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  MORON ROLL CALL

  

  

  

  

• General Wesley Clark Suggests Putting "Disloyal Americans" In Internment Camps

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  If these people are radicalized and don’t support the United States, and they’re disloyal to the United States, as a matter of principal that’s fine, that’s their right. It’s our right and our obligation to segregate them from the normal community for the duration of the conflict.

   

  – General Wesley Clark in a MSNBC interview

  Noting that the recent tyrannical, entirely anti-American comments made by General Wesley Clark during a MSNBC interview are statist and disturbing would be the understatement of the century.

  What General Clark is advocating in no uncertain terms is that the U.S. rewrite it laws to allow for the internment of Americans who the government feels have engaged in thought crime. Mind you, laws on the books are sufficiently strong to punish people engaged in actual criminal behavior. What Clark is suggesting is forcibly separating people based on their political views.

  Sure, he couches it in the war against ISIS (an entity created by U.S. government foreign policy), but once you make it policy to disappear people based on one particular type of thought, it will quickly spread to other undesirable political views.

  Please share this video with everyone you know. It’s that crazy:

   

  The interview is so fascist, desperate and creepy you wonder why General Clark is willing to say such totalitarian things. Does he owe powerful people favors for his crime of telling the truth about the Iraq war  many years ago when he outed U.S. Plan To Invade Iraq, Syria, Lebanon, Libya, Somalia, Sudan, and Iran right after 9/11?

  Perhaps he has to make certain amends to his overlords, recall that he took a job with financial giant Blackstone a couple of years ago: Meet the Military-Industrial-Wall Street Complex: Blackstone Hires General Wesley Clark.

  

   

  I wonder, did MSNBC mention that General Clark works for Blackstone? Moreover, what should happen to foundations that accept money from countries directly funding ISIS? Should their founders also be placed in internment camps? Seem like Hillary and Bill might qualify for such treatment: Hillary Clinton Exposed Part 2 – Clinton Foundation Took Millions From Countries That Also Fund ISIS.

  With generals like these…

  

  

  

  

  

• The Greek Economy Is Finished! A Quarter Of Firms Shifting Abroad

  Capital controls imposed by the Greek government are taking a heavy toll on Greek businesses, according to a new report from Endeavour Greece. With over two-thirds of respondents reporting a "significant drop in revenues," and 1 in 9 firms forced to suspend production due to shortages of raw materials (unable to buy due to capital controls), the problems created by The Greek government's action seem asymmetric as almost a quarter (23%) of firms are now "planning to transfer their headquarters abroad for security, cashflow, and stability reasons."

   

  

   

  As ekathimerini reports,

  Endeavour Greece, a non-profit group that supports entrepreneurs, found that 58 percent of the 300 companies it surveyed between July 13 and July 17 reported a "significant impact on their operations caused by the limitations imposed to cross-border transactions."

   

  "Many of these companies cannot import raw material or have access to foreign services and infrastructure," the group said in a statement, adding that 23 percent "plan to transfer their headquarters abroad for security, cash flow and stability reasons."

   

  More than two thirds of the companies – 69 percent – reported a "significant drop in turnover," with 11 percent forced to decrease or suspend production due to shortages of raw materials.

   

  Greece imposed a raft of capital controls on July 29, closing the banks and restricting cash withdrawals in a bid to prevent a disastrous bank run from draining money out of the financial system.

   

  Banks reopened on Monday and restrictions on cash withdrawals have been partially relaxed, though the capital controls remain in place.

   

  Endeavour Greece reported that businesses were facing "significant impediments" due to the continuing ATM limits, but on "a smaller scale."

   

  Nearly half of the companies – 45 percent – said they had been forced to postpone payments to suppliers.

  This offers little hope for a silver lining as the nation is hollowed out. As Jeffrey Sachs notes, the formula for success is to match reforms with debt relief, in line with the real needs of the economy.

  A smart creditor of Greece would ask some serious and probing questions. How can we help Greece to get credit moving again within the banking system? How can we help Greece to spur exports? What is needed to promote the rapid growth of small and medium-size Greek enterprises?

   

  For five years now, Germany has not asked these questions. Indeed, over time, questions have been replaced by German frustration at Greeks’ alleged indolence, corruption, and incorrigibility. It has become ugly and personal on both sides. And the creditors have failed to propose a realistic approach to Greece’s debts, perhaps out of Germany’s fear that Italy, Portugal, and Spain might ask for relief down the line.

   

  Whatever the reason, Germany has treated Greece badly, failing to offer the empathy, analysis, and debt relief that are required. And if it did so to scare Italy and Spain, it should be reminded of Kant’s categorical imperative: Countries, like individuals, should be treated as ends, not means.

   

  Creditors are sometimes wise and sometimes incredibly stupid. America, Britain, and France were incredibly stupid in the 1920s to impose excessive reparations payments on Germany after World War I. In the 1940s and 1950s, the United States was a wise creditor, giving Germany new funds under the Marshall Plan, followed by debt relief in 1953.

   

  In the 1980s, the US was a bad creditor when it demanded excessive debt payments from Latin America and Africa; in the 1990s and later, it smartened up, putting debt relief on the table. In 1989, the US was smart to give Poland debt relief (and Germany went along, albeit grudgingly). In 1992, its stupid insistence on strict Russian debt servicing of Soviet-era debts sowed the seeds for today’s bitter relations.

  Germany’s demands have brought Greece to the point of near-collapse, with potentially disastrous consequences for Greece, Europe, and Germany’s global reputation. This is a time for wisdom, not rigidity. And wisdom is not softness. Maintaining a peaceful and prosperous Europe is Germany’s most vital responsibility; but it is surely its most vital national interest as well.

  

  

  

  

  

• New Obama Initiative To Ban Guns For Some Social Security Recipients, Veterans, And Disabled

  Submitted by Brandon Turbeville via ActivistPost.com,

  Whenever one thinks the Obama administration’s war on the Second Amendment couldn’t get any more insane, Barack Obama prances onto the stage to prove everyone wrong yet again.

  This time, it is not merely a carefully planned and orchestrated jig on the graves of mass shooting victims or pathetic whining about “gun crime” and the amount of time he must give regarding the issue. It is a push to ban a large number of Social Security benefits recipients from owning guns.

  That’s correct. When the Obama administration can’t get its way by attacking gun owners head on, it merely turns to extorting the elderly and disabled whom it holds hostage via their need to receive Social Security benefits – benefits I might add, that are owed to them.

  Thus, the Obama administration is pushing to prohibit Social Security benefit recipients from owning firearms if they “lack the mental capacity to manage their own affairs,” a move which the Los Angeles Times reports would affect millions of people whose disability payments – for one reason or another – are handled by other people.

  The idea is to bring the Social Security Administration under the jurisdiction of laws that regulate who gets reported to the National Instant Criminal Background Check System (NICS), a database that was initially supposed to pertain to illegal immigrants, drug addicts, and felons.

  Of course, it should be pointed out that, with the exception of illegal immigrants, prohibiting American citizens who are not confined to a prison cell from owning weapons is itself unconstitutional. Clearly, the push to add the Social Security Administration and thus millions of SS recipients under this new policy is unconstitutional as well.

  Nevertheless, it is difficult to remember a time when a Presidential administration even pretended to be concerned with what the US Constitution had to say about anything.

  As the Los Angeles Times reports,

  A potentially large group within Social Security are people who, in the language of federal gun laws, are unable to manage their own affairs due to "marked subnormal intelligence, or mental illness, incompetency, condition, or disease."

  There is no simple way to identify that group, but a strategy used by the Department of Veterans Affairs since the creation of the background check system is reporting anyone who has been declared incompetent to manage pension or disability payments and assigned a fiduciary.

  If Social Security, which has never participated in the background check system, uses the same standard as the VA, millions of its beneficiaries would be affected. About 4.2 million adults receive monthly benefits that are managed by "representative payees."

  The move is part of a concerted effort by the Obama administration after the 2012 Sandy Hook Elementary School shooting in Newtown, Conn., to strengthen gun control, including by plugging holes in the background check system.

  The Obama Administration and Social Security Administration have been crafting this new policy in relative secret. Finally informed about the issue, the National Rifle Association and the National Council on Disability are both opposing the initiative, the latter in opposition due to the fact that millions of disabled Americans will have their rights eviscerated as a result of this policy. Of the many enrolled who may be affected, disabled veterans are among the high risk category for having their Second Amendment violated.

  

  

  

  

  

• Chinese Stocks Tumble As Labor Market Starts To Crack

  While the rest of the world attempts to convince themselves that a Chinese stock market bubble and bust is at worst irrelevant, CapitalEconomics notes, evidence that the labor market is coming off the boil arguably matters more to China’s economy. Chinese stocks futures are down 2% in today's pre-open after yesterday's whipsaw action as 'exit plans' for the stabilization were discussed (dumping stocks) and then denied (surging stocks) shows just how fragile (and quickly and entirely addicted to China's new 'measures' investors have become); but as BofAML warned earlier, selling pressure will likely remain relentless. Now that the spell is broken, we expect that many holders may want to sell to the forced buyers in the market.

