Today’s News June 3, 2015

• Chinese Stocks Stumble As Hanergy Debt Debacle Looms Over All The 500%-Club

  If one sentence sums up the farce that the hyper-speculative ponzifest that is the 500% club in China it is "Hanergy Group was basically using the listed company as a means to produce collateral in the form of shares that it could then pledge to secure financing." While the stock has been cut in half, lenders remain mired in opacity as they try to figure out, as Bloomberg reports, which of Chinese billionaire Li Hejun's many creditors risk losing every yuan they put into his company? Shenzhen and CHINEXT indices are lower out of the gate today after a 14% and 18% surge in the last 2 days as a group of 11 lenders (ranging from large banks to small asset managers) ask for a meeting to discuss various loans with various Hanergy entities… and whatever they find in Hanergy is bound to have been repeated manifold across China's manic markets.

   

  The surge is over… for now…

  

   

  As investors grow a little weary of "the opacity about parent finances and billings," in Hanergy and across numerous other names we are sure. As Bloomberg reports, a plethora of Chinese lenders are exposed to Hanergy Thin Film Power Group Ltd. and its parent company, including Industrial and Commercial Bank of China, which is owed tens of millions of dollars.

  "The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,” said Charles Yonts, an analyst with CLSA Asia-Pacific Markets in Hong Kong. “The opacity about parent finances and billings is extraordinary.”

  A Bloomberg examination of debt held by Hanergy Thin Film and its closely held parent, Hanergy Holding Group Ltd., show Li has tapped a variety of financing sources since the Hong Kong unit’s stock started surging last year. They include policy-bank lending, short-term loans from online lenders with interest rates of more than 10 percent and partnerships with local governments.

  Lenders also include China Everbright Bank, China Minsheng Bank, two of the companies set up to manage Chinese banks’ bad assets; and Harvest Fund Management Co., one of the country’s biggest fund managers with assets of more than $55 billion.

   

  Local governments have also provided money. Hanergy entered separate financing deals with governments in Sichuan, Shandong and Hebei.

   

  Hanergy pledged ownership stakes in a hydropower station in southern China to four trust companies, a guarantee company and a subsidiary of Harvest Fund Management in exchange for credit. It also guaranteed more than 100 million yuan in loans from online microfinancer Itouzi, and took 18.5 million yuan in loans from another microfinancer, Jimubox, according to the two lenders’ websites.

   

  …

   

  Hanergy Group has given no public accounting of all its debt or the debt scattered among its units. In its 2014 full-year results, Hanergy Thin Film reported debt of 4.4 billion yuan ($710 million).

   

  Li, who holds a 73 percent stake in Hanergy Thin Film, has also used shares as collateral to secure loans. In its 2013 annual report, Hanergy said it pledged 5.1 billion shares to four financial companies.

   

  “Hanergy Group was basically using the listed company as a means to produce collateral in the form of shares that it could then pledge to secure financing,” said Francis Lun, chief executive officer of Geo Securities Ltd. in Hong Kong.

  *  *  *
  Coming to the rest of the 500% club soon…

  

  (Note: These are all Year-to-date performance figures!!)

  

  

  
  
  

  

• Greece Faces Moment Of Truth: Troika To Present Final Offer On Wednesday

  Tuesday was an interesting day for negotiations between Athens and creditors. Recall that after venting his frustrations in a lengthy op-ed over the weekend, Greek PM Alexis Tsipras submitted what he called a “realistic plan for an agreement” ahead of an emergency meeting in Berlin between French President Francois Hollande, German Chancellor Angela Merkel, ECB chief Mario Draghi, and European Commission President Jean-Claude Juncker. 

  That meeting ended without any indication of concrete progress suggesting the group was either not impressed with what Tsipras had proposed or simply didn’t care and spent their time discussing a final, take it or leave it deal to send to Athens.

  By Tuesday morning it was clear that the troika was well on the way to drafting their own proposal. Fed up with Greece, the institutions had apparently decided to simply draft an agreement on their terms and place on X on the line where Tsipras needed to sign if he wanted to avert a default in three days. 

  The troika acknowledged that the deal they were crafting would be a tough sell to the radical members of Syriza and thus would be difficult for Tsipras to get through parliament, setting up what we have predicted all along: an imminent government reshuffle.

  The fact that the draft deal will contain language that forces Tsipras to concede at least a portion of Syriza’s campaign promises was later confirmed when Eurogroup President Jeroen Dijsselbloem was quoted as saying creditors would “not meet Greece halfway.” 

  Reuters is out with the latest, which serves as further confirmation that Tsipras will now be forced into concessions and the troika will have succeeded in using financial leverage to effect what will almost invariably be a government shakeup in Athens. 

  Via Reuters:

  Greece’s creditors on Tuesday drafted the broad lines of an agreement to put to the leftist government in Athens in a bid to conclude four months of acrimonious negotiations and release aid before the cash-strapped country runs out of money…

   

  “It covers all key policy areas and reflects the discussions of recent weeks. It will be discussed with (Greek Prime Minister Alexis) Tsipras tomorrow,” a senior EU official said.

   

  Another official said German Chancellor Angela Merkel and French President Francois Hollande would put the plan to Tsipras by telephone within hours to try to secure his acceptance…

   

  Tsipras, who has vowed not to surrender to more austerity, tried to pre-empt a take-it-or-leave-it offer by the creditors, sending what he called a comprehensive reform proposal to Brussels on Monday before they could complete their version.

   

  Euro zone officials branded the Greek text insufficient and said it was not formally on the table.

   

  The Greek leader faces a backlash from his own supporters if he has to accept cuts in pensions and job protection to avert a default and keep Greece in the euro zone.

   

  Despite defiant rhetoric and face-saving efforts, he seems likely to have to swallow painful pension and labor reforms, facing the choice between putting them to parliament at the risk of a revolt in his Syriza party, or calling a snap referendum.

  Reuters also suggests that Greece will likely not make a €300 million payment due to the IMF on Friday if Tsipras does not accept the proposal:

  A Greek government official said Athens would make a 300 million euro ($329.58 million) repayment to the IMF on Friday as due if there was an agreement with the creditors, hinting it might otherwise withhold the money without saying so explicitly.

   

  “If we judge that a deal has been sealed, then we will make the June 5 payment normally,” the official said, adding that the money would be transferred even if a preliminary agreement had not yet been approved by Eurogroup finance ministers.

  It appears we will know within the next 48 hours the extent to which Tsipras was forced by creditors to abandon Greek voters in order to save them from economic catastrophe. 

  

  

  
  
  

  

• Sounding The Alarm On The Country's Vulnerability To An EMP

  Last year, Elliott Management's Paul Singer highlighted "one risk that stands way above the rest in terms of the scope of potential damage adjusted for the likelihood of occurrence" – an electromagnetic pulse (EMP). As Michael Snyder previously details, our entire way of life can be ended in a single day.  And it wouldn’t even take a nuclear war to do it.  All it would take for a rogue nation or terror organization to bring us to our knees is the explosion of a couple well-placed nuclear devices high up in our atmosphere.  The resulting electromagnetic pulses would fry electronics from coast to coast.

   

  

   

  As PeakProsperity.com's Chris Martenson explains, the country is extremely vulnerable to an EMP…

  In the past here at Peak Prosperity, we’ve written extensively on the threat posed by a sustained loss of electrical grid power. More specifically, we've warned that the most damaging threat to our grid would come from either a manmade or natural electromagnetic pulse (EMP). 

  A good friend of mine, Jen Bawden, is currently sitting on a committee of notable political, security and defense experts  — which includes past and present members of Congress, ambassadors, CIA directors, and others — who are equally concerned about this same threat and have recently sent a letter to Obama pleading for action to protect the US grid.

  Before we get to that letter, here’s a snippet from what we wrote on the matter roughly a year ago:

  We talk a lot about Peak Cheap Oil as the Achilles' heel of the exponential monetary model, but the real threat to the quality of our daily lives, if not our lives themselves, would be a sustained loss of electrical power. Anything over a week without power for any modern nation would be a serious problem.  A month would lead to chaos and many deaths.

   

  When the power goes out, everything just stops. For residential users, even a few hours begins to intrude heavily as melting freezers, dying cell phones, and the awkward realization that we don't remember how to play board games nudge us out of our comfort zone.

   

  However, those are just small inconveniences.

   

  For industrial and other heavy users, the impact of even a relatively short outage can be expensive or even ghastly. Hospitals and people on life-assisting machinery are especially vulnerable. Without power, aluminum smelters face the prospect of the molten ore solidifying in the channels from which it must be laboriously removed before operations can be restarted.

   

  Many types of nuclear power plants have to switch to back-up diesel generators to keep the cooling pumps running. And if those stop for any reason (like they run out of fuel), well, Fukushima gave us a sense of how bad things can get.

   

  And of course banking stops, ATMs are useless, and gas stations cannot pump gas. Just ask the people of New Jersey in the aftermath of Hurricane Sandy.

   

  A blackout of a few hours results in an inconvenience for everyone and something to talk about.

   

  But one more than a day or two long? Things begin to get a bit tense; especially in cities, and doubly so if it happens in the hot mid-summer months.

   

  Anything over a week and we start facing real, life-threatening issues. National Geographic ran a special presentation, American Blackout, in October 2013 — it presented a very good progression covering exactly what a timeline of serious grid disruption would look and feel like. I recommend the program for those interested.

   

  We're exploring this risk because there are a number of developments that could knock out the power grid for a week or more. They include a coronal mass ejection (CME), a nuclear electromagnetic pulse (EMP) device, a cascading grid failure, and malicious hacking or electronic attacks.

  Others Are Waking Up To The Danger

  Recently, we've been contacted by a well-connected group of powerful people who have formed a commission to study the matter, and have recently made a public and urgent appeal in an open letter to President Obama to take this threat seriously.

  This letter was sent to the President over the Memorial Day weekend.  It begins (emphasis mine):

  Dear Mr. President,

   

  We need your personal intervention to provide for the protection of the American people against an existential threat posed by natural and manmade electromagnetic pulse (EMP). The consequent failure of critical infrastructure that sustain our lives is a major national security threat and would be catastrophic to our people and our nation.

   

  The national Intelligence Council, which speaks for the entire U.S. Intelligence Community, published in its 2012 unclassified Global Trends 2030 report that an EMP is one of only eight Black Swan events that could change the course of global civilization by or before 2030. No official study denies the view that an EMP is a potentially catastrophic societal threat that needs to be addressed urgently. America is not prepared to be without water, electricity, telephones, computer networks, heating, air conditioning, transportation (cars, subways, buses, airplanes), and banking.

   

  All the benefits of our just-in-time economy would come to a deadly halt, including the production of petroleum products, clothing, groceries and medicine. Think about cities without electricity to pump water to their residents.

