Today’s News October 22, 2015

• Endocrine-Disrupting Chemicals Are Making Us Fat and Giving Us Diabetes

  We documented in 2012 that that toxic chemicals in our food, water and air our causing an epidemic of obesity … even in 6 month old infants.

  No matter how lazy and gluttonous adults may have become recently, 6-month-olds can’t be lazy … they can’t even walk, let alone go to the gym.   And 6-month-olds can’t “binge” … Gerber doesn’t make corn dogs or milk chocolate truffles fried in beer batter.

  And we documented in 2012 that the same thing is being observed in animals … hardly your stereotypical couch potatoes.

  A study published last month in the journal Obesity Research & Clinical Practice found that it’s harder for adults today to maintain the same weight – even at the same levels of food intake and exercise – as adults in the 1980s. (As reported by the Atlantic and the Independent.)

  And last month, the prestigious Endocrine Society reinforced the argument that endocrine-disrupting chemicals are making us fat.

  As Medical Xpress reports:

  Emerging evidence ties endocrine-disrupting chemical exposure to two of the biggest public health threats facing society – diabetes and obesity, according to the executive summary of an upcoming Scientific Statement issued today by the Endocrine Society.

   

  ***

   

  The statement builds upon the Society’s groundbreaking 2009 report, which examined the state of scientific evidence on endocrine-disrupting chemicals (EDCs) and the risks posed to human health.

   

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  The chemicals are so common that nearly every person on Earth has been exposed to one or more. An economic analysis published in The Journal of Clinical Endocrinology and Metabolism in March estimated that EDC exposure likely costs the European Union €157 billion ($209 billion) a year in actual health care expenses and lost earning potential.

   

  “The evidence is more definitive than ever before – EDCs disrupt hormones in a manner that harms human health,” said Andrea C. Gore, Professor and Vacek Chair of Pharmacology at the University of Texas at Austin and chair of the task force that developed the statement. “Hundreds of studies are pointing to the same conclusion, whether they are long-term epidemiological studies in human, basic research in animals and cells, or research into groups of people with known occupational exposure to specific chemicals.”

   

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  Animal studies found that exposure to even tiny amounts of EDCs during the prenatal period can trigger obesity later in life. Similarly, animal studies found that some EDCs directly target beta and alpha cells in the pancreas, fat cells, and liver cells. This can lead to insulin resistance and an overabundance of the hormone insulin in the body – risk factors for Type 2 diabetes.

   

  Epidemiological studies of EDC exposure in humans also point to an association with obesity and diabetes, although the research design did not allow scientists to determine causality. The research offers insights into factors driving the rising rates of obesity and diabetes. About 35 percent of American adults are obese, and more than 29 million Americans have diabetes, according to the Society’s Endocrine Facts and Figures report.

   

  

  

  

  

• Obama Unveils Roadmap To 'Bailout' Puerto Rico: "New" Bankruptcy Rules & Federal Fiscal Oversight

  America is not Greece, but judging from the Obama administration's just-unveiled plans to bailout Puerto Rico's disastrous debt situation, the American territory may have to sacrifice a little more sovereignty to get some relief. Obama is pressing for Congress to give Puerto Rico (PR) sweeping powers to reduce its $73 billion debt burden through a form of bankruptcy protection not now available to American territories and will also ask lawmakers to establish an independent body to monitor the island’s fiscal affairs (a la Troika). While the proposals likely face an uphill battle in Congress, as NYTimes reports, both Democrats and Republicans are under pressure to respond because Puerto Ricans are flooding the US, particularly in central Florida, and are becoming an increasingly important voting block in the 2016 presidential race.

  Puerto Rico is teetering under debt amassed from years of borrowing as the economy failed to grow and residents left for the U.S. mainland. Governor Alejandro Garcia Padilla is seeking to persuade investors to accept less than they’re owed, saying tax increases and spending cuts alone won’t be sufficient to eliminate the government’s budget shortfalls.

  

  Creditors say that the island’s government has been seeking to portray the fiscal situation in Puerto Rico as beyond repair, hoping to force the administration and Congress to act. As The NY Times reports, on Wednesday, Puerto Rico took the unusual step of announcing that talks over restructuring about $750 milllion of the island’s debt had broken off, a move that some creditors saw as posturing to Washington for help.

  It appears to have worked… (as Bloomberg details)

  President Barack Obama is pressing for Congress to give Puerto Rico sweeping powers to reduce its $73 billion debt burden through bankruptcy, escalating administration involvement as the Caribbean island’s access to cash dries up.

   

  Puerto Rico would be provided with a form of bankruptcy protection not now available to American territories. Administration officials also called for lawmakers on Wednesday to increase health-care funding for Puerto Rico, extend tax credits to the poor and put independent oversight in place to monitor the government’s budget.

  The details of the proposals are sparse as yet, but as The NY Times adds, there is some willingness, particularly among top Senate Republicans, to work out a compromise on the bankruptcy issue, according to a person briefed on the matter.

  But the Republican leadership would be willing to grant Puerto Rico access to the bankruptcy courts only on a limited basis, and only with strings attached like the imposition of a federal “control board” to oversee the island’s finances.

   

  Control boards have been used in cases of severe municipal distress to take the power to spend public money out of the hands of elected officials. They do not generally have the powers that bankruptcy judges do to abrogate contracts, such as labor contracts and promises to repay debt.

  But any such move faces political headwinds…

  These changes “are going to be extremely hard to get through both the U.S. Congress and the Puerto Rican legislature,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Market Analytics. “This is a Congress that gets almost nothing done. So to expect them to get something controversial done at the request of the administration right before an election is difficult.

  Though, there is a chance…

  Both Democrats and Republicans are under pressure to respond to the Puerto Rico crisis. Largely because of the island’s economic problems, Puerto Ricans are flooding the United States, particuarly in central Florida, and are becoming an increasingly important voting block in the 2016 presidential race.

  According to Bloomberg, Treasury Secretary Jacob J. Lew, National Economic Council Director Jeff Zients, and Health and Human Services Secretary Sylvia Mathews Burwell said the steps are needed to revive Puerto Rico’s economy.

  “The decade-long recession has taken its toll on Puerto Rico’s finances, its economy, and its people,” officials said in the statement. “To reward work and break this vicious cycle, Congress should enact proven, bipartisan tools for stimulating growth and rewarding work to people living in Puerto Rico.”

   

  The situation in Puerto Rico “risks turning into a humanitarian crisis as early as this winter,” one senior administration official said, speaking on condition of anonymity because the person was not authorized to speak publicly.
   

  But, it is not just politicians that will be hard pressed to pass the bailout…

  The proposal is likely to meet resistance from many investors in the municipal bond market according to Brandon Barford, a partner at Beacon Policy Advisors LLC in Washington and a former Senate Banking Committee staffer.

   

  “Including ‘super Chapter 9,’ significant new social spending, and demands for respecting Puerto Rican public sector pensions when mainland pension funds would register losses from restructuring are all a bridge too far,” Barford said.

  Finally, there is the unintended consequences…

  Federal law allows for cities, counties, special districts and the like to seek bankruptcy protection if their states agree, but the states themselves are excluded. There are concerns that if Puerto Rico gains access to bankruptcy, fiscally troubled states like Illinois might try to follow suit.

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  So the bottom line is that Puerto Rico is Greece… laws will be changed to enable the proligate spending of the past to be bruched under the carpet, and Federal oversight of fiscal affairs (i.e. all government in a nation whose finances are so dire) will be handled by an 'independent' body (just like Troika) and that will enable Puerto Rico to borrow more (likely from the US taxpayer via some subsidized router) to fund what officials call "growth initiatives."
  Because:

  “The situation in Puerto Rico is urgent,” one administration official said. “Without economic growth there is no path out.”

  So the same as the rest of the world then?!

  *  *  *

  But for now, we celebrate, President Obama will save the day…

  

  

  

  

  

  

• Guest Post: The Nazification Of America Is Almost Complete

  Submitted by Michael Snyder via The End of The American Dream blog,

  Once upon a time America fought a great war to rid the world of the Nazis, but now we have become just like them.  In fact, I would venture to say that the Nazification of the United States is pretty much complete.

  As you will see below, we have a heavily socialized economy where tax rates are out of control and lots of freebies are given out just like the Nazis did.  And just like the Nazis, our society has become highly militarized and our government has become increasingly obsessed with watching, tracking, monitoring and controlling the general population.  But more than anything else, all of the pageantry and beauty in our society masks an evil which has grown to a level that is almost unspeakable.  The other day, my wife and I were watching some footage of the beautiful parades and celebrations that were held in Germany before World War II, and they certainly were very impressive.  But under the surface, a great evil was growing.  Just because something happens behind closed doors does not make it okay, and just like the Nazis, our society is about to learn an exceedingly painful lesson in that regard.

  Let’s start out by talking about the economy.  Most people tend to regard the Nazis as “far right”, but the truth is that they were socialists.  By heavily taxing and spending, the Nazis were able to temporarily restore economic prosperity after the great economic crisis that occurred under the Weimar Republic, and this helped fuel their wild popularity.  The following comes from Wikipedia…

  In the midst of the Great Depression, the Nazis restored economic stability and ended mass unemployment using heavy military spending and a mixed economy. Extensive public works were undertaken, including the construction of Autobahns (high speed highways). The return to economic stability boosted the regime’s popularity.

  Just like the Democrats of today, most people don’t consider the Nazis to have been socialists, but that is precisely what they were.  I think that former game show host Chuck Woolery nailed it with some of his recent public statements…

  Chuck Woolery, perhaps best known for being the host of the show “Love Connection” from 1982-94, also frequently takes to Twitter to express political viewpoints. In a recent series of tweets Woolery, 74, offered his opinion on politics, the size of government, and the political nature of the Nazi party:

   

  “Nazi is described as a right wing organization, Yet their were Socialists [sic]. They were left. But Chuck. But My BUTT.”

   

  “National Socialist German Workers’ Party. Nazi Party. Hitler. Need I go on?”

   

  “Maybe better. Democrats don’t value the country. They value the power of Government. There is a difference ya know.”

  I knew there was a reason why I always liked that guy.

  Just like Barack Obama and the Democrats, the Nazis loved to give out free stuff.  Kitty Werthmann was a child in Austria at the time the Nazis took over, and her description of the freebies the Nazis were handing out sounds very much like what the Democrats want to do today…

  Newlyweds immediately received a $1,000 loan from the government to establish a household. We had big programs for families. All day care and education were free. High schools were taken over by the government and college tuition was subsidized. Everyone was entitled to free handouts, such as food stamps, clothing, and housing.

  I like free stuff too, but in the end someone always has to pay for all of that free stuff.  According to Kitty Werthmann, “our tax rates went up to 80% of our income“, and in America we are moving in the same direction.

  In the United States today, when you add up all federal taxes, all state taxes, all local taxes, all property taxes and all sales taxes, there are some Americans that actually pay more than 50 percent of their incomes in taxes.

  Somehow we still have the audacity to claim that we are not socialists even though that is exactly what we have become.

  And the Germans had their own version of Obamacare too.  The following is more eyewitness testimony from Kitty Werthmann…

  Before Hitler, we had very good medical care. Many American doctors trained at the University of Vienna . After Hitler, health care was socialized, free for everyone. Doctors were salaried by the government. The problem was, since it was free, the people were going to the doctors for everything. When the good doctor arrived at his office at 8 a.m., 40 people were already waiting and, at the same time, the hospitals were full. If you needed elective surgery, you had to wait a year or two for your turn. There was no money for research as it was poured into socialized medicine. Research at the medical schools literally stopped, so the best doctors left Austria and emigrated to other countries.

  There is no way that you can get around it.  The Nazis were never on “the far right”.  The were always leftists, and they always hated capitalsim.  National Socialist theologian Gregor Strasser once made the following statement…

  We National Socialists are enemies, deadly enemies, of the present capitalist system with its exploitation of the economically weak … and we are resolved under all circumstances to destroy this system.

  Not even Barack Obama or Bernie Sanders would make such an extreme statement today.

  And like the Nazis, our society has become highly militarized.

  Just prior to World War II, the Germans probably had the most powerful military on the entire planet, and they loved to use that military to push other countries around.  They stunned the entire world when they swept through Poland, and the lightning speed with which they defeated France changed the way war is waged forever.

  But just like the leftists in our own nation, the Nazis definitely did not want the general population to be armed.  Kitty Werthmann remembers very well what happened in Austria under the Nazis…

  Next came gun registration. People were getting injured by guns. Hitler said that the real way to catch criminals (we still had a few) was by matching serial numbers on guns. Most citizens were law abiding and dutifully marched to the police station to register their firearms. Not long after-wards, the police said that it was best for everyone to turn in their guns. The authorities already knew who had them, so it was futile not to comply voluntarily.

  And just like the leftists of today, the Germans were extremely suspicious of individual liberty and freedom.  The secret police were everywhere, and anyone that was even suspected of anti-government activity was monitored very closely.

