers to pay for their gold plated government benefits and pensions. Evidently the BLS just ignores prices, mortgage payments, and real estate taxes when calculating their lies.

  The final outrage is the weighting applied by the BLS to the owners equivalent rent. It accounts for 24% of the CPI calculation, virtually the same as it did in 2007. In case you haven’t noticed, the home ownership rate has plunged to 22 year lows since 2007, as millions of foreclosures booted people out of homes and millions of millennials are so loaded with student loan debt and stuck with low paying Obama jobs that home ownership is a distant dream. How can the BLS continue to weight home ownership at the same level when the percentage of rental units has soared?

  

  There is no question the BLS should have dramatically increased the weighting of rental housing. In reality, the large increases in rental rates and the surge of rental households reflects a much higher inflation rate than is being reported by the government. The BLS figure is a blatant lie. The recent report from the Center for Housing Studies reveals the falsity of the government reported propaganda. Over 20.7 million renter households (49.0%) pay more than 30% of their income on housing. More than a quarter of all renter households, or 11.2 million, spend more than 50% of their income on housing. The median US renter household earned $32,700 in 2013 and spent $900 per month on housing costs. Renter housing costs are gross rents, which include contract rents and utilities. If the median renter household spends 33% of their income on housing costs how can the BLS give it only a 7.2% weighting in the CPI calculation?

  

  The Center for Housing Studies report drives a stake into the heart of the manipulated, politically massaged, false data put out by the BLS to keep the masses sedated and their bosses fat, happy and rich:

  Over the span of just 10 years, the share of renters aged 25–34 with cost burdens (paying more than 30 percent of their incomes for housing) increased from 40 percent to 46 percent, while the share with severe burdens (paying more than 50 percent of income) rose from 19 percent to 23 percent. During roughly the same period, the share of renters aged 25–34 with student loan debt jumped from 30 percent in 2004 to 41 percent in 2013, with the average amount of debt up 50 percent, to $30,700.

  The faux journalists in the dying legacy media act baffled by the continued real decline in retail sales when the answer is staring them right in the face. True inflation in essential living expenses combined with declining real wages and increasing debt burdens has left the average household with little or no money to spend.

  The next blatantly manipulated false data is related to healthcare. Let’s peruse some this detailed inflation data:

  • Prescription Drugs – 4.8%
  • Non-Prescription Drugs – Negative 1.6%
  • Medical Equipment – 0.0%
  • Medical Care Services – 2.3%
  • Hospital Services – 3.5%
  • Health Insurance – 0.7%

  Anyone living in the real world knows Obamacare has resulted in a tremendous increase in demand for drugs, medical services, and medical equipment. Health insurance companies, drug companies, drug wholesalers, hospital corporations, and drug stores are reporting record profits as their stock prices hit all-time highs. When was the last time you saw prices drop or stay flat in the healthcare arena?

  It is patently outrageous for the BLS to report an annual health insurance cost increase of a mere 0.7%. The annual cost of employee sponsored health insurance is 6.3% higher than last year, with the employee portion skyrocketing by 8.0% based on real data in the real world. I work for the largest employer in Philadelphia, with the most negotiating clout against insurers, and my portion has gone up by 10% to 20% annually for the last five years. Everyone working for a company has experienced the same or higher increases.

  

  Even the Obamacare exchanges are seeing double digit premium increases in many states. Studies from Price Waterhouse Coopers and McKinsey found increases in average premiums between 6% and 10% across the country. It takes major cajones for the BLS to report 0.7% health insurance inflation, but their job is not to report factual information. Their job is to keep the ignorant masses ignorant of their plight. The bigger the lie, the more likely it is to be believed. The even more ridiculous aspect to the BLS data is that health insurance is weighted at .75% in the CPI calculation. The median household income in this country is $52,000. Employees are paying approximately $4,000 in health insurance per year on average. That is 7.7% of their income. The BLS weighting is absurd. Using a true inflation rate and true weighting would add at least 2% to the CPI figure.

  

  Another area that impacts every American every day is transportation. People need to drive or take public transportation in order to live their lives. Here are some more crucial inflation data points from the BLS:

  • New Cars – 1.2%
  • Used Cars – Negative 0.7%
  • Gasoline – Negative 23.3%
  • Vehicle Leasing – Negative 1.1%
  • Vehicle Insurance – 5.1%
  • Parking & Tolls – 2.4%
  • Public Transportation – Negative 3.2%

  So we have near record levels of new auto sales, driven by subprime auto debt and 7 year 0% financing, with average vehicle prices at all-time highs, and the BLS reports prices only went up 1.2% in the last year. Edmunds, the authority in auto data, says prices went up 2.6% in the last year. Do you believe the BLS model or real data from the real world, broken down by automaker and vehicle? The even more ridiculous contention is that used car prices fell. I’ve bought two used cars in the last year and I can attest that prices are not falling. Edmunds reported that used car prices have risen by 7.1% in the last year. Leases as a percentage of total auto sales is also at record levels. Does this really jive with a decrease in leasing expenses? I think not.

  There are 254 million passenger vehicles registered in the United States. We have a record level of auto loan debt totaling $1 trillion and a record level of auto leases. According to Edmunds, the average monthly car payment is $479. That is $5,748 per year. That equals 11% of the median household income. Why would the BLS only give this category a 5.7% weighting? Bankrupt states across the country have been jacking up tolls. The BLS says they went up by 2.4%. My beloved state of Pennsylvania has increased them by 10% per year for the last three years. The BLS says the cost of public transportation is plummeting. Has a Amtrak or any municipal public transportation system EVER reduced fares? Not a chance. They need more revenue to fund the government pensions of their union employees.

  There are a few other categories that might be of interest to you:

  • Banking Fees – 5.9%
  • College Tuition – 3.4%
  • Childcare – 4.3%
  • Sporting Events – 8.8%
  • Pet Care – 3.5%
  • Cigarettes – 2.5%
  • Alcohol Served Away from Home – 4.0%

  Isn’t it delightful that your friendly neighborhood Wall Street bank gets free money from the Fed, charges you 18% on your credit card balance, pays you nothing for your deposits, and then jacks up your bank fees? The relentless inflation in college tuition is being driven by the relentless doling out of student loans by the Federal Government to people who aren’t intellectually capable of completing college level material. The $1.4 trillion of student loans will never be repaid. The taxpayer will be on the hook for hundreds of billions in write-offs.

