- Liberty Movement Needs More Innovations To Counter Technological Tyranny
Submitted by Brandon Smith via Alt-Market.com,
The great lesson from history that each consecutive generations seems to forget is that the tools of tyranny used outward will inevitably be turned inward. That is to say, the laws and weapons governments devise for supposed enemies abroad will ALWAYS and eventually be used against the people they are mandated to protect. There is no centralized system so trustworthy, no political establishment so free of corruption that the blind faith of the citizenry is warranted. If free people do not remain vigilant they will be made slaves by their own leadership. This is the rule, not the exception, and it applies to America as much as any other society.
The beauty of the con game that is the “war on terror” is that such a war is ultimately undefinable. An undefinable war has no set enemy; the establishment can change the definition of the “enemy” at will to any culture, country, or group it wishes. Thus, the war on terror can and will last forever. Or, at least, it will last as long as corrupt elitists remain in positions of power.
As I have outlined in past articles, most terror groups are creations of our nation's own covert intelligence apparatus, or the covert agencies of allied governments.
ISIS is perhaps the most openly engineered terror organization of all time (surpassing Operation Gladio), with U.S. elites and purported anti-Muslim terror champions like Sen. John McCain and Gen. Paul Vallely making deals with “moderate” Free Syrian Army rebels who immediately turn out to be full fledged ISIS fighters (I'm sure they were not “surprised” by this outcome) and the Obama Administration blatantly funding and arming more “moderates” which again in turn seem to be crossing over into the hands of ISIS. Frankly, the whole idea that there is a moderate front in places like Syria where alphabet agencies reign supreme is utterly absurd.
The bottom line – our political leadership, Republican and Democrat alike, created ISIS out of thin air, and now the American people are being expected to relinquish more individual liberties in the name of stopping this fabricated threat. Apparently, the Orwellian police state structures built under the auspices of the Patriot Act, the AUMF, the NDAA, FISA, etc. have not been enough to stop events like the Chatanooga shooting from occurring. So, what is the answer? Well, certainly not a reexamination of our insane foreign policy or an investigation into government funded false flag terrorism; that would make too much sense.
Instead, the establishment claims we need MORE mass surveillance without warrants, tighter restrictions on individual freedoms, and even, according to retired General Wesley Clark, internment camps designed to separate and confine “disloyal” Americans from the rest of the population.
Remember, all of this is being suggested in the name of stopping ISIS, but the language being used by political elites does not restrict such actions to ISIS related “extremists”. Once again, the war on terror is an ambiguous war, so ambiguous that internment camps supposedly meant for those the government labels POTENTIAL Islamic extremists could also be used for potential extremists of any group. Once the fuse is lit on the process of rendition, black bagging, internment, and assassination of citizens, any citizens, without trial, there will be no stopping the powder keg explosion to follow.
I believe that the power brokers that dictate legal and political developments within our country are preparing to turn the full force of the police state machine against the American people, all in the name of protecting us, of course. I do not need their brand of “protection”, and neither does anyone else.
It comes down to this – in the face of an increasingly advanced technological control grid, either liberty movement activists and freedom fighters must develop our own countermeasures, or, we will lose everything, and every generation after us will blame us for our inaction, if they remember us at all.
Keep in mind a countermeasure must be decentralized. Bitcoin, for instance, is NOT a practical countermeasure being that it relies on a centralized and monitored global internet in order to function. It also does not encourage any tangible production capabilities or skill sets. Therefore, it does not provide for the function of a true alternative economy. It is a false solution and a useless countermeasure to a fiat currency based economy.
A real countermeasure to a controlled economy, for instance, would be a localized barter economy in which people must develop ways to produce, rather than play make believe with digital cryptocurrencies.
Countermeasures do not always have to be high tech. In fact, I am a staunch believer in the advantages of low tech solutions to high tech tyranny. As many are already aware, with the aid of Oath Keepers I recently developed a long term wearable cloak system which defeats FLIR thermal imaging, including military grade thermal imaging. Something which has never been offered on the civilian market before.
But this is only one countermeasure to one major threat. I will continue to work on defenses in other areas in which I feel I am best qualified, however, the movement needs more R&D, and we need it NOW before it is too late. I would like to suggest some possible dangers, and how people with far more knowledge than myself could create tools for defeating tyranny. I would also like to examine some simple organizational countermeasures which EVERYONE should be undertaking right now.
Community Defense
This is an amazing countermeasure for the liberty movement because it removes the monopoly of state control over individual security. Nothing pisses off the establishment more than people taking individual and community defense into their own hands. Fear is the greatest weapon of a corrupt government, and if they can't keep you afraid because you are your own security, then they have lost considerable leverage over you.
This dynamic is represented perfectly in the Oath Keepers Community Preparedness Team model, which has been utilized successfully in places like Ferguson, MO. Today, in the wake of the Chatanooga shootings, Oath Keeper teams are volunteering across the nation to stand guard (discreetly) at military recruiting offices. The recruiters themselves, who are forced to remain disarmed by the DoD, appear to be thankful for the Oath Keeper presence. This kind of effort shows those in the military that the liberty movement is not the great homegrown monster that the government and the SPLC have made us out to be. It also throws a monkey wrench into the use of false flag terrorism or terrorism funded by covert agencies (as ISIS is) as a means to herd the masses into totalitarianism in the name of safety.
You might not be an engineer, or a tactician, but anyone can and should be organizing security teams for the places they live. Nothing could be more important.
Community Food Reserve
Am I talking about feeding your entire neighborhood or your entire town during a crisis? No, not necessarily. But, if you found an innovative way to make that possible, the rest of the movement would surely be grateful. Preppers do what they can for themselves and their families, but the bottom line is, if you are isolated and unorganized, all your prepping will be for naught. You are nothing more than an easy target and no amount of “OPSEC” is going to hide the fact that you will look well fed and healthy while everyone else doesn't. The solution to this is to organize community defense, as stated above, but to also organize a community food reserve.
I highly suggest approaching already existing groups, like your local churches if they are willing to listen, and discussing the idea of food stores, water filtration, and shelter scenarios. If you can convince at least one community group to make preparations, you have just potentially saved numerous lives and stopped the exploitation of food scarcity as a means to dominate your local population during disaster.
WiFi Radar
Active WiFi based radar systems have been developed over the past several years which can see through walls (to a point) and potentially detect persons hiding in an urban environment. The number of radio frequency based radar projects coming out of the dark recesses of DARPA have been numerous, and each project appears to revolve around the goal of complete surveillance ability, or total information awareness. Such measures are not as effective against a technologically advanced opponent, but they could be very effective in dominating a lower tech civilian population.
WiFi radar in particular is a rather disturbing concept, and not a field that I am personally well versed. I have seen some examples of radio-wave based personnel tracking and have not been all that impressed with the visual results, but this is only what has been made available to the public. Sometimes, the DoD will present a technology that does not work as well as they claim in order to strike fear in the minds of their enemies. That said, sometimes they also use tech tools that work far better than they let on.
Luckily, radar countermeasure information is widely available to the public, and WiFi blocking and absorbing materials exist also. Liberty champions would do well, though, to look into active countermeasures along with passive, and devise methods for jamming WiFi radar altogether.
RFID Matrix
RFID chips are a passive technology but rather dangerous under certain conditions. With a grid of RFID readers in place in an environment such as a city, or a highway, a person could be tracked in real time every second of every day. He might not even know he is carrying a chip or multiple chips, the trackers being so small they could be sewn behind the button of a shirt.
This is one threat which would probably have to be solved with higher technology. I have seen RFID jamming and “spoofing” done by civilian computer engineers, mostly from foreign countries. But, this should not just be a hobby for computer experts in technical institutes. The Liberty Movement needs portable RFID jamming and spoofing capability to ensure that these chips, which are set to be ingrained in almost every existing product in the near future from clothing to cars to credit cards, can be rendered useless.
Drones Vs. Drones
The predator drone is not the biggest threat on the block anymore in terms of surveillance ability. DARPA has been working on other drone designs similar to the A160 Hummingbird and the MQ-8 Fire Scout; lightweight helicopter-style UAVs that can stay in the air for up to 24 hours and provide overwatch in a 30 mile area. And lets not forget about JLENS surveillance blimps (also ironically referred to as "ISIS" Integrated Sensor Is The Structure project) which can and are outfitted with high grade cameras and radar that can be used to track people from 10,000 feet up in the sky.
This is the future of combat operations and the lockdown of populations. Standard military units will be reduced as much as possible while UAVs will be deployed en masse. Air power has always been the biggest weakness of civilians seeking to counter corrupt governments, but this is actually changing.
While they may be lower tech in certain respects, civilian based drones are actually keeping pace with military projects, if only because military projects are restricted by bureaucracy and red tape while civilians are encouraged and emboldened by profit motive. Range and elevation limitations in the civilian market are purely legal right now, and such limitations will be of no concern once the SHTF. For the first time in history, common people now have the ability to field an aerial defense.
The DoD is well aware of this, and is already working on measures to counter enemy drones through their Black Dart and Switchblade program. The Liberty Movement needs its own Black Dart program.
Long Distance Radio And Codes
Regardless of the region they live, liberty activists should be developing their own radio code methods for secure communications. There are a few existing frequency hopping and coded radio systems out there on the civilian market, but these are short range units usually with around 1 watt of power. This makes them ideal for quick operational comms and difficult to listen in on simply because their range is so limited. That said, longer range radio communication will likely be essential for the spread of information from one region to the next, and no one should assume that regular phone and internet will be available in the future. News must travel somehow.
