Today’s News May 15, 2015

• Why Not Tell Greece How To Run A Democracy?

  Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

  I know I’ve talked about this before, but it just keeps coming and it keeps being crzay. Bloomberg ‘reports’ that the ‘German Finance Ministry’, let me get this right, “is supporting the idea of a vote by Greek citizens to either accept the economic reforms being sought by creditors to receive a payout from the country’s bailout program or ultimately opt to leave the euro.” And that’s it.

  They ‘report’ this as if it has some sort of actual value, as if it’s a real thing. Whereas in reality, it has the exact same value as Greek Finance Minister Varoufakis suggesting a referendum in Germany. Or Washington, for that matter. Something that Bloomberg wouldn’t even dream of ‘reporting’ in any kind of serious way, though the political value would be identical.

  Apparently there is some kind of consensus in the international press – Bloomberg was by no means the only ‘news service’ that ‘reported’ this – that Germany has obtained the right to meddle in the internal politics of other eurozone member nations. And let’s get this one thing very clear: it has not.

  No more than the Greek government has somehow acquired the right to even vent its opinions on German domestic issues. It is a no-go area for all European Union countries. More than that, it’s no-go for all nations in the world, and certainly in cases where governments have been democratically elected.

  So why do Bloomberg and Reuters and all the others disregard such simple principles? All I can think is they entirely lost track of reality, and they live in a world where reality is what they say it is.

  Now, I know that Schäuble ‘merely’ said – I quote Bloomberg -: “If the Greek government thinks it should hold a referendum, it should hold a referendum.. Maybe it would even be the right measure to let the Greek people decide whether they’re ready to accept what needs to be done.”

  That’s admittedly not the same thing that Bloomberg makes of it, though it’s possible that the ‘reporter’ got some additional background information from the German Finance Ministry, and that that’s the reason the ministry gets mentioned, instead of just Schäuble.

  But that still doesn’t make it alright by any stretch of the imagination. The EU, and the eurozone, are made up of sovereign nations. Who function in a system of equal partners, certainly from a political point of view. So the German FinMin has no business even talking about a Greek referendum, no more than the Greeks have talking about a German referendums. And Angela Merkel should be on his case for this. But she’s not. At least not in public.

  Whether or not Greece has a referendum -about the euro or anything else- is up to the Greek people, and first of all to the government they elected only 3.5 months ago. It has absolutely nothing to do with whoever is in charge in Berlin, or Paris, or even in the EU headquarters in Brussels. It’s a fatal mistake to think otherwise. Bloomberg has made that fatal mistake. Schäuble has come so close Athens should file a complaint against him.

  Granted, all parties involved may be influenced by what happened 4 years ago -more Bloomberg-:

  Schaeuble’s stance on a Greek plebiscite is a departure from Germany’s position in 2011. Back then, Prime Minister George Papandreou dropped his plan for a referendum after Chancellor Angela Merkel and French President Nicolas Sarkozy urged him not to hold the vote.

  That referendum involved a haircut on Greek debt ‘negotiated’ by the troika, which Papandreou wanted the Greek people to vote on. And Merkel and Sarkozy did much more than ‘urge’ Papandreou not to hold the vote. They were afraid it would drive Greece from the eurozone, and scared the sh*t out of him so much he withdrew the plan a few days after proposing it.

  Which is just another case of Euro nations meddling in the internal affairs of a fellow member nation. Something for which there wasn’t then, and still isn’t now, any political or legal support or framework inside the EU. Still, Brussels, Berlin and Paris applied similar pressure on Italy PM Berlusconi in those days, and installed – helped install – a technocrat PM, Mario Monti. In Greece, they got Papademos. Both Papandreou and Berlusconi were gone soon after the ‘pressure’ was applied.

  That’s how Europe operates. And they have no legal right to do it. But that you won’t read at Bloomberg. The whole thing is so accepted that not even Syriza tells the Germans – or Bloomberg for that matter – to shut their traps. Even though they would have a lot more right to do that than Schäuble has to comment on internal Greek affairs.

  And from where I’m sitting that means that Ashoka Mody’s piece for Bruegel is too little too late. Nice try but..

  Europe’s Integration Overdrive

  The problems will worsen in Greece and, will inevitably, arise elsewhere. The economic and political costs of breaking the Eurozone are so horrendous that the imperfect monetary union will be held together. Instead, the cost of the ill-judged rush to the euro and mismanagement of Greece will eventually be a substantial forgiveness of Greek debt.

   

  But this is a good moment to step back and loosen European ties. As Schuman said, “Europe will not be built according to one plan.” The task is to create a de facto solidarity—not to force a fragile embrace. A new architecture should scale back the corrosive power relationships of centralized economic surveillance. Let nations manage their affairs according to their priorities.

   

  And put on notice private creditors that they will bear losses for reckless lending. The European fabric -held together by commercial ties- is fraying as European businesses seek faster growing markets elsewhere. That fabric could tear if political discord and economic woes persist. History and Schuman will be watching.

  Things have moved way beyond where Mody thinks they are at present. The secret ingredient is simply the crisis. The way the eurozone was hastily slapped together allows only for good times. The idea was that as long as things go well, nobody would notice the cracks. But Europe has been nothing but cracks for 7 years now, and there’s no end in sight.

  The Greek people can vote all they want to end the misery Europe has inflicted on them, it doesn’t matter to the major powers in the union. They simply blame it all on the same Greeks, and judging from how Bloomberg approaches the issue, they have the upper hand. They live above their means, they’re wasteful and they’re lazy. That’s the portrait painted, and that’s how 90% of the world therefore sees them.

  It makes no difference whether it is true or not. It’s all just about who has more money and power and press; they get to decide what people think about other people.

  Does the euro have a future? If it does, it won’t look anything like it does today. The eurozone has only ever been a mechanism to make more money flow from the south to the north. And now the north will have to come up with a measure of solidarity, of being an actual union, and they bluntly refuse.

  Rich European countries are all led by politicians who want to win their next elections. And these are national elections, not European elections. Those hardly matter. Because Europe is made up of sovereign nations. And that’s why the European Union in its present shape is doomed to fail.

  Brussels will always clamor for a closer union, politically, fiscally, economically. But the way Germany et al has treated Greece and Italy and Spain over the past 7 years makes abundantly clear that such a close union will never come to fruition. These are all countries that are proudly independent, that commemorate battles from hundreds of years ago where their ancestors shed the blood and gave the lives that made them independent.

  They’re not going to let Germany and France and Holland call the shots in their economies and countries now. Not a chance.

  Europe only has a -peaceful- future as a continent of independent nations that work together where they can. To get there, they will need to abolish the euro and completely redo the union project, from scratch, close down all offices in Brussels, and they will have to do it soon, or there will be no peace.

  Meanwhile, what’s left for Greece in Brussels that is beneficial to the country? I don’t see it. It makes me think more of a Stockholm syndrome by the hour. Get out, get your own currency, negotiate a treaty with Italy and Spain, maybe France. But don’t stay in a ‘union’ with outsiders who think they can tell you, Greeks, how to run a democracy, or when to hold a referendum. That can only be a road to nowhere.

  

  

  
  
  

  

• UBS Shocked To Learn Ratting Out Fellow Criminals Doesn't Buy DOJ Immunity

  Back in 2012, when the first massive marketwide-rigging scandal made the front pages, that of Libor (one which Zero Hedge discussed first in January 2009 with “This Makes No Sense: LIBOR By Bank“ and for which we won early points in the “you are a fringe tinfoil blog” category until proven correct as usual) the prosecution’s case was handed on a silver platter by one bank which hoped it would squeeze through the prosecutorial cracks by ratting out all of its heretofore complicit partners in crime: UBS.

  And sure enough, UBS did indeed get away with a paltry fine, and the whole affair was quietly swept under the rug with a December 2012 settlement, in which the U.S. agreed not to prosecute the bank on the condition that it “commit no United States crime whatsoever” for the two-year term of the agreement, subsequently extended by an extra year.

  Unfortunately for UBS, its reputation as a ratting squealer was all for nothing, because just over one year later UBS as well as virtually all the same banks that were manipulating Libor, were caught rigging that other massive, global market in secret online chatrooms such as the “Bandits” and the “Cartel“: foreign currency rates.

  And also unfortunately for UBS which had sworn to commit no US crimes, it had just been caught committing at least one US crime. As a result, as Bloomberg reported earlier this week and as WSJ reported tonight, the US “Justice” Department is now tearing up and voiding the UBS 2012 settlement.

  Actually, make that two crimes: “UBS also was viewed by the Justice Department as a repeat offender, having reached previous settlements including one in 2011 related to antitrust violations in the municipal-bond investments market.”

  Actually, make that three crimes: “[Justice Department criminal division head Leslie] Caldwell’s message in the talks was stern: UBS was a recidivist having previously settled with the Justice Department over antitrust violations and had also obtained a deferred-prosecution agreement in 2009 to resolve charges it helped American taxpayers hide money overseas.”

  Sure enough, UBS is shocked, shocked to find out there was criminal gambling going on in its world’s largest trading floor in Stamford, CT which is on its way to becoming a mini golf course. And again. And again.

