Today’s News November 9, 2015

• A 14 Handle on Silver. Again. 14 Nov, 2015

  What’s the difference between the Supply and Demand Report 1 November and the Supply and Demand Report 8 November? Just a minor punctuation change. Last week, we asked (rhetorically) if silver would have a 14 handle again.

  This week, the market answered. Why yes, yes we can!

  Silver closed the week, trading at $14.78. This is down $0.76 from last Friday and almost 20 cents under our fundamental price from that date. The price of gold also dropped, $52. This is quite a discount to what we calculate as its fundamental price.

  So what happened? It’s always a challenge to explain a market price move in terms of a concurrent or preceding event, and financial reporters get it wrong all the time. In this case we feel pretty confident that the driver was the nonfarm payroll report, as the price of gold plunged about $15 within a minute of the release of the data on Friday.

  Why? What has the payroll data got to do with the price of tea in China or the price of gold in New York? Traders (likely not hoarders, but speculators) are trying to figure out if the Fed will: (A) cut interest rates, (B) hold them steady, or (C) hike them. If they are to hike, then everyone wants to know when. Since the Fed has said it wants to see full employment as one measure of a recovery before risking a rate increase, the market looks to the Bureau of Labor Statistics for hints.

  Such is life in a centrally planned world, where the most important price of all—the price of money—is administered.

  There’s only one flaw in this approach. The price of gold does not correlate to the money supply or to the interest rate. In the 1970’s, we had a rapidly rising price of gold and skyrocketing interest rates. In January of 1970, one could have bought gold (if one was not an American—in America, it was illegal) gold for $36.56. By December 1979, the price was up to $593.84 which is a 16-fold increase. More than half of this gain occurred from 1977-1979, which saw the price rise from about $132 to $594.

  During that same period 1977-1979, the interest rate on the 1-year Treasury went from under 5% to almost 12%, well over a double.

  As to more recent years, let’s look at a graph of 2001 through present, overlaying the gold price with the interest rate.

                The Price of Gold and Fed Funds Rate
  
  

  Here’s a trick question. If we told you the next interest rate trend, how would you bet on the price of gold?

  You can’t.

  We can tell you that our theory calls for a continuation of the 34-year trend: interest rates are falling worldwide. Although we can’t predict what the Fed will say at their next meeting, we don’t expect any major hikes, because the Fed cannot do it. We would have thought a 25bps increase was possible, but it seems even that meager rise would cause too much difficulty.

  As to predicting the price of gold, we have a different methodology. Read on for our picture of supply and demand fundamentals…

  First, here is the graph of the metals’ prices.

                The Prices of Gold and Silver
  
  

  We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.

  One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.

  Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.

  With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.

  Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio barely moved this week, upwards. 

  The Ratio of the Gold Price to the Silver Price
  
  

  For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

  Here is the gold graph.

                The Gold Basis and Cobasis and the Dollar Price
  
  

  We’re still in the same mode. As the price of the dollar rises (i.e. people sell gold, i.e. the price of gold as measured in dollars falls) the scarcity of gold rises (i.e. the cobasis). The red and green lines continue together. Unlike the Fed Funds Rate and the price of gold, there is no an uncanny correlation between the cobasis and the dollar price.

  This means that sometimes, speculators are selling futures (typically purchased with leverage) and sometimes they are buying. They have no effect on the price at which supply and demand would clear.

  Which, as the price of gold dropped by $52, we calculate moved by only $2. Up. Does this mean gold will trade at almost $200 higher by tomorrow morning? Probably not. So what does it mean? It means gold is on sale, offered at a discount thanks to speculators that are going to lose a large number of dollars one of these days.

  Now let’s look at silver.

  The Silver Basis and Cobasis and the Dollar Price
  
  

  The silver price did fall relatively quickly, less than a month since we noted the market price was above the fundamental.

  This week, the market price fell hard. The graph shows that the scarcity of silver rose even hard (though bear in mind that silver has much more of a cobasis distortion field than gold, as the near contract tends to tip into temporary backwardation before gold does, and deeper).

  The fundamental silver price fell about a dime this week, thus putting the market price under the fundamental. While that’s a better place to be, if one is a silver bettor, we wouldn’t bet either way on silver right now. The action is going to depend on whether momentum continues to carry the price lower, or whether there’s a sharp rebound as speculators jump to the other side. Maybe those with razor-sharp technical models can make a buck here. That’s not for us.

   

  Do you support the gold standard? Please come and be counted. Show the legislature and governor in Arizona that honest money is popular! Please come to the Monetary

  Innovation Conference in Phoenix on Nov 17 (Keith Weiner is a speaker). At the conference, speakers will discuss gold and how innovators are using it to solve real problems for real people. Please click here to register. After the conference, we may put on a Monetary Metals seminar if there is sufficient interest. Please click here if interested (different link).

   

  © 2015 Monetary Metals

  

  

  

  

• Photographer Captures Amazing Time-Lapse Video Of Trident Ballistic Missile Launch

  Earlier today, we reported that just after 9pm local time on Saturday evening, a dramatic white light lit up not only all of California, but stretches of Arizona and Nevada, in what was subsequently revealed to be an unannounced launch of a Trident II (D5) missile from the Kentucky, an Ohio-class ballistic missile submarine situated off Point Mugu. But while the entire internet was throttled under the weight of millions of snapshots and short underexposed clips of the missile flight being uploaded to YouTube, Facebook and Twitter, one person captured the whole event in its dramatic entirety on time-lapse photography.

  That person was Justin Majeczky, who was conducting time-lapse photography above the Golden Gate bridge, when he noticed an unexpected object in his viewfinder: an ICBM.

  The result, first noted by Foxtrot Alpha, is 3 minutes of breathtaking imagery that not only catches the missile emerging from the horzion following its submarine launch, but disappearing far off into the sky on its long voyage to the Marshall Islands.

  

  

  

  

  

• What America Has Devolved To: "Online Begging Has Become The New Economy"

  With a record 46.7 million Americans living in poverty (9.4 million more than before the financial crisis), it is perhaps not entirely surprising that the need for 'help' is surging. However, as NYTimes reports, there is a spreading epidemic on social-media that smacks of anything but providing for the needy – and one man whose mailboxes have been increasingly filled with monetary requests, has a theory about it all – "I think online begging has become the new economy."

  “I woke up to four new people today asking me for money on four different donation platforms,” one friend said. “One was my ex-babysitter announcing her wedding and where I could send cash. No invitation to the wedding. Just cash.”

   

  “I’m a believer in giving to real charities: medical research, school drives, the Red Cross, et cetera,” said Heidi Knodle, owner of a picture framing store in San Francisco. “I’m tired of people asking for a vacation, funds for a wedding or their college tuition.”

  Of course, there are plenty of worthy causes and worthy donation recipients, as The New York Times' Judith Newman explains,

  A visit to GoFundMe or YouCaring yields site after site of people whose homes were wiped out by natural disasters. People with diseases I’d never heard of, with no insurance and staggering medical expenses. Kids trying to pay for their parents’ funerals. Parents with seriously ill children wanting a trip to Disney World, and sick animals owned by people who couldn’t afford the vet bills.

  One man had set up a fund for a friend who needed to take a couple of months off while his wife died of brain cancer.

  But then, there were others. Many, many others…

   Education funds are great, but do I really want to pay for a friend to travel to Peru to become a shaman?

   

  Should the woman who has lost a lot of weight (good for you!) ask her friends to pay for $2,500 worth of laser skin tightening? What about the girl seeking $600 for her “personal development journey”? (Not much to ask, but she was so beautiful, I didn’t understand why she didn’t develop herself into a model and make a whole lot more than that.)

   

  Another woman was asking for help with the legal bills for her divorce, as her new husband had bolted to Israel. She was a little dramatic in her plea: “My life — the innocent, carefree life which I had known, and the blissful happy life of hopes and dreams shattered overnight. Instead of partaking of gourmet meals and donning my kalla/bridal trousseau, chaos and turmoil, sprinkled with vicious gossip became my daily food and clothing.”

   

  The requests continued.

   

  Sponsorship for a child’s figure skating lessons from a mother who, according to the friend who got daily reminders to donate, just renovated her kitchen.

   

  Money for a power generator for a guy in Brooklyn who holds parties for artists, writers and musicians in a shack in his backyard, who said he is doing a project on “the history of shacks.”

   

  A talented writer who was having a rough patch put up a “birthday plea” for $2,000 – no, make that $200,000. A guy who needs a new MacBook after someone spilled a drink on his. The woman who just asked for $20,000 for plastic surgery because she had children early and “struggles with body image issues.”

   

  Or take the recent page of Larry Paciotti, a.k.a. the famous pornographic film director/drag queen Chi Chi LaRue, who was asking for $40,000 to extend his stay in rehab at Betty Ford. One non-funder on his funding page called the request “a gross abuse of fame … Larry has plenty of personal resources available to secure this funding on his own.”

  And that, of course, is at the heart of the backlash: the sneaking suspicion that someone of considerable (or at least ample) means and/or connections is asking for help.

  As Newman sums up perfectly,

  Here’s the question I can’t stop asking myself: Has social media made our craving for attention and validation overwhelm all other considerations? There is nothing new about asking your friends for help (remember rent parties?), but that help was confined to a small group of people you actually knew.

   

  Now, no such boundaries exist. Your 4,000 Facebook friends should know if you can’t pay for your rent — or your plastic surgery. And who knows? They may just pay up.

   

  There was a time when there were needs, and there were wants, and we knew the difference. Now?

   

  Now I’m not so sure.