  (Source)

  Given the deadly drama that would accompany a such major and sustained grid-down event, you’d think that the US would be spending lots of money to safeguard against one happening. But you’d be wrong.

  A bit further in the letter they warn about the vulnerability of nuclear reactors, a risk that causes me a lot of personal concern:

  We urge you immediately to issue a Presidential Study Directive (PSD) directing your National Security Advisor to lead a focused interagency effort to provide, in connection with your current budget execution activities and future budget requests, a specific program to address this natural and manmade threat. In particular, this PSD should direct that hardening technology, well known in the Department of Defense, be exploited by all agencies with responsibility for maintaining the electric power grid. It is imperative that plans are immediately implemented to protect America’s at least 100 nuclear reactors and their co-located spent fuel storage facilities from an EMP. 

  As Fukushima taught the world, if nuclear plants lose grid power, they rely on diesel generators to keep the cooling water circulating.  Lacking grid power, they can keep everything working for as long as the diesel generators run. Of course, in a grid-down event nothing works, including refineries and the ability to pump and move refined fuel.  After the diesel runs out (assuming the generators themselves were not completely ruined by the EMP), the nuke plants will experience various forms of distress as cooling systems are compromised, up to and including complete meltdowns as a possibility.

  Nature Can Play This Game, Too

  As a reminder, an EMP can also come from a natural cause such as a coronal mass ejection from our sun — something we’ve covered in detail here in repeated interviews with NASA scientist Lika Guhathakurta (here and here) as well as in numerous reports centered on the electrical grid and/or warfare:

  A coronal mass ejection from the Sun can generate a natural EMP with catastrophic consequences. A geomagnetic super-storm in 1859 called the Carrington Event caused worldwide damage and fires in telegraph stations and other primitive electronics, which at the time were not necessary for societal survival. In contrast, today a Carrington-class geomagnetic super-storm-expected every century or so-could collapse electric grids and destroy critical infrastructure everywhere on Earth.

   

  We know it will happen; we just don’t know when, but we know humanity can’t risk being unprepared. In July 2012, we missed a repeat by only a few days when a major solar emission passed through the Earth’s orbit just after planet Earth passed. NASA recently warned that the likelihood of such a geomagnetic super-storm is 12 percent per decade; so it is virtually certain that a natural EMP catastrophe shall occur within our lifetime or that of our children.

  We covered the July 2012 event here at PeakProsperity.com because it was a very narrow miss for Earth. Had it instead hit, I seriously doubt I would be typing this or that you’d be reading it. Instead, more likely, we’d be writing letters by candlelight (assuming someone had a pony available to deliver them).

  Now, a 12% per decade chance of a natural EMP occuring per is a pretty high risk. Statistically, it translates into a pretty safe bet that sooner or later on is going to strike. Despite all our advanced technology, we’ll only have, at best, a couple of days advance warning. And that’s assuming that the government decides to tell us, risking a mass panic before the CME arrives.

  EMP As A Tool Of War

  But the bigger risk, in my mind, is that a military confrontation induces one (or several) players to use an EMP as a means of warfare. With the US poking the Russian bear, and now considering military options to confront China over the islands they are building in the South China Sea, it's not out-of-the-question that one of these world powers could consider using an EMP as a means of retaliation..

  The letter to Obama continues:

  As we have known for over a half-century from actual test data, even more damaging EMP effects would be produced by any nuclear weapon exploded a hundred miles or so above the United States, possibly disabling everything that depends on electronics for control or operations within a line of sight from the explosion.

   

  Electricity networks could be shut down indefinitely until major repairs could be made, and this could take months, even years. Cascading failures from even a lower altitude nuclear burst over the northeastern U.S. could indefinitely shut down the electric grid that produces three quarters of the U.S. electric power. Computers would be incapacitated. Supply chains would shut down. Imagine Hurricane Sandy affecting a much larger area without the immediate physical damage but also without any hope for relief supplies.

   

  Russia and China have already developed nuclear EMP weapons and many believe others possess EMP weapons including North Korea and soon Iran – and likely their terrorist surrogates. For example, they could launch nuclear-armed short or medium range missiles from near our coasts, possibly hiding the actual sponsor from retaliation. North Korea and Iran have tested their missiles in ways that can execute EMP attacks from ships or from satellites that approach the U.S. from the couth where our ballistic missile warning systems are minimal.

  A nuclear EMP device is thought to have the potential to completely ruin an unhardened electrical grid for as long as it takes to repair/replace all the ruined electrical items affected.  This is especially concerning in the case of large scale transformers, which are specially made in just a few places with very low manufacturing throughput capacity that could take a year or more (and that’s assuming the plants are still up and running after the attack).

  There is one quibble I have with the letter: I'm not at all concerned about Iran at this stage. Iran has never physically threatened the US nor funded any terrorists that have directly attacked the US like, say, Saudi Arabia.  Perhaps we should be more concerned about the Saudis:

  Saudis ‘to get nuclear weapons’

  May 17, 2015

   

  SAUDI ARABIA has taken the “strategic decision” to acquire “off-the-shelf” atomic weapons from Pakistan, risking a new arms race in the Middle East, according to senior American officials.

   

  The move by the Gulf kingdom, which has financed much of Islamabad’s nuclear programme over the past three decades, comes amid growing anger among Sunni Arab states over a deal backed by President Barack Obama, which they fear could allow their arch foe, Shi’ite Iran, to develop a nuclear bomb.

  (Source)

  So, yes, I’d personally be more concerned about a volatile and increasingly unstable Saudi Arabia having a few nukes in their hot little hands than I would Iran. But that's just me. And it's a small point relative to the main message of the letter.

  I do agree, though, that the US has plenty of enemies. And its relationships with major powers Russia and China are clearly deteriorating and becoming more hostile:

  China state paper warns of war over South China Sea unless U.S. backs down

  May 21, 2015

   

  A Chinese state-owned newspaper said on Monday that "war is inevitable" between China and the United States over the South China Sea unless Washington stops demanding Beijing halt the building of artificial islands in the disputed waterway.

   

  The Global Times, an influential nationalist tabloid owned by the ruling Communist Party's official newspaper the People's Daily, said in an editorial that China was determined to finish its construction work, calling it the country's "most important bottom line".

  (Source)

  It’s a far leap from a general risk of ‘war’ to panicking about a nuclear EMP device being detonated on our soil, but reasonable and prudent individuals cannot entirely discount the possibility. I agree that our government should have plans in place for such a shock, and a program to firm US national weaknesses in advance.

  As long as I'm making demands, it would also be my wish that the US practice more diplomacy and issued fewer blustery ‘my way or the highway’ ultimatums to major nuclear superpowers. Sadly the current State Department seems to be fully occupied by extremely hawkish Neocons who have a differnet point of view.

  China has a very strong interest in the South China Sea (where lots of oil is thought to be found, by the way) and they are very much unlikely to back down to US demands or even direct military confrontation. Both national pride and critical resources are at stake (things that the US should understand quite well).

  Protecting Yourself

  I'm glad that there is a group of concerned and well-connected individuals that are seeking both to raise awareness at the top of government and to encourage more direct action to insulate our electrical grid from the impact of an EMP. We applaud those efforts.

  But as with nearly every major societal risk we face, we don't recommend pinning your hopes on the government to ride to the rescue. Instead, we’ve been carefully and consistently raising awareness among our readers to the threat posed by a loss of grid power (especially due to an EMP event, because the duration of the outage in that case is likely to be long).

  It turns out there are plenty of steps you can take to insulate yourself from the worst effects of a loss of power.  We’ve covered everything from building your own Faraday cages, to installing solar and other electricity-generating systems that might themselves withstand an EMP or other acts of warfare and still function in providing essential power during dark times.

  In Part 2: Reducing Your Risk To A Grid-Down Event, we reveal the vulnerabilities mostly likely to cause prolonged outages of the national power grid: cyber attacks. The current system in the US has a disconcerting number of failure points that can — and are, the data shows — being targeted by malicious agents. 

  And more importantly, we lay out the specific steps concerned individuals should take at the home level to have backup support and protection should the grid go down. The cost of such preparation is very low compared to the huge magnitude of this low-probability, but highly disruptive, threat.

  Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

  

  

  
  
  

  

• Ron Paul Fears The CIA Is The Biggest Threat To Americans' Liberty

  As the Senate scrambled to pass the USA Freedom Act this evening, reinstating the agency’s ability to spy on Americans, Ron Paul points out that US intelligence organizations have always – and will continue – to operate outside the law; with Daniel McAdams noting the CIA “is sort of the President’s own Praetorian Guard.” As Sputnik News reports, before Americans applaud a minor step toward transparency, Paul warns that they should recognize the corrosive nature of the CIA, “They are a secret government,” operating way above the law, and are “way out of control.”

   

  “[The CIA] is sort of the President’s own Praetorian Guard,” Daniel McAdams, from the Institute of Peace and Prosperity, said on the Ron Paul Liberty Report.  “We know…that he sent assassination squads, he sent people to monitor Martin Luther King, and all sorts of things like this.”

  “This is like his own personal army which is accountable to no one,” McAdams adds.

  As Sputnik News reports, according to Paul, the CIA could be an even bigger threat to liberty than McAdams suggests. A covert army that doesn’t answer to Congress, the Supreme Court, or even the president.

  “That, to me, was the most frightening experience in Washington, is there were black budgets. We never knew exactly how much money was spent,” Paul says.

   

  Those secret budgets have allowed the CIA to carry out some pretty shady practices over the years. Chiefly, assassinations.

   

  …

   

  “There are certainly a lot of theories about the CIA being involved in even domestic assassinations, and they certainly are now involved in presidential directed assassinations,” Paul says.

   

  “The US has covertly and overtly influenced elections overseas a number of times,” McAdams says. “It’s a very open secret that the CIA infiltrates monitoring organizations like the OSCE with their personnel.”

  For some, the USA Freedom Act and similar legislation may be the best way to rein in renegade intelligence agencies. But as Paul notes, many laws already exist to implement limitations. These laws are routinely ignored.

  “They are a secret government,” Paul says of the CIA. “Way out of control.”

   

  Nevertheless, Paul ends on an optimistic note, pointing out that young Americans are tired of the status quo and fed up with broad government overreach.

   

  “In a true republic, there is no place for an organization like the CIA,” Dr. Paul says, quoting former FBI agent Dan Smoot. “I think he’s closer to the truth than a lot of what’s going on today.”

  *  *  *

  

  

  
  
  

  

• The Defaults Continue In China As Duck Producer Sinks

  On Monday, in “China May Double Down On Debt Swap As ABS Issuance Stumbles”, we reiterated the important point that China is effectively pursuing a number of competing policy goals in an attempt to deleverage and re-leverage simultaneously. 

