Today’s News October 25, 2015

• 5 Questions For Bernie Sanders Supporters

  Authored by Derrick Broze, originally posted Op-Ed at TheAntiMedia.org,

  I have five simple questions for supporters of Senator Bernie Sanders’ presidential campaign. Before I get to them, I find it necessary to preface this with a plea for logic and respectful communication. I am going to be critical of Bernie, and I need you to listen, remain calm, take in the information, and answer honestly.

  I ask that you refrain from calling me a shill, a Republican agent, or anything of that sort. I also ask that before you write me off as “another corporate media shill,” you take a moment to consider that I have praised Bernie when he was in the right (see here and here). I have also called him out in the areas where he needs work.

  Personally, I am slightly frightened by the online interactions I have witnessed from those who #FeelTheBern. There seems to be a tendency to dismiss anyone who criticizes Bernie as either a Donald Trump supporter or simply an idiot. I can only speak for myself and say that neither of those accusations are true. This hysteria around Sanders is reminiscent of Obama’s supporters, who were quick to attack detractors pointing out that “Hope and Change” was quickly turning into more of the same.

  And now on to the questions. Each of them relates to Sanders’ own comments about his potential presidency. I ask that you respond to each comment individually and think about what exactly you are looking for when you say you want to vote for a president.

  If you are seeking more freedom and prosperity, ask yourself if that is what you will get by voting for any of the current candidates. If you are seeking to reclaim the moral high ground the United States may have once had, ask yourself if these policies will do just that. Please, please stand by your principles and do not allow the Corporate-State powers to pull the wool over your eyes.

  Question 1. Would Bernie’s tax on Wall Street speculation work?

  Bernie Sanders has said that he would tax Wall Street speculation and use the funding to pay for his “free” public college tuition program. A fact check by the Associated Press reported that “Sanders’ plan would cover tuition and fees at public universities – a $70 billion annual expense with the federal government picking up two-thirds of that tab by taxing trading in the financial markets.”

  “Students would still be on the hook for room and board costs that average $9,804, according to the College Board,” the AP added.

  But would this Wall Street speculation tax actually achieve the desired outcome? Donald J. Boudreaux, Professor of Economics at George Mason University, does not believe the plan can work. Boudreaux recently wrote:

  “If such speculation is as economically destructive as Mr. Sanders regularly proclaims it to be, the tax on speculation should be set high enough to drastically reduce it.  But if – as Mr. Sanders presumably wishes – speculation is drastically reduced, very little will remain of it to be taxed and, thus, such a tax will not generate enough revenue to pay for Mr. Sanders’s scheme of making all public colleges and universities ‘tuition-free.’”

  If a speculation tax is a successful deterrent, there will likely be a decrease in speculation and therefore, very little funds to appropriate for a college tuition fund. Can Bernie’s Wall Street speculation tax work?

  Question 2. Do you support an increase in payroll tax for all Americans to fund Bernie’s minimum wage and healthcare plans? Do you believe Bernie’s plans will only tax the 1%?
  Bernie Sanders recently appeared on This Week with George Stephanopoulos to discuss his plans for his presidency. Stephanopoulos asked Sanders about his plans to tax the wealthiest Americans. Here is a segment of the transcript:

  Stephanopoulos: But to pay for all of your programs, you’re going to have to do more than tax the top 1 percent. How far below the top 1 percent are you going to go with tax hikes?

  Sanders: It is not true that we have to go much further.

  Stephanopoulos:  Tax hikes below the top 1 percent? No tax hikes below the top 1 percent?

  Sanders: I didn’t say that. I think if you’re looking about guaranteeing paid family and medical leave, which virtually every other major country has, so that when a mom gives birth, she doesn’t have to go back to work in two weeks, or there’s an illness in a family, dad or mom can stay home with the kids. That will require a small increase in the payroll tax.

  Stephanopoulos: That’s going to hit everybody.

  Sanders: That would hit every — yes, it would.

  Bernie Sanders was also quizzed on his plans on a recent episode of “Real Time with Bill Maher”:

  “So you’re saying we can pay for all of this without raising taxes on anybody but the 1 percent?” Maher asked.
  “We may have to go down a little bit lower than that — but not much lower,” Sanders replied.

  Do you trust Sanders when he says the payroll tax will be “small” and that he will only raise taxes on the 1% (or a little bit lower)?

  Question 3. Do you support Bernie’s comments on Edward Snowden?

  Sanders has openly spoke against the NSA’s massive surveillance programs but stands with the rest of the presidential candidates in his belief  that Snowden should face some type of punishment. At the first Democratic presidential debate, Bernie was asked about his position on Edward Snowden. Sanders said he believes Snowden “played a very important role in educating the American people” — but he broke the law. “I think there should be a penalty to that,” he said. “But I think that education should be taken into consideration before the sentencing.”

  I know some Bernie supporters may feel these comments provide some hope for Snowden to receive a fair trial, but the truth is that Snowden could not possibly face anything resembling a fair trial in the U.S. Simply look at the prosecution (and persecution) of Chelsea Manning, Barrett Brown, Jeffrey Sterling, and John Kiriakou to see the way whistleblowers are treated in the land of the free. Snowden should be welcomed home as a hero and the masterminds of the NSA’s spying programs should be the ones facing penalties.

  Question 4. Do you support Bernie’s stance on Israel and Saudi Arabia? Both of these nations are responsible for atrocious human rights violations (here and here). Saudi Arabia is also accused of funding the 9/11 attacks. Despite this, the majority of politicians — including Bernie — continue to support these nations.

  Last summer, as Israeli soldiers deliberately targeted hospitals in Operative Protective Edge, Sanders joined the rest of the U.S. Senate by unanimously voting to support Israel’s actions and supporting “the State of Israel as it defends itself against unprovoked rocket attacks from the Hamas terrorist organization.”

  Mint Press News recently reported on Sanders’ Israel stance:

  “Yet when it comes to more recent statements, journalists describe Sanders as difficult to pin down on foreign policy issues, including Israel. Josh Nathan-Kazis, writing in June for Forward, noted that ‘a search of the Congressional Record reveals very few statements about Israel by Sanders on the floor of the House or the Senate,’ but ‘in February 2015, Sanders was the first Senator to announce that he would skip Israeli Prime Minister Benjamin Netanyahu’s speech to a joint session of Congress.’”

  Nathan-Kazis reports that Sanders does have limited ties to AIPAC, the pro-Israel lobbying group that’s trying to drive the U.S. to war with Iran:

  “In Vermont, a small group of AIPAC-linked Jewish activists do have Sanders’ ear on Israel-related matters. Yoram Samets, a Burlington businessman and a member of AIPAC’s national council, said that he has been in touch with Sanders for the past decade, but that Sanders does not sign any AIPAC-backed letters. His Vermont colleague Senator Patrick Leahy does not, either.”

  Though it appears Sanders keeps his distance from Israeli radicals like Netanyahu, his silence on the matter and support of Operation Protective Edge reveals his true stance.

  Sanders also recently spoke about Saudi Arabia while taping a PBS show at the University of Virginia. Sanders’ said the nation with untold amounts of blood dripping off its hands should “get their hands dirty” and take a bigger role in the war against ISIS. Why would someone interested in ending the wars demand that a nation known for blatant human rights violations “get their hands dirty” and support more war? Saudi Arabia killed dozens of civilians in a single airstrike over a wedding in Yemen last month, yet Sanders still believes they should lead the assault on the Islamic State.

  Should we expect President Sanders to continue supporting these nations?

  Question 5. Do you support Bernie’s plan to continue the drone program? According to documents released by a new whistleblower, during one five-month period of drone operations, nearly 90 percent of the people killed in airstrikes were not the intended targets.

  Senator Bernie Sanders recently said he would continue Obama’s disastrous drone program, which has resulted in the deaths of innocent people across the Middle East. In late August, Truthdig reported that Bernie Sanders told George Stephanopoulos he would continue the program.

  “I think we have to use drones very, very selectively and effectively. That has not always been the case.” Sanders said. “What you can argue is that there are times and places where drone attacks have been effective. … There are times and places where they have been absolutely countereffective and have caused more problems than they have solved. When you kill innocent people, the end result is that people in the region become anti-American who otherwise would not have been.”

  Sanders is absolutely right that killing innocent people fosters anti-American sentiment around the world (this makes his push for the civilian-killing Saudi military’s involvement in the fight against ISIS all the more puzzling). In 2014, the journal Dynamics of Asymmetric Conflict released two papers discussing the use of drones by the military and found an increasing number of Americans are against the use of drones on suspected terrorists in foreign countries. One paper notes that if drones continue to receive negative publicity within the United States and abroad, they may become “politically impractical.” The second paper asks whether drones are actually increasing the power of anti-U.S. protesters by gaining sympathy with the civilian population.

  According to the Bureau of Investigative Journalism, the CIA carried out 27 drone strikes in Pakistan during 2013, as well as 38 in Yemen — including the now infamous attack on December 12, 2013 that killed 15 people at a wedding. TBIJ estimates there have been over 2,400 deaths since Obama took over the drones. Since official numbers are not recorded, it is difficult to know exactly how many civilians have been killed under the U.S. drone program. However, Senator Lindsey Graham has estimated that 4,700 people have been killed.

  These numbers seem to line up with what the newest whistleblower has stated: “Anyone caught in the vicinity is guilty by association,” the whistleblower told The Intercept. When “a drone strike kills more than one person, there is no guarantee that those persons deserved their fate.”

  The whistleblower also stated that the program uses a phone number or email address to locate targets and is very unreliable. The source told The Intercept that drone bombings are carried out based on these phone numbers or emails and might not result in the death of the intended target.

  Many are quick to say that we are keeping American soldiers safe by using drone warfare, but we are learning that this war is not being fought with accurate intelligence or oversight. With all of this information readily available, how can Bernie Sanders continue to support this drone program?

  *  *  *

  These are my five questions for supporters of Senator Bernie Sanders’ presidential campaign. I hope some of you made it this far and were willing to read and respond with respect and honesty. It is important to recognize that there is a growing number of Americans who no longer buy into the two-party system and do not trust anyone running within those parties. Rather than voting for a new leader every four years, these radicals focus on creating solutions built on voluntary association and mutual aid rather than government force. Remember, not everyone is an idiot, a Republican, or an apathetic sheeple. Some of us simply disagree with Bernie’s economics and solutions.

  Personally, I recommend each of you begin researching agorism and seeking solutions outside of the ballot box.

  

  

  

  

  

• Individualism Vs Sacrificial Collectivism

  Submitted by Richard Ebeling via EpicTimes.com,

  Free, competitive markets have been the engine for both freedom and prosperity. In addition, free market capitalism is morally based on the principle of individual rights to life, liberty and honestly acquired property, in which all social relationships require the voluntary and mutual consent of the participants.

  Private property rights are central to the free society. The most fundamental private property right is the right of each person to own himself – his mind, his body, his peaceful actions, and the fruits of his efforts either on his own or in interaction with others.

  The opposite of owning yourself is slavery. Under a slave system some individuals assert the right to own and control the actions of others under the threat or use of force. The slave lives and works for and obeys the commands of another human being with violence the ultimate instrument of control.

  Slavery in All Forms is the Opposite of Freedom

  For the friend of freedom, it does not matter whether the slave-master is one private individual on his own, or a private group or gang imposing their coercive rule on a number of others in society. Nor does it matter if the group is a political collective that imposes its will on another segment of the society based upon a “democratic” decision-making process.

  Regardless of the institutional circumstance and situation under which one person is made to live and work (completely or partly) for another, it remains a total or partial restraint on the individual’s right to live his own life as he sees fit for the purposes that he considers of value and of importance so he may give meaning and possible happiness to his existence.

  Critics of this “individualistic” understanding of freedom and its opposite often brand such a perspective as “selfish” or “egotistical.” If to say that an individual should be treated and respected as an end in himself and not the compelled pawn or a tool to serve the ends of another is selfish or egotistical, then the very definition of liberty – if liberty is to mean anything – cannot be separated from the person’s right to be self-oriented.

