Today’s News July 22, 2015

• Greek Prime Minister Asked Putin For $10 Billion To "Print Drachmas", Greek Media Reports

  Back in January, when we reported what the very first official act of open European defiance by the then-brand new Greek prime minister Tsipras was (as a reminder it was his visit of a local rifle range where Nazis executed 200 Greeks on May 1, 1944) we noted that this was the start of a clear Greek pivot away from Europe and toward Russia.

  We further commented on many of the things that have since come to pass:

  Europe, for one, will be most displeased that Greece has decided to put its people first in the chain of priority over offshore bidders of Greek assets. Most displeased, especially since the liquidation sale of Greece is part of the Greek bailout agreement: an agreement which as the Troika has repeatedly stated, is not up for renegotiation

  But most importantly, even back then we explicitly said that in order for Greece to preserve its leverage (something it found out the hard way it did not have 6 months later), it would need a Plan B, one that involves an alternative source of funds, i.e., Russia and/or China, which could be the source of the much needed interim cash Greece needs as it prints its own currency and prepares for life outside the European prison.

  The Germans were not happy: A German central banker warned of dire problems should the new government call the country’s aid program into question, jeopardizing funding for the banks. “That would have fatal consequences for Greece’s financial system. Greek banks would then lose their access to central bank money,” Bundesbank board member Joachim Nagel told Handelsblatt newspaper.

   

  Well, maybe…. Unless of course Greece finds a new, alternative source of funding, one that has nothing to do with the establishmentarian IMF, whose “bailouts” are merely a smokescreen to implement pro-western policies and to allow the rapid liquidation of any “bailed out” society… Which naturally means that now Russia (and China) are set to become critical allies for Greece, which would immediately explain the logical pivot toward Moscow.

  Somewhat jokingly, on June 27, the day after Tsipras announced the shocking referendum decision, we repeated precisely this:

  Dear Greece, if you want to apply for a loan from the Asian Infrastructure Investment Bank, send an email to: information@aiibank.org

  — zerohedge (@zerohedge) June 28, 2015

  As it turns out, none of this was a joke, and, if Greek newspaper “To Vima” is to be trusted, a “Plan B” involving an emergency $10 billion loan from Vladimir Putin which would be used to fund a new Greek currency, is precisely what Greece had been contemplating!

  According to Greek Reporter, Greek Prime Minister Alexis Tsipras has asked Russian President Vladimir Putin for 10 billion dollars in order to print drachmas.

  In other words, if true, then Greece did just as we said it should: approach Russia and the BRICs with a request for funding to be able to exit Europe’s gravitational pull…

  The newspaper report cited Tsipras saying in his last major interview to Greek national broadcaster ERT that “in order for a country to print its own national currency, it needs reserves in a strong currency.”

  … however, somewhat surprisingly, both Moscow and Beijing said no:

  Moscow’s response was a vague mention of a 5-billion-dollar advance on the new South Stream natural gas pipeline construction that will pass through Greece. Tsipras also sent similar loan requests to China and Iran, but to no avail, the report said.

  The report continues:

  Tsipras was planning the return to the drachma since early 2015 and was counting on Russia’s help to achieve this goal. According to the report, Panos Kammenos, Yiannis Dragasakis, Yanis Varoufakis, Nikos Pappas, Panagiotis Lafazanis and other key coalition members were aware of his plan.

   

  In his first visit to Moscow, Tsipras condemned the European Union policy in Ukraine and supported the referendum of east Ukraine seeking secession. It was then that Germany realized Greece was prepared to shift alliances, something that would threaten the Eurozone cohesion. Tsipras was hoping that Germany would back down under that threat and offer Greece a generous debt haircut. At the time, Tsipras had the rookie ambition that he could change Europe, the report continued.

   

  It also spoke of a “geopolitical matchmaking” as Tsipras was introduced to Leonid Resetnikof, Director of the Russian Institute of Strategic Studies, before the European Parliament elections in May 2014. The introduction was made by Professor of Russian Studies Nikos Kotzias, who later cashed in on his services by getting the chair of Foreign Affairs Minister.

  But the biggest stunner: it was Putin who declined the offer on the night of the referendum.

  The July 5 referendum was a test for Tsipras to see what the Greek
  people were thinking about Europe and the Eurozone. However, on the
  night of the referendum, word came from Russia that Putin did not want
  to support Greece’s return to the drachma. That was confirmed the days
  that followed. After that, Tsipras had no choice left but to “surrender”
  to German Chancellor Angela Merkel and sign the third bailout package.

  In other words it was not Tsipras’ failure to predict how Greece would react to the Greek referendum nor was it his secret desire to lose it as previously suggested (expecting a Yes vote and getting 61% “No”s instead), but a last minute rejection by Putin that lead to the Greek government’s capitulation, and the expulsion of Varoufakis who most certainly was the propagator of this plan.

  It also means that Merkel suddenly has a massive debt of gratitude to pay to Vladimir, whose betrayal of the Greek “marxists” is what allowed the Eurozone to continue in its current form. The question then is what is Vlad’s pro quo in exchange for letting down the Greek government (and handing over its choicest assets to the (s)quid), whose fate was in the hands of the former KGB spy.

  Finally, it is very possible that To Vima is taking some liberties with truth. For confirmation we would suggest to get the official story from Varoufakis, who lately has been anything but radio silent. If confirmed, this will certainly be the biggest and most underreported story of the year, one which suggests that the perpetuation of Merkel’s dream of a united Europe was only possible thanks to this man.

  

   

  If confirmed, first and foremost look for a growing schism between Europe and the US (which has clearly been pushing Merkel’s buttons via the IMF’s ever louder demands for a debt haircut not to mention Jack Lew’s rather direct intervention in the Greek bailout negotiations) and an increasing sense of friendly proximity between Berlin (and Brussels) and Moscow.

  The biggest loser in this game of realpolitik, once again, are the ordinary Greek people.

  

  

  

  

  

• The American Nightmare: The Tyranny Of The Criminal Justice System

  Submitted by John Whitehead via The Rutherford Institute,

  How can the life of such a man
  Be in the palm of some fool’s hand?
  To see him obviously framed
  Couldn’t help but make me feel ashamed to live in a land
  Where justice is a game.—Bob Dylan, “Hurricane”

  Justice in America is not all it’s cracked up to be.

  Just ask Jeffrey Deskovic, who spent 16 years in prison for a rape and murder he did not commit. Despite the fact that Deskovic’s DNA did not match what was found at the murder scene, he was singled out by police as a suspect because he wept at the victim’s funeral (he was 16 years old at the time), then badgered over the course of two months into confessing his guilt. He was eventually paid $6.5 million in reparation.

  James Bain spent 35 years in prison for the kidnapping and rape of a 9-year-old boy, but he too was innocent of the crime. Despite the fact that the prosecutor’s case was flimsy—it hinged on the similarity of Bain’s first name to the rapist’s, Bain’s ownership of a red motorcycle, and a misidentification of Bain in a lineup by a hysterical 9-year-old boy—Bain was sentenced to life in prison. He was finally freed after DNA testing proved his innocence, and was paid $1.7 million.

  Mark Weiner got off relatively easy when you compare his experience to the thousands of individuals who are spending lifetimes behind bars for crimes they did not commit.

  Weiner was wrongfully arrested, convicted, and jailed for more than two years for a crime he too did not commit. In his case, a young woman claimed Weiner had abducted her, knocked her out and then sent taunting text messages to her boyfriend about his plans to rape her. Despite the fact that cell phone signals, eyewitness accounts and expert testimony indicated the young woman had fabricated the entire incident, the prosecutor and judge repeatedly rejected any evidence contradicting the woman’s far-fetched account, sentencing Weiner to eight more years in jail. Weiner was only released after his accuser was caught selling cocaine to undercover cops.

  In the meantime, Weiner lost his job, his home, and his savings, and time with his wife and young son. As Slate reporter journalist Dahlia Lithwick warned, “If anyone suggests that the fact that Mark Weiner was released this week means ‘the system works,’ I fear that I will have to punch him in the neck. Because at every single turn, the system that should have worked to consider proof of Weiner’s innocence failed him.”

  The system that should have worked didn’t, because the system is broken, almost beyond repair.

  In courtroom thrillers like 12 Angry Men and To Kill a Mockingbird, justice is served in the end because someone—whether it’s Juror #8 or Atticus Finch—chooses to stand on principle and challenge wrongdoing, and truth wins.

  Unfortunately, in the real world, justice is harder to come by, fairness is almost unheard of, and truth rarely wins.

  On paper, you may be innocent until proven guilty, but in actuality, you’ve already been tried, found guilty and convicted by police officers, prosecutors and judges long before you ever appear in a courtroom.

  Chronic injustice has turned the American dream into a nightmare.

  At every step along the way, whether it’s encounters with the police, dealings with prosecutors, hearings in court before judges and juries, or jail terms in one of the nation’s many prisons, the system is riddled with corruption, abuse and an appalling disregard for the rights of the citizenry.

  Due process rights afforded to a person accused of a crime—the right to remain silent, the right to be informed of the charges against you, the right to representation by counsel, the right to a fair trial, the right to a speedy trial, the right to prove your innocence with witnesses and evidence, the right to a reasonable bail, the right to not languish in jail before being tried, the right to confront your accusers, etc.—mean nothing when the government is allowed to sidestep those safeguards against abuse whenever convenient.

  It’s telling that while President Obama said all the right things about the broken state of our criminal justice system—that we jail too many Americans for nonviolent crimes (we make up 5 percent of the world’s population, but our prison population constitutes nearly 25% of the world’s prisoners), that we spend more money on incarceration than any other nation ($80 billion a year), that we sentence people for longer jail terms than their crimes merit, that our criminal justice system is far from color-blind, that the nation’s school-to-prison pipeline is contributing to overcrowded jails, and that we need to focus on rehabilitation of criminals rather than retribution—he failed to own up to the government’s major role in contributing to this injustice in America.

  Indeed, while Obama placed the responsibility for reform squarely in the hands of prosecutors, judges and police, he failed to acknowledge that they bear the burden of our failed justice system, along with the legislatures and corporations who have worked with them to create an environment that is hostile to the rights of the accused.

  In such a climate, we are all the accused, the guilty and the suspect.

  As I document in my book Battlefield America: The War on the American People, we’re operating in a new paradigm where the citizenry are presumed guilty and treated as suspects, our movements tracked, our communications monitored, our property seized and searched, our bodily integrity disregarded, and our inalienable rights to “life, liberty and the pursuit of happiness” rendered insignificant when measured against the government’s priorities.

  Every American is now in jeopardy of being targeted and punished for a crime he did not commit thanks to an overabundance of arcane laws. Making matters worse, by allowing government agents to operate above the law, immune from wrongdoing, we have created a situation in which the law is one-sided and top-down, used as a hammer to oppress the populace, while useless in protecting us against government abuse.

  Add to the mix a profit-driven system of incarceration in which state and federal governments agree to keep the jails full in exchange for having private corporations run the prisons, and you will find the only word to describe such a state of abject corruption is “evil.” 

  How else do you explain a system that allows police officers to shoot first and ask questions later, without any real consequences for their misdeeds? Despite the initial outcry over the shootings of unarmed individuals in Ferguson and Baltimore, the pace of police shootings has yet to slow. In fact, close to 400 people were shot and killed by police nationwide in the first half of 2015, almost two shootings a day. Those are just the shootings that were tracked. Of those killed, almost 1 in 6 were either unarmed or carried a toy gun.

  For those who survive an encounter with the police only to end up on the inside of a jail cell, waiting for a “fair and speedy trial,” it’s often a long wait. Consider that 60 percent of the people in the nation’s jails have yet to be convicted of a crime. There are 2.3 million people in jails or prisons in America. Those who can’t afford bail, “some of them innocent, most of them nonviolent and a vast majority of them impoverished,” will spend about four months in jail before they even get a trial.

  Not even that promised “day in court” is a guarantee that justice will be served.

