- The Deep State: Source Of All Negativity
Submitted by Doug Casey via InternationalMan.com,
I’d like to address some aspects of the Greater Depression in this essay.
I’m here to tell you that the inevitable became reality in 2008. We’ve had an interlude over the last few years financed by trillions of new currency units.
However, the economic clock on the wall is reading the same time as it was in 2007, and the Black Horsemen of your worst financial nightmares are about to again crash through the doors and end the party. And this time, they won’t be riding children’s ponies, but armored Percherons.
To refresh your memory, let me recount what a depression is.
The best general definition is: A period of time when most people’s standard of living drops significantly. By that definition, the Greater Depression started in 2008, although historians may someday say it began in 1971, when real wages started falling.
It’s also a period of time when distortions and misallocations of capital are liquidated, and when the business cycle, which is caused exclusively by currency debasement, also known as inflation, climaxes. That results in high unemployment, business failures, uncompleted construction, bond defaults, stock market crashes, and the like.
Fortunately, for those who benefit from the status quo, and members of something called the Deep State, the trillions of new currency units delayed the liquidation. But they also ensured it will now happen on a much grander scale.
The Deep State is an extremely powerful network that controls nearly everything around you. You won’t read about it in the news because it controls the news. Politicians won’t talk about it publicly. That would be like a mobster discussing murder and robbery on the 6 o’clock news. You could say the Deep State is hidden, but it’s only hidden in plain sight.
The Deep State is the source of every negative thing that’s happening right now. To survive the coming rough times, it’s essential for you to know what it’s all about.
The State
Now, what causes economic problems? With the exception of natural events like fires, floods, and earthquakes, they’re all caused directly and indirectly by the State, through its wars, taxes, regulations, and inflation.
Yes, yes, I know this is an oversimplification, that human nature is really at fault, and the institution of the State is only a mass dramatization of the psychological aberrations and demons that lie within us all. But we don’t have time to go all the way down the rabbit hole, so let’s just talk about the proximate rather than the ultimate causes of the Greater Depression. And here, I want to talk about the nature of the State, in general, and then something called the Deep State, in particular.
A key takeaway, and I emphasize that because I expect it to otherwise bounce off the programmed psyches of most people, is that the very idea of the State itself is poisonous, evil, and intrinsically destructive. But, like so many bad ideas, people have come to assume it’s part of the cosmic firmament, when it’s really just a monstrous scam. It’s a fraud, like your belief that you have a right to free speech because of the First Amendment, or a right to be armed because of the Second Amendment. No, you don’t. The U.S. Constitution is just an arbitrary piece of paper…entirely apart from the fact the whole thing is now just a dead letter. You have a right to free speech and to be armed because they’re necessary parts of being a free person, not because of what a political document says.
Even though the essence of the State is coercion, people have been taught to love and respect it. Most people think of the State in the quaint light of a grade school civics book. They think it has something to do with “We the People” electing a Jimmy Stewart character to represent them. That ideal has always been a pernicious fiction, because it idealizes, sanitizes, and legitimizes an intrinsically evil and destructive institution, which is based on force. As Mao once said, political power comes out of the barrel of a gun. But things have gone far beyond that. We’re now in the Deep State.
The Deep State
The concept of the Deep State originated in Turkey, which is appropriate, since it’s the heir to the totally corrupt Byzantine and Ottoman empires. And in the best Byzantine manner, the Deep State has insinuated itself throughout the fabric of what once was America. Its tendrils reach from Washington down to every part of civil society. Like a metastasized cancer, it can no longer be easily eradicated.
I used to joke that there was nothing wrong with Washington that 10 megatons on the capital couldn’t cure. But I don’t say that anymore. Partially because it’s too dangerous, but mainly because it’s now untrue. What’s now needed is 10 megatons on the capital, and four more bursts in a quadrant 10 miles out.
In many ways, Washington models itself after another city with a Deep State, ancient Rome. Here’s how a Victorian freethinker, Winwood Reade, accurately described it:
Rome lived upon its principal till ruin stared it in the face. Industry is the only true source of wealth, and there was no industry in Rome. By day the Ostia road was crowded with carts and muleteers, carrying to the great city the silks and spices of the East, the marble of Asia Minor, the timber of the Atlas, the grain of Africa and Egypt; and the carts brought out nothing but loads of dung. That was their return cargo.
The Deep State controls the political and economic essence of the U.S. This is much more than observing that there’s no real difference between the left and right wings of the Demopublican Party. It’s well known by anyone with any sense (that is, by everybody except the average voter) that although the Republicans say they believe in economic freedom (but don’t), they definitely don’t believe in social freedom. And the Democrats say they believe in social freedom (but don’t), but they definitely don’t believe in economic freedom.
Who Is Part of the Deep State?
The American Deep State is a real, but informal, structure that has arisen to not just profit from, but control, the State.
The Deep State has a life of its own, like the government itself. It’s composed of top-echelon employees of a dozen Praetorian agencies, like the FBI, CIA, and NSA…top generals, admirals, and other military operatives…long-term congressmen and senators…and directors of important regulatory agencies.
But Deep State is much broader than just the government. It includes the heads of major corporations, all of whom are heavily involved in selling to the State and enabling it. That absolutely includes Silicon Valley, although those guys at least have a sense of humor, evidenced by their “Don’t Be Evil” motto. It also includes all the top people in the Fed, and the heads of all the major banks, brokers, and insurers. Add the presidents and many professors at top universities, which act as Deep State recruiting centers…all the top media figures, of course…and many regulars at things like Bohemian Grove and the Council on Foreign Relations. They epitomize the status quo, held together by power, money, and propaganda.
Altogether, I’ll guess these people number a thousand or so. You might analogize the structure of the Deep State with a huge pack of dogs. The people I’ve just described are the top dogs.
But there are hundreds of thousands more who aren’t at the nexus, but who directly depend on them, have considerable clout, and support the Deep State because it supports them. This includes many of the wealthy, especially those who got that way thanks to their State connections…the 1.5 million people who have top secret clearances (that’s a shocking, but accurate, number)… plus top players in organized crime, especially the illegal drug business, little of which would exist without the State. Plus mid-level types in the police and military, corporations, and non-governmental organizations.
These are what you might call the running dogs.
Beyond that are the scores and scores of millions who depend on things remaining the way they are. Like the 50%-plus of Americans who are net recipients of benefits from the State…the 60 million on Social Security…the 66 million on Medicaid…the 50 million on food stamps…the many millions on hundreds of other programs… the 23 million government employees and most of their families. In fact, let’s include the many millions of average Joes and Janes who are just getting by.
You might call this level of people, the vast majority of the population, whipped dogs. They both love and fear their master, they’ll do as they’re told, and they’ll roll over on their backs and wet themselves if confronted by a top dog or running dog who feels they’re out of line. These three types of dogs make up the vast majority of the U.S. population. I trust you aren’t among them. I consider myself a Lone Wolf in this context and hope you are, too. Unfortunately, however, dogs are enemies of wolves, and tend to hunt them down.
The Deep State is destructive, but it’s great for the people in it. And, like any living organism, its prime directive is: Survive! It survives by indoctrinating the fiction that it’s both good and necessary. However, it’s a parasite that promotes the ridiculous notion that everyone can live at the expense of society.
Is it a conspiracy, headed by a man stroking a white cat? I think not. I find it’s hard enough to get a bunch of friends to agree on what movie to see, much less a bunch of power-hungry miscreants bent on running everyone’s lives. But, on the other hand, the top dogs all know each other, went to the same schools, belong to the same clubs, socialize, and, most important, have common interests, values, and philosophies.
The American Deep State rotates around the Washington Beltway. It imports America’s wealth as tax revenue. A lot of that wealth is consumed there by useless mouths. And then, it exports things that reinforce the Deep State, including wars, fiat currency, and destructive policies. This is unsustainable simply because nothing of value comes out of the city.
- "It's Over For Me" Matt Drudge Warns Public "You're A Pawn In The 'Ghetto-isation'" Of The Web
The very foundation of the free Internet is under severe threat from copyright laws that could ban independent media outlets, according to Matt Drudge. "I had a Supreme Court Justice tell me it’s over for me,” said Drudge, warning web users that they were being pushed "pawn-like" into the cyber "ghettos" of Twitter, Facebook and Instagram.
"Reclusive" Drudge says he has not had a photo taken in 8 years
During an appearance on the Alex Jones Show, Drudge asserted that copyright laws which prevent websites from even linking to news stories were being advanced.
“I had a Supreme Court Justice tell me it’s over for me,” said Drudge. “They’ve got the votes now to enforce copyright law, you’re out of there. They’re going to make it so you can’t even use headlines.”
“To have a Supreme Court Justice say to me it’s over, they’ve got the votes, which means time is limited,” he added, noting that a day was coming when simply operating an independent website could be outlawed.
“That will end (it) for me – fine – I’ve had a hell of a run,” said Drudge, adding that web users were being pushed into the cyber “ghettos” of Twitter, Facebook and Instagram.
“This is ghetto, this is corporate, they’re taking your energy and you’re getting nothing in return – nothing!”
Watch the full interview below…
Drudge warned that social media giants like Twitter and Facebook were swallowing up content and strangling the organic growth of independent Internet news platforms. Automated news aggregators like Google News also came under fire.
“Google News – hello anybody? The idiots reading that crap think there is actually a human there – there is no human there – you are being programmed to being automated even up to your news….a same corporate glaze over everything,” said Drudge.
“Stop operating in their playground, stop it,” said Drudge, asserting that people were being confined by what the likes of Facebook and Twitter defined as the Internet as a result of this “corporate makeover” of the web.
“I’m just warning this country that yes, don’t get into this false sense that you are an individual when you’re on Facebook, no you’re not, you’re a pawn in their scheme,” concluded Drudge.
- Gun Control: Fashionable Prohibition For Modern Lawmakers
Submitted by Ryan McMaken via The Mises Institute,
With the latest school shooting, all humane people are expected to jump up and do something to stop the next shooting. The most popular response among media pundits and national policymakers right now is an expansion of the various prohibitions now in place against guns.
For anyone familiar with the history of prohibitions on inanimate objects, however, these appeals to prohibition as a “common sense” solution are rather less convincing.
Americans and others have tried a wide variety of similar prohibitions before, and with mixed results at best. Nowadays, prohibitions on drugs are in decline as states continue to unravel prohibitions of the past and make the nature of prohibition less drastic and less punitive. And, of course, the prohibition of alcohol has been dead for decades.
The prohibitions of old have been deemed failures. But fortunately for prohibitionists, there’s a fashionable form of modern prohibition that won’t go away.
Why Not Ban Alcohol?
Now, I know what some of you are saying: “Hey, McMaken, you can’t compare alcohol prohibition to gun prohibition because alcohol mostly only hurts the drinker, while guns have many harmful side effects for the public at large.”