  

  Collectivist Confusions and Misconceptions

  There is no collective mind, or body, or purpose. The fact is, the world is comprised only of individuals. What often causes confusions and misconceptions is that individuals are born into families, grow up in communities, and live their lives in arenas of societal interaction and association.

  And due to this many of the beliefs, values, and purposes we hold as individuals have been taken as our own from the surrounding people, groups, and communities of others with whom we have grown into adulthood.

  We find ourselves holding many of the same beliefs, values and purposes as many of the others around us. They are the commonly shared and taken-for-granted ideas, ideals, attitudes, and presumptions about “the way things work” and how things are or supposed to be.

  Yet, nonetheless, unless and until those beliefs, values and purposes become accepted and motivating for each and every individual influenced by them, they have no effect or power over him.

  These beliefs, values and purposes seem to be outside and independent of ourselves, with a seeming life and reality of their own; an transcendent entity of some sort that defines who and what we are, and outside of which our individual life seems to have neither existence nor meaningful orientation.

  Philosophers have referred to this as the “fallacy of misplaced concreteness.” To assign physical or some other objective reality to an idea or concept that is used to categorize or classify a series of beliefs, attitudes, or other characteristics that a group of individuals are postulated as possessing in common and which are then is used to define who and what those individuals are, and outside of which those people have no real existence.

  Soviet Collectivism and Social Class-Based Sacrifice

  If this seems rather abstract or amorphous, the seeming reality of such a transcendent collective entity into which we are born and live out our lives, and for which we are expected to serve and sacrifice has been used as the basis for some of the most manipulative and brutal ideologies of our times.

  Marxian socialism conjured up the image of everyone in society divided into “social classes” defined by whether they privately owned the means or production or sold their labor services to those private owners. It was insisted that these two “classes” of people were in irreconcilable antagonism and conflict with each other over the control and use of the land, resources and capital equipment without which needed and desired goods and services cannot be produced.

  In this Marxian world, the property-owning capitalists were the exploiters of the workers, who were deprived of part of what they produced. The Marxian socialists portrayed the human condition under capitalism as a great morality play between the exploited and the exploiters.

  By definition, anyone in the other “social class” was an inescapable “enemy” of everyone one in your own social class. The Marxian ideologues leading the socialist revolutions of the twentieth century often viewed themselves as, or at least took on the public mantle of appearing to be, secular prophets bearing sword and fire to cleanse the world of the exploiters denying “social justice” to the greater part of humanity.

  To cleanse the world not only were tens of millions condemned to death through execution, torture, slave labor, or starvation, but also all members of the righteous “workers’ class” had the obligation to live, work and obey the revolutionary leaders claiming to speak for the good of “humanity” as a whole.

  To not do so, to not sacrifice, work, and live for the socialist collective was a sign that one was a “wrecker,” an “enemy of the people,” or an agent of the “class enemies” trying to undermine or destroy the great socialist revolutionary cause. (See my article, “The Human Cost of Socialism in Power.”)

  

  Nazi Collectivism and Race-Based Sacrifice

  The other great and destructive twentieth century manifestation of this fallacy of misplaced concreteness was the racial ideology of the National Socialist (Nazi) movement in Germany. Human identity as a biological and social being was determined by one’s genetic make-up, with the defining characteristic of who and what you were being based on “the blood” that flowed in your veins.

  Nazism was an outgrowth of the eugenics movement that asserted that what a person is, was dictated by their genetic make-up. But this was not only a matter of the physical characteristics that one inherited from one’s ancestors through one’s parents. No, it was claimed that genetics also was a, if not “the,” defining basis of personality and behavioral proclivities.

  Thus, whether one was prone to be a murderer or a malcontent or a moocher on others could be predicted by one’s biological ancestry. Thus, the “sins” of the father and the mother could be predicted to fall upon the children through genetic transmission. The conclusion was that the spreading of the “bad seed” to future generations could be contained through compulsory sterilization and through managed sexual bleeding to create a biologically and socially superior human type. (See my article, “The Nazi Connection.”)

  Hitler and the National Socialists defined “the Germans” as the superior and “master” race in physical, mental and social characteristics; they then proceeded to classify all other “races” in descending order of “purity.” Of course, the “Jews” were placed at the lowest level, as sub-humans portrayed as vermin and rats threatening to biologically and socially undermine and destroy German genetic superiority through interbreeding and social penetration of German society.

  In the name of racial purity and protection, all those that the National Socialists classified as “Jews” had to be eliminated. Both German and Jew was defined and identified by pseudo-biological characteristics – the shape of one’s nose, the slope and size of one’s forehead or earlobes, the religion of one’s ancestors as indication of one’s genetic inheritance, and one’s attitude and allegiance and loyalty to the Nazi ideology.

  Six million Jews, three million Poles, half a million Gypsies, over ten million Russians and Ukrainians and Byelorussians, were sacrificed at the altar of Nazi racial collectivism. Plus hundreds of thousands of others who fell under Nazi control during the war.

  But neither were racially pure Germans exempt from the commanded sacrifice. As the Second World War was reaching its end in Europe in April 1945, Hitler said to Albert Speer, his favorite prewar architect and wartime Minister of Munitions, that if the Germans lost the war they will have failed their “fuhrer,” and had shown their racial inferiority in comparison to the victor to the East (the Russians); the German people will have forfeited their right to exist and should perish in the rubble and ashes of the aftermath of the war.

  If Soviet collectivism is estimated to have required the sacrifice of upwards of 68 million lives to build the “bright future” of Marxian socialism, and if Nazi collectivism imposed the sacrifice of as many as 25 million lives in the name of pursuing a racially pure, German-dominated Europe, we continue to see the effects of the fallacy of misplaced concreteness in our contemporary world today.

  

  Islamic Collectivism and Faith-Based Sacrifice

  The world has been seeing the return of violent religious fanaticism in the form of Islamic extremism. It has been captured in the imagery from the Middle East in the form of the Islamic State, though it is certainly not confined to this one variation of religious collectivism.

  Are you Muslim or are you not? Do you follow the asserted correct reading of the Koran, or not? Are you willing to kill and die in pursuit of the earthly fulfillment of God’s will and purpose?

  All non-believers are to be either converted or threatened with death in a multiple of cruel and brutal forms – thrown off a rooftop, beheaded on social media, burned alive in a cage, or shot in acts of mass execution with the victims thrown into rivers until the water runs red. Or forced into slavery for compulsory labor and/or sexual abuse.

  And if you are a “believer” it has to be the right belief system of ideas, practices, and rituals within the Islamic faith, otherwise one is condemned to the same fate as the infidel, the non-believer.

  The Islamic collectivism of religious sacrifice requires not only the non-believer to forfeit his life if he does not accept, believe and follow the “true” faith, the believer must rigidly limit his life to the practice and performance of all that is expected and demanded from a member of the community of Islam.

  The individual has no right to live, act, or believe other than what the voices who claim to speak for God declare to be the path to righteousness in this life and after. The individual’s mind and body have no existence outside of the prescriptions of Islamic dogma; one is a human cog in the cosmic wheel of God’s purpose as God’s voices on earth dictate your place in the greater and higher cause of the “pure” faith.

  In all of these variations on the collectivist theme, the individual is considered “selfish” or “egotistical” if he refuses to accept and act within the confines of the group identity that others conceptually impose on the world and to which he is demanded and commanded to conform under threat of punishment for refusing to sacrifice for a purpose or cause not of his own making or acceptance.

  Individualism the Enemy of All Forms of Collectivism

  This is why all forms of collectivism – philosophical, religious, political, or economic – reject and condemn all philosophies of political and economic individualism. Philosophical individualism argues that “society” – any formed and continued association of people for shared or mutually advantageous purposes – does not exist and does not have a reality independent of, or separate from, the individual human beings who comprise the participants in these associative relationships.

  Political individualism insists that nations and states do not have an existence independent from or superior to the individuals who may be members of a particular nation-state. The purpose of the political authority is to secure and protect each individual’s right to his life, liberty and honestly acquired property (i.e., property acquired through peaceful production and voluntary exchange).

  Government’s purpose is not to make the individual a slave or a sacrificial animal to some declared “higher cause,” because there are no higher causes separate from the purposes, values and goals that individuals choose for themselves and non-violently pursues through their actions and interactions with others.

  Economic individualism emphasizes that production, work, and creative and innovative entrepreneurial discovery are the results of individual effort and imagination. The “nation,” the “society,” does not produce, work or create. Individual human beings do these things and they do not happen separate from these individual actions and activities.

  Economic individualism explains that order and coordination of the actions of multitudes of tens of millions of people do not required government central command or regulatory dictation or direction. From the time of Adam Smith, economic individualists have shown that a system of individual rights, voluntary exchange, and associative interdependence through division of labor – what Adam Smith called a “system of natural liberty” – brings about self-interested incentives and opportunities for individuals to mutually improve their own lives through a network of trades and transactions that rebounds to the benefit of all, without the imposed and compulsory political hand of governmental control.

  Philosophical, political and economic individualism, rightly understood, is the ethical and practical bulwark against collectivism and its demands for compulsory sacrifice for imaginary “higher goods” or “greater causes” that justify the denial or reduction of human freedom to the limits of what the collectivist controllers permit.

  The philosophy of individualism is the foundation of a free society; it is the basis of a community of men that does not require or demand the sacrifice or enslavement of some for the one-sided benefits of others. Individualism is the premise of a morality for mankind that recognizes and respects the liberty and dignity of every human being. It is the ethical philosophy of freedom.

   

  

  

  

  

  

• Overstock Holds 3 Months Of Food, $10 Million In Gold For Employees In Preparation For The Next Collapse

  Overstock CEO Patrick Byrne’s crusade against naked short sellers in particular, and Wall Street and the Federal Reserve in general, has long been known and thoroughly documented (most recently with his push to use blockchain technology to revolutionize the multi-trillion repo market).

  But little did we know that Overstock’s Chairman Jonathan Johnson is as vocal an opponent of the fiat system, and Wall Street’s tendency to create bubble after bubble, if not more than Byrne himself.  That, and that his company actually puts its money where its gold-backed money is and in preparation for the next upcoming crash, has taken unprecedented steps to prepare for what comes next.

  One week ago Johnson, who is also candidate for Utah governor, spoke at the United Precious Metals Association, or UPMA, which we first profiled a month ago, and which takes advantage of Utah’s special status allowing the it to use gold as legal tender, offering gold and silver-backed accounts. As a reminder, the UPMA takes Federal Reserve Notes (or paper dollars) which it then translates into golden dollars (or silver). The golden dollars are based off the $50 one ounce gold coins produced by the Treasury of The United States. They are legal tender under the law and are protected as such.

  What did Johnson tell the UPMA? Here are some choice quotes:

  We are not big fans of Wall Street and we don’t trust them. We foresaw the financial crisis, we fought against the financial crisis that happened in 2008; we don’t trust the banks still and we foresee that with QE3, and QE4 and QE n that at some point there is going to be another significant financial crisis.

   

  So what do we do as a business so that we would be prepared when that happens. One thing that we do that is fairly unique: we have about $10 million in gold, mostly the small button-sized coins, that we keep outside of the banking system. We expect that when there is a financial crisis there will be a banking holiday. I don’t know if it will be 2 days, or 2 weeks, or 2 months. We have $10 million in gold and silver in denominations small enough that we can use for payroll. We want to be able to keep our employees paid, safe and our site up and running during a financial crisis.

   

  We also happen to have three months of food supply for every employee that we can live on.

  The contents of the rest of his speech are largely familiar to advocates of sound money: fiat paper has no value, solid gold – as both a currency and an asset – has tremendous value but is difficult to transport (and since a systemic collapse would certainly involve gold confiscation, portability would be an issue); gold-backed money may be the best option, and so on.

