Today’s News May 7, 2015

• When The Elites Wage War On America, This Is How They Will Do It

  Submitted by Brandon Smith via Alt-Market.com,

  The consequences and patterns of war, whether by one nation against another or by a government against the citizenry, rarely change. However, the methods of war have evolved vastly in modern times. Wars by elites against populations are often so subtle that many people might not even recognize that they are under attack until it is too late. Whenever I examine the conceptions of “potential war” between individuals and oligarchy, invariably some hard-headed person cries out: “What do you mean ‘when?’ We are at war right now!” In this case, I am not talking about the subtle brand of war. I am not talking about the information war, the propaganda war, the economic war, the psychological war or the biological war. I am talking about outright warfare, and anyone who thinks we have already reached that point has no clue what real war looks like.

  The recent exposure of the nationwide Jade Helm 15 exercise has made many people suspicious, and with good reason. Federal crisis exercises have a strange historical tendency to suddenly coincide with very real crisis events. We may know very little about Jade Helm beyond government admissions, claims and misdirections. But at the very least, we know what “JADE” is an acronym for: Joint Assistance for Deployment and Execution, a program designed to create action and deployment plans using computer models meant to speed up reaction times for military planners during a “crisis scenario.” It is linked with another program called ACOA (Adaptive Course of Action), the basis of which is essentially the use of past mission successes and computer models to plan future missions. Both are products of the Defense Advanced Research Projects Agency (DARPA).

  As far as I know, no one has presented any hard evidence as to what “HELM” really stands for, but the JADE portion of the exercise explicitly focuses on rapid force deployment planning in crisis situations, according to the government white paper linked above. This fact alone brings into question statements by the Department of Defense that Jade Helm is nothing more than a training program to prepare military units for “foreign deployment.” This is clearly a lie if Jade Helm revolves around crisis events (which denotes domestic threats), rather than foreign operations.

  Of course, if you also consider the reality that special operations forces ALWAYS train like they fight and train in environments similar to where they will fight, the entire notion of Jade Helm as a preparation for foreign theaters sounds absurd. If special operations forces are going to fight in Iraq, Iran or Syria, they go to training grounds in places like Kuwait. If they are training in places like Fort Lauderdale, Florida (including “infiltration training”), then there is no way around the fact that they are practicing to fight somewhere exactly like Fort Lauderdale with a similar culture and population.

  I would further note that Jade Helm exercises are also joint exercises with domestic agencies like the FBI and the DEA.  Again, why include domestic law enforcement agencies in a military exercise merely meant to prepare troops for foreign operations?  I often hear the argument that the military would never go along with such a program, but people who take this rather presumptive position do not understand crisis psychology.  In the event of a national catastrophe many military personnel and government employees may determine that they will do what is "best for them and their families".  And if following orders guarantees the security of their families (food security, shelter, etc), then they may very well follow any order, no matter how dubious.  Also, a large scale crisis could be used as a rationale for martial law; otherwise well meaning military men and women could be convinced that the loss of constitutional freedoms might be for the "greater good of the greater number".  I believe some military will indeed resist such efforts, but of course, Jade Helm may also be a method for vetting such uncooperative people before any live operation occurs.

  So if Jade is actually a crisis-planning system for the military and the military is training for domestic operations, what is the crisis it is training to react to? It’s hard to say. I believe it will come down to an economic disaster, but our economic and social structures are so weak that almost any major event could trigger collapse. Terror attacks, cyberattacks, pandemic, a stiff wind, you name it. The point is the government expects a crisis to occur. And with the advent of this crisis, the ultimate war on the American people will begin.

  Why wait for a crisis situation? With the cover of a crisis event, opposition to power is more easily targeted. For my starting point on the elite war strategy, I would like to use the following presentation on guerrilla warfare by Max Boot, Council on Foreign Relations senior fellow and military adviser, at the elitist World Affairs Council.

  I would first point out that Boot claims his work is merely a historical character study of interesting figures from the realm of insurgency and counterinsurgency and is not “polemical.” I’m afraid that I will have call horse hockey on that. Boot is direct adviser to the Department of Defense. His work and this presentation were obviously a study of guerrilla tactics from the perspective of counterinsurgency and an attempt to explore strategic methods for controlling and eradicating guerrillas and “terrorists.”

  Any defense the American people might muster against elitist dismantling of constitutional liberties would inevitably turn to "insurgency". So using CFR member Boot’s views on counterinsurgency as a guideline, here is how the elites will most likely wage open war on those within the American population who have the will to fight back.

  Control Public Opinion

  Boot stresses the absolute necessity for the control of public opinion in defeating an insurgency. Most of his analysis is actually quite accurate in my view in terms of successes versus failures of guerrilla movements. However, his obsession with public opinion is, in part, ill-conceived. Boot uses the American Revolution as a supposed prime example of public opinion working against the ruling powers, claiming that it was British public opinion that forced parliament and King George III to pull back from further operations in the colonies.

  Now, it is important to recognize that elitists have a recurring tendency to marginalize the success of the American Revolution in particular as being a “fluke” in the historical record. Boot, of course, completely overlooks the fact that the war had progressed far longer than anyone had predicted and that the British leadership suffered under the weight of considerable debts. He also overlooks the fact that pro-independence colonials were far outnumbered by Tories loyal to the crown up to the very end of the war. The revolution was NEVER in a majority position, and public opinion was not on the revolutionaries’ side.

  The very idea of the American Revolution is a bit of a bruise on the collective ego of the elites, and their bias leads them to make inaccurate studies of the event. The reality is that most revolutions, even successful ones, remain in a minority for most, if not all, of their life spans.  The majority of people do not participate in history.  Rather, they have a tendency to float helplessly in the tides, waiting to latch onto whatever minority movement seems to be winning at the time.

  Boot suggests that had the Founding Fathers faced the Roman Empire rather than the British Empire, they would have been crucified and the rebellion would have immediately floundered because the Romans had no concern for public opinion. This is where we get into the real mind of the elitist.

  For now, the establishment chooses to sway public opinion with carefully crafted disinformation. But what is the best way to deal with public opinion when fighting a modern revolution? Remove public opinion as a factor entirely so that the power elite are free to act as viciously as they wish. Engineered crisis, and economic crisis in particular, create a wash of other potential threats, including high crime, looting, riots, starvation, international conflict, etc. In such an environment, public opinion counts for very little, if people even pay attention at all to anything beyond their own desperation. Once this is achieved, the oligarchy has free reign to take morally questionable actions without fear of future blowback.

  Control The Public

  Another main tenet Boot describes as essential in defeating insurgency is the control of the general population in order to prevent a revolution from recruiting new members and to prevent them from using the crowd as cover. He makes it clear that control of the public does not mean winning the “hearts and minds” in a diplomatic sense, but dominating through tactical and psychological means.

  He first presents the example of the French counterinsurgency in Algeria, stating that the French strategy of widespread torture, while “morally reprehensible,” was indeed successful in seeking out and destroying the insurgent leadership. Where the French went wrong, however, was their inability to keep the torture campaign quiet. Boot once again uses the public opinion argument as the reason for the eventual loss of Algeria by the French.

  What Boot seems to be suggesting is that systematic torture is viable, at least as a hypothetical strategy, as long as it remains undetected by the overall public. He also reiterates this indirectly in his final list of articles for insurgency and counterinsurgency when he states that “few counterinsurgencies (governments) have succeeded by inflicting mass terror, at least in foreign lands,” suggesting that mass terror may be an option against a domestic rebellion.

  Boot then goes on to describe a more effective scenario, the British success against insurgents in Malaya. He attributes the British win against the rebellion to three factors:

  1)  The British separated large portions of the population, entire villages, into concentration camps, surrounded by fences and armed guards. This kept the insurgents from recruiting from the more downtrodden or dissatisfied classes. And it isolated them into areas where they could be more easily engaged.

  2)  The British used special operations forces to target specific rebel groups and leadership rather than attempting to maneuver through vast areas in a pointless Vietnam-style surge.

  3)  The British made promises that appealed to the general public, including the promise of independence. This made the public more pliable and more willing to cooperate.

  Now, I have no expectation whatsoever that the elites would offer the American public “independence” for their cooperation in battling a patriot insurgency, but I do think they would offer something perhaps more enticing: safety.

  I believe the British/Malayan example given by Boot would be the main methodology for the elites and the federal government in the event that a rebellion arises in the U.S. against planned shifts away from constitutional republic or martial law instituted in the wake of a national emergency.

  Isolate Population Centers

  There is a reason why certain American cities are being buried in technologically sophisticated biometric surveillance networks, and I think the Malayan example holds the key. Certain cities (not all) could be turned into massive isolated camps, or “green zones.” They would be tightly controlled, and travel would be highly restricted. Food, shelter and safety would likely be offered, after a period of disaster has already been experienced. A couple months of famine and lack of medication to the medically dependent would no doubt kill millions of people. Unprepared survivors would flock to these areas in the hopes of receiving aid. Government forces would confiscate vital supplies in rural areas whenever possible in order to force even more people to concentrate into controlled regions.

  I have seen the isolation strategy in action in part, during the G20 summit in Pittsburgh. More than 4,000 police and National Guard troops locked down the city center, leaving only one route for travel. The first day, there were almost no protesters; most activists were so frightened by the shock-and-awe show of force that they would not leave their homes. This is the closest example I have personally experienced to a martial law cityscape.

  Decapitate Leadership

  The liberty movement has always been a leaderless movement, which makes the “night of long knives” approach slightly less effective. I do not see any immediate advantage to the elites in kidnapping or killing prominent members of the movement, though that does not mean they will not try it anyway. Most well-known liberty proponents are teachers, not generals or political firebrands. Teachers leave all their teachings behind, and no one needs generals or politicians. The movement would not necessarily be lost without us.

  That said, there is a fear factor involved in such an event. The black-bagging of popular liberty voices could terrorize others into submission or inaction. This is why I constantly argue the need for individual leadership; every person must be able and willing to take individual action without direction in defense of his own freedoms, if the need arises. Groups should remain locally led, and national centralization of leadership should be avoided at all costs.

  According to the very promoters of Jade Helm exercises, training will center on quick-reaction teams striking an area with helicopter support, then exfiltrating within 30 minutes or less. Almost every combat veteran I have spoken with concerning this style of training has said that it is used for “snatch and grab” — the capture or killing of high value targets, then exfiltration before the enemy can mount a response.

  Fourth-Generation Warfare

  The final method for war against the American people is one Boot does not discuss: the use of fourth-generation warfare. Some call this psychological warfare, but it is far more than that. Fourth-generation warfare is a strategy by which one section of a population you wish to control is turned against another section of the population you wish to control. It is warfare without the immediate use of armies. Rather, the elites turn the enemy population against itself and allow internal war to do most of their work for them. We can see this strategy developing already in the U.S. in the manipulation of race issues and the militarization of police.

