Today’s News June 26, 2015

• "Blood On The Streets": Chinese 'Nasdaq' Crashes Most On Record, Morgan Stanley Warns "Don't Buy This Dip"

  China's "Nasdaq" – the 90% small-cap tech-firm dominated CHINEXT is down 8.3% intraday – its biggest single-day loss ever… it is now down 27% from its highs!

  

   

  At the end of the morning session, there is blood on the streets of Shanghai and Shenzhen…

  

   

  *  *  *

  And this is what we noted earlier…

  Is it time to step in and buy the dip in Chinese mainland shares after last week’s harrowing 13% decline on the SHCOMP? Absolutely not, Morgan Stanley says.

  Beijing is fighting desperately to keep the country’s stock market miracle alive, as China needs a distraction to deflect attention from the flagging economy and bursting real estate bubble. But aggressive policy rate cuts and an abrupt 180 on LGVF financing for local government projects are working at cross purposes with efforts to deleverage the economy (which is laboring under a $28 trillion debt load) which include allowing for more defaults, reining in shadow financing, and restructuring a local government debt pile that amounts to 35% of GDP. 

  In addition to contradictory policy decisions, Beijing is also struggling to reconcile slumping exports with accelerating capital outflows, a combination which makes currency devaluation both necessary and impossible at the same time. 

  In this context, it’s easy to see why a stock market collapse would be a particularly unwelcome event and until last week, the music was still playing thanks to anticipation surrounding A share inclusion in FTSE and MSCI EM benchmark indices. Now, with China’s millions of newly-minted day traders having recently discovered that stocks can go down as well as up, and with a contraction of margin financing via umbrella trusts beginning to weigh, there are renewed questions about the sustainability of the rally. Here’s Morgan Stanley with more:

  Our stance on China A shares is that this is probably not a dip to buy. In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and Chinext has now taken place. We remain concerned over four factors: a) increased equity supply, b) continued weak earnings growth in the context of economic deceleration, c) high valuations, and d) very high margin debt to free float market capitalization. Our Shanghai Composite Index EPS forecasts for 2015 and 2016 are significantly lower than consensus (5% vs. 9% for 2015, and 8% vs. 16% for 2016). 

   

  We set a new 12-month Target Price range for Shanghai Composite of 3,250-4,600. This range is -30% to -2% below the current level of the index (4,690 as of June 24 close). Our base case EPS integer forecast for Shanghai for June 2016 is 259 versus consensus' 279 (7% lower). 

  

   

  We forecast 5% base case EPS growth in 2015 and 8% in 2016 for the Shanghai-A index, which is significantly lower than the current I/B/E/S consensus numbers of 9% for 2015 and 16% for 2016. Recent earnings growth trends continue to be poor. Trailing EPS y-o-y growth rate for the Shanghai Composite Index in June has dropped to -1.3% from 7.3% a year ago. For the Shenzhen Composite Index, yoy growth has dropped to 6.8% from 11.5% a year ago. This poor momentum in EPS in a forecast continued weak economy is the primary reason why we have modeled for below-consensus EPS growth.

   

  In summary, we project that China's economy will continue to struggle over the next 12 months as it transitions towards consumption- and services-led growth in the face of the legacy of the rapid build-up in leverage in recent years and significant excess capacity in the 'old economy' sectors. As a result, our base case June 2016 12-month EPS forecast is 259, 7% lower than the consensus number of 279. 

   

  

   

  We have often heard in recent months that the Chinese authorities would not allow a market decline as we are now forecasting. The implied move from the peak on June 12 – if that is the peak – to the lower end of our new Target Price range for mid-2016 would represent a decline of 37%. Certainly, it is true that the Chinese authorities have been more vocal in their support for the development of the market in this cycle than in previous cycles, where major declines occurred within one year after the peak. However, our general view is that governments are not able to exert direct control over stock market behaviour, in particular where trading volumes, valuations and margin leverage are as stretched, as they are now in China. For us, ultimately this argument against a sustained bear phase for China A shares over the next 12 months sounds almost as dubious as what we were hearing in late 2007. Then, it was frequently argued that the Chinese authorities would not let the A share equity markets decline before the major international prestige event of the Beijing Olympics in August 2008. The Shanghai Composite fell by 57% from the peak in October 2007 to the opening days of the Beijing Olympics.

  And sure enough, based on CSI-300 futures, China is not seeing any bounce whatsoever after yesterday continued crash…

  

   

  With cash marketsdown sharply now they are open…

  

   

  • *SHANGHAI COMPOSITE SLUMPS 3.5% AT OPEN

  With CHINEXT in a bear market – they are trying something else:

  • *HIGH-TECH COS. ACCOUNT FOR ABOUT 90% OF CHINEXT FIRMS: XIAO
  • *CHINA TO START EQUITY CROWDFUNDING TRIAL: XIAO GANG

  and the rest of Chinese stocks in correction at best, one wonders if the PBOC will stand idly by as the bubble they unleashed crashes and burns bringing down most of rural China's wealth with it…

  

  

  
  
  

  

• Putin Unexpectedly Calls Obama: What Did They Talk About?

  Nearly a year since the last phone call between Obama and Putin, most of which happened at the request of the US president to provide sound-ops for the US media as part of the US “pacifist” intervention in the Ukraine civil war instigated by the US State Department, earlier today in an unexpected development, it was Putin who made an impromptu phone call to Obama.

  This is what the Kremlin stated was the official purpose of Putin’s phone call:

  Vladimir Putin had a telephone conversation with President of the United States of America Barack Obama.

   

  In particular, the two leaders discussed the Ukrainian crisis and the fulfilment of the Minsk Agreements. The Presidents agreed that US Assistant Secretary of State Victoria Nuland and Russian Deputy Foreign Minister Grigory Karasin will be in contact to discuss implementation of these agreements.

  Significant attention was given during the discussion to a set of issues pertaining to fighting terrorism, particularly the spread of influence by the “Islamic State” group in the Middle East. Vladimir Putin and Barack Obama agreed to instruct Russian Foreign Minister Sergei Lavrov and US Secretary of State John Kerry to hold a meeting to discuss this issue.

   

  In addition, the presidents of Russia and the US had an extensive discussion of current issues in bilateral relations. They also engaged in a detailed exchange of opinions concerning the situation in Syria and touched on settling the issue of the Iranian nuclear programme.

  So why really did Putin call Obama?

  The underlying reason may well have to do with what we discussed three weeks ago in “The Noose Around Syria’s Assad Tightens” a post which we left off with two rhetorical questions: i) what is the maximum pain level for Russia, which has the greatest vested in interest in preserving the Assad regime in place, and when does Putin finally get involved, and ii) how.

  Perhaps Putin gave an answer on i) or ii), or both, to Obama in the phone call. Curiously, speaking of US support for ISIS as a front to topple Assad, just a few hours before Putin’s phone call, the WSJ reported an even more outlandish conspiracy theory:

  In a tent city under a highway overpass in Baghdad, refugees from Iraq’s Sunni province of Anbar were unanimous about whom to blame for their misery.

   

  “I hold Americans responsible for destroying Anbar,” said former policeman Wassem Khaled, whose home was taken over by Islamic State, or ISIS, after the Iraqi army fled from Anbar’s provincial capital of Ramadi last month.

   

  “We all know that America is providing ISIS with weapons and food, and that it is because of American backing that they have become so strong,” added Abbas Hashem, a 50-year-old who also escaped from Ramadi and now lives in the makeshift Baghdad camp that is only occasionally supplied with water.

   

  Such conspiracy theories about America’s support for Islamic State are outlandish, no doubt. But they are so widespread that they now represent a political reality with real-world consequences—making it harder for the U.S. and allies to cobble together Iraqi forces that could regain the country’s Sunni heartland from Islamic State’s murderous rule one day.

  Outlandish, sure. But when is the last time the US supported a local murderous insurgency just to achieve some ulterior regime-change model. We ask, of course, rhetorically.

  So with that in mind, could the real conversation between Putin and Obama have been a simple quid-pro-quo of the sort: you let us keep Assad, and we won’t bail out Greece jointly with China and plant a Russian naval base in Piraeus, right next to the brand new Chinese military base, smack in the middle of a NATO country, leading to the biggest diplomatic headache for a US administration since deciding how to pass of a vial full of innocuous white powder as a weapon of mass destruction and a pretext to invade Iraq in the middle of the UN assembly.

  

  

  

  
  
  

  

• The Biggest Threat To Chinese Stocks: "Shadow Lending" Crackdown

  For a few days last week, Chinese equity investors discovered that stocks can go down as well as up.