This means HAM radio, using mobile repeaters to avoid triangulation, and old school coded messages. The R&D portion of this issue I believe needs to be in the use of an Automatic Packet Reporting System (APRS) for the liberty movement regionally and nationwide. This is a kind of “texting” through HAM radio, and combining this with traditional low tech cipher coding may be our best bet for long range secure comms. It could also help defeat drones that intercept standard messages and use voice recognition software to identify targets.
Decentralized Internet
Information sharing makes or breaks a society. Without the web, the liberty movement would not have found the success it has today, and the alternative media would not exist, let alone be outmatching the readership ratings of mainstream media sources that have otherwise dominated news flow for decades. Unfortunately, the web is NOT a “creative commons” as many people believe. It is, as Edward Snowden's revelations on the NSA proved, a highly controlled and monitored network in which there is essentially no privacy, even with the existence of cryptography.
The great threat to the establishment is the possibility that people will begin building an internet separate from the internet; a decentralized network. Recently, an inventor named Benjamin Caudill was slated to release a device called “Proxyham”, designed to reroute wifi signals and remove the possibility of government monitoring of digital communications. Strangely, just before the release of Proxyham, Caudill pulled all devices with the intent to destroy them, and will not be releasing the source code and blueprints to the public as planned.
Clearly, something or someone scared the hell out of Caudill, and he is rushing to appease them. We don't know who for certain, but my vote is the NSA. And if this is the case, it means his project and others like it are a threat to the surveillance state, and must be released to the public ASAP. If Caudill doesn't have the guts to do it, then the liberty movement must.
An alternative internet would be a holy grail in the fight against tyranny, if only to show the world that people can indeed decouple from the system and create advanced networks themselves, and do it better than the establishment.
These are just a few of the areas that require immediate attention from those with ingenuity in the liberty movement. The time for talk is over. The time for tangible action has begun. Beyond the need for immediate local organization by those preparing for social and economic breakdown, there is a desperate need for out-of-the-box thinkers to develop countermeasures to technological fascism. It's time for the movement to go beyond mere intellectual analysis and provide concrete solutions. There is nothing left but this.
- Gold "Flash-Crashes" Again Amid Continued Commodity Liquidation As China Manufacturing Slumps To 15-Month Lows
As Bridgewater talks back its now widely discussed bearish position on fallout from China's equity market collapse, Chinese stocks rose at the open (before fading after ugly manufacturing data). However, liquidations continue across the commodity complex in copper, gold, and silver. Though not on the scale to Sunday night's collapse, the China open brought another 'flash-crash' in precious metals. All signs point to CCFD unwinds, and forced liquidations as under the surface something smells rotten in China, which has just been confirmed by the lowest Manufacturing PMI print in 15 months.
Gold flash crashed…
As we noted previously, while the actual selling reason was irrelevant, the target was clear: to breach the $1080 gold price which also happens to be the multi-decade channel support level.
As liquidations across the metals complex continue..
Scotiabank's Guy Haselmann noted earlier…the plunging of the commodity complex is telling us that the China economy could be imploding.
Problems stemming from China are spreading further into more sectors and markets (various high yield sectors, emerging markets, EM and commodity currencies).
As I wrote in my note Tuesday (Too Much of Everything), Zero interest rates have contributed to over-production, pressuring consumer prices lower. Certainly, borrowing in the energy sector contributed to the over-supply of oil and look what has happened in that sector. Now, weakening demand from China is accelerating the decent in most commodities. Budgets of EM supplier-countries and commodity exporters are being materially impacted.
As commodities fall, the FOMC says that inflation targets are harder to obtain, leading to a self-perpetuating belief that continued cheap money is needed.
Yet, claims fell to the lowest level since 1973, housing is strong, and auto sales are back to almost 17mm units (etc). Clearly, the Fed has gotten itself into a difficult position. By not lifting-off and taking their medicine in 2014 – market imbalances today are now bigger and the consequences greater.
China is unfolding as the most important story of 2015 for markets. Stay alert. Long-dated US Treasuries remain attractive and good place to hid.
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It seems Guy may be on to something as Manufacturing just collapsed in China…
All that stimulus, all those "measures" and Chinese manufacturing collapses at the fastest rate in 15 months; and it appears bad news is bad news still in China…
Charts: Bloomberg
- The World Economy Visualized
Via Jim Quinn's Burning Platform blog,
If itsy bitsy pie slice – Greece (.33%) – can create this much worldwide economic havoc because of their unpayble level of debt, imagine what will happen when the truth is revealed about France (3.81%), Italy (2.88%), and Spain (1.88%). China’s (13.9%) entire economic model has been built upon debt and the world consuming their output.
The world has run out of money to consume their shit. Japan (6.18%) is in the midst of a demographic and debt death spiral. The U.S. (23.32%) is living on borrowed time and the continued dominance of the USD. How long will it last? We are inhabiting in a world stacked with TNT run by monkeys with matches.
Courtesy of: Visual CapitalistToday’s data visualization is the most simple breakdown of the world economy that we’ve seen. Not only is it split to show the GDP of dozens of countries in relation to one another based on size, but it also subtly divides each economy into its main sectors: agriculture, services, and industry.
The lightest shade in each country corresponds to the most primitive economic activity, which is agriculture. The medium shade is industry, and the darkest shade corresponds to services, which tends to make up a large portion of GDP of developed economies in the world economy.
To take it one step further, the visualization also shades the countries by continental geography, to easily see the relative economic contributions of North America, Europe, South America, Asia, Oceania, and Africa.
- How Monsanto, Exxon Mobil, & Microsoft Lobbyists Are Bundling Funds For Hillary
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
The pantsuit revolutionary is at it again. Once again demonstrating her populist chops by employing the services of lobbyists to bundle millions in campaign funds. It’s no wonder opinion polls on her have been plunging as of late.
We learn from Bloomberg that:
When Barack Obama was running for the presidency in 2008—and later for reelection in 2012—he promised he wouldn’t take money from registered lobbyists, not even as bundlers. In the race to succeed him, Hillary Clinton is not following in his footsteps.
The former secretary of state raised more than $2 million from 40 “bundlers”—fundraisers who get their contacts to give to campaigns—who were also lobbyists, according to financial forms released Wednesday by the Federal Election Commission. In all, the Clinton campaign raised $46.7 million between the beginning of April and the end of June.
Clinton’s bundlers include some familiar names: Jerry Crawford, an outside lobbyist to Monsanto and Iowa kingmaker, put together another $35,000 or so. Tony Podesta, a mega-lobbyist who co-founded the Podesta Group and is the brother of Clinton’s campaign chair John, bundled almost $75,000.
Other bundlers lobby for big companies including Microsoft (Fred Humphries) and Exxon Mobil (Theresa Fariello) or industry groups including the National Cable & Telecommunications Association (Daphna Peled). Another group includes former staffers for prominent Democratic politicians (including President Clinton) and politicians themselves, including former South Carolina Governor Jim Hodges. Lobbyist bundlers don’t have to disclose their employers, but the names appear on both Clinton’s disclosures and 2015 lobbyist registrations.
She certainly knows how to diversify her portfolio when it comes to people who bribe U.S. Congress for a living.
Clinton was the only Democrat running for president to have declared lobbyist bundlers as of Thursday. Two Republicans candidates, former Florida Governor Jeb Bush and Florida Senator Marco Rubio, also filed disclosures on lobbyist bundlers, with Bush raising more than $228,000 from eight lobbyist bundlers and Rubio raising more than $133,000 from three lobbyist bundlers.
Lobbyist participation in a campaign can be hard to avoid: Despite President Obama’s promise, the New York Times found in 2011 that at least 15 of his bundlers had strong links to lobbyists, including “overseeing” them, even if they weren’t registered themselves.
But hey,
* * *
For related articles, see:
Hillary Clinton Blasts High Frequency Trading Ahead of Fundraiser with High Frequency Trader
Where Does Hillary Stand on the TPP? 45 Public Statements Tell You Everything You Need to Know
Cartoons Mocking “Goldman Rats” and Hillary Clinton Appear All Over NYC
How UCLA Tried to Negotiate a Lower Speaking Fee, but Hillary Clinton Refused and Demanded $300,000
- The 'Fallout' From Fukushima Summed Up In 1 Disturbing Image
If this is what is happening to a daisy now… good luck to the Olympic athletes in 5 years…
Four years after the disastrous 2011 earthquake, subsequent tsunami, and Fukushima nuclear meltdown, this small patch of deformed daisies suggests all is not well no matter what Abe tells the world…
?????????(?????5/26)? ????????????????????????????????????????????????????????????????????????????????0.5?Sv??(???1m) pic.twitter.com/MinxdFgXBC
— ??? (@san_kaido) May 27, 2015
We are sure everything is fine.. apart from
Fukushima's nuclear fuel "missing"
A specially designed robot 'dying' after just 3 hours of exposure, or
So what is really going in Fukushima?