  Sadly, we are becoming just like the Nazis in this regard, only now we have the technological capability to take things so much farther.  Government control freaks are systematically watching us, tracking us, recording our phone calls and monitoring our emails.  It has gotten so bad that even 64 percent of all reporters believe that the government is spying on them.  We spy on our enemies, we spy on our friends (just ask the French and the Germans about this) and we even spy on the little old lady down the street.

  We have been sold the lie that we have to give up our privacy and our liberty in exchange for security.

  It is the same lie that the Nazis told.

  But perhaps our greatest similarity to the Nazi regime of the 1930s is our lust for blood.

  What the Nazis did behind closed doors was so horrific that it is hard to even speak about it.  Once the Holocaust was revealed, the world should have never allowed crimes against humanity like that to ever happen again.

  But they are happening.

  They are happening behind closed doors in America today, and most Americans are perfectly okay with this.

  In this country, millions of babies are being systematically murdered and their organs are being harvested.  Those organs are then sold off to the highest bidder and they are ultimately used in extremely bizarre scientific experiments.

  In recent months these crimes have been put on display for all the world to see, and yet the American people have not responded with outrage.  In fact, only 29 percent of Americans even want to cut off the hundreds of millions of dollars that Planned Parenthood is getting from the federal government every year.

  Do you know what that 29 percent figure tells me?

  It tells me that America is done.

  America is finished.

  And it turns out that Hitler was actually a huge fan of the founder of Planned Parenthood, Margaret Sanger.  As I have written about previously, it was Sanger that once said the following…

  “The most merciful thing that a family does to one of its infant members is to kill it.”

  Hitler echoed this sentiment when he penned the following in Mein Kampf…

  “The demand that defective people be prevented from propagating equally defective offspring. . . represents the most humane act of mankind.”

  Of course those on the left are going to get very upset by all of this, and I am sure that some of them will leave some very nasty comments following this article.

  But the truth is the truth.

  And it isn’t just Democrats – most Republicans in Congress are in the exact same boat too.

  If we don’t want to be like the Nazis, we should stop acting like them, and that includes not pushing Christianity out of every area of public life.  The following information was uncovered by author Bruce Walker, the author of “The Swastika Against the Cross: The Nazi War on Christianity“…

  The Nazi tract Gott und Volk was distributed in 1941, and it describes the life cycle of German youth in the future, who would:  “With parties and gifts the youth will be led painlessly from one faith to the other and will grow up without ever having heard of the Sermon on the Mount or the Golden Rule, to say nothing of the Ten Commandments… The education of the youth is to be confined primarily by the teacher, the officer, and the leaders of the party.  The priests will die out.  They have estranged the youth from the Volk.  Into their places will step the leaders.  Not deputies of God.  But anyway the best Germans.  And how shall we train our children?  Thus, as though they had never heard of Christianity!”

  Our nation is falling apart because we have rejected the values and the principles that were handed down to us by our forefathers.

  We have embraced the same lies that the Nazis embraced, and if we don’t turn around we will experience a similar fate.

  I think that the following excerpt from a recent RT editorial sums things up pretty well…

  The United States is in decline. While not all major shocks to the system will be devastating, when the right one comes along, the outcome may be dramatic.

   

  Not all explosives are the same. We all know you have to be careful with dynamite. Best to handle it gently and not smoke while you’re around it.

   

  Semtex is different. You can drop it. You can throw it. You can put it in the fire. Nothing will happen. Nothing until you put the right detonator in it, that is.

   

  To me, the US – and most of the supposedly free West – increasingly looks like a truck being systematically filled with Semtex.

   

  But it’s easy to counter cries of alarm with the fact that the truck is stable – because it’s true: you can hurl more boxes into the back without any real danger. Absent the right detonator, it is no more dangerous than a truckload of mayonnaise.

  But add the right detonator and you’re just one click away from complete devastation.

  Absent a major crisis, the United States may be able to keep going down this same road for a few years more.

  But I wouldn’t count on it.

  We have willingly chosen to tear down and destroy everything that our forefathers built, and we were convinced that we had a better way.

  Now decades of incredibly foolish decisions are starting to catch up with us, and yet we still persist in our stubbornness.

  So where do we go from here?

  What will the fate of America be?

  

  

  

  

  

• NASA Warns: 99% Chance Of At Least A 5.0 Quake Hitting LA Within 30 Months

  If scientists at NASA’s Jet Propulsion Laboratory in Pasadena are correct, a moderately-sized earthquake is expected within the next two-and-a-half years.

  As CBS LA reports, JPL experts predict a possible 5.0 magnitude quake in Los Angeles, but say it very well could be stronger.

  JPL geophysicist Dr. Andrea Donnellan, along with seven other scientists, has been using radar and GPS to measure Southern California’s chances for a sizable earthquake, and has made a sobering hypothesis about another big one.

   

  “When the La Habra earthquake happened, it was relieving some of that stress, and it actually shook some of the upper sediments in the LA basin and moved those a little bit more,” Dr. Donellan said.

   

  However, according to Dr. Donnellan, those strains remain, with enough power to produce an even larger quake in the same epicenter in La Habra.

   

  “There’s enough energy stored to produce about a magnitude 6.1 to 6.3 earthquake,” Dr. Donnellan described.

  The new NASA-led analysis of a moderate magnitude 5.1 earthquake that shook Greater Los Angeles in 2014 finds that the earthquake deformed Earth's crust across a broad region encompassing the northern Los Angeles Basin and northern Orange County. As Fox LA adds rather ominously,

   The shallow ground movements observed from this earthquake likely reflect strain accumulated on deeper faults, which remain locked and may be capable of producing future earthquakes.

   

  "The earthquake faults in this region are part of a system of faults," said Donnellan. "They can move together in an earthquake and produce measurable surface deformation, even during moderate magnitude earthquakes. This fault system accommodates the ongoing shortening of Earth's crust in the northern Los Angeles region.

   

   

  

   

  Tectonic motion across the Los Angeles region is distributed on an intricate network of horizontally and vertically moving faults that eventually release accumulated strain in the form of earthquakes, such as the destructive 1994 magnitude-6.7 Northridge earthquake.

   

  Donnellan said a future earthquake to release the accumulated strain on these faults could occur on any one or several of these fault structures, which may not have been mapped at the surface. "Identifying specific fault structures most likely to be responsible for future earthquakes for this system of many active faults is often very difficult," she said.

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  Seismologists at the US Geological Survey have questioned that probability, suggesting it may in fact be slightly lower, stating: “…the accepted random chance of a (magnitude five) or greater in this area in three years is 85 percent, independent of the analysis in this paper.”

  USGS uses different methods from radar and GPS, such as fault maps and models, to develop their results.

  Regardless of the discrepancy in percentage, scientists agree that the probability of at least a moderate-sized earthquake in Los Angeles over the next three years is high.

  “We all need to be prepared. That’s not new for LA.”

  

  

  

  

  

• What Will Mario Draghi Announce Tomorrow: Here Is What Wall Street Thinks

  Tomorrow morning Mario Draghi is widely expected to if not announce an extension, or expansion, of the ECB’s QE program, than to at least jawbone sufficiently, and push the EURUSD lower from its recently anchored level in the 1.10-1.20 range. But what are the specifics of Draghi’s announcement: will he merely expand the monetization limit per security, as he did in early September, will he increase the universe of eligibile securities, or will he simply extend the maturity of the non-open ended QE from September 2016 to some indefinite date?

  It is unclear: the one thing we do know with certainty is what Draghi has said before he will never do, which is to buy gold.

  As to what he may do, there are many opinions. The following list, courtesy of Bloomberg, summarizes what the sellside universe believes Draghi will unveil in just under 12 hours:

  • Most banks expect ECB to ease policy further, probably as early as Dec. and in the form of a QE extension, according to analysts.
  • At this week’s press conference to be held in Malta, Draghi is expected to use dovish rhetoric, which may push EUR lower at least temporarily, while leaving monetary policy on hold
  • Further deposit-rate cut seen as most powerful tool to weaken EUR, even as economists assign low odds for this to be announced before yr end as it may require a worsening of euro-zone financial conditions
  • Expectations for more easing increased after ECB’s Nowotny said Oct. 15 that both headline and core CPI are ‘clearly’ missing central bank’s target, although the GC member said on Oct. 18 policy makers may not extend QE any time soon
  • Survey conducted by Bloomberg show economists expect ECB to step up QE by Jan. 2016. Below are more details of such expectations, based on published research and interviews:

  BARCLAYS (team incl. Nikolaos Sgouropoulos, Cagdas Aksu)

  • WHEN: Expect announcement of QE time extension in Dec. when ECB updates 4Q 2015 staff economic forecasts
  • HOW: ECB has 2 main options to provide more accommodation; first, making QE more expansive; second, introducing possibility of deposit rate cut more openly, or delivering it
  • First option more likely at this stage; the easiest way would be to lengthen end-date from Sept. 2016 by 6-9 months to 1Q-2Q 2017; this is already expected by mkt
  • IS A DEPOSIT RATE CUT LIKELY: Don’t rule it out but remains unlikely for next two meetings; a likely trigger for rate cut would be further material appreciation of EUR, possibly related to more signs that Fed will stay on hold for longer
  • EXPECTATIONS FOR OCT. 22: Continuation of dovish rhetoric
  • ’’We think that it is just a matter of time until the ECB decides to drive EUR/USD lower’’

  CREDIT SUISSE (team incl. Christel Aranda-Hassel)

  • WHEN: More ECB monetary policy accommodation is in pipeline, probably in Dec.; EUR is key trigger for more action; if it trades above 1.15/USD and toward 1.20 in run-up to Thursday’s meeting, we would bring baseline Dec. QE extension forward to Oct. meeting
  • HOW: Baseline scenario is that ECB will state that QE is extended to March 2017 or beyond
  • IS A DEPOSIT RATE CUT LIKELY: Cutting the deposit rate further and/or increasing purchased amount would require a more significant deterioration in CPI outlook
  • EXPECTATIONS FOR OCT. 22: Below and up to EUR/USD 1.15 in run-up to Thursday’s meeting, expect no action from ECB and a very dovish press conference, which leaves the door wide open for action in Dec.

  GOLDMAN SACHS (Dirk Schumacher)

  • WHEN: ECB may ease further at Dec. or Jan. meetings
  • HOW: By extending purchase program until mid-2017, with a tapering from Jan. 2017 onward
  • IS A DEPOSIT RATE CUT LIKELY: A sharp appreciation of EUR may prompt a further reduction in deposit rate; not base case scenario
  • EXPECTATIONS FOR OCT. 22: On hold, Draghi to adopt a strongly dovish undertone: MORE
  • ’’Coming policy meetings are pivotal if the ECB wants to re-establish its credibility. It is decision time for the ECB’’ strategists incl. Robin Brooks say in client note

  BOFAML (team incl. Gilles Moec, Athanasios Vamvakidis)

  • WHEN: Pushes central case for QE2 from Oct. to Dec.: MORE
  • HOW: By Dec. ECB would probably need to deliver not only an extension beyond Sept. 2016 but also an expansion with “delta” in purchases possibly being directed toward corporate bonds
  • IS A DEPOSIT RATE CUT LIKELY: Don’t expect it; it would be a surprise for mkt as very little is priced in and Draghi said that deposit rate has reached its floor; an even lower rate may complicate QE implementation
  • EXPECTATIONS FOR OCT. 22: It remains a “live” meeting; communication could be complicated for Draghi; if he comes out too hawkish, there is a risk that euro exchange rate could go through a knee-jerk leap
  • ’’We think the more the ECB waits, the more it will have to do to convince the market it can deliver on its price stability objective’’

  UNICREDIT (team incl. Marco Valli)

  • WHEN: More easing may be announced in first months of 2016, March at latest: MORE
  • HOW: Expect ECB to boost QE by another EU300b-400B after Sept. 2016
  • IS A DEPOSIT RATE CUT LIKELY: Think QE2 is much more likely than a deposit rate cut
  • EXPECTATIONS FOR OCT. 22: Expect no action and dovish rhetoric, mainly intended to stem EUR appreciating trend
  • ’’It seems that a EUR/USD at 1.15-1.20 may represent a sort of pain threshold. This implies that dovish rhetoric is very likely to continue and, possibly, intensify this week’’

  BNP PARIBAS (team incl. Ken Wattret)

  • WHEN: Dec. is the most likely timing of a move, in tandem with review of ECB’s staff macroeconomic projections
  • HOW: Expect an extension of ECB’s asset-purchase program beyond Sept. 2016; also expect monthly volume of purchases to be increased by EU10b
  • IS A DEPOSIT RATE CUT LIKELY: It would come into play if changes to asset-purchase program fail to have desired effect on euro-area conditions: MORE
  • EXPECTATIONS FOR OCT. 22: Press conference should leave the door ajar for a lower deposit rate, as ECB aims to lean against tightening of financial and monetary condition
  • ’’We would not rule out a surprise policy change as soon as this week. We put the chances at around 40%’’