  The effort to rein in shadow banking (deleveraging) has led to slowing credit creation just as economic growth decelerates, a decisively undesirable scenario that multiple policy rate cuts (re-leveraging) have so far proven ineffective at ameliorating. Meanwhile, a push to make it easier for banks to securitize loans and thus free up their balance sheets for more lending (re-leveraging) has been complicated by rising NPLs and Beijing’s apparent willingness to let the free market play more of a role in deciding which companies default (deleveraging). 

  Over the past several months we’ve seen at least three examples of Chinese defaults including Baoding Tianwei Group, a subsidiary of state-owned parent China South Industries, and while creditors have asked China South to guarantee the notes, the mere possibility that Beijing will begin to take a more hands-off approach when it comes to propping up borrowers (especially state-owned borrowers) has some lenders nervous. This was on full display on Monday when duck processing company Zhongao defaulted citing banks’ unwillingness to roll its debt. 

  FT has the story:

  A profitable Chinese duck processing company has defaulted on its debts after banks refused to roll over its loans — in a sign of lenders’ wariness over refinancings as China’s economy slows.

   

  Until recently, Chinese banks have been reluctant to write off big debts, preferring to keep businesses alive by rolling over their loans. But privately owned Zhongao has cited banks’ tighter lending policies as a reason why it lacked the funds to repay Rmb282m ($45m) in principal and interest despite turning a profit last year.

   

  It has now defaulted on debt from 13 banks, and warned it may not be able to repay Rmb200m in bonds maturing on June 12.

   

  If it fails to pay its bondholders, it will add to a series of recent defaults in China’s bond market where — until recently — many investors had assumed the government would not allow them to take losses.

   

  Underscoring how much things have changed, Zhongao was actually a profitable company, unlike Baoding Tianwei, for instance, which incurred large losses in 2014.

   

  Unlike other defaulters, however, Zhongao remains profitable, according to its latest financial statements. It made a net profit of Rmb388m in the first nine months of 2014, up 42 per cent over a year earlier. In late April, though, the company said the release of its fourth-quarter 2014 and first-quarter 2015 results would be delayed.

  In the past, Beijing would pressure banks to roll over bad debt in an effort to paper over problems and keep NPLs artificially suppressed at the country’s large lenders and indeed, that practice looks likely to continue especially for local governments who will enjoy lenient treatment should they run into trouble on any new debt incurred through the use of LGFV financing for ongoing projects.

  It’s now a different story for private companies however. Here’s FT again:

  But analysts point out that non-state entities such as Zhongao have less clout than state-owned enterprises and local governments to demand that banks roll over their loans. Last month, Chinese authorities ordered banks to roll over loans to local government financing vehicles, even if borrowers were unable to repay principal or interest.

   

  Non-performing loans at Chinese banks reached their highest level in more than five years by the end of March, official data show, and bankers say they are under pressure to curtail risks. Local media has reported that many branch managers’ pay is now directly linked to their NPL ratio.

  One would certainly expect this trend to continue because as noted last month, some 40% of credit risk in China is carried outside of traditional loans, but even if you take the figures at face value (which, again, one absolutely should not, especially as it relates to NPLs in China), the picture is not pretty.

  

  

  

  
  
  

  

• "If It Looks Like A Duck" – The Man In The Moon: Part 2

  Submitted by Paul Brodsky of Macro Allocation, Inc.

  In part 2 of the “Man in the Moon” series we look at Paul Volcker’s roundtrip – monetary policies and their impacts from 1971 through the Great Leveraging to today. Part 1 can be found here.

  If it Looks Like a Duck…

  Prior to 1971, all global currencies were valued based on a fixed exchange rate system, commonly referred to as “Bretton Woods”. Each currency was directly linked to the US dollar’s fixed exchange rate to gold.

  Bretton Woods effectively died in August 1971 (officially 1973) when the U.S. Treasury ceased exchanging dollars for gold in what became known as “The Nixon Shock”. Overnight, global money and credit became un-tethered to anything scarce. (The Man in the Moon is concerned only with understanding the value of money, not gold’s status as an economic, financial and political lightning rod.)

  What followed from 1973 to 1982 in the West was a period of significant inflation coincident with economic stagnation (i.e., “stagflation”), a state of dis-equilibrium with which most global economists were unfamiliar. 1970s stagflation is now commonly blamed on two Middle East wars, in 1973 and 1979, which led the Organization of Oil Producing Exporters (OPEC) to embargo crude oil and drive its price higher. It is thought the embargo created higher prices coincident with an economic slowdown because consumption dropped without a commensurate and offsetting downward adjustment in oil prices.

  Such macroeconomic analysis begins with the vagaries of geopolitics – the wars. Less blame is placed on what was then the new threat of a dramatically increasing stock of global currency – currency the OPEC cartel would have to accept in exchange for their relatively finite oil.

  Since 1971, the cost of creating money dropped to near zero and there was suddenly no limit to potential currency dilution. The Man in the Moon might wonder whether the new anchor-less, post-Bretton Woods monetary system that began in 1971/1973 contributed to OPEC’s decision to reduce oil exports? Perhaps the cartel simply wanted more hard-to-value currency in exchange for its precious resource?

  Paul Volcker, who, as Under-Secretary of the Treasury for internal monetary affairs under President Nixon in 1971, and as one of three primary decision makers that advised Nixon to abandon the fixed gold-exchange system, was appointed Fed Chairman in 1979 by President Carter. He was given the mandate of reversing debilitating inflation.

  Over the course of eighteen months, Volcker raised overnight rates from 11% to 20%. This created greater demand for U.S. Dollars, reduced the propensity to spend them, and stabilized the currency as a global store of value. As a result, foreign USD reserve holders, like OPEC, were given reasonable assurance that for the first time in a decade that they would receive fair terms of trade. Volcker may have successfully whipped inflation, but his actions effectively saved the USD as a reserve currency (which he helped jeopardize a decade before).

  The Great Leveraging

  As the purveyor of the world’s reserve currency and its monetary hegemon, The Man in the Moon would likely notice that it has become easy to disparage the United States, the country that first came to visit him.

  Since the demise of hyperinflation in 1981, central banks, led by the Fed, have generally maintained an easy credit posture, either through stimulative overnight funding rates or other policies meant to encourage credit growth. As a result, mountains of debt were piled onto bank, household, government and corporate balance sheets in the U.S. and around the world. The naturally-occurring production model for economic growth and stability was effectively replaced with a more managed financial model.

  There was an upside to this. It could be reasonably argued that this new financialism doomed communism in Russia and altered it in China, greased the wheels of great technological innovations, and improved coordination and unity among economies willing to play along with the leverage game.

  Nevertheless, it seems that years of financial return-seeking mal-investment arising from unnaturally easy credit conditions also forced economic imbalances, market distortions, and, as is becoming more obvious today, the potential for unsanctioned currency-based trade wars. (TMITM might even suspect The Great Leveraging re-defined global cultural relations to the point where it made it easier for less secular, un-levered members of the global community to revolt.)

  As a matter of course, central banks forever defend their political impartiality; which is to say, they deny being influenced by the whims of the political dimension to whom they ostensibly answer.

  While this may be true, the record seems to show clearly that monetary authorities have become loathe to making long-term economic sustainability their top priority. Whether they cave to political influences or the best interests of private banks, for whom central banks are directly responsible to provide constant liquidity and solvency, is a subject for gossipers. The net result is the same.

  Over the last generation, global monetary authorities have been able to help accommodate (or generate) global nominal output growth and inflation through policies that engendered credit growth and debt assumption. This can be seen clearly in the U.S., home to the world’s largest debt markets, where the total credit market debt-to-GDP ratio peaked in 2008 at 3.7. (It is about 3.2 today after holding constant from 1950 to 1980 at 1.5.)

  A broader measure of economic leverage would be the total credit-to-GDP ratio, implied in the following graph. Similar leverage implications can also be seen in Europe and China, where Fitch recently reported: “the interest-cost burden of servicing the debt has risen to an equivalent of around 15% of GDP, exceeding nominal GDP growth.”

  Incentives

  As a result of this leverage-based economic model, the global supply of credit (and now base money) has grown based not only on real economic incentives driven by production and capital formation, but also based purely on shorter-term financial incentives. As time passed and balance sheets became more leveraged, financial return ultimately overwhelmed production and capital formation as the primary investment driver.

  The more economies with established financial asset markets leveraged themselves, the less incentive the factors of production have had to produce. Production competes with financial returns for capital, and it has become unable to keep up. Corporate capital allocators are rationally choosing to operate their businesses in search of financial return rather than investing in new plant and equipment. (Tax incentives for debt assumption and “central bank puts” against rising funding rates also help.)

  Capital formation could still occur (and has, judging by the great innovations discussed in TMITM Part 1), but such innovations produce deflationary efficiencies and are accompanied by ever more debt and the need for inflation to service it. Indeed, the widening gap in the accompanying graph also implies how a dollar of debt has produced a decreasing amount of output.

  

  Consequences

  “Economic dis-equilibrium”, formally acknowledged via the onset of QE in Japan in 2001, China in 2008, the U.S. in 2009, and Europe in 2015, has been little more than necessary (and predictable) bank system de-leveraging.

  Put in context, QE’s impact today is as extreme as the events from 1971 to 1981. By raising rates in 1979 and 1980, the Fed saved the purchasing power of the US dollar and, by extension, all global currencies. By creating bank reserves today (excess reserves as they are commonly referred to, which implies any reserves are unnecessary), global central banks are planting the seeds for a new bank multiplier effect – a financial re-leveraging. This promises to further devalue currencies vis-à-vis the global production they will be exchanged for tomorrow.

  The impact of this would be felt most in the non-bank public and private sector. Under the right circumstances, re-liquefying the bank credit channel could benefit domestic commerce, international trade, and asset market valuations. Another impact of QE is that it temporarily offsets the burden of government debt repayment. QE, however, does not literally reduce federal debt or de-leverage household, corporate, or provincial government balance sheets. Today, total aggregate debt is higher than ever.

  During “normal times” – an economic growth phase accompanied or generated by rising systemic leverage – central banks have incentive to promote nominal growth and inflation, which make banking systems profitable and their free-spending political overseers happy. In such times, commercial banks have fiduciary responsibilities to shareholders to constantly increase their market values, which they do by expanding their balance sheets.

  Now that economies are highly leveraged, extinguishing debt would require banks to reduce the sizes of their loan books, which would shrink their market values. Thus, it seems economic policy makers never have incentive to promote debt extinguishment in the banking system, regardless of economic conditions or prospects.

  So, by all indicators it seems monetary policy makers intend to inflate away the purchasing power value of their currencies, and with it the PPV of savings.