- Central Banks And Our Dysfunctional Gold Markets
Submitted by Marcia Christoff-Kurapova via The Mises Institute,
Many investors still view gold as a safe-haven investment, but there remains much confusion regarding the extent to which the gold market is vulnerable to manipulation through short-term rigged market trades, and long-arm central bank interventions. First, much of the gold that is being sold as shares, in certificates, or for physical hoarding in dubious "vaults" just isn't there. Second, paper gold can be printed into infinity just like regular currency. Third, new electronic gold pricing — replacing, as of this past February, the traditional five-bank phone-call of the London Gold Fix in place since 1919 — has not necessarily proved a more trustworthy model. Fourth, there looms the specter of the central bank, particularly in the form of volume trading discounts that commodity exchanges offer them.
The Complex World of Gold Investments
The question of rigging has been brought to media attention in the past few months when ten banks came under investigation by the US Commodity Futures Trading Commission (CFTC) and the US Department of Justice in price-manipulation probes. Also around that time, the Swiss regulator FINMA settled a currency manipulation case in which UBS was accused of trading ahead of silver-fix orders. Then, the UK Financial Conduct Authority, which regulates derivatives, ordered Barclays to pay close to $45 million in fines against a trader who artificially suppressed the price of gold in 2012 to avoid payouts to clients. Such manipulations are not limited to the precious-metals market: in November of last year, major banks had to pay several billion dollars in fines related to the rigging of foreign-exchange benchmarks, including LIBOR and other interest-rate benchmarks.
These cases followed on the heels of a set of lawsuits in May 2014 filed in New York City in which twenty-five plaintiffs consisting of hedge funds, private citizens, and public investors (such as pension funds) sued HSBC, Barclays, Deutsche Bank, Bank Scotia, and Société Génerale (the five traditional banks of the former London Gold Fix) on charges of rigging the precious-metals and foreign-exchange markets. "A lot of conspiracy theories have turned out to be conspiracy fact," said Kevin Maher, a former gold trader in New York who filed one of the lawsuits that May, told The New York Times.
Central Banks at the Center of Gold Markets
The lawsuits were given more prominence with the introduction of the London Bullion Market Association (LBMA) on February 20, 2015. The new price-fixing body was established with seven banks: Goldman Sachs, J.P. Morgan, UBS, HSBC, Barclays, Bank Scotia and Société Génerale. (On June 16, the Bank of China announced, after months of speculation, that it would join.)
While some economists have deemed the new electronic fix a good move in contrast to behind-closed-door, phoned-in price-fixing, others beg to differ. Last year, the commodities exchange CME Group came under scrutiny for allowing volume trading discounts to central banks, raising the question of how "open" electronic pricing really is. Then, too, the LBMA is itself not a commodities exchange but an Over-The-Counter (OTC) market, and does not publish — does not have to publish — comprehensive data as to the amount of metal that is traded in the London market.
According to Ms. Ruth Crowell, the chairman of LBMA, writing in a report to that group: "Post-trade reporting is the material barrier preventing greater transparency on the bullion market." In the same report, Crowell states: "It is worth noting that the role of the central banks in the bullion market may preclude 'total' transparency, at least at the public level." To its credit, the secretive London Gold Fix (1919–2015) featured on its website tracking data of the daily net volume of bars traded and the history of gold trades, unlike current available information from the LBMA as one may see here (please scroll down for charts).
The Problem with Paper Gold
There is further the problem of what is being sold as "paper" gold. At first glance, that option seems a good one. Gold exchange-traded funds (ETFs), registered with The New York Stock Exchange, have done very well over the past decade and many cite this as proof that paper gold, rather than bars in hand, is just as sure an investment. The dollar price of gold rose more than 15.4 percent a year between 1999 and December 2012 and during that time, gold ETFs generated an annual return of 14 percent (while equities registered a loss).
As paper claims on trusts that hold gold in bank vaults, ETFs are for many, preferable to physical gold. Gold coins, for instance, can be easily faked, will lose value when scratched, and dealers take high premiums on their sale. The assaying of gold bars, meanwhile, with transport and delivery costs, is easy for banking institutions to handle, but less so for individuals. Many see them as trustworthy: ETF Securities, for example, one of the largest operators of commodity ETFs with $21 billion in assets, stores their gold in Zurich, rather than in London or Toronto. These last two cities, according to one official from that company, "could not be trusted not to go along with a confiscation order like that by Roosevelt in 1933."
Furthermore, shares in these entities represent only an indirect claim on a pile of gold. "Unless you are a big brokerage firm," writes economist William Baldwin, "you cannot take shares to a teller and get metal in exchange." ETF custodians usually consist of the likes of J.P. Morgan and UBS who are players on the wholesale market, says Baldwin, thus implying a possible conflict of interest.
Government and Gold After 1944: A Love-Hate Relationship
Still more complicated is the love-hate relationship between governments and gold. As independent gold analyst Christopher Powell put it in an address to a symposium on that metal in Sydney, October 2013: "It is because gold is a competitive national currency that, if allowed to function in a free market, will determine the value of other currencies, the level of interest rates and the value of government bonds." He continued: "Hence, central banks fight gold to defend their currencies and their bonds."
It is a relationship that has had a turbulent history since the foundation of the Bretton Woods system in 1944 and up through August 1971, when President Nixon declared the convertibility of the dollar to gold suspended. During those intervening decades, gold lived a kind of strange dual existence as a half state-controlled, half free market-driven money-commodity, a situation that Nobel Prize economist Milton Friedman called a "real versus pseudo gold standard."
The origin of this cumbersome duality was the post-war two-tiered system of gold pricing. On the one hand, there was a new monetary system that fixed gold at $35 an ounce. On the other, there was still a free market for gold. The $35 official price was ridiculously low compared to its free market variant, resulting in a situation in which IMF rules against dealing in gold at "free" prices were circumvented by banks that surreptitiously purchased gold from the London market.
The artificial gold price held steady until the end of the sixties, when the metal's price started to "deny compliance" with the dollar. Still, monetary doctrine sought to keep the price fixed and, at the same time, to influence pricing on the free market. These attempts were failures. Finally, in March 1968, the US lost more than half its reserves, falling from 25,000 to 8,100 tons. The price of other precious metals was allowed to move freely.
Gold Retreats Into the Shadows
Meawhile, private hoarding of gold was underway. According to The Financial Times of May 21, 1966, gold production was rising, but it was not going to official gold stocks. This situation, in turn, fundamentally affected the gold clauses of the IMF concerning repayments in currency only in equal value to the gold value of such at the time of borrowing. This led to a rise in "paper gold planning" as a substitution for further increases in IMF quotas. (Please see "The Paper Gold Planners — Alchemists or Conjurers?" in The Financial Analysts Journal, Nov–Dec 1966.)
By the late 1960s, Vietnam, poverty, the rise in crime and inflation were piling high atop one another. The Fed got to work doing what it does best: "Since April [1969]," wrote lawyer and economist C. Austin Barker in a January 1969 article, "The US Money Crisis," "the Fed has continually created new money at an unusually rapid rate." Economists implored the IMF to allow for a free market for gold but also to set the official price to at least $70 an ounce. What was the upshot of this silly system? That by 1969 Americans were paying for both higher taxes and inflation. The rest, as they might say, is the history of the present.
Today, there is no “official” price for gold, nor any “gold-exchange standard” competing with a semi-underground free gold market. There is, however, a material legacy of “real versus pseudo” gold that remains a terrible menace. Buyer beware of the pivotal difference between the two.
- China Furious Over Rig Pictures: "What Japan Did Provokes Confrontation"
On Wednesday, we detailed China’s latest maritime dispute with a US ally. Just as the back-and-forth banter and incessant sabre-rattling over Beijing’s land reclamation activities in the Spratlys had died down, Washington and Manila passed the baton to Tokyo in the race to see who can prod the PLA into a naval confrontation first.
To recap, Japan apparently believes that China is strategically positioning rigs as close to a geographical equidistance line as possible in order to siphon undersea gas from Japanese waters.
Here’s a map showing the position of the rigs and the line which divides the countries’ economic zones:
And here are the rigs themselves:
Tokyo’s position is that Beijing’s exploration activities violate a 2008 joint development agreement between the two countries. Beijing, on the other hand, “erroneously” believes it has the right to development gas fields located in its territorial waters.
As we noted yesterday, Chief Cabinet Secretary Yoshihide Suga’s assurance that the spat would not endanger the slow thaw of Sino-Japanese relations didn’t sound convincing under the circumstances:
The dispute won’t do anything to help Sino-Japanese relations and although Suga claims the issue won’t derail diplomatic progress, one has to imagine that Beijing has had just about enough of being told what it can and can’t do in what it considers to be territorial waters.
Sure enough, China has taken the rhetoric up a notch. Reuters has more:
Japan’s release of pictures of Chinese construction activity in the East China Sea will only provoke confrontation between the two countries and do nothing for efforts to promote dialogue, China’s Foreign Ministry said.
In a statement late on Wednesday, China’s Foreign Ministry said it had every right to develop oil and gas resources in waters not in dispute that fall under its jurisdiction.
“What Japan did provokes confrontation between the two countries, and is not constructive at all to the management of the East China Sea situation and the improvement of bilateral relations,” it said.
According to some accounts, China’s O&G development efforts are tied to a long-running island dispute between the two countries. Here’s Reuters again:
In 2012, Japan’s government angered Beijing by purchasing a disputed, uninhabited island chain in the East China Sea.
