Today’s News July 31, 2015

• Liar Loans Pop up in Canada’s Magnificent Housing Bubble

  Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

  For a long time, the conservative mortgage lending standards in Canada, including a slew of new ones since 2008, have been touted as one of the reasons why Canada’s magnificent housing bubble, when it implodes, will not take down the financial system, unlike the US housing bubble, which terminated in the Financial Crisis.

  Canada is different. Regulators are on top of it. There are strict down payment requirements. Mortgages are full-recourse, so strung-out borrowers couldn’t just mail in their keys and walk away, as they did in the US. And yada-yada-yada.

  But Wednesday afterhours, Home Capital Group, Canada’s largest non-bank mortgage lender, threw a monkey wrench into this theory.

  Through its subsidiary, Home Trust, the company focuses on “alternative” mortgages: high-profit mortgages to risky borrowers with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime borrowers.

  So it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September: “falsification of income information.” Liar loans.

  Liar loans had been the scourge of the US housing bust. Lenders were either actively involved or blissfully closed their eyes. And everyone made a ton of money.

  So Home Capital revealed that it has suspended “during the period of September 2014 to March 2015, its relationship with 18 independent mortgage brokers and 2 brokerages, for a total of approximately 45 individual mortgage brokers,” who’d together originated nearly C$1 billion in single-family residential mortgages in 2014. That’s 5.3% of the company’s total outstanding loan assets, and 12.5% of its total single-family mortgage originations in 2014.

  That’s a big chunk. The company, however, didn’t disclose why it took so long to disclose this.

  It said an “external source” had warned it about income falsification on mortgage applications submitted by a number of brokers. Its investigation did not find any evidence of falsified credit scores or property values, it said.

  It’s not hard for a lender to require income verification. Not requiring it is precisely what US lenders had done before the Financial Crisis. Add a little encouragement from a broker, and that’s how you get perfect liar loans.

  Home Capital had already announced on July 10 (Friday afterhours!) that in Q2, originations of high-margin uninsured mortgages had plunged 16% and originations of lower-margin insured single-family mortgages had plummeted 55% because it had axed some brokers. Its shares plunged 20% the following Monday and another 4% the next day [read… Largest “Alternative” Mortgage Lender in Canada Plunges, Denies “Systemic Problem” in Housing Market].

  At the time, HCG was the fourth most shorted stock in Canada. By July 29, the day before the current announcement, HCG had risen to the second most shorted stock. Today, massive short-covering set in, and shares soared 13%, but remain 42% below where they’d been during the halcyon days last November.

  “Everyone had their ideas about what transpired in the past six months; this corroborates some suspicions but dispels some others,” Shubha Khan, an analyst at National Bank Financial told the Financial Post, adding – with Canadian understatement – that there were “still some questions.”

  Among them, whether these insured liar loans would continue to be insured; and whether this was an isolated problem, rather than an industry issue in the Canadian housing market. In other words, is it just the tip of the iceberg?

  Housing bubbles are money generators. Temptations are huge. Falsifying mortgage applications is easy if no one checks them. It’s a mad scramble to extract as much money as possible for as long as possible – but with a devastating aftermath.

  Now liar loans are coming out of the Canadian woodwork. The much touted down-payment requirements in Canada have already fallen apart. Don’t have the money for even 5% down? Solutions are openly promoted, for example:

  It is not a problem anymore!!! Canada Mortgage & Financial Group (CMFG) has a new product that now allows you to borrow your down payment from any source…. The only amount you need to show on your own is 1.5% of the purchase price….

  With regulators breathing softly down their necks, banks might have become more careful in lending to people to buy homes that are among the most overpriced in the world. What has that accomplished? The rise of alternative lenders in the shadow banking system. They’re not subject to the same regulations as banks.

  “There’s a lot more that can be hidden from the public, things that are not right could not be noticed early on,” Michael Dolega, a senior economist at TD Economics, told the Huffington Post of Canada. “The quality is slipping, and it’s far more questionable for some of these smaller lenders, but at the same time I think it’s still better than it was in the U.S., when it went south pretty quickly.”

  Yes, this time it’s different.

  But the patterns are crystallizing: Home Capital Group with liar loans on its books, CMFG with ultra-low down-payment loans on its books…. In banking, bad deals are made in good times.

  Even the Bank of Canada, in its most recent Financial System Review in June, fretted over the risks in the shadow banking system due to its “less regulated nature” and outright “opacity,” and considered it a “particularly important vulnerability” to financial stability. While the sector is still relatively small, it would impact the overall economy, it said.

  But it’s not so small anymore – estimated at 10% of Canada’s mortgage market and growing rapidly: A report by CIBC (Canadian Imperial Bank of Commerce), cited by the Huffington Post, found that lending by alternative lenders had doubled since 2012, and as of the Q3 last year, was still growing 20% year-over-year.

  This comes at the worst possible time for Canada. The economy likely shrank in the first half. Hence, the Conference Board of Canada just downgraded growth to 1.6% in 2015, worst since 2009. It sees some deep problems, after a 15.5% plunge in business investment in Q1:

  Oil and gas firms are expected to chop their investment by almost one-third…. Outside the energy sector, firms remain hesitant to invest. Purchases of machinery and equipment suffered a substantial decline in the first quarter of the year, and a decline in building permits suggests a downturn in commercial construction in 2015. Overall, business investment will drop by close to 7% this year.

  Household spending is also expected to weaken, despite savings for consumers at the gas pump and federal tax cuts. Soft employment growth, weak wage gains, high level of household debt and job losses in oil producing provinces will combine to limit growth in consumer spending to 2.1% in 2015.

  That would be the optimistic scenario. It assumes that the magnificent housing bubble can be maintained; but all bets are off if it takes liar loans, among other underwriting schemes, to maintain it. And when the housing bubble deflates, all these schemes that are forgiven as long as prices rise will turn into an unappetizing mess.

  The problems are already spreading in the Canadian real estate sector. Read… Epic Glut of Office Space Crushes Hope in Canadian Oil Patch

  

  

  

  

• Debt Slaves: 7 Out Of 10 Americans Believe That Debt "Is A Necessity In Their Lives"

  Submitted by Michael Snyder via The End of The American Dream blog,

  Could you live without debt?  Most Americans say that they cannot.  According to a brand new Pew survey, approximately 7 out of every 10 Americans believe that “debt is a necessity in their lives”, and approximately 8 out of every 10 Americans actually have debt right now.  Most of us like to think that “someday” we will get out of the hole and quit being debt slaves, but very few of us ever actually accomplish this.  That is because the entire system is designed to trap us in debt before we even get out into the “real world” and keep us in debt until we die.  Sadly, most Americans don’t even realize what is being done to them.

  In America today, debt is considered to be just part of normal life.  We go into debt to go to college, we go into debt to buy a vehicle, we go into debt to buy a home, and we are constantly using our credit cards to buy the things that we think we need.

  As a result, this generation of Americans is absolutely swimming in debt.  The following are some of the findings of the Pew survey that I mentioned above…

  *”8 in 10 Americans have debt, with mortgages the most common liability.”

   

  *”Although younger generations of Americans are the most likely to have debt (89 percent of Gen Xers and 86 percent of millennials do), older generations are increasingly carrying debt into retirement.”

   

  *”7 in 10 Americans said debt is a necessity in their lives, even though they prefer not to have it.”

  Most of us wish that we didn’t have any debt, but we have bought into the lie that it is a necessary part of life in America in the 21st century.

  It has been estimated that 43 percent of all American households spend more money than they make each month, and U.S. households are more than 11 trillion dollars in debt at this point.

  When it comes to government debt, that is easy for us to blame on someone else, but all of this household debt is undoubtedly something that we have done to ourselves.

  It all starts at a very early age for most of us.  When we are still in high school, we are endlessly told about how important a college education is.  All of the authority figures in our lives insist that we should just try to get into the best school that we possibly can and to not even worry about how much it will cost.

  So many of us go into staggering amounts of debt before we even get out into the working world.  We had faith that the “good jobs” that were being promised to us would be there when we graduated.

  Unfortunately, in this day and age those “good jobs” end up being a mirage more often than not.

  But whether or not we can find a good job, we still have to pay off all that debt.

  According to new data that was recently released, the total amount of student loan debt in the United States has risen to a grand total 1.2 trillion dollars.  If you can believe it, that total has more than doubled over the past decade.

  Right now, there are approximately 40 million Americans that are paying off student loan debt.  For many of them, they will keep making payments on this debt until they are senior citizens.

  Another way that they get you while you are still in school is with credit card debt.

  I got my first credit card while I was in college, and nobody ever taught me about the potential dangers.

  Today, the average U.S. household that has at least one credit card has approximately $15,950 in credit card debt.

  So let’s say that you have that much credit card debt and you are paying an annual interest rate of 17 percent.  If you only pay the minimum payment each month, it will take you 229 months to pay your credit card off, and during that time you will have paid $13,505.82 in interest charges.

  In other words, you will almost have paid twice as much for everything that you originally bought with your credit card by the time it is all said and done.

  This is why banks love to give you credit cards.  If they can get back nearly twice as much money as they originally give you, they get rich and you get poor.

  Most of us get loaded down with even more debt when we go to buy a vehicle.  Instead of saving up and getting what we can afford, many of us end up getting the largest loans that we can qualify for.

  In a previous article, I discussed the fact that the average auto loan at signing in America today is approximately $27,000.  In order to get the monthly payments down to a level where we can afford them, many of these auto loans are now being stretched out for six or seven years.  In fact, the number of auto loans that exceed 72 months has hit at an all-time high of 29.5 percent.