  We are confident the echo-chamber of worthless econohacks and macrotourists, the same ones who were absolutely certain the great financial crisis will never happen, will be quick to mock “prepper” Johnson and Wall Street pariah Overstock. And they have every right to do so. We only hope that after the next crash, with central banks all in and when calls for another global bailout hit a fever pitch, that all those pundits who made fun of the Johnsons of the world, will keep their damn mouth shut.

  

  

  

  

  

• Things Fall Apart

  Originally posted at EconomicNoise.com,

  “Things fall apart” is an apt sub-title for historians to apply to the first half of the 21st century. The phrase properly describes the collapse of the domestic and foreign policy of the United States. Further, it also is appropriate to describe the happenings in Europe, the Middle East and Asia.

  

  Things fall apart describes the economy of every developed nation and the balance of power that the world has known since the end of World War II.

  The powers that be have lost control. After almost a century of playing the Wizard of Oz, the curtain is disintegrating. Institutions to ensure control, stability and prosperity are failing. People and markets were not to be trusted and most of these institutions were established to protect against such freedom. Bureaucrats, central planners and big governments were to be the answers for a better world.

  The damage of nearly a century of this nonsense is suddenly becoming evident. Things fall apart is characterized by institutions that no longer are trusted or believed in. Few institutions are seen to work and when they do they are increasingly seen as favoring the elites at the expense of the masses. No institution is under greater scrutiny as the cloak of wisdom is being destroyed by the hard facts of reality is that of central banking, the corner piece of socialism even at the height of the Thatcher–Reagan movement back toward markets. The Daily Bell writes about the US Federal Reserve, although other central banks are incurring similar doubts and distrust:

  Things Fall Apart Around Janet Yellen

  By Daily Bell Staff – October 16, 2015

  

   

  Fed policymakers downplay divisions on U.S. rate hike … Federal Reserve policymakers are not as divided as it may appear and are generally operating under the same framework for determining when to raise interest rates, one Fed official said on Thursday, while another said the differences of opinion reflect the countervailing economic data. Many Fed watchers are exasperated by the mixed messages from the U.S. central bank in recent weeks. Fed Chair Janet Yellen and other officials have said they expect a rate hike will be needed by the end of this year, but two Fed governors this week urged caution. – Reuters

   

  Dominant Social Theme: Everything is OK. Janet Yellen is OK. The Fed is OK. Inflation is OK. The data is OK. It’s OK, man!

   

  Free-Market Analysis: But maybe it’s not … Of course the mainstream media – as represented above by Reuters – is going to emphasize the normalcy of the process. There should be no doubt that the Federal Reserve has weathered worse crises and as soon as the numbers prove out one way or another, Fed officials will figure out the next move.

   

  On the other hand, maybe, just maybe, we are seeing the final days of the Fed as a credible institution. Often in autocratic societies, power centers become dysfunctional long before they are retired or crumble into dust and blow away. This is part of how a society dies – when the people abandon the institutions in which they are supposed to believe.

   

  So the Fed’s quandary is a serious one. Nobody is going to shut the place down, certainly not right away, but once credibility has leaked away what’s left? Big buildings, gilt furniture … and a dying mythology that adherents have abandoned.

   

  This is the Fed’s REAL danger. Its painfully-won credibility – the product of a vast, intergenerational campaign of intimidation, bribery and misinformation – is beginning to crumble in earnest. It is harder and harder to insist with any seriousness that a few good, gray men in expensive surroundings can figure out the direction and value of money for a US$15 trillion economy.

   

  They will keep insisting, of course. Mainstream mouthpieces like Reuters will quote higher-up Fed officials with the seriousness one associates with oracular statements from the Pantheon of the Gods. See here:

   

  New York Fed President William Dudley, who repeated his view that a rate hike was likely by year’s end … downplayed the differences that existed among officials. “At the end of the day people are exaggerating” the divisions, Dudley said in response to a question after a panel presentation in Washington on Thursday. “We are all pretty much on the same page.”

   

  In fact, Dudley can’t seem to keep track of his own statements. CNBC recently featured an article with the headline, “Fed’s Dudley: The economy may be slowing.” The article quoted Dudley as admitting that recent data suggest the economy is slowing – and certainly this conclusion would lead one to surmise that rate hikes are off the table, at least for this year.

   

  The same article mentioned a Fed report claiming that US labor markets were “tightening.” One wonders if the data was collected before or after Walmart announced hundreds of layoffs at its Arkansas headquarters.

   

  Perhaps iconoclastic, libertarian trend-follower Gerald Celente has a more accurate perspective on the Fed. In an article posted at LewRockwell.com and entitled, “Is the Fed Lying, or Not Telling The Truth?” Celente points out that the “expectation on the Street, based on the Fed’s bullish growth, inflation and equity market forecasts, was for the first round of interest rate hikes to begin by mid 2015.”

   

  He then goes on to observe, “The Fed was wrong. The Street was wrong.”

   

  And Celente does us the favor of unwrapping what just happened in mid-September when the Fed blinked once again.

   

  Faced with plunging commodity prices, plummeting currencies, battered equity markets and a global deflationary cycle, the FOMC, concerned that China’s economy was slowing and the global economy risked falling into recession, did not raise interest rates.

   

  But just one week later the story changed. The reason not to raise rates was no longer the reason. Instead, a rate hike was on the near horizon.

   

  Fed Chairwoman Janet Yellen, speaking at the University of Massachusetts, signaled that the Fed may raise rates before year’s end, because inflation was set to rise and the Fed “is monitoring developments abroad, but we do not anticipate the effects of these recent developments to have a significant effect.”

   

  It doesn’t end here. On October 8, FOMC minutes were released and showed clearly that the committee was “deeply concerned” over volatile market indexes. “Over the intermeeting period, the concerns about global economic growth and turbulence in financial markets led to greater uncertainty among market participants about the likely timing of the start of normalization of the stance of U.S. monetary policy,” the minutes stated.

   

  Celente has encapsulated the credibility problem that the Fed faces. Central bank officials were quite certain that rates would be raised in 2015. But the year is almost over and the Fed hasn’t acted. When rates remained static, after the September meeting, Fed officials let it be known that the Chinese market meltdown had stayed their hands.

   

  A week later, Yellen was once more stating that a rate hike loomed. Meanwhile, FOMC minutes explain that the prospect of a rate hike spooked officials who anticipated that even a minuscule hike could lead to considerable market “turbulence.”

   

  After summarizing all this, Gerald Celente writes the following:

   

  Is the Fed afraid to do anything considering the possible implications of raising rates at a time of “concerns about global economic growth and turbulence in financial markets,” thus the mixed messages? Or is this just another round of Fed ineptness?

   

  Celente then answers his questions by suggesting that Fed officials really do not know what to do. And perhaps due to this miasma of doubt, Celente is sticking to his forecast for a “major equity market correction by year’s end.”

   

  Our conclusion would be a bit broader than Gerald Celente’s. Regardless of what the Fed does or doesn’t do, and regardless of the reasons for it, the ineptness that the Fed is showing is incredibly damaging to the institution. Policymakers are giving virtually contradictory statements and as Celente has shown us, even the justifications for Fed actions change from week to week.

   

  Recently we wrote the Fed’s dithering may be purposeful. The idea is to act paralyzed while the market sells off piecemeal, allowing the Fed eventually to raise rates without a market “event.” But even this speculation doesn’t take the Fed off the proverbial hook. People are going to be angry regardless, as this upcoming recession – really a continuation of the 2008-2009 slump – is simply too much to bear.

   

  The dotcom disaster of 2001, the subprime bubble that ate the world’s economy only seven years later and now a further looming “recession” that comes on the heels of a Great Recession that never dissipated is a concatenation of disasters that will undermine the Fed in ways that the enemies of central banks have never been able to do in the modern era.

  People don’t necessarily believe what they read, but they do trust their own eyes, ears and bellies. Whether the Fed hikes or doesn’t hike at this point is almost immaterial. The plot itself has been mislaid and the ramifications will haunt the Fed as its reputation unravels.

   

  This is serious business. Without speculating on the “whys,” one can certainly anticipate that a crisis of confidence in the monetary system will create uncertainty about the dollar and about the sustainability of Western economies generally.

   

  This is not to say that markets will inevitably crack asunder. There may be several more boom years as central banks do everything they can to raise the averages and sustain the appearance of prosperity. But at some point, a creeping crisis of confidence will begin to destroy what’s left of middle-class wealth and prosperity in ways central bankers can’t counteract because they will be seen as primary instigators of the problem.

   

  

  

  

  

  

• The Fed's Inconvenient Truth (In 1 Hope-Crushing Chart)

  Year after year, economic growth collapses from “hope” to “nope.”

  
  

  

   

  The question we are surprised everyone is not asking is, after 6 years of experimental extreme monetary policy that is utterly failing to create anything like escape velocity, isn’t The Fed’s inconvenient truth that they are impotent (as opposed to omnipotent) at anything other than financial asset inflation and the transitory mirage of wealth creation?

   

  Charts: Bloomberg

  

  

  

  

  

• Putting China's "6.9% GDP Growth" In Context

  By Michael Lebowtiz of 720Global

  Mirage

  In our latest article, “China Growth – Miracle or Mirage” published October 20, 2015, we questioned whether China’s perfectly forecasted and uniquely steady economic growth is a mirage. On Friday morning, following Chinese Premiere Li’s comment that growth was still in a “reasonable range”, China’s central bank (PBoC) proceeded to cut interest rates as well as the required deposit reserve ratio for major banks. The language of the Premier and the actions of the PBoC are contradictory. Their actions in conjunction with their words offer even more evidence to believe reported growth is a mirage and the correct answer to the question.

  This postscript offers a series of facts and recent economic data to lend further context toward determining whether China’s growth is, in fact, a miracle or a mirage. Before viewing the statistics below take a moment to consider the following: If China’s economy is in fact
  humming along at a “reasonable” 6.9% pace, then what is the logic and motivation behind aggressively easier monetary policy? Put another way, what don’t we know about the Chinese economy?

  Central Bank Actions

  • 1yr Benchmark Lending Rate: Since November 2014 China has cut their 1 year interest rate 6 times. Over this period the rate has been lowered from 5.60% to 4.35%
  • Required Deposit Reserve Ratio for Major Banks (determines amount of leverage banks can take and therefore the amount of loans they can make): Since February 2015 China has lowered it 4 times from 19.50% to 17.50%.
  • Renminbi: Since August China devalued their currency 2.8%

  Economic Statistics

  • China export trade: -8.8% year to date
  • China import trade: -17.6% year to date
  • China imports from Australia: -27.3% year over year
  • Industrial output crude steel: -3% year to date
  • Cement output: -3.2% year over year
  • Industrial output electricity: -3.1% year over year
  • China Manufacturing Purchasing Managers Index: 49.8 (below 50 is contractionary)
  • China Services Purchasing Managers Index: 50.5 (below 50 is contractionary)
  • Railway freight volume: -17.34% year over year
  • Electricity total energy consumption: -.20% year over year
  • Consumer price index (CPI): +1.6% year over year
  • Producer price index (PPI): -5.9% year over year, 43 consecutive months of declines
  • China hot rolled steel price index: -35.5% year to date
  • Fixed asset investment: +10.3% (averaged +23% 2009-2014)
  • Retail sales: +10.9% the slowest growth in 11 years
  • Shanghai Stock Exchange Composite Index: -30% since June

  Are these actions and statistics consistent with a country thought to be growing at 6.90% annually?

  

  

  

  

• "Colonel" Sanders' Communist Fried Chicken – It's Finger-Flippin' Good

  Free stuff? While Bernie is sincere about "helping people," as Ben Garrison notes, it's the middle class and poor will pay for it. 

   

  

   

  There's no such thing as a free lunch, but real freedom is worth preserving.

   

  Source: Ben Garrison

  

  

  

  

  

• Is America The Greatest Country In The World?

  Submitted by Simon Black via SovereignMan.com,

  I’m in New Haven today to attend the funeral of Irwin Schiff, who unfortunately passed away last weekend.

  If you’ve never heard of Irwin, he was one of the original “tax protestors”.

