Today’s News November 13, 2015

• Did Russia Just "Gently" Threaten The USA?

  Authored by The Saker,

  Interesting stuff today.  A major Russian TV channel just aired a report about Putin meeting with his top military commanders.  I don’t have the time to translate what Putin said word for word, but basically he said that the USA had refused every single Russian offer to negotiate about the US anti-missile system in Europe and that while the US had initially promised that the real target of this system was Iran, now that the Iranian nuclear issue had been solved, the US was still deploying the system.  Putin added that the US was clearly attempting to change the world’s military balance.  And then the Russian footage showed this:

   

  

   

  According to the Kremlin, it was a mistakenly leaked secret document.  And just to make sure that everybody got it, RT wrote a full article in English about this in an article entitled “‘Assured unacceptable damage’: Russian TV accidentally leaks secret ‘nuclear torpedo’ design“. According to RT

  The presentation slide titled “Ocean Multipurpose System: Status-6” showed some drawings of a new nuclear submarine weapons system. It is apparently designed to bypass NATO radars and any existing missile defense systems, while also causing heavy damage to “important economic facilities” along the enemy’s coastal regions. The footnote to the slide stated that Status-6 is intended to cause “assured unacceptable damage” to an adversary force. Its detonation “in the area of the enemy coast” would result in “extensive zones of radioactive contamination” that would ensure that the region would not be used for “military, economic, business or other activity” for a “long time.” According to the blurred information provided in the slide, the system represents a massive torpedo, designated as “self-propelled underwater vehicle,” with a range of up to 10 thousand kilometers and capable of operating at a depth of up to 1,000 meters.

  Actually, such ideas are nothing new.  The late Andrei Sakharov had already proposed a similar idea to basically wipe out the entire US East Coast.  The Russians have also look into the possibility to detonate a nuclear device to set off the “Yellowstone Caldera” and basically destroy most of the USA in one shot.  While in the early years following WWII the Soviets did look into all sort of schemes to threaten the USA with destruction, the subsequent development of Soviet nuclear capabilities made the development of this type of “doomsday weapons” useless.  Personally, I don’t believe for one second that the Russians are now serious about developing such system as it would be literally a waste of resources.  So what is going on here?

  This so-called “leak” of “secret documents” is, of course, no leak at all.  This is a completely deliberate action.  To imagine that a Russian journalist could, just by mistake, film a secret document (helpfully held up for him by a general) and then just walk away, get it passed his editor and air it is laughable.  Any footage taken in a meeting of the President with his senior generals would be checked many times over.  No, this was a deliberate way to remind the USA that if they really are hell-bent on spending billions of dollars in a futile quest to create some kind of anti-missile system Russia could easily develop a cheap weapon system to still threaten the USA with total annihilation.  Because, make no mistake, the kind of long range torpedo being suggested here would be rather cheap to build using only already existing technologies.  I would even add that rather than setting such a weapon off the US coast the system could also be designed to fire off a secondary missile (ballistic or cruise) which could then fly to any inland target.  Again, such technologies already exist in the Russian military and have even been deployed on a smaller scale. See for yourself:

   

  Coming back to the real world, I don’t believe for one second that any type of anti-missile system could be deployed in Europe to shield NATO the EU or the US from a Russian retaliatory strike should the Empire ever decide to attack Russia.  All the East Europeans are doing is painting a cross-hair on themselves as these will be the very first targets to be destroyed in case of a crisis.  How? By use of special forces first and, if needed, by Iskander missile strikes if all else fails.  But the most likely scenario is that key components of the anti-missile system will suddenly experience “inexplicable failures” which will render the entire system useless.  The Russians know that and so do the Americans.  But just to make sure that everybody got the message the Russians have now shown that even a fully functional and survivable US anti-missile system will not protect anybody from a Russian retaliation.

  The sad thing is that US analysts all fully understand that but they have no say in a fantastically corrupt Pentagon.  The real purpose of the US program is not to protect anybody against a non-existing Russian threat, but to dole out billions of dollars to US corporations and their shareholders.  And if in the process the US destabilizes the entire planet and threatens the Russians – then “to hell with ‘em Russikes!  We are the indispensable nation and f**k the rest of the planet!”  Right?

  Wrong.

  What happened today is a gentle reminder of that.

  

  

  

  

  

• How To Know If You're A Fascist – Lessons From Yale & Mizzou

  Submitted by Bill Barlow via The Harvard Law Record,

  Usually, we at Harvard are more than happy to see Yale students make fools of themselves on camera. The video that emerged this week of Yale students screaming down one of their professors might make for a good laugh, if its implications were not quite so serious. It’s a scene we’ve seen played out far too often at college campuses in recent years, and it deserves to be called by what it is: a nascent form of fascism.

  In case you haven’t heard, Yale has recently endured a firestorm of protest after a lecturer that presides over one of the undergraduate colleges questioned whether concerns about the offensiveness of Halloween costumes had gone too far in impinging on free speech.

  In response, hundreds of protesters gathered on the quad, calling for Nicholas and Erika Christakis to be removed from their roles. Nicholas voluntarily came to discuss the matter with them, and soon, a crowd of students enveloped him.

  The video is chilling.

  One student is heard saying, “Walk away. He doesn’t deserve to be listened to.” When Nicholas started to explain himself, a student yells, “Be quiet!” and then proceeds to lecture him. When Nicholas calmly and politely says “I disagree,” the protestor explodes, screaming, “Why the fuck did you accept the position?! Who the fuck hired you?! You should step down!” Then, finally, “You’re disgusting!”

  The problem here isn’t that people disagree with what Nicholas said. The problem is that they are calling for reprisals against Nicholas and Erika simply for saying it. This recent movement of university students to use administrative procedures to punish speech with which they disagree should be called by its rightful name: proto-fascism.

  Several days later, students disrupted an event held by the William F. Buckley, Jr. program that was designed to highlight the importance of free speech. According to reports by the Yale Daily News, several attendees were spat on as they left.

  Once again, the problem isn’t that you disagree with what the event said (though, if you disagree with an event about the importance of free speech, that might be a cause for concern itself), but that you are using a tactic—spitting—that constitutes battery, and should never be used against someone for expressing beliefs that you disagree with.

  I understand that it can sometimes be difficult for college students today to tell the difference between fascist methods and non-fascist methods of advancing their beliefs and agendas. Luckily, I spent my senior thesis studying the rise of fascism in Europe, and am happy to give a few, easy tips about whether the activity you are engaged in adopts fascist tactics or not. To make it even easier, I’ve put it in table form:

  

   

  Of course, this isn’t an exhaustive list, but it’s a good starting point. Ask yourself the question: Am I calling for people to be officially sanctioned because of what they believe, or am I committing a crime against someone because of what they believe? If the answer is yes, you are probably engaging in fascist tactics.

  Given the public outcry, it seems that the majority of people, including the majority of progressive liberals, believe that Yale students calling for the resignation of those professors have gone too far in punishing free speech. The problem is that no one is willing to stand up to them. If we are going to begin anywhere, we are going to begin by calling them by their rightful name.

  They are fascists.

  They are fascists.

  They are fascists.

  

  

  

  

  

• Another Bubble Bursts: Ultra Luxury London Home Prices Tumble 12%

  In mid-September, when we looked at the Australian housing market, we said that in the aftermath of Beijing’s crack down on capital controls following its August currency devaluation, that “new Chinese ‘regulations’ may just kill Australia’s golden goose of ‘weath creation’ as Aussie’s largest trade partner sees its economy collapse.” More:

  While the Aussies themselves proclaimed a “war on cash,” it appears, as AFR reports, that Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing’s move to tighten capital controls. With Chinese banks now limiting any overseas transfer to USD50,000 – in an effort to control capital outflows – and with China dominating the Aussie housing market, one agent exclaimed, “it has affected 70 to 80 per cent of current transactions and some have already been suspended.”

  The results were immediate: “the tighter rules in China come as Sydney recorded its lowest auction clearance rate for the year this past weekend, while Melbourne has now recorded two weekends below the same time last year, according to Corelogic RP Data.”

  Two months later, the sudden withdrawal of Chinese hot and laundered money has just popped another housing bubble: perhaps the biggest one of all. London.