  In Part 3, The Man in the Moon takes an analytical dive into monetary identities and the current states of the global economy and capital markets, and concludes there will be “A Great Reconciliation”.

  Paul Brodsky

  Macro Allocation Inc.

  

  

  
  
  

  

• DoNT WaiT UNTiL IT'S Too LaTe…

  

  
  
  

  

• The Future Of India's Monetary Policy Is Now "Monsoon Dependent"

  In a world priced to perfection and beyond, thanks to 7 years of central bank micromanagement of not only the capital markets but the economy, any and every scapegoat will be used when even the smallest deviations from the scripted economic path occur.

  Enter “harsh winter weather.” However, when said “harsh winter weather” entered two years in a row and highly-paid US economists turned out to be far more clueless about the future than the worst-paid weatherman, things promptly got funny when the BEA announced last week that it will seasonally adjust seasonally-adjusted data, thus officially jumping the econometric shark, and revealing how big a farce all underlying economic measurements of the economy truly are.

  As it turns out it is not just a US “thing” to blame the weather.

  Enter the Bank of India, which overnight cut its benchmark rate from 7.5% to 7.25%, as had been largely expected, taking India’s interest rate to the lowest since September 2013.

  The punchline, however, was when RBI’s governor Raghuram Rajan gave his outlook for the possibility of future rate cuts, saying he would have to wait to assess monsoon rains before acting again, an outlook that according to Bloomberg  disappointed investors looking for more cuts to spur weak economic growth.

  While “a conservative strategy would be to wait” for more certainty on how monsoon rains will affect inflation, weak investment means “a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty,” Rajan said. He also lowered the RBI’s growth forecast and said inflation risks are tilted on the upside.

   

  Consumer prices rose 4.87 percent in April from a year earlier, holding below Rajan’s 6 percent target for an eighth straight month. While price pressures have so far proved immune to crop damage from unseasonal rains, the weather department predicts monsoon rainfall — which waters more than half of India’s farmland — will be below average this year.

  Well, we already have a Dow data dependent Fed, it is only fitting that we also have a Monsoon-dependent central bank: Rajan said three risks are clouding, no pun intended, the inflation outlook: the possibility of a weak monsoon, rising oil prices and a volatile external environment. Of these, however, the weather got top billing as the biggest swing factor.

  Slowly a pattern is emerging: the Fed will never hike rates just before, or during, winter; India will never cut rates just before, or during, a weak monsoon; the ECB will never accelerate QE during summer when everyone goes on vacation (only in the late spring), and so on.

  We used to joke that John’s Weather Forecasting Stone is a tool no sell-side economist and strategist should live without. But it has now become abundantly clear that when it comes to monetary policy, there is just one tool that every central planner needs more than anything.

  The following.

  

  

  

  
  
  

  

• Caught On Tape: Hillary Puts "Everyday American" In Her Proper Place

  Presented with little comment aside to note that every now again the truth bubbles out from behind the mask…

   

   

  Source: The Daily Caller

  

  

  
  
  

  

• This Is What Market Mania Looks Like

  Following the Chinese stock market’s worst drop in recent history, a record-smashing 4.4 million new ‘investors’ opened stock-trading accounts last week, confirming that – despite the words (but no actions) of the regulators – China’s BTFD market mania (after all the PBOC will just bail them out, right?) is in absolute full swing.

   

  

   

  Charts: Bloomberg

  

  

  
  
  

  

• From Whence Cometh Our Wealth – The People's Labor Or The Fed’s Printing Press?

  Submitted by David Stockman via Contra Corner blog,

  It is hard to believe that in these allegedly enlightened times this question even needs to be asked. Are there really educated adults who believe that by dropping helicopter money conjured from thin air, the central bank can actually make society wealthier?

  Well, yes there are. They spread this lunacy from the most respectable MSM platforms. And, no, I’m not talking about professor Krugman and his New York Times column. At least, he pontificates from a Keynesian framework that has a respectable, if erroneous, intellectual heritage.

  What I am talking about here is the mindless bunkum issued by so-called financial journalists who swish around Wall Street and Washington exchanging knowing tidbits with policy-makers, deal-makers and each other. Call it the bubble finance “narrative”, and recognize that its gets more uncoupled from economic facts, logic and plausibility with each passing day in the casino.

  The estimable folks at The Automatic Earth put a bright spotlight on this crucial matter this morning, even if not by design. Their trademark daily vintage photo was a 1911 picture of a family including all the kids picking berries in the field; they were making GDP the old fashioned way.

  In its usual manner, the site’s “debt rattle” list of links to timely reads followed, and the first was a Bloomberg View opinion piece called “QE For The People: Monetary Policy For The Next Recession” by one Clive Crook. It was actually a case for literally dropping central bank money from the skies to enable policy-makers to better “support demand and keep their economies running”.

  In thoughtfully supplying a photo of a helicopter in full flight to accompany Crook’s discourse, the Bloomberg graphics department crystalized the essential economic issue of our times. Namely, whether wealth is made by the Berrie Pickers or the Money Printers.

  Needless to say, The Automatic Earth’s vintage photo reminds us how GDP is actually made. And, no, its not about child labor. I grew up in a family farm labor force of five kids and ended up no worse for the wear. But we did produce something—lots of strawberries, raspberries, tomatoes, peaches, grapes and apples.

  

  Lewis Wickes Hine Whole family works, Browns Mills, New Jersey 1910

  Not surprisingly, the house organ of the Bloomberg empire—the very offspring of bubble finance—- says wealth can be made by dropping trillions of dollars of unearned money from helicopters. Back in the day, even berry-picking kids wouldn’t have believed that.

  

  It used to be that “helicopter money” was a sort of metaphor—-certainly the great libertarian, Milton Friedman, did not literally mean that the state should engage in airborne redistribution through the aegis of the central bank when he famously coined the term. No longer. Here is what Bloomberg’s apparently lapsed Onion contributor said this morning:

  Sooner rather than later, attention therefore needs to turn to a new kind of unconventional monetary policy: helicopter money…. (or) how about “QE for the people” instead? It has a nice populist ring to it — suggesting a convergence of financial excess and the Communist Manifesto…… “Overt monetary financing” is closer to what’s required, but something even duller would be better.

   

  Whatever you call it, the idea is far from crazy. Lately, more economists have been advocating it, and they’re right.

   

  The logic is simple. If central banks need to expand demand — and interest rates can’t be cut any further — let them send a check to every citizen. Much of this money would be spent, boosting demand just as Friedman said.

  Uncle Milton must be rolling in his grave. Yet, in a way, he asked for it. He erroneously taught the world that capitalism can catastrophically fail if the central bank allows money and credit to be liquidated too intensively and extensively.

  To be sure, he did not believe this was an everyday risk on the free market; he was talking about the Great Depression of 1930-1933, but he had his causative factors upside down. During the period in question, excess bank reserves—–the stuff the Fed creates—-soared by 13X, while money market interest rates fell close to zero. So the banking system was actually awash with liquidity, meaning that a Bernanke-style bond-buying spree would have amounted to pushing on a string, exactly as has been the case since the Lehman meltdown.

  Instead, the problem in October 1929 was 15 years of massive, Fed-fueled credit creation—first to finance the Great War and then the Wall Street boom in foreign bonds and domestic stocks during the Roaring Twenties. The result of that era’s financial bubble was a massive, unsustainable expansion of US export capacity in agriculture and industry alike——along with bloated levels of industrial inventories, capital goods production and big ticket durable goods (autos, radios and refrigerators).

  When the music stopped, the washout in these sectors resulted in a $35 billion drop over the next three years—or 75% of the total plunge in nominal GDP during the 1929-1933 period. Not surprisingly, therefore, this contraction of bubble-fueled economic activity triggered massive insolvencies in the export-oriented agricultural and industrial districts and in the speculative precincts of Wall Street and their wire house affiliates all across the country.

  In short, the Great Depression did not represent a catastrophic failure of capitalism nor was it the result of a giant error by the central bank. And most assuredly, it was not owing to a deficiency of some mystical economic ether that the Keynesians were subsequently pleased to call “aggregate demand”.

  Plain and simple, the Great Depression was caused by massive insolvencies of banks, businesses and households in the agricultural hinterlands and the new auto, steel and industrial export belt of the upper Midwest and mid-Atlantic. The four-year decline of nominal GDP from $100 billion to $57 billion did not represent the disappearance of “aggregate demand” that could be reincarnated by the state and its central banking branch. As I detailed in the Great Deformation, it represented the liquidation of malinvestment and phony GDP, jobs, production and residual war-time inflation that had never represented real wealth in the first place.

  

  Nevertheless, statists have lived off the false proposition that capitalism is catastrophe prone and is chronically lapsing into recessionary slumps and under-performance ever since. But at least until the Greenspan era, the primary tool of state intervention to purportedly keep the macro economy off the shoals and on the path toward “full employment” was fiscal—–that is, deficit spending and tax cuts.

  And that kind of state action to improve upon the alleged inferior performance of producers, consumers, investors, entrepreneurs and speculators on the free market entailed at least some outer boundaries. To wit, hereditary fear of too much national debt kept the politicians from outright free lunch economics—even after the Reagan era destroyed the will of the old guard GOP budget balancers.

  As it happened, it was Greenspan who confected the bridge from fiscal stimulus by the unruly and inconstant processes of political democracy to central bank based monetary stimulus based on the purported wisdom of an unelected monetary elite. Slowly at first, and then with a rush during his post dotcom interest rate slashing campaign, Greenspan converted the old  counter-cyclical doctrines of the first generation Keynesians, who made a stagflationary hash out of the US economy during the late 1960s and 1970s, into the bubble finance economy which prevails today.

  Clive Crook is simply the archetype of today’s swarm of financial journalists who were house-trained on Dr.Greenspan’s doctrine of statist economics. Always and everywhere, both the old-style fiscal Keynesians and the new style Greenspan/Bernanke/Yellen money printers, postulate that the macro-economy suffers from a deficiency of “aggregate demand”.

  And why wouldn’t they argue just so?  If the family in the figurative berry patch pictured above is not spending enough to meet the policy-makers’ arbitrary growth targets—whether because it does not produce enough income or chooses to save a purportedly “excessive” portion—-then what economic agency can pour more spending into the nation’s economic bathtub until it is full up to the very brim? Why the state, of course.

  But here’s the insidious thing.  There is no such thing as “aggregate demand” which is separate and apart from production and income. The only way an economy can spend more than it produces is to finance excess consumption from artificially conjured credit.

  Now, admittedly, that works——but only so long as balance sheets have available runway and the servicing cost of higher leverage does not overtax the carrying capacity of current incomes. In other words, credit expansion has temporal and economic limits; its not a feature of some mythical, timeless,  dynamic stochastic general equilibrium!