  The use of provocateurs during unrest in places like Ferguson, Missouri, and Baltimore suggests that a race war is part of the greater plan. I believe law enforcement officials have also been given a false sense of invincibility. With military toys and federal funding, but poor tactical philosophies and substandard training, LEOs are being set up as cannon fodder when the SHTF. Their inevitable failure will be used as a rationalization for more domestic military involvement; but in the meantime, Americans will be enticed to fight and kill each other while the elites sit back and watch the show.

  4th Gen warfare also relies on fooling the target population into supporting measures that are secretly destructive to the people.  For example, liberty movement support for controlled opposition such as Russia or China, or liberty support for a military coup in which the top brass are elite puppets just like the Obama Administration. Think this sounds far fetched?  It has already happened in our recent history!  Marine Corp Major General Smedley Butler was hired by corporate moguls to lead a paid army in a coup against Franklin D. Roosevelt (also an elitist puppet) in 1933.  Butler luckily exposed the conspiracy before it ever got off the ground.  Both sides were controlled, but the coup if successful could have resulted in popular support for the expedient erosion of the Constitution, rather than a slow erosion which is what took place.  This is the epitome of 4th Gen tactics – make the people think they are winning, when they are actually helping you to defeat them.

  Know Thy Enemy

  I have outlined the above tactics not because I necessarily think they will prevail, but because it is important that we know exactly what we are dealing with in order to better defend ourselves. Such methods can be countered with community preparedness, the avoidance of central leadership, the application of random actions rather than predictable actions, etc. Most of all, liberty champions will have to provide a certain level of safety and security for the people around them if they want to disrupt establishment efforts to lure or force the population into controlled regions. Crisis is the best weapon the elites have at their disposal, and exercises like Jade Helm show that they may use that weapon in the near term. The defense that defeats crisis is preparation — preparation not just for yourself, but for others around you. War is coming, and while we can’t know the exact timing, we can assume the worst and do our best to be ready for it as quickly as possible.

  

  

  
  
  

  

• China To Establish Yuan-Denominated Gold Fix In Bid To Upend London Benchmark

  A long time ago, in a financial galaxy far, far away, a “fringe” blog raised the topic of gold market manipulation during the London AM fix. Several years later (which, incidentally, is about average in terms of the lag time between when something is actually going on and when the mainstream financial media finally figures it out and reports on it), it was revealed that in fact, shenanigans were likely afoot and indeed, regulators are still trying to sort out what happened. 

  Via WSJ earlier this year:

  The precious-metals probes are the latest example of regulatory scrutiny into how the world’s biggest financial institutions influence widely used benchmarks. Until last year, prices for gold, silver, platinum and palladium were set using a decades-old practice of once- or twice-a-day conference calls between a small group of banks. The process for setting each of the price “fixes” has since been overhauled…

   

  Last year, the FCA fined Barclays £26 million ($40.2 million) for lax controls after one of its traders allegedly manipulated the gold fix at the expense of a client…

   

  Swiss regulator Finma settled last year allegations of foreign-currency manipulation with UBS. The regulator said it found “serious misconduct” among precious-metals traders at UBS, including “front running,” or trading ahead of, the silver-fix orders of one client…

   

  More than 25 lawsuits have been filed against Barclays, Deutsche, HSBC, Bank of Nova Scotia and Société Générale over their alleged role in setting the gold fix. 

  The ‘fix’ for the ‘fixed’ gold fix (only in the world of corrupt high finance is such a hilariously absurd passage possible) is supposedly a new system whereby the fixings are derived electronically, but as Reuters notes, there’s a new kid on the block when it comes to benchmarking the price of gold. Here’s more:

  China conducted trial runs for the planned launch of a yuan-denominated gold fix last month, three sources familiar with the matter said, in a sign the world’s second-biggest bullion consumer was moving closer to creating a benchmark price.

   

  The state-run Shanghai Gold Exchange (SGE), on whose international platform the fix will be launched, conducted the trial with major Chinese banks and a few foreign banks, the sources said this week…

   

  China plans to launch a yuan gold fix this year through trading of a 1 kg contract on the SGE, Reuters reported in February.

   

  “The launch of the fix is towards the end of the year … Banks were invited in April to test the fixing process,” said one of the sources directly involved in the process.

   

  The SGE will act as the central counterparty, unlike the London fix where the bullion banks settle trades amongst themselves, the source said.

   

  If the Chinese fix becomes a success, it could add to the pressure on the London benchmark, which is used worldwide by producers, refiners and central banks to price holdings and contracts, although the two could exist side-by-side.

  The ironic conclusion: the currency ‘manipulating’, GDP fabricating, soon-to-be global superpower is now set to challenge the century-old gold price fixing regime which is under fire for being just as corrupt as every other ‘benchmark’ has proven to be since we first suggested that LIBOR was rigged some six years ago. But don’t worry: China promises that yuan hegemony is not something Beijing is interested in establishing.

  

  

  
  
  

  

• The Complete UK Election Preview

  The UK General Election will be held tomorrow. The polls close at 10 pm. We should have a pretty clear picture of the overall seat count by 5 to 6 am on Friday morning. The result, as SocGen notes, is almost certain to be a hung parliament.

  Then the fun will really start.

  The leader of the incumbent Conservative/ Liberal Democrat coalition (David Cameron) stays in power until or unless it becomes clear that he does not have the ability to form a new government. Most polls are showing that the Conservatives will win the most seats but fall far short of an absolute majority. That will then lead to a contest between them and the Labour party to negotiate with the other parties to form some type of formal or informal coalition. The first test of the new government will be the vote on its legislative programme which is then presented in the Queen’s speech (tentatively scheduled for 27 May). That vote should be in the early part of June.

   

  The main concern for the markets should be whether or not a Conservative-led coalition is formed that is sufficiently supportive of the Conservative’s plans to allow them to hold the promised Brexit referendum by the end of 2017.

  Here are the possible outcomes (along with SocGen's probabilities)…

  

   

  As a reference, here are 2010's results:

  

   

  And here are the key features of tomorrow's election relative to that result…

  1) A reduction in Conservative seats and an increase in Labour seats;

   

  2) A major fall in support for the Liberal Democrats who could easily see the number of seats won fall to less than 30;

   

  3) A surge in the SNP seats from 6 to maybe even more than 50;

   

  4) The poor performance of the UKIP (UK Independence Party), despite its heavy influence on Conservative party policy in recent years. As the chart above shows, they won NO seats in 2010. They currently have two seats as a result of defections from the Conservative party but they will be lucky to win even one more seat than that. So, in the absence of the most unlikely outcome of the Conservatives being only one or two seats short of a stable government, UKIP would have no role in the formation of the next government.

  The opinion polls show Conservative and Labour to be neck and neck

  

   

  SocGen concludes, there is a real choice between the broad fiscal plans of the Conservative and Labour parties.

  Labour would cut the deficit more slowly to allow a higher level of net investment than the Conservatives plan. That is a defensible position, worthy of debate at a time when financing costs are at record lows.

   

  However, the key point for the markets is that both major parties have plans to continue austerity at a pace that would satisfy the markets. Certainly, the Labour party has been accused of being anti-big business but that is something that, if true, would only have a gradual impact on the economic future of the UK.

   

  

   

  More immediately worrying for the financial markets would be if the Conservatives were able to construct a form of coalition that allowed them to deliver the promised Brexit referendum by the end of 2017. That would create lasting uncertainty that could damage business and investor confidence.

  Deutsche Bank believes UK politics alone are unlikely to derail the recovery or meaningfully change foreign appetite for UK assets, in the short term at least and lays out 7 predictions for post-election UK…

  Rather than try to guess the outcome, however, in this note we make a few broad brush predictions about what the post-election UK will look like for investors. Our conclusion is that while the politics is extremely uncertain, the policy mix may undergo less rather than more change. Politics alone are unlikely to derail the recovery or meaningfully change foreign appetite for UK assets, in the short term at least.

   

  

   

  For GBP, once the initial uncertainty over government formation has passed, the focus should quickly turn back to the monetary policy outlook. On that front, we still see the risks lying in earlier rate cuts from the Bank of England than the market expects. For this reason we see value in using election uncertainty as an opportunity to position into EUR/GBP shorts.

   

  Prediction #1: Fiscal policy will be easier, but the deficit will fall
  At the Budget in March, forecast tightening over the next five years fell from 5.5% GDP to 4.4% as the coalition abandoned its goal of a GBP 23bn surplus by 2019-20, but the next two years were still projected to be roughly as austere as at the start of the coalition.1 After the election, there is reason to think this may change.

   

  In the first place, Labour policy is less tight than implied by current forecasts. As the IFS notes, the party’s plans mean only moderate reductions in departmental spending may be required. Under the increasingly likely probability the SNP holds influence over the next parliament, policy could be easier still. The party currently advocates rises of 0.5% public spending in real terms. Note that even under SNP plans, Treasury analysis suggests that the deficit would continue to fall.3 If the Conservatives were to remain in office, current forecasts may not materialize. The party eased off austerity in the middle of the last parliament as growth suffered, and there are question marks over where additional cuts implied by their deficit plans will come from. The party may also be helped by the improving growth outlook. Receipts have started to improve in recent months, and the OBR’s current growth projections are on the pessimistic side of official forecasters. In sum, and as our economist has noted, it may be helpful to look through the very noisy political debate on the deficit, and focus instead on the underlying improvement in the public finances. This has important implications for sterling, because the Bank of England’s inflation and growth projections as of the February Inflation Report are currently predicated on the very austere fiscal path outlined in the December Autumn Statement. Easier fiscal policy should provide the bank with more scope for monetary tightening.

   

  Prediction #2: There will be no fiscal crisis, whatever the outcome
  Even if fiscal policy were loosened, there seems little chance of a fiscal crisis. In the first place, the structural deficit has halved over the last five years. Perhaps more importantly, the markets’ understanding of fiscal risks has moved on since 2010, when a genuine loss of investor confidence in the UK finances was arguably on the cards. As the Eurozone crisis has shown, debt and deficits are much more relevant when countries lack an independent monetary policy. A lack of market concern is reflected in credit spreads, which remain at pre-crisis lows. Third, the external environment is very favorable for UK assets. The ECB’s QE program had driven yields of core fixed income negative across the curve. One of the obvious beneficiaries should be the UK. The spread between 10-year UK and German yields is currently the widest on record. Today’s Bank of England data showed massive (GBP 26bn) foreign buying of gilts in March, more than reversing outflows in the first two months of the year.