  Citing Richard Barber, a director at broker W.A. Ellis LLP, a unit of Jones Lang LaSalle Inc., Bloomberg reports that prices of homes valued at 5 million pounds ($7.6 million) or more fell 11.5% on a per square foot basis from the third quarter of 2014. Bloomberg is eager to assign the plunge on “the government’s stamp duty sales tax”, however that has been around for a while and only after the Chinese devaluation was there such a sudden drop in prices.

  What changed? Why China’s far more aggressive crackdown on the exporting of hot money, of course. Just like in Australia.

  The result has been sharp and acute: sales volumes across all homes in the best parts of central London dropped 14%, the realtor said on Thursday.

  “The bubble may already have burst” for the most expensive homes, Barber said. Now, “36 percent of all properties currently on the market across prime central London are being marketed at a lower price than they were originally listed at, with the average reduction in price being 8.5 percent.”

  

  According to the W.A. Ellis report, values across all homes in London’s best central districts rose 1.4 percent during the third quarter to 1,832 pounds a square foot, which means that the one segment most impacted was the one which also happens to be most desirable to offshore (read Chinese “all cash”) clients. 

  Neither the London housing bubble nor its sudden pop should come as a surprise to central bankers, either in the UK or in China. After all it is their easy money policies, and the creation of tens of trillions in excess deposits in banks via the reserve pathway (deposits which had to be parked in “safe” jurisdictions such as Swiss bank accounts until recently or in London/NY/SF/Vancouver real estate, that caused this.

  Sadly, and as usual feigning ignorance for the consequences of their actions, instead of finally admitting they are at fault, these same central bankers decided to take the easy way out and simply blame the market itself.

  Case in point BOE chief economist Andrew Haldane, who said on Thursday that the British housing market is “broken.”

  According to him, Britain needed to build around 200,000 new homes a year, and that its failure to build much more than half that, largely due to a lack of new public housing, had caused prices to rocket. “The UK housing market is broken,” he said at a meeting hosted by Britain’s Trades Union Congress. “There is a chronic and accumulated imbalance between demand and supply, and it is that which is sending skyward – and has sent skyward – house prices.”

  So a “broken market” leading to skyward prices due to lack of public housing (read even more debt creation and misallocation) – not a single word about price indescriminate foreign buyers benefitting from years of ZIRP and China’s 300 debt/GDP, not a single word about why private-sector builders are not building houses in the first place (after all if the demand was there, the private sector would have supplied the good).

  Just… “broken.”

  Sure – it’s easier to blame the market for being broken – and always in the passive voice – than taking responsibility for being the one whose policies broke it.

  And now, with the luxury bubbles in Australia and London popped and soon to be in tatters, we sit back and wait to see how long before it crosses the Atlantic, and such real abominations of the second housing bubble as Million Dollar Listing, can finally meet the fate of Wall Street Warriors.

  

  

  

  

  

  

• US Flies B-52 Bomber Near China Sandcastles: "Get Away From Our Islands!"

  The Pentagon was pretty proud of itself when, late last month, Washington sailed a guided missile destroyer by Subi Reef, one of Beijing’s man-made islands in the South Pacific. 

  The “freedom of navigation” exercise was designed to prove to China that the US wouldn’t be deterred from sailing through the disputed waters near the Spratlys even as Beijing claims the islands it’s built atop reefs represent new sovereign territory. 

  To be sure, the Obama administration really didn’t have much of a choice. America’s regional allies have become extremely unnerved with regard to the islands and so it was ultimately incumbent upon The White House to green light the pass-by to avoid giving the appearance that the US will no longer stand with its “friends” against “aggression.”

  And while the PLA didn’t surround the USS Lassen nor fire upon it, Beijing was livid and Admiral Wu Shengli went so far as to tell US chief of naval operations Admiral John Richardson that this needs to stop now unless the US wants to go to war.

  Late this afternoon, reports surfaced that the US has now flown a B-52 bomber over or least “near” the islands. Here’s Reuters with more:

  A U.S. B-52 strategic bomber flew over Chinese manmade islands in the South China Sea recently and was contacted by Chinese ground controllers but continued its mission undeterred, the Pentagon said on Thursday.

   

  “We conduct B-52 flights in international air space in that part of the world all the time,” Pentagon spokesman Peter Cook told a briefing. “My understanding is there was one B-52 flight, I’m not even sure the date on it, but there was an effort made by Chinese ground controllers to reach out to that aircraft and that aircraft continued its mission. … Nothing changed.”

  And here’s a more colorful account from The Hill:

  The United States flew two B-52 bombers over the weekend near man-made islands constructed by China in the South China Sea, a U.S. official tells The Hill, in a clear challenge to China’s territorial claims to the area.

   

  The bombers made one pass within 12 nautical miles of the islands, the official said, in what the military refers to as a “freedom of navigation” operation.

   

  During the operation, the Chinese military radioed the bombers, telling them to “get away from our islands.” The bombers did not comply, according to the U.S. official. 

   

  Questioned by The Hill about the official’s account, Pentagon press secretary Peter Cook on Thursday confirmed that a B-52 incident with China near the islands took place, but declined to say when.

   

  Pentagon spokesman Navy Cmdr. Bill Urban later said the B-52s did not get within 12 miles of the man-made islands, and called the flight part of “routine operations.”

  As The Hill goes on to note, and as we reported earlier this week, this comes as China sends J-11BH/BHS fighter jets to Woody Island, south of Hainan in what one could be forgiven for believing is an attempt to discourage US military flyovers. 

  US military flyover like the one described above.

  

  So there you have it, the latest escalation in what frankly is becoming an increasingly dangerous (and largely uneccesary) game of chicken.

  We’d also note that the US has expressed its intention to conduct the destroyer operations twice per quarter, so one wonders how many times the B-52s will be flying over “near” the islands.

  

  

  

  

  

• An Interactive Look At China's Massive Coal Bubble

  Submitted by Zachary Davies Boren via Greenpeace Energy Desk,

  China has given the green light to more than 150 coal power plants so far this year despite falling coal consumption, flatlining production and existing overcapacity.

  According to a new Greenpeace analysis, in the first nine months of 2015 China’s central and provincial governments issued environmental approvals to 155 coal-fired power plants — that’s four per week.

  

   

  The numbers associated with this prospective new fleet of plants are suitably astronomical.

  Should they all go ahead they would have a capacity of 123GW, more than twice Germany’s entire coal fleet; their carbon emissions would be around 560 million tonnes a year, roughly equal to the annual energy emissions of Brazil; they would produce more particle pollution than all the cars in Beijing, Shanghai, Tianjin and Chongqing put together; and consequently would cause around 6,100 premature deaths a year.

  But they’re unlikely to be used to their maximum since China has practically no need for the energy they would produce.

  Coal-fired electricity hasn’t increased for four years, and this year coal plant utilisation fell below 50%.

  It looks like this trend will continue, with China committing to renewables, gas and nuclear targets for 2020 — together they will cover any increase in electricity demand.

  Wasted trillions

  What looks to have triggered this phenomenon is Beijing’s decision to decentralise the authority to approve environmental impact assessments on coal projects starting in March of this year.

  But it’s been a problem years-in-the-making, driven by the Chinese economy’s addiction to debt-fuelled capital spending.

  Almost 50% of China’s GDP is taken up by capital spending on power plants, factories, real estate and infrastructure.

  It’s what fuelled the country’s enormous economic growth in recent decades, but diminishing returns have fast become massive losses.

  Recent research estimated that the equivalent of $11 trillion (more than one year’s GDP) has been spent on projects that generated no or almost no economic value.

  Since the country’s power tariffs are state controlled, energy producers still receive a good price despite the oversupply.

  And boy is it a huge oversupply: China’s thermal power capacity has increased by 60GW in the last 12 months whilst coal generation has fallen by more than 2% and capacity utilisation has fallen by 8%.

  With thermal power generation this year is equal to what it was in 2011, China has essentially spent four years building 300 large coal power plants it doesn’t use.

  Total spend on the upcoming projects would be an estimated $70 billion, with the 60% controlled by the ‘Big 5′ state-owned groups potentially adding 40% to company debt without any likely increase in revenue.

  Basically, if these plants get built China’s coal bubble will be inflating faster than ever.