  Welcome to the new normal… where the Free Stuff Army has now morphed with the cult of narcissism into "The Begging Economy" where everyone expects that a required standard of living – because it's fair and deserved – should be paid for by someone else… and never ever paid back… and if you disagree, you are an extremist, racist bigot oppressing the minorities and under-privileged who deem the latest iPhone and Caramel Vanilla 3-pump extra-hot fuzzychino to be their forefathers' given right.

  

  

  

  

  

• What's in Store for the Global Energy Markets?

  By Chris at www.CapitalistExploits.at

  After the series of articles discussing the shale oil industry I received a lot of feedback discussing both shale oil and energy in general, including the following from a reader discussing electricity in Europe:

  Chris,

   

  Here’s the puzzle I am trying to figure out:

   

  Will there be mean reversion with regards to electricity wholesale prices in Europe/Germany and if so, how should one play it?

  • wholesale electricity prices – the main value driver for electricity producers – have been driven down to levels not seen for more than a decade in Europe (currently below EUR 30/MWh for delivery 2016/2017/2018).
  • this is due to substantial overcapacity in production (and sluggish demand due to the weak European economy).
  • this overcapacity in production is coming from Germany, which decided to turn off its nuclear power plants by 2022 and to massively support renewables.
  • so far the business model for operating a renewable power plant (wind, photovoltaics, biomass, water) in Germany (and other European countries) essentially was:
    you will receive X EUR/MWh for the electricity produced by your renewable power plant for the next 20 years (you don’t need to worry about who is going to buy that electricity or whether actually anybody needs that electricity).
  • the latest data I have shows that Germany (more precisely it’s consumers and households) is paying on average something like 160 EUR/MWh for its renewable electricity (n.b. that is roughly 5 times the price where wholesale prices are now).
  • on average means: there are power plants of different renewable technologies (wind, photovoltaics, biomass, etc.) and of age (the costs of new installations have come down substantially during the past; e.g. during the last 5 years the costs of a turn-key utility scale photovoltaics plant came down from lets say 3.600 EUR/kW to 1.000 EUR/kW).
  • even if one takes the cost reductions of the past years into account total costs per MWh for newly installed wind turbines or photovoltaic plants (the main technologies at work here) are somewhere around EUR/MWh 60-80 for wind and EUR/MWh 80-100 for utility scale PV
  • as of now Germany covers roughly 30% of electricity production from renewables and wants to get to 40-45% by 2025 and 55-60% by 2035.
  • Germany realized that this is going to be rather expensive and tries to redefine the renewable business model as described above and change the design of it’s electricity market.
  • at the same time European utilities are getting killed because of the low wholesale prices (see for example the following article: http://www.economist.com/news/briefing/21587782-europes-electricity-prov…).
  • utilities like Germany’s E.On an RWE are trapped because they can not shut down capacities – which would be good for wholesale prices and profitability of the remaining plants – because they (a) need a business model and (b) need the cashflow to service their debt.
  • the really interesting thing about this technological shift is that conventional power plants need a fossil fuel to burn which comes at a cost – in other words SRMC of conventional power plants are linked to the price of oil, gas or lignite/coal or whatever is burned.
  • the current low wholesale price is due to the low coal prices worldwide.
  • virtually all gas power plants have been crowded out of the European market as those would need a wholesale price of more than 60 EUR/MWh in order to be profitable.
  • renewable power plants (wind, photovoltaics) on the other hand have SRMC of zero, as there is no cost associated with the input (wind or irradiation).
  • so one has a big lump sum up-front investment (sunk cost) with only minor operating expenses during operation.
  • this means that in the short run any price above zero is good enough for a renewable power plant.
  • in the long run renewables need to earn total costs (60-100 EUR/MWh).
  • In a commodities market general competitive strategy dictates that cost leadership is the way to go – one has to be a low cost producer to stay in business.
  • All this leaves us in this rather bizarre situation in Europe (again!? probably the main reason you are investing not in the developed world!?) where renewables are entering the market with total costs of 60-100 EUR/MWh and are crowding out conventional power plants (mainly oil, gas and lignite) with similar or lower total costs.

  The really big question here is, what happens:

  1. to all those unprofitable over capacities in the market, or
  2. if RWE or E.On go bust?

  Somebody will be there to pick up those assets for pennies on the dollar (Euro) and will hence have a different cost structure (in terms of total cost NOT SRMC) than is prevailing today.

   

  I’d say that lots of people in the utilities world like to say that we will see stronger wholesale prices once Germany switches off it’s nuclear power plants – the forward prices for wholesale electricity do not reflect this so far.

   

  I have to admit that I see a strong case for rising wholesale prices medium turn (and I am not from the utilities world).

   

  The rationale is that if nobody earns total costs at this level prices will have to reflect costs at some point in time.

   

  Nevertheless, this whole situation with built over capacities (which are mostly sunk cost) reminds me very much of your point in case about the “dot-com” bubble and the infrastructure that it created and helped to make internet affordable faster than otherwise possible.

   

  I strongly believe that one needs to “shoot your darlings” when investing.

   

  Which means not to search for the 23rd argument in favour of one’s opinion but to look for arguments that falsify one’s investment thesis.

   

  Have you come across this mess in Europe’s electricity market or anybody who has his focus on that?

   

  What am I missing here?

  I share the above with readers as I found it quite an interesting puzzle with many moving pieces. I’m largely unencumbered by any in-depth knowledge of the dynamics at work in European electricity. More educated minds may have some insights.

  Here is what I do know with a caveat that I’m not an expert in this sector.

  Energy is much more global than ever before. Infrastructure for things such as the transportation and storage of energy has meant that there exists a much closer relationship between energy costs in Europe say and those in South America or Asia. From that perspective I look at some major drivers taking place globally. Drivers which affect energy in general and wholesale electricity pricing downstream.

  Firstly, the age of oil as the world’s dominant driver of energy has been in decline for the last 15 years. While it is still the largest, with coal close on its heels, its overall share of the energy mix has nevertheless been in decline. Electricity today makes up a larger and larger portion of this mix.

  However, electricity comes from multiple sources including oil, so it’s a little more difficult to quantify without writing a 30-page report on the topic.

  We’ve discussed solar previously and alerted readers to this sector last year. Take a look at the cost structure for solar below:

  

  As the cost of anything falls, typically the usage grows as it becomes increasingly cost effective, and this is exactly what we’re seeing in both solar and wind. This cost base is bound to collapse even further in the next few years.

  Why? China is one answer. We all know what China did to the commodity boom of yesteryear, and while that particular game is over, I believe China is set to change the landscape on solar in the coming years and here’s why.

  China has a huge air pollution problem, largely due to coal fired power generation. They are aggressively addressing this problem and they’re doing it by building solar infrastructure… lots of it.

  How much? China will build more solar infrastructure this year (2015) than existed in the entire world in 2008. I find it hard to imagine that this build out doesn’t impact the cost decline curve of solar.

  From Reuters:

  Apple announced Wednesday it will build 200 megawatts of solar energy projects in China and work with local suppliers to source more renewable energy, its latest moves to green its Chinese supply chain amid criticism that its local partners are heavy polluters.

   

  As part of Wednesday’s announcement, major Apple supplier Foxconn said it will build 400 MW of solar energy projects by 2018, starting in Henan province.

  To put this into perspective, consider that in 2013 China had 11.3 GW connected to the grid, followed by Japan with 6.9 GW connected, and the US in third place had 4.8 GW connected.

  China is planning on adding a whopping 100 GW by 2020 and Japan already just added a whopping 9 GW in 2014, adding more in 2014 than they previously had in total.

  As this additional infrastructure build-out in solar, wind and nuclear continues, I think it’s fair to extrapolate that low energy prices on a look-forward basis are in the cards. Additionally, the cost of solar will continue to fall and the quality will continue to rise. The guy sitting in Ghana may not think it affects him that China is building a ton of solar infrastructure but if he’s even modestly educated and understand economics he’ll be able to understand why the solar panels he’s buying in Accra are falling in price and likely increasing in quality and efficiency. This affects wholesale electricity providers, some more and some less, depending on particular countries.

  I’m not sure about wholesale electricity prices in Europe or how best to participate (if at all) as per the comments from our reader.  We are however long solar, synthetically short oil by being long the USD across multiple strategies – a trade which we began telling you about in late 2014 and which we believe has a lot more juice left in it. I won’t rehash all the reasons for that as they’re detailed in depth on our site and in reports we’ve sent to those on our mailing list.

  – Chris

  PS: If you enjoyed this note then you might also want to receive future write-ups just like this one as well as periodical subscriber-only free reports and more (no spam, though). We’re consistently building upon our investment framework, shared with you in these notes and we welcome the widest possible participation, as well as your thoughts and comments. You can join us HERE.

   

  “China is now the largest wind power market in the world. They have increased their power generation from renewables from really nothing 10 years ago – and now it’s 25%.” – Maria van der Hoeven, Former Executive Director of the International Energy Agency

  

  

  

  

• Three Ads That Summarize The Current State Of The Subprime Housing Market

  If 2014 was the year that saw the return of No Income, No Job, No Assets (NINJA), and Stated Income, Stated Assets (SISA, or “plug in random numbers”) mortgage loan applications, then the current three recent ads shown below, courtesy of KGBinvestor, demonstrate just how further down the subprime rabbit hole we have fallen in 2015.

  One can only imagine what happens in 2016.

