Today’s News June 21, 2015

• Paul Craig Roberts: "Washington Is Impotent To Prevent Armageddon"

  Submitted by Paul Craig Roberts,

  Paul Craig Roberts’ address to the Conference on the European/Russian Crisis, Delphi, Greece, June 20-21, 2015

  ?Paul Craig Roberts, formerly Assistant Secretary of the US Treasury for Economic Policy, Associate Editor, Wall Street Journal, Senior Research Fellow, Stanford University, William E. Simon Chair in Political Economy, Center for Strategic and International Studies, Georgetown University, Washington, D.C.

  The United States has pursued empire since early in its history, but it was the Soviet collapse in 1991 that enabled Washington to see the entire world as its oyster.

  The collapse of the Soviet Union resulted in the rise of the neoconservatives to power and influence in the US government. The neoconservatives have interpreted the Soviet collapse as History’s choice of “American democratic capitalism” as the New World Order.

  Chosen by History as the exceptional and indispensable country, Washington claims the right and the responsibility to impose its hegemony on the world. Neoconservatives regard their agenda to be too important to be constrained by domestic and international law or by the interests of other countries. Indeed, as the Unipower, Washington is required by the neoconservative doctrine to prevent the rise of other countries that could constrain American power.

  Paul Wolfowitz, a leading neoconservative, penned the Wolfowitz Doctrine shortly after the Soviet collapse. This doctrine is the basis of US foreign and military policy.

  The doctrine states:

  “Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union. This is a dominant consideration underlying the new regional defense strategy and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power.”

  Notice that Washington’s “first objective” is not peace, not prosperity, not human rights, not democracy, not justice. Washington’s “first objective” is world hegemony. Only the very confident so blatantly reveal their agenda.

  As a former member of the Cold War Committee on the Present Danger, I can explain what Wolfowitz’s words mean. The “threat posed formerly by the Soviet Union” was the ability of the Soviet Union to block unilateral US action in some parts of the world. The Soviet Union was a constraint on US unilateral action, not everywhere but in some places. Any constraint on Washington is regarded as a threat.

  A “hostile power” is a country with an independent foreign policy, such as the BRICS (Brazil, Russia, India, China, and South Africa) have proclaimed. Iran, Bolivia, Ecuador, Venezuela, Argentina, Cuba, and North Korea also proclaim an independent foreign policy.

  This is too much independence for Washington to stomach. As Russian President Vladimir Putin recently stated, “Washington doesn’t want partners. Washington wants vassals.”

  The Wolfowitz doctrine requires Washington to dispense with or overthrow governments that do not acquiesce to Washington’s will. It is the “first objective.”

  The collapse of the Soviet Union resulted in Boris Yeltsin becoming president of a dismembered Russia. Washington became accustomed to Yeltsin’s compliance and absorbed itself in its Middle Eastern wars, expecting Vladimir Putin to continue Russia’s vassalage.

  However at the 43rd Munich Conference on Security Policy, Putin said: “I consider that the unipolar model is not only unacceptable but also impossible in today’s world.”

  Putin went on to say:

  “We are seeing a greater and greater disdain for the basic principles of international law, and independent legal norms are, as a matter of fact, coming increasingly closer to one state’s legal system. One state and, of course, first and foremost the United States, has overstepped its national borders in every way. This is visible in the economic, political, cultural and educational policies it imposes on other nations. Well, who likes this? Who is happy about this?”

  When Putin issued this fundamental challenge to US unipower, Washington was preoccupied with its lack of success with its invasions of Afghanistan and Iraq. Mission was not accomplished.

  By 2014 it had come to Washington’s attention that while Washington was blowing up weddings, funerals, village elders, and children’s soccer games in the Middle East, Russia had achieved independence from Washington’s control and presented itself as a formidable challenge to Washington’s uni-power. Putin blocked Obama’s planned invasion of Syria and bombing of Iran.

  The unmistakable rise of Russia refocused Washington from the Middle East to Russia’s vulnerabilities.

  Ukraine, long a constituent part of Russia and subsequently the Soviet Union, was split off from Russia in the wake of the Soviet collapse by Washington’s maneuvering. In 2004 Washington had tried to capture Ukraine in the Orange Revolution, which failed to deliver Ukraine into Washington’s hands. Consequently, according to neocon Assistant Secretary of State Victoria Nuland, Washington spent $5 billion over the following decade developing Ukrainian non-governmental organizations (NGOs) that could be called into the streets of Kiev and in developing Ukrainian political leaders willing to represent Washington’s interests.

  Washington launched its coup in February 2014 with orchestrated demonstrations that, with the addition of violence, resulted in the overthrow and flight of the elected democratic government of Victor Yanukovych. In other words, Washington destroyed democracy in a new country with a coup before democracy could take root.

  Ukrainian democracy meant nothing to Washington. Washington was intent on seizing Ukraine in order to present Russia with a security problem and also to justify sanctions against “Russian aggression” in order to break up Russia’s growing economic and political relationships with Europe. Washington feared that these relationships could undermine Washington’s hold on Europe.

  Sanctions are contrary to Europe’s interests. Nevertheless European governments accommodated Washington’s agenda. The reason was explained to me several decades ago by my Ph.D. dissertation committee chairman who became Assistant Secretary of Defense for International Security Affairs. I had the opportunity to ask him how Washington managed to have foreign governments act in Washington’s interest rather than in the interest of their own countries. He said, “money.” I said, “you mean foreign aide?” He said, “no, we give the politicians bags full of money. They belong to us. They answer to us.”

  Recently, the German journalist Udo Ulfkotte wrote a book, Bought Journalists, in which he reported that every significant European journalist functions as a CIA asset.

  This does not surprise me. The same is the situation in the US.

  As Europe is an appendage of Washington, a collection of vassal states, Europe enables Washington’s pursuit of hegemony even to the extent of being driven into conflict with Russia over a “crisis” that is entirely a propaganda creation of Washington’s.

  The media disguises the reality. During the Clinton regime, six mega-media companies were permitted to acquire 90% of the US print, TV, radio, and entertainment media, a concentration that destroyed diversity and independence. Today the media throughout the Western world serves as a Propaganda Ministry for Washington. The Western media is Washington’s Ministry of Truth. Gerald Celente, the trends forecaster, calls the Western media “presstitutes,” a combination of press prostitutes.

  In the US Putin and Russia are demonized around the clock. Every broadcast alerts us to “the Russian threat.” Even Putin’s facial expressions are psychologically analyzed. Putin is the New Hitler. Putin has ambitions to recreate the Soviet empire. Putin invaded Ukraine. Putin is going to invade the Baltic states and Poland. Putin is a threat on the level of ebola and the Islamist State. US Russian experts, such as Stephen Cohen, who state the facts are dismissed as “Putin apologists.” Any and every one who takes exception to the anti-Putin, anti-Russian propaganda is branded a “Putin apologist,” just as 9/11 skeptics are dismissed as “conspiracy theorists.” In the Western world, the few truth-tellers are demonized along with Putin and Russia.

  The world should take note that today, right now, Truth is the most unwelcome presence in the Western world. No one wants to hear it in Washington, London, Tokyo, or in any of the political capitals of Washington’s empire.

  The majority of the American population has fallen for the anti-Russian propaganda, just as they fell for “Saddam Hussein’s weapons of mass destruction,” “Assad’s use of chemical weapons against his own people,” Iranian nukes,” the endless lies about Gaddafi, 9/11, shoe bombers, underwear bombers, shampoo and bottled water bombers. There is always a new lie to keep the fear factor working for Washington’s endless wars and police state measures that enrich the rich and impoverish the poor.
  The gullibility of the public has enabled Washington to establish the foundation for a new Cold War or for a preemptive nuclear strike on Russia. Some neoconservatives prefer the latter. They believe nuclear war can be won, and they ask, “What is the purpose of nuclear weapons if they cannot be used?”

  China is the other rising power that the Wolfowitz Doctrine requires to be constrained. Washington’s “pivot to Asia” creates new naval and air bases to control China and perpetuate Washington’s hegemony in the South China Sea.

  We come to the bottom line. Washington’s position is not negotiable. Washington has no interest in compromising with Russia or China. Washington has no interest in any facts. Washington’s deal is this: “You can be part of our world order as our vassals, but not otherwise.”
  European governments and, of course, the lapdog UK government, are complicit in this implicit declaration of war against Russia and China. If it comes to war, Europeans will pay the ultimate price for the treason of their leaders, such as Merkel, Cameron, and Hollande, as Europe will cease to exist.

  War with Russia and China is beyond Washington’s capability. However, if the demonized “enemy” does not succumb to the pressure and accept Washington’s leadership, war can be inevitable. Washington has launched an attack. How does Washington back off? Don’t expect any American regime to say, “we made a mistake. Let’s work this out.” Every one of the announced candidates for the American presidency is committed to American hegemony and war.

  Washington believes Russia can be isolated from the West and that this isolation will motivate those secularized and westernized elements in Russia, who desire to be part of the West, into more active opposition against Putin. The Saker calls these Russians “Atlanticist integrationists.”

  After two decades of Russia being infiltrated by Washington’s NGO Fifth Columns, the Russian government has finally taken action to regulate the hundreds of Western-financed NGOs inside Russia that comprise Washington’ subversion of the Russian government. However, Washington still hopes to use sanctions to cause enough disruption of economic life within Russia to be able to send protesters into the streets. Regime change, as in Ukraine, is one of Washington’s tools. In China the US organized the Hong Kong “student” riots, which Washington hopes will spread into China, and Washington supports the independence of the Muslim population in the Chinese province that borders Kazakhstan.

  The problem with a government in the control of an ideology is that ideology and not reason drives the action of the government. As the majority of Western populations lack the interest to search for independent explanations, the populations impose no constraint on governments.

  To understand Washington, go online and read the neoconservative documents and position papers. You will see an agenda unconstrained by law, by morality, by compassion, by common sense. You will see an agenda of evil.

  Who is Obama’s Assistant Secretary of State for the Ukrainian part of the world? It is the neoconservative Victoria Nuland who organized the Ukrainian coup, who put in office the new puppet government, who is married to the even more extreme neoconservative, Robert Kagan.

  Who is Obama’s National Security advisor? It is Susan Rice, a neoconservative.

  Who is Obama’s Ambassador to the UN? It is Samantha Power, a neoconservative.

  Now we turn to material interests. The neoconservative agenda of world hegemony serves the powerful military/security complex whose one trillion dollar annual budget depends on war, hot or cold.

  The agenda of American hegemony serves the interests of Wall Street and the mega-banks. As Washington’s power and influence spreads, so does American financial imperialism. So does the reach of American oil companies and American agribusiness corporations such as Monsanto.

  Washington’s hegemony means that US corporations get to loot the rest of the world.

  The danger of the neoconservative ideology is that it is in perfect harmony with powerful economic interests. In the US the left-wing has made itself impotent. It believes all the foundational government lies that have given America a police/warfare state incapable of producing alternative leadership. The American left, what little remains, for emotional reasons believes the government’s 9/11 story. The anti-religious left-wing believes the threat posed to free thought by a Christian Russia. The left-wing, convinced that Americans are racists, believes the government’s account of the assassinations of Martin Luther King.

  The left-wing accepts the government’s transparent 9/11 fable, because it is emotionally important to the American left that oppressed peoples strike back. For the American left, it is emotionally satisfying that the Middle East, long oppressed and exploited by the French, British and Americans, struck back and humiliated the Unipower in the 9/11 attack.

  This emotional need is so powerful for the left that it blinds the left-wing to the improbability of a few Saudi Arabians, who could not fly airplanes, outwitting not merely the FBI, CIA, and NSA, which spies on the entire world, but as well all 16 US intelligence agencies and the intelligence agencies of Washington’s NATO vassal states and Israel’s Mossad, which has infiltrated every terrorist organization, including those created by Washington itself.

  Somehow these Saudis were able to also outwit NORAD, airport security, causing security to fail four times in one hour on the same day. They were able to prevent for the first time ever the US Air Force from intercepting the hijacked airliners. Air traffic control somehow lost the hijacked airliners on radar. Two airliners crashed, one into the Pennsylvania country side and one into the Pentagon without leaving any debris. The passport of the leader of the attack, Mohammed Atta was reported to be found as the only undamaged element in the debris of the World Trade Center towers. The story of the passport was so preposterous that it had to be changed.