  To celebrate the near zero inflation reported by your friendly government drones at the BLS take your family of four to a baseball game, spending $160 for tickets, $25 to park your car, $20 for two warm beers, $10 for two sodas, $24 for four hot dogs, and $10 for an order of cheese fries. Make sure you toast Greenspan, Bernanke, Yellen and the rest of the Federal Reserve governors who have purposefully reduced the purchasing power of your dollar by 96% over the last century.

  You know your true level of inflation. You know it’s not 0.1%. You know it’s somewhere between 4% and 10%. You know your government is lying to you. You know the captured corporate media perpetuates the lies. You know those in control of the government must lie to keep their Ponzi scheme going. You know they are just following the Edward Bernays playbook. They want you to believe it’s for your own good. Do you think it’s for your own good?

  “The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. …We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. …In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons…who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.” – Edward Bernays – Propaganda – 1928

  

  

  

  

  

• Janet Yellen Was Half Right

  Just over a year ago, Janet Yellen did the unthinkable. In a moment of clarity, The Fed called out two darlings of the momentum-chasing euphoria-driven stock buying frenzy for 'special' treatment when Yellen uttered the Cramer-mind-blowing fact that "small cap social media and biotech stock valuations were substantially stretched." It appears, judging by today's market, that she was half right…

   

  

  The equal-weighted basket of nine social media stocks (Angie's List, Demand Media, Groupon, Jive Software, King Digital, Pandora Media, United Online, Yelp, and Zynga) is down 23% since Yellen's truthiness (underperforming the broad small cap universe by almost 32%). However, Small cap Biotechs have soared rather than stalled – now up almost 89% since The Fed chair's drubbing.

   

  Of course – she is actually right about both but timing is everything (just ask Greenspan) as small cap biotech valuations move on to be "substantially stretched"-er.

  

   

  Charts: Bloomberg

  

  

  

  

  

• How The Fed And Wall Street Are Eating Their Seed Corn

  Submitted by Mark St.Cyr,

  When it comes to the stock market these days the overriding theme you hear from the financial media is “You’ve got to get in.” Another is, “Buy on the dips and average in.” Or, “You can’t profit if you aren’t in it” and more. So many more it would fill its own multi-volume set. However, there was some truth to many of those quips just a few years ago. Today, the amount of hidden reality to the actual destruction of one’s wealth is far more factual than any will let on. Let alone reveal.

  I hear and speak to a lot of entrepreneurs who are absolutely mystified by not only the rise in the markets since the financial crisis in 2008. Rather, what many just can’t wrap their heads around is: “If the markets are a reflection of the economy. Then how in the world did we get up here?”  That line of thought I rendered down to be the overwhelming theme when discussing the current state of business affairs throughout the economy. This confusion is coming from a group of people who at one time would seek out Wall Street aficionados for insight or expertise. Today, they tend more to distrust what they hear. For what they lack in stock market expertise   – they make up in spades with an acutely precise B.S. meter honed by years of business acumen. And many confirm today; it’s off the charts far more than they can ever remember. So much so, as to avoid stepping in any of it – they just avoid it all together.

  At one time entrepreneurs were not only sought out by Wall Street, rather, entrepreneurs did the same in kind. Before the advent of 401K plans and more it was entrepreneurs with the sale of their business, or profits from something else that fueled many a brokerage firms bottom line. And in many cases that relationship did well for both sides. There was true expertise needed to help one navigate the pitfalls of exactly how and where one was to put their money to work (usually a substantial amount such as after a business sale etc.) in relative safety as to finance the remainder of one’s years. Today, not only in much of that expertise gone – so too is the safety.

  There’s probably no better example of this than what transpires at any bank branch today (those that are left that is). Opening a checking or savings account? You used to be incentivized to do so. But what this initial transaction is really designed for today is more along the lines of “a soft opening” to ask…”So, do you have a 401K account elsewhere?” Then the sales pitch is on by some seemingly just out of grad school quota seeking “financial adviser” with an array of pamphlets, jargon, and sales phrases anyone with any financial sense can see through. “Index this… diversify that…dividend paying yields ” and on and on. Along with whatever might be the latest tagline from the financial shows.

  This is the true face of Wall St. today. As much as Wall St. would like to think of itself as it was in the glory days of a Gordon Gekko – that image is long gone. Today, what most people see is nothing more than some recent college grad trying desperately to say anything that might convince one to switch 401K accounts as to possibly make this months quota. For if not they too will have to join the hordes of recently dislocated tellers they once worked with. And the numbers show this to be true because not only is the vast majority not switching – they aren’t even staying, let alone “getting in.”

  Let’s use a few scenarios that are emblematic to the challenges facing the likes of both the recently cashed out entrepreneur as well as a recent retiree of any sorts. I’ll use the dollar amount of $3,000,000.00 ($3MM). To some this may seem high, to others it’s not all that great. However, for many entrepreneurs it’s an amount easily understood as well as feasible. I also use if because it’s a representative amount even Julian Robertson of Tiger Management™ has used to describe the dilemma many entrepreneurs find themselves in with navigating today’s financial morass.

  (The following of course is over simplified, I mean it as such. However, the questions, answers, as well as premise can not be over stated as to their importance.)

  The “buy and hold” strategy. Sounds great, makes perfect sense – unless you can’t hold. Retirement for many means just that: no more working to generate income. Income is now derived via their stock holdings. If one doesn’t sell (e.g., their stocks) – there’s no money to eat. Better to “stay and hold” in one’s business and take their chances rather than try to “cash out” and place their livelihoods (i.e., money) in someone else’s hands. Especially what constitutes as today’s “investment adviser.”

   

  “Buy stocks that pay out dividends!” Again, sounds great and seems to solve the problem of the above. Problem is, in a stock rout, what’s the first thing companies cut? Dividends. You had just better hope and pray the companies that do cut – aren’t the ones you were sold. Or, you’re now cut out. But not too worry, they say skipping a meal or two here and there is healthy. And that’s what you’ll need to remember when there’s no food on the table because – there’s no “dividend” in the mailbox. I’ll also add: it’s probably safe to assume in another financial rout, the “financial adviser” that sold you those “dividend” plays is no longer employed themselves. So calling them for further “advice” might be more challenging than it is frustrating.