But the fact that anyone could think this shows just how well the anti-alcohol-prohibition rhetoric has worked. Since the repeal of prohibition in the 1930s, alcohol has taken on an image of fun and relaxation. Sure, some people use it irresponsibly, we are told, but for the most part, people should be allowed the freedom to use it. For those high risk behaviors linked to alcohol, such as drunk driving, we’ll regulate that, but the ownership of alcohol itself, of course, should be open to all adults.
And yet, in the face of this laissez-faire attitude toward drinking, we could offer a host of illustrations of how alcohol is in fact a public safety menace.
Indeed, prior to the 1920s, during the heyday of the temperance movement, alcohol’s image was as anything but a mere benign luxury among a sizable portion of the population.
While many people today assume that the prohibitionists argued along puritanical lines, and emphasized the dangers of moral ruin, the arguments against alcohol were really far more complex than that.
The prohibitionists argued — quite plausibly, mind you — that any number of social ills could be addressed through alcohol prohibition. Chief among these was the fact that many families, including children, were often rendered destitute by the drinking of the male head of the household who was unable to hold down a job due to his addiction. Moreover, cases of child abuse and spousal abuse were clearly connected to alcohol consumption, as were household accidents and accidents on the job.
When breadwinners were killed or injured on the job, or if a drunk spent half his income at a bar on payday, families often ended up on the local dole. Or worse.
And there was a connection to non-domestic violence too. Public drunkenness, bar fights, and the deadly and irresponsible use of guns were connected to drinking as well.
Ironically, back then though, it wasn’t the guns that were seen as the problem (although gun control advocates did exist). For many, the problem was that drunks were irresponsibly using guns and that the common-sense solution was to prevent them from getting drunk.
Guns are Less Deadly than Alcohol
Nowadays, 88,000 deaths per year are attributed to alcohol abuse, and thirty people per day in the United States die in alcohol-related auto accidents. Heavy drinkers are more prone to violence, suicide, and risky sexual behavior.
In fact, if we compare these statistics, we find that alcohol abuse is significantly more deadly and problematic than misuse of guns. There were 36,000 gun-related deaths (including suicides and accidents) in the US in 2013, and as a percentage of all causes of death, alcohol-related deaths are more than twice as common as gun deaths.
What’s more, one-third of gun deaths are alcohol related. Thus, according to prohibitionist logic, we could eliminate one-third of gun-related deaths overnight by prohibiting alcohol consumption. So why aren’t we doing it? If it could save one life, wouldn’t it be worth it?
Most have concluded that saving one life is not, in fact, worth it. In practice, alcohol-related deaths (including those inflicted against third-party victims) are treated very differently than gun-related deaths.
For example, it is clear that alcohol is a central component in the more than 10,000 drunk-driving deaths that occur each year. So, is the response to restrict certain types of alcohol or populations that can buy it? Are background checks instituted to prevent sales to incorrigible drunk drivers? No, the response is to ban how alcohol is used in certain cases.
On the other hand, in response to the 11,000 gun-related murders per year, the prescribed response is to restrict the guns themselves. But, if we were to apply the same logic behind drunk driving bans to gun violence, the only legislation we would be considering would be something along the lines of special penalties for carrying firearms when mentally impaired, on psychotropic drugs, when sight impaired, or in crowded areas where accidents are more likely to affect bystanders. The mere purchase or ownership of guns would not be restricted, just as the purchase or ownership of alcohol is not restricted in response to drunk driving.
Indeed, if we add to drunk driving all the cases of spousal abuse and child abuse and public cases of assault, bar fights, and more, it becomes clear that alcohol is in fact far more damaging to the social fabric than guns have ever been. Once we factor in the harm that alcohol does to the user himself, in terms of health problems, riskier sex, and suicides, the numbers look even worse for alcohol.
Does Prohibition Work?
Now, you might be thinking, “yes, but if gun prohibition works, shouldn’t we try it?” Unfortunately, there are few reasons to believe that it would work, or that the cure would not be worse than the disease.
Mark Thornton illustrated years ago that alcohol prohibition led to more alcohol consumption, and more consumption of harder distilled drinks versus more mild beer and wine beverages. In addition to the complete failure to end the behavior it targeted, Americans also became acquainted with numerous unpleasant side effects of prohibition including more organized crime and more government harassment of peaceful citizens.
Comparing the States
As far as gun prohibition goes, thanks to a diversity of gun laws among the American states, we can compare between gun ownership levels in the states and homicide rates.
And what we find is that there is no correlation between the level of restrictiveness in gun laws and the murder rate. Most recently, Eugene Volokh ran the numbers looking at homicide rates and the so-called Brady Score assigned to states by gun-control advocates. Volokh even provides the data so you can analyze it yourself. (Volokh explains why homicides and not “gun deaths” is the important metric here.)
We can also see that this is quite plausible by simply eyeballing the data if we look at gun restrictions by state and homicide rates. Gun-control advocates like to point to southern states that have both permissive gun laws and high murder rates, such as Alabama and Mississippi. But, even a cursory analysis beyond this cherry-picking shows that there are numerous states with permissive gun laws (such as Utah, Wyoming, Kansas, and others) where the murder rate is very low. And states with more restrictive laws, such as Illinois, New York, and California have higher murder rates than numerous states where it is easy to buy a gun.
So, while gun-control advocates press for “common-sense” restrictions, real common sense suggests that gun restrictions cannot explain the prevalence of murder in a state. This means that gun-control advocates are looking at the wrong social statistics to explain the violence.
Reasons Why They Want to Ban Guns and Not Alcohol
But none of this matters when gun violence is being exploited to drive for more state power and more regulation of private citizens. Many gun-control advocates really do believe that government regulation and management can solve every social ill. They ignore the realities behind failed experiments such as alcohol prohibition or the war on drugs, and instead move on to the latest sexy prohibitionist drive because they sense an opportunity to control one more aspect of daily life.
Most everyone accepts that prohibition creates unintended consequences that can be negative, and with alcohol prohibition, these consequences included organized crime and the criminalization of peaceful citizens. Gun-control advocates assert, however, that whatever the downsides of gun control may be, they are minimal compared to the many advantages.
As Murray Rothbard pointed out in For a New Liberty, whether or not you come face to face with those down sides ban depend a lot on your wealth and influence within society. For example, white, middle class people who live in safe suburbs, have influence over local police forces, and can even resort to private security (including alarm systems) see little down side to gun control. After all, they have little reason to fear police or common criminals when they can exercise their well-established political influence at the local level or purchase a home security system with the expectation that police will arrive quickly in case of emergency.
Powerless minorities, on the other hand, face much larger downsides to gun control. For them, police are an unreliable deterrent to local crime, and are little use in cases of social unrest. Many may remember how police in Ferguson, Missouri protected government buildings, but left the rest of the town on its own during the riots there. Local citizens paid for police protection, but got none. And then, of course, there are countless cases of the “proper” authorities using their legal guns against powerless populations, with no resource left to them other than private firearms. Just one example would be the Texas Ranger rampages that followed the so-called Plan de San Diego when the Rangers swept through southern Texas lynching Mexican-Americans who were deemed traitors.
Consequently, some principled leftists, most of whom are radicals, do not subscribe to the dominant gun-control position of the left. But certainly the mainline left, dominated by university intellectuals, government employees, and politicos with nice houses in safe neighborhoods, see few problems associated with centralizing coercive power in the hands of “official” law enforcement.
The downsides of restricting alcohol, however, are plentiful for those who spend many hours at cocktail parties and send their children to booze-soaked elite universities to be paired up with the appropriate social class.
So, until this changes, we ought not expect much of a change in the double standard applied to alcohol and guns in terms of violence, health, and safety. The people who make the laws are quite happy having plenty of booze around. But they can afford to pay someone else to handle the guns for them.
- "We Should Have Known Something Was Wrong"
Remember when stuff such as the following was written exclusively on “conspiracy” tin-foil blogs by deranged lunatics who could not appreciate the brilliance of the neo-Keynesian system and central-planning by academics, in all its glory? Good times.
Here is Bank of America’s Athanasios Vamvakidis channeling Tyler Durden circa 2009
The real cost of QE
QE was not a free lunch after all
If only it was that easy to print our way out of a global crisis. Eight years after the crisis, we are still debating about whether the recovery has gained enough of a momentum to allow exit from crisis-driven policies and start hiking rates from zero. The world economy has actually lost momentum this year (Chart 1), deflation risks have increased (Chart 2), and EM indicators and overall market volatility have reached crisis levels (see Chart 3). All this is despite unprecedented expansion of central bank balance sheets (Chart 4). Things may have been worse otherwise, but in hindsight we believe relying too much on unconventional monetary policies was not a free lunch after all.
We should have known something was wrong
The Fed “taper tantrum” could have been the first warning that QE had gone too far. The Fed’s announcement in June 2013 that they would consider tapering QE, contingent upon continued positive data, triggered a sharp market sell-off, particularly in EM. The aggressive search for yield, which intensified after the Fed announced QE3—or QE infinity as markets called it—came to a sudden stop. QE was not for infinity after all. The Fed tried to reassure markets that QE tapering was still policy easing and that its end would not imply rate hikes immediately, but the markets apparently thought otherwise. A key takeaway was not that QE had already gone too far, but that announcing its tapering may have been a mistake. The Fed waited until December to start tapering, although the market had already priced its beginning in September.
The second warning sign may have been the across-the-board EM sell-off that started in mid-2014, as QE tapering was coming to an end and the market started pricing Fed tightening, a sell-off that intensified substantially this year. EM FX tends to underperform when the Fed tightens and the USD strengthens, but by early 2015 the EM FX index had reached a level below that during the global financial crisis (Chart 3). China’s devaluation made things worse in August, but the EM sell-off started much earlier. Risk assets more broadly have reached oversold levels. The market has been anxious about Fed hikes, despite pricing a very slow tightening and expecting interest rates to remain historically very low for years to come.
The point when things started going wrong
The Fed and other major central banks were the first to act when the global crisis started, and we believe their actions helped avoid another great depression. Political disagreement and brinkmanship led to a messy fiscal policy in the US and a neverending Eurozone crisis. The Fed and the ECB, successfully, came to the rescue a number of times in recent years. In Japan, the BoJ has delivered the strongest arrow from the three arrows in Abenomics, with mixed progress in the arrow on structural reforms and no progress in the arrow on fiscal sustainability. However, monetary easing is not the solution to every problem and risk in an economy – and we believe that using it when other polices may have been better used has its own costs.
At some point during Fed QE, the markets started reacting positively to bad news. In our view, this is when things started going wrong. Bad news became good news for asset prices, as markets expected more QE by the Fed. Asset prices were increasingly deviating from fundamentals, as the markets were trading the Fed instead of the economic reality. This was clearly not sustainable.