  It is the same thing with home loans.

  In the old days, it was extremely rare for a mortgage to be stretched over 30 years, but today that is pretty much the standard.

  Sadly, most people don’t understand how much money this is costing them.

  If you take out a $300,000 mortgage at 3.92 percent and stretch it over 30 years, you will end up paying back a grand total of $510,640.

  In other words, you will pay for two houses by the time you are done.

  Yes, we all need somewhere to live, and there are definitely negatives to renting as well.  But it is very important that we all understand what is being done to us.

  And I haven’t even discussed one of the most insidious forms of debt yet.

  Have you noticed that most doctors and most hospitals will never tell you how much something is going to cost in advance?

  They get us when we are at our most vulnerable.  When there is something wrong with us physically, we are often desperate to get help.  So we don’t ask too many questions and we just go along with whatever they say.

  But then later we get the bill and we are often completely shocked by what they have charged us.

  If you are completely unethical, it is a great business model.  People that are extremely desperate and needy come to you and you don’t even have to tell them how much your services are going to cost.  And then once they leave, you send them an absolutely outrageous bill for whatever you feel like charging.

  Frankly, I don’t know how a lot of people working in the medical field live with themselves.  In their extreme greed, they are ruining the lives of millions of ordinary American families.

  One very disturbing study found that approximately 41 percent of all working age Americans either currently have medical bill problems or are paying off medical debt.  And collection agencies seek to collect unpaid medical bills from about 30 million of us each and every year.

  Most of us will spend our entire lives paying off debt.

  That is why we are called debt slaves – our hard work makes others extremely wealthy.

  

  

  

  

  

• Secret Memo Reveals US Was Aware Of Americans Killing Zimbabwe Lions; Only Concern Was Getting Caught

  Over the past 3 days, it appears that the only thing Americans can talk about, whether around the watercooler, in the office or during prime time TV, is the tragic death of Cecil the Zimbabwe lion, and his “monster” killer, Minnesota dentist Walter Palmer. The reality, of course, is that despite engaging in the rather anachronistic pursuit of self-gratification through shooting at animal prey, in this case a bow and arrow, in a day and age of online apps and cyberspace, Palmer, a self-professed avid big-game hunter, did nothing illegal in his opinion having relied on local guides and was said to believe the hunt was legal.

  “I have not been contacted by authorities in Zimbabwe or in the U.S. about this situation, but will assist them in any inquiries they may have,” Palmer said but by then the witch hunt was on: not only were crowds of people stalking out his office but investigators have knocked on the front door of Palmer’s house, stopped by his dental office, called his telephone numbers and filled his inbox with e-mails. There is even a petition, with over 155,000 signatures, demanding Palmer be extradited to Zimbabwe where he would “face justice” alongside his two guides who are already said to be in custody.

  Not surprisingly, Palmer has prudently disappeared until tempers cool off and/or an arrest warrant is issued for his arrest.

  In the grand scheme of things, this is yet another grand, and convenient distraction du jour for the US public to rally around with a cry of fake (or in some TV talk show hosts, almost real) indignation while preaching moral superiority (killing one lion is apocryphal but killing millions of hamburgers and pork burritos every year is, well, meh) while the US economy continues to disintegrate under everyone’s feet.

  However, where this particular episode rapidly crossed the surreal threshold, is when news hit overnight that Obama administration officials are offering to help the Zimbabwean government investigate the high-profile killing.

  Yes, the president would show the American people just what a humanitarian he is, and do what he does best: dispense “fairness” and “justice.”

  Only… this being the US government, what really happened is another grotesque instance of unparalleled hypocrisy promptly backfiring.

  Presenting “QUIET DIPLOMACY” SUSPENDS ELEPHANT HUNTING IN NATIONAL PARKS – FOR NOW” – a Confidential memo sent on October 23, 2008 by the current US ambassador to Zimbabwe, James D. Mcgee, to the CIA, and released by Wikileaks.

  In it we read that, as usual, there is none more culpable of the recent event in Zimbabwe, which incidentally is and has been quite permitted by the local authorities as long as everyone’s palms are appropriately greased, than the US government, which years ago was fully aware that Americans were killing lions in Hwange National Park, but that its concern was not with the dead animals – no matter how hard the administration tries to feign empathy for the beheaded lion here and now – but with Americans getting caught in the act. As has just happened.

  But first, here is some background on how legal local poaching, whether it is for lions or elephants is. From the formerly classified memo:

  Meeting with poloff and conoff on October 10, Bown said that it was unclear “how legal” these hunting operations were, since it appeared the hunters had permits issued by Parks to kill the animals, despite the provision in the National Parks Act that prohibits commercial hunting.  The photographic safari operators indicated Parks had given several local and South African hunting companies concessions to kill elephants in Hwange if they met specific criteria: (1) total ivory weight less than 30 pounds, (2) young/adolescent males, (3) isolated areas (i.e. away from watering holes and main roads), and (4) controlled by Parks staff.  Parks has never publicly stated these criteria or explained the operation.  Frustrated photographic safari operators weighed and photographed many of the tusks at the Park’s ivory store in Hwange and found that many were over 30 pounds each.  In one case, an operator claimed an American hunter killed an elephant with tusks weighing over 120 pounds.  Photos also show some elephants were killed very near main roads and close to watering holes.  In at least one reported case, a vehicle drove around the animal before the hunter killed it at close range.  In emails to Mtsambiwa and Nhema, safari operators decried the unethical hunting both in terms of the detrimental ecological impact and the negative impact it would have on their own businesses.

   

  … the safari operators also  reported that some of the hunting guides had been issued hundreds of hunting permits for elephants in Hwange and other national parks in mid-to-late August.  Normally, hunting permits are offered in an auction to all professional hunting guides.  In contrast, Bown said these recent permits were issued through a non-transparent process to professional hunters of ill-repute, including some South African operators.

  So both the Zimbabwe ambassador and the CIA knew Zimbabwe was permitting and flaunting its own “regulations” when it comes to poaching if the fee is good enough. And, since American citizens were involved, the fee most certainly was:

  Despite Mtsambiwa’s assurances at our August meeting that Parks was only planning a management/training exercise for Parks staff, in early September poloff received an email  from an American citizen in California, asking about an advertisement for an elephant hunt in Zimbabwe to hunt five elephants over ten days for USD 6,000 as part of a culling exercise.  The meat from the animals would go to local villagers and hunters were expected to help with on-site butchering of the animals.  This price is significantly less than most elephant hunting packages.  Normally, elephant hunting excursions in Zimbabwe cost about USD 1,000 per day, plus a fee for each animal killed.  The hunting operation was to be led by Zimbabwean Headman Sibanda and was arranged by Thomas Powers Internationale, based in Colorado.

  Where was the disgust then? Oh yes, elephants are not cute animals about which Broadway musicals are written.

  However, there is a problem, because reading on we find that not only did the government know about everything that was going on involving US poachers, quite legal and paying very well, involving the hunting of elephants, but also, drumroll, lions.

  Bown, Save Valley Conservancy Director Clive Stockil and other conservationists opined in conversations with us that hunting permits were issued by Parks under intense pressure from its politicized board and ZANU-PF.  Bown believed this frantic last grab at hunting revenue was one more aspect of ZANU-PF insiders’ efforts to strip assets and fill their pockets before losing power to the MDC.  She said that the same small group of hunters involved in this operation had been consistently involved in unethical and marginally legal hunting.  Bown had no evidence that they were involved specifically with sanctioned individuals within the Mugabe regime, but believed such connections were likely.  According to Bown, the Zimbabwean professional hunters involved include Guy Whitall, Tim Schultz of African Dream Safaris, Headman Sibanda and Wayne Grant of Nyala Safaris, Evans Makanza, Alan Shearing, Buzz Charlton and James Macullam of Charlton Macullum Safaris, A.J. Van Heerden of Shashe Safaris, Barry Van Heerden of Big Game Safaris, and Lawrence Boha.  (COMMENT: Numerous conservationists have suggested the Van Heerden brothers are involved in suspicious hunting and land deals with the Director of the Central Intelligence Organization, Happyton Bonyongwe, although none have provided proof of the relationship.  END COMMENT.)  

   

  Additionally, one safari operator accused an American, by name, of killing a lion illegally and then smuggling its hide out through South Africa.  Given the rampant smuggling of other animal products across Zimbabwe’s southern border (reftel), this is not unlikely.  As reported in reftel, American hunting dollars are vital to Zimbabwe’s conservation efforts, but there are also serious risks that Americans could be implicated in smuggling and poaching operations.

  And there you have it: while blaming Walter Palmer is easy, the truth is that at its core, the death of Cecil, as well as countless other lions, elephants, rhinos and other animals, is solely as a result of the Zimbabwe government’s corruption. A corruption, which the US government knew all about, and which also knew that US hunters were killing not only elephants but lions.

  The government’s only real concern: the “serious risks that Americans could be implicated in smuggling and poaching operations.”

  And now that an American has been implicated in poaching, what does the government do? It generously offers to “help the Zimbabwe government investigate the killing” of Cecil. Even though both Zimbabwe and the US government have tacitly approval of just this kind of behavior for years. Until something went wrong.

  Come to think of it, that’s precisely what happens in the US capital markets too: as long as stocks go up, nobody cares about criminal behavior and bubble blowing (just don’t get caught spoofing an ES sell orders). But once the real selling begins…

  

  

  

  

  

• Chinese Stocks Extend Yesterday's Plunge Despite Regulators "Asking" Insurers To Stop "Net Sales"

  Following last night's afternoon session plungefest (with ChiNext's biggest drop in a month), as it appeared the government experimented with 'free' markets briefly, regulators have "asked" insurance companies to be "net sellers" of stocks going forward. With margin debt dropping for the 4th day in a row (to fresh 4-month lows), Markit noted that accusations of foreigners short selling shares is “overblown” by Chinese market regulators and not the cause of a recent rout in the stock market, according to the SCMP. The requests and threats appear to not be working as CSI-300 futures open down 0.7%.

