Today’s News July 27, 2015

• Supply and Demand Report 26 Jul

  by Keith Weiner

   

  For those who are speculating on the dollar—i.e. most people—there was good news this week. The dollar rose almost a milligram, to 28.3mg gold. That’s a big gain, and welcome news for those who keep all of their eggs in the one dollar basket, perhaps because they don’t want to risk any of it on pet rocks.

  Yes, Jason Zweig at the Wall Street Journal actually said that. He couldn’t be more wrong—and yet he had a point. Wrong? Let me count the ways.

  One, per his title, he compares gold to a pet rock. A pet rock is either a useless knickknack, or else a fraud that preys on the irrational psychology of people in crowds. Gold is honest money, and the extinguisher of debt. Just because governments have banned it from the monetary system, does not make it either useless or a fraud.

  Two, he quotes a Barclays researcher saying that investors have become disillusioned with gold. Well, gold is not an investment. Even if one accepts the mainstream premise that gold is a commodity that you buy so you will make money—i.e. dollars—when it goes up, this is speculation. It is not investing. Our whole financial world is now stoned on the drug of zero interest rates. With no yield to be had, capital gain is all.

  Three, he says to own gold is an act of faith. Boy is this backwards! To go all-in on the debt of bankrupt governments is the real act of faith. And that is what one does, if one holds dollars or euros or pounds, etc.

  Fourth, he refers to inflation (by which he means rising prices) a few times. Gold purportedly has magical powers to fight inflation, but gold isn’t a “panacea” for it (straw man, much?) He later says gold is viewed as a hedge against inflation, but it does not go up as much as the alternatives (whatever those may be).

  I could go on, but I will stop here. Despite the cornucopia of errors, there is an excellent point buried in Zweig’s blog post.

  Suppose, as Zweig says, that everyone—or at least the current marginal gold trader—views gold as a speculative vehicle. In this view, it’s only useful to make bucks. Then, of course its price action is about as rational as the path of the planchette on a Ouija board. Everyone has the same price charts, and the same technical tools. Everyone can see the same trends. So when it is going up, it goes up. And when it is going down, it goes down.

  Of course, this may temporarily describe market conditions. But it in no way objectively describes gold.

  The price of gold dropped further this week, especially last Sunday night. We would guess that margin calls in China forced some liquidation. The price of silver did not drop as much, which is interesting in itself. Whomever was forced to liquidate either did not have a silver position, or else they have greater faith in that the price of the white metal will rise.

  The question is: did these hapless Chinese folks sell futures or metal? And we do not have to guess the answer to this question. We have the data to show it. Read on for the only accurate picture of the supply and demand conditions in the gold and silver markets, based on the basis and cobasis.

  First, here is the graph of the metals’ prices.

         The Prices of Gold and Silver
  

  We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

  One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

  Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in
  months. The world just does not keep much inventory in wheat or oil.

  With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

  Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio moved down this week.

  The Ratio of the Gold Price to the Silver Price
  

   

  For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

  Here is the gold graph.

         The Gold Basis and Cobasis and the Dollar Price 

   Note that we transitioned to the October contract, as First Notice Day for the August future approaches.

  Look at the price of the dollar rising (i.e. the price of gold falling) and along with it the scarcity of gold rising. This answers the question we posed up top. The price action this week was driven by selling of futures.

  Our comment last week now seems well-timed:

  “Is this a good time to bet on gold? While other events could continue to dominate the fundamentals (temporarily), we can think of worse times for this trade.”

  Other events—we suspect credit conditions in China—did dominate. And the attractiveness of a gold position increased this week. The fundamental price is now more than $100 over the market price. This is no guarantee that the market couldn’t go lower. The basis is not a timing indicator. It is helping us measure value.

  The December contract, by the way, also entered backwardation this week.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  The silver price dropped about 20 cents (i.e. the price of the dollar, measured in silver rose to about 2.12g silver). However, the cobasis actually fell. The December cobasis is nowhere near backwardation.

  The bottom line is that the fundamental price of silver fell even more. It is now dead even with the market price.

  We think it’s best to continue approaching silver with extreme caution. While the time is long past for shorting it (we never recommend naked shorting a monetary metal!) it is not the time for betting on silver either. We want to see either one more price drop, or else a steady increase in the scarcity of this metal to the market.

   

  © 2015 Monetary Metals

  

  

  

  

• Meet The Kagans: Seeking War To The End Of The World

  Submitted by Robert Parry, via The Ron Paul Institute for Peace & Prosperity,

  
  

  If the neoconservatives have their way again, US ground troops will reoccupy Iraq, the US military will take out Syria’s secular government (likely helping Al Qaeda and the Islamic State take over), and the US Congress will not only kill the Iran nuclear deal but follow that with a massive increase in military spending.

  Like spraying lighter fluid on a roaring barbecue, the neocons also want a military escalation in Ukraine to burn the ethnic Russians out of the east, and the neocons dream of spreading the blaze to Moscow with the goal of forcing Russian President Vladimir Putin from the Kremlin. In other words, more and more fires of Imperial “regime change” abroad even as the last embers of the American Republic die at home.

  Much of this “strategy” is personified by a single Washington power couple: arch-neocon Robert Kagan, a co-founder of the Project for the New American Century and an early advocate of the Iraq War, and his wife, Assistant Secretary of State for European Affairs Victoria Nuland, who engineered last year’s coup in Ukraine that started a nasty civil war and created a confrontation between nuclear-armed United States and Russia.

  Kagan, who cut his teeth as a propaganda specialist in support of the Reagan administration’s brutal Central American policies in the 1980s, is now a senior fellow at the Brookings Institution and a contributing columnist to The Washington Post’s neocon-dominated opinion pages.

  On Friday, Kagan’s column baited the Republican Party to do more than just object to President Barack Obama’s Iranian nuclear deal. Kagan called for an all-out commitment to neoconservative goals, including military escalations in the Middle East, belligerence toward Russia and casting aside fiscal discipline in favor of funneling tens of billions of new dollars to the Pentagon.

  Kagan also showed how the neocons’ world view remains the conventional wisdom of Official Washington despite their disastrous Iraq War. The neocon narrative gets repeated over and over in the mainstream media no matter how delusional it is.

  For instance, a sane person might trace the origins of the bloodthirsty Islamic State back to President George W. Bush’s neocon-inspired Iraq War when this hyper-violent Sunni movement began as “Al Qaeda in Iraq” blowing up Shiite mosques and instigating sectarian bloodshed. It later expanded into Syria where Sunni militants were seeking the ouster of a secular regime led by Alawites, a Shiite offshoot. Though changing its name to the Islamic State, the movement continued with its trademark brutality.

  But Kagan doesn’t acknowledge that he and his fellow neocons bear any responsibility for this head-chopping phenomenon. In his neocon narrative, the Islamic State gets blamed on Iran and Syria, even though those governments are leading much of the resistance to the Islamic State and its former colleagues in Al Qaeda, which in Syria backs a separate terrorist organization, the Nusra Front.

  But here is how Kagan explains the situation to the Smart People of Official Washington:

  Critics of the recent nuclear deal struck between Iran and the United States are entirely right to point out the serious challenge that will now be posed by the Islamic republic. It is an aspiring hegemon in an important region of the world.

   

  It is deeply engaged in a region-wide war that encompasses Syria, Iraq, Lebanon, the Gulf States and the Palestinian territories. It subsidizes the murderous but collapsing regime of Bashar al-Assad in Syria, and therefore bears primary responsibility for the growing strength of the Islamic State and other radical jihadist forces in that country and in neighboring Iraq, where it is simultaneously expanding its influence and inflaming sectarian violence.

  The Real Hegemon

  While ranting about “Iranian hegemony,” Kagan called for direct military intervention by the world’s true hegemonic power, the United States. He wants the US military to weigh in against Iran on the side of two far more militarily advanced regional powers, Israel and Saudi Arabia, whose combined weapons spending dwarfs Iran’s and includes – with Israel – a sophisticated nuclear arsenal.

  Yet reality has never had much relationship to neocon ideology. Kagan continued:

  Any serious strategy aimed at resisting Iranian hegemony has also required confronting Iran on the several fronts of the Middle East battlefield. In Syria, it has required a determined policy to remove Assad by force, using US air power to provide cover for civilians and create a safe zone for Syrians willing to fight.

   

  In Iraq, it has required using American forces to push back and destroy the forces of the Islamic State so that we would not have to rely, de facto, on Iranian power to do the job. Overall, it has required a greater US military commitment to the region, a reversal of both the perceived and the real withdrawal of American power.

   

  And therefore it has required a reversal of the downward trend in US defense spending, especially the undoing of the sequestration of defense funds, which has made it harder for the military even to think about addressing these challenges, should it be called upon to do so. So the question for Republicans who are rightly warning of the danger posed by Iran is: What have they done to make it possible for the United States to begin to have any strategy for responding?

  In Kagan’s call for war and more war, we’re seeing, again, the consequence of failing to hold neocons accountable after they pushed the country into the illegal and catastrophic Iraq War by selling lies about weapons of mass destruction and telling tales about how easy it would be.

  Instead of facing a purge that should have followed the Iraq calamity, the neocons consolidated their power, holding onto key jobs in US foreign policy, ensconcing themselves in influential think tanks, and remaining the go-to experts for mainstream media coverage. Being wrong about Iraq has almost become a badge of honor in the upside-down world of Official Washington.

  But we need to unpack the truckload of sophistry that Kagan is peddling. First, it is simply crazy to talk about “Iranian hegemony.” That was part of Israeli Prime Minister Benjamin Netanyahu’s rhetoric before the US Congress on March 3 about Iran “gobbling up” nations – and it has now become a neocon-driven litany, but it is no more real just because it gets repeated endlessly.

  For instance, take the Iraq case. It has a Shiite-led government not because Iran invaded Iraq, but because the United States did. After the US military ousted Sunni dictator Saddam Hussein, the United States stood up a new government dominated by Shiites who, in turn, sought friendly relations with their co-religionists in Iran, which is entirely understandable and represents no aggression by Iran. Then, after the Islamic State’s dramatic military gains across Iraq last summer, the Iraqi government turned to Iran for military assistance, also no surprise.

  Back to Iraq

  However, leaving aside Kagan’s delusional hyperbole about Iran, look at what he’s proposing. He wants to return a sizable US occupation force to Iraq, apparently caring little about the US soldiers who were rotated multiple times into the war zone where almost 4,500 died (along with hundreds of thousands of Iraqis). Having promoted Iraq War I and having paid no price, Kagan now wants to give us Iraq War II.

  But that’s not enough. Kagan wants the US military to intervene to make sure the secular government of Syria is overthrown, even though the almost certain winners would be Sunni extremists from the Islamic State or Al Qaeda’s Nusra Front. Such a victory could lead to genocides against Syria’s Christians, Alawites, Shiites and other minorities. At that point, there would be tremendous pressure for a full-scale US invasion and occupation of Syria, too.