  UBS officials are confounded by the outcome, some of the people familiar with the negotiations said. The bank believes it provided early cooperation which helped prosecutors break open the foreign-exchange investigations and, as a result, was promised immunity by the antitrust division of the Justice Department.

   

  But for prosecutors the punishment is seen as justified, the people said: The bank promised not to break the law in its 2012 deal and it violated those terms when its traders engaged in the currency-market misconduct after the 2012 agreement, they said. Prosecutors have been investigating whether traders colluded to move currency rates to benefit themselves to the detriment of clients.

  We too would be shocked to learn that ratting out all our former peers and colleagues doesn’t pay off in the end.

  The WSJ also adds, “the negotiations with the Justice Department are expected next week to result in UBS paying a fine of about $200 million to the Justice Department and pleading guilty to allegations that UBS traders manipulated the London interbank offered rate, or Libor, prior to 2012, according to some of the people.”

  While the fine is paltry, the guilty plea will open the bank to a myriad of lawsuits from around the globe, which will surely result in billions of new recurring, non one-time “one-time, non recurring” legal fees, charges and further settlements as UBS is now open to litigation by anyone and everyone.

  And while we applaud the DO”J” for doing its job for once, will it be too much just once not to assume everyone is an idiot and that clearly the DO”J” has a bias against foreign banks who are used as a buffer to avoid prosecution of domestic banks, which have mysteriously gotten away with virtually every criminal act known to man and mafia.

  Such as JP Morgan for example. The same JP Morgan whose luck may have run out, because according to the WSJ, in addition to UBS, Barclays, Citigroup, RBS, and J.P. Morgan “are expected to plead guilty to criminal antitrust charges and pay between $500 million and more than $1 billion in penalties to various government entities, according to company disclosures and people familiar with the talks. On Thursday, J.P. Morgan disclosed in a financial filing that “any resolution acceptable to DOJ would require that the Firm plead guilty to an antitrust charge.”

  Curiously, it is none other than JPMorgan who courtesy of Troy Rohrbaugh happens to be the Chairman of the Fed’s Foreign Exchange Committee.

  

   

  We are confident, however, that JPMorgan admiting guilt to a criminal anti-trust FX rigging charge will have zero impact on, and no conflicts of interest whatsoever with it remaining head advisor to the NY Fed on all issues FX.

  And while there are several things we can be absolutely certain of i) the banks will pay a few more billion in settlements here and there, and maybe UBS will be barred from competing with Goldman and JPM in fields in which the US banks feel there is “too much competition” (because a Lehman-type raid on a key competitor would not quite work out just now), and ii) nobody will actually go to prison, we have one question: just which umbrella agreement with US prosecutors will UBS use for that “other other other” market UBS was most recently caught rigging: gold.

  Actually, if UBS made the price of gold drop with its gold-rigging, it may well be that the Swiss bank just may get a commendation by the US DO”J” for that one.

  

  

  
  
  

  

• George Orwell's Final Warning

  “…something like 1984 could very well happen; this is the direction the world is going in at the present time. In our world, there will be no emotions except fear, rage, triumph, and self-abasement… but always there will be the intoxication of power…if you want a picture of the future, imagine a boot stomping on a human face… forever.”

   

   

  h/t The Burning Platform

  

  

  
  
  

  

• The Regulatory State: Central Planning & Bureaucracy On A Rampage

  Submitted by Pater Tenebrarum via Acting-Man.com,

  The New 10,000 Commandments Report – It’s Worse than Ever

  Before we begin, we should mention that the US economy has long been one of the least regulated among the major regulatory States of the so-called “free” world, and to a large extent this actually still remains true. This introductory remark should give readers an idea of how terrible the situation is in many of the socialist Utopias elsewhere.

   

  

  Even in the US though, today’s economic system is light years away from free market capitalism or anything even remotely resembling a “laissez faire” system. We are almost literally drowning in regulations. The extent of this regulatory Moloch and that the very real costs it imposes is seriously retarding economic progress. It is precisely as Bill Bonner recently said: the government’s main job is to look toward the future in order to prevent it from happening.

  A great many of today’s regulations have only one goal: to protect established interest groups. Regulations that are ostensibly detrimental to certain unpopular corporatist interests are no different. Among these is e.g. the truly monstrous and nigh impenetrable thicket of financial rules invented after the 2008 crash in a valiant effort to close the barn door long after the horse had escaped. They are unlikely to bother the established large banking interests in the least. The banking cartel is probably elated that it has become virtually impossible for start-ups to ever seriously compete with it. The same is true of many other business regulations; their main effect is to protect the biggest established companies from competition.

   

  

   

  The Competitive Enterprise Institute (CEI) – evidently named after a species close to extinction – has just released its 2015 report on the regulatory State, entitled “The 10,000 Commandments” (download link at the end of the article). Here is a summary of the grisly highlights (now would be a good time to get the barf bags out):

  “Federal regulation and intervention cost American consumers and businesses an estimated $1.88 trillion in 2014 in lost economic productivity and higher prices.

   

  If U.S. federal regulation was a country, it would be the world’s 10th largest economy, ranking behind Russia and ahead of India.

   

  Economy-wide regulatory costs amount to an average of $14,976 per household – around 29 percent of an average family budget of $51,100. Although not paid directly by individuals, this “cost” of regulation exceeds the amount an average family spends on health care, food and transportation.

   

  The “Unconstitutionality Index” is the ratio of regulations issued by unelected agency officials compared to legislation enacted by Congress in a given year. In 2014, agencies issued  16 new regulations for every law — that’s 3,554 new regulations compared to 224 new laws.

   

  Many Americans complain about taxes, but regulatory compliance costs exceed what the IRS is expected to collect in both individual and corporate income taxes for last year—by more than $160 billion.

   

  Some 60 federal departments, agencies and commissions have 3,415 regulations in development at various stages in the pipeline. The top six federal rule making agencies account for 48 percent of all federal regulations. These are the Departments of the Treasury, Commerce, Interior, Health and Human Services and Transportation and the Environmental Protection Agency.

   

  The 2014 Federal Register contains 77,687 pages, the sixth highest page count in its history. Among the six all-time-high Federal Register total page counts, five occurred under President Obama.

   

  The George W. Bush administra­tion averaged 62 major regulations annually over eight years, while the Obama administration has averaged 81 major regulations annually over six years.

  (emphasis added)

   

  

  Look at it and weep: the estimated cost of federal regulations and interventions alone in 2015 – click to enlarge.

   

  If one adds taxes and the damage done by the Fed’s incessant money printing to these regulatory costs, it is a miracle the economy hasn’t imploded yet. Note the deeply undemocratic nature of the regulatory process: The vast majority of the rules – all of which have the power of law – is concocted by unelected bureaucrats in the form of “administrative law”. It would otherwise simply be impossible to make up thousands of new rules every year. As unproductive as the bureaucracy is, it is still smothering the economy with this onslaught. This will probably never change, unless the entire system collapses one day. After all, the people tasked with making the rules need something to do.

   

  

  The cost of federal regulation per US household, compared to various major household expenditure items – click to enlarge.

   

  Growing Like a Weed

   

  

   

  A look at the Federal Register shows that the growth in regulations is essentially a permanent feature. There are no longer any significant time periods during which the number of rules actually declines. It is probably no coincidence that the charts below are eerily reminiscent of charts showing total federal debt or charts depicting the growth in the money supply. The only thing that is no longer showing any respectable growth is the economy. Of course, no-one should be surprised by this.

  Federal Register pages per decade. One wonders how people survived the practically lawless 1940 – 1970 period. Note that if we were to go back in time by another 30 years, we would see that the federal government wasn’t even a footnote in most people’s lives.

   

  

  Over the past 22 years, almost 91,000 final rules and regulations were published cumulatively. We are just guessing here, but we believe that between the time the average citizen gets out of bed until shortly after he has slurped his morning coffee, he has violated at least five laws or regulations already – click to enlarge.

   

  

  Cumulative regulations published in the Federal Register – almost 91,000 in the past 22 years alone – click to enlarge.

   

  Monetary costs are just one aspect to this. There is also the wasted effort and psychic cost that is incurred when people realize that there are many things they simply cannot do, even though they would harm no-one and would actually provide a service to their fellow men. It will often prove extremely difficult to fight the red tape and still establish a successful business venture at the same time. Certain sectors of the economy have been closed off to the private sector completely (see the example of roads below). Very often start-ups with little capital cannot hope to compete in certain business sectors, as the regulatory obstacles are simply impossible to overcome.

  Recently a US trucking organization has penned a manifesto in which it is bitterly complaining about crumbling roads and bridges across the US and urging the government to “do something”. The authors should take a long, hard look at their sad collection of statistics and realize that this is what actually happens when the government monopolizes a sector of the economy.

  Another aspect is of course social control. By making a criminal or a potential criminal out of everybody, the mountain of laws and regulations can always be brought to bear against citizens or organizations that have somehow displeased government officials or managed to attract their wrath. One can see a variation of this principle at work in modern-day criminal court cases. People who are indicted for a crime are usually faced with a whole plethora of charges apart from the main charge. The intention is to force them to accept a plea deal whether or not they are innocent. The point is obviously not to serve the cause of justice.

