Today’s News November 14, 2015

• Why The Neocons Hate The Donald

  Submitted by Justin Raimondo via Anti-War.com,

  Most Americans don’t think much about politics, let alone foreign policy issues, as they go about their daily lives. It’s not that they don’t care: it’s just that the daily grind doesn’t permit most people outside of Washington, D.C. the luxury of contemplating the fate of nations with any regularity. There is one exception, however, and that is during election season, and specifically – when it comes to foreign policy –  every four years, when the race for the White House begins to heat up. The President, as commander in chief, shapes US foreign policy: indeed, in our post-constitutional era, now that Congress has abdicated its responsibility, he has the de facto power to single-handedly take us into war. Which is why, paraphrasing Trotsky, you may not be interested in politics, but politics is certainly interested in you.

  The most recent episode of the continuing GOP reality show, otherwise known as the presidential debates, certainly gave us a glimpse of what we are in for if the candidates on that stage actually make it into the Oval Office – and, folks, it wasn’t pretty, for the most part. But there were plenty of bright spots.

  This was supposed to have been a debate about economics, but in the Age of Empire there is no real division between economic and foreign policy issues. That was brought home by the collision between Marco Rubio and Rand Paul about half way through the debate when Rubio touted his child tax credit  program as being “pro-family.” A newly-aggressive and articulate Rand Paul jumped in with this:

  “Is it conservative to have $1 trillion in transfer payments – a new welfare program that’s a refundable tax credit? Add that to Marco’s plan for $1 trillion in new military spending, and you get something that looks, to me, not very conservative.”

  Rubio’s blow-dried exterior seemed to fray momentarily, as he gave his “it’s for the children” reply:

  “But if you invest it in your children, in the future of America and strengthening your family, we’re not going to recognize that in our tax code? The family is the most important institution in society. And, yes…

   

  ”PAUL: Nevertheless, it’s not very conservative, Marco.”

  Stung to the quick, Rubio played what he thought was his trump card:

  ”I know that Rand is a committed isolationist. I’m not. I believe the world is a stronger and a better place, when the United States is the strongest military power in the world.

   

  “PAUL: Yeah, but, Marco! … How is it conservative … to add a trillion-dollar expenditure for the federal government that you’re not paying for?

   

  ”RUBIO: Because…

   

  “PAUL: … How is it conservative to add a trillion dollars in military expenditures? You can not be a conservative if you’re going to keep promoting new programs that you’re not going to pay for.

   

  (APPLAUSE)”

  Here, in one dramatic encounter, were two worldviews colliding: the older conservative vision embodied by Rand Paul, which puts domestic issues like fiscal solvency first, and the “internationalist” stance taken by what used to be called Rockefeller Republicans, and now goes under the neoconservative rubric, which puts the maintenance and expansion of America’s overseas empire – dubbed “world leadership” by Rubio’s doppelganger, Jeb Bush – over and above any concerns over budgetary common sense.

  Rubio then descended into waving the bloody shirt and evoking Trump’s favorite bogeyman – the Yellow Peril – to justify his budget-busting:

  “We can’t even have an economy if we’re not safe. There are radical jihadists in the Middle East beheading people and crucifying Christians. A radical Shia cleric in Iran trying to get a nuclear weapon, the Chinese taking over the South China Sea…”

  If the presence of the Islamic State in the Middle East precludes us from having an economy, then those doing their Christmas shopping early this year don’t seem to be aware of it. As for the Iranians and their alleged quest for nuclear weapons, IAEA inspectors are at this very moment verifying the complete absence of such an effort – although Sen. Paul, who stupidly opposed the Iran deal, is in no position to point this out. As for the fate of the South China Sea – if we could take a poll, I wonder how many Americans would rather have their budget out of balance in order to keep the Chinese from constructing artificial islands a few miles off their own coastline. My guess: not many.

  Playing the “isolationist” card got Rubio nowhere: I doubt if a third of the television audience even knows what that term is supposed to mean. It may resonate in Washington, but out in the heartland it carries little if any weight with people more concerned about their shrinking bank accounts than the possibility that the South China Sea might fall to … the Chinese.

  Ted Cruz underscored his sleaziness (and, incidentally, his entire election strategy) by jumping in and claiming the “middle ground” between Rubio’s fulsome internationalism and Paul’s call to rein in our extravagant military budget – by siding with Rubio. We can do what Rubio wants to do – radically increase military expenditures – but first, he averred, we have to cut sugar subsidies so we can afford it. This was an attack on Rubio’s enthusiasm for sugar subsidies, without which, avers the Senator from the state that produces the most sugar, “we lose the capacity to produce our own food, at which point we’re at the mercy of a foreign country for food security.” Yes, there’s a jihadist-Iranian-Chinese conspiracy to deprive America of its sweet tooth – but not if President Rubio can stop it!

  Cruz is a master at prodding the weaknesses of his opponents, but his math is way off: sugar subsidies have cost us some $15 billion since 2008. Rubio’s proposed military budget – $696 billion – represents a $35 billion increase over what the Pentagon is requesting. Cutting sugar subsidies – an unlikely prospect, especially given the support of Republicans of Rubio’s ilk for the program – won’t pay for it.

  However, if we want to go deeper into those weeds, Sen. Paul also endorses the $696 billion figure, but touts the fact that his proposal comes with cuts that will supposedly pay for the hike. This is something all those military contractors can live with, and so everybody’s happy, at least on the Republican side of the aisle, and yet the likelihood of cutting $21 billion from “international affairs,” never mind $20 billion from social services, is unlikely to garner enough support from his own party – let alone the Democrats – to get through Congress. So it’s just more of Washington’s kabuki theater: all symbolism, no action.

  Paul’s too-clever-by-half legislative maneuvering may have effectively exposed Rubio – and Sen. Tom Cotton, Marco’s co-pilot on this flight into fiscal profligacy – as the faux-conservative that he is, but it evaded the broader question attached to the issue of military spending: what are we going to do with all that shiny-new military hardware? Send more weapons to Ukraine? Outfit an expeditionary force to re-invade Iraq and venture into Syria? This brings to mind Madeleine Albright’s infamous remark directed at Gen. Colin Powell: “What’s the point of having this superb military you’re always talking about if we can’t use it?”

  In this way, Paul undermines his own case against global intervention – and even his own eloquent argument, advanced in answer to Rubio’s contention that increasing the military budget would make us “safer”:

  “I do not think we are any safer from bankruptcy court. As we go further, and further into debt, we become less, and less safe. This is the most important thing we’re going to talk about tonight. Can you be a conservative, and be liberal on military spending? Can you be for unlimited military spending, and say, Oh, I’m going to make the country safe? No, we need a safe country, but, you know, we spend more on our military than the next ten countries combined.”

  I have to say Sen. Paul shone at this debate. His arguments were clear, consistent, and made with calm forcefulness. He distinguished himself from the pack, including Trump, who said “I agree with Marco, I agree with Ted,” and went on to mouth his usual “bigger, better, stronger” hyperbole that amounted to so much hot hair air.

  Speaking of Trumpian hot air: Paul showed up The Donald for the ignorant blowhard he is by pointing out, after another of Trump’s jeremiads aimed at the Yellow Peril, that China is not a party to the trade deal, which is aimed at deflecting Beijing. That was another shining moment for Paul, who successfully juxtaposed his superior knowledge to Trump’s babbling.

  This obsession with China’s allegedly malign influence extended to the next round, when foreign policy was again the focus. In answer to a question about whether he supports President Obama’s plan to send Special Operations forces to Syria, Ben Carson said yes, because Russia is going to make it “their base,” oh, and by the way: “You know, the Chinese are there, as well as the Russians.” Unless he’s talking about these guys, Carson intel seems a bit off.

  Jeb Bush gave the usual boilerplate, delivered in his preferred monotone, contradicting himself when he endorsed a no-fly zone over Syria and then attacked Hillary Clinton for not offering “leadership” – when she endorsed the idea practically in unison with him. Bush added his usual incoherence to the mix by averring that somehow not intervening more in the region “will have a huge impact on our economy” – but of course the last time we intervened it had a $2 trillion-plus impact in terms of costs, and that’s a conservative estimate.

  Oddly characterizing Russia’s air strikes on the Islamic State as “aggression” – do our air strikes count as aggression? – the clueless Marie Bartiromo asked Trump what he intends to do about it. Trump evaded the question for a few minutes, going on about North Korea, Iran, and of course the Yellow Peril, finally coming out with a great line that not even the newly-noninterventionist Sen. Paul had the gumption to muster:

  “If Putin wants to go and knock the hell out of ISIS, I am all for it, one-hundred percent, and I can’t understand how anybody would be against it.”

  Bush butted in with “But they aren’t doing that,” which is the Obama administration’s demonstrably inaccurate line, and Trump made short work of him with the now undeniable fact that the Islamic State blew up a Russian passenger jet with over 200 people on it. “He [Putin] cannot be in love with these people,” countered Trump. “He’s going in, and we can go in, and everybody should go in. As far as the Ukraine is concerned, we have a group of people, and a group of countries, including Germany – tremendous economic behemoth – why are we always doing the work?”

  Why indeed.

  Trump, for all his contradictions, gives voice to the “isolationist” populism that Rubio and his neocon confederates despise, and which is implanted so deeply in the American consciousness. Why us? Why are we paying everybody’s bills? Why are we fighting everybody else’s wars? It’s a bad deal!

  This is why the neocons hate Trump’s guts even more than they hate Paul. The former, after all, is the frontrunner. What the War Party fears is that Trump’s contradictory mixture of bluster – “bigger, better, stronger!” – and complaints that our allies are taking advantage of us means a victory for the dreaded “isolationists” at the polls.