  Well, those limits have been reached and we are therefore in a new, post-Keynesian ball game. The US economy hit “peak household debt” at the time of the crisis. Accordingly, central bank fueled credit expansion has been exposed as the one-time parlor trick it actually was.

  During the decades leading up to the great financial crisis, household leverage levels were ratcheted higher and higher during each stimulus cycle, causing income based household spending to be topped-up with incremental outlays from higher borrowings. But now the process has been reversed: household leverage ratios are falling, even as they remain far above their healthy and sustainable pre-1970 norms.

  So household consumption is once again tethered to current income and savings preferences, as it must be on a long-run basis. You couldn’t have an economy based on the inevitable normalization of interest rates and, say, 400% debt to wage and salary income ratios, too. So the credit fueled boom of 1970-2008 wasn’t the normal capitalist condition; it was a trick of the state.

  

  Household Leverage Ratio – Click to enlarge

  To be sure, that monetary financing trick did generate the illusion of growth. But it wasn’t sustainable. Accordingly, the tepid growth rate since the pre-crisis peak——that is, just a 1.0% annualized gain in real final sales for the last eight years—-simply represents the limits of a production and supply-side constrained economy.

  During the 40 years leading up to the year 2000, nominal wages in the private economy grew by 7.5% annually, while CPI inflation averaged 4.5% per annum. So real wages grew by 3.0% and with some help from the ratchet in household leverage and total credit relative to GDP, real GDP growth averaged 3.6%.

  By contrast, from December 2007 and up to and including this morning’s personal income and spending report for April, private sector wage and salary growth have decelerated sharply—-to just 2.5% at an annual rate for the last eight years. Even if you credit the BLS’ undercount of actual inflation, which has posted at 1.5% per annum during the same period, real wages have grown at just 1.0% per annum or by one-third of their historic trend. And with a discount for actual real world inflation, real aggregate wages have grown hardly at all.

  In short, we now have a 1% growth economy, not the 3.6% economy of the Keynesian yesteryear. Households are spending at levels constrained by the tepid growth of their production and incomes, not because some magic ether called “aggregate demand” has gone missing.

  It goes without saying, of course, that if you want to expand a supply constrained economy at a higher rate, the answer is to reduce the state’s barriers to enterprise and labor input, not to expand the central bank’s balance sheet and further falsify money market prices and inducements for rent-seeking speculation. For instance, abolish the 15% payroll tax barrier to low-skill labor and abolish the FOMC interest rate peg which subsidizes carry trade gamblers.

  None of this will happen, of course. So the bubble finance narrative will roll on awhile longer. Indeed, having been house-trained on the Greenspan wealth effects doctrine, financial journalists like Crook are now taking the intellectual dead-end of state sponsored “demand” stimulus to an absurd and dangerous extreme. Namely, to an out-and-out case for anti-democratic governance by a Wall Street-beholden posse of central bankers.

  The real objection is political not economic. Sending out checks is a hybrid of monetary and fiscal policy — public spending financed by pure money creation. That’s why it would work. Politically, this is awkward…….The real case for central-bank independence isn’t that monetary policy is non-political; it’s that central banks are better than politicians at economic policy.

  There you have it. Start with the sheer Keynesian myth that there is deficient aggregate demand; spend a lifetime in the Wall Street/ Washington corridor drinking the Kool-Aid; and you end up not knowing the difference between Berry Pickers and Money Printers.

  

  

  
  
  

  

• Six Nigerian Central Bankers Arrested In Currency Rigging "Mega Scam"

  Those following the ongoing currency market rigging scandal may be surprised to learn it isn’t just a “developed” world phenomenon in which virtually all TBTF commercial and central banks, such as the Bank of England, take part and engage in criminal manipulation of everything that trades. Apparently even plain-vanilla “developing” countries, elsewhere also known as ‘banana republics’, do it too such as that ground zero of 419 scams, Nigeria, only there FX manipulation takes place at such a modest degree most “cartel” chat room members wouldn’t even bother to waste their time.

  According to Bloomberg, six Nigerian central bankers were charged with fraud in an 8 billion naira ($40.2 million with an m, not a b, not a tr) currency “scam.” No chat rooms here, just a plain old “mega scam involving the theft and recirculation of defaced and mutilated currencies,” the Abuja-based Economic and Financial Crimes Commission said in a statement dated Sunday on its website.  In addition to the central bankers, among those charged are also sixteen commercial bankers who conspired with Central Bank of Nigeria regional executives. The suspects will appear at the Federal High Court in the southwest city of Ibadan from Tuesday to June 4.

  

  This is where it gets amusing: “instead of destroying defaced local currency, the officials substituted it with newspaper cut into the size of naira notes, the EFCC said. The fraud was partly to blame for the failure of monetary policy to check inflationary pressure for years, according to the agency.”

  In other words, Nigerian authorities blame financial executives for using currency-like newspaper clippings in lieu of notes for propagating inflation. Let that sink in for a second.

  The “systematic scheme” had been running for several years and “middle-level officers” were either dismissed or placed on indefinite suspension in October and handed over to the EFCC, the central bank said in a separate statement on its website on Monday. A national audit at the regulator’s 37 branches found it was an “isolated scheme” in the southwestern city of Ibadan.

   

  The EFCC said the scam was exposed on Nov. 3 through a petition alleging more than 6.6 billion naira was diverted and recycled by “light-fingered top executives of the CBN at the Ibadan branch.”

   

  The suspects, who were responsible for taking mutilated notes in exchange for fresh cash equivalent to the amount deposited, abused their positions, the EFCC said. Investigations found boxes that should have contained bundles of naira notes filled with newspaper instead.

   

  “This practice, known as interleafing, basically labels a box with a higher value than its true content,” the central bank said. “The bank will continue to collaborate with the EFCC to ensure that affected CBN staff, as well as their accomplices in some commercial banks, are brought to justice.”

  And unlike in the US, where the criminal bankers control the regulators and enforcers through the “rotating” (and in Goldman’s case, double-rotating) door phenomenon, in Nigeria President Muhammadu Buhari, a 72-year-old former military ruler, has made battling endemic corruption one of his administration’s top priorities.

  It is therefore likely that if convicted, the accused will likely see many years of prison time or worse, instead of just suffer a monetary penalty paid for by shareholders and a deferred prosecution.

  Which may explain why rumors are already rife the currency manipulation crew has begged the Southern District of New York to extradite them to the United States where they can face the proper “justice” for  financial criminals which guarantees immunity from any actual hard time.

  Joking aside, after several central bankers are sentenced to spend years to contemplate their criminal decisions in Nigerian prison, one may ask “who truly is the banana republic”, especially since the most difficult decision facing those who colluded, defrauded and manipulated tens of billions, will be in which of their numerous East Hampton mansions they will spend the upcoming weekend.

  

  

  
  
  

  

• John Nash Hated Keynesians

  Submitted by Jeff Berwick via The Dollar Vigilante blog,

  John Forbes Nash Jr., the Princeton University mathematician who inspired the film  “A Beautiful Mind,” died on May 23rd in a New Jersey car crash.

  While we always look at things critically, and are aware that he had said he was just days away from releasing his discovery of a replacement for Einstein’s relativity theory, we’ll leave that private detective work for the millions of truth researchers on the internet.

  While researching John Nash, however, we came across numerous anti-Keynesian comments by Nash that caught our eye here at the always anti-Keynesian Dollar Vigilante.  Of course, as with most things, his anti-Keynesian stance wasn’t talked about very much and certainly not featured in the movie based on his life.

  “Good money,” Nash once argued, is money that is expected to maintain its value over time. “Bad money” is expected to lose value over time, as under conditions of inflation.

  This seems to be a consistent economic statement by the late, great mathematician. His economic understanding, and disdain of “Keynesians”, goes deeper.  As he stated in this lecture:

  The special commodity or medium that we call money has a long and interesting history. And since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have we may become irrational in thinking about it and fail to be able to reason about it like about a technology, such as radio, to be used more or less efficiently.

  He goes on to analyze one school of thought’s views on money; namely, Keynesians:

  So I wish to present the argument that various interests and groups, notably including “Keynesian” economists, have sold to the public a “quasi-doctrine” which teaches, in effect, that “less is more” or that (in other words) “bad money is better than good money”. Here we can remember the classic ancient economics saying called “Gresham’s law” which was “The bad money drives out the good”. The saying of Gresham’s is mostly of interest here because it illustrates the “old” or “classical” concept of “bad money” and this can be contrasted with more recent attitudes which have been very much influenced by the Keynesians and by the results of their influence on government policies since the 30s

  He sees  Keynesians as “manipulative.”

  So let us define “Keynesian” to be descriptive of a “school of thought” that originated at the time of the devaluations of the pound and the dollar in the early 30’s of the 20th century. Then, more specifically, a “Keynesian” would favor the existence of a “manipulative” state establishment of central bank and treasury which would continuously seek to achieve “economic welfare” objectives with comparatively little regard for the long term reputation of the national currency and the associated effects of that on the reputation of financial enterprises domestic to the state.

  He recognizes Keynesians need an ignorant citizenry or “customers of the currency supplied by the state”:

  The Keynesians implicitly always have the argument that some good managers can do things of beneficial value, operating with the treasury and the central bank, and that it is not needed or appropriate for the citizenry or the “customers” of the currency supplied by the state to actually understand, while the managers are managing, what exactly they are doing and how it will affect the “pocketbook” circumstances of these customers.

  Essentially, as we’ve concluded many times here at TDV Blog, the Keynesians are Communists:

  I see this as analogous to how the “Bolshevik communists” were claiming to provide something much better than the “bourgeois democracy” that they could not deny existed in some other countries. But in the end the “dictatorship of the proletariat” seemed to become rather exposed as simply the dictatorship of the regime. So there may be an analogy to this as regards those called “the Keynesians” in that while they have claimed to be operating for high and noble objectives of general welfare what is clearly true is that they have made it easier for governments to “print money”.

  Nash was in particularly distrustful of a world currency administered by the current global structures.

  He foresaw in the future a sort of world currency being developed, and he had some worries about how one might evolve.

  “In practice, I’m a little distrustful of the politicians at the level of the United Nations and elsewhere,” who would be in charge of administering a world currency.

  So, Nash, one of the most influential mathematicians of our time, is not fooled by the money manipulators.

  Further critiquing the ideology:

  …while they have claimed to be operating for high and noble objective of general welfare what is clearly true is that they have made it easier for government to print money.

  In conclusion:

  And this parallel makes it seem not implausible that a process of political evolution might lead to the expectation on the part of the citizens in the great democracies that they should be better situated to be able to understand whatever will be the monetary polices which, indeed, are typically of great importance to citizens who may have alternative options for where to place their savings.