  However, we don’t want to digress too much here. The purely economic cost on which the CEI report focuses is distressing enough all by itself. One only has to think the problem properly through. Similar to other government interventions such as interest rate and money supply manipulations by the central bank, these enormous costs hamper the economy to such an extent that economic progress is slowed to a crawl. Who knows what we could have achieved by now if this were not the case? Perhaps people would already be able to reach the ripe old age of 150 and still feel like spring chickens in their early 100ds. Concerns over material well-being that continue to bedevil so many people today may already be orders of magnitude smaller. As Israel Kirzner once remarked in this context:

  “We are not able to chart the future of capitalism in any specificity. Our reason for this incapability is precisely that which assures us . . . the economic future of capitalism will be one of progress and advance. The circumstance that precludes our viewing the future of capitalism as a determinate one is the very circumstance in which, with entrepreneurship at work, we are no longer confined by any scarcity framework.”

  However, for this to be true, free market capitalism must be able to breathe. We won’t be able to enjoy the fruits of entrepreneurship if it is smothered at every opportunity.

   

  

   

  Conclusion

  As revolting as the full picture is, we recommend reading the entire “10,000 Commandments” report, which can be downloaded here (pdf). Above we show only a very small selection of the charts and data contained in the complete report. One thing should be clear to everyone reading it: This is a major problem that deserves a lot more attention than it usually seems to get.

  

   

  

  

  
  
  

  

• Chinese Tech Company's 3,000% Post-IPO Gain Takes Unthinkable 4% Hit

  Two weeks ago, we brought you the story of Beijing Baoefung Technology which in many ways exemplifies everything that’s wrong (or right, depending on whether you, like Japan’s Economics Minister Akira Amari, have come to believe that bubbles are good) with today’s capital markets. The online video company’s shares posted a remarkable post-IPO run amid China’s red-hot equity mania, but as FT reports, something went terribly wrong on Thursday: the stock fell.

  This column’s favorite stock for the past month has been Beijing Baofeng Technology, which offers online videos in China. Baofeng means “storm”, and it has been a near-perfect performer: its shares traded limit-up every day from its March IPO in Shenzhen apart from one, and opened up the maximum 10 per cent on Thursday, too.

   

  It looks like the storm has now broken. Its shares ended the day down for the first time, falling 4.4 per cent after news of a copyright dispute over content. 

  
  

  

   

  There’s no need to panic though because “the stock [is] up 3,285 per cent from the offer price.”

  In other words:

  

  

  
  
  

  

• The Trouble with Cash

  Submitted by Alasdair Macleod via GoldMoney.com,

  When interest rates are zero and it costs a bank to look after your money it becomes an unattractive asset. Banks in some jurisdictions (such as Switzerland, Denmark and Sweden) are even charging customers interest on cash and deposits. And if you go to your bank and withdraw large amounts in the form of folding notes to avoid these charges you will be lucky if you are not treated as a sort of pariah. For the moment, at least, these problems do not extend to sound money, in other words gold.
   
  There are two distinct issues involved with government-issued currency: zero-to-negative interest rates, which all but eliminate any interest turn on deposits for the banks; and a systemic issue that arises if too many people withdraw their money from the banking system. The problems with the latter would become significant if enough people decide to effectively opt out of holding money in the banks.
   
  Conversion of bank deposits into physical cash increases reserve ratios, restricting the banks’ ability to create credit. However, while the banks are contractually obliged to supply physical cash to anyone who wants it, a drawdown on bank deposits is a bad thing from a central bank’s point of view. A desire for physical cash is, therefore, discouraged. Instead, if the option of owning physical cash was removed and there was only electronic money, deposits would simply be transferred from one bank to another and any imbalances between the banks resolved through the money markets, with or without the assistance of a central bank. The destabilising effects of bank runs would be eliminated entirely.
   
  In the current financial climate demand for cash does not originate so much from loss of confidence in banks, with some notable exceptions such as in Greece. Instead it is a consequence of ultra-low or even negative interest rates. The desire for cash is therefore an unintended consequence of central banks attempting to inject confidence into the economy. The rights of ordinary individuals to turn deposits into physical cash are therefore resisted by central banks, which are focused instead on managing zero interest rate policies and suppressing any side effects.
   
  Central banks can take this logic one step further. Monetary policy is primarily intended to foster investor confidence, so any tendency for investors to liquidate investments is, therefore, to be discouraged. However, with financial markets getting progressively more expensive central bankers will suspect the relative attraction of cash balances are increasing. And because banks are making cash deposits more costly, this is bound to increase demand for physical notes.
   
  Monetary policy has now become like a pressure cooker with a defective safety-valve. Central bankers realise it and investors are slowly beginning to as well. Add into this mix a faltering global economy, a fact that is becoming impossible to ignore, and a dash-for-cash becomes a serious potential risk to both monetary policy and the banking system.
   
  There is an obvious alternative to cash, and that is to buy physical gold. This does not constitute a run on the banking system, because a buyer of gold uses electronic money that transfers to the seller. The problem with physical gold is a separate issue: it challenges the raison d’être of the banking system and of government currencies as well.
   
  This is why we can still buy gold instead of encashing our deposits, for the moment at least. It can only be a matter of time before people realise that with the cash option closing this is the only way to escape an increasingly dysfunctional financial system.

  

  

  
  
  

  

• How China's Banks Hide Trillions In Credit Risk: Full Frontal

  On Monday, we noted that NPLs in China saw their biggest quarterly increase on record in Q1, jumping 141 billion yuan sequentially to 983 billion. We also discussed why the proliferation of property loans is spreading real estate risk to the larger economy before outlining several reasons why the “official” data on bad loans may severely understate credit risk in much the same way that “official” data out of Beijing on economic output probably grossly overstates GDP growth. As a reminder, here is what we said:

  One might be tempted, upon reading this, to point to “official” data on bad loans at Chinese banks on the way to concluding that “modest loss-absorption capacity” or not, sub-2% NPL ratios certainly do not seem to portend an imminent catastrophe. However, given the official figure is just 1.39%, and given what we know about the state of China’s economy, one could be forgiven for wondering if NPLs at China’s biggest lenders are grossly understated. To let Fitch tell it, determining the true extent of China’s NPL problem is complicated by a number of factors and the ‘real’ data might be just as hard to get at as an accurate reading on Chinese GDP.

  In order to truly understand how exposed China’s lenders are to potentially toxic “assets”, it’s worth taking a closer look at all of the different non-standard channels through which the banks have taken on credit risk. 

  At the outset it should be noted that it is virtually impossible to determine how many of the traditional loans banks carry on their books would actually be impaired were it not for what Fitch calls “centrally managed NPLs.” Put simply, the government has a tendency to ‘influence’ banks’ decisions when it comes to rolling over problem loans. Here’s Fitch:

  It is not uncommon for the authorities (central or provincial government, PBOC, or China Banking Regulatory Commission; CBRC) to encourage banks to roll over loans to support the broader economy. Such influence from the regulators is common in China, but less so in more developed markets as it runs counter to the principle of strict prudential oversight. (In addition, in some cases in China the regulator has lowered risk weights to encourage banks to lend to potentially riskier borrowers.)…

  Where a bank agrees to provide additional funding to prevent default, i.e. by rolling over the loans and requiring more collateral as credit enhancement, this exposure and/or other loan exposures relating to the same borrower may not be recognised as impaired. The level of disclosure of widely reported corporate defaults (or near defaults) is low, and there is no information available on the amount of debt renegotiations that are unreported by the media. 

  In other words, there’s no way to know how pervasive Beijing’s practice of forcing banks to roll-over problem loans truly is, meaning that even if we ignore the fact that quite a bit of credit risk is obscured by the practice of shifting it around, moving it off balance sheet, and reclassifying it, (i.e. if we just look at traditional loans) it’s still difficult to know what percentage of loans are actually impaired because it’s entirely possible that a non-trivial percentage of sour debt is forcibly restructured and thus never makes it into the official NPL figures. 

  Fitch goes on to note what we mentioned earlier this week, namely that the percentage of  loans which are not yet classified as non-performing but which are nonetheless doubtful is much higher than the headline NPL figure and in fact, the ratings agency seems to suggest that some Chinese banks (notably the largest lenders) may be under-reporting their special mention loans:

  Banks in China have remarkably similar NPL ratios and performance trends, which suggests little or no difference in risk appetite despite large differences in ownership and systemic importance, and varying levels of investment in their risk-management systems. However, state banks’ capital adequacy ratios have clearly benefited from having greater access to capital markets due to their much larger franchises. 

   

  There are more notable differences in special-mention and overdue loan trends, implying that loan classification standards, which in principal are on a par with international practice, may not be applied consistently and uniformly across all banks in China. For example, loans overdue for more than three months are not always classified as NPLs at some banks. The only common trend is that all banks’ provision coverage ratios fell during 2014 as the increase in loan provisioning was insufficient to offset the NPL increases, even as NPLs have been partly offset by write-offs and/or disposals.