  So not fear there will be plenty of liquidity…

  • *PBOC TO MAINTAIN LIQUIDITY AT MODERATE LEVEL: FINANCIAL NEWS
  • *PBOC TO INJECT 35B YUAN WITH 7-DAY REVERSE REPOS: TRADER

  While the market may need more than just moderate amounts. As while yesterday's stability bounce helped,. futures are pointing lower as we open tonighht…

  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 2.0%
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.3% TO 3,939.90

  

   

  The real economy (goalseeked headline data aside) appears to be showing further cracks… (via CapitalEconomics)

  The equity market has received all the attention recently but evidence that the labour market is coming off the boil arguably matters more to China’s economy. There was a big fall in the ratio of job openings to job seekers in Q2 and slightly fewer new jobs were created in the first half of 2015 than a year before.

   

  

   

  None of this is evidence of major stress and other indicators remain upbeat – for example, migrant wages are still rising at near 10% y/y. But the leadership is aware that economic changes are often only reflected in labour markets with a lag and it is already responding. Alongside broad policy easing, the government has introduced tax breaks for migrants setting up companies, cheap loans for start-ups, a reduction in employers’ social insurance contributions, and tax incentives and subsidies for some firms hiring workers.

  *  *  *

  Finally we have Goldman sounding the alarm for iron ore…

  *IRON ORE SEEN DROPPING EVERY QUARTER THRU 2Q 2016, GOLDMAN SAYS

   

  

   

  Prices seen at $49/ton in Q3 2015, $48 in Q4, $46 in Q1 2016 and $44 in Q2 2016, bank says in report.

   

  “We expect seaborne supply to increase sequentially over the next two quarters and to gradually overwhelm the weak demand from Chinese steel mills,” bank says

   

  While housing starts in China bounced back and infrastructure has overtaken property as largest end-market for steel, improvement during 2H 2015 may not be strong enough to support iron ore prices, Goldman says

  Not great news for Australia.

   

  

  

  

  

  

• Charting The Slow, 30-Year Death Of The US Middle Class In A Global Context

  When it comes to the favorable aspects of capitalism, one thing is clear: with the largest concentration of millionaires and billionaires from around the globe, the US is second to none when it comes to letting the entrepreneurial spirit flourish and rewarding it (and letting the rich get even richer).

  Unfortunately, when it comes to the malignant, “crony” aspects of capitalism, the US is also the world’s undisputed leader.

  Because while we have shown previously that over the past 30 years median incomes in the US have barely grown (indicative of a middle class whose income has been largely stagnant for some 35 years), we have never before shown just what how this middle class “stasis” looks like in comparison to other developed nations. Now, thanks to Max Roser and “Our world in Data“, we know. Sadly, in this particular sample of median income growth since 1980, the US is dead last, behind such countries as the UK, Canada and even Spain and France!

  

   

  Of course, the chart above does not mean that the entire US population have seen their wealth stuck at virtually the same level in the past 35 years. Only 90% of it. As for the remaining, top 1%, the past 35 years is precisely when the sky became the limit…

  

  

   

  … and perhaps also why, as we wondered previously, there is nothing more hated by the very same 1% who have benefitted the most from the unbridled proliferation of credit money since the advent of the Greenspan regime, than the gold standard.

  

  

  

  

  

  

• "The Spell Is Broken" In China, Selling Pressure To Remain "Relentless": BofAML

  Just three days ago, we outlined the series of events that ultimately led Beijing to transform China Securities Finance Corp into a half-trillion dollar, state-sponsored margin trading Frankenstein.

  To recap, two weeks ago the PBoC said it was set to inject capital into China Securities Finance Corp., which is effectively a subsidiary of the China Securities Regulatory Commission. “China’s central bank is now underwriting brokerages’ margin lending businesses,” we said, before driving the point home with this: “The PBoC is now in the business of financing leveraged stock buying.”

  Since then, the plunge protection funds channeled through the CSF have ballooned and on Friday, China’s commercial banks agreed to lend another CNY209 billion to the margin finance vehicle. All in, the CSF has around $483 billion in available funds it can use to “support” Chinese stocks. 

  Amusingly, China sounded the all clear on Monday as officials claimed that “timely measures” had arrested (perhaps literally) the panic and restored “order” to the market. If “order” means the conditions which persisted prior to June, then we suppose margin trading that totals nearly 20% of the free float market cap and straight-line, limit up buying is just around the corner.

  China is apparently so confident that three week’s worth of unprecedented (and comically absurd) intervention has stabilized the situation and repaired what we still contend is irreparable damage to the collective psyche of the Chinese retail investor, that the PBoC is set to wind down the CSF’s plunge protection activities just days after several commercial banks pledged billions more in support for the margin lender.

  The CSRC is “studying stock stabilization fund exit plan,” Bloomberg reported on Monday morning, citing Caijing. The market’s response was not favorable:

   

  

   

  Although Chinese stocks closed green after the CSRC said it would “continue to focus on stabilizing [the] market and preventing systemic risks,” it seems clear that China’s unsustainable equity bubble is … well, rather unsustainable without explicit government support.

  That of course is bad news for China in terms of its push to liberalize markets and promote the yuan in international investment and trade by projecting an air of stepped up transparency and market-based reforms. 

  BofAML has more on why Beijing’s attempts to support equities will ultimately fail (note the reference to the “broken spell” which is another way of saying what we said weeks ago about the change in retail investors’ mentaility) and on the negative effect intervention has on China’s international reputation. 

  *  *  *

  From BofAML

  The A-share market may see another leg down within months

  Forces holding up the market may not last long

  In our view, the short-term stability in the A-share market was achieved at the expense of: 1) the government’s reform credentials and 2) the wallets of state-directed entities, including brokers, banks, insurers and the PBoC. Faced with relentless selling pressure, neither of these two can last long, in our opinion. As a result, we expect the market to experience another leg down, possibly within months. 

  The price for the short-term market stability is heavy.

  Essentially, how the government stabilized the market was by limiting selling activity and then using state-directed money to buy broadly in the market (Table 1, a detailed list of the government’s market-supporting measures since late June). At the peak, roughly half of the A-shares were suspended from trading (Chart 1) and the police heavy-handedly investigated selling activities, especially in the index futures market. Meanwhile, banks may have provided an Rmb2tr credit line, in addition to the PBoC’s lending, to the China Securities Finance Corp (CSFC) for it to buy stocks directly or indirectly. Based on media reports, CSFC had probably spent at least Rmb860bn by Jul 17 to support the market.

  Reform credential is important to the government.

  What happened in recent weeks has made many question the government’s reform resolve. As a result, we believe that the government’s desire to roll back the administrative controls is strong.

  Given the expensive market valuation, the Prisoner’s Dilemma dictates that most state directed buyers may want to stop buying and reduce their stock exposure as soon as possible. That means that the buyer of the last resort will be the PBoC, via direct lending to the CSFC or by underwriting bank loans to the CSFC. If this practice persists for long, it may do the PBoC’s reputation irreversible damage and hurt RMB’s globalization. In addition, loans to the CSFC may crowd out bank lending in the real economy by using up their loan quotas.

  Selling pressure will likely remain relentless.

  Now that the spell is broken, we expect that many holders may want to sell to the forced buyers in the market. In addition, although difficult to assess accurately, due to a lack of data, we estimate that around 1/5 of the free float is still carried on margin. The high margin cost means that selling pressure is high as long as investors do not expect the market to go up significantly.

  

  

  

  

  

  

• Pay Attention Greece: Puerto Rico Refuses To Pay Creditors Before It Fully Funds Its Citizens' Needs

  While Greece may be “contained” for the time being, the only reason why its creditors were eager to collaborate on an expedited basis with the humiliated Syriza government is because as we noted earlier, of the €7.1 billion bridge loan released to Greece €6.8 billion would promptly be used to repay Greece’s creditors including the ECB for whom an event of default would be unthinkable unlike the IMF.

  The sad part, as we laid out in “The Unspoken Tragedy In The Upcoming Greek Bailout” is that both with the bridge loan(s) and the actual €86 billion (or more) EFSF bailout still to come, the vast majority of funds will be used to repay creditors, and even that wouldn’t be sufficient hence the need to put €50 billion in Greek assets in escrow as a repayment pledge for all incremental overages.

  Said otherwise, very little if anything from Europe’s generous third bailout would actually reach the Greek people yet again (and quite likely there would be a funding deficiency hence the need to sell assets).

  Compare that to the position taken by Puerto Rico today, when its budget director said the commonwealth won’t redirect cash from its operating budget to make debt payments, in the process “ratcheting up the pressure to restructure the island’s $72 billion debt burden” as Bloomberg reports.

  The comments from Luis Cruz, director of the Office of Management and Budget, come as Standard & Poor’s slashed its rating on the Public Finance Corp.’s bonds to CC from CCC-, calling an Aug. 1 default on the securities a “virtual certainty.”

  Puerto Rico has $36.3 million of Public Finance Corp. debt maturing Aug. 1 that needs to be repaid through legislative appropriation and as previously reported, Puerto Rico said last week the agency failed to transfer $36.3 million to a trustee to cover the Aug. 1 debt payment because the legislature didn’t appropriate the funds.

  The junk-rated island must first pay health, security and education expenses, Luis Cruz, director of the Office of Management and Budget, said during a press conference Monday in San Juan.

  “It is the government’s priority to provide public services and we will not be transferring funds from these assignments to pay the debt,” Cruz said.