   

  “Buy the dips!” Sure, there’s only one problem. If there is a “dip” doesn’t that mean the markets lost value? So if one didn’t sell at the heights where is the money to buy on the dip? And if one is selling on the high to fund retirement as to eat and pay bills: That money is now gone. There is no money to now “buy the f’n dip!”

   

  “A stock market correction of 20% to 30% is a gift to buy great companies that are now on sale!” No. A 20% to 30% market correction is a loss of $600,000.00 to just shy of  $1,000,000.00 of ones net worth. More than likely a “net worth” that was to be “worth” food to eat, and pay living expenses.

   

  “If you’re nervous about the markets just be diversified.” This line means squat. Diversified as in what? Other markets? Other vehicles? Lot of good that did during the financial crisis of ’08 when everything was going down and coming apart together. And if one believes the markets to be more stable today, and better fortified to withstand another such calamity, even one only half as extreme – I have some beautiful oceanfront property here in Kentucky I’d love to sell you. Cheap!

   

  Don’t like the “markets?” Don’t worry – you can be safe in bonds. Only problem? Today they pay next to nothing. The bigger problem? Tomorrow they may charge you. All while having to be willing to accept: if you want out sooner than later – it’s gonna cost you a plenty if that sooner is at the wrong time. But don’t worry. It’s not like you need to eat or pay bills anytime sooner or later, right?

   

  Want to keep your money as safe as possible? “Keep it in liquid instruments such as C.D.’s or savings accounts here at our bank.” Unless of course it’s over $100K. Then depending on the bank not only might you have to pay for the privilege, if they deem you have too much they might ask you to take your money elsewhere. Why? Easy. Your “cash” is now a hindrance that needs to be protected as well as accounted for. And that’s not what a “bank” is in business for any longer. Silly you for thinking “bank” today means anything what “bank” meant in the past.

   

  “Don’t like banks? Put you’re money in a money market!” Right. Only problem there is after the financial meltdown of 2008 where it was shown a great deal of distress was caused by funds needing to keep 1 for 1 notional values in their cash accounts, it’s now been deemed that pesky thing of trying to preserve someones cash balance was just too hard. So a new rule was implemented where this pesky detail is no longer relevant. Now if your “cash” value in a money market account resembles an equation of cents on the dollar rather than a dollar for a dollar – oh well; it is 2015 after all. And the times – they have a changed. I’ll bet you didn’t even get a toaster when you opened that six or seven figured account. So there should be no need to whine about not having any bread to cook in it. After all it’s no longer even clear when you may gain or regain access to it (if there’s anything left) in another market rout. For any doubts on this just look to the bottom of your latest statement. it’s written right there in black and white. (Just have your 10X magnifying glass at the ready is all I’ll say.)

  I could go on and on, yet I believe, you get the point. Ask just one of the above scenarios to what constitutes a “Wall St. maven” today and I’ll bet dollars to doughnuts you’ll hear more back peddling or more evasive, jargon laced, mumbo-jumbo – it will have you questioning humanity itself let alone just financially.

  What both Wall Street in general as well as the Federal Reserve has wrought is a market so adulterated, so anemic, and so mistrusted the euphemistic “money on the sidelines” has more in common with nursery rhymes than it does with anything reality based. There is no money on the sidelines. Nobody wants “in” to this market. Anyone with half a brain and a modicum of common sense wants out – and the outflow numbers show it still to be true.

  “Buying the right index, diversification, and thinking like a billionaire” is not only nonsensical in today’s marketplace. It can cause one a whole lot of pain when one is unable to fully comprehend as well as separate euphemisms for real world panic and dismay.  All one needs to do is look east to see just how well that type of thinking is doing in China today. For “bubbles” no matter the culture when it comes to one’s money “pop” the same way: First panic – then distrust – then the repeating of another euphemism that sometimes lasts for generations: Never trust a bank or the markets. Never, ever, ever!
   

  

  

  

  

  

• French President Calls For The Creation Of United States Of Europe

  On Friday, SocGen’s Albert Edwards was confused: when describing the events of last weekend, when Greece seemed on the verge of being “temporarily” exiled from Europe thus confirming once and for all that the Euro is in fact quite reversible, it was not Germany against France, a France whose total government liabilities assure that its countdown to sovereign insolvency is just a few years behind that of Greece…

  

  … but France alongside Germany, playing the good cop to Schauble’s now traditional “Dr Evil” routine. To wit:

  [what] surprised me over the weekend was France’s position. I was not in any way surprised that Germany was able to gather a huge number of allies to its camp, with its traditional fiscally conservatively minded allies such as Finland, Holland and Austria, as well as many central European governments. I was not even surprised that other countries previously crushed by austerity, Spain, Ireland etc., were firmly in the Germany camp too. But I was really surprised that French authorities did not stand up to say what was happening was unacceptable, unsustainable, and indeed unfair, and that they would have no part of it.

   

  The reason why I am surprised that France went along with this extreme and humiliating austerity programme – and the effective removal of sovereignty forced on Greece – is simply its own self-interest, for France could itself end up in the firing  line. The problem France will surely find further down the road is that its own debt dynamics and sustainability is also highlyquestionable. Estimates we have used before with calculations for the present value of unfunded liabilities (as a % of GDP) show that actually it is not Spain or Italy that have the worst long-term debt sustainability issues; it is the US and France, and then next in line, surprisingly, Germany.

  We said that we found France’s capitulation “far less surprising: ultimately Hollande’s sole focus was to preserve near-term stability (and his job) at any cost, if only until the 2017 French elections, which he is guaranteed to lose. Even if the French fiscal and solvency situation deteriorates dramatically over the next two years (and it will because as we showed in June, France has now had 80 consecutive months of record unemployment as a result of yet another socialist economic failure), by the time the world wakes up it will be someone else’s problem, most likely that of Marine Le Pen, at which point the only way to resolve the French “problem” will by through the printing of French Francs.”