Until then, Beijing had curtailed activities under a pact with Japan to jointly develop undersea resources in disputed areas.
So, spiteful retailiation or legitimate exploration and development? We’ll let readers decide with the help of the following color from BBC on the history behind the Senkaku islands row.
* * *
At the heart of the dispute are eight uninhabited islands and rocks in the East China Sea. They have a total area of about 7 sq km and lie north-east of Taiwan, east of the Chinese mainland and south-west of Japan’s southern-most prefecture, Okinawa. The islands are controlled by Japan.
They matter because they are close to important shipping lanes, offer rich fishing grounds and lie near potential oil and gas reserves. They are also in a strategically significant position, amid rising competition between the US and China for military primacy in the Asia-Pacific region.
Japan says it surveyed the islands for 10 years in the 19th Century and determined that they were uninhabited. On 14 January 1895 Japan erected a sovereignty marker and formally incorporated the islands into Japanese territory.
After World War Two, Japan renounced claims to a number of territories and islands including Taiwan in the 1951 Treaty of San Francisco. These islands, however, came under US trusteeship and were returned to Japan in 1971 under the Okinawa reversion deal.
Japan says China raised no objections to the San Francisco deal. And it says that it is only since the 1970s, when the issue of oil resources in the area emerged, that Chinese and Taiwanese authorities began pressing their claims.
China says that the islands have been part of its territory since ancient times, serving as important fishing grounds administered by the province of Taiwan.
- Hoisington On Bond Market Misperceptions: "Secular Low In Treasury Yields Still To Come"
Submitted by Hoisington Investment Management's Lacy Hunt via MauldinEconomics.com,
Misperceptions Create Significant Bond Market Value
From the cyclical monthly high in interest rates in the 1990-91 recession through June of this year, the 30-year Treasury bond yield has dropped from 9% to 3%. This massive decline in long rates was hardly smooth with nine significant backups. In these nine cases yields rose an average of 127 basis points, with the range from about 200 basis points to 60 basis points (Chart 1). The recent move from the monthly low in February has been modest by comparison. Importantly, this powerful 6 percentage point downward move in long-term Treasury rates was nearly identical to the decline in the rate of inflation as measured by the monthly year-over-year change in the Consumer Price Index which moved from just over 6% in 1990 to 0% today. Therefore, it was the backdrop of shifting inflationary circumstances that once again determined the trend in long-term Treasury bond yields.
In almost all cases, including the most recent rise, the intermittent change in psychology that drove interest rates higher in the short run, occurred despite weakening inflation. There was, however, always a strong sentiment that the rise marked the end of the bull market, and a major trend reversal was taking place. This is also the case today.
Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. These are:
- The recent downturn in economic activity will give way to improving conditions and even higher bond yields.
- Intensifying cost pressures will lead to higher inflation/yields.
- The inevitable normalization of the Federal Funds rate will work its way up along the yield curve causing long rates to rise.
- The bond market is in a bubble, and like all manias, it will eventually burst.
Rebounding Economy and Higher Yields
The most widely held view of these four misperceptions is that the poor performance of the U.S. economy thus far in 2015 is due to transitory factors. As those conditions fade, the economy will strengthen, sparking inflation and causing bond yields to move even higher. The premise is not compelling, as there is solid evidence of a persistent shift towards lower growth. Industrial output is expected to decline more in the second quarter than the first. This will be the only back-to-back decrease in industrial production since the recession ended in 2009 (Chart 2). Any significant economic acceleration is doubtful without participation from the economy’s highest value-added sector. To be sure, the economy recorded higher growth in the second quarter, but that was an easy comparison after nominal and real GDP both contracted in the first quarter.
Adding to a weak manufacturing sector, other fundamentals continue to indicate that top- line growth will not accelerate further this year, and inflation will be contained. M2 year-over-year growth has slipped below the growth rates that prevailed at year-end. The turnover of that stock of money, or velocity, is showing a sharp deceleration. Presently M2 velocity is declining at a 3.5% annual rate, and there are signs that it may decline even faster. If growth in M2 or velocity subsides much further, then nominal GDP growth is unlikely to reach the Fed’s recently revised forecast of 2.6% this year (M*V=Nominal GDP).
At year-end 2014 the Fed was forecasting nominal GDP growth to accelerate to 4.1% this year, compared with 3.7% and 4.6% actual increases in 2014 and 2013, respectively. In six months the Fed has once again been forced to admit it's error and has massively lowered its forecast of nominal growth to 2.6%. Additionally, the Fed formerly expected a 2.8% increase in real GDP and now anticipates only a 1.9% increase in 2015, down from 2.4% and 3.1% in 2014 and 2013, respectively. The inflation rate forecast was also lowered by 60 basis points.
Transitory increases in long Treasury bond yields are not likely to be sustained in an environment of a pronounced downward trend in growth in both real and nominal GDP. However the expectation of lower long rates is also bolstered by the well-vetted economic theory of “the Wicksell effect” (Knut Wicksell 1851-1926).
Wicksell suggested that when the market rate of interest exceeds the natural rate of interest funds are drained from income and spending to pay the financial obligations of debtors. Contrarily, these same monetary conditions support economic growth when the market rate of interest is below the natural rate of interest as funds flow from financial obligations into spending and income. The market rate of interest and the natural rate of interest must be very broad in order to capture the activities of all market participants. The Baa corporate bond yield, which is a proxy for a middle range borrowing risk, serves the purpose of reflecting the overall market rate of interest. The natural rate of interest can be captured by the broadest of all economic indicators, the growth rate of nominal GDP.
In comparing these key rates it is evident that the Wicksell effect has become more of a constraint on growth this year. For instance, the Baa corporate bond yield averaged about 4.9% in the second quarter. This is a full 230 basis points greater than the gain in nominal GDP expected by the Fed for 2015. By comparison, the Baa yield was only 70 basis points above the year-over-year percent increase in nominal GDP in the first quarter.
To explain the adverse impact on the economy today of a 4.8% Baa rate verses a nominal GDP growth rate of 2.6% consider a $1 million investment financed by an equal amount of debt. The investment provides income of $26,000 a year (growth rate of nominal GDP), but the debt servicing (i.e. the interest on Baa credit) is $48,000. This amounts to a drain of $22,000 per million. Historically the $1 million investment would, on average, add $2,500 to the annual income spending stream. Over the past eight decades, the Wicksell spread averaged a negative 25 basis points (Chart 3).
Since 2007 however, the market rate of interest has been persistently above the natural rate, and we have experienced an extended period of subpar economic performance. Also, during these eight years the economy has been overloaded with debt as a percent of GDP and, unfortunately, too much of the wrong type of debt. The ratio of public and private debt moved even higher over the past six months suggesting that the Wicksell effect is likely to continue enfeebling monetary policy and restraining economic growth and inflation.
Cost Push Inflation Means Higher Yields
The second misperception is more subtle. The suggestion is that higher health care and/or wage costs will force inflation higher. It follows, therefore, that Treasury bond yields will rise as they are heavily influenced by inflationary expectations and conditions. Further, this higher inflation will cause the Fed to boost the federal funds rate.
Some argue that health care insurance costs are projected to rise very sharply, with some companies indicating that premiums will need to rise more than 50% due to the Affordable Care Act. Even excluding the extreme increases in medical insurance costs, many major carriers have announced increases of 20% or more. Others argue that the six-year low in the unemployment rate will cause wage rates to accelerate.
Four considerations cast doubt on these cost- push arguments. First, increases in costs for medical care, which has inelastic demand, force consumers to cut expenditures on discretionary goods with price elastic demand. Goods with inelastic demand do not have many substitutes while those with elastic demand have many substitutes. When an economy is experiencing limited top-line growth, as it is currently, the need to make substitute-spending preferences is particularly acute. Thus, discretionary consumer prices are likely to be forced lower to accommodate higher non-discretionary costs, leaving overall inflation largely unchanged.
Second, alternative labor market measures indicate substantial slack remains and evidence is unconvincing that wage rates are currently rising to any significant degree. The U.S. Government Accountability Office (GAO) released a report that looks at the “contingent workforce” (Wall Street Journal, May 28, 2015). These are workers who are not full-time permanent employees. In the broadest sense, the GAO found these workers accounted for 40.4% of the workforce in 2010, up from 35.3% in 2006. The GAO found that this growth mainly results from an increase in permanent part-timers, a category that grew as employers reduced hours and hired fewer full-time workers. The GAO also said that the actual pay earned was nearly 50% less for a contingent worker than a person with a steady full time job. The process portrayed in the study undermines the validity of the unemployment rate as an indicator because a person is counted as employed if they work as little as one hour a month. Additionally there is an upward bias on average hourly earnings due to the difference in hours worked between full-time and contingent workers.
Third, corporate profits and closely aligned productivity measures are more consistent with declining, rather than strengthening, wage increases. After peaking in the third quarter of 2013, profits after tax and adjusted for inventory gains/losses and over/under depreciation have fallen by 16% (Chart 4). Over the past four years, nonfarm business productivity increased at a mere 0.6% annual rate, the slowest pace since the early 1980s. A significant wage increase would cut substantially into already thin profits as top-line growth is decelerating, and the dollar hovers close to a 12.5 year high. Together the profits and productivity suggest that firms need to streamline operations, which would entail reducing, rather than expanding, employment costs.