   

  Prediction #3: The UK will remain one of the most attractive destinations for foreign investment
  The last few years have been very positive for foreign investment. FDI inflows to the UK have totaled over 8% of GDP since the fourth quarter of 2012, financing around half of the current account deficit. The policy mix has played an important role. The corporation tax rate has fallen from 28% to 21% over the last five years, seeing the UK leapfrog above every OECD country save Switzerland in terms of corporate tax competitiveness. On the margin, a Labour-led administration would imply a moderately less positive investment climate than a Conservative one, but the policy mix is not set for wholesale change. The party favors keeping the corporation tax rate at its current low level (against another 1% cut proposed by the Conservatives). We doubt that other Labour party policies such as a mansion tax, changes to the non-domicile status of taxpayers and rises in the top rate of income tax, will result in a foreign exodus. Significant changes to the tax treatment of non-doms and foreign purchases of UK property were made by the current coalition government over the last five years with no apparent effect on foreign investors’ appetite for UK assets.

   

  Prediction #4: A new Scottish referendum won’t happen anytime soon
  Last year’s Scottish independence referendum generated panic among investors as it became apparent that a ‘yes’ vote was a real possibility, with potentially destabilizing consequences for the UK banking system and economy. But even if the SNP were to hold the balance of power after the next election, it seems unlikely that a new referendum would materialize soon. The party made no mention of another referendum in its manifesto released earlier this month. This should not be surprising – recent polling suggests that the issue ranks extremely low on Scottish voters’ priorities. Even if the SNP wished to reintroduce the question over the next five years, the party’s leverage over a future Labour government may be overestimated (see Prediction #6). A more likely date for the issue to be reintroduced is after the Scottish parliamentary elections in May next year, assuming the SNP holds on to its majority in the Scottish parliament. But it is also worth pointing out that a future referendum would likely be less destabilizing than last year’s events. Precisely because of uncertainty in September, authorities and businesses are now much better informed about the risks of a Scottish exit, particularly with respect to risks concerning the banking sector.

   

  Prediction #5: An EU referendum may be good for the UK economy
  Under the Conservatives, a referendum on the UK’s membership in the European Union would likely be held before 2017 following a renegotiation of the UK’s terms of membership. A ‘Brexit’ could have severe consequences for UK growth performance and foreign investment, and the potential impact on business confidence leading into a referendum has been widely noted.6 Less commented on, however, are the potential benefits that a renegotiation could bring to the British economy. As our economists have argued, the UK is uniquely placed to benefit from reforms to the EU Single Market and the Department for Business Innovation and Skills has estimated that the potential gains for British exports could add up to 7% GDP.7 A referendum may be an ideal bargaining chip for the UK to remodel aspects of the EU in its favor. Of course, this would depend on an ‘in’ vote, but polls currently suggest a majority in favor of staying in, particularly after a successful renegotiation.

   

  Prediction #6: A Labour minority government would be more stable than you might think
  If no party wins a majority next Thursday, the UK faces the prospect of a coalition or minority government. In the event that SNP support is required to pass legislation in the House of Commons, an increasingly probable outcome given the latest opinion polls in Scotland, the latter seems the more likely option. Labour has ruled out a formal deal with the nationalists. Some have argued that if the SNP held the balance of power, the result could be destabilizing, but the party’s leverage may be less than thought. Even if the SNP found Labour uncooperative on key policy issues, it would not be rational for them to bring down the government with a vote of no-confidence.

   

  

   

  This would cause a new election, a possible future Conservative government, and damaging Labour accusations that the SNP had voted down a ‘progressive’ administration (we outline the SNP’s options on a decision tree on the previous page). The party also looks set to perform exceptionally well next week, with some polls suggesting a near clean sweep of Labour’s seats. It is unclear why the party would want to risk these with a new election.

   

  Prediction #7: There may be less change rather than more
  Precisely because no party is likely to have enough seats for a majority, it is difficult to envisage sweeping changes to the policy mix. The last five years have seen the deficit cut in half, the employment rate reach a record high and UK growth accelerate above any other advanced economy. Major challenges remain, however. The current account deficit has reached a record, meaning much-vaunted ‘rebalancing’ has failed to occur. Productivity has also been the weakest among any G10 country. This has important implications for wage growth, which has been very slow relative to previous recoveries. Indeed, the current fracturing of the UK’s political environment can indirectly be attributed to imbalances in the labour market. Pollsters find that a key explanatory variable behind support for the UK Independence Party (UKIP), for example, is lack of a university degree. 8 It is unclear whether any major party has the solutions for these issues, but also doubtful that it will have the electoral resources. On the other hand, the doom-laden predictions of certain commentators are unlikely to materialize.

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  Finally, Goldman simplifies the decision process to three potential outcomes. While there is a whole range of potential outcomes to the May 7 election, each of the most likely governmental combinations falls into one of three broad groupings:

  1. A Conservative-led government (either on its own or in coalition with the LibDems). This is likely to be perceived as the most ‘market-friendly’ outcome, partly because it would come closest to maintaining the status quo and also because the Conservatives’ stated aim is to reduce the budget deficit through cutting current expenditure rather than by raising taxes. Set against this, the Conservatives’ commitment to hold a referendum on EU membership by 2017 and the increased risk of exit would likely be negative for investment spending and UK assets.

   

  2. A Labour-led government (either on its own, with the implicit support of the SNP, or in a formal coalition with the LibDems) would shift the balance of further fiscal adjustment away from spending cuts to tax increases. Labour’s proposals include: raising the top rate of income tax from 45% to 50%; raising the headline corporation tax rate from 20% to 21% (offset by measures designed to help small businesses); increasing the ‘Bank Levy’ on banks’ balance sheets, applying a second ‘one-off’ tax on bank bonuses, removing the non-domicile tax status and introducing a ‘Mansion Tax’ on residential properties worth more than £2 million. At the same time, a government of this complexion would be less likely to contemplate a referendum on Britain’s EU membership.

   

  Of the potential Labour-led government combinations, financial markets would likely respond more favourably to a Labour/LibDem coalition than to a minority Labour government supported by the SNP on a confidence and supply basis. (The Labour party has ruled out a formal coalition with the SNP.) In this scenario, concerns are likely to emerge that reliance on the SNP would pull the Labour government away from the centre to the left of the political spectrum, as well as raising the spectre of distributional policies favouring Scotland at the expense of the UK as a whole.

   

  3. It is also possible that there will be no clear outcome to the election. If no party (or coalition of parties) is able to form a stable government, a second election could be called shortly after the first or a minority government might attempt to struggle on. Again, the lack of clarity surrounding such an impasse would likely be damaging for UK growth and assets.

  *  *  *
  The Bottom Line is that at the macro level the implications of the election may be less pronounced than many anticipate. Monetary policy has been de-politicised through the Bank of England’s independence. Moreover, the formation of a coalition government is likely to involve convergence towards centrist positions, while a minority administration that pursues policies outside the mainstream would be unlikely to survive given its fragile parliamentary basis. In either case, the political system is unlikely to deliver radically different macroeconomic outcomes.

  Sources: Bloomberg, Goldman Sachs, Societe Generale, and Deutsche Bank

  

  

  
  
  

  

• Weak Dong Forces Vietnam Central Bank To Devalue Currency (Again)

  Having put off the decision to devalue the Vietnamese currency in March, the Dong has pressured the weaker limit (1% trading band) of the reference rate ever since. This has led to Vietnam’s central bank devaluing the dong reference rate to 21,673 (from 21,458) for the 2nd time this year. This is the softest the dong has ever been relative to king dollar, pushing them deeper into the currency wars.

  • *VIETNAM CENTRAL BANK DEVALUES DONG
  • *VIETNAM DEVALUES DONG REFERENCE RATE TO 21,673 PER DOLLAR

   

  

   

  As Bloomberg notes,

  The State Bank of Vietnam devalued the dong for the second time this year in a bid to spur exports and accelerate economic growth.

   

  The central bank weakened its reference rate by 1 percent to 21,673 dong per dollar. The Vietnamese currency is allowed to trade as much as 1 percent either side of the daily fixing, which was also cut by 1 percent on Jan. 7.

  Chart: Bloomberg

  

  

  
  
  

  

• Peter Schiff: The Embarrasment Of Fed Transparency

  Submitted by Peter Schiff via Euro Pacific Capital,

  Over the past decade or so, "transparency" has become one of the buzzwords that has guided the Federal Reserve's culture. The word was meant to convey the belief that central banking was best done for all to see in the full light of day, not in the murky back rooms of Washington and New York. The Fed seems to be on a mission to prove that its operations are benevolent, fair, predictable, and equitable. Part of that transparency movement took shape in 2007 when the Fed began publicizing its Gross Domestic Product (GDP) forecasts, which previously (to the frustration of investors) had been kept under wraps. Most of the Fed's policy moves are tied to how strong, or how weak, it believes the economy will be in the coming year. As a result, its GDP forecast is perhaps the single most important estimate it makes.

  So the good news for investors is that the Fed now tells us where it thinks the economy is headed. The bad news is it has been consistently, and sometimes spectacularly, wrong. Talk about the blind leading the blind.

  In the eight years that the Fed has issued GDP forecasts in the prior Fall, only once, in 2010, did the actual economic performance come in the range of its expectations (referred to as its "central tendency.") And even in that year, Fed forecasters did not manage to put the ball through the goal posts. Instead it just hit the upright (the low end of its range: 2.5% in actual growth vs. a central tendency of 2.5% to 3.5%). In all other years the Fed missed the mark completely on the downside. The tale of the tape tells the story:

  

  The biggest misses clearly came during the recession years of 2008 and 2009. The Fed clearly had no idea that trouble was brewing, or that the trouble would last once it started. In 2008 the actual growth came in 2.1% below the low end of its forecast range and 2.5% below the midpoint of its estimates. In 2009 it was 2.6% below the low end and 3.2% below the midpoint. 2011 wasn't much better, with the Fed missing by 1.4% and 1.7% for the same criteria. The rest of the years had more pedestrian misses of less than a percentage point. But it never really hit the mark, and it consistently overbid by a significant margin.

  And while we are only a few months into 2015, it doesn't look like they will be on target this year either.

  

  With first quarter growth at just a scant .2% annualized, the remaining three quarters of the year would have to average 3.4% annualized just to get to 2.6% for the full year (the low end of the Fed's range). Furthermore, the latest data, such as the spectacular increase of the trade deficit in March (to $51.4 billion, the largest month over month growth on record and the biggest monthly gap since the crisis month of October 2008), and today’s report showing the largest consecutive quarterly decline in productivity in more than 20 years, will likely force a downward revision to Q1 GDP. With April data looking even weaker than what was seen in February and March, a strong second quarter rebound, like the one seen in 2014, seems increasingly unlikely. In other words, good luck getting to 2.6%. But even if we do get there, it is no cause for celebration. 2.6% growth would be indicative of a struggling economy (recall that for the 20th Century, annual growth averaged well north of 3%).

  In the seven full years since the Fed brought rates to zero, and at times showered the markets with trillions of dollars of QE cash, GDP growth has averaged just 1.1%. Even stripping out the recession years of 2008 and 2009, to focus only on the five "recovery" years of 2010-2014, gives us an average GDP of 2.2%, a rate that has been below the central tendency every year. 