  HSBC (Fabio Balboni)

  • WHEN: Expect program to be formally expanded in Dec.
  • HOW: By dropping the reference to Sept. 2016 and making it effectively open-ended
  • IS A DEPOSIT RATE CUT LIKELY: Unlikely as it would be in contradiction with policy of balance-sheet expansion
  • EXPECTATIONS FOR OCT. 22: Expect ECB to forcefully reiterate commitment to expand program if necessary without delivering any actual change
  • ’’We won’t have a formal expansion of the size of monthly purchases for now. Otherwise, as the constraints become apparent, the ECB might face considerable credibility problems if inflation doesn’t revert quickly’’

  DEUTSCHE BANK (Mark Wall, Marco Stringa)

  • WHEN: ECB to act further in Dec.; changed call Oct. 2 saying that further QE is no longer just a risk: MORE
  • HOW: Expects a 6-month flexible extension of QE
  • IS A DEPOSIT RATE CUT LIKELY: QE extension is more likely than a deposit rate cut
  • EXPECTATIONS FOR OCT. 22: Council will likely sound increasingly dovish, but is unlikely to take concrete action in absence of negative shocks
  • ’’A depo cut would need to be designed to incentivize lending to SMEs to be effective. Otherwise it might not compensate for the cost of the policy U-turn’’

  CREDIT AGRICOLE (Valentin Marinov)

  • WHEN: ECB may ease further in 1Q 2016
  • HOW: By extending duration of asset purchases beyond Sept. 2016, initially; also expect ECB to leave door open for increase in amount of monthly buying
  • IS A DEPOSIT RATE CUT LIKELY: Depo rate cut not part of Credit Agricole economists’ base case, though wouldn’t rule out another decrease to boost impact of any additional QE measures
  • EXPECTATIONS FOR OCT. 22: On hold; ECB to downgrade economic outlook and signal QE would be extended beyond Sept. 2016; investors should watch for hints from Draghi that additional easing will be occurring before long
  • ’’We expect the ECB to extend QE in 1Q 2016 and this should help reinstate the negative relationship between EUR and QE’’

  NOMURA (Nick Matthews)

  • WHEN: ECB may ease further by March 2016 meeting, at the latest; whether policy makers act at Dec. meeting, or at least signal that further action may come in 1Q 2016, may be a close call given international developments and stronger EUR
  • HOW: By extending asset purchases to end-March 2017 or beyond
  • IS A DEPOSIT RATE CUT LIKELY: Don’t expect a depo rate cut to be part of ECB’s next round of easing
  • EXPECTATIONS FOR OCT. 22: On hold; expect ECB to sound dovish and emphasize willingness and ability to act, if warranted; also see continued signal that focus for next round of easing remains on flexibility of asset-purchase program

  CITIGROUP (team incl. Guillaume Menuet)

  • WHEN: Baseline for Dec. meeting
  • HOW: Expect ECB to announce that it intends to extend or expand pace of asset purchases; an extension is the slightly more likely option
  • IS A DEPOSIT RATE CUT LIKELY: Not baseline; some unexpected EUR appreciation together with more evidence of EM mkts slowdown would likely prompt a re-think about whether -20bp deposit rate is really the lower bound
  • EXPECTATIONS FOR OCT. 22: ECB will likely conclude that more time is necessary before announcing further policy easing
  • ’’Increasing the size of the public-sector purchase program on Oct. 22 remains a possibility for GC, but the hurdle seems higher’’

  MORGAN STANLEY (team incl. Elga Bartsch, Hans Redeker)

  • WHEN: If updated ECB forecasts in Dec. show there are renewed downside risks to CPI, ECB could act further
  • HOW: If ECB acts, expect combination of a reduction in depo rate and faster pace of purchases to be more effective than a simple extension of program; it also might be easier to agree on than an extension of purchase program well beyond Sept. 2016 for some of the hawkish members
  • IS A DEPOSIT RATE CUT LIKELY: Attach a probability of 1 in 3 to ECB acting this wk
  • If ECB was to embark on concrete policy actions, it would probably up pace of QE above EU60b/month, add to overall size of QE program beyond EU1.14t, and consider a reduction in deposit rate to widen the pool of eligible assets ECB can buy at shorter maturities
  • Say a 10bps ECB deposit rate cut is likely to be the most effective measure to limit the scope for EUR appreciation: MORE
  • EXPECTATIONS FOR OCT. 22:On hold, stressing its determination to act, if needed; expect ECB to open the door further to possible policy action at Dec.

  RBC (Timo Del Carpio, Peter Schaffrik)

  • WHEN: Dec.
  • HOW: Expect either a 6-mo. extension or even a rolling 6-mo. extension until further notice
  • IS A DEPOSIT RATE CUT LIKELY: EUR short end has become rich on the back of rate cut “fantasies”; if there’s any mention of “all options being open” would propel the market substantially higher and the short end even richer
  • EXPECTATIONS FOR OCT. 22: On hold; the lack of a conclusive message from economic data mean policy bias to stay ’waiting and seeing’; MORE

  RBS (Giles Gale, Michael Michaelides)

  • WHEN: Expect QE to be both extended, possibly to March 2017, and accelerated to EU90b per month at the Dec. meeting
  • HOW: By extending beyond Sept. 2016 and increasing the monthly pace to EU90b
  • IS A DEPOSIT RATE CUT LIKELY: Not RBS’s base case
  • EXPECTATIONS FOR OCT. 22: This meeting isn’t live for more action; GC members have been categorical as can be expected that extension isn’t yet on the table

  JPMORGAN (Gianluca Salford, Fabio Bassi)

  • WHEN: Most likely dates for further stimulus are Dec. this year and Jan. 2016
  • HOW: The bulk of any additional stimulus will have to come from an increase in govt bond purchases with main bottleneck coming from the low stock of German bonds; doubt ECB will be in a position to deliver more than an increase of the monthly pace to EU70b-EU80b and extension to Dec. 2016 or March 2017
  • IS A DEPOSIT RATE CUT LIKELY: It will be very difficult for ECB to deliver a rate cut after having delivered and maintained over past year a consistent message in which policy rates are at the floor lvls
  • EXPECTATIONS FOR OCT. 22: Expect Draghi to keep his options open

  SUNRISE (Gianluca Ziglio)

  • WHEN: Best case for an extension is March
  • HOW: ECB may go for an extension; expanding size very unlikely as ECB will already find it hard to do EU60b/month at year-end
  • IS A DEPOSIT RATE CUT LIKELY: No as have said they are done on rates
  • EXPECTATIONS FOR OCT. 22: Don’t expect much from ECB until year-end as bank needs to see how end of year/Jan. base effects on energy inflation play out early next year

  UBS (Reinhard Cluse)

  • WHEN: Don’t expect any change to QE, even in Dec.; base case is ECB will run QE in its current form or EU60b/month until Sept. 2016, followed by some form of tapering
  • IS A DEPOSIT RATE CUT LIKELY: No. When they cut last year, Draghi said it is at the lower bound, a sentiment Coeure repeated more recently so any cut would come at cost of ECB credibility
  • EXPECTATIONS FOR OCT. 22: Not adding new stimulus may disappoint some mkt participants, making it important the ECB carefully calibrates its message; expect Draghi to leave door open for more accommodation in Dec.

  IHS GLOBAL INSIGHT (Howard Archer)

  • WHEN: Most likely ECB will extend QE, possibly in Dec.; if 3Q GDP growth holds up relatively well, may wait until New Year
  • HOW: Any further ECB action would be most likely through increasing and/or extending QE
  • IS A DEPOSIT RATE CUT LIKELY: Draghi has repeatedly stated that interest rates have reached their lower bound
  • EXPECTATIONS FOR OCT. 22: Draghi will deliver a dovish message, saying ECB is focused on downside risks to euro zone inflation and growth

  ABN AMRO (Hyung-Ja de Zeeuw, Nick Kounis)

  • WHEN: Expect announcement of extended and larger ECB QE before yr-end
  • HOW: Will extend QE beyond Sept. 2016, increase monthly purchases to EU80b vs EU60b; list of eligible assets will be broadened to include more utilities: MORE
  • IS A DEPOSIT RATE CUT LIKELY: Don’t think that a deposit rate cut will be the ECB’s first port of call, but we think it is certainly an option at a later stage
  • EXPECTATIONS FOR OCT. 22: We could get a clearer idea of future ECB action

  * * *

  Clearly, nobody really has any idea what is about to happen tomorrow, yet one thing which is far more critical than any of the opinions voiced above, is that just like the Fed, the ECB too is trapped. On one hand, it is suffering a collapse in inflationary expectations, seen not only via the tumbling 5Y5Y, but through real 10Y yields.

  

  On the other hand, as the chart below shows, if the ECB announces an extension until September 2017, which is virtually guaranteed, the ECB will soon approach the limit of monetizable debt, especially in Germany, Portugal and Finland, as well as Slovakia and Slovenia, that the ECB can monetize without adversely impairing even further the already scarce liquidity of Europe’s bond market.

  

  

  

  

  

  

• China Calms Fears, Says "Stock Plunge Is Normal Correction" As Panic-Buying Resumes On Japanese Open

  After last night's bloodbathery in China, analysts and officials are out en masse to ensure a newly re-leveraged Chinese investors that the "stock plunge is a normal correction." Disappointingly, Chinese stocks are barely bouncing at the open, which is not what we can say for Japan, where the mysterious uneconomic panic-buyer-of-first-resort appeared once again and smashed the Nikkei 225 200 points higher at the open (after weakness in the US).

   

  Japanese stocks meltup to catch up with USDJPY at the open, but are fading back…

  

   

  And after last night's carnage in China…

  

   

  Analysts are anxiously reeassuring everyone… (as Bloomberg reports),

  Investors shouldn’t be too pessimistic about market outlook as Wed.’s tumble was “normal correction” from previous strong run, analysts Luo Wenbo and Zeng Yan at Zhongtai Securities said in report.

   

  Some investors sold shares ahead of next week’s Party plenary session on concern gains were excessive, causing “herd effect” on Wed., report said

   

  Room for further downside is limited as liquidity is still adequate, reform motivation is strong and market sentiment has gradually picked up: report

  PBOC fixed the Yuan modestly weaker but the Offshore-Onshore spreads remains near 1 month wides…

  

   

  In addition, China’s central bank added funds to the banking system using six-month loans to keep borrowing costs down as a slowdown in the world’s second-largest economy spurs capital outflows.

  The People’s Bank of China supplied 105.5 billion yuan ($16.6 billion) to 11 commercial lenders on Wednesday using the Medium-term Lending Facility, according to a statement posted on its official microblog. The rate was 3.35 percent, the same as for similar-term funds injected in August.

  And The USDollar is slipping against Asian FX…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Capital Is Still Flowing Out Of China, Here's How Beijing Is Hiding It

  Earlier this month, we asked if the market was being deceived about the pace of capital outflows in China. 

  Our concerns came on the heels of a rally in EM FX and other assets that may have been fueled by a “better-than-expected” read on China’s reserve drawdown in September. The figure came in at “just” $43 billion, which of course made no sense because on one measure, outflows totaled more than that by the middle of the month. 

  This is important because as we outlined three weeks after the deval, the monthly read on China’s FX reserves has to a certain extent become the new risk on/off trigger for the market which means that if the data is unreliable or otherwise opaque, then investors will be operating with bad information. That is, what we really want to know is how much pressure there is in terms of capital outflows, and to the extent that China’s official FX reserve data doesn’t capture that, the data isn’t a useful indicator of where EM is headed on a more general level.

  As Goldman began to discuss in September, Chinese banks appear to be absorbing some of the outflows using their own books. Here’s how they explained the situation last week: 

  Given possible PBOC balance sheet management (e.g., short-term transactions and agreements between with banks, e.g., forward transactions, FX entrusted loan drawdown or repayment), we interpret the FX reserves data with caution, as it might not give a complete picture of the FX flow situation. The large gap between today’s data and the other PBOC data for September suggests that banks might have used their own spot FX positions to help meet some of the outflow demand, although banks’ overall FX positions might still have been squared with the PBOC via forward agreements.

  In short, our argument has been that much like the NBS will obscure any weakness below 7% in China’s GDP data, the PBoC will do “whatever it takes” (central bank pun fully intended) to make sure that the market doesn’t get wind of the fact that there’s still a tremendous amount of pressure in terms of capital outflows.

  Now, the word is apparently out. Here’s Bloomberg:

  The People’s Bank of China and local lenders increased their holdings in onshore forwards to $67.9 billion in August, positions that would boost China’s currency against the dollar. The amount is five times more than the average in the first seven months, PBOC data show. The positions are part of a three-stage process to support the currency without immediately draining reserves, according to China Merchants Bank Co. and Goldman Sachs Group Inc.