  As a reminder, this is how things ended last night…

   

  

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  And tonight we are seeing losses extend…

  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1% TO 3,777.15
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.4% TO 3,655.67

  

   

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  More measures…

  China Insurance Regulatory Commission asked insurers to try their best to avoid net sales of equities in near future, Shanghai Securities News reports, citing an unidentified person from an insurer.

  And refutations to China's claims that foreign sellers were "waging economic war"

  Accusations of foreigners short selling shares is “overblown” by Chinese market regulators and not the cause of a recent rout in the stock market, South China Morning Post cites financial data co. Markit analyst Relte Stephen Schutte as saying.

  • Official data shows minimal short selling of individual shares with shorting of domestic ETFs at only 1.2% of total domestic ETFs under management, Schutte is cited as saying

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  On a more sombre note, the first major casualty of the Chinese stock market disaster has happened as Caixin reports well-known fund manager, Liu Qiang, a 36-year-old fund manager at Ruilin Jiachi,  jumped to his death from a high-rise in downtown Beijing, angry the government intervened in the stock market rout, people who knew him say…

  Several people close to Liu said he suffered from depression and returned to work in April after spending three years in the southwestern province of Yunnan where he was seeking treatment for depression. "He has had a very tough time in recent years," one of Liu's friends said.

   

  

   

  Some of Liu's friends said he had been very frustrated by the government's efforts to support the bourse amid recent turmoil because he believed this upset market order. He thought that "the rules and order of the market had been broken … and was desperate, feeling that he was at his wit's end," one of his friends said.

   

  Publicly available data show that the fund he managed, which invests in stocks and futures, had lost about 18 percent of its value this year and would be liquidated if losses exceeded 20 percent. But a person close to Liu said most of the fund's investors were his friends who agreed with his belief in long-term investment. They were not eager to liquidate the fund, he said.

   

  In a blog dated July 7, Liu wrote: "The stock market disaster has turned many of my investment principles upside down … and made me doubt many times whether I'm still suitable for the market."

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• "Greed Is King" – What We Learned Talking To Chinese Stock Investors

  Authored by J.J. Zhang, originally posted at MarketWatch.com,

  Though Greece has dominated the news recently, its overall market impact has been surprisingly muted. Instead, the real market mover and shaker for the last couple of months has been China.

  By now, many are familiar with the facts and numbers of the Shanghai market situation. But recent events have also shed a light on a less well known dynamic — the individual behavioral habits and viewpoints of Chinese market participants.

  During a short stay in Shanghai a few weeks ago on unrelated business, I had an opportunity to witness the ground zero of the China market frenzy at its peak and its nascent plunge. Chinese retail investors make up 85% of the market, a far cry from the U.S. where retail investors own less than 30% of equities and make up less than 2% of NYSE trading volume for listed firms in 2009.

  Combined with the highest trading frequencies in the world and one of the lowest educational levels, describing China’s market as immature is an understatement. As many readers know, mental irrationality is often cited as the No. 1 cause of poor returns.

  Using the opportunity to interview some China market participants, both in Shanghai and elsewhere, here are a few observations of how they think and act — and the potential lessons that await.

  Bubbles can be surprisingly predictable

  During the housing bubble run-up and subsequent recriminations, a common excuse was the impossibility of predicting and diagnosing bubbles. However, bubbles can often be characterized by several irrational behaviors and metrics and the recent China bubble is no exception. Almost everyone in the financial industry knew the Shanghai market was in a bubble. Interestingly, from my interviews with everyday participants, they knew it as well, many agreed that the market was crazy and was likely in a bubble. It was not a question of if, but when, the bubble would pop.

  Chasing bubbles in China isn’t new

  An interesting counterpoint to the bubble awareness is that, frankly, Chinese participants are used to chasing bubbles. Whether a cultural phenomenon or something else, over the last decade there’s been a continual hopping of investment from one big money-making scheme to the next. Whether it was real estate a decade ago, gold half a decade ago or wealth-management products a few years ago, there’s a continual cycle of money rotation into the “hot” investment, with each failing eventually in some way. It’s simply stock’s turn. As one interviewee said: “The Chinese market is not for investing, it’s for gambling.”

  Early birds get the worms

  This goes completely against most prudent and established norms. While the standard advice is to avoid “hot” bubbly assets, in China the experience has actually been to jump in early and fully instead. Many of the bubbles or “hot” investments mentioned earlier have in truth made many of the people I’ve talked to a lot of money. China real estate today is a poor investment but those who got in early doubled or tripled their investments. Similarly with wealth-management products, more people have benefited from their high-interest-rate payouts than have suffered. While the Shanghai market has dropped 20%-30% from its peak a few weeks ago, it still represents a 100% gain from a year ago and a 30% gain over the last 6 months. Those participants who jumped in early are still more than happy.

  Greed is king

  Despite recognizing it’s a bubble, almost everyone was still all-in on stocks. Why? Quite simply — greed with a dash of jealously. Seeing constant market gains in the news along with daily sharing and boasting from friends and family getting rich is simply too tempting and thus caution was thrown to the winds. Subsequently, this fueled a massive amount of equity exposure followed by leveraging and margin borrowing to go even more all-in.

  But fear is the emperor

  The only emotion more powerful than greed is fear. Almost everyone I talked to was still all-in on stocks but everyone had a foot halfway out the door, ready to bolt at the first sign of trouble. While not uniquely a China problem — market drops are almost always more violent than the initial rise — in China, it’s several times more volatile. Look no further than solar-panel firm Hanergy’s Hong Kong listed stock, which lost 47% in one hour, or the numerous days the Shanghai market rose or dropped by 5% or more.

  Moral hazard in government rescues is real

  During the most chaotic moments of the financial crisis, bailout discussions always raised the specter of moral hazard. While it didn’t play a major role in the subsequent U.S. recovery, moral hazard in China is fast becoming a deep problem. Many market participants I talked to said they were confident in the Chinese government to step in eventually to maintain order and prevent mass panic. They know the government’s legitimacy relies heavily on economic progress and fear any contraction. So far, they’ve been right — the government has announced a never-ending stream of interventions over the last few weeks to stem the selloff and panic, with the latest being the implementation of a half-trillion-yuan fund to purchase stock and shore up the market. Of course, the question is: When does a problem become too big for the government to control?

  Maturity takes time

  Perhaps the last lesson I took away from my Shanghai experience: Maturity takes time. Just as kids grow from naïve adolescence to rowdy teenage years to eventual maturity, so will China and its market participants. While stocks have been a part of U.S. culture and wealth creation for several generations now, in China this is really the first generation where participants both have the money and the ability to invest in stocks.

  Perhaps in another generation, after several years of painful lessons and surprising opportunities, it’ll look completely different.

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  [ZH: Just like US investors have learned…

  

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• Donald Trump's Soaring Popularity "Is The Country's Collective Middle Finger To Washington"

  Submitted by Paul Brodsky, via Macro-Allocation.com,

  Donald Trump’s ascendance as the early GOP front-runner is symbolic of a greater global trend: growing pushback against institutional political and economic power.

  To many centrist politicians and mainstream political observers, Donald Trump is a boastful, insensitive egomaniac spouting populist rhetoric. Whether such a characterization is true is not worthy of debate, which may explain why the rantings of enraged career political pundits have no impact on Mr. Trump’s popularity among Republican voters in Iowa, New Hampshire, and across America. It seems no amount of ink or air time spent tarring and feathering Trump’s reputation sticks; in fact it seems to help Teflon Don in the polls, where he leads a crowded field of career politicians.

  Donald Trump is a threat not only to the nattering nabobs in the press corps and the Republican Party. His day in the sun may be symbolic of a broader dynamic: the declining power held by historically powerful institutions. Ask yourself if Trump’s campaign is making a mockery of the political process or exposing the mockery that the political process has become. A not-insignificant percentage of Americans away from the coasts, are looking past his utter lack of decorum and political savvy to hitch their wagons to his outrage.

  Let’s forget, for a moment, about our personal politics, preferred policies, and individual candidates we may be excited to elect. Are we supposed to forget that the Supreme Court, through its 2010 decision that corporate donors should be treated legally as individual donors under the First Amendment, effectively subordinated individual voters into mere supporting targets to which political aspirants have to appeal? Most importantly, are we supposed to nod our bobble heads in agreement with the heads of the national parties to choose a candidate they find acceptable based on which will appeal to the best funded special interests?

  Is anyone really polling in favor of Donald Trump or is he conveniently filling the role of the not-so-quiet counterfactual?

  I recently texted one of the premier Sunday morning political pundits with these thoughts and he texted back:

  “That’s what I am arguing internally. This is the country’s collective middle finger to Washington.”

  As an investment strategist and consultant observing our current global economy and markets, it is difficult not to extrapolate this sense of helplessness against powerful institutions. Tell us again why six years of central bank financial repression is serving the interests of the greater factors-of-production? As investors, should we care about widening wealth and income gaps that are clearly part-and-parcel with central bank policies devoted to maintaining asset values (see here and here)?

  Should we expect free, democratic markets that create, form and price capital efficiently – not that treat financial assets as balance sheet collateral for credit?

