Today’s News June 6, 2015

• Ron Paul Stunned That George Soros Seeks To "Expand War In Ukraine"

  Earlier this week, using hacked and leaked documents and pdfs created by, among others, George Soros’ most recent wife who is less than half his age, we showed something fascinating: the puppetmaster behind the entire Ukraine conflict may be none other than George Soros himself. To wit:

  Just days after George Soros warned that World War 3 was imminent unless Washington backed down to China on IMF currency basket inclusion, the hacker collective CyberBerkut has exposed the billionaire as the real puppet-master behind the scenes in Ukraine. In 3 stunning documents, allegedly hacked from email correspondence between the hedge fund manager and Ukraine President Poroshenko, Soros lays out “A short and medium term comprehensive strategy for the new Ukraine,” expresses his confidence that the US should provide Ukraine with lethal military assistance, “with same level of sophistication in defense weapons to match the level of opposing force,” and finally explained Poroshenko’s “first priority must be to regain control of financial markets,” which he assures the President could be helped by The Fed adding “I am ready to call Jack Lew of the US Treasury to sound him out about the swap agreement.”

  Needless to say, there was absolutely no mention of any of this in the broader media. However, despite the limited distribution of this very fascinating story which casts a vastly different light on the Ukraine conflict than one shone by the mainstream, it did catch the attention of one person: Ron Paul.

  In the following clip Ron Paul looks at the stunning implications of Soros’ involvement behind the scenes in Ukraine, how he may be pulling the strings in this most critical proxy war between East and West, and what he stands to gain.

  

  

  
  
  

  

• "The Simplest Way To Describe Keynesianism" In One Photo

  This is the simplest way to describe Keynesianism:

  

  via Alejandro Pedrosa

  

  

  
  
  

  

• Looking For The Next One: "All The Pieces Are Already In Position, Missing Now Only A Spark"

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  Looking For The Next One; Part 2, Finding Risk Rather Easily

  As noted in Part 1, The Fed sees no risks of bubble trouble because they are looking at it all from the 2008 perspective. That is completely wrong-headed; if there is a “next one” it will have nothing to do with subprime mortgages, or even mortgages and real estate. By March 2007, the conventional estimate is that there were $1.3 trillion in subprime mortgages outstanding, all of which caused inordinate decay in liquidity and pricing through wholesale mechanisms that turned out to be disastrously self-feeding and often contradictory (as an example, tranche pricing through correlation trading where correlation estimates were based on CDS prices derived from liquidity in hedging demand which traced back to tranche pricing). Everyone seems to simply assume that the subprime problem ended in 2008, if only by crash.

  That is true but only of mortgages. Deleveraging is myth as debt has still expanded, and greatly, just not in the same exact places. There are certainly auto and student loans that have exploded exponentially, especially in subprime categories, but if there is another credit bubble now, the third, it is undoubtedly corporate debt. The FOMC looks at corporate credit spreads being narrow and yields being low as a measure of its own success with QE, but that largely misses the real risks in such a condition – junk bonds are not meant to yield 5% or 6% because there is absolutely no cushion to that price!

  A junk bond that yields 12%, as it had historically, offers some interest cushion to the pricing in principle – that was the whole point of junk bonds to begin with, the basic financial factor of risk/reward to be gainfully compensated by recognizing and pricing much higher credit risk. Thus, if a junk bond issuer were to start trending toward negative factors it wouldn’t necessarily offer a disruptive circumstance as prices typically were not exaggerated until the very end closer to default. A junk bond issued at 5.5% offers absolutely no cushion, and worse, the entire predicate position of junk bonds at 5.5% is endless liquidity which artificially caps default rates at historical lows, self-feeding the upward trend in prices (if the weakest companies can get financing easily, they don’t default where they may have before but that does nothing to change their business circumstance especially in a weak economy). In other words, the fact of the corporate debt bubble is that it will, in the end, push defaults together into a single event rather than allow them to be interspersed more organically. Worse, the more that artificial impediment to creative destruction seeps the less of a rebalance there is in pricing.

  What good will a 5.5% yield be if defaults not only tick higher but do so in what looks like the snowball effect? That means the potential for selling is far, far higher under those circumstances than would ordinarily be the case where the Fed had not so intruded. Combine that with lack of liquidity systemically and the potential for disorder is enhanced beyond comprehension at this moment. Last month, Charter Communications floated three bond series of BB- junk, all priced with yields under 6%; May 2023 maturities with a worst yield of 5.125%; May 2025’s with a worst yield of 5.375%; and, May 2027’s with a worst yield of 5.875%. There isn’t even much “protection” or cushion in those prices if a recovery did actually show up and interest rates normalized, let alone systemic defaults finding general illiquidity.

  The problem seems to be, not unlike the 2003-07 period, lack of visibility. It seems as if there is vague awareness more generally about a junk bond problem but that it is taken as a minor affair; the vast majority of the deluge in corporate debt in this “cycle” has been investment grade. But that was also true of the housing finance debacle – $6 or $7 trillion in mortgages (depending on the source) overall but “only” $1.3 trillion in subprime. As I tabulated last week, corporate debt issuance (gross) was around $4.2 trillion in the QE3 period (defined as 2012-14) while junk gross was “only” $975 billion of that.

  

  Admittedly, this is a bit of mixed comparison, as gross issuance can often replace matured or outstanding debt or bonds, but I am just using the past three full calendar years on the corporate side. In some ways, that doesn’t even matter because these are all bonds that must be held somewhere by someone now (in other words, it is possible that a company may have issued a junk bond in 2012 and then floated a cheaper one in 2014 to retire the previous issue, meaning that there is some double counting in using gross issuance figures cumulatively, but given the short window here and the almost exponential increase in overall gross outstanding that is likely a limited occurrence).

  Some might view that as entirely manageable, especially as being only three-quarters the size of subprime mortgages in 2007. The overall credit market has swung far higher, meaning proportions dedicated to the riskiest sector is actually smaller, and junk bonds are traded much more lively and openly; subprimes and their related structures were highly illiquid and thus pricing was limited to narrow gauges.

  But that is not the extent of the corporate “subprime” problem, however, and it goes far greater to illiquidity and hidden regimes. In fact, leveraged loans may be the single largest problem in the corporate bubble universe under adverse conditions, even factoring any “gate” problems that will undoubtedly show up as corporate bond funds look to sell junk bonds if redemptions come in too hot. Leveraged loans are syndicated junk loans that are dispersed through the banking and financial system in almost exactly the same manner as MBS pieces were in the last bubble – and there is no real liquidity in them in which to offer robust and broad systemic pricing should it all go wrong.

  I wish this were a small problem, but the fact is that leveraged loan gross in the QE3 period actually far, far outpaces even junk bonds – some $1.6 trillion!

  

  And that’s not the fullest extent, either. We can add corporate debt CLO’s too, as even though not all are junk or of the leveraged loan type, they are essentially structured products with very low liquidity and open pricing just as dispersed throughout the financial system. That brings the total corporate bond bubble potential basis up to some $2.8 trillion!

  

  Not only is that an immense total, even if gross, it has taken place in a manner totally unknown to financial history. We have no real idea how corporate bond prices will perform with bond funds and leveraged loan “products” scattered so far and wide, inside and outside of the banking system, and with a decaying eurodollar system to try to hold it all together. If there is another financial crisis, it will indeed look nothing like 2008 in its consistency, but the patterns are all already arranged.

  All of this has taken place upon a foundation of illusion far too similar to the housing bubble – that economic growth would be sustained and robust, and that liquidity would be just as unfailing and dependable. That is the commonality among all asset bubbles, which the Yellen Doctrine asserts is unproblematic even where great financial imbalances are endemic; as they are assuredly now. That is a dangerous acceptance all its own, but for the Yellen Doctrine to survive, the flimsy bubble basis must as well. The herd is absolutely enormous and it will not take but a few to peel off toward the “sell” side to move prices into the snowball/stampede. The only reason that hasn’t happened yet is that the vast majority simply still don’t want to believe in any downside, especially one where the Fed got it all wrong; easy money is too much fun.

  How does all this maintain itself if and when economic growth tends toward the worst case and liquidity is steadily revealed as beyond sickly already?

  I don’t have the answers to that, obviously, but imagination being what it is this is not a pretty scenario. As stated at the outset, I wouldn’t even begin to venture a guess as the likelihood of it all going wrong other than to say it is much more realistic than is being talked about or even considered right now, and that a worst case at this point is really and truly a worst case. All the pieces are already in position, missing now only a spark. Maybe the Fed has more magic in its arsenal, but the eurodollar realities actually reveal that it never really did in the first place. There is now at least twice the leverage and still none of the financial cushion.

  

  

  

  
  
  

  

• Vietnam To Buy Fighter Jets, Drones From West To Counter Chinese 'Aggression'

  Earlier this week Philippine President Benigno Aquino — a self-proclaimed “amateur student of history” — warned Japanese lawmakers that the continual appeasement of China with regard to Beijing’s island construction project in the South China Sea poses a similar risk to the global balance of power as the pre-war appeasement of Hitler. 

  China did not appreciate the reference and had the following advice for “certain people in The Philippines”: 

  “…cast aside [your] illusions and repent [and] stop provocations and instigations.”