   

  Standard central-bank intervention to support a currency generally involves selling dollars and buying the home tender. In this case, China’s large state banks borrowed dollars in the swap market, sold the U.S. currency in the cash spot market and used forward contracts with the central bank to hedge those positions.

   

  “If you can intervene without actually diminishing your reserves, it’s somehow viewed as better,” said Steven Englander, global head of Group-of-10 foreign exchange-strategy in New York at Citigroup Inc. Such central-bank activity “may not look quite as dramatic as the sale of reserves, and they may prefer that optically,” he said.

   

  

   

  Using derivatives for intervention had the benefit of delaying any decline in the PBOC’s $3.5 trillion trove of foreign-exchange reserves, helping calm investors rattled by an economic slowdown and a slumping stock market. It was also faster as the monetary authority’s managers didn’t have to liquidate assets such as U.S. Treasuries to raise the dollars needed for direct yuan purchases.

   

  Major Chinese banks borrowed dollars in the onshore swap market in late August and September, and then undertook “heavy dollar selling” in the spot market, said Frank Zhang, head of foreign-exchange trading at Shenzhen-based China Merchants Bank. 

  The PBOC then came in to offset, or “square”, the positions with the banks, essentially taking on their trades onto its own balance sheet, according to Goldman Sachs.

   

  On a practical level, buying yuan forwards means the PBOC wouldn’t drain yuan liquidity out of the system as it would otherwise by buying its own currency in the spot market. Policy makers cut interest rates and the reserve-requirement ratio in August, partly to replenish the funds drained during intervention.

   

  “If you have a transaction that settles down the road, the actual liquidity impact in the short term may not be as dramatic,” said Citigroup’s Englander. “Down the road you can’t avoid it.”

  In the simplest possible terms (although really, this isn’t that complex a transaction to begin with), they’re just kicking the can in an effort to control the optics around the deval, which would be fine if everyone realized what’s going on, but rest assured they do not, because no matter how many Bloomberg or WSJ articles are published on the subject, the market (or the machines) will still read the headline figures and make a snap judgement about the extent to which the pressure on the yuan has mitigated. 

  At the end of the day, the takeaway is simply this: the narrative around Chinese capital outflows is extraordinarily important right now, and indeed, it’s influencing the Fed’s reaction function. Even as Beijing doesn’t necessarily want the Fed to raise rates, the PBoC doesn’t want to lose complete control of the narrative either, which is why you can expect to see more efforts on China’s part to mitigate near-term FX reserve burn, even if it means stacking the deck against the yuan down the road. And really, who can blame them? The entire world is involved in the largest can-kicking experiment of all time, so why should China’s central bank be any different?

  

  

  

  

  

• Did Paul Volcker 'Save' A System That Was Simply Not Worth Saving?

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

  Disappearing Growth

  Investors are regaining their calm. A few weeks ago, it looked as though the end of the world had begun. We are talking, of course, about the world in which credit, stocks, and central bank reputations only go up.

   

  

  Fated to eventually become a house of ill repute: the Mariner Eccles building (Fed board HQ)

  Photo credit: AgnosticPreachersKid

  But after a big fright in August, investors recovered their relaxed madness. They concluded that there was nothing to worry about. They may be right. You never know. But our guess is that the end of the world has already begun… and they just can’t face it.

   

  

  The SPX, monthly – a proxy for the seemingly never-ending asset bubble. What if the end of the party is already here and people have just not noticed yet? – click to enlarge.

   

  Since the end of World War II, credit has been expanding in the U.S. At first, it was a healthy expansion. Young, middle-class families took out mortgages and ran up bills on “charge cards,” such as Diners Club and American Express.

  Then, in the late 1950s, came the first credit cards. This was accompanied by large increases in consumer credit. Until the 1970s, all was well, because wages were rising, too. And with so much new technology coming online, people believed their wages could only increase.

  Debt was no problem – neither for the nation nor for households. We would “grow our way out of it.” But a strange – and as yet not fully understood – new trend began in the 1970s. After accounting for inflation, incomes for most Americans dramatically tapered off.

   

  

  Total credit market debt, federal debt and GDP – a non-problem on its way to becoming an intractable problem … – click to enlarge.

   

  The economy was slowing, too, after taking the effects of inflation into account. At first, this was thought to be temporary – a fluke, perhaps caused by the 1973 oil crisis. But the trend toward lower economic growth continued. Decade after decade, the trend in GDP growth was down. In most parts of the U.S., GDP per person peaked in the 1970s or 1980s.

  Remarkably, the average American working man earns less today than he did a half century ago (again, accounting for changes in consumer price inflation). That is not the same as saying that a person with a good job earns less today than he did in the 1960s.

  According to Census Bureau figures, the average inflation-adjusted wage for Americans in the top 5% of earners is up by more than 75% since 1967. Women earn a lot more, too.

  But good jobs have become scarce. The labor participation rates – the number of people who have jobs or are looking for jobs as a percentage of the people who are of working age – is at its lowest level since 1977.

   

  

  Labor force participation rate – at its lowest level since 1977. Something is clearly amiss – click to enlarge.

   

  Debt Goes Sour

  But although economic growth and most people’s incomes slipped, debt (the flip side of credit) kept growing. This was Stage II – the unhealthy phase of the credit expansion. No longer backed by broad-based wage increases, debt was expanding beyond the capacity of the economy – and borrowers – to repay it.

  Now we were asking for trouble. You may be wondering how this was possible. Why would lenders extend credit to people who couldn’t pay back? The answer: The fix was in.

  In 1971, President Nixon dramatically transformed the global monetary system. Under the previous Bretton Woods system, the dollar was backed by gold. And the major global currencies traded at fixed rates to the dollar… and by extension to gold.

  This meant a nation couldn’t get too far into debt… especially when it came to its trading partners. Trade surplus nations – which amassed dollars in return for net exports to the U.S. – could ask to redeem their dollars in gold. This caused gold to leave the overspending nation and flow to the creditor nation.

  That’s how the U.S. got so much gold in the first place. France and Britain spent more than they could afford on World War I. The U.S. sold them food, weapons, and fuel… and demanded gold in repayment. But by the 1960s, the shoe was on the other foot.

  The U.S. started spending money on both “guns and butter” – a Great Society at home and a war in Vietnam. Much of the spending to fund the war in Vietnam ended up as dollars in the hands of Vietnamese branches of French banks.

  French president de Gaulle warns of the dollar-centric monetary system that was leading to enormous debt growth and would one day lead to an uncontrollable crisis. He started coming for his gold shortly thereafter, ultimately exposing the fact that dollars were no longer fully backed by gold.

   

  And when, in 1965, president Charles de Gaulle sent the French navy across the Atlantic to pick up $150 million worth of gold in exchange for dollars, it was greeted like a long-lost relative at the reading of the will.

  Finally, with gold being airlifted from Fort Knox to meet foreign demands for payment, rather than honor Washington’s promise to convert dollars to gold, Nixon panicked and defaulted. Henceforth, anyone holding dollars was on his own …

  Nixon announces that the US will default on the gold exchange standard by “temporarily” suspending gold convertibility, while raising tariffs concurrently. Essentially he was telling a whole bunch of lies in the process, while proudly parading his appalling economic ignorance. This was called the “Nixon shock”. We’re not sure if people were more shocked about the lies or the ignorance, but surely many people must have wondered if it was April 1 instead of early August.

   

  “Tall Paul” Takes Over

  It all would have gone bad very fast. By April 1980, the annual rate of consumer price inflation was running at almost 15%. Gold soared as high as $800 an ounce. It looked as though Nixon’s new fiat money system would go off the rails soon – as all previous experiments with paper money had.

  Instead, in 1979, President Carter appointed Paul Volcker as Fed chairman. Volcker stepped in front of the runaway train and commanded it to halt. And it did. By January 1981, “Tall Paul” jacked up the federal funds rate – the key lending rate in the economy – not to 2%… or 4%… or even 8%. He set it at 19% – and placed the train squarely on the tracks again.

  We remember the howls of discontent. Volcker was “stifling the economy,” said the politicians. He was “killing jobs,” said the newspapers. He was causing “the worst downturn since the Great Depression,” said the economists. But Volcker didn’t budge. And when Ronald Reagan entered the White House in 1981, he backed Volcker.

   

  

  Paul Volcker applied tough medicine for about two years, but by the time he became Fed chairman, US true money supply growth had already been declining sharply for two years running. In other words, the main driver of price inflation was already in retreat when he entered the scene. Later, in 1982, he produced the biggest one year surge in the broad money supply aggregate TMS-2 that had been seen since the war, a feat never again repeated. While he fended off assorted yammering politicians in the first two years of his chairmanship, it is a good bet this was actually a mock battle to pull the wool over the eyes of the hoi-polloi. We won’t be able to shake his firmly cemented reputation as an “inflation fighter”, but it is not nearly as deserved as is commonly assumed. Plus, as Bill Bonner notes below, in the best case he saved a system simply not worth saving.

  Photo credit: John Duricka / AP

   

  Volcker announced his intention to squeeze inflation out of the system soon after he became Fed chairman. Bonds – which do well when inflation is low – should have rallied. Investors should have raced to lock in roughly 10% yield available on the 10-year Treasury note. Instead, bonds price fell… and bond yields rose.

  Then, as now, people were not aware – or were not willing to believe – that a major change had occurred. It wasn’t until 1982 that the bond market turned; finally, investors realized that it was a new world. Volcker saved the system. Bond yields – and interest rates – have been coming down ever since.

  Too bad he didn’t save a better system. Not many men can resist the appeal of free money. Americans proved they were no better at it than others. Falling interest rates and the paper dollar gave them a way to impoverish themselves – by spending money they hadn’t earned.

  They took the opportunity offered to them. They borrowed and spent… and drove the entire world forward at a furious pace. But now that stage is over.

   

  

  The “stability” of the “scientific monetary policy” in one stark image.

  Investors only realized in late 1981/early 1982 that the era of rising CPI inflation had ended – a reaction delayed by nearly two years. Something similar could well be happening now – an era is ending, they just don’t know it yet – click to enlarge.

  

  

  

  

  

• From Russia With Love: Assad Unexpectedly Visits Putin In Moscow

  On Tuesday, we noted how absurd it is for Saudi foreign minister Adel al-Jubeir to suggest that it will be “difficult” for Iran to play a part in “resolving” Syria’s years-old civil war. Here’s how we put it yesterday:

  It’s rather strange for the Saudis to make statements like “it will be difficult for Iran to play a role in finding a solution to the conflict.” We hate to be the bearers of bad news, but Iran is already playing a role in finding a “solution” – they’re summarily wiping out the groups funded by the Saudis on the way to restoring the regime. If anyone is going to have a “difficult” time playing a part, it’s the Saudis. 

  That same logic applies to the US and any of Washington and Riyadh’s regional allies.

  With each passing day, the opportunity for the West and the Sunni axis to have some say in Syria’s political future slips away. As we’ve said on a number of occasions, Russia isn’t going to risk the lives of her troops and spend who knows how many tens if not hundreds of millions of dollars only to have the West dictate the terms of any political “transition” which may or may not take place once the smoke has cleared. 

  Indeed, several Western powers and some of the regional backers of the Sunni extremist groups battling the regime have already admitted that Assad may have to remain in power during a “transitional” period. 

  Now that Iranian ground troops are poised to take Aleppo in what amounts to a final push to restore Assad’s grip over the country, The Kremlin is already looking at how to go about shaping the country’s political future as Assad traveled to Moscow in what the media says is his first foreign visit since the start of the civil war. At a meeting with Putin, the two leaders discussed the “political process” and reviewed the progress in the fight against “international terrorists.” Here’s Bloomberg with more:

  Syrian President Bashar al-Assad held talks in Moscow with President Vladimir Putin on Tuesday in his first known foreign visit since the civil war erupted in 2011, underscoring the growing Russian role in the four-year conflict.

   

  Almost a month into a Russian bombing campaign in support of Assad’s forces, Putin told the Syrian leader during the unannounced visit to the Kremlin that “there have been some major positive results in this fight” against the “international terrorists” battling government forces, according to a transcript released by Russia’s government.

   

  Ending the crisis requires “a political process with the participation of all political forces, ethnic and religious groups,” Putin said in comments shown on Russian state television on Wednesday. Assad, thanking Russia for its assistance, said the fight against “terrorism” is the “obstacle against any true political steps that could be taken on the ground.”

   

  Sami Nader, head of the Beirut-based Levant Institute for Strategic Affairs, said the trip to Moscow was Assad’s first foreign visit since the Syrian conflict began with an uprising against the regime in Damascus, and pointed to future Russian strategy ahead of any peace talks.

   

  It’s “Russia’s way of saying he is in our pocket, he is our asset and we will decide whether to keep him,” Nader said. “This is for sure a preparation for a deal and one more attempt by the Russians to embolden their bargaining position.”