  Today Bloomberg confirmed just that, when it reported that instead of seeking a mathematical resolution to France’s unsustainable government liability brick wall, Hollande is now likewise prepared to follow in Tsipras’ footsteps and hand over French sovereignty to a German-led European “government” if it means extending the unsustainable French status quo as long as possible. To wit:

  French President Francois Hollande said that the 19 countries using the euro need their own government complete with a budget and parliament to cooperate better and overcome the Greek crisis.

   

  “Circumstances are leading us to accelerate,” Hollande said in an opinion piece published by the Journal du Dimanche on Sunday. “What threatens us is not too much Europe, but a lack of it.”

  In other words, France just called for the creation of the United States Of Europe, where the dominant power (Germany) is in charge, and where the people of all the smaller, weaker countries, pardon pro forma European states, are merely slaves. See Greece.

  And speaking of Greece, somehow we doubt the insolvent nation, which justt last week just handed over its sovereignty to Germany and Brussels, feels there is a “lack of Europe.“

  While the euro zone has a common currency, fiscal and economic policies remain mostly in the hands of each member state. European Central Bank President Mario Draghi made a plea this week for deeper cooperation between the euro members after political squabbles over Greece almost led to a rupture in the single currency.

   

  Countries in favor of more integration should move ahead, forming an “avant-garde,” Hollande said.

   

  “Europe has let its institutions weaken and the 28 European Union member countries are struggling to agree to move ahead,” Hollande said on Sunday in a text which was also a homage to his mentor Jacques Delors, a former European Commission President who proposed similar ideas. Draghi called for the creation of a shared treasury within 10 years in a joint proposal with politicians.

  Well, of course Draghi would call for that: after all, the more “globalized” end markets are, and the greater the stock of monetizable debt collateralized by a supergovernment, the greater the profits for Goldman (followed shortly thereafter by a global government controlled by the Inner Party; call it “Oceania” for lack of a better made up word).

  Not to mention that what would happen in Hollande’s “avant-garde” world is that Germany will have achieved its World War II goal of taking over Europe without firing a single shot, with every other country, first Greece now France, and everyone inbetween, handing over its sovereignty to the Bundestag (not to mention to German exporters) to run the show.

  As for Hollande, and his all time low approval rating, his immediate concern is not how to hand over Paris to Berlin, but how to prevent Marine Le Pen aka “Madame Frexit” from taking his seat in two years because as we wrote before the Greek referendum was even announced, “Forget Grexit, “Madame Frexit” Says France Is Next: French Presidential Frontrunner Wants Out Of “Failed” Euro.”

  Greece is now a sideshow even as its economy implodes completely and the country ultimately exits the Euro – the real question is can Germany build on the Hollande momentum to finally implement a Berlin-controlled, Frankfurt-funded “government” before Le Pen crushes the European dream, or nightmare as it is better known in Greece and for the half of Europe’s peripheral youth who are permanently unemployed, once and for all.

  

  

  

  

  

• China Destroyed Its Stock Market In Order To Save It

  Submitted by Patrick Chovanec via ForeignPolicy.com,

  During the Vietnam War, surveying the shelled wreckage of Ben Tre, an American officer famously remarked, “It became necessary to destroy the town to save it.” His comment came to epitomize the sort of self-defeating “victory” that undoes what it aims to achieve.

  Last week, China destroyed its stock market in order to save it. Faced with a crash in share prices from a bubble of its own making, the Chinese government intervened ruthlessly, and recklessly, to turn those prices around. Its heavy-handed approach seemed to work, for the moment, but only by severely damaging far more important goals and ambitions.

  Prior to the crash, China’s stock market had enjoyed a blissful disconnect from reality. As China’s economy slowed and corporate profits declined, share prices soared, nearly tripling in just 12 months. By the peak, half the companies listed on the Shanghai and Shenzhen exchanges were priced above a preposterous 85-times earnings. It was a clear warning flag — one that Chinese regulators encouraged people to ignore. Then reality caught up.

  At first, when prices began to fall, the central bank responded by cutting interest rates and bank reserve requirements — measures to inject more money that had never failed to juice the market. But prices continued to fall. Then the government rallied the major brokerages to form a $19 billion fund to buy shares and waded directly into the market to buy stocks too. A few stocks rose, but most fell even further.

  The relentless crash was intensified by a new factor in Chinese markets: margin lending. Chinese punters were borrowing in large sums, from both brokerages and more shadowy sources — like “umbrella trusts” and peer-to-peer lending websites — to buy shares, with the shares themselves as collateral. At the peak, according to Goldman Sachs, formal margin lending alone accounted for 12 percent of the market float and 3.5 percent of China’s GDP, “easily the highest in the history of global equity markets.” Margin loans served as rocket fuel for the market on its way up, but prices began to fall and borrowers received “margin calls” that forced them to liquidate their positions, pushing prices down further in a kind of death spiral.

  Chinese regulators, who had been trying (ineffectually) to rein in risky margin lending, now suddenly reversed course. They waved rules requiring brokerages to ask for more collateral when stock prices fall and allowed them to accept any kind of asset — including people’s homes — as collateral for stock-buying loans. They also encouraged brokerages to securitize and sell their margin-lending portfolios to the public so that they could go out and make even more loans. All these steps knowingly exposed major financial institutions, and their customers, to much greater risk. Yet no one will borrow if no one is confident enough to buy, and the market continued to fall, wiping out nearly all its gains since the start of the year.

  By this point last week, China’s state media was talking openly of a “war on stocks.” And in that war, China’s leaders chose to employ the nuclear option: In effect, they closed down the market and outlawed selling. As of the morning of July 10, about half of China’s 2,800 listed companies filed to suspend trading. Many of their owners had pledged shares as collateral for corporate and personal loans and were facing margin calls that would cause them to lose control of their companies. Chinese regulators also banned major shareholders from selling any shares for the next six months. Additionally, they directed companies to start buying back their own shares and instructed state-run banks to provide whatever financing was needed.

  But the real turn in the market came when China’s Ministry of Public Security — the no-nonsense tough guys normally tasked with cracking down on political dissent — announced that it would arrest what it called “malicious” short-sellers. It was clear, however, that this meant anyone whose selling (not just “short” selling) interfered with the government’s efforts to boost prices. The announcement cast a chill over the market. I have heard multiple reports of Chinese brokers refusing to accept sell orders for fear of angering the authorities. So when we say China’s stock market stabilized, we need to put quotation marks around the word “market.”