  As Judge Alex Kozinski of the Ninth Circuit Court of Appeals points out, there are an endless number of factors that can render an innocent man or woman a criminal and caged for life: unreliable eyewitnesses, fallible forensic evidence, flawed memories, coerced confessions, harsh interrogation tactics, uninformed jurors, prosecutorial misconduct, falsified evidence, and overly harsh sentences, to name just a few.

  In early 2015, the Justice Department and FBI “formally acknowledged that nearly every examiner in an elite FBI forensic unit gave flawed testimony in almost all trials in which they offered evidence against criminal defendants over more than a two-decade period…. The admissions mark a watershed in one of the country’s largest forensic scandals, highlighting the failure of the nation’s courts for decades to keep bogus scientific information from juries, legal analysts said.”

  “How do rogue forensic scientists and other bad cops thrive in our criminal justice system?” asks Judge Kozinski. “The simple answer is that some prosecutors turn a blind eye to such misconduct because they’re more interested in gaining a conviction than achieving a just result.”

  The power of prosecutors is not to be underestimated.

  Increasingly, when we talk about innocent people being jailed for crimes they did not commit, the prosecutor plays a critical role in bringing about that injustice. As The Washington Post reports, “Prosecutors win 95 percent of their cases, 90 percent of them without ever having to go to trial…. Are American prosecutors that much better? No… it is because of the plea bargain, a system of bullying and intimidation by government lawyers for which they ‘would be disbarred in most other serious countries….’”

  This phenomenon of innocent people pleading guilty makes a mockery of everything the criminal justice system is supposed to stand for: fairness, equality and justice. As Judge Jed S. Rakoff concludes, “our criminal justice system is almost exclusively a system of plea bargaining, negotiated behind closed doors and with no judicial oversight. The outcome is very largely determined by the prosecutor alone.”

  It’s estimated that between 2 and 8 percent of convicted felons who have agreed to a prosecutor’s plea bargain (remember, there are 2.3 million prisoners in America) are in prison for crimes they did not commit.

  Clearly, the Coalition for Public Safety was right when it concluded, “You don’t need to be a criminal to have your life destroyed by the U.S. criminal justice system.”

  It wasn’t always this way. As Judge Rakoff recounts, the Founding Fathers envisioned a criminal justice system in which the critical element “was the jury trial, which served not only as a truth-seeking mechanism and a means of achieving fairness, but also as a shield against tyranny.”

  That shield against tyranny has long since been shattered, leaving Americans vulnerable to the cruelties, vanities, errors, ambitions and greed of the government and its partners in crime.

  There is not enough money in the world to make reparation to those whose lives have been disrupted by wrongful convictions.

  Over the past quarter century, more than 1500 Americans have been released from prison after being cleared of crimes they did not commit. These are the fortunate ones. For every exonerated convict who is able to prove his innocence after 10, 20 or 30 years behind bars, Judge Kozinski estimates there may be dozens who are innocent but cannot prove it, lacking access to lawyers, evidence, money and avenues of appeal.

  For those who have yet to fully experience the injustice of the American system of justice, it’s only a matter of time.

  America no longer operates under a system of justice characterized by due process, an assumption of innocence, probable cause, and clear prohibitions on government overreach and police abuse. Instead, our courts of justice have been transformed into courts of order, advocating for the government’s interests, rather than championing the rights of the citizenry, as enshrined in the Constitution.

  Without courts willing to uphold the Constitution’s provisions when government officials disregard them, and a citizenry knowledgeable enough to be outraged when those provisions are undermined, the Constitution provides little protection against the police state.

  In other words, in this age of hollow justice, courts of order, and government-sanctioned tyranny, the Constitution is no safeguard against government wrongdoing such as SWAT team raids, domestic surveillance, police shootings of unarmed citizens, indefinite detentions, asset forfeitures, prosecutorial misconduct and the like.

  

  

  

  

  

• Chinese Stocks Slide Into Red After Business Sentiment Crashes To 6-Year Lows

  After a modesly positive open, Chinese stocks have pushed back into the red after Chinese business sentiment collapsed in July. The MNI China Business Indicator fell a straggering 8.8pts to 48.8 in July (below 50 signifying pessimism) – the lowest since January 2009. It appears the encouraging bounce after the massive creduit injections into June has been eviscerated and future expectations also dropped 6.4 to 54.1 in July (below the long-run average). While bad news is good news for much of the rest of the world, for China, as it continues to try to project a strong underlying economy to sustain its still extremely rich stock market, bad news is bad news.

   

  Weakest business sentiment since Jan 2009…

  

   

  and stocks are not getting a bounce from the need for moar stimulus that this implies…

  

   

  The latest fall in overall sentiment outstripped the declines in the Production and New Orders indicators – although these both also fell significantly – suggesting that other factors, principally uncertainty brought on by the large correction in the stock market, may have played a part.

  So a Chinese stock market crash does matter after all?

  Charts: Bloomberg

  

  

  

  

  

• US Economic 'Hope' Plunges To 10-Month Lows

  57% of Americans see the US economy "getting worse," according to Gallup's latest survey, sending 'hope' to its lowest since September. Overall economic confidence slipped once again, despite the Greek deal, now at its lowest since October. It appears rising gas prices trump the rising stock prices when it comes to the average joe in America.

   

  Americans More Negative About Economic Outlook Than Current Conditions

  Gallup's Economic Confidence Index is the average of two components: how Americans rate the current economy and whether they feel the economy is getting better or getting worse. As has been the case since March, Americans rated the outlook for the economy worse than they rated current economic conditions for the week ending July 19.

  

  The current conditions score was essentially unchanged from the week prior at -5. This was the result of 25% of Americans saying the economy is "excellent" or "good" and 30% saying it is "poor." Meanwhile, 39% of Americans said the economy is "getting better," while 57% said it is "getting worse."

  This resulted in an economic outlook score of -18, slightly below the -16 from the week prior, and the lowest weekly average since the week ending Sept. 21, 2014.

  Source: Gallup

  

  

  

  

  

• Can You Hear the Fat Lady Singing?: The China Connection

  By Chris at www.CapitalistExploits.at

  Greece is connected to China by the very same thing which has been connecting sex, drugs, and rock’n’roll since Bretton Woods – dollars.

  Last week I shared some thoughts on the unintended consequences of actions taken in Europe and why Greece may matter as a result. There is zero chance that the actions taken will result in a stronger Europe, a stronger euro, or an economic strengthening in either Greece or the wider eurozone. Zero!

  As interesting as Greece and the euro is, my attention today is on China and how China may well be forced by events taking place globally to make some far reaching choices.

  Two scenarios have been widely discounted by the market with respect to China. The first is a remnimbi devaluation and the second is a hard landing for a slowing Chinese economy.

  We know that the Chinese economy is slowing. We know this because Beijing tells us it’s so. Their last numbers were that the economy has slowed to their growth target of 7%. Bang on their target rate. How convenient! Now of course these numbers are rubbish, but it’s telling that they’re acknowledging a slowing economy.

  We account for these government numbers in the same way we account for any government numbers: by acknowledging that underneath all the pompous sophistication of bureaucrats everywhere pulsates the brain of a tree shrew. The important takeaway is that they’re acknowledging they’re slowing.

  China’s Market Crash

  As everybody now knows, the Chinese stock market lost over 30% in 3 weeks wiping $2.8 trillion off the books. The only way to lose that much money in such a rapid period of time is by getting caught by your wife having hanky panky with her best friend.

  

  Sure, investors who bought at the top are hurting, but consider that the stock market is up roughly 80% over the last 12 months, and this is AFTER the crash. Viewed with that timeframe and taken into context this is hardly problematic.

  This correction is nowhere near as big a concern as it would be if we had a similar occurrence take place in the US due to who is participating.

  80 – 90% of the domestic A-share market is made up of retail investors. Novices. This was a bubble waiting to burst as retail investors flooded the market with a record 40 million new brokerage accounts created in the last year. Not only were novices entering the market but they were entering it on margin. By June of this year margin lending as a percentage of market cap ran as high as 20%. While these investors make up the majority of the market they represent a small part of the population. The free float of China’s markets is about a third of GDP, whereas in the developed world this number is over 100%. A soaring stock market and a crashing stock market will have little effect on the vast majority of Chinese households. This is unlike the developed world.

  Essentially, this is a tiny portion of the market that got burned. It really needn’t be a problem unless someone does something stupid and causes unintended consequences. Sadly this is exactly what Beijing is doing.

  Is China or the US the Next Greece?

  Perhaps it’s simply a matter of timing and what’s racing across the news feeds but I’ve read quite a few articles about how the US and China are next after Greece. Debt levels are cited along with a host of other similarities. This is – how do I put this politely – rubbish. The US and China are NOT Greece. Even if the debt levels were the same the similarities end there. Greece cannot issue its own currency. In last week’s missive I mentioned that:

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

  That makes Greece unique. The US, on the other hand, can print all the currency they want and pay their debts at par. Greece can’t do that. The bonds of the US, Japan and even China are not at all to be likened to the bonds of Greece. One needs to make a distinction between debt denominated in the country in questions own currency and debt denominated in some other currency.

  For countries sporting high debt levels and where simultaneously those debts are foreign denominated this can become a huge problem. Just ask that crazy woman in Argentina…

  The Asian crisis, which I discussed last week, is such an example whereby debts denominated in USD became unsustainable. Once the rout started a self-fulfilling trend developed whereby as the currencies in Southeast Asian nations moved lower this added multiples to the payments required on leveraged assets. A vicious unwinding of the carry trade.

  China’s Reaction

  What I find the most fascinating is not the correction in the Chinese stock market but the actions taken by the PBOC subsequently.

  This can only be described as outright panic. Consider the following actions taken.

  1. China Securities Finance Corp has lent $42 Billion to 21 brokers instructing them to buy blue chip stocks
  2. A $40 billion stimulus plan to “foster growth”
  3. Speeding up infrastructure spending.
  4. Capital controls by another name: controlling shareholders and board members are locked up for 6 months from selling stock.
  5. All new IPOs stopped
  6. PBOC slashed rates and eased reserve requirements.
  7. Chinese investors are now allowed to use their properties as collateral to buy stocks.

  Aside from the fact that they are doing exactly the opposite of what should be done I find it telling that they are so willing to slash rates and devalue the yuan.

  As mentioned, this needn’t be a problem if they simply let the market correct and find its equilibrium.

  They haven’t done that and this is what has caught my attention more than anything else.

  The Debt Component and What This May Mean for the Yuan

  Debt is important to understand as debt is the “gasoline” added to any trade. Debt, or more correctly put, leverage amplifies gains and losses and as such is both the prozac as well as the viagra of global markets. I wrote extensively about the US carry trade in our USD Bull Report but will summarise an important point.

  China boasts an estimated US$3 trillion borrowed and invested in various Chinese assets. A decline in those assets values materially affects investors who’ve leveraged their positions, but what really really matters is when the funding currency appreciates and those investors who are short dollars are forced to buy back their dollar positions.

  Now this is where Greece and China are interconnected. Greece, as mentioned, threatens to be a poster child of Europe and the euro. This is naturally bullish for the euro in the same way that spandex pants look good on Angela Merkel – not so much! 

  The euro against the USD

  In Europe we have intervention in the markets by Brussels. They may save Greece from introducing the drachma and devaluing it, and having German banks forced to realise losses but they can’t stop the market from devaluing the euro. Risk off is “on” and the dollar is moving higher.

  In China we have Beijing intervening in the markets and we have to wonder what those US$3 trillion in the USD carry trade are invested in and what they look like right now.

  Consider that globally we are seeing liquidity drying up and global capital flows moving into shorter term paper – US paper.

  Two months ago I wrote about capital moving into shorter maturity paper:

  Bond yields are rising sharply on the long end of the curve (long duration bonds) in favour of the short end. This is a rational move. Liquidity is crashing on all the long dated maturities and as you can see yields are breaking out. It makes perfect sense to sell the long end of the yield curve given the fundamentals. What we’re witnessing is that cash flooding into the shorter duration maturities.