  This implausible account did not raise any eyebrows in the tame Western print and TV media.

  The right-wing is obsessed with immigration of darker-skinned peoples, and 9/11 has become an argument against immigration. The left-wing awaits the oppressed to strike back against their oppressors. The 9/11 fable survives as it serves the interests of both left and right.

  I can tell you for a fact that if American national security had so totally failed as it is represented to have failed by the official explanation of 9/11, the White House, the Congress, the media would have been screaming for an investigation. Heads would have rolled in agencies that permitted such massive failure of the national security state. The embarrassment of a Superpower being so easily attacked and humiliated by a handful of Arabs acting independently of any intelligence agency would have created an uproar demanding accountability.

  Instead, the White House resisted any investigation for one year. Under pressure from the 9/11 families who lost family members in the World Trade Center Towers, the White House created a political commission consisting of politicians managed by the White House. The commission sat and listened to the government’s account and wrote it down. This is not an investigation.

  In the United States the left-wing is focused on demonizing Ronald Reagan, who had nothing whatsoever to do with any of this. The left-wing hates Reagan because he had to use anti-communist rhetoric in order to keep his electoral basis while he strove to end the Cold War in the face of the powerful opposition of the military/security complex.

  Is the left-wing more effective in Europe? Not that I can see. Look at Greece for example. The Greek people are driven into the ground by the EU, the IMF, the German and Dutch banks and the New York hedge funds. Yet, when presented with candidates who promise to resist the looting of Greece, the Greek voters give the candidates a mere 36% of the vote, enough to form a government, but not enough to have any clout with creditors.

  Having hamstrung their government with such low electoral support, the Greek people further impose impotence on their government by demanding to remain in the EU. If leaving the EU is not a realistic threat, the Greek government has no negotiating power.

  Obviously, the Greek population is so throughly brainwashed about the necessity of being part of the EU that the population is willing to be economically dispossessed rather than to leave the EU. Thus Greeks have forfeited their sovereignty and independence. A country without its own money is not, and cannot be, an independent country.

  Once European intellectuals signed off on the EU, they committed nations to vassalage, both to the EU bureaucrats and to Washington. Consequently, European nations are not independent and cannot exercise an independent foreign policy.

  Their impotence means that Washington can drive them to war. To fully understand the impotence of Europe look at France. The only leader in Europe worthy of the name is Marine Le Pen. Having said this, I am immediately denounced by the European left as a fascist, a racist, and so forth. This only shows the knee-jerk response of the European left.

  It is not I who shares Le Pen’s views on immigration. It is the French people. Le Pen’s party won the recent EU elections. What Le Pen stands for is French independence from the EU. The majority of French see themselves as French and want to remain French with their own laws and customs. Only Le Pen among European politicians has stated the obvious: “The Americans are taking us to war!”

  Despite the French desire for independence, the French will elect Le Pen’s party to the EU but will not give it the vote to be the government of France. The French deny themselves their independence, because they are heavily conditioned by brainwashing, much coming from the left, and are ashamed to be racists, fascists, and whatever epithets have been assigned to Le Pen’s political party, a party that stands for the independence of France.

  The European left-wing, once a progressive force, even a revolutionary one, has become a reactionary force. It is the same in the US. I say this as one of CounterPunch’s popular contributors.

  The inability even of intellectuals to recognize and accept reality means that restraints on neoconservatives are nowhere present except within Russia and China. The West is impotent to prevent Armageddon.

  It is up to Russia and China, and as Washington has framed the dilemma, Armageddon can only be prevented by Russia and China accepting vassal status.

  I don’t believe this is going to happen. Why would any self-respecting people submit to the corrupt West?

  The hope is that Washington will cause its European vassals to rebel by pushing them too hard into conflict with Russia. The hope that European countries will be forced into an independent foreign policy also seems to be the basis of the Russian government’s strategy.

  Perhaps intellectuals can help to bring this hope to fruition. If European politicians were to break from Washington’s hegemony and instead represent European interests, Washington would be deprived of cover for its war crimes. Washington’s aggressions would be constrained by an independent European foreign policy. The breakdown of the neoconservative unipower model would be apparent even to Washington, and the world would become a safer and better place.

  

  

  
  
  

  

• Visualizing The World's Ten Biggest Oil And Gas Companies

  From 2005 to 2015, global oil usage has only increased from 83 million to 93 million bpd (1.13% CAGR). However, the overall rate at which the Top 10 has grown production has been at a 1.29% CAGR pace, and their production now makes up about 58% of all global production. 

  The biggest oil and gas companies with the most impressive increases in production are all state-owned. Saudi Aramco, the world's largest producer, increased production from 10.8 million bpd (2004) to 12 million bpd (2014). NK Rosneft' OAO, National Iranian Oil, Petrochina, and Kuwait Petrol Corp all saw sizeable increases. The only company to see a big decrease, however, was also state-owned (Gazprom).

   

  

  Courtesy of: Visual Capitalist

   

  Oil and gas continues to make up the majority of the global energy mix with 33% and natural gas at 24%. That said, based on the CAGRs above, it does seem that we are making progress in tapering the growth of production. Human population and the economy are growing at rates higher than 1.13%, so that means oil is giving up ground to other energy sources.

  

  
  
  

  

• The Lesson In China: Don't Go Bubble In the First Place

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  There can be no mistaking that Chinese stocks are in a bubble. Since November 21, the Shanghai SSE Composite index has risen more than 100%. Going back to July 22, the gain is nearly 145%. Those dates are not random coincidence, as they mark specific points of PBOC activity. The stock bubble in China is certainly a monetary affair, but in ways that aren’t necessarily comparable to our own stock bubble experience (twice).

  There is, of course, great similarities starting with leverage; in China at the moment there is no shortage, which is precisely the problem. It is quite precarious, though, in that the PBOC has at times shown far more open contempt for Chinese stock margin than the Federal Reserve or Bank of Japan ever did.

  Stock forecasters in search of an early-warning system for the next Chinese bear market are zeroing in on the country’s record $358 billion pile of margin debt.

   

  When that three-year build-up of leveraged positions starts to unwind, regulators will struggle to limit the selloff, according to Bocom International Holdings Co. and Rabobank International. Almost all of this year’s biggest declines in the Shanghai Composite Index, including a 6.5 percent slump on May 28, were sparked by investor concerns over margin-trading restrictions. The securities regulator announced plans Friday to limit the amount brokerages can lend for stock trading.

  Unlike central banks here and elsewhere, the PBOC has a vastly different understanding and appreciation for asset bubbles, at least to the point that in 2014 and 2015 under reform it is not shirking responsibility for them. The Federal Reserve, in particular, had long been against any linkage between monetarism and asset bubbles, believing instead that they were fully contained under “market” irregularities (that has evolved, somewhat, under the relatively new Yellen Doctrine). I’m not sure the PBOC ever went so far as to completely delink its own activities from asset bubbles, but it at one point was clearly embracing of them even if reluctantly part of a greater government mandate.

  In trying to dig China out of the Great Recession mess, which is and remains a global affair, the PBOC did what all other central banks did, perhaps to an even greater degree. The distaste for the effort did not, at that time, undermine the scope, which simply became immense once the global economy failed to reach its first “benchmark” expectations. All central banks were expecting only to have to fill some time between the Great Recession and a robust recovery, but by 2012 certainly it became clear that the task was much broader and deeply embedded. Most central banks acted again, including the PBOC, but were again rebuffed by a lack of recovery; and indeed worse, an actual and sustained global slowdown from even the tepid pace of expansion from the trough.

  

  By that time, the Chinese bubbles were immense and located mostly in various credit pockets – expressed through real estate and overdevelopment of many industries (oversupply). The stock market didn’t much figure. The reform agenda, born in late 2013, prioritizes managing the greater financial imbalances even above economic expansion, reversing the 2009-12 paradigm, placing the Chinese experience in the past few years very much in reverse of almost everywhere else in monetarism (which is why the PBOC right now so confuses economists and commentary).

  To gain some ability in managing the credit bubbles, which had grown through Wealth Management Products but also Local Government Financing Vehicles, the PBOC in early 2014 experimented with a few limited credit defaults. The results right away were not encouraging, which seems to have forced the PBOC to alter its intended reform path. Seeing the negative reaction in liquidity, especially “dollars”, new efforts were implemented to simultaneously tighten and loosen – tighten the wasteful speculations that were inducing credit bubbles, while targeting liquidity for parts of the financial system deemed vital to the real economy.

  Among the latter was the China Development Bank, which received on July 22 RMB1 trillion in funding support through the new Pledged Lending Facility (PLF). Some have likened this to a Chinese QE, but in reality it is far more of redirecting liquidity than any kind of broad and more familiar expansion. The rise in Shanghai stocks, however, began precipitously with that event.

  

  While that might suggest stock “investors” reacting to “stimulus” as any others have around the world, in the context of reform I think it amounts to what always happens when you start to squeeze a bubble – it breaks out in other places. In other words, as it became clear what reform aimed to accomplish, mostly getting a handle on the credit creation and debt-driven expressions, some financial agents saw the writing on the wall and moved to the “next” open door, stocks, in a very conscious effort to get out of credit while still positively positioned.

  That alternate view was aided on November 21 when the PBOC again made a targeted adjustment to deposit rates, and then further on December 8 when China Securities Deposit and Clearing Corp (CSDC) restricted repo collateral, largely of corporate bonds and notes, to AA or above. That cut repo eligibility in half, signaling that credit, especially low-rated junk, was no longer an open bubble door.

  “The regulation will damp investor demand for lower-rated corporate bonds,” said Yang Feng, a Beijing-based bond analyst at Citic Securities Co., the nation’s biggest brokerage. “That may result in higher borrowing costs for LGFVs.”

  Borrowing costs rose, but “investors” did not disappear – they simply traded junk debt for Chinese stocks. Banks have followed, somewhat, that trend by being rather eager to supply margin, a slighter swap than it might at first appear.

  Analysts say the regulators’ exclusion of lower grade bonds from being used in bond repurchase contracts, a key source of secondary liquidity in trade, increases the risk of trading such bonds, depressing demand and putting upward pressure on yields…

   

  “This is bound to have a major impact on the bond market,” said a dealer at a Chinese commercial bank in Shanghai.

   

  “The Shanghai Stock Exchange’s bond market will be hit the most as China’s corporate bonds are concentrated in the stock exchanges, although the move is likely to spill over to the main interbank bond market as well to a lesser extent,” he said.

  With traders already aligned to the Shanghai exchange, shifting from bonds to stocks as the PBOC cracks down was not a large leap. The banks were there, too, having been the great supplier of repo funds for traded debt issues; now piling up $358 billion in margin debt in short order instead of repo assets (the chart accompanying the article quoted at the outset shows the close relationship, as you would expect, between margin debt and the stock index price, receiving a major boost in late November 2014 after the first great ascension in late July; margin in Shanghai stocks has more than quadrupled since the PLF was first employed).

  If the PBOC was committed to a broad-based monetaristic regime consistent with 2009 views, I seriously doubt stocks would have started to rise as they did since a widespread liquidity program would simply have fed back into the same credit mess as twice before. The very open and public change in monetary policy character is responsible for the change in asset bubble focus, especially as another round of defaults was “allowed” to occur late in 2014.

  There is nothing in the latest re-adjustment that will impact especially the beleaguered housing sector, nor its backing in the Wealth Management Products. Instead, it seems to me the PBOC was intentionally careful to not give the “bubbles” much of anything, relying and focusing solely on actual businesses (and smaller versions at that) rather than the broad-based elements that marked all prior (futile) attempts at “stimulus.” That is the message that should have been received, that in other words this was a far different approach of the PBOC toward a slowing economy.

  What the stock bubble shows is the unthinkable degree of difficulty in trying to actually manage letting air out of any bubble in an orderly fashion; they target for decline credit-funded junk WMP’s and it breaks out in stocks instead. It may already be too late, as growth declines still further month by month, but stock prices go even more insane, drawing in more and more “retail” accounts and regular Chinese. In other words, the reform idea may have been impossible from the start; that the PBOC went ahead anyway, and still continues despite all that has happened, more than suggests that they now recognize the most dangerous existence is asset bubbles, far and away more important than even “necessary” growth.