  Consider:

  • No seasoning is now pretty much standard for all prior bankruptcies
  • Loans are issued up to 80% LTV, and in some cases up to 97% for conventional loans
  • FICO scores of 500 only need 10% down; FICO scores of 580 (subprime) – only 3.5% down
  • Tax returns aren’t needed
  • Got caught fabricating your tax returns (4506-T) – no problem there either.

  In short: every little trick mortgage lenders had during the first subprime bubble is now back.

  And here are three ads showing how subprime is not only back, it’s as bad as it ever was.

  

  

  

  h/t @KGBInvestor

  

  

  

  

  

• Goldman Now Thinks "The Economy Might Start To Overheat Unless Growth Slows From The Current Pace"

  Remember when a month ago Goldman “called it” on the question whether there would be a rate hike in 2015, when, in response to the rhetorical question of “What is your own view of the appropriate liftoff date?” chief economist Jan Hatzius said the following:

  A: Our own answer to that question has long been 2016. In fact, our own view is similar to that of Chicago Fed President Charles Evans, who recently shifted his call from early 2016 to mid-2016. Although it is definitely possible to rationalize a December 2015 liftoff using various forms of the Taylor rule, there are two good reasons to delay the move longer. First, the risk of hiking too early is bigger than the risk of hiking too late when inflation is so far below target and we have spent so much time stuck at the zero bound. Second, we have seen a sizeable tightening of financial conditions. At this point, our “GSFCI Taylor rule” suggests that the FOMC should be trying to ease rather than tighten financial conditions. Our own view in terms of optimal policy is quite strongly in favor of waiting well into 2016.

  Well, the gambit worked and while the “rate hike delay thesis” sent markets soaring in October on one after another piece of bad news as “bad news was good news”, the tables have now turned, and following the “stellar” October jobs report, it is time to attempt “good news is good news” for a change, and engage in the most hypocritical game of revisionist history, and pitch a rate hike as the bullish catalyst this economy has needed all along – because if only the Fed has raised rates in 2009 instead of engaging in QE2, Twist, QE3 and keeping ZIRP until now, the middle class would be thriving… just ignore the S&P at 2100.

  So here comes Goldman, not two months after it said that the Fed should think about easing, with what can only pass for Sunday evening humor saying that 7 years to the day after it landed on the zero bound on December 16, 2008, the Fed will hike because, “the economy might start to overheat by late 2016/early 2017 unless growth slows from the current pace“.

  And just like that the economy goes from needing “further easing” to being on the verge of overheating.

  One can’t make it up.

  Here is Goldman who did make it up:

  Friday’s numbers have dispelled the earlier fears of a sharp labor market slowdown. Although the 271k payroll gain in October benefited from a couple of special factors—including a bounceback in sectors such as retail trade and business services from earlier weakness—the trend still looks to be close to 200k, well above the 85k “breakeven” pace that we think is needed to keep the unemployment rate stable. In the household survey, the headline unemployment rate edged down and the U6 underemployment rate dropped another 0.2pp to 9.8%, on top of the 0.3pp decline in September. We regard U6 as reasonable “shorthand” for broad labor market slack, and it is now less than 1pp above our estimate of its structural rate.

   

  The better data combined with steadfast communication from Chair Yellen have increased our confidence that the FOMC will hike the funds rate on December 16, after exactly seven years at the zero bound. Nothing is ever certain, but it would now probably take major downside surprises in the data or markets to dissuade the leadership from starting the normalization process next month. Barring such surprises, the data over the next month probably matter mostly for the path of rates after the first hike, not the rate decision in December itself.

   

  Is it a good idea to tighten monetary policy at this point? We still have some sympathy for the “risk management” approach recently laid out by Governor Brainard and others. The main reason is that financial conditions look tighter than warranted in the current economic environment and could tighten further as the dollar appreciates. Nevertheless, the case for waiting has become less compelling, as the risks to the outlook have clearly diminished and our baseline view of the economy now implies a clear need for higher rates before long. In particular, the continued rapid pace of labor market improvement—best illustrated by the 1.7pp drop in U6 over the past twelve months—suggests that the economy might start to overheat by late 2016/early 2017 unless growth slows from the current pace. In addition, we expect both core inflation and the equilibrium funds rate to recover gradually in coming years. Putting these pieces together in a Taylor-type rule—even one that focuses on U6, puts greater weight on labor market slack than Taylor’s original formulation, and assumes a depressed near-term equilibrium funds rate—implies that the FOMC should start the normalization process. All in all, we can now see a decent case for a December liftoff.

  And this, according to the Fed’s 2016 GDP “central tendency” forecast is what economic overheating looks like.

  

  

  

  

  

  

• The Fly In The Buyback Ointment: Corporate Leverage Is At Record Levels

  We’ve gone out of our way over the last year to explain that whatever monthly flow was lost to the taper was promptly recouped by corporate management teams via an endless stream of ZIRP-induced buybacks. 

  Put simply, thanks to the now ubiquitous global hunt for yield, anything that even looks like a creditworthy company can borrow for nothing and then promptly funnel the proceeds into EPS-inflating buybacks. That’s great from a myopic, “let’s worry about this quarter first and longevity later” perspective, but in the long-run, it can’t possibly work as all you’re doing is leveraging the balance sheet to explain away a poor top line.

  

  

  Indeed, this has become a hot-button issue on the campaign trail as Hillary Clinton, at the likely behest of Cheryl Mills, is out to attack the “tryanny of the next earnings report.”

  

  Still, “investors” are stupid (sorry, the filter is off tonight) and algos just scan headlines, so as long as the bottom line looks good, the equity continues to rise. But with Eccles QE gone (for now anyway) and with the cost of capital expected to rise in December (hold your breath), the question is this: what happens to quarterly earnings once the buyback bonanza beat is history? 

  Citi is now out questioning just how long PMs are going to entertain the proliferation of financial engineering now that i) we’re in a revenue recession, and ii) coporate leverage is sitting at record highs.

  *  *  *

  From Citi

  Corporate leverage continues to push higher. In Figure 3 we present the debt-to- EBITDA ratio for the average non-fin in the IG and HY markets. We see that in IG leverage rose from 1.8x to 2.1x over the past twelve months, and in HY it rose from 4x to 4.4x (Figure 3). Note that in both markets, at current levels gross leverage for our sample set is well north of the ‘09 highs. Unfortunately, we see little chance that it will decline in the near-term, or even stabilize for that matter, as the earnings backdrop appears to be too soft.

  Until recently, rising corporate leverage was primarily the result of companies desire to bolster shareholder value at the expense of bondholders — issue bonds and buy stock or issue bonds and buy a company. But in recent quarters declining earnings have been an important reason for the upward trend (Figure 4).

  

  The 3-fold increase in share buybacks in the past five years has been the key driver of corporate re-leveraging (Figure 5). In large part, buybacks have been the result of strong incentives provided to corporate managers by activists in particular and equity investors in general. 

  But there are signs that this may be changing. Recent conversations that we’ve had with equity PMs suggest that they have become far more focused on revenue growth, and are placing far less of a premium on any financially engineered EPS growth.

  Why might equity investors be less impressed with financially engineered growth now than they were a short while ago? One of the key reasons may simply be because default risk has risen, and historically when default risk rises buybacks tend to fall.

  This relationship exists in part because equity holders have a claim on future cash flows. While buybacks increase that cash flow stream itself (per share), they also lower the probability of equity holders actually receiving that cash flow stream. After all, should a company default equity holders may very well end up with no claim at all. 

  Figure 5 highlights the relationship between buybacks and the default rate over time at the macro level, and in Figure 6 we show the debt outstanding and share price relationship for a specific issuer (DAL). Note that we can find any number of examples where more debt equates to a lower share price rather than a higher one.

  

  Given that we are clearly moving into a higher default environment we believe that equity investors may be inclined not to reward stocks that have large buyback programs. And if this is the case, corporate managers will have a diminished incentive to borrow money to finance buybacks.

  *  *  *

  Got it. So what Citi is saying is that now that corporate leverage is at record levels, the game is officially up and once the defaults start and the cost of capital begins to rise, no sane equity investors (of course nowadays the idea of a “sane” or even a “human” equity investor is an oxymoron) will ever buy into the story nor even think about throwing money at a secondary. 

  Needless to say, that’s bad news for corporates that have to this point relied on ZIRP to stay afloat and it’s also bad news for anyone betting on fresh highs on the S&P. This will only get worse as pressure from Presidential candidates overwhelms the whims of the 2 and 20 crowd when it comes to dictating how corporate management teams finagle the bottom line and so, if Citi is correct, expect PM’s to be less impressed with EPS “beats” going forward which means either Janet Yellen will need to step back in to provide the bulge bracket with the monthly dry powder they need to fire up the prop desks, or else it may be time to take profits.

  

  

  

  

  

• The War On Cash Is Advancing On All Fronts: "First They Came For The Pennies…"

  Submitted by Don Quijones via WolfStreet.com,

  The War on Cash is advancing on all fronts. One region that has hogged the headlines with its war against physical currency is Scandinavia. Sweden became the first country to enlist its own citizens as largely willing guinea pigs in a dystopian economic experiment: negative interest rates in a cashless society. As Credit Suisse reports, no matter where you go or what you want to purchase, you will find a small ubiquitous sign saying “Vi hanterar ej kontanter” (“We don’t accept cash”):

  Whether it’s for mulled wine at the Christmas market, a beer at the bar, even the smallest charge is settled digitally. Even the homeless vendors of the street newspapers Faktum and Situation Stockholm carry mobile card readers.