  That likely came as a surprise to the many millions of newly-minted, semi-literate day traders who have entered the market in droves this year helping to fuel one of the most monumental equity rallies in recent memory. As documented here, and subsequently everywhere else, margin debt has played an outsized role in supercharging Chinese shares. 

  

  As you can see, China’s margin loan balance sits at around CNY2.2 trillion, and while that’s certainly impressive, there’s every reason to believe that at least another CNY500 billion in margin lending has been funneled into the Chinese stock market via the country’s shadow banking complex.

  Essentially, brokerages are only allowed to facilitate margin trading for investors whose account balances total at least CNY500K, and even then, traders can only lever up 2X. Clearly that’s no fun, so brokerages naturally looked for ways to skirt the rules. Umbrella trusts offered a way around the restrictions and while the mechanics can be made to sound complex, the idea is actually quite simple. An umbrella trust is set up like a CDO. The senior tranche is sold by banks to clients who receive a fixed payout (like a coupon payment), only instead of CDS premiums (in the case of a synthetic structure) or cash flows (from a cash structure), the ‘coupon’ payments are generated by equity investments in the subordinated tranches, which are used by brokerages to skirt margin restrictions. In other words, the guys holding the senior tranches are financing the stock trades of the guys in the junior tranches (this is probably a horrible idea for any number of reasons, but we’ll save that for another day). 

  Back in April, China cracked down on brokerages’ ability to tap umbrella trusts and now, some suggest restrictions on the shadow banking complex’s ability to finance leveraged equity trading are putting pressure on Chinese stocks. FT has more:

  China’s shadow banks, increasingly wary of lending into a slowing economy, have turned to the stock market, fuelling a surge in unregulated margin lending that has driven the market’s dizzying gains over the past year.

   

  Now regulators are cracking down on shadow lending to stock investors, a campaign analysts say is partly to blame for last week’s 13 per cent fall in the Shanghai Composite Index — the largest weekly drop since the global financial crisis in 2008.

   

  “The price of funds has increased, the flow has shrunk, and transaction structures are getting more complicated,” says a Chongqing-based shadow banker who provides grey-market loans to stock investors.

   

  “We’re no longer in a growth period. It’s more like, feed the addiction until you die, earn fast money. No one treats this as their main career.”

   

  In the murky world of grey-market margin lending.. few rules apply. Leverage can reach 5:1 or higher, and there are no limits on which shares investors can bet on.

   

  The money for these leveraged bets comes mainly from wealth management products sold by banks and trust companies..

   

  Traditional WMPs are backed by credit assets such as bonds, loans and money-market instruments. Ultimately much of the funds have flowed to property developers and local government infrastructure projects. 

   

  But with China’s property market suffering a slowdown and the central government focused on curbing the rapid run-up in local-government debt, this form of shadow banking has receded. Meanwhile, monetary loosening has fuelled an equity boom, attracting WMP funds into the market.

   

  “The flourishing of financial markets has caused ‘ersatz fixed income’ products that invest in secondary markets to become the preferred target for wealth management funds.”

   

  There is no reliable data on “umbrella trusts” — the most prevalent structure — but Haitong estimates that between Rmb500bn and Rmb1tn in margin lending from trust companies has flowed into the stock market.

   

  With a touch of financial alchemy, trusts transform an equity investment into a structured product that yields a fixed return — that is, unless something goes wrong.

   

  In the case of umbrella trusts, banks purchase the senior tranche, which guarantees a fixed return. They then slice up this tranche and distribute it to clients as WMPs. 

   

  Hedge funds, brokerages and other institutions subscribe to the subordinate tranche, which absorbs the first losses from stock investments but also enjoys all profits once the senior tranche holders have received their fixed return.  

   

  Subordinate-tranche investors are effectively borrowing money from senior tranche-holders to make leveraged stock bets. The interest that subordinate tranche-holders pay on the margin loans comprises the fixed returns paid to the senior tranche.

   

  With the flow of margin finance now slowing, investors can no longer rely on flush liquidity to drive the market.

  It’s not entirely clear which is worse, the fact that between CNY500 billion and CNY1 trillion in margin trading is being conducted through a mutant CDO structure that sounds like it could have walked out of some nightmare a sellside risk manager had after a long night of drinking or the fact that there really isn’t any way to accurately assess what portion of Chinese banks’ off-balance sheet credit risk (which amounts to as much as 40% of total credit risk) is somehow connected to these vehicles. 

  Trade accordingly.

  *  *  *

  For all the structured credit fans out there, we’ll leave you with the following clip which sums up how we feel about using depositors’ money to fund hundreds of billions in retail margin trading in Chinese brokerage accounts by chanelling cash through a CDO that’s not really a CDO:

  

  

  
  
  

  

• The Pentagon Goes Nuclear On Russia

  Authored by Pepe Escobar, originally posted at RT.com,

  We all remember how, in early June, President Putin announced that Russia would deploy more than 40 new ICBMs “able to overcome even the most technically advanced anti-missile defense systems.”

  Oh dear; the Pentagon and their European minions have been freaking out on overdrive ever since.

  First was NATO Secretary-General, Norwegian figurehead Jens Stoltenberg, who condemned it as “nuclear saber rattling.”

  Then there’s Lt. Gen. Stephen Wilson, the head of US Global Air Strike Command – as in the man responsible for US ICBMs and nuclear bombers – at a recent briefing in London; “[They’ve] annexed a country, changing international borders, raising rhetoric unlike we’ve heard since the cold war times…”

  That set up the stage for the required Nazi parallel; “Some of the actions by Russia recently we haven’t seen since the 1930s, when whole countries were annexed and borders were changed by decree.”

  At His Masters Voice’s command, the EU duly extended economic sanctions against Russia.And right on cue, Pentagon supremo Ashton Carter, out of Berlin, declared that NATO must stand up against – what else – “Russian aggression” and “their attempts to re-establish a Soviet-era sphere of influence.”

  Bets are off on what this huffin’ and puffin’ is all about. It could be about Russia daring to build a whole country close to so many NATO bases. It could be about a bunch of nutters itching to start a war on European soil to ultimately “liberate” all that precious oil, gas and minerals from Russia and the Central Asian “stans”.

  Unfortunately, the whole thing is deadly serious.

  Get your tickets for the next NATO movie

  Vast desolate tracts of US ‘Think Tankland’ at least admit that this is partly about the exceptionalist imperative to prevent “the rise of a hegemon in Eurasia.” Well, they’re not only “partly” but totally wrong, because for Russia – and China – the name of the game is Eurasia integration through trade and commerce.

  That condemns the “pivoting to Asia”, for the moment, to the rhetorical dustbin. For the self-described “Don’t Do Stupid Stuff” Obama administration – and the Pentagon – the name of the game is to solidify a New Iron Curtain from the Baltics to the Black Sea and cut off Russia from Europe.

  So it’s no surprise that in early June, the Pentagon’s Office of Net Assessment, in itself a think tank, hired another think tank, the Center for European Policy Analysis (CEPA) to churn out – what else – a bunch of war games.

  CEPA happens to be directed by A. Wess Mitchell, a former adviser to former Republican presidential candidate and master of vapidity Mitt Romney. Mitchell – who sounds like he flunked history in third grade – qualifies Russia as a new Carthage; “a sullen, punitive power determined to wage a vengeful foreign policy to overturn the system that it blames for the loss of its former greatness.”

  Russian intelligence is very much aware of all these US maneuvers.So it’s absolutely no wonder Putin keeps coming back to NATO’s obsession in building a missile defense system in Europe right at Russia’s western borderlands; “It is NATO that is moving towards our border and we aren’t moving anywhere.”

  NATO, meanwhile, gets ready for its next super production; Trident Juncture 2015, the largest NATO exercise after the end of the Cold War, to happen in Italy, Spain and Portugal from September 28 to November 6, with land, air and naval and special forces units of 33 countries (28 NATO plus five allies).

  NATO spins it as a “high visibility and credibility” show testing its “Response Force” of 30,000 troops. And this is not only about Russia, or as a rehearsal in pre-positioning enough heavy weapons for 5,000 soldiers in Lithuania, Latvia, Estonia, Poland, Romania, Bulgaria and Hungary.

  It’s also about Africa, and the symbiosis NATO/AFRICOM (remember the “liberation” of Libya?) NATO Supreme Commander Gen. Breedhate, sorry, Breedlove, bragged, on the record, that, “the members of NATO will play a big role in North Africa, the Sahel and sub-Saharan Africa.”

  Feel the love of my S-500

  As far as Russia is concerned, all this warmongering hysteria is pathetic.

  Facts: under Putin, Russia has actively rebuilt its strategic nuclear missile force. The stars of the show are the Topol M – an ICBM which zooms by at 16,000 miles an hour – and the S-500 defensive missile system, which zooms by at 15,400 miles an hour and effectively seals off Russian airspace.