  That may be why Kagan wants to throw tens of billions of dollar more into the military-industrial complex, although the true price tag for Kagan’s new wars would likely run into the trillions of dollars. Yet, Kagan still isn’t satisfied. He wants even more military spending to confront “growing Chinese power, an aggressive Russia and an increasingly hegemonic Iran.”

  In his conclusion, Kagan mocks the Republicans for not backing up their tough talk: “So, yes, by all means, rail about the [Iran] deal. We all look forward to the hours of floor speeches and campaign speeches that lie ahead. But it will be hard to take Republican criticisms seriously unless they start doing the things that are in their power to do to begin to address the challenge.”

  While it’s true that Kagan is now “just” a neocon ideologue – albeit one with important platforms to present his views – his wife Assistant Secretary of State Nuland shares his foreign policy views and even edits many of his articles. As she told The New York Times last year, “nothing goes out of the house that I don’t think is worthy of his talents. Let’s put it that way.” [See “Obama’s True Foreign Policy ‘Weakness.’”]

  But Nuland is a foreign policy force of her own, considered by some in Washington to be the up-and-coming “star” at the State Department. By organizing the “regime change” in Ukraine – with the violent overthrow of democratically elected President Viktor Yanukovych in February 2014 – Nuland also earned her spurs as an accomplished neocon.

  Nuland has even outdone her husband, who may get “credit” for the Iraq War and the resulting chaos, but Nuland did him one better, instigating Cold War II and reviving hostilities between nuclear-armed Russia and the United States. After all, that’s where the really big money will go – toward modernizing nuclear arsenals and ordering top-of-the-line strategic weaponry.

  A Family Business

  There’s also a family-business aspect to these wars and confrontations, since the Kagans collectively serve not just to start conflicts but to profit from grateful military contractors who kick back a share of the money to the think tanks that employ the Kagans.

  For instance, Robert’s brother Frederick works at the American Enterprise Institute, which has long benefited from the largesse of the Military-Industrial Complex, and his wife Kimberly runs her own think tank called the Institute for the Study of War (ISW).

  According to ISW’s annual reports, its original supporters were mostly right-wing foundations, such as the Smith-Richardson Foundation and the Lynde and Harry Bradley Foundation, but it was later backed by a host of national security contractors, including major ones like General Dynamics, Northrop Grumman and CACI, as well as lesser-known firms such as DynCorp International, which provided training for Afghan police, and Palantir, a technology company founded with the backing of the CIA’s venture-capital arm, In-Q-Tel. Palantir supplied software to US military intelligence in Afghanistan.

  Since its founding in 2007, ISW has focused mostly on wars in the Middle East, especially Iraq and Afghanistan, including closely cooperating with Gen. David Petraeus when he commanded US forces in those countries. However, more recently, ISW has begun reporting extensively on the civil war in Ukraine. [See “Neocons Guided Petraeus on Afghan War.”]

  So, to understand the enduring influence of the neocons – and the Kagan clan, in particular – you have to appreciate the money connections between the business of war and the business of selling war. When the military contractors do well, the think tanks that advocate for heightened global tensions do well, too.

  And, it doesn’t hurt to have friends and family inside the government making sure that policymakers do their part to give war a chance — and to give peace the old heave-ho.

  

  

  

  

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

  By Chris at www.CapitalistExploits.at

  I love what I do! A recent get together filled with blonde stick insects and cologne covered chinos found me subjected to talk about “work at the office”:

  “What did you do at work today?”

   

  “Oh, nothing much, tried to look down the new girl’s top for a bit then I made some phone calls, you?”

   

  “Oh, much the normal, searched the web for our next vacation and found I can get a Filipino bride for a grand.”

  After only 10 minutes I was ready to leave.

  I then received a call from a friend which snapped me back into my world and cemented my decision to leave. This friend has been extremely successful trading Asian credit and I was eager to get his perspective on emerging market debt and in particular China.

  This brings me to my thoughts on emerging market currencies and debt, which I’d like to share with you today.

  It all starts with the dollar bull market which we’ve discussed previously at length. As Brad mentioned earlier this year:

  So while the US current account deficit continues to narrow there is absolutely going to be a shortage of USDs. There is $9 trillion of dollar denominated debt outstanding, well considering that it took a number of years to build up this debt, it is going to take more than just a few months to unwind, more likely a couple of years at least. If the US Federal Reserve were to raise rates this year it sure wouldn’t help the cause, rather it would throw accelerant on the smouldering liquidity fire!

  After a brief breather, the dollar looks set to take out new highs:

  

  This time around the dollar looks set to take out 100 on the Dollar Index. My thoughts today lie in what this may mean for various emerging market asset classes.

  Take a look at the MSCI Emerging Markets ETF:

  

  Support sits at 36 and we’re getting close!

  This is a function of a stronger dollar. The larger question lies in where the leverage in emerging markets may lie, remembering that the unwinding of the carry trade will be particularly severely felt where leverage is highest.

  Taking a step back for a minute and thinking about the events in Europe recently and the events we’ve just witnessed in China, it’s clear to me that central banks are out of control.

  Risk lies in with the fact central banks believe themselves omnipotent. This is only half of the problem. The majority of investors believe the central banks are actually omnipotentand that is the other half of the problem. Central bank omnipotence is at an all time high… or is it?

  If we look back in history, it’s littered, not with successful central bank intervention, but with central bank failures. For every action there is a reaction. Everything is connected. You can’t throw a stone into a pond and not get ripples. Similarly you can’t have central banks buying assets, or slashing interest rates or any other such action, without consequences for those actions.

  Last week I looked back at how the Asian crisis unfolded. That particular crisis was only 18 years ago, yet market participants seem to have forgotten the lessons. We know that central bank intervention in the face of a levered market which is unwinding can often be the precursor to an outright rout.

  I then spoke about China earlier this week and how easily and quickly the Chinese central bank stepped in to attempt to stabilise the stock market. That they acted so aggressively is far more concerning to me than the actions themselves. The consequences of this are ultimately a weaker remnimbi, and a weaker remnimbi threatens to exacerbate losses for investors that have been participating in the USD carry trade.

  Furthermore, as Chinese growth slows the temptation to slash interest rates and devalue the remnimbi, should it happen, puts additional pressure on competitive emerging market currencies. Countries such as Korea, Malaysia, Thailand, even India. Once again, a stronger dollar vis-à-vis these respective currencies threatens any levered capital invested in the bond markets to seek first to reduce exposures. This means selling the respective currencies and buying back dollars. This self-reinforcing cycle can quickly force margin calls and the global carry trade unwind threatens to get particularly “exciting”.

  It’s not difficult to imagine a scenario where as the dollar bull run gathers steam we may well see more and more emerging markets looking like Greece.

  Right now a number of emerging market currencies are looking like they’re getting ready to roll over. The repercussions could well be an emerging market bond rout. As such, we’ve been dipping our toes into shorting the iShares JP Morgan Emerging market bond ETF (EMB) with some long dated options.

  If nothing else, it’s a heck more interesting than boring cocktail parties…

  – Chris

   

  “It amazed her how much people wanted to talk at parties. And about nothing in particular.”– J.D. Robb, Holiday in Death

  

  

  

  

• Donald Trump's Top 30 Insults

  Amid the 16 (yes sixteen!) candidates for Republican Presidential nominee, there is one, and only one, that stands above the rest in terms of sheer un-filtered, un-political, and some would say un-presidential outspoken-ness. In an oustanding aggregation of abuse, The Hill has documented Donald Trump's Top 30 insults (so far in the 2016 campaign alone).