  And so, just as we said from the beginning, Moscow’s move to muscle the West out of the way militarily has led directly to Russia hijacking the political negotiations as well.

  In short: Washington and its regional allies will be allowed to participate in a discussion with The Kremlin, but that’s as far as it goes. Russia will decide Syria’s political future in consultation with Iran and given the strategic importance for Tehran of ensuring that there’s a “friendly” government operating in Damascus, you can bet that whatever the solution ends up being, Washington, Riyadh, Ankara, and Doha will most assuredly not like it. 

  To the victor go the spoils.

  For now, we’ll close with one quote from Sergei Karaganov, dean of the Faculty of World Economy and International Affairs at Moscow’s Higher School of Economics, and one amusing picture which we’ll leave it to readers to caption (note the ear-to-ear grins). 

  “The message to the world is that Russia solves problems and you don’t. If you want to solve problems, work with us.” 

   

  
  

  

  

  

  

  

• Goldman Is Getting Nervous: "There Are Significant Risks To Our Forecast For Gold Price Weakness"

  When it comes to assets, economists, Wall Street, and central planners love them all… except one: gold. Forget about Bernanke’s hilarious sworn testimony that gold has “value only due to tradition”, and recall Mario Draghi’s QE announcement in December 2014 when asked what sorts of assets should be included in QE, his response: “we discussed all assets BUT gold.”

  Well of course the ECB will never buy gold – by its very nature, the precious metal stands for everything the legacy insolvent regime patched together with the superglue of money printing central-bankers, hates: prudent use of money and leverage, living within one’s means, and most importantly, saving not spending. Gold applied to the current regime where the world is drowning in about 3.5 times more debt than GDP would mean wiping out trillions in equity value that should not exist.

  It also makes impossible such monstrous abortions as $1 quadrillion in global derivatives which, like a house of cards, is only as strong as the weakest counterparty, and is why central banks around the globe have gone all in on the Greenspan/Bernanke/Yellen/Draghi put, and will never allow another major bank to fail again.

  Ironically, while the “very serious”, if laughable and totally discredited people, take every opportunity to bash gold, they are quietly buying up all the physical gold they can find, whether it is in London (where the local vaults are practically empty), or in Beijing or Bombay, which are the largest natural sources of demand for physical gold.

  Lately these same “serious” people are starting to get nervous, because while most other “commodities” have seen their prices plummet in the biggest crash since Lehman, gold just went green for the year. And the last thing the financial system, already teetering on the edge of global recession, can handle is another massive momentum wave out of “intangible” assets and into very real gold, like what happened in 2010 and 2011 before the BIS ended gold’s meteoric rise in September 2011.

  Enter Goldman, which moments ago admitted that while its “base case is still for higher US real interest rates, lower gold”, it may be wrong adding that “while our base case remains for higher US real rates and lower gold prices, there are significant risks that our forecast for gold price weakness is pushed out, should the Fed surprise us and remain on hold in December.”

  From Goldman’s Max Layton

  Gold has rallied by almost 8% since its July lows, leaving the price flat over the 2015 calendar year to date, which represents substantial outperformance relative to most other commodity prices (see chart below). Indeed, prices are near our forecast as we expected only a gradual decline in prices in 2015 (please see Central banks stall a more bearish gold outlook, published January 25, 2015).

   

  

   

   

  The rebound in the gold price was associated with a strong pickup in comex net speculative positioning (Exhibit 7). In July, August and early September, the net speculative long position build was associated with short covering of comex speculative positions, but more recently the rise in net speculative positioning has been associated with both new gold long positions and further short covering (Exhibit 8).

   

  

  Actually, no. The biggest reason for the recent surge in gold is a direct consequence of the Fed losing credibility, and confirming yet again that the market calls all the shots, even it means debasing the dollar and sacrificing the reserve currency. In other words, it means that the more Yellen avoids renormalizing monetary policy – and since she is trapped, even the most modest rate hike will lead to an immediate rate cut and/or QE, just like in the Japan experience from August 2000, the higher gold will rise.

  Goldman admits as much:

  Looking ahead, our economists continue to expect a 25 basis point rate hike at the December FOMC meeting, and for a further 100 basis points of rate increases during 2016. The Fed leadership has signaled that such a move is likely if the economy and markets evolve broadly as expected, and our economists’ forecast is similar to theirs. However, they are only about 60% confident. Most of the uncertainty relates to the possibility that the economic and market environment – or in a broad sense, “the data” – will be worse than the FOMC’s (and our) expectations.

   

  The low market-implied probability of a December hike of only 30%-40% probably reflects a mixture of concerns about the data (which we find reasonable) and a belief among some market participants that the FOMC will find an “excuse” to stay on hold even if the economy does fine (which we find unreasonable). The low market-implied probability is not a problem now, but Fed officials will need to find a way to move it much higher by the time of the meeting if they really do want to hike.

   

  The Fed’s rationale for wanting to start the normalization process is straightforward. In their view, labor market slack has diminished substantially, the link between slack and inflation is stronger than widely believed, and the funds rate is far below the longer-term equilibrium rate, so they need to get started well before the economy is back to normal.

  Goldman also finally admits that 7 years after it started, central-planning is not going quite as planned, with the biggest “risk” being another major move higher in the price of gold:

  While our base case remains for higher US real rates and lower gold prices, there are significant risks that our forecast for gold price weakness is pushed out, should the Fed surprise us and remain on hold in December.

  So in light of all this information, what does the TBTF hedge fund with the FDIC backstop want you to do? Why sell it to Goldman of course!

  Indeed, notwithstanding the fact that the “new normal” equilibrium in interest rates remains uncertain, a plausible range of scenarios all imply lower gold prices. Overall, our forecasts are unchanged, however we roll our forecasts along the existing price forecast path, such that our 3/6/12-month forecasts are $1,100/oz, $1,050/oz, and $1,000/oz, respectively.

  Right – so Goldman, which has been almost as wrong about its “economic recovery” forecasts as the Fed, not only is confident that “this time” it will get it right, but that gold will plunge even though in the sentence right before it the central banker-spawning hedge fund admits there as “significant risks” that its gold forecast will be “pushed out”… which is economist talk for “wrong.”

  And just in case Goldman is wrong, it would love to rid you of any barbaric relic you may currently have. So run, sell it all now, before it plummets to $1,000 or lower in the coming months. You won’t even have to look far for a willing seller: Goldman will buy all you have to sell.

  

  

  

  

  

• Martin Armstrong Explains How To Create A Fairer System

  Submitted by Martin Armstrong via ArmstrongEconomics.com,

  This is the problem with taxation. Major public corporations can move their tax domicile offshore to avoid taxes legally. The average person cannot move his labor offshore to lower his taxes, which is a disadvantage we must address with tax reform. VAT is far worse than a sales tax. Every person in the chain must collect and file paperwork. It must require three times the number of people to administer such a system compared to a point of sales tax collection.

  But that issue aside, there should be ABSOLUTELY NO income taxes whatsoever. That not only eliminates government having to track everything, but it also eliminates the whole movement of capital solely for tax purposes. This is unfair, for the average person cannot send their labor offshore to avoid taxation without moving. Even then, that would only get an American the first $100,000 tax-free; after that, it would be subjected to U.S. income tax.

  The Founding Fathers of the United States revolted over taxation without representation. We are back to that now, for we are being taxed to pay interest to service debts from the last two generations. We had no right to vote on that spending, which took place before we were born. This is not a democratic process.

  There should be ONLY a retail sales tax EXCLUSIVELY for local government.

  Federal government should be prohibited from imposing ANY tax and it should be barred from borrowing money. The local tax will naturally be checked by the free market, for if they keep raising taxes, businesses will move to the next town and there goes the jobs. This will help to restrain government on a more practical level.

  Moreover, there should be NO PUBLIC SCHOOLS. All schools should be private for then there will be no mismanagement, crazy pension failures, or tax hikes to line their pockets. Schools should be by voucher and run by private industry just like Catholic schools, which were always known for having better education in the States.

  It is the teachers and their unions who have ruined society, as taxes are imposed on property and people cannot afford to retire in their home where they raised a family. They are forced to sell because they cannot afford taxes that never stop and only rise. PROPERTY TAXES must also be abolished.

  *  *  *

  Our problem is the total mismanagement of government. They promise and award themselves all sorts of perks, which reduces the quality of life for everyone else. We must look at the cause and that is the seriously flawed design of the financial-economic-governmental system.

  

  

  

  

  

• Can Trump Be Stopped?

  Submitted by Patrick Buchanan via Buchanan.org,

  Three months ago, this writer sent out a column entitled, “Could Trump Win?” meaning the Republican nomination.

  Today even the Trump deniers concede the possibility.

  And the emerging question has become: “Can Trump be stopped? And if so, where, and by whom?”

  Consider the catbird seat in which The Donald sits.

  An average of national polls puts him around 30 percent, trailed by Dr. Ben Carson with about 20 percent. No other GOP candidate gets double digits.

  Trump is leading Carson in Iowa, running first in New Hampshire, crushing the field in Nevada and South Carolina. These are the first four contests. In Florida, Trump’s support exceeds that of ex-Governor Jeb Bush and Sen. Marco Rubio combined.

  If these polls don’t turn around, big time, Trump is the nominee.

  And with Thanksgiving a month off, then the Christmas season, New Year’s, college football playoffs and NFL playoffs, the interest of the nation will drift away, again and again, from politics.

  Voting begins Feb. 1 in Iowa. Super Bowl Sunday is Feb. 7. And the New Hampshire primary will likely be on Tuesday, Feb. 9.

  We are only three months out, and Trump still holds the high cards.

  After months of speeches and TV appearances, he is a far more disciplined campaigner and communicator. In a year when a huge slice of the nation is disgusted with political correctness, wants to dethrone the establishment, wipe the slate clean and begin anew with someone fresh, Trump is in the pole position.

  His issues — secure the border, send illegal immigrants back, renegotiate rotten trade deals that shipped our jobs abroad — are more in tune with the national mood than pro-amnesty, Obamatrade or NAFTA.

  Wall Street Journal conservatism is in a bear market.

  Trump says he will talk to Vladimir Putin, enforce the nuclear deal with Iran, not tear it up on Inauguration Day, and keep U.S. troops out of Syria. And South Korea should pay more of the freight and provide more of the troops for its own defense.

  A nationalist, and a reluctant interventionist, if U.S. interests are not imperiled, Trump offers a dramatic contrast to the neocons and Hillary Clinton, the probable Democratic nominee. She not only voted for the Iraq war Trump opposed, but she helped launch the Libyan war.

  The lights are burning late tonight in the suites of the establishment tonight. For not since Sen. Barry Goldwater won the California primary in 1964 have their prospects appeared so grim.

  Can Trump be stopped?

  Absent some killer gaffe or explosive revelation, he will have to be stopped in Iowa or New Hampshire. A rival will have to emerge by then, strong enough and resourced enough to beat him by March.

  The first hurdle for the establishment in taking down Trump is Carson. In every national poll, he is second. He’s sitting on the votes the establishment candidate will need to overtake Trump.

  Iowa is the ideal terrain for a religious-social conservative to upset Trump, as Mike Huckabee showed in 2008 and Rick Santorum in 2012.

  But Carson has preempted part of the Evangelical and social conservative vote. Moreover, Sen. Ted Cruz, an anti-establishment man, is working Iowa and has the forensic abilities to rally social conservatives.

  Should Trump fall, and his estate go to probate, Cruz’s claim would seem superior to that of any establishment favorite.

  Indeed, for an establishment-backed candidate — a Jeb Bush, Marco Rubio, John Kasich, Chris Christie, Bobby Jindal — to win Iowa, he must break out of the single-digit pack soon, fend off Cruz, strip Carson of part of his following, then overtake Trump. A tall order.

  Yet, the battle to consolidate establishment support has begun. And despite his name, family associations, size of his Super PAC, Jeb has lost ground to Marco Rubio. Look to Marco to emerge as the establishment’s last best hope to take down Trump.

  But if Trump wins in Iowa, he wins in New Hampshire.

  The Iowa Caucuses then, the first contest, may well be decisive. If not stopped there, Trump may be unstoppable. Yet, as it is a caucus state where voters stick around for hours before voting, organization, intensity and endless labor can pay off big against a front-runner.

  In Iowa, for example, Ronald Reagan was defeated by George H. W. Bush in 1980. Vice President Bush was defeated by Bob Dole and Pat Robertson in 1988. Reagan and Bush I needed and managed comeback victories in New Hampshire. One cannot lose Iowa and New Hampshire.

  Thus, today’s task for the Republican establishment.

  Between now and March, they must settle on a candidate, hope his rivals get out of the race, defeat Trump in one of the first two contests, or effect his defeat by someone like Carson, then pray Trump will collapse like a house of cards.