  In yet another sign that Beijing’s neighbors in the region (who have competing claims in the Spratlys) are seeking to guard against what they view as Chinese aggression, Vietnam is set to bolster its defense capabilities and deepen its security relationship with the US. 

  On a visit to Hanoi on Tuesday, Defense Secretary Ash Carter said the following:

  “As Defense Minister Gen. Phung Quang Thanh and I reaffirmed in our meeting today, we’re both committed to deepening our defense relationship and laying the groundwork for the next 20 years of our partnership. Following last year’s decision by the United States to partially lift the ban of arms sales to Vietnam, our countries are now committed for the first time to operate together, step up our defense trade and work toward co-production.” 

  The DoD’s official press release suggests Washington will play an active role in helping Vietnam to defend its claims via the build up of the country’s “maritime security capacity”:

  Carter also discussed maritime security issues and the South China Sea. He pledged continued U.S. support to build Vietnamese maritime security capacity and underscored U.S. commitment to a peaceful resolution to disputed claims there made in accordance with international law.

  More specifically, the US will facilitate the purchase by Vietnam of $18 million in American Metal Shark patrol vessels which will be used for “peacekeeping operations.” But that’s hardly the end of it. As Reuters reports, Vietnam is now looking to Western defense contractors to purchase drones, fighter jets, and maritime patrol aircraft. 

  Via Reuters:

  Vietnam is in talks with European and U.S. contractors to buy fighter jets, maritime patrol planes and unarmed drones, sources said, as it looks to beef up its aerial defenses in the face of China’s growing assertiveness in disputed waters.

   

  The battle-hardened country has already taken possession of three Russian-built Kilo-attack submarines and has three more on order as part of a $2.6 billion deal agreed in 2009. Upgrading its air force would give Vietnam one of the most potent militaries in Southeast Asia.

   

  The previously unreported aircraft discussions have involved Swedish defense contractor Saab, European consortium Eurofighter, the defense wing of Airbus Group and U.S. firms Lockheed Martin Corp and Boeing, said industry sources with direct knowledge of the talks.

   

  Defense contractors had made multiple visits to Vietnam in recent months although no deals were imminent, said the sources, who declined to be identified because of the sensitivity of the matter. Some of the sources characterized the talks as ongoing.

   

  One Western defense contractor said Hanoi wanted to modernize its air force by replacing more than 100 ageing Russian MiG-21 fighters while reducing its reliance on Moscow for weapons for its roughly 480,000-strong military.

  Here again we see the US facilitating the buildup of arms in the name of bolstering defense and increasing the “security capabilities” of nations Washington views as strategic partners.

  As indicated above, maintaing close military ties with Hanoi accomplishes two goals. First, it allows the US to rally yet another regional “ally” around the idea that China’s activities in the Spratlys constitute an unacceptable attempt to project power by redrawing maritime boundaries and creating thousands of acres of sovereign territory which did not previsouly exist. 

  Second, the West is more than happy to assist Vietnam with any shift away from relying on Russia for weapons (recall that in March, the US was quite displeased that Hanoi was still allowing nuclear-capable Russian bombers to refuel at a former US airbase).

  In the end, this is a win-win for Washington and marks yet another point of escalation in the South China Sea standoff.

  

  

  
  
  

  

• Memo To The Fed And Jon Hilsenrath: We're Not Here To Enrich Your Corporate Cronies

  Submitted by Charles Hugh-Smith from the OfTwoMinds blog,

  Memo to the Fed: you are the enemy of the middle class, capitalism and the nation. 

  The Federal Reserve is appalled that we’re not spending enough to further inflate the value of its corporate and banking cronies. In the Fed’s eyes, your reason for being is to channel whatever income you have to the Fed’s private-sector cronies–banks and corporations.

  If you’re being “stingy” and actually conserving some of your income for savings and investment, you are Public Enemy #1 to the Fed. Your financial security is nothing compared to the need of banks and corporations to earn even more obscene profits. According to the Fed, all our problems stem from not funneling enough money to the Fed’s private-sector cronies.

  Fed media tool Jon Hilsenrath recently gave voice to the Fed’s obsessive concern for its cronies’ profits, and received a rebuke from the middle class he chastised as “stingy.” Hilsenrath Confused Midde-Class “Responded Strongly” To “Offensive” Question Why It Isn’t Spending.

   

  Memo to the Fed and its media tool Hilsenrath: we’re not here to further enrich your already obscenely rich banker and corporate cronies by buying overpriced goods and services we don’t need. Our job is not to spend every cent we earn on interest to banks and mostly-garbage corporate goods and services. Our job is to limit the amount we squander on interest and needless spending. Our job is to build the financial security of our families by saving capital and prudently investing it in assets we control (as opposed to letting Wall Street control our assets parked in equity and bond funds).

  Your zero-interest rate policy (ZIRP) has gutted our ability to build capital safely. For that alone, you are an enemy of the middle class. Let’s say we wanted to buy a real asset that we control, for example, a rental house, rather than gamble our retirement funds on Wall Street’s Scam du Jour (stock buybacks funded by debt, to name the latest and greatest scam).

  Thanks to your policies of ZIRP and unlimited liquidity for financiers, we’ve been outbid by the Wall Street/private-equity crowd–your cronies and pals. They pay almost nothing for their money and they don’t need a down payment, while we’re paying 4.5% on mortgages and need 30% down payment for a non-owner occupied home. Who wins that bidding process? Those with 100% financing at near-zero rates.

  Here’s a short list of stuff we don’t need to buy:

  1. New house: overpriced. Debt-serfdom for a wafer-board/sawdust-and-glue mansion? Pay your banker buddies $250,000 in interest to buy a $300,000 house? Hope the bursting of the real estate bubble doesn’t wipe out whatever equity we might have? No thanks.

  2. New vehicle: overpriced. We can buy a good used car and a can of “new car smell” for half the price, or abandon car ownership entirely if we live in a city with peer-to-peer transport services. We can bicycle or ride a motorscooter.

  3. Anything paid with credit cards.

  4. Any processed food.

  5. A subscription to the Wall Street Journal and other financial-media cheerleaders for you, your banker buddies and Corporate America.

  How Wall Street Devoured Corporate America: Thirty years ago, the financial sector claimed around a tenth of U.S. corporate profits. Today, it’s almost 30 percent

  Here’s how your cronies have fared since you started your low-interest rate/free money for financiers policies circa 2001: corporate profits have soared:

  

  Now look at median household income adjusted for inflation: down 4%–inflation which we know is skewed to under-weight the big ticket items such as healthcare and college education that are skyrocketing in cost:

  

  And here’s how the middle class has fared since the Federal Reserve made boosting Wall Street and the too big to fail banks its primary goal, circa 1982: the bottom 90% have treaded water for decades, the top 9% did well and the top 1% reaped fabulous gains as a result of your policies.

  

  If you’re wondering why we’re not spending, look at our incomes (going nowhere), earnings on savings (essentially zero) and the future you’ve created: ever-widening income disparity, ever-greater financial insecurity, ever-higher risks for those forced to gamble in your rigged casino, and a political/financial system firmly in the hands of your ever-wealthier cronies.

  Capital–which includes savings–is the foundation of capitalism. If you attack savings as the scourge limiting corporate profits, you are attacking capitalism and upward mobility. The Fed is not supporting capitalism; rather, the Fed’s raison d’etre is crony-capitalism, in which insiders and financiers get essentially free money from the Fed in unlimited quantities that they then use to buy up all the productive assets.

  Everyone else–the bottom 99.5%–is relegated to consumer: you are not supposed to accumulate productive capital, you are supposed to spend every penny you earn on interest paid to banks and buying goods and services that further boost corporate profits.

  This inversion of capitalism is not just destructive to the nation–it is evil. Funneling trillions of dollars in free money for financiers while chiding Americans for not going deeper into debt is evil.

  Memo to the Fed: you are the enemy of capitalism, the middle class and the nation.

  * * *  

  And, best of all, all of this was known and described over 100 years ago when the motives behind the Aldrich Plan were revealed to the American people, and while rejected by Congress in 1912, it served as the foundation of the Federal Reserve Act of 1913 which ultimately led to the current economic devastation.
  

  
  

  

  

  
  
  

  

• DoJ To Tax Wall Street (Again) In MBS Probe

  Fresh off a farcical ‘crack down’ on “bad actor” banks that colluded to rig the $5 trillion-a-day FX market, the DoJ is launching another faux crusade against Wall Street.

  As a reminder, the Justice Department recently extracted guilty pleas from several TBTF banks in connection with forex manipulation. The entire effort was of course meaningless and ended with what amount to token fines and no jail time for any of the conspirators. Worse, the banks were able to obtain SEC waivers which ensured their ability to “efficiently” raise capital and participate in private offerings (among other important activities) would not be curtailed because after all, no one wants another “Arthur Andersen”.

  If you don’t see the connection between banks rigging FX markets and a decade-old accounting scandal, that’s because there isn’t one. Here’s what we said last month regarding the excuse for allowing Wall Street’s to obtain SEC waivers:

  The excuse for allowing Wall Street to skirt the very penalties that were put in place as a result of the very things for which the banks are now being prosecuted is two-fold: 1) there’s the so-called ‘Arthur Andersen effect’ whereby the decade-old collapse of an accounting firm and the layoffs that accompanied it are somehow supposed to represent what would happen if a Wall Street bank were not able to claim seasoned issuer status, and 2) curtailing a major bank’s ability to issue capital “speedily and efficiently”, participate in private placements, and manage mutual funds represents a systemic risk.