  He believed not only that paying federal income was unconstitutional, but actually went so far as to stop paying tax altogether.

  And he spent years of his life in prison as a result.

  Now, you may not agree with his philosophy or its legal basis.

  But I hope we can agree that keeping an 87-year old terminally ill cancer patient handcuffed to a hospital bed for failing to file taxes is a disgusting reflection of modern America.

  The fact that failing to file taxes is even a criminal matter at all in the Land of the Free is truly bizarre.

  In civilized countries, tax matters are precisely that– civil. They don’t throw people in prison with violent felons over something so trivial.

  But this has become the way of so many things in the Land of the Free.

  Aside from the most obscure violation of the US federal tax code, which goes on for thousands of pages, you can go to jail for violating any number of federal regulations, the sum of which could fill an entire football stadium.

  And that’s precisely the problem with this place.

  You see, I think the United States really is wonderful… with a huge caveat.

  America has some of the nicest malls in the world. There are so many quality brands and luxurious shops. The restaurants are fantastic with speedy, efficient service.

  You can buy the nicest cars models and live in big McMansions. All the latest technological gadgetry is available for sale at the big box retailer down the street.

  Street corners are dotted with gourmet coffee shops or convenient drug stores. And there are thousands of programs to watch on television at any given moment.

  Yes, the United States is one of the greatest places in the world… to be a consumer.

  If you want to shop, spend, and consume, the US is pretty damn near #1 in the world.

  But if you want to build. If you want to create. If you want to be a producer in the United States… it’s a whole different story.

  Just think about what it takes to start a business these days– there are permits, licenses, and regulations to follow, most of which you have probably never even heard of.

  Every single business day the federal government publishes hundreds of pages of new rules and regulations in what’s called the Federal Register.

  Today’s edition alone is a massive 815 pages.

  On Monday there will be several hundred pages more. And Tuesday. Wednesday. Etc. It never stops.

  Many of these rules come with severe penalties as well.

  Months ago we discovered that the Commerce Department was threatening people with a $25,000 fine and potential litigation simply for not filling out a survey.

  And on top of everything else are all the rules you have to deal with regarding employees, taxes, and now Obamacare.

  Oh, and that’s just at the Federal level. State and local governments add their own burdensome requirements as well.

  No one is immune. They even chase away little girls who dare to operate a lemonade stand without a permit. It’s unbelievable.

  And young people who try to become productive by going to university graduate with $30,000+ in debt that they’ll spend the next fifteen years paying down.

  Then there’s the additional hassle of dealing with the financial system; just getting a bank account open for a new business is now a major challenge.

  Banks force small businesses to jump through all sorts of ridiculous hoops to prove that they’re not money launderers, just for the privilege of depositing their money to earn 0% interest.

  What’s really ironic is that a consumer can walk into a bank and easily obtain a loan to buy a new car, or even a television.

  But you have basically no chance of obtaining a loan to start a new business or invest in a great company.

  These are all symptoms of the same problem. If you want to spend, borrow, and consume, America is fantastic.

  But if you want to save, invest, and produce, America is becoming more challenging every year.

  The Universal Law of Prosperity is very simple: produce MORE than you consume. And it applies equally to people, governments, and entire economies.

  In the US, and most of the West, everything in the system is designed for the exact opposite– rewarding consumption at the expense of production.

  And this is a massive problem that’s causing a major decline.

  Sure, you might have accumulated more ‘stuff’. But every year the West is less wealthy, and less free.

  Here’s the bad news: Your government can’t fix this. They’re a huge part of the reason this problem exists in the first place.

  And you can’t fix this yourself either. There is no grassroots campaign, no ‘get out the vote’ movement to get your nation back on track.

  But what you can do is take care of yourself. Make sure that, if this trend continues, you’re not going to be a victim of other people’s stupidity.

  Produce more than you consume. Safeguard your purchasing power. Protect what you’ve worked for. Diversify abroad. Invest wisely. Have a Plan B.

  In short, you can’t fix your country, or your government. Especially if the system is designed to make you less wealthy and less free.

  Because if you really want to be able to change something for the better, just make sure that no matter what happens, you’re always going to be in a position of strength.

  

  

  

  

  

• Fuku-zilla? Japan's TEPCO Discovers "Living Creature" Inside Nuclear Reactor

  After sending robots into the Fukushima nuclear reactor (and seeing them mysteriously die), perhaps this is the reason why Japanese officials have decided to re-start the building of a huge ice-wall for 'containment'. As Fukushima Diary reports, TEPCO’s camera caught a possible aquatic living creature in retained coolant water of Reactor 3.

   

  The following images are from the inside of PCV 3 (Primary Containment Vessel of Reactor 3). In their previous investigation, 1 Sv/h was detected above the water surface. Yellow-ish sediment was observed accumulating in the water as well.

  The possible living creature is recorded from approx. 0:19 of the video. It looks like aquatic microbe, which is independently swimming unlike other substances.

   

  The following GIF was edited by Fukushima Diary. It contains the zoomed (200% and 300%) parts to capture the creature more closely.
   

  *  *  *

  It may not look like much but with radiation flooding through its seemingly impervious body, who knows what happens next?

  

  

  

  

  

  

• Systemic Fragility & The Fed's "Hobson's Choice"

  Submitted by Doug Noland via The Credit Bubble Bulletin,

  More than two months have passed since the August “flash crash.” Fragilities illuminated during that bout of market turmoil still reverberate. Sure, global markets have rallied back strongly. Bullish news, analysis and sentiment have followed suit, as they do. The poor bears have again been bullied into submission, as the punchy bulls have somehow become further emboldened. The optimists are even more deeply convinced of U.S., Chinese and global resilience (the 2008 crisis “100-year flood” view). Fears of China, EM and global tumult were way overblown, they now contend. As anticipated, global officials remain in full control. All is rosy again, except for the fact that global central bankers behave as if they’re utterly terrified of something.

  The way I see it, underlying system fragility has become so acute that central bankers are convinced that they must now forcefully (“shock and awe,” “beat expectations,” etc.) react to any fledgling market “risk off” dynamic. Risk aversion and de-leveraging must not gather momentum. If fragilities are not thwarted early, they could easily unfold into something difficult to control. Such an outcome would risk a break in market confidence that central banks have everything well under control – faith that is now fully embedded in the pricing and structure for tens of Trillions of securities and hundreds of Trillions of associated derivatives – everywhere. With options at this point limited, the so-called “risk management” approach dictates that central banks err on the side of using their limited armaments forcibly and preemptively.

  With today’s extraordinary global backdrop in mind, I’m this week noting a few definitions of “Hobson’s Choice”:

  “An apparently free choice that actually offers no alternative.” (The American Heritage Dictionary of Idioms)

   

  “A situation in which it seems that you can choose between different things or actions, but there is really only one thing that you can take or do.” (Cambridge Idioms Dictionary)

   

  “No choice at all, take it or leave it.” (Endangered Phrases by Steven D. Price)

  There are subtleties in these definitions, just as there are subtleties in financial Bubbles. Importantly, over time Bubbles embody a degree of risk where they stealthily begin to dictate ongoing monetary accommodation. These days, global market Bubbles have reached the point where their message to central bankers is direct and unmistakable: “No choice at all, take it or leave it.” “Keep expanding monetary stimulus or it all comes crashing down – and that’s you Yellen, Draghi, Kuroda, PBOC – all of you…”

  As Ben Bernanke’s book tour lingers on, there are comments to add to the debate. From an interview with the Financial Times’ Martin Wolf:

  Wolf: “… We have to recognise that neither he nor the Fed expected the meltdown. Does the blame for these mistakes lie in pre-crisis monetary policy, particularly the targeting of inflation, with which he is closely associated? Had interest rates not been kept too low for too long in the early 2000s?”

   

  Bernanke: “The first part of a response is to ask whether monetary policy was, in fact, a major contributor to the housing bubble and all that happened. Serious studies that look at it don’t find that to be the case. People such as Bob Shiller [a Nobel laureate currently serving as a Sterling professor of economics at Yale University], who has a lot of credibility on this topic, says that: it wasn’t monetary policy at all; it came from a mania, a psychological phenomenon, that took off from the tech boom and moved into housing.”

   Mortgage Credit almost doubled in six years. Home prices inflated dramatically throughout much of the country, with prices about doubling in key markets (i.e. California). Egregious lending excess was conspicuous. Speculative excesses throughout ABS, MBS, GSE debt securities and mortgage-related derivates (i.e. CDOs) were only slightly less conspicuous.

  Why did the Fed fail to impose some monetary restraint (recall that Fed funds remained below 2% for several years of double-digit annual mortgage Credit growth)? Because they had (once again) badly missed their timing. A Bernanke-inspired policy course was determined to see reflationary measures gain robust momentum. The Fed believed that the benefits of prolonging aggressive accommodation greatly outweighed minimal risks (CPI and inflation expectations were contained!). Meanwhile, mortgage finance Bubble excess reached a scale where the Fed would not risk the un-reflationary consequences of piercing the Bubble. Financial and economic vulnerability were too acute for our central bank to take such institutional risk.

  Then, one might ask, why exactly had the Fed been so unwilling earlier in the cycle to restrain obviously overheating mortgage and housing marketplaces? This is a critical yet somehow completely neglected issue. Well, it’s because the Federal Reserve had specifically targeted mortgage Credit growth and housing inflation as the reflationary drivers for the post-technology Bubble recovery. Though apparently lost in history, manipulating mortgage Credit and housing markets were the primary (Bernanke’s “helicopter money”) mechanism for the Fed’s war against deflation risk.

  The Bubble was of the Fed’s making, and our central bank lost control. It became a Hobson’s Choice issue in the eyes of the Fed, and they fully accommodated the Bubble. Historical revisionism seeks to portray Bernanke as the hero that saved the world.

  These days, the Fed and global central bankers face a similar yet much more precarious Bubble Dynamic: The Fed specifically targeted higher securities market prices as its prevailing post-mortgage finance Bubble (“helicopter money”) reflationary mechanism. This ensured that the Fed would again be unwilling to impose any monetary restraint before it would then become too risky to remove accommodation (Einstein’s definition of insanity?). In concert, global central bankers now aggressively accommodate financial Bubbles.

  Global markets have the Yellen Fed petrified of even a little 25 bps baby-step nudge up from zero rates. Despite booming bond market Bubbles, a huge rise in stock prices, generally loose financial conditions and expanding economic recovery, the Draghi ECB Thursday signaled additional monetary stimulus would be forthcoming (above the current $60bn monthly QE and near-zero rates). Global markets were overjoyed. In the face of much trumpeted financial and economic stabilization, booming corporate debt markets and significant ongoing Credit growth, Chinese officials moved Friday to again cut lending rates and reserve ratios. Markets were more overjoyed.

  The halcyon days have returned. Powered by strong earnings from heavyweights Amazon, Microsoft and Google, the Nasdaq 100 (NDX) surged 4.2% this week. The NDX has now rallied 22% off August lows to within about a percent of all-time highs. The S&P500 gained 2.1% this week, closing just a couple percent below record highs. Bloomberg headline: “Junk Bond ETFs Break Monthly Flow Record With a Week to Spare.” And to be clear, that’s an inflow record.

  Friday morning from Bloomberg: “$100 Billion Rally Coming in Google, Microsoft, Amazon Shares.” Tech Bubble 2.0 is raging, fueled by the loosest financial conditions imaginable – spurred along by speculative market dynamics and a global industry arms race arguably on a much grander scale than that of the late-nineties. Friday evening from the New York Times: “America’s Heartland Feels a Chill From Collapsing Commodity Prices.” The impact from the faltering global Bubble is spreading. Fed Bubble accommodation ensured incredible wealth has been freely lavished upon Silicon Valley, exacerbating the issue of “the haves and have nots” locally, regionally, nationally and internationally.

  It’s certainly worth noting that market strength continues to narrow. The broader market this week badly lagged tech – especially big tech. In a financial management world desperate for relative performance, Fed-induced market rallies compel market participants to jump aboard the big outperformers. It’s exciting – dangerous late-cycle financial market dynamics.