  Russian intelligence identified as early as the dawn of the new millennium that the weapons of the future would be missiles; not clumsy aircraft carriers or a surface fleet which can easily be smashed by top-class missiles (as the new SS-NX-26 anti-ship, Yakhont missile which zooms by at 2.9 Mach).

  The Pentagon knows it – but hubris dictates the “we’re invincible” posing. No, you’re not invincible; silent Russian submarines offshore the US could engage in a nuclear turkey shoot knocking out every major American city in a few minutes with total impunity. In only fifteen years Russia has jumped two generations ahead of the US on missiles and may be on the verge of a first strike nuclear capacity, while the US can’t retaliate because the Pentagon can’t get through the S-500s.

  Public opinion in the US doesn’t know any of this – so what’s left is posturing. We’re back to the Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey spinning the US is “considering” deploying land-based missiles – with nuclear warheads – that could reach Russian cities across Eurasia.

  This does not even qualify as a childish – and unbelievably dangerous – provocation. These missiles will be useless. The US has submarine-based missiles available, and they cannot get through Russian defenses either; the S-500s will do the job. So if the Pentagon and NATO really want war, wait until next year or 2017 max – with ‘The Hillarator’ or Jeb “I’m not Bush” at the White House – when the S-500 deployment will be completed.

   

  

  A Topol intercontinental ballistic missile launcher with a transport. (RIA Novosti / Ramil Sitdikov)

  Putin knows extremely well how dangerous is this posturing. That’s why he emphasized that the US unilateral withdrawal from the 1972 Anti-Ballistic Missile (ABM) Treaty – which established that neither the US nor the USSR would try to neutralize each other’s nuclear deterrence by building an anti-missile shield – is pushing the world towards a new Cold War; “This in fact pushes us to a new round of the arms race, because it changes the global security system.”

  Washington unilaterally withdrew from the ABM Treaty during the “axis of evil” Dubya era, in 2002. The pretext was that the US needed “protection” from rogue states, at the time identified as Iran and North Korea. The fact is this cleared the Pentagon to build a global anti-missile system directed against – who else – the only true “threats” against the hegemon; BRICS members Russia and China.

  Terminator Ash on a roll

  Under neocon Ash Carter – compared to whom Donald Rumsfeld barely qualifies as Cinderella – the Pentagon wants to go Terminator all the way.

  “Options” being considered against Russia are an offensive missile shield across Europe to shoot Russian missiles (totally useless against the Topol M); a “counterforce” (in ‘Pentagonese’) that implies pre-emptive non-nuclear strikes against Russian military sites; and “countervailing strike capabilities”, which in ‘Pentagonese’ means pre-emptive deployment of nuclear missiles against targets – and cities – inside Russia.

  So we’re talking about the unthinkable here; a pre-emptive nuclear strike against Russia. There’s only one scenario if that happens; a full-scale nuclear war. The mere fact that this is considered an “option on the table” reveals everything one needs to know about what passes for “foreign policy” in the heart of the Indispensable Nation.

  In Iraq, a pre-emptive strike – although non-nuclear – was “authorized” based on non-existent weapons of mass destruction (WMDs). So the whole planet knows the ‘Empire of Chaos’ is capable of fabricating any pretext. In the case of Russia, the Pentagon may play ‘Ultimate Terminator’ all they want, but it won't be a walk in the park; after all in less than two years Russian airspace will be effectively sealed by the S-500s.

  Beware of the ‘Shock and Awe’ you want. Still, no chance the Pentagon will take Putin seriously (Ash Carter, on the record, is a sucker for regime change.) Recently, the Russian President couldn’t be more explicit; “This is no dialogue. It's an ultimatum. Don't speak the language of ultimatums with us.”

  MAD – Mutually Assured Destruction – is way over. It kept a somewhat uneasy peace during seven decades of Cold War. Cold War 2.0 is as hardcore as it gets. And with all those Breedhate Strangeloves on the loose, nuclear madness is now at five seconds to midnight.

  

  

  
  
  

  

• How Much Is $160 Of Silver Worth To The Average American? (Hint: Less Than $10)

  Seemingly confirming the national new normal, dumbing-down-ness, the following clip shows Americans have absolutely no idea about the value of precious metals. When asked if they would like to purchase a 10oz silver bar (worth $160) for just ten bucks, every single one refused… one even refused to handover a half-drunk Starbucks coffee for the silver bar.

   

  Mark Dice does it again…

   

  Exposing the staggering ignorance of the average American even more, the clip was filmed right in front of a  coin shop.

  We wonder what the same interviews would be like in China or India or Russia?
  

  

  

  
  
  

  

• China To Philippines: Stop "Roping In" Other Countries In Sea Standoff

  Three weeks ago, Philippine President Benigno Aquino “went there” when, in a speech to Japanese lawmakers, the self-proclaimed “amateur student of history” compared China’s land reclamation efforts in the South China Sea to the Nazi occupation of Czechoslovakia.

  

  This prompted Beijing to advise “certain people” in the Philippines to “repent” and “stop their provocations.”

  Aquino would do neither. 

  Shortly thereafter, the Philippines aired a documentary entitled “Maritime Rights” designed to drum up domestic support for the government’s tough stance towards Beijing’s activities in the disputed waters around the Spratlys. 

  Since then, China has “completed” its dredging efforts and although the PLA admits it will use the new islands for military purposes, a new propaganda campaign has been launched, designed to show that despite attempts by the US and its regional allies to cast aspersions, island life in the Spratlys is all about girls, gardening, puppies, and pigs. 

  Apparently that wasn’t enough to calm Aquino’s fears of an impending Chinese blitzkrieg because as Reuters reports, tempers are once again flaring between Beijing and Manila with China accusing the Philippines of “roping” other countries in and attempting to incite a war. Here’s more: 

  China’s military on Thursday accused the Philippines of trying to “rope in” other countries to the dispute over ownership of the South China Sea and stir regional tension after Japan joined a military drill with the Philippines.

   

  According to Japanese and Philippine officials, a Japanese surveillance aircraft, with three Filipino guest crew members, this week flew at 5,000 feet (1,524 m) above the edge of Reed Bank, an energy-rich area that is claimed by both China and the Philippines. It was accompanied by a smaller Philippine patrol aircraft.

   

  Chinese Defence Ministry spokesman Yang Yujun, asked about the exercises, said that bilateral military cooperation between countries should benefit regional peace and security and not harm the interests of third parties.

   

  “Certain countries are roping in countries from outside the region to get involved in the South China Sea issue, putting on a big show of force, deliberately exaggerating the tense atmosphere in the region,” he told a monthly news briefing.

   

  “This way of doing things will not have a beneficial effect on the situation in the South China Sea.”

  Earlier this week, Japan and the US joined the Philippines in conducting military drills near the disputed waters where China and others have conducted land reclamation projects. Here’s Bloomberg:

  The U.S. and Japan are conducting separate military drills with the Philippines near the disputed South China Sea, signaling support for the country as China builds out reclaimed reefs in the waters.

   

  The annual CARAT Philippines joint exercise started Monday off the east coast of Palawan island and will run until June 26, according to U.S. Navy spokesman Arlo Abrahamson. The Philippine and Japanese navies are holding drills around the same island through June 27, Japan’s Maritime Self-Defense Force said last week.

   

  The drill includes a sea phase with the littoral combat ship USS Fort Worth, diving and salvage ship USNS Safeguard and a P-3 Orion surveillance aircraft and at least one Philippine frigate, according to the U.S. Navy. It’s the first time a littoral combat ship has taken part in CARAT Philippines.

   

  Japan’s exercises with the Philippines will take place adjacent to the Spratly Islands, where China has created more than 2,000 acres of land in waters also claimed by the Philippines, Vietnam, Brunei, Taiwan and Malaysia. Japan will send a P-3C anti-submarine, maritime surveillance aircraft and 20 personnel. 

   

  “The intent of CARAT is enhancing capabilities, navy-to-navy capabilities, increasing interoperability,” Rear Admiral Leopoldo Alano, commander of the Philippine Fleet, told reporters on Monday on Palawan. “These can be used both in wartime missions or missions other than war.”

  The war games “should not be taken as an affront to any other and are an expression of cooperation and learning from all those involved,” an Aquino spokesperson said. 

  That’s good to know, because when it comes to learning how to keep a tense situation from escalating into a full-blown military conflict, there’s surely no better teacher than the US.

  

  

  
  
  

  

• Why Do We Ignore The Obvious?

  Submitted by Zen Gardner via ZenGardner.com,

  I have a hard time with people not being willing to recognize what’s obviously in front of their faces. It’s a voluntary mind game people play with themselves to justify whatever it is they think they want. This is massively exacerbated by an array of social engineering tactics, many of which are to create the very mind sets and desires people so adamantly defend.