  

  

  
  
  

  

• The Coming US Recession Charted

  Submitted by Eugen von Bohm-Bawerk,

  The idea of an imminent US recession may seem moot as all the self-proclaimed experts and talking heads still acts as we are well into a recovery and patiently waiting for the forthcoming escape velocity which will take care of all ills plaguing today’s over-indebted society. Never do they stop to think about why things looks as dismal as they do. Not once have it ever occurred to them that unprecedented accumulation of unproductive, or even counter-productive and destructive, debt in itself might be the very cause for low growth. No, these people have the audacity to claim low growth is the reason for high debt ratios, and only through even higher leverage against household and public income can economic growth rates be re-established on previous healthy levels to once again render out-of-control politicians lust for spending sustainable.

  The sheer scale of the backwardness shown in such gross economic illiteracy suggest to us there is ulterior motives behind so-called Keynesian economic theories. No grown-ups would take this seriously if our monetary masters didn’t need to look out for their buddies running fractional reserve warehouse scams across the planet.

  Perfectly in line with our thinking presented in Goebbelnomics a key aspect of communication from our money masters is to put current economic conditions up on a pedestal. Take the latest GDP forecast from the Federal Reserve as a perfect example. Despite the fact that first quarter GDP fell at an annualised rate of 0.7 per cent and higher frequency data going into the second quarter have underperformed there are people within the Federal Reserve System who still believe the US will grow by 2.3 per cent this year.  For that to happen, assuming quite generously a 2 per cent annualised growth rate in the second quarter, the third and fourth quarter must each grow by 4 per cent for the math to add up.

  For 2016 it is even worse. Once again we are told to expect escape velocity, but as the two charts below show, the FOMC have consistently predicted higher growth than what turned out to be the case after the fact. The exact same is true for IMF, World Bank and ECB forecasts. We do not blame them for being wrong, GDP forecasting is a fools guessing game after all, but if they were truly guessing there should not be any consistency in their error. Always too optimistic. Or always trying to condition the great masses into creating their own wealth effect and presto escape velocity.

  

  Source: Federal Reserve, Bureau of Economic Analysis, Bawerk.net

  What our two simple charts goes a long way of proving is that Goebbelnomics has very much become bread and butter of institutionalised mass-manipulation.

  However, asking the very same people where they think interest rates will be at the end of 2015 they all agree that the US economy will remain on life support.

  

  Source: Federal Reserve, Bawerk.net (note, red dots indicate the median projection)

  There are only two persons in the FOMC that have the interest rate expectation right; and they believe rates will be kept at current level even after the December meeting. Perfectly in line with continuous postponement of so-called lift-off. It will as usual turn out to be a dud.

  What we know already is that the US “expansion” is among the longest on record and if history rhymes, as it often does, it is soon time for a new recession – and that with both fiscal and monetary policy stretched beyond recognition.

  

  Source: Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA), National Bureau of Economic Research (NBER), Bawerk.net

  In GDP accounting personal consumption expenditure account for just under 70 per cent; which tells you just how lopsided the whole concept of GDP really is. The best monthly proxy for consumption expenditure is retail and wholesale sales. As the next chart shows, US retail sales has been struggling for quite some time. On a month on month comparison retail sales fell in December, January and February, had a good month in March before coming to a standstill in April.

  

  Source: US Census Bureau, National Bureau of Economic Research (NBER), Bawerk.net

  The May number was unexpectedly strong, but the seasonal adjustment factor suggest that number will eventually be revised down. Non-seasonally adjusted “core” retail sales fell compared to last year suggesting the underlying trend is weakening, not strengthening.

  

  Source: US Census Bureau, Bawerk.net – Hat tip to ZeroHedge for adjustment factor

  What is more worrisome though, from a retail sales perspective, is the build-up in inventories. The inventory to sales ratio has been on a downtrend for the last three decades due to improved demand management, but relative to trend retail inventories are pushing a two standard deviation difference. We didn’t even see this after the dot-com crash. Bloated inventories are highly indicative of a coming inventory liquidation cycle, in other words a “normal” post WWII recession.

  

  Source: US Census Bureau, Bawerk.net

  Activity in the wholesale market may be a leading indicator for what to expect in the retail business over the coming months. Wholesale trade has been falling while inventories has been building. The inventory to sales ratio is clearly in recessionary territory.

  

  Source: US Census Bureau, Bawerk.net

  The manufacturing sector is obviously not doing any better as the weak retail and wholesale trades reverberates throughout the supply chain.

  

  Source: US Federal Reserve, Bawerk.net

  And we know for a fact that the oil and gas extraction part of the IP complex, which contributed almost 50 per cent to overall IP over the last 12 months, will not fare well in the near future as the shale industry contracts on back of falling CAPEX. When the HY energy investor wakes up, maybe due to a quarter from Yellen, the carnage will be that much worse.

  

  Source: US Federal Reserve, Bawerk.net

  Judging by the level of factory orders, we should not expect a positive contribution from industrial production regardless of the whimsical allocation from the HY investor.

  

  Source: US Census Bureau, Bawerk.net

  While some may claim the latest hiring spree suggest things are not as bad we contend that without a spurt in labour productivity this development will soon turn for the worse. US productivity has been lacklustre over the last fifteen years, and while both employment and hours grew over the last five quarters, the marginal labour added came at a severe cost. Labour productivity actually fell suggesting hiring has been nothing more than “labour inventory accumulation” and will have to be liquidated along with the rest of capital misallocations witnessed in the US economy if interest rates were ever to increase.

  

  Source: Bureau of Labor Statistics (BLS), Bawerk.net. Hat tip to Alhambra Investment for second chart

  It is also worth noting that most of the new hires is in the less productive service sector which provide low paying jobs without benefits.

  Summing it all up, the last chart of US GDP together with cumulative goods sale and inventory accumulation since 2000 should tell you everything you need to know. The US economy is now on the verge of a new recession.

  

  Source: Bureau of Economic Analysis (BEA), Bawerk.net

  Our prediction, which should always be taken with a grain of salt, is that the FOMC will maintain ZIRP (we consider a 25, or even 50bp hike within the range of ZIRP) well into 2016, the US will soon experience two consecutive quarters of GDP contraction and the strong dollar will change on the prospects of another round of QE.

  

  

  
  
  

  

• The World According To Americans

  Presented with no comment…

  The World According to Middle-Aged Americans…

  

  Source: Richmond.edu

   

  The World According to Young Americans…

  

  Source: HappyPlace

  

  

  
  
  

  

• Signs Of Financial Turmoil Are Brewing In Europe, China And The United States

  Submitted by Michael Snyder via The Economic Collapse blog,

  As we move toward the second half of 2015, signs of financial turmoil are appearing all over the globe.  In Greece, a full blown bank run is happening right now.  Approximately 2 billion euros were pulled out of Greek banks in just the past three days, Barclays says that capital controls are “imminent” unless a debt deal is struck, and there are reports that preparations are being made for a “bank holiday” in Greece.  Meanwhile, Chinese stocks are absolutely crashing.  The Shanghai Composite Index was down more than 13 percent this week alone.  That was the largest one week decline since the collapse of Lehman Brothers.  In the U.S., stocks aren’t crashing yet, but we just witnessed one of the largest one week outflows of capital from the bond markets that we have ever witnessed.  Slowly but surely, we are starting to see the smart money head for the exits.  As one Swedish fund manager put it recently, everyone wants “to avoid being caught on the wrong side of markets once the herd realizes stocks are over-valued“.

  I don’t think that most people understand how serious things have gotten already.  In Greece, so much money has been pulled out of the banks that the European Central Bank admits that Greek banks may not be able to open on Monday…

  The European Central Bank told a meeting of euro zone finance ministers on Thursday that it was not sure if Greek banks, which have been suffering large daily deposit outflows, would be able to open on Monday, officials with knowledge of the talks said.

   

  Greek savers have withdrawn about 2 billion euros from banks over the past three days, with outflows accelerating rapidly since talks between the government and its creditors collapsed at the weekend, banking sources told Reuters.

  All over social media, people are sharing photos of long lines at Greek ATMs as ordinary citizens rush to get their cash out of the troubled banks.  Here is one example…

  Long queues at ATM's all around Athens center. #Greece pic.twitter.com/k4wgerQ7gP

  — Elly Vintiadis (@EllyVintiadis) June 19, 2015

  And if there is no debt deal by the end of this month, the Greek debt crisis is going to totally spin out of control and financial chaos will begin to erupt all over Europe.  But instead of trying to be reasonable, EU president Donald Tusk “has delivered an ultimatum to Greece”, and it almost appears as if EU officials are more concerned about winning a power struggle than they are about averting financial catastrophe…

  EU president Donald Tusk has delivered an ultimatum to Greece, claiming the country must ‘accept an offer or default’ at an emergency summit set for Monday – in a last-ditch effort to stop the debt-stricken nation crashing out of the euro.

   

  ‘We are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or to head towards default,’ Mr Tusk said today.

   

  His comments come as Greek Prime Minister Alexis Tsipras warned that his country’s exit from the eurozone would trigger the collapse of the single currency.

   

  ‘The famous Grexit cannot be an option either for the Greeks or the European Union,’ he said in an Austrian newspaper interview.

  ‘This would be an irreversible step, it would be the beginning of the end of the eurozone.’

  While all of this has been going on, the obscene stock market bubble in China has started to implode.  Just check out the following numbers from Zero Hedge…

  As the carnage began last night in China we noted the extreme levels of volatility the major indices had experienced in recent weeks. By the close, things were ugly with the broad Shanghai Composite down a stunning 13.3% on the week – the most since Lehman in 2008 (with Shenzhen slightly better at down 12.8% and CHINEXT down a record-breaking 14.99%).

  Under normal circumstances, numbers like these would be reason for a full-blown financial panic over in Asia.  But these are not normal times.  Even with these losses, stock prices in China are still massively overinflated.  For example, USA Today is reporting that the median stock over in China is “trading at 95 times earnings”…

  Margin debt in China has soared to a record $363 billion, according to Bloomberg, and the median stock in mainland China is now trading at 95 times earnings, which even tops the price-to-earnings multiple of 68 back at the 2007 peak.

  That is absolutely ridiculous.  When a stock is trading at 25 or 30 times earnings it is overpriced.  So these numbers that are coming out of China are beyond crazy, and what this means is that Chinese stocks have much, much farther to fall before they get back to any semblance of reality.

  Meanwhile, in the U.S. money is flowing out of bonds at a staggering pace.  The following quote originally comes from Bank of America…

  “High grade credit funds suffered their biggest outflow this year, and double the previous week (and also the biggest since June 2013). High yield outflows also jumped to $1.1bn, the biggest since the start of the year. However, government bond funds suffered the most amid the recent spike in volatility, with outflows surging to the highest weekly number on record ($2.7bn). This brings the total outflow from fixed income funds to almost $6bn over the last week, the highest since the Taper Tantrum and the third highest outflow ever.”

  What this means is that big trouble is brewing in the bond markets.  This is something that I warned about in my previous article entitled “Experts Are Warning That The 76 Trillion Dollar Global Bond Bubble Is About To Explode“.

  For the moment, U.S. stocks are doing fine.  But just about everyone can see that we in a massive financial bubble that could burst at any time.  Presidential candidate Donald Trump says that what we are witnessing is a “big fat economic and financial bubble like you’ve never seen before”…

  Yesterday during an interview on MSNBC, presidential candidate Donald Trump said he has some big names in mind for the Treasury secretary if he wins the White House. “I’d like guys like Jack Welch. I like guys like Henry Kravis. I’d love to bring my friend Carl Icahn.” He also opined on the economy and the stock market, admitting that the Fed has benefited people like him but that the economy and is in a “big fat economic and financial bubble like you’ve never seen before.“

  Ron Paul also believes that this financial bubble is going to end very badly.  Just check out what he told CNBC earlier this week…

  Despite record highs in the market, former Rep. Ron Paul says the Fed’s easy money policies have left stocks and bonds are on the verge of a massive collapse.

   

  “I am utterly amazed at how the Federal Reserve can play havoc with the market,” Paul said on CNBC’s “Futures Now” referring to Thursday’s surge in stocks. The S&P 500 closed less than 1 percent off its all-time high. “I look at it as being very unstable.”