  Some people believe Nash’s contributions to math, economics, and other disciplines helped pave the way for Bitcoin.  Some think he is Satoshi Nakamoto, the creator of Bitcoin… which makes his death all the more suspicious.

  While bad guys like Dick Cheney, Henry Kissinger, Zbigniew Brzezinski and David Rockefeller seem to never die it seems that more and more of the good guys, like John Nash tend to pass before their work was done or end up in prison for life, like Ross Ulbricht of the Silk Road.

  R.I.P. John and Alicia Nash.

  

  

  
  
  

  

• Auto Sales Reach 10 Year Highs On Record Credit, Record Loan Terms, & Record Ignorance

  There’s no question about it, Experian’s senior director of automotive finance Melinda Zabritski is an optimist.

  Back in March, Zabritski chided the subprime Chicken Littles of the world, noting that “whenever there is an uptick in the number of loans to subprime and deep subprime customers, there is the potential for a ‘sky is falling’ type of reaction, [but] the reality is we are looking at a remarkably stable automotive-loan market, in part because consumers are continuing to stay on top of their payments.”

  Fast forward to Monday and Zabritski was back at it, this time defending the proliferation of longer average terms for auto loans in the US. “While longer-term loans are growing, they do not necessarily represent an ominous sign for the market,” Zabritski said, before explaining that extending the loan term is simply the most logical way for borrowers to buy cars they can’t really afford: “Most longer-term loans help consumers keep monthly payments manageable while allowing them to purchase the vehicles they need without having to break the bank.” 

  In other words, either car buyers are overreaching as homebuyers did in the McMansion era, or the American consumer is in bad shape courtesy of a sputtering economy and barely existent wage growth. To be clear, neither of those alternatives is a good thing.

  Consider the following out Monday from Experian:

  The average loan term for new and used vehicles increased by one month, reaching new all-time highs of 67 and 62 months, respectively.

   

  Findings from the report also showed that longer loans, those with terms lasting 73 to 84 months, accounted for a record-setting 29.5 percent of all new vehicles financed, an 18.6 percent rise over Q1 2014 and the highest percentage on record since Experian began publically tracking this data in 2006.

   

  Long-term used-vehicle loans also broke records, with loan terms of 73 to 84 months, reaching 16 percent in Q1 2015, rising from 12.94 percent the previous year — also the highest on record…

   

  The average amount financed and the average monthly payment for a new vehicle also increased to record heights. The average new vehicle loan was $28,711 in Q1 2015, compared to $27,612 in Q1 2014. The average monthly payment for new vehicles also rose, moving from $474 in Q1 2014 to $488 in Q1 2015.

   

  Additionally, leasing continued to increase in popularity during the quarter, jumping from 30.22 percent of all new vehicles financed in Q1 2014 to a record high of 31.46 percent in Q1 2015.

  So let’s break that Q1 data down:

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

  You get the idea.

  Given the above, it certainly comes as no surprise that auto sales for May came in quite strong. In fact, May saw the largest MoM increase since November 2013:

   

  Put simply, people are buying more cars because they’re allowed to take out long-term loans at extremely low rates, and the fact that monthly payments are still hitting all-time highs suggests that borrowers are not taking advantage of these conditions to make prudenct decisions in terms of what they’re buying (or leasing). While all of the above might seem like a recipe for disaster, Zabritski thinks otherwise:

  “Increases in vehicle financing are signs of a strong automotive market. By gaining a deeper understanding of current financing trends, lenders are able to stay competitive and better meet the needs of the marketplace, while consumers can use the data to become more educated on the different vehicle financing options and make a more informed purchasing decision.“

  Yes, “more informed purchasing decisions”, like taking out an 84-month loan to buy a used car. 

  All of the above notwithstanding, Experian would likely point to the fact that the averge FICO score for borrowers financing new cars fell only slight from 714 to 713 Y/Y while the same Y/Y scores for those financing used vehicles actually rose from 641 in Q1 2014 to 643 in Q1 2015. While that’s all well and good, there’s every indication that those figures are likely to deteriorate significantly going forward. Why? Because Wall Street’s securitization machine is involved. Let’s look at some numbers for consumer ABS issuance via Deutsche Bank:

  The consumer ABS sector saw $16.6 billion of new issue supply in April. This reflects a modest slowdown from Q1, when the average monthly issuance amount reached $18.9 billion. Nonetheless, year-to-date issuance, at $73.4 billion, remains flat year-over-year. Auto ABS saw $7.9 billion of new paper in April, bringing year-to-date new issue supply to $38 billion; nonprime auto ABS issuance totals $10 billion year-to-date. 

  So, in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit), auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers. Put simply, those subprime borrowers are getting subprimey-er. Here’s FT with the latest example of the deep subprime deal from Santander Consumer (which we have profiled on a number occasions, most notably here): 

  When Santander Consumer USA sold a $1bn pool of subprime auto-loans this week, it made no pretence that the loans would be paid back in full. So confident was SCUSA that a big chunk of the money would not be coming back that it said it would shield investors in the lowest-rated tranche of the deal from the first 19 per cent of losses.

   

  That is a lower level of protection than the Spanish bank’s US securitisation vehicle provided in its first trip to the lower reaches of subprime auto lending in March, when it offered “credit enhancement” of 25 per cent on the worst-ranked bonds.

   

  

  (details of the above mentioned March deep subprime deal)

  And Santander Consumer is hardly the worst. Recall Skopos Financial, to which we introduced readers in April. Skopos is run by a team of Santander veterans and the stats on their latest ABS offering look even worse. Note that a fifth of all loans in the collateral pool are made to borrowers with a FICO of between 350 and 500:

  

  The implication here is clear. The auto ABS market is alive and well with total issuance expected to reach around $100 billion this year and as the competition for borrowers heats up, lenders are reducing their underwriting standards in order to make the loans needed to feed the securitization machine. 

  *  *  *

  But perhaps the best bubble indicator of all is the rise of the “cash out auto loan”:

  

   

  “Use your car as collateral — our equity loans can help put your car to work for you.”

  Ladies and gentlemen, the “cash out auto loan” is the new home equity loan. Welcome to the great American car bubble.

  

  

  
  
  

  

• The Difference Between Republicans & Democrats

  What do “everyday Americans” do for a living compared to “average Joes”?

   

  

   

  Source: VerdantLabs.com

  

  

  
  
  

  

• The War on Cash is Now a Global Phenomenon

  More and more institutions are trying to make it harder for you to move your money into cash.

   

  Globally, over $5 trillion in debt currently have negative yields in nominal terms, meaning the bond literally has a negative yield when it trades. In the simplest of terms this means that investors are PAYING to own these bonds.

   

  Bonds are not unique in this regard. Switzerland, Denmark and other countries are now charging deposits at their banks. In France and Italy, you are not allowed to make cash transactions above €1,000. Spain, Uraguay,

   

  This is also at work in the US. Louisiana has made it illegal to purchase second hand goods using cash. This is just the beginning. The War on Cash will be spreading in the coming weeks.

  The reasoning is simple. Most large financial entities are insolvent. As a result, if a significant amount of digital money is converted into actual physical cash, the firm would very quickly implode.

   

  This is true for banks around the world. European banks as a whole are leveraged at 26 to 1. In simple terms, this means they have just €1 in capital for every €26 in assets (bought via borrowed money).

   

  The US financial system isn’t any better. Indeed, the vast majority of it is in digital money. Actual currency is just a little over $1.36 trillion. Bank accounts are $10 trillion. Stocks are $20 trillion and Bonds are $38 trillion.

   

  And at the top of the heap are the derivatives markets, which are over $220 TRILLION.

   

  If you think the banks aren’t terrified of what this market could do to them, consider that JP Morgan managed to get Congress to put the US taxpayer on the hook for it derivatives trades. Mind you, this is the same bank that is now refusing to let clients store cash in safe deposit boxes.

   

  This is just the beginning. As anyone can tell you, it’s all but impossible to move large amounts of money into cash in the US. Even the large banks will routinely ask you for 24 hours notice if you need $10,000 or more in cash. These are banks will TRLLLIONS of dollars worth of assets on their books.

   

  This is just the beginning.

   

  Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

  We are making 1,000 copies available for FREE the general public.

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/cash.html

   

  Best Regards

  Phoenix Capital Research

   

   

  

  
  
  

  

• ISIS, Assad Regime Now Fighting Together In Syria, US Alleges

  When last we checked in on the situation in Syria, ISIS (who a secret Pentagon document recently revealed was, and probably still is, considered a US “strategic asset”) was supposedly on the move, emboldened by recent successes in the ancient city of Palmyra and the conquest of Ramadi in Iraq, where, you’re reminded, Iraqi forces showed “no will” to fight according the Pentagon. 

  Recent reports also indicated that the militants may have commandeered 2,300 humvees worth more than $1 billion when the group sacked Mosul last summer, a convenient “loss” for the US which can now justify four times that amount in arms sales to allies who will now need to counter a ‘better-equipped’ ISIS. 

  On the heels of Palmyra, Ramadi, and a suicide bombing at a Saudi mosque, the US military  and Congressional war hawks have ratcheted up the calls for American boots on the ground in Iraq. More specifically, what’s needed is so-called forward “spotters” who will aid in making airstrikes more precise and thus avoid the type of collateral damage and failed bombing runs that have allegedly plagued the air campaign thus far. Or, as we put it last week: Carefully worded trial balloons don’t get much better than that. You see, the problem is that we are accidentally killing innocent children on our bombing runs and that’s if we’re lucky enough to be able to drop any bombs at all which apparently we only do a quarter of the time, and the whole “problem” could be “fixed” by deploying a couple of “spotters” with laser pointers. 

  But no good narrative is complete without a series of multi-colored maps which usually depict the enemy’s advance using various shades of red or orange or purple much like one might use to depict the spread of a deadly virus. That way, the public begins to equate the enemy advance with a rapidly proliferating biological threat.

  

  

   

  Alas, none of this has yet created enough public support for a ground incursion in Iraq and Syria, which needs to come sooner rather than later because after all, Qatari natural gas isn’t going to pipe itself into Europe. 

  So we suppose that if the original plan was to wait on ISIS to make the final push into Damascus before claiming that the US “must take action” to expel the murderous black flag-waving hordes on the way to installing a more ‘agreeable’ regime, it might make sense to just skip a step and claim Assad and ISIS have now teamed up, that way, we can equate the two and kill two birds with one stone (or, more accurately, serve one CIA asset a burn notice and oust an ‘unfriendly’ regime with 10,000 marines). 

  Cue Reuters:

  The United States has accused the Syrian military of carrying out air strikes to help Islamic State fighters advance around the northern city of Aleppo, messages posted on the U.S. Embassy Syria official Twitter feed said.

   

  Islamic State fighters pushed back rival insurgents north of Aleppo on Sunday near the Turkish border, threatening their supply route to the city, fighters and a group monitoring the war said.

