Today’s News June 5, 2015

• Tyranny: It Pisses Me Off

  Submitted by Brandon Smith via Alt-Market.com,

  

  Tyranny is not a wholly definable condition. There are many forms of tyranny and many levels of control that exist in any one society at any given time. In fact, the most despicable forms of tyranny are often the most subtle; the kinds of tyranny in which the oppressed are deluded into thinking that because they have “choices”, that necessarily makes them “free”. Tyranny at its very core is not always the removal of choice, but the filtering of choice – the erasure of options leaving only choices most beneficial to the system and its controllers.

  The choice may be between freedom and security, individual opinion and societal coherency, personal principle or collective indulgeance, catastrophic war or disaster multiplied by complacency, terrorism or surveillance, economic manipulation or financial Armageddon. We are presented with these so called choices everyday and they are about to become even more of a bane in our regular lives. But these are often engineered options that do not represent reality. We are led to believe that only one path or the other can be taken; that there is no honorable way, only the lesser of two evils. I am done with false choices and the lesser of two evils. I prefer to create my own options.

  Beyond method lies motivation; and tyranny begins where the best of intentions end. Every despotic action by government and collectivists today, from the NDAA, to the John Warner Defense Authorization Act, to mass electronic surveillance, to drones in our skies, to political correctness and social justice warrior tirades; all are given rationalization through “noble intentions”.  Most tyrants are not high level dictators, corrupt corporate CEOs, or politically obsessed wannabe-demigods with aspirations of empire. In fact, tyrants can be found all around you every day, in friends, family and millions of people you’ve never met or heard of in your life. While the elites at the top of the pyramid are the originators of most tyrannical shifts, it is the little minded mini-tyrants hovering around you like blood-gutted mosquitoes in the mall, at the bar, at home, and at the office that make the designs of statists a possible reality.

  They do not always participate directly in the construction of the cage. They just have a habit of doing nothing while it is being built around us. Some of them love the cage, and see it as a kind of affirmation of their own twisted ideals.

  Tyranny is for the most part the forced imposition of contrary principles into the sacred space of the individual. That is to say, people create tyranny when they enact or support the invasion of their beliefs and desires onto those who only wish to be left alone. Tyranny is only minimally about physical control and far more about psychological control. Physical threats are merely keys to the doorway of the mind.  And within this resides the great trick.  Too many of the ignorant believe that tyranny requires jackboots, armbands and concentration camps in order to be real.  In fact, tyranny begins with a single voice self-silenced by fear of collective disapproval and/or social and legal retribution.

  True tyranny is born in the putrid slithering hive of group-think, where the lazy and incompetent find refuge within the protective egg sack of intellectual idiocy.  Statists use the lie of abstract majority and the force of government to intrude upon the private ideals of those with opposing views.  In the end, it is not enough for them to extort your silence – eventually, they will demand your conversion to their faith, to their collective.  Basically, your rights end where their feelings begin.

  Your thoughts and ideas are subject to approval. They are not your own in a collectivist system.  THIS is what real tyranny is.

  Real slavery is not possible unless the slave is made to accept or even love his servitude. The conditions of structure and restriction and permission and “license” are often ingrained into the minds of participating serfs until they cannot comprehend the world without such arbitrary things. Acting outside the established box isn’t even considered. The rules are simply the rules, even though most people have forgotten why or how.  The more gullible proponents of social cohesion sometimes claim that the dichotomy between the individual and the collective is “false”.  This is utter nonsense.  If a collective is not VOLUNTARY, then it is by its very nature counter to the health and rights of the individual, which is why I always try to make the distinction between community and collectivism.  Collectivism is entirely destructive to the individual because collectivist systems cannot survive without removing individual thought and action.  The modus operandi of a collective is to erase independence so that the hive can function.  Anyone who states that individualism and collectivism are “complementary” is either a liar, or a simpleton of the highest degree.

  Fantastical constructs of social organization are used to justify themselves as self evident. Statists love the argument of society for society’s sake. We are born into this system whether we like it or not, they say. We benefit from the system and therefore we owe the system, they claim. The system is mother and father. The system provides all because we all provide for the system. Without the system, we are nothing.

  The clever trap of collectivism is that it makes participation of individuals a survival imperative for the group. A person is certainly not allowed to work against the advancement of the group, even if the group is morally reprehensible in their goals. However, totalitarian collectivism from socialism to fascism to communism does not even allow for people to refuse to participate. You are not allowed to walk away from the collective because if you do, you might hurt the overall performance of the collective. A gear in a machine cannot be allowed to simply up and leave that machine, or everything falls apart. See how that works…?

  People fall into tyrannical behaviors through what Carl Jung referred to as the “personal shadow”; the uglier cravings of our unconscious that fester into morally relative philosophies. One fact of life that you can always count on is this: All people want things. The kinds of things and the level of the want determine their willingness to do wrong. I’m not just talking about money and wealth. Some people want unfettered or unrealistic security, some people want fame, some people want adoration, some people want subservience, some people want to avoid all responsibility, some people want perpetual childhood, some people are shameless glory hounds, and some people want their worldview imprinted on every other person until all is uniform, uncluttered, homogenized, safe.

  People’s wants can be harnessed, manipulated and directed to disturbing ends, and the elites know very well how to do this.  The people who are harder to dominate are those who have discipline over their wants and thus control over their fears of not attaining those wants.  These are the men and women that frustrate the establishment.

  In my life I have met many people who cannot set aside their immediate desires even if their behavior is translating into eventual misery for themselves and everyone else. People who cannot balance the pursuit of wealth with a healthy level of charity. People who cannot participate in an endeavor without trying to co-opt or control that endeavor. People who marginalize the talents of others when they could be nurturing those talents. People who sneer or superficially criticize the valid accomplishments of others rather than cheering for them. People who see others as competition rather than allies in a greater task. People who fabricate taboos in order to shame others into subservience rather than relying on rational arguments.  It is weaknesses like these that cause smaller forms of tyranny, and such microcosms of despotism often culminate in wider enslavement. It is through the personal shadow that we fall victim to the collective shadow, the place where devils reside.

  Tyranny is an environment in which the very worst in us is fed caffeine and cocaine and allowed to run wild while pretending to be a model of principled efficiency.  It is a place where vile people are most likely to succeed.

  Frankly, I’m a little tired of those who consider themselves to be social advocates so overtly concerned with what we individuals are thinking or feeling or doing. We don’t owe them any explanations and we certainly never agreed to be a part of their ridiculous covens of academia and the mainstream. I have no patience for people who have the audacity to think they can mold the rest of us into abiding by their intrusive ideology. Is your goal to force me to adopt your collectivist philosophy because you are too biased or too sociopathic to compose an argument that convinces me to join voluntarily? Then I’m afraid one day I’ll probably react by shooting you.  Am I advocating violence?  Actually, the establishment and its statist cheerleaders are advocating violence through their trampling of individual liberty, but let me answer directly:

  Yes, I believe violence is often the only answer for such tyrants, historically and practically.   We have every right to be left alone, they have no right to their aggressive statism, and we have every right to defend ourselves.

  I am tired of oppressive social constructs that undermine our greater potential. I am tired of assumptions. Assumptions and lies fuel every aspect our world today, and this will only end in utter calamity. I am tired of tolerance for oppressive behaviors; tolerance for corruption and criminality leads only to more of the same. I am tired of compromise. I am tired of being told that a discriminating attitude is a bad thing, and that total acceptance is somehow “enlightened.” I am tired of people thinking pleasantries are a better method for combating stupidity than a good slap upside the head. In other words, it’s time to slap some people upside the head; be they friends, family, neighbors, whoever. The days of diplomacy are over. Our world is changing. And from this point on, there will be people who do tangible and voluntary good (the people who count), the passive spectators, and the people who stand in the way of people who do tangible and voluntary good.

  My advice? Don’t be a part of the latter group. The doers, the thinkers, the producers, the builders, the self-made and self sufficient- all may be trying to undo the damages of tyranny, but that does not mean we will continue to be nice about it when totalitarian groupies try to stop us.

  

  

  
  
  

  

• Vanguard To Buy Mainland China Shares For $69 Billion EM Index Fund

  Early last week, Chinese shares got a boost (because China’s millions of newly-minted, semi-literate day traders needed to be reassured after the Hanergy debacle) from three pieces of news. 

  The headline grabbers were: a report (citing unnamed sources) that indicated the quota on the Shanghai-Hong Kong link would be abolished once a similar setup with the Shenzhen exchange is in place later this year, and the announcement of a so-called “mutual fund recognition” scheme that will facilitate cross-border mutual fund flows.

  But some of the underlying momentum may have also been attributable to news that FTSE Russell will begin a gradual transition aimed at the eventual inclusion of Chinese A shares in global EM benchmark indices. An interim arrangement will involve two “transitional indices” that include Chinese mainland equities. 

  Now, Vanguard is set to benchmark its $69 billion FTSE EM index fund against one of these transitional indices.

  FT has more:

  A surprise move by Vanguard to include onshore Chinese A-shares in its flagship emerging market fund will “put pressure” on other asset managers to follow suit.

   

  Pennsylvania-based Vanguard, which has $3.3tn under management, has said its $50bn FTSE Emerging Markets exchange traded fund, the world’s largest such vehicle, is to adopt a 5.6 per cent weighting to mainland Chinese stocks.

   

  The move follows last week’s decision by index provider FTSE Group to launch a new emerging markets index with an initial China weighting of about 5 per cent, which will run alongside its existing index that has no exposure to A-shares (see table).

   

  Vanguard has opted to switch the benchmark for its ETF to this new FTSE index.

  This is potentially quite significant. As you can see from the below, the move will mean a nearly 5% allocation to mainland Chinese equities…

  

  …and, more importantly, will force other providers to follow suit…

  John Kennedy, investment director of Harvest Global Investments (UK), a subsidiary of Beijing-based Harvest Fund Management, China’s largest institutional asset manager, said: “Everything I read post the [FTSE] announcement was that this was going to be ignored by the world and his wife, so this is potentially quite a revelation.

   

  “To see somebody adopting it within the week is very very important indeed. It will have quite an impact because it’s a very prominent provider. I would expect others to follow.” Mr Kennedy, whose parent company manages $85bn of assets, about half of which is in A-shares, added:

   

  “The direction of travel is quite clear. International investors have got to think about how they are going to access mainstream Chinese equities and fixed income”.

  That said, there are significant logistical hurdles ahead:

  Vanguard’s move is an early indicator of what is likely to be an avalanche of overseas investment into the mainland market in the years to come, with most foreign institutions currently having little or no exposure to A-shares.

   

  The Shanghai and Shenzhen bourses are now large enough to account for 24.2 per cent of emerging market stock capitalisation, according to recent calculations by FTSE.

   

  However the main index providers have shied away from including these A-shares in their benchmarks because of concerns over capital controls and access for foreign investors.

   

  At present, foreign groups can invest in A-shares if they have a quota allowance under Beijing’s qualified foreign institutional investor or renminbi-denominated QFII schemes, for which just $125bn of allocations have so far been made, although this is increasing.