  As for Carly Fiorina and John Kasich: they merely served as a Greek chorus to the exhortations of Rubio and Bush to take on Putin, Assad, Iran, China, and (in Trump’s case) North Korea. They left out Venezuela only because they ran out of time, and breath. Fiorina and Kasich were mirror images of each other in their studied belligerence: both are aspiring vice-presidential running mates for whatever Establishment candidate takes the prize.

  Yes, it’s election season, the one time – short of when we’re about to invade yet another country – when the American people are engaged with the foreign policy issues of the day. And what we are seeing is a rising tide of disgust with our policy of global intervention – in a confused inchoate sense, in the case of Trump, and in a focused, self-conscious, occasionally eloquent and yet still slightly confused and inconsistent way in the case of Sen. Paul. Either way, the real voice of the American heartland is being heard.

   

  

  

  

  

  

• Context for Paris Terror Attack: U.S. and Its Allies C-R-E-A-T-E-D ISIS

  We are horrified by the terror attack in Paris, and send our prayers and good wishes to the French people (we were just there on a wonderful family vacation).

  Here’s the context that we dare the Western press to discuss: the U.S. and its allies CREATED ISIS. And see this.

  Postscript:  The First Question to Ask After Any Terror Attack: Was It a False Flag?

  

  

  

  

• The Buffet Backlash: Anger Builds At "Hypocrite" Billionaire Hiding Behind "Folksy" Facade

  Two days ago in “Billionaire Bitch Fight: Ackman Slams Munger, Buffett For Profiting Off Fat Americans” we highlighted an absurd back-and-forth exchange between Bill Ackman and Buffett’s incorrigible right-hand man Charlie Munger who called Valeant’s business strategy “deeply immoral.” 

  That jab struck a nerve with Ackman who at certain times over the past 45 or so days has suffered dramatic paper losses in a matter of seconds on his Valeant stake as the stock plunged, and so, the Pershing Square chief fired back, accusing Munger and Buffett of essentially promoting childhood obesity and profiting from fat Americans’ addiction to “sugar water.”

  As we noted on Wednesday, Ackman isn’t the first person to implicitly (or explicitly for that matter), call Buffett a hypocrite. Indeed, we’ve been keen to note just how convenient it is that the Obama administration has come out against the Keystone Pipeline on environment grounds while the administration’s friend Uncle Warren corners the railroad market. Of course the environment argument kind of goes out the window when Buffett-owned BNSF derailments seem to be a dime a dozen these days. 

  Perhaps the most poignant critique came earlier this year when Dan Loeb, speaking at the SkyBridge Alternatives Conference in May, said the following about Omaha’s favorite octogenarian: 

  “I love reading Warren Buffett’s letters and I love contrasting his words with his actions. He’s a very wise guy.”

   

  “I love how he criticizes hedge funds, yet he had the first hedge fund. He criticizes activists, he was the first activist. He criticizes financial services companies, yet he loves to invest in them. He thinks that we should all pay taxes, yet he avoids them himself.”

  Now, Ackman’s spat with Munger seems to have prompted WSJ to take a look at Buffett’s folksy hypocrisy. Here’s more:

  Behind the latest barbs is a paradoxical view of Mr. Buffett on Wall Street, where many people admire his investing record and envy his immense wealth—Mr. Ackman is a self-confessed fan who made his comments at a New York symposium to commemorate Berkshire. Yet many of the same people also say Mr. Buffett hides behind the image of a folksy, benevolent businessman while he pursues the same profit-maximizing deals that are the target of some of his attacks.

   

  There is even an adage in the investing community: “Do as Warren Buffett does, not as he says.”

   

  He routinely speaks out against the fees charged by hedge funds and investment banks, the tactics of activist shareholders, the danger of derivatives and the heavy use of debt by private-equity firms. He has needled Wall Street in 17 of his last 25 letters.

   

  Mr. Buffett also readily dispenses his views on politics, business, finance and other matters that have little to do with Berkshire directly. 

   

  Take taxes. Critics often accuse Mr. Buffett, a Democrat, of advocating higher taxes while pursuing tax-saving moves at Berkshire. Over the years he has taken public stances that inflamed Republicans, including urging Congress not to repeal estate and gift taxes and opposing tax cuts on dividends. In 2011, he wrote an op-ed article in the New York

  Timesarguing for higher taxes on the wealthy and pointing out that his office staff paid a higher tax rate than he did.

   

  Even as Mr. Buffett has supported tax increases, Berkshire has been a savvy navigator of tax rules. As of the end of 2014, the company had been able to defer $61.9 billion in cumulative corporate taxes by taking advantage of credits and other incentives—money that Berkshire invests and compounds until the taxes come due.

   

  Another tax-related criticism of Mr. Buffett emerged last year when Berkshire participated in a deal to merge Burger King with a Canadian company. Critics said Mr. Buffett was supporting an “inversion” deal that could eventually reduce U.S. tax revenue. Burger King executives have said the deal was driven by global ambitions rather than by tax savings.

  And then there’s the Heinz deal. Recall that back in August, we said “thanks uncle Warren” on the heels of reports which indicated it was time for Kraft employees to do their part to facilitate merger “synergies” in the wake of the Kraft-Heinz tie-up engineered earlier this year by Beuffett along with 3G. 

  In short, Kraft Heinz said it would lay off 700 workers at Kraft’s corporate headquarters in north suburban Northfield, part of a cost-cutting plan that would slash the combined entity’s headcount in the U.S. and Canada by 2,500 jobs.

  Earlier this month we got more of the same with CNBC reporting that Kraft Heinz will close seven plants and lay off 2,600 employees.

  Back to WSJ:

  Perhaps the best example of Mr. Buffett’s complex reasoning is his move in 2013 to team up Berkshire with Brazilian buyout firm 3G Capital for several joint acquisitions. 3G pushes for drastic change at the companies it buys, stripping costs, cutting jobs and installing new management. The partnership riled many shareholders of Berkshire, where subsidiaries operate with little interference and layoffs and management turnover are rare.

  As one Florida hedge fund manager told The Journal: “He has always been about: ‘How can I compound money at the fastest after-tax rate in a sustainable way?’”

  And to a certain extent that’s Buffett’s right as a successful capitalist, but when you publicly deride others for doing in some instances not only the very same things you do, but the very same things you do better than anyone else, well that’s a whole different story. 

  More importantly, when you are able to move deftly between the public and private sectors while influencing policymakers’ decisions along the way, it’s important you don’t appear to be profiting from those policy decisions – especially in a way that seems to undercut the reasoning the government employed when explaining those decisions to the public.

  And that looks like exaclty what’s going on with the Keystone Pipeline and Buffett’s railroads. 

  

  

  

  There have been three BNSF oil train derailments in the past 8 months, but at least the environment is safe because Obama finally pulled the plug on the “dangerous” Keystone XL pipeline…

  

  

  

  

  

  

• The First Amendment Is Dying

  Submitted by David Harsanyi via Reason.com,

  "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;"

  Unless we're talking about a white chocolate-paneled cake for a gay wedding or perpetual funding for "women's health" clinics because it's the "right thing to do."

  "or abridging the freedom of speech;"

  Unless that speech is used by boorish climate change denialists to peddle dirty fossil fuels and run capitalist death machines that wreck the Earth, by anyone engaging in upsetting hate speech or other forms of "aggression," by a wealthy person supporting candidates who undermine "progress," by a pro-life protester who makes people feel uncomfortable about their life decisions, by a cisnormative white male who displays insufficient appreciation for the "systematic oppression" that minorities experience in places of higher learning or by anyone who has a desire to undermine the state-protected union monopolies that help fund political parties.

  "or of the press, or the right of the people peaceably to assemble,"

  Unless the press invades safe spaces designated by mobs or writes about incorrect topics at incorrect times.

  "and to petition the Government for a redress of grievances."

  Unless someone is a member of a predesignated special interest group, he should report to the IRS before doing so.

  That's pretty much the state of the First Amendment today. Climate change, abortion, gay marriage, race, taxes, what have you, even in mainstream political debate, these interests outweigh your piddling concerns about the First Amendment. So the notion that a bunch of students and leftist professors would agitate to shut down free expression in a public space in Missouri because they feel their special issue trumps your antiquated list of rules is not particularly surprising.

  Now, we shouldn't overstate the problem. Most of us are able to freely engage in arguments and express ourselves without worrying about the state's interfering. This will not end tomorrow. But it is difficult to ignore how creeping illiberalism has infected our discourse and how not many people seem to care.

  The thousands of other University of Missouri students, for example, could have held a counter-protest against dimwitted fascists cloistered in safe spaces. Where are those student groups? Why was there no pushback from those kids—and really, there was none as far as I can tell, at either Missouri or Yale—against the bullies who want administrators fired for thought crimes? It can mean that students are too intimidated, too uninterested or not very idealistic about these freedoms. None of those things bodes well for the future.

  And where is the faculty, those brave souls who value the freedom to debate and champion sometimes-controversial ideas when mobs of students are making wild accusations against their school without any real evidence? Where are they when students shut down conservative, libertarian or not-progressive-enough Democrats from speaking at their schools?

  In fact, the campus police—not the hissy-fitting communications professor or the would-be authoritarian student—asked students to call authorities and report "incidents of hateful and/or hurtful speech" in detail. A school, the place where young people supposedly ponder challenging ideas, now has students reporting any instances of unsavory speech. What does "hurtful speech" entail anyway? Is it enough for someone to challenge your priggish worldview? Is it enough for someone to hurt your brittle feelings? And what is the consequence?