  

  China’s temporary success at manipulating a share-price rebound has come at a terrible longer-term cost.

  Two years ago, China’s leaders adopted “market forces will be decisive” as the guiding principle behind a much-lauded push for reforms needed to reinvigorate China’s slowing economy. That principle now lies in ashes.

  For years, China has dreamed of Shanghai’s becoming a global financial center. Now, one analyst at the global investment firm Julius Baer told the Financial Times, “confidence in the local Chinese equity market has been shattered and is unlikely to come back anytime soon.” Just a few weeks ago, observers confidently predicted it was “inevitable” that domestic Chinese stocks would soon be added to the major global indices that serve as benchmarks for professional investors. Today, with a mere rump of China’s stock market trading at all, and with investors afraid they will be thrown in prison for selling at the wrong time for the “wrong” price, it’s inconceivable.

  It didn’t have to be this way. Some compare China’s intervention to the U.S. Troubled Asset Relief Program (TARP), but the difference is striking. TARP didn’t try to stop market prices from falling; it focused on containing the damage. If Chinese authorities identified a large securities firm that was at risk of failing from bad margin loans and stepped in to prevent a chain reaction, that would make more sense — and do a lot less damage — than trying to prop up the entire stock market by fair means and foul. Memories are short, but in 2007, China allowed an equally large stock bubble to collapse without its economy suffering irreparable harm. Caixin, one of China’s most prominent financial magazines, argued recently that this time around, the government “had no reason to intervene” to prevent a much-needed market correction and had grossly overreacted.

  China needs a functioning stock market that allocates investors’ capital to the most promising enterprises. This means prices that aren’t obedient to the whims of the state, or the party. China may have arrested the stock market’s fall by threatening to arrest sellers. But when it did that, it destroyed the town it was trying to save.

  

  

  

  

  

• Russia Unveils "Terminator T-1" Inspired Killer Robots

  The first time Russia’s armed forces demonstrated the Platform-M combat robot was one year ago in mid-June 2014, when in the course of military drills by the Baltic Fleet near Kaliningrad, the robotic combat platforms, armed with grenade launchers and Kalashnikov rifles saw their first action, executing their military missions alongside their live colleagues.

  

   

  But what is the Platform-M aside from looking like a very angry, heavily armed version of Wall-E, or a predecessor of the T-1 Series terminator? As explained by RBTH, “the Platform-M is a remote controlled robotic unit on a crawler” one which resembles the protagonist of the 2008 Pixar computer animation WALL-E as well as the original T-1 terminator.

  

  The Terminator Series T-1

  The affinity between Platform-M and the animated character can also be seen in the robot’s prototype, which appeared on the Russian internet in an animated presentation. In the video, the robotic vehicles, which resemble Platform-M (only on wheels instead of tracks), easily destroy a force of enemy militants armed with NATO weaponry.

  According to some data provided by the Russian military, the Platform-M unit is supplied with “a differentiated defensive chassis and a firing platform and can carry out combative tasks during the night without unmasking instruments.”
  The robot is armed with the famous Kalashnikov rifle made in Izhevsk and four grenade launchers.

  At the Progress Scientific Research Technological Institute of Izhevsk, where it was made, the “crawling creation” was given the following assessment: “Platform-M is a universal combat platform. It is used for gathering intelligence, for discovering and eliminating stationary and mobile targets, for firepower support, for patrolling and for guarding important sites. The unit’s weapons can be guided, it can carry out supportive tasks and it can destroy targets in automatic or semiautomatic control systems; it is supplied with optical-electronic and radio reconnaissance locators.”

  As RBTH adds, Russian robotic technology has existed since the days of the Moon rovers. Back in 1964 the Russian Air Force acquired a system of long-range pilotless photo and radio technological reconnaissance called the DBP-1. This reconnaissance machine, launched from western parts of the country, could carry out its assignments over all of Central and Western Europe.

  In 1973 the Soviet Union initiated the first state scientific and technological program devoted to the creation and implementation of industrial robots. Consequently, by 1985 the USSR had 40 percent of the world’s industrial robots at its disposal, having surpassed the U.S. These units were guided by network-centric principles and artificial intelligence was embedded in the military sphere.

  Still, many had believed that Russia was years behind the envelope when it comes to putting advanced robotic technology on the battlefield. Until today, when a video showcased Russia’s latest military equipment in Sevastopol, ranging from the “Bastion” air defense and anti-ship complexes missile system to sniper rifles and special ops naval guns, also showed none other than the Platform-M combat robot mingling among the population of this most important Crimean city.

  Now all that is needed is for some hacker to penetrate the Platform-M firewall and take control of a small army of these units and then we can finally move the Terminator series into the non-fiction section.

  

  

  

  

  

• Creator Of Internet Privacy Device Silenced: "Effective Immediately We Are Halting Further Development"

  Submitted by Mac Slavo via SHTFPlan.com,

  

  (Pictured: Proxyham by Benjamin Caudill / Rhino Security Labs)

  Data collection and invasive monitoring of American citizens has been at the forefront of government activities for decades. After revelations by Edward Snowden in recent years, the fringe conspiracy theorists who warned of Big Brother surveillance and had been laughed at by the general population were finally proven right.

  But despite the literal hundreds of thousands of pages of information about government snooping and the Congressional “investigations” that followed, nothing has been done to curb the unabated violations of Americans’ Constitutional rights to be secure in their homes and personal effects.

  Thus, as always, the free market began developing its own solutions. Earlier this year an inventor by the name of Benjamin Caudill announced a device he dubbed the ProxyHam which was going to literally change everything about how those concerned with privacy could connect to the internet:

  “I PRESENT PROXYHAM, A HARDWARE DEVICE WHICH UTILIZES BOTH WIFI AND THE 900MHZ BAND TO ACT AS A HARDWARE PROXY, ROUTING LOCAL TRAFFIC THROUGH A FAR-OFF WIRELESS NETWORK – AND SIGNIFICANTLY INCREASING THE DIFFICULTY IN IDENTIFYING THE TRUE SOURCE OF THE TRAFFIC. IN ADDITION TO A DEMONSTRATION OF THE DEVICE ITSELF, FULL HARDWARE SCHEMATICS AND CODE WILL BE MADE FREELY AVAILABLE.”