  In no particular order…

  1. Former President George W. Bush: — “You mean George Bush sends our soldiers into combat, they are severely wounded, and then he wants $120,000 to make a boring speech to them?” asked Trump on July 9, after reports the former president charged a vets group for a speech. “Bush didn’t have the IQ [to be president],” he added on June 16.
  2. Former Gov. Jeb Bush (R-Fla.) — “I’m not a big fan. The last thing we need is another Bush,” Trump said on June 16. Trump's account also retweeted an insult to Bush’s wife on July 4th: “@RObHeilbron: @realDonaldTrump #JebBush has to like the Mexican Illegals because of his wife.” It was later deleted.
  3. Hillary Clinton — “Hillary Clinton was the worst secretary of State in the history of the United States," Trump told Business Insider. His account on April 16 also retweeted an attack on Clinton: “@mplefty67: If  Hillary Clinton can’t satisfy her husband what makes her think she can satisfy America?” Trump said a campaign staffer was responsible and deleted the tweet.
  4. Anderson Cooper — “What a waste of time being interviewed by@andersoncooper when he puts on really stupid talking heads like Tim O'Brien-dumb guy with no clue!” Trump tweeted on July 22 after his interview with the CNN anchor. During his interview, Trump told Cooper: "The people don’t trust you and the people don’t trust the media."
  5. Bill Cosby — Trump said he believed the sexual assault allegations against the comedian, calling him "guilty as hell." “I’ve known him, and I’ve never liked him,” Trump said in a July radio interview. “I think he is a highly overrated guy, both in talent and in many other ways,”
  6. Des Moines Register — After the paper called on Trump to drop out, he dismissed it as a "sophomoric editorial" and called their coverage "uneven and inconsistent, but far more importantly, very dishonest."
  7. Forbes Magazine — “Why does a failed magazine like @Forbes constantly seek out trivial nonsense? Their circulation way down. @Clare_OC,” Trump tweeted on July 9.
  8. Sen. Lindsey Graham (R-S.C.) —"What a stiff, what a stiff, Lindsey Graham. By the way he has registered zero in the polls,” Trump said, at a campaign speech in Bluffton, S.C. on July 21. “A total lightweight. In the private sector, he couldn’t get a job. Believe me. Couldn't get a job. He couldn't do what you people did. You're retired as hell and rich. He wouldn't be rich; he'd be poor.” Trump also shared Graham's personal cellphone number and said he had begged him to help get on Fox News's "Fox and Friends." "What's this guy, a beggar? He's like begging me to help him with [the show] 'Fox and Friends.’” Trump said of Graham on "CBS This Morning," on July 21.
  9. Jonah Goldberg — “Jonah Goldberg @JonahNRO of the once great @NRO#National Review is truly dumb as a rock. Why does @BretBaier put this dummy on his show?” Trump tweeted, criticizing the conservative columnist on April 20.
  10. Joaquin "El Chapo" Guzman — Trump said the Mexican drug lord would be no match for him. “Can you envision Jeb Bush or Hillary Clinton negotiating with 'El Chapo', the Mexican drug lord who escaped from prison? …Trump, however, would kick his ass!” he tweeted on July 12. Trump later called in the FBI after a death threat from a Twitter account associated with Guzman.
  11. Arianna Huffington — “The liberal clown @ariannahuff told her minions at the money losing @HuffingtonPost to cover me as entertainment. I am #1 in Huff Post Poll,” Trump tweeted on July 18.
  12. Penn Jillette — After the magician and comedian criticized Trump, he responded on July 16, tweeting: “I hear @pennjillette show on Broadway is terrible. Not surprised, boring guy (Penn). Without The Apprentice, show would have died long ago.” He then followed up with, “I loved firing goofball atheist Penn @pennjillette on The Apprentice. He never had a chance. Wrote letter to me begging for forgiveness.”
  13. Ohio Gov. John Kasich (R) — “What people don’t know about Kasich- he was a managing partner of the horrendous Lehman Brothers when it totally destroyed the economy!” Trump tweeted on May 20.
  14. Charles Krauthammer — “One of the worst and most boring political pundits on television is @krauthammer. A totally overrated clown who speaks without knowing facts,” Trump tweeted about the conservative writer and Fox News contributor on June 4. A tweet a day later called him a "dumpy political pundit" and took issue with Krauthammer's support for the Iraq war. Krauthammer brought on Trump's ire by mocking his then-low standing in the polls.
  15. Bill Kristol — When the Weekly Standard editor belittled Trump’s chances against Hillary, Trump responded on July 23, tweeting, “Bill, your small and slightly failing magazine will be a giant success when you finally back Trump. Country will soar!”
  16. Mitt Romney — “Why would anybody listen to @MittRomney? He lost an election that should have easily been won against Obama. By the way,so did John McCain!” Trump tweeted of the 2012 Republican nominee on July 18.
  17. Sen. John McCain (R-Ariz.) — “He’s not a war hero,” Trump said at a rally on July 18. “He was a war hero because he was captured. I like people who weren’t captured.” This followed a July 16 tweet saying, “@SenJohnMcCain should be defeated in the primaries. Graduated last in his class at Annapolis–dummy!” The insults came after McCain said Trump had "fired up the crazies" on immigration.
  18. Macy’s — Trump called for a boycott after the department store dropped his men’s clothing line. "I hope the boycott of @Macys continues forever. So many people are cutting up their cards. Macy's stores suck and they are bad for U.S.A.,” he tweeted on July 16. “Boycott @Macys, no guts, no glory. Besides, there are far better stores!” he tweeted later.
  19. Mexico  — Trump lambasted the southern neighbor. “The U.S. has become a dumping ground for everybody else’s problems,” he said on May 30 at his campaign launch. “When Mexico sends its people, they’re not sending their best. They’re not sending you. They’re sending people that have lots of problems, and they’re bringing those problems with us. They’re bringing drugs. They’re bringing crime. They’re rapists. And some, I assume, are good people.” The remarks led a number of businesses to cut their ties with him. He doubled down after the escape of a top drug kingpin. "It's a corrupt place," Trump said on July 17. "It's a terrible court system." "Let's put it this way," he added, "I'm not going to Mexico."
  20. President Obama — Trump has long said he is not sure Obama was born in the U.S. and slammed his policies, calling him the "worst ever president." Obama hit back at the 2011 White House Correspondents Dinner, mocking Trump who was in attendance. But Trump hasn't let up. During the Baltimore riots in April this year he tweeted: “Our great African American President hasn’t exactly had a positive impact on the thugs who are so happily and openly destroying Baltimore!” He also Obama to leave office early and golf on one of his many courses. “If he’d like to play, that’s fine. In fact, I’d love for him to leave early and play. That’d be a very good thing,” he said at his campaign launch in June. After the Chattanooga shooting, Trump pressed Obama to lower the flag for the victims. "We have a president who just can't say a few words: 'Put the flags at half-mast for the five Marines that were just killed.' Why? Why? Why?” Trump said at a South Carolina rally on July 21. “It's almost like, does he read the papers? Does he watch television?"
  21. Lawrence O’Donnell — “Dopey @Lawrence O’Donnell, whose unwatchable show is dying in the ratings, said that my Apprentice $ numbers were wrong. He is a fool!” Trump tweeted on July 16 of the MSNBC host.
  22. Former Gov. Rick Perry (R-Texas) — Perry has been a tough critic of Trump's rhetoric on immigration. “Rick Perry failed at the border. Now he is critical of me. He needs a new pair of glasses to see the crimes committed by illegal immigrants,” Trump tweeted on July 5th. On July 16, he added, “@GovernorPerry failed on the border. He should be forced to take an IQ test before being allowed to enter the GOP debate.” "He's doing very poorly in the polls. He put on glasses so people will think he's smart. And it just doesn't work! You know people can see through the glasses," Trump said at a rally on July 21.
  23. Former Gov. George Pataki (R-N.Y.) — Trump tweeted that Pataki "couldn’t be elected dog catcher if he ran again—so he didn’t!” Trump tweeted July 1. He followed up with: “.@GovernorPataki was a terrible governor of NY, one of the worst — would’ve been swamped if he ran again!”
  24. Karl Rove — Trump went off on the Republican strategist's record in 2012 record. “@KarlRove wasted $400 million + and didn’t win one race—a total loser.@FoxNews,” he tweeted on July 16, followed by “Irrelevant clown @KarlRove sweats and shakes nervously on @FoxNews as he talks ‘bull’ about me. Has zero cred. Made fool of himself in '12.” Trump even called out the network: “@FoxNewsYou shouldn’t have @KarlRove on the air—he’s a clown with zero credibility—a Bushy!”
  25. Sen. Bernie Sanders (I-Vt.) — “[Sanders] knows the country is ripped off. And I know the country is being ripped off,” Trump told The Hill on July 23. “The difference is that I can do something about it and he can’t. He’ll never be able to negotiate with China.”
  26. Republican National Committee — “The RNC has not been supportive. They were always supportive when I was a contributor. I was their fair-haired boy,” Trump toldThe Hill on July 23. “The RNC has been, I think, very foolish.”
  27. Chuck Todd —“I hear that sleepy eyes @chucktodd will be fired like a dog from ratings starved Meet The Press? I can't imagine what is taking so long!” Trump tweeted on July 12 about the "Meet the Press" host.
  28. Univision — “@Univision cares far more about Mexico than it does about the U.S. Are they controlled by the Mexican government?” Trump tweeted on June 26 after the network cut ties with him over his immigration remarks. “Has anyone seen the financials of @Univision. They are doing really badly. Too much debt and not enough viewers. Need money fast. Funny!” he followed up on July 11.
  29. The Wall Street Journal — Trump has had a long feud with owner Rupert Murdoch. After the paper questioned his candidacy, Trump tweeted on July 20: “The ever dwindling @WSJ which is worth about 1/10 of what it was purchased for, is always hitting me politically. Who cares!”
  30. Juan Williams — “@TheJuanWilliams you never speak well of me & yet when I saw you at Fox you ran over like a child and wanted a picture,” tweeted Trump on July 3 of the Fox personality.

  Perhaps just as troubling for The Republican Party:

  Donald Trump leads in New Hampshire with 21% support of potential Republican voters, according to NBC News/Marist latest polls. Jeb Bush has 14%, and Scott Walker 12% in New Hampshire

  It appears abusing McCain's war-record did nothing to dent Trump's popularity (except in the media).

  

  

  

  

  

  

• Clinton Favorability Plunges, Sanders Surges Amid Classified Emails Scandal

  Despite all her proclamations of new fairness doctrines, false promises of her truthfulness, and exclamations of 'everyday Americanism' Hillary Rodham Clinton is seeing her favorability ratings collapse. As populist as she dares to be, in the face of her donating captors, it appears the everyday American just isn't buying it as Gallup reports just 43% Americans view her favorably (down from 66% just a few years ago) while none other than Bernie Sanders is bounding up the popularity ladder, rising from 12% to 24% favorability in recent weeks.

  Via Gallup,

  Vermont Sen. Bernie Sanders' favorable rating among Americans has doubled since Gallup's initial reading in March, rising to 24% from 12% as he has become better known. Hillary Clinton's rating has slipped to 43% from 48% in April. At the same time, Clinton's unfavorable rating increased to 46%, tilting her image negative and producing her worst net favorable score since December 2007.

  Clinton, Clint-off…

  

   

  Clinton maintains a higher absolute favorable rating from Americans than any of her official rivals for the 2016 Democratic nomination. In contrast to the relative prominence of numerous candidates on the Republican side, she remains the only Democratic candidate known well enough by a majority of Americans for them to rate her, which helps Clinton maintain a higher overall favorable score.

  Sanders is still an unknown to a majority of Americans, with just 44% able to rate him compared with Clinton's 89%.

  Clinton's favorable rating has slipped slightly among Democrats and Democratic-leaning independents since April, falling to 74% from 79%. This partly accounts for her overall decline in favorability among the public. The other factor is a drop among non-leaning independents, from 44% to 36%, while her image among Republicans and Republican leaners is essentially unchanged at 14%.

  Among Democrats and Democratic leaners, Clinton is currently viewed more favorably by older than younger adults, by nonwhites than whites and by liberals than moderates or conservatives. However, she retains solid majority favorable scores from all of these groups. And she enjoys equally high ratings from men and women as well as in each of the four major regions of the country.

  However, as Gallup concludes,

  Clinton's national image has taken a slight turn for the worse, which is also evident in her image among Democrats. But she remains the only Democratic candidate for president with a national name, and Clinton continues to stand head and shoulders above her next closest competitor — Sanders — in popularity for the presidential nomination.

  * * *

  

   

  *  *  *

  And it is not surprising Hillary remains the front-runner as Liberty Blitzkrieg's Mike Krieger reports yet another group of lobbyists are raising funds for her campaign…

  Earlier this week, we learned that lobbyists for Monsanto, Exxon Mobil, Microsoft and the Telecom industry are actively raising funds for the pantsuit revolutionary, Hillary Clinton. Today, we can add private prison companies to the list. Because private prisons are sooooooo progressive.

  From the Intercept:

  As immigration and incarceration issues become central to the 2016 presidential campaign, lobbyists for two major prison companies are serving as top fundraisers for Hillary Clinton.

   

  Corrections Corporation of America and the Geo Group could both see their fortunes turning if there are fewer people to lock up in the future.

   

  Richard Sullivan, of the lobbying firm Capitol Counsel, is a bundler for the Clinton campaign, bringing in $44,859 in contributions in a few short months. Sullivan is also a registered lobbyist for the Geo Group, a company that operates a number of jails, including immigrant detention centers, for profit.

  You ready?

  

  

  

  

  

  

• Chinese Stocks Extend Friday's Losses Following Drop In Corporate Profits

  Following the weakness in Friday's afternoon (China) session, tonight's open is decidedly shaky as Shanghai Composite open down over 2% and CSI-300 (China's S&P 500) is now down over 5%. This follows a year-over-year drop in China Industrial profits (-0.3%), the first since March as the small bounce in April and May is now done. Commodities are lower and silver saw a minor flash-crash shortlty after China opened.