  <img alt="Yellow river water pollution coal" data-facebook="http://energydesk.greenpeace.org/2015/11/11/chinas-coal-bubble-155-new-overcapacity/?picshare=2030" data-tweet="China's coal bubble:… http://pic.twitter.com/wExMgbwZsH http://energydesk.greenpeace.org/2015/11/11/chinas-coal-bubble-155-new-overcapacity/” src=”http://energydesk.greenpeace.org/wp-content/uploads/2014/12/19-490A7676.jpg” style=”height: 400px; width: 600px;” />

   

  Environmental impacts

  Because there’s no room for this much new coal, and because China is sticking to its 15% non-fossil fuel target by 2020, older plants will likely be closed.

  Because of that it’s unlikely the new fleet would cause a net increase in carbon emissions, particulate pollution or premature deaths.

  To appreciate the sheer scale of the plan, however, here are some of eye-watering stats:

  Assuming they operate the same number of hours per year as the most efficient Chinese coal plants did in 2012, these 155 would produce 96,000 tonnes of SO2 pollution, 124,000 tonnes of NOx and 29,000 tonnes of particulates per year.

  Modelling suggests that this would cause 6,100 premature deaths a year — that’s 150,000 over a 24-year operating life.

  Around Shenyang, where there are reports of record pollution levels 50 times worse than the World Health Organisation’s recommended limit, there are plans for five new coal plants.

  Annual carbon emissions of 560 million tonnes would equal 6% of China’s total CO2.

  But here’s an oft-overlooked consequence of these coal plants: water.

  Nearly half of the proposed power plants are in areas of extremely high water stress, a further 5% are in high water stress regions and another 6% are in arid places.

  Demanding at least 310-370 million cubic metres of water every year (which would meet the needs of 5-6 million city dwellers), these projects would exacerbate the conflict between urban, agricultural and industrial consumption.

  So they’re not only a waste of money.

   

  

  

  

  

  

• "What We've Got Here Is A Failure To Communicate"

  The Fed goes 6 for 6 today as Bullard, Yellen,Lacker, Evans, Dudley, and Fischer (respectively) all manage to jawbone a looming rate hike without any confirmation of the "well everything must be awesome" meme to satisfy increasingly doubtful stock market worshippers…

   

  

   

   

  Summarized…

  • *BULLARD: NO REASON TO CONTINUE EXPERIMENT WITH `EXTREME' POLICY
  • *BULLARD WANTS TO RETURN TO 1984-2007 U.S. MACROECONOMIC SETTING

  • *YELLEN: MUST BE MINDFUL OF NEW POLICY TRANSMISSION CHANNELS
  • *YELLEN DOESN'T DISCUSS OUTLOOK FOR FED POLICY, ECONOMY IN TEXT

  • *LACKER SAYS NOT SURPRISED BY `POPULIST ANGER' AGAINST FED
  • *LACKER SAYS `PLAUSIBLE' QE HAD SCANT REAL EFFECTS ON ECONOMY

  • *EVANS SAYS U.S. FUNDAMENTALS LOOK `PRETTY GOOD' AT THE MOMENT
  • *EVANS: TIMING OF FED LIFTOFF LESS IMPORTANT THAN RATE PATH

  • *EVANS FAVORS `SOMEWHAT LATER LIFTOFF' THAN MANY FED COLLEAGUES
  • *EVANS SEEKS SLOWER RATE-RISE PATH THAN 25 BPS EVERY OTHER MTG

  • *DUDLEY: IT'S POSSIBLE LIFTOFF CONDITIONS MAY SOON BE SATISFIED
  • *DUDLEY: RISKS OF MOVING TOO FAST VS TOO SLOWLY NEARLY BALANCED

  • *FISCHER: U.S. ECONOMY WEATHERING HEADWINDS FROM STRONGER DOLLAR
  • *FISCHER: OCT. FOMC SIGNALED DEC. RATE RISE MAY BE APPROPRIATE

  By the close, December rate hike odds had actually dropped very modestly to 66.0%. If these guys can't 'communicate' with one another, then how are investors (and algorithms) supposed to understand what they are doing?

  

  

  

  

  

• Runaway Stories & Fairy Tale Endings: The Cautionary Tale Of Theranos

  Looking back at the build up and the let down on the Theranos story, the recurring question that comes up is how the smart people that funded, promoted and wrote about this company never stopped and looked beyond the claim of “30 tests from one drop of blood” that seemed to be the mantra for the company. While we may never know the answer to the question, Aswath Damodaran offers three possible reasons that should operate as red flags on future young company narratives…

  1. The Runaway Story: If Aaron Sorkin were writing a movie about a young start up, it would be almost impossible for him to come up with one as gripping as the Theranos story: a nineteen-year old woman (that already makes it different from the typical start up founder), drops out of Stanford (the new Harvard) and disrupts a business that makes us go through a health ritual that we all dislike. Who amongst us has not sat for hours at a lab for a blood test, subjected ourselves to multiple syringe shots as the technician draw large vials of blood, waited for days to get the test back and then blanched at the bill for $1,500 for the tests? To add to its allure, the story had a missionary component to it, of a product that would change health care around the world by bringing cheap and speedy blood testing to the vast multitudes that cannot afford the status quo.

   

  The mix of exuberance, passion and missionary zeal that animated the company comes through in this interview that Ms. Holmes gave Wired magazine before the dam broke a few weeks ago. As you read the interview, you can perhaps see why there was so little questioning and skepticism along the way. With a story this good and a heroine this likeable, would you want to be the Grinch raising mundane questions about whether the product actually works?

   

  2. The Black Turtleneck: I must confess that the one aspect of this story that has always bothered me (and I am probably being petty) is the black turtleneck that has become Ms. Holmes’s uniform. She has boasted of having dozens of black turtlenecks in her closet and while there is mention that her original model for the outfit was Sharon Stone, and that Ms. Holmes does this because it saves her time, she has never tamped down the predictable comparisons that people made to Steve Jobs.

   

  

   

  If a central ingredient of a credible narrative is authenticity, and I think it is, trying to dress like someone else (Steve Jobs, Warren Buffett or the Dalai Lama) undercuts that quality.

   

  3. Governance matters (even at private businesses): I have always been surprised by the absence of attention paid to corporate governance at young, start ups and private businesses, but I have attributed that to two factors. One is that these businesses are often run by their founders, who have their wealth (both financial and human capital) vested in these businesses, and are therefore as less likely to act like “managers” do in publicly traded companies where there is separation of ownership and management. The other is that the venture capitalists who invest in these firms often have a much more direct role to play in how they are run, and thus should be able to protect themselves. Theranos illustrates the limitations of these built in governance mechanisms, with a board of directors in August 2015 had twelve members:

   

   

  

   

  I apologize if I am hurting anyone’s feelings, but my first reaction as I was reading through the list was “Really? He is still alive?”, followed by the suspicion that Theranos was in the process of developing a biological weapon of some sort. This is a board that may have made sense (twenty years ago) for a defense contractor, but not for a company whose primary task is working through the FDA approval process and getting customers in the health care business. (Theranos does some work for the US Military, though like almost everything else about the company, the work is so secret that no one seems to know what it involves.)

   

  The only two outside members that may have had the remotest link to the health care business were Bill Frist, a doctor and lead stockholder in Hospital Corporation of America, and William Foege, worthy for honor because of his role in eradicating small pox. My cynical reaction is that if you were Ms. Holmes and wanted to create a board of directors that had little idea what you were doing as a business and had no interest in asking, you could not have done much better than this group of septuagenarians. 

   

  Bottom Line

   

  I would like to believe that I would have asked some fundamental questions about the science behind the product and how it was faring in the FDA approval process, if I had been a potential investor or journalist. However, it is entirely possible that listening to the story, I too would have been tempted to go along, wanting it so much to be true that I let hope override good sense. Some of my worst mistakes in investing (and life) have been when I have fallen in love with a story so much that I have willed a happy ending to it, facts notwithstanding.

   

  The question of whether Theranos makes it back to being a valuable, going concern rests squarely on the science of its product(s).

  • If the Nanotainer is a revolutionary breakthrough and what it needs is scientific fixes to become a reliable product, there is hope. But for that hope to become real, Theranos has to be restructured to make this the focus of the business and become much more transparent about the results of its tests, even if they are not favorable. Ms. Holmes has to scale back many of her high profile projects (virtuous and noble though they might be) and return to running the business.
  • If the Nanotainer turns out to be an over hyped product that is unfixable, because it is scientifically flawed, Theranos has a bleak future and while it may survive, it will be as a smaller, low profile company. The investors who have put hundreds of millions in the company will lose much of that money but as I look at the list, I don’t see any of them entering the poor house as a consequence.