Fourth, experience indicates inflationary cycles do not start with rising cost pressures. Historically, inflationary cycles are characterized by “a money, price and wage spiral” and in that order. In other words, money growth must accelerate without an offsetting decline in the velocity of money. When this happens, aggregate demand pulls prices higher, which, in turn, leads to faster wage gains. The upturn leads to a spiral when the higher prices and wages are reinforced by another even faster growth in money not thwarted by velocity. Current trends in money and velocity are not consistent with this pattern and neither are prices and wages.
Normalizing the Federal Funds Rate
A third argument is that the Fed needs to normalize rates, and as they do this, yields will also rise along the curve. It is argued the Fed has held the federal funds rate at the zero bound for a long time with results that are questionable, if not detrimental, to economic growth. Proponents for this argue that the zero bound may have resulted in excessive speculation in stocks and other assets. This excess liquidity undoubtedly boosted returns in the stock market, but the impact on economic activity was not meaningful. At the same time, the zero bound and the three rounds of quantitative easing reduced income to middle and lower range households who hold the bulk of their investments in the fixed income markets. Thus, to reverse the Fed’s inadvertent widening of the income and wealth divide, the economy will function better with the federal funds rate in a more normal range. Also, by raising short-term rates now, the Fed will have room to lower them later if t he economy worsens.
Normalization of the federal funds rate is widely accepted as a worthwhile objective. However, achieving normalization is not without its costs. In order to increase the federal funds rate, the Fed will raise the interest rate on excess reserves of the depository institutions (IOER). Also, the Fed will have to shrink the $2.5 trillion of excess reserves owned by the depository institutions by conducting reverse repurchase agreements. This is in addition to operations needed to accommodate shifts in excess reserves caused by fluctuations in operating factors, such as currency needs of the non- bank public, U.S. Treasury deposits at the Fed and Federal Reserve float. If increases in the IOER do not work effectively, the Fed will then need to sell outright from its portfolio of government securities, causing an even more significant impact out the yield curve. The Fed’s portfolio has close to a seven-year average maturity.
A higher federal funds rate and reduced monetary base would place additional downward pressure on both money growth and velocity, serving to slow economic activity. Productivity of debt has a far more important influence on money velocity than interest rates. Nevertheless, higher interest rates would cause households and businesses to save more and spend less, which, in turn, would work to lower money velocity. Such a policy consequence is highly unwelcome since velocity fell to a six decade low in the first quarter and another drop clearly appears to have occurred in the second quarter.
These various aspects of the Fed’s actions would, all other things being equal, serve to reduce liquidity to the commodity, stock and foreign exchange markets while either placing upward pressure on interest rates or making them higher than otherwise would be the case. Stock prices and commodity prices would be lower than they otherwise. In addition the dollar would be higher than otherwise would be the case deepening the deficit between imports and exports of goods and services.
Increases in the federal funds rate would be negative for economic activity. As the Fed’s restraining actions become apparent, however, the Fed could easily be forced to lower the federal funds rate, making increases in market interest rates temporary.
The predicament the Fed is in is one that could be anticipated based on the work of the late Robert K. Merton (1910-2003). Considered by many to be the father of modern day sociology, he was awarded the National Medal of Science in 1994 and authored many outstanding books and articles. He is best known for popularizing, if not coining, the term “unanticipated consequences” in a 1936 article. He also developed the “theory of the middle range”, which says undertaking a completely new policy should proceed in small steps in case significant unintended problems arise. As the Fed’s grand scale experimental policies illustrate, anticipating unintended consequences of untested policies is an impossible task. For that reason policy should be limited to conventional methods with known outcomes or by untested operations only when taken in small and easily reversible increments.
Bond Market Bubble
The final argument contends that the Treasury bond market is in a bubble, and like all manias, it will burst at some point. In The New Palgrave, Charles Kindleberger defined a bubble up as …" a sharp rise in the price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers". The aforementioned new buyers are more interested in profits from “trading the asset than its use or earnings capacity”. For Kindleberger the high and growing price is unjustified by fundamental considerations. In addition Kindelberger felt that the price gains were fed by ‘momentum’ investors who buy, usually with borrowed funds, for the sole purpose of selling to others at a higher price. For Kindleberger, a large discrepancy between the fundamental price and the market price reflected excessive debt increases. This condition is referred to as “overtrading”. At some point, perhaps after a prolonged period of time, astute investors will begin to recognize the gap between market and fundamental value. They will begin to sell assets financed by debt, or their creditors may see this gap and deny the speculators credit. Charles Kindleberger called this process “discredit”. For Kindleberger, the word discredit was designed to capture the process of removing some of the excess debt creation. The phase leads into the popping of the bubble and is called “revulsion”.
The issue in determining whether or not a bubble exists is to determine what constitutes fundamental value. For stocks this is generally considered to be after-tax earnings, cash flow or some combination of the two and the discount rate to put these flows in present value terms. Most experts who have addressed this issue of economic fundamentals have confined their analysis to assets like stocks or real estate. In the Palgrave article Kindelberger did not specifically cover the case of bonds. We could not find discussions by well- recognized scholars that explicitly defined a Treasury bond value or a market bubble. The reason is that there is no need.
To be consistent with well-established and thoroughly vetted theory, the economic value of long-term Treasury bonds is determined by the relationship between the nominal yield and inflationary expectations, or the real yield. To assess the existence of a Treasury bond bubble one must evaluate the existing real yield in relation to the historic pattern of real yields. If the current real yield is well above the long-term historic mean then the Treasury bond market is not in a bubble. However, if the current real yield is significantly below this mean, then the market is in a bubble. By this standard, the thirty-year Treasury bond is far from a bubble. In the past 145 years, the real long bond yield averaged 2.1%. At a recent nominal yield of 3.1% with a year over year increase in inflation of 0.1%, the real yield stands at 3%, 50% greater value than investors have, on average, earned over the past 145 years. Indeed, the real yield is virtually the same as in 1990 when the nominal bond yield was 9%. Contrary to the Treasury bond market being in a bubble, errant concerns about inflation or other matters have created significant value for this asset class.
Conclusion
In summary, economic theory and history do not suggest the secular low in inflation, or that its alter ego, Treasury bond yields, is at hand. The excessive debt burden, slow money growth, declining money velocity, the Wicksell effect and the high real rate of interest indicate that the fundamental elements are exerting downward, rather than upward, pressure on inflation. Inflation will not trough as long as the US economy continues to become even more indebted. While Treasury bond yields have repeatedly shown the ability to rise in response to a multitude of short-run concerns that fade in and out of the bond market on a regular basis, the secular low in Treasury bond yields is not likely to occur until inflation troughs and real yields are well below long-run mean values. We therefore continue to comfortably hold our long-held position in long-term Treasury securities.
- 15 Years After Land-Grabs, Mugabe Invites White Farmers Back To Zimbabwe
File this one away in the “when populism backfires” folder.
A little over a month after announcing that the Zimbabwean dollar – which, you’re reminded, was phased out in 2009 after inflation rose modestly to 500 billion percent – would be demonetized and exchanged at a generous rate of $5 for every 175 quadrillion, Zimbabwe will for the first time rethink the sweeping land grabs which began in 2000 and subsequently crippled the country’s economy.
Many Zimbabwean farmers who have stopped growing food in favor of “green gold” (tobacco) fear they will starve this winter after a severe drought and a generalized “lack of knowledge” left them with a subpar crop that fetched little at auction. Here’s more from Rueters:
Thousands of small-scale farmers in Zimbabwe fear they will be going hungry this winter after abandoning traditional staples like maize, sorghum and groundnuts for tobacco, a cash crop known locally in this southern African nation as “green gold”.
For 15 years after Zimbabwe’s agriculture sector collapsed in the face of President Robert Mugabe’s seizure of white-owned farms to resettle landless blacks, the tobacco industry has been booming, with farmers funded by private firms to grow tobacco.
But this switch, coupled with the worst regional drought in nearly a decade, has left Zimbabwe in a precarious food situation. Many farmers have complained of low prices as the season ends while buyers argue the quality of the crop was poor.
The tobacco industry has become the country’s biggest export earner with over 88,000 growers registered with the tobacco regulatory body, the Tobacco Industry and Marketing Board, in the 2014/15 season, up from 52,000 in 2012.
But the returns are often uncertain and many farmers have been left disappointed.
Industry figures showed that at the end of the selling season this month farmers sold 188.5 million kgs worth $555 million, down 8.5 percent from a year ago when the crop was worth $654 million.
“It was a disaster,” said David Muyambo, 35, a father of four, who earned $74 from tobacco sales this season after investing $1,200 in his crop. “I need to buy food for my family and I have no money.”
Muyambo blames his failure on erratic rains, which decimated his crop, as well as his lack of knowledge on how to apply fertilizer, remove suckers and cure the crop.
Muyambo said he will never farm tobacco again.
With more farmers focused on tobacco, Zimbabwe’s harvest of maize, a staple food, dropped by 49 percent in the 2014/15 season, the government said, which is set to exacerbate food shortages in Zimbabwe, once the bread-basket of the region.
Against this rather dreary backdrop, the government is beginning to reconsider its stance towards white farmers and will, according to The Telegraph, “give official permission for some whites to stay on their land.”
Via The Telegraph:
Zimbabwe’s government has for the first time suggested it may give official permission for some white farmers to stay on their land, 15 years after it sanctioned widespread land grabs that plummeted the country into an economic crisis.