  Rhino Security Labs via HackRead

  What Caudill had built is a device that would mix up your personal WIFI signal in such a way that no one, not even the National Security Agency, could track down where it originated.

  That, of course, is not something the government wants in the hands of ordinary citizens, and the events of the last week show exactly how dangerous of a device this is to the Big Brother Surveillance State.

  Just hours before Caudill was to reveal a fully-functioning ProxyHam at the DefCon hacking conference his presentation was abruptly cancelled. No reason was given and Caudill posted several cryptic Tweets that left many baffled.

  The device had been disappeared, the company was cancelling production on retail units, and the source code and blueprints would no longer be released to the public.

  

  Some have suggested that a private business approached Caudill before the conference and made him an offer for retail distribution.

  But the more likely scenario, given what we’re privy to about the device and the government’s incessant need to know everything about everyone, is that someone made Caudill an offer he couldn’t refuse. Hackread explains:

  There’s another possibility of this sudden cancellation i.e. intrusion by the government. Maybe that is the reason why Caudill is not discussing the reason behind this halt. Even though the security firm was “excited” to unveil ProxyHam at Def Con.

   

  Steve Ragan of CSO Online said:

  “IT WOULD LOOK AS IF A HIGHER POWER – NAMELY THE U.S. GOVERNMENT – HAS PUT THEIR FOOT DOWN AND KILLED THIS TALK […] IT ISN’T PERFECT, BUT A TOOL LIKE PROXYHAM – WHEN COMBINED WITH TOR OR OTHER VPN SERVICES, WOULD BE POWERFUL.”

  Incidents like this give us clear insight into what the goals of government surveillance are. As we noted in 2011, well before the Snowden revelations, everything we do is monitored.

  They want to know everything. They want to monitor everyone. And they will stop at nothing to accomplish their goals.

  But despite these obvious attempts to maintain tight, centralized control over the populace, the hacking community has never been one to just sit back and take it from the tyrants in charge. John McAfee, known for creating one of the first virus security programs for computers, has also been working on a new gadget that would create a “dark web” of interconnected devices designed to shield individuals from government monitoring. The device, according to McAfee would cost less than $100.

  The cat is out of the bag with the ProxyHam and its abilities. It shouldn’t be long before source codes and blueprints for similar gadgets begin appearing on the open market.

  The government can push all it wants. Freedom loving people will always push back.

  

  

  

  

  

• The Complete Guide To ETF Phantom Liquidity

  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.

  

  

  

  

  

• What's Scarce Geopolitically: Stability, Ways To Get Ahead, & Innovation

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  Conserving what is failing is not a path to stability.

  What's in demand but scarce is valuable. This is one of those scale-invariant principles: businesses large and small want what's scarce and in demand, because that's what generates profits.

  What's abundant but not in demand is cheap. What's scarce but not in demand is ignored. Capital, talent and profits flow to whatever is scarce and valued as an engine of wealth creation.

  Geopolitically speaking, tangible assets have self-evident value: seas between your borders and potential enemies, a wealth of natural resources, and so on. But equally important are intangible assets: the human, social and symbolic capital of the people, culture and institutions of the nation.

  What seems scarce in the world is not just a specific tangible asset or intangible form of capital, but a mix that provides stability, ways for average citizens to get ahead and fosters innovations that can quickly spread through the society and economy.

  We could say engines of wealth creation are scarce, but if the wealth isn't distributed somewhat broadly, or the source of the wealth is not innovation but extraction of resources, any stability is temporary or illusory: resources run out, and wealth inequality fuels social and political instability.

  What's exceptional is a mix of assets and attributes that yield the stability needed for for people to get ahead, a playing field that's level enough for people to get ahead, and a culture of innovation, because ultimately only innovation increases productivity, and increasing productivity is the only sustainable source of wealth.

  For example, cheap energy is a gift to its owners and consumers; but eventually cheap energy is consumed and what's left becomes expensive. Innovation is needed to extract more work from the remaining energy.

  There is no one combination that yields Stability, Ways for Everyone to Get Ahead and Innovation; a variety of potentially successful models exist. Resource-poor Japan, for example, has been stable and wealthy for decades, despite a sclerotic economy.

  But as history speeds up and volatility increases, some elements of that mix become increasingly important. Resources that are suddenly unavailable due to weather or crises elsewhere can derail stability, so autarky (self-sufficiency) in key assets starts becoming consequential.

  By default, most institutions are conservative; they avoid rapid changes out of caution. It's a safe bet that what worked in the past will work in the future. But as history speeds up, clinging to "this is the way we've always done it" can become a losing strategy.

  How big is the slice of the culture and economy that spurs and spreads innovation–not just technological innovation, but social innovation? If that slice is tiny, then the society simply doesn't have the capacity to absorb innovations fast enough to change direction. If only 1% of a society and economy are encouraged to innovate, experiment and fail, that tiny slice simply doesn't have the mass to move the 99% in time to avoid instability.

  The Pareto Principle suggests that a minimum 4% of the society/economy must be actively innovating to eventually influence 20% of the society/economy, which then influences 80%. If 20% of a society/economy mutates/adapts rapidly due to the fast cycling of innovation, experimentation and failure, that nation has an exceptional advantage over other societies/economies that lack the ability to respond/adapt to changing circumstances.

  When what's worked for decades no longer works, the ability to find solutions and quickly distribute those solutions will make a profound difference in stability, ways to get ahead and innovation. Innovation disrupts the old ways, and that means some people will lose their jobs. The distribution of opportunity and wealth (ways to get ahead) are as critical as stability and innovation: the society/economy must have mechanisms for enabling those disrupted by change to adjust and find their footing.

  Another way of saying all this is: it's not wealth that counts, it's the engines of wealth creation that count, and the distribution mechanisms for that wealth. Wealth dissipates or is consumed if it isn't renewed; wealth that flows into the hands of the few at the expense of the many triggers instability.

  Those nations with the greatest stability, meritocracy and engines of innovation/dispersal of innovation will naturally attract capital and talent from nations that cannot muster up a mix of capital and attributes that generate Stability, Ways to Get Ahead and Innovation.