   

  Vanguard was recently awarded a Rmb10bn ($1.6bn) allocation, which it will use to buy A-shares for the ETF and an umbrella fund, which between them have $69bn of assets.

  Technical barriers to entry notwithstanding, the Shanghai and Shenzhen bourses are together large enough to account for nearly a quarter of EM market cap which speaks to the potential for incredible inflows once Beijing removes restrictions. 

  If there is no correction in between, it is truly frightening to consider how large China’s equity bubble will become if, as FTSE CEO Mark Makepeace contends, Chinese equities comprise 20% of global stock portfolios by 2018.

  *  *  *

  Statement from Vanguard:

  China A-shares in Emerging Markets Stock Index Fund

  The addition of China A-shares to the Emerging Markets Stock Index Fund and its ETF share class, VWO, the world’s largest emerging-markets ETF, will provide investors with more complete exposure to a key emerging economy and the second-largest stock market in the world by market cap. With the world’s second-largest GDP, China accounts for 20% of global trade and 7% of global consumption4. China A-shares will represent 5.6% of the new benchmark for the Emerging Markets Index Fund. Vanguard5 recently received a quota for China A-shares, which provide exposure to China’s largest issuers and a level of diversification that isn’t otherwise available in the market.

  China A-shares are equity shares in mainland China companies that are traded on the Shanghai and Shenzhen stock exchanges and are only available to foreign investors through regulated systems, including the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) systems or the Shanghai Hong Kong Stock Connect program.

  “As the first major emerging markets fund to add exposure to China A-shares, the fund will benefit investors with more diversification, deeper emerging markets exposure, and greater access to the growth potential of Chinese equities,” said Mr. McNabb. 

  

  

  

  
  
  

  

• Meet The NSAC – The US Government's Shadow Spy Agency

  Just when you thought you knew what the government's spy state was up to – thanks to Ed Snowden's heroics – along comes the National Security Analysis Cneter (NSAC). As PhaseZero exposes, they are not who you think they are. They are not the NSA or the CIA. The NSAC is an obscure element of the Justice Department that has grown from its creation in 2008 into a sprawling 400-person, $150 million-a-year multi-agency organization employing almost 300 analysts "for the purpose of monitoring the electronic footprints of terrorists and their supporters, identifying their behaviors, and providing actionable intelligence." Read that again "and their supporters." As PhaseZero concludes, this shadow government agency is considerably scarier than the NSA.

  If you have a telephone number that has ever been called by an inmate in a federal prison, registered a change of address with the Postal Service, rented a car from Avis, used a corporate or Sears credit card, applied for nonprofit status with the IRS, or obtained non-driver’s legal identification from a private company, they have you on file.

  They are not who you think they are. As Gawker's Phase Zero reports, they are not the NSA or the CIA. They are the National Security Analysis Center (NSAC), an obscure element of the Justice Department that has grown from its creation in 2008 into a sprawling 400-person, $150 million-a-year multi-agency organization employing almost 300 analysts, the majority of whom are corporate contractors.

  The Center has its roots in the Foreign Terrorist Tracking Task Force (FTTTF), a small cell established in October 2001 to look for additional 9/11-like terrorists who might have entered the United States. But with the emergence of significant “homegrown” threats in the late aughts, the Task Force’s focus was thought to be too narrow.

   

  

   

  NSAC was created to focus scrutiny on new threat, specifically on Americans, particularly Muslims, who might pose a hidden threat (the Task Force became a unit within NSAC’s bureaucratic umbrella). As Americans began traveling abroad to join al-Shabaab and then ISIS, the Center’s dragnet expanded to catch the vast pool of “youth” who also might fit a profile of either radicalism or law-breaking. Its mission runs the full gamut of “national security threats…to the United States and its interests,” according to a partially declassified Justice Department Inspector General report. That includes everything from terrorism to counter-narcotics, nuclear proliferation, and espionage.

   

  NSAC not only has a focus beyond foreign investigations or terrorists, but in the past year-and-a-half, according to documents obtained by Phase Zero and extensive interviews with contractors and government officials who have worked with the Center and the Task Force, it has also aggressively built up a partnership with the military, taking on deep background investigations of foreign-born and foreign-connected soldiers, civilians, and contractors working for the government. Its investigations go far beyond traditional security “vetting”; NSAC scours certain select government employees, contractors and their affiliates, examining multiple layers of connected relatives and associates. And the Center hosts dozens of additional “liaison” officers from other government agencies, providing those agencies with frictionless access to private information about U.S. residents that they would otherwise not have.

   

  Today, through a series of high-level classified authorities and commercial relationships, the Center has access to over 130 databases and datasets of information comprising some two billion records, over half of which are unique and not contained in any other government information warehouse. The Center is, in fact, according to interviews with government officials, the sole organization in the U.S. government with the authority to delve deeply into the activities and associations of foreigners and Americans alike.

  The Center’s powerful perch—and its virtually unlimited reach—brings the federal government closer than ever to the Holy Grail of connecting every dot, a dream that has been pursued by terrorist hunters since the failures that permitted the 9/11 attacks 14 years ago.

  The data access and analytic methods it uses grew out of a retrospective analysis of the vast reams of data about the 19 hijackers that law enforcement and intelligence agencies had indicators off, but never acted on. The Foreign Terrorist Tracking Task Force (originally called “F-tri-F” by insiders) meticulously reconstructed the actions of the 19 hijackers and other known law-breakers—how they lived their day-to-day lives and what they did to avoid intelligence detection—to find patterns and triggers of potential wrongdoing. They created thousands of pages of chronologies covering the 19 hijackers from the moment they entered the United States, trying to recreate what each did every day they were here.

   

  …

   

  Those patterns then became profiles that could be applied to vast amounts of disparate and unstructured data to sniff out similar attributes. Those attributes, once applied to individuals, became the legal predicate for collection and retention of data. If someone fit the profile, they were worthy of a second look. They were worthy of a second look if they might fit the profile.

   

  The American people have repeatedly rejected the notion of a domestic intelligence agency operating within our borders. Yet NSAC has become the real-world equivalent. Along the way in its development though, the Center has rarely been discussed in the federal budget or in congressional oversight hearings available to the public. And being neither solely a part of the intelligence community (IC) nor solely a law enforcement agency (and yet both), it skirts limitations that exist in each community, allowing it to collect and examine information on people who are not otherwise accused of or suspected of any crime.

  The Foreign Terrorist Tracking Task Force was always meant to be a proactive lookout, using data mining and the full gamut of public and private information to identify hidden operatives based upon their associations, movements or transactions.

  An internal document provided to Phase Zero describes the Task Force as organizing “data from many divergent public, government and international sources for the purpose of monitoring the electronic footprints of terrorists and their supporters, identifying their behaviors, and providing actionable intelligence to appropriate law enforcement, government agencies, and the intelligence community.”

   

  And their supporters. And their supporters. And their supporters. How many mouseclicks away is your name?

  Read more here…

  *  *  *
  Two words… Freddom? Schmeedom!

  

  

  
  
  

  

• The Real Reason Why There Is No Bond Market Liquidity Left

  Back in the summer of 2013, we first commented on what we called “Phantom Markets” – displayed quotes and prices, in not only equities, FX and commodities but increasingly in government bonds, without any underlying liquidity. The problem, which we first addressed in 2012, had gotten so bad, even the all important Treasury Borrowing Advisory Committee to the US Treasury had just sounded an alarm on the topic.

  Since then we have sat back and watched as our prediction was borne out, as bond market liquidity slowly devolved then sharply and dramatically collapsed recently to a level that is so unprecedented, not even we though possible, leading first to the October 15 bond flash crash and countless “VaR shock” events ever since.

  And while we urge those few carbon-based life forms who still trade for a living to catch up on our numerous posts on market “liquidity” and lack thereof, here is a quick and dirty primer on just why there is virtually no bond market left, courtesy of the man who, weeks ahead of the Lehman collapse when nobody had any idea what is going on, laid out precisely what happens in 2008 and onward in his seminal note “Are the Brokers Broken?”, Citigroup’s Matt King.

  Here is the gist of his recent note on the liquidity paradox which is a must read for everyone who trades anything and certainly bonds, while for the TL/DR crowd here is the 5 word summary: blame central bankers and HFTs.

  * * *
  

  The more liquidity central banks add, the less there is in markets

  • Water, water, everywhere — On many metrics, liquidity across markets seems abundant. Bid-offers are tight, if not always  back to pre-crisis levels. Notional traded volumes in credit and rates have reached all-time highs. The rise of e-trading is helping to match buyers and sellers of securities more efficiently than ever before.
  • Nor any drop to drink — And yet almost every institutional investor, in almost every market, seems worried about liquidity. Even if it’s here today, they fear it will be gone tomorrow. They say that e-trading contributes much volume, but little depth for those who need to trade in size. The growing frequency of “flash crashes” and “air pockets” – often without obvious cause – adds weight to their fears.
  • Yes, street regulation has played a role — The most frequently cited explanation is that increased regulation has driven up the cost of balance sheet and reduced the street’s appetite for risk, and hence ability to act as a warehouser between  buyers and sellers.
  • But so too have the central banks — And yet this fails to explain why even markets like FX and equities, which do not consume dealers’ balance sheets, have been subject to problems. We argue that in addition to regulations, central banks’ distortion of markets has reduced the heterogeneity of the investor base, forcing them to be the “same way round” over the past four years to a greater extent than ever previously. This creates markets which trend strongly, but are then prone to sudden corrections. It also leaves investors more focused on central banks than ever before – and is liable to make it impossible for the central banks to make a smooth exit.

  How Bad Is Liquidity Reall?

  From the BIS to BlackRock, and Jamie Dimon to Jose Vinals, everyone seems to be talking about market liquidity. Chiefly they seem to be fretting about a lack of it. Primary markets might be wide open, thanks in large part to the largesse of central banks, but the very same investors who are buying today seem deeply concerned about their ability to get out tomorrow.

  Liquidity as a concept is notoriously difficult to pin down. It has a reputation for being very much in evidence when not required, and then disappearing without trace the moment you need it. For strategists – and regulators – this represents a challenge: conventional metrics like bid-offer and traded volume can go only so far towards capturing what investors mean by liquidity. And yet because investors’ concept of liquidity tends very much to be focused on tail events, by definition, data to help monitor it are scarce.

  This paper tries to assess the evidence across markets, and evaluate what is driving it.

  Some observers have argued that even if liquidity is disappearing from some markets, it is being maintained – or even concentrated – in others. We argue in contrast that the risk of illiquidity is spreading from markets where it is a traditionally a problem, like credit, to traditionally more liquid ones like rates, equities, and FX. There is a bifurcation – but it is between decent liquidity much of the time and then sudden vacuums when it is really required, not across markets.

  We likewise take issue with the widespread notion that the problem is solely due to regulators having raised the cost of dealer balance sheet, and could be ameliorated if only there were greater investment in e-trading or a rise in non-dealer-to-non dealer activity. To be sure, we see the growth in regulation – leverage ratio and net stable funding ratio (NSFR) in particular – as one of the main reasons why rates markets are now starting to be afflicted, and indeed we expect further declines in repo volumes to add to such pressures. But illiquidity is a growing concern even in markets like equities and FX, which use barely any balance sheet at all, and where e-trading is the already the norm rather than the exception.