  So what do we make of this? Are Fed economists just horrible forecasters? And if so, why not hire others who more competent? Or is something more troubling going on? The most benign explanation is that they simply failed to anticipate a string of unfortunate events that have supposedly prevented a real recovery from taking hold. First it was the European debt crisis, then it was the high energy prices, then it was Syria, then Ukraine, then the Polar Vortex, then it was the low energy prices, then it was the European recession, the strong dollar, and then another bad winter. Apparently, unbeknown to Fed forecasters, the world is a tricky place fraught with economic, political and meteorological crises. But hasn't that always been the case?

  A more troubling possibility is that the Fed simply doesn't understand how its policy tools really impact the economy. It expects that zero percent interest rates and quantitative easing will stimulate aggregate demand, encourage consumers to spend and businesses to hire, thereby initiating a virtuous cycle that will propel the economy back to healthy growth. Since it believes its medicine will cure the patient, it builds a favorable outcome into its forecasts, which biases those forecasts in an upward direction. Based on that assumption, it's a bit of a headscratcher to the Fed as to why the economy has failed to deliver as expected. So cue the long litany of excuses.

  But what if that's not the way it works?  What if, as I have argued many times, that stimulus in the form of zero percent interest rates and QE bond purchases, act more like economic sedatives than stimulants? What if, as I have argued, that these crutches prevent an economy from finding the solid footing needed to build a real recovery? This would explain why we have failed to recover after seven years of policies expressly designed to spur recovery.

  A more sinister possibility is that the Fed is not really forecasting at all but cheerleading. The fact that all its forecasts have missed on the high side reveals that its misses may not be random. If the Fed were just wrong, one would expect some of its forecasts to be too low. An obvious explanation is that the Fed may be using its "forecast" to talk up the economy. By forecasting strong growth, the Fed may be hoping to engender optimism, with more spending and hiring hopefully to follow. Kind of like a field of dreams recovery — if the Fed forecasts it; it will come. Plus the Fed may be hesitant to issue a somber assessment of future growth even if it expects it, fearful that its forecasts become self-fulfilling as businesses and consumers cut back to reflect that forecast. If so, its economics "forecasts" would be in actuality just another policy arrow in its quiver, and should never be taken seriously.

  Another inconvenient fact that needs to be ignored in the string of GDP reports is the consistently low inflation numbers that the Fed uses. Remember, to get a sense of real growth, the bean counters need to subtract inflation from the nominal figures. Now I have always argued that the CPI itself has consistently underreported inflation, but I have also explained how the Fed's preferred gauge of inflation used in the GDP report, called the GDP deflator, is consistently lower than the CPI (a trend that goes back to 1977). But the GDP report for First Quarter 2015 really kicks that trend into another dimension.

  To arrive at the .2% annualized GDP estimate, the Fed assumed inflation was running at minus .1% annually (Bureau of Economic Analysis). With the exception of two quarters during the depths of the Great Recession (2nd and 3rd Quarters of 2009), we have to go all the way back to the First Quarter of 1952 to find a negative deflator (BEA). If positive inflation data had been used, growth in Q1 would have come in negative.

  Based on what we have seen thus far in the year, fantasies about a 2015 recovery should be evaporating. But, as of March 18, the Fed continues to hold to 2.5%-3.0% GDP forecasts and tangential assumptions that rate hikes will begin the second half of this year and will continue throughout next year. (A February 12th survey of economists by the Wall Street Journal shows a consensus 2.2% Fed Funds rate by year end 2016). With these assumptions baked into portfolio dispositions investors risk being caught wrong footed when the ugly truth is finally accepted.

  

  

  
  
  

  

• Two-Thirds Of Workers Plan To Fund Retirement With Inheritance, HSBC Finds

  With more than 80% of America’s non-farm workers laboring under non-existent wage growth, and with central bank policies serving not only to exacerbate the gap between the wealthy and everyone else while wiping out what’s left of the Middle Class in the process, but also creating conditions whereby pension funds are unable to meet their obligations without assuming inordinate amounts of risk, the idea of a comfortable retirement could become more elusive than ever in the new paranormal. Exacerbating the problem are rock bottom yields on traditional savings vehicles and risk-free assets, and the simple fact that generally speaking, people just aren’t saving enough in a world driven by rampant consumerism. Here’s NY Times on the latter issue:

  On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances.

   

  That’s not nearly enough. And the situation will only grow worse.

   

  The Center for Retirement Research at Boston College estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement, even if the members of the household work until 65, two years longer than the average retirement age today.

   

  Using a different, more complex model, the Employee Benefit Research Institute calculates that 83 percent of baby boomers and Generation Xers in the bottom fourth of the income distribution will eventually run short of money. Higher up on the income scale, people also face challenges: More than a quarter of those with incomes between the middle of the income distribution and the 75th percentile will probably run short.

  Fortunately, some forward-thinking members of the world’s workforce have devised a clever workaround (no pun intended): they’ll just rely on funds they imagine they’ll receive when family members die. According to a new study commissioned by HSBC (which has in the past developed its own innovative take on the ‘tax advantaged’ retirement savings plan), one in three working age people are banking on an inheritance to partially or fully fund their retirement. Here’s more:

  Many working age people are banking on receiving an inheritance. Almost two thirds (66%) of those who have received or expect to receive an inheritance believe that it will help to fund their retirement, while more than a quarter (27%) expect it will completely or largely fund it.  

  Unfortunately, these expectations don’t match up particularly well with reality:

  Less than a third (32%) of working age people have received an inheritance. While this is more understandable among younger working age people, the proportion of older people who have received an inheritance is also lower – just over a third (36%) of working age people aged 45-64 have received an inheritance, while for those aged 65+, the proportion is still less than half (48%). 

  And the gap between perception and reality may be growing because ironically, nearly a quarter of those surveyed — and this is the same pool of respondents wherein 66% are betting on an inheritance to retire — indicated that they believe “it is better to spend all your money and let the next generation create their own wealth.” In other words: “I expect the previous generation to fund my retirement, but I’ll be damned if I’m going to pay for my kids to quit working.”

  

  

   

  HSBC draws the following conclusion regarding working age people’s assumptions about inheritances:

  To avoid disappointment in later life, working age people need to consider what happens if an inheritance is lower than expected – or doesn’t come at all. 

  And if the survey results presented above are any indication, that conclusion goes double for the children of those who participated in the study. 

  *  *  *

  

  

  
  
  

  

• There Will Be No 25-Year Depression

  Submitted by Bill Bonner via Acting-Man.com,

  Good and Bad News

  Today, we have bad news and good news. The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.

  The bad news: It will be much worse than that. On Monday, the Dow rose another 43 points. Gold seems to be working its way back to the $1,200 level, where it feels most comfortable.

  “A long depression” has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.

   

  

  Newspaper from October 24 1929, a.k.a. “Black Thursday” – at this point, the panic had just begun with the market losing 11% in one day. On the next two trading days (Friday and Saturday – at the time, the market was open on Saturdays) the market rebounded slightly, then came “Black Monday” and “Black Tuesday”, which erased all doubt about the seriousness of the situation

   

   

  Old People Are Dead Wood

  First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the US. As we’ve described many times, as people get older, they change. They stop producing and begin consuming.

  They are no longer the dynamic innovators and eager early adopters of their youth; they become the old dogs who won’t learn new tricks.

  Nor are they the green and growing timber of a healthy economy; instead, they become dead wood. There’s nothing wrong with growing old.

  There’s nothing wrong with dying either, at least from a philosophical point of view. But it’s not going to increase auto sales or boost incomes – except for the undertakers.

   

  

  Mr. Hislop is looking forward to booming business

  Photo credit: State Library of Queensland

   

  The Cure for Debt? More Debt!

  Second, most large economies are deeply in debt. The increase in debt levels began after World War II and sped up after the money system changed in 1968-71.

  By 2007, US consumers reached what was probably “peak debt.” That is, they couldn’t continue to borrow and spend as they had for the previous half a century. Most of their debt was mortgage debt, and the price of housing was falling.

  The feds reacted, as they always do… inappropriately. They tried to cure a debt problem with more debt. But consumers were both unwilling and unable to borrow. Their incomes and their collateral were going down. This left corporations and government to aim only for their own toes.

  Central banks created more money and credit – trillions of dollars of it. But since the household sector wasn’t borrowing, the money went into financial assets and zombie government spending.

  Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.

   

  

  In order to revive the credit creation machinery, the Fed has monetized incredible amounts of debt, via Saint Louis Federal Reserve Research. With the end of QE 3, its balance sheet has begun to subtly decline … click to enlarge.

   

  The Cronies Are in Control

  Third, the developed economies have been zombified. The US, for example, is way down at No. 46 on the World Bank’s list of places where it is easiest to start a new business. And only one G8 country – Canada – even makes the top 10.

   

  

  How to get ahead in the world of today….

  Cartoon by Stahler

   

  Paperwork. Expenses. Regulation. High taxes. High labor rates. Entrenched competition with aging, loyal customers. All are endemic from Boston to Berlin to Beijing.

  Leading industries – heavily controlled and regulated, including defense, education, health and finance – are practically arms of the government. All are protected with high barriers to entry and low expectations. Competition is barely tolerated. Innovation is discouraged. Mistakes are forgiven and reimbursed.

  Meanwhile, the masses are encouraged to become zombies too, with generous rewards for those who 1) do nothing, 2) pretend to work or 3) prevent other people from doing anything. After all the zombies, cronies and connivers get their money, there is little left for the productive economy.

   

  

  How it all works in crony heaven – until it doesn’t anymore – via bastiatinstitute.org

   

  The Solution Begins When Markets Crack

  Typically, these problems – too much debt, too many zombies, and too many old people – lead to financial crises. Then, they are “solved” by either inflation or depression. And the solution begins when markets crack.

  Markets never go up forever. Instead, they go up, down and even sideways. They breathe in and out. And after sucking in air for the last 30 years, US financial assets are ready to exhale. Legendary asset manager Bill Gross comments:

  “When does our credit-based financial system sputter/break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.”

  When that happens, problems begin to take care of themselves, in one of two ways…

  A quick, sharp depression wipes out the value of credit claims. Borrowers go broke. Bonds expire worthless. Companies declare bankruptcy. The whole capital structure tends to get marked down as debts are written off and financial assets of all kinds lose their value.

  Or, under pressure, the feds print money. Debts are diminished as the currency loses its value. The zombies still get money, but it is worth less. Inflation adjustments cannot keep up with high rates of inflation. Pensions, prices and promises fade. Either way, the slate is wiped clean and a new cycle can begin. But what rag will clean the slate now? Stay tuned…

   

  

  You knew there would eventually be a picture of the living dead.