  There is as well a powerful real economy dynamic at work. For the most part, the bull vs. bear argument has the economy either rather robust or on the cusp of recession. Most importantly, the U.S. economy is badly imbalanced. Segments and sectors are absolutely booming. Monetary policy is recklessly loose, with cheap liquidity apparently to fuel excess until Bubbles have finally run their course. Meanwhile, vast swaths of the economy suffer from structural stagnation, the aftermath of previous boom/bust episodes. Here, monetary accommodation has little impact. And this stagnation plays a major role in seemingly benign aggregate consumer inflation and economic output data.

  Yet when it comes monetary stimulus fueling Bubbles and exacerbating structural imbalances, the U.S. is overshadowed by China. Spurred by a surge in state-directed bank lending, total Credit (“total social financing”) jumped back over $200bn in September. There are also indications that post-stock market Bubble reflationary measures have pushed China’s corporate debt Bubble to only more precarious excess. While many contend that the Chinese economy, markets and currency have stabilized, I see it much more in terms of ongoing unsustainable Credit excess.

  Chinese officials missed their timing for reining in Bubble excess by years. It’s now a Hobson’s Choice of throwing everything at the faltering boom. Brief thoughts: The Chinese will need a couple Trillion (in U.S. dollars) of new Credit over the next year, then the year after and so on. Throwing enormous amounts of new Credit at a terribly maladjusted system will ensure epic maladjustment and a Credit Time Bomb. Normally, such dynamics ensure significant currency debasement. I would think in terms of a Credit and Currency Peg Time Bomb.

  October 18 – Financial Times (Gabriel Wildau): “It seems a long time ago that China was piling up foreign exchange reserves at a record pace as economists fretted about global imbalances from Beijing gobbling up US Treasury bonds. Now investors are wondering how long China’s dwindling forex reserves — down to $3.5tn from a peak of $4tn in June 2014 — can hold out. Capital is flowing out of China at a record pace and the central bank is drawing down reserves to support the renminbi after its recent dramatic fall. A lack of clarity over how China calculates its reserves and how much is readily available to deploy at short notice has intensified these concerns. As growth slows and bad debt rises, investors have viewed China’s massive forex pile… as the ultimate guarantor of financial stability. The prospect that reserves could be quickly exhausted raises doubts about the government’s ability to ward off crisis. It also limits the central bank’s ability to continue foreign exchange intervention, which may have cost as much as $200bn in August alone.”

  Thus far, markets have been incredibly tolerant of erratic Chinese policymaking. “We don’t care how you do it, just stabilize your markets and economy.” But at the end of the day, I see a lack of trust weighing on the Chinese currency. China’s Hobson’s Choice: aggressively inflate Credit or not. And this will put the currency at risk – the currency peg at risk. Currency controls, state-directed currency manipulation and derivatives to mask “capital” flight only increase the risk of financial accidents. Commodities and developed sovereign debt markets seem to confirm that China is not out of the woods.

  FT’s Wolf: “I ask him whether he is confident that the improvement in the resilience of the banks is adequate. ‘It’s a fool’s game to predict that everything is going to be fine, because either it is fine, in which case nobody remembers your prediction, or something happens, and then …’ They remember your prediction, I interject. Bernanke continues: ‘My mentor, Dale Jorgenson [of Harvard], used to say — and Larry Summers used to say this, too — that, ‘If you never miss a plane, you’re spending too much time in airports.’ If you absolutely rule out any possibility of any kind of financial crisis, then probably you’re reducing risk too much, in terms of the growth and innovation in the economy.’”

  Miss your plane and you reschedule a later flight. And the issue is certainly not ruling out “any possibility of any kind of financial crisis.” By now we should recognize that failed experimental monetary management was the leading culprit in the so-called “worst financial crisis since the Great Depression.” So what’s at risk today from much more egregious monetary experimentation? With runaway Bubbles at risk or faltering around the globe, central bankers are left with a choice of pushing ever forward with monetary inflation and market manipulation – or coming clean. Clearly they believe they have no choice at all.

  

  

  

  

  

• Here's What Happens When Central Banks Go Broke

  On Friday, in “Is Mario Draghi About To Go Full-Kuroda? RBS Says ECB Could Buy Stocks,” we took a closer look at what the ECB’s options are when it comes to implementing further easing measures come December. 

  As a reminder, Mario Draghi telegraphed either another depo rate cut, an expansion of PSPP, or both at Thursday’s ECB presser and now the market is keen to analyze the situation and determine not only what Goldman’s man in Europe is most likely to announce, but what the implications of his announcement are likely to be. 

  To be sure, further cuts to the depo rate will simply trigger a chain reaction whereby the Riksbank and the SNB will be forced to respond in kind, lest they should lose ground in the global currency war on the way to seeing their inflation targets threatened. This raises the spectre that NIRP may soon come to household deposits, something which, despite the proliferation of negative rates, hasn’t yet occurred. 

  As for the expansion of PSPP, we looked at a variety of options courtesy of RBS’ Alberto Gallo who notes that Draghi could end up buying corporate bonds, munis, equities, and even individual bank loans before it’s over. Here’s how we summed it up yesterday:

  In the end, all that will happen is the EMU’s neighbors will be forced further into NIRP and the ECB will end up with a nightmarish balance sheet full of stocks, corporate credit, munis, and God only knows what kind of loans purchased from banks, and all of which will have been bought at or near the top. That sets up the possibility that central banks could end up being forced to operate from a negative equity position. In other words: it sets up the possibility that they’ll technically go broke. 

  There’s been no shortage of coverage over the past several years regarding the idea that central banks can effectively go bankrupt.

  There are plenty of commentators who say that’s nonsense because after all, they control the printing press. Of course that argument suffers from the same defect as the argument that providing fiscal stimulus to an economy that isn’t acting the way you want it to is as simple as printing one liability (a government bond) and buying it from yourself with another liability you also print (fiat money). The common thread is this: if it were that simple, then we wouldn’t be having the conversation in the first place.

  If a central bank ends up in a negative equity position because the “assets” it purchased at nosebleed valuations decline in value, there are very real consequences both in terms of the ability to effectively conduct policy and in terms of optics. For more, we go back to RBS’ Alberto Gallo.

  *  *  *

  Via RBS

  What is the endgame of QE? Central bank balance sheets larger than GDP, potential losses or even negative equity capital. Large balance sheets can expose central banks to heavy losses. The SNB, for example, lost CHF52bn or 60% of equity in the first six months of the year, given unfavourable FX movements and price drops in its bond/equity holdings. As we discuss below, there are also other central banks that have accumulated losses and gone into negative equity in the past, including Chile, Czech Republic, Costa Rica and Jamaica. In theory, central banks can take losses and live with negative equity, as suggested by the SNB’s Vice Chairman Thomas Jordan in 2011. The example of the Czech Republic below also shows that central banks can sometimes grow out from negative equity through investment returns, over long periods of time. However, as suggested by the ECB, negative capital can limit central banks’ independence. A BIS paper also argues that significant losses could undermine their credibility, which has already been declining. 

  A history of central bank losses: towards the limits of balance sheet powers Central Banks could operate with negative net worth, but at the risk of affecting “the credibility of […] monetary policy” according to the ECB. The Chilean and Czech Central Bank are examples of central banks which have operated with negative net worth for a prolonged period (almost continuously since 1982, for Chile). However, while the Czech Central Bank has reduced their negative net worth due to good equity investments, Chile’s central bank has received two recapitalisations from the government since 1982. This dependence on the government brings into question the independence of central banks. The ECB have also previously said that negative net worth would “affect the credibility of the Eurosystem’s monetary policy”. 

  Negative capital could hinder central banks’ ability to meet their monetary targets. The central bank of Costa Rica suffered from losses for almost 20 consecutive years, leading it to a negative capital balance at the end of 2000. In fear of its balance sheet sustainability, the central bank chose not to lower their target rate of inflation. Jamaica is another example. Estimates show that in 1991 it had a negative net equity of USD 1.5bn. Large losses limited the policy instruments at the bank’s disposal. As a result, the country entered a stage of hyperinflation where CPI exceeded 80%. 

  Concerns about potential losses could also limit central banks’ policy flexibility. According to an IMF working paper, the market questioned whether Japan’s central bank could continue their purchases of government debt due to the risk of incurring substantial capital losses. According to the paper, because of these concerns, the monetary policy did not have the desired effect and failed to bring interest rates down to the desired levels. In January 2015, the SNB surprised markets by ending its Euro-buying programme because of concerns with Euro devaluation. But this change in monetary policy, which caused the Swiss Franc to strengthen, has also hurt Swiss exports (-3.8% YoY in September). 

  

  *  *  * 

  So, far from being some trivial problem that can be fixed by pressing “print”, central banks operating from a negative equity position face the possibility of i) losing their independence as they have to be recapitalized at the behest of the government, ii) being forced into policy decisions (or, perhaps more appropriately “in”decisions) that they might not otherwise make, and iii) losing the ability to control the narrative, thus heightening market concerns about the loss of omnipotence (or, in Haruhiko Kuroda’s words, a failure to believe in Peter Pan).

  Also bear in mind that the more focus there is on central banks, the more scrutinized their balance sheets will be. Of course one cannot mark an equity portfolio “held to maturity”, which begs the question of what happens when central banks that have bought stocks begin to incur losses. Will they simply print more money to buy more stocks in order to prop up their portfolios in a never-ending loop? 

  In any event, what the above underscores is that in short order we may move beyond the merely theoretical idea that central banks have “lost credibility” with market participants into a world where there is demonstrable, quantitative evidence that the emperors have no clothes.

  

  

  

  

  

• Another Government Ponzi Scheme Starts To Crack – Do You Depend On It?

  Submitted by Nick Giamburino of International Man

  Another Government Ponzi Scheme Starts to Crack – Do You Depend on It?

  Government employees get to do a lot of things that would land an ordinary citizen in prison.

  For example, it’s legal for them to threaten and commit offensive, rather than defensive, violence. They can take property from others without their consent. They spy on anyone’s email and bank accounts whenever they please. They go into trillions of dollars in debt and then stick the unborn with the bill. They counterfeit the currency. They lie with misleading statistics and use accounting wizardry no business could get away. And this just scratches the surface…

  The U.S. government also gets to run a special type of Ponzi scheme.

  According to the Merriam-Webster dictionary a Ponzi scheme is:

  [A]n investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.

  In the private sector, people who run Ponzi schemes are rightly punished for their fraud. But when the government runs a Ponzi scheme, something very different happens.

  It’s no secret that the Social Security system is effectively one giant Ponzi scheme.

  Actually, I think it’s worse. That’s because the government uses force and the threat of force to coerce people into it. People don’t have the option to opt out. They either pay the tax for Social Security or someone with a gun will show up sooner or later. I imagine Bernie Madoff’s firm would have lasted a lot longer had he been able to operate this way.

  This whole practice is particularly egregious for young people. They have no chance at collecting the future benefits the government has promised to them. But they’re hardly the only people that are going to be disappointed in the system, which will eventually break down.

  There are simply too many people cashing out at the top and not enough people paying in… even with the government’s coercion. That’s a function of demographics, but also the economic reality in which there are fewer people with quality jobs for the government to sink its fangs into. I expect both of those trends to increase and strain the system.

  Actually, it’s already starting to happen.

  Recently, the government announced that there would be no Social Security benefit increase next year. That’s only happened twice before in the past 40 years.

  You see, the government links Social Security benefit increases to their own measure of inflation. If the government says “no inflation” then there are no benefit increases. It’s like letting a student grade his own paper.

  So it’s no surprise that the official definition of inflation is not reflective of the real increases in the costs of living most people feel.

  Medical care costs are skyrocketing. Rent and food prices are reaching record highs in many areas. Electricity and utility costs are soaring. Taxes, of course, are going nowhere but up.

  But the government says there’s no shred of inflation. In actuality, it amounts to a stealth decrease in benefits.