   

  • *SHANGHAI COMPOSITE FALLS 2.4% AT OPEN

  

   

  • *CHINA JUNE INDUSTRIAL COMPANIES' PROFIT FALLS 0.3% Y/Y

  

   

  Silver saw a mini flash crash…

  

   

  But PMs are bouncing back now…

  

   

   

  Charts: Bloomberg

  

  

  

  

  

• It's Really Very Simple…

  Submitted by Dmitry Orlov via Club Orlov blog,

  There are times when a loud cry of “The emperor has no clothes!” can be most copacetic. And so, let me point out something quite simple, yet very important.

  The old world order, to which we became accustomed over the course of the 1990s and the 2000s, its crises and its problems detailed in numerous authoritative publications on both sides of the Atlantic—it is no more. It is not out sick and it is not on vacation. It is deceased. It has passed on, gone to meet its maker, bought the farm, kicked the bucket and joined the crowd invisible. It is an ex-world order.

  If we rewind back to the early 1980s, we can easily remember how the USSR was still running half of Europe and exerting major influence on a sizable chunk of the world. World socialist revolution was still sputtering along, with pro-Soviet regimes coming in to power here and there in different parts of the globe, the chorus of their leaders' official pronouncements sounding more or less in unison. The leaders made their pilgrimages to Moscow as if it were Mecca, and they sent their promising young people there to learn how to do things the Soviet way. Soviet technology continued to make impressive advances: in the mid-1980s the Soviets launched into orbit a miracle of technology—the space station Mir, while Vega space probes were being dispatched to study Venus.

  But alongside all of this business-as-usual the rules and principles according which the “red” half of the globe operated were already in an advanced state of decay, and a completely different system was starting to emerge both at the center and along the periphery. Seven years later the USSR collapsed and the world order was transformed, but many people simply couldn't believe in the reality of this change. In the early 1990s many political scientists were self-assuredly claiming that what is happening is the realization of a clever Kremlin plan to modernize the Soviet system and that, after a quick rebranding, it will again start taking over the world. People like to talk about what they think they can understand, never mind whether it still exists.

  And what do we see today? The realm that self-identifies itself as “The West” is still claiming to be leading economically, technologically, and to be dominant militarily, but it has suffered a moral defeat, and, strictly as a consequence of this moral defeat, a profound ideological defeat as well.

  It's simple.

  How can they talk of the inviolability of private property while confiscating the savings of depositors in Cypriot banks?

   

  How can they talk of safeguarding the territorial integrity of countries while destroying, in turn, Yugoslavia, Iraq, Libya, Syria and Ukraine?

   

  How can they talk of free enterprise and then sign contracts to build ships but then refuse to deliver them because of pressure from Washington, as happened with Mistral ships which Russia ordered from France?

   

  How can they talk of democracy and then use naked threats against the premier of Greece—the birthplace of European democracy—forcing him to ignore the unprofitable results of the Greek national referendum?

   

  How can they talk about fighting racism while in the US they are constantly shooting mass quantities of unarmed Negros, all the while forbidding people to call them Negros.

   

  How can they accuse Serbs of genocide while refusing to acknowledge what they did to supposedly “independent” Kosovo, which has been turned into a European criminal enclave specializing in the production and distribution of narcotics?

   

  How can they talk about justice while the US maintains the largest prison population in the history of the world and has executed many people subsequently discovered to have been innocent?

   

  How can they accuse others of corruption after the colossal financial embarrassment of 2008, in the run-up to which obvious financial bubbles that were ready to bust were assigned the highest ratings?

   

  What has happened is the worst thing that could have possibly happened: in full view of the entire world, “Western values” have been demonstrated to be null and void.

   

  Are there any “Western values” left intact? Just one: the rights of sexual minorities. But it is not possible to maintain Western civilization on the strength of gay marriage alone.

  Is it any wonder then that the rest of the world is trying to put as much distance between itself and the morally bankrupt “West” as it possibly can, as quickly as it can? China is working on developing its own model, Russia is striving for self-sufficiency and independence from Western imports and finance, and even Latin America, once considered the backyard of the US, is increasingly going its own separate way.

  The ranks of the fools who are still buying the West's story are shrinking, while the ranks of the rebels are growing. There is the truth-teller Edward Snowden, who was forced to flee to Moscow to avoid persecution back home. There are European parliamentarians who recently broke ranks and visited Crimea. There are French and German military men who are volunteering to defend Eastern Ukraine against Western attack. There are the many European businessmen who came to the Economics Forum in St. Petersburg to sign trade deals with Russia, never mind what their politicians think of that.

  On the other side, the rapidly emerging new world order was recently on display in Ufa, capital of the majority-Moslem Republic of Bashkortostan in Southern Urals, Russian Federation. Leaders of more than half the world's population came there to sign deals, integrate their economies, and coordinate security arrangements. India and Pakistan set their differences aside and walked in through the door at the same time; Iran is next. “The West” was not represented there.

  Now that all Western values (other than the rights of sexual minorities) have been shown to be cynical exercises in hypocrisy, there is no path back. You see, it is a matter of reputation, and a reputation is something that one can lose exactly once. There is no path back. There is a path forward, but it is very frightening. There is the loss of control: Western institutions can no longer control the situation throughout much of the world, including, in due course, on their own territory. There is the abandonment of the Western narrative: Western pontificators, pundits and “thought leaders” will find that their talking points have been snatched away and will be reduced to either babbling apologetically or lapsing into embarrassed silence. Finally, there is the loss of identity: it is not possible, for the non-delusional, to identify with something (“The West”) that no longer exists.

  But the most frightening thing of all is this:

  behind a morally bankrupt civilization there are morally bankrupt people – lots and lots of them. Their own children, who will be forced to make their way in the world – whatever it turns out to be – will be as disrespectful of them as they were of their own vaunted civilizational values.

  

  

  

  

  

• Energy M&A Hits A Brick Wall: Ex Shell-BG Megadeal, Q2 Deal Value Was Lowest Since 2008

  One of the few catalyst that had helped maintain a consistent bid under energy names in the first half of 2015, despite the dramatic drop in the price of oil in late 2014 and then again in the last several weeks, was persistent fears of an “unexpected” M&A bid which would crush any new or incremental shorts who would otherwise have been delighted to accelerate the downward momentum in the beaten down energy sector.

  The result was an epic surge in forward energy P/E multiples: ones which even put the “glamour” multiples to shame, and threatened to overtake the all time fwd multiple high as recently as a few months ago.

  

   

  However, now that the latest crude dead cat bounce is over, it is time to reassess just how credible a surge in energy M&A activity truly is. The answer, as the EIA’s energy blog reveals, is not very credible at all (especially when considering the disappointing for the industry development when Whiting Petroleum pulled itself off the block when it found no buyer and was forced to massively dilute its shareholders instead).

  In fact, if one excludes the gargantuan April merger between Shell and the BG Group, Q2 M&A activity was the slowest in since 2008! If the price of oil continues to decline, one can be certain that Q3 M&A activity will be a dead zone.

  From the EIA:

  The second quarter of 2015 exhibited the largest amount of oil companies’ merger and acquisition (M&A) activity by value since fourth-quarter 2012. The announced merger between Royal Dutch Shell and BG Group in early April accounted for $84 billion of the $115 billion quarterly total.

   

  Without the Shell-BG merger, however, the value of deals in the second quarter of 2015 would have totaled $31 billion, $18 billion higher than first-quarter 2015, which was the lowest since at least 2008. The 137 deals announced in the second quarter was the lowest number of deals since fourth-quarter 2008 and 42% below the 235 median quarterly number of deals over the previous two years, indicating less breadth of activity.

   

  

   

  Companies often merge with or acquire other companies or their assets in an effort to achieve longer term growth, economies of scale, access to new technologies, diversity of market exposure, or a combination of factors. The buying or selling company may see a valuable opportunity that aligns with its own goals and expectations in deciding to purchase or sell assets. Also, a company may feel that it could benefit from adding new assets that complement its current strengths or by developing expertise in a market segment it currently does not participate in.

   

  M&A deals vary in size and can sometimes take months of negotiating to complete. M&A activity often reflects how market participants view future opportunities. The availability and cost of financing as well as legal factors also play a critical role in the value and amount of M&A activity.

  And since with the exception of just one mega-deal, the merger and acquisition landscape has hit a brick wall, one needs no explanation to understand just how “market participants view future opportunities.”

  

  

  

  

  

• Gold's Two Stories: Paper Markets Collapse… While The Retail Public Buys At A Record Pace

  Submitted by Mac Slavo via SHTFPlan.com,

  We’ve seen some significant swings in precious metals over the last several years and if we are to believe the paper spot prices and recent value of mining shares, one would think that gold and silver are on their last leg. Last weekend precious metals took a massive hit to the downside, sending shock waves throughout the industry. But was the move really representative of what’s happening in precious metals markets around the world? Or, is there an effort by large financial institutions to keep prices suppressed? In an open letter to the Commodity Futures Trading Commission First Mining Finance CEO Keith Neumeyer argues that real producers and consumers don’t appear to be represented by the purported billion dollar moves on paper trading exchanges.

  With China recently revealing that they have added some 600 tons of gold to their stockpiles and the U.S. mint having suspended sales of Silver Eagles due to extremely high demand in early July, how is it possible that prices are crashing?

  As noted in Mike Gleason’s Weekly Market Wrap at Money Metals Exchange, while it appears that gold is currently one of the world’s most hated assets, the retail public continues to buy at a record pace:

  The paper market is telling one story. But the actual physical bullion market is telling quite another.

   

  The U.S. Mint has sold over 100,000 ounces of American Eagle gold coins so far in July. That’s the highest monthly demand volume registered since April 2013. And that’s just as of this week. There’s still another week left to go before the final sales tally for Gold Eagles comes in for the month of July. It could be one for the record books with 109,000 1-ounce Gold Eagles sold — with bargain hunters purchasing 6% of the U.S. Mint’s production from Money Metals Exchange.

   

  As for Silver Eagles, the U.S. Mint has given up on trying to keep up with demand. After brisk sales during the first week of July, Mint officials suspended deliveries of Silver Eagles to dealers. Sales of the popular coins are set to resume next week. But we expect the Mint will be unable to get its act together and keep up with demand.

   

  Listen: Full Interview With Chris Powell Of The Gold Anti-Trust Committee (GATA)

  It’s not clear exactly who is suppressing precious metals or why, but it is quite apparent that prices on paper exchanges are completely disconnected from reality, as retail buyers are taking this opportunity to scoop up gold and silver at prices that are 50% or more off their highs.

  But what happens next? That, of course, is anybody’s guess, but considering current prices and movements within the context of a broader economic crisis, there is a precedent for what we have seen in recent years.