   

  

  

  Interestingly, it appears that when overdue loans are included, the banking sector’s loan loss reserves aren’t sufficient…

  The sector’s provision coverage declined to 232% at end-2014 from 283% a year before, even though the reported NPL ratio only rose marginally to 1.25% from 1.0% over the same period (Fitch-rated banks’ reported NPLs rose another 14% quarter on quarter in 1Q15). This ratio would fall to 66.5% at end-2014 if special-mention loans were included. This means China’s loan-loss reserve, equivalent to 2.9% of loans at end-2014, is insufficient to cover both NPLs (1.25% of loans) and “special-mention” loans (3.1% of loans). 

  …but ultimately it’s irrelevant because between bad assets that are ultimately transferred to AMCs, loans that are channeled through non-bank financial institutions and carried as “investments classified as receivables”, and off-balance sheet financing, nearly 40% of credit risk is carried outside of traditional loans, rendering official NPL data essentially meaningless in terms of assessing the severity of the problem:

  China’s four major AMCs were set up in 1999 to absorb CNY1.4trn in bad assets at par value from China Development Bank and the big four banks (Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China) before their restructuring. NPL disposals to AMCs have increased in recent years as more banks have come under pressure to manage their reported NPL levels…

   

  Banks work with non-bank financial institutions (ie trust companies, securities firms, other financial subsidiaries and/or affiliates to the banks) to channel credit to sectors that have restricted access to traditional banks loans. This is usually called “channel” business in China. The banks may put together these transactions themselves, in which case the borrower could be an existing bank customer, or the non-bank financial institution may help the bank identify profitable lending opportunities. Some of this credit is sold to investors as WMPs, but banks are increasingly holding it on their own books as “financial assets held under repurchase agreements” or “investments classified as receivables”…

   

  The amount of informal loans channelled through non-bank financial institutions and accounted as “investments classified as receivables” has increased from close to zero in 2010 to CNY4.4trn at end-2014 for Fitch-rated commercial banks, equivalent to 8% of total loans. 

   

  

  Off-balance-sheet financing (I.e. trust loans, entrusted loans, acceptances and bills) accounted for 18% of official TSF stock at end-2014, up from less than 2% just over a decade ago. Of the off-balance-sheet exposure reported at individual banks, this is equivalent to 15% of total assets for state commercial banks and 25% for mid-tier commercial banks, on a weighted average basis. These ratios would be even higher if we included entrusted loans (see Figure 2), although this information is not disclosed at all banks.

  Fitch estimates that around 38% of credit is outside bank loans.

   

  

  
  

  *  *  *

  There are several takeaways here. First — and most obvious — is the fact that accurately assessing credit risk in Chna is extraordinarily difficult. What we do know, is that between forced roll-overs, the practice of carrying channel loans as “investments” and “receivables”, inconsistent application of loan classification norms, and the dramatic increase in off balance sheet financing, the ‘real’ ratio of non-performing loans to total loans is likey far higher than the headline number, meaning that as economic growth grinds consistently lower, the country’s lenders could find themselves in deep trouble especially considering the fact that loan loss reserves aren’t even sufficient to cover NPLs + special mention loans, let alone defaults on a portion of the 38% of credit risk carried off the books.

  The irony though is that while China clearly has a debt problem (282% of GDP), it’s also embarking on a concerted effort to slash policy rates in an effort to drive down real rates and stimulate the flagging economy, meaning the country is caught between the fallout from a shadow banking boom and the need to keep conditions loose because said boom has now gone bust, dragging credit growth down with it.

  

  In other words, the country is trying to deleverage and re-leverage at the same time.

  A picture perfect example of this is the PBoC’s effort to facilitate a multi-trillion yuan refi program for China’s heavily-indebted local governments. The idea is to swap existing high yield loans (accumulated via shadow banking conduits as localities sought to skirt borrowing limits) for traditional muni bonds that will carry far lower interest rates. So while the program is designed to help local governments deleverage by cutting hundreds of billions from debt servicing costs, the CNY1 trillion in new LGB issuance (the pilot program is capped at 1 trillion yuan) represents a 150% increase in supply over 2014. Those bonds will be pledged as collateral to the PBoC for cheap cash which, if the central bank has its way, will be lent out to the real economy. So again, deleveraging and re-leveraging at the same time.

  This is just one of many ‘rock-hard place’ dynamics confronting the country as it marks a difficult transition from a centrally planned economy based on credit and investment to a consumption-driven model characterized by the liberalization of interest and exchange rates. 

  

  

  
  
  

  

• 3 Things: The Labor Hoarding Effect

  Submitted by Lance Roberts via STA Wealth Management,

  The Claims Problem

  This morning initial jobless claims plunged to the lowest level in the last 42 years. The chart below shows the weekly claims as compared to the 4-week moving average.

  

  Surely, this must be a sign that the economy has turned the proverbial corner as full-employment has finally been obtained. Right? Maybe not.

  As discussed earlier this week:

  "That really is the point that the majority of analysis misses when they point to jobless claims and the U-3 or U-6 unemployment rates. IF, and that is a big IF, employment was as strong as suggested by headlines then wage growth would be rising sharply and economic growth would be running near levels historically associated with 'full employment rates.'

   

  However, the chart below, which is the labor force participation rate of 16-54-year-olds as a percentage of just that age group, is representative of the real problem. Just because the BLS chooses not to "count" those individuals, it DOES NOT mean that they have ceased to exist.(The percentage of workers participating in this age group as has fallen for the past 3 months.)"

  

  However, I am not suggesting there has been NO JOB growth. There has. However, it has been a function of hiring due to the increases in population growth, which creates incremental demand, rather than an organically driven surge in overall economic growth and prosperity.

  It is there that we find the problem with the reports on jobless claims and the actual economy.

   

  Labor Hoarding

  Since the end of the financial crisis, businesses have been increasing bottom line profitability by massive cost cuts rather than increases in revenue. Of course, one of the highest "costs" to any business is labor. One way that we can measure this view is by looking at corporate profits on a per employee basis. Currently, that ratio is near its highest level on record. (Scale below is inverted for clarity)

  

  The problem that businesses are beginning to face is while they have slashed labor costs to the bone there is a point where businesses simply cannot cut further. At this point businesses have to begin to "hoard" what labor they have, maximize that labor force's productivity (increase output with minimal increases in labor costs) and hire additional labor, primarily temporary, only when demand forces expansion.

  This issue of "labor hoarding" also explains the sharp drop in initial weekly jobless claims. In order to file for unemployment benefits, an individual must have been first terminated, by layoff or discharge, from their previous employer. An individual who "quits" a job cannot, in theory, file for unemployment insurance. However, as companies begin to layoff or discharge fewer workers the number of individuals filing for initial claims decline. This is shown in the chart below which shows the 4-month average of layoff and discharges versus the 4-week average of initial jobless claims.

  

  However, the mistake is assuming that just because initial claims are declining, the economy and specifically full-time employment is markedly improving. The next chart shows initial jobless claims versus the full-time employment to population ratio.

  

   

  Obscuring Reality

  The issue of "labor hoarding" is an important phenomenon that is likely obscuring the real weakness in the underlying economy. Without an increase in the demand part of the economic equation, businesses will continue resorting to productivity increases to stretch the current labor force farther to protect profitability. The effect is a decline in real median incomes which negatively impacts future demand.

  

  While massive binges in stock buybacks and accounting gimmicks have continued to blur the actual profitability of businesses, the decline in jobless claims suggests that there is little room from further reductions in body counts. However, that does not mean that businesses must begin rapidly increasing employment and wages.

  The "good news" is that for those that are currently employed – job safety is high. Businesses are indeed hiring, but prefer to hire from the "currently employed" labor pool rather than the unemployed masses. The "bad news" is that for those unemployed, full-time employment remains elusive, and wages remain suppressed due to the high competition for available work.

  The current detachment between the financial markets and the real economy continues. The Federal Reserve's interventions continues to create a wealth effect for market participants. However, it is unfortunate that such a wealth effect is only enjoyed by a small minority of the total population – those at the upper end of the pay scale that have jobs.

  

  

  
  
  

  

• The Greatest Water Crisis In The History Of The United States

  Submitted by Michael Snyder via The Economic Collapse blog,

  What are we going to do once all the water is gone?  Thanks to the worst drought in more than 1,000 years, the western third of the country is facing the greatest water crisis that the United States has ever seen.  Lake Mead is now the lowest that it has ever been since the Hoover Dam was finished in the 1930s, mandatory water restrictions have already been implemented in the state of California, and there are already widespread reports of people stealing water in some of the worst hit areas.  But this is just the beginning.

  Right now, in a desperate attempt to maintain somewhat “normal” levels of activity, water is being pumped out of the ground in the western half of the nation at an absolutely staggering pace.  Once that irreplaceable groundwater is gone, that is when the real crisis will begin.  If this multi-year drought stretches on and becomes the “megadrought” that a lot of scientists are now warning about, life as we know it in much of the country is going to be fundamentally transformed and millions of Americans may be forced to find somewhere else to live.

  

  Simply put, this is not a normal drought.  What the western half of the nation is experiencing right now is highly unusual.  In fact, scientists tell us that California has not seen anything quite like this in at least 1,200 years…

  Analyzing tree rings that date back to 800 A.D. — a time when Vikings were marauding Europe and the Chinese were inventing gunpowder — there is no three-year period when California’s rainfall has been as low and its temperatures as hot as they have been from 2012 to 2014, the researchers found.