Douglas Mombeshora, the Zanu-PF Lands Minister, said provincial leaders had been asked to draw up a list of white farmers they wanted to stay on their farms deemed to be “of strategic economic importance”.
“We have asked provinces to give us the names of white farmers they want to remain on farms so that we can give them security of tenure documents to enable them to plan their operations properly,” Mr Mombeshora said.
More than 4,000 white farmers lost their land after Mr Mugabe lost a referendum to the new Movement for Democratic Change party and, in a bid to regain popularity, authorised land grabs by disaffected war veterans.
Today, fewer than 300 white farmers remain on portions of their original land holdings in Zimbabwe and many of the seized farms lie fallow, meaning the former Breadbasket of Africa has to import food to feed its population.
Among remaining farmers who have been recommended for a reprieve of Mr Mugabe’s edict that whites can no longer own land in Zimbabwe is Elizabeth Mitchell, a poultry farmer who produces 100,000 day-old chicks each week.
And so once again we see that necessity (a food shortage) breeds invention (rethinking populist land grabs), but lest anyone should believe that Mugabe has done a complete 180, we’ll close with the following advice given to supporters at a recent Patriotic Front rally:
“Don’t be too kind to white farmers. They can own industries and companies, or stay in apartments in our towns but they cannot own land. They must leave the land to blacks.”
- Commodity Carnage Contagion Crushes Stocks & Bond Yields
Summing up Mainstream media today…
Where to start…
Bonds – Good!
Stocks – Bad!
Commodities – Ugly!
* * *
Everything was red in equity index land today… Trannies worst day since January
Stocks are all red for the week… Dow is down over 400 points from Monday's highs back below its 200DMA; S&P 500 cash is back below its 50DMA; and Russell 2000 broke below its 50 & 100DMA
Financials have given up their earlier week gains (as rates flatten) and only builders remain green on the week…
Leaving The Dow red for 2015…
52-Week Lows are at their highest since 2014…
On the week, the Treasury complex is seeing major flattening as the long-end collapses while short-end lifts on rate hike expectations…
With 30Y retracing all "Greece is fixed" weakness…
With 2s30s near 3 month flats…
Maybe all that NIM hope is overprices after all…
The US Dollar leaked lower on the day as EUR strengthened and cable weakened…
Summing up th edetails across the FX space (courtesy of ForexLive)
The dollar was mixed in trading today. It rose against the GBP and AUD, fell against the EUR NZD. and JPY, and was little changed vs the CAD and CHF.
The cable was the big loser on the day and is closing near low levels after weak retail sales took some of the jubilance from thoughts of a quicker tightening. BOE McCafferty did comment, however, that the BOE must be careful not to keeps rates too low for too long. EURGBP surged higher in trading today.
In Canada, stronger than expected retail sales sent the USDCAD sharply lower, but oil price continued to fall with WTI crude down 1.14% on the day at the close. What was gained in the London morning session for the loonie (and after the release of the data) was taken all back by the close.
The EURUSD rallied to new week highs (highest level since July 15th). The pair did find sellers against technical levels defined by the 50% retracement and the 100 day MA at the 1.1011 and 1.1000 respectively.
Twenty-four hours after the RBNZ cut their rate by 25 basis points, the NZDUSD is ending the day up from 5 pm close at 0.6560 but off the London session highs at 0.6694. The pair is ending the NY session testing the 200 hour MA at the 0.6606 level. Disappointment from not cutting 50 basis points sent the pair higher but lower rates are still expected between now and the end of the year.
But that did nothing to support commodities…
Copper now at 6 year lows
And front-month crude getting close to cycle lows…
* * *
Scotiabank's Guy Haselmann provides some more ominous color…
I believe the plunging of the commodity complex is telling us that the China economy could be imploding. Problems stemming from China are spreading further into more sectors and markets (various high yield sectors, emerging markets, EM and commodity currencies).
As I wrote in my note Tuesday (Too Much of Everything), Zero interest rates have contributed to over-production, pressuring consumer prices lower. Certainly, borrowing in the energy sector contributed to the over-supply of oil and look what has happened in that sector. Now, weakening demand from China is accelerating the decent in most commodities. Budgets of EM supplier-countries and commodity exporters are being materially impacted.
As commodities fall, the FOMC says that inflation targets are harder to obtain, leading to a self-perpetuating belief that continued cheap money is needed.
Yet, claims fell to the lowest level since 1973, housing is strong, and auto sales are back to almost 17mm units (etc). Clearly, the Fed has gotten itself into a difficult position. By not lifting-off and taking their medicine in 2014 – market imbalances today are now bigger and the consequences greater.
China is unfolding as the most important story of 2015 for markets. Stay alert. Long-dated US Treasuries remain attractive and good place to hid.
* * *
Charts: Bloomberg
Bonus Chart: Protection costs are dramatically diverging between credit and stocks…
As Bloomberg notes, the last time the VIX diverged from high-yield CDS this much was in August 2013, when investors were anticipating the Federal Reserve would start reducing its quantitative easing program. The equity volatility gauge jumped more than 70 percent in the next two months as the S&P 500 lost as much as 4.6 percent.
Bonus Bonus Chart: The real fear index is the most complacent since before Lehman… (details on Implied Correlation here)
- The Hard Truth: For Retail Investors, The NYSE Is Always Out Of Service
1. Charts of the Event.
On July 8, 2015 at 11:32:57, trades and quotes stopped updating from the NYSE. Trading eventually resumed at 3:10pm.
Timeline up to the halt.
Trades from NY-ARCA (red) and NYSE (blue) when NYSE halted (note the disappearance of the blue dots).
NYSE trades when NYSE halted. (This is the chart Stephen Colbert used on the The Late Show)
NYSE trades when NYSE resumed.
2. Does the NYSE matter? The Importance of NYSE's Quote.
On a typical trading day, quotes from the NYSE set the NBBO (National Best Bid/Offer) more than 60% of the time – beating out 10 other exchanges. You would think that losing NYSE's quote would severely impact the Retail Investor's trading experience.
Below is the same chart as above but on the day of the NYSE halt. Right at the open we can see there's a problem. Then NYSE's quote disappears, mostly replaced by Nasdaq.
There is also this excellent study of how trades fared among different exchanges, which is worth reading. What they found: the NYSE has great executions compared to other exchanges.
3. The Halt's Impact on Retail Investors: Experts and Spin.
"Even though the NYSE floor is down, the NYSE Arca exchange is still operating.
A retail investor who wants to trade Exxon will see no impact from the outage."James Angel, Georgetown business school finance professor to Business Insider
The Street.com article below is representative of how most main stream news media were spinning the NYSE halt story: Retail was having a rough day! It's hard to fault them, given how important NYSE's quote is for NYSE stocks.
Later in the day, when no evidence surfaced of Retail Investors having trouble, a few began questioning the news spin.
When it was clear that Retail Investors weren't impacted, the search was on for what was behind the miracle "success story".
Without any evidence or a basic understand of retail order execution, some went so far as to claim stock market fragmentation saved the day. (We think Pisani got it dead wrong).
Naturally, Modern Markets, the High Frequency Trading (HFT) Lobbyist, was quick to claim another benefit of HFT!
They saved the day! Naturally. For a good look at how far lobbyists will go to spin a story (and probably more disturbing, how far a major network will let them), please watch this short video.
4. The Hard Truth: To Retail Investors, the NYSE is Always Dark.
A few of those who really understood where retail stock orders execute spoke the truth:
But wait a minute, can Chris Nagy be right? After all, we know that the NYSE sets the best prices more than 60% of the time. Without NYSE's best prices, there had to be some harm, right?
Retail orders execute on the NYSE, right?
Well, in a word: NO.
What the news media conveniently (or intentionally) forgot to ask and investigate:
What really happens to the Retail Investor order?
Answering part of that question is a simple matter of searching SEC required 606 reports from each retail broker.
The following list is by no means complete. For brokers not listed, simply Google "BrokerName 606 Report".
Here's what we found:
1. Schwab Doesn't Route to NYSE
2. Vanguard Brokerage Doesn't Route to NYSE
3. E*Trade Doesn't Route to NYSE
4. Fidelity Retail Brokerage Doesn't Route to NYSE
5. Scottrade Doesn't Route to NYSE
6. Credit Suisse (Private Client Services no less) Doesn't Route to NYSE (or anywhere else!)
7. Morgan Stanley Wealth Management Doesn't Route to NYSE
8. Edward Jones Doesn't Route to NYSE
9. Northern Trust Doesn't Route to NYSE
10. Wells Fargo Doesn't Route to NYSE
11. Lightspeed Doesn't Route to NYSE
12. TradeKing Doesn't Route to NYSE
13. Citigroup Doesn't Route to NYSE (Note: Citi isn't retail, but as they own ATD we found this very interesting)
Now you know why Retail Investors didn't have a problem with the NYSE being out of service – retail orders rarely route to the NYSE.
For Retail Investors, the NYSE is ALWAYS OUT OF SERVICE.
Which leads to the inevitable question..
5. Where Do Retail Investor Orders Go?
The simple answer: to the highest contracted bidder. Stock "wholesalers" or internalizers like Citadel or Knight pay retail brokers lots of cash to execute retail trades, essentially creating a "third market". Why? Because in a high frequency trading world, where stock prices have never been more fuzzy to the end user, but crystal clear to those that spend enormous sums on colocation and PhD employees, it's never been easier to print money (not unlike Bernie Madoff's scheme in the 90's). But that is the subject of a much, much longer story. Someone should write a book.