  We need only look back to the recession of the 1970’s.

  

  You’ll notice that gold saw some significant price movements, not dissimilar to what we’re experiencing today. There were several down swings of 25% or more within the broader gold bull market. Most notably, take a look at what happened from 1975 to 1976. Gold shot up to nearly $200 an ounce, only to be pounded just twelve months later by 50% to a price of just over $100 an ounce.

  As the crisis accelerated in severity into the late 1970’s, complete with gas shortages, job losses and geopolitical tensions, we saw gold explode in value to a high of $850 by January of 1980.

  We’re not necessarily suggesting that gold will follow the exact same pattern. But history does rhyme, and the world again finds itself in serious financial, economic, and monetary crisis.

  

  As we’ve noted before, gold is and always has been the historical asset of last resort for preserving wealth. Should the current crisis accelerate as we saw in the 1970’s, the value of gold will likely rise accordingly. We may not be looking at a 700% increase in price like we did from 1976 to 1980, but there is a distinct possibility that we will witness serious gains in real value as crisis and panic unfold.

  You can’t eat gold and silver, of course. If crisis is coming we have always urged our readers to prepare themselves for disruption to credit-dependent commerce systems with reserves of food, emergency cash and other supplies. But having a physical asset with real monetary and barterable value in your possession is certainly an important strategic consideration going forward.

  It’s been said that an ounce of gold could buy 350 loaves of bread in Biblical times. Today, an ounce of gold still buys about 350 loaves of bread. However you slice it, whether the system falls into a deflationary depression like the 1930’s or an inflationary recession like the 1970’s, gold will maintain its purchasing power.

  Though past performance is not necessarily an indicator of future results, we have over 6,000 years of history backing gold’s legitimacy as a true mechanism of exchange.

  

  

  

  

  

• In These 13 US Cities, Rents Are Skyrocketing

  Seven years ago, the American homeownership “dream” was shattered when a housing bubble built on a decisively shaky foundation burst in spectacular fashion, bringing Wall Street and Main Street to their knees. 

  In the blink of an eye, the seemingly inexorable rise in the American homeownership rate abruptly reversed course, and by 2014, two decades of gains had disappeared and the ashes of Bill Clinton’s National Homeownership Strategy lay smoldering in the aftermath of the greatest financial collapse since the Great Depression.

  

  In short, decades of speculative excess driven by imprudence, greed, and financial engineering and financed by the world’s demand for GSE debt had come crashing down and in relatively short order, a nation of homeowners was transformed into a nation of renters. 

  It wasn’t difficult to predict what would happen next.

  As demand for rentals increased and PE snapped up foreclosures, rents rose, just as a subpar jobs market, a meteoric rise in student debt, tougher lending standards, and critically important demographic shifts put further pressure on homeownership rates. Now, America faces a rather dire housing predicament: buying and renting are both unaffordable. Or, as WSJ put it last month, “households are stuck between homes they can’t qualify for and rents they can’t afford.”

  We’ve seen evidence of this across the country with perhaps the most telling statistic coming courtesy of The National Low Income Housing Coalition who recently noted that in no state can a minimum wage worker afford a one bedroom apartment. 

  In this context, Bloomberg is out with a list of 13 cities where single-family rents have risen by double-digits in just the last 12 months. Note that in Iowa, rents have risen more than 20% over the past year alone.

  

  More color from Bloomberg:

  Landlords have been preparing to raise rents on single-family homes this year, Bloomberg reported in April. It looks like those plans are already being put into action.

   

  The median rent for a three-bedroom single-family house increased 3.3 percent, to $1,320, during the second quarter, according to data compiled by RentRange and provided to Bloomberg by franchiser Real Property Management. Median rents are up 6.1 percent over the past 12 months. Even that kind of increase would have been welcome in 13 U.S. cities where single-family rents increased by double digits.

   

  It’s more evidence that rising rents have affected a broad scope of Americans. Sixty percent of low-income renters spend more than 50 percent of their income on rent, according to a report in May from New York University’s Furman Center. High rents have also stretched the budgets of middle-class workers and made it harder for young professionals to launch careers and start families.

   

  “You’re finding that people who wouldn’t have shared accommodations in the past are moving in with friends,”says Don Lawby, president of Real Property Management. “Kids are staying in their parents’ homes for longer and delaying the formation of families.”

  And for those with short memories, we thought this would be an opportune time to remind you of who became America’s landlord in the wake of the crisis…

  

  

  

  

  

• Raoul Pal: GroupThink Is Almost Ubiquitous (& The 1 Chart That Matters)

  Exceprted from Raoul Pal's exclusive Global Macro Investor letter,

  All together now

  From a very top-down perspective, I find it interesting that most macro funds tend to align themselves in groups that share ideas, however I find the uniformity of views amongst these groups somewhat troubling. That is not to say that everyone is wrong but that too many firms have the same views and same positions.

  The three groups tend to be:

  1. the newer New York macro and credit community,
  2. the older New York macro funds and,
  3. the London and Geneva crowd.

  All three tend to be somewhat distinct from each other but the views held within each group are similar.

  This is the groupthink effect.

  However, it is not totally ubiquitous as there are many who hold very different views. The very macro-orientated tend to be broader in their opinions than those who are crossing over into macro from credit, multi-strat or event driven.

  Summary of views

  The first group (and the majority with whom I met in NYC) have extremely similar views generally. These are as follows:

  • The US economy is fine and the lagged effect of lower oil prices on consumption is about to kick in along with real wage growth.
  • Inflation is going to rise with wage growth.
  • The European equity market is a better investment that the US market.
  • Chinese equities are a trade worth having on.
  • Japanese stocks are still an opportunity.
  • The Euro is going lower and the dollar higher.
  • Energy prices are going to rise.
  • Global growth is fine and EM is not much of a risk.

  Positioning

  In terms of positions, people were very light on dollar positioning, had zero bond exposure at best or were short, were long Chinese equities, long oil names, long German equities, long Japanese equities and generally long US equities. Many had on specific EM trades such as Argentina or Venezuela, Puerto Rico or Greece (yeah, it’s an EM now).

  I’m a tad different…

  Just to be clear, my views are startlingly out of consensus. My view is that shorting the Euro is the best risk reward trade in macro, US bonds are setting up to be a stunning opportunity on the long side, oil carries significant downside risk, the US and elsewhere are potentially heading into recession, equity volatility is highly likely, EM is a major risk and Germany is at the risk of leading Europe into a recession.

  Pure macro heaven (or hell)

  My overarching belief is that this is the most “pure macro” environment we have been in for over a decade, probably since the Asian Crisis in the late 1990s, and I just don’t think people understand what is going on.

  My entire thesis rests neatly on the US Dollar. Nothing else matters and if my view is wrong on that, then it is likely wrong on many things. What is really weird to me is that most people agree with my views on the dollar but don’t have the trade on, and were less versed on the macro knock-on effects of a strong dollar. Groupthink has tended to isolate particular parts of the US or global economy and ignore the bigger picture.

  …

  My views
  In New York I presented a very different spin on the world to almost anyone else. I am wildly and comfortably out of consensus.

  I think that the dollar is the only thing that matters. My view remains that we are in the early stages of what will prove to be one of the biggest dollar bull markets in history, and it is going to reap devastation on the global economy…

  The Chart Of Truth
  If you care about one chart and one chart only that sums up the entire risk to the world it is this: the DXY is forming a perfect wedge. It is going to break during the summer and the dollar is going to explode higher… 

   

  

   

  If this wedge breaks then I think the dollar will finish the year around 110 to 115, which would be consistent with the pattern of other dollar bull markets with an annual gain of over 20%.

  In a nutshell
  So, as you will see from all of the points below (and above), I fear that many people may well be backing the wrong horses.

  Clearly I can be wrong, and for me to be proven wrong is pretty simple: if the dollar does not rally further then the status quo can be maintained and we can continue with this lacklustre global expansion for a while longer.

  If the dollar rallies again from here then it is game over and the exit doors are small.

   *  *  *

  While mostly cost-prohibitive for the average investor, here is Raoul Pal's exclusive Global Macro Investor July letter…

  Raoul Pal GMI July2015 Monthly

  

  

  

  

  

• From Trump Tower To Clinton's Compound – The Homes Of The 2016 Presidential Candidates

  As dozens now vie for residence in the big white one of Pennsylvania Avenue, MarketWatch, courtesy of LoanDepot.com and CoreLogic, unveil the homes (since most own more than one) and mortgages of the 2016 presidential candidates. With homeownership rates at multi-decade lows, and the American Dream disappearing for most, it appears it pays to be in government – from Trump Tower and Clinton's Compounds to Bernie Sanders' underwater mortgages and Carly Fiorina's five fireplaces…

   

  Sen. Hillary Clinton (Democrat)

  

  Chappaqua, N.Y.

  Former President Bill Clinton and former Secretary of State and Sen. Hillary Clinton own a five-bedroom, four-bathroom Dutch colonial–style home in Westchester County built in 1889 that was assessed at $375,000 in 2014. The home at 15 Old House Lane has 5,232 square feet of living area. Public records show the home was purchased in 1999 for $1.7 million with an adjustable-rate first mortgage of $1.4 million, according to CoreLogic. Zillow estimates the market value today at $2.3 million. (The low tax assessment for the home compared with its market value is another example of New York state’s well-documented phenomenon of inconsistent tax assessment schedules.)

  

  Washington, D.C.

  The Clinton’s four-bedroom, six-bath (plus and two half-baths) home at 3067 Whitehaven St. in Washington, D.C., is two and a half stories with 5,152 square feet of living space and a brick exterior. Built in 1951 near Washington’s Embassy Row, the house was purchased by the Clintons in 2001 for $2.85 million, financing $2 million of that sum with a 30-year adjustable rate mortgage at 7.25% from Citibank with a down payment of $855,000. A Satisfaction of Mortgage filed in 2007 indicates it was paid off. The house was valued for the 2014 tax year at $5,049,180, and its projected assessment for 2016 is $5,225,900, according to CoreLogic. Zillow estimates the house to have a market value of $5.76 million.

  Gov. Martin O’Malley (Democrat)

  

  Baltimore

  Martin O’Malley and his wife, Katie, purchased a four-bedroom, four-bath, 2,726-square-foot Tudor house at 5304 Tilbury Way in the Homeland section of North Baltimore in December 2014 for their family, which includes four children. They paid $549,000 in 2014, with a 30-year first mortgage of $494,100, according to CoreLogic. The two-story house was built in 1928 and has a stone fireplace, nine-foot ceilings and a cherry-paneled family room.

  Sen. Bernie Sanders (Democrat)

  

  Burlington, Vt.

