Today’s News June 4, 2015

• China Is Crashing (Again)

  It appears – as opposed to what the world’s asset-gathering commission-takers would have one believe – that huge illiquid spikes in bond markets are not good for stocks. As the bond carnage continues to careen throughout Asia, Chinese stock investors appear to have decided enough is enough at doubling their money in a mere few months. After early weakness out of the gate, the ubiquitous dip-buyer-of-last-resort failed to appear as the afternoon session arrived and Chinese stock indices are down between 5% (Shanghai Comp – which never took out its previous highs) and 7% (CHINEXT which was up over 16% in the last 3 days) overnight. Everybody better be hoping for a disastrous jobs number on Friday or this drop may suddenly become the long lost ‘healthy’ correction in global stocks so many have called for.

   

  Today…

  

   

  And the last week… 10% correction… 16% face-ripper… 7% correction

  

   

  Every asset manager in the world is currently praying that MSCI does not include China in its indices or risk budgets everywhere will be blown and exposure to global equities will be forced lower.

   

  Charts: Bloomberg

  

  

  
  
  

  

• Free Speech, Facebook & The NSA: The Good, The Bad & The Ugly

  Submitted by John Whitehead via The Rutherford Institute,

  “A person under surveillance is no longer free; a society under surveillance is no longer a democracy.”—Writers Against Mass Surveillance

  THE GOOD NEWS: Americans have a right to freely express themselves on the Internet, including making threatening—even violent—statements on Facebook, provided that they don’t intend to actually inflict harm.

  The Supreme Court’s ruling in Elonis v. United States threw out the conviction of a Pennsylvania man who was charged with making unlawful threats (it was never proven that he intended to threaten anyone) and sentenced to 44 months in jail after he posted allusions to popular rap lyrics and comedy routines on his Facebook page. It’s a ruling that has First Amendment implications for where the government can draw the line when it comes to provocative and controversial speech that is protected and permissible versus speech that could be interpreted as connoting a criminal intent.

  That same day, Section 215 of the USA Patriot Act, the legal justification allowing the National Security Agency (NSA) to carry out warrantless surveillance on Americans, officially expired. Over the course of nearly a decade, if not more, the NSA had covertly spied on millions of Americans, many of whom were guilty of nothing more than using a telephone, and stored their records in government databases. For those who have been fighting the uphill battle against the NSA’s domestic spying program, it was a small but symbolic victory.

  THE BAD NEWS: Congress’ legislative “fix,” intended to mollify critics of the NSA, will ensure that the agency is not in any way hindered in its ability to keep spying on Americans’ communications.

  The USA FREEDOM Act could do more damage than good by creating a false impression that Congress has taken steps to prevent the government from spying on the telephone calls of citizens, while in fact ensuring the NSA’s ability to continue invading the privacy and security of Americans.

  For instance, the USA FREEDOM Act not only reauthorizes Section 215 of the Patriot Act for a period of time, but it also delegates to telecommunications companies the responsibility of carrying out phone surveillance on American citizens.

  AND NOW FOR THE DOWNRIGHT UGLY NEWS: Nothing is going to change.

  As journalist Conor Friedersdorf warns, “Americans concerned by mass surveillance and the national security state’s combination of power and secrecy should keep worrying.”

  In other words, telephone surveillance by the NSA is the least of our worries.

  Even with restrictions on its ability to collect mass quantities of telephone metadata, the government and its various spy agencies, from the NSA to the FBI, can still employ an endless number of methods for carrying out warrantless surveillance on Americans, all of which are far more invasive than the bulk collection program.

  As I point out in my new book Battlefield America: The War on the American People, just about every branch of the government—from the Postal Service to the Treasury Department and every agency in between—now has its own surveillance sector, authorized to spy on the American people. Just recently, for example, it was revealed that the FBI has been employing a small fleet of low-flying planes to carry out video and cell phone surveillance over American cities.

  Then there are the fusion and counterterrorism centers that gather all of the data from the smaller government spies—the police, public health officials, transportation, etc.—and make it accessible for all those in power.

  And of course that doesn’t even begin to touch on the complicity of the corporate sector, which buys and sells us from cradle to grave, until we have no more data left to mine. Indeed, Facebook, Amazon and Google are among the government’s closest competitors when it comes to carrying out surveillance on Americans, monitoring the content of your emails, tracking your purchases and exploiting your social media posts.

  “Few consumers understand what data are being shared, with whom, or how the information is being used,” reports the Los Angeles Times. “Most Americans emit a stream of personal digital exhaust — what they search for, what they buy, who they communicate with, where they are — that is captured and exploited in a largely unregulated fashion.”

  It’s not just what we say, where we go and what we buy that is being tracked. We’re being surveilled right down to our genes, thanks to a potent combination of hardware, software and data collection that scans our biometrics—our faces, irises, voices, genetics, even our gait—runs them through computer programs that can break the data down into unique “identifiers,” and then offers them up to the government and its corporate allies for their respective uses.

  All of those internet-connected gadgets we just have to have (Forbes refers to them as “(data) pipelines to our intimate bodily processes”)—the smart watches that can monitor our blood pressure and the smart phones that let us pay for purchases with our fingerprints and iris scans—are setting us up for a brave new world where there is nowhere to run and nowhere to hide.

  For instance, imagine what the NSA could do (and is likely already doing) with voiceprint technology, which has been likened to a fingerprint. Described as “the next frontline in the battle against overweening public surveillance,” the collection of voiceprints is a booming industry for governments and businesses alike. As The Guardian reports, “voice biometrics could be used to pinpoint the location of individuals. There is already discussion about placing voice sensors in public spaces, and [Lee Tien, senior staff attorney with the Electronic Frontier Foundation] said that multiple sensors could be triangulated to identify individuals and specify their location within very small areas.”

  Suddenly the NSA’s telephone metadata program seems like child’s play compared to what’s coming down the pike.

  That, of course, is the point.

  Whatever recent victories we’ve enjoyed—the Second Circuit ruling declaring the NSA’s metadata program to be illegal, Congress’ inability to reauthorize Section 215 of the Patriot Act, even the Supreme Court’s recognition that free speech on the internet may be protected—amount to little in the face of the government’s willful disregard of every constitutional safeguard put in place to protect us from abusive, intrusive government agencies out to control the populace.

  Already the American people are starting to lose interest in the spectacle of Congress wrangling, debating and negotiating over the NSA and the Patriot Act.

  Already the media outlets are being seduced by other, more titillating news: Caitlyn Jenner’s Vanity Fair cover, Kim Kardashian’s pregnancy announcement, and the new Fifty Shades of Grey book told from Christian’s perspective.

  What remains to be seen is whether, when all is said and done, the powers-that-be succeed in distracting us from the fact that the government’s unauthorized and unwarranted surveillance powers go far beyond anything thus far debated by Congress or the courts.

  

  

  
  
  

  

• Who Are Washington's Most Expensive Speakers?

  Recently, we’ve taken a look at some of the details surrounding speeches made by Bill and Hillary Clinton. As discussed in April, Goldman Sachs paid Bill Clinton nearly a quarter of a million dollars for a speaking engagement before lobbying Hillary’s State Department in an effort to secure $75 million in financing for a Chinese company that would later purchase aircraft from a Goldman-owned manufacturer.

  Seperately, we outlined Hillary Clinton’s keynote speech requirements which include the customary $225,000 plus a “chartered roundtrip private jet”, $1,000 for a stenographer, and a host of other “incidentals.”

  But the Clintons actually come cheap compared to a certain former Fed chair. Here’s a look at speaking engagement rates for some well-known former and current US officials (and one real estate magnate whose relevance to this list isn’t immediately discernable):

   

  

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  Two words: “everyday Americans”.

  

  

  
  
  

  

• THe BouNTiFuL GaMe…

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• It's Official: The USA Freedom Act Is Just As Destructive As The USA Patriot Act

  Submitted by Simon Black via Sovereign Man blog,

  My general rule of thumb when it comes to legislation is that the more high-sounding the name, the more insidious the law.

  Exhibit A: the just-passed USA FREEDOM Act.

  “Freedom”. It sounds great.

  So great, in fact, that they stuck it in the title and built an absurd acronym around it– the real name of the law is “Uniting and Strengthening America by Fulfilling Rights and Ensuring Effective Discipline Over Monitoring Act of 2015″.

  U-S-A-F-R-E-E-D-O-M. Hooray!

  And without fail, the media has bought in to the myth, praising the government for heralding in a new era of liberty with headlines like “Congress Reins In NSA’s Spying Powers” and “NSA phone program doomed as Senate passes USA Freedom Act”.

  Unfortunately this is simply not the case. And shame on the mainstream media for making such thinly-researched, fallacious assertions.

  If anyone had actually taken the time to read the legislation, they’d see that most of the ‘concessions’ made by the government are entirely hollow.

  Secret FISA courts still exist. Lone wolf surveillance authority and roving wiretaps still exist. They can still grab oodles of other data like medical and business records.

  And the US Attorney General has even been awarded new ’emergency powers’ to use in his/her sole discretion… just in case the secret courts might be uncooperative.

  The big victory being cheered by the media pertains to the collection of phone records. This one is actually hilarious.

  The USA FREEDOM Act prevents the government from seizing and storing ‘call detail records’, the so-called meta-data information like your phone number, the other caller’s phone number, the length of the call, etc.

  But section 107(k)(3)(B) of the new law specifically states that ‘call detail records’ do NOT include the *actual content* of the call itself. Or your name. Address. Financial data. Cell-site location. Etc.

  So basically they can’t archive your phone number. But everything else is fair game. Congratulations on your freedom.

  Lawmakers also managed to sprinkle all sorts of other worthless provisions into the USA FREEDOM Act.

  For example, the Inspector General (IG) of the United States is required to issue a report discussing what civil liberty violations may have occurred over the last few years.

  Great. Except that IG reports are just that– reports. They have no teeth. And Congress can do with this one precisely what they do with every other IG report that gets issued: nothing.

  (Seriously, when was the last time you heard any ruckus about an IG report? Probably never.)

  They also stated that a panel of ‘advocates’ (whoever they may be) would attend and observe any secret FISA court hearing in which profound legal issues might be at stake.

  Again, sounds great. Except that, like the IG report, a panel of advocates has no teeth… no power to stop the court or spy agencies.

  Bottom line, these concessions may look good on paper, but they don’t amount to any real concession.

  This is a classic negotiation tactic. When working out a contentious deal, the stronger side will invariably offer some irrelevant concession that has no material impact on what they want.

  We did this several months ago for our Chilean agriculture fund, pushing through a substantial price reduction on a 2,000 acre property by ‘conceding’ to let the seller stay in the farm house for a few months.

  He felt like he got something, but for us the concession was pointless and ceremonial.

  The same thing happened here. And the American people just got played.

  The government has spent the last 14 years turning up the heat on the boiling frog. They increased the temperature by 100 degrees over that time… and have now turned it down 1 degree.

  Yet people are treating this like it’s some sort of victory.

  It’s not. And this is a sad reflection of how low people’s expectations have become of their own government and liberty.

   

  It’s a mistake to rely on a government to solve the problems that they themselves created.

   

  It’s a mistake to expect bureaucrats to voluntarily give up the power that they have awarded themselves… and have spent years abusing.

   

  It’s a mistake to wait for politicians to give you back the freedom that they’ve taken away.

  They don’t give a damn about your freedom. And they’re certainly not going to give it to you.

  But it still exists. It’s out there for anyone who cares enough to do something about it.

  When I was in the military everyone used to say ‘freedom isn’t free’. And this is totally true.

  Freedom starts with the individual. No one is going to give it to you. Becoming free means you have to put forth just a little bit of effort to take some common sense baby steps.

  

  

  
  
  

  

• America's Discouraged, Underpaid Workforce Turns To Drugs

  It’s not a fantastic time to be a job hunter in America. The US economic “recovery” officially stalled in Q1 no matter what Steve Liesman, The San Francisco Fed, and/or the BEA say after double-adjusting the numbers, and as we’ve shown, those who are highly skilled at delivering beer and wings to restaurant patrons are far better off than highly skilled factory workers or, indeed, than those with freshly-minted master’s degrees in today’s marketplace. 

  Of course, even for those who are lucky enough to find work, the picture isn’t pretty, as wage growth for the 80% of laborers classified by the BLS as “non-supervisors” remains largely absent, while for those unfortunate enough to be stuck in minimum wage positions, affording even a one bedroom apartment is now officially out of the question in every state.  

  Given this rather depressing backdrop, it’s little wonder that workers are inclined to “alter their mood” a bit before punching the clock. Indeed, over the past 24 months, a decades-old trend towards falling workplace drug usage has reversed itself, with 4% of workers now testing positive for either legal or illegal drug use:

  

  More, via WSJ:

  The share of U.S. workers testing positive for drugs appears to be on the rise, according to data from millions of workplace drug tests administered by one of the nation’s largest medical-screening laboratories.

   

  Traces of drugs—from marijuana to methamphetamine to prescription opiates—were found in 3.9% of the 9.1 million urine tests conducted for employers by Quest Diagnostics Inc. in 2014, up from 3.7% in 2013.

   

  While the numbers might seem small, they reflect the reversal of a longtime trend of declining drug use among workers. Before 2013, positives had dropped nearly every year for 24 years, from 13.6% in 1988 to a low of 3.5% in 2012. Some of the positive results are later discarded if a worker produces a doctor’s prescription for a legal drug, but the majority reflect illicit use, driven by increases in marijuana, cocaine and methamphetamine positives, said Dr. Barry Sample, director of science and technology for Quest’s diagnostics employer solutions business.