  The improbabilities of accomplishing this grow by the week, and will soon start looking, increasingly, like an impossibility – absent the kind of celestial intervention that marked the career of the late Calvin Coolidge.

  

  

  

  

  

• Saudi Arabia Will Be Broke In 5 Years, IMF Predicts

  As crazy as it sounds, the Saudis are going broke.

  Of course you wouldn’t know it if you read the account of King Salman’s latest visit to Washington which included booking the entire DC Four Seasons and procuring a veritable fleet of Mercedes S-Class sedans.

  

  You’d also be inclined to think that everything is fine if you simply looked at SAMA holdings (i.e. FX reserves) which still total nearly $700 billion. 

  

  The problem however, is the outlook. 

  Fighting wars costs money and so does bribing the citizenry to ensure you don’t get some kind of Arab Spring-type uprising. When you endeavor to artificially suppress the price of the export that is the source for your wealth and international prestige (all in an epic attempt to bankrupt the competition and secure geopolitical “ancillary benefits”) you don’t do yourself any favors from a financial perspective and now, the Saudis are staring down a massive budget deficit and a current account that’s in the red for the first time in ages.

  So while things may look on the up and up from an FX reserve perspective (even as the cushion is at its lowest level since 2013) and while the kingdom has plenty of capacity to borrow with a debt-to-GDP ratio of just a little over 2%, things are about to get ugly very quickly going forward and if Riyadh decides to plunge headlong into Syria’s civil war, it will only get worse. Note that while debt levels are likely to stay low relative to a world where countries like Japan are borrowing so much that the number of decimal places won’t even fit into a title, going from basically 0% to ~16% of GDP in the space of just 24 months isn’t exactly a good sign:

  

  The situation is in fact so dire that the Saudis have begun delaying payments to contractors in an effort to preserve cash. 

  On Wednesday, the IMF is out with a new report on the economic outlook for the Mid-East and the picture for the Saudis is not pretty. In short, Riyadh will burn through its cushion in less than 5 years under current conditions. Here’s more: 

  Sharply lower oil prices have significantly affected the fiscal prospects of oil exporters across MENA and the CCA.1 The Brent oil price is projected to average $53 a barrel in 2015, down from almost $110 a barrel in the first half of last year. Exporters’ fiscal balances have turned from sizable surpluses to large deficits, with MENA and CCA export revenues dropping by $360 billion and $45 billion, respectively, this year alone.

   

  

   

  For oil exporters, the main policy issue is fiscal adjustment and rebuilding buffers over the medium term. The Brent oil price is projected to recover only modestly to about $66 a barrel by the end of the decade, with MENA and CCA export receipts remaining $345 billion and $30 billion, respectively, below the 2014 level, even in 2020. In the absence of adjustment, fiscal balances will remain in deep deficit in most countries, with public debt ratios rising rapidly (red lines in Figure 4.2). 

   

  

   

  Even under the IMF baseline scenario, however, public debt ratios will continue to rise in many GCC and CCA exporters (blue lines in Figure 4.2). In a number of countries, mediumterm fiscal balances will fall well short of the levels needed to ensure that an adequate portion of the income from exhaustible oil and gas reserves is saved for future generations (Figure 4.3). Bahrain, Oman, and Saudi Arabia have medium-term fiscal gaps of some 15–25 percentage points of non-oil GDP, while conflict-torn Libya has a gap of more than 50 percent of non-oil GDP. 

   

  The large and sustained drop in oil prices has increased fiscal vulnerabilities in MENA and CCA oil-exporting countries. The issue of fiscal space has become critical as oil exporters decide how quickly to adjust their fiscal policies to the new reality of persistently lower oil prices. This box considers several alternative measures of fiscal space. A good starting point is the size of governments’ financial assets—commonly referred to as “fiscal buffers.” In general, countries with larger buffers can afford to maintain fiscal deficits further into the future, so as to reduce the impact of lower oil prices on growth. On current trends, however, all non-GCC MENA oil exporters are already projected to run out of liquid financial assets in the next three years (see Chapter 1). In, contrast, CCA oil exporters have at least 15 years’ worth of available financial savings,1 while GCC countries are split evenly between countries with relatively large buffers (Kuwait, Qatar, and the United Arab Emirates—more than 20 years remaining) and countries with relatively smaller buffers (Bahrain, Oman, and Saudi Arabia—less than five years).

  As a refresher, here’s BofAML’s sensitivity analysis which shows how long Riyadh’s SAMA reserves will last under various scenarios for crude prices and debt issuance:

  

  One important takeaway from the above is that if the Saudis were to burn through their reserves it would represent a nearly $700 billion global liquidity drain as Riyadh dumps its USD-denominated assets. That would amount to a complete reversal of the petrodollar virtuous circle that’s underwritten decades of dollar dominance and which has served to underpin the global economic order for as far back as most market participants can remember. 

  And while it’s by no means a foregone conclusion that oil prices will remain “lower for longer” as the Saudis are to a certain extent the masters of their own destiny in that regard, one thing worth noting is that not only is Iranian supply set to come back online, but Tehran seems determined to supplant Riyadh as regional power broker. Both of those eventualities will have very real consequences for crude prices and thus for the future of The House of Saud.

  

  

  

  

• Undermining Property Rights In San Francisco

  Submitted by Pater Tenebrarum via Acting-Man.com,

  Expanding the Regulatory State with the “Anti Airbnb Measure”

  The best thing one can say about “Proposition F” is that it will be up to voters to decide on its adoption. However, it actually shouldn’t be up to them, because it concerns an issue that is really none of their business.

  Here is what it is about in a nutshell: as noted in this article, if the proposition is adopted, “you will be able to do anything in your bedroom, except rent it” (sic). Meaning, if one has a spare bedroom one occasionally rents out to travelers via Airbnb, one will in future no longer be able to do so – by law.

   

  

  San Francisco: a nice place, but housing and rental prices have become unaffordable for many people

  Photo credit: Alex Zyuzikov

  In short, other people will now decide what one can or cannot do with one’s own property. Given that this particular use of property doesn’t infringe on anyone else’s property rights in the slightest, there should not even be a debate over whether it should or shouldn’t be “allowed”.

  So what is behind this push to make life difficult for Airbnb, countless tourists and countless people who make a little money on the side with the help of Airbnb? In all likelihood it is a well-connected established business lobby. The main suspects are hotel owners, whose businesses are under threat from Airbnb’s competition.

  What makes this case especially bizarre are the utterly transparent lies used to argue in favor of adopting the measure, in combination with San Francisco’s terrible housing reality. Note that the interests that are actually behind the proposition are craftily hiding behind the “little guy” (whom they are about to trample on). As an aside, it should be seen as a huge red flag that Dianne Feinstein is all for it as well.

   

  

  Consumers love it: Airbnb

   

  According to the article linked above:

  “The measure would impose additional restrictions on short-term rentals. Supporters can claim to be the little guys because the deep-pocketed opposition — headlined by the home-sharing technology platform Airbnb — has $8 million to bury the less than $400,000 raised by the “yes” campaign, according to proponent Dale Carlson. Prop F does have high-profile supporters, notably Sen. Dianne Feinstein, but when the other side outspends you by a 20-1 ratio, you can call yourself the underdog.

   

  The No on F folks also stand for the little guy (or gal) who rents out a guest room to make ends meet. San Francisco Supervisor Scott Wiener says he opposes the measure because more and more of his constituents rely on Airbnb. Many are women, often older women, who are “house poor” and presently could not afford to buy the homes they bought years ago. They don’t want to take on a full-time roommate; they also enjoy the energy young travelers bring with them. “The one thing they have is that spare bedroom,” Wiener told the San Francisco Chronicle’s editorial board last month. If Prop F is approved, “they are going to get thrown under the bus.”

   

  The “yes” folks have a populist message. Former San Francisco City Attorney Louise Renne put it this way: “The short-term rentals, in my view, are reducing the housing stock.” Tourists don’t belong in residential neighborhoods, the “yes” side adds. Speculators are buying properties so that they can cash in by setting up pseudo-hotels that aren’t up to code. Something must be done.

   

  The “yes” side’s remedy, however, threatens to cut into the income of middle-class residents — people like architect Kepa Askenasy, who told me last year she was “just trying to survive in this beautiful city and do it in a way that’s positive for everybody.” Because City Hall adopted legislation championed by former Supervisor David Chiu, she registered with the city and pays the 14 percent hotel tax. Airbnb now pays about $1 million each month in taxes. Askenasy is proud that the San Francisco startup also threw in some $25 million that would have been levied as taxes if the Chiu legislation had taken effect earlier. Now, she said Thursday, critics should give the new rules time to work.

   

  What really frosts Askenasy is that a small group of city big shots wants to cut into her side business on the grounds that there is not enough affordable housing. City Hall failed to ensure there would be more homes for working residents. Large-scale developers did not build those homes. Somehow the proponents of Prop F are blaming the sharing economy — that is, entrepreneurial San Franciscans — for a housing shortage.”

  (emphasis added)

  As noted above, this “housing shortage” argument cannot be called anything but a brazen, transparent lie. Given house prices and rental prices in San Francisco, there can be only one reason for the housing shortage: over-regulation that is keeping the housing stock too small. One wonders moreover, if spare bedrooms can no longer be legally rented out, how exactly is this going to increase the housing stock?

  We were unable to find out what the proponents of the measure have in mind in this context. Perhaps the “city big shots” plan to have them confiscated, so they can decide who should stay there? After all, the property rights of their owners will already be violated, so surely they can be violated some more.

  Given that regulations are undoubtedly co-responsible for the fact that housing in SF has become unaffordable for average people (the Fed’s insane monetary policy is admittedly the chief culprit), how are even more regulations going to do the trick? Regarding the affordability of housing in SF, we are not exaggerating one bit: consider this story of a software engineer who is living in the streets in a rusty van because SF rents are simply out of this world.

   

  

  Median San Francisco home prices compared to California and nation-wide prices (by Paragon Real Estate) : a bubble for the history books.

   

  Apart from the fact that the proposition is an attempt to restrict the property rights of people and their ability to earn an additional income that they actually rely on and need in many cases, the point about tourism shouldn’t be neglected either. No back-pack tourists can possibly afford to stay in this hyper-expensive burg without the help of services like Airbnb. As the article notes:

  Keith Freedman rents out a spare bedroom and a Murphy bed in his apartment’s living room. He told me, “Most of the guests I get couldn’t afford to come to San Francisco and stay in a hotel.” Gag Airbnb and San Francisco becomes a town for well-heeled tourists only. If Prop F is approved, big government will dictate what people cannot do in their own bedroom – rent it out.

  (emphasis added)

   

  Conclusion

  We have ceased to live in a free market economy a long time ago. The only sector of the economy that has managed to remain relatively free in many ways is the technology sector, because it innovates so rapidly that it tends to stay a step or two ahead of politicians and the oligarchies giving them their orders. They simply cannot catch up quickly enough with regulating all these innovations to death.

  Lately technology has begun to invade the turf of a number of established service businesses, such as banking (think Bitcoin, and now Bitgold as well), taxi services (Uber) and hospitality services (Airbnb). This provides us all with a reminder of how free market capitalism is actually supposed to work. In the market economy, no successful entrepreneur can rest on his laurels. He can be deposed from his exalted position at anytime by a start-up competitor offering a better or cheaper (or both) product to consumers.

  Should horse breeders and buggy whip manufacturers have been protected from the motor car? Should the inept US Post Office have been protected from the evils of email and instant messaging? The answer to such questions seems obvious enough. Why should an exception be made for taxis and hotels?

  Note here that such measures as a rule see nominally “capitalist” cronies and assorted socialists/collectivists happily working together: the former because they want to use the State to preserve their income by force, the latter because they want to stop economic progress, as they hope this will increase the number of State-dependents voting for them.

  Do not fall for their snake oil.

   

  

  Unfortunately a great many people don’t understand that asking the government for “help” is simply going to invite more of the same.

  

  

  

  

  

• ISIS, Al-Qaeda Contemplate Syrian Militant Merger Amid Russian Advance: Kremlin

  If you’re looking to close on an M&A deal, now might be the time to do it before the cost of capital starts to rise. Sure, “liftoff” might have been delayed by a month (or 12) but you have to do your due diligence and make sure there are enough synergies to make it worth everyone’s time and effort.

  Critically, you’d hate to miss an opportunity to strike a potentially accretive deal while capital markets are still favorable, especially if you’ve recently found yourself in a compromising position vis-a-vis competitors. 

  We suppose the above helps to explain why, according to the Russian Defense Ministry, ISIS and al-Qaeda are contemplating a merger in the face of, how shall we say, “new entrants” in the race for Syrian market share. 

  Here’s more from RT:

  The Russian Defense Ministry said on Wednesday its intelligence had overheard Islamic State commanders talking to Al-Nusra Front about uniting forces against the Syrian Army.