We believe QE1 by the Fed (Nov 2008) was a necessity. Without it, the world economy was heading to a new global depression. The Fed, led by the world’s expert on the great depression, did what needed to be done. The ECB took the opposite approach, avoiding QE and even hiking rates in the midst of the global crisis and again in the midst of the Eurozone crisis. The crisis got worse, the Eurozone economy still had the largest output gap in the Q10 group, and deflation forced the ECB to finally start QE this year. We are more skeptical about QE2 (mid 2011). The world had avoided a second great depression by that point. The justification was to address deflation risks and support the recovery during deleveraging. It was not clear cut—US inflation was above 2% and core inflation only slightly below—but one could see the Fed’s point taking into account the risks and empirical evidence that recoveries from balance sheet recessions are very slow. QE2 was not trying to address depression risks, but to avoid a Japan scenario. As such, we think QE2 was needed, albeit less so than QE1.
However, we are less sure about QE3. We believe this round was intended to support asset prices, with the idea that high asset prices would lead to a stronger recovery. Instead, Wall Street was increasingly deviating from Main Street, inflating asset prices. Equity prices started pointing towards a strong recovery, while bond prices were flagging a Japan scenario for the next decade. Both could not be right, and both turned out to be wrong. The recent sell-off suggests to us that the Fed underestimated the risks from strong EM inflows because of QE.
While we will of course never know what would have been had other policies been pursued, we believe that excessive reliance on unconventional monetary policies in recent years has had side effects. The recent market turmoil has shown that macroprudential measures have limited ability to deal with such side effects. Indeed, despite continued central bank balance sheet expansion (Chart 4) and further easing by most G10 central banks from already historically low policy rates (Chart 5), monetary conditions have tightened in most G10 economies (Chart 6) and global liquidity conditions have worsened this year (Chart 7). No macro-prudential measures could prevent this from happening, in our view.
We wouldn’t necessarily look at QE as the root of these issues. Less QE might have been necessary if US fiscal policy wasn’t so fractious, Europe had been faster to respond to the crisis, global policy coordination was stronger, and governments worldwide had grasped the “opportunity” of the crisis to implement structural reforms and progress in trade agreements. As the IMF has warned, we believe the world put too much burden on monetary policy. We have started seeing the consequences this year.
The above has lessons for both the Eurozone and Japan looking forward:
- ECB QE has led to historically low periphery yields, which are not pricing sovereign risks—just think where Greek yields are going to be if the ECB starts buying GGBs. When at some point in the (likely distant) future the ECB stops QE, the adjustment in the periphery yields is unlikely to be smooth, particularly if the countries in the region have not taken advantage of the ECB easing to implement reforms. These concerns would not justify stopping ECB QE early, but we believe they do point to consequences when central bank policies force markets to ignore risks for too long and governments are not addressing these risks in the meantime—recent reform progress in Italy is encouraging from this point of view.
- Japan could face challenges if delivery of the non-monetary “arrows” in Abenomics remains so weak. In our opinion, Japan needs structural reforms to grow and a credible long-term fiscal consolidation plan to ensure debt sustainability. We believe aggressive BoJ QE is currently kicking the can down the road, but these problems could eventually come back to haunt Japan.
Now what?
The story of the year so far may be that of a negative feedback loop leading to a bad equilibrium. First, risk assets sold-off expecting the Fed to tighten. Then, the sell-off went too far and started affecting the real economy, including in the US. Now, the Fed is not tightening as a result. However, postponing Fed tightening does not necessarily increase the demand for risk assets. We are oversimplifying, and there are certainly many other things going on, but it helps make the point.
This appears to be a new regime, in which bad news is bad news, as we wrote a year ago and reiterated recently. Fed QE does not appear to be coming to the rescue anymore. The Fed staying on hold can support risk assets in the short term, but is not as strong as QE. This is an environment with high market volatility, as the so-called central bank put is less powerful without Fed QE. ECB and BOJ QE apparently cannot do the trick. Bad news is supposed to be bad news and this should be a healthier market than before, but the adjustment back to normal has not been, and in our view is not going to be, easy.
Risk-on recommendations are only tactical. If the US data improves in the months ahead, the Fed will likely tighten and risk assets could sell-off again. If the US data remains weak, or weaken even further, we would expect risk aversion to increase, as the threshold for QE4 by the Fed appears high—and more QE may not be as effective anymore.
* * *
And that, dear Janet Yellen, is how you trapped yourself in reflexivity from which there is no way out. Now if only someone could have possibly foreseen all of this years ago…
- The Real Reason Belgium Sold 1,098 Tonnes Of Gold
Submitted by Koos Jansen via BullionStar.com,
For our global investigation how much physical gold central banks have stored at what location and how much is leased out, I decided to submit the local equivalent of a Freedom Of Information Act (FOIA) request at the central bank of Belgium, de Nationale Bank van België (NBB), to obtain information about the amount of Belgian official gold reserves, the exact location of all gold bars, the type of gold accounts NBB holds at the Bank Of England (BOE) and how much is leased out and to whom. The outcome of this research was not what I had expected.
History Of The Official Gold Reserves Of Belgium
Some of the questions I directed at the NBB I used a stepping stone, as this information is publicly available in part. At the end of August 2015 NBB was holding 227.4 tonnes of gold, down 0.04 tonnes from 227.44 tonnes in July, according to data from the Bundesbank that publishes the gold holdings of 19 European central banks and the ECB in compliance with the IMF’s most recent version of the Balance of Payments and International Investment Position Manual (BPM6). The Bundesbank (BuBa) publishes the fine troy ounces of the official gold reserves in ‘Gold bullion’ and ‘Unallocated gold accounts’. If we add up both categories the outcome for all countries equals the reserves disclosed by the World Gold Council.
From BuBa:
The balance of payments statistics will … be consistent with the framework set out in the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6). The application of the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) is binding for EU member states by virtue of a regulation adopted by the European Commission.
Back in 1965 NBB was holding over 1,300 tonnes of gold. Since 1978 it has sold a whopping 1,098 tonnes, or 83 %.
Belgium was one of the eight participating countries in the London Gold Pool, together with the US, Germany, the UK, France, Italy, the Netherlands and Switzerland, that operated from 1961 until 1968 to stabilize the gold price at $35 an ounce by selling/buying gold in the London bullion market. Eventually the pool collapsed in 1968 because the US had printed too many dollars and France was not willing to sell any more gold to defend the gold price at $35.
Remarkably, Belgian official gold reserves dropped significantly after the Pool collapsed, from 1978 until 1999. Likely, NBB was partially seeking to diversify its reserves into higher yielding assets or to lower the national debt, in addition it could have sold metal to lower the price or to “equalize its holdings relative to other gold holding nations”. Let me explain that last quote. Belgium was not the only European country that has sold vast amounts of gold in the nineties and before. When the Dutch Minister Of Finance in 2011, J.C. De Jager, was questioned about the gold sales of the central bank of the Netherlands in the nineties he answered:
Question 6: Can you confirm that since 1991 DNB [central bank of the Netherlands] has sold 1,100 tonnes of the 1,700 tonnes it owned…
Answer 6: Since 1991 DNB sold 1,100 tonnes. At the time DNB determined that from an international perspective it owned a lot of gold proportionally. It decided to equalize its gold holdings relative to other important gold holding nations.
So, the independent central bank of the Netherlands (DNB) had decided to sell gold because “from an international perspective it owned a lot of gold proportionally”. Clearly DNB was considering the amount of gold reserves of other central banks and weighed these against its own holdings before it decided to make a downward adjustment. Was this a unilateral decision for the sake of balanced gold reserves among central banks? I don’t think so.
In 1999 the Central Bank Gold Agreement (CBGA, also called the Washington Agreement On Gold) was signed by 14 European central banks, inter alia NBB, to jointly manage gold sales. This demonstrates central banks are not unfamiliar with managing their gold reserves in concert. First there was the London Gold Pool, then the Dutch sold gold to equalize their holdings relative to other central banks and then CBGA was signed.
Maybe NBB has sold part of its reserves prior to 1999 for the same reason De Jager mentioned; to equalize the chips. Allegedly this was the idea behind the euro. GoldCore wrote on 28 May 2013:
Belgium announced another sale of 203 tons of gold on March 27, 1996, stating that the sale had reduced the share of gold in total reserves to a level which would facilitate the participation of the National Bank of Belgium [NBB] in the process of European unification and which, corresponded to the proportion of gold in the total reserves of the Member States of the European Union.
More information about the Belgian gold reserves that was perviously known: most of it is stored at the BOE in London, the heart of the global gold lease market, hence my question at the NBB regarding the type of gold accounts it has with the BOE. From searching the internet and the website of NBB I could read Belgium had leased out 84 tonnes of its gold reserves in 2011, this decreased to 37 tonnes in 2012 (lent to 5 commercial banks) and 25 tonnes in 2013 (lent to 5 commercial banks).
Data from the Bundesbank shows Belgium has a steady 17 tonnes of ‘unallocated gold’ since January 2013 and 210 tonnes of ‘gold bullion’. Apparently reserves qualified as ‘gold bullion’ (allocated gold) can be leased out, as in 2013 NBB had leased out more than was unallocated (25 tonnes versus 17 tonnes). This makes me wonder why Belgium still has any unallocated gold. (It also makes me wonder how much of the allocated gold held by other central banks is leased out.)
The Verdict
In response to my FOIA, the NBB notified me it is exempt from any such requests regarding its gold reserves – click here to read the reply from NBB in Dutch. This response was similar to that of a FOIA request I submitted to DNB in 2013 in order to obtain the list of bar numbers of the Dutch official gold reserves, which bounced as well.
NBB wrote me that aside from the rules they aim to be as transparent as possible by disclosing all information to the public about their official gold reserves that is not sensitive. NBB wrote me (my translation):
– Total NBB gold reserves amount to 227.4 tonnes (7,311,955.9 fine ounces).
– The majority of this stock is stored at the Bank or England [BOE]. The remainder is at the Bank of Canada and the Bank for International Settlements. A very tiny amount is stored at the NBB.
– The storage and safekeeping abroad happens according to standards and practices that are common among central banks.
– Against a guarantee covering 101.5 % of the credit NBB had an average of 15.7 tons of gold leased out in 2014. The counterparties are commercial banks with high creditworthiness. The NBB will not enter into any new gold leases and leave the existing book until it’s fully unwound in February 2018.
Because I sensed to be in touch with an employee from NBB that knew all about the Belgian gold, I asked why they had sold 1,098 tonnes of gold since 1978? Was it to diversify reserve assets, reduce the national debt or to be accepted to the Eurosystem. NBB replied (my translation):
The sales in question took place in the context of a more balanced composition of the reserves of NBB with regard to its integration into the European System of Central Banks, although it was not the result of a legal obligation.
Next I asked what the reason was to sell the gold if there was no legal obligation, was there a verbal agreement among central banks? NBB replied (my translation):
The aspects of the management of the foreign reserves that have not been communicated by the NBB through its annual reports and press releases constitute confidential information that can not be disclosed on the grounds of professional secrecy laid down in Article 35 of the law of 22 February 1998 establishing the Statute of the NBB.