  

  

  
  
  

  

• Japanese Bond Yields Spike Most In 2 Years On Return From Golden Week Holiday

  As Japanese markets re-open after Golden Week, the bond market is extremely active (which in itself is unusual given its total lack of liquidity). Playing catch up to the rest of the world’s igniting bond markets, 10Y JGB yields are up over 6bps (and even the 20Y is trading). The last few days have seen yields spike from 28bps to 43bps – a colossal move only seen before in May 2013 (after the initial euphoria of QQE).

  Biggest absolute yield swing in bonds since May 2013…

  

   

  Which drags yields to 2-month highs…

  

   

  Charts: Bloomberg

  

  

  
  
  

  

• Ultra-Secrecy Surrounds Barack Obama's New Global Economic Treaty

  Submitted by Michael Snyder via The Economic Collapse blog,

  Barack Obama is secretly negotiating a global economic treaty which would destroy thousands of American businesses and millions of good paying American jobs.  In other words, it would be the final nail in the coffin for America’s economic infrastructure.  Obama knows that if the American people actually knew what was in this treaty that they would be screaming mad, so the negotiations are being done in secret.  The only people that are allowed to look at the treaty are members of Congress, and even they are being banned from saying anything to the public.  American workers are about to be brutally stabbed in the back, and thanks to all of this secrecy and paranoia they won’t even see it coming.

  The name of this new treaty is “the Trans-Pacific Partnership”, and it is being touted as perhaps the most important trade agreement in history.  But very few people in this country are talking about it, because none of us are allowed to see it.  An article that was just released by Politico detailed the extreme secrecy that is surrounding this trade agreement…

  If you want to hear the details of the Trans-Pacific Partnership trade deal the Obama administration is hoping to pass, you’ve got to be a member of Congress, and you’ve got to go to classified briefings and leave your staff and cellphone at the door.

   

  If you’re a member who wants to read the text, you’ve got to go to a room in the basement of the Capitol Visitor Center and be handed it one section at a time, watched over as you read, and forced to hand over any notes you make before leaving.

   

  And no matter what, you can’t discuss the details of what you’ve read.

  This treaty is going to affect the lives of every man, woman and child living in this nation, and yet it is deemed so “important” that none of us can know what is in it?

  Are you sure that we still live in a Republic?

  This treaty will cover 40 percent of the global economy, and U.S. officials hope that the EU, China and India will become members eventually as well…

  Right now, there are 12 countries that are part of the negotiations: the United States, Canada, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  These nations have a combined population of 792 million people and account for an astounding 40 percent of the global economy. 

   

  And it is hoped that the EU, China and India will eventually join as well.  This is potentially the most dangerous economic treaty of our lifetimes, and yet there is very little political debate about it in this country.

  If the EU, China and India did eventually join the treaty, that would essentially make it a trade agreement for the entire planet.

  This is a really big deal, and it should be openly debated by the American people.  But instead, Barack Obama has chosen to shroud the entire process with as much secrecy as possible.  Not only that, he also wants Congress to give him fast track negotiating authority.  If Congress does that, they would essentially be saying that they blindly trust Obama to negotiate a good treaty for us.  At the end of the process, Congress would be able to vote the treaty up or down, but would not be able to amend it.

  That sounds insane, right?  Well, if you can believe it, Republicans in the Senate are quite eager to give Barack Obama this authority.

  And this is not just an economic treaty.  The following is an excerpt from one of my previous articles…

  It is basically a gigantic end run around Congress.  Thanks to leaks, we have learned that so many of the things that Obama has deeply wanted for years are in this treaty.  If adopted, this treaty will fundamentally change our laws regarding Internet freedom, healthcare, copyright and patent protection, food safety, environmental standards, civil liberties and so much more.  This treaty includes many of the rules that alarmed Internet activists so much when SOPA was being debated, it would essentially ban all “Buy American” laws, it would give Wall Street banks much more freedom to trade risky derivatives and it would force even more domestic manufacturing offshore.

  We can’t consume our way to prosperity, and we can’t borrow and spend our way to prosperity.  In order to be prosperous as a nation, we have got to create at least as much wealth as we consume.  But instead, we are doing just the opposite.  We are consuming wealth like mad even while our economic infrastructure is being absolutely gutted.  We have lost thousands of businesses and millions of jobs already, and this new treaty will make things much worse.

  And of course eventually even the ultra-cheap labor on the other side of the planet will be replaced.  This is something that is already happening in China.  Just today there was a news story about a new manufacturing facility in China that will use only robots…

  Construction work has begun on the first factory in China’s manufacturing hub of Dongguan to use only robots for production, the official Xinhua news agency reported.

   

  A total of 1,000 robots would be introduced at the factory initially, run by Shenzhen Evenwin Precision Technology Co, with the aim of reducing the current workforce of 1,800 by 90 percent to only about 200, Chen Xingqi, the chairman of the company’s board, was quoted as saying in the report.

   

  The company did not give a figure for the investment in the factory, but said its production capacity could reach a value of 2 billion yuan (US$322 million) annually.

  All of this is very bad news for American workers.  Whether it is ultra-cheap labor on the other side of the globe or new technology, big corporations are constantly looking for ways to produce things less expensively.

  But in order to have a middle class, we have got to have middle class jobs.  The middle class in the United States is steadily disappearing, and neither political party seems very concerned about this at all.

  Even without this new trade treaty, our trade deficit with the rest of the planet continues to grow even larger.  We just learned that the monthly U.S. trade deficit for March rose to $51.4 billion.  That was the largest monthly trade deficit since October 2008.  If you will remember, in October 2008 we were experiencing the worst financial crisis since the days of the Great Depression.

  And if you take oil out of the number, our trade deficit for the month of March would be the worst ever recorded.

  Thank you Barack Obama.  Your trade policies are really “working”.

  Because the trade deficit was much worse than expected, that is going to push the GDP number for the first quarter into negative territory…

  Greg Daco of Oxford Economics says he expects the wider than expected trade deficit to prompt the government to revise its estimate of 0.2% growth in U.S. gross domestic product for the first quarter to a 0.5% contraction.

  That means that if we have another contraction in the second quarter, we will officially be in a recession.

  In fact, we could be in a recession right now (according to the official government definition) and not even know it yet.

  One of the biggest reasons why the U.S. economy has been struggling so much in recent years is due to our trade policies.  If we had balanced trade with other nations, our cumulative economic growth since mid-2009 would have been nearly 20 percent higher…

  Since rising trade balances subtract from economic growth, the increase in this real non-oil goods deficit has now cut cumulative U.S. economic growth after inflation by a stunning 19.49 percent since the recovery technically began in mid-2009.

  Are you starting to see why I get so fired up about trade?

  But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin…

  Nine years, a trillion dollars in sales, and almost no taxes paid. That’s just the starting point for wondering about Apple’s actual contribution to the US economy.

   

  Apple’s success drags down the US GDP.  The behemoth that is Apple sold almost 200M phones last year, none of which were made in the US or used components made here. Instead of exporting $100B in iPhones, the US imported $50B. That $150B swing matters in terms of balance of trade, GDP and jobs. If you wanted to improve the US economy, there’s no better place to start than with Apple and smartphones.

   

  Apple undermines the US manufacturing base. Assembly matters and manufacturing matters more. There was a time when Apple could have assembled phones and tablets in the US, but that would mean spending an extra $5 per phone since that’s approximately the extra labor cost to build that $700 phone here instead of in Vietnam or China. Assembly may not be a competitive, value-add step but it does employ a lot of people.

   

  Unfortunately, it would also cut Apple’s profits by $1B, shrinking the company’s annual net income from $45B to $44B. Apple wouldn’t notice a drop in profits of $1B because it’s not putting its cash to use: Apple has $200B in cash conveniently parked outside of the US, not doing anything. On the other hand, assembling in the US would employ tens of thousands of people.

  You can read the rest of that great article right here.

  Our trade policies matter.  Decades of incredibly foolish decisions have ripped our economic infrastructure to shreds, and we are slowly but steadily committing national economic suicide.

  Now, Barack Obama is absolutely determined to deliver the finishing blow, and it is all being done in secret.

  When are you going to wake up and start getting angry America?

  

  

  
  
  

  

• The End Of The "Reflation" Trade? China To Focus On Fiscal Stimulus, Avoid Monetary Policy

  One of the biggest, if not the driving, factor behind the latest bout of the “reflation trade” which has sent bond yields surging (not to mention sending the Chinese stock market into outer space) in a deja vu rerun of the “Great Rotation” of 2013 and 2014, was constant chatter of imminent monetary easing by the People’s Bank of China, and perhaps with good reason: with the Chinese economy hard-landing and growing according to some estimates as low as 1.6%, the Chinese housing market tumbling faster than that of the US in the great financial crisis, the media has been flooded with recurring reports of Chinese QE any minute.

  To be sure, the PBOC has given plenty of ammunition for such speculation, having cut both its interest and Reserve Ratio rates twice in 2015.

  

  As a result of constant jawboning that the PBOC may not only cut rates even more but proceed to launch QE (which it will ultimately, just not for a while), both the Shanghai Composite has been trading at multi-year highs and oil has found a bid strong enough that in the past two months it has surged by some 50% on hopes that Chinese demand will finally come back once the local economy is so weak it leaves the PBOC no other choice.

  However, two things suggest that the great “reflation” trade is ending.

  Overnight, Xinhua reported that after months of plunging housing sales, the all important Chinese housing market, where the bulk of Chinese net worth is located, is rebounding sharply: sales volume of new homes in China’s major cities posted a solid gain in April with the support of the recent policy easing, the latest industry report showed.

  New home sales in China’s 30 major cities including Beijing, Shanghai, Guangzhou and Shenzhen surged 15.1 percent in April from the previous month to 16.57 million square meters, also representing an increase of 30.8 percent from the previous year, according to the report released by E-house China R&D Institute, a leading property consultancy.

  Of the tier-one cities, Beijing witnessed the strongest new home sales growth at 70.7 percent in April compared with a year earlier, noted the report released Wednesday.

  Xinhua recounts that China’s property market took a downturn in 2014 due to weak demand and an excess of unsold homes. In late March, China’s central bank cut the minimum down payment requirement for second home buyers to 40 percent.

  Business tax will be exempt for sales of homes purchased more than two years ago, instead of the previous requirement of five years, the Ministry of Finance announced. These easing measures have bolstered the recent rebound of the real estate market, analysts said.

   

  Policy easing should further lift home transactions in the months ahead, with a strong rebound expected in the second quarter, predicted Yan Yuejin, a researcher with the institute.

  In other words, what the PBOC has already done may be quite sufficient to claim victory for the near to mid-term future, to where no additional easing, much of which has been factored into global asset prices, is forthcoming.

  But where things get dangerous for the liquidity-addicted, risk-on crowd, is a report just released by Reuters, according to which, China is “likely to resort to fiscal stimulus to revive growth after a run of monetary policy easings proved less effective, policy insiders said.“

  “They are very worried. If they don’t take bolder measures, it will be very hard to achieve the full-year growth target, and there is risk the slowdown may get out of control,” an economist at a well-connected think-tank said of top policymakers.