  But that’s no excuse for a lack of simple conscious recognition and frankly makes absolutely no sense.

  We can’t blame these manipulators for everything. Ultimately we all have free choice. Plainly seeing what’s right in front of our noses, no matter how well sold or disguised, is our human responsibility. That people would relinquish this innate right and capability totally escapes me.

  The Handwriting On the Wall

  Actually, it’s much more obvious than even that. Pointless wars costing millions of innocent lives, poisoned food, air and water, demolished resources, manipulated economies run by elitist bankers who nonchalantly lend money with conditions for “interest”, corporate profiteering at any cost to humanity, a medical system built on sickness instead of health, media mindmush poisoning children and adults alike, draconian clampdowns for any reason, and on and on.

  Why is this not obvious to people that something is seriously wrong, and clearly intended to be just the way it is? Do they really think it’s gonna iron itself out, especially with clearly psychopathic power mad corrupt maniacs in charge?

  That’s what they’ll tell you. “Give it time, we’re just going through a hiccup. Everything works out…” yada yada. Why? Because that’s what they want to believe. And the constructed world system is waiting with open arms to reinforce that insanity. And “Heck, if millions of others feel the same as me I can’t possibly be wrong.”

  Fear of Drawing Conclusions

  That’s pretty much the bottom line. Acceptance for seeming security. However, if even one of these inroads of control vectors becomes clear to people then their whole world threatens to turn upside down. When two or more start appearing then the discomfort becomes quite intense, and that’s when the decision takes place. Either they keep pursuing this line of awakened thought or they shut it down.

  It’s all about comfort. And what a deceptive thing that is! Call it sleepwalking to oblivion or what have you, it’s endemic to today’s dumbed-down society. This is why the education system was their primary target since way back, conditioning humanity from childhood to not think analytically but to simply repeat whatever is in their carefully sculpted curriculum.

  But most of all do not question authority.

  We see this in the news cycle daily and how people react, or should I say don’t react. They’re taught that until the so-called authorities determine what really happened, whodunnit and all the rest, they’re not allowed to make any sort of judgement. No matter how obvious, whether it’s the “suicide” of a prominent whistleblower by several impossible gunshots to the head or clearly engineered false flag events, they won’t form a decision until they get the “signal” it’s OK to think that way.

  The Cost of Cowardice

  It’s not just infuriating but literally costing those very people, their children and the rest of us, our lives. We can only hold ourselves accountable for such cowardice. Each of us. Unless we stand up against it. And that is an individual choice, not a group one.

  We each answer for ourselves. And once we do answer the call to wake up we take action. That’s the only rational response. We’ll tell others like there’s no tomorrow, because there may not be one if we don’t. We take appropriate action in our own lives first and move to prepare our loved ones for what may be immediate consequences of what we’ve realized is going on and how to avoid or mitigate it. We change our eating and buying habits, we re-evaluate our livelihood, personal attachments and living conditions.

  All the while intelligently yet passionately sharing what we’ve discovered to be true and the possible consequences.

  That’s called waking up. And it’s not comfortable. It’s a lot of hard work, and takes a lot of courage. But really we’re only acting in a responsible manner when we do so, simply doing what’s right. It’s not that big of a deal – unless our priority is how we appear to others, and keeping old patterns of behavior and possessions that we call “comforts”.

  How misleading can anything be?

  They say a rut is just a grave with the ends kicked out. I heartily agree.

  Waking Up Is A Choice

  No one can take away our right to choose. We can comply with circumstances or we can make our own path. We can be true to the truth at any time we choose, or we can go along with the deceit and cover up all around us and just get by, thinking that’s the way of self preservation.

  Cover your ass, as they say. It’s insane to the core.

  The irony is that that is the biggest lie of all. What happens to one happens to all. When innocents are being slaughtered, whether next door or in some far away land, those are our sons and daughters, brothers and sisters. If we allow this inhumanity to man to flourish it will soon consume all of humanity at the hands of those who think they have the most to gain.

  We live in such a world. We have to face it for what it is and respond. That’s the only conscious choice. Not in anger or fear, but in full awareness and an overwhelming love for truth and our fellow man.

  It’s the only choice.

  Choose – and act – wisely. Don’t shirk it. We all suffer as a result.

  Know that to the bone…because it’s the Truth.

  

  

  
  
  

  

• The Simple Reason Why China's Stratospheric Stock Market Rally Can't Fuel Economic Growth

  Despite Janet Yellen’s efforts to explain to poor people how important it is to build up one’s financial assets, the trickle down “wealth effect” that Ben Bernanke promised would accompany successive rounds of QE never quite panned out as economic growth — which, in the US, is driven by consumption — has now flatlined and even the NY Fed admits that perhaps weather isn’t to blame after all.

  Indeed, despite the loud protestations of Blogger Ben, not only has QE failed to boost aggregate demand, it has in fact served to accelerate the death of the American Middle Class by inflating the value of the assets most likely to be concentrated in the hands of the rich. Similarly, record highs on the Nikkei haven’t led to a sustainable upturn in Japanese consumption, as evidenced by April’s abysmal household spending print. 

  But what about China, where record margin debt and a flood of newly-minted day traders have conspired to drive valuations into the “stratosphere” in a rally so impressive that many mainstream media outlets, constrained as they are by political correctness, have run out of adjectives to describe it?

  Surely the “world-beating” Chinese rally (last week’s sell-off notwithstanding) and the paper profits it’s generated have had a decisively positive effect on the spending habits of the millions of housewives and banana vendors who have pyramided borrowed money into small fortunes.

  Or maybe not. 

  Recall what we said last September about the breakdown of household wealth in China versus the US:

  In the US it is all about (record) financial assets. So much so, in fact, that financial assets as a percentage of total household assets have never been higher at 70.3%, which also means that real estate as a percentage of total is as low as it has ever been. Meanwhile, in China the largest household asset is Real Estate, which at 74.7% of total household assets, is by far the most valuable asset that China’s population has.

   

  

   

  Given the above, we weren’t surprised to learn that despite Beijing’s best efforts to replace a real estate bubble with a stock market bubble and thereby help the Chinese economy along on what is proving to be a difficult transition from a smokestack economy to a consumption-led model, the “wealth effect” is just as elusive in China as it is in the US. WSJ has more:

  Even after a slump last week, China’s benchmark stock index has more than doubled in the past year, but there is no sign that investors are splurging with their profits to help the sagging economy.

   

  In developed markets like the U.S., rising stock markets sometimes boost consumer spending and help spur growth. But in China, that effect appears to be nonexistent. The Shanghai Composite Index has jumped 122% in the past 12 months, but retail sales increased just 10% year on year in May and April, the slowest rate of growth in five years.

   

  The reason? At the most, one in 15 Chinese trade stocks, compared with more than half of Americans. That means that much of the gains in equities are made by wealthier Chinese, who have money to put into the markets but are more likely to save profits than spend them. And those who do own stocks appear to be deferring spending, so they can invest more in the markets, especially since recent history shows that rallies can be short-lived.

   

  While the rally has done little to help consumption, it could hurt spending in the event of a market collapse. That is because much of the recent buying has been with borrowed money. Margin debt as a percentage of China’s stock-market capitalization is now higher than on the New York Stock Exchange. If the market’s downturn continues, investors may have to rein in spending to repay loans.

   

  China has 89 million investors with brokerage accounts for a population of 1.3 billion, according to the China Securities Depository and Clearing Corp., implying about 7% of the people are set up to trade stocks. Just 55% of the accounts held stocks on June 12. China’s mutual-fund industry still is small and people’s mandatory retirement savings are managed by the government, which invests the bulk in fixed-income products.

   

  In China, investors have typically preferred real estate over equities, but a runup in apartment prices, followed by a recent cooling, has failed to significantly affect spending.

  And while the fact that the percentage of the population that actively trades stocks is smaller in China than it is in the US helps to explain why the majority of household wealth is concentrated outside of financial assets and thus why the wealth effect from rising stocks has not taken hold in China, the punchline here is that the very rally which one might have expected to boost consumer spending is in fact holding consumption back because more Chinese are dumping their money in the market:

  Instead of buying a new vehicle, “some people have decided to lease a car for the first time so they can keep investing,” said Shaun Rein, managing director for China Market Research, a consumer-intelligence firm.

   

  Xiaolin Zhang, a housewife in Shanghai, usually spends a third of her household budget buying clothing and cosmetics from Taobao.com, China’s largest e-commerce portal by sales. Now she spends more time watching stock movements than browsing websites. “Trading stocks can be more fun than surfing for bargains on Taobao,” Ms. Zhang said.