So indeed there was a secret agreement among central banks to sell gold and balance reserves, but NBB is not required to disclose this information based on “Article 35 of the law of 22 February 1998 establishing the Statute of the NBB” – a law that was passed right before CBGA was signed and the euro was launched. Actually, the details of the agreement are secondary because NBB’s statement “the sales in question took place in the context of a more balanced composition of the reserves of NBB with regard to its integration into the European System of Central Banks”, is very clear to me. Especially when we add De Jager’s statement from 2011, “DNB determined that from an international perspective it owned a lot of gold proportionally. It decided to equalize its gold holdings relative to other important gold holding nations.”
It can’t be a coincidence both central banks sold gold prior to 1999 for “more balanced reserves” while the sales would not have been executed in conjunction of each other. My conclusion is that the gold sales of European central banks prior to CBGA have been jointly managed in secret.
- The Dumbest Thing You Will Read Today… Maybe Ever
Dear Americans, meet your venerable central planners:
- FED’S EVANS: DOT PLOT CHART CLEARLY SHOWS US ECON DOING BETTER
So, according to the Fed’s academic experts, the US economy is not, well, the US economy, it’s not Y = C + I + G + NX, it’s not the product of all goods and services created in the United States… it’s this:
Which, for those confused, is precisely what it appears to be: a bunch of dots drawn on a piece of paper, not to be confused with this following random bunch of dots drawn on a piece of paper, which however is far more indicative of what the US economy is really like.
So the actual – you know – economy may be on the verge of a recession, but the Fed’s model of an “economy” as represented by the dotted paint-by-numbers gibberish shown above, which only a cabal of arrogant academic hacks, who have never held an actual job in their lives and who can only do one thing: print money and make the rich richer while crushing the rest of the economy with trillions of debt, can deem is anything more than just that – utter gibberish – is recovering.
(Please just ignore the negative “dot”, of course. That is what, in economic parlance, one calls a (non-GAAP) outlier to be ignored drawn by an angry, outgoing member of said cabal.)
* * *
And just in case anyone wants more, there was this:
- EVANS: STRONGER GLOBAL ECONOMY WILL BENEFIT EVERYBODY
Finally, this:
- EVANS: MAINTAINING CREDIBILITY IS KEY TO EFFECTIVE MONETARY POLICY
???
- Brazil Bank Interest Rates At 20-Year High
Things in Brazil are getting worse by the day as the following brief summary of soaring interest rates courtesy of BNAmerics demonstrates.
Brazil Bank Interest Rates At 20-Year High
Brazil’s overdraft interest rates reached 12.28% in October, the highest since September 1995 when the rate was 12.58%, according to research conducted by consumer protection group Procon.
Of the seven financial institutions included in the research, five increased their overdraft rates and one upped its rate for personal loans. The average overdraft rate of 12.28% per month was higher than that registered in September, 11.90%.
The bank that increased its rate the most was Caixa Econômica Federal, which changed its rate to 11.38% from 10.35% per month, a variation of 9.95% when compared to the September rate, Procon said.
Santander saw a positive variation of 4.21% from the previous month, Banco do Brasil had a variation of 3.69%, Itaú‘s variation was 2.58%, and Bradesco‘s was 2.41%. Other banks maintained their rates.
For personal loans, the average rate of banks surveyed was 6.27% per month, higher than the previous month, which was 6.26%. Bradesco raised its rate to 6.61% per month, an increase of 0.61% over September’s rate. Other banks maintained their rates.
* * *
That said, she doesn’t appear too concerned.
- The War On Islamic State: A New Cold War Fiction
Submitted by Nafeez Ahmed via MiddleEastEye.net,
Russia is bombing “terrorists” in Syria, and the US is understandably peeved.
A day after the bombing began, Obama’s Defence Secretary Ashton Carter complained that most Russian strikes “were in areas where there were probably not ISIL (IS) forces”.
Anonymously, US officials accused Russia of deliberately targeting CIA-sponsored “moderate” rebels to shore-up the regime of Bashir al-Assad.
Only two of Russia’s 57 airstrikes have hit ISIS, opined Turkish Prime Minister Ahmet Davutoglu in similar fashion. The rest have hit “the moderate opposition, the only forces fighting ISIS in Syria,” he said.
Such claims have been dutifully parroted across the Western press with little scrutiny, bar the odd US media watchdog.
But who are these moderate rebels, really?
Moderate al-Qaeda
The first Russian airstrikes hit the rebel-held town of Talbisah north of Homs City, home to al-Qaeda’s official Syrian arm, Jabhat al-Nusra, and the pro-al-Qaeda Ahrar al-Sham, among other local rebel groups. Both al-Nusra and the Islamic State have claimed responsibility for vehicle-borne IEDs (VBIEDs) in Homs City, which is 12 kilometers south of Talbisah.
The Institute for the Study of War (ISW) reports that as part of “US and Turkish efforts to establish an ISIS ‘free zone’ in the northern Aleppo countryside,” al-Nusra “withdrew from the border and reportedly reinforced positions in this rebel-held pocket north of Homs city”.
In other words, the US and Turkey are actively sponsoring “moderate” Syrian rebels in the form of al-Qaeda, which Washington DC-based risk analysis firm Valen Globals forecasts will be “a bigger threat to global security” than IS in coming years.
Last October, Vice President Joe Biden conceded that there is “no moderate middle” among the Syrian opposition. Turkey and the Gulf powers armed and funded “anyone who would fight against Assad,” including “al-Nusra,” “al-Qaeda in Iraq (AQI),” and the “extremist elements of jihadis who were coming from other parts of the world”.
This external funding enabled Islamist factions to systematically displace secular Free Syria Army (FSA) leaders, culminating in the rise of IS.
In other words, the CIA-backed rebels targeted by Russia are not moderates. They represent the same melting pot of al-Qaeda affiliated networks that spawned the Islamic State in the first place.
Our Islamists
And they rose to power in Syria not in spite, but because of the US rubber-stamping the jihadist funnel through the so-called “vetting” process. This summer, for instance, al-Qaeda led rebels received accelerated weapons shipments in a US-backed operation to retake Idlib province from Assad.
Notice here that the US priority was to rollback Assad’s forces from Idlib – not fight IS. Yet the brave Western press, so outspoken on Russian duplicity, somehow overlooked how this anti-ISIS coalition operation failed to target a single IS fighter.
Since Russia’s intervention, the press has been particularly coy about the fact that Washington’s “moderate” rebels include the likes of al-Nusra, Ahrar al-Sham and the Islamic Front.
While al-Nusra, of course, is al-Qaeda’s Syrian branch, Ahrar al-Sham openly “cooperates with the Syrian affiliate of al-Qaeda and has welcomed former associates of Osama bin Laden” according to the New York Times. “While its leaders say they seek to create a representative government, they avoid the word ‘democracy’ and say Islam must guide any eventual state.”
The Islamic Front, Syria’s largest opposition grouping consisting of tens of thousands of fighters, aims to establish an “Islamic state” in Syria, rejects democracy and secularism, and welcomes al-Qaeda foreign fighters as “brothers who came to help us”.
Islamic Front leader Zahran Alloush is on record as having praised Osama bin Laden, endorsed cooperation with al-Nusra, and repeatedly called for the total extermination of Shia and Alawite communities in the Levant.
These are the “moderates” the US has empowered in the name of fighting IS.
How not to vet rebels and influence people
The US has evaded formal responsibility for doing so using the best covert operation traditions: plausible deniability by passing the buck.
Since 2012, the CIA-run clandestine rebel-vetting programme has been conducted outside Syria, in partner countries like Saudi Arabia, Qatar, Jordan and Turkey. Although CIA and US military personnel oversee the programme, they “vet” rebels largely through ‘intelligence’ provided by its own allies.
The supposedly rigorous vetting process includes “psychological exams,” gathering of “biometric data,” and running the names of candidates “through US databases” and “with regional allies for checks”.
Recruits already known to the US government are checked easily based on internal data. But for new recruits, the US depends on the “expertise” of its coalition partners like Saudi Arabia and Turkey.
Still, CIA personnel were “helping allies decide which Syrian opposition fighters” would receive arms. But the relationship between the “moderate” FSA and the jihadist factions, including IS, had grown increasingly porous.
German journalist Jurgen Todenhofer, who spent 10 days inside the Islamic State, reported last year that IS militants are being “indirectly” armed by the West: “They buy the weapons that we give to the Free Syrian Army, so they get Western weapons – they get French weapons… I saw German weapons, I saw American weapons.”
The CIA knew what was happening: classified intelligence assessments year after year showed that most Saudi, Turkish and Qatari arms ended up with “hard-line Islamic jihadists, and not the more secular opposition groups”.
The CIA programme has not been shut down, although it has predictably failed to arm moderates despite seeding nearly 10,000 rebel fighters – many of whom have joined the IS terrorists the West is supposed to be fighting.
Instead, the Pentagon has been tasked to establish a “new,” separate, “moderate” rebel-training programme.
Unsurprisingly, that programme has virtually collapsed, even as the CIA continues to arm the jihadists that pretend to hate IS while cooperating with IS to fight Assad.
Just last month, in extraordinary testimony before the Senate Armed Services Committee, General Lloyd Austin who leads the anti-ISIS strategy at US Central Command admitted that there are only “four or five” US-trained “moderate” rebels in Syria currently fighting IS.
Who is fighting IS, really?
This doesn’t mean questions about Russia’s strategy are unjustified. Clearly, Vladimir Putin’s self-serving intervention in Syria is about keeping the brutal Assad in power, by crushing the rebel forces seeking his removal.
But Western journalists obediently mimicking the State Department line have universally failed to ask the sort of questions they rightly ask of Russia: namely, why is the US-led coalition refusing to bomb Islamic State extraction wells and oil truck convoys?
A sobering Greenwich University study published by Maritime Security Review in March on the Islamic State’s illicit oil trafficking networks comes to some surprising conclusions on this issue.
Authored by George Kiourktsoglou, lecturer in maritime security and former Royal Dutch Shell strategist, and Dr Alec Coutroubis, acting head at the Faculty of Engineering and Science, the study finds that US, Turkish and Gulf air raids on ISIS “oil manufacturing facilities” have not gone far enough: “Extraction wells in the area of bombardments have yet to be targeted by the US or the air-assets of its allies, a fact that can be readily attributed to the at times ‘toxic’ politics in the Middle East.”
The scholars, who have previously given evidence before the UK Parliamentary Foreign Affairs Select Committee, further report that despite large convoys transporting IS oil through Syria, Iraq and Turkey, “allied US air-raids do not target the truck lorries out of fear of provoking a backlash from locals” (although killing up to a thousand Syrian civilians is apparently fine). As a result, “the transport operations are being run efficiently, taking place most of times in broad daylight”.
So the US is not targeting the Islamic State’s financial lifeline – its black market oil infrastructure – but instead is teaming up with the same al-Qaeda affiliated groups that spawned IS in the first place, to undermine Assad. And Russia, for all its muscle-flexing rhetoric, sees its main priority as countering US-led efforts to topple Assad, by targeting his most immediate opponents.