   

  “Fiscal policy will become more forceful, and infrastructure investment will accelerate, while monetary policy will be more flexible,” said the economist.

  Confused by the 5% drop in the Shanghai Composite in the past two days and the worst 6-day run since June 2013?

  

  This may explain it:

  The emerging view is that the direct impact of government spending would work where monetary policy, including two cuts in interest rates and two cuts in bank reserve requirements since November, has not.

   

  The government is eyeing “a package of measures to stabilize growth and control risks”, said a senior economist at the cabinet’s Development Research Centre think-tank.

   

  “There is no big problem in employment. They (top leaders) are more worried about financial risks and debt risks.”

  If true, expect the dramatic doubling in Chinese stocks to promptly deflate because while fiscal stimulus is indeed great for the economy it does absolutely nothing for a market that desperately needs constant liquidity injections merely to stay at the same level, nevermind keep rising.

  The level of fiscal stimulus detail provided by Reuters suggests that indeed hopes for more PBOC interventions have been officially snuffed. To wit:

  The National Development and Reform Commission (NDRC), the country’s top planning agency, is already speeding up investment projects in several key sectors, including water conservation, environmental protection, power grids and health care.

   

  And President Xi Jinping is spearheading the integration of Beijing with Tianjin and Hebei province, aiming to create a growth driver similar to the Yangtze River Delta around Shanghai and Pearl River Delta in Guangdong, the sources said. The government has said the new metropolis would require investment of 42 trillion yuan ($6.8 trillion).

   

  “It’s hard to boost consumption while external demand is weak, so the only thing they can do is boost investment,” said Lu Zhengwei, chief economist at Industrial Bank.

   

  The NDRC has been struggling to lure private investment into such projects, adding more pressure on the government to spend.

  Needless to say, China already has a massive overcapacity problem as a remnant of its late 2000s policy of a massive, debt-fueled spending binge that has now left the country with trillions of (mostly undisclosed) bad debt, and a mountain of shadow liabilities the Politburo is desperate to eliminate. Reuters confirms as much: “Stimulus plans will, nevertheless, be restrained by the fact that China is still struggling with a mountain of local government debt from the 4 trillion yuan ($645 billion) stimulus rolled out in 2008/09 to cushion the impact of the global crisis.”

  Which means that while monetary stimulus is now firmly on the backburner, not even fiscal policy will match the massive stimulus dumps seen in previous years, which in turn suggests that anyone hoarding oil over hopes that China will reemerge as a massive source of demand will be disappointed.

  As for the sudden bout of the great reflation trade… well, just keep an eye on Chinese stocks – leaking inside information in the Middle Kingdom is usually encouraged, and if someone is aware of the PBOC’s plans, or lack thereof, it will sweep like wildfire through the market, and lead to an avalanche of selling as the liquidity tsunami is drained.

  

  

  
  
  

  

• Repatriation Of Gold From Fed Suggests Historic Vote Of No Confidence

  Submitted by Seth Mason via Solidus.Center blog,

  Since 2012, there’s been an unprecedented call from foreign nations to repatriate their gold from Federal Reserve vaults in the U.S. This is an incredible development given many countries’ 71-year reliance on the Fed as a custodian for their bullion. Over the last few years, countries including, but not limited to, Germany, the Netherlands, France, Belgium, Austria, Poland, Ecuador, Finland, Switzerland, Venezuela, and Romania have either formally requested repatriation of their gold or are in discussions with the Fed about it. Some of these nations, mind you, have held more than 50% of their entire reserves of bullion in the U.S. since 1944, when the Dollar became the world’s reserve currency.

  Something huge must of happened in the last few years to prompt such action. That something may be a break in foreign gold holders’ trust in the Fed as a custodian of their precious metals.

  There’s evidence that, in recent years, the Fed has been leveraging some of its foreign gold holdings to lower skyrocketing gold prices as part of its grand scheme to “engineer” an economic recovery from the 2008 Financial Crisis. This is to be expected. After all, the Fed has spent the past 7 years throwing everything but the kitchen sink at the chronically-ill American economy and its epidemic of long-term unemployment and underemployment: It’s bailed out the Too Big to Fail banks to the tune of $14 trillion. It’s printed more than $4.2 trillion. It’s crushed down interest rates to zero and has kept them there. Naturally, the good people at the Eccles Building would include leveraging their foreign gold holdings in their campaign to prop up the economy. After all, high gold prices are a proxy for fears about the future of the economy, and prices reached generational highs in late summer 2011–3.5 years into the Fed’s post-crisis “recovery”.

  (Interestingly, gold prices began their long journey downward from their summer 2011 peak just after the Economic Cycle Research Institute called a double dip recession and the Bureau of Economic Analysis–if you believe government data–reported that we narrowly missed a second recession due to GDP growth hovering just above zero.) Gold prices are supposed to rise when economic data are bad!

  So, if the Fed has been leveraging its foreign gold holdings in order to lower the price of bullion, it’s quite possible that it simply doesn’t have in its possession the amount of foreign gold it should. Again, this isn’t a stretch. In fact, it’s Occam’s Razor: Hypothecation is a common practice in the precious metals world, and, recently, the Fed has been flat-out refusing foreign nations from auditing their gold and will only return large holdings on installment plans.

  Pretty suspicious behavior, particularly given the long history of foreign nations continuing to store their gold in Fed vaults during times in which repatriation would have made more sense.

  Consider the following:

  The Fed became a popular custodian of foreign gold during World War II, when threats of appropriation of valuable assets by invading empires were an unfortunate reality in much of the Allied world. In 1944, through the Bretton Woods Agreement, much of the globe came to the consensus that the U.S. Dollar would become the world’s de facto reserve currency and that the Dollar would be backed by foreign and domestic gold physically held by the Fed.

  Then, in 1971, Bretton Woods was repealed, and the Dollar was decoupled from gold. One would think that the foreign nations that held gold at the Fed would have recalled much of their bullion at this time. Not only was the gold not needed to back the world’s reserve currency any more, but the threat of appropriation by foreign empires had diminished significantly. Three decades had passed since WWII, the Khrushchev Era of the Cold War had ended years earlier, and the West had begun to develop diplomatic and trade relations with the Soviet Union and China. But, despite these favorable conditions for repatriation, few nations called for it. It wasn’t worth the cost or effort: The price of gold at the time was at an inflation-adjusted 20th Century low of $210. (2015 dollars – See chart at end of article. Prices likely higher due to use of Bureau of Labor Statistics data, whose methodology has been altered several times to discount inflation.)

  But the financial incentives for repatriation significantly improved by the end of the 1970s, to say the least. By January 1980, with the Fed’s home country mired in stagflation and shocked by an oil crisis, the price of gold skyrocketed to an all-time record inflation-adjusted high of $2100 (a record that remains today, even after the Financial Crisis). Decades removed from the threats of appropriation of WWII and early Cold War-era empires, the late ’70s and early ’80s would have been a great time to repatriate bullion from the Fed. But there were simply few calls.

  More astonishingly, there were few calls for repatriation in the early 2000s, when Alan Greenspan’s post-tech bubble recession and Al-Qaeda’s devastating attacks on the world’s then-largest financial complex–LOCATED JUST BLOCKS FROM WHERE THE FED WAS HOLDING THE GOLD–sent bullion prices skyrocketing. If there were an ideal time for mass calls of repatriation, it was then. But the calls just didn’t come.

  Nor did they during the 2008 Financial Crisis, an event which plunged the U.S. into its worst recession since the Great Depression and sent gold prices skyrocketing again…after a 10 year run-up since Greenspan’s tech bubble. Nor did they come when it appeared that Greece’s collapse was imminent and was going to jeopardize the future of the EU. Nor did they come when it appeared that the U.S. was going to go over the Fiscal Cliff.

  No, they’ve only come recently, during a period of time in which the possibility that the Fed has been depressing gold prices has come to light and in which the Fed has been suspiciously prohibiting foreign nations from auditing their gold.

  

  (Click to enlarge chart.)

  Given all of this history, the recent massive calls for repatriation suggest that foreign gold holders have lost trust in the Fed as a custodian of their precious metals.

  

  

  
  
  

  

• Meet The FBI's Secret 'Eye In The Sky' Overseeing The Baltimore Riots

  As the controversy surrounding the upcoming Jade Helm military exercises has made abundantly clear, Americans are growing more distrustful of a federal government they perceive as being increasingly willing to infringe upon the civil liberties of US citizens. Fears that Washington is conducting clandestine activities aimed at gathering intelligence about the US populace and the notion that we are witnessing a creeping militarization of US cities has many Americans on edge and as the following story from the Washington Post makes clear, it’s not paranoia if they’re really watching you. 

  Via WaPo:

  As Benjamin Shayne settled into his back yard to listen to the Orioles game on the radio Saturday night, he noticed a small plane looping low and tight over West Baltimore — almost exactly above where rioting had eruptedseveral days earlier, in the aftermath of the death of a black man, Freddie Gray, in police custody.

   

  The plane appeared to be a small Cessna, but little else was clear. The sun had already set, making traditional visual surveillance difficult. So, perplexed, Shayne tweeted: “Anyone know who has been flying the light plane in circles above the city for the last few nights?”

   

  That was 9:14 p.m. Seven minutes later came a startling reply. One of Shayne’s nearly 600 followers tweeted back a screen shot of the Cessna 182T’s exact flight path and also the registered owner of the plane: NG Research, based in Bristow, Va.

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

  — Pete Cimbolic (@pete_cimbolic) May 3, 2015

  

  As it turns out, Shayne had unwittingly uncovered a secret FBI overhead surveillance campaign carried out over Baltimore during the riots that set the city ablaze late last month. The operation involved two planes circling the city, and as WaPo notes, if equipped with the latest technology, the aircraft would have been capable of monitoring “dozens of city blocks” at a time. The revelations have prompted the ACLU to demand answers as to the legality of what an unnamed official calls FBI “aerial support”:

  Civil libertarians have particular concern about surveillance technology that can quietly gather images across dozens of city blocks — in some cases even square miles at a time — inevitably capturing the movements of people under no suspicion of criminal activity into a government dragnet. The ACLU plans to file information requests with federal agencies on Wednesday, officials said.

   

  “A lot of these technologies sweep very, very broadly, and, at a minimum, the public should have a right to know what’s going on,” said Jay Stanley, a senior policy analyst at the ACLU specializing in privacy and technology issues.

   

  A government official familiar with the operations, speaking on the condition of anonymity to discuss matters not approved for public release, said the flights were aerial support that Baltimore police officials requested from the FBI.

   

  Flight records maintained by the Web site Flightradar24 show two Cessnas — one a propeller plane, the other a small jet — flying precise formations over the part of West Baltimore where the rioting had occurred. The smaller Cessna conducted flights in the area on Thursday, Friday and Saturday, always after dark. The planes used infrared technology to monitor movements of people in the vicinity, the official said.