  “We all know the difficult situation we are facing in terms of cash flow,” Cruz added, “And we have to decide how we handle that cash flow and our priority is to provide services to citizens: health, safety, education.“

  Bloomberg adds that last month the island’s legislators approved a budget for the fiscal year that began July 1 that doesn’t include $93.7 million to repay debt-service costs on PFC bonds. “The legislature did create a fund that the Government Development Bank can use to repay debt. The bank, which handles the island’s borrowing deals, must ask the legislature before it can access that money. The legislature doesn’t reconvene again until mid-August, after the bonds mature. Governor Alejandro Garcia Padilla doesn’t plan to call a special legislative session to bring lawmakers back earlier to discuss the Aug. 1 payment, Cruz said.”

  David Hitchcock, a S&P analyst in New York, wrote that “A default on the PFC bonds would be further demonstration of increasing unwillingness to pay debt in full and also raises the potential for future unequal treatment between various types of bondholders.”

  And while it would be easy to say that Puerto Rico and Greece are comparable, the reality is that unlike the soon to be default island, Greece truly did have, and still has, a gun to its head, as a result of its unwillingness to prepare for the Plan B it itself was eager to escalate to, namely existing in a world without the financial backing of the ECB which it found the hard way, means capital controls, bank runs, and a paralyzed financial system.

  Which is why Puerto Rico is lucky that its creditors are largely inert entities – mostly municipal funds and a few activist hedge funds – who have no leverage over the island. Which is why PR can default on them without fear of retaliation – surely the US will never throw the commonwealth out of the Dollarzone, whether permanently or “temporarily”, and why Greece can only stand and watch as two case studies emerge: one of an insolvent state which can at least prioritize its own population over the demands of foreign creditors, and another insolvent state, whose creditors can take advantage of the European monetary “union” which for Greece is now a prison, and set any and every demand they want, knowing full well they can crush the local economy all over again with just one ELA-limiting press release.

  In this regard, it is quite clear that Schauble was joking when he offered to trade Greece, which has zero leverage over its creditors (at least until it implements plans for existence outside of the Eurozone) for Puerto Rico, whose creditors have zero leverage over the island.

  Finally, we hope the Greek government is watching and learning, and taking appropriate measures so that it too can, at least once, prioritize its own people’s needs over those of a global banking oligarchy.

  

  

  

  

  

• 42 Billion Reasons Why Putin's Time May Be Running Out

  Russian municipal bond risk is surging once again (at 6-week highs) heading towards crisis-levels as Bloomberg reports numerous regions (including Chukotka – across from Alaska, Belgorod -near Ukraine, and three North Caucus republics) are prompting concerns as debt-to-revenue levels top 100% (144% in the case of Chukotka).

  Risk is on the rise once again…

  

   

  The clock is ticking for President Vladimir Putin to defuse a situation he set off in 2012 with decrees to raise social spending. That contributed to a doubling in the debt load of Russia’s more than 80 regions to 2.4 trillion rubles ($42 billion) in the past five years and it all rolls within the next two to three years.

  

   

  As Bloomberg details, threats to municipal finances are snowballing as sanctions over Ukraine choke access to capital markets, forcing local governments to fund social outlays with costlier bank loans.

  While regional debt sales are down 53 percent so far this year, Moody’s Investors Service estimates borrowing will grow as much as 25 percent in 2015, driven by spending on health care, education and utilities.

   

  The squeeze is putting regions in jeopardy. They’re facing “an increasing likelihood of defaults,” S&P warned in June. At least one non-rated local government delayed a principal repayment on a bank loan in the first quarter, it said.

   

  “A default by a large region could block market access for the Finance Ministry itself,” said Karen Vartapetov, associate director of S&P’s Moscow office. “Right now the federal center has an opportunity to help regions. In three years, there may be fewer resources, while regional debt may be bigger, and that will result in greater risks.”

   

  Local administrations are running a 625 billion-ruble deficit, up 42 percent from 2014, according to S&P. Seventy-five regions had a budget gap last year, the Higher School of Economics in Moscow said in a May report.

  Even The Russian Central Bank is nervous…

  “Because of the high debt burden, access to market sources of financing may be partly closed for some regions,” it said. “In addition, these regions may have difficulties with refinancing existing debt because banks are becoming more selective in assessing regional risk.”

  Charts: Bloomberg

  

  

  

  

  

• The Case Of China’s Missing Gold

  Following China’s official revelation on Friday that, for the first time since April 2009, it increased its gold holdings by “only” over 600 tons – supposedly in one month, which goes without saying is impossible and confirms how even the PBOC not only cooks its books but is willing to confirm that it does so – many have sprung to ask: what is really going on behind the scenes at the central bank which even Bloomberg’s conservative estimates saw its gold tripling to over 3,510 tons.

  Perhaps the answer is very simple: while many assume that the only reason China revealed (some of) its latest gold holdings is to further bolster its case for admission into the IMF’s Special Drawing Right, the real reason why the PBOC may have resorted to telegraph to the world that it has much more gold is simply to prop up its markets.

  Impossible?

  Recall what little-noticed quote Reuters cited on July 3, just as Chinese stocks were plummeting 7% on a daily basis, with index futures halted limit down, and half of Chinese stocks halted from trading:

  The Shanghai Composite Index plummeted more than 7 percent at one point in early trade. It ended the morning session down 3.3 percent at 3.785.6 points, heading for a weekly loss of nearly 10 percent. “This is a stock disaster. If it’s not, what is it?” said Fu Xuejun, strategist at Huarong Securities Co.

   

  “The government must rescue the market, not with empty words, but with real silver and gold,” he said, saying a full-blown market crash would endanger the banking system, hit consumption and trigger social instability.

  Perhaps all the PBOC did was take Fu’s advice, and gently pull the curtain on what its true holdings are for no other reason than to restore confidence in its balance sheet and from there, to stabilize the market.

  Incidentally, this is precisely what we said on Friday when the PBOC stunner hit the wires. Recall what China SAFE’s official explanation was for the unexpected revelation:

  Gold as a special asset, with multiple attributes financial and commodities, together with other assets to help regulate and optimize the overall risk-return characteristics of international reserves portfolio. From the perspective of long-term and strategic perspective, if necessary, dynamically adjusted international reserves portfolio allocation, safety, liquidity and increasing the value of international reserve assets.

  And as we further noted “China had to wait until its stock market was crashing to present the “systemic stability” bazooka: gold. Because in revealing a surge in its gold holdings, the PBOC is hoping to finally provide that final missing link that will boost investor sentiment, and get people buying stocks all over again.”

  And now that the seal has been finally broken after so many years, and since today’s update indicates that Chinese gold numbers are clearly goal-seeked with a specific policy purpose – to boost confidence – we await for the PBOC to start leaking incremental gold holding data every month (and especially in months when the market crashes) which will bring us ever closer to what China’s true gold holdings are.

  So perhaps it is a simple case of revealing the PBOC owns more gold than expected simply to preserve some more confidence after engaging in an unprecedented series of “plunge protecting” events few of which have had much success (at least until threats of outright arrests of sellers emerged).

  Then another potential explanation was offered by Telegraph’s Ambrose Evans-Pritchard who late today quoted Sharps Pixley’s analyst Ross Norman as saying that “the level of gold reserves announced by China massively understates the country’s true holdings. “We think they have at least twice as much, maybe even 4,000 tonnes,” he said. “Sharps Pixley said a “seismic change” is under way in the bullion markets as economic power shifts to the East, boosting gold prices over time.”

  A division of the People’s Liberation Army mines gold and transfers the metal to the Chinese finance ministry, acting outside normal commercial channels. The government also buys gold directly from Chinese producers. This is an internal transaction and is therefore not necessarily recorded in China’s external reserves.

  Then AEP goes on to quote David Marsh, from the monetary forum OMFIF, who said “China would risk unsettling the world gold market if it revealed bullion reserves of 2,000 or 3,000 tonnes. This might be interpreted as an unfriendly move against the dollar at a “delicate time.”

  And from a purely logical standpoint, it would be far more sensible for the PBOC to reveal just a fraction of its gold holdings, whether it was to stabilize its stock market or to boost its chances of SDR admission, than to expose the entire vault, especially if it wanted to buy more: it doesn’t take rocket surgery to realize that one can buy more assets for cheaper, if one is not exposed as amassing a huge position in a given asset.

  So the next question is if China does indeed have more gold than is represented, and if the PBOC is simply exposing its holdings one month at a time for whatever reason (especially since we know the PBOC did not buy 600+ tons in the month of June), then where is this gold “hidden” or, rather, where did all of China’s gold – the thousands of tons both mined domestically and imported over the past five years – go?

  One answer is presented by Louis Cammarasno in the following Smaulgld blog post:

  “The Case Of China’s Missing Gold”

  • The People’s Bank of China Updates Its Gold Reserve Holdings
  • Chinese Gold reserves jump 604 tons from 1,054 tons last reported in 2009 to 1,658 tons.
  • Many gold observers ask – ‘Is that it’?
  • Since 2009 China has mined over 2,000 tons of gold and imported over 3,300 tons of gold through Hong Kong*.
  • Where did it all go?

  The Case of China’s Missing Gold

  On July 17, 2015, the People’s Bank of China (PBOC) updated its gold reserves holdings for the first time since 2009. The PBOC reported adding 604 tons of gold to their reserves bringing the total from 1,054 tons to 1,658 tons.

  The PBOC announcement was widely anticipated as a pre-requisite of China’s application for inclusion in the International Monetary Funds’ (IMF) Special Drawing Rights (“SDRs”).