  A senator from Vermont and a former mayor of Burlington, Bernie Sanders and his wife, Jane O’Meara, have a four-bedroom, 2 ½-bath home in Chittenden County. The colonial-style home was built in 1981 and sold to Sanders in 2009 for $405,000, according to CoreLogic. The property has a 2013 assessed value of $321,900.

  Washington, D.C.

  Sanders and his wife also own a town house in the District. The 892-square-foot, one-bedroom, 1 ½-bath home with brick exterior was built in 1890. They bought it for $488,999 in 2007. The first mortgage was a 30-year conventional adjustable-rate mortgage for $391,200 at 5.88%. Records indicate there is also a $73,350 second mortgage on the property. The house has a taxable assessment of $480,970 for 2014 and a projected assessment in 2016 of $521,660.
  *  *  *

  Gov. Jeb Bush (Republican)

  

  Coral Gables, Fla.

  The former governor of Florida and his wife, Columba, live in the development of Almeria Row in Coral Gables, a suburb of Miami. They purchased their 3,485-square-foot, four-bedroom, four-bath town house in August 2011 for $1.3 million. Its assessed value in 2014 was $1.1 million. In July 2013, the Bushes refinanced their mortgage to a 30-year conventional loan for $754,000, according to CoreLogic.

  Sen. Marco Rubio (Republican)

  

  West Miami, Fla.

  The Florida senator, his wife, Jeanette, and their four children live in a four-bedroom, three-bath house in West Miami. The single-family home has 2,581 square feet of living area and was built in 2005. The Rubios paid $550,000. It has a porch, brick patio and swimming pool. After listing the house in 2013 for $675,000, the Rubios didn’t end up selling. In June 2015, they refinanced to a 30-year mortgage for $604,000. In 2014, the total value of the home was assessed at $430,936, according to CoreLogic and Zillow. Zillow estimates the house would sell today for $569,749.

  Gov. Chris Christie (Republican)

  

  Mendham, N.J.

  New Jersey Gov. Chris Christie has been in office since 2010, but he, his wife, Mary Pat, and their four children don’t live in the official New Jersey governor’s residence. The family lives in their 6,979-square-foot house in Mendham, N.J., which they bought in August 1998 for $775,000. Public records show the first mortgage was for $300,000 — a conventional, fixed-rate loan. They have since refinanced five times. The most recent loan was recorded in October 2008 for $400,000 — it is a 30-year adjustable-rate loan. The property assessed in 2014 for a total of $1.9 million and a market value of $2 million, according to CoreLogic.

  Gov. Bobby Jindal (Republican)

  

  Baton Rouge, La.

  The Louisiana governor and native of Baton Rouge still lives in his hometown — but not in a privately owned residence. Bobby Jindal and his wife, Supriya, and three children live in the state Governor’s Mansion, where they have resided since January 2008. The home was built in 1963 and has 12 bedrooms, 18 baths, two kitchens, a kitchenette, two dining rooms, a breakfast room and a receiving room for state affairs.

  Sen. Ted Cruz (Republican)

  

  Houston, Texas

  The junior senator, his wife, Heidi, and their two daughters live in a two-bedroom, 2 ½-bath luxury high-rise condominium unit with views of Houston, including the skyline. The Cruzes’ 19th-floor unit has 2,049 feet of living area and was built in 2003. Cruz and his wife bought it for $837,500 in September 2008 and financed $670,000 of it with a conventional, 30-year adjustable mortgage. In March 2011, public records show they refinanced $417,000 to a 15-year fixed-rate loan, according to CoreLogic data.

  Sen. Rand Paul (Republican)

  

  Bowling Green, Ky.

  The junior senator from Kentucky and his wife, Kelley, live in a four-bedroom, three-bath home with 4,206 square feet of living area. The white house with a gabled roof was built in 1994 and sits on a lush, tree-lined 1.99-acre lot. Its total value was assessed at $525,000 in 2014 with a land value of $257,500. In July 2014, the Pauls took a 10-year conventional mortgage out on the property for $172,500

  Rick Perry (Republican)

  

  Austin, Texas

  James Richard “Rick” Perry and his wife, Anita, spent the past 15 years living in the Texas Governor’s Mansion. When he left office this past January, the couple moved to a two-bedroom, two-bathroom town house in Austin while a new home is being built in Round Top, a community about 70 miles from the state capital in Fayette County.

   

  Sen. Lindsey Graham (Republican)

  Seneca, S.C.

  The South Carolina senator has been in office since January 2003 and has two residences: one in Washington and one in his home state. The latter is a 1,901-square-foot single-family ranch home in Seneca, S.C., built in 1989. He bought it for $164,000 in October 1993. In 2013, it was assessed at $213,230. A new, five-year conventional mortgage was recorded on March 2012 for $51,138.

  Washington, D.C.

  Graham also has a two-bedroom, two-bathroom 1,254-square-foot brick town house in Washington, D.C., that was purchased in 1997. Public records show the most recent mortgage is a 30-year conventional loan recorded June 21, 2012, for $207,000. The town house was assessed in 2015 at $560,910.

  Donald Trump (Republican)

  

  New York City, N.Y.

  Media personality and commercial property developer Donald Trump and his wife, Melania, live on Trump Tower’s top three floors, which are lavishly decorated in 24-karat gold and marble. The home was designed by Angelo Donghia in a style reminiscent of King Louis XIV with painted ceilings, ornate columns, opulent furnishings and crystal chandeliers. Trump took out a $100 million mortgage on the entire tower in 2012, New York City public records show.

  Palm Beach, Fla.

  The Mar-A-Lago Club in Palm Beach was initially a 126-room, 110,000-square-foot estate that Trump bought for $10 million in 1985. After a renovation, the home is said to have 58 bedrooms, 33 bathrooms, a 29-foot-long marble-top dining table, 12 fireplaces and three bomb shelters. Trump keeps private residential quarters at the club, which he calls his “home away from home.”

  He transferred the property to Mar-A-Lago Club Inc. in 1995 with a $10 million mortgage, according to CoreLogic.

  *  *  *
  It's good to be king… or even to try to be king.

  Source: MarketWatch

  

  

  

  

  

• It's Not Just Margin Debt: Presenting The Complete Chinese Stock Market Ponzi Schematic

  Late last month in “The Biggest Threat To Chinese Stocks: Shadow Lending Crackdown“, we suggested that the pressure on Chinese equities – which at that point had only begun to build – was at least partially attributable to an unwind in the country’s CNY1 trillion backdoor margin lending edifice. 

  As we explained, brokerages were only allowed to facilitate margin trading for investors whose account balances totaled at least CNY500K, and even then, traders could only lever up 2X. Brokerages naturally looked for ways to skirt the rules, leading to the development of multiple off-the-books vehicles and creating a situation wherein the official headline figure for margin lending (around CNY2.2 trillion at the time) woefully underrepresented the actual amount of leverage behind China’s world-beating equity rally.  

  Put simply, precisely measuring the amount of shadow financing that helped China’s legions of newly-minted retail day traders make leveraged bets on the SHCOMP and Shenzhen is virtually impossible, as is determining how much of that leverage has been unwound and how much remains or has been restored thanks to Beijing’s explicit efforts to reignite the margin madness by pumping PBoC cash into CSF.

  For our part, we’ve suggested that regardless of what the actual figure is, the important point is that the unwind has probably just begun. In short: it seems unlikely that all of the leverage has been squeezed out of China’s exceedingly intricate shadow financing system. 

  As it turns out, BofAML agrees and is out with a valiant attempt to not only identify each shadow lending channel, but to quantify just how much leverage is built into the Chinese market.

  *  *  *

  From BofAML

  We estimate that margin outstanding, only from the seven channels that we can estimate reasonably, easily exceeds Rmb3.7tr. Assuming an average 1x leverage, it means that at least Rmb7.5tr market positions are being carried on margin, equivalent to some 13% of A-share’s market cap and 34% of its free float. Meanwhile, A-shares ex. banks are still trading at 36.6x 12M trailing PER. We believe that the government will struggle to hold up the market beyond a few months, unless it is prepared to let go some of its other policy objectives including RMB credibility. When the market ultimately settles at a level that can be sustained on fundamental reasons, we expect that the balance sheet of most financial institutions (FIs) may get impaired and the financial system may wobble, due to high contagion risk. 

  Leverage means relentless selling pressure.

  The seven channels mentioned above are margin financing (MF), stock collateralized lending (SCL), umbrella trust (UT), stock benefits swap (SBS), structured mutual fund (SMF), P2P and offline private fund matching. There are a few other difficult–to-estimate channels, such as banks’ corporate/personal loans that ended up in stocks, brokers’ proprietary desk and funds’ subsidiaries. We suspect that the size of these may be Rmb1-2tr. In addition, China Securities Finance Corp. (CSFC) might have borrowed Rmb1.5tr from banks & PBoC to buy stocks. All the leveraged positions may want to unwind at certain point given the inflated collateral value, in our view. Additional selling pressure may come from hedge funds with compulsory winding-down clauses, when the market heads lower.

  

  *  *  * 

  So there you have it – an estimated CNY3.7 trillion in still-outstanding margin via official and unofficial channels. We’ll have much more soon on how each channel is structured, where the biggest risks lie, and the broader implications not only for China’s stock market and economy, but for the renminbi as well.

  For now, we’ll leave you with the following rather ominous quote from BofAML:

  The risk is that the unwinding of the leverage will be disorderly – due to implicit guarantees behind most shadow banking financial products, investors could easily panic if they suffer from meaningful capital losses, by our assessment. 

   

  

  

  

  

  

• Gold and Gibson's Paradox

  Submitted by Alasdair Macleod via GoldMoney.com,

  There is a myth prevalent today that the gold price always falls when interest rates rise.

  The logic is that when interest rates rise it is more expensive to hold gold, which just sits there not earning anything. And since markets discount future expectations, gold will even fall when a rise in interest rates is expected. With the Fed's Open Market Committee debating the timing of an interest rate rise to take place possibly in September, it is therefore no surprise to market commentators that the gold price continues its bear market. Only the myth is just that: a myth denied by empirical evidence.

  The chart below is of a time when the opposite was demonstrably true. From March 1971 to December 1979 the trends in both interest rates and the gold price rose and fell at the same time. It is worth noting that this occurred over more than one business cycle, so it is not a relationship which was cycle-dependant.

  

  The myth is therefore satisfactorily debunked.

  To understand why this relationship between interest rates and gold is not as simple as commonly believed, we must take the argument further to bring in commodities generally and visit the tricky subject of Gibson's Paradox. This paradox is based purely on long-run empirical evidence, when gold was transaction money, covering the two centuries between 1730 and 1930. It observes that the level of wholesale prices and interest rates are positively correlated. It is not the price relationship that is consistent with the quantity theory of money, which presupposes that interest rates correlate to the rate of price inflation instead of the price level itself. This maybe a reason why monetarists mistakenly argue, as we also discovered in the seventies, that central banks can manage the rate of inflation through interest rate policy. The common view in markets today about the relationship between interest rates and price inflation is wholly at odds with the longer-run evidence of Gibson's Paradox and accords with the more fashionable quantity theory instead.