  Who can voters elect to again have an economy that puts producers over rentiers, or to have markets that price value? I’m sure it’s not Donald Trump (a rentier’s rentier!), but I’m also sure it’s not the heads of the Democrat and Republican Parties. Who can investors elect to keep the rentier thing going? Is that really what investors should want? It’s complicated.

  Read more here…

  

  

  

  

  

• Why Do So Many Working Age Americans Choose Not To Enter The Workforce?

  Via ConvergEx's Nick Colas,

  Today we look at a unique dataset – Gallup’s annual poll of job satisfaction – to see what it can tell us about secular trends in employment, consumer confidence and spending.  This annual survey of +1,000 people active in the U.S. workforce goes back to the late 1980s, so it is a useful lens with which to consider issues like labor force participation rates that have shifted unexpectedly over the period.

   

  Most surprising news first: Americans express a broad satisfaction with their jobs, regardless of economic conditions. The very worst reading since 1989 was in 2011 when “Only” 83% of respondents said they were either “Somewhat” or “completely” satisfied with their jobs.  The peak was in 2007 at 94%, and last year (August 2014) it was 89%.

   

  The key takeaway is that declining labor force participation rates since the year 2000 (67% then, 62.6% now) aren’t because of any systemic disaffection with the American workplace. 

   

  The other notable takeaway: workers are (strangely, we must say) satisfied with what they earn. Those expressing “Complete” satisfaction with their paystub hit a high last year (31%) not seen since 2010 and 2006…  Wage inflation?  What for?

  You could call it the “Mystery of the Missing Worker” – why do so many people of working age chose not to enter the workforce?  Here are the numbers, as of the most recent Employment Situation report:

  • 250 million: the total number of people of working age in the United States. 
  • 149 million: the total number of people in that population that have a job.
  • 8 million: the number of people who want a job but do not have one.
  • 93 million: the number of people who don’t work, and don’t want work.

  To put some context around that last number, it is 30% of the entire U.S. population.  This is the same as the current population of the entire West Coast (CA, OR, and WA) AND New York State AND Florida.  Plus another 10 million people.  Economists measure this with the Labor Force Participation rate, and it has been in decline since February 2000, when it peaked at 67.3%.  It is now 62.6% and last month was a new low back to the 1970s. People of working age increasingly do not consider themselves part of the labor force.  Most economists chalk this up to the demographics of an aging workforce even though virtually all the literature on the topic in the early 2000 predicted participation would continue to increase. 

  We recently took a long look at a dataset that doesn’t often see the light of day but does provide some useful takes on how workers view their jobs.  It comes from the Gallup organization and is an annual survey of +1,000 employees since 1989 on their perceptions of job satisfaction in all its forms, from health and safety concerns to compensation to job security.  The complete data set can be found here, and the charts below highight the trends…

  

  But here are the important takeaways.

  #1: Americans are consistently satisfied with their jobs, although the readings vary slightly through a given economic cycle. The highest ever combined responses of “Completely Satisfied” and “Satisfied” was in 2007 at 94%. The worst since the start of the survey in the late 1980s was 2011, at 82%.  Last year – the results come out every August – the combined reading was 58% “Completely” and 31% “Somewhat” Satisfied, for a total of 89%.

   

  #2: They also feel relatively secure in their positions.  Last year some 88% reported being “Completely” (58%) or “Somewhat” (31%) satisfied by the security offered by their jobs and, implicitly, their employers.  The worst readings were in 2009 at 80% total and in the early 1990s at 79%.

   

  #3: Workers also report high levels of satisfaction with what they receive in terms of compensation.  Back in 1991 – the worst year in terms of general reported satisfaction for this question – “only” 66% of respondents were completely or somewhat satisfied with their pay stubs.  Even during the Financial Crisis and its aftermath that number troughed at 70% in 2011. Last year a total of 75% of respondents were satisfied with what they received for compensation.

   

  #4: Workers who respond to the Gallup survey last year have the biggest gripes about health insurance benefits (only 61% satisfied), retirement planning (only 63% satisfied) and chances for promotion (68%).

   

  #5: Conversely, workers reported exceptionally high levels of satisfaction in their relations with co-workers (95% completely or somewhat satisfied), physical safety (93%) and the flexibility of their hours (90%).

  Frankly, when we started to look at these numbers we expected to see a mirror of the volatility common in consumer confidence surveys.  A few points here:

  • Consumer confidence as measured by the Conference Board peaked in 1966/67 and again in the late 1990s at readings of +140. 
  • Troughs occurred in the early 1970s, late 1970s/early 1980s and post September 11 at readings of 50 or so. 
  • The Financial Crisis took us down to below 30 in 2008 and readings struggled to get past 70 until 2013. 

  We therefore thought that Americans would feel broadly the same about their work situations as they did the economy as a whole – that things are still pretty bad and the past was much better than the present.  This turned out not to be the case.  Yes, they express some marginal disaffection when times are hard, but the trough reading during and after the Financial Crisis was 83% satisfied with their jobs.  Hardly a pitchforks and barricades kind of number.  

  In short, we can’t blame lower participation rates on the nature of work – broadly speaking – offered in the American economy.  In Internet parlance, the American workplace gets 4 ½ stars and a lot of recommendations.  Perhaps, in the words of Yogi Berra: “No one goes to that restaurant any more.  It’s too crowded”.

  *  *  *

  Of course, when work is punished in the Entitlement State Americans live in… what else should we expect but 30% of the employable to sit at home? As we previously explained,

  This isthe painful reality in America: for increasingly more it is now more lucrative – in the form of actual disposable income – to sit, do nothing, and collect various welfare entitlements, than to work.

   

  This is graphically, and very painfully confirmed, in the below chart from Gary Alexander, Secretary of Public Welfare, Commonwealth of Pennsylvania (a state best known for its broke capital Harrisburg). As quantitied, and explained by Alexander, "the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

   

  

   

  We realize that this is a painful topic in a country in which the issue of welfare benefits, and cutting (or not) the spending side of the fiscal cliff, have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for most Americans who find themselves in a comparable situation: either being on the left side of minimum US wage, and relying on benefits, or move to the right side at far greater personal investment of work, and energy, and… have the same disposable income at the end of the day.

  

  

  

  

  

• China Says US "Militarization" Of South China Sea Shows Washington "Wants Nothing Better Than Chaos"

  If you follow geopolitics you’re well aware that China has become a magnet for maritime conflict and controversy over the past six or so months. 

  It all started earlier this year when satellite images showing the construction of what appeared to be a 10,000 foot runway (long enough to accommodate military aircraft) atop a newly constructed island in the contested waters of the South China Sea touched off an international firestorm as the US and its allies accused Beijing of seeking to redraw maritime boundaries and expand its naval capabilities at the expense of regional security.

  China vigorously denied the accusations, pointing to the fact that other nations had undertaken similar land reclamation efforts in the Spratlys. 

  The situation escalated meaningfully when the PLA threatened a US spy plane, prompting Washington to remind Beijing that artillery stationed on “sand castles” would certainly not be enough to deter the US Navy from navigating wherever it chooses whenever it chooses to do so.

  The “conflict” subsided briefly after a propaganda campaign by Beijing put a humorous spin on the entire ordeal, but China found itself right back in the spotlight last week after Japan essentially accused it of stealing natural gas by positioning rigs too close to a demarcation line that separates the two countries’ exclusive economic zones. 

  For the latest on China’s seaborne exploits we go to Reuters, who notes that Washington and Beijing are back at each other’s throats over the Spratly issue, only this time it’s China which is accusing the US of militarizing the region. Here’s more:

  China’s Defence Ministry on Thursday accused the United States of “militarizing” the South China Sea by staging patrols and joint military drills there, ramping up the rhetoric ahead of a key regional security meeting in Malaysia next week.

   

  China has been angered by U.S. navy and air force forays through waters it claims as its own, especially this month, when U.S. Navy Admiral Scott Swift said he joined a routine surveillance flight.

   

  The United States has also stepped up military contacts, including drills, with regional allies such as the Philippines, which also has claims in the South China Sea.

   

  The United States was hyping up the “China threat” and attempting to sow discord between China and other claimant countries, Defence Ministry spokesman Yang Yujun told a news briefing.

   

  “China is extremely concerned at the United States’ pushing of the militarization of the South China Sea region,” he said.

   

  “What they are doing can’t help but make people wonder whether they want nothing better than chaos.”

  Well yes, one “can’t help but wonder” that about a lot of what Washington does foreign policy wise (especially in the Middle East), although we suspect that this particular issue can be chalked up to a combination of curiosity and the irresistible temptation on the part of the Pentagon to prove to China that no matter what Beijing says, the US will continue to fly, sail, and conduct war games in the region if for no other reason than to spite Xi Jinping. 

  But the atmosphere isn’t completely hostile because as Reuters also notes, China is fine with “certain U.S. officials taking civilian flights over the South China Sea to enjoy its beauty.”

  

  

  

  

  

• Least Transparent Ever: IRS Used "Wholly Separate" Message System To Hide Communications

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Barack Obama promised to have the “most transparent administration ever,” but as with pretty much every other promise he’s made over the years, the exact opposite is what has occurred.

  From Hillary Clinton using her own private email server while Secretary of State, to the latest revelations that the IRS (which intentionally targeted American citizens based on their political views), used a “wholly separate” instant messaging system in order to conceal their internal communications. Of course, not only is there no transparency, but as is the case with all shady and undemocratic “elite” behavior, there is no accountability.

  In the latest bit of information to emerge, we learn from Americans for Tax Reform that:

  The IRS used a “wholly separate” instant messaging system that automatically deleted office communications, according to documentation released by the House Oversight Committee on Monday. The system appears to have been purposefully used by agency officials responsible for the targeting of conservative non-profits, in order to evade public scrutiny.