   

  Experts are unsure why drug usage is rising. Researchers haven’t been able to conclusively link drug consumption to economic cycles. A 2013 paper from the Federal Reserve Bank of St. Louis, for example, concluded that “the Great Recession did not generate a clear temporary or permanent pattern in rates of substance abuse.”

  Maybe it’s the weather…

  

  

  

  
  
  

  

• Bond Crash Continues – Aussie & Japan Yields Burst Higher

  The carnage in Europe and US bonds is echoing on around the world as Aussie 10Y yields jump 15bps at the open (to 3.04% – the highest in 6 months) and the biggest 2-day spike in 2 years.  JGBs are also jumping, breaking to new 6-month highs above 50bps once again raising the spectre of VAR-Shock-driven vicious cycles…

   

  

  

   

  The spectre of a self-feeding dynamic is something we’ve discussed at length before, most notably in 2013 when volatility-induced selling — reminiscent of the 2003 JGB experience — hit the Japanese bond market again, prompting us to ask the following rhetorical question: 

  What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations? 

  The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan's banks.

  What we described is known as a VaR shock and simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.

  Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly. 

  Here’s more from JPM on the similarities between the Bund sell-off and the JGB rout that unfolded two years ago:

  The sharp rise in bond volatility over the past week or so is reminiscent of the VaR shocks of October 2014 in US rates and April 2013 in Japanese rates. The common feature of these rate volatility episodes was that there was no clear fundamental trigger. Instead, positions and flows experienced a sharp swing making these VaR episodes appearing more technical and unpredictable in nature. In October 2014, a violent capitulation on short positions at the front-end of the US curve had caused a collapse in UST yields. In April 2013, profittaking in long duration exposures post BoJ's QE announcement caused a sharp rise in JGB yields that started reversing two months after. 

  What is causing VaR shocks and why are they happening often? We argued before that one of the unintended consequences of QE is a higher frequency of volatility episodes or VaR shocks: investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This, we note, is how QE increases the likelihood of VaR shocks.  

   

  The proliferation of VaR sensitive investors, such as hedge funds, mutual fund managers, risk parity funds, dealers and banks raise the sensitivity of bond markets to self- reinforcing volatility-induced selling. These investors set limits against potential losses in their trading operations by calculating Value-at-Risk metrics. Value-at-Risk (VaR) is a statistical measure that investors use to quantify the expected loss, over a specified horizon and at a certain confidence level, in normal markets. Historical return distributions and historical market volatility measures are often used in VaR calculations given the difficulty in forecasting volatility. This in turn induces investors to raise the size of their trading positions in a low volatility environment, making them vulnerable to a subsequent volatility shock. When the volatility shock arrives, VaR sensitive investors cut their duration positions as the Value-at-Risk exceeded their limits and stop losses are triggered. This volatility induced position cutting becomes self- reinforcing until yields reach a level that induces the participation of VaR-insensitive investors, such as pension funds, insurance companies or households.  

   

  The VaR shock in the JGB market in April 2013 contained most of the above characteristics. By looking at quarterly Flow of Funds data from the BoJ, it was Japanese banks, Broker/Dealers and foreign investors who sold JGBs at the time. And it was VaR insensitive investors, such as Pension Funds and Insurance Companies and Households (via investment trusts) who absorbed that selling along with the BoJ.

  As we warned last time, it appears the fireworks are far from over.

  Charts: Bloomberg

  

  

  
  
  

  

• The Definition Of An Unfree Market

  Commentary by Guy Haselmann of Scotiabank

  Unfree

  A market economy is one based on supply and demand with little or no government control.   Dictionary site ‘Investopedia’ states that “a completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.” 

  Toto, I don’t think we are in Kansas anymore.

  After the 2008 financial crisis, regulatory banking rules (i.e. macroprudential policies) conspired with zero (or negative) interest rates and asset purchases to exterminate the markets’ ability to freely calibrate clearing market prices based on supply and demand factors.   It is impossible for central banks to sustain controlling influence on market sentiment, investor behavior, correlations, and valuations, simply because effectiveness wanes over time. 

  As time passes, central bank stimulus stretches financial asset valuations in a manner that outpaces fundamental economic improvements, thus skewing future risk-reward distributions to the downside.  Investors slowly begin to boycott over-priced securities, which in turn compromises market liquidity.  Eventually the slow drip morphs into a cascade where central banks lose control of the process.

  • The October flash crash in Treasuries might be an example. 
  • Zimbabwe was the greatest modern example of lost control when its money printing policy resulted in a worthless currency after achieving an estimated inflation rate of 79 billion percent (no, really).
  • In January, the Swiss National Bank broke its currency-cap-promise resulting in its (G-10) currency moving over 40% in 10 minutes.
  • The ECB began its overly-hyped asset purchase program after markets had re-priced trillions of debt securities into negative yields.  Could the 14 point (44 bps) collapse this week in the price of German 30-year bonds be an indication of the collateral damage resulting from the ECB’s market involvement?

  Central bank policies have encouraged financial risk-taking, but central bankers offer (spurious) assurances that while pockets of froth exist, equity valuations (in particular) are ‘in-line with historical multiples’.  This advice may prove just as fatuous as it did in 2006/2007, when Bernanke testified before congress that the housing sector was not in a bubble. 

  At least FOMC members admit that they expect ‘bumpy’ markets when rate ‘lift-off’ occurs. They are fully aware that their policies have provided cheap financing for carry trades and speculation which is evident in near-record low yields and credit spreads, and record amounts of NYSE margin debt.  By most measures, stocks, bonds, and various real estate regions are over-valued.   Unfortunately, ‘fair’ value is a futile concept during non-free markets and aggressive interventionist policies.

  The historical movement of Portuguese yields is a worthy example of the sway of central bank policy. The Portuguese 10 year traded above 17.25% in 2012.  This past March it traded 55 basis points below the US 10-year yield to a level of 1.56%. Portugal’s debt-to-GDP ratio was 83.7% in 2010, 111% in 2012, and has been greater than 125% since 2013. Clearly, the drop in yield has not been a function of improving debt levels or free market determinants. It has also not been due to debt restructuring or due to a balanced budget (its budget deficit is >3%). The significant improvement in yields was mainly a function of aggressive central bank action on the part of the ECB.

  Fed’s Timing and Path

  In order for the FOMC to hike no later than the July meeting as I expect, they need to obtain some undefined amount of further evidence that weak Q1 GDP was indeed a transitory aberration; something each member believes.  Since every FOMC member expects a decent bounce-back in Q2 (which they believe will accelerate into the second half of 2015), it is unlikely that they need a full quarter of strong growth under their belt before voting to hike. There have been some pockets of economic strength, including the May auto sales yesterday which tallied to an astounding 17.79 million rate.

  When looking through the smoke screen of ‘data dependency’ the fact is that the Fed is basically within a whisker of its dual mandates.  At this point, waiting for some improved economic data has as much to do with its perception of maintaining its credibility as it does with receiving insurance that it is correct about Q1 being transitory.  

  At a higher level, the Fed’s experiment with zero interest rates and asset purchases pre-supposes the correctness of many Keynesian assumptions; many of which make little sense.  Investors are also asked to accept with a great leap of faith that the FOMC can provide some ideal mix of difficult-to-measure variables that achieves what it considers to be the ‘appropriate’ amount of inflation and economic growth.  It doesn’t take much to see how arbitrary this all is.

  Does the Fed know for certain that its policy over the past few quarters hasn’t actually been counter-productive?  Does the Fed truly have any sense how markets will react when it finally raises rates for the first time in nine years?   If monetary policy works on an 18 to 24 month lag, and the Fed is confident that Q1 was an aberration and inflation will ‘move toward 2% in the medium term’, then shouldn’t the Fed just hike rates at its June 17th or July 29th meeting?  Isn’t it possible that the uncertainty hanging over markets about the timing for lift-off has become more harmful than beneficial?

  Only if the economy is powered by the marginal borrower who will no longer borrow after a 0.25% hike, does it make sense to believe a hike will derail the economy.  Comparisons to 1937, where a hike pushed the US into recession, are incomparable and groundless. 

  On the other hand, maybe the FOMC is worried that the ‘no free lunch’ concept makes them suspicious of the possibility of a meaningfully deleterious market reaction which could have a negative impact on the broader economy.  However, under this logic, delaying a hike would only exacerbate such a response.

  If the Fed were to hike, say, in July, then it could spend a few months allowing markets to settle down before hiking a second time prior to the end of the year. When choosing to further remove accommodation in 2016, the Fed will likely prefer shrinking the balance sheet rather than hiking IOER.  This hiking-path scenario would allow the Fed to be as gradual as they have promised; maximizing the time between actions, which could help prevent undue stress on markets inflated by years of moral hazard ‘puts’ and massive central bank liquidity.

  On April 30th, I urged caution on Treasuries and advised holding powder to purchase in front of 2.40% 10 year yields.  I recommend making opportunistic purchases in the backend today, as well as re-establishing flatteners. I also advise re-entering volatility and US dollar longs.  A good argument could be made for these exposures regardless of the outcome of Friday’s employment data.  In March, I recommended the position ‘long US Treasuries vs. short EU periphery’.  This position should be maintained.

  “A great deal of intelligence can be invested in ignorance when the need for illusion is deep” – Saul Bellow

  

  

  
  
  

  

• Six Political Issues to Watch This Summer

  Via Goldman Sachs’ Alec Phillips,

  • The next several weeks are likely to be relatively eventful in Washington. While the votes are close, we expect the House to pass Trade Promotion Authority (TPA) this month, which should increase the likelihood that negotiators conclude talks on the Trans-Pacific Partnership (TPP).
  • The Supreme Court looks more likely to rule in favor of the Obama Administration in its decision on the Affordable Care Act, expected later this month, but the issue is likely to dominate the political agenda if the court rules against the current subsidy program.
  • A debate on bank and mortgage regulation in the Senate also looks possible, though at this point we believe major changes face an uphill climb.
  • Congress looks likely to miss another opportunity to enact a long-term infrastructure program, and will probably enact a temporary extension instead. This may also close the window of opportunity for tax reform until after the 2016 presidential election, since using repatriation-related corporate tax revenue to pay for highway spending had bipartisan support and was seen as a potential driver of reform. While highway legislation may not carry tax reform this year, it does look increasingly likely to carry an extension of the Export-Import Bank charter, which expires June 30.

  1. Trade Promotion Authority looks likely to pass this month

  After a failed first attempt and some uncertainty about potential amendments, the Senate finally passed legislation to reinstate Trade Promotion Authority (TPA), also known as “fast track,” which is generally viewed as critical to implementing the Trans-Pacific Partnership (TPP) currently being negotiated. From here, the remaining obstacle is the vote in the House of Representatives, which has always appeared to be a higher hurdle than the Senate.

  The House looks likely to vote on TPA at some point in the next three weeks. In our view, it is more likely that the House will pass TPA than defeat it, though the outcome is harder than usual to predict because support and opposition do not fall cleanly along party lines. In particular, the Obama Administration is counting mainly on Republicans to pass TPA in the House, but at least a few dozen of the 245 House Republicans look likely to vote against it, leaving the bill short of the 217 votes needed to pass. To make this up, at least 10 Democrats and potentially as many as 20 would need to support the measure. This seems to be roughly where Democratic support is as the moment, but the situation could clearly still change. That said, TPA has an institutional advantage: Republican congressional leaders, who support TPA, can time the vote for when support appears to be sufficient and can make multiple attempts if necessary.

  Negotiations on the Trans-Pacific Partnership appear to be in the final stages. It seems likely that the most of the outstanding issues could be settled reasonably soon after TPA is enacted, since some trading partners may be waiting for TPA passage before presenting their final offers. Once negotiations are concluded, it could take another few months for the agreement to be released and formally signed. TPA imposes some deadlines to expedite congressional consideration, but also imposes some waiting periods that could prolong some of the earlier steps in the process. In all, it is likely to take at least four months, and potentially a few months longer, from the time negotiations conclude until Congress can begin considering the agreement, meaning Congress is unlikely to begin considering the TPP agreement, even if it is finalized soon, until late 2015 at earliest.

  2. The Supreme Court should rule on ACA subsidies in the next few weeks

  The court is expected to rule soon–probably between June 22 and June 29–on the challenge to the Obama Administration’s implementation of insurance subsidies under the ACA. The plaintiffs in the case contend that because the law states that only insurance purchased on an exchange “established by the state” is eligible for subsidies, enrollees in the 34 states with federally run exchanges should not be subsidized. The outcome is far from clear, though questioning during the oral arguments in March suggested that at least five of the justices were more inclined to rule in favor of the administration, albeit for different reasons. Those arguments seemed to boil the case down to two questions: whether the current law is ambiguous, and whether denying subsidies to states that have not established their own insurance exchanges amounts to unconstitutional coercion of states by the federal government. If the court finds the law ambiguous, it seems likely to rule in favor of the administration. If the court finds that denying subsidies as a means of forcing states into action is unconstitutional, this would also likely preserve the status quo. The administration’s implementation of the law would be overturned only, it seems, if the court found that the law was clear and that only insurance purchased on exchanges “established by the state” (rather than the federal government) is eligible for the subsidies.