  Instead, we argue that in addition to bank regulations, there is a broad-based problem insofar as the investor base across markets has developed a greater tendency to crowd into the same trades, to be the same way round at the same time. This “herding” effect leads to markets which trend strongly, often with low day-to-day volatility, but are prone to air pockets, and ultimately to abrupt corrections. Etrading if anything reinforces this tendency, by creating the illusion of lliquidity which
  evaporates under stress.

  Such herding implies a reduction in the heterogeneity of the investor base. One potential cause is the way steadily more investor types having become subject to procyclical accounting and capital requirements in recent years, most obviously for insurance companies and pension funds.

  But the tendency towards illiquidity pockets even in markets where insurance and pension money is not dominant suggests a deeper cause. We think the most likely candidate is central banks’ increasing hold over markets. Over the past four years, it is expectations of central bank liquidity, not economic or corporate fundamentals, which have become the main driver of everything from €/$ to credit spreads to BTP yields.

  While central banks have always been significant market participants, their role has obviously grown since 2008. Most obviously, their global asset purchases have drastically reduced the net supply of securities available to be bought by investors. At the same time, we have seen a breakdown in a number of fundamental relationships which had previously correlated well with markets – and their replacement with metrics directly linked to central bank QE. Because the herding is not directly backed by leverage, it is unlikely to be reduced by macroprudential regulation.

  To date, the air pockets and flash crashes represent little more than a curiosity, having mostly been resolved very quickly, and having had little or no obvious feedthrough to longer-term market dynamics, never mind to the real economy.

  But we think ignoring them would be a mistake. Each has occurred against a largely benign economic backdrop, with little by way of a fundamental driver. And yet with each one, investors’ nervousness about the risk of illiquidity is likely to have been reinforced. When the time comes that investors do see a fundamental reason all to sell – most obviously because they start to doubt the extent of central banks’ support – their desire to be first through the exit is liable to be even greater.

  There when it’s not needed

  First, let us consider the evidence that all the fuss about liquidity is much ado about nothing. In many markets, under normal conditions, it is now possible to trade on more platforms, with more counterparties, and with tighter bid-offer, than ever before. While some market developments may perhaps point to the potential for problems, day-to-day liquidity remains remarkably good.

  Plenty of notional volume, with tight bid-offer

  The most obvious data point in this respect is that notional traded volumes in many markets are at or close to all-time highs.

  

  US credit, for example, saw nearly $27 trillion in secondary trading last year; HY volumes have doubled since the crisis (Figure 1). In government bonds, the increase was typically pre-crisis, but volumes have typically remained flat even in the face of a growing proportion of bonds being absorbed by the central banks (Figure 2). German Bunds are a notable  exception. Notional volumes in equities have fallen from precrisis peaks, but remain close to them in the US and Japan (Figure 3).

  Likewise, data on bid-offer across markets mostly paints a healthy picture. The BIS shows that bid-offer in govies has largely fallen back towards pre-crisis levels. Equity bid-offer is likewise close to pre-crisis lows, and seems to suggest that even quite large portfolios could be transacted at tight spread levels – provided volumes were split quite broadly across a large number of stocks (Figure 4). Bid-offer in credit remains wide to pre-crisis levels, as far as we can tell4, but is the tightest it has been since then (Figure 5). For small investors not correlated with the broader herd, these gains in notional volume and tight bid-offers will represent a very real ability to transact.

  

  Turnover in decline

  Admittedly, the positive message in these notional data is considerably mitigated when the growth in many markets – and in many investors’ portfolios, especially in rates and credit – is taken into consideration. Once transaction volumes are adjusted to show the difficulty an investor is likely to have moving a given percentage of the market, a very different picture emerges – and one which is much more consistent across markets.

  In credit, rates, and equities alike, turnover relative to market outstandings has fallen considerably. Corporate turnover has almost halved since the crisis (Figure 6). The decline in government bond turnover has been more protracted, but is just as drastic, especially in US Treasuries (Figure 7). Equity turnover is more obviously influenced by the rise and fall in outstandings with market movements, but has also suffered a post-crisis decline (Figure 8).

  

  For most investors, turnover is probably a more useful metric than straight traded volume. Monthly mutual fund inflows and outflows have generally grown as fund sizes have increased; for high-yield bond funds, net outflows seem to have been growing even in percentage terms, never mind in notional ones (Figure 9). Given that their share of the market has also been growing, the capacity to move a given percentage of the market is a much better guide than the ability to move a  given notional volume. The same tendency is not quite as pronounced in other long-term fund types, but seems also to be true for money market funds (Figure 10).

  

  And yet despite declining turnover, the fact remains that outflows to date have not led to obvious liquidity problems.

  ETFs, futures and indices – can they be more liquid than their underlying?

  If the mutual funds’ role in contributing to market liquidity risks has been exaggerated, then we think ETFs have been more maligned still. They may well be responsible for some of the reason “day-to-day” liquidity has held up so well, but we struggle to see that they can be blamed for any increase in its tendency to disappear under stress.

  The rise in ETFs has certainly been striking; in equities, in particular, net ETF sales have outstripped regular mutual fund sales in recent years (Figure 16), though in fixed income their rise has been slower. More striking still is that ETF trading now constitutes just under 30% of all US equity dollar volume. The rise of ETFs is probably one reason why, also in Europe, a growing proportion of daily volume is shifting away from intraday trades and towards end-of-day auctions (Figure 17).

  There may well be a positive feedback loop in which other large trades are increasingly executed at end-of-day auctions, precisely because investors know that liquidity is becoming concentrated there, and to avoid being seen for reporting purposes to have dealt away from the daily closing price.

  But what is striking in Figure 17 is that non-auction equity volumes have also been rising in recent years. Rather than ETFs subtracting from cash traded volume, they seem to have added to it. The same might be said for the rise of traded volume  in dark pools.

  In this respect, we see ETFs as very much akin to the CDS indices in credit, or futures in equities and rates. It is not that there is a fixed quantity of trading to be done, and that the arrival of a new instrument necessarily removes trades which would have been done elsewhere. If anything, we see the opposite phenomenon. Liquidity begets liquidity: when investors have new instruments with which to express views and refine their positions, it tends to encourage still more trading.

  In addition, in contrast with open-ended mutual funds, ETFs – like closed-end investment trusts – offer the possibility for prices to diverge from net asset values. This affords an additional cushion, especially during periods of market stress. The fact that ETF volumes have a tendency to increase relative to cash volumes during periods of stress – even though they then are likely to be trading at a discount – suggests that this cushion works well, and may even act to boost liquidity during stressed conditions. We have much sympathy for the way one ETF provider put it: “Everyone complains when they see our prices deviating from the underlying. But what they fail to realize is that at least people can and do actually trade at those prices: in troubled times, the prices shown on broker screens for underlying instruments are often a fiction.”

  So while we would agree with the statement that “no investment vehicle should promise greater liquidity than is afforded by its underlying assets”5, we think there is something for an exception for vehicles which are themselves tradable, and can trade with a basis relative to their underlyings. ETFs, CDS indices and futures can and do provide much more liquidity than their underlyings. This, though, is not so much because they “promise” more liquidity, as that they facilitate additional activity, much of which is crossed at the index level, and only a fraction of which is transmitted through to the underlying. While investors are periodically surprised and frustrated by these vehicles’ failure to perfectly track movements in their underlyings, this failure is in some ways the secret of their liquidity. Rather than stealing liquidity from the underlyings, we think their growth has added to it.

  Missing when required

  But if neither ETFs nor mutual funds can be held responsible for perceptions of reduced liquidity across markets, what can? The finger is most often pointed at the street. Many buysiders feel that dealers’ willingness to act as a liquidity provider even during good times has waned; might such reduced willingness also help explain an increased tendency of liquidity to evaporate altogether? We think this is much closer to the truth – but even so, we doubt it is the full story.

  Are the brokers broken?

  Such arguments have been voiced most persuasively in Jamie Dimon’s recent letter to JPM shareholders. He cited three factors: higher cost of balance sheet, explicit constraints for US banks as a result of the Volcker Rule, and in extremis the fact that the rescues of the likes of Bear Stearns, WaMu and Countrywide/Merrill have led not to gratitude but to heavy fines for JPMorgan and Bank of America, in at least one case following the abnegation of ex ante assurances otherwise.

  The effects of the latter two factors are hard to observe, and would probably become visible only in a proper crisis. Even then, they might in principle be offset by “Rainy Day” funds. These are pools of money being set up by asset managers precisely so as to take advantage of liquidity-related distortions. But it seems doubtful that these will ever reach the scale required to take 2008-style rescues, at least without large amounts of leverage.

  The effects of reduced dealer balance sheet, however, are visible already, and are contributing directly to the perception of illiquidity in fixed income. Unlike equities or FX, fixed income trading is fragmented across an extremely large number of outstanding securities. Only rarely can a willing buyer and seller of the same security be found at the same instant. As such, liquidity, particularly for larger trades, relies heavily on dealers’ ability to act as a warehouse, temporarily hedging a long position in one security with a short position in another. This requires both the availability of balance sheet, and the ability to borrow securities freely through repo. Both of these are now under threat from regulation.

  

  Why e-trading is no panacea

  E-trading works extremely well as an efficient means of uniting buyers and sellers of a given security – provided those buyers and sellers exist in the first place.

  That is, a buyer can probably find a seller faster now than they could a few years ago, when they had to rely solely on email and phone calls. In indices, in equities and in on-the-run govies, where many investors are ready and willing to trade the same security on either side of the market multiple times in an hour, this can bring about significant improvements (Figure 24).

  But in much of fixed income (and especially credit), liquidity is intrinsically fragmented. End investors’ willingness to buy and sell a large notional volume of a given security is simply not there in the first place (Figure 25). Even if investors could be persuaded to concentrate their positions in a given issuer on a smaller number of outstanding “benchmark” securities, as BlackRock has called for, issuers could never be persuaded to do so, since it would add to their refinancing risks. Issuers like the diversification that a multitude of outstanding securities brings.

  

  As such, it is no use efficiently putting together buyers and sellers when those buyers and sellers do not exist in the first place. This is why many traders report that – even when they have on occasions been able to offer ‘choice’ markets with zero bid-offer for a while, these have not necessarily resulted in any trading. End user liquidity remains fundamentally dependent on a counterparty’s willingness to act as a warehouse: to buy the security the seller wants to sell, to offer the security the buyer wants to buy, find a hedge of some sort and then move to unwind the position later. This is also why so many bond market participants – buyside and sellside – are opposed to efforts to copy-paste equity-inspired regulations into a fixed income framework in the interest of increased transparency.