  When looking to understand China I believe that the probability of of a devaluation of the yuan has just risen markedly.

  About the Yen?

  I would be remiss in mentioning the yen from any discussion on global capital flows. The yen goes lower. We’ve been saying that for 2 years now and I won’t rehash thoughts here. Few seem to understand that the devaluation of the yen exacerbates the probability of a Chinese hard landing and that increases the risks of a devaluation of the yuan.

  A rising dollar is globally deflationary. What happens when we get deflation in China?

  China absolutely cannot have deflation and will be stuck between attempting to maintain a strong currency and stimulating their economy. This threatens to rapidly become a situation where they run out of “palatable” options and the least painful will be to devalue the yuan. Both politically and economically it will be acceptable. Most importantly it will allow those in power to stay in power.

  To summarize, China has:

  • A huge USD carry trade which threatens to unwind
  • A trigger happy PBOC who have shown no restraint in slashing interest rates in order to support the market.
  • Increasing pressures being put on domestic competitiveness due to a strong currency

  Soros famously said to “find the premise which is false and bet against it”. When the market’s premise is false, coincidentally the pricing of assets reflects this. Looking at the futures and options markets right now the market is NOT expecting a Chinese devaluation. We think this is a mistake.

  The market typically has the collective mentality of a hive, and a pool hall understanding of the global interconnectedness that drives global capital flows. At the local level it believes in the ability of central bankers to forever prop markets. It believes in imposing rules and laws to circumvent free market forces, and it believes this because it views the world through the microcosm of an extremely limited timeframe and geography, much like a field mouse in a corn field surveying its landscape, unable to see the harvesters warming up.

  I will leave you with one last thought. This time from the brilliant Albert Edwards of SocGen

  We have long believed that China’s growth and deflation problems will necessitate a devaluation of the renminbi in a strong dollar environment. There is mounting evidence that this process may already be underway as the currency falls to a 28-month low against the dollar…

   

  In the current deflationary environment the Chinese authorities simply can no longer tolerate the continued appreciation of their real exchange rate caused by the dollar link.

  – Chris

  

  

  

  

• China's Record Dumping Of US Treasuries Leaves Goldman Speechless

  On Friday, alongside China’s announcement that it had bought over 600 tons of gold in “one month”, the PBOC released another very important data point: its total foreign exchange reserves, which declined by $17.3 billion to $3,694 billion.

  

   

  We then put China’s change in FX reserves alongside the total Treasury holdings of China and its “anonymous” offshore Treasury dealer Euroclear (aka “Belgium”) as released by TIC, and found that the dramatic relationship which we first discovered back in May, has persisted – namely virtually the entire delta in Chinese FX reserves come via China’s US Treasury holdings. As in they are being aggressively sold, to the tune of $107 billion in Treasury sales so far in 2015.

  

   

  We explained all of his on Friday in “China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium“, and frankly we have been surprised that this extremely important topic has not gotten broader attention.

  Then, to our relief, first JPM noticed. This is what Nikolaos Panigirtzoglou, author of Flows and Liquidity had to say on the topic of China’s dramatic reserve liquidation

  Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.

  JPM conclusion is actually quite stunning:

  This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2).

  

  Incidentally, $520 billion is roughly triple what implied Treasury sales would suggest as China’s capital outflow, meaning that China is also liquidating some other USD-denominated asset(s) at a feverish pace. So far we do not know which, but the chart above and the magnitude of the Chinese capital outflow is certainly the biggest story surrounding the world’s most populous nation: what is happening in its stock market is just a diversion.

  At this point JPM goes into a tangent explaining what the practical implications of a massive capital outflow from China are for the global economy. Regular readers, especially those who have read our previous piece on the collapse in the Petrodollar, the plunge in EM capital inflows, and their impact on capital markets and global economies can skip this part. Those for whom the interplay of capital flows and the global economy are new, are urged to read the following:

  One way that slower EM capital flows and credit creation affect the rest of the world is via trade and trade finance. Trade finance datasets are unfortunately not homogeneous and different measures capture different aspects of trade finance activity. Reuters data on trade finance only aggregates loan syndication deals, which have mandated lead arrangers and thus capture the trends in the large-scale trade lending business, rather than providing an all-inclusive loans database. Perhaps the largest source of regularly collected and methodologically consistent data on trade finance is credit insurers (see “Testing the Trade Credit and Trade Link: Evidence from Data on Export Credit Insurance”, Auboin and Engemann, 2013). The Berne Union, the international trade association for credit and investment insurers with 79 members, includes the world’s largest private credit insurers and public export credit agencies. The volume of trade credit insured by members of the Berne Union covered more than 10% of international trade in 2012. The Berne Union provides data on insured trade credit, for both short-term (ST) and medium- and long-term transactions (MLT). Short-term trade credit insurance accounts for the vast majority at around 90% of new business in line with IMF estimates that the vast majority 80%-90% of trade credit is short term.

   

  

   

  Figure 4 shows both the Reuters (quarterly) and the Berne Union (annual) data on trade finance loan syndication and trade credit insurance volumes, respectively. The quarterly Reuters data showed a clear deceleration this year from the very high levels seen at the end of last year. Looking at the first two quarters of the year, Reuters volumes were down by 25% vs. the 2014 average (Figure 4). The more comprehensive Berne Union annual volumes are only available annually and the last observation is for 2014. These data showed a very benign trade finance picture up until the end of 2014. Trade finance volumes had been trending up since 2010 at an annual pace of 8.8% per annum (between 2010 and 2014) which is faster than global nominal GDP growth of 6% per annum, i.e. the trend in trade finance had been rather healthy up until 2014, but there are indications of material slowing this year. This is also reflected in world trade volumes which have also decelerated this year vs. strong growth in previous years (Figure 5).

  Summarizing the above as simply as possible: for all those confounded by why not only the US, but the global economy, hit another brick wall in Q1 the answer was neither snow, nor the West Coast strike, nor some other, arbitrary, goal-seeked excuse, but China, and specifically over half a trillion in still largely unexplained Chinese capital outflows.

  * * *

  But wait, because it wasn’t just JPM whose attention perked up over the weekend. This morning Goldman Sachs itself had a note titled “the Curious Case of China’s Capital Outflows“:

  China’s balance of payments has been undergoing important changes in recent quarters. The trade surplus has grown far above previous norms, running around $260bn in the first half of this year, compared with about $100bn during the same period last year and roughly $75bn on average during the previous seven years. Ordinarily, these kinds of numbers would see very rapid reserve accumulation, but this is not the case. Partly that is because China’s services balance has swung into meaningful deficit, so that the current account is quite a bit lower than the headline numbers from trade in goods would suggest. But the more important reason is that capital outflows have become very sizeable and now eclipse anything seen in the recent past.

   

  Headline FX reserves in the second quarter fell $36bn, from $3,730bn at end-March to $3,694bn at end-June. While we estimate that there was a large negative valuation effect in Q1 (due to the drop in EUR/$ on the ECB’s QE announcement), there was likely a positive valuation effect in Q2, which we put around $48bn. That means that our proxy for reserve accumulation in the second quarter is around -$85bn, i.e. the actual “flow” drop in reserves was bigger than the headline numbers suggest because of a flattering valuation effect. If we put that number together with the trade surplus in Q2 of $140bn, net capital outflows could be around -$224bn in the quarter, meaningfully up from the first quarter. There are caveats to this calculation, of course. There is obviously the services deficit that we mention above, which will tend to make this estimate less dramatic. It is also possible that our estimate for valuation effects is wrong. Indeed, there is some indication that valuation-related losses in Q1 were not nearly as large as implied by our calculations. But even if we adjust for these factors, net capital outflows might conceivably have run around -$200bn, an acceleration from Q1 and beyond anything seen historically.

  Granted, this is smaller than JPM’s $520 billion number but this also captures a far shorter time period. Annualizing a $224 billion outflow in one quarter would lead to a unprecedented $1 trillion capital outflow out of China for the year. Needless to say, a capital exodus of that pace and magnitude would suggest that something is very, very wrong with not only China’s economy, but its capital markets, and last but not least, its capital controls, which prohibit any substantial outbound capital flight (at least for ordinary people, the Politburo is clearly exempt from the regulations for the “common folk”).

  Back to Goldman:

  The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.

  In other words, for once Goldman is speechless, however it is quick to point out that what traditionally has been a major source of reserve reflow, the Chinese current and capital accounts, is no longer there.

  It also means that what may have been one of the biggest drivers of DM FX strength in recent years, if only against the pegged Renminbi, is suddenly no longer present.

  While the implications of this on the global FX scene are profound, they tie in to what we said last November when explaining the death of the petrodollar. For the most part, the country most and first impacted from this capital outflow will be China, something its stock market has already noticed in recent weeks.

  But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China’s Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman… and this website of course.

  Finally, if China’s selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.

  Or let us paraphrase: how soon until QE 4?

  

  

  

  

  

• GOP Enters Panic Mode: Des Moines Register Calls For Trump To Withdraw From Presidential Race

  When Donald Trump announced he would give 2016 another try as a republican presidential candidate, the GOP saw him as a mild nuisance. Little did they appreciate just how big of a “nightmare” he would very soon become, a nightmare which now sees the flamboyant billionaire whose self-reported net worth fluctuates daily with a double digit percentage lead over his closest competitor Scott Walker.

  

   

  But the biggest mistake the GOP did is they inability to comprehend that either the US public enjoys being trolled, or is just so sick of the left/right paradigm, it will gladly latch on to anyone, even the most farcical, self-lampooning candidate, who promises a break from the old routine which has proven not to work for the common American.

  The latest confirmation that the Trump “nightmare” is causing not only sleepless nights but also panic attacks for a GOP that is scrambling to respond to the Donald’s juggernaut is not only open attempts at caricature, which however merely feed Trump’s ego and push him to troll his accusers even more, but to use the influential Des Moines Register, Iowa’s largest newspaper and a critical voice when it comes to endorsing, or panning, presidential candidates in this first caucus state, to call on Donald Trump to drop out of the 2016 presidential race.

  Officially the Register’s position was simply in escalation to the furor over the real estate magnate’s weekend comments about Sen. John McCain’s service during the Vietnam War. As Fox reports, in an editorial piece published late Monday, the Register said Trump’s comments were “not merely offensive, they were disgraceful. So much so, in fact, that they threaten to derail not just his campaign, but the manner in which we choose our nominees for president.”

  The paper, the most influential in the first-in-the-nation caucus state, went on to say that if “[Trump] had not already disqualified himself through his attempts to demonize immigrants as rapists and drug dealers, he certainly did so by questioning [McCain’s] war record.”

  Unofficially, it is called throwing everything at the wall and hoping something sticks.

  Following this weekend’s firestorm, Trump – who clearly enjoys playing the starring role in every social scandal – appeared to back off some of his comments Monday, telling Fox News’ Bill O’Reilly that “if there was a misunderstanding, I would totally take that back.” However, Trump also said he “used to like [McCain] a lot. I supported him … but I would love to see him do a much better job taking care of the veterans.”

  Whether Trump’s apology is sincere or not, the nationwide response he got for his comments, coupled with his popularity surge, will merely encourage him. And since for the real estate magnate, advertising is everything, the fact that he has become the only topic of discussion, whether at the water cooler or during the prime time news circuit, expect the Trump-eting to continue to whatever bitter end is in store.

  The Register, which broke a 40-year run of backing Democrats in presidential elections by endorsing Mitt Romney in 2012, was the latest voice to pile on Trump for his comments, joining veterans groups, Republican colleagues and President Obama’s spokesman, who defended McCain and called on Trump to apologize.

   

  Paul Rieckhoff, founder of Iraq and Afghanistan Veterans of America, said Monday that Trump’s “asinine comments” were “an insult to everyone who has ever worn the uniform — and to all Americans.”

   

  White House Press Secretary Josh Earnest said veterans “are entitled to an apology.”

  The bottom line is that the GOP did not take Trump seriously, which is precisely what he wanted. And now that underestimation is costing the GOP dearly, as it scrambles with damage control which merely adds insult to injury, because conventional retaliation that may have worked with any other candidate simply strengthens Trump.