  So, emboldened by its recent “unprecedented” prosecutorial success, the DoJ will now pursue a fresh round of MBS-related settlements with banks that knowingly packaged and sold shoddy CDOs.

  Via WSJ:

  Up to nine banks are in line for the next round of billion-dollar payments related to soured mortgages as federal and state officials prepare their next set of cases, people familiar with the matter said.

   

  The Justice Department and state officials, which already have reaped almost $37 billion from the largest U.S. banks, are now targeting U.S. and European banks. Settlements with Goldman Sachs Group Inc. and Morgan Stanley could be finalized as early as late June, these people said.

   

  The settlements relate to securities backed by residential mortgages that plunged in value during the financial crisis. Banks are expected to pay from a few hundred million dollars to $2 billion or $3 billion each, depending on their size and the level of misconduct they allegedly employed in arranging the securities, some of these people said. The deals, which are expected to come individually rather than as a group, are likely to stretch out over months as details are worked out, these people said. Negotiations with most banks are still in early stages, these people said..

   

  The Justice Department could pursue settlements with large U.S. regional banks when these settlements are over, in part based on the amount of mortgage-related securities they underwrote and sold, some of these people said..

   

  Other banks expected to settle in coming months include Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, Royal Bank of Scotland Group PLC,UBS AG and Wells Fargo & Co.

  Most of them have disclosed that they are being investigated for mortgage matters, but the timing and size of potential fines haven’t been reported before..

   

  These settlements would represent a passing of the torch to new U.S. Attorney General Loretta Lynch, since settlements with J.P. Morgan, Citigroup and Bank of America were negotiated under her predecessor, Eric Holder.

   

  

  (Attorney General Loretta Lynch)

  Ah, yes. The proverbial “passing of the torch” from one crusader for justice to another.

  Or, more accurately, Loretta Lynch is now the person in charge of shaking down Wall Street for government protection money. As long as the banks pay their “taxes”, no one will ever go to jail, fines will never amount to more than a fraction of the profits reaped from the activities under scrutiny, and, most important of all, the SEC will ensure that the rules designed to punish “bad actor” banks will never be enforced. 

  We’ve said it before and we’ll say it again: it’s good to be TBTF.

  

  

  
  
  

  

• Quantifying The Global Sovereign Bond "Carnage": $625 Billion Lost Since March, And Counting

  Submitted by David Stockman’s ContraCorner

  Stay Out Of Harm’s Way

  Shock waves have been rumbling through the global bond market in the last few days. On April 17 the yield on the 10-year German bund pierced through the 5bps level, but yesterday it tagged 100bps. That amounted to a 20X move in 39 trading days.

  It also amounted to total annihilation if you were front running Mario Draghi’s bond buying campaign on 95% repo leverage and didn’t hit the sell button fast enough. And there were a lot of sell buttons to hit. The Italian 10-year yield has soared from a low of 1.03% in late March to 2.21% last night, and the yield on the Spanish bond has doubled in a similar manner.

  Needless to say, this is not by way of a lamentation in behalf of the euro-bond speculators who have had their heads handed to them in recent days. After harvesting hundreds of billions of windfall gains since Draghi’s mid-2012 “whatever it takes ukase” they were overdue to get slapped around good and hard.

  Instead, what we have here is just one more striking demonstration that financial markets are utterly broken. The notion of honest price discovery might as well be relegated to the museum of financial history.

  The exact catalyst for yesterday’s panicked global bond sell-off, apparently, was Draghi’s public confession that although the ECB would stay the course on its $1.3 trillion QE program, it cannot prevent short-run “volatility” in the trading pits.

  Why that should be a surprise to anyone is hard to fathom, but it does crystalize the “look ma, no hands” essence of today’s markets. The trading herd goes in the direction enabled by the central banks until a few dare devils finally fall off their bikes, causing an unexpected pile-up and inducing the pack to temporarily reverse direction.

  Thus, it is not surprising that a few traders got caught flat-footed in recent days. In the case of the insanely over-valued Italian 10 year bond, for instance, the price went straight up (and the yield straight down) for nearly 33 months.

  

  What was happening during that interval, of course, had nothing to due with the fundamentals. Italy’s real GDP was actually 3% lower in Q1 than it had been at the time of Draghi’s 2012 pronouncement.

  

  Likewise, during the interim its political system has lapsed into complete paralysis, and its public debt ratio to GDP has continued to rise. Among major DM economies its crushing debt burden is exceeded only by that of Greece and Japan.

  

  The Italian job engineered by Draghi, however, merely illustrates the universal global condition. Namely, financial systems have been transformed into central bank managed gambling dens where prices have been massively falsified by ZIRP and QE, and where short-term trading movements are entirely capricious wavelets that bear no rhyme or reason or any relationship to real world economic conditions.

  Accordingly, the financial casinos are the most dangerous, unstable and destructive institutions on plant earth. Anyone who values their accumulated wealth would be well advised to get out of harm’s way, and the sooner the better.

  After all, there is nothing unique about the euro bond market. The carnage visited upon it in the last few days can strike anywhere; it amounted to nothing more than a momentary stampede of the trading herd that was triggered by the loose phraseology of a clueless central banker who had previously incited a monumental bubble in the euro bond markets.

  In that regard, the US treasury market is every bit as vulnerable to pancaking in response to a central bank mis-step. As it happened, the spillover from Europe resulted in an upward lurch of the 10-year treasury note from a yield of 2.09% five days ago to 2.43% yesterday. Self-evidently that whipsaw—–which saw the 10-year yield surge from a 1.65% low in late February—–had absolutely nothing to do with developments on the US fiscal front or American economy.

  Indeed, the US treasury market—-the single most important securities market in the world—has been untethered from the fundamentals for years now. That’s partly owing to the Fed’s massive direct purchases under QE ($3.5 trillion of treasuries and GSEs since September 2008), and also its complimentary enablement of carry trade speculators who piled into the belly of the curve every time Bernanke hinted that more QE was hovering just ahead.

  And why not. ZIRP is the mother’s milk of rampant speculation; it results in the drastic mis-pricing of securities carried on free repo money. On the fiscal front,  there has been zero improvement in the present value of the nation’s dismal long-run fiscal outlook since the fall of 2008. Uncle Sam’s acknowledged balance sheet debt has soared from $9 trillion to $18 trillion and the $100 trillion of unfunded entitlement liabilities have accreted by even more.

  Likewise, there is nothing in the macro-economic firmament—-GDP, jobs or the so-called full-employment gap—–that explains the downward direction of the 10-year yield or the undulating wavelets along the way. This is central bank intrusion and suffocation of the debt markets pure and simple.

  

  10 Year Treasury Rate data by YCharts

  But here’s the thing. The dozen or so people running the worlds central banks and related institutions have no idea what they are doing, and for the most part are academics and apparatchiks who are completely ignorant about markets, to boot.

  If you didn’t hear the latest emission of tommyrot from the head of the IMF, here it is. Seeing no goods and services “inflation” in a world that is drowning in excess capacity—–funded by years of central bank financial repression——-Christine Lagarde now opines that ZIRP should be extended well into 2016. That is, into its 90th month running.

  We think a rate hike would be better off in 2016,” said Christine Lagarde, the IMF’s managing director at a press conference……

   

  In its annual review of the U.S. economy, the IMF said the central bank said the Fed should wait for “more tangible signs” of wage or price inflation than are currently evident.

   

  Inflation won’t reach the Fed’s 2% annual inflation target until mid-2017, Lagarde said.

  There you have it. The world’s markets are on fire with financial asset inflation, but the recycled French political hack running the IMF, who apparently learned economics from the Wikipedia page on Keynes, does not even understand an obvious truth. Namely, that the single most important price in all of capitalism is the money market interest rate because its the cost of gambling stakes in the casino.

  Needless to say, when you tempt gamblers with free money—-and then you keep it flowing for 90 months running—-you are nurturing the financial furies. Indeed, the global financial system is literally booby-trapped with freakish speculations that will erupt any day now in a manner that will make the recent German bund carnage look like a sunday school picnic.

  According to the latest authoritative reckoning of the pre-IPO venture capital start-up pipeline, for example, the top 20 deals—-ranging from Uber, Snapchat, Pinterest, Airbnb and Dropbox through Pure Storage—–have a current valuation of $100 billion. That compares to funded cash equity of $25 billion—–almost all of which has been supplied within the last two or three years.

  That’s right. The Silicon Valley punters have marked-up their own investments by 4X in anticipation of dumping them on the greater fools who have been lured into the IPO market for the third slaughter of this century. Meanwhile, the torrent of “burn rate” cash pouring into the San Francisco housing market means that slumlords are now getting $2,000 per month in rents from a bed and bath to share with 20 other persons.

  This will end in a fiery immolation, but not just along the northern reaches of the San Andreas Fault. The systematic falsification of financial markets by the central banks have literally herded trillions worth of investable funds into the most risky precincts of the bond market in a desperate scramble for yield.

  As Jeff Snider pointed out yesterday, that has resulted in the issuance of $2.8 trillion of new junk bonds, leveraged loans and CLOs (collaterized loan obligations) in just the last three years. All of these securities are drastically overvalued, and none of them are traded in markets that have even a modicum of real liquidity.