  Nor is it obvious that there is an easy alternative to the existing broker-dealer model when it comes to warehouses. Bid-offers are tight enough that the market-making model relies upon leverage in order to generate a reasonable return on equity. Even if, say, asset managers or hedge funds are prepared to act as warehouses, for them to make money on the operation they will want to operate with leverage. But – as the clearing houses are now starting to find out, and banks discovered some time ago – such leverage represents precisely the sort of systemic risk that regulators are now keen to limit.

  As such, e-trading to date has done a great deal to boost what the IMF calls “flow”, or day-to-day liquidity, for small-sized trades. But when it comes to larger transactions, they can seldom be cleared (Figure 26).

  ‘Phantom liquidity’ – is the problem getting worse?

  There is an argument that the liquidity provided by e-trading seems to be more fleeting than that stemming from voice trades and personal relationships. When markets become volatile, e-trading operators tend to pull the plug – or, at best, reduce the size they are willing to trade. A recent IMF analysis concluded that it was precisely such a reduction in the depth of order books which seems to have led to the ‘flash rally’ in US Treasuries on October 15th 2014. A high dependence on electronic trading also seems to have contributed to the flash crash in equities on May 6th 2010.

  It is this phenomenon that is known as “phantom liquidity”, or the “liquidity illusion” – a tendency to evaporate when really needed. It does seem possible that e-trading may have added to such a tendency, by improving the appearance of liquidity under normal conditions, and then withdrawing it in periods of stress. This could help explain why some of the most obvious instances of recent illiquidity have occurred in markets which already have high proportions of trades conducted electronically.

  And yet beyond the anecdotal, quantitative data demonstrating an increased tendency towards “phantom liquidity” is extremely hard to pin down. After all, it makes predictions not about day-to-day circumstances but about tail events, which by definition are few and far between.

  The best evidence is probably some increase in bifurcation in day-to-day trading conditions, visible in daily volatility levels across markets. Rather than there being a steady stream of moderately volatile days (and liquidity conditions), volatility seems to be becoming more clustered than it used to be: there are many days with tight ranges and good liquidity, and then occasional days of extreme intraday volatility and reportedly poor liquidity – even though (as in the flash crash and flash rally) volumes on such days can actually remain quite high.

  Often, the volatility is thought to occur intraday, and therefore may not be captured by the net daily changes implicit in volatility metrics. Looking at intraday high-low ranges in markets paints a slightly clearer picture – but not decisively so. It does in general seem to us that intraday ranges have become more bifurcated since around 2005, most obviously with a period of low volatility prior to the financial crisis being followed by the extremely high ranges during the crisis itself, but also with post-crisis daily trading ranges being more bifurcated than prior to 2005.

  

  Low day-to-day volatility, punctuated by occasional sharp corrections, are exactly what we might anticipate if markets were becoming less liquid. In credit, for example, they are one of the features which distinguishes the cash market relative to the continual bouncing around of the CDS indices. And we have argued previously that markets seem to be becoming more subject to positive feedback loops, which see them trending steadily upward only to fall back suddenly and often unexpectedly.

  And yet the limited number of observations, and the variations across markets, make it hard to make confident statistical statements about any change in the shape of distributions. We are left with the unsatisfying conclusion that evaporating liquidity is as much a feeling voiced by many market participants as to what might happen under stress, illustrated by a few idiosyncratic examples, as it is a statistically demonstrable phenomenon.

  The evidence of increased herding

  A recipe for a perfectly liquid market would be one with a small number of homogeneous securities being traded by a much larger number of heterogeneous participants. This would do a great deal to improve the likelihood of a buyer and seller both wanting to transact in the same security at the same time, and hence being able to agree upon an appropriate price. Indeed, it has even been suggested that we might quantify markets’ potential for liquidity along such lines, taking the number of distinct market participants and dividing by the number of securities traded.15 This is one reason why liquidity in indices and futures is often so good, as they concentrate a large amount of activity in a small place.

  One potential explanation for growing illiquidity is that markets have been evolving in an exactly opposite direction. Not only has the number of securities traded been growing (in credit in particular), but the heterogeneity of market participants seems to have been reducing as well. Here too, the regulations are partly to blame, with more and more investors being forced both to mark to market and to hold capital or cover pension deficits on the basis of such mark to market calculations. In addition, though, it feels to us as though market participants are increasingly looking at the same factors when they make their investment decisions.

  For the last few years, valuations in more and more markets seem to have stopped following traditional relationships and instead followed global QE. Likewise in meetings with investors, we have been struck by how little time anyone spends discussing fundamentals these days, and how much revolves around central banks. Record-high proportions of investors think fixed income is expensive and think equities are expensive.  A growing number of property market participants seem to think real estate is expensive. And yet almost all have had to remain long, as each of these markets has rallied. Could it be that central bank liquidity has forced investors to be the same way round more so than previously, and that this is  making markets prone to sudden corrections.

  

  While it is hard to demonstrate conclusively, a growing weight of evidence would seem to point in such a direction. CFTC data on net speculative positioning in futures and options markets has become more extreme in recent years, and abrupt falls in net positioning have often coincided with sharp market movements. Net shorts in Treasuries reached record levels immediately prior to the flash rally, for example (Figure 29); net longs in commodities contracts preceded the sharp fall in commodities indices in the second half of last year, and record net euro shorts (Figure 30) and dollar longs are being squeezed at the moment. However, it could be argued that growth in notional contracts outstanding is a normal part of financial market deepening; normalizing by the net open interest would (at least in some cases) suggest recent positioning is not too far out of line with history.

  But other data also point to an increase in investor crowding. Our own credit survey shows that investors’ positions in credit since the crisis have not only been longer on average than ever previously, but also less mean reverting, and exhibiting less dispersion and less mean reversion (Figure 31). Fully 83% of those surveyed were long credit in December last year – a sizeable imbalance for any market. Similarly, the BAML global investor survey shows that investors have been long in equities for a longer period than would historically have been normal.

  Research specifically designed to detect investor herding has reached the same conclusion. An IMF analysis of the correlation between individual securities transactions by US mutual funds, using the vast CRSP database, shows a clear pickup in herding with the crisis, and then another one in late 2011. The herding seems to have occurred consistently across markets, but was more intense in credit and especially EM than in equities. It also occurred both among retail and among institutional investors. The IMF were unable to test for herding in government bonds and FX because of the much more limited number of securities.

  What we find striking about the herding numbers is the way they correlate with the metrics we use to track the scale of central bank interventions: rolling global asset purchases by DM central banks, and global net issuance of securities once central bank purchases (and, in this case, also LTROs) have been subtracted out. Over the past four years, we have had to use these metrics to help explain market movements when traditional fundamental relationships have broken down.

  Investors likewise agree on the dominance of central banks: in a survey of global credit derivatives investors we conducted in January this year, fully two thirds thought “central bank actions” would be the main driver of spreads this year, well ahead of “credit fundamentals”, “global growth trends” or “geopolitical risks”. Even if the central banks are only having to intervene because the systemic risks they are confronting have become bigger, the effect remains the same.

  

  This, then, would seem to be the final piece of the puzzle as to what is making markets prone to pockets of illiquidity. Central bank distortions have forced investors into positions they would not have held otherwise, and forced them to be the ‘same way round’ to a much greater extent than previously. The post-crisis increase in correlations, which has been visible both within credit and equities and across asset classes (Figure 35), stems directly from the fact that investors now increasingly find themselves focused on the same thing: central bank liquidity. Every so often, when they start to doubt their convictions, they find that the clearing price for risk as they try to reverse positions is nowhere near where they’d expected.

  This explains why the air pockets have not just been in markets where the street acts as a warehouser of risk. It explains why they have occurred not only in the form of sell-offs which could have caused multiple market participants to suffer from procyclical capital squeezes. It also explains why the catalysts have often, while often trivially small, have nevertheless been macro in nature, since they have boosted expectations of a change in central banks’ support for markets.

  Unfortunately, it leads to a rather ominous conclusion. The bouts of illiquidity will continue until central banks stop distorting markets. If anything, they seem likely to intensify: unless fundamentals move so as to justify current valuations, when central banks move towards the exit, investors will too.

  Rather than dismissing recent episodes as relatively harmless, then, we are supposed to worry how much larger a move could occur in response to a more obvious stimulus. While financial sector leverage has fallen, debt across the nonfinancial   sectors of almost every economy remains close to record highs, meaning that the potential for negative wealth effects in the real economy is very much there.

  In principle, markets could gap to a point where they went from being absurdly expensive to being absurdly cheap, and then – as investors stepped in again – gap tighter, perhaps even without very much trading. But the existence of the feedback loop to the real economy means that the fundamentals tend also to be affected by extreme market moves: “cheap” may be a moving target. This in turn could force central banks to step back in again.

  To sum up, we are left with a paradox. Markets are liquid when they work both ways. Market participants, though, find themselves increasingly needing to move the same way. This is not only because of procyclical regulation; it is also because central banks have become a far larger driver of markets than was true in the past. The more liquidity the central banks add, the more they disrupt the natural heterogeneity of the market. On the way in, it has mostly proved possible to accommodate this, as investors have moved gradually, and their purchases have been offset by new issuance. The way out may not prove so easy; indeed, we are not sure there is any way out at all.

  * * *  

  To which all we can add is: Good luck with the “exit”
  

  

  

  
  
  

  

• 40 Million People Will Be Out Of Work Next Year, OECD Warns

  While today’s IMF cut in US growth estimates served merely to reestablish long positions in the long end of the curve and to serve as a basis for this quarter’s IMF “comedy of errors” update, a more concerning update was presented by the far more credible OECD whose latest forecast is truly troubling for all those who claim the global economy is in a recovery.

  As reported by AFP, in the latest economic forecast from the Organization for Economic Cooperation and Development, the Paris-based body made up of 34 of the world’s most developed countries, the conclusion is that the world economy risks being bogged down in a low-growth spiral unless measures are taken to spur demand and incite businesses to boost their stubbornly sluggish investments.

  Hint: raise rates now, send the economy into a tailspin, do QE4 imminently, pretend it is to “boost the economy”, send the S&P500 to 3000. Rinse. Repeat.

  Coming just hours ahead of the IMF’s own slashing of US growth forecasts, yesterday the OECD cut its forecast for the U.S. economy. The OECD now expects U.S. economic growth to slow to 2% this year from 2.4% in 2014, compared to March when it forecast an acceleration to 3.1% in 2015. Odd: today’s IMF revised cut is nearly identical. One wonders if the IMF’s economists don’t merely read the OECD’s work and present it as their own?

  Canada’s growth estimate was also lowered to 1.5% from a March prediction of 2.2% and November’s estimate of 2.5%. It must have snowed harshly there too.

  Looking at the bigger picture, the overall global economic growth is now projected at just 3.1% this year — half a percent lower than the November estimate.

  The Eurozone is still expected to grow 1.4% this year, unchanged from the March forecast: should Greece exit the Eurozone, the OECD can just a minus sign in its next revision.

  The OECD also trimmed its forecasts slightly for China and Japan.

  The world economy has suffered from stubbornly weak growth throughout its recovery from 2009’s Great Recession. This, the OECD notes, “has had very real costs in terms of foregone employment, stagnant living standards in advanced economies, less vigorous development in some emerging economies, and rising inequality nearly everywhere.”