  You may also remember when Chris Cuomo of CNN, a lawyer, tweeted (since deleted) that "hate speech is excluded from protection" under the First Amendment. He wasn't alone.

  Not long ago, 51 percent of Democrats in a YouGov poll claimed to support criminalizing "hate speech." (A third of Republicans did so, as well.) Another study, by the First Amendment Center a few years back, found that nearly 40 percent of Americans said the First Amendment "goes too far" guaranteeing rights—a record high.

  People are scared. They're scared to be accused of bigotry or racism, an ugly accusation that is easy to level but impossible to disprove. It's a lazy but effective method of intimidation.

  So we can laugh at the confused millennial J-school major, but he is not alone. When the mayors of Chicago and Boston used their positions of power to keep Chick-fil-A out of their cities because of the CEO's thoughts on same-sex marriage, they were working under the same notion as kids who want to be in safe spaces where their worldviews remain unchallenged. (Using the state to punish a person or company for its beliefs is even worse.) When Bill Nye argues that climate change skeptics are nuts who hate science and should be ignored by any right-thinking person, he is attempting to convince you of something. When Nye contends that America needs to drum climate change skeptics completely "out of our discourse," he's no longer a liberal.

  Because what's happening on college campuses hasn't happened in a vacuum.

  

  

  

  

  

• These Are America's Fattest States

  A couple of weeks ago, in what we said could be the “worst news” ever, the World Health Organisation added steak to (long) list of things that can give you cancer. As we pointed out at the time, America’s weight problem has become so bad, that nearly three quarters of men are either overweight or obese. But as we also noted, Americans are used to their sedentary lifestyle and have become accustomed to gorging themselves at meal time and if persisting in such creature comforts means shaving a few years off their lifespans well, for most people that’s probably a reasonable trade off so the whole heart disease/heart attack threat isn’t likely to be exceptionally effect. Hence the WHO decided it was time to break out the big gun: the “C” word. 

  Now, WalletHub is out with a new analysis that looks to “pinpoint where the weight problem is most prevalent” in America by comparing states on 12 “key” metrics. New statistics, the analysis notes, show that in 2014, some 83 million Americans were completely inactive, the highest number in seven years. With the holidays on the horizon, WalletHub figured it would do America a favor and identify the “problem” states so that residents might exercise a little discretion going back for seconds, or thirds.

  What was the methodology?

  In order to identify the states with the biggest weight problems, WalletHub’s analysts compared the 50 states and the District of Columbia across two key dimensions, including “Obesity & Overweight Prevalence” and “Unhealthy Habits & Consequences.”

  Next, we compiled 12 relevant metrics, which are listed below with their corresponding weights.

  To obtain the final rankings, we attributed a score between 0 and 100 to each metric. The more points a state accrued, the bigger its weight problems are. Therefore, 100 points = the worst state. We then calculated the weighted sum of the scores and used the overall result to rank the states. Together, the points attributed to the two major dimensions add up to 100 points.

  The dimensions are as follows:

  Obesity & Overweight Prevalence – Total Points: 70

  • Percentage of Adults Who Are Overweight: Full Weight (~11.67 Points)
  • Percentage of Adults Who Are Obese: Double Weight (~23.33 Points)
  • Percentage of Children Who Are Overweight: Full Weight (~11.67 Points)
  • Percentage of Children Who Are Obese: Double Weight (~23.33 Points)

  Unhealthy Habits & Consequences: 30

  • Percentage of Residents Who Are Physically Inactive: Full Weight (~3.75 Points)
  • Percentage of Residents with High Cholesterol: Full Weight (~3.75 Points)
  • Percentage of Adults Eating Less than 1 Serving of Fruits/Vegetables per Day: Full Weight (~3.75 Points)
  • Percentage of Residents with Diabetes: Full Weight (~3.75 Points)
  • Percentage of Residents with Hypertension: Full Weight (~3.75 Points)
  • Sugar-Sweetened Beverage Consumption Among Adolescents: Full Weight (~3.75 Points)
  • Death Rate Due to Obesity: Full Weight (~3.75 Points)
  • Healthy-Food Access (percentage of urban-area residents with low income and living more than 1 mi. from a grocery store or supermarket): Full Weight (~3.75 Points)

  And as for the results, here’s an interactive map which shows the breakdown by state (the closer to one you are, the higher your state’s obesity rate):

  Source: WalletHub

  Here are the top 10 fattest states:

  

  Finally, the full 50 state breakdown:

  

  

  

  

  

  

• JPMorgan's "Gandalf" Quant Nailed It Again

  Over the past 3 months, the name Marko Kolanovic, head of JPM's Quant Team, has become one of the most loved, or feared (depending on which way he is leaning) and respected on all of Wall Street for one simple reason: think Dennis Gartman, only correct every time. Well, the man Bloomberg calls "Gandalf" just did it again – "nailing" the top in stocks last week.

   

  There are three possible explanations for Kolanovic’s mojo:

  1. He’s Gandalf. This guy is truly a wizard who deciphers the quant tea leaves like few others out there.

   

  2. Self-Fulfilling Prophecy. There are enough traders and investors out there who are so completely flummoxed by this market that they’re inclined to believe Marko’s take and trade accordingly.

   

  3. Random Luck. If you flip a quarter four times and it lands on heads four times, it doesn’t mean you’ve found a magic quarter.

  The reason, however, as we have profiled before, is simple: he has somehow succeeded in calling every single market inflection point since the August 24 flash crash, and we have documented them all:

  • August 21, just before the Black Monday flash crash: "Why The Market Is Crashing Into The Close: JPM Explains"
  • August 27: "JPM Head Quant Warns Second Market Crash May Be Imminent: Violent Selling Could Return On Thursday"
  • September 3, before the next leg lower in stocks: "Home JPM Head Quant Is Back With New Warning: "Only Half The Selling Is Done; Expect More Downside""

  But his most prodigious call came on September 24 when we wrote "Bears Beware, JPM's Head Quant Just Flipped To Bullish: "The Technical Buying Begins." So it did, leading to the biggest market ramp in history, and biggest monthly point gain ever.

  But then, on November 5th, he said "The Rally Drivers Are Gone" and 'mysteriously' this happened…

  

   

  A reminder of his reasoning….

   

   

  In our reports in August, we forecasted the selling pressure from option hedging and pointed to the role various systematic strategies had in the selloff. In our note from September 24th, we predicted a reversion of these technical flows and their potential to lift the market. We believe that most of these equity inflows played out over the past month and were a significant driver of the October market rally.

  Just add a historic short squeeze and buybacks greater than even during last year's record, and you get the three catalyst that led to the massive rally since September. More importantly, according to Kolanovic the "technical inflows" that led to the rally are now over.

   

   

  After the September option expiry, investors rolled protection lower, and as the market moved higher, convexity in index option products declined. We estimate that hedging of index options during the week of September 28th contributed to ~$20bn of equity inflows. During the month of October, the gamma exposure of put options declined significantly (and gamma of call options increased), such that the net effect of option hedging has been muted since (and likely contributed to lower realized volatility given the imbalance of option gamma towards calls).

  Where did the inflows come from? Why the momos of course, as the best performing stocks were once again those which were going up because they were going up:

   

   

  Perhaps the most significant inflows came from trend following strategies, i.e. CTAs. As discussed in our previous reports, all of the equity momentum signals (short, medium and long term momentum) turned negative in late August. As a result, CTA Equity exposure (as measured by its equity beta) reached record short levels in mid-September. On October 2nd, short term momentum turned positive (e.g. 1M momentum) and shortly afterwards long term momentum turned positive as well (e.g. 12M momentum). This implied a significant re-levering of CTAs during the week of October 5th (which we observe from the sharp increase in CTA beta – as shown in Figure 1).

   

  

   

  At the end of October/early November intermediate equity momentum (e.g. 3M-6M) also turned positive, and this resulted in another large equity inflow from CTA strategies. Currently, all of the equity momentum terms are positive, which suggests that CTA equity exposure should be at the high levels observed in early summer (also confirmed with the short term beta of a CTA index to the S&P 500 in Figure 1). In short, trend followers made a full circle of equity investing from record long, to record short and  then long again over the past quarter. Our estimate of equity inflows from trend following strategies over the past month is ~$70-90bn.

  Then it was the constant vol traders, who too were caught in a feedback loop of buying stocks as vol dropped:

   

   

  Given the sharp decline in realized volatility, strategies that target constant volatility also had to re-lever. Figure 2 shows estimated equity exposure of Volatility Targeting strategies (our asset/signal assumptions about Volatility Targeting (VT) strategies are unchanged: ~$300bn in assets, with an average 8-9% target volatility).

   

  

   

  VT strategies likely started buying equities in late September and through October, at a pace of ~$5-8bn per week (or a total of ~$30-50bn). Given that levels of volatility are still below those observed in early summer, in theory, VT strategies could continue buying equities if volatility were to decline further. However, our view is that realized volatility is unlikely to drift much lower (e.g. to the summer lows), so any residual buying from VT strategies may not be sufficient to push the market much higher.

  And then, the infamous risk parity funds:

   

   

  Finally, we want to address Risk Parity strategies. Our estimate of assets following various versions of Risk Parity is ~$500bn. However, Risk Parity strategies employed by Hedge Funds may be substantially different from those employed by e.g. Pension funds (using risk parity in house as a longer term asset allocation method). For this reason, we use different models for ~$150bn in ‘HF-like’ risk parity assets (leverage >1, higher rebalance frequencies, and typically using volatility target overlays) and ~$350 in Risk Parity pension asset allocations (leverage < 1, slower rebalance frequencies and signals, and typically not using volatility targeting overlays). Figure 3 shows the equity exposure of a prototype ‘HF-like’ Risk Parity allocation, which indicates that these funds de-levered in August and September, but re-levered in October to finish at their pre-crash equity allocations.