  Then again, considering America’s artificially polarizing left/right model – all of it controlled by unelected corporations and bailed out Wall Street banks – has failed, and a vote for Trump is not “a vote for Trump” but a vote against America’s broken political system, perhaps it is the case that the president the US truly needs, and the one person the American electorate will select, is this guy.

  

  

  

  

  

  

• Gold Warns Again

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  With all the problems right now beyond Greece and China, from Canada’s “puzzling” recession to Brazil’s unfolding disaster, and even the still-“shocking” US economic slump, it is interesting that gold garnered the most attention in early Monday trading. The fact that gold prices were slammed in Asian trading was certainly significant, but that really isn’t why gold is being highlighted all over the world. With gold prices at a five-year low, economists have some “market” indication that finally, they think, is moving in their favor, thus distracting, minutely, from all the global conflagration.

  “We have breached significant support levels, we know U.S. rate hikes are coming, there is no inflation and there is no catalyst to hold gold when other markets are doing better,” Societe Generale analyst Robin Bhar said.

  It is far more indirect than in 2013 when economists were positively crowing about the slams in gold, but the same basic setup remains even if almost coded; “U.S. rate hikes” are supposed to occur when the FOMC judges the US economy, and the globe by extension, quite sufficient so the drastic fall in gold is once more an indication, though indirect this time, that all will be well soon enough. You would think that after being so wrong about gold in 2013 that economists would be far more careful about appealing in that direction, and maybe they are since they have so far remained, as noted above, more muted than openly projecting great economic recovery with low gold prices this time.

  

  That may itself be significant, in that while economists remain gold haters (literally) they aren’t, contra two years ago, declaring decisively its death as evidence of at the same time central bank omniscience. Of course, gold prices are not limited to simple-minded appeals upon interest rates or even differentials, as clearly mainstream commentary continues to have great trouble with gold behavior in any direction.

  The exact reason for the selling was unclear. Recent strength in the U.S. currency and expectations for higher U.S. rates have undermined the case for holding gold and other precious metals, while analysts also noted that China imported a record volume of gold in 2013 that has created an oversupply situation. Still, the swiftness of the decline surprised traders and resulted in two separate trade halts in U.S. gold futures.

  Again, 2013 provides a guide as to why gold prices may be declining in sharp moves, especially right at the open or in weaker trading hours, and it has very little to do with interest rates apart from fixed income suggesting the same factors about the “dollar.” Whether it is growing unease about the global economic picture or the “sudden” recurrence of financial irregularity almost wherever you wish to gaze, the “dollar” is once more wreaking havoc. This isn’t controversial at all, but somehow economists can miss that gold is global and universal collateral and when the eurodollar system is stressed it becomes activated in that manner. The correlations alone are strongly suggestive of these financial factors.

  

  The relationship between gold and the real, for instance, is quite indicative of eurodollar financing trends. Apart from the sharp rise in gold just before the January 15 franc event, gold and the real have been almost inseparable in both timing and degree.

  The damage extends beyond that affiliation, however, as the “dollar” (bank balance sheet factors) is again moving quickly. Copper has been pushed back under $2.50 and crude oil, at least at WTI spot, is nearly back into the $40’s again for the first time in months (despite recent drawdowns in both inventory and production).

  

  In other words, there was a brief respite once Greece slipped on its noose and the Chinese rewrote their stock market, but that short enthusiasm hasn’t at all disrupted the renewed wholesale retreat. Since early to mid-May, the “dollar” has been spotty in its effects, but those negative pressures have clearly started to unify into renewed irregularity in late June and early July. In that respect, Greece and China may have just been visible sideshows of all that.

  

  Even the Swiss franc has found its way below 0.963, a low not posted since April. The catalyst may be the FOMC’s increased publicity about its preferred intentions to get “markets” to reflect the recovery and economy that isn’t there, but even that is rather unclear as eurodollar futures aren’t really anymore suggestive of that potential then they were back in March.

  

  The futures curve had sunk to an unusual level in early July (maybe that was Greece), so recent trading has simply pushed the curve back into the same cluster as dominated in May. In other words, it doesn’t appear, and certainly not decisive, that “higher U.S. interest rates” is actually being predicted here, rendering the mainstream ideas about gold once more grasping at straws.

  In my view, the “dollar’s” destructive tendencies here are more primal rather than exclusively policy-specific. I think in this accumulated view these “dollar” proxies suggest that regardless of the FOMC’s stated tendencies there is already more than a fair amount of volatility and disorder evident not just in these markets but in the global economy (“unexpected” only to economists). Thus, any perceptions about the FOMC raising rates (whatever they think they can) is just another element of amplification of that existing and underlying syndrome and distress.

  The initial “dollar” behavior after the March FOMC meeting strengthens that reading as I think it amounted to not better fortune but rather just some less distant hope that the without a suicidal FOMC “dollar” pressures might on their own ease and abate – that without a forced policy shift the underlying torment might be able to in shorter order resume more stable behavior and existence free from further depressive influence. The “dollar” and fixed income world had grown so bearish especially after December 1 that it was due for at least a minor retracement on even the most marginal of hope. I really believe that was the animating factor of credit and “dollars” out of 2013; that gold correctly predicted growing eurodollar problems that were parallel and related to fomenting economic decay. The FOMC’s role was simply to further antagonize those concerns, which they did repeatedly on the flimsiest of narratives.

  Yellen’s May 6 speech about stock bubbles and “reach for yield” was thus damaging in that respect; that the FOMC was instead going to push on with its amplification of negative pressure and send the world further into its tailspin regardless of how much discontent and disquiet was already evident.

  The action in gold in 2013 was a warning about the “dollar”, a warning that went completely unheeded yet has been largely fulfilled. Current gold prices and the rest of the “dollar’s” proxies are, if only in smaller doses this time, suggesting the same tendency. In short, while the magnitude might be diminished now that is only because the time component is so much shorter and the “wavelength” so much more widespread; the point of no-return may be at hand or already surpassed.

  

  

  

  

  

• Obama Simply Switched from One War Crime Which Increases Terrorism to Another

  The Water Torture
  Facsimile of a woodcut in J. Damhoudère’s
  Praxis Rerum Criminalium,
  Antwerp, 1556

  It has now been proven beyond any shadow of a doubt that specific type of torture which the U.S. used during the Bush years was a war crime.

  Top terrorism and interrogation experts agree that torture creates more terrorists.  Indeed, the leaders of ISIS were motivated by U.S. torture.  And French terrorist Cherif Kouchi told a court in 2005 that he wasn’t radical until he learned about U.S. torture at Abu Ghraib prison in Iraq.

  

  But all Obama has done is to transition to drone assassinations which – beyond any shadow of a doubt – are a war crime (more here and here), and create more terrorists than they stop.

  As the eminent historian  Alfred McCoy notes:

  Back in 2006 readers may well have dismissed that warning about “state-sponsored murder” as improbable, even irresponsible. But now this distinguished panel [which includes former FBI director William S. Sessions, former Army intelligence chief Claudia Kennedy, and former DEA director Asa Hutchinson] tells us that is exactly what has happened. Under President Obama, the torture issue has faded not from reform but because we are no longer taking prisoners since, as this report states, “the regime of capture and detention has been…supplanted in large measure by the use of drones.” By killing high value targets with drones, “the troublesome issues of how to conduct detention and interrogation operations are minimized.” In effect, we have slid down the slippery slope of human rights abuse to find extra-judicial killings awaiting us like an unwelcome specter at the bottom.

  Postscript: In reality, the Obama regime has simply replaced Bush’s torture techniques with ones “that emphasize psychological torture,” and by outsourcing torture to our “allies.”

  And Obama is committing other war crimes which increase terrorism, like – according to a group of CIA officers – arming Al Qaeda in Libya so they would overthrow Gaddaffi.

  

  

  

  

• Wall Street Prepares To Reap Billions From Another Main Street Wipe Out

  On Monday evening, we noted that market participants are reducing the size of their trades and turning to derivatives in order to avoid the perils associated with what are increasingly illiquid markets. 

  While we’ve been pounding the table on bond market liquidity for years, the rest of the world (operating on the standard 2-3 year time lag) has just begun to wake up to how thin markets have become. Now, pundits, analysts, billionaire bankers, and incorrigible corporate raiders alike are shouting from the rooftops about the pitfalls of illiquidity. The secondary market for corporate credit has received the lion’s share of the attention (for reasons we outlined yesterday) and as Carl Icahn was at pains to explain to Larry Fink last week, ETFs are a large part of the problem. 

  The story is simple. Shrinking dealer inventories (the result of a post-crisis regulatory regime wherein the term “prop trader” is taboo) have made it harder to transact in size without having an outsized effect on prices for corporate bonds. Meanwhile, artificially suppressed borrowing costs and the attendant hunt for yield have led to record corporate issuance and voracious investor demand. In short, the primary market is booming while the secondary market has become a veritable no man’s land. If you need an analogy, try this: the crowded theatre is getting larger and more crowded while the exit keeps getting smaller.

  The proliferation of ETFs has made it easier for the retail crowd to chase yield in corners of the bond market where they might not have dared to venture before, and this has only served to create still more demand for things like high yield credit. 

  Now, with the US staring down a rate hike cycle, and with some corners of the HY market (see HY energy for instance) facing a number of insurmountable headwinds going forward, the fear is that the retail crowd will all head for the exits at once, leaving fund managers with a very nondiversifiable, unidirectional flow which will force them to sell the underlying assets into illiquid markets. Due to a generalized lack of market depth, that selling pressure has the potential to trigger a rout. Of course a sharp decline in prices would send still more panicked retail investors to the exits necessitating even more asset sales by fund managers and so on, and so forth.

  But don’t take our word for it, here’s WSJ with more on how Wall Street is preparing to profit from an unwind in Main Street’s ETF and mutual fund portfolios:

  Wall Street is preparing for panic on Main Street.

   

  Hedge funds are lining up to profit from potential trouble at some “alternative” mutual funds and bond exchange-traded funds that have boomed in popularity among retirees and other individual investors.

   

  Financial advisers have pushed ordinary investors into those funds in search of higher returns, a strategy that has come into favor as Federal Reserve benchmark interest rates remain near zero. But many on Wall Street worry the junk bonds, bank loans and esoteric investments held by some of those funds will be extremely hard to sell if the market turns, leaving prices pummeled in a rush for the exits.

   

  Concerns about such scenarios have been escalating for some time. Now, investment firms such as Leon Black’s Apollo Global Management LLC and Oaktree Capital Management LP are laying the groundwork to cash in if they come to pass.

   

  Apollo has been raising money from wealthy investors and portfolio managers for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: “ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit.”

   

  Guided by a similar outlook, Reef Road Capital Management LLC, led by former J.P. Morgan Chase & Co. proprietary trader Eric Rosen, has been betting against, or shorting, exchange-traded funds that hold junk bonds and buying options that will pay off if the value of these high-yield securities falls.

   

  The hedge funds are taking aim at what is regarded by many on Wall Street as a weak spot in the markets. “Liquid-alternative”” funds have emerged as one of the hottest products in finance, fueled by a promise to deliver hedge-fund-style investing to the masses. They use many of the same strategies as hedge funds, with wagers both on and against markets, but are open to less-wealthy investors with fees closer to mutual-fund standards.

   

  
  

   

  Liquid-alternative funds manage a cumulative $446 billion, according to fund tracker Lipper, up from $83 billion at the start of 2009. High-yield bond ETFs, another popular product, manage more than $38 billion, and in the week ended last Wednesday took in their biggest inflows on record at $1.5 billion, Lipper said.

   

  Activist investor Carl Icahn brought the issue to the fore last week, saying at an investment conference that he feared a bubble was expanding in junk bonds thanks to the rush into high-yield exchange-traded funds run by companies like BlackRock Inc.

   

  Managers of ETFs and liquid-alternative funds said they are well-protected against any tumult. Some have lines of credit to cover redemptions if needed and point to research showing that even during past crises, mutual-fund investors generally withdraw no more than 2% of assets each month.