  Needless to say, when the margin calls start, the Xiaolin Zhangs of the world are going to wish they had bought discount lipstick instead of paying 130 times earnings day trading the Shenzhen, but in any event, after analyzing the situation WSJ discovered that in the final analysis, the only thing that’s guaranteed to trigger the “wealth effect” is … well, wealth: 

  The biggest influence on consumption—in both China and the U.S.—appears to be inflation-adjusted wages. In China, real wage growth has been slowing over the past two years, to 6.4% in 2014 from 9.8% in 2012.

  

  

  
  
  

  

• CNN Reporter Stunned As Young Black Man Defends Confederate Flag

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Divide and conquer has been the most successful strategy used by humans to attain and maintain power since ancient times. The concept is simple and effective in that those being ruled are too busy fighting amongst themselves to be capable of taking a step back and seeing the bigger picture. The bigger picture is that they are being intentionally played.

  This strategy is being quite effectively employed by the American oligarchy against the American population. While racism and associated violence certainly still exist, as we recently saw in the South Carolina tragedy, this remains a marginal issue compared to the relentless, systemic and daily oligarch oppression against hundreds of millions of people. The issue of the 0.01% versus the 99.99% is almost never covered or hyped on mainstream media, while issues of “sexism” and “racism” are covered and exploited incessantly. Why is that? It’s divide and conquer stupid.

  Naturally, the American plebs must be kept distracted and consumed by issues that, while important, pale in comparison to the major issue of our time: The financial oppression of everyone by a handful of oligarchs and their servants in Congress. Nothing will change as long as we continue to fight amongst ourselves for the diminishing scraps of a shrinking pie and remain incapable of seeing the true problem. The status quo understands this and leverages it more than anyone wishes to admit. 

  I’ve found that the saying: “It’s easier to fool people than to convince them that they have been fooled,” is 100% true. People who are ignorant really are ignorant. They don’t get it, and they don’t want to get it. Only a serious shock, often financial hardship, can get people to question the false paradigms they have accepted for years if not their entire lives. This is why I don’t expect real change to kick in until the next economic downturn arrives.

  Before I share a video of the very eloquent, introspective and brave Bryan Thomas, I want to make a few things clear. Personally, I find the Confederate Flag to be offensive. You can’t deny that to many people it elicits painful images of slavery and oppression. Personally, I don’t like looking at the flag and I wouldn’t want it around me. But this is my personal preference and perspective. If someone else wants to fly it because it means something about southern pride, racial bias, or whatever else, that is their right. The flag is a free speech issue. People have a right to offend me or anyone else. All that said, I do think whether or not it flies on state capitols is a fair and necessary debate.

  However, is it the most existential issue facing American society today? Of course not. After all, we have a black President who has systematically funneled as much money as possible to the most entrenched wealthy elites in America, and has governed as if his top priority was a seamless continuation of the George W. Bush administration. If that doesn’t prove to you that symbols don’t really mean much in big picture, I don’t know what will. Symbols are just that, symbols.

  As I quipped on Twitter yesterday:

  "Great minds discuss ideas; average minds discuss events; small minds discuss people"…and complete fucking idiots obsess about flags.

  — Michael Krieger (@LibertyBlitz) June 24, 2015

  Now watch the CNN interview. Whether or not you agree with his opinion, we should all agree to defend his right to have an opinion, and to do whatever he wants with a piece of colored cloth.

   

   

  I believe this hype about the flag is just another attempt by the status quo to attack free speech in a crafty manner. Similar to the recent attack on blog comment sections, which I wrote about in the recent post:

  The War on Free Speech – U.S. Department of Justice Subpoenas Reason.com Over Comment Section

   

  

  

  
  
  

  

• IRS Deleted Backups Of 24,000 Lois Lerner Emails Months After Subpoena

  Back in 2013 when the IRS’ scandalous targeting of “teaparty” organizations was first disclosed and when then IRS-official Lois Lerner pleaded the Fifth while the IRS’ defense was that all her emails in the period under question were destroyed due to a local hard disk “failure” (which was then shredded to destroy all evidence) everyone who was not an utter idiot asked a simple question: where are the backup servers? After all, every email not only leaves a permanent trail, it can always be tracked down to a host server.

  Today during a testimony by the Treasury’s Inspector General for tax administration, J. Russell George, before Jason Chaffetz, chairman of the House Oversight and Government Reform Committee, the IRS finally closed that gaping loophole. In the most idiotic way possible.

  

  Treasury Inspector General J. Russell George

  As AP reports, according to the IG’s deputy Timothy Camus, two “lower-graded” employees at the IRS center in Martinsburg, West Virginia, erased 422 computer backup tapes that contained as many as 24,000 emails to and from former IRS official Lois Lerner.

  It gets better: the tapes were erased in March 2014, months after congressional investigators requested all of Lerner’s emails, and months after Zero Hedge, among many others, said to simply track down the server backups.

  And the punchline: according to George, who before “investigating” IRS cimes, was a page for the 1980 Democratic National Convention and a founder of the Howard University College Democrats, the workers might be incompetent, a lead investigator said Thursday, but there is no evidence they were part of a criminal conspiracy to destroy evidence.

  Funny: remember the conversation the guy who was overseeing the Deutsche Bank Libor riggers had with a member of the Brither Bankers Association shortly before all hell broke loose?

  Mr. Nicholls repeatedly dismissed concerns that Libor could be manipulated. “Banks do not collude to try to set a Libor rating,” he told John Ewan, the BBA official in charge of running Libor.

   

  “I think I am just hearing a lot of hysteria about Libor that is just misinformed,” Mr. Nicholls added.

   

  When the Deutsche Bank official argued that an individual bank wouldn’t be able to improperly influence Libor, which at the time was set by a group of 16 banks, Mr. Ewan responded: “A cabal of them could.”

   

  “What’s a cabal?” Mr. Nicholls asked.

   

  “A group together could,” Mr. Ewan said.

   

  “That’s an interesting conspiracy theory,” Mr. Nicholls responded.

  It was interesting. It was also a fact, and it was playing out right under Nicholls’ nose for years. All the while he had not the faintest idea.

  Same thing with the IRS, only much, much worse: the guy who just informed a committee that two IRS employees purposefully deleted 422 computer backup tapes, containing tens of thousands of Lois Lerner emails, said they did so by accident. Because it would be a “conspiracy theory” to suggest they could have possibly done so maliciously, and hence criminally. Ignore the fact that they had clear Congressional orders to preserve all emails relating to Lois Lerner!

  In a statement, the IRS said it repeatedly alerted employees starting in May 2013 that they must save all emails, computer tapes and other records related to investigations by Congress and the Justice Department.

  “The IRS recognizes there was a clear breakdown of communication in one part of the organization regarding the need to preserve and retain the backup tapes and information, although (the inspector general) concluded this wasn’t intentional,” the statement said.

  And while the usual idiots will once again rise up and say George is being sincere and not grossly colluding with a criminal cartel engaging in epic malfeasance at the highest level of government, not everyone was utterly lobotomized to the banana republicanization of America.

  “It just defies any sense of logic,” said Rep. Jason Chaffetz, R-Utah, chairman of the House Oversight and Government Reform Committee. “It gets to the point where it truly gets to be unbelievable. Somebody has to be held accountable.”

  Well, somebody is: two “lower-graded” IRS employees. Better known as scapegoats. At least they didn’t also flash crash the market.

  Camus said the workers did not fully understand an IRS directive not to destroy email backup tapes. He did not name the workers.

  “When interviewed, those employees said, `Our job is to put these pieces of plastic into that machine and magnetically obliterate them. We had no idea that there was any type of preservation (order) from the chief technology officer,'” Camus told the committee.

  And the hits just keep on coming: Camus said interviews, sworn statements and a review of the employees’ emails turned up no evidence that they were trying to destroy evidence. Well, let’s see: if everyone at the IRS is lying under oath, why not two of its lowliest employees desperate to avoid prison time. And as for emails not exposing an IRS crime implicating the IRS with destroying emails, well… it is not even worth bothering to joke about that.

  Rep. Thomas Massie, R-Ky., asked Camus if incompetence was to blame for the tapes being erased.

  “One could come to that conclusion,” Camus said.

  Which is ironic, because moments ago the following statement hit:

  BREAKING: US officials: State Department can’t find 15 Clinton emails released by Benghazi panel.

  — The Associated Press (@AP) June 25, 2015

  One can surely blame incompetence for those emails being deleted too. In fact, why not just blame the US submergence into third world banana republic status on the grossest incompetence ever conceivable by an administration.

  Actually, that would be more or less accurate.