  One reason for this is that they constantly change the way they calculate inflation so as to understate it. Free market analysts have long documented this sham. If you take a global view, it’s easy to see that fudging official inflation statistics is standard operating procedure for most governments.

  Incidentally, governments and the financial media don’t even understand what inflation is in the first place.

  To them, inflation means an increase in prices. But that is not at all how the word was originally used. Inflation initially meant an increase in the supply of money and nothing else. Rising prices were a consequent of inflation, not inflation itself.

  It’s not being overly fussy to insist on the word’s proper usage. It’s actually an important distinction. The perversion of its usage has only helped proponents of big government. To use “inflation” to mean a rise in prices confuses cause and effect. More importantly, it also deflects attention away from the real source of the problem…central bank money printing.

  And that problem shows no signs of abating. In fact, I think the opposite is the case. The money printing is just getting started.

  At least this is what we should prudently expect as long as the U.S. government needs to finance its astronomical spending, fueled by welfare and warfare policies.

  As long as the government spends money, it will find some way to make you pay for it – either through direct taxation, money printing, or debt (which represents deferred taxation/money printing).

  It’s as simple as that.

  

  

  

  

  

• Haunting Drone Footage Captures Syrian Destruction In Stunning High-Def

  There’s one silver lining to Europe’s worsening migrant crisis: it ensures that the human toll from Syria’s protracted civil war doesn’t get lost in the fog of Russian battlefield glory. 

  Regardless of your stance on whether the EU should be receptive to the millions of asylum seekers fleeing the war-torn Mid-East, the simple fact is that if you remain in Syria, you are risking your life on a daily basis, caught in the crossfire between a bewildering array of state actors, rebel groups, and proxy armies, all with competing agendas. 

  Now that Russia and Iran have taken control of the situation (and that’s not an effort to parrot some pro-Kremlin propaganda line, it’s just a realistic assessment of the facts), it’s tempting to focus squarely on the near daily videos of Moscow’s warplanes decimating targets and on the various social media depictions of Iranian generals rallying Shiite fighters ahead of what’s been billed as the “promised” battle for Aleppo.

  In other words, one could be forgiven for being swept up in the glory of the battle while forgetting that the entire debacle (which the US and its regional allies facilitated) has cost the country both its population and its cultural heritage as both have been destroyed by nearly five years of war. 

  With that in mind, we bring you two haunting videos produced by frontline journalists from Rossiya 24 news channel.

  They are at once breathtaking and tragic (they’re set to music, but you can always mute that) and serve to underscore just how devastating this conflict has ultimately been.

  In the same vein, we close with a few searing images from Aleppo ca. 2012:

  

  

  

  

  

  

  

  

• America – In Search Of A Cause?

  Submitted by Patrick Buchanan via Buchanan.org,

  “If the Cold War is over, what’s the point of being an American?” said Rabbit Angstrom, the protagonist of the John Updike novels.

  A haunting remark, since, for 40 years, America was largely united on the proposition that our survival depended upon our victory over communism in the Cold War.

  We had a cause then. By and large, we stood together through the crises in the first decades of that Cold War — the Berlin blockade, Stalin’s atom bomb and the fall of China to Mao, the Korean War, the Hungarian revolution, the Cuban missile crisis, and on into Vietnam.

  We accepted the conscription of our young men. We accepted wars in Asia, and, if need be, in Europe, to check the Soviet Empire.

  Vietnam sundered that unity.

  By 1967, the Gene McCarthy-Robert Kennedy wing of the Democratic Party had broken with the Cold War consensus. “We have gotten over our inordinate fear of communism,” said Jimmy Carter.

  The Reagan Republicans and George H. W. Bush would pick up the torch and lead the nation to victory in the last decade of that Cold War that had been a defining cause of the American nation.

  But when it was over in 1990, America was suddenly at a loss for a new cause to live for, fight for and, if need be, see its sons die for.

  Bush 1, after leading a coalition that drove Saddam Hussein out of Kuwait, declared that America’s cause would be the building of a “New World Order.” But few Americans bought in.

  Sixteen months after his victory parade up Constitution Avenue, after Bush had reached 90 percent approval, 62 percent of his country’s electorate voted to replace him with Bill Clinton or Ross Perot.

  Clinton pursued liberal interventionism in the Balkans, leading to 78 days of bombing Serbia, and he regretted not intervening in Rwanda to halt the genocide.

  George W. Bush promised a “humble” foreign policy. But 9/11 put an end to that. After driving the Taliban from power and Osama Bin Laden out of Afghanistan, he declared that America’s new goal was preventing an “axis of evil” — Iraq, Iran, North Korea — from acquiring nuclear weapons. Then, Bush marched us up to Baghdad.

  The wars in Afghanistan and Iraq lasted years longer and cost far more in blood and treasure than Bush had anticipated.

  At the peak of his prestige, like Pope Urban II, Bush declared a global crusade for democracy.

  This ended like many of the crusades. Democratic elections were won by Hezbollah in Lebanon, Hamas in Gaza and, after the Arab Spring, the Muslim Brotherhood in Egypt.

  Barack Obama promised to end the Bush wars and bring the troops home. And he was rewarded with two terms by a country that has shown minimal enthusiasm for more wars in the Middle East.

  Obama is now openly mocking the McCainiacs.

  “Right now, if I was taking the advice of some of the members of Congress who holler all the time, we’d be in, like, seven wars right now,” he told a group of veterans and Gold Star mothers of slain U.S. soldiers.

  This reluctance to begin wars or intervene in wars — be it in Syria, Iraq, Iran, Ukraine — seems to comport with the wishes of the country. And this new reality raises serious questions.

  What is America’s cause today? What is our mission in the world? For what end, other than defending our citizens, vital interests and crucial allies, would we be willing to send a great army to fight — as we did in Korea, Vietnam, Kuwait, Iraq and Afghanistan?

  Are all the global causes of Bush I, Clinton, Bush II over?

  Where is the coherence, the consistency, of U.S. policy in the Middle East that should cause us to draw red lines, and fight if they are crossed?

  If our belief in democracy demands the ouster of the dictator Assad in Damascus, how can we ally with the theocratic monarchy in Riyadh, the Sunni king sitting atop a Shiite majority in Bahrain, and the Egyptian general on his throne in Cairo, who took power in a military coup against a democratically elected Muslim government?

  Other than supporting Israel, maintaining access to Gulf oil and resisting ISIS and al-Qaida, upon what do Americans agree?

  Henry Kissinger seeks a restoration of the crumbling strategic architecture. Neocons and interventionist liberals want to confront Russia and Iran. Reluctant interventionists like Obama, Donald Trump and Bernie Sanders think we should stay out of other wars there.

  “When a people is divided within itself about the conduct of its foreign relations, it is unable to agree on the determination of its true interests,” wrote Walter Lippmann at the climax of World War II:

  “Thus, its course in foreign policy depends, in Hamilton’s words, not on reflection and choice but on accident and force.”

  America is a nation divided, not only upon the means we should use to attain our ends in the world, but upon the ends themselves.

   

  

  

  

  

  

• The Three Things Goldman's Clients Were Most Worried About This Week

  Following the perfectly expected intervention of not one but two central banks last week, which came at just the right time to crush the last of the “weak hand” shorts (recall three weeks ago we reported that the NYSE Short Interest had hit the highest level since Lehman, when we said that a likely outcome is that “either a central bank intervenes, or a massive forced buy-in event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs”) the market extended on its best rally since 2011.

  However, the majority of the hedge fund community barely noticed this twofer of central bank generosity.

  The reason for this is that not only is the “smartest money in the room” suffering its worst year since 2011 (more on this later) even as the S&P500 finally went green for the year, but this is the week when public attention finally turned to what until recently had been one of the biggest hedge fund hotel darlings, aggressive pharma rollup Valeant. The attention was not good, and as insinuations of massive fraud spread, the stock cratered.

  The result: according to Goldman’s chief equity strategist, David Kostin (who recently lowered his year end S&P price target to 2000 or 75 below its Friday closing price, and who expects the S&P will trade at 2075 in 12 months time) the fate of Valeant was one of the three biggest concerns on Goldman’s (mostly hedge fund) clients’ minds for the past week.

  The other two: buybacks and Q3 results.

  Here is Kostin explaining why the market surge on the back of more central bank intervention may have been a Pyrrhic victory for those who were supposed to benefit the most from the recent rally: the hedge fund community which “unfortunately” owns roughly 22% of Valeant’s shares.

  From Goldman’s Kostin:

  Reflexivity in action: A case study in specialty pharma; total cash return outperforms

  This week’s 35% plunge in Valeant Pharmaceuticals (VRX) represents a classic example of reflexive behavior in financial markets as
  described by George Soros in The Alchemy of Finance. Eight Health Care stocks including ENDP (-18%) and AGN (-3%) are in our
  Hedge Fund VIP basket (GSTHHVIP) that was flat this week compared with a 2% rise in the S&P 500. Stocks with high cash returns to
  shareholders via dividends and buybacks (GSTHCASH) matched the market, rising by 2%. We welcome 24 new constituents into our
  rebalanced high cash return basket that has a P/E of 14.6x vs. 17.0x for median S&P 500 stock with twice the cash yield (10% vs. 5%).

  Three topics dominated our client discussions this week: (1) Hedge fund performance in the wake of the collapse in Valeant Pharmaceuticals (VRX) during the past five days and bear market in biotechnology stocks during last three months (Nasdaq Biotech Index is 21% below its July peak); (2) cash return to shareholders, especially buyback activity; and (3) 3Q results.

  The recursive relationship that George Soros memorably described in The Alchemy of Finance: Reading the Mind of the Market (1987) was in full evidence this week as VRX shares plunged by 35%. In the case of the equity market, reflexivity comes into play when some mechanism is triggered and participants’ bias shifts. Simply put, the so-called fundamentals that are supposed to determine market prices no longer matter. Instead, “market prices play a different role: They do not merely reflect the so-called fundamentals; they themselves become one of the fundamentals which shape the evolution of prices. This recursive relationship renders the evolution of prices indeterminate and the so-called equilibrium price irrelevant.” The classic example is equity leveraging in an M&A roll-up where the temporary overvaluation of shares is converted into high EPS growth which expands the P/E ratio and allows shares to be issued at inflated multiples to fund more acquisitions.

  

  Reflexivity changes the structure of future events and is significant in cases where the starting point is far from equilibrium. Our Specialty Pharmaceuticals equity research analyst Gary Nachman authored a report this week that looks at the disarray within the sector given new uncertainties and fears that have entered the narrative (see Framing the debate after a challenging day in spec pharma, October 22, 2015).

  Hedge funds are important to VRX and VRX is important to many hedge funds. First, hedge funds own roughly 22% of the firm’s shares, so investor sentiment and perceptions matter. Second, our Hedge Fund Trend Monitor indicates that 7% of fundamental hedge funds own shares in VRX with 5% owning it as a top 10 position. In those cases the average weight is 10% of the portfolio! Netflix (NFLX) and Kraft Heinz (KHC) are the only other stocks in our Hedge Fund VIP basket (GSTHHVIP) where funds owning the shares hold them with a double-digit average long portfolio weight.

  Allergan (AGN) ranks at the top of the list of stocks that “matter most” to long/short hedge fund performance. Shares fell by 3% this week. Fully 14% of all hedge funds own some AGN shares and 10% of funds have it as a top 10 position in which case the average weight is 6% of their long portfolio. Another specialty pharma firm in our basket, Endo International (ENDP), fell by 18% this week. However, a few important hedge fund holdings rallied this week including GM (+8%) AAPL (+7%), and Priceline (+2%) Our hedge fund VIP basket was flat this week versus a 2% rise in S&P 500.

  Companies seeking to return cash to shareholders have two choices: buybacks and dividends. Investors have clearly expressed their  preference in 2015 and the pattern has been consistent for decades: They prefer both! A portfolio of firms with high combined buyback and dividend yields has outperformed baskets of stocks emphasizing either one of the approaches.