  When Reuters first reported that fund managers were lining up emergency liquidity lines like the ones mentioned above, we smelled trouble and were quick to note that not only did that not bode well for the market, but that funding redemptions with borrowed cash is a fool’s errand and depends upon the market stress being transitory (see here and here). But beyond that, it betrayed the extent to which the country’s largest and most influential ETF issuers have become worried about just the type of meltdown the hedge funds mentioned above are banking on.

  If you want a candid take on just what the smart money thinks is ahead for all of the retail money that’s been herded into esoteric ETFs, we’ll leave you with the following from David Tawil, president of hedge fund Maglan Capital, who spoke to WSJ:

  “They are going to be toast. It will be one of our first levels of shorting the moment we start to see cracks, because it’s ripe with retail, emotional investors.”

   

  

  

  

  

  

• 470,000 Vehicles At Risk After Hackers "Take Control & Crash" Jeep Cherokee From A Sofa 10 Miles Away

  In what is being called "the first of its kind," Wired.com reports that hackers, using just a laptop and mobile phone, accessed a Jeep Cherokee's on-board systems (via its wireless internet connection), took control and crashed the car into a ditch from 10 miles away sitting on their sofa. As The Telegraph details, the breach was revealed by security researchers Charlie Miller, a former staffer at the NSA, and Chris Valasek, who warned that more than 470,000 cars made by Fiat Chrysler could be at risk of being attacked by similar means. Coming just weeks after the FBI claimed a US hacker took control of a passenger jet he was on in the first known such incident of its kind, the incident shows just how vulnerable we are to modern technology.

   

   

  As The Telegraph reports, the hackers (security experts) worked with Andy Greenberg, a writer with tech website Wired.com, who drove the Jeep Cherokee on public roads in St Louis, Missouri…

  In his disturbing account Greenberg described how the air vents started blasting out cold air and the radio came on full blast when the hack began.

   

  The windscreen wipers turned on with wiper fluid, blurring the glass, and a picture of the two hackers appeared on the car’s digital display to signify they had gained access.

   

  Greenberg said that the hackers then slowed the car to a halt just as he was getting on the highway, causing a tailback behind him – though it got worse after that.

   

  He wrote: ‘The most disturbing maneuver came when they cut the Jeep’s brakes, leaving me frantically pumping the pedal as the 2-ton SUV slid uncontrollably into a ditch.

   

  ‘The researchers say they’re working on perfecting their steering control – for now they can only hijack the wheel when the Jeep is in reverse.

   

  ‘Their hack enables surveillance too: They can track a targeted Jeep’s GPS coordinates, measure its speed, and even drop pins on a map to trace its route.’

   

  The hack was possible thanks to Uconnect, the Internet connected computer feature that has been installed in fleets of Fiat Chrysler cars since late 2013.

   

  It controls the entertainment system, deals with navigation and allows phone calls.

   

  The feature also allows owners to start the car remotely, flash the headlights using an app and unlock doors.

   

  But according to Miller and Valasek, the on-board Internet connection is a ‘super nice vulnerability’ for hackers.

   

  All they have to do is work out the car’s IP address and know how to break into its systems and they can take control.

  In a statement to Wired.com Fiat Chrysler said:

  "Under no circumstances does FCA condone or believe it’s appropriate to disclose ‘how-to information’ that would potentially encourage, or help enable hackers to gain unauthorised and unlawful access to vehicle systems.

   

  ‘We appreciate the contributions of cybersecurity advocates to augment the industry’s understanding of potential vulnerabilities. However, we caution advocates that in the pursuit of improved public safety they not, in fact, compromise public safety."

  *  *  *

  

  

  

  

  

• So You Say You "Don't" Want A Revolution?

  Submitted by Dmitry Orlov via Club Orlov blog,

  Over the past few months we have been forced to bear witness to a humiliating farce unfolding in Europe. Greece, which was first accepted into the European Monetary Union under false pretenses, then saddled with excessive levels of debt, then crippled through the imposition of austerity, finally did something: the Greeks elected a government that promised to shake things up. The Syriza party platform had the following planks, which were quite revolutionary in spirit.

  • Put an end to austerity and put the Greek economy on a path toward recovery
  • Raise the income tax to 75% for all incomes over 500,000 euros, adopt a tax on financial transactions and a special tax on luxury goods.
  • Drastically cut military expenditures, close all foreign military bases on Greek soil and withdraw from NATO. End military cooperation with Israel and support the creation of a Palestinian State within the 1967 borders.
  • Nationalize the banks.
  • Enact constitutional reforms to guarantee the right to education, health care and the environment.
  • Hold referendums on treaties and other accords with the European Union.

  Of these, only the last bullet point was acted on: there was a lot made of the referendum which returned a resounding “No!” to EU demands for more austerity and the dismantling and selling off of Greek public assets. But a lot less was made of the fact that the results of this referendum were then ignored.

  But the trouble started before then. After being elected, Syriza representatives went to Brussels to negotiate. The negotiations generally went like this: Syriza would make an offer; the EU officials would reject it, and advance their own demands for more austerity; Syriza would make another offer, and the EU officials would reject it too and advance their own demands for even more austerity than in the last round; and so on, all the way until Greek capitulation. All the EU officials had to do to force the Greeks to capitulate was to stop the flow of Euros to Greek banks. Some revolutionaries, these! More like a toy poodle trying to negotiate for a little more kibble to be poured into its dish, if it pleases the master to do so. Stathis Kouvelakis (a Syriza member) summed up the Greek government's stance: “Here’s our program, but if we find that its implementation is incompatible with keeping the euro, then we’ll forget about it.”

  It is not as if revolutions don't happen any more. Just one country over from Greece there is a rather successful revolution unfolding as we speak: what used to be Northern Iraq and Syria is controlled by the revolutionary regime variously known as ISIS/ISIL/Daash/Islamic Caliphate. We can tell that it is a real revolution because of its use of terror. All revolutionaries deserving of the name use terror—and what they generally say is that their terror is in response to the terror of the pre-existing order they seek to overthrow, or the terror of their counterrevolutionary enemies. And by terror I mean mass murder, expropriation, exile and the taking of hostages.

  Just so that you understand me correctly, let me stress at the outset that I am not a revolutionary. I am an observer and a commentator on all sorts of things, including revolutions, but I choose not to participate. Remaining an observer and a commentator presupposes staying alive, and my personal longevity program calls for not being anywhere near any revolutions—because, as I just mentioned, revolutions involve mass murder.
   

  Good old Uncle Joe. The kids loved him.

  In the case of the French revolution, it started with liberté-égalité-fraternité and proceeded swiftly to guilliotiné. The Russian revolution of 1917 remains the gold standard for revolutions. There, thanks to Uncle Joe, so-called “red terror” went on and on, eventually claiming millions of victims. Mao and Pol Pot are also part of that revolutionary pantheon. The American revolution wasn't a revolution at all because the slave-owning, genocidal sponsors of international piracy remained in power under the new administration. Nor does the February 2014 putsch in the Ukraine qualify as a revolution; that was an externally imposed violent overthrow of the legitimate government and the installation of a US-managed puppet regime, but, as in the American Colonies, the same gang of thieves—the Ukrainian oligarchs—continue to rob the country blind just as before. But if the Nazi thugs from the “Right Sector” take over and kill the oligarchs, the government officials in Kiev and their US State Dept./CIA/NATO minders, and then proceed with a campaign of “brown terror” throughout the country, then I will start calling it a revolution.
   

  * * *

  The fact of mass murder does not automatically a revolution make: you have to make note of who is getting killed. So, if the dead consist of lots of volunteers, recruits, mercenaries, plus lots of nondescript civilians, that does not a revolution make. But if the dead include a good number of oligarchs, CEOs of major corporations, bankers, senators, congressmen, public officials, judges, corporate lawyers, high-ranking military officers, then, yes, that's starting to look like a proper revolution.

  Other than big huge pools of blood littered with the corpses of high-ranking representatives of the ancien régime, a revolution also requires an ideology—to corrupt and pervert. In general, the ideology you have is the ideology you make revolution with. It stands to reason that if you don't have an ideology, it's not really a revolution. For instance, the American Colonists had no ideology—just some demands. They didn't want to pay taxes to the British crown; they didn't want to maintain British troops; they didn't want limits on the slave trade; and they didn't want restrictions on profiting from piracy on the high seas. That's not an ideology; that's just simple old greed. With the Ukrainian “revolutionaries,” their “ideology” pretty much comes down to the statements “Europe is wonderful” and “Russians suck.” That's not an ideology either; the former is wishful thinking; the latter is simple bigotry.

  Taking the example of ISIS/ISIL/Daash/Islamic Caliphate, they are Islamists, and so the ideology they corrupt and pervert is Islam, with its Sharia law. How? Islamist scholars have been most helpful by compiling this top-ten list:

  1. It is obligatory to consider Yazidis as “People of the Scripture.”
  2. It is forbidden in Islam to deny women their rights.
  3. It is forbidden in Islam to force people to convert.
  4. It is forbidden in Islam to disfigure the dead.
  5. It is forbidden in Islam to destroy the graves and shrines of Prophets and Companions.
  6. It is forbidden in Islam to harm or mistreat Christians or any “People of the Scripture.”
  7. Jihad in Islam is a purely defensive struggle. It is not permissible without the right cause, the right purpose, and the right rules of conduct.
  8. It is forbidden in Islam to kill emissaries, ambassadors, and diplomats — hence it is forbidden to kill journalists and aid workers.
  9. Loyalty to one’s nation is permissible in Islam.
  10. It is forbidden in Islam to declare a Caliphate without consensus from all Muslims.

  But, as Lenin famously put it, “If You Want to Make an Omelet, You Must Be Willing to Break a Few Eggs.” And if you want to make a revolution, then you must be willing to pervert your ideology. Those Islamist scholars who eagerly exclaim “That's not Islam! Islam is a religion of peace and tolerance!” are missing the point: the ideology of ISIS/ISIL/Daash/Islamic Caliphate is still Islam—revolutionary Islam.

  The example of ISIS/ISIL/Daash/Islamic Caliphate is germane to the topic of Greece, because it is a contemporary example of what is definitely a revolution, and it is taking place just one country over from Greece. But the ideology of Syriza is not Islam—it's socialism, and philosophically they are Marxists. And so a better example for Syriza to follow, were they to suddenly stop being Europe's pathetic poodles and don the mantle of fearless, heroic revolutionaries, is still the good old Russian revolution of 1917.
   

  * * *

  As I mentioned, one of the most important tools of a revolution is terror. In Russia, revolutionary terror was called “red terror,” which, the revolutionaries claimed, arose in opposition to “white terror” of the Russian imperial regime, with its racist bigotry (Jews weren't allowed in any of the major cities), numerous forms of oppression, some major, some quite petty, and rampant corruption. An interesting feature of the Russian revolution is that the terror started several years prior to the event.

  Let us pause for a second to consider why revolutionary terror is necessary. A revolution is a drastic change in the direction of society. Left alone, society tends to worsen its worst tendencies over time: the rich get richer, the poor get poorer, the police state becomes more oppressive, the justice system becomes more riddled with injustice, the military-industrial complex produces ever less effective military hardware for ever more money, and so on. This is a matter of social inertia: the tendency of objects to travel in a straight line in absence of a force acting at an angle to its direction of motion. The formula for inertia is
   

  p=mv

  where p is inertia, m is mass and v is velocity.

  To make a radical course change, revolutionaries have to apply force, counteracting the social inertia. To make it so that it is within their limited means to do this, they can do two things: reduce v, or reduce m. Reducing v is a bad idea: the revolution must not lose its own momentum. But reducing m is, in fact, a good idea. Now, it turns out that, with regard to social momentum, most of the mass that gives rise to it resides in the heads of certain classes of people: government officials, judges and lawyers, police officers, military officers, rich people, certain types of professionals and so on.