   

  In Paul’s eyes, “the fallacy of economic planning” has created such a “horrendous bubble” in the bond market that it’s only a matter of time before the bottom falls out. And when it does, it will lead to “stock market chaos.”

  Yes, this financial bubble has persisted far longer than many believed possible, but all irrational bubbles eventually burst.

  And you know what they say – the bigger they come the harder they fall.

  When this gigantic financial bubble finally implodes, it is going to be absolutely horrifying, and the entire planet is going to be shocked by the carnage.

  

  

  
  
  

  

• How The Saudi Foreign Ministry Controls Arab Media

  From Wikileaks, as part of its latest release of confidential government information, The Saudi Cables

  Buying Silence: How the Saudi Foreign Ministry controls Arab media

  
  

  On Monday, Saudi Arabia celebrated the beheading of its 100th prisoner this year. The story was nowhere to be seen on Arab media despite the story’s circulation on wire services. Even international media was relatively mute about this milestone compared to what it might have been if it had concerned a different country. How does a story like this go unnoticed?

  Today’s release of the WikiLeaks “Saudi Cables” from the Saudi Ministry of Foreign Affairs show how it’s done.

  The oil-rich Kingdom of Saudi Arabia and its ruling family take a systematic approach to maintaining the country’s positive image on the international stage. Most world governments engage in PR campaigns to fend off criticism and build relations in influential places. Saudi Arabia controls its image by monitoring media and buying loyalties from Australia to Canada and everywhere in between.

  Documents reveal the extensive efforts to monitor and co-opt Arab media, making sure to correct any deviations in regional coverage of Saudi Arabia and Saudi-related matters. Saudi Arabia’s strategy for co-opting Arab media takes two forms, corresponding to the “carrot and stick” approach, referred to in the documents as “neutralisation” and “containment”. The approach is customised depending on the market and the media in question.

  “Contain” and “Neutralise”

  The initial reaction to any negative coverage in the regional media is to “neutralise” it. The term is used frequently in the cables and it pertains to individual journalists and media institutions whose silence and co-operation has been bought. “Neutralised” journalists and media institutions are not expected to praise and defend the Kingdom, only to refrain from publishing news that reflects negatively on the Kingdom, or any criticism of its policies. The “containment” approach is used when a more active propaganda effort is required. Journalists and media institutions relied upon for “containment” are expected not only to sing the Kingdom’s praises, but to lead attacks on any party that dares to air criticisms of the powerful Gulf state.

  One of the ways “neutralisation” and “containment” are ensured is by purchasing hundreds or thousands of subscriptions in targeted publications. These publications are then expected to return the favour by becoming an “asset” in the Kingdom’s propaganda strategy. A document listing the subscriptions that needed renewal by 1 January 2010 details a series of contributory sums meant for two dozen publications in Damascus, Abu Dhabi, Beirut, Kuwait, Amman and Nouakchott. The sums range from $500 to 9,750 Kuwaiti Dinars ($33,000). The Kingdom effectively buys reverse “shares” in the media outlets, where the cash “dividends” flow the opposite way, from the shareholder to the media outlet. In return Saudi Arabia gets political “dividends” – an obliging press.

  An example of these co-optive practices in action can be seen in an exchange between the Saudi Foreign Ministry and its Embassy in Cairo. On 24 November 2011 Egypt’s Arabic-language broadcast station ONTV hosted the Saudi opposition figure Saad al-Faqih, which prompted the Foreign Ministry to task the embassy with inquiring into the channel. The Ministry asked the embassy to find out how “to co-opt it or else we must consider it standing in the line opposed to the Kingdom’s policies“.

  The document reports that the billionaire owner of the station, Naguib Sawiris, did not want to be “opposed to the Kingdom’s policies” and that he scolded the channel director, asking him “never to host al-Faqih again”. He also asked the Ambassador if he’d like to be “a guest on the show”.

  The Saudi Cables are rife with similar examples, some detailing the figures and the methods of payment. These range from small but vital sums of around $2000/year to developing country media outlets – a figure the Guinean News Agency “urgently needs” as “it would solve many problems that the agency is facing” – to millions of dollars, as in the case of Lebanese right-wing television station MTV.

  Confrontation

  The “neutralisation” and “containment” approaches are not the only techniques the Saudi Ministry is willing to employ. In cases where “containment” fails to produce the desired effect, the Kingdom moves on to confrontation. In one example, the Foreign Minister was following a Royal Decree dated 20 January 2010 to remove Iran’s new Arabic-language news network, Al-Alam, from the main Riyadh-based regional communications satellite operator, Arabsat. After the plan failed, Saud Al Faisal sought to “weaken its broadcast signal“.

  The documents show concerns within the Saudi administration over the social upheavals of 2011, which became known in the international media as the “Arab Spring”. The cables note with concern that after the fall of Mubarak, coverage of the upheavals in Egyptian media was “being driven by public opinion instead of driving public opinion”. The Ministry resolved “to give financial support to influential media institutions in Tunisia“, the birthplace of the “Arab Spring”.

  The cables reveal that the government employs a different approach for its own domestic media. There, a wave of the Royal hand is all that is required to adjust the output of state-controlled media. A complaint from former Lebanese Prime Minister and Saudi citizen Saad Hariri concerning articles critical of him in the Saudi-owned Al-Hayat and Asharq Al-Awsat newspapers prompted a directive to “stop these type of articles” from the Foreign Ministry.

  This is a general overview of the Saudi Foreign Ministry’s strategy in dealing with the media. WikiLeaks’ Saudi Cables contain numerous other examples that form an indictment of both the Kingdom and the state of the media globally.

  * * *

  Saudi Arabia’s only official response to the Wikileaks release came from the Twitter account of the foreign ministry:

   

   

  ????? #???????_?????? : ?? ???? ?? ????? ?? ???? ????? ????? ????? ????? ?? ????? ???????.

  — ????? ???????? (@KSAMOFA) June 19, 2015

  ????? #???????_?????? : ???? ?????? ??? ?? ???? ???? ?????? ??? ????? ?? ??????? ????? ?? ???? ??? ?????? ???? ??????? ???? ?????.

  — ????? ???????? (@KSAMOFA) June 19, 2015

  Translation:

  Avoid accessing any website for leaked documents or information which may be incorrect, with the intent of harming national security….  the documents may be rigged to help the enemies of the homeland in achieving their goals.

  “Enemies of the homeland”, such as Edward Snowden, revealing just how the corrupt deep state operates.

  It was not clear just what the punishment for “accessing” websites which contain the leaked files may be, although treason may be a fair assumption. After all, to quote George Orwell, “In a time of universal deceit, telling the truth is a revolutionary act.”

  The leaked Saudi files, of which the first batch has been released, can be found here.

  

  

  
  
  

  

• The Russian Pipeline Waltz

  Submitted by Simone Tagliapietra and Georg Zachmann via Bruegel.org,

  This is an eventful period for EU-Russia gas relations. Six months ago Russian President Vladimir Putin surprised the energy world by dismissing the long-prepared South Stream project in favour of Turkish Stream. Like South Stream, Turkish Stream is intended to deliver 63 billion cubic metres (bcm) of gas per year through the Black Sea to Turkey and Europe by completely bypassing Ukraine from 2019.

  Yesterday, during the St. Petersburg International Economic Forum 2015, Gazprom unexpectedly signed a set of Memorandums of Intent with the European gas companies E.ON, Shell and OMV. These plan for the construction of two additional gas pipeline strings along the Nord Stream pipeline system that connects Russia and Germany through the Baltic Sea. This project would double the current capacity of Nord Stream from 55 bcm per year to 110 bcm per year.

  Both Turkish Stream and an expanded Nord Stream indicate that Russia does not intend to abandon its position in the European market (by for example shifting attention to Asia).

  As illustrated in the figure below, current EU-Russia gas trade is based on three key axes: the Nord Stream pipeline, the Yamal-Europe pipeline through Belarus and the pipeline system crossing Ukraine. Of these three routes, only the Ukrainian gas transportation system is not controlled by Gazprom.

  EU-Russia existing gas connections

  

  Source: Bruegel based on BP Statistical Review of World Energy 2015, IEA Gas Trade Flows in Europe, Nord Stream website.

  Gazprom has asserted several times that it will cut off gas transits through Ukraine by the end of the decade. The current alternative routes (Nord Stream + Belarus), however, only present a capacity of 86.5 bcm per year. To maintain the current level of Russia’s exports (119 bcm in 2014) at least 35 bcm of additional pipeline capacity would be needed.

  In fact, current capacities are not being fully exploited due to disputes over the access regime to the OPAL pipeline in Germany which connects Nord Stream to European markets. Gazprom would like to make full use of the pipeline, but the European Commission, the German regulator and Gazprom have not yet reached a decision on the conditions for an exception from the EU's Third Energy Package that would allow Gazprom to control more than 50% of the capacities.

  Either Turkish Stream (with its 49 bcm per year devoted to the European market) or an expansion of Nord Stream (55 bcm per year) alone wouldallow Russia to circumvent Ukraine. Both lines together would result in significant over-capacity. So there seems to be a trade-off between Turkish Stream and an expanded Nord Stream.

  So, how should the most recent evolutions of the Russian waltz of pipelines be interpreted? There are three possible scenarios:

  i) Turkish Stream for Turkey only & Nord Stream for the EU. In this scenario Russia would target the construction of the first string of Turkish Stream to divert the 14 bcm per year currently supplied to Turkey via the Trans-Balkan pipeline (crossing Ukraine, Moldova, Romania and Bulgaria) by 2016, as recently agreed in Ankara. This would allow Russia to capitalize on the massive investments already made in the "Russian Southern Corridor" and to make use of the South Stream pipes already delivered at the Varna harbor and of the pipe-laying ships already placed in the Black Sea. Considering the regulatory and financial barriers to the development of new infrastructure to deliver Turkish Stream gas to EU destination markets, Russia would abandon its plan to supply the EU market via Turkish Stream and rather invest in the expansion of Nord Stream to cover this market. 

   

  ii) Nord Stream expansion as a bargaining chip to advance Turkish Stream. In this scenario Russia would propose the expansion of Nord Stream, in order to have another bargaining chip in the negotiations with Turkey (and Greece), and to quickly advance the full Turkish Stream project and ensure better commercial conditions. This would allow Gazprom to avoid further controversies around the OPAL pipeline and to deliver gas directly to southern European markets. This way Gazprom’s ability to sell gas to southern Europe would not depend on additional north-south pipelines under EU rules, and some price-differentiation between the northern and southern market for Gazprom gas could be maintained.

   

  iii) No pipelines, just politics. In this scenario Russia does not intend to develop either the full Turkish Stream (but at most the first string for the Turkish market) or the expansion of Nord Stream. The proposals are thus intended to create political cleavages within the EU, at a moment when the EU is toughening its stance against Russia due to the Ukraine crisis. They create cleavages between northern and southern EU countries (Germany favoured by Nord Stream; Italy and Greece favoured by Turkish Stream); between the EU and Member States (for example Member states’ actions that counteract the Brussels strategy to diversify away fro m Russia); and within EU countries (by causing the interests of governments and energy companies to diverge). In such a scenario, this waltz of pipelines thus represents a new chapter in Russia’s enduring divide and rule strategy vis-à-vis the EU energy market.

  

  

  
  
  

  

• China Must Be Getting Really Nervous To Do This

  One of the most stunning data points of the ponzi bubble called Chinese Stock Markets has been the greater-than-exponential rise in the opening of new retail stock trading accounts in the last few months. If ever there was a better indicator of speculative excess or a government policy out of control, it was the pace of new account openings. So… when we discover that after 8 years of weekly data provision, China Securities Depository & Clearing (CDSC) Corp has decided to discontinue the time series – it is clear China is getting very worried.

  "Discontinued" – in a very McDonalds-monthly-sales-esque manner, China appears to have decided opacity is the better part of valor.

  

   

  The Source of the data is CDSC's Weekly Statistics…

  Week of 5/29 was the last update…

  

   

  Nothing since…

  

   

  And this is a series updated on the Friday US session after China's Friday Session is closed (with no lag)… so there has been 3 weeks with no data since the open accounts spiked to 4.3 million in one week…

  

   

  Just what is China trying to hide?