  China’s announced gold reserves are a respectible amount, but far lower than what many gold observers believe China has.

  1,658 Tons of Gold – Good Enough For the IMF?

  Having large gold reserves are not required to be in the SDR. England is in the SDR and has just over 310 tons of gold.

  We have argued that China’s primary objective is not acceptance into the SDR but rather to establish a viable parallel international financial structure to rival the IMF.

  We think China holds a portion of its gold at the PBOC as reserves with the rest held elsewhere in China.

  The PBOC’s updated gold reserves are five times more than England’s and certainly enough to show the financial heft required for admission to the SDR. The PBOC doesn’t need to report thousands of tons of gold to get into the SDR and they don’t need to upstage their largest single country trading partner, the United States at this point (whose stated gold reserves are 8,135 tons).

  

  China’s recent update to its gold holdings put it in fifth place among gold holding nations.

  How China Reported The Update to its Gold Reserves

  The PBOC’s addition of more than 600 tons of gold to their reserves showed up as a single entry in June 2015!

  Unlike Russia that reports increases in its gold reserves monthly (that we catalogue here), the PBOC chose to include all of the increase in its gold reserves since 2009 in just one month.

  

  The People’s Bank of China supposedly added 1,943,000 ounces of gold (approx 600 tons) to its reserves in June.

  How Much Gold is There in China?

  The additional amount of gold that the PBOC reported doesn’t seem to square with publically available reports on the amount of Chinese gold production and imports.

  Chinese Mining Production

  China is now the world’s largest gold mining nation and exports virtually none of it.

  

  China has produced over 2,000 tons of gold since 2009.

  Chinese Mining Reserves

  There’s plenty more where that came from!

  On June 25, 2015, Zhang Bignan Chairman and Secretary General of the China Gold Association presented this slide at London Bullion Market forum indicating that China’s gold mining reserves were approximately 9,800 tons.

  

  According to the Chairman and Secretary General of the China Gold Association, China has over 9,800 tons of gold in mining reserves.

  Chinese Gold Imports

  China has also ramped up its gold imports significaly since 2009. From 2010 to May 2015 net Chinese gold imports through Hong Kong were well over 3,300 tons.

  

  Chinese gold imports through Hong Kong have amounted to over 3,300 tons since 2009.

  *China also imports an undisclosed, but large amount of gold through Shanghai.

  Chinese Gold Trading on the Shanghai Gold Exchange

  In addition to massive gold production and imports, China also operates the Shanghai Gold Exchange (SGE) a major physical gold trading hub. Withdrawals of physical gold on the SGE to date in 2015 are well over 1,200 tons and over 9,000 tons since January 2009.

  

  Withdrawals of physical gold on the Shanghai Gold Exchange are well over 1,200 tons year to date in 2015.

  Who’s Got the Chinese Gold?

  If Chinese gold mining production and imports through Hong Kong and Shanghai don’t end up at the PBOC, where is it?

  The Chinese People

  A good portion of Chinese gold is with its citizens. The famed gold crazed “Da Ma” or Chinese housewives who buy any dip in gold prices supposedly hold a good portion of the nation’s gold. Some estimate that Chinese citizens hold thousands of tons of gold. One estimate claims Chinese citizens hold 6,000 tons of gold.

  Chinese State Owned Banks

  Perhaps another chunk of the Chinese nation’s gold is held in other state owned banks, not necessarily with the PBOC, such as the Agricultural Bank of China, Bank of China, China Construction Bank, China Development Bank and Industrial and Commerical Bank of China all located, like the PBOC, in Beijing, China.

  Chinese Sovereign Wealth Fund

  The China Investment Corporation (CIC), also located in Bejiing, is a sovereign wealth fund responsible for managing part of the People’s Republic of China’s foreign exchange reserves. The CIC has $746.7 billion in assets under management and reports to the State Council of the People’s Republic of China.

  Off Balance Sheet Accounting?

  The CIC lists $225.321 billion in finacial assets and about $3.130 billion of “other assets” on its balance sheet. It’s possible that some of these “assets” are in the form of gold.

  The CIC has three subsidiaries: CIC International (responsible for internatonal equity and bond investments), CIC Capital (direct investments) and Central Huijin (equity investments in Chinese state owned financial institutions and state owned enterprises).

  Central Huijin owns significant equity stakes in each of: Agricultural Bank of China (40.28%), Bank of China (65.52%), China Construction Bank(57.26%), China Development Bank (47.63%) and Industrial and Commerical Bank of China (35.12%).

  For a gold backed Chinese Remnimbi 1,658 tons of gold reserves are insufficient, but for admission to the SDR are perfectly adequate.

  If indeed China holds gold with the CIC and/or with any of the Chinese state owned banks, the PBOC could roll up that gold on to its own balance sheet in order to show more gold reserves quickly and easily in one month with a single entry.

  

  

  

  

  

• Desperate California Farmers Turn To "Water Witches" As Drought Deepens

  You know it's bad when… With most of California experiencing "extreme to exceptional drought," and the crisis now in its fourth year, state officials recently unleashed the first cutback to farmers' water rights since 1977, ordering cities and towns to cut water use by as much as 36%. With the drought showing no sign of letting up any time soon, and the state’s agricultural industry suffering (a recent study by UC Davis projected that the drought would cost California’s economy $2.7 billion in 2015 alone), Yahoo reports farmers have begun desperately turning to "water witches" who "dowse" for water sources using rods and sticks.

  As Yahoo reports,

  With nearly 50 percent of the state in “exceptional drought” — the highest intensity on the scale — and no immediate relief in sight, Californians are increasingly turning to spiritual methods and even magic in their desperation to bring an end to the dry spell. At greatest risk is the state’s central farming valley, a region that provides fully half the nation’s fruit and vegetables. Already, hundreds of thousands of acres have been fallowed, and farmers say if they can’t find water to sustain their remaining crops, the drought could destroy their livelihoods, cause mass unemployment and damage the land in ways that could take decades to recover.

  Meet Vern Tassey…

  Vern Tassey doesn’t advertise. He’s never even had a business card. But here in California’s Central Valley, word has gotten around that he’s a man with “the gift,” and Tassey, a plainspoken, 76-year-old grandfather, has never been busier.

   

  

   

  Farmers call him day and night — some from as far away as the outskirts of San Francisco and even across the state line in Nevada. They ask, sometimes even beg, him to come to their land. “Name your price,” one told him. But Tassey has so far declined. What he does has never been about money, he says, and he prefers to work closer to home.

   

  And that’s where he was on a recent Wednesday morning, quietly marching along the edge of a bushy orange grove here in the heart of California’s citrus belt, where he’s lived nearly his entire life. Dressed in faded Wranglers, dusty work boots and an old cap, Tassey held in his hands a slender metal rod, which he clutched close to his chest and positioned outward like a sword as he slowly walked along the trees. Suddenly, the rod began to bounce up and down, as if it were possessed, and he quickly paused and scratched a spot in the dirt with his foot before continuing on.

   

  A few feet away stood the Wollenmans — Guy, his brother Jody and their cousin Tommy — third-generation citrus farmers whose family maintains some of the oldest orange groves in the region. Like so many Central Valley farmers, their legacy is in danger — put at risk by California’s worst drought in decades. The lack of rain and snow runoff from the nearby Sierra Nevada has caused many of their wells to go dry. To save their hundreds of acres of trees, they’ll need to find new, deeper sources of water — and that’s where Tassey comes in.

  *  *  *
  Tassey is what is known as a “water witch,” or a dowser — someone who uses little more than intuition and a rod or a stick to locate underground sources of water. It’s an ancient art that dates back at least to the 1500s — though some dowsers have argued the origins are even earlier, pointing to what they say is Biblical evidence of Moses using a rod to summon water. In California, farmers have been “witching the land” for decades — though the practitioners of this obscure ritual have never been as high profile or as in demand as during the last year.

  “It’s an energy of some sort. … Like how some people can run a Ouija board. You either have it or you don’t. You can’t learn how to get it, but if you do have it, you have to learn how to use it,” he said. “It took me years to get my confidence. … At first, you are a bit leery of telling someone they are going to have to go dig a $50,000 hole. What if nothing is there? But over time, I learned to trust.”

  Across the Central Valley, churches are admonishing their parishioners to pray for rain. Native American tribal leaders have been called in to say blessings on the land in hopes that water will come. But perhaps nothing is more unorthodox or popular than the water witches — even though the practice has been scorned by scientists and government officials who say there’s no evidence that water divining, as it is also known, actually works. They’ve dismissed the dowsers’ occasional success as the equivalent of a fortunate roll of the dice — nothing but pure, simple luck. But as the drought is expected to only get worse in coming months, it’s a gamble that many California farmers seem increasingly willing to take.

  *  *  *

  As Gaius Publius (via Down woith Tyranny blog) concludes, here's what's more likely to happen…

  The social contract will break in California and the rest of the Southwest (and don't forget Mexico, which also has water rights from the Colorado and a reason to contest them). This will occur even if the fastest, man-on-the-moon–style conversion to renewables is attempted starting tomorrow.

   

  This means, the very very rich will take the best for themselves and leave the rest of us to marinate in the consequences — to hang, in other words. (For a French-Saudi example of that, read this. Typical "the rich are always entitled" behavior.) This means war between the industries, regions, classes. The rich didn't get where they are, don't stay where they are, by surrender.