In the meantime, we strongly encourage you to read this fabulous guide, written by an industry insider. This guide shines much needed light on how Wall Street treats (games) each type of Retail Investor order.
- US Recession Imminent – World Trade Slumps By Most Since Financial Crisis
As goes the world, so goes America (according to 30 years of historical data), and so when world trade volumes drop over 2% (the biggest drop since 2009) in the last six months to the weakest since June 2014, the "US recession imminent" canary in the coalmine is drawing her last breath…
As Wolf Street's Wolf Richter adds, this isn’t stagnation or sluggish growth. This is the steepest and longest decline in world trade since the Financial Crisis. Unless a miracle happened in June, and miracles are becoming exceedingly scarce in this sector, world trade will have experienced its first back-to-back quarterly contraction since 2009.
Both of the measures above track import and export volumes. As volumes have been skidding, new shipping capacity has been bursting on the scene in what has become a brutal fight for market share [read… Container Carriers Wage Price War to Form Global Shipping Oligopoly].
Hence pricing per unit, in US dollars, has plunged 14% since May 2014, and nearly 20% since the peak in March 2011. For the months of March, April, and May, the unit price index has hit levels not seen since mid-2009.
World trade isn’t down for just one month, or just one region. It wasn’t bad weather or an election somewhere or whatever. The swoon has now lasted five months. In addition, the CPB decorated its report with sharp downward revisions of the prior months. And it isn’t limited to just one region. The report explains:
The decline was widespread, import and export volumes decreasing in most regions and countries, both advanced and emerging. Import and export growth turned heavily negative in Japan. Among emerging economies, Central and Eastern Europe was one of the worst performers.
Given these trends, the crummy performance of our heavily internationalized revenue-challenged corporate heroes is starting to make sense: it’s tough out there.
But not just in the rest of the world. At first we thought it might have been a blip, a short-term thing. Read… Americans’ Economic Confidence Gets Whacked
- What's The Real Reason The Fed Is Raising Rates? (Hint: It's Not Employment)
Submitted by Roger Thomas via ValueWalk.com,
Sometime this fall, the Federal Reserve will begin a new tightening cycle.
Publicly, Federal Reserve officials appear to be confident that the American labor market may be overheating or that inflation may be on the way in.
Is this the case?
In looking at Employment, Industrial Production, Consumer Prices, Capacity Utilization, Retail Sales, and the West Texas Intermediate price of oil, there's no evidence that the Fed should raise rates.
What is the Fed worried about?
Probably, and almost exclusively, it's financial asset price appreciation.
Here's a review.
Employment
A picture of employment growth against the Federal Reserve's target interest rate follows. Interestingly, in past tightening cycles, employment growth was either accelerating or flat.
That's not the case this time around. Employment growth is decelerating, and has been decelerating since February 2015.
Industrial Production
A very similar story to Employment is present in the Industrial Production picture. Except for one instance, Industrial Production growth is either accelerating or flat when the Fed raises rates.
That's not the case this time around.
Consumer Prices
Here's the Consumer Price picture.
As with employment, the Fed almost always raises rates when inflation is accelerating.
That's not the case this time.
Capacity Utilization
Capacity Utilization has a very similar story to Industrial Production.
Price of Oil
Here's the oil price picture.
A less interesting story emerges here, probably because, of the indicators mentioned here, oil is of least policy value.
Retail Sales
As with the other economic indicators already mentioned, a tightening cycle this fall would be quite odd when looking at Retail Sales growth.
Summing Up the Non-Causes
As indicated, it's probably not the real economy behind the Fed's thinking.
* * *
Here's what's really concerning Fed officials.
Equity Values
It's equity values that has the Fed concerned.
The Fed sees it's ultra-low monetary policy as having been incredibly stimulative to financial assets. And, they don't want another technology bubble.
So, to avoid a technology bubble, now's the time to start raising rates.
Since the last time the Fed started a tightening cycle, the S&P 500 is up 62%, about where the mid-90s experience of 63% was. It's well short of the +191% in the late90s/early 2000s equity markets produced. It's also better than the -21% experienced in the mid-2000s.
Interestingly, the P/E ratio confirms a similar story.
In looking at the Shiller P/E ratio, perhaps a better rule than the Taylor rule to predict Fed tightening moves today is the P/E ratio rather than inflation and unemployment. Just think about it.
It's an interesting experiment for the Fed this time around, being concerned about the financial economy more than the real economy.
Fed Conclusion
Overall, although Federal Reserve officials publicly claim that the reason for impending rate hikes is that the American economy is doing well, there's not a lot of evidence, at least based upon prior tightening cycles, that it's the real economy the Fed is worried about.
Rather, the pending beginning of the Fed's rate hiking season likely stems almost exclusively from concern about financial markets.
Perhaps unsurprisingly, the Fed doesn't want another technology-type bubble (interesting that the Fed thinks it knows the intrinsic value of stocks better than the market). At least, that's what the data appear to suggest.
- A Stunning Look At California's Historic Drought – From The Air
"Ugly brown rings where waves used to lap at the shore. Dry docks lying on desiccated silt. Barren boat ramps. Trickles of water." Those are just some of the disturbing images California's Department of Water Resources team saw in an aerial tour of Northern California's Folsom Lake, Lake Oroville and Shasta reservoirs released this week…
The dramatic aerial views timelapsed from just a year ago show the level of devastation already… and it's not about to get any better…
Click image below for interactive gallery…
- Amazon Just Became Bigger Than Walmart: Here's Why
MThe moment everyone has been waiting for has finally arrived, by which of course, we mean the moment when the market cap of AMZN would finally surpass Wal-mart.
Just after 4pm Jeff Bezos’ Amazon reported number that were quite impressive at first blush. And at second blush as well. Among these: a whopping blow out beat on the topline of $23.2 billion in revenue, an increase of 27% from a year ago, and far above the $22.4 billion expected, which in turn resulted in Net income of $92 million, or EPS of $0.19. The street was expecting a loss of $0.14 per share.
In terms of where the bulk of the growth and profitability came from, one word, or rather three letters: AWS (Amazon Web Services), also known as the “cloud”, whose net sales soared by 81% Y/Y to $1.8 billion generating a 21.4% operating margin and net income of $391 million up from $77 million a year ago.
And while the quarter was good especially for AMZN the “web services” company, it was AMZN’s forecast for the future that was even more impressive:
The company now expects net sales to be between $23.3 billion and $25.5 billion, or to grow between 13% and 24% compared with third quarter 2014. It also expects operating income (loss) is expected to be between $(480) million and $70 million, compared to $(544) million in third quarter 2014, although if the current quarter is any indicatiton this is some rather serious sandbagging.
But words aside: here, in three charts is what happened, with the company that now employs a record 183,000 people:
Worldwide net sales vs total Employees:
Q2 operating and net income in context. Clearly the quarter was an outlier – the only question is why and how?
And finally LTM Free Cash Flow. It appears Bezos does indeed have quite a bit FCF leverage if and when he wants it.
Again our question: why convert AMZN from a growth to a free cash flow model now: the last time the company tried this it ended up being quite disappointed.
For now, however, the algos love it, the shorts hate it and are scrambling to cover, and the result is an AMZN whose market cap has just jumped by over $40 billion to a record $268 billion.
And, yes, It is now far bigger than Walmart.
- The Ashley Madison Data Breach Explained
- Is The Echo Housing Bubble About To Burst?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Echo bubbles aren't followed by a third bubble.
Speculative bubbles that burst are often followed by an echo bubble, as many participants continue to believe that the crash was only a temporary setback.
The U.S. housing market is experiencing a classic echo bubble. Exhibit A is the Case-Shiller Housing Index for the San Francisco region, which has surged back to levels reached at the top of the first bubble:
Exhibit B is the Case-Shiller 20 City Housing Index, which has notched a classic Fibonacci 62% retrace of the first bubble's decline.
Several things pop out of the Case-Shiller San Francisco chart. One is the symmetry of the two stages of the initial housing bubble: the first leg rose 80% from 1997 to 2001, and the second leg also rose about 80% from 2003 to 2007.
There is also a time symmetry, as each leg took about five years.
The echo bubble has now inflated for roughly the same time period, and has almost fully retraced the 45% decline from the 2007 peak. Though recent buyers may hope this bubble will be different from all previous bubbles (i.e. it will never pop), history suggests the echo bubble will be fully retraced in a sharp decline lasting about two to three years, in rough symmetry with the collapse of the first housing bubble 2008-2010.
The broader 20-city Case-Shiller Index reflects the same time symmetry: the echo bubble and the initial housing bubble both took about the same length of time to reach their zenith. Once again, we can anticipate a symmetrical decline that roughly parallels the 33% drop from 2007 to 2009.
There is one key difference between the first bubble and the echo bubble: echo bubbles aren't followed by a third bubble. Markets often give second-chances, but they rarely offer third-chances.