  

  

  
  
  

  

• In Gold We Trust, 2015

  Submitted by Pater Tenebrarum via Acting-Man.com,

  The Gold Standard of Gold Reports is Back

  As every year around this time, our good friends Ronald Stoeferle and Mark Valek, the managers of the Incrementum Fund, have published their annual “In Gold We Trust” report, the extended version of which can be downloaded below.

   

  

  This year’s report is slightly longer than the 2014 report and discusses practically the entire breadth of gold-related topics, including highly instructive excursions into economic theory, monetary history and an extensive discussion of current political and economic trends.

  For the past few years, gold investors certainly had little to write home about. In dollar terms, gold has essentially been going nowhere, with a slight downward bias. Actually, the past three years in the USD gold price look a bit like the past 18 years of “global warming”.

  And yet, a lot depends on one’s home currency. Gold’s sideways trend in dollar terms actually represents a small victory, given the strong rally in the dollar in 2014. As a result, gold price charts actually look quite encouraging in terms of most non-dollar currencies. In fact, its performance in euro and yen terms over the past 18 months has been none too shabby.

  Moreover, as Ronnie and Mark point out, gold has held up extremely well in a disinflationary environment in which many commodities such as crude oil have been obliterated. As our readers know, we believe that the underlying bid that is supporting gold is from people who are looking at the third huge asset bubble blown by loose monetary policy within the past two decades and are feeling increasingly queasy. It can’t hurt to hold some insurance – and sooner or later it will be essential.

  Naturally, while the party in “risk” still rages, it is widely held that this time is somehow different. Actually, every slice of economic history is unique, but as Mark Twain noted, history often does tend to rhyme. There is one thing that unites all credit expansions: they eventually all blow up – as in, no exceptions. In this sense, it is never different.

   

  

  Gold priced in US dollars, euro and yen over the past 18 months. Gold may look weakish in dollar terms, but it certainly looks just fine in terms of every other major currency, via StockCharts, click to enlarge.

   

  Since the last financial crisis, even more debt has been piled up all over the world. Much of this debt is collateralized by hopelessly overvalued assets, ranging from real estate to securities (it seems unlikely that many art works are bought on credit, but the vast money supply growth of recent years has certainly spilled over into this particular sector as well). More and more debt has come to depend solely on faith: the faith that governments will continue to be able to roll over their debt indefinitely without endangering the value of the currencies they issue.

  Ronnie and Mark inter alia discuss Japan, the public debt of which by now amounts to 19 times its tax revenues. It seems obvious that buyers of the government’s debt can no longer merely rely on being made whole by its coercive powers of taxation. That leaves only the central bank’s proverbial printing press as a backstop to this debtberg. Well, we have seen it all before – countless times in fact. Somehow we have yet to see it end happily.

   

  

  A solidus issued by Roman Emperor Heliogabalus, who ruled from AD218-222

   

  

  One of the earliest known gold coins, the gold stater minted by King Croesus (who ruled Lydia from 561 – 546 BC). Incidentally, the coin depicted above sold for €63,000 at an auction (approx $70,500)

   

  Conclusion

  If you wonder why one should buy and hold gold while “missing out” on the seemingly unstoppable expansion in stock, bond and assorted real estate prices, the 2015 “In Gold We Trust” report should make the matter abundantly clear.

  In Gold We Trust – pdf version

  

  
  
  

  

• Artist's Impression Of 'New' American History

  Presented with no comment…

   

  

   

  Source: Townhall.com

  

  

  
  
  

  

• There's Something Wrong With The World Today (Hint: 1995)

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  There weren’t any surprises in the “final” GDP update for Q1. Going back to -0.2%, the same interpretations still apply, especially and including the inventory contribution. Economists and policymakers want to talk particularly about how Q1 is prone to “residual seasonality” but that is missing the bigger part of the problem. Whether Q1 was -0.2% or +2% doesn’t really matter, as what truly makes this a dangerous economic situation is that Q1 and all the prior quarters were not a steady +4%.

  To listen to economists today is to suggest that such an expectation amounts to wishful thinking, and that such “normal” growth is no longer. That sentiment may apply, but only to the narrow manner in which orthodox economics can integrate real world factors. In other words, “they” accept that there is something wrong but cannot answer the relevant and primary question as to what that might be.

  

  This problem is obvious in every economic account, including GDP. Using year-over-year figures to harmonize among other economic systems, the lack of growth is striking post-crisis – made all the more so by the size of the huge hole left in the wake of the Great Recession itself. That means, even by this count, the opportunity cost of this non-recovery is severely understated.

  I picked 1995 as a starting point for a reason, which I’ll get back to below. Suffice to say, in isolating only the growth periods of each economic cycle the current version is by comparison about half that of the late 1990’s. The middle cycle, the housing bubble age, shows what is plainly a transition from the first to the third. The primary opportunity cost is not simply the difference between them, but rather far more importantly the compounding nature of time. In other words, the longer these deficiencies drag the more costly in very real economic distortions that cannot be measured.

  

  We can try to do so, but the intangible portions of this kind of negative reality are difficult if not impossible to quantify – the further you stray from the efficient path, the more trouble you incur (geometrically) when you realize the error and attempt to strike back toward the “optimal.” In the counterfactual example above, I have plotted GDP as it is currently estimated (green line); what it “would” be if the housing bubble cycle average had been repeated (blue line); and, what it “would” be if the dot-com bubble cycle had returned. The disparities are enormous, and demonstrate quite well the effects of lost compounding – the difference between current GDP and the dot-com example is nearly $2 trillion!

  These are not just unrealistic numbers on an unrelated chart, as those upper trends are exactly what businesses and people are and have been expecting all along. That disparity was sharpened by each of the successive QE’s and promises about ZIRP, as they were explicitly tailored and proclaimed to deliver something like the red line, not the blue, and certainly nothing near the green. Businesses have planned and acted on that expectations for that success as monetarism somehow made it through 2008 largely unscathed if somewhat dented in public opinion (mostly because 2008 remains hidden, especially under cover of “it would have been worse”). I have little doubt that is a big reason why the economy exhibits an almost stop-go pattern, centered on each of the QE’s (not the weather).

  What is truly extraordinary, however, is not just the US deficiency but how that same pattern or idea has been clearly transported nearly everywhere around the globe.

  

  GDP volatility from quarter to quarter remains constant, but the baseline upon which that volatility pivots has shifted dramatically lower. It started somewhat, like the US, in the middle cycle period but has attained an enormous depression in this third cycle. Again, that would be a huge problem itself if not for the massive decline of the global Great Recession which means the largely positive numbers that have followed it are even more uninspiring than they first appear.

  When switching to the “developing” world, though, the middle cycle turns upward as a clear surge beyond either the first or the third. Not surprisingly, that penetrates not just China but relatedly Brazil (and other “resource” nations I won’t present here).

  

  And so we can start to appreciate the nature of the serial asset bubble economy as it existed globally. In the first age, the dot-coms’ (US terminology, to be sure, but it fits the rest of the world at least loosely) economy was driven the combined impact of the start of housing imbalances as well as a flood of stock-based “money” which heavily influenced, artificially, capital spending. Those two bubble basis effects combined enough to draw in and begin to orient global economic factors toward them.

  The serial bubble age began in 1995, a fact easily observed by any number of asset bubble indicators – from stocks to housing to even the relative measures for actual economic efficiency drawing from the bubbles as a primary source.

  

  There are a couple reasons as to why 1995 is such a fixture in starting this global reorientation. It was around that point where eurodollar behavior altered enough so that what was left after the end of the gold exchange standard as an almost niche (if still huge) credit market could suddenly become the primary means of speculative expansion inside the US (and around the world). The key mechanical difference in 1995 was VaR, opened up through JP Morgan’s “publishing” its securities database into what would become RiskMetrics (a service rolled out widely to the global banking sector starting in October 1994). It sounds simple and innocuous, but that one change would unleash untold leverage through nothing more than balance sheet mathematics made deliverable by the Basel rules – technology and regulatory short-sightedness combining to define marginal global expansion for, unfortunately, decades.

  

  The difference in GDP among the three cycles is simply the decreasing efficiency each one can/could produce. After the dot-com crash and related recession, the far bigger housing bubble was left more a matter of asset inflation than actual direct economic activity – a highly inefficient transfer of house prices to mortgage credit to home equity as ATM’s (along with a bump in construction).

  The primary difference of the second age in the US and Europe to that in China and Brazil was how the housing bubble affected each. It was highly inefficient in the US and Europe to a lesser extent, but to China and the resource supply chain around the world it was the opposite (if still, again, artificial). Since the middle cycle was largely consumption-based, it makes sense that the consumption chain globally would be among the primary responses. In other words, the eurodollar system “produced” the credit expansion, some of which went to fuel asset prices as the basis for consumption in the US and Europe, but a good portion was dedicated by expediency to China, Brazil and the rest in which to service that consumption trend as cheaply as possible.