   

  Government will have to decide between the wealthy and the citizenry. How do you expect that to go?

   

  Government dithering and the increase in social conflict will delay real solutions until a wake-up moment. Then the real market will kick in — the market for agricultural land and the market for urban property. Both will start to decline in absolute value. If there's a mass awareness moment when all of a sudden people in and out of the Southwest "get it," those markets will collapse. Hedge funds will sell their interests in California agriculture as bad investments; urban populations will level, then shrink; the fountains in Las Vagas and the golf courses in Scottsdale will go brown and dry, collapsing those populations and economies as well.

   

  Ask yourself — If you were thirty with a small family, would you move to Phoenix or Los Angeles County if the "no water" writing were on the wall and the population declining? Answer: Only if you had to, because land and housing would be suddenly affordable.

  All of which means that the American Southwest has most likely passed a tipping point — over the cliff, but with a long way to the bottom to go.

  

  

  

  

  

• Liquidity Is "Thin To Zero": Worried Bond Managers Shrink Trades, Dodge Cash Markets

  It would be no exaggeration to say that with the exception of Grexit and the spectacular collapse of the Chinese equity bubble, bond market liquidity is now the most talked about subject on Wall Street. The focus on illiquid markets comes years (literally) after the subject was first discussed in these pages, but over the past several months, pundits, analysts, billionaire bankers, and incorrigible corporate raiders alike have weighed in. 

  Make no mistake, the liquidity problem is pervasive (i.e. it exists across markets) and generally stems from a combination of central bank largesse, HFT proliferation, and the (possibly) unintended consequences of the post-crisis regulatory regime. 

  Thus far, illiquidity in Treasury and FX markets has been somewhat of a delicate subject as an honest assessment of the conditions that led to last October’s Treasury flash crash and that help explain similar gyrations in the currency markets invariably entails placing blame squarely with central bankers and algos run amok, and that risks upsetting both the central planning committees that are now in charge of business cycle “management” and the deeply entrenched HFT lobby. 

  As such, discussing illiquid corporate credit markets is easier if you find yourself among polite company. You see, the lack of liquidity in the secondary market for corporate bonds is a somewhat benign discussion because although it unquestionably stems from a noxious combination of regulatory incompetence and irresponsible monetary policy, myopic corporate management teams and the BTFD crowd, not to mention ETF issuers, have also played an outsized role, so there’s no need to lay the blame entirely on the masters of the universe who occupy the Eccles Building and on the “liquidity providing” HFT crowd that’s found regulatory capture to be just as easy as frontrunning. 

  But while explanations for the absence of liquidity vary from market to market, the response is becoming increasingly homogenous. Put simply: market participants are simply moving away from cash markets and into derivatives. Where market depth has disappeared, it’s become increasingly difficult to transact in size without having an outsized effect on prices. This means that for big players – fund managers, for instance – selling into ever thinner secondary markets is a dangerous proposition. And not just for the manager, but for market prices in general.

  In Treasury markets, traders have turned to futures to mitigate illiquidty… 

  

  …while corporate bond fund managers utilize ETFs and other portfolio products to avoid trading the underlying assets…

  

  

  With the stage thus set, Bloomberg has more on the move to smaller trades and cash market substitutes:

  Sometimes less is more. At least according to investment managers trying to navigate Europe’s credit markets.

   

  TwentyFour Asset Management capped a bond fund to new investors at 750 million pounds ($1.2 billion) and JPMorgan Asset Management, which is marketing a 128 million-pound fund, said smaller investments are more flexible in a sell-off. Other managers are also limiting the size of their trades and using derivatives to avoid getting trapped in positions.

   

  It’s become more difficult to buy and sell securities as Greece’s financial crisis curbs risk taking and dealers scale back trading activity to meet regulations introduced since the financial crisis. The Bank for International Settlements warned of a “liquidity illusion” in June because bond holdings are becoming concentrated in the hands of fund managers as banks pull back.

   

  “Liquidity is generally poor in corporate bond markets and in the U.K. market it’s thin to zero,” said Mike Parsons, head of U.K. fund sales at JPMorgan Asset Management in London. “You don’t want to be in a gigantic fund where there’s potential for a lot of investors rushing for the exit at the same time. Smaller funds are more nimble.”

   

  “Without enough strong liquidity, it’s hard to execute bond trades in sufficient size or price to move portfolio risk around quickly or cheaply,” he said. “The bigger the position, the harder it is to find enough liquidity to sell it or buy it.”

   

  Liquidity in credit markets has dropped about 90 percent since 2006, according to Royal Bank of Scotland Group Plc. That’s because dealers are using less of their own money to trade as new regulation makes it less profitable.

   

  Euro-denominated corporate bonds got an average of 5.3 dealer quotes per trade last week, up from 4.5 recorded in January and compared with a peak of 8.8 in 2009, according to Morgan Stanley data. That’s based on dealer prices compiled by Markit Group Ltd. for bonds in its iBoxx indexes.

   

  Liquidity is especially bad in the U.K. corporate bond market, which is being abandoned by companies looking to take advantage of lower borrowing costs in euros and investors seeking securities that are easier to buy and sell.

   

  NN Investment Partners said it seeks to manage difficult trading conditions by diversifying positions and capping trade size. The Netherlands-based asset manager avoids owning large concentrations of a single bond and uses derivatives such as credit-default swaps or futures that are easier to buy and sell, said Hans van Zwol, a portfolio manager.

   

  “We really want to stay away from positions we can’t get out of,” he said.

  The conundrum here is that the more reluctant market participants are to venture into increasingly illiquid cash markets, the more illiquid those markets become.

  At the end of the day, one is reminded of what Howard Marks’ recently said about ETFs: 

  “[They] can’t be more liquid than the underlying and we know the underlying can be quite illiquid.”

   

  

  

  

  

  

• Why America's First National Supermarket Chain Just Filed For Bankruptcy, Again

  Back in December 2010, we were “stunned” when we learned that in a what was a clear case of a supermarket chain unable to pass through costs to consumers, the Great Atlantic & Pacific Company (“Great Atlantic”, “A&P” or the “Debtors”), which in 1936 became the first national supermarket chain in the US, would file for bankruptcy adding that “it is ironic that instead of passing through costs supermarkets are instead opting out to default”. Although perhaps even back then it was clear to A&P that the capacity of US consumer to shoulder higher prices is far worse than what the mainstream media would lead everyone to believe.

  Fast forward to last night, when less than five years after its first Chapter 11 filing (and three years after emerging from a bankruptcy in March 2012 as a privately-held company part owned by Ron Burkle’s Yucaipa with a clean balance sheet including $490 million in new debt and equity financing), overnight Great Atlantic, which controls such supermarket brand names as A&P, Waldbaum’s, SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars, and A&P Liquors – filed for repeat bankruptcy, or as it is better known in restructuring folklore, Chapter 22.

  So what happened in the intervening 5 years that caused the company which employes 28,500 workers (93% of whom are members of one of twelve local unions and who are employed by A&P under some 35 separate collective bargaining agreements) to deteriorate so badly that it burned through all of its post (first) petition cash and redefault?

  In one word: unions.

   Because just like in the case of comparable Chapter 22 (and subsequently liquidation) case of Twinkies maker Hostess, so A&P is blaming the unwillingness of its biggest cost center, its employees, to negotiate their way out of what will be an event in which at least half the company’s employees will be laid off.

  Here is the full story, as narrated by Christopher W. McGarry, Great Atlantic’s Chief Restructuring Officer:

  [Great Atlantic is] one of the nation’s oldest leading supermarket and food retailers, operating approximately 300 supermarkets, beer, wine, and liquor stores, combination food and drug stores, and limited assortment food stores across six Northeastern states. The Debtors’ primary retail operations consist of supermarkets operated under a variety of wellknown trade names, or “banners,” including A&P, Waldbaum’s, SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars, and A&P Liquors. The Debtors currently employ approximately 28,500 employees, over 90% of whom are members of one of twelve local unions whose members are employed by the Debtors under the authority of 35 separate collective bargaining agreements (collectively, the “CBAs”). As of February 28, 2015, the Debtors reported total assets of approximately $1.6 billion and total liabilities of approximately $2.3 billion.

   

  

   

  A&P was founded in 1859. By 1878, The Great Atlantic & Pacific Tea Company (A&P)—originally referred to as The Great American Tea Company—had grown to 70 stores. A&P introduced the nation’s first “supermarket”—a 28,125 square foot store in Braddock, Pennsylvania—in 1936 and, by the 1940s, operated at nearly 16,000 locations. The Tengelmann Group of West Germany’s purchase A&P in 1979 precipitated an expansion effort that led to the acquisition of, among others, a number of Stop & Shops in New Jersey, the Kohl’s chain in Wisconsin, and Shopwell. Due to a series of operational and financial obstacles, including high labor costs and fast-changing trends within the grocery industry, by 2006 A&P had reduced its footprint to just over 400.

   

  In 2008, A&P acquired its largest competitor, Pathmark Stores, Inc., in an effort to continue expanding its brand portfolio and, in doing so, became the largest supermarket chain in the New York City area. A&P continued to experience significant liquidity pressures on account of burdensome supplier contracts, overwhelming labor costs, and other significant legacy obligations. Moreover, A&P had become highly leveraged and was unable to operate as a profitable company.