  In the event of a ruling against the administration, subsidies would probably be eliminated by August unless the court explicitly granted a grace period for Congress and/or the states to respond (for example, Justice Alito raised the possibility of delaying the effect of the court’s decision until year end). This would put political pressure on Congress to act, with little time to do so. Congressional Republicans have floated a few proposals to replace the subsidies, but face two potential obstacles. First, the leading proposals would eliminate the individual and employer mandates, which the White House would be likely to reject. Second, some Republicans object to replacing the subsidies if they are struck down, raising the possibility that intra-party divisions could lead to a stalemate. Ultimately, if the court rejects the administration’s implementation of the subsidies, there is a high probability that Congress would reinstate some form of financial assistance, but the process would create significant uncertainty and would probably involve changes to the health law beyond simply reversing the effect of the court’s decision.

  3. Senate banking legislation faces a tough road ahead

  In May the Senate Banking Committee passed wide-ranging legislation that would make changes to mortgage and bank regulation and some organizational changes at the Fed. Specifically, among other changes, the bill would (1) loosen mortgage lending standards by providing banks with a “safe harbor” from qualified mortgage rules for loans that they originate and hold entirely in their own portfolio, along with other criteria; (2) increase the threshold for financial institutions to be automatically designated as “systemically important” by the Financial Stability Oversight Council (FSOC) from $50 billion to $500 billion in assets (FSOC would still retain the ability to designate institutions below that level); (3) require the president to nominate and the Senate to confirm the President of the New York Fed, and (4) prohibit the Treasury from disposing of the preferred stock it holds in Fannie Mae and Freddie Mac without congressional approval.

  However, the bill faces an uphill battle in getting through the Senate. Democrats on the Banking Committee unanimously opposed the legislation, and it is unlikely to have sufficient support to pass in its current form. There is a possibility that Senate Banking Committee Chairman Shelby will be able to negotiate a slimmer package of reforms that might win some Democratic support, but most of the important provisions noted above would be unlikely to make the cut, in our view. The upshot is that the Senate seems unlikely to pass the bill that came out of committee, and if the Senate does ultimately pass a bill it would probably necessitate dropping most of the provisions of greatest interest to market participants.

  4. Transportation infrastructure spending looks likely to be punted…

  Congress has failed to pass a long-term transportation infrastructure spending program for several years, and another temporary patch ahead of the July 31 expiration of spending authority looks likely. The highway program currently spends more than it takes in via the gasoline tax, so Congress will need to plug this hole (estimated at $11 billion through year end) by transferring funds from the Treasury and using a package of spending cuts and/or tax increases to cover cost of doing so. The duration of the next extension is uncertain, but given the funding constraints, we would expect the upcoming patch to last only through year-end.

  5. …closing the window of opportunity for tax reform…

  The next extension of the highway spending bill probably marks the end of the road for tax reform until after the 2016 election. Some lawmakers in both parties have held out hope for an agreement that combines a long-term (i.e., six-year) infrastructure plan with corporate tax reform, using revenues from taxing repatriated foreign earnings to fill the highway program’s funding gap and potentially to boost spending. However, tax reform has failed to get off the ground this year, and even Senate Finance Committee Chairman Orrin Hatch (R-UT) conceded recently that Congress is “not even near doing tax reform at this point.” While we expect to see some additional activity on the issue–House Ways and Means Committee member Charles Boustany (R-LA) is expected to introduce an international corporate tax reform bill in the next several weeks and working groups in the Senate are expected to report shortly on potential areas of agreement– the lack of progress thus far and the short time left before other political distractions take over suggest that the political opening that tax reform seemed to have early this year has just about closed.

  6. …but creating an opening for reauthorization of the Export-Import Bank

  While the transportation bill looks unlikely to become a vehicle for tax reform, it has emerged as a potential vehicle for renewing the charter of the Export-Import Bank. Senate Majority Leader McConnell has promised to allow a vote on Ex-Im renewal this month, as part of a political agreement that allowed Trade Promotion Authority to move forward. Ex-Im supporters are likely to seek to combine renewal of the bank’s charter with some other must-pass legislation; the most obvious is the highway bill. If this occurs, it would increase the probability that the Ex-Im charter will be extended, at least temporarily. That said, since the highway program’s authority does not expire until July 31, such a strategy would also raise the probability that authority for the Ex-Im Bank to make new export credit loans and guarantees would expire at least temporarily.

  

  

  
  
  

  

• Why Did These Former Fed Members Admit Mathematically, Logically, & In Reality: "It's Over"?

  In the ironically titled "Paying For The Past" presentation, none other than Dick Fisher, Al Greenspan, and Larry Lindsey appear to have crossed the Rubicon of denial, lies, and deception to the dark-side of accepting reality. As Bill Holter asks, why exactly would these former Federal Reservists hint that, mathematically, logically, intuitively and in real life, IT'S OVER! Do they now realize what the crazy gold bugs have been saying all along is true and the day of reckoning is very close at hand.  They must be trying to get "out in front" of what is coming so they're on the record for historical and "legacy" purposes.  Nothing else makes any sense.

  

   

  As Bill Holter details…I could only chuckle after watching the interview because my entire writing can now consist of "yeah, what they said!".  Rather than write an entire article on this, I believe it might be better to let you watch what I was going to write, and we can move on to the "motives" of these three telling "mostly" the truth.  If you watch this interview, please keep in mind this one question "…and the alternative is"?

   

   
  Why exactly would these former Federal Reservists hint that, mathematically, logically, intuitively and in real life, IT'S OVER!  They did back peddle a little bit as the interview went on but "why" or better yet why now?  I believe they know what the crazy gold bugs have been saying all along is true and the day of reckoning is very close at hand.  They must be trying to get "out in front" of what is coming so they're on the record for historical and "legacy" purposes.  Nothing else makes any sense.  Are they "trying" to torpedo the system or to break confidence?  I highly doubt it but after watching the interview, would any kid with a paper route invest their money into the current system?  Are they trying to bad mouth the Fed now they are no longer employed there?  No, in fact, they each one pointed the blame at Congress.  It's Congress' fault we are in this mess!  "They" (Congress) spent the money and made the promises which cannot be honored and will ultimately be broken.
   
  There is a punch line of course, one these three men don't want you to hear!  Actually, the joke AND the punch line are both one in the same, "the money itself is bad and is the core to ALL economic and financial problems!".  You see, Congress could never had authorized all of the spending if the Treasury did not have the "money" in its coffers.  Yes Treasury could have borrowed money but would have been restrained if "money" was gold or something "real".  The only way that Congress has been able to get away with bankrupting the country was with the aid of … yes, the FEDERAL RESERVE these guys used to work for!  The Fed has in fact underwritten the scheme, if there was no Fed …the leverage could never have been built into the system.  Greenspan, Fisher and Lindsey of course know this but they can never admit it.  Were they to admit it, it would be an admission that they knew all along they were driving the bus over a cliff …with a roadmap wide open!
   
  All three spoke about the current state of interest rates and the unsustainability of the situation.  They ask "why", for what good reason are interest rates at levels only justified by a crisis?  The answer of course is; we are still in a crisis, we never exited and if rates HAD been increased …their greatest fears would have already been realized!  Mathematically, rates cannot go higher because of the inability to service interest payments (not to mention blowing up the leveraged interest rate derivatives) would come front and center.  They are trying to say the inability to pay is guaranteed to come …but is a future event.  If rates were to rise now, it becomes a current event.  It's really this simple!          
   
  Lawrence Lindsey even said at the 45 minute mark, "this is how they all end …including Zimbabwe"!  All "what" Larry?  Fiat currencies?  Or central banks who issue them?  This brings me to another article which has come out and ties in perfectly.  Actually, it ties in so well we can bring this entire article full circle and back to one of the gold bugs most central theses.  Zerohedge posted an article regarding a systemic bet being made by billionaire hedge fund manager Paul Singer.  Mr. Singer's strategy is simple, he calls it the "bigger short".  He believes interest rates have only one way to go, up.  He also believes we will see far more staggering defaults than we did in 2008-09.  He believes shorting the debt of the world is a no brainer trade and one where you can win ALL the marbles.
   
  Zerohedge of course picked up on the "minor flaw" in this strategy.  The very same flaw I might add that Harry Dent, Martin Armstrong and others are missing.  You see, when you "win", you must be "paid", but paid in "what" is the question.  Assuming Mr. Singer is correct and the system does collapse on itself and he "wins".  His win of course will be HUGE …but, he will be paid in dollars or euros or whatever fiat currency his trade is done in.  What will his winnings be worth if the currency itself is worth nothing?  It reminds me of Mikhail Barishnikoff in the movie "White Nights", he had a stack full of worthless rubles and threw them handful after handful up in the air while saying "rubles, rubles, lots and lots of rubles".  He had money …but it wasn't worth anything.
   
  You see, the currencies themselves are supported by the very debt Mr. Singer is selling short and expects to collapse!  Which now brings us back full circle to the crazy gold bugs.  This is exactly what they have been saying all along, a debt default will also mean a collapse in confidence of the currencies themselves and direct "fear capital" back into real money.  This will create huge demand, force supply into hiding and additionally revalue gold higher because the currencies themselves are losing value and confidence.  Gold bugs are not so different from those who see the dangers in the system from overheated markets and overleveraged debtors.  The only difference is that these nut jobs want what hasn't been for nearly 50 years, they want TRUE and REAL "SETTLEMENT"!  They actually want to get paid in something real!  How crazy is that?

  

  

  
  
  

  

• Tspiras Says "Don't Worry" About IMF Payment After Latest Failure To Clinch Deal

  Following this evening’s “private” meeting with Jean-Claude Juncker and Jeroem Dijsselbloem, Greek PM Alexis Tsipras once again admits that there is no deal. Both sides issued statements – The EU’s was a 3 sentence boiler-plate; and Tsipras was a brief press conference on Greek TV. In the interests of clarity we provide the statements (and their actual translations from “we have nothing to say” to “this is what we are trying not to say.”)

   

  The European Commission:

  *EU COMMISSION SAYS TALKS WITH TSIPRAS WERE CONSTRUCTIVE [no plates were thrown]

   

  *EU COMMISSION: INTENSE WORK ON GREECE TO CONTINUE [we are no closer at all to a deal]

   

  *EU COMMISSION SAYS PROGRESS MADE IN UNDERSTANDING POSITIONS [it is our way or no-way]

   

  It was agreed they will meet again – [seriously!?]

  Tspiras then explained:

  *BRUSSELS TALKS WERE CORDIAL: TSIPRAS [we finished dinner before plates were thrown]

   

  “DON’T WORRY,” TSIPRAS SAYS ABOUT FRIDAY IMF PAYMENT [Please do not pull all your deposits from Greek banks, everything is fine]

   

  “We are very close on an agreement on primary surpluses; that means that all the sides agreed to go further without the tough austerity measures of the past.” [Rest assured fellow Greek politicians, we will magically achieve a primary surplus with lower tax receipts and no austerity]

   

  “I think the realistic proposals on the table are the proposals of the Greek government” [sadly it seems the EU disagrees]

   

  “Aid accord w/ euro area, IMF is “in sight”” [like a mirage in the desert?]

   

  GREECE TO NEAR AGREEMENT WITH CREDITORS IN `NEXT DAYS’: TSIPRAS [if only The EU would back down on VAT and Pensions provisions]

   

  Tsipras “optimistic” European Commission intends to continue with a “realistic point of view” [when did hope become the international negotiating strategy]

  And finally Jeroem added:

  *DIJSSELBLOEM EXITS BRUSSELS TALKS, SAYS `MEETING WAS GOOD‘ [Only the cheap plates were thrown]

  *  *  *

  So to sum it all up – No Deal… no closer to a deal… and the same sticking points remain.

  For those looking for any glimmer of hope – they claims to be close to an agreement on fiscal targets – Almost no progress over pension system – Small progress on VAT & taxes

  EURUSD is drifting slowly lower – entirely unimpressed by this news… (if news is what it can be called)

  

  

  

  
  
  

  

• Cartoons Mocking “Goldman Rats” And Hillary Clinton Appear All Over NYC

  Submitted by Mike Krieger via Liberty Blitzkrieg blog

  It appears mysterious cartoons mocking “Goldman Rats” and Hillary Clinton are appearing all over NYC. The best one I’ve seen, is the image which shows the two entities as the unified oligarch oppressors they are. See: below:

  

  Business Insider notes that:

  A street artist has set their sights Goldman Sachs and is putting up stickers around New York City attacking the investment giant. 

   

  I spotted the Clinton sticker in a Brooklyn subway station last week, but it seems to have appeared in multiple locations. A blog dedicated to Brooklyn street art posted a picture taken of one of the stickers last month. 

   

  The Clinton sticker is clearly relatively new. In the sticker, the “H” in “Hillary” is copied from her campaign logo, which was unveiled when she launched her campaign in April. It echoes a line of attack that has been used by one of Clinton’s Democratic rivals, former Maryland Gov. Martin O’Malley (D), who has suggested Goldman Sachs would like to see her in the White House.

  While we don’t know who made the stickers, we should all be grateful to the creator. While the oligarchy remains firmly in place, we don’t have to respect them, and mocking corrupt cronies is the first step in delegitimizing their undeserved claims to positions of extreme wealth and power.