  

  When the subprime mortgage market began to slouch towards its monumental melt-down in March 2007, outstandings totaled just $1.3 trillion. But just in this precinct of the US high yield market there is now upwards of $3 trillion of financial time-bombs ready to blow.

  The fact is, the world’s financial system is saturated with speculations fostered by nearly two-decades of central bank credit inflation. Just since 2006, the footings of central bank balance sheets have expanded from $6 trillion to upwards of $22 trillion.

  That’s all combustible monetary fuel that cannot be recalled; it can only be liquidated in the course of a monumental meltdown in the casino.

  So, yes, after the carnage of the past few days the global sovereign bond index has lost $625 billion since the bond bubble peak in late March. Call that spring training.

  

  

  
  
  

  

• Al-Qaeda Informant Says Yemen Lied To US, Secretly Channelled Money, Bombs

  In a speech on September 10, 2014, President Obama famously cited Yemen as a model of “success” in the war on terror. A little over six months later, Yemen was a failed state. 

  As we’ve documented exhaustively (here, here, and here for instance), the situation in Yemen is a reflection of failed US foreign policy. Washington’s tendency to pursue short-term, narrow-minded, geopolitical expediency at the expense of promoting long-term regional stability has led directly to multiple bloody proxy wars including the conflict that is unfolding in Yemen today. 

  As the US attempts to navigate what is now a hopelessly conflicted set of regional alliances, and as Washington tries to keep track of where the US supports Shiite militias versus where the CIA assists Sunni militants, a new picture has emerged of pre-Arab Spring Yemen. 

  In an exclusive interview with Al Jazeera, a former al-Qaeda informant for the Ali Abdullah Saleh government claims Abdullah Saleh and his lieutenants not only turned a blind eye to AQAP operations in the country, but in fact played a direct role in facilitating al-Qaeda attacks even as the government accepted anti-terrorism financing from the US government. 

  Via Al Jazeera:

  Hani Mujahid chose to tell his story to Al Jazeera because he felt trapped: When the al-Qaeda operative-turned Yemeni government informant tried to brief the CIA on his allegations that Yemen had been playing a double game in the fight against al-Qaeda, he found himself detained and badly beaten by Yemeni security personnel.

   

  No longer able to trust any of the stakeholders, he turned to the media to tell his story. If his allegations prove true, they will be deeply embarrassing to the US.

   

  But the testimony of men like Mujahid, erstwhile foot soldiers of al-Qaeda, is valuable in itself, offering the world unique insights into the motivations of the young men who answered Osama bin Laden’s call to arms.

   

  By his account, he became an insider at the highest levels of both al-Qaeda in the Arabian Peninsula (AQAP) and the Yemeni security services – and concluded that those two entities had more in common than was generally known..

   

  The story of Mujahid’s remarkable interview with the network began on December 5, 2013, when fighters from AQAP wearing Yemeni military fatigues shot their way past security inside the Ministry of Defence complex and mounted a prolonged and gruesome rampage that killed 52 people, most of them unarmed civilians and medics.  

   

  That attack prompted unprecedented unanimity in condemning AQAP among all of Yemen’s political and religious factions, outraged by the targeting of innocent Muslims in a hospital. It also appears to have prompted Mujahid to reach out to 42-year-old lawyer Abdul Rahman Barman..

   

  “Brother Abdul Rahman,” Mujahid’s text message to Barman read, “consider me a suicide attacker of another type. My bombing will be the information I shall divulge”. Barman closed his phone, unsure of whether his correspondent was just suffering from the high emotion of the day..

   

  Mujahid had previously met Barman through some of his other clients facing harassment by the security services of former President Ali Abdullah Saleh. Mujahid’sstory was not unfamiliar to the lawyer. Bin Laden’s message of “global jihad” as a response to the problems of the Muslim world had resonated with many young men in Yemen, and in 1998, Mujahid – unemployed, and with only a high school education at age 20 – decided to act on it..

   

  The US invasion of Afghanistan following the 9/11 attacks saw Mujahid and his al-Qaeda brethren retreat to Pakistan’s tribal areas in 2002, from where they staged cross-border attacks against the US and its allies before being arrested in September 2004 in Quetta by Pakistan’s Inter-Services Intelligence (ISI)..

   

  Mujahid says that while imprisoned at Sanaa’s squalid prison, he was tapped to work as an informer for Yemen’s two most powerful security services – the National Security Bureau (NSB) and the Political Security Organisation (PSO)..

   

  The first incident that troubled him, Mujahid explained, was a July 2, 2007, AQAP ambush that killed 10, including eight Spanish tourists. Mujahid says he warned his handlers of the preparations one week before the operation and then again on the morning of the attack, but that it went ahead without any interference.

   

  He was even more alarmed by the September 17, 2008, attack against the US embassy in Sanaa, which resulted in 19 deaths, most of whom were Yemeni citizens. In Al Jazeera’s documentary – Al-Qaeda Informant – Mujahid alleges that Colonel Ammar Mohammed Saleh, the then-president’s nephew who was second in command at the National Security Bureau, provided AQAP with money and arrangements to receive the explosives they needed for the attack.   

   

  Full article here

   

  

  

  
  
  

  

• "Stratospheric", "Irrational" Chinese Rally "Screams Speculative Bubble" To BNP

  On Friday, Shanghai-listed shares rose to their highest levels since 2008.

  The inexorable, self-feeding rally in Chinese stocks has recently been characterized by wild intraday swings. Take Thursday for instance, when a move by Golden Sun Securities to curb margin trading triggered panic selling, sending shares lower by more than 5% before the momentum abruptly shifted, and just like that, a straight-line, limit-up frenzied buying spree helped benchmark indices close green on the session. 

  

  This volatlity is spilling over into Hong Kong, which has in turn prompted officials to consider implementing a “cooling off period”, designed to calm traders down after the types of violent swings that are becoming commonplace as the rally continues. Here’s more via Bloomberg:

  The manic trading that makes China the world’s most volatile stock market is seeping across the border into Hong Kong.

   

  Swings in the 10 Hong Kong shares most traded by mainland investors over the city’s exchange link more than tripled in April, increasing at almost twice the rate as the benchmark Hang Seng Index. Last month, volatility in the most-active link shares, including Hanergy Thin Film Power Group Ltd. and Evergrande Real Estate Group Ltd., was little changed on average even as fluctuations in the Hang Seng shrank 30 percent.

   

  Chinese investors are gaining unprecedented freedom to bring their own brand of trading to overseas markets as the government eases capital controls to promote international use of the yuan.

   

  The seven-month-old exchange link with Hong Kong lets them buy a net 10.5 billion yuan ($1.4 billion) of shares in the former British colony each day. Authorities will soon let some wealthy individuals buy international shares and other assets under the so-called QDII2 program, China’s Securities Times reported last week.

   

  In Hong Kong, “I have people telling me now that they’re concerned about this volatility,” said Herald van der Linde, the head of Asia-Pacific equity strategy at HSBC Holdings Plc. “It becomes a little bit more like mainland China.”

   

  Hong Kong’s bourse is considering changes to its trading rules that would give investors a “cooling-off period,” limiting trades to a fixed range for five minutes whenever a stock price spikes more than 10 percent. The exchange currently has no limits on intraday swings and mainland bourses cap daily moves at 10 percent.

  China’s world-beating rally has been driven by a dangerous combination of margin debt and unprecedented growth in new stock trading accounts.

  Shares have also gotten a boost from the relaxation of trading restrictions and indeed, the quota on the Shanghai-Hong Kong connect is set to be abolished later this year, once a similar link is established between Hong Kong and the Shenzhen Comp.

  Still other factors have added fuel to the fire, including a new “mutual fund recognition” scheme that will facilitate cross-border mutual fund flows and, importantly, the inclusion of Chinese A shares in two transitional FTSE Russell indices, one of which will serve as the new benchmark for Vanguard’s $69 billion EM Index fund. 

  As you can see from the above, there are plenty of catalysts to drive shares ever higher, making the situation still more precarious with each passing day of trading. 

  

  Back in March, BNP gave up on trying to predict what happens when record margin debt collides head-on with millions of newly-minted, semi-literate day traders. “What happens next,” the bank wrote, “is clearly an unknown-unknown.”

  Despite the uncertainty inherent in trying to call blow-off tops, BNP is out with a new note on China’s equity “bubble trouble.” 

  Via BNP:

  China’s A-share markets continue to climb into the stratosphere. At the time of writing, the Shanghai Composite was up by around 52% YTD and more than 140% y/y. The even frothier (though much smaller) Shenzhen Composite has soared by more than 115% YTD and 185% y/y. Chinese equities remain the best-performing asset on the planet by a wide margin. The scale and speed of these gains scream ‘speculative bubble’. The workhorse definition of a bubble is large and sustained asset-price movements that are unexplainable by fundamentals. For stock markets, ‘fundamentals’ are, of course, earnings. It is noticeable that the A-share surge has coincided with both steady downward revisions to GDP growth and flat to falling profits  

   

  Equity margin debt has soared by almost 3% of GDP since the A-share market began its dizzying run-up last summer. Now pushing towards 3.5% of GDP, China’s outstanding margin debt exceeds that of the US, which itself has hit record highs (Chart 3). In classic bubble fashion, the pace of increase in margin debt has also accelerated. Over the last two months, margin debt has expanded at an annualised clip of 6% of GDP. 