  And that’s just fine with Moscow because unlike Washington, Riyadh, and Doha, The Kremlin is an equal opportunity extremist eliminator. Here’s the latest on Russia’s airstrikes: 

  In the course of the last 24 hours, aircraft of the Russian air group in the Syrian Arab Republic have performed 46 combat sorties engaging 83 terrorist facilities in the Hama, Idlib, Damascus, Aleppo and Deir ez-Zor provinces.

   

  Near Aleppo, a facility of the Jabhat al-Nusra terrorist grouping with workshop for manufacturing of radio-controlled bombs as well as a depot with explosives were destroyed.

   

  After a pinpoint strike with guided air bombs and further detonation of explosives, the facility and 2 trucks, which had delivered tens of tons of explosives, were destroyed.

   

  Near Khan Shaykhun settlement located in the al-Ghab plain, a large field camp of the Jabhat al-Nusra grouping was detected by the air reconnaissance. An airstrike conducted by a Su-25 attack aircraft eliminated the terrorist object with all its facilities: accommodation and training areas of militants, as well as depots, automobile vehicles.

   

  In the Idlib province, a command-surveillance centre of the ISIS militants located on the Seryatel mountain was uncovered by reconnaissance UAVs. It used to carry out the control over the illegal armed groups at the battlefield as well as fire adjustment for mortar crews of militants. A strike of a Su-24M bomber aircraft hit the target.

  Yes, “it used to”, but not anymore. Here are the visuals.

  The question we have is this: will Washington (and the US media) still classify al-Nusra as “moderate” if they ally themselves with ISIS in the battle against the Russian “infidels?” And further, to the extent Riyadh and Doha (and perhaps Ankara) may be aiding al-Nusra, will that assistance continue in the event the group pulls off a militant merger with Islamic State?

  Of course perhaps the most critical question of all is this: if al-Nusra and ISIS merge, how many people will be laid off after the deal?

  And further, is the job market in Langley, Virginia robust enough to accommodate the new job seekers? 

  

  

  

  

  

• Truth Is Being Suppressed By The Tools Of Money

  Excerpted from Artemis Capital Management letter to investors,

  Dorothy Thompson once said “peace is not the absence of conflict”. Never forget there is a form of peace and stability reinforced by a foundation of underlying volatility. Game theorists call this the paradox of the Prisoner’s Dilemma, and it describes a dangerously fragile equilibrium achieved only through brutal competition. The Prisoner’s Dilemma is the most important paradigm for understanding shadow risk in modern financial markets at the pinnacle of a multi-generational debt cycle unparalleled in the history of finance.

  In their masterwork tapestry entitled “Allegory of the Prisoner’s Dilemma” the artists Diaz Hope and Roth visually depict a great tower of civilization that rests upon a bedrock of human cooperation and competition across history. The artists force us to confront the fact that after 10,000 years of human civilization we are now at a cross-roads. Today we have the highest living standards in human history that co-exist with an ability to destroy our planet ecologically and ourselves through nuclear war. We are in the greatest period of stability with the largest probabilistic tail risk ever.

  

  The majority of Americans have lived their entire lives without ever experiencing a direct war and this is, by all accounts, rare in the history of humankind. Does this mean we are safe from the risk of devastating conflict on our own soil?

  In 1961, at the height of the Cold War, a B-52 bomber carrying two Mark 39 thermonuclear bombs accidentally crashed in rural North Carolina. A low technology voltage switch was the only thing that prevented a 4-megaton nuclear bomb with 250 times the yield of the bomb dropped on Hiroshima from detonating on American soil. In addition to killing everyone within the vicinity of the blast, the winds would have carried radioactive fallout over Washington D.C., Baltimore, Philadelphia, and New York City. It is not inconceivable to imagine that, at the height of cold war, a weapon of that magnitude exploding randomly on the eastern seaboard would have triggered immediate accidental retaliation against the Soviets resulting in full scale Armageddon and the end of humankind as we know it. This is just one of many nuclear accidents during the cold war.

  Peace has a dark side. Peace can exist due to hidden conflict in the Prisoner’s Dilemma.

  Global Capitalism is trapped in its own Prisoner’s Dilemma; fourty four years after the end of the Bretton Woods System global central banks have manipulated the cost of risk in a competition of devaluation leading to a dangerous build up in debt and leverage, lower risk premiums, income disparity, and greater probability of tail events on both sides of the return distribution. Truth is being suppressed by the tools of money. Market behavior has now fully adapted to the expectation of pre-emptive central bank action to crisis creating a dangerous self-reflexivity and moral hazard. Volatility markets are warped in this new reality routinely exhibiting schizophrenic behavior. The tremendous growth of the short volatility complex across all assets, combined with self-reflexive investment strategies, are creating a dangerous ‘shadow convexity’ that will fuel the next hyper-crash.

  Central banks in the US, Europe, Japan, and China now own substantial portions of their own bond or equity markets.  We are nearing the end of a thirty year “monetary super-cycle” that created a “debt super-cycle”, a giant tower of babel in the capitalist system. As markets now fully price the expectation of central bank control we are now only one voltage switch away from the razors edge of risk.  Do not fool yourself – peace is not the absence of conflict – peace can exist on the very edge of volatility. 

  The middle class is unknowingly trapped in the Prisoner’s Dilemma and this is perhaps our greatest non-linear risk as a nation. America is built on the promise of upward mobility but that promise is increasingly becoming a lie.  Wealth inequality is at the highest level in 100 years and close to levels last achieved before the 1928 crash that led to the Great Depression.

  

  Today the top 0.1% of households now control an equivalent amount of the wealth as the bottom 90%. Since 1973, real family income for the top 1 percent has grown over 150% while incomes for the lowest 20% of earners has remained stagnant. The median household income adjusted for inflation in 2011 was just below its level from 1989 and $4,000 lower than in the year 2000.

  The illusion of a middle class prosperity has been sustained via low interest rates, consumer debt, and globalization.  Instead of helping the problem, accommodative monetary policy has accelerated this pace of income inequality in the US.

  

  “Economic inequality has long been of interest within the Federal Reserve System” said Janet Yellen during a April 2015 speech. Yellen has repeatedly argued that accommodative monetary policy reduces income inequality by lowering unemployment. While it is true that unemployment has declined, her conclusion assumes that lower wealth inequality and lower unemployment are correlated in some kind of linear fashion. In reality, the wealth gap peaked the year before the Great Depression started when the country was close to full employment and the joblessness rate was only 2.08%. The point is that full employment with extreme income disparity can and often does co-exist. If we measure the average income in a hypothetical village of 100 people, 99 of which have minimum wage jobs, the last of which is Warren Buffett, who employs the rest, you have income disparity and full employment. To this extent, Yellen’s argument that lowering unemployment somehow decreases the wealth gap is illogical. During Yellen’s September 17th, 2015 press conference she alludes to a mysterious academic paper that somehow proves otherwise, but I looked everywhere and couldn’t find that paper. I do have a non-academic paper entitled “Common Sense” that takes a very different view.

  Yellen’s treatment of the wealth gap problem is an example of mistakenly linearizing a non-linear problem. The Bernanke-Yellen Fed has achieved a linear decline in unemployment via exponential growth in the monetary base. When asset prices increase in a non-linear fashion the top 1% of wealthy families that own real estate, stocks, bonds, and have access to low rates will benefit disproportionately. When the middle class earns a dollar, they spend that dollar on goods and services that reach the real economy. When the top 1% earns a dollar that money is likely to be reinvested in assets.

  As a result, we have seen non-linear inflation in asset prices but no significant inflation in real wages or core CPI. With no wage inflation, global central banks are inclined to continue their rotation of devaluation further exacerbating this mad cycle and encouraging an even greater income gap and vast political risk. The policies of the Fed have simply exchanged nonlinear expansion of the wealth gap in exchange for a linear decline in the unemployment rate.

  What is clear is that Janet Yellen would make a terrible derivatives trader because she just does not seem to understand that you cannot hedge a nonlinear risk with the linear benefit. The current monetary experiment, left unchecked, will inevitably threaten the very fabric of our democracy. 

  

  The global economy is suffering from a cancer of debt-deflation, income inequality, and low growth. Instead of treating the root cause, policy makers have treated the symptom of asset price declines. Whenever the patient feels weak an increasing amount of policy drugs are required to maintain the illusion of stability to the point where the patient is addicted to the painkillers.

  In all instances, policy intervention has generated a short-term market fix at the expense of addressing the longer-term fundamental problems.

   

  The Federal Reserve has expanded its balance sheet $4.5 trillion to create middle class jobs but instead has incentivized asset bubbles and the highest wealth concentration since before the Great Depression.  The European Central Bank and Bank of Japan are pursuing quantitative easing to drive up asset prices rather than addressing the core issues of structural reform and weak demographics that are causing their deflation. European institutions rely on last minute ‘bail-outs’ and quantitative easing to avoid debt default while ignoring the necessary fiscal and philosophical integration required to make a unified Europe a success. China is struggling to shift from an export driven economy to a consumption driven economy despite decelerating growth, total debt growing four times faster than GDP, and the valuation of the Shanghai Composite at levels comparable to 2007.

   

  How does spending an estimated 10% of GDP, including $263 billion in direct stock market intervention, coupled with cheap real estate loans to build ghost cities, fundamentally address any of China’s real problems?

  The root cause of the cancer is never confronted and as a result, the fundamental health of the patient does not improve. Neither the doctors nor the patient wish to face the reality that difficult and painful therapy is needed to destroy the cancerous leverage in the system. The inevitable result of this denial will be the death of the patient.

  

  

  

  

  

• Who Really Controls Iraq? Inside Iran's Powerful Proxy Armies

  When social media began to light up with pictures of Quds Force commander Qassem Soleimani rallying Shiite militiamen and Hezbollah soldiers ahead of Russia and Iran’s joint effort to retake the city of Aleppo, some wondered where all of these fighters came from. After all, even though the IRGC has now all but admitted it sent soldiers to Syria for the offensive, it wasn’t as if the entire Iranian army marched in overnight and if you believe the reports from the frontlines, the ground force marching on Syria’s largest city looks quite a bit different from the depleted SAA which was all but decimated just two months ago. 

  Those who have frequented these pages lately know exactly where those troops came from. Some are Hezbollah fighters and the rest were ordered to the Syrian frontlines from Iraq by Soleimani himself. We predicted this would happen months ago and now that the social media selfies are beginning to show up, everyone now seems to be gradually discovering the plan we outlined in “Mid-East Coup: As Russia Pounds Militant Targets, Iran Readies Ground Invasions While Saudis Panic.” Here’s WaPo for instance:

  Maj. Gen. Qasem Soleimani, the leader of Iran’s elite Quds forces and the public face of Iran’s military intervention in the region, has ordered thousands of Shiite militiamen into Syria for an operation to recapture Aleppo, according to officials from three Iraqi militias.The militiamen are to join Iranian troops and forces from Hezbollah, the Iranian-backed Lebanese Shiite militia, the officials said. The Iraqi Shiite militia Kitaeb Hezbollah has sent around 1,000 fighters from Iraq, one said.

   

  The Lebanese group Hezbollah and the Quds Force, which is part of the Iranian Revolutionary Guard Corps, have also sent reinforcements, he said. Last week, a U.S. defense official said hundreds of Iranian troops were near the city in preparation for an offensive.

   

  “It’s not a secret. We are all fighting against the same enemy,” said Saidi.

   

  His militia released a photo of Soleimani, the Quds Force commander, with its fighters near Aleppo on one of its social media accounts last week.

   

  “The operation is an extension for our operations in Iraq because it’s the same enemy, and when we hit them there it means that it will get results in Iraqi lands,” the Kitaeb official said. Soleimani “specifically requested they go there for the launch of the operation for Aleppo,” he said.

  But this is more than some general calling in favors from fanatical Khamenei followers operating across the border.

  The Shiite militias called to the fight in Syria control Iraq.

  Literally. 

  Take for instance the recent battle to recapture the Baiji refinery from ISIS. Although badly damaged, the site has both strategic and symbolic significance and even as the victory was claimed by the Iraqi army, there were more Shiite militiamen fighting than Iraqi regulars. Here’s The New York Times:

  A spokesman for Shiite militias said that several thousand Shiite militiamen were fighting in and near Baiji, which is more than the estimated number of Iraqi soldiers also fighting there. 

  Tehran’s control of the militias mirrors Iran’s influence on Iraqi politics. Although PM Haider al-Abadi certainly wouldn’t put it in these terms, Iraq is now for all intents and purposes a large Iranian colony, an ironic twist of fate given Saddam’s invasion of Iran 35 years ago. 

  We bring all of this up because Tehran’s influence in Iraq will be one of the key issues going forward once Russia and Iran retake Western Syria for Assad. Once the regime’s key strongholds are secured, it seems very likely that Russia will begin bombarding ISIS positions in the East while Iran’s Shiite militias will simply drive Islamic State out of Syria and right over the border into Iraq where fighters from the very same militias will be waiting with weapons at the ready. ISIS will, in effect, be encircled. 