  Much of the state of California was once a desert, and much of it is now turning back into a desert.  The same thing can also be said about much of Arizona and much of Nevada.  We never really should have built massive, sprawling cities such as Las Vegas and Phoenix in the middle of the desert.  But the 20th century was the wettest century for western North America in about 1,000 years, and we got lulled into a false sense of security.

  At this point, the water level in Lake Mead has hit a brand new record low, and authorities are warning that official water rationing could soon begin for both Arizona and Nevada…

  Lake Mead, the largest reservoir in the US, has hit its lowest level ever. Feeding California, Nevada and Arizona, it can hold a mind-boggling 35 cubic kilometres of water. But it has been many years since it was at capacity, and the situation is only getting worse.

   

  “We’re only at 38 percent full. Lake Mead hasn’t been this low since we were filling it in the 1930s,” said a spokeswoman for the US Bureau of Reclamation in Las Vegas.

   

  If it gets much lower – and with summer approaching and a dwindling snowpack available to replenish it, that looks likely – official rationing will begin for Arizona and Nevada.

  And did you know that the once mighty Colorado River no longer even reaches the ocean?  Over 40 million people depend upon this one river, and because the Colorado is slowly dying an enormous amount of water is being pumped out of the ground in a crazed attempt to carry on with business as usual…

  The Colorado River currently supplies water to more than 40 million people from Denver to Los Angeles (as well as Las Vegas, Phoenix, Tucson, San Diego, Salt Lake City, Albuquerque, and Santa Fe—none of which lie directly on the river). According to one recent study, 16 million jobs and $1.4 trillion in annual economic activity across the West depend on the Colorado. As the river dries up, farmers and cities have turned to pumping groundwater. In just the last 10 years, the Colorado Basin has lost 15.6 cubic miles of subsurface freshwater, an amount researchers called “shocking.” Once an official shortage is declared, Arizona farmers will increase their rate of pumping even further, to blunt the effect of an anticipated sharp cutback.

  The same kind of thing is going on in the middle part of the country.  Farmers are pumping water out of the rapidly shrinking Ogallala Aquifer so fast that a major crisis in the years ahead is virtually guaranteed…

  Farther east, the Ogallala Aquifer under the High Plains is also shrinking because of too much demand. When the Dust Bowl overtook the Great Plains in the 1930s, the Ogallala had been discovered only recently, and for the most part it wasn’t tapped then to help ease the drought. But large-scale center-pivot irrigation transformed crop production on the plains after World War II, allowing water-thirsty crops like corn and alfalfa for feeding livestock.

   

  But severe drought threatens the southern plains again, and water is being unsustainably drawn from the southern Ogallala Aquifer. The northern Ogallala, found near the surface in Nebraska, is replenished by surface runoff from rivers originating in the Rockies. But farther south in Texas and New Mexico, water lies hundreds of feet below the surface, and does not recharge. Sandra Postel wrote here last month that the Ogallala Aquifer water level in the Texas Panhandle has dropped by up to 15 feet in the past decade, with more than three-quarters of that loss having come during the drought of the past five years. A recent Kansas State University study said that if farmers in Kansas keep irrigating at present rates, 69 percent of the Ogallala Aquifer will be gone in 50 years.

  At one time, most of us took water completely for granted.

  But now that it is becoming “the new oil”, people are starting to look at water much differently.  Sadly, this even includes thieves…

  With the state of California mired in its fourth year of drought and a mandatory 25 percent reduction in water usage in place, reports of water theft have become common.

   

  In April, The Associated Press reported that huge amounts of water went missing from the Sacramento-San Joaquin Delta and a state investigation was launched.

   

  The delta is a vital body of water, serving 23 million Californians as well as millions of farm acres, according to the Association for California Water Agencies.

   

  The AP reported in February that a number of homeowners in Modesto, California, were fined $1,500 for allegedly taking water from a canal. In another instance, thieves in the town of North San Juan stole hundreds of gallons of water from a fire department tank.

  In case you are wondering, of course this emerging water crisis is going to deeply affect our food supply.  More than 40 percent of all our fruits and vegetables are grown in the state of California, so this drought is going to end up hitting all of us in the wallet one way or another.

  And this water crisis is not the only major threat that our food supply is facing at the moment.  A horrific outbreak of the bird flu has already killed more than 20 million turkeys and chickens, and the price of eggs has already gone up substantially…

  The cost of a carton of large eggs in the Midwest has jumped nearly 17 percent to $1.39 a dozen from $1.19 since mid-April when the virus began appearing in Iowa’s chicken flocks and farmers culled their flocks to contain any spread.

   

  A much bigger increase has emerged in the eggs used as ingredients in processed products like cake mix and mayonnaise, which account for the majority of what Iowa produces. Those eggs have jumped 63 percent to $1.03 a dozen from 63 cents in the last three weeks, said Rick Brown, senior vice president of Urner Barry, a commodity market analysis firm.

  Most of us are accustomed to thinking of the United States as a land of seemingly endless resources, but now we are really starting to bump up against some of our limitations.

  Despite all of our technology, the truth is that we are still exceedingly dependent on the weather patterns that produce rain and snow for us.

  For years, I have been warning that Dust Bowl conditions would be returning to the western half of the country, and thanks to this multi-year drought we can now see it slowly happening all around us.

  And if this drought continues to stretch on, things are going to get worse than this.

  Much worse.

  

  

  
  
  

  

• Seymour Hersh Slams Establishment Media: "I Am Not Backing Off Anything I Said"

  Authored by Isaac Chotiner, originally posted at Slate.com,

  In a blockbuster 10,000-word story for the London Review of Books this week, longtime New Yorker investigative journalist Seymour Hersh called into question the official account of the American raid that killed Osama Bin Laden, and argued that what is arguably seen as the apex of Barack Obama’s presidency is actually built on a lie.

   

  Hersh’s piece claims that Bin Laden was being held prisoner by the Pakistani military and intelligence service (the ISI), who were using him as a means to control Taliban and al-Qaida elements, and hoping to use him as leverage in their relationship with the United States. According to Hersh, who relied largely on an anonymous intelligence source, the Obama administration found out that Pakistan had Bin Laden, and eventually convinced Pakistani military leaders to allow a raid on the compound where Bin Laden was being held. The plan, Hersh writes, was to say publicly that Bin Laden was killed not in the raid but in a drone strike. The White House, however, supposedly broke this deal because of the political value of making the details of the raid public.

   

  Hersh’s story has been much debated over the past several days, with many calling it into question and (a comparable few) others applauding its willingness to undercut the official narrative. NBC News and the AFP have both backed up small elements of Hersh’s story, although both outlets have also called other elements of his piece into question (and NBC later backed away from its original reporting). And no news source has supported Hersh’s largest claim—that the president lied about the raid.

   

  I spoke to Hersh by phone this week. Here is a transcript of our conversation, which has been slightly condensed and edited for clarity.

  Isaac Chotiner: If the plan until the night of the raid was to use the cover story that he had not been killed in a raid but in a drone strike, then why have the raid at all?  Why not just have the Pakistanis kill him? Why risk Obama’s presidency?

  Seymour Hersh: Of course there is no answer there because I haven’t talked to any of the principals. But I can just give you what the people who were in the process believed to be so, which is that for [Gens.] Pasha and Kayani, the chance of something like that getting leaked out would be devastating. America was then running at about 8 percent popularity in Pakistan, and Bin Laden was running at 60, 70 percent. He was very popular. [Editor’s note: This 2010 opinion poll says that Bin Laden’s popularity was at 18 percent in Pakistan.] You couldn’t just take a chance, because if someone ratted you out—I can only give you a basic theory.

  Chotiner: It just seems like a huge raid with Pakistani complicity brings up just as many problems for the Pakistanis.

  Hersh: If you believe, as a smart guy said to me, if anybody, if anyone didn’t think the president was going to fuck [the Pakistani military] they are out of their mind. He was always going to fuck them.

  Chotiner: OK. In your piece you call into question that the Americans got valuable documents in the raid. But Ayman al-Zawahiri, the current head of al-Qaida, himself seemed to confirm that this was true. How do you handle that contradiction?

  Hersh: I handle it pretty easy. [Laughs] The issue for me is the treasure trove issue. Did the SEALS take out piles of computers? There were claims they found computers and disks and sticks, what do they call those sticks?

  Chotiner: I don’t know.

  Hersh: You’re not as old as I am. You should know that. Anyway, the SEALs mission was to go kill the guy. They did pick up some papers, but most of the papers were delivered by the ISI. He was a prisoner under their control. He wasn’t beaten and could walk around but it was a prison. He couldn’t get out. They kept encouraging him to write stuff. And he did. But I am bothered by the contradictions. [The] president said it was a treasure trove so there had to be a treasure trove. Is it real? I don’t know. It was used in a trial. Is it real? Is it not? I don’t know.

  Chotiner: You seem slightly annoyed that Obama double-crossed the Pakistanis.

  Hersh: Double-crossed is your word.

  Chotiner: OK fine. I want to understand why you seem bothered by that, aside from the lying. Turning our back on the worst elements in Pakistan who we have long nurtured doesn’t seem so bad. We have supported them forever.