  The rest of the population is much less of a problem. Suppose some revolutionaries show up and tell them that

  • they don't have to worry about paying taxes (because we are confiscating the property of the rich),
  • medicine and education are now free, 
  • those with mortgages can stop making payments; they automatically own their real estate free and clear
  • renters now automatically own their place of residence,
  • employees are automatically majority stockholders in their businesses,
  • they should fill out an application if they want a free (newly liberated) parcel of land to farm,
  • there is a general amnesty and their loved ones who have been locked up are coming home,
  • ration cards are being issued to make sure that nobody ever goes hungry again,
  • the homeless are going to be moving in with those whose residences are deemed unduly spacious,
  • they are now their own police and are in charge of patrolling their neighborhoods with the revolutionary guards available as back-up, and
  • if any non-revolutionary authorities, be they the former police or the former landlords, come around and bother any of them, then these traitors and impostors shall face swift, on-the-spot revolutionary justice.

  Most regular people would think that this is a pretty good deal. However, government officials, the police, military officers, judges, prosecutors, rich people whose property is to be confiscated, corporate officers and shareholders, those living on fat corporate or government pensions, etc., would no doubt think otherwise. The revolutionary solution is to take them as hostages, exile them, and, to make an example of the most recalcitrant and obstructive, kill them. This dramatically reduces m, allowing the revolutionaries to effect drastic course changes even as v increases. I compiled this list because it would be such an easy sell—piece of cake, a slam-dunk, a no-brainer. But I lack the uncontrollable desire to smash eggs and the insatiable appetite for omelets. As I mentioned, I am no revolutionary—just an observer.

  In the run-up to the Russian revolution, from 1901 through 1911, there were 17,000 such casualties. In 1907, the average toll was 18 people a day. According to police records, between February 1905 and May 1906, there were among those killed:

  • 8 governors
  • 5 vice-governors and other regional administrators
  • 21 chiefs of police, heads of municipalities and wardens
  • 8 high-ranking police officers
  • 4 generals
  • 7 military officers
  • 79 bailiffs
  • 125 inspectors
  • 346 police officers
  • 57 constables
  • 257 security personnel
  • 55 police service personnel
  • 18 state security agents
  • 85 government employees
  • 12 clergy
  • 52 rural government agents
  • 52 land-owners
  • 51 factory owners and managers
  • 54 bankers and businessmen

  Good old Zinka Schoolteacher, Revolutionary, Assassin

  Clearly, these terrorist acts must have had some not inconsiderable effect in softening the target, making the government overthrow easier. This was not an accident but a matter of well-articulated revolutionary policy. The concept of “red terror” was first introduced by Zinaida Konoplyannikova, a rural schoolteacher who first got on the police radar for being an atheist and was later convicted as a terrorist for shooting a notorious general-major at point-blank range. At her trial in 1906, she said this: “The [Socialist-Revolutionary] Party has decided to counter the white, yet bloody, terror of the government with red terror…” She was executed by hanging that same year, aged 26.

  After the revolution, red terror became government policy. Here is Lenin's response to being questioned by Communist party members about his “barbaric methods”: “I reason soberly and categorically: what is better—to imprison a few tens or hundreds provocateurs, guilty or innocent, acting consciously or unconsciously, or to lose thousands of soldiers and workers? The former is better. Let them accuse me of any deadly sins and violations of liberty—I plead guilty, but the interests of the workers win.”
   

  Grandpa Lenin belting out a tune Grandpa Trotsky going wild on the harmonica

  Trotsky produced a particularly crisp definition of “red terror.” He called it “a weapon to be used against a social class that has been condemned to extinction but won't die.”

  Estimates of the exact number of victims of “red terror” vary. Robert Conquest claimed that between 1917 and 1922 the revolutionary tribunals executed 140,000 people. But the historian O. B. Mozokhin, after an exhaustive study of the data available from government archives, put the number at no more than 50,000. He also noted that executions were the exception rather than the rule, and that most of those executed were sentenced for criminal rather than political acts.

  But this was nothing compared to what Stalin unleashed later on. The ideological foundation of Stalin's terror was “intensification of class struggle at the culmination of the building of socialism,” which he articulated at the plenum of the Central Committee in July of 1928. According to his logic, USSR was economically and culturally underdeveloped, surrounded by hostile capitalist states, and as long as there remained the threat of foreign military intervention with the goal of reestablishing the bourgeois order, only the preventive destruction of the remnants of “bourgeois elements” could guarantee the security and independence of the USSR. These elements included former police officers, government officials, clergy, land-owners and businessmen. The peak of Stalin's repression occurred in 1937 and 1938. During these two years 1,575,259 people were arrested, of which 681,692 were shot.

  You may be forgiven for thinking of Stalin as a psychopathic murderer, because he was certainly that, but more importantly he was a competent, and sufficiently ruthless, head of a revolutionary state. For a revolutionary regime, killing too many people is rarely a problem, but killing too few people can easily prove fatal. To play it safe, a revolutionary should always err on the side of murder. This attitude tends to pervade the entire power pyramid: if you give Stalin a memorandum recommending that 500 priests get shot, and Stalin crosses out 500 and pencils in 1000 in red pencil, then you better find 500 more priests to shoot, or the number becomes 1001 and includes you.

  This guarantee of security and independence did seem to hold. After all, there was a subsequent invasion by a hostile bourgeois capitalist state (Germany) and bourgeois order was temporarily reestablished on the territories it occupied. But there was nobody left to instigate anti-revolutionary rebellion elsewhere in the USSR because most of the would-be counterrevolutionaries were by then dead.

  Of course, this took a terrible toll on society. Here is what Putin had to say on the subject of “red terror”: “Think of the hostages who were shot during the civil war, the destruction of entire social strata—the clergy, the prosperous peasants, the Cossacks. Such tragedies have recurred more than once during the history of mankind. And it always happened when initially attractive but ultimately empty ideals were raised above the main value—the value of human life, above the rights and liberties of man. For our country this is especially tragic, because the scale was colossal. Thousands, millions of people were destroyed, sent to concentration camps, shot, tortured to death. And these were primarily people who had their own opinions, who weren't afraid to voice them. These were the most effective people—the flower of the nation. Even after many years we feel the effect of this tragedy on ourselves. We must do a great deal to make sure that this is never forgotten.”

  Given that the price is so high, perhaps it would be better after all if we just sat quietly, allowed the rich get richer as the poor get poorer, watched listlessly as the environment got completely destroyed by capitalist industrialists in blind pursuit of profit, and eventually curled up, kissed our sweet asses good-bye and died? Good luck selling that idea to young radicalized hotheads who have nothing to lose—except maybe you, if you happen to stand in their way as they change the world! No, revolution is here to stay, and one of its main weapons is terror. No matter how well we remember, the annihilation of counterrevolutionary social elements is bound to recur.
   

  * * *

  Getting back to Greece and Syriza: what if Syriza were not just a particularly fluffy breed of miniature Europoodle but actual honest-to-goodness revolutionaries, ready to do whatever it takes? How would they act differently? And what would be the result?

  Well, one thing that comes to mind immediately is that they wouldn't try to stay in the Eurozone—they would seek to destroy it. The solution is simple: no Eurozone—no Euro-debt—no problem. There is a general principle involved: never accept responsibility for that which you cannot control. Speaking from experience, suppose you invite a plumber to fix your toilet, and the plumber finds that the toilet has been Mickey-moused in multiple ways by an incompetent amateur. In this situation, the professional thing for the plumber to do is to completely obliterate that toilet. Now the solution becomes simple: install a new toilet.

  Here's a very simple one-two punch which Greece could have delivered instead of futile attempts at negotiation:

  1. Immediately announce an open-ended moratorium on all debt repayment, taking the position that Greece has no legitimate creditors within the Eurozone—it's all financial fraud at the highest levels. After a few months, the fake bail-out financial entities that magically convert garbage Eurozone debt into AAA-rated securities (because they are guaranteed by Eurozone governments) are forced to write off Greek debt. In turn, Eurozone governments, being pretty much broke, balk at refinancing them out of their national budgets, showing to the world that their guarantees aren't worth the paper they are written on. There follows a bond implosion. Shortly thereafter, the Euro goes extinct, and along with it all Eurozone debt.

   

  2. Start printing Euros without authorization from the European Central bank. When accused of forgery, make the forgery harder to detect by changing the letter at the front of the serial number from Y (for Greece) to X (for Germany). Flood Greece and the rest of the Eurozone with notionally counterfeit (but technically perfect) Euro notes. As the Euro plummets in value, institute food rationing and issue ration cards. Eventually convert from the now devalued and debased Euro to a newly reintroduced Drachma and reestablish trade links with the now “liberated” former Eurozone countries using trade deals based on barter and local currency swaps with gold reserves used to correct any minor imbalances.

  Could this have been done without any “red terror”? I doubt it. Greece is very much oligarch-ridden; even the celebrated former Syriza FM Yanis Varoufakis is the son an industrial magnate. The Greek oligarchs and the rich would have had to be rounded up and held as hostages. Numerous people in the government and in the military have a split allegiance—they work for Europe, not for Greece. They would have had to be sacked immediately and held incommunicado, under house arrest at a minimum. No doubt foreign special services would have run rampant, looking for ways to undermine the revolutionary government. This would have called for drastic preemptive measures to physically eliminate foreign spies and agents before they could have had a chance to act. And so on. This wouldn't have been a job for fluffy mini-poodles. As Stalin famously put it, “Cadres are the key to everything.” You can't make a revolution without revolutionaries.

  

  

  

  

  

• Obamanomics? More Chidren Live In Poverty Now Than During Crisis

  For all the back-patting exuberance over manipulated record high stock prices and record periods of illusory job gains, it appears the administration and its Obamanomics forgot one important thing – the children! As USA Today reports, a higher percentage of children live in poverty now than did during the Great Recession, according to a new report from the Annie E. Casey Foundation released Tuesday.

  “Where you grew up is similar to where you end up when you’re an adult,” Bloome said. “That helps perpetuate racial segregation.”

  

   

  As USA Today reports,

  About 22% of children in the U.S. lived below the poverty line in 2013, compared with 18% in 2008, the foundation's 2015 Kids Count Data Book reported. In 2013, the U.S. Department of Human and Health Service's official poverty line was $23,624 for a family with two adults and two children.

   

  

  “The fact that it’s happening is disturbing on lots of levels,” said Laura Speer, the associate director for policy reform and advocacy at the Casey Foundation, a non-profit based in Baltimore. “Those kids often don’t have the access to the things they need to thrive.” The foundation says its mission is to help low-income children in the U.S. by providing grants and advocating for policies that promote economic opportunity.

  As AECF details,

  Millions of low-income U.S. families with children face considerable daily obstacles that can threaten the entire family’s stability and lead to lifelong difficulties for their kids. A family-supporting job that provides a steady source of parental income and opportunities for advancement is critical to moving children out of poverty.

   

  

   

  But having a job, even one that pays enough to support a family, is only part of the solution. Working parents need access to paid time off to adequately care for themselves and their children. Access to affordable, high-quality, flexible child care is critical for all working parents with young children, but the need is especially great for those parents working in low-paying jobs with irregular, often erratic work hours.

   

  Even several years after the recession ended, the number of children living in low-income working families continues to increase. In 2013, one in four children, 18.7 million, lived in a low-income working family in the United States. This is 1.7 million more than in 2008. And, 27 percent of children in low-income working families are younger than age 6.

  *  *  *

  

  

  

  

  

• 'Buffett' Says Sell; BofAML Asks, Should We Listen?

  When Janet Yellen speaks, investors buy stocks (whether she tells you stock valuations are 'substantialy stretched' or not). When Warren Buffett speaks, investors listen… so when his favorite indicator is flashing a huge "sell signal" trading 80% 'expensive' to its long-term average, perhaps, as BofAML suggests, it is time to listen.

   

  On most measures, the S&P 500’s valuation remains elevated relative to history, the exceptions being Price to Normalized EPS and P/FCF. From an asset allocation standpoint, the S&P still looks attractive vs. bonds and small-caps, but trades at an historical premium to oil and gold.