  A similar situation is unfolding in Denmark, where nearly 40% of the paying demographic use MobilePay, a Danske Bank app that allows all payments to be completed via smartphone. With more and more retailers rejecting physical money, a cashless society is “no longer an illusion but a vision that can be fulfilled within a reasonable time frame,” says Michael Busk-Jepsen, executive director of the Danish Bankers Association.

  World’s Biggest Cashless Laboratory

  While Sweden and Denmark may be the two nations that are closest to banning cash outright, the most important testing ground for cashless economics is half a world away, in sub-Saharan Africa.

  In many African countries, going cashless is not merely a matter of basic convenience (as it is in Scandinavia); it is a matter of basic survival. Less than 30% of the population have bank accounts, and even fewer have credit cards. But almost everyone has a mobile phone. Now, thanks to the massive surge in uptake of mobile communications as well as the huge numbers of unbanked citizens, Africa has become the perfect place for the world’s biggest social experiment with cashless living.

  Western NGOs and GOs (Government Organizations) are working hand-in-hand with banks, telecom companies and local authorities to replace cash with mobile money alternatives. The organizations involved include Citi Group, Mastercard, VISA, Vodafone, USAID, and the Bill and Melinda Gates Foundation.

  In Kenya the funds transferred by the biggest mobile money operator, M-Pesa (a division of Vodafone), account for more than 25% of the country’s GDP. In Africa’s most populous nation, Nigeria, the government launched a Mastercard-branded biometric national ID card, which also doubles up as a payment card. The “service” provides Mastercard with direct access to over 170 million potential customers, not to mention all their personal and biometric data.

  The company also recently won a government contract to design the Huduma Card, which will be used for paying State services. For Mastercard these partnerships with government are essential for achieving its lofty vision of creating a “world beyond cash.”

  A New Frontier

  In India an even more ambitious project is under way: the Unique Identification Authority of India (UIDAI), which aims to create a centralized voter enrolment system for 1.2 billion people. It will be the largest identity platform and biometric database in the world. There’s only one snag: according to its creators, the only way to make the system work effectively will be through the widespread adoption of electronic payment systems, side by side, as always, with biometric recognition systems.

  Given that cash is still king on the subcontinent, the government may have its work cut out. Finance minister Arun Jaitley has repeatedly underscored the need to transform India into a cashless economy, supposedly to “rein in the problem of black money.” However, with its huge informal economy, India remains the largest producer and consumer of currency notes after China (as well as the biggest consumer of gold).

  Here’s more from India’s Financial Express:

  Currently less than 5% of all payments are done electronically. Results from the ICE 360 Cash Survey 2014 show that cash is the preferred mode of payment even in Delhi, the most affluent and developed metropolis. Nearly 73% of all purchases by Delhi consumers are paid for in cash and only 17% by card.

  Naturally the Indian government will do all it can to change this situation. In an article in the Daily Mail Nandan Nilekani, one of the technocrats behind UIDAI, urges the government to lead the way. “The government must be the initial driver, using the heft and reach of its social security schemes to drive the adoption of an electronic payments model,” Nilekani asserts. “As momentum grows, private players can step in.”

  Those private players will no doubt include banks. After all, in a world where every transaction – or at least every “official” transaction – must be electronic, the power of banks over individuals is likely to dramatically increase, as Brett Scott warns in an article for The Guardian:

  With this comes the specter of bank surveillance, where every transaction you ever partake in is authorized and recorded by a privately run commercial bank, giving it a transaction-by-transaction history of your entire commercial life. If such a bank does not like an enterprise – such as Wikileaks – it can just freeze it out.

  The New Cost of Doing Business

  An oft-overlooked benefit of cash transactions is that there is no intermediary. One party pays the other party in mutually accepted currency and not a single middleman gets to wet his beak.

  In a cashless society there will be nothing stopping banks or other financial mediators from taking a small piece of every single transaction. They would also be able to use – and potentially abuse – the massive deposits of data they collect on their customers’ payment behavior. This information is of huge interest and value to retail marketing departments, other financial institutions, insurance companies, governments, secret services, and a host of other organizations.

  Another very important perk of cash is that it significantly limits central banks’ ability to continue conducting arguably the greatest financial heist of the modern age, i.e., negative interest rate policy (NIRP). The only way that central banks can maintain negative interest rates ad infinitum is by abolishing cash altogether, as the Bank of England chief economist Andrew Hadlaine all but admitted. As long as cash exists, there’s no way of preventing depositors from doing the logical thing – i.e. taking their money out of the bank and parking it where the erosive effects of NIRP can’t reach it.

  So in order to save a financial system that is morally beyond the pale and stopped serving the basic needs of the real economy a long time ago, governments and central banks must do away with the last remaining thing that gives people a small semblance of privacy, anonymity, and personal freedom in their increasingly controlled and surveyed lives.

  The biggest tragedy of all is that the governments and banks’ strongest ally in their War on Cash is the general public itself. As long as people continue to abandon the use of cash, for the sake of a few minor gains in convenience, the war on cash is already won.

  A war conducted by bankers, politicians, academics, even startup guys.

   

  

  

  

  

  

• BRICs Finally Broke: Goldman Pulls The Plug On "Revolutionary" Acronym Fund After 88% Loss

  Back in February 2013, 12 years after coining the term BRIC (Brazil, Russia, India and China) as an acronym for the world’s strongest source of emerging market growth, Goldman’s Jim O’Neill retired, but not before some very (traditionally) optimistic words of parting, namely that there is “clear evidence things are doing better economically.”

  This is what Goldman said in his retirement announcement:

  Jim is an influential economist and thought leader, and is regarded as an expert in the world’s foreign exchange and bond markets. Importantly, he has identified revolutionary economic trends, defining the concept of the BRICs which has become synonymous with the emergence of Brazil, Russia, India and China as growth opportunities of the future. Jim’s BRIC thesis has challenged conventional thinking about emerging markets and, as a result, has had a significant economic and social impact.

  Nearly three years later, things are not only not doing better economically, with the entire world now engaged in outright, or quasi QE (with helicopter money to follow as Adair Turner infamous warned) just to support global asset prices, but the very emerging markets that made up the BRICs, have devolved to a state of economic freefall. And nowhere is this more obvious than in Goldman’s decision to pull the plug on the infamous fund that bears the name of Goldman’s most bullish acronym in history.

  According to Bloomberg, Goldman’s bank’s asset-management unit folded its money-losing BRIC fund, which invests in Brazil, Russia, India and China, and merged it last month with a broader emerging-market fund. Goldman Sachs pulled the plug on the nine-year-old product because it doesn’t expect “significant asset growth in the foreseeable future,” according to a filing to the U.S. Securities and Exchange Commission.

  The BRIC fund lost 21% in the five years through Oct. 23, the last trading day before the merger. Its assets declined to $98 million at the end of September after peaking at $842 million in 2010, according to data compiled by Bloomberg.

  

  As Bloomberg reports, “the downfall of the BRIC fund, which had lost 88 percent of its assets since a 2010 peak, also underscores how the strategy of bundling disparate countries into a single investment theme is losing its appeal among investors.”

  Perhaps it has sentimental value, but instead of liquidating the BRIC fund outright, Goldman will instead let it be merged into its larger EM Equity Fund:

  The BRIC fund is being swallowed up by the Emerging Markets Equity Fund as part of Goldman Sachs’s efforts to “optimize” its assets and “eliminate overlapping products,” the New York-based bank said in the Sept. 17 filing.

   

  Instead of liquidating the fund, Goldman Sachs opted for the merger because it will give investors access to “a more diversified universe” of developing nations. The bank pointed out that the emerging-market fund has outperformed in the one-, three- and five-year periods.

  As it turns out, the BRICs was nothing more than investing in flow momentum, because while it worked for many years…

  In the decade following the creation of the BRIC moniker, the group surged as a global economic power, amassing 40 percent of the world’s foreign reserves. MSCI Inc.’s BRIC Index returned 308 percent in the 10 years through 2010, compared with a 15 percent gain in the Standard & Poor’s 500 index.

  While the four countries still account for more than one fifth of the global economy, their growth prospects have dimmed. In a December 2011 report, Dominic Wilson, then chief markets economist at Goldman Sachs, said the economic potential for BRICs probably peaked because of a smaller supply of new workers.

  The predicament has become even more striking this year. Brazil is reeling from a corruption scandal and the worst recession ina quarter century, while Russian companies are locked out of global capital markets because of international sanctions. In China, the government was caught off guard by a stock crash this year that wiped out $5 trillion in market value. Even in India, where growth accelerated, Prime Minister Narendra Modi is struggling to push through reforms.

  … All it took was the end of the Petrodollar and China’s hard(ish) landing to kill all the wind in the sails of the BRICs – something nobody noticed (as we duly noted) a year ago, and which ultimately manifested itself in the EM debt crisis of the late summer, precipitated by the soaring dollar and leading to China’s devaluation and record capital outflows.

  And now that it’s all over, the Mondey morning quarterbacking begins: “The BRIC acronym didn’t make any sense in the first place because you just randomly group four countries which are completely different,” said Xavier Hovasse, who oversees $2.3 billion emerging market assets at Carmignac Gestion. “If you restrict your investment universe too much, it’s more difficult to perform. I am not surprised that those funds are collapsing.”

  And to think it was only 2 years ago when not a cloud was in sight.

  Andrew Williams, a spokesman for Goldman Sachs, declined to comment on the fund’s closure. O’Neill, who stepped down as the chairman of Goldman Sachs Asset Management in 2013 and became commercial secretary to the U.K. Treasury in May, also declined to comment, Bloomberg notes.