  There is a chance that the lessons about not letting runaway stories stomp the facts, never trusting CEOs who wear only black turtlenecks and caring about governance and oversight at even private businesses may be learned, but I will not hold my breath expecting them to have staying power.

  Excerpted from Musings On Markets, read more here…

  

  

  

  

  

• Here Is The Biggest, And Most Underreported, Risk Facing China

  When it comes to the laundry list of China “hard-landing” risk factors, after many years, even the mainstream media has finally gotten it mostly right:

  • a slowing economy crippled by soaring debt, now over 300% of GDP
  • an economy which is overly reliant on fixed investment
  • an artificially high exchange rate which is adversely impacting exports and impairing trade, in a “beggar thy neighbor” world everyone is rapidly devaluing their own currency
  • the feedback loop of plunging commodity prices and highly levered domestic corporation which can not pay their annual interest expense payments at current prices of industrial commodities, leading to surging business failures and defaults
  • a burst housing bubble which recently popped (although slowly growing again)
  • a burst stock market bubble which recently popped (although slowly growing again)
  • Non-performing loans, as high as 20%, and metastssizing across the Chinese banking sector

  And much more.

  However one risk, perhaps the biggest one, which has so far flown deep under the radar, is also the biggest one – which may explain why so few have noticed it – namely social discontent, resulting from a breakdown in recent “agreeable” labor conditions, wage cuts and rising unemployment, leading to labor strikes and in some cases, violence.

  Over the past few months we have chronicled several such incident which suggest that the labor market is rapidly becoming China’s biggest risk factor, such as:

  • The “Hard-Landing” Has Arrived: Chinese Coal Company Fires 100,000
  • Thousands Of Angry Unpaid Chinese Workers Protest Shocking Bankruptcy Of Major Telecom Supplier.
  • And earlier today, 600 Hungry, Angry Chinese Workers “Sleep On The Street” After CEO Disappears With Their Wages

  But the best confirmation just how serious the employment situation in China is getting comes courtesy of the China Labour Bulletin website, which tracks the number of largely unreported labor protests and strikes across China.

  Presenting exhibit A demonstrating how, quietly, deteriorating employment conditions have become a gaping risk for China’s politburo: the total number of strikes over the past 5 years:

  

   

  And for those who prefer a hands on experience, here is an interactive tracker of every single reported strike that has been caught by the website over the past 5 years:

  

  We wonder: just how much “more exponential” will China’s “strike chart” have to get before everyone else finally notices?

  

  

  

  

  

• Veterans Affairs Paid Out $142 Million In Cash Bonuses Immediately Following Deadly Scandal

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  The Department of Veterans Affairs doled out more than $142 million in bonuses to executives and employees for performance in 2014 even as scandals over veterans’ health care and other issues racked the agency.

   

  The agency paid more than $380,000 in 2013 performance bonuses to top officials at hospitals where veterans faced long delays in receiving treatment, including those under investigation for wait-time manipulation.

   

  In Tomah, Wis., the former chief of staff of the VA medical center there, Dr. David Houlihan — whom veterans nicknamed the “Candy Man” because of his prolific prescribing of narcotics — received a $4,000 bonus in December. That was nine months after an inspector general investigation report concluded he was prescribing alarmingly high amounts of opiates. And it was four months after Marine Corps veteran Jason Simcakoski, 35, died of “mixed-drug toxicity” as an inpatient at Tomah after he was prescribed a fatal cocktail of medications, including opiates. The inpatient pharmacist supervisor also received a $1,050 bonus in December. A spokesman for the Tomah VA declined to comment. The VA moved last month to fire Houlihan. A lawyer who represented him did not respond to a message Tuesday seeking comment.

   

  In Augusta, Ga., VA financial manager Jed Fillingim was awarded a $900 performance bonus. He drew scrutiny from Congress last year after news reports revealed he admitted drinking and driving a government truck to a VA meeting in 2010 and a co-worker fell from the truck and was killed.

   

  – From the excellent USA Today article: Veterans Affairs Pays $142 Million in Bonuses Amid Scandals

  For several months in 2014, one of the biggest stories in America revolved around revelations of incompetence and death at the Department of Veterans Affairs (VA). Specifically, an internal VA investigation admitted at least 23 veterans died while waiting for care, and that 120,000 were being affected by delinquent care. The FBI subsequently launched a criminal probe into the VA, and here’s what the White House had to say about the entire affair:

  A summary of the review by deputy White House chief of staff Rob Nabors says the Veterans Health Administration must be restructured and that a “corrosive culture” has hurt morale and affected the timeliness of health care. The review also found that a 14-day standard for scheduling veterans’ medical appointments is unrealistic and that some employees manipulated the wait times so they would appear to be shorter.

  So how did the VA respond to its shocking and deadly mismanagement of U.S. veterans’ affairs? By spending $142 million in cash bonuses to its employees, some of whom should have clearly been fired, if not jailed. Thank you U.S. taxpayer.

  From USA Today:

   

  WASHINGTON – The Department of Veterans Affairs doled out more than $142 million in bonuses to executives and employees for performance in 2014 even as scandals over veterans’ health care and other issues racked the agency.

   

  Among the recipients were claims processors in a Philadelphia benefits office that investigators dubbed the worst in the country last year. They received $300 to $900 each. Managers in Tomah, Wis., got $1,000 to $4,000, even though they oversaw the over-prescription of opiates to veterans – one of whom died.

   

  The VA also rewarded executives who managed construction of a facility in Denver, a disastrous project years overdue and more than $1 billion over budget. They took home $4,000 to $8,000 each. And in St. Cloud, Minn., where an internal investigation report last year outlined mismanagement that led to mass resignations of health care providers, the chief of staff cited by investigators received a performance bonus of almost $4,000.

  Yes, you read that right: $1 billion over budget. Somebody got paid…

   In all, some 156,000 executives, managers and employees received them for 2014 performance.

   

  The agency paid more than $380,000 in 2013 performance bonuses to top officials at hospitals where veterans faced long delays in receiving treatment, including those under investigation for wait-time manipulation. “Rewarding failure only breeds more failure,” he said Tuesday. “Until VA leaders learn this important lesson and make a commitment to supporting real accountability at the department, efforts to reform VA are doomed to fail.”

   

  Miller spearheaded – and the House passed – a measure last year that would have eliminated bonuses for VA senior executives for five years. But ultimately the House and Senate compromised on legislation that still allows the VA to hand out up to $360 million annually to executives, managers and employees.

   

  Overall, the agency awarded $276 million in incentives in 2014, including retention and relocation payments, rewards for saving money on travel and coming up with inventive ideas, according to committee data.

  The cash bonuses of $142.5 million were tied to performance reviews.

  Now here are some of the more egregious examples of bonus payments highlighted by USA Today:

  Tomah, Wis., the former chief of staff of the VA medical center there, Dr. David Houlihan — whom veterans nicknamed the “Candy Man” because of his prolific prescribing of narcotics — received a $4,000 bonus in December. That was nine months after an inspector general investigation report concluded he was prescribing alarmingly high amounts of opiates.  And it was four months after Marine Corps veteran Jason Simcakoski, 35, died of “mixed-drug toxicity” as an inpatient at Tomah after he was prescribed a fatal cocktail of medications, including opiates. The inpatient pharmacist supervisor also received a $1,050 bonus in December. A spokesman for the Tomah VA declined to comment. The VA moved last month to fire Houlihan. A lawyer who represented him did not respond to a message Tuesday seeking comment

   

  In Augusta, Ga., VA financial manager Jed Fillingim was awarded a $900 performance bonus. He drew scrutiny from Congress last year after news reports revealed he admitted drinking and driving a government truck to a VA meeting in 2010 and a co-worker fell from the truck and was killed.  Fillingim resigned from the VA after the incident but was rehired in March 2011, WRC-TV reported. A spokesman for the VA Medical Center in Augusta, Brian Rothwell, said Fillingim is not employed there.

   

  In St. Paul, Minn., VA benefits office director Kimberly Graves received a bonus of $8,697 for 2014 performance. A VA inspector general report issued in September this year concluded Graves improperly used her authority to engineer a switch into her current post in October 2014. IG investigators concluded she also improperly received an additional $129,000 related to the move. Graves pleaded the Fifth Amendment and declined to answer questions at a House VA Committee hearing last week.