  

  

  
  
  

  

• Hurricanomics: Keynesian Stimulus Or Captain Facepalm

  Submitted by Jared "The 10th Man" Dillian via Mauldin Economics,

  An old friend from the Coast Guard visited me over the weekend. He is retired and now works as an emergency planner.

  If there’s one thing government folks do, it is plan. But many times I’ve seen plans go out the window when emergency strikes and people start to improvise. Or maybe the planned-for emergency never materializes. Maybe you get a different emergency you didn’t plan for. The anarchist in me says that plans are useless. But I agree that it’s good to think about these things ahead of time.

  So my friend and I got to talking about hurricanes, which is a specialty of his. He told me that no hurricane has ever scored a direct hit on my piece of the South Carolina coast (I live just a few yards away from the beach). Hurricanes have hit north of me and south of me, but in the recorded history of hurricanes, none have ever hit here, at least, not a direct hit by one of the big ones.

  I’m not sure if that makes me feel good or not. If my house did sustain a direct hit, smell you later.

  But it got me thinking about when I was working at Lehman Brothers in 2004, when Hurricane Katrina hit. Were you active in the markets back then? If so, you probably remember that stocks ripped to the upside, particularly energy and construction companies that would have to repair all the damage. Of course, the insurance stocks got killed.

  I was 30 years old back then and not really steeped in economic thought. None of us were. We were traders, not philosophers. But we were all sitting around wondering why the stock market was ripping when the hurricane was clearly going to wipe out a huge city. Made no sense.

  My answer was that the winners from Katrina were probably publicly traded, while the losers weren’t.

  But does anybody win from a hurricane in the first place?

  The Parable of the Broken Window

  You may have heard of the “Broken Window Fallacy,” where a boy throws a rock through a storefront window, breaking it. The shopkeeper must hire the glazier to come fix the window. He pays him 50 bucks, thereby stimulating business in town.

  Everyone sees this and says, “Gee whiz, a kid breaks a window and suddenly there’s 50 bucks in circulation. Hey kid, why don’t you run around town and break the rest of the windows?”

  If this sounds familiar, it’s because you’ve heard it before—from an economist named Frédéric Bastiat.

  Bastiat basically comes up with the ideas of opportunity cost and unintended consequences simultaneously, when he observes that if the shopkeeper did not spend 50 bucks to fix his window, he might have spent it on something else more productive. What, we don’t know. But we can assume that he knows best how to spend the 50 bucks, at least better than the kid who broke his window.

  Bastiat is one of the forefathers of libertarian/Austrian economics, and he often talked about the things that are unseen in finance. A good example is the minimum wage debate, which we talked about briefly in last month’s issue of Bull’s Eye Investor.

  The layman thinks if you raise the price of labor to $15/hour by fiat—yay, people are making $15! But generally what happens is that some people will see their wages drop to $0/hour, because the bossman had $150 to spend on labor to begin with, and he can either hire 20 people at $7.50/hour or 10 people at $15/hour.

  If you think the bossman should somehow operate at a loss to accommodate everyone at the higher wage, then we can have a nice discussion on the role of profit in society.

  Bastiat is the reason I come to work every day, because there are so many people who have believed, and will always believe, that you can fix the price of something at x just because 51% of the voters said so.

  Keynesian Stimulus

  One of the great tragedies of the financial crisis was the $780 billion we shelled out for the giant stimulus package. Wow, was that bad, for a lot of reasons.

  I remember driving around and getting stuck in construction and seeing these stupid signs everywhere:

  

  So back to Bastiat, why was the stimulus bad? We spent $780 billion basically paving the same roads over and over again. It was one step up from digging holes and filling them back in. And just like in the broken window example, sure, some people got rich off it.

  But what would the taxpayers have done with $780 billion, aside from paving roads? Probably some pretty interesting stuff. Possibly they could have thought of better things to do with it than paving roads.  Even if they had saved it, that’s $780 billion less the government would have had to borrow, which would have lowered interest rates and increased credit availability for private borrowers.

  The counterargument is that if you go back to the 1930s when we did all this Keynesian stimulus (the Hoover Dam, etc.), that it worked in getting us out of the Great Depression. Did it? Maybe it made the depression worse. You can’t go back in time and not have the Keynesian stimulus and see what happens.

  In US history classes over the years, FDR has generally gotten credit for ending the depression, but more and more scholars are beginning to challenge that idea.

  Captain Facepalm

  I think these things are pretty obvious. I can’t figure out why people have such a difficult time seeing them. I can’t figure out why Nobel Prize winners can’t see them.

  Any economic intervention, no matter how slight, causes unintended consequences. There are things that you cannot see, that the planner cannot anticipate. There are also easy ones. If you cap the price of a good, there will be a shortage. If you put a floor on it, there will be a surplus.

  If you make it hard for people to trade swaps, you might reduce liquidity and push people into other, potentially more risky products.

  

  

  
  
  

  

• Greek Contagion Abyss Looms – Wealth Preservation Strategies

  Greek Contagion Abyss Looms – Wealth Preservation Strategies

  • Greece, EU and Banks Staring Into Abyss
  • Markets Are “Irrationally Exuberant” – Gods Punish Hubris 
  • “Invisible Hand” Propping Up Sanguine Markets
  • Short Term Considerations
  • Long Term Considerations
  • Best Case Outcomes
  • Worst Case Outcomes
  • Wealth Preservation Strategies

  We are here, staring into the abyss. The greatest monetary experiment of the modern world – the euro, encapsulating the largest middle class market of consumers ever assembled is about to face its greatest test to date.

  To say anxieties are high is an understatement. Normally the broad markets will weigh up downside risk as the markets formulate and assimilate varying views on matters of importance, but not so in this case.

  

   

  The markets are decidedly sanguine, as if an “invisible hand” is propping them up, guiding them, nudging them, buying any dips in stock and bond markets and maintaining calm.

  The VIX measure of U.S. stock volatility, is languishing at 15 – not even whimpering. Gold, that other key barometer of risk, has only seen slight gains and languishes at $1,200 per ounce.

  It is as if the fire alarms have been turned off despite the fire beginning to rage.

  Is the Working Group on Financial Markets or Plunge Protection Team (PPT) working tirelessly through proxy Wall street banks to keep gold depressed and prop up leading benchmarks such as the S&P 500 and thus the wider markets?

  There are many that believe that Wall Street banks and central banks work closely together and coordinate policy and market interventions. They are sometimes dismissed as “conspiracy theorists.” Despite much evidence showing that banks have manipulated and rigged markets frequently.

  Ironically, those that dismiss this as conspiracy theory are the same people who would say that if the central banks and governments are not propping up and intervening in markets, they should be.

  If central banks are not already “market makers of last resort” then it seems likely that they soon will be and indeed overnight the IMF has called for this.

  Such interventions simply paper over the cracks for a period of time – meanwhile the fire is burning, the structure is crumbling and will ultimately collapse.

  

  A Greek exit from the euro would change everything. The greatest change being simply doubt and fear regarding the outlook for other vulnerable EU nations, EU banks and the EU banking and financial system.

  From that day forward every statement from every EU official will have a risk premium attached to it.

  They will say this and that, but the market will here “maybe” this, “maybe” that. As such the costs of participation in every financial transaction will alter, as the accounting for “what if” scenarios slowly gets priced in.

  This change in risk perception and pricing, rather counterintuitively, is in fact a good longer term development. The markets have become increasingly captive by non elected and elected officials within the world monetary apparatus.

  These ‘hidden hands’ have, and are, over anxious and seek to to quell market volatility and market dislocation in what they believe to be in the interest of the  public good. They believe that market volatility is a bad bad thing – when in fact nothing could be further from the truth.

  It was this same hubris and “super man” mentality that created the first global financial crisis and indeed financial crises throughout history.

  The same mistakes are being made over and over again. Market hubris and official hubris is rife. How apt – Greek gods liked to punish those guilty of being overconfident and arrogant.

  We are seeing this misdiagnosis being played out in the current negotiations between the Troika and the Greek government. Ultimately the effect of a Greek exit could manifest in any number of ways, with  far reaching consequences for our interconnected global capital market with all of its regulatory gaps, opaque credit structures and massive $200 trillion and growing debt burden.

  Short term considerations

  • capital controls and extent of
  • bank collapse and bail-ins
  • credit market contagion
  • Greek euro exit
  • rising government bond yields and interest rates
  • geopolitical considerations and Russian influence

  Long term considerations

  • higher interest rates
  • stock market fall
  • “PIIGS” contagion
  • global contagion?
  • effect on Germany (arguably the greatest Euro benefactor)
  • loss of confidence in ECB, monetary union and euro
  • increase in nationalism
  • makes Brexit more likely?

  Best case outcomes

  • Greek default – ECB blinks and continues liquidity support
  • Greek get a deal to peg debt obligations to growth and spread repayments over the very long term
  • stability returns, bailout countries return to more solid economic growth as interest rates begin to slowly normalise
  • Greece and its new currency start recording significant growth in a post debt overhang world

  Worst case outcomes

  • capital controls across Europe until Greek exit is managed
  • Greek exit in a messy way, euro credit seizes up as collateral bombs go off  – “Lehman II”
  • bail-ins imposed on depositors across world – further devastating depositors, small and medium enterprises and our economies
  • banks and hedge funds smell blood and start rounding on the next weakest member, shorting bonds and local markets, forcing an exit
  • likely Italy, Spain, Ireland, Portugal and in time France targeted in terms of interest rate sensitivity
  • Euro becomes a lame duck currency, all countries start to prepare for an exit orderly or otherwise. New euro launched with exclusively northern European industrial economies
  • collapse of western banking system…for a period of time

  Wealth preservation strategies

  • Speculate by going short euro and long drachma and Greek assets
  • Own USD, NOK, HKD, SGD, CHF in safe banks in safe jurisdictions
  • Diversify cash holdings to non European banks and offshore institutions
  • Own physical precious metals  in safe vaults in safe jurisdictions

  Short term considerations

  Greek banks have haemorrhaged over €30 billion since October. Over €2 billion was withdrawn between Monday and Wednesday and likely as much since then as the talks intensified and the situation worsened this week.

  The problem can only have been exacerbated by an ECB official’s suggestion at a closed door meeting on Thursday – in response to a direct question from Dutch Fin Min Jeroen Dijsselbloem – that the Greek banks would not open on Monday as reported by Reuters.

  The ECB later denied that this was the case but clearly capital controls are on the table. That being said Bloomberg reports that “the Governing Council of the European Central Bank plans to hold an unscheduled call on Friday to discuss Emergency Liquidity Assistance available for Greek lenders, according to two people familiar with the plans”.

  Whether the ECB agrees to raise the ceiling on the ELA is not certain. The leak reported by Reuters suggests that certain parties are happy to provoke bank runs in order to force the hand of the Greek government.

  

  We may soon see capital controls imposed in Greece as depositors are bailed-in to try keep the banks afloat.

  At the start of June the European Commission ordered 11 EU countries to enact the Bank Recovery and Resolution Directive (BRRD) within two months or be hauled before the EU Court of Justice.  EU regulators ordered 11 countries to adopt the new EU deposit bail-in rules.

  Were another serious crisis to materialise with regard to European banks and markets in the coming days on the back of a Greek default it seems likely that emergency legislation would be put in place that would allow bail-ins to take place.

  Whether the ECB provides ELA to save all Greek banks, just the strategically important banks or none at all will likely be decided as much by political factors as financial ones.

  A widespread banking crisis would weaken the resolve of the Tsipras government but would present unforeseeable contagion risks to Europe’s interconnected financial system despite Dijsselbloem’s assurances that the EU is prepared for all eventualities.

  In January, JP Morgan highlighted in a report that exposure to Greek debt among banks in France and Germany is relatively low but warned that peripheral nations – particularly Italy – were at risk of contagion.

  It is unclear if core eurozone banks can absorb losses from Greek exposure but in the short term it would likely lead to a tightening in capital markets as distrust among financial institutions cause them to hold their reserves.