   

  

  

  

  

  

• From Protesting Vietnam to Demanding "Safe Spaces" – What Happened To America's College Kids?

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  I grew up hearing stories of protest. About those years, a decade or so before I was born, during which America’s youth rebelled against the prevailing establishment, and forever changed the nation’s course in some meaningful ways.

  Of course, many of you will accurately state that not much about the imperial state has actually changed since those days of protest, and that in fact, the out of control abuse of power both abroad and at home has gotten far worse in the subsequent decades. I will concede this point, but want to add a caveat. Certain things really did change, particularly with regard to racial discrimination in these United States. Not to say things are perfect, but to discount the significant gains achieved in this regard would be unfair.

  Nevertheless, as far as the “shadow government” is concerned, not much has changed. Other than the fact that the status quo learned important lessons from those years of rebellion, and was forced to operate even more secretly than it did before. As an example, the military-industrial complex learned that it couldn’t have genuine journalists running around war zones after images taken in Vietnam shocked the nation and helped turn popular sentiment against it. As such, reporters in war zones these days are nothing more than propagandists and imperial shills. Indeed, increasingly effective propaganda and a captured corporate media has probably been the single most important tool used by the shadow government to maintain and consolidate control over all these years. In a nutshell, people have been dumbed down, as well as mentally and emotionally castrated, to the point of being almost unable to rebel against anything of real importance.

  Which brings me to the point of this post. The reason I brought up the civil disobedience and activism of the 1960’s, is because it did at least represent a true conflict with that generation’s status quo, and it did in fact attempt to tackle some of the pressing issues of power, justice and freedom that existed at the time. This is in stark contrast to what passes as “activism” on college campuses today, which essentially amounts to “pro-censorship” students vigilantly defending an entirely invented and unconstitutional right to “not be offended.” Whereas the 60’s movements, for all their failings, were at least ostensibly about freedom (of the mind and body), today’s college movements are strikingly focused on shackling the mind, and turning campuses in unintellectual, zombie-filled wastelands.

  Of course, while someone like myself might be tempted to just laugh off such infantile and pathetic “activism,” it is in fact one of the most dangerous trends facing modern American society. You’d think that a culture in which the most vibrant source of college protest centered around the defense of a non-existent right to not be offended, would be one where all other issues of national importance had been successfully addressed.

  You’d never know there was an ongoing surveillance state panopticon systematically spying on everyone and trampling their constitutional rights. You’d never know that the U.S. government has special forces in 135 countries as it launches new wars almost every other week. You’d never know that the Federal Reserve, Washington D.C. and Wall Street had colluded to redirect all wealth into the hands of a few oligarchs via a centrally planned, criminally corrupt economic and financial system. You’d never know any of this, because America’s youth are focused on creating safe spaces for their precious feelings.

  So this begs the question. Does intent matter? For all its failings, at least the 60’s protesters actually attempted to confront real issues, and sometimes even paid the highest price for doing so. Today’s college youth are not only not confronting any of the pressing issues of the day, but they aren’t risking anything at all, because they are the establishment.

  For example, in almost all cases where coddled, thin-skinned students claim their feelings are hurt, school administrators bend over backwards to appease them, legality notwithstanding (see: Speechless – UCLA Engages in Absurd, Anti-Intellectual and Dangerous Attack on Campus Free Speech). In fact, if anyone is being discriminated against, it’s those rare and courageous professors who publicly stand up to this unconstitutional nonsense. Which brings me to today’s post about an ongoing incident at Yale.

  As the always excellent Lenore Skenazy explains in her post: Mob of Yale Students Scream Profanities about Halloween Costume Insensitivity:

  A Halloween message signed by 13 college administrators asked Yale students to be sensitive about the costumes they chose, so as not to demean, alienate or “impact” any groups or individuals.

   

  But when the associate Master (faculty head) of one of the dorms on campus, early childhood educator Erika Christakis, wrote her own note to students suggesting that maybe we don’t want the authorities deciding what costume is or is not sensitive enough, you’d think she’d endorsed genocide.

   

  Students, hundreds of them, insisted they  longer felt “safe.” They protested. They screamed. They demanded her ouster,  even though in her letter, Christakis bent over backwards to say that she knows that the costume guidelines came from “a spirit of avoiding hurt and offense.” What’s more:

   

  I laud those goals, in theory, as most of us do. But in practice, I wonder if we should reflect…on the consequences of an institutional (which is to say: bureaucratic and administrative) exercise of implied control over college students.

  …As a former preschool teacher…it is hard for me to give credence to a claim that there is something objectionably “appropriative” about a blonde-haired child’s wanting to be Mulan for a day….

   

  Even if we could agree on how to avoid offense – and I’ll note that no one around campus seems overly concerned about the offense taken by religiously conservative folks to skin-revealing costumes– I wonder, and I am not trying to be provocative: Is there no room anymore for a child or young person to be a little bit obnoxious… a little bit inappropriate or provocative or, yes, offensive?

  Well said, but here’s what happened next…

  Over 700 angry Yalies (my alma mater) signed a petition saying that Christakis’ “offensive” letter “trivializes the harm done by these tropes” (stereotypes) and “invalidated” those hurt.

   

  As the days passed, the outrage mounted, a until a mob surrounded Christakis’ husband, the sociologist/doctor/professor Nicholas. He is seen in this video being screamed at by a student swearing at him and insisting he and his wife step down, because their job is not to create an intellectual space, but a “safe space” for students.

  Watch the video:

   

  Did you hear that? She claimed, in a completely unhinged rant, college “is not about creating an intellectual space.”

  I have a two week year old infant at home, and I’ve yet to see him throw a temper tantrum anywhere in the ballpark of that student’s performance. Which confirms my belief, that my new role as father is the most important job I’ve ever taken on in my life, and one I take very seriously.

  As such I want to leave you with the following question:

  With students being coddled in a fantasy world of “safe spaces” and fear of “micro-aggressions,” can we really expect them to grow up to be adults capable of confronting real issues of money, power and imperial aggression?

  

  

  

  

  

• What Comes Next: 41, 43, …

  Presented with no comment…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• Officials Secretly Added Cancer-Causing Chemicals to City’s Water Supply

  Submitted by Cassius Methyl via TheAnti-Media.org,

  In 2013 and 2014, the City of Sacramento performed a water treatment experiment at the expense of residents of the city “to save money,” according to a local news investigation.

  Area residents were never informed about the toxic chemical contamination of their water that resulted from the experiment. “Cancer, miscarriages, and birth defects” are the consequences of consuming those chemicals, but the extent to which Sacramento residents are likely to experience these symptoms is not yet known.

  City officials allowed the experiment to continue for an entire year — despite knowing early on that very process was creating carcinogens. For how long that contamination will be suspended in the water supply is up in the air.

  Officials experimented on the water with a new added chemical to aid in removing sediment, silt, and other impurities in the water supply: aluminum chlorohydrate (ACH). It was due to replace the chemical known as ALUM that was regularly used to take the larger particles out of river water to treat it. Both chemicals weigh down the sediment to make it easily removable.

  However, the addition of ACH to the city’s water supply wound up being ineffective as a treatment — so an excessive quantity of chlorine was added to the water, as well.

  An astonishing failure, the combination of excess chlorine and aluminum chlorohydrate ended up yielding carcinogenic toxins known as “DBPs” — disinfection byproducts. Specifically, these are in the class of chemicals known as THMs, or Trihalomethanes.

  According to Water Research, THMs are in the same chemical class as chloroform; and, although this water experiment ended about a year ago, the THMs remain in Sacramento’s water supply in levels that exceed EPA regulations. Several readings of THM levels provided to ABC10 exceeded 80 parts per billion, the EPA limit.

  The ABC10 investigation says “data showing dozens of readings in excess of the EPA standard of 80 parts-per-billion during the year-long trial. In the Westlake neighborhood, near Sleep Train Arena, during a two-month period between August and October 2013, 11 of 13 readings were above EPA limits. Then in March of 2014, readings were way up across the city. Some people were drinking water with DBP levels above 130 parts-per-billion.”

  Sacramento’s Utility Director, Bill Busath, told ABC10 the entire issue had to do with saving money: “There was an expectation that we would be able to save quite a bit of money.”

  Bob Bowcock grew up working in the water treatment industry. His description, as reported by ABC10, is telling:

  “This community was basically looked at as a laboratory guinea pig, in that they were exposed to violation level trihalomethanes for up to one year without any proper notification whatsoever […] Every corner you turn, on this particular project, it’s red flag, red flag, red flag. It’s like peeling back an onion. There is just another layer. The closer you get to the center, the stronger the smell.”

  According to an ABC10 news report:

  “Pregnant women and unborn babies, Bowcock said, are especially vulnerable to DBPs. In first trimester pregnancies, there’s a significant rise in miscarriages, and in third trimester there’s evidence of low birth weight,” he said, describing how the DBP-tainted water is even more dangerous when its mists are breathed in while showering or washing dishes.”

  This isn’t the only  water contamination that affects greater Sacramento — Northside residents need to be aware that McClellan Air Force Base is rumored to be the source of contaminated water, as a “chromium plume” of groundwater contamination radiates from out from the base.

  Our water, in other words, is polluted with cancer-causing chromium-6.

  According to a June article from the Sacramento Bee:

  “Water from six of 11 wells in the Rio Linda-Elverta district tested above the state’s maximum contaminant levels for chromium-6 […] Wells closest to the former McClellan Air Force Base have the highest levels of hexavalent chromium, or chromium-6, a known carcinogen […] Exposure to chromium-6 can lead to skin irritation, occupational asthma, and kidney and liver damage, according to the National Institute for Occupational Safety and Health.”