  We tend to assume that the key to stability is keeping everything the same, but as history speeds up, stability will require maintaining an active sector of instability that cycles efficiently through innovation, experimentation and failure and rapidly distributes what's faster, better cheaper.

  Conserving what is failing is not a path to stability. As Charles Darwin observed, "It is not the strongest of the species that survives, nor the most intelligent, but the ones most adaptable to change."

  

  

  

  

  

• "The Streets Of Athens Will Fill With Tanks": Kathimerini Reveals Grexit "Black Book" Shocker

  Over the course of six painful months, round after round of fraught negotiations between Greece and its creditors produced all manner of speculation about what a “Grexit” would actually entail. 

  With no precedent to turn to for guidance, mapping out the implications of an exit from the currency bloc was (and still is) a virtually impossible task, but the collective efforts of the sellside, the mainstream media, political analysts, and economists did manage to produce a veritable smorgasbord of diagrams, decision trees, flowcharts, and schematics, in a futile attempt to map the complex interplay of politics, economics, and financial concerns that would invariably follow if Athens decided to finally break off its ill-fated relationship with Brussels.

  And it wasn’t just outside observers drawing up Grexit plans. Despite the fact that EU officials denied the existence of a “Plan B” right up until German FinMin Wolfgang Schaeuble’s “swift time-out” alternative was “leaked” last weekend, no one outside of polite eurocrat circles pretends that a Greek exit wasn’t contemplated all along and indeed Yanis Varoufakis contends that Athens was threatened with capital controls as early as February if it did not acquiesce to creditor demands. 

  Now, in what is perhaps the most shocking revelation yet about what EU officials really thought may happen in the event Greece crashed out of the EMU and unceremoniously reintroduced the drachma, Kathimerini is out with a description of what the Greek daily calls the “Grexit Black Book,” which purportedly contained the suggestion that civil war would breakout in Greece in the event the country was forced out of the currency bloc.

  Here’s more (Google translated):

  On the 13th floor of the building Verlaymont in Brussels, a few meters from the office of the European Commission President, Jean-Claude Juncker, stored in a special security room and in a safe Greece’s exit plan from the Eurozone. There, in a multi-page volume, written in less than a month from 15-member team of the European Commission, answered questions on how to tackle such an outflow, including, as shocking as it may sound, even the possibility of the country out of the Treaty Schengen, and not only being driven outside the euro, but also outside the EU

   

  According to European official, in that the European Commission Summit already had a bound volume, a multi-page document, which described the Greek prime minister, before the start of the session, by the same Mr. Juncker with all the details of a Grexit , giving him to understand the legal and political context of such a decision. In multipage document in accordance with European official who has the ability to know its contents, there are detailed answers to 200 questions that would arise in case Grexit.

   

  These questions, as he explains official, are interrelated, as an exit from the euro would create a cascade of events, which would evolve in a relatively short time. From  the drachmopoiisi economy to foreign exchange controls that would take place at the country’s borders and which will ultimately lead at the exit of Greece from the Schengen Treaty.

   

  The authors of the draft, according to European official, conducted under conditions of absolute secrecy. A special group of 15 people of the European Commission, by direct contact with Greece started to prepare, and was also in direct contact with a number of senior officials and DGs in the European Commission who had expertise in specific areas. The writing of the project started when the expiry date of the program (end of June) was approaching, so it is the Commission prepared for every eventuality, and by the time the referendum was announced, Friday, June 26, the relevant procedures were accelerated. The weekend of the work referendum intensified, so now two days later, Tuesday of that Synod, the project has been finalized.

   

  According to well-informed source, involved in creating the plan worked “suffer the pain” as typically describe the “K” and “overwhelmed” because they could not believe that things had reached this point, and most of them had direct involvement with the Greek rescue programs. The European Commission also was hoped that even until the last minute solution would be found as members of this group knew better than anyone the consequences exit of Greece from the Eurozone and understand the cost of such a decision. One of those involved with direct knowledge of Greek reality in the critical phase of the training, he said the rest of the group that “if implemented this plan, the streets of Athens will sound tracks of tanks.”

  Sight unseen, it’s not entirely clear what is meant by “will sound the tracks of tanks,” and we assume the suggestion is not that the EU and its constituent member states would somehow seek to orchestrate a military takeover of the Greek state in the event Athens makes the ‘wrong’ decision about EMU membership. 

  Rather, the suggestion seems to be – and again this is simply an interpretation based on the information presented by Kathimerini – that Brussels was of the opinion that the referendum results together with the divergent rhetoric emanating from Greek lawmakers on the right and far-left betrayed the degree to which the Greek people were deeply divided. Although Tsipras’ concessions will undoubtedly have far-reaching implications for politics and Greek society in general, it looks as though Brussels feared that the economic malaise that would have resulted from redenomination might have triggered widespread social unrest that would ultimately have to be brought under control by the Greek army. 

  We’ll leave it to readers to determine both the accuracy of our interpretation and the degree to which the “secret” document’s mention of “tanks” represented an accurate assessment of the situation versus yet another attempt to scare Tsipras into capitulating, but one thing is for sure, even mentioning the possibility that “the streets of Athens” will be occupied by the military doesn’t seem like something one “partner” would say to another.

  

  

  

  

  

• Inside Look At US Government Cyber Security

  Do you feel safe?

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Can You Hear the Fat Lady Singing? – Part I

  By Chris at www.CapitalistExploits.at

  Raoul Pal, author of the Global Macro Investor and the co-founder of Real Vision TV, is one of my favourite thinkers and investment minds. Regrettably I’ve not met him… yet, though I’ve been fortunate enough to meet his business partner Grant Williams, who is both smart, genuine and intellectually curious.

  One of the concepts Raoul discusses is “The Law of Unintended Consequence”. You can and absolutely should go watch it on Real Vision TV!

  The unintended consequences of the very decisions being made right now at a macro level set the stage for some particularly catastrophic outcomes. This relates in particular to Europe and China which I’ll delve into over the next few weeks.

  

  The chart above shows the incredible increase in global debt since 2000. The bond market, powered by a powerful combination of kryptonite, dilithium crystals and central bankers who have completely misread the market forces is beginning to crack around the edges.

  It’s worth remembering that absolutely no nation has ever survived a debt crisis and it’s equally important to understand that global debt is now about twice the size of the ENTIRE world economy – something the world has never dealt with before.