This is, in other words, a New Cold War between competing empires, the unending victims of which are the Syrian people. As for the Islamic State, it is little more than the proxy bastard child of a conflict that looks set to escalate.
- As World "Recovers", China's Economic Weakness Spreads Wider & Deeper In September
While much of this latest round of exuberant short-squeezing stocks and hot money flows into EM FX is driven by a Fed that is scared of its own shadow, the underlying meme has been that China is “stabilizing”… that everything will land softly… that policymakers have got this…
However, as Bloomberg’s Tom Orlik points out – it is not! China’s economic weakness widened and deepened in September…
Source: Bloomberg’s @TomOrlik
- Another Petro-State Throws In The Towel: The Last Nail In The Petrodollar Coffin
Submitted by Eugen von Böhm-Bawerk of Bawerk.net
Another Petro-State Throws In The Towel – The Last Nail In The Petrodollar coffin
Source: Norwegian Ministry of Finance, Bawerk.net
According to the proposed budget submitted by the current ‘blue-blue’ government the Norwegian deficit will reach another record high in 2016. Mainland taxes are expected to bring in 1,008 billion NOKs, while expenditures are estimated at 1,215 billion NOKs. In other words, 2016 will be another year of record mainland deficit which need to be covered by the offshore sector and its 6,900 bn NOK sovereign wealth fund (SWF).
While record mainland deficits covered by the petroleum sector is nothing new in Norwegian budget history, on the contrary it is closer to the norm, the 2016 budget did raise some eyebrows. The other side of the ledger, the net inflow to the SWF from activities in the North Sea will, again according to budget, be lower than the required amount to cover the deficit. This has never happened before and is testimony of the sea change occurring in the world of petrodollar recycling. Interestingly enough, the need to liquidate SWF holdings is helping to create further deflation in the Eurodollar system in a self-reinforcing loop.
As Eurodollar liquidity dries up and consequently pushes up the price of actual dollar (note, Eurodollars are international claims to domestic US dollars but for which no such dollars actual exists) the problem for petro-states compounds. One way this manifest itself is through international purchasing power of prior savings. A SWF as the Norwegian was created through a surplus of exports over imports meaning it can only be utilized through future imports over exports. When the Norwegians look at their wealth expressed in Norwegian kroner it all looks fine, but expressed in dollars the SWF has shrunk considerably in size. Thus, the surfeit imports expected by the Norwegian populace cannot be met. Norway rode high on a wave of liquidity which pushed up commodity currencies, leading Norwegians to consume more imported goods today, without realizing they were tapping into the principal of their future. When the tide turns the gross misconception is revealed.
Source: Norwegian Ministry of Finance, Central Bank of Norway, Bawerk.net
The Government claims it is all fine though. The current down-cycle will, according to them, end early 2016 so despite a 2 percentage point reduction in corporate- and personal income tax, mainland tax revenues are expected to increase 1.9 per cent. That is obviously a pipedream, just as the expected 17.9 per cent increase in interest and dividend income which will make sure the SWF continue to grow at a healthy pace despite the massive mainland deficit.
Assuming oil prices remain low, mainland tax revenue will plummet as they are very much a function of what goes on offshore, while expenditure will rise as they do in all welfare states during a down cycle.
If we are right, a global recession is imminent, meaning the expected increase in dividend income will never materialize.
In other words, the drawdown of the SWF will exceed its inflow even after adding financial income flows. The last remnant of the petro-dollar will thus die in 2016.
For a country 100 per cent dependent on continued leverage in the Eurodollar system the absolutely best case scenario is for the US economy to grow just slowly enough for international monetary policy to again realign; reducing the value of the USD through continued ZIRP in the US.
Robust growth in the US will prompt Yellen to hike, spiking the dollar (as Eurodollar claims scramble for actual dollars) while paradoxically a recession in the US will lead to the exact same outcome. The goldilocks scenario of 1-2 per cent growth is the best that the Norwegian government can hope for. It will minimize the gap between the lies and propaganda spewed out by the Ministry of Finance and reality.
- This "Unlivable $350,000 Shack" Is The Cheapest Home In San Francisco
According to the broker, it's the cheapest home on the market in San Francisco, and it's an unlivable shack.
As Fortune reports, it is a worn-down, decomposing wooden shack that was built in 1906, and the interior is unlivable in its current condition. The San Francisco house is also selling for $350,000.
According to Zillow, $350,000 would comfortably fetch a 1,500-square-foot, three-bedroom home in many smaller cities in the U.S., including Cincinnati, Ohio.
Realtor Alexander Han, would definitely advise against moving in too soon.
"The house still needs a lot of work. I would not recommend anyone moving right in. The bathroom is not functioning. The kitchen needs a bit more work. The flooring has a couple of places that are little bit weaker, and needs to be reinforced."
Located at 16 De Long Street in the (slightly) more affordable Outer Mission district, the house’s price is a reflection of the skyrocketing real estate market in San Francisco.
Since 2012, the city has seen a 103% increase in median housing prices; this month, that figure stands at $1.35 million.
- Summing Up Obama's Economy In 8 Words
We’d say this just about sums up Barack Obama’s Presidency perfectly…
h/t @LibertyBlitz
- Weekend Reading: Is The Correction Over?
Submitted by Lance Roberts via STA Wealth Management,
This past week saw the markets rebound off their lows which has brought the "bulls" rushing back claiming the correction is over. However, is that really the case? As I questioned earlier this week:
"As you can see, the markets did retest the late August lows, and when combined with the very oversold conditions, led to a frantic "short covering" rally back to previous resistance. It is worth noting that the recent market action is very similar to that of the August decline and initial rebound as well.
Of course, the question that must be answered is whether we have seen the end of the current correction or is this just another "reflexive rally" that will fail?"
"While the 'seasonally strong' period of the year could foster a further rally in the market, it is highly likely that it will ultimately fail. As shown, since the turn of the century there have only been two previous times when the market traded in oversold territory combined with all three major 'sell' signals triggered. Both of these periods marked a much more severe bear market cycle."
"Given the late stage of the current market cycle, the issue of rising global economic weakness and deflationary pressures and deteriorating earnings, many of the "bullish" arguments have been broken."
However, as always, it is important to look at the current market environment for opposing points of view to reduce the potential of "confirmation bias." This weekend's reading list provides a broad look at the current market environment from both the "bullish" and "bearish" perspective. Unfortunately, we will only know "who's right" after the fact.
But here is the rub. If you choose the "bearish" view and are wrong, you only miss out on some of the rather limited potential upside from current levels. If you choose the "bullish"view and are wrong, you suffer a real destruction of investment capital.
This is a point that is rarely discussed, but is a harsh reality. As I stated last week:
"Hoping to get back to even" has never been a successful investment strategy.
THE LIST
1) A Major Headwind For Stocks by Jesse Felder via The Felder Report
“And if profit margins reverting to their long-term mean leads to falling earnings growth, is it any wonder that major peaks in profit margins don't just foreshadow major stock market peaks but economic peaks, as well? The chart below comes from Barclays. It demonstrates that only in 1985 did the economy avoid entering recession after a 60 basis point decline in profit margins, the degree of decline we have just witnessed.
Clearly, record-high profit margins have been a significant driver of both the economy and the stock market over the past few years. But this, 'most mean-reverting series in finance,' looks to be rolling over and now this powerful tailwind could is shifting into a headwind."
Read Also: Buffett And Grantham Warned Us About This by Sam Row via Business Insider
2) A Bullish Pause Or A Bear Market by Tom Petruno via LA Times
“The forces weighing on stocks, including global economic fears, weak corporate earnings and expectations of rising U.S. interest rates, haven't diminished. That makes it a good time for a financial reality check to better prepare yourself for whatever markets bring.”
Read Also: Don't Be Fooled By Retest Of Lows by Avi Gilburt via MarketWatch
But Also Read: How Bad News Is Good News by Mark Hulbert via MarketWatch
3) Disregard Dow Theory At Your Own Peril by Jack Schannep via MarketWatch
“So where do we stand now? Thus far, the correction lows on Aug. 25 were some 12% to 13% below all-time highs, from which there was a three-week bounce into September. That being a qualifying secondary reaction, it set up the possibility of a reversal to a Dow Theory buy signal.
Later in September was a setback, which successfully tested and held above the August lows, which is encouraging, and now what is needed is for the Transports to join the Industrials in surpassing their bounce high of 8,215.44. For the Original Dow Theory, the interpretation to get a buy signal is really just that simple. The odds of the sell signal being profitable are quite favorable. There have been only seven of 24 such signals since 1953 that did not go into a bear market that year, making it hard to ignore any Original Dow Theory signal.”
Read Also: The Bull Market Lives On by Brian Wesbury via First Trust
4) Bull or Bear? Market At A Crossroad by Michael Ashbaugh via MarketWatch
"And the S&P 500 has staged the U.S. markets' headline technical move.
To start, the index bottomed last week at 1,871, just above major support at the August low. It's subsequently knifed to major resistance, topping Monday just four points lower.
Price action within the range is technically bearish, though the S&P's response to the range top is worth tracking. The S&P's 50-day moving average (1,998) is descending to match resistance."
Read Also: Margin Pressures = Subdued L-T Returns by Cam Hui via Humble Student
5) Despite The Rally, Charts Favor The Bears by Michael Kahn via Barrons
"Technically, Friday's drop and recovery following the weak September jobs report was quite bullish. Unfortunately, there are still too many negatives out there to rely on this one indication, and that means it is far too early to change teams from bear to bull.
To be sure, the big bearish signal of a drop below the August low has still not happened. That leaves the market in somewhat of a funk but with a downside bias.
In previous columns I suggested that the Standard & Poor's 500 was in a giant head-and-shoulders topping pattern spanning back nearly two years. The neckline, or support line, slopes gently higher but for simplicity let's just say that it comes in now at 1870 – roughly the same level as the August low."
Read Also: 10 Signs Stocks Are Overpriced by Doug Kass via TheStreet.com
Read Also: More Commodity Price Weakness Ahead by A. Gary Shilling via BloombergView
Other Reading
- Gross: Capitalism Can't Survive Zero Rates by Matt Egan via CNN Money
- There Is A Growing Risk Of Recession by John Hussman via Hussman Funds
- How Much Is Dow Theory Worth? by Ironman via Political Calculations
- Are Buybacks An Oasis Or Mirage? by Chris Brightman via Research Affiliates
- A Self Correcting Mechanism by Joe Calhoun via Alhambra Partners
- Bernanke's Cockroachesby Yves Smith via Naked Capitalism
- Time To End Monetary Central Planning by Richard Ebeling via Zero Hedge
“When the music stops, you better have a chair.” – Barry Sternlicht
Have a great weekend.
- Stocks Soar To Best Week In A Year On "Mother Of All Short Squeezes"
The week summarised… as BofA put it –"It's Not A Risk-On Rally, This Is The Biggest Short Squeeze In Years"
With China shut and The Fed going full dovish panic-mode over growth fears, world markets went crazy…
- S&P up 7 of last 8 days +3.2% – best week since Oct 2014
- Russell 2000 +4.5% – best week since Oct 2014
- Nasdaq up 7 of last 8 (since Death Cross) closed above 50DMA
- Trannies up 8 of last 9 closed above 100DMA +4.9% – best week since Oct 2014
- Dow up 8 of last 9 +3.5% – best week since Feb 2015
- "Most Shorted" +4.7% – biggest squeeze in 8 months
- Biotechs -2.3%
- Financials +2.2% – best week in 3 months
- Asian Dollar Index +1.4% (worst week for USD vs Asian FX since Oct 2011)
- Dollar Index -1.2% (worst week for USD vs Majors in 2 months)
- AUD +4% – best week sicen Dec 2011
- 2Y TSY Yields +6.5bps – biggest rise in 7 weeks
- 5Y TSY Yields +11bps – biggest rise in 4 months
- WTI Crude +8.9% – 2nd best week sicne Feb 2011
- OJ +4.8% – best day since March
- Silver +3.8% – best week since May
LOLume!!
The last 8 days have seen a massive short-squeeze… 2nd biggest in history
The last 2 times stocks were short-squeezed this much, did not end well…
And the following stunning chart shows the percent of S&P 500 names above their 50-day moving-average has soared from 4% to 60% in a few weeks…
h/t @ReformedBroker
* * *
Off the Payrolls lows, it's been non-stop…
Credit tracked stocks all week but decoupled this afternoon…
VIX has fallen for 9 straight days… the longest streak since Oct 2011..
Energy stocks outperformed and Healthcare (Biotechs) were the laggards…
Treasury yields surged all week but Friday saw the push slow a little… (everything but 2Y is now higher than pre-payrolls)…
The USDollar Index slipped notably after the FOMC Minutes but had been weaker all week… (AUD rose 3.8% on the week)
Commodities all rose on the week
Crude had its 2nd biggest week since Feb 2011…
Gold broke notably above its 100-day moving-average and Silver had its best week since May (breaking but not holding its 200DMA)…
But The Ags were the biggest movers today after USDA forecasts sent everything crazy… (and Orange Juice had its best day since March)
Finally, it appears stocks have decided to re-de-couple from any fundamentals as Macro and Micro data has tumbled in recent weeks…
Charts: Bloomberg
- Here's What Happened When Venezuela Imposed Gun Control Laws
Submitted by Simon Black via SovereignMan.com,
I just got back from Caracas, Venezuela, a city so dangerous that every time I left my hotel, the staff would warn me against even going outside.
It’s an incredibly difficult reality to reconcile. People hate the fact that they may get robbed or killed just steps from their front door when they leave the house every morning.
And nobody wants that.
After all, everyone wants to be safe. Even wild animals seek out safety in nature.
A few years ago, in response to national outcry, the government of Venezuela took steps to fix this problem.
There was too much death, too much crime. So they imposed strict gun control laws to stop the murderers and thieves.
The end result? Violent crime actually increased. And Caracas is now one of the most dangerous cities in the world.
But across the Andes is another city that used to be one of the most dangerous in the world – Bogota.
Years ago, Bogota led the region in murder. And they imposed their own strict gun control laws trying to clean up the streets.
It worked. Bogota became safer. There was less murder. Less crime. Less violence.
But how could the same policy engineer completely different results in two cities?
This disparity becomes even more vexing when we look at other countries.
Honduras and Brazil both have very high homicide rates. Yet Brazil has highly restrictive gun laws, while Honduras has fairly lax gun laws.
Pakistan has some of the loosest gun laws in the world. Chile’s are fairly restrictive. Yet both have low homicide rates.
Bosnia has a very liberal gun laws. Belgium has very restrictive laws. Yet their homicide rates are similar.
Luxembourg has few privately-owned guns per capita, yet its murder rate is much higher than Germany’s, which has over twice as many.
Hawaii and Vermont have polar opposite gun laws yet nearly the same homicide rate.
Maryland and Virginia have vastly different gun laws, yet almost identical rates of gun-related deaths.
The numbers are all over the board.
- Staunch advocates for gun control tend to think that more regulations and fewer guns make us safer.
- Those who oppose gun control tend to think that more guns and fewer regulations make us safer.
- But the data doesn’t support either assertion, meaning there must be other factors at work.
(By the way, the National Academy of Science and the Center for Disease Control and Prevention came up with the exact same conclusion– the numbers don’t support either assertion.)
But it’s impossible to even begin to analyze until we admit what the real concern is. After all, we’re not really talking about gun violence.
Gun violence has been occurring for years, predominantly in poor neighborhoods across the country. 75% of gun-related violence takes place in just 5% of US zip codes.
But no one really cares about that.
As long as gun violence stays localized to black people, Mexicans, and other ethnic minorities in poor neighborhoods, it’s considered ‘crime’ and never makes the news.
It’s not until some lunatic shoots up a predominantly white, middle class neighborhood that CNN covers it, and Hollywood celebrities air public service announcements telling us that ‘we’ have to do something.
That response is an emotional one. Let’s get rational.
These incidents are undoubtedly tragedies. But if the goal really is to save lives, and you start with a flawed premise that it is the government’s responsibility to protect people, consider that every piece of legislation incurs a rather significant cost.
There’s the cost of lobbying… campaigning… plus the actual costs incurred in implementing and enforcing a gun control program.
How much is that? Billions? Tens of billions? Hundreds of billions? I mean, we’re talking about politicians who spent $2 billion on the Obamacare website.
Also consider that the United States government doesn’t exactly have limitless resources.
Based on its own financial statements, the US government is in the hole by more than $60 TRILLION, and they run a half-trillion dollar budget deficit each year.
These guys are broke, which means they have to choose wisely.
So again, if the goal is to save lives (and if you really believe this is the government’s responsibility), the cold, hard truth is that you have to make rational decisions to get the highest return on investment, i.e. the most lives saved per dollar spent.
The President of the United States proudly told the nation last week that his government had spent $1 trillion protecting Americans against terrorists.
That’s a pretty amazing figure given how low the odds are of dying in a terror attack.
Hell, it’s more likely that you’d be shot by a police officer, or get killed in a US drone strike while visiting a hospital in Pakistan.
(By any independent count, Mr. Obama has killed more innocent civilians than all the crazed lunatics put together. Perhaps he needs to control some of his own guns.)
The government’s own numbers tell us that 3.8 people per 100,000 in the US die each year from non-suicide gun violence. Terror-related deaths are effectively 0.0.
Meanwhile, 11.6 per 100,000 die in traffic related deaths. A whopping 169.8 people per 100,000 die from heart disease.
If you’re going to spend scarce resources (time, energy, and money that you don’t have) to save lives, doesn’t it make sense to tackle a bigger problem that’s easier to solve, and where the solution is actually supported by the data?
Let’s talk about this more in today’s podcast. And it’s not what you think.
I’m not going to make an argument that more guns make us safer, or that ‘guns don’t kill people, people kill people…’ or anything like that.
Regardless of how you feel about the issue, I really encourage you to spend some time listening to this.
- The "Secret" Of Successful Biotech Investing Revealed: All You Need To Know In One Chart
Back in March, just before the last parabolic phase of the biotech bubble, we showed something which at the time we thought was quite amazing: of the 150 companies that made up the Nasdaq Biotech Index, only 41 had any earnings. Of these 41 companies, just five companies (Gilead, Amgen, Shire, Biogen and Celgene) had earnings of at least $1 billion each, and the five combined accounted for 83% of all earnings in the entire sector. The combined Net Income of the profitable companies was $21 billion; this compared to a market cap for the NBI of $1.1 trillion, a 50x P/E ratio.
109 companies, or 73% of biotechs, had never made a dime in profit.
We were content with our “amazing” findings… until we ran into a recent note by Convergex’ Nick Colas also looking at the biotech sector, which in addition to profitability looked at a very key second dimension, one which we had ignored: 2015 profits.
His finding is nothing short of stunning, and “explains” the “secret” behind biotechs’ success.
* * *
While we present the full note in its entirety below, here is the TL/DR version:
What Colas did was first to pull the entire list of companies in the index – currently 144 in total – and ranked them by weighting in the index. The 80/20 rule applies to this group of companies – roughly 20% of the names (18.8% to be exact) made up 80% of the index.
27 names made Colas’ list, 15 are profitable in 2015 (and analysts expect 18 to produce profits in 2016). The balance are in the red through the next year at least.
Looking at this universe of names, this is what he found:
- On valuation: for the companies with profits in 2015 and 2016, earnings multiples are 22.3x this year and 19.0x next year.
- On growth expectations: analysts expect our sample to show an average of 21.4% revenue growth in 2016. As with all the other data on this group, however, individual stock results vary a lot. Wall Street expects as little as negative 1% sales growth for one large company, and as much as 170% for another name inside the top 10.
And the amazing punchline: equities of companies with actual profits are down 6.8% on the year, while the stocks of loss-making companies are up an average of 46.3%.
… or shown visually, the scatterplot of biotech earnings vs biotech YTD returns. This is also the chart exposing the “secret” behind biotech investing success: the more cash a biotech company burns, the higher the return it generates.
Thank you Federal Reserve for giving us this schizophrenic new normal.
* * *
Here is the full Nick Colas note:
Taking Biotechs to 11
There’s an old joke among equity salespeople on Wall Street that goes something like this:
Question: When do analysts put a “Strong Buy” recommendation on a stock?
Answer: When it is a “Buy” recommendation that’s dropped 30% or more.
Like most bittersweet humor, it is funny because it is all too often true. “Strong Buy” is what analysts say when their idea isn’t working but they still like the company management and/or strategy and/or valuation. Now, money managers know that buying a stock as it declines is only for the knowledgeably brave or carelessly foolhardy. Sell side analysts don’t really see a problem with it… If I liked it at $50 I better LOVE it at $35, right?
I got to wondering about the Biotech group – specifically the NASDAQ Biotechnology Index – and how analysts were responding to the price volatility in the sector. To analyze that, we pulled the entire list of companies in the index – 144 in total – and ranked them by weighting in the index. The 80/20 rule applies to this group of companies – roughly 20% of the names (18.8% to be exact) make up 80% of the index. Attached to this note you will find those name in list form, broken down by analyst recommendation (Strong Buy through Strong Sell) as well as revenue and earnings expectations and related valuation ratios.
To start with the question at hand – have analysts stepped into the recent drop of 30% since mid-July? The answer is “No”. Two months ago, “Buys” and “Strong Buys” were 70% of all Wall Street recommendations on our sample companies. Now, that number is 69%. Not much difference. The average name has 4.6 “Strong Buys”, up from 4.2 such recommendations 60 days ago, but the number of “Buys” has dropped from 6.2/company to 5.4/company.
At some level, it is easy to understand the Street’s reluctance to amp up their profile on this group. The overarching negative is clearly visible and seemingly growing by the day: political focus on drug pricing. We are, after all, meandering our way into a presidential election year. Consumers may appreciate the health benefits of new pharmaceuticals, but a few ill-timed and well publicized price increases are apparently too good a crisis to let go to waste.
The deeper issue in analyzing this group, and the one we’ll spend the rest of this note covering, is that it isn’t really a “Group” at all. Yes, macro issues like drug pricing create the appearance of common fundamental drivers. But the reality is that this “group” trades on individual company fundamentals more than most industries. Consider the following points, with supporting data in the tables attached:
- On equity price performance: The NASDAQ Biotechnology Index is up 1.5% year to date. Good news: that’s better than the S&P 500, which is still down on the year to the tune of 3.1%. Bad news: in mid-July it was up just over 30%.
The price performance for our 80/20 list of 27 names shows a lot of single-stock volatility. On the plus side, two equities (Anacor and Ultragenyx) are +261% and +117% higher in 2015. Conversely, three of the 27 are lower by 20% or greater: Mylan (25.1% lower), Jazz (20.0% lower) and Isis Pharma (31.2% lower). All told, our 27 name sample has a standard deviation of year to date returns of 59%, quite broad for a collection of stocks in one “Sector”. - On profitability: of the 27 names on our list, 15 are profitable in 2015 and analysts expect 18 to produce profits in 2016. The balance – a third of the list – are in the red through the next year at least.
- On valuation: for the companies with profits in 2015 and 2016, earnings multiples are 22.3x this year and 19.0x next year.
- On growth expectations: analysts expect our sample to show an average of 21.4% revenue growth in 2016. As with all the other data on this group, however, individual stock results vary a lot. Wall Street expects as little as negative 1% sales growth for one large company, and as much as 170% for another name inside the top 10.
The real kicker: equities of companies with actual profits are down 6.8% on the year, while the stocks of loss-making companies are up an average of 46.3%.
In that last comment is the kernel of a problem that every investor faces when they look at this group. The biotech sector produces a lot of winning stocks, and the group as a whole has performed extremely well for years. For active investors who may be down more than the 3.1% decline for the market in 2015, the group presents an important opportunity just now. If it can recover from the recent chatter on drug pricing, it could well dramatically outperform into December. And if either the group or the market as a whole continues to swoon, then biotechs will likely have another very noticeable leg down.The only other industry group with this “Make the call, right now!’ dynamic is Energy. It, however, has been pummeled far longer than biotechs and value investors have an easier call there. But the biotechs have a lot more beta on their side, for good or for bad. Either way, this is one group every investor will need to consider regardless of their market call.
To return to that old saw from the top of this note, the group isn’t a “Buy” or “Sell” here – it is either “Strong Buy” or “Strong Sell”.
- It A "Liquidity Mirage": New York Fed Finally Grasps How Broken The Market Is Due To HFTs
In the aftermath of the October 15th, 2014 Treasury flash crash that was much fake “confusion” among the punditry about what caused the dramatic 20-sigma move in the 10 Year treasury. For us, however, there was no confusion, it was all due to a vicious case of HFT algo quote stuffing – a key component of algos trying to establish whether there are credible size orders to be frontrun – gone horribly wrong.
Several months later, in July, the Joint-Staff Report released by the Treasury, Fed, SEC and CFTC confirmed as much, and even if they didn’t explicitly single out HFTs as the culprit for the flash crash (that would mean having to redo the topography of the market, in the process gutting and redoing the entire market structure after tacitly admitting the market is broken), they did very clearly note that it was “self-trading”, or quote stuffing, that was responsible for the unprecedented move.
Here are the only two charts that mattered from that report:
As we thoroughly documented back in July, this is what the staff report said: “Given the finite capacity of any matching engine to simultaneously process messages and execute matches between buyers and sellers, extremely high message rates appeared to cause trading platform latency to temporarily jump higher”, or as we explained it ” a massive burst of quote stuffing (seen with absolute clarity on Figure 3.29 above) in the form of a surge in messages, resulted in a burst of accumulated order latency, which in turn was the catalyst to send the price soaring from 129 to over 130 in the span of 5 minutes, and then sliding back down again once the quote stuffing effect was eliminated.”
Which brings us to our conclusion then:
… what is surprising is that unlike the SEC’s Flash Crash report which was a travesty and blamed the crash on Waddell and Reed, to be followed by another travesty of a report, one which has sent an innocent trader behind bars, this time HFT is explicitly, if not deliberately, singled out.
Which in our opinion sets the stage. The stage for what? Why blaming the upcoming market crash on HFTs, of course. As Bloomberg commented, these findings “will probably add to regulatory scrutiny of the industry.”
The reality is that regulators know very well what is really going on in the markets, and now that HFTs have been exposed as the catalyst for the bond market crash, when the inevitable stock market crash – a crash that will be the result far more of the ruinous decisions of central planners around the globe – it will be the HFTs, pardon, PTFs that will be the first to blame, while the central bankers do their best to quietly slip out to a non-extradition country.
Just look at China: the government is so terrified of losing control over its own stock market bubble and the potential for violent, social conflict that would result, that it will throw everything at the market to support it. In the US, the regulators are already one step ahead: they know a crash is inevitable, and the only thing they need is the scapegoat to blame it on when it all comes crashing down.
Nameless, faceless algos would be just the perfect scapegoat.
Today we are one stop closer to that inevitable moment when the enabled systemic parasite, high frequency trading, which exists solely as a result of the market overhaul allowed in the aftermath of Reg NMS, is rooted out.
In a report authored by NY Fed economists Dobrislav Dobrev and Ernst Schaumburg, we get one step closer to the regulators admitting what we have said since day one: HFT does not provide liquidity (although it does provide a whole lot of liquidity-rebate generating volume), it provides a “liquidity mirage.“
In the note the authors roundly crush the biggest, and frequently only, benefit of HFTs as stipulated ad nauseam by its advocates, namely an increase in “market efficiency and pricing developments.” The authors note:
“that the (price) efficiency gain comes at the cost of making the real-time assessment of market liquidity across multiple venues more difficult.
* * *
… it has arguably become more challenging for large investors to accurately assess available liquidity based on displayed market depth across venues.
* * *
This situation, which we term the liquidity mirage, arises because market participants respond not only to news about fundamentals but also market activity itself. This can lead to order placement and execution in one market affecting liquidity provision across related markets almost instantly. The modern market structure therefore implicitly involves a trade-off between increased price efficiency and heightened uncertainty about the overall available liquidity in the market.”
* * *
The striking cross-market patterns in trading and order book changes
suggest that quote modifications/cancellations by high-frequency market
makers rather than preemptive aggressive trading are an important
contributing factor to the liquidity mirage phenomenon.Goodbye to “fat fingers” being blamed for flash crashes, and welcome to the Heisenberg uncertainty market: you can have your 1 cent bid/ask spreads… but you can’t have any real market depth at the same time.
And the moment you try to buy or sell a big chunk in Treasurys (or any other asset class), that tight bid/ask spread explodes as HFTs yanks opposing offers (or bids), and all the telegraphed market depth evaporates in an instant, leading to events like October 15, 2014.
As Bloomberg summarizes the note, which adds nothing new to what we have said over the past 6 years, “after examining trading across the most active platforms, including futures through CME Group Inc. and cash Treasuries on ICAP Plc’s BrokerTec and Nasdaq OMX Group Inc.’s eSpeed, the researchers found evidence that high-frequency traders create an illusion of liquidity in the Treasuries market.”
With their stealth technology, high-frequency traders are able to detect competing investor orders on one of the trading venues, and with a five millisecond delay — the shortest possible transmission time between the CME and BrokerTec — they’re able to pre-empt the order that’s likely to appear on the other venue.
Once again: what HFTs do in a normal state is not trading; it’s frontrunning and trying to evaluate just how many of the other concurrent “orders” in the market are just as fake; needless to say, the one with the fastest server and most expensive colo box wins, even if they never actually provide liquidity.
Investors often submit orders to buy or sell to all three venues in an effort to get the most competitive prices. The order is likely to reach one of the trading venues first, which gives the high-frequency traders the opportunity to profit from the time lapse.
The moment a real order does enter the marketplace, the quasi equilibrium represented by the order book disappears in an insant leading to the liquidity mirage the NY Fed has exposed.
How did the two authors reach their conclusion, one which has been known to our readers for years?
The researchers pointed out a trade that may be completed by an investor on BrokerTec.
“As soon as the BrokerTec transaction is observed in the market data feed, co-located low-latency market participants may immediately seek to cancel top-of-book offers on eSpeed and CME or submit competing buy orders to eSpeed and CME,” researchers Dobrislav Dobrev and Ernst Schaumburg wrote on the N.Y. Fed’s blog. Top-of-book orders reflect the highest buy and the lowest sell prices. Low-latency is another term for the high-speed trading technology.
“The striking cross-market patterns in trading and order-book changes suggest that quote modifications/cancellations by high-frequency market makers, rather than preemptive aggressive trading, are an important contributing factor to the liquidity mirage phenomenon,” the researchers wrote.
Worse, the researchers “did not find any evidence that the liquidity mirage was more pronounced on Oct. 15 compared with our control days.” In other words, courtesy of HFTs, multiple-sigma events like October 15 are always just around the corner, and always threaten to unleash market chaos the moment some unexpected “shock variable” disturbs the artificial equilibrium created by countless HFT algos to give the impression of an deep, orderly market.
In the aftermath of this report, one can be sure that the days of current market structure are numbered, and that the scene is now set to throw the book at the HFTs. The only thing that is missing is the appropriate catalyst. And what is better than an orchestrated, or ad hoc, market crash, one which exonerates the real culprit for the stock market bubble – the Federal Reserve – and unleashes populist anger by millions of investors who lose their net worth in an HFT instant, aimed squarely at the HFTs, and the 20-year-old math PhDs behind them?
- Ranking The Peasants: China Introduces Orwellian "Citizen Scores"
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
The following is extraordinarily creepy and disturbing. It’s also extremely clever, from a jackbooted, fascist thug perspective. When massive censorship itself isn’t enough…
TechDirt reports:
China’s plan to control the hearts, minds and internet connections of its citizens continues unimpeded. That’s the great thing about authoritarian regimes: rollout of mandatory programs is usually only a problem of logistics, not opposition.
The Chinese government has mandated a rating system for all of its connected citizens. It looks like a credit rating but goes much deeper than just tying a measurement of financial risk to a number. It’s a way of defining who someone in terms of the government’s desires and aims. And its desires aren’t all that honorable.
Everybody is measured by a score between 350 and 950, which is linked to their national identity card. While currently supposedly voluntary, the government has announced that it will be mandatory by 2020…
In addition to measuring your ability to pay, as in the United States, the scores serve as a measure of political compliance. Among the things that will hurt a citizen’s score are posting political opinions without prior permission, or posting information that the regime does not like, such as about the Tiananmen Square massacre that the government carried out to hold on to power, or the Shanghai stock market collapse.
This is where all the government’s moves towards greater control of the internet comes to fruition. To keep “score,” the government needs to tie IDs to online activity. Keeping the internet within the government’s walls makes it that much easier. But it’s not just online activity that will affect “citizen scores.” It’s almost every aspect of their lives.
Most disheartening is the fact that many citizens seem to view higher scores as status symbols.
Sadly, many Chinese appear to be embracing the score as a measure of social worth, with almost 100,000 people bragging about their scores on the Chinese equivalent of Twitter.
How do you say “fucking morons” in Mandarin?
The government’s program feeds on the natural competitive desires of human beings. There may be no official leaderboard (YET!) but with millions of easily-accessed “citizen scores,” anyone can enter this unofficial score-measuring contest. The government obviously realizes this, as it has tied perks to certain score tiers.
Those with higher scores are rewarded with concrete benefits. Those who reach 700, for example, get easy access to a Singapore travel permit, while those who hit 750 get an even more valued visa.
Klout, but for controlling the hearts and minds of a large populace.
So who will run this sick, perverted system? Let’s turn to Cory Doctorow at BoingBoing for the answer:
It’s a perfect storm of terrible: the program will be administered by Alibaba (China’s answer to Amazon) and Tencent (the country’s huge, government-compliant social network). Your score will be generated not only by your activities, but by the activities of the friends in your social graph — the people you identify as friends on social media. Your score will be decremented for doing things like mentioning Tienanmen Square or speculating on official corruption, or for participating in activities that the state wishes to “nudge” you away from, like playing video-games.
Paternalism, surveillance, social control, guilt by association, paternalistic application of behavioral economics and ideology-driven shunning and isolation — it’s like someone took all my novels and blended them together, and turned them into policy (with Chinese characteristics).
(Unless you have a serf score of 700 or higher)
* * *
For related articles, see:
The New Orwellian Term for Americans that Disagree with Government: “Paper Terrorists”
Introducing the Latest Orwellian Definition of Terrorists: “Associates of Associates”
- Obama Weighs "Syria Retreat" As White House Ends Training Of Moderate Rebels
This past weekend we called Obama’s latest failed attempt to replace Syria’s president (after a comparable attempt in 2013 also ended in failure) for what it is: “Make no mistake, this is shaping up to be the most spectacular US foreign policy debacle since Vietnam – and we don’t think that’s an exaggeration.”
Some of our high level observations:
The US, in conjunction with Saudi Arabia and Qatar, attempted to train and support Sunni extremists to overthrow the Assad regime. Some of those Sunni extremists ended up going crazy and declaring a Medeival caliphate putting the Pentagon and Langley in the hilarious position of being forced to classify al-Qaeda as “moderate.” The situation spun out of control leading to hundreds of thousands of civilian deaths and when Washington finally decided to try and find real “moderates” to help contain the Frankenstein monster the CIA had created in ISIS (there were of course numerous other CIA efforts to arm and train anti-Assad fighters, see below for the fate of the most “successful” of those groups), the effort ended up being a complete embarrassment that culminated with the admission that only “four or five” remained and just days after that admission, those “four or five” were car jacked by al-Qaeda in what was perhaps the most under-reported piece of foreign policy comedy in history.
Meanwhile, Iran sensed an epic opportunity to capitalize on Washington’s incompetence. Tehran then sent its most powerful general to Russia where a pitch was made to upend the Mid-East balance of power. The Kremlin loved the idea because after all, Moscow is stinging from Western economic sanctions and Vladimir Putin is keen on showing the West that, in the wake of the controversy surrounding the annexation of Crimea and the conflict in eastern Ukraine, Russia isn’t set to back down. Thanks to the fact that the US chose extremists as its weapon of choice in Syria, Russia gets to frame its involvement as a “war on terror” and thanks to Russia’s involvement, Iran gets to safely broadcast its military support for Assad just weeks after the nuclear deal was struck. Now, Russian airstrikes have debilitated the only group of CIA-backed fighters that had actually proven to be somewhat effective and Iran and Hezbollah are preparing a massive ground invasion under cover of Russian air support. Worse still, the entire on-the-ground effort is being coordinated by the Iranian general who is public enemy number one in Western intelligence circles and he’s effectively operating at the behest of Putin, the man that Western media paints as the most dangerous person on the planet.
Today, less than a week later, we have confirmation that this assessment was accurate, following two major developments in the Syria global proxy war.
First, Bloomberg reports that a week into Russia’s military intervention in Syria, some top White House advisers and National Security Council staffers are trying to persuade President Barack Obama to scale back U.S. engagement there, to focus on lessening the violence and, for now, to give up on toppling the Syrian regime.
It adds that “the administration came to this conclusion late. Despite warnings from U.S. intelligence agencies that Putin’s military buildup was intended to keep Assad in power, the White House nonetheless decided to explore cooperating with Russia on the ground. Throughout the summer and into the fall, top Russian officials — including Putin himself in a meeting last month with Obama at the U.N. — said they were not committed to keeping Assad in power for the long term, and would only target Islamic State fighters in their military offensive, according to U.S. officials.”
So U.S. intelligence is shocked that following a multi-year campaign which was launched in 2011, which escalated in 2013 to a near-naval war, and which culminated in 2014 with the “mysterious” emergence of ISIS whose stated purpose according to leaked CIA documents was a simple one: to depose Assad, that Obama’s biggest antagonist on the global superpower stage, Russian president Putin would do everything in his power to prop up his own key pawn in the middle east.
Putin’s intervention has had the U.S. flummoxed from day one. As the Russian military moved into Syria, U.S. intelligence officials tell us, the intelligence community was skeptical that it intended to focus its military campaign on the Islamic State. Even so, as the New York Times reported, the U.S. was surprised by the speed with which Russia built and then announced its new coalition with the governments of Syria, Iran and Iraq to support its military campaign.
Did we say “U.S. intelligence”? Scratch that.
In any event, after confirming virtually every word of our conclusion from past weekend, now that the administration realizes it is trapped without a credible way out absent de-escalation, it has no choice but to do just that:
Obama has ruled out engaging in a proxy war with Putin’s military, leaving few good options. One path, however, would mean finding ways to tamp down the fighting by negotiating small, local ceasefires with the Assad regime. “The White House somehow thinks we can de-escalate the conflict while keeping Assad in power,” one senior administration official told us.
“The current policy of the United States and its partners, to increase pressure on Assad so that he ‘comes to the table’ and negotiates his own departure, must be rethought,” Malley’s predecessor at the National Security Council, Philip Gordon, wrote at Politico as Russia was amassing its forces in Syria.
The planted Bloomberg story, meant solely to lessen the blow from the latest foreign policy humiliation adds that “that view, being pushed by top White House National Security staffers, including senior coordinator for the Middle East Rob Malley, is not new. But it has received fresh emphasis given Russian intervention.”
To be sure, there are neo-con war hawks, led by John Kerry and Samantha Power, who as a reminder was the puppet-masted behind the Ukraine coup, who want to escalate to the bitter end, even if it literally ends in a mushroom cloud: “The NSC view is opposed by top officials in other parts of the government, especially Secretary of State John Kerry and U.S. Ambassador to the UN Samantha Power. They are trying to persuade Obama that the only way to solve Syria is to increase the pressure on Assad in the hopes he will enter negotiations.”
However, just like in the 2013 Syria campaign, when Kerry huffed and puffed and ultimately folded, so two years later the man who married into the Heinz family fortune will have no choice but to fold again:
Yet Kerry and Power now find themselves without any hope that Putin might bring the Syrian regime to the table. Kerry, though always skeptical of Russia, has been the point man on engaging the Russian government through several conversations with Foreign Minister Sergei Lavrov. But it’s now clear the Russians were leading the Obama administration down the primrose path.
Others in Congress have already understood the endgame: Senate Foreign Relations Committee Chairman Bob Corker said that by not doing more to confront Putin’s escalation, “the administration is tacitly admitting it will no longer be able to secure Assad’s ouster.”
The implications are profound:
“If Assad is staying and there’s no political process in sight, this argument goes, the U.S. might as well focus on alleviating the suffering of the Syrian people and mitigate the growing refugee crisis.
Local ceasefires have been struck sporadically throughout the war, mostly in areas under siege by the Assad regime. The United Nations special envoy for Syria, Staffan de Mistura, has been pushing this idea for over a year.
This means that the dramatic migrant exodus heading into Europe, which is now spun as positive for the economy, and would have been the catalyst form more deficit-funding QE as a result of debt-funded spending spree required by Germany to pay for the millions in refugees, may be coming to an end, with substantial implications for monetary policy.
Bloomberg’s own conclusion shows a glimmer of hope that the end is not in sight just yet:
Caught between two camps in his administration, Obama may not end up shifting the U.S. approach to Syria at all, although the de-escalation side has the momentum. Either way, as Russia, Iran and the Syrian regime change facts on the ground, the relative position of America and the Syrians it has supported becomes graver by the day.
And then moments ago, the NYT confirmed that the de-escalation process has begun, when it reported that “the Obama administration has ended the Pentagon’s $500 million program to train and equip Syrian rebels, administration officials said on Friday, in an acknowledgment that the beleaguered program had failed to produce any kind of ground combat forces capable of taking on the Islamic State in Syria.”
Pentagon officials were expected to officially announce the end of the program on Friday, as Defense Secretary Ashton B. Carter leaves London after meetings with his British counterpart, Michael Fallon, about the continuing wars in Syria and Iraq.
A senior Defense Department official, who was not authorized to speak publicly and who spoke on the condition of anonymity, said that there would no longer be any more recruiting of so-called moderate Syrian rebels to go through training programs in Jordan, Qatar, Saudi Arabia or the United Arab Emirates. Instead, a much smaller training center would be set up in Turkey, where a small group of “enablers” — mostly leaders of opposition groups — would be taught operational maneuvers like how to call in airstrikes.
To be sure, the admin tried to soften the blow: moments ago Reuters added that “The U.S. military program to train and equip Syrian rebels is not “ending” but is instead being refocused, a senior U.S. defense official said on Friday, ahead of an announcement on overhauling the troubled U.S. effort.” No matter how one diplomatically phrases it though, at this point the wheels are in motion.
Which brings us to our own conclusion from last week:
If Russia ends up bolstering Iran’s position in Syria (by expanding Hezbollah’s influence and capabilities) and if the Russian air force effectively takes control of Iraq thus allowing Iran to exert a greater influence over the government in Baghdad, the fragile balance of power that has existed in the region will be turned on its head and in the event this plays out, one should not expect Washington, Riyadh, Jerusalem, and London to simply go gentle into that good night.
It is precisely this scenario that U.S. “intelligence” just realized, and why Obama is now sounding the retreat. The only question is whether Putin, who is now on the offensive across the mid-east region, agrees to take Obama’s olive branch, or whether he continues the “campaign to end ISIS“, in the process creating the biggest shift in the mid-east balance of power with a Russia-Syria-Iran-Iraq axis, and with China waiting patiently in the wings.
Finally, this may be just the catalyst that ends the torrid surge in oil higher over the past week now that the biggest geopolitical factor pushing black gold above $50 is in the rear view mirror.
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