   

  The system, known as “Office Communication Server” or OCS was used by IRS officials, including many in the Exempt Organizations (EO) Unit, which was headed by Lois Lerner.

   

  As the Oversight Committee report states, the instant messaging system did not archive any communications, so it is not possible to know what employees of the EO unit discussed on it.

  However, in an email uncovered by the Committee Lerner warns her colleagues about evading Congressional oversight:

  “I was cautioning folks about email and how we have had several occasions where Congress has asked for emails and there has been an electronic search for responsive emails – so we need to be cautious about what we say in emails.”

   

  Lerner then asks whether OCS is automatically archived. When informed it was not, Lerner responded “Perfect.”

   

  While it is possible to set the instant messaging system to automatically archive messages, the IRS chose not to do so, according to one employee interviewed by the Committee.

  This is not what freedom looks like.

  

  

  

  

• This Is The 714 Sq. Foot Hovel In LA That Can Be Yours For Just $1.1 Million

  Submittted by Dr. Housing Bubble

  Venice is an interesting place.  I’ve always enjoyed the unique atmosphere and it can be argued that Venice was one of the leading hipster enclaves in Southern California.  It was cool before it was cool to be cool.  Similar to San Francisco, old homes are being sold for ridiculous amounts of money.  We recently featured a home in Venice that had 0 beds going for over $1 million.  That is how crazy things are getting in SoCal.  But there is definitely more of a feeling of “get out at the top” versus “I’m buying to ride some more appreciation” sentiment.  Venice has gotten wildly expensive.  Even just a few years ago visiting friends in Venice you were entering questionable neighborhoods where it didn’t seem safe.  But hey, who needs safety when you can live the life of luxury in a crap shack?  Is it any wonder why there is a steady migration out of California by the middle class?  Let us take a look at a home in Venice and get your thoughts on it.

  Venice in California

  Perception is everything when it comes to real estate.  Beverly Hills was able to garner fame and notoriety because at least the homes looked nice.  At least you were getting a home that looked like a million dollars.  Right now the big marketing push is “up and coming” neighborhoods.  Get in before you are priced out forever and are destined to a life of eating out of food trucks.

  The home we are going to look at today was built back in 1904.  You read that correctly.  1904, as in 111 years ago.  Let us take a look at this place:

  

   

  1130 Electric Ave, Venice, CA 90291

  1 bed 1.5 baths 714 sqft

  I love places that have more restrooms/bathrooms than actual bedrooms.  This place has 1 bedroom and is listed at 714 square feet.  I love the first few lines in the ad:

  “Old School Venice living at its finest! Don”t miss the opportunity to own one of the most unique properties off Abbot Kinney! This bright happy bungalow is loaded with charm and character in one of the most desirable locations around.”

  This is definitely old school.  Take a look inside:

  

   

  This place screams dual income hipster household.  I love that the place is pitched as old school but the price is definitely new school:

  

  The last recorded sales price was $450,000 back in 2010.  It was then listed for $799,000 back in 2011 but was removed shortly after.  What justified a $349,000 increase in one year?  Apparently nothing.  But then in 2014 it was listed for $1,500,000!  Bwahahaha!  They bought for $450,000 in 2010 and were asking for $1 million more just because.  Of course that didn’t work.  They had to drop it down to $1,250,000 back in November of 2014.  Then down to $1,165,000.  And now it is listed at $1,100,000.  This is still $650,000 more than what they paid for in 2010.  So what justifies a 144% increase in five years?

  This is full on mania and with inventory building up, people are starting to crunch the numbers more carefully.  I’m curious, how does someone justify a 144% increase on this place?  As we all know, real estate is essentially a game of musical chairs, especially in boom and bust California.  Someone is trying to cash in on a lottery ticket here for Venice.

  No mania here folks.  This is all reasonable and makes complete sense.

  

  

  

  

  

• Does This Look Like An Accidental Relationship To You?

  Submitted by Ben Hunt via Salient Partners Epsilon Theory blog,

  I figure not one Epsilon Theory reader in a thousand has seen “Suddenly, Last Summer”, but let me tell you … it’s got everything. Katherine Hepburn in a phenomenal performance as bizarro Aunt Vi. Elizabeth Taylor cavorting in the surf. Montgomery Clift. Lobotomies. Pedophilia. Cannibalism. Honestly, it’s kind of what you would expect if Gore Vidal took a Tennessee Williams script and just went gonzo with it. Which, in fact, is exactly what happened.

   

  The subtext, as with so much of Southern Gothic in general and Tennessee Williams in particular, is mendacity and its crushing psychological damage.

  

  I found this quote, where Katherine Hepburn is trying to convince Montgomery Clift to lobotomize Elizabeth Taylor so that she’d forget her former life and be less fearful and anxious … less volatile, in other words … to be an eerily apt description of what Central Bankers have tried to do with markets.

   

  We endured an event last summer that, just as in the movie, ultimately brings all the mendacity out of the shadows and into the open. When Yellen declared last summer that the Fed had now firmly embraced a tightening bias, followed by the rest of the world declaring that they were doubling down on extraordinary monetary policy easing, the entire world was set on a path where all of the political fragmentation – all of the deep fissures within and between countries – would be inexorably revealed. Suddenly last summer, the mask of global monetary policy cooperation was ripped away, and the investment world will never be the same.

  

   

  Here are two Bloomberg charts that show what I mean. On the top is a 5-year chart of DXY – the trade-weighted dollar index. On the bottom is a 5-year chart of WTI crude oil spot prices. Does this look like an accidental relationship to you? Can we just stop with all the hand-wringing about how there’s suddenly too much oil in the world, or how the Saudis are trying to crush US shale production, or any of the other spurious supply-and-demand “explanations” for why oil prices have collapsed? Seriously. Can we just stop?

   

  Monetary policy divergence manifests itself first in currencies, because currencies aren’t an asset class at all, but a political construction that represents and symbolizes monetary policy. Then the divergence manifests itself in those asset classes, like commodities, that have no internal dynamics or cash flows and are thus only slightly removed in their construction and meaning from however they’re priced in this currency or that. From there the divergence spreads like a cancer (or like a cure for cancer, depending on your perspective) into commodity-sensitive real-world companies and national economies. Eventually – and this is the Big Point – the divergence spreads into everything, everywhere. Some things will go up, and some things will go down. But the days of ALL financial assets inflating in lock-step … the days of everything, everywhere going up together … that’s over.

   

  For a lot of active investment managers, this is great news.

   

  For a lot of politicians and central bankers – particularly the weaker ones, either in resources or in willpower (yes, I’m looking at you, Alexis Tsipras) – this is terrible news.

   

  For investors? Well, it’s a mixed bag. Certainly it’s a more difficult bag, where so many of the learned behaviors of the past five years that worked so well in an environment of monetary policy coordination will fail miserably in an environment of monetary policy competition. But it beats getting a lobotomy. I think. We’ll see.

  

  

  

  

  

• Now It's Personal: Koch Brothers "Freeze Out" Donald Trump

  "He's not going away," warns one Republican committee member, adding "there are people who think his candidacy is a flash in the pan or a flash in the moment, but I think that underestimates his appeal." As Reuters reports, Trump has surged since suffering a slight downtick in the wake of the McCain furor, rocketing to 24.9% on Tuesday (compared to his closest rival, former Florida governor Jeb Bush, who trails at 12%). With everyone asking 'what can derail this?', perhaps, there is something. As Politico reports, the massively influential Koch brothers are freezing out Donald Trump from their influential political operation – denying him access to their state-of-the-art data and refusing to let him speak to their gatherings of grass-roots activists or major donors.

   

  As Reuters reports,

   Predictions of his demise were apparently premature. Instead, Trump is gaining momentum ahead of next week's first Republican debate, a new Reuters/Ipsos opinion poll shows.

   

  The poll shows Trump with his greatest support yet nationally, as nearly a quarter of Republicans surveyed said he would be their choice as the party's presidential nominee in 2016. He has opened up a double-digit lead over his closest rival, former Florida governor Jeb Bush, who trails at 12 percent.

   

  "I’m proud to be in first place by such a wide margin in another national poll," Trump said in a statement to Reuters.

   

  Trump has surged since suffering a slight downtick in the wake of the McCain furor. The five-day rolling online poll had the real-estate mogul and reality TV star at 15 percent among Republicans on Friday before rocketing to 24.9 percent on Tuesday.

   

  …

   

  But perhaps of greater concern to establishment Republicans, Reuters/Ipsos polling also shows that in a three-way race with Trump running as an independent in the general election, Trump would drain support from the Republican nominee and allow the Democrat, likely Hillary Clinton, to skate to victory.

   

  Trump has refused to rule out a possible independent run. In a matchup with Clinton and Bush, he would essentially tie Bush at about 23 percent among likely voters, with Clinton winning the White House with 37 percent of the vote. (About 15 percent of those polled said they were undecided or would not vote.)

   

  It is that scenario that should keep party strategists up at night.

  Which prehaps explains, as Politico reports, The Koch brothers decision to freeze-out The Donald from their operations…

  Despite a long and cordial relationship between the real estate showman and David Koch, as well as a raft of former Koch operatives who are now running Trump’s presidential campaign, the Koch political operation appears to have concluded that Trump is the wrong standard-bearer for the GOP. And the network of Koch-backed policy and political outfits is using behind-the-scenes influence to challenge Trump more forcefully than the Republican Party establishment — by limiting his access to the support and data that would help him translate his lead in the polls into a sustainable White House campaign.