   

  The OECD says weak investment, with growth of little more than 2 per cent this year, is partly to blame for the slack recovery. Its forecast of stronger growth in 2016 hinges on its prediction that investment will almost double to 4 per cent next year — although it warns that this upturn “could remain elusive.”

  Of course, it could be unelusive if and when corporate buybacks become an official part of the GDP calculation, perhaps replacing such economic relics as fixed investment, which nobody really does any more.

  But perhaps the most disturbing, and factual (unlike the IMF’s forecast of Greek 2022 debt/GDP), finding is that unemployment in the OECD region has fallen only 1 per cent since its 2010 peak.

  In other words, by 2016, the group warned, 40 million people will be out of work, 7.5 million more than immediately before the crisis.

  Um, what recovery?

  Oh, and 40 million angry people we should add, with little hope of professional realization and lots of free time. Is it surprising why in recent months not a day passes without some mass violence event breaking out somewhere in the world (but mostly in the US)?

  And speaking of jobs, tomorrow we will learn if nearly 8 years after December 2007, the US will finally recover all the full-time jobs lost during the second great depression:

  

   

  … or if the job reality for most American potential employees is shown on the picture below.

  

  Job seekers line up outside at Choice Career Fairs’ New York career fair at the Holiday Inn Midtown in New York

  

  

  
  
  

  

• Did The US Department Of Justice Just Do Vladimir Putin A Great Favor

  Last year, in the aftermath of the western-mediated Ukraine presidential coup and subsequent proxy civil war between Russia and NATO countries, the US imposed sanctions, largely over the complaints of the German business lobby, on Moscow which did little to dent the Russian economy but crippled European exports to such a degree that a few months later the continent was on the verge of a triple dip recession which in turn paved the way for the ECB’s QE.

  That is not to say Russia was spared: Russia’s economy was also substantially impacted but not by US “costs”, since unlike the US, financial markets in Russia are a fraction of the size and importance they are in the west, but by the collapse in oil prices. It took US some 6 months to realize that for a commodity exporting powerhouse such as Russia, sanctions are meaningless, but crush the price of its main export and suddenly everything changes.

  This was the basis for various rounds of “secret” talks between John Kerry and Saudi Arabia: to punish Russia by lowering the price of oil, which also ended up smothering not only US shale production but the most vibrant part of the US economy, and its job creation dynamo, the state of Texas.

  Furthermore, the Russian economy had also been weakened recently by the Winter Olympics in Sochi, which may have been the grand spectacle Putin wanted to put on, but it came at a cost: the final bill is said to have topped $50 billion, much more than originally planned, although oil was still well above $100, in line with what had been Russia’s budgeted oil price for 2015-2017. 

  Which is why in retrospect, the DOJ’s crackdown against FIFA in general, and the Russian World Cup of 2018 in particular, may have been just the blessing in disguise that Putin, who whether he likes it or not has been forced to hunker down in cash conservation mode, wanted.

  According to Reuters, Russia expects to spend more than 660 billion rubles ($12 billion) on preparations including building six new stadiums, hotels, training grounds and health facilities. “Russia won the right to host the finals in 2010 with a bid promising to overhaul the transport system, build state-of-the-art sport facilities and put several regional cities on the map.”

  Costly, but meaningless, airport renovations and high-speed rail links are also needed to ease travel between the 11 host cities, the most distant of which, Yekaterinburg, is almost 2,000 km (1,250 miles) from Moscow.

  Below is Reuters’ map of all the Russia cities whose infrastructure would require massive renovations ahead of the event:
  

  Reuters further notes that last week the “government reduced planned spending on the World Cup by 3.5 billion rubles, the latest in a series of cuts made as the economy flags.”

  Since the start of 2015, the World Cup organizers have axed plans to build 25 hotels, cut the number of training grounds in each host city from four to three and reduced the capacity of some of the venues to save on building costs.

  Moscow’s Luzhniki stadium, which will stage the opening match and the final a month later, will be able to seat 81,000, down from the 89,000 originally billed.

   

  “This World Cup is an image project for Putin. He really has something to prove here,” a source close to the organizing committee said.

   

  But he added: “The approach to this World Cup now is to do what was promised, with no frills, and nothing more.”

   

  Michal Karas, editor-in-chief of website Stadium Database, said many high-tech features included in designs for Russia’s new stadiums have been scrapped as the weak rouble made imports more expensive.

  And therein lies the rub: when it comes to projecting an outward image, for Putin it is everything or nothing, no matter the cost. However, as a result of economic (and geopolitical) developments over the past year, the cost has started to matter. And as a result, suddenly the grand vision of the world cup had to be scaled down.

  Enter the US department of justice, and the FBI which as reported yesterday, is now investigating whether bribes were involved in the selection of Russia and Qatar as hosts of the 2018 and 2022 World Cup venues.  And as we predicted one week ago when the FIFA scandal broke out, it is only a matter of time before Russia is stripped of its World Cup hosting.

  Which would be not a single, but double victory for Putin:

  • first, Putin will save billions in funds for far better uses (the IRR on mass sport spectacles is terrible), and avoid the bottomless pit that is building if not bridges, then surely road, to nowhere and stadiums that will be used once only to become grazing grounds for sheep in the years to come.
  • more importantly, for a country fanned by nationalistic fervor, Putin will be able to wave the patriotic flag and slam the evil USA for not only meddling in other people’s affairs, but taking away what was rightfully Russia’s, thereby boosting his nationalism-inspired popularity to even greater heights.

  Finally, what better time and place to stage a massive false flag event than during a world cup, one where countless international, innocent casualties can be blamed on the host nation for not providing sufficient security, leading to an even greater outcry from the global media. No world cup matches, no false flag risk.

  So, ironically, the great FIFA scandal meant to strip Russia of its 2018 World Cup hosting may just end up being the deus ex win-win for Putin which the Russian leader never expected would fall straight into his lap.

  

  

  
  
  

  

• Wikileaks Reveals Full Text Of Trans-Pacific Partnership

  Finally “America’s biggest secret” has been revealed and now the full, formerly confidential text of the Trans-Pacific Partnership, aka Obamatrade, has been made public. You just have to be quick.

  

  

  
  
  

  

• Philippine President Compares China To Nazi Germany; Beijing Tells Him To "Repent"

  Anyone who follows geopolitical news knows that China is in the midst of a tense standoff with the US and its allies regarding Beijing’s land reclamation efforts in the South China Sea. 

  To recap, China is building artificial islands atop reefs in the Spratly archipelago. Although other countries have embarked on similar initiatives in the past, the scale of Beijing’s efforts is, according to the US, unparalleled.

  As the following graphic from WSJ shows, Taiwan, Malaysia, Brunei, The Philippines, and Vietnam all have sovereign claims in the area:

  

  China has constructed some 1,500 acres of sovereign territory in the Spratlys this year alone, leading its neighbors to cry foul and prompting the US to send surveillance aircraft to monitor the situation. Beijing views Washington’s interference as unacceptable (not to mention hypocritical) and has variously suggested that further intervention from the US could easily lead to a maritime “accident.”

  Over the past two weeks, the tension has escalated, culminating in China’s move to place artillery on one of its new islands and break ground on two lighthouses which will be used to provide “international public services.” 

  If you thought the war of words around the “sand castles” couldn’t get any more contentious (and absurd) you’d be wrong because Philippine President Benigno Aquino has now compared China’s “construction efforts” to the Nazi occupation of Czechoslovakia.

  “I’m an amateur student of history and I’m reminded of … how Germany was testing the waters and what the response was by various other European powers,” Aquino said, in a speech in Japan. 

   

  

  (Aquino speaks in Tokyo)

   

  “They tested the waters and they were ready to back down if, for instance, in that aspect, France said (to back down). But unfortunately, up to the annexation of the Sudetenland, Czechoslovakia, the annexation of the entire country of Czechoslovakia, nobody said stop. If somebody said stop to Hitler at that point in time, or to Germany at that time, would we have avoided World War II,” he added.

  Needless to say, Beijing was not pleased with the reference. Here’s more via The People’s Daily:

  China said on Wednesday that it was deeply shocked and dissatisfied with the Philippine president’s remarks likening China to Nazi Germany, warning Manila to stop provoking Beijing on the South China Sea issue.

   

  Foreign Ministry spokeswoman Hua Chunying said that the Philippines has tried to occupy Chinese islands for decades and has kept “colluding with countries outside the region to stir up trouble and sling mud at China”.

   

  “I once more seriously warn certain people in the Philippines to cast aside their illusions and repent, stop provocations and instigations, and return to the correct path of using bilateral channels to talk and resolve this dispute,” she said.

   

  During a speech in Japan on Wednesday, Philippine President Benigno Aquino compared China’s actions to Nazi Germany’s territorial expansion before the outbreak of World War II.

  Meanwhile, President Obama stopped short of likening the PLA to the SS, opting instead for a characteristically colorful (and asinine) colloquialism: 

  “The truth is, is that China is going to be successful, it’s big, it’s powerful, its people are talented and they work hard and, and it may be that some of their claims are legitimate. But they shouldn’t just try to establish that based on throwing elbows and pushing people out of the way.”

  It’s worth noting (again) that when the US accuses China of using its size and relative power to “push people out of the way”, Washington opens itself up to accusations of blatant hypocrisy. Indeed, as we mentioned when the South China Sea feud first began to simmer, using size, influence, and relative power to shape geopolitical outcomes is unspoken foreign policy in Washington.

  In any event, Aquino’s comments won’t do anything to stabilize the region because after all, once the Nazi name-calling starts, all bets are off.

  

  

  
  
  

  

• The Danes Are Revolting: Tax Administration Set On Fire

  In Fredensborg, Denmark, ten official cars from the Tax Administration Office were set on fire and destroyed overnight in a protest. As ExstraBladet reports, police received notification Wednesday night at 3:09 a.m. that the Tax Administration offices on Kratvej were on fire. So far, there are no suspects. But, as Martin Armstrong notes, the police will undoubtedly hunt for someone retaliating against the Tax Man.

   

  

  As Martin Armstrong further points out, this is not the first time the world has seen this…

  On February 18, 2010, a man in a dispute with the IRS for seizing his home flew his plane in a suicide mission directly into the IRS building in Austin, Texas.

  

  His battle against the Tax Man made him a hero to many.

  As the economy turns down and governments become far more aggressive to grab money from everyone, we should see a sharp rise in these types of incidents.

  This is part of the rising trend in civil unrest.

   

  This is all insane since money is no longer tangible; taxes are also no longer necessary. We should seriously address the fact that money is not what it used to be.

   

  We have moved forward in technology, science, medicine, and every field except economics. France is high on the list for a major tax revolution as nearly 50% of GDP is consumed by annual tax collections. That is totally insane. And they wonder why the rich flee and unemployment rises? This is the 21st century, not the 17th. Money has changed and taxes are no longer necessary, yet they create it anyway. That is like me giving you a $100 bonus and then charging you $50 to receive it.

  What’s the point? They spend more than they collect anyway.