  That is why China is the perfect expression of the upside (and now downside) to the eurodollar system as it advanced through the middle 2000’s.

  

  The lack of growth universally in the third cycle is simply that neither of the temporarily positive effects of the first two were actually transcendent. The US and Europe are stuck without financial “production”, meaning a consumption problem without any leftover and organic productive expansion to fill that hole. That, then, leaves the rest of the world both dangerously waiting for all that to rekindle (since productive power and ability in the second cycle was based on eurodollar leverage – the global dollar short – to begin with) and short of inertial and internal expansion without any of it. The longer this hole has lingered, the more negative self-feeding starts to unwind the financial basis (clearly seen in China’s severe retrenchment).

  The post-1995 eurodollar system simply became so inefficient that it was no longer re-workable past the Great Recession itself. The Fed has become so irrelevant, in the real economy, as to be stuck quibbling whether Q1 was slightly negative or slightly positive when the real problem is much more widespread, global even, and far deeper than they certainly appreciate. Trillions upon trillions in “stimulus” and the FOMC is left, pathetically, fighting for the distinction of “it’s not as bad as it looks.” That would seem to make this the most costly economic age ever conceived, with global implications that are just now starting to be felt as whatever faith was leftover from 2008, wrong or right, wears off all over the world. That is a highly combustible deficiency, since the longer the global economy remains disorientated the more likely it is to experience not just recession but, since this is all still so leveraged (even more poorly this time), something potentially worse.

  

  

  
  
  

  

• American Babies Are No Longer Mostly White

  As regular readers are no doubt aware, shifting demographics are affecting everything from the labor market, to homeownership, to race relations in America. 

  In “The ‘Illegal Immigrant’ Recovery” for instance, we documented the stunning fact that in May, the number of foreign born workers lept 279K which means that, assuming the Household and Establishment surveys were congruent, there were just 1K native-born workers added in May of the total 280K jobs added. Alternatively, assuming the series, which is not seasonally adjusted, was indicative of seasonally adjusted data, then the 272K increase in total Household Survey civilian employment in May would imply a decline of 7K native-born workers offset by the increase of 279K “foreign borns.”

  And while we also noted that these comparisons are apples to oranges, we pointed out that using the BLS’ own Native-Born series, the US has added 2.3 million “foreign-born” workers, offset by just 727K “native-born” since December 2007. Because the “foreign-born” category includes both legal and illegal immigrants, it may well be that the surprise answer why America’s labor productivity has plummeted in recent years and certainly months, and why wage growth has gone precisely nowhere, is because the vast majority of all jobs since December 2007, or 75% to be specific, have gone to foreign-born workers, a verifiable fact. What is unknown is how many of these millions of “foreign-born” jobs have gone to illegal immigrants who are perfectly willing to work hard, and yet whose wage bargaining power is absolutely nil (after all they are happy just to have a job) thereby leading to depressed wages for native-born workers in comparable jobs, resulting in wage growth which over the past 8 years has been non-existent.

  

  As for the housing market, we recently cited data from the Urban Institute which shows that because the vast majority of new households in the next decade will be formed by minorities, and because minority groups tend to have lower homeownership rates, the overall homeownership rate in America — which has already retraced twenty years’ worth of gains — will likely slide further in the coming years.

  

  Meanwhile, the Obama administration is embroiled in a legal battle with several states who contend an executive order designed to accelerate immigration “reform” amounted to executive overreach.

  In this context, consider the following excerpts from a new Bloomberg piece entitled “American Babies Are No Longer Mostly Non-Hispanic White”: 

  Racial and ethnic minorities now surpass non-Hispanic whites as the largest group of American children under 5 years old, the Census Bureau said Thursday. 

  

  The reversal in 2014 marked a milestone in a trend toward a more diverse U.S. that’s projected to continue. Births outnumbered deaths for all ethnic and racial groups last year except for non-Hispanic whites, the new Census data show. A report earlier this year projected that by 2044, today’s majority white population will be the minority.

   

  The demographic rise of minorities comes at a time when heightened racial tensions make headlines from St. Louis to Charleston, South Carolina, and as minorities lag in education, earnings and labor market outcomes. In the first quarter, blacks over the age of 25 made 78 cents for every dollar a white worker made, based on median weekly earnings data from the Bureau of Labor Statistics. Hispanic people were even further behind, at 70 cents. 

   

  That disadvantage could grow more important to the U.S. economy, because today’s ethnic and racial minorities will form the cornerstone of tomorrow’s labor market.  In the decade through 2022, Hispanics will make up about 80 percent of growth in the workforce, based on Bureau of Labor Statistics projections.

  Clearly (and as indicated by Bloomberg) this seismic shift has implications far beyond economics and BLS and Census Bureau data. And with that, we’ll close with what we said on Monday about the current (and sad) state of American society:

  Increasingly, it seems Americans have lost all faith in the government’s ability to help create the conditions under which groups and individuals with divergent interests can coexist without sinking into a Hobbesian state of nature. 

  

  

  
  
  

  

• 18 Years Ago This Country Collapsed Almost Overnight. Is This Time Different?

  Submitted by Simon Black via SovereignMan.com,

  In late June 1997, eighteen years ago, this part of the world felt pretty normal.

  People had jobs. Inflation was fairly low. The economy was growing. Confidence was high. Life was great.

  For years, most of the economies across Asia had seen meteoric, credit-fueled growth. Capital was pouring in from all corners of the globe, feeding a construction boom and stock frenzy.

  Property prices soared. Stock prices soared. It was a classic bubble.

  My friends who have been living in the region for decades tell me stories about how people bought property with the expectation to flip it and make a 50% return in no time.

  Or they’d invest in the stock market without the slightest bit of analysis, simply because ‘stocks go up.’

  That was the prevailing attitude in Asia back then– this time is different, and the good times will last forever.

  But it all unraveled, practically overnight.

  Thailand was hit first when a nasty currency swing caused the economy to practically grind to a halt. And the pain quickly spread to the rest of the region.

   

  The local currency here in Indonesia, the rupiah, plunged 83% from its pre-crisis levels.

   

  Dozens of banks went under, credit dried up, and many depositors got wiped out.

   

  Then something interesting happened: the Indonesian economy simultaneously experienced BOTH inflation AND deflation.

   

  On one hand, asset prices collapsed. Stocks dropped like a rock, and people felt much more poor.

   

  But as the currency fell, suddenly imports became MUCH more expensive. So retail prices actually increased as consumers paid more, especially for imported goods.

  This is about the worst economic scenario imaginable– asset prices falling with retail prices rising. But it happened.

  Three important lessons I’d like to highlight:

  1) Perhaps the great financial debate of our time is whether the unprecedented monetary expansion over the last several years will result in inflation OR deflation.

   

  There are many a brilliant mind firmly entrenched in one camp or the other.

   

  And the point is, there could easily be BOTH.

   

  2) No one can predict precisely WHEN a correction will occur. But when the great unraveling does unfold, history shows that it happens very quickly.

   

  3) People allow themselves to believe impossible things.

   

  They’ll believe that asset prices can, will, and SHOULD go up forever.

   

  They’ll believe that conjuring trillions of dollars out of thin air is consequence-free.

   

  But they refuse to believe in the possibility that something will go wrong.

  This time is never different.

  

  

  
  
  

  

• Stocks Give Up "Greece Doesn't Matter" Gains; Oil Drops, VIX Pops

  There was only one clip for today…

   

  But Greece is priced in and doesn't matter anyway right?

  

   

  Not off the lows…

  

   

  Futures how the day's moves with a hope-driven ramp early on (based on absolutely nothing) that tumbled after mixed data (spending up – but only because energy prices are up; and PMIs down and ugly) only to extend losses after EU Leaders cancelled the summit, walked away, and said "game over"

  

   

  Post-FOMC gains are dissolving…

  

   

  VIX jumped back above 14 (was 11 handle 2 days ago)…

  

   

  Trannies closed at their lowest since Oct 20th 2014… and are lower than they were in early june 2014!

  

   

  Trannies are in the red YoY!!