  Greece with 177% debt to GDP just came dangerously close to exiting the euro. Greeks themselves voted to regain their sovereignty but in the end Tsipras caved in to Eurocrat pressure. For the Eurocrats, an unelected group of intellectually challenged but progressively greedy group of bureaucrats, the last thing they need is citizens of Europe choosing their own outcomes. That would mean a rise of multiple fringe political groups. Greece had to be pulled into line and though it’ll inevitably and finally assist in the downfall of the entire European Union, for now it keeps an increasingly angry Europe glued together… just that little bit longer.

  The release valve for a country at risk of defaulting on its debt is the currency.

  Greece, however, no longer issues its own currency and as such there exists no release valve. Trapped in a deflationary spiral the economy continues to contract: 0.2% in the first quarter of this year following a 0.4% in the last quarter of 2014. When Greece joined the euro, they ceded monetary sovereignty to Brussels, and in doing so stuck a plug in its currency release valve.

  

  Tourism, for example, makes up 18% of Greek GDP and remains relatively uncompetitive since everything is still priced in euros. If Greece threw off the shackles of the euro they’d be printing drachma with abandon, defaulting on their debts, and Germans and Brits would be turning lobster pink on their beaches while overindulging on ouzo.

  As unbalanced as the pink Germans and Brits would be this would allow for a re-balancing of the market. But it isn’t going to happen and Greece will remain in deflation, except it’ll do so now with ever increasing debts. This promises to simply increase the deflationary forces in play and create a much larger problem in the near future.

  These are some of the unintended consequences of the euro and the decisions being made across Europe. This is important since Greece is but one of 19 of the 28 member states officially using the euro.

  Greece is fairly meaningless on its own. It accounts for just 2.5% of European GDP – about the same as Maryland in the US. Inconsequential some say.

  But why Greece matters can be seen from the following chart:

  

  Clearly Greece has bedfellows. What happens in Greece has the potential to become a trigger point and poster child for what happens elsewhere in Europe.

  Global capital flows are probably THE most important macro factor we look at.

  Right now we don’t see global capital flows within the EU states quite so clearly since they’re all using the same currency. Where we do see movement is in the spread between Bunds and both other member state bonds but particularly US bonds.

  Gavekal wrote an interesting piece on the topic of the widening spread between German and US bonds here. If you look at the chart below taken from Gavekal you’ll see the widening spread between German Bund’s and the US 10-year bond.

  

  Bond holders are puking risk and they see risk particularly in European member states debt but they see risk in Europe in general and this includes Germany. This is a clear sign of stress in the system.

  An Asian Example

  The Asian crisis which began in Thailand provides a text book example of how over-indebted economies can unravel with the speed of a bush fire.

  February 5^th, 1997, was the date that Somprasong Land, a Thai property developer, announced that it had failed to make a scheduled $3.1 million interest payment on an $80 billion Eurobond loan. Much like the Greeks are now tied to the euro, the Thai baht was pegged to the dollar plugging the currency release valve.

  Currency traders saw the anomalies much like bond traders currently see the anomalies between European countries, and began betting against the baht. The Thai central bank spent $5 billion defending the baht, reducing their currency reserves to $33 billion, before the Thai government bowed to the pressures allowing the baht to float freely. Once this took place the Thai debt bomb blew out as many debts priced in dollars became unpayable and the Baht collapsed.

  Much like Europe of today, the entire Asian region had taken on unsustainable levels of debt and once Thailand had “shown the way” it didn’t take long for a wave of selling hit Malaysia, Indonesia, South Korea and Japan.

  Similarly, consider that the Latam crisis in the early 80s was a direct result of the huge dollar bull market. Currency trends tend to be self-reinforcing in nature which is also why they tend to last longer than other market trends.

  This is what Raoul refers to as “unintended consequences”.

  As we’ve detailed in our Dollar Bull Report we believe we’re in a dollar bull market. The reasons for this are many though the largest by far is an unwinding of the USD carry trade, something I explained in “The Anatomy of a Carry Trade Bubble”.

  Credit bubbles and fixed exchange rates never end well. We have the mechanics of both in Europe. Greece is simply a symptom of a much larger problem. Yes, it’s small but that may be missing a more important point.

  Greece matters since the repercussions from what takes place in Greece increase the probability of the following happening:

  • Debt holders, largely German banks, risk having to mark to market existing debt held on their balance sheets at par.
  • Political fringe parties in neighboring European countries will be provided a blueprint to rally political support and exit the euro.
  • Investors noticing all of the above will actively look for the next “ugly girl” to eliminate for the EU popularity contest.
  • High levels of debt historically lead to war. Taking away release valves for this debt increases the probability of war.

  We’re already in a USD bull market and any of the above will only add fuel to this fire.

  Next week I’ll explain how I see this relating to China.

  – Chris

   

  “Politics is tricky; it cuts both ways. Every time you make a choice, it has unintended consequences.” – Stone Gossard

  

  

  

  

• Caught On Tape: Pro Surfer Attacked By Shark On Live TV

  If you thought your day was bad, remember: it can always get worse as pro surfer Mick Fanning found out earlier today when during the final of the World Surfing League’s J-Bay Open in South Africa, he was attacked by a shark.

  Perhaps for the first time ever, the stunning encounter was captured on live TV. But most amazing, after Fanning felt the shark attack, he “punched” the shark in the back, which then promptly lost interest and Fanning got away completely unscathed.

  From CBS:

  “I felt something grab, got stuck in my leg rope, and I instantly just jumped,” a still-shocked Fanning said immediately after the incident. “It just kept coming at my board.”

   

  The Australian three-time world champion was lifted out of the water by a rescue jet ski mere seconds after the attack, which happened when he was paddling out to catch his first wave.

   

  “I just saw fins, I didn’t see teeth,” he said. “I was waiting for the teeth to come at me. I punched it in the back.”

   

  The WSL issued an official statement following the incident: “We are incredibly grateful that no one was seriously injured today. Mick’s composure and quick acting in the face of a terrifying situation was nothing short of heroic and the rapid response of our Water Safety personnel was commendable — they are truly world class at what they do.”

   

  The competition was canceled following the attack.

  The full dramatic encounter shown here.

  

  

  

  

  

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