- Turkey Permits U.S. To Use Its Airbase For Air Strikes Against Syria
Earlier we reported that in an apparent retaliation against Monday’s alleged suicide bombing and today’s follow up killing of a Turkish soldier on the border with Syria, the Turkish army launched what under normal conditions would be deemed a land invasion of Turkey when four of its tanks entered Syrian territory. Rhetorically, we asked in “one may wonder if NATO-member Turkey’s land invasion of Syria, which many have said was long overdue following months of rhetoric and belligerent posturing, under the pretext of ISIS “liberation”, has just begun.”
A following report from the WSJ largely answers our question: citing unnamed defense officials, WSJ reports that after months of negotiations, “Turkey has agreed to let the U.S. military carry out airstrikes against Islamic State fighters from a U.S. air base near the Syrian border.”
This is the same authoritarian president who has repeatedly cracked down against protesters using various less than media friendly means, and one whom Obama has lashed out at diplomatically. It appears that when pursuing grander visions, Obama is will to forgive anyone’s humanitarian record, or lack thereof, and do anything to achieve America’s real politik ambitions.
Like in this case: the deal, agreed to by President Barack Obama and Turkish President Recep Tayyip Erdogan, will allow the U.S. to use Incirlik Air Base in eastern Turkey to send manned and unmanned planes to attack Islamic State fighters, the officials said. The two leaders spoke on Wednesday, the White House said.
Use of Incirlik is part of a broader deal between the U.S. and Turkey to deepen their cooperation in the fight against Islamic State that is growing increasingly perilous for Turkey.
On Thursday, Islamic State forces in Syria and the Turkish military engaged in a deadly cross-border battle that left at least one Turkish officer dead.
“They’re in a counter-ISIL fight right across the border,” said one defense official, using one of the acronyms for Islamic State, which is also known as ISIS.
And with that the northern wing of the anti-Syria, pardon anti-ISIS campaign is complete, with the US covering air sorties while Turkey will use NATO tanks to secure the ground and slowly but surely, together with the eastern front where the US will soon deplay troops, close in on Damascus to eliminate the biggest Syrian ISIS threat of them all: president Assad and his (and the Kremlin’s) stern anti-Qatar pipeline position.
- The Hunt For The "Mystery" Gold "Bear Raid" Leader Begins
In the immediate aftermath of Sunday night’s massive gold slam, which was oddly reminiscent of the great silver crash of 2011 when on May 1 just around 6:25pm, silver plunged by 15%, from $48 to $42 with no news or catalyst…
… marking the all time high price of silver in the current precious metals cycle (that particular ‘malicious seller’ has never been identified) the promptly arranged narrative was that because the gold crash took place in the span of 30 seconds just before Chinese stocks opened and broke the gold futures market not once but twice, that it has to be a China-based seller with Reuters taking the lead and quickly pointing the finger with an article titled “Gold hits five-year low, under $1,100 on Chinese selling.”
Ironically, the very same Reuters last night admitted that it had been wrong and that it was in fact: “New York sell orders in thin trade” that triggered the “Shanghai gold rout”:
In early Asian trading hours on Monday, when typically only tens of contracts of gold are traded, investors dumped more than $500 million worth of bullion in New York in four seconds, triggering the market’s biggest rout in years.
The sell-off began when one or more massive sell orders hit the price of gold on the CME Group’s Comex futures in New York a tenth of a second after 9:29 a.m. in Shanghai, triggering turnover of almost 5,000 lots of gold in a blink of an eye. That equates to 13 tonnes of gold, more than typically trades in hours during this time of day, and the selling knocked the price almost $20 to $1,100 per ounce during those four seconds. It marked the first leg of a dramatic 60-second sell-off that saw prices sink more than 4 percent to five-year lows.
And just like that the narrative shifts again: instead of a Chinese seller, the real culprit appears to have been a US-based entity masking as a Chinese trader, around which the media then conveniently built a further goal-seeked “story” in which the Sunday night selling (by a US entity now) was the result of a PBOC announcement that its gold holdings had risen to “only” 1600 tons… however the problem is that all this had been known since Friday morning.
So, fast forward to this morning when in yet another Reuters piece, we “find” that the narrative has shifted once more and that now, “traders from Hong Kong to New York are pointing the finger at others for being behind the move while struggling to unmask the mystery sellers.”
In other words: the “hunt” for the great gold “bear raid leader” has begun.
Singapore-based futures brokerage Phillip Futures declared “indiscriminate selling by Asian hedge funds at the stroke of the market’s open in Shanghai” as the chief cause of the price fall in a letter to clients.
But the most well known Chinese funds denied involvement, and as futures trading is anonymous, dealers may never know who was buying and selling during those crucial seconds.
Such details often only become available if regulators take action, and amid the regulatory scrutiny following China’s recent equity market tumbles, it’s unlikely any trader or fund will be eager to take credit for setting off another avalanche.
The fact that the selloff occurred while Japan’s markets were closed for a holiday and U.S. and European traders remained on weekend leave served to implicate China-based dealers in the eyes of some market participants.
At this point a Reuters source even dared to use the “M” word:
“That move was aggressive manipulation. Somebody clearly wanted the market lower and timed it very well,” said a gold trader at a bank in Hong Kong, who saw parallels with the way funds have been linked to swings in copper.
Of course it was, but instead of focusing on what truly matters let’s go chasing for red, literally, herrings…
Chinese funds such as Shanghai Chaos Investment Co and Zhejiang Dunhe Investment Co were, according to traders, behind falls in copper, one in March last year when the metal fell more than 8 percent in three days, and again in January this year when copper slid almost 8 percent in two days.
… herrings which however had nothing to do with the actual selling:
Sources familiar with both Zhejiang Dunhe and Chaos, and at similar outfits, say that while China’s status as the dominant copper consumer left that market vulnerable to potential influence, China’s traders have no such sway over bullion.
“Honestly, Chinese hedge funds are not as experienced as the overseas veterans and gold is more connected to U.S. dollar movement and well-dominated by Wall Street,” said a trader with a Shanghai hedge fund.
Then, inexplicably, more truth:
A London-based trader with an investment bank agreed the lead seller might not be from Asia. “The selling was on Comex and could also be a non-Chinese fund just executing in what they thought was an illiquid timezone to get the biggest move,” the trader said.
Others got close to admitting what happened, but were stopped just short, instead falling back to what had already been set up as the false narrative:
Vishnu Varathan, senior economist at Mizuho Bank, added “there’s a good real money presence in centres like Hong Kong and Singapore. But of course, the inside people who knew where the trades were executed probably have their reason for citing Chinese hedge funds, but I don’t think they were alone in this trade.”
“I think one of the triggers was some disappointment with the amount of the buildup in China’s gold reserves so in terms of the proximity of that particular trigger and the markets that were open there was some involvement, I’m sure, but it may not be the full story,” Varathan said.
For the record, here is what we said moments after the “bear raid” took place:
Once again, as in February 2014 and on various prior cases, the fact that someone meant to take out the entire bid stack reveals that this was not a normal order and price discovery was the last thing on the seller’s mind, but an intentional HFT-induced slam with one purpose: force the sell stops.
So what caused it?
The answer is probably irrelevant: it could be another HFT-orchestrated smash a la February 2014, or it could be the BIS’ gold and FX trading desk under Benoit Gilson, or it could be just a massive Chinese commodity financing deal unwind as we schematically showed last March it could be simply Citigroup, which as we showed earlier this month has now captured the precious metals market via derivatives.
We then added: “we won’t know for sure until the CME once again explains who violated exchange rules with last night’s massive orders.“
This is the same CME which took 18 months to admit that the almost identical market halting gold flash crash from January 6, 2014 was the result of potentially premeditated “flawed” algo trading which “resulted in a disruptive and rapid price movement in the February 2014 Gold Futures market and prompted a Velocity Logic event.“
And, anticipating precisely today’s latest development in the great gold crash story, namely the pursuit of the perpetrators we also added: “there are many who do want to know the reason for the gold crash, which just like in January 2014 had a clear algorithmic liquidation component to it. Which means that until the CME opines on precisely who and what caused the latest gold market break, we won’t know with any certainty. That doesn’t mean that some won’t try to “explain” it.'”
Such as Reuters, on several occasions.
But the real answer, which almost certainly once again points to the trading desk of one Benoit Gilson in Basel, will surely never be revealed. Even in the January 2014 case, the CME stopped short of actually identifying precisely who had oredered the gold collapse instead leaving it broad as follows: “this failure resulted in unusually large and atypical trading activity by several of the Firm’s customers.”
Which ones? Or perhaps the $64,000 answer to that question is what the central banks and the BIS, and hence the CME, will guard at all costs.
Finally, as we also noted previously, “while the actual selling reason was irrelevant, the target was clear: to breach the $1080 gold price which also happens to be the multi-decade channel support level.“
So far this has almost succeeded, with gold repeatedly sliding just shy of $1080 but never actually breaching it. We expect this too support level to be taken out as what is now clear and accepted manipulation continues, which in retrospect, will merely afford those who buy gold for its true practical value, as insurance against a systemic collapse which is pretty close to where the Chinese central planners find themselves right now not to mention the imploding European monetary union, to buy more for the same paper price.
As for the “great”, and greatly misdirecting, hunt for the “bear raid” leader, one which will never reveal the true culprit, bring it on – we can always do with some entertainment meant to distract the masses. In fact, we would not be at all surprised if some Indian trader out of his parent’s basement in a London suburb ends up going to prison for this while those guilty of chronic, constant manipulation continue to walk free…
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