  

   

  The big news – Healthcare! Between Managed Care M&A and SCOTUSCARE (but gains in the broad healthcare saw losses for Biotechs as ETF paits trades implied weakness)…

  

   

  NFLX pooped the bed again – biggest 2 day drop since Oct 2014 earnings collapse…

  

   

  Greek Stocks and US Stocks "coupled"…

  

   

  Treasury yields were mixzed with the short- and long-end unch and belly slighlty higher – though bid after a striong 7Y auction traded through…

  

   

  The dollar was deadstick despite some early turnoiling in Swissy and EUR…

  

   

  Silver & Gold slipped lower once again as did Crude (with coppers China drop v-shape recovering)…

  

   

  Charts: Bloomberg

  Bonus Chart: The Greek Debt meetings will continue…

  ?????????? ??? ???????????? ?? ???? ?? ???????? ????? ???? 2283 ?? pic.twitter.com/r8R2Lyhe2z

  — Develina (@Develina_9) June 24, 2015

  

  
  
  

  

• Is This The Chart That Scared Yellen Capital Out Of Biotechs?

  Nope – no bubble here at all…

  "wrong" or "early" or "other"… Biotechs driven by fun-durr-mentals like everything else.

  

   

  As Bloomberg reports, perhaps there is a limit it this insanity…

  Demand for options tied to declines in an exchange-traded fund tracking the companies rose to the highest level in three years relative to bullish ones, according to data compiled by Bloomberg. The Nasdaq Biotechnology Index has risen 549 percent since March 2009, including a 3.8 percent advance last week.

   

  Interest in bearish options on drug developers has jumped in the last year after the group was called out as overvalued by Federal Reserve Chair Janet Yellen on two occasions. Biotechs are selling stock at a pace not seen in a decade and one concern is that something will disrupt the money spigot.

   

  “The sector is dependent on capital that might shy away at the first sign of weakness,” Goldman Sachs derivatives strategists Katherine Fogertey and John Marshall wrote in a June 17 client note. “Recent pipeline setbacks have increased concern of this going forward.”

   

  Biotech companies are doing follow-on stock offerings at the fastest pace in more than 10 years. In the first quarter, biotech and pharmaceutical companies used 93 share sales to reap $18.7 billion, three times more than in 2014, according to data compiled by Bloomberg.

  *  *  *

  Be careful…

  “Biotech stocks have had a speculative fervor to them for some time now,” Todd Lowenstein, who helps manage $16 billion at HighMark Capital Management Inc. in Los Angeles, said by phone. “Of any part of the market, this is the one with the most bubble-like characteristics, without question.”

  Or Buy buy buy…

  “The customer base for biotech won’t stop buying,” Warren, who manages more than $100 million at Exton, Pennsylvania-based Warren, said by phone. “This sector is probably the best-placed to get any kind of growth, and it’s not going to go away quickly.”

  

  

  
  
  

  

• EU's Tusk To Greece's Tsipras: "Game Over"

  Brinksmanship is building:

  • *GREEK OFFICIAL SAYS TUSK TOLD TSIPRAS AT EU SUMMIT “GAME OVER”
  • *GREEK GOVT OFFICIAL COMMENTS IN TEXT MESSAGE
  • *TSIPRAS TOLD TUSK AT EU SUMMIT “THIS ISN’T A GAME”: OFFICIAL
  • *TSIPRAS SAID AT SUMMIT CREDITORS’ PROPOSALS EXTREME: OFFICIAL
  • *GREECE-AID DEAL IS MATTER OF POLITICAL WILL: GREEK OFFICIAL
  • *GREEK GOVERNMENT EXPECTS MIX OF GREEK, CREDITOR PLANS: OFFICIAL
  • *TSIPRAS TOLD EU SUMMIT GREECE HAS NEW PRIORITIES: OFFICIAL

  *  *  *

  Insert Coin!

  

  

  
  
  

  

• 3 Things: Trend, Ceiling & Rates

  Submitted by Lance Roberts via STA Wealth Management,

  The Long Term Trend

  Yesterday, I posted an article discussing the lack of ability by investors to accurately predict the future. To wit:

  But it is precisely this conversation that leads to a litany of articles promoting "buy and hold" investing. While "buy and hold" investing will indeed work over extremely long periods, investor success is primarily a function time frames and valuation at the beginning of the period. Considering that most investors have about a 20-year time horizon until the reach retirement, the "when" becomes a critical component of future success."

  

  Importantly, when valuations have been elevated, forward returns over the next 20-years have been rather disappointing.

  That discussion prompted my colleague and technician "extraordinaire," Walter Murphy, to send the following analysis of the long-term trend of the market.

  

  There are a couple of interesting points to note about this chart. First, on an inflation-adjusted basis, the market is pushing a level of resistance that was only previously, and briefly, exceeded by the "dot.com" exuberance. Secondly, as shown in the RSI chart at the bottom, the market is currently at levels that have coincided with market peaks in the past.

  Importantly, this is a monthly data chart that is very slow to develop. Therefore, this analysis does NOT suggest that a massive market correction is set to occur by the time you finish reading this article. It does suggest, however, that there is likely not a lot of relative reward currently remaining in the markets relative to the "risk" required to extract it.

  Despite plenty of historical precedent and statistical evidence, the reality is the investors are consistently swept up by the short-term psychosis of "greed" and "fear" which obfuscate more logical decision-making processes. But that is the reality of market dynamics and why outcomes have never been "different this time."

  Has The Market Finally Reached It's Ceiling?

  Despite the ongoing bullish parade of commentary that the markets could, and should, only go higher from current levels, it is worth noting that there has seemed to be a somewhat invisible barrier to the markets advance since the beginning of this year.

  As shown in the chart below, the flatlining of the market's advance is something that hasn't been witnessed since Bernanke's launch of "QE 3" in December of 2012. However, these periods of increased volatility with little, or no, overall advance combined with very "overbought" conditions have historically been less "bullish" than most of the media suggests.

  

  With levels of investors complacency at extremely high levels, it is a currently "fact" that little can go wrong. There is no recession in sight; the earnings decline was all primarily related to energy companies and most importantly, global Central Banks are continuing to support the financial markets.

  Of course, maybe it is the last point that should be questioned. If the economy is doing so well, then why are Central Banks still needing to intervene to support the growth? This is equivalent of saying the "the patient is cured, as long as we don't take him off of life support."

  Interest Rates Aren't Going Higher

  Despite the recent uptick in interest rates as of late, which has been a short-covering bounce following the sharp decline at the beginning of this year, I remain bullish on bonds longer term. The reason is not because there is going to be a phenomenal return out of bonds in coming years as there is little gain left with rates currently at 2.4% on the 10-year Treasury. But rather because bonds will likely remain stuck at current levels for close to the next decade and will provide a buffer to weaker equity markets in the future.

  This was a point I made recently in questioning the logic that "Interest Rates Have Nowhere To Go But Up?"

  "The chart below is a history of long-term interest rates going back to 1857. The dashed black line is the median interest rate during the entire period."

  

  "Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time. There have been two previous periods in history that have had the necessary ingredients to support rising interest rates. The first was during the turn of the previous century as the country became more accessible via railroads and automobiles, production ramped up for World War I and America began the shift from an agricultural to industrial economy.

   

  The second period occurred post-World War II as America became the "last man standing" as France, England, Russia, Germany, Poland, Japan and others were left devastated. It was here that America found its strongest run of economic growth in it history as the "boys of war" returned home to start rebuilding the countries that they had just destroyed.

   

  Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases. Today, the number of workers between the ages of 16 and 54 is at the lowest level relative to that age group since 1976. As discussed recently, this is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance."

  It is worth noting that we are currently only a little more than 4-years into the current low-level interest rate environment. Both previous periods in the U.S. have averaged 40-years.

  As stated above, interest rates are a function of strong economic growth which continues to elude policy makers in Washington. Despite annual hopes of stronger economic growth, it has yet to materialize as consumers, which make up 2/3rds of that growth, remain hamstrung by somewhat stagnant wage growth consumed by spiraling healthcare costs.

  This was a point made by Stephanie Pomboy in an article entitled "What To Expect In The Q2 GDP Number" by Elizabeth MacDonald.

  "Spending on healthcare (insurance and services) has increased $232 billion over the last twelve months. That increase accounts for a big 'two-thirds' of the $353 billion in consumer spending and one-third of the $666 billion growth in total GDP over the stretch.

   

  And wage gains are being wiped out by rising health costs. 'The increase in healthcare outlays over the last year is roughly equal to the $284 billion in wage gains for households during that time.'"

  Spending on rising healthcare costs, primarily premiums, does not boost economic growth. In fact, it deters it as it saps spending from other areas that actually do contribute to overall growth. As shown in the chart from ZeroHedge, Q1 GDP growth was primarily supported by rising healthcare and utility costs.

  

  Those expenditures to incite the type of economic growth needed to spur higher borrowing rates. Not now, and not likely any time in the foreseeable future. 

  So, yes, the "Great Bond Bull Market" is likely over. However, just take a look at Japan and you can start guessing about how long the "Great Bond Bear" will likely remain in hibernation.

  

  

  
  
  

  

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