  Gibson and his paradox are generally forgotten today, and those who centrally plan our money and markets appear unaware of the challenge it poses to their monetarist preconceptions. Keynes, no less, described Gibson's Paradox in 1930 as "one of the most completely established empirical facts in the whole field of quantitative economics", and Irving Fisher also wrote in 1930 that "no problem in economics has been more hotly debated". Even Milton Friedman agreed in 1976 that "The Gibson Paradox remains an empirical phenomenon without a theoretical explanation".*

  Resolving this paradox can be left to another time; instead we shall consider the implications by looking at price relationships between wholesale prices and interest rates in a post-gold world. The next chart is of producer prices measured in gold compared with one-year Treasury yields.

  

  I have taken the St Louis Fed's "Producer Price Index by Commodity for Crude Materials for Further Processing" to more closely reflect commodity price trends, and to reduce the additional considerations of changes in processing margins over time. The one-year interest rate is preferred to the original evidence of Gibson's Paradox, which used the yield on undated British Government Consols stock as being the only continual information on rates available, because we need to more firmly link the evidence to modern interest rate policies.

  Looking at the chart, it is hardly surprising that Gibson's Paradox was quashed from the time of the Nixon Shock in 1971, when the US unlocked a huge rise in the gold price by ending the Bretton Woods Agreement. Instead, the gold price took on a life of its own, driving down wholesale prices priced in gold for the next nine years. The rise in the index from 1980 to 2000 reflected gold's subsequent bear market when gold fell from $800 to $250, but the influence of Gibson's Paradox appears to have returned thereafter.

  This conclusion might be considered suspect; but the chart tells us that not only are producer prices at their lowest for thirty-five years when measured in sound money, the price level also coincides with zero interest rates. In theory, it accords precisely with Gibson's Paradox. So where do we go from here?

  There is only one way for interest rates to go from the zero bound, it being only a matter of time, time which according to the Fed is now running out. Commodity prices in their role as raw materials therefore seem set to rise with interest rates, if the Paradox is still valid. Furthermore, the evidence from this analysis suggests that wholesale prices are suppressed even more than the price of gold. This being the case, when the interest rate cycle turns the potential for higher raw material prices measured in dollars could be truly spectacular, even more so in the event the gold price rises at the same time, which seems likely in the event that financial markets become destabilised by higher interest rates.

  It is worth repeating at this point that the economic consensus, which adheres to the quantity theory of money and has been comforted by the apparent absence of consumer price inflation in the wake of the post-Lehman monetary expansion, takes a diametrically opposite view to that indicated by the Paradox. The prospect of a turn in the interest rate cycle is expected to drive the dollar's exchange rate higher still, weakening commodity prices and gold even further. In the language of the dealers, everyone is on the same side of the trade, meaning the dollar is technically over-bought and commodities over-sold.

  Gibson's Paradox says it will turn out otherwise, and it could be central to linking the cyclical relationship between interest rates, securities markets, and commodity prices. It becomes much easier to see how these relationships tie together. Rising interest rates would almost certainly be accompanied by a potentially large fall in overpriced bond and stock markets as speculative positions are unwound, the former even undermining bank solvency ratios.

  The flight of speculative capital from falling markets has to go somewhere, particularly if cash balances held in the banks are at a growing risk from systemic default. The Paradox tells us that these are the conditions for commodities to become the safe haven of choice for the highest levels of speculative money ever recorded since fiat currencies dispensed with their golden anchor. Ergo, Gibson's Paradox probably still holds.

  *All three quotes are taken from Barsky & Summers, National Bureau of Economic Research Working Paper No. 1680, (August 1985).

  

  

  

  

  

• How We Got Here – The 2008 Financial Crisis For Dummies

  It could never happen again, right?

   

  

   

  h/t 2020Crash.blogspot.com

  

  

  

  

  

• Europe's New Colonialism: ECB Rejects Greek Request To Reopen Stock Market

  It has been one month since Greek capital controls were imposed, and as we explained earlier, Greece is nowhere closer to having its deposit limits lifted. In fact, with several more months of capital controls at least, the Greek banks are likely to suffer ongoing balance sheet impairments which will ultimately result in depositor bail-ins, with Germany already pushing for haircuts on deposits over €100,000.

  However, when it comes to banks there is at least still the illusion that Greece has some residual sovereignty. The reality is that it does not, as Greece is no longer an independent nation, and as of July 15, the Greek “In Dependence” day, every Greek decision needs to get pre-approval from both the ECB, Brussels and, naturally, Berlin.

  This was made very clear earlier today when Reuters reported that the Greek stock exchange will remain closed on Monday but might reopen on Tuesday after a one-month shutdown which started on June 29. “It’s certain that it will not open on Monday, maybe on Tuesday,” a spokesperson for the Athens Stock Exchange told Reuters on condition of anonymity.

  A spokesman for the Athens Stock Exchange said on Friday a proposal to reopen the bourse had been submitted to the European Central Bank for an opinion before a decision on the matter is made by the Greek finance ministry.

   

  Another person with direct knowledge of the matter confirmed that Greek authorities aimed to reopen the bourse on Tuesday.

  However, to understand what really happened, one should read the Bloomberg explanation, according to which it was the ECB which rejected proposals by Greek authorities to reopen country’s financial markets with no restrictions in place for both Greek and foreign traders, citing an Athens Exchange spokeswoman.

  Ministerial decree is now expected, setting some restrictions in use of money from Greek bank accounts for trading.

  And just like that, we wave goodbye to the Hellenic Republic, and greet the Mediterranean Vassal Province of Mario and Merkel. Because as of this moment, no Greek decision can be taken without the direct or indirect express prior approval of either the ECB and/or Berlin.

  Oh, and incidentally, Greece may be better off leaving its markets closed indefinitely because since the day Greece was “fixed”, the GREK ETF, which has been the only equity way to trade Greece, has sunk 15%.

  

  It has also managed to drag down the S&P 500 with it despite the Greek can having supposedly been kicked for at least a few more months.

  And once the locals can finally cash out of the local banks which as we explained are an assured “doughnut” for existing equity investors pending either bankruptcy or massive dilution which will wipe out all existing stakeholders (the fate of depositors depends on whether a €25 billion source of liquidity can be found in very short notice) they will, which in turn will lead to another market closure for Greek stocks, only this time it will most likely be permanent.

  

  

  

  

  

• Reports Of Secret Drachma Plots Leave Tsipras Facing Fresh Crisis

  On Friday, we brought you the shocking story of the rebellion that never was in Greece. 

  According to FT, Former Greek Energy Minister and maverick among mavericks Panayotis Lafazanis convened a “secret” meeting at the Oscar Hotel in Athens on July 14 at which he attempted to convince Syriza hardliners (including, in FT’s words, “supporters of the late Venezuelan president Hugo Chávez [and some] old-fashioned communists”) to storm the Greek mint, seize the country’s currency reserves, and, if necessary, arrest central bank governor Yannis Stournaras. 

  

  (Lafazanis)

  Obviously, the plan was never implemented, but if the story is even partly true it betrays the degree to which Greece teetered on the edge of social upheaval and even civil war in the days that followed PM Alexis Tsipras’ decision to concede to creditors’ demands and abandon not only Syriza’s election mandate but the very referendum outcome he had himself campaigned for just days prior. 

  Now that Tsipras has succeeded in compelling Greek lawmakers to cede the country’s sovereignty to Brussels in exchange for the right to use the euro, tales of unrealized redenomination plots have come out of the woodwork so to speak, and now, in addition to the scheme described above and rumors that a return to the drachma was nearly financed by a loan from the Kremlin, we get a glimpse at yet another plan hatched behind the scenes, this time courtesy of a recorded conference call between Yanis Varoufakis and “members of international hedge funds.”

  Here’s the story from Kathimerini:

  Former Finance Minister Yanis Varoufakis has claimed that he was authorized by Alexis Tsipras last December to look into a parallel payment system that would operate using wiretapped tax registration numbers (AFMs) and could eventually work as a parallel banking system, Kathimerini has learned.

   

  In a teleconference call with members of international hedge funds that was allegedly coordinated by former British Chancellor of the Exchequer Norman Lamont, Varoufakis claimed to have been given the okay by Tsipras last December – a month before general elections that brought SYRIZA to power – to plan a payment system that could operate in euros but which could be changed into drachmas “overnight” if necessary, Kathimerini understands.

   

  Varoufakis worked with a small team to prepare the plan, which would have required a staff of 1,000 to implement but did not get the final go-ahead from Tsipras to proceed, he said.

   

  The call took place on July 16, more than a week after Varoufakis left his post as finance minister.

   

  The plan would involve hijacking the AFMs of taxpayers and corporations by hacking into General Secretariat of Public Revenues website, Varoufakis told his interlocutors. This would allow the creation of a parallel system that could operate if banks were forced to close and which would allow payments to be made between third parties and the state and could eventually lead to the creation of a parallel banking system, he said.

   

  As the general secretariat is a system that is monitored by Greece’s creditors and is therefore difficult to access, Varoufakis said he assigned a childhood friend of his, an information technology expert who became a professor at Columbia University, to hack into the system. A week after Varouakis took over the ministry, he said the friend telephoned him and said he had “control” of the hardware but not the software “which belongs to the troika.” 

   

  
  

  Apparently, Varoufakis planned to take control of the computers first, then hack into the ministry’s software, steal the code, and design the parallel payments system. Here are excerpts from the call, again from Kathimerini, quoting Varoufakis:

  “The prime minister before he became PM, before we won the election in January, had given me the green light to come up with a Plan B. And I assembled a very able team, a small team as it had to be because that had to be kept completely under wraps for obvious reasons. And we had been working since the end of December or beginning of January on creating one.

   

  “What we planned to do was the following. There is the website of the tax office like there is in Britain and everywhere else, where citizens, taxpayers go into the website they use their tax file number and they transfer through web banking monies from the bank account to their tax file number so as to make payments on VAT, income tax and so on and so forth.

   

  “We were planning to create, surreptitiously, reserve accounts attached to every tax file number, without telling anyone, just to have this system in a function under wraps. And, at the touch of a button, to allow us to give PIN numbers to tax file number holders, to taxpayers. 

   

  “That would have created a parallel banking system while the banks were shut as a result of the ECBs aggressive action to deny us some breathing space.

   

  “This was very well developed and I think it would have made a very big difference because very soon we could have extended it, using apps on smartphones and it could become a functioning parallel system and of course this would be euro denominated but at the drop of a hat it could be converted to a new drachma.