  Of course, this is just the latest example of government bureaucrats not only being “above the law,” but actually being rewarded for criminal behavior. The incentive structure throughout government, Wall Street, and big business generally is that “crime pays,” which is exactly why we’re seeing more and more of it. It will only get worse, until we grow up as a culture and demand accountability.

  Until then…

  

  

  

  

  

  

• Japan Was Just Added To List Of "Partially Dangerous" Places For Tourists To Visit In The World

  Whether it is because of Abe’s shift to a newly militaristic doctrine or simply its proximity to a more sabre-rattling China is unclear, but Britain’s Foreign Office just added Japan to its list of “dangerous” or “partially dangerous” countries.

   

  

   

  As ValueWalk’s Vikas Shukla notes, the list of “high risk” countries includes Syria, Yemen, Tunisia,
  Afghanistan, Iraq, Somalia, Congo, Libya, Burundi, Chad, Central African
  Republic, Guinea, Somaliland, South Sudan, Sierra Leone, Niger,
  Mauritania, and the Palestinian territories.

  Japan among partially dangerous countries

  Then there are 45 countries that are partially dangerous.
  Surprisingly, Japan has been included in this list. Parts of Russia,
  including areas of Chechnya and regions near the border with Ukraine,
  are also deemed dangerous. Here’s the full list of 45 “partially
  dangerous” countries.

  • Algeria
  • Angola
  • Armenia
  • Azerbaijan
  • Bangladesh
  • Burkina Faso
  • Burma (Myanmar)
  • Cambodia
  • Cameroon
  • Colombia
  • Djibouti
  • Ecuador
  • Egypt
  • Eritrea
  • Ethiopia
  • Georgia
  • Haiti
  • India
  • Iran
  • Israel
  • Ivory Coast
  • Japan
  • Jordan
  • Kenya
  • Kosovo
  • Lebanon
  • Madagascar
  • Malaysia
  • Mali
  • Nepal
  • Nigeria
  • Pakistan
  • Philippines
  • Republic of Congo
  • Russia
  • Saudi Arabia
  • Sudan
  • Tajikistan
  • Thailand
  • Turkey
  • Uganda
  • Ukraine
  • Venezuela
  • Western
  • Sahara

  If you have already booked tickets to any of these countries, you may want to reconsider it.

  

  

  

  

• This All Has A Familiar Ring To It

  Via NorthmanTrader.com,

  The recent new highs on the $NDX accompanying the recent rally off of the August and September lows have been accompanied by bullish headlines. $SPX 2300+, $DJIA 20K, etc. And it is true the action in some stocks is truly awe inspiring.

  Yet all the action has an oddly familiar ring to it and it may not be bullish. While most traders today haven’t really lived through the 2000 bubble older hats like me have institutional memory. Back then it was the “horsemen” of stocks that seemed to defy gravity and just kept pushing higher to stratospheric valuations. Yet back then the leadership was ever more narrowing and oddly enough we are now finding ourselves at a very similar spot.

  And not only is the leadership narrowing, but it is happening at exactly the same price level.

  In the $NDX chart below the horizontal red line is representing the exact same price as 15 years ago, right at the market’s peak of the year 2000. Note the negative divergence on the bullish percentage of stocks in the $COMPQ (click chart to zoom in). New highs with fewer stocks participating:

  

  It is of course the $COMPQ that did not confirm news highs during this recent rally:

  

   

  Not even close. Does this all point to an imminent crash similar to 2000? I can’t know, nobody can, but we can observe that the recent rally excels in non participation as opposed to participation.

  On an equal weight basis both $RSP and $XVG indicate significant weakness:

  

  

  Insiders are not buying:

  

   

  And high yield? $JNK and $HYG are not playing along either:

  

   

  Now here’s where it gets interesting. The leaders that have been driving this rally are vastly disconnected from their moving averages and very overbought. Just a basic reconnect to their weekly 5EMA and 8MAs risks a 5-10% correction in these stocks.

  Weekly chart examples:

  

  

  

   

  Extended much? You decide. But all these factors together have a very familiar ring to them.

  But before you think this issue is one of tech only, it is not. It’s one of haves versus have nots. And this large negative divergence extends to large cap stocks across the board as seen here in the $OEX:

  

  The big difference now compared to 2000? All the central banks are “all in”, although the ECB may add to its QE program in December.

  Last time central banks came to the rescue of a sharply correcting market by cutting rates. Who will be coming now?

  

  

  

  

  

• Can't Afford To Buy A House? Buy It Anyway Housing "Experts" Advise

  “In metros with high-income growth, unaffordable mortgage payments can become affordable within a few years,” writes Trulia Housing Economist Ralph McLaughlin in a blog post titled “For Millennials, Buying an Unaffordable Home Isn’t Always a Bad Idea”. 

  Now first, buying an unaffordable home is always a bad idea, just like buying an unaffordable anything. 

  Sure, it might one day become affordable, but saying it’s a good idea to buy something that you can’t afford because circumstances could eventually conspire to make you richer is like saying it’s a good idea to quit your day job and become a traveling magician because there’s a chance people will love your act. After all, on this logic, one could buy a Ferrari because there's a chance you could win the lottery next week (well, unless you're playing in Illinois where they'll pay you in IOUs).

  In other words, you can justify anything you want by saying it might turn out ok, but the flaw in that logic seems to have escaped McLaughlin (who has a Ph.D. in Planning, Policy, and Design from the University of California at Irvine) because as you’ll read below, he thinks millennials should consider buying houses where mortgage costs are too high as a percentage of their income on the assumption that based on local trends, their incomes will eventually rise. Here’s more:

  In many housing markets where most workers see strong wage and income growth – New Haven, Conn., Providence, R.I., and Newark, N.J., among them – mortgage payments actually shrink as part of the monthly budget and can become affordable within just a few years and, in some places, in just a few months. 

   

  We’ve crunched the numbers to identify where, and when, buying an unaffordable home might not be such a terrible idea. To do this, we’ve identified metros: 

  • Where the median home is feasibly unaffordable to millennial households (25-34 year olds), that is, where initial mortgage payments exceed 31% the federal government’s definition of unaffordable 
  • And those payments don’t exceed 43% of income, the limit a vast majority of lenders place on new mortgages 
  • And finally, we projected lifecycle income growth of millennial households to calculate the number of years it would take for mortgage payments to drop below 31% of a household’s income. 

  It gets still better. Here's a look an infographic which shows you how many it would take in select areas of the country for your mortgage payment to become "affordable":

  

  And here's a chart from Bloomberg which shows New Haven and Providence (mentioned above by McLaughlin as places millennials may want to consider if they want to buy above their means):

  

  So just to be clear, Trulia is saying that it would be a good idea for millennials to buy a house they can't afford in New Haven and Providence because in 3 years it will be "affordable." Here's how Trulia came up with these figures:

  Second, we’ve estimated projected 30-year income growth of millennial households. To do so, we looked at the percentage difference in median household income between households aged 25-34 and households aged 55-64 in each metro using 2014 American Community Survey Data. We annualized this percentage over 30 years to get an idea of how much income growth a 25-34 year old can expect over their career, and then, assuming an inflation rate of 2%, use it project future monthly income for the median 25-34 year old household. 

  That's it? You just took a look at what older people make versus younger people and annualized it? What happens if that changes? What happens if there's another deep recession? You're looking at a 30-year time frame here. Anything could happen to income trends in these areas over three decades. Not to mention the fact that while losing one's job is always a bad thing when it comes to making mortgage payments, it's made that much worse if you've bought a house you can't afford.

  Trulia does go on to show that there are plently of places where buying a home is easily affordable now – like pristine Detroit – and based on the same income analysis, you'd have plenty of cushion the event circumstances change. We recommend millennials choose wisely when it comes to overreaching based on simplistic analysis lest you should end up not being able to make the payments, because then you might find yourself in the market for a rental and with current asking prices in that market going parabolic, you might soon find yourself back in your parents' basement.

  

  

  

  

  

• World's Largest Hedge Fund Dumped 31% Of Its US Equity Holdings In The Third Quarter

  The world’s biggest hedge fund, Ray Dalio’s Bridgewater Associates got into some hot water in the past few months when it was accused by many members of the underperforming “hedge fund hotel” club for being the “risk parity” catalyst that sent the market tumbling in August, and perhaps for being the catalyst for the August 24 market crash.