  

  

  
  
  

  

• US Police And Prosecutors Fight To Retain Barbaric Right of “Civil Asset Forfeiture”

  by Mike Krieger of Liberty Blitzkrieg

  Land of the Unfree – Police and Prosecutors Fight Aggressively to Retain Barbaric Right of “Civil Asset Forfeiture”

  Efforts to limit seizures of money, homes and other property from people who may never be convicted of a crime are stalling out amid a wave of pressure from prosecutors and police.

   

  Their effort, at least at the state level, appears to be working. At least a dozen states considered bills restricting or even abolishing forfeiture that isn’t accompanied by a conviction or gives law enforcement less control over forfeited proceeds. But most measures failed to pass.

       – From the Wall Street Journal article: Efforts to Curb Asset Seizures by Law Enforcement Hit Headwinds
  
  The fact that civil asset forfeiture continues to exist across the American landscape despite outrage and considerable media attention, is as good an example as any as to how far fallen and uncivilized our so-called “society” has become. It also proves the point demonstrated in a Princeton University study that the U.S. is not a democracy, and the desires of the people have no impact on how the country is governed.

  Civil asset forfeiture was first highlighted on these pages in the 2013 post, Why You Should Never, Ever Drive Through Tenaha, Texas, in which I explained:

  In a nutshell, civil forfeiture is the practice of confiscating items from people, ranging from cash, cars, even homes based on no criminal conviction or charges, merely suspicion. This practice first became widespread for use against pirates, as a way to take possession of contraband goods despite the fact that the ships’ owners in many cases were located thousands of miles away and couldn’t easily be prosecuted. As is often the case, what starts out reasonable becomes a gigantic organized crime ring of criminality, particularly in a society where the rule of law no longer exists for the “elite,” yet anything goes when it comes to pillaging the average citizen.

   

  One of the major reasons these programs have become so abused is that the police departments themselves are able to keep much of the confiscated money. So they actually have a perverse incentive to steal. As might be expected, a program that is often touted as being effective against going after major drug kingpins, actually targets the poor and disenfranchised more than anything else.

  Civil asset forfeiture is state-sanctioned theft. There is no other way around it. The entire concept violates the spirit of the 4th, 5th and 6th amendments to the Constitution. In case you have any doubt:

  The 4th Amendment: The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

   

  The 5th Amendment: No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

   

  The 6th Amendment: In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defense.

  Civil asset forfeiture is a civil rights issue, and it should be seen as such by everyone. Just because it targets the entire population as opposed to a specific race, gender or sexual orientation doesn’t make it less important.

  The problem with opposition in America today is that people aren’t seeing modern battle lines clearly. The greatest friction and abuse occurring in these United States today comes from the corporate-fascist state’s attack against average citizens. It doesn’t matter what color or gender you are. If you are weak, poor and vulnerable you are ripe for the picking. Until people see the battle lines clearly, it will be very difficult to achieve real change. Most people are divided and conquered along their superficial little tribal affiliations, and they completely miss the bigger picture to the peril of society. Which is why women will support Hillary just because she’s a woman, not caring in the least that she is a compromised, corrupt oligarch stooge.

  In case you have any doubt about how little your opinion matters when it comes to the rights of police to rob you blind, read the following excerpts from the Wall Street Journal:

  Efforts to limit seizures of money, homes and other property from people who may never be convicted of a crime are stalling out amid a wave of pressure from prosecutors and police.

  Read that sentence over and over again until you get it. This is a free country?

  Critics have taken aim at the confiscatory powers over concerns that authorities have too much latitude and often too strong a financial incentive when deciding whether to seize property suspected of being tied to criminal activity.

   

  But after New Mexico passed a law this spring hailed by civil-liberties groups as a breakthrough in their effort to rein in states’ forfeiture programs, prosecutor and police associations stepped up their own lobbying campaign, warning legislators that passing such laws would deprive them of a potent crime-fighting tool and rip a hole in law-enforcement budgets.

   

  Their effort, at least at the state level, appears to be working. At least a dozen states considered bills restricting or even abolishing forfeiture that isn’t accompanied by a conviction or gives law enforcement less control over forfeited proceeds. But most measures failed to pass.

   

  “What happened in those states is a testament to the power of the law-enforcement lobby,” said Scott Bullock, a senior attorney at the Institute for Justice, a libertarian-leaning advocacy group that has led a push for laws giving property owners more protections.

  It seems the only people in America without a powerful lobby group are actual American citizens. See: Charting the American Oligarchy – How 0.01% of the Population Contributes 42% of All Campaign Cash

  Prosecutors say forfeiture laws help ensure that drug traffickers, white-collar thieves and other wrongdoers can’t enjoy the fruits of their misdeeds and help curb crime by depriving criminals of the “tools” of their trade. Under federal law and in many states, a conviction isn’t required.

  “White-collar thieves,” they say. Yet I haven’t seen a single bank executive’s assets confiscated. Rather, they received taxpayer bailout funds with which to pay themselves record bonuses after wrecking the global economy. Don’t forget:

  The U.S. Department of Justice Handles Banker Criminals Like Juvenile Offenders…Literally

  In Texas, lawmakers introduced more than a dozen bills addressing forfeiture during this year’s legislative session, which ended Monday. Some would either force the government to meet a higher burden of proof or subject forfeiture programs to more stringent financial disclosure rules and audits.

   

  But only one bill, which law-enforcement officials didn’t object to, ultimately passed. It requires the state attorney general to publish an annual report of forfeited funds based on data submitted by local authorities. That information, at the moment, is only accessible through freedom-of-information requests.

  This is what a corporate-statist oligarchy looks like.

  Shannon Edmonds, a lobbyist for the Texas District and County Attorneys Association, said local enforcement officers and prosecutors “educated their legislators about how asset forfeiture really works in Texas.

  Maryland Gov. Larry Hogan last month vetoed a bill that would, among other things, prohibit the state from turning over seized property to the federal government unless the owner has been charged with a federal crime or gives consent.

  Remember, the terrorists hate us for our freedom.

  Prosecutors said the Tenaha episode was an isolated breakdown in the system. “Everybody knows there are bad eggs out there,” Karen Morris, who supervises the Harris County district attorney’s forfeiture unit, told Texas lawmakers at a hearing this spring. “But we don’t stop prosecuting people for murder just because some district attorneys have made mistakes.”

  When police aren’t out there stealing your hard earned assets without a trial or charges, they can often be found pounding on citizens for kicks. I came across the following three headlines this morning alone as I was the scanning news.
  
  Cop Exonerated After Being Caught on Video Brutally Beating A Tourist Who Asked For A Tampon

  Kids in Police-Run Youth Camp Allegedly Beaten, Threatened By Cops
  
  Florida Cop Charged With On-Duty Child Abuse; Suspended With Pay

  This is not what freedom looks like.

  

  

  
  
  

  

• Who's Next? China Finally Starts Snapping Up Gold Miners

  Submitted by John Rubino via DollarCollapse.com,

  One (perhaps the only) bright spot in the past few year’s gold market has been Chinese and Indian demand for the metal. Here’s a chart, courtesy of Ed Steer’s Gold & Silver Daily, showing that the two countries have imported a cumulative 15,000 tonnes since 2008, which is not far from the total production of the world’s gold mines in that period.

  

  But physical bullion is only part of the story, and may not be the biggest one going forward. Speculation has been circulating for years that China’s miners, flush with cash from selling their low-cost output to the government, would soon start buying up the world’s in-ground gold reserves. Here’s a representative opinion from 2010:

  China buying Gold Mines Instead of Gold Bullion

  A top industry official from the China Gold Association told The China daily back in February that the Chinese purchase of IMF bullion would cause market speculation and volatility. Instead, China is continuing to buy gold not directly from the market but through acquiring gold mines…abroad!

  Dennis Gartman reported in March: “Perhaps we are to begin owning gold mines rather than gold futures of gold ETFs. We have avoided owning mines for years, preferring the “purer” play of owning gold rather than the mines, for we fear being exposed to poor mine management, or accidents in a mine that might do damage to the equity while gold itself moves higher. But if the Chinese authorities want to own mines, perhaps we have to consider doing so also…"

  Why shouldn’t this make sense? After all, where do investors want to put their money? Banks are unsafe. Stocks are unsafe and speculative. With Real Estate at least you have a tangible asset and it will hold some value despite market busts. And buying Gold Bullion, especially buying in large quantities, can cause the prices to fluctuate significantly.

  The best bet? Gold Mines! Maybe even patented gold mines where the investors own both the title to the land AND the Gold in the ground. Get ready to see a huge surge in gold mine buyers, especially from China!

  That was obviously a little optimistic, since mining shares have plunged in the ensuing five years. But price action notwithstanding, the speculation didn’t let up. From 2013:

  5 reasons China is coming to buy your gold mine

  Chinese producers are aggressively looking at picking up gold companies and mines elsewhere as domestic demand reaches record highs.

  Takeovers and asset purchases by Hong Kong and mainland miners increased to a record $2.2 billion in 2013 according to data compiled by Bloomberg.

  Chinese companies like Zijin Mining Group and Zhaojin Mining Industry Co are in a good position to to take a bite out of struggling North American and European-based producers because:

  • Chinese gold demand is soaring and at 1,000 tonnes will overtake Indian purchases this year, but domestic deposits are less than 5% of the global total.

  • Targets are cheap – the S&P/TSX Global Gold Index of the globe’s 49 biggest gold companies are down 31% this year alone.

  • Domestic Chinese producers enjoy some of the lowest cash costs – Zhaojin manages $549/oz, compared with a global average of $831/oz

  • Chinese and Hong Kong companies have access to cheap capital – Zijin got $4.9 billion in soft loans from a state bank for M&A

  • The majors are actively looking to sell as debt levels increase and high-cost mines are mothballed – Barrick could dump as many as 12 of its mines.

  Possible targets include:
  • Australia’s Mali-focused Papillion Resources ($390 million)
  • Toronto-based Iamgold ($2.5 billion)
  • Amara Mining active in West Africa ($48 million)
  • Perseus Mining ($325 million) with producing mines in Ghana and Cote d’Ivoire

  While these companies are looking to get rid of a number of mines:
  • Barrick Gold
  • Newmont Mining Corp
  • Gold Fields
  • Alacer Gold Corp

  Again, too early. Mining stocks are down by about half since that article was published.

  But now, finally, the China-buying-all-the-gold-mines scenario has begun to solidify. From last week:

  Barrick Gold Sells 50% Stake In Big PNG Gold Mine To The Chinese

  In what it describes as a ‘long-term strategic co-operation agreement which outlines the intent of both companies to collaborate on future projects’ Barrick (NYSE:ABX) is to sell a 50% stake in Barrick (Niugini) Limited (which owns 95% of the Porgera gold mine in Papua New Guinea) to China’s Zijin Mining (OTCPK:ZIJMY) for $298 million in cash. Barrick (Niugini) Mining is wholly-owned by its parent company.