   

  

   

  Equity inflows from these funds may have amounted to ~$20bn in October. Risk parity strategies that use slower signals (e.g. 12M covariances) did not materially change their equity exposures.

  His conclusion: the catalysts behind the furious, technically-driven October rally are now gone, but unlike mid-August, at least the likelihood of another flash crash is lower…

   

   

  Summarizing technical flows from option hedges, volatility targeting, CTA and Risk Parity funds, we believe that these strategies largely re-levered to pre August crash levels. This was a significant driver of the S&P 500 performance in October and hence poses some downside risk. Additionally, given the tight trading range over the past year, CTA signals have risk of changing on relatively small market moves (i.e. there is elevated ‘CTA gamma’). On the other hand, given the lack of a large put option gamma imbalance, and perhaps some residual buying from VT funds, near term the market is likely more resilient to the risk of another technically driven flash crash.

  … unless the Fed surprises: according to Kolanovic one person can overturn the cart, and that person is Janet Yellen if she once again confuses the market:

   

   

  Over the past year, macro momentum trades increased exposure to various liquid assets in anticipation of a rise in US rates. Example trades include going long USD and Developed Markets, and short Commodities and Emerging Markets. These macro trends have also percolated into equity long-short momentum trades which are currently short Energy, Materials and Industrials, and Long Health Care and Consumer Discretionary sectors. Several of these macro and stock trends are relying on an anticipated Fed tightening that would boost the USD and further weaken commodities and EM assets. The risk of this increasingly one dimensional positioning across CTAs, Macro and some of Equity Long-Short managers is that these trends don’t materialize and trades become too crowded. The result could be a sharp reversion as positions are exited.

  The only question then is: does the Fed want to risk such a "sharp reversion as positions are exited." The answer is revealed on December 16

  

  

  

  

  

• French President Declares State Of Emergency, Enforces Curfew, Closes Borders, Reinforces Army

  In the wake of the stunning wave of bombings, shootouts, and hostage situations unfolding in Paris on Friday, French President Francois Hollande has closed the French border.

  Addressing the nation, President Francois Hollande called on everyone to remain strong and show “compassion and unity.”

   

  “There is much to fear, but we must face these fears as a nation that knows how to muster its forces and will confront the terrorists,” the president said.

  He has also declared a state of emergency and called for more army assistance.

  • HOLLANDE SAYS STATE OF ALERT IMPOSED IN FRANCE
  • HOLLANDE SAYS CLOSING FRENCH BORDERS
  • HOLLANDE REQUESTS MILITARY REINFORCEMENT

  

  The dramatic move comes amid an ongoing situation in the streets of Paris that will likely go down in history as one of the more daring terrorist attacks in history. 

  A series of bombs echoed through the streets followed by sporadic gunfire. What unfolded afterwards turned the streets into a veritable war zone with dozens killed thus far and a hostage situation involving some 100 people. 

  The move to close the border will likely serve as a rallying cry for those who oppose the accommodation of the millions of refugees seeking asylum in Europe. 

  The President ended his speech with "Vive la Republique et Vive la France."

  

  

  

  

  

• Something Went Wrong On The Way To The Future

  Submitted by Bill Bonner via Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),

  Lies and Misunderstandings

  As we keep saying, you can get any opinion you want. The problem is you can also get any fact you want…

   

  

  Ford F-150, 1976 model. Sold for $5,000 back then. Reportedly did get people from A to B.

   

  Yesterday, our friend and economist Pierre Lemieux challenged the numbers in Monday’s Diary on the U.S. manufacturing recession:

  “You write, ‘In real terms, the typical man of working age in the U.S. earns less today than he did in 1975 – 40 years ago.’ Where did you get this data?

   

  Even the notably unreliable data of the Census Bureau on median family income are not that dark. All data I know show that, in the U.S., real incomes have grown over the last 40 years. I am sure it is the same in Europe. Some prices have increased, like home prices, relative to other prices, and it is quite certainly more difficult to buy a house now than back then.

   

  Most other things are easier to afford – including for the typical worker. This is confirmed by casual observation: Look at their cars, their TV sets, their boats, their vacations, their appliances, their restaurants (not to speak of computers). Look at their children’s cars, iPhones, shoes, etc. Indeed, look at their hunting or hiking boots with Thinsulate and Gore-Tex!”

   

  

  “Real median household income” as calculated by the Fed (based on inflation statistics that are more than just questionable). That the data nevertheless yield this downtrend is all the more remarkable. The reasons for this development are inflationary policy and other types government meddling with the economy – click to enlarge.

   

  In general, we have little confidence in numbers or statistics. Except in the world of science, where they mean something precise, they are mostly lies and misunderstandings. Many of them are plain wrong. Many are pure inventions. We don’t trust them – especially our own.

  You’d think it would be a fairly simple matter to tell if wages, after you account for inflation, have gone up. But it’s not. You can begin with the raw data. Then you need to adjust it for inflation… which is where the trouble comes in. How much is a 1975 dollar worth today?

   

  

  Since the Fed has begun to “help us” in 1913 by providing “monetary stability”, the dollar’s purchasing power has crashed by 96% (this is what they themselves admit to). So a 1913 dollar is now worth 4 cents. According to the same statistic, a 1975 dollar is worth 21.9 cents, so since then the collapse amounts “only” to 78.1% – click to enlarge.

   

  Real Earnings

  We don’t want to mislead readers with faulty numbers, so we put the issue to our research team. “The data supports us,” says Bonner & Partners researcher Nick Rokke. “Real income for men was higher throughout the 1970s.”

  The data from the Census Bureau has the average American working man’s income, in 2012 dollars, at about $37,000 in 1972 – its highest level of the decade. Today, it is close to $34,000. We also have the news of lower incomes reported as “fact” in the New York Times on October 22, 2012:

  “[T]he real earnings of the median male have actually declined by 19% since 1970. This means that the median man in 2010 earned as much as the median man did in 1964 – nearly a half-century ago.

   

  Men with less education face an even bleaker picture; earnings for the median man with a high school diploma and no further schooling fell by 41% from 1970 to 2010.”

  But wait. It’s not that simple. Pierre again:

  “The data makes (a bit) more sense for males. But, as I suspected, the figures come from unreliable Census Bureau data. The Census Bureau gets it from its Current Population Survey, which amounts to asking people what they earn. This data is inconsistent with NIPA (National Income and Product Accounts) data, which contains multiple cross-checks (total income must be equal to total expenditure and to total value added). Note also that the Census data do not include in-kind transfers (such as food stamps, Medicaid, and employee benefits)…”

   

  

  Bill from Anchorage has the right idea

   

  Right. Add in the free company T-shirts and state welfare handouts, and you seem to have a working man who is better off. But he can’t be much better off. Just taking the unvarnished numbers, the average working stiff in 1975 earned $8,853 (in 1975 dollars). Now, he earns $36,302.

  Ford introduced its F-150 in 1975. We weren’t able to find an exact price, but it appears to have been sold at about $5,000. Today, an F-150 Super Cab sells for about $28,000.

  The average new home sold for $39,000 in 1975. Today, it sells for $364,100. In very raw terms, if a man wanted to buy a house and a car in 1975 he had to work just under five years to pay for them. If he wants a house and a car today, he has to work almost 11 years…

   

  Happier, Healthier, Richer?

  Whoa! This makes it sound like his real income has been cut in half. Of course, it’s never that simple. He gets more house and more car for his money today. Still, the remarkable thing is that we are doing this calculation at all.

  We shouldn’t be wondering about it. It should be obvious that we are all far better off today than we were a half-century ago. This should have been the easiest period in human history in which to make financial progress.

  Never before had there been so many inventors and entrepreneurs. Never before had they so much accumulated science and capital to work with. Never before had there been so many people making things… and so many consumers with money in their pockets to buy them.

  And never before were there so many earnest lawmakers, PhD economists, curious researchers, diligent policymakers, and nonprofit-employed do-gooders – millions of people all doing their level best to make us happier, healthier, and richer!

  Something seems to have gone wrong on the way to the future…

   

  

  It’s a case of too much GOSPLAN…

  Cartoon by Rube Goldberg

  

  

  

  

  

• ECB Had 3 Accused Rate Manipulators In Crisis Focus Group

  Earlier this month in “Secret ‘Diaries’ Show ECB Board Members Met With Banks, Hedge Funds ‘Days’ Before Policy Meetings,” we brought you just the latest example of nefarious intermingling between central planners and a select group of private sector operators who essentially bet on policy. 

  As it turns out, top ECB officials met personally with “banks and asset managers” just “days” and sometimes “hours” before policy meetings. This rather disconcerting revelation came courtesy of ECB officials’ “diaries” and although you would have to be completely devoid of a healthy sense of skepticism and/or entirely naive to believe that no nonpublic information was passed at those meetings, that’s what Mario Draghi wants you to believe. Here’s an ECB spokesperson: “The same underlying principles — guarding against signalling future monetary policy — are of course applied to bilateral meetings. In any case, no market-sensitive information is disclosed by the ECB in any non-public forum.” 

  Right. “the same underlying principles” that led Benoit Coeure to tip off a non-public audience of hedge funds in London about PSPP frontloading.

  And then of course there was the story of Martin Mallett, the BOE’s chief currency trader who was let go last year after 30 years with the bank after it became apparent that he might have known traders were rigging FX markets for years before the scandal became public but nevertheless failed to escalate the issue. 