  For related articles, see:

  Hillary Clinton’s Poll Numbers Plunge to the Worst Since 2001

  Charting the American Oligarchy – How 0.01% of the Population Contributes 42% of All Campaign Cash

  Portrait of the American Oligarchy – The Very Troubling Income and Wealth Trends Since 1989

  Just Another Tale from the Oligarch Recovery – $100 Million Homes Being Built on Spec

  The Face of the Oligarch Recovery – Luxury Skyscrapers Stay Empty as NYC Homeless Population Hits Record High

  

  

  
  
  

  

• Top 10 Military Spenders

  Follow ZeroHedge in Real-Time on FinancialJuice with Voice News

  Hey Big Spender! Well, that’s what Shirley Bassey warbled out in 1967 when apparently the ‘minute you walked into the joint’ it was possible to see you ‘were a man of distinction’. It would seem, therefore, that a man is judged neither on the clothes he wears, nor on his manners these days. Not for a long time. These days, what counts is the amount of money that you spend. You don’t have to have it, you just need to flaunt it and brashly show it off to the rest of the world. It’s only dirty books that gather no dust, isn’t it? It’s only a dirty man that is able to do what he pleases; dirty being here the way the rich arms dealers are playing their tiresome game of I produce, I sell, you wage war, we tell everyone it’s bad and the kids will believe it. A man of distinction in today’s world is a man that throws his money in military monkey business, the shenanigans that our wealthiest nations excel at.

  The Stockholm International Peace Research Institute (SIPRI) carries out research on military spending around the world and measures how it changes. Most of the world’s armed countries are included in the study. Although, what country exactly isn’t armed these days? Any guesses? A French statesman, Georges Clemenceau, once said that “war is too serious a matter to be entrusted to the military”. That’s why the government always looks after it. One thing that he forgot to say also was that it was far too lucrative a business to let it out of the hands of the politicians. So, there are very few countries in the world that have no military force. Where are they and have you heard of all of them? Here’s the list (in alphabetical order):

  Countries with NO Military Force

  1. Andorra

  The principality in the Pyrenees mountain range has no military and even declared war on Germany in 1914 despite this fact. There were 10 men in the army that went to war in World War I as representatives of this small state. After the Great War the 10-man army was replaced by a 240-strong police force. France and Spain provide protection of the principality.

  2. Costa Rica

  After the Costa Rican Civil War and on December 1^st 1948 President José Figueres Ferrer abolished the military. Today the only force in the country is the Fuerza Pública providing ground law enforcement and border controls. Only under the Inter-American Treaty of Reciprocal Assistance (1947) would Costa Rica be protected if attacked. 21 countries including the USA and Cuba, for example would come to its assistance.

  3. Grenada

  There has been no army in this country since the US-led invasion took place in 1983 under the name Operation Urgent Fury. There is only the Royal Grenada Police Force. It is the Regional Security System that ensures that countries such as Antigua, Barbados and the Grenadines provide assistance in the event of a threat on the country.

  4. Lichtenstein

  This country abolished its army in 1868 following the Austro-Prussian War. Apparently, the country did not have enough money at the time in order to be able to afford an army. The police force is known as the Principality of Lichtenstein National Police Force. In the event of war it would be the European Union that would ensure its protection.

  5. Marshall Islands

  The Marshall Islands have been granted the status of a sovereign nation since 1983 under the Compact of Free Association.  The US acts as a protectorate and as such the Marshall Islands has no military force. There is, however, the Marshall Islands Police force that carries out every day duties in the country in order to ensure security.

  6. Nauru

   This is the smallest country in the world and it measures just 8.1 square miles. It has no standing army or military force. There is a Nauru Police Force but oddly there is no capital in the country. The last time that Nauru was attacked was by Nazi Germany in 1940 and at the time, as today if it were to be attacked, it was Australia that stepped in to provide assistance.

  7. Palau

  There exists a Palau National Police force but there is no military as such. Palau would obtain assistance from the USA since under the Compact of Free Association Palau is to all intents and purposes a protectorate of the USA.

  8. Samoa

  There is no military force in this country and it would have to rely on other countries to ensure its own defense. It has a treaty for such a purpose with New Zealand which undertook its protection as from 1962.

  9. Solomon Islands

  The Solomon Islands was a British protectorate as from 1893 and there was very little military force on the thousands of islands that make up the country. When the Solomon Islands created a government in 1976, it remained in relative stability, but with no military force until 1998. At that date until 2006, the country was rife with crime and ethnic conflicts and peace was restored only when New Zealand and Australia stepped in. However, there is no military and only a Solomon Islands Police Force today.

  10. Vatican

  There is no legal military present in the Vatican City. In the past the Noble Guard and the Palatine Guard were created to protect the Pope. However, these were abolished in 1970 by Pope Paul VI. Today there are only the Pontifical Swiss Guards. They are there to protect the pope and the Vatican Palace, but they are not legally speaking considered to be an army or a military force. The Gendarmerie Corps deal with traffic and keeping order as well as criminal investigations. Rome is responsible for the protection of the Vatican City.

   Obviously if there are so few that have banished, outlawed and abolished their military force, then there must be some reason behind wanting to do. It can’t be that there is just some overriding need to have some means of protecting yourself from that nasty neighbor that so longingly wants to invade you and to take from you what you never had but just made him believe you were hiding under the mattress.

  The top ten countries that spend the most on military are as follows and these are in ascending order. Wonder who’s at the top of the roost? Any guesses?

  Top 10 Military Spenders in the World

  10. Brazil

  Military Expenditure stands at $36.2 billion per year and it represents 1.4% of Gross Domestic Product in the country. In one year it has reduced its military spending by 3.9%. It imports $254 million and exports $36 million. Military spending increased rapidly during the 2000s, mainly due oil revenues increasing. It decreased by 4% in 2013. It is the military force that maintains order within the country and not just the police force.

  9. India

  India’s military spending for the latest available figures (2014) stands at $49.1 billion per annum, meaning a 2.5% share of GDP. Spending only decreased by 0.7% by comparison with 2013 and total imports represent a value of $5.6 billion (which is the highest figure in the word). Exports stand at a value of $10 billion. India is one of the highest spenders in the world on its military force. This is more than likely for its need to show outwardly that it is wealthy enough and capable enough of providing protection against Pakistan.

  8. Germany

  Military expenditure in this country is worth 1.4% of GDP and works out to $49.3 billion per year. There was no change by comparison with 2013 and total exports stand at $972 million, making it the world’s 6^th largest arms exporter. It is 36^th highest importer only in the world of arms, worth a value of $129 million. Since World War II Germany has being passive in world conflicts and its main role today is arms seller. Whereas the majority of countries in the world dropped their military spending when the financial crisis hit, Germany increased it by 2% as from 2008, until 2013.

  7. United Kingdom

  The UK spends $56.2 billion, representing 2.3% of GDP. As a percentage of GDP this is the 34^th highest country in the world. Between 2013 and 2014 there was a 2.6% drop in military spending due to the consequences of the financial crisis still and austerity measures. It exports are to the value of $1.4 billion and it is the 5^th highest arms seller in the world. It imports $438 million in military equipment and that means it is the 15^th highest importer in the world.

  6. Japan

  Japan spends 1% of its GDP on military and it is worth $59.44 billion. It imports $145 million-worth of military equipment today. Territorial disputes have led the country to arm itself more in case of need for defense against China.

  5. France

  France spends $62.3 billion on military and it stands at 2.2% of GDP, making it the 39^th highest country in the world. Spending decreased from 2013 by 2.3%. It exports a total of $1.5 billion and is currently the 4^th largest exporter of military equipment in the world.

  4. Saudi Arabia

  Saudi Arabia spends $62.8 billion on arms and the military and it represents a total of 9.3% of GDP (the 2^nd highest figure in the world). Between 2013 and 2014 it increased military spending by 14.3%. There is the overriding worry in the country that political turmoil and terrorism will overflow into the country from neighboring Yemen and Iraq.

  3. Russia

  Military expenditure stands at $84.9 billion per year in this country and it represents 4.1% of GDP making it the 10^th highest in the world.  It exports $8.3 billion per year and this is the world’s number one arms seller. By comparison it is the 33^rd highest arms importer only.

  2. China

  Military expenditure here is worth $171.4 billion, and it is worth 2% of GDP. It increased spending by 7.4% between 2013 and 2014. Military spending is representative of economic growth usually. The better the economy, the higher the spending. Or is it the spending on the military that fuels the economy?

  1. United States

  The USA spends $618.7 billion on the military and that is the 14^th highest percentage of GDP (3.8%). It saw its military budget decrease between 2013 and 2014 by 7.8%. It is the 2^nd highest exporter in the world and its market is worth $6.2 billion. It is the 8^th highest importer in the world and imports to the tune of $759 million. Military spending was cut due to austerity measures as well as the withdrawing of troops from Afghanistan and Iraq.

   

  According to J. K. Galbraith: “All candid economists concede the role of military expenditures in sustaining the modern economy. Some have held that expenditures for civilian purposes would do as well. The transition would be rather easy … [But] there is the problem of magnitude. For the price of a smallish fleet of manned supersonic bombers, a modern mass transit system could be built in virtually every city large enough to have a serious bus line. What would be built then?” That’s certainly food for thought. The views of Chomsky are that the ‘Pentagon System’ means that the military spending keeps the economy ticking over sweetly. The demand for arms in the word is a myth, a created, fake demand that is driven by business and economics.

  Big Spender, the song immortalized by Bassey, ends with ‘How’s about a few laughs? Laughs?’. Who’s laughing at the race to military success these days? Only the top countries make, sell, arm others and then create wars between countries, while they teach their children that they are doing it all in the name of democracy. Since when did producing and selling arms prevent warfare? Since when did arms dealing become so lucrative that everybody would be willing to start a war to get in on the act? Is that laughable? Ask Shirley! She’s about the only one that might have the answer!

  What’s your opinion of arms dealing today in the world? 

  

  

  
  
  

  

• The Next Escalation: FBI Launches Probe Of Russia 2018 World Cup Award

  With The FBI now reportedly investigating the award of The Soccer World Cup to Qatar and Russia, it appears, as Mises' Lew Rockwell exclaimed, "FIFA has got to change its name, it’s going to have to take out the “I” and put in an “A” for American." This sudden act of imperialism by The US, putting itself in charge of world soccer, as Paul Craig Roberts notes, it "is another Washington-British scam against Russia," adding "law is a weapon that Washington uses to achieve its agenda."

  Which is as we predicted a week ago, has only one goal:

  And now Russia is stripped of the 2018 World Cup

  — zerohedge (@zerohedge) June 2, 2015

  Recall:

  What happens next? Sepp Blatter's reelection this coming Friday, which until yesterday had been guaranteed, is now virtually assured to fail as Putin's frontman at FIFA is shown the door. What else likely happens?

   

  Following some dramatic procedural changes, Russia loses the hosting of the 2018 World Cup.

   

  And now, let's see how FIFA strips Russia of its 2018 World Cup hosting, which also as noted previously, was the entire reason for the sudden and unexpected DOJ crackdown on FIFA, whose corruption has been well known for decades.

  Paul Craig Roberts previously noted,

  “This is another Washington-British scam against Russia. It reminds me of the orchestrated press attack on the Sochi Olympics. Washington is trying to turn professional sport into a propaganda weapon against Russia. They are going to use this to take the World Cup away from Russia.”

  “There is no rule of law in the US. Law is a weapon that Washington uses to achieve its agenda.”

  And as the following interview with Mises Institute's Lew Rockwell confirms, it proves there is nothing Washington will not interfere with…

  RT: This story has generated a huge amount of interest around the world. From an economic point of view, there is also a lot at stake, isn’t there?

   

  Lew Rockwell: Well, there certainly is, but I think the political angle is more important. We’ve had this act of imperialism. Who put the US in charge of international football? They’re able to because FIFA made a mistake of having an office in New York. Probably that is a warning to anybody else: Don’t have an office on US soil because then they can use that to take control.

   

  Maybe the corruption charges are true, I don’t know, but again: Why is it the business of the US? I think that’s entirely because FIFA gave the World Cup in 2018 to Russia. This is just another anti-Russian move, and the US wanting to run the entire world, be in charge of every crime or alleged crime every place on the globe.

   

  RT: But doesn’t it have a case there, because there are allegations of $150 million being misappropriated? A lot of this money apparently went through American banks, so part of it happened on American soil. So do they have the right to investigate it?

   

  LR: They can investigate what happens on American soil, but they don’t have the right to go and arrest people in Switzerland or elsewhere. Would you say that England or Switzerland can go and arrest people in New York without the US government’s permission?

   

  I have to tell you, there is corruption in the US too: there is corruption in US sports; there is corruption in the US government; there is corruption in every government. The problem the US has with this is not corruption, the problem it has got is with the results – Blatter wasn’t doing what he was told to do. And I guess now he has done what he was told to do. Obviously something happened to him. Maybe it was just the sponsors’ withdrawing; maybe it was the CIA. Who knows, maybe he was personally threatened or his family. This is the way governments operate there, sort of big-time mafias. We don’t know what happened. But as I said, this is not a good thing for football, not a good thing for the world. FIFA has got to change its name, it’s going to have to take out the “I” and put in an “A” for American.

   

  RT: Do you think that major corporations, such as McDonald’s, played an important role here, forcing Sepp Blatter to resign?