   

  Bubbles ultimately burst: they expand continuously, then pop. The extreme reliance on leverage of this A-share run further foreshadows this inevitability.. As the increased supply of margin debt has been the key driver, market sensitivity to any restriction in its continued growth would cause an abrupt and most likely cascading price reaction. 

   

  
  

  And just as we said on Thursday, the inclusion of mainland shares in global EM benchmark indices could indeed prolong the bubble.

  How long the bubble can continue to inflate is the key question – but necessarily unanswerable. Inherently irrational, bubbles usually last longer than expected. Recent academic literature has emphasised the strong growth in global financial assets and associated buying power of institutional asset managers. Momentum buying reinforced by market-capitalisation benchmark weightings could further inflate the bubble. In particular, imminent decisions on the inclusion of A-shares in global equity indices might see strong institutional buying buttress the retail mania for a time. Still, the exponential trends in turnover, margin debt and increasingly valuations imply that a climax is now unlikely to be too far away. The Shenzhen Composite’s P/E ratio is now over 66x (with a median P/E of 108x), compared with the 75.8x P/E at the 2008 bubble peak. 

  Recall also, that when the PBoC implemented its second YTD RRR cut in April we said the following about the country’s equity bubble:

  In other words, the Chinese market may be “red hot”, but please don’t stop making it even redder. Because as long as China is unable to halt its housing hard-landing, it will gladly take an equity bubble in lieu of a housing bubble if that helps preserve the people’s wealth (the problem being that in China only 25% of household assets are in financial products – 75% is in real estate, something which as we showed before is inverted in the US). 

  This is echoed by BNP:

  The good news is that the inevitable bursting of the bubble is unlikely to have too pronounced a macroeconomic impact. Equity bubbles are less pernicious than credit and housing bubbles, where fixed liability and long duration ensure a much longer-lasting fallout. The bad news, of course, is that China is already labouring under the influence of an epic housing and credit market bubble, which has only just begun to deflate. A desire to mitigate the impact of that bubble is a key reason why the Chinese authorities have been so prepared to cheerlead and sustain the A-share surge through regulatory support. Clearly, a sharp pull-back in equity prices would partially reverse the aggressive loosening of financial conditions in the last few months that is showing signs of helping stabilise the economy in the near term.

  As suggested above, there are quite a few incentives for Beijing to do everything in its power to keep the music playing for as long as possible. Economc growth is decelerating, the government’s move to rein in shadow banking has curtailed credit creation, the real estate bubble is bursting, and the country’s economy is weighed down by $28 trillion in debt, making credit expansion efforts extraordinarily risky especially considering the alarming rate at which NPLs are rising.

  In other words, China needs a distraction. The country needs its equity bubble. 

  And while BNP may be correct to suggest that a Chinese stock market crash may not trigger an macro-catastrophe, investors would still be wise to remember that the more spectacular the boom, the more painful the inevitable bust. 

  

  

  
  
  

  

• 5 Things To Ponder: Odds And Ends

  Submitted by Lance Roberts of StreetTalk

  5 Things To Ponder: Odds And Ends

  Earlier this week I discussed the oxymoron of the “bearish bull market” suggesting that the deterioration in the technical backdrop of the market acting in a manner only seen at previous major market peaks.

  However, the real divergence is occurring within the market itself as shown in the chart.

   

  Currently, every single internal measure of momentum and relative strength have not only deteriorated, but are behaving in a manner that only previously existing during the last two major market peaks.

   

  This is what I meant by using the oxymoron of the “incredibly bearish bull market.” 

   

  Despite the significant number of economic, fundamental and technical data points that suggest risk has risen to elevated levels,the bullish exuberance in the market remains.“

  That last sentence is critically important. While there are many fundamental, economic and technical warning signs that suggest investor caution currently, the markets remain hovering near their all-time highs.
  

  I was speaking at a conference recently discussing this very important point of managing money. When managing money we can make logical assumptions about what we think will happen in the future. While that logical outcome will eventually mature, the markets can, and do, act illogically for longer than logical analysis would expect. Therefore, investors who try and predict future market outcomes, and act accordingly, suffer the outcomes of being wrong.

  Our job as investors is to make money, not by being right. This is why, despite the current evidence of deterioration, the markets remain bullishly biased for now suggesting the portfolios remain fully allocated. As investors we must be “patient”  in awaiting those market driven instructions. But patience, and complacency, are two entirely different things.

  While there is little doubt that a major market reversion is on the horizon, there is no evidence that such a correction is in the immediate future. Therefore, we wait patiently, but not complancently.

  So, while we wait patiently, this weekend’s reading list is a collection of articles that I just found very interesting that I thought were worth sharing with you.   

  1) The 7-Maleficent Behaviors Of Individuals by Robert Seawright via AboveTheMarket

  “The Magnificent Seven is a terrific 1960 movie “western” about seven gunfighters hired to protect a small Mexican village from marauding bandits. A re-make is currently in the works and the “original is itself a re-make of Akira Kurosawa’s Japanese classic, Seven Samurai. Meanwhile, Maleficent is the “Mistress of All Evil” in Sleeping Beauty who curses the infant princess to prick her finger on the spindle of a spinning wheel and die before the sun sets on her sixteenth birthday. Today I’m offering up a mash-up from these movies to outline what I’m calling the Maleficent 7 – seven inherent human problems and limitations that impede our ability to make good decisions generally and especially about money.”

  Read Also: The Great Bond SellOff by Bill Bonner via MoneyWeek

  2) How’s This For An Epic Fail by Cullen Roche via Pragmatic Capitalist

  “This month marks the 36th straight month in which the Fed has missed its inflation target.”

  

  Read Also: New Retirement Age Is Not 65, 80 or 95: It’s Higher by Eric Rosenbaum via CNBC

  3) The Most Crowded Trade On Wall Street: Denial by Jesse Felder via The Felder Report 

  “It just doesn’t matter.” This is the mantra of the bulls who, no matter what bearish evidence is presented, simply insist, “earnings don’t matter. Valuations don’t matter. Margin debt doesn’t matter. Market breadth doesn’t matter.” You name it and they defame it. I was recently told by a bull who was dead serious that, not only do none of these things matter, there is an invisible magical force more powerful than any of these them which ensures stocks will continue to march higher. I was dumbfounded.”

  

  Read Also: When It Comes To Investing: It’s Not Data Mining by Cliff Asness via AQR

  4) Fed Urged To Delay Rate Hikes Until 2015 by Kasia Klimasinska via BloombergBusiness

  “The Federal Reserve should delay raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its U.S. growth forecast for the second time this year.

  The lender also said that the dollar was ‘moderately overvalued’ and a further marked appreciation would be ‘harmful,’ in a statement released in Washington on Thursday on its annual checkup of the U.S. economy.””

  

  Read Also: Odds Of A Bear Market Are High And Rising by Mark Hulbert via MarketWatch

  5) 10 Bearish, 1 Bullish Chart by Meb Faber via Meb Faber Research

  “10 charts or stats to mull over this weekend.”

  

  Read:  The Trend In Profits And GDP by Dr. Ed Yardeni via Dr. Ed’s Blog

  ANYTHING HAPPEN YET? OKAY, OTHER STUFF WHILE WE WAIT
  

  Why Women Cheat by Noel Biderman, Founder/CEO Ashley Madison via CNBC

  “At the heart of it is being the object of desire. Someone thought you were the greatest thing and wanted to spend their life with you. Ripping that away from someone feels awful. Now they don’t even want to look at you, touch you, talk to you. But you have economic stability — A home. Kids. Family. You don’t want to walk away from that just because you feel less than desired. People think, ‘I’ll just put myself out there in an anonymous way.’ They want to rekindle that object of desire. You’ll often find women seeking this attention by Facebooking with past lovers.“

  Liquidity Everywhere, But Not A Drop To Drink by Tyler Durden via ZeroHedge

  “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.“

  Chart Of The Week by Julie Verhage via Bloomberg Business

  “‘Are stocks overvalued, depends on which measure you use.”

  

  

  
  
  

  

• Week Of Epic Bond Volatility Ends With A Whimper

  For all the talk and feverish anticipation of today’s payrolls number, which came in far stronger than expected on the headline assisted by a surge in self-employed Americans, some 370,000 to be exact, most of whom between the ages of 20 and 24 at least according to the BLS, the market reaction was largely a dud and after an initial spike lower, followed by a just as frenzied episode of BTFD, ES was locked in a trading range set by yesterday’s lows and VWAP of course.

  

   

  The weekly chart shows that while the three main indexes all closed modestly lower, the Russell managed to outperform but the biggest winner this week was the trannies, assisted by the recent drop in crude.

  

   

  However to see the real stock action catalyst one needs to step even further back, look at the one month volume chart, which shows a tale of two (volume) tapes: a rise on declining volume, and a drop from recent all time highs on ever higher volume. As the chart below shows, something snapped on May 26 when the trendline higher was broken, and selling on every higher volume has been the norm.