  Hersh: Why do we do that?

  Chotiner: Because we see it as being in our own interest.

  Hersh: Well no, we do it for nukes.

  Chotiner: Fine, we see that as being in our interest.

  Hersh: In my experience in the last 30 years, one of the major worries was about the “Islamic bomb,” about Pakistan. If you knew the lengths to which we go, working with the ISI, to make sure some ultranationalist or ultrajihadist doesn’t get [control of nukes].

  Chotiner: Yes, although you could argue that if we hadn’t nurtured these elements for so long, the country would be less of a threat.

  Hersh: You could argue anything.

  Chotiner: I want to—

  Hersh: Swing away fella.

  Chotiner: You sent me—

  Hersh: You probably don’t know that NBC reported, and now they have reported it on one of these dopey afternoon shows with that woman, what’s her name, the NBC woman who claims to have some knowledge of foreign policy, married to Alan Greenspan.

  Chotiner: Andrea Mitchell.

  Hersh: She’s comical. On her show the administration is acknowledging walk-ins but saying the walk-ins aren’t necessarily linked to Bin Laden.

  Chotiner: The AFP piece, which you sent me approvingly, says the same thing, that there is no evidence the walk-in led to Bin Laden, and that the walk-in did not even know the target was Bin Laden.

  Hersh: Uh huh, OK.

  Chotiner: OK but here is my question about journalism, since you have been doing this longer than I have—

  Hersh: Oh poor you, you don’t know anything. It is amazing you can speak the God’s English.

  Chotiner: Are you hoping with this piece to say that you made no mistakes, or that OK there were mistakes because I am getting the ball rolling? You have quoted two pieces very approvingly, from NBC and AFP, that differ from key points in your own story. I want to know how accurate you think your story now is.

  Hersh: [Laughs loudly] Well I will tell you one thing: At one point a copy editor in England confronted me about the SEALs training in Nevada and changed it to Utah, and the line made it because according to her they were sort of the same.

  Chotiner: The AFP piece contradicts your piece but you aren’t running around worried about that.

  Hersh: I sent it approvingly because it crossed my desk and it does say there were walk-ins. [Laughs] You can read it any way you want. The White House has been very clever about this. They have gone after me personally. They don’t like me boo hoo hoo. But they have been very careful to hedge everything, they quote Peter Bergen. Bergen or Berger, is that his name?

  Chotiner: Bergen.

  Hersh: They quote him. He views himself as the trustee of all things Bin Laden.

  Chotiner: I just want to talk to you about your piece and journalism.

  Hersh: What difference does it make what the fuck I think about journalism? I don’t think much of the journalism that I see. If you think I write stories where it is all right to just be good enough, are you kidding? You think I have a cavalier attitude on throwing stuff out? Are you kidding? I am not cavalier about what I do for a living.

  Chotiner: I don’t think you are cavalier. That was not my question.

  Hersh: Whatever it is, it’s an impossible question. It’s almost like you are asking me to say that there are flaws in everybody. Yes. Do I acknowledge that not everybody can be perfect? But I am not backing off anything I said.

  Chotiner: Well let’s talk about sources. A lot of the reporting that got us into the last stupid war was based on bad and often anonymous sources. Is there a problem with journalists having a limited number of sources, just generally speaking? Is this a problem? With unnamed sources—

  Hersh: Are you kidding me? Unnamed sources? You are smarter than that. This is too boring.

  Chotiner: Let me finish my question and then you can yell at me.

  Hersh: I am done yelling.

  Chotiner: Is there some sort of journalistic standard that reporters should try to meet to prevent more errors?

  Hersh: Let me say something to you. There was a practice at the New Yorker that continued at the London Review of Books. The reason I like the LRB is that it isn’t tied down to Americana. It is more open to being … In Europe people think this story makes sense. There is not the quibbling. It is a different approach. By that I mean that the view of America is less cheery abroad but the standards are the same. The people at the London Review knew whom I talked to. It is the same at the New Yorker. David Remnick knows who I talk to. I do have sources, which is a problem for a lot of people that don’t.

  Chotiner: OK well it seems like the upshot of what you are saying, and correct me if this is wrong—

  Hersh: I just said what I said. I don’t want to hear what the upshot is. If you have another question then ask it. This is going on too long. I am too old and too cranky and too tired. I have been doing this fucking thing for a day. I told you, I warned you, that I am really irritable.

  Chotiner: OK so if both places check your sources, and the New Yorker—

  Hersh: Now you are restating it. In Europe it is an easier path. The notion that somehow America—I have one slight layer less. Believe me. I don’t know if you know who Mary-Kay Wilmers is. You probably don’t.

  Chotiner: She is the editor of the LRB.

  Hersh: Do you know how smart she is?

  Chotiner: I have heard stories.

  Hersh: She is fantastic. She is as good as they say. They go gaga over her. She was married to Stephen Frears. She is tenacious. But believe me this piece took a long time to get into print. A lot of questions. A lot of nasty questions.

  Chotiner: OK—

  Hersh: Don’t turn this into some sort of profound anti-American statement.

  Chotiner: It seems like you are hinting the New Yorker rejected it for reasons having to do with politics.

  Hersh: Would you care to hear the truth? Would you care to hear something that didn’t come from Vox, whoever Vox is? I am not sure you are that interested in it. I am doing a book. Within four or five days I hear that there are problems with the [official] OBL story. A lot of problems. And I have good friends in Pakistan. Really good friends. I go there a lot. Hold on, I just walked out of a two-room suite and the fucking movie crew. The fucking movie crew just leaves the desk. God dammit. [A film crew had been in Hersh’s office.] Anyway. First of all, you may get some suggestion of this. Maybe I am not an easy guy.

  Chotiner: I wouldn’t dream of suggesting that.

  Hersh: There was a point with the New Yorker where I thought they should rename the fucking magazine the Seymour Hersh Weekly. David Remnick has his own theories and opinions. He is not cowed by me. We have a lot of fights. We have a lot of disagreements. I don’t find that so shocking. I like him a lot, he is brilliant, he is great. I think he is even a better writer than editor. I have always been a freelancer. I always work for myself.

  Chotiner: I get that.

  Hersh: So, all that happens is I tell him about the story, and his initial approach was to say do a blog item. Go fuck yourself! A blog? I have done a couple blogs when it is 1,000 words but this is worth more. At that point it was very early. So I was on contract for a book and said fuck it … You want to make a lot out of it? David always says he welcomes another view. I am the guy who said fuck it, I will do what I want to do. [Editor’s note: Other news sources have reported that the New Yorker declined to publish a version of the story.]

  [Hersh picks up other phone]: Yeah. Yeah. Oh no, fuck no … I don’t want to do it there! Go fuck—

  Hersh: You there?

  Chotiner: Yes.

  Hersh: Fucking TV interview sets up in the hall of my office building. It’s a lawyer’s building.

  Chotiner: I was just asking—

  Hersh: You want to write about this totally tedious shit? Yes, I am a huge pain in the ass. I am the one that decided to publish it wherever the hell I please. That’s the story. You want to listen to hall gossip about me? Go ahead. [Sarcastic voice] It is so immensely important to so many people to know where I published. I can’t believe it.

  Chotiner: Can I tell you why?

  Hersh: I don’t want to hear why. You think there is a different standard in London?

  Chotiner: I wish you would listen.

  Hersh: All right, maybe I will listen, but I gotta hang up.

  Chotiner: If people here are turning down stories because of certain politics—you yourself said it was easier in Europe—that is a story that should be written.

  Hersh: Now you said the first intelligent thing you have said. If you had asked whether he didn’t run this because he is in love with Obama and all that stuff that people think, no … It is a very good question. Although we have huge disagreements. My children and I have huge disagreements. I have a huge disagreement with my dog. We have a lot of disagreements and there are times when he will call me and I will not answer the call. Oh fuck hold on. He always has said to me he welcomes any information and it was I who said fuck it.

  Chotiner: OK but you have talked about the New Yorker’s Americana and said my question was a good one, so is there something to it?

  Hersh: I think it is a great question.

  Chotiner: So what do you think of it?

  Hersh: I just told you what I think. In the case of the Bin Laden story, he is open for anything. It was I who made the decision.

  Chotiner: I feel like you are telling me two different things. One is that you get less pressure in Europe, and the other is that this story would have been fine at the New Yorker.

  Hersh: So fine, I am glad you are confused. Write whichever one makes you happy.

  Chotiner: OK.

  Hersh: I don’t mean to yell at you but I feel good doing it. Goodbye.

  

  

  
  
  

  

• McCain Joins Ukraine Advisory Committee Headed By Georgia's Fugitive Ex-President

  John McCain — everyone’s favorite possibly senile senator who Vladimir Putin thinks may have gone nuts in ‘Nam and who has had quite a difficult time shaking rumors about his past dealings with “brave” Syrian ‘freedom fights’ who may have gone on to become ISIS militants — is ‘back in the (former) USSR.’