  S&P 500 buyback announcements have jumped by 50% vs. last year to $521 billion. Examples include AAPL and GE ($50 billion each), WMT ($20 billion), and GOOGL ($5 billion). Nearly 25% of annual buybacks occur during November and December just after firms report 3Q results. History reveals that high total cash return stocks typically outperform when the buyback window is open. Most firms can repurchase shares starting in November.

  
  

  In an income-starved world, firms are also returning cash via dividends: 249 S&P 500 firms have raised their payouts YTD with a median hike of 10%. Dividends have comprised 70% of the annualized total return for US stocks since 1975 and 55% of the annualized return since 2000.

  Our sector-neutral basket of 50 stocks with the highest trailing 12 month total cash return yield has outperformed the S&P 500 YTD by
  almost 100 bp (3.4% vs. 2.5%). In contrast, firms with the highest buyback yield alone lagged the market by more than 250 bp (-0.3% vs. 2.5%). We continue to recommend our total cash return basket (GSTHCASH).

  We have re-balanced our high total cash return to shareholders basket. With 24 new companies, our 50-stock sector-neutral basket has a trailing 12-month total yield of 10.2% vs. 4.7% for the median S&P 500 stock. But the basket has a median P/E of 14.6x versus 17.0x for the median S&P 500 firm.

  New firms in our basket include LOW, NAVI, ABBV, PFE, CTAS, and LLL. We have also re-balanced our buyback basket composed of stocks with the highest trailing 12-month repurchase yields (GSTHREPO). Our 50-stock sector-neutral basket has 25 new constituents including NAVI, GILD, and MON. The median firm in the basket has a trailing 12-month buyback yield of 8.3% versus 2.5% for the S&P 500. See Exhibits 5-6 for constituents.

  We are 35% through 3Q earnings season and results have been mixed. Energy and Materials firms have generally disappointed while consumerfacing companies have posted better results.

  

  

  

  

  

• Has The Market Trend Shifted From Bull To Bear?

  Submitted by Brian Pretti via PeakProsperity.com,

  Emotions are running high for the investment community in the wake of recent market volatility. Up until August, we had been in the third longest period in market history without a 10% correction. Since then, stock indices sold off hard, only to bounce once again over the past two weeks of trading.

  As you’d guess, the generic punditry has been out in full force.  A good number of very well respected technicians are not mincing words: We've entered a bear market.  No equivocation.

  On the other side of the equation are plenty proclaiming a successful retest of the lows has been made, and now away we go.  Earnings will be better next year. No recession in sight. Just another dip to be bought, right?

  And certainly the truth is….No one knows. Especially in today’s world where global central banks can concoct further QE/monetary schemes at the drop of a hat.  Let’s face it, at this point the global central banks are all in. In fact, beyond all in. Without question, the US Fed knows that if equities fall, they lose the high end consumer. (Wal-Mart shoppers have already long been lost) 

  I thought in this discussion I’d run through a number of indicators I've been watching that will hopefully help answer the key question – was the recent market turbulence a sign of a short-term correction, or something larger?  We know there's no single Holy Grail metric in this wonderful world, but I tend to think of indicators as mosaic pieces.  If we can get enough pieces in the right place, we have a good shot at actually deciphering the “picture” of what is to come.  And for that, we can only really rely on historical experience.  

  At The Margin

  A number of months back, in fact just prior to the recent correction, I wrote a piece about US margin debt.  It had just climbed above $500 billion for the first time in history.  The conclusion of that article was that today’s margin debt acceleration would be tomorrow’s price volatility.  Nothing in that article about timing at all.  But as we stand here today, I believe watching margin debt levels dead ahead will be very helpful.

  The history of margin debt in graphical form is what you see below.

  

  Not surprisingly, historical equity market peaks of significance have been accompanied by cycle peaks in margin debt levels.  The chart above is clear.  What has been most helpful in the past is to watch for divergences between margin debt levels and price.  At the prior two equity market peaks in 2000 and 2007, price actually went to a new high temporarily, while margin debt levels diverged and continued falling.  In hindsight, this was a key tell-tale top of cycle divergence.

  As we stand here today, margin debt levels have begun to decline from their summer-time peak.  Admittedly, the data is only current through August at this point and a contraction in margin debt for August should be no surprise at all.  But here is what I believe will be helpful ahead: if this is simply a correction in an ongoing bull market, then we should expect margin debt levels to again accelerate and move to new highs.  Why?  Because that is the exact fingerprint history of margin debt and equity market cycles.  I do not expect margin debt to contract meaningfully (20%) unless this is truly a new bear trend.  And we will not see a true move downwards in margin debt until after we see a few claw marks.  So watching for new highs that would corroborate further upside becomes one important watch-point of the moment in my book. 

  The chart below is a close up look at the last three years.  For now, margin debt levels in the US peaked in April.  Keep your eyes on these levels in the months ahead.  If margin debt cannot make it back to its highs, we need to consider this a cycle top in the equity market:

  

  Oh Behave!!

  One thing I've been watching for is a change in market behavior in response to central bank commentary.  And we've been finally seeing a bit of that from time to time in recent months (last 2 days not withstanding). 

  As you are fully aware, the Fed again declined to raise interest rates at their meeting last month, making it now 60 Fed meetings in a row since 2009 that the Fed has passed on raising rates.  Over the 2009 to present cycle, the financial markets have responded very positively in post-Fed meeting environments where the Fed has either voted to print money or voted to keep short term interest rates near 0%.  Not this time.  Markets swooned in the immediate aftermath of the decision on the again seemingly-positive news of no rate hikes.  Why?

  Although we are clearly not fully there yet, we need to think about the possibility that investors are now seeing the Fed (and really all global central bankers) as trapped.  Trapped in the web of intended and unintended consequences of their actions.  As I have argued over the past year, the Fed’s greatest single risk is being caught at the zero bound (zero percent interest rates) when the next US/global recession hits.  With declining global growth evident as of late, this is a heightened concern and that specific risk is growing.  Is this what the markets are becoming more sensitive to?

  Behavior does not change overnight.  And certainly the rally back from the end of September lows has been impressive.  But it has also been accompanied by chatter about a potential QE4 or NIRP stateside (neither of which I believe is in the cards any time soon).  Moreover, with the release of the FOMC meeting minutes a few weeks back, the Fed admits in their own words they are scared of “volatility.”  (Translation?  A down equity market.)  So in one sense investors know full well they have the Fed cornered.  Throw a tantrum and they will change intentions/actions on a dime.  And now the Fed even admits it!

  But when will continued zero rates or “threats” (Draghi) of expanded QE simply no longer be good enough?  I think this is one of the key “tipping points” to watch for.  I think we are edging our way toward that right now. But slowly, and not in linear fashion.

  It's clear in recent weeks that for many companies, quarterly revenues and earnings growth is a struggle.  In fact, for a good number, deterioration has been ongoing for years now.  Caterpillar not only missed again (huge surprise, right?), but has now reported 34 consecutive months of declining world sales.  In it's latest report, the company announced 10,000 to be laid off over the next few years. And Caterpillar is not alone.

  IBM reported its lowest revenues in 13 years at $19.3B.  For perspective, literally three years ago in 3Q 2012 that number was in excess of $29B.  The year-over-year decline in revenues (not earnings, revenues) was 13.9%.  In comparison, IBM never even dipped this low on rate-of-change revenue contraction during the “Great Recession”.  Good thing they’ve levered up their balance sheet to buyback shares! (After all, it's the shareholders who “own” the balance sheet and the executives who have the options.) The number of revenue and earnings missing in the current quarter so far, has been more than noticeable.

  Walmart indeed made the gallant gesture of raising wages for their employees.  And the move cost them dearly, as they just announced a 12% reduction in earnings guidance for next year.  Remember, this is one of the largest retailers on planet Earth, accounting for 10% of total retail sales in the US.  Suppliers will be squeezed and squeezed hard.  More fallout will come in quarters ahead, and be certain, Walmart will react with massive cost controls.

  On the bright side of the earnings equation, we’ve also seen a new wrinkle in a number of cases.  Biogen announced very respectable numbers and growth.  But simultaneous with the “good news” is another type of news – they are laying off 11% of the work force globally.  Microsoft “crushed” the numbers….and also crushed another 1,000 employees into the unemployment line.  The issue being: even companies reporting strong numbers are letting folks go during supposedly "good" times.  Why would management teams be doing this?

  I could go on and on about many more examples, but the issue is the revenue and earnings stagnancy to deterioration is increasingly noticeable and the management commentary has backed this up. 

  What seems apparent is that, for a good number of companies, weakness has accelerated during the prior quarter.  Could it be the stumbling of the “symbol” of the economy, the stock market, that has prompted such an immediate response?  I wish I knew the answer, but for a while now I have been of the opinion that central bankers are scared to death that if equities start failing, so will the domestic/global economy.  They know full well that it is the high end of the wealth demographic that is doing the yeoman’s work in holding up the economy broadly.  If they lose the equity market?  They lose the high end consumer.  And, let’s face it, there's no middle class left below to pick up the ball.  Stagnant wage growth, 0% return on savings, and rising costs of living have squeezed it dry..

  So in one sense, it all comes back to equities.  The central bankers are totally beholden and scared.  It’s no wonder Mario Draghi “promises” the ECB will discuss lower rates and perhaps further ease.  I fully expect to see more in the way of similar action from the PBOC and BOJ.  The central banks are all in at this point. There is no turning back. They will continue this course right up to it predictable and inevitable destruction.

  Warning Signals

  So, I believe one of the key signals of the coming cycle change will be not only tracking data point anecdotes such as margin debt levels, but also the behavioral characteristics of the investment community.  Can investors continue to indefinitely “dance” to the words and actions of central bankers, after 7 full years of those same words and actions having produced nothing of substance in terms of reinvigorating the global economy?  Or will the focus shift to the increasingly visible slumping of the global economy and corporate revenues? So far the dancing continues, but the tune is getting old…

  We all remember the words Chuck Prince (former CEO of Citi) wished he’d never uttered in 2007.  “The music is still playing, so we’re still dancing.”  For now, investors are still dancing to the music of central bankers globally.  If this behavioral shift I'm looking for actually takes place, prices should react as Citi’s stock price did the day Mr. Prince found out the music had actually stopped. That is to say, plunge violently.

  Bottom line: equity markets have not priced a meaningful slowdown in global corporate earnings.  They are still pricing in central banker commentary…..for now.  History teaches us that equity turbulence accompanied by meaningful economic softness often marks the turn from a secular bull market in to a bear market.

  In Part 2: Why The Next Market Drop Will Likely Be 30-40% we look further into the alarm bells of caution the underlying economic data and technical analysis are now sounding. The messages of the moment are: 1) pay attention, this is absolutely no time for complacency, 2) if the charts do not revert back to technical health, do not be afraid to look like an idiot and be “too” conservative with capital, 3) market tops usually frustrate both the bulls and the bears…until they don’t. After that point, everyone is running for the same exit. One that few can make it out of in time.

  Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

   

  

  

  

  

  

• Russia Takes Over The Mid-East: Moscow Gets Green Light For Strikes In Iraq, Sets Up Alliance With Jordan

  Once it became clear that Moscow and Tehran had jointly planned the incursion in Syria with Russia promising full air support and Iran pledging ground troops from Hezbollah, its various Shiite militias, and the IRGC, we immediately suggested that Iraq was next on the agenda after the Assad regime is restored. 

  For those unfamiliar with the situation on the ground, we encourage you to read “Who Really Controls Iraq? Inside Iran’s Powerful Proxy Armies,” in which we outline the extent to which Tehran effectively controls both the Iraqi military and the politicians in Baghdad.