  

   

  And yet, today’s relatively quiet stock tape masks the real tension in markets which is not so much about equities, where volatility remains artificially supressed as we showed yesterday…

  

  …  but continued to be all about China, where the manic phase, punctuated by increasingly sharper, more frequent sell offs, clearly visible to all…

  

   

  … and most of all the bond market, where we either are approaching an inflationary inflection point, confirmed by the 10Y closing at the highest yield since 2014…

  

  … or are witnessing central banks slowly losing control, as shown in the following chart of MOVE, i.e., the Merrill bond market volatility index, which has been steadily rising in the past month…

  

  … and leading to a doubling in German Bund yields in the past week alone.

  

   

  Oil, on the other hand, was in its own world, trading according to the whims of stop-hunting algos and leading to the following perplexing monthly formation.

  

   

  In any event, something here has to break: either yields will finally springboard higher, leading to a dramatic end in debt-funded stock buybacks which are no longer accretive at rising yield levels, thus leading to a drop in stocks, or today’s close encounter with economic growth is shown to be short-lived once again and yields resume their trek lower, cross-asset volatility normalizes, which in turn allows equities to resume their “wealth effect” climb ever higher.

  Conveniently, with a number of key geopolitical events on the table, the resolution one way or another will reveal itself on very short notice.

  

  

  
  
  

  

• The Next Round of the War on Cash Will be Even More Aggressive

  For six years straight, the Fed has been trying to “trash” cash.

   

  First it cut interest rates to zero… making it so that savings deposits produced almost nothing in the way of interest income. Consider that at current rates, a retiree with $1 million in savings earns a measly $2,500 per year in interest income.

   

  The Fed’s hope was that by making it painful for savers to sit in cash, said savers would move into risk assets such as bonds and stocks. This has worked in that stocks are now in one of, if not THE biggest bubbles in history… while bonds are trading at yields never before seen outside of war-time.

   

  However, this has now created a NEW problem for the Fed.

   

  With bonds yielding so little, (AND increasingly volatile due to the lack of liquidity caused by QE), cash is once again looking increasingly attractive.

   

  Put it this way, if you had a choice between having your cash earn next to nothing but remain stable vs. watching your capital gyrate by 5% or more per year (while still earning next to nothing), which would you take?

   

  

   

  The answer is easy: you’d pick cash. Sure, you’d make next to nothing… but it sure beats the roller coaster ride you get in stocks or bonds. Indeed, cash actually produced the SAME return as stocks did last year… without the volatility!

   

  

   

  This has created a REAL problem for the Fed… and it’s going to result in a far more aggressive campaign to TRASH cash going forward.

   

  That campaign has already begun with several economists with close ties to the Fed calling to TAX cash… if not outlaw it altogether!

   

  This is not just idle chatter either. JP Morgan and other large banks are beginning to forbid clients from storing actual physical cash in safe boxes. More banks will be joining in on this as well the Government. Indeed, the state of Louisiana has made it illegal to buy second hand goods in cash.

   

  This is just the beginning. We've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

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

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

  Survive the Fed's War on Cash.

   

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

   

  To pick up yours, swing by….

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

   

  Best Regards

  Phoenix Capital Research

   

   

  

  
  
  

  

• Artist's Impression Of Iran Nuclear Deal "Monitoring"

  Presented with no comment…

  

  Source: Townhall.com

  

  

  
  
  

  

• Confused Economists Ponder Missing Wage Growth "Mystery"

  On Thursday, in “‘Where’s My Raise?’: American Workers Suddenly Realize The ‘Recovery’ Isn’t Real”, we once more took up the topic of America’s missing wage growth. 

  The idea that unemployment is trending lower while wage growth remains stagnant is perplexing to central bankers and although we solved this apparent mystery some three months ago, we understand that for PhD economists, it takes a while for things to sink in, which is why we’re happy to explain once more that there is in fact wage growth in America — just not for 80% of the workforce. 

  We suspect this still hasn’t hit home for the central planner/ Ivory Tower crowd, but we’re at least encouraged to learn that Fed economists are thinking very “seriously” about this vexing problem and indeed, the WSJ has taken the time to lay out nine prevailing theories from some of the country’s ‘finest’ economic minds. 

  Without further ado, here are some proposed explanations for non-existent wage growth in America, straight from your favorite Fed researchers:

  1. The labor market simply hasn’t healed from the 2007-09 recession, according to Chicago Fed economists Daniel Aaronson and Andrew Jordan. 

   

  2. Sluggish productivity growth and other long-term changes in the economy, such as workers’ declining labor share of overall national income, are restraining pay raises, according to Cleveland Fed economists Filppo Occhino and Timothy Stehulak. 

   

  3. Companies were unable to cut pay during the recession and later compensated by withholding raises during the expansion, according to San Francisco Fed economists Mary C. Daly and Bart Hobijn.

   

  4. The large number of part-time workers, including people who want full-time work but are stuck in part-time jobs, is weighing on wages, the Atlanta Fed said in its most recent annual report. 

   

  5. Not enough people have been quitting their jobs, according to Chicago Fed economists R. Jason Faberman and Alejandro Justiniano. 

   

  6. People who have left the formal workforce but still want a job are holding down pay because they might rejoin the pool of job seekers, according to Fed Board of Governors economist Christopher L. Smith.

   

  7. A shift in the makeup of the U.S. labor market to include more low-wage jobs is a factor, but not a big one, according to Atlanta Fed economist Whitney Mancuso. 

   

  8. The unemployment rate may not have fallen far enough yet to generate strong wage growth, Dallas Fed economists Anil Kumar and Pia Orrenius suggested. 

   

  9. Wage data may not tell a clear story about the state of the labor market at all, according to Richmond Fed economists Marianna Kudlyak, Thomas A. Lubik and Karl Rhodes. 

  So, in sum, the labor market may be stuck in a post-recession hangover, but it could also be that companies wanted to pay less during the downturn but couldn’t (because workers are just looking for an excuse to quit during a quasi-Depression). Or, the demand for full-time work is so great that employers can afford to pay less (which directly contradicts suggestion number three), which is somehow compounded by not enough people quitting. Alternatively, wage growth could (somehow) be supressed by people who have given up looking for a job but who may decide to look later and although common sense suggests that more low-wage jobs may contribute to lower wage growth, that’s probably not a “big” factor. Finally, it may be that unemployment simply hasn’t fallen enough yet or, the data may just need to be double-adjusted. 

  We have another suggestion: perhaps there never was a recovery in the first place and still-depressed global demand is curtailing consumption, profits, and investment.

  But admitting that would be to admit that trillions in QE has been an abject failure. That’s Keynesian heresy and is never to be spoken of again. 

  

  

  
  
  

  

• Get Used to Selloffs, Central Bankers Say as They Fret about the Terrifying Moment When Liquidity Evaporates

  Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

  Axel Weber, president of the Bundesbank and member of the ECB’s Governing Council until he quit both in 2011 to protest the ECB’s bond purchases, quickly landed a new gig: chairman of UBS. WHIRR went the revolving door. From this perch, he warned in 2012 that the easy-money policies and the expansion of central-bank balance sheets would lead to “new turmoil in the financial markets.” Now that the turmoil has arrived, he’s at it again.

  “Volatility and repricing” – a euphemism for losses – are “part of getting back to normal,” he told NBC. We should get used to it, he said, echoing what ECB President Mario Draghi had said a couple of days ago. So no big deal. However, he was fretting “about the liquidity in the market, in particular under stress situations.”

  Despite unleashing a deafening round of QE on the European markets, the ECB has watched helplessly as government bonds have done the opposite of what they should have done: Prices have plunged, and yields have spiked. The German 10-year yield soared in seven weeks from 0.05% to over 1% on Thursday, before settling down a bit. And it wasn’t even a “stress situation.”

  US Treasuries have sold off sharply as well since the beginning of February, with the 10-year yield jumping from 1.65% to 2.31%, the worst selloff since the taper tantrum in 2013.

  Now one word is on the official panic list: “liquidity.” They’re thinking about the terrifying moment when it suddenly evaporates.

  Weber blamed central banks for the liquidity issues in the global bond markets. They’ve been buying “vast amounts of assets and putting them on their balance sheets”; not just government bonds but also corporate bonds. Since central banks “buy and hold,” they “take some liquidity out of the market.”

  He pointed at regulation that “has moved a lot of banks out of market-making into more long-term sustainable business models,” he said. UBS, for example, has turned from investment banking to wealth management.

  And the Fed’s forward guidance has changed from a nearly unified statement about not raising rates to a cacophony on whether to raise rates earlier or later. “That actually impacts pricing in the market; market moves are then translated into much bigger moves because people aren’t on the same page.”

  Everyone is chiming in with their fears that liquidity in the bond market will dry up just when you need it the most.

  The liquidity that investors believed they had in the bond markets was “illusory” during the last crisis, explained Fed Governor Daniel Tarullo at an Institute for International Finance summit on Thursday. Like Draghi, Weber, and many others, he said that investors should get used to more volatility. It’s liquidity they’re worried about.

  So in effect, get used to selloffs. It’s all part of “re-pricing,” as Weber had put it so eloquently. It’s the new normal. IF there is enough liquidity, “re-pricing” is going to be orderly. But that’s a big IF.

  The next crisis will “probably be oriented to lack of liquidity,” BlackRock CEO Larry Fink said at the same summit. And there’s “the potential for frozen markets….”

  That’s when everyone panics.