  Italian, Spanish and Portuguese bond yields rose in a very jittery market after a eurozone finance ministers’ meeting ended yesterday with no breakthrough in the deadlocked Greek debt talks.
  Italian, Spanish and Portuguese 10-year yields were five to seven basis points higher at 2.35 percent, 2.34 percent and 3.16 percent, respectively this morning.

  In the short term, government bond yields could surprise and yields decline again. However in the medium and long term, government bond yields are only going to go one way and that is higher with attendant consequences for our $200 trillion in debt saturated world.

  Longer term considerations

  Geopolitical considerations are to the fore and yet rarely considered by most analysts.

  Greece may decide that its interest – painful though it may be in the short term – lies outside of the eurozone. Certainly its experience since the launch of the euro in 2001 has been an unmitigated disaster.

  Between 1960 and 2001 Greece enjoyed more or less constantly improving prosperity. Total production increased 600% in that period – more than double that of Germany. Post-euro Greece’s productivity has plummeted 26%.

  Were it to pull out of the single currency, it would not be without powerful friends in the region. Today, Tsipras is visiting St. Petersburg for a meeting with President Putin where they will sign a non-binding agreement on bringing Russian gas into Europe via Greece.

  The “Turkish Stream” project would see a pipeline from Turkey go through Greece and eventually to Austria via Serbia and Hungary. Russia seeks to bypass Ukraine and to bring NATO member Greece into its sphere of influence would greatly undermine NATO.

  While the Greeks have insisted that they have no intention of availing of Russian financial assistance it is a fact that such assistance has been offered and remains an option.

  The BRICS New Development Bank comes into operation next month.

  Faith in the ECB would be greatly undermined and with it faith in the euro currency. For half of it lifetime the euro has been in crisis. With the exit of Greece it will be apparent that the architects of the euro system may not be omniscient and that the euro is by no means guaranteed a permanent existence.

  Were Greece to exit the euro, wilfully or not, it would lead to surge in nationalism in Europe. We have seen hostility towards Greece being whipped up in sections of the German media and vice versa.

  Among peripheral states there are large swathes of the population who now view the EU as a destructive force in their societies. As mentioned above, Greece was economically successful prior to the launch of the euro.

  Both Spain and Italy were also industrial powerhouses pre-2001. But having to compete with their northern neighbours on an equal currency footing has destroyed their export capacity. In these countries many people believe that austerity has has been foisted upon them to protect a project that has not benefited their societies particularly well.

  In the core of the eurozone there is also a surge in nationalism as taxpayers resent what they see as their subsidising of inefficient and unproductive welfare states. However, Germany has derived enormous benefit from the euro project through its ability to export across Europe to countries whose currencies should be much weaker than its own.

  Germany and the other core nations may ultimately decide to go it alone and establish a new joint currency of the costs begin to outweigh the benefits of the current system. Indeed, plans were drawn up to do just that in 2011.

  Alternatively the terrible experience of the single monetary union may out the German people and elites and indeed other Northern Europeans completely off monetary unions and we may see a reversion to national currencies.

  The scepticism towards the EU displayed by many voters in the UK can only be reinforced as the current fiasco continues to unfold. David Cameron’s promised referendum on Britain leaving the EU will likely receive more support as Europe’s unmanageable problems continue to fester.

  Stock markets, currently levitating on the panglossian narrative that we live in the best of all possible worlds – despite dismal PE ratios and stagnation in real economies around the globe – would likely be jolted from their slumber. With rising rates the ability to prop up markets with practically unlimited QE cash would be greatly impaired.

  The contagion would likely spread to peripheral eurozone nations like Italy, Spain, Ireland and Portugal whose banks are still on life support. The ability of the powers that be to contain the cumulative effect of multiple bank crises on the eurozone core is debatable.

  Wealth preservation strategies

  In the short term the dollar is regarded as a “safe-haven”. So long as the prevailing psychology remains the dollar should provide a degree of protection for those seeking to avoid euro contagion.

  U.S. assets are still extremely popular despite increasingly poor fundamentals.

  Allocations to global equities and bonds should be reduced.

  Cash should be diversified and spread around in different non-European banks and institutions. For high net worth seeking wealth preservation in the form of cash, owning a few of the safer currencies remains advisable. These include the Norwegian krone, Singapore dollar, Hong Kong dollar and the Swiss franc.

  The most effective hedging instrument and safe haven asset remains gold bullion. We advise clients to own physical gold and silver in the safest vaults in the safest jurisdictions in the world.

  Must-read guides:
  Protecting Your Savings In The Coming Bail-In Era

  From Bail-Outs To Bail-Ins: Risks and Ramifications – includes 60 safest banks in the world

  

  
  
  

  

• Meanwhile, Greece Is Quietly Printing Billions Of Euros

  Earlier today we showed why Greece is now literally living on borrowed time. The combined €2.9 billion in ELA cap increases ‘generously’ bestowed upon the flailing Greek banking sector by the ECB last week looks to have been barely enough to keep things from “ending very differently” (to quote Kathimerini) at the ATMs on Friday.

  But perhaps more importantly from a big picture perspective, Greece may have already breached the upper limit of its borrowing base. JPM calculates Greek banks’ eligible collateral at €121 billion (€38 billion in EFSF bonds €8 billion in government securities, and €75 billion in “credit claims”). With Friday’s ELA increase, the country’s total borrowings (that’s OMO plus ELA) amount to some €125 bilion. Why would the ECB allow this? Because it knows the breach will be promptly limited or reversed on Monday, or there will be a deal. 

  So, it is literally “deal or no deal” time, because if JPM is correct and eligible collateral was either exhausted two weeks ago or, in the best case scenario, is right at the limit, capital controls will need to be put in place as early as Tuesday at which point the ATMs will officially stop dispensing freshly-minted euros which, incidentally, brings up an important point. As Barclays notes, during the same period over which Greek banks lost nearly €30 billion in deposits, banknotes in circulation jumped by some €13 billion. In short, because Greeks are increasingly prone to stuffing their euros in mattresses, a large proportion of the deposit flight has come in the form of hard currency withdrawals, meaning the Bank of Greece is forced to (literally) print billions in physical banknotes:

  A large part of the deposit outflows is in the form of banknotes, whose usage has increased significantly since the end of last year (+44%). Indeed, out of a deposit outflow of €29bn (from the end of November 2014 to the end of April 2015), banknotes in circulation in Greece have increased by €13bn.

   

  

  But hard currency printed in excess of NCB quotas (set by the ECB) represents a liability to the rest of Eurosystem and so must be added to Greece’s negative TARGET2 balance to determine the EMU’s total exposure to Greece:

  The amount of banknotes in excess of the quota for Greece (about €27bn) represents a liability of the Central Bank of Greece to the Eurosystem in addition to the net liabilities related to transactions with the other Central Banks in the Eurosystem (Target 2 liabilities). As of the end of April, net liabilities related to the allocation of euro banknotes were €16.2bn and the Target 2 balance was negative by about €99bn. Therefore, the total exposure of the Eurosystem to Greece was around €115bn. This corresponds to the amount of borrowing of Eurosystem liquidity (OMOs + ELA), as shown in Figure 4. Taking the increase in the ELA ceiling as an indication of the deposit outflows/usage of banknotes and the increase in Eurosystem funding, such exposure might have increased to about €125bn currently, we calculate. 

   

  
  

  Of course, given Germany’s massive TARGET2 credit with the ECB, a liability to the Eurosystem is, for all intents and purposes, a liability to Germany:

  

  So we can add the quiet printing of some €13 billion in banknotes to the list of reasons why German FinMin Wolfgang Schaeuble, a growing number of German MPs, and, increasingly, the German people have run completely out of patience with Athens. 

  As for all the Athenians who have recently tapped the ATMs, check your euros. If the serial number starts with a “Y” that means it was printed by the Bank of Greece and you should probably hang on to it because you might soon be able to sell it at a premium to a museum. 

  

  

  
  
  

  

• How Hillary "Identifies"

  White? check. Woman? check. “Poor Progressive”? hhmm….

   

  

   

  Source: Townhall

  

  

  
  
  

  

• Liquidity And Manipulated Prices Are Not An Economy And Never Will Be

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  The Greek drama seems to have reached somewhat of a boundary, with deadlines and credit assistance drawing toward maximums. If this seems more than a little déjà vu that’s because it is an almost exact replay of 2012; all that is missing at this point is another default (debt swap or however it shall be classified). Greek banks have been beset by billions in withdrawals, in turn sending them to the Bank of Greece, loosely backstopped by the ECB, for “liquidity.”

  In broader terms, it has always been liquidity that answers these difficulties. Central banks have little else to offer, but that doesn’t necessarily violate what they are trying to accomplish. In fact, it is an article of monetary faith, neutrality and all that, where liquidity is the answer to these problems. The operative orthodox theory for all of this is that the economy, of true and robust character, is hidden amidst a mountain of irregularity. In the case of Europe, the ECB has decided that banks are the issue as they fail to restore the immense credit function that central bankers believe consistent with typical economic momentum.

  To gain a robust economy, then, requires, as they believe, robust banking and therefore robust liquidity. Working backwards from the 2008 panic, the ECB has been almost exclusively fixated on the liquidity portion in order to jump-start lending. In terms of Greece’s specific problems, that was accompanied by fiscal refiguring born out of intense monetarism, where the national government was “relieved” of massive burdens through what was called a debt swap but was really a default.

  The highlight of the process, and the formal step with which success was briefly claimed, was last year’s floatation of new Greek government debt. It was just fourteen months ago that Greece was selling its issue at a promised yield of 5.25% to 5.50%, around €3 billion euros total of five-year paper. The underwriters took in more than €20 billion in bids, and the deal eventually priced at a yield of just 4.95%!

  Again, that was by intention as Mario Draghi promised in July 2012 that he would use the ECB in whatever capacity to save the euro, taken to mean that he would no longer allow such high yields to clog monetary channels. Greece selling its bond only two years after the largest sovereign default was the high point in the effort. With all that euphoria over once-disowned and disavowed paper surely meant that monetary policy had reached at least Step 2, liquidity into lending, inching tantalizingly close to Step 3 – real recovery through debt.

  

  The illusion lasted perhaps longer than it should have, as that 5-year bond remained priced at a premium into October 2014 (there’s that month again), despite the ECB’s struggles elsewhere to convince the economy to follow its simple monetary packages. Reality has caught up, as “markets” (a term that in this case deserves the scare quotes) realize that liquidity solved exactly nothing except convincing at least €20 billion worth of “investors” that monetary policy actually holds some specific healing capacity.

  At the time the Greek bond was first taking subscriptions, I wrote quite incredulously:

  That is more than astounding given the risks attached. Greek bond yields have been steadily dropping ever since Draghi’s promise, but it strains reason to see new Greek bonds trade to the same yield as that of Hungary, Dominican Republic or even Sri Lanka. All three of those countries hold higher ratings than Greece (though the “big” news is that Moodys might upgrade Greece to less junk status), but far more importantly none of them have defaulted in the past three years. The Greek government managed to do it twice.

  The way things are going, including bond prices and “emergency” liquidity yet again, Greece may yet find a third default in its future. That would mean the ECB, for all its supposed and assumed economic vigor and attention, only managed to accomplish creating €20 billion in Greater Fools that we know of; small miracle, then, that the Greek government did not dare to float far greater debt, especially as current thinking has the chance at that third default around 75%.

  

  NOTE:  the Emergency Liquidity Assistance program (ELA) is aggregated with other monetary programs, classified within a single line item on the ECB’s aggregated view of all its constituent National Central Banks’ (NCB’s) balance sheet; “Other Claims on Euro Area Credit Institutions Denomimated in Euros” as an asset.

  By every measure of what those bond “investors” were expecting, the Greek government and the economy there failed miserably – which is not actually a change from the period leading up to the default. In fact, despite all the immense interference financially from central planners, Greece has exhibited an extraordinary sense of stability of the exact wrong kind. As the Bank of Greece put it just two days ago,

  In late 2014, there were serious indications that the Greek economy had overcome the recession and was returning to positive growth. At the time, the Bank of Greece, as well as all the international organisations, were projecting positive GDP growth in 2015 and a further pick-up in 2016.

  These projections have since been revised downwards, as the latest GDP data point to a sharp slowdown in annual growth and to quarterly contractions of GDP in two consecutive quarters. The deterioration of economic sentiment indicators and financing conditions in the private sector suggest that the slowdown of the economy is likely to accelerate in the second quarter of 2015, putting the economy at risk for a renewed bout of recession.