  The US allows this because i) there’s really not much Washington can do about it, and ii) even if there was, it would mean first trying to root out Iranian influence on the political process and second attempting to separate the Shiite militias from the Iraqi regulars, which would only serve to weaken the country’s ability to resist Sunni extremists like ISIS. The other important thing to understand about Iran’s proxy armies in Iraq is that they are the very same militias fighting alongside the Russians in Syria (we mean “very same” in the most literal sense possible as they were called over the border by Quds commander Qassem Soleimani himself). This means they are Washington’s allies in Iraq but as soon as they cross the border into Syria, they become the targets of US-supported and supplied rebels battling at Aleppo. Obviously, that makes absolutely no sense and is emblematic of just how schizophrenic Washington’s Mid-East strategy has become. It’s also worth noting that these are the same Shiite militias who, with Tehran’s blessing, attacked US troops in Iraq after George Bush destroyed the US-Iran post-9/11 alliance by putting the country in his infamous “Axis Of Evil” (see here for more). 

  Here’s a picture that should give you an idea about why Iran’s proxy armies have proven particularly effective at bullying the ISIS bully, so to speak:

  

  Meanwhile, flying missions over Iraq is the logical next step for The Kremlin in Russia’s bid to supplant the US as Mid-East superpower puppet master. One would be hard pressed to come up with a more humiliating scenario for Washington than for the US to be effectively kicked out of the country it “liberated” over a decade ago by Vladimir Putin on the excuse that try as they may (or may “not”, depending on how prone you are to conspiracy theories), the Americans are apparently not very good at fighting terror. 

  Just like in Syria, Russian airstrikes would be supported by Iran-backed fighters on the ground, and thanks to the IRGC’s grip over Iraqi politics, Moscow would find Baghdad very receptive to Russia’s presence in the country. 

  The US knows all of this of course and in an effort to get out ahead of the situation, Washington sent Gen. Joseph Dunford (chairman of the Joint Chiefs of Staff) to Iraq this week to issue what can only be described as a petulant, childish ultimatum to PM Haider al-Abadi. “It’s either us, or the Russians,” Abadi was told, although not specifically in those terms. Here’s what Dunford actually said: 

  “I said it would make it very difficult for us to be able to provide the kind of support you need if the Russians were here conducting operations as well. We can’t conduct operations if the Russians were operating in Iraq right now.”

  

  (Iraqi PM Haider al-Abadi)

  Although the PM purportedly pledged not to request Russian assistance, anyone who’s followed the story knows Dunford’s trip was far too little, far too late.

  ISIS has been running amok in Iraq for more than a year and the US appears powerless to stop them. As we noted, there are several theories as to why Washington is so intent on keeping Moscow out. The common sense theory that requires no conspiratorial ruminations says that the US is desperate to avoid ceding Baghdad to Russia and the Pentagon knows that with Iran already effectively in control of the army and the government, Russia would find a very receptive military and political environment. For those inclined to think that in addition to any initial support (i.e. funding and training prior to the official formation of ISIS), the US is still supporting Islamic State, well then the worry for Washington is that Russia simply wipes them out.

  Whatever the case, Iraq has apparently had just about enough of it and indeed, one of the reasons Dunford made the trip was that last week, Abadi said he would “welcome Russian airstrikes.” Throw in the brand new intelligence sharing center in Baghdad jointly staffed by Russia, Iran, and Syria and it’s pretty clear that despite what Abadi might have told Dunford to reassure the Pentagon, the “red” coats (if you will) are indeed coming. 

  Sure enough, according to Turkey’s state run Anadolu Agency, Russia has now received permission from Iraq to target ISIS convoys coming from Syria. Here’s more: 

  The Iraqi government authorized Russia to target Daesh convoys coming from Syria, a senior Iraqi official said.

   

  The authorization for Russia to target Daesh inside Iraq comes amid security coordination between Iraq, Russia, Iran and Syria.

   

  Hakem al-Zamli, chief of the Iraqi parliament’s security and defense committee, told Anadolu Agency on Friday that the measure contributed to weakening Daesh by cutting off its supply routes.

  That will be just the beginning. We assume the whole “convoys from Syria” language is an effort on Baghdad’s part to make it sound like this isn’t a green light for Russia to take over the skies above Iraq but one certainly wonders how Washington intends to respond given that Abadi just told Dunford Iraq wouldn’t allow this to happen. 

  And that’s not all. 

  Russia has now created yet another intelligence sharing cell in the Mid-East, this time in Jordan as Moscow and Amman are set to work together to rout ISIS. Here’s RT:

  Russia and Jordan agreed to create a coordination center in Amman, which will be used by the two countries to share information on the counter-terrorism operations, Russian Foreign Minister Sergey Lavrov said.

   

  Russia is already in touch with Iran, Iraq and Syria through a Baghdad-based center used for the same purpose. 

   

  Lavrov said Jordan would play a positive part in finding a political solution to the Syrian conflict through negotiations between Damascus and opposition forces, an outcome that Russia itself is pursuing. 

   

  “Under an agreement between His Majesty King Abdullah II and Russia’s President Vladimir Putin, the militaries of the two countries have agreed to coordinate their actions, including military aircraft missions over the Syrian territory,”Lavrov said. His Jordanian counterpart Nasser Judeh said the center would serve as an efficient communication tool for the militaries of the two nations.

  As you might recall, Jordan’s King Abdullah wasn’t exactly pleased after ISIS released a video showing a Jordanian pilot being burned alive. Here’s the visual message he sent to the group after the video surfaced:

  

  Once again, it’s important to understand that this is all made possible by the fact that the US, Saudi Arabia, Qatar, and Turkey decided to use extremist groups as their weapon of choice to destabilize Assad. That gives Moscow all the political and PR cover it needs to not only make a pure power play in Syria, but to establish closer diplomatic and political ties in Iraq and now Jordan. Thanks to the fact that the Western media has held up ISIS as the devil incarnate, The Kremlin has a foolproof cover story for what is quite clearly becoming a sweeping attempt to establish Russian influence across the region. 

  Finally, don’t forget that with each move Russia makes towards replacing the US as Mid-East superpower puppet master, Iran gets that much closer to supplanting Saudi Arabia as regional power broker. The Kremlin’s alliance with Jordan plays right into that dynamic as the Moscow-Tehran nexus is literally encircling Riyadh, Doha, and the UAE…

  

  

  

  

  

• The Inflation Lie

  By EconMatters

   

  

   

   

  Inflation Over Estimated?

   

  I was watching a little of the ECB press conference after their policy meeting and a reporter asked why inflation is such a bad thing for Europe and European consumers. Mario Draghi gave a canned response, but the real interesting moment came when an individual sitting to his left on the ECB panel opened his mike up and wanted to speak about inflation. I thought this was a little odd, and it became stranger by the moment. He really went out of his way to point out some obscure economic study that showed that US inflation was overestimated, and that actually US inflation was actually negative according to this recent study.

   

  

  Central Bankers & Research Objectivity

   

  

  The first question is what does US Inflation have to do with the ECB`s decision to add more stimulus to the European economy, and what does it have to do with European inflation?

   

  I guess the inference is that even in the US where the economy is the relative strongest house on the block so to speak, that there is even underlying deflation in the world`s strongest performing economy.

   

  But is sure seemed to point out that Central Bankers are not objective data driven, independent academics seeking the truth regarding economics, but rather have a goal ahead of time, and look for any type of data to support said agenda.

   

  Most of the studies actually show that inflation is underreported and this is the first time I have come across someone citing the opposite conclusion regarding inflation reporting.

   

  

  Gas Savings Eaten Up Fast by Increasing Healthcare, Food & Housing Expenses

   

  

  This is rather intuitive as well, energy and commodities have collapsed due to the oversupply of these markets, but really that is the one area which makes the overall inflation numbers appear lower than most feel in their everyday living experiences.

   

  For example, the cost of renting or home ownership has been rising steadily the past 16 months, and will continue to do so over the projected near term future. Healthcare costs continue to rise each year despite a nationalized healthcare plan. Even those lucky enough to have great company backed healthcare plans are paying higher deductibles and more out of pocket health expenses each year. Education and tuition costs continue to rise above the average rate of inflation. Entertainment expenses from movies, eating out, cable and internet fees, mobile phone plans, gym memberships, and travel accommodations are all experiencing inflationary pressures. Automobile prices sure aren`t deflationary as anyone who has purchased a new car recently realizes. Shoot even HOA fees are rising year after year! And those pesky real estate taxes sure seem to go up well above the stated rate of 2% inflation that is the Fed`s desired target rate. Ironic isn`t it that if inflation could only hit that 2% mark they would be raising interest rates in a heartbeat. Like when it was well over 2% 16 months ago, and the Federal Reserve not only wasn`t raising rates, but was still buying bonds each month via QE 3?

   

  

  Deflation is not a problem anywhere in the world

   

  It is pretty obvious to anyone with a little common sense and operates a household budget that deflation is not a problem here in the United States or anywhere in the world. This is all Central Bank nonsense used to justify an agenda regarding monetary policy. It is also abundantantly clear that the real inflation rate is much higher than that reported by the official governmental data sets. That in fact these reporting tools substantially underrepresent the real level of inflation in the economy. This is what I refer to as part and parcel of the Inflation lie.

   

  

  Government Spending & Debt Monetization

   

  Inflation and all the Central Bank rhetoric is used as a tool to manipulate policy towards an agenda, and all the official government tracking reports have a role in promoting the company line, which at its core is spend beyond your means, and kick the can down the road by monetizing the debt, robbing consumers of purchasing power along the way in a never ending currency devaluation scheme. This is also why the debt ceiling needs to be raised every year, and the US has doubled the national debt over the last 8 years. If you keep a healthy dose of inflation, let us call it the real inflation rate in the economy, the overall debt is less as a percentage of GDP, Tax Revenue, and overall Production Output – thus the debt has been monetized. At least this is the Central Bank and government strategy to dealing with out of control government spending far in excess of tax receipts taken in. Borrow, rack up huge deficits, print more money, devalue the currency, create inflation in the money supply, and make the borrowed money less onerous than it otherwise would appear with a lower rate of inflation. This is why Central Banks are so obsessed with inflation, the entire scheme falls apart and fast if the debt cannot be monetized or lessened as a percent of its original value through currency devaluation via the printing presses.

   

  

  Debt Monetization Scheme a Delicate Juggling Act

   

  

  This is the big Inflation Lie, Inflation doesn`t hurt consumers; it is a needed tool to monetize the debt and keep the whole deficit spending scheme going for as long as possible. The theory is sort of like the expansion of the Universe. If Central Bankers can inflate the money supply without inflation going nuclear on them, and keep diluting the currency without Zimbabwe like repercussions, then the size of the national debt is as manageable as 20 Trillion can be in a relative sense.

   

  

  But it is a dicey game in juggling of account variables and the slightest unbalanced move of any of these account balance variables and the entire deficit financing scheme implodes or blows up on itself. It is terribly unsound financial engineering, and a looming disaster that at best is kicked down the road a little further. My calculations are that the government liabilities hitting around 2018 are just the variable that makes this whole financial engineering scheme face some serious here and now addressing. But it can be any variable in this complex financial engineering equation that can go out of control. Inflation as reported over 4%, interest rates rising significantly, Real Deflation, Economic Recession, Credit Rating Downgrade, Spending at a rate exponentially more than currency devaluation of Monetary Policy, Central Bank Credibility and Confidence, and a full-blown Currency Crisis to name just some of the possible variables that could blow up in the face of this financial engineering experiment.

   

  

  Deflation, Demonizing, Central Bankers & the Power of Language to Manipulate

   

  Now you know why Central Bankers try so hard to demonize deflation, well we have never had real deflation in my lifetime, it is the reason that cars that used to cost $5,000 now cost $50,000. But more specifically Central Bankers know that the official Inflation reporting tools are built to underrepresent inflation in the economy, and anything trending below their fake targets is a problem for them because government spending continues exponently and unabated, and without elevated inflation the debt cannot be monetized and kicked down the road a few more years – which is the agenda. And really the whole purpose for their existence in government service. This is why Central Bankers will look for any semblance of deflationary pressures, albeit some obscure economic study in the United States, any excuse possible to ramp up the old printing presses at full speed ahead come what may! This is the big Inflation Lie purposefully put forward by Central Bankers to continue the charade that is modern financial engineering.

   

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