  Well now, we find out that the ECB – the same ECB where policymakers like to meet with banks and asset managers before major policy meetings, actually had three of the traders accused of gaming Euribor by Britain’s Serious Fraud Office on Friday in a group that helped the the bank craft its response to the financial crisis! From Reuters:

  The documents on the ECB website show that former Barclays euro money market desk head Colin Bermingham and Joerg Vogt and Ardalan Gharagozlou from Deutsche Bank – three of 10 people charged by the SFO on Friday – were part of the central bank’s Money Market Contact Group at the height of the crisis.

   

  The group regularly met and held conference calls as the central bank scrambled to stabilise markets that were threatening to push debt-strained Greece, Portugal, Ireland and even Italy and Spain out of the euro in 2010 and 2011.

  Amusingly, the 10 people charged include Deutsche Bank’s Christian Bittar who can’t seem to get away from his title as rate rigger par excellence (although that’s not the term Anshu Jain used, that’s the spirit of a conversation the ex-Deutsche CEO once had about Bittar with a colleague back in the good ol’ days). Here’s Bloomberg:

  U.K. prosecutors charged 10 former Deutsche Bank AG and Barclays Plc employees with manipulating a benchmark interest rate, including high-profile trader Christian Bittar, with an 11th facing indictment as soon as next week.

   

  Six traders from Deutsche Bank employees and four from Barclays were charged with conspiracy to manipulate the Euribor benchmark, the Serious Fraud Office said in a statement Friday. Another trader listed anonymously in court documents may also be charged, according to three people familiar with the case.

   

  Alongside Bittar, those linked to Deutsche Bank are Andreas Hauschild, Joerg Vogt, Ardalan Gharagozlou,  Achim Kraemer and Kai-Uwe Kappauf. Former Barclays employees Colin Bermingham, Carlo Palombo, Philippe Moryoussef and Sisse Bohart also face charges.

  Ok, so the ECB was regularly communicating with three traders who are now charged with manipulating Euribor. Here’s what Francesco Papadia, head of market operations at the ECB during the financial and euro zone debt crises has to say about the group: 

  “They helped understand what was going on beyond what you see on the screens.”

  If you follow financial markets and that doesn’t strike you as hilarious, then check your pulse. That is, we bet they did “help the ECB what was going on behind the screen”, after all, they were the ones colluding to fix the market! 

  In any case, we’ll have to see what the time frames were here and if there was any overlap between when the allegations stem from and when this ECB committee operated (it’s probably a better bet that the manipulation took place before the euro debt crisis), but in any case, we’ll close with the following amusing quote for now: 

  “The ECB plays no role in the setting of the Euribor rate,” the ECB said in a statement.

  Are you guys sure about that?…

  

  

  

  

  

• Weekend Reading: Will They, Or Won't They?

  Submitted by Lance Roberts via STA Wealth Management,

  The past week has been fairly quiet as all eyes have turned to focus on the Fed and the expected rate hike at the December meeting. Will they, won't they, should they or shouldn't they? Those are the questions being hotly contested by the mainstream media on a daily basis.

  Of course, the reality is the Federal Reserve faces the huge obstacle of weak global growth and deflationary pressures which could very well keep them on hold well into 2016. The potential loss of credibility in the Fed by the markets could be the bigger issue to be concerned with.

  For now, we wait. The markets rapid surge in October has run into resistance as earnings season rapidly comes to an end. This is at a time when much of the economic data flow shows weakness and investors remain skittish following the summer bruising.

  While the markets have entered into the "seasonally strong" time of year, there is a marked difference between the current market environment and that of either the 2010 or 2011 summer corrections. In fact, the current market action as discussed earlier this week, is more reminiscent of a market topping process rather than a simple correction within an ongoing bull market. To wit:

   There is little evidence currently that the rally over the last couple of months has done much to reverse the more "bearish" market signals that currently exist. Furthermore, as noted by Jochen Schmidt, the current market action may be more indicative of market topping process."

   

  "Not unlike previous market topping action, the markets could indeed even register 'new highs,' as witnessed in both 2000 and 2007 before the major market correction begins. This is typically how 'bull markets' end by providing false signals and sucking in the last of those willing to 'buy the top.' The devastation comes soon after."

  There is sufficient evidence that warrants more caution by investors currently, and patience for a better entry point remains a virtue.

  As Gen. James Mattis once stated:

  "The problem with being too busy to read is that you learn by experience (or by your men's experience), i.e. the hard way. By reading, you learn through others' experiences, generally a better way to do business, especially in our line of work where the consequences of incompetence are so final for young men … Ultimately, a real understanding of history means that we face NOTHING new under the sun."

  Therefore, while we wait for the market to tell us what to do next, we shall read. 

  ---

  ON THE FED

  Jobs Report Greenlights Irrelevant Fed Rate Move by Louis Woodhill via Real Clear Markets

  “To the FOMC, the whole point of raising the Fed Funds rate would be to prevent the economy from 'overheating.' So it would make sense for the markets to fall in anticipation of a policy move whose purpose was to slow economic growth.

   

  So, why the late recovery? It could be because, upon reflection, the markets realized that, as long as the FOMC is thinking of monetary policy in terms of the Fed Funds rate, it makes no difference what they do. If the economy were a car, the Fed Funds rate would be the rearview mirror. It is possible to turn it like a steering wheel, but it doesn't affect anything."

  As "FedExodus" Looms, Big Stock Gains Behind Us by Paul Vigna via WSJ MoneyBeat

  A Debate With Bernanke Over Fed Policies by William Cohan via DealB%k 

  Not A Done Deal by Joe Calhoun via Alhambra Partners

  "Stocks also belie this belief that the Fed finally has it right, that growth is finally accelerating and the real recovery is finally underway. Yes, stocks have rallied nicely the last few weeks and have nearly recovered from their August swoon. But all that has done so far is to bring stocks back to where they were in mid-August just before the sell off. While it is certainly possible that we will yet make new highs, I think it is important that momentum is not confirming the move higher except, again, in the very short term. Long term momentum indicators still show a market in the process of topping."

  Worst Case Scenario via Kessler Companies

  On To The Next Question by Tim Duy via Fed Watch

  ON THE MARKETS

  The 60/40 Portfolio Is Dead In 2016 by Jeff Reeves via USA Today

  “The two big reasons that clinging to the old 60/40 formula is a bad idea, Puritz says, are a combination of short- and long-term factors.

   

  There's the historic low-interest-rate environment, but also the fact that people are living dramatically longer." 

  

   Now Is The Time To Go To Cash by Mitch Goldberg via CNBC

  "It isn't too late to sell. In fact, if an older client came to me today and wanted to sell stocks to raise cash, I would find it harder to argue against that strategy."

  Is Investor Sentiment Indicative Of Major Top? by Simon Maierhoer via MarketWatch

  Next 3-Weeks Will Decide 2016 For The S&P by Avi Gilburt via MarketWatch

  "As you can also see from the chart, if wave (iv) support holds, we should be going directly to the 2200 region before we see another larger consolidation, which then sets us up to target the 2300 region to complete wave (3) of wave V of Primary wave 3, potentially near the end of the year.

   

  I will warn you now that this would not be the preferable path for those who are bullish for 2016. Rather, if this is the path we take, then Primary wave 4 will take hold in the first quarter of 2016, will likely last for the remainder of 2016, and potentially take us back toward the 1800 region."

  Time For A Pause by Macro Man via Macro Man Blog

  The Next 1000-Point Down Day Is Coming by Kirk Spano via MarketWatch

  ON THE ECONOMY

  Decline And Fall Of America's Working Class by Noah Smith via Bloomberg

  “The paper highlights a very disturbing trend — death rates are increasing for white people in America, especially for working-class middle-aged whites. The increase looks like it has been going on since the late 1990s.

   

  Something very troubling and very unique is happening to American working-class whites.

   

  The immediate causes of the increase are not hard to identify. Drugs and suicide are the culprits. There is an epidemic of prescription painkillers, alcohol and heroin abuse among American whites."

  Despair, American Style by Paul Krugman via NYT

  Older American's Never More Miserable by Catey Hill via MarketWatch

  Social Security – The Long, Slow Default by Kirby Cundiff via Mises Institute

  VIDEOS

  Jim Grant – 2008 Crisis Didn't Come From Nowhere via Bloomberg

  Stanley Druckenmiller – The Chickens Will Come Home To Roost via CNBC

  Senator McCaskill Has A Message For Men (Humor…maybe?)

  ---

  OTHER READING

  • 13 Military Leaders Quotes For Better Investing by Elena Holodny via Business Insider
  • 18 Inspiring Quotes To Get You Thru Any Challenge by Lolly Daskal via Inc.
  • EBITDA Can Be Hazardous To Your Health by Ramy Elitzur via The Accounting Art Of War
  • America's Education Bubble by Mohamed El-Erian via Project Syndicate
  • The Power Of Common Sense by Morgan Housel via Motley Fool
  • The Most Brazen Corporate Power Grab In US History by Chris Hedges via TruthDig
  • Q3 Earnings – A Summary And 4-Main Themes by Tyler Durden via Zerohedge
  • Lagging Job Numbers Give Investors Whiplash by John Hussman via Hussman Funds

  ---

  “It is better to be approximately right, than precisely wrong” – J. Maynard Keynes 

  Have a great weekend.