  And while the bulk of Bridgewater’s asset are in various commodities and futures, most of which are never reported to the public, earlier today it did disclose its long holdings in public equities when it filed its latest 13F. Perhaps those accusing Bridgewater of being the market-moving catalyst did have a point, because after posting a total AUM of $10.8 billion at June, this total declined by a whopping 31% to just $7.5 billion as of September 30.

  Here is what Brigewater was dumping (and adding).

  Bridgewater sold 41% of its holdings in the world’s two largest EM ETFs in the third quarter amid a rout in developing-nation assets.  Specifically, it cut its investments in Vanguard Group Inc. and BlackRock Inc.’s ETFs to a combined 104 million shares, from 175 million in the previous three-month period.

  The value of the ETF holdings dropped more than 50 percent to $3.4 billion as a result of share price declines and the divestments.

  In other words, if anyone is looking for the culprits behind the aggressive ETFlash Crash of August 24, Bridgewater may indeed be a good starting point.

  As a result of this major unwind in Emerging Market exposure, Bridgewater’s total US public equity holdings dropped 31%.

  As Bloomberg adds, the company has said the impact of emerging-market losses is likely to be more widespread than in the crises of the 1980s and 1990s because investors have more money invested in developing markets. Of course, that also means that the company’s prior belief in an EM resurgence has gone the way of the “beautiful deleveraging.”

  The reduction in the emerging-market investments marked a sharp reversal after Bridgewater had steadily boosted its holdings in recent years.

  Its holdings in the $36 billion Vanguard FTSE Emerging Markets ETF dropped to 67.4 million shares by September, from a peak of 116.2 million in December. It had 19 million shares in June 2011.

  The hedge fund’s investment in the $23 billion iShares MSCI Emerging Markets ETF fell to 36.5 million shares from 80.1 million a year earlier.

  Also notable: Bridgewater’s SPY holdings declined by 230,000 shares, which happened at the same time as Dalio was buying up single name constituents of the ETF. Was that the risk-imparity pair trade?

  Finally, note that while Bridgewater was buying up single names as it was selling ETFs, it also sold half its AAPL stake.

  Altogether, a dramatic deleveraging and gross derisking over the third quarter. The question is whether now that Bridgewater has once again rerisked, it will repeat the whole exercise all over again leading to the next market crash.

  Finally, here is a break down of Bridgewater’s top 10 publicly held equities.

  

  

  

  

  

  

• Get Ready For Crazy

  Submitted by Jeff Thomas via InternationalMan.com,

  Recently, the Honduras homes and businesses of the family of Jaime Rosenthal were raided by the Honduran government. The properties themselves were seized and other assets taken. The family-owned bank was also seized and has been forced into liquidation, creating potential financial crisis for its 220,000 clients.

   

  Throngs of angry clients, unable to go about their personal and professional business, have blocked surrounding streets, demanding the release of their savings.

   

  

   

  In response, the government has promised that each depositor will have the opportunity to withdraw up to US$9,600 from other banks, beginning with the smallest depositors.

  At first glance, those of us who live in the First World may regard this sort of crazy seizure as typical Third World governmental behaviour, but, in recent years, the First World has been changing. We’ve witnessed banks and governments confiscating depositors’ funds, increasing capital controls, and instituting asset forfeiture laws that have turned police departments into looters. They’ve created dramatically increased powers for all authorities, leading the populace to live in fear of detention or arrest for the smallest perceived infraction.

  Some First World governments have taken a decidedly Third World turn.

  And in this instance we see an ironic twist: The raids in Third World Honduras were a direct result of the legalised shakedowns that are occurring in the First World.

  With the understanding that the U.S. government now seizes the assets of those they charge with a crime (and sometimes with no charge having been made), the government of Honduras undertook their seizure of the Rosenthals’ assets as a preemptive act, after one of the Rosenthals had been arrested in the U.S.

  In essence, what we’re seeing is one government acting in a totalitarian manner to preempt another government acting in a totalitarian manner. Worse, the latter government is that of the U.S., once regarded as the leader of the Free World.

  In discussing the event with a colleague in Honduras, I was advised that, as she is British, she has come to assume that the First World, into which she had been born, was more developed, more civilised than the Central American country in which she now resides. Although she was aware of the 2013 bank confiscation in Cyprus and has heard rumblings of new restrictive laws in the EU and U.S., she had not pieced together the fact that, whilst Third World countries continue to develop, the First World is going in the opposite direction and is beginning to pass the Third World level on their way down.

  The First One to Make the Grab Gets the Spoils

  The Honduran government said in a statement that it conducted the raids and closed the bank because it “wants to prevent the transfer of assets during the investigation.”

  It would seem that they were content to leave the future of the Rosenthal businesses to the free market, but were not willing to allow the U.S. government to seize substantial assets that make up a part of the Honduras economy. The choice, then, was to either allow the U.S. plunderers to seize assets located in another country, or to become the plunderers themselves. In essence, “I don’t wish to see my neighbour robbed, but if I know someone’s coming to my neighbourhood to rob him, I’ll rob him myself first.”

  If this were to be the only incident of its kind, it wouldn’t be worth the effort to provide comment. However, it may well be a bellwether of events to come. Certainly, those who seek public office (in all or at least most countries) are far more focused on their own benefit than the well-being of their constituents. As such, if they feel that the squeeze is on (be it a political, military or monetary squeeze), we can expect them to behave in a manner that’s intended to save their own skin, not that of their people.

  Historically, such conditions begin with a few small warnings, such as the one in Honduras, then, at some point, bubble over quickly. The “crazy” period is usually brief, usually a few years at most, then it burns itself out after the wealth has disbursed.

  If this premise is correct, we can predict a period of increased looting by governments in general. We already know that the leading jurisdictions of the First World are in serious economic trouble and are instituting draconian measures at home in order to grab what they can from their citizens on their way down. In addition, they’re spreading their reach throughout the world under the auspices of organisations like the Organisation for Economic Cooperation and Development to loot assets in other countries under the pretence that they constitute “the good guys,” whilst the rest of the world constitutes, “the bad guys.”

  The real truth, of course, is that “the good guys” are in no way better than the rest of the world; they merely have more power and, at least for the present, have the ability to presume their good guy status through force.

  By extension, we can anticipate that, as the Great Unravelling progresses, we shall see actions being taken by governments and financial institutions worldwide that we’ve never seen in our lifetimes. An aggressive action taken by one entity will cause a knee-jerk reaction by the target entity and, in some cases, chain reactions will occur. In addition, as in Honduras, we shall see preemptive aggressive actions taken in the belief that another entity may move first. Along the way, a sense of what is morally right will lose its importance. In its place, we shall see a “Nice guys finish last,” ethic come to the fore. Those who behave the most honourably in this period will become the foremost victims of those whose ethics have, until the present, been more the product of convention than conviction.

  The looting of the tribes is nothing new. It goes back throughout history. It flourishes during crisis times, then subsides, as productivity reasserts itself.

  The question that remains is what to do during the crisis period, when, it seems, everyone is going after each other’s possessions.

  History tells us that the vast majority of people hunker down and hope that they’re not victimised too badly. In the end, they generally end up as casualties to a greater or lesser degree.

  Others vote with their feet. Throughout history, whenever there’s been turmoil in some countries, there have been other countries where the government and/or society is less aggressive and less rapacious. The same is true today. There are many jurisdictions where those who plan ahead can either move permanently, or merely plan to wait out the storm.

  

  

  

  

  

• US Government Shocked To Find Job Openings Continue To Surge Above Actual Hires

  Something odd is happening in the US labor market.

  As the BLS reports in its latest JOLTS report, “the number of hires has exceeded the number of job openings for most of the JOLTS history” which should make intuitive sense for any normal, “growing” economy, where the labor market works as expected. However, as JOLTs also adds, “over the past year, this relationship has changed as job  openings have outnumbered hires for several months.”

  This is how this shocking inverted relationship looks like:

  

   

  What is really happening is that hires have plateaued and at 5.049MM in September, were the lowest since April! The last time we have seen such a dramatic peak in hiring was in 2005-2006, just before the economy and the market crashed.

  Is the labor market rolling over?

  

  

  The JOLTs economists at the BLS are very confused, as the following shows:

  Hires exceeded job openings for over thirteen years, between December 2000 and July 2014. Job openings exceeded hires for the first time in August 2014, although hires then outnumbered job openings for the next five months. Since February 2015, however, this new relationship has persisted with job openings exceeding hires for eight consecutive months

   

  At the end of the most recent recession in June 2009, there were 1.3 million more hires throughout the month than there were job openings on the last business day of the month.