   

  LR: I guess, yes. Of course they are the ones that could be pressured by the US. Even aside the scandal thing, imagine that the US gave them their marching orders, and they took them. And I can understand why companies don’t want to be involved in something that’s potentially corrupt. Although they put on great football games. I don’t know whether they are corrupt or not. I think there is probably corruption in many different international sports associations, because there is so much money at stake. That is not a good thing – people shouldn’t be corrupt, people shouldn’t give bribes, people shouldn’t take bribes. But again, the US is using this to take control of international football; that’s what going on.

   

  Never again will the World Cup happen in a country that the US doesn’t like. The whole world is threatened by the US, which would like to be the world government; nothing is beyond its ken; nothing is outside of its control; nothing can stand against it in the view of the US.

  *  *  *

   

  

  

  
  
  

  

• FBI Uses Surveillance "Air Force" To Monitor US Citizens, AP Finds

  In the wake of the violent protests, looting, and riots that shook Baltimore to its core and left parts of the city smoldering in late April, Benjamin Shayne — who had just sat down in his backyard to enjoy a radio broadcast of an Orioles game — inadvertently uncovered a secret FBI aerial surveillance program when he noticed a small plane circling overhead and asked Twitter if anyone could explain the aircraft’s low, circular flight pattern. As it turned out, one of Shayne’s followers had some answers:

  @scanbaltimore It’s registered to NG Research: http://t.co/mCWpUzvndp
  For some other info: http://t.co/cbCehxiCS0 pic.twitter.com/eGXFIKXCgr

  — Pete Cimbolic (@pete_cimbolic) May 3, 2015

  That exchange would culminate in a Washington Post article which outlined the “aerial support” provided to the Baltimore Police Department by the FBI. 

  We went on to take a closer look and, in “Meet The FBI’s Secret Eye In The Sky Overseeing The Baltimore Riots”, we postulated that the Cessna’s monitoring the riots may have been equipped with night vision equipment provided by Persistent Surveillance Systems, a company which has worked with the Baltimore PD in the past. Here’s a schematic (via WaPo):

  

  On the heels of the revelations, AP followed up and has much more on the FBI’s aerial surveillance program.

  Via AP:

  The FBI is operating a small air force with scores of low-flying planes across the country carrying video and, at times, cellphone surveillance technology — all hidden behind fictitious companies that are fronts for the government, The Associated Press has learned.

   

  The planes’ surveillance equipment is generally used without a judge’s approval, and the FBI said the flights are used for specific, ongoing investigations. The FBI said it uses front companies to protect the safety of the pilots and aircraft. It also shields the identity of the aircraft so that suspects on the ground don’t know they’re being watched by the FBI.

   

  In a recent 30-day period, the agency flew above more than 30 cities in 11 states across the country, an AP review found.

  The FBI claims the program is “not secret” and does not aim to collect “mass surveillance”, but as we discussed in depth in the article linked above (and as you can see from the graphic), it’s difficult to believe that the equipment on the planes is powerful enough to be of use to the FBI but somehow not capable of the types of mass surveillance that the planes over Baltimore were capable of. More from AP:

  “The FBI’s aviation program is not secret,” spokesman Christopher Allen said in a statement. “Specific aircraft and their capabilities are protected for operational security purposes.” Allen added that the FBI’s planes “are not equipped, designed or used for bulk collection activities or mass surveillance.”

   

  
  

   

  But the planes can capture video of unrelated criminal activity on the ground that could be handed over for prosecutions.

   

  Some of the aircraft can also be equipped with technology that can identify thousands of people below through the cellphones they carry, even if they’re not making a call or in public. Officials said that practice, which mimics cell towers and gets phones to reveal basic subscriber information, is rare.

  AP discovered the names of many of the shell companies the FBI has used to conduct the operation and in an ironic twist, the government asked the news agency not to reveal the names because then the Bureau would simply have to create new companies, a process which would cost taxpayers money. In other words: “if you reveal this information to taxpayers, it will cost them.”

  U.S. law enforcement officials confirmed for the first time the wide-scale use of the aircraft, which the AP traced to at least 13 fake companies, such as FVX Research, KQM Aviation, NBR Aviation and PXW Services.

   

  During the past few weeks, the AP tracked planes from the FBI’s fleet on more than 100 flights over at least 11 states plus the District of Columbia, most with Cessna 182T Skylane aircraft. These included parts of Houston, Phoenix, Seattle, Chicago, Boston, Minneapolis and Southern California.

   

  The FBI asked the AP not to disclose the names of the fake companies it uncovered, saying that would saddle taxpayers with the expense of creating new cover companies to shield the government’s involvement, and could endanger the planes and integrity of the surveillance missions. The AP declined the FBI’s request because the companies’ names — as well as common addresses linked to the Justice Department — are listed on public documents and in government databases.

   

  At least 13 front companies that AP identified being actively used by the FBI are registered to post office boxes in Bristow, Virginia, which is near a regional airport used for private and charter flights. Only one of them appears in state business records.

   

  
  

   

   

  The moral of the story: if you’re ever in your backyard relaxing and listening to a baseball game and happen to notice a Cessna making concentric circles overhead remember, it’s not paranoia if they’re really watching you.

  

  

  
  
  

  

• A Much Bigger Threat Than Our National Debt

  Submitted by Bill Bonner via Bonner & Partners,

  The markets are acting as though it was already summer. They are wandering around with little ambition in either direction. Meanwhile, we’ve been wondering about… and trying to explain… what it is we are really doing at the Diary.

  We expect a violent monetary shock, in which the dollar – the physical, paper dollar – disappears. But why?

  Credit Bubble, the Sequel

  As you know, we tend to take the side of the underdogs… as well as half-wits, dipsomaniacs, and unrepentant romantics. But currently, we are standing up for the young, the poor, and all the others the credit bubble has hurt and handicapped. It’s not that we are saints or do-gooders. We are just trying to make a living, like everybody else.

  But we come at it from a different direction than most. Almost all the movers and shakers have the same bias: They want to see the credit extravaganza continue.

  The Federal Reserve has already “invested” (if that’s the right word for throwing phony money down the drain in a futile and jackass effort to hold off the future) $4.5 trillion to protect the balance sheets of the elite. This money has been amplified by zero-interest-rate policies to something like $17 trillion of stock market gains… and umpteen trillion in bond and real estate profits. Naturally, the people who own these things – and not coincidentally provide early stage funding for congressional and presidential candidates – do not want to see a new movie. They want to see the sequel, Credit Bubble 5. Then Credit Bubble 6. And so on…

  And the show goes on! They buy their candidates. They place their ads. The newspapers they support voice their opinions. Their corporations wheel and deal on Wall Street, spinning off bonuses, fees… and even higher stock prices. And the pet economists appointed to run central banks do their bidding.

  Eyes Wide Open

  We’re not complaining about it. We’re just calling attention to it. Because we believe there is a lot of money to be lost by not recognizing what is going on… and perhaps a little money to be made too by following the plotline carefully. Most people do not recognize what is going on because they are paid not to recognize it.

  As we’ve pointed out many times, no central bank is going to hire a guy who thinks it should mind its own business.

  Few investors are going to dispute the happy ending. And nobody is going to be appointed secretary of the Treasury who quotes Andrew Mellon’s famous advice to President Hoover following the 1929 Crash to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate.”

  The credit bubble causes an extreme bias to the upside. Almost no one wants to see it end. Except us.

  *  *  *

  Is that because we are smarter or more virtuous? Not at all. It’s just that we are not paid to ignore things. And neither is any member of our team of worldwide analysts at Bonner & Partners – the small, independent publishing business behind the Diary. We are not beholden to the elite; we get no money from them. And our business model (and maybe our natural contrariness) tells us to open our eyes and try to see what others have missed. Yes, we own stocks. But capital gains take a back seat – far behind our desire to connect the dots.

  Beating Mr. Market

  Since we founded Agora Inc. – the parent company of Bonner & Partners – in 1980, we have published thousands of investment reports and recommendations. We now have analysts and economists in 10 different countries. Our advice and recommendations appear in French, German, Mandarin, Spanish, and Portuguese… as well as English.

  Is the advice good? Do the recommendations always go up? We recently commissioned an outside accountant to study them. The conclusion? Some good. Some not so good. Some do very well – with several of our paid-for advisories outpacing the S&P 500 over the last 10 years.

  …

  Our personal experience is similar: Sometimes we do well. Sometimes we don’t.

  This generally confirms what we know about the way the investment markets work: If you are lucky and work hard you can do a little better than the market.

  But Mr. Market is always hard to beat. The Efficient Market Hypothesis – which tells us that financial markets do not allow you to earn above-average returns without taking above-average risk – may overstate the case. But probably not by much.

  “Black Swan” Hunting

  On the other hand, when we look at the big macro events of the last 30 years, we find our team does very well.

  There were five major events that marked the period:

  1. The collapse of the Soviet Union
  2. The fall of the Japanese miracle economy in 1990
  3. The bursting of the dot-com bubble in 2000
  4. The attack on the World Trade Center in 2001 and the “War on Terror”
  5. The financial crisis of 2008 and the subsequent non-recovery

  These things are important because they were unanticipated. As our friend Nassim Taleb puts it, they were “black swans.” People weren’t ready for them. And most authorities said they wouldn’t happen.

  In the 1980s, for example, the CIA believed the Soviet Union was going from strength to strength. Until 1990, investors were betting heavily on a continuation of the Japanese boom. Same thing for the dot-com bubble. It was accompanied by the most delirious “this time it’s different” talk we’ve ever heard. And on the morning of September 11, 2001, nobody expected such a dramatic attack on Manhattan – especially not the people we paid billions of dollars to stay on top of it.

  And Fed chairmen Alan Greenspan and Ben Bernanke both admitted that the 2008 global financial crisis was unforeseeable. But the crash in real estate and finance of 2008 wasn’t unforeseeable at all.

  In 2003, my Agora colleague Addison Wiggin and I wrote a book called Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. The foreword to that book, penned by our friend Jim Rogers, summed up our thesis:

  As this book you hold in your hands demonstrates, artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks in the late 1990s.

   

  Now, policies being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble.

   

  And when those bubbles burst, it’s going to be worse than the stock market bubble, because there are many more people involved in consumption and housing. When all these people find out that house prices don’t go up forever, with very high credit card debt, there are going to be a lot of angry people.

  And our analysts were all over the story years before the crisis hit. (As one reader commented: We are often very early.) As for the other big events, our analysts were on top of three out of four of them. The only one we missed was the attack on the World Trade Center. In the interest of full disclosure, it is also true that we saw many other things coming – such as the Y2K computer glitch in 2000 – that never happened. Still, we were able to see many of these events coming when so many others – including those responsible for keeping an eye on them – failed.

  *  *  *

  How We Get to Hyperinflation from Here

  How did we do it? Our customers pay us to notice things that others are paid not to notice. Bear markets, crashes, credit contractions… governmental, technical, and social catastrophes – nobody wants to look carefully for these things. Nobody wants them to happen. They make people poor, not rich. And yet, they do happen.

  It seems part of nature’s system that mistakes are punished, errors are corrected, and “bad” things happen from time to time. But like forest fires, they have a useful purpose: They clear away the dead wood and allow future growth.

  Currently, we are predicting a credit crisis – much worse than the 2008 meltdown.

  No one wants it – especially not the deadwood. But we put a high probability factor on this forecast. It is unavoidable… even if we don’t know exactly what form it will take.

  And we believe it will be foreshadowed by something even rarer and more unexpected – the disappearance of cash dollars.

  Just to be clear, our prediction is that the “Ice Age” of low rates and low growth for a long time – as predicted by many analysts and economists – won’t happen.

  Instead, a crisis will cause a crash on Wall Street. The banks will go broke. The credit system will seize up. People will line up at ATMs to get cash and the cash will quickly run out. This will provoke the authorities to go full central bank retard. They will flood the system with “money” of all sorts.

  The ice will melt into a tidal wave of hyperinflation.

  

  

  
  
  

  

• Presenting The Next Great Source Of Middle Class Prosperity

  On the heels of yesterday’s news that auto sales blew away expectations in May, posting their largest MoM increase since November 2013 on the back of record numbers across-the-board for financing (including average new car loan terms of 67 months and record high average payments of $488/month), we present the reincarnation of the home equity loan.

  With PNC’s “cash out auto loan,” you can put your vehicle “to work” by pledging it as collateral for a cash loan.

  Welcome to the Great American auto bubble, now at PNC soon at every bank near you.

  

  

  
  
  

  

• Former US FIFA Official Admits Taking Bribes In Selection Of French And South African World Cups

  With the crackdown against FIFA corruption escalating with every passing day, just 24 hours after Sepp Blatter announced his unexpected resignation moments ago it was revealed that former US FIFA executive Chuck Blazer, who had been suspended in 2013 from CONCACAF amid corruption allegations and who became a confidential FBI informant, admitted to taking bribes when deciding the winners of the 1998 (France) and 2010 (South Africa) world cups.

  The revelation was made when a November 25, 2013 transcript between Loretta Lynch and the former FIFA official was unsealed hours ago. While the full transcript (attached below) makes for a fascinating read, the key section is the following:

  From 1997 through 2013, I served as a FIFA executive committee member. One of my responsibilities in that role was participating in the selection of the host countries for the World Cup. I also served as General Secretary of CONCACAF from 1990 through December of 2011 , and was responsible for, among other things, participating in the negotiations for sponsorship and media rights.