  In other words, despite all that was done, nothing (nothing) was moved even slightly in the right direction except a bunch of prices predicated on the same assumptions disproven time and again. Liquidity is effective in only a narrow capacity to send economic estimates and asset prices ever-skyward – prices that now only create more problems.

  It would be fittingly tragic if this was all limited to just Greece, but it is rather universal beyond even Europe. This is a failure of orthodox thinking from its most basic premises, including how an economy actually works. If you view the economic world through the concepts incorporated into Milton Friedman’s plucking model and encounter a great financial “shock” that produces a severe recession, including a huge curtailment in credit supply and lending, then it might seem a plausible solution to address only that shock and expect the economy, through restored lending, to return to its prior and healthy trajectory.

  

  If that doesn’t occur, certainly after the passage of five and now six years, that might suggest rethinking the entire premise. But orthodox monetary economics does not allow such evolution. Instead captured by monetary neutrality and Keynesian hysteresis (which is nothing more than an updated, fancy “pump priming”) the “solution” is never to change course but always bigger. The ECB, as other central banks, do greater and greater “liquidity” convinced only of debt (and future debt at that) as the one true answer.

  The ECB cannot even gain Step 2 aside from some minor turns here and there. Overall, as noted last week, lending in Europe is decidedly unbothered no matter what the ECB does or does not do. Despite tremendous influence in the banking system, consistently and perpetually, real economy lending is about as stable as could possibly be; if there is monetary influence in these lending patterns it is remarkably well-hidden. You would think trillions in euros in “stimulus” would at least offer some minor perturbation, but none still exists exactly where it should be and is expected to be.

  

  The Greek case offers quite a relevant view into the world of 21st century monetary alchemy, because that is what it really amounts to. Consistent with the Yellen Doctrine, the ECB conspired to a bubble (even a mini version this time) in order to create the economy that would eventually justify the bubble on an ex post facto basis – liquidity, to prices, to lending, to recovery and normal economy. That places financial factors upside down or backwards, as asset prices are no longer discounting mechanisms but simple (and ineffectve) tools not to recognize what might happen in the near future but rather to actually make it happen (rational expectations).  What is left, however, is the worst of all cases; no recovery, no lending and now just more financial imbalance piled onto the same negative pressures and imbalances that never really went away. The recessionary “shock” in the first place was itself the “solutions” that central banks continue to offer; thus, what they really offer is the condition to make it all still worse.

  Accountability will likely continue to be narrowed to hysteresis terms yet again, meaning that the “experts” will claim that they didn’t do enough to get Sisyphus’s rock over the economic hill. The problem isn’t really Sisyphus or the rock, it is the fact that the hill, the mountain of debt, remains the primary problem and can never be solved by more of the same. What is amazing is how short the attention of “investors” may be, and how they allow themselves to think monetary complexity passes for proficiency or even expertise despite all and continued observation otherwise. The ECB has innumerable programs, theories and mathematical equations, all of which amount to everything I have shown above; nothing.

  

  

  
  
  

  

• So You Think You Are Rich

  The bigger they are…

  

   

  … the harder they fall

  

   

  China’s bubble is bursting with the weakest (fraud) links hit first as margin-loan pressure builds. After rallying well over 500% year-to-date, these 3 stocks (among many) stand out as the biggest losers:

  • Digital Domain Holdings became the latest Hong Kong stock to tumble after surging more than 500 percent in a matter of months, following declines in Hanergy Thin Film Power Group Ltd. and Goldin Financial Holdings
  • Goldin Financial, a broker that provides short-term corporate financing, fell 43% Thursday, wiping out $12 billion of market value
  • Hanergy share price plunge and subsequent indefinite halt dethroned Li Hejun as China’s richest man

  But there is still hope for even the very biggest of them all – the infamous Beijing Baofeng Technologies IPO (up 4,200% in the 55 days after its IPO) – which “pending the disclosure of an important issue” has been halted for 2 weeks now at its record highs.

  

  Is that the trick to not killing a bubble: Halting geverything? If so that is precisely as we predicted in our observation that the entire market has noe become like CYNK.

  So are you rich, if only on paper… or about to get the biggest margin call of your life?

  Charts: Bloomberg

  

  
  
  

  

• Dumb Or Smart Money? Bullish Bets On VIX Highest Since 2008

  Via Dana Lyons' Tumblr,

  There has been an odd trend of late in stock sentiment readings. Despite major averages that are near all-time highs, sentiment has dropped considerably across many of the measures we track. It is true that many of the readings are moving down from historically bullish readings in the beginning of the year. However, some sentiment surveys are actually registering extreme bearish readings even on an absolute level (see these excellent posts from fellow YahooFinance Contributors Ryan Detrick and Joe Fahmy for more analysis and specific examples on this development).

  We are hard-pressed to come up with a satisfying reason for this trend. One possibility is that, in this age of information awareness and distribution, perhaps folks taking part in the sentiment surveys had themselves become aware of the sky-high sentiment and dialed back their enthusiasm – either out of concern for the skewed bullishness or to avoid becoming part a contrarian “dumb money” market top statistic. While there may be something to this theory, there is one problem. It is not only the sentiment surveys that are showing this trend, but real money indicators as well (which we prefer).

  One such example comes from options trading on the S&P 500 Volatility Index, better know as the VIX. As most observers are aware, the VIX tends to rise as the stock market declines. Thus a rising VIX is associated with bad markets. The interesting thing about present conditions in VIX options is that the Put/Call Ratio (using a 21-day average) is at the lowest level since the summer of 2008. That means that there are more bets on a rising VIX versus bets on a falling VIX than we have seen in 7 years. And again, a rising VIX is associated with bad markets.

  

   

  So, again, here is another example of significant levels of fear, despite indices near their highs. We aren’t sure exactly what all is at play here, particularly as this volatility market is already a derivative of the equity market. Therefore, there may be all sorts of different hedging strategies being deployed in coming up with this mix of put and call options. However, the gist remains – folks would not have so many hedging strategies on if they were not willing to bet on rising volatility, and perhaps by extension, falling equity prices. Therefore, on the surface this would appear to be a contrarian bearish sign for the VIX and a bullish sign for equities.

  That said, an asterisk is appropriate when applying this data series as a contrarian sentiment reading. That’s because, unlike most sentiment measures, the track record of the VIX Put/Call Ratio suggests it is not a cut-and-dry contrarian signal. That is, extreme low readings historically have not always come at market lows. In fact, the strange thing about low readings historically is that they have come both at intermediate-term lows and highs.

  For instance, the current 21-day average of the VIX Put/Call Ratio is 0.28 as of June 18. We have to go back to 2008 to find occasions when the Ratio dropped below 0.3. Since the options didn’t start until 2006 and were fairly thin and whippy for the first year, we really only have 2007-2008 to locate potentially reliable readings below 0.3%. The timing and future returns following such readings were actually quite binary.

  Occurrences in January, March and June 2007 and March and July 2008 led to almost no rise in the VIX over the following month. At the same time, the S&P 500 showed essentially zero drawdown over that period, rising 3-7% each time over the next month. Additionally, in January 2008, a near-miss reading of 0.31 led to an instant 4% rise in the S&P 500 without practically any increase in the VIX.

  On the other hand…

  Occurrences in February and July 2007 and May 2008 led to a minimum rise of 70% in the VIX over the next 6 weeks. At the same time, the S&P 500 suffered 6-week drawdowns of -5%, -9% and -13%.

  So you see the interpretation isn’t that straightforward. And obviously since there haven’t been any readings this low since 2008, we cannot judge more contemporary instances. Lowering the bar, we do find relative extreme low readings in July 2009 and February 2010, concurrent with intermediate-term market lows/VIX highs, i.e., dumb money. Then again, the next lowest readings occurred in April and July 2011 and April and September 2013, near short to intermediate-term market tops/VIX lows, i.e., smart money (note: the VIX Put/Call did bottom in the first week of August 2011 along with the market, but it was already extremely low before the market sold off).

  Again – essentially binary and ambiguous market action in the readings’ aftermath. The most recent examples of extreme low readings may or may not settle the debate. Before this week, the three lowest readings in the VIX Put/Call Ratio since 2009 came in January, July and September 2014. And while you may immediately think “the market has gone straight up during that time”, each reading was followed by short-term weakness in the market and short-term strength in the VIX. The S&P 500 saw a 1-month drawdown of -5%, -3% and -7%, respectively, following the three occurrences. And while that may not sound like much weakness (and it isn’t really), relative to what we’ve seen recently, it would probably seem like a crash. Meanwhile, the VIX saw 1-month jumps of 70%, 60% and 150% following the three readings. That’s nothing to sneeze at, even though those jumps were coming from very low levels.

  And ultimately, that may be the simple answer to the best interpretation of an indicator that measures bets on the VIX rising versus bets on the VIX falling: traders are betting that the VIX will rise. Considering the low level in the VIX, it wouldn’t take much of a rise to bring a pay day for these traders, even if it is not accompanied by a concomitant big drop in equities.

  What it means for equities is unknown. It is possible that the “smart” readings in 2007 and 2011 are most relevant considering their location in the market cycle, i.e., after multi-year rallies. We don’t have a good answer for that. We do typically give the benefit of the doubt to more recent readings with regard to such indicators. In that light, perhaps the reading is somewhat of a concern given the 2014 readings that saw weakness shortly after – at least in the short-term. Whether or not that is the best read on the indicator, we should find out fairly soon.

  

  

  
  
  

  

• Getting Hired Now Takes Longer

  By EconMatters

   

  I came across an interesting research by Glassdoor.  According to this new research paper,  the time required for hiring processes has grown dramatically in recent years, both in the U.S. and internationally.  That means it is taking longer for job seekers to get through the interview process and actually land a job.

   

  The chart below shows the average time for hiring processes by country in 2014, which ranged from 22.1 days in Canada to 31.9 days in France.

   

  

   

  Screening Takes Time

  
  The research found one major contributing factor to the longer wait time to get hired has to do with  job interview “screening” methods used by employers.  Each additional “screen”—such as group panel interviews, background check, skills tests—adds significantly to hiring times.

  
  High-Skill Jobs Harder to Match

   

  The longer hiring process could also be a reflection of a more fundamental shift toward more non-routine, more judgement-oriented jobs (high-skilled) making job-match more difficult.

  
  Bureaucracy Takes Its Time 

   

  Of course bureaucracy is certainly a factor contributing to the current lengthy hiring process.  The chart from Bloomberg (based on the same Glassdoor research data set) shows the number of days in the interview process by major U.S. cities.  So not surprisingly Washington DC bureaucrats lead the U.S. city group with the longest waiting days of 34.4 days.

  

   

   

  The Beveridge Curve Shift

   

  Delays in the hiring process could also mean longer period of unemployment in the economy.  This trend could be partly responsible for “a notable shift in the Beveridge Curve” observed by the Federal Reserve Bank of New York.

   

  Chart Source: Bloomberg.com

  The Beveridge Curve depicts the relationship between unemployment rate and job openings. Historically (from 2000 to 2007) there had been a strong relationship between the two, that is, if job openings climbed, the unemployment rate tended to fall.  But then, during the post-2008-crisis recovery, the job openings began to climb, yet unemployment remained sticky high.  This suggests employers are hesitant (or reluctant) to hire even as more workers/positions are actually needed.  

   

  Youthification in Corporate America 

  
  I personally believe the longer hiring process is also a reflection of the current trend of ‘youthification’ in the corporate world.  Worried about the vacuum left by the much hyped mass baby boomer generational retirement, many corporations have accelerated (shortened) the typical leadership role promotion process experienced by the boomer generation, as well as the boomer’s retirement process and timeline in the name of “Workforce Management” or other similar terms.  As a result, many current “hiring managers” are Gen X or Millennials (i.e. Gen Y), and many of them were put in leadership roles pre-maturely.  