   

  “But let me tell you – and this is quite a fascinating story – what difficulties I faced. The General Secretary of Public Revenues within my ministry is controlled fully and directly by the troika. It was not under control of my ministry, of me as minister, it was controlled by Brussels. 

   

  Ok, so problem number one: The general secretary of information systems on the other hand was controlled by me, as minister. I appointed a good friend of mine, a childhood friend of mine who had become professor of IT at Columbia University in the States and so on.  I put him in because I trusted him to develop this.

   

  

   

  “At some point, a week or so after we moved into the ministry, he calls me up and says to me: ‘You know what? I control the machines, I control the hardware but I do not control the software. The software belongs to the troika controlled General Secretary of Public Revenues. What do I do?’

   

  “So we decided to hack into my ministry’s own software program in order to be able break it up to just copy just to copy the code of the tax systems website onto a large computer in his office so that he can work out how to design and implement this parallel payment system.

   

  “And we were ready to get the green light from the PM when the banks closed in order to move into the General Secretariat of Public Revenues, which is not controlled by us but is controlled by Brussels, and to plug this laptop in and to energize the system.

  In short, Varoufakis claims Tsipras had pre-approved the creation of secret accounts for every tax filer (which, knowing Greece, might have left Varoufakis short on accounts for quite a few citizens). Greeks would be made aware of the accounts’ existence in the event the banking system ceased to function altogether, and Athens would effectively facilitate payments through the new system in defiance of the EMU. Clearly, this would not have been well received by Brussels – especially the bit about hacking their software – but ultimately, because the new system would be entirely controlled by Varoufakis’ finance ministry, it could be converted to the drachma immediately. 

  Kathimerini goes on the quote Varoufakis as saying that German FinMin Wolfgang Schaeuble intended to use Grexit as leverage to force France into supporting a system that ceded fiscal decision making to Brussels (which would of course mean giving Berlin more say over EMU countries’ finances):

  “Schaeuble has a plan. The way he described it to me is very simple. He believes that the eurozone is not sustainable as it is. He believes there has to be some fiscal transfers, some degree of political union. He believes that for that political union to work without federation, without the legitimacy that a properly elected federal parliament can render, can bestow upon an executive, it will have to be done in a very disciplinary way. And he said explicitly to me that a Grexit is going to equip him with sufficient bargaining, sufficient terrorising power in order to impose upon the French that which Paris has been resisting. And what is that? A degree of transfer of budget making powers from Paris to Brussels.”

  The new revelations raise serious concerns for Alexis Tsipras. The deep divisions within Syriza are by now well publicized, but reports of covert plans to establish parallel banking systems using tax filers’ IDs and the idea that elements within the ruling party plotted to seize billions in currency reserves and take control of the central bank have left some lawmakers demanding answers. Here’s Reuters:

  The center-right New Democracy party and the centrist To Potami and the Socialist Pasok parties, which all backed Tsipras in parliamentary votes on the bailout this month, demanded a response to the reports.

   

  “The revelations that are coming out raise a major political, economic and moral issue for the government which needs in-depth examination,” it said in a statement.

   

  “Is it true that a designated team in the finance ministry had undertaken work on a backup plan? Is it true they had planned to raid the national Mint and that they prepared for a parallel currency by hacking the tax registration numbers of the taxpayers?”

   

  
  

  Tsipras thus finds himself in an extraordinarily difficult spot. Passing two sets of prior bailout actions through parliament cost him dearly on the political front as more than 30 Syriza MPs defected on both votes. This means he’ll be forced to rely on the support of opposition lawmakers to govern going forward or at least until he can call for elections and get a “clean start” after the third troika program is formally in place.

  If Syriza’s political opponents come to believe that their efforts to back Tsipras on the way to keeping Greece in the euro are being subverted in secret by members of Tsipras’ own party, their support could dry up quickly leaving the PM with no support from either side of the aisle. 

  Given all of this, it’s easy to see why many analysts and commentators still belive that Grexit – and everything that comes with it both for Greece and for the EMU – is still the most likely outcome.

  

  

  

  

  

• Forget Banks – GMOs Are The New "Too Big To Fail' System

  Authored by Mark Spitznagel and Nassim Nicholas Taleb, originally posted at The NY Times,

  Before the crisis that started in 2007, both of us believed that the financial system was fragile and unsustainable, contrary to the near ubiquitous analyses at the time.

  Now, there is something vastly riskier facing us, with risks that entail the survival of the global ecosystem — not the financial system. This time, the fight is against the current promotion of genetically modified organisms, or G.M.O.s.

  Our critics held that the financial system was improved thanks to the unwavering progress of science and technology, which had blessed finance with more sophisticated economic insight. But the “tail risks,” or the effect from rare but monstrously consequential events, we held, had been increasing, owing to increasing complexity and globalization. Given that almost nobody was paying attention to the risks, we set ourselves and our clients to be protected from an eventual collapse of the banking system, which subsequently happened to the benefit of those who were prepared.

  The fallacies used in the arguments against us at the time were as follows:

  First, we were said to be “against science.” Our adversaries invoked consensus among economists in favor of these methods, a serious fallacy. Had science operated solely by consensus, we would still be stuck in the Middle Ages. According to scientific practice, scientific consensus is used in telling us what theory is wrong; it cannot determine what is right. Nor can it apply to risk management, which requires much greater scrutiny.

   

  Second, we faced the argument that “more technology is invariably better,” a corruption of the notion of progress. In fact, only a small minority of technologies end up sticking; most fail because of some flaw identified over time.

   

  Third, we were told that had ideas such as ours prevailed in the past, they would have hindered risk-taking. Yet, the first rule of risk-taking is to not cross the street blindfolded.

   

  Fourth, toxic financial exposures were deemed to be “safe,” according to primitive risk models. But Fannie Mae went bust exactly because of overconfidence in its bad models (and, incidentally, after its bailout, appears to use the same risk models).

   

  Fifth, the system kept relying on “predictions,” not noticing that the past track record of predictions by central bankers and economists can be used to make astrologists look good. Yet the entire economic system rested on these flimsy predictions — while we were advocating a system that had isolated parts to withstand prediction errors.

  We were repeatedly told that there was evidence that the system was stable, that we were in “the Great Moderation,” a common practice that mistakes absence of evidence for evidence of absence. For the financial system to be viable, the solution is for it to resemble the restaurant business: decentralized, with mistakes that stay local and that cannot bring down the entire apparatus.

  As we said, the financial system nearly collapsed, but it was only money.

  We now find ourselves facing nearly the same five fallacies for our caution against the growth in popularity of G.M.O.s.

  First, there has been a tendency to label anyone who dislikes G.M.O.s as anti-science — and put them in the anti-antibiotics, antivaccine, even Luddite category. There is, of course, nothing scientific about the comparison. Nor is the scholastic invocation of a “consensus” a valid scientific argument.

   

  Interestingly, there are similarities between arguments that are pro-G.M.O. and snake oil, the latter having relied on a cosmetic definition of science. The charge of “therapeutic nihilism” was leveled at people who contested snake oil medicine at the turn of the 20th century. (At that time, anything with the appearance of sophistication was considered “progress.”)

   

  Second, we are told that a modified tomato is not different from a naturally occurring tomato. That is wrong: The statistical mechanism by which a tomato was built by nature is bottom-up, by tinkering in small steps (as with the restaurant business, distinct from contagion-prone banks). In nature, errors stay confined and, critically, isolated.

   

  Third, the technological salvation argument we faced in finance is also present with G.M.O.s, which are intended to “save children by providing them with vitamin-enriched rice.” The argument’s flaw is obvious: In a complex system, we do not know the causal chain, and it is better to solve a problem by the simplest method, and one that is unlikely to cause a bigger problem.

   

  Fourth, by leading to monoculture — which is the same in finance, where all risks became systemic — G.M.O.s threaten more than they can potentially help. Ireland’s population was decimated by the effect of monoculture during the potato famine. Just consider that the same can happen at a planetary scale.

   

  Fifth, and what is most worrisome, is that the risk of G.M.O.s are more severe than those of finance. They can lead to complex chains of unpredictable changes in the ecosystem, while the methods of risk management with G.M.O.s — unlike finance, where some effort was made — are not even primitive.

  The G.M.O. experiment, carried out in real time and with our entire food and ecological system as its laboratory, is perhaps the greatest case of human hubris ever. It creates yet another systemic, “too big too fail” enterprise – but one for which no bailouts will be possible when it fails.

  

  

  

  

  

• Revenue Recession: Investors Are Paying Too Much For Growth, Barclays Says

  The myopia displayed by corporate America in terms of inflating short-term earnings at the expense of balance sheet leverage and long-term growth is now so pervasive that it’s become a major campaign issue for Hillary Clinton who recently unveiled a plan to forcibly break what she’s calling the “tyranny of the next earnings report” (for more on possible ulterior motives for Clinton’s decision to effectively tax shortsightedness, see here). 

  Zero Hedge readers are well aware of how ZIRP has served as a convenient excuse for price insensitive corporate management teams to borrow and plow the proceeds into EPS-inflating, equity-linked compensation-boosting buybacks. 

  This comes at a price. Capex (i.e. future productivity) and wage growth suffer even as investors are rewarded and executives are enriched.

  Of course buying back shares can obscure negative earnings trends but it can’t do anything to hide the fact that revenue growth is non existent and indeed, as FactSet reports, “the blended revenue decline for Q2 2015 is -4.0%. If this is the final revenue decline for the quarter, it will mark the first time the index has seen two consecutive quarters of year-over-year revenue declines since Q2 2009 and Q3 2009. It will also mark the largest year over-year decline in revenue since Q3 2009 (-11.5%).”

  Here with more on what certainly looks like a ‘revenue recession’ and on the excessive price investors are willing to pay for top-line growth, is Barclays.

  *  *  *

  From Barclays

  Paying for revenue growth

  Growth is not easy to find.

  In the U.S., the economy has failed to accelerate, with GDP growth stubbornly below 2.5%. It is worse in Europe and even China has slowed. Stagnant global economic growth, a strong USD, and lower oil prices have combined to cause revenue growth for the S&P 500 to fall. The first quarter of 2015 was the first quarter of negative sales growth for the S&P 500 since the financial crisis. 2Q15 is expected to be worse (Figure 2).

  Few sectors have been immune to the slow growth macro environment. Only health care continues to experience sales growth of more than 5%. Over the last 15 years there have not been many others times when only one sector was able to achieve more than 5% sales growth (Figure 3). 

  

  Considering the scarcity of growth it is rational for investors to pay for it. But, has the outperformance of growth gone too far? Is it now too expensive and poised to underperform? We see evidence that it is.

  

  In Figure 11 we show the median price-to-sales ratio for each quintile of the S&P 500 based on revenue growth. As shown, there is a substantial premium being charged for the fastest growing companies. This once again indicates that the price of growth is now high, in our opinion. 

  

  

  

  

  

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