  

  

  

  

  

• Paris Under Siege: French Military Deployed After Shootout, Explosions Leave 60 Dead, 100 Hostages Taken – Live Feed
  • AROUND 100 DEAD IN ATTACK ON PARIS CONCERT VENUE: AFP
  • FRENCH POLICE HAVE TAKEN CHARGE OF PARIS THEATER, BFM TV SAY
  • FRENCH SPECIAL FORCES ATTACK BATCLAN THEATER, ITELE REPORTS

  #BREAKING Attacker in Paris concert hall shouted 'Allahu akbar', fired into crowd, witness says

  — Agence France-Presse (@AFP) November 13, 2015

  There are now reports of multiple gunshots and "booms" inside the location where the hostages are being held.

  • BOMB DISPOSALTRUCK AT STADE DE FRANCE STADIUM:FRANCE INFO RADIO
  • ATTACKS IN PARIS TOOK PLACE AT SEVEN LOCATIONS, AFP SAYS
  • GUNFIRE HEARD NEAR LOCATION OF HOSTAGE SITUATION: AP

  Update: Reports on social media indicate that the Louvre, Pompidou Centre & Les Halles may be under attack as well.

  • *FRENCH POLICE ASKS PUBLIC IN PARIS REGION TO STAY INSIDE
  • *FRENCH POLICE ASKS PUBLIC ESTABLISHMENTS TO REINFORCE SECURITY
  • *FRENCH POLICE REQUESTS A STOP TO OUTDOOR PUBLIC EVENTS
  • *NYC: NYPD IS IN CLOSE CONTACT WITH INTL LIAISON IN PARIS

  *PRESIDENT OBAMA BEGINS REMARKS AT WHITE HOUSE

  

  • *OBAMA SAYS ATTACKS IN PARIS `OUTRAGEOUS'
  • *OBAMA SAYS ATTACKS ARE ON `ALL OF HUMANITY'
  • *OBAMA SAYS U.S. WILL PROVIDE ANY ASSISTANCE NEEDED TO FRANCE
  • *OBAMA SAYS SITUATION IN PARIS IS `HEARTBREAKING'

  A 4th event has occurred…

  BREAKING: Another shooting reported in Paris, at Les Halles shopping mall: Europe 1 Radio. https://t.co/uixSvEfEMR

  — Reuters Top News (@Reuters) November 13, 2015

  * * *

  UPDATE: Bataclan hostages communicate on social media, report being slaughtered "one by one." #Paris @JuliaDavisNews pic.twitter.com/9YzOTc8ABl

  — Julia Davis (@JuliaDavisNews) November 13, 2015

   

  BREAKING: At least 60 dead in Paris attacks, BFM-TV reports https://t.co/oPcKAQxWD0

  — BNO News (@BNONews) November 13, 2015

  Vidéo de la fusillade pic.twitter.com/bpO7mLNcci

  — a (@dihlaz_Y) November 13, 2015

   

  • @JeremyCliffe: Reports from Bataclan: some escaped, describing pools of blood and attackers using pump-action shotgun against crowd inside
  • @Reuters: BREAKING: U.S. security officials believe #Paris attacks were coordinated

  Syria has been implicated:

  • @FKrumbmuller: Shooter in #Bataclan said to have shouted "this is for Syria" #BFMTV #parisattacks

   

  2) Recently #ISIS fans campaigned against #France. Hackers launched "FranceUnderHacks" against French websites pic.twitter.com/yXR7JGi9K1

  — Rita Katz (@Rita_Katz) November 13, 2015

  As we previously detailed: reports are coming in fast and furious from Paris where witnesses have reported multiple explosions along with possible shootout in a restaurant near Place de la République.

   

  • FRENCH PRESIDENT HOLLANDE EVACUATED FROM STADIUM: ITELE
  • TWO BLASTS HEARD NEAR STADE DE FRANCE STADIUM NEAR PARIS: BFMTV

  Explosions can be heard during the game…

  Fans are too afraid to leave the satdium, amassing on the field…

  pic.twitter.com/A5QQFBo6Eg

  — Lucie B. (@LucieBacon) November 13, 2015

   

  • *AROUND 100 HOSTAGES TAKEN AT PARIS THEATER, 35 DEAD: AP
  • 15 DIED IN ATTACK AT CONCERT HALL, 3 NEAR STADIUM:POLICE TO AFP
  • ONE HOSTAGE SITUATION UNDERWAY IN PARIS: ITELE, CITING POLICE

   

  BREAKING: 60 hostages being at concert hall in Paris

  — Lisa Daftari (@LisaDaftari) November 13, 2015

  France 24 is reporting that "masked armed men fired from all sides":

   

  #URGENT Fusillade à #Paris : "Plus de 10 victimes. Des gens masqués, armés ont tiré de tous les côtés" https://t.co/bh9OxBs6Wq

  — FRANCE 24 Français (@France24_fr) November 13, 2015

  From BFMTV:

  A shooting at the Kalashnikov has left several dead in a restaurant in the tenth arrondissement. At least seven people were injured, according to our information. According to a reporter on site BFMTV, bodies lying on the ground.

   

  The shots were heard near the metro station Goncourt. A large security cordon was established around the perimeter. The police are asking all residents to take cover in buildings and gradually close all the streets. They evacuated all the bars, restaurants and terraces nearby.

   

  The shooters or have not yet been apprehended.

  Here some images from the scene:

  Suivi – Photo du lieu de la fusillade Rue #Bichat à #paris via @Odonata2000 pic.twitter.com/R8bKQuP1ZL

  — LesNews (@LesNews) November 13, 2015

  Fusillade paris pic.twitter.com/APtH7Zx5b4

  — petemystrong (@pierre75010) November 13, 2015

  Tirs à la Kalash au petit Cambodge dans le 10 ème à #Paris plusieurs morts. Secours et police sur place #tir pic.twitter.com/BBKaYocMz7

  — Vincent Berthézène (@Vince66240) November 13, 2015

  It now looks as though there were at least three explosives.

  

   

  Here are the locatios of the 3 events…

  

   

  Au 90 rue de Charonne, un 7ème corps … pic.twitter.com/PGFh63cwTj

  — Tommy Pouilly (@5h55) November 13, 2015

  MORE: Live feed from scene of #ParisAttacks https://t.co/h5irPM03C6 pic.twitter.com/bKPuHozDms

  — Sputnik (@SputnikInt) November 13, 2015

   

  Victims lay on the pavement in a #Paris restaurant pic.twitter.com/n6u45qH5Ji

  — Michele Galvani (@GalvaniM) November 13, 2015

  

   

  While it feels a little callous to mention it, we note dthat US equity futures are tumbling on this news…

  

  

  

  

  

• Stocks, Commodities & Credit Collapse As Retail Rapture Wrecks Rate-Hike Hype

  But "hawkish" was "bullish"?

  

   

  Roughly translated….

   

  A Week of turmoiling…

  • S&P -3.2% – worst week in 3 months
  • Retail -8.2% – worst week in 4 years
  • VXX +17.9% – biggest week in over 2 months
  • VRX -8% – down 7 of last 8 weeks
  • AAPL -6.4% – worst week in 2 months
  • Financials -3.2% – worst week in 2 months.

  • Copper -3.5% – worst week in 2 months (down 5 in a row)
  • WTI Crude -8.7% – worst week since Dec 2014

  • HYG -1.7% – worst week in last 7 weeks
  • HY CDX +35bps – worst (non-roll) week since Decmber 2014
  • Long Bond +0.8% – best week in last 4
  • 5Y Yield dropped 5bps – most in over a month today

  Futures markets show a clear pattern throughout the week of US session weakness and overnight recovery…

  

   

  Nasdaq closed very ugly on the day…

  

   

  Which left Small Caps worst but everything red for the week…

  

   

  Retail pukefest…

  

   

  FANG FUBAR since FedSpeak began…

  

   

  TWTR back below its IPO price…

  

   

  And Camera-on-a-stick below its IPO price…

  

   

  Eveything is red since FOMC…

  

   

  Financials and Energy wewre ugly this week….

  

   

  As financial stocks catch down to credit once again…

  

   

  Stocks year-to-date…

  

   

  Once again "123" was the number that mattered… As soon as Europe closed, USDJPY ramped to 123.00 dragging S&P Futures with it… and then rolled over…

  

   

  Trannies caught down to Crude once again…

  

   

  Stocks are catching down to credit…

  

   

  Treasury yields closed down notably on the week after consistent early selling and late buying… (with today's rally the biggest of the week)

  

   

  The dollar ended the week modestly lower against the majors…

  

   

  Commodities were a bloodbath this week…notice the similar pattern in the USD and crude…

  

   

  Gold closed lower for the 4th week in a row – lowest weekly close since Jan 2010…

  

   

  Crude carnage…

  

   

  Charts: Bloomberg

  

  

  

  

• Will 92% Of Economists Be Wrong Again?

  Three months ago, when looking at the predictive track record of US economists, we said that “if PhD economists were serious about getting things right, they would have a tough job. That goes double for PhD economists charged with making policy decisions based on their conclusions.”

  We furher explained that’s because economics (like sociology and political science and astrology) isn’t a real science. It’s a pseudo-science. And as is the case with other pseudo-sciences, it’s flat out impossible to discover laws and immutable truths, no matter what anyone told you in your undergrad economics course.

  Back then we were specifically looking at economist’s predictions about the Fed’s first rate hike, which based on a WSJ survey of “respected” economists, nearly 95% said the Fed would hike by September.

  

  It did not… once again showing just how truly clueless about a binary event a short 9 months in the future, economists truly are.

  * * *

  Where are we now? Here is the latest WSJ poll:

  About 92% of the business and academic economists polled by The Wall Street Journal in recent days said they expected the Fed to raise its benchmark federal-funds rate at its Dec. 15-16 policy meeting. Some 5% said the Fed would stay on hold until March and 3% predicted the Fed would keep rates at near-zero even longer.