   

  The Koch operation has spurned entreaties from the Trump campaign to purchase state-of-the-art data and analytics services from a Koch-backed political tech firm called i360, and also turned down a request to allow Trump to speak at an annual grass-roots summit next month in Columbus, Ohio, sponsored by the Koch-backed group Americans for Prosperity, POLITICO has learned.

   

  …

   

  Continued stiff-arming by the powerful Koch network could limit Trump’s ability to build a professional campaign operation to mobilize supporters ahead of primaries and caucuses.

   

  “The good news is that Donald Trump doesn’t need the Koch brothers, and he can do this perfectly without their assistance,” said Josh Youssef, who’s chairing Trump’s campaign in Belknap County, New Hampshire. Of the Kochs, Youssef said: “Their motivations are clearly not to break the mold of political insider-ship. Their goal is to keep the wheel spinning. Trump’s bad for business for them.”

   

  Still, the Koch network’s rejections of Trump are telling because of the relationships between Trump and his aides, and the Kochs and their operation.

  *  *  *

  We conclude with the two opposing views from within the Republican party…

  "The activists are doubly angry," Geer said. "He's capturing that anger. They're looking for a voice, and he happens to be here at the right time.”

  and

  "The curtain has not been pulled back yet," Feehery said. "In time, people will see Trump is not who they want to have as a nominee. But that’s going to take awhile."

  

  

  

  

  

• "Why Commodities Defaults Could Spread", UBS Explains

  UBS has been keen to warn investors about just how perilous the situation in high yield has become – which works out nicely, because we’ve been saying precisely the same thing ever since it became readily apparent that between investors’ hunt for yield and energy producers’ desire to take advantage of low rates and forgiving capital markets in order to stay solvent, the market was setting up for a spectacular implosion. 

  Lots of supply (hooray for record issuance!), a gullible retail crowd (bring on the secondaries and find me a junk bond ETF!), and a lack of liquidity in the secondary market (down with the prop traders!) have conspired to create a veritable nightmare scenario and with commodity prices (especially crude) set to remain in the doldrums for the foreseeable future, the question is not whether there will be defaults in HY energy, but rather what the fallout will be for the broader market. 

  Or, as we put it in “The Junk Bond Heat Map Has Not Been This Red In A Long Time,” at some point, investors (using other people’s money) will tire of throwing good money after bad hoping to time the bottom tick in oil just right (and if oil tumbles in the $30, that may be just that moment) at which point the commodity capitulation which we noted previously, will spread away from just commodities and junk bonds, and spread to all sectors and products, including stocks. 

  Here with more on the contagion risk from commodities defaults is UBS.

  *  *  *

  From UBS

  Credit contagion: why commodity defaults could spread

  In the wake of the commodity price swoon one of the recurring questions is will the stress in commodity markets spillover to other sectors? 

  First, regular readers will recall our HY energy default forecast of 10-15% through mid- 2016. Simply framed, the commodity related industries total 22.8% of the overall HY market index on a par-weighted basis. In our view, sectors most at-risk for defaults (defined as failure to pay, bankruptcy and distressed restructurings) total 18.2% of the index and include the oil/gas producer (10.6%), metals/mining (4.7%), and oil service/equipment (2.9%) industries. 

  How large are contagion risks to the broader HY market? And what are the transmission channels? Historically, investors in the limited contagion camp would probably point to the early 1980s. In this cycle commodity price defaults spiked with the drop in oil prices yet average default rates (IG & HY) increased only moderately amidst a favorable economic environment. In our view, however, the parallels in terms of the credit and asset price cycles are a stretch versus the current context. In the last three cycles, commodity price defaults have either led or coincided with a broader rise in corporate default rates (Figure 2). 

  

  But why should there be contagion from commodity sectors to other segments?

  There is a clear pattern of default correlation dependent on fluctuations in national or international economic trends. Commodity price weakness is symptomatic of weak economic growth in China and emerging markets – with possible spillover risks for commodity related sovereigns (oil exporters) and corporates.

  In addition, distress in one sector affects the perceived creditworthiness as well as profits and investment of related firms in the production process. For example, exploration and production firm defaults could negatively affect suppliers and customers which would include oil equipment and service, metals, pipeline, infrastructure, and engineering firms. Furthermore, related literature points to the significance of the supply/demand balance for distressed debt; our theory is that there is a relatively finite pool of capital for distressed assets, implying greater supply of distressed paper pushes down valuations of like assets. Unfortunately, a rise in the supply of stressed bonds typically coincides with a decline in demand for such assets. This self-reinforcing dynamic historically leads to a re-pricing in lower quality segments. 

  

  

  

  

  

• Twist Those Dirty Bags!

  From the Slope of Hope: Greetings from Whole Foods Market in Palo Alto. There are times when I simply have to get away from my home office, since even I have limits as to how many hours I want to stay in the same place. I come to Whole Foods often enough to notice that a fair number of insane people come here. I divide them into (a) insane people without money and (b) insane people with money.

  The insane ones without money are the more obvious ones. They are the ones yammering to themselves, or dressed in really peculiar outfits, or otherwise looking semi-homeless. The ones with money require a more discerning eye (or, in my case, a good memory). FLASH update: at this very moment, one of group (b) sat next to me and is having a business meeting on speakerphone. Astonishing. (It’s a very typical conversation: “I’m just trying to keep my day job while trying to raise money for my pet project.”)

  Today was really annoying from a trading perspective. It started off profitable, got really profitable, and then withered into a small loss. A market that isn’t “allowed’ to go its natural direction gets to be irksome. We’ve been trapped in a fairly tight range for the entire year.

  I’m still pretty comfortable shorting this market, and on Thursday I increased my positions from 62 to 80. I’ve still got 64 other prospects, but their price isn’t where I’d want them to be to short them. There are five charts that I think speak to the good prospects for bearishness. My favorite of them I shared this morning with my (beloved) Slope Plus members, but here are the others:

  The Dow Jones Composite has painted out a beautiful series of lower highs. My fervent wish, of course, is that the recent surge we have been dealing with is just another opportunity to disappoint our bullish friends.

  

  The S&P 100 has quite clear broken its wedge pattern:

  

  Similarity, the Russell 2000 broke its own wedge and has a pretty decently-formed head and shoulders top in place:

  

  And my intent is to remain stalwart in the face of bullish bluster and nonsense until we get a VIX spike to the mid-20s. I know that seems impossible, but…..that’s my benchmark.

  

  Another guy just sat down to replace the one earlier, and he’s talking to someone about his startup. My God, this place has lost its mind. But it’s doing so with money, so people forgive the insanity.

  

  

  

  

  

• Shorting The Buyback Contradiction

  Submitted by Michael Lebowitz via 720Global.com,

  “To arrive at a contradiction is to confess an error in one’s thinking; to maintain a contradiction is to abdicate one’s mind and to evict oneself from the realm of reality”  ?  Ayn Rand

  The positive short?term price action of buybacks lures unsuspecting investors on the promise that such a shell game is sustainable. Many on Wall Street support such activities as it promotes rising stock prices, ultimately bolstering their wallets. However, clear?headed reason would argue that unless one is an executive whose compensation is tied to metrics influenced by the effects of share buybacks, there are few instances that support this use of corporate resources. 

  Those who promote buybacks base their support on the fact that fewer shares outstanding, a by?product of the share repurchases, produces more earnings per share (EPS) as the numerator in the EPS equation is unchanged while the denominator is smaller. In “Corporate Buybacks; Connecting Dots to the F?word” we point out that most investors fail to consider the use of assets required to execute the buyback and the current valuation of those companies. Even more worrisome they fail to fully understand the implications of spending corporate capital to repurchase (often expensive) shares instead of investing it in the future growth of companies. The obscured shortcomings of share repurchases actually highlight a blatant contradiction. Share repurchases boost EPS, making valuations appear cheaper, however at the same time they reduce the ability of companies conducting such buybacks to grow future earnings. Recognition of this circumstance presents significant opportunities for those willing to embrace the “realm of reality”. This article uses logic and mathematical analysis to demonstrate the serious price distortions share buybacks are creating and offers specific trade recommendations to capitalize on those distortions.

  Distortion

  Buybacks distort financial ratios that many investors rely upon to evaluate stock prices. This is most evident in the widely used price to earnings ratio (P/E). This straightforward ratio simply divides the price per share of a company by its earnings per share. The resulting multiple tells an investor the price one must pay for each dollar of earnings. Investors calculating P/E can use a wide variety of historic, current or estimated future data for the denominator, earnings per share. On the other hand the numerator, price, is a known number – the current equity price of the company in question. Therefore, when using P/E as a valuation technique, the validity of the earnings per share input should be given careful consideration. 

  The reality is that stock buybacks distort EPS data and produce lower P/E ratios, thus making the shares optically cheaper. As an example, consider a company with a $20 price per share, $1 EPS and plans to buyback half of their outstanding shares. Upon completion of the buyback, the company’s P/E will drop from 20 to 10 as the price remains at $20 but EPS will double to $2, due to the reduced share count.  This P/E distortion (an investor now only needs $10 to claim $1 of earnings instead of $20 prior to the buyback) will likely lead investors to conclude that the equity is cheap. However, investors have failed to consider the use of cash to purchase the stock and the now impaired ability of the company to fund and produce future growth. 