   

  A woman from North Sacramento lamented: “I know [the water] gave me cancer.”

  Rio Linda resident, Anna Marie Tomlinson, hasn’t touched her tap water in years — because she was the fourth person on her block to get cancer. “I drank it every day,” she said.

  How do we allow officials to blindly add chemicals to our water supply? Unfortunately, most of us probably weren’t even aware the first chemical, ALUM, had been added to our drinking water — much less the insane chemical soup that resulted as a byproduct of this reckless experiment.

  

  

  

  

  

• Defense Secretary Suggests Putin Might Nuke America, Says US Will "Defend International Order"

  Defense Secretary Ash Carter is a funny guy. We’re not out to disparage him personally (although we’ll happily disparage Washington’s foreign policy for which he is partially responsible), but he sure does have an uncanny ability to land himself in situations that end up generating amusing photo ops. Here are just two examples from last week: 

  “Show me some love”…
  

  “Just listening to Kenny Loggins in my headphones with my water bottle and yeah, since you asked, that’s my aircraft carrier down there”…

  

  Of course to be fair to Carter, Washington hasn’t exactly put him in a good position. After all, what the US is doing in Syria is deplorable and with the passing of MANPADS and anti-tank missiles to Sunni extremists near Aleppo, the whole “strategy” now borders on the bizarre, especially in light of what happened over the Sinai Peninsula last weekend and also taking into account Washington’s relationship with Siite militias battling ISIS in Iraq. 

  Meanwhile, the situation in the South China Sea is just downright silly, as Washington and Beijing risk starting World War III over 3,000 acres of sand that Beijing piled on top of reefs in the Spratlys. 

  Still, when you’re the face of The Pentagon, you’ve got to champion the narrative and that narrative now revolves around two things, i) a resurgent Russia, and ii) the rise of China. 

  Put simply (and colloquially), more than one US military strategist believes the US and NATO would be “annihilated” in a Balkan battle with the Russians and when it comes to China, well, getting into a maritime dispute in the South Pacific (which is the right way to analyze this by the way, because it’s not like Beijing is going to sail into San Francisco and invade the US mainland) might be a horrible idea:

  

  So, against that backdrop, and with Russia’s dramatic intervention in Syria in mind, Ash gave a keynote speech during the annual Reagan National Defense Forum in southern California, on Saturday. 

  Below, we present the “highlights” as documented by the DoD and the video clip courtesy of AP. Enjoy your Sunday evening US foreign policy briefing and please do note that Carter suggests Putin wants to nuke America:

  “In the face of Russia’s provocations and China’s rise,” Carter said, “we must embrace innovative approaches to protect the United States and strengthen that international order.”

   

  Russia is violating sovereignty in Ukraine and Georgia and is trying to intimidate the Baltic states, and in Syria it is prolonging a civil war, the secretary added.

   

  “At sea, in the air, in space and in cyberspace, Russian actors have engaged in challenging activities,” he told the audience, noting that Moscow’s nuclear saber-rattling raises questions about Russian leaders’ commitment to strategic stability.

   

  “We do not seek to make Russia an enemy,”Carter said. “But make no mistake. The United States will defend our interests, and our allies, the principled international order, and the positive future it affords us all.”

   

  Carter said the United States is modernizing its nuclear arsenal to ensure America’s nuclear deterrent, investing in new unmanned systems, a new long-range bomber, and innovation in technologies like the electromagnetic rail gun, lasers and new systems for electronic warfare, space, cyberspace, and others.

   

  “And we’re accordingly transforming our posture in Europe to be more agile and sustainable,” the secretary said.

  

  

  

  

  

• Are Guns Safer Than Prescription Drugs?

  Submitted by Ryan McMaken via The Mises Institute,

  The DEA released new drug overdose data yesterday. According to the DEA press release:

  DEA Acting Administrator Chuck Rosenberg today announced results from the 2015 National Drug Threat Assessment (NDTA), which found that drug overdose deaths are the leading cause of injury death in the United States, ahead of deaths from motor vehicle accidents and firearms.  In 2013, more than 46,000 people in the United States died from a drug overdose and more than half of those were caused by prescription painkillers and heroin. 

  These are 2013 numbers, so let's compare to other causes of death in the United States, according to the Centers for Disease Control.

  A drug overdose, with a death rate of 13.9 per 100,000, is almost four times as common as a cause of death than gun homicides (3.6 per 100,000). Death from prescription drugs (7.2 per 100,000) is twice as common as gun homicides.

  

   Those are the total numbers. If you prefer your stats in the often used format of x per 100,000, here you go:

  

  Obviously,  homicides aren't exactly a leading cause of death in the US, and gun homicides, even less so. Accidental death by firearms (0.2 per 100,000) is a small blip.

  For all those concerned parents who think little Johnny is likely to get gunned down on the street would be better advised to keep tabs on their prescription painkillers, as Johnny is far more likely to die from popping those than from any gun in your house or in the hands of a school mate.

  And, of course, one is almost three times as likely to die in an auto accident (death rate of 10.7 per 100,000) than as a result of a homicide.

  Moreover, nothing listed here is even in the top ten of causes of death in the US. You're much, much more likely to die from suicide, or "influenza and pneumonia"than anything listed above.

  

  Many people don't fear heart disease like they fear gun violence because they feel they have some control over it, and often judge their risk of an untimely demise by a heart attack to be much lower than it actually is. Simultaneously, they greatly overestimate their chances of dying due to homicide or a gun accident .

  On the other hand, one might raise the argument that homicides are different than the other causes of death here because they are intentional, and they affect innocent third parties. That's fair enough, although this claim does not work for drunk driving which affects third-party innocents. The fact that drunk driving deaths occur through negligence rather than malice (usually) is small comfort to the dead and their families.

  As a noted recently in this Mises Daily article, alcohol poses far more of a public health risk to society than firearms do, and drunk-driving deaths (10,076) are similar in number to gun homicides (11,208). And yet, the response to drunk driving (which results in the deaths of innocents due to the actions of another) is nothing like the response to gun violence. The proper response to drunk driving, we are told, is to target the crime of careless driving, and to focus most especially on those who have been known to use automobiles carelessly. Those who have a history of abuse are barred from engaging in further risky behavior. Everyone else is free to purchase alcohol in enormous amounts, until proven guilty of an alcohol-related crime. 

  The response to gun homicides, on the other hand, is to restrict access to guns for everyone without any due process first.

  If policymakers responded to drunk driving the way they respond to gun violence, we would be forced to endure nationwide bans on fast cars and automobile engines that can exceed speed limits. We would be hearing demands for laws shrinking the overall number of automobiles sold each year. "More cars equal more fatalities! We are awash in cars," we would be told. (We do hear about this for environmentalist reasons, though.)

  But the fact of the matter is that gun violence is simply not a leading cause of death in the US, and those things that are more likely to kill us or our children — such as prescription drugs and alcohol — are approached with caution and demands for a "measured" approach.

  Of course, it may not be purely coincidental that the pharmaceutical industry appears to be wealthier and more influential than the gun lobby.

  

  

  

  

  

• CEO Of World's Largest Shipping Company: "Global Growth Is Worse Than Official Reports"

  Last week we reported that, as measured by its three primary means of transportation, global trade is in nothing short of freefall: to wit – “China Container Freight At Record Low; Rail Traffic Tumbles, Trucking Slows Down.” The slowdown in this most important metric of global growth (or lack thereof), one which unlike asset prices can not be manipulated by central banks through “printing” was confirmed when Maersk, the world’s biggest container shipping company, reported it would cut shore-side headcount by about 4,000, a reduction of about 17%.

  As reader Joe points out, they also declined to execute options for additional 19,000 TEU mega ship new-builds and a couple of smaller 3,600 TEU feeder vessels, and will postpone a decision on building some large 14,000 TEU vessels. He adds that industry analysts have been critical of Maersk’s counter-intuitive expansion over the past few years in a recessionary climate, during which the container carriage capacity that Maersk brought on line is credited with driving ocean transport rates down.

  It is unclear whether Maersk was able to capture additional market share with their larger and likely more efficient mega-ships by driving less efficient operators out of business, or if the recession killed off their competitors. What is certain is that Maersk’s pricing strategy merely accelerated the “deflationary” climate experienced across the globe over the past several years, as companies have rushed to cut prices in an attempt to put competitors (who have survived this far thanks to global ZIRP policies which have pushed debt to unprecedented levels around the globe) out of business.

  What is also clear is that Maersk is not just making it up. In fact, according to Maersk CEO, Nils Smedegaard Andersen, the reason why companies that are reliant on global trade, such as his, are flailing is simple: global growth is substantially worse than the official numbers and forecasts. To wit: “The world’s economy is growing at a slower pace than the International Monetary Fund and other large forecasters are predicting.“

  Quoted by Bloomberg, Andersen says that “we believe that global growth is slowing down,” he said in a phone interview. “Trade is currently significantly weaker than it normally would be under the growth forecasts we see.“

  Impossible, you say, the IMF would never lie or be overly optimistic in a transparent attempt to boost consumer optimism, and thus spending. Actually, it would.

  As Reuters recently pointed out, “the International Monetary Fund, World Bank and Organization for Economic Cooperation and Development have not just been wrong; for years they have all been wrong in the same direction, persistently forced to revise down predictions that proved too rosy. “There’s an inbuilt ‘optimism bias’,” said Stephen King, senior advisor to HSBC and a former economic adviser at the British treasury. “But facts have to dominate a forecast eventually.”