   

  Reliance on Group and Tools in Decision-making Process

   

  The Post-boomer Generation grew up with the luxury of many new technologies and tools unavailable to the Boomer Generation, they tend to rely more on tools (e.g., screening) in the decision-making process.  They also tend to be ruthless and like to band together making ‘team decision’ and act as a ‘Group’ favoring technique such as ‘group panel interview’ in the hiring process.  (On a side note: this tendency of banding together also gives the younger generation more advantage, typically over older boomers, in corporate power struggle).

   

  In contrast, since technology was not as advanced and widely available during the Boomer generation, Boomers tend to be more independent thinkers with sharper instinct and less hesitant in making a judgement call decision (Note: this does not necessarily mean poor decision-making without reviewing supporting facts). 

   

  So that means the decision-making process(e.g. filling a vacant position) now takes longer within the new generation of managers, and partly why it is getting more difficult to match non-routine high skill job vacancies (try finding a tool that can reliably screen a job applicant’s intangibles like ‘judgement call’ capability).  

   

  Gen X and Y have been hyped as having superior computer skills (mostly entertainment-related such as mp3, games, but not the more advanced work-related like data-warehouse, ERP systems) than Boomers and many corporate management training classes in the past decade have preached boomer managers to make consideration for the ‘generational gap’ (well, Obama is a Baby Boomer).  The other side of the coin is this has bred a new middle management with the tendency to ‘group think’ and over-standardize everything killing creativity and ‘big-picture view’ within Corporate America.

   

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• "The Collateral Has Run Out" – JPM Warns ECB Will Use Greek "Nuclear Option" If No Monday Deal

  In Athens on Friday, the ATM lines began to form in earnest.

  

  (via Corriere)

  Although estimates vary, Kathimerini, citing Greek banking officials, puts Friday’s deposit outflow at €1.7 billion. If true, that would mark a serious step up from the estimated €1.2 billion that left the banking system on Thursday and serves to underscore just how critical the ECB’s emergency decision to lift the ELA cap by €1.8 billion truly was. “Banks expressed relief following Frankfurt’s reaction, acknowledging that Friday could have ended very differently without a new cash injection,” the Greek daily said, adding that the ECB’s expectation of “a positive outcome in Monday’s meeting”, suggests ELA could be frozen if the stalemate remains after leaders convene the ad hoc summit. Bloomberg has more on the summit:

  Dorothea Lambros stood outside an HSBC branch in central Athens on Friday afternoon, an envelope stuffed with cash in one hand and a 38,000 euro ($43,000) cashier’s check in the other.

   

  She was a few minutes too late to make her deposit at the London-based bank. She was too scared to take her life-savings back to her Greek bank. She worried it wouldn’t survive the weekend.

   

  “I don’t know what happens on Monday,” said Lambros, a 58-year-old government employee.

   

  Nobody does. Every shifting deadline, every last-gasp effort has built up to this: a nation that went to sleep on Friday not knowing what Monday will bring. A deal, or more brinkmanship. Shuttered banks and empty cash machines, or a few more days of euros in their pockets and drachmas in their past – – and maybe their future.

   

  

   

  For Greeks, the fear is that Monday will be deja vu, a return to a past not that distant. Before the euro replaced the drachma in 2002, the Greeks were already a European bête noire, their currency mostly trapped inside their nation, where cash was king and checks a novelty.

   

  Everything comes together on Monday. Greek Prime Minister Alexis Tsipras, back from a visit with Vladimir Putin in St. Petersburg, will spend his weekend coming up with a proposal to take to a Monday showdown with euro-area leaders.

   

  A deal there is key. The bailout agreement that’s kept Greece from defaulting expires June 30. That’s the day Greece owes about 1.5 billion euros to the International Monetary Fund.

   

  Without at least an understanding among the political chiefs, Greek banks will reach the limits of their available collateral for more ECB aid. 

  Indeed, JP Morgan suggests that the central bank may have already shown some leniency in terms of how it treats Greek collateral. Further, analyst Nikolaos Panigirtzoglou and team estimate, based on offshore money market flows, that some €6 billion left Greek banks last week.

  If no agreement is struck on Monday evening that paves the way for further ELA hikes, the ECB may do exactly what we warned on Monday. That is, resort to the “nuclear option” which would, as JPM puts it, make capital controls are “almost inevitable.” Here’s more:

  The escalation of the Greek crisis over the past week has caused an acceleration of Greek bank deposit outflows which in turn increased the likelihood of Greece introducing capital controls as soon as next week if Monday’s Eurozone leaders’ summit on Greece brings no deal. Indeed, our proxy of Greek bank deposit outflows, i.e. the purchases of offshore money market funds by Greek citizens is pointing to a material acceleration this week vs. the previous week.

   

  
  

   

  The €147m invested into offshore money market funds during the first four days of this week is equivalent to €5bn of deposit outflows based on the relationship between the two metrics during April (during April, around €155m was invested in offshore money market funds, which was accompanied by deposit outflows of around €5bn). Assuming a similar outflow pace for Friday brings the estimated deposit outflow for the full week to €6bn. In the previous week (i.e. the week commencing June 8th) around €40m was invested into offshore money market funds, which is equivalent to around €1.6bn of deposit outflows. So this week’s deposit outflows almost quadrupled relative to the previous week. Month-to-date €8bn of deposits has likely left the Greek banking system on our estimates, following €5bn in May and €5bn in April. As a result, the level of household and corporate deposits currently stands at just above €120bn. 

   

  As mentioned above this acceleration in the pace of deposit outflows is raising the chance that the Greek government will be forced to impose restrictions on the withdrawal of deposits if no deal is reached at the Eurozone summit on Monday. This is because Greek banks’ borrowing from the ECB has moved above the €121bn maximum we had previously estimated based on available collateral (€38bn using EFSF as collateral, €8bn using government securities as collateral & €75bn using credit claims as collateral). In particular, by assuming that Greek banks operate at c €1-2bn below the ELA limit as a buffer, we estimate that their current borrowing is €125bn. This is based on the ECB raising its ELA limit to €86bn on Friday this week from €84bn on Wednesday.  

  Here is the punchline: when the ECB hiked Greek ELA by €1.8 bilion in its Friday emergency meeting (an amount that was promptly soaked up by the €1,7 billion in Greek bank runs on Friday), it may have done so in breach of the Greek “borrowing base” because, according to JPM, with total ECB borrowings of €125, this means that Greece is now €4 billion above its maximum eligible collateral. The ECB surely knows this, and has breached its own borrowing base calculation for one of two reasons: because it knows the breach will be promptly limited or reversed on Monday, or there will be a deal. In other words, Greece is now officially living on borrowed time:

  This €125bn of borrowing from the ECB is €4bn above our estimated maximum borrowing of €121bn, suggesting that the ECB has already showed flexibility with respect to the collateral constraints Greek banks are facing. We argued before that the ECB has the flexibility to adjust haircuts to allow Greek banks to borrow more from the Bank of Greece for a given amount of collateral. It can also start accepting government guaranteed bank bonds as collateral despite the ECB having rejected these bonds before as a source of acceptable collateral. Greek banks have been rolling over government guaranteed bank paper since March. For example Greek banks rolled over €33bn of government guaranteed bank debt over the past three months. However, we doubt the ECB will ever accept large amounts of government guaranteed bank debt, effectively of what it considers as collateral made “out of thin air”. And if no agreement is reached on Monday, then the ECB will have little reason to show further flexibility and it will likely freeze its ELA limit on Greek banks. As a result capital controls will become almost inevitable after Monday. 

  All of this is now moot: as we explained previously, for the Greek banks it is now game over (really, the culmination of a 5 year process whose outcome was clear to all involved) and the only question is what brings the Greek financial system down: whether it is a liquidity implosion as a result of a bank run which one fails to see how even a “last minute deal”, or capital controls for that matter, can halt, or a slow burning solvency hit as Greek non-performing loans are now greater than those of Cyrpus were at the time when the Cypriot capital controls were imposed. As Bloomberg calculated last week, just the NPL losses are big enough now to wipe out the Big 4 Greek banks tangible capital.

  
  

  JPM, for now, focuses on the liquidity aspect:

  The deposit outflows from Greek banks show how dramatic the reversal of Greece’s liquidity position has been over the past six months. The €8bn that left the Greek banking system month-to-date has brought the cumulative deposit withdrawal to €44bn since last December. This €44bn has more than reversed the €14bn that had entered the Greek banking system between June 2012 and November 2014 (Figure 2). The €117bn of deposits lost cumulatively since the end of 2009 has brought the bank deposit to GDP ratio for Greece to 66%. This is well below the Eurozone average of 94%.

   

  
  

  And with more than three-quarters of the nearly €500 billion in outstanding foreign claims on Greece concentrated among foreign official institutions, any “contagion” will come will come not from the financial impact of Grexit, but from the psychological impact as the ECB’s countless lies of “political capital” and “irreversible union” crash like the European house of cards.

  Would a Greek exit make the Eurozone look “healthier” as problem countries that do not obey rules are ousted? Or would markets rather question the ability of the Eurozone to cope with a bigger problem/country in the future if they cannot deal with a small problem/country such as Greece? Would a Greek exit make the Eurozone more stable by fostering more fiscal integration and debt mutualization over time? Or would the large losses from a Greek exit rather make creditor nations even more reluctant to proceed with much needed debt mutualization and fiscal transfers in the future? Would a Greece exit, and the punishment of Syriza as an unconventional political party, reduce the popularity of euroskeptic and unconventional political forces in Europe, as Greece becomes an example for other populations to avoid? Or would a Greek exit and the punishment of a country that refused to succumb to neverending austerity rather demonstrate the lack of flexibility, solidarity and cooperation giving more ground to euroskeptic parties across Europe?

  Again we see that the entire world is now wise to the game the troika is playing. This isn’t about Greece, it’s about Spain and Italy or any other “bigger” problem countries whose voters elect “euroskeptic” politicians. As a reminder, if and when the Greek problem shifts to other PIIG nations, then it will be truly a time to panic:
  

  

   

  So much as US-Russian relations are, to quote Kremlin spokesman Dmitry Peskov, “sacrificed on the altar of election campaigns”, so too are relations between Greece and its European “partners” sacrificed for political aims. In the end, the entire Greek tragicomedy comes back to the simple fact that a currency union with no fiscal union is no union at all and will likely be nearly impossible to sustain. We’ll leave you with the following quote from Alexandre Lamfalussy, BIS veteran, first President of the EMI (the ECB before the ECB existed), and the “Father of the Euro”:

  “It would seem to me very strange if we did not insist on the need to make appropriate arrangements that would allow for the the gradual emergence and the full operation once the EMU is completed of a community-wide macroeconomic fiscal policy which would be the natural compliment to the common monetary policy of the community.”

  

  

  
  
  

  

• All The World's Investable Assets In Context

  With central bank credibility suddenly on the line once again, following both the Fed’s June rate hike punt (so it doesn’t disturb “data-dependent” stocks), and with a possible imminent Greek default and Grexit, which will crush the ECB’s “political capital” and “irreversible union” propaganda, it is time once again to check what are the safe assets in a world in which nearly one quadrillion in “paper wealth” exists solely due to faith in solvent counterparties, a faith which has been bought by the central banks at a cost of €22 trillion so far, and which is rising exponentially with every passing year.

  For the answer, we go to the latest letter by Elliott’s Paul Singer which lays out the “size of global markets” just to put it all in perspective.

  We decided to do a little research to find out the size of different investable asset classes globally, to try to get some color on the money flows in this extraordinary period. The data is from various dates from 2013 to 2014, but the differences don’t matter much.

   

  Over-the-Counter derivatives, notional amounts: $692 trillion at year-end 2014, per the BIS. For comparison, this figure was $72 trillion in 1998.

   

  Global real estate: $180 trillion, according to global real-estate services provider Savills.

   

  Global debt market, both securities and other forms of debt: $161
  trillion at year-end 2014, per the Institute for International Finance’s
  Capital Markets Monitor. According to the Bank of International
  Settlements (BIS), debt securities make up $95 trillion of this total.

   

  Global equities: $64 trillion, per the World Federation of Exchanges.

   

  Global M1 money supply: $24 trillion at year-end 2013, per the World Bank.

   

  Gold: $6.8 trillion at year-end 2013, according to the Thompson Reuters GFMS Gold Survey.

  Which, of course, is just another way of showing the famous inverted pyramid of John Exter, himself a former Fed official.

  

  

  

  
  
  

  

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