   

  

  
  

   

   

  Last year, the Post outlined how Cessnas can be outfitted with technology “that can track every vehicle and person across an area the size of a small city, for several hours at a time.” The camera setups the Post profiled are developed by Persistent Surveillance Systems (PSS). Here’s a schematic:

  

  The company’s Chief Technical Officer Ross McNutt told the Chicago Tribune that PSS was not involved in the Baltimore operation, noting that “the kinds of sensors used in most government surveillance flights can see at least a five-block-by-five-block area. What they need is a system that follows people back to the house they came out of.“

  Nevertheless, it’s worth noting that these systems have been deployed over Baltimore before. Here’s WaPo from last February:

  Already, the cameras have been flown above major public events such as the Ohio political rally where Sen. John McCain (R-Ariz.) named Sarah Palin as his running mate in 2008, McNutt said. They’ve been flown above Baltimore; Philadelphia; Compton, Calif.; and Dayton in demonstrations for police. 

  If that’s a little too ambiguous for you, have a look at the following slide from a company presentation delivered in January 2014 by the very same Ross McNutt:

  

   

  Just what is this PSS ‘eye’ that the company swears was not ‘in the sky’ over Baltimore, you ask? A good place to start in terms of answering that question might be a product called the “NightHawk” which employs infrared technology that provides “wide area surveillance capability with persistent coverage of areas as large as 4 square kilometers.” 

  

  The NightHawk “integrates seamlessly” with the company’s HawkEye II wide area surveillance sensor which PSS markets to law enforcement with this rather compelling sales pitch:

  Have a Crime Spike?  Criminals on the run?  Gang or Drug Networks you need to shut down? [ZH: Rioters burning down your city?]  Do you have limited manpower and/or limited intelligence assets?

  PSS can help – and fast.

   

  Whether your objective is to monitor a single intersection, several city blocks, or a whole city, PSS’s HawkEye II gives the capability and the flexibility to meet your mission requirements.

   

  To get an idea of what the Hawkeye II is capable of in terms of both scope and detail, have a look at the following images from the portion of the company’s webpage dedicated to its law enforcement customers:

  

  

  *  *  *

  Besides the Baltimore Police Department, PSS has conducted operations in conjunction with police in Dayton, Los Angeles, and Philadelphia, and while we can’t say for sure whether Baltimore was indeed under the watchful eye of the PSS “NightHawk” last month, we think it’s safe to say that if you want to watch those who may be watching you, PSS is a good company to keep an eye on. 

  

  

  
  
  

  

• 7 Person CFTC Team Charges Gold Manipulators Identified First On Zero Hedge With Gold And Silver Spoofing

  Last Tuesday, as part of our ongoing effort to help the clueless commodity regulator, the CFTC, do its jobs of identifying, preventing and punishing manipulators, we wrote “Dear CFTC: Here Is Today’s Illegal “Spoofing” In Gold Futures” in which we presented “3 examples of spoofing in gold futures which, you’ll note, aren’t difficult to spot if one is willing to expend the tiniest effort.”

  The gold spoofing was obvious, and as as the following Nanex charts showed, a cursory glance revealed how large buy and sell orders push prices up and down without every transacting.

  

  2. Another set of instances appear about 50 minutes after the first set (shown in chart 1).

  

  3. Another set of spoofing instances appear about an hour after the second set (shown in chart 2).

  

   

  We go the spoofing right, but we got our audience wrong because the very next day it was not the CFTC, but the exchange on which said manipulation was taking place, the CME, that issued an order denying access to the alleged spoofers we had identified just hours before, Heet Khara and Nasim Salim, and which would be barred from trading on the CME for a period of 60 days.

  Fast forward to today when, humiliated at having its job done not only by a for-profit exchange but a tinfoil fring blog first, the CFTC finally did its job and charged United Arab Emirates residents Heet Khara and Nasim Salim with “Spoofing in the Gold and Silver Futures Markets.” Note: “and silver” – this is important.

  Here is the full CFTC order:

  Court Issues an Ex Parte Restraining Order Freezing Defendants’ Assets and Preserving Records

   

  Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a civil enforcement action in the U.S. District Court for the Southern District of New York against Heet Khara and Nasim Salim, residents of the United Arab Emirates.  According to the CFTC’s Complaint, Defendants engaged in unlawful disruptive trading practices known as “spoofing” in the gold and silver futures markets by placing bids and offers with the intent to cancel them before execution.

   

  Based on Defendants’ pattern of unlawful spoofing conduct and the potential for dissipation of Defendants’ assets, on May 5, 2015, U.S. District Judge Deborah A. Batts issued an Order freezing and preserving assets under Defendants’ control and prohibiting them from destroying documents or denying CFTC staff access to their books and records. The court scheduled a hearing on the CFTC’s motion for a preliminary injunction for May 19, 2015.

   

  The Complaint alleges that between at least February 2015 and at least April 28, 2015, Defendants Khara and Salim, both individually and in a coordinated fashion, regularly placed larger aggregate orders for gold and silver futures contracts on the Commodity Exchange, Inc. (COMEX) opposite smaller orders and cancelled the larger orders after the smaller orders were executed.

   

  CME Group Inc.’s (CME Group) Market Regulation Department identified the disruptive trading practices and initiated an investigation.  On or about April 30, 2015, CME Group issued notices summarily denying Defendants Khara and Salim’s access to all CME Group markets and any trading platforms owned or controlled by CME Group.  CME Group Inc. operates four self-regulatory organizations and designated contract markets, which are the Chicago Mercantile Exchange Inc., Board of Trade of the City of Chicago, Inc., New York Mercantile Exchange, Inc., and COMEX.

   

  CFTC Director of Enforcement Aitan Goelman commented: “Protecting the integrity and stability of the U.S. futures markets is critical to ensuring a properly functioning financial system.  Aggressive prosecution of spoofing is an important part of that mission.  Today’s actions make clear that the CFTC will partner with self-regulatory organizations to find and swiftly prosecute those who engage in such disruptive trading practices, wherever they may be.”

   

  In its ongoing litigation, the CFTC is seeking preliminary and permanent injunctive relief, civil monetary penalties, and equitable relief including trading and registration bans and disgorgement. 

  Curious where your taxpayer dollars go? It took the CFTC seven (7) well-paid manipulation sleuths to figure out what was revealed on the pages of Zero Hedge on the day of the manipulation, without us ever having accepted a single taxpayer dollar.

  CFTC Division of Enforcement staff members responsible for this matter are Patryk J. Chudy, David Oakland, Neel Chopra, Katie Rasor, Trevor Kokal, Lenel Hickson, and Manal Sultan.

  Finally:

  The CFTC thanks and acknowledges the assistance of the CME Group in this matter.

  You are welcome.

  And perhaps in retrospect it is time for the CFTC to revise its announcement from September 25, 2013…

  The @CFTC Closes Investigation Concerning the Silver Markets. http://t.co/JZRliwfW6P

  — CFTC (@CFTC) September 25, 2013

  … in which it said:

  “The Commodity Futures Trading Commission (CFTC or Commission) Division of Enforcement has closed the investigation that was publicly confirmed in September 2008 concerning silver markets. The Division of Enforcement is not recommending charges to the Commission in that investigation. For law enforcement and confidentiality reasons, the CFTC only rarely comments publicly on whether it has opened or closed any particular investigation. Nonetheless, given that this particular investigation was confirmed in September 2008, the CFTC deemed it appropriate to inform the public that the investigation is no longer ongoing. Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets.”

  Because, you see, had the “woefully underbudgeted” CFTC, which needed at least 7 employees to discover what took Nanex and Zero Hedge about 10 minutes of work, not closed its particular investigation, it would have caught not only this but countless other instances of gold and silver manipulation…

  The good news, of course, is that with a UK spoofer, working out of his parents’ basement, having been charged with causing the Flash Crash, and now two Arabs found guilty of manipulating gold and silver, both the S&P and the gold markets are once again completely unrigged, the CFTC is on top of everything, and investors should, please, come right back in.

  

  

  
  
  

  

• It Begins: US Government Issues $700,000 Fine Against A Digital Currency

  Submitted by Simon Black via Sovereign Man blog,

  Well, it was bound to happen sooner or later.

  Our beloved amigos at the US Financial Crimes Enforcement Network (FinCEN), have just issued the first-ever ‘civil enforcement action’ against a virtual currency.

  The offending criminal mastermind in this case? Ripple Labs.

  If you’re not familiar, Ripple is a virtual currency platform that was once the darling of Silicon Valley, attracting top VC firms like Google Ventures and Andreessen Horowitz.

  Ripple’s technology allows users to conduct financial transactions with one another — sending and receiving payments in cryptocurrencies like Bitcoin, as well as fiat currency.

  Imagine Bitcoin meets Paypal… and you have the basic idea.

  As part of its technology, the parent company Ripple Labs also created a native virtual currency called ‘XRP’, which is the second largest in the world after Bitcoin when measured by market capitalization.

  Because of all of these features, Ripple Labs qualifies as a ‘money service business (MSB)’ according to FinCEN… which makes them subject to all sorts of regulations.

  At the top of the list is the Bank Secrecy Act (BSA), which, contrary to its name, requires banks and MSBs to betray their customers’ financial secrets to the US government.

  Specifically, the BSA mandates that all banks and MSBs file ‘suspicious activity reports’ if they “know, suspect, or have reason to suspect” that a transaction of $2,000 or more is ‘suspicious’.

  And in the age of the USA PATRIOT Act, suspicious transactions are BIG BUSINESS for Uncle Sam.

  Last year a record 2.4 MILLION suspicious activity reports were filed. That’s a 40% increase from 2013’s record year of 1.7 million.

  As you can imagine, Ripple Labs failed to register with FinCEN as an MSB, nor did it submit suspicious activity reports.

  In its complaint, FinCEN describes several of the oooooh-so-nefarious violations.

  According to FinCEN, “In January 2014, a Malaysian-based customer sought to purchase XRP from [Ripple Labs], indicating that he wanted to use a personal bank account for a business purpose.”

  HOLY JIHAD BATMAN!!!! Someone wanted to use a personal bank account for business purposes?!?! NUKE THE SON OF A BITCH!

  I mean, seriously. This is the complete nonsense that keeps financial bureaucrats up at night: some guy in Malaysia wants to buy digital currency with his personal funds.

  Whoop-dee-doo.

  But what’s really wild is that Ripple actually DENIED the transaction. They just didn’t file the SAR.

  So… even though Ripple didn’t actually ENGAGE in said ‘suspicious activity’, failing to file the SAR (with the appropriate TPS report cover sheet) was enough to land them in hot water.

  End result — Ripple was dinged with a $700,000 fine.

  Now, $700k is a pittance compared to the $9 BILLION that BNP Paribas was slammed with last year for doing business with countries that were former enemies-turned-BFFs of the US government — namely Cuba and Iran.