  It’s with all of that in mind that we bring you the following excerpts from a new Reuters feature report entitled “Power failure in Iraq as militias outgun state.” 

  Iraqi Prime Minister Haider al-Abadi, a Shi’ite, came to office just over a year ago backed by both the United States and Iran. He promised to rebuild the fragmented country he inherited from his predecessor, Nuri al-Maliki, who was widely accused of fueling sectarian divisions. Since then, though, even more power has shifted from the government to the militia leaders.

   

  Those leaders are friendly with Abadi. But the most influential describe themselves as loyal not only to Iraq but also to Iran’s supreme leader, Ayatollah Ali Khamenei. Three big militias – Amiri’s Badr Organisation, Asaib Ahl al-Haq and Kataib Hezbollah – use the Iranian Shi’ite cleric’s image on either their posters or websites. Badr officials describe their relationship with Iran as good for Iraq’s national interests.

   

  Initially, Abadi had little choice but to lean on the Shi’ite paramilitary forces. They grew in power after Sunni extremist group Islamic State captured large parts of northern Iraq in June last year and Iraq’s top Shi’ite cleric, Grand Ayatollah Ali al-Sistani, called for volunteers to fight Islamic State, which soon declared a caliphate straddling the border with neighbouring Syria.

   

  As the Shi’ite militias’ popularity surged, Abadi publicly lamented the lack of Western support. He made plain his desperate desire for help earlier this month after Iran and Russia opened offensives against the group in Syria. The prime minister said he would welcome Russian air strikes in Iraq as well. Abadi is looking not just to hurt Islamic State but to bolster his own position in Iraq.

   

  The Shi’ite militias, which dominate most frontlines, say they support the government and pose no threat to Iraq’s minority Sunni sect. The Popular Mobilisation Committee, or Hashid Shaabi, as the militias are collectively known, belongs “to the Iraqi government,” said Naim al-Aboudi, a spokesman for the Asaib Ahl al-Haq militia. “The Hashid doesn’t represent a sect. It represents all Iraqis.”

   

  But the militias make no secret of their independence from Baghdad. Militia leader Amiri warned in a televised interview last month that if the Shi’ite groups did not approve of U.S. military operations in Iraq, “We can go to Abadi and the government and … pressure them: ‘Either you will do this, or we will do that.’” Amiri did not specify what action his group would take.

   

  Abadi took office facing many challenges. He inherited a military that had all but collapsed. Three months before he became prime minister, Islamic State overran the army in Mosul, the largest city in the north. At its height, the militant group, which has used rape as a weapon of terror and executed Iraqi Shi’ites and Christians, controlled nearly a third of Iraq.

   

  Early on, Abadi struggled to work out what was left of the army and federal police. “There wasn’t really a good picture of how many soldiers, how many police he really had, and who the hell is really on the rolls,” said Lieutenant

  General Mick Bednarek, the senior U.S. military officer in Iraq from 2013 until July. Bednarek said Abadi and his defence minister worked hard on the issue and by November last year recognised the military was “ill prepared and lacking in leadership.”

   

  Abadi also turned to the militias for support. “He doesn’t like it,” said Bednarek, who retired in late August. “But he has to, because Iraqi security forces can’t do it alone.”

   

  The Hashid Shaabi now commands more than 100,000 fighters. On paper, it receives over $1 billion from Iraq’s state budget. Two Iraqi officials said the militias get additional funding from other sources, including Iran, religious clerics and political figures, but declined to give details. U.S. military officials believe large amounts of funding come from Iran.

   

  The Shi’ite militias have also made inroads within the government security apparatus.

   

  The Fifth Iraqi Army Division now reports to the militias’ chain of command, not to the military’s, according to several U.S. and coalition military officials. The division rarely communicates with the Defence Ministry’s joint operation command, from which Abadi and senior Iraqi officers monitor the war, the officials said.

   

  Iraqi security officers, Iraqi politicians and U.S. and Western military officers say the Interior Ministry has become another militia domain. The ministry came under the influence of Shi’ite militias previously, in 2005, and was accused of running death squads.

   

  Today it is run by Mohammed Ghabban, a senior member of the Badr militia. Badr fighters fought alongside Iranian soldiers in the 1980-1988 Iran-Iraq war. 

  One of the most important things to understand about this is that the US largely supports (in public at least) the Shiite militias fighting ISIS in Iraq. After all, to not support them publicly would be to support ISIS publicly and as we’ve seen, the US is hell bent on keeping up the charade that Washington hasn’t and isn’t providing aid to extremists. 

  Indeed, these are the same Shiite militias who dropped off an Abrams tank in the Green Zone for service last week. 

  And so you can begin to see just how absurd the situation is. The US is now supplying anti-tank weapons and other munitions to the rebels fighting in Aleppo and those weapons are being used to kill these very same Shiite militiamen who are driving US tanks, fighting alongside the Iraqi army, and indirectly receiving US assistance just across the border in Iraq.

  So thanks to Washington’s twisted foreign policy, they are friends on one side of the Syria-Iraq border and mortal enemies on the other.

  Of course they’re fighting ISIS in both countries. So what accounts for the Pentagon’s schizophrenia you ask? Simple: Bashar al-Assad doesn’t run Iraq. 

  We leave it to readers to speculate on what will happen once Assad is restored and ISIS vanquished. That is, Iran’s Shiite militias pretty much are the Iraqi military and they also effectively control the government, so once there’s no longer an excuse (i.e. ISIS) for the US to stick around, we wonder whether Washington will be content to simply cede the country it “liberated” to the Ayatollah. 

  Here are some recent images of the Shiite militias the Quds Force controls in Iraq:

  

  

  

  

  

  

  

  

  

  

  

• VRX a sign of collapse of the greed bubble

  Companies used to build things.  Not because they were noble, but because they had no other choice.  Selling snake oil simply wasn’t possible on a large scale, for a long time; in the previous economy.  Now, like during the dot com boom, all you need is a phone, a website, and a power point machine.  Actual sales, or an actual product, it’s so 80’s.

  Today shares for VRX “Valeant” Pharmaceuticals was haled 4 TIMES:

  Valeant is using “a network of phantom captive pharmacies” connected to Philidor, with the same management and phone numbers, to create false sales and avoid auditor scrutiny, Citron alleged in its report.

  Valeant has released a statement responding to the allegations, noting that Philidor provides back-end services to and shares a call center with the “phantom” pharmacies such as R&O Pharmacy that Citron referenced. Shipments to pharmacies in Philidor’s network are not recorded in the company’s revenue, and inventory at these pharmacies is not included in consolidated inventory balance, according to the statement.

  But the good news for investors, this will make a monumental class action lawsuit, which are already starting to pile up from leading firms.  But this begs the question, are the markets going to be unwound in court?  Will the final trade be in a courtroom – not on a trading floor?

  How many more VRX are out there – hiding just under the noses of honest investors, in plain sight?  

  Or, is it the rules of the stock market, that ‘force’ companies to behave in such a way, in order to keep their past investors afloat?  

  Words such as “Enron style accounting” and the “Pharmaceutical Enron” are not an encouraging sign of stability:

  Valeant Pharmaceuticals has been crushed by investors after short-selling research-firm Citron called it the “pharmaceutical Enron.”

  The stock fell 39% before Valeant called Citron’s claims “erroneous.” That stopped the bleeding, but the stock still fell 19% to close the day at around $118 per share. Just two months ago, the stock was trading above $250.

  Citron alleged Valeant improperly benefited from a business relationship with Philidor, a pharmacy that distributes drugs for specialty pharmacies. Citron says Valeant filed fake invoices with Philidor to make its revenue appear greater than it is. Valeant is Philidor’s only customer, Citron points out.

   

  In a release Wednesday, Valeant said that Philidor is a legitimate distribution network through which Valeant sells some of its products.

  At least if the stock market is moving to the courtroom, we can still trade Forex!

  And yes – of course there are companies that build things – but their stock is selling for much greater times than it should be, due to their use of free QE money and Goldman derivatives.

  

  

  

  

• QE vs Negative Rates: A Cost-Benefit Analysis Of The Monetary Twilight Zone

  The world may be at (or near) ZIRP, and in many cases mostly in Europe, NIRP, but that does not mean rates can not go any lower. In fact, the topic of “absolute zero”, or what is the very lowest interest rate central banks can go to, either outright via negative rates or synthetically via asset monetization, is the topic of the latest note by DB’s Abhishek Singhania titled “In search of absolute zero: why ZIRP central banks can still cut rates.”

  In the past month the Fed finally confirmed what we said in January, namely that it is only a matter of time before NIRP crosses the Atlantic and lands in the Marriner Eccles building, the one section in the report we found most interesting is DB’s comparison of the cost-benefit between QE and negative rates.

  And since either NIRP, or QE, or most likely both, are about to cross the Atlantic and make landfall in the US before the Fed
  is forced to launch the monetary helicopter, those who want to know what is
  really coming – no, not rate hikes – are urged to read this.

  Negative rates versus QE, a cost benefit analysis

  If there is more room for policymakers to cut rates further into negative territory, what are the pros and cons versus other monetary policies?

  1. Financial stability risks: Where an economy is highly leveraged or financial conditions loose, there may be an advantage to pursuing negative rates over asset purchases, at least in the short term. Asset purchases are designed to push down term premia and hence borrowing costs for the real economy. As we have seen, negative rates could actually help to reduce leverage by encouraging banks to raise borrowing costs. On the other hand, if central banks were to commit to keep rates negative for long periods, expectations of negative rates could become embedded and result in lower long term yields resulting in similar financial stability concerns.

  2. Assets available for unconventional QE: Further cuts to deposit rates may be more attractive where an economy does not have enough assets to sustain a large-scale asset purchase program. In the case of Sweden, for example, the Riksbank asset purchase program will have bought 20% of outstanding Swedish government bonds by the end of the year. Switzerland’s outstanding stock of government debt is even smaller. This is particularly problematic where buying other assets would have unwanted side-effects, such as the Riksbank buying covered bonds and exacerbating housing market risks.

  In the Eurozone, despite the concerns voiced by some ECB members over liquidity in Eurozone government bond markets, the ECB has much more room on a relative basis to extend its asset purchase program. At the very least the ECB can extend the current purchase programme by 12 months to Sep-17 without expanding the range of eligible assets or changing other parameters of the programme10.

  A related but different concern would be where central bank balance sheets have become sufficiently large for them to become concerned about capital losses. This is only a theoretical constraint, as a central bank could in practice operate with negative capital. In the case of Switzerland, however, concern over losses arising from a large balance sheet played an important role in the decision to abandon the open ended FX intervention.

  3. FX or credit conditions channel. Negative rates have tended to be a highly effective tool for weakening currencies. Short-end rates are more correlated to currency movements than long-end rates, likely because FX investors tend to fund positions using overnight or short-end rates rather than further down the curve (chart 31).

  

   

  Negative rates have also proved to be more effective that outright currency intervention. The contrasting experiences of Switzerland  and Denmark serve to underline this point. SNB’s approach of targeting the size rather than price of reserves failed to alleviate pressure on the EUR/CHF floor. It was only until the SNB finally cut rates into deeply negative territory that pressure on the Swiss franc has relented, and the currency has begun to depreciate. By contrast, the Nationalbank was able to effectively defend the peg between the Danish krone and euro by aggressively cutting rates at the same time as currency intervention.

  

   

  Negative rates appear to be much less effective in relaxing credit conditions in the overall economy. As we have noted, the experience of the four economies under negative rates suggests that borrowing costs may actually rise, not fall, for households once negative rates are implemented. Moreover, insofar as markets do not expect negative rates to be permanent, pass-through into assets with longer maturities may be limited.

  Finally, as Praet has argued, the impact of asset purchases in reducing term premium and via the portfolio rebalancing channel is likely to be maximized when the central bank has reached a lower bound11. In the absence of a floor on front-end rates and the potential for further rate cuts the scope for potential capital gains on fixed rate assets reduces the incentive for investors to move further out along the maturity and credit spectrum.

  4. Fragmentation: In the Eurozone case, deeply negative rates in combination with an active expansion of the ECB balance sheet may be additionally problematic. The excess reserves created via asset purchases are likely to flow back to banks in the core countries. This would imply that the burden of negative rates will be excessively borne by banks in the core countries. Making the deposit rates more negative would not necessarily incentivize banks in core countries to lend to banks in periphery as the opportunity cost for these banks will be the difference between market rates and the deposit facility rate rather than the absolute level of negative rates. This spread is already minimal and likely to get even smaller as excess liquidity increases.

  * * *

  In retrospect, when we said that NIRP is the functional equivalent of the the “Monetary Twilight Zone”, we were right: not only is there no getting out, but once you are in absolutely nothing makes sense any more. Good luck to anyone who still believes that “fundamentals” matter when making financial decisions.

  

  

  

  

  

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