  It’s worse than that, because after 7 years of screaming “recovery” nobody believes it anymore, and meanwhile for CEOs such as Andersen, the world is on the verge of a global recession.

  The IMF on Oct. 6 lowered its 2015 global gross domestic product forecast to 3.1 percent from 3.3 percent previously, citing a slowdown in emerging markets driven by weak commodity prices. The Washington-based group also cut its 2016 forecast to 3.6 percent from 3.8 percent. But even the revised forecasts may be too optimistic, according to Andersen.

  The punchline: “We conduct a string of our own macro-economic forecasts and we see less growth – particularly in developing nations, but perhaps also in Europe — than other people expect in 2015,” Andersen said. Also for 2016, “we’re a little bit more pessimistic than most forecasters.”

  A little as in 0.2% or as in 2%, which would mean that the world GDP is currently, as we have long claimed, in a recession and not just in dollar terms.

  

  On second thought no need to wait for the answer: as noted above, Maersk’s on Friday reported a 61 percent slump in third-quarter profit as demand for ships to transport goods across the world hardly grew from a year earlier. The low growth rates are proving particularly painful for an industry that’s already struggling with excess capacity.

  Here is the damage, as we showed last Thursday in a chart of China’s containerized freight index. As of the latest data point, it just hit an all time low!

  

   

  Trade from Asia to Europe has so far suffered most as a weaker euro makes it tougher for exporters like China to stay competitive, Andersen said. Still, there are no signs yet that the global economy is heading for a slump similar to one that followed the financial crisis of 2008, he said.

  Still, despite the historic collapse in profit, the Maersk CEO remains optimistic:

  “We’re seeing some distortions amid this redistribution that’s taking place between commodity exporting countries and commodity importing countries,” he said. “But this shouldn’t lead to an outright crisis. At this point in time, there are no grounds for seeing that happening.”

  We are confident that Mr. Andersen will be the first to advice when said distortions do lead to an “outright crisis.”

  

  

  

  

  

• Greece May Open Border Fence With Turkey, Accept Refugees In Exchange For Release Of Bailout Cash

  As part of its third bailout from this summer when the party that was elected on an anti-austerity, “no more debt” platform caved to Europe’s every demand (under the threat of deposit confiscation and bank failure) and promised to unleash even more “austerity”, while raising Greek debt to 200% of GDP over the next few years, Athens was supposed to get its first €2 billion installment of the first €26 billion tranche for discretionary spending purposes sometime around now.

  Unfortunately, it isn’t, if only for the time being, for the simple reason that – surprise – it hasn’t implemented most of the reforms demanded under the terms of the Third bailout agreement.

  According to Reuters reports, the country and its international creditors “remained at odds over the treatment of non-performing loans at Greek banks, a government official said on Sunday, holding up part of the first installment of aid under a multi-billion-euro bailout.” 

  Furthermore, “discussions have stumbled over how to foreclose on non-performing loans at Greek banks. Athens insists resolving the issue should not result in thousands of Greeks at risk of losing their homes.”

  According to Kathimerini, the key issues being discussed over the weekend were the criteria that apply to home repossessions, the rules governing the 100-installment payment plan for unpaid taxes and the coalition’s continuing efforts to find a fiscal measure to replace the 23 percent value-added tax rate on private education, which it agreed in the summer but has since pledged to scrap.

  On the issue of primary residence repossessions, the Greek government is trying to find a formula that would protect at least half of local homeowners, compared to the proposal from the institutions, which would lead to just 20 percent not facing the threat of losing their home if they do not keep up with their mortgage repayments.

   

  The two sides’ positions on the installment scheme, which allows taxpayers who have amassed debts to the state to pay them off in up to 100 tranches, also differ substantially. Greece’s lenders want those who enroll in the scheme to be removed from it if they miss a payment by more than a day, compared to the current 26-day grace period they have been given. Athens is mulling the possibility of gradually reducing the limit from 26 days and linking it to the performance of the country’s economy.

  Greece’s progress in meeting the terms of the bailout is due to be assessed at a meeting of euro zone finance ministers, known as the Eurogroup, on Monday. “There is a distance with lenders on that issue, and I don’t think that we will have an agreement soon,” a government official told Reuters.

  Reuters adds that the Greek Prime Minister Alexis Tsipras and European Commission President Jean-Claude Juncker discussed the bad-loans issue by telephone on Sunday. French President Francois Hollande and German Chancellor Angela Merkel also talked about it by phone, another government official said.

  The problem is that having done what it always does, namely kicked the can since the summer, the creditors are actually demanding credible reform. That may be a challenge: public dissent already stirring over broad terms of the bailout – a nationwide strike has been called for Nov. 12 – the official said Greece would stand its ground.

  “This call is the first step for the issue to be solved at a political level,” the government official told Reuters. “We will use all the time (we have at our disposal) to reach an agreement and discussions might continue on Monday morning if required.”

  Yes, this means that the endless Greek soap opera may be coming back for another season, even though this time it is assured to be an utter and total flop and zero viewership, following this summer’s anticlimatic and farcical conclusion.

  Perhaps realizing that another wave of social unrest and failure to obtain creditor cash may well lead to a violent social upheaval, Tsipras seems to be contemplating a Plan B, one which would see Greece accept thousands of refugees destined for Europe in exchange for getting the earmarked cash without any reform.

  Kathimerini reports that Citizens’ Protection Minister Nikos Toskas suggested that the Greek government would be willing to consider opening a safe passage for refugees through the fence on the Evros border in northeastern Greece if there is an agreement with Turkey, Bulgaria and the European Union.

  

  “We can’t just open everything when there is a danger that everything will close in Europe,” said Toskas in reference to other eastern and central European countries installing fences at their borders. 

  Well, you can… if there is enough incentive, like allowing the government to reneg on most of its promised reforms (avoiding another period of social unrest) and instead getting a few billion in wire transfers in exchange for accepting several thousand Syrian refugees.

  Everyone wins… except the Greek people of course, but they lost long ago.

  

  

  

  

  

• "US Debt Is 3 Times More Than You Think" Warns Former Chief US Accountant

  In a shocking admission for most of mainstream America, the former U.S. comptroller general says the real U.S. debt is closer to about $65 trillion than the oft-cited figure of $18 trillion, thanks to unfunded liabilities which simply cannot be ignored. As The Hill reports, unless economic growth accelerates, he warns, "you’re not going to be able to provide the kind of social safety net that we need in this country," adding unequivocially that Americans have "lost touch with reality" when it comes to spending.

  As The Hill reports,

  Dave Walker, who headed the Government Accountability Office (GAO) under Presidents Bill Clinton and George W. Bush, said when you add up all of the nation’s unfunded liabilities, the national debt is more than three times the number generally advertised.

   

  “If you end up adding to that $18.5 trillion the unfunded civilian and military pensions and retiree healthcare, the additional underfunding for Social Security, the additional underfunding for Medicare, various commitments and contingencies that the federal government has, the real number is about $65 trillion rather than $18 trillion, and it’s growing automatically absent reforms,” Walker told host John Catsimatidis on “The Cats Roundtable” on New York’s AM-970 in an interview airing Sunday.

   

  The former comptroller general, who is in charge of ensuring federal spending is fiscally responsible, said a burgeoning national debt hampers the ability of government to carry out both domestic and foreign policy initiatives.

   

  “If you don’t keep your economy strong, and that means to be able to generate more jobs and opportunities, you’re not going to be strong internationally with regard to foreign policy, you’re not going to be able to invest what you need to invest in national defense and homeland security, and ultimately you’re not going to be able to provide the kind of social safety net that we need in this country,” he said.

   

  He said Americans have “lost touch with reality” when it comes to spending.

   

  Walker called for Democrats and Republicans to put aside partisan politics to come together to fix the problem. 

   

  "You can be a Democrat, you can be a Republican, you can be unaffiliated, you can be whatever you want, but your duty of loyalty needs to be to country rather than to party, and we need to solve some of the large, known, and growing problems that we have,” he said.

  *  *  *

  Of course, that is to say nothing of the other unfunded liability – America's Pension Ponzi, as we detailed previously...

  Just how big of a problem is this you ask? Well, pretty big, according to Moody’s which, as we noted last month, contends that the largest 25 public pensions are underfunded by some $2 trillion. 

  It’s against that backdrop that we present the following graphic and color from Goldman which together demonstrate the amount by which state and local governments would need to raise contributions to "bring plans into balance over time."

  

  From Goldman:

   

   

  Unfunded pension liabilities have grown substantially. There are several factors behind this, led by lower than expected investment returns and insufficient contributions from state and local governments to the plans. The two issues are related. The assumed investment return is used as a discount rate to determine the present value of liabilities. The higher the discount rate, the lower the estimated liability, and the lower the periodic payment into the fund a state or local employer is expected to make. There is, of course, no clear answer about what the discount rate ought to be, though the fact that the average assumption used by private plans has continuously declined for more than a decade suggests that the rates have probably been too high and that the current average assumption of 7.7% may come down further.

   

  Contributions have also generally been lower than necessary to stabilize or reduce unfunded liabilities because of the rules around how those unfunded liabilities are amortized. Payments into pension plans are generally meant to account for the future cost of benefits accrued during the current year, as well as catch-up payments equal to some fraction of the unfunded liability left from prior years. Many plans target payment amounts that would work off this underfunding over 30 years, though some use shorter periods. However, the amounts of these payments are often backloaded, with the result that even if the “required” payment is made in full the unfunded liability often grows.