   

  In September 2015, there were 477,000 fewer hires throughout the month than there were job openings on the last business day of the month.

  So what is going on here? Simple: a broken labor market, in which as a result of 94 million people out of the labor force, most of whom have been out of a job for years and have lost their “hirability”, US businesses are unable to grow and fill open slots, as a result hiring is sliding. And, since hiring is so low, the other end of the job pipeline, separations, are also painfully low.

  Which means that workers have little ability to negotiate wage hikes using the threat of quitting and finding a better paid job elsewhere, due to precisely this dislocation in the labor market.

  Worst of all, with every passing month this dislocation is getting worse and continues to press down on wages: which is precisely the conundrum the Fed has been unable to solve and is the reason why the missing piece in the US economic puzzle “wage growth”, refuses to appear.

  

  

  

  

  

• Black Fridays Matter

  Submitted by Lance Roberts via STA Wealth Management,

  Small Business Not Optimistic About Spending

  The perennial hopes of a strong retail shopping season are once again upon us. As always, the National Retail Federation (NRF) is kicking of the season with their always cheerful holiday forecast. To wit:

  "The National Retail Federation announced today it expects sales in November and December (excluding autos, gas and restaurant sales) to increase a solid 3.7 percent to $630.5 billion — significantly higher than the 10-year average of 2.5 percent. Holiday sales in 2015 are expected to represent approximately 19 percent of the retail industry's annual sales of $3.2 trillion. Additionally, NRF is forecasting online sales to increase between 6 and 8 percent to as much as $105 billion."

   

  To no great surprise, since the NRF is an industry trade group, their forecasts are generally much more optimistic than reality eventually turns out to be. 

  For a more "realistic" expectation of retail sales over the next couple of months, we might want to look at data from actual retail businesses. The National Federation of Independent Business Small Business Survey shows a substantially different outlook from retailers.

  

  As shown, the percent of businesses surveyed expecting higher sales over the next three months is declined sharply from the beginning of the year. Not surprisingly, when forward expectations decline so do actual nominal sales.

  Furthermore, if we look at "control purchases," which also excludes gas, food and autos, we see that actual activity in the economy is at levels more normally associated with recessionary environments. 

  

  Given the current deflationary backdrop, the sharp decline in imports and weak wage growth, it is quite likely that actual retail sales will likely disappoint the NRF's forecast of a "shopping season significantly above the 10-year average."

  Regardless, I do suspect that consumers will once again be breaking out the credit cards and maxing out the remaining limits. The "shopping party" of chasing deals over a 36-48 hour "shopping day" has become a holiday tradition. Unfortunately, it is the "hangover" that hurts when the bills come due.

  But it is truly important to remember that for retailers all #BlackFridaysMatter

   

  Debt Funded Buybacks Failing To Boost Performance

  I have written many times in the past about the use of debt-funded share buybacks as a method to boost bottom line earnings reports even as top-line revenue remains weak. Since 2009, the reported earnings per share of corporations has increased by a total of 190%. This is the sharpest post-recession rise in reported EPS in history. The issue is that the sharp increase in earnings did not come from a similar surge in revenue that is reported at the top line of the income statement. Revenue from sales of goods and services has only increased by a marginal 23% during the same period. To wit:

  "For profitability to surge, despite rather weak revenue growth, corporations have resorted have resorted to using debt to accelerate share buybacks. The chart below shows the total number of outstanding shares as compared to the difference between operating earnings on a per/share basis before and after buybacks."

  

  "The reality is that share buybacks create an illusion of profitability. If a company earns $0.90 per share and has one million shares outstanding – reducing those shares to 900,000 will increase earnings per share to $1.00. No additional revenue was created; no more product was sold, it is simply accounting magic."

  This point was further made by Mike Bird via Business Insider in a discussion of a recent report from Goldman Sachs:

  "US corporations have loaded up on a lot of debt since the financial crisis. In fact, America's corporations have doubled their total debt levels, according to a note Tuesday from analysts at Goldman Sachs. The debt has been raised by American firms to fund mergers and acquisitions and to buy back their own shares."

  

  Over the last several years, corporations have been extremely effective at slashing costs to boost bottom line earnings. However, as I have stated many times, the benefits of cost-cutting, wage suppression and artificially manipulating bottom line earnings through share repurchases, are finite. Eventually, weak top-line growth will be reflected in bottom line earnings.

  As reality begins to catch up with "earnings fantasy," the performance of the "buyback index" is showing relative underperformance in recent months as compared to the index as a whole. (Note: that chart below is a total return calculation to put both indices on an equal scale.)

  

  As Goldman notes:

  "Following the crisis, imbalances of all types have been created. Chief among them, in our view, is the re-leveraging of America and the quiet growth of goodwill, as a percentage of assets on balance sheets. While neither poses an immediate terminal risk to the health of corporate America the changing nature of corporate balance sheets does raise the question, again, about the lack of organic growth and reinvestment post the crisis. Taken a step further, the spectre of rising rates, potential global disinflation (dare we say "deflation"?), declining operating profits and wider credit spreads continues to create near-term consternation for weak balance sheet stocks."

  That brings me to EBITDA.

   

  EBITDA Is A Trap

  I have written in the past about the fallacy of using EBITDA (Earnings Before Interest Taxes Depreciation and Amoritization) due to the ability to fudge/manipulate the number. To wit:

  

   

  "As shown in the table, it is not surprising to see that 93% of the respondents pointed to "influence on stock price" and "outside pressure" as the reason for manipulating earnings figures. For fundamental investors this manipulation of earnings skews valuation analysis particularly with respect to P/E's, EV/EBITDA, PEG, etc."

  Ramy Elitzur, via The Account Art Of War, recently expounded on the problems of using EBITDA.

  "Being a CPA and having an MBA, in my arrogance I thought that I am well beyond such materials. I stood corrected, whatever I thought I knew about accounting was turned on its head. One of the things that I thought that I knew well was the importance of income-based metrics such as EBITDA and that cash flow information is not as important. It turned out that common garden variety metrics, such as EBITDA, could be hazardous to your health."

  The article is worth reading and chocked full of good information, however, here are the four-crucial points:

  1. EBITDA is not a good surrogate to cash flow analysis because it assumes that all revenues are collected immediately and all expenses are paid immediately, leading, as I illustrated above, to a false sense of liquidity.
  2. Superficial common garden-variety accounting ratios will fail to detect signs of liquidity problems.
  3. Direct cash flow statements provide a much deeper insight than the indirect cash flow statements as to what happened in operating cash flows. Note that the vast majority (well over 90%) of public companies use the indirect format.
  4. EBITDA just like net income is very sensitive to accounting manipulations.

  The last point is the most critical. The tricks to manipulate earnings are well-known. A difficult quarter can be made easier by releasing reserves set aside for a rainy day, recognizing revenues before sales are made, slashing costs, buying back shares, etc. More importantly, these "accounting gimmicks" can account for as much as 10% of the reported earnings per share numbers. So, before you jump off the "EBITDA Bridge", you may want to take a much closer look at the real underlying picture.

  Just something to think about.

  

  

  

  

  

• Nordstrom Plummets After Abysmal Results, Slashing Guidance

  If there were any questions if the US consumer was merely “strong” or “quite strong”, after the abysmal results from Macy’s first, and moments ago, Nordstrom, they should all be safely swept away now.

  Any time a company starts its press release with a blatant mea culpa… run. Like in the case of Nordstrom: “The Company’s third quarter performance was below Company expectations, reflecting softer sales trends that were generally consistent across channels and merchandise categories.”

  What happened was ugly: the company reported revenue of $3.24 billion, a miss to the $3.38 billion expected, and EPS of $0.42, nearly 50% below the expected $72. Q3 EBIT likewise crashed from $262 million to $151 Y/Y, as comp store sales of 0.9% were massively below the 3.6% expected.

  Amusingly the retailers are unable to keep their lies straight – on one hand you have Macy’s blame the warm weather for plunging sales, and here you have JWN saying costs were among its best sellers: “Nordstrom comparable sales, which consist of full-line stores and Nordstrom.com, increased 0.3 percent. The top-performing merchandise category was Cosmetics. In addition, coats, younger customer-focused departments and dresses continued to reflect strength in Women’s Apparel.”