  Charted:

  

   

  To summarize: in January, 95% of economists were wrong in their forecast about a binary event 9 months into the future.

  And now we have an even better bogey: should the Fed not hike rates on December 16, then we will know with certainty that over 90% of economists are unable to accurately forecast a simple yes/no event, which is due to take place in just over a month.

  No pressure.

  We, for one, can’t wait: should Yellen pull the rug on everyone again, it won’t be the Fed whose credibility will be terminally crushed: it has been for years. It will be that of the army of Fed sycophants, the sad souls whose job it is to perpetuate a failed and dying system, known as economists.

  

  

  

  

  

• EU Commissioner's Dire Warning: "The Only Alternative To Europe Is War"

  While the saying goes "good fences make good neighbors," it appears the leadership of The EU is starting to get frustrated with the lack of acquiescence among some of the 'union's' newer or more marginal members. In a somewhat stunning statement, following ongoing and contentious meetings to discuss solutions to the migrant 'problem', EU Commissioner Timmermanns appeared to warn disagreeable member states, "There is an alternative to everything. I believe in EU cooperation because of all other forms in history have been tried to help Europeans get on better, and with the exception of this one, all other forms have led to war – so let's stick to this one."

   

  @MattTempest @TimmermansEU pic.twitter.com/ZXWf9BoydU

  — Bruno Waterfield (@BrunoBrussels) November 13, 2015

   

  As Elsevier reports (via Google Translate),

  European leaders read the last few days the alarm about the survival of the European Union (EU). Prague said Commissioner Frans Timmermans (PvdA) Friday that the EU is only one alternative: war.

   

  "The only alternative to the EU is war," said Timmermans Friday gave a speech at a conference in Prague, said a reporter for The Times of London who attended the speech.

   

  Timmermans is the way Europe responds to the migration crisis' the biggest threat to the EU ever. The Commissioner underlined that countries should cooperate better when it comes to border controls. "Migration is part of life, but we must lead these movements together in the right direction," said Timmermans.

   

  Matching words Timmermans in the alarmist tone that European leaders were heard in recent days about the survival of the EU. Earlier this week, Timmermans at the House of Europe Lecture in Amsterdam that he fears for the survival of the EU. "I do not optimistic about doing that, because I'm just not. This is the first time in my conscious experience of European cooperation that I think: it could ever really be able beaches.

   

  Luxembourg Foreign Minister, who will chair the Council of the European Union on behalf of his country, spoke in an interview about identical words.

   

  The current migration crisis is the European ideal of free movement shaking on its foundations. EU President Donald Tusk said that the EU is engaged in "a race against the clock." "But we are determined to win this race," said Tusk. "As I warned earlier, the only way not to dismantle the Schengen ensure proper management of the external borders of the EU."

   

  The EU appears to be unable to curb migration flows. Because the borders are not guarded, seeing more and more countries are forced to protect their own borders. Even the welcoming Sweden went on Thursday to intensive checks on the southern border.

  Remember when Hank Paulson waved the "Mutual Assured Destruction" card in the face of the U.S. with his infamous "blank check" three page term sheet? Now, it's Europe's turn.

  What's worse, however, for things to devolve this much, it confirms that the European 'Union' is rapidly disintegrating, much more than the recent surge in barbed wire fences around European nations will demonstrate, and as Timmermanns warns, that means war.

  

  

  

  

  

• What's Wrong With This Picture?

  Demand, Supply, or Outright Manipulation?

   

  

   

  Charts: Bloomberg

  

  

  

  

  

• Never Forget

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  

  

  

• It's Official: Barack Obama Wants To "Help" You Manage Your Retirement Savings

  Submitted by Simon Black via SovereignMan.com,

  In 1875, right around the time the United States overtook the UK as the largest economy in the world, the American Express Company established the very first private pension plan in the US.

  American Express had a simple goal: attract the best and brightest employees by giving them retirement security.

  At the time, this was a revolutionary idea. The concept of “retirement” was practically martian.

  Back then, most people worked until they were no longer medically fit to do so.

  To voluntarily stop working and live out your golden years on perpetual vacation was a complete fantasy.

  But a century after American Express, thanks in large part to rising prosperity in the 20th century, retirement had become the norm.

  Private companies’ pension plans covered over 40% of the American workforce and millions of Americans were receiving Social Security by the 1970s.

  Then in 1974 the government passed the Employee Retirement Income Security Act, establishing Individual Retirement Accounts (IRAs) to help people save for retirement in a tax advantageous way.

  Fast-forwarding to 2015, we can see that none of this turned out quite like they’d expected. The state of retirement in America is now pretty abysmal.

  First and foremost, Social Security is desperately, woefully unfunded.

  Again, this is not Simon Black’s conjecture. The Treasury Secretary and the Labor Secretary both sign an annual report stating that Social Security is close to “trust fund depletion”.

  In fact one of Social Security’s major trust funds is literally days away from running out of money.

  Federal retirement trust funds across the board, like the Railroad Retirement Fund, are also nearly exhausted.

  Meanwhile, private companies have followed the government’s example, with many private pension funds similarly approaching insolvency.

  You see this frequently in the news as the cost of their pension funds push airlines and manufacturers into bankruptcy. They simply cannot pay their retirees.

  Not to worry, the federal government has an agency called the Pension Benefit Guaranty Corporation to bail out guarantee insolvent private pensions.

  It’s like the FDIC for private pension funds.

  There’s just one problem. The PBGC itself needs a bailout.

  PBGC’s latest report shows a net financial position of NEGATIVE $62 billion, which is how much more they have in liabilities than assets. There’s another word for that: insolvent. So there goes that idea.

  Last, there are individual retirement plans, like IRAs and 401(k)s.

  Unfortunately, most Americans’ individual retirement plans are woefully underfunded.

  According to the Employee Benefit Research Institute, the median IRA balance in the US was just $32,179 at the end of 2013.

  And the median amount saved by baby boomers amounts to just 13% of what their projected retirement needs are.

  But not to worry, once again the federal government is to the rescue.

  Last week the Obama administration officially rolled out its MyRA program.

  MyRA is a special form of IRA that ‘helps’ Americans save for retirement by making it easy for you to loan your money to the federal government.

  Like a retirement account, the idea is to save a little bit every month or every year to be set-aside in a tax-advantageous way for retirement.

  The big catch here is that for MyRA accounts, there’s only one investment: US government bonds.

  At present, US government bonds fail to pay interest rates that meet the government’s officially published rate of inflation.

  So with these MyRA accounts, when adjusted for inflation, you’re guaranteed to lose money.

  The Obama administration, of course, entirely dismisses this criticism, saying that these MyRA accounts are for “people who aren’t saving and who have a fear of losing their principal.”

  It’s pretty appalling when you think about it.

  Private pensions are nearing insolvency, and the government’s guarantee agency is insolvent.

  Public pensions and retirement funds are also nearing insolvency. And individual retirement funds are completely undercapitalized.

  This will become an epic retirement funding crisis..

  Yet the government ‘solution’ is to encourage Americans who are at risk of losing their retirement to loan their money to the greatest debtor that has ever existed in the history of the world at interest rates that don’t even keep pace with inflation.

  The government claims that MyRAs are guaranteed.

  But the only thing guaranteed is that you’ll lose money… whether through inflation, default, or confiscation.

  The lesson here is clear: don’t rely on the government for your retirement. YOU are a far more reliable manager of your own money.

  But as with anything, financial success starts with financial education.

  So before you invest your money, invest your time in learning about winning investment strategies, unconventional investments, and real retirement options.

  You might find that you could live in absolute luxury somewhere overseas for a tiny fraction of what it would cost you back home. (Colombia comes to mind)

  Or that you can generate substantial rates of return from buying high-yielding private businesses, or through asset-backed peer-to-peer lending programs.

  You won’t hear about any real solution from the government. But with a reset in thinking, that dream of sipping Mai Tai’s by the pool can still be a realistic vision.

  

  

  

  

  

• Caught On Tape: Pollution 1 – 0 China

  Over the past 3 years, as a result of its accelerated launch into the industrial-age with no emission controls, China has been fighting an unprecedented war with air pollution, which as documented extensively before, has resulted in air quality in most Chinese  metropolitan areas which in virtually unbreathable, and which is estimated to kill 4,000 people per day. 

  Sadly, when it comes to its war with pollution, China keeps on losing the war. The latest proof comes from the following clip by Reuters showing that for all the grandiose talk out of Beijing, China is simply unable to have both an economy growing at 7% (really below 3%) and breathable air.

  Here’s the latest video from Reuters explaining why:

   

  And in stils:

  

  

  

  

  

  

  

  

  

  

• The Recessions Are Underway

  Submitted by Andrew Zaitlin of Moneyball Economics

  “People’s confidence that the consumer can somehow offset this industrial recession that we’ve had is really being shaken to the core with the disappointing numbers from some of these major retailers”

        – James Abate, CIO of Centre Funds.
  

  Recessions Are Underway

  China drove the recent economic boom, just as it is behind the recent malaise. A turnaround in Chinese demand would certainly change things but the current data does not look promising.

  For China’s trade partners, it means recession today. Only Germany and the US look positioned to weather the storm. Expect the next macroeconomic leg down to start in January. Between now and then, data will continue to weaken incrementally. Expect urgent Central Bank intervention in Taiwan, Korea, Brazil, and Australia.

  It’s Not a US Recession… Yet

  The US economy may be only 30% dependent on exports, but a sudden drop still hurts. Especially when GDP is growing only 2%.

  The domestic hit this year from the downturn in commodities is well known. Falling prices and production immediately led to lower capital expenditure (CAPEX) spending on pipelines, extraction equipment, and so on. That extended to basic industrial component suppliers like pumps and fasteners, among others.