  Porgera, in production terms, is one of the world’s larger gold mines. Barrick’s share of gold production in 2014 was 493,000 ounces at all-in sustaining costs of $996 per ounce. Barrick’s share of proven and probable mineral reserves as at December 31, 2014, was 3 million ounces of gold.

  From the Zijin standpoint this will all be a part of the overall Chinese move to secure supplies of strategic metals from around the world to meet its future needs. And China considers gold as very much a strategic metal on the economic front, particularly as it tries to increase its global trading influence over the next few years – which seems to be a key aim of the nation’s government. A $298 million outlay for a share in annual production amounting to 250-275,000 ounces of gold in a single year strikes one as a pretty good deal for the Chinese – and Porgera has an expected mine life of at least another five or six years, and this may well prove to be a conservative estimate.

  Despite the “win-win” rhetoric, it’s clear that at this point in the gold price cycle the power is with the deep-pocketed Chinese while the many, many miners who brought expensive mines on-line just in time for financing to dry up are there for the taking. So — just based on current market conditions and leaving aside long term strategic considerations — it’s reasonable to expect plenty of similar deals in the next few years, and that the end result will be Chinese control of reserves that dwarf the bullion now sitting in its bank vaults.

  Whether this is a buy signal for the gold mining sector remains to be seen. A falling gold price would, without doubt, more than offset the occasional merger. But in a world of stable to slightly higher gold prices, the presence of big Chinese buyers would make the dominant question “who will they buy next?” and that’s great news for the takeover candidates.

  

  

  
  
  

  

• Caught On Tape: Navy Releases Clip Of Russian Warplane "Buzzing" US Destroyer

  Last week saw what was seemingly the first ‘close encounter’ between a US warship (USS Ross) and a Russian Su-24 fighter jet in the Black Sea (after America’s “provocative and aggressive” behavior). The fly-by was ‘caught on tape’ aboard USS Ross and as Alert5 notes was released by The Navy this week who said both the ship and warplane were both in international waters and airspace at that time.

   

  

  

  
  
  

  

• Greece Unable To Make €300 Million IMF Payment, Requests "Bundling"

  With Greece and creditors unable to come to a compromise on a deal over the past several days, we’ve said repeatedly that despite claims to the contrary by Greek economy minister George Stathakis, Greece will not make Friday’s €300 million payment to the IMF and will instead request to have the payments bundled so as to buy PM Alexis Tsipras a few extra weeks to negotiate a deal and pass an agreement through parliament. 

  Indeed, we said the following on Sunday:

  It’s quite possible the sense of urgency around the negotiations has now eased because, as we mentioned on Saturday, it looks as though Greece can buy a few weeks by opting to “bundle” its June payments to the IMF, something the Greek government has denied (meaning it’s probably assured) but which seems increasingly likely especially given cryptic comments like this one from economy minister George Stathakis:

  • STATHAKIS SEES `TECHNICAL SOLUTION’ SOON TO MEET IMF PAYMENTS

  While it’s unclear whether that means the country will find yet another channel by which they can ask creditors to pay themselves back as they did with the IMF last month or whether that’s a reference to bundling the payments is unclear, but here’s what Stathakis told Corriere della Sera:

  
  

  “There shouldn’t be any neeed [to bundle the payments]”

  
  

  We shall see. 

  And then yesterday following the latest failure to reach a deal:

  Pretty clear now Greece will bundle IMF June payments despite official spokesman’s denial

  — zerohedge (@zerohedge) June 3, 2015

  However, Christine Lagarde was confident as recently as three hours ago:

  IMF chief Christine Lagarde said Thursday that she was “confident” that Greece will make a key debt payment on Friday, as the country mulls a new proposal from official creditors.

   

  Lagarde said the proposal offered by European creditors in talks Wednesday, with revised performance requirements for the Greek government, “clearly demonstrated significant flexibility on the part of the institutions.”

  Needless to say, we were rather skeptical when she said it:

  LAGARDE SAYS GREEK PAYMENT BUNDLING DOESN’T APPEAR IN CARDS #timestamp

  — zerohedge (@zerohedge) June 4, 2015

  Now may be an opportune time for Lagarde to update everyone her “confidence” level, because moments ago, what we knew was inevitable, was confirmed:

  • DJ GREECE SUBMITTED A REQUEST FOR BUNDLING JUNE IMF PAYMENTS INTO ONE — GREEK GOVERNMENT OFFICIAL

  And Reuters:

  Greece has asked to bundle its four debt payments to the International Monetary Fund that fall due in June so that it can pay them in one batch at the end of the month, Greek newspaper Kathimerini reported on Thursday.

   

  The request is expected to be approved by the IMF, the newspaper said. That would mean Greece does not have to pay the first tranche of 300 million euros that falls due on Friday.

   

  Greece faces a total bill of 1.5 billion euros owed to the IMF over four installments this month.

  And just like that, after effectively defaulting to the IMF a month ago, Greece has just re-effectively re-defaulted to the same IMF on its payment due tomorrow, which now will not be made, just as predicted.

  Then, adding to the confusion, Greek PM Tsipras tweeted some token statement which for some inexpicable reason had a photo of himself in the tweet:

  The Government will not accept extreme proposals. Our people have suffered enough during the past five years. #Greece pic.twitter.com/5wUSoNtw0I

  — Alexis Tsipras (@tsipras_eu) June 4, 2015

  All of the above of course indicates that Athens has rejected the proposal drafted by creditors on Tuesday and indeed we now have confirmation from the Greek finance ministry:

  “After 4 months of negotiations, creditor institutions submitted proposals which can’t solve the riddle of the economic crisis caused by the policies implemented in the last 5 years. The proposals submitted would deepen poverty and unemployment”

   

  “The agreement and solution which both Greece and Europe so badly need requires the immediate convergence of institutions to more realistic proposals, which will advance economic growth and social sensitivity. Greek government has submitted such proposals”

  Just like that, Greece has called the troika’s bluff and put the ball back into creditors’ court. For their part, Europe expects a re-counter proposal to the troika’s original counter proposal by June 8:

  The Euro Working Group expects Greece to respond to an EU proposal to conclude the country’s bailout by June 8, according to a person familiar with the talks.

  The farce continues.

  In any event, with Friday’s payment delayed, there are just a few more left.

  

  

  

  
  
  

  

• In These Cities, Jobs Are Plentiful And Housing Is Cheap

  If there are two things that are scarce in the US it’s good jobs and affordable housing. 

  As we’ve shown on any number of occasions, the “strong” jobs market is largely a fabrication — a creation of the BLS which, like the BEA will do what it has to in order to ensure that the myth of the US economic “recovery” can be sustained.

  In the real world, those with newly-minted master’s degrees are forced to wait tables while those fortunate enough to find work labor under non-existent wage growth while the Jamie Dimons of the world (perhaps that’s unfair, there’s only one Jamie Dimon) get rich on the back of Fed policy designed to enrich the wealthy while everyone else awaits a trickle-down “wealth effect” that will never come. 

  As for affordable housing, the following graphic from the National Low Income Housing Coalition betrays a sad fact. In no state in the union can a minimum wage worker afford a one bedroom apartment. 

  

   

  But all is not lost, because apparently, there are some places in America where the Goldilocks combination of good jobs and affordable housing actually exists. The following interactive graphic from Zillow shows where the so-called “sweet spots” are:

  

  

  

  
  
  

  

• The Evolution Of "Man"

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  
  
  

  

• China Blamed For "Largest Theft Of US Government Data Ever" – 95% Of Federal Employees Affected

  A week ago, Russian “crime syndicates” were blamed when the IRS announced that a “major cyber breach allowed criminals to steal the tax returns of more than 100,000 people.” Today, it is China’s turn to be blamed following a report that the FBI is probing what has been described as “one of the largest thefts of government data ever seen.”

  

  The alleged penetration by Chinese hackers breached the files of the Office of Personnel Management, in which a vast amount of information about federal employees was accessed.  According to the WSJ, investigators believe the hack compromised the records of approximately 4 million individuals. Indicatively, according to the OPM, there are about 4.2 million total personnel, so the hack affected some 95% of all Federal workers.

  OPM Director Katherine Archuleta told the WSJ that: “we take very seriously our responsibility to secure the information stored in our systems, and in coordination with our agency partners, our experienced team is constantly identifying opportunities to further protect the data with which we are entrusted.”

  From the WSJ:

  An FBI spokesman said the agency is working with other parts of the government to investigate. “We take all potential threats to public and private sector systems seriously, and will continue to investigate and hold accountable those who pose a threat in cyberspace,” he said.

   

  The Office of Personnel Management, in a statement, said it detected the breach in April 2015 and is working with the Department of Homeland Security and the FBI.

   

  The Department of Homeland Security said it “concluded at the beginning of May” that the information had been stolen.

   

  The OPM said it could discover that even more records were stolen. It couldn’t be learned how many of those individuals are government officials and how many might be contractors.

  China has yet to respond officially, but as a reminder the last time the Pentagon accused China of hacking US defense programs, the communist nation was less than thrilled:

  The U.S. claims contain “errors in judgment,” Defense Ministry spokesman Geng Yansheng told reporters at a monthly news conference.

   

  “First, they underestimate the American Pentagon’s ability to protect its safety, and second, they underestimate the intelligence of the Chinese people,” Geng said. “China is entirely capable of producing the weaponry needed for national defense,” he added, pointing to recent domestic technological breakthroughs such as the country’s first aircraft carrier, new generation fighter jets, large transport planes and the Beidou satellite system.

   

  China has consistently denied claims its military is engaged in hacking, including those in a report by U.S. cybersecurity firm Mandiant that traced the hacking back to a People’s Liberation Army unit based in Shanghai.

  It was unclear how the FBI determined that Chinese hackers were behind the attack: supposedly computer experts in China were able to penetrate the massive US government firewalls, foregoing the guaranteed fame and riches from BTFD in Chinese stocks.

  In any event, the release of this data just days after the NSA’s massive surveillance powers were curbed is hardly a coincidence, although it remains to be seen if this latest penetration of government workers will generate any sympathy points with the massive spy agency, best known for cracking down not on foreign hackers but on domestic electronic communication.

  The revelation, however, is sure to inflame already tense relations between China and the US, which has reached a fever point in recent weeks over the escalation of Chinese encroachment into territories claimed by US allies in the South China Sea.

  

  

  
  
  

  

• Looking For The Next Big One: Part 1, Orderly Or Not?

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  I generally remain noncommittal about giving specific predictions about the future because there is simply no way toward predilection. We can think about probabilities as a guide for analysis, particularly in setting investment guidelines, but to offer targets for factors like GDP or some stock index is pointless. Even now, with all that is taking place of economic unraveling, there is still a non-trivial chance that GDP improves and stocks take off; I wouldn’t call that the baseline scenario but it’s enough to not ignore.

  That being said, recent indications have darkened the probability spectrum to the point that it may actually be worth examining a worst case scenario. My gut sense is that there is indeed a recession forming, and one that looks worse by the month, so there are numerous relevant factors that demand attention the greater the potential for it. That starts with leverage and any transmission from finance to the economy.