  

   

  As if that was enough, BofAML further explains…

  One metric used by some (including Warren Buffett) to gauge whether the stock market is overextended is the Market Cap to GDP ratio. We show this using S&P 500 market cap below…

  

  While there are other variations…

  

   

  All of which are highly correlated and illustrate similar trends. The S&P 500 market cap to GDP ratio is 1.03, over 80% above its historical average since 1964.

  However, BofAML, provides a "different this time" silver lining – this metric may have limited utility:

  Problems with the numerator and denominator: Market Cap/GDP is analogous to Price/Sales, with all of its shortcomings and more. Price/Sales ratios do not account for structural changes in profit margins, which has been the case for the S&P 500, chiefly due to lower taxes, lower interest expense, and higher operating margins in Tech. Meanwhile, using market value or stock price as the numerator is not consistent given that sales accrue to the entire company and not just equity stakeholders. Enterprise value is more appropriate, and is particularly important today given lower leverage ratios vs. history.

   

  Geographic exposure differences: The S&P has increasingly derived sales and profits from overseas, and has thus become more tied to global GDP than US GDP. Comparing market cap to global GDP (since 1980), this metric trades a much lesser premium to its average – 30%, vs. 60% using US GDP over the same period.

   

  Mix differences: Many sectors (such as Tech, Industrials and Energy) carry a much larger weight within the US equity market than they do within the US economy. US GDP is also much more services-oriented, while S&P 500 profits are more goods-oriented.

  *  *  *
  So – no don't listen to anyone or anything apart from "buy" – when has that ever ended badly.

  

  

  

  

  

• Three Huge Reasons Why the Fed Cannot Let Rates Normalize

  The Fed continues to dangle hints of a “rate hike” in front of investors… but the reality is that as far as any significant raise in rates, its hands are tied.

   

  True, the Fed may raise rates from 0.25% to 0.3% or possible even 0.5% sometime in the next 24 months… but these moves will be largely symbolic.

   

  There are three reasons for this:

   

  1)   There are over $555 trillion in interest-rate based derivatives trades sitting on the big banks balance sheets globally.

   

  2)   The US Dollar carry trade is over $9 trillion in size.

   

  3)   Many Western welfare states would go bankrupt if rates normalized.

   

  Regarding #1… the Fed cannot risk a significant rise in rates, as doing so would potentially burst the bond bubble. Bonds have been in a bull market for over 30 years now. Today, globally the bond market is over $100 trillion in size. And there are over $555 trillion in derivatives that trade based on these bonds.

   

  This is why former Fed Chairman Ben Bernanke admitted that rates would not normalize anytime during his “lifetime” during a closed-door luncheon with several hedge funds last year. For rates to normalize (meaning rise to the historic average of 4%+) would trigger a derivatives implosion. Bernanke knows this. And current Fed Chair Janet Yellen knows it too.

   

  Given that ALL of the Fed’s actions over the last seven years have been devoted to propping up the insolvent big banks (insolvent due to their massive derivatives portfolios), the Fed cannot and will not risk any interest rate surprises.

   

  Regarding item #2 (the US Dollar carry trade), there are over $9 trillion in borrowed US Dollars sloshing around the financial system. These are effectively US Dollar (shorts) as when you borrow in one currency to fund a carry trade you are effectively shorting that currency.

   

  US Dollar deposits yield 0.25%. The Yen yields 0.001%, while the Euro yields negative 0.2% and the Swiss Franc yields negative 0.75%.

   

  In simple terms, the US Dollar is extremely attractive as a store of value relative to most major world currencies. This is why capital has been flowing into the US Dollar, pushing the US Dollar to a 10 year high.

   

  The flip side of this is that every upward move the Dollar makes against other currencies puts more pressure on the $9 trillion worth of US Dollar carry trades. This is why the US Dollar’s rally has been so aggressive: because much of it was carry trades blowing up forcing traders to cover their US Dollar shorts.

  On that note, the US Dollar is currently breaking out against most major world currencies.

   

  

   

  This is already a big enough concern that the Fed has been mentioning it in FOMC communiqués. Any rate hike will only INCREASE the interest rate differential between the US Dollar and other major world currencies… which in turn would drive even more capital to the US Dollar… and put even more pressure on the $9 trillion US Dollar carry trade.

   

  Finally, regarding #3 (the impact of interest rates on welfare states)… it is no secret that most western nations are bankrupt due to excessive social welfare expenses. Most nations rely heavily on the bond markets to fund their social spending patterns as tax revenues don’t come anywhere near enough to cover them.

   

  

   

  In the US, a 1% increase in interest rates means over $100 billion more in interest rate payments. The US is already running a deficit (meaning that it spends more than it takes in via taxes) and has been for most of the last 20 years. As the above charts who, most Western developed nations are in similar situations.

   

  If the Fed began to let rates normalize it would render numerous nations insolvent.  Every asset under the sun trades based on its risk relative to Us Treasuries (the so called “risk free rate”). If US yields rise, so will yields around the world.

   

  And the world cannot afford that.

   

  In short, the world is awash with debt. The bond market has ballooned up to $100 trillion in size. And most nations are struggling to service their debt loads even with rates at historic lows.

   

  At some point, the bond bubble will burst. And when it does, entire countries will go bust.

   

  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.

   

  We are making 1,000 copies available for FREE the general public.

   

  We are currently down to the last 25.

   

  To pick up yours, swing by….

   

  http://www.phoenixcapitalmarketing.com/roundtwo.html

   

  Best Regards

   

   

   

  

  

  

  

• Meet The Newest Enemy Of Your Financial Privacy: George Clooney

  Submitted by Simon Black via Sovereign Man blog,

  I’m at a complete loss for words.

  I keep waiting for the deep baritone of that guy who voices all the action movie trailers to chime in. But it doesn’t come. Because this all real.

  I’m talking about the trailer George Clooney has just released to promote his new non-profit, entitled THE SENTRY.

  (Yes, they use all-caps. It sounds like a great name for the next Marvel superhero movie.)

  THE SENTRY is an initiative that “seeks to disrupt and ultimately dismantle the networks of perpetrators, facilitators, and enablers who fund and profit from America’s deadliest conflicts.”

  Wow, eliminating genocide sounds like an incredibly noble cause. Of course, in order to do so, Mr. Clooney’s aim is break down financial privacy.

  There’s been a long-standing war against financial privacy for years.

  As western governments have slid further into bankruptcy, they’ve made coordinated efforts to interdict privacy across the world through tax information exchange agreements, black lists, and turning bankers into unpaid spies.

  Plus they’ve been extremely clever in their marketing campaign, working tirelessly to associate financial privacy with some of the worst elements of society.

  At first, their propaganda suggested that only people interested in financial privacy were guilty of tax evasion. Then organized crime. Then terrorist financing.

  Now it’s genocide.

  This is really insane. Privacy is completely natural and part of our most basic social edicts.

  Privacy is why it’s taboo to discuss how much money you make. It’s why we thrive on keeping secrets and knowing other people’s secrets.

  Privacy is normal. And for years it was something that used to be the rule, not the exception. Especially in regards to finance.

  That was the origin of the term “private banking”. It wasn’t about money laundering. It was about being a grown adult and keeping your business to yourself.

  Now they’ve destroyed the concept to the point that anyone who seeks out financial privacy is suspect of tax evasion. Or organized crime. Or terror financing. Or now genocide.

  And it’s not just finance; it’s privacy in all things.

  Here in Europe the British Prime Minister wants to outlaw encryption technology… because apparently only terrorist criminals and ISIS members use secure email.

  What’s even more bizarre is how a guy like George Clooney even has a say in the global financial regulations.

  Yes, Ocean’s Eleven was very entertaining.

  But I’m completely baffled at how George Clooney has any influence over my financial privacy. Or anybody else’s except for his own.

  Ominously, THE SENTRY has been among the first that I’ve seen which specifically mentions gold as a means of illicit finance.

  And governments have already taken dramatic steps to criminalize the holding of physical cash.

  Apparently they want to ensure that your only financial option is to deposit your money with a shaky bank in a bankrupt country earning a rate of interest that fails to keep up with inflation.

  Now, I think we can all agree that dictators are bad people (as are rapists, murderers, pedophiles, fraudsters, and corrupt politicians). And stopping them is a nice idea.

  But the road to tyranny is always paved with the stones of good intentions.

  Because no matter how many financial regulations get passed, and no matter how far the dictators are chased by Mr. Clooney on his white horse, the fact remains that bad people will always find the resources to do bad things.

  And in the meantime, the crusade to save the world only serves to make everyone else less free.

  This war on privacy is a war on freedom. And it’s getting totally out of control.

  

  

  

  

  

• Apple Plunges Despite EPS Beat On iPhone Sales Miss, Drop In China Sales, Weak Guidance And Strong Dollar Warning

  Apple is important. Perhaps the most important company not only for the Dow Jones, but because it also happens to be the largest company by market cap, in the world. As such nobody will be happy that moments ago AAPL reported results which were in a word, lousy.

  It wasn't so much the earnings, because the EPS of $1.85 was a modest beat of expectations of $1.81, while revenues also beat consensus of $49.4 billion fractionally, printing at $49.6 billion; the margin also beat slightly coming at 39.7% above the exp. 39.5%.

  The problem was in the detail, with 47.5 million iPhone shipments missing expectations by 1.3 million units, even as both iPad (whose ASP came at $415 below the $426 expected), and Mac units coming in as expected.

  But the biggest surprise was in China, where as we warned previously, the Apple euphoria appears to have ended with a bang, with greater China sales tumbling by 21% from $16.8 billion to $13.2 billion. And keep in mind this was in the quarter when the Composite was hitting multi year highs, and the July crash was not even on the horizon.

  As for the cherry on top it was the company's guidance which now sees Q4 revenue at $49-$51 billion, or below the $51.1 bn consensus estimate, with the CFO adding that the strong USD is finally getting to the company, warning that Apple "faced a difficult foreign exchange environment."

  And all this happened in a quarter in which AAPL bought back $10 billion of its own stock.

  The above in charts:

  Revenue:

  

   

  Unit shipments:

  

   

  Geographic breakdown:

  

   

  Margins:

  

   

  Finally, AAPL's net cash (excluding steadily rising debt) remains flat:

  

   

  As expected, there was no mention of either the iWatch or Apple TV. Or a new buyback.

  * * *

  And here, from the WSJ, is a reminder why AAPL is so very crucial to not only the tech sector, but the entire market:

  No company produces bigger profits than Apple Inc. Likewise, no company contributes more to the profit picture of the S&P 500 than Apple.

   

  Apple is a leviathan of a company that is a major contributor of profits in corporate America. Its fortunes, also, are inextricably intertwined with two of the biggest growth markets that exist, smartphones and China. That makes it a bellwether. Because of its success, Apple is also an out-sized member of the S&P 500. We noted yesterday that the stock comprises about one percentage point of the S&P 500's 3.5% gain for this year (before Tuesday's selloff). It is also, due to its massive profits and market-cap weighting within the index, the largest single contributor to S&P 500 profits. By a long shot.

   

  Now, there certainly isn't anything to be worried about here. Apple is expected to earn about $1.80 a share, or about $10.4 billion, on nearly $50 billion in sales, and as usual with this company, the only real question is by how far will it exceed Street estimates.

   

  Apple is projected to single-handedly give the tech sector all of its earnings growth this quarter, just edging it up by 0.2%. Without Apple, the sector would see a contraction of 6%.

   

  It has a big impact on the overall market as well. Since the third quarter of 2011, Apple, for every single quarter, has comprised no less than 3% of the S&P 500's operating earnings, according to data from S&P Dow Jones Indices. It accounted for 2.87% of the index's operating earnings of $25.29 in September 2011, and has ranged higher since then. In the first quarter of 2015, it comprised 5.97% of the $25.81 operating profit. In the fourth quarter of 2014, it was 7.62% of the $26.75 profit.