  During my association with FIFA and CONCACAF, among other things, I and others agreed that I or a co-conspirator would commit at least two acts of racketeering activity. Among other things, I agreed with other persons in or around 1992 to facilitate the acceptance of a bribe in conjunction with the selection of the host nation for the 1998 World Cup.

   

  Beginning in or about 1993 and continuing through the early 2000s, I and others agreed to accept bribes and kickbacks in conjunction with the broadcast and other rights to the 1996, ‘1998, 2000, 2002, and 2003 Go1d Cups. Beginning in or around 2004 and continuing through 2011, I and others on the FIFA executive committee agreed to accept bribes in conjunction with the selection of South Africa as the host nation for the 2010 World Cup.

  It is worth noting that earlier today, South Africa’s sports minister Fikile Mbalula said that the previously disclosed payment of $10 million made to the Caribbean Football Union in 2008, was not a bribe and was not made to assure his country hosted the 2010 world cup. The US indictment released by America’s department of justice last week alleged that: “a high-ranking Fifa official caused payments … totalling $10m – to be wired from a Fifa account in Switzerland to a Bank of America correspondent account in New York … controlled by Jack Warner”.

  Blazer’s sworn testimony clearly confirms that South Africa did pad some bank accounts to make sure it was awarded the 2010 world cup.

  It is unclear as of yet who may have been the source of funding for the 1992 bribe – some 23 years ago – to assure France was the recipient of the 1998 world cup.

  Blazer not only admits to taking bribes but to evading taxes while a resident of New York:

  Between 2005 and 2010, while a resident of New York, New York, I knowingly and willfully failed to file an income tax return and failed to pay income taxes. In this way, I intentionally concealed my true income from the IRS, thereby defrauding the IRS of income tax owed. I knew that my actions were wrong at the time.

  For those curious, the residence in question was in the Trump Tower, where in a $6,000/month apartment he kept his cats.

  And while it is only a matter of time before even more such transcripts are unsealed revealing the acceptance of bribes by FIFA officials to award the hosting of the 2018 and 2022 World Cups to Russia and Qatar, respectively, following promptly by the stripping of these countries hosting rights, one perhaps even more stunning revelation is that the abovementioned Chuck Blazer had, and still has a blog, titled Travels with Chuck Blazer and his Friends… (hosted by blogspot) which was launched in 2007 and whose most recent post was in February 2014, or after the above sworn deposition took place and Blazer already knew he was facing a indictment.

  Just who are these “friends” of Blazer’s? These are some examples:

  Here is the 450 pound Chuck with Miss Universe:

  

   

  Chuck with Vladimir Putin in 2010. This is what Blazer said of that meeting:

  On August 5th, I had the pleasure of visiting with the Prime Minister of Russia, Vladimir Putin, in his private office in the Russian Federation Office Building. It was a very busy day in the nation’s capital, with the Prime Minister’s itinerary changed, keeping him grounded to his office, due to the rash of forest fires sweeping the Moscow region. That morning I received a call inviting me to come to the House of the Russian Government and have a chat.

   

  Primed and ready for the opportunity, I arrived on time and was brought to a room where I met the very skilled translator who was specialized in simultaneous translation; not with headphones and equipment, but by softly speaking in the complimentary language while each speaker was saying their piece. We chatted informally for a while and then my Exco colleague Sports Minister Mutko joined us, giving us the opportunity to practice and establish a working cadence of translation.

   

  About an hour passed, while the PM had his cabinet in his office to consider how to put out the fires and to reduce the tension and the dense smoke that filled the city. Rain would have helped, but the weatherman brought no relief and the politicians needed to continue to do their best to fight the fires while battling mounting negative public sentiment. Minister Mutko left the room and went to check on when we would be received. While he was gone, I was ushered into a small receiving room with three large comfortable chairs. I calmly waited on the one with my name placed by protocol to make sure I was seated in the right place. All of a sudden, word came to the room that we were to move to another place to actually meet. So, with the translator in tow, we walked down a long corridor and through a room full of cabinet members and key officials. As the large doors to his private inner sanctum swung open, I was greeted by a smiling and very affable leader of the government, Mr. Putin himself.

   

  A firm handshake and a personable smile set the tone for what turned out to be a very special experience. He guided me to sit on a leather couch in the near right corner of the room. At right angles to that couch was another matching one where he took up his position so that we flanked the corner of a large wood bordered coffee table. On my couch, sitting near enough to be part of the conversation was the translator; while on Mr. Putin’s was Vitaly Mutko. The conversation began in a normal enough way, each of us thanking the other for making time for the visit. Genial welcomes continued until at one moment, he looked at me with a very serious gaze and said, without cracking a smile, “You know, you look like Karl Marx!”

   

  I guess I could have responded to his observation in any of a dozen unpredictable ways. Instead, I simply winked at him and said, “I know”. This brought an immediate response with him lifting his right arm up in the air and thrusting it forward to give me my first High-5 from a Prime Minister. I must admit that it was unique after all we have heard about this famous leader of the Russian Republic with a work history in the KGB. So, who knew what to expect? I can tell you that this began a half hour exchange of wit, charm and effective communications.

   

  Shortly after the High-5, he had some questions about my blog. Yes, this same one you are reading now. He asked how it began. I told him about the World Cup in Germany and the fact that I had many special experiences which I wanted to share with people who didn’t have the same opportunities. So, I began Inside the World Cup, which ran until the final whistle in Berlin.

   

  Shortly thereafter, Travels with Chuck Blazer was born. I still had many experiences to share, albeit not accompanied by as much writing as during the World Cup. Instead, more pictures, since recreational writing at times can be very demanding in the face of other obligations. Following discussion on other topics, Mr. Putin rose and walked to a wall behind the table where his cabinet had just met. He slid open two massive doors, revealing a beautiful wooden inlaid map of the whole of Russia, which filled the expanse of the largest wall in the room. As he did this, he talked about a vacation he was about to go on during the waning days of summer. He said that security normally doesn’t like him talking about his plans in advance, but he wanted to share with me some of the plans he had in mind. He walked from the western edge of the map where his St. Petersburg home and Moscow were located and walked to the right towards Siberia and great river deltas and continental roadways being connected. He talked of the things he planned to do, but I must admit I thought he was just trying to show me how very large an 11 time zone land mass of Russia is, when walking from the map’s western edge to the eastern perimeter.

   

  Before returning to the table, he posed the question, “If I send you pictures from my trip, will you post them in your blog and then what will you do?”. I told him yes, the pictures would definitely appear and I would change the name of the blog to “Travels with Chuck Blazer and his Friends”. Indeed, what he was telling me was the real preview of his trip. So, I now happily do what I committed to him and share with you the pictures he has been kind enough to send to me. You will note the new title of the blog has now reflected the pictures from my friend. I hope this opens up my forum to allow for other generous contributions of the people I have had the pleasure to meet in my very special role with FIFA.

  

   

  And here is Chuck with Bill Clinton and a random blonde:

  

   

  Here is Chuck with Hillary:

  

   

  Chuck with UEFA head Michel Platini

  

   

  Pirate Chuck with a nurse:

  

   

  Chuck with a stripper

  

  And so on: more here.

  * * *

  Full unsealed transcript below

  

  
  
  

  

• "Bernanke & Greenspan Have Destroyed America" Schiff & Maloney Warn "People Don't Realize What Is Coming"

  Ali and Frazier, Laurel and Hardy, Mayweather and Pacquiao, Liesman and Santelli, and now Schiff and Maloney. Peter and Mike join clash of the titan-like to discuss their investment strategies and expose the charts the government doesn't want you to seeas "people like Bernanke are taken seriously still and the people that did predict [the crisis] are dismissed as lunatics half the time." The wide-reaching conversation covers everything from gold and stocks to The Fed and The Dollar – Bernanke "took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning." The air is coming out of the bubble, they warn, "Bernanke and Greenspan have absolutely destroyed America. People don’t realize what is coming…"

   

  Full interview here:

   

  Full transcript below:

  Mike: I was in Puerto Rico a little while back and Peter Schiff invited me over to his house and we were just amazed at how we are exactly on the same page when it comes to everything economically. And so he just made a trip out to California near my offices and we decided we’d get together and discuss some of this stuff. So on your travels Peter lately you were just at a show you were speaking. Where were you at?

  Peter: I was in Las Vegas. It’s great to see you again Mike. I was speaking to a very main stream audience of hedge fund managers at an annual conference there. And what was very interesting is even though the audience was, as I said, very main stream, and I was on a panel with a lot of very high profile, main stream individuals, the only person that really got applause was me. I also got some laughs because I told a few jokes, but I think people really got what I was saying and I had maybe 50 to 100 people come up to me afterwards and shake my hand. And really appreciate the candor with which I spoke and I really agree with what you had to say and I was saying some things that the mainstream never really hears about the real problem in the US economy and I blamed it all on the Fed and everybody else was a cheerleader there for the Fed. In fact, Ben Bernanke spoke at the same event as me and he was introduced as being the savior of the US economy and I think he damned it.

  Mike: I absolutely agree. I saw you had your picture taken with him right?

  Peter: Yes, we were at a cocktail party following the event and I thought people would get the irony of the juxtaposition between the two of us kind of having a glass to drink.

  Mike: I think that he and Greenspan have absolutely destroyed America. People don’t realize what is coming from the stored up energy from the manipulations that they did.

  Peter: And speaking of him, this was really the first chance I had to have a conversation with Ben Bernanke. Speaking of him, I really got the sense that he has no idea of the Fed’s culpability in the housing bubble or the ensuing financial crisis, he really doesn’t know. And he denies that the Fed had anything to do with that, that maybe it was pure happenstance or coincidence that we had a housing bubble and these very low interest rates. And because Ben Bernanke still doesn’t get the connection between the Fed’s mistakes of the past and the last crisis he certainly doesn’t understand the coming crisis, which is going to be far worse because the mistakes the Federal Reserve made in the aftermath of that crisis are far worse than the ones and far bigger than the ones that caused it.

  Mike: Right. Ben Bernanke’s overreaction was far bigger than Greeenspan’s reaction to the NASDAQ crash.

  Peter: And as a result the crisis in our future unfortunately is going to be far larger than the one that we just experienced.

  Mike: I wanted to show you a couple of things because I have a feeling that you and I will be exactly on the same page here. You know how indicators…there’s all these different factors in the economy and they’ll be going up at different rates. Suddenly one or two indicators start to point down when you’re near a top and then more of them start to point down and then things roll over and then there’s a crash and everybody thinks that nobody saw it coming. But there’s a few people that are watching this stuff that do see it coming.

  Peter: That’s exactly what they said about the last crash that nobody could have possibly predicted this except there were people who did predict it.

  Mike: You predicted that we were in a real estate bubble. I predicted that we were in a real estate bubble.

  Peter: Ben Bernanke denied that there was a real estate bubble. Even after it burst, he still couldn’t figure it out.

  Mike: And what amazes me is people like Bernanke are taken seriously still and the people that did predict it are dismissed as lunatics half the time. It really burns me up. But this is manufacturing new orders for consumer goods and this is from the Fed’s website and you can see this big plunge that it took in 2008. And there’s a big plunge that’s happening right now. That suggests to me if people aren’t ordering new goods it feels like this could be this summer maybe..

  Peter: Remember, the air is coming out of the bubble because the Fed halted or paused it’s quantitative easing program. Most people think they ended it but I think it’s just a pause because now everybody expects the Fed to raise interest rates because they think the recovery finally has enough traction that it no longer needs the emergency life support of 0% yet your chart is showing and a lot of other economic indicators are showing that the economy is already rolled over and is rapidly headed back to recession even though the Fed hasn’t raised them yet. All they’ve done is talk about raising them in the future and we’re already rolling back into recession.

  So I believe that the Fed is going to have to do another round of quantitative easing, that they’re not going to raise rates and that’s going to be a shocker. It’s going to send shock waves throughout the currency markets and the bond markets because everybody expects the Fed to raise rates and when they don’t do it because the economy is too fragile because it’s just a bubble, not a legitimate recovery then people are now going to have to second guess their idea that what the Fed worked instead of calling Ben Bernanke a hero a lot more people are going to say, wait a minute he wasn’t a hero what he did wasn’t heroic. He took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.

  Mike: Yes the derivatives are bigger instead of smaller. Everything that was put in place to create that bubble that then popped. The two big [inaudible 00:05:36] banks are all bigger. Nothing has been addressed right?

  Peter: No. Those banks are now bigger than ever and if it was going to be a problem to let them fail in 2008 it’s going to be much bigger problem to let them fail in 2016. So the government has to do whatever it can unfortunately to keep the bubble from popping and I think the air is already coming out even without a rate hike but…

  Mike: So do I, yes.

  Peter: But more importantly, the reason that he’s been able to look like he’s succeeded is because of the illusion that it’s all temporary. Everybody believes that the Fed can normalize rates, shrink their balance sheet but when they realize that they can’t do that, that they’ve been lied to then this is going to be a major event for the currency markets or the financial markets when people come to terms with the predict that we’re in. That it’s QE infinity, that rates have to stay at zero in perpetuity. Because the debt is now so enormous that even the slightest increase in interest rates would collapse the system because there is just so much debt.

  Mike: I agree. I don’t think that they can raise interest rates. The next thing here is rejection of credit applications. And I wasn’t following this chart before. I just saw it in somebody’s newsletter. I think this is zero hedge maybe, but this is the crisis of ’08 and look at what happened in March for credit application rejections. So there’s something happening in the economy.