   

  
  

   

  Fighters from Levant Front, a northern alliance which includes Western-backed rebels and Islamist fighters, said they were worried Islamic State was heading for the Bab al-Salam crossing between Aleppo and the Turkish province of Kilis.

   

  “Reports indicate that the regime is making air strikes in support of ISIL’s advance on Aleppo, aiding extremists against Syrian population,” a post on the U.S. Embassy Syria Twitter account said late on Monday, using an acronym for Islamic State.

   

  But the U.S. Twitter feed said Damascus had a hand in promoting Islamic State, an al Qaeda offshoot which has seized land in Syria and Iraq.

   

  “With these latest reports, (the military) is not only avoiding ISIL lines, but, actively seeking to bolster their position,” it said. Syria has accused its regional enemies of backing hardline insurgent groups.

  If that sounds strange to you, that’s because it is. Recall from the Pentagon document mentioned above that a spokesperson for The Islamic State of Iraq called on “the Sunnis in Iraq to wage war against the Syrian regime regarding Syria as an infidel regime for its support of the infidel army Hezbollah and other regimes he considers dissenters like Iran and Iraq.”

  Now, apparently, ISIS and the Assad regime have inexplicably decided to ban together.

  With these latest reports, #Asad is not only avoiding #ISIL lines, but, actively seeking to bolster their positon. #Syria

  — U.S. Embassy Syria (@USEmbassySyria) June 1, 2015

  Here’s more from Reuters:

  Syrian officials have previously dismissed as nonsense allegations by Washington and Syrian opposition activists that the Syrian military has helped Islamic State’s fight against rival Syrian insurgent forces.

   

  “The Syrian army is fighting Islamic State in all areas where it is present in Syria,” a military source said.

  And the US again:

  Reports indicate that the regime is making air-strikes in support of #ISIL‘s advance on #Aleppo, aiding extremists against Syrian population

  — U.S. Embassy Syria (@USEmbassySyria) June 1, 2015

  For their part, the ‘moderate’ Syrian opposition claims “it is fact” that Assad is now aiding ISIS and in fact has been doing so for the better part of two years. From Islam Alloush, a spokesman for the Islamic Front, via The Guardian:

  “Yesterday, the regime bombed Mare’a (which was held by the opposition) exactly at the same time when Isis was attacking us, and this helped them greatly.”

   

  “It has become a matter of fact since 2013 that the Syrian regime has bombed us to stop us fighting Isis properly. Isis have never attacked Syrian planes. They owe their success to the regime.”

  Draw your own conclusions, but if one wanted to speed up the process of bringing about regime change in Syria, one way to do so would be to claim that Assad and ISIS are now working together in an attempt to crush the opposition.

  That way, increased US military “support” could be justified by claiming that the barbarous ISIS hordes are now teaming with a regime that allegedly uses chemical weapons on its own people, thus creating a murderous Frankenstein monster by sewing together the ISIS bogeyman and the ‘maniacal’ Assad regime and trotting it out to the public as justification for yet another US ground war.

  

  
  
  

  

• Perception Is The Putrescence Of Politics And The Plague Of The People

  Submitted by Thad Beversdorf via FirstRebuttal.com,

  In the following piece I want to lay to rest any notion that the accepted state of the economy has anything to do with any other than perception.  My hope is that by the end there will be very few that can continue to believe there is anything left to the idea that the underlying economy is either strong or improving; a perception substantiated by current market valuations rather than a reality substantiating current market valuations.

  But remember the idea that perception is reality is a force to be reckoned with in that perception not only deceives but can create a temporary self fulfilling prophecy.  This is the very basis of the danger of perception.   For it is perception of thick ice that leads us to the middle the of lake but reality that takes us to the bottom.  And so it is in the perception that the true danger of reality can hide.  I will limit the discussion today to economics but make no mistake, the putrescence via the dislocation between perception and reality extends to every nook and cranny of modern American and the Western world.

  I recently listened to a fairly impressive speech on television but unfortunately tuned in after the introduction.  It was a representative of the indigenous nations of North America.  The speaker discussed many issues and wrapped in the well being of all people so it was very inclusive and, as I said, very impressive.  However, toward the end of the speech the lecturer made a point to place blame, for much of his subject matter, on capitalism.  Such a disappointing and trite end in an otherwise interesting and persuasive set of arguments.

  While this speaker was just some obscure orator, there are much more prominent ‘authorities’ of public policy constantly making similar disappointing claims on perceptions for the public to digest.  Guys like Paul Krugman are incessantly twisting and mutating Keynesian economics to mean full on, full time government control of the economy while decrying capitalism as some evil force meant to destroy all but the top of the food chain.  But at the same time we have those profiting from the current system too twisting perception that indeed our system is capitalism at its finest.

  Capitalism is, in its most honest and basic form (i.e. its true and only form), simply the trade off of something for something else, with the value of trade being determined by supply and demand dynamics on both sides of the transaction.  That’s it.  And so then it becomes a very difficult task to understand how that can be the evil force so many around the world attribute to capitalism.  It is also a very trying task then to see how the current system has anything to do with capitalism.  But as does Krugman with Keynesian economics the definition of things that most don’t understand very well can be easily mutated for public consumption to make a particular stance seem much stronger than truth would merit.  And there is that other evil term that goes hand in hand with capitalism, merit.

  Again, merit is something just about all of us understand innately.  I don’t care how compassionate one wants to see them self, everyone gets annoyed when people take something that seems to have been earned by someone else.  For example, standing in line at the “I love trees”, T-shirt booth, if socialist A were to, for no reason, bud ahead of socialist B who has been patiently standing there for 3 hours, this would be a problem for all but the very best of us.  And this really explains merit.

  There is an inherent understanding by all, that socialist A didn’t deserve to be ahead of socialist B.   In other words, socialist B earned their place in line ahead of socialist A and so has every natural right to expect socialist A not to jump the line.  I say natural right because this concept is so woven into the reality of existence that it is a natural right.  It doesn’t preclude socialist B from kindly given up his right to be ahead of socialist A in line but the right is his prerogative to give up or keep.  If you understand and agree with that proposition then you understand and agree with capitalism and acknowledge it is a natural system. But I would argue capitalism has been replaced by economic cannibalism.

  Capitalism has an inherent way of avoiding dead weight losses via efficient resource allocation, while Cannibalism feeds on dead weight losses.  To be clear these dead weight losses are losses to labour (i.e. the consumer) in the current system (but can be otherwise, for instance with regulated pricing).  Similar to monopolistic pricing, in a cannibalistic economy profits to the producer increase despite a reduction in output.  While monopolies are difficult in the current regulatory world, the Fed has created a similar earnings scenario for corporations by allowing a reallocation of funds away from operations and into a guaranteed secondary stock market that provides no benefit to the economy (or to labour).

  Yet there is an active perception campaign that is taking us out to the middle of the lake.  Specifically, we are being led to perceive an expanding and thus improving economy despite the reality of contraction.  In fact, this focus on creating an ideal perception has become the main strategy of American policymakers.  The historic alternative being a focus on building an ideal reality.  This focus on perception is the putrescence of politics and it is an incredibly dangerous game for we the people.

  The very question of how is it that our ‘capitalistic’ society has become so seemingly unbalanced highlights the dislocation between perception and reality.  Very simply, our society is no more capitalistic than it is democratic.  This is where the effort to understand and be aware is an obligation of citizens.  To be a wantonly foolish citizen is to be an immoral citizen.  If we hope and expect to have a fair and just society, which does include the economy, we must work for it, that is, we must earn it.

  Society, with it’s rules and regulations is man made, and so by definition comes without natural rights.  And that is good because nature can be cruel to the weak.  However, we can design the rules and regulations to mimic our natural rights where ideal and can curve them where compassion is perhaps lacking in nature.  But again, such a design requires a moral citizenry, meaning, in part, an aware citizenry.

  By simply accepting the story as told without regard to integrity of truth we allow ourselves to become feed for those controlling the story and thus the system.  That is, our sweat equity becomes their wealth, our might becomes their weapon and our efforts become their strength.  In effect those controlling the story eat the just rewards of all those around them.  And that is exactly the system currently in place.  You will find it impossible to reconcile the description of the existing system against the nature of capitalism.  The two systems couldn’t be further apart, in fact, each is the antithesis of the other.

  Capitalism inherently optimizes the allocation of available capital between profits and labour.  But by creating policies that reward operational contraction (whether it be the ability for monopolies or for risk free returns in a secondary market) and by incentivizing investors and management in the short term, capital allocators will always divert capital to profits and away from labour.  This is a pure example of economic cannibalism in that investors and C-suite managers are filling their bellies from the meat of not only labour but also future investors and managers; an incredibly short sighted strategy.

  Warren Buffet, often perceived as America’s most beloved capitalist, is perhaps that grandest example of a economic cannibalist.  Let me give you give you a couple examples of how Mr. Buffet has zero respect for or interest in capitalism but practices economic cannibalism as a normal course of business.

  With his BNSF rail company generating significant profits transporting oil across the Midwest, Buffet lobbied hard and fierce against a pipeline being built that would create a more efficient method of delivery.  He lobbied all the way up to the president of the United States.  Not only did he lobby to get his way but he aligned himself with the Environmentalists no less.  Touting trains are safer and more efficient than a pipeline for transportation of oil is mythical at best.  But truth is irrelevant when it comes to cannibalism.  The truth is simply that Warren is willing to eat any competitive benefits to the end consumer to fill his own belly.  He does so not by being more competitive (capitalistic) but by purchasing ideal legislation for himself (cannibalistic) with all lost gains to the consumer from denying a capitalistic process being digested directly by him.

  Step forward to today and we find Buffet this time fighting against the Environmentalists and casinos to protect his bets on energy profits (MidAmerica’s purchase of NV Energy) in Nevada by lobbying to eliminate credits to folks that are net suppliers of renewable solar energy back into the grid.  Clearly, if people are adding to the existing power supplies using renewable sources of energy generation they should receive credit for those supplies.  However, that would eat away at the non-renewable energy profits being generated by Buffet’s energy plays.

  What it means is that nonrenewable energy companies like Buffet’s holdings need to quash the more competitive (albeit smaller) renewable sources and do it via purchasing favourable legislation rather than by being more competitive (hard to compete with the efficiency of the sun once the cells are in place and paid for).  This is quite obviously anti-competitive and thus anti-capitalistic.  The truth is that Warren is wealthy and unethical enough to eat the meat of all those competitive benefits of renewable energy supplies into the grid simply to keep his own belly filled.

  And look I’m not trying to have a go at Buffet in particular he just is an easy target to make the point.  In reality there are a million examples at all levels and in all facets of the economy but the point is that capitalism has very little to do with America today.  Let me say that again.  Capitalism has very little to do with America today and so we need to get this idea of evil capitalism out of the public discourse.