   

  Think of its this way. If all 500 of the companies in the index contributed an even amount, Apple's earnings would account for about 0.2% of the overall profit. On the contrary, Apple is by far the single biggest contributor to the index's earnings. The next largest contributor is J.P. Morgan, which is contributed about half of that, at 64 cents. For comparison sake, this is what other tech names are contributing: Microsoft Inc. (estimated): 52 cents, IBM: 42 cents, Google Inc.: 38 cents; Cisco Systems Inc. (estimated): 32 cents, Intel Corp.: 32 cents.

  The result, AAPL is down over 7% after hours (and Nasdaq futures down 1.2%), with the 200DMA serving as support for now, so all those hoping for the "leviathan" break out will have to wait until the next quarter, or the release of the iWatch 2.0, whichever comes first.

  

  

  

  

  

  

• How A Pork Bellies Trader And Milton Friedman Created "The Greatest Trading Casino In World History"

  “I held in my hand the Holy Grail for the Chicago Mercantile Exchange. The most influential economic mind of the twentieth century provided the CME with the intellectual foundation upon which to build its financial superstructure.”

  Nixon’s estimable free market advisors who gathered at the Camp David weekend were to an astonishing degree clueless as to the consequences of their recommendation to close the gold window and float the dollar. In their wildest imaginations they did not foresee that this would unhinge the monetary and financial nervous system of capitalism. They had no premonition at all that it would pave the way for a forty-year storm of financialization and a debt-besotted symbiosis between central bankers possessed by delusions of grandeur and private gamblers intoxicated with visions of delirious wealth.

  In fact, when Nixon announced on August 15, 1971, that the dollar was no longer convertible to gold at $35 per ounce, his advisors had barely a scratch pad’s worth of ideas as to what should come next. 

  Its first attempted solution was a Burns-Connally hybrid known as the Smithsonian Agreement of December 1971. The United States needed precisely a $13 billion favorable swing in its balance of trade. This was not to be achieved the honest way—by domestic belt tightening and thereby a reduction of swollen US imports that were being funded by borrowing from foreigners. Instead, America’s trading partners were to revalue their currencies upward by about 15 percent against the dollar.

  Connally’s blatant mercantilist offensive was cut short in late November 1971, however, when the initially jubilant stock market started heading rapidly south on fears that a global trade war was in the offing. 

  As it turned out, a few weeks later Connally’s protectionist gauntlet ended in an amicable paint-by-the-numbers exercise in diplomatic pettifoggery. The United States agreed to drop the 10 percent import surtax and raise the price of gold by 9 percent to $38 per ounce. 

  Quite simply, the United States had made no commitment whatsoever to redeem paper dollars for gold at the new $38 price or to defend the gold parity in any other manner. At bottom, the Smithsonian Agreement attempted the futile task of perpetuating the Bretton Woods gold exchange standard without any role for gold. 

  During the next eight months, further international negotiations attempted to rescue the Smithsonian Agreement with more baling wire and bubble gum. But the die was already cast and the monetary oxymoron which had prevailed in the interim, a gold standard system without monetary gold, was officially dropped in favor of pure floating currencies in March 1973.

  Now, for the first time in modern history, all of the world’s major nations would operate their economies on the basis of what old-fashioned economists called “fiduciary money.” In practical terms, it amounted to a promise that currencies would retain as much, or as little, purchasing power as central bankers determined to be expedient.

  In stumbling to this outcome, Nixon’s advisors were strikingly oblivious to the monetary disorder they were unleashing. The passivity of the “religious floaters” club in the White House was owing to their reflexive adherence to the profoundly erroneous monetarist doctrines of Milton Friedman.

  A Friedmanite Fed would keep the money growth dial set strictly at 3 percent, year in and year out, ever steady as she goes. 

  Friedman’s pre-1971 writings nowhere give an account of the massive hedging industry that would flourish under a régime of floating paper money. This omission occurred for good reason: Friedman didn’t think there would be much volatility to hedge if his Chicago-trained central bankers stuck to the monetarist rulebook.

  Most certainly, Friedman did not see that an unshackled central bank would eventually transform his beloved free markets into gambling halls and venues of uneconomic speculative finance. 

  It thus happened that Leo Melamed, a small-time pork-belly (i.e., bacon) trader who kept his modest office near the Chicago Mercantile Exchange trading floor stocked with generous supplies of Tums and Camels, found his opening and hired Professor Friedman. 

  THE PORK-BELLY PITS: WHERE THE AGE OF SPECULATIVE FINANCE STARTED

  Leo Melamed was the genius founder of the financial futures market and presided over its explosive growth on the Chicago “Merc” during the last three decades of the twentieth century. 

  At the time of the Camp David weekend that changed the world, the Chicago Merc was still a backwater outpost of the farm commodity futures business.

  The next chapters in the tale of Melamed and the Merc are downright astonishing. In 1970, Melamed made an intensive inquiry into currency and other financial markets about which he knew very little, in a desperate search for something to replace the Merc’s rapidly dwindling eggs contract. The latter was the core of its legacy business and was then perhaps $50 million per year in annual turnover.

  Four decades later, Leo Melamed’s study program had mushroomed into a vast menu of futures and options contracts—covering currencies, commodities, fixed-income, and equities, which trade twenty-four hours per day on immense computerized platforms. The entire annual volume of the old eggs contract is now exceeded in literally the blink of an eye.

  The reason futures contracts on D-marks and T-bills took off like rocket ships is that the fundamental nature of money and finance was turned upside down at Camp David. In effect, Professor Friedman’s floating money contraption created a massive market for hedging that did not have any reason for existence in the gold standard world of Bretton Woods, and most especially under its more robust pre-1914 antecedents.

  When currency exchange rates were firmly fixed and some or all of the main ones were redeemable in a defined weight of gold, exporters and importers had no need to hedge future purchases or deliveries denominated in foreign currencies. The spot and forward exchange rates, save for technical differentials, were always the same.

  Even more importantly, the newly emergent need of corporations and investors to hedge against currency and interest rate risk caused other fateful developments in financial markets; namely, the accumulation of capital and trading resources by firms which became specialized in the intermediation of financial hedges. Purely an artifact of an unstable monetary régime, this new industry resulted in prodigious and wasteful consumption of capital, technology, and labor resources.

  The four decades since Camp David also show that the Friedmanite régime of floating money is dynamically unstable. Each business cycle recovery since 1971 has amplified the ratio of credit to income in the system, causing the daisy chains of debt upon debt to become ever more distended and fragile.

  Currently, the daily volume of foreign exchange hedging activity in global futures and options markets, for example, is estimated at $4 trillion, compared to daily merchandise trade of only $40 billion. This 100:1 ratio of hedging volume to the underlying activity rate does not exist because the currency managers at exporters like Toyota re-trade their hedges over and over all day; that is, every fourteen minutes.

  Due to the dead-weight losses to society from this massive churning, the hedging casinos are a profound deformation of capitalism, not its crowning innovation. They consume vast resources without adding to society’s output or wealth, and flush income and net worth to the very top rungs of the economic ladder—rarefied redoubts of opulence which are currently occupied by the most aggressive and adept speculators. The talented Leo Melamed thus did not spend forty years doing God’s work, as he believed. He was just an adroit gambler in the devil’s financial workshop—the great hedging venues—necessitated by Professor Friedman’s contraption of floating, untethered money.

  THE LUNCH AT THE WALDORF-ASTORIA THAT OPENED THE FUTURES

  According to Melamed’s later telling, by 1970 he had “become a committed and ardent disciple in the army that was forming around Milton Friedman’s ideas. He had become our hero, our teacher, our mentor.”

  Thus inspired, Melamed sought to establish a short position against the pound, but after visiting all of the great Loop banks in Chicago he soon discovered they weren’t much interested in pure speculators: “if you didn’t have any commercial reasons, the banks weren’t likely to be very helpful.”

  The banking system was not in the business of financing currency speculators, and for good reason. In a fixed exchange rate régime the currency departments of the great international banks were purely service operations which deployed no capital and conducted their operations out of hushed dealing rooms, not noisy cavernous trading floors. The foreign currency business was no different than trusts and estates. Even Melamed had wondered at the time whether “foreign currency instruments could succeed” within the strictures designed for soybeans and eggs, and pretended to answer his own question: “Perhaps there was some fundamental economic reason why no one had before successfully applied financial instruments to futures.”

  In point of fact, yes, there was a huge reason and it suggests that while Melamed might have audited Milton Friedman’s course, he had evidently not actually passed it. There were no currency futures contracts because there was no opportunity for speculative profit in forward exchange transactions as long as the fixed-rate monetary régime remained reasonably stable.

  Indeed, this reality was evident in a rebuke from an unnamed New York banker which Melamed recalled having received in response to his entreaties shortly before the Smithsonian Agreement was announced. “It is ludicrous to think that foreign exchange can be entrusted to a bunch of pork belly crapshooters,” the banker had allegedly sniffed.

  Whether apocryphal or not, this anecdote captures the essence of what happened at Camp David in August 1971. There a motley crew of economic nationalists, Friedman acolytes, and political cynics supinely embraced Richard Nixon’s monetary madness. In so doing, they opened the financial system to a forty-year swarm of “crapshooters” who eventually engulfed capitalism itself in endless waves of speculation and fevered gambling, activities which redistributed the income upward but did not expand the economic pie.

  As it happened, Melamed did not waste any time getting an audience with the wizard behind the White House screen. At a luncheon meeting with Professor Friedman at the New York Waldorf-Astoria on November 13, 1971, which Melamed later described as his “moment of truth,” he laid out his case.

  After asking Friedman “not to laugh,” Melamed described his scheme: “I held my breath as I put forth the idea of a futures market in foreign currency. The great man did not hesitate.”

  “It’s a wonderful idea,” Friedman told him. “You must do it!”

  Melamed then suggested that his colleagues in the pork-belly pits might be more reassured about the venture if Friedman would put his endorsement in writing. At that, Friedman famously replied, “You know I am a capitalist?”

  He was apparently a pretty timid capitalist, however. In consideration of the aforementioned $7,500, Melamed got an eleven-page paper that launched the greatest trading casino in world history. It made Melamed extremely wealthy and also millionaires out of countless other recycled eggs and bacon traders that Friedman never even met.

  Modestly entitled “The Need for a Futures Market in Currencies,” the paper today reads like so much free market eyewash. But back then it played a decisive role in conveying Friedman’s imprimatur.

  In describing the paper’s impact, Melamed did not spare the superlatives: “I held in my hand the Holy Grail for the Chicago Mercantile Exchange. The most influential economic mind of the twentieth century provided the CME with the intellectual foundation upon which to build its financial superstructure.”

  *****

  Source: The Great Deformation by David Stockman

  

  

  

  

  

• Earnings Avalanche: CMG, GPRO, YHOO, MSFT All Lower After Hours

  Unleash the talking head spin…

   

  Yahoo misses and cuts guidance…

  • *YAHOO 2Q ADJ. EPS 16C, EST. 19C
  • *YAHOO SEES 3Q ADJ. EBITDA $200M-$240M, EST. $279.7M
  • *YAHOO SEES 3Q REV EX-TAC $1B-$1.04B, EST. $1.07B

  Micorosft beat bottom, missed top line…

  • *MICROSOFT 4Q ADJ. EPS 62C, EST. 58C
  • *MICROSOFT 4Q UNEARNED REV. $25.32B, EST. $25.96B

  Chipotle beat bottom line but missed comps and revenues…

  • *CHIPOTLE 2Q COMP SALES UP 4.3%, EST. UP 5.8%
  • *CHIPOTLE 2Q EPS $4.45 , EST. $4.43
  • *CHIPOTLE 2Q REV. $1.2B, EST. $1.22B

  GoPro beats but fails to raise guidance, reiterating prior margins

  • *GOPRO 2Q REV. $419.9M, EST. $395.2M
  • *GOPRO 2Q ADJ. EPS 35C, EST. 26C
  • *GOPRO REPEATS L-T GROSS MARGIN, OPER MARGIN TARGETS IN SLIDES

  And the result…

  

  

  

  

  

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