  Peter: One of it is the big transformation from full time employment to part time jobs. Everybody points to all the jobs that are being created and the low unemployment rate but the problem is that the unemployment rate dropped not because people found jobs but because a) they stopped looking or b) they settled for a part time job. So when people who used to have full time jobs now have part time jobs they don’t have the income to get the credit that they need.

  Mike: Right so they apply for a loan and it gets rejected.

  Peter: You know you have home ownership rates now at almost 30 year lows, yet rents are rising. I mean, now you have a record number of 50% or excuse me 25% of people who are renting now devote half their income to pay their housing costs. That’s never happened before. You have hardly anything left over for food or other expenditures that you have. And people are loaded up with student loans and unfortunately a lot of these college grads now have student loans and all they can get is minimum wage jobs and a lot of them are just part time. So people are trying to get by.

  In fact, a lot of people are actually enrolling in college now, not because they want the education but because they need the loans. They just want to get the money so they can pay their utility bills. They don’t even care and a lot of our college grads when they graduate with lots of debt, they can’t find jobs so they go to grad school to get a master’s degree so now they have even more debt but they still can’t get a job.

  Mike: Right, right. The big debt that has been plaguing us lately, the growth in debt. A lot of it is in student loans and auto loans. There are subprime auto loans now.

  Peter: As if the government didn’t learn their lesson from the housing bubble, they decided to create an auto bubble because when the governments.. when GM and Chrysler went bankrupt the government also acquired their financing divisions and they still own them. So the government after they bailed out these companies they certainly didn’t want them to fail again. They wanted to make it look like the ballot was a good idea. So they wanted to revive their profits by making it possible for just about anyone to buy a car. And so many people have been able to buy cars with zero down and they’ve been stretching out their payments so that now people are getting six and seven year auto loans.

  Mike: Right, the seven year auto loan. The car only lasts maybe that long. So you have no equity ever.

  Peter: Well the warranty only lasts for four years. Four or five years tops. And when these cars come out of warranty, try to have it repaired. We don’t have a lot of repair places anymore. It costs a fortune, and of course the value of the cars are plunging. People are going to have much less equity in their car than the remaining payments on their mortgage. And so they end up not making the payments. Now you’ve got to repossess the cars. But there is a huge bubble. But interestingly enough, the first four months of 2015, this was the worst start to a year in auto sales since 2009. So it looks to me like the air is coming out of the auto bubble already. We’ve already saturated the market and so this is just the beginning of the decline.

  Mike: Home mortgages, they’re going longer now than 30 years. There’s longer home mortgages being offered too, trying to keep that bubble inflated.

  Peter: Well, of course they’re offering 3.5% down payments now too with government guarantees which was part of the problem because 3.5% is not enough down to actually have skin in the game. It costs you more than that just to sell a house. So if you buy a house with 3.5% down, the minute your mortgage closes you’re already under water. But now the problem is you’re giving the homeowner a free gamble on the real estate market. Because if real estate prices go up, he can keep the profits, refinance. If prices go down, he could just walk away but better than that he can just stop making his payments altogether and live rent free for three years before they can kick you out.

  That’s really what they set up. I think a lot of the recent home buyers that did put 3.5% down are going to do just that. They’re just going to stop making their payments when they realize that they’re underwater especially when a lot of their repair bills come in. Because a lot of people were lulled into buying homes they couldn’t afford, once they see that it’s just not the mortgage but you also have maintenance and property taxes and some of these people might lose their jobs in this next recession so they no longer even have the income to service. And a lot of these people have adjustable mortgage. Imagine the people that are not even taking out 30 year fixed.

  Mike: With rates this low they are still buying an adjustable rate of mortgage.

  Peter: Because they couldn’t afford the fixed rate. That’s how stretched they are. You know the real solution to the housing market problem is to let real estate prices come down so that homes are affordable, but the government doesn’t want to do that because it will bankrupt all the banks that loaned on them so what their answer is to keep prices inflated and just make credit available by keeping interest rates low and keep throwing the lending standards out the window so that people can buy houses that they cant afford.

  Mike: Ben Bernanke recently commented on the savings glut. He doesn’t think people are spending enough and what is interesting is when you find out what constitutes savings paying down debt is not included in this calculation so any currency that goes to this that is considered savings for some reason. They consider paying down debt savings.

  Peter: Well it’s money you haven’t spent but I think when Bernanke is talking about a savings glut..

  Mike: That they’re paying for previous consumption basically..

  Peter: Right. But when they’re talking about the savings glut they’re referring in other countries, not the United States. We have a savings shortage. There’s maybe a glut of savings in Asia for example but people look at that.. I read an article recently about Chinese have this big savings problem. They have a bad habit of savings. Like smoking or something. Savings is a virtue, but we’re lecturing the Chinese, “You guys are saving too much. You need to spend more money.” One of the criticisms was that they don’t have social security. They expected the Chinese to save for their retirement. Imagine that. Allowing people the freedom to save for their own retirement. And we basically said “No.”

  China needs a gigantic Ponzi scheme run by the government. They should adopt social security so that the Chinese people won’t have to save anymore. As if savings are somehow undermining economic growth. But the only problem for China is that they’re squandering savings on US treasuries. They’re loaning the money to us and we’ll never pay it back. So that’s a waste of their savings they need to invest their savings productively in their own economy and I think that is going to happen and when it does the dollar is going to come crashing down.

  Mike: Yes, I agree and then the engineering of the entire economy and the illusion. This is interest rates from 1950 to today. And then we have base money as the red line here and then I plotted the Wilshire 5000 Total Market Cap Index so the value of the 5000 largest companies in America and what you see.. I’ll zoom in on this section here. You see that they took rates down to zero and at the same time created all this currency and the correlation between currency creation and the markets is just mind bogglinginly close. It’s a cannot possibly be an accident that the markets..

  Peter: Of course not and that’s why they can’t raise rates without bursting that bubble. To not understand how these things are connected the way that they are is one causes the other and I’ve heard people say, “Peter I’ve had 4%, 5% interest rates in the past so why can’t we go back there now?” It didn’t create a problem then because we didn’t have the enormity of the debt that we have now. It’s one thing to have higher interest rates when you don’t have a lot of debt. Sure you can afford it. But when you’re overwhelmed by debt you can’t afford it.

  The other thing is when you’ve been on 0% for 6 years you develop an addiction to that. We have built an entire economy around free money. You can’t take that away even if the interest rates are still low, even if they went to just 2% to 3%. Yes that’s still low. But not low enough for an economy addicted to 0%. If you’re a heroin addict and your body is used to a certain amount of heroin then your pusher says “I can only give you half of what I normally give you, but you still have some heroin.” That’s not gonna cut it. You’re already gonna start going through withdrawal.

  You know that’s why the Fed… supposedly we’ve been in a recovery for six years. Yet interest rates are still at zero. I mean if it was a real recovery they would have raised rates years ago. But they’re afraid to do it because they know it’s phony. But after a while they had to at least talk about raising interest rates. They have to pretend that there’s an exit strategy somewhere but you know just like someone who’s overweight and talks about going on a diet in the future they don’t go on one in the present. So the Fed wants to maintain the ruse that they can raise rates by talking about their intention to raise rates but they don’t actually do it and they play word games about “well we’re going to be patient” or “we’re going to wait a considerable period.” Now they take away the word patient but we’re not impatient. Now they’re saying “we can’t raise rates until unemployment improves.” Well it’s supposedly been improving. The unemployment rate is 5.5%. They initially said they would raise rates if it got to 6.5%. But the bottom line is that it doesn’t matter where the unemployment rate goes, doesn’t matter how high the inflation rate goes they can never raise rates without precipitating a worse financial crisis than the one we had in ’08.

  Mike: So you and I just absolutely agree that this entire recovery has been engineered through the creation of currency. Now if Keynesian economics was remotely plausible, if it worked would they have made it a QE2 or a QE3?

  Peter: Well no, it would have worked the first time.

  Mike: Right.

  Peter: The reason they’ve done it three times is because it fails every time which is why they’re going to do a fourth. Quantitative easing is like trying to put out a fire with gasoline. You can’t put the fire out, you just make the fire bigger. The problem is when all you have is gasoline that’s all you can do. The Keynesians don’t understand that their own remedy is the reason the patient is so sick and they just want to keep on administering it. But I don’t think we’ve had recovery. We haven’t recovered from anything. We’re sicker than ever. The average American knows that. The man on the street can feel his standard of living declining despite what the Federal Reserve. The cost of living is going up, the quality of jobs is going down, all the Fed is doing with its monetary policy is redirecting our resources from productive uses on main street to speculation on Wall Street. They’re propping up the stock market, they’re propping up housing, they’re diverting loans to things like education, they’re propping up health care but the real economy is disintegrating and Americans can feel that.

  If we actually had a real recovery we wouldn’t be talking about all the jobless recovery. The reason it’s jobless is because it’s not a recovery. If it was a recovery there would be good jobs and the jobs that are being created..you know I think the most interesting thing is who is getting them because they look at the labor force participation rate which is the lowest it’s been since the mid 1970s. And everybody wants to say it’s because the baby boom is retiring. So hey, there’s nothing we can do about it. We all know there’s a baby boom. They’re getting old, they must be retiring. That’s why the labor force is shrinking. A lot of people accept that on face value. Even Janet Yellen says that right?

  But the reality is the baby boomers, the older people, they are the ones working in record numbers. In fact, there are months when the only jobs that are created are for people 55 and older. It’s the younger people, people in their 20s and 30s that are leaving the labor force. And what’s happening is you have so many Americans who were retired who have to come out of retirement and take a part time job so they can pay their utility bills, so they can put food on the table. That’s where all the jobs are coming. So the labor force participation is not about people retiring. The people who should be retiring can’t afford to and the younger people who should be working can’t get jobs. That’s the truth behind the numbers.

  Mike: Yes. The markets are in a bubble. I think there’s a crash coming. This is Dr. Robert Shiller’s data. It’s a little bit of a confusing chart because it’s got two data plots in it and interest rates in red. But the valuation of the stock market, judge by PE ratios. You see bubbles in 1901 and then undervalued in 1921 and overvalued during the peak of the 1929 stock market bubble and without exception once it reaches a bubble it bounces on the way down but it has to go to undervaluation before a new bull market can start. There was a peak in 1966 of about 22 and the peak in 2000 where the PE ratio is over 45 which was absolute insanity and it started to bounce, it went down to fair value but then bounced back up into a bubble here at 27. We’re in an extreme bubble and so with these other indicators turning do you think we’re in for a stock market crash?

  Peter: I think first of all that it’s actually worse than that because the earnings have been manufactured by share buy backs because interest rates have been so low it’s been easy for companies to buy back their shares. So now their earnings per share number can be higher because there’s fewer shares. So they’re not really driving the profitability, they’re not driving the revenues, they’re just shrinking the share base but they’re subjecting their shareholders..

  Mike: So the earnings per share look better.

  Peter: Yes but now they all this debt but right now the interest rates are really low so it’s not hurting their earnings but what happens when interest rates rise and if they rise during a recession where they’re earnings are declining and they have no ability to pay the interest a lot of these companies that were buying back shares might have to come back to the market and resell the shares to raise money to service or repay debt that they can no longer afford.

  Mike: ..which will cause it to go way down to the greatest undervaluation in history I think.

  Peter: Right but the reason why I think there may not be a stock market crash even though one is warranted and in fact it would be a healthy development rather than to perpetuate the overvaluation and all the malinvestments that result from that. But I think this bubble is literally too big to pop. I think the Fed knows it. Again, that’s why they’ve been talking about raising rates..

  Mike: So you think they’ll do more of this, the quantitative easing for..

  Peter: The way you stop the value of the stock market from plunging is make the value of the dollar plunge and so rather than nominal prices declining real prices decline. So the real value of stocks let’s say measured in honest money like gold plunges because the Fed is trying to prop everything up. They’re trying to keep these bubbles from popping because they’re literally too big to pop. They think the mistake that they made in 2008 was turning off the spigots right, now they want to keep them wide open and so it’s the dollar that’s more likely to crash this time than the stock market.

  Mike: Yes. I do think though that if the problems first develop in other countries like if the Euro has a problem or if China has a problem we could see the dollar go higher. It might not but I think that we could see a very very short term deflation, that’s something that the Fed can’t control and then they will overreact and print into potentially a hyperinflation.

  Peter: I think we’ve already seen the dollar rally. In fact there is probably more agreement among traders, speculators in the dollar’s direction. Everybody believes that the dollar’s going to go up, everybody has longed to dollar, betting on it continuing to rise because everybody bought into this myth of legitimate U.S. recovery and they believed that the Fed was going to raise rates. So I doubt something that everybody expects to happen will in fact happen. What’s going to surprise everyone is dollar weakness. Everybody is positioned for dollar strength and I think that trade is already over. I think the dollar is fully valued or overvalued based on this belief and when everybody has ultimately has to come to the conclusion they were wrong, when the Fed is forced to admit the economy is much weaker than they thought and instead of a rate hike we get QE4 I think the dollar collapses. So I wouldn’t want to hold out waiting for another dollar rally. I think we’ve already had it. I think now the next thing for the dollar is a big drop.

  Mike: The move that the dollar made was..it’s less than a year right?

  Peter: Yes.