  Did we mention this is the second Great Atlantic bankruptcy in under five years? Yes, we did.

  This is the Debtors’ second bankruptcy in just five years. A&P previously filed the 2010 Cases seeking to achieve an operational and financial restructuring. The 2010 Cases were difficult and challenging. Unfortunately, despite best efforts and the infusion of more than $500 million in new capital in the 2010 Cases, A&P did not achieve nearly as much as was needed to turn around its business and sustain profitability. For example, during the 2010 Cases, A&P decided against closing approximately 50-60 underperforming stores in their supermarket portfolio in favor of preserving the jobs in those stores. Instead, A&P pursued a financial restructuring and negotiated a reduction in labor and vendor costs to attempt to return these stores to profitability. Those efforts have failed. Similarly, A&P did not seek to address its multi-employer pension and certain other significant legacy obligations. These obligations have been a drain on the Company for the entire post-emergence period. From February 2014 through February 2015, A&P lost more than $300 million.

  Which was more than half of the total exit funding Great Atlantic obtained as part of its first bankruptcy process.  And now comes the blame:

  In addition to their weak performance, the Debtors’ businesses remain plagued by other limitations that have prevented them from operating in an efficient and profitable manner. Among other things, most of the Debtors’ CBAs contain “bumping” provisions that require A&P to conduct layoffs by seniority, i.e., by terminating junior union members before more senior members. Bumping provisions also have an inter-store component: upon the closing of a store, terminated union employees are permitted to take the job of a more junior employee at another store (resulting in the most junior employee at that store losing his or her job). As a result, the closing of one store results in increased salaries—the same high salaries that may have in part precipitated the store closing—being transferred to another (possibly profitable) store. In fact, the Debtors have continued to operate certain stores that regularly operate at a loss because continuing to operate such stores at a loss is less costly to A&P than the bumping costs (combined with other “legacy” costs) that would be triggered by closing such stores.

  It’s not just the unions: A&P takes at least some blame for being unable to properly invest CapEx into growth, instead squandering its cash on unresolved cash drains: look for this excuse to be prevalents during the mass bankruptcies to follow in the next few years when hundreds of companies which are buying back stock now will lament loudly they did not invest in their own future instead.

  The Debtors’ deteriorating financial condition has also been compounded by the fact that, since emerging from the 2010 Cases, their unsustainable cost structure has prevented them from investing sufficiently in their businesses at a pivotal time in the competitive grocery industry, when their peers were investing heavily in new stores and existing store remodels, robust pricing initiatives, and were introducing technological advances and other initiatives to customize and improve the consumer experience. For example, under its plan of reorganization in the 2010 Cases, A&P was projected to invest over $500 million in capital improvements during the ensuing 5-year period. Since emergence, due to insufficient capital and declining operations, among other things, the Debtors have been able to deploy capex at scarcely more than half that rate. As a result, many of the Debtors’ stores have remained outdated and/or underinvested, making it difficult to attract and retain new customers during a crucial time of rebranding and rebuilding

  And then, once the market realized A&P was in dire straits, it didn’t take long for the “JCPenney effect” to materialize and for suppliers to tighten vendor terms, draining the company of even more cash:

  In addition to the historical pressures on their liquidity, as news of the Debtors’ continued financial challenges recently began to permeate throughout the market, a number of the Debtors’ suppliers and vendors began contacting management and demanding changes in payment and credit terms. Certain of the Debtors’ vendors have negotiated reduction in trade terms while others have demanded that the Debtors pay cash in advance as a condition for further deliveries. Although the Debtors have been working diligently with their advisors to resolve open vendor issues and avoid supply chain interruption, the actions taken by these vendors have further diminished the Debtors’ cash position by approximately $24 million in the weeks prior to the Commencement Date. Furthermore, on July 14, 2015, C&S Wholesale Grocers, Inc. (“C&S”) – the Debtors’ primary supplier of approximately 65% of all goods – issued a notice of default for non-payment of the $17 million deferred paymen.

  The end result of this escalation of bad management decision and intransigent labor unions: “cash burn rates averaging $14.5 million during the first four periods of Fiscal Year 2015”  which gave the company no choice but “to commence these Chapter 11 Cases as the only viable alternative to avoid a fire sale liquidation of the company.”

  But why not try to do what the company tried in 2010 with its first bankruptcy, and get it right this time? Here is what happened the last time A&P bet on a post-bankruptcy existence:

  Upon emergence from the 2010 Cases, the Debtors had $93.3 million of cash on their balance sheet and were prepared to invest in the growth of their business. In an effort to distance their businesses from the specter of bankruptcy, the Debtors designed and implemented an integrated marketing campaign intended to show customers that they had successfully emerged from bankruptcy and were prepared to move forward by offering highquality, localized products and enhanced services. The campaign entailed temporary price reductions and promotional advertising of the same through print, television, and radio. The Debtors’ investments did not, however, achieve the desired returns. Although the Debtors’ strategy drew more customers to their stores, such efforts were at the expense of margin income and the Debtors were not building productive, long-lasting relationships with their customers.

   

  The Debtors’ thwarted attempts to attract and retain a new customer base compounded with their lingering legacy obligations drove down sales throughout many of their stores and negatively impacted their bottom line. During the first six months of fiscal year 2012, the Debtors were losing approximately $28 million per month. In an effort to turnaround their businesses, the Debtors’ management team launched a business strategy intended to restore stability and offset increasing post-restructuring liquidity pressures by scaling back the temporary price reductions they had implemented in certain of their stores because such reductions were showing diminishing marginal returns, setting up better controls over cash management, and monetizing a number of their real estate assets. Over a period of six to ten months, the Debtors generated over $200 million in asset sales, including sale leasebacks, while only relinquishing a handful of stores. The proceeds from these sales were used largely to pay down debt, while also giving the businesses with a slim liquidity buffer.

   

  The Debtors’ business strategy showed signs of success and, by the end of fiscal year 2013, the Debtors had $192 million in cash, EBITDA was in the range of $121 million, and four-wall EBITDA was approximately $228 million. Still, due to the increasing competitive nature of the industry, during the same year, sales were down by 7.6% when compared to the prior year.

  And this was during a period when the US economy was allegedly growing like gangbusters. Still, Yucaipa did not enjoy the prospect of losing its entire investment and pushed the company to sell itself. That did not work out:

  After stabilizing their businesses during fiscal year 2013, the Debtors’ private equity owners began to evaluate potential strategic alternatives and, in Spring 2013, the Debtors retained Credit Suisse AG (“Credit Suisse”) to review such alternatives, including a possible going concern sale of the company. Credit Suisse initiated contact with a number of potential buyers and financial sponsors and marketed an equity-based sale of the company. Although the Credit Suisse marketing process garnered meaningful interest in the Debtors’ assets, the Debtors did not receive a viable offer for the stock of the company. The Debtors and their advisors ultimately determined that selling assets in smaller or one-off sales was not the best way to maximize recoveries and protect the interest of stakeholders, including their thousands of employees. Accordingly, plans to sell the Debtors’ businesses were placed in a state of suspension.

  Right, they were concerned about the thousands of employees, sure.

  In any event, then came the endgame, right at a time when the US recovery had never been stronger if one listens to the propaganda media:

  The Debtors continued to suffer declining revenues. The Debtors showed a net loss of $305 million in Fiscal Year 2014, compared with a net loss of $68 million in Fiscal Year 2013. The Debtors generated a negative EBIT of -1.9% of sales or $105 million in Fiscal Year 2014, compared to a positive EBIT of 1.1% of sales, or $62 million, in Fiscal Year 2013. In 2014, the Debtors experienced a sales decline of approximately 6% when compared with 2013, and the trend continued into 2015.

   

  The Debtors determined that they may continue to lose up to $10 to 12 million in cash per period during 2015. Additionally, the recent tightening of vendor terms has adversely affected working capital by approximately $24 million. Those situations  would make them unable to maintain sufficient liquidity to meet the minimum cash requirements during 2015. Based on preliminary projections, the Debtors expected EBITDA of approximately $40 to $50 million in the 52 weeks ending February 29, 2016 (“Fiscal Year 2015”). With maintenance capital expenditures (approximately $35 million), higher cash contributions for workers’ compensation payments than expense (approximately $17 million), pension contributions greater than the actuarially-calculated book expenses (approximately $17 million), the tightening of accounts payables terms (approximately $24 million) and an eroding sales base, the company projected it would be unable to satisfy the $38 million in interest and principal due during Fiscal Year 2015.

  So here is the CRO’s summary of the two key factors that precipitated Great Atlantic’s second, and final, bankruptcy. Chief among them: labor unions:

  • Inflexible Collective Bargaining Agreements [aka Unions]. In addition to mandating direct labor costs, the CBAs contain a variety of different work rules that have functioned to hamstring the Debtors’ operations. For example, as stated above, most of the CBAs contain “bumping” provisions that require the Debtors to hire employees from a closed store  location at a different nearby store and replace less senior employees at such store. Because any healthy store in close proximity to a store that is closing must take on the increased costs of retaining more senior level employees, “bumping” costs make it difficult and, in some cases, financially impractical, to close unprofitable stores notwithstanding that such stores continue to strain the Debtors’ balance sheet. For instance, one of the Debtors’ stores in Hackensack, New Jersey loses approximately $4 million per year but, under the applicable CBA, closing that store would require the Debtors to “bump” certain senior employees to a number of nearby stores— increasing labor costs by around $1.5 million per year. Preliminary analysis conducted by the Debtors’ advisors indicates that closing Initial Closing Stores alone could generate bumping costs as high as almost $14.8 million—making it more efficient to keep these stores open, absent relief from such provisions pursuant to the MA& Strategy.
  • Crippling Legacy Costs. Historically, the Debtors’ legacy costs have not been aligned with the operating reality of their  businesses. The Debtor’ labor-related costs make up 17.75% of sales while the total merchandising income before any warehousing/transportation and operating expenses is 35.48% of sales.