  Earlier this year, McCain expressed his disappointment in the glacial pace at which Washington is moving on the path to World War III, saying he is “ashamed” of the President, the country, and of himself, for not “doing more to help those people.” By “those people” McCain meant Ukrainians and by “more to help” he meant sending lethal aid to Kiev so the Ukrainian army can turn the on-again-off-again “conflict” with Russia into a proper war that self-respecting hawks can be proud of.

  McCain is no stranger to Ukrainian politics. In 2013 he spoke to a crowd of protesters in the wake of then-President Viktor Yanukovich’s (who was once the victim of an attempted assassination-by-egg and who famously fled the country amid widespread protests last year) decision to lean Russian on trade, telling the crowd that “the free world is with you, America is with you, I am with.” It appears McCain is taking that pledge quite literally because as you can see from the following official release from the Ukrainian government, the Senator has been added to Poroshenko’s International Advisory Board. 

  APPROVED

  Decree of President of Ukraine on May 13, 2015

   

  REGULATIONS of the International Advisory Council reform International Advisory Board Reform (hereinafter – the Council) is a consultative body under the President of Ukraine, whose main task is to provide suggestions and recommendations for the implementation of reforms in Ukraine based on the best international practices.

   

  COMPOSITION

  International Advisory Board Reform

   

  Miheil Saakashvili – President of Georgia in 2004-2007 and 2008 -2013 years, chairman (by consent)

   

  Carl Bildt – Prime Minister of the Kingdom of Sweden in 1991 – 1994 years, Minister of Foreign Affairs of the Kingdom of Sweden in 2006 – 2014 years (by consent)

   

  Elmar Brok – Chairman of the European Parliament Committee on Foreign Affairs (the agreement)

   

  Mikulas Dzurinda – Prime Minister of the Slovak Republic in 1998 – 2006 years (by consent)

  Andrius Kubilius – Prime Minister of the Republic of Lithuania in 1999 – 2000 and 2008 – 2012 years (by consent)

   

  John McCain – United States Senator, Chairman of the Committee on Armed Services of the Senate of the United States (by consent)

   

  Anders Aslund – Senior Fellow, Peterson Institute for International Economics (United States), Professor (by consent)

   

  Jacek Saryusz-Wolski – Member of the European Parliament (by consent).

  Note that former Georgian President Miheil Saakashvili also made the list, which is notable because .. well, he’s an international fugitive. Here’s RT:

  Saakashvili has been appointed as head of the new advisory group, says the statement on Ukraine’s presidential website…

   

  Back in February Saakashvili was appointed as a non-staff adviser to Poroshenko. The ex-Georgian president, who was in power from 2004 to 2013, faces numerous charges at home, including embezzlement of over $5 million, corruption and brutality against protesters during demonstrations in 2007. Georgia’s Chief Prosecutor’s Office launched proceedings to indict Saakashvili and place him on the international most wanted list, but Kiev refused to hand over the fugitive president, despite an existing extradition agreement between Ukraine and Georgia.

   

  Saakashvili is known for his strong anti-Russian stance, which garnered heavy US support. In August 2008 during his term in office Georgia launched an offensive against South Ossetia, killing dozens of civilians and Russian peacekeepers stationed in the republic. Georgia’s shelling of Tskhinval prompted Russia to conduct a military operation to fend off the offensive. Despite Saakashvili’s claims that the conflict was “Russian aggression,” the 2010 EU Independent Fact Finding Mission Report ruled that Tbilisi was responsible for the attack…

   

  Following the new Kiev authorities’ attempt to suppress dissent in the east of the country and Crimea’s ascension into the Russian Federation, McCain became the main engine of lobbying for lethal arms supplies to Ukrainian forces to “defend themselves” and Europe from “Russian aggression.”

  
  

   

  “The Ukrainian people don’t want US or Western troops to fight for them; they are simply asking for the right tools to defend themselves and their country,” he said late last month at a hearing on US security policy in Europe. “Russia’s invasion and dismemberment of Ukraine should remind everyone of the true nature of Putin’s ambitions and the fragility of peace in Europe.”

  Yes, the “fragility of peace in Europe,” which is of course made infinitely more fragile by the type of snap drills, troop buildups and NATO sabre rattling that the good senator so ardently supports. But as anxious as McCain may be to do his part to help the “poor” people of Ukraine by plunging them into a bloody civil war, he’s still keen to express the proper deference to ethics, the law, and “that kind of stuff“: 

  “I was asked to do it both by Ukraine and Saakashvili and I said I would be inclined to do it, but I said I needed to look at all the nuances of it, whether it’s legal under our ethics and all that kind of stuff.”

  We’re sure the makeup of this new “advisory council” will do wonders to promote peace in Eastern Europe. And as if on cue (via Bloomberg just hours ago):

  Senate Armed Services Cmte approves bill on 22-4 vote, says Sen. Jack Reed, ranking Democrat on cmte.

   

  Bill would preserve A-10 close-air combat plane; authorizes arms to Ukraine, McCain says.

   

  

  

  

  
  
  

  

• Yet Another Chart That Whimpers "Recession"

  Submitted by Charles Hugh-Smith via OfTwoMinds blog,

  It's worthwhile recalling that mainstream economists, the Federal Reserve, government agencies and the mainstream financial media all deny the economy is in recession until it falls off a cliff. 

   

  Back in March I published unambiguously recessionary charts of new orders and per capita energy consumption: New Orders Look Recessionary (March 9, 2015)

   

  Why Is Per Capita Energy Consumption at Recession Levels After Six Years of Recovery?(March 10, 2015)

   

  Zero Hedge recently published an overview of charts that also spell recession: The US Is In Recession According To These 7 Charts.

   

  Mish has provided evidence that a recession has already started: Household Spending Growth Expectations Plunge; Recession Already Started?

   

  For those who want yet more quantitative evidence of recession, here is another chart, courtesy of longtime contributor B.C. This is a chart of the Chicago Fed's National Financial Conditions Index (NFCI):

   

  Because U.S. economic and financial conditions tend to be highly correlated, we also present an alternative index, the adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on financial conditions relative to current economic conditions.

   

  The chart also displays the spread between Baa-rated corporate bond yields (Baa bonds are just above junk bonds, which are typically rated BB or lower) and 10-year Treasury bond yields.

   

  Widening spreads between corporate bonds and Treasuries are associated with recessions, as are ANFCI readings above zero. The current reading is .20, a level that correlates to deteriorating financial conditions and the early stages of recessions.

   

  The more dependent the economy is on financialization, the greater the impact of deteriorating financial conditions. To a large degree, the U.S. economy's apparent strength is an illusion based on extremes of financialization: rampant Fed monetization of Treasury debt and mortgages, extremes of leverage and speculation that have inflated asset bubbles that have created a wealth effect that is limited to the top 10% of households, and is highly concentrated in the top .01% of households.

   

  How Wall Street Devoured Corporate America.

   

  

   

  Here is the ANFCI and the Fed Funds rate, which has been near-zero for years. What can we say about an economy that requires zero-interest rates as the New Normal? How can anyone claim this is a healthy, robust economy if tepid expansion depends entirely on unprecedented zero rates, unprecedented Federal Reserve monetization/asset purchases and a highly asymmetric wealth effect that has widened income and wealth inequality?

   

  

   

  At this juncture, it's worthwhile recalling that mainstream economists, the Federal Reserve, government agencies and the mainstream financial media all deny the economy is in recession until it falls off a cliff. Only after a recession can no longer be denied will the organs of propaganda concede that the economy is indeed mired in a recession.

   

  When the organs of propaganda finally concede that the economy is in recession, they inevitably fight the last war: whatever worked in the past is repeated, even though the next recession will be an entirely new financial battlefield. Repeating what worked in late 2008-early 2009 will fail, and fail catastrophically, because conditions have changed.

  

  

  
  
  

  

• Caught In The Act: Government Hackers

  But… what difference does it make…

   

  

   

  Source: Townhall

  

  

  
  
  

  

• Miami Beach Cops Caught Exchanging 100s Of Racist, Pornographic Emails

  Just as race relations in America leave the front-pages for a day – as the news cycle briefly and sadly focuses on Amtrak – Miami Beach police department drags the nation back into debate. According to Miami-Dade State Attorney Katherine Fernandez Rundle, more than a dozen Miami Beach Police officers exchanged numerous racist and pornographic emails. "This is a very sad day for Miami Beach," Mayor Levine concluded, after Rundle explained that the officers are involved in 540 cases, with about 30% of them involving black defendants.

   

  Coming just months after four Fort Lauderdale Police officers lost their jobs over a racist video and racist text messages (where dozens of cases linked to those officers have been dropped), NBC Miami reports,

  "Minorities and women were being demeaned in these emails that were sent between the officers, nude photographs were passed around and emails portraying offensive sexual acts were disseminated," Fernandez Rundle said.

   

  Prosecutors are reviewing the cases of 16 officers who sent or received the emails, Fernandez Rundle said.

   

  The officers are involved in 540 cases, with about 30 percent of them involving black defendants.

   

  "Our job and our commitment is to ensure that we will do everything that we can to make sure that we do not prosecute cases that have been tainted by racial prejudice and racial insensitivity," Fernandez Rundle said.

   

  Chief Oates said the major senders of the emails were a major who left the department in July and a captain who had been demoted and was fired Thursday morning.