   

  A separate but related issue is that some states have simply declined to make even the “required” contribution, which is probably lower than it should be in any case due to the factors just noted. For example, over the last few years New Jersey has made on average only around 40% of the expected payment. New accounting rules promulgated by the Government Accounting Standards Board (GASB) will penalize underfunded plans with a lower discount rate, but the change is fairly minor and, in any case, affects only the accounting; it will not impose any new legal requirements to make the contributions.

   

  If state and local governments are ultimately forced to devote more resources to these obligations, the effect on state and local spending would be noticeable. Exhibit 8 shows the states’ pension contributions, as a share of gross state product, with two potential additions. The first is the level that would be required to simply meet the “actuarially required contribution.” To bring the plans back into balance over time, further contributions would be necessary. In aggregate this would raise government pension contributions by something like $100bn per year (0.6% of GDP), lowering spending in other areas (or raising taxes) by a similar amount. In theory, OPEB costs could push this adjustment a bit higher.

  

  

  

  

  

• What Can Yellen Really Do?

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  For one, eurodollar futures are “obliged” to take account of any threats from the FOMC even though, in the end, they might only be self-fulfilling. Because the Fed has very little actual ability to condition money markets, none of that is truly “real” but there remains the unknown and money dealing agents still seem reticent about any kind of (further) showdown. Where the eurodollar curve was shriveled toward nothing up to the September payroll report released on October 2, the October payroll report has advanced the recent run of Yellen’s apparently restored resolve.

  At pivotal points on the curve, such as the June 2018 maturity, that has obliterated the “dollar” run trend that began back around July 6. However, as the fuller curve displays, that seems to be only a change in policy perceptions and not especially much more than that.

  

  Again, the entire curve had been flattening up to October 2 before meandering throughout October while trying to survey that FOMC resolution. The October FOMC seems to have reversed further doubts and pushed expectations back toward a rate hike. However, as the eurodollar curve today demonstrates, that amounts only to a shift in that policy view rather than a complete outlook.

  

  Even in the shorter maturities, the curve is still inside where it was at the eurodollar outbreak of the last “dollar” wave/run. Further out, though, the curve remains much, much flatter. Again, that suggests eurodollar “obligations” about policy decisions and not wanting to contest that fate directly. In terms of economic progression, that flatter curve continues the trend.

  That much we can observe directly via commodities. Copper as of yesterday’s close revisited the lowest closing price since August 26; matching that day’s multi-year low. So far this morning, copper is trading down to $2.241 at the December maturity, which is in the same range as it was on the morning of the global liquidations of August 24.

  

  Crude oil prices continue to be similarly unresolved, trading more so in a conspicuous range both on the front and toward the rear. The shorter end of the WTI curve is, as always, being directed by the “dollar”, or at least perceptions of what that might be. Thus, the lack of discernable trend echoes what was in eurodollar futures. The fact that WTI has continued on much the same sideways line even after the front end of the eurodollar curve succumbed to Yellen madness bolsters the eurodollar case – only a policy shift. The back end of the WTI futures curve continues to be almost pinned in the same very narrow price range, marrying “dollar” with physical economy.

  

  That physical economy according to domestic crude oil continues to be grim and getting more so. Inventories that had started to rise, coincidentally, around the week before August 24 have surged of late. The reported domestic crude oil stocks have neared again their 80-year highs despite production cuts from the summer largely holding. Less production and rising inventory, especially given this time of year, equates to “something” about demand.

  

  With crude stocks moving up solidly despite inventories being still almost one-third above the “cycle” trend from 2009 through 2014, the economics of that behavior suggest the opposite of what the FOMC would like to project.

  

  And that would seem to bridge the eurodollar curve’s front and back ends, aligning it with commodities more generally. In that view, eurodollar futures are suggesting exactly what they have been for almost a year and a half – that the Fed might or might not act, but if they do it won’t alter the economic course but only wield the potential to make a bad (and growing more so) physical and general economy situation that much worse.

  In the end, it may not as much matter except as a test of these kinds of perceptions. The history of FOMC decisions during this “dollar” run dating back to last year has been quite the same; hint with greater magnitude at imminent rate hikes only to relent and recoil at what is wrought (and, really, what is rot underneath).

  

  

  

  

  

• Officials Are "90% Sure" There Was A Bomb On Doomed Russian Passenger Plane

  It’s now been more than a week since a Russian passenger jet plummeted to the Earth at 300 miles per hour in the Sinai Peninsula and to be sure, we’ve made no secret of our suspicions that an explosion was the likely culprit. 

  Of course you needn’t be an Egyptian forensics expert or some kind of flight safety guru to come to the conclusion that a “technical failure” probably wasn’t responsible for the what happened. Sadly, the fact that body parts were littered in an 8 kilometer radius supports the contention that the aircraft did indeed explode and over the course of the last several days, both Washington and London both said that intercepted “chatter” points to ISIS. 

  And then there’s the fact that IS Sinai insists they “destroyed” the plane. 

  On Sunday, we got still more evidence that an explosive device may have been planted on the flight. Reuters, citing sources familiar with the black box investigation, now says officials are “90% sure” that a bomb was responsible. Here’s more: 

  Investigators of the Russian plane crash in Egypt are “90 percent sure” the noise heard in the final second of a cockpit recording was an explosion caused by a bomb, a member of the investigation team told Reuters on Sunday.

   

  His comments reflect a higher degree of certainty about the cause of the crash than the investigation committee has so far declared in public.

   

  Lead investigator Ayman al-Muqaddam announced on Saturday that the plane appeared to have broken up in mid-air while it was being flown on auto-pilot, and that a noise had been heard in the last second of the cockpit recording. But he said it was too soon to draw conclusions about why the plane crashed.

   

  Asked to explain the remaining 10 percent margin of doubt, the investigator declined to elaborate, but Muqaddam cited other possibilities on Saturday including a fuel explosion, metal fatigue in the plane or lithium batteries overheating.

  So, it’s either the metal “expired” (so to speak), some batteries overheated, or the plane was blown up by terrorists. You can draw your own conclusions there. 

  If you, like David Cameron and US intelligence officials, do indeed believe that an “explosive device” was on board, then the next question to ask is how it got there. According to Sharm El Sheikh workers who spoke with WSJ, there’s speculation this was an inside job:

  Airport workers here say they have faced intensive questioning in recent days from Egypt’s internal security agency, a sign the government is now exploring the prospect that airport insiders might have facilitated a terror attack that brought down the Russian plane that crashed last weekend.

   

  The workers say officials from Egypt’s Ministry of Interior, the internal security agency, have questioned them about their actions and whereabouts on Oct. 31, the day the plane crashed in the Sinai Peninsula, killing all 224 people on board.

   

  At the same time, Egypt’s military has assigned guards for airplanes staying overnight on the tarmac of Sharm El Sheikh International Airport, according to workers, as international carriers resumed flights this weekend to ferry stranded vacationers back home.

   

  “Normally, policemen are not allowed on the tarmac,” said a person familiar with the security arrangements. “Recently, they’re being asked to spend nights beneath jets.”

   

  In the Egyptian civil aviation ministry’s first public briefing since last weekend’s crash, agency chief Ayman Al Moqadem confirmed that there had been a mysterious sound heard on the final second of the cockpit recorder, but shed no light on what the pilots discussed during the 23 minutes after takeoff and before Metrojet Flight 9268 went silent.

  To be sure, none of this is particularly surprising given everything we’ve learned over the past several days and at a certain point, one has to ask how many officials need to come out and confirm that this was indeed a bomb before someone finally delivers definitive proof, but regardless of whether the story is starting to get repetitive, it still has far-reaching implications – and not just for Russia’s campaign against Islamic extremists. Here’s Bloomberg: 

  “If this turns out to be a device planted by an ISIL operative or by somebody inspired by ISIL, then clearly we will have to look again at the level of security we expect to see in airports in areas where ISIL is active,” U.K. Foreign Secretary Philip Hammond told BBC Television’s Andrew Marr show on Sunday.

   

  Emirates airline, ranked world No. 1 by international traffic, is already looking at its security procedures in anticipation of tighter rules, President Tim Clark told reporters in Dubai on Sunday.

   

  “As we speak, we’re reviewing our procedures in terms of security and ramp handling and access to our aircraft,” Clark said. “We have 22 cities in Africa, multiple cities in west Asia — India, Pakistan, et cetera — all of these will have to be reviewed to make sure we’re as safe as we can be.”

   

  Britain banned commercial flights to and from Sharm el-Sheikh on the Red Sea in the wake of the crash, leaving thousands of vacationers stranded. Other countries, including Russia, followed and travel warnings ensued with Norway, Finland and Denmark all advising against all non-essential trips. Hammond said those trying to get home on unscheduled flights face delays of two to three days at most.

   

  Egypt’s benchmark EGX 30 Index of stocks slumped 2.6 percent at the close in Cairo, the most in two months.

  In short, this is likely to cause a global rethink of airline security and importantly, this is a veritable disaster for an Egyptian tourism industry which was still stinging from a September “incident” that saw the military accidentally engage a group of Mexicans having a barbecue after mistaking them for ISIS. 

  It will be interesting to watch the Egyptian economy over next six or so months because frankly, the above suggests Cairo could be in for a bumpy ride. 

  Finally, note that the al-Sisi government recently signed new legislation widening Cairo’s surveillance authority and the President isn’t exactly known for having a sterling record on human rights (he’s a Mubarak disciple after all). If this ends up hobbling the economy, expect al-Sisi to crack down, setting the stage for more of the same in terms of social unrest, coups, and counter-coups. 

  

  

  

  

  

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