  But the bond rout might have another cause, one that has been assiduously denied all around: Inflation expectation (as measured by the difference in yield between 10-year Treasuries and 10-year Treasury Inflation Protected Securities) is 1.8%. On a 10-year investment, it’s logical that investors would want to beat inflation by a smidgen.

  Some markets are by nature illiquid. The housing market, for example. When you put a home on the market in normal times, you might get an acceptable offer after a couple of months. If the market turns sour, you might not be able to sell it at all at a price you can live with. Or you might have to drop the price by 30%. That’s lack of liquidity.

  At the rarefied air where properties sell for tens of millions of dollars, it can take years to unload a property. The California mansion used in Scarface came on the market in May 2014 at $34 million. Recently, the price was dropped to $17.8 million. Lack of liquidity. In the housing market, it’s expected.

  Homes, classic cars, art, farmland, a factory… they’re all more or less illiquid assets. Everyone knows it, and so it’s no big deal. Until there’s a bust, and then suddenly it’s a big deal.

  Bond markets are supposed to be fairly liquid, with the US Treasury market being the most liquid. Corporate bonds are less liquid. Each bond issue is different, and even in good times, it may take days to find a buyer for a particular bond at a price that won’t kill the seller. But when liquidity dries up – that is, when buyers with liquidity lose interest – these bond markets can seize, and that’s when forced selling leads to a collapse in prices, runs on bond funds, panic, and mayhem.

  Even conservative sounding “open end” bond funds can get eviscerated when they experience a run and are forced to sell their holdings into an illiquid market [Are These Ticking Time Bombs in Your Portfolio?].

  Stock markets are very liquid, supposedly. Trading is electronic, accomplished in microseconds, with prices disseminated globally in real time. Manipulation runs rampant, and you get screwed, but you can always assume that there is going to be someone at the other end willing to buy the crap you’re trying to dump. Until there isn’t.

  One day during the crash of the dotcom bubble, I received a friendly margin call from my broker and became one of the forced sellers. I tried to unload my trash first. One of the stocks was a former dotcom highflyer. I’d bought it at a beaten-down price a few months earlier, trying to catch a falling knife. So when I tried to sell it, there were no buyers willing to pay more than a few cents. Liquidity had totally evaporated before my very eyes, just when I needed it the most. Even in the stock market.

  But liquidity magically reappears when the price is low enough. For central bankers who’ve been inflating asset prices for years, and for investors who’ve gotten fat and lazy from these policies, that simple fact is a terrifying thing.

  The EU’s top regulator for insurers and pension funds wasn’t kidding when it warned that QE was triggering treacherous “volatility” in the bond markets. “Volatility” isn’t actually the right word. It implies ups and downs. But euro sovereign bonds have experienced a brutal rout. Read…  ECB Loses Its Grip, Bond Market Comes Unglued

  

  
  
  

  

• Greek Banks On Verge Of Total Collapse: Bank Run Surges "Massively" As Depositors Yank €700 Million Today Alone

  While the Greek government believes it may have won the battle, if not the war with Europe, the reality is that every additional day in which Athens does not have a funding backstop, be it the ECB (or the BRIC bank), is a day which brings the local banking system to total collapse.

  As a reminder, Greek banks already depends on the ECB for some €80.7 billion in Emergency Liquidity Assistance which was about 60% of total deposits in the Greek financial system as of April 30. In other words, they are woefully insolvent and only the day to day generosity of the ECB prevents a roughly 40% forced “bail in” deposit haircut a la Cyprus.

  

   

  The problem is that a Greek deposit number as of a month and a half ago is hopefully inaccurate. It is also the biggest problem for Greece, which has been desperate to prevent an all out panic among those who still have money in the banking system.

  Things got dangerously close to the edge last Friday (as noted before) when things for Greece suddenly looked very bleak ahead of this week’s IMF payment and politicians were forced to turn on the Hope Theory to the max, promising a deal with Europe had never been closer.

  It wasn’t, and instead Greece admitted its sovereign coffers are totally empty this week when it “bundled” its modest €345 million payment to the IMF along with others, for a lump €1.5 billion payment, which may well never happen.

  And the bigger problem for Greece is that after testing yesterday the faith and resolve of its depositors (not to mention the Troika, aka the Creditors) and found lacking, said depositors no longer believe in the full faith (ignore credit) of the Greek banking system.It may have been the Greek government’s final test.

  Because accoring to banking sources cited by Intelligent News, things today went from bad to horrible for Greek banks, when Greeks “responded with massive outflows to the Greece’s government decision to bundle the four tranches to IMF into one by the end of the June.”

  According to banking sources, the net outflows sharply increased on Friday and the available liquidity of the domestic banking system reduced at very low and dangerous levels.

   

  The same sources estimate the outflows on Friday around 700 million Euros from 272 million Euros on Thursday. The available emergency liquidity assistance (ELA) for the Greek banks is estimated around 800 million Euros. In addition, the outstanding amount of the total deposits of the private sector (households and corporations) has declined under 130 billion Euros or lower than the levels at early 2004.

   

  The total net outflows in the last 7 business days are estimated 3.4 billion Euros threatening the stability of the Greek banks.

  This means 2.5% of all Greek deposits were pulled in just the past 5 days! Indicatively, this is the same as if US depositors had yanked $280 billion from US banks (where total deposits amount to about $10.7 trillion)

  As further reported, the Bank of Greece is set to examine on Monday if Greece will urgently ask additional ELA. However, since one of the main conditions by the ECB to keep providing ELA to Greece is for its banks to be “solvent” (a condition which is only possible thanks to the ECB), one wonders at what point the Troika, whose clear intention it has been from day one to cause the Greek bank run in the process leading to the fall of the Tsipras government, will say “no more.”

  For those interested, according to IN, the deposit (out)flows in the last 7 business days are as follows:

  

   

  Finally, for those who missed it, here is the first hand account of the Greek bank run from precisely a week ago as retold by ZH contributor Tom Winnifrith:

  Witnessing the great bank run first hand as I deposit money in Greece

  Jim Mellon says that the Greeks should build a statue in my honour as on Friday I opened a bank account in Greece and made a deposit. Okay it was only 10 Euro, I need to put in another 3,990 Euro to get my residency papers so I can buy a car, a bike and a gun, but it was a start. But the scenes at the National Bank in Kalamata were of chaos, you could smell the panic and they were being replicated at banks across Greece.

  For tomorrow is a Bank Holiday here and if you are going to default on your debts/ switch from Euros to New Drachmas a bank holiday weekend is the best time to do it. And with debt repayments that cannot be met due on June 5 (next Friday) Greece is clearly in the merde. If it defaults all its banks go bust.

  But I had to open an account and make a deposit. Outside the bank in the main street of Kalamata there are two ATMs. The lines at both were ten deep when I arrived and when I left an hour later. Inside I was directed to the two desks marked “Deposit”. You go there to put in money, to open an account or if you are so senile that you cannot do basic admin of your account without assistance. As such it was me depositing cash and four octogenerians who had not got a clue about anything. Actually I lie. These folks may have been gaga but they were not so gaga that they were actually going to deposit cash, I was the sole depositer.

  Friday was also the day when pensions are paid into bank accounts. On the Wednesday and Thursday it was reported that Greeks withdrew 800 million Euro from checking accounts. Friday’s number will dwarf that. Whe you go to a Greek bank you pull off a ticket and wait for your number to be called. The hall in my bank contains about 60 seats all of which were filled. There were folks standing behind the seats and in fact throughout the hall, all wanting to get their cash out before the bank closed at 2 PM.

  At the side of the room, shielded by a glass screen sat a man behind a big desk. He tapped away at his screen and made phone calls. Ocassionally folks wandered over, shook papers in his face and harangued him having got no joy elsewhere. So I guess he was the bank manager. I rather expected him to end one phone call and stand up to say “That was Athens – all the money has gone, its game over folks.” But he didn’t. He may well do so at some stage soon.

  Eventually I got the the front of my five person queue of the senile and opened my account. Passport, tax number, phone number all in order. I handed over a 10 Euro note and the polite – if somewhat stressed – young man gave me about ten pieces of paper to sign and stamped my passbook. I have done my bit for Greece and have given it 10 Euro which I will lose one way or another in due course. So Jim – time to lobby for that statue.

  The Government did not put up a default notice on Friday as I half expected. The can kicking goes on. The ATMs will be emptied this weekend and on Tuesday and in the run up to a potential default day next Friday the banks will be packed again with folks taking out whatever money they can.

  It is not just the bank coffers that are being emptied. To get to The Greek Hovel where I sit now from my local village of Kambos is a two mile drive. On my side of the valley there is some concrete track but it is mainly a mud road. On the other side of the valley there is a deserted monastery so to honour the Church – even if there are no actual monks there – a concrete road was built in the good times. By last summer it was more pothole than road.

  By law, since I have water and electricity, I can demand that the road be mended and so last summer I went to the Kambos town hall (4 full time staff serving a population of 536) and did just that. They said “the steam roller is broken and we have no money but will try to do it in the Autumn.” They did not.

  But last week a gang of men appeared and the road is now pothole free, indeed in some places we have a whole new concrete surface. And as I head towards Kalamta there are extensive road mending programmes. At Kitries, the village has found money to renovate its beach front. It is a hive of activity across the Mani.