  US exports pulled down as global customers got whacked.

  

  After rising 2% from 2013 to 2014, non-petroleum exports suddenly contracted: down -3.5% year-to-date through August.

  • Metal Exports -$3B
  • Machinery Exports -$8B
  • Industrial Machinery -$3B or -5%

  While direct exports to China have fallen only $2B, the remaining drop is still China-related. The bulk of the export drop comes from commodity producing countries. Mexico and Canada account for $20B of the export drop and finished-goods producing countries that export to China (EU) account for $10B.

  Bottom line: You can’t strip out $34B from the US economy without significant blow-back. If oil and mining companies were the first to be hit, the second victim of China’s downturn has been industrial goods suppliers. The next wave will be operating expenditures (OPEX), in the form of temporary workers.

  The US Response: Slower Production

  Hats off to US producers for responding quickly. Businesses have dramatically curtailed factory expansion and spending on capital goods.

  

  The swift response is also a warning sign: if demand remains sluggish, additional cuts will come quickly.

  Capital goods spending has also dropped. Some of that comes from IT spending shifts (Windows 10 release has pushed out some IT spending, the Cloud is reducing hardware spending). Most of the drop is business retrenching in the face of an inventory overhang.

  

  Unfortunately, US producers are still behind the curve. While inventory production has slowed, demand is slowing even faster. US non-petroleum exports are contracting faster. The result: inventory overhang.

  

  

  US: Weak Exports, Sudden Downturn in Imports

  Not only have exports fallen to the lowest level since 2012; per the latest Census Bureau trade data through August, the pace is accelerating. That extends to exports minus food, autos, and oil which shrank 2X the rate of the previous six months.

  The worst is yet to come. For more recent data, we looked at the biggest ports on either US coastline: Los Angeles, Long Beach, New York, and Savannah. (The individual port data was distorted by the 1Q 2015 West Coast ports slowdown and subsequent re-routing of cargo shipments via East Coast ports. So we combined all ports to get a clear overview.)

  

  No surprise, the export story remains grim. Volumes continue to contract although the pace is flat, but this data includes oil exports and we know that they contracted in 4Q 2014 and 1Q 2015. Adjusting for oil and cargo, exports have probably contracted at a more constant pace. This means that it is possible that we are approaching a bottom of sorts.

  

  Big surprise, imports turned for the worse. September imports suddenly collapsed to 0% y/y. The China-facing ports of Long Beach (-2%) and LA (-9%) fared the worst. It’s the lowest level of shipments since 2009. Just a guess, but it fits the industrial slowdown story (not holiday shopping season related).

  Semiconductors: No Bottom and Continued Manufacturing Softness

  Back in August, Southbay Research noted that semiconductor companies were uniformly less bullish. Recent earnings calls have reinforced the less bullish picture, and no wonder: top-lines have begun to contract.

  Semiconductor companies are preparing for no growth. Silicon wafers are the basic building blocks of semiconductors. After surging last year, volume demand has collapsed from 11% in 2014 to barely 2% this year. Expectations are for 1% growth next year.

  

  The standard playbook says to start with CAPEX cuts. The top three semiconductor manufacturers announced CAPEX cuts in the last month:

  • Intel lowered CAPEX a further $500M, bringing total CAPEX budgets down from $11B last year to $7B.
  • Samsung cut CAPEX $2B or 20%.
  • TSMC to cut CAPEX $3B or ~30%.

  The reason: China demand is lower than expected. Last year was a boom time for semiconductor makers as the Chinese smartphone market continued to surge. In particular, a new cellular infrastructure roll-out boosted sales of higher end phones. However, actual demand was overstated. The desire to not miss out on a sale drove handset makers to over-order.

  “[There was] an artificial peak in retrospect meaning there was a lot of inventory being built up by our customers who all thought they were going to get a higher share… we had many customers thinking they were going to get a bigger share out of that.” -Jon Olson, XLNX CFO

  The result was that supply exceeded demand and inventories surged. As the CEO of TSMC put it, the sudden weakness was surprising. The smartphone supply chain spent the summer bleeding off excess inventory. But demand remains weak. The China smartphone market contracted in 2Q. TSMC now forecasts 0% semiconductor growth in 2016, down from the previous forecast of 3%, citing China as the reason for weakness.

  “Most of our customers are pretty optimistic about their own business… but growth has just slowed at least for now. And I think when you are CEO of the company and you take a look at what’s going on out there, you are sort of trying to save a little bit of money right now and waiting to see what happens.” -Don Zerio, CFO LLTC

  

  Indeed, recent semiconductor sales continue to contract, and that’s after we include the massive production ramping for the new iPhone release (heavy demand for chips).

  

  Expect more cost cutting and the start of layoffs. Beyond cutting back expansion plans, some companies are selectively shutting down production lines. Adding to the pain of excess capacity, more capacity is coming online. We expect layoffs and consolidation to accelerate into 1Q 2016. This is a great time for Chinese companies looking to hire talented engineers.

  Adjusting to Slower Chinese Demand

  “It’s not like [our customers have] seen a significant decline in demand. It’s just they haven’t seen the increase that they had originally planned.” -Richard Clemmer, CEO NXPI

  Global exporters and producers are in a recession. China’s iron ore imports epitomize the current situation as Chinese demand flattened. While technically that’s not a recession (demand quantity has not dropped), the impact feels the same (falling prices and profits) and the response is the same: cuts in OPEX and CAPEX.

  

  

  How did this all start? It began in late 2013, when China popped its credit bubble. The chilling effect was seen across the entire Chinese economy, from iron ore to housing prices. Everything proceeded to downshift in late 2013 as credit tightened. Credit bubbles tend to behave in the same way: hot money bids up assets and popping the bubble leads to over selling.

  

  China’s bubble and current blow-back have some unique qualities:

  1. Significant global impact from changes in Chinese marginal demand
  2. Over reliance on real estate

  

  The origins of the bubble started with China setting course on returning to economic might by becoming a manufacturing powerhouse and having world-class infrastructure. Both objectives turned China into a capital intensive economy and a destination for global industrial suppliers (machinery, commodities, etc.). Loose monetary policy facilitated the growth.

  A boom in asset prices followed. This was partially the natural outcome of real demand driven by an unprecedented boom in consumption for domestic development and exports. It was also partially the outcome of credit bubble hot money that bid up asset prices.

  Trouble came from significant and extreme corporate gambling in real estate and commodities. Seeing ever-rising asset prices, Chinese companies saw an opportunity: using special access to cheap credit, they bought iron ore, copper, and real estate which they then used as collateral to buy more iron, copper, and real estate. Actual demand, together with this artificial demand, combined to create the impression that consumption was racing higher. A false high growth trajectory was established and then reality hit. First came monetary tightening. Then came the Chinese government’s 2014 infrastructure budget which called for no growth. Producers were hit hard but borrowers were hit even harder. In other words: a textbook popping of a credit bubble.

  • Overvalued assets get oversold and fall in price (commodities and real estate)
  • Discretionary spending gets squeezed (gambling in Macau)
  • Liquidity squeeze

  Commodities have been hit especially hard.

  1. Focus of corporate gambling: loss of big demand coupled with stockpile sell-off
  2. Factory production slowdown: unprofitable factories dependent on loans to stay afloat are suddenly facing liquidity crunch
  3. Sluggish infrastructure spending: slowdown in public sector projects and private sector real estate development

  Inventory adjustments define global trade through 2016. The market is still trying to discover the true levels of sustainable demand.

  • Today: Bleed inventory, push out expansion
  • Tomorrow: Reduce production and capacity

  The first step is dealing with excess capacity. Here’s that iron ore chart again. Demand was on a trajectory of 80M-90M tons, and capacity was expanding accordingly. Instead, demand has stopped at 70M tons. That’s 15%-20% excess capacity.

  

  As China exports deflation, political reality takes over. The Chinese government talked a good game.

  When the new government took over in early 2014, one of its first moves was to emphasize the need for a more market-driven economy. In May 2014, President Xi stressed the point: a “decisive” role of market forces to allocate resources. We never believed it for a moment.

  Then reality hit. The normal market reaction to a manufacturing recession is to close factories, reduce capacity, and fire workers. But that’s politically impossible in China. Instead the government is saving companies and hoping to export its way to growth. The Chinese government could reignite demand through more infrastructure spending. That would create a bottom in prices. We’ll know in December when the 2016 budget gets released. Regardless of spending initiatives, monetary policy will be to weaken the yuan, provide easy credit, and support dumping of excess supply into global markets. This is all very deflationary for the US and EU.

  What This All Means

  In the near-term (4Q 2015-1Q 2016), bleed inventory. The sequence of events will be:

  • Push out factory expansion plans (CAPEX to drop)
  • Reduce production (cut back extra shifts, slow hiring)

  Longer term (2016-2017), cope with excess factory capacity. The sequence of events will be:

  • Stop factory expansion plans (severe CAPEX cuts)
  • Reduce production (shutter production lines, fire workers)

  Industrial layoffs have already started, but will begin in earnest in 1Q 2016. Companies have entered a wait-and-see mode which is a precursor to layoffs.

  This is a bearish place to be. Industrial company dividends are not at risk yet, but growth is very much under pressure. For the next 3-4 months, consider ETFs which are short Asia or short US industry.

  One risk to this strategy is that Asian stock markets may jump on various currency moves or Chinese stimulus. Another risk is that the current adjustments to lower demand start to wind down by 3Q 2016, which would create a temporary boost to industrial stock.

  The overall theme is excess supply, and it has yet to finish playing out across the ecosystem.

  

  

  

  

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