  If this is to be the third bubble episode in succession, the prior two do offer at least a useful guide as to potential even if their ultimate resolutions were quite different (to say the least). The dot-com bust that began in April 2000 took nearly three years to resolve itself, but remained suspiciously orderly in how that occurred. For a market event that took almost 60% off the S&P 500 high to low, it was both torturous and downright regular. The economy took its cues from that as well, despite fears of 1929 and asset-driven “deflation” there was no banking element in the reversal, and the recession itself, dated officially from March 2001 until November that year, was about as mild as a recession might go.

  Alan Greenspan took the credit for all that, even though he was belated in his response and his monetary monster was responsible for it (denials somehow still persist). If there was a monetary factor in limiting the collateral damage to the economy and larger financial system, it had nothing to do with his expedition with the federal funds rate into “ultra-low” territory, instead the action was all over the eurodollar system. In short, the ascendancy of the eurodollar standard provided a massive cushion against even the largest asset bubble ever seen (to that point) – demonstrating the sheer absurdity of the bubble that took its place.

  Convention views the housing bubble as arising sometime around 2003, but it is clear the world was fully engulfed long before then. The eurodollar effects (Greenspan’s idiotic idea of “global savings glut”) showed up as early as 1995 in so many places only a blind ideologue could have missed them. Thus, the dot-com bust was but a sideshow to wholesale finance that gave only partial and temporary pause then.

  

  In fact, the housing bubble was hit harder (relatively) in its infancy by the Asian flu than the dot-com bust, more than suggesting that offshore “dollar” influence. Greenspan did nothing but sit back and let the eurodollar insanity carve out his GDP mandate year after year, through debt upon debt, all the while the Fed thought its 19th century view of finance was the monetary equivalent of magic and genius.

  And that is why the 2008 bubble burst event was so much more dramatic. In these terms, it wasn’t necessarily the asset bubbles that were changing, it was the eurodollar standard that built them. Whereas there was solid financial flow in the 2000-03 period to keep that first bubble’s reversal orderly and far less problematic, starting in August 2007 liquidity underwent two successive reversals that ultimately amounted to total failure by 2008.

  

  In this context it is easy to see why 2008 was so devastating where 2001 was not. In response to getting everything wrong in 2008, the Fed (almost understandably) by the end of 2008 and into 2009 set about trying to recreate the economy and financial system as it existed at that 2007 peak. It finally evolved into the 21st century by shedding its role as “lender of last resort”, with anachronistic tools like the Discount Window, and belatedly entered the realm of derivative and shadow finance becoming “dealer of last resort” and even “market of last resort.” QE’s fell under that regime, both as a means to force spending in the economy and as intended (though ultimately meaningless) assurance to financial agents (the real “printing press”) for the debt-basis that is all that is allowed under activist central banking.

  The results of all of this have been far from fruitful, evidenced greatly at the start by the fact that there is still debate eight years later about whether or not a recovery has ever taken place. With that in mind, thinking about what might come next is already deficient just on the economic side (a recession with consumers already in the bunker before it ever began?). But there are also building dangers about financial feedbacks to consider, especially as it relates to the eurodollar standard in structural reverse. As shown above, through TIC flow, which is one meaningful method of presentation, the eurodollar standard has not been reconstituted despite all aimed efforts.

  Initially, there seemed great promise to the determination in that area, as late as April 2011 there appeared some likelihood of getting back to at least close to the pre-crisis mode of operation. But the euro crisis that summer, which was in no small way a parallel “dollar” crisis, ended any hopes for revisiting pre-2007 financialism. The Fed, as always, did not get that message and instead opted to simply make it worse by removing the one “pillar” that was holding even that limited rebound in place – tapering QE. Just the threat of doing so has strained and totally sapped global “dollar” liquidity to the point that minor disruptions become major global events (October 15, January 15).

  In short, the rebound in the eurodollar standard was never a permanent solution because it was as artificial as the economy it was intended to foster. Dealer capacity was rebuilt solely on the promise of QE-forever and that effect on bond prices as without pre-crisis conditions for gain-on-sale profit through proprietary “hedging” of inventory and providing liquidity through inventory and warehousing, there isn’t any real profit opportunity anymore. Spreads have been squeezed and avenues shut down (this, on its own, would not necessarily be an unwelcome result as financialism is due for several steps back, the problem, however, is where the Fed, again, intends on recreating 2006; in other words, you need the dealers and their activities to get you there, so you either have to accept what they do or stop trying to go back).

  As noted yesterday, liquidity is bad and getting worse which would seem to rule out the 2001 version of bubble reversions. With the eurodollar standard growing even more precarious, arguably as bad now as in 2008, there is no financial cushion should “risk” shift dramatically.

  

  

  
  
  

  

• Crowdsourcing US Police Brutality

  In the wake of the violent protests that left Baltimore in ashes at the end of April, US race relations and police misconduct are now the subject of intense debate in America. 

  One theory — dubbed the “Ferguson Effect” — claims police are now reluctant to engage in “discretionary enforcement” for fear of prosecution. “Discretionary enforcement” of course refers to the use of lethal force in the line of duty and the implication seems to be that in light of recent events, law enforcement officers are afraid that their actions will be scrutinized by the public. In extreme cases, such scrutiny could culminate in social unrest, something no one individual wishes to be blamed for. 

  Casting doubt on the so-called Ferguson Effect is a report from The Washington Post which shows that US police are shooting and killing “suspects” at twice the rate seen in the past. More specifically, 385 people have been killed by police in 2015 alone. Unsurprisingly, minority groups are overrepresented in cases involving the fatal shooting of unarmed suspects. 

  

  In a testament to how other developed countries view US policing, The Guardian is now crowdsourcing the number of people killed by police in the US and tracking it in real-time.

  The effort, which The Guardian is calling “The Counted”, has state-by-state breakdowns, names, per capita ranking, and pictures of the victims.

  

  

  

  (Full interactive site)

  We’ll leave it to readers to determine what it says about police accountability in America when other countries feel compelled to put a face and a name to hundreds of people whose deaths, if left in the hands of the US government, might have gone unnoticed or worse, undocumented. 

  *  *  *

  About the project (via The Guardian):

  The Counted is a project by the Guardian – and you – working to count the number of people killed by police and other law enforcement agencies in the United States throughout 2015, to monitor their demographics and to tell the stories of how they died.

  The database will combine Guardian reporting with verified crowdsourced information to build a more comprehensive record of such fatalities. The Counted is the most thorough public accounting for deadly use of force in the US, but it will operate as an imperfect work in progress – and will be updated by Guardian reporters and interactive journalists as frequently and as promptly as possible.

  Why is this necessary?

  The US government has no comprehensive record of the number of people killed by law enforcement. This lack of basic data has been glaring amid the protests, riots and worldwide debate set in motion by the fatal police shooting of Michael Brown, an unarmed 18-year-old, in Ferguson, Missouri, in August 2014.

  Before stepping down as US attorney general earlier this year, Eric Holder described the prevailing situation on data collection as “unacceptable”.

  The Guardian agrees with those analysts, campaign groups, activists and authorities who argue that such accounting is a prerequisite for an informed public discussion about the use of force by police.

  

  
  
  

  

• "Where's My Raise?": American Workers Suddenly Realize "Recovery" Isn't Real

  In March, we solved the mystery of America’s missing wage growth. Here is the conundrum facing PhD economists:

  One of the biggest conundrums, one that has profound monetary policy implications, and that has been stumping the Fed for the past year is how can it be possible that with 5.5% unemployment there is virtually no wage growth. The mystery only deepens when the Fed listens to so-called economist experts who tell it wage growth is imminent, if not here already, and it is merely not being captured by the various data series.

  In fact, the Fed is still trying to understand why wages aren’t rising more quickly. After all, once you triple-adjust the Q1 GDP print, the economy is on sound footing. Here’s an excerpt from Janet Yellen’s speech in Rhode Island last month:

  Finally, the generally disappointing pace of wage growth also suggests that the labor market has not fully healed. Higher wages raise costs for employers, of course, but they also boost the spending and confidence of customers and would signal a strengthening of the recovery that will ultimately be good for business. In the aggregate, the main measures of hourly compensation rose at a rate of only around 2 percent through most of the recovery.

  The answer to this apparent quandary, lies in the distinction between what the BLS classifies as “non-supervisory” workers and “supervisory” workers. The following charts tell the story nicely.

  

  

   

  What the above suggests is that in fact, wage growth in America has never been higher — for your boss. Or, put differently:

  For all who are still confused why there are no wage hikes despite the Fed’s relentless efforts to micromanage the economy and stimulate wage growth via trickle-down record high stock market prices, the answer is that there is wage growth.

   

  Just not for 83% of the working population.

  Now, with pundits parroting the “robust” jobs market refrain on the nightly news, “everyday Americans” are beginning to ask “where’s my raise?” WSJ has more:

  The unemployment rate here and in other thriving metropolitan regions across the U.S. is below where it was when the financial crisis blew a hole in the U.S. economy in 2008. Now, many American workers are asking: Where’s my raise?

   

  Questions about the slow pace of wage growth aren’t only stumping workers, but also economists and policy makers at the Federal Reserve—with the answers weighing on households and the larger U.S. economy.

   

  When U.S. unemployment rates fall, conventional notions of supply and demand predict wages will go up as firms bid for increasingly scarce workers, and there are signs of that, for example, in building trades and restaurants. “Basic economics hasn’t gone out the window,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in an interview. “When employment grows, wages will start to grow.”

   

  But a Wall Street Journal analysis of Labor Department data points to persistent constraints on worker pay, even as the economy approaches full employment. The Journal found 33 U.S. metropolitan areas—from the small to the sizable—where unemployment rates and nonfarm payrolls last year returned to prerecession levels. In two-thirds of those cities—including Columbus; Houston; Oklahoma City; Minneapolis-St. Paul, Minn.; and Topeka, Kan.—wage growth trailed the prerecession pace. 

  As The Journal goes on to note, the American Middle Class has been suffering from stagnant pay for quite some time:

  Stagnant incomes are a long-running problem for the American middle class. Median household income, adjusted for inflation, was $51,939 in 2013, only slightly higher than it was in 1988, when it was $51,514. Slow wage growth is part of the problem; adjusted for inflation, blue-collar pay has increased just 0.3% a year over the past quarter-century.

  This could be partially due to America’s vanishing workers (described in detail here):

  Companies tapping pools of workers who have disappeared from the U.S. unemployment tallies, creating what economists describe as hidden slack in the economy. Until this invisible labor supply is spent, these men and women, including part-timers, temporary workers and discouraged labor-market dropouts, could hold wages down. 

  Another possibility — and this speaks further to the anemic pace of the global economic “recovery” and the utter failure on the part of central bank policy to bring about sustained economic prosperity — is that an endemic lack of demand is keeping the so-called virtuous circle of increased wages, higher consumption, increased profits and investment levels from taking hold.

   

  In other words, as long as global trade is “in the doldrums” (to quote BofAML) and as long as aggregate demand is subdued, wage growth will remain elusive for more than three quarters of American workers.

  
  

  

  

  
  
  

  

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