  Quite simply each little municipality is spending every cent it has as fast as it can. The Greek State asked all the town halls to hand over spare cash a few weeks ago to help with the debt repayment. The town halls know that next time it will not be a request but an order. But by then all the money they had hoarded will have been spent. That is Greekeconomics for you.

  Everyone knows that something has to give and that it will probanly happen this summer. The signs are everywhere

  

  

  
  
  

  

• "The Job Numbers Literally Do Not Add Up"

  By Jeff Snider of Alhambra Investment Partners

  Payroll Stats Become Even More Implausible

  Since Q1 GDP was revised lower by almost 1% that meant estimates of productivity were going to be even more out of alignment than they were at the first release. Of course, in a less massaged environment productivity might have preserved some sense if there was less rigidity from the BLS on the employment side. In other words, when “output” estimates were reduced (and they were, by more than GDP) it would make sense that everything would be revised downward in a more cohesive process. Instead, output was reduced significantly, by 1.4%, while total hours worked was marked down by all of 0.1%.

  As a result, productivity is revised from a nonsensical -1.9% to an even more skeptical -3.1%.

  

   

  If this was just a one-quarter problem, then it would be easy to dismiss as random variation or expected variance in all these statistics trying to tie together across real economy lags and such. But that is not the case, as productivity, and by extension the estimates for how “expensive” marginal labor is and thus the primary reason businesses hire and fire in the first place, has been seriously “off” for some time. With these latest estimates and revisions, productivity is now -0.7% over the last 5 quarters dating back to last year’s polar vortex. That just doesn’t make any sense in a meaningful context of business operations in the real economy – especially when the BLS is saying that this has been the best run of hiring in decades.

  The productivity figures alone show us how the BLS is likely overstating labor gains. Simply substitute a more meaningful level of productivity, such as the average gain during the less robust hiring period of 2003-07, and, by the rigid method of calculation here, total hours gained almost disappear entirely.

  

  

  The last time the Establishment Survey was as robust as the past year or so was 1999; then, the average productivity was 3.7%! That number actually makes sense intuitively, since businesses would have good reason to go on a hiring spree. Porting that to the current period, as in the mathematical construction of productivity here, would mean, holding output constant, that total hours in the past five quarters would have been not +2.7% but -1.7%. These numbers literally do not add up.

  The deeper you go into the maze of calculations, the more that sentiment grows, not dissipates. The “next step” is to take productivity and turn it into what is called Unit Labor Costs. This is one estimate for how much it “costs” businesses to employ labor, not just in terms of compensation but in terms of what comes out of the capital transformation of that labor input. Where productivity is low or especially negative, unit labor costs are exceedingly high because you pay workers and (assumed) more workers and get less out of them per unit. That is why it makes no intuitive sense for businesses to be hiring rapidly during periods of high unit labor costs, even where revenue growth is robust.

  

  

  In the past two quarters alone, because the BLS will not budge on their employment estimates, we are supposed to believe that businesses in the US have been falling over themselves to hire when doing so is historically very expensive. With the Q1 revisions to “output” moving downward significantly, unit labor costs in Q1 were revised up from 5% to 6.7%! That makes for two consecutive quarters of about 6%, which is usually what ignites, historically, recessions.

  

  Unit labor costs surge prior to each and every recession, which, again, makes sense, but the problem with this historical comparison is that the calculations more recently no longer conform to any truly identifiable pattern. What used to be fairly stable and at least consistent has turned into a muddle of numbers all over the place.

  

  That process appears to have started at the outset of the dot-com recession, gained into the Great Recession and has never abated apart from the typical negative labor costs only in 2009 and Q1 2010 (what recoveries are actually made of; negative and low labor costs at the margins show businesses to hire more and start the recovery process, not in the opposite manner as the BLS has it now). This obvious lack of consistency more than suggests problems in the various statistical pieces flowing into the calculations here.

  We are left with two primary interpretations in terms of the macro view (and a slew of mathematical and statistical quiddities that I won’t get into here); either these numbers are correct and US businesses have suddenly lost all ability to profitably to project and conduct business or the BLS is being stubborn in over-estimating labor utilization across-the-board. The third possibility, that output itself should be revised much, much higher I simply reject out of sheer overwhelming evidence to the contrary. The first explanation, dumb businesses, seems almost exhaustively implausible except for the interference of QE and economists’ ridiculous projections. It is possible, how likely is debatable, that businesses have simply rejected what they see of the current environment and ramped up hiring in anticipation of what every single economist the world over told them to. I have said before that I think that is a very real problem and is likely causing economic imbalances in certain places (inventory comes to mind) but I don’t believe that would be sufficient in such a broad labor scope.

  No, I think all the evidence continues to point to trend-cycle over-estimation and the BLS refusing to bend toward what is becoming irrefutable reality. There is absolutely nothing to suggest this is the best employment environment in decades, and the fact that the payroll numbers keep making that comparison only has one effect – to so skew “downstream” statistics as to preclude any other interpretation. With Payroll Friday upon us yet again, it is useful to keep this in mind that those payroll estimates not for actual job counts but of chained variations are completely bogus.

  

  

  
  
  

  

• QE Breeds Instability

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.

  What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.

  Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.

  That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.

  Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.

  Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.

  But the lack of scrutiny should still puzzle. How central bankers managed to pull off the move from admitting they had no idea what they were doing, to being seen as virtually unquestioned maestros, rulers of, if not the world, then surely the economy. Is that all that hard, though, if and when you can push trillions of dollars into an economy?

  Isn’t that something your aunt Edna could do just as well? The main difference between your aunt and Janet Yellen may well be that Yellen knows who to hand all that money to: Wall Street. Aunt Edna might have some reservations about that. Other than that, how could we possibly tell them apart, other than from the language they use?

  The entire thing is a charade based on perception and propaganda. Politicians, bankers, media, the lot of them have a vested interest in making you think things are improving, and will continue to do so. And they are the only ones who actually get through to you, other than a bunch of websites such as The Automatic Earth.

  But for every single person who reads our point of view, there are at least 1000 who read or view or hear Maro Draghi or Janet Yellen’s. That in itself doesn’t make any of the two more true, but it does lend one more credibility.

  Draghi this week warned of increasing volatility in the markets. He didn’t mention that he himself created this volatility with his latest QE scheme. Nor did anyone else.

  And sure enough, bond markets all over the world started a sequence of violent moves. Many blame this on illiquidity. We would say, instead, that it’s a natural consequence of the infusion of fake zombie liquidity and ZIRP rates.

  The longer you fake it, the more the perception will grow that you can’t keep up the illusion, that you’re going to be found out. Ultra low rates may be useful for a short period of time, but if they last for many years (fake stability) they will themselves create the instability Minsky talked about.

  And since we’re very much still in uncharted territory even if no-one talks about it, that instability will take on forms that are uncharted too. And leave Draghi and Yellen caught like deer in the headlights with their pants down their ankles.

  The best definition perhaps came from Jim Bianco, president of Bianco Research in Chicago, who told Bloomberg: “You want to shove rates down to zero, people are going to make big bets because they don’t think it can last; Every move becomes a massive short squeeze or an epic collapse – which is what we seem to be in the middle of right now.”

  With long term ultra low rates, investors sense less volatility, which means they want to increase their holdings. As Tyler Durden put it: ‘investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This is how QE increases the likelihood of VaR shocks.’

  QE+ZIRP have many perverse consequences. That is inevitable, because they are all fake from beginning to end. They create a huge increase in inequality, which hampers a recovery instead of aiding it. They are deflationary.

  They distort asset values, blowing up prices for stocks and bonds and houses, while crushing the disposable incomes in the real economy that are the no. 1 dead certain indispensable element of a recovery.

  You would think that the central bankers look at global bond markets today, see the swings and think ‘I better tone this down before it explodes in my face’. But don’t count on it.

  They see themselves as masters of the universe, and besides, their paymasters are still making off like bandits. They will first have to be hit by the full brunt of Minsky’s insight, and then it’ll be too late.

  

  

  
  
  

  

• Fed Unable To Comply With Congressional Subpoena Due To Criminal Probe

  On October 3, 2012, consulting firm Medley Global Advisors sent a newsletter to clients entitled “Fed: December Bound.” The “special report” essentially constituted an early leak of the minutes from the FOMC’s September meeting, at which the central bank launched the third installment of QE.

  An internal investigation by then-Chairman Bernanke revealed that indeed, some members of the committee had met with the firm that year but the names were not disclosed.On April 15, Congress sent Yellen a letter requesting that the Fed furnish a list of names no later than April 22.

  That deadline came and went with no response. 

  On May 4, the Fed acknowledged a DoJ and OIG criminal investigation into the leak, and in the same letter, Yellen admitted that indeed, she had met with the analyst who penned the newsletter at the center of the controversy:

  

  Subsequently, The Committee on Financial Services subpoenaed the Fed for records related to the central bank’s review. Now, the Fed has declined to comply in full citing the ongoing criminal investigation. More specifically, Yellen says the OIG has advised the Fed that providing access to the information requested by congress would risk “jeopardizing the investigation.”

  Note the irony: the Fed says it cannot comply with a Congressional subpoena regarding an alleged leak due to the fact that producing the requested documents could ultimately result in… a leak. In any event, the full letter is below. 

  Hensarling Letter 20150604

  

  

  
  
  

  

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