  Analysis

  For this analysis, we considered publicly traded companies listed on U.S. stock exchanges with a market capitalization greater than $5 billion. To quantify the distortions to P/E created by share repurchases, a buyback “adjusted” P/E is calculated. This adjusted P/E ratio normalizes EPS, the denominator, by assuming NO shares were repurchased since 2011. Normalizing EPS in this way reduces the denominator and therefore increases the P/E ratio. Comparing the current P/E to the adjusted P/E gives one some sense for just how much buybacks may be distorting values. To illustrate, the adjusted P/E of the company used in the example above would be 20, instead of the post buyback P/E of 10.  The distortion of P/E highlights how buybacks may lead investors to misinterpret value and then misallocate investment capital.

  Of the over 600 companies analyzed, including 99 which did not conduct buybacks, the average adjusted P/E was 3.99 higher than the average non?adjusted P/E. Based on the trailing 12 month S&P 500 P/E of 18.25 currently present in the market, investors are unknowingly invested in an adjusted market P/E which is over 20% higher than they assumed. Buyback distortions are larger than ever and not limited to any one industry grouping. The table below shows the average distortion to P/E by industry.  

  

  The following tables expand the analysis by detailing the P/E distortion for individual companies. Company specific analysis was limited to the S&P 100 to ensure we highlight widely held companies that can be easily traded from the short side and have liquid option offerings.

  Within the S&P 100 six companies were selected based upon a combination of large P/E distortions and the magnitude of recent share buybacks versus total outstanding shares. 

  

  The Contradiction

  When investors pay an above?market P/E for shares they are frequently betting that the company will deliver higher future earnings growth than the market. The table below uses the adjusted P/E of the six companies to calculate the annualized required EPS growth. The required EPS growth is the pace at which earnings must rise in order to align the adjusted P/E with the current market price to earnings ratio without requiring a discounting of current share prices. In other words, how much does EPS have to grow to reduce the company’s P/E to equate it with a market average P/E? Revenue growth is a sound proxy for earnings growth as a company cannot grow earnings more than sales in the long run. In the table below, annualized revenue growth is also included for the last 3 and 5 years. 

  

  Consider the large gap between the required EPS growth rates and historical revenue growth rates. The transparency of the adjusted P/E reveals that the required EPS growth hurdle has risen to seemingly unachievable levels. Given these large differences, investors should be alarmed that these companies have limited and continue to constrain their ability to grow by using cash for buybacks. Using these resources for the purposes of buybacks makes them unavailable for projects that might generate those earnings! Those that believe buybacks are a vote of confidence by management in the company should carefully reconsider that opinion and the inherent conflicts buybacks create. 

  Trade Recommendation and Conclusion

  Aggressive investors can take advantage of this analysis by shorting the six highlighted companies on a market neutral basis and countering the short positions with long positions in companies offering fair valuations.  Conservative investors may want to sell holdings in these firms or shy away from future purchases in them. 

  P/E ratios calculated with past, present and future EPS along with many other valuation techniques currently register in the extreme upper tiers of historical readings (click here to reference “Courage” in which we illustrate the currently rich valuations). Investors in companies or indices containing a significant number of companies conducting buybacks should carefully consider the effects, distortions and long term ramifications of share buybacks.  

  The contradiction of buybacks is apparent; a company should not have a higher P/E multiple resulting from buyback actions when those actions at the same time reduce the company’s ability to achieve the additional growth required to justify the higher P/E multiple. 

  The best way to avoid the permanent impairment of capital is to never overpay for an asset.

  

  

  

  

  

• "Moscow Must Burn": Ukraine's "Christian Taliban" Pledges Anti-Russian "Crusade"

  “Like the majority of Ukrainian people, I think (the new leadership) is bad … They steal a lot. When Yanukovich was stealing, that was bad. But these people are clearing up when the country is at war, so they are guilty on two counts. This is marauding.”

  Those are the words of Dmytro Korchynsky, the commander of “Saint Mary”, a volunteer battalion that, like Ukraine’s official forces, is fighting to subdue the Russian- backed separatists who control the eastern part of the country. 

  Korchynsky – who spoke to Reuters – shares his generalized disaffection for the Poroshenko government with other Ukrainians who feel that little has changed since the ouster of Viktor Yanukovich. 

  “The (Maidan) revolution was interrupted by the aggression (in the east) and the patriots left Maidan and went to the east to protect Ukraine. Only 10 percent of people in positions of power are new; the rest are all the same, pursuing the same schemes they always did”, says Serhiy Melnychuk, an MP and volunteer battalion founder who also sat down with Reuters. 

  Over the course of the last year, Ukraine has become the battleground for a proxy war between Russia and the West. It’s one of several pieces currently in play on the geopolitical chessboard, and its citizens, like those of Yemen and Syria (fellow pawn nations), have been forced to endure a humanitarian crisis while more “consequential” countries sort out how the spoils will be divided and how borders will be redrawn.

  Some Ukrainian nationalists however, have chosen to take matters into their own hands, taking up arms against the separatists and likening themselves to a “Christian Taliban” bent on ensuring that “Moscow burns.”

  Here’s more from a Reuters special report on Ukraine’s “maverick battalions”:

  From a basement billiard club in central Kiev, Dmytro Korchynsky commands a volunteer battalion helping Ukraine’s government fight rebels in the east. 

   

  A burly man with a long, Cossack-style moustache, Korchynsky has several hundred armed men at his disposal. The exact number, he said, is “classified.”

   

  In the eyes of many Ukrainians, he and other volunteer fighters are heroes for helping the weak regular army resist pro-Russian separatists. In the view of the government, however, some of the volunteers have become a problem, even a law unto themselves.

   

  Dressed in a colorful peasant-style shirt, Korchynsky told Reuters that he follows orders from the Interior Ministry, and that his battalion would stop fighting if commanded to do so. Yet he added: “We would proceed with our own methods of action independently from state structures.”

   

  Korchynsky, a former leader of an ultra-nationalist party and a devout Orthodox Christian, wants to create a Christian “Taliban” to reclaim eastern Ukraine as well as Crimea, which was annexed by Russia in 2014. He isn’t going to give up his quest lightly.

   

  “I would like Ukraine to lead the crusades,” said Korchynsky, whose battalion’s name is Saint Mary. “Our mission is not only to kick out the occupiers, but also revenge. Moscow must burn.”

   

  Most of Ukraine’s almost 40 volunteer battalions grew out of squads of protesters who battled the Berkut riot police during the protests on Kiev’s Independence Square, or Maidan Nezalezhnosti, which began in November 2013. 

   

  
  

   

  After the protests toppled President Viktor Yanukovich, pro-Russian separatists rose up in the east of Ukraine in April, 2014, demanding independence from the new government in Kiev, which they called a “fascist regime.” In response, several leaders of the Maidan protests raced east with fellow protesters to try to stop the rebel advance.

   

  Numerous brigades and battalions formed haphazardly, with most leaders accepting anyone willing to fight. Serhiy Melnychuk, who founded the Aidar battalion in eastern Ukraine and is now a member of parliament, said he signed up people between the ages of 18 and 62 and “from the homeless to pensioners.”

   

  Irregular though theses forces were, some acquired weapons from the Defense Ministry, officials and battalion leaders said. Others received money and equipment from wealthy oligarchs. They became powerful forces in the struggle against pro-Russian separatists. 

   

  In his billiard club headquarters, commander Korchynsky of the Saint Mary battalion made his disdain for the government plain. “Like the majority of 

  Ukrainian people, I think (the new leadership) is bad … They steal a lot. When Yanukovich was stealing, that was bad. But these people are clearing up when the country is at war, so they are guilty on two counts. This is marauding.”

   

  He said the revolution that began with the Maidan had been interrupted, but would one day be completed. He did not say when.

   

  If so, he will have to confront Poroshenko. On July 16, the president, decried the problems posed by unspecified “internal enemies” of the country.  He told parliament: “I will not allow anarchy in Ukraine.”

  So in the end, we suppose the question is whether US weapons shipments to Kiev will be handed out to Ukraine’s “Christian Taliban” and whether they, like their namesake, will one day turn those weapons back on the US once the Russians have been expelled. 

  Scratch that. The real question is this: what does George Soros think?

  

  

  

  

  

• LinkedIn Pumps'n'Dumps As Revenue Growth Rate Continues To Slow

  Despite early exuberance at beating top and bottom lines (and users), it appears those looking for hyper-growth opportunities are selling into the machines. An initial 12% spike in the stock after hours has been completely destroyed into the red as investors realize growth rates continue to tumble, capex is rising, and organic growth is slow.

  Pump… and Dump!

  

   

  as Revenue growth rates continue to tumble…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Another Day, Another V-Shaped Manic-Melt-Up Recovery In Stocks (To Unchanged)

  After 3 days of magical buying on no volume after heavy volume dumps, this seemed appropriate… "if you don't buy the dip, then you are a f##king idiot"

   

  First things first… Fed Funds Futures prices tumbled (implying a big shift higher in rates expectations)…

  

   

  Chinese stocks plunged overnight as no late-day rescue arrived…

  

   

  But more importantly in the US, another day, another opening dip, and another melt-up V-Shaped Recovery…

  

   

  Stocks and bonds decoupled again today…once again triggered as Europe closed…

  

   

  Credit markets notably decoupled also…

  

   

  But despite the best efforts of JPY and VIX, stocks were mixed by the close…

  

   

  With cash indices ending with Trannies & Dow red, S&P unch, and Nasdaq the winner (even with AAPL lower)

  

   

  On the week, Trannies remain the biggest gainer and Small Caps the least…

  

   

  Faceplant…machines did their best to anchor FB around VWAP all day…

  

   

  It's all about the MOMO…

  

  h/t JC O'Hara at FBN Securities

   

  Away from stocks, Bonds rallied notably with yields tumbling into the red for the week… (notice the considerable flattening post-GDP)

  

   

  The US Dollar surged higher – enabling JPY carry to save the day in stocks and driving EUR back down to a 1.08 handle (following The IMF's "non" to Greece)

  

   

  Dollar strength took the shine off commodities with crude and copper fading…

  

   

  As Gold was clubbed overnight once again…and ramped when The IMF said "Non" to Greece…

  

   

  And Crude lost some of yesterday's squeeze higher…

  

   

  Charts: Bloomberg

  

  

  

  

• Brazil's Economy Slides Into Depression, And Now Olympians Will Be Swimming In Feces

  Back on December 29 of last year, we explained how under the burden of its soaring current account deficit, and its its first primary fiscal deficit since 1998, not to mention numerous corruption scandals and a dysfunctional monetary policy, the Brazilian economy “just imploded.” We also noted the main reason for the Latin American collapse: Brazil had for the past decade become China’s favorite source of commodities, and now that China suddenly no longer needed commodities, the Brazilian economy went into freefall.