   

  "This is a very sad day for Miami Beach," Mayor Levine said. "I can assure the public that we've made all the necessary steps, and will continue to do so, because situations like this we will never sweep under the rug."

   

  According to Oates, most of the material was sent between 2010 and 2012. Oates joined the department in June 2014 and found out about the material in July 2014.

  About one million emails were examined and about 230 were found to be offensive, Oates said. Hundreds of pornographic images were given to the National Center for Missing and Exploited Children to ensure none of the images were of minors, Oates said.

  

  

  

  

  

  m Bpd Racist Emails

  *  *  *

  As Chief Oates concludes, "at the very top, there was a tolerance for bad behavior," placing the blame on his predecessor, former Police Chief Ray Martinez who, as MiamiNewTimes reports, retired last year and took a cushy gig as the head of security for Ultra Music Festival.

  

  

  
  
  

  

• Market Melts Up To Record Highs, Bonds & Bullion Bid

  Record Highs… why the f##k not!!

  Before we get started, this…WTF!!

  

   

  OK – having got that idiocy off our chest. It is OPEX tomorrow, BATS Options and NYSE Arca broke this morning and volume was terrible… so what more do you expect than this!

  

   

  It seems pretty clear that there is only one thing that matters now… keeping The Dow in positive territory for 2015…

  

   

  Can central bank buying of ES today push the S&P to record highs?

  — zerohedge (@zerohedge) May 14, 2015

   

  VIX banged back under 13… (it has the 'give the market the finger' pattern to it)

  

   

  And the gap open cash markets did not look back..

  

   

  On the week, Trannies weak – rest all green again now…

  

   

  Bonds & Stocks decoupled today…(or recoupled with the old normal)

  

   

  Bonds rallied on the day but Treasury yields majorly diverging on the week – 2Y -2bps, 30Y +16bps!

  

   

  Curves are different for now…

  

   

  The USDollar retraced its early losses to end the day almost unchanged – USDJPY absolutely dead.

  

   

  Crude and copper slipped lower as precious metals boomed once again today…

  

   

  Crude closed back below $60…

  

   

  But it was gold & Silver that really ripped again

  

   

  Wheat soared… its biggest day in almost 6 months…

  

   

  Charts: Bloomberg

  Bonus Chart: AVP WTF

  

   

  Bonus Bonus Chart: SHAK Shook

  

  

  
  
  

  

• President Obama Explains How Well The Meeting With Persian Gulf "Allies" Went – Live Feed

  This should be good… as we explained earlier, analysts have pointed to a growing rift between the Obama administration and the Gulf’s Sunni states over the emerging nuclear deal with Iran as a chief reason for the snub, though the Saudi king, as well as his Bahraini counterpart, have denied such assertions.

   

  “An excellent summit,” says Pres Obama of his talks today with Persian Gulf leaders at Camp David. pic.twitter.com/0UQMHFHw3E

  — Mark Knoller (@markknoller) May 14, 2015

   

  President Obama Q&A due to start around 1730ET…(after a statement)

  

  

  
  
  

  

• Ray Dalio: "If You Don't Own Gold, You Know Neither History Nor Economics"

  Bridgewater's Ray Dalio explains in under 120 seconds why everyone should allocate some of their portfolio to gold:

  "If you dont own gold…there is no sensible reason other than you dont know history or you dont know the economics of it…"

   

  Of course, few 'status quo' believers will pay heed to the $150 billion AUM fund manager, despite his imploring everyone that to be successful, one must "Think Independently, Stay Humble"

  

  

  
  
  

  

• Even The FDIC Admits It's Not Ready For The Next Banking Crisis

  Submitted by Simon Black via Sovereign Man blog,

  We have entered a most bizarre and unprecedented age in the financial system where there’s risk in just about everything that we do.

  Indiscriminately investing in stocks at their all-time highs carries enormous risk, and financial history is unkind to people who fail to learn that lesson.

  To buy bonds, on the other hand, means loaning money to insolvent governments at rates that are either below inflation or even outright negative.

  Real estate markets in many parts of the world are right back at the frothy highs they experienced prior to the last financial crisis.

  And if Pablo Picasso is any indicator, even an asset class like fine art is booming at all-time highs.

  The normal approach in an era of so much financial risk would be to do nothing; gather your capital, sit on the sidelines, and wait for a crash.

  Yet now the act of doing nothing and holding your money in a bank also brings an orgy of risk.

  Most banks in the West are extremely illiquid, and are in many cases insolvent. But few people ever give thought to the financial condition of their bank.

  In the United States, for example, people are indoctrinated almost from birth that banks are safe and somehow infallible.

  Banks inter themselves in the most expensive locations with ornate lobbies and cornerstones that proudly inform the world they are backed by the full faith and credit of the United States government.

  But that barely counts given that the US government is itself insolvent with a negative equity of minus $17.7 trillion according to their own financial statements.

  Then there’s the FDIC, which insures deposits in the US banking system.

  In its 2014 annual report the FDIC itself points out that its whole insurance fund constitutes just a fraction of a percent of all deposits in the system, and that its ‘reserve ratio’ is just 1.01%.

  With a reserve so low, the FDIC not only lacks any meaningful teeth to insure the system, but it actually fails to meet the minimum level that is required by law.

  This quasi-government regulatory agency fails to meet the government regulatory requirement and is in worse shape than the banks that it’s supposed to insure.

  Perhaps even more important, the FDIC doesn’t expect to meet this statutory minimum until at least 2020.

  To me this begs an obvious question. Do we really have another 5+ years before there’s another major crisis in the US banking system?

  Most US banks today are just as illiquid as they were before the crisis, holding just a tiny portion of deposits in reserve and gambling away the rest.

  And the most popular place that they invest their customers’ deposits today is exactly the same as in 2008: mortgage-backed securities.

  Curiously, the FDIC’s reserves today are actually far lower than they were prior to the crisis.

  On top of that, back then the FDIC only insured $100,000 worth of your deposits per financial institution. Now it’s $250,000.

  So essentially the FDIC is on the hook to pay more than twice as much money to depositors. Yet it has a lower reserve to support an even larger system that is up to the same precarious practices as before.

  This doesn’t exactly inspire confidence.

  But don’t take my word for it.

  In a recent announcement, the FDIC tells us how banks have grown far larger and even more complex since 2008, and that “[s]uch trends have not only continued, they accelerated as a result of the crisis.”

   

  The FDIC goes on to suggest that its current tools and business model are “not sufficient to mitigate the complexities of large institution failures.”

   

  But even though they’re not equipped to handle it, they’re not entirely sure what to do.

   

  That’s why the FDIC is “seeking comment on what additional regulatory action should be taken. . .”

   

  In other words, they’re asking the public for suggestions about how to handle a major US bank failure. Hardly encouraging.

  Bottom line– your bank is potentially in the same boat it was in 2008. The FDIC is worse off. And the federal government is totally insolvent.

  These are not risks you should assume away. Give great care to the decision of where you hold your savings.

  And definitely look abroad.

  There’s an entire laundry list of offshore banks that are in great financial condition and located in strong, stable foreign countries.

  It’s hard to imagine that you’ll be worse off for holding a portion of your savings in a country with no debt at a healthy bank that’s 5x more capitalized and 10x more liquid than where you currently bank.

  

  

  
  
  

  

• "Obama's Tax-The-Rich Plan Is Futile" Druckenmiller Warns, America's Aging Population Is A "Massive, Massive Problem"

  "Young people are not going to be talking about cutting back," exclaims billionaire hedge fund manager Stanley Druckenmiller, ominously concluding "there will be nothing to cut back." The reason he is so doom-full about the future – an aging population will present a "massive, massive problem" for the U.S. in 15 years – as Bloomberg reports, because of demographics, "we're just using more and more of society’s resources to fend for the old people," warning that Obama's plans to tax the rich to pay for more social services for the poor would be futile.

  “We’re going to go from five workers of working age supporting every elderly person to two and a half because of demographics,” said Druckenmiller.

   

  “We’re just using more and more of society’s resources to fend for the old people.”

  As Bloomberg reports, Druckenmiller, 61, has argued for several years that the mushrooming costs of Social Security, Medicare and Medicaid will bankrupt the nation’s youth and eventually result in a crisis worse than the financial meltdown of 2008. The government will have to reduce payments to the elderly, he said at the event.

  …an aging population will present a “massive, massive problem” for the U.S. in 15 years.

   

  “The young people are not going to be talking about cutting back,” Druckenmiller said Wednesday night in New York at an event hosted by Addepar, a technology company that provides software to financial advisers, fund managers and family offices. “There will be nothing to cut back.”

  *  *  *

  Druckenmiller also had some comments on the share buyback debacle in US equity markets…

  Druckenmiller criticized companies for borrowing money to pursue corporate buybacks.

   

  “I think it’s nuts,” he said. “If you’re running a business for the long term, the last thing you should be doing is borrowing money to buy back stock.”

  Finally, Druckenmiller concludes,

  President Barack Obama’s proposals to tax the rich to pay for more social services for the poor would be futile.

   

  “That’s not where the money is,” he said, instead pointing to spending on entitlements.

  But then again – when did futility stop the governmenmt?

  

  

  
  
  

  

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