  And then there was the usual red herring excuse:

  • Competitive Industry. The Debtors also continue to face competitive pressure within the supermarket industry. For the reasons set forth herein, upon emerging from the 2010 Cases, the Debtors had a diminished capacity to invest in long-term  capital projects. Thus, as the Debtors’ competitors realized new technology platforms, remodeled and enhanced their stores, and implemented localization strategies geared toward tailoring each store to specific neighborhood needs, the Debtors have not been able to invest in creating an operational distinction between their various “banners” and tailor stores to customer needs.

  Which brings us to what happens next to Great Atlantic, which instead of simply throwing more good money after bad and hoping for a different outcome this time, is filing bankruptcy to break all existing labor union collective bargaining agreements (CBAs). Briefly, the company had conducted a pre-petition asset sale process and found that the best it can do is find buyers for just 120 stores, which employ 12,500 employees, for an aggregate purchase price of almost $600 million as part of a Stalking Horse process.

  In other words, one failed acquisition and one failed bankruptcy later, A&P is about to go from 300 supermarkets to at most 120, and over 15,000 workers or well over half of the work force is about to be laid off.

  The irony is that if it wasn’t for unions, it would be something else, like loading up on massive amounts of debt to repay Yucaipa’s equity investment, which would then be unsustainable once rates rose and once interest expense became so high it soaked up all the company’s cash flow (a harbinger of what is coming for the rest of US corporations who have rushed to issued trillions in debt just to pay their shareholders).

  And, sure enough, the Union wasted no time in responding: The United Food and Commercial Workers Union, which represents A&P’s 30,000 employees, called on the company and any potential buyers to “do what is right” for the membership.

  “As difficult as this bankruptcy process is, our message to A&P is a simple one. For the sake of the men and women of A&P, now is the time for A&P and any potential buyers to focus on doing what is right for our hard-working members and their families,” the union said.

   

  “Our hard-working members are not just employees — they are the heart and soul of these stores. They are committed to their success and determined to make them even stronger. We look forward to working with any company that will do what is right by our members and their families.”

   

  Addressing the members themselves, the union said, “We understand the uncertainty and concern that this bankruptcy announcement brings. We want our members and their families to know we are here to help in every way we can.”

   

  The UFCW also said it expects A&P “to stay in business during this bankruptcy process and honor its responsibilities to its employees … The UFCW and UFCW local unions will work hard to ensure that the process for selling stores protects our members’ jobs, working conditions and benefits.

   

  “We will also hold A&P to its commitments to involve UFCW in the sales process [and] protect union contracts and these good jobs.”

  Good luck.

  In conclusion, one can’t help but wonder if current events that are taking place behind the non-GAAP facade of America’s public companies, what is going on at A&P is far more indicative of the true state of the economy, an economy where due to both legacy constraints, bad management and, naturally, a deteriorating economy for all but the top 1%, the best that companies can do is support at most half their employees… after filing for bankruptcy of course.

  Full A&P affidavit below

  

  

  

  

  

• 95% Of The Real Estate Market In Greece Is "All Cash"

  When PM Alexis Tsipras announced that he was set to put Greece’s creditors’ proposals to a popular vote, lines quickly formed at ATMs despite the fact that the referendum call came after midnight local time. And while the long queues served as a poignant reminder of just how worried the Greek people truly were about the future, the more shocking images surfaced around 24 hours later when the shelves at Greek grocery stores began to resemble those of another socialist paradise: Venezuela. 

  The empty supermarket shelves and long waits at gas stations presaged the acute credit crunch that accompanied the imposition of capital controls. Ultimately, the Greek economy was crippled as vendors, unable to obtain credit from suppliers, faced the possibility that they would have to close the doors if they couldn’t manage to keep the shelves stocked. In short, an economy already in free fall slipped into a terminal decline. 

  There’s quite a bit of disagreement about whether or not more austerity will succeed in returning Greece to growth – some say the situation can only get worse under the terms of the proposed third bailout agreement while creditors insist that the mandated “reforms” are meant to put Greece back on track. Whatever the case, the country remains, for now, stuck in what can only be described as a depression which is why we weren’t entirely surprised to hear that half of Athens’ real estate agents have been forced to close their doors as the property market in Greece is now almost completely dependent upon buyers who can afford to pay cash. Here’s Bloomberg with “a day in the life of a Greek realtor.”

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• Trump Lead Surges In Polls, Again

  Since last week's FOX News poll, Donald Trump has extended his gains dramatically in the race to be GOP Presidential nominee. According to ABC-Washington Post latest poll, 24% of Republicans prefer Trump (up from 18% last week) with Scott Walker nudging ahead of Jeb Bush. Notably the poll was taken from Thursday to Sunday and so does include some reaction from Trump's McCain comments…

   

  

   

  As Jim Kunstler concluded earlier,

  I’ve proposed for many years that we are all set up to welcome a red-white-and-blue, corn-pone Nazi political savior type. I don’t think Donald Trump is it. But he will be a stalking horse for a far more skillful demagogue when the time comes. There’s a fair chance that the wheels will come off the banking and monetary system well before the 2016 election. Who knows who or what will come out of the woodwork before then.

  *  *  * 

  

  *  *  *

  Here's Martin Armstrong on the matter…

  

  Trump is hitting very hard, clearly tapping into the emerging anti-establishment politician trend. He bluntly states, “Who do you want negotiating with China? Trump or Bush?” You could expand that to Hillary. Her negotiations amount to how much they are willing to donate to her questionable charity. People setup such charities because they have money to give back TO society, like Bill Gates. The Clintons started their charity when they were broke. Who is the charity really benefiting and why did Hillary shakedown countries as Secretary of State to pile in money to their questionable charity?

  MSNBC keeps trying to focus on Trump’s comments on Mexico. They give him tons of airtime in an attempt to discourage people from voting for him, but they may be creating the exact opposite. Despite what everyone says, he is tapping into the increasingly popular view that everyone is starting to feel, having had enough of politicians, or at least the ones with a brain.

  *  *  *

  

  

  

  

  

• Oil and Coal Indicate the Global Economy is in a Free Fall

  In the US, Coal has become a political hot button. Consequently it is very easy to forget just how important the commodity is to global energy demand. Coal accounts for 40% of global electrical generation. It might be the single most economically sensitive commodity on the planet.

   

  With that in mind, consider that Coal ENDED a multi-decade bull market back in 2012. In fact, not only did the bull market end… but Coal has erased ALL of the bull market’s gains (the green line represents the pre-bull market low). For all intensive purposes, the last 13 years were a wash.

   

  

   

  Those who believe that the global is in an economic expansion will shrug this off as the result if the US’s shift away from Coal as an energy source. The US accounts for only 15% of global Coal demand. The collapse in Coal prices goes well beyond US changes in energy policy.

  What’s happening in Coal is nothing short of “price discovery” as the commodity moves to align itself with economic reality. In short, the era of “growth” pronounced by Governments and Central Banks around the world ended. The “growth” or “recovery” that followed was nothing but illusion created by fraudulent economic data points.

   

  We get confirmation of this from Oil.

   

  For most of the “so called” recovery, Oil gradually moved higher, creating the illusion that the world was returning to economic growth (demand was rising, hence higher prices).

   

  

   

  That blue line could very well represent the “false floor” for the recovery I mentioned earlier. Provided Oil remained above this trendline, the illusion of growth via higher energy demand was firmly in place.

   

  And then Oil fell nearly 60% from top to bottom in less than six months.

   

  

   

  As was the case for Coal, Oil’s drop was nothing short of a bubble bursting. From 2009 until 2014 Oil’s price was disconnected from economic realities. Then price discovery hit resulting in a massive collapse.

   

  Moreover, the damage to Oil was extreme. Not only did it collapse 60% in a matter of months. It actually TOOK out the trendline going back to the beginning of the bull market in 1999.

  

   

  This is a classic “ending” pattern. Breaking a critical trendline (particularly one that has been in place for several decades) is one thing. Breaking it and then failing to reclaim it during the following bounce is far more damning.

   

  We’ve just took out this line AGAIN a week or so ago. Oil will be dropping down to $30 per barrel if not lower.

   

  In short, the era the phony recovery narrative has come unhinged.  We have no entered a cycle of actual price discovery in which financial assets fall to more accurate values. This will eventually result in a stock market crash, very likely within the next 12 months.

   

  If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.

   

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  To pick up yours, swing by….

   

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  Best Regards

   

  

  

  

  

• Martin Armstrong: "Little By Little These People Are Destroying Everything That Made Society Function"

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

   

  Germany Replacing Bank Cards Eliminating Cash Withdrawals

   

  

  The game is afoot to eliminate CASH. We have been informed with reliable sources that in Germany where Maestro was a multi-national debit card service owned by MasterCard that was founded in 1992 is seriously under attack. Maestro cards are obtained from associate banks and can be linked to the card holder’s current account, or they can be prepaid cards.