  We followed this up a month later with “Brazil’s Economy Is On The Verge Of Total Collapse” which repeated more of the same, only this time the situation was even worse.

  It took the rating agencies 7 months to figure out what our readers had known since 2014, when two days ago S&P downgraded Brazil’s credit rating from Stable to Negative citing, what else, the “sharp deterioration of the growth and fiscal consolidation outlook and heightened political/institutional friction” adding that “the negative outlook reflects the agency’s view of a “greater than one–in–three likelihood that the policy correction will face further slippage given fluid political dynamics and that the return to a firmer growth trajectory will take longer than expected.”

  In other words, Brazil is about to become the next BRIC to follow Russia into junk territory:

  

   

  Goldman followed up S&P with a report in which it said “There is nothing so bad it couldn’t get worse!” tongue in cheekly because it noted that “records show that over the last 11 years we cannot find a period with a strictly-worse growth-inflation outcome than that of 2Q2015 . That is, since 1Q2004 there has not been a single quarter in which we had simultaneously higher inflation and lower growth than during 2Q2015 (i.e., there are no data points in the lower right quadrant in Exhibit 1). In fact, in 96% of the 46 quarters between 1Q2004 and 2Q2015 the economy was delivering simultaneously higher growth and lower inflation than during 2Q2015 (upper left quadrant of Exhibit 1). Finally, during the remaining 4% of the quarters, the economy was performing better in one component—recording lower growth (4Q2008 and 1Q2009) but also much lower inflation than currently (located in lower-left quadrant).

  Exhibit 1: 2Q2015 – A sour macroeconomic spot: Very High Inflation and declining growth

  

  In short, the Brazilian economy has never been worse and just to hammer that point home, Goldman added a chart which makes it quite clear that Brazil is not in a recession: it is almost certainly in a depression at this moment – note the recession bar on the chart below and where it is now.

  

  One can debate what is causing this until one is blue in the face, and Goldman does, repeating once again that it is the collapsing current and fiscal accounts that are the culprits for Brazil’s depression…

  The sizeable current account deficit and rapidly widening fiscal deficit are also a significant source of market concern. We repeated the same exercise above, this time with a two-dimensional vector that contains the fiscal and current account balances vs. growth and inflation. The two deficits together are now tracking at over 12% of GDP of GDP, by far the worst combined outcome in more than a decade. Exhibit 3 shows that over the last 11.5 years (since Jan-04) we cannot identify a month with a strictly-worse fiscal-CA deficit outcome than that of May-14 (lower left quadrant is empty). In fact, at 7.9% of GDP the fiscal deficit is now the widest it has ever been since Jan-04, and there were only a few months (5 out of 137 months in the sample) were the current account deficit was marginally wider than currently.

   

  

  … but it doesn’t really matter: whether it is China, whether it is runaway stagflation, whether it is simple politician greed and corruption, Brazil has passed the recession phase and its economy is in absolute free fall.

  The result is that the local central bank is about to lose control: despite soaring inflation, overnight the central bank Monetary Policy Committee hiked the Selic policy rate by another +50bp, to 14.25%. This was the sixth consecutive 50bp rate hike following the initial 25bp hike on October 29. What made this hike unique is that the policy statement was modified by adding a sentence that openly indicated that the tightening cycle ended yesterday, and that the policy rate will remain at the current level for a prolonged period of time.

  

  In other words, Brazil’s central bank has given up on fighting inflation and is instead hoping to stabilize what little is left of the economy.

  Unfortunately, it may be too little too late, and now both the market…

  

  … and the local population as the following Evercore ISI chart of consumer confidence shows…

  

  …have finally figured out what it means when your economy snaps shut as your biggest trading partner suddenly shuts its doors.

  Unfortunately, it is getting even worse, as a cursory scan of headlines in just the past 24 hours reveals:

  • Brazil downgrade threat is a real danger sign
  • As Brazil’s Economy Goes In Reverse, Illusion Of Prosperity Fades With It
  • New Scandal Emerges in Brazilian Hideaway
  • Brazil indicts Italy’s Saipem for bribery with Petrobras
  • Italy’s Saipem Implicated in Petrobras Corruption Scandal
  • Brazilian police probe nuclear submarine program

  But the Brazilian economy hit its metaphorical, and literal, bottom earlier today when AP reported that, with the Brazil Olympics of 2016 just about 1 year away, “athletes in next year’s Summer Olympics here will be swimming and boating in waters so contaminated with human feces that they risk becoming violently ill and unable to compete in the games.“

  An AP analysis of water quality revealed dangerously high levels of viruses and bacteria from human sewage in Olympic and Paralympic venues — results that alarmed international experts and dismayed competitors training in Rio, some of whom have already fallen ill with fevers, vomiting and diarrhea.

  In other words, competitors in Brazil’s olympic games will be swimming in shit.

  How is this possible? Simple: the government promised it would fix everything, and the IOC believed it. Now, the moment of truth arrives and it is literally covered in feces.

  Brazilian officials have assured that the water will be safe for the Olympic athletes and the medical director of the International Olympic Committee said all was on track for providing safe competing venues. But neither the government nor the IOC tests for viruses, relying on bacteria testing only.

   

  Extreme water pollution is common in Brazil, where the majority of sewage is not treated. Raw waste runs through open-air ditches to streams and rivers that feed the Olympic water sites.

   

  As a result, Olympic athletes are almost certain to come into contact with disease-causing viruses that in some tests measured up to 1.7 million times the level of what would be considered hazardous on a Southern California beach.

   

  Despite decades of official pledges to clean up the mess, the stench of raw sewage still greets travelers touching down at Rio’s international airport. Prime beaches are deserted because the surf is thick with putrid sludge, and periodic die-offs leave the Olympic lake, Rodrigo de Freitas, littered with rotting fish.

   

  “What you have there is basically raw sewage,” said John Griffith, a marine biologist at the Southern California Coastal Water Research Project. Griffith examined the protocols, methodology and results of the AP tests.

   

  “It’s all the water from the toilets and the showers and whatever people put down their sinks, all mixed up, and it’s going out into the beach waters. Those kinds of things would be shut down immediately if found here,” he said, referring to the U.S.

  As AP notes, more than 10,000 athletes from 205 nations are expected to compete in next year’s Olympics. Nearly 1,400 of them will be sailing in the waters near Marina da Gloria in Guanabara Bay, swimming off Copacabana beach, and canoeing and rowing on the brackish waters of the Rodrigo de Freitas Lake. They will all be delighted to learn about the “quality” of the water they will be swimming in: “Everybody runs the risk of infection in these polluted waters,” said Dr. Carlos Terra, a hepatologist and head of a Rio-based association of doctors specializing in the research and treatment of liver diseases.

  The AP commissioned four rounds of testing in each of those three Olympic water venues, and also in the surf off Ipanema Beach, which is popular with tourists but where no events will be held. Thirty-seven samples were checked for three types of human adenovirus, as well as rotavirus, enterovirus and fecal coliforms.

   

  The AP viral testing, which will continue in the coming year, found not one water venue safe for swimming or boating, according to global water experts.

  The irony is that most countries go broke after the Olympics, when the spending on infrastructure and facilities dries up. Brazil may be the first nation in recent history to have imploded before the Olympics.

  In the meantime, just like Greece, Brazil promised to stars and the moon…

  In its Olympic bid, Rio officials vowed the games would “regenerate Rio’s magnificent waterways” through a $4 billion government expansion of basic sanitation infrastructure. It was the latest in a long line of promises that have already cost Brazilian taxpayers more than $1 billion — with very little to show for it.

  Rio’s historic sewage problem spiraled over the past decades as the population exploded, with many of the metropolitan area’s 12 million residents settling in the vast hillside slums that ring the bay.

  … and delivered, well, 1.7 million times the normal amount of crap. And now reality comes crashing back with a bang:

  As the clock ticks down, local officials have dialed back their promises. Rio Gov. Luiz Fernando Pezao has acknowledged “there’s not going to be time” to finish the cleanup of the bay ahead of the games.

   

  Rio Mayor Eduardo Paes has said it’s a “shame” the Olympic promises wouldn’t be met, adding the games are proving “a wasted opportunity” as far as the waterways are concerned.

   

  But the Rio Olympic organizing committee’s website still states that a key legacy of the games will be “the rehabilitation and protection of the area’s environment, particularly its bays and canals” in areas where water sports will take place.

  Just don’t hold your breath. Or actually, if you want to avoid the smell, hold it.

  We end with a note of hope for our Greek readers: yes life is bad, and it won’t get better for a long time, but it could always be get worse: you, too, could be swimming in feces.

  

  

  

  

  

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