  Mike: Now imagine if you’re an importer or an exporter, what that’s doing to your business. This whole thing of national currencies is just a silly stupid game that countries play that hurts all of us, it hurts all of our prosperity. An importer or an exporter that sees the cost of their goods changed by 25% or the price that they’re able to get for goods going overseas by 25 % in six months this is something… if you chart it out, the exchange rates you can probably draw a line across it and say my business will be successful when this is under here and it’ll go broke when the exchange rate is above a certain amount. If we were using gold there wouldn’t be an exchange rates. Right? If they used honest money all over the world, if honest money was the money that we used in exchange.

  Peter: Yes, it would certainly be a lot easier to do business and we wouldn’t have all these imbalances. The United States couldn’t run these huge trade deficits if we had to pay for our imports with either exports or gold.

  Mike: Yes.

  Peter: But when we can pay for them just by printing money that costs nothing, we can make an unlimited quantity of it but this is going to end in disaster. This is something that’s never been tried on a global scale. We have had individual examples of fiat currencies being tried in one country or another and it always ends in disaster, it never works and countries always return to a gold standard but what’s unique about this time period since we went off the gold standard in 1971 since the world was on a dollar standard and when we went off the gold standard we took the entire world off of it and this has gone on for a while but I think we’re in the final stages of the world rejecting this monetary system where the dollar is at the center because it cannot work.

  Mike: Yes, I do too. When I was writing my book I loaded into a spreadsheet looking for cycles, every currency crisis, stock market crash, bank panics or whatever looking for some kind of cycle in there and what leapt out at me was that every 30 to 40 years the world has a new monetary system. And here we are like 43 years, going on 44 years after the end of the Bretton woods being on this global dollar standard. I think the days are numbered and that there is going to be a crisis and I think it is going to be soon. This is margin debt and the red line is just numerics, the total amount of dollars of margin debt but the blue is margin debt compared to the GDP of the country so the size of the economy. And this chart is already a year old but what you see is every time it got over a certain percentage of the economy here there was a stock market crash right after it got up to those levels and margin debt is back up to those levels.

  Peter: And more importantly though too the actual quality of our GDP has declined because so much of it is now just consumer spending finance by debt, the real wealth producing components manufacturing, mining, things like that those parts of our economy have been contracting. So the size of the GDP is very vulnerable to a collapse which would exacerbate those ratios especially if there was an increase in interest rates. So we’re certainly due for a stock market crash but the economy is so vulnerable that it really can’t withstand one anymore which is why I think again the Federal Reserve is going to do everything it can to prevent that from happening and there’s only one thing they can do is printing money but unfortunately the ultimate consequence there is even worse because a dollar crash is going to be much more damaging to the US economy and to the standard of living of the typical American than what a stock market crash or a real estate crash or banking crisis.

  But unfortunately the Fed doesn’t care abut that. It’s just trying to delay the inevitable. It doesn’t care how much worse it makes it during that time period because they’re hoping that there’ll be a different administration in charge at the time. They have no idea how much time we have so rather than face the music they want to keep on playing.

  Mike: Right just keep on blowing that balloon up bigger and bigger and every time it springs a leak they slap a band-aid on it and keep on blowing more air in. For some reason, people get used to living in a bubble. They like it and the politicians want to..

  Peter: Well, some people like it because there are some people that benefit from this process but there’s only a small sliver of the population. The overwhelming number is suffering don’t understand why. You know you talk about now we have this huge growing chasm between the very rich and everybody else. Call it 1% and the 99%. But this class warfare is being fueled by the very people who are creating it and they don’t even realize that it’s their policies that are doing it. It’s the monetary policies we have that are responsible for this widening divide. It’s not capitalism that’s doing it and just calling for higher taxes and more wealth distribution isn’t going to solve the problem. It’s only going to compound it. We have to get to the source of what is driving this and it’s the central bankers and their monetary policy and to the lesser extent the regulatory and taxing policy of the US government.

  Mike: Absolutely agreed. The gap between main street and Wall Street again, it’s engineered by all of this currency they created going into Wall Street and not to main street and that’s the reason wages haven’t grown. This chart that John Hussmann came up with where he took overvalued, overbought, overbullish indicators and internals weakening like earnings per share and added those factors together and what was interesting is every time there’s a major top this flashes up to very high levels. The 1987 stock market crash, it nailed that. And we’ve been getting these alarms going off over and over again lately. And it may not.. you may be right, the last time they started creating a lot of currency Wall Street partied but you did say that there’s going to come a time where they’re gonna start questioning the currency creation that it might be different this time. They might start partying on Wall Street first but do you think that even with massive currency creation though that people can say if they’ve got to do it again that means it really hasn’t worked?

  Peter: Well they have to come to that conclusion yet. Obviously they didn’t come to the conclusion with QE2 or 3 but I think there’s been so much anticipation and self congratulations by the Fed and the Keynesian economists and the Paul Krugmans of the world that when it doesn’t work, when we’re right back where we started with as far as back to recession and if we’ve gone through the entirety of a business cycle and rates have been at zero the entire time people might start to realize when can you ever raise rates? And if we’re doing a QE4 and instead of the Fed’s balance sheet shrinking from the current four and a half trillion we have to expand it to six to seven trillion, the idea that it’s ever going to go back down again people are going to see that for the ruse that it is and I do think there’s going to be a loss of confidence. Why anyone still has confidence in the Fed is beyond me. But I think that that confidence is going to go away and when it does you know you’ve destroyed the value of the currency.

  I think that as the world tries to shun the dollar denominated debt because the rates have to stay low, we can’t raise interest rates to make the dollar attractive because we can’t afford to pay those rates. So we have to keep the rates artificially low. We can only do that by creating more money but the more money we create the less it’s worth, the fewer people who actually want it. So then you have a situation where the Fed Reserve has to expand it’s QE program not just to mortgages and treasuries but to corporate bonds, to municipal bonds, they have to start buying everything. They become the buyer of only resort and then the dollar really has a crisis and now the Fed is in a position..

  Mike: How moral is that that there’s an entity that gets to create currency that is going to become the buyer of everything and they’re creating the currency to do it?

  Peter:It’s not moral at all, it’s theft is what it is. But eventually people are not going to want to be stolen from and they are going to rebel against that currency and they’re going to look for a safe haven. Something like gold where they can protect themselves from really this monetary looting.

  Mike: Most people don’t realize that when we’re in this grand experiment that the Keynesians that run things don’t actually know what they’re doing because this has never been done at this level before.

  Peter: Well the irons is it’s not an experiment because we know how it’s going to end. There’s no chance that this can work. Because history is replete with examples again on a smaller scale but if it doesn’t work on a small scale just putting it on a bigger scale doesn’t change the outcome. It maybe changes the dynamics.

  Mike: It makes the same outcome but much bigger to match the energy put into it.

  Peter: People that say this is some kind of experiment they’re wrong, they haven’t learned anything. We don’t have to experiment, we have history. We can learn from the mistakes of the past. The problem is that our central bankers and economists never learn from the mistakes of the past. They repeat them all.

  Mike: What I mean is from their point, they think they’ve got these little models that say if you do this this will happen but they don’t know that they actually can’t control it. They can influence stuff short term but..

  Peter: They think that this time it’s different or they can tweak it a little bit. It’s like somebody having another communist revolution saying, we’re gonna get it’s right. The Soviets didn’t get it right or the Chinese didn’t get it right, the Cubans or the North Koreans wherever it’s been tried, we’re gonna try it again. You don’t have to try communism again, it’s failed right.

  Mike: Right

  Peter: It doesn’t work. No matter how you want to repackage it, it’s never going to work but everybody thinks they’re smart enough they can make it work. And so you’ve got people now that think yes, we can make this work. Yes, it didn’t work in the past but we’re so smart that it’s gonna work now and it’s not going to work it’s going to fail even more spectacularly because it’s even bigger.

  Mike: Okay. We were talking about home ownership a little bit earlier. So this is a chart that goes back to 1980. It’s the levels of home ownership have dropped back down to 64% and it hit 69% during the peak of the real estate bubble.

  Peter: First of all, it’s going to go lower. But you’re really graphing the disintegration of the middle class who can no longer afford, thanks to the government to buy homes, and you had all these government programs designed to make home ownership more affordable and of course like everything the government does it backfires. And it’s now made home ownership less affordable and less desirable. So you have record numbers of people who are now renting their houses from hedge funds and private equity funds. And you know what’s been happening to rents for the past few years? They’ve been rising, 4% or 5% or 6% per year, more, 10% in some areas. Because people have no choice now but to rent and those rents don’t even make it into the CPI because they use something like owners equivalent rent and for some reason that never goes up.

  But the actual rent that people are paying is going up. That’s why I mentioned that right now you have 25% of renters have to spend half their income on their housing costs which is up considerably from where it was in 2007 right before the Great Recession started. The old rule of thumb used to be that housing costs should make up no more than a quarter of your income. And now people are devoting half their income. And of course everything else is getting more expensive. Food is getting more expensive, health care is getting more expensive, utility bills. The only life line that many Americans had is that gas prices came down. Gasoline got less expensive. That’s already changing. Oil prices are going back up. And people are wondering “Where was the benefit that we got because we didn’t see it in retail sales from the lower gas prices?” And there was a benefit, there were just so many other problems that you couldn’t see it because the consumer was drowning. Okay, now he’s got a lifeline here but you couldn’t see it. It wasn’t like they were spending the extra money, they needed the extra money for food. But now that lifeline is being yanked away because gas prices are going back up.

  Mike: And so this will go lower. Home ownership.

  Peter: Yes, because you need to eat, you need energy, there are certain things you have to buy.

  Mike: That figure of 50% to put a roof over your head.

  Peter: Yes.

  Mike: The percentage of your income going to home ownership or rent to put that roof over your head, that’s pretty much a constant that you can trace back to like ancient Roman times. You can only afford a certain percentage of your income and you can see when something’s in a bubble because it’s at or beyond a certain extreme.

  Peter: And think about this Mike because this is the cost of home ownership with interest rates at record lows. The Fed’s got rates at zero.

  Mike: Yes, so there’s nowhere to go.

  Peter: It’s never been cheaper to borrow money. Back in the day, in the 80’s, people were buying homes with 12% mortgages, 14% second mortgages, carried back by the seller. How could we have afforded that? Imagine how much wealthier Americans used to be in the past when they can buy a house? Put 20% down? And then pay 12% in mortgage on the remaining 80%? Now Americans are so broke they can barely scrape up 3.5% with a 2.5% adjustable rate mortgage. So you imagine where home prices will have to go, or where home ownership will have to go if we just had a return to low interest rates? Not zero, just historically low. Or if people were requiring a down payment again?

  Mike: Real estate would definitely crash.

  Peter: Of course, either the prices would crash or nobody would own any homes. It would all be owned by hedge funds.

  Mike: Yes. So levels of margin debt, we’ll skip that. These are different countries here and all of these countries are in Europe. The blue here is the different durations of their bonds that are in negative interest rate territory where you have to pay to loan the country your currency.

  Peter: It shows you how absurd this is. And right that old expression “Whom the God’s would destroy, they first made mad” Well, you can see we’re on the eve of destruction when the world is this crazy that you would actually pay somebody money to borrow from you. They have the use of your money and you get back less. I’m going to buy a bond for $1,000 knowing that I’m only going to get $999 back. I mean, what is the purpose of doing that? But you know, it’s actually worse than that because I do believe there are a lot of countries where their CPI is not accurately measuring what’s really going on with the cost of living. So there probably are a lot of other countries that have negative rates.

  Mike: So when you apply real rates to that you think much of the world is upside down.

  Peter: I think the United States has negative rates. We say “Oh we have 2% interest rates for a 10-year bond but our inflation is only a 0.5%.” I think our inflation rate is more than 2%. I don’t think the government’s statistics reflect how bad it really is.

  Mike: Right, I don’t believe so either. I call it the CP lie.

  Peter: Yes, we’ve got negative rates. The fact that there’s actually negative nominal rates where again you buy a bond for 1,000 Euros and you only get nine hundred and ninety something Euros when it matures. Or even the interest you make along the way when you add it to what you get back is still less than you originally loaned.

  Mike: Right. It’s crazy. This has never happened before in human history.

  Peter: It shows you we’re running out of rope here and now people are saying “Why should I buy that bond? I’m just going to hold on to cash.” “And the bank deposits have a negative rate, why even put my money in the bank? Why don’t I just put it in my mattress?” Now putting money under the mattress seems like it’s a more responsible thing to do than to loan it to a bank at a negative rate of interest. Because the bank could fail and you’ve lost your money. Why take a risk if you’re not going to be paid?

  Mike: Right. It’s illegal to put cash in a safe deposit box.

  Peter: Some of these countries want to make it illegal to even have cash. And they’re cracking down on people who are even conducting their business in cash which the way around that is own gold. Own real money. If they’re going to start punishing you for owning Euros or owning Yen or maybe owing dollars, okay, don’t own it. Own something real.

  Mike: Yes, that’s what I do. My total net worth is split up between cash and a vast majority is physical gold and silver.

  Now we’re going to talk about what you can do to protect yourself in this environment and Peter had some… we were talking about gold potentially basing here.

  Peter: Well, I think it’s been building this base now for a couple of years. You’ll notice every time we get down below 1200 people start saying “This is it! It’s going to collapse. Gold’s going below a 1000.”

   

  Source: SchiffGold.com

  

  

  
  
  

  

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