  But it’s still a ridiculous penalty for having done nothing wrong.

  Of course, it’s never about right or wrong. It’s about sending a message. And that’s exactly what FinCEN is doing.

  By going after Ripple (a major player in the industry), FinCEN is trying to scare all the smaller players into ratting out their customers.

  This, after all, is what desperate, bankrupt governments have done for millennia —

  Step 1: Track down where everyone’s money is.

  Step 2: Take it.

  You don’t see rich, stable countries doing this sort of thing. In fact, the exact opposite.

  An official from Hong Kong’s Treasury recently stated that: “the Government does not consider it necessary to introduce at the moment new legislation to regulate trading in such virtual commodities or prohibit people from participating in such activities.”

  Night and day difference.

  We’ll continue to see these steps in the US and in Europe. Tracking down virtual currency transactions. Banning cash. Anything they can do to keep your money trapped in the system where they can keep their eyes on it.

  It’s all the more reason to move a portion of your savings out of that system and into somewhere safe.

  

  

  
  
  

  

• Mapping Income Mobility: The Best (And Worst) Places To Grow Up

  A new study from Harvard economists Raj Chetty and Nathaniel Hendren seeks to quantify the financial impact of where America’s children are brought up. More specifically, Chetty and Hendren measure “the percentage earnings gain from growing up in each county [in America] relative to an average place for children in low-income families.” 

  The goal of the study (and its predecessors) is to determine the most effective way to imporove economic outcomes for low-income children. Here, the researchers “focus on families who moved across areas to study how neighborhoods affect upward mobility.” Unsurprisingly, Chetty and Hendren “find that every year of exposure to a better environment improves a child’s chances of success.” Interestingly, the economists have actually quantified the improvement in order to “estimates of the causal effect of each county in America on upward mobility.”

  The map below, from NY Times, shows “how much extra money a county causes children in poor families to make” compared to national averages for low-income households:

  

  Click here for interactive map

  More from NY Times:

  Raj Chetty and Nathaniel Hendren [have had] huge consequences on how we think about poverty and mobility in the United States. The pair, economists at Harvard, have long been known for their work on income mobility, but the latest findings go further. Now, the researchers are no longer confined to talking about which counties merely correlate well with income mobility; new data suggests some places actually cause it.

   

  Across the country, the researchers found five factors associated with strong upward mobility: less segregation by income and race, lower levels of income inequality, better schools, lower rates of violent crime, and a larger share of two-parent households. In general, the effects of place are sharper for boys than for girls, and for lower-income children than for rich.

   

  “The broader lesson of our analysis,” Mr. Chetty and Mr. Hendren write, “is that social mobility should be tackled at a local level.”

  We’ll leave you with the following screenshots from the interactive map (presented with no comment):

  

  

  

  

  
  
  

  

• Why The Fed Will Do QE4 (In 4 Ugly Charts)

  While The Fed and its apologists (except for Jim Bullard) remain firmly attached to the idea that it is the 'stock' (or absolute level) of Fed Assets that represents the amount of policy-easement and not the 'flow' (rate of change), we have explained numerous times that this is complete rubbish. With the Federal Reserve balance sheet hitting 6-month lows this week, we thought the following 4 pictures would paint more than a thousand words on why The Fed will need to restart the flow soon… or the game is up.

   

  The quiet, subtle decline in the Federal Reserve's balance sheet continued in April. As of May 1st, Gavekal notes the Fed's balance was at $4.47 trillion. While undoubtedly still incredibly large, the Fed's balance sheet is about $45 billion less than its peak level on January 16, 2015.  Total assets at the Fed are back to levels last seen on October 17th. Total assets at the Fed have declined by nearly $29 billion over the past three months. On a rolling three-month basis, the Fed's balance sheet has been declining for the last two months.

  

  And the three-month difference in total Fed assets has produced some interesting relationships since QE started. Below are some economic indicators that caught our eye…
  

  

  

  

  All suggesting it is indeed the flow.. and not stock that has pumped everything… and now that it is officially in decline, Yellen is going to need to find an excuse to crank the flow once again…

  Source: Gavekal

  

  

  
  
  

  

• Does The Stock Market Matter?

  Submitted by Omid Malekan,

  Today marks the five year anniversary of the Flash Crash, the day in 2010 when the US stock market fell drastically in a matter of minutes then recovered most of the losses.

  

  Unlike sharp declines in the past, the Flash Crash happened for apparently no reason. Since then the government has launched multiple inquiries into what happened and recently charged a trader for alleged market manipulation. Figuring all of this out is considered a priority because the stock market is an important part of the economy and has an important place in economic policy.

  But does the stock market really matter? And if it does, should it?

  Stock market relevance to policy dates back to the crash of 1987, when Fed Chairman Alan Greenspan decided the Fed should respond boldly to market machinations. That emphasis on the importance of stocks was at the core of the Greenspan Fed and was continued by his successors Ben Bernanke and Janet Yellen.

  

   

  Along the way economists increasingly factored stocks into their theories and the Wealth Effect – the idea that when people feel rich from their investments they spend more – gained prominence.

  The 2008 financial crisis cemented the importance of stocks in economic management. Policy makers monitored falling stocks as if they were a good barometer for economic activity and reacted accordingly. In 2010, in an editorial defending the Fed’s then controversial Quantitative Easing program, Chairman Ben Bernanke pointed to rallying stocks as evidence the policy was working. In 2012 Assistant Attorney General Lanny Breuer, the man who presided over the Justice Department’s Criminal division in the aftermath of the financial crisis, said when considering prosecution of a bank executive they took into account the impact on the bank’s shares and financial markets. More recently Fed President Bill Dudley has stated that how the market reacts will play a role in how quickly the Fed raises interest rates back to normal.

  The first thing we should recognize about the stock market is that it’s a pretty bad indicator for the economy. Today stocks trade at all time highs, but that’s not the case for any meaningful metric of the economy, like employment, GDP growth or wages. Real median household income, perhaps the purest measure of the vitality of the middle class, has steadily declined…

  

   

  …while the stock market has rallied during the recovery.

  

   

  The second thing we should realize is that stocks only matter to a small and peculiar subset of the population: large corporations and the wealthy. The employees of the S&P 500, the index consisting of the 500 largest public companies in America make up only 15% of all employed persons. Most jobs in this country are created by companies that can’t participate in the stock market. As for the minority that do, there is no evidence that higher stock prices lead to hiring. If companies added and subtracted employees based on volatile individual stock prices they would constantly be firing and hiring people in almost random fits that might have little to do with their actual business.

  Shareholders also consist of a minority of the population, in this case the highly affluent. Most shares are not owned by average Americans, but rather executives and founders. Think of people like Mark Zuckerberg and Warren Buffet. Some academics estimate the top 10% in terms of wealth own over two-thirds of all stocks. Scan down a list of the world’s richest people and you will see why. Meanwhile, the most recent Gallup survey shows almost half of all Americans don’t own any stocks.

  Given this reality, it should come as no surprise that the post-crisis era has seen a surge in the economic disparity between the haves and the have-nots. As policy makers have focused increasingly on stocks, they have committed resources to elevating the market thus improving the lot of the rich and powerful. Most of the Fed’s post-crisis programs for example would have been considered a failure if they weren’t constantly validated by a surging Dow Jones Industrials Index. There is a moral imperative to help the majority that has been left behind by this recovery, and it starts with paying closer attention to economic factors that measure their well being.

  There is also a practical benefit to shifting our attention away from the stock market. Any market that can yo-yo 10% within a day for no apparent reason, or undergo multiple booms and busts in a 20 year period should not be given too much credibility. The wealth-effect on the way up always turns into the wealth-destruction effect on the way down.

  If we can look away from the daily machinations of the unpredictable market we are more likely to work on the sort of structural reform that pays off in the long run, even if it doesn’t make the market go up today.

   

  

  

  
  
  

  

• Late-Day Buying Scramble Saves Dow's Year After Yellen Yanks Punchbowl

  Translating what Janet Yellen (and Lockhart) said today to stock investors….

   

  Before we start – Trannies are trading 2% below the levels pre-EndQE3 and The Dow was rescued late on into the green YTD for 2015…

  

   

  UNRIGGED!!!! Every time the Dow lost YTD green, VIX was smashed… and look at the close!!!

  

   

  Stocks have now given up all the exuberant gains post March payrolls

  

   

  Volume is back…

  

   

  The epic late-day ramp was a desparate effort to get The Dow into the green YTD… managed to get Small Caps comfortably green (because you Fight The Fed)

  

   

  Futures show the swings today more clearly…

  

   

  On the week, Nasdaq remains the laggard, Small caps outperforming

  

   

  The initial driver was the weak ADP print which sparked selling in the USD, then Yellen's comments really pulled the rug…

  

   

  Shale stocks continue to slide post-Einhorn (even despite this morning's meltup in crude after DOE inventory draw). Worst still for the frackers, Gartman said "The frackers are going to ramp back up, there is no question at all"

  

   

  Treasury yields are up 8 days in a row – the longest stretch of increases since 9 days in a row in March 2012. (note the big AAPL issue today whioch may be the driver of the recent weakness in US sessions as ratelocks hit an illiquid market)

  

   

  10Y yield closes above its 200DMA…

  

   

  The dollar slipped once again…

  

   

  Commodities (except for Crude) saw muted activity today…

  

   

  But crude pumped and dumped after the EOD draw…

  

   

  Just as an aside, this is what happened in European bond risk today…

  

   

  Charts: Bloomberg

  Bonus Chart: What's worse than worst?

  

   

  

  
  
  

  

• Top NSA Official Who Created the Global Surveillance System: Fire the U.S. Intelligence Agencies … Hire Anonymous, Instead

  William Binney is the high-level NSA executive who created the agency’s mass surveillance program for digital information. A 32-year NSA veteran widely regarded as a “legend” within the agency, Binney was the senior technical director within the agency and supervised thousands of NSA employees.

  Binney sent Washington’s Blog an article from Monday showing that a member of the cyber collective Anonymous tipped off Texas police to the imminent shootings by Muslim extremists.

  Binney comments:

  This is the objective of intelligence agencies that I worked in – predict intentions and capabilities in advance. I agree with my VIPS [i.e. Veteran Intelligence Professionals for Sanity] associates, hire Anonymous and fire the bums we got including the intelligence committees and the FISC [U.S. Foreign Intelligence Surveillance Court].

   

  After all, when was the last time our “intelligence community” predicted anything like this in advance????

  Binney and other top NSA whistleblowers have previously explained that the intelligence agencies should have stopped 9/11, the Boston Marathon bombing, the Paris shootings and other terrorist attacks.  But corruption prevented them from  stopping the attacks.

  Veteran Intelligence Professionals for Sanity – a group composed of former high-level military and intelligence officials – recently called for independent intelligence analysis to keep our country safe.

  

  
  
  

  

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