  Already we find such cards are being cancelled and new debit cards are being issued. Why? The new cards cannot be used at an ATM outside of Germany to obtain cash. Any attempt to get cash can only be as an advance on a credit card.

  

  Little by little, these people are destroying everything that held the world economy together.

  Their hunt for spare change for tax purposes is undermining every aspect of civilization. This will NEVER END NICELY for they can only think about their immediate needs with no comprehension of the future they are creating.

  Indeed – somebody better pray for us, for those in charge truly do not know what they are doing.

  

  We serious need to hit the Cntrl-Alt-Delete button on government.

  This is total insanity and we are losing absolutely everything that made society function.

  Once they eliminate CASH, they will have total control over who can buy or sell anything.

   

  

  

  

  

• California Regulators Slap Farmers With Record $1.5 Million "Water-Taking" Fine

  In what seems a lot like a strawman for just how much they can pressure the population, AP reports California water regulators proposed a first-of-its-kind, $1.5 million fine for a group of Central Valley farmers accused of illegally taking water during the drought. This would be the first such fine for holders of California's oldest (most senior) claims to water, and follows suits from the farmers to the government arguing their 'law changes' are illegal.

   

  As AP reports, the State Water Resources Control Board said the Byron-Bethany Irrigation District in Tracy illegally took water from a pumping plant even after it was warned there wasn't enough water legally available.

  The move by the board was the first against an individual or district with claims to water that are more than a century-old, known as senior water rights holders.

   

  The action reflects the rising severity of California's four-year drought that has prompted the state to demand cutbacks from those historically sheltered from mandatory conservation.

   

  The Byron-Bethany district serves farmers in three counties in the agriculture-rich Central Valley and a residential community of 12,000 people relying on water rights dating to 1914.

   

  District general manager Rick Gilmore said he did not know a penalty was coming and wasn't aware of the details.

   

  "Perhaps the state water resources control board is not taking into account we purchased supplemental supplies," he said.

  The district has sued the state over the board's June warning to immediately stop taking water because the watershed was running too dry to meet demand.

  Several irrigation districts have filed unresolved legal challenges to stop the curtailments demanded by the state.

   

  Among them is the West Side Irrigation District, which claimed a victory in a ruling last week by a Sacramento judge who said the state's initial order to stop pumping amounted to an unconstitutional violation of due process rights by not allowing hearings on the cuts.

   

  Superior Court Judge Shelleyanne Chang also indicated, however, that the water board can advise water rights holders to curtail use and fine them if the agency determines use exceeded the limit.

   

  West Side is a small district with junior water rights, but the ruling also has implications for larger districts with senior rights.

   

  West Side's attorney Steven Herum said the order issued Thursday was prompted after the judge sided with his client.

   

  "It is clear that the cease-and-desist order is retaliatory," Herum said. "It's intended to punish the district."

  The board has sent out more than 9,000 notices across parched California warning there wasn't enough water entitled under rights.

  The water board issued a cease-and-desist order last week against the West Side Irrigation District, also in Tracy, to immediately stop taking water. That district also had filed a lawsuit challenging the board's cuts, but the state denies it's retaliating against the agency.

   

  Courts have not yet settled the question of whether the board has authority to demand cutbacks from farmers, cities and individuals with California's oldest claims to water.

  *  *  *

  Of course we suspectthe proposed fine will be reduced but it is likley testing the waters with just how much a fine is required to scare the people into not exercising their senior rights to water. But as Gaius Publius (via Down woith Tyranny blog) concludes, here's what's likely to happen next…

  The social contract will break in California and the rest of the Southwest (and don't forget Mexico, which also has water rights from the Colorado and a reason to contest them). This will occur even if the fastest, man-on-the-moon–style conversion to renewables is attempted starting tomorrow.

   

  This means, the very very rich will take the best for themselves and leave the rest of us to marinate in the consequences — to hang, in other words. (For a French-Saudi example of that, read this. Typical "the rich are always entitled" behavior.) This means war between the industries, regions, classes. The rich didn't get where they are, don't stay where they are, by surrender.

   

  Government will have to decide between the wealthy and the citizenry. How do you expect that to go?

  *  *  *

  We suspect the tipping point in this situation is looming soon as tensions between the government's tyrannical law changes (albeit due to historic weather conditions) become unbearable for the citizenry.

  

  

  

  

  

• What Happened The Last Time The Mainstream Media Unleashed The Anti-Gold Artillery

  With the mainstream media onslaught against precious metals climaxing this weekend as WSJ's Jason Zweig proclaimed gold "like a pet rock," describing owning gold as "an act of faith," we thought it worthwhile looking back at the last time 'everyone' was slamming gold and entirely enthused by the omnipotence of central bankers… May 4th, 1999 – "Who Needs Gold When We Have Greenspan?"

  Over 16 years ago, The New York Times' Floyd Norris unleashed the last big gold slamming piece topping a period of precious metal bashing…

  Who Needs Gold When We Have Greenspan?

   

  Is gold on its way to becoming just another commodity? The people who run the world's financial system are doing their best to secure that fate for the metal that once was viewed as the only ''real'' money.

   

  The process of removing the glitter from gold has been a gradual but inexorable one, and is one of the most telling counters to the argument that national governments are less important in this era of globalization. Much of the world is now quite happy to accept the idea that a greenback backed by Alan Greenspan is just as good as one backed by gold.

   

  Certainly gold's reputation as a store of value has eroded. At the peak of the gold frenzy in 1980, an ounce of gold cost $873, precisely that day's level of the Dow Jones industrial average. Now the Dow is at 11,014.69, about 38 times higher than the $287.60 price of gold.

   

  Actually, that measurement understates the amount by which stocks have outperformed gold. If you had owned stocks all those years, you would have received substantial dividends. If you owned a lot of gold, you got no dividends but did have to pay storage fees for the stuff.

   

  That is, in fact, how the central bankers of the world look at gold these days. Michel Camdessus, the managing director of the International Monetary Fund, said last week he expected the fund to sell gold for the first time in two decades. The Clinton Administration is pushing for such sales by the I.M.F. to help finance a laudable program to forgive debts owed by very poor countries.

   

  The money received from the gold sales is to be invested in Government securities that will provide income, and that income will pay off the loans. The implicit assumption is that gold, which does not pay interest, is a lousy investment.

   

  A couple of weeks ago, the Swiss electorate voted to begin untying the Swiss franc from its gold backing. The Swiss central bank could begin selling gold as early as next year. Once again, the argument was that selling gold was a way to find easy money for good deeds. To those who still view gold as the only real money, having the Swiss defect is a bit like discovering that Rome is embracing Protestantism. It is the last place that should happen.

   

  But it is happening, and it seems likely that more central banks — like the Australian and Dutch banks — will join those that have already begun selling gold.

   

  The argument against retaining gold is that its day is past. Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.

   

  Once gold served as protection for investors against governments that debased their currencies. Now there is plenty of debasing going on — the Brazilian real is down 27 percent this year — but the lesson people have drawn is to believe in the dollar. There is growing support for the idea that all of Latin America should adopt the dollar as a currency.

   

  Dollarization, as that idea is called, amounts to a sort of a gold standard without gold. There would be a universal money whose value was based not on gold in the vaults, but on the wisdom of Mr. Greenspan and his successors at the Federal Reserve. Few fear that one of those successors might resemble G. William Miller, the Fed chairman in the late 1970's who seemed to have no idea how to slow inflation.

   

  If the demonetization of gold continues, the price is likely to keep falling as central-bank sales more than offset any increase in demand from jewelers or industrial users. That could change if it turns out that central bankers are not the geniuses they are now deemed to be. But for now, the world believes in Mr. Greenspan and sees little need for gold.

  What happened next? A 650% run over the next 12 years:

  

   

  Not to mention a complete about-face by the very same Alan Greenspan:

  Remember what we're looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.

   

  …

   

  And the question is, why do central banks put money into an asset which has no rate of return, but cost of storage and insurance and everything else like that, why are they doing that? If you look at the data with a very few exceptions, all of the developed countries have gold reserves. Why?

  As we concluded previously,

  So here's a thought Jason: instead of quoting a Barclays analyst why "a lot of investors have become disillusioned with gold" and why "safe-haven demand hasn’t been strong enough to lift prices, but has only been strong enough to keep them from falling", maybe you can try to figure out why that is the case.

   

  Start by making a few phone calls to Citi or JPM and find out why their commodity/precious metal derivatives exploded as they did – as can be factually seen in the OCC's Q1 report – at a time when gold has not only not risen following a surge in global risk, but has tumbled to its lowest value since 2010.

   

  Because that's what actual "reporters" do – they report, something the WSJ may have forgotten.

  It appears the mainstream media's total indoctrination of a narrative handed down by the central bank… in the face of central bank hording of gold – once again shows the desperation of the status quo to keep the dream alive (and suppress any signs of fragility) as The Fed moves to tighten.

  Paraphrasing The New York Times from the 1999 lows in gold,

  If the demonization of gold continues, the price is likely to keep falling as central-bank buys are nmore than offset byu paper manipulation. That could change if it turns out that central bankers are not the geniuses they are now deemed to be. But for now, the world believes in [Mrs. Yellen] and sees little need for gold.

  

  

  

  

  

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