  Considering we already mocked the “it’s the weather” bullshit, there is little we can add.

  Where things get really bad though, is when looking at the acceleration in markdowns and the surge in inventory:

  Gross profit of $1.1 billion, or 33.9 percent of net sales, decreased 163 basis points compared with the same period in fiscal 2014, primarily due to higher markdowns in addition to the planned impact of higher occupancy costs related to store growth and the increased mix of Nordstrom Rack. Ending inventory increase of 8.0 percent...

  But wait, there’s more because just before the abysmal earnings report the Company paid a special cash dividend of $900 million, or $4.85 per share of outstanding common stock on October 27. Better to do that when the stock is higher rather then lower, eh?

  It gets better: “the Company expects to initiate share repurchase for the remaining net proceeds beginning in the fourth quarter…. . For fiscal 2016, the Company estimates the net financial impact, including the share repurchase impact, to be approximately neutral to earnings per diluted share.”

  And the punchline:

  On October 1, 2015, Nordstrom’s board of directors authorized an additional $1.0 billion share repurchase program. During the third quarter, the Company repurchased 3.5 million shares of its common stock for $250 million. A total of $1,486 million remains available under its existing share repurchase board authorizations. The actual number, price, manner and timing of future share repurchases, if any, will be subject to market and economic conditions and applicable Securities and Exchange Commission

  And to think it could have waited just a few weeks and gotten 15% more for its money consiering the absolutely collapse in JWN stock after hours.

  

   

  … but no, its management team had to go ahead and buyback half a billion of its shares in 2015 at an average price of $72, a -26% return that is even worse than that of Bill Ackman.

  

  Finally, and not unexpectedly, JWN slashed its outlook across the board confirming just how “strong” the US economy really is.

  

   

  Three weeks ago we asked a simple question.

  https://twitter.com/zerohedge/status/658427632284008448?lang=en

  We now have the answer.

  

  

  

  

  

• "Sell Mortimer": Stocks Tumble Most In 6 Weeks, Back To Red For 2015

  Given this…

  

   

  And the fact that The Dow is down over 500 points from last week's highs…

  

   

  We suspect the message to Fed Speakers from "the bulls" is…

  Or this…

  

   

  The biggest issues today were the collapse in credit, crude, and copper; but stock weakness dragged the S&P 500 into negative territory for the year…

  

   

  On the day, Fed speak dragged us lower along with carnage in copper, crude and credit but towards the close USDJPY snapped and EURUSD broke 1.08 and seemed to extend the losses in stocks…

  

   

  Biotechs broke below the 50DMA…

  

   

  VRX closed at the lows of the day…

  

   

  VXX surged…

  

   

  And erased all the gains post-Payrolls (so good news is bad news after all)… with the S&P leading the way…

  

   

  And Bonds are now outperforming post-payrolls…

  

   

   

  Crude's carnage is starting to wake up Dow Transports traders (again!!!)…

  

   

  Today saw HY Credit spreads widen over 15bps – the biggest jump (for a non-roll day) since Dec 2014…

  

   

  And stocks are catching down to credit…

  

   

  Bonds & Stocks appear to be recoupling…

  

   

  FX markets were noisy but the main message wqas dumping dollars…

  

   

  And notice EURUSD tested up to 1.08 twice and broke 3rd time…

  

   

  Commodities were big news today…

  

   

  First gold crashed to 2010 lows, before spiking back higher…

  

   

  Then crude crumbled to the late-August lows…

  

   

  And Copper continues to get clubbed…7th down day in a row…having tagged perfectly the 50DMA before plunging

  

   

   

  Charts: Bloomberg

  Bonus Chart: What Happens Next-er?

  

   

  Bonus Bonus Chart: What Happens Next-er?

  

  

  

  

  

• Welcome To Crickhowell – The Entire Welsh Town That Just Went 'Offshore'

  Submitted by Simon Black via SovereignMan.com,

  On September 25, 1794, US President George Washington issued a proclamation authorizing the use of military force against a group of defiant citizens.

  It had all started a few years before when a handful of politicians had succeeded in passing an excise tax on liquor, something that became known as the Whiskey Tax.

  The Whiskey Tax was the brainchild of Treasury Secretary Alexander Hamilton, who was under pressure to pay off the government’s debts from the Revolutionary War.

  The thing is, much of the debt had been originally owed to soldiers who fought in the war. They had been paid in IOUs, many of which had been scooped up by bankers in New York for pennies on the dollar.

  Hamilton had family connections to prominent New York banks– the first example of Wall Street infiltrating the Treasury Department. It wouldn’t be the last.

  (Over 200 years later, the American taxpayer would again be on the hook to bail out banks.)

  Back then the Whiskey Tax was a big deal. America was a ‘whiskey nation’.

  Whiskey was such a prevalent part of American culture in the 1790s, in fact, that it was even commonly used as a medium of exchange in parts of the country.

  So you can imagine that the government’s intent to tax whiskey distillation was met with pockets of staunch opposition, especially once people found out that the entire reason for the tax was to pay back the New York bankers.

  In some cases the opposition was militant. Parts of Pennsylvania, Maryland, and Virginia swelled with local resistance to the point that people began physically assaulting federal tax collectors and forming rebel militias.

  Washington eventually had to dispatch federal troops (which he personally commanded) to put down the insurrection.

  The rebels lost. But this conflict between government and the taxpayer continued to run deep.

  It still exists to this day. It’s ingrained in the DNA of the nation, and in every free individual around the world.

  At its core, taxation is an elaborate form of theft based on deeply flawed premises that we all have a claim on each others’ earnings, and that the government knows how to spend your own money better than you do.

  There are certainly some places where people do receive value for the taxes that they pay.

  Norwegians are commonly cited as tolerating their incredibly high levels of taxation because they receive relatively good quality medical care, education, etc. in return.

  But for most people in the West, taxes fund wars, debt, dropping bombs on brown people by remote control, and yes, bailing out banks.

  It’s perfectly natural to be enraged at such immoral waste, and people deal with it in different ways.

  Some take the approach that if we’re going to be screwed then we should all be screwed together, equally.

  They throw childish temper tantrums when anyone uses perfectly legal means to reduce their taxes, labeling them ‘tax dodgers’.

  Usually this is an emotion grounded in petty jealousy and ignorance, wanting everyone to be equally miserable, and failing to realize that tax mitigation solutions are open to everyone.

  Right now there’s actually an entire town in Wales called Crickhowell that is ‘protesting’ how big businesses use the tax code to slash what they owe.

  They’re angered that Facebook, Google, Amazon, etc. pay very little tax.

  And to voice their frustration, the butcher, the baker, and candlestick maker decided to employ the exact same tax strategies used by big companies to reduce their own tax burdens.

  As the proprietor of the local smokery put it, the plan is “jolly clever.”

  Clever indeed. Because they’ll soon realize the tremendous power and freedom of using completely legal solutions to keep more of what you’ve earned.

  Doing this is not immoral or unpatriotic.

  In fact, if you believe that your government makes your country worse off and less free, then reducing the financial resources available to them is a highly effective expression of patriotism.

  Rather than people whining about everyone else paying less tax, it would be a much better use of time to learn about ways to reduce their own taxes.

  This is a far more powerful way of voicing your opposition to a government than standing in a voting booth. And you’ll be better off financially as well.

  To be fair, most of these concepts aren’t far fetched or complicated.

  How many of us have gone shopping at a duty-free store in order to save a few bucks from not paying taxes?

  Plenty of people already incorporate businesses in no-tax states like Delaware. Or they’ll work in a place like Boston (high tax) but live nearby in New Hampshire (zero tax).

  There are plenty of other solutions. US taxpayers who live on investment income can move down to the beach in Puerto Rico and pay 0% tax.

  Or you can move abroad and earn over $100,000 per year (per spouse) tax free.

  There are also more complicated solutions such as setting up captive insurance companies to reduce business profits tax, trust structures to eliminate estate tax, and much more.

  These aren’t ‘loopholes’ where you need teams of lawyers to misuse or take advantage of some cryptic language in the tax code.

  It’s all right there in black and white, part of the law.

  Criticizing a very sensible, legal strategy to keep more of what you earn is like criticizing someone for driving the speed limit, claiming that it’s some sort of traffic ‘loophole’.

  There are completely legal options out there for everyone. Taking advantage of them just makes sense.

  

  

  

  

  

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