  Our system could be considered an immoral system in the sense that it is materially unethical and inefficient, based on massive resource misallocation but it cannot be considered capitalism.  Now I’m certain you are asking yourself if this is going anywhere or is this just some theoretical moral point being made??  Ok, let me bring this back to the here and now tangibility of the average American.

  Part of being an American profiteer today is getting ahead by any means available for which one will not go to prison nor pay 100% of their ill gotten gains in fines to the Treasury’s General Fund.  Just refer to the libor, FX, MBS or gold market manipulations that have so far found guilt but no one of any relevance prosecuted or broke.  The facts speak loud and clear to a system designed on economic cannibalism.  But because a picture is worth a 1000 words allow me to provide a few charts to make the point slightly more succinctly how this impacts we the people.

  The following is a visual of economic cannibalism in its most obvious form, understanding the idea that capital must go to either profit or labour.  It is apparent that while labour once sat at the table with profiteers, today, labour has become the meal.

  

  What we find in the above chart (source: Bloomberg/ Allocated Bullion Exchange) is that while corporate profits (dark blue line) and S&P valuations (light blue line) have historically correlated positively to real incomes, in the new Fed manipulated and highly cannibalistic economy, corporate profits and market valuations are actually feeding on incomes i.e. labour and thus on their own source of subsistence as labour is also the consumer.  Purely cannibalistic activity.  But due to the short term nature of today’s investor and managers, long term health has no place in strategy discussions.

  The next chart I’ve presented previously but it is perhaps the best representation of how earnings growth is simply an illusion/perception created by operational contraction.  You see while historically stock valuations grew with increased sales meaning operational expansion (i.e. non-temporary increased expected future cash flow), in the new cannibalistic economy, markets are thriving on lower sales i.e. contracted operations i.e. contracted labour i.e. temporary earnings growth.

  

  I simply cannot disseminate the above chart enough.  It is at the heart of the giant con I’ve been discussing for the past year.  Consumers are not spending more (i.e. real sales are down) because they have less income.  When one reads between the lines of the above chart one understands that the growth in market valuation has come via earnings growth, which has come by eating corporate operations (cannibalism not capitalism).   In effect, reducing economic activity by reallocating capital away from operations (capex and labour) and into profits via dividends and buybacks, corporations have created the perception of growth (expansion) leading to increased stock valuations when in fact the opposite it true.

  The next chart dispells the perception that because the defined unemployment statistic is falling more people are working.  This is truly unbelievable to me that people still talk as though we have had any sort of an improvement in labour over the past 6 years.

  

  What we actually find is that declining unemployment historically resulted in increasing labour participation rate meaning as unemployed fell out of the statistic they actually were moving into jobs as one would expect.  However, subsequent to 08 in the new perception economy, while the rate of unemployed persons (U6- red line) is falling those persons are not moving into employment as we are led to perceive but are simply no longer part of the defined labour force (blue line).  In short, they simply no longer exist according to the unemployment statistic.

  There is an abundance of evidence indicating the same reality.  For example, the Fed still cannot raise rates despite a historically low unemployment statistic (U3 at 5.8%).  Additionally, the instance of declining real wages and income is not a typical economic phenomenon during a tightening job market.  Yet the perception is of a highly improved job market via a deceptive unemployment statistic which continues to be pressed and pressed very hard despite all of the evidence to the contrary.

  Now let’s look at perhaps the strongest argument which I expect should alleviate any remaining doubt as to a choreographed perception based strategy.  The fact of the matter is that markets have now completely lost any logical tangibility to real economic growth vs contraction.  Allow me to crystallize the point with a chart that leaves no room for argument.  In fact, I would love to have one of you permabulls reach out to me and explain this next chart.

  

  I’m not sure there is a better depiction of long term market manipulation than the above chart.  Note that we’ve experienced an economic collapse (white line) matching that of 2008, yet while 2008 S&P (orange line) sold off +45% the market today has traded slightly higher in the face of the equivalent economic collapse.  I’ve added a vertical red line showing just where the pure market manipulation begins.  Notice the market price pops at each unexpected economic downturn (post 2011) with absolute absurdity and blatant market manipulation.

  But without this manipulation we are back to the chaos of late 2008.  The reason is that a market sell off triggers a systemic failure of assets collateralising the banking system which in turn paralyzes credit.  From an economic standpoint this manipulation holding market valuations constant is the only thing separating our experience today from our experience during the last collapse.  Think about that for a moment.

  The above chart clearly depicts two parallel worlds of perception and reality.  The media picking up only on the perception and avoiding discussion of the reality.  The market manipulation carries the perception which takes us further out onto the lake, each step adding to the depth of the lake bottom from which we will ultimately be forced to rebound or drown.  Some may argue prolonging the inevitable is better but it is a weak argument in that the lake bottom is only getting deeper and thus increasingly more difficult to survive when reality finally bites.

  Recently a friend clued me in on a great discussion by James Montier (h/t Ryan Bailey), who highlights an idea by 19th century economist, Michal Kalecki.  Kalecki predicted back in 1943 that if the Fed were to attempt to maintain full employment by stimulating private investment (via some equilibrium interest rate), interest rates would end up negative and income would end up being subsidized.  Well this is exactly what the Fed has attempted.  Kalecki’s prediction is brilliant (albeit more complex than I have laid out here) and we have now seen both aspects of his prediction come true over the past 15 years.  Negative interest rates are here and consumer debt has unquestionably become a necessary income subsidy if we are to maintain the perception output growth.

  The perception is that GDP has continued to expand which implies that the American consumer (to include the government) has continued to grow.  However, when one adjusts GDP for consumption by way of debt rather than income we see a very different story.

  

  Now debt is neither a positive nor negative economic influence naturally but its influence will be determined by its effectiveness.  Taking on debt for a good investment can create expansion of wealth and income.  Taking on debt for a poor investment or consumption can create loss of wealth and income.  The following chart shows how (inefficiently) debt is being used today to maintain the perception of a robust economy.  The cost of doing so being an incredible loss of wealth and income.

  

  You can see that for each dollar of debt we are taking on as a nation we are returning less than a dollar of output (red line).  The result is a net contraction not just a slowing of output.  And that is exactly what we saw in the previous GDP chart that adjusted out consumption debt i.e. a true contraction of output.

  Perhaps an easier way to see this is the following chart.  Very simply, below we are subtracting the periodic increase in GDP (output) by the increase in total public debt.

  

  Notice that historically, only periods of economic recession (shaded periods) showed results materially less than zero.  However, since 2008 almost all periods have less output than debt and to greater extents than ever before.  This is the epitome of the perception state.  Debt consumption is not growth.  Debt consumption is at very best a zero sum transaction assuming 0% interest.  However, debt consumption for 99.9% of the economy is a net negative (that is, borrowing costs are above 0% interest).

  What that means is that for each period above with a negative result, real GDP is actually contracting.  This is basic mathematics I’m afraid and so to all naysayers it is simply not an arguable point but cold, hard fact.  And again the reality is depicted in the adjusted GDP figure in the earlier chart above.  GDP has, in real – real terms, contracted significantly below where it was in 2007 when we account for the negative impact of debt consumption on long term output.  The only way to offset that negative impact is to continue to print and distribute ever increasing amounts of debt for consumption i.e. income subsidies as Kalecki had predicted.

  In summary, by accepting the story as told without regard to integrity of truth we have allowed ourselves to become feed for those controlling the story and thus the system.  As the charts above clearly depict we have two distinct economic states.  One is perceived and the other is real.  The perceived state gets sole attention allowing the economic cannibalism to continue and draws us further out to the middle of the lake.  And as the ice disappeared so quickly not yet 7 years ago it will again reveal itself only a perception created by policymakers for sycophants so willing to feast and profit on the rest of us and, perhaps more startling, on their own future well being.

  

  

  
  
  

  

• Blood On The Street In The Big Boys' Markets: Bonds & Dollar "Blatter"-ed

  We suspect more than a few professional traders can find some analagous context with this clip after today's turmoil… (forward to 1:30 if it does not automatically jump)

  Quite a day…

  • 0400ET Early drop on hotter-than-expected EU inflation
  • 0500ET Ramp on Greek deal rumors once again
  • 0815ET Airline Bomb Threats send stocks lower
  • 0830ET BTFDers ignore those headlines – stocks jump
  • 0915ET Dijsselbloem dismisses deal – stocks drop
  • 0945ET S&P touches 50DMA and bounces
  • 1000ET Terrible Factory Orders data – stocks surge
  • 1130ET Rip to new highs as algos latched on to Crude's spike – run stops
  • 1200ET VIX monkey-hammered lower surges stocks
  • 1400ET Stocks start to rollover on no news
  • 1430ET NYMEX Closes, oil-stock link fades and stocks drop into red
  • 1445ET RTRS headline bullshit on EU agreement on terms for Greece
  • 1500ET Great Auto Sales data bumped stocks briefly but faded

  *  *  *

  While stocks traded like an EKG today, the big story is in FX and Bond markets where turmoil was an understatement…

  The USDollar was crushed today… down a stunning 1.8% as EUR spiked over 2% ahead of tomorrow's ECB conference

  

   

  This is the 2nd biggest down day for the Dollar since March 2009…

  

   

  All driven by a huge roundtrip in EURUSD…

  

   

  Bond yields were smashed higher – in Bunds…

  

   

  And Treasuries… 30Y Yields broke above 3.00% once again

  

   

  Stocks and bonds recoupled yesterday but once EU inflation hit and spanked Bunds, TSYs and US equities decoupled once again…

  

   

  Stocks and USDJPY carry decoupled as they plunged this morning and algos flipped to EURJPY as the driver…

  

   

  *  *  *

  Ok so how did stocks do on the day…

  

   

  In cash – exactly the same pattern as yesterday!

  

   

  12:00 pm is the new 3:30 pm https://t.co/hXb3Dy4rd6

  — zerohedge (@zerohedge) June 2, 2015

   

  And since Friday's close…The Dow is clinging to Green, Trannies outperforming (despite oil's rally)

  

   

  S&P bounced off its 50DMA…

  

   

  VIX was once again gappy and noisy…

  

   

  Despite all the carnage in the dollar, commodities were kinda blah… positive but modest…

  

   

  Although stocks and Oil recoupled after Europe closed…then decoupled after NYMEX close (note the 2 pumps in Crude early on that led stocks)

  

   

  Charts: Bloomberg

  Bonus Chart: Deja vu all over again…

  Groundhog Day (??????? ?????) pic.twitter.com/YWQaOrQAMz

  — Rudolf E. Havenstein (@RudyHavenstein) June 2, 2015

  

  
  
  

  

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