Today’s News October 21, 2015

• Who on Wall Street is Now Eating the Oil & Gas Losses?

  Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

  Banks, when reporting earnings, are saying a few choice things about their oil-and-gas loans, which boil down to this: it’s bloody out there in the oil patch, but we made our money and rolled off the risks to others who’re now eating most of the losses.

  On Monday, it was Zions Bancorp. Its oil-and-gas loans deteriorated further, it reported. More were non-performing and were charged-off. There’d be even more credit downgrades. By the end of September, 15.7% of them were considered “classified loans,” with clear signs of stress, up from 11.3% in the prior quarter. These classified energy loans pushed the total classified loans to $1.32 billion.

  But energy loans fell by $86 million in the quarter and “further attrition in this portfolio is likely over the next several quarters,” Zions reported. Since the oil bust got going, Zions, like other banks, has been trying to unload its oil-and-gas exposure.

  Wells Fargo announced that it set aside more cash to absorb defaults from the “deterioration in the energy sector.” Bank of America figured it would have to set aside an additional 15% of its energy portfolio, which makes up only a small portion of its total loan book. JPMorgan added $160 million – a minuscule amount for a giant bank – to its loan-loss reserves last quarter, based on the now standard expectation that “oil prices will remain low for longer.”

  Banks have been sloughing off the risk: They lent money to scrappy junk-rated companies that powered the shale revolution. These loans were backed by oil and gas reserves. Once a borrower reached the limit of the revolving line of credit, the bank pushed the company to issue bonds to pay off the line of credit. The company could then draw again on its line of credit. When it reached the limit, it would issue more bonds and pay off its line of credit….

  Banks made money coming and going.

  They made money from interest income and fees, including underwriting fees for the bond offerings. It performed miracles for years. It funded the permanently cash-flow negative shale revolution. It loaded up oil-and-gas companies with debt.

  While bank loans were secured, many of the bonds were unsecured. Thus, banks elegantly rolled off the risks to bondholders, and made money doing so. And when it all blew up, the shrapnel slashed bondholders to the bone. Banks are only getting scratched.

  Then late last year and early this year, the hottest energy trade of the century took off. Hedge funds and private equity firms raised new money and started buying junk-rated energy bonds for cents on the dollar and they lent new money at higher rates to desperate companies that were staring bankruptcy in the face. It became a multi-billion-dollar frenzy.

  They hoped that the price of oil would recover by early summer and that these cheap bonds would make the “smart money” a fortune and confirm once and for all that it was truly the “smart money.” Then oil re-crashed.

  And this trade has become blood-soaked.

  The Wall Street Journal lined up some of the PE firms and hedge funds, based on “investor documents” or on what “people familiar with the matter said”:

  Magnetar Capital, with $14 billion under management, sports an energy fund that is down 12% this year through September on “billions of dollars” it had invested in struggling oil-and-gas companies. But optimism reigns. It recovered a little in October and plans to plow more money into energy.

  Stephen Schwarzman, CEO of Blackstone which bought a minority stake in Magnetar this year but otherwise seems to have stayed away from the energy junk-debt frenzy, offered these words last week (earnings call transcript via Seeking Alpha):

  “And people have put money out in the first six months of this year…. Wow, I mean, people got crushed, they really got destroyed. And part of what you do with your businesses is you don’t do things where you think there is real risk.”

  Brigade Capital Management, which sunk $16 billion into junk-rated energy companies, is “having its worst stretch since 2008.” It fell over 7% this summer and is in the hole for the year. But it remained gung-ho about energy investments. The Journal:

  In an investor letter, the firm lamented that companies were falling “despite no credit-specific news” and said its traders were buying more of some hard-hit energy companies.

  King Street Capital Management, with $21 billion under management, followed a similar strategy, losing money five months in a row, and is on track “for the first annual loss in its 20-year history.”

  Phoenix Investment Adviser with $1.2 billion under managed has posted losses in 11 months of the past 12, as its largest fund plunged 24% through August, much of it from exposure to decomposing bonds of Goodrich Petroleum.

  “The whole market was totally flooded,” Phoenix founder Jeffrey Peskind told the Journal. But he saw the oil-and-gas fiasco as an “‘unbelievable potential buying opportunity,’ given the overall strength of the US economy.”

  “A lot of hot money chased into what we believe are insolvent companies at best,” Paul Twitchell, partner at hedge fund Whitebox Advisors, told the Journal. “Bonds getting really cheap doesn’t mean they are a good buy.”

  After the bloodletting investors had to go through, they’re not very excited about buying oil-and-gas junk bonds at the moment. In the third quarter, energy junk bond issuance fell to the lowest level since 2011, according Dealogic. And so far in October, none were issued.

  And banks are going through their twice-a-year process of redetermining the value of their collateral, namely oil-and-gas reserves. Based on the lower prices, and thus lower values of reserves, banks are expected to cut borrowing bases another notch or two this month.

  Thus, funding is drying up, just when the companies need new money the most, not only to operate, but also to service outstanding debts. So the bloodletting – some of it in bankruptcy court – will get worse.

  But fresh money is already lining up again.

  They’re trying to profit from the blood in the street. Blackstone raised almost $5 billion for a new energy fund and is waiting to pounce. Carlyle is trying to raise $2.5 billion for its new energy fund. Someday someone will get the timing right and come out ahead.

  Meanwhile, when push comes to shove, as it has many times this year, it comes down to collateral. Banks and others with loans or securities backed by good collateral will have losses that are easily digestible. But those with lesser or no protections, including the “smart money” that plowed a fortune into risks that the smart banks had sloughed off, will see more billions go up in smoke.

  Next year is going to be brutal, explained the CEO of oil-field services giant Schlumberger. But then, there are dreams of “a potential spike in oil prices.” Read… The Dismal Thing Schlumberger Just Said about US Oil

  

  

  

  

• Things Are Getting Scary: Global Police, Precrime, & The War On Domestic "Extremists"

  Submitted by John Whitehead via The Rutherford Institute,

  • Are you afraid that the government is plotting to confiscate your firearms?

  • Do you believe the economy is about to collapse and the government will soon declare martial law?

  • Do you display an unusual number of political and/or ideological bumper stickers on your car?

  If you answered yes to any of the above questions, you may be an anti-government extremist (a.k.a. domestic terrorist) in the eyes of the police.

  As such, you are now viewed as a greater threat to America than ISIS or al Qaeda.

  Let that sink in a moment.

  If you believe in and exercise your rights under the Constitution (namely, your right to speak freely, worship freely, associate with like-minded individuals who share your political views, criticize the government, own a weapon, demand a warrant before being questioned or searched, or any other activity viewed as potentially anti-government, racist, bigoted, anarchic or sovereign), you have just been promoted to the top of the government’s terrorism watch list.

  I assure you I’m not making this stuff up.

  Police agencies now believe the “main terrorist threat in the United States is not from violent Muslim extremists, but from right-wing extremists.”

  A New York Times editorial backs up these findings:

  Law enforcement agencies around the country are training their officers to recognize signs of anti-government extremism and to exercise caution during routine traffic stops, criminal investigations and other interactions with potential extremists. “The threat is real,” says the handout from one training program sponsored by the Department of Justice. Since 2000, the handout notes, 25 law enforcement officers have been killed by right-wing extremists, who share a “fear that government will confiscate firearms” and a “belief in the approaching collapse of government and the economy.”

  So what is the government doing about these so-called terrorists?

  The government is going to war.

  Again.

  Only this time, it has declared war against so-called American “extremists.”

  After decades spent waging costly, deadly and ineffective military campaigns overseas in pursuit of elusive ISIS and al Qaeda operatives and terror cells (including the recent “accidental” bombing of a Doctors Without Borders hospital in Afghanistan that left 22 patients and medical staff dead), the Obama administration has announced a campaign to focus its terror-fighting forces inwards.

  Under the guise of fighting violent extremism “in all of its forms and manifestations” in cities and communities across the world, the Obama administration has agreed to partner with the United Nations to take part in its Strong Cities Network program. Funded by the State Department through 2016, after which “charities are expected to take over funding,” the cities included in the global network include New York City, Atlanta, Denver, Minneapolis, Paris, London, Montreal, Beirut and Oslo.

  Working with the UN, the federal government will train local police agencies across America in how to identify, fight and prevent extremism, as well as address intolerance within their communities, using all of the resources at their disposal.

  What this program is really all about, however, is community policing on a global scale.

  Community policing, which relies on a “broken windows” theory of policing, calls for police to engage with the community in order to prevent local crime by interrupting or preventing minor offenses before they could snowball into bigger, more serious and perhaps violent crime. The problem with the broken windows approach is that it has led to zero tolerance policing and stop-and-frisk practices among other harsh police tactics.

  When applied to the Strong Cities Network program, the objective is ostensibly to prevent violent extremism by targeting its source: racism, bigotry, hatred, intolerance, etc.

  In other words, police—acting ostensibly as extensions of the United Nations—will identify, monitor and deter individuals who exhibit, express or engage in anything that could be construed as extremist.

  Consider how Attorney General Loretta Lynch describes the initiative:

  As residents and experts in their communities, local leaders are often best positioned to pinpoint sources of unrest and discord; best equipped to identify signs of potential danger; and best able to recognize and accommodate community cultures, traditions, sensitivities, and customs.  By creating a series of partnerships that draws on the knowledge and expertise of our local officials, we can create a more effective response to this virulent threat.

  Translation: U.S. police agencies are embarking on an effort to identify and manage potential extremist “threats,” violent or otherwise, before they can become actual threats. (If you want a foretaste of how “extreme” things could get in the U.S.: new anti-terrorism measures in the U.K. require that extremists be treated like pedophiles and banned from working with youngsters and vulnerable people.)

  The government’s war on extremists, of which the Strong Cities program is a part, is being sold to Americans in much the same way that the USA Patriot Act was sold to Americans: as a means of combatting terrorists who seek to destroy America.

  For instance, making the case for the government’s war on domestic extremism, the Obama administration has suggested that it may require greater legal powers to combat violent attacks by lone wolves (such as “people motivated by racial and religious hatred and anti-government views” who “communicate their hatred over the Internet and through social media”).

  Enter the government’s newest employee: a domestic terrorism czar.

  However, as we now know, the USA Patriot Act was used as a front to advance the surveillance state, allowing the government to establish a far-reaching domestic spying program that has turned every American citizen into a criminal suspect.

  Similarly, the concern with the government’s anti-extremism program is that it will, in many cases, be utilized to render otherwise lawful, nonviolent activities as potentially extremist.

  Keep in mind that the government agencies involved in ferreting out American “extremists” will carry out their objectives—to identify and deter potential extremists—in concert with fusion centers (of which there are 78 nationwide, with partners in the private sector and globally), data collection agencies, behavioral scientists, corporations, social media, and community organizers and by relying on cutting-edge technology for surveillance, facial recognition, predictive policing, biometrics, and behavioral epigenetics (in which life experiences alter one’s genetic makeup).

  This is pre-crime on an ideological scale and it’s been a long time coming.

  For example, in 2009, the Department of Homeland Security (DHS) released two reports, one on “Rightwing Extremism,” which broadly defines rightwing extremists as individuals and groups “that are mainly antigovernment, rejecting federal authority in favor of state or local authority, or rejecting government authority entirely,” and one on “Leftwing Extremism,” which labeled environmental and animal rights activist groups as extremists.

  Incredibly, both reports use the words terrorist and extremist interchangeably.

  That same year, the DHS launched Operation Vigilant Eagle, which calls for surveillance of military veterans returning from Iraq and Afghanistan, characterizing them as extremists and potential domestic terrorist threats because they may be “disgruntled, disillusioned or suffering from the psychological effects of war.”

  These reports indicate that for the government, anyone seen as opposing the government—whether they’re Left, Right or somewhere in between—can be labeled an extremist.

  Fast forward a few years, and you have the National Defense Authorization Act (NDAA), which President Obama has continually re-upped, that allows the military to take you out of your home, lock you up with no access to friends, family or the courts if you’re seen as an extremist.

  Now connect the dots, from the 2009 Extremism reports to the NDAA and the UN’s Strong Cities Network with its globalized police forces, the National Security Agency’s far-reaching surveillance networks, and fusion centers that collect and share surveillance data between local, state and federal police agencies.

  Add in tens of thousands of armed, surveillance drones that will soon blanket American skies, facial recognition technology that will identify and track you wherever you go and whatever you do. And then to complete the circle, toss in the real-time crime centers being deployed in cities across the country, which will be attempting to “predict” crimes and identify criminals before they happen based on widespread surveillance, complex mathematical algorithms and prognostication programs.

  Hopefully you’re getting the picture, which is how easy it is for the government to identify, label and target individuals as “extremist.”

  We’re living in a scary world.

  Unless we can put the brakes on this dramatic expansion and globalization of the government’s powers, we’re not going to recognize this country 20 years from now.

  Frankly, as I make clear in my book Battlefield America: The War on the American People, the landscape has already shifted dramatically from what it was like 10 or 20 years ago. It’s taken less than a generation for our freedoms to be eroded and the police state structure to be erected, expanded and entrenched.

  Rest assured that the government will not save us from the chains of the police state. The UN’s Strong Cities Network program will not save us. The next occupant of the White House will not save us. For that matter, anarchy and violent revolution will not save us.

  If there is to be any hope of freeing ourselves, it rests—as it always has—at the local level, with you and your fellow citizens taking part in grassroots activism, which takes a trickle-up approach to governmental reform by implementing change at the local level.

  Attend local city council meetings, speak up at town hall meetings, organize protests and letter-writing campaigns, employ “militant nonviolent resistance” and civil disobedience, which Martin Luther King Jr. used to great effect through the use of sit-ins, boycotts and marches.

  And then, while you’re at it, urge your local governments to nullify everything the federal government does that is illegitimate, egregious or blatantly unconstitutional.

  If this sounds anti-government or extremist, perhaps it is, in much the same way that King himself was considered anti-government and extremist. Recognizing that “freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed,” King’s tactics—while nonviolent—were extreme by the standards of his day. 

  As King noted in his 1963 “Letter from Birmingham City Jail”:

  [A]s I continued to think about the matter I gradually gained a bit of satisfaction from being considered an extremist. Was not Jesus an extremist in love—“Love your enemies, bless them that curse you, pray for them that despitefully use you.” Was not Abraham Lincoln an extremist—“This nation cannot survive half slave and half free.” Was not Thomas Jefferson an extremist—“We hold these truths to be self-evident, that all men are created equal.” So the question is not whether we will be extremist but what kind of extremist will we be. Will we be extremists for hate or will we be extremists for love?

  So how do you not only push back against the police state’s bureaucracy, corruption and cruelty but also launch a counterrevolution aimed at reclaiming control over the government using nonviolent means?

  Take a cue from King.

  

  

  

  

  

• Professor Compares Law-Abiding Gun-Owners To Slaveholders, Calls For Them To Be Shot

  Submitted by Alex Thomas via Intellihub.com,

  In what will go down as one of the most disgusting, hate filled articles ever published on the hard left clickbait rag Salon.com, an author and liberal college professor has written a piece that calls for all gun owners to be shot. 

  No, you did not read that incorrectly and this is not hyperbole.

  The article, written by Coppin State University teacher D. Watkins, not only calls for all gun owners to be shot but also ridiculously compares them to slaveholders while claiming that there is no legitimate reason to own a weapon.

  Starting out the article with the writers dreams of charging five thousand dollars per bullet, Watkins then makes his position on gun ownership in America startlingly clear. (emphasis mine)

  Rock was definitely on point, $5000 bullets would be great but I’d take it a step further––I believe that being shot should be requirement for gun ownership in America. It’s very simple. You need to have gun, like taking selfies with pistols, can’t live with out it? Then take a bullet and you will be granted the right to purchase the firearm of your choice.

   

  If we could successfully implement this rule, I guarantee the mass shootings will stop. Watching cable news now in days makes me physically ill.

   

  Week in and week out we are forced to learn about another coward, who can’t stand to deal with the same rejection that most of us face–– so they strap themselves with guns and then cock and spray at innocent people. Heartbroken survivors and family member images go viral, as our elected officials remain clueless.

  He then goes on to attack the usual right wing boogeyman (Carson and Trump) before making yet another patently false statement that shows his complete ignorance on the actual facts of gun ownership. Watkins, like so many other clueless authoritarian liberals, simply does not understand gun ownership and its connection to freedom and liberty. (emphasis mine)

  Bullets are extremely hot and they hurt. I saw them paralyze, cut through faces, pierce children and take life. I have friends, relatives and loved ones be gunned down. Guns break apart families and ruin lives.

   

  Other than giving a coward the heart to stand tall, what’s the positive part of gun ownership? Other than the people in rural areas who use them to hunt for food, I have only seen them destroy, both in the suburbs and in our inner cities.

  Watkins only sees them destroy so the millions and millions of other American citizens who do not share his opinion should be shot!? It’s almost as if Watkins has decided to lift the veil and publish a piece chock full of the actual thoughts that liberal authoritarians share with each other on a regular basis.

  Not wanting to have his call for all gun owners to be shot to be the only unbelievably messed up thing in his hate piece, Watkins then compares all gun owners to slaveholders in a transparent attempt to label those he disagrees with as racists. (a tried and true tactic of the authoritarian left) (emphasis mine)

  Gun praisers are just like the people who were in favor of slavery back in the day – the elite, lazy and ignorant who weren’t being beaten, raped or in the field doing the work, so they were perfectly okay with involuntary servitude, which is a problem and why I think gun owners need to feel more– -they need a taste of the other side.

  Got that gun owners. You are elitists, you are lazy, you are ignorant, and most of all you are like a slaveholder for owning those terrible firearms!

  In case the reader thought that they may had just misread what the author meant in the beginning of the article, Watkins closes by reiterating his belief that all gun owners should be shot. (emphasis again mine)

  So if you love guns, if they make you feel safe, if you hold and cuddle with them at night, then you need to be shot. You need to feel a bullet rip through your flesh, and if you survive and enjoy the feeling­­––then the right to bear arms will be all yours.

  Ironically, this hate piece was published by a news outlet that routinely labels anyone that they disagree with as dangerous, violent racists. Apparently they are not worried about calling for millions of Americans to be shot just as long as those Americans are on the other side of the political isle.

  The above quoted piece is a perfect example of how gun control advocates really feel about millions of America gun owners and should be a wake up call to anyone still on the fence over whether or not gun control fanatics are just calling for “common sense” reform rather than full-scale confiscation and attacks on actual gun owners.

  It is also important to note that the call for gun owners to be shot is possibly tied directly to the recent promotion of Australian style gun control by the mainstream media. Australia initiated a massive mandatory buyback program (also known as confiscation by government force) after a mass shooting and one can imagine Americans would not be so keen to turn in their weapons if a similar law were passed in this country.

  Attempting to implement this type of gun control in the United States is an obvious recipe for civil war and gun owners who refuse to go along with the confiscation would be subject to violence at the hands of the government. (see all gun owners being shot)

  But hey, we are all just crazy right wing extremists for worrying about gun control, even as the media calls for mass confiscation and gun owners across the country to be shot.

  

  

  

  

  

• Furious Germans Stage Massive Anti-Islam Protest: "The Concentration Camps Are Unfortunately Out Of Action"

  Over the past several months, we’ve warned repeatedly that Europe’s escalating migrant crisis threatens to set off a dangerous bout of scapegoating xenophobia. 

  Germany’s open door policy to asylum seekers has effectively been forced on other countries by decree, a move which could very well engender intense and possibly dangerous feelings of nationalism among citizens who disagree with Berlin’s approach to the crisis. We’ve already seen Hungary resort to razor wire fences, water cannons, and tear gas to keep migrants out and Budapest’s move to close its border with Croatia and Serbia has set off a Balkan border battle wherein no one can quite figure out the most efficient way to get the refugees to Germany without allowing their countries to be used as migrant superhighways. 

  Meanwhile, German Chancellor Angela Merkel is beginning to feel the heat at home. Recall the following from AFP: 

  Germany’s Angela Merkel is used to owning the room when she speaks to her party faithful, but the mood turned hostile when she defended her open-door refugee policy this week.

   

  In a heated atmosphere, some of the 1,000-odd members at the meeting warned of a “national disaster” and demanded shuttering the borders as Germany expects up to one million migrants this year.

   

  “Stop the refugee chaos — save German culture + values — dethrone Merkel,” read a banner at the congress late Wednesday in the eastern state of Saxony, the home base for the anti-foreigner PEGIDA movement.

  As Reuters notes, PEGIDA (which stands for Patriotic Europeans Against the Islamization of the West,) almost “fizzled out” earlier this year when the group’s leader Lutz Bachmann posted the following picture of himself on Facebook with the caption “He’s Back”:

  

  Now, thanks to the refugee crisis, PEGIDA is apparently “back” as well, as attendance at the group’s Monday night “gatherings” swells amid the influx of Syrian asylum seekers. Here’s Reuters:

  The German anti-Islam movement PEGIDA staged its biggest rally in months on Monday, sparked into fresh life on its first anniversary by anger at the government’s decision to take in hundreds of thousands of migrants from the Middle East.

   

  But it has swelled again as Germany implements Chancellor Angela Merkel’s decision to accept a tide of refugees that could exceed a million this year, as she argues that Germany can not only cope but, with its aging population, will benefit in the long term.

   

  Police declined to estimate the number of protesters but media put it at 15-20,000, somewhat below a peak of around 25,000 in January. Around 14,000 counter-demonstrators urged people to welcome refugees rather than whip up opposition.

   

  PEGIDA supporters waved the national flag and carried posters bearing slogans such as “Hell comes with fake refugees” and “Every people should have its country, not every people a piece of Germany”.

   

  Gathering outside Dresden’s historic opera house, the Semperoper, PEGIDA supporters chanted “Deport! Deport!” and “Merkel must go!”.

   

  “We’re just normal people who are scared of what’s coming,” said 37-year-old Patrick, a car mechanic. “As a German citizen who pays taxes, you feel like you’re being taken for a ride.”

  And Bachmann was there on Monday, not dressed as Hitler. Here’s what he had to say to the crowd which reportedly handed him bouquets of flowers:

  “Politicians attack and defame us and the lowest tricks are used to keep our mouths shut. We are threatened with death, there are attacks on our vehicles and houses and we are dragged through the mud, but we are still here … And we will triumph!”

   

  
  

  While it’s not entirely clear what “triumph” means in this context, you can get a clue or two by simply taking a look at the following homemade sign which showed up at last Monday’s rally in Dresden:

  

  More from Deutsche Welle:

  The anti-“Islamization” movement PEGIDA marked its first birthday with a significant resurgence – and what many observers saw as a new radicalization. The new influx of refugees over the summer and a significant backlash against Merkel’s decision to open the borders to Syrians has apparently given the racist elements in the PEGIDA movement new confidence.

   

  Police put the attendance at Monday’s PEGIDA rally at between 15,000 and 20,000 people, with an equal number of counterdemonstrators, making this the largest turnout since the movement’s previous high point in February. But there was also a new aggression in the crowds: a Saxony police statement said the two sides threw “objects and fireworks” at one another, and said there were several attacks on officers themselves, who deployed pepper spray.

   

  The media’s attention was particularly drawn to a 25-minute speech by the German-Turkish writer Akif Pirincci, otherwise known for a cat-based crime fiction series and a libertarian blog called “The Axis of Good,” which has often been accused of racism.

   

  Pirincci’s extraordinary and occasionally vulgar ramble, all read from notes, included references to refugees as “invaders,” politicians as “gauleiters against their own people,” Muslims “who pump infidels with their Muslim juice” and a threat that Germany would become a “Muslim garbage dump.”

   

  After the crowd responded with shouts of “resistance, resistance,” Pirincci said, “Of course there are other alternatives – but the concentration camps are unfortunately out of action at the moment.” 

  You read that correctly, the man who stood up in front of 10-15,000 people and delivered a 25-minute rant complete with the suggestion that Germany should fire back up the concentration camps writes cat detective novels in his spare time…

  

  In any event, this is precisely what we meant when we said that feelings of intense nationalism could well lead directly to dangerous bouts of scapegoating xenophobia, and don’t expect anyone at a PEGIDA rally to be persuaded by the argument that the influx of Syrian refugees may help Germany overcome the economic hurdles it will soon face from challenging demographic shifts.

  We’ll leave you with a quote from Hungary’s Viktor Orban and some visuals from Monday’s rally.

  “Spiritually, Islam was never part of Europe. It’s the rulebook of another world.” 

   

  

  

  

   

  First chant by the protesters: “Merkel muss weg” (“Merkel has to go”) pic.twitter.com/Td5uor5As7

  — Thomas Sparrow (@Thomas_Sparrow) October 19, 2015

  “Money for our children instead of money for your asylum seekers”. #Pegida. We hear what looks like a few fireworks pic.twitter.com/HXpkR54djG

  — Thomas Sparrow (@Thomas_Sparrow) October 19, 2015

  And more:

  

  

  

  

  

  

  

  

• Hillary Would Be The "Most Disliked" President Ever

  With Joe Biden still undecided, perhaps the following chart will help make up his mind… for, if Hillary (with all her populist platitudes and elitist sponsorship) were to become Queen President, she will be the most unliked (least favorable) in recent history…

  

   

  Ironically, there is only one ‘contender’ who ranks lower…

  

   

  Source: Bloomberg

  

  

  

  

  

• Europe Secretly Starts Imposing TTIP Despite the Public’s Overwhelming Opposition

  Submitted by investigative historian Eric Zuesse, author of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.

  Europe Secretly Starts Imposing TTIP Despite the Public’s Overwhelming Opposition

  The terms of Obama’s proposed TPP ‘trade’ treaty with Asian countries won’t be made public until the treaty has already been in force for at least four years. The terms of Obama’s proposed TISA (Trade In Services Agreement) with 52 nations won’t be made public until the treaty has already been in force for at least five years. Obama’s proposed TTIP treaty with European countries has been so successfully hidden, that even the number of years it will be kept from the public isn’t yet known. Hello, international fascism — all in secret, until too late for the public to do anything.

  But in Europe, things are being rushed, just in case secrecy breaks and the treaty fails to pass. The European Union is already secretly imposing provisions from the secret Transatlantic Trade and Investment Partnership (TTIP) treaty, even before anyone has signed it, and even before it has been formally approved in any nation. This was revealed over the last weekend in two places:

  On the night of October 17th, Phillip Inman of the online version of the Guardian bannered (in an article that the Guardian  declined to publish in its printed edition), “Prospect of TTIP already undermining EU food standards, say campaigners,” and he reported that,

  Nick Dearden, director of anti-poverty group Global Justice Now, says the EU’s chief trade counsellor, Damien Levie, has let slip that free trade means undermining current minimum standards agreed by the EU.

  Dearden says that according to a report in the  [subscription-only] newsletter Washington Trade Daily, Levie told a conference held by US free market thinktank the Cato Institute [which is owned by America’s passionately anti-regulatory billionaire oil-investors, the Koch brothers] that genetically modified crops and chemically washed beef carcasses were being allowed into the EU ahead of a deal.

  According to the report, Levie said EU member states “have been stepping up case reviews and approving new genetically modified organisms [GMOs] with five new products approved so far”. …

  Levie … told the Cato Institute conference that neither side wants to reach anything less than a comprehensive economic agreement. He conceded the deal could founder on resistance from the US to include financial services in the deal and Washington’s reluctance to open local and state procurement to bids from EU businesses.

  Previously, information that was made public by wikileaks had made clear that in the negotiations over the TTIP, the U.S. has been the most aggresssive nation pushing for the ability of international corporations to shape national laws — this being the position that’s also favored by the Koch brothers.

  On October 18th, Lauren McCauley at Common Dreams headlined “TTIP Already ‘Rewriting the Rule Book’ for EU Food Standards, New Report Finds,” and stated that a progressive British organization, Global Justice Now, issued a study on October 18th, which noted that:

  US officials successfully used the prospect of TTIP to bully the EU into abandoning plans to ban 31 dangerous pesticides with ingredients that have been shown to cause cancer and infertility.

  A similar fate befell regulations around the treatment of beef with lactic acid. This was banned in Europe because of fears that the procedure was being used to conceal unhygienic  practices. The ban was repealed by MEPs in the European Parliamentary Environment Public Health and Food Safety Committee after EU Commission officials openly suggested TTIP negotiations would be threatened if the ban wasn’t lifted.

  On climate change, the European Fuel Quality Directive which would effectively ban Canadian tar sands oil [the world’s worst oil from a global-warming standpoint] has foundered in the face of strong US-Canadian lobbying around both TTIP and the EU-Canada CETA deal.

  As I reported on 2 February 2014:

  [The proposed] Keystone XL Pipeline wouldn’t contribute to U.S. energy-production, but instead to exports of the global-warming-dirtiest oil, from Canada, to Europe and South America. It would transport Alberta Canada’s tar-sands oil — half of which is owned by the Kochs — south to two Koch-owned refineries near the Texas Gulf Coast for transshipment mainly to Europe. President Obama is thus trying to get Europe to relax its anti-global-warming standards to permit their importation of this oil, which is the world’s absolute worst oil from the global-warming standpoint.

  Furthermore, “Currently, most Canadian tar sands exports are mainly limited to the U.S. Midwest market by a lack of transportation infrastructure.” This fact (the lack of “infrastructure” or transportation facilities to move the oil to the international market) keeps down not only the price the Kochs can get for their oil (since it can’t currently be sold on the international market); it also greatly lowers the sheer volume of it that they can sell (at any price), because the local Midwest oil market is small. Keystone XL would thus also enormously increase the annual sales-volume of this currently deeply landlocked oil.

  Moreover, if this filthy oil isn’t sold out fast, it won’t ever be sold at all; and here is why, as explained by no less than the Oil & Gas Sector Analyst at the world’s largest bank (in terms of assets):

  He says, “Between 60 and 80% of current fossil fuel reserves listed on global markets cannot be burned if we are to limit the rise in global temperature to 2 degrees [Celsius, or 4.5 degrees Fahrenheit],” and that’s the temperature-rise 97% of climatologists endorse as being the cut-off point that mustn’t be exceeded if the climate is to avoid going haywire with soaring heat and destroying the planet’s biosphere as humans have always known it.

  So: U.S. President Obama has been aggressively pushing for the largely-Koch-owned Canadian tar-sands oil to be allowed into European markets in order for that portion of their — and Exxon’s, etc. — oil reserves to be sellable at all, because it otherwise might not be.

  The Koch brothers are generally considered to be the biggest fundraisers for the U.S. Republican Party. On 5 January 2012, the Washington Post headlined, “Koch-backed political coalition, designed to shield donors, raised $400 million in 2012” and Matea Gold reported that, “The resources and the breadth of the organization make it singular in American politics,” and that, “Its funders remain largely unknown.” However, one self-admitted member,

  Jack Schuler, a Chicago health-care entrepreneur, attended one of the Kochs’ donor meetings in Beaver Creek, Colo., several years ago and has contributed about $100,000 a year to their efforts since then. “They came across as guys who are putting a lot of their own money into it,” Schuler said. “They are pretty soft-spoken, not screamers or screechers. They provide the leadership, the staff — without the framework, I wouldn’t do it on my own.”

  A large portion of that $400 million went to Republican Mitt Romney’s campaign against Barack Obama’s re-election bid. Obama supports the Kochs financially, though the Kochs preferred the self-declared Republican candidate.

  Thus, apparently, the Kochs have already won Obama’s success at defeating the EU’s fuel-quality standards, even if the TTIP gets turned down. The EU did it without needing to go all the way to put in place and effectuate the TTIP.

  NOTE: The headline to this article says “Despite the Public’s Overwhelming Opposition,” but the publicly available scientific polling on these secret treaties is also being gamed. Early on, the polls had asked respondents whether they approved of “free trade” or other such vagaries, and the public did. Then the polling just stopped, as if that was that, and Obama’s proposed ‘trade’ deals are popular. But the massive public demonstrations, etcetera, since then, against these treaties, have become increasingly clear that, to the extent people actually come to know about Obama’s proposed ‘trade’ treaties (especially in Europe, which isn’t quite as corrupt as is the U.S. and so fewer people are totally in the dark), they’re strongly opposed, and might even revolt violently if that’s the only way to stop the treaty from being approved. News such as you’re reading here has been submitted to the news-media in all Western countries, but only few publish it. The major advertisers have participated in the committees that drafted these treaties, and probably wouldn’t be pleased if their handiworks were known to the public in time to be blocked from going into effect.

  

  

  

  

  

• Offshore-Onshore Yuan Spread At 1-Month Wides Hinting At Outflows As Japanese Stocks 'Mysteriously' Meltup At The Open

  Since China GDP was unleashed, Offshore Yuan (CNH) has weakened significantly relative to Onshore Yuan (CNY). After over 3 weeks of 'stability' with CNY and CNH on top of each other, it appears selling pressure has reappeared suggesting outflows are on the rise (despite PBOC's best efforts to hide/manage them) which may explain why Treasuries were so relatively weak today. The "will-never-learn" Chinese investors pile in once again extending the period of margin debt increases to the most since the peak of the bubble. AsiaPac stocks are mixed with China flat and Japan higher after a mysterious bidder lifted NKY 200 points instantly at the open. China strengthened the Yuan fix after 5 days of weakness.

   

  Offshore Yuan relative weakness suggest capital outflows are gaining pace once again…

  

   

  as PBOC strengthened the Yuan fix for the first time in 6 days…

  

   

  which may explain why Treasuries sold off so much today (on a relatively quiet equity day).

  

   

  Chinese investors continue to pile into stocks in a leveraged way…

  • *SHANGHAI MARGIN DEBT RISE HITS LONGEST STRETCH IN FOUR MONTHS

  9th day in a row…

  

   

  As Chinese stocks continue limp back towards pre-devaluation levels…

  

   

  Japanese Stocks melted up to the 120 USDJPY tractor beam at the open…

  

   

  And why would Japanese stocks melt-up? Why disastrous trade data of course!!!!

  • Japan Sept. Exports Rise 0.6% Y/y; Est. +3.8%

  

   

  Which can only mean one thing!! More Stimulus, More Devaluatiuon, and More Einsteinian Insanity until it's all over.

  *  *  *

  Oh and with regard China's bond bubble…

  • *PBOC GETS >CNH30B ORDERS FOR CNH5B DIM SUM BOND

  Nope, no bubble there.

   

  Charts: Bloomberg

  

  

  

  

  

• Banks Turn Down Deposits As Stealth NIRP Takes Hold

  Back in February, we noted that NIRP had officially (albeit technically) arrived in the US as JP Morgan announced it was preparing to charge some large institutional customers for deposits. 

  Between the squeeze ZIRP has put on NIM and regulations around so-called “hot money,” banks quite simply do not want certain types of deposits and when trying to talk customers out of putting their money in the bank didn’t work, some financial institutions simply resorted to charging fees.  

  As we discussed months ago, if the cost of funding isn’t zero, banks are no longer interested, which means if the Fed finally does raise short term rates, other sources of funding will be far more attractive. Besides, it’s not as if banks don’t have enough deposits. On the contrary, they’re inundated and deposit to loan ratios have plunged in the post-crisis years. Here’s how we put it earlier this year: So now that the Fed may be finally pushing back on the commercial banks, and telling them that the cost of deposit funding is about to go up, banks themselves are pushing back on the Fed, and signalling that thanks to the trillions in fungible QE liquidity, they don’t care if the Fed hikes rates, as they are now proactively seeking to purge deposits from their balance sheets.

  If you needed still more evidence that what one might call “stealth NIRP” has taken hold in America, consider the following from WSJ:

  U.S. banks are going to new lengths to ward off a surprising threat to their financial health: big cash deposits.

   

  State Street Corp., the Boston bank that manages assets for institutional investors, for the first time has begun charging some customers for large dollar deposits, people familiar with the matter said. J.P. Morgan Chase & Co., the nation’s largest bank by assets, has cut unwanted deposits by more than $150 billion this year, in part by charging fees.

   

  The developments underscore a deepening conflict over cash. Many businesses have large sums on hand and opportunities to profitably invest it appear scarce. But banks don’t want certain kinds of cash either, judging it costly to keep, and some are imposing fees after jawboning customers to move it.

   

  The banks’ actions are driven by profit-crunching low interest rates and regulations adopted since the financial crisis to gird banks against funding disruptions.

   

  The latest fees center on large sums deemed risky by regulators, sometimes dubbed hot-money deposits thought likely to flee during times of crises. Finalized last September and overseen by the Federal Reserve and other regulators, the rule involving the liquidity coverage ratio forces banks to hold high-quality liquid assets, such as central bank reserves and government debt, to cover projected deposit losses over 30 days. Banks must hold reserves of as much as 40% against certain corporate deposits and as much as 100% against some deposits from hedge funds.

  Yes, that’s right, banks are forced to hold either Fed reserves or USTs to guard against the dangers associated with…cash.

  That sounds strange on the surface, but it all comes back to the fact that fractional reserve banking is just one giant ponzi scheme. It’s a confidence game, plain and simple. I, the bank, take your money which I claim you can have back any time you want or need it, and then I go and lend that money out to someone else who might not pay it back for decades, if at all. If you – or, more accurately, a bunch of yous – come beating down the doors all wanting your money back at once, I won’t be able to give it to you because I lent it out to someone else. So the idea is to make banks guard against that possibility by identifying the types of depositors who are likely to come wanting large portions of their money back in a pinch and make financial institutions hold reserves against that funding. 

  Well, if I’m the bank and I’m going to have to hold reserves against your cash and on top of that my NIM is already in the doldrums, plus I’ve got plenty of deposits, plus the cost of deposit funding is about to rise possibly before I can realize any kind of rebound in my margins, why do I want your deposits when I’m already awash with fungible liquidity?

  The answer is: I don’t. 

  Here’s WSJ again:

  The push comes as the globe is awash in cash, reflecting soft economic growth and low interest rates that limit investment. Some asset managers have been increasing the amount of cash they are holding in their portfolios, in part because of an increased focus by the Securities and Exchange Commission on liquidity management in mutual funds.

   

  Domestic deposits at U.S. banks in the second quarter hit $10.59 trillion, up 38% from five years earlier, Federal Deposit Insurance Corp. data show. Loans outstanding at U.S. banks as a share of total deposits tumbled to 71% from 78% in 2010 and 92% in mid-2007, before the financial crisis, the data show.

   

  

  
  

  Jerome Schneider, head of Pacific Investment Management Co.’s short-term and funding desk, which advises corporate and institutional clients, said that as a result of the bank actions, he and his customers have discussed as cash alternatives boosting investments in U.S. Treasury bonds, ultrashort-duration bond funds and money-market funds.

   

  When it comes to cash, Mr. Schneider said, “Clients have been put on warning.”

   

  Banks are struggling to generate returns for investors. A low-interest-rate environment squeezes bank profits by narrowing the spread between the rate they lend at and their borrowing, or funding, cost.

   

  Deposit fees are particularly significant at State Street because its primary business is custodying client assets, including holding cash for clients rather than seeking to lend out those funds, as other banks typically do.

   

  State Street customers earlier were told that fees were possible on accounts whose nonoperational balances had grown, the people familiar with the matter said. There is no minimum deposit size that triggers the fee, which varies and is applied case by case to new and existing clients, the people said.

   

  “The persistence of the current rate environment requires that we take action consistent with prudent financial management with certain accounts that continually maintain significant excessive cash balances,” State Street said in a statement to The Wall Street Journal.

   

  BNY Mellon and Northern Trust haven’t yet begun charging to hold clients’ cash, people familiar with the matter said.

  A Bank of New York spokesman said the bank hasn’t ruled out doing so in the future.

   

  Since last year, Bank of America Corp. has told some institutional clients that they will need to move their deposits or pay to keep them at the bank, people familiar with the matter said.

  And while small depositors are for the time being immune, anyone who has dealt with a TBTF bank in the post-crisis years knows that there are enough fees levied on a variety of services and transactions to take the real return on your savings into negative territory. 

  Of course everything described above represents a kind of de facto NIRP rather than de jure NIRP, but as those who followed last month’s FOMC decision closely are no doubt aware, one dot now suggests that the US is about to take an officially sanctioned trip into the Keynesian Twilight Zone:

  
  

  

  

  

  

  

• Meet The New Generation Of Traders

  Having spent the last 5 years of his trading career "in short option spreads and Biotech," we are sure Tyler McCain and his Fed-fueled ilk are very well equipped to deal with whatever it is that The Fed has in store for the markets next…

  Good luck Tyler.

  

   

  Luckily, Tyler has corrected his initial Bio which showed his spreading options from the nursery…

  

   

  If only Tyler had a math Ph.D, Virtu would hire him on the spot – after all the HFTs are smart and they know that when the scapegoating begins, they will need a few sacrificial lambs besides just the algos to throw at the regulators.

  h/t @zzlangerhans

  

  

  

  

  

• Show Of Hands: Who's Interested In A CDO Backed By A Pool Of Subordinated Community Bank Debt?

  It’s no secret that the global hunt for yield is herding investors into riskier and riskier assets fueling demand not only for traditional HY bonds, but for more esoteric paper as well such as auto- and student-loan backed ABS. 

  This is the inevitable consequence of seven years of ZIRP and now NIRP. With nowhere to run and an ocean of liquidity at their fingertips, investors search out opportunities in corners of the market where they might not normally have dared to tread. 

  Earlier this year, we noted that Goldman was set to resurrect the synthetic CDO with a marketing pitch that included the phrase “bespoke tranche opportunity.” Of course any time Goldman pitches you something as an “opportunity” it’s best to ask: “Yes, but is that for you or for me?” In other words: “Am I about to get muppetized here?”

  But the main draw for Goldman (and others) on these deals is that the underwriting fees are higher. What they’re essentially doing is allowing investors to try their hand at picking individual credits to bet on/against and if you’re good at that sort of thing, there might indeed be a chance for you to pick up a nice CDS premium. But if it turns out you aren’t as good as you thought you were when it comes to judging idiosyncratic credit risk in a dicey environment (see the Valeant case for an example of what can go wrong), well then you could get yourself into trouble. 

  In any event, the longer investors remain mired in ZIRP, the louder the calls will be for the creation of products that offer some semblance of yield. 

  As we said back in February, the Bloomberg piece that announced the Goldman deal was the latest installment in a series of articles that pop up every so often in the financial news media touting the resurgence of structured credit and, more specifically, CDOs. Cue another in this series. Via Bloomberg:

  Joshua Siegel is bringing back one of the most toxic financial vehicles ever devised and arguing that this time it’s going to be different.

   

  His StoneCastle Financial is among the hedge funds that are reviving the collateralized debt obligation, or CDO.

  CDOs stuffed with mortgages and their derivatives caused billions in losses around the world during the 2008 crisis.

   

  The CDO that StoneCastle put together is a little different. 

  Oh, really? How so?

  It’s backed by subordinated debt issued by about 35 community banks, some of them so small they don’t have credit ratings.

  Great. A collateral pool full of subordinated community bank debt. Sounds promising.

  But don’t worry, Siegel has done this before:

  This isn’t the first time Siegel pooled small-bank debt into a structured financial product. At Salomon Smith Barney in the late 1990s, he proposed bundling banks’ trust-preferred securities, a predecessor to subordinated debt, into so-called TruPS CDOs.

   

  The trick to doing it right, according to Siegel, is regional diversification.

   

  In a 2001 research report, Siegel divided the U.S. into five regions and wrote that the geographic diversity of the banks whose TruPS he used — picking debt from different areas — would make the CDOs safer.

  Yes, “geographic diversity would make it safer.” 

  You see this is just a derivative (no pun intended) of the same old argument everyone used to justify the supposed “safety” of anything backed by a mortgage in the lead up to the crisis. The contention is that while individually, the loans in the collateral pool may be crap, and while crap in isolation is just, well… crap, a bunch of crap pooled becomes “investment grade” and is thus “safer.”

  Of course that all fell apart in 2008:

  But banks failed all over the country in the 2008 credit crunch, throwing shade on Siegel’s original theory about regional diversification. Larry Cordell, a vice president at the Federal Reserve Bank of Philadelphia, said that’s because too many banks’ portfolios were concentrated in real estate and mortgages. They weren’t diversified enough, he said. The market for TruPS CDO collapsed. Some investors are still waiting to be repaid.

  But that’s not going to stop Siegel from doing the exact same thing again: 

  TruPS issuance has fallen to zero while publicly traded banks sold $12.3 billion of sub-debt, as it’s called, in 2013, about four times what they issued between 2009 and 2012, according to SNL Financial.

   

  Brett Jefferson, president of Hildene Capital Management in Stamford, Connecticut, said that sub-debt CDOs are simply a retooling of TruPS CDOs.

   

  “It’s a flavor of the old deals,” Siegel said. 

  It sure is, and we won’t blame anyone for whom that flavor has left a bad taste.

  

  

  

  

  

• 5 Corporations Sucking California Dry During The Drought

  Submitted by Jake Anderson via TheAntiMedia.org,

  As most people in the country know by now, California is currently suffering from a severe, record-breaking drought. In fact, it’s the worst drought in 1,200 years. While Governor Jerry Brown recently issued a mandate for people to start conserving water, large corporations use up and waste vastly more water than individuals and small businesses, often in ways that are detrimental to the environment.

  Let’s take a look at five of the most massive corporations in California that are the worst culprits when it comes to wasting water:

  1. Nestle

   

  Nestle, once mainly known for its chocolate bars, is now becoming increasingly notorious for the way it uses up water in its bottled water products. Nestle, of course, has been criticized for using up water in drought-stricken third world countries. However, it is also doing this right at home in California. For example, one of the places where Nestle gets water is on the Morongo Reservation in the Cabazon region of the state. This is an area where groundwater levels of water have been steadily declining in recent years.

   

  2. Harris Ranch

   

  Harris Cattle Ranch is the largest producer of beef in California. At last count, it produced more than 150 million pounds of beef per year. While much of the attention on conserving water is focused on individuals, the fact is that more than 90% of the water used in California is used by agriculture. Cows consume more than twenty times as much water as humans. Crops such as soybeans and corn, which are heavily subsidized by the government, also use up massive amounts of water.

   

  3. Occidental Petroleum

   

  Occidental Petroleum is one of the oil companies in California that use enhanced oil recovery techniques, more commonly known as ‘fracking’. This is a practice that has become increasingly controversial due to potential health risks and suspected fracking-related seismic activity. Fracking also uses up large amounts of water. According to one estimate, a single well may use more than 5 million gallons of water to extract resources. Recent evidence also suggests that fracking companies have dumped waste water into aquifers, which contaminates the water with pollutants such as heavy metals and radiation.

   

  4. California Dairies, Inc.

   

  California Dairies, Inc. is the largest dairy processing cooperative in the state, producing 43% of California’s milk and 9% of the milk of the entire country. Along with beef, dairy production is another practice that uses up incredible amounts of water. It actually takes as much as 30 gallons of water to produce one gallon of milk.

   

  5. Paramount Farming

   

  Paramount Farming is the largest producer in the nation of nuts such as almonds and pistachios. Almond production alone uses up more water than is used by both residents and businesses in Los Angeles and San Francisco combined. Most nuts grown in California are exported to various parts of the world.

  California’s drought is a serious and complex issue. Solving it will take an effort on the part of many people, including individuals, politicians and businesses. When studying this issue, however, it’s important not to ignore the considerably more massive part played by large companies. We have seen what happens on a geopolitical level when vital resources begin to dwindle, and I’m not talking about Frank Herbert’s Dune, which features a planet in which the scarcity of water has made it the most precious of substances. People can help to conserve water in many ways. More importantly, in addition to using less water with everyday tasks, people can pay more attention to what type of products they buy and consume. If you are interested in the macro view of water conservation, consider boycotting the companies and industries listed above.

  

  

  

  

  

• SPaCe BuSH…

  

  

  

  

  

• PM-Elect Of 'US Ally' Canada Wastes No Time: Tells Obama Will Withdraw Fighter Jets From Syria, Iraq

  With the ink still damp on voter slips, newly crowned elected Canadian Prime Minister Justin Trudeau wasted no time in fulfilling the first of his liberal "hope" and "change" promises. As AFP reports, hours after defeating Stephen Harper, Trudeau has told US President Obama that he will withdraw Canadian fighter jets from Syria and Iraq, though giving no timeline. So far, the US response is a mutedly diplomatic but tinged with guilt, "We have stood shoulder to shoulder with Canadian armed forces… in Iraq and Afghanistan," from the US State Department.

  "About an hour ago I spoke with President Obama," Trudeau told a press conference.

   

  While Canada remains "a strong member of the coalition against ISIL," Trudeau said he made clear to the US leader "the commitments I have made around ending the combat mission."

   

  Canada last year deployed CF-18 fighter jets to the region until March 2016, as well as about 70 special forces troops to train Kurds in northern Iraq.

   

  During the campaign, Trudeau pledged to bring home the fighter jets and end its combat mission. But he vowed to keep military trainers in place.

   

  His new Liberal government will be "moving forward with our campaign commitments in a responsible fashion," Trudeau said.

   

  "We want to ensure that the transition is done in an orderly fashion."

  Earlier on Tuesday, as Sputnink News reports, the US State Department addressed questions as to whether or not it was concerned that Canada's new government may not support US foreign policy regarding IS presence in Afghanistan.

  "These are all decisions the Canadian people have to make and Canadian legislators have to make… and their Prime Minister [has to make]," department spokesperson John Kirby told reporters.

   

  "We have stood shoulder to shoulder with Canadian armed forces…in Iraq and Afghanistan," he added.

  *  *  *

  While this move seems like a hope-y and change-y step forward, the lack of timeline leaves plenty of room for the neocons to knock on Trudea's door and shower gifts on an economy floundering on the verge of "Emerging Market" status (as HSBC analysts warned).

  

  

  

  

  

• Then It Was BlackRock, Now It's Blackstone But The Result Will Be The Same

  Whether one calls it the latest glitch in the matrix, or yet another “market peak” indicator, the outcome will be the same.

  First, a flashback to the following October 17, 2006 Bloomberg story when BlackRock together with Tishman, announced it would buy Stuyvesant Town for $5.4 billion:

  Tishman Speyer Properties LP, the owner of New York’s Rockefeller Center, and BlackRock Realty won the auction to buy MetLife Inc.’s Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, for $5.4 billion.

   

  MetLife, the biggest U.S. life insurer, has been divesting Manhattan property holdings since last year, when it paid $11.8 billion for Citigroup Inc.’s Travelers Life & Annuity insurance business. MetLife sold its namesake building at 200 Park Avenue to closely-held Tishman Speyer in April, 2005, for $1.72 billion.

   

  “This is just a rare, rare opportunity” to buy 80 acres of Manhattan, said Robert White, president of Real Capital Analytics Inc., a New York-based real estate research firm. “Also, we’re in a period where a lot of real estate investors are flush with cash, so billion-dollar deals are not so uncommon anymore.”

   

  The sale may be the biggest real estate transaction in U.S. history, said Steve Murray, editor of Real Trends, a residential real estate communications company. The United States government paid $15 million for the Louisiana Purchase in 1803, the equivalent of $277 million in today’s dollars, according to the historical price calculator measuringworth.com. The median price of new homes in the U.S. was $237,000 in August, up .34 percent from $236,200 a month earlier, according to the U.S. Census bureau. The median price of Manhattan condos rose 1.5 percent to $990,000 in the second quarter from $975,000 in the first, according to Miller Samuel Inc., the biggest Manhattan appraiser.

  Fast forward 4 years to 2010 when Blackrock and Tishman admitted a complete loss on their “rare, rare opportunity” investment:

  The partnership that bought the 80-acre property on the East River announced on Monday that it was turning the keys over to its lenders after it defaulted on its loans and the value of the property fell below $2 billion. Yet in walking away, the partners, Tishman Speyer Properties and BlackRock Realty, have left tenants in limbo and other investors with far bigger losses.

   

  “At the time, it looked like a sound investment,” said Clark McKinley, a spokesman for Calpers, the giant California public employees’ pension fund, which bought a $500 million stake in the property. “When the market tanked, we got caught.”

  And then, today, only it is no longer BlackRock, now it is Blackstone which is again buying Stuy Town for the same amount: $5.3 billion.

  Blackstone, working with Canada’s Ivanhoe Cambridge Inc., will acquire the 80-acre (32-hectare) enclave for about $5.3 billion, the company and city officials said Tuesday. That’s just under the record $5.4 billion that prior owners Tishman Speyer and BlackRock Inc. paid almost nine years ago before walking away from the mortgage in 2010, marking one of the biggest collapses in the last decade’s real estate boom.

   

  Blackstone — which has built itself into the largest U.S. single-family home landlord and is bulking up an apartment business — made its first multifamily purchase in Manhattan in September, leading a venture that acquired 24 buildings for $690 million. Gray said this month that he was bullish on the borough’s rentals because it’s too costly for many residents to buy.

   

  The transaction was formally announced at a press conference Tuesday featuring New York City Mayor Bill de Blasio, Blackstone real estate chief Jon Gray and City Councilman Daniel Garodnick, a lifelong resident of Stuyvesant Town-Peter Cooper Village.

   

  “We can now say to thousands of hard working people, thousands of families in Stuytown: Your future is now secure,” de Blasio said from a courtyard in the complex, flanked by long-time tenants who just learned of the deal. “You can afford your housing for the long haul.”

  Actually no: “The deal includes an agreement that would keep almost half of the more than 11,000 apartments affordable for 20 years.” Which means more than half will suddenly become unaffordable, once Blackstone yanks rents through before the ink on the title deed is even dry.

  As for the obligatory forecast:

  Stuyvesant Town is “so big, it’s so well located, there’s still so much upside in it that someone is still going to make a lot of money if you hang in there,” said Peter Hauspurg, chief executive officer of brokerage Eastern Consolidated, who isn’t involved in the deal.

  Or just call it a “rare, rare opportunity”, again.

  And because this time is not different, we eagerly look forward to 2019 when Blackstone is BlackRocked, and it too, suffers a complete loss on its “rare, rare opportunity” investment.

  

  

  

  

  

• Confusion, Delusions, & Illusions

  Submitted by Jim Quinn via The Burning Platform blog,

  Two recent surveys, along with numerous other studies and data, reveal most American households to be living on the brink of catastrophe, but continuing to act in a reckless and delusionary manner. There have certainly been economic factors beyond the control of average Americans that have resulted in real median household incomes remaining stagnant for the last 36 years. The unholy alliance of mega-corporations, Wall Street and bought off corrupt politicians have gutted the nation of millions of good paying jobs under the guise of globalization, while utilizing debt, derivatives and financial schemes to enrich themselves. The malfeasance of the sociopathic privileged class does not discharge the personal responsibility of citizens for living within their means. A lack of discipline, inability to delay gratification, failure to understand basic mathematical concepts, materialistic envy, absence of critical thinking skills, and a delusionary view of the world have left the majority of Americans broke and in debt.

  The data that captured my attention was how little the average American household has in savings. Roughly 62% of Americans have less than $1,000 in savings and 21% don’t even have a savings account, according to a new survey of more than 5,000 adults conducted this month by Google Consumer Survey for personal finance website GOBankingRates.com. This dreadful data is reinforced by a similar survey of 1,000 adults carried out earlier this year by personal finance site Bankrate.com, which also found that 62% of Americans have no emergency savings for a medical crisis, car repair, or unanticipated household expenditure.

  

   

  The fact is these are not highly unlikely scenarios. They happen every day as part of our routine existence. Everyone gets sick. Every car eventually needs new tires or an engine repair. Every home will need a new hot water heater or roof at some point. It is foolish and short sighted to not expect “unexpected” expenditures. Living in the moment and fulfilling your immediate desires may feel good today, but leaves you susceptible to disaster tomorrow. Gradually building a rainy day fund over time is what adults should do. Only immature children operate with no safety net. Everyone has an excuse for why they end up living on the edge, but the data exposes us to be an infantile nation of spendthrifts incapable of distinguishing between wants and needs. It might be understandable for young adults who are burdened by student loan debt and entry level jobs to have little or no savings, but the data for older Americans is most disturbing.

  It seems 51% of all Generation X adults between the ages of 35 to 54, in the prime earning years of their lives, have ZERO savings, the highest among all age cohorts, with over 20% of them not even having a savings account. This is incomprehensible and reveals an almost juvenile approach to life. Approximately 70% of all 35 to 54 year old households have $1,000 or less in savings. These are people who should have been working for the last 10 to 30 years. To not have put aside more than $1,000 is beyond irresponsible, and the justification of earning no interest on savings is disingenuous as they could have earned 5% up until 2008. This shocking state of affairs can’t only be laid at the feet of the evil bankers and rich corporate titans.

  Every person has to accept personal responsibility for their own life. There is one sure fire way to accumulate savings and that is to spend less than you earn. It sounds simple, but the vast majority of Americans have chosen to live beyond their means by allowing themselves to be lured into debt by the Wall Street debt peddlers and their Madison Avenue media maggots selling dreams to willfully ignorant delusional consumers. Consumer dependent corporations hawking autos, electronics, glittery baubles, fashionable attire, toxic processed sludge disguised as food, and other slave produced Chinese crap, require a vast unlimited supply of easy money debt to keep profits rolling in. And the Federal Reserve has been willing and able to accommodate them.

  Those who control the levers of this perverted economic system utilize Fed easy money, propaganda advertising messages, and the susceptibility of an oblivious populace, suffering from delusions of grandeur, to create generations of debt enslaved hamsters running on the wheel of life. But, we were not forced into this enslavement. Millions have chosen to live lives of quiet desperation in order to keep up with the Joneses. They would rather portray themselves as successful and wealthy, rather than make the necessary sacrifices required to achieve success and wealth. Everyone has the ability to live beneath their means. Millions have made the choice to do so. The chart above shows 10% to 20% of people do have $10,000 or more in savings, including young people. Many are average middle class Americans, not the despised 1%.

  

  It is certainly not easy to accumulate savings in an economy stacked against the working middle class, but it is possible. It requires self-discipline, deferring gratification, patience, budgetary skills, staying employed, and not coveting your neighbors’ possessions. The lack of short-term savings is not an isolated data point. It is representative of a nation of narcissistic live for today ne’er-do-wells who rarely concern themselves with the future or the consequences of their actions. They haven’t been putting all their spare cash into their retirement plans either. When you realize the typical household between the ages of 35 to 54 has less than $10,000 saved for their retirement, the mass delusion becomes clear. How could Boomers, who have worked for 30 to 40 years, and experienced the greatest bull market in history (1981 – 2001) have only $12,000 of retirement savings as they approach retirement?

  

  These are median figures, so half the households have even less retirement savings. It requires decades of living above your means to accumulate such little in savings. The apologists for the non-saving masses often argue Americans were utilizing their homes as a store of wealth to be used in retirement. This is just another false storyline, as the savings poor public used their homes like an ATM machine from 2001 through 2008, extracting hundreds of billions to spend on granite countertops, exotic Caribbean vacations, home theaters, BMWs, Olympic sized pools, bling, and new boobs for mommy. Equity in homes plunged from 60% to below 40% in the space of a few years and has only recovered to 55% after the Fed induced faux housing recovery. There are still millions of homeowners underwater, with the next leg down guaranteed to add millions more.

  

  The millions of American households living on the edge and headed for a poverty stricken old age have a million excuses for why they never saved a dime. These are the same people who will demand the government save them from their own foolishness and irrational life choices. They will demand the rich (anyone who worked hard, saved, and planned for their future) be taxed more, so they don’t have to live with the consequences of their reckless disregard for common sense and self-discipline. These people should have read some Shakespeare in high school, and maybe they wouldn’t be in this predicament.

  “The fault, dear Brutus, is not in our stars, but in ourselves.” – William Shakespeare, Julius Caesar

  We are all responsible for our own lives and our own decisions. It isn’t complicated regarding how to save money. But it is hard. It requires simple math skills like addition, subtraction, multiplication and division – concepts not thought too important in our government controlled educational system. It requires self-control, acting like an adult, and distinguishing between what you want versus what you need. It’s OK to splurge once in a while, but since around 1980, multiple generations have been binge spending in an orgy of debt debauchery unmatched in human history. Since 1980 the U.S. population has gone up by a factor of 1.42, GDP has expanded by a factor of 6.3, and consumer debt has exploded by a factor of 10. The amount of consumer debt per person in 1980 was $9,300. Today, the total is an astounding $65,200 per person, a 700% increase in 35 years. We owe $21 trillion of mortgage, credit card, student loan and other debt to the felonious Wall Street bankers. This nation has gone insane.

  

  “In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.” – Friedrich Nietzsche

  With a median household income of about $56,000 and median net wages per worker of $29,000 it is fairly easy to grasp the monthly inflow of a middle income household. In Median World, taxes will take about a 16% chunk out of those figures, so the median household ends up with about $4,000 of take home pay per month. If they own a median priced home of $189,000, their monthly mortgage payment would likely be about $850. Add another $200 to $300 per month for property taxes and you are on the hook for $1,100 per month. A median rent figure would be in the same ballpark, unless you live in SF, NYC or a few other overpriced markets. This is where many people go off course, allowing themselves to be lured into more house than they can really afford with low down payments guaranteed by the government, driving the monthly housing burden north of $1,500. McMansion envy has destroyed more lives in the last ten years than any other delusion.

  Food, clothing, utilities, and home upkeep expenses could total $1,500 per month for a family with kids. If one or both parents are stuck with student loan debt, a monthly payment of $200 to $400 would be normal. There isn’t much spare change left to fund their remaining needs, wants and desires. But their neighbors and coworkers are all driving new cars. They can’t be seen driving a used 10 year old clunker. People will think they’re poor. Shallow appearances are all that matter to a vast swath of America. According to Edmunds.com, the average monthly payment on a new vehicle is $479. We can’t have one spouse driving a new car, while the other slums it on public transportation, so two newer cars will add another $900 or so of expenses to the monthly budget.

  Wall Street and the automakers are only too glad to offer those with good credit a 7 year 0% loan, guaranteeing a permanent status of being underwater on your loan until you must have that new model after four years, rolling the underwater loan into the next purchase. The permanent leasers convince themselves they are making a good deal as they sign their lives away every three years without understanding the financial implications of the leases. And then there are the 20% subprime auto buyers who pretend to pay until the repo man shows up in the middle of the night. This delusion of debt is how annual auto sales have soared from 10 million in 2009 to almost 18 million today.

  

  I’m on the road every day and it is mind boggling to see the number of newer $30,000 to $50,000 vehicles cruising the highways and byways of America. Even in the poverty stricken neighborhoods of West Philly, brand new BMWs, Cadillacs, and other $25,000 or more vehicles are parked in front of dilapidated hovels and low income housing complexes. Virtually none of these vehicles are owned outright. Americans are essentially renting their luxury wheels so they can appear successful. The way to become financially successful on a modest income is to buy used cars and drive them for ten or more years. The years of no car payment can be directed into savings. Very few people chose this path. That is why auto loan debt has now exceeded $1 trillion, up 40% since 2010. Wall Street wants you in perpetual debt and millions have bought it hook line and sinker. But at least they appear prosperous to their neighbors, while they’re really in debt up to their eyeballs.

  

  The choice to indulge in driving over-priced ornamental transportation basically leaves the average household with little or no discretionary income at the end of the month. But that doesn’t stop spendthrift nation from becoming addicted to their mobile phones and binge watching reality TV. The average American, who had never heard of a mobile phone in 1990, now can’t go 20 seconds without checking their phone. And they are paying through the nose for the privilege of staying terminally connected. We have smart phones for dumb people. Even welfare recipients without jobs, living in low income housing and dependent on food stamps, somehow find the funds to have a smartphone in their hand 24/7. Maybe directing those funds towards books might give them a better chance of exiting poverty.

  In one survey, 46% of Americans with mobile phones said their monthly bill was $100 or more and 13% said their monthly bill topped $200 per month. The average individual’s cell phone bill was $73 per month last year, a 33% increase since 2009, according to J.D. Power & Associates. When they aren’t texting, tweeting, or facebooking on their iGadgets, they are watching basic cable boob TV at average price of $100 per month, up 39% since 2010. But our connoisseurs of crapola need the NFL Package, HBO, Showtime, Netflix, and on demand porno. Tricked out smart phones and cable packages are not necessities. They are wants. Wasting $200 to $300 per month on narcissistic compulsions is a choice.

  Possibly the largest squandering of resources occurs on a daily basis, as Americans spend money they don’t have on $5 lattes, toxic fast foodstuff, craft beers, and whatever else strikes their fancy. According to the most recent Bureau of Labor Statistics consumer expenditure surveys, the typical household spends $2,625 each year, or around $219 per month, on food away from home. Those in higher income brackets spend the most on restaurants at around $370 per month. Millennials, with the least amount of discretionary funds, view dining out as a social event, and choose fun and frivolity over finances. The concept of brown bagging your lunch for $1 rather than spending $10 at Paneras, or brewing a pot of coffee for 25 cents rather than paying $5 at Starbucks is inconceivable to the live for today credit card cowboys and cowgirls.

  

  Dining out is the ultimate personal choice and a huge factor in the non-existent savings of American households. Over the last two decades Americans have abandoned the frugality of buying food at the grocery store on sale, using coupons in favor of eating out at a hefty premium on a daily basis. The result has been a $10 billion gap in spending between groceries and dining out being obliterated by an army of live for today for tomorrow we can make the minimum payment on our credit card juveniles. Not only has this penchant for satiating their hunger contributed greatly to their lack of savings, but has been financed on their credit cards. That $25 Applebees dinner, financed at 18% interest over the next ten years ends up costing $54. Multiply this foolishness hundreds of times per year over decades and you understand why Boomers have less than $1,000 in savings accounts and $12,000 or less in retirement savings. It’s just math.

  

  The expenditures detailed above don’t include healthcare, entertainment, vacations, government extractions (tolls, fees, fines, taxes) and assorted other miscellaneous wastes of money. It is pretty clear the monthly outflow exceeds the monthly inflow for the majority of Americans. That is why the average household has credit card debt of $7,500 and those carrying a balance pay an average interest rate of 14% on their $16,000 ball and chain. This is on top of an average mortgage obligation of $155,000 and average student loan commitment of $32,000. The Wall Street hucksters are only too happy to help you finance a lifestyle well above your true means. They borrow from the Fed at .25% and charge you 10% to 20% for the use of credit created out of thin air. They always win. The willfully ignorant are thrilled they can now pay their IRS bill, property taxes, utilities, and just about every daily expense with a credit card. They fail to acknowledge the insanity of their chosen lifestyle path.

  I still remember something my sophomore English teacher Mr. McGrath taught the class, based upon the writings of Aristotle. Human beings are rational, sentient, living, corporeal substances. What separates us from animals is our ability to think and act in a rational manner, rather than just on instincts and urges. Based on what has occurred in this country over the last 35 years, I’m starting to question the rational part. It’s almost as if a mental illness has befallen a majority of Americans. The Deep State and their minions on Wall Street and the corporate media certainly attempt to mold and manipulate the minds of the masses, but at the end of the day people are free to disregard those messages and live meaningful lives on their own terms. Even though living above your means has become “normal”, it is only normal in relation to our profoundly abnormal society. Telling people the truth today is meaningless, as they don’t want their illusions destroyed. But destroyed they will be, when this teetering edifice of debt comes crashing down on their heads.

  “The real hopeless victims of mental illness are to be found among those who appear to be most normal. Many of them are normal because they are so well adjusted to our mode of existence, because their human voice has been silenced so early in their lives, that they do not even struggle or suffer or develop symptoms as the neurotic does.” They are normal not in what may be called the absolute sense of the word; they are normal only in relation to a profoundly abnormal society. Their perfect adjustment to that abnormal society is a measure of their mental sickness. These millions of abnormally normal people, living without fuss in a society to which, if they were fully human beings, they ought not to be adjusted.” – Aldous Huxley – Brave New World Revisited

  

  “Sometimes people don’t want to hear the truth because they don’t want their illusions destroyed.” – Friedrich Nietzsche

  

  

  

  

  

• Economists Stunned By "Irrational Consumers" Who Used Gas Savings To Buy More Expensive Gas

  Over the past year, we have repeatedly given the quantitative answer that has stumped so many: where did all those overhyped US “gas savings” go, because they certainly did not go into the broader economy, or toward discretionary purchases, as countless economists had said they would. The answer: more gas.

  Gallup confirmed as much most last week when it reported that Americans’ reported changes in spending have remained stable in most categories of goods and services over the past year – except for gasoline, with 35% reporting they spent more on gasoline in the August-September period.

  Paradoxically, Gallup found the inverse of what had become erroneous conventional wisdom: “not only were Americans not spending more, they are spending less than they did in the past year on discretionary purchases such as retirement investments, leisure activities, clothing, consumer electronics, dining out and travel.”

  But while we knew the quantitative answer, namely that Americans bought more gas with their gas savings, we were missing the qualitative one. Courtesy of the NYT we now learn that not only did consumers not redirect their spending to other discretionary items, but engaged in an act that has stunned economists around the globe: they don’t just buy more gasoline; they bought more expensive gasoline!

  And this is how a product that was essentially a staple good, suddenly provided the satisfaction of a discretionary splurge, even though it is virtually the same just more expensive.

  The NYT explain this observation which is just the latest mockery of macroeconomist models, and once again shows why theory never applies to the real world.

  A new report by the JPMorgan Chase Institute, looking at the impact of lower gas prices on consumer spending, finds the same pattern as earlier studies. The average American would have saved about $41 a month last winter by buying the same gallons and grades. Instead, Americans took home roughly $22 a month. People, in other words, used almost half of the windfall to buy more and fancier gas.

  The refiners will be delighted:

  We know how that extra money was probably spent thanks to a separate 2013 study by the economists Justine Hastings of Brown University and Jesse M. Shapiro of the University of Chicago, who got their hands on detailed accounts of the purchases made by 61,494 households at an unidentified retail chain that also sold gas.

   

  Professors Hastings and Shapiro showed that households adjusted their gas consumption much more sharply in response to changes in gas prices than in response to equivalent changes in overall income. In the fall of 2008, for example, as gas prices fell amid a broad economic collapse, consumers responded as if the decline of gas prices were the more important event, significantly increasing purchases of premium gas.

  And this is where the head of every tenured economist living in their ivory academic tower, and tweaking economic models they themselves created and thus know the goalseeked answer apropri based on their own preset assumptions, explodes.

  This is not rational behavior. Americans spent about 4 percent of pretax income on gas in 2014. One might expect them to spend about the same share of any windfall at the pump — maybe a little more because gas got cheaper. Instead they spent almost half.

   

  Americans, in short, have not been behaving like the characters in economics textbooks.

  Inconceivable: after all academic central planners are in charge of the entire world – what would happen if suddenly it becomes common knowledge that the entire “New Normal” experiment has failed because the lifetime academic hacks inside the Marriner Eccles building don’t realize their theoretical models have zero applicability in the real world?

  At least when it comes to the “premium gas” paradox, there is an explanation:

  Researchers have found that people treat money as earmarked for particular kinds of spending, a tendency behavioral economists call “mental accounting.” If someone is buying rounds at the neighborhood bar, people tend to treat the money they didn’t spend as “beer money,” and sooner or later they tend to spend it disproportionately on beer. As a result, they end up drinking more beer than they had originally intended.

   

  The JPMorgan study compares gas spending between December 2013 and February 2014, when prices averaged $3.31 a gallon, with gas spending by the same people in the same period one year later, when average prices were one dollar lower. The study found that the average American spent $136 per month on gas during the high-price period and $114 per month on gas during the low-price period. While the price of gas fell by roughly 30 percent, spending on gas declined by only 16 percent.

   

  The study, based on the spending patterns of about one million JPMorgan customers, does not track the kind of gas consumers purchased. It shows that people bought more gas as prices fell, and that the increase in consumption is not sufficient to explain the entirety of the increase in spending on gas.

  And perish the thought someone actually saved it, but no fear: the upcoming negative interest rates will surely fix that pesky glitch in the economists’ model. Unless they don’t, and economists end up scratching their heads at even more “irrational” behavior:

  Moreover, this behavior was prevalent: 61 percent of the households made at least one irrational gas purchase. People “treat changes in gasoline prices as equivalent to very large changes in income when deciding which grade of gasoline to purchase,” they wrote.

  At the end of the day, though, the joke is on the consumers themselves: as the FTC notes, for most modern cars “splurging” on premium gas is usually a waste of money. At least the refiners are laughing all the way to the bank, as economists the world over continue to scream that any minute now “irrational” consumers will finally make the spreadsheet’s life easier, and engage in rational behavior.

  

  

  

  

  

• How The Entire Short Volatility ETF Complex Could Be Wiped Out Overnight

  Excerpted from Artemis Capital Management letter to investors,

  Global central banking has artificially incentivized bets on mean reversion resulting in tremendous demand to short volatility.  The growth of short volatility exchange traded products (“ETPs”) since 2012 is nothing short of extraordinary and at the end of August, total short volatility assets exceeded long for only the second time in history. The rise of this short complex is intrinsically linked to the recent schizophrenic behavior of the VIX and adds significant shadow convexity to markets.

  

  Velocity Shares Daily Inverse VIX (“XIV”) is the largest of these short VIX ETPs and has a cult-like following among day traders. Although the product has gained +111% since 2012, when decomposed on a risk-adjusted basis, it basically resembles a 3x levered position in the S&P 500 index with more risk. As the short and leveraged volatility complex becomes more dominant it is contributing to dangerous self-reinforcing feedback loops with unknowable consequences.

  

  Many retail investors simply do not understand that short and leveraged volatility ETPs rebalance non-linearly (see below). To the casual observer it may appear that short and long assets counterbalance one another but this is not the case. For example if the first two VIX futures move 20% higher the short volatility ETP providers must buy an estimated 33% more volatility (vs. 25% for long) to balance that exposure. The first rule of derivatives hedging is that you never hedge a non-linear risk with a linear tool.  The mismatch means a large move in spot-volatility in either direction requires excessive buying or selling pressure whenever short volatility assets are dominant. Therein lies the problem. Falling volatility begets falling volatility and rising volatility begets rising volatility.

  

  The great unknown is that this massive short volatility animal that appears tame given a regular diet of central bank liquidity may turn wild when that liquidity is removed. The wrong ‘risk-off’ event may expose a hidden liquidity gap in the short VIX complex that could unleash a monster. Artemis has attempted to quantify this theoretical liquidity gap by gauging the percentage of VIX open interest and volume required by exchange-traded products for rebalancing.

  

  During recent market stress points such as October 2014 and August 2015 the short and leveraged volatility ETP complex required upward of 40-50% of the total liquidity of VIX futures as measured by average trading volume and open interest. Consider that the largest one day VIX move in history was the +64% jump that occurred on February 27, 2007 when the VIX went from 11.15 to 18.31. This was not even a period of high financial stress! If a similar volatility spike occurred today, given the current size of the short VIX complex, the ETPs by themselves would require an estimated 95% of the liquidity for rebalancing!

  This would drive the price of the VIX futures up further exacerbating the nonlinearity. The VIX futures market may struggle to absorb the demand for long volatility. Dealers seeking to plug the liquidity gap would purchase S&P 500 options and forward variance swaps. The excess buying pressure exerted from the short-volatility complex would then push spot-VIX higher contributing to panic selling in the underlying S&P 500 index and a vicious and self-reinforcing cycle of fear followed by horror.

  The recent bi-polar behavior in spot-VIX empirically supports the theory that a structural weakness now exists in this market by crowding of short volatility players. The shot across the bow for the short volatility complex came during the August 24th correction when SPX futures opened limit down and the CBOE struggled for 30 minutes to calculate the VIX. By the time the VIX level was finally calculated it opened 25 points higher at 53.29, before falling to 28 intra-day, then rebounding to 40.74 by the close, with the S&P 500 index down -3.9%.

  At the time of the crash, the assets in long VIX ETPs outnumbered shorts on a two to one basis however, the complex still required an estimated 25% to 46% of market liquidity between August 21 and 24th.  Markets delivered historic volatility-of-volatility despite relatively mild historical declines in the S&P 500 index.  It is important to understand that markets have experienced much more dramatic oneday losses across history than what occurred in August 2015. For example on August 8th 2011, the market suffered a oneday decline of -6.7%. September to December 2008 experienced ten declines of more than -5%, and on Black Monday 1987, the market fell an incredible -20.5% in one day. During the Black Monday 1987 crash implied volatility in the S&P 100 index more than tripled going from 36.37 to 150.19.

  If the VIX experienced any of these historic moves at current levels of short convexity the entire $2bn+ short volatility ETP complex would likely be wiped out overnight.

  Short volatility sellers ridicule the fact that the prospectus for the iPath Long Volatility ST Index (VXX) clearly states that the ETF has an expected long-term return of zero. They should ask themselves, is it better to know with certainty you are going to go bankrupt slowly, or be completely ignorant of the fact you will go bankrupt suddenly. 

  

  

  

  

  

• Bonds & Stocks Drop Amid Crude Carnage; Bills, Biotechs, & Big-Boy-Toys Battered

  For everyone who rushed to the safety of stocks as T-Bills collapsed on US default fears…

   

  The moment when reality sets in… Stocks suddenly realize that a collapsing T-Bill market is NOT bullish…

  

   

  The last time 1-month yields were in this panic mode, VIX was over 20…

  

  *  *  *

  Trannies love weaker crude prices today… (guess what happens next)

  

   

  and algos did their best to drag stocks back to unch (Nasdaq was ugly – see below)…

  

   

  The last two days have been somewhat crazy in terms of equity futures swings…

  

   

   

  The last few days have been very 'odd' in VIX with gaps and craps everywhere…

  

   

  FANGs FUBAR…

  

   

  Biotechs Brusied…

  

   

  HOG Hammered…

  

   

  Tesla Tanked…

  

   

  "You get a short squeeze, you get a short squeeze… everyone gets a short squeeze"

  

   

  Treasuries were broadly ugly today… with the same selling until Europe closese pattern…

  

   

  As 10Y yield caught up to stocks OPEX-ramp (note we have seen this flush before, right before stocks give way)…

  

   

  The USD dumped and pumped to end the day unchanged against the majors… with JPY weakness pumping up stocks…

  

   

  But the USD held on to gains against Asian FX…

  

   

  Commodities were mixed with precious metals drifting higher (even as the USD gained) while crude tumbled… (of course the post-NYMEX close panic-buying ramp happened)

  

   

  WTI Crude (Dec contract) hit its lowest since October 2nd intrday today…back below $46…and back below the crucial 50DMA

  

   

  And Oil volatility and the underlying ETF are converging…

  

   

  Charts: Bloomberg

  Bonus Chart: In case you needed reminding.. fun-durr-mentals

  Still a divergence on borrowed time pic.twitter.com/KSXIx83PMD

  — Not Jim Cramer (@Not_Jim_Cramer) October 17, 2015

  

  

  

  

• Ferrari Prices IPO At $52 (Upper End Of Range), Raises $893 Million

  With the ticker symbol RACE, what could possibly go wrong?

  With Tesla tanking, what better option that this…

  • *FERRARI RAISES $893 MLN PRICING SHARES IN IPO
  • *FERRARI PRICES 17.18 MLN SHRS AT $52 EACH IN U.S. IPO AT TOP OF RANGE ($48-52)

  There was some talk of a higher price…

  • *FERRARI IPO EXPECTED TO PRICE AS HIGH AS $53/SHR: CNBC

  We just wanted an excuse to post pictures